Integra Lifesciences Holdings Corp (IART) 2009 Q4 法說會逐字稿

Good day, everyone, and welcome to the Integra LifeSciences fourth-quarter 2009 conference call. As a reminder, today's conference is being recorded. And at this time for opening remarks and introductions, I would like to turn the conference over to host, Ms. Angela Steinway, Head of Investor Relations. Please go ahead.

Thank you. Good morning and thank you for joining us for the Integra LifeSciences fourth quarter and full year 2009 earnings release conference call. Joining me today are Stuart Essig, President and Chief Executive Officer; Jack Henneman, Chief Financial Officer; and Gerry Carlozzi, Chief Operating Officer, who is joining us from Boston.

Earlier this morning we issued a press release announcing our fourth-quarter and full-year financial results. This year -- this release is available on our website in the press release section under investor relations. During this call, we will review the financial results and provide our forward-looking guidance for 2010.

At the conclusion of our prepared remarks, we will take questions from the telephonic audience. Though we will try to keep the call to one hour, we would like to continue our tradition of answering all of your questions. As a courtesy to all, so that we may accommodate a large number of requests, please limit yourselves to one question and one follow-up during the Q&A period. If you do have additional questions, please rejoin the queue.

This presentation is open to the general public and can be heard through telephone access or via a live webcast. A replay of the conference call will be accessible starting about one hour after the conclusion of the live event. Access to the telephonic replay is available through March 15, 2010 by dialing 719-457-0820, access code 5467929]. Additionally, a webcast replay will be archived on the investor relations page of our website.

Today's call is the proprietary presentation of Integra LifeSciences Holdings Corporation and is being recorded by Integra. No recording, reproduction, transcript, transmission, or distribution of today's presentation is permitted without Integra's consent. Because the content of this call is time sensitive, the information provided is accurate only as of the date of this live broadcast, March 1, 2010.

Certain statements made during this call are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Among others, statements concerning management's expectations of future financial results, new product launches, regulatory approval, and market acceptance of these new products, future product development programs, and potential business acquisitions are forward-looking. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from predicted results.

These forward-looking statements are made only as of the date hereof and the Company undertakes no obligation to update or revise forward-looking statements, whether as a result of new information, future events, or otherwise. For a discussion of such risks and uncertainties, please refer to the risk factors included in item 1-A of Integra's annual report on Form 10-K for the year ended December 31, 2009 and the information contained in our subsequent filings with the Securities and Exchange Commission.

Certain non-GAAP financial measures are disclosed in this presentation. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is provided in the press release we issued this morning. Additionally in this press release and in the current report on Form 8-K that we filed this morning, we provide explanations for why management believes that presentation of these non-GAAP financial measures provides useful information to investors regarding Integra's financial conditions and results of operations and the reasons for which Integra's management uses the non-GAAP financial measures.

I will now turn the call over to Stuart.

Thank you, Angela. In 2009, our Company confronted challenges similar to those faced by many other companies, yet we grew and met milestones. We generated $143 million of operating cash flow in 2009, nearly double the prior year's level. This highlights the diversity and robustness of our business.

Our revenues grew 5% in constant currency. For the fourth quarter, total revenue increased 5% to $183.5 million, an increase of 3% in constant currency. We were pleased with the performance of our entire business in the fourth quarter including NeuroSciences and Instruments, which struggled early in the year.

Now I will walk through the fourth quarter's results for our three revenue categories. Integra Orthopedics, which includes the products sold to foot, hand, spine, and orthopedic surgeons represented approximately 37% of Integra's overall revenue, increasing 9% to $69 million from the prior year period.

In the fourth quarter, we saw growth in each of extremity reconstruction, spine and orthobiologics, and private label on both a sequential year-over-year basis. Extremity reconstruction, which is the largest component of our orthopedics category, again posted double-digit worldwide growth. Sales continued to be particularly strong in our mid and hind foot products but all of our extremity product lines grew.

Although growth was below our longer-term expectations for the spine and orthobiologics category, sales grew across all the lies primarily due to expanded distribution and new product introductions. Private label revenue also increased in the fourth quarter versus the prior year as our partners returned to purchasing at a more normal level.

Integra NeuroSciences encompasses the products sold to the neurosurgeon and neuro nurse. The products in the category represented approximately 37% of Integra's overall revenue in the quarter, increasing 6% to $68 million. International markets and our ultrasonic tissue ablation and duraplasty product families drove this growth.

