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spk08: to the Integra Life Sciences fourth quarter 2021 financial results call. Today's call is recorded, and I'd now like to turn the conference over to Chris Ward, Senior Director of Investor Relations. Please go ahead, sir.
spk03: Thank you, Emma. Good morning, and thank you for joining the Integra Life Sciences fourth quarter and full year 2021 earnings conference call. Joining me on the call this morning are Jan DeWitt, President and Chief Executive Officer, Glenn Coleman, Chief Operating Officer, and Carrie Anderson, Chief Financial Officer. Earlier today, we issued a press release announcing our fourth quarter and full year 2021 financial results. Our corresponding earnings presentation, which will be referenced during the call, is available at integralife.com under Investors and Events and Presentations. Before we begin, I would like to remind you that statements made during this call may be considered forward-looking. 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 in our prepared remarks, we will make reference to both reported and organic revenue growth for 2021. Organic revenue growth excludes the effects of foreign currency acquisitions, including ASL, divestitures, including the sale of our extremities orthopedics business, as well as discontinued products. Unless otherwise stated, all disaggregated and franchise-level revenue growth rates are based on organic performance. And lastly, our comments today will include certain non-GAAP financial measures. Reconciliation of any non-GAAP financial measures can be found in today's press release, which is an exhibit to Integra's current report, Form 8-K, filed today with the SEC. And with that, I will now turn the call over to Jan.
spk00: Thank you, Chris, and good morning, everyone. Thank you for joining us. I would like to make a few brief remarks at the start of this call, my first earnings call with Integra. Let me start with congratulating and thanking our employees. Since I joined the company, our team's dedication and resilience across the globe have been readily apparent to me. I look forward to working alongside this team in the months and years ahead as we chart our exciting path forward. Through our first few months on board, I'm quite impressed with and proud of what Integra has achieved in recent years. I'm thrilled to be leading this organization with its strong legacy, values, and capabilities into the future. Integra has a sound business platform with significant untapped future potential. And it will be my focus to lead our team into reaching its full potential. 2021 was a successful year for the company despite many ongoing challenges from the global pandemic. We've run a steady ship through the rough COVID seas, but while doing so, we've also driven significant changes in the portfolio and strengthened our platform for the future. And throughout this unusual year, our team showed tremendous resilience in serving our customers and patients while continuing to move our growth priorities forward. During today's presentation, Glenn will go into more detail about the 2021 performance and our key accomplishments. And then Kerry will provide a deeper look at our financial performance and will share our outlook for 22. Finally, I will conclude with my thoughts on our key initiatives for accelerating growth and the company's areas for focus for this year. So with that, let me turn it over to Glenn.
spk13: Thanks, John, and good morning. Please turn to slide six. As John mentioned, we made great strides in 2021 and believe we are at another inflection point for growth. So let me highlight a few of our key accomplishments. First, we transformed our portfolio through the divestiture of our low-growth, non-core orthopedics business and the acquisition of ASEL, a faster-growing and more profitable regenerative tissue business. We also continued to optimize our manufacturing footprint as one of our key levers to improve our gross margins over time. We have substantially completed the manufacturing transfer of the Codman portfolio from J&J into our Mansfield, Massachusetts facility. And we're on track to close our manufacturing site in France and complete the necessary product transfers to another existing location by the end of this year. We also made meaningful progress on several new innovative products in each of our segments. In CSS, we launched Surlink, our advanced monitoring system for measuring intracranial pressure in both the US and Europe in the third quarter of 2021. We will have the full year benefit of Sirlink in these two markets in 2022. Plus, we're also launching in Japan and several other international markets later this year. We also initiated a phase clinical launch of our Aurora Surgiscope, proprietary surgical solution for minimally invasive neurosurgery, or MIS, with integrated visualization designed specifically for use in deep-seated brain lesions. We are gathering clinical evidence using the same technology for early surgical intervention for the treatment of intracerebral hemorrhages, or ICH, as well. Together, these two opportunities, MIS and ICH, are expected to expand our addressable market in neurosurgery by about $1 billion. In tissue technologies, we followed the PMA for Surgimen and participated in an FDA panel meeting regarding a specific indication for breast reconstruction. We also completed a multicenter study regarding the use of Prime Matrix in treating diabetic foot ulcers intended to expand commercial coverage. Some of our most important accomplishments in 2021 occurred outside of an R&D or a commercial setting. I'm pleased to share that Integra has been recognized by leading publications as a 2021 Best Company for Diversity, and also one of the top 100 healthcare technology companies. These honors serve as external validation of our diversity and inclusion efforts and market leadership. And near the end of last year, we executed a smooth leadership transition, welcoming Jan as our new CEO. Let's turn to slide seven, where I'll provide some 2021 financial highlights and also some initial thoughts on 2022. Despite a challenging external environment once again in 2021, we delivered strong financial results. Our full year revenues were just over $1.5 billion, with organic growth exceeding 14% compared to 2020 and 4.6% compared to 2019. We saw a strong recovery across most of our product lines despite COVID setbacks. Benefiting from the critical nature of our products, as well as the diversity of our portfolio. Our products play a crucial role in improving the quality of patients' lives. As a result, the majority of procedures in which our products are used can only be deferred for short periods of time, which bodes well for continuing revenue recovery as we move beyond the lingering pandemic-related disruptions in 2022. Our full year adjusted EPS was $3.18, representing growth of 30% versus 2020, and 16% compared to 2019. EBITDA margins also expanded 160 basis points, and we delivered record operating cash flow of $312 million. As we look to 2022, specifically in the first half of the year, we expect that COVID impacts will linger, with staffing challenges at hospitals and production and supply chain disruptions posing the greatest risk. Our current backorder levels are about two and a half times higher than normal, so even as commercial demand is recovering, we are seeing challenges in keeping up with our customers' requirements. These impacts will be felt most acutely in the first quarter, and we expect them to continue beyond the first quarter as it will take time for hospitals, our own manufacturing plants, and supply chain to return to normal staffing and production levels. Consequently, we expect more modest sales growth to continue in the second quarter, with faster growth in the second half of the year. In closing, I want to reiterate our confidence in our long-term plans and the ability of our teams to deliver on our growth targets once COVID pressures subside. And with that, I'll now turn the call over to Karen.
