Integra Lifesciences Holdings Corp (IART) 2010 Q1 法說會逐字稿

Good day everyone, and welcome to the Integra LifeSciences first quarter 2010 conference call. As a reminder, today's call is being recorded.

At this time, I would like to turn the conference over to Ms. Angela Steinway. Please go ahead, ma'am.

Good morning and thank you for joining us for the Integra LifeSciences first quarter 2010 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 Deutsche Bank healthcare conference in Boston. Earlier this morning we issued a press release announcing our first quarter financial results. This release is available on our website in the press release section under Investor Relations.

During this call, we will review these financial results and reiterate 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 yourself 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 May 17th 2010 by dialing 719-457-0820, access code 8819084. Additionally, a Webcast replay will be archived on the Investor Relations page of our website. Today's call is a proprietary presentation of Integra LifeSciences Holdings Corporation and is being recorded by Integra. No recording, reproduction, transcript, transmission, or distribution of today's call 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, May 3rd, 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 the 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 31st, 2009 and to 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. 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. We are pleased to report solid financial results for the first quarter of 2010, and growth across each of our three product categories.

For the first quarter, total revenue increased 7% to $173 million, an increase of 6% in constant currency. We were encouraged by the performance of of our entire business in the first quarter, including NeuroSciences and instruments, both of which met or exceeded our guidance for growth after a very tough 2009. Integra Orthopedics, which includes products sold to foot, hand, spine, and orthopedic surgeons, represented approximately 41% of Integra's overall revenue and increased 9% to $70 million for the prior year period. In the first quarter, all our orthopedic product categories grew over last year.

Extremity reconstruction, which is the largest component of our Orthopedics category, again posted double-digit worldwide growth. Sales were particularly strong across our foot and ankle products. Elective forefoot products rebounded in the quarter. Spine and orthobiologics grew less than we expected. Our orthobiologics products continued to grow well, and we expect an acceleration in these lines as we are now introducing new spine focused products to the metal dealer network. The middle part of the category suffered, however, because we have not added distributors as quickly as we had hoped, and to some degree we are disappointed with the productivity. That said, we continue to expect improvements in these products throughout the year.

Industry conditions have not helped. Along with the leading players, our pricing is down mid single digits. Private label revenue also increased in the first quarter versus the prior year.

Integra NeuroSciences encompasses the products sold to the neurosurgeon and the neuro nurse. The products in this category represented approximately 37% of Integra's revenue during the quarter, increasing 8% to $65 million. Sales of capital products including ultrasonic tissue ablation, cranial stabilization, and Stereotaxi product lines drove this growth. That said, many of our capital products are still weaker than historical levels.

Integra Medical Instruments accounted for 22% of Integra's overall revenue in the first quarter. Instrument revenue of $38 million represented an increase of 2% versus the prior year period. Office based sales drove the growth. On the office space side demand has been relatively stable since the second half of 2009, but sales remain below historical levels. Consolidated international sales accounted for 25% of revenue in the first quarter. International revenue increased 13% as reported, and 6% on a constant currency basis.

Now I will turn the call over to Gerry to discuss some highlights among our selling organizations in the quarter.

Thank you, Stuart. Extremity reconstruction remains one of our best performing sales organizations.

Focusing on skin for a moment, sales of these products have been consistent growth drivers, our tissue regeneration product lines have been instrumental in allowing us to execute on a disease state strategy for extremity reconstruction. We positioned these products for the treatment of diabetic foot and ankle disorders, providing the surgeon with a full range of products that are required to treat the various stages of disease progression. The major products behind the strong growth in the first quarter are the flowable matrix and the mesh matrix. We've initiated a new project, which will address the clinical requirements to minimize the complications associated with Stryker fractures in diabetic patients. We are assembling key opinion leaders in Europe and the US to collaborate on future solutions and improvement in patient treatment.

Also in orthopedics, we are pleased with the progress we have made since the full commercial launch of the Paramount Minimally Invasive Spine Pedicle Screw Fixation System which we announced at the AA Arts meeting in New Orleans in March. Demand for this new product has been strong among both surgeons and our distributors. We have an active surgeon training program in place and expect Paramount to have a strong ramp throughout 2010.

We have begun our European sale and marketing efforts to support the introduction of our spine products in EMEA. We recently hired a Vice President of Sales and Marketing, located in Leon to head up this effort. We are also excited about the addition of the Integra Spine branded orthobiologic products which will allow us to access an expanded distributor network and surgeon base. Currently, 30% of our spine distributors carry our orthobiologics. By year end we expect that number to approach 75%.

EVO 3 continues to exceed expectations. This is one of our fastest growing products and is our largest orthobiologic product. While it is an ideal option for general orthopedic applications, it is growing most quickly in spine. We expect this product will be a major contributor to accelerating spine and orthobiologic growth for the remainder of the year and well beyond.

