Integra Lifesciences Holdings Corp (IART) 2012 Q1 法說會逐字稿

Good day everyone and welcome to the Integra LifeSciences First Quarter Financial Reporting Conference Call. As a reminder, today's call is being recorded. At this time I would like to turn the conference call over to Ms. Angela Steinway, Head of Investor Relations. Please go ahead, ma'am.

Good morning and thank you for joining us for Integra LifeSciences First Quarter 2012 Earnings Results Conference Call. Joining me today are Peter Arduini, President and Chief Executive Officer, and Jack Henneman, Chief Financial Officer.

Yesterday afternoon we issued a press release announcing our financial results for the first quarter. As you have probably seen in our press release, we are now presenting our revenue in five segments. These segments are International, US Neurosurgery, US Instruments, US Extremities, and US Spine and Other, which includes spine hardware, orthobiologics, and private label.

We provide historical revenue information for these segments in the quarterly financial summary available on the Investor Relations page of our website. While we will also continue to provide revenue in the three product categories, our commentary and guidance will follow these five segments. We believe the results of this change in reporting and guidance will be useful to investors.

Certain statements made during this call are forward looking and actual results might differ materially from those projected in any forward-looking statement. 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 of our website at IntegraLife.com. As we aim to keep our prepared remarks short, we will reference the financial results in 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 call over to Pete.

Thank you, Angela. We are pleased with the progress that we have made, particularly with our commercial and operations team. As a result we came in at the top end of our guidance range we provided to you in late February.

Our strongest growth continues to come from Orthopedics, particularly in the United States. Our US Extremities grew 25% in the period helped by the addition of Ascension revenues. Production of our regenerative medicine products met its targets during March, and we started to clear backorders during the quarter. As a result, sales of regenerative products grew in the mid-teens.

During the quarter our direct sales force began selling the full line of products from Ascension's portfolio. The integration of the product lines is complete. Sales of our legacy foot and ankle products also increased during the quarter.

US Spine and Other, which includes our spine hardware, orthobiologics, and private label products, increased approximately 20% primarily from the addition of the C-Spine revenue and strong growth in orthobiologics. While the cross-pollination of the two spine hardware lines is progressing well, the spine hardware market remains challenging, both in price and volume. Our Evo3 and Mozaik products continue to see high demand through both our existing base and newly added distributors. This demand drove another quarter of double-digit growth for orthobiologics. Private label decreased versus the private -- the prior period.

US Neurosurgery revenue increased about 5% over the first quarter in 2011. Continued demand for our market-leading duraplasty products as well as strength in our critical care and stereotactic product lines drove most of the increase.

US Instruments revenue increased 1% versus prior year. Increasing sales in the acute care setting and high interest in our new LED surgical headlight drove the growth. In the alternate site channel, sales declined slightly. End-user sales of our products continue to grow well in line with our expectations. We believe that our distributors have largely achieved their lower inventory targets, and we expect normal buying patterns to return in the second quarter. To be clear, we are not forecasting an increase of customer inventory back to historical levels, but we are expecting a return of buying patterns to match end-user demand.

International revenue was flat with prior year. Europe was down 6% in line with our expectations. While Neurosurgery and Extremities product sales decreased, Spine and Orthobiologics product introductions increased well over a small base. The rest of the world grew 5% driven by demand in Latin America and Asia across all product categories. The International business continues to deal with shortages of certain regenerative products during the first quarter tempering revenue. We expect to clear most of those backorders during the second quarter.

We've made a great deal of progress since our last earnings call in February. While we are pleased with our results for the first quarter, we still have a lot of work to do to achieve our objectives in 2012, including quality systems, new product introductions, and our regenerative medicine supply chain. Our focus on execution influences our expectations for both sales and profits for the rest of the year.

Now I will turn the call over to Jack to discuss the financial results in more detail and provide an update to our 2012 outlook. Jack?

Thank you, Pete. As we cautioned on our guidance call in February, much of our Q1 performance relied upon our ability to execute successfully in the last month of the quarter, which we did. As a result, the sales that brought us to the high end of our revenue guidance, particularly sales of our regenerative products, were incremental relative to our expense base and therefore highly profitable.

We also did a good job controlling expenses in the quarter and executed well on the supply chain. When you look at our EPS guidance, our first quarter out performance has increased our confidence in our adjusted earnings per share guidance for the year. As I will discuss in a moment, we are therefore tightening our guidance to adjusted earnings per share by raising the lower end of the range. After I walk through the remainder of the P&L results, I'll discuss our revised annual guidance in a little more detail.

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%. In the first quarter, the two-point decline in GAAP gross margin to 61.9% versus the prior-year period was the result of increased operational variances, higher manufacturing costs including period expenses associated with the remediation of our Plainsboro Regenerative Facility. We also incurred about $1 million of costs related to discontinuing minor product lines as we continue to optimize our portfolio.

We calculate adjusted gross margin by backing out the adjustments to cost of goods sold detailed in column A of the adjustments table in our press release. During the first quarter our adjusted gross margin of 64.1% was down 70 basis points from the comparable measure in the first quarter of 2011. Higher department spending to improve quality systems and locations other than Plainsboro drove this decrease. In addition, currency had a slightly unfavorable impact on the gross margin our instruments product lines. Compared to the fourth quarter, the adjusted gross margin improved half a point driven by overall yield improvements.

