Integra Lifesciences Holdings Corp (IART) 2011 Q2 法說會逐字稿

Good day, everyone, and welcome to the Integra LifeSciences second quarter 2011 conference call. As a reminder, today's call is being recorded. Now at this time, I will turn the call over to Angela Steinway, Head of Investor Relations

Thank you. Good morning, and thank you for joining us for the Integra Lifesciences's second quarter 2011 earnings release conference call. Joining me today our Stuart Essig, Chief Executive Officer; Jack Henneman, Chief Financial Officer; and Pete Arduini, President and Chief Operating Officer. Earlier this morning, we issued a press release announcing our second quarter financial results. This release is available on the website in the press release section under investor relations. During this call, we will review the financial results and update our forward-looking guidance for 2011. At the conclusion of our prepared remarks, we will take questions from the telephone audience. Though we will try to keep the call to 1 hour, we would like to continue our tradition of answering all of your questions.

As a courtesy to all that we may accommodate a large number of requests, please limit yourself to one question during the Q and A period. Hold your follow ups for the second round. This presentation is open to the general public and can be heard through telephone access or through a life webcast. A replay of the conference call will be accessible starting about 1 hour after the conclusion of the live event. Access to the telephonic replay is available through August 11, 2011 by dialing 719-457-0820 access code 272-8148. 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 recordings, reproduction, transcripts, transmission, or distribution of today's presentation is permitted without Integra's consent. Because of the content of this call is time sensitive, the information provided is accurate only as of the date of this live broadcast, July 28, 2011. Certain statements made during this call are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Among others, the statements concerning management expectations and future financial results regulatory approval and market acceptance of these products, future product development programs and potential business acquisition 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 discussion of such risks and uncertainties, please refer to the risk factors included in item 1-A of Integra annual report on form 10-K for the year ended December 31, 2010 and the information contained in our subsequent filing with the Security and Exchange Commission. Certain non-GAAP financial measures are disclosed in this presentation. A reconciliation of these non-GAAP financial measures and to the most comparable GAAP measures is provided in the press release issued this morning.

Additionally, in this press release and in the current report on the form 8-K that we filed this morning, we provide explanation for while management beliefs that presentation of these non-GAAP financial measures provide useful information to investors regarding Integra's financial condition and results of operation 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 had a strong performance in the second quarter. Total revenue for the second quarter of 2011 increased to $193 million. Up 8% as reported, and 6% on a constant currency basis. Each of our product categories contributed to solid growth. In addition, we closed the acquisition of SeaSpine during the quarter. We expect that our growth driving investments, particularly in extremity reconstruction, spine and developing markets, were propelled faster top line growth in the second half of the year.

Orthopedics which includes products sold to foot, hand, spine and orthopedic surgeons, represented approximately 42% of Integra's overall revenue during the second quarter, an increase over the prior year period by 11% to $80 million. Extremity reconstruction which is the largest component of our orthopedics category grew in the mid-teens. Growth in each of the product lines, especially skin, drove the increase. International recon cells also benefited from currency. Spine sales increased significantly in the quarter. Both are spine hardware and orthobiologic product line showed double-digit increases.

SeaSpine net revenue contribution in the second quarter exceeded our expectations. We will discuss the acquisition in a bit more detail later. Private label revenues decreased versus the prior year period. We expect a mid-single digit percentage decline for the full year, 2011. Neurosurgery revenues grew 9% to $72 million representing approximately 37% of Integra's overall revenue. Growth in each of the product lines, especially in plants, critical care, and ultrasonic tissue ablation drove the increase. International neuro sales also benefited from currency.

Instruments accounted for 21% of our overall revenue in the second quarter. Instrument revenue of $41 million represented an increase 3% over last year. In the acute-care setting increased purchases across our product offering drove growth in this category. Sales of instruments in our office-based channel were flat. Consolidated international sales accounted for 25% of revenue in the second quarter. International revenue increased 22% as reported and 11% on a constant currency basis. Sales in both Europe and Asia Pacific were up significantly performing better than expected. While Europe was helped by currency, sales also increased high single digits on a constant currency basis. Integra had a good first half of 2011. Fast growth in international markets and good execution across our diverse revenue base, led to the solid performance. We expect these strengths, coupled with the investments that we are making in the business, to sustain our ability to achieve our goals for 2011 and beyond. Now I will turn the call over to Pete to discuss some operational highlights.

