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

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

Joining me on the call are Peter Arduini, President and Chief Executive Officer; Glenn Coleman, Chief Operating Officer; Carrie Anderson, Chief Financial Officer and Sravan Emany, Senior Vice President, Strategy, Treasury and Investor Relations.Earlier this morning, we issued a press release announcing our second 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 second quarter 2019 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..

Thank you, Mike and good morning everyone. If you turn to Slide 4 in the earnings presentation, I'd like to start by reviewing some of our second quarter highlights.

Total revenues in the quarter were $384 million, representing organic growth of 6.6% which was above the guidance we provided in April.Our outperformance was driven by new products launches, strong U.S.

and international demand for our portfolio of neurosurgery products, the ongoing success of the Codman integration and stability in our global commercial channels.In the second quarter, adjusted earnings per increased 22% to $0.73 and our adjusted EBITDA margin increased 200 basis points to approximately 25% compared to the prior year.

Based on our strong results in the first half, we are reaffirming our full year 2019 organic revenue growth guidance of approximately 5% and raising our adjusted earnings per share guidance to a new range of $2.70 to $2.75, an increase of $0.05 at the midpoint from our prior guidance.In the Codman Specialty Surgical segment, we began the commercial launch of our new products ahead of schedule.

These products which are being well received by our customers include; CereLink our ICP monitor, CertasPlus our family of Hydrocephalus management products and the Integra DUO, our new LED Surgical Headlight.As we near completion of the integration and continue to leverage our experienced R&D team, we are well positioned to increase investments in our existing product pipeline and pursue external opportunities in the second half of 2019.We are also pleased to announce that in late June, we successfully completed our first clinical case using DuraGen in Japan.

And as a reminder, DuraGen is the first and only collagen xenograft approved for use as a Dural substitute in Japan and we are proud to be able to offer surgeons a proven product that has benefited more than two million patients.During the second quarter, international revenue growth in both our segments achieved the highest levels since we closed the acquisition.

International scale was one of the strategic benefits we expected to achieve from the Codman acquisition.And as we exit the second quarter, we’ve taken control of commercial activities in the majority of Day 2 countries.

Next month, we expect to close the transition services agreement in Japan which represents the last substantial Codman TSA.While our guides reflect some risk in the third quarter as we complete our integration work, we are confident that we have the right structure in place and are making the right investments to achieve scale and growth from our international markets.Moving to our Orthopedics and Tissue Technology segment.

Wound Reconstruction grew mid-single digits in the second quarter.

Sales in the outpatient wound care increased double-digits over the prior year with strength in products like MediHoney and Total Contact Cast, as well as our advanced tissue products portfolio which saw growth accelerate sequentially from the first quarter.In our Surgical Reconstruction channel, global sales of SurgiMend increased double-digits.

We believe there are significant global opportunities to expand this product line for plastic and reconstructive procedures and plan to make additional investments in the second half of 2019.Second quarter performance in our Orthopedics business was flat despite case scheduling delays but several high volume users.

And through the first half of 2019, Orthopedics had grown at a low-single-digit rate.As we move into the second half of the year, revenue growth should increase to a mid-single-digit pace driven by recent launch products in our dedicated Orthopedics channel.To summarize our performance of both segments through the first half of 2019, we are on track or ahead of our full year financial and operational goals.

Wrapping up our second quarter highlights, I’d like to congratulate Glenn Coleman on his recent promotion to the newly created role of Chief Operating Officer and welcome Carrie Anderson who was appointed Chief Financial Officer.Glenn’s proven leadership and deep understanding of our business makes him an ideal candidate to assume the day-to-day operations of the company.

The creation of this role will give me more time to focus on executing our long-term growth strategy.Carrie joins our executive leadership team from Dover Corporation, a diversified global manufacturing company. She brings broad-based global financial experience as well as expertise in manufacturing and engineering.

She most recently served as Chief Accounting Officer and Corporate Controller at Dover responsible for Corporate Accounting and Global Financial Planning.The creation of the COO position and the addition of Carrie as CFO will expand the capabilities of our executive leadership team, drive consistency in our execution and further enable the company to achieve our goals.Now I’d like to turn the call over to Carrie to make a few comments before Glenn discusses our second quarter financial performance.

Carrie?.

Thanks, Pete and good morning. I am excited to join Integra as we enter a new period of growth for the company.

And as Pete mentioned, most of my professional experience has been with complex finance and manufacturing operations and while I am only four weeks into my new role at Integra, I am impressed with the quality of the finance organization under Glenn’s prior leadership and I look forward to working with the team to accelerate Integra’s growth.I would like to thank Pete, Glenn and all of my colleagues at Integra who have assisted with my onboarding thus far and I look forward to getting on the road over the coming weeks and months to meet with employees and the broader investment community.And with that, I’ll hand the call over to Glenn..

Thanks for the kind words Carrie. We are off to a great start with the transition and I look forward to partnering with you in my new role.Turning to the second quarter, total revenues were roughly $383.6 million, representing growth of 4.8% on a reported basis, and 6.6% on an organic basis.

This better than expected performance was driven by broad strength across our Codman Specialty Surgical or CSS segment both in the U.S.

and outside the U.S.Our strong top-line results led to adjusted earnings per share that were $0.06 above the top-end of our guidance range and represent a growth of 21.7% over the prior year period.If we turn to Slide 5, I’ll review our CSS segment. Reported revenues were $249.2 million in the second quarter, an increase of 6.2% on an organic basis.