Currency also had a positive impact on reported revenue in the quarter. Sales of capital products slowed their decline because sales of our new CUSA and XT product gained traction. That said, many of our capital products are still weaker than we would prefer at least when compared to the levels of a couple of years ago.

Our final category, Integra Medical Instruments, includes medical and surgical instruments sold into hospital and office-based practice channels and accounted for 26% of Integra's overall revenue in the fourth quarter. The wider economy continues to affect this category, although it has improved.

Instrument revenue of $47 million decreased 1% versus the prior year period but has increased sequentially every quarter since the very challenging first quarter. Hospital sales increased slightly in the quarter, helped by a particularly strong performance outside the US. Anecdotally, we shipped a handful of large orders to US hospitals, but we view this as an incremental improvement rather than a mark of a strong recovery. These drivers helped offset the negative impact of the winding down of our distributed third-party product lines.

Office-based sales declined from the prior year fourth quarter to the lower end user demand. Although we have seen some indications that the office-based market has stabilized and sales to the distributors are now matching their out the door sales, office-based sales are still well below 2008 levels. This is particularly true of the dental and veterinary markets where we expect a slow recovery in 2010. Consolidated international sales accounted for 25% of revenue in the fourth quarter. International revenue increased 24% as reported and 13% on a constant currency basis.

Now I will turn the call over to Gerry to discuss some highlights among our selling organization and operational developments in 2010.

Thank you, Stuart. First, we are quite pleased to have completed our first full year in the spinal hardware market. We launched eight new products in 2009 and continued to build our distribution channel. We also acquired the Paramount system, an important minimally invasive spine technology, and we are pleased to announce the successful completion of the alpha launch of the Paramount minimally invasive pedicle screw fixation system. The wider commercial launch will begin next week at the American Academy of Orthopedic Surgeons meeting in New Orleans. First targeting the original users of the Paramount system.

Adding to our nascent MIS spine business, we have also launched a minimally invasive version of our flagship Coral brand pedicle screw fixation system. These systems have not only gained us access to new surgeons, but have sparked interest in other Integra Spine products.

While our main focus in 2010 will be continuing to expand spine and orthobiologic distribution inside the United States, we began to sell our spine products internationally, starting in Latin America.

Extremity reconstruction continues to be one of our best performing sales organizations. We ended the year with about 120 sales representative in the United States and plan to add to this group in 2010. We successfully launched five new products through the sales channel in 2009 and we have an aggressive product development plan to bring innovative new products to market in 2010 and beyond.

Also in December, we acquired our distributor of extremity reconstruction products in the United Kingdom, which will improve our access to that important market.

Turning to operations for a moment, I would like to mention two major investment initiatives. First, we are launching a new version of our enterprise management software system across our organization. This roughly $30 million capital expenditure commitment over the next three years will enable us to streamline business processes throughout the Company and enable our employees to do their jobs more efficiently. We are also initiating Phase II of our capacity expansion program for our college and manufacturing facilities in New Jersey and Puerto Rico. We expect to spend approximately $20 million on this expansion over the next three years.

These upgrades to our existing systems and facilities will help Integra support our $1 billion revenue objective and beyond.

Now I will turn the call over to Jack for a review of our numbers.

Thank you, Jerry. We are pleased with Integra's financial performance in both the fourth quarter and the full year. We grew our top and bottom lines, generated record cash flow from operations and paid down debt. Although the world economy remains difficult to predict, I will provide you with guidance for the P&L line items and Stuart will give our revenue and earnings outlook in a moment.

In this quarter, foreign exchange had a favorable impact on revenues of approximately $4 million versus the same quarter in 2008. If exchange rates stay where they have been, the impact of currency on revenues in the first quarter should be positive by roughly $3 million.

Gross margin on total revenue in the fourth quarter of 2009 was 65%. The improvement in our gross margin as a percentage of sales was the result of the relative strength in our higher-margin implant sales, fewer impairments of intangible assets, and decreased inventory step-up charges from purchase accounting. We expect our gross margin in 2010 to be 64.5% to 65.5% of sales, including purchase accounting and other special charges.

Research and development expenses in the fourth quarter of 2009 increased from the prior year to $12 million or about 6.5% of sales. We are targeting spending of approximately 6.5% to 7% of total revenue on research and development in 2010.

