Good day and welcome to the Integra LifeSciences' Third Quarter 2019 Financial Results Conference Call. Today's conference is being recorded.At this time, I would like to turn the conference over to Mike Beaulieu, Director of Investor Relations. Sir, please go ahead..

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 third quarter 2019 financial results.

The release and corresponding earnings presentation, which we will reference during the call, are available at integrlife.com under Investors, Events & Presentations in the file named third 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 the third quarter highlights.

Total revenues in the quarter were $379 million, representing organic growth of 4.7%, above the guidance we provided in July.For the second quarter in a row, our performance is attributable to our Codman Specialty Surgical or CSS segment.

In the third quarter, adjusted earnings per share increased over 15% to $0.68 and our adjusted EBITDA margin increased 120 basis points to 24.2%.Based on our operating results, year-to-date, and our outlook for the fourth quarter, we're tightening the range of our full year reported revenue guidance and reaffirming our organic revenue growth guidance of approximately 5%.

We're also reaffirming our full year 2019 adjusted earnings per share guidance range of $2.70 to $2.75.In our CSS segment, organic sales growth exceeded 7% in the third quarter due to broad-based strength in nearly all of our franchises.When we acquired Codman, we spoke extensively about the opportunity to accelerate Integra's international expansion in scale, which we demonstrated with double-digit growth in our international CSS sales this quarter.As an example, in 2016, Integra had a very small presence in Japan and China.

But today, in these combined markets, we are on an annual sales run rate of close to $100 million and expect both of these countries to be among our fastest growing markets.We recently launched DuraGen in Japan and are experiencing strong early adoption.

DuraGen is the first and only xenograft on the Japanese market and we believe this is an opportunity to accelerate growth over a multi-year period with this differentiated technology.As you can imagine, we are delighted to move past the heavy-lifting of the Codman acquisition.

With the integration substantially complete and our global presence well-established, we expect to deliver consistent execution, launch new products, and help our customers and patients achieve better outcomes.I'd like to acknowledge all the great work that our integration teams along with our international colleagues have achieved to substantially complete this acquisition while delivering on their financial commitments.During the third quarter, we acquired Arkis Biosciences and Rebound Therapeutics; two early stage technology platforms in which we're making investments to drive future growth.

Each of these companies has its base technologies that will complement our existing product portfolio and offer neurosurgeons unique solutions to solve unmet needs.Collectively, these acquisitions have the potential to increase our total addressable market within CSS and drive our weighted average market growth rates towards the upper end of our long-term guidance range.Arkis has the platform technology that reduces platelet activation resulting in less thrombus formation or clotting in catheter-based products.

This offering will complement our existing Bactiseal technology, which is designed to reduce the risk of bacterial infection.

Together, these products will allow us to solve two of the key challenges faced by neurosurgeons.Rebound Therapeutics will bring a platform of single-use medical devices that enable minimally invasive access with enhanced lighting and visualization to the neurosurgery suite.

This platform technology is an enabler of our product portfolio and will fit nicely into our channel once launched.

Importantly, it provides us the opportunity to expand into new faster growth therapeutic areas such as intracerebral hemorrhage and minimally invasive neurosurgery.In our Orthopedics and Tissue Technologies segment, organic growth was flat in the third quarter, largely as a result of timing and lower sales in our private label business.

Organic sales in our regenerative portfolio were up low single-digits with strength in our advanced wound care business and double-digit growth in our Surgical Reconstruction channel.As we discussed in July, we began making investments to expand capacity at several of our regenerative manufacturing facilities to better meet rising demand.

These investments will continue to grow by 2020 and are necessary for the company to address the increasing opportunities in our markets.In the third quarter, global sales of our orthopedics business increased low-single digits with growth in the U.S. of about 7%. Combined our ankle and shoulder portfolios grew nearly 20% in the quarter.

We expect growth in orthopedics to accelerate sequentially as we continue to benefit from our dedicated channel and the recently launched products.Summarizing our third quarter performance, I am pleased to report that we are on track to meet our full year 2019 priorities.

We exceeded our organic revenue growth and adjusted earnings per share guidance.We completed all the significant TSA and Day 2 Codman integration activities while overperforming in CSS.

And we're increasing investments in our regenerative tissue capacity in order to meet higher demand and we're on track to grow orthopedics, in line with our plans.With that I'd like to turn the call over to Carrie to discuss our third quarter financial performance.

Carrie?.

Thanks, Pete and good morning. Third quarter total revenues were $379.1 million, representing growth of 3.6% on a reported basis and 4.7% on an organic basis.If you turn to slide 5, I'll start with a review of our CSS segment. Reported revenues were $253 million in the third quarter, an increase of 7.3% on an organic basis.

The strong quarter was driven by the successful completion of the Codman transition services agreements, synergies within our global commercial organization and sales from new product introductions.Sales in our global neurosurgery business grew approximately 7% on an organic basis compared to the prior year.

Within the franchises, sales in dural access and repair increased high-single digits compared to the prior year's quarter. Our outperformance was led by growth outside the US, including a successful launch of DuraGen in Japan.

And looking at the fourth quarter, we expect sales for this franchise to trend back to the low to mid single digit range, in line with our year-to-date performance.Sales in flow and pressure monitoring increased high-single digits, driven by strong growth from the new programmable valve configurations and the benefit of the new electronic toolkit in our Certas portfolio.

For the balance of the year, we expect sales in flow and pressure monitoring to grow in a high single digit range.Third quarter sales in advanced energy increased high single digits, driven by strong performance from both CUSA capital and the associated consumable products.

We continue to assume low to mid single-digit growth in this franchise for the balance of the year.Moving to precision tools and instruments, organic revenues grew nearly 9% compared to the prior year with strength in our MicroFrance and Mayfield product lines.

For the fourth quarter, we assume organic growth in PT&I will return to the low-single digit range, in line with the long-term outlook for this business.On an organic basis, CSS international sales increased over 10% in the third quarter even as we closed out the last of the substantial Codman integration activities.