Within our Global Neurosurgery business, sales in dural access and repair increased low-single digits compared to the prior year's quarter with growth in both grafts and sealants.We expect to see growth continue at this pace for the remainder of 2019. Sales in flow and pressure monitoring increased double-digits and were well above our expectations.

As Pete mentioned, our strong sales performance was largely driven through the relaunch of our Certas Plus portfolio, which includes new valve configurations and electronic toolkit and incredibly focused marketing program.The franchise also benefited from stronger demand from early adopters of our CereLink ICP monitor.

With this recent product launch, we are investing an experienced neurocritical care specialist who can provide in-servicing, education and customer support.

Our commitment for the unique needs of these compromised patients will now include both the increases in comprehensive portfolio of solutions, coupled with the tele critical support that customers expect and deserve.During the second half of the year, we expect these products will be the two factors growing product families within CSS and will grow double-digits.Wrapping up the discussion of our Neurosurgery business, sales on advanced energy increased approximately 5%.

Sales of CUSA Clarity and the associated recurring revenue stream from our disposable products outside the U.S.

drove this growth.Our full year guidance for this franchise assumes low to mid-single-digit growth as selling cycles for capital equipment will likely expand due to competitive product launches.Moving to precision tools and instruments, revenues increased mid-single-digits compared to the prior year with strength in acute surgical instruments and cranial stabilization.

In July, as part of our ongoing strategic portfolio analysis, we made the difficult decision to announce the future closure of our locations in Pennsylvania and Mexico.These sites make endodontic products and accessories such as dental files and mirrors.

The shutdowns will result in an estimated annual revenue impact of $10 million with minimal impact to adjusted earnings per share since these are low-margin products.For the remainder of the year, we are guiding C&I to a low-single-digit organic growth in line with the long-term outlook for this business.

CSS international sales were a clear bright spot in the quarter increasing 9% driven by commercial stability in Europe, solid execution on Day 2 countries, and strong growth in Canada, China, and Japan.Based on a strong first half performance and second half expectations for each of the CSS franchises with modestly increase in our CSS reported revenue growth guidance for the full year to slightly greater than 2% and are also raising our organic growth guidance to slightly more than 4%.Let me now move to Orthopedics and Tissue Technologies or OTT segment on Slide 6.

Second quarter revenues were $134.4 million representing an increase of 7.2% on an organic basis compared to the prior year.

Wound Reconstruction increased mid-single-digits in the second quarter with growth coming from our Outpatient Wound Care portfolio and plastic and reconstructive products, both of which grew double-digits.In addition, our in-patient business increased mid-single-digits in the quarter driven largely by sales of PriMatrix.

Revenues in our private-label business grew 15% largely due to timing. As a reminder, the private-label business can be lumpy on a quarterly basis with over the long-term organic revenues are expected to grow in the mid to high-single-digits.Organic growth in our Orthopedics business was roughly flat for the second quarter.

Our lower fixation portfolio improved sequentially as growth in our new Panta 2 Nail helped to stabilize this business.

Sales in our ankle portfolio grew in the low-single-digits as the recent launch of our XT revision ankle is performing well despite case scheduling delays at several of our high volume accounts.Our Upper Extremity product lines also increased mid-single-digits with growth in both our shoulder and wrist.

We expect organic growth of our Orthopedics business to accelerate into the mid-single-digits during the second half of the year based on new product launches, and the increasing momentum of our focused sales channel.International sales within OTT increased double-digits driven by strength in our regenerative portfolio in both Europe and Canada.

For the full year 2019, our reported and organic growth guidance for the total OTT segment remains unchanged.Turning to Slide 7, I’ll now review the key P&L performance below revenue for the second quarter 2019. GAAP and adjusted gross margin were essentially unchanged from the prior year.

Our adjusted EBITDA margin was 25.5% in the second quarter, an increase of 200 basis points compared to the prior year and was driven mainly by improved operating leverage.Based on the strong second quarter performance, we now expect to be at 24.5% for the full year which is at the high-end of our previous guidance range.

Our adjusted tax rate was 18.8% in line with our guidance and is on a four points higher than last year due to a lower deduction from stock-based compensation.GAAP earnings per share was $0.34 in the second quarter, compared to $0.14 in the prior year. Adjusted earnings per share were $0.73 representing growth of nearly 22%.

The improvement was the result of higher revenue, improved operating leverage, and lower interest expense.For the full year 2019, we are reaffirming our total reported revenue guidance range of $1.515 billion to $1.525 billion representing growth in the range of 3% to 4% and organic revenue growth of approximately 5%.Moving to earnings per share, we are reaffirming our GAAP EPS guidance range of $1.46 to $1.53.

However, we are increasing the midpoint of our adjusted earnings per share by $0.05 to a new range of $2.70 to $2.75.For the third quarter, we expect reported revenues of between $373 million and $378 million, which represents organic growth of approximately 4%. This guidance reflects a sequential decline of $5 million in sales due to timing.

Roughly $3 million was in orders of our new products placed to some of our early adopters and $2 million was in our private-label business, both of which were realized in the second quarter.We expect third quarter adjusted earnings per share to be in a range of $0.64 to $0.67, which at the midpoint represents growth of approximately 10% over the prior year.Turning to Slide 8, I’ll now discuss our cash flow performance.

Our operating cash flow in the second quarter was $48.5 million, an increase of over $12 million compared to the prior year.

Free cash flow conversion on a trailing 12-months basis as of June 30 was 54% an improvement of more than 12 points over the prior year.As we indicated on our first quarter earnings call, we expect an improvement in cash flows during the second half of the year as we move past the spending associated with Codman integration activities.