Thank you, Stewart. Extremity reconstruction grew mid-teens in the second quarter. Our regenerate products portfolio drove this sales growth. The nerve-intended product lines remain strong in both upper and lower extremity procedures. These products are a big part of the disease-state focus that our sales team offers to customers. Strong increases in the regenerative skin product line with continued uptake of the newer [premest] offerings also helped the performance. Our marketing and sales team has also been active in training and education programs for our surging customers.

Turning now to Spine, since the acquisition of SeaSpine our integration teams has been hard at work bringing the 2 businesses together. 2 months after the deal, we have made solid progress in executing against our transition plan and should finish by the end of the year. Kurt Stevenson, former CEO of SeaSpine, and previously announced new President of our US Spine business, has assembled his management team which consists of veteran industry experts from both companies. Kurt and his team are working hard to merge the portfolio in distribution channel so that we can promote an integrated product line under the Integra brand. We plan to take advantage of the upcoming CNS, NASS and EuroSpine meetings in the fall to showcase the combined portfolio and to cross train the distribution channels. Sales for our spine product categories improved in the second quarter led by SeaSpine and strong growth in OrthoBiologics.

OrthoBiologics posted record quarterly sales in the US The 3 drivers that have led to strong sales in the U.S, are productivity of distributors, added during the second half of 2010, robust growth of our third-generation demoralized bone products, in the recent launch of our cancellous sponge products. The OrthoBiologics's market has been very dynamic with the acquisition of our primary competitors. Our multi-brand strategy combined-product offering of OrthoBiologics and hardware puts us in a unique position to capitalize on current market opportunities. We also continue to leverage and strengthen our GPO relationships to drive new business and cement the existing business. Our hardware product lines contributed to growth as well.

aPOD Prime, a standalone anterior lumbar interbody device posted a record month in June. The Daytona deformity system enabled us to participate in the critical summer season and provided incremental revenue. The Zuma-C radiolucent interbody was also successfully launched in June in full market release. Zuma-C is based on the original Zuma platform which has several years of successful use in the lumbar spine. But it features the benefits of a low-profile anterior fixation plates in a radiolucent interbody, in an integrated user-friendly device for the cervical spine. Zuma-C is well-positioned to meet the demands for a simple-to-place cervical spine system.

Moving on to Neurosurgery. As Stuart mentioned earlier, we had a strong quarter with 9% growth. International led that growth with the double-digit revenue increase over last year. Neuro critical-care implants and ultrasonic tissue ablation product lines drove the performance. During the quarter, we renewed our agreement with Premier which covers the critical care, DuraGen and Shundt's product lines. The 3-year agreement further demonstrates our value proposition to our hospital customers and highlights the importance of our product offering to neuro surgeons.

On the international front, we continue to expand our geographic scope by registering more products in more countries, including g-cranial stabilization and epilepsy products in 3 Latin American markets and CUSA ultrasonic tissue ablation in 2 Asian markets during the quarter. Instruments sales grew 3% in the quarter bringing our year-to-date progress back in line with expectations. Acute care sales drove the growth as demand from our hospital customers remained healthy. Additionally, our focus on fill rates continues to limit uncertainty for our customers and create a competitive advantage. As we demonstrate the ability to provide customers with instruments when and where they need them.

Integra's international sales were quite strong in the second quarter aided by currency. Last month we created an international structure consolidating our existing European infrastructure with our Asia-Pacific and Latin America region under the same management, led by one of our Integra veterans, Debbie Leonetti. By leveraging in an international structure, we can free up resources to continue driving sales in Europe, Asia, and Latin America more efficiently. This organizational change enables us to reposition our international organization as a key revenue growth driver into the future. In terms of international priorities, we are focusing first on the most profitable and high growth opportunities. As an example, we plan to open Integra's sales office in China by the end of 2011.

As an update to our ERP systems implementation project, we are pleased to announce that we recently completed implementation of integrated software across most of our European selling entity facilities. This will facilitate order-to-cash business processes In our UK, French, Swiss, and Belgian distribution sites. Standard business processes were implemented in our manufacturing warehouse and distribution operations, which we expect will provide many benefits including improved inventory management capabilities, improved customer service functionality, and standardized more efficient distribution processes. The implementation is a key enabler for our future growth and operating efficiencies. Now I will turn the call over to Jack for a review of our financial results.

