Integra Lifesciences Holdings Corp (IART) 2014 Q4 法說會逐字稿

Good day, everyone. Welcome to today's Integra Life Sciences fourth-quarter financial reporting call.

As a reminder, today's conference call is being recorded.

At this time, I'd like to turn the call over to Ms. Angela Steinway, Head of Investor Relations. Please go ahead, ma'am.

Thank you Alan.

Good morning and thank you for joining the Integra Life Sciences fourth-quarter 2014 earnings results conference call. Joining me today are Pete Arduini, President and Chief Executive Officer; and Glenn Coleman, Chief Financial Officer.

Earlier this morning, we issued a press release announcing our fourth quarter 2014 financial results and 2015 guidance. We also posted a presentation on our website, which we will reference during the call today. You can find this presentation at www.integralife.com, under investors, events and presentations, in the file named fourth-quarter earnings call presentation.

If you would open that up to slide 2. Please reference our safe harbor statement covering the forward-looking statements we will make on the call today. As well, please reference the reconciliations of non-GAAP measures at the end of the presentation, beginning on slide 11.

As a reminder both the results and forward-looking guidance we're discussing today include the performance of the spine business. We will provide revenue guidance in both the historic five-segments format, as well as in the new three segments, one of which is the new global spine business.

And now, I would like to turn the call over to Pete.

Thank you, Angela, and good morning, everyone.

We are pleased with our strong results in the fourth quarter. Referencing slide 3, sales in the fourth quarter increased 14% as reported, or 16% excluding the effect of currency. Our sales results this quarter reflect strength in several key areas across the business.

We were particularly pleased with the strong organic revenue performance, which increased 6%. The acceleration of organic growth in this quarter was driven by our world-wide neurosurgery business, which was up 12% excluding DuraSeal. Skin and wound sales were up more than 20%, and our international sales accelerated to 15% growth on an organic basis.

Below the top line, our adjusted EBITDA margin increased to slightly above 23%, which reflects an improvement of nearly 400 basis points over the prior fourth quarter. It demonstrates the achievability of our long-term target of 23% to 24%.

Free cash flow conversion for the year reached 38%, with free cash flow of $37 million for 2014. We believe these strong financial results, including faster topline growth, are directly attributable to better execution of our plans to simplify and focus our organization.

While we do not expect to sustain these metrics on a quarterly basis near-term, we're on the right path to achieve our financial targets sooner than 2018, including organic growth of 5% to 7%, and adjusted EBITDA margin of 23% to 24%, and free cash flow conversion north of 80%. Before Glenn goes through the detailed financials, I would like to take a few minutes to look back on 2014, and a few of the accomplishments that reflect the progress we've made.

If you would please turn to slide 4. In November, we announced the transformation of our organization. We realigned from five businesses into three global segments, focused on specialty surgical solutions and orthopedics and tissue technologies. And, we announced the planned spinoff of the spine business.

Both of these actions tie into our optimization and growth strategies. And we're well into the separation of SeaSpine, and remain convinced that this approach will result in both companies growing faster, and operating in a simplified, more focused structure. And Glenn will provide more details on how the separation is progressing in a few moments.

To further our growth strategy in 2014, we completed three acquisitions. The DuraSeal acquisition closed January 2014, and continues to complement our legacy Dural Repair franchise. This acquisition performed very well in its first year, and has exceeded our expectations.

In October, we acquired MicroFrance. This acquisition brings us manufacturing and distribution of a broad range of manual instruments used in laparoscopy and ear, nose, and throat surgical procedures. In a December, we acquired the foot and ankle products of Metasurg, which will enhance our lower extremities position. These three acquisitions fill portfolio gaps with innovative products, provide clear growth opportunities through market adjacencies such as ENT, and give us increased scale and reach.

In 2015, we will continue to pursue strategic tuck-in M&A opportunities in our areas of clinical focus: wound care, specialty surgical, and extremities. In addition to these acquisitions, in 2014 we laid the groundwork to accelerate our organic growth. We completed the clinical study of our Integra Derma-Regenerative template, and earlier this month filed our PMA supplement application with the FDA for a new indication of use: the treatment of diabetic foot ulcers.

2014 also marked the first full year in the shoulder market, with the launch of Reverse Shoulder, completing our tightened product line just over a year ago. While these accomplishments are opening up new sizable markets, we are also experiencing success in the burn market with our new thin version of Integra Wound Matrix, which we launched last summer. Overall, I'm pleased with the progress we've made with the new product introductions, our DFU plans, and the upcoming launches we have planned for this year.

Finally, we continue to execute on our strategy of leveraging our infrastructure and driving manufacturing improvements. Over the last few years, we focused our investments in a few areas: improving quality systems, expanding our regenerative technology production capacity, rationalizing the manufacturing footprint, and streamlining ERP systems.

