Integra Lifesciences Holdings Corp (IART) 2013 Q2 法說會逐字稿

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

Good morning and thank you for joining us for the Integra LifeSciences Second Quarter 2013 Earnings Results Conference Call. Joining me today are Peter Arduini, President and CEO, and Jack Henneman, Chief Financial Officer.

Earlier this morning, we issued a press release announcing our financial results for the second quarter of 2013 and confirming our full-year guidance. Certain statements made during this call are forward-looking and actual results might differ materially from those projected in any forward-looking statements. Additional information concerning factors that could cause actual results to differ is contained in our periodic reports filed with the SEC. The forward-looking statements are made only as of the date hereof and this 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 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.

As we mentioned in the Form 8-K we filed on July 16, the FDA has begun its reinspection of our Plainsboro, New Jersey manufacturing facility. We do not expect to comment on or discuss that inspection until after it has concluded. We will communicate to you after the inspection is over and we have analyzed those results. I will turn the call over to Pete.

Thank you, Angela, and good morning, everyone. As we said on our first quarter conference call, our most important priorities are supporting our customers through the voluntary product recall in April and preparing for a successful FDA reinspection. We have made good progress on these areas. We have a third shift running in our Anasco manufacturing facility and have efficiently allocated product to our most important customers. In addition, we are carefully managing production among our proprietary products in our private label business. That said, we're still working hard to restore inventory of our affected products and some backorders will persist into the fourth quarter. Our goal is to have successful FDA inspections in our facilities operating under warning letters this year.

We're focused on the quality systems and operations at each site. The FDA is in Plainsboro now and we expect the agency to return to both Anasco and Andover before we report the third quarter. We believe we are well-prepared in all of these facilities. We will learn how successful we have been in retaining and recovering customers and in preparing for FDA inspections between now and when we report the third quarter earnings in late October. At that time, we expect to have a better sense of our long-term commercial consequences of the recall and the extent of incremental remediation expenses, if any. In light of this, our guidance remains unchanged at this time.

Turning to the top line results from the second quarter, the recall-related product shortages had a significant impact on our consolidated revenues. But for the supply issues, we estimate that the revenues of our US Neurosurgery, private label, and international businesses would have been higher by a total of $10 million to $12 million. Moving on to segment performance, our Extremities business grew 5% in the period against a very tough comparison. This Extremities performance was on plan for the second quarter. If you remember the first half of last year, we had backorders that negatively impacted our Skin and Wound sales in the first quarter, but supply and sales rebounded strongly in the second quarter. On the Hardware side of the business, we likewise faced a strong comparison against last year. The result -- a lumpy growth rate in the first half of this year averaging 11%, which we believe is more indicative of the underlying momentum in our business. The second-half poses no such comparison issues and we continue to expect the Extremities business to grow high single-digits to teens in the second half of this year.

US Spine and Other, which includes our spine and private label products decreased 12%. In addition to general market softness and pricing pressure, our spine hardware product sales declined more than the market because of execution challenges in the business. We've identified the issues causing this performance and have plans in place to return to market performance by the end of the year. Orthobiologic sales were flat because of backorders in collagen and ceramic bone void fillers and we expect supply to return to a normal level by the end of third quarter. Sales growth in the rest of the portfolio offset much of the backorder and demand for the overall Biologics line remains strong.

Sales of our private label products were down significantly from both the prior-year period and from the first quarter, due to the recall-related supply shortage and long-term consistent decline in sales to a private label partner. The financial impact in our business is a reduction of $7 million to $10 million in revenue in 2013. Supply considerations will continue to adversely to affect our private label business and the results of the US Spine and Other segment for the balance of the year.

US Neurosurgery revenues decreased 1% over the second quarter 2012. DuraGen was down because of the recall, but under the circumstances, the business performed well. Tissue ablation sales also decreased on a strong comparison from the prior-year period, but strong growth in our neurocritical care, cranial stabilization, and stereotaxy partially offset these declines. Overall sales of neuro capital products were relatively flat. US Instruments revenue decreased 3% versus prior year. Most of the reduction was attributable to the discontinuation of low margin products and declining sales of legacy Xenon lighting.

Within lighting, growth of our LED surgical headlamps remained strong, but they're replacing our lower margin, higher-priced Xenon lights. This trend is an overall benefit to both operating profit margin, but negatively affects revenue. Sales of our acute care products grew well, benefiting from several large new hospital orders and showing growth versus a strong performance in the prior-year period.

