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Integra Lifesciences Holdings Corp  (NASDAQ:IART)
Q4 2018 Earnings Conference Call
Feb. 21, 2019, 8:30 a.m. ET

Contents:

Prepared Remarks:

Operator

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 would like to turn the call over to Mike Beaulieu. Sir, you may begin.

Michael Beaulieu -- Director, Investor Relations

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.

Peter J. Arduini -- President, Chief Executive Officer and Director

Thank you, Mike, and good morning, everyone. If you turn to slide five 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 3 times 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, today 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 agreements in the US, 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 the Orthopedics & Tissue Tech segment, we have realigned 100% of our inpatient wound reconstruction in orthopedic territories as part of our channel expansion strategy.

In the second half of 2018, we saw a positive response in the sales performance of our Regenerative Technologies franchises, because of the increased time our commercial teams were spending with customers in these accounts. Although, it's taking a little longer than originally expected to realize the full benefits of expansion and realignment of our Extremity Orthopedic team, we look forward to improve sales productivity and growth in 2019.

During 2018, we also made significant progress in positioning the Company for accelerated growth. Our investments in global infrastructure, manufacturing, distribution and support services made as part of the Codman integration, will allow us to leverage our larger commercial organizations and broader product portfolios for years to come.

We entered into several partnerships, including a program with Healogics in which we are a primary provider of cellular and tissue-based products for the treatment of acute and chronic wounds.

In 2019, we plan to launch over 10 new products and registrations, including over seven in our CSS segment, which is a result of a successful integration of the R&D teams. In OTT, we will launch products in both our extremity orthopedics and regenerative franchises, and have also invested in clinical studies to drive broader adoption of tissue products.

In summary, we accomplished many of our strategic and financial objectives in 2018 and positioned the Company for accelerated growth in 2019 and beyond.

Now, I'd like to turn the call over to Glenn to discuss the details of our fourth quarter performance and 2019 guidance. Glenn?

Glenn G. Coleman -- Chief Financial Officer and Corporate Vice President, International

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 was $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 US Codman Specialty Surgical business, which grew organically over 6.5% in the fourth quarter versus the prior year.

If we turn to slide seven, 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 and 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 Neuro Monitoring 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 shots. As we move into 2019, we expect performance of the Flow & Pressure Monitoring franchise to improve with the launch of new products such as CERELINK, our new ICP monitoring platform and a new toolkit for our programmable valves.

Moving to precision tools & instruments. Sales increased high single digits in the fourth quarter compared to the prior year, driven by growth in our broad surgical instrument portfolio and record sales of Mayfield, the market-leading device in cranial stabilization.

Turning to our full year 2019, CSS segment guidance. We expect reported sales to increase 1.5% to 2% and organic revenues to increase 3.5% to 4%, driven largely by expanded commercial channels and new product launches. We are expecting slower growth in the first half of the year, with the first quarter being the lowest, due to the ongoing integration work related to exiting TSAs in Western Europe and transitioning Day 2 countries.

Let me now move to the Orthopedics & Tissue Technologies or OTT segment on slide eight. Fourth quarter sales were $134 million, representing an increase of 3.7% on a reported basis and 4.3% on an organic basis compared to the prior year. Wound reconstruction grew over 7% in the fourth quarter, driven by core tissue products like Integra bilayer PriMatrix and SurgiMend, which are used in burn, trauma wounds and reconstructive procedures. The expansion and increased focus of our commercial sales teams contributed to the growth of our wound reconstruction business.

Sales in our outpatient wound care channel which we call advanced wound care, grew double digits in the fourth quarter driven by new accounts and our broad portfolio of products led by AMNIOEXCEL and PriMatrix. In addition to our direct sales coverage, our enterprise contracting group has been successful in developing a strong funnel of new business, as we look to further increase adoption of our portfolio of advanced wound care solutions.

Sales in our private label business grew mid-single digits in the fourth quarter as we continue to benefit from healthy demand from our existing partners.

We expect to increase private label capacity as we ramp up more products in our collagen manufacturing center later in 2019.

