Integra Lifesciences Holdings Corp (IART) 2011 Q4 法說會逐字稿

Good day everyone, and welcome to the Integra LifeSciences Fourth Quarter Financial Reporting Conference Call. Just as a reminder, today's presentation is being recorded. At this time, I would like to turn things over to Miss Angela Steinway, Head of Investor Relations. Please go ahead.

Good morning and thank you for joining us for the Integra LifeSciences Fourth Quarter and Full Year 2011 Earnings Release Conference Call. Joining me today are Peter Arduini, President and Chief Executive Officer, and Jack Henneman, Chief Financial Officer.

Earlier this morning, we issued a press release announcing our financial results for the fourth quarter and full year. Certain statements made during this call are forward-looking and actual results might differ materially from those projected and any forward-looking statements. Additional information concerning factors that could cause actual results to differ is contained in our periodic reports filed with the SEC.

The 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. Certain non-GAAP financial measures are disclosed in this presentation. A reconciliation of these non-GAAP financial measures is available on the Investor Section at integralife.com. In an attempt to shorten our prepared remarks, we will reference the financial results and the press release and will not restate the individual numbers. As a result, you may want to keep a copy of the release handy during the call. I will now turn the all over to Pete.

Thank you, Angela. The results we have discussed with you today are in line with our preliminary report in early January. In the orthopedics revenue category, the addition of C Spine Ascension products to our portfolio drove our growth. In neurosurgery, softer capital sales caused a slight decline versus our sales a year ago. Instrument sales declined significantly due to inventory destocking by our distributor customers in the alternate site channel.

Extremities reconstruction, which is the largest component of our orthopedics category, grew in the low teens. Ascensions incremental revenue contribution was in line with our initial guidance of about $4 million. As we discussed in our January conference call, sales of Legacy foot and ankle products and regenerative medicine products were weaker than we originally expected.

We believe that this weakness is temporary, but will extend through the first quarter. In addition to managing through the supply issues with the regenerative medicine products, our extremity sales force is still ramping up with the Ascension product lines from customers. As a result, the reps will not be fully productive until the middle of the year. We're making good progress and expect both issues to resolve in the second quarter. I will discuss our actions in more detail later in the call.

Spine sales increased significantly in the quarter, driven by the C Spine acquisition and Orthobiologics posted another quarter of double-digit growth. The spine hardware market is evolving and remains challenging both in price and volume. Private label revenues were flat versus the prior period. And moving on to neurosurgery, neurosurgery revenues declined slightly in the fourth quarter because of softer capital sales based on timing and a tough comparison.

In alternate site instruments, sales to our distributors were substantially lower than our mid-quarter expectations, as we communicated on our January call. This primarily resulted from our distributors reducing their inventory. However, end-user sales of our products have held up well. Conversations with our distributors and our own internal analysis gives us confidence that our sales in this market will return to normalized buying patterns in the second quarter.

To be clear, we're not forecasting an increased of customer inventory back to historic levels, but we're expecting a return of buying to match end-user demand. Consolidated international revenues increased slightly over prior period. With respect to Asia Pacific, the results were in line with what we communicated last month. The short-fall was related to timing issues with one of our distributors, tenders and insulation of capital equipment.

As we is said on the pre-announcement call in early January, we were disappointed by the loss of momentum in the last few weeks of the quarter. The majority of the shortfall was associated with alternate site instruments and extremities, which we believe are transitory issues. We are in the process of addressing those issues and we expect to be back on track in the second quarter.

Now, I'll turn the call over to Jack to discuss the financials in more detail in and provide our 2012 outlook. Jack?

Thank you, Pete. I'll focus the majority of my comments on the items below the sales line, and then I will elaborate on our 2012 guidance and the press release. As noted in our press release, gross margin as a percentage of revenue declined versus the prior year period. The impact of price and sales mix on gross margin was favorable so the decline in gross margin percentage was the result of increased operational variances.

In particular, our higher manufacturing costs include period expenses associated with the remediation of our Plainsboro Regenerative Medicine Facility. We calculated adjusted gross margin by backing out the adjustment to cost of product revenue detailed in column A of the adjustments table in our press release.

During the fourth quarter, our adjusted gross margin of 63.6% was down 1% from the comparable measure in the fourth quarter of 2010, and flat compared to the third quarter. Higher department spending to improve quality operations in some of our other manufacturing sites drove this decrease. In addition, currency had an unfavorable impact on gross margin of half a point in the instruments category.

For 2012, we expect reported gross margin to be in the range of 61.5% to 62.5%, and after adjustments in the range of 64% to 65%. Research and development expenses were relatively flat versus the prior year, and were 6.6% of sales. Increases in extremities and spine were offset by cuts in other areas. We expect future R&D spending to remain between 6.5% and 7% of revenues.

Reported SG&A increased significantly versus a year ago, mainly resulting from spending on the implementation of our ERP system, and the accelerated vesting of our former CEO's stock-based compensation. In total, these and other special charges amounted to $11.3 million. SG&A adjusted to these special charges with 41% of revenues, up versus the prior year. Additional expenses related to the Ascension and C Spine acquisitions mainly drove the increase on an adjusted basis.

Selling expense in particular, increased because of a shift at revenues to higher cost distributor sales. Even with these additions, overall we're pleased with our successful efforts to keep spending in check. After adjustments, we expect SG&A during 2012 to remain at last year's level around 41% of revenues. The fourth quarter, our adjusted EBITDA margin was 19.1%, down from last year.