The International business was affected by the recall; however, international revenues increased 4% from prior year. Our Spine and Neurosurgery franchises performed well outside of the US. Although we are dealing with tough economic challenges and planned changes within our distribution channels, both Europe and the rest of the world grew. This is in line with expectations and we anticipate accelerating growth from this segment in the second half of the year.

Now, I'll turn the call over to Jack to discuss the financial results in more detail and provide an update to our 2013 outlook. Jack?

Thank you, Pete. Our revenues in the second quarter were in line with our guidance and expectations. Since we faced a fair amount of near-term uncertainty in our business, we clamped down hard on spending that was not essential to improving product supply, supporting our customers, and preparing for FDA inspections. The result was a higher adjusted EPS than we expected when we last guided in May.

Looking to the second half of 2013, Pete highlighted both the importance and the variability inherent in our near-term priorities to support our customers and have successful FDA inspections between now and October. In addition, we have targeted spending priorities that we plan to approve once we clear some of these near-term hurdles and gain better visibility in the second half. Our own internal expectations generate a wide range of outcomes on both the top and bottom lines. These have not changed since May and as a result, neither has our guidance.

Now, I will walk through the P&L results and our detailed expectations for the full year. In the second quarter, GAAP gross margin declined 3 points to 60% versus the prior-year period, primarily as a result of higher spending on quality systems in the plants, unfavorable product mix driven by supply shortages and high margin products, and the medical device excise tax which we report in cost of goods sold. 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 second quarter, our adjusted gross margin of 62.5% was down 3 points from the comparable measure in the second quarter of 2012. For 2013, we expect reported gross margin to be between 60% and 61% and adjusted gross margin to be between 63% and 64%.

In the second quarter, R&D expenses decreased $1 million versus the prior year to 6% of sales; mostly on delayed product development spending in our Orthopedics businesses. We expect R&D spending to increase over 2012 and to be around 6% of sales for the full year. GAAP SG&A during the second quarter increased significantly versus a year ago, resulting from greater spending on our ERP implementation, higher head count, and temporarily higher sales commission rates, freight and marketing programs related to managing supply shortages. SG&A, adjusted for special charges as detailed in our press release, was 44.1% of revenues, up 1 point versus the prior year. For 2013, we expect reported SG&A to be approximately 46.5% to 47% of revenues and after adjustments, to be around 44% to 44.5% of revenues.

In the second quarter, our adjusted EBITDA margin was 16%, down 3 points from the prior-year period. For the remainder of 2013, we suggest modeling approximately $8 million in depreciation expense per quarter and approximately $4.5 million in intangible asset amortization, $1.5 million will be recorded in COGS. Cash interest expense net of interest income was $3.1 million in the quarter. For 2013, we recommend modeling approximately $5 million per quarter in total interest expense. During the second quarter, we reported $300,000 of other expense. We recommend modeling this line item as zero going forward. We ended the second quarter with an effective tax rate of negative 14.9% and an adjusted tax rate of 26%. For the full-year of 2013, we expect our reported tax rate to be about 4.5% and our adjusted tax rate to remain around 26%.

We generated $3 million of cash from operations in the second quarter. Operating cash flow suffered because of much lower GAAP earnings and a significant increase in inventory; both of which we expect to improve significantly in the second half. Keep in mind we record the [med tech] tax in inventory. We invested $14 million in capital expenditures in the quarter. During 2013, we expect to spend between $55 million and $65 million on capital expenditures.

I will now provide some color on the 2013 guidance that we reiterated in the press release this morning. Within that guidance, we expect US Neurosurgery revenues to be flat to up, mid-single digits, US Instruments revenues to be flat to down, low single digits, US Extremities revenues to increase mid-teens, US Spine and Other revenues to be down mid- to upper-single digits, and International revenues to increase mid-single digits. These ranges are unchanged from when we last guided in May. As we have noted already, a great deal of uncertainty remains in our business as we progress through the next several months and we are leaving our guidance range wider than we typically have.

With that said, we want to provide you with some directional guidance on how to think about our performance for the remainder of the year. On the top line, we are comfortable with the street's current range of estimates and consensus for the third quarter. We are also comfortable with the sequential progression embedded in the street's estimates for the fourth quarter, which appears to be about a $5 million to $11 million increase over the third quarter. Despite the considerations that drove down our profits in the first half of the year, we expect some supply catch-up to benefit the third and fourth quarters. As implied in the P&L line item guidance I provided, we expect gross profit margins in the second half to improve and to be much closer to those seen in 2012.