And then wrapping up with our Extremity Orthopedics business. Performance in this franchise was at the lower end of our stated guidance from the third quarter earnings call on October. As anticipated, we experienced solid growth in our shoulder and ankle portfolio, that(ph)had offsetting declines in lower fixation. Overall sales decreased by approximately $2 million compared to the prior year's quarter. As we indicated on our last earnings call, we expect to deliver growth in Orthopedics by the second quarter of 2019 as we start to benefit from our expanded and more focused sales channel.

For the OTT segment in 2019, we expect organic revenue to increase in the range of 6% to 8% over the prior year and reported revenue to increase in the range of 5% to 7%.

Please turn to slide nine for our consolidated revenue guidance. We expect our full year 2019 revenues to be in the range of $1.515 billion to $1.525 billion, representing reported growth in the range of 3% to 4% and organic growth of approximately 5%.

Our reported revenue guidance range includes foreign currency headwinds of approximately $10 million. In addition, we're in a process of undertaking a global product portfolio assessment, due to the new EU MDR requirements.

Based upon the work performed today, we expect a $5 million to $10 million headwind in our reported revenues, which is reflected in our guidance range. We expect to show this net impact as discontinued products in our quarterly reporting that will be adjusting for the impact in our organic growth calculation.

For the first quarter of 2019, we expect revenues of between $357 million and $362 million, which assumes about 3% organic growth and the largest headwinds of the year from foreign currency. Our guidance includes the loss of some selling time attributable to the European TSA exits occurring this quarter.

Turning to slide 10, I'll now review the key components of our fourth quarter 2018 P&L performance. Fourth quarter GAAP gross margin was 61.8%, an improvement of 200 basis points over the prior year, driven by lower acquisition-related costs.

Adjusted gross margin was 65.6%, a decline of 150 basis points compared to the prior year. During the second half of 2018, we invested in our regenerative manufacturing facilities to increase capacity by adding shifts, running additional lines and making capital improvements to drive efficiencies.

Over the short-term, we incurred higher manufacturing costs, which is evident in our lower gross margins in the fourth quarter. These improvements in production are expected to result in higher capacity utilization, supporting increased demand for our regenerative products, thus driving improved gross margins moving forward.

For the full year 2019, we expect an adjusted gross margin of approximately 67.5%, representing an improvement of close to 100 basis points over 2018. Our adjusted EBITDA margin for the fourth quarter and full year was 23.2%.

The full year improvement of 50 basis points was largely based on accretion from the Codman acquisition and better leverage to G&A costs.

For 2019, we expect an adjusted EBITDA margin in the range of 24% to 24.5%, which at the midpoint represents about a 100 basis point increase over 2018. This improvement is expected to come from better sales productivity, higher gross margins and G&A leverage. Our adjusted tax rate for the full year 2018 was 17.7%.

For 2019, we expect our adjusted tax rate to be about 1 point higher, due to a lower expected benefit from stock-based compensation. Fourth quarter GAAP earnings per share were $0.29 compared to $0.56 in the prior year. Fourth quarter adjusted earnings per share was $0.65 compared to $0.64 in the same quarter of the prior year.

Adjusted EPS for the quarter was at the high-end of our guidance range. For the full year 2019, we expect GAAP earnings per share to be in a range of $1.36 to $1.43 and adjusted earnings per share to be in the range of $2.65 to $2.72, representing an increase of 10% and 12% over 2018. For the first quarter of 2019, we expect adjusted earnings per share to be in the range of $0.59 to $0.62.

Now, I'd like to turn the call over to Sravan for a brief discussion of our cash flow performance and capital structure. Sravan?

Sravan K. Emany -- Senior Vice President, Strategy, Treasurer and Investor Relations

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.

Take it all together, 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 cash flow 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 2.9 times.

In summary, we significantly strengthened our capital structure in 2018 and provided additional flexibility to support our long-term strategic plans.

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

Peter J. Arduini -- President, Chief Executive Officer and Director

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 the 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 will 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 a 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 payers. 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 II, an evolution of our internal ankle fixation offering, and a full market release of our new Glenoid baseplate, which was designed to expand our Titan Shoulder System.

We also will benefit from a full year of the XT Revision Ankle, which was specifically designed for revision of any commercially available primary total ankle replacement system. Importantly, we expect sales in our lower fixation portfolio to stabilize as we begin to benefit from the increased focus resulting from our sales channel expansion and the additional investments we made in 2018.

