Good day, and welcome to the Integra LifeSciences Fourth Quarter 2018 Financial Results Conference Call. Today's conference is being recorded. At this time, I’d like to turn the call over to Mike Beaulieu. Sir, you may begin.

Thank you, Brandon. Good morning and thank you for joining the Integra LifeSciences fourth quarter 2018 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 and Investor Relations. Earlier this morning, we issued a press release announcing our fourth quarter 2018 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 fourth quarter 2018 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’ll turn to Slide 5 in the earnings presentation, I’d like to start by reviewing some of our 2018 highlights. 2018 was a strong year for us financially. Total revenues increased 24% and adjusted earnings per share increased 25% marking the fifth consecutive year of double-digit revenue and adjusted earnings per share growth. We generated nearly $200 million of operating cash and over $120 million in free cash flow, both of which were records for the company. In 2018, we strengthened our balance sheet by reducing our leverage ending the year with a ratio of less than 3x net debt to bank EBITDA. One year ago, we indicated that our primary focus during 2018 would be on the integration of the Codman Neurosurgery business and the expansion and realignment of our OTT commercial channel. While our efforts to integrate the Codman business continue, to date we have executed our integration plan with minimal commercial disruption and employee and customer retention rates are at or above our plans. The thesis of the deal and associated strategies are intact and we expect to realize many of the benefits in the coming quarters. In July, we exited transition services agreement in the U.S., Canada, Australia, New Zealand, and China. Our performance in these regions exceeded our targets in the second half of 2018. We also transitioned a Swiss manufacturing facility and made significant progress establishing a new manufacturing site in Massachusetts. More recently, in the first quarter of 2019, we successfully exited a transition services agreement covering 15 countries in Western Europe and converted to a single global instance of our ERP system. It has been four weeks since the milestone and all commercial and operating functions are performing in line with our expectations. In…

Thanks, Pete. Good morning, everyone. Total reported sales in the fourth quarter increased 4% over the prior year to $383 million or 4.4% on an organic basis. Foreign currency exchange rates negatively impacted sales by approximately $3 million in the quarter. Adjusted earnings per share in the fourth quarter were $0.65, which drove full year adjusted earnings per share growth of 25%. Our sales, organic growth, and adjusted earnings per share numbers were at the high end of the guidance ranges we provided in October. Our better-than-expected performance in the quarter was driven by the U.S. Codman Specialty Surgical business, which grew organically over 6.5% in the fourth quarter versus the prior year. If we turn to Slide 7, I’ll review the segment performance starting with the Codman Specialty Surgical or CSS segment. Reported sales of CSS grew 4.1% to $249 million in the fourth quarter, while organic sales increased 4.4% ahead of our expectations. Starting with our global neurosurgery business, sales in Dural Access & Repair grew over 5% organically compared to the prior year’s quarter with strong performances in both our graft and sealant product lines. Sales in Advanced Energy increased almost 14% in the fourth quarter compared to the prior year, driven by continued momentum in CUSA Clarity where we’ve generated significant growth in both capital and disposable products. In order to realize technology synergies, we recently combined our CSF Management and Neuromonitoring businesses and renamed this franchise Flow & Pressure Monitoring. Sales here were flat compared to the prior year’s fourth quarter in line with our expectations. Growth in our programmable valves and antimicrobial catheters was offset by declines in more mature technologies such as fixed pressure shunts. As we move into 2019, we expect performance of the Flow & Pressure Monitoring franchise to improve with…

Thanks, Glenn. If you will turn to Slide 11 in the presentation. Our operating cash flow in the fourth quarter of 2018 was $43 million compared to $12 million in the prior year. For the full year 2018, operating cash flow was approximately $200 million and free cash flow was $122 million, both records for the company. These results were driven by improved profitability and effective cash flow management offsetting the impact of the rising interest rate environment. The components of our effective cash flow management included the equity offering in May 2018 to reduce our total debt, the refinancing of our credit facilities to lower borrowing costs, benefits from the cross currency of interest rate swaps implemented in 2017 and 2018 and tax planning to repatriate cash. Taken altogether, these cash flow improvements resulted in approximately $25 million of additional operating cash relative to our initial 2018 guidance. For 2019, we expect operating cash flow in the range of $220 million to $230 million. Our capital expenditures were $26 million in the fourth quarter compared to $14 million in the prior year. The increase was primarily attributable to spending on our new manufacturing site in Massachusetts. In 2019, we expect capital expenditures of approximately $60 million slightly weighted to the first half of the year. Our free cash flow conversion in the fourth quarter was approximately 60% on a trailing 12-month basis compared to 46% in the prior year. For the full year 2019, we expect free cash flow conversion to be about 70% with higher performance in the second half of the year consistent with our capital spending plans. Turning to Slide 12, I’ll wrap up with a brief update on our capital structure. In 2018, we renegotiated our $2.2 billion bank facility extending the maturity of our credit agreements to 2023, modifying the composition of our loans and achieving more favorable interest rates. We also put in place instruments to fix approximately two-thirds of our floating rate debt during 2018. We ended the year with a consolidated leverage ratio as defined in our bank covenants of 2.9x. In summary, we significantly strengthened our capital structure in 2018 and provided additional flexibility to support our long-term strategic plan. And with that, I’ll turn the call back over to Pete.