Thank you, Pete. On top of the solid revenue performance, we were pleased with the profitability of the company in the second quarter. In addition to walking through the elements of P& L, I will update our guidance on those line items and discuss the one-time charges related to the various transactions we completed during the quarter. Stuart will then discuss our overall revenue outlook--outlooks for revenue, and earnings. We reported GAAP net income of approximately $1.5 million or $0.02 per diluted share for the second quarter. When adjusted for acquisition related expenses, other special charges, and intangible asset amortization, net income is $21 million or $0.70 per diluted share. In this quarter, foreign exchange had favorable impact on revenues of $4 million versus the same quarter in 2010.

Gross margin on total revenue in the second quarter was 62% down from the prior year period and from the first quarter. Accounting for the additional inventory evaluation for those recent acquisitions, we now expect our GAAP gross margin to be approximately 63.5% for the remainder of 2011. Because the accounting for acquisitions causes GAAP gross margin to bounce around, we will also discuss adjusted gross margin. We are calculating adjusted gross margins by backing out the detail in Column A of the adjustments table in our press release. These adjustments include intangible assets and amortization expense and charges related to acquisitions, intangible assets impairments, discontinued products, and facility consolidations.

During the second-quarter after these adjustments, our gross margin was about 65% flat versus the comparable measure in the second quarter of last year and down 80-basis points from Q1. There were $5 million of special charges recorded in the quarter, these include $2.5 million of inventory provisions in technology and intangible asset impairment charges related to the discontinuation of certain spine hardware product lines in connection with the integration of SeaSpine. Also, included were $600,000 of fair value step-up charges related to the acquired SeaSpine inventory and $1.5 million of intangible asset amortization. Adjusting for special charges and amortization, we would expect our gross margin to be approximately 65% for the full year 2011 which is consistent with a 50-basis points of improvement discussed in our previous guidance.

We expect the majority of this improvement to our margins to result from changes in our product mix. Going forward, we expect an annual improvement in gross margin of 75-basis points. Research and development expenses in the second quarter increased from the prior year to $13 million and remained at about 6.5% of sales. We are targeting spending of 6.5% to 7% of total revenue on research and development in 2011. Selling general and administrative expenses in the second quarter increased from the prior year to $96 million. About $15 million of this spend were special charges including $3 million related to our ARP implementation. $8 million related to equity compensation to extend the term of our CEO's employment agreement; $2 million related to assets impaired in connection with discontinuing certain spine hardware product lines, and $2 million related to acquisitions fees and severance.

Excluding these special charges, our spending in SG&A was 41.7% of revenues. Excluding all special charges, we target future selling general and administrative expenses at between 40% and 42% of revenues. The second quarter we earned $38.5 million on adjusted EBITDA and $42 million on adjusted EBITDA excluding stock-based competition. We reported a $2 million increase in net interest expense to $6.5 million resulting from higher levels of debt and fees paid in the senior financing we did in June.

Now I will recap the effect of the financing transactions we completed during second quarter. First, we renegotiated our credit facility with our bank group. This resulted in 75-basis point of lower borrowing expense, an increase in our borrowing capacity under the revolver from $450 million to $600 million with the option to expand this to $800 million and an extension of the terms to June 2016. Second, we issued $230 million of 1.625% convertible notes due December 2016. These 2 transactions give us ample capacity to complete acquisitions within our historical strategic range. As a result of these transactions, we suggest modelling approximately $7.5 million dollars per quarter of interest expense going forward. Of that, $3.5 million is the non-cash amortization of imputed interest for convertible debt, which we exclude from our adjusted EPS measure. Taken together the new financing had a negative impact on GAAP EPS and insignificant impact on adjusted EPS.

The Company recorded $600,000 of other income during the quarter. We recommend modeling this as $0 for the remainder of 2011. Our income tax expense was $1.3 million reflecting an effective tax rate of 65% for the quarter. The implied tax rate on our adjusted net income during the quarter was 27%. For the full year 2011, we expect our tax rate will be about 10% on a reported basis and 27% on an adjusted basis. Previously, we had guided the tax rate of 18% and 25.25% respectively. Our reported GAAP tax expense and the implied rate will fluctuate as we record discreet items in the quarter in which they occur.

