Good day, and welcome to the Integra LifeSciences First Quarter 2019 Financial Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Mike Beaulieu. Please go ahead, sir..

Thank you, Britney. Good morning and thank you for joining the Integra LifeSciences First Quarter 2019 Earnings Conference Call.

Joining me on the call are Peter Arduini, President and Chief Executive Officer; Glenn Coleman, Chief Financial Officer and Corporate Vice President of International; and Sravan Emany, Senior Vice President of Strategy, Treasury and Investor Relations.

Earlier this morning, we issued a press release announcing our first quarter 2019 financial results. The release and corresponding earnings presentation, which we will reference during the call, are available at integralife.com under Investors, Events & Presentations in the file named first quarter 2018 earnings call presentation.

Before we begin, I'd like to remind you that many of the statements made during this call may be considered forward-looking statements. Factors that could cause actual results to differ materially are discussed in the Company's Exchange Act reports filed with the SEC and in the release.

Also, the discussions will include certain non-GAAP financial measures. Reconciliations of any non-GAAP financial measures can be found in today's press release, which is an exhibit to Integra's Current Report on Form 8-K filed today with the SEC. I'll now turn the call over to Pete..

If you turn to Slide 4 in the earnings presentation, I'd like to start by reviewing some of our first quarter highlights. Total revenues in the quarter were roughly $360 million, representing growth of 3.1% on an organic basis, in line with the guidance we provided in February.

Adjusted earnings per share of $0.65 exceeded our expectations, increasing 12% over the prior year, driven primarily by 180 basis point improvement in gross margins. We remain on track to achieve our full year 2019 financial targets.

In our Codman Specialty Surgical segment, first quarter operating performance for each franchise was in line or slightly better than our expectations, despite the TSA exits, ERP conversion and Day 2 transitions.

In February we discussed our exit of the transition services agreements covering Western Europe and the successful transition to a single global instance of our ERP system from roughly 30, just a few years ago. Our last major milestone will be the TSA covering Japan in the third quarter of this year.

After which we would have closed out all substantial Codman TSAs. In early April we took control of the first significant wave of Codman Day 2 countries. As a reminder, these are indirect markets in which we will have full control of all commercial activities for the first time since the close of the acquisition.

We now have commercial ownership of roughly 25 Day 2 countries and expect to assume control of the most significant Day 2 countries by the end of the third quarter of 2019. We're confident that we can stabilize performance in these indirect markets over the next several quarters.

In our Orthopedics & Tissue Technologies segment Wound Reconstruction grew mid-single digits in the first quarter and is positioned to accelerate later this year. As we indicated on our 2018 year-end call in February, last year's channel expansion increased demand in our regenerative businesses requiring us to invest in our manufacturing capacity.

These investments largely have been completed. And as we approach the second half of 2019, we'll be in a position to support faster growth both in our existing product lines and new product launches. In our Orthopedics business we achieved organic growth in the first quarter, one quarter ahead of schedule.

Growth in orthopedics was attributable to improved sales force effectiveness, new product introductions and double-digit growth in both our ankle and shoulder product lines.

We are at an inflection point with orthopedics and expect growth to improve over the course of 2019, as our commercial teams further penetrate new and existing accounts, and we begin to benefit from a full market release of new products. If you turn to Slide 5, I'd like to highlight a few of our new products from each of our segments.

First in our CSS segment, we're launching seven new products this year, all of which will contribute to growth in the second half of 2019. Last week at the American Association of Neurological Surgeons or AANS, we showcased these new product introductions, and received very positive feedback from clinicians.

Our new products includes CereLink, the most technologically advanced intracranial pressure monitor we've ever offered. This system provides neuro critical care teams with greater insight and accuracy than current monitoring technologies, as well as enhanced flexibility and usability within the MRI suite.

We expanded our CUSA Clarity technology platform with the launch of a new handpiece, in an array of state-of-the-art surgical tips.

With the enhanced power and performance of CUSA Clarity and its leading tissue capabilities, surgeons now can remove both bone and challenging tissue faster than competitive products, further boosting CUSA Clarity's popularity among neurosurgeons.

Also at AANS we formally introduced additional sizes of Certas Plus, our MRI compatible programmable valve portfolio to expand the surgeons options for managing patients with hydrocephalus. Included within this launch is a new state-of-the-art toolkit enabling surgeons to more efficiently adjust and confirm the settings of the Certas Plus valve.

In the second half of 2019, we also look forward to launching DuraGen in Japan, which will be the first and only non-autologous collagen xenograft approved for use as a dural substitute in Japan.

The approval of DuraGen in Japan with the culmination of several years of work by our global team and we're proud to be able to offer surgeons in Japan a proven product that has already benefited more than 2 million patients over the past 20 years.

In our OTT segment, at the recent orthopedic academy meeting we announced the launch of a new reverse shoulder glenoid plate that expands our Titan Reverse Shoulder System. The new baseplate was designed with advanced imaging analysis to fit a broader range of anatomies, specifically patients with smaller glenoids.

And this product expansion builds upon the benefits of our Reverse Shoulder System and its press-fit femoral stem design allowing surgeons to treat patients without cement in primary and revision surgeries.

We also launched the Panta 2 Arthrodesis Nail System which offers the latest innovations for fusion of the ankle, due to severe arthritis and complex deformities. Panta 2's new radiolucent carbon fiber targeting and compression device provides surgeons with improved visibility under X-ray and positioning.

Turning to our regenerative portfolio, we look forward to full market release of AmnioExcel Plus later this year. We have received strong reviews from clinicians of both the handling and healing characteristics of AmnioExcel Plus and are confident this product would be a growth driver over the next several years.