For 2012, we suggest modeling approximately $27 million in depreciation expense, and $25.5 million in intangible asset amortization, $7 million of which will be recorded in COG. Interest expense was unplanned. We recorded $400,000 of other income during the fourth quarter. We recommend modeling approximately $8 million per quarter of interest expense during the first half of the year.

In June, we will repay our $165 million convertible notes on maturity using a combination of cash on hand and borrowings under our credit facility. We recommend modeling approximately $6 million per quarter of interest expense during the second half of 2012.

We ended the full year 2011 with a tax rate of 1.8%, recording an income tax benefit during the quarter. The tax rate is below the outlook we provided in October, resulting from lower-than-expected income and greater-than-expected special charge expenses in the United States. The implied tax rate on our adjusted net income during the quarter and the full year was 29.1%. For 2012, we expect our reported tax rate the to be 16.5% and our adjusted tax rate to be 27.5%.

As we disclosed on our October conference call, we repurchased 400,000 shares during the fourth quarter. Cash flows from operations during the fourth quarter increased $6 million over the prior year period, including a $10 million tax refund on 2010 income tax filings. We are pleased with the continued strength of our cash generation and good cash management in spite of the lower net income during the quarter.

While we are not providing specific guidance on cash flow, we call your attention to the effect of the maturity of our 2012 convertible notes in June. Because of the accounting treatment to this instrument, $30.6 million of the $165 million repayment will be treated as a payment of accreted interest and would be recorded under GAAP as a decrease in cash flows from operations. Accordingly, we expect cash flows from operations to be lower in 2012 than in 2011.

During 2012, we expect to spend between $65 million and $75 million on capital expenditures. This is a significant increase over spending levels in 2011, driven by our ERP implementation project and the new Regenerative Medicine Facility. We believe the underlying core CapEx spend to be around $35 million.

Referring to the press release, we are guiding our 2012 revenues to increase 5% to 7%, or 6% to 8%, excluding the impact of foreign currency. Within that guidance, we expect our orthopedics revenues to increase 10.5% to 13.5%, our neurosurgery revenues to increase 0% to 2%, and our instrument revenues to increase 2% to 4%. Within orthopedics, we expect extremity reconstruction to increase 10% to 14%, spine including Orthobiologics to increase 20% to 25%, and private label to decrease 7% to 9%. We expect some continuing revenue weakness in the first quarter of the year for a few reasons, including still resolving regenerative medicine supply issues, the transition of the Ascension products from distributors to our direct sales force on January 1, alternate site instrument distributor customers completing the reset of their inventory levels, and continued weakness in Europe.

As a result, the revenue expectations we laid out for the first quarter represent a much wider range than we would prefer to provide at this point in the quarter. It reflects some level of uncertainty around several of the factors that hurt our performance in Q4, particularly the ones I just mentioned. If we make significant progress against these issues, we will finish at the high end of the range. However, March will be an important month for both production and sales, and it's too early to know the extent to which these issues will persist into the second quarter.

Turning to earnings and again referring to the press release, we expect to increase our bottom line faster than revenues. Due to the timing of the various business issues Pete and I have outlined, we expect adjusted earnings-per-share to decline on the order of 10% in the first quarter versus the prior year and accelerate significantly in the second half of 2012. Drivers of the slope include accretion from the Ascension acquisition beginning in the second half, expected increase in our higher margin Regenerative Medicine product sales during the second half, and accelerating sales from cross pollination efforts in our higher margin Spine and Orthobiologics products as the year progresses.

Finally, to answer one question in advance, we are still digesting the proposed regulations around the medical device excise tax beginning in 2013. We expect to give our forecast of its impact in the summer after we have done the analytical work and roll through our annual planning process to have a better sense of our revenue mix for the next year.

Now, I'll hand the call back over to Pete.

Thank you Jack. Before we begin the Q&A, I will provide updates on our FDA remediation activities in our Plainsboro manufacturing facility and the integration of Ascension. We continue to make progress in the remediation activities in our Plainsboro manufacturing plant. We're up and running, and expect to have the supply issues resolved in Q2. We've submitted both an initial response to the warning letter in our first monthly update. As we anticipated, the FDA has not indicated when it might re-inspect the facility.

In addition, we are spending increased amounts on quality system improvements in other facilities. We've not adjusted these out of our expenses, which is why both COGS and SG&A will remain relatively high as a percentage of sales this year, notwithstanding our current aggressive cost controls in other areas.

The Ascension integration is going well. Our Extremity sales force is trained, excited, and busy ramping with the new products and customers. And we are still transitioning through the integration of Ascension and the supply issues associated with our Plainsboro facility, which caused the challenges in Q4. But we're quite optimistic for the year in the longer term.

Now, we'll be happy to answer your questions. In an effort to accommodate a large number of requests, please limit yourself to one question and one follow-up. You may rejoin the queue if you have additional questions.

Operator, you may now turn the call over to our participants.

(Operator Instructions) Chris Pasquale with JP Morgan.

Thanks, good morning. First, one of the priorities you list in your presentation is aggressive portfolio management. And obviously, you guys have a long history of bringing in new product lines. You've been a little bit more active on the M&A front in the past six months, but what's the likelihood as you look at the portfolio that the Company could actually look to divest some assets? Are there pieces of Business today you don't think fit the strategic direction?