Because operating expenses were kept in check during the second quarter, we believe the second quarter's operating expenses as a percentage of revenues adjusted for special charges are at or below where spending could be for the remainder of the year. For adjusted EPS, we agree with the current range of estimates and consensus for the third quarter. We are also comfortable with the sequential progression embedded in the street's estimates of adjusted earnings per share for the fourth quarter, which appears to be about a $0.05 to $0.18 increase over the third quarter. Now, I will hand the call over to Pete.

Thank you, Jack. While we're focused on addressing the needs of our customers and having successful FDA inspections in the near-term, we remain committed to our longer term margin improvement and growth acceleration targets. In the category of accelerating growth, we made recent progress in two important product lines -- shoulder and skin. First, we're excited to announce the 510K clearance of our Titan Reverse Shoulder System. Differentiated features of this system include simplified conversion of a primary total shoulder or hemi for fracture, but to a reverse minimally invasive interoperative options for surgeons and interchangeability with the primary and hemi for fracture systems and options for either a press fit or cemented stems. We expect to begin a limited market release in the US in the coming weeks and upon CE Mark clearance in Europe, begin a full global commercial launch in the first quarter of 2014. This is an important product launch for us as it gives us a much more comprehensive shoulder product line that our distributors are looking for and gives our surgeons more options in the OR.

We have another positive development to report from our Extremities group. As you know, the diabetic foot ulcer market is growing and is important for us. Our pilot study on the use of Integra skin in diabetic foot ulcers was just published in the Journal of the American Podiatric Medical Association. The pilot study concluded that the Integra bilayer wound matrix is easy to use, safe and effective when used on diabetic foot ulcers in an outpatient clinical setting, without requiring an additional autograph procedure to achieve closure. Our pivotal trial DFU clinical trial continues to advance and the completion of enrollment is expected between the fourth quarter of this year and the first quarter of 2014.

Finally, we continue to anticipate 20 to 25 new product launches and international product registrations by the end of 2013, which will lay the groundwork for accelerating growth in 2014 and the years to come. We're on track to achieve our 2013 target savings from our sourcing initiative. We're also making progress towards optimizing the Company by streamlining our manufacturing and distribution footprint and we hope to have an update for you during the fall. Overall, even with our near-term focus on supporting our customers and completing FDA remediation work, we're optimistic about our initiatives and their impact. We remain fully committed to achieving our five year growth and margin objectives. We look forward to a busy schedule of conferences and meetings with investors.

In addition, we will be at the North American Spine Society meeting in New Orleans in early October, where we will have new spine products on display. Finally, we're planning to schedule our next investor day meeting for the spring of 2014 in New York City.

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

(Operator Instructions)

Chris Pasquale, JPMorgan.

Can you start off with providing some color on the different components within the US Spine business? How much was private label down this quarter and what were the execution issues you mentioned on the hardware side?

Chris, if you take a look across our overall Spine and Other category, I would frame it up this way -- about 60% of that broader impact was associated with the recall of the products related to our collagen products. 40% of this tie, then, was related to Spine. If you think about within the Spine category, I'd say a little more than half was associated with execution-related items and the rest of it in market.

Candidly, on the execution front, there are two areas. One is, I would say, our effectiveness of converting ineffective distributors out and bringing up new ones. The timing on that slid out some. We made some specific decisions on some raw materials relative to some key products in the Orthobiologics side to do some work relative to some of our broader remediation efforts, which we completed. But it had an impact of slowing some supply during the quarter.

Do you feel like you're in a position now where those issues are under control or is this something that's going to linger into 3Q?

It's as I commented, we believe that, from a standpoint of the distribution plans that we've got those in good shape and the supply issues have already been addressed. But it will take, as I commented, through the end of the third quarter here to get that ramped up again. But, no, I feel quite good about the plans we have in place and the ability to get that back on track.

On the Extremities side, you got the Titan approval, where do you feel you are now with the shoulder product line? You've got a reverse option in place. What else do you need to really be competitive in that space and how big a driver could upper extremities be for that business in 2014?

I think at this point in time, we believe we've got what we need to be a serious competitor within the shoulder arena within Extremities. As you well know, obviously it's one of the bigger ticket items that we haven't had and so that percentage of growth, obviously, is a drag when you compare us to other folks. We're quite excited about it.

I would also comment that we believe we're more than a me too, and I think that there's been a lot of good work of incorporating the best of concepts from other suppliers out there. We put a lot of energy in this modular body design, which we believe, as younger individuals have more work, there's revisions later, there's a big chunk of capabilities there. Then the other aspect is even just from a cost standpoint how we think about the hospital itself. We focused on this product being less instrument trays than many other products that are needed to do that and that's really tied to this Lego or modularity, if you will.