To summarize we've moved past most of the Codman integration activities and the ERP conversion, now launching multiple new products.

We've made significant progress in our orthopedics business and have largely completed investments in our regenerative manufacturing capacity, all of which position the company for stronger growth in the second half of 2019. With that, I'd like to turn the call over to Glen to discuss the details of our first quarter performance.

Glenn?.

Thanks Pete, good morning, everyone. As Pete mentioned our reported inorganic revenues were in line with the guidance we provided in February.

Our top line performance coupled with stronger-than-expected gross margins enabled us to exceed the high-end of our adjusted earnings per share guidance range by $0.03 and generate year-over-year EPS growth of 12%. If you turn to Slide 6, I'll review our segment performance starting with the Codman Specialty Surgical or CSS segment.

Reported revenues in CSS were $234.6 million in the first quarter, representing a 2.5% increase on an organic basis. Despite the anticipated disruptions in Europe, we were into integration activities in the ERP conversion. Our CSS performance was slightly better than expectations.

Starting with our global neurosurgery business, sales in dural access and repair increased mid-single digits on an organic basis compared to the prior year's quarter, with growth in both our graft and sealant product lines. Sales in flow and pressure monitoring increased low single-digits over the prior year's first quarter.

Growth in CSF management remained steady in the first quarter and offset slight declines in neuromonitoring. We expect performance to accelerate in the second half of 2019 as we begin to benefit from new product launches in this franchise.

Wrapping up the discussion of our Neurosurgery business, sales in advanced energy increased low single digits, driven by continued strength in our CUSA product line in the U.S., which grew more than 10% year-over-year. Our growth in the U.S.

was partially offset by flat sales in Europe as our commercial team spent more time supporting integration activities and less time in the field. Moving to precision tools and instruments, revenues were roughly flat compared to the prior year. We strengthen our acute and specialty surgical product lines, offset by declines in dental instruments.

Looking at the quarterly cadence for CSS in 2019, we expect organic growth to improve slightly in the second quarter, with greater acceleration in the second half of the year, as we move beyond the integration activities and benefit from new product launches.

For the full year, we expect reported revenues to increase 1.5% to 2% and organic revenues to increase 3.5% to 4%, consistent with the guidance we provided on our last earnings call. Let me now move to Orthopedics and Tissue Technologies or OTT segments on Slide 7.

First quarter revenues were $125.1 million, representing an increase of 4.2% on an organic basis compared to the prior year. The Wound Reconstruction grew mid-single digits in the first quarter, let by strong revenues in our core tissue portfolio, including products such as Integra Bilayer Skin, PriMatrix and SurgiMend.

As previously discussed we've been investing to increase capacity to support stronger demand in our regenerative portfolio following last year's channel expansion and realignment strategy.

These investments are largely complete and we expect growth to accelerate in our Acute Wound Reconstruction and Advanced Wound Care and Surgical Reconstruction businesses during the second half of 2019. Revenues in our private label business grew mid-single digits in the quarter, but we're below expectations to the timing of orders.

Performance in our Orthopedics business improved in the first quarter as we've achieved organic growth, one quarter sooner than we expected.

Our orthopedics performance represents an inflection point as is our first quarter of year-over-year organic growth since Q4 of 2017 and is a direct result of the operational and commercial changes we implemented over the last 18 months.

Our commercial teams have also gained greater access to high-volume ankle specialists following the recent launch of the XT total ankle revision system. This sales activity coupled with more focused marketing programs, are driving consistent double-digit growth in our ankle portfolio.

Our Upper Extremity product lines also increased double-digits as we saw benefit from the benefit from the addition of new distributors and a recent launch of the new glenoid baseplate for our Titan Reverse Shoulder System.

For the full-year 2019, we expect organic revenues to increase in the range of 6% to 8% over the prior year and reported revenues to increase in a range of 5% to 7%, unchanged from our prior guidance. Turning to Slide 8. I'll now review the key P&L components below revenue for the first quarter of 2019.

GAAP gross margin was 64.2%, an improvement of 460 basis points over the prior year. Adjusted gross margin was 68.4%, an increase of 180 basis points compared to the prior year, driven mainly by improved sales mix and manufacturing efficiencies.

Our gross margin improvement resulted in a 100 basis point increase in adjusted EBITDA margin for the first quarter to 24.3%, the highest we've achieved in over two years. Our adjusted tax rate was 18.8%, a slight increase over the prior year.

GAAP earnings per share more than doubled to $0.38 over the prior year due to significantly higher gross margins, lower interest expense and a lower tax rate. The lower tax rate was a result of a onetime tax benefit related to our operations in Switzerland.

Adjusted earnings per share was $0.65 compared to $0.58 in the prior year, representing 12% year-over-year growth. For the full year 2019, we are reaffirming guidance for total reported revenues to be in the range of $1,515 million to $1,525 million representing growth in range of 3% to 4% and organic revenue growth of approximately 5%.

Moving to earnings per share, we're increasing our GAAP EPS guidance range by $0.10 to a new range of $1.46 to $1.53, reflecting the onetime tax benefit. We are reaffirming our adjusted earnings per share guidance range of $2.65 to $2.72.

For the second quarter of 2019 we expect reported revenues of between $370 million and $375 million, which assumes organic growth in a range of 3.5% to 4%, and a foreign currency headwind of over $4 million based upon current rates.

We expect adjusted earnings per share to be in a range of $0.64 to $0.67 which at the midpoint would represent growth of about 10% over the prior year. Turning to slide 9, I'll now discuss our cash flow performance. Our operating cash flow in the first quarter was $29.5 million compared to $41.5 million in the prior year.