Chris, at this point in time, what when we take a look at the portfolio. At the first level, what we're looking at is within our three legs, orthopedics, neurosurgery, and instruments. It's less about how each of those pieces fit into the Integra strategy and are there sub areas within that, that we're actually cleaning up. And so clearly there's product segments and lines that aren't as profitable as other parts of the Business and that is our primary focus.

And going throughout this year we'll be communicating later on as we get closer to our strat process how we may evolve that view. That being said, we look at orthopedics when it comes to Spine and Extremities. That, combined with neurosurgery, we think, is a nice mix of combinations between our Business. Obviously Instruments comes up as a question for us so many times. At this point in time, it actually is a great cash flow generator.

And, quite frankly, is -- creates some interesting synergies with other parts of our Business. And so, there aren't plans on the horizon to do that, but specifically on aggressive portfolio management within each of those segments, there's lots of opportunity to, I'll say, prune the portfolio and focus it on higher margin products.

Okay. And I thought the Spine Biologics outlook for 2012 was a nice, bright spot amid some of the troubles you're having in other segments. Obviously on a hardware side, you benefit from C-Spine. But can you talk a little bit about what you're seeing in Biologics? Where do you think you are today in terms of procedures that are using your hardware, and what your penetration is on the Biologic side into those cases, and where that can go? And how are you guys able to continue to generate strong growth there when some other competitors are having some troubles?

Yes. Let me comment a little bit there Chris, and then Jack if you want to add. So obviously, we're quite happy with our progress with the C -pine integration. We integrated, fundamentally, the two organizations together in Q4, and now we're embarking on cross pollination of the hardware product lines between the two organizations, as well as bringing out some new products.

We've got a new deformity product line, some MIS products as well, as well as some other new adds into our cervical line. So, we're making some good progress there. That being said, hardware is still quite tough. As other people have reported, priced down anywhere from 3% to 6% range, based on different product areas. There's just a lot of fluctuation going on in that market and we see that continuing.

Our focus is to really focus on getting out the new products to fill out our pipeline and bring in new distributors. Now, why do a lot of people want to join us versus other folks? A big chunk of it is to your second part of your question on Biologics. And our demineralized bone product, our third generation product EVO 3, as well as our Mosaic synthetic product, are doing quite well.

And we've been successful in really telling our story to bring new distributors on that have strong relationships. Obviously with a wide swath of clinicians around the States, and then and we see that success continuing into this year. The combination of the two, the hardware and Biologics, we think separates us out from some of the other guys that are in the marketplace. But that being said, Chris, it's still, we believe, going to be an interesting market over the next few years as the spine market's evolving.

And if you were to look at the cases where your hardware is being used, rough estimate how often are you getting Biologics pulled through there, as well?

I don't have a specific number to kind of throw out, Chris, but clearly where our hardware is used and with our biologics in the vicinity, we're getting a high, high percentage of use of our Biologics pulled through. The fact is our Biologics distribution and reach is significantly larger at this point in time because of our historical timeline. Our Biologics are used with many, many other metal providers. And so, our opportunity, obviously, is to combine those two and to grow that way in the direction. But I don't have a specific number that I would throw out to you this morning.

All right. That's helpful.

Yes and other than our Biologics guys are doing a really good job and they're executing very well, and we're very happy about that.

Yes.

Thanks, guys.

David Lewis with Morgan Stanley.

Good morning. Jack, one for you and then one for Peter. I'm just -- I think it's pretty clear to everyone what is driving those slightly downward pressure on revenues in terms of the guidance range. It was less clear to me what sort of captured in the lower end of the EPS guidance range, and linked to that question, Jack, is thinking about gross margins for '12, just given the growth rates of Ortho versus instruments in neuro, I would assume there's some positive mix benefit to '12 but GMs are sort of flattish. So, maybe help us understand the key factors that are pressuring gross margins in '12? And then sort of what's capturing that lower end of EPS?

Sure. So, you're absolutely right. It has remained the case that mix and price have both been favorable for us on a consolidated basis. Just to get it out, we've suffered the same pricing pressures in spine hardware as everybody else sort of talks about.

There's nothing unique about our situation, but spine hardware is not even close to a fifth of our Business. And we're at more like 10% or so. And so we're doing pretty well otherwise across the board on pricing mix. Our challenges have been in operations. And I think everybody knows we are -- we've embarked upon major initiatives, not just in our Plainsboro facility but around the Company to really raise our quality systems to a whole new level.

And frankly, it's to get ahead of any possibility that we might possibly run into the same issues somewhere else that we've had in Plainsboro. And while we have called out the Plainsboro remediations as special charges and exclude them from our adjusted numbers, we have not done so around the rest of the Company. So we're spending a lot more money in that area and that's hitting COGS.

And then there are other things that we plan to be doing later in the year and talking it through. So, we're being cautious in our gross margin area, I would say. There is certainly opportunity for up side there if we execute well. But we don't want to bake in sort of a perfect year in that regard, because there's all sorts of things going on around the Company.

Okay. Very helpful. And then just Peter, one additional question. If you think about the last couple years, orthopedic performance in '10 versus '11. Obviously there's a pretty marked deceleration in that performance in '11. I guess part of that is the market, and part of that is sort of Integra performance. So, what is your view in 2011 in terms of how much of that was market pressure? How much of that was your internal performance, and how do you see that turning around heading into '12 and '13?

