Good day everyone, and welcome to the Integra LifeSciences Fourth Quarter and Full Year 2015 Financial Results Conference Call. As a reminder, today's call is being recorded. At this time, I would like to turn the call over to Ms. Angela Steinway, Global Head of Strategic Initiatives and Investor Relations. Please go ahead.

Thank you, Priscilla. Good afternoon, and thank you for joining the Integra LifeSciences fourth quarter 2015 earnings results conference call. Joining me today are Pete Arduini, President and Chief Executive Officer; and Glenn Coleman, Chief Financial Officer. Earlier today, we issued a press release announcing our fourth quarter and full year 2015 financial results and providing 2016 full year guidance. We also posted a presentation on our website, which we will reference during the call today. You can find this presentation at integralife.com under Investors, Events and Presentations with the file named Fourth Quarter and Full Year Earnings Call Presentation. If you would open that file up to slide two, please reference our Safe Harbor statement covering the forward-looking statements we will make on today's call. As well, please reference the reconciliations of non-GAAP financial measures at the end of the presentation beginning on slide 13. And now, I will turn the call over to Pete.

Thank you, Angela, and good afternoon everyone. Turning to slide three, let me start with some of our financial highlights. In the fourth quarter, our sales were $241.2 million representing an increase of 10% as reported and 12% on a constant currency basis, over the prior year. Regenerative product portfolios in both our Specialty Surgical Solutions and Orthopedics and Tissue Technologies segments once again drove the growth, including TEI regenerative sales in both segments increased to 42% of total revenues, up from 35% in the prior-year period. Organic growth in the fourth quarter was 3.9% set against the tough comparison in the prior year as we previously communicated. Full-year organic growth of 6.7% came in at the high end of our guidance, and is more representative of the growth we think we can sustain on a long-term basis. Our adjusted net income increased 7.2% from the fourth quarter of last year, driven by our top line results and a 270 basis point improvement in adjusted gross margin, which reached a record high of 68.3%. In addition, our quality of earnings continues to improve as evidenced by our full-year free cash flow conversion rate of over 67%. Please turn to slide four for an update on our recent accomplishments. In the first week of January, we achieved another key milestones in our plans to enter the outpatient diabetic foot ulcer market, when we received FDA approval of our PMA supplement for Omnigraft. We are on track to our previously communicated commercialization plans and expect a mid-2016 launch. We are well-positioned to execute on our 3x3 wound care strategy that we outlined at our Investor Day meeting in November. We will be the only company that offers three technologies through three sales channels with our engineered collagen matrix, acellular dermal collagen and…

Thanks, Pete, and good afternoon, everyone. Overall, we're pleased with our fourth quarter financial performance, which is in line with the guidance we provided in November. And we're now even more optimistic about our financial outlook for 2016. First, let me start with the discussion on our fourth quarter reported sales, which was $241.2 million up 12% on a constant currency basis. Our fourth quarter organic growth of 3.9% over a tough comparison in the prior year was in line with our guidance. Full-year organic growth of 6.7% demonstrates the strength of our underlying businesses and the success of new product launches, which accounted for about a third of the organic growth. Please turn to slide five. Reported fourth quarter sales in Specialty Surgical Solutions of $153.1 million, increased 2.6% on a constant currency basis despite a challenging comparison with the fourth quarter of 2014 particularly outside the United States. For the full year of 2015, organic sales were up roughly 5.3% over the prior year, equally balanced between U.S. and international markets. This increase was largely driven by sales in our dural repair franchise, which grew 9% over the prior-year fourth quarter and 14% over the full year. In addition, we saw continued momentum in our Precision Tools and Instruments franchise, which reflects broader distribution of our instruments in Europe and higher sales of MAYFIELD 2 in the United States. Organically, sales in this franchise accelerated throughout 2015 for a full-year growth rate of 5%, marking a successful transition of our Instruments franchise into Specialty Surgical Solutions. Global Tissue Ablation and NeuroCritical Care sales were down for the quarter and for the full year in line with our expectations, due to a higher volume capital equipment replacement cycle and large international orders in both of these product lines in…