For 2012 we expect future R&D spending to remain between 6% and 7% of revenues. In the first quarter R&D expenses were down slightly versus the prior year to 6.1% of sales. Increases in extremities and spine were offset by cuts in other areas.

For 2012 we expect reported SG&A to be in the range of 43% to 44% of revenues and after adjustments to remain at last year's level, around 41%. GAAP SG&A increased significantly versus a year ago, mainly resulting from increased selling expense related to the addition to C-Spine and Ascension and greater spending on the implementation of our ERP system. SG&A adjusted for about four and a half dollars of special charges detailed in our press release was 42.3% of revenues, up versus prior year. Selling expense in particular increased over the prior year because a higher proportion of our US sales were through distributors.

In the first quarter our adjusted EBITDA margin was 19.9%, down half a point from the prior year period but up half a point from the fourth quarter of 2011. 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 on plan. We recorded $300,000 of other income during the first quarter. We recommend modeling approximately $7.5 million of net interest expense for the second quarter. 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. These amounts include the non-cash portion of our interest expense. We would suggest modeling cash net interest expense of $5 million in Q2 and $4 million per quarter in the second half.

We ended the first quarter with an effective tax rate of 30%. The implied tax rate on our adjusted net income during the quarter was 29.5%. For 2012 we expect our reported tax rate to be 20.5% and our adjusted tax rate to be 29.5%. The increase in our expected tax rate mainly relates to changes in the locations in which we expect to record income and expenses during the year. Our adjusted tax rate assumes the reinstatement of the R&D tax credit in the fourth quarter, but our GAAP tax rate does not.

Cash flows from operations during the first quarter increased $11 million over the prior-year period to $32.3 million. However, we expect to spend between $65 million and $75 million on capital expenditures this year. This is a significant increase over our spending levels in 2011 driven by our ERP implementation project and the new regenerative medicine facility. We believe that the underlying core CapEx spend is around $35 million.

On our earnings call in February we provided revenue guidance by worldwide product category of the following. Orthopedics revenues to increase 10.5% to 13.5%, neurosurgery revenues to increased 0% to 2%, and instrument revenues to increase 2% to 4%. This guidance by product category still holds, but we will not update it in the future or provide it again.

We will now be providing revenue guidance by reporting segment. For 2012 we expect US Neurosurgery revenues to increase low to mid single digits, US Instrument revenues to increase low single digits, US Extremities revenues to increase high teens to low twenties, US Spine and Other revenues to increase mid to high single digits, and International revenues to be flat to up low single digits with declines in Europe essentially offsetting growth in the rest of the world.

To the extent that you need help adjusting your models to follow our new segments, please refer to the quarterly financial summary available on our Investor Relations website or call us.

Looking ahead to the full year, we are raising the bottom end of our adjusted earnings per share guidance to reflect a combination of the successful first-quarter results and the risk that we must manage during the balance of the year. We believe this is a prudent approach, and we are cautiously optimistic that we will be able to meet our targets.

Finally I will answer two questions in advance. First, we're still digesting the proposed regulations around the medical device excise tax beginning in 2013. We expect to give our forecast of its impact later this year after we have concluded our annual strategic planning process and have a better sense of our revenue mix for the next year.

Second, many of our peers have discussed the impact of an extra selling day during the first quarter of 2012 relative to the prior-year period. We had the same number of selling days in both periods.

Now I'll hand the call over to Pete.

Thank you, Jack. We are certainly pleased with our performance in the first quarter. That said, we still have much to do to reach our goals for 2012. We've set three major goals for the Company this year. First goal is to improve execution on fundamentals including in our operational areas. We were able to meet our production targets in Plainsboro for March, clearing a large portion of our regenerative product backorder. However, we still have work to do to remediate the issues the FDA raised in a warning letter for the Plainsboro facility. We are on track to our internal plans and making good progress in our Plainsboro facility remediation program.

In 2012, ensuring our ability to supply products consistent with the demand and meet customer expectations is a top priority. Hence, we're aggressively applying both financial and human resources towards that end, particularly during the second quarter.

The second goal is to optimize our operations. For our size, we are a complicated company with more technologies, products, and locations than even some larger businesses. That complexity is a significant opportunity to optimize the organization to a more streamlined footprint in common systems. We kicked off this journey in 2012. At our Analyst Day Meeting later this year, we plan to discuss our efforts to streamline our operations, processes, and activities.

Finally, we have been also hard at work implementing a new ERP system and expect our first field implementation later this year. Each of these initiatives will contribute to optimizing the Company, enabling our efforts to become a multi-billion dollar organization.

The third goal is to accelerate growth. I will update -- I will provide an update on the two acquisitions we are integrating in our efforts outside the United States. The C-Spine integration has progressed as planned. We completed the unification of the two sales forces in Q4. After the consolidation of the sales forces, we began work on adding new distribution in under-penetrated markets and have added significant new distributors over the last few months. The majority of our distribution network has now been trained on both the legacy C-Spine and Integra product lines.

We recently completed the full market release of the Vu aPod Prime System, and both the NewPort MIS and the Daytona Deformity Systems will be fully released to the market during the second quarter. Although the spine market continues to be extremely challenging with pricing pressure and procedural volumes, currently we remain optimistic in our ability to grow the business through new distribution, acquisitions, and new product introductions.