The resolution of our Anasco, Puerto Rico warning letter last month substantiates the investments we've made in quality, and marks the end of the last warning letter remediation program. We begun validation runs in our new Plainsboro collagen manufacturing center this quarter, and we're excited to have increased capacity in the state-of-the-art Biologics facility.

We completed the transfer of production activities from the Burlington, Massachusetts and Andover, England manufacturing sites into our existing footprint, and closed both locations, in line with our previously communicated plans. And we successfully began the implementation of our new common ERP system in foreign subsidiaries, bringing the percentage of the Company's revenue on a single platform up to 80%, and reducing the number of ERP systems to 11.

As we close the book on a successful 2014, I'd like to thank all of the employees at Integra for their hard work and commitment to Integra's brand promise of limiting uncertainty for caregivers, and our core vision of becoming a multi-billion dollar medical device company.

Now, I'll turn the call over to Glenn to provide details on our financial results and introduce our 2015 outlook. Glenn?

Thanks, Pete, and good morning, everyone.

Overall, I would characterize the top and bottom line performance in the fourth quarter as strong, despite the impact of unfavorable foreign currency translation. Our fourth-quarter organic revenue growth at 6% coupled with adjusted EBITDA margin of 23.1%, reflect the kind of growth and profitability we expect in the business, longer term. Our operating cash flow result of $21 million during the fourth quarter brought us to $79 million for the year, which is at the high end of our guidance range.

Adjusted earnings per share increased 14% to $0.94. We're well-positioned to achieve our long-term targets, starting with a plan for 2015 that shows further organic growth acceleration, and margin improvement over the full year 2014.

Let me now turn to our segment revenue performance in the fourth quarter, shown on slide 5. Starting with US Neurosurgery, sales hit on all cylinders in this segment, and was 45% in the fourth quarter, largely driven by DuraSeal, which had its best quarter of the year. Organic sales grew 11%, and were driven by strength in our new critical care monitor, as we passed the second anniversary of its launch, and DuraGen sales increased 10%, reflecting volume run rates above pre-recall levels.

Our US Instruments business was down about 1% in the fourth quarter, compared to the prior year. Sales in the alternate site channel declined, which offset modest increases in sales of acute care and lighting. The MicroFrance integration is on track to our plan, and contributed incremental revenue during the last two months of the quarter. These differentiated products increase the strength of specialty instrument solutions for laparoscopic and ENT procedures offered through our existing sales channels.

Our US Extremities business had another very strong quarter, with sales up nearly 17% of the prior year. Our new thin version of Integra Wound Matrix, used in the treatment of second degree burns, was launched mid-year and is ramping very well.

The addition of new sales reps to our skin and wound channel in the second half of 2014 also generated higher sales. Sales of these products increased more than 20% over the fourth quarter of the prior year.

Our Titan shoulder offering fully launched just over a year ago, and other new product introductions such as the Total Foot System 2 and Freedom Wrist, added to the segment's growth. New products will continue to be an important growth driver for our extremities business.

Fourth-quarter sales in the US Spine and other segment were down 8%, year-over-year. While OrthoBiologic sales increased for the six consecutive quarter, hardware sales softened because of ongoing pricing pressure, delays in expected product launches, and slower addition of new distributors.

To wrap up our segment performance discussion, sales in our international segment were up over 17% on a reported basis and 24% on a constant currency basis, as foreign-currency reduced revenue by $3.1 million in the current quarter. Regionally, sales were strongest in Europe, Japan, and China, reflecting the investments we're making in our selling efforts in each of these markets.

Our international neurosurgery portfolio, led by DuraSeal, DuraGen, and tissue ablation posted the strongest performance year-over-year. In addition, instruments in the MicroFrance acquisition fueled the rest of the growth.

Before we move on to the 2015 outlook, I wanted to note that all of the guidance I'm providing today is based on the current Integra portfolio which includes of Spine performance for the full year. Once the separation is complete, we will begin reporting this spine business on a discontinued operations basis, which will have the effect of removing the spine business for the full year, and all historical periods.

Slide 6 provides an overview of our revenue guidance for 2015. We expect sales to be in the range between $960 million and $980 million, which translates to reported revenue growth of 3.5% to 4.5%. On a constant currency basis, revenues are expected to grow 6% to 8%, comprised of organic growth of 4% to 5%, and acquisitions adding the remaining 2% to 3%.

With respect to the first quarter of 2015, we expect currency exchange rates to reduce revenue by about $6 million. Taking foreign-currency, the recent acquisitions, and other normal seasonality into account, we expect first quarter revenue to be in the range of $229 million to $233 million, which represents 6% to 8% growth and assumes an organic growth rate of roughly 5%.

