Integra Lifesciences Holdings Corp (IART) 2010 Q2 法說會逐字稿

Good day everyone. Welcome to the Integra LifeSciences 2010 conference call. As a reminder today's call is being recorded. Now I would like to turn the call over to Angela Steinway, Head of Investor Relations. Please go ahead.

Good morning and thank you for joining us for the Integra LifeSciences second 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. Earlier this morning we issued a press release announcing our second 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 update 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 accommodate a large number of requests, please limit yourself to one question and one follow-up during the Q&A period. If you 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 we be accessible starting about one hour after the conclusion of the live event. Access to the telephonic replay is available through August 12, 2010 by dialing 719-457-0820, access code 8154044. Additionally a webcast replay about be archived on the Investor Relations page of our website.

Today's call is a proprietary presentation of Integra LifeSciences Holding's 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 the live broadcast, July 29, 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 31, 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 measures to the most comparable GAAP measures is provided in the press release we issued this morning. Additionally in this press release and on the current Form 8-K that we filed this morning, we provide explanations for why management believes that presentation of the 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. We performed well in the second quarter. Total revenue increased 8% to $179 million from last year on both a reported and a constant currency basis. Our second quarter results reflect the substantial contribution of internal growth to our financial performance, each of our product categories posted healthy growth. We entered the second half the year with good momentum.

Integra Orthopedics which includes products sold to foot, hand spine, and orthopedic surgeons represented approximately 41% of Integra's overall revenue during the second quarter, and increased 12% to $73 million from the prior year period. Extremity reconstruction which is the largest component of our Orthopedics category was again strong across all of its product lines.

Spine and OrthoBiologic sales grew as expected. We anticipate that these lines will accelerate, because we are introducing new products for the spine surgeon through the dealer network. We are also doing a better job of supporting our distributors, negotiating account level contracts, and assigning managerial and technical resources to benefit our best distributors. In a moment, Gerry will provide more information on the steps we have taken to improve our performance in the second half of the year.

Private label revenue increased significantly with all major product lines up from the prior year. Integra NeuroSciences revenues grew 8% to $66 million. The fastest growth in 7 quarters, representing approximately 37% of Integra's overall revenue. Sales of capital products including ultrasonic tissue ablation, cranial stabilization, and stereotaxy product lines in the United Statesdrove the faster growth.

Integra Medical Instruments accounted for 22% of our overall revenue in the second quarter. Instrument revenue of $39 million increased 1% over the last year. Stable procedure volumes drove the growth in our office-based sales channel,this offset continued weakness in the acute care setting. Demand for our instruments has been relatively steady for the past year.

Consolidated international sales accounted for 22% of revenue in the second quarter. International revenue increased 3% as reported, and 5% on a constant currency basis. Significant weakness in Europe was offset by strong sales to Asia Pacific and other markets. Overall Integra had a good quarter. Improvements in the US economy, better sales execution, and strong profitability led to another solid performance. We feel confident heading into the second half of the year.

Now I will turn the call over to Gerry to discuss some operational highlights.

Thank you, Stuart. First I will provide an update on spine. We have continued to introduce new spine products through our dealer network, which has contributed to the performance of the spine group this quarter. We are improving the dealer network. We turned over 7% of our dealer network in the first half of 2010. We are now managing most of our dealers by an account level rather than a geographic territory, which allows us to assess their performance more rapidly, and respond to poor performance more quickly. We are also adding experienced buying sales managers to support our expanded dealer network. Finally, we are increasing the quality and frequency of our training programs for both our sales reps and surgeons.

We continue to add our Integra spine-branded OrthoBiologic products to the spine dealer network. Spine distributors representing two-thirds of our metal implant revenue carry Integra OrthoBiologic products, and we expect that number to grow. We are pleased with the progress that the spine organization has made in the past several months. With these efforts, several key new product launches, new distributor agreements, and successful training programs we expect this category to accelerate in the second half of the year.

Extremity reconstruction continues to have a very strong double-digit growth in the United States. As in other parts of our business the European component was relatively weak, with the successful onboarding of 30 domestic sales reps during 2009, the extremities sales group is performing well. We plan to add an additional 15 to 20 new sales people to our domestic sales organization over the next 12 months to improve service to the surgeon and our coverage of the market. New products focus on the diabetic disease state that will help extremity surgeons improve their clinical outcomes.