All of this gives us confidence in our full year financial targets, which include approximately 5% organic revenue growth, roughly 100 basis points of margin expansion and double-digit adjusted earnings-per-share growth. And with many of the larger investments related to Codman acquisition behind us, we're looking forward to further improvements in our operating cash flow.

Turning to slide 14, I'll make some closing comments and then open up the call for questions. At our December 2017 Investor Day, I described our strategy for achieving our long-term targets, which was centered around four pillars. First, building an execution-focused culture, where we've made great strides across all areas of our business. Second, achieving relevant scale, which we view as a top four share position in the markets that we serve. Third, improving our agility and innovation. And fourth, delivering an excellent customer experience.

In 2018, we made progress across all four pillars, through a successful integration of Codman and the expansion of our OTT sales channels, we have established a foundation for achieving our targets in 2019 and beyond. After a disruptive year of integration and expansion, I feel confident that our commercial organization has the right people and the appropriate focus for execution over the long-term. With the acquisition of Codman, we now have relevant scale in the global neurosurgery market to accompany our leadership positions in the regenerative tissue space.

As a leader, we're driving innovation with our product roadmap to improve clinical care and ultimately patient outcomes. At the same time, the realignment of our tissue tech business into three commercial channels, allows us to get closer and respond more quickly to our customers in this clinically focused market.

In our Extremity Orthopedics franchise, sales focus and new products will bring increased growth. In addition, our ability to pursue broader contracting ensures we deliver greater value to our customers and patients. In the coming year, we'll continue to focus on improving operational efficiency and optimizing our manufacturing footprint, both of which we expect to drive improved margins and cash flow in line with our long-term goals.

In the first quarter of 2019, we begin operating on One Global ERP system, down from around 30 several years ago, which will play a large role in driving efficiencies, while at the same time streamlining our interactions with our customers. In addition to our expectations for fast organic growth, we maintain a strong balance sheet and a talented team, capable of integrating businesses, which positions us to capitalize on external opportunities as well. We expect to launch over 10 new products across our business this year, are in the process of rolling out new digital platforms for customer interaction and continue to look for ways to bring value to the healthcare system through innovative products and contracting solutions. As we start the new year, I remain as confident as ever in Integra's ability to meet our full potential.

That concludes our prepared remarks. Thank you for listening. And Brandon, if you would please open up our lines for questions.

Questions and Answers:

Operator

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

Raj Denhoy -- Jefferies LLC -- Analyst

Hi, good morning.

Peter J. Arduini -- President, Chief Executive Officer and Director

Good morning.

Glenn G. Coleman -- Chief Financial Officer and Corporate Vice President, International

Good morning.

Raj Denhoy -- Jefferies LLC -- Analyst

Maybe I could start with the Orthopedic Tissue segment. If you look at the performance of the year, I mean, I think, you guys alluded to it, but I guess you finished a little lower than you thought you are going to as the year progress. It sounds like a lot of it may be 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 would get comfortable that it's actually going to accelerate here in 2019?

Peter J. Arduini -- President, Chief Executive Officer and Director

Raj, I would say again, if you think about it it's kind of a tale of two cities. If you look at Orthopedics and Tissue, let's just kind of split those and talk about 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 (inaudible) valve work actually had solid performance.

I'd say the only thing (inaudible) is this year, because of the growth we'd have to 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 the demand is great, team is doing well.

On the Orthopedic 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 in 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 extended -- the expanded growth within our Shoulder, which grew double digits. Ankle grew double digits, I think globally and as well as 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 up 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.

Glenn G. Coleman -- Chief Financial Officer and Corporate Vice President, International

And 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 a 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 were launching in the space. We have the Small Post baseplate, we have the XT Ankle Revision, and we've got a Panta 2 Nail as well that would be for fixation in the foot. So we've got new products, stable channel, 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.

Peter J. Arduini -- President, Chief Executive Officer and Director

And just a last part of an Ortho, we haven't talked a lot about this. But I think with our commercial leader, Pete Liccardi(ph)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(ph)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 2019 through the year we start putting up the positive growth we would expect in orthopedics.

Operator

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

Matthew Miksic -- Credit Suisse -- Analyst

Hi. Thanks for taking my question. So I had one on just some of the pacing of the 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. You talked about second quarter ending in the third quarter larger to smaller. Any kind of color you could 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 place(ph)in these geographies. It's a cost -- it's obviously taking 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 the MDR and how it plays into that geography would be helpful. Thanks.