Moving to slide 7, I'll now provide the full year 2015 growth rate expectations for our new segments. The current slide also reconciles our guidance to the previous five segment structure. We plan to provide supplemental reconciliation of our historical revenues by quarter in the new segments for 2013 and 2014 and will communicate that to you before we report our first-quarter 2015 financial results.

As a reminder, our three new reporting segments are now global, so each new segment picks up its portion of our international product sales and currency exposure. We're expecting 2015 sales growth of 2% to 6% within specialty surgical solutions. We anticipate a stable end market, and new product introductions to support modest growth. The rest of the growth reflects the benefit of a full year of MicroFrance, and expanding international channel investments. Of these three segments, specialty surgical solutions contains the greatest foreign-currency exposure.

We expect the orthopedics and tissue technology segment to grow in the 7% to 11% range in 2015. A number of new product introductions and sales channel investments, as well as our recently acquired Metasurg products, drive the sales growth in this segment.

And then finally, we expect the spine segment revenue to be roughly flat during 2015. We believe new product introductions, coupled with the strength of our OrthoBiologics portfolio, will help return the spine business to a growth trajectory, longer-term. However, the effect of these launches will require time as the team works to recruit and train new distributors, and build and deploy new instrument sets. Taking this into consideration, we expect the spine business to be roughly flat in our hands during 2015.

Now, I will review our fourth-quarter and full-year 2014 P&L performance, and provide our expectations for 2015. Please turn to slide 8. Adjusted gross margin was up 20 basis points versus the prior-year fourth quarter. The benefit of favorable product mix offset the negative impact of foreign-currency. For 2015, we expect GAAP gross margin in a range between 61.5% and 62%, and adjusted gross margin between 65.5% and 66%.

Savings from the Burlington and Andover closures and increasing sales of higher-margin products will be more or less offset by higher depreciation and start up costs required to operate our new collagen manufacturing center, as we previously communicated. Further, we expect currency to negatively impact our gross margin during the first half of 2015, because we're selling products procured in Euros six to nine months ago.

We anticipate this effect to normalize in the second half of 2015, as we sell through the inventory that we purchased at higher rates. As a result, we expect a slight decline in gross margin in the first half of 2015 as compared to the prior-year, with steady improvements throughout the year.

Moving to our operating expenses. In the fourth quarter 2014, R&D expense decreased to 4.8% of revenue, largely due to lower spending on the DFU study. We're continuing to invest in clinical work and product development, and expect an uptick in our R&D expense in 2015 to approximately 6% of sales.

SG&A expenses in the fourth quarter of 2014 decreased 150 basis points as a percentage of revenue, due to lower corporate G&A spending and better leverage of our cost base at higher revenues. In dollars, SG&A expense increased over the prior-year, mainly due to acquisitions as well as higher selling costs on higher sales.

In 2015, we're planning to add commercial resources during the first half of the year but keep in mind that it takes about three to six months for the new reps to effectively generate sales. We're also incurring additional expense to hire employees for key SeaSpine positions prior to the spend. As a result, we expect SG&A as a percentage of sales to be higher during the first half of 2015 as compared to the second half of the year.

For the full year 2015, we expect a GAAP SG&A rate of 47% to 48%, and in adjusted SG&A rate of 42% to 43%. In the fourth quarter, our adjusted EBITDA margin was 23.1%, up 380 basis points over the prior-year quarter. For 2015, we are expecting an adjusted EBITDA margin improvement in the range of about 50 to 150 basis points over the prior-year, with the majority of the improving coming in the second half of the year.

Turning to slide 9. Let me now discuss our cash flow performance. During the fourth quarter, our cash flow from operations exceeded $20 million, and our free cash flow conversion approached 40% on a trailing 12 month basis. The improvement versus 2013 was largely result of higher net earnings and lower capital expenditures. These cash flow metrics were at the high end of our expectations for the full year, and demonstrate an improvement in our quality of earnings.

In 2015, we expect cash flow from operations to be in a range of $80 million to $90 million, with capital expenditures between $40 million of $45 million, and a free cash flow conversion of 36% to 45%. This guidance includes the cost required for separating the spine business, which we expect to impact cash by approximately $20 million.

To wrap up our 2015 outlook, we expect full-year GAAP earnings to be the range of $0.87 to $1.05, and adjusted earnings per share to be the range of $3.05 to $3.23, which again includes the results of our spine business for the full year. This implies an increase of 3% to 9% in adjusted earnings per share for 2015.

