Integra Lifesciences Holdings Corp (IART) 2012 Q2 法說會逐字稿

(Operator Instructions). Good day, everyone. Welcome to the Integra LifeSciences, second quarter, 2012 conference call. As a reminder, today's call is being recorded. At this time I would like to turn the call over to Ms. Angela Steinway, Head of Investor Relations, please go ahead.

Good morning, and thank you for joining us for the Integra LifeSciences, second 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 second quarter. Certain statements made during this call are forward-looking and actual results may differ materially from those projected in any forward looking statements.

Additional information concerning factors that could cause results to differ is contained in our periodic report filed with the S.E.C. The forward-looking statements are made only as of the date here of, and the Company undertakes no obligation to update or revise forward-looking statements.

Certain Non-GAAP financial measures are disclosed in this presentation, a reconciliation of these Non-GAAP financial measures is available in the Investor Section of our website at www.Integralife.com.

As we aim to keep our 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. As you saw in this mornings Press Release, we had a strong quarter on the top and bottom line, which came in above our expectations. As pleased as we are with our performance this quarter, we are concerned about macro uncertainties and have further work to do related to our systems and quality improvements.

Both external and internal considerations influence our revised guidance for the balance of 2012, which we will discuss in more detail later in the call. U.S. Orthopedic led the growth. U.S. extremities grew 38% in the period, with significant contributions from regenerative medicine, which grew almost 20%. New product additions also contributed to growth in the quarter.

U.S. Spine and other, which includes our Spine Hardware, OrthoBiologics, and Private Label products increased approximately 13%. The increase was primarily from the addition of new product launches and strong growth in OrthoBiologics. As we saw in the first quarter, the Spine Hardware market remains challenging both in price and volume. OrthoBiologic's products Evo3 and Mozaic, continue to see high demand through both our existing base and newly added distributors.

This demand drove growth in excess of 20% for OrthoBiologic's in Q2. Private label decreased, verses the prior year period. U.S. Neuro Surgery revenue increased 2.4% over the second quarter of 2011.

Continued demand for our market leading Duraplasty products as well as strength in our CUSA and Cranial Stabilization product lines drove most of the increase. U.S. Instruments revenues increased 9%, verses prior year. Sales grew in both the Alternate Site and Acute Settings.

The Acute Care business accelerated in Q2, in part due to some large deals we do not expect to repeat in the second half. Demand remains strong for our new (inaudible) L.E.D. surgical head lamp. In the alternate site channel, end user sales of our products continue to grow well, in line with our expectations.

Our distributors have largely achieved their lower inventory targets and have returned to normal buying patterns. International revenue is up 2% constant currency, but down 4% on a reported basis. Verses the prior year. In line with our expectations, Europe was up 1% constant currency, down about 9.5% on a reported bases.

The improvement in Europe is primarily driven by Neurosurgery, due to increased selling efforts in our direct markets. The rest of the world grew about 1% on a reported basis and to 2% constant currency, driven by growth in some Asian markets, and offset by declines in Latin America, the decline in Latin America is mainly due to decline in Dental Instruments in some markets and a strong comparison resulting from the launch of our Spine Hardware products in Q2 last 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, which after I will bring you up to date on our quality system improvements and the remediation of regenerative medicine facility.

Thank you, Pete. I am going to talk about the top line and our decisions on guidance, and review the PNL in a bit more detail. We had a stronger quarter than we expected.

All our businesses performed well. As a result our revenues exceeded the high end of our expectations, growing 10% on a constant currency basis. We continue to improve execution in our supply chain, and took the opportunity of our over performance on the top line to make faster progress against our initiatives.

Looking ahead to the full year, we are raising 2012 guidance for revenues but not earnings, to reflect a combination of the successful first half results, an increase in our GAAP and adjusted tax rates, and the risk that we must manage during the remainder of the year. The increase in our expectations with the top line balances the good start to the year with our growing concern that external economic considerations will make for a tougher second half than we originally planned for.

In addition, as Pete will discuss in a moment, it has been our consistent message that we still have work to do with our quality systems, have not yet revolved all of the outstanding issues with our regenerative medicine facility, and expect to accelerate other initiatives if better revenue performance affords us that opportunity.

We believe this is a prudent approach, and that we will be able to meet our targets. 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 second quarter, the GAAP gross margin percentage of 62.8% improved over both the prior year period and the first quarter of this year.

Reflecting improved sales mix, and fundamental performance in manufacturing operations offset by higher expenses for quality systems improvements in the plants. Higher manufacturing costs include period expenses associated with the remediation of our Plainsboro Regenerative Medicine Facility and quality systems improvements in other facilities.

We calculated adjusted gross margin by backing out the items to cost of goods sold, detailed in Column A of the adjustments table of the Press Release. During the second quarter our adjusted gross margin of 65.3% was up nearly half a point over the comparable measure in the second quarter of 2011, not withstanding higher department spending to improve quality systems in locations other than Plainsboro.