As of June 30, our bank leverage ratio was 2.8 times. We maintain a strong and flexible balance sheet with cash and cash equivalents of $176 million and capacity on our revolver of approximately $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 9, I’d like to provide a few summary thoughts on the company relative to the focus areas we communicated in February. Our strong financial results in both segments through the first half of the year gives us confidence that we could achieve our full year 2019 financial targets.

We’ve launched ten new products into a larger and more focused global commercial organization on or ahead of schedule.We also achieved the fastest growth from our international business since we closed the Codman acquisition, which help drive better than expected performance in the second quarter.

With organic revenue growth of 4.9% through the first half of the year, we’ve reduced the ramp required to meet our full year guidance of 5%.During the third quarter the teams are focused on exiting the TSA with J&J in Japan and taking control of all substantial Day 2 countries thus completing the majority of the commercial integration work associated with the Codman acquisition.As these integration activities wind down, we will make further investments in our product pipeline to drive future growth and this is an area I plan to spend more time on and is a benefit of our new leadership structure.

With our global scale in the neurosurgery market and a highly effective commercial channel, we are investing in technologies that can drive upside to our plans.On the Orthopedics and Tissue Technology side of the house, we are investing to meet the increasing demand across our regenerative portfolio.

We are increasing manufacturing capacity, and resources to support our existing leadership position and also enter new markets finishing the first half of 2019 in Orthopedics with positive growth was an important milestone in turning around this franchise and we look to accelerate growth in the back half.Finally, with our relevant scale in neurosurgery and regenerative technologies, we continue to work with customers to develop value-based healthcare products and services and deliver them through our innovative contracting solutions.In summary, we believe we have the team and plans in place to achieve or beat the goals we set in 2019 and expect to see organic revenue growth accelerate above 5% in 2020.That concludes our prepared remarks.

Thanks for listening and operator, would you please open up our lines for questions?.

[Operator Instructions]We will go first to Raj Denhoy at Jefferies..

Good morning, Raj..

Raj, you may have your line on mute. Hearing no response, we will move to Matt Miksic at Credit Suisse..

Good morning, Matt..

Hey, good morning. Thanks for taking the question. I think Raj is going to juggling multiple calls here.

Can you hear me okay?.

Yes, we can..

So, congrats on a strong second quarter and sort of progression that you’ve talked about throughout the year kind of improving visibility and growth.

And I just wanted to maybe get a sense, Q3 feels like a transitional quarter and wanted to get a sense of maybe what some of the key drivers are in Q3 in terms of new products or continued momentum in new products or sort of improving visibility and do we get those in the third quarter, or at the end of the third quarter, how to think about the sort of pivoting pivot around Q3?.

Yes, I would say, Matt, look, if you think about Glenn’s comment about we had some benefit in Q2 that we’re expecting in Q3. Again, it was about $5 million bucks and some of that was with new products some of that was private-label.

So we talked about $2 million of private-label which you remember is lumpy.But that business continues to do well and the other portion of the three was tied actually to some of our new monitor launches which are being perceived very well.

But the fact is, we actually had uptake the side I am seeing with the monitors and those sales came in through than we expected. Typically, we’ve done other products there is a whole value discussion and then it takes place.And so, we benefited those earlier in Q2.

As it relates to Q3, I think all those launches we expect to continue to advance and grow, most of the products that we launched either in OTT or CSS have about a three year peak sales window.

So, with us only being six months in, that we are very early into this cycle and we think all of those are going to perform at a much higher level.So, I would say, if you think about Q3 across the board, OTT through our plastic and reconstructive, our wound care products, advanced wound care, we expect all of those to continue to perform well and all of the new products within CSS.

I think the one hedging point that we laid out is the fact that there is some new competition that’s coming into a few areas.We’ve talked about that.

We think we’ve got products that are actually superior but the fact is that the demo cycle, the time customers will take to look at them will extend the sales cycle out and that’s part of why we’ve been a little more cautious about how we think about the overall third quarter.Glenn, you may want to add something to those..

Yes, the only thing that I would add relative to the third quarter is, keep in mind we are going to be getting off our last significant TSA with J&J in Japan.

But – last it is the most complicated one and what we have done is really well previously, we are being a bit cautious relative to expectations in Japan we are going to have to put a lot of resources on as to make sure we get it done right.And I would also say, still being cautious on Day 2 countries.

We’ve taken most of those over now seeing better performance and continue to be cautious through the back half of the year until we see a trend of consistent growth coming out of these countries. But all in all, combination of those items the new competitor entrance into the CUSA capital space is causing us to a bit cautious in Q3..

Fair enough. And then just one follow-up if I could on sort of the regenerative medicine and value-based strategies that you’ve taken and approaching out of wound care and outpatient wound care in particular.

Any clinical data, any progress that you are gaining traction on that front feet or any notable dynamics in those end-markets that you call out?.

Well, for competitive reasons, I wouldn’t give real specific examples, but in short, yes, I would say, both with good dialogue with CMS about how the whole model is working us and other folks and then with individual IDMs that have their own insurance programs, I think we’ve been able to have some very good dialogues about this discussion that we’ve had with investors and analysts over the past few years about products that can actually heal someone and fewer applications and lower cost and how that may relate to the reimbursement structure.I think we are starting to get more receptivity to that.

We are starting to see a pickup in some of those products, but that component of value particularly in outpatient is something that we are focused on and feel very confident that again, over the long run, we are going to start seeing more pickup related to a product that heals faster at a lower cost..

Super. Thanks again for the color and congrats again..

Thank you..

Thanks, Matt..

[Operator Instructions] We’ll go to our next question from Robby Marcus at J.P. Morgan..

