Integra Lifesciences Holdings Corp (IART) 2019 Q1 法說會逐字稿

Good day, and welcome to the Integra LifeSciences First Quarter 2019 Financial Results Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Mike Beaulieu. Please go ahead, sir.

Thank you, Britney. Good morning, and thank you for joining the Integra LifeSciences First Quarter 2019 Earnings Conference Call. Joining me on the call are Peter Arduini, President and Chief Executive Officer; Glenn Coleman, Chief Financial Officer and Corporate Vice President of International; and Sravan Emany, Senior Vice President, Strategy, Treasury & Investor Relations. Earlier this morning, we issued a press release announcing our first quarter 2019 financial results. The release and corresponding earnings presentation, which we will reference during the call, are available at integralife.com under Investors, Events & Presentations, in the file named First Quarter 2019 Earnings Call Presentation.

Before we begin, I'd like to remind you that many of the statements made during this call may be considered forward-looking statements. Factors that could cause actual results to differ materially are discussed in the company's Exchange Act reports filed with the SEC and in the release. Also the discussions will include certain non-GAAP financial measures. Reconciliations of any non-GAAP financial measures can be found in today's press release, which is an exhibit to Integra's current report on Form 8-K filed today with the SEC. I'll now turn the call over to Pete.

Thank you, Mike, and good morning, everyone. If you turn to Slide 4 in the earnings presentation, I'd like to start by reviewing some of our first quarter highlights. Total revenues in the quarter were roughly $360 million, representing growth of 3.1% on an organic basis, in line with the guidance we provided in February. Adjusted earnings per share of $0.65 exceeded our expectations, increasing 12% over the prior year, driven primarily by 180 basis point improvement in gross margins. We remain on track to achieve our full year 2019 financial targets.

In our Codman Specialty Surgical segment, first quarter operating performance for each franchise was in line or slightly better than our expectations despite the TSA exits, ERP conversion and Day 2 transitions. In February, we discussed our exit of the transition services agreements covering Western Europe and the successful transition to a single global instance of our ERP system from roughly 30 just a few years ago. Our last major milestone will be the TSA covering Japan in the third quarter of this year, after which, we will have closed out all substantial Codman TSAs. In early April, we took control of the first significant wave of Codman Day 2 countries. As a reminder, these are indirect markets in which we will have full control of all commercial activities for the first time since the close of the acquisition. We now have commercial ownership of roughly 25 Day 2 countries and expect to assume control of the most significant Day 2 countries by the end of the third quarter of 2019. We're confident that we can stabilize performance in these indirect markets over the next several quarters.

In our Orthopedics & Tissue Technologies segment, wound reconstruction grew mid-single digits in the first quarter and is positioned to accelerate later this year. As we indicated on our 2018 year-end call in February, last year's channel expansion increased demand in our regenerative businesses, requiring us to invest in our manufacturing capacity. These investments largely have been completed. And as we approach the second half of 2019, we'll be in a position to support faster growth, both in our existing product lines and new product launches.

In our Orthopedics business, we achieved organic growth in the first quarter, 1 quarter ahead of schedule. Growth in Orthopedics was attributable to improved sales force effectiveness, new product introductions and double-digit growth in both our ankle and shoulder product lines. We are at an inflection point with Orthopedics and expect growth to improve over the course of 2019 as our commercial teams further penetrate new and existing accounts and we begin to benefit from a full market release of new products.

If you turn to Slide 5, I'd like to highlight a few of our new products from each of our segments.

First in our CSS segment, we're launching 7 new products this year, all of which will contribute to growth in the second half of 2019. Last week, on the American Association of Neurological Surgeons, or AANS, we showcased these new product introductions and received very positive feedback from clinicians. Our new products include CereLink, the most technologically advanced intracranial pressure monitor we've ever offered. This system provides neurocritical care teams with greater insight and accuracy than current monitoring technologies as well as enhanced flexibility and usability within the MRI suite.

We expanded our CUSA Clarity Technology platform with the launch of a new handpiece and an array of state-of-the-art surgical tips. With the enhanced power and performance of CUSA Clarity and its leading tissue capabilities, surgeons now can remove both bone and challenging tissue faster than competitive products, further boosting CUSA Clarity's popularity among neurosurgeons. Also at AANS, we formally announced -- introduced additional sizes of CERTAS Plus, our MRI compatible programmable valve portfolio to expand a surgeon's options for managing patients with hydrocephalus. Included within this launch is a new state-of-the-art toolkit enabling surgeons to more efficiently adjust and confirm the settings of the CERTAS Plus valve.

In the second half of 2019, we also look forward to launching DuraGen in Japan, which will be the first and only nonautologous collagen xenograft approved for use as a dural substitute in Japan. The approval of DuraGen in Japan was the culmination of several years of work by our global team, and we're proud to be able to offer surgeons in Japan a proven product that has already benefited more than 2 million patients over the past 20 years.

In our OTT segment, at a recent orthopedic academy meeting, we announced the launch of a new reverse shoulder glenoid plate that expands our Titan Reverse Shoulder System. The new baseplate was designed with advanced imaging analysis to fit a broader range of anatomies, specifically patients with smaller glenoids. And this product expansion builds upon the benefits of our Reverse Shoulder System and its press-fit humeral stem design, allowing surgeons to treat patients without cement in primary and revision surgeries.

We also launched the Panta II Arthrodesis Nail System which offers the latest innovations for fusion of the ankle due to severe arthritis and complex deformities. Panta II's new radiolucent carbon fiber targeting and compression device provides surgeons improved visibility under X-ray and positioning.