Compared to the first quarter of 2012, the adjusted gross margin improved slightly driven by sales mix. For 2012, we expect R&D spending to remain between 6% and 7% of revenues. In the second quarter R&D expenses were up about 3% verses the prior year, but declined to 6.2% of sales.

Increases in spending on Extremities and Spine were offset by reductions in other areas. For 2012, we expect reported SG&A to be in the range of 44%, to 45% of revenues and after adjustments to remain at last year's level around 42%. In the second quarter, GAAP SG&A was essentially flat verses a year ago, declining nearly 4 points to 46% of sales.

GNA decline compared to 2011, which included an equity grant to our prior C.E.O. that did not recur in the current period. Sales and marketing expense increased over 2011, mainly because of the addition of C Spine and Ascension. SG&A adjusted for about $5.7 million with special charges as detailed in our Press Release. Which 43% of revenues up verses the prior year.

Selling expense in particular increased over the prior year because a higher proportion of our U.S. sales were through distributors. In the second quarter our adjusted EBITDA margin was 19.3%. Down slightly from 19.6%, the prior year period.

For 2012, we suggest modeling approximately $27 million in depreciation expense, and $25 million in intangible amortization, $6.5 million of which will be recorded in costs. Interest expense, net of income, was $6.7 million. We recorded $200,000 of other income during the second quarter.

In June, we repaid our $165 million convertible notes on maturity. Using a combination of cash on hand, and borrowings under our credit facility. We finished the quarter with $322 million in borrowing under our credit facility, and $194 million reported for our senior convertible notes due in 2016. We recommend modeling approximately $5.5 million per quarter of interest expense during the second half of 2012.

These amounts include the non cash portion of our interest expense. We suggest modeling $3.5 million per quarter of cash interest expense in the second half. We ended the second quarter with an effective tax rate of 26.4%.

For 2012, we expect a reported tax rate to be 21.3% and our adjusted tax rate to be 30.2%. There these are slight increases from our previous guidance. Our adjusted tax rate assumes the reinstatement of R&D tax credit in the fourth quarter, but our GAAP rate does not. We generated $2.3 million in operating cash flow during the second quarter.

As we discussed when we gave guidance for the year, about $30 million of the convertible notes repayment in June ran through operating cash flow as accreted interest. Taking that payment into account, the underlying business generated considerable cash. Capital expenditures in the quarter were about $14 million.

We expect to spend $55 million to $65 million on capital expenditures this year, which reflects our new estimates for the timing of our capital projects. Not withstanding the strong performance in the first half, we do not expect any fundamental change in the growth expectations for the segments. For the full year 2012, we expect U.S. Neurosurgery revenues to increase low to mid to single digits.

U.S. Instrument revenues to increase low to mid single digits. U.S. Extremities revenues to increase high teens to low 20's. U.S. Spine and other revenues to increase mid to high single digits.

And International revenues to be flat to up low single digits, with a flat to declining business in Europe, essentially offsetting growth else where in the world. Finally, we promised on our April call that we would give a first estimate of the impact of the Medical Device Tax, on our 2013 results. For the caveat of the regulations are not final, we expect the gross effect of the tax to be approximately $13 million.

That number does not include offsetting Federal Corporate tax benefits and tax itself, of which we will have more to say when we give our guidance for 2013 on our fourth quarter call. We are still considering how we will reflect the tax on our financial statements, but expect to follow the practices of the large cap medical device companies. Now I will hand the call over to Pete.

Thank you, Jack. We are certainly pleased with our performance in the second quarter. That said, we have much to do to reach our goals in 2012.

We have set three major goals for the Company. The first goal is to improve execution on fundamentals including in our operational areas. We have cleared a large portion of our Regenerative Medicine back order, but we still have catch up work to do, especially in our Private Label business.

More critically, we still have work to do to remediate the issues the FDA has raised in our Plainsboro Facility, the FDA is inspecting our Plainsboro Facility as we speak. While we do not know the results of the inspection, we are both pleased with the progress we have made, and we believe that we still have more work to do before the FDA will clear the issues raised in then warning letter.

We will not speculate further about the results of the inspection or otherwise characterize it until the FDA has completed its work. Resolving the warning letter and improving our quality systems in our other facilities remain as top priority. Hence, we are aggressively applying both financial and human resources towards that end.

While we believe our incremental remediation expenses peaked in the first half, we will continue to put significant dollars towards improving our quality systems until we are satisfied that they are sufficiently robust. 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 streamline footprint and common systems. We kicked off this journey earlier this year, at our Analyst Day Meeting, which we will have scheduled now for October 24th, in connection with the North American Spine Society Meeting in Dallas, Texas, we will discuss our long term plans. Which will include our efforts to streamline our operations, processes and activities in more detail.

Finally, we have also been hard at work implements a new global ERP system. And expect our first field implementation later this year. Each of these initiatives will contribute to optimizing the Company.

The third goal is to accelerate growth. The second quarters results are a nice step in that direction. We look forward to the new product launchers, the growth of our sales and distribution organization, and especially in Orthopedics in and outside the United States.