Turning to neurosurgery, we had a strong performance in the quarter. Our tissue ablation, cranial stabilization and stereotaxi device sales increased significantly over last year. We do not see indications of pent -up demand or a full release of capital dollars. The growth in neurosurgery was also driven by adoption of our recently launched Integra Mayfield Infinity XR2 radiolucent cranial stabilization system. This system is used in neurosurgical applications where intraoperative x-ray imaging is required such as cerebral vascular and cervical spine procedures. Improvements include increased rigidity, improved ergonomics, and a simplified design that reduces assembly time and patient positioning for the surgeon, and it's sold at a premium to our existing cranial stabilization products.

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

Thank you, Gerry. We're pleased with Integra's financial performance in the first quarter. Our top line grew well, profitability was particularly strong, and we paid down more debt.

I'll walk through the elements of our P&L and Stuart will update our revenue and earnings outlook in a moment. In this quarter, foreign exchange had a favorable impact on revenues of approximately $3 million versus the same quarter in 2009. If exchange rates stay where they have been, the impact of currency on revenues on the second quarter should be positive by roughly $1 million. Gross margin on total revenue in the first quarter of 2010 was 63.5%. The decline in our gross margin as a percentage of sales was largely the result of manufacturing variances and inventory reserves.

We expect our gross margin in 2010 to be 64 to 65% of sales, including purchase accounting and other special charges. This guidance is lower by 0.5 percentage point due to higher expected manufacturing variances and provisions. Research and development expenses in the first quarter of 2010 increased from the prior year to $11 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 first quarter of 2010 increased from the prior year to $73 million or 42% of revenue. The increase was principally attributable to additional headcount, higher commissions and bonus accruals. We anticipate that SG&A will approximate 41 to 42% of sales in 2010. In the first quarter, we earned $34 million in adjusted EBITDA, and $38 million in adjusted EBITDA, excluding stock-based compensation.

We reported a $2 million decrease in net interest expense to $5 million for the first quarter of 2010, due primarily to repurchases of our convertible notes and the repayment of bank debt. The Company recorded $1 million of other income, due to foreign exchange gains and intercompany transactions. Our income tax expense was $4 million, reflecting an effective tax rate of 21% for the quarter. The implied tax rate on our adjusted net income was 31%. We expect our tax rates for 2010 to be about 29% on a reported basis, and 31% on an adjusted basis.

In the quarter, we recorded depreciation of $5 million, and amortization of intangible assets of $4.5 million, including $1.5 million in cost of product revenue. In 2010 we expect depreciation of approximately $20 million and amortization of approximately $17 million. Approximately $6 million of the amortization will be included in cost of product revenue for the year. 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 $15 million or $0.50 per diluted share for the quarter. When adjusted for acquisition related expenses, other special charges and intangible asset amortization, net income was $19 million, or $0.63 per diluted share. In the first quarter, we generated $28 million of cash flow from operations, of which about $3.5 million came from working capital improvements, and we spent about $6 million on CapEx.

We used our cash to pay down $15 million on our credit facility. At the end of the quarter, we had $82 million of cash, outstanding borrowings of $145 million under our revolving credit facility, $78 million of our 2010 convertible notes outstanding, and $165 million of our 2012 convertible notes outstanding. We expect to use our cash and borrowings under the credit facility to repay the 2010 convertible notes next month.

We ended the quarter with 53 accounts receivable days outstanding, in line with 51 days at the end of 2009 and down from 57 days a year ago. We had 200 days of inventory at the end of the quarter, in line with 202 days at the end of 2009 and down from 219 days a year ago. We're pleased with both metrics.

Overall, we are very pleased with the execution and profitability of the Company in the first quarter. During 2010 we will continue to invest in our business. We believe we can achieve strong revenue growth and we recognize the needs within our organization to support that growth. Our business model remains solidly profitable and generates strong cash flows.

Now I hand the call over 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 reiterating annual revenue guidance and GAAP and adjusted EPS guidance. We expect to recognize between $715 million and $735 million in revenue in the full year of 2010. The revenue guidance assumes exchange rates stay as they are now. As we have said in the past, we do not presume that overperformance in one quarter, or for that matter underperformance changes our estimated range for the year. Within this guidance range, we are still anticipating Orthopedics to grow approximately 8 to 10%, neuro 5 to 7% and instruments 1 to 3%.

Further, we are reiterating our adjusted diluted earnings per share guidance. The Company expect GAAP earnings per diluted share between $1.92 and $2.07. And adjusted earnings per diluted share of between $2.60 and $2.75. Our adjusted earnings per share guidance excludes intangible asset amortization and its tax effect. We expect that intangible asset amortization net of tax will be approximately $0.38 per share in 2010.

In the absence of any future acquisitions, we anticipate a quarterly progression in our earnings throughout the year, consistent with our historic seasonality. And with Q4 being the strongest quarter of the year. 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 the 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. Gerry will be presenting later this morning at the Deutsche Bank Healthcare Conference in Boston, and again next week at the Banc of America Merrill Lynch conference in New York City. On our medical conference agenda, we are all attending the AANS in Philadelphia this week. Now we would be happy to answer your questions. As a reminder, in an effort to keep this call to an hour, please 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.