Our Neurosurgery product lines performed strongly in the first half of this year. Strong US performance led the category's growth. A rebound in overall demand for capital continued solid execution disposal and implants contributed to the overall improvement of our Neuro platform. Our tissue ablation, cranial stabilization, and critical care product lines drove Neuro's growth in the second quarter.

Last year we launched a new tissue ablation system, the CUSA NXT into a very difficult climate for capital equipment. The product has gained traction and we have succeeded in upgrading our market-leading installed base of tissue ablation systems. The cranial stabilization product line also had a good quarter because of the successful launch of the XR2 Radiolucent Cranial Stabilization system, and an increase in our overall surgical headrest product line. Medical Instruments continues to grow this year albeit slow. These product lines are strong contributors to both operating profit and cash flow.

Now I will turn the call over to Jack for review of our financial results.

Thank you, Gerry. In addition to the strong revenue performance we were pleased with the profitability of the Company in the second quarter. I will walk through the elements of our P&L, and Stuart will discuss our outlook for revenue and earnings.

We reported GAAP net income of approximately $15 million, or $0.50 per diluted share for the second quarter. When adjusted for acquisition related expenses, other special charges and intangible asset amortization, net income was $21 million, or $0.68 per diluted share. In this quarter foreign exchange had an unfavorable impact on revenues of approximately $0.5 million versus the same quarter in 2009. While we expect a revenue headwind from currency in the second half of the year, sales in currencies other than the euro and British pound will eventually yield higher gross margins, because products manufactured or purchased in Europe will cost less in terms of those other currencies.

Gross margin on total revenue in the second quarter was 64%, flat compared to the prior year period, and up from the first quarter. We expect our GAAP gross margin to be 64% to 65% of sales for 2010. Research &Development expenses in the second quarter 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 & Development in 2010.

Selling, general and administrative expenses in the second quarter increased from the prior year to $74 million, or 42% of revenue. The increase resulted mainly from additional head count, higher commissions, and bonus accruals. We anticipate that SG&A will approximate 41.5% to 42% of sales in 2010. In the second quarter we earned $35.5 million in adjusted EBITDA, and $39 million in adjusted EBITDA excluding stock-based compensation. We reported a $2 million decrease in net interest expense to $4 million for the second quarter, resulting primarily from a reduction in debt. The Company recorded $800,000 of other income from foreign exchange gains on inter-company transactions.

Our income tax expense was $6 million reflecting an effective tax rate of 28% for the quarter. The implied tax rate on our adjusted net income was 29%. We expect our tax rates for 2010 will be about 26% on a reported basis, and 29% on an adjusted basis. This is 3 percentage points lower on a GAAP basis, and 2 percentage points lower on an adjusted basis, than the tax rate that we provided on our Q1 conference call. The lower tax rate is the result of higher sales of products manufactured in lower tax jurisdictions.

During the quarter we recorded depreciation of $4.5 million, and amortization of intangible assets of $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.

At the beginning of June we borrowed $75 million under our credit facility, and used the proceeds to retire our maturing convertible notes. The second quarter we generated $19 million of cash flow from operations, and we spent about $6 million on capital expenditures. Cash flow from operations included the payment of $6.5 million of accreted interest upon the maturity of the convertible notes, which for accounting purposes hits cash flow from operating activities. At end of the quarter we had $94 million of cash, outstanding borrowings of $220 million under our revolving credit facility, and $165 million of convertible notes outstanding.

We ended the quarter with 50 Accounts Receivable Days Outstanding, an improvement from 53 days at the end of March, and down from 56 days a year ago. We had 201 days of inventory at the end of this quarter, in line with 200 days at the end of the first quarter, and down from 212 days a year ago.

Now I will 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 our annual revenue guidance, as well as our GAAP and adjusted EPS guidance range.

On the top line we expect to recognize between $715 million and $735 million in revenue in the full year of 2010. We expect our constant currency growth rate to exceed our reported growth rate in the back half of the year. Our guidance today assumes that exchange rates will remain where they are now. Within this guidance range for 2010, we are anticipating Orthopedics to grow approximately 8% to 10%,Neuro 6% to 8%, and Instruments 1% to 2% on a reported basis.

