Good day everyone and welcome to the Integra LifeSciences First Quarter 2017 Financial Results Call. As a reminder, today's call is being recorded. At this time, I would like to turn the call over to Angela Steinway, Global Head of Strategic Initiatives and Investor Relations. Please go ahead.

Thanks, Ashley. Good morning, and thank you for joining the Integra LifeSciences' first quarter 2017 earnings results conference call. Joining me today are Peter Arduini, President and Chief Executive Officer; and Glenn Coleman, Chief Financial Officer and Corporate Vice President of International. Earlier this morning, we issued a press release announcing our first quarter 2017 financial results. 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 in the file named First Quarter 2017 Earnings Call Presentation. If you would open that file up to Slide 2, please reference our Safe Harbor statements covering the forward-looking statements. Also please turn to Slide 3 to find an explanation of non-GAAP financial measures that we will refer to on today's call and 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 morning everyone. We're pleased that we've gotten off to a solid start beginning of the year and our performance in the first quarter slightly exceeded expectations and this performance increases our confidence that we can achieve our financial targets for the full-year. If you'll turn to Slide 4, I will walk through some of the first quarter's highlights. First quarter sales of $258.6 million represents organic growth of 6.4% over the prior year, double-digit increases in our Orthopedics and Tissue Technologies segment led the growth and sales in Specialty Surgical Solutions increased 4% on an organic basis slightly ahead of our expectations. We achieved an adjusted gross margin of over 70% for the second consecutive quarter driven by our higher margin regenerative products and improved operating efficiencies. We accomplished this gross margin performance despite a partial quarter of dilution resulting from the Derma Sciences acquisition. Operating cash flow increased over 15% to $28.9 million resulting in an adjusted free cash flow conversion of over 85% on a trailing 12-month basis. Not only does this performance demonstrated significant improvement over the prior year, but also represents the best performance that we've achieved in the past five years. We closed the Derma Sciences acquisition in the middle of the quarter and are off to a good start with the integration of that business. As we previously indicated, the addition of Derma Sciences products and channel to our 3x3 advanced wound care strategy adds significant scale and allows us to leverage our distribution, manufacturing, and operational capabilities. Our portfolio advanced cellular and tissue based products such as Omnigraft, PriMatrix, and AMNIOEXCEL, allows us to offer solutions to treat wounds from early onset to the most severe and chronic cases. Our expanded outpatient commercial organization combined with an established…

Thanks, Pete, and good morning everyone. Our first quarter financial performance was slightly better than the guidance we provided during our February earnings call. Let me now discuss further details of our first quarter results. Please turn to Slide 5, where I will begin with an overview of the revenue performance for our Specialty Surgical Solutions segment. First quarter reported sales were $156.3 million, an increase of 4.1% over the prior year on an organic basis. Sales in dural repair increased in the high-single-digits over the first quarter of 2016 largely driven by volume. Sales in Precision Tools & Instruments increased mid-single-digits compared to the prior year quarter resulting from the continued strength of our MAYFIELD 2 cranial stabilization device. Our tissue ablation franchise increased mid-single-digits and we expect the ramp to accelerate in the second half of the year with the launch of CUSA Clarity. We have taken great care in designing a scalable platform to support future enhancements at improved gross margins versus prior CUSA generations. We expect some trialing of the new system over the near-term followed by a multi-year upgrade cycle. And rounding out our capital discussion, neuro-critical care sales performed in line with our expectations. International sales within the segment increased in the mid-single-digits driven by strong growth in Asia-Pacific with double-digit increases coming from Japan and China. For the full-year 2017, we're not making any changes to our segment guidance. We continue to expect sales in the Specialty Surgical Solutions segment to increase in the range of 3.5% to 5.5% on a reported basis and a point higher on an organic basis. Please turn to Slide 6 for an overview of our revenue performance in Orthopedics and Tissue Technologies. First quarter sales in this segment were $102.3 million representing an increase of almost 20%…

Thanks, Glenn, and congratulations to both Angela and Nora. If you turn to Slide 11 I will provide an update on our key focus areas for 2017. Our first quarter performance was slightly better than our expectations and we're on a clear path to achieve our 2017 financial targets of organic growth between 7% and 8.5% and adjusted EPS of $1.88 to $1.94 with double-digit adjusted net income growth. We closed the acquisition of Derma Sciences in the first quarter and are on track to complete the integration efforts on cross training and sales force alignment by mid-year and that we now have scale, we set out to achieve several years ago to achieve our 3x3 advanced wound care strategy. And we have a comprehensive portfolio of regenerative technologies including Engineered Collagen and amniotic tissue. We can better leverage our outpatient channel which is nearly doubled in size as well as our established in-patient team and our enterprise contracting group that focuses on large hospital networks. With many of the investments now made, we look forward to accelerating growth in the second half of 2017 and beyond. As I discussed earlier with respect to the planned acquisition of Codman Neurosurgery, our pre-closing activities are on track and we remain as excited as we were when we announced the deal about the strategic benefits and opportunities this acquisition offers. We anticipate closing in the fourth quarter. And finally, we remain focused on the core businesses. We're executing on our pipeline of new product introduction and global commercial investments. These investments are critical achieving our organic growth targets not only for 2017 but also for 2018 and beyond. And that concludes our prepared remarks. And operator, if you would please open up our lines for questions.

