Integra LifeSciences Holdings Corporation

Good day, and thank you for standing by. Welcome to the Integra Life Sciences third quarter 2023 financial results conference call. At this time, our participants are in listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone, and you will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to introduce your host for today's call, Chris Ward, Senior Director of Investor Relations. Please go ahead.

Thank you, Justin. Good morning, and thank you for joining the Integral Life Sciences third quarter 2023 earnings conference call. Joining me on the call are Jan DeWitt, President and Chief Executive Officer, and Leah Knight, Chief Financial Officer. This morning, we issued a press release announcing our third quarter 2023 financial results. The release and corresponding earnings presentation, which we will reference during the call, are available in IntegraLife.com under Investor Events and Presentations in a file named Third Quarter 2023 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 reference reported and organic revenue growth, and organic revenue growth excluding Boston. Organic revenue growth excludes the effects of foreign currency, acquisitions, divestitures, as well as discontinued products. Organic revenue growth excluding Boston also excludes the revenues from products manufactured in our Boston facility in both periods. Management believes that excluding revenues from all products manufactured at the processing plant provides useful information when evaluating the company's organic growth because of the unusual nature of the manufacturing stoppage and voluntary global recall. Unless otherwise stated, all disaggregated and franchise-level revenue growth rates are based on organic performance. And lastly, in our comments today, we 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 today with the SEC. And with that, I will now turn the call over to Jan.

Thank you, Chris, and good morning, everyone. I want to begin our remarks today with an update on our progress on the quality system remediation at our Boston manufacturing facility and our return-to-market plans for surgical informatics and our private labor code. We recognize this remains top of mind for our investors and analysts, as it is for me and our leadership team. So before going into the broader business updates, let's turn to slide four. As a reminder, during our last call, we told you we expected to resume manufacturing by the end of the fourth quarter this year. We also highlighted that a final external audit of the updated quality system would be conducted in the first quarter 2024, with results submitted to the FDA by the end of March, 2024. This then paves the way for the resumption of commercial distribution in the mid to late second quarter of 2024. For the past four months, we have worked diligently on the remediation of our quality system in Boston, consistent with the holistic plan we built in alignment with FDA expectations. We've bolstered our Boston operations leadership, quality expertise, project management capabilities and capacity with internal resources. And we further engaged external subject matter experts as well. We recently completed several interim external reviews that confirmed the adequacy of the changes we are making. So I'm pleased to report that as a result of all this progress, we remain on schedule with the restart timelines we communicated last quarter. I also want to provide insight into a couple of critical milestones along the way. We have plans for an external review shortly after we restart the factory. This review will be in addition to and in preparation for the independent audit we intend to submit to the FDA before the end of March. These activities will then clear the way for us to build sufficient inventory ahead of our relaunch into the market. In the meantime, we have also been working closely with our customers to manage through the recall and have now substantially assessed and reconciled our customers' inventory. Our tissue technology sales team is also working closely with our customers to facilitate product substitutions in about 10% to 15% of cases, on track with our expectations. And finally, our manufacturing and clinical progress keeps us in line for PMA approval for surgements in the first half of 2025. The right side of the slide shows the updated financial impact. Financial results for the third quarter bore the effect of $7 million of returns, which Leah will discuss in more detail, in addition to the lost sales for the third quarter we previously communicated. The additional returns impact, albeit isolated to the third quarter only, has impacted our revenues by $7 million, adjusted gross margin by 60 basis points, and adjusted earnings per share by seven cents. In summary, we're making significant headway toward completing the necessary remediation requirements in Boston to bring these critical technologies back to the market for our customers and their patients. And we are on track with our communicated timelines. With that, let's move to slide five for some overall third quarter business highlights. And starting on the right side of this page, Our third quarter revenues were $382.4 million and decreased by 0.4% on an organic basis. These results reflect the Boston impact, including the $7 million return reserve increase, which offset otherwise strong organic growth performance. Our top-line performance was below our guidance for the quarter, and I realize this will be frustrating for our investors, but we are making things right with our customers and we're taking the necessary steps to get through this period as quickly as possible to position our business for long-term sustainable growth again. Our end markets for both CSS and tissue technologies remain strong and continue to grow in line with the expectations we outlined during our May investor day. In the third quarter, we saw strong demand for our unique technologies across the portfolio. Excluding the Boston impact, we delivered organic growth of 7.1% at the high end of our LRP range. In our CSS business, we saw organic growth of 7.4% above our LRP range for this segment. In our tissue technologies business, we delivered organic growth of 6.7%, excluding the Boston impact. And our international growth was strong once again at nearly 12%. Now turning to our bottom line. Our third quarter adjusted earnings per share came in at 76 cents within our July guidance range. This result included the approximate 7 cent headwind from the increase in the Boston recall return provision. As we look beyond our third quarter revenue results and back to the left side of the page, we continue to deliver several proof points along our path to the growth commitments we laid out during our investor day. First, on innovating for outcomes, we're excited about return to market of the Cellulink monitors for our customers and their patients. We relaunched in our first international markets and will be broadening our reentry in the fourth quarter. We also filed the updated 510K in the U.S. in mid-September with an expected launch for the product in the U.S. in the first quarter, early in the first quarter of 2024. addition to settling we also submitted 510k for the next generation aurora surgescope which brings enhanced usability to the eight millimeter surgescope based on customer learnings from our initial limited releases second we advanced our international growth strategy with further geographic expansions extensions of our kusa platform and registrations of Duragen, Duracell, Mayfield, and our dual lighting system in EMEA and Latin America, as well as the launch of Duragen Plus in China. Though each product alone won't be material to our overall revenue growth, collectively, they showcase our strategy to bring our existing technologies to international markets and leverage our commercial footprint. We also made a significant step forward with our In China for China strategy by starting to build out of a leased manufacturing facility near Shanghai. And then third, on inorganic opportunities and broadening our impacts on care pathways, we're delivering on the successful integration of the SIA business with greater than 100% revenue growth year-to-date and advancement of our clinical program for a second PMA approval in the high-growth breast reconstruction market. We have also expanded our UBM platform with a 510 clearance for MicroBatrix Flex, bringing the first organic NPI to the ASEL UBM portfolio.