Further, to the extent we make changes in our estimated full-year tax rate, those changes are reflected as year-to-date adjustments in the quarter. During the quarter we recorded about $2.4 million of tax expense related to a correction to a deferred tax asset and the re-measurement of certain other deferred tax assets, resulting from a change in New Jersey State tax laws. Because of the lower proportion of our GAAP income will come from the United States, which is the highest tax rate jurisdiction, our consolidated tax rate will decline. For the full year, this results in a decrease in our estimated full year GAAP tax rate to 10%. In the year-to-date reduction in the tax expense of about $1.4 million.

Adding those US-based expenses back to our adjusted pretax income at the higher US tax rate, in addition to the Q2 tax event, increases our adjusted tax rate for the year to 27%. We repurchased approximately 1.1 million shares during the quarter. 800,000 of which were in conjunction with the convertible note offering. Because we bought these shares late in the quarter, it was no meaningful effect on the average share outstanding. Going forward, we recommend modeling a share count of 29.2 million shares in the third and fourth quarters, which averages to 29.7 million shares for the full year 2011. Holding everything else constant, the impact of the 1.1 million share repurchase would be expected to increase reported an adjusted EPS by $0.02 to $0.03 per quarter.

During the quarter, we recorded depreciation of $8 million in amortization of intangible assets of $7 million. Including $3 million in cost of product revenue. Of the $7 million of amortization, $2.5 million were one-time charges related to our decisions to impair certain of our technology, and trade name intangible assets during the quarter. The amortization expense we recorded is greater than historical levels due in part to these decisions and to the addition of SeaSpine intangible asset amortization. In addition, we determined as part of our corporate branding initiative to shorten the estimated useful life to certain other trade names. This will increase our intangible asset amortization expense for the next 6 quarters but will then drop off significantly beginning in 2013.

For the next 2 quarters in 2011, we expect depreciation of approximately $6 million in amortization of approximately $6 million per quarter. Approximately, $1.5 million of the amortization will be included in cost of product revenue for the year. We expect the quarterly impact of shared-base compensation expense in 2011 to be approximately $3 million to $4 million or $0.06 to $0.08 per diluted share. The second quarter, we generated about $25 million of cash flow from operations, and we spent about $8 million on capital expenditures. For the full year 2011, we expect to spend approximately $35 million to $40 million on capital expenditures. Turning to the balance sheet at the end of the second quarter, we had $137 million of cash, borrowings of $144 million under our credit facility, $165 million of 2012 convertible notes, and $230 million of 2016 convertible notes. Excluding the impact of the SeaSpine, we had a 52 days of accounts receivables and 204 days of inventory. Now I will hand the call over to Stuart.

Thank you, Jack. Before providing full company guidance for 2011, I will describe how we are modeling the impact of the SeaSpine acquisition in a bit more detail. We expect net revenue contributions of approximately $18 million to $20 million in the orthopedic category in the second half of 2011. Preliminarily, we expect these incremental revenues to grow by about 5% during 2012. Further, we continue to expect the adjusted EPS contribution to be neutral for the second half of 2011.

On a GAAP basis SeaSpine related charges will lower reported EPS by approximately $0.05 in the second half. We will not separately report any SeaSpine numbers including the transaction impact going forward. We are providing updated annual revenue in GAAP and adjusted EPS guidance. We expect to recognize between $785 million and $800 million in revenue in the full year of 2011. This guidance contemplates current foreign currency exchange rates.

If the rates stay where they are, we expect a positive impact from currency of $4 million in the third quarter and $2 million in the fourth. Within this guidance range we are anticipating Orthopedics to grow approximately 13% to 15%, neurosurgery 4% to 6%, and instruments 3% to 5%. The company expects GAP earnings per diluted share between $1.40 and $1.50, an adjusted earnings per diluted share between $2.92 and $3.02. We anticipate the second half of 2011 to grow between 8% and 11% over the prior year with the fourth quarter growing faster than the third. Further, we expect our adjusted earnings per share to increase sequentially in each of the third and fourth quarters with the fourth quarter showing the greater increase.

While we are not yet providing 2012 guidance we recommend that you take your 2011 number including the impact of SeaSpine, pro forma adjust for the first half of 2011 before the acquisition closed and grow the consolidated business by 5% to 7%. Beyond 2012 we suggest modeling 5% to 7% constant currency revenue growth. Within this range we expect Orthopedics to grow 7% to 9%, Neurosurgery to grow 4% to 6%, and instruments to grow 2% to 4%. Further, excluding the impact of the Med-Tech tax in 2013, we anticipate annual adjusted earnings per share growth between 9% and 12%.