Selling, general, and administrative expenses in the fourth quarter of 2009 increased from the prior year to $76 million or 42% of revenue. The increase was principally attributable to higher commissions and additional headcount particularly in Orthopedics. We anticipate that SG&A will approximate 41% to 42% of sales in 2010. While we do not break out expenses between sales and marketing and general and administrative, there are two countervailing trends inside the SG&A line that we expect to persist for the foreseeable future.

On the one hand, we expect to realize operating leverage in our infrastructure and staff which will drive down G&A as a percentage revenues excluding the impact of systems implementations in the next couple of years. On the other hand, sales and marketing expense particularly sales will increase as orthopedics becomes a larger proportion of our business.

In the fourth quarter, we earned $41 million in adjusted EBITDA and $45 million in adjusted EBITDA excluding the stock-based compensation. These metrics were each up 12% over the prior year period. We reported a $2 million increase in net interest expense to $5 million for the fourth quarter of -- excuse me -- a $2 million decrease in net interest expense to $5 million for the fourth quarter of 2009, due primarily to having paid down debt.

Our income tax expense was $7 million in the fourth quarter, reflecting an effective tax rate of 31% for the quarter and 30% for the full year. The implied tax rate on our adjusted net income for both the fourth quarter and the full year was 32%. We expect our tax rates for 2010 to be about the same as our 2009 rate.

In the quarter, we recorded depreciation of $8 million and amortization of intangible assets of $5 million including $1.5 million in cost of product revenue. 2010, we expect depreciation of approximately $20 million and amortization of approximately $17 million or roughly $5 million per quarter of depreciation and $4 million per quarter of amortization. Approximately $6 million of the amortization will be included in cost of product revenue for the year or roughly $1.5 million per quarter.

We expect the quarterly impact of share-based compensation expense in 2010 to be approximately $4 million or $0.08 per diluted share. We reported GAAP net income of approximately $16 million or $0.53 per diluted share for the fourth quarter 2009. When adjusted for acquisition-related expenses and other special charges, net income for the fourth quarter of 2009 was $18 million or $0.60 per diluted share.

The fourth quarter of 2009 adjusted net income excluding amortization was $21 million or $0.71 per diluted share. Beginning next quarter, our adjusted net income and EPS measure will exclude intangible asset amortization.

In a moment, Stuart will provide guidance for 2010 adjusted earnings per diluted share in this way. This should make it easier for you to compare Integra and its peers on an apples-to-apples basis.

The fourth quarter, we generated a record $47 million of cash flow from operations. In 2009, total cash flow from operations exceeded $143 million. Of the annual amount, roughly $30 million came from improvements in working capital. While we are not providing 2010 guidance for cash flows, we encourage you to model an increase of $10 million to $15 million in capital expenditures over 2009, mostly related to the software and capacity expansion projects Gerry described earlier.

We used our cash to repurchase $87 million face value of our convertible notes due in June of this year, to repay $100 million on our credit facility, and to meet a $52 million earn-out obligation associated with the acquisition of Integra Spine.

At the end of the year, we had $72 million of cash and outstanding borrowings of $160 million under our revolving credit facility, $78 million of our 2010 convertible notes outstanding, and $65 million of our 2012 convertible notes outstanding -- $165 million. We expect to use our cash and borrowings under the credit facility to repay our outstanding 2010 convertible notes in June and the final earn-out payment for Integra Spine.

We ended the quarter with 51 account receivable days sales outstanding, down from 54 days at the end of the third quarter and from 59 days a year ago. We had 202 days of inventory at the end of this quarter, flat with the third quarter and down from 204 at year-end 2008.

Finally I would like to touch on our financial goals in the year to come. While we have carefully managed cash and realized cost savings in several areas during 2009, we have not withheld investments in much-needed support functions for our fast-growing orthopedics category including R&D and SG&A. In 2010, we will continue to invest in these areas and in capital infrastructure. We believe we can achieve strong revenue growth and we recognize the needs within our organization to support that growth.

Nevertheless, our business model remains strong and profitable. Overall, we are very pleased with the discipline of our management and employees. Back to Stuart.

Thank you, Jack. Our management team continues to seek out external opportunities for growth and future acquisitions could affect our results going forward. However, the forward-looking guidance that we are providing today does not reflect the impact of acquisitions or other strategic corporate transactions that have not yet closed.

For 2010, we are providing annual revenue and GAAP and adjusted EPS guidance. We expect to recognize between $715 million and $735 million in revenue in the full year of 2010. This revenue guidance assumes constant currency exchange rates or 5% to 7% constant currency revenue growth for 2010. Within this guidance range, we are anticipating Orthopedics to grow approximately 8% to 10%; Neuro 5% to 7%; and Instruments 1% to 3%.

