Integra Lifesciences Holdings Corp (IART) 2016 Q2 法說會逐字稿

Good day, everyone, and welcome to the Integra LifeSciences second-quarter financial reporting conference call. As a reminder, today's call is being reported. At this time I would like to turn the call over to Angela Steinway, Global Head of Strategic Initiatives and Investor Relations. Please go ahead.

Thank you, Robbie. Good morning and thank you for joining the Integra Life Sciences second-quarter 2016 earnings results conference call. Joining me today are Pete Arduini, President and Chief Operating Officer; and Glenn Coleman, Chief Financial Officer.

Earlier this morning we issued a press release announcing our second-quarter financial results and raising our full-year 2016 guidance. We also posted a presentation on our website which we will reference during the call today. You can find this presentation at investors.IntegraLife.com under Events and Presentations in the file name Second-quarter Earnings Call Presentation.

If you would now open that up to slide 2, please reference our Safe Harbor statement covering the forward-looking statements we will make on today's call. As well, please reference the reconciliations of non-GAAP financial measures at the end of the presentation, beginning on slide 13.

Additionally, we noted in our press release today that we are electing the early adoption of FASB update number 2016-09, Improvements to Employee Share-based Payment Accounting. Our six-months' results reported today reflect year-to-date impact of this adoption.

Going forward, we will present the first quarter of 2016 as if we had adopted at the beginning of 2016. We added a short supplemental financial schedule to slides 20 and 21 of the Appendix and to the website, which provides a first-quarter 2016 financial results recast for the new accounting standard. This information should help you update your models.

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

Thank you, Angela. And good morning, everyone. Turning to slide 3, I will start by making some brief comments on our financial highlights for the first half of 2016. Second-quarter sales increased 17% to $249 million, ahead of our expectations. Organic growth in the second quarter reached a record high of 10.7%, contributing to organic growth of 9.8% for the first half of 2016. Domestic and international strength across both specialty surgical solutions and orthopedic and tissue technologies contributed to this growth.

Our adjusted gross margin improved 130 basis points over the prior year and exceeded 69%, reflecting favorable product mix. The strong topline performance enabled us to make additional clinical and commercial investment during the quarter, while delivering earnings per share slightly higher than our guidance.

Turning to slide 4 I'd like to take a minute to discuss a few of our recent accomplishments. Strength in organic growth came from both segments. [Dermal] repair and precision tools and instruments again grew faster than their respective markets. In orthopedics and tissue technologies, our core regenerative portfolio delivered double-digit growth.

International sales also contributed to a strong organic performance in both segments. Growth in our direct European markets reflect the benefit of investments we've made in sales training and infrastructure.

On the medical education front, in mid-June our global team held a international tissue technologies training and educational symposium in Portugal. We brought together over 100 surgeons from around the world for clinical training and education in areas such as dermal regeneration and plastic and reconstructive procedures.

Events such as this increase awareness of the breadth and depth of our portfolio and drive utilization in markets outside the US. We are successfully moving forward with the control market release of our Cadence total ankle system and we received positive feedback from surgeons on this bone-sparing design, simplified instrumentation and reproducible results.

We are also continuing to see solid sales growth with the Salto ankle. Last week at the American Orthopedic Foot and Ankle Society meeting in Toronto, we were positioned as one of the leaders in ankle arthroplasty and had many physicians visit our booth to learn about our ankle systems. We also had a mobile lab on-site which allowed us to conduct hands-on training for both the Salto and Cadence total ankle systems.

We are making progress with our global supply chain and inventory initiatives. These efforts are beginning to have a positive effect on operating cash flow. As part of our ongoing manufacturing, optimization and efficiency efforts, we consolidated up rations and distribution capabilities and closed two small European facilities.

In addition, we kicked off a new Companywide customer excellence program, focused on enhancing the customer experience in the many ways customers interact with us.

In the second quarter, we received FDA approval to begin commercialization of Omnigraft for the treatment of diabetic foot ulcers. Omnigraft currently has reimbursement for over 145 million covered lives and we are working with additional payers for even broader coverage. In addition to reimbursement coverage, there are typically three phases to the transaction cycle for commercialization of the new product in the outpatient market.

The process begins with the approval from value assessment committees, also known as VACs, followed by trialing by lead clinicians and finally ongoing use and retreat orders from the broader clinic. The process of getting on the agendas of VACs is taking a little longer than we initially expected, but we are in the midst of summer and we initially expected a 60-to-90-day period for initiating the VAC process to being available in the clinic. And now we think the transaction cycle will be closer to 120 to 150 days.

We see that in other parts of the business that the market demand for regenerative products is clearly ongoing, and Integra is investing in new products, clinical studies and expanded indications. Early feedback from initial users of Omnigraft has been very positive. Glenn will provide a more detailed update on the rollout shortly. The commercialization of Omnigraft represents a significant milestone for Integra and we consider it a franchise product that can contribute to growth and profitability for many years to come.