Turning to our Regenerative portfolio. We look forward to full market release of AMNIOEXCEL Plus later this year. We have received strong reviews from clinicians of both the handling and healing characteristics of AMNIOEXCEL Plus and are confident this product will be a growth driver over the next several years.

To summarize, we've moved past most of the Codman integration activities and the ERP conversion, and are launching multiple new products. We've made significant progress in our Orthopedics business and have largely completed investments in our Regenerative manufacturing capacity, all of which position the company for stronger growth in the second half of 2019.

With that, I'd like to turn the call over to Glenn to discuss the details of our first quarter performance. Glenn?

Thanks, Pete, and good morning, everyone. As Pete mentioned, our reported and organic revenues were in line with the guidance we provided in February. Our top line performance, coupled with stronger-than-expected gross margins, enabled us to exceed the high-end of our adjusted earnings per share guidance range by $0.03 and generate year-over-year EPS growth of 12%.

If you turn to Slide 6, I'll review our segment performance, starting with the Codman Specialty Surgical or CSS segment. Reported revenues in CSS were $234.6 million in the first quarter, representing a 2.5% increase on an organic basis. Despite the anticipated disruptions in Europe related to [integration] activities and the ERP conversion, our CSS performance was slightly better than expectations.

Starting with our global neurosurgery business, sales in Dural Access and Repair increased mid-single digits on an organic basis compared to the prior year's quarter, with growth in both our graft and sealant product lines. Sales in flow and pressure monitoring increased low single digits over the prior year's first quarter. Growth in CSF management remained steady in the first quarter and offset slight declines in neuromonitoring. We expect performance to accelerate in the second half of 2019 as we begin to benefit from new product launches in this franchise.

Wrapping up the discussion of our neurosurgery business. Sales in advanced energy increased low single digits, driven by continued strength in our CUSA product line in the U.S., which grew more than 10% year-over-year. Our growth in the U.S. was partially offset by flat sales in Europe as our commercial team spent more time supporting integration activities and less time in the field.

Moving to precision tools & instruments. Revenues were roughly flat compared to the prior year, with strength in our acute and specialty surgical product lines offset by declines in dental instruments.

Looking at a quarterly cadence for CSS in 2019, we expect organic growth to improve slightly in the second quarter with greater acceleration in the second half of the year as we move beyond the integration activities and benefit from new product launches.

For the full year, we expect reported revenues to increase 1.5% to 2% and organic revenues to increase 3.5% to 4%, consistent with the guidance we provided on our last earnings call.

Let me now move to Orthopedics & Tissue Technologies or OTT segment on Slide 7. First quarter revenues were $125.1 million, representing an increase of 4.2% on an organic basis compared to the prior year. Wound Reconstruction grew mid-single digits in the first quarter, led by strong revenues in our core tissue portfolio, including products such as Integra Bilayer skin, PriMatrix and SurgiMend. As previously discussed, we've been investing to increase capacity to support stronger demand in our Regenerative portfolio following last year's channel expansion and realignment strategy. These investments are largely complete, and we expect growth to accelerate in our Acute Wound Reconstruction, Advanced Wound Care and Surgical Reconstruction businesses during the second half of 2019.

Revenues in our private label business grew mid-single digits in the quarter but were below expectations due to timing of orders. Performance in our Orthopedics business improved in the first quarter as we've achieved organic growth 1 quarter sooner than we had expected. Our Orthopedics performance represents an inflection point, as is the first quarter of year-over-year organic growth since Q4 of 2017 and is a direct result of the operational and commercial changes we implemented over the last 18 months. Our commercial teams have also gained greater access to high-volume ankle specialists following the recent launch of the XT total ankle revision system. This sales activity, coupled with more focused marketing programs, are driving consistent double-digit growth in our ankle portfolio.

Our upper extremity product lines also increased double digits as we saw a benefit from the addition of new distributors and the recent launch of the new glenoid baseplate for the Titan Reverse Shoulder System. For the full year 2019, we expect organic revenues to increase in the range of 6% to 8% over the prior year and reported revenues to increase in the range of 5% to 7%, unchanged from our prior guidance.

Turning to Slide 8. I'll now review the key P&L components below revenue for the first quarter of 2019. GAAP gross margin was 64.2%, an improvement of 460 basis points over the prior year. Adjusted gross margin was 68.4%, an increase of 180 basis points compared to the prior year, driven mainly by improved sales mix and manufacturing efficiencies. Our gross margin improvement resulted in a 100 basis point increase in adjusted EBITDA margin for the first quarter to 24.3%, the highest we've achieved in over 2 years.

Our adjusted tax rate was 18.8%, a slight increase over the prior year. GAAP earnings per share more than doubled for $0.38 over the prior year due to significantly higher gross margins, lower interest expense and a lower tax rate. The lower tax rate was a result of a onetime tax benefit related to our operations in Switzerland. Adjusted earnings per share was $0.65 compared to $0.58 in the prior year, representing 12% year-over-year growth.

For the full year 2019, we are reaffirming guidance for total reported revenues to be in the range of $1.515 billion to $1.525 billion, representing growth in the range of 3% to 4% and organic revenue growth of approximately 5%.

Moving to earnings per share. We're increasing our GAAP EPS guidance range by $0.10 to a new range of $1.46 to $1.53, reflecting the onetime tax benefit. We are reaffirming our adjusted earnings per share guidance range of $2.65 to $2.72.