Moving to the bottom line, we are reiterating our GAAP and adjusted EPS guidance. We 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. 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 historical seasonality, with the fourth quarter being the strongest quarter of the year. Beyond 2010 and for modeling purposes we suggest 7% to 9% constant currency growth in revenue.

In summary, we are confident in the strength and diversity of our business, and we are optimistic about our performance in the second half of 2010. Longer term, we believe we have the potential to grow faster, both on the top and the bottom lines. We expect our near term investments to help realize that growth potential. With a strong cash flow generation, we are also hopeful to add both strategic and financial value to our internal growth through acquisitions and strategic alliances.

We look forward to meeting with investors. In August, Gerry will be presenting at the BMO Capital Healthcare Conference in New York City. Jack will be presenting at the Barrington Research Healthcare Conference in Chicago, and I will be presenting at the Canaccord Adams Global Growth Conference in Boston. On our medical conference agenda, we will all be attending the North American Spine Society Meeting in Orlando the first week of October, and the Congress of Neurological Surgeons Annual Meeting later that month. Additionally, we would like you to save the date for Integra's Annual Analyst Meeting in New York City which is scheduled for the afternoon of November 15th. Expect more information from Angela in the coming weeks.

Now we will be happy to answer all of 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.

Thank you. (Operator Instructions). We will turn first to Matt Miksic with Piper Jaffray.

Good morning.

Hi.

Hey Stuart, hey Jack. Thanks for taking our questions. One question on the guidance, and one on just the P&L if I could, for Jack. On guidance, I noticed you brought it looks like Neuro up a little bit, if I am not mistaken. And then of course, the numbers were stronger than we were looking for in the quarter. I guess is it some of the other folks that have reported so far are talking about moderating second quarter procedures, and things like that, hanging on growth of their businesses? Maybe what are you seeing that is helping you get more confident in Neuro?

Okay. So as you probably recall, Matt, Neuro procedures for the most part remain strong even through the downturn in the economy, and the financial crisis of probably all of our businesses neuro procedures, which are typically head trauma, brain tumors, epilepsy, functional neurosurgery are less discretionary, than probably many other medical procedures.

So we haven't been as influenced by procedure volume as we have by the ebb and flow of availability of capital in hospitals. And so what we have seen in the first half of the year is an improvement in the availability of financing at hospitals, and therefore an improvement in their willingness to invest in things like our CUSA ultrasonic aspirator, or our stereotaxy products, and other products that are relatively low ticket capital. I think we saw that in the first and second quarter, it is predominantly a US phenomenon, and we see that continuing into the back half of the year. As you have correctly observed we tweaked up the Neuro expectations for the back half of year, and we tweaked down a bit our Instrument revenue expectation, each by about a point, to some extent reflective of the first year performance, and to some extent relative of our expectation for the back half of the year.

That is helpful. The P&L question I guess you mentioned FX is a positive, as it often is I think to your gross margin. Can you, Jack, maybe help us understand how that drops through the P&L, and whether that is something we should look at as having had an impact on your operating line?

I mean the script to some degree speaks for itself. The short version is that we either manufacture or purchase a fair amount of product in Europe when we are able to do so at a lower Euro cost, and that product goes into inventory at a lower cost, and when we sell it in the future we have a better margin on that product. So there is an effect. It is not necessarily timed in the same quarter as the headwind on revenue, but there is an effect. We are not going to help your you quantify it. It is pretty complicated, and depends on a lot of variables and its actual unfolding.

Understanding there is a positive to the gross margin, are there offsetting elements that prevent it from hitting the operating line, or is it neutral to the operating line, or is it also positive to the operating line?

Well, the big impact, of course, that hits first, and is the most visible is in revenue, and that obviously has a pretty big impact on the operating line. So what we are really talking about here is some mitigation to the impact on revenue in the middle of the P&L.

So maybe --

I guess our--

Go ahead.

I guess our comment, Matt, would be, first of all, I think we are just distinguishing ourselves a little bit from maybe some of the other reporting companies. First of all, only about 10% of our revenues are European, so that is one point. Do we have 22% O-US revenues, about half of that is Europe and most in euros and pounds. So when we have a situation where the euro depreciates that does impact our top line, but on the other hand because we have disproportionate costs over in Europe those mitigate the impact. Now Jack's point, which has always been the case, is it doesn't always happen one for one in any quarter because of the turn in inventories. But I guess we just don't feel like the euro movements will be as impactful on our bottom line as some other companies do.