Yes, thank you. [Operator Instructions]. We will take our first question from Robert Marcus from JP Morgan. Your line is open. Please go ahead.

Good morning, Robbie.

Good morning. And congrats on the good quarter.

Thank you.

And congrats on the promotion, Angela.

Thanks.

I wanted to start; you touched on this a bit in the opening remarks about how you're going to see acceleration through the back half of the year. But I think the second quarter organic sales growth guidance came in a point or so below where many on the street have their models. So if you could just help bridge the gap between the first and second quarter organic sales performance and then may be give us some specific examples of what drives that to, closer to double-digit in the back half of the year.

Yes, I mean I'll comment may be on Q1 and Q2 and then may be Glenn, if you want to, you can reinforce the second half. I mean if you think about our Q1 and Q2 it's a pretty good sized step up from Q1 to Q2 but it's really in line with how we performed thus far I'd say in Q1. I think, you know about a third of that growth is going to come from SSS primarily continued growth in durable pair and we also expect in capital particularly in the CUSA line to have a good quarter. The majority of it the two-thirds is coming from a combination of Derma Sciences probably represents about half of the OTT growth in Q2 and I would say the other half of it comes from products such as the regenerative products which are our skin portfolio both inpatient and outpatient. We think we're going to continue to be strong contributors and particularly the outpatient products continue to accelerate while inpatient remains stable. Ankle and shoulder both had a very good quarter and we expect that to continue and then we have some private label businesses we think will be there. So I would say as we take a look at our Q1 to Q2 number we feel very good about it. Is there some opportunity to do better than that? There is. Keep in mind at the same time as we communicated on Derma this is the quarter where we do the channel integration, the territory alignment, and had factored into those numbers already some channel disruption but feel quite good about that growth in Q1 to Q2. Glenn, maybe you want to talk a little bit about how we think about three and four.

Yes, sure but before I do that I just want to first highlight that we probably did about a point better in Q1 and so while the sequential improvement does not look at significant as probably as most would have modeled initially coming into the year, we're pretty much holding our Q2 plans as we initially thought coming into the year. So you don't see the bigger sequential increase because we outperformed in Q1. As I look to the back half of the year and Pete hit on the most of the key points about how we're going to see accelerated growth but it's really the new product launches. Keep in mind CUSA Clarity is a global launch so we're expecting to see an uptick in our international business also in the back half of the year coupled with the fact I'm expecting to see faster international growth coming from some of the tenders that we're seeing in Q3 and Q4. You take that coupled with the rest we're adding here in the first half of the year that will benefit us in the back half of the year and a combination of all those factors, gives us confidence we can generate organic growth that will be 8% plus in the back half of the year to get us to our full-year guidance range.

Okay, that's really helpful. And may be if I could just ask a follow-up sounds like Derma and Codman are better than expected in the first quarter maintaining the 60 million outpatient wound guidance for the year. May be you could just give us some early thoughts on how the combination between Derma and the existing Integra products are going, how is the offloading boot the amniotic helping maybe help sell Omnigraft a bit and maybe how the value committees are progressing now that you're, four or five months into the year. Thanks guys.

Yes, so Robbie couple things in there but I would say overall it's looking to be a very, very good bit for us. If you think about this that the first part is, when you think about a product like the Omnigraft and PriMatrix which we've talked about until we have some bigger broader corporate contracts in place that manage type of shared risk scenarios, we're going to have more of a linear increase. The nice part about thinking of Derma as we pick up AMNIOEXCEL which is a product that is very competitive to any of the amniotic products out there from any of the leaders in amniotic pipeline. So I think we have a product now that from an amniotic standpoint is extremely comparative, high quality manufacturing structure in operation and so we believe we're going to be able to take share within that space. And again having the three different products and being able to actually match up in a broad clinic just on the advanced tissue line this is the first time we've really had it. So we've talked about the 3x3. This completes it with the three products in advanced tissue and now the three channels. The other aspects of the portfolio we really think and it gives us the girth to be relevant throughout the clinical pathway meaning from preparing a wound to treating a wound to protecting a wound. We now have products rate that can be used day one when someone comes in the door through protecting it on the back end which is the offloading boot which we think is going to be a very great product are kind of tying into our line but also in an account that may not be using Integra they may be using the TCC…

And we'll take our next question from Matt Miksic from UBS. Your line is open.

Hi, Matt.

Hi. Can you guys hear me okay?

We can, Matt. Good morning.

Good morning. Thanks so much for taking my question. So one follow-up on the Orthopedic Extremities business, can you give me a sense or may be help elaborate on where in that portfolio you've seen the growth, you mentioned the ankle -- the total ankle. If you could talk may be a little bit about the rest of the lower extremities portfolio and what some of the drivers are throughout this year, where we are in that total ankle and then I'll have one follow-up?