Thanks, Glenn. We exited 2015 with momentum across our business. And, I want to take a few minutes to recap our key areas of focus for 2016. So, if you turn to slide 12, in November of last year, we raised our key long-term financial targets, including organic revenue growth, by 100 basis points to 6% to 8%, and adjusted EBITDA margins to about 25% from 23% to 24% prior. These targets are long-term. So, while we may see some variability quarter-to-quarter, we expect to continue to execute and show progress towards these targets over the next three years. A few minutes ago, Glenn outlined our 2016 financial guidance. Achieving 7% organic revenue growth with double-digit EPS growth is a top priority for the year. Improving execution has been an important theme for our business over the last several years, and we've strengthened our operational foundation. From the stronger position, we are focused on accelerating growth. We have numerous opportunities, new products to launch, new markets to enter, and an energized team executing against these growth plans. At our Investor Day last November, we provided details on our 3x3 commercialization strategy for Omnigraft. January PMA approval was the first for a diabetic foot ulcer treatment in roughly 15 years, and we take great pride in having accomplished something that will provide new solutions for this large and growing market. And we're executing on all aspects of the launch and look forward to providing additional updates to you in the next couple of months. In addition to the launch of Omnigraft in our regenerative technologies portfolio, our extremities franchise is well-positioned for accelerating growth in 2016. The re-launch of Salto through the Integra sales team and the introduction of Cadence will add organic growth in the fourth quarter of 2016. And…

Certainly. We'll take our first question from Travis Steed with Bank of America. Your line is open.

Good evening, Travis.

Thanks for taking my questions. So, originally you gave guidance a few months ago at the Analyst Day and you're raising revenue a little bit, but you're widening out the EPS range a bit as well. So, can you help us understand what you're seeing in the business that gives you confidence in raising the revenue growth, but needing to widen out the EPS range?

Yeah. I'll comment and maybe Glenn, you can jump in. Travis, I think as we take a look at – as we mentioned in the prepared comments, I think our product launches that we have prepared for the year, we have better insights into what those estimates look like. Our legacy portfolios, both in Specialty Surgical, including dural repair, as well as we take a look at our regenerative products, our skin products and such, we've got increased confidence that we could move to the higher end of that range. And if you recall, we talked about 6% to 7%. I would say, and I have Glenn put a finer point on it, at the same time we are entering two new segments that we've never been in before, ankle, as well as into the diabetic outpatient foot area and just the amount of marketing, the amount of ramp up, the amount of investments, we really decided to make sure that we put the adequate investments upfront. So, that we can accelerate our growth in the long term, and that's some of the investment concerned. Glenn, you may want to add a little bit more on the profit.

It's obviously, you're exactly right, when we've sort of taken our guidance up now to 7% organic growth for 2016. Previously, we talked about 6% to 7%. I think some of these new product launches could be higher than we initially thought potentially. So, we're kind of giving ourselves a little bit of cushion in our guidance range. We're also more bold just in general about our regenerative portfolio and our skin products. So, if you look at the momentum that we've got in our skin portfolio, if you really go about what's happening there – even in our private label business now with some of the additional capacity we have in our new collagen manufacturing center, we see some potential opportunities to do better in our private label business. And then as Pete mentioned, on the ankle space, we had a good start with the Salto ankle, it did better than we thought in the first quarter out of the box and we feel pretty bullish about our total ankle portfolio as we go into 2016. So, on the top line, we're feeling a little bit better about things, despite the fact we've got some headwinds in some emerging markets like Brazil, Mexico and China. But, overall, we feel better than we did back in November on the top line. EPS-wise, we have a lot of moving parts, we know the first half of the year is going to have a lot of investment with these product launches. So, relative to how we see the year shaping up, expect the first half to be lower than the second half just given the investments we're going to be making in a lot of these product launches. But, relative to our guidance range, I think $335 million to $350 million is a good range to go out of the year with. And, if these products are successful and these new launches are better than we think, we'll probably end up in midpoint to higher point of that range. But, we're giving ourselves a little bit of latitude with respect to a lighter range. And, again, the range would give us a growth rate of 9% to 14% year-over-year.