Further, the Company expects GAAP earnings per diluted share between $1.92 and $2.07 and adjusted earnings per diluted share between $2.60 and $2.75. Please note this adjusted earnings per share guidance excludes intangible asset amortization and its tax effect, which was $0.44 per diluted share in 2009. We expect that intangible asset amortization net of tax will be approximately $0.38 per share in 2010 and $0.36 per share in 2011. Historical quarterly reconciliations of this measure from 2007 through 2009 are available on our investor relations website.

In the absence of any future acquisitions, we anticipate a quarterly progression in our earnings throughout the year that is consistent with our historical seasonality. Thus, we anticipate first-quarter 2010 revenue to be sequentially lower than Q4 by about 6% to 8% or roughly 6% above the level we reported in Q1 last year. Further, since the revenue impact has a disproportionate effect on the bottom line and because period expenses are much less variable by quarter than revenue, we expect our adjusted earnings per share in the first quarter of 2010 to be roughly flat versus the first quarter of 2009. Accordingly, we expect a marked quickly progression in our adjusted earnings per share throughout the year. While we were pleased with our fourth-quarter performance, we remain conservative in our 2010 estimate in recognition of the continuing uncertainty in the timing and strength of any economic recovery. Beyond 2010 and for modeling purposes, we would suggest 7% to 9% constant currency revenue growth.

In summary, we remain confident in the underlying strength and resilience of our business. We believe we have potential to grow faster both on the top and bottom lines. We expect our investments to help realize that growth potential in the medium to long term.

We look forward to meeting with investors. Jack will be presenting at the Raymond James Healthcare Conference in Orlando and Gerry will be presenting at the Canaccord Adams Musculoskeletal Conference in New Orleans, both next week. On our medical conference agenda, we will be exhibiting at the AAOS in New Orleans also next week.

Now we will be happy to answer your questions. As a reminder, in an effort to keep this call to an hour, please do limit yourself to one question and one follow-up. Rejoin the queue if you have more questions. Operator, you may now turn the call over to our participants.

(Operator Instructions) Tao Levy, Deutsche Bank.

Good morning. So just two quick questions. First, Stuart, you talked about the sequential decline in the first quarter, which you also mentioned last year. Is that primarily in NeuroSciences and in medical segments and sort of the Orthopedics are less affected by the seasonality?

Yes.

Would you expect Orthopedics to be up sequentially or --?

I don't have specific guidance for Q1, but certainly the Orthopedics category is much less affected by the fourth quarter. So I don't want to give specific guidance, i.e. our three categories, but I certainly would not expect it down 6% to 8%. The strongest impact is actually in the medical instrument category for a variety of reasons and then next Neuro and then finally Orthopedics.

Okay, and in the spine orthobiologics areas where you commented, the growth rates weren't as high as you were used to. Anything specific that you saw there? Is it just the markets? You know the markets have slowed down in the fourth quarter for spine, but I didn't know if it was also sales disruption or you weren't able to hire as much as you would have liked or product launch delays or anything like that.

Well, I would say as we prepared for the call, I was looking for some specifics to give you because we knew we'd get the question. And the answer is it's not really any one thing. I don't want to blame it on the overall slowdown in the spine market because the truth is we have been saying and we continue to say that it's really about share for us.

So I would say it was -- no one particular thing. And I don't think it's a trend and we certainly expect to continue to grow longer-term in that roughly 15% topline growth level we've been talking about for spine and orthobiologics. So I wouldn't present that as a concern. We are just trying to describe which things did particularly well and which did not in the quarter.

Thank you.

Amit Bhalla, Citi.

Good morning. Stuart, I wanted to get a sense of your views on the changing 510(k) regulatory environment and also how that would potentially impact the timing on the two-piece ankle?

Well, we are influenced by the 510(k) timing certainly as much as any other technology-driven med tech company. So we are certainly building now into our timetables an expectation for longer review times and more clinical activity. That's going also into our budgeting as we think about research and development and need to focus more on providing clinical support to 510(k)s.

Now that's something that has been influencing our numbers for at least a year already because of reimbursement. So I would not present the 510(k) as a unique reason for needing more clinical data. Reimbursement has been driving that for at least a couple of years.

And I would also say if one wants to look for a glass half full from our adhesion trial winding down is we have room in our historical R&D budget to finance the incremental activities around the 510(k)s and clinical work needed for reimbursement.