Thanks, Sravan. If you turn to Slide 13, I’d like to summarize our key messages. As we begin 2019, we remain on track with our Codman integration goals. As I mentioned earlier, we’re four weeks into the exit of the transition services agreement in Western Europe and a conversion to a single global ERP instance both which are proceeding as planned. The last remaining country on a TSA is Japan which is expected to exit in the third quarter of this year. We will begin to take control of the first tranche of Day 2 Countries in April and we’ll complete most of the transitions by the end of the third quarter. We expect increased effectiveness across our global CSS channel and anticipate the contribution from new products to lead to faster growth in the second half of 2019. These product launches include CERELINK, a new advanced intracranial pressure monitor and the new program with valve configurations for our CERTAS franchise with a new toolkit that greatly simplifies hydrocephalus management for neurosurgeons. Our new products will improve the experience for individual patients and allow surgeons to spend more time providing care. Within our Orthopedics & Tissue Technologies, we expect growth to accelerate in 2019 as we increase investments in our regenerative technologies portfolio. We will complete a clinical study for AmnioExcel Plus later this year at which point we will pursue publication followed by reimbursement discussions with payors. Also, we are running a clinical study of PriMatrix intended to expand reimbursement which we anticipate completing in 2020. Further, we will launch several new products in the OTT segment including new configurations of SurgiMend and European registrations of our Integra skin portfolio. In Orthopedics, new products include the Panta 2, an evolution of our internal ankle fixation offering and a full…

Thank you. [Operator Instructions]. The first question will come from Raj Denhoy with Jefferies. Please go ahead with your questions, sir.

Hi. Good morning.

Good morning.

Good morning.

Maybe I could start with the Orthopedics & Tissue segment. If you look at the performance of the year, I think you guys alluded to it, but I guess you finished a little lower than you thought you were going to as the year progressed. It sounds like a lot of it may be a sales force integration issue, but as you look out into 2019, I guess, how do we get confidence in the improving performance over the course of the year? And also, it sounds like you’re planning the first part of the year perhaps to be a bit lower and then accelerate in the back half. But really just trying to understand why that business has not performed as you thought it would? And then how we get comfortable that it’s actually going to accelerate here in 2019?

Yes, Raj, I would say again if you think about it, it’s kind of a tale of two cities. If you look at Orthopedics & Tissue, let’s just kind of split those and talk about it that way. The three channels that we have that sell into the tissue space have all performed quite well. Our outpatient wound care grew double digits. Our inpatient wound reconstruction business grew in the upper-high-single-digit range. And also our reconstructive business, which does all types of valve work actually had solid performance. I’d say the only thing in that area is this year, because of the growth we’ve had, if you recall, we actually doubled the size of the inpatient wound channel. We’ve been actually ramping up our supply throughout the year. I would say that team as we’ve been ramping up our supply probably could have even done a little bit better with the growth. We just didn’t have all the product that we needed. And I’d say as we exit Q1, our ramp up in supply will be where it needs to be for the rest of the year. So that was the only I would say kind of – demand’s great, team’s doing well. On the Orthopedics side, it’s real consistent with what I said in Q3. It took us longer than we thought to get all the roles filled in Q2 coming into Q3. As you know, the intimacy and relationships in orthopedics tends to be even at a higher level than some of the other segments, and it just took a little bit longer to get there. That said, I think the expanded growth within our shoulder, which grew double digits, ankle grew double digits, I think globally and as well domestically were good performances. I think if you look at how we’ve actually done sequentially particularly in these big arthroplasty type products, we actually did better. So I think we’re on track with what we communicated, which was that we can put a positive growth for the orthopedics business in the second quarter, and Q1 will be a transitional window really tied to the effectiveness of the sales force.

Raj, I would just add. Pete alluded to it a little bit. We did see some signs of improvement sequentially Q3 to Q4 in orthopedics, so that was positive even though the year-over-year declines were still on a high-single-digit range. And then we’ve got a lot of new products that we’re launching in this space. So we have a Small Post Baseplate, we have the XT ankle revision and we’ve got a Panta 2 Nail as well that will be for fixation in the foot. So we’ve got new products, stable channels, all territories filled, and starting to see some signs of progress here. But again, we’re not counting on seeing any growth until Q2 of 2019.