The first quarter of 2019 included a onetime inventory buy from J&J associated with the TSA exits in Europe. Our capital expenditures in the first quarter was $16 million in line with the prior year as we continue to make investments in our Massachusetts manufacturing facility.

Free cash flow conversion on a trailing 12-month basis as of March 31, 2019 was 51%. As a reminder, we expect a significant improvement in our cash flow during the second half of 2019. As our operational performance improves and we move past the spending associated with Codman integration activities.

As of March 31, 2019 our bank leverage ratio remained at about 2.9x, consistent with our year-end position. We maintained a strong and flexible balance sheet with cash and cash equivalents of $157 million and capacity on our revolver of about $1 billion to support potential future tuck-in acquisitions.

And with that, I'll turn the call back over to Pete..

Thanks, Glenn. If you turn to Slide 10, I'd like to summarize our key messages. So we've made great progress of the Codman integration activities and the expansion of our global commercial organization. Today we highlighted the launch of eight new products and look forward to several more later this year.

We are also optimistic about the increased demand we've seen in our orthopedic and regenerative businesses.

Our investments and channel expansion, manufacturing capacity, R&D, IT systems and integration activities over the last 18 months have positioned us for both accelerated growth and increased profitability in the second half of 2019 and for the full year of 2020. That concludes our prepared remarks. Thanks for listening.

And operator if you would, please open up our lines for questions..

Thank you. [Operator Instructions] Our first question comes from Jonathan Demchick from Morgan Stanley..

Hello. Thanks for taking the questions. Wanted to start off, really I guess the main story for Integra; really this year looks to be like the timing of the acceleration for sales. So kind of reach this 5% number, and you look at 1Q results and then 2Q guidance.

I guess this suggests that the second half of the year growth needs to be kind of close to the 7% number, as I guess comps get a little tougher.

So I was just hoping if you kind of walk through maybe some of the key areas like growth as may be been derisked or the visibility has improved for how accelerations are going to happen into the back half of the year? And then I have one quick follow-up for Glenn..

Yes, Jon, I'll start, and then Glenn please feel free to jump in. So first of all I'd say we're right on track, how we thought about this sequential growth where we ended up with Q1, continued growth in 2Q and then further acceleration in Q3 and Q4.

So again to reemphasize the points that we put out, the new launches that we have are really now all out, they're doing well. But the actual, as we through value committees and the ramp up, we'll really start to begin in late Q2. But most of the effect will be a Q3 to Q4. So that's a big part of it.

Q2 also is kind of a transitional quarter here for us for the last cleanup of the TSA items. We do have Japan as we mentioned as a TSA conversion in third quarter. But the majority of the Day 2 countries all of the changes we made that settles out.

So the fact is that, I think we got a realistic view on our guidance for Q2, if all good things aligned could we do better? Sure. But how we think about it is, there is new products and stuff, we need to do 6.5% say growth in the second half. The new products themselves we're counting on probably about 2 points of growth.

So in that range we're talking about the core business growing around 4.5% in the second half and that's kind of how we frame out, Glenn if you want to add anything else to that?.

No. I'd say Jon, if you look at the sequential ramp to get to the guidance for Q2 that being 3.5% to 4%, it would imply a sequential increase in revenues of about $13 million. We would expect roughly half of that coming from OTT, half coming from CSS from a segment perspective.

And if you think about the ramp of $13 million and how we get there, almost half of it or $6 million to $7 million comes from two extra selling days in Q2 versus Q1. And then in addition to that, seeing a bigger ramp in CUSA Clarity right now we got a really strong funnel in terms of our capital pipeline.

So we expect to see a sequential improvement there.

Further progress in orthopedics business we were delighted by the performance in the first quarter, in fact we put up by organic growth quarter on – one quarter sooner than expected was obviously good news, we expect that to continue getting more supply in region to support the underlying demand we're seeing there.

And then internationally, we should see less construction moving forward between the TSA exits in Europe. And now that we got one common ERP platform, better performance or selling time in the field. So all-in-all we've got good line of sight to the ramp from Q1 to Q2 that would get us 0.5 point to 1 point of organic growth acceleration.

And then as Pete mentioned, the back half of the year for us is really all about this new product launches. Pete mentioned, 2 points growth coming just from the new product launches.

The most significant one is there, and the highlight would be CereLink or ICP monitoring platform, and also Certas with the toolkit we're launching, coupled with some other new configuration fits for all sizes. So that's how we see the year playing out..

Thank you. Very helpful. And just quick follow up on margins. Obviously gross margins was a pretty good out performer this quarter.

Was there anything onetime here, any reason why performance would I guess normalize a bit lower for the back half of the year? And then secondly on R&D, that seemed to take a step down from I guess the trend that we would have seen over the past couple of years.

I mean anything going on there or it's just the way it's spending may be it gets ramped up for the back half of the year?.

Yes. So let me comment on the gross margin piece and Pete maybe you can hit on R&D. So gross margin is coming at 68.4% was better than what we're expecting. But keep in mind we had modeled for about 100 basis point year-over-year improvement in gross margins. So we were expecting gross margins to improve this year.

Nothing really one-time in the first quarter. I would just say there is always some variability in the timing of manufacturing expenses from quarter-to-quarter. But nothing of a one-time nature. Why we had such a strong quarter is really a function of sales mix, number one, which if you look at where the sales were driven from and the growth, more U.S.

growth than OUS growth and that obviously helps the overall mix story geographically. But from a product perspective, so good growth in region both on the OTT and on CSS, we had a really strong quarter on dural repair, in both our graft and sealant product lines. So new product launches that we are launching here have higher gross margins.