Thank you. (Operator Instructions). We'll pause for a moment. Matt Miksic of Piper Jaffray.

Hey, Matt.

Hi, this is Roshni in for Matt. Matt is in Europe. Hi, thank you for taking my questions. A quick question on CapEx. Some of your competitors have talked about a nonlinear recovery in CapEx spending. Could you talk about if that's what you're seeing or what you're seeing in the market?

Sure. We believe that approximately 10% of the Company's overall revenue would be classified as capital by hospitals, for example, and we saw in early 2009 a severe contraction in hospital buying. We saw by the fourth quarter some improvement in that, and we saw this quarter some improvement in that as well. So we're certainly seeing an increase in capital spending by hospitals.

That said, it's not back to where it was in prior years, so indeed, we outperformed in neurosurgery this quarter, to some extent because of that now increase in demand. But what we commented was that we don't see the impact of pent-up demand and we don't see an acceleration in capital. So I'm not completely sure what nonlinear means, but we're certainly not back to levels that existed prior to 2009.

I guess they talked about lumpy capital spending. That's what I was referring to.

I see. Well, from our perspective, most of the products that we sell tend to be relatively small ticket capital. So we don't have very many products that sell for $1 million ASPs. In fact, many of our capital products are in the $5,000 to $25,000 range. So it's unlikely to be lumpy so much as reflecting the improvement in the hospital's ability to finance itself and, therefore, its willingness to free up CapEx dollars.

Okay. Thanks. And then a quick follow-up in spine. You talked about lower than expected growth in spine. Could you provide any color on the differences in the US and outside the US?

Sure. Yes, this is our second quarter where we commented that spine didn't meet our expectations and so we just wanted to clarify that principally when we sign a new distributor, there's a process that we go through, both from a quality and a training perspective, before they can begin selling our products. And this can take anywhere from 30 days to several months and what we saw in the fourth and the first quarters was that this process took a bit longer than we planned and we're adjusting to the timing of these types of processes. The other thing, based on competitors' comments in the fourth and the first quarter, is we did undertake an analysis of our own ASPs and indeed, like others, we were down mid single digits. So that certainly didn't help.

In terms of international, I guess it's all good news. We really only started in international in the late fourth, early first quarter, and we have had now sales in Latin America, we just recruited a head of sales for spine in EMEA, Europe, Middle East and Africa, and we're off recruiting senior spine people around the world as we speak. So it's all up side outside the US. The revenue impact is all US.

Thank you very much for taking the questions.

Next, we'll hear from Bruce Jackson of Morgan Joseph.

Hi, Bruce.

Hi. I was hoping we could get an update on your efforts to expand the sales force in extremity orthopedics.

Sure. Gerry, would you like to take that? Are you close enough to the phone to be able to do that at the conference?

Yes, I'm fine. We continue to expand the extremity sales organization. Last year we had approximately 30 people for the selling organization, extremity reconstruction. And now we're trying to -- there's a ramp-up time in spine distribution, there's a ramp-up time for our salespeople in extremity reconstruction as well.

Now we're starting to see some productivity coming from the sales organizations that we put on four or five months ago, and we'll continue to build on our selling organization in extremity reconstruction as we continue to see increases in market share, increased growth in extremities. We continued to have double-digit growth. We've seen some strong favorability toward our tissue regeneration products and that will help us fund additional salespeople as we go throughout the year and the plan is to continue to add more salespeople in order to increase our penetration in coverage in accounts around the US, as well as starting to expand distribution outside the US, specifically in the Asia-Pacific markets.

Thank you.

Joshua Zable of Natixis.

Hey, Josh.

Hi, guys. Good morning, congrats on a nice quarter. Thanks for taking my questions. Just a couple quick ones here. Maybe you guys can just comment on gross margin. I know you gave an explanation. Just any more color around the manufacturing variances, maybe kind of what surprised you, what didn't, how to think going forward, any color around that would be helpful. Thanks.

A couple thoughts. First, I would put our adjustments to guidance on both the gross margin and the R&D line, a little bit in the category of micro managing our model. And so what I would say is we didn't lower the gross margin guidance because of any fundamental change in the sales mix. That's really the driver, long-term. But indeed, the driver for adjusting it down for the year by 0.5% really reflects our review of actual manufacturing variances in the first quarter and so we undertake a review of what our expectations are for the rest of the year, and it caused us to reduce it by 0.5%.

A couple -- so that's a combination of simply variances, so write-offs of product when produced, and/or strengthening of the US dollar which impacts our instrument business to some extent, and then furthermore, we do have a significant expansion of sets of inventory so the instruments that go with the inventory get expensed, and so if you look across the year, we have a significant expansion of both our spine and extremities and so we tend to, as we deploy the sets, begin depreciating inventory and writing off certain sizes of the specific inventory that's deployed.