Finally, we are increasing our total revenue and organic growth guidance for the full year. This increased outlook is based on our strong first-half performance, particularly within our specialty surgical segment. For the second half of 2016, our expectations have not changed, as we expect our teams to execute on our previously communicated plans.

And with that I will now turn the call over to Glenn to provide a more detailed review of the second-quarter financial results. Glenn?

Thanks, Pete. Good morning, everyone. Total sales for the second quarter were $249.3 million, up 17.2% on a reported basis and up 10.7% organically with strong contributions from both of our segments.

We also saw a geographic balance of organic growth, with the US showing an increase of about 10% and international up 11%. This was a great topline performance, and before I jump into the segment details, let me highlight some of the puts and takes in the quarter.

We were pleased that sales in dermal repair and precision tools and instruments exceeded our expectations, as did the orthopedics and tissue technologies regenerative portfolio and ankle arthroplasty sales. The strength across these areas was enough to offset slower than expected growth within the former TEI portfolio.

Please turn to slide 5 for a discussion on segment performance. My commentary for segment results will be in constant currency terms. Foreign currency translation had a minimal impact on our results in the second quarter. Sales in our specialty surgical solutions segment were $158.2 million in the second quarter, representing growth of 7.7%, while organic sales rose 7.2%. [Dermal] repair sales increased midteens, driven largely by volume growth arising from an expanded customer base and broader acceptance of two recent [Duragraft] product line extensions, DuraGen Secure and bovine pericardium.

Sales in our precision tools and instruments franchise increased mid-single digits in the second quarter and, again, grew above market rates. Mayfield 2, our premium stabilization device, as well as specialty laparoscopic and ENT instruments, drove this growth. Tissue ablation and neurocritical care each saw a modest growth in the quarter compared to last year and both were in line with our expectations.

International sales in the segment increased 12.5%. European countries in which we have a direct go-to-market structure led to growth, reflecting the benefits of recent sales methodology training. Asia also contributed to the overall growth in the segment with particular strength seen in Japan across our broad portfolio of specialty surgical products.

While we expect growth in [dural] repair and precision tools and instruments to temper from the second quarter, we expect to maintain above-market growth rates in these two franchises. With this outlook and our year to date performance we are increasing our full-year expectations specialty surgical solutions. Both organic and reported sales growth are now expected to be in the range of 5% to 7%, up 1% from the guidance range provided in April.

Turning to slide 6, I will now discuss second-quarter segment performance for orthopedics and tissue technologies. Sales in the segment were $91.2 million, an increase of 38% over last year. Organic sales grew 18.9%, driven by our regenerative products, which make up over 70% of sales in the segment. Sales of our regenerative products, excluding the TEI acquisition, increased more than 25% in the second quarter and were a significant contributor to the overall organic growth rates of the Company.

We have seen increased success from our commercial and channel investments made both this year and last year as well as a steady increase in market adoption of regenerative products. In addition, we are seeing increased end-user market demand in certain parts of our private-label business.

Sales in our extremities franchise increased high teens, driven by contributions from the Salto acquisition. Excluding this acquisition, extremities hardware saw slight increase in sales driven by growth in shoulder products.

We are also encouraged to see several product lines within our lower extremities foot reconstruction portfolio, resuming growth. International sales in the segment increased about 22%, driven by contributions for the TEI acquisition and sales growth in Asia and Europe.

For the full-year 2016, we are tightening our revenue range for reported growth in the orthopedics and tissue technologies segment to be between 25% and 28% and increasing our organic growth guidance to a range of 12% to 16%.

Let me now provide a brief update on the TEI performance. It has been just over a year since we closed the acquisition. The integration of TEI has been successful and positions us for long-term growth. However, second-quarter sales were lower than we expected.

Our inpatient legacy Integra sales team, which sells the majority of the TEI and Integra regenerative audits, has recently absorbed a number of new product introductions. The breadth of these new products and the associated clinical ramp-up reduced the ability of the team to open new accounts. Additionally, some of the TEI sales were cannibalized by Integra's IDRT, which resulted in overperformance in our legacy regenerative product sales. In fact, on a pro forma basis our regenerative technologies business grew double digits compared to the second quarter of 2015 including TEI.

We have put plans in place to make additional investments in our sales channel over the balance of the year and expect TEI sales growth to accelerate in 2017.

We remain confident in our broad portfolio of unique regenerative products and exciting market expansion opportunities along with increasing market demand. As Pete touched on in his opening remarks, the early clinical results for Omnigraft are positive and customer interest levels are high. It is, however, taking us longer than we initially planned to work through the transaction cycle.

As a result, we feel that it is more appropriate to bracket our expectations around outpatient DFU sales in 2016 to $12 million to $15 million versus our guidance of $15 million. We believe Omnigraft is a differentiated and competitive product and feel very good about its long-term potential.

Overall, the orthopedics and tissue technology segment is doing very well. The regenerative markets we serve look strong. Added manufacturing capacity has enabled us to expand business with our private-label partners. And we are executing on a robust new product pipeline.

Additional investments will be made in our channels to take advantage of the opportunities we see and deliver future growth.