Good morning, Robby..

Good morning and congrats on a good quarter..

Thank you..

I wanted to ask, maybe you could just give us an update, it’s now been over a year since you restructured and grew the sales forces.

Maybe just catch us up on where we are in terms of the progress, the status versus your internal expectations? And any kind of qualitative trends or where improvements you can get for each of the sales forces and how they are working out of segmentations?.

Robby, it’s Glenn. I’ll take a crack at this one.

If I look at the different sales forces starting with CSS, clearly we saw stability, really right after we closed the Codman deal and so we’ve continued to see more and more progress with cross-selling synergies, which is a big area of opportunity for us and some of those value we saw with the Codman deal both in the U.S.

and outside the U.S.I would say, outside the U.S. it took us a bit longer and now we are starting to bear the fruits of some of those cross-selling efforts that you saw here in the second quarter. In CSS we’ve put up 9% organic growth. So it’s doing really well there.

So I would say all in all, the seats are filled.The channel is very stable, capitalizing on our cross-selling synergies, especially now outside the U.S. and we’ve got a whole bunch of new product launches we are going to be putting through these channels. So, I feel really good about that.

The key thing around the CSS channel going forward is going to be adding more specialists.So a good example of that would be in the neurocritical care space. I mentioned that in some of my prepared remarks. We will be adding more specialty there.

And if you look outside the U.S., we are going to be adding more commercial resources in places like Japan where we have a lot of new products that we are just launching there as well.So I feel really good around the channel. We have seen that come through in the results overall for the segment. We grew in the quarter over 6%.

And we look at key sites, as we talked about at the beginning of 2018 during the channel split, I think in the beginning we saw really good stability on our regenerative side, on the in-patient side, but it took us longer to ramp this channel on the Orthopedic side.As we got into 2019, obviously, we saw more stability. We filled most of those roles.

And so our progress in the actual business performance and I would say, right on plans for Orthopedics for the first half of this year, same growth for the first time in a number of years and again, a lot of that coming out of our ankle and shoulder portfolio.But all in all, we feel really good about where we are with the channel there as well.

So, both sides, I would say are stable, progressing well and we are adding resources where we see growth opportunities. If you want to add anything to that..

I think you covered and I think just the other part I would say our turnover in our field force is probably at as low as it’s been in the last three years which is a good sign relative to we chose the right folks, people are feeling good about the other opportunities.And to Glenn’s point, although we’ve kind of filled all the seats, there is clearly selective opportunities to add as we add specialists to support some of the new launches or some of the new market areas, so as mentioned plastic and regenerative surgery moving into the breast reconstruction space, particularly outside the United States the opportunity that will lend down the road in the U.S.

we’ve got some pretty good things set up and we are quite happy with the changes that we needed to make in the channels and I think that fruits that will bear here in the coming years.And clearly, we are seeing an increase in the productivity levels of the individual, especially in the OTT side and you are seeing that really reflected in some of the EBITDA margin expansion.

So we had one of that quarter has been probably three or four years on EBITDA margins, we are getting leverage on the selling and marketing line, as well, because our reps are becoming more productive than on better role for a while and are growing sales in each of those channels..

Great. And then, a quick financial question. You raised EPS guidance, you kept free cash flow guidance the same, but the free cash flow came in a little lower than at least we were expecting. Maybe just talk about some of the puts and takes over the balance of the year and your confidence in the free cash flow guidance. Thanks..

Yes, I would say on the free cash flow side, one of the things that we are working through is a lot of these new product launches. So we are seeing higher inventory levels as we build inventory in support of those product launches. So that’s one of the drivers.

That will get better in the back half of the year.And in addition, we are going through some legal manufacturing changes with Codman and as you do that you have to build inventory as you go through the regulatory approval process. So that’s what you are seeing in the first half of the year.

Clearly we expect better performance in the back half between increased profitability, some improvements in working capital and lower one-time charges that are cash-related relative to the Codman integration.So you should expect to see better performance for sure in the back half of the year, but from our perspective, we are pretty much on plan on those metrics we are little behind on inventory, but again that’s a timing issue..

Thanks a lot..

You are welcome..

We will go next to Ryan Zimmerman at BTIG..

Good morning, Ryan..

Good morning. Carrie, congrats on the new role. Glenn, congrats on the promotion and run in thereon in the strong quarter. Just want to follow-up on the question Matt had asked earlier around wound.

You called out a couple of segments, but maybe just help us understand, maybe what’s occurring in the strength in wound, is that driven by potentially some newer accounts, is that deeper penetration, are you seeing continued disruption competitively?Maybe just help us understand what the dynamics are in wound and then I have a follow-up on gross margins..

Yes, I would say, Ryan, it’s a little bit of all of the above. I’d say, it’s a combination of, we have a stable channel now. We’ve been able to kind of develop that, that’s where it starts and they have a very nice quarter. We have been able to open up some new accounts.

Some of that is the conversion of the Healogics business and getting into a new account there. We’ve also had some good results in the VA.So, combination of opening some new accounts, getting deeper into existing accounts for sure.

And so, we had very strong growth within our matrices products, it’s PriMatrix our antimicrobial products all did well, on the graft as well.

So those all did well.And then, as you know in our portfolio, we have some slower growth products that are typically high-single-digit growers such as the Cast or even MediHoney and that acceptance of those products being used to drive compliance, we are using products like MediHoney more broadly and other wounds that aren’t as acute is definitely starting to pickup.So, when you pull all those together, really probably put up the best quarter we’ve seen in sometime.