On a constant currency basis, the midpoint of our adjusted EPS guidance range would show double-digit growth, year-over-year. Further, we expect the negative effect of currency exchange rates to disproportionately impact first-half earnings. Taking this effect into account with recent acquisitions, normal seasonality, and other items I highlighted earlier, we expect first quarter adjusted earnings per share to be between $0.60 and $0.65, with the midpoint of our first quarter guidance range showing low double-digit growth over the prior-year first quarter.

Before I turn the call back over to Pete, I want to provide some additional details regarding the separation of SeaSpine. We expect to file the form 10 in the next four to eight weeks. The form 10 will contain three year historical standalone financials, which we will include an allocation of Integra's corporate overhead costs.

In addition, certain inter-company expenses will be reflected as external costs in the form 10, which we believe are not indicative of SeaSpine's operating costs. We believe the contribution for the business today, excluding these allocations, reflects an adjusted EBITDA as a percentage of sales in the low to mid-teens.

It is important to point out the profitability of SeaSpine, as shown in the form 10. We'll depict significantly greater operating expenses that we believe SeaSpine will require to run as independent public company. We plan to provide more information to assist you in your financial models sometime after the initial filing of the form 10, but closer to the completion of the registration process.

And with those final comments, I'll now turn the call back over to Pete.

Thanks, Glenn. We have a number of priorities that we're focused on in 2015, and they're summarized on slide 10. Our top priority is executing on our 2015 targets, which includes delivering organic revenue growth of at least 4% to 5%, driving margin improvement and hitting adjusted earnings per share growth of 10% or more, excluding currency.

Second, completing the spinoff of SeaSpine and integrating our two divisional global structure are critical priorities in 2015. We are optimistic about the value this spinoff will create, and our teams are working hard to complete the separation. We believe that we're on track with the timeline that we communicated back in November. We've narrowed down our list of candidates for the CEO position, and are confident that the process will result in hiring a strong leader to achieve the goals we've outlined for SeaSpine.

SeaSpine will have the ability to utilize the -- what Integra sees as operating profit today for investments that will enhance its R&D pipeline, sales structure, and surgeon training. And with these investments, as well as a strong starting cash balance of $30 million to $40 million, SeaSpine will be set up for success as an independent public company.

For Integra the spin will enable the organization to focus on scaling two businesses: specialty surgical solutions and our orthopedics and tissue technologies. We will be able to direct our management focus and investment dollars to accelerate growth and development of our two divisions, which we believe the result will be in Integra with a faster topline growth profile, as well as higher operating margins.

Moving on, our third initiative for 2015 centers on organic growth. We expect our R&D efforts to begin to support a stronger cadence of impactful new product introductions. In 2015, we expect to see new product introductions drive roughly 1/4 of our organic growth. We recently announced the expansion of our skin and wound products lines with the introduction of the Integra Mesh Durmal Regenerative template and Integra Reinforcement Matrix. We will also introduce a new cranial positioning device, the Mayfield 2, this year.

In addition, we have several new products coming out to address disease states and enhance our product offering in lower extremities. And we're also pleased to announce today that the development of our two-piece ankle system is ahead of plan. We expect to initiate a limited market release toward the end of 2015, and scale up to full global market launch in 2016.

On February 3rd, we announced the PMA supplement filing for the DFU indication on our Integra Skin platform, and have submitted our data for Journal publication. In the second half of 2015, we will begin building our sales channel in the veteran affairs system, and we remain on track for full commercialization in mid-2016.

We are continuing many of our investments that we began in 2014, including target additions to our sales organization, strengthening our international infrastructure, and leveraging our enterprise sales organization. And we'll be adding more than 70 commercial resources during 2015.

And finally, we see strategic M&A as a core competency, and plan to continue utilizing internal resources to pursue opportunities, to expand our presence in specialty surgical solutions and orthopedics and tissue technologies. We believe we've got the right balance of investment in the near and long-term to reach growth opportunities on the top line of 5% to 7% growth, 23% to 24% adjusted EBITDA margins, and EPS growth of greater than 10% and free cash flow conversion of over 80% earlier than 2018.

So with that, operator, we would like to open up the lines for questions. In an effort to accommodate a large number of callers, we ask that you limit yourself to one question and one follow-up, after which you may rejoin the queue. Operator?

Thank you, sir.

(Operator Instructions)

David Lewis, with Morgan Stanley.

Good morning, this is actually John Demchick, in for David. Organic growth sales in the quarter is probably the strongest we've seen in a couple of years, and adjusting out SeaSpine probably somewhere between 6% at 7%, if I'm doing my math right.

As we think about the strength in 4Q and heading into 2015, are there any reasons why we would expect this performance to slow into 2015, as guidance implies? Given some of the recent launches and filings.

I would say, John, I think as we communicated within our guidance, we do believe that Q4 was a higher bench point level. I think the important message is, we believe we're going to be in our range here of the 5% to 7% in organic growth. It does show a signal that our product pipeline is beginning to start to bear more fruit.