And just a last part on Ortho, we haven’t talked a lot about this, but I think with our commercial leader, Pete Ligotti and the team that he has assembled, we really brought in some strong players that are orthopedic, 20-year plus folks that really know how to drive this business. We’ve put in different types of operating mechanisms that kind of separate how we run that business from the rest of the organization which occasionally I think has been some of our challenge, and we have a really integrated orthopedics business that is running the kind of mechanisms that you would expect to see in a world-class ortho business. That’s pretty much new for us coming out of the back half of this year. So, I think you combine all those things, we expect '19 to be the year we start putting up the positive growth we would expect in orthopedics.

Thank you. The next question will come from Matt Miksic with Credit Suisse. Please go ahead with your question.

Hi. Thanks for taking my question. So I had one on just some of the pacing of Day 2 Countries and some of the other European sort of factors that you mentioned, puts and takes around MDR. If I could just understand maybe the way that those countries come in, and you talked about second quarter ending and the third quarter larger to smaller, any kind of color you can provide us as to what we can expect or when we should start to see some stability and improvement? And then on the MDR side, maybe if you could just talk a little bit about the significance of those decisions that you’re making and competitively, is that down the competitive chain of companies that you face in these geographies? It’s a cost. It’s obviously taken some products out of your lineup which you obviously must feel you can do without. But just competitively maybe over the next 12 to 18 months, any color on MDR and how it plays into that geography would be helpful? Thanks.

Yes. Hi, Matt. Maybe what I’ll do is – it’s Glenn [indiscernible] have him comment on Day 2 and I’ll give you my view just broadly on EU MDR. So in terms of the cadence of the Day 2 Countries, we’ll close over 20 here in the second quarter of 2019 and the bigger ones will be included in the second quarter. So we’ll have most of the Day 2 pretty much completed as we get to June. And then we have another wave of 30 or so that will happen in the third quarter but they’re smaller in nature. And so that’s the way to think about the Day 2 Countries and essentially we’ll have a couple of stragglers after Q3, but we’ll essentially be complete with the country closings by mid to late third quarter I would say. Once we get control of those commercially, we’re doing things to make sure we’re training our distributors, we’re doing things to ensure that we’re actively bidding on new tenders but this is going to take us some time to both stabilize and then hopefully see some growth. But again, we’re not counting on much growth in these Day 2 Countries in our 2019 guidance. So Pete, maybe you can comment on the EU.

Yes. Matt, part of the EU MDR new regulation that came in I think is it’s pretty profound how broad it will impact I think everybody in the broader industry. There were new regs a few years ago called MDD which kind of changed kind of the file approach and EU MDR basically says that if you’ve got a product, every X years you need to be able to demonstrate effectiveness with its own clinical or its own relative user data, which means you can’t really point back to another product and say it’s similar to the way we do in the U.S., it’s aligned to that. That’s a generalization I’m making. But the point is some products that are 15, 20 years old that might have been on the low end of the profit curve might not have been the products that you also use domestically but were more cost effective in Europe, you would need to so some type of clinical study or work to those. And some of those would cost in the neighborhood of $300,000 to $500,000 to update a given set of products. And so we as well as I believe others are in the industry just taking a broader look and saying, if you have 20 SKUs in the category and you’re going to have to pay to update all those, can you live with 10. And you feel confident that you can move customers who use the 20 to keep all those customers but now buy out of the 10. And I think the short answer for us is in a broader picture of portfolio management we actually think this could actually help us. One is to clean up the portfolio. When you buy a company like Codman integrated with Integra, we do have some product areas where we probably have too many SKUs. This will give us an opportunity to do it. It also then plays into our broader footprint strategy. But in short, the less products that you need to convert the less overall cost that you’re going to incur. So we’re going to be taking a very hard look at making sure any products that don’t a long history to stay with us or a long future with us, we’re going to take them out of the portfolio. And I do think it will have a minimal overall impact into the broader portfolio over the long run. But obviously as you take it out and you switch it, there will be some impact which Glenn alluded to in our comments.

Thank you for the next. The next question will come from Robbie Marcus with JPMorgan. Please go ahead with your question.

Great. Thanks for taking the question and congrats on the good quarter.

Thanks, Robbie.

Pete or Glenn, maybe you could help us walk through some of the different businesses in the Codman Specialty Surgery. This will be the first time that we’re going to have organic revenue reflecting in the Codman business. Maybe help us understand how the growth has been in Codman for each of the line items or how should we think about modeling those line items going forward? And then maybe just part two, Raj touched on it, but maybe you could help us understand your confidence in the back half weighted year both from a cash flow and a performance basis. And what gives you more confidence this year versus past years? Thanks.