The Ascension integration is also on schedule. In Q1 we saw excellent cross-selling opportunities, particularly in foot and ankle. The new and combined lower extremity portfolio has proven to be a powerful combination of product lines, allowing us to capture surgical cases we could not have secured prior to the acquisition. Our direct sales force has called on all Ascension customers, and we believe we have lost minimal business during this transition. We expect the sales force to be acclimated and productive in Q2 as we said on the February call. From a financial point of view, the integration is complete. We are on track to taking cost out of the business and reaching break even by midyear.

Finally, we generate -- generated just 24% of our revenue from outside of the United States during the quarter. Our peers in the medical device industry derive a significant greater portion of their revenues from these markets, and we're focused on increasing our international growth. Our plans include country-specific strategies that will enable advancing our product registrations, optimizing our distribution, and regionalizing our service and repair operations.

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.

Certainly. (Operator instructions.) We'll take our first question from David Lewis with MS. I'm sorry.

Hello, David.

Hi, this is actually Jon in for David. Jon Demchick.

Hi, Jon.

With the press to organic extremity sales along with increased quality systems spending expected in the first half of '12, I guess we expected to see improvement in gross margins to occur throughout the year. However, I guess we didn't see as much as pressure as we maybe would have expected in the first quarter. Is it still fair to say that we would expect the margins to maybe trend higher throughout the year?

Why don't you take that, Jack?

Sure. All right. So a couple of times. One, we stand by our annual gross margin guidance for the year, so that's point one. Point two, the critical thing to recognize about gross margin in this quarter, and in fact this has been the case all along for us, is that price was not a driver to the downside. We got the benefit of some price on a consolidated basis. Most of our businesses were able to pick up price.

The third point is, look, if you go back and take a look at it, our gross margin moves around a fair amount. It typically moves more in a given quarter from one change or another in our supply chain to manufacturing variances or changes in departmental spending than the trend line. So we are always -- we always caution people not to try to derive too much significance out of one quarter to the -- gross margin trends one quarter to the next.

That said, we're pleased with the progress we're making around the Company in our operations. They definitely have more discipline. But we're also going to be spending a fair amount of money over the balance of the year on quality systems and the like, and we think that the sum and substance of all of that will basically keep us within the guidance range as the year goes by.

Okay, very helpful. And then also a quick followup on the decision not to raise the top end of the EPS guidance following the strong EPS achieved in the first quarter. Maybe did the street just put too much of the cost pressures in the first quarter or -- and maybe are the quarters just more balanced than we thought, or is there probably substantial upside there to the numbers?

Well, I'd make a couple observations. One, and probably the most significant, is look, we've got an awful lot that we're working on this year around the Company, and we've talked about that pretty systematically on the two calls we've already had this year. So our view is the strong performance in Q1 -- the strong performance in Q1 essentially took some risk out of the bottom half of the range, and that's how we look at this.

So we think that our odds of hitting our guidance range have gone up and we feel very good about that, but we're not yet at the point where we want to declare victory on the year. So our solution was to pull up the bottom of the range, and I don't know, Pete, if you want to elaborate?

Yes, just to give a little bit more color, and most of you remember in our February call we talked about the 190 to 196 revenue range, and we talked about it was quite a wide range at the time. And we also explained that it really came down to a big portion of that was our ability to ship x-level of products in March.

The good news is we achieved what we needed to achieve and we shipped the levels of product that we needed out of the Plainsboro facility, which took us to the higher end of the revenue range. That being said, that, as Jack said, just really de-risks some of the rest of the year.

The other side is with obviously having this risk, we were quite tight on our expense control in the first quarter, which helped us across the board. We have to loosen some of that up to invest in some of the other programs we have throughout the year, but we're pleased with the execution that the team really around the world delivered for us.

Thank you.

Next from Citi, we'll take a question from Amit Bhalla.

Hi. Good morning. How are you?

Hi, Amit. Good morning. Good.

So quick question on two of the segments within the international business. Can you talk a little bit more about the OUS performance in neuro as well as extremities? Give us a little bit more color on what happened in those two segments?

Yes, Amit. International, I'll just kind of frame up at a high level. It's playing out pretty much as we have -- have planned. It's a little bit of the tail of two areas. Europe is down although in line with what we expected in our planning process. And our Latin America and Asia Pacific businesses are up doing reasonably well.

Extremities, it's a mix of stories. I think in our markets where we're bringing the products in and merging, we're actually doing well. We have some new entrance areas where we're actually bringing on some new components of the business. The neuro business, as you well know, is a big chunk of our OUS revenue. A large portion of that is actually tied in Europe, and so things like capital and some of the other products we've had probably more pressure there and actually been down somewhat in some of our neuro categories outside the United States, particularly in Europe. And as noted in the numbers, this quarter actually US neuro did quite well.

And as a follow-up, you've talked in the past about undertaking some restructuring efforts and potentially later this year. I was wondering if you could talk a little bit more about your thoughts on restructuring and your evaluation of where some of that can come out of for the Company?