And we had a really strong overall performance in CSS management which has very good gross margins, and that the programmable valves and antimicrobial catheter portfolio. So all of that really help from a mix perspective. And then we're seeing better productivity in some of our key manufacturing sites.

So all of that generated a very healthy first quarter gross margin improvement. I would just say from a cautious perspective we are modeling still our full year guidance of 67.5%. So a bit of a down tick in Q2, but we're more confident now, we will be at or above our gross margin guidance for the full year, given how we started the year..

And Jon, just on R&D, I mean we kind of model the year to have a less expense in Q1, some of that was – with all the other moving parts we had going on, that we actually held back a little bit of spend. I think you'll see that tick up through the year.

And particularly when it comes to clinical studies and some of the new investments we've made, I've been impressed with both sides of our house, how well they've done with program execution. Again, just highlight the point that eight of these products are coming out of CSS, during the time of a huge integration.

Many companies has program slipped, our team did a great job there, and I'd say on the region, same deal with the new products in clinical studies. And a shout out to our Orthopedics team who did a great job with the Panta 2. Chris and his team, and also with some of the shoulder products has really made a difference.

And I think we've struggled there a little bit in the past. We're now starting to click and with that, we'll end up putting more money into R&D investments..

Thank you very much..

Thanks..

Thank you. Our next question comes from Matt Taylor with UBS..

Good morning..

Hi, guys. This is actually Young Li for Matt. Thanks for taking the question. May be first on the 25 Day 2 countries you mentioned.

Can you maybe talk about where your focus on in terms of trying to stabilize the business in the coming quarters? Maybe timing of some of the metrics that you’ve focused on related to that stabilization?.

So in terms of the Day 2 countries, we did a nice job to close all of them on-time here in the first quarter. We have more coming here in the second quarter.

Our focus is obviously making sure that the distributors have very little disruption, making sure they're trained on the portfolio and then we got commitments moving forward relative to the products we're going to be selling, so all of that activity is taking place prior to the close.

And we feel now that we've got good line of sight to some of these bigger distributors, some of the tenders that are going on in these countries, that we'll be able to stabilize performance in the near term meaning next couple of quarters.

But I would just say our Day 2 performance in the first quarter was pretty much in line with what we had expected, so no negative or positive surprises there..

Okay. That's good to hear. And then on the ortho business, you achieved growth, a quarter sooner than expected which was great.

Can you maybe talk about the inflection in ortho growth and your ability to penetrate new accounts? Also what are you seeing in the Extremities market in terms of growth and share dynamic?.

Yes. I'd say look at a broader picture we're still a small payer, so you have to kind of take our market views obviously with a little bit of a greater soul, because we're not one of the largest players. But I think we're seeing very healthy growth within the whole mobile pages – the ankle area. We did quite well the double-digit growth there.

I think just to give you view year-over-year, our team probably was capable maybe a little over half of being able to fully being able to sell on ankle on their own without specialized health. That's probably almost 100% now.

And so we're seeing the benefit of being able to bring more surgeons in, and then also the confidence of existing surgeons expanding that out. So that's been one big drivers that help us achieve the growth faster. And the other area is in shoulder.

Our shoulder grew over 20% and the combination of bringing in some of these new features which we do have a lineup of things with our new agreement with third-party group and a small baseplate has helped out quite a bit.

What that's done now is to allow us to bring in some other bigger distributors into the fold that have been able to expand the growth of the product in. And again our Titan platform, both the full shoulder and reverse, it really gets great feedback on the simplicity of the instrumentation and the elegance of it.

The product line right now only covers a portion of the shoulder market. And again as we continue to add on new features that expands out into all areas. We see this is going to be a growth vehicle. Those two really made the difference. I think on the broader lower area with the fixation device, I mentioned the Panta 2.

We saw a really good uptick and we think that's going to then help stabilize and reduce some of the major pressure we had in forefoot, midfoot over the past couple of years. So we feel pretty good about it. And again, channel energize good leadership with our commercial team and a nice set of new products.

Those are which, really making a difference for us..

All right. Great. Thanks for taking our questions..

Sure..

Our next question comes from Robbie Marcus with J.P. Morgan..

Hi, Robbie..

Hey, thanks and congrats on the good quarter..

Thank you..

Glenn, a question for you. Gross margin did really well this quarter. SG&A was a bit higher than the Street. But down, P&L was pretty good with the – honest EPS beat. Just run through your thoughts on especially with second quarter guidance coming in slightly above The Street on the bottom line.

Why not raise EPS guidance here? And maybe talk about how you feel about positioning toward the middle-top or end of the guidance range?.

Yes. Thanks, Robbie. I would just say it's early in the year. I mean we're only three months in. We obviously got to off to a strong start profitability-wise. Across the Board from our perspective and gross margins were obviously very positive surprise to us. So yeah, it could be upside the EPS, absolutely.

But we still have more spending plans here, especially in the second quarter, around marketing programs to launch these new products. Steve mentioned some of the R&D programs we're going to be kicking-up in the second quarter. But clearly this conversion does well to hit our guidance range for the full year.

And the reason why we didn't take it up, it's just early in the year. We still want to see a couple of more months – that before we start calling a higher set of numbers, but we were very confident right now in our full year numbers..

Okay. Great. In wound care there is a lot of moving pieces with some of your competitors, you're restructuring in new product launches.

Maybe you could just give us a lay of the land on what you're actually seeing on the ground both in the inpatient and outpatient and maybe just comment on the split of how those two businesses are performing with the specialized sales forces? Thanks..