From a growth standpoint, we're being conservative about as we come in as a new player into the market, but being able to move into the low single-digit share range. And over time, be able to get something above that, potentially in the 10% share range, we think, is very reasonable with the technology that we have. Obviously, one of our other interests, as well, is to couple some of our regenerative technologies in that area as well and we look to do that, but at this point in time, we're just excited we got the 510K. We have this pilot going on, our commercialization ramp up and then we'll bring this into full commercialization here at the end of this year going into 2014.

Great, thanks.

Amit Bhalla, Citigroup.

This is actually Adam in for Amit. I was just wondering if you could talk a little bit about Anasco? I know last quarter you talked about doing some product re-prioritization to potentially be able to hit the upper end of the guidance range. How is that progressing?

What kinds of decisions were you making? How did that go?

I would say across the board, we feel very good about the progress we've made in our Puerto Rico facility. We've been extremely diligent to, first priority, to make sure that we get all of the items that we need to get addressed by the FDA. That, in coordination, with being able to meet supply for our customers.

As I'd communicated last call, we believe there would be, clearly, some customers that we would GAAP. We feel quite good that a vast majority of customer base we were able to, with substitutions or some creative approaches, be able to address a lot of their needs.

Now, that being said, we still certain SKUs and things that we'll have through the end of this year that getting to adequate supply. But I feel quite good about that.

The other component that I'd mentioned was our ability to bring up a third shift and be able to ramp up our supply to a significantly higher level. We were and are successful with that and continuing to, in conjunction, do our remediation work, which I believe we're making good progress on. And also run a full third shift and be able to ramp up our supply; candidly, at a slightly higher level than we initially planned. We had a little bit slower start, but I believe, as far as where we are now and how that plays into the second half of the year, we're in good shape with how our supply is ramping up.

Just one follow-up, on the DuraGen customers, I know you were talking about trying to work and get some of those customers back. Were there any concessions that you had to make to bring some of those accounts back in?

Adam, at this point in time, it's still to come. I would characterize, our neuro sales force team, I'm just very, very proud of the work that they did. One to just take care of customers and cases at our core is making sure we do the right things by patients and they did a lot of heroic work to make that happen.

Secondly, I'd say about 85% of our core customer volume, we have adequate supply into, so we're probably talking in the 15% or less range. Really, third quarter, as Jack had commented as well, is that critical window where we're getting all the supply that they need and some of those customers moved over to alternate versions of supply.

We believe that the clinical data, some of the different feature options that we actually have of different flavors, if you will, of DuraGen coupled with some promotional work, that we'll be able to bring back a larger percentage of that customer base, but ultimately, we will see. To your specific point, third quarter is probably the bigger window where some of that promotional effort will take place.

We mentioned it in the script, but it's worth hammering home. The third quarter is really important quarter for us on a lot of fronts. We expect inspections in two, if not three of our warning letter sites.

We have an opportunity to drive revenue growth over Q2 if we execute well, especially on the production side. We have a lot of things that we believe will clarify before we report Q3 or by the time we report Q3. That's why we left the guidance range wide. A lot of this is still very much in train, rather than resolved and clarified.

Okay. Thank you very much.

David Lewis, Morgan Stanley.

This is actually Jon Demchick in for David. I had a quick follow-up on the EPS guidance, which you mentioned was pretty wide at $0.30 versus $0.10 is probably the normal range for you guys. Obviously, a lot of that's with the remediation costs and other spending. But with half of the year left, I was wondering if you could maybe specifically could point to a few of the large dollar issues that could push you more to the top end or the bottom end of the range?

The biggest impact, I think, is where we ultimately land with our revenues and the mix of those revenues. If we deliver in our regenerative medicine products from a reduction point of view, if the spine trajectory goes to where we think it'll be on more of a medium to long-term basis, that will have a disproportionate impact on the bottom line.

We also, of course, have some thinking to do about the level of expenses we're going to incur in the second half. If these inspections go well, on the one hand, we expect our, call it, unusual remediation expenses to decline, but we have been keeping other initiatives in check, because you can't do everything at once. We may, in fact, relieve spending to get to work on things that we believe will make for a better 2014.

So, between those top line considerations and decisions we've not yet made on expenses because they're sort of dependent on how market share questions resolve and FDA inspections resolve, we've left the range wide. So that, frankly, we have the freedom to make those choices in the fall in time to have an impact on 2014.