Yes, Amit, I'm not going to speculate or going to give you what our target is. That will be for later this year. But what we're doing in the things that we've kicked off this year is really doing a broad look across the Company about how to optimize our overall structure. And so it starts with the ERP, enabling, taking multiple instances down to common systems so that we can actually rewire the Company in different ways to be more effective. It's a broad look at our distribution structure as well as our make structure and designing and looking at certain centers of excellence about how we will actually grow out of those platforms.

It's taking a hard look at where we have capabilities in emerging markets as well as capabilities in some of our traditional markets. And it also is taking a hard look at overall sourcing strategies. And we think across all of those different components we've got some nice opportunities that ultimately will increase our overall leverage, and so that's what our focus is. And as we've spoken about, we'll come forward with that plan later this year. You'll get about the start that we've made with getting that pulled together.

Thanks a lot, Pete.

Yes. Thanks.

Moving on to Chris Pasquale with JPMorgan.

Hi, Chris.

Thanks. Hey, how are you? Maybe just to start off with, of the three main issues you cited for the 4Q shortfall, you had the inventory destocking in instruments, the international weakness, and then the disruption in your extremities sales force, it sounds, if I'm hearing you correctly, like maybe all three of those have made some significant improvement? Could you just talk about where you are with each one of those issues, which ones if any are still going to be a drag as we move into 2Q?

Yes, Chris, let me -- I'll start and then, Jack, if you want to add some comment. So relative to the alternate site instruments business that we had the destocking and distributors down to lower carrying levels, as we talked about on the February call, we believe that a majority of our distributors are going to be carrying at something of a lower inventory level, and I can't quote a specific number because each of them has different target numbers, but lower than what they carried in the past.

And we believe right now that that is actually in process. Some of those distributors have reached those levels as we speak. There's a still a few that will probably reach it in second quarter. So we believe, as we had stated earlier, that by the end of Q2 we'll really be at normalized levels.

As we look at out-the-door sales, those sales to actual end-users, our share position looks good and is actually up. And so we feel confident that that will normalize here in the second quarter. So that really is kind of the alternate site instrument piece.

Relative to the extremities business, a big portion of the extremities challenge we had in Q4 was tied to a combination of two things. One is the integration of Ascension and just a lot of the activities of taking a distributed sales force and integrating it into a direct sales force. That complemented with the challenges that we had in our Plainsboro facility, in fact we were actually having multiple upgrades going at the same time. As we communicated in February, we are up and making the products, doing well, getting products out the door, so that issue has been resolved.

And secondly, the integration with Ascension, as I had mentioned, financially is complete, and essentially from a product training and integration of the lines is on track and doing well. We suspect really through second quarter we'll be focusing really on picking up more customers and cross-pollinating the product lines into the new customer base. But the two of those are on track.

The international piece really was a very small component in Q4. It was as much about timing and changes, and so I look at our plans for international this year are very much on track. I will tell you with the changes that we're focused on, particularly in emerging markets where we're working on registration strategies in distribution that we are going to have some lumpiness. Some quarters will be up and some will be down just because of the changes, but our growth for the year, and really our future outlook from an international standpoint, particularly Asia and Latin America, we feel very comfortable with.

Great. Thanks. And then you had previously said that you expected to finish your remediation of Plainsboro during Q2. Is that still a fair assumption?

Well, what we -- what we talked about is our -- the substantial amount of work that we would complete within the first half, and yes, we still feel that that is where our goal is. We are on track to those internal plans. How that correlates to when the FDA may come and what other type of input or work they may want us to do, obviously we can't predict that. But we're on track to our plans here for second quarter.

Great. Thanks.

Moving on to Piper Jaffray with Mike Miksic.

Hi. Good morning, Pete. Good morning, Jack.

Hi, Matt.

Good morning.

I'm going to apologize in advance here. We're all juggling some calls so I may have missed this, but is it -- is it clear or is it true, am I seeing this right that you're sort of supply issues out of Plainsboro on the skin side, on the collagen side, have been -- you're sort of caught back up here at this point?

Yes, Matt. It's Pete. Fundamentally we met our expectations for the first quarter. Have we built up the supply levels where we want them to be for the rest of the year? No, we're still building that. In international we've got a little bit more work to do. But as far as where we wanted to be in Q1, we definitely met that to might slightly exceeded where we wanted to be. But realistically I think we're quite in line with what we talked about in the February call, which is it's really going to be through into Q2 until we get to the levels that we want to be.

But as far as customer issues and things of that nature, we're out of that. It's really about getting supply levels to where we want them.

Okay, just because if I look at the business, and I know we don't need to get into the weeds of plus or minus Ascension, but just at a gross reanalysis of what we thought Ascension might be doing in the quarter and what bio -- how important biologics is to extremities, it seemed like that business, x-Ascension was pretty solid, and I'm wondering were there other new -- were there other new hardware products, implant products that sort of maybe helped backstop your building supply on the biologic side?

Well, I will tell you that obviously the biologics and the skin sales were up and that did a nice job, but realistically the complement of the Ascension products with our legacy products together really is opening more doors for us, and so our lower feet -- foot sales -- mid and hind foot sales and such actually did quite well within the quarter on both sides of the acquisition. So we did have some nice hardware growth as well from the extremities product lines.

Okay, so something like -- something like some synergy you're between -- their products and your sales force?