This strong performance was driven by both the core portfolio and new product introductions with double-digit sales growth in China and Japan as Pete mentioned earlier.Based on the strong performance through the first three quarters of 2019, we are increasing our CSS reported revenue growth guidance for the full year to approximately 3% and raising our organic revenue growth guidance to approximately 5%.Let's move to our Orthopedics and Tissue Technologies or OTT segment on slide 6.

Third quarter OTT revenues were $126.1 million, flat compared to the prior year. As Pete discussed, OTT sales were impacted by declines in our private label business.Excluding private label, sales within OTT increased approximately 3%.

Third quarter sales at our private label business declined over 10%, largely due to timing, which we discussed on our July earnings call.In addition to timing, we saw some softness in customer orders late in the quarter, which will have an impact on our fourth quarter as well.

As a result, we expect sales in private label to be roughly flat for the full year.

We do not believe there is any fundamental change in this business beyond the short-term and in fact we have visibility into early 2020 schedules that give us confidence that this franchise will return to its long-term growth rate of mid-single digits.In wound reconstruction and care, organic sales increased about 3% in the third quarter.

With strength coming from our outpatient wound care and surgical reconstructive portfolios.

Demand for PriMatrix, SurgiMend and our amniotic products remained strong, and during the third quarter, we continued investments to expand our manufacturing capacity for these key products.Sales in our inpatient portfolio increased low-single digits slightly below our expectations.

This was primarily a result of late quarter supply disruption associated with final product sterilization.

Our third-party supplier has already addressed their equipment issue and we expect growth to return to our expected run rates in the fourth quarter.Organic sales in our orthopedics business increased 3% in the third quarter, with sales in the U.S. growing about 7%.

We have shown a sequential improvement in our sequential business throughout 2019, which is consistent with our expectation of how these business was expected to ramp for the year.Sales in our combined ankle and shoulder portfolios grew nearly 20%, driven by the increasing effectiveness of our sales force in the respective territories, the addition of new users of our Titan Reverse Shoulder and new surgeons trained on our ankle portfolio.

We expect organic growth in our orthopedics business to improve sequentially in the fourth quarter.International sales within OTT increased mid single digits, driven by strength in our tissue portfolio in Europe.

Given our year-to-date performance in OTT and the fourth quarter softness expected in our private label business, we are lowering our OTT reported revenue growth guidance for the full year to approximately 4% and revising our organic revenue growth guidance to approximately 5%.Turning to slide 7, I'll now review the rest of the key P&L components.

Third quarter GAAP gross margin improved 160 basis points, primarily due to lower acquisition and integration-related expenses, compared to the prior year.Adjusted gross margin was unchanged from the prior year at 67%.

Based on our year-to-date performance, we are reaffirming our full year guidance for adjusted gross margin of 67.5%, representing a 90 basis point improvement over 2018.Our adjusted EBITDA margin was 24.2% in the third quarter an increase of 120 basis points compared to the prior year and was driven by improved operating leverage.

On a year-to-date basis, our adjusted EBITDA margin has increased 140 basis points compared to the first nine months of 2018.

And looking at the full year, we are reaffirming our guidance of 24.5%, which represented an increase of 130 basis points over 2018.In the third quarter, we incurred a GAAP loss per share of $0.32 compared to GAAP income of $0.15 per share in the prior year.

The GAAP loss was primarily due to a $59.9 million in-process research and development charge related to purchase accounting treatment for the Rebound acquisition.Adjusted earnings per share were $0.68, representing growth of 15.3% compared to the prior year.

The improvement was a result of higher revenue, improved operating leverage and lower interest expense.For the full year 2019, we are tightening our total reported revenue guidance to a range of $1.517 billion to $1.522 billion, which includes absorbing $13 million of foreign exchange headwinds for the full year.

We are also reaffirming our organic revenue growth guidance of approximately 5%. Based on the full-year guidance I just provided, our fourth quarter reported revenue will be in the range of $395 million to $400 million and organic growth of approximately 5%.Moving to earnings per share.

We are revising our GAAP EPS guidance to a new range of $0.61 to $0.66 from our prior range of $1.46 to $1.53, largely driven by the Rebound charge. We are reaffirming our adjusted earnings per share range of $2.70 to $2.75.

Fourth quarter adjusted earnings per share is expected to be in a range of $0.64 to $0.69, which at the midpoint represents full year growth of approximately 13% over 2018.Turning to Slide 8. I'll now walk through our cash flow performance.

Our operating cash flow in the third quarter was $64.2 million, a sequential improvement from the second quarter, as expected.

Free cash flow conversion on a trailing 12-month basis as of September 30 was approximately 48%.We are reaffirming our full year guidance for operating cash flow in a range of $220 million to $230 million, but we are adjusting our CapEx guidance slightly higher for the year, reflecting increased investments in growth initiatives that I mentioned earlier.As a result, we now expect our free cash flow conversion for the full year to be approximately 65%, a slight decline from prior guidance.

As of September 30, our bank leverage ratio was just under three times, a slight increase from the second quarter, reflecting financing for the Arkis and Rebound acquisitions.

We maintain a strong and flexible balance sheet with cash and cash equivalents of $208 million and capacity on our revolver of over $850 million.And with that I'll turn the call back over to Pete..

Thanks, Carrie. If you turn to Slide 9, I'll close out our prepared remarks with a few thoughts on our progress we've made towards our 2019 key focus areas. The successful completion of all significant Codman integration activities and the overperformance in our CSS segment both in the U.S.

and the rest of the world give us confidence we will achieve our 2019 organic growth targets.As we continue to leverage our scale in neurosurgery and Tissue Technologies to drive growth, we plan on optimizing our product portfolio and manufacturing footprint to deliver on margin expansion and profitability targets, we've set a few years ago.Based on our 2019 results, we remain confident that organic revenue growth will accelerate above 5% in 2020 and we look forward to providing more detailed financial guidance on our fourth quarter earnings call.That concludes our prepared remarks.

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

Thank you, sir. [Operator Instructions] Our first question will come from Ryan Zimmerman with BTIG..

Good morning, Ryan..