Thank you, very helpful. A quick follow-up on the broader restructuring -- last quarter, it sounded like the recall may have an impact on the timing of some of the revenue and cost initiatives that you discussed at your last year investor day. Today, it sounded like everything was going more as planned. I was just wondering if you could maybe discuss if the recall has pushed things back a little bit; specifically, in regard to plan and distribution consolidation or sourcing opportunities as those are probably the more near-term opportunities?

Jon, as we communicated the first quarter, it hasn't changed. We went into this mode of, I've termed it as a surge focus, to focus on the three warning letter sites supplying customers and we clearly made some trade-offs. That had probably had a six to nine month impact on the breadth of all of our initiatives.

That being said, those that we could keep chugging along, we did so. I would say sourcing's a great example of one that we've been able to keep separate, keep focused, and they're well on track. We delayed some of the timing, clearly, of some of our plans when we think about our facilities and took a different look about scope and all the other factors. As you can imagine, if you've got major FDA audits in a given facility, you're planning to do something at that facility one way or the other, you would take a little different time if you understand what the ramifications are. That's kind of where we are.

That said, I think that the operations team still made good progress and we expect, later on this year, to come back to you to let you know about specific plans of our next steps around more of the operational efficiencies that we are going to bring this year. The effect, very consistent to what we said, is this -- as we delayed some expense we had this year to put it on these remediation-focused efforts, some of those expenses will roll to 2014, which will put a little higher burden than we had initially, strategically planned for 2014. Some of those benefits, because the programs will start a little bit later, will also push out; hence why the six to nine month delay from how we looked at the original strategic plan.

Okay. Thank you very much. Very clear.

(Operator Instructions)

Matt Miksic, Piper Jaffray.

I wanted to just get your sense, Pete, on where things are in terms of getting back to supply levels as you think about where you thought that you'd be here? Are you on track for the third quarter?

I think I remember you saying a few months or several months. Are you slightly behind that mark? Just some color would be helpful.

I would characterize it as we weren't the fastest out of the blocks, but we picked up quite quickly about midway through the sprint. As we were ramping up our third shift, we probably didn't come up as fast as we had ultimately hoped to do in Q2. But as we came up to a full level and as we are running right now, I would say we're performing at a higher level than we had expected.

What does that mean? It means in third quarter, the vast majority of our supply should be addressed for customer needs. However, there will be specific codes that we still believe in the fourth quarter we're going to be getting them back to adequate levels. I feel, actually, where we sit right now, pretty good about capabilities and our production scenarios in our plants. Obviously, that's all predicated on stable operations where we are.

We, obviously, are expecting the FDA to be coming into Puerto Rico this quarter, as Jack commented on. We had put [the ADK say] they're in New Jersey currently.

We believe that we've planned appropriately, meaning that we can do an audit and meet production simultaneously, unless something changes on some type of direction or our plant, which we don't foresee, but that's how I'm thinking about it. I think we've thought it through and feel pretty good about where we are at this point, based on, obviously, the tough recall we had in the first quarter. Jack, I don't know if you want to add anything to that?

No, I think that pretty much says it. Third quarter will be important. We expect a fairly significant catch-up in the second half of the year and if that materializes, we'll finish the year stronger than we had, obviously, the first half by quite some margin. That'll be nice if we can accomplish it.

Okay. On the new shoulder, it does sound very much like you have hit every -- just about checked every box for this new system in terms of press fit and convertible flexibility for this reverse system. Can you talk a little bit what the field -- what you need to do in the field to successfully execute on that and commercialize that?

Are you going to need to expand that field force? Do you anticipate some sort of spend throughout 2014 maybe to support that?

Matt, that's a good question. First of all on the shoulder, we believe that we've got a good mix of the key concerns and requests that are in the marketplace. That was a very important part of this.

Leading up to this, as you guys all well know, without having a reverse and having a total shoulder, particularly on this procedure, you really don't have a full offering. And it's difficult to bring surgeons in that go into the theater with a question mark, will it be a traditional reverse? That's a key piece and obviously, that makes us a very viable player with that change.

This sales force is a distributor sales force, so keep in mind, our traditional Extremities business is all direct. We made a decision post the acquisition of Ascension to keep a distributor-based force mainly because we can bring in deep expertise and not de-focus the rest of our Extremities business. Obviously, with a new shoulder, being able to ramp up our distribution structure and be able to recruit will be a critical part of our ability to expand our share in growth. And as you can imagine, we've already been hard at that and running hard.