From a standpoint of the new skin products that we have out, to much of the growth that we had within our neuro business -- I would say for fourth-quarter, when you think of the higher level, neural had a tremendous quarter. We've had the conversion of our new Camino monitors, which isn't something that will last for perpetuity. There's a replacement install base, so that drives up a little bit higher organic growth rate in Q4, and really from a DuraGen standpoint, we're now back to where we are in a leadership share position.

We've taken back all of our share that we'd lost before. So, that will start decelerating, if you will, or running at a steady level. But that steady level we're quite excited about, because we're still in that 4% to 5% overall growth range across-the-board. I think the other aspect, and you saw in the numbers, was international.

We've had a lot of work going on in China. A lot of work in Japan and Western Europe. And in those markets in particular, our neural platform as well as extremities also continue to accelerate. And we believe that will continue on here, really, in the next few quarters.

John, the only other thing I'd add to Pete's comment is, once we do spin the spine business, we're expecting accretion to our revenue growth. We've already said about a point of growth, so the numbers you see here in our guidance, you could expect an additional point of growth once we actually spinoff SeaSpine.

Understood. And then, as we think about international, it looks like obviously impacted by FX this year, but it looks like you're probably seeing more of a meaningful step up in the international sales, kind of heading into 2015. Can you kind of discuss a little bit of the progress made here, and if we think that this is going to be the inflection year in the international?

So, I would say it starts with last year. We made some major changes in bringing some top talent into the team from leadership in Latin America to leadership in Asia. We made a commitment in 2014 to actually build out some country leadership capabilities, and so leadership in Japan for the first time we built out a direct sales force for a portion of our sales within Japan.

And we made some major investments within China. We've lapped some of the challenges we've had in that country with registration ownership. We went through some rough spots up and down, candidly, on getting registrations completed, and we believe that we have that behind us. We have got a really nice structure in place there.

And then in Western Europe, I would say between the team, the focus that we've had. We've expanded some of our sales force, particularly in skin and wound. And also we're expanding in our instruments world.

We just have better traction, across the board. More products that we've been working on for a couple of years that were filed are now actually getting approved. So, yes, we believe that 2015 should be a solid year, and a good year for international shows -- to show that we're on track for that 30% of our overall sales coming from international.

Thank you very much.

Bob Hopkins, Bank of America.

Good morning, Bob.

Hello, good morning. Thanks for taking the question. I appreciate the incremental color on SeaSpine and the profitability level there.

Doing some quick math, in your 2015 guidance, it looks like contribution from SeaSpine is about in the $0.30 area. Am I in the ballpark, there?

Yes, Bob, we're not quoting any EPS numbers at this point. We gave the trailing 12 month revenue number previously of about $140 million for the business. We've given the EBITDA numbers as well, relative to low- to mid-teens.

So that can give you level of the EBITDA dollars, but we're still working through the stranded costs. So we're looking at how we can probably reduce our G&A structure relative to the spinoff, and that includes capitalizing on some of the ERP system moves that we've made. Leveraging that platform, as well as looking at the transition service agreements we're going to have in place with SeaSpine, which will help to reduce some of the corporate costs in the short term.

So, we have more work to do relative to reducing some of those stranded costs. We at least wanted to give you an idea about the EBITDA dollars that that business generates today, and that's why we made those comments.

Yes, I know. The genesis of my question is that, in all likelihood, SeaSpine is going to end up being valued on revenues like most small spine companies, and so what I'm really trying to get at is -- what is the implied earnings power of Integra ex-SeaSpine in your 2015 guidance?

I understand, but at this point, we're not going to give any specific EPS numbers relative to the SeaSpine dilution.

Okay. And just real quickly, on the currency side, could you give us a sense as to the impact of currency on Q4 and then impact from a gross margin perspective, and then the impact of currency on the gross margin for 2015 as well?

Sure. So, relative to Q4, the impact of currency on our topline was a little over $3 million. I would say, relative to EPS, it probably had about a $0.03 to $0.04 impact, negatively, on our bottom-line.

Gross margins, it's difficult to say because we're procuring materials six to nice months ago that are actually coming through now at higher Euro rates, so it's difficult to say, but clearly if I just look at the instruments part of our business, which is where we procure most of our materials outside the US in Euros, it's probably at least a 50 basis point impact on our Q4 gross margins.

As we look at 2015, the impact to the top line with FX right now, based upon current rates, is about $25 million. And we've called out about $0.10 to $0.15 for the EPS impact.

And most of that flowing through gross margin?

Yes.

Okay. Thank you very much.

You're welcome.

Larry Biegelsen, Wells Fargo.

Good morning, Larry.