For the second quarter of 2019, we expect reported revenues of between $370 million and $375 million, which assumes organic growth in the range of 3.5% to 4% and a foreign currency headwind of over $4 million based upon current rates. We expect adjusted earnings per share to be in the range of $0.64 to $0.67, which at the midpoint would represent growth of about 10% over the prior year.

Turning to Slide 9, I'll now discuss our cash flow performance. Our operating cash flow in the first quarter was $29.5 million compared to $41.5 million in the prior year. The first quarter of 2019 included a onetime inventory buy from J&J, associated with the TSA exits in Europe. Our capital expenditures in the first quarter was $16 million, in line with the prior year as we continue to make investments at our Massachusetts manufacturing facility.

Free cash flow conversion on a trailing 12-month basis as of March 31, 2019, was 51%. As a reminder, we expect a significant improvement in our cash flow during the second half of 2019 as our operational performance improves and we move past the spending associated with Codman integration activities. As of March 31, 2019, our bank leverage ratio remained at about 2.9x, consistent with our year-end position. We maintained a strong and flexible balance sheet with cash and cash equivalents of $157 million and capacity on our revolver of about $1 billion to support potential future tuck-in acquisitions.

And with that, I'll turn the call back over to Pete.

Thanks, Glenn. If you'll turn to Slide 10, I'd like to summarize our key messages. So we've made great progress of the Codman integration activities and the expansion of our global commercial organization. Today, we highlighted the launch of 8 new products and look forward to several more later this year. We are also optimistic about the increased demand we've seen in our Orthopedic and Regenerative businesses. Our investments in channel expansion, manufacturing capacity, R&D, IT systems and integration activities over the last 18 months have positioned us for both accelerated growth and increased profitability in the second half of 2019 and for the full year 2020. That concludes our prepared remarks. Thanks for listening. And operator, if you would, please open up our lines for questions.

(Operator Instructions) Our first question comes from Jonathan Demchick from Morgan Stanley.

I wanted to start off, really -- I guess the main story for Integra, really this year looks to be like the timing of the acceleration for sales. It's kind of reached this 5% number, and then you look at 1Q results and then 2Q guidance. I guess this suggests that the second half of the year, your growth needs to be kind of close to the 7% number as, I guess, comps get a little tougher. So I was just hoping if you kind of walk through, maybe some of the key areas that growth has maybe been derisked or that visibility has improved for how accelerations are going to happen into the back half of the year? And then I have one quick follow-up for Glenn.

Yes, Jon, I'll start. And then Glenn, you please feel free to jump in. First of all, I'd say we're right on track to how we thought about this sequential growth where we ended up at Q1, continued growth in 2Q and then further acceleration in Q3 and Q4. So again, to reemphasize the points that we put out, the new launches that we have are really now all out. They're doing well. But the actual, after you get through value committees and the ramp-up will really start to be good in Q2. But most of the effect will be Q3 to Q4. So that's a big part of it. Q2 also is also kind of a transitional quarter here for us for the last cleanup of the TSA items. We do have Japan, as we've mentioned, is a TSA conversion in third quarter. But the majority of the Day 2 countries, all of the changes we've made, that settles out. So the fact is that I think we've got a realistic view in our guidance for Q2. If all good things aligned, could we do better? Sure. But how we think about it is -- those new products and stuff, we need to do 6.5%, say, growth in the second half. The new products themselves, we're counting on probably about 2 points of growth. So in that range you're talking about the core business growing around 4.5% in the second half. So that's kind of how we frame it. I don't know, Glenn, if you want to add anything else to that.

No. The only thing I'd say, Jon, is if you look at the sequential ramp to get to the guidance for Q2 with that being of 3.5% to 4%. It would imply a sequential increase in revenues of about $13 million. We would expect roughly half of that coming from OTT, half coming from CSS from the segment perspective. And if you think about the ramp of $13 million and how we get there, almost half of it, or $6 million to $7 million, comes from 2 extra selling days in Q2 versus Q1. And then in addition to that, seeing a bigger ramp of CUSA Clarity right now, we've got a strong funnel in terms of our capital pipeline. So expect to see a sequential improvement there. Further progress in our Orthopedics business, we were delighted by the performance in the first quarter. In fact we put up a -- organic growth quarter, one sooner -- on 1 quarter sooner than expected. It was obviously good news. We expect that to continue getting more supply in Regen to support the underlying demand were seeing there. And then internationally, we should see less disruption moving forward before the TSA exits in Europe. And now that we've got the 1 common ERP platform, better performance, more selling time in the field. So all in all, we've got good line of sight to the ramp from Q1 to Q2. That would get us 0.5 point to 1 full point of organic growth acceleration. And then as Pete mentioned, the back half of the year for us is really all about this new product launches. Pete mentioned 2 points of growth coming just from the new product launches. The most significant ones there I would highlight, would be CereLink, our ICP monitoring platform; and also CERTAS, with the tool we're launching, a couple with some of the new configurations for smaller sizes. So that's how we see the year playing out.

Very helpful. And just quick follow-up on margins, obviously, gross margins was a pretty good outperformer this year, or this quarter. Was there anything onetime here? Any reason why performance would, I guess, normalize a bit lower for the back half of the year? And then secondly, on R&D. That seemed to take a step down from, I guess, the trend that we would have seen over the past couple of years. I mean, anything going on there? Or was it just delayed spending that, maybe, it gets ramped up for the back half of the year?