Sure. So I’ll start with the CSS plan, Robbie. When we look at the CSS business, keep in mind the fourth quarter results were all organic including Codman. So it’s now all organic. We’re not going to split out the Codman standalone performance from our Integra legacy business because we’ve integrated in the commercial teams now. But as you look at the different franchises, I would say Dural & Repair think of it as a low single digit growing or mid single digit growing franchise in both our graft and our sealant business there. Advanced Energy right now is seeing very fast growth because of CUSA. We have some additional enhancements coming out with CUSA. We’ve got a new generator being launched. Again, that’s a part of the business we probably would expect to see a higher single digit growth for the next couple of years. PT&I is an area that we’d expect to see low single digit growth, so think of that as may be 1%, 2% grower. It generates very good cash flows for us but that’s the way we think about it. And then Flow & Pressure Monitoring as I mentioned in some of my prepared remarks, we were flat in the quarter. We see some good signs of growth from the programmable valves, from the antimicrobial catheters, the newer Codman products. But it’s being offset by declines of some mature technologies like our fixed pressure shunts. The good news here though is we have a number of product launches whether it be CERELINK, our new ICP launch, we’ve got additional handsets coming out and configurations for the programmable values and the toolkit. That’s going to drive better growth than what we’ve put out the past couple of years in this part of our business. And so I would say that you can expect it to be at low to mid single digit grower for us over the next couple of years as we launch new products. But all-in-all, we see CSS growing in the 3% to 5% range organically and obviously going to drive towards the upper end of that range to the extent we can with a lot of these new product launches.

And I’d just comment, Robbie, if you step back, the sales forces are now stable. We’ve had very low turnover. I would say as we exit this year, both sides of the legacy teams, obviously the previous Codman team, previous Integra group which is now one are really not comfortable with what they inherited in their portfolios, which means there’s room just to grow in the territories they have being comfortable with that portfolio. And then Glenn went through the new launches which we think the teams are going to be really jazzed up about and particularly just how we’ve taken a fresh look at the portfolios. The CERTAS valve as an example for program, it’s kind of been a sleepy area. We think with our MRI compatibility claims, some other new configurations that have really limited our access into pediatrics and really this whole programming which is an ongoing event with clinicians, we had probably one of the more clumsy programmers out there and the new one now puts us in the front with probably one of the most elegant. So that’s an example of what we’ve done to try and think about clinically how may change the game and start changing the growth trajectory at some of these franchises which we’ve picked up in this acquisition.

Thank you for the question. The next question will come from Bruce Nudell with Robinson Humphrey. Please go ahead with your question.

Good morning. Thanks for taking my question. I have a trivial question and two more real questions. Firstly, on your Slide 9 for the 2018 reported number or the 1.7 billion, is that inclusive of the kind of Natus TMA revenues?

Yes, so Slide 9 is our total revenue guidance if I’m not mistaken. And I would say in that discontinued divestiture product bucket, we’re assuming $5 million to $10 million of net headwinds coming from discontinued products associated with portfolio management and then the rest of it, call it, $8 million coming from the decline in the Natus revenues year-over-year.

And that’s something that we messaged a few months back.

And so 2018 – the presentation of 2018 includes the transition manufacturing agreement.

Yes, it does. So in the 2018 revenue numbers that were reported, we had about $11 million of revenue to Natus and we did not include that in our organic growth calculation, but it was in our reported numbers.

Okay, great. And then just looking at the potential for divestiture of sleepier product lines, could you just make some comments about anything in the PT&I segment or in the Extremity Orthopedics segment kind of – they may generate cash but they really may be weighing down the weighted average growth rate. Are there any – should we be expecting any pruning of just slower growing, less interesting product lines?

So, Bruce, it’s Pete. I would say right now I wouldn’t expect any major product families that we have plans to divest in 2019. But I think to the point about discontinued products, would we see some instruments families, would we see some shunts, catheters, things tightened up across the board? Clearly that’s what we’re pointing to here within the info. But no broader specific plans for a divestiture at this point.

Thank you. The next question will come from Jonathan Demchick with Morgan Stanley. Please go ahead.

Hello. Thanks for taking the questions. Two quick ones. You did a really good job of walking through some of the drivers of acceleration into the back half, but I guess was curious to discuss a little of the deceleration in 1Q. It’s certainly the easiest comp of the year understanding a lot of the drivers moving forward, it still implies I guess some pretty significant deceleration. I think you mentioned some of the selling time from the European TSA exits. I was just kind of curious how large those impacts were and then what else was contributing? And then the second question I had and I’ll just kind of squeeze them in together was on Precision Tools & Instruments. I was curious what really drove the acceleration and it was a very strong quarter relative to the prior ones and was just curious about the sustainability of this growth.

