Wright Medical Group's (WMGI) CEO Robert Palmisano on Q2 2016 Results - Earnings Call Transcript

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Wright Medical Group NV (NASDAQ:WMGI)

Q2 2016 Earnings Conference Call

August 2, 2016 4:30 PM ET

Executives

Julie Tracy - Senior Vice President and Chief Communications Officer

Robert Palmisano - President and Chief Executive Officer

Lance Berry - Chief Financial Officer

Analysts

Matthew O'Brien - Piper Jaffray

Rich Newitter - Leerink Partners

Andrew Hanover - J.P. Morgan

Kaila Krum - William Blair

Larry Biegelsen - Wells Fargo

Raj Denhoy - Jefferies

Mike Matson - Needham & Company

Matt Miksic - UBS

Jason Bednar - Robert W. Baird

Glenn Novarro - RBC Capital Markets

Chris Pasquale - Guggenheim

Travis Steed - Bank of America

Joanne Wuensch - BMO Capital Markets

Operator

Good day, ladies and gentlemen, and welcome to the Wright Medical Group NV Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Julie Tracy. Please go ahead.

Julie Tracy

Thank you, and good afternoon, everyone. Welcome to the Wright Medical's second quarter 2016 conference call. We appreciate you joining us. I'm Julie Tracy, Wright's Chief Communications Officer. With me on the call today are Bob Palmisano, Wright's President and Chief Executive Officer; and Lance Berry, Wright's Chief Financial Officer.

We issued a press release this afternoon regarding our second quarter results, and a copy of that press release is available on our website at wright.com. The agenda for this call will include a business update from Bob, a review of our financial results and updated 2016 guidance from Lance, a question-and-answer session, and then conclude with closing comments from Bob.

Before we begin, I would like to remind you that this call includes forward-looking statements, including statements about our outlook for 2016, our beliefs and expectations regarding the outcome of pending litigation, the completed merger with Tornier, the sale of our Large Joints business, and AUGMENT Bone Graft. Each forward-looking statement contained in this call is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements. Additional information regarding these factors appears in the section entitled Cautionary Note Regarding Forward-Looking Statements in the press release we issued today.

More information about risks can be found under the heading Risk Factors in Wright's annual report on Form 10-K for the fiscal year ended December 27, 2015 and quarterly report on Form 10-Q for the fiscal quarter ended June 26, 2016 filed or to be filed by Wright with the SEC, as supplemented by our other SEC filings. Our SEC filings are available at www.sec.gov and on our website at wright.com. The forward-looking statements in this call speak only as of today and we undertake no obligation to update or revise any of these statements.

Our earnings release and today's discussion include certain non-GAAP financial measures. Please refer to the reconciliations, which appear in the tables of today's press release and are otherwise available on our website. Note further that our Form 8-K filed today provides a detailed narrative that describes our use of such measures. In addition, as a result of our previously announced anticipated sale of our Large Joints business to Corin, all current and historical operating results for the Large Joints business are reflected in discontinued operations. Unless otherwise noted today's discussions refer to results from continuing operations.

With that introduction it is now my pleasure to turn the call over to Bob Palmisano. Bob?

Robert Palmisano

Thanks, Julie, and welcome to Wright's second quarter earnings call.

For the third consecutive quarter all our most important financial results exceeded our expectations. Lower Extremities and Biologics pro forma constant currency net sales growth of 14%, adjusted EBITDA for continuing operations of $12.2 million and adjusted gross margins from continuing operations of 78.5% reflect the strength of our markets and our unique position in them.

We continue to successfully execute our merger integration plans and with the continued success we are seeing, we believe we are well positioned to continue our strong business momentum and to deliver on our synergy commitments as we progress through the remainder of 2016.

When we announced the merger with Tornier we set out three aggressive goals.

First, to be a mid-teens growth company; second, to have gross margins in the high 70% range; and third, to achieve adjusted EBITDA margins of approximately 20% three years post close. After only three quarters post close we are well ahead of schedule on all three of these key financial metrics. Highlights in the quarter included strong contributions from the ongoing roll out of our SIMPLICITY and ASCEND FLEX Shoulder Systems which drove 20% sales growth in U.S. shoulders, and the ongoing launch of the INFINITY Total Ankle Replacement System which drove 33% sales growth in the U.S. In addition, our U.S. Biologics grew 52% in the quarter driven by the ongoing commercial activities for AUGMENT bone graft.

Biologics is now the fastest-growing part of our business. We expect all three, all of these products which are still in early commercial roll out to continue to be growth engines during the remainder of 2016 and beyond.

We also believe our previously announced binding offer to sell our Large Joint business to Corin represents a significant opportunity going forward. As we've said, this Large Joint business is not in line with our strategy to be a premier Extremities and Biologics companies, and the sales of this business is the next logical step for Wright. We're pleased we found an excellent strategic buyer in Corin, a company that is deeply committed to the success of the Hip and Knee business, and will continue to provide the focus and investment to enable it to reach its full potential. We expect the transition to close by the end of the third quarter or early fourth quarter of 2016.

Based on the strength of our second quarter performance and our outlook for the remainder of the year, we are increasing our full year net sales and adjusted EBITDA guidance. Although we're only halfway through the year, the strength of our core Upper Extremities, Lower Extremities and Biologic businesses plus our ability to capture cost synergies earlier and at a greater level than anticipated gives us confidence to increase our outlook for the full year.

We will continue to focus on executing our duration plans to realize our full potential and believe that the positive progress we have made since the merger close sets up well for continued strong revenue growth and significant margin expansion this year, next year and beyond. I believe the future, both long-term and short-term, is indeed very bright.

Let me now highlight our business result for the second quarter. Unless stated otherwise, the revenue growth rates I provide today will be based on a combined pro forma constant currency basis over the prior-year quarter.

As anticipated, we began to see the impact of revenue dyssynergies in the second quarter, particularly in our U.S. Lower Extremities business, which grew 6% this quarter including dyssynergies. Excluding the impact of these dyssynergies, we continue to see strong growth driven by U.S. Total Ankle business which grew 33% for the quarter as there were nice contributions from the launch of our Salvation Limb Salvage System for treating Charcot foot and limb salvage cases. We are still in the early - we're still early into the launch, but based on the positive physician feedback received so far we look forward to this product ramping up nicely throughout the year.

I also want to highlight the strong performance in our U.S. Biologics business, which grew 52% in the second quarter, the fastest-growing segment of our business. This growth was driven by the ongoing launch of AUGMENT Bone Graft as well as strong performance from our other Biologics products.

With regard to AUGMENT, we have converted new accounts while holding price. We continue to average over one new value analysis committee approval per working day in Q2. In addition, we trained approximately 320 U.S. physicians during the quarter, which was double the number we trained in Q1. Although we expect our momentum to continue as we add new customers and further penetrate top decile accounts, we do expect that normal summer seasonality will impact both our revenue trajectory and the amount of VAC committee meetings and approvals, both of which we believe should tick back up late in - late in the third quarter.

The U.S. Upper Extremity business continued its excellent performance with 17% growth this quarter, driven by our innovative product portfolio and clinically superior sales team. The ASCEND FLEX shoulder continued to perform well, and its growth was supplemented by the positive performance of our ongoing launch of the SIMPLICITI Shoulder System in the U.S.