Thank you for taking the questions. And it's nice to see CSS performing. Glenn, it's a -- maybe carryover for Glenn. I think you cited a few competitive dynamics in the quarter that could potentially disrupt growth, particularly in advanced energy and dural repair.

Maybe help us understand what you're seeing in the marketplace? It seems like it didn't impact you in the third quarter.

But maybe, how should we thinking about these competitive product introductions into the fourth quarter, and then particularly in 2020 in the CSS business?.

Hey, Ryan. Thanks for the question. In terms of the competitive dynamics, really two areas in our CSS business, we're expecting to see increased competition that being advanced energy along with dural access and repair.

In the third quarter, we didn't see much of an impact of that, but having said that, we are anticipating a bigger impact in the fourth quarter and moving forward.We feel quite good around advanced energy, the impact is more timing related.

So as a competitor comes into this space with a new product, we feel quite good that a lot of this is just going to be trial and that ultimately will keep this year that we have and it will be a timing related item.On the dural access and repair side, specifically dural sealant, haven't seen much of an impact yet.

We do anticipate that to increase in the fourth quarter and moving into 2020.

I think the key things to think about when we talk about dural sealant, one, we have two indications, both the cranial and a spinal indication where the competitor only has a cranial indication.The second, the bigger opportunity for us is to continue to go after and increase the opportunity around fibrin sealants which is still a big part of the market, and we've got a study that was done on Jonathan Hopkins University that shows the benefits of using dural sealant versus fibrin sealants, which includes things like significantly fewer leaks, shorter patient stays, fewer hospital readmissions and so forth.

And so that's really where we're pushing on very hard, and so those are the things that we're seeing. We do expect to see more competitive pressure certainly coming into the space in the fourth quarter.Having said that, you heard some of the prepared remarks around DuraGen in Japan, we're really excited about the launch.

It's got a much better than expected. So that should help to bolster our dural access and repair franchise. I just came back from Japan two weeks ago, got great receptivity from the Japan neurosurgery, meeting that we had over there. And neurosurgeons are calling it is a transformational product launch in the Japanese market.

So we're quite excited about the opportunity with respect to DuraGen to help bolster the overall franchise..

That's helpful. Thank you. And then just as a follow-up from me for Pete. The past few quarters we’d expected the sales force in CSS to be able to really grow at a faster rate due in part to new products, but also just the nature of the larger sales force of their portfolio, and I think we're starting to see some of that now.

But, help us understand or characterize kind of where the CSS sales force is at and -- and what you're expecting in terms of their maturity post CSS.

Os there further opportunities for productivity enhancements and things like that as we move into 2020, especially in light of your commentary about organic growth kinds been north of 5% in 2020? Thank you..

See Ryan, I think I'd frame it up this way, Glenn. You're welcome to join on this as well. I would say, I think from a United States standpoint, we've got a quite matured group that's well established in their territories that has had rebuilt relationships that we changed obviously when we combined sales forces, we are bolstering support.

We have a two-tiered structure, so that we roll out new products like the Hydro product which is growing at double-digit levels for our shunt business, bringing in specialists that can support that, as we roll out our monitoring products other things will support that way and make sure that we don't have folks over extended.But the model has worked very well for us mainly because it creates intermittency with one individual and provides the expertise when needed when the transaction is going to take place.

So that's kind of a model that's worked out well.I'd say outside the United States there was a lot of disruption and challenges this year because that we change the IT system, so pretty much every country and we came off of a TSA. And so Glenn you may want to comment.

I think we still have room for maturity, but this quarter we just exited which had very good growth rate coming outside of the United States, I think it's a sign of things to come..

Ryan I would say, outside the U.S. we clearly have plans to expand our commercial teams. And in particular I'll highlight Japan and China.

If you think about Japan, we just had growth this past quarter of 20% in the Japanese market, in a quarter where we exited the most complicated TSA we have across the company.And we talk about exiting this TSA because it's literally going to our ERP system moving crosswise into Integra, customer service, distribution, logistics.

The team actually generated 20% growth, despite having to deal with the TSA exit.But when we think about the future growth in Japan which is going to be a key long-term growth market for us launching DuraGen which we see is a big opportunity will probably had more sources around that.CUSA Clarity continues to go really well for neurosurgery applications.

Obviously it's a 2-tiered model in such cases, so we may have more special attention around CUSA. The programmable valve growth has been tremendous.

We are the market leader in Japan and so that's going to continue to drive more need for resources.And then finally I would say in 2020, we are going to be taking our general surgery business in Japan from indirect to direct.

And so we're going to be adding a sales team to sell directly with certain general surgery products like CUSA Excel which is used for liver indications and other general surgery type instruments.So all in all, I would say that you can expect more investment certainly in Japan and the same thing we China.

We're going to be adding more resources given the growth opportunity in China.

We have consistently delivered 20% or so growth in each of the last five years in China and we see that as another very exciting and fast growing market for us where we're going to add more resources.In Europe, I think there's still more opportunities to get productivity from the team. We saw a lot of it this past quarter.

Grew almost 9% in Europe which is the best performance we've had in several years. But I think there's still more opportunity to just do more with the existing team in the European markets..

Thanks for the question..

Our next question comes from Robbie Marcus with JPMorgan..

This is Allen on for Robbie. I think just a quick question for our guidance methodology. This is going to be second quarter that you guys have put up stronger-than-expected results.

Obviously there were some dynamics in private label that are expected to -- dynamics reported expect to remain a headwind.But you are reiterating guidance for both organic and earnings growth despite beating on both.

So I guess just why only reiterate guidance for the year? What's kind of your thought process there? And Codman may be coming in above that number?.

I'll take that Allen. In terms of the way that we're thinking about the revenue guidance outlook we're consistent and trying to derisk the second half and we were able to do that with our second quarter performance and we're doing that again with our third quarter performance. For the full year, we still see the path to 5% organic growth.

And when you look at year-to-date performance, we're about 4.8% organic growth, which implies roughly just over 5% in the fourth quarter and so we see that as a balanced year.But as we think about it, because if you go back to some of the prepared remarks, some of the growth that we had in some of our franchises within CSS will temper a little bit back to more of a normal run rate range.

