This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk09: Good day and welcome to the Integra Life Sciences first quarter 2022 financial results. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Chris Ward, Senior Director, Investor Relations. Please go ahead, sir.
spk04: Thank you, Cecilia. Good morning, and thank you for joining the Integra Life Sciences first quarter 2022 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 first quarter 2022 financial results. The release and corresponding earnings presentation, which we will reference during the call, are available at integralife.com under Investors, Events and Presentations, and the file named First Quarter 2022 Earnings Call Presentation. Before we begin, I would like to remind you that many of the statements made during this call may be considered forward-looking statements. Factors that could cause actual results to differ materially are discussed in the company's Exchange Act report filed with the SEC and in the release. Also in our prepared remarks, we'll make reference to both reported and organic revenue growth. Organic revenue growth excludes the effects of foreign currency acquisitions, including ASEL, for the first 19 days of the year, divestitures, 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. Reconciliations of any non-GAAP financial measures can be found in today's press release, which is an exhibit to INTEGRA's current report on Form 8-K, filed today with the SEC. And with that, I'll now turn the call over to Jan.
spk10: Thank you, Chris, and good morning, everyone. Let me start by providing a review of our first quarter business highlights on slide four. Definitely a quarter we feel good about, and that is reflective of a strong start to the year. Our first quarter revenues finished at around $377 million above the high end of our guidance range and with organic growth above 5%. You will remember that in mid-February, we went in with cautious guidance for the first half of the year. Although we felt confident about our capabilities at that time, we had very few data points on exactly how and until when our markets and operations would be impacted by the Omicron disruption, and also how they would ease toward the next level of normality after the peak of that disruption passed. Our better-than-expected revenue resulting Q1 was driven by a stronger-than-expected recovery in surgical procedures across the globe in March, as well as by favorable order timing in our private label business. We saw demand for our products steadily increase, starting in early March, while agility in our commercial teams and operations allowed us to keep up with strengthening demands late in the quarter. Our growth in the first quarter was broad-based, with both our Codman specialty surgical and our tissue technology segments at or exceeding 5% organic growth, and with strong contributions from both our US and international markets. Our first quarter adjusted earnings per share of 74 cents also exceeded the high end of our guidance range driven by the higher revenue and with gross margins improving 40 basis points compared to Q1 of 2021. We're pleased that the increasing utilization of our factories combined with margin protection measures taken by commercial supply chain and procurement teams succeeded in protecting our margins. despite the inflationary environment. And we intend to maintain this margin focus throughout the year. As we think about the full year, we feel more optimistic now, but still tempered with continued caution around microeconomic-driven uncertainties, including interest rate hikes, geopolitical instability, and further risk from COVID disruptions like what we are seeing in China at this moment. We expect surgical procedures will continue to steadily improve through the balance of the year with more normal seasonal patterns. And while we anticipate continued ripples on the supply side of our operations due to some of these macro factors, we should see improving trends in our operations over the balance of the year. As a result of our strong start and balanced outlook for the remainder of the year, we are increasing our organic growth expectations for the full year to a range of 3.8 to 5.2%, compared to our initial range of 3.5 to 5%. Reported revenue guidance remains the same as our family guidance, as we are absorbing additional currency headwinds as the dollar continues to strengthen. We're also reaffirming our full year guidance for adjusted EPS. Our Q1 performance, as well as the resilience in our organization, provides us a solid foundation for continuing to invest in our future in order to accelerate the business to a next level of performance over the coming years. During the first quarter, we invested in our organizational capabilities and capacities, as well as our growth catalysts, and we initiated a number of strategic roadmap projects. Also, in the first quarter, we launched NeuroGen3D, our new peripheral nerve repair product, and we continued our global rollout of Serolink in Canada, Australia, and several indirect markets. Finally, we completed the accelerated share repurchase program we previously announced, and as a result have returned $125 million to our shareholders, keeping up with our track record of strong financial rigour. With that, I would like to turn the call over to Carrie now to go deeper into our first quarter performance and our updated guidance.