spk01: Thanks Glenn and good morning everyone. I'd like to start with a summary of our fourth quarter and full year revenue results on slide nine. Q4 total revenues were $406 million, representing an increase of 4.3% on a reported basis and 8.3% on an organic basis compared to the prior year. Revenues were negatively impacted by approximately $3 million of FX in the quarter. For full year 2021, revenues were just over $1.54 billion, representing reported growth of 12.4% and organic growth of 14.2% compared to 2020. Despite COVID Delta impacts in Q3 and Omicron and hospital staffing impacts in Q4, we achieved second-half organic growth of 7.5% compared to 2020 and 5.8% compared to 2019. Our strong second half top line growth was driven in part by a recovery in our capital business, including the benefit of our new SaraLink ICP monitor and a recovery in our indirect market, as well as both our instruments and private label businesses. We also continue to benefit from double digit growth in China and Japan. If you turn to slide 10, we'll take a deeper dive into our CSS revenue highlights for the fourth quarter. Q4 revenues in CSS were $270 million, an increase of 6.4% on a reported basis and 9% on an organic basis over the prior year, with equal contribution from both neurosurgery and instruments. Geographically, sales in the U.S. grew high single digits, and international sales grew low double digits compared to 2020. The recovery in global neurosurgery sales was broad-based, and sales in instruments continued to benefit from pent-up demand We saw continued growth contribution from the launch of Serolink in the U.S. and Europe. And even excluding sales of Serolink, our capital sales grew approximately 30% compared to 2020 and about 4% compared to 2019. International sales and CSS increased across all major regions compared to the prior year. Japan and China continued to deliver strong growth in Q4, with both countries delivering low double-digit growth over 2019. Moving to our tissue technology segment on slide 11. Q4 sales in tissue technologies were $135 million, up slightly on a reported basis, and 6.7% on an organic basis from the prior year. Sales in wound reconstruction increased 3.8% on an organic basis compared to 2020, led by integrous skin and surgimen in our burn, trauma, and surgical reconstruction markets. The ACL business stabilized during the fourth quarter, delivering $16.9 million in sales, in line with November guidance. Sales and private label increased 15% compared to 2020, driven by continued recovery in customer orders. Turning to slide 12, I'll cover the highlights of the P&L for the fourth quarter and full year. Adjusted gross margin in Q4 was 66.8%. This was lower than what we expected and was impacted by multiple pandemic-related factors, including increased freight costs, supply chain disruption, and unusually high levels of absenteeism in our factories caused by the Omicron variant. The disruptions to our factories, which causes idle capacity charges and under-absorption costs, have continued into the first quarter, and staffing in our sites is only now beginning to return to normalized levels. Since manufacturing under absorption costs are capitalized on the balance sheet and recognized only as inventory turns, our gross margin will continue to be negatively impacted through the first half of 2022. Our Q4 adjusted EBITDA margin was 26% compared to 26.4% in the prior year, as the benefit from increased revenue was offset by higher operating costs. As we discussed in Q3, operating expenses continue to increase as we ease the spending restrictions put into place into 2020 in response to the global pandemic. Nevertheless, we remain disciplined in our spending while investing in new product innovation, further geographic expansion, and clinical studies. And although full-year operating expenses increased year over year, the strong recovery in revenue helped us expand EBITDA margins by 160 basis points for the full year 2021. Adjusted earnings per share for the fourth quarter was $0.84 flat versus 2020, while full-year adjusted EPS grew 30% compared to 2020. Now, if you tune to slide 13, I'll provide a brief update on our balance sheet capital structure and cash flow. Operating cash flow in the quarter was $69 million, and free cash flow was $42 million. Free cash flow conversion was 58% in Q4, reflecting higher levels of capital spending. On a full year basis for 2021, both our operating cash flow of $312 million and our free cash flow of $264 million were record highs for the company. As of December 31st, net debt was $1.05 billion, and our consolidated total leverage ratio was 2.3 times. The company had total liquidity of $1.78 billion, including $513 million in cash, and the remainder available under our revolving credit facility. As a result of restaurant cashflow and liquidity position at the end of the year, we commenced a $125 million accelerated share repurchase program in January that is expected to be completed in the first half of the year. Turning to slide 14, I'll provide an update to our consolidated revenue and adjusted earnings per share guidance for the full year 2022 and the first quarter. Our guidance for 2022 reflects continuing first half uncertainty around the scope and duration of the pandemic and its related impacts on our business. For the full year 2022, while we anticipate less of a direct impact on underlying procedures than in 2021, we do expect first half variability and uncertainty in sales to continue as a result of the indirect effects of COVID, including staffing challenges and ongoing supply chain disruption. We expect revenues to be in the range of $1.58 billion to $1.6 billion, representing reported growth of 2.5% to 3.5% and organic growth of 3.5% to 5% compared to 2021. Our revenue range accounts for an 80 basis point headwind from FX. And as a reminder, the calculation of organic growth removes the year-to-year fluctuation in FX, the year-over-year change in discontinued products, and revenue from ASEL prior to January 20th, the one-year anniversary of the acquisition. ASEL revenue is included in organic growth as of January 20th. We expect the staffing and supply chain challenges to be more pronounced in the first quarter, and as a result, we are expecting first quarter revenue of $357 to $365 million, representing reported growth of negative 1% to positive 1.5%. and organic growth of 0 to 2.5% compared to 2021. As we think about quarterly phasing beyond Q1, we anticipate organic growth to exceed 5% in the second half of the year. Turning to adjusted earnings guidance for 2022, we expect first quarter adjusted EPS to be in the range of 67 to 71 cents. And for the full year, we expect adjusted EPS to be in the range of $3.27 to $3.35. This guidance includes the benefit of the accelerated share repurchase and a slightly higher year-over-year adjusted effective tax rate of 18.5%. Given some of the headwinds discussed earlier, as well as our plans to continue to prioritize OPEX investments to build out our capabilities to activate our growth catalyst, we expect moderate improvements in adjusted gross margin and EBITDA margin in the second half of 2022. as compared to 2021 as the pandemic-related challenges abate. We expect return to greater margin expansion toward our long-term targets once we reach the other side of the macro impacts of the pandemic. With that, I'd like to turn the call back over to Jan.