So now as it relates to the two-piece ankle, I think we've built enough timing into our expectations for that. And I don't know, Gerry is in a different place than I am physically. Gerry, do you want to comment at all on the ankle trial in that regard?

Sure, originally we were looking at a 2010 launch and as we looked more towards the regulatory environment and what the likelihood of us getting it through the FDA process with enough clinical data in this year, we pushed it off into 2011 from a planning standpoint. We are still moving aggressively on the pathway to complete the development and get our clinical evidence and do the submission. But we haven't built that into our 2010 numbers.

Thanks, Gerry.

Okay, then my quick follow-up is on the Instruments business. You mentioned distributor inventory levels are starting to stabilize. I think last quarter you said that they were about two and a half to three months. Is that still the case?

Yes, and to be clear, if we said it this way or if it came off this way, they started stabilizing in the third quarter and we don't see any change in the third quarter versus the fourth quarter. So I would guess the rough level is two to three months and what we watch is in the door and out the door sales for the distributors who report that data and they are roughly equal. They were in the third quarter and to remain that way in the fourth quarter.

You can also look for published reports from a number of those companies and they talk a little bit about the stabilization in their business. I look at that as further support for the trends that we are seeing.

Thank you.

Jayson Bedford, Raymond James.

Hi Stu, good morning. Just wondering, I guess the revenue guidance looks like it's 5% to 8% growth, but the adjusted EPS guidance looks like it's flat to up 5% year over year for 2010. I realize it's a little less amortization next year, but I'm just wondering where is that spend going? Why isn't there a little more leverage?

Okay, to be fair, there's always something to pick at in our numbers and this is probably it this quarter. Let me make a forward-looking comment, which is we are expecting long-term to drive our revenue growth in the 7% to 9% range and we expect to get leverage over and above that, which would give us earnings growth in the teens -- low teens. So that is consistent with what we said at our analyst meeting and there's really no change in our expectation.

Now 2010 is a transition year in particular for this new approach to adjusted guidance and so indeed if one compares the 2010 number to the 2009 number, there is $0.06 of amortization that essentially won't go through our P&L this quarter because it ran off -- sorry, this year -- because it ran off over 2009. So that is part of it.

The second part of it is there's a million more shares outstanding in our calculation of EPS in terms of our expectation for 2010 versus 2009, and that's not because we issued a million more shares. It's because of the depressed stock price in 2009 where options and other securities, mostly options, were out of the money and now with the stock at approximately $39 to $40, and we are assuming the stock price remains at those levels, would be in the money for 2010. So that's not an insignificant number.

And again, I would reiterate, we didn't issue new shares. Many of those are five, six-year-old options, but they are now in the money for our expectation and guidance for 2010.

The other point I would make is that our guidance does assume approximately being in the middle of our range. And so if you are at the high end of our revenue range, then you would expect significantly more leverage than at the low end. And I would urge you to look at Q4 and compare it to prior year Q4 including our new adjusted EPS measure. You will see that we actually showed approximately 13% leverage in this Q4 over prior Q4 on adjusted earnings per share. So certainly as we perform at the high end of the guidance, you will see more leverage.

Finally, we are assuming that the economy continues to be only modestly improving this year. And so we have made investments in the business in the fourth quarter and third quarter that carry over into the first half of the year and so you really start to see more leverage in the back half of the year than you do in the first half of the year.

The last thing I will point out is that we are giving our guidance here in early March. So many other companies who you may have heard from gave their guidance earlier in the quarter, and so our currency expectations for 2010 are updated versus some of the other companies. Hence our comment about 6% constant currency growth for 2010 and that 6% reported currency growth for 2010 so we have taken some of the upside out of our numbers based on currency for the year. So hopefully the comments there are helpful in comparing the quarters.

Okay, that is helpful. Just as a follow-up, it looked like US sales were flat in the fourth quarter. What drives that next year? And then can you provide an assumption around US growth in 2010? Thanks.

Okay, two thoughts. By the way, if you compare last year's adjusted EPS numbers to this year's, you will note that throughout the year last year we were bringing down our expectations for tax rate. As you know, we were working on improving our tax rate and our understanding of our tax rate throughout the year, and so it is worth noting that the reported numbers on a quarterly basis, even on an adjusted basis don't add up to the full-year numbers because by the end of the year 2009, our full-year rate was down substantially versus beginning of the year. So the full-year reported numbers actually a few cents higher than the sum of the quarters throughout the year.

