Integra LifeSciences Holdings Corporation

Thank you for standing by, and welcome to Integra Life Sciences' fourth quarter and full year 2022 financial results call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. I would now like to hand the call over to Chris Ward, Senior Director, Investor Relations. Please go ahead.

Thank you, Lateef. Good morning, and thank you for joining the Integral Life Sciences fourth quarter and full year 2022 earnings conference call. Joining me on the call this morning are Jan DeWitt, President and Chief Executive Officer, Jeff Mosbrook, Chief Accounting Officer, and Matthew Alsemeyer, Vice President, Corporate FP&A, Investor Relations, and Treasurer. Earlier today, we issued a press release announcing our fourth quarter 2022 and full year 2022 financial results. The release and corresponding earnings presentation, which we will feature during the call, are available at integralife.com under Investors, Events, and Presentations in a file named Fourth 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 reports filed with the SEC and in the release. Also in our prepared remarks, we will refer to both reported and organic revenue growth. Organic revenue growth excludes the effects of foreign currency, acquisitions, 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 8K filed with the SEC. And with that, I will now turn the call over to Jan.

Thank you, Chris, and good morning to all of you joining us today. We'll take you through our accomplishments and financial results for 2022, as well as our plans and financial guidance for 2023. Please turn to slide four. 2022 was a year of many challenges for all of us, especially from the macro environment. I'm proud of our colleagues for having demonstrated themselves to be responsible stewards of our business in a challenging economic and supply environment. remained focused on doing right by our customers and patients while delivering on our financial commitments to our shareholders. We met our full-year organic growth targets, exceeded our original adjusted EPS guidance, advanced our strategic initiatives, and bolstered key capabilities. So let me start by highlighting several of these accomplishments in 2022, including key new product introductions, commercial optimization, and strategic M&A, that not only expanded our portfolio but also strengthened our capabilities to catalyze for growth. In our Cogman specialty surgical division, we added important line extensions to our CUSA portfolio with the recent launch laparoscopic tip and with clearance of our bone tip in late Q4. Although the direct contribution to our revenues in 2003 from these projects will be modest, They illustrate the continued differentiation of our KUSA product line with new functionalities that enhance the utility of this technology platform. We also launched the Aurora Evacuator Plus Coagulation Tip in the U.S. as we continue to partner with surgeons to address their needs and expand the Aurora platform. Within our tissue technologies division, we launched NeuroGen3D, a unique mid-gap nerve repair product. We also successfully completed the integration of the ACE cell portfolio through the expansion of our wound reconstruction sales team. As planned a year ago, we returned the A-cell portfolio to growth and grew double digits in the second half of 2022. Now that Micromatrix, Sitel, and Gentrix are fully integrated into our wound care business, we are well positioned for strong sales growth and to deliver on our long-term expectations for that business. We've made substantial progress on our PMA for the use of surgiment in implant-based breast reconstruction. And we remain on track with the approval timeline we discussed during the last earnings call and at the recent JP Morgan Healthcare Conference. In December, we acquired Strategic Innovation Associates, or SIA, makers of Durasorb, an innovative resorbable synthetic mesh. With Durasorb, we strengthened our strategy for the high-growth breast reconstruction market. Now with Durasorb and Surgiment, we have a path to securing the first and second PMA products in the market. And by offering two distinct product solutions to plastic and reconstructive surgeons, Integra can build a leading position by addressing various clinical, contracting, and economic needs across different sites of care. CL was the first deal that came from our new M&A game board, which we completed in connection with our in-depth reviews of our divisional product market strategies. With our game board, we have laid out clear roadmaps for where and how M-Enable contributes to our growth strategy. Finally, in line with our focus on differentiated regenerative technologies, we divested our non-core traditional wound care business, or TWC, in the third quarter of last year. In addition to our performing commercial priorities, we continued to build out capabilities in our operations and organizations. We closed a high-cost manufacturing facility in France and outsourced select back-office activities, which enabled us to increase profitability and redeploy resources to our strategic imperatives. We strengthened our organization with key executive leadership additions, including the appointments of Mark Jesser, company's first chief digital officer, as well as Harvinder Singh, who is heading up our international business and is the first executive VP located outside the U.S., We also added talent more broadly, particularly within our strategic marketing, manufacturing, and quality organizations, with the ambition to strengthen our innovation capabilities and operational efficiency. We continue to invest in talent development across the organization, focused on further stepping up engagement and inclusion to maximize the potential of our organizations. Within our culture, we have embraced sustainability as a guiding principle in how we produce and deliver life-saving technologies to surgeons and patients while providing financial returns to our shareholders. We formalized our sustainability roadmap last year when we issued our inaugural ESG report. Our commitment to our culture was once again called out by several external organizations, recognizing Integra for being a great place to work. Clearly, we accomplished a lot for