Oh yes, absolutely. I think there's a really nice combination of new technologies from PyroCarbon and new products in Ascension that are opening doors for people to want to talk to us about different things that we might not have had call points before, and then a lot of Ascension doctors that have used products seeing the Integra products in many cases first time new as well, so there's some good cross-pollination there. As well as we've increased the robustness of our upper extremities line, and so that's opening some doors in some of the same practices where we might have had some strong lower access, now we're starting to see some of the upper extremity guys in the same practice.

That's great. And then one just follow-up here on some of the new lines that you've given us, reporting lines, which are very helpful by the way. The extremities --

Thank you.

And spine and other, those lines, when you talk about US Extremities, for example, and US Spine and Other growth, just to make sure I -- we understand this. So the US Spine and Other would include the biologics that are sold into the US Spine business along with the implants that are sold there, and the same for Extremities?

Correct.

So splitting biologics? Okay. And so looking at US Spine and Other, understanding of course that you're bringing together in the current quarter C-Spine. Can you give us any color if that was a US growth, what the OUS growth looked like?

The OUS growth in Spine, that's a good question. It's off an extremely small base. So I think the critical -- the critical thing to remember is it actually in percentage terms was quite good. But, it was off a very small base. So we're not -- we're not running any victory laps on it, but that business is effectively launching for us and we're pleased with it how it's going. But it's not a big contributor yet.

Okay. So dollar basis small, but maybe growth faster just because of the size.

Yes.

Yes, I would just match up to say from our expectations for our Europe launches and our Asia launches they're doing quite well, but to Jack's point, they aren't really, at this point, making a big difference in the overall aggregation.

Okay. That's helpful color. I'll stop there and let some other folks get in. Thanks again for taking our questions.

Thanks.

Taking our next question from Bruce Jackson with Northland Capital Markets.

Good morning, Bruce.

Hi, thanks for taking -- good morning. Thank you for taking the question. Did you guys say how much Ascension and C-Spine added in terms of revenue for the quarter?

No, we did not, and we're sticking with our usual policy of not doing that. The reasons, for those of you who haven't heard the explanation, is that these businesses are really fully integrated into the legacy businesses. So the Ascension piece is in the bag with the rest of our extremities products. C-Spine is integrating. We're doing a lot of cross-pollination in sales there, distributors carrying both. So they substitute for each other. And for us to try to really tease apart which aspects of those growth -- of that growth is acquired versus which aspect of the growth is the product of our own investment is, to our mind, analytically unsound. So that's it.

Okay. Then just one quick question on the orthobiologics. You've got both allograft and synthetic. Is there any particular group of products within the orthobiologics that are driving the growth?

Well our orthobiologics across the board is actually doing quite well. Our synthetics, our Mozaik products, as well as our demineralized bone products both are doing very well. I had mentioned in my prepared comments about Evo3, which has done quite well for us and continues to grow. But we had some very nice performance in the Mozaik product lines as new distributors came on, and quite frankly the product has penetrated in different formats more broadly within the customer base. And that performance really on orthobiologics has continued really around the world for us. We feel pretty good about the growth plans we've got.

Okay. Thank you.

Moving on to Glenn Novarro with RBC Capital Markets.

Hey, Glenn.

Hey guys. Good morning. I have a follow-up question on the US Extremities number in the quarter. By our math, when you strip out Ascension, it looks like the US business grew in the high single digits, which is better than what we saw in 4Q. Is that in the ballpark and is that in line with the market, better than the market, any commentary? And then I had a quick follow-up on spine.

Well, I guess I don't want to repeat the response I just gave you on the organic growth. So rather than -- rather than talking about implied organic growth or anything big like that I'll just say we feel that the whole extremities business is doing well, that the addition of Ascension has energized the sales force, that progress toward the resolution of our supply issues, particularly in the dermal products, has made a big improvement on that side of things, and we're very pleased with how it's all running now.

And we believe --

Could you at least comment -- I was going to say can you at least comment on whether or not you think you've -- you're gaining share, you're growing with the market?

Yes, Glenn. I think we think we're in some cases clearly taking some share to slightly at or above the market. Again, I remind you, and you know this, is that unlike a lot of the other extremity portfolios, half of our volume, really a big chunk of it, is in the biologics and skin-based products of that nature. So we obviously had a strong quarter from that standpoint, which helped drive our overall growth.

That being said, the metals did quite well in particular areas, and it's related to the synergies that we're gaining of both the portfolios put together.

Okay. And then just, Pete, in your earlier remarks you said that you had, on the spine side, brought on more distributors. Can you quantify how many distributors you added, and are these distributors exclusive?

Glenn, we're not going to quantify them because it just -- some have multiple people working for them, some of them are one-guy shops. The main thing is that we're getting the right coverage plans on specific doctors that we didn't have before, and so we're gaining critical access in markets that we haven't had.

Relative to -- the second part of your question was?

Exclusivity.

Oh, exclusivity. Typically we do very few agreements where we do exclusivity.

So then, just as one follow-up, curious, how do you get these distributors to be selling your product versus maybe Medtronic or J&J, or are they selling something that you have that they previously had not sold by one of the other players?