Glenn G. Coleman -- Chief Financial Officer and Corporate Vice President, International

Yeah. Hey, Matt. Maybe what I'll do is, it's Glenn, (inaudible) have him on comment on Day 2 and I'll give my view just broadly on EU MDR. And just so in terms of the cadence of these 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 2s 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 are smaller in nature. And so that's the way to think about the Day 2 countries and essentially, while 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 make sure that we're actively bidding on new tenders. But this is going to take us some time to of all stabilize and then hopefully see some growth. But again, we're not counting on much growth from these Day 2 countries in our 2019 guidance. So Pete maybe you can comment on the EU.

Peter J. Arduini -- President, Chief Executive Officer and Director

Yeah. Matt, part of the EU MDR new regulation that came in, I think 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 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 similar the way we do in the US, 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've 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 do 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 of those can you live with 10? And do you feel confident that you can move customers who used 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 have a long history to stay with us or 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 of your switch, there will be some impact which Glenn alluded to on our comments.

Operator

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

Robbie Marcus -- JPMorgan -- Analyst

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

Peter J. Arduini -- President, Chief Executive Officer and Director

Thanks, Robbie.

Robbie Marcus -- JPMorgan -- Analyst

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 reflected in the Codman business. Maybe help us understand how the growth has been in Codman for each of the line items. Or how we should 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.

Glenn G. Coleman -- Chief Financial Officer and Corporate Vice President, International

Sure. So I'll start with the CSS line 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 stand-alone performance from our Integra legacy business, because we've integrated the commercial teams now. But as you look at the different franchises, I would say dural repair think of it as a lowest single-digit growing or mid-single-digit growing franchise, both our graft and our sealant business there. Advanced energy right now, we've seen 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 for higher single-digit growth for the next couple of years. PCNI(ph)is an area that we'd expect to see low single-digit growth, so think about it as maybe a 1%, 2% grower, generates 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 in some mature technologies like our fixed pressure shunts.

The good news here though is we have a number product launches, it's got to be CERELINK, our new ICP launcher. We've got some additional handsets coming out and configurations for their programmable valves and the toolkit. That's going to drive better growth than what we've put up over past couple of years in this part of our business.

And so I would say that you can expect us to be a 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 3% to 5% range organically, and obviously going to drive toward the upper end of that range to the extent we can with a lot of these new product launches.

Peter J. Arduini -- President, Chief Executive Officer and Director

And I'd just comment Robbie, and if you step back from the -- sales forces are now stable, we've had very low turnover. I would say as we exited this year, both sides of the legacy teams, obviously the previous Codman team, previous Integra Group which is now one are really now 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 in 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 kind of think about clinically, how we may change the game and start changing the growth trajectory at some of these franchises, which we picked up in this acquisition.

Operator

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

Bruce Nudell -- Robinson Humphrey Inc. -- Analyst

Good morning. Thanks for taking my question. I have a trivial question and two more real questions. Firstly on your slide nine for the 2018 reported number or the $1.47 billion is that inclusive of the kind of Natus TMA revenues?

Glenn G. Coleman -- Chief Financial Officer and Corporate Vice President, International

Yeah. So slide nine is our total revenue guidance, if I'm not mistaken. I would say in that discontinued product divestiture product bucket, we're assuming a $5 million to $10 million of net headwinds coming from discontinued products associated with portfolio management. And then the rest of it $4 million(ph)to $8 million(ph)is coming from the decline in the Natus revenues year-over-year. And that's up (multiple speakers) just a few months back.

Bruce Nudell -- Robinson Humphrey Inc. -- Analyst

And so 2018, the presentation of 2018 includes the transition manufacturing agreement?

Glenn G. Coleman -- Chief Financial Officer and Corporate Vice President, International

Yeah, it does. So in the 2018 revenue numbers that we 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.

Bruce Nudell -- Robinson Humphrey Inc. -- Analyst

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

Peter J. Arduini -- President, Chief Executive Officer and Director

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 shunts catheters things tightened up across the board. Clearly that's what we're pointing to here within the info. But now no broader specific plans for a divestiture at this point.