Yes. Robbie, I think, first of all I think across-the-Board we have three specialized sales forces in the United States, that cover tissue. So we have a group that calls into plastic and reconstructive surgeons that has everything from hernia repair to upper chest valve types of repair.

We have a group that sells primarily into the outpatient wound area. And then we have a group that calls into the inpatient which covers everything from burns through trauma. I would say all three of them are doing quite well.

We expect that all three of them will be putting up either high single to double-digit numbers here as we kind of go forward through the year. If you think about the outpatient area for Wound Reconstruction we've been delivering double-digit numbers. We think that's going to continue, obviously there is been some acquisitions that have taken place.

We haven't really seen any changes that significantly – we've some other competitors who're going through some challenges. The need and demand for the products clearly is there. And so we see that not changing. We are beginning to benefit from that. We've talked about some of the larger contracts that we picked up.

Change takes a while, it takes a little bit of while to kind of get through value committees and things. But we're also seeing that come together. And as we referenced in our prepared remarks, the ramp up in manufacturing, so that we can meet that demand – but the big part of some of the investment we started last year.

On the inpatient side, it still continues to be very dynamic and positive. I think there is more and more uses by surgeons for a lot of our major disease that are out there. We're in the past, they might not have used, they might have done a flat procedure or something. And so we're seeing more now in trauma cases going to in IDRT.

We clearly are growing and the number one leader in burns, both third degree as well as second degree. But a lot of activity in that space and that'll be an area of investment. And in the last part I mentioned which we picked up in our acquisition of TEI is in the ab wall and breast and upper pectoral chest area.

And that's starting to really pick up quite a bit. I think the xenografts that we have versus some of the synthetics that other people have in the marketplace has actually been feeling some of that growth, lower risk of infection, better adaptability and obviously something that helps remodel within the body.

There are a few players in the marketplace, but we're starting to really see a good pick-up here in our growth. And again, as we think about growth in the second half of the year, these products all have gross margins that are significantly above the company average. And that's going to continue to help fuel our profitability as well as the growth..

Thanks a lot..

Thank you. Our next question comes from Craig Bijou with Cantor Fitzgerald..

Good morning, guys. Thanks for taking the questions..

Good morning, Craig..

Let me start with a follow-up on the Day 2 countries. And I wanted to see maybe if you guys could provide or remind us what percentage of revenue that Day 2, the ones that you brought on, and then are going to bring on.

Kind of what percentage of your overall revenue and that represents? The reason I ask, I know the performance has been down and you guys are now going to take control over those markets.

And you talked about the tender process, are you positioning those markets for the tender processes that are coming up? So wanted to get a sense for how much you guys expect that performance to improve in those countries? And I guess how much of that improvement is potentially built into your guidance? And obviously the tender process is uncertain.

But just kind of want to get a sense for what you guys are expecting from those countries?.

Hey, Craig, thanks for the questions. So the Day 2 countries are relatively insignificant, meaning it's about 1.5% of our total revenue. So think of it as about 25 million of annualized revenues. So $6 million per quarter or so. Our expectations around this is, most of those will be closed by the end of Q3.

And we're basically counting on flat performance through the end of this year. Obviously, as we get into 2020, hopefully we'll start to see some growth. But right now our expectations are just flat growth as we get through the rest of this year which would be a slight improvement from what's been happening to date.

But again it's about $25 million of total revenue, on $1.5 billion or so..

Okay. That's helpful. And then maybe just on a bigger picture, wanted to see what your thoughts are on acquisitions. Glenn, I think in your prepared remarks you talked about the capacity for tuck-in acquisitions.

So I wanted to get a sense for your willingness or how you're looking at the market for acquisitions, given that you're still are kind of integrating? And then maybe any color on size or areas within your portfolio that you may be looking to boost..

Yes, Craig, I would say, we look at our capacity both from a management bandwidth point of view, and moving past a lot of the Codman integration activities. And so my comments around our balance sheet flexibility. We are now in a position to do some tuck-in acquisitions.

Really, in the key parts of the portfolio that were in today, so neurosurgery specialty instruments won't care, going deeper in those areas, not having a fourth leg for this tool so to speak. But I would just say the size of these deals for a several hundred million dollars is usually what we call a tuck-in acquisition.

I think we're in a good position to continue to move forward and hopefully close a couple of deals later this year.

Obviously, dependent upon market conditions and some of the seller expectations, but Pete if you want to add anything to that?.

No, just to say that, I think where we are really now, particularly on the OTT side of the house which we run as a separate entity, we're ready to go.

We find the right tuck-in deals or bolt-on and we've got these discrete channels which even reduces the risk of integration, right, if it's something that's going to go into advanced wound or in-patient, you don't disrupt the other channels in the past, when we integrate something, it disrupt the channel every time, so that's one of the other benefits of the tuck-ins.

And I'd say on the neuro side in our instrumentation business, for the most part just take a look at the United States. I mean we had the integration completed as of last July in many cases. And so with a brunt of those revenues from tuck-in products would come, team is pretty much ready for itself.

We'll be out looking, I think the right types of tuck-in deals to build out the portfolio, to build our relevant share positions. It's really what, what we plan to do here..

And Craig, let me also add, in addition to tuck-in acquisitions we continue to look for opportunities around licensing deals, forming partnerships is a good example of that would be the reason why we announced our own shoulder with the Consortium of Focused Orthopedists there.

So with those types of arrangements we continue to move forward with us well, to position us for further growth in 2020 and beyond..

Great. Thanks for taking the questions guys..