spk00: Thank you, Kerry. As was indicated earlier, although we start 2022 feeling confident about our capabilities, we still have very few data points on exactly how COVID and the world will fare now that we're getting over Omicron, and how our markets and operations will ease toward the next level of normality, hence the caution in our outlook for 2022. However, our near-term caution should not obscure our ambition and opportunities to continue to invest in our future and to accelerate the business to a next level of performance over the coming years. If you turn to slide 16, I would like to outline our expected revenue growth trajectory and how we will accelerate this path. The first factor for growth is the momentum we have today in our core portfolio. When we look back into the results over the past four years, we've delivered historic organic growth between 4% and 5%. We expect this to be arranged in 2022, as Kerry mentioned in our guidance, acknowledging that our near-term growth will likely continue to be impacted by COVID. We expect to see the pandemic limit the speed at which our customers' staffing returns to normal and worldwide supply chains move back to a steady state. However, as we look past the first half of 2022, we should see a return to normal procedure volumes and growth. At the same time, we will begin to see more substantial benefits from our NPIs and growth initiatives, which we have continued to invest in during the past two COVID years and will continue to focus on in 2022. These NPIs will allow us to expand our time and strengthen positions in existing segments, which will get us more solidly above that 5% organic growth mark. The third factor is about expanding our commercial activities along the international axis, as well as broadening our value-added adjacencies, including leveraging digital capabilities. These are mid to long-term opportunity areas we will advance in 2022. Once we see the benefits of our efforts in these areas, we expect to be solidly into a new organic growth rhythm of 5% to 7%, our long-term organic growth target. And finally, the third factor is executing on synergistic M&A to further strengthen our business portfolio with the creative growth and value enhancing opportunities. 2022 will be about laser focus on further building the momentum with which we exited 2021. while capturing near-term acceleration opportunities as a function of how fast our markets leave COVID impacts behind, and at the same time seeding and building the foundation for mid- and long-term acceleration. If you turn to slide 17, as we think about near to mid-term, there are a lot of great catalysts that can drive our performance. These include capturing our strong international growth opportunities in Japan, China, key European countries, and other markets. ramping up commercial success of NPIs, as well as further expanding our ASEL territory cover. In parallel to capturing the potential of our catalyst, we will drive focus around those initiatives that strengthen our mid- and long-term capabilities and growth potential. We are stepping up as we speak our focus on employee engagement, talent development, and resilience, leveraging the lessons learned during the COVID period. With a very full and diversified portfolio of new products and innovation ideas across both of our business segments, we will also strengthen product management capabilities and drive focus on R&D and regulatory execution, while in parallel ramping up and optimizing new capacities in our factories. We've started to define a multi-year path to bring our portfolio of products to additional international markets, aiming to leverage and amplify the momentum and lessons learned from our international initiatives over the past years. And as I'm working with our division leaders to evaluate our longer-term strategic options, we will translate these into M&A game boards to support a steeper growth curve. And finally, as I communicated earlier this year, we're making ESG an ongoing operational pillar for the company with a three-year ESG roadmap in development to define our future ambitions and an inaugural ESG report to be published later this year. If you turn to slide 18, our final slide, I would like to acknowledge the actions we've taken to date that have set us up for long-term success. We have substantially transformed our portfolio, focusing on more profitable, differentiated products. COVID has tested us, but made us more resilient and agile in our operations as well as commercially. We're stepping up our focus on important growth initiatives, knowing that our financial rigor and strong balance sheet provide us additional optionality to execute a growth strategy. As we focus on our priority initiatives and move past the current pandemic headwinds and distractions, we expect to position Integra into a long-term organic revenue growth rhythm in the 5% to 7% range, with double-digit adjusted EPS growth, adjusted gross margins between 70% and 72%, adjusted EBITDA margins of 28% to 30%, and free cash conversion above 90%. In conclusion, let me reiterate my excitement about Integra's future and the opportunity to lead our team forward in bringing great outcomes to surgeons, their patients, as well as to our shareholders and our colleagues. With that, I would like to open the call for Q&A.
spk08: Thank you. If you'd like to ask a question, you can do so now by pressing star one on your telephones. That's star one if you'd like to ask a question. We will now take our first question from Stephen Lichman from Oppenheimer and Company. Please go ahead. Your line is open.
spk06: Thank you. Good morning. This first question on the revenue outlook for 2022. Any further questions granularity you could provide in terms of what your outlook is by segment. And Jan, what do you see as the biggest product growth driver opportunities here in the near term for Integra?