And also, sensible and strategically important acquisitions to drive growth in the future. Before I conclude, we are pleased to welcome Bob Davis to Integra as the president of U.S. Neuro DivisionBob is a strong leader in Business Manager with more than 25 years of experience in the Global Healthcare Industry.

Most recently, Bob was the General Manager for the Global Anesthesia and Critical Care Business at Baxter Health Care. Prior to Baxter, Bob held various Leadership positions at GE Healthcare and Hewlett Packard. Chris Thatcher, who many of you know, has been appointed President of Corporate Initiatives, focusing on key strategies aligning with our organizational commitments.

Now, we will be happy to answer your questions in an effort to accommodate a large number of requests, please do limit yourself to one question, one follow up. You may rejoin the que, if you have additional questions. Operator, you may now open the call to our participants.

(Operator Instructions). We will take out first, Matt Miksic, Piper Jaffray.

Good morning, Matt. Hello?

Mr.Miksic , your line is open, please go ahead. (Operator Instructions). And hearing no response, we will go to Chris Pasquale, JPMorgan.

Thanks. Can you hear me okay?

Yes.

Good morning, Chris.

So I am just trying to understand some of the moving pieces within Ortho, extremities was very strong this quarter, but spine another took a little bit of step back. Sounds like that wasn't due to biologics. So I guess the first question is what is going on with US spine hardware? And what can you tell us about the success you are having on the extremity side?

Sure. I will take a shot at that, and then Pete may fill in and expand and elaborate as he sees fit. So the U.S. spine and other segment, just so everyone has it in mind, has really two pieces to it.

Our spine and OrthoBiologic business which is essentially managed centrally through overlapping distributor networks, and our private label business which is heavily oriented to orthopedics, as well. As we said the private label business was down. So that had an impact on that segment's results.

The OrthoBiologic numbers which are obviously do not include any impact of any acquisition, we are up very -- up strongly again. I don't know how many quarters in a row this is, but they have been doing very well. Spine hardware was actually pretty encouraging for us.

We faced the same pricing headwinds that are reported by the other the players. We are not going to go tee the park, cause as we really said, we really fully integrated C spine. When we file our queue in the next few days, you will see the pro-forma numbers.

You guys should go back and take a look at those. If you pro-forma it all back, using the methodology required in the queue, you will see that we had about a 1% gain, small gain in spine hardware fundamentally. So that is very encouraging for us. We have actually managed to get the whole thing running pretty well, and we are pretty encouraged by it.

Chris, I would just add that to Jack's point, in extremities the regenerative products of skin, and our nerve products continue to do well. Obviously the new ascension products, not only the effect of just ascension by itself, but those products coupled with our portfolio, created some new energy in our total portfolioSo that is driving some of our continued growth in our hardware on the extremities side.

As Jack said in the spine, obviously the OrthoBiologics continues to do well. In spine outside of some good execution by the commercial team, we also have some new launches, new scoliosis system, the Daytona system which did quite well within the quarter, and we see that continuing. We have a minimally invasive system out that is doing quite well. So compliment our good commercial execution. And quite frankly, on going and tough market with some new products is kind of how we see it.

Thanks, that is helpful. Just secondly, can you comment on how much of an impact those large orders you cited within instruments had this quarter? And what is the right growth rate for that business now it seems like things are normalizing a bit?

Chris, we are not going to specifically quantify the level, but the fact is that we had a stronger first half in instruments, primarily driven by the acute care business with some bigger orderswe do not see recurring the second half. So we expect to get back to our normal kind of run rate levels which is more in the lower single-digit growth areas. So to Jack's point with the stronger first halve, lower second half, kind of in the mid growth range for the year is how we see the growth continuing. Offsite, we believe at this point now as I mentioned in my prepared comments, that our distributors are really at their normalized level, which means at the lower carrying levels, and we believe they are going to continue to order at that rate for the foreseeable future.

Great, thanks guys, congrats on a good quarter.

Thank you.

(Operator Instructions). At this time we will hear from Spencer Nam with ThinkEquity.

Thank you for taking my questions. So just a couple of questions on the one on the revenue line and then maybe a quick question on the guidance on the earnings. In terms of revenues I was very encouraged by the instrument business growing quite a bit in second quarter here.

You guys obviously are bullish enough to raise the numbers. Just curious how you see the second half. Where do you get the confidence there? Is this something that you are seeing? Are we seeing some pent up demand playing out here? How should we think about the next few months as we -- in the context of who you have just done the second quarter? .

Spencer, thanks for the question. From an instrument standpoint we have had a good first half across the board for the most part. As we mentioned in the comments, challenges in Europe just the whole economic uncertainty, even in the United States, we tend to be a little bit more cautious.

Our guidance really if you take a look at our increase we had in the first half , and we fundamentally do not parlay that forward that still relates to our increase that we have placed for the second half. And part of the nonraising on the EPS side as well is specifically tied to we have other expenses and things that we plan on spending additional funds on as we already communicated in previous calls. And Jack, you may want to talk a little bit more specifically about the revenue guidance.