Okay. Just understanding you are different, I want to make sure that we understand it, and that is helpful. I will keep it to two. Thanks again.

Next we will turn to Amit Bhalla with Citi.

This is [Valerie] subbing in for Amit this morning.

My first question is just about, you talked a little bit about improved distribution.

Can you provide more detail and an update on your efforts both in the US and outside the US, and also provide the number for your current coverage in the US?

Okay. Sure. In the Orthopedic area, this is Gerry Carlozzi. In the Orthopedic area, right now in the extremity reconstruction which is the largest component of our orthopedics, we have approximately 123 to 125 sales reps direct employees working covering hospitals in the United States. We added about 30 reps last year, and it takes normally a six to nine month ramp before the reps become productive.

From a coverage standpoint we have pretty much full geographic coverage, but from a hospital case load coverage we are always in need of adding more reps to increase coverage to hospitals, and participate in more surgical cases. As a rule of thumb, we usually add about 15 to 20 reps a year. We expect to add another, again 15 to 20 reps over the next 12 months. And that just continues to allow us to continue to drive our sales growth into the double digits, as we continue to invest in our selling organization.

In addition to that, we are continuing expanding our product portfolio to give our sales reps more products to sell in the same procedure with a participating surgeon. If you look at our Spine distribution, we talked about earlier in the first quarter how from a performance standpoint, we weren't happy with the performance of some of our new dealers that we put on in the last six months, and started looking at from a performance base, turning over some of the low performers, and during the first half of the year we have turned over about 7% of our dealers in the Spine area, and then we started signing up new dealers and actually at a faster rate than we have been turning them over.

And focusing more on an account level basis so that we can do better management of their performance and at a hospital account level, which allows us to almost manage them like we are managing a direct selling organization, where we can see their performance in that hospital, and determine if they are actually penetrating that account at the rate that we think is acceptable. Like any distribution channel when you bring on a new sales rep or a new dealer it takes time to ramp up, and see the benefit of the results of the efforts of that deal, or in that account.

I say geographically full coverage pretty much geographically in the United States, but we are constantly looking at how do we fine-tune the distribution network, constantly looking at how do we train and onboard our distributors and dealers in the Spine area, and how do we train surgeons to be comfortable with our products, and feel comfortable in a surgical procedure using our products, as compared to other techniques that they might have used. We have really invested heavily in our sales training programs and workshops, and surgeon training programs and workshops. It is an ongoing process. It is not something that has an endpoint that we say we are done with. It is sort of what we do as a Company, and we look at it as basic sales management, always looking at the bottom 20%, and figuring out how we can take and turn that bottom 20% into the middle, and then continually rolling the bottom into the middle or the top of the group.

That 37% coverage number you gave last quarter, was that in terms of geography or the hospital account?

That is from an OrthoBiologic standpoint. We currently have about two-thirds of our dealers who carry our hardware products, or two-thirds of our dealers who generate our Spine revenues also carry our OrthoBiologics products, and our expectation is we will continue to grow that number, so we end up with more of our dealers who are selling full line products.

Just to clarify, I think at this point we have got good geographic coverage of the whole US for Spine and OrthoBiologics products. Now what we are working toward is to have the vast majority of the dealers carry both the Metal and the OrthoBiologics products. I think that 37% number was perhaps confusing to you. I would ignore that number. We were two-thirds overlap, and our objective would be to be as close as we can to 100% overlap.

Okay, thank you. And I just have one follow-up question, and I will go back in the queue. Last quarter you commented on some pricing pressure in Spine, and just wondering if you have experienced similar price deterioration this quarter, or in any other parts of our business? Gerry Carlozzi: We sat down to do some analysis and looked on a year-on-year basis. Same customers, same accounts, to evaluate the pricing impact on the business that we had in Q2 of 2009. And what we actually saw is we had no deterioration in price in the same customers from 2009 to 2010, actually a slight increase in price in those accounts. But what we are seeing is we sign on new accounts, we are going in and matching market price into new business that we are generating as we penetrate the market. So we are really not experiencing pricing pressure from our existing customers, and we are just matching price.