Overall the sales performance this quarter was very strong as our innovative products in Upper, Lower and Biologics continued to drive growth, and the timing of the synergies has been playing out as we had anticipated.

Now moving to our progress in the merger integration. We are continuing to successfully execute our plans with a goal of maximizing focus and alignment while minimizing disruption. As of the end of Q2, all the U.S. Lower Extremity sales force and distribution system has been fully integrated. This is a key milestone for the integration, and I am very pleased with how quickly and cleanly we were able to get to this point.

It's important to note that the timing of the sales to synergies is playing out exactly as we expected. With the transition of our U.S. Lower Extremity sales force now complete, we begin the transition process of our U.S. Upper Extremity sales force, and expect to have that completed by the end of the year.

Based on where we are, with our sales force integration, with U.S. Lower Extremities complete, International complete, and U.S. Upper Extremities in process, I believe by the end of the third quarter, we will have good visibility, as to the open impact we'll see from the synergies. From a cross-synergies perspective, we're also off to a great start, and we have already seen some earlier than anticipated cost savings, which contributed to the adjusted EBITDA over-performance in the quarter.

As I mentioned in our last earnings call, we have significant opportunity to improve our balance sheet, with initiatives to improve inventory, instrument utilization and DSLs, with our first focus on our legacy Wright business. We are starting to see the impact from these initiatives, as evidenced by approximately 80 days' reduction in our gross inventory days on hand for the legacy Wright business so far this year, which underscores our conviction around fundamentally changing the way we do business, so that we can have both a role-managed balance sheet, and deliver high growth.

Looking forward in connection with the integration of our U.S. Upper Extremity sales force, we are also integrating the U.S. Upper Extremities distribution into our hub network. This represents a significant opportunity to increase instruments that utilization, decrease inventory and DSL, and increase rep selling time. This initiative was highly successful and produced significant benefits for the Legacy Wight Lower Extremity business, and I'm looking forward to the benefits it can drive in the Upper Extremity business as well.

In summary, the execution of our merger integration plans is firmly on track, and we are well positioned to continue our strong business momentum, and deliver on our synergies commitments, as we progress through 2016. Before I turn the call over to Lance, I did want to provide a few comments on the metal-on-metal hip, metal-on-metal hip and insurance litigation Legacy Wright is involved in.

First, I encourage you to read the disclosures in our SEC filings, including our previously filed 10-K and the 10-Q for the second quarter that will be filed shortly. With regard to these matters, I continue to be limited in what I can say, since it is pending litigation, and I am not going to comment on our legal strategy, or the details of our negotiations.

During the second and early third quarters of 2016 we believe we made meaningful progress towards resolution of our metal-on-metal hip litigation and related insurance litigation.

In June 2016 we reached a confidential settlement in principle with a sub-group of three insurance carriers. Settlement discussions with the remaining three insurance carriers continue. In July 2016 we continued with ongoing mediation discussions with the plaintiffs. As a result of these July discussions, we established a reasonably possibility loss range for a substantial portion of the revision cases of $150 million to $198 million net of expected recoveries from the insurance settlement. Accordingly, we recognized $150 million charge within discontinued operations and are continuing settlement negotiations with the plaintiffs.

We will continue to actively work towards the goal of securing a global settlement, although as I have previously said, this is a complex - this is complex and subject to significant uncertainties, which makes the ultimate outcome and precise timing difficult to predict. I do continue to believe and expect that with the resources available to us we will have ultimately - we will ultimately be able to resolve this matter in a way that will not be a long-term issue for us.

I understand that there are many questions about the details of the litigation; however, my first priority is to do what's right for Wright. Therefore I will not be giving any further information. And as I have said before, we will not negotiate this matter in the public domain because this work hurt, not help, our negotiations. We are currently unable to determine the amount or timing of any potential settlement.

During the second half of the year we look forward to closing the transaction with Corin, completing our merger integration activities and exiting the year as a high growth, pure play Extremities and Biologics Company. We have multiple opportunities through our robust new product pipeline to further accelerate our growth, continue to expand our markets and gain market share. In addition we will be - we will be able to devote our full resources and attention to accelerating growth opportunities in our markets.

We continue to believe Wright Medical is a unique company that has the ability to drive mid-teens growth, gross margins in the high 70% range, and achieve adjusted EBITDA margins of approximately 20%. In the second half of the year we will continue to drive towards achieving these key financial metrics.

With that I will now ask Lance to provide further details on our second quarter results and 2016 guidance. Lance?

Lance Berry

Thanks Bob. As we get started, all sales growth rates that I refer to in my prepared comments will be on a pro forma constant currency basis over the prior-year quarter. Our results of operations refer to our as-adjusted results and comparisons on a pro forma basis which are non-GAAP financial measures, as described by Julie in the introduction of our call.

In addition, as a result of our previously announced anticipated sale of our Large Joints business to Corin, all current and historical operating results for the Large Joints business are reflected in discontinued operations. Unless otherwise noted, today's discussions refer to results from continuing operations. Please refer to the non-GAAP reconciliations in our press release, and also I strongly encourage you to review the information posted on our website. Similar to last quarter, we have provided you with information to assist you with your modeling and to provide you with pro forma information and cash EPS through the second quarter of 2016.

First, before I get into the details of the quarter, to assist you with comparing our results to your previous models, I wanted to let you know that sales for the Large Joints business were $10.2 million in Q2. And, therefore, if they had been included in continuing operations this quarter, our net sales would have been $180.9 million.

Now moving on to the details of our continuing operations. Globally, the Extremities and Biologics business grew 14%, driven by strong performance in the U.S. upper Extremities business, U.S. total ankle replacement products and outstanding growth in the U.S. Biologics business. The combined U.S. Biologics business grew 52%, driven by the ongoing launch of AUGMENT. AUGMENT has continued to steadily increase as we work our way through the value analysis committees. We have converted new customers while holding price and expect our momentum to continue as we add new customers and further penetrate top decile accounts.

The combined U.S. Upper Extremities business growth of 17% in Q2 was driven by strong contributions from our U.S. shoulder products with growth of 20%, driven by the positive performance of the SIMPLICITI Shoulder System launch and continued strong sales of ASCEND FLEX in the U.S. The legacy Wright Upper Extremities business has not yet seen the revenue dyssynergies that we anticipate in that business as the sales force integration will not be completed until the end of the year.

The combined U.S. Lower Extremities business grew 6% in Q2, led by strong growth across the legacy Wright portfolio, including 33% growth in our total ankle products. As we anticipated, we started to see dyssynergies late in Q1 and continuing into Q2. With the Lower Extremity and international sales force integrations complete and the U.S. Upper integration in process, by our Q3 earnings call, we expect to have good visibility into the ultimate amount of dyssynergies. And we are still confident that those will not exceed our original expectation of $25 million to $30 million

Our International Extremities and Biologics business grew 10% in Q2, led by strong growth in our European, Canada and Australian markets, partially offset by slower growth in Asia and Latin America.

Now moving on to some detail below the sales line. Please note that there is some impact to the individual line items of the P&L due to the Large Joints business now being in disc ops. On our website we have provided you with historical information with the Large Joints business in disc ops to assist you with your modeling and analysis of the business. All of my discussions will refer to our continuing operations results.