If you turn to slide 7, I will discuss the changes to our total revenue guidance. Based on our performance in the first half of 2016, we are raising our five-year 2016 revenues to a new range of $192 million to $1.002 billion, representing growth of between 12% and 13.5% on a reported basis. We are raising our range as a result of the strong organic growth in the first half of the year. As a result, we are also increasing our full-year organic growth rate to about 9%, a 1% increase from our April guidance.

We expect about 4.5% of overall growth to come from acquired products, and foreign currency to have a minimal impact based upon current exchange rates.

For the third quarter of 2016, based upon usual seasonal patterns, we expect revenue to be roughly flat on a sequential basis. Organic growth of about 8% is implied in this guidance.

Now, if you please turn to slide 8, I will review our second-quarter P&L performance and update our expectations for 2016. In the second quarter, GAAP gross margin of 64.1% declined 50 basis points from the prior year, resulting from non-cash charges associated with acquisitions. Adjusted gross margin of 69.2% expanded 130 basis points over the prior-year period, due to a shift in revenue mix towards high gross margin regenerative products. For the full year of 2016, we are increasing our GAAP and adjusted gross margin each by 50 to 100 basis points.

Moving to operating expenses, our R&D expense increased 30 basis points to 5.9% of sales in the second quarter. For the full-year 2016, our expectations for R&D expenses remains in the range of 5.5% to 6% of sales.

SG&A expense was 47.8% of revenues in the second quarter of 2016, an increase of 110 basis points year over year on a reported basis. On an adjusted basis, SG&A increased 170 basis points for the quarter to 44.5%. As previously discussed, we are investing in new sales channels and commercial infrastructure to support new product introductions and expansion into new markets. We also had a number of commercial activities such as national training meetings and major industry conferences during the first half of the year, which will not recur in the second half of 20%.

For the balance of the year we expect adjusted SG&A to decline as a percentage of sales. However, given the high level of investment we've made in the first half of the year, we are increasing our full-year expectations for SG&A expenses at 50 basis points.

Our adjusted EBITDA margin was 21.9% for both the second quarter and the first six months of the year. Our stronger-than-expected topline performance has enabled us to make greater commercial investments, which we believe benefit our current year topline results and sets us up well for the future. Based upon the investments we made in the first half of the year, we are slightly lowering our adjusted EBITDA margin guidance to a range of 23.5% to 24%.

Moving to income taxes, we are lowering our adjusted tax rate guidance by ultimately 40 basis once to reflect higher R&D tax credit and higher income in lower-tax jurisdictions. In addition, we have adopted a GAAP accounting standard regarding the tax treatment for stock-based compensation. This adoption will further reduce our adjusted tax rate by approximately 160 basis points, resulting in a 2-point drop our adjusted tax rate to 28%. We also expect GAAP tax rate of between 20% and 20.5%, down 350 to 400 basis points from prior guidance, for the same reasons.

Let me now spend a minute reviewing changes to our adjusted EPS guidance for the year, if you would please turn to slide 9. With the adoption of the new stock-based compensation accounting standard, we expect to realize a full-year benefit of approximately $0.07. In addition, due to the recent increase in our stock price, we are expecting incremental share dilution of $0.04 associated with the December 2016 convertible notes and warrants. And finally, we are increasing our operational outlook for the year by $0.01 to reflect a slight beat in the second quarter. Our new guidance range for the full-year 2016 is now expected to be $3.43 to $3.53. For the third quarter, we expect our adjusted EPS to be in the range of $0.85 to $0.90.

Turning to slide 10, second-quarter cash flow from operations was approximately $38 million, a decrease from the prior-year due to the timing of supplier and vendor payments. Capital expenditures were $8.3 million. We are increasing our guidance for operating cash flows by $5 million, largely to reflect adoption of the new accounting standard. As a reminder, this guidance range excludes the accreted interest payment associated with our convertible notes. Full-year adjusted free cash flow conversion of between 70% and 80% remains unchanged.

Turning to slide 11 I will wrap up with a quick update on our capital structure. As of June 30, we had net debt of $623 million, borrowing capacity under our existing revolver of about $610 million and a bank leverage ratio of about 2.9 times.

And with that I will turn the call back over to Pete.

Thanks, Glenn. If you turn to slide 12 I'd like to spend a few minutes reviewing our key priorities for 2016 and beyond. The organic growth in the first half from both our global segments has put us on the path to meet or exceed the revenue targets we established at the beginning of the year. This growth has allowed us to make the investments necessary to position the Company to reach our long-term targets.

With the launch of Omnigraft in the second quarter, we are in the very early stages of executing on our outpatient wound care strategy. As we wait for Omnigraft to work through the value assessment committees, we are enhancing our product positioning alongside PriMatrix and now [Voltek] which we began distributing early this month. We are also working to optimize the sales channel by adding some new exciting products into the portfolio over the last few months.

In addition to Omnigraft, we have a pipeline of new products to help fuel our organic growth. The controlled market release of the Cadence total ankle system is expanding and we had our first international surgery this month. We have been working to increase the speed to market around the world for new products and are pleased to see Cadence launch nearly simultaneously in the US and in Europe.