Yes David. I think it's a fair question. I would probably say it was about fifty-fifty. And what do I mean? Clearly the market component slow downs into single digits, or based on whose data you agree with, might even be actually down some in certain markets, such as Spine. Extremities has slowed down some but clearly it's still kind of the shining star in the Ortho space.

We bought two companies. Both we feel very, very good about over the long run. Both from a standpoint of integration, we had minimal issues with C Spine, but we had more challenges, we already talked about, with the integration with Ascension. Less probably with Ascension and more that some of the distraction to our Legacy business. And so this year, it's really about, as I've mentioned, at the conferences just a month ago, is focused on execution is a big part of our strategy. And that execution is really around sales execution, delivering on that top line.

So part of our range and part of our guidance, as Jack stated, takes into that representation. If we execute well on the high side, particularly in Q1, we'll do well. It's a combination of what we have to do at the plant, as well as what we have to do at the sales organization. If we continue to have some more challenges here into Q2, as I'd mentioned, working on the low end of that side.

But I think the good part is, I think a lot of that is in our hands and our ability to execute. We can actually do some good growth here in 2012. So I'm optimistic, the teams feel good about their plans and have very good stable structures starting out the year.

Great, thank you very much.

Raj Denhoy with Jefferies & Company.

Hello. Good morning. I wonder if I could ask about the revenue guidance for the year. You know back in January, when you guys pre-announced the numbers, you'd talked about 7% kind of constant currency growth for the year, now you're entertaining kind of 5% to 7%. And I'm curious to know what's evolved over the last six weeks or so that's perhaps introduced a bit more uncertainty and cost? Are you kind of entertaining the idea it might be a little lower than what you thought previously?

Yes, Raj. Let me comment, and Jack, if you want to add some comments. So, I'd stated actually at 7%, 8% growth based on currency, and as you stated, we talked 5% to 7%, 6% to 8% window. I view again, we did our preliminary discussions back then. I view that it's in the range of what we talked about, primarily from this. As we look at our ramp up in our facility here with getting capacity out with our plan, our integration with Ascension, it's very similar to the question that I just answered with -- that David asked.

If we actually do well and get ahead of the curve here on our execution, we're going to be on the higher end of the range. But if it takes little longer to get up and we actually have a little bit slower ramp in the first half, we'll be a little bit below that range. And so we felt it was prudent to actually place the range that way.

So, I don't think a lot has changed other than we have a lot better handle on timelines and horizons about some of the adjustments and some things that we have to do in the Business here, really, in the first half of 2012. And to Jack's point, Ascension was dilutive overall. We've got a great plan actually on cost reductions. But those things kick in the second half, so we have more of a -- more increased slope in the second half of the year. And obviously, if we're on track to the first half expectations, we'll be moving towards the higher end of the range.

Yes. That's exactly right. I think, you know, we -- as you will recall, give our sort of full-blown deep-dive guidance on this call every year. We gave preliminary numbers at the first week in January that had not even been able to be built off the final 2011 results. So, this result -- these numbers are, in effect our first guidance for the year.

You guys got the benefit of our early look in early January, because we had to preannounce the MIS. But we feel pretty good about these numbers. They've been beaten up, as Pete said. We think we can execute against them.

Okay. And then just kind of two detailed questions. But one of the things that I think was a concern with the disruption in Extremities -- Extremities sales effort was that perhaps you might lose some customers and through that process. And I'm curious, have you been able to retain customers? Has there been some disruption in the sales base there?

Yes, Raj, just to remind everyone, our mix, again, in Extremities in particular. Half the Business come from regenerative issue, primarily half comes from traditional extremities type implant products. The majority of our challenge was associated with the products supply component with skin, which we think we have a pretty strong position in. Talking with our customers, you know if they use an allagraph because they didn't have full access to all of our products in the Integra product family line, we feel quite confident that they'll come back to Integra skin products in their next cases and we see that.

As I'd mentioned, I think at our January call, where we had some metal pressure. Yes, there's probably some cases where we did lose some share here or there. But as we actually bring in the Ascension product line, over 20 something new products, a whole new segment with Inshoulder, our ability to grow, share, and bring new positions actually into our fold, new surgeons, because we actually have differentiated products like pyrocarbon.

That, complemented with our regenerative products, we don't -- we have very strong confidence that we can continue to bring more people into the Integra fold and grow. But that being said, getting our product pipeline back to where it needs to be so that our sales organizations can really focus on selling, get them all the right mixes of SKUs, is a big part of the priority focus, and why we've pressed our guidance wider in the first quarter, because we're still working through that.

Okay, just to that point it sounds like Skin is still somewhat challenged in terms of supply, and you're having to kind of move things around in order to meet demand there. But any updates on when that might be fully worked through, or when you'll be back in sort of a normalized selling mode?

Yes, Raj, I mean, it's that I've mentioned, really in Q2 -- I mean we're up and running now. But as you could imagine the timing on our product, the cycle time to actually get the -- all of our SKUs filled and to the right supply levels is going to take us into the second quarter. We've got aggressive plans to do that faster. If we do, we'll be up healthier a little bit sooner. If not, it's going to bleed into the middle of second quarter. But that's what our focus is, is to be able to get things back to normalized levels in Q2.

Okay, thank you.

Amit Bhalla with Citi.

Hello. Good morning, Jack and Pete. I wanted you to just to jump into Europe for a second. You were talking about cancellations and push outs. And in early January you now had six additional weeks. So, can you talk what you're seeing in Europe across the segments?