So I would say it's not one major thing, but rather a series of small things that when you stare at them, you recognize the year is likely to come in 0.5% lower. I'd also say, looking at our model, our R&D line is likely to come in slightly less than the overall 7% that we've guided at the top end of the range and so it sort of accommodates it.

Okay. Great. Very, very helpful. And then just my follow-up here, I know you talked about quote, unquote, capital spending before. Maybe you could just comment sort of on the instrument business, just sort of if that sort of goes in line with the comments about quote, unquote, capital or if there's any changes on that front. Thanks a lot, guys.

Sure. Most of our discussion around capital sits in the neurosurgery groups and so those are products like the stereotaxis products, the fixation products and the ultrasonic aspirator. But as we observed last year, our surgical instrument product lines are also affected by the economy, even though we don't classify them as capital. And in particular, we started to see an improvement in the second half of last year in the physician based part of the instrument product lines, and that continued through the first quarter. Certainly there was some freeing up of dollars for hospital-based instruments, but really the performance in the first quarter was really led by the physician-based part of the business.

Great. Thanks, guys.

Jayson Bedford of Raymond James.

Good morning, guys. Thanks for taking the questions. Just quick kind of micro and then more macro question. The micro, other income, a little over $1 million, do you expect that to recur and what should we look for for that line item for the year?

This is Jack. There's almost always been small amounts in other income, one direction or the other, largely because of intercompany notes and that kind of thing and changes in currency that influence intercompany transactions. So it will go up and down. It's very hard to forecast. And so we don't forecast it. But it's there this quarter.

The objective is for it to be zero and so if you look over the last several years, it's on average going to be zero. But it just depends on which site shipped which other site product and the length of the receivable and the timing of paying it off and the funny thing in the last year or two is there's been such extraordinary movements in currencies, it shows up as a much bigger item than it really did in prior years, but there's no process that drives other income. It's really just the intercompany receivables or notes and what happens to happen to currency in the quarter. So in terms of modeling, you should model zero going forward because that's what we always anticipate and it's not really predictable.

Fair enough. And then just a little broader question. From an acquisition standpoint, you guys have been a little quieter than you have in the past over the last year and I'm just wondering, is that a function of you guys not seeing what you want out there? Is it sellers not willing? Or is it just a preference to build cash right now?

I think you need to put it in context and I would say the context started about 18 months ago. So as the financial crisis hit the markets, and not even the customer markets, but the financial markets, we moved to a much more conservative posture with a plan to on the one hand pay down the debt that we had put on the balance sheet earlier, to consummate the various acquisitions we did, as well as to repurchase shares in the prior several years. And so because of the demands of the financial markets, we made a real concerted efforts to reduce our debt. And I think have gotten to the point where we really feel very comfortable that when you look at our debt profile, it looks relatively conservative and that was one of our objectives, both from our equity investors' perspectives and our lenders' perspectives. Also, the facts were that the hospital environment, the economic environment were such that we want to be very conservative with how we operated and so we took the opportunity to focus on things like bringing down our balance sheet items like inventory and receivables, taking certain actions internally to reduce cost, as well as to invest in growth in our infrastructure.

That said, as you know, we've always felt that acquisitions were an important part of our longer term strategy, and I think it's something that we have a good core competency in. And we have continued to talk with potential targets. Now, the fact is the valuations have gone down and many of the targets don't like that and we really haven't missed a deal that we wanted to do because most of the people who we approach to acquire just chose not to sell in the time frame where all evaluations were down, and so we had some nice pickups like the acquisition of the Paramount system. But other than that, it's been quiet.

Starting around I would say February of this year coming into what seemed like an improving economic environment and also a sense of stability in our own business, we kick-started some of the acquisition discussions that we've had with smaller companies and private companies, and so I think there's the opportunity as we go into the end of this year and 2011 to be back in our historical mode of having several small acquisitions available to grow our businesses. And I think the statement that we made on a number of occasions is we're going to remain focused for the most part in the categories that we participate in. So we feel like we've got now a very good diversified mix of businesses and to be in spine, orthobiologics, neuro, extremities, these are good markets to be in, and that's where we'll look for most of our acquisition activity. I think we've used the pause in the economy to our advantage to build a stronger Company and to position ourselves well for the next several years.

Thanks, those are my two. I'll get back in queue.

Bill Plovanic of Canaccord.

Hi guys. Just two questions. First, the spine is obviously coming in a little slower. Does that at all impact the way you think about the spine and the biologics as you go into 2010 and 2011 for growth prospects for that business?

I don't think so. I think we can accommodate what we view as a somewhat shorter term phenomenon, which is really our execution. We've said I think pretty consistently, we're not going to either take credit for -- we're not going to either blame our growth or take credit for our growth on the overall spine market performance. We are in an environment that is to some extent more challenging, and I actually think that may work to our advantage.