Beginning with our Q2 gross margin, we achieved 78.5% for the quarter, an increase of 230 basis points over the same prior-year period, driven by mix, leverage and lowered levels of excess and obsolete inventory reserves. We are confident in our ability to drive continued improvement in gross margins, and expect to see positive impacts from the merger as we begin to leverage our global manufacturing footprint.

As to the line items making up our Q2 operating expenses, selling, general, and administrative expenses totaled 73.9% of net sales for the second quarter compared to 83.3% in the prior-year period. The decrease as a percent of sales was driven primarily by the impact of higher Q2 revenue driving leverage in the cost structure and capture of cost synergies. R&D expense was $12 million in Q2 of 2016 and $13.3 million in Q2 of 2015. And finally, amortization expenses of approximately $7.5 million in Q2 of 2016 compared to $6.8 million in the prior-year period.

Below the operating income line net interest expense and other expense totaled $6.1 million for Q2. Our Q2 tax expense is $1.1 million related to profits in taxable jurisdictions. As a reminder, we have a tax valuation allowance against our deferred tax asset in U.S. jurisdictions. We expect to have approximately $3 million in tax expense in 2016.

Finally for share count, our Q2 per share results as adjusted are based on average diluted shares of 102.8 million for Q2 of this year, and average diluted shares of 101.7 million for Q2 of 2015. Altogether this resulted in adjusted EBITDA of $12.2 million and 7.2% of sales for the quarter.

From a cash standpoint, our total cash balance at the end of Q2 was approximately $326 million. This includes approximately $238 million in net proceeds from our recent convertible debt offering. With this financing we have addressed the need to refinance our 2017 notes and raise additional funds to cover the potential AUGMENT revenue milestone payment.

Additionally, we raised funds to facilitate a settlement related to our metal-on-metal litigation. At this point we believe we've addressed our near-term financing needs. We are still evaluating our options for a line of credit to provide us with some additional flexibility.

Both net sales and adjusted EBITDA significantly over-performed our expectations. Our sales over-performance is driven by strong underlying growth, less than anticipated dyssynergies and better than expected currency exchange rates. Our adjusted EBITDA benefited from the drop-through of the constant currency sales over-performance, and we also had greater than anticipated cost synergies as we were able to get some benefits sooner than expected. Overall our second quarter results were excellent, and demonstrate the opportunity we have as we drive strong growth in Extremities and Biologics.

I will now transition to a discussion on our 2016 full year guidance. Consistent with Wright's past practice, please note that our guidance ranges and assumptions for 2016 exclude any condition for the effect of potential future acquisitions, or any other possible material business developments.

Additionally, it is important to note that we will be using a number of non-GAAP financial measures to describe our outlook for the business. In particular, unless stated otherwise, all of today's discussions regarding our financial guidance refer to our as-adjusted results of continuing operations. Our press release issued today notes those items that are excluded from our as adjusted results.

Starting now with sales - as a reminder, in our Q1 earnings release, we raised our net sales guidance to a range of $705 to $715 million. Then, during the second quarter, we announced the binding offer to sell our Large Joints business, and the resulting move of that business into discontinued operations.

This adjusted our sales outlook by $37 million, resulting in a new guidance range of $668 to $678 million. As you'll see in today's press release, we are increasing our net sales guidance for 2016 to $675 to $685 million, from this previous guidance range of $668 to $678 million. The midpoint of our net sales guidance range assumes mid-teens pro forma constant currency growth, excluding the impact of revenue dyssynergy.

For full year adjusted EBITDA, in our Q1 earnings release, we raised our guidance to a range of $30 to $35 million. Moving the Large Joints business to disc ops negatively impacts 2016 adjusted EBITDA by approximately $5 to $6 million. However, in that announcement, we maintained our previously provided guidance range, despite that negative impact.

Today, we are increasing our full year 2016 adjusted EBITDA outlook to be in the range of $40 to $45 million, from our previous range of $30 to $35 million, which - excluding the impact of moving the Large Joints business to disc ops - is an increase of approximately $15 million, or 46%, as compared to the guidance we provided in our Q1 earnings release.

This increase of adjusted EBITDA is driven by the first half performance and our ability to capture synergies earlier and at a greater level than anticipated. At this point, we anticipate cost synergies in 2016 to be in the $20 million range, up from our previous expectation of $10 to $15 million. We still anticipate $40 to $45 million of annualized cost synergies in year three, post-close.

To assist with updating your models for our updated guidance and the impact of transferring Large Joints to discontinued operations, here are some specifics on our outlook for line items on the P&L. First, on gross margin, for full year 2016, we're expecting gross margin expansion of approximately 100 basis points to the 78% range as we leverage our global manufacturing footprint and drive improved plant utilization. This 100 basis point improvement is in line with our previous expectations. Moving Large Joints to disc ops benefits our gross margin by a little over 100 basis points, which is why we now expect gross margin in the 78% range for the year as opposed to the 77% range previously.

We expect SG&A as a percent of sales to decrease in the range of 600 basis points over the 2015 pro forma continuing operations SG&A percent of sales of 80.8% through a combination of cost synergies and leverage. SG&A as a percent of sales is slightly negatively impacted by moving Large Joints to disc ops, but the remaining business to delivering better leverage, which result in an expectation for SG&A as a percentage of sales roughly in line with our previous expectations.

R&D is still expected to be in the range of 8% of sales, and excluding any future acquisitions amortization expense is expected to be in the range of approximately $7 million per quarter.

Before we move to the line items below the operating income line, to assist you with modeling EBITDA I want to provide you with our outlook for depreciation expense which for the full year 2016 is in the range of approximately $51 million to $53 million as compared to $49 million in 2015. This is slightly lower than our previous guidance due to the impact of moving Large Joints to disc ops. Stock-based compensation is anticipated to be in the range of $14 million to $15 million.

Now let's touch briefly on the items below the operating income line. Due to our recent convertible debt offering, our expectation for interest and other is approximately $6 million per quarter. Due to the valuation allowance on our NOLs, we will not have an income tax benefit in 2016. We expect to have approximately $3 million in tax expense related to profits in taxable jurisdictions.

The company anticipates adjusted cash earnings per share, including stock-based compensation, for full year 2016 of negative $0.54 to negative $0.47 per diluted share. The company estimates approximately 103 million diluted weighted average ordinary shares outstanding for fiscal year 2016. Altogether these assumptions make up the midpoint of our adjusted EBITDA guidance.

From a quarterly cadence perspective you should expect significantly lower but positive EBITDA in the third quarter as we expect to have lower sales due to seasonality and additional dyssynergies as compared to the first half of the year, as well as some of the spending we expected to occur in the first half shifting to later quarters. We continue to expect Q3 to be the lowest quarter for net sales and adjusted EBITDA, primarily due to seasonality. Q4 has typically been the seasonally strongest quarter for both net sales and adjusted EBITDA, and we still anticipate Q4 to be our largest quarter for net sales and adjusted EBITDA; however, given the significant first half EBITDA over-performance, Q4 may not be significantly larger than Q1 or Q2 on the EBITDA line.

In closing, we are very pleased with our second quarter results where all key financial metrics exceeded our expectations again. We believe we have a great plan to drive sales, improve profitability and improve the underlying operations of the business in 2016, and we are focused on executing that plan with excellence. With that, we'd now like to open up the call to take your questions. Operator?