Thank you.

Next we will turn to Glenn Novarro with RBC Capital Markets.

Thanks guys. Stu or Gerry, I was wondering if you could provide a little bit more commentary on the Orthopedic business. You mentioned that the quarter came in good, very good but I recall last quarter you mentioned Biologics were better, but Spine hardware was a little bit light, and extremities came in line, or slightly better than you thought. I am wondering, I know you don't like to give us the specific numbers for spine and extremities, but I am wondering if you could give us a little bit more color as to how some of the segments did relative to your expectations?That is question one.

I will make a general comment, and then Gerry can make some specific. I would say, first of all, it was a really good quarter and we were real pleased across the board not just with our Orthopedic division but with the Neuro groups and the Instrument groups, and it was sort of nice to see the whole business do as expected or a little bit better. In Orthopedics, I would also say there is a certain evening out, there is not that distinction between Spine and OrthoBiologics and probably to some extent because of the convergence in the dealer network. I think probably we don't need to and will refrain from breaking the two out.

Since our strategy is to try to arm all of those metal dealers with OrthoBiologics, the distinction was a little bit artificial in the last year or so, because we were combining as it were the two different acquisitions, and the two different product lines, and then as we said, we had a really nice quarter in extremities led principally by the US, which remains real strong, and our private label it was nice to see that pretty much all of the major products were up. I would like to take some credit on the back of our sales organizations, and I also see that improvement in the overall economic environment is certainly helping us as well.

Just one follow-up before Gerry jumps in. But it just seems like your tone on your Spine business today, is better than what it was from what I recall in April. Is that a fair assessment?

Yes, this is Gerry. I think that is true. I mean if you look at the quarter, we exceeded our expectations with 12% growth for Orthopedics. We have strong growth in extremity reconstruction and Spine held its own amid our expectations. We feel much more confident with the actions we took over the last several months fine-tuning and doing better performance management of the sales distribution channel.

One follow-up just maybe for Jack just in terms of guidance. I mean you came in at $0.69 for 2Q, so that was a very strong quarter, beating Consensus handily, and your commentary was also sequentially you think things are going to get better, and your tax rate is coming down. And so it just seems like when I run my model I am getting to $2.75. Why the reaffirming of guidance? Is this you guys wanting to stay conservative, given the past, and some of the misses we have seen in the past few years?

I don't want to characterize our guidance. What I will say is that we made a decision some time ago to give our annual guidance. We learned that we are much better at predicting, thinking, planning about our business, managing our business in annual terms rather than quarterly terms, and we have essentially made a decision to stick with that approach.

The other thing we have said, just so that everyone has the same basis for thinking about this, is that we have never taken the point of view that you can draw an absolute straight line, from say the top of our revenue range to the top of our earnings range, or the bottom of the revenue to the bottom of the earnings. We have a lot going on in the numbers, we always have, and we think the best thing to do is to plan around these ranges and stick with them annually. I don't know if, Stuart, you want to elaborate? It has been a nice string of quarters where we have done what we said we would do, and I think that is a good place for us to be.

I am just trying to get to, like I think for 3Q I think what you are trying to lead us to is it will be sequentially on the EPS line a little better than 2Q, and then obviously a bigger 4Q. Is that fair?

That is generally right. That was exactly the message we were getting across.

Okay.

Do keep in mind we had $0.01 or $0.015 of currency benefit in the Other Income line, and you just can't count on that. Remember we shoot for zero. It is good that we can be on the right side of it, but we shoot for zero, and so we did have $0.015 in the quarter on that front. Tax rate is more real. We have done a good job in terms of our tax rate, and that is good news.

Okay. Thanks. I will get back in the queue. Thank you, guys.

Next we will next turn to Chris Pasquale with JPMorgan.

Thanks, guys. Good morning. Just to follow-up first on Glenn's guidance question. There is a pretty significant change in the tax rate guidance. Understanding that you want to stick with an annual range, can you talk about whether there are other factors that are offsetting that on the other side, and kind of how you quantify that impact?