Well typically it's a combination of the products that we've got in our biologics portfolio as well as some differentiation we think that we've got in our medics -- medical -- our metal portfolio. In many cases these are distributors that might not have been with some specific big guy in the past, or they were and for whatever reason they decided that the combination of our portfolio, both biologics and metal, was more appealing for their long-term growth of their business.

And I think that's one of the interesting opportunities for a company of our size is with our biologics and now fundamentally comprehensive metal portfolio, we can compete and be a more appealing partner to a distributor than a company that may be significantly larger and might be planning on doing different approaches in their distribution strategy. So we feel pretty good to compete that way and really haven't had to do exclusives.

Obviously, choosing those partners wisely and having contracts that assure the right focus on your products are some of the things that we try to do through contracting as well. Jack, I don't know if you want to add anything?

Well, the only thing I would sort of clarify is it would be pretty unusual for us to -- for us to have a distributor in spine hardware that was also selling the Medtronic or DePuy hardware. That would be more likely if we were non-exclusive with a distributor in hardware, it would be other relatively small spine companies, and we line up very well under -- within the -- within the distribution portfolio or that distributor's portfolio, we would line up very well under those circumstances. That's the main other thing I would say.

Got it. Can I just ask one quick followup? Because you guys do help supply a component to InFuse, and you are a biologic player and your biologic numbers were very good in the quarter, are you seeing the issues that Medtronic is facing with InFuse as a plus for your business? And I'm wondering is that also one of the reasons why you're able to pick up more distributors? Thanks.

Well, I think, as you know, we have for ten years now refused to comment on our perspective on InFuse from the vantage point of our capacity as a supplier because we value that relationship and it's a good one and profitable for us.

It is the case that I think to some degree everybody in the industry who sells orthobiologics that compete with InFuse have to some degree attributed the strong growth in that field to taking share from InFuse, at least on a procedural level. Whether it's in dollar level or not is a different matter. So you've heard lots of companies do that, and I think that we would certainly, I'm sure, have had our products go into procedure in lieu of InFuse, so that has certainly happened. But I don't know whether there's any ability on our part to quantify that.

Yes, I would just add, Glenn, on the last part of your question is we know we've been very successful with adding a significant amount of new distribution, mainly because of the breadth of our portfolio, and I would attribute the growth really about our ability to attract new distributors because of our product portfolio, and that's driven the growth probably more so than the other item that you mentioned.

Okay, great. Thanks for taking my question guys.

Moving on to Spencer Nam with ThinkEquity.

Just a -- I have a quick question on the overall -- the spine market opportunities and sort of what you guys are seeing from your competition? There seems to be a relatively positive view on the rest of the year despite some of the challenges. What are you guys seeing out there, and how do you feel your competitive position is relative to say last year or previous couple of years versus today?

Spencer, this is specifically relating to spine you're asking a question?

That's correct.

Yes, look, I think from our perspective, and again, we kind of always state this. We're still a small player so our broader view of the market isn't quite as strong as a lot of other players. That being said, some level of finding the plateau here, we're hoping that we're getting to some of that point.

That being said, pricing pressure and consolidation, things of that nature, we still see things taking place every day that still have some pressure what's on the overall business externally. We still like the business. Again, it's the largest market that we play in by any conceivable amount of measure. And it's one of those markets that obviously has the trends that play to the overall demographics. And so it's why we believe that it's still a very good market for us.

I think as we talked about on the previous questions, the biologics component to help differentiate us and bring metal as well as biologic solutions to customers is a strong component that we will accelerate. And versus last year, we were in the midst of a lot of integration work, and I think the integration went extremely well, but with any integration you have some level of disruption.

All of our teams now are fully integrated on our operations team, our marketing and sales groups, as well as, as we mentioned in the prepared comments, that we've begun cross-pollinating a vast majority of the products, as well as we have some new launches.

So when you take a look at the new launches, the MIS line, our deformity line, which really gives us, for our scoli season, we think a world-class solution that we haven't had in the past. You match up all those positives with some of the headwinds that are in the market, we still feel based on our size that we can do reasonably well.

That being said, I'd like to see the market be a little bit better than it is, and hopefully we'll see some changes here down the road.

Appreciate that. Just a quick question to Jack. You know you have the convertibles coming due in the next few months. How are you guys thinking about managing that process here?

Well, our plan all along, it doesn't require a ton of management. We have a $600 million line of credit, revolving credit facility with a big group of banks led by Bank of America. We put that in place a couple years ago. We amended it last year to get longer terms and better terms. And we're going to -- we're going to draw -- we're going to borrow on that revolving credit facility to repay the converts at the beginning of June.

And then what we might do in the way of longer-term capital of course remains to be seen, but we're very well positioned from a capital standpoint, and that's been the plan all along with our banks.

Great. That's helpful. Thanks very much guys.

Yes.

Moving on, a question from Argus Research from David Toung.

Good morning, David.

Hey, good morning. Thank you for taking my call, and I'll take another shot at the spine market. I think you've talked in the past about where your margins and your opportunities are versus the more -- some of the other larger players. You've obviously talked about some of the nice things about where your spine is headed, but where are your margins coming? Is it coming in where you would like it to be? And is it still at a point where it's a net contribution to the overall average?

So our gross margins in spine remain far above our corporate average, so start with that. I guess the second point is we are not immune from the pricing pressure that everybody else in the industry is reporting and have had comparable pricing pressure. So we -- on our spine hardware business.