spk01: Steve, good morning. I'll start the question and then Jan can hit that back half of your question there. In terms of the segment color, I think I would say that both TT and CSS will be largely in line for the full year in line with the corporate averages. Obviously, there'll be some pluses and minuses there, but generally, I would say you should model the segments for the full year to be somewhere in the range of the corporate ranges. In the second half of the year, I would say you'll probably see more of a pickup in TT as it should benefit from that ASEL acceleration in the back half of the year and some of our other product launches there. And then, Jan, if you want to take... Yeah, if you...
spk00: I mean, take one, the building up momentum of the core of our business as we get over COVID, that's one. If you take additional products on top of that, like Ceralink, like Acell, where we are building out our commercial, those are specific products that will further accelerate over and above this, I would say, normal comeback after COVID.
spk01: Yeah, and I would also say, you know, capital... is still an area, and Jan mentioned Sarah Link, but capital in itself, I still think has the opportunity to recover further in 2022. We saw a nice rebound in our smaller size capital in 2021, but our largest capital is the CUSA unit. And although we saw some nice recovery in Q4, I think compared to 2019, we still have some opportunity to see some further bounce back as we move through the COVID headwinds.
spk13: And Steve, I would just give a little geography color as well. If I look at the fastest growing market, most likely in 2022, it's going to be China. I mean, China, we should be putting up over 20% growth organically. We're expanding into these tier two and tier three cities. We've got a really good plan in place for China. So, you know, now it's over a $50 million market for us. I'm sure you're going to hear us talk about pretty consistently in 2022 about the growth coming out of China and which will be a key market for us over the next five to 10 years as well. But I would highlight that as kind of an exceptional growth market for us in 2022. Great.
spk06: Thank you. Relative to COVID, you spoke about the, you know, the indirect impacts, but relative to the direct impacts, wondering if you could provide a little bit more color in terms of what you've seen in recent weeks and months, obviously been very dynamic. Any color you could provide on December versus January versus February on that front?
spk13: Yeah, so I'll start and then, you know, carrying on, you can add into this. I think first and foremost, the biggest thing we're seeing in our business is the absentee rates at our facilities. We saw a significant spike up in absentee rates, which has caused manufacturing disruption. Day by day, that's getting better. So the good news is that's coming back to a more normal trend, but we're still not going to be normal probably for the rest of this quarter. But nevertheless, that did have an impact, certainly. in January and early February. We're still struggling with supplies in certain cases, whether it be electronic components, packaging materials, plastic moldings, things that get used in our products. And so our supplier consistency is not what it was three to four months ago. I think we're working through that, but that was part of my comments around this record high number in terms of our back orders. And just to put it into quantitative terms, I mean, two and a half times Higher than normal means we've got $10 to $12 million of incremental backwaters we typically wouldn't see. As I think about COVID on procedures, it looks like that's all trending in a positive direction. ICU bed capacity is improving. So all that looks like it's moving in the right direction as well. But these are all things that have an impact. as we exited 2021 and the beginning part of 2022. Carrie, you know.
spk01: Yeah, I would only add, I think that was a pretty comprehensive response. And I would say hospital staffing challenges still are lingering as well. So, you know, I think it's a combination as I think about the dynamics that took place last year in the first quarter to the second quarter and compare it to what we're seeing now. Those are the two biggest pieces is continued hospital staffing issues and then the continued supply chain disruption as it relates just to the contagious nature of Omicron and just labor being impacted in our facilities, but also in the supply chain as well.
spk06: Got it. Thanks, everyone. I'll jump back in here.
spk13: Thanks, Steve.
spk08: Thank you. We will now take our next question from Matt Missick from Credit Twist. Please go ahead. The line is open.
spk11: Great. Thanks so much for taking our questions. One, follow-up on this transition of staffing and COVID-related pressures in Q1. I think, Glenn, you mentioned that things are starting to get a little bit better. Wondering if you could maybe provide any color as to how this is breaking out, U.S. and OUS, just because I think some other elective-exposed, elective-focused names in our elective surgery-focused names in our universe are sort of seeing an inflection now, and it sounds like you're suggesting that the inflection is beginning but may not be complete until sometime in Q2, and just love to understand the nuance. And one quick follow-up.
spk13: Yeah, I think the recovery of procedures is clearly happening, so that inflection point is happening. I think the challenge we see is the disruptions to the supply chain are not going to be immediately coming back to normal. So that's going to take us a bit more time to get through. And it really is the two things I mentioned earlier. The absentee rate in our facilities was at very high levels. That's now all trending in the right direction and day by day getting better. But we're probably still a ways to go on that through the end of the quarter before we get back to normal staffing levels. The other part of the supply chain is going to take us some time to work through. So you know, getting components, packaging materials, and everything else that we need to do to ship product to customers is going to take several more months, in my mind, at least to get back to a much better rhythm and cadence. So by geography, you know, obviously these issues affect the globe. I would say from a procedure perspective, we still have more challenges in certain markets like Australia, where that has not come back yet. That's more of a March discussion. So market by market, you'll see some procedure areas that are still not back to normal. But on the whole, the items that we've talked about really impact the globe.
spk00: Let's maybe add from a customer perspective. What we see is that our customers, hospitals, are still struggling with staffing constraints or staffing moves. They're working through that, but we see a steady improvement of that, not a step change where suddenly... everything is going to be back to normal. Hence, Q1, part of Q2, we see it steadily come back, but not a step change.
spk11: Understood. And then just a follow-up on ASEL. Up slightly from Q3 to Q4, stable, as you pointed out, Carrie, and just would love to get an understanding of whether we should expect that business to start growing sequentially again or it's going to be stable here. in the near term, and what are some of the drivers that sort of get it moving upward again?