Yes. So, Jon, when we look at the first quarter of 2019, we’re currently projecting about 3% organic growth. The reason why it’s a lower quarter than the rest of the year really drives around three different areas. So first and probably most significantly is the TSA exits in Western Europe. So we’re in the midst of going through all that as we speak. It’s gone quite well. I would say we’re in a stable environment right now with no significant disruptions. So, so far so good, but we’re only several weeks past the actual cutover date. But that’s kind of the biggest item. A lot of that affects selling time, so a lot of our reps right now are in I’ll call it a service mode around a lot of their accounts versus the selling mode. And so what that means is as customers are placing order, if they get misplaced with J&J as an example instead of to Integra, they’re doing a lot of servicing just to make sure the order gets routed to the right place, the product gets shipped to the customer and doing some of the administrative things that they typically would not do. And so that’s where that disruption factor comes in. But the other two items as well are the Day 2 Countries closes that don’t happen until Q2 and Q3. So Day 2 Countries were down in the fourth quarter, again, consistent with what we had expected, but down year-over-year. Good news is it’s at least stable versus Q3. But again, we’re not going to see any improvement in these Day 2 Countries in terms of how we have modeled this until we get to the middle of 2019. And then third is the orthopedic business. So as we mentioned in the fourth quarter, we had another down quarter. We’re seeing signs of improvement with all things in place to be successful in 2019. But we’re not counting on seeing growth until the second quarter. Could it happen sooner? We’re obviously driving towards that, but right now we’ve modeled that business to not show growth until Q2 relative to our guidance. So those are really the big drivers. And then just keep in mind, once we get passed the first and second quarter, all of these new product launches should result in faster growth in the back half of the year and there’s at least seven or so on the CSS side, three or four mentioned earlier on the OTT side. That should drive much better growth in the back half of the year.

And then Jon to your second question just on PT&I, the short answer is it’s a little bit more timing than anything. If you look at Q3, we had a slower quarter. So from a combined back half, the two kind of equalized each other out and normally where we would see which would be kind of mid single digit growth. That being said, our Mayfield, also some of our retractor business, all of our instruments business performed quite well. But there was some timing that was associated with that. Part of the underlying lift and when you get into things like Mayfield which is the number one neurosurgical head holder really used around the world, this larger sales force now part of what they do is inventory all their customers, do they need upgrades, components to it. And that really grew heavily in the fourth quarter because all these sales folks were really kind of doing that type of effort, which again shows some of the potential of more competent and larger sales organization. But the bigger answer is, it’s a little bit timing and I think from a second half standpoint Q2 and Q3 combined with kind of rate minus [ph] we had hoped for the second half.

Yes, if you look at the second half of the year growth for PT&I, Jon, it was a little above 3%. So we were down 2% in Q3, up 7% plus in Q4. But on the whole it’s just timing and we had a bit of a softer quarter in Q3 and a better quarter in Q4.

Thank you for the question. The next question will come from Craig Bijou with Cantor Fitzgerald. Please go ahead.

Hi, guys. Thanks for taking the questions. Just wanted to ask two quick ones on the P&L side and I’ll ask them together. So obviously you guys started 2018 expecting gross margin that was relatively flat to '17, came in I think it was 200 basis points lower and recognize that you guys are making investments in regenerative manufacturing. But just kind of wanted to touch on your confidence in getting to that number – getting to the 100 basis points in 2019? And then I think your longer term guidance has you guys over 70% gross margin in 2022. So wondered to see what you could do there. And then just as a second follow up on operating leverage, you guys didn’t provide some of the detail that you usually do. So just wanted to get a sense for what operating leverage looks like in 2019?

Yes. So Craig I’ll take a crack at the gross margin piece. So if you look at the fourth quarter performance, we had at least a full point of what I’ll call nonrecurring manufacturing costs to ramp up the regenerative plant to support future demand. So I feel quite confident that when we report Q1, you’re going to see a more normalized gross margin level that are closer to the 67% plus that we’ve been putting out more recently. And we also had I’ll call it a mix issue with respect to the TMA revenues to Natus. So they came in higher than we had modeled and expected and that has essentially no gross margin on it. And that piece of it, keep in mind, goes away here probably by no later than midyear 2019. So those are two headwinds that go away and why we feel confident that you’ll see kind of an immediate rebound from the levels you see here in Q4. As we look at 2019 in addition to the outlook as mentioned, keep in mind we’re anticipating a very strong growth year from our regenerative portfolio and that has the highest gross margins across the company. And a lot of these new product launches as well carry gross margins that are at or above the overall corporate average. And so we feel quite good that we’ll see 100 basis points of gross margin expansion over 2018. Longer term, we have a lot of drivers and we feel quite confident that we’ll drive towards that 70% gross margin level by 2022. So as of the others that I just mentioned, as we go through the portfolio management piece that Pete walked through earlier, we’d expect to see some improvement in gross margins as we get rid some…

Thank you for the question. The next question will come from Ryan Zimmerman with BTIG. Please go ahead with your question.