So Spencer, just to clarify, were you asking about the consolidated revenue guidance, or about the instrument guidance?

I was just trying to -- yeah, trying to get a -- the view on both in terms of the consolidated as well as the instrument side. Sort of what kind of thought processes or -- you guys -- in your numbers how you guys have thought about the next six months plus outlook sort of where you guys are coming out with based on your projections kind of how the guidance reflects that I guess is what I am trying to ask.

Sure. So on the instrument side, specifically just to clarify it. We did say that because of the strong performance in the second quarter we expect the 2012 growth to be instrument business to now be low to med single digits. That is a little bit of a tweak up in the language from the first quarter, but that reflects the second quarter performance, where we had a couple of these big orders. We do not expect them to repeat.

Do not go extending the second quarter growth rate for instruments through the rest of the year. You should listen to our guidance for the full year, low to midsingle digits for the instruments division. Now, as far as the entire Company goes, we have had a good half.

In the first quarter, we came in at the top of our guidance range and that reflected our ability to execute in March as we had forecasted when we talked in February. The second quarter, again, was quite strong. So on the one hand, it is a strong first half.

And we give annual guidance. So if we did not give you any increase it would look like we were taking down the back half, and we do not want to take down the back half.

On the other hand, we do not want to raise the back half, because even though we are doing well in our businesses, and we have a bunch of momentum, the truth of the matter is we see a lot of uncertainty out there. I think every other device company is talking about the same things we are seeing. So that is the sort of message we are sending. It is a small raisin meant to reflect our total performance for the year, not new bullishness about the back half.

Okay. That is very helpful Jack. Just to follow up on the EPS. guidance, this may have is been just me, but my impression when Peter came in as the new C.E.O was that you guys may go through some review of your current cost structure and take a hard look at some of the operational issues and potentially try to get some of that improved or tweaked to be more efficient and so forth.

I was curious whether that -- kind of where that process is at this point, and if there is going to be any leverage from that when would we see something like thatat the bottom line?

So we are developing the plans, and as you probably heard on the scripted portion of the call, we are going to talk a lot about that at our analyst meeting in the fall, which is now scheduled for October 24th in Dallas, in connection with the mass meeting.

Yes.

So we are going to do our analyst day, and we will have sort of a fairly I would think developed presentation of what we plan to do at the time. We are still in the middle of planning for that. So we are not suggesting that long term restructuring benefits are flowing through our current results. We are working on it. In fact we are spending money as you can see, to develop what our -- what we plan to do, and to get working on some of these programs now.

So that is the main point there. Now, as far as the EPS. guidance for the year is concerned, yes, we did raise the revenue guidance for the year a little bit.

We did not raise the earnings guidance, and the main reason we did not raise the earnings guidance, along with the revenue guidance, is number one, we do expect a slightly higher tax rate for the year. So that eats up some of the gain you would get. And secondly, we have concluded that we are going to spend a little bit more money in the back half on initiatives, quality systems, and a number of other things, and so while we are fairly optimistic about the year and we are happy how it has progressed so far, we do not want to raise the earnings guidance in the back half.

Great, thanks very much. Very helpful.

Next we will hear from David Lewis, with Morgan Stanley.

Hello.

Good morning David.

This is actually John in for David.

Hi, John.

I had a quick question on the integration for ascension. We kind of saw US extreme lies perform a little better than we expected it to, and was wondering if this was more related to converse energies from the acquisition fading and maybe even them turning into some synergies from cross selling.

Well, John, we communicated I think we talked even last call, that the ascension integration fundamentally was completed really at the end of Q1. We feel good about the progress, and as I just commented earlier, one of the benefits that we are getting is new products into the pipeline. Are really starting to actually generate some good synergies with our legacy products as well.

Also, keep in mind, that we have got the new shoulder product into the portfolio, which we are starting to see some nice lift in Q2 that we did not have the same type of growth in Q1, primarily because if you remember, we are just really launching this product line. That accentuate with our biologics portfolio which continues to be strong.

And then just a quick follow up. Gross margins I guess seemed a bit stronger than we would have expected and SG&A was probably a little higher as well. Is this something we should expect carrying forward into the remainder of the year?

Well, we have had the gross margins really coming down to a nice shift with mix. We have been talking about that mix shift primarily tied to a lot of our orthopedics growth. So we are starting to see some of that come through the overall P&L. Jack, I do not know if you want to comment any further.

Yes, I would pay some attention to the guidance on gross margin. We don't necessarily expect the strong results on gross margin in Q2 to extend in a linear way through the second half of the year.

Our gross margins always moved around a little bit, and it has always been a mistake to try and draw a granular trend from any one quarter to the next. We do have some variances that are in inventory that will come out in the back half that will have a negative impact on gross margin to some degree, for instance. But it is highly dependent on the mix, and we do not know exactly what the mix of products that will sell in the back half will be. If you set a stick to our guidance as a way of thinking about it, it will probably drive you to the closest result we can come up with.