spk13: Yeah, no, listen, I think first and foremost, Matt, we love the ASL portfolio. So the Micromatrix powder product, Cytol, the sheet, and also Gentrix used in laparoscopic procedures. We love the product portfolio. We've made the necessary improvements and changes that I think are going to have a big benefit for us in 2022. So what have we done? I think first and foremost, we've added more coverage in territories and added more resources. So you could think of that as we're net net going to probably add incrementally 15 plus resources in Q1 and then probably double that in Q2. So I think getting better coverage, adding back more resources is going to be important in terms of this revenue recovery plan. We've also done things to change our sales compensation plans, which is going to help as well. And I think the combination of those two items is going to put us on a trajectory where we start talking about growth, kind of the mid-year time frame. And I think ultimately we'll be growing this business kind of in line with the overall tissue tech portfolio, so call that high single digits or so. So we think we're on the right path. We like the asset. I would just say the good news is we're adding these resources back in and still achieving our financial models when we bought this business. So it's very accretive to our overall business. Bottom line, you can see that in our EBITDA numbers and our overachievement of EBITDA and margin expansion. So even with adding back the resources, we're still on track to our right targets and our financial measures when we bought this business. So I would just say look for continued improvement here and then kind of a real return to growth kind of mid-year is how I would set the expectation.
spk11: Great. Thank you.
spk08: Thank you. We will now take our next question from Robbie Marcus from JP Morgan. Please go ahead. The line is open.
spk10: Hi, this is actually Lily. I'm for Robbie. Thanks for taking the question. By our math guidance implies something like one to 3% growth in the first half of the year and five to 7% in the second half, which is a pretty meaningful step up. So what gives you the confidence in that acceleration in the back half of the year?
spk01: Yeah, I'll take that Lily. I think in terms of what we see in the first half, obviously it is impacted by COVID related disruptions, and obviously that's going to tamp down growth in the first half of the year. And as those issues abate, we can see more clearly a stronger, faster growth rate in the second half that, as I mentioned, would be greater than 5%. I think if you think about some of the underlying momentum there that we talked about in Steve's first question, is you have the benefit of the Serolink launch, the full-year benefit of that. You have what Glenn just mentioned, the ASEL recovery that will start to pick up in the second half. We will be launching our NERV product here at the end of Q1 that will start to add some nice contribution, as well as two other areas I see, capital recovery that still hasn't, I would say, gotten fully back on the large capital, and then the international growth that Glenn talked about as well, with double-digit growth expected in China, as well as continued recovery of some of the other markets. So I think it's a combination of all of those things that really then lead us to that momentum in the second half.
spk00: And don't forget, we're sitting at this point on significant back orders, and we expect in the second half to get back to normal situations. So our supply chain will be catching up with some of the demands that at this point we can't fulfill.
spk10: Okay, that's helpful. And then just a quick follow-up. Can you give us any color on how things have trended on the inflationary side and how much pressure from this do you have baked into EPS guidance for the year? Thanks.
spk01: Yeah, I would say, you know, the thing that has changed over the last couple months is some of the new things we've talked about, which is what I would call more temporary impacts as it relates to this high level of absenteeism in our plants. that creates this underabsorption part that has to kind of move through our P&L over the period of time that our inventory turns. So I'd say that was incrementally new. I'd say the inflation, that hasn't necessarily changed, I would say. I was hoping that maybe some of the freight would have been a bit more faster and those freight costs are still with us and certainly were there in the fourth quarter. and will likely continue to be with us into first quarter, into the second quarter, as we deal with the backorder issue that we've talked about, and trying to get product where it needs to be. We have incorporated inflationary pressures, working with our global sourcing group, and we have also incorporated commensurate price increases as well. So we have the opportunity to to look at price. Obviously, that's an annual process for us. We were pretty aggressive in the second half here looking at that and factoring that into our budget thoughts for 2022. As I think about price, not only do they have the opportunity to do list price adjustments, obviously looking at your discount levels, but we also have the opportunity as we introduce new products that we can add incremental price. When we bring on new customers, we can add incremental price And then even in our enterprise contracts, those tend to be a little bit longer term in nature. But a lot of those contracts do have volume commitments as part of those. And we have the opportunity to audit those contracts to ensure that those volume commitments are being made. And if they're not, that leads us to an opportunity to open negotiations with those. So I think that we've largely tried to offset that inflationary pressures. And I think with incrementally net new information, is some of the backorder issues because of some of the levels of high absenteeism that are impacting our gross margins.
spk10: That's helpful. Thanks.
spk08: Thank you. We will now take our next question from Ryan Zimmerman from BTIG. Please go ahead.
spk04: Good morning. Thanks for taking the questions. So I want to ask Jan, you know, I appreciate the cadence of the business. I appreciate some of the growth drivers here. Are there other areas, and I've been in the seat for a little bit to kind of assess the state of Integra, are there other areas of slower growth products or areas that you think make sense for potentially either divestiture or discontinuation just given that they're kind of dragging down the corporate average?
spk00: The short answer is that I do not see an obvious, yeah, slow growth area where we should take immediate action. We are of course, first my focus is on looking how can we accelerate across the board and as leveraging international, it's focused on the NPIs and make sure they get the full attention. There's one area where we are discussing it's a classic area, but relatively small.
spk01: I would say that we continuously, Ryan, look at the portfolio. So I think that is one thing Integra has done well, even before I joined Integra, was this continual review of the portfolio. I think to Jan's point, we've gotten the portfolio largely to where we want it to be, but I would say that that review is continuous and we will continue to look at opportunities to refine the portfolio, bending that to more faster growth type of opportunities.
spk13: Yeah, Ryan, the heavy lift was obviously divesting orthopedics. So that's now done. It was done last year. That was really the last big piece of the portfolio. There's always going to be some pruning, but I think, you know, as it relates to the go-forward portfolio in business, we like the portfolio we have.