spk11: Thanks, Jan, and good morning, everyone. I'd like to start with a brief summary of our first quarter financial highlights on slide five. First quarter total revenues were $377 million, representing an increase of 4.6% on a reported basis and 5.6% on an organic basis. Total revenues were $12 million above the high end of the guidance range communicated on February 23rd. I would characterize the revenue upside as driven largely by the strong recovery of procedures in March, coupled with our ability to maintain our pace with customer deliveries, as well as favorable order timing from our private label business. If you recall, we talked about higher levels of back orders during our last earnings call. We ended the first quarter in roughly the same backorder position we discussed then, still higher than historical levels, but with no increase since our February call. And when considering the sharp escalation in demand in March, maintaining the same level of backorders was a good outcome, all things considered, as it meant our supply chain kept up with stepped-up demand and delivered revenue upside. First quarter revenue growth was strong across most of our portfolio. We achieved organic growth at or above 5% in both our common specialty surgical and tissue technology segments, with U.S. organic growth of 6% and international organic growth nearly 5%. Adjusted EBITDA margin for the quarter was 24.8%, down 20 basis points, and adjusted earnings per share increased 7% to 74 cents. If you turn to slide 6, I'll now review the first quarter revenue performance of our CSS segments. Reported Q1 revenues in CSS were $247 million, an increase of 2.5% on a reported basis and 5% on an organic basis from the prior year. Global neurosurgery sales were up 5.8% on an organic basis, driven by CSF management and neuromonitoring. CSF management increased high single digits and was led by growth in our programmable valves, while neuromonitoring grew low double digits, benefiting from the recent launch of Serolink. Total capital sales in the quarter grew low single digits, driven by smaller capital, including Serolink and Mayfield, offsetting lagging sales in larger capital equipment, where we saw extended selling cycles linked to the Omicron disruption. Q1 sales and instruments grew approximately 2% on an organic basis, in line with our long-term growth expectations for this business. Recall that last year we saw significant growth in our instruments business as a result of pent-up demand. International sales in CSS increased mid-single digits led by Saralink in Europe and by growth in Asia. Performance in China and Japan was strong with low double-digit growth in both countries. Moving to our tissue technology segment on slide seven. Tissue technologies grew 8.8% on a reported basis and 6.9% on an organic basis compared to the prior year. First quarter sales in wound reconstruction increased 4% on an organic basis, driven by sales in Integra Skin and Surgiment. ASAL is reported within the wound reconstruction franchise, and ASAL revenue in the first quarter was consistent with Q3 and Q4 2021 levels, in line with our expectations. As we shared on our February 23rd call, we plan to hire additional sales colleagues in our wound reconstruction business over the first half of 2022. And in Q1, we hired a total of 15. We intend to hire another 15 in the second quarter and anticipate building momentum with the ASAL product portfolio in the second half. In our private label franchise, sales grew 15% driven by higher customer demand, and favorable timing of orders as our partners continue to build inventory. And finally, international sales and tissue technologies increased mid-single digits on an organic basis driven by strength in Europe and Canada. Turning to slide eight, I'll now review our first quarter P&L components. Adjusted gross margin was 67.7% up 40 basis points compared to Q1 of 2021. The improvement was driven by higher revenues and favorable product mix within our neuro and tissue technology businesses. Our gross margin, which was in line with expectations, was impacted unfavorably by higher freight costs, material and labor inflation, as well as manufacturing and supply chain inefficiencies caused by the Omicron variant. These challenges were offset by our pricing actions, purchasing initiatives, and cost improvement activities. Our guidance for adjusted gross margin for the first half of the year remains unchanged from our February call. For the first half of 2022, we expect adjusted gross margins to be largely in line with first half of 2021 margins at the midpoint of our guidance range, which implies roughly flat adjusted gross margins in Q2 compared to Q1. Our first quarter adjusted EBITDA margin was down 20 basis points compared to the prior year. which was consistent with our expectations communicated on our February call as we planned for increases in R&D, selling, and marketing expenses in support of our key growth priorities. Similar to gross margin, we expect first half adjusted EBITDA margins for 2022 to be relatively flat compared to first half of 2021. Adjusted EPS was $0.74 in the quarter compared to $0.69 in the prior year. reflecting an increase of 7% driven primarily by revenue growth. Now, if you turn to slide 9, I'll provide a brief update on our balance sheet, capital structure, and cash flow. Operating cash flow in the quarter was $44 million, and free cash flow was $35 million. Free cash flow conversion was 86% on a trailing 12-month basis, reflecting capital spending at more normal levels and increased spending for EU MDR compliance. In the first quarter, we completed the previously announced $125 million accelerated share repurchase program with approximately 1.9 million shares repurchased. Our balance sheet remained strong with ample liquidity to support our short- and long-term plans. And as March 31st, net debt was $1.15 billion, and our consolidated total leverage ratio was 2.5 times. The company had total liquidity of $1.66 billion, including $407 million in cash and the remainder available under our revolving credit facility. Turning to slide 10, I'll provide an update to our consolidated revenue and adjusted earnings per share guidance for the second quarter and full year 2022. Second quarter revenues are forecasted to be in the range of $392 million to $400 million. representing reported growth of 0.5% to 2.5% and organic growth of 2.8% to 4.8%. Our second quarter revenue guidance reflects continued procedure recovery, offset partially by increased FX headwinds and an expected impact in our revenue in China due to the government-mandated COVID lockdown. For the full year 2022, we are raising our organic growth expectations from an initial range of 3.5% to 5%, to a new range of 3.8 to 5.2%. The increase reflects our better-than-expected Q1 revenue performance, but also the continued uncertainty of global markets and the expectation of continued supply constraints. Our revenue guidance assumes only a modest improvement in backorder levels through the balance of the year as we work to keep pace with anticipated procedure recovery. Notwithstanding our increase in the guidance for organic growth, guidance for reported revenue growth remains unchanged at $1.58 billion to $1.6 billion, reflecting the absorption of an additional 30 basis points in the FX headwinds for the full year. Turning to adjusted earnings guidance for the second quarter, we expect adjusted EPS to be in the range of $0.78 to $0.82, roughly flat when compared to the second quarter of 2021 at the midpoint, again reflecting continued planned growth investments. We are holding our full year 2022 adjusted EPS guidance range of $3.27 to $3.35, which reflects additional FX headwinds and continuing macroeconomic uncertainty. Now I'd like to turn the call back over to Jan to provide a brief recap of where we stand with our 2022 growth drivers.