Yes, Matt I'll comment and Glenn just jump in. I think there's -- there's kind of four areas that are leading to growth when you think about OTT. So on the tissue side it really is our in-patient wound matrices that are driving a lot of the growth. And then on the outpatient world all that growth that we're going to be picking up is all incremental new growth and that's what we're talking about in the second half that's the tissue side. And that's growing -- and that's driving a good 50% of the overall growth within OTT. The other components are coming from metal and I would say this was probably one of the best orthopedic extremity metals quarter we've had in some time and we're optimistic about what this means in future quarters. But if you look in lower both Salto and Cadence which you know, Cadence is extremely nascent and it's growth think there's lots of opportunity there. We have a new EX fixation product which is used for ankle trauma. Our Panta Nail system which is really the leading internal fixation product all those together when you talk about a someone who had ankle injuries and you're going to fixated, you're going to stabilize it, you may go into an ankle arthroplasty that combined is the portfolio we have and we're seeing some very good growth. There's also some encouraging news of potentially some increased reimbursement in the Medicare space that we're optimistic may kick in later this year as well which would promote the broader segment growth. I then move, further up the body to the shoulder. I mean our shoulder product has performed well. We had a very good quarter we shoulder. We introduced a press fit version which others have within the industry. We didn't have. So it broadens our clinical indications for our primary and our reverse shoulder and we continue to see some good growth and uptick there as well as new distributors coming on board as they're excited about the overall portfolio. Those are really the key drivers. I think, if you think about shoulder and you think about ankle and metal just based on the transaction size they have a larger effect relative to revenue growth in a given quarter. And then we're making good progress I would say with the rest of our plating systems and expect, more introductions and products come out later this year into 2018 as we really kind of collocated our R&D Group down in Austin, Texas, and I think we're starting to make some good traction in these areas. Anything else Glenn, you would like to add?

I would just say we had one of our best metal cores in a long time; ankle and shoulder had very good performances. Keep in mind Matt that outside the U.S. we're off the market now with an ankle, Integra is now discontinued. So once we get to the back half of the year with Cadence launching in Europe that will help us in terms of our growth. Salto will likely come into the portfolio later this year as well. So I feel more optimistic around the ankle portfolio outside the U.S. in the back half of the year. If I look at the extremities business excluding ankle and lower extremities we're essentially flat. So we've still have work to do on our foot system but overall we had one of the best quarters we had in a while on extremities.

It's great. I do have a follow-up just on sort of your comments, on the outpatient side but just if I could ask one more on the foot and ankle I mean you're an important player obviously and have been for a long time in lower extremities and just any sense of whether the strength is this is a market phenomenon. Is it share gains on your side?

Well, I appreciate you say, we've been a strong player I'd say we've been one of the key players but not necessarily as strong as we'd like. And I think what this represents is when you have a portfolio in ankle that says you're really, the or one of the top two or three players in that area and the fact that ankle is probably the fastest sub-segment growth within extremities that's really the combination which is driving it. And I would say the second part to that was what I was alluding to is, is we're starting to get the formula worked out here for how to get more products out on a -- on a real time basis and not just for the U.S. but getting in and out globally and I think to Glenn's point the Cadence rollout is a good example of that. If you come up with a new product with a right type of global input and within an 18 month period get it out to about 15 to 20 countries obviously the ramp up impact is significantly higher than taking five years to do it with U.S first. And that's some of the benefit that we're starting to see. I think on the SSS side when you look at CUSA Clarity it's another good example of feedback from markets all around the world factoring in feature changes, ergonomic needs, and then being able to actually launch that product simultaneously around the world, will create greater and faster ramp ups than we've seen in previous product launches.

That's great color. And there is a follow-up on outpatient just one of the -- we hear a fair amount of interest in Omnigraft in the outpatient clinic you mentioned, you experienced at these recent meetings and the integration with Derma. I just wanted to get a sense of where are things moving, where are the challenges is Value Analysis Committee still kind of the hurdles you need to get over or how far along are you along are you on those kinds of things, reps -- representation just in certain centers is -- is something that we hear from the field that, getting just get a rep into detail the product would help a great deal and just may be some color on that process will be very helpful.

Yes, Matt. I think it's two things one is you hit on the last point reach, with only 45, 50 reps versus a lot of competitors that have 200 we're just touching the, the edge of the iceberg here relative to the amount of opportunities that are out there. So the combination of Derma and Integra to get close to 100 reps doubling our sales force is going to have quite a positive impact. And that doubling then is simultaneously you're going to have a rep that can go in that can talk about offloading, can talk about preparing the wound and have three different advanced products that they can offer and actually even bundle that from a contracting standpoint. We've never had that before so, that's going to be a big impact. Omnigraft itself we get very, very positive feedback on its ability to heal, its clinical capabilities the quality of the study. Where we have challenges is where we've spoken about before which is in a case where it's a fee-for-service market and someone's using an amniotic product that takes seven or eight applications they're getting paid for each application to use a product that closes in one or two application is an economic disincentive to that particular center. So we're aware of that and there's other competitors that talk about that that doesn't mean that our product isn't better for patients, it isn't better for health outcomes, and it clearly is better for reducing cost in health care. So over time it will be a winner. But we're going to offer any product they want. We have an amniotic product that is as good as any product in the marketplace and with some future work we will be able to bring out new modifications to that. And…

And our next question comes from Young Li from Barclays. Please go ahead.

Hi good morning. Thanks for taking my questions. I guess the first question may be just one on kind of the macro environment or surgical volume environment in Q1. I guess may be can you talk about some of the variances or cadences that you saw in Q1 were there any changes up or down in terms of just overall surgical volumes?

Young, I will take a crack at that. I mean we look at the volumes in Q1, we didn't really see any change in patterns from our customers; I would say there was pretty steady state overall. If you look at our varying businesses in the surgical space, we had a pretty strong quarter overall in our capital business. So we didn't see any slowdown in capital spending. So I would just characterize it as a pretty steady state relative to what we've seen in the past few quarters.