Question-and-Answer Session

Operator

Thank you, ladies and gentlemen. [Operator Instructions]. Our first question today comes from the line of Matthew O'Brien with Piper Jaffray. Your line is open.

Matthew O’Brien

Good afternoon. Thanks so much for taking the questions. Bob, I was hoping we could start with the dyssynergy commentary that you had. I think if memory serves, you mentioned about $25 million to $30 million of dyssynergies. Most of that should be in lower extremities. Is there a way, first of all, to quantify what, how much dyssynergy you've seen at this point? Is it 10% or 25% of what you've expected that you've seen this at this point? And then, with the sales force and distributors kind of transitioned at this point, why wouldn't you feel more comfortable really taking another look at that dyssynergy number and saying, okay we think it's going to be half or even lower than what we expected?

Robert Palmisano

Well, I'll answer part of that, Lance can also comment. I think that the number of 25 to 30 is still pretty much the right number when you consider the totality of the dyssynergies over time, but as far as 2016, we think it's going to be less than that range. So, by the end of Q3, which I think is the major quarter where we have, well we said that the, that we will, that most of the synergies would hit, is we will have a much better feel and outlook for what the final number will be for 2016. But I do think that it's safe to say that 2016 is going to be somewhat less than the 25 to 30 that we had originally set for the year.

Lance Berry

Yeah, and Matt, as far as quantifying for the quarter, you know we didn't break that out separately. We did mainly see it in the lower extremity business, and you can see that in the growth rate deceleration from Q1 to Q2 which is in line with what we anticipated. We had talked about at the beginning of the year something in the line of mid-single digit type growth rates for that business due to the dyssynergy. So I would say the timing of the dyssynergies is playing out in line with what we expected. The amount so far in 2016 has been less, which is driving Bob's comments that for 2016 is probably going to be less than the 25 to 30, but as far as the ultimate amount, the ultimate amount of lost business, I think once we get a full quarter behind us of completing the Lower Extremity integration and be a full quarter into the Upper, we'll be able to have a lot better visibility to that and really dial it in.

Matthew O’Brien

Fair enough. And then as a follow-up, I know you don't want to comment too much on litigation, but was hoping that we could just clarify a couple of things. I think you said $150 million to around $200 million net of insurance, does that include all of the revisions that have come in to date? Does that cover the full number of revisions? And then when you talked about net of insurance, I think you said that three of the carriers are on board and three of them you're still negotiating with. Could - I guess what I'm asking you is could some of the insurance coverage amount rise if the other three come on board to the midpoint of that range, $175 million, would actually be lower if the other three insurance carriers decided to pay?

Robert Palmisano

No, the - I think that the amount is the insurance would be on top of the range that we - that we gave you. And again, it's just not a good idea to start talking about the intricacies of whose paying, who hasn't, and what the ranges are. I think that what we have now with the - the range that we just gave you is we have kind of the goalposts that we feel that we can - we can deal with. Nothing's for certain; this is still fluid, as I said. But I think we - it's safe to say that we're pleased we made some progress. We know the - where the goalposts are, generally speaking.

And regarding the what's included and what's excluded, we're not going to comment too much on that other than to say is that what we think is that having a global settlement that includes most of these cases is - would be terrific. And then if there's some left over as the other companies have settled - have seen, is that will be something we can deal with. But our objective is to get most of these things done with as best we can.

Matthew O’Brien

Very helpful. Thank you.

Operator

Thank you. Our next question comes from the line of Rich Newitter with Leerink Partners. Your line is open.

Rich Newitter

Hi. Thanks for taking the questions and congrats on a great operating performance this quarter. So I'll ask the litigation one first, and I appreciate you don't want to say too much more, but just - your comments were helpful, but just, you said, Bob, that on the additional three insurance cards would on top of, kind of, the range specified. Does "on top of" mean that you're kind of saying, "in theory," the way Matt was saying to look at it as the right way? That would be extra insurance coverage, in addition to what you have?

Robert Palmisano

Well, we have an agreement in principle with three carriers, and we know what that amount is. The remaining three carriers, we don't have an agreement on, and they're where they always have been, in terms of - not denying coverage, saying we do have coverage, but putting all the coverage into one year, so there's ways to go, to negotiate without or without those guys. So I think that the range that we have is what basically is the Wright Medical portion of this as opposed to the insurance, because the insurance would be on top of what the Wright portion would be.

Rich Newitter

Okay. I think that's given me a little bit more to go on. Again, the synergy commentary was appreciated. It sounds like you'll have more visibility in the third quarter. What I want to throw on the Biologic side, a strong performance there - you mentioned some seasonality factors to consider, and I just want to make sure I'm understanding. It sounds like maybe the VACs are people who are doing the decision-making process are on vacation, or just not as efficiently kind of focused on this, as they are at other portions of the year, so this is purely, maybe a slight step down relative to the 2Q and 3Q on tap in Biologics, and then a rebound in 4Q? Is that the right way to think about it?

Robert Palmisano

Well, yeah, I mean, in Q3, everything steps down a bit, internationally and domestically. You're right in that that are many fewer VAC committee meetings scheduled in July and August then there was in May and June. We expect that to pick up into September. Also, there many fewer cases done in July and August than there are in any other months of the year. So we were just kind of alerting people to the fact that that's normal, and that's going to happen.

But the Biologics business, both the AUGMENT piece and the other biologics that we have, is performing extremely well, both from a financial point of view and from a clinical point of view. We have not had any instance that I'm aware of that a physician said that AUGMENT didn't meet their expectations. In most cases you get, this was spectacular, it really helped, like the healing was great, it was better than I expected. So we really think that this is a special product. It's going to be a strong growth driver for us, not only this year, but for many years to come.

Rich Newitter

Great. And just one further on that. Did you guys launch the different sizing or packaging for AUGMENT yet, and is that having an impact or are you expecting to do that now.

Robert Palmisano

Actually, we did launch a test. So, it's not in full launch. And I don't know if it will turn out to be in full launch. But we did launch, and I'm not sure, I think it was in Q2, some different size configurations. But all in all I would say that price has held well and our unit volume is increasing nicely and is meeting our expectations.

Rich Newitter

Thank you.

Operator

Thank you. Our next question comes from the line of Andrew Hanover with J.P. Morgan. Your line is open.

Andrew Hanover

Thanks for taking our question. Bob, I hate to ask this one other way, but in regards to litigation, the range that you gave, the $150 million to $198 million, is that respective of three carriers versus six carriers, or how do you think about the range?

Lance Berry

Andrew, this is Lance. So that $150 million to $198 million is net of the proceeds from, expected proceeds from the agreement and principle of the three carriers. It doesn't include anything from the other three carriers.

Andrew Hanover

Got it. Thank you. And then, in regards to AUGMENT, I was coming up somewhere in the ball park of $7 million in the quarter and just wanted to see if that was reasonable and if so it looks like May and June took a nice step up. And so I was just wondering how much stocking happened in the quarter, if any? Or if this is just somewhat of a normalized trend moving forward.

Robert Palmisano

Andrew, there's really no stocking going on, it's pretty much ordered for each individual surgery. So, what you see is pull through, it's not really any stocking. So I don't think - and I don't think I know, nor would we tell you each month what we're - the amount on any individual line item. But it certainly is a - it's certainly meeting our expectations though.