In summary, we are confident of the strength and diversity of our business and are pleased with the solid performance year to date. Longer-term, we believe that we have the potential to continue growing faster than the market. Both on the top and the bottom line. We expect our near term investments to help realize that growth potential. With our strong cash flow we hope to add to our internal growth through acquisitions and strategic alliances. We look forward to meeting with investors in the coming weeks. In August, we will be presenting at the Canaccord Genuity global growth conference. We also like to mark your calendars for the annual analyst Day meeting which will take place on November 14th, in New York City.

Now, we will be happy to answer questions. As a reminder in an effort to keep this call to an hour please do limit yourself to one question. Hold your follow-ups and rejoin the queue if you have more questions. Operator you may not turn the call over to our participants.

Operator instructions. Matt Miksic, Piper Jaffray & Co.

So a question for Peter, this may be on the tone sequentially here and in the second quarter, sounds a little bit better in extremities sequentially. If I'm hearing that correctly, can you talk about maybe what improved, I think you mentioned, skin being a driver. Was it sequentially from Q1 to Q2? Improvement in biologic? Was it implants? Was it buying in some color will be helpful?

Clearly you read the tone correctly. As we had spoken last quarter that we saw throughout the year a pickup in extremities reconstruction, really across the board, we had a strong performance. But our products on the skin side, in particular premed products, products are used in the wound area have actually done quite well. So that contributes to a lot of the growth and actually, on the hind foot as well, we also -- excuse me -- the fourth foot, we also have also seen some good uptake. So those areas in the first quarter actually did reasonably well. The biggest difference between the 2, is we saw a nice take up in skin.

And sustainable? You think is [right] to be we back into a nice double digit range here, or is this something that with these new products that will have some legs or how should we think about it?

These are existing products. Some have been in the portfolio in the recent years, but we see this as sustainable.

Okay/ And then follow up on more of a macro question for Stuart and whomever has a view on it, there has been a lot of commentary in the last week or 2 about weakening utilization volumes. Your business seems to be pretty healthy here in the second quarter not so necessarily for everybody and certainly not for the outlook that seems to be hanging on the group a little bit in the last week or so. Can you talk about how we put what folks like HCA saying or J&J saying in terms of surgical volumes into context with your business going forward?

Sure, I will go through that in some detail because it's an important question. I would ask people to stick with the one question and then come back with a follow-up just because we have some new people dialed into the call. That said, first of all, we did not see procedural slowdown in the quarter. Now each of our businesses are different, and as we anticipated this question I will try to give you some color. Probably most importantly from your perspective in that question, as our instrument business domestically and in particular in hospitals remained solid. And so that might be the thing that we have that is closest to a reflection of the entire market.

That business remains solid. You saw a 3% growth in that category and that came mostly from acute care as opposed to our alternate site. In the first quarter, I think we had a 7% growth; and we said that was too strong. It was a bit of unique quarter, but the 3% is right in the middle of our guidance and where we had expected it to be. In Neurosurgery, we also had solid performance, although much of that performance came from international. And also capital.

So I would say in Neurosurgery, we would have had adequate surgical volumes not declining, but it certainly wasn't robust in the US. In spine and OrthoBiologics I think mostly our performance was tied to I hope improved management and really, I don't think we have something unique to say about the overall market, although we did have double digits OrthoBiologics growth. I think that share -- I am too sure it has anything to do with underlined-procedure volume. And finally as Pete pointed out, our extremity growth returned to double digits. I think the extremity market is different than the overall market and so, we are just happy to be participating in that market. An extremity growth was strong both domestically and internationally. So why do we turn to the next question.

Imran Jaffer, Jefferies & Co.

I wanted to just ask about the international business. That continues to do well, including Europe, despite the cost macro backdrop; can you just talk broadly about the good growth there. Is that the function of [end] market stabilization, geographical extension, new products? Just give us a little more color there, please. Thanks.

I will try to give you a little bit of flavor on it. From a standpoint of international, it's obviously been a key focus area for us. As we mentioned, a currency play to some of the left throughout the quarter; but at the same time, when you take a look at our business across the globe, I will kind of go through some of the different areas, Europe, we have of it better count last year; but we also had some strong growth in our neuro products. Stuart mentioned some of the products across our neuro line actually did quite well; and as you look into other markets, particularly in Asia Pacific, we have some good growth as well tied with our neuro product lines in branch.