Thanks..

Our next question comes from the Larry Biegelsen with Wells Fargo..

This is Shagun, in for Larry. Thank you for taking the questions. I just wanted to touch on Dural Access and Repair it's obviously a strategically important area for Integra.

Is the mid single-digit growth outlook still intact for 2019? And I was wondering if you've seen any impact from strikers purchase of HyperBranch or do you still believe that the business is fairly insulated given that part of your business is tied in one to three-year contracts? And I believe you had mentioned that there was some opportunity for conversion of the fibrin glue market.

And then a similar question on the competitive landscape in regenerative technologies.

Have you seen any impact from the disruptions at MiMedx and what are your expectations for Osiris and Smith & Nephew transactions?.

Hey Shagun, thanks for the questions. Maybe I'll hit on the first piece and Pete can hit on MiMedx piece when I'm finished. So on Dural Access and Repair – had a strong quarter mid single-digit growth, so big growth in both the graft and sealant areas of our business, including the Codman portfolio. So we're pretty pleased with that.

I think we've messaged in the past that we expect this to be a low to mid single-digit growth part of our business, so we just model something a little bit lower and it will be just saw in the first quarter, obviously we're shooting to the high end of that range but we think of it as a low to mid single-digit growth part of our business.

Haven't seen too much here on the dural and sealant front from the competitor that you mentioned. Obviously, we're expecting to come in more aggressive way here later this year. And obviously we think having two companies in a space promoting dural and sealants versus fiber and sealants could be a benefit for the overall market.

But clearly there is going to have some market share gains that they will probably make as we move forward into the back half of this year, when we factor into our guidance. Pete, maybe you can comment..

Yes. Just on the operation wound care, the underlying demand remain strong. The reason is pretty straightforward. These products work, they actually help to heal the wounds.

You're right, there is quite a bit of disruption that's out there, and so we are starting to see some of the benefit of that, and we think that's only going to continue here in the second half of the year. We tend to also be the toolbox offer to surgeons in that space where some folks kind of said, I have one product and it works for everything.

Truth is, it really doesn't. We come in with over four different products that can fit the different needs. And I think that with contracting as well as being a more consultative sale for where you may need a product that is actually significantly a tougher one that has different regenerative capabilities.

We're really the only player out there that has that full line of offerings. And so we're starting to see the benefits of that, and we think again that's going to continue to accelerate here as we get into the second half of the year..

Thank you. If I could just follow up with one other question, your OTT growth outlook in 2019 of 6% to 8%, and it compares with high single-digit to low double-digit growth in your LRP. Do you expect to return to high single-digit, low double-digit run rate in 2020 and beyond? Thank you..

Sure answer is, yes. That’s our long-term plan is 9% to 12% for OTT and that’s what we plan to do..

Thank you..

Thanks..

Our next question comes from a Ryan Zimmerman with BTIG..

Great, thank you guys for taking the questions.

Can you hear me okay?.

Yes..

Yes. Thanks, Ryan..

All right, wonderful. PTI has bounced around the past two quarters. Fourth quarter was really strong. This quarter was flat. Help us understand, you may remind us kind of what you think kind of the long-term growth rate for the PTI business? And then I have a question on private label and CUSA Clarity as well. Thank you..

Sure. So PTI, you should think of it as a low single-digit growth business. So 1% to 2% is what we've modeled. Quarter-to-quarter you can see some lumpiness in the numbers, and you saw last year we had a quarter of 7%, another quarter we're down a couple of percent. But overall, on a full year basis we expect it to be up 1% to 2%.

Seeing faster growth in our specialty instruments area, including surgical lighting, but in the other parts of instruments like dental instruments, it offsets some of that faster growth. But overall, I think it as a 1% to 2% grower for us..

Thank you for that Glenn. And then private label, you called out it sounds like you're little disappointed, may be it's around some of the timing of the orders.

What should we think about in terms of the cadence of the private label business going forward? The orders that you missed were those made up early on in the second quarter, just kind of help us understand the cadence there?.

Yes. So similar as order and that's not significant so we'll look that where we're little bit short on OTT. Private label we are expecting to be about $1.5 million higher than where we ended up. Again just some of those orders had shifted to Q2 and Q3. So I would just say it's timing.

For the full year again we continue to expect private label grow pretty consistent with the overall OTT growth. But Q1 was a little bit late than we were expected because of the timing of some orders with our larger private label partners..

And just to say our longer-term outlook Ryan, as I mean as Glenn said, as you get to the second half, some of the capacity additions we've had like a lot of these products we either make in Puerto Rico or we make here in New Jersey, we're running both facilities here. So we got a room to expand that.

And I would expect as we kind of make the turn into 2020 as well that private label should be robust for us..

Okay. Helpful Pete. And then just lastly if I could squeeze in one more. CUSA Clarity, it sounds like your order booking is pretty positive. You guys seem to be pretty excited about that. So help us understand.

Is this a combination of new customer acquisitions with CUSA Clarity? Or is this working through your existing customer base kind of going through the upgrade cycle and just how you're looking at that outlook? Some of your competitors are coming out with updated systems later this year, so is that – how is that playing in your thoughts around CUSA Clarity dynamics?.

Yes, Ryan, so we've been obviously expecting a couple of new – not new entrants but upgrades to two existing players, systems for some time. Both of them at the reach double line asset at showcase them. Some are ready, soon some later of the year, as you alluded.

So kind of what we had expected and aligned, so what we had thought when we gave our guidance. I would say right now, we still have a reasonable amount of kind of home accounts that are there in the first half of the year.