All right, thank you very much.

And your SG&A question. Yes, SG&A spending was a little higher than expected partly because the mix of business in the Company continues to shift towards orthopedics. That has higher selling expenses associated. And partly because we are continuing to spend money where we need to on things like quality systems and other initiatives, and we will do so when we have the P&L capacity to make it happen. We are not being tight on that front, because we need to become excellent in that area.

Got you. Thank you, that was very helpful.

We have Matt Miksic with Piper Jaffray.

Good morning, Matt.

And Mr. Miksic, (Operator Instructions). No response, we will move on to Amit Hazan.

I am here. I am good, and I am here. So I question on neuro.

The USneuro looks like it is tracking more to the low end of your range. Can you talk a little bit about USneuro. And also can you clarify your overseas neuro comment. I believe you said Europe nuero was performing pretty well because of some changes in selling efforts there. Can you talk a little bit more about the overseas neuro as well.

Yes, Amit from a USstandpoint, it was a solid quarter. It was a little bit due to timing of what deals and things are coming through played a little bit into where we are.

Fundamentally we feel pretty good about where we ultimately ended up from a deal structure in particular what our flow products look like , and as I had mentioned in the comment CUSAs did wellWe don't see really any major declines or issues with that level of capital purchases. And we also have our cranial positioning products, the stabilization products that actually did well during the period. I have communicated in previous calls we do have product launches and stuff coming in the second half.

So we are counting on some of those products to pick up a little bit of the growth rate for our full year projections. So that is kind of the US From an OUSstandpoint, particularly in Europe, it is obviously a tough market, all across the board.

And since neuro is a larger part of our business, we typically feel it more. That being said, my comments were about distribution, since (inaudible) Nettie has taken over running our overall international business a little over a year ago, we have had a major focus on really optimizing our sales effectiveness and performance.

Very is focused country plans performance management, we have really looked at our distribution structure, our direct and both indirectand implement a lot of changes really at the end of last year, and we think now we are starting to see the benefit of really just selling stronger capabilities in certain countries that a lot of our neuroproducts are strong, and many of these at this point are the Western Europe markets.

So I just want to clarify, so you expect that to continue going forward then? It sounds like on the overseas side?

Yes. I would expect better execution to continue, in a world of uncertainty and challenges in Europe. I guess that is kind of how I would place the caveat. So clearly from our comp from previous years we are doing better because we have better people on the ground executing and delivering. But in a market that is clearly even softer than it was last year.

Okay, and then my follow up was on foot and ankle. Can you just review for us the competitive landscape especially in 4-foot, and just give us the performance on mid and hind, thanks.

Yes, I will comment a little bit about the market, and then Jack will comment a little bit about just some of our overall performance that way. The market continues to be competitive. There is more players obviously coming into the market place. We see, obviously, now verses a few years ago, increase competition clearly across the board. That definitely translates into some more price pressure than we had seen in previous years.

All that being said, the addition of new products that actually make the procedures obviously more effective and increased outcomes for patients as well as our easier to use, either in instrumentation, or actually in the implants clearly gives us some differentiation. We feel good about the timing and the integration of ascension. To my previous point, not only in the upper extremities where the ascension product line brought some really nice products in, but also in lower. Because now we have a more extensive product line, you have more competition.

If you have everything that is needed you can be a little more captive with certain positions on your discussions. So we are definitely seeing more focus there. A lot of the new players, a lot of the bigger guys obviously coming into the space, but what we have done as well on top of the new products is we have really spent a lot of time on sales force effectiveness, with training and development, really taking a look at our distribution structure.

We have optimized many of our territories into a much more focused area to be more competitive, and feel really good about our overall position. Jack, you may want to comment at a high level on some of the extremity performance.

Yes. I am not sure there is a whole lot to add to that. Our extremities grew, had a really good quarter.

I would make an observation, that it also grew substantially over Q1. And obviously there is no acquisition noise in Q2 verses Q1. So we feel really good about our extremities business in the main. I am not sure that -- it is the case that there is more competition in the foot and ankle hardware, as in other things. We think our guys are meeting that competition.

They are also scratching where it itches and selling a lot of the stuff that we have in our bag that other people do not have. And that is showing up in the results of this segment. So that is how we look at it.

Did legacy foot and ankle grow in the quarter?

Yes.

Okay. All right, thank you.

Our next question will come from Jayson Bedford, with Raymond James.

Hi, Jayson.

Good morning. Hey, Pete. Congrats on the progress guys.

Thank you.

I guess just first on gross margin, is pretty solid here for the second straight quarter about 65%, the full year guide, 64% to 65%. It looks like the start of a trend here. Can you give us an idea and what hurts gross margin in the second half of the year?

Sure. So Jayson, you have been following us a long time, and this is probably a conversation we have had before. My view, based on history, is that it is never wise to come up with quarter to quarter trends and stare at them. We have a lot of things going on.