Yes. So maybe I'll comment on the gross margin piece and Pete, maybe you can hit R&D. So gross margin is coming in at 68.4%, was better than we were expecting. But keep in mind, we had modeled for about a 100 basis point year-over-year improvement in gross margins. So we were expecting gross margins to improve this year. Nothing really onetime in the first quarter. I would just say there's always some variability in the timing of manufacturing expenses from quarter-to-quarter, but nothing of a onetime nature. Why we had such a strong quarter is really a function of sales mix, number one; which if you look at where the sales were driven from and the growth, more U.S. growth than OUS growth rate, and that obviously helps the overall mix story geographically. But from a product perspective, saw good growth in Regen, both on the OTT and the CSS side. We had a really strong quarter on dural repair in both our graft and sealant product lines. Some of these new product launches that we were launching here have higher gross margins. And we had a really strong overall performance in CSF management, which has very good gross margins. And that's the programmable valve and the antimicrobial catheter portfolio. So all of that really helped from a mix perspective. And then we're seeing better productivity and some of our key manufacturing sites, and so all of that generated a very healthy first quarter gross margin improvement. I would just say from a cautious perspective, we're modeling still our full year guidance of 67.5%. So a bit of a downtick in Q2, but we are more confident now we will be at or above our gross margin guidance for the full year, given how we've started the year.

And Jon, just on R&D. I mean we've kind of modeled the year to have a little less expense in Q1. Some of that was with all the other moving parts we had going on, that we actually held back a little bit of the spend. I think you'll see that tick up through the year, and particularly when it comes to clinical studies and some of the new investments we've made. I've been impressed with both sides of our house, how well they've done with program execution. Again, just to highlight the point that 8 of these products are coming out of CSS during the time of a huge integration. Many companies, those programs slip. Our team did a great job there, and I'd say on the Regen, same deal with the new products in clinical studies. And a shout out to our Orthopedics team that did a great job with the Panta II, Chris and his team. And also with some of the shoulder products, that has really made a difference. And I think we've struggled there a little bit in the past. We're now started to click, and with that, we'll end up putting more money into R&D investments.

Our next question comes from Matt Taylor with UBS.

This is actually Xuyang Li in for Matt. Maybe just first on the 25 Day 2 countries that you mentioned. Can you maybe talk about where you're focused on in terms of trying to stabilize the business in the coming quarters? Maybe timing of some of the metrics that you're focused on relating to that stabilization?

So in terms of the Day 2 countries, we did a nice job to close all of them on time here in the first quarter. We have more coming here in the second quarter. Our focus is, obviously, making sure that the distributors have very little disruption, making sure they're trained on the portfolio and then, we've got commitments moving forward relative to the products we're going to be selling. So all of that activity is taking place prior to the close. And we feel now that we've got good line of sight to some of these bigger distributors, some of the tenders that are going on in these countries, that we'll be able to stabilize performance in the near term, meaning next couple of quarters. But I would just say our Day 2 performance in the first quarter was pretty much in line with what we had expected. So no negative or positive surprises there.

Okay. Good to hear. And then on the Ortho business. You achieved growth 1 quarter sooner than expected, which is great. Can you maybe talk about the inflection in Ortho growth and your ability to penetrate new accounts? Also what are you seeing in the Extremities market in terms of growth and share dynamics?

Yes. I mean -- I'd say we look at a broader picture, we're still a small player. So you have to, kind of, take our market views, obviously, with a little bit of a grain of salt, because we're not one of the largest players. But I think we're seeing very healthy growth within the whole mobile base -- ankle area. We did quite well, did double-digit growth there. I think just to give you a view year-over-year, our team probably was capable, maybe a little over half of being able to fully being able to sell an ankle on their own without specialized help. That's probably almost 100% now. And so we're seeing the benefit of being able to bring more surgeons in. And then also, the [complement] of existing surgeons expanding that out. So that's been one big driver that helped us achieve the growth faster. And the other area is in shoulder. Our shoulder grew over 20% and the combination of bringing in some of these new features which we do have a lineup of things, with our new agreement with a third-party group. And then this small baseplate has helped out quite a bit. What that's done, then, has allowed us to bring in some other bigger distributors into the fold that have been able to expand the growth of the product in -- and again, our Titan platform, both the full shoulder and reverse, it really gets great feedback on the simplicity of the instrumentation and the elegance of it. But the product line right now only covers a portion of the shoulder market. And again, as we continue to add on new features that expands out into all areas, we see this is going to be a growth vehicle. Those 2 really made a difference. I think on the broader, lower area with the fixation device I mentioned, the Panta II. We saw a really good uptick, and we think that's going to then help stabilize and reduce some of the major pressure we had in forefoot, midfoot over the past couple of years. So we feel pretty good about it. And again, channel energized, good leadership with our commercial team and a nice set of new products. Those are what's really making the difference for us.

Our next question comes from Robbie Marcus with JPMorgan.

Glenn, a question for you. Gross margin did really well this quarter. SG&A was a bit higher than The Street. But down the P&L was pretty good with an honest EPS beat. Just run through your thoughts on, especially with second quarter guidance coming in slightly above The Street on the bottom line. Why not raise EPS guidance here? And maybe talk about how you feel about positioning towards the middle to upper end of the guidance range?

Yes. Thanks, Robbie. I would just say it's early in the year. I mean we're only 3 months in. We obviously were off to a strong start profitability-wise across-the-board from our perspective, and gross margins were obviously a very positive surprise to us. So yes, could there be upside the EPS? Absolutely. But we still have more spending plans here, especially in the second quarter, around marketing programs to launch these new products. As Pete mentioned, some of the R&D programs are going to be kicking up in the second quarter. But clearly this positions us well to hit our guidance range for the full year, and the reason why we didn't tick it up is it's just too early in the year. We still want to see a couple more months pass before we start calling a higher set of numbers. But we're quite confident right now in our in full year numbers.