Finally, we are counting and we are continuing to evaluate M&A opportunities and specialty surgical solutions and orthopedics and tissue technologies. Our capital structure is strong and we have the flexibility to invest in our business and pursue strategic M&A opportunities to reach our long-term growth plans.

Overall, through the first half of 2016 we have been able to meet or exceed our near-term targets and still make the long-term investments that position the Company for industry-leading performance.

And with that, operator, please open the lines for questions. In an effort to accommodate everyone, we ask that you limit yourself to one question and one follow-up, after which you may rejoin the queue.

Operator, you may now open the call for questions.

(Operator Instructions) [Travis Steed], Bank of America.

So your expectations for the second half are pretty much unchanged, but you had two quarters were things came in well ahead. Can you just comment what you are not comfortable enough at this point to think growth in the second half could also be better?

And also what kind of visibility do you have where you think dural repair is going to slow in the second half? You have had two quarters where it came in above expectations.

Good questions. This is Pete. I'll have a few comments and then maybe Glenn focus on it. I think, when you think of orthopedics and tissue technology, it's pretty consistent on track to what we estimate. Really, the specialty surgical had performed stronger in the first half. And the reason we believe that's tempered some in the back half is consistent to what we have talked about in the past.

If you think about dural repair, there's two parts to that. There's our [DuraSealant] and then there's our [onlay] business. And a few quarters back the sealant business was growing up in the high double digits, high 20% range. And that is tailing down some two what we had estimated, again the market growing in the neighborhood of 4% to 5% overall on the high end.

The dural onlay business, we actually has -- Glenn mentioned this -- two recent launches that have really taken a little bit of time to move through the hospital systems but now they are doing quite well. This is the bovine pericardium and also our DuraGen Secure product. And that is actually given us a really nice boost here this year. But again, we see that being the plateau to the market levels and again, still having a very strong performance. But we see that leveling out and I think that's really how we take a look at what that performance is.

I think the other aspect of this is, as we mentioned about TEI being a great fit for the Company and going on, we don't see a big pickup in the second half on TEI, although I will say from the investments we've made we see that benefiting us out into 2017. And those are the main components.

Glenn, what did I miss?

Well, now, Travis, I think when I frame up the year, for the second time we through the year we have raised our organic growth expectations, started the year off with 7%, went to 8% after our call and now we are at 9%.

And to your point, we are not changing our expectations in the back half of the year. I think that's an important point that when we came into the year we were expecting 8% to 9% organic growth in the back half. Expectations have not changed, relative to that.

The reasons why we've raised our guidance because of the outperformance in the first half of the year. And as Pete mentioned, that you will repair business we are modeling a little bit of a slower ramp in the back half of the year when you look at year-over-year growth rates. We have a new competitor in the DuraSealant space.

And also, within our precision tools and instruments business, we had a record quarter with our Mayfield product. And we're modeling a little bit slower growth relative to that, still very healthy year-over-year growth. But we're modeling a little bit slower growth.

The other thing I would say is we are still being somewhat cautious on the international side of our business. Most of the international side of our business is in Europe. Obviously, there's some uncertainty with the Brexit situation. Latin America is still not where it needs to be from a stability perspective. So we are being a little bit cautious also with our international business when we look at the back half of the year.

So those are really good reasons why we are not raising our guidance for the back half of the year at this point. But feel great about the progress we've made overall for organic growth and we are sitting here now talking about 9% organic growth is a great story.

I definitely agree there. Can you talk about the uptake for Omnigraft in the centers where you have got through the value committees and if the conversion rates have what you expect and the feedback from doctors has been what you expect? And then also give us a sense for doctor training demand versus your capacity for offering training.

Yes. I would say, Travis, first of all on the demand and the training component, we are in very good shape, I think. We've got the right cues.

And again, we've talked about all along with roughly 50 sales folks we have a very targeted, focused area. We are not trying to get all accounts in all areas. And so from that standpoint we are very well aligned and properly funded. And that's a big chunk of some of the investments that we made in the first half year, both reimbursement as well as training of clinicians in our sales team -- as well as the reception for the those that have used it at this point has been very good.

We've had cases of product being used on DFUs that were not [healed] by other products that have actually performed well using the Omnigraft product. And so we -- again, very much aligned to what came out of the clinical studies, which is no surprise, what we had expected.

As I mentioned, it is the summer months. You know the story on value assessment committees. Many of those are used as a control point for IDNs in big centers. It makes a lot of sense, the approval process. And sometimes the agenda is filled in August and you don't get on until September to have your case laid out. And I think we were a little bit overoptimistic that we could get through some of these a little bit faster.

But that's a small setback, relative to how we think about things. I think the bigger point is it is received very well, the team is well-trained, doctors are excited about getting their hands on it. In fact, some of our investigators have not been able to get the product yet. It's just getting through their VACs as we speak. And so they won't be starting use here within August. And again, just part of the process that's evolving really within overall healthcare and value assessment committees.