A number of these very successful spine companies have done it in a pretty easy environment and I would like to think that we've got a pretty hardened team, used to competing in environments like the instrument market where prices are flat and you're really competing based on the quality of your sales organization. So I think we've got a good opportunity to be a market share taker in a more challenging environment. I'd also make the point that we run profitably and others may face in an environment with price contraction a situation where they're actually losing money.

So I think it doesn't change our enthusiasm or expectations for the business longer term, and our strategy remains completely intact and indeed, we're now into the launch of the orthobiologics products through the spine channel, and so if you make it to the American Association of Neurosurgeons, you'll see our new spine orthobiologics products and get a sense for the breadth of our product line which we really haven't at all taken advantage of to date in terms of the channel.

Okay. And then on the lower tax rate, I'm just curious. That came down probably mid single digits going forward on the guidance, and why wouldn't you -- why wouldn't that cause an impact or a higher guidance for earnings if the tax rate has come down that much?

Okay. Keep in mind that our forward-looking comment about adjusted tax rate really didn't change much. So even though the quarterly rate was down significantly, we actually adjust that out. So to our disadvantage and note that our adjusted EPS assumes a higher tax rate than our GAAP EPS. So we're not in any way utilizing the tax rate, as it were, in any quarter to either beat or meet our numbers. Indeed, what happens is we always have to make an estimate for the full year on our adjusted -- first on our GAAP rate, and then our adjusted rate.

And so our GAAP rate came down by about a point, and, therefore, our adjusted rate comes down by about a point for the year. But for GAAP purposes, that all happens in the one quarter. But we adjust that back up to the expected average rate for the year. So really, the impact on our annual guidance is only 1 percentage point, Bill.

Okay. That's helpful. Thank you.

Robert Goldman of CL King.

Good morning. Also a couple questions on gross margin. Stuart, I think you gave some additional explanation on the inventory provisions impact to gross margin, but if you did, I missed the further explanation on manufacturing variances and what that is. Could you go into that again?

Sure. First of all, my controller has chastened me. We adjusted our tax rate down by 0.5%, not 1% in our forward-looking guidance. So apologies to you all. It was a minor impact on the full year.

Second point, I made the point, we look every quarter and in particular early in the year at what things will impact our gross margin throughout the year. And in this particular quarter, there are really three items. One, just the expectations based on recent performance of yields and lot acceptance across the Company, and we concluded that we should estimate a slightly lower margin based on that. We also deployed capital to the field for our various orthopedic products, and based on expected utilization or non-utilization within the full set, we make an estimate as to reserves.

And then finally, in our instrument business, we have some advantage or some disadvantage of currency and we make an estimate of that, since we purchase many of our instruments in Euros. And so when you roll that all up for the year, it adds to a reduction in our overall gross margin expectation of about 0.5%.

And if I could ask the second question on gross margin, relates to the impact from the price declines on spine. Of course, spine is a meaningful piece of your business. And the way you described it, Stuart, was that after you heard the competitor commentary which we heard as well on the quarterly call, price declines, you went back and discovered that prices did go down. But I'm curious though why that was the sequence of events. Do the divisions have pricing carte blanche or knowing the price declines now, will you be reining in the divisions on price declines going forward?

Hi, Bob. It's Jack. I'd say a couple things. First, the divisions do not have pricing carte blanche. Especially in the establishment of list prices. But I think it's important to recognize that in spine, in particular, where we have a very small share of the market, almost no matter how you measure it, we're price takers, we're not price setters. And we respond locally as needs require to get the business. And those decisions are pushed down into the organization. Our sales executives and divisional managements are motivated to keep their prices high or as high as competitive conditions warrant.

But, on the other hand, they also are motivated to defend their profitability and more to the point in the spine area, actually grow share. So they respond to local conditions as local conditions require, and the spine business in particular, in contrast to, say, most of neuro and virtually all of our instruments business, does have by its nature a fairly significant gap at all times between list pricing and ASP. I think that's true across the spine business. And so the only question really is the magnitude of that gap on any given day in any given hospital.

It's clear that the pricing has come under more pressure in the spine sector. It's not a dominant feature of our business plan or a dominant concern in our business plan, which relies primarily on executing on superior -- or on incremental distribution, better distribution. So we're not proposing to set up pricing as some sort of major excuse for the performance of the spine business at all. But on the other hand, we did see the effect that some of the other companies have been talking about.

I guess I would add to that. We don't normally comment on price at all, but we anticipated listening to 10 other spine conference calls, the questions, so we figured we'd weigh in with where things appeared to be. I would say we are a winner in a declining price environment. Our strategy in orthobiologics has been to get on GPO in virtually every instance that we can, and that's been a winning strategy and has helped up drive share in the orthobiologics area.

I would similarly say our breadth of product line allows us to present a unique portfolio to many hospitals where, keep in mind, spine is done in at least half the instances by neurosurgeons who are already buying our other neuro products. So I'm actually in an odd way enthusiastic about the opportunity that this challenging spine environment from a pricing perspective provides for Integra because, candidly, we have very little to lose in terms of the impact and quite a bit to gain in terms of market share and I would say, given our strong cash flows, given our access to capital, given our already established positions in these hospitals, I think it's a competitive advantage.