Andrew Hanover

Great. And then one other, if I could. On AUGMENT, I know there's a pilot study for AUGMENT injectable versus autologous bone that was stopped when AUGMENT was stopped as well. I'm just wondering if you have any updates on where that trial is at the moment? And thanks.

Robert Palmisano

Yeah. The - most likely I think it will be late this year, early next year before we have made a decision and have worked through with the FDA what the plan is. The injectable product, the injectable product is on the markets in Australia and I think Canada as well, I'm not sure, but I know in Australia. And we have seen a - we saw a meaningful uptick in business when - with injectable. So we think that this would be a good move for us. The question is what is the regulatory path on the injectable AUGMENT product. And we don't know yet. That - but I think it's going to be later this year or early next year, just the way the FDA works, before we're able to really clarify that this is what we're going to do and here's the time table.

Operator

Thank you. Our next question comes from the line of Kaila Krum with William Blair. Your line is open.

Kaila Krum

Hi, guys. Thanks for taking my questions. Congrats on the quarter. So first on the EBITDA performance, I guess I'd like to parse out some of the drivers of that better than expected performance and sort of what had changed since the Q1 call, since I know you all were suggesting EBITDA would pull back more than it did this quarter. And then I know that you've pegged EBITDA margin at 20% sort of within three to four years, so just given the outperformance that we've seen thus far, is it fair to assume that 20% goal is perhaps closer to three years of sooner? Just any update there would be helpful.

Robert Palmisano

Well, I think that EBITDA is growing faster than we had originally expected and that's why we're taking our guidance up. When you look at the midpoint of the range, I think its $17 million over what we had originally given as guidance. And if you include what's gone into disc ops it's like $23 million over, over what we had originally given. So we're on our - we're on a really good trend.

I still think that the 20% target is the appropriate target, three years or so post-close. And we'll take another look at that because we are growing faster at this point, and I think that when we give 2017 guidance we - we'll give you a better impact of that. But all in all, you - we're all very pleased - we're all very pleased with that. It's just the primary benefit of an increasing - the primary way you get there is increasing sales performance and have greater than anticipated cost synergies and getting them quicker. So we have to anticipate if we're going to have greater than anticipated cost synergies, we know we're getting them quicker right now than we had anticipated. Additionally there's some timing that has helped us this year that may play out differently in the years ahead. But obviously overall a very good trend for us.

Kaila Krum

Okay. And then another on the litigation side, I mean can you just give us a sense for your level of confidence that that $198 million is sort of worst-case scenario? And then I know that timing's obviously tough, but just any clarity around steps that need to be completed now prior to global settlement?

Robert Palmisano

What was the first part of that, Kaila? I'm sorry, I missed it.

Kaila Krum

Sure. So if you can just give us a sense for your level of confidence that $198 million is sort of the worst-case scenario?

Robert Palmisano

Oh. That's the range. So unless - and so I - our point of view is that we should be within that range. So you know you never have a deal until you have a deal. And so I'm reluctant to say that's a slam dunk or anything else, but I think that that's why we're saying it the way we are is that we have a range. We're accruing reserve at the bottom end of the range, but I think that that looks pretty good. So...

Kaila Krum

Okay. And then just again, if there's - if you can give us any clarity just around the steps that have to be completed prior to global settlement? Thank you.

Robert Palmisano

Thanks, Kaila. Really I can't, I can't comment. There's ongoing negotiations and as I've always said, it's complex. There are many plaintiffs, there are many law firms and there are a sub-group of lead law firms. And all this is very complicated, but the progress we've made in Q2 is meaningful.

Kaila Krum

Thank you.

Robert Palmisano

So I have to put it that way.

Kaila Krum

Thank you.

Operator

Thank you. Our next question comes from the line of Larry Biegelsen with Wells Fargo. Your line is open.

Larry Biegelsen

Hey, guys. Good afternoon. Thanks for taking the questions. Hey, Lance, I wanted to drill down on the sales guidance. IR math, the second half, implied growth is 6% to 9%. I think you did 14% in the first half. Can you give us a little bit of color around do you expect Q3, Q4 to look similar? What gets weaker in the second half for the first half? I assume it's Upper given the integration. And if you do grow 6% to 9% in the second half of the year, what gives you the confidence you'll be growing at a mid-teens rate again in 2017? I think you said that you would grow at a mid-teens rate once fully integrated. And I think you said on this call that the integration would be complete by the end of 2016. Thanks.

Lance Berry

Yeah, so, Larry - first of all, I don't mean to, starting backwards - if you look into 2017, we've always said is, grow mid-teens, excluding these synergies. If you annualize out of those synergies before you would totally see the mid-teens growth rate. So in the first half of the year, we've had, from Q1, when we had fairly minimal dyssynergies, in Q2, we did see dyssynergies. But we were still able to grow in the mid-teens. So I think that's some strong evidence that, without a big headwind from dyssynergies, that that's the kind of trajectory the business is on. But we're going to see a much bigger impact from dyssynergies in the second half, and that'll be a drag until we can annualize out of those.

So that's one thing, if you look first half to second half. The other thing is, we do annualized launch of AUGMENT in Q4, that'll impact the Biologics growth rate for them, and then, as it is right now - our guidance is for a little bit of currency headwind in the second half. There's a little bit of cushion of guidance, but that's another factor, as well. So you kind of add all those things up, and that gets into the difference between the first half and the second half.

Larry Biegelsen

So, Lance, just a couple thoughts on that. You still expect mid-teens? Guide me on these synergies in 2017, and then, on my question on Upper versus Lower. Is it really the Upper, which was really strong this quarter that you expect to slow a little bit in the second half, because of the integration? Just those two questions, thanks.

Lance Berry

Yeah, I think definitely, Upper has not experienced, really, any dyssynergies at this point. So we would expect to see some of that in the second half. And then, if you lose business in the second half of the year, that's a drag in your growth rate until you've annualized the loss of that business, which would be the second half of next year. So we don't necessarily expect to see additional dyssynergies in, meaning additional loss of business, in 2017. But it's just that, until you annualize the hit, that it does impact your growth rate.

Larry Biegelsen

And just lastly, for me, the FX cushion, I think it was about $10 million, you said on the Q1 call? Is there still another $10 million cushion in the 2016 guidance? And I'll drop. Thanks, Lance.

Lance Berry

I think the $10 million's more like, on the Q4 call. I think in Q1 we said slightly less than 1%, and I'd say at this point, the cushion is less than 0.5%.

Larry Biegelsen

Thanks for taking my questions.

Lance Berry

Sure.

Operator

Thank you. Your next question comes from the line of Raj Denhoy with Jefferies. Your line is open.

Raj Denhoy

Thanks. Larry deviated from the pattern of litigation question, and another one, so I'm going to go back to that, though. So on the litigation, the one thing that you noted in here was that you were still in discussions, or you're having mediation discussions with the plaintiffs. And I think what you described previously was that the plaintiffs had yet to really coalesce into a group. I guess this was maybe a couple of months ago. And so it sounds like maybe that's progressed, but given that you're still in discussions with them, how do you get comfortable with that bound of $198 million on the upper end?