And I think it’s not a one-time event. We feel pretty confident that we are starting to kind of get the right tailwinds in outpatient wound care. There is some disruption in the market, but like most things there is a lot of strong players out there.There is a lot of good things going on.

I think this is just as people really start to understand our broader portfolio, we can be more of a one stop shop and we are starting to pick up more talents because of that and our ability to contract..

Helpful.

And then, gross margins little bit lower than last quarter and with wound as strong as it was in the quarter, Glenn, was that a result of private-label or the strength you saw in private-label impact in the second quarter gross margins or is that something else to call out?.

No, it’s a good question. You are pretty much spot on. It’s really mix. So if you look at where the growth came from in the quarter, private-label obviously is a big driver of that that has lower gross margins but higher EBITDA margins.

So it helped our EBITDA margin story but obviously impacted the gross margins.Also, the strength in both our instruments business which carries lower gross margins and our international business were the drivers. So, those three areas in general carry lower gross margins on the corporate average and brought the overall gross margins down slightly.

In addition, we are making some investments in our regenerative plants to build out increased capacity.So that’s also impacting both Q2 and what we expect to see in the back half of the year to get to our full year guidance..

Okay, helpful. Thank you guys..

We’ll go next to Steven Lichtman at Oppenheimer and Company..

Thank you and congrats everyone. I guess, first, Glenn, you just mentioned on the manufacturing expansion in Regen.

Can you just update us on where you are at with that? And once it’s complete, what it’s going to allow you guys to do?.

So, we are really talking about several of our regenerative plants, one in Memphis, Boston and the plant here in Plainsboro.

So, in Memphis, as you know, that’s where we make our Amniotic tissue product a huge area of growth for us, a huge potential area of further growth in the future.So we are increasing capacity in that plant and just to put into context we probably doubled capacity since the beginning of the year and we expect to have four times the capacity by the end of this year.

And so we are doing as we are adding shifts, increasing raw materials, supply of centers.

We are adding clean rooms to that facility to increase the capacity there.But I would expect, it’s going to take us still another six months in investments to going to tour where we want to be.In Boston obviously, working few plants there as well, SurgiMend is made up there along with PriMatrix.

These are very fast growing areas as well and so it’s a relatively small plant and we are looking at ways to build out increased capacity and change some of the process steps there to drive more products in the field which will drive more growth down the road.And then here in Plainsboro, obviously we are continuing to work on how to increase capacity here as well by adding more layers as an example.

So, all in all, lots going on and we are really making these investments to support what we believe will be very fast growing areas for us over the next five years..

Got it. Thanks. And then, just one on CSS. So, as you’ve talked about getting close to the end of the integration and things are stable and starting to turnkey.

Now talk about some of the synergies you are expecting to see from Codman, whether cross-selling or some of the enterprise selling that you talked about sort of as we transition into – from the integration?.

Steve, so, it’s a good point. Relative to Codman and what’s done for the business, we clearly have a number one position. We’ve got the size and scale really in all markets around the world that we compete to be able to have a seat at the table for favorable contracting discussions or such.

So, we are seeing the benefit of that.The first benefit comes, you have an account, we sell thirty products in neuro into that account. There is only 20, you have an opportunity to talk about the other ten and find ways to bring that in. We are starting to see some of that happen across the globe.So, I think that’s point one.

Point two is, with the new product launches, I just give a big shot out to our R&D team has done a tremendous job with the products, partnering with our marketing team to really build the right, help economics wrapper around us.And we are just really starting to see lot of places such as like our Hydrocephalus valves, in the monitors, people are really taking a look and saying, I wasn’t necessarily thinking about changing, but you build such a strong case here why I may want a competitively convert.

Worldwide they want to upgrade my technology now because of the features you’ve brought.The productivity you’ve brought. The ease of use you’ve brought or my long-term savings as a user, we are starting to see that change.

And obviously when you bring a product and a program that’s innovative it makes someone stop sometime ago whom, maybe I should look at everything else and think about it and I think that’s what’s going on right now.And to Glenn’s point, it took us a little bit longer OUS, but we are seeing a very similar thing and neat part of neurosurgery is, it’s actually a small homogenous community around the world and a procedure that gets done at the Mayo Clinic or gets done at some other institution around the world, they all know about it pretty quickly, because it’s a small community.So, if you can play that leadership role and drive change, you can in fact change around the world pretty quickly and we are starting to see the early signs that that’s possible.

So, feeling pretty good about that uptake and our ability to kind of use the scale to expand our footprint..

Great. Thanks guys..

We will take our next question from Matt O'Brien at Piper Jaffray..

Good morning. Thanks for taking my questions. So, I think that everybody is looking at the Q3 guidance and maybe a little bit lie versus what people were expecting.

You kind of talked a little bit, Pete and Glenn about the reasons there and I am curious so, there is a couple of competitors, bigger consolidator of the spot products in Dura and new competitor to CUSA that’s rolling out right now.How much of those dynamics have you incorporated into the Q3 and Q4 guidance specifically?.

So, we’ve covered all those in our guidance. I mean, we’ve taken a look at a couple of other aspirator competitors. I would argue that when we’ve got in the bottoms up comparison, it’s down, we have a better product that performs really well. But the fact is customers are going to look. They respect those other players.

They are going to want to take their time to kick the tires, so to speak.And so, when I talk about longer sales cycle we believe we are still going to win more times than that and so that’s all factored in.

But our sales cycle when you are the only one with a new one might be 60 days, sales cycle when you got to look at two other players maybe 120 days. So that’s factored in.