Yes, I mean the only thing I would add is that obviously there is a lot of communication in the United States going on is ZHDA on and ZHDA off. I mean I think so much that happened quickly was in and out that there was a lot of talk but when you look at actual numbers or effect on procedures, I don't think we saw people running to get procedures done nor did we see people putting the brakes on spending such as capital it seemed to be as Glenn said a pretty consistent quarter compared to how we would have thought about it in 2016.

Okay, great. That's helpful color. I guess may be a follow-up on the extremity side, can you may be provide us an update on the build-out of the extremity free comp sales channel may be talk about how that's going to types of reps are getting the overall rep hiring environment?

Yes so if you think about our sales footprint, the first part is the discussion I was just addressing prior is with Derma Sciences and our existing outpatient structure, we're going to roughly about 100 sales professionals, I don't think we're going to add any more on top of that until we show corresponding growth above what those territory levels could handle. So I mean that area we're going to be fully staffed and typically as we bring new territories in, we bring people, and some come from competition that want to come to a company that has a more broader portfolio and that they can grow their career, we bring people in from even large and small companies from that aspect. On the in-patient side, we're actually expanding quite a bit additional skin specialist and folks in that area the reason being is with PriMatrix products with the growth we're having within our bi-layer products, we think that there's still a lot of untapped market opportunity out there. And I think we communicated last call we're going to be adding a good chunk of resources. We're already well on our way as Glenn said and I think in Q2, we will have training itself completed and those reps will start having an impact in Q3 and Q4. And then internationally, we're also expanding our footprint quite a bit. There's already been quite a bit of hiring actually that took place within Q1 in select markets around the world. So we think we're in pretty good shape to have all those folks in place. If you'd ask me a few years ago we would be taking people from a lot smaller companies, we actually have half of our reps come from larger companies that really are may be not happy with the bureaucracy or the lack to be able to be in a dynamic company that's bringing out a lot of new products. And so we've had the benefit now with some ongoing success and investment in new products to be able to track some really premier sales representatives join the company.

[Operator Instructions]. We will take our next question from Dave Turkaly from JMP Securities.

Hey, thanks a lot. I know you mentioned CUSA Clarity as sort of a driver here in the back half. I was curious would you be willing to give us some color on sort of the installed base, I have to imagine it could be several thousand or something to that magnitude but sort of what kind of upgrade cycle, we could see and how long that might actually last?

Sure, Dave. When we think about CUSA Clarity in the embedded base, it's a couple of thousand units in the field, so call it probably 2,000 may be a little bit less than that is the numbers that we have. As we look at that franchise globally over the long-term, it's a franchise that probably grows in the low-single-digit range. We think with CUSA Clarity, we move towards the upper-single-digit range over the next several years. So it's a multi-year upgrade cycle will probably go out three to four years, so this is a nice growth driver for us for at least the next three to four years as we swap out that embedded base. Just keep in mind as CUSA Clarity is going to ramp up; there is some cannibalization on our CUSA XL products. So as we go through that or expecting growth, you just can't take the incremental revenues from CUSA Clarity without offsetting some of the expectations around what we were expecting from our previous CUSA Capital Equipment. But overall that's where we look at it; it's a business that's going to grow from low-single to high-single-digits over the next three to four years. And embedded base wise there is a couple of thousand units out there.

Yes, I would just add. This product is -- we're really excited about it, I think it's going to have, it's got a nice feature laden structure that if you take features out, if you take cost out of the system as you add features in, you add value and also margin accretion to it. So it's been designed that in a market like China it can be featured appropriately with appropriate cost in a market, the United States it may require significant more capabilities. It can be ramped up that way. And there's been a lot of work that's been put in the ergonomics and capabilities of it, it's a very elegant design and some of our top users from some of the biggest neurosurgery centers around the world have not talked about this as an upgrade or new system, but really transformational in their hands and what it can do and are actually dealing with some of the toughest tumors that they deal with and again part of that is having a cutting device that can really get it out there quickly but has the sensitivity not to affect any of the healthy tissue and that's the feedback that we're getting with this. And I would just add to Glenn, there is an installed base for couple of thousand, there is a lot of competitive units out there probably in the couple of thousand and we think this is a product that we're also going to be able to take share with in this marketplace. I think it's it also has a platform capability into going into other parts of the body down the road. So from an ROI standpoint, from an investment product that can be used in neurosurgery but then ultimately with new indications that will come down the road can be used in other parts of the body, it's going to have a really nice return on $400,000 kind of capital investment. And so those are the normal things that we would go through but we feel very good about it and again all the initial feedback just from this weekend at the AA and that's we're very, very positive.

Yes, great, thanks for that detail. And then may be one for Glenn free cash flow conversion at a record, can you just highlight may be like what may be the main driver of the year-over-year improvement was and then sort of as you fold Codman in, what do you anticipate in terms of how that business will look from a free cash flow conversion standpoint? Thanks.