But it's doing quite well and I am as optimistic as ever about the potential of this product.

Great, thank you.

Robbie Marcus, JPMorgan.

Congrats on the good quarter, guys. I wanted to maybe head down to lower extremity. It looks like the ankle business continues to do well. It looks like there's good pull through coming on the rest of the product portfolio. Maybe you could just talk about lower extremities, how you feel about the $12 million guidance for the year.

Yes, sure. So we had a really strong quarter on lower extremities, the best we've had in quite some time. The $12 million you are referencing is the ankle guidance we gave on the last call.

Clearly, we are seeing a lot of great traction on the Salto ankle. I would say that the $12 million is probably conservative when we look at the run rates of the ankle business. So we will probably do better than the $12 million overall.

And the nice thing is the pull through effect we are seeing on lower extremities now, having access to some of these key opinion leaders, is actually driving some growth in the rest of the portfolio, whether it be the screws and plates or other hardware parts of the business.

This is the first quarter in the foot system that we've had a number of quarters we actually saw some growth versus declines in the past five or six quarters. And we said last year this would be the point in the year when we would actually see some growth, and we actually are seeing it now in the lower foot system.

So I know Pete just recently came back from a conference. Maybe you can give some additional color, Pete, from --

Yes. So, Robbie, to Glenn's point, I think the sales team is doing a very nice job. I think two things-- kudos to our teams with the integration on Salto. It probably has been about one of the most well-executed integrations, I think, of people coming into the organization and taking an asset that fundamentally was declining down to just a few million dollars and accelerating with just some focus and energy around it.

And then, I'd say the other part is that our internally developed Cadence ankle really looks like a home run. I think it's a product that has all the capabilities and has all the features that many in seeking is this ankle arthroplasty market for years. I just got back from the main Ankle and Foot meeting which was in Toronto last week, when we had our online lab, which I mentioned, which is a semi with eight operating [cataveric] tables in it. And we were overbooked; we couldn't even meet the demands for everyone coming through.

And just great feedback on the simplicity of our instrumentation versus some of the other new ankles that were just launched by other companies and bone sparing design -- a huge deal. Some of the three-piece ankles just really utilized a lot of the bone and don't allow a lot for revision work or any in the future. In this design has really contemplated that, and all the feedback says is it's is a winner.

So that brings in, then, new luminaries that we never dealt with before they want to work with us on ankle, then start asking about other components within the foot. And we are starting to see that reenergizing our lower systems overall.

And I would also tell you think the team has done a nice job with their focused R&D efforts in Austin, Texas. We are really starting to get our cadence of R&D development out here, our ongoing series of developments. And so it's a good structure on we have right now, really built around both of these ankles. And again, positioning works out quite well with an ankle that brings different capabilities such as biasing, the ability to change the gait of an individual. That's with the Cadence product.

And then Salto, which has the longest and the most amount of clinical data of any ankle in the market. And so, now all that is at Integra. So that has been a real energizer for our organization and, I think, customers looking at Seybert.

Great. And then looking at the guidance for third-quarter and the back half of the year, it looks like the cadence is a bit different on the bottom line versus what the Street was thinking. Maybe you could just spend a minute and walk through some of the puts and takes of how that will impact third and fourth quarter.

Yes. So when we think about the third quarter, seasonally we've had a flat quarter from Q2 to Q3 historically. We expect to see a similar trend this year, so on the topline expecting to see a pretty flat sequential quarter.

Having said that, we are expecting to see an uptick in our gross margins in Q3, so probably looking at gross margins that are close to 70% in the third quarter and getting some leverage on our SG&A costs to get us to the $0.85 to $0.90 EPS range. And then when we think about the fourth quarter, I expect our gross margins to ramp higher from the third quarter, along with higher revenue volumes and getting more leverage with SG&A, getting us to our full-year EPS guidance range.

So that's how we modeled out the year. We feel very good about our plans to get there. And again, it's pretty consistent with what we've seen when we look at some prior years relative to Q2-Q3 trend and then Q4 being the largest quarter of the year.

Thanks.

Matt O'Brien, Piper Jaffray.

This is J.P. in for Matt. Thanks for taking the question and congrats on the quarter. I think I want to touch on the last comment you had there, on gross margin. I think, just given this product mix that you had in this quarter and that the growth drivers for 2017 -- I'm just trying to frame out where gross margins can get as a Company. Is getting to 75% -- it doesn't seem that too far away. Is that a long shot?

Well, I think 75% is pretty far out there. We'd like to see 70% first, which is still in our guidance now on the top end of the range. But clearly, when we look at the mix, that's going to help us. We are seeing better utilization in our plants, expecting to see some of the headwinds from our new collagen manufacturing center become less of a headwind as we get into the end of 2017 and 201. But we are not going to call out gross margin that's at the levels you are suggesting at this point.

But clearly, we feel really good about our plans. We've laid out a long-term target of 70% to 71% gross margins by 2018. You can see we are starting to bump up against those probably towards the end of this year. And so we feel really good about it.