Okay. Great. In Wound Care, there is a lot of moving pieces, with some of your competitors, your restructuring and new product launches. Maybe you could just give us the lay of the land on what you're actually seeing on the ground, both in the inpatient and outpatient. And maybe just comment on the split of how those 2 businesses are performing with the specialized sales forces?

Robbie, I think -- well, first of all, I think across the board, we have 3 specialized sales forces in the United States that cover tissue. So we have a group that calls into plastic and reconstructive surgeons that has everything from hernia repair to upper chest wall types of repair. We have a group that sells primarily into the outpatient wound area. And then we have a group that calls into the inpatient, which covers everything from burns through trauma. I would say all 3 of them are doing quite well. We expect that all 3 of them will be putting up either high single to double-digit numbers here as we kind of go forward through the year. If you think about the outpatient area for Wound Reconstruction, we've been delivering double-digit numbers. We think that's going to continue. Obviously there's been some acquisitions that have taken place. We haven't really seen any changes to that significantly. We have some other competitors that are going through some challenges. The need and demand for the products clearly is there and so we see that not changing. We are beginning to benefit from that. We've talked about some of the larger contracts that we've picked up. Change takes a while, it takes a little bit of a while to kind of get through value committees and things. But we're all seeing that come together. And as we referenced in our prepared remarks, the ramp-up in manufacturing so that we can meet that demand has been a big part of some of the investment we started last year. On the inpatient side, it still continues to be very dynamic and positive. I think there's more and more uses by surgeons for a lot of our matrices that were out there, where in the past, they might not have used it. They might have done a flat procedure or something. And so we're seeing more now in trauma cases going to in IDRT. We clearly are growing and are the #1 leader in burns, both third degree as well as second degree. But a lot of activity in that space and that will be an area of investment. And the last part I mentioned was, we picked up in our acquisition of TEI, is in the ab wall and breast and upper pectoral chest area. And that's starting to really pick up quite a bit. I think the xenografts that we have versus some of the synthetics that other people have in the marketplace has actually been fueling some of that growth, lower risk of infection, better adaptability and, obviously, something that helps remodel within the body. There are a few players in the marketplace, but we're starting to really see a good pickup here in our growth. And again, as we think about growth in the second half of the year, these products all have gross margins that are significantly above the company average. And that's going to continue to help fuel our profitability as well as the growth.

Our next question comes from Craig Bijou from Cantor Fitzgerald.

Let me start with a follow-up on the Day 2 countries. And I wanted to see, maybe if you guys could provide or remind us what percentage of revenue that Day 2, the ones that you brought on and then are going to bring on, kind of what percentage of your overall revenue that represents? The reason I ask, I know the performance has been down and you guys are now going to take control over those markets. And you talked about the tender process or you're positioning those markets for the tender processes that are coming up. So wanted to get a sense for how much you guys expect that performance to improve in those countries. And I guess, how much of that improvement is potentially built into your guidance? And, obviously, the tender process is uncertain. But I just kind of want to get sense of what you guys are expecting from those countries.

Yes Craig, thanks for the questions. So the Day 2 countries are relatively insignificant, meaning it's about 1.5% of our total revenue. So think of it as about $25 million of annualized revenues. So $6 million per quarter or so. Our expectations around this is -- most of those will be closed by the end of Q3. And we're basically counting on flat performance through the end of this year. Obviously, as we get into 2020, hopefully we'll start to see some growth. But right now our expectations are just flat growth as we get through the rest of this year, which would be a slight improvement from what's been happening to date. But again, it's about $25 million of total revenue on $1.5 billion or so.

Okay. That's helpful. And maybe just on a bigger picture. I wanted to see what your thoughts are on acquisitions. Glenn, I think in your prepared remarks, you talked about the capacity for tuck-in acquisitions. So I wanted to get a sense for your willingness or how you're looking at the market for acquisitions, given that you still are kind of integrating? And then maybe any color on size or areas within your portfolio that you may be looking to boost.

Yes. So Craig, I would say we look at our capacity both from management bandwidth point of view and moving past, so all of the Codman integration activities, and some of my comments surround our balance sheet flexibility. We are now in a position to do some tuck-in acquisitions, really, in the key parts of the portfolio that we're in today; so neurosurgery, the specialty instruments, Wound Care, going deeper in those areas and not adding a fourth leg to the stool, so to speak. But I would just say the size of these deals for us, several hundred million dollars is usually what we call as tuck-in acquisition. And I think we're in a good position to continue to move forward and, hopefully, close a couple of deals later this year. Obviously, dependent upon market conditions and some of the seller expectations. But Peter, if you want anything to that?

No. Just to say that I think where we are right now, particularly on the OTT side of the house, which we run as a separate entity, we're ready to go. We find the right tuck-in deals [or bolt-on], we've got these discrete channels which even reduces the risk of integration, right? If it's something that's going to go into advanced wound or inpatient, you don't disrupt the other channels. In the past when we integrated something, it just interrupts the channel every time. So that's one of the other benefits for the tuck-ins. I'd say on the neuro side in our instrumentation business, for the most part, just take a look at the United States. I mean, we've had the integration completed as of last July in many cases. And so where the brunt of those revenues from tuck-in products would come, the team is pretty much ready for it. So we'll be out looking, I think, the right types of tuck-in deals to build out the portfolio, to build relevant share positions, is really what we planned to do here.