Well, I don't think I want to go into a tremendous amount of detail. For us, we find that the last month of the quarter is an important one. There is, I would say, continued economic pressure in Europe. I think you saw that today the European -- I think it was the Central Bank issued it in forecast and took European GDP from flat to down.

And there's all sorts of things going on. I would say that right now our European business is doing what we expected it to do, which is gratifying. That doesn't mean that it's going to be an outperforming business for us. And, of course, there's still half the quarter yet to go. So I'd say right now, we have hopes that Europe will be neither a big drag on our plan, nor a big benefit.

Yes, I mean, just to add -- this is Pete. Is that we plan 2012 to be a tough year in Europe. Our plans and our guidance already reflects that versus 2011. That being said, as I'd mentioned, we've had a increased focus on OUS growth strategies. A lot of these plans take some time.

And a big part of 2011 was kind of reevaluating how we look at our distribution structure, how we take a look at our channels, marketing, countries that we want to target, and our leadership team over there I think has done a really nice job. And so also the spirit of tough markets and execution. I think this is one that's probably in the 70-30 camp of 70% market, 30% on Integra execution and we're count on some increased effectiveness in our execution this year to be consistent and be able to drive some growth in the markets that we can.

Middle East and Africa, it still looks quite healthy. A lot of the core markets across Europe, we aren't counting on them being healthy to even to the level they were in 2011. But I would say there are certain products now as we're bringing Spine, which is really new for us coming in to Europe. More of our Biologics, we expect to be able to hit our overall expectations, and if the market gets little bit better and stabilizes in Europe, to be able to deliver some upside against that. But at this point in time, we're -- we have more of a I'll say, a wait-and-see attitude on how Europe evolves.

Okay, and my follow-up is on the instrument side and related to the inventory levels that are in the channel. I think if I heard your comments correctly, you said that you expect demand to meet supply but that you are kind of at a new level of inventory in the channel. So what's giving you confidence that the inventory in the channel not going to step down even further through the year, and can you tell us what inventory level there is maybe in terms of weeks on hand? Thanks.

So, to give you some sense of it, some of this won't be new to the people who were on our call in early January, but it's worth setting the table again. In our alt site Business, our alt site Business accounted for about half of the disappointment, if you will, from our perspective, between, say call it early November and the end of the year.

Right.

And that's because -- and so how did that show up? Well, typically, the alt site Business does about 30% of its business for the year in Q4. This year, it did 22% or 23% of its business for the year in Q4. So, Q4, rather than being the make it quarter, turned out to be a drag on the alt site business. Obviously that's something that it would have been nice to have forecast better. We certainly wish we had. But we've done a fair amount of communicating with our distributors, the big ones, certainly, since, and we know that sales of our products have held up.

So the question really is, how will these various companies manage their inventory going forward? Because they're quite interested in maintaining their revenues, obviously. At some point, reasonably soon, those inventory levels distributor by distributor are going to reach levels where they are basically back to buying at a replacement rate. What we're trying to say is we don't expect them to change their minds again, rebuild inventory. We don't expect a snapback, but we do expect to get back to normal pretty fast. Right now, we think that the turn will come in the second quarter and I think we feel reasonably confident of that.

Well, Jack quick I mean, like, why, though? I mean have they told you that, or are you just assuming that? I'm a little confused there.

Yes, they've -- I mean, you get somewhat different messages from each but in general, Shine is our biggest partner and they've essentially told us where they're headed on their inventory, and so we have a pretty good sense of it.

Yes Amit, we have obviously -- our out-the-door sales by SKUs, and knowing roughly what each of our key suppliers are holding on hand, knowing what their sales to end-users are, we obviously see the spread of what that is. And on certain suppliers, it's very different across the board. We're getting down to a month on hand or so. We actually have a very good fill rate. We think it's our ability to deliver turnaround time in a short period is probably one of the best in the industry.

And a lot of the suppliers out there are trying to manage down their own inventory and work with someone like Integra that can meet a 30-, 35-day turnaround to meet their supply levels. So what we're hearing is, is that they want to have higher turn rates, not a big surprise, driving working capital goals. But the idea of them going back to, potentially, levels that they carried before at this point in time, we aren't counting on that happening and don't think it actually will.

And quite frankly staying at the levels they are, and with our fill rates, could ultimately turn to be a competitive advantage for us of how we can meet the needs of faster turns required by distributors. But we have a pretty good insight into it and think again, based on the distributor going into Q2, that these will get normalized back to match up with end-user demand.

Okay. thanks, guys.

Matt Miksic with Piper Jaffray.

Hello, good morning. This is [Young] actually in for Matt. Can you hear me okay?

Yes.

All right great. Thank you. A question on Spine. Even though you are currently still pretty small there, what are seeing in physician-owned distributorships, and are you open to those arrangements with your customers?

So, Young, this is Pete. From a standpoint of the question on pods. We have probably seen more activity in the beginning of last year than we've actually seen in the second half of 2011. Physician-owned distributorships are not a focus area for us by any stretch of how we actually do business. We focus on setting up separated distributor network structures. It's one of those areas where you could argue that it is ultimately gray what actually a physician- owned distributor structure is. There's been a lot of different press on it.

But our core strategy isn't to actually align with physician owned distributorships for growth. Ours is much more on a traditional stand-alone Spine distributor structures, how we've been structured and we will continue to be so in the future. How pods evolves in the eyes of the US government, and things of that nature. Bending -- depending on how those rulings take place. Obviously, our strategy of working with further or doing some other things potentially will change. But at this point in time, it's clearly not a core part of our strategy. Jack, I don't know if you'd want to add any other comments or not.