We have also been focusing on our extremities business outside of the US and in Australia, as example, we've gone direct to some of our customers, we seen some uptakes from those moves. And then also in Latin America with a particular kind of re focus, we've been able to make some good inroads. I mentioned in the comments about international, obviously is a key focus. I think we talked last quarter. You're going to hear more about it. It represents 25% of our business today, and it's a key area to kind of keep moving that up to play a bigger portion of our overall growth.

The second component is that now under Debbie's leadership, which I mentioned in a prepared comments, we are looking at how we really optimize what a OUS or international strategy actually represents for us. And finding ways to leverage those. We feel good about it. The increase of our presence. We put some more folks on the ground. We been able to have some pretty good inroads, but at the same time, we had some nice tail winds from currency and some easier comps, particularly in Europe from last year.

Joshua Zable, Analyst, WJB Capital Group, Inc.

Hi, this is actually Ethan Roth on for Josh. Congrats on the great quarter. Just a quick question on SeaSpine. I recognize it's only been a couple of months, but it sounds like integration is going pretty smoothly. SeaSpne sales are a bit stronger this quarter than you expected, maybe give us a little bit more color on SeaSpine distributor retention and also, the discontinued products that you called up in spine this quarter?

Why don't I let Pete walk you through some of the highlights of the SeaSpine Acquisition and from where I sit, this is one of our better acquisitions, it is going quite well. The people fit is really excellent. So, Pete, you want to go through the highlights?

Sure. Thanks, Stuart. I think to your question, as Stuart commented, it has been roughly a couple months, and I commented that Kurt Stevenson who was previous CEO is running the US business reporting to Bryant Larkin who runs our global spine business and also with the OrthoBiologics. I think we made some very good progress from a standpoint of sales integration. We have integrated the leadership team from our legacy business. Also, from a marketing standpoint and R&D. We believe that was quite critical because as we have mentioned there was overlap in the product portfolios; we really wanted to take a hard look at how we optimized over our distribution footprint.

One of the things we are excited about is, there isn't that much overlap and so, we have been able to take a look at how we get the right products in the hands of our different distributors on each side. The team has already made some good progress on combining the product portfolios and making some decisions. We have actually announced a couple of products that we have retired this quarter based on some of this work that is going on. And from an R&D standpoint, we are really taking a look at where we want to go with the product portfolio, as you can imagine there are a few products that are duplicate. There are some programs that were redirect and stuff, and we are using it as an opportunity to make sure that we are focused on the bigger place that will help us out.

I think as we get into the portfolio of SeaSpine, we are excited about what it brings and lines up well for what we thought we had. I mentioned deformity products, and we talked about in the past that we needed some other areas to fill out our deformity product line; and we are excited about what we see with the Daytona system. So all in all, it looks quite good. From a distributor analysis standpoint, our distributor and structure there, we are really just in the focus right now of making sure that we are working with those teams and having communicating prop with them and working where we may have any overlaps and disconnects; but the goal really is to obviously hold on to those distributors and to maximize our reach and extent as we have communicated previously.

David Louis, Morgan Stanley.

This is actually John Demchak in for David. Could you discuss your capital deployment strategy on forward until SeaSpine for this quarter, it has been a little while since acquisition and with the some of the recent financing moves. We are wondering if we can expect any more acquisitions around the SeaSpine level in which areas you are hoping to target?

At a high level, we are obviously a company that generates a fair amount of operating cash flow, fair amount of EBITDA, and we have a fair amount of liquidity in our credit facility, which in our balance sheet most of debt which now reaches out five years. So inside of that, just to set the table for everybody, our main uses for cash or capital expenditures for initiatives to drive internal growth paying down debt buying in stock and doing acquisitions, and we do all those things as the circumstances require, and where we can get the best opportunity. The acquisition environment right now is quite active. Our business development group has been busy in the last 6 to 9 months as it has been in years. You have already seen the fruits of that once this year in the SeaSpine Acquisition.

I would say that the odds are fairly reasonable that in the next 6 to 12 months will be in a position to do another significant acquisition. I say that the opportunities are rich in the 2 especially orthopedic areas that we plan, spine and OrthoBiologics on one hand and extremities on the other; but we are quite open to acquisitions that make strategic sense in both our neuro and instrument businesses. We have been saying for some time when asked the question that we are not looking particularly to build another leg to our business at the moment, although we also often qualify that by saying there are areas that we have looked at the past and absolutely great opportunity came along, we are not foreclosing ourselves from pursuing it. Sor that's sort of the broad view in our approach.