spk04: Okay. And then just on the guide, you know, Carrie, I appreciate your comments about some of the new product contributions, like, say, the NERG and 3D product. What's assumed in guidance for Surgiscope, for SurgiMend, and some of these other kind of, you know, bigger profile growth initiatives for 2022? And if you could just comment on kind of each of those and their contribution in 2022, it would be appreciated.
spk01: Yeah, thanks, Ryan, for the question. I think We certainly see Surgiscope, Aurora Surgiscope, and Surgimend as part of our near to midterm growth drivers for us. I would say that as it relates to the Aurora Surgiscope, we started with a limited clinical-based launch in the third quarter of 2021. And it's really being placed with KOLs that can help us, you know, inform ourselves in our hope to do a randomized control trial initiation later in the year. You'll start to see some sales from the Aurora Surgiscope as it relates to this limited clinical launch. It's really concentrated in this minimally evasive part of the opportunity. At the same time, we've also launched a MIRA registry that is looking to capture information and data regarding our other opportunity for the Aurora Surgiscope, which is the ICH opportunity. Not a lot of revenue that's going to come from the Aurora Surgiscope in 2022. Some revenue, yes, but I'd say the bigger opportunity is beyond 2022. And then relating to Surgimen, remember that product, we are selling it today. We cannot specifically advertise and promote for breast reconstruction, but that product has been on the market for over 15 years and gaining some nice traction today. in both the complex hernia as well as the breast reconstruction market. We just can't promote for it. So our opportunity, and I'll let Glenn maybe talk about the opportunity for a PMA here, but I would say it doesn't impact our growth for 2022 as we think about our guidance right now.
spk13: Yeah, the only thing I would add to Carrie's comments is we've talked about new product introductions contributing about 25% of our organic growth. So You can think of that as about a point and a half of organic growth. I think this year will be consistent with that when you look at the new product launches with Serling, Aurora, the Nerve product that we're launching. So that's the way I think about it. We're not going to break out the revenues for each individual piece, but we certainly feel quite good that MPI is going to contribute at least that point and a half of growth given the products that we're launching this year. You know, on Surgimen, we're not counting on any incremental revenue from the breast indication in 2022. I think once we get Later into the year, we'll give you more color on how we see this rolling out in 2023 as we advance this with the FDA. But I think for now, nothing's been included relative to incremental growth in 2022 for Surgiment. Got it. Thank you, guys. Thanks.
spk08: Thank you. We will now take our next question from Samuel Budofsky from Truist. Please go ahead. Your line is open.
spk09: All right, thanks for taking the questions. There's a few on the new products here. Starting with NeuroGen3D, I'd be curious to hear a little bit more detail about the go-to-market strategy there, and specifically with regards to a potential competitive data readout in the space. How do you think about positioning the product if that data potentially comes back positively?
spk13: Yeah, so I think first and foremost, keep in mind, we already have a nerve product on the market, Neurogen. It's been on the market for many, many years. It's relatively small. It's 1% of our consolidated revenues when you think about our nerve business, only addressing short-gap nerve repair. And so what Neurogen 3D does for us, it takes us from short-gap to mid-gap, gives us some more addressable market opportunity. And basically, it's the collagen hollow conduit but included in that conduit is chondroitin sulfate, chondroitin sulfate. And so it helps to accelerate growth of the nerve for these mid-gap nerve repair issues. And so we're very excited about it. We've got a dedicated team that will be selling the products. We've got a team that's already hired and ready to go that will be selling our nerve portfolio. And then longer term, we've got some additional things in the pipeline that will hopefully further expand our nerve portfolio. So That's the way we're thinking about it. It's one of a number of growth drivers for us. But again, I think the key thing to keep in mind is we've always had a nerve portfolio, but really addressing short gap. I think what we're moving to now is how do we get to mid and long gap nerve repair, which is a bigger part of the overall market opportunity.
spk09: Got it. That's helpful.
spk13: Nerve in 3D is obviously the first step in that direction.
spk09: Got it. So switching to ASAL, just As we think about the growth this year and that sort of second half inflection, I mean, how much of that is reliant on that, you know, adding reps to that product there? And then can you kind of, with the labor shortages we're seeing sort of all over the place now these days, can you characterize what you're seeing in terms of ability to add reps to that franchise and how that may, you know, how that may impact growth?
spk13: Yeah, no, I think a key part of the growth for ASO is getting more coverage. And we've made really good progress here in the first quarter. I mentioned net, meaning when you look at the ads and anybody that's left, we're plus probably 15 for the first quarter here. Just gives you an idea that we are ramping, even though we've had some attrition. And that should continue into the second quarter. So I'd like to see us be net 30 people up. as we get into later stages of Q2, and that's going to really help to grow the overall ASEL portfolio, along with other parts of our wound reconstruction business, right? They're not just selling the ASEL products. So it's important that we continue to ramp this part of our business. I feel really good about it. And, you know, we've been very fortunate to be able to bring in a lot of talent. I think a lot of that goes to a lot of these external recognitions we've been getting as a company, top diversity company, top 100 med tech companies. These are all positive things when people look at Integra and why they want to come to work here. And so we are making good progress. It's important we continue that, and I expect that you're going to hear more positive stories around ASIL and what we're doing, in particular, as we get to mid-year and get these jobs filled and these territories filled.
spk08: Thanks. Thank you. We will now take our next question from Larry Vigelson from Wells Fargo. Please go ahead.
spk05: Good morning. Thanks for taking the question. Hey, morning, Carrie. Hey, one for you on the P&L. Maybe it would be helpful if you could provide a little bit more color on the gross margin and operating margin for the year that that's implied. I thought I heard your comments were on the gross margin were more specific to the second half of the year and, you know, any color on that. just EPS cadence, and I had one follow-up.