Well, yes. The one thing I would say is we've been pretty directive to our Orthopedics businesses, not to deal with any pod that would be structured in such a way as to create a -- economics for and induced sale. So, we've been very clear on that topic. There are obviously, as Pete said, many ways to go about these things. But this is an area where I'd say we've been pretty uncompromising.

All right, thanks. And a quick follow up. I was wondering about Symmetry's acquisition of J&J Surgical's Codman Systems. In your view, does that create any opportunities, or raise any concerns for you competitively?

Well, and I think it's a reasonably stable market. Obviously there's a few players within this overall market and when you have a change like this, it obviously creates some new perspectives on what the competitive landscape change will be. But it also creates opportunities. We think that, again, with our fill rates the best in the industry, our service record really the best in the industry, and a great track record of bringing out innovative products that we can differentiate ourselves from new players coming in to the marketplace.

You know, case in point, we have a new headlamp system, which is an LED high-intensity light system. It's really one of the first ones in the market that clinicians are saying has an adequate level of lux output and quality of light. And combined with our neuro sales force and our instrument sales force together that are co-marketing it, it's doing quite well. So, we think we're going to do quite well as this whole market evolves.

But bringing out other products that are beyond what just what was in the traditional Codman business and having those brought together, retractors and such, some of the other things that we do, I think, extremely well, we feel quite good about our ability to grow and compete. And I think it's going to be interesting to see, is the strategy the same or different. We haven't seen anything yet, but we're well prepared to perform.

As you can see from the guidance, we are forecasting a good year for our Instruments business. Just to say. We feel good about it from a whole range of reasons. Lighting, main line instruments, and so forth. So, that message should not be missed.

All right. Great. Thank you. Thank you for taking our questions.

Robert Goldman with CL King.

Okay thank you. Good morning. Back on January 5, a lot of folks had mentioned then what your guidance was for 2012 compared to now. But I'm curious, because I don't think this was yet addressed. On the January 5 presentation, you also mentioned that you thought that the history, that the fourth quarter of '11 would come in at $65 million to $70 million, and I think apples to apples you're now saying $72 million. And I'm wondering what happened that sort of changed your view of history in the last month?

Well, so I think the short version is, is -- and I think we were reasonably clear in questions and answers and one on ones and all the rest of it. The $65 million to $70 million was much more preliminary in its nature than the revenue number. And we had $500,000 more revenue than we had forecast, because there's a fair amount of cutoff casting, and other things that had not happened by the end of the week.

The earnings, though, as we said at the time are not as developed by the third day of January as they get to be by the time they're completely finished and audited, as they are now. And in particular, we noted that there's a certain amount of volatility inherit in our cash number, which is a surprise to absolutely nobody over the last two or three years. And the tax came in with a little bit of a benefit in Q4 that had the effect of improving by $0.01 or $0.02.

So, when you sort it all out, we were dealing with a very preliminary number, it was really a forecast at that point. We wanted to provide a range that certainly wouldn't surprise to the downside. We obviously didn't want to give you guys a range where you would beat massively to the upside.

But apart from tax and the revenue bead -- and Pete notes, we did a good job with cost control in Q4 that's worth pointing out. We had -- obviously as we saw our numbers on the top line slow down, we put the word on the street to be very careful about spending money wisely, and people have responded well to that, which also took a couple weeks to verify well after the call. So that's all it was.

And if I could -- as well, follow up on one financial thing. And Jack, I know you said you're not providing cash flow guidance for 2012, but in providing the CapExes you did, as well as that issue with the convertible accrued interest, it seems like you're guiding to not expect not much of any free cash flow in 2012. Am I really misreading that?

We're expecting -- so the short version is we're expecting some free cash flow in 2012. I think that you're absolutely right. There are two big factors that flow through the number. One, GAAP operating cash flow will be reduced by almost -- by about $31 million because of this accreted interest payment, that most people will regard as simply paying back the bonds on maturity. But, we have to call your attention to the fact that in Q2, we will have a $31 million wind in our face on operating cash flow as a result of that number.

The second thing is, we are spending -- are planning to spend about twice what we think is our core CapEx run rate this year. It's the peak year of our ERP implementation and they're flipping over to the build phase, which is capitalized. And I think we've rather famously discussed all the work in our collagen supply chains, the new plant, and so forth.

So, when you add all of that up, we are really pushing hard on a number of fronts that we believe will position us very well in 2013. We do expect significant cash flow this year, but you're right, the free cash flow will be a much lower number than it has been historically.

Okay, thank you.

Spencer Name with Zinc Equity.

Thanks for taking my questions. Just one quick question and I guess somewhat of a clarification, if you will, and then a more broad market question for you guys. First question on the clarification side is, I'm curious kind of what your seeing on the capital equipment demand, particularly on the neuro side, whether you guys are seeing sort of a second pull back, if you will, post 2008, 2009 weakness. If so, what could be the drivers of that? If not, are you seeing recovery on that front?

Spencer, overall from a capital standpoint, it's pretty stable. I mean, and our plans are for this year not to see significant increases but not to actually see any major decreases in the market. Our capital, our neuroablation products, we see doing well this year. Also, our critical care monitoring, those were kind of our largest two categories of capital equipment.