Okay. Thank you.

Amit Bhalla, Citi.

Hi, good morning. A couple of questions on instruments. I was wondering if you could give us an update of how the dental and veterinary markets of the instruments are performing, I know they have been weak the past few quarters. And then last quarter in instruments you did talk about distributor demand matching market sales. I'm wondering if that's still the case or are you seeing any bolus coming through.

This is Jack. So the dental and veterinary market is addressed through our office based instrument business, which is known as a branded matter as Milltex. And we actually had quite good performance in Milltex this quarter, which would not have been possible were it not for a significant performance in both dental and vet. I don't have and indeed did not dig through the more granular numbers, but just as a mathematical problem, I can tell you that Milltex's performance which we thought was quite positive would not have been possible without a better than recent showing in dental and vet.

As for the second part of your question, distributor stocking, we actually said last summer that we believed that the destocking phenomenon that we discussed in the first half of 2009 had pretty much resolved itself by July to August. We had data on that, and continued to, in that the biggest of the wholesalers and distributors provide us with out-the-door sales of our products. So we see what they are selling in any period of our products. We can compare it to what they're ordering from us, and we know whether they're moving their inventory up or down. We said last summer, actually, that that phenomenon had pretty much resolved itself, that the biggest players had gotten their inventory where they wanted it.

I meant on the distributor side, were they buying more than demand, not the other way around.

No.

Okay. And my follow-up question is actually going back to Bill's question on the tax. Because last quarter, when you gave that tax guidance you said that the adjusted tax rate was going to be similar to 2009 which we had around about 33%. So wondering actually I guess could you just give us what the -- what you had for that adjusted tax rate for last year? Because if it was indeed 33%, it's more of a 200 basis point change from our model, kind of goes back to Bill's original question.

Hang on one second. Okay. So last year's adjusted number was 32.5 for the full year. This year's adjusted number is 31 for the full year. And we brought our estimate down a half a point from where we had last estimated it.

Okay. So at the end of the day, then, you have some gross margin variances that you talked about already. R&D is a little bit on the higher end. But from a product specific revenue guidance standpoint, all of that stands, you're not leaning to the high end or low end for any of the business segments at this point?

Correct. I think we were actually trying to make a point that neuro outperformed this quarter a little bit, but don't assume it will continue. We like our overall revenue allocation guidance in the ranges that we started the year at, so 1 to 3 for instruments, et cetera, et cetera.

Okay. Thanks.

One final observation, just for the people who are paying a lot of attention to the tax rate. The small changes in our forecast for the tax rate are driven by a bunch of different things that we don't -- are not inclined to get into, but particularly the types of products that we forecast to sell over the course of the year, and the location of expenses. And that's what does it.

Next we'll hear from Mike Weinstein of JPMorgan.

Hi, Mike.

Hi. Good morning. Thank you. Let me just ask a couple questions. You give your adjusted EBITDA numbers with, without stock based comp. I think you commented for the quarter that it was $37.6 million, I think, which is flat year-over-year. What do you expect that to start to grow, you actually grow EBITDA and what is your guidance for the year?

So the biggest impact in particular in the first quarter on adjusted EBITDA is our decision this year to accrue a bonus, and last year in the first quarter, given the economic environment, we did not. So if you look at the progression of our numbers last year, one of the things you will note is that throughout the year as the economy started to improve, we went from assuming that there would be no bonuses for any one of our either senior management team or employees to accruing by the end of the year, essentially, in line with where we would normally wish to accrue. You may not know that the prior year everybody voluntarily took a no bonus, so that was two years in a row, potentially. This year, with things returning to relative normalcy, we assumed in the first quarter that we would accrue the expected bonus at the level that historically we would, had, and so that's a significant impact for a Company of our size, but to be clear, we're not projecting some windfall for people, just getting back to a normal environment, pre the crisis. So that's the biggest impact. As we go through the year, adjusted EBITDA should increase and indeed, if you look at our expected adjusted earnings per share, it's not an insignificant increase from prior year.

So if I can try and reconcile, your revenue growth is call it roughly 5 to 8% reported on the top line, what would adjusted EBITDA growth look like?

We don't have specific guidance for that but the earnings per share guidance accommodates both growth in the items above the operating line, operating profit line, and those below it.

I'm trying to get --

There's leverage, but as other companies have pointed out, 2010 is sort of a funny year because when you go back to a normal year, indeed there are increased costs that people were very careful to not spend including ourselves in 2009 that we have to to be long-term competitive in 2010. The biggest one being the bonus which for the whole Company is anywhere from $5 million to $10 million.

That's helpful.