But that's also why, when you think about our ramp-up, our timing, some may say, gee, six months until you get to full production, how does that play out? A lot of that, as much as anything, is about getting up the right amount of sets, the investment levels, getting the right distributors online and also, the training that's involved with it. That's the critical next step for us and I think the team is very focused on it.

Great. Thank you, Pete. Thank you, Jack.

Larry Biegelsen, Wells Fargo.

First, Pete, I'd be curious to hear from you your thoughts on the DFU pilot study that was published. I haven't had a chance to read it yet, but maybe if you could give us an update on that and what that means?

Larry, I made a few comments on this. At the end of the day, obviously, the most important component for us isn't the pilot study, it's our clinical study that we've had ongoing that I commented on.

We believe that we're into the final legs here to get the study closed out and the closeout of that study would be Q4 this year into Q1. Part of that is just enrollment speed. As you guys know, in a lot of these things, August into even September you have some low points and we'll see.

Optimistically, we could be in Q4 and then, more conservatively Q1. That's on the study and that's moving forward.

The pilot, what's important about that is, keep in mind this is with our IDRT product, which really what the company was founded on, it's really known as the premier product for dealing with large burns. When you utilize that product, it is typically in conjunction with an autograph. You would obviously bride the wound, you put this in deep wounds. After a certain level of healing you would actually do an autograph off the patient somewhere in the body and then you would put that on top.

When you're dealing with diabetic foot ulcers, it's really about, actually, can you put in a matrix that actually doesn't need the autograph on top of it and there's a lot of factors that go into that. What the pilot study basically showed is, using our product for diabetic foot ulcers, for their relative size, without having to put an autograph on top, the wound actually healed closed. That's obviously a critical component relative to, can it be a standalone product and can it be cost-effective? That's how we look at the outcome of that study.

Thanks, that's helpful. I know on the last call there was a lot of discussion about the baseline for 2014. Can you guys talk about how we should think about 2014 a little bit, given the recall in 2013 from missed sales and also EPS perspective?

Maybe a little bit color on expectations for gross margin and the tax rate? I think it may actually step up a little bit in 2013. Thanks.

Larry, I'll have Jack frame that up for you.

Sure. Really, for the same reason that we have a wide range in our guidance this year, we're not quite yet in a position to talk with any kind of precision about 2014. Obviously, we normally give our guidance for the year in February and we expect to stick to that calendar. But no doubt we'll have some deeper thoughts on the topic before the end of this year as we prepare our operating plan, but we're not at that point, yet.

I'll say, our early thoughts on 2014 really haven't changed much to what we indicated on the May call, just as our guidance for 2013 hasn't. I'll just reiterate or make a couple of points. We expect a stronger half, as we'd said in 2013, but part of that is snapback from the tough first half. We don't think that it makes sense to necessarily draw a straight line from our performance in the back half of 2013 up into 2014. We have to see how some of that unfolds before we're willing to say that.

For revenue, though, the full-year 2013 results are probably a good place to start and then grow off of that within our long-term guidance range of 5% to 7%. Rather than trying to jump off the fourth quarter, we suggest you jump off the total 2013 revenue estimates.

From an expense point of view, we're quite far from being able to give any good guidance on that. But as we intimated, we probably, because of all the extra things we've had to do this year, we probably pushed off a bunch of the costs around our long-term restructuring initiatives into 2014. And then some of the benefits have essentially drifted into 2015, as we now think about it. That's about all we can do now. No doubt many of you will ask the same question on the October call and we may have something more to say, although we're going to give our guidance for the year, obviously, in February, as we always do.

I would just comment, Larry, the fact is, and we were reiterating this about the wide range for this year, is the fact that with three sites we believe we're going to have inspections completed on, that gives a wide range of views. And obviously, that drives a lot of subsequent decisions about investment or cost. As they go well, there are key items that we clearly want to accelerate, as Jack commented on, that really are about changing the motif of the company for the long run and really changing the margin and growth trajectories for the long run.

We're still aggressively focused on being able to make as much of those happen as we can this year going into next year, because it's critical for how we laid out the overall strategy. That being said, I think our Extremities underlying business, we believe, is quite strong and we're excited about the new products coming in.

Neuro, as we'd mentioned before, really, without the recall, we were on track for achieving our overall growth plans and that underlying market is strong. Instruments, we've had some weakness in our off-site area, we've had some strength in acute care, but as I've mentioned in the comments, a larger chunk of it was specifically tied to, we actually got rid of some lower margin products within our portfolio, which will have a positive effect, obviously, as we go forward.