spk01: Yeah, sure, Larry. And I think you heard those remarks correct in that my specifics was a modest level of improvement in margins on gross margin and EBITDA margins in the second half of the year. So you should interpret that as flat margins in the first half on gross margins and EBITDA margins and modest growth in the second half of the year. I think it's important, and I just want to, again, go back to the fact that it's going to take us a little bit of time to work through some of the headwinds on these high levels of absenteeism and the impact that it has in the factories. And it will take some time until that inventory turns and gets that full underabsorption out of the P&L. In addition, I would say that... You know, we are really wanting to make sure that we are prioritizing our OpEx investments. That's something that we did in 2021 where we gradually brought OpEx investments back in. And I think as you think about next year, Larry, I would look at our Q4 of 2020 of one number of OpEx and annualize that. That's probably a good number to think about how we're thinking about OpEx for the year. And that will gradually increase over the year there. But it is something that we're not going to sacrifice prioritizing our long-term investment plans at the expense of really kind of optimizing gross margin right now. We want to make sure through this temporary COVID disruption that we're still prioritizing those OPEX investments because we have a lot to be excited about in terms of the long-term growth momentum of the business. And then I would say that should flow through your EPS as well, very similarly.
spk05: Sorry about that. Yep, thanks. That's super helpful. And just one quick follow-up. Carrie, are you suggesting kind of that the second quarter and the first quarter organic growth should be pretty similar? Is that kind of the message here, or do you expect an improvement in Q2 over Q1? Thanks for taking the questions.
spk01: Yeah, I mean, I would expect to see sequential revenue growth from Q1 to Q2, right? I do hope that some of the things that are impacting more acutely in Q1 will start to abate, but it will still be with us. What I think our comments are, if you compare last year and you look at what happened between the first quarter and second quarter of 2021, there was a substantial kind of spring back, a bounce back in Q2. I don't think we're expecting that here this year, and I think it's because of some of these lingering impacts of back orders, staffing challenges at hospitals, that I think you should expect a gradual sequential recovery, but not maybe the same level of bounce back that we saw last year.
spk07: Thanks for taking the questions.
spk08: We will now take our next question from Craig Abidjou from Bank of America. Please go ahead.
spk14: Good morning. Thanks for taking the questions. Just a couple quick follow-ups here. Kerry, on your comments on the capital markets, I just want to make sure that I am clear. And are the smaller capital markets, are they back to a normal level? And then I know you mentioned the larger ones are probably not quite back. What do you think needs to happen before Could those get back to a normal level? And when do you kind of foresee that within 2022?
spk01: Yeah, Craig. So let me start with first a reference of capital as a percent of our total sales. It's only about 6% of our total sales, including our new Sarah link. So if I look at where we came in for 2021, capital was about 6% of revenue. So not a big driver. But certainly as I think about opportunities to see a broader recovery in 2022, the larger capital, which is really the CUSA for us. So CUSA, the unit price is a couple hundred thousand dollars. And then everything else falls into that smaller capital, which is you're talking 40,000 or less in that neighborhood of what small capital is. And as we look at how capital trended in 2021, we saw a nice bounce back in the smaller capitals. So think of that as our lighting systems, as our cranial stabilization systems, as our generators, as our Leicox units. And obviously, we did see some nice Serolink launch momentum here in the second half. And even with that, I would say fourth quarter still proved to be a nice quarter for us. So we expected to see a rebound from third quarter to the fourth quarter. As most hospitals' fiscal years end in the fourth quarter, we did see that. Our capital sales were up probably about $5 million from Q3 to Q4. CUSA was part of that recovery in the fourth quarter as well. But I do think that as I look at CUSA relative to 2019, I think there's further opportunities to see some recovery and bounce back in 2022. I think it's going to take a little bit of time. Q1 has started out slow. And I think we owe that to the Omicron variant, the contagious nature of that, impacting staffing shortages and back committees and so forth. So it is one of these things where we're going to have to get past some of those items before we start to see the funnel. The funnel is still very, very strong. We have great visibility to the CUSA funnel. We do not believe that anything has fundamentally changed in the competitive landscape. It's just an extension of the selling cycle.
spk13: And, Craig, just keep in mind, you know, I know we're talking capital, but with these capital sales, you get the recurring revenue stream for disposables. So as procedures recover, we'll see faster disposable growth on CUSA, on Serolink, because every time a procedure gets done, you get a recurring revenue. So just something to note as well, that as procedures get back to normal, we'll see an uptick in revenue in our disposals business that's very much attached to capital.
spk14: Got it. Uh, that's helpful. Um, next one, just on, on Surgimend, um, just wanted, you know, follow up here, wanted to know if you guys had any more color or any additional discussions kind of with the FDA and maybe remind us of the, the approval timing for the, um, breast recon, uh, indication. And, you know, if, if you still kind of, if you're still planning and expecting that, uh, I believe it was, uh, the second half of this year, but please correct me if I'm incorrect.
spk13: Yeah, so first and foremost, we're continuing to work with the FDA. We're doing additional analysis around the data. I think you know we submitted the PMA. We've had the panel discussion, so we're continuing to work through the necessary things to get the approval, but it's obviously going to take us some time to get there. I think we need to get further into 2022 before talking about when we would expect an approval for uh the pma but it's not a 2022 approval i can say that it will be a 2023 approval is what we're shooting for and we'll give you a better idea of timing once we get later into this year great thanks for taking the questions thanks thank you as a reminder if you would like to ask a question today please do so now by pressing star 1 on your telephone
spk08: We will now take our next question from Jason Bedford from Raymond James. Please go ahead.
spk12: Good morning, and thanks for the questions. Just a couple quick ones. Getting back to your gross margin commentary, Carrie, I think you said flat in the first half. I was just curious, is that relative to first half 21 or flat relative to the fourth quarter number?