So on the one hand, it's a very, very profitable business no matter how you look at it. On the other hand, it is under pricing pressure, and in that regard, we're the same as everybody.

Yes, I would just add that as part of our plans looking at the Company on ways to optimize, I've mentioned sourcing. Our opportunity as we gain scale in extremities, we gain scale in spine, to -- actually to be able to get better opportunities in cost of goods and products is something that we're getting to that point that we'll be able to go after, and that'll be part of our plans in the future as well as the market in spine has been somewhat volatile.

Great. Let me just take another question. Pete, you mentioned that you'd like to see the international business grow more. Where would you like it to be in terms of percentage of overall say three to five years down the road?

David, we haven't broken out -- obviously international is a big bucket of countries. When you take a look at our emerging market countries, we're expecting those to be in the high teens or above in many cases, and that's then combined with markets like Canada and Australia that we see which are much more mature markets running in I'll say more classic growth rates closer to what the United States is.

My biggest component really is taking a look at actually as we grow increasing our overall percentage of our sales outside the United States. And as I had mentioned, we're roughly 24%. Getting closer to 30% as a goal and a reasonable strategic planning horizon is something that we've talked about from a company standpoint. We've been successful in the US. We plan to be continuing successful in the US, but when you take a look at China, you look at India, the opportunities in Southeast Asia. Latin America for us we've had some very good starts. All of those markets have potential to be strong double-digit growers for us.

The only point that I'd caution you with, when we're going through these changes there's clearly going to be windows of time when we're going to have low growth because of specific structural changes we made to set up future growth. And we're in the midst of doing some of those things right now and feel pretty good about the plans that we have in place country by country.

All right, great. Well thanks for the update.

Thank you.

Jayson Bedford with Raymond James has our next question.

Hi, good morning. Thanks for taking --

Hey, Jayson.

Hey, Pete, and congrats on the progress. Just a couple quickies here. Price. Apologize if I missed it, but I thought you said year over year price was actually up. So if you'd just elaborate a little bit on that. I'm guessing it's a function of mix?

Yes, on a consolidated basis, price was up. And indeed it was up sort of in all of our segments except spine hardware, and it was flattish in the orthobiologics business. But everywhere else we got some benefit from price.

Okay.

So consolidated -- the consolidated impact was price was beneficial.

Okay. And Jack, is that expected to continue in and around that range?

Yes. We haven't seen any reason to think that either the favorable trends in our other businesses or the pressure in spine will alter their trajectories in the next couple of quarters.

Okay. And just on the remediation efforts at Plainsboro, I'm a little unclear. At what point will you be ready for the FDA to come in and re-inspect the facility? And then secondly, is the FDA currently looking at other facilities and do you feel comfortable that you're fine in the other facilities outside of Plainsboro?

Yes, Jason. Look, at Plainsboro, when it comes to the immediate observations, and I think we've talked about this in the past, we think we've done a very good job of covering all those. From our third-party experts looking at experience of what the Agency coming back looking -- we're really going through the complete quality system right now and making sure that everything is to the level that we want it to be and doing different enhancements and things, mainly because some of these are obviously important to implement for the specific facility, but if you think about we're opening up a new regenerative facility, we're going to be transferring all those new procedures and protocols -- those procedures and protocols into the new facility, we actually want to go through and inventory all of those and make sure that we know we have a very high bar set for when the FDA comes in to do that initial inspection as well.

So that's why some of the timing plays into this, and so when it comes to the warning letter, we believe that we've done a lot of the work right now. When it comes to a full comprehensive look, that's why we're really spending a lot more time and money really through the second quarter is really our kind of peak to get those things done.

The Agency, I wouldn't want to speculate when they want to -- when they want to come in, but as you know they can come in at any time, and we're acting accordingly that they could. But it has been a very important part of our journey as well, is we're also moving towards common quality components.

And so just like as we're evolving the CAPA structure within the given plant in 105 and we think we're going to have a best practice, then we want to roll some of that out to other facilities. And so we have been looking at other facilities, and we've had some tough audits that we've closed out and done well. We've actually had some strong audits where we've had no form 483 observations.

But the broader point though is as we learn things and see how the Agency is thinking about different areas, different part of the 820s then they might have just a few years ago, we're trying to proactively then take those ideas that we've learned and implement them in other plants, which is driving some of the other incremental expense in our other facilities that we talked about on this call and we've talked about in previous calls.

But I feel good about our progress. Our team is very focused and taking it very seriously. We've got a good quality group that we have in place, and quite frankly that we're building in additional to that. But really through second quarter, it's still a big chunk of the focus that we'll be putting in to get the warning letter work where we want it to be.

That's helpful, Pete. Thanks.

Yes.

And we do have one more question left in the queue. (Operator instructions.) We'll move on to Steven Lichtman with Oppenheimer.

Thank you. Hi guys.

Hi, Steven.

Really just one question. We talked a lot about the drivers in spine and extremities. Pete, I'm wondering what you think in terms of we'll get neuro reaccelerated except for aside from obviously the macro in Europe, what kind of product pipeline are you seeing that you think can drive the growth better here in the coming quarters and years?