But a big part of our portfolio which didn't happen in the past, prior to CUSA Clarity is a big part of our funnel, our mix sites are purely competitive sites. And the reason for that is, the previous generations of many of these products they weren't that differentiated.

But with our tissue in select technology which no one has from what we've even seen from a new introduction still will not have, really makes a big difference when dealing with tough tumors.

And again the difference here is, can take a case that's three-four hours down, a good hour plus in the procedure, but still also have the sensitivity not to damage critical structures. So we think that were going to start penetrating more and more of those competitive socket.

That being said, what we've had in our estimates is that whenever you have new entrants coming, everybody takes a little bit longer to evaluate the technology. So we think and we built this in and the sales cycles will probably extend out a little bit longer than they were in the last 18 months..

Hey, Ryan, I would just add to Pete's comment, that in addition to the capital piece which we're focusing on a lot, the consumables part of the business is also growing nicely and this embedded base that we've now got with all the capital we put in place is driving a nice consumable, annuity for our business, and as we continue going forward as well..

Thanks guys for the questions..

Thanks..

Thanks. You’re welcome..

Thank you. Our next question comes from Travis Steed with Bank of America..

Hi, good morning. Thanks for taking my questions..

Good morning..

Good morning. Ortho did a little better in Q1 than you expected. But overall growth was in line.

Was the TSA conversion in Western Europe a little more impactful than you expected? Just trying to think through what the offset was in Q1? And then in Q2 the extra two selling days, what's that worth on revenue growth and if you could just quantify the extra two days?.

Yes. Thanks. So on the ortho question, we did do a little bit better. We said that it was really offset by private label, and the timing of the orders there. The TSA exits and the disruption factor was pretty much consistent with what we were expecting. And so no surprises there either way.

I think the good news around that as we move past the majority of the disruption there we're going to see faster growth moving forward into the second quarter and beyond. As we look at the extra selling days, my comment was around a sequential increase.

So year-over-year, Q2 to Q2 it's the same number of selling days but sequentially we get two more from Q1 to Q2. So, hopefully it helps to clarify the selling day comment I meant..

Okay. And then you commented a reacceleration in the wound recon business mid-single digits this quarter, we accelerating later this year.

Just help us through remind us the – what's driving that reacceleration and do you think about high single-digits or low double-digits? And then any comments on the growth in the Healogics account versus the rest of the portfolio? Are you starting to see any sign of share gains in those accounts?.

Yeah. So look on the Healogics and the outpatient, we're starting to see some good progress across the Board.

It's taking a little bit of time as we had mentioned, it would be a linear ramp but some of that, even though there are no new contracts that each hospital goes through their own back committee and we've had good 1800 accounts that have been through that, and it has a pretty good conversion rate.

I would say on the second half of the ramp, a big chunk of it is getting the adequate level supplied to convert certain accounts. So I supposed to converting a doctor or converting a large swath of the accounts. We've been cautious about how aggressive we've been, we've adding the supply on.

As an example now with our whole broader IDRT product family line here, we've added capacity, added lines and we should start seeing the benefit of that in second quarter. So commercially we've added some incremental resources in certain areas. I think we've kind of got into the new channel structures and all the training complete.

So between that productivity of channel, now all the adequate supply to meet it, that's really the key that should help drive it toward the upper end of the range in the high single-digit range that we typically expect to see in Wound Reconstruction..

Great. Thank you..

Our next question comes from Matthew O'Brien with Piper Jaffray..

Great. Thanks for taking the questions. This as Will on for Matt. First question was orthopedics, it was nice to see their organic growth ahead of schedule, and it sounds like there was a function of sales force effectiveness and new product introductions.

Curious if there is certain geographies that really stood out particularly with established territories or any other factors? Thanks..

I would just say, Will, a broader picture the – big discussion U.S. outperformed. Europe was a little bit behind, some of that was expected in Europe because of this disruption with the ERP conversion which has a higher impact on orthopedics because of the kidding in the old field operations. There is just more of things going on.

So on the positive side of that, we see that recovering here as we move forward starting to see some growth there. In the United States while the geographical areas more around the Southeast, Southwest as we've expanded focus, we've added some new distributors. But really across the Board we've been able to perform.

So as I mentioned in the previous point, when we first split the channel, one of the most complicated sales we have is a full ankle sale. And many of our reps by themselves needed to have a specialist to be able to transact. And that was maybe 20% of the sales force, today, that's over tripled. And the vast majority can handle themselves.

So what that mean? It means that we're converting more ankles at a faster clip. That coupled with, now the revision ankle which many leading groups want to know that you a revision product before you can enter into it. All those things have upheld. And then I'd say we have really the leading ankle fixation device for internal fixation for deformities.

This Panta 2 product, it's a big deal and how well you actually do the internal placement, the accuracy of it, the tolerance to make this product is quite challenging. I think we're really one of the only that had something that works this way. And the radiolucent component of it allows these guys to use the c-Arm or X-ray right there in the lab.

And the placement just comes out superior to anything out there. We're getting huge demand on that fact, even meeting the ramp up of the supply as we're just managing that pretty closely. So again a combination of maturity, adding distributors in the right markets for shoulder, new products and new features on there.

All the things that we had talked about it's coming together. And so, our outlook looks quite good for the rest of the year as well..

Great. Thanks for that. And then secondly HHS put out a technology review of chronic wound products earlier this year, with your data really kind of being the key stand out, but they did request longer-term data. So I was curious if you are working on any key studies that we should expect sometime this year? Thanks..

Yes. So one of our big investment areas within R&D is broader study work across the board, a lot of that is focused in the Wound Reconstruction and outpatient wound area. We have two key studies.