Okay. Thanks. Just had a follow-up on the extremities business. You said it was down low single-digits. Can you parse out what upper and lower grew on a global basis or a U.S. basis? And, kind of what drove the weakness overall relative to the last three quarters?

Yeah, Travis. I would just say, we don't break it out, but overall upper has done well, shoulder continues to do well. As Glenn said, the first – the first three months or first quarter that we actually had the ankle, which was in the first quarter – fourth quarter of last year. It's continued to be impressive and that will be accelerant. The areas – the area we've spoken about, which is our lower – our foot products, primarily tied to some older product versions that we're upgrading. And we had that type of slowdown, it was actually a little bit lower rate than in previous levels. We believe by midyear in 2016 that we'll able to turn that tide around, specifically on those legacy products. I mentioned on my prepared remarks some of the new products are coming out in that area, as well as, we're kind of refreshing that whole line. And so there's two things, one is the refreshing of the lower, we believe is going to make a difference for us in 2016; having the ankles, it gives you access to new customers that we really didn't have before that use all of the rest of our lower portfolio and then we've also done some things to focus and add to our channel. And so that's kind of the three areas, but being down, it's the same area that we've spoken to in the past, which is kind of in the forefoot, mid-foot, hind foot areas at different areas and we feel pretty good about our plans to turn the course on that midyear 2016.

All right. Thanks a lot.

Yeah.

Thank you. We'll take our next question from Larry Biegelsen from Wells Fargo. Your line is open.

Good evening, Larry.

Good afternoon. Hey, guys, thanks for taking the question. Pete, maybe let's start with the diabetic foot ulcer launch and just my questions are as follows, are you still comfortable with the $15 million this year for that franchise that you talked about at the Investor Day? And maybe if can you can talk a little bit, I know, it's early, about what you're hearing from payers on the Omnigraft, excuse me? Thanks. And I had a follow up.

Yeah. Sure. So, Larry, I mean, across the board, we feel very good about where we are positioned with diabetic foot ulcer product branded Omnigraft. I would say, our feedback from the FDA, as many of you saw, a press release that the FDA actually put out on the product itself, talking about how excited they are about what this can do for patient care. Our ramp up in our overall packaging of our product, we're in good shape and we're really commencing hitting the road here with payers, with the focus on being able to build up the amount of, not only in the area of open policy max which is roughly about just over 25 million lives, but also on the closed policy max, so we've been working through that and the private payers, which I would tell you, we're well on track to where we hope to be for mid-2016. So, I feel quite good about that. I think the initial feedback that we're hearing is extremely positive. As I mentioned, there's been a lot of products that have come to some of these payers that haven't had much data. So, we bring the largest study that's been out there with some very definitive data, what it can do for outcomes. And then being able to show the amount of product that's actually needed to close a wound in this product, it's been very exciting for folks to see. Ultimately, the rubber meets the road, once we get it in clinicians' hands and see how we can move from there, but I would say, our initial feedback on the quality of the data, the quality of the study, the health economics and cost benefits all being received well.

Thanks. That's helpful. And then one long-term EBITDA margin question. You guys are guiding to 24% EBITDA margin this year, which is a big improvement over last year. But your 2018 goal is 25%, which seems conservative given that you expect 6% to 8% organic growth. So, Pete, can you talk a little bit about, is that just a 25% – something you see is being conservative? Thanks.

I would just say, and I think Glenn can add some points to it, I think that we have opportunities to obviously outperform that potentially sooner. But I want to just kind of frame this up, we have again areas with some pretty formidable competitors that we plan to invest at a proper level to do long pilot studies, do the right types of investments to be able to compete. And so, a big chunk of our assumption is just to take the (30:14) previous question, we have 50 reps, many of our competitors are going to be in the range of 100 reps to 150 reps as you grow, those are going to take additional investments and you know we gave out those targets, we thought about some of the infrastructure and capabilities that need to be there. So, look if things go extremely well, do we have an opportunity to better than that? I'm sure we do, but I think it's quite realistic at this point in time to say that's the type of target that makes sense for us.