spk10: Thank you, Carrie. And let's turn to slide 11. Our first quarter results provide confidence that we can deliver on our 2022 commitments while investing in our growth catalysts and strategic projects. We feel our full-year outlook is balanced. It reflects our focus on commercial and operational execution, but also recognizes that a great deal of micro-related uncertainty still exists, and we are diligently working to execute on the levers we can control. These levers include price capture, supply chain initiatives, and driving efficiencies in our processes and sites. Combat inflationary pressure and protect our margins. At the same time, we're providing room to invest behind our key growth catalysts. Over the past two months, I've continued to spend a significant portion of my time in our factories and in the field with our customers and commercial teams. I can see the growth momentum return as hospitals manage through their staffing shortages and free up capacity for elective procedures. At our own sales meetings, I see commercial colleagues who are energized to leverage the strength of our diverse portfolio, including our new products. And I've seen our supply chain teams fully engaged, managing through the many disruptions that continue to be thrown at them. We're also excited by our international growth opportunities. Our commercial teams in China and Japan continue to deliver double-digit growth in these markets. And we are also seeing improved procedure volumes in Europe. We continue to launch Serolink in new countries as part of our multi-year global growth plan for the product, which includes geographic expansion, a growing recurring revenue stream as our installed base grows, and the addition of digital capabilities. The controlled market release of the Aurora Surgescope for use in minimally invasive neurosurgery continues as planned. as does the mirror registry for the surgical treatment of intracerebral hemorrhage, or ICH. Although the 2022 revenue contribution from the Aurora platform is small, the long-term benefits to surgeons and patients have the potential to change the standard of care in neurosurgery for ICH. And we expect it will be a significant contributor to our long-term growth, as well as a place in our product portfolio for further digital innovation. In our tissue technologies business, we expect to see continued procedure recovery through the balance of the year. The launch of our NeuroGen 3D product targeted for mid-gap peripheral nerve repair should boost this momentum. In our A-cell business, we clearly have more work to do to achieve the performance that we expected when we acquired the company. As Kerry mentioned, we expect to have hired 30 incremental resources in our wound treatment reconstruction commercial team by the end of June. With an expanded commercial team, as well as new marketing and digital customer outreach programs, and a more focused compensation plan, we anticipate revenue growth for ASEL in the second half of 2022. In conclusion, we're executing on our 2022 commitments with a strong start to the year. The organization continues to demonstrate resilience in the face of numerous challenges while keeping its focus on near-term execution as well as our long-term growth objectives. So this concludes our prepared remarks. Thank you for listening. And Cecilia, with this we can open the lines for questions.
spk09: Thank you, sir. As a reminder, if you wish to ask a question, please press star 1 on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. We will now take our first question from Steven Lichtman from Oppenheimer and Company. Please go ahead.
spk15: Thank you. Good morning, everyone, and congratulations on the start to the year. I just wanted to start maybe carrying on inflationary pressures. As you think about the totality of those efforts that you mentioned, how much are you able to offset those pressures? In other words, how much of a net headwind is assumed in your gross margin guidance? And did your assumption of the gross impact from inflation increase since the start of the year?
spk11: Thanks, Steve, and I appreciate the question. I would say that our gross margins came in largely where we expected. So we knew we were going to have some headwinds. I think we properly baked those into our forecast guidance. But we also started out the year strong with a lot of actions around those areas in terms of price capture, in terms of procurement initiatives, and just other cost reduction activities that we're doing in our factories as well. And I think all of that largely played out as we expected. I think as I think about the balance of the year, and part of the reason why we maintained the EPS guidance range where we did is that I don't see those necessarily abating at this particular point. I think they largely will get a little worse than they are right now. And as I think about the guidance range we've provided for the full year, that does give us some room in case those gross margin headwinds get a little bit worse in the second half. But I would say we're equally focused on all of those mitigation activities that did bode well for protecting those margins in Q1 and We actually saw a little bit of growth in our gross margin line in Q1. So I think they're all there. I think freight, it continues to be a big issue. Rising energy costs that are finding its way into the supply chain also are there as well. All of those things, I think, are not going to ease as we move through the year. But at the same time, we're working just as hard to offset those.
spk15: Great. Thanks, Carrie. And then Maybe just my second question on just a couple of macro items. I know your capital business doesn't include a lot of big-ticket items, but I was hoping to get your perspective on the health of the capital equipment environment in the U.S. And then in China, I know you're still under-levered there, but what's the latest you're seeing in terms of demand impact from the lockdowns? Thanks.
spk11: Yeah, and I'll have Glenn talk about the China, but maybe I'll hit the capital question first. Overall, I think, as I think about our performance in Q1 in capital, we did have the contribution of Saralink. So obviously that was not there. That product was not launched until late last year. So it was a nice tailwind for us in Q1, as well as some of the smaller capital like Mayfield saw some nice growth. If you kind of exclude those, the larger capital did see declines year over year. And I think many other companies have seen the same thing. I think with the Omicron disruption, those selling cycles just extended a bit longer. So I wouldn't read into it any more than that. Our view of the pipeline is still very strong. And we do expect to see capital sequentially continue to increase both in absolute dollars but also in terms of year-over-year growth as we move through the quarter. The second half of last year was a good capital recovery quarter, so you need to moderate your growth just because of that. But generally, an absolute capital dollar growth will continue to increase through the year, and I don't think it's more than just some extended selling cycle with Omicron. And then, Glenn, you want to add? respond to the China question.