One that will be coming out later this year is on our AMNIOEXCEL Plus product, which is our tri-layer amnion that received great feedback on its healing and handling characteristics. And we have to study coming out here later this year and that will move into broader reimbursement. We utilized for broader reimbursement on the private side.

We also have a study going on in PriMatrix product as well. Both of those, so you have an amniotic and also a bulbine product that we think we'll have a pretty big impact. We've spent a good chunk of time on making sure that we do our studies, I'll say it in a right way with the right power to have an impact.

And then we take a look at Omnigraft which we came out a few years ago, which actually has been challenged by the reimbursement markets. We're starting to see more customers as they look at that data and look at their cost base.

How they can actually repair a wound in one or two applications, we are starting to see more acceptance and actually uptick in that area as well..

Right, thank you..

Our next question comes from Steven Lichtman with Oppenheimer and Company..

Hi, Steve..

Thank you. Hi, guys. So with the ortho business starting to turn and what it seems like a stabilization of that sales force following the split last year. Do you see opportunities to expand the number of feed on discrete on the ortho and/or the wound side.

Is that something we could see from you guys looking ahead?.

Yes, Steve, I mean the short answer is yes. So we expanded on The Street in the first quarter with distributors on the shoulder site. As you know lot of people have been going direct, it's opened up some world-class distributors, which we've been taking advantage of and we will continue to do so.

And then we've added a combination of additional direct reps and what we call ASRs or associate sales reps. Where we bring young folks in and directly out of school, kind of train them the way we want, after a couple of years of either running smaller lines or supporting that senior rep.

We actually have someone we can plug directly into a territory, so that some of the model, but I would tell you today, when we look at our shoulder and our ankle protector compared to the marketplace. If we had 30, 40 more reps out there, could we correspondingly grow the business for sure.

And why is that? Because we know we've got great products within those areas. So we're going to be smart about it and cautious, but we feel good that things are coming together on the orthopedic side..

And similar message on the wound side in terms of your strategic potentially add here?.

Yes. I would say on the wound side we're probably – we've already added as you know, we doubled the size of wound reconstruction. We've added specific in the outpatient area. The outpatient area will probably be the place that we would add a more ongoing faster clip as we go into the VA and more centers.

Why? Well, as we start taking broader share with the Healogics contract in other areas, we just need more people to service. So think of that as the area that probably has more adds coming up. I also would say in a broader wound, Surgical Reconstruction area.

With the growth that we've been able to put up double digits in that area, really the future on that business looks quite promising as well. And some of that is driven by new techniques for upper chest reconstruction work and also the need for more xenograft based products within the AB wall.

So both of those areas I think, we'll probably see some level of investment here this year..

Got it. And then just Glenn, how much is FX impacting your reported sales growth based on recent rates? And how much of an EPS impact are you absorbing from FX in your guidance this year? Thanks..

Thanks, Steve. I would say FX is probably a little worse than we had guided to back in February. In the first quarter we had about a $5.3 million headwind. In the second quarter right now based upon current rates it's going to be above $4 million. So keep in mind our guidance was about $10 million headwind for the full-year.

Now it's looking more like $12 million. But we're keeping our guidance for the moment. So this is some context right, and that's probably a little bit worse than we started the year, and again most of it being an impact in the first half of the year on a reported basis.

On the EPS line you can think of it as about 15% drops to the bottom line, so 15% to 20% or so. So if you think about a $10 million to $12 million headwind that's about a $0.02 impact on EPS..

Got it. Great, thanks guys..

Our final question comes from Matt Wizman with Raymond James..

Good morning, guys. It’s Jayson. Just a couple of quick ones and I apologize if they're redundant. I joined the call a little late. Gross margin was better than we expected in the first quarter. You kept the full-year guidance.

What pressures gross margin over the next three quarters? Or on the flip side was there something that helped to prop up the first quarter GM?.

Yes, I would Jayson that our sales mix was very good in the first quarter, probably won't see the same level of favorable sales mix to rest of the year. And what we mean by that is, lot of growth coming out of the U.S. has higher gross margins than our OUS business. And where we saw the growth between region both on a CSS and the OTT side.

Some of the CSS management growth which was robust kind of in the high single-digit range for us which has high gross margins. In fact, the instrument didn't grow, which has lower gross margins, were all favorable in Q1. So I would just say we're not counting on a same level of favorable mix. Obviously if that happens, it would provide upside for us.

And I would just say some of the variability in terms of the manufacturing expenses from quarter-to-quarter moves around. And so we had a really strong quarter from a manufacturing perspective. Obviously, we're not counting on – significantly getting worse.

But I would just say given where we started the year, it's probably more upside potential on gross margins on the full year. But again only one quarter into the year, we don't want to start saying, our product is too high, until we get to about midyear.

And so good news is we had expected a 100 basis point improvement for the full year, 2019 versus 2018 we're off to a great start..

Got it.

And my second question is, can you quantify the impact or opportunity for DuraGen in Japan? And I'm just thinking in the context of your low to mid-single-digit growth expectation for dural repair this year, is the anticipated weight on growth more on the sealant side?.

So Jayson relative to this year, I would have modest expectations because rolling them have about one quarter's worth of benefit from DuraGen, given we got the approval but we still have to work to reimbursement. So once we have that, we should start to see sales really the beginning of the fourth quarter.

But on an annual basis where we reached peak year sales with a several years from now, it could be a $15 million type product in Japan, just to give you some sizing of what that could look like..

Okay. All right. Thanks..

Thank you, everyone. This concludes today’s teleconference. You may now disconnect..