If you have questions on that, you know, please go ahead and give them to us off-line and we will try to walk you through that reconciliation.

Now as for the US business and why we expect it to be up in 2010, remember we really got creamed in our instrument business in 2009 and that instrument business is relatively weighted towards the US. And so if you look at the full year, it's so much impacted in the US by the instrument business, which I think is over 90% domestic compared to the Company as a whole, which is $0.75 domestic. So that is the overall strongest driver of that flatness. Next question.

Joshua Zable, Natixis Bank.

Good morning, guys. Thanks for taking my question here. Just a quick question on the gross margin. Jack, I know you gave some guidance. Maybe you could just give us a little bit of color there on just sort of why it's coming down a little bit or in line.

Well, I'd say that there are a couple of factors. But the main one is that the instrument business was really weak last year and that drove consolidated gross margin as a percentage of revenues. We expect it to strengthen a bit this year as a proportion of the total. Obviously absolute gross margin will increase, and that's a lot better than worrying about the gross margin percentage. But we had a very big jump if you go back and look at gross margin from 2008 to 2009, it was very heavily mix driven. It was partly also driven by better manufacturing and so on and so forth. So that's the main answer.

I will add one thing. As you look out to 2010, you've got to keep in mind the impact of currency. So when you translate euro-based currencies back to dollars, to the extent that the dollar strengthens, that weakens your gross margin. That's not just for us. That's for every company.

Okay, great, guys. Thanks.

(Operator Instructions) Glenn Novarro, RBC Capital Markets.

I just wanted to ask one more question on spine and I've asked this on past or previous calls just this quarter. But can you give us a sense -- I know your business is going to be predicated on market share gains, but when you look at your business in the fourth quarter, did you have any pricing pressure in the quarter? It sounds to me that other companies that have reported in the fourth quarter face facing pressure that was above normal levels and they also saw a step down in volume growth.

So can you give us any more color on what you are seeing your spine business as it relates to volume as it relates to pricing?

I do so, but a little hesitantly. Firstly for us, again, it's a market share game and particularly on the metal side, Integra is relatively new to the market and I don't really think we see much pricing pressure. Indeed, what we are looking to do is to be very competitive even on pricing with others in the market. I would say on the biologics side, we always see pricing pressure and we have tried to again use the fact that we manufacture as opposed to buy from third parties to take advantage of the fact that we can drive a high margin but still be competitive on price. And one of the strategies we have employed there is the GPO strategy like our instrument business, adding significant GPO relationships to our biologics where you do give up a little bit of price but take substantial share.

So I don't think in our particular case, that's a significant impact. Certainly I wouldn't want to say, well, that was what drove a somewhat less than satisfactory performance in the fourth quarter. I think again in the long-term for us, it's all about share.

Then just one follow-up. When you look at your spine performance, were you weaker in biologics or weaker in metal and any color behind why one segment was weaker than the other?

I think the answer is we were a little weaker in metal and I would attribute that to being newer in the market and with a less broad portfolio of customers. And therefore, the impact of taking accounts or new distributors is that much more important in that part of the business.

So yes, metal more than biologics, but again, we've had many other quarters during the year where metal was the driver and biologics was more consistent. But because of our Biologics business being part of Integra a lot longer than metal and being far more diversified in a customer base, that doesn't surprise me.

Okay, great. I'll get back into queue. Thank you.

Matt Miksic, Piper Jaffray.

So one clarification on guidance. Someone had asked the question about 5% to 8%. Did I miss or did you make any comments on FX? Our calculations show sort it like a minus 1%, maybe minus 1.5% FX hit this year, which would make that sort of a 6% to 9% constant currency, or is it 5% to 8% constant currency?

Well, I want to be cautious. Someone said 5% to 8%. That's not what I said. I think it's about right, but we said our guidance was at the midpoint 7.25% for the year and -- I'm looking over at Jack -- I think we said 7.15% to 7.35%.

Now I didn't do the calculation, but I'm assuming that whoever said 5% to 8% got it right. The one point that we did get across is that we are assuming essentially no currency impact in 2010 versus 2009. In fact, if you do a constant currency calculation for our 2010 guidance versus 2009, you come out to just about 7.25%. I think it's 7.24%.

So there is 1% impact versus what we said earlier in the third quarter, where we said 6% constant currency and 7% revenue. And now we're saying 5% to 7% constant currency, so we're just bracketing that 6%. Hopefully, that's a little clearer.