spk14: Just to add on to the capital piece, outside the U.S., we actually did have growth in our small and large capital businesses. And that was largely driven by Japan, China, Canada, and many markets in direct Europe. So it was very encouraging to see that both small and large capital. In terms of China, I think as we mentioned before, China is our second largest market and country by revenue outside the U.S. It represents about 3% to 4% of our overall consolidated revenue. So it's not significant yet in terms of dollars, but it's been a key growth driver for us, consistently growing in double digits for the last five years or so. In terms of a lockdown, clearly it's had an impact on our business in the second quarter. It could possibly go beyond that. But right now, we've built the expectation in that the lockdown will end kind of in the mid-May timeframe. That's what's been built into our guidance plan. One thing to keep in mind when you think about a lockdown is a lot of the procedures that are not happening right now will not come back to us because when you have a lockdown, you don't have a lot of traumatic brain injury as an example. So some of them will come back from a timing perspective, but some of them will not. And so we've built that into our guidance for the second quarter and full year. And if it goes beyond, I would say mid-May, it could have impact on our business, largely in the third quarter period. And I say that because the second quarter, we've got already the commitments with our logistic providers in China, so we pretty much have our revenue locked in for the second quarter. But if it went beyond, say, the May timeframe, it could have some impact in the third quarter. But on the whole, I think it's very manageable, and we're still very excited about our opportunity in China.
spk15: Got it. Thanks, Glenn. Thanks, Kerry.
spk09: We will now take your next question from Robbie Marcus from JP Morgan. Please go ahead.
spk08: Oh, great. Thanks for taking the question and congrats on a nice quarter. Thanks, Robbie. You touched on this in the prepared remarks a little bit, but I was hoping to just get a little more detail on how you're sizing up sort of the bottom line impact from and some of the macro cost pressures. Just thinking about since you beat in first quarter and you're being conservative, how much is conservatism balanced against incremental headwinds at the bottom line?
spk11: Sure, Robbie. Thanks for the question. And I would say that we started out Q1 with a really nice performance and so I think consistent with our remarks. We're cautiously optimistic on the balance of the year, but we're only at the end of April, and I think there's just a lot of macro factors that are still swirling about. And you can call it conservatism, but I do think it's a pragmatic view to say we still have a whole lot of factors that have to kind of play out to see where they land. And when I think about that, it's not only FX headwinds, I didn't see where the rates were this morning, but yesterday the U.S. dollar continued to strengthen, so it's even more headwind as we think about the balance of the year. Interest rate hikes, geopolitical instability, obviously the war in Ukraine, but anything that escalates beyond that, and just overall supply constraints. So all of those things come into play as we all think about – our performance in the balance of the year. And so I think there's a lot to be optimistic here, but a lot that still has to be, um, kind of shaken out here. And, um, and I think our, our guidance range does give us some room to maneuver within that. So as I mentioned to, to the response to Steve, we're going to fight like hell to, to offset all of this inflationary headwind that we have. And we did a really nice job in Q1. That is a real focus for us for the balance of the year. But I do think those, um, may get worse before they get better. And look, if we can manage successfully in those gross margin headwinds, that does give us the optionality to actually accelerate some increased investments for our growth initiatives in the back half of the year. So we'd like a little bit of degrees of freedom here as we think about positioning ourselves in the back half of the year as I think about beyond 2023.
spk08: Great. I appreciate that. And maybe just to focus in on the tissue technology business a little bit here, how should we think about the balance of private label versus the wound business for the balance of the year? I know private label could be a little lumpy. And if you could just give us an update on the tissue business, where you think the market growth is and how you think you're doing in terms of share gains there. Thanks a lot.
spk11: Yeah, and maybe I'll hit the first question and then ask Glenn or Jan to talk about the TT in general market question. But in terms of private label, there definitely was some advancement of orders into Q1 for private labels. Our private label partners are building inventory. So as you think about the supply constraints, that we've talked about, they have their own supply constraints. So they are building inventory and our Q1 benefited from that. So a little bit of timing advancement from Q2 to Q1. So as I think about our guidance for the second quarter, we have assumed that private label, that revenue is going to be lower in the second quarter as it relates to growth rate. We're going to see much more of a tempering of that growth rate as that got pulled forward. So I do believe that as we move through the year, private label, you won't see as much growth as you saw just because of some of the year-over-year comps. If you remember, private label was really strong last year as well as, again, I think our partners were building inventory. So that's going to balance out quite a bit here as we move through the balance of the year. And then the balance of the wound reconstruction part of the business, we'll start to see some performance there. So maybe I'll turn it over to Glenn or to Janne.
spk14: Yeah, so in terms of the overall market for tissue, I think you've got to break down some of the segments within it, but overall, it's probably growing in the mid to high single-digit range, so consistent with our long-term growth target to 7% to 9%. I would say within that, though, peripheral nerve repair and breast reconstruction or plastic and reconstructive procedures are probably growing faster in the low double-digit range, and complex wound is probably in the mid-single-digit range, just breaking it down, but Overall, pretty consistent with what our message has been around how we expect to grow over the next five years.
spk10: And then maybe on ASL specifically, where we saw ASL in the first quarter pretty much in line with Q4 and Q3. That's not where we want to be. We are building up further capacity, sales capacity within wound reconstruction, which will benefit ASL. ASEL and so on, the other products. Ambition there is to show real growth as of the second half of the year in ASEL.
spk08: Great. Thanks so much.
spk09: Thank you. We're going to take our next question from Ryan Zimmerman from VTIG. Please go ahead.
spk05: Hi. Thanks for taking the questions. I want to ask a couple questions. Kerry, you talked about the backlog dynamics and you were able to successfully navigate that with your supply chain team this quarter. Can you give us a sense of what that backlog is in terms of size and scale and how that could or couldn't be worked down? I guess your ability to titrate that backlog through the balance of the year would be helpful.