Chris Pasquale, JP Morgan

Just wanted to follow-up on your comments there at the end of the call about the long-term growth expectations for the individual businesses compared to last year's analyst meeting, you moderated your outlook for ortho and neuro. I don't think the ortho change will come as a surprise to people given the market dynamics there, but narrow has actually been performing very well. So what is driving the decision to reduce the long-term target there from 5% to 7% to 4% to 6%?

So first of all we did indeed modify downward by 1% our overall long-term growth rate, and we did that really based on our own and others' views as to what's going on in the orthopedics. We haven't really changed our view on what we can do as an independent player in extremities or spine, but I think we fell that we were a bit of an outlier in terms of our comments about the overall growth in the spine market in particular. As for neuro, we did not see any issues in our numbers and indeed in the first half of this year, we saw extraordinarily good performance in neuro. I think our overall view was reflective of what you all seeing and what we all are seeing in markets in general which is a tough US market and risks in the Europe market.

So I think it is an overall desire to present a more cautious outlook and candidly, I don't think investors and companies are rewarded by our be an out on a limb on long-term growth rate. I will give you the comfort that it's not really based on some new set of internal dynamics and indeed for the first half of the year, we outperformed the neuro than in the second quarter that included outperforming in Europe.

Bill Plovanic, Canaccord Genuity.

I think you had mentioned, and I don't know if I caught this correctly, private label, you were expecting it to be down the back half of the year, or down single digits the whole year. I was just curious for clarity on that. If OrthoBio is down, are you seeing a pickup in the DBM. Are we seeing a shift from INFUSE to DBM or anything like that?

So just to be clear, our OrthoBiologic products of our spine group have really a great quarter, and I think what you are seeing for a number of quarters we were pointing out the frustrating challenge we had with registrations of OrthoBiologics OUS, and the truth is the reality is that has now permanently impacted our Ortho Biologics, in particular DBM sales in Europe. The good news is, we are starting to anniversary the impact; and we also just launched the mosaic in Europe which is not impacted by the registration process. Our US OrthoBiologics business throughout this whole period has been growing quite substantially. But that category was fighting the impact of international.

So we have anniversary that, and we had double-digit growth in our OrthoBiologics and that includes both US and international. Now, as to private label, which is a different piece of our orthopedic category, we are expecting it to be down in the single digits both the second half and for the full year. Keep in mind while, it's not all INFUSEd, indeed, we haven't broken out the amount of our private label business, INFUSE represents less than 25% of that category. I think what you are seeing in our private label business is rather much of it does go to orthopedics products generally, and with the challenges in the overall orthopedic industry is having, that has had a negative impact on our private label business.

That said, we have had some nice improvements this year, in particular in our dental and infection control areas and that is to some extent offsetting the challenging orthopedic part of private label. Finally, as you know it's sort of a double-edged sword on INFUSE. To the extent that INFUSE is impacted, and I'm not going to comment whether it has been impacted by the overall environment, we do lose some revenue in our private label categories. That said, given that we have a 15% share plus or minus in the US OrthoBiologics category excluding INFUSE, we do pick up any cases that convert from INFUSE to a DBM or a synthetic product; hopefully, in proportion to or in greater proportion to our market share in DBM's. I hope that was clear, Bill?

It was, thank you.

(Operator Instructions) Spencer Nam, Madison Williams.

Good morning. Thank you for taking my question. Just a quick question going to the guidance outlook question that has been asked. You have done a pretty good job first half of this year in neuro sciences, but you are kind of maintaining your outlook for the rest of the year. 4% to 6% growth. Besides FX affect potentially, is anything that -- you seems a little conservative anything that leads to that conclusion here?

That leads to the conclusion of the second half been stronger, is that what your question?

Well, the second half been not as strong as the first half in terms of the overall growth of your business.

The first half had some prettier easier -- had some relatively easy comps certainly compared to the back half. The neuro performed well, and so we are not expecting a drop off in the business but relative to its strong back half last year, it will probably narrow a little bit.

Great, thank you.

Jayson Bedford, Raymond James & Associates.