We had a nice quarter from a gross margin stand point. We had good sales mix. We sold a lot of high margin stuff. You saw the regenerative medicine products and extremities did really well, all good stuff. So we are very pleased with it.

The reason why we did not raise the guidance for the full year though, is number one, we are continuing to do a bunch of work in our facilities, that we are having dependent spend in the facilities, and we are going to continue to do that until we feel there really coming like tops. That is point one. Point two is there are variances in inventory, we already know about them, that will be popping out in the back half of the year, and that will be a little bit of a headwind on gross margin. I do not want to get into the granularity of that, because it depends again on what products we actually do end up selling, but that will have some impact.

Do you feel more confident in your ability to forecast gross margin today verses say year ago.

Yes. Yes. The manufacturing -- number one, we have substantially upgraded frankly our FP&A team working in that area. Number two, we have -- we are getting more -- slowly but surely we are getting more consistent month by month performance out of our plants and our planning group, and it is not a straight line, but it is an improvement, and it is just getting better for us.

I would add, Jayson to Jack's comments about obviously everything from our S&LP processes to our forecasting it has been a big focus area. Obviously since the end of last yearand we think that improvement is increasing. Just to echo Jack's points we benefited from the mix.

We are spending against the quality initiatives which we will continue really through this year. We are making some good progress, and some of this is less about spend on actually trying to correct things and more around spend to create commonality and simplify. But the spend is still roughly at the same level. And we have talked about the initiatives that we are going to talk about more really at our investor day. A lot of things were already starting to put money in against, and some of those changes have some direct effects obviously to gross margin.

Okay, that is helpful. And just quickly as a follow up, I was a little unclear, are you cleared of your back order situation, both in the USor OUS or are you still in some sort of backorder?

Yeah, I mean we are fundamentally for our major product lines out of backorder, but we still have selective backorders across the globe. We feel very comfortable that we will be able to alleviate those here in the next few months. Now, that is backorders. But we still will not be to the same level of carry in inventory that we want to be at in those products.

Quite frankly, the added growth we had in the first half, we are very excited about, that is great, but also have more of a challenge on alleviating the back order, because we also had increased sales in a lot of those selective products.

Thank you.

Sure.

(Operator Instructions). Next is David Toung Argus research.

David, good morning.

Good morning and congrats on bringing another person executive from Chicago to New Jersey. Looking at your revenue guidance, if you were too take out currency, you had been guiding 6% to 8% at currency. Given that the currency headwinds, what would the new revenue guidance look like ex-currency?

What would the new revenue guidance look like ex-currency? So the revenue guidance we gave assumes current exchange rates. So that is a way to think about it for the rest of the year.

If exchange rates stay the same, we expect to do between $828 million, and $838 million for the year. Now, there are baked in year-over-year currency differences. Obviously, the euro in Q3 a year ago, the euro was something like $0.18, $0.19, $0.20 more valuable than it is today.

So when we get to reporting Q3, we will tell you about the year-over-year currency effects. However they unfold ultimately. But the guidance we are giving for the year assumes current exchange rates. Is that does that make sense?

Well, you had a 9% reported and a 10% ex-currency for the quarter. So if you were able to look forward at the end of the year, and take that -- put that currency, what would the new guidance look like in terms of --

The year-over-year growth rate, would be on the order of 6.5%, to 8.5% constant currency if currency stays the way it is today.

Okay.

Something like that.

All right. I think that's --

That was on the fly math that we were doing here to get you that answer.

I think that is fair. Are there any other benefits from the spending that you are doing, optimization, Peter as you said, commonality to simplify in terms of either cost savings, or benefits that you may not see this year, but further down the road that you are spending on?

Well, ultimately, David that is our plan. The focus that we have got is again around the three strategic points for the Company about improving overall execution, optimizing the Company, and accelerating growth. Just the focus on execution goes much deeper than obviously making sure that we deliver our numbers.

It is about creating a deeper culture in the Company, with training and development, so that we can take on bigger things, do things more effectively, do things more effectively with less systems and less people involved to be able to accomplish that. That is part of the whole simplification piece. And in Dallas, that is part of what our plans are to give you a view into the different components of what we are working on, the rough benefits of how we see those manifesting themselves.

And it also then how we see the company evolving because of that. So, the short answer is yes. But like many of these items as you start these initiatives, they take money to start. They tend to have some level of lumpiness in the benefits meaning you sometimes take a step back to get two forward.

And how you orchestrate those together is what we clearly are looking at and integrating in. We are quite pleased with how the organization is embracing and adapting kind of these approaches, and we are quite happy with the results we have had to date.

Great, thank you.

And next question is Nathan Cali with Noble Financial.

Thanks for taking -- good morning. Thank you for taking the questions this morning. So you mentioned significant growth of 20% in regenerative medicine. What particular product line led that growth if that is available?