And I think at the last investor day meeting, as well, Pete laid out his aspirational view of how we saw Integra as a multibillion-dollar Company and we laid out targets that were in the 72%-73% type range. So I think 75% is a ways out there, but clearly making some great progress on gross margins and expect to see that continuing towards the latter half of this year and then going into 2017.

So Pete, maybe you have a couple of additional comments.

Yes. I'd say, Matt, I like the way you are thinking. But I would agree with Glenn. I think, look, if you step back from 30,000 feet about our strategy -- and again, this idea of once we can scale, does the Company has the potential to reach there? We had mentioned at some point there in the future we think this is a company that can reach those kind of goals that some point down the road, based on the mixes we are in.

So if you think about our regenerative product lines, have margins significantly above that level. And things such as the ankle product have margins that are in that range or above that. But the investments that we need to make to be able to get the kind of growth to be a sustainable grower and to really have the scale to complete in the consolidating market -- we're going to have to continue to make those ongoing investments.

But again, to the point, we feel quite good that we've got that kind of portfolio where markets are growing significantly and the margins are quite healthy, mainly because they bring highly differentiated advantages to patients. And we believe that differentiation, again combined with our expertise, warrants the kinds of gross margins that we are seeing.

Got it. And then just one, if I could, on the regen portfolio, especially in the outpatient. I know you took the guidance down to 12% to 15%, down from 15%. And I just want to get a sense, is that more the timing around VACs and Omnigraft, or is it more the TEI distraction?

And I just want to ask -- your confidence in these markets remains unchanged; it's just more of a timing issue for the back half of the year, but your outlook here hasn't changed for the future.

Yes. Our confidence in the product and the market -- completely unchanged. I'd say, as we dig into it further our confidence has increased that this is going to be a great market and we've got a winner of a product.

It's a timing scenario. And again, this is our first entree into the outpatient market. And realistically it's even a little bit of seasonal here. Again, obviously now. A lot of vacations in August. You have things that are booked up relative to access to get on the VAC. I think I think a VAC is actually a very smart move by integrated delivery network to say, if we only wanted four products, well, we are going to bring another one in, one has to go off, there has to be a body to make those decisions and they have a lot of products going through it. That's what we are entering into.

But I think, as we come out the other side, our confidence in the step up in the adoption -- there's nothing that's changed there. So this is just a slower start, and a little bit bigger ramp that will take place over time.

And then for the broader regenerative market, as you commented on, what is interesting is we are starting to see use in applications more broadly than we traditionally have in the past. And this is on inpatient as well as outpatient, the acceptance of more regenerative products. And that goes for things such as placental-based products to [major C] products. There's just more of an adoption in different applications because obviously using a product that helps the body regenerate is much better than putting a synthetic product or something that stays in you for life and doesn't regenerate.

And so, we are seeing that. And I think that's also some of the benefits that we are feeling on our legacy product lines as well, as more and more of these products are used in broader applications.

Great, thanks for taking my questions.

David Lewis, Morgan Stanley.

This is actually Jon Demchick in for David. I know we've talked about the investments that needed to be made for Omnigraft and TEI ahead of the launch. And now that launch has started, are there still more incremental investments that we need to be making into the back half of the year? And where are we on reps compared to where you think you would like to be over the next few years?

Yes. So, I would just say, on the TEI front, which again the inference is more around the inpatient scenario and the products that are held, it's more around optimizing how we think about training, how we think about secondary support specialists and things of that nature.

So there is some incremental investments there, but they are not a tremendous change. And again, part of it has been also getting through some of the training. There's been a lot of new products that's come through there.

When it comes to the outpatient space, as I've always communicated, our plan was to never get really out over our ski tips and forward-forward invest before we start having sales. So we are at 50 reps right now. Many of our competitors are double that or triple that.

I think, to be a long-term player with the kind of growth that we expect, we are going to be needing to double our sales force in the reasonably near future. But what we have been trying to do and, I think, successfully is take a look at how the ramps are looking and add on appropriately as those ramps increase. And so we are at 50 reps now.

Have we had some more reps in the second half? Most likely we will. And then as we see the ramp coming up in the second half of the year, most likely we will have more of it in a substantial increase as well within 2017 because, again, this is a game of reaching coverage. And our initial strategy with Omnigraft and outpatient is, again, just to focus on a very select set of customers to start, and then we will continue to expand it out.

And that comes to IDNs that are doing wound care in their outpatient setting. It's dedicated wound care clinics. There are doctors' offices that you wound care and there's the Veterans Affairs area.

So those are all areas that obviously one could see easily over 100 sales reps that would be able to cover those areas. And so, at this point in time we are quite focused.

So, when appropriate, we will have more additional reps into the channel. And that will be probably the biggest ongoing investment associated with the sales that we believe will follow.

Thank you. Very, very helpful. And one on M&A -- still seems to be one of the main focus areas you seem to list. Made a few deals recently. Mentioned there is a lot of capacity on the call.