spk01: No, it's first quarter of 2021.
spk12: Okay. Okay. And then what is the gross margin implied in your EPS guidance for 22?
spk01: Yeah, I would say, again, roughly think about it as, again, gross margins that are roughly flat compared to first half of 2021, slight margin improvement compared to second half 2021 gross margins.
spk12: Okay. Okay. That's helpful. And then just in terms of you mentioned price, what is the net impact of price in 22 on the top line?
spk01: Yeah, we don't necessarily provide that level of breakdown, but I would say that that is something that we have been working very actively with our commercial teams, and we have reflected that into our numbers. So it is definitely part of our guidance.
spk12: Okay. And In which areas of the business are you seeing the biggest back order, meaning how much of the 10 to 12 that Glenn mentioned is CSS versus TT? And can we assume by the third quarter you've kind of exhausted that back order?
spk13: Yeah, it's mostly CSS and the CSS products. So obviously that impacts both our U.S. and our international business because we're heavily concentrated in CSS and the international business. We don't expect the back orders to be normal as we exit Q2. It certainly should be better than where we are in Q1, but we're probably not going to be back to a normal state until later in the year.
spk01: In the area of tissue technology, we'll see some of that back order issue in our private label business as well. Obviously, we work to prioritize different parts of the business there, and private label will be one of the areas that could be affected by backorders on the tissue technology side.
spk12: Okay. Thank you.
spk08: Thank you. We will now take our next question from Matt Taylor from UBS. Please go ahead.
spk15: Hi. Thank you for taking the question. Good morning. Jan, I wanted to ask you kind of a higher level strategic question. You had some time under your belt now in your new role. And I just wanted to see if you could give us an assessment of the lay of the land. What do you like about Integra's strategy? Are there things that you might tweak or change or emphasize differently? And what are some of the key strengths from your experience that you think you can bring to the role?
spk00: Thank you for the question. First, I very much like the portfolio. Like Glenn said earlier, I mean, the heavy lifting in terms of shifting the portfolio towards a higher growth, higher profitability portfolio has been done. So my first part is make sure to build out the portfolio that we have. There's clearly the international dimension where despite having some great successes and great cases from the past. There's way more we can do. And we started a few weeks back a project to really lay out that roadmap, which countries, which products, and what are the investment needs to really sell more of what we have in more countries. I mean, second discussion I have with the division leaders is about what do we represent within care pathways? And with the portfolio we have, how can we broaden into adjacencies to be more of a solutions player, more of a partner to the healthcare professionals that we serve today? So that will guide organic as well as inorganic investments to broaden our portfolio, including digital capabilities. I mean, any technology, any process business has opportunities to enhance its value proposition by building more digital capabilities. So those are two, and that's what I try to reflect in those different vectors. And then, of course, this is an acquisitive business with great potential to do acquisitions. And so we're continuing to look into near and further adjacencies as opportunities to further build out the portfolio of businesses that make sense within the Integra family.
spk15: Great, thanks for the talk. I'll leave it there.
spk08: Thank you. We will now take a question from Matthew O'Brien from Piper Sandler. Please go ahead.
spk02: Thanks for taking that question, and I'll just stick with one given that we're getting kind of late here. On the, the commentary about the back half increase in, uh, or the kind of back half loading of guidance here, you know, your commentaries about your commentary about Q1 is a little bit worse than we've heard from other companies. So I'm just, you know, you've got to, it just puts more pressure on the back half of the year. And so I'm just wondering what really needs to go right. To kind of hit these numbers. And I know you talked about the new products, but how much you have to get through all the backlog that the ASL new reps need to be very productive. You know, does the absenteeism need to come down meaningfully to hit these back half numbers, or have you built in enough conservatism that you feel comfortable in that big spike in the back half of the year? Thanks.
spk13: You know, I think we've got the right level of conservatism built into our forecast. At the same time, when we look at the back half of the year, we're confident we're going to get there. When you look at the back orders, they're going to be clearing, so that's going to help us as a starting point. Supply is going to get better. That's going to be a nice tailwind for us. getting procedures more back to normal from an overall COVID perspective is going to be a positive for us. And then, you know, these new product launches are going to continue to ramp. So, you know, we're just launching our nerve product here at the end of the first quarter. That's going to be a contributor, obviously more so in the back half of the year. Surlink obviously having a full year benefit in the U S and Europe will continue to ramp. We've launched now in Canada, Australia, We're going to be launching in Japan mid-year, which is a good opportunity for us, along with a number of indirect markets. And so these NPI launches should be a nice tailwind for us, more so in the back half of the year. And then ASEL, as we add these resources, should show sequential annual over year improvement as well. And so those are the key growth drivers for us. We feel quite good about it. Understand it looks like it's got risk to it any time you have a back half loaded year, but we feel quite good about it, quite frankly.
spk00: I think we're appropriately cautious. One underlying assumption is that we see gradual, steady improvement. We're not counting on any step change, snapback, both, I would say, in the staffing situations on our customers. On our own internal, we do see steady improvement. The question was asked on the ASEL staffing up. I'm following that since December. We've drawn a line from December to end of second quarter where we want to be. We're nicely tracking to that line despite the challenges that there are in the market. So, yeah. Appropriate the causes and assumptions of steady improvements.
spk02: Got it. Appreciate it.
spk08: Thank you. I will now turn the call back to your host for some closing remarks.
spk03: Thank you for joining us for the conference call today. Going over our 2021 fourth quarter results, we'll have follow-up questions. If you need to reach us, please feel free to reach out to me directly at investorrelations at integralife.com or you can find my contact information in the press release today. Thank you very much.
spk08: Ladies and gentlemen, that will conclude today's call. You may now all disconnect.
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