Indications, same day that we see that you may see, as well, on what CFOs are saying. I'm not seeing any major fundamental shifts down nor increases. And so we think it's -- we plan on being stable. The only caveat I would say for that is we're planning for it to be a little bit lighter in Europe. And again, based on some of the comments we made about Europe before.

Great, that's helpful. And then just on the broader market, issues, you guys look at addressing three different market segments. It seems like the perennial protection, if you will, on the neuroside is a little bit under pressure. The Instrument business also has gone through some tough times.

You are, sort of, I would say, the bright spot in orthopedics is actually, overall marketing is having a very challenging times. How do you guys think about sort of growing in those environments where all three areas that you guys are involved in are having some challenging times right now? And whether they -- the recovery will actually happen is somewhat of a question mark at this point.

Well, Spencer, just to push back on some of your comments, I don't think we're seeing challenges across all of the markets. But let me hit on them quickly. So Instruments we're actually saying we're going to have a reasonably healthy year. Some of it, obviously, is a little bit lighter comp from the previous year, but we also have some new products.

We also see, actually, some new starts coming up on the Acute Care side, so we feel quite confident that we can have a reasonable year here in overall instruments. And so that's kind of the instruments story. Neuro, we're planning on some FX pressure, more so than not actually from outside the US. We also have the comments I made on capital. But a lot of our products are flow products.

In particular, our DuraGen products and such have been doing quite well, and we see that continuing on into this year. And so, our optimism is a little bit dampered, just based on till we see how the first part of the year starts out. But we also have some new launches coming out in Neuro, first time that we've had probably half dozen launches in Neuro in quite some time.

They're not until later second half of the year, but we're optimistic that that's going to create some more interest. Not only in, obviously, those particular products, but new things the sales team has to talk about as they're going in to see neurosurgeons that they've had very, very long-term relationships with.

Ortho-wise, Spine, tough market and I think it's going to continue to be so. Our two silver bullets are the I think the cross pollination of our product lines between our two groups will continue. And Ortho Biologics, we think Ortho Biologics, particularly in our third-generation DVM, and also our Mosaic synthetic products are going to continue to do well. Our private label, as we mentioned, which is a collection of a lot of agreements, is actually down. We're forecasting it to be down for this year.

But we do feel good about that and come to extremities, the market clearly isn't as growing what it was, say, two years ago but it's still a very healthy market. And with our skin products and also with our new acquisition of Ascension, bringing, again, 25 to 30 new different products, a new technology in pyrocarbon, which we think, in our hands, we can do some unique and even different implants. We're getting some pretty good energy around it.

So when you take a look at our guidance, 5% to 7%, 6% to 8%, based on currency, we think we've reflected that. That we're not being too aggressive but we also think based on the challenges that we've had, things that we've fixed, and also taking a look at the markets we've positioned in that we've represented it well. And again, if things go better than planned, we'll be on the high end of the range. If not, we'll be towards the low end of the range from a revenue standpoint.

Great. Thanks much.

Jayson Bedford with Raymond James.

Good morning. Just a couple quick ones. Just as a clarification. The low teens extremity growth in 4Q, that growth included Ascension, is that right?

That's correct.

Okay. And just on the status of the warning letter, what's left to do before you invite the FDA back in to the facility? And then are you still expecting to open the new facility in mid'12?

Yes, so as you probably know, it's less about an invite and more about when the agency is ready to come back in. As far as I'd mentioned, we're up and running. The major changes in items that we've dealt with on the actual observations are well in hand. But there's time needed for actually showing that these -- been implemented and they're effective.

And so part of the timing scenario is, the agency may want two months, three months, four months of run time until they actually come back in. We probably will get a better handle on that in the next few months, again as I'd mentioned, we had just put in our initial response, which happens in the first 15, 20 days and we did our first update. We haven't had any formal dialogue. Our outside experts tell us that's not unusual, but we suppose that we'll have more dialogue on timing here in the next few months, and we'll be able to give you some better insights relative to that.

Second part of your question was on the new facility, the new facility, which is actually here on the same campus. We've been ramping up the capital investment that Jack spoke to represents that major increase here in 2012. Our plans are by midyear to be making some of our products within that facility and then transitioning and ramping up a vast majority of those products into early 2013.

So, as you can imagine, some of our A priority products will be starting sooner in this year, 5-10K products. Some of the products that are PMA-based will be more on the back side of the transfer and that's associated to everything with the warning letter, as well as they just take longer because of all the filings that have to be taking place. But we feel good about the plans and the progress that we're making.

Okay. And then I guess just lastly for EMEA, you may have touched on it on the International side. At least in the January call you talked about revenue in Asia Pacific, and you talked about delayed approvals, and weakness with one of your distributors. I guess the question is, have you received the necessary approvals, and have you seen any pick up with that distributor? Thanks.

Jack, why don't you take that?

yes, I'd say we're good on all these fronts. I think the thing to remember about this business for us is, there's two or three things to remember. It's very much the law of small numbers. And it's very easy for us to have either an overperformance or an underperformance in a quarter, depending on whether a distributor moves in order, or whatever else, because it's pretty small for us. As you know, OUS is 23% of our revenues. Europe is about half of that. We've got a bunch of revenues in Latin America, Canada, Australia, so you're -- it's at a law of small numbers.

Second thing is, it is an area of significant investment for us. And we're engaging in -- we are recruiting new distributors, we're spending time moving registrations. We're doing a lot of activities that will put us in a position to be, I think, quite successful over a multi-year period in that market.