spk14: You're right. I'll take a crack at this one. In terms of our back orders, we ended the quarter pretty consistent with where we ended the end of last year. So we're probably about two to two and a half times above normal levels. And it's mostly within our CSS business where we're seeing the back orders. So that just gives you an idea about where we are in terms of back orders. But considering the sharp increase that we saw in demand during the quarter and in March specifically, just maintaining the same level of backorder was really a good outcome for us, as it essentially meant that our supply chain kept up with the higher demand and we were able to deliver the revenue upside. So we actually thought we did a nice job of managing through supply in the first quarter. Moving forward, in Carrie's prepared remarks, we talked about some modest reductions in the backorder levels for the rest of this year, but still supporting expectations for increased demand, especially in the second half of the year. So we do expect to see improvements in our backwaters. They should come down, but we're going to be pretty much dealing with a backwater situation and supply constraints for the rest of this year, but it should get mildly better as we move forward. So hopefully that gives you some context. I would just say on a positive note, taking a glass half full approach, We're seeing improvements in lead times with suppliers. However, I would just say things are still far from normal. We've seen improvements in the absentee rates in our manufacturing facilities. That was an area of concern early in Q1. That's coming back to much more normalized levels. And so those items are going to help us to get more throughput, more output from our manufacturing sites and help to improve the backorder situation. So things are trending in a positive direction, but still far from normal.
spk05: Okay. That's helpful, Glenn. And, you know, given the balance sheet position, the leverage ratio, and also the share repurchases that you did, you know, this quarter, this past quarter, I should say, what's your view on the M&A landscape? I mean, it seems like with the share repurchase dynamics, you know, maybe there's not as much out there that's, you know, kind of striking you guys as attractive. But I want to get both Jan and Carrie's thoughts on that, please.
spk10: Yeah, in terms of M&A, Ryan, I think we remain the same posture as before. We are actively looking at opportunities. I think what is maybe different the past couple of months compared to before was here is that in parallel to scouting the market, I am running with the different divisions a deeper strategic look into where exactly in the care pathway which adjacencies do we feel we have a strong logic and a strong position to want to spread our wings. So we're adding a somewhat more strategic filter onto the broad set of opportunities that we are looking at.
spk11: Yeah, and Ryan, I would just add, you know, on the balance sheet, we do have lots of flexibility there. So We definitely want to be active on the M&A side. Obviously, we continue to look at opportunities, but we're a disciplined acquirer, and so we're going to wait until we find the right target before we jump on that opportunity. In the meantime, always looking for opportunities to allocate our capital and opportunistically the share buyback opportunity. worked out very, very well, and we were able to buy back 1.9 million shares. But our leverage ratio had dropped below our window. We'd like to target 2.5 to 3.5. And so at the end of last year, we were at 2.3 times. So a little bit of excess cash there. So we deployed it in an opportunistic way. So I think that's still open, but certainly we'd like to be active on the M&A side.
spk05: Got it. Okay.
spk17: Thanks for taking the questions.
spk09: We will now take our next question from Vic Chopra from Wells Fargo. Please go ahead.
spk02: Hey, good morning, and thanks for taking the question, and congrats on the quarter. So just two for me. First, I guess, is on the capital environment. When do you expect it to return to 2019 levels? And then I was just wondering if you could provide us with an update on the PMA for surge of men. I don't think I heard anything on the prepared remarks about that. So that would be super helpful. Thanks so much.
spk11: Sure. Vic, I'll take the first part of that question and ask Glenn to take the PMA question. On capital, again, I look at the Q1 capital performance as a little bit of mixed. As I mentioned, the smaller capital did well. We had the contribution of Seroling coming in, as you heard from Glenn earlier. On the international markets, both the small and large capital did well in Q1 as well. And it was really more of that U.S. market on the larger capital that saw a bit of lagging. And I attribute that to just the longer extension of selling cycles, nothing more than that. And I do think that we'll start to see some continued growth. year over year in the remaining parts of the quarter. And from a dollar perspective, we'll start to see continued trends up in capital. I think we still can be bullish on capital. I think it's just a selling cycle extension that's driving that. So, Glenn, if you want to take the Surgimen question.
spk14: Sure. So, Vic, on Surgimen, don't have a lot to update. I think it's still too early to speculate on any approval timing. We're continuing to follow the process that we're working with the FDA on. as they're reviewing our submission. So I would just say we remain hopeful that Surgimen will ultimately receive the approval for the specific indication for use of post-mastectomy breast reconstruction, but don't have any real updates. I would expect probably late this year we'll give you a better indication of where we are and the timing, but nothing really new to report on that front.
spk11: And I would just say that, you know, if you look back through our prepared remarks, we did comment that some of the strength in tissue technology on the wound reconstruction side was Surgimen's, So even without the indication, we do have some very nice growth in Surgimen. As the properties of that product really lend themselves to revascularization and post-mastectomy breast reconstruction. What the indication does allow us is to essentially train and to promote for that specific indication. But without it, we still have a general indication and we still see some nice growth in Surgimen.
spk14: Yeah, and just as a reminder, we do have a specific indication for rest outside the U.S. and Europe, and so we do have that ability to market and so forth, but the biggest opportunity still resides in the U.S.
spk02: Thank you.
spk09: We will now take our next question from Greg Bidju from Bank of America. Please go ahead.
spk01: Good morning, everyone. Thanks for taking the questions. Maybe just to follow up on Surgimen for breast and on your comments, Kerry and Glenn, maybe just understand the underlying demand and, you know, your comments are interesting and I did want to see if you are seeing a greater use in breast even though you don't have the label in the U.S. So, basically are docs using it off-label more than they were, say, last year?