Well, a couple of thoughts. First of all, again, we have a range that we put out several months, 6, 7, 8 months ago and I think the right point is to stay with the range and stay in the range. So the tax rate is good news, and maybe gives you more confidence that we are going to do what we said we would do. I don't think I want to elaborate more on it. I don't want to offer any bad news. I just think we have got good numbers. We put up a good second quarter, and expect to achieve our objectives. I realize that seems like a non-answer, but that is the answer.

Okay. And then turning back to Neuro, the third straight solid quarter after a difficult stretch last year. The comps get tougher as we move into the back half of the year. How do you think about the health of that business at the moment, and you said in the past that you hadn't seen pent-up demand on the capital side coming back. Do you think we do see that at some point, or do you think your customers have made sort of a permanent adjustment?

I think the improvement that we have seen in the first and second quarter in our Neuro business is sustainable, hence why we raised our revenue guidance by that 1% for the year. And I think pent-up demand has always been a euphemism for wow, there is going to be some big bolus of capital sales, and we have been really careful not to characterize it as that, but rather say we have an aging installed base of product that needs to be replaced in the capital market, and I think you saw in the first and second quarter that happening.

I think that will continue to happen in the back half of the year and into 2011. But that means a sustained improvement in the business, as opposed to a one-shot everybody has got to go one quarter out and buy these things. So the distinction is I think the fact that a good 18 months went by in hospitals in the US where they were really doing unfortunately a good job of avoiding buying new capital products, I think that is going to provide wind at our back in terms of the Neuro business for a while. But that is to be distinguished from a bolus where some big quarter performance is expected.

Great, thanks.

Next we will turn to Bill Plovanic with Canaccord.

Hey, Bill.

Great, good morning, gentlemen. So the questions, a lot of them have been asked, but I was wondering given that we have just had the panel for Amplify, if you could quantify or at least directionally tell us what the impact of approval of Amplify would do for you on a revenue and operating basis?

Sure, and I know you know this, but I will say it for others who may not have followed the Company as long, in our Orthopedics category, we report and we talked about the three components, the extremities, the spine, and the private label. And in the private label category we have a number of products that we make that leverage our core tissue regeneration technology, but are sold by other companies, and we have a, it is actually a more than 20 year long alliance with what was Genetics Institute, became Wyeth, and then became Pfizer, and is now in collaboration with Pfizer and with Medtronic on INFUSE, and we supply the carrier that infuses that is part of INFUSE, and our carrier was also or is also the carrier that was used for Amplify.

So when and if they are able to launch that product, A, we will continue to get revenues on INFUSE, we will continue to get new revenues on am Amplify, and we get better revenues on Amplify. I am not going to quantify it but it is significant and the economics are better for us, and so we are certainly hopeful that Medtronic will be in a position to launch the product sooner rather than later.

So it is a revenue improvement and an operating profit improvement, so a little more like as a percentage the operating profit is higher than even the revenue increase would be?

Yes. It will, said differently just to be clearer, we get a per unit transfer price, and we get a royalty. It is a small royalty. And both improve in the Amplify product. I won't provide more detail than that.

That is fine. Thank you. That is helpful. And then just for Jack, as you swap the debt from the convert to the credit line, what type of impact, is that a positive or negative impact on interest expense going forward?

So it wasn't a swap, just to be focused on the terminology, our 2010 converts matured in June.

Right.

That was an original issuance of $165 million through episodic buybacks of those bonds when it was opportunistic to do so. We had worked the total down to $78 million so that is just for the group. Those bonds had a coupon of around, there was 2.875%, so we exchanged those using the proceeds of borrowing on our bank facility, and we pay around 100 basis points over LIBOR under that facility. So that is a straightforward mathematical construct.

And what is that running right now, LIBOR plus 100?

It is under 1.5% right now. So if you are thinking about the impact going forward, all of the prior repurchases are already in the guidance, and so what you would be thinking about is the $75 million changing from the 2.875% that goes through our adjusted EPS to about 1.5 going through our adjusted EPS. Don't make the mistake of changing all $165 million.

Got you. All right. That is all I had. Thanks.

(Operator Instructions). We will move to Bruce Jackson with Morgan Joseph.

This is a question for Gerry. With your Spine distribution network has there been any change in the number of dealers who are handling your hardware exclusively?

No, not really. I mean we have over 60 dealers who sell our hardware products. We increased the number a little bit, but we have turned some dealers over. So we have been pretty steady over the last several months.