Operator

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

Jonathan Demchick -- Morgan Stanley -- Analyst

Hello. Thanks for taking the questions. Two quick ones. For the -- I mean, you did a really good job of walking through some of the drivers of acceleration to the back half. But I guess, I was curious to discuss a little of the deceleration in 1Q. I mean 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 second question I have and I'll just kind of squeeze in them together was on precision tools & instruments. I was curious on what really drove the acceleration? It was a very strong quarter relative to the prior ones and was just curious about the sustainability of this growth?

Glenn G. Coleman -- Chief Financial Officer and Corporate Vice President, International

Yeah. 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 of 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, and a lot of that affect 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 selling mode. So what that means is, is customers replacing order, if they get misplaced with J&J as an example, it's better(ph)to Integra. We're doing a lot of servicing just to make sure the order gets routed to the right place, product gets shifted to customer and doing some of the administrative things that they physically would not do.

And so that's where the disruption factor comes in. But the other two items as well are the Day 2 country 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.

The good news is we're stable versus Q3. But again, we're not going to see any improvement in these Day 2 countries in terms of how we model 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, are seeing signs of improvement, we put all things in place to be successful in 2019, but we're not counting on seeing growth until the second quarter. Could that happen sooner? We're obviously driving toward 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 we just keep in mind, once we get past 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.

Peter J. Arduini -- President, Chief Executive Officer and Director

And then Jon to your second question, just on PT&I, I mean, the short answer is it's a little bit more of timing than anything. If you look at Q3 we had a slower quarter. So from a combined back half, the two kind of equalize 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 our retractor(ph)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 of these sales folks were really kind of doing that type of effort, which again showed some of the potential of more confident 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, which kind of rate minus we had hoped for the second half.

Glenn G. Coleman -- Chief Financial Officer and Corporate Vice President, International

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

Operator

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

Craig Bijou -- Cantor Fitzgerald -- Analyst

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 2017 came in I think it was 200 basis points lower, I recognized that you guys were making investments in regenerative manufacturing. But just kind of wanted to touch on your confidence in you're 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 wanted 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?

Glenn G. Coleman -- Chief Financial Officer and Corporate Vice President, International

Yeah. 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 non-recurring manufacturing costs to ramp up the regenerative plans to support future demand. So we're quite confident that when we report Q1, you're going to see a more normalized gross margin levels that are closer to the 67% plus that we have been putting up more recently. And we also had -- I'll call it a mixed 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(ph)than midyear of 2019. So those are two headwinds that go away. And why we feel confident? That you see kind of an immediate rebound from the levels that you see here in Q4.

As we look at 2019 in addition to I just mentioned, keep in mind, we're anticipating a very strong growth year from our regenerative portfolio, and that is 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 toward 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 walk through earlier, we'd expect to see some improvement in gross margins as we get rid of some of the lower margin products that are there.

We expect to get better production capacity out of our new collagen manufacturing center be keep in mind that's all fully equipped with robotics us well, which is going to help our gross margins. And probably more significantly, a couple of years from now, when we exit the J&J TMA in Massachusetts, that's going to be a very nice driver of gross margins. We've already got good line of sight around the manufacturing costs for those products. And keep in mind, the price we're paying today is cost plus arrangement. And so we have a good idea around the gross margin improvements once we transfer that manufacturing, and that's still a couple of years down the road. But as you look longer-term and how we get to the 70% plus, that's obviously a key factor in how we get there.

And then on the operating leverage question, we didn't give all those P&L line items, but I will just say things are pretty consistent year-to-year when you look at R&D as a percent of sales, SG&A as a percent of sales, G&A should come down as a percent of sales. And we've made great progress over the last couple of years. Right now, we're just above 13%, and we continue to drive that number lower.

And that combined with the gross margin improvement would get us to 100 basis points plus of EBITDA margin expansion 2019 versus 2018.

Operator

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

Ryan Zimmerman -- BTIG -- Analyst

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 acquisitive 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 services 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 a sales miss in some of those countries before those come off the transition services agreement?

Sravan K. Emany -- Senior Vice President, Strategy, Treasurer and Investor Relations

Sure, Ryan. This is Sravan. I'll start with the leverage ratio and then Glenn will take the Day 2 country questions. Long-term, I think our long-term focus for consolidated net leverage ratio is somewhere between 2.5 to 3.5 times. So 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, 10 years, where we're working I think more -- in other years will be closer to 2.5. I think that's sort of our long-term guidance.