On the Dural Sealant side of things, we’ve been competing since the first quarter with the new ownership.I think both of this are obviously talking the story which is half the users still don’t use a respective Dural Sealant. They may be using something like fiber or nothing at all other than they basically suturing.

And so, at this point in time, I think both are continuing to grow.We have tampered the amount of growth in our plants this year and I think as you think about Q3, we want to get another quarter behind us before we would talk about any other accelerations in those two categories.

But for sure, we’ve built that, I’d say cautiousness into our plans until we get a couple quarters behind us and really see those products rolled out.In case if some of the tissue ablation products most of those from the competitors aren’t shipping at this point in time..

Got it. That’s very helpful. And then, a second follow-up question is on DuraGen in Japan. You mentioned it is your first case there. It’s a big growth driver for you guys.

How aggressive are you going to be with that rollout there and how do we think about modeling that product for 2019 and 2020?.

So, it’s clearly the biggest opportunity from a new product launch perspective, or new product registration I should say, perspective, outside the U.S. in 2020. Part of our thinking is we are going to be adding more resources to support DuraGen, to support the CUSA Clarity launch that we just did there.

So, I would just say, we are not going to give any specific numbers.But again, just keep in mind, we still have to get through the TSA exit here in August. Once we do that, while more people focused on selling, if you will. But I don’t want to give a specific number for it.

But you can look for us to be talking about very strong growth coming out of Japan in 2020 as a result of these new product launches including DuraGen.And just keep in mind for us, Japan is a market size, you could think of it as a $40 million to $50 million type market today..

Thank you..

Yes..

We’ll go next to Craig Bijou at Cantor Fitzgerald..

Good morning guys. Thanks for taking the questions. Just have a couple on some of the comments that Pete, you made.

Let me start with the – you are looking at external opportunities in the second half and obviously I know you guys have been in acquisitive company and now that it seems that Codman integration is winding down.Just wanted to kind of hear your renewed thoughts given the call out on the - in the script on what you may be looking for in external opportunities, whether it's Codman side of the business, OTT, and maybe size, size profile?.

Yes, Craig, look, thanks for the question. So, a big part is, to your point, we have obviously done a lot with the company building it with smart acquisitions typically talking. Codman was kind of the eyeball relative to overall scale.

And I would say, again, is it part of what our strategy is to look for Codman-ish deals.The majority of our focus is really on tuck-ins and the area that we are looking at is really how we find key components that continues to build this relevant scale point.

Take select parts of our business and moves us into maybe a number four position even in sub-category into a number one or number two, and again the focus on this as more consolidation takes place on all of our customers, on the payers.We want to be - even though we may not be as large as some of our biggest competitors, we want to be very large in those segments we compete.

So think about us planning into and buying technologies as well as operating companies to help build out that portfolio that actually then brings a better answer to a productivity solution for the customer and therapeutic.I would say with our scale, particularly in the regenerative side, as well as in CSS, we do have the opportunity to take some technologies into the house so to speak that solves some of the bigger issues in our segments that haven't been addressed before.And we're looking at things like that what causes some of the major issues for a neurosurgeon, what causes complications for a patient that if we can do these things, we could kind of change the trajectory some to differentiate that treatment for a patient unchangeably how Integra has perceived.

So I'd say both sides of the house we're looking at those.In OTT area, there is some near neighbor new green space areas, whether it would be if we think about breast reconstruction and leveraging the products that we have and potentially other technologies or products that could help fill out a bag on a clinical area that could make us a one-stop shop.So that’s kind of feel for the things we are looking at and we are obviously conscious of what valuations and things look like, so between private as well as public opportunities.We are scanning the area wide and as you know in my capacity as CEO and now with Glenn and Carrie on Board, I plan on spending a lot more time here and particularly the farming aspect of really trying to getting out, taking a hard look at the landscape.

I would say, I wouldn't expect that you see a flurry of deals anytime soon.But we've got a really good pipeline on both sides of the house and you know how this plays out. They start coming in at different times based on how it's playing out together.

But I would say, we've got a nice pipeline and now that we've got the integrations fundamentally completed our capacity to bring in other deals I think is going to increase..

Great. Very helpful color, Pete, thanks. And on your comment on organic growth accelerated in 2020 and I know you guys have touched on a couple of the potential growth drivers.

But I wanted to ask maybe more directly, when you look at the OTT business and the Codman business.How do you see the acceleration playing out for the overall company, whether it's OTT, accelerating in Codman and then if there is any color - general color, I know you're not probably going to provide specifics, but any general color on some of the sub-segment drivers within each of those business for 2020? Thanks..

Thanks, Craig. I would say a couple of things. It's overall before I talk about segments. So we are not going to give too much color at this point given where we are in the year, but why we are confident in faster growth in 2020 is a combination of a couple of factors.

First, having a full year impact of new product launches, which impacts both segments.So, we've got a nice launching list of CSS products we are rolling out, same thing on the orthopedic side of the house.

And so, that will be a nice contributor to faster growth in 2020 will we past the Codman integration and that will be nice to say as we get past the third quarter here.So not having the disruption we saw in the first quarter of 2019 and having a more stable business outside the U.S.

going into 2020 should be a positive for us – parts like orthopedics expecting faster growth though and we got a more focused channel with these new product launches.

Private-label, a lot of our private-label partners I would say, are seeing good end-market growth, which will benefit us.And just the fact we are going to be adding more resources like I mentioned earlier. So, from the neurocritical care area adding a specialist there. Japan as an example.

And so I would just say, those are the factors that give us confidence we are going to see faster growth next year. And I would expect the growth to be in both segments. But at this point we are not going to give any further color on guidance for 2020..