I would work with the number 7.15% to 7.35% and current exchange rates as it relates to our 2010 guidance. We do update it just prior to doing this call.

Okay, thanks for that clarification. I had one question on spine and then I had one sort of follow-up on the taken earn out. So maybe for Gerry, if you think about these new products that you are launching, I don't know if you are comfortable giving us a range of where you think -- where the spine business is growing currently, but maybe more interesting to know would be what do you think the impact of these products are going to have?

I understand it's going to take a while to get adoption up, but are these door openers for you? Are they -- have you gotten feedback that you need to have these to get into some of your existing relationships with a full set of instruments and implants? Any color there would be helpful.

First of all, I would be clear we are not going to give specific revenue guidance on the spine business in particular. But I think Gerry can talk about some of the key new product launches for the year and perhaps in particular the positive impact that the MIS products are having on unawareness of our Company.

Yes, Matt. From a product portfolio, we need to continue to invest and introduce new products. As far as how those will impact our opportunities in the future, as Stuart mentioned, the minimally invasive systems for spine, the Paramount system, the Coral minimally invasive pedicle screw fixation system, we have a new retractor for a mini open system. It is allowing us to gain access to two pieces, one to distributors who are looking for a broader portfolio and the minimally invasive products combined with our orthobiologics gives us that broader portfolio to some of the smaller competitors that we are up against for those distributors.

By being able to upgrade some of our distributors to larger, more focused distributors, we also gain access to accounts. So I think the portfolio and executing our product development strategy has really helped us develop and engage a higher level of distributor which gives us access to more accounts in the US.

Okay, that's helpful. One than just -- Stuart or Jack, I don't know if you gave this number but you talked about it in your modeling for capital spending or for capital layouts this year. The earn-out for Theken, are you -- should we go back and sharpen our pencils and figure that out or can you give it to us?

I think that -- you mean the earn-out for Theken in the coming year? I think that you should go back and sharpen your pencils. I don't think we are going to give it to you, and the reason for the wider audience is that it's purely a multiple of revenue and we have already said we're not going to give the revenue number.

Just so people know the formula, though, it is 2.5 times trailing 12-month sales for the legacy Theken business as of September 30, 2010, minus everything that has been paid up until that point. And you can go back and make your own calculations just to bring everyone up to the same level.

And what I would say to be a little more helpful than Jack, is if the business did grow about 15% or between 10% and 15%, then they would pay out somewhere around $20 million. So that's something we said in a number of forums already. So I think we're just trying to be cautious and not give particular revenue amounts for each of our subcategories.

Understood, thank you.

(Operator Instructions) Bill Plovanic, Canaccord Adams.

Great, thank you. Good morning. Actually I would like to ask on the MedSurg business or the Medical Instruments business was strong. Ortho was a little bit weaker than we thought, yet your SG&A was much higher as a percentage of revenues and given the dynamics of the businesses, that just doesn't make a lot of sense. So I'm trying to figure out what's going on there?

Good question, Bill, and I would -- actually you can summarize it in -- we decided to pay a bonus this year that we have throughout the year had only been partially accruing. By the way, we are not talking about to Gerry, Jack, and I. But throughout the year, we maintained a relatively conservative view on what bonus payouts should be. Based on the performance of our business particularly in the back half of the year, we did accrue up some incremental SG&A in the fourth quarter, some extent in the third quarter as well to capture a partial payout, not a full payout but a partial payout of cash bonuses to a subset of our employees.

So that's really what it was and again it wasn't for Jack and Gerry and I. It was looking at the overall performance of the business.

Can you quantify what that incremental amount was?

I think it's approximate -- in the fourth quarter, it was approximately $1.5 million $2 million and we filed our K this morning and there is some incremental detail in there as well.

Yes, obviously when you are looking at what happens to a big number like SG&A, you can take a lot of things at the margin. So a way of looking at the increase, a way of looking at the increase is that about 80% of the increase was the delta in bonus accrual year-over-year. That is a way. There's a bunch of other ways to look at it as well that are probably tedious and more detailed, but that's a way to look at it.

And can you remind me just relative to the investment in the sales and marketing, is that a front-end loaded expense?

All right, so are you talking about the bonus accrual?

No, I'm talking about as we roll through 2010 and you build out the more distribution in foot and ankle and what have you.