Good morning. Thanks for taking the question.

I just wanted to circle back to an earlier question on Q4, first. Last quarter you talked about adding new distributors outside the US, and some other items that sounded one-time in nature. Can you quantify how much you benefited outside the US this quarter from one-time items?

Obviously, the international result was very strong, this quarter. And then I had a follow-up.

Yes, I would say Larry, the view for Q4 on one timers was quite small. As far as any type of stocking distributors or things of that nature, the majority of what we took place if we take a look at Western Europe and things of that nature, we had very strong sales through our direct channels, particularly in Neuro.

We had some nice tenders that we knew were a little bit light in Q3, that picked up in Q4, as we had communicated in the last call. And then really, in, I'd say Asia and Latin America, we just had some good, strong close. I think our [Cusa] devices, our DuraGen products as well, DuraSeal continued to do well. We just had good run-rate execution, and a lot of is tied to we put broader capabilities in place.

I'll give you an example. In China, our plan all along has been to move from one or two large mother distributors into a more flatter structure, which we've done. We've got our own management leadership team in place. Our office structure to actually manage through that, and the result is of actually selling resources, we're up 30%, 40% of people actually selling our products.

We are starting to see the benefit of that come through the P&L.

That is helpful. So with Zimmer, Biomet and Wright and Tornier, there's potential for disruptions across both lower and upper extremities. Can you discuss what those disruptions mean for Integra, and have you seen any disruption from the announced deals, yet? And just lastly, based on some of the FTC actions or requests around Wright, Tornier, looks like the combined company may have to sell one of their total ankles.

I heard your comments about the 2-piece ankle, but would you be interested in acquiring one of their ankles if it became available? Thanks a lot.

So, Larry, I would first start off and say we're not really seeing really any changes, so to speak, or disruptions in the marketplace yet, and I would expect, as we start seeing the announced integrations here in 2015, no matter how good of execution plans all these companies have, there will be some changes. Will that open up some distributor opportunities? Will that open up some IDN opportunities?

My gut says most likely, there will be some opportunities that will come our way. Relative to products that come out, we always keep our ear to the ground, if you will, for interesting products that could fill out our product portfolio. That could be from the mega-deal that is taking place, to some of the orthopedics deals that are taking place. But I wouldn't say we have a specific product anywhere that we're definitely focused on.

I would just comment that, when it comes to some of the larger joints within the extremities world, whether it be a shoulder or whether it be an ankle, the more that you have a different variety in your portfolio, what it does is, in some cases, is dis-focus you, and it adds additional labs, additional training, additional tools.

So, it's not to say that we wouldn't be interested, but in our spirit of staying very focused, keeping our sales channel focused, being able to really have impactful spend in labs and training, our strategy for bigger joints is to stay on a common platform where it makes sense. But we will be looking at different opportunities that come up, and evaluate them to see if it makes sense for the Company when they happen.

Thanks for taking the questions guys.

(Operator Instructions)

Bruce Jackson, Lake Street Capital Markets.

Morning, Bruce.

Good morning. Thanks for taking my question. About the diabetic foot ulcer data, I think that you were planning on having that published someplace. Do you have any indication as to when that might be published?

My follow-up question is -- you had some internal targets as to the performance of the product. Did you hit those targets, and were those targets set more on an Apligraf, Dermagraft level, or maybe a little bit higher?

So just, let me answer the first and I'll clarify -- but to clarify, your second question, are you talking about the outcomes of the study on your second part of your question?

Yes.

Okay. So, the first part of your question relative to the DFU data and publications, yes, we have submitted into some major journals. We believe that we're going to hear back, as far as the acceptance of the journals, probably in Q2, latter part of Q2. Then from there, it could be 60 to 90 days after that until it actually get published out within the journals.

So, we believe in the second quarter, we will be able to communicate which journal it's going to be in, and when you're going to see the information. Relative to the study itself, we spoke on previous calls that we achieved our primary and secondary endpoints. The study was focused on, like many of the other studies that were done in the marketplace, on the standard of care, which is based on closure rates, quality of the close, time to closure versus the standard of care, which is the moist wound dressings.

So that's been the focus. We obviously had some other secondary endpoints in there that I'm not going to go through, now, that we believe are going to be relatively important in an economics discussion, or a discussion on how you think about the treatment regimen. Yes again we feel very good about our data. We feel very good about the power of the study. The quality of the study.

And again, we had just submitted our PMA supplement, which gets us on the way. I also remind everyone, once we receive our PMA, we do then have the capability to begin some initial sales within the veteran affairs world. But that also then kicks off our journey into CMS and with the [max], which is how you get to the major 2016 for an impact on DFU.

That is helpful. Thank you.

Steven Lichtman, Oppenheimer.