And Craig, I would also add, in addition to tuck-in acquisitions, we continue to look for opportunities around licensing deals. Forming partnerships, a good example of that would be when we recently announced around shoulder, with the Consortium of Focused Orthopedists there. So those types of arrangements we continue to move forward with well, to position us for further growth in 2020 and beyond.

Our next question comes from Larry Biegelsen with Wells Fargo.

This is Shagun in for Larry. I just wanted to touch on Dural Access and Repair. It's obviously a strategically important area for Integra. Is the mid-single-digit growth outlook still intact for 2019? And I was wondering if you've seen any impact from Stryker's purchase of HyperBranch? Or do you still believe that the business is fairly insulated, given that part of your business is tied in 1- to 3-year contracts? And I believe you had mentioned that there is some opportunity for conversion of the fibrin glue market. And then a similar question on the competitive landscape in Regenerative Technologies. Have you seen any impact from the disruptions at MiMedx? And what are your expectations for Osiris and Smith & Nephew transaction?

Shagun, thanks for the question. So maybe I'll handle the first piece and then Pete on MiMedx piece when I'm finished. So on Dural Access and Repair, had a strong quarter, mid-single-digit growth. So big growth in both graft and sealant areas of our business, including the Codman portfolio. So we were quite pleased with that. I think we've messaged in the past that we expect this to be a low to mid-single-digit growth part of our business, so we just modeled something a little bit lower than what we just saw in the first quarter, obviously we're shooting to the high end of that range. But we think of it as a low to mid-single-digit growth part of our business. Haven't seen too much yet on the dural sealant front, or from the competitor that you mentioned. Obviously, we're expecting it to come in, in a more aggressive way here later this year. And obviously we think having 2 companies in a space promoting dural sealants versus fibrin sealants could be a benefit to the overall market. But clearly, they're going to have some market share gains that they will probably make as we move forward into the back half of this year and we factored that into our guidance. Pete, maybe you can comment on that.

Yes. Just on the operation Wound Care, the underlying demand remains strong. The reason is pretty straightforward. These products work. They actually help to heal the wounds. You're right, there is quite a bit of disruption that's out there, and so we are starting to see some of the benefit of that and we think that that's only going to continue here in the second half of the year. We tend to also be the toolbox offer to surgeons in that space, where some folks kind of said I have 1 product and it works for everything. Truth is, it really doesn't. We come in with over 4 different products that can fit the different needs. And I think that with contracting as well as being a more consultative sale or where you may need a product that is actually significantly tougher, one that has different regenerative capabilities. We're really the only player out there that has that full line of offerings. And so we're starting to see the benefits of that and we think, again, that's going to continue to accelerate here as we get into the second half of the year.

If I could just follow up with one other question. Your OTT growth outlook in 2019 of 6% to 8% and it compares with high single-digit to low double-digit growth in your LRP. Do you expect to return to high single-digit, low double-digit run rate in 2020 and beyond?

The short answer is yes. But the long-term plan is 9% to 12% for OTT and that's what we plan to do.

Our next question comes from Ryan Zimmerman with BTIG.

Can you hear me okay?

Yes. Thanks, Ryan.

Right. Wonderful. PTI has bounced around the past 2 quarters, fourth quarter was really strong. This quarter was flat. Help us understand, maybe remind us kind of what you think of the long-term growth rate for the PTI business. And then I have a question on private label and CUSA Clarity as well.

Sure. So PTI, you should think of it as a low single-digit growth business. So 1% to 2% is what we've modeled. Quarter-to-quarter, you could see some lumpiness in the numbers. And you saw last year we had a quarter of 7%, another quarter, we were down a couple of percent. But overall, on a full year basis, we expect to be up 1% to 2%. Seeing faster growth in our specialty instruments area, including surgical lighting. But in the other parts of instruments like dental instruments, it offsets some of that faster growth. But overall, think of it as a 1% to 2% grower for us.

And then private label, you called out -- it sounded like you were a little disappointed. Maybe it's around some of the timing of the orders. What should we think about in terms of the cadence of the private label business going forward? The orders that you missed, were those made up early on in the second quarter? Just kind of help us understand the cadence there.

Yes. Some of those orders, not that significant. So we looked at where we were a little bit short on OTT. Private label, we were expecting to be about $1.5 million higher than where we ended up. Again, just some of those orders have shifted to Q2 and Q3. So I would just say it's timing. For the full year, again, we continue to expect private label to grow pretty consistent with the overall OTT growth. But Q1 was a little bit lighter than we were expecting because of the timing of some orders with our larger private label partners.

And just to say our longer-term outlook, Ryan, as Glenn said, as you get to the second half, some of the capacity additions we've had, like a lot of these products we either make in Puerto Rico or we make here in New Jersey, we're running both facilities here. So we've got the room to expand that. And I would expect as we kind of make the turn into 2020 as well that the private label should be robust for us.

Okay. Helpful, Pete. And lastly, if I could squeeze in one more. CUSA Clarity, it sounds like your order book has been pretty positive. You guys seem to be pretty excited about that. So help us understand, is this a combination of new customer acquisitions with CUSA Clarity? Or is this working through your existing customer base, kind of going through the upgrade cycle? And just how you're looking at that outlook. Some of your competitors are coming out with updated systems later this year. So how does that play into your thoughts around CUSA Clarity dynamics?