Yes, turning to our first quarter performance 85% on a trailing 12-month basis was a record high for us. And in fact going back five years since we've been tracking the metric the highest we've achieved, a lot of it has been driven by the quality of our earnings, the fact that we've generated higher profitability at the same time doing a better job of managing working capital and we've made a really big conservative effort around inventory management, you've seen our inventory really come down our turns improving and a big result of that is showing up in our cash flows. So those would be the two big ticket items. We're doing nice job, we're also managing our capital expenditures that's come down over the past several years and the capital that we're now investing is really supporting growth initiatives. So instruments that supporting our extremities teams automation and some of our new facilities that's a type of capital that's going to really generate profitability improvements as we go forward as well as top-line improvement. So it's a combination of those factors. But as we look forward with Codman we're not giving specific guidance yet on what the free cash flow conversion is going to be. The only thing I'd say is once we move past some of the initial one-time costs with the Codman integration Codman is a very profitable business. We've mentioned previously that EBITDA margins within J&J are in excess of 30%. So we're very excited about the free cash flow generation that will come from that business but we have to move past some of the one-time costs in 2017 and 2018 we really start to see and reap the benefits from that. And when we do, we're going to be able to quickly pay down our debt and reduce our leverage in a meaningful way.

And our next question comes from Raj Denhoy with Jefferies. Your line is open.

Hi, Raj.

Hi, good morning. Hi, just a couple questions I could, one kind of broadly on international. I know it's been a focus for you guys for several years in terms of improving that or making it a larger percentage of the business and there I realize Codman is going to do a lot of this but thus far, it's still kind of low 20% range for the company and I think growth there is perhaps been a little lower than may be you're expecting. So is there anything in particular in internationally you can point to that that might get the performance a bit better.

You want to take that Glenn?

Sure. Now, so look at -- we just got back from several weeks visiting various key countries for us in Europe as well as Asia-Pacific. I came back much more optimistic and enthusiastic around the growth potential especially in Asia-Pacific. Japan and China represent really key opportunities for us over the long-term. Codman does bring a different element to this and accelerates a lot of the growth especially in areas where we can go direct in certain markets. But we have some very impactful new product launches taking place in some of these markets like China and Japan to name two, coupled with the fact we can go direct in certain markets the market itself is expanding. And I look at the opportunities in Asia and say there is a big opportunity for us to grow our business much faster than the U.S. and also certain parts of our international business. Very excited in Europe about the growth potential there as well I mean CUSA Clarity launched in March again if we look at Europe it's a very mature market but at the same time with CUSA Clarity now launching in Europe along with some upside potential with our Tissue Technologies business which is really in its in 50 stage in Europe. I think there's opportunities to partner with certain companies where you can actually have immediate go to market strategy with our Tissue Tech business and generate some growth there as well. So Raj to your point, we're still around 23% of revenues but if I look at the growth potential internationally there's no reason to think we can't see growth in the high-single low-double-digit range as we go forward outside the U.S.

That's helpful. And just thinking about Codman so, it's been a couple months now since you announced the acquisition and I think you noted you've been in discussions with some of the various regulatory bodies in terms of antitrust discussions is there any, anything you can update us there, is there anything from the initial guidance in terms of what the revenue base could look like and the earnings accretion we could expect in the first year has any of that change from what you've learned thus far.

Yes, Raj its Pete, no nothing has changed at this point in time. I mean it's obviously still early with some of these regulatory bodies were gone through the timing, there is kind of direct fully as we had fact that the commentary and the discussion I would say on the portfolios as we had thought. And so relative to our $0.22 in first full-year and then accelerate beyond that nothing, nothing has come up that would impact that at this point in time. So I would say everything is in line with how we've expected and progressing actually quite well with a good open dialogue with multiple countries as you'd expect.

Great thank you and congratulations Angela.

Thank you.

Our next question comes from Larry Biegelsen from Wells Fargo.

Good morning, Larry.

Hey guys it's actually Craig on for Larry.

Hi, Craig.

I wanted to follow-up on one of the questions before on the second half acceleration. Obviously you guys have several, several drivers to get to the second half growth that's going to be above the full-year guidance. And I guess the question really is just how with all the drivers, do all of those, all of the specific pieces have to, have to hit or do very well for you to hit that guidance or is it more of some products can hit the guidance, some can underperform and you're still comfortable getting to that growth acceleration.

Yes, Craig so when you look at our back half of the year guidance keep in mind it's not a significant step up in the first half. We did 6.4% if you look at our guidance range for Q2 6.5% to 7% they have to be only point 0.5 higher in the back half of the year. We do not need perfection to hit our guidance range to get to the guidance range that we have laid out there 17.5% for the full-year. We have a number of different shots on goal to point a phrase that Pete uses all the time. But we feel very good about our growth in the back half of the year. We've seen the new product launches the commercial investments that we're making, the international opportunities, and the tenders we’re expecting to hit in the back half of the year, if we see a lot of these things come together and are positive, we know probably end up at the higher end of our guidance range. But we do not need perfection to get to our guidance range I think we've got good plans in place and given where we ended up in Q1 we're more confident now we're going to get into that 17.5% range for the full-year.

Great thanks. That's helpful. And I want to ask on a question about the private label business and I know Pete, I think you mentioned it earlier as part, one of the growth drivers that for the second half acceleration. And I think on a previous call you made a mention that there were some agreements that you were going to see come through in Q3 and Q4. So the question really is, I don't know if you've ever put a number to the sales of that private label business but I wanted to see if you'd be willing to share the size of the business and may be the contribution that you expect from that business in the second half and then going forward.