All right. Thanks for taking the question. So a bunch have been asked. I want to ask a couple of questions. One, your leverage ratio has come down pretty significantly over the course of the year. You seem to indicate that you’re comfortable now being more inquisitive or at least starting to consider that. So what’s the right or idealized leverage ratio you want to be at over time and where can that go? And then my second question is around the Day 2 Countries. I recognize we have numerous countries coming off of transition service agreements over Q2 and Q3. But how are you getting comfortable or how do you mitigate the impact of what you saw earlier in the year in Q3 and Q4 around the Day 2 Countries so that we don’t have, say, sales miss in some of the countries before those come off the transition service agreements? Thank you.

Ryan, this is Sravan. I’ll start with the leverage ratio and then Glenn will take the Day 2 Countries question. Long term, I think our long-term focus for unconsolidated net leverage ratio is somewhere between 2.5x and 3x, so it’s centered around 3 sort of where we are. I think in years where we’re going to be inquisitive, we’ll probably push to the upper bounds and years where we’re working I think – in other years we’ll be closer to 2.5. I think that’s sort of our long-term guidance.

Yes. And obviously just as we had in Codman kind of exceptional deal, we popped up above that to do that but brought it back down. But I would agree with Sravan. And I think when you look at the size of the deals that we’re talking about, there’s a lot of things we can do to build the company to hit our long-term goals within that range.

And, Ryan, on the Day 2 Countries point, just to clarify [indiscernible] you mentioned. There are no TSAs with these Day 2 Countries. So the TSAs are really back office support functions for the commercial countries that we control today that we call them Day 1. Day 2 which transfers so to speak later from a commercial perspective, we had to take over immediately once we actually closed those countries, all functions. And that’s why they’re a bit delayed relative to when we take over control. But our view is once we do take over control, focus will be a big thing for us in terms of how do we get better results. We’re already in the process of working through training programs, the marketing materials for the key Day 2 Countries and how to sell the portfolio. And then obviously we plan on being much more aggressive around the bidding process. So I think it’s really just around focus, training and marketing and we’re going to continue to drive at least Day 2 Countries to be flat and then hopefully grow towards the back half of 2019. Again, that’s how we have reflected this in our guidance range for our total revenues and organic revenues that we outlined during the call.

I think it’s worth just to add, Glenn, unlike the Day 1 Western countries where we’ve been through all the processing of the AR, AP, all of those things, most of the Day 2 Countries are distributed control, which means the distributor handles a lot of those things that we do in the Day 1 Countries. So when you switch it over and you actually either take over an existing distributor that was with J&J or you move the business to one of our existing distributors in that geography, the transition lift so to speak is quite less than it is in what we define as a Day 1 Country. And then obviously with this being a high focus for us, our ability to spend time with them we think will really make the difference in being able to pick up the growth in those markets.

Thank you for the question. The next question will come from Travis Steed with Bank of America Merrill Lynch. Please go ahead.

Hi. Good morning. Thanks for taking the questions. Just wanted to make sure we were properly modeling out the progression in 2019 on revenue growth with Q1 3%. Is Q2 likely around 4%, Q3 with a tougher comp around 5% and then a big Q4? And then the second question that I had was on free cash flow conversion. Are you still sticking with the 90% by 2020? And how do we get confidence if conversion is going 60% to 70% in 2019, how do we get confidence that it’s going to accelerate all the way to 90% in 2020? Thanks for taking the questions.

Hi, Travis. I’ll take the first portion of it and ask Sravan maybe to comment on free cash flow. So as we see the cadence for 2019 I think the only thing we can comment on right now is 3% organic for the first quarter, certainly less than 5% for the first half of the year for the reasons we mentioned earlier getting off the TSAs in Western Europe, closing Day 2 Countries, getting the new products launched. And then obviously we’ll see faster growth in the back half of the year getting us to an average of 5% for the year. Sravan, maybe you can comment on the free cash flow piece?

Sure. So prior to the Codman transaction, the company was running north of 90% in terms of free cash flow conversion. As we exit sort – as we finish the third quarter, the third quarter will be our first quarter that will be north of 90% and on a run rate basis it will take a year before we have a full LTM period that has greater than 90% free cash flow. But I think in the back half of this year we’re going to start to see free cash flow levels. It’s our expectation to start bringing it up in that range.

Thank you for the question. The next question will come from Will Inglis with Piper Jaffray. Please go ahead.

Hi, guys. Thanks for taking the questions. Just drilling into the Advanced Energy business regarding CUSA, it sounds like you’re expecting that business to grow high single digits. Just curious if there are any particular geographies that you expect to standout or if you’re expecting a launch in new geographies and then it’s the mix of growth will be disposable versus system placements? And then any thoughts on additional applications outside of cranial.