But maybe, Bruce, if your question it exclusivity, we have very few dealers who sell our products exclusively.

Right.

We just still, although we have a really great product line, we don't have a complete product line. So many of our dealers carry other products. Very few carry products that would compete with our products, but they carry complementary products.

In extremities, were there any particular products that did well in the quarter?

I would say pretty much we had good performance across all of the product categories in foot and ankle and upper extremity. It wasn't any really one product that carried the growth in extremities.

Okay. And then how would you characterize the pricing environment in extremity orthopedics right now?

I would say we are seeing no real impact from an economic standpoint. Our prices have held pretty well, and we have actually been able to see some slight price increases in some areas.

Okay. Thank you very much.

Next up is Patrick Clingan with Lazard Capital Markets.

Hi, Patrick.

Congratulations on a good quarter.

Thank you.

A lot of the questions have been picked off. Wanted to ask a little bit about your thoughts on operating profit leverage over the back half of the year. Do you expect that you will see perhaps a little bit of an uptick in operating margins over the balance of the year?

We do, and it is driven by our expectation that gross margin will improve a bit. If you look at our model that we articulated, we have got an expectation in the back half of the year of a slight improvement in gross margin. We are also spending a bit more on R&D, but we are holding nicely with SG&A. So as you put those pieces together, the operating margin will improve or should improve, and in particular in the fourth quarter, which is generally a quarter where the significant improvement in sales versus sequential tends to fall disproportionately to the bottom line.

As I do kind of some of my math and I look at some of the adjustments that you guys make, if I think about excluding amortization on the operating margin line, there is probably about 110 to 120 bips in incremental upside to the numbers that you guided because you guide by GAAP line items, correct?

That is a complicated question. Maybe we can take it offline.

Absolutely.

Most of our guidance, correct, is GAAP guidance, but our adjusted earnings per share guidance is non-GAAP, and so a reconciliation takes a few minutes, and so you could pick up the phone and call Angela, and she can take you through any questions that you have got.

Great, thanks, I will do that. Last question for me is just on the new product pipeline. I know you mentioned in Spine you need a more complete product portfolio prior to getting maybe some exclusive distributors. Could you talk about goals in terms of what is coming through the pipeline, whether you think you might get to the point where you have the more complete product portfolio that might warrant having more exclusive distributors?

This is Gerry. In the product pipeline for Spine we introduced several new products in the first half of the year. Some were everything from the spinal matrix product, which is based off of the DuraGen technology, that now we sell through our Spinal organization, so spine-branded OrthoBiologics and then a range of hardware products which concentrated on our MIS focus with the Paramount system. And we continue to have a pretty robust product line. We expect to introduce another several products as we go through the back half of the year. The way we set up our product development portfolio, we anticipate introducing new products on a regular basis throughout the year through this year into next year.

I think getting to an exclusive basis with a dealer network is a bit more challenging. I think as we continue to look at how do we improve our product portfolio and continue to add new products to fill gaps, it still becomes a challenge because it really comes down to a business decision on a dealer network basis, as to how you control the amount of revenue they generate from you, and is it worth carrying just your products and can they also add some complementary products. It is not something we see in the near future, but over time certainly that would be our objective to get to an exclusive position if possible.

I guess I would say we are looking at our dealers as partners, and so you can only ask for exclusivity when you can offer a full product range, and it would not be in the interest of Integra to penalize a dealer who needs a particular product to support a hospital account. I don't view exclusivity as an objective per se. But rather I view it that we would have such a broad product line that our dealers would choose to work with us exclusively because we are better to work with than anybody else. You should look at that as the objective. We are not looking to present some numbers which say that we have got this number of dealers exclusive, because that would be sort of a mindless objective. Our objective is to have a great dealer network, and support them with a full range of products.

Sure yes, my question was predominately on the pipeline. Are there any timelines around when we might see additional rollouts of new products? Thanks.