Spine has been a little bit more of a challenge for us. We think we've got a handle on some of the key things that we need to do. And obviously, private label was directly affected by the recall, which is going to be coming back as we get our supply addressed.

Thanks for taking the questions.

Jason Bedford, Raymond James.

This is Mike calling in for Jason. First, on the Extremity growth, I know you touched on it briefly, but I know it was a difficult comp, but can you elaborate a little bit more on the source of the slowdown? How comfortable are you that you can re-accelerate that growth? The guidance implies a decent ramp in the second half.

Let me comment and then I'll have Jack comment. I would say the first point is that, for us, the Extremities achieved their plan. I guess I would say we probably didn't do as effective a job of maybe communicating or telegraphing a little bit more that we had a much more lumpier first half than we actually did.

But again, the point on this one was, if you recall back last year, we were actually having a lot of remediation work going on in our Plainsboro facility. We really hadn't made much skin product at all in late Q4 into Q1. The question, at that point in time, is what are you going to be able to get out and we gave a range -- it could be an incremental $2 million to $3 million of skin volume, things of that nature, and we achieved those numbers and that all shipped within Q2.

The other aspect was, we had bought Ascension and you may recall that was all a distributed based product structure and we were integrating that into our direct sales force. That event was in late Q4 into Q1 and we clearly had some challenges in Q1 with that integration. We were quite successful with all the training and ramp up and Q2 was a strong hardware ramp. When you add those two together, that's really what it is.

When I look at the second half, I look at our opportunities, our run rates, I actually feel quite confident in what we're projecting relative to our growth rate for the rest of the year. Jack?

I think just to really hammer the point home, the Extremities business did exactly what it was supposed to do this quarter. The only thing we failed to do was telegraph to you guys on the Q1 call that, by the way, we're going to have this tight comp in Q2, so be sure to model that in.

It was up, actually, Q2 over Q1 2013 sequentially by something like 7%. It had a really good quarter this quarter. It will have a strong second half, barring some change we can't see right now.

We feel very good about the business. It's not a slow down. It's a math problem.

That's helpful. Thank you. As a follow-up, we you look at the Anasco and maybe the Plainsboro plant, I'm not sure, are there still a decent amount of consultants there in the plants? If so, what's the timeline for them leaving the plants and does that get backed out of your adjusted EPS numbers?

I would say at a high level, less in Plainsboro, more in Puerto Rico, that's more so a fact of where are we relative to where we need to be ready. Obviously, we believe we're ready and need to be where we are in New Jersey so it's primary all our folks.

In Puerto Rico, we'll be coming upon the six-month window of when we received the letter here in mid-to-late August. We still have more work to do, but we've made a lot of good progress.

We feel quite good about our progress and that has a significant amount of outside help associated with it. Andover has a reasonable amount of outside help tied to it as well.

As we get to closure and completion, obviously, our goal in all these are making sure it's full Integra employees that own all of these items. But to surge quickly to get a lot of items closed, that's how we've ramped up some of our expenses. Puerto Rico still has a large amount of spend associated with outside help.

Okay, great. Is that backed out of earnings on the adjusted basis?

We adjust it out, yes.

Okay. Thank you very much.

To be clear, just because we've now been saying this for a while, we actually have extra spend all over the company that we're not backing out. What we've done, essentially, is we're backing out the specific warning letter plants, but we don't expect, company-wide, to have this level of quality spend long-term at this level of revenues and so forth. I'm not going to get into the business of quantifying that, but we do expect that to be part of the margin improvement game long-term.

Thank you.

(Operator Instructions)

David Toung, Argus Research.

You talked about back orders in Orthobiologics. You talk about that snapback, so, should we be looking for some stronger growth in orthobiologics because you're on backorder? It sounds like the underlying demand is pretty good there.

I would frame up, David, this way, when Jack uses the snapback, it's primarily heavily tied to what we look at in the Neuro business because of the majority of the recall. On the Orthobiologics side, as I commented, it's not associated with the recall. We made a specific decision to get items done and our collagen plants, pre-FDA, we wanted to get some things done on our raw material used in that product. We went after it aggressively.

I think we're quite successful of getting the items we need to get done. The impact was we disrupted supply, which clearly slowed down some of our overall ability to ship. That is addressed and will be ramping up in Q3.

The short answer is yes, we expect to have better results coming out of Orthobiologics, but I don't see that this is a major snapback. I see that we've got to ramp back up to the levels that we were expecting.

Shifting over to Spine, you talk about the execution issues as part of the issues. Where are you in terms of getting the right people, distributors?