the year and believe with positions as well for 2023 and beyond. Let's turn now to slide six with the highlights of our 2022 financial performance. Despite the challenging environment, we delivered solid results for the year. And as I stated before, I'm proud of our colleagues for skillfully navigating through these hurdles in 2022. Our full year revenues were $1.56 billion approximately 1% growth on a reported basis, inclusive of the TWC divestiture, and a $38 million or 250 basis points unfavorable impact from foreign exchange compared to last year. We delivered 4.2% organic growth for the year, excluding sterling organic growth across the remainder of our business was approximately 4.7%, demonstrating the strength of our diverse portfolio. Throughout the year, we saw consistent demand recovery in our markets, and procedures ended the year at near pre-COVID levels. This provides a solid foundation for 2023 as we further mitigate supply challenges and prepare for the relaunch of settling by the end of the second quarter. We delivered, above our February guidance range, full-year adjusted earnings per share of $3.36, representing growth of 5.7%. We overcame both higher-than-expected FX headwinds as well as the second-half selling recall impacts. We increased our EBITDA margin by 40 basis points while continuing to invest in both our operations and key strategic growth priorities. We also delivered solid cash flows for the year, with $264 million in operating cash flow and 79% free cash flow conversions. Please turn to slide seven now for additional insights into our fourth quarter revenue performance. Fourth quarter, total revenues were $398 million, representing a decrease of 1.8% on a reported basis, inclusive of the $11 million unfavorable impact from FX and the impact of the TWC divestiture. On an organic basis, we delivered 2.9% growth compared to the prior year. Overall, we saw solid demand recovery across our various segments and key product lines, including double-digit growth from ASEL. However, the growth across our business in the quarter was tempered by supply challenges, a sterling recall, and normalization of private label orders. If you turn to slide 8, we'll take a deeper dive into our CSS revenue highlights for the fourth quarter. Reported fourth quarter revenues in CSS were $265, 1.8% on an organic basis from the prior year. Excluding satellite, organic growth was 3.5% across the remaining parts of the CSS portfolio, led by CSS management and advanced energy product lines. Global neurosurgery sales were up 1.8%. Within that, CSS management grew low in double digits, driven by growth in our programmable valves. Advanced energy grew low single digits, driven by CUSA capital and small capital sales. Dural access and repair was down low single digits as a result of supply challenges, including packaging material availability. And neuromonitoring declined mid-single digits due to the satellite. Sales and instruments grew low single digits in line with our long-term growth expectations for this franchise. And international sales on CSS increased low single-digit with mid-single-digit growth coming from Japan, China, and our indirect markets. Moving to our tissue technology segment on slide nine. Reports of Q4 sales in tissue tech were $133 million, an increase of 5% on an organic basis from the prior year. Wound reconstruction grew 8.2% on an organic basis compared to 2021. It saw its performance across the portfolio, led by Integra Skin, Primatrix, Micromatrix, and Satel. We're pleased with the accelerated momentum of ASA, delivering double-digit growth in the quarter and for the second half of the year, as we finalized the integration of ASA and benefited from the increased capacity and productivity of the combined sales team. Sales in private label were down 4% for the quarter compared to 2021. You may recall that we saw double-digit growth in private label through the first half of the year because our partners increased their safety stocks to support their supply chains. We have since seen these inventory levels begin to normalize, resulting in lower sales versus the prior year. Turning to slide 10. I'll cover the highlights of the P&L for the fourth quarter and the full year. Adjusted gross margin in Q4 was 66.3%, down 50 basis points compared to 2021. More than expected as our supply chain challenges impacted some of our higher gross margin products. And we also saw impacts from the sovereign recall and inflation. Our Q4 adjusted EBITDA margin was 27.6% compared to 26% in the prior year, significant improvement of 160 basis points. We carefully managed our operating expenses by restructuring and redeploying overhead costs to investments in our key strategic growth drivers. Our disciplined spending management allowed us to improve our full-year adjusted EBITDA margin by 40 basis points. Adjusted earnings per share for the fourth quarter were 94 cents, up 10 cents versus 2021. Our full-year adjusted EPS grew by 5.7%. Careful spending allowed us to offset full-year effects as well as the several recall headwinds and also enabled us to deliver full-year EPS above the high end of our original guidance. If you turn to slide 11 for a brief update on our balance sheet and cash items. Operating cash flow in the quarter was $85 million and free cash flow $71 million with 90% free cash flow conversion. On a full year basis, operating cash flow was $264 million and free cash flow was $222 million. As of December 31st, our net debt was approximately and total leverage ratio was 2.2 times below our target range of 2.5 to 3 times. The company had total liquidity of $1.76 billion, including $457 million in cash and the remainder available under our revolving credit facility. With this strong cash flow, we have been able to pay down debt and return additional value to shareholders as we executed a 125 million share repurchase at the beginning of 2022 and commenced a $150 million share repurchase in 2023. With 2022 behind us, let us now move to 2023 and turn to slide 11. What will drive Integra in 2023 is a further acceleration of growth, strengthened margin accretion, and stepped-up investment in strategic initiatives to support future growth. The revenue side, as I mentioned