PT&I we had really wonderful quarter there in the third quarter, but we'll see that temper back to more of a -- of a normal type of -- of a single-digit type of growth and the same thing with Dural Access and Repair, we had a couple of thoughts there.

We still expect nice growth but little moderate a little bit there.And Glenn mentioned in his comments about some additional competition that we would expect in the fourth quarter and from a reported basis, we have additional FX headwinds and China tariffs that we will need to work through.

That's all comprehended within our -- within our guidance.But as part of the thinking as we think about the full year, and as we think about the EPS, if you recall in the second quarter, we talked about that the second half would have incremental higher spend than the first half and we expect third quarter had higher spend and we expect sequentially fourth quarter spend to be higher than third quarter, particularly in the area of R&D, inclusive of our clinical study work.The other thing that I would mention that's really important is that we did make two late quarter acquisitions, Arkis and Rebound that Pete talked about.

Those were all pre-revenue acquisitions. So they're not going to add any revenue for us in 2019 and in 2020 as well, but they have additional investment costs. They do have incremental R&D and operating expenses that we had to absorb in the fourth quarter. And so that's part of our guidance.

So as we thought about those, we can absorb those within the guidance range we previously given you and we reaffirm the guidance..

Got it, okay. I guess also, moving on to kind of like, just a quick question on the ortho base business. It sounds like you guys have good momentum there -- growing close to 20% is pretty impressive. But I guess, relative to where -- and the street with that it looks like it was a little bit softer than what we were hoping for us.

I guess is there any dynamic there that we should be looking at or is it just kind of like a little bit of a disconnect between our expectations and your own internal forecasting?.

Yeah, I will take that one. I mean, we look at our ortho business we actually performed in line with our plans for the third quarter.

The 20% you referenced is really the combined performance of our ankle and shoulder business, so that performed quite nicely for us, 20% really good performance overall.Ortho in total was up about 3% on a constant currency basis, pretty much in line with our plan, acceleration formulated in the second quarter and we continue to expect a nice sequential acceleration of ortho performance in the fourth quarter.

So all the things we've done over the last couple of years, we're starting to see play out for us including a channel change that we made, moving centers of excellence to Austin, Texas, where we have a training lab, state-of-the-art facility for training and then the new product launches are all taking hold here and having great success and that includes our ankle XT revision product that can be used in our ankle as well as competing ankles, our Panta 2 Nail and our small post baseplate for shoulder.So the combination of all the things has taken us from a declining business to an actual growing business and we expect to see more better performance as we go out here, not just into the fourth quarter, but into 2020.

So from our perspective, we're doing exactly as we thought when it comes to ortho and we continue to drive better performance moving into 2020..

Got it. Thanks guys..

Thank you. Our next question comes from Dave Turkaly with JMP Securities..

Hey, thanks, good morning. Just looking at the TSAs wrap it up, you mentioned the heavy lifting being done. Can you just remind us, what we should expect if anything on the P&L as those wrap up, will you get some incremental SG&A leverage or will it be the reverse in your OpEx as those are completed.

Do you get incremental earnings are or less?.

Yeah, Dave, I'll comment on that. I’ll ask Glenn and Carrie to join in. I think the first part is the biggest benefit at anytime that you switch over from another company's support services, there is all-in efficiency component that we're still ramping up through.

And I think in the United States since it's over a year now past, we've gone through that. In Europe though it's only been as an example just a few months, and in the case of Japan, it's only been 30 days.

So that's probably the first that the productivity was on your new system.The other aspects are that we still have manufacturing that is being done by Codman and we'll be transferring product lines over the next few years. Those are manufactured for us at an up charge.

And so when they come into our facility, we believe that there will be some cost of goods benefits that we’ll fall into it as well. Those are two of the largest ones and guys you want to make any other comments..

No. I would just say that the TMA is probably got the bigger benefit when you got to fill manufacturing agreement but that's still a few years down the road. From a TSA perspective, I would say, there's no unexpected cost surprises.

For the most part, the cost to stand up this business has been consistent with our deal models when we first did the deal. And I expect over time at these points that we're going to get efficiencies and synergies would actually generate further improvements and bring some of the cost but we're still in the early days of the TSA transitions..

And you didn't mention day 2 countries. But I would say, there is a number of transitions of day 2 countries that happened in Q2 and Q3 and substantially all of the major day 2 countries are now behind us. That gives us additional control and visibility into those channels.

So that's helpful in terms of driving international sales and again forecast ability and transparency in those markets..

Got it. And then on the private label front and I think last quarter we talked about $5 million being pulled forward into 2Q with $2 million coming from private label. $3 million from the new monitors, but the magnitude of the change in private label from up 15% last quarter, down 11%.

It just seems largely, and you mentioned softness in customer orders. I was wondering if you could quantify that and maybe just talk about that kind of variability going forward. Thanks..

Sure, Dave. It's Glenn. I'll take that one. We did mention that we are expecting to see a decline in the growth we saw in the second quarter because of the timing of some of the orders. I think we quantified it to be around $3 million.

In addition, we did see some softness throughout in addition to the timing here in the third quarter and we expect that to continue into the fourth quarter based upon the forecast we received from our key private label partners. And we've talked about in the past, private label can be lumpy between some of these quarters.

Also, clearly when we look at the full year performance now for private label, we're expecting it to be flat overall.Having said that, we have good insight now into some of the forecast for next year and we do expect to return to kind of mid-single digit growth range for the private label business.

So I feel quite confident that you're going to see us return to better growth in private label in 2020.But clearly, when you look at some of the third quarter performance in OTT was impacted by the softness in the private label orders. And we're expecting some of that continue here into the fourth quarter.

But should recover and we get better growth as we go into 2020..

Yeah, I just add a little more color into kind of on the forecasting piece of it is, is that some of the partners are two or three steps back in the supply chain.

Meaning, we sell to someone that actually sell to another person that incorporates in a product.And so depending on how much supply of that component they have within their change, the active change some of these based on their forecasting models.