You got it, Ryan. So we've been, obviously, expecting a couple of new -- not new entrants but upgrades to 2 existing players' systems for some time. Both of them, at the recent AANS, had showcased them. Some are ready soon, some later in the year as you alluded. So kind of what we expected and aligned to what we had thought when we gave our guidance. I would say right now we still have a reasonable amount of -- kind of, home accounts that are there in the first half of the year. But a big part of our portfolio, which didn't happen in the past prior to CUSA Clarity, is a big part of our funnel, our mix sites are purely competitive sites. And the reason for that is the previous generations of many of these products, they weren't that differentiated. But with our Tissue Select technology, which no one has, and from what we've even seen from a new introduction, still will not have, really makes a big difference with dealing with tough tumors. And again, the difference here is, can take a case that's 3, 4 hours, down a good 1 hour-plus in the procedure but still also have the sensitivity not to damage critical structures. So we think that we're going to start penetrating more and more of those competitive sockets. That being said, what we've had in our estimates is that whenever you have new entrants come in, everybody takes a little bit longer to evaluate the technology. So we think and we built this in, that the sales cycles will probably extend out a little bit longer than they were in the last 18 months.

Ryan, I would just add to Pete's comments that, in addition to the capital piece which we focus in on a lot, the consumables part of the business is also growing nicely. This embedded base that we've now got, with all the capital we put in place, is driving in nice consumable annuity for our business and that should continue going forward as well.

Our next question comes from Travis Steed with Bank of America.

So Ortho did a little better in Q1 than you expected, but overall growth was in line. Was the TSA conversion in Western Europe a little more impactful than you expected? Just trying to think through what the offset was in Q1. And then in Q2, the extra 2 selling days. What's that worth on revenue growth? And if you could just quantify the extra 2 days?

Yes. Thanks. So on the Ortho question, we did do a little bit better. We said that it was really offset by private label and the timing of the orders there. The TSA exits and the disruption factor was pretty much consistent with what we were expecting. And so no surprises there either way. I think the good news around that as we move past the majority of the disruption now we're going to see faster growth moving forward into the second quarter and beyond. As we look at the extra selling days, my comment was around the sequential increase. So year-over-year, Q2 to Q2, it's the same number of selling days but sequentially, we get 2 more from Q1 to Q2. So hopefully, that helps to clarify the selling day comment I made.

Okay. And then you commented on a reacceleration in the Wound Recon business, mid-single digits this quarter, reaccelerating later this year. Just help us, sort of remind us what's driving that reacceleration. And then -- does it get back to high single digits or low double digits? And then any comments on the growth in the Healogics account versus the rest of the portfolio. Are you starting to see any sign of share gains in those accounts?

Yes. So look, on the Healogics and the outpatient, we're starting to see some good progress across the board. It's taking a little bit of time, as we had mentioned, it would be a linear ramp. But some of that, even though there are no new contracts, that each hospital goes through their own [vat] committee and we've had a good 80, 100 accounts that have through that and had a pretty good conversion rate. I would say on the second half of the ramp, a big chunk of it is getting the adequate level of supply to convert certain accounts. So as opposed to converting a doctor or converting a large swath of the accounts, we've been cautious about how aggressive we've been, we've been adding the supply on. As an example now with our whole broader IDRT product family line here, we've added capacity, added lines and we should start seeing the benefit, that in second quarter. So commercially, we've added some incremental resources in certain areas. I think we've kind of gotten the new channel structures and all the training completed. So between that productivity of channel and now all the adequate supply to meet it, that's really the key that should help drive it towards the upper end of the range, in the high single-digit range that we typically expect to see in Wound Reconstruction.

Our next question comes from Matthew O'Brien with Piper Jaffray.

This as Will on for Matt. First question with Orthopedics. It was nice to see the organic growth ahead of schedule and sounds like it was a function of sales force effectiveness and new product introductions. Just curious if there were certain geographies that really stood out, particularly with established territories or any other factors?

I would just say, Will, the broader picture in the big macro discussion, U.S. outperformed, Europe was a little bit behind. Some of that was expected in Europe because of the disruption with the ERP conversion, which has a higher impact in Orthopedics because of the kitting and the whole field operations. There's just more things going on. So on the positive side of that, we see that recovering here as we move forward, starting to see some growth there. The United States, while the geographical area is more around the Southeast, Southwest as we've expanded focus, we've added some new distributors. But really across the board, we've been able to perform. So as I'd mentioned on a previous point, when we first split the channel, one of the most complicated sales we have is a full ankle sale. And many of our reps, by themselves, needed to have a specialist to be able to transact. And that was maybe 20% of the sales force. Today, that's over tripled, and the vast majority can handle it themselves. So what's that mean? It means that we're converting more ankles at a faster clip, that coupled with now the revision ankle, which many leading groups want to know that you have a revision product before you can enter into it. All those things have helped. And then I'd say we have, really, the leading ankle fixation device, for internal fixation for deformities. This Panta II product. It's a big deal on how well you actually do the internal placement and the accuracy of it, the tolerance to make this product is quite challenging. I think we're really one of the only that had something that works this way, and the radiolucent component of it allows these guys to use a C-arm or X-ray right there in the lab. And the placement just comes out superior to anything out there. We're getting huge demand on that, in fact, even meeting the ramp-up of the supply, we're just managing that pretty closely. So again, a combination of maturity, adding distributors in direct markets for shoulder, new products and new features on there. All the things that we had talked about, it's coming together. And so --and our outlook looks quite good for the rest of the year as well.

Right. And then secondly, HHS put out a technology review of chronic wound products earlier this year, with your data really kind of being the key standout, but they did request longer-term data. So I was curious if you were working on any key studies that we should expect sometime this year?