Peter J. Arduini -- President, Chief Executive Officer and Director

Yeah. I mean, and obviously just as we hit the Codman kind of an 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.

Glenn G. Coleman -- Chief Financial Officer and Corporate Vice President, International

And Ryan, on the Day 2 country point, just to clarify Ryan(ph)that 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 transfer so to speak later from a commercial perspective, we have to take over immediately once we actually close 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 we get better results.

We're running a process of working through training programs and marketing materials for the key Day 2 countries and have a seller portfolio. And then obviously, we plan being much more aggressive around the bidding process. So I think it's really just around focus training and marketing and were going to continue to drive at least Day 2 countries to be flat and then hopefully grow toward the back half of 2019. And again, that's how we've reflected this in our guidance range for total revenues and organic revenues that we outlined during the call.

Peter J. Arduini -- President, Chief Executive Officer and Director

And I think it's worth just to add Glenn, unlike the Day 1 Western countries where we then do all processing of the AR, AP all of these things. Most of 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 takeover an existing distributor that was with J& J or you move a business to one of our existing distributors in that geography, the transition lifts 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.

Operator

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

Travis Steed -- Bank of America Merrill Lynch -- Analyst

Hi, good morning. Thanks for taking the questions. Just wanted to make sure you're properly modeling out the progression in 2019 on revenue growth. For Q1, 3%, is Q2 likely around 4%? Q3 with the tougher comp around 5%, and then a big Q4?

And then the second question I had was on free cash flow conversion. Are you still sticking with the 90% by 2020? And how do we get confidence 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.

Glenn G. Coleman -- Chief Financial Officer and Corporate Vice President, International

Hey, Travis, I'll take the first portion of it, and ask Sravan to maybe 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 these 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?

Sravan K. Emany -- Senior Vice President, Strategy, Treasurer and Investor Relations

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 of the -- as we finish the third quarter, the third quarter will be our first quarter that will be north of 90%. And we'll -- on a run rate basis, we're taking(ph)a year before we have a full LTM period that has greater than 90% free cash flow, but I think the back half of this year we're going to start to see free cash flow levels to our expectation to start ramp up in that range.

Operator

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

William Inglis -- Piper Jaffray -- Analyst

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's any particular geographies that you expect to stand out? Or if you're expecting to launch in new geographies? And then if the mix of growth will be disposable versus system placements? And then any thoughts on additional applications outside of cranial?

Peter J. Arduini -- President, Chief Executive Officer and Director

Yeah. 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 in existing business as well. We'll 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 a lot of opportunities for continued growth. But I would say as we start moving into more competitive conversion opportunities, which we think there is 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 moderated down the conversion of what we've seen in '18 and into '19. So if something comes out of 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've 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 -- a component of this product is really when it's 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 easy-use factor. So obviously all these systems that we have placed the more they use it, the disposable revenue chain will continue to grow as well.

Operator

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

Peter J. Arduini -- President, Chief Executive Officer and Director

Hi, Matt.

Operator

Mr. Taylor, make sure you're phone is not on mute, sir?

Yong Lee -- UBS -- Analyst

Can you hear me all right?

Operator

Yes, sir.

Peter J. Arduini -- President, Chief Executive Officer and Director

We can.

Yong Lee -- UBS -- Analyst

Okay, great. Sorry about that. This is actually Yong Lee 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 any -- some color on approval or commercialization timeline? And also just probably how important is that product and filling holes in the upper extremities portfolio?

Glenn G. Coleman -- Chief Financial Officer and Corporate Vice President, International

Yeah. So we're excited about this agreement that we had entered into with consortium of leading shoulder surgeons. As you know we've got a great portfolio today between our Total and reverse shoulder, but this now moves us into a different space in terms of short stem and the stemless shoulder, which I would say commercially will probably be available on a 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 call it $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 getting toward our PYROHEMI 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?

Peter J. Arduini -- President, Chief Executive Officer and Director

Yeah. I would just say I think, if you think about what we're doing we've really taken a look at a combination of funding internal development. PyroCarbon is 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 a portfolio out. So as Glenn said, with short and long stem being able to recover the full range of how the markets 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 on 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.