But as Glenn commented and Carrie did in the prepared remarks, we've got good visibility into 2020.And honestly into the Q4, which is why, we've communicated what we did on the private label numbers for this year..

Thank you..

Thank you. Our next question comes from Matt Miksic with Credit Suisse..

Good morning, Matt..

Matt, please make sure ….

Hello?.

…your phone is not on mute..

I am sorry about that and a couple of calls here, as you may know.So, congrats on a really solid quarter, I think, and what shaping up to be a pretty solid earnings season and turning the corner here into the back half for Integra. I just, maybe, wanted to ask about a couple of things.

As the first on, just the portfolio, this comes up often for names across our universe.And Integra, in particular, just where you are in the spectrum of either actively managing the portfolio or if it considering additions to the portfolio here as you sort of certainly appears as though you stabilize the business team and kind of ready to move into 2020, with a sort of steady state-run rate business again after kind of rebuilding over the past few quarters.

And then, I have one follow-up..

Sure. Look, I think, we feel pretty good about where we are obviously with the whole company. The move to do the Codman acquisition for CSS was a big move, having left.

I mean a lot of people question you buy a 1% to 2% grower, how are you going to get back to growth rates.We feel as confident as we ever did that we can move the CSS business up towards the higher end of its range over time, mainly because of the scale that we've been able to create, the products that we can bring out and the global reach.And I think we saw the first glimpses of that opportunity here within Q3.

If you look at OTT particularly, I'll just start with the O side of things. Our strategy here really is to get down to basics. The Arthroplasty type plays, whether it'd be ankle, wrist, shoulder are really the bigger opportunities for us.Ankle fixation as well Glenn mentioned the Panta.

And so we really haven't been trying to chase every screw in plate that plays even into the forefoot, there is a lot of players out there.We've been focusing on some of these bigger items that we can add differentiation with.

And I think we've got a formula coming together, with a dedicated sales force relationships with third party to bring in changes within the product portfolio.

And some bigger home markets such as the pyrocarbon plays, which we've actually advanced those programs quite a bit.So I would say, from that one is staying the course and we going to need to continue to execute here into 2020 and then look out to expand the portfolio in the right way.On the tissue side, it's been a year and a little bit while we've been chasing supply, but the demand is actually great.

I mean, I think our brother contracting agreements we've had that have driven amniotic sales, it's kind of a no secret that if we had more amniotic supply we could sell it. And Glenn and team have done a nice job of ramping that up.

And so that will be a growth vehicle for us.I think on the, in the tissue side, particularly our legacy tissue business, we continue to do well. We had this one small blip again in the quarter, but we see that coming back and we see that being a strong growth vehicle for us in the future.

And these products, SurgiMend and PriMatrix, we're quite optimistic about for new markets opening up in the plastic and regions.So, again, I think across the board, we feel good. At the same time, there's areas where we can prune the portfolios to optimize it.

So we spoke last quarter about some dental accessories and other products that we took out of the portfolio that were lower gross margin products.

We have some other products in the portfolio that we'll probably consider as well.And I would say the focus on the MDR work around the globe, has precipitated into a very strong look at what products we want to keep, which ones are worth doing the added work with, to streamline the portfolio and I think the result of that will be is ultimately a stronger gross margin and stronger, faster mix within -- a faster growth mix within our overall portfolio.So I think we're in a good spot here as we make the turn into 2020 to really drive the longer-term numbers, which we laid out which is being in this 5% to 7% range, I've talk about, being above 5%.

We talked longer-term about moving closer and above 70% gross margins and we've talked about our longer-term targets of being above 28% to 30% EBITDA. All those are in play and I think we've got all the components in place to be able to drive this..

That's super helpful and then a good segue into the second question, which is on this – from sort of a high level to sort of the ground level, particularly overseas around MDR and product registration.

I guess, maybe if you could and I realize it's hard to maybe see that or carving out or looking at it individually, given all the work that's happening globally around the Codman integration and product integration and SKU assessment, et cetera.But maybe help us understand, like, what's the investment opportunity there in terms of, as you talked about sort of deciding which product you're going to kind of put your investment behind and what's to return opportunity maybe in terms of – especially, for Integra where you have a pretty broad portfolio and I would assume a lot of smallish competitors that kind of have one or two products? The opportunity for consolidation and sort of leaning out some of your end markets to a place where you're capturing more share and maybe at a higher price point?.

Yes, Matt. I would just say, I think, we're not really prepared now to kind of talk through kind of MDR and kind of the scope of it. As you know, there's somewhat of a potential moving target there.

But the point being is that, the products that are most critical for those markets, we'll make sure that we get our registrations on the medications we have.At the same time, we're taking a look at for active portfolio management. Glenn, you may want to comment.

I do think this point about the larger base of products, our ability to acquire and integrate around the globe to build a stronger faster-growing base is clearly something that we see as an opportunity..

Yes. I mean Matt you probably remember two years ago when we acquired Codman, we talked about the importance of size and scale with Codman, especially outside the U.S.

And now we past the integration, we have stable channels, being the number one player in neuro and the fact that we are investing a lot in this business creates opportunity for us in my mind when you look at some of that EU MDR [ph] and the competitive landscape.The piece we still have more work to do across the entire portfolio, we're not ready to talk about all those pieces just yet.

But I would say that probably when I look at next year, the level of discontinued products is probably going to be higher than what you're seeing here in 2019 as we get into this. So, just to set a lower expectation will probably higher amount of discontinued products.

But again these are lower margin products that don't fit to the portfolio longer term. And in many cases have overlaps, so we think transition to higher margin SKUs..

No, that's helpful. Thank you..

Thank you. Our next question comes from Steven Lichtman with Oppenheimer & Co..

Hey Steve..

Hi, good morning guys. So, just first on CSS. Solid growth out of neurosurgery despite some of the pull forward into Q2 you talked about last quarter.

Can you talk about what you're seeing from the CereLink rollout and how the interest in pipeline of potential customers is looking?.

Yes, Steve, thanks for the question. I think in general the new product launches have been extremely successful. We're looking at service plus the small configuration, the toolkit that goes along with the valve. Seeing great receptivity in the markets, coupled with the marketing campaigns that we've launch.