spk14: Yeah, again, Surgimen gets used for plastic and reconstructive procedures along with hernia and have all procedures. And, you know, we don't specifically sell into the breast area today because we're not allowed to because we don't have the indication. So we don't necessarily have a good way to track what's being used for breasts versus other areas where Surgimen gets used. But, um, We're clearly seeing an overall uptake on our Surgimen product, both in the U.S. and outside the U.S.
spk11: Yeah, and to follow up on Glenn's point, in both of those areas, in plastics and reconstruction, as well as the hernia side, we've seen very nice growth in both of those areas.
spk01: Got it. Okay. And then you guys, I don't think we talk about pricing that much today. with you guys and haven't over the last several years. But I did want to ask the question, given some of the supply chain inflationary pressures, what have you been able to get on price and have you been able to get price on your products? And if not, do you think that's an option for you if the supply chain pressures don't abate later this year or even the following year?
spk11: Yeah, Greg, I would say that the price capture has always been, certainly it's top of mind as we think about 2022, but we've always had the ability to capture some amount of price. So if we look back at our history, we've always had an opportunity to capture some level of price, and I look at it a number of different ways. You have your annual price increases. You have an opportunity to look at discount rates. You have an opportunity to, when you get new customers, to think about pricing with new customers different than maybe older customers. You also have the opportunity with new product introductions to increase prices. So think about Serilink going into the market. So there's always a number of opportunities that we can think about price capture. You know, a lot of the work that we thought about for 2022 began in the fall. thinking about. We knew some of these headwinds were coming, and so there was a very active dialogue with our commercial teams about price capture. And I think I've commented this before, that there's a fair amount of our U.S. revenue that falls under enterprise contracts, and those typically are two to three years in duration. And sometimes you don't have an annual bite at the apple, per se, on those, because they can be a little bit longer if But obviously knowing when those contracts expire gives you an opportunity to renegotiate. But also most of those contracts have volume commitments in them. So even if you are not able to reopen the contract, you can audit for volume and understand are they living up to the volume commitments, which is another opportunity to reengage in a discussion process. with our customers. So all of those things are there. You know, where we sit, as you think about even on the CSS side, where we sit in the total operating feeder bill, the cost of our products relative to the overall cost of a neurosurgical procedure, it's not the highest cost. So, again, there are opportunities to capture price, and I think with our innovations that we've done in our product portfolio, it does give us that opportunity on an annual basis.
spk10: Yeah. But maybe, Greg, to make it clear, we did start the year with a number of price increases where we could, and we're working now to make sure we capture that price. At the same time, we keep a close eye on the different inflationary pressures, how we compensate some of that with operational measures, or what additional price levers that we can use to pass some of that through. So For the remainder of the year, for Carrie and myself and Glenn, this is one of our top priorities to stay very, very close to our gross margin and the different up and down pressures.
spk17: Great. Thank you for taking the questions.
spk09: We will now take our next question from Dave Turkley from JMP Securities. Please go ahead.
spk12: Good morning. Good morning. Maybe one for Yen. You know, you mentioned the rep hiring on the ASO side. That seemed like such a complimentary deal, such a plug-and-play sort of bag. I guess I'm just curious, you know, is there something additional on the training side that they need for those products, or why would additional reps sort of be the solution to driving that, given the portfolio you already have?
spk14: Hey, Dave, it's Glenn. I'll give you some color around this. So we actually bought the business – we had to go through some compliance-related matters and actually reduce the workforce. And we did that and probably went too deep on some of the cuts as it relates to the sales reps. What we came to learn during the process post the acquisition was, in many cases, these reps are calling on more than just complex wounds. They were calling on other parts of the hospital. And so we are now adding back many other reps 15 in the first quarter, probably another 15 or so in the second quarter to get better account coverage now and also cover complex wounds and areas outside of complex wounds, which we don't have adequate coverage today. So that's kind of the first thing. The second thing is we're really going hard after some of the bigger accounts now. And then lastly is we've done some things to change our sales compensation plans to drive more positive behavior and selling in the ASEL portfolio. So We feel really good about the momentum in the business right now. Like we've said earlier, the revenues have been pretty consistent the last couple of quarters. I'm expecting in the second half of the year we're going to see an uptick in revenues and growth. And we feel quite confident that that's going to happen.
spk11: And I think that's more of a timing relative to the fact that you're adding a few more heads. You've got to get them productive, right? You've got to get them trained. They're not dedicated to just ASAL, these incremental headcounts. These are headcount that are being added to the entire wound reconstruction sales channel. So they will be just a little bit of time to get them up and productive and selling. And that's why we've talked about a second half momentum expectation.
spk10: It takes about three to six months between hiring a person and getting full productivity out of that person. And then you may say it's only 30 headcounts, but I would say If I look back over the past six months in the mobility in the workforce, I mean, that is not an easy job to bring 30 great sales talents on board. Now, we have good momentum. I mean, week by week, we're bringing them in and getting them productive. And we feel by the second half of the year, we should see the full productivity of that added capacity.
spk12: Good detail. I guess as a quick follow-up, an easy one, your authorization right now for buybacks is $325 million. Is that correct?
spk11: No. So if you go to the press release on that one, we had – so the original authorization was $225 million from the board, and we used $125 million of that up. So we had a balance of $100 left. So essentially we've canceled the remaining $100 and kind of re-upped to the historical level of $225 million. just kind of reset that authorization level back at 225 just to give us some additional flexibility and optionality there for share buyback. Nothing that we've announced further, though.
spk12: I appreciate the help on the simple math that I got wrong. Thank you for that. Have a good one.