Lance Berry

Yeah. Raj, this kind of gets into getting into details of the negotiations. I would say we have been involved in formal mediation with the plaintiffs, and based on that mediation and the agreement in principle with three of the insurance carriers that we were comfortable in developing this range. And that really I can't get into any more details than that.

Raj Denhoy

Okay. Okay. That's fair enough. And then maybe just on the Lower Extremities, the synergies that you're starting to see now. And you know the growth in the U.S. clearly fell off, but I guess I'm curious how quickly you can reverse that? I mean is this something that we simply have to anniversary it out over the span of a year? Or are there things you can do now that you've realized where the dyssynergies would develop and a sense of the sales people that would leave and what pockets might develop. Is this something you can address sooner than having to anniversary it?

Robert Palmisano

Yeah. I think what happens, Raj, is that when you lose reps or groups of reps, a distributor, is that you take a hit right away, but then you have the opportunity to go back and try to gain those customers back again. So it's not that necessarily that you have a loss of customers as much as you have a disruption in your distribution channel. And that can be corrected and should be corrected as you go forward.

And we have seen that where we have - where we try to bring a distributor over or we did bring a distributor over and then later they changed their mind and went out on their own and - with some other company. And by the way, we don't usually lose distributors to like major companies; they usually go to some people like I've never even heard of but they have - they take a certain amount of revenue with them. But there always is the opportunity to go back and get that. And I think that we will be aggressively doing that.

So as we develop our plans, we think that our Lower Extremity business should be able to get back to that kind of growth rate that we've had. And our new products will help it, but our core products also, once we get through this dyssynergy thing. We always - I always looked at the synergies as something that is going to have an impact for a period of time. It's also hard to say whether - how long that period of time is, but we still think that we have the bag of products that are superior. We have the most full bag and the most superior products, so we should be able to be able to get some of - a lot of these customers - a lot of these actually surgeries back over time.

So it's a little bit of disruption. It's playing out pretty much just like we thought. We took a lot of - well, there was a lot of discussion on last call, maybe even the call before that, but when we didn't see that many dyssynergies thinking that this was going to be a lot less. And we kept cautioning people to understand that we have been here before when we did the Hip and Knee business. And that it plays out over time. And that you can't underestimate it because these folks, particularly distributors, are independent business people to a large extent, do what's best for them.

Raj Denhoy

Right.

Robert Palmisano

And if they think - they think that giving up the Wright line, going with some other company's product line and giving them a lot more freedom than we give them because we try to control the act - there's a lot of control, is what they want to do, that's what happens. But it's never - we never think that we're going to lose this forever. And so we'll just see how it plays out. But I do think that we're committed to this goal of a mid-teens growth company. We're there now in that our - all our businesses are performing well. And we have tremendous revenue growth in our new products, our SALVATION, INFINITY, SIMPLICITI, AUGMENT. So we're pretty - we're very confident about our outlook of a mid-teens growth company.

Raj Denhoy

That's helpful. And just one follow-up related to that, but the fall off we saw in growth from 11.5% last quarter, 11.6% to 6.3% U.S. growth in Lower Extremities, is - have we seen the worst of it? Or is there - because one is that you [indiscernible] an improvement from here, but do you think you've lost or you're going to lose; now it gets better?

Robert Palmisano

Well, I think in the third quarter you're going to see continued losses. But I would say this, is that had we not had the dyssynergies we would be - we would be strongly mid-teens in our Lower Extremity business.

Raj Denhoy

Okay. That's helpful. Thank you.

Operator

Thank you. Our next question comes from the line of Mike Matson with Needham & Company. Your line is open.

Mike Matson

Hi. Thanks for taking my questions. I guess just wondering if you could give us an update on Total Ankle penetration? Do you have any feel for where it's at for the broader market?

Robert Palmisano

I don't have that - any new quantifiable objective third-party information, but given that we're growing so strongly and I think a lot of other companies are reporting growth in - also that penetration is picking up. When we started really focusing in on Total Ankle, it was less than 10% penetration of available cases and now, last time we took an objective look at it, it was over 15%. So it's accelerating from that, Mike. But I don't have an, a precise number I'm willing to put out there because we haven't. What we usually do is contract with an outside party to do these kinds of service work. And we haven't done that in the last 90 days or so.

Mike Matson

Sure. Understand. Okay, and then just on - obviously AUGMENT's doing really well. You mentioned you're opening a number of new accounts. So wondering to what degree this is enabling pull-through/market share gains with your Lower Extremity hardware products?

Robert Palmisano

Yeah, there's been a significant number of sales of AUGMENT into accounts that we had never done business with before. And in those accounts, we also are able to now see some pull through of other products. Now, I think this is something that should accelerate over time. We're really into it, we've only had AUGMENT on the market three quarters now, but we're starting to see, to have some success around that. And we think that's a meaningful part of our go forward strategy.

Mike Matson

All right. Thanks a lot.

Operator

Thank you. Our next question comes from the line of Matt Miksic with UBS. Your line is open.

Matt Miksic

Hi. Thanks, everybody, for taking the questions. So, Bob, just one follow up on your comments on EBITDA. Really, obviously very strong result in the quarter. But, you talked about some of the benefit there coming from getting some faster than expected cost synergies or cost benefits. Obviously some of it driven by the strong outline, but I'd love to get a sense of - you know you touched on this a little bit, but what - how much of that is sort of driven more by a better than expected integration process maybe? And how much is sustainable in terms of that strain?

Robert Palmisano

Well, I think it's a good mix of both. The - most of it, I believe, and Lance can pop in, comes from over performance in the revenue line. That is what drives a lot of it. Without strong revenue, we just wouldn't get the EBITDA that we've gotten. But the synergy, the cross synergies coming in quicker helps us, but that's somewhat timing. There's some timing involved in that. But I think it's, I don't know whether it's 50/50, but I still think that most meaningful part comes from revenue.

Matt Miksic

Okay.

Lance Berry

Yes. So the follow-up on that, Matt, you know if you go back to our original guidance back in February and you kind of - you exclude the negative impact of moving Large Joints to disc ops, we've moved our EBITDA guidance up by about $23 million. And we noted on the call that our original expectation for cost synergies in 2016 was in the $10 million to $15 million range. And right now we're trending more towards like the $20 million range. So that gives you some sense of magnitude on cost synergies versus other things, in particular sales over-performance and leverage driving increased EBITDA.

And as Bob said, some of that's timing. So we were just able to execute better and get those cost synergies into the model sooner, which helps calendar year 2016. We're not ready to commit to any difference on our longer-term goal of $40 million to $45 million of cost synergies by year three, but obviously getting the cost savings into the model sooner is great.

Matt Miksic

Sure. No, that's very helpful color. Thank you. The other sort of follow-up on one of the topics that's come up a couple times here is dyssynergies coming in the back half for Upper Extremities. And I'd love to get a sense of what's driving that? I know we haven't seen any yet and I know you dialed some in, but what do you - what have - give us some color, if you would, as to how that plays out in Upper?