The other thing I would point out, Mike, is we have kept the cost of share-based compensation relatively flat as the Company has grown, so we've moved the Company increasingly toward cash bonuses and increasingly away from stock options and restricted stock, and so that's also reflected to some extent the differential between the two adjusted EBITDA numbers. If you look at our share-based comp, it's been essentially flat over the last several years which means as a percentage of employee compensation, it's come down pretty significantly.

Okay. Can you walk us through all these items that you guys call out in your press release, all these additional one-offs, if you would, systems implementation charges, charges associated with discontinued, withdrawn product lines, there's a pretty good laundry list there.

Sure. Jack, you want to start or do you want me to do it?

Well, I can do it. The biggest elements are intangible asset amortization. The non-cash interest expense related to the converts. We did terminate or retire a fairly large group of higher comped employees in the first quarter, so we reflected that.

That's not the kind of thing that's likely to recur. And we had relatively lower amounts compared to some of our historical periods in acquisition-related expenses, for example. That's the sort of thing we've called out fairly routinely. The rest of it is reasonably small.

Mike, add a couple points. First of all, in our 8-K there's a lot of detail. So we file an 8-K along with the press release so there's more detail than Jack was giving and the key programs that you'll see through the year that are impacting as one-timers are, one, our Oracle implementation. We're at the very front end of a significant Oracle implementation. We talked about on the last conference call, it's about a 20 to $30 million investment over the next three to four years. Most of that will be capital and so you won't see significant impact, but in the short term there's a number of things that are classified as extraordinary.

It's a tiny number but we do call them out as unusual. The second thing as Jack was pointing out was acquisition related charges. This is really the tail end of the purchase accounting for a number of acquisitions, in particular the Paramount system we bought almost a year ago. And then when we do shut sites or do significant relocations, we call those out and that's what facility consolidation, manufacturing, distribution is and there will be continued activity in that regard throughout the year. But as Jack mentioned, the big numbers are the intangible amortization and the convert adjustment.

I see those. I'm trying to reconcile all the other stuff. Just trying to get to a cleaner number. Okay. Thank you.

Next we'll hear from Spencer Nam of Summer Street Research.

Thanks for taking my questions. My phone is wigging out a little bit, so I may get cut off. I can have you guys on the phone, just I wanted to ask a couple questions. I know a lot of the details have been asked already. On the orthopedic side, you know, when you guys purchased the Tecan and you outlined the strategy, you sort of -- we will go where they ain't, if you will, try to grow the presence across the United States and go to places where you guys were not present, and I'm just curious at this point how much of that initial strategy has played out and some of the pressures you guys feel, especially in pricing, whether they are having any impact on you guys executing your strategy at this point for Orthopedics?

Well, first of all, I would say the strategy is quite intact and indeed the significant presence in orthobiologics plays well with the increased distribution in spine metal. So we're real happy with it but we also want to point out on these calls things that are particularly underperforming our expectations or particularly outperforming, and indeed the last few quarters in the orthopedic category have really been driven by the extremities. Gerry Carlozzi, do you want to talk about the distribution strategy, if you can get that from there?

Sure. I think on the spine distribution, when we started we had very little coverage, about 39% of the US covered with the distribution network in the US. And since the acquisition, we've continued to build out that distribution channel in the US.

As Stu mentioned earlier on the call, we're just at the beginning stages of our international strategy for expanding sales and distribution, but if we focus on the US for a moment, I think what you'll see is we've seen significant growth in the distribution network but one of the things that where we say we're disappointed in the progress, it does take a series of time as you bring on a new distributor and then you start training them, doing the workshop programs and then getting into accounts for penetration. We just had anticipated or expected it would be a faster ramp for some of the distributors and to our disappointment it's been a slower than what we expected progress.

The pricing really didn't have an impact on the strategy in terms of expanding distribution. We have nearly full coverage in the United States now. We have as most companies do when you set up a new channel, you look around and you see some poor performers that we're working on weeding out and replacing with better performers and we look at that as a continuous process. It's not something that's an anomaly for Integra as we go through this process.

We expect by the end of the year to have a much stronger channel than what we have now with people performing because they've been on board for more than the four or five-month period and then as we continue to come on outside the US, we've just begun putting the infrastructure in place and leveraging some of the infrastructure we already have in place, just not establishing sales in markets where the original Integra Spine did not have any sales. So we still see it as a lot of upside opportunity coming from outside the US and so a lot of growth opportunity inside the US.

I would add, if you look across the range of companies we compete with, we compete mostly with smaller companies, under $1 million or less of revenue, and those areas we're very competitive. We've got a broader portfolio, a highly focused specialist group that focuses on both orthobiologics and metal, and we go out of our way to make sure surgeons understand the advantages of our orthobiologic products and the advantages of our hardware systems that allow surgeons to perform the same procedures with fewer steps and makes it an easier procedure with good clinical outcomes. I think we're competing very effectively on a procedural basis by having such a broad product offering and now adding the MIS products and we're continuing to invest in product development and clinical activities to support the momentum and introducing our new products and techniques. So we're quite excited about our potential place in the spine community.