I would say the buildout of orthopedic SG&A is relatively variable. So in other words, it's tied to -- in spine as you know and orthobiologics, it is tied almost purely to the performance of the business based on commission. On the orthopedic extremity area, it is the incremental hiring of additional people. But I would say as you think about the move from Q4 to Q1, it's not so much incremental people that we are adding from Q4 to Q1, it's the infrastructure that we've got into for that we walk into Q1 with and therefore revenues being 6% to 8% lower in Q1 than Q4 having to cover a much larger nut. So there's a fair amount of fixed costs that's been added in the third in the fourth quarter and as we go into the new year, we carry those with us.

I would also say for budgeting purposes going into next year, we've assumed again a partial payout of this bonus accrual for the Company, but we've assumed it throughout the year now as opposed to it being backend loaded. So that's part of what's going on as well. I think in 2008, we paid no cash bonus. In 2009, we started the year assuming no cash bonus for our employees but started building one into the back half of the year, and we are assuming in 2010 that there is an appropriate level of cash bonuses throughout the year, again certainly not the maximum, but an appropriate level. So that is now in our guidance and may explain a little bit the lack of leverage in the first half of the year.

Okay, since I'm last just for Gerry, when do you expect to complete the clinicals for the foot and ankle trial, for the ankle implant?

Yes, well, we have a plan currently in place for the two-piece ankle. We're also collecting data from some of our mechanical testing and we have some meetings with the FDA set up, so it's really too early to tell. It is going to based on setting up the enrollment schedule and making sure that we get adequate enrollment in a reasonable period of time. Until we have actually staffed the enrollment in that trial, I think it's too premature to talk about when we think we will finish it.

That's helpful. Thank you.

Spencer Nam, Summer Street Research.

Thanks for taking my question. Just have one question about the revenue guidance. You know, you mentioned that last year that the economic weakness could affect total of $40 million of your revenues that came from capital equipment inside. In this current guidance, roughly what proportion of that would be coming from those capital equipment stuff? Then what portion of that would be coming from your core growth?

Okay, so if you look at 2010, we're classifying approximately $75 million of revenue as capital and we are assuming no significant recovery in 2010, but incremental [hiring] that we've been talking about and saw in the fourth quarter. Similarly the instrument business is economically sensitive, although not defined as capital much of it, and we've assumed a modest improvement in 2010 in our 1% to 3% revenue guidance for that category.

Keep in mind again in 2009, there was a significant impact of discontinued product lines. In 2010, it's only $1 million or so, so that -- we kind of lapped that problem. So hopefully that answers your question.

That's helpful. One follow-up question on this is between say beginning of this year versus today, are you seeing much improvement in your customer sentiments or kind of how would you describe any change over the last couple of months if there is any?

I would not say there is a significant change in Q1 sentiment versus Q4. I think there was some optimism in January and then if you look at what reports are on the economy in February, they are not that positive. I think the lack of a healthcare bill either dead or resolved is also sort of an overhang in people's minds. Again not specifically for Integra, but for healthcare in general.

Yes, great. Thanks.

A follow-up from Glenn Novarro.

Thanks, since it's only 9.25, I thought I would ask one more question. Part of the market share gaining opportunity in spine is driven by, one, adding new distributors and then two, moving up in terms of exclusivity with distributors. So can you give us where you are in that progress in 4Q relative to where it was in 3Q and then where you expect that to go in 2010?

Okay, we're a little early for exclusivity and as I've said on prior calls, you can't demand things that you can't offer, and so we try to be appropriately demanding from our distributor network in terms of carrying our full product line, but not suggesting they can't carry other product lines if we don't have an entree.

Now that said, where we have been particularly focused is on Biologics and in that area we've got again in my opinion the most broad and attractive product line. And so we have been able to drive about 25% of the dealer network to be carrying both our metal and biologics, and I expect that to go up throughout the year 2010.

So that -- and again, we are being cautious there because we have many biologics dealers who carry competitive metal and we certainly don't want to inappropriately drive them away from carrying our biologics. So I think we've got a very pragmatic approach which has to be a win-win for our customers.

The other thing that I'm pleased we begun in 2010 is international and we mentioned on the call the we've launched in Latin America and I think you'll see throughout the year an increased focus on adding countries outside the United States for our metal side of the business. We already sell orthobiologics outside the US.

Okay, great. Thanks, Stuart.

There are no further questions in this queue at this time.

Well, thank you all very much and we look forward to reporting on our first quarter in the coming months. Take care.

Once again, thank you for your participation in today's conference call. This does conclude the event.