And Larry, the only thing I'd add is keep in mind, we have TEI in for a full year in 2016 versus five months, it's a very profitable business, so we get the one-time benefit really in 2016 and then you have a recurring business portfolio thereafter. So, in addition to what Pete said just keep in mind, TEI full year helps us to get more of an impact in 2016, but still very bullish about getting to those 25% EBITDA margins by 2018.

Thank you. We'll move next question to David Lewis with Morgan Stanley. Your line is open.

Hello, this is actually Jon Demchick in for David. Thanks for taking the question.

Hey, Jon.

What is the, I guess start off a bit on, I guess, earning quality. So, it's been a large focus of our team and they're seeing the large gap in guidance EPS versus adjusted EPS, I guess, it gave us a little pause, but – I mean, I think that's largely related to the interest payments on the convertible debt, which you all pointed out. And I mean, certainly there's been a lot of improvement over the years in earnings quality for you all and I was wondering if you can maybe talk to some of that improvement and what drove it and how sustainable that is at these sort of 70% to 80% levels that you talked about for this year, moving forward?

Hey, Jon, this is Glenn. Let me take a crack at this and peek in – add any additional color to it. So, when we look at our differences between GAAP and adjusted earnings, especially in 2016 as an example, the vast majority of those special charges are non-cash related charges for acquisition. So, intangible asset, amortization, inventory step up, you mentioned non-cash interest portion on the converge, those are the big ticket items. So, when you look at our cash flow improvements, the fact that those are non-cash, you're seeing cash flow improvements in the business. Part of it is also the ERP system cost coming down year-over-year. We had about $10 million or so of less cash outlays for the ERP in 2015, expect a similar type improvement in 2016, and then going away. And so, yeah, we are expecting more improvements in our cash flows. We're expecting the cash special charges to go down and we're very confident, we're going to get to a 95% cash conversion rate by 2018 as we previously said. So, we're on a good path, we made great progress in 2015. We're going to make more progress in 2016. And on a path to getting close to 95% or 100% by 2018.

Thank you. And just a quick follow-up on R&D guidance. Actually, I was, I guess, expecting that R&D would probably be moving a little higher than just the 5.5% to 6% that we saw and you mentioned – called out a few different studies in ankle, shoulder and others. Is the sort of 5.5%, 6% rate where you expect it to be moving forward? Do you expect that to kind of move higher to, I guess, fund the higher growth that the business is driving?

So, Jon, I think again, obviously it's a percentage of sale growing on 7% growth, it's actually a pretty good step up in the actual investment dollars. And so, I think running towards that higher end of the range is probably where we see it. There will be windows of time, we're starting out and using some of the investment dollars from the medtech tax to start our tightened shoulder. PyroCarbon work, that will happen this year, and going to next year and so there will be windows of time when you'll actually have multiple studies going, that we may pop up in there. But we think with the mix of businesses that we have that – running in that 6% range, and at times going slightly above that makes sense. And again, with the growth that we've had organically and just a few years ago, when we were only growing say 2%, 3%, obviously growing at a 7% level. It's been feeding our R&D, we think, at the right level and the right clip.

Thank you. We'll move next to Matthew O'Brien with Piper Jaffray. Your line is open.

Hi, good afternoon everyone, this is actually JP in for Matt. Thanks for...

Hey, JP.

...taking my question.

Sure.

Yeah. I just had – had one on Omnigraft. I think once you got the FDA approval, you had, I think, coverage of around 50% of the max and then, you have to go and negotiate with the other half. I wonder if you could comment on some of those discussions thus far and then I mean, what's – is there anything that could happen in terms of gaining more coverage decisions that could accelerate the launch to maybe earlier than mid-2016 or that's just kind of an internal – making sure the team's ready and the marketing is ready, et cetera.