And these are campaigns around things like everything in magnets, so you can have unintended changes to a valve setting which is applicable to competing products in the market like ours, ours is MRI-resistant.And so we're seeing really strong growth coming out of the valve portfolio. And part of that is attached to the new product launches.

Still getting good growth right out of CUSA and bone cutting. So bone cutting was a new capability we came out at the beginning of this year. And we just launched the surgical headband and electrosurgical generator coupled with a new product registration of DuraGen in Japan that I mentioned earlier.

So, I would say all-in-all, those are going quite well.If you remember CereLink, back in the second quarter, we had our initial launch to early adopters. We had a limited set of customers we sold the product to.

I think about less 20 customers or so, generated strong interest got great feedback.In the third quarter though, we found an issue in one of the components on the CereLink. And so we are addressing the issue.

What that means is we're making an assumption now that we will have no additional sales of CereLink in the fourth quarter or the first quarter of next year.

But I would just say that based upon the competitive dynamics in the space, we view this more as a delay or a timing issue versus lost business.But having said that, you look at the growth we've put up greater than 7% organic growth in CSS, a lot of it is coming from the success of new product launches.

A lot of it coming from the benefits we're seeing from the Codman business, especially outside the U.S. We feel really good about how the CSS business is performing overall..

Got it. And it sounds as though based upon that timing that the time to correct that one issue in CereLink is not elongated.

It seems pretty quick?.

Correct. Again we're not expecting anything in terms of additional sales were in Q4 and Q1. But mid next year, we're expecting the -- show the ramp to growth again for CereLink..

Okay got it. And then quickly on OTT, you talked about the strong ankle shoulder growth in the quarter.

Can you talk about the progress you're making on the shoulder pipeline with the consortium of Focus Orthopedics?.

Yes. So the good news is we launched a small post baseplate which is helping the current growth that you're seeing and we're adding more distributors to our network. We're still on track to deliver a short stem in the stemless shoulder out in the future here. Still probably about 18 months out.

We think once we do that it's going to open up a $600 million market opportunity for us and we'll see even faster growth in shoulder. So, all things are still on track relative to that, seasonal impact still always now posting a really strong overall numbers in shoulder. And shoulder actually did growth above 20% this past quarter.

So we're quite pleased around how that's progressing..

I mean, Steve one of the feedbacks we get from a lot of the users that look at our product versus what's out there is our instrumentation. And significantly simplified down versus some of the product that are out in the marketplace.

It mitigates less instrumentation to place it, which ties to actually a more efficient way to actually train and ramp-up users since we explained this I think this piece tied with the CFO relationship is one of the things that we would advance going forward.

And I think what the team has done a very nice job in Austin with this as well.We look forward to PyroCarbon with success of that product, actually having at modular play into the current shoulder base.

So, if you learn how to do the shoulder procedures on us now, in the short baseplates comp the same fundamental platform when the PyroCarbon have comps same platform, and I think that philosophy is now having people look and say I'd like to get on board now, and as this new upgrades and changes come I can advance with it.

And so that's the strategy we've been implementing and thus far has been helping drive some of this faster growth rate..

Great. Thanks guys..

Thanks..

Thank you..

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

Thanks, guys for taking the question. I want to start with the organic growth expectations for both Codman and OTT. So they're both around 5% for 2019 and obviously that wasn't what you guys expected at the beginning of the year.

So when thinking about that – that they're equal for 2019 and looking ahead to 2020, where you're going to see the acceleration from where we are today and then even with the LRP, OTT was supposed to be significantly higher growth than Codman.

So just wanted to get your thoughts on how that growth mix plays out over the next couple of years especially with some of the strength that you're seeing in Codman recently?.

I would say that, we're not at a place to give guidance for 2020 yet. I think that for this year again our guidance for both franchise and both segments being around for 5% is where we would expect obviously we've had some really nice strength coming out of CSS. That puts it on the high end of that long-term growth range of 3% to 5% for CSS.

So, I would expect in 2020 beyond again we're still thinking about 3% to 5% for CSS long-term.The opportunity for Rebound and Arkis type acquisition helps drive it towards the higher end of that range, but we won't see material revenue contribution for Arkis and Rebound in 2020 on that – on the CSS side.

In OTT, I think again we added a temporary gift here in the third quarter related to private label and as well as some sterilization issues that we found ourselves working through in the third quarter. We expect that to hop backup in the outside of the private label business with the nice bounce back during the fourth quarter.

So as we think about OTT longer term, we would still be thinking about that 9% to 12% long-term growth range..

Hey, Craig just filling out to Carrie's point on OTT is again these investments that Glenn and John and the operations team are making on capacity, we really start seeing some of the benefits of those as we kind of exit Q1.

And it’s kind of that point between whether it be in plastic or the reconstructive side, the amniotic pipeline or all of our traditional products. We move into an unconstrained demand model. And so what that mean is our ability to aggressively go after new accounts and convert -- accounts go up.

So hence getting back to what would be our normal growth rates as Carrie said. We feel quite good about it..

Great. That's helpful guys. Maybe just one follow-up on OTT, and I know you talked about the visibility Glenn in the private label business. But some of the other businesses within OTT have kind of bounced around; ortho was strong in Q1, flat in Q2 and then kind of bounce back.

And you guys are expecting acceleration?So maybe if you could just provide a little bit of color on the visibility that you guys feel that you have into some of those other businesses and especially with some of the one-time or temporary issues that you guys had seen during the different quarters thus far in 2019?.

Yeah. Look private label is quite good about. We've got a forecast for next year from our partners. So, we're quite confident we’re going to get back to that mid-single-digit growth for private label.Ortho, a lot of its run rate meet the procedures that are taking place. We added more ankle users this past quarter. I think we have close to 13.

So as we look at the sequence of cadence of the business itself, we feel quite good that the orthopedics business will continue to show sequential improvement in Q4 going into next year.The rest of the region, I think the inconsistency has been due to a couple of different things. One is – one of which is the supply.