So Craig when we look at private label I would say this has been a real bright spot for us in the past year-and-a-half, two years. The growth is actually now in line with our overall regenerative products within OTT. So you probably remember three, four years ago as we're working through some supply issues that business was declining now we're really seeing a pick up. And a lot of it have to do with the end market demand picking up with some of our existing private label partners, some of that has to do with new private label deals we're entering into. So when we look at the growth of private label we're very optimistic that's going to continue as we go forward. But the size of that business we don't break it out separately but it would not surprise me if we ended up close to $100 million in business as we exit 2017 just to give you an approximate sizing of that business. There's a pretty healthy growth factor in there but I think we'll be around $100 million as we exit 2017.

And Craig the thing I would add is, we have our core business which is associated with kind of our regenerative platform that things that we don't necessary sell but we make for others there is a portion of that we picked up with TEI and there's even a small portion that we pick up in the -- in the Derma world. So when you bring all those together there's the combination of that plus just the growth with the new plan. I think, we talked about this a lot, we have this new facility state-of-the-art prior years we were at 85%, 90% capacity that plan you couldn't take any new deals on we have. And so as we bring those deals on it's also going to help the gross margin of all of our products that we make in that regenerative facility and probably the biggest growth lever and so I'm going to have private label as one of our partners I won’t disclose had been off certain markets for a period of time with that product that's going to be coming back on in the second half of the year and so that will generate some upside growth as we provide a key component of their products. So when you look at the opportunity to grow player coming back on in certain markets that's why we feel quite confident in our private label business continuing to grow.

Our next question comes from Matthew O'Brien from Piper Jaffray. Your line is open.

Thanks and thanks for taking the questions. Just for starters on the tender side, Glenn, you mentioned those come in the back half of the year. I loved to hear about line of site that you have on those tenders are those all or nothing type contracts or can you get a portion of those what kind of economics would you have to potentially give up in order to make sure you secure those and how impactful could those be towards steady you may be to the high end of your organic guidance range.

Yes, so no we have good line of sight of where the tenders are we're actively participating in those offers as we speak. I would expect a couple of those to close here in Q2 but we have line of sight to them and I would say it's not all or nothing in many cases we've been a part of a tender so it's just going to depend upon how successful we are with some of them but a lot of these are recurring tenders. So I have a high degree of confidence that most of them will come to fruition if we got upside it would be because we won the vast majority of the tender itself versus a partial win. So I feel very confident that the tenders are going to happen that we will win at least a partial amount which would put us within our guidance range. And to your point if we actually won the full tender will actually give us a little bit of uplift but right now we're modeling kind of a partial tender within many of these areas we're participating in.

Okay. And then as far as the, the amniotic side of the business goes obviously you got Derma in the bag now is there and we haven't heard much about your internal product are you going to kind of put that to the side at this point and then, you've got some competitors within the space already I'd love to hear about kind of your freedom to operate from a intellectual property perspective and is this potentially a source of litigation for you guys going forward.

So relative to the amniotic product we had internally sourced product which we -- we still have over time we will most likely move out of that product and move into our own manufactured product over time and work through, how we've positioned the branding and such. But at this point in time we have both our sourced product has lower gross margin than our manufactured product which we picked up from Derma. So as we convert that over that business will obviously come back in at higher gross margin but that will be a time period and we'll do the right thing on how we want to transition that and think that it will be pretty seamless. Relative to freedom to operate, we're wide open. And we did our diligence when we bought Derma looked at the portfolio very, very cautiously took a look at all the IP and any claims that that people might may be making and can actually feel quite good even to the fact that we think we may be sitting on some scenarios where we have a very good position versus other folks that are out there. So, yes I don't see any, any concerns or issues relative to freedom to operate that doesn't mean someone can't send you a Candygram in the mail, with what they believe is their view of things but we feel quite confident in how we've looked at the portfolio and our ability to operate.

Our next question comes from Steven Lichtman from Oppenheimer. Your line is open sir.

Thank you. Hi guys. Dural repair had another solid quarter can you maybe update us on your latest thoughts on the market there and the driver is that give you a confidence in dural repair growing solidly looking forward.

Steve, I would say, Glenn and I've gone back and forth in this. If you know I've talked about dural repair performing kind of like it's performed in Q1 for some time now. Its right in line with what we've been talking about it's actually been over performing in previous quarters and when you think about the neurosurgery market may be growing in the 3% range and this growing in the mid-to-upper-single-digits it just makes a lot of sense. What we're having is again half of the procedures for closing the dural, do not use an online or they do not use some type of sealant it's purely suture only. And as we get more neurosurgeons a lot of cases, residents and fellows using onlays and also something like DuralSeal we're starting to get more and more conversions so I would say when you look at me out of use, growth for the whole market I think we're going to continue to see a nice steady consistent few points above what the procedures growth is for many years to come. And so that's how we think it is going to be a steady performer. I don't scenarios where in given quarters will jump up to 10% or 15% growth or something like that when we first came in with DuralSeal unless there's some type of market disruption or something that goes on but we feel pretty good between the combination of onlay as well as sealant that the market is quite healthy and continue to perform at this level.

Great. Thanks Pete and then I apologize if I missed this but I know last quarter you mentioned adding to the channel and extremities in the first half here any update on where you are in that process?