Yeah. I would say, I'm not – really don't have a whole lot more to comment other than I addressed on Larry's question. I think between the open policy max as well as the close, we're calling on all, as you may or may not know, some of them have a process of when you have to submit the information and there's windows of time you have get there, so that dictates the time. And then with the private guys, the Uniteds and all of those folks, there's a little bit more a methodical approach to go through and some of those could even take up to a year, but we're well on our way of having our meetings set up and plans for reviews with those with a walk-up on how we'd see covered lives increasing. Relative to the launch and pulling it up, I would just kind of position it this way: there's really nothing with the payer side that I think inhibits anything happening faster. Obviously, the more time that goes by, the more covered lives that we get in position. We have our sales teams now fully staffed and we've actually been commencing training. They're already starting to have discussions on the PriMatrix product with the customers within the space. So, we'll be commencing having the discussions there. The $15 million that we had mentioned relative to the Investor Day for including Omnigraft, including PriMatrix, is still a number that we're forecasting here for 2016. And some of the main items are, as you can imagine, we commenced ramping up the products here quite soon and you need to build up inventory. And you also need to build up the right level of product so that you get your dating on the products, so when you initially ship what you have it out there, all that's factored into our midyear launch. So some of those are procedural things from a manufacturing thing that we worked through, but obviously, if we have the opportunity to go out sooner, we would take advantage of it. At this point, we just feel very good and confident that we can hit our mid-year 2016 date to launch.

Great. Thank you. And, if one more, if I could on the gross margin guidance for 2016, is it fair to say that the med device tax should add around 100 bps, 1%, and that you're looking for around organic gross margin expansion of around 50 bps? Is that math correct? And, I guess just given the new products you're launching in terms of total ankle or the DFU products are higher margin, why that can't be more I guess?

Yeah. So, I'll take the first part and maybe see if Pete has any additional comments on the second part. So, relative to the medical device tax, keep in mind that that's a G&A expense for us, so that does not show up in our gross margins. Overall, the impact is about a 100 basis points, so you're right in terms of your math, but it's not in the gross margin line. And, again, while it's coming out of our G&A expense line item, we're reinvesting in selling and marketing and R&D. So, from an EBITDA perspective, we're viewing that as a neutral event. So that's how you should think about the impact of the medical device tax. And Pete, I don't know if you have any comments on the other piece.

Yeah. I mean, I'd just say on the products again, as you're scaling up in their partial years, you're typically dealing not with full production runs as far as your costs. And so, sometimes your cost of goods on those products clearly aren't at the level of full production. That starts coming in at the end of this year or into 2017 is when you see some of the benefits. So, we think that they're well-positioned. Again, if we were to have a faster ramp and we could get to some of those quantities higher, and that would give us a better cost advantage. That's in the products. And then, one that we've talked about quite a bit is how fast we fill up the new plant, also has an impact on actually reducing the cost of some of our regenerative products which would pass-through at higher gross margins. But, as of now, products coming out of that plant and the estimates that we've given you right now are really probably at their lowest position, meaning, we have the highest burdens on this because the plant's only producing 15%, 20% of its capacity. So, Glenn mentioned about private label, that's an interesting adder that can help across the board, mainly because in the last five years, we haven't had the capacity to really do any additional private label because our plant was maxed out making products for ourselves. And so, we do have some opportunities there and as they come into the facility, they can obviously be profitable products, but they can also help the overall capacity and cost for every product that's in that plant. So, a bunch of different things that we're looking at and thinking through, but I think how we position it right now, it's pretty representative of how we think 2016 will finish up.

Yeah. It's a significant improvement over 2015, we're talking about a 150 basis point improvement year-over-year and so we feel really good about our plans and continuing to drive increased profitability in 2016.

Thank you. We'll move next to Jayson Bedford from Raymond James. Your line is open.

Good afternoon, thanks.

Hey, Jayson.

Hey, Pete. Maybe just a follow on at the last line of discussion there, you mentioned on your private label business that you reupped the contract, just wondering, was that on the kind of the core legacy in Integra side or was that on the TEI business?