spk09: We will now take our next question from Rich Newitter from Trust. Please go ahead.
spk07: Hi, guys. Thanks for taking the questions. And congrats on seeing some improvement in the quarter here. Nice to see. Maybe just to start, I was jumping around calls, but I think an earlier question was on the M&A front. Jen, just wondering, you know, I appreciate you're doing, you know, more strategic deep dives on the various units. You know, you've been there a relatively short while. But I'm curious, you know, any – any sense of when you think all of that work will start to come to a head or any timing on when you think you'll be a little bit more aggressive and focused on filling holes or identifying where you want to deploy capital?
spk10: We plan by the end of the summer to be fully ready with our updated long-range plan, including clear direction for strategic acquisitions. In the meanwhile, when it comes to tuck-ins, acquisitions that can fully leverage our strong sales force, that is of a different nature, so we're not holding back to that type of opportunities.
spk07: Okay. That's helpful. Thanks. So not too far from now. And then On ASEL, I think you said to expect improvement in the second half. I appreciate you have some rep ads that you're waiting for. I'm curious, what, if any, contribution should we expect from increasing presence in the office setting? How does that factor into the strategy there? I think you're more indexed to inpatients. Maybe just level set us on kind of what the mix is in that business and kind of how you see, you know, a potential, you know, site of care mix evolving over time there. And if the rep strategy plays into that at all. Thanks.
spk14: Yeah, no, thanks for the question. Clearly the ASL business and our wound reconstruction business in general is all on the acute or hospital side. So very little in the outpatient side in the physician offices.
spk07: is there opportunity to expand or to move in that direction? I guess is the question.
spk14: Sure. I think it does create an opportunity for us, but right now our focus is really on the acute and hospital side. And that'll be our focus for sure, at least for the next 12 months.
spk07: Okay. That's fair. And maybe if I can, just one last one. You mentioned, I guess, supply issues. Can you be a little more specific on how that's hitting? Is that an issue with fulfilling demand, or is it just more you're able to fulfill the demand, you just have to go to the spot purchasing, and that just comes at a higher price?
spk14: You know, I think in terms of supply, we are doing a good job of meeting demand. We haven't actually reduced the overall backorder levels, but the good news is we're seeing a pickup in procedures, we're seeing a recovery, and we're able to keep up with that increased demand. I think as we move forward, will not only keep up with the demand and the higher procedure rates, but will also start to eat into that backwater and backlog. So that should come down modestly over the next several quarters.
spk10: When I look at our supply chain, I do not see us have structural shortages like you hear about in the electronics space. But what we do see is just ripples where delivery times are not met because suppliers have issues with their supply. But it's more ripples in the supply chain, which I expect will continue for the remainder of the year as the world tries to come to somewhat of a more steady state.
spk17: Thank you.
spk09: We will now take our next question from Matt Masek from CreditSys. Please go ahead.
spk03: Hey, thanks so much for taking the question. We're a little late in the call here, so maybe just one on a topic that we haven't talked about in a while, I don't think, is sort of your progress through this sort of European med device regulation, MDR regulation. environment that you've been investing in. You know, we see the charges come through. I know we talked about it kind of at the outset, consolidating some of the SKUs in your portfolio, investing behind some of the products there and phasing other products out. Can you maybe just touch on where you are in that process and maybe talk a little bit about some of the benefits you're seeing or if any of sort of consolidation around key products where you've made the investment and maybe other smaller players have just opted to get out. Thanks.
spk14: Yeah, Matt, it's Glenn. I'll take a shot at this one. So I think first and foremost, you know, we've done a lot of work over the last couple of years around EUMDR. We got an early start. There's still a lot to go. but we're compliant with the Class 1 products. That was May of last year. We're continuing to work to get compliant on Class 2 and Class 3 products. And while the date is still a ways out there being May of 2024, there's a lot of work that has to happen this year so that we can do the submissions to the notified body, which we require at least 12 months for many of our products. For animal-based products, it's 24 months. That means that we have to submit this year for those types of products. A lot of the work effort and a lot of the costs that you see coming through are for efforts that are currently ongoing and will take place in 2022. But we think we're on track to meeting those deadlines. There's quite a bit of activity happening as we speak. And we've done a lot of the work around the portfolio rationalization prior to this year. So that was all done. The files that we're remediating are files and products that we're going to sell. going forward, and we think if we do this right, it actually could be a competitive advantage where many other products may be pulled from the market. So, you know, more to come, but this is obviously an important year when you think about EUMDR and all the work that has to take place.
spk03: Great. Thanks, Glenn, and nice quarter.
spk09: Thank you. We can now take our next question from Frank Pinnell from Jefferies. Please go ahead.
spk16: Hey, guys. Congrats on the next quarter. Just picking up on the M&A questions, I think, Jan, last quarter you commented on the coast sort of filling out adjacencies and focusing on digital. I'm just curious if you've identified a particular segment to focus on digital right out of the gate, number one, and then have a follow-up after that.
spk10: There's... Let's say there's a few opportunity areas that are matching where we play, whether it's in our occult business or in our tissue technology setting. Both are linked into enabling the care pathway where today we are part of. And then in our occult business, whether it's our Cellulink or our Aurora platform, we are de facto into data and analytics and augmented visualization. So those are other areas where inorganically, but possibly also organically, we have opportunities to further broaden our value added with digital.
spk16: Great. Thanks, Jan. And just a final one here. Just hoping you can give some feedback on... on the Neuro 3D, NeuroGen 3D launch and maybe Aurora. What are you sort of seeing in limited launches there and how should we think about timing and what you expect to see ahead of the full-scale launch?