If you take a look at -- for the actual quarter itself we were pleased with how US Neuro did overall. And I think our duraplasty and a lot of our flow products did well. Neuro critical care solutions did well for us. And really where the pressure came was primarily focused in Europe.

That being said, the team has been very focused on how to bring more products into the portfolio, and so I'm not going to call them all out, but we actually have in the back half of the year a handful of introductions in some of our legacy product lines that we think are going to bring some new and unique capabilities from everything from our Mayfield product line to bring in some new capabilities to allow how now with image-guided surgery different components can be added on to make it more productive to new tips and things in our tissue ablation world as well as monitoring products.

So we're really trying to get our product lines updated, which we think are going to stimulate some new growth. That's one part of it. The second part is with the largest really neurosurgery sales force in the United States and with the call points that we have, we've been spending a good chunk of time looking at licensing opportunities to bring some products in from some smaller companies that may not have our reach.

So those would really be the two areas. It does come down to new products. And we've got a great field team out there that really knows how to move some products with the right capabilities. To give you an example, we're actually tag-team selling our new LED headlamp, the neurosurgery sales channel with our instruments channel. And one of the reasons that LED headlamp is doing so well is how well those two work together. And I think it's a great example of our diversified model and the synergies that we can generate by selling into GPOs, selling into administration, but having a call point with the neurosurgeon who actually makes the decision, then sees their buddies in the lounge who might be in other disciplines who see this fabulous light and say where'd you get that at?

That's a great example of one and the type of products that we want to bring in to the fold to acclimate our differentiation and our capabilities as a Company.

Great. That's helpful. Thanks, Pete.

And we'll take our other question from Imron Zafar with Jefferies.

Hey. Good morning. Thanks a lot for taking my question. Just a quick one from me. Can you just give us your latest thinking in terms of M&A strategy? Is it -- is it fair to assume that near term you're still pretty full -- your hands are still pretty full with integration of Ascension and C-Spine or should we expect more acquisitions over the next four to six quarters, and without maybe showing your hand too much, what specific areas are the priorities? Is it international or is that more internal growth or is it US Spine? Can you just sort of give the latest thinking there? Thanks.

Sure. I would say several things. One, in our view the Ascension and C-Spine integrations are finished, and we have got those organizations working well and would be very receptive to the right transaction in either of those orthopedic spaces. So the question is the right transaction, of course, and as you know, or I'm sure have read, we're quite disciplined about how we go about this. So yes, that would be something we would do.

International, we've done over the years, although not recently, a half dozen or so acquisitions outside the United States, including we've acquired our distributors of course, but we've also done substantive device company acquisitions outside the United States. We would do so again.

So we think that there are a lot of opportunities and a lot of possibilities for that. As you know, it takes -- it takes six months to do a deal typically. Sometimes it takes four, sometimes it takes 24. But pipeline is a long one, so I wouldn't expect any announcements from us imminently or anything. But we're definitely active, we're definitely looking at opportunities.

Great. Thank you so much.

And we'll take our last question from Matt Miksic with Piper Jaffray.

Hi guys, just a quick followup, and I'm not sure if somebody asked it and I just missed it. But you had some expectations for the -- a kind of a moving target, the growth in lower extremities, foot and ankle, or however you look at it, heading into the year, heading into the quarter. Can you kind of remind me where you thought things were growing, maybe your latest thoughts on where you think that market's growing?

Well Matt, I don't know if we've called out some of the specifics, but I think we've talked in some previous discussions that forefoot and things where there's a lot more pressure in that area with competition and stuff. But one of the things I had mentioned, maybe before you jumped on, was the fact that our lower extremities, particularly in midfoot, hindfoot, in our core products as well as now with the complement of the Ascension products, has done quite well.

And what -- our belief is that we're getting into more doors than we might have in the past without -- without the Ascension product line, and then the combination of the Ascension and Integra lines together, we're getting into a lot of legacy Ascension doctors that hadn't seen our products. And the result of that is we're being able to actually grow our overall revenue base.

But from a standpoint of procedures growth and things of that nature, we still see it as quite healthy. We still see that market has lots of potential to grow, mainly tied to a lot of the demographic trends with obesity and also with aging population. We still see those lower extremity procedures being a strong part of our core. And that'll be an area that we're obviously looking to invest and bring more and more products into that portfolio.

So you're -- so the market -- so that's helpful. The market just in round numbers, understanding that you're doing well with the synergies and products that you've brought on board, but the market in total maybe -- is it right to think about it as a market that's growing in the upper single to low double digits, or the mid to upper single digits, or how would you frame the -- just to give us a sense of how the market might be performing? And if that's changed at all, if what you've seen in the quarter has changed that?

Yes, we think it's in the upper singles. There might be some components of it due to reimbursement and stuff that it might be in the low double, but probably more in the upper single. We haven't seen really any trends from Q4 to Q1 that would change anything.

I would state that in the first half of 2011 there was clearly stronger growth. We had spoken to, and I think many others did, that we didn't see as much of strength in say the second half of 2011. But since the second half of 2011 coming into 2012, we haven't really seen any major changes in procedural growth.

Great. Thanks so much.

Okay.

It looks like we have no further questions at this time.

Thank you for joining the call, and we'll look forward to speaking to you next quarter.

And ladies and gentlemen, that does conclude today's conference. We thank you for your participation. Have a good day.