Yes, Will, so it’s obviously been a star for us. The product has performed very well. It’s overall quality, reliability has been there and its unique features unlike any other tissue ablation product on the market to have this tissue select capability that really differentiates how you cut, which is one of the big reasons that indications in the liver which are a big growth opportunity for us around the world and an existing business as well will continue to grow this broader than just on the neurosurgery side. We had a tremendous fourth quarter, really a record level for us. And I would say as we think about '19 and '20, we clearly see lots of opportunity for continued growth. But I would say as we start moving into more of competitive conversion opportunities which we think there’s a significant amount and we do think that there’s going to be some competitive launches taking place this year, we think the sales cycle will extend longer than it’s traditionally been which will result in a little bit lower sales which is why we moderate it down the conversion of what we’ve seen in '18 into '19. So if someone comes out with a new product even though we may win the sale, you’re going to try both, you’re going to evaluate both and sales cycle that might have been 60 days now is 90. So that’s what I mean by that example. But we’re quite confident in what we’ve done. I would also say one of the key new feature sets coming out with CUSA will be our bone cutting capabilities which has been realistically probably one of the main items that was a weakness on the existing system. I think we’ve got a very extensive thought out strategy on this. And so when you add in that feature set with its current capabilities, it’s really the leadership product within the market. So we think it’s obviously going to play as a growth vehicle for years to come. On the point on disposables, the fact that a big feature component of this product is really one-and-done loading as far as making this work has greatly simplified it from other products and also historically using this product. And we’re already seeing the uptick in disposables because of the ease-of-use factor. So obviously all these systems that we have placed, the more they use it, that disposable revenue chain will continue to grow as well.

Thank you for the question. The next question will come from Matt Taylor with UBS. Please go ahead.

Hi, Matt.

Mr. Taylor, make sure your phone is not on mute, sir.

Can you hear me all right?

Yes, sir.

We can.

Okay, great. Sorry about that. This is actually Young Li in for Matt. Thanks for taking the questions. Maybe just one on the short stem and stemless shoulder program you announced earlier in the year. Can you provide some color on approval or commercialization timeline? And also just probably how important is that product in filling holes in the upper extremity portfolio?

Yes, we’re excited about this agreement that we have entered into with Consortium of leading shoulder surgeons. As you know, we’ve got a great portfolio today between our total and our shoulder, but this now moves us into a different space in terms of short stem and a stemless shoulder which I would think commercially will probably be available in the 18 to 24-month timeframe just to put some parameters around it. But for us it opens up two-thirds of the shoulder market that we don’t play in today. So that’s $600 million of market opportunity and obviously that creates a nice way to take our shoulder portfolio today and evolve it over the next couple of years. It also then puts us on a transition path to getting towards our PYROHEMI [ph] shoulder which is a few years after that. And so now we’ve got a really nice long-term transition in R&D pipeline relative to our current shoulder to where we see shoulder going over the next five to seven years. Pete, maybe you want to add to that.

Yes, and I would just say if you think about what we’re doing, we’ve really taken a look at a combination of funding internal development, PyroCarbon’s a great example of that and also working these smart partnerships with leading clinicians and some small agile development groups that can really help us build the portfolio out. So as Glenn said with short and the long stem being able to cover that full range of how the market’s moving to resurfacing opportunities. The glenoid plate that we just talked about is another plate. So I think what you’re going to hear from us as we go forward is more of these types of partnerships coupled with internal development and those two together enabling us to really bring more products out that the market wants at a faster rate.

Thank you for the question. The next question comes from Matt Wizman with Raymond James. Please go ahead.

Hi. Thanks for the questions. I’m on for Jayson Bedford this morning. So my question is on margins. Are you still expecting synergies from Codman in 2019? And is there any way you could kind of break out those assumptions around underlying margin expansion versus kind of what’s left from Codman next year? Thanks.

Listen, I think one of the things Codman did for us was got us significant scale globally. And with that we’re seeing G&A leverage and synergies on the G&A line. So if you look at where we were two years ago, we brought our G&A leverage down by over 250 basis points as an example. Codman’s been a big enabler of that. And so yes, we’re seeing the synergies. We expect to get more synergies especially now that we’ve gone to one instance of Oracle and one common ERP platform. So that’s another leverage point for us when we think about how we can get more synergies with the Codman deal. From a margin perspective, I think we’ve built in the expectations around 2019 and Codman have been accretive to our 2019 results. So I think at this point in time until we get further along post these TSAs, we’re being a little bit cautious around what the cost will be on an ongoing basis to run these businesses outside the U.S. Could there be some upside for us? Yes, I think there is. But until we get further into the European exits as well as Japan which happens in the third quarter of this year, we’ll remain a bit cautious around what to expect on leverage from a profitability perspective. But you’re already seeing some of that come through the P&L in 2018 and we’d expect some more to come through in 2019, although we’re being cautious outside the U.S. until we get further along.

Thank you for the question. The next question comes from Steven Lichtman with Oppenheimer & Co. Please go ahead.