Good morning.

Good morning.

Pete, now that we're closer on the total ankle, any further details you can provide as to how you see that platform differentiating from others on the market, or just how you see that impacting momentum in your extremities franchise when you guys can add that to the bag?

Yes, I would just say on the design, Steve, we're not ready to talk about it. Mainly for competitive reasons.

There's a lot of things going on in the space, and so that's -- we view that as something that we want to keep proprietary at this point. I will tell you, our focus has been on driving this product out in a way that really focuses on our mission, which is around limiting uncertainty for caregivers and surgeons, and in the case of an ankle, a product that can be effectively utilized when revisions are needed to come up. Obviously we have a large fixation market within the United States.

The other area has been a very good focus by the team on the instrumentation. To allow them to be a lot more simpler design. And the third part of it has been a focus on being able to do this in such a way that we can have launches in multiple parts of the world, not just the United States, when it's ready.

So that's kind of that component of it. In 2015, it's going to have a minimal impact at all. We're going to be methodical in our control market release. Which is really about making sure our manufacturing partner can ramp up effectively, our labs, our training, all of that are on track.

Our instrumentation is right, and then we'll ramp up with a higher acquisition of capital. And as you know, that will be gated, basically, by the amount of capital you get out for sets. Our direct lower extremity sales team will be the key focal point for that.

And then at that same time, we'll also be supplementing and growing more of our wound care capabilities and reps. That will sell different products. In that case, DFU and some of our other skin products. So, longer-term, we think it's going to be an impactful product. We think it's going to be a really nice fit within the focus that we deliver on. And I'm just really excited that the team is not only on track, but a little ahead of plan.

Got it. And then secondly, instruments outlook on an organic basis in 2015. Just wondering your thoughts there? Overall 2014, I know had a number of headwinds, but where do you see that business on an organic basis going in 2015?

I will comment, and then I'll have Glenn add a few comments.

If you saw the fourth quarter numbers, alternate site is still a little soft. We actually really had some very good lighting performance, and we think our lighting franchise can benefit from some even more growth with some adders and changes into that line. It was also good to see the acute care business start to pick up a little bit.

As we talked about through most of 2014, we just didn't see as many new starts in centers where they were buying new instrumentation. I wouldn't say we see significant changes early on in the year, but we are more optimistic that we're going to see a little bit more of a pickup within that area.

I will also say that the integration in with specialty surgical, one of the key things that we wanted to do with this is to create a capability where, fundamentally, 90% of our products, there may be a lot of similarities in that space to other players, but in that 10% area where we have some really differentiated products, we now have some sales capabilities to detail those to surgeons that can create some additional pull-through on the acute care side. And that will be part of our strategy as we come into 2015, to kind of change our trajectory on our instruments business. I don't know, Glenn, if you want to comment a little bit further about how we looked at the growth rates?

Yes. So Steve, I agree with all of Pete's comments, obviously. Organically, we are expecting this business to be up in the low single-digits for the reasons that Pete mentioned.

Acute-care is doing a little bit better now, our lighting business doing well. So overall, from a global perspective, we see our instruments business being a low single-digit grower for us in 2015.

I would say one of the things just to add on instruments that we're really excited about and why MicroFrance was just a great acquisition for us is, two-thirds of those revenues come from outside the United States, and yes they are impacted by currency right now, but it does give us a large enough base in Europe that we have some markets that we can entertain going direct. Which means not only selling the MicroFrance products, but now that we actually have a sales force, bring the rest of our portfolio through.

That will be a process through 2015, and most likely something that will benefit us going into 2016. It's a nice enabler, and we are quite happy with that acquisition.

The quality of the people. The quality of the products. It's a really great fit for Integra.

Great. Thanks guys.

Thank you.

Jason Bedford, Raymond James.

Good morning, Jason.

Good morning, guys. Thanks for taking the questions.

Just a quick clarification. I think Pete mentioned that SeaSpine will have $30 million to $40 million in cash upon the spin. Is that on a net basis?

So we're going to put $30 million to $40 million of cash on the balance sheet of SeaSpine with no debt

With no debt. Okay.

And then just on R&D. Over the last few years, you've been kind of walking down the R&D investment. In the fourth quarter, it was below 5%, which is the lowest in a while. And I realize you've given guidance of 6% of sales, but if I exclude what was likely an elevated spend associated with the DFU trial, you haven't been there in a while.

So I guess my question is, strategically, can you bring down R&D, and do you kind of view it as a bit of a source of cushion in the P&L?

Jason, from my perspective, we're looking to spend more in R&D rather than less. So, could we bring it down? Absolutely.