Having more consistent supply to meet the end demand that we're seeing in the field is going to help us. Pete mentioned the investments we're making in the facilities. That could help predictability going into next year and also help overall business performance.We did have specific issue this quarter around sterilization.

We have one of our third-party sterilization providers who had an issue with their electron beam sterilization equipment at the end of the quarter. That's been fixed. It had an impact on some of our inpatient business this quarter.But going forward we're not anticipating things like this to create some of the choppiness in the numbers.

So I would say overall we feel good around the numbers we've communicated for both this year and longer term getting into the 9% to 12% for OTT..

Good. Thanks for taking the questions..

Thank you. Our next question comes from Matt O'Brien with Piper Jaffray..

Hi, good morning. This is J.P. on for Matt. I just wanted to go back to a product question around delta and growth rates between Codman and OTT.

Do you think that kind of lasts for two quarters given what’s going on in private label and the supply constraints, and then maybe exiting Q1 that's where we see OTT really become the growth driver next year?.

I would expect that -- again CSS delivered over 7% in Q3. I think if you do the math on our year-to-date guidance that would put you something lower than in the fourth quarter as some of those franchises moderate back to what we would expect this normal run rate growth rate. So I would say that you'll see CSS again moderate back in the fourth quarter.

In OTT, I think to get to that 5%, they got to go up in the fourth quarter compared to where they were in the third quarter even with private label being not a contributor for us in the fourth quarter.And that's really about improving supply. It's obviously working through that sterilization issue that heard this in the third quarter.

A lot of those things are freeing up some additional capacity for us in the fourth quarter. And again, we're seeing sequential expectations of growth in our ortho business as well. So that would say that OTT should be higher than their year-to-date number to get to 5% for the full year..

Okay. That's helpful. And then just maybe one on sticking on OTT. It sounds like you have capacity especially on the amniotic side exiting Q1.

So maybe could you just frame up what that can do to the model for the remainder of the year and maybe talk about how much demand you're seeing out there relative to what you've been able to supply and may be what that actually do to the margin profile as well? Thank you..

Yes. I would just say we're seeing a really strong demand in amniotic, especially in the wound care space. As we came into the year, we've made a lot of investments to upgrade our Memphis facility.

Part of it was increasing the network supply of Central recovery, increasing raw material supply, adding clean rooms, adding three shifts to the plant and improving the yield in that facility.

And all in all, we made great progress and significantly now start to ramp up in that facility.So even as we exit 2019 in the first half of 2020, we're still not going to remain unconstraint in the field.

We have plans to do additional clean rooms in that facility in the first half of 2020, which will then put us in a position to meet all the end market demand. So I would just expect to see continued strong growth in the business and then probably a bit of a hockey stick to the back half of the year as we increase capacity of that facility.

But yes, this is a big opportunity for us. We're seeing very nice growth in this part of our business and we expect it to accelerate, especially in the back half of 2020..

I would just want to emphasize the biggest chunk of your regenerative business here all of the IDRT within all of our classic products fundamentally you're in great shape now and so that'll be probably in the biggest levers to start the year..

Yes. for everything we have a plan for degenerative products this skin products we're in great shape from a supplier perspective heading into 2020. And so that should be a good thing for us in terms of meeting the demand we're seeing from the field..

Thank you..

You're welcome..

Thank you. Our next question comes from Shagun Singh from Wells Fargo..

Thank you so much for taking the questions. Pet, you've indicated that there will be faster growth in 2020 than in 2019.

Should we think of growth more in the mid-to upper end of your five to seven LRP range for next year given that you will exit the year at about 5.6% based on our math? And then I was just interested in getting more color on your commentary around lifting the long-term weighted average growth for you guys.And I think the Rebound acquisition was interesting as it addresses the stroke market, what are your thoughts on expanding into the space more meaningfully especially given that it's a high-growth market and you operate in neuro space? And then I have a follow up..

Shagun, good morning. I would say, I will give you a couple of thoughts here and then I'll ask Carrie and then Glenn to jump in with other color. So first we're not going to give really any guidance yet for next year.

We'll clarify that when we do our February Q4 call.I think as we've kind of discussed, we feel quite good that we'll finish up here at 5% organic for the year. And I don't think we're being overly conservative. I think we're being realistic.

We haven't really seen the effects of a large competitor in the neuro space yet.We believe there are a little slower to market on some products and so we're calculating that that will have a little bit of an effect in the fourth quarter if that doesn't happen obviously, we deal better but we think that's right estimation.And on the orthopedic side, we believe, because of the private label component that will be the main drag while we're picking up growth within the tissue space.

So that is the basic dynamics. And as we go into next year, you heard us both comment on that. We'll get back to our normal growth ranges for OTT and also for CSS.To your question on the technologies, I think these are emblematic types of acquisitions that we can do now that we couldn't have done a couple of years ago. So we have this large platform.

We got the channel reach now around the world and we're able to bring something like Arkis in, which again is dilutive R&D deal to bring in.

But very, very good data that shows that this coating technology can reduce [indiscernible] for clogging and if it's a shunts or it’s an EVD catheter or it's a catheter for a monitoring products for neurology one of the biggest issues is that sometimes they stop functioning because they could clog.So if they crack the code on that.

And as I've mentioned in my remarks complement that with an antimicrobial play, we're the only game in town that would have obviously the anti-unclogging and combined would be the only game in town globally for that. So these are the kind of things and there's other technologies in our space like that.

I think you expect to see tuck-in.What's interesting about Rebound for us is this triple play in exchange in what's happening in technology space, which is you kind of fully disposable device something that is a one use device that has a high-resolution camera on it, has high output intensity lighting on it and is done in an elegant design that you don't really need a whole sophisticated imaging tower endoscope to be able to get this visualization.And so it does open up interesting opportunities instead of having a larger craniotomy that you can actually do a burn hole and perform some of the procedures that are now done in an open procedure which should reduce cost, reduce risks to the patient.Clearly changes the profile and how you might think about need within a certain exam.

So again this will take us a couple of years to develop and evolve but pretty exciting. And you'd mentioned ATH. There's a couple of players in this space that are looking at different studies.