Which is obviously where a lot of the world's economic growth is coming from. But it's not going to be a straight line. Suffice it to say we have high hopes for it this year and next, but we're going to probably have another bounce up or down one quarter or another between here and success.

Okay, thanks. I'll get back in queue.

Glenn Novarro with RBC Capital Markets.

Hello, good morning. Two questions. One, part of the Integra strategy for the last ten years has been M&A. Given the fact that there's going to be less free cash flow generation this year, and given these spends to fix the warning letter and given the fact that you just closed Ascension, should we assume 2012 minimal deals, far fewer deals? That's my first question and then I had a follow-up.

Hello, Glenn, it's good question. I think, and as I communicated some of this, actually in January, it's different updates. Our first half, probably less actual [inquisitive] focus. We're focused on integrating the two that we actually purchased, and just to remind everyone, those were the first two deals we'd really done in the previous 2, 2.5 years. That doesn't mean, though, in second half of this year we're on track to our numbers. We're out on track to some of our plans that we won't be definitely moving much more aggressively back to our strategies.

The three points that we've talked to is around improving our execution. That's a big focus right now. Optimizing what we have, which is a combination of products between -- products, as well as plants and quality system improvement. But the third pillar is clearly accelerating growth, organically, as well as looking at inorganic opportunities. And it's still very high on the list. We still see lots of interesting opportunities that are out in the marketplace.

But from a disciplined standpoint, clearly in the first half of the year we're much focused on delivering what we said we would do, and addressing some key issues such as the warning letter, getting our facility ramped up, and getting the integration of the two deal that we had just done and, Jack, I don't know if you want to add any other --

Yes, look, acquisitions for this Vompany which has a bunch of experience with it, and that's both managerial experience and, frankly, psychological experience, acquisitions are really energizing for our sales organizations in particular. And we're going to do them when confronted with the right opportunity. You are absolutely correct. Right now, we've got a lot of work to do and a lot of money to spend so we've been clear on that point.

And if I were a betting man, I think you're making basically the right bet. Certainly through the first half of the year, I would not expect us to make any bold moves. We never say never, but that would be the bet I would make. But Pete's absolutely right. We're not backing away from this as part of the things we do to make our sales force more efficient, gain effectiveness in organization and fill up our pipeline.

Can I just say one big picture question to you guys?

Sure.

A lot of us are both buy side and sell side, we're trying to get a feel for surgical volume. And fourth quarter, volumes seem to get a little better but that was more seasonality. We're almost two months into the quarter now. Can you just give us your impressions on US surgical volumes? Have they gotten a little bit better since December? Are they stable? Any commentary would be helpful. Thanks.

Yes Glenn, from our perspective again, we have a smaller lens than many of the other folks that you may cover. But in the diverse makeup that we actually have, we actually think they're reasonably stable at this point in time. There's no -- when you take a look at our Instruments businesses, which touches a vast majority of procedures, we're starting again to see some start-ups and things of that nature. I mean, my only -- the only call out is kind of what we already said, is Spine tends to be a little bit more challenged. And that's probably more of the area we see it. But I would say on aggregate, we think things are reasonably stable and the outlook looks pretty good at this point in time for 2012 that they'll remain that way.

Okay, great. Thanks, guys.

(Operator Instructions) Bob Hopkins with BOA.

Yes, good morning. Thanks very much. Can you hear me okay?

Sure.

Great. I just have one question. There's been a lot of questions asked already. And my one question is, I just want to go back to these -- the 2012 guidance you're giving now versus the preliminary estimates you gave at the beginning of January. And I realize we're only talking about a percentage point or so. But I just wanted to be very clear that you did widen out the range, which if you look at the midpoint versus the previous point estimate, that midpoint is lower now than it was what you gave in January.

And so I just want to be clear that the reasons for that -- did that have anything to do with what you've seen in January and February? Have things been a little worse than what you thought they would be and that's why you gave the wide range, or is this simply conservatism on your part? Just want to be clear about what you're seeing in January and February and the impact that might have had on guidance.

I would say it's not a function of what we've seen in January and February, per se. And we feel build this up from forecasts from a number of different organizations. Our FD&A guys go back and beat them up, and then we make a judgment about the range we're going to supply when we give detailed numbers that is based on our experience. How do our diversified businesses perform? As you and everybody else who's followed this Company for some time knows, we rarely have a quarter where everything goes right and we rarely have a quarter where everything goes wrong. We have a lot of diversification here.

So I'm not going to tell you there's no corner of our Business that's going to do a little bit worse than we expected. There's also places in our Business that are probably doing better than we thought they were going to do in December. So I'm not sure how to answer the question. I'd say the main point is, this is the first time we've given what we regard as the bottoms-up detailed guidance for the year.

Your math is absolutely correct. We have -- if you lowered the bottom end of the range, which lowered the midpoint of the range by a little bit, but that is the best way to reflect our judgment about the opportunities and uncertainties in the Business. I think you heard us say also that if we do our plan and actually do what we've got people working towards, we'll do pretty well this year.

Okay. That's helpful. I was curious about what you've seen over the last month and a half, and to the degree that impacted the range you provided.

Yes, I think that's sort of all I got on the point.

Got it. Thanks very much.

And at this time there are no further questions.

All right, thank you for dialing in and we'll look forward to speaking to you again in April.

And that does conclude today's teleconference. Thank you all for joining.