Got it. Thanks for taking the questions guys..

Thanks..

We'll go next to Jayson Bedford at Raymond James..

Good morning. So, I jumped on the call little late. So I apologize if these questions have been asked. But just a few here.

I wanted to ask about wound care plastic recon, just for clarity, is the in-patient outpatient mix in wound care still roughly two-thirds in-patient, a third outpatients? And then second, the double-digit growth in outpatient wound care is that level sustainable going forward, meaning double-digits?.

So, Jayson, I think you are splits in the ballpark, I mean traditionally, it's been just even slightly a little bit more in-patient, but we're moving in that direction.

As far as the growth I think relative to the overall mix of all the products, we think that the MediHoneys and the Contact Casts are probably not consistent double-digit growers.Those are probably high-single, but relative to the strong performance in the matrices and double-digit growth, yes, we think that we see future quarters here, that will hold that growth rate and some quarters where we'll be able to accelerate beyond that..

But Jayson, I would say, here is where I really think we are seeing the growth portfolio play out for us and our strategy of taking in-patient from the time they walk into the clinic to the time they are healed, having products serving from the protect side when he walk in to treating as Pete mentioned to...

Preparing.

Preparing the wound bed, they really have a good strategy around the whole patient care in this space. And as Pete mentioned we will see growth probably each of the different three buckets there, but faster growth really on the treat side..

Okay. I wanted to ask about extremities, which were basically flat year-over-year. You reiterated that the growth expectation for OTT, but it seems like wound care and private-label are tracking better than expected.

So, I guess the question is, what is the expectation for extremity growth in the second half of 2019?.

So we are expecting to see mid-single-digit growth for the back half of the year..

For Orthopedics..

For Orthopedics and again, that's largely driven by ankle and shoulder, which are the growth parts of the portfolio. And as I mentioned, we did see a sequential improvement in the lower fixation area, as well. It's still not growing, but it's an improvement what we've done in the last few quarters.

But all-in-all, feel quite good around the new product launches.Our new Revision ankle, some of the new products we rolled out in shoulder like our small post baseplate. We've also got a really nice pipeline coming with Short Stem and Stemless Shoulder.

But I would say, relative to the second half of the year, mid single-digit growth is where we are modeling..

Great. Thank you..

Will go next to Larry Biegelsen at Wells Fargo..

Hello..

Thank you. This is Shagun in for Larry.

Can you hear me Okay?.

We can..

Great. Pete, thank you for the color on 2020. If I could just follow up, I was just wondering that your guidance kind of implies that you would exit Q4 at about 6% growth. Is that how we should think about 2020? And then, I also wanted to ask about recent management changes.

Why was this the right time?And Pete, you talked about your focus on future growth. How should we think about that relative to your LRP? You also talked about a focus on M&A and I was just wondering, do you need M&A to drive growth to the high-end of your 5% to 7% long-term growth outlook? Thank you..

Yes, Shagun, thanks for the questions. I would say, we are not going to give any more color on 2020. I think your math plays out correct on how the year would play out. But we'll give more details other than Glenn spoke to already as we get into our February call window when we traditionally do it.But we feel very good about how we are positioned.

Obviously having a strong Q2 reduces the ramp, which we know investors had concerns about and we are well positioned here now in the second half of the year for all the previous discussions we made.Relative to the organization changes, why it was the right time to do it right now is we are out of size where we've doubled the size of the company really over the last eight years.

We've got some large platforms.We are a diversified company in the mid-cap space. So there is a lot of things going on.

And so, the opportunity to have bring someone in with Carrie's background, world-class capabilities to help take the finance group to the next level.Glenn, as he got a lot of exposure too has really learned this business and again over the last few years he has not just been the CFO, but has ran all the rest of the world outside the United States and demonstrated his ability to do that very well.

Obviously, second quarter results are a nice sign of what him and Mike have been able to pull it up.But we think we've got a lot of opportunity in front of us and a lot of that opportunity is about spending more time thinking about where we should go. How we should build out sub-legs to the stool.

How we should actually go deeper in certain clinical areas.

Some of those toe and joint therapeutic beds that need more time and focus.And so that's going to allow me in the CEO role to spend the time on that and help develop out some of those pieces where when you are doing both sides of it and you've got a lot of change on with the portfolio management, the fact is some of the strategy time sacrifices.So that gets resolved.

And then, Glenn being able to focus on the day-to-day and in particular, our consistency on our execution quarter-by-quarter. And so, our hope here is, is that, we get the best of both worlds as far as being able to build-out our longer-term growth strategy, as well as being able to consistently improve our execution..

That's helpful. Thank you so much..

We'll move next to Travis Steed at Bank of America..

Hi, Travis..

Hi, congrats on a good quarter. Hey, good morning..

Thank you..

Congrats on a good quarter and welcome Carrie. Look forward to working with you..

Thank you..

And just wanted to ask, I know prior you thought about kind of 6% revenue growth in the back half, now with the better quarter in Q2, you only need 5%, it sounds like some of the private-label may not repeat.But it seems like some of the new products are off to a really good start.

So, just wanted to hear your thoughts on how realistic you think the 6% growth could still be in the back half? And any reason why the new products what they contribute more in Q3 and Q4 versus what they did in Q2?.

Yes. So keep in mind, part of the - be in the second quarter was timing related is there are really two areas. One is the new product area. The other is private-label, which we talked about. To put some color around the new product though, a lot of this is done by early adopters.

And what we mean by that is, these are customers that are very familiar with the space.They will buy the product on-site without doing a lot of trialing and know it pretty well. And so we had some pent-up demand that was built in the first six months of the year. And we are expecting to get supply in mid-July.