So in our extremities business, the portion of that just again to remind everyone, that half of our business unlike a lot of the other extremities players is regenerative products and many are traditional metal implants. In that portfolio our skin derivative based products are well as nerve repair like products are the two main categories and they drove the majority of the growth.

Okay. Thanks and then just one quick follow up question. Would you look to do any additions in that area on the regenerative side? Either through acquisition or new product lines?

So regenerative medicine is clearly one of our wheel houses. It is one of the core strengths of the Company. We are clearly been focused internally on our own R&D and prioritizing items towards that area. So that is an area you will see, and we are going to be focusing on growth in that area to bring out new products. And clearly from an acquisition standpoint, either in partnering, licensing, as well as straight out acquisitions, yes, I would say in the future that you will hear more from us from that area.

Thanks a lot, thanks for taking the questions today.

Yes.

And our next question will come from Steven Lickman with Oppenheimer and Company.

Hi guys. It is Rosemary in for Steve. Can you hear me okay?

Yes, Rosemary.

Thanks for taking my questions. Can you talk more to the latest initiatives on the ground to accelerate spine growth?

Sure. First of all, the whole back drop is that we have not really seen a significant change in the spine market. Meaning that the price challenge is still - - we see them consistent -- persisting. And we also see a lot of the same challenges in consolidation items that are taking place that allow the hospitals meaning how people are actually buying.

That being said, internal to Integra with the integration of Cspine which was completed a few quarters ago, we have got a very strong commercial team, the team has been quite successful, really selling the story of what Integra spine is all about, and where we are headed. So we have had a positive impact of bringing new distributors into the fold.

When you take a look at our world leading OrthoBiologics and the growth that has had, that is also a very nice component of having more distributors come in, more distributors being able to get our products out to a further reach has been a big part of it. The second part I mentioned earlier here in the Q & A which is new products. So we have had a nice unfolding of new products inner body devices that have some novel capabilities to actually reduce steps and reduce limit uncertainty for the clinician.

The deformity product, the fact is we have not really had a full deformity system, and as you probably know, the deformity season really happens around the December holiday break and really in the summer when a lot of kids are out of school. We started this one with a strong set, and a good chunk of our growth from spine hardware really came from some of those new products. That all said, any growth we get, you have to deal with 3% to 5% price headwind pretty much each quarter. So we feel good about the focus in the spirit of our overall strategy, execution is the focus within spine both in commercial as well as getting new products out the door.

Okay that's helpful. And just following up on Amit's question. I was hoping to get some more color on your European outlook in general. It does not sound like your macro outlook for Europe is any better or worse than it was previously.

Yes, I will comment, and then Jack if you want to add further color. We have been very transparent from the beginning of the year saying that our plans really contemplated this year a tough Europe. And obviously we were hoping that it would not be a tough Europe, but it is. And we had planned for that, that coupled with really realignments in our European organization which took place at the end of last year helped position us to kind of deal well with some tough markets that are there.

We also have been bringing so new products into the market. So our spine products, new extremity products primarily tied with dissension, so that has given us some new reach, and really some new products and energy, with our sales force and actually with customers, but that all being said, we do not have any crystal ball that says that we think Europe is going to get any significantly better in the second half. From what everyone else has been saying about the feelings on Europe, we are probably in the same boat relative to the ongoing outlook. And so our focus is really being able to deliver execution against RTF customers, being able to bring the new products in that we had planned and actually launch them on time which we feel good about. I do not know if you want to add anymore color.

Look, we were up 1% constant currency. And judging from the landscape in the industry that is actually pretty good. As Pete said, our plan -- not that one plan would be down -- we pretty much forecast that we would be down in Europe for the year. And so the fact that we are up a hair is not a bad place to be.

No definitely. Thanks a lot for taking my questions.

You're welcome, Rosemary.

And we have Matt Miksic with Piper Jaffray.

Matt, are you there?

I am. Sorry about that before.

That is all right. We are glad to hear you.

I could hear you for some reason, I guess you could not hear me. That has happened twice here today. Unfortunately for us.

So just want to follow up on spine, and one on some of the work that you are doing sort of in the backoffice systems, functions,shared services kind of work. On the spine business your annualizing the Cspine acquisition currently? And I am just wondering as you head into the back half of the year, and I apologize if this question came up, spine and OrthoBiologics if that is the way you talk about it. Do we see some moderation there? What should we expect from that line as you sort of get past the annualizing of Cspine?

Well, so this is Jack. It all sort of depends on what you are comparing it to. But early in the call, and I do not know whether you were on at that stage or not. We got the question about spine, that segment. And we said on the call, private label was down. We said on the call that OrthoBiologics was up north of 20%.That was a strong performance there and that is part of the segment.

And we did not give a sort of organic growth number for spine hardware, because we have integrated the lines and as always we have taken to point of view that we do not want to change the behavior of our people, because if we are talking about one product line verses another. But what I did say is that if you go pro-forma the performance of the business, and look at what Cspine did last year before we bought them, and then after bought them, and add that ends, our spine hardware was actually up low single digits. And that in the face - - we said 1%. So that is in the face of pricing pressure. Same pricing pressure everyone else has.