earlier, we exited the year with procedures near pre-COVID levels, providing us a solid foundation for growth in 2023. Our outlook reflects this procedural demand along with a gradual improvement of supply, including sourcing reliability of components and packaging. We also expect overall demand for our products to further grow, and we are excited at the prospect of relancing Federalink by the end of the second quarter. Our new products are expected to contribute to the company's growth, along with Durasorb, the offering from SIA, our most recent acquisitions. We intend to drive profitable growth in 2023 with strong gross margin improvements, driven by favorable product mix, focus on price capture, and increased efficiencies within our manufacturing sites. We'll also benefit from the full-year impacts of our TWC divestiture and the closure of our high-cost manufacturing site in France. With that profitable growth, we will reinvest in our business. by stepping up our strategic investments and strengthening our core capabilities to position ourselves well for future growth. These key growth accelerators include, first, PMA readiness for Surgiment Endurosorb, by which I mean execution of the clinical studies, delivery of the PMA submissions, and preparation of our relevant manufacturing sites to produce PMA-level products. Second, further advancements of our Aurora platform And lastly, enhanced generation of clinical evidence to support regulatory approval and strong reimbursement of our portfolio around the world. We'll also invest in the expansion of our international business and our first digital pilots. Turning to slide 13 to translate these drivers into financial expectations for 2023. For the full year, we expect revenues to be in the range of $1.602 billion to $1. $1.620 billion, representing reported growth of 2.9% to 4% and organic growth of 4% to 5.2%. Our revenue range accounts for a 40 basis points headwind from FX, which reflects the lower impact compared to 2022 as a result of the strengthening of major foreign currencies versus the US dollars over the past few months. If we look in more detail at full-year revenue, we expect to see higher growth contribution in the second half of the year compared to the first half of the year, mainly as a result of a number of 2022 timing items. First, as mentioned previously, we expect a gradual improvement in supply, which will contribute more heavily to the second half of the year. Next, we have the year-over-year impact of the sterling recall, the third quarter of 2022, and we anticipate relaunching at the end of second quarter 2023. Third, we expect private label to continue to normalize in 2023, resulting in tougher comps in the front half of the year. And lastly, we expect a larger contribution from our China business in the second half, given the end of rolling lockdowns late last year. Overall, At midpoint of guidance, we expect organic growth of approximately 3% in the first half and approximately 6% in the second half of 2023. On a reported basis, we will see the timing from the TWC divestiture create an unfavorable comp in the first eight months of 2023. Turning to our profit outlook for the year, we expect adjusted earnings per share to be in the range of $3.43. to $3.51. If you turn to slide 14 for a look at our guidance for the first quarter of 2023. For the first quarter, we expect revenues to be in the range of $370 to $376 million, representing reported growth of approximately negative 1.5 to flat, and organic growth of 2 to 3.5%. We expect the first quarter to be most impacted by the year-over-year comps I highlighted before. Turning to adjusted earnings guidance for the first quarter of 2023, we expect adjusted EPS to be in the range of $0.72 to $0.76 flat year-over-year at the midpoint of the guidance. If you turn to slide 15, I'll conclude with a brief look at our strategic pillars and a summary of our prepared new model. As we outlined earlier this year, we've rallied the business around five strategic pillars for 2023 and beyond. The first three pillars are our biggest growth levers, driving stronger innovation for outcomes, catching up on our growth potential in international, and broadening our impact across the care pathways in the therapeutic areas on which we focus. The last two pillars are key enablers, driving operations and customer excellence, and cultivating a high-performance culture. These five pillars are a great way to understand how and where we're prioritizing our investments to achieve our 2023 results and building towards our long-range plan. We look forward to going deeper into our strategy and how we will execute at our May 4th investor date. So let's move now to the last slide, slide 16, to conclude our prepared remarks. In 2022, we were able to capitalize on the recovering markets with our resilient and diverse global portfolio of products and great brands. Delivered above 4% organic growth for the full year in what was still a tough operating environment. Our execution in 2022 points towards a clear path of organic growth within the range of our long-range prime. Utilizing a broad set of operating levers, including price capture, operational efficiencies, careful restructuring, and cost management, we exceeded our profitability commitment for the year, and we delivered additional value to shareholders in the form of share repurchases, a more focused portfolio, and a strategic acquisition expected to strengthen our position in one of the most exciting growth markets in plant-based breast reconstruction. We are positioned in 2023 and beyond to accelerate our organic growth rates and improve our growth margins. For 2023, a portion of that margin improvement will be redeployed to investments in our growth catalysts, which will temper our EBITDA and EPS growth. However, these investments will further strengthen our core capabilities and operational resilience while building capability to develop and deliver lifesaving technologies and products for our customers, the fuel to enable us to meet our long-range plan targets. So that brings us to the end of the prepared remarks. I will hand it back now to Chris and the operator, and Mathieu Ossermeyer and Jeff Mosbrook are going to join me for the Q&A. Chris?