I would say this, we have talked a bit about our product pipeline, and I would expect at NAS you will get to see, these products tend to be launched at NAS, and like any other company, we try to on the one hand, get our products out as quickly as possible, but on the other hand have some interesting things to talk about at NAS, so I think you will get to visit with our booth at NAS and at CNS, and that is what I would go with next. I wouldn't underestimate the value, by the way, of our launch of the DuraGen product category into and through our Spine network. As you know, that is a real nice product for us in Neuro, and the new specialized configuration spinal matrix gives us a whole new distribution network to bring those products to. If you recall, most of our time in our Neuro group is spent with neurosurgeons, and so for many of the customers that this is going to the orthopedic surgeons who may not have even had the opportunity to be aware of the Dural graft to deal with Dura leaks, so we are excited about the opportunity to bring that into a new market.

Great. Thanks for taking the question.

Now we will move to Joshua Zabel with Natixis.

Hi everyone, congratulations here on a nice quarter. Thanks for taking the question. Most of my questions have been answered, but just a couple of follow-ups. I am trying to do a bunch of things, so apologies. Jack, can you just follow-up on the tax rate, just so I understand going forward, can you repeat what that should be?

We gave a GAAP rate of 26%, and an adjusted rate of 28%.

29%.

29%, I am sorry.

29%. Okay. Great. Thanks. And then just your quarter is pretty solid, not too much to nitpick on here, although we all find a way somehow. Looking at Instruments you mentioned you kind of ticked it down. I know it is not a big deal. Obviously comps are relatively easy. Hospital spending seems to be improving kind of across the board. You grew instruments 1%. I am trying to just understand how should we think about the business going forward, is just general is the sort of psyche on how hospitals are purchasing these instruments changed, maybe instead of it being a mid-single digit, we should think of it as a low-single digit grower? Is anything going on, or is it just lumpy, it is what it is?

In reverse order, it is actually not that lumpy. It is not big chunks of capital, it is reusable instruments, so that is not issue. Certainly the economy is the issue, and continued improvement in the economy will help that business. I think we have characterized it on a number of occasions as a low-single digit player, and I can't recall the last time we talked about longer term, but if we are saying 1% to 2% in 2010, I certainly would expect as we go out longer term, it wouldn't be 1% or 2% but it would be somewhere in the middle of the range of 1% to 5%. So we said a couple of points better than the 2010 guidance.

I don't think we are losing share. I think we are actually taking share. And I don't know that really that much has changed in hospital psyches on instruments. What I will say is nobody is building new ORs, nobody is building new hospitals, and so the extra juice you have from that kind of expansion is not flowing into the system. We do know that in our office-based instrument base we have seen a nice improvement, and that is based on the physicians whether they be general, dental, vet, or others improving their buying. And we have definitely seen out the door numbers solidly up, and therefore our shipments to our dealers solidly up. I think it is a tale of an improving performance.

The one other thing I will say is we have really strategically asked that division to focus on profitability and cash flow. And so I would say we are not offering that division as much in terms of discretionary sales and marketing dollars as we would, for example, the Orthopedics. And so really the focus there is on hitting the guidance that we provided, certainly improving it as we go into 2011, and being a very profitable contributor to the overall Company.

Great, very, very helpful commentary. Thanks, guys.

(Operator Instructions). We will now turn to Robert Goldman with CL King.

Thanks and good morning. My apologies for asking this if it has been answered, I had to come onto the call late. But at least by my analysis there was a mix shift in the second quarter toward Orthopedics, I think that was 41% of our sales, versus 39% in the prior year. But the gross margin did go down year-over-year. Could you just take me through the reason for the gross margin decline despite the mix shift?

Yes, I think it is probably easier to look at sequential gross margin which is up a bit. So the mix shift over the last 12 months toward Orthopedics is a continued process, and so the year-over-year is more complex. I think we continue to expect gross margin improvements as we said in the back half of the year, it is principally driven by mix. But to go and look at year-over-year as opposed to the sequential improvement, there is a lot more detail in there than is worthy of covering. Jack, you --

And then one other thing I would add is within Neuro some of the strongest lines were the capital lines which have decent gross margins, but are not sort of gross margin leaders. So within the Neuro piece which did quite well, as I think we have already said, there was a sort of an internal mix that is all good, but nevertheless, probably dampened the quarterly mix shift in consolidated gross margins.

Okay. Thank you.

And there are no further questions in the queue. I will go ahead and turn the conference back to our speakers for any additional or closing remarks.

Thank you very much. And we look forward to reporting next quarter on our continued improvement in performance. Thank you.

And with that we will conclude today's conference. Thank you everyone for joining us today.