We got it about a month sooner and so we are able to ship out that initial pent-up demand if you will in the second quarter.

So that was a big part of it in terms of timing.Now you kind of have a little bit of a low, because you've got to go through the normal selling cycle which includes trialing which should take us in 90 to 120 days to close the sale.

So if you don't see this continue to ramp, you kind of had a full ahead or a timing-related item relative to early adopters.

And so, for the full year, I would just say our best estimate right now is going to just about 5% in the back half of the year.Combination of the timing item that we just talked about, but also the extended cycle around the capital area that Pete mentioned, some caution just around expectations in Japan actually in the TSA, caution around some Day 2 expectations and so, we are being I think prudently cautious on a number of items.

If some of these get mitigated, then there could be some upside.To your point, right now, our best view is we'll do just about 5% in the back half of the year. The good news is we have de-risked the year. We almost did 5% in the first half. Expect to do a little bit above 5% in the back half.

And so, I think a lot of the concern is just around the ramp should be alleviated with the first half performance..

And it sounds like a lot of the upside from the new products is really around the ICP monitor.

So maybe, talk about the pipeline there in terms of orders that you have, how much of that pipeline or how much of your order book you worked through already, and interesting competitive accounts?And longer term, I am not sure how you think about - what percent of the installed base you can covert in the first year typically the 10% or 20%?.

Yes, again, you could view this as a multi-year cycle in terms of growth that we would expect out of the ICP monitoring space. We are building the pipeline.

We see this as a nice opportunity as you remember back going through the Codman acquisition, we divested our ICP monitor because we knew this was going to be coming out of development.We thought it was a much better monitor than the previous monitor that we were selling.

It gives us advanced data presentation, gives clinicians a way to manipulate and evaluate data to make better decisions in the neurocritical care suite. It's got a great microsensor and very intuitive. So I think all-in-all, we feel really good about it. We are hearing great receptivity about it.We are adding more commercial resources behind it.

But right now, we are just building the funnel. We are building the ramp and as I mentioned earlier, we had some pent-up demand from the early adopters.

But now we are building the pipeline, which will take us some time, we'll see some more growth in the back half of the year.We are counting on over 0.5 coming from new products in the back half of the year, CereLink is a big part of that. And I don't think we are going to comment any further than what I just said relative to the ramp..

Okay. Thank you..

Thanks..

We'll go next to Raj Denhoy at Jefferies..

Hi, thanks..

Hey, Raj..

Yes, I apologize for missing the question earlier. Lots been asked. But I really just kind of want to ask a higher level question about the strategy kind of long-term. So much has been or so much of your longer-term plan seem driven on an acceleration rate in OTT. In the last quarter, we saw some good result.

This quarter it seems particularly in Orthopedics it stepped down a little bit.But you're seeing very good results still out of Codman right, and I think you even raised the guidance there a little bit.

And so, the question is really as you think about the complexion of the business over the next several quarters and years really, is it the right focus to expect an improvement in OTT or is it really – should more emphasis be put on what Codman can ultimately do given everything you've described around the scale of that business and the competitive landscape?.

Raj, thanks for the question. Look, it's a really important question and one, as we do at Investor Day at some point here in the future, obviously, this will be kind of the core of it.

Clearly with Codman, we do have this capability and we now have this scale that not only can we add tuck-in acquisitions in the United States that we now have this global scale.One of the big priorities that we had when we bought Codman to add things that have an impact in markets around the world, so totally agree.On the OTT side of the shop though, I would say first of all in Orthopedics as Glenn just previously commented on, we actually are in a really good position here with a very strong ankle and shoulder portfolio.

And finally, a stable, very strong dedicated sales force. So I think, yes, you should expect to see that accelerate. But probably be smaller tuck-in type plays or specifically organic developed products.When you think about the work that we've done with this CFO relationship and stuff, those are the kind of deals that I think will help build that out.

But we've got all the right pieces in place there. On the OTT side, we are the leader in broader in-patient and outpatient combined wound reconstruction. I think we are just starting to get the right traction here on outpatient.But I am very excited about our future opportunity in nerve and where we might be able to go with that.

Our opportunity in plastic and reconstructive, which is breast reconstruction, ab wall and building that out. And so, we are actually starting to see some of those benefits, it's early. But I think you could expect to see us between organic and inorganic investments focus on those areas..

Now that's helpful. Maybe I could also just ask about nerve as kind of a second question. You mentioned, that - particularly that product line in particular, is there any updated thoughts on new product launches there.I know kind of as the quarter was progressing, you made some comments at various forums about that.

What's your current thought around the portfolio in nerve and your ability to kind of expand what you have there?.

Yes I would say that, it's an area of interest for us. We are one of the earlier pioneers within the area. I would say that we had lost focus over the last few years. We've regained that focus. This is really a building year.We have some new products that we plan to bring out in 2020.

One that we've talked about specifically is this nerve 3D product, which is a conduit that actually has an inter-core that we believe will help deliver better reach recovery of the nerves.And then some other products that we will be working on to fill out that pipeline.

But I would say at this point in time, it's still a very small component of our business, but we think about the technologies and the channels that we have, we clearly believe that we can be one of the leaders in the space.

And as you know, it's not a significantly crowded space.So I would say, I think there's room for plenty of folks to grow as this business content continues to grow. But I'd say, look to hear more about what we are thinking about nerve in 2020..

Now it's helpful. Thank you..

Thanks, Raj..

And that does conclude the question and answer session and today’s conference. We thank you for your participation. You may now disconnect..