It seems like all the end markets -- surgical, extremities, wound care -- are still on the table. Are there any areas that you view yourself as still subscale, where a more sizable deal makes a lot of sense? Or are we thinking at this point -- deals are still likely to come but not likely to be of the same size.

Well, I would say -- first of all I'd say, Jon, if you look broadly I think on both segments there's plenty of room for tuck-in acquisitions either in specialty surgical or orthopedics and tissue. Both of them can benefit from OUS international acquisitions to build our footprint.

So when we find those right deals that actually lead us more towards a bigger foot print or capability, that's an important aspect.

If you look at specialty surgical, we have a really strong sales organization. We've got a strong marketing group and we have really expanded out from our traditional just neuro world already into ENT. We've already moved into certain other areas within the body.

And a lot of the things that are common there are our ability for how we could tissue and how we seal tissue. And so, technologies that help us constantly be seen as a leader in those spaces, I think, will fit well within our overall portfolio.

And then on the orthopedic and tissue side, you could argue obviously in burn and broader skin, we are really one of the top three layers in burn. We are by far the number one player, and we either a 2 or 3 player when it comes to put you start thinking about how you think about different types of chronic or acute wounds. But we still need some scale within those areas.

And the types of acquisitions that could actually build out our focus within plastic and reconstructive surgery could make a lot of sense for us. As you can imagine, a big call point for us are plastic surgeons, many that do difficult work inpatient around burns to folks that do reconstructive surgery throughout the body. And so that's still an interest for us.

But by far the area that we are underscaled today is in extremities. And I think the right plug-ins that enhance our capabilities, we will be interested in looking at. And I think the Salto/Cadence together and the results we are seeing are a great example of as you bring in more scale and focus what it can do for us.

So that's how we think of the landscape. There isn't an interest at this point in time to go outside of those areas. We are going to stick to our focal areas. But we still believe and we see in our pipelines that there's quite a few tokens of different sizes that would continue to enhance the Company's performance.

And Jon, let me just add to that in the orthopedics and tissue business we are investing very heavily with organic money as well. So if you look at the investments we are making clinical studies and new product launches, we think that that can get us some scale as well. And we are investing 5.5% to 6% of R&D across the Company. It's much more heavily weighted in our orthopedics and tissue business.

So that's just another factor when we think about scale. Yes, it's about going out and acquiring some technologies but also developing in-house as well, a combination of both of those.

Thank you very much.

Steven Lichtman, Oppenheimer.

So just first on total ankle, obviously very good early start here. Two questions -- one, when should we expect the Cadence on Cadence rollout to pick up? And then secondly, can you talk a little bit more about maybe the halo effect you are starting to see on the rest of the lower extremity portfolio, based upon now having the two total ankle offerings?

Yes. I would say, well, first of all, on the Cadence we are still in what we call our controlled market release fees, which is getting everything finalized up and with the controlled amount of users. We will start expanding that in the second half.

But realistically, with the lead time to bring incremental sets in all of our instrumentation, and it's still going to be quite controlled here in the second half of the year. And then, 2017 is obviously the point where we see a bigger ramp-up associated with Cadence.

You know, the effect of ankle and the so-called halo effect is, simply put, that ankle is the most complicated, really, lower procedure that is out there. If you have products, obviously, that are preferred by many of those clinicians that do those cases, a lot of those are in larger groups or in groups that do these more sophisticated areas. Once they start liking your training, your products, your team, there's obviously a lot of questions that open up about what do you have in these areas.

And honestly, with you I would say there are some areas that we have some product that still need to be refreshed -- we've been very candid about that -- and will be refreshed through the end of this year and into next year, which I think is going to open up even more business for us. And then new products and leadership products that we already have, such as a product like our PANTA Nail with internal fixation. We've come out with the new, novel ex fix positioning, external fixation device, as well, which is being received. So the thought with that as well is, if we were to bring in not only products that we developed but some that we actually acquired into lower portfolio, we are really quite well positioned as we bring more of these advanced clinicians on for ankle to actually fill out the rest of the portfolio.

So that's what's going on. And like anything else, we've got a lot of energy in that area and a lot of excitement, other products typically benefit from that. And that's what we are seeing.

Great. Thanks. And then just secondly, on international, certainly understanding the macro visibility that Glenn mentioned, but it sounds as though you are feeling better about your international business. Maybe you could talk just a little bit more about some of the progress you are making there and some of the initiatives that are having some positive effect?

Yes, I would reiterate Glenn's point. It's obviously -- there's still a lot of unrest in markets around the world and a lot of uncertainty. So that's why we remain cautious. The performance of, to your point, Steve, came from just really better execution and, I'd say, an increased focus on what our strategy should be and isn't, in certain markets. So as an example, we spent a good chunk of money in the first half working on the type of training that would help us be much more effective in capital type selling situations throughout the world. And we are clearly seeing better execution and forecasting against selling things like the CUSA. And we saw that in our overall numbers.