Thank you. Hi, guys. I was wondering if you could talk about international opportunities overall in 2019 and beyond? I know Japan and China have been areas of particular focus for you. As you look out in sort of the near medium term here, what’s your outlook for expansion maybe in those two countries in particular given the larger footprint and more product launches I think you’re expecting? Thanks.

Steve, great question. Both Japan and China represent really significant opportunities for growth over the next five years for us. To put into perspective, again this year in China in 2018 we generated over 20% growth and I would say in the last five years we’ve seen consistent double digit growth and we’re quite excited around the opportunities in China. Japan for us is a real big opportunity because we’re launching many new products through a very large sales channel. So earlier in 2018 we announced the CUSA Clarity launch. We’re also expecting to be launching other new products in 2019 which I’ll likely talk more about I think on our first quarter earnings call. But to your point, a big channel, new products going to this big channel is a great opportunity for us to show growth in both Japan and China. Having said that, Europe is a big opportunity for us. When you look at the expansion of our sales force in Europe going up over 50% with Codman, we haven’t yet fully seen all the synergies relative to our neurosurgery business. And so we feel quite good that as the rest become more productive, as we launch new products to that sales force as well, which is pretty much consistent with the timing of the U.S. launches, we should see faster growth in Europe as well. And so I’m quite excited around the opportunities internationally both in Europe as well as Japan, China and many other markets around the globe. And we would expect that international should grow at least in line with the overall corporate average.

Thank you. The next question will come from Amit Hazan with Citi. Please go ahead.

Hi, guys. This is Phil on for Amit. Thanks for filling me in. I think I’d like to circle back to the five-year plan, a pretty similar question to what was asked on the gross margin side. I’m hoping you all can talk to the 2 billion number that you reiterated on the revenue front and just sort of walk us through or help to foot how we get there from here pretty healthy cadence of acceleration in 2019? And then basically how we get from 2019 to that 2022 figure? Thanks a lot.

Yes. Look, I would just say at a high level, it’s a combination of executing in our 5% to 7% organic range, obviously some of those years at the higher end of the range. That coupled with some tuck-in deals and that’s really how we see getting to the $2 billion by 2022. A big part of that growth that would move us toward the higher end of the range in some of these outer years is a combination of the regenerative portfolio, particularly outpatient wound continuing to accelerate and growing in the upper double digit range, expanding further into surgical reconstruction and wound reconstruction markets and then the new launches and such that we see within this neurosurgical business to be able to move the growth. I think when we talked about buying Codman, it was a 2% grower and we said that we believe that we could grow this somewhere in the neighborhood of 4% to 6%. Part of our assumptions to get to 2 billion would be to be able to move that Codman business closer to 6% not every year, but some years over that time period.

Thank you. The last question will come from Larry Biegelsen with Wells Fargo. Please go ahead.

Hi, guys. Thanks for fitting me in. I’ll just ask one question. Pete, with the leverage ratio down to I think 2.9%, how are you thinking about M&A in 2019? And related to that, the stroke market is very – is growing very rapidly right now. That would seem to be a natural adjacency for your Codman business. How are you thinking about the stroke market as an opportunity? Thanks for taking the question.

Larry, thanks for the question. Look, I would say I’ll address the first part and maybe I’ll have – second part and have Glenn to address the first part. So just on the stroke side, I think we see neurovascular and neurosurgery to be very different markets that don’t have a significant amount of overlapping synergies. That being said, there are some kind of crossover areas between what is minimally invasive neurosurgery access points that use vascular components of it. So there’s clearly some things around the edges there that we think we could play a key role in. But at the same time, the neurovascular business either neuro radiology or a purely trained neurosurgeon in vascular is very different business than we’re focused on. And we think at this point we’ve got plenty of ways to go to kind of build out that business at this point. I think on the deal side, and I think Glenn you may want to comment as well about how we think about this year, next year and when the right timing is to start doing some more deals?

Yes. So Larry to your point, Sravan and team has done a nice job of taking our leverage down to 2.9x. It continues to come down with our improvements in cash flows or really pleased with how we’ve generated significantly more cash flows here even in the short term. As we look at the financial flexibility of the company, we’re in great position. We’ve got $1 billion of capacity to do deals. But at the same time, while we have the financial capacity, we’re still working through a lot of the integration work. So I would expect and hopefully see some tuck-in acquisitions later this year as we move past these TSA exits in Europe in the first quarter and start to move forward with adding some more nice tuck-in complementary technologies to our portfolio. But financially, we’re in great shape. From a management perspective, I think we’re at a point now where we can handle more tuck-in acquisitions in the short to intermediate term.

We have no further questions at this time, sir.

So thank you everyone for joining the call, and we’ll be updating you either on the road or obviously in our upcoming first quarter call. Thanks so much for joining the call.

Thank you.

Thank you. Ladies and gentlemen, this concludes today’s event. You may now disconnect your lines.