We think this is quite interesting because there is a significant amount of unmet need.Today as you know, and so if you could reach in via a femoral punch or radio access there's great companies out there doing all kind of stuff with intravascular approaches.

If you have a deeply, deep in your cranium today it's pretty much you put on a TPA or drug and medically managed.

And there's not much help for you.And what we believe is that this active evacuation in the critical time period could be a significant game changer.What's interesting for us is this technology or forms thereof could be applicable for MIS, minimally invasive neurosurgery also the same platform could be available for ICH that it's an unmet need that's out there today.

And again, I think this idea of having that you don't need the major capital investment is a disposable item bodes well for our global markets, and also bodes well for the non-tertiary big, big centers outside of that.So again, more to come and I think in next year, we'll be able to talk more about it.

These are both platforms that in the 2021, 2022 time period will be accelerators to our pipeline. And again, why we're pretty pumped up about CSS? It's all the products we launch this year. Really had peak year sales about three years out and we're only about nine months into them.

So, just a great opportunity with CSS and our ability to continue to grow it..

Thank you so much for the color. And just for a follow-up. Pete, based on a checks, it appears that CMS is looking at reimbursement in the hospital outpatient wound care setting more closely. And they're specifically looking at the two bundles payment system.

I was just wondering if you had any conversations with CMS in this regard and if you could just give your thoughts on the reimbursement environment and wound care more broadly? Thank you very much..

Sure, Shagun. Look I think wound care reimbursement is in flux at some level. As you know has been pretty much on a fee-for-service kind of structure.

We have been playing a lead role as well as others communicating with CMS review as well as other bodies around the world, how we see it play out.We believe that if it move to an episodic payment structure, it would make a lot more sense in a particular case for the U.S. health care to be more cost efficient.

I think it would drive the proper incentives. And then in the case with a company like Integra where we have amniotic products.We have products like PriMatrix.

We have products like Omnigraft, we can meet all of those needs, but we are a firm believer that if you have a product that you can actually cure a patient faster with less cost that should be a winner. And so we've been active in communicating that and demonstrating why some evolution within the payment structure would make sense for the U.S.

as well as other countries around the world..

Thank you..

Thank you. Our next question comes from Jayson Bedford with Raymond James..

Hi, Jayson..

Yeah. Hey, Pete. Just a few questions and I'll try to be quick here. Just to clarify.

The fourth quarter implied organic growth is 5%, correct?.

Yeah. It's just a little bit higher than 5%..

Okay. I wanted to ask you a few questions about 3Q and specifically few growth rates in CSS. Dural was up high single-digit in 3Q. Next quarter I expect it to be low to mid-single, similarly precision tools & instruments was up I think 9% in 3Q. Expect to be low single-digit in 4Q. I think someone earlier use the word pops.

I guess my question is, would there be any kind of stocking or large one-time orders that helped 3Q?.

Yeah. So Jayson for 3Q we just had overall solid quarter. We do have some lumpiness in this business as well as we've been talked about in the past. We saw strong growth in our specialty instruments area. I think it was MicroFrance. We did get some large orders on MAYFIELD really outside the U.S.

I think it's a combination of seeing the benefits of the Codman deal now, seem to be much more comfortable and upgraded some of the capital outside in the U.S. and so we sell a real nice quarter and MAYFIELD sort of kind of moderating that in our expectations for Q4. And we had really strong growth coming out of our new surgical had lab.

And so those are some of the key drivers. I would not expect that we been growing 9% PTNI going forward. We may have some quarters where you see some high single-digit growth. But MAYFIELD is more of a capital item and that was timing wise a pretty [indiscernible] close to 9%..

Glenn, what is the end market growth of PTNI? I know it's difficult but what is the approximate end market growth?.

Yes, we think it's like 2%, somewhere between 1% and 3%. It's low single-digit growth for sure. And we consistently demonstrated our ability to grow at least one point or two higher than that.

We got some quarters we're flat some quarters where we're going to be up like it's all here in the high single-digits range but we view it is kind of a low single-digit market overall..

Okay. I wanted to ask you also about outpatient wound care. I thought last quarter was a bit of a highlight with double-digit growth. This quarter it looked like there was a deceleration to mid-single-digit growth.

I realize that there's always comp dynamics but what happened there? Why did the growth slowed a little bit in 3Q relative to 2Q?.

I would say it was generally in line with our expectations. Overall, our growth for the full quarter was 4%. So we knew that sequentially from Q2 to Q3 that we would see a little bit of moderation. So I think largely the outpatient was in line. At mid-single digits we saw some really nice strength in SurgiMend and amniotic products and PriMatrix.

But again, as Glenn mentioned, we still are not needing the underlying demand in the market. So incrementally we'll see some additional supply release here in the fourth quarter that will continue to help us meet that underlying market demand in the fourth quarter.

So we would expect to see some nice sequential improvement between Q3 and Q4 in the outpatient as well as the inpatient side..

Okay, thank you..

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

Hi. Thanks for squeezing me in. Just one question for me.

I just wanted to see, are you still committing to double-digit earnings growth in 2020? And as you think about the puts and takes next year in gross margin OpEx, I know you're not necessarily give guidance today but anything we should be aware of on gross margin or OpEx? Where the opportunity is for leverage next year?.

Yes. I would say, at this point, we're not prepared to give guidance beyond what Pete has talked about the acceleration in the top line growth above 5%. So we'll be more prepared to give you guidance on that in February..

And Travis nothing has changed within our long-term metrics and targets that we laid out there. So that hasn't changed. But to Carrie's point before, we get to February we'll give you all the breakouts there for 2020..

Okay, great. So it's not -- you're not really backing away from double-digit earnings growth. It just means you're not ready to provide that at this point..

Sorry, we're not backing off from any of our long-term targets that we've laid out whether it be the 5 to 7 or 28 to 30 and so and how you get there. So that's correct..

Okay, thanks a lot..

Thank you..

Thank you. Showing no further questions in the queue. We have reached the end of today's conference call. Thank you for joining us. Have a great rest of your day..

Thank you..