Good morning, Thanks for taking the question. Just on the neuro business, to follow up on previous question. What was the growth in the US; and then international growth, is it largely from share gains or is it more function of getting into new geographies? Are there many more new geographies that you expect kind of enter over the next years, specifically in neuro?

First of all, we obviously don't and haven't provided specific breakout US versus international by division. So I'm not going to give specific numbers. That said, US growth was tempered; international growth was great. Some that international growth came from currency, but there was a lot of non-currency related growth. Our international -- our neuro business is the most international of our businesses. It is a business we have been in the longest.

It's a business that we have been able to drive outside the US That said, with a 25% share of the whole Company, OUS we are almost 20 percentage points less than many of our direct competitors. But our products are very sellable out in most markets around the world. So as Pete touched on earlier one of his key priorities over the coming 12 months, is to bring to our international division more resources more vision, and to drive the neuro products may be as high as 50% of our overall neuro business worldwide. And yes, there are many countries that products like DuraGen which have been in the United States now for more than 12 years, I believe, are not registered. That's not because they can be registered, is just that we were immature as a company and focused most of our energy on the United States. Given our substantial resources now, we can push those products into markets like China. Our sales in China of things like DuraGen, Kusa, neuro monitoring products are still very immature, and there's a lot of demand from neuro surgeons who are globally trained now for those market-leading products for China and China is just one example.

Steven Lichtman, Oppenheimer & Co.

On gross margin, it sounds like this year is coming in as you expect, and you talked about 2012 and beyond, and you are looking at that acceleration and gross margin extension. Can you remind us to what the initiatives are. You guys are putting in place to '11 to drive that expansion in gross margin in '12 and beyond and how those are tracking?

I will make the main point that the great majority of the gross margin improvements that we baked into the guidance thinking is product mix. So that is a function of the faster growth rates and particularly orthopedic businesses where the implant line had very high gross margins comparable to other industries and also, in our full-line orthopedics companies, and of course, the line share of our regenerative medicine products are reported in our orthopedic category, and they are also very profitable products and growing, generally speaking, faster than the corporate average. There are a number of initiatives, we have a lot we can do internally to make ourselves more efficient both in the manufacturing and in procurement of our product, and other things that you going to costs. Maybe Pete will elaborate a little bit on some of those initiatives just so people have the flavor of it. By and large, they are not embedded too heavily into the guidance.

I think just to play up your comments, we are looking at a broader portfolio so we talk about higher margin products in the mix in general, a broader focus from our product managers on product life cycle management, and taking a look at even within the portfolio of neuro or other products doing makeshift work; and as we talked about across the board it is a multi year focus, but on efficiency and effectiveness throughout our operations whether it's how we procure, how we take a look at our yield increases and capabilities within our plants, in some areas we have critical mass and other areas, we don't. So what are those thresholds that we can then be able to deliver better products and the big focus on inventory. These are items that don't necessarily have an impact in one or two quarters. In many cases they are multi year initiatives. Over the long run they will be able to move the needle.

Great, thank you.

(Operator Instructions) Glenn Novarro, RBC Capital Markets.

Hi, this is (inaudible) in for Glenn. A couple of questions. What was the contribution of SeaSpine in the quarter, and then ex SeaSpine at the 2011 revenue guidance for orthopedics changed at all. It looks like it was maybe bumped 1% or 2%?

This is Jack. We are not disclosing the specific contribution of SeaSpine. We have given, of course, guidance as to the incremental impact of the acquisition. We don't think it's a useful way to measure what we are doing because these two businesses are being integrated. For example, we have already discontinued some of the product lines from our legacy business from other businesses and that confuses the entire picture. So from our standpoint, we have given some incremental guidance on the aggregate impact of the acquisition, and that is all we are going to do. I am sorry if you can repeat the other elements of your question.

For 2011 guidance, excluding SeaSpine just for the orthopedics, it looks like it was bumped up to be 1% or 2%. What is implied by that they have maybe done a little better in the first half?

Let me interject, I think if you go back to the transcript, we provided a ton of detail. I think it will confuse the call if we just repeated. We provided 2011 growth rate for the orthopedic category in general, and we also provided 2012 expectations if you pro forma backward to the beginning of 2011 to 2012 expectations. I think it would be better to go to the transcript we provided it's just a ton of detail which I'm thinking it will pick up.

At this time, there are no further questions.

Thank you very much for your interest, and we look forward to continuing to grow and build Integra.

That ends today's conference. We thank everyone for their participation.