Integra products that we actually made here in our older facility that now enables us to actually make more capacity in the new facility.

And with this the expanded production here, are you actively going out and looking for new private label partnerships?

Yes. And I would say, not just anything, but we're looking for things that might actually help us to join R&D or work within some of our product platforms that would be in areas that we're not going to compete in, but actually the enhancement could actually help across our product lines. And so where those opportunities exist, we're very interested in, and as you could imagine, there's a reasonable amount of opportunities for scaffolds and structures with the leadership position that we have.

We'll go next to Steven Lichtman with Oppenheimer. Your line is open.

Thank you. Hi guys.

Hi, Steve.

Pete, you mentioned that the surgical sales channel with SurgiMend is integrated now, can you talk about the opportunity you see there looking ahead here, and also what are the type of products you see as adding through that channel potentially?

Yeah. Thanks, Steve. It's a good question. So, again, when you think about this, to kind of frame that, we'd never had a call point where we saw the reconstructive surgeon that did breast reconstruction or did hernia repair before. So, with the proper studies, we think our opportunity to go into the breast area for reconstruction is a really interesting opportunity. And with the right studies on the legacy TEI products, but also the work that could be done with our products such as Flowable and other scaffoldings there could be some really interesting opportunities for us. If you go into the hernia area, we think that with some focus that TEI had already commenced, there's a lot of interesting opportunities to increase products that have higher vascularization, other types of fits and stuff. And so, we're already working together closely, integrating R&D teams to come up with some new products, so that's an interesting thing. And then I would say, with the channel structures we have now that go into that area of inpatient, into the OR that touches burn, into the OR that touches broader – wound, and in the outpatient area, there's some interesting products that we could license, that we could fold into each of these channels. And I would say, they can range from everything from a synthetic-type product, all the way to a human tissue product, that could properly fit into those areas. We obviously have an amniotic product today, that we're talking about in wound, but there's clearly derivatives thereof that could go into those other segments. And I'd say, we're looking at all of those different areas, and I'd say, this year we hope to be able to bring some of those into the fold, that would most likely have benefits in 2017 and 2018 and beyond.

Great. And then – and then just the second. Can you talk a little bit more about your advancements, you're making in enterprise selling, any comments overall on how that – that effort is going, would be great?

Yeah, I think we're to starting to, in short, hitting our stride. It starts with getting your own organization to embrace it, meaning that you've got the systems now to look at a – a integrated delivery network, as a integrated customer, and P&L, if you will, and we can do that now. Having the right types of analytic skills to be able to understand, we bring x products together, does it make sense for the customer, does it make sense for us? We have that in place now, and we're growing much beyond just the GPO agreement, and actually setting up individual delivery network agreements. And I'd say last year, our growth out of those account areas was significantly higher than our core growth, and we're pursuing quite a bit of those this year. I would say relative to things like the 3x3 strategy, we just don't know, we haven't really gone down that route. But we do think that approach of bringing together products and capabilities in multiple channels and bringing together, not a hunting license agreement, but literally an agreement that talks to a level of commitment. A customer needs to buy this amount of product from us. We'll be some of the type of agreements that we'll be able to write here in the latter part of 2016 once we get those products launched. Operator :

Okay. Well, look, thank you, all, for attending the call, and all your questions today. I'd also like to just take a couple of minutes here just to kind of recap. We're very proud of how we've executed the 2015 plan and delivered on our financial results. 2016 will focus on the following objectives and items that I highlighted in the prepared remarks, I'd just like to touch on again. First of all, we're executing on our 2016 financial objectives is a key area for us, including its organic growth of 7% and double-digit adjusted earnings per share growth. Secondly, is entering the outpatient wound care market that we spoke quite a bit about and implementing our 3x3 strategy with the successful launch of Omnigraft midyear, which we feel quite good about. Third is continuing to drive the organic growth with new product introductions. And finally is pursuing M&A within Specialty Surgical, extremities and wound care and staying very disciplined about those three areas. So, again, thank you so much for listening and we look forward to speaking with all of you in the near future.

Thank you.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.