Robert Palmisano

Well, it'll play out the same way pretty much it did in Lower, although there's less - a little bit less risk, I believe, in Upper than there was in Lower. Lower is the - when we looked at our total ply of dyssynergies, the majority of it came from Lower because in the Upper Extremity business it's really a current Right Lower Extremity rep handing off the business to a legacy 20A Upper Extremity rep that already has a business in that area, and that will be able to focus on Upper Extremities. So I think it's less risky, and also there's less dollars involved. The Upper Extremity - what was that risk, I believe, in Upper Extremity? It was about $20 million in total. And it was more than double that in Lower Extremity.

So the Lower - the Upper Extremity dyssynergies, just by the size of the business and the nature of the - of the two sales forces, should be less than the Lower Extremity.

Matt Miksic

And you're just, just to clarify, you're just saying that, that should, could come in the back half because that's what you planned for the year, it just - but it just hasn't happened yet?

Robert Palmisano

Well, we haven't really executed the Upper Extremity integration yet. That's - that is in the last half. We have fully executed the Lower Extremity integration.

Matt Miksic

Gotcha. So - and then I wouldn't be just part of the team here if I didn't ask a follow-up question on the litigation. But I hope it's an easy one. I just wanted to make sure I understand this reserve is cumulative, or does that include other things that were reserved before, around this? I thought you had taken a reserve before earlier on, if you could just give us the total number, if there is one, if they're two separate numbers.

Lance Berry

To this point, we have not had a reserve for our metal-on-metal hip litigation. These lot disclosures have not had an actual reserve. So the $150 million low end of the range that we disclosed today is what we accrued. And that is really our first accrual; absent any kind of one-off specific case reserves that we would have that we've booked for metal-on-metal.

Matt Miksic

Got it. And if I could just squeeze in one more here, on this subject - just the market as you look at integration. You talked about losing reps, and backfilling reps that might have decided to leave. Can you give us a sense of, we talk a lot about integration, but how much new reps are you bringing in, if any? Or is that just not on the table now? And maybe what the competitive market for reps in Upper and Lower looks like right now?

Robert Palmisano

Well, I think that there's been, particularly in the Lower Extremity business, there's a very low turnover of reps that's been pretty solid for a period of time. And in Upper there's been a bit little more, as there's been a lot more change in that business. But it's all working very well, as you can see. We had 20% growth in Shoulders in the U.S., and 17% growth in Upper Extremities in total, so - although there has been some turnover, we are executing extremely well.

Matt Miksic

And adding at this point, or just, no need would be...

Robert Palmisano

I think, I think, the size of our sales forces, both Upper and Lower, are pretty well set. So I wouldn't think we're adding additional reps. With the size of our sales forces, a couple hundred people, there's normal turnover and change that happens, for a whole variety of reasons. But, in total, the numbers are going to be pretty much the way it is.

Matt Miksic

Great. Thank you.

Operator

Thank you. Our next question comes from the line of Jason Bednar with Robert W. Baird. Your line is open.

Jason Bednar

Hi, thanks for taking our questions. Most have been answered already, but a couple one-off product-related questions from us. First, it's been a couple quarters since we've heard you talk about Envision. Though it's somewhat small, you guys are revision ankle, but any update on that system, and the timeline, or expected launch details of that product?

Robert Palmisano

Yeah. The product is in physician preference testing in the second half of this year. We expect to launch in Q1 of 2017. And as you alluded to, Jason is that we don't see this as a big dollar volume product, but we do see it as driving conversion to Total Ankle as it does give doctors a true revision system. And a lot of them are reluctant to do Total Ankle because they don't have a true revision system. So we think it's a meaningful product in totality, and we'll be very happy to get it on the market. And we're - we feel pretty confident of our timeline of beginning of 2017.

Jason Bednar

All right. That's helpful. And then a whole another one from us here, I know you mentioned SALVATION off to a good start here. Just wondering if there's any way to quantify the impact or what kind of qualitative feedback you're getting, just trying to understand where we are here in the early stages of uptake of that system?

Robert Palmisano

SALVATION is going gangbusters. It's a - reps love it. It's high commission. There's very little pricing pushback because of the - what it does and how it helps people as a last resort. It's a big market. It's a market that is as big as what Total Ankle was when we started, so it's a big opportunity. And Jason, while I've got you, Julie just is telling me that I made a mistake on the launch for Envision, and she says it's now Q3 rather than Q1 of 2017. I just want to clarify that.

Jason Bednar

Okay. Thank you both for that.

Robert Palmisano

Thank you.

Operator

Thank you. Our next question comes from the line of Glenn Novarro with RBC Capital Markets. Your line is open.

Glenn Novarro

Hi. Can you hear me okay?

Robert Palmisano

Yes. I can hear you, Glenn.

Glenn Novarro

Okay. Hey, I do have to ask my question on litigation. And we've done a lot of work and we've done a lot of - we're written a lot of research on this, and one of the things when you're trying to calculate ultimately what the settlement will be is you've got to make an assumption as to how many of the claimants actually come back for a revision. So can you share with us your assumptions as to the number or percentage of patients that will eventually come back for revisions?

Robert Palmisano

No. I can't. I'm sorry.

Glenn Novarro

No worries.

Robert Palmisano

That really gets to the core of the negotiations.

Glenn Novarro

Yeah. Sorry. I had to ask it though. All right. Let me ask just a follow-up on AUGMENT, part of the success of AUGMENT right now is opening up new hospitals, new surgeons and so forth. I'm wondering, Bob, if you can give us some - some data points as to how some of the early adopters are using AUGMENT? Have they gone from using it once a week to twice a week? Are the reorder rates like 99%? Just anything you can give us in terms of data points that tell us some of the early users have been really strong adopters and we can continue to see this pace as new people come on board.

And then just as a follow-up, AUGMENT has an extremely high gross margin. I know you're not going to give me the gross margin, but can you say, is it already starting to contribute to the slightly higher gross margins for the company? Thanks.

Robert Palmisano

Yeah. AUGMENT does contribute positively to the gross margins of the company. Regarding the - some data points, what the normal sequence of events is, doctors, the early adopters, like any - I guess any doctors, is what they kind of do is they use the product in a couple of cases and then they wait for the first signs of healing, which is - then they usually do scans six to eight weeks out. So that - in that six to eight-week period they're not doing many cases, or any cases. They're waiting to see how it performs. Then once they get the results back from them, then they become we call adopters. But they don't use it in all cases. It's very product - it's very patient specific. And - and sometimes there's a discussion whether it's appropriate or not. And where we think it's appropriate and we can work with the doctor, we do those cases.

But that's the kind of normal - the normal sequence is that once a doctor does a couple of cases, waits a period of time, gets the results, then they adopt the product and use it on what they would consider all appropriate cases. By the way, I do think that if we ever do decide on an injectable that will aid the appropriate cases because it - the product will be easier to use in some cases than it is currently. But I would also say that - that the results from - in any measure that we have has really exceeded everyone's expectations. So we expect this to continue to grow.

The leading indicators are always going to be number of physicians trained and VAC committee approvals. Then you get - then you start seeing guys doing a couple of cases, waiting their six to eight weeks and doing more. So the original guys now, or doctors, men and women, that are doing these procedures are now adopting for the cases that are in their eyes to use AUGMENT on and they, and that's what they're doing. But it's not 100% of these cases, it will never be that, but it's a good portion of them.

Glenn Novarro

But you are seeing high satisfaction rates, extremely high reorder rates I guess from some of the early users, utilization increases quarter after quarter.