So we feel like we are actually increasing procedure volume and moving up in spine hardware now. Which is a nice place to be and something of an improvement all in over the last couple of quarters. So that is a way to look at that business. When we fully elapse Cspine the reported growth rate for that segment will decline a little bit, because we will have fully elapped it.

Okay. But decline down year-over-year, or not grow as fast. Just to be clear.

Not grow as fast. The reported growth for that segment will not be quite as fast.

Yes.

Because we have fully elapped the acquisition.

That is helpful Jack.

Jack commented earlier, we are expecting this year spine to be mid to high single digits with the combination of the two pieces.

So consolidation of those taken and it sounds like that is behind you, and in a flat to down spine market, you are growing faster than the market which is terrific. The other question I had was either for Jack or for Pete about the spend. And you talked a little bit about it earlier on the call, but I am not sure if you quantified the amount and the duration of those projects. If you can maybe provide some color.

So we did not. We did not quantify it, and I do not think we are going to per se because we ourselves want to make sure that the work gets done. And we are going to basically fund it as necessary.

That said, there are just to remind everyone on the call, our excess quality spend, excess over baseline to get where we think we need to go is in two pieces. The piece for the regenerative medicine plant is excluded from our adjusted number, and you can go to the back of the press release, and there is a forecasting effect of what that will be for the balance of the year. So we lay that out. The excess spend elsewhere in the Company is -- we have said typically running hundreds of thousands of dollars a quarter.

We have not said a lot. It is going to go up and down, and it is more than that one quarter than the net. I am getting corrected. It is over $1 million a quarter, and it is not excluded from the adjusted numbers. So that is actually rolling through the P&L, and we will get relief from that as we complete projects around the Company.

That is very helpful, thanks.

(Operator Instructions). Next we will hear from Dale Doodle with the Boston Company.

Good morning.

Just wanted to - - trying to interpreted your comments about Plainsboro and the fact that you are still doing work to address the FDA letter, but the FDA is inspecting the plant. I would have expected they would have been in there after the fact. Let me just start there.

Well, you heard my opening comments the agency is currently in the facility. At a high level, I do not want to really kind of speculate or comment broadly. But I think the point is that we have made very good progress in the facility. We have commented on previous calls about the structural updates and the changes that we have made.

The processes and the overall controls, and really, our ability to get the products ramp back up and be able to manage our backlog. That being said, we real have not had all the items on the warning letter closed out. Really at the start of the inspection, the FDA has obviously been aware of this. They get monthly updates from us. So if you had asked me would you see the warning letter getting left out of the inspection? I would say no.

In fact, we have had open items that we have been working on. I would expect we will get additional comments or observations coming back out of the audit. But we feel good about our overall progress. We have made some good trends forward, and we will be looking forward for the closeout, and obviously moving on to get this item behind us. Our view is from taking a look at what others have experienced from talking outside experts, many cases these take as we communicated before over a year in many cases from the day they are open until they actually get closed out. And we do not think this is any different.

Okay. I know you have moved some product out of that facility. Can you help us understand what is still made there? Either product, or revenue run rate or something? Give us a sense of the scope of what we are talking about?

Yes. Dale, for competitive reasons I do not want to go line item, but I will tell you that between our Puerto Rico facility and our New Jersey facility, a vast majority of our products we have redundancy. We have been quite successful with moving certain products into the Puerto Rico facility, and having the ability to make either portions of the process or all of the process at either facility. Many of you know that if you listen to this has been a part of our long term strategy to create redundancy. Obviously, in the midst of some of our scenarios we have been accelerating some of those. When you think about our supply, our ability really to manage all of our key products either out of New Jersey or Puerto Rico, we are in a pretty good spot.

So the plan -- sorry I am going beyond my allotted questions. This is kind of a follow up to the original.

Go ahead.

Is the plan to eventually to move everything out of Plainsboro into New Jersey and Puerto Rico and when would that occur?

The plan is actually to build up a redundant capability for our regenerative medicine products in Puerto Rico. Our current facility in New Jersey, which we refer to as our 105 facility, that is where the warning letter actually is. We have another facility on the same campus that will be bringing up in 2013. We will actually have some products and some processes this year, but fundamentally bringing it up with a high volume in 2013.

That is literally on our same campus. Then the plan with the 105 facility is really to use it more as an R&D development facility that we have developed and bring on new R&D, products, new capabilities. It also has the capability, obviously, to continue on for production. But that is really what our existing capabilities are, is to have a footprint. That we actually have a new facility in 109, the 105 facility not to be used for production, and then the facility in Puerto Rico to be the redundant site.

Great, thank you.

At this time, there are no questions in the queue(Operator Instructions). I will turn the conference over to our host for an closing or additional remarks.

Great, thank you for dialing in, and we will be looking forward to speaking to you in the third quarter from Dallas.

Thanks, everyone.

And that does concludes today's conference call, thank you for your participation.