Yes. So one of our big investment areas within R&D is broader study work across-the-board, a lot of that is focused in the Wound Reconstruction and outpatient wound area. We have 2 key studies, 1 that will be coming out later this year is our AMNIOEXCEL Plus product, which is our tri-layer amnion that received great feedback on its healing and handling characteristics. And we'll have the study coming out here later this year and then that will move into broader reimbursement -- reuse -- utilized for broader reimbursement on the private side. We also have a study going on, a PriMatrix product as well. Both of those, so you have an amniotic and also a bovine product that we think will have a pretty big impact. We've spent a good chunk of time on making sure that we do our studies. I'll say it in the right way with the right power to have an impact. And then when you take a look at Omnigraft, which we came out a few years ago, which actually has been challenged by the reimbursement market, you're starting to see more customers, as they look at that data and look at their cost base, how they can actually repair a wound in 1 or 2 applications. We're starting to see more acceptance and actual uptick in that area as well.

Our next question comes from Steven Lichtman from Oppenheimer & Co.

So with the Ortho business starting to turn and what it seems like, a stabilization of that sales force following the split last year, do you see opportunities to expand the number of feet on the street on the Ortho and/or the wound side? Is that something we could see from you guys looking ahead?

Yes, Steve. I mean, the short answer is yes. So we expanded feet on the street in the first quarter with distributors on the shoulder side. As you know, a lot of people have been going direct. It's opened up some world-class distributors which we've been taking advantage of and we will continue to do so. And then we've added a combination of some additional direct reps and what we call ASRs or associate sales reps, where we bring young folks in directly out of school, kind of train them the way we want, after a couple of years of either running smaller lines or supporting a senior rep. We actually have someone who we can plug directly into the territory. So that's some of the model. But I would tell you today, when we look at our shoulder, and our ankle in particular, compared to the marketplace, if we had 30, 40 more reps out there could we correspondingly grow the business? Sure. And why is that? Because we know we've got great products within those areas. So we're going to be smart about it and cautious, but we feel good that things are coming together on the Orthopedic side.

And similar message on the wound side in terms of strategically, potentially add here?

Yes. I would say on the wound side, we're probably -- we've already added, as you know, we doubled the size of Wound Reconstruction. We've added specific in the outpatient area. The outpatient area will probably be the place that we would add at a more ongoing faster clip as we go into the VA and more centers. Why? Well, as we start taking broader share with this Healogics contract in other areas, we just need more people to service. So think of that as the area that probably has more adds coming up. I also would say in a broader Wound Recon -- excuse me, Surgical Reconstruction area, with the growth that we've been able to put up, double digits in that area. Really, the future on that business looks quite promising as well. And some of that is driven by new techniques for upper chest reconstruction work and also the need for more xenograft-based products within the ab wall. So both of those areas, I think, we'll probably see some level of investment here this year.

Got it. And then just, Glenn, how much is FX impacting your reported sales growth based on recent rates? And how much of an EPS impact are you absorbing from FX in your guidance this year?

I would say FX has probably gotten a little worse than we had guided to back in February. In the first quarter, we had about a $5.3 million headwind. In the second quarter right now, based upon current rates, it's going to be above $4 million. So keep in mind our guidance was about $10 million headwind for the full year. Now it's looking more like $12 million. But we're keeping our guidance for the moment. So this is some context around that. We're probably a little bit worse than we started the year. And again, most of it being an impact in the first half of the year on a reported basis. On the EPS line, you can think of it as about 15% drops to the bottom line. So 15% to 20% or so. So if you think about a $10 million to $12 million headwind, that's about a $0.02 impact on EPS.

Our final question comes from Matt Wizman with Raymond James.

It's Jayson. Just a couple of quick ones and I apologize if they're redundant. I joined the call a little late. Gross margin was better than expected in the first quarter. You kept the full year guidance. What pressures gross margin over the next 3 quarters? Or on the flip side, was there something that helped prop up the first quarter GM?

Yes. I would say, Jayson, that our sales mix was very good in the first quarter. Probably won't see the same level of favorable sales mix the rest of the year. And what we mean by that is a lot of the growth coming out of the U.S. has higher gross margins than our OUS business. And where we saw the growth between region, both on a CSS and the OTT side, some of the CSF management growth which is robust, kind of in the high single-digit range for us which is high gross margins and the fact that instruments didn't grow, which has lower gross margins, were all favorable in Q1. So I would just say, we're not counting on the same level of favorable mix. Obviously if that happens, it would provide upside for us. And I would just say some of the variability in terms of the manufacturing expenses from quarter-to-quarter moves around. And so we had a really strong quarter from a manufacturing perspective. Obviously, we're not counting on anything significantly getting worse, but I would just say, given where we started the year, there is probably more upside potential on gross margins than the full year. But again, only 1 quarter into the year we don't want to start saying, "Well that's too high," until we get to about midyear. And so good news is, we had expected a 100 basis point improvement for the full year. 2019 versus '18, we're off to a great start.

And my second question is, can you quantify the impact or opportunity for DuraGen in Japan? And I'm just thinking in the context of your low to mid-single-digit growth expectation for dural repair this year, is the anticipated weight on growth more on the sealant side?

So Jayson, relative to this year, I would have modest expectations because we're only going to have about 1 quarter's worth of benefit from DuraGen, given we've got the approval but we still have to work through reimbursement. So once we have that, we should start to see sales really at the beginning of the fourth quarter. But on an annual basis, where we reach peak year sales, which is several years from now, it could be a $15 million type product in Japan, just to give you some sizing of what that could look like.

Thank you, everyone. This concludes today's teleconference. You may now disconnect.