Robert Palmisano

Yeah. Yeah, we're seeing very high satisfaction rates, absolutely. I don't know, I'm not saying there aren't any, but I don't know of any physician that has stopped using it. That has said, I'm not going to use it, I've used it. I've seen just the opposite. People being very enthusiastic about continuing to use it.

Glenn Novarro

And then, just to clarify, my question on the gross margin from AUGMENT, because you know it's a high risk margin product field. And I know it will be a big contributor down the road, but my question was, is it already starting to contribute. Is it already becoming a source of gross margin?

Robert Palmisano

I think, I think it is slightly but really too small. All our new products are - have gross margins above the norm of the company, which is pretty good at 78.5 when INFINITY is a strong gross margin product. SIMPLICITI is a great gross margin product. And that's why new differentiated products are so important, and we put such a high regard on them because you don't get those pricing pressures that you have on more of the commodity type products.

So that's our - that's really - underlies kind of like the strategy that we have about these things, is that we want to have highly differentiated products that are needed in the marketplace. That we could, that we have the ability to make at reasonable costs and make high gross margins at. I mean, our gross margins are pretty strong and I'm really proud of that, but I also think that it has to do with product mix to some extent. It has to do with how we book reserves for inventory write-offs and things like that. But also is that I think that we're pretty efficient manufacturing and have good standard cross programs that produce good gross margins as well.

Glenn Novarro

Okay. Thanks for taking the questions, Bob.

Operator

Thank you. Our next question comes from the line of Chris Pasquale with Guggenheim. Your line is open.

Chris Pasquale

Thanks. One question on upper extremities, which was a nice surprise again this quarter. What's changed over the past few quarters to drive the acceleration there? Is SIMPLICITI having a halo effect on the rest of the business? Or are you seeing some other benefit from having that legacy Tornier product portfolio under the Wright umbrella?

Robert Palmisano

Well, I think a lot of it; I do think that the - both parts of that business are doing well. The - when I say both parts I'm talking about the anatomical as well as the reverse shoulder. ASCEND FLEX is doing real well. SIMPLICITI is really kind of a gangbuster's kind of a product. And the ASPs are significantly higher on SIMPLICITI so that the ASPs are about 60% higher than they are on ASCEND. So as - and - as we're able to - and in some ways it's cannibalizing some products, but in some ways it's into new markets, particularly younger patients with the short stem design.

So I think that the acceleration is on - both on the stem product and moving - and while in the U.S. most of the - most of the shoulder replacements are anatomic as opposed to reverse, internationally it's just the opposite. But we think, we're predicting over time that the U.S. market will eventually more mirror the international market and more will be reverse. So we're benefiting from all of that, all those different dynamics right now.

Chris Pasquale

Okay. And then just following-up on the dyssynergy comments, and I apologize if I missed this, but what do you estimate the Lower Extremities business grew this quarter, excluding the impact of dyssynergies?

Robert Palmisano

Yeah. I think it's - you know it's probably in double-digits, Chris.

Chris Pasquale

Okay. So last year it was around a mid-teens grower. You don't think that that's changed all that much?

Robert Palmisano

Maybe slightly, but I think it's still in that area.

Chris Pasquale

Okay. Great. That's helpful. Thank you.

Operator

Thank you. Our next question comes from the line of Travis Steed with Bank of America. Your line is open.

Travis Steed

Thanks for taking the questions. Just wanted to follow-up on AUGMENT, having really good uptick on doctor training and continue to get the VAC approvals at a good rate. Just curious, is there any difference in utilization between some of the early adopters that started adopting AUGMENT last year versus some of the newer adopters over the last quarter?

Robert Palmisano

Nothing significant. It's a pretty straightforward product to use. And these guys, these guys are - adapt pretty quickly. So the - so I would say that it's pretty similar, the - what we saw in the early adopters and late last year, early this year versus what we're seeing now. It's pretty similar.

Travis Steed

Okay. And just wanted to follow-up on has there been any competitive response, how are your competitors responding, surgeons not to use AUGMENT? And also, do you think the reason that you're maybe not seeing quite as big of an uptake in AUGMENT is because you're holding on price? And is price something that's really not really a factor once you get to the Value Analysis Committee?

Robert Palmisano

Well, I can't say price is not a factor, but we've been able to hold price and still grow very significantly. So when you certainly get into Value Analysis Committees they're very concerned with price. And they're not used to seeing a lot of products come through with the level one PMA data that we have, so it takes an educational process to get them there. And - but I would kind of - I guess my point is that AUGMENT is really on a great trajectory. It's certainly meeting our expectations. We look forward to the second part of the year, particularly as we get through the summer months which are usually pretty slow, and to see a re-acceleration of AUGMENT in the - later in the year. But it's working. It's just I - I'm not a - I am very pleased with the way this is going; I guess I can put it that way.

Travis Steed

Okay. Great. Thank you.

Operator

Thank you. And our final question for today comes from the line of Joanne Wuensch with BMO Capital Markets. Your line is open.

Joanne Wuensch

Thank you so much. And I apologize, I've been jumping in between calls, if this has been asked; it sounds like at the beginning of this presentation you talked about international sales overall being strong in Europe, Canada and Australia but somewhat slower in Asia and Latin America. Is there anything to read into that? Or is it product related?

Robert Palmisano

No. The - what have - in Latin America and Asia, that - those sales are kind of chunky, I would put them that way, in that those are stocking distributor markets? And so you have to other - you have to get all the way through the distribution channel to have visibility to what the sell-through is. And that can vary from quarter-to-quarter by a lot. In our direct markets in international we've done very well, and particularly U.K., Australia, Canada. And that's where - that's where we make - we make decent margins and have good growth opportunities. But the stocking distributor markets are always going to be a bit chunky.

Joanne Wuensch

And if you step back and take a look at the competitive landscape, I think you talked about Foot and Ankle landscape, but if we look at Shoulders, how has that changed over the last couple of years, or the last couple of months, for that matter?

Robert Palmisano

Well, not much. Shoulders is a more mature market, than is Foot and Ankle. I would say, just using the old baseball analogy, it's probably the mid-innings, and Foot and Ankle's early innings.

There are a lot of Shoulders out there. It's a very competitive market. Having SIMPLICITI well out there, ahead of competitors, is a huge advantage. And this product's going to be pretty sticky, so we're going to be able to keep that. But we do say, 2017, most likely, there'll be other short-stem or stemless products on the market. But we have a strong head of steam, and I think that we will continue to see abnormally high growth rates.

Joanne Wuensch

Thank you very much. And very nice quarter.

Robert Palmisano

Thank you, Joanne.

Operator

Thank you. And that does concludes today's Q&A portion of the call. I'd like to turn the call back over to Bob Palmisano for any closing remarks.

Robert Palmisano

Thank you, operator. Thank you, all of you, for joining us today. We have multiple opportunities through a robust new pipeline to further accelerate our growth, continue to expand our markets, and gain market share. With the execution of integration plans off to a positive, productive start, we are now well-positioned to continue to accelerate our business and drive market leading growth and profitability.

I want to reiterate my excitement for the bright future that I believe is ahead for our company, and express my appreciation to our team, for their efforts during the second quarter. I look forward to updating you on our next quarter earnings call. We appreciate your interest and your continued support. This concludes our call.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.

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