Yes, so we're well on our way, I would say we're probably about halfway there, a bigger chunk of the ads are going to take place in Q2. So we talked around 70 plus reps around the world that we're going to be adding in the first half and I'd say international plus maybe half of the U.S. resources have been brought on at some of the increased cost that onboarding and training and all those kind of things, we thought and the other portion of it is going to happen in Q2 and they just so happened to be pretty much OTT, U.S. focused individuals. So we have some associate sales reps that will actually be able to help us with metal as we have increased demand in the lower area and those reps then tend to be a pipeline for senior reps later, so that we don't have territories there that if there are changes that are disrupted. And then on the tissue side as I mentioned adding a good chunk of increased in-patient tissue folks. And the reason for that is with the uptick we have in IDRT with the opportunities we think we have with new product growth around PriMatrix and also the broader line. Those are reps who will get in place in the second quarter and latter part of Q3 into Q4, we will start having a positive impact to that to the P&L. So I would say fundamentally on track to have what we had thought about it. And then the previous one, I mentioned is the bringing together Derma and Integra patients, we're not necessarily adding to that growth but you fundamentally double the size of the sales force that's now selling twice the amount of products and in the same call point which is a big deal for us.

Great, thanks Pete and congratulations to Angela and Nora.

Thank you.

Thank you.

And our next question comes from Jayson Bedford from Raymond James. Your line is open.

Hi, Jayson.

Hi, Pete. I will make it quick here's just a couple Glenn private label you said close to $100 million, is that a run rate exiting the year or is that for the full-year?

It's for the full year.

Okay. I didn’t realize that big okay.

Gross margins keep in mind it has been growing double-digits now for a number of consecutive quarters. So it's come up from what it was even 12 months ago by a pretty meaningful number.

And seemingly that's a pretty high margin business given --

It's a high EBITDA margin business. So keep in mind on the gross margin line, it's lower than our corporate average but because of the little infrastructure necessary to support that business.

Right, okay. Just on gross margin, it was stronger than we expected despite the bigger contribution from Derma Sciences. So I guess my two questions are one what was regenerative products as a percent of total sales? And then second why I realize if Derma Sciences is going to get bigger throughout the year but why shouldn't gross margins improve from first quarter level?

Yes, so when we look at our regenerative mix, it was around 44%, 45% of our total company sales, so that continues to creep up from the previous numbers if you look at our historical results. But we were pleasantly surprised with the gross margins it did come in higher than we had modeled, so being above 70% with the month and the few days of Derma was a very good result for us but the mix continues to be good we're seeing really good operational performance coming out of our plans. And so very happy with how we ended Q1. Just keep in mind for the rest of the year having a full quarter of Derma Sciences is 100 basis points dilutive. So to put it into context, we did 70.2% which had about 40 basis points of dilution from Derma in Q1. So add another 60 basis points to that sequentially and now you're into the 69.5% type range going into Q2 all other things being equal. And so we would expect our gross margins to be within the 69% to 70% range for the next three quarters and could there be some upside? Sure, if the regenerative products continue to do well there could be a little bit of upside on gross margin but right now given the dilution from Derma Sciences, that's going to bring our gross margins down sequentially but still within our guidance range of 69% to 70%.

Okay. Was Derma dilutive to EPS in the quarter?

Yes. Slightly dilutive.

And is expectation still for $0.03 dilution for the full-year?

It is. So consistent with what we said previously it's still $0.03 dilutive to 2017 and I think in 2018, we would expect it to be slightly accretive for the full-year 2018.

And up next is Jonathan Demchick with Morgan Stanley.

Hello, thanks for -- thanks for taking the questions. I just had a couple quick ones on Codman so probably its six months out you said of closing the deal and so first off I guess obviously it’s very involved deal. So I was hoping you could provide a little more color on some of the free work that's being done and also have some early conversations are going with the Codman team and now that they are joining Integra? And then second I was hoping you could kind of give me little more color on basically the updated expectations on the leverage ratio end of the year less than 4.5 now versus under five times for guidance didn't really move so just curious what was driving the overall leverage.

Yes, so I'll cover maybe a little bit on the structuring team and then Glenn may be you can talk a little bit about the leverage that we announced today. So I would say from a team structure standpoint, we've obviously Jon, have done a lot of deals this would be our largest but when it comes to how we think about the construct of standing up the deal I think I had mentioned before we actually did a lot of analysis even before we signed and talked to outside experts that have actually done carve out financials from Johnson & Johnson so that we could have a very good fulsome debate on TSA's to put in place before and I think our team did a very good job. And candidly J&J was actually very cooperative and wants to do the right thing for their employees and was actually a good partner negotiating that. We've got a dedicated leader who has done significant amount of integration work leading the effort. She is supported by some outside consultancy groups that have done this type of carve out have done splits of companies and all those. And then we have as I mentioned pretty much about 30 to 40 folks, 30 for sure dedicated that right now have been pulled out of fundamentally their day jobs that are focused on standing this up. So you can imagine every function in the company sub-functional areas, additional resources and HR. So we've really gone down that path aggressively to do that and we had it exercised led by my executive leadership team that we kind of came up what we called our platinum priorities for the company as you can imagine a company of our size may have hundreds of different sub priorities and…

Sure. But before we do that, I would first just want to recognize Nora for the incredible job that she did in negotiating this term loan under our existing credit facility with every favorable terms. We're quite pleased on how this ended up and was better than what we had modeled for the deal. When we look at the leverage and coming into the year, we had not completed the actual financing and had all things in place. And so I was a bit conservative in my messaging around leverage because I didn't know how some of that was going to end up and ultimately when we finalized with the banks under the new facility, we got credit for more one-time add-backs on EBITDA, we got credit that for some additional synergies on the deal. And because of those factors now we're projecting to be less than 4.5 times levered by the end of the year. The good news is as I mentioned previously we still expect to have a half a turn or a full turn of delevering each year in the first two years and that will become much more meaningful as we get beyond 2019. So I believe now that as we get towards the end of 2018, we will be less than four times levered with our cash flows, we're expecting and paying down debt probably by mid-2019 less than 3.5 times. So our views on leverage with the banks now has come down from what our previous projections were.