Operator

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

Matt Wizman -- Raymond James -- Analyst

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 anyway you could kind of break out those assumptions around underlying margin expansion versus kind of what's left from Codman for next year? Thanks.

Glenn G. Coleman -- Chief Financial Officer and Corporate Vice President, International

Yes. Listen, I think one of the things Codman did for us was got a 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 put our G&A leverage down by over 250 basis points as an example. Codman has been a big enabler of that. And so yeah, 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 built in the expectations around 2019 and Codman have been accretive to our 2019 results. So I think at this point in time, until it gets 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 US. Could there be some upside for us? Yeah, I think there is. But until we get further into the European exits as well as Japan which happens in the third quarter this year, we'll remain a bit cautious around what to expect on leverage from a profitability perspective.

But we've already seen some of that come through the P&L in 2018 and would expect some more to come through in 2019, although we're being cautious outside the US until we get further along.

Operator

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

Steven Lichtman -- Oppenheimer & Co. -- Analyst

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 at in the sort of the near, medium term here, what's your outlook for expansion may be in those two countries in particular given the larger footprint and more product launches that I think you're expecting? Thanks.

Glenn G. Coleman -- Chief Financial Officer and Corporate Vice President, International

Yeah. That'll be(ph)a great question. Both Japan and China represent really significant opportunities for growth over the next five years for us. To put it into perspective, again, this year in China in 2018, we generated over 20% growth. And I would say in the last five years, we see 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 we'll -- let me talk more about I think on our first quarter earnings call. But to your point, a big channel, new products go into this big channel. It 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 reps become more productive as we launch new products to that sales force as well, which is pretty much consistent with the timing of the US 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.

Operator

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

Philip Coover -- Citi -- Analyst

This is Phil on for Amit. Thanks for floating me in. I think I'd like to circle back to the five-year plan. 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 side, 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.

Glenn G. Coleman -- Chief Financial Officer and Corporate Vice President, International

Yeah. 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 on the 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, with the 2% grower, 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.

Operator

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

Larry Biegelsen -- Wells Fargo -- Analyst

Hey guys. Thanks for fitting me. 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 the natural adjacency for your Codman business. How are you thinking about the stroke market as an opportunity? Thanks for taking the question.

Peter J. Arduini -- President, Chief Executive Officer and Director

Yeah, Larry. Thanks for the question. Look I would say, just I'll address the first part and maybe I'll have -- sorry the 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 as of either a neuro-radiology or a purely trained neurosurgery and vascular is very different business than we're focused on. 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 then 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?

Glenn G. Coleman -- Chief Financial Officer and Corporate Vice President, International

Yeah. So Larry to your point, Sravan and the team has done a nice job of taking our leverage down to 2.9 times, 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 a great position, we've got $1 billion of capacity to do deals. But at the same time, we'll 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 this 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 a 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.

Operator

We have no further questions at this time, sir.

Peter J. Arduini -- President, Chief Executive Officer and Director

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.

Glenn G. Coleman -- Chief Financial Officer and Corporate Vice President, International

Yeah. Thank you.

Operator

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

Duration: 72 minutes

Call participants:

Michael Beaulieu -- Director, Investor Relations

Peter J. Arduini -- President, Chief Executive Officer and Director

Glenn G. Coleman -- Chief Financial Officer and Corporate Vice President, International

Sravan K. Emany -- Senior Vice President, Strategy, Treasurer and Investor Relations

Raj Denhoy -- Jefferies LLC -- Analyst

Matthew Miksic -- Credit Suisse -- Analyst

Robbie Marcus -- JPMorgan -- Analyst

Bruce Nudell -- Robinson Humphrey Inc. -- Analyst

Jonathan Demchick -- Morgan Stanley -- Analyst

Craig Bijou -- Cantor Fitzgerald -- Analyst

Ryan Zimmerman -- BTIG -- Analyst

Travis Steed -- Bank of America Merrill Lynch -- Analyst

William Inglis -- Piper Jaffray -- Analyst

Yong Lee -- UBS -- Analyst

Matt Wizman -- Raymond James -- Analyst

Steven Lichtman -- Oppenheimer & Co. -- Analyst

Philip Coover -- Citi -- Analyst

Larry Biegelsen -- Wells Fargo -- Analyst

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