But we want to make sure we're continuing to pump a lot of money in clinical studies, new product development, and so 6% is our targeted spend. That is the number we want to actually drive up in terms of our overall spending. Including going into areas of exploratory areas, such as regeneration and things of that nature.

Jason, I think one of the things that's quite exciting for us, you might remember we created this office of the Chief Scientific Officer about a year ago. We've centralized our clinical resources for the whole Company. In the spirit of, really, the changes with the ACA and changes around the world, we're up on clinical studies.

Some of these are even very small studies, but studies that create evidence on our products across-the-board. In that 6%, there is a definitely significantly larger portion of clinical studies that provide proof at the point of launch. If you looked at us as a company four years ago, and candidly, any med-tech company, the amount of studies that one had at launch was quite small. We're really changing that quite a bit. Investing appropriately there.

And the other areas where Glenn mentioned, which is -- look at our core. We're a regenerative medicine company. We've been a leader in skin technologies. We have some really interesting products coming out in the nerve space within tendon repair and other areas of skin.

The fact is, is that they take a little bit larger R&D up front. With our capabilities with success, we believe they will bring the highest returns for the Company. That's kind of the areas where the money is going, in regenerative and also the clinical work to make sure that our products have the reimbursement power that is expected of them.

(Operator Instructions)

Dale Dutile, the Boston Company.

Good morning, guys. Just a question on the ERP system. I think you said you have 80% of revenues now running through that. In which case, I would have thought that the spend next year would be down more considerably than you're suggesting. Why is it you're still spending $18 million on that?

Dale, this is Glenn. We are reducing our spend next year relative to the ERP system. So, between capital expenditures and the amount we actually run through our P&L as expense, expect it to be down probably about $7 million to $8 million in 2015, and then that significantly drops off in 2016.

We are going to see a reduction in 2015, and then it really dropping off in 2016.

So the rate of spend is not commensurate with units getting on revenues flowing through it?

We still have additional locations to roll out in 2015. We just completed the rollout of Australia and Canada.

We have more locations to roll out in 2015, including some of our US manufacturing sites. Once those are complete in 2015, you're really going to see that taper off in 2016.

I think, Dale, the other part of it, as well, is that once you get the systems in place -- even skip the other 20%, we've got the United States. We've got a lot of our business running through it.

Now that we have that common system, there's a window of time here we can utilize that platform to rethink how we do some things. So where we had multiple ERP systems, and we might have had [Pod], so to speak, of work in either customer service or we had work in different capabilities in the Company.

Really, over this next year, we'll be able to kind of streamline that, and to Glenn's point, that is where we see additional value that can come to the Company by leveraging this new platform that we have in place.

Okay. And then on the structural optimization charges, those are up next year? I know you closed, was it Andover and something else? I'm forgetting. Are they more facility closures, or what's in that number for this year?

So the two plants, I'll have Glenn give you the details on that. We closed our Andover, UK facility, and we closed our facility up in Massachusetts; Burlington. And consolidated those into our existing footprint.

So yes, out of there, there were clearly charges for severance, and also for charges of closing the facility. And now we start seeing the direct P&L benefit of that coming in from those shutdowns. Actually beginning here in Q1.

And as I mentioned in some of my prepared remarks, relative to the savings for Andover and Burlington. Some of that is being offset in our gross margins relative to the new collagen manufacturing center.

So you don't necessarily see the gross benefit coming through in 2015, but we also have more plans in 2015 as well, relative to additional site closures. So, we have some things going on in the US as well as outside the US, and so I'll call it phase 2 of our consolidation plans are moving forward.

Have you announced what those are? Could you give us any sense?

We have not.

Okay. Thank you.

At this time, we have no further questions, so I'd like to turn it back over to our speakers for any additional or closing remarks.

Thank you. I'd like to thank everyone for attending our call today, for the questions, and I would just like to take a couple of minutes just to reiterate some of our key points, here.

We're clearly proud of the achievements and the financial performance of the organization during 2014, and we feel confident about our position as we start this new year. In 2015, we will be focused on the following four key objectives, which I commented on in my prepared remarks.

First was executing on the 2015 targets, which include delivering organic revenue growth of at least 4% to 5%. Driving margin improvement and ending adjusted earnings per share growth of 10% or more, excluding currency impact. Second, completing the spinoff with SeaSpine, and integrating the new origination into a two divisional global structure.

Third, investing in channel strategies and new product introductions, to strengthen our international infrastructure. Leverage our enterprise selling organization, and generate roughly a quarter of organic growth from new product introductions. And then lastly, we will pursue strategic tuck-in M&A in the core markets of our two businesses. Especially surgical and orthopedics and tissue technology.

So again, thanks again for listening, and we look forward to speaking with all of you in the near future. Have a great day.

Thank you.

That does conclude today's call. We thank everyone again for their participation.