The other aspect is that we focused in on certain countries' strategies -- Italy is one that comes to mind where we've gone direct with our neuro products. We have recently brought in our regenerative products. And so having more control of that end market and really seeing what's going on and then having our global franchise leaders, which are the marketing folks, really help leverage to support a country is something we really haven't done in the past. We've typically been a little bit further away from that, and that sometimes happens with the distributor structure.

So where we have put in more direct structures and as well as where we've partnered it at more intimate levels with certain distributors, we have been able to see the results in the growth. And again, I think we believe in the second half that will continue. But we are cautious, relative to market disruptions that can be associated with macro items that you never know when they are going to pop up.

But we feel quite good about how Dan and the international team are executing and the focus that they've put on specific markets and they have been able to actually deliver those results.

Great. Thanks, Pete.

Jayson Bedford, Raymond James.

I jumped on a little late, so I apologize if these were asked. But on TEI, where are you seeing the weakness? Is it more on the private-label business? Is it PriMatrix? Or is it more on the surgery side?

I would say the way I'd frame it is, look, year-over-year we are going to be flat to slightly up from the whole business area. And I think Glenn -- you might have missed the comments that we were up double digit when you take a look at the full regenerative portfolio including TEI on a pro forma basis. We talked about earlier in the year we actually were lighter on some private-label business. That continues for the whole year. And I think part of that was, as we acquired the business, I think the run rates that we actually have probably words that. I think the good news is without a lot of good sessions with all our private-label partners and we know where we are and are quite confident within that business.

The majority of the focus is really about the internal PriMatrix product that goes through our internal sales, our acute care hospital sales that also sell IDRT. And again, that sales organization has had numerous other products that have actually been introduced to them simultaneously. And just been a lot to digest.

I think, as we move here into second-half and into next year, we are going to start seeing the ability to actually open new accounts and also have the right product positioning to optimize which account would be better PriMatrix account than an IDRT account. And that is really the tail of the tape.

But as far as the technology, as far as the fit between the two, we feel very good about it. In fact, we have a pipeline and some incremental products that were already started in the TEI pipeline that will be coming out at the end of this year and also through 2017, which we think are going to make a difference.

And so there are some further investments that we are going to be making commercially to be able to adopt these between training as well as maybe thinking about some different coverage points. But overall, it has been a good fit and I think people feel very good about being part of Integra on the TEI team. But we probably overestimated how many new products we could move into a given channel in one year.

Okay. On the outpatient GSU guide, the 12% to 15% versus 15%, is it more due to PriMatrix or Omnigraft?

Omnigraft timing. So it's really about we had hope that the ramp-up would begin probably now, and it's probably a couple months later till we see, really, the main ramp-up. And that's what I referenced on the prepared remarks was the transaction cycle, which is the combination of getting through the -- scheduling the VAC, getting through the vac. And then there's typically a trial after that. Right? Someone wants to use it or 5-6 weeks, and then they adopt it.

And again, I think that's about 60 days longer than we estimated. That's really the whole effect of it.

Okay. And not to get too much into the weeds here, but is there a specific or a common source of -- I don't want to use the word pushback, but I think you know what I mean. In terms of the delays here, is there something that these VAC committees are not liking or --?

No. I think guys that -- we have people put -- and so a VAC will meet once a month. They have a slot to talk about 20 products. They have a queue of 25. In some cases we convinced some folks to take 10 off the agenda and put ours on. But cardiology, other specialties are wanting to get their products on. And it literally is just the time to get on the schedule.

And again, as you can imagine, August -- people take vacations. If the agenda is already booked, you get moved to September.

So that's literally what it's all about. It's literally a scheduling component that you get through.

Okay, fair enough. And then just lastly for me, I realize you gave a few numbers out there. But total extremity -- was it flat, up mid single? What was the growth rate there, Glenn? Thanks.

Up single digits excluding ankle. So with ankle it was up high teens. Obviously, that's a big driver being the Salto ankle. If you remove Salto from our numbers, extremities grew in the single-digit range.

Thank you.

We have no further questions at this time. I will now turn the program back over to our presenters for any additional or closing remarks.

Thanks, Robbie. Well, first of all I'd like to just reiterate a couple of the key messages that we had commented on in our prepared remarks and Q&A. So first, we are executing on our 2016 objectives quite well. We are raising our overall revenue guidance to $992 million, to slightly over $1 billion, raising organic growth to 9% and increasing adjusted earnings per share to a range of $3.43 to $3.53.

Second, we exceeded 69% adjusted gross margin in the second quarter and are now expecting a record 69.5% to 70% margin for the full year, based on our strong performance in regenerative products that are driving this favorable mix we've talked about.

Third, we have the launch of Omnigraft in the outpatient wound care center to look forward to. And it's really becoming a franchise product for us. We feel very confident about that, and that is going to contribute to growth and profitability for many years to come.

And then finally, that we are continuing to drive organic growth through new products that we've developed. And we will be launching at least seven new products in 2016.

And so with that, I just like to thank you again for listening. And we look forward to speaking with all of you in the near future.

This concludes today's program. Thank you for your participation. You may now disconnect.