spk10: Yeah, I'll let Glenn give some color there.
spk14: Yeah, sure. So Neuro 3D was launched at the end of the first quarter. So we're starting to see the pickup of momentum here into Q2. Very excited about it. It opens up now the mid-gap nerve repair market for us, which previously we were only addressing the short-gap nerve repair market. So we've got a team in place. We've got a group of specialists that are selling this product along with our other nerve products. And so this will be a nice growth driver for us. I'd say not so much this year because it's going to be a partial year launch, but certainly in 2023. So more to come on that. We'll give regular updates on how we're doing. with the nerve launch. On Aurora, continue to get really good feedback from our KOLs. And again, this is a platform technology that's going to be used for minimally invasive surgery and intracerebral hemorrhage. And we see big opportunities in both areas, both in the U.S. and down the road outside the U.S., but have some very good momentum in both of these spaces. And the revenues, you know, in terms of what's going to happen in And our actual results will really come from the MIS side of it, you know, in the near term. And then over time, ICH will hopefully have the clinical evaluation support that we need and demonstrate the differentiation where we can actually drive significant revenues. But that's still a few years down the road.
spk11: Yeah, and I would just say it's not an issue of reimbursement. The reimbursement is there. It is more of just converting surgeons to do their approach a bit differently. So instead of an open craniotomy to use this tool to do a minimally invasive approach, and for the ICH market, it's really changing the standard of care where deep bleeds in the brain in the past there hasn't really been any surgical intervention It's mainly medical management, and so this is a really exciting area where we can change the standard of care for ICH. So it is really about this limited clinical launch, getting access and getting our product in the hands of KOLs here that can influence the adoption of this technology.
spk17: Okay.
spk09: We will now take our next question from Jason Bedford from Raymond James. Please go ahead.
spk13: Hi, good morning. I jumped on a little late, so I apologize if these questions are redundant, but did you quantify the level of SaraLink revenue in the quarter?
spk11: No, Jason, we didn't, but I would say that it was a very nice contributor to our growth. I think last year we had about $9 million worth of capital sales in the second half of the year. And so we haven't disclosed their length for Q1, but it certainly, as I think about 2022 to 2021, obviously you'll have the full year benefit of it. And it was a nice growth contributor in Q1 for us. And remember, this is a multi-year growth opportunity for us, and it has a recurring revenue stream. So as you seed the market with the capital unit, which is more like a small to mid-sized capital purchase. I wouldn't consider it large capital. You also have the microsensors, which is a nice recurring revenue stream for us. So as the capital sale goes, you'll start to see the buildup of the recurring revenue, and that's, as I think about, the continued year-over-year opportunity for Ceralink. That's, as I think about it, the combination of capital and recurring revenue.
spk14: And, Jason, keep in mind, we're still launching Ceralink in new markets, outside the U.S. in 2022 and beyond. So this year we'll launch in some of the indirect markets. We're launching in Japan by 2025. We're expecting to launch in China. So even though we've launched the product, when we say launched it, we've launched it in major markets like the U.S., Europe, Canada, Australia. There's other markets that are going to be new in 2022 and beyond.
spk13: Right. Okay. And just the second one here, low single-digit growth in durable access. Is this kind of the level of growth that we should expect for this segment, or are there other dynamics going on in the market? Thanks.
spk11: I think it's what we expected. I mean, overall, CSS, we've talked about 3% to 5% growth. Instruments is going to be on the lower side of that spectrum, and the rest of the neurosurgical will be a little bit higher. But I would say nothing unusual here. I think, again, it was a very nice quarter, all things considered in the CSS group.
spk13: Okay, thanks.
spk09: We're going to take our next question from Matt O'Brien from Piper Sandler. Please go ahead.
spk06: Hi, good morning. This is Drew from Ed, and thanks for taking the questions. Sorry to ask the 100 supply chain question here, but, Kerry, your comment that some pressures may, from a margin perspective, may get a little worse throughout the year, is that related to anything in particular? Is that freight, raw materials, staffing, anything like that? And then probably just related to the backlog, are you able to quantify the revenue impact in the quarter due to issues sourcing anything up or down the supply chain? Thank you.
spk11: Yeah, I'll have Glenn talk about the backlog. But on the specific comments on gross margin headwinds, I'd say it's more of a generic comment, Drew. There's nothing in particular other than what I'd say is continued supply chain challenges, continued material pressures around energy input costs as well as just overall freight costs and just other material pressures. So I don't think these are subsiding. I think they are still prevalent, and the question will be is will they get any worse than they have been. I think we've done a very nice job of keeping them at bay and working at actions to offset them very nicely here in Q1, and that's our intent for the balance of the year. But generally, I would say we hear more about these than less about them, and so it's more of a general comment rather than anything in specific.
spk14: And then in terms of backorder quantification, I think the way we look at backorders, in a normal year, we'd have about $4 million to $5 million of backorders, and right now we're around $15 million. So if we were down to a normal level, we'd have $10 million of incremental revenue is the way to think about it. But again, relative to year-end, we're pretty consistent with that backorder number. We were around $15 million at the end of the year. We're $15 million now. I think the good news is as we start to eat into that backorders situation later this year, obviously that's incremental revenue for us. But again, that's all built into the guidance that Carrie provided.
spk17: Thank you.
spk09: This now concludes the Integra Life Sciences first quarter 2022 earnings call. Thank you for joining.
Disclaimer