Is there still more to be done or are you confident now you've done what you need to do and the execution should get better going forward? Particularly, some of the competitors have already reported and as you've noted, the market seems to be coming back in Spine. As far as timing, it sounds like it's rather critical to be catching up to the market.

The first part is that we don't necessarily see the market doing any major performance. I would say the fact is, we still see it being potentially stable from our perspective, pricing still being down a few points in that area. Coming off of where it was last year, that's clearly a little bit better.

To your point, the comments that I made around execution fall into two buckets. One I just referenced which is, decisions we made that ultimately didn't allow us to get the right supplies of orthobiologics out, that was a portion. But the other is, our ability as we converted out some inefficient distributors and then our ability to bring in new distributors. How we do that, we went through some changes. We've got, I believe, the right people in place now to do that.

We've been, actually, successful here at the end of the quarter to bring on a good chunk of new distribution and that's a big focus for the team, is to be able to expand our reach. I think I might have mentioned before that we probably touch less than half of the overall orthopedic surgeons doing spine work in the US. A big part of our growth opportunity is to be able to increase our distribution.

We've got a nice product line offering, we've got some new products coming out there. In the Biologics space as well, we think we've got a really nice scenario with some new products, as well, coming out next year. Sometimes these things happen on the execution side. We've identified them, we'll own up to them, and I believe that we've got them addressed.

Just to elaborate slightly so that people can get the US Spine and Other number right, I think this is possibly the final point, that even Chris asked at the beginning of the call. In that segment, about 60% of the decline was private label, about 40% was spine. A big chunk was private label and the reason for that had to do with supply issues, from Anasco, primarily. Our private label customers go up and down and we did flag one.

But the long-term private label is a good business and it's going to be just very lumpy this year because it is such a function of supply. I'd say that is added color when you look at that segment number.

Great. Thank you both.

Imron Zafar, Jefferies.

First, a broad question, any notable changes you're seeing in any of your end markets or geographies in terms of capital spending, procedure volumes, pricing or any of those macro factors?

I would say overall, we haven't seen any significant shifts one way or the other. I always make this caveat -- we are diverse, but relative to scope and scale of a lot of our other competitors, we just don't have the same reach. We don't see as much.

However, our capital sales, there wasn't any major changes, they're roughly flat, for the most part, in line of how we were expecting. And there's a lot of puts and takes in our world, too, between new products and things in and out in that space. We hear more customers, obviously, really trying to understand the impact of how healthcare reform is going to affect them. And so nothing more specific than being cautious to take a look at where they place their bets and where they put their money.

But how have we seen that? We really haven't seen any fundamental changes in the US and/or around the world at this point in time. I would say, for us, from a Europe standpoint, there's a slightly more increased view of, I would say, optimism just around we're seeing more stability and consistency in how the sales are ramping up. But it's still not anything of how the market was there five years ago.

In terms of M&A, there's been a little bit of a lull there. Is that a function of focusing the FDA issues? Is it just discipline, due diligence? What's the latest thinking on acquisitions?

Let me comment, then I'll have Jack jump in on that. It's probably a little bit of both.

One is that, obviously, as many things as we've got going on, we've been very focused to make sure that, if we enter into a deal, it's the right deal that we can digest strategically as the right fit. And makes sense just based on everything we've got going on. That being said, I think Jack can comment on, we think we probably have got a funnel as vibrant and full as we've ever had with the company. There's a lot of exciting different plays and opportunities. We spent a good chunk of time taking a look at it.

There's still great opportunities for us, yet, even before the year's over, to do the right type of deal that would plug into things. We are spending a reasonable amount of my personal time, Jack's time as well, looking at some of the good opportunities that are out in the marketplace. Jack, comments?

I'd follow up that's true and I would add, we've gone, before, in my long tenure here, we've gone a year and a half or two years without doing significant deals before. I'd say some of the secret to our pretty good track record here is that we don't push transactions because we're trying to meet some external expectation of deal pays or anything like that. We really tell the entire organization, look, it's far better not to do a deal than to do a bad deal. We have maintained our traditional pricing discipline and everything else, but there is a lot of opportunity out there and I think, at some point, the stars will align and we'll have a good transaction that you guys will like.

Lastly, any inquiries, formal or informal, from the OIG in terms of your Spine business?

No.

Okay. Thank you so much.

At this time, there are no further questions in the queue. I'd like to turn the conference back over to the speakers for any additional comments.

Thank you for joining the call and we look forward to speaking to you in October.

That does conclude today's teleconference. We thank you all for your participation.