Next we'll hear from Glenn Novarro of RBC Capital Markets.

Just one last question on spine. What was your spine growth in the quarter? And what are your expectations for spine growth for the rest of the year? Thanks.

Again, Glenn, while it is an entirely appropriate question, we've managed to for many quarters not break out any of the components of our orthopedic revenue and prefer not to. We went out of our way to say that each of the major categories grew but any more detail we'd prefer not to provide for competitive reasons.

Would you at least be able to say whether or not you grew close to market growth which is somewhere in the 10% range?

Again, Glenn, I don't want to respond to the level of detail. Overall -- and it's not to be evasive. We manage the whole category. We gave guidance around the whole category. We came out in the high end of the whole category. And candidly, one particular group or one particular quarter does not make the Company. And we've I think made a good effort to give people the appropriate color of each of the categories in such a way that we don't overemphasize any particular product in any particular quarter and I think that serves our investors well.

No worries. I'm fine. Let me then ask one follow-up question, just on distribution, because I think what you're guiding us to is the fact that your distribution on spine is going to be better as the year goes on. Now, it's my understanding that distributors used in spine are not exclusive to Integra, meaning they could also sell Depuy and Stryker and Medtronic. So what gives you the confidence that the distributors that you have in place today, they're not exclusive, that they're going to do a better job of selling your product down the road? In other words, choose to sell Integra versus an existing relationship, whether it be with J & J or Medtronic? Thanks.

Couple thoughts. First of all, indeed our distributors almost never carry Medtronic, Depuy or any of the large companies. They tend to cover our products and smaller Company products that are unique in some way and not in our portfolio. So your question is how do we avoid getting crowded out by Medtronic. That is a great question. We're not going to be crowded out by Medtronic in our dealers. I'm talking about metal dealers, a majority of our products would be our products and then they will fill in the blanks with other small Company products.

Second of all, the distributors are a moving target. We continue to add distributors and delete distributors based on performance. And so it's not a question of saying, well, dealer X, how do I whip him harder. It's much more a question of how do we train the dealers on our products, how do we provide appropriate support and how do we continue to add dealers or sub-dealers in places where we're not covering a market effectively.

So -- and again, we're not talking about bad performance. We're just talking about performance relative to our expectations. Keep in mind as well, we've got a big group of orthobiologic dealers who have been performing very well and we're now going to leverage some of those products through the metal dealer network. So again, you know, one of the concerns I have is we've got a plus or minus $700 million business and we've spent a good third of this call talking about spine metal which I think we've guided to in our discussions being plus or minus $50 million business, and I think it's a bit of a reflection on the interest of the people who cover the Company, not the underlying performance of Integra.

Thanks, Stu. Thanks for clarifying that, though. Thanks.

(Operator Instructions). Ben Forest, Summer Street Research.

Actually this is Spencer Nam again. Thanks for taking my question. Just one quick follow-up from my previous question. You guys also mentioned in your call that the growth in neuro segment should not be viewed as a repeatable, if you will, or that you guys are conservative on the outlook. I recognize that you are trying to temper the expectations and so forth. But I'm just trying to understand, what aspect of the growth you guys are not comfortable in terms of thinking that it's going to get repeated in the next couple of quarters and just the overall -- the hospital spending behaviors, if you guys are seeing any changes. It looks like we may have hit the bottom but I don't know, maybe you're seeing something different.

Well, a couple things. Not to be tongue in cheek, but we're delighted with the neuro performance. It's not a question of not being comfortable with it. We think the team did a great job and what we're trying to do is encourage people not to draw a line from a point estimate and say okay, because we grew 8% this quarter, that's a reason to change your forward-looking models for the year. I think I've said in a number of investor meetings, perhaps even on the last conference call, is we don't view the neuro business as a 5% to 7% grower. We never did, and if you go back two or three years ago, we were talking about a business we felt we could grow well over 10% to 15%.

On the other hand, the economy's not better. There's still a lot of challenges for hospital financing. There's still a lot of challenges in the economic situation, and so what we're trying to do in the same way we did in prior quarters is not let people get too enthusiastic about what was a very good quarter.

The strength of this company is the diversification of our divisions and one performing well in a quarter helps cover the sins of one underperforming in the quarter and vice versa. And that's what allows us to deliver strong underlying cash flows, and so what we're really asking people to do is not assume because we have a challenging spine quarter that that means a challenging year, and not assume because we have an extraordinarily good neuro quarter that that means a blow-out year for neuro. I think we feel that the revenue guidance we've given for the year and the components thereof for the year is still the right place to be.

By the way, the hospital capital environment is improving slightly, but I think we're being as cautious as anybody else in saying there's still a lot of challenges out there and the unemployment rate is still about 10%.

Thank you very much.

And it appears there are no further questions at this time.

Well, thank you all for participating with us in this call and we look forward to reporting to you again next quarter.

That does it for today's teleconference. Thank you all for your participation.