Thank you guys very much for that color and just one quick follow-up, so SurgiMend and PriMatrix there was weakness here with lower stocking orders last quarter heading into this quarter was there any one-time benefit from broader stocking or was this more of a normalized run rate that you would expect at this point?

No, no substantial stocking increases let's say everything for the quarter was really across the board as I reflect on it, just normal run rate.

And our next question comes from Bob Hopkins from Bank of America. Your line is open sir.

So just a two quick follow-ups. Because I know we've gone long here first just on the private label discussion Glenn, could you give us a sense for what you -- how you think about that business in terms of a sustainable growth rate over the next couple of years. I mean obviously you've had some really good success lately it's a bigger business just how should we be thinking about the growth outlook for that business?

Yes. So when we look at that business just keep in mind, we acquired some assets that are now part of private label from the Derma Sciences acquisition. But going forward it's going to be a driver of growth for us but I wouldn't view it as a key growth driver when we look at our overall portfolio. It's an important part of our business but obviously the key part of our business is our in-source regenerative products that we're selling to customers through direct. So as we go forward we see some opportunities to add more private label partners but I wouldn't view this as a key growth driver for the company looking at 2018 and 2019 but something that we think we get some growth in our overall portfolio.

I would say Bob the only thing I would add to that is the fact that where private label will help us build out our own base capabilities and sell a portion of capabilities or technology in a market that we're not going to go into, we take advantage of it. And there's plenty of those markets out there as Glenn said but we don't necessarily trying to chase it for non-branded Integra growth. The great part is we have lots of room, I think within the regenerative space to partner with pharma companies with other med tech companies on using our technologies as a component within may be a solution they're working on and the team has done a nice job of bringing in some new players as well as growing the existing relationship with some existing folks and coming up with some new ideas and extensions and helping fill out the combination of our own products within our new facility and complementing that with private label. It's going to help some top-line growth but it's probably going to have a bigger impact on, helping with EBITDA margins over the long run because of its profitability profile and its ability to fill up plans that may not be fully utilized.

Got it. Thank you for that. And then one quick follow-up on Codman and I appreciate all of the, the disclosure and response to the last question but maybe kind of I'll ask it succinctly on Codman I think a lot of people look at this as a really interesting deal from a long-term perspective but I have some questions on the potential for short-term disruption given how big an integration it's going to be. It sounds like you're putting a lot of effort into this but, how would you have us look at kind of the sort of the -- the first 12 months in terms of your confidence that this won't be disruptive from -- from a growth perspective.

So Bob just to put a finer point on it. I look at this business and believe that the amount of disruption we're going to have to start out of the box is pretty minimal. And the reason that I feel that is the fact that one, we know the space very good right it's in our bones to Integra is we understand it globally across the board and why that's so important is any decision down at even a local level we have expertise as we're thinking about that's one. Secondly, we take a look at the opportunity for the Codman folks to become part of Integra in a lot of these cases there's concerns about what this means for me, why it's a good fit. We're seeing people really energized about becoming a part of a company that can have this type of a comprehensive portfolio within neurosurgery so they get it strategically and I would just say from a third standpoint we're just putting in the diligence. I mean we're really focusing to make sure that we aren't leaving, any Ts [ph] across eyes not dotted and we look at where there's been some carve-outs in the past and candidly where other people bought some products from J&J and weren't so successful and I think we understand where some of those failure modes are and we've really tried to build the constructs in place to make sure that we don't make the same thing. I would put a huge premium as well on the fact that we actually have the Codman brand. For folks that buy products this wide and you don't get the name and you have to stand up a structure and you have to call it something different it's just is very challenging and so, that was one of the really important component that we negotiated. And then the last part, I'd say just the TSA’s I think our team have classes are ahead of [indiscernible] our old broader team did a really good job negotiating transition services that many cases will give us, 18 to 24 months at minimum services on a majority of the capabilities. And in some plants up to five years the transition. So when you add all that together, the day one event actually is not that big of a deal because there's so much TSAs wrapped around it and then you disperse the integrations out over the next couple of years.

Yes, thanks. Thanks. Operator I'm just going to make some final comments and just thanks for everyone. I know we went a little bit longer and a lot of good questions but just to reiterate a couple takeaways from this morning's call. We feel we had a very solid start to the year and we remain focused on the 2017 financial targets feel quite good about organic growth of 78.5% and that's going to be driven by these core businesses a new product introductions that we spent a lot of time talking about. Second we're on plan to complete the Derma Sciences commercial integration here by midyear, the territory alignments in such and as we mentioned the Codman Neurosurgery acquisition we're on track to close in the fourth quarter very optimistic as I mentioned about these two acquisitions and what they can bring to Integra. And the scale and profitability from both of these acquisitions is definitely going to be a long-term driver of value growth for years to come. So again thanks again for listening and look forward to speaking with all of you and seeing all of you here in the near future. Thanks again.

Thank you.

That concludes today’s conference. Thank you for your participation. You may now disconnect.