Q4 2019 Earnings Call

Today's conference is being recorded at this time I would like to turn the conference over to Mike <unk> Director of Investor Relations. Sir. Please go ahead.

Thank you Katie good morning, and thank you for joining Integra life Sciences fourth quarter and full year 2019 earnings conference call.

Joining me on the call, our Peter Arduini, President and Chief Executive Officer, Glenn Coleman, Chief Operating Officer, Kari Anderson, Chief Financial Officer, and Trevena money Senior Vice President strategy Treasury and Investor Relations.

Earlier. This morning, we shouldn't press release announcing our fourth quarter and full year 2019 financial results.

Well at least in corresponding earnings presentation, which we will reference during the call are available at Integra life Dot com under investors events and presentations in the final named fourth quarter 2019 earnings call presentation.

Before we begin I'd like to remind you that many of the statements made during this call maybe 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 FCC and in the release.

Also the discussions will include certain gap certain non-GAAP financial measures.

Reconciliations of any non-GAAP financial measures can be found in today's press release, which is an exhibit two entegris current report on form 8-K filed today with yes, you say.

I'll now turn the call over to Peter Thank you, Mike and good morning, everyone. Just turning to slide four in the earnings presentation I'd like to start by reviewing some of our 2019 highlights.

As we discussed at our recent earnings calls 29 gene was a year of significant integration work in operational investments that will position the company for accelerated organic growth.

We achieved mid single digit topline organic growth and a six consecutive year of double digit EPS growth.

Oh Ganic revenues for the year increased 4.8% in line with dark pre announcement on January 14, adjusted earnings per share increased over 13%.

Adjusted gross margin increased 90 basis points over 28 team and our adjusted EBITDA margin increased 110 basis points.

We started to benefit from the scale and leverage the Cogs in acquisition.

Margin expansion as a result faster growth in higher margin products as well as our strategy of portfolio and manufacturing optimization, which we outlined in 27th Jeep Cherokee.

I could just a blended rational approach to making strategic decisions about where we compete which enables us to take advantage of scale and create efficiencies across the portfolio.

The company remains on a path towards achieving EBITDA margins of 28% to 30% and gross margins of greater than 70% by 2022.

Turning to our Cogs in specialty surgical performance in 2019, we substantially completed all the integration activities related to the acquisition.

After two years of significant investments and integration work, we achieved organic growth of 5.6% in 2019.

This growth was well above the low single digit trajectory condiments has been office is attributable to our expanded scale, new product introductions and expansion into faster growing markets, such as China and Japan.

In 2019, we acquired too early stage technology platforms burst wasn't anti thrombus coating technology to reduce catheter obstructions and the second a platform technology for minimally invasive neurosurgery.

Technologies, our natural addition to our portfolio and create clinical opportunities to expand into new larger and faster growing markets, such as interest rebrand hemorrhage and minimally invasive neurosurgery.

Well, we'll continue to make investments in these technologies, our development and clinical progress are on track with our commercialization plans.

Looking at our orthopedics and tissue technology segment 2019 represented a year of investment for the company as we focused on expanding capacity at several of our facilities that manufacturer regenerative products used in wound care antibiotics and plastic and reconstructive procedures.

Let's start supply to increase and revenue growth to accelerate beginning in the first quarter 20 Twond.

Importantly, our manufacturing investments have positioned the company to meet the increase in demand and heightened regulatory requirements. We expect for these products in the years ahead.

[noise] and 2019, we established our we stabilized our orthopedics franchise and salt positive momentum in both our ankle and shoulder portfolios, which grew double digits. We expect global performance to improve as we benefit from the combination of new products such as the core revision.

All post based play.

And our established commercial team.

In 2019 for the total company, we introduced 10, new products, making it one of the most productive years for our product development teams I'd like to highlight our strong wind up programmable valves for hydrocephalus management.

Which demonstrates our ability developed products with advanced technologies Sol unmet clinical needs.

And the strong performance during June and Japan shows, how our new product launches are having a positive impact outside the U.S., where our international business achieved its fastest growth in four years.

With innovative marketing programs launched for many of these products and peak sales not occurring for another three to four years. These new products will be a key driver of our organic growth.

Wrapping up our 2019 performance I think there's a lot to be please what we successfully integrated the cotton business move to one common ERP platform streamlined our operations and expanded our commercial organization.

All of which should benefit us in 20, Twond and keep us on track to achieve our long term financial goals now I'd like to turn the call over to carry to discuss our fourth quarter performance in 2020 guidance, Gary HP and good morning, Let me start with our Q4 financial highlights for the total company fourth quarter total.

Revenues were $395 million representing growth of 3.1% on a reported basis.

4.6% on an organic basis.

Results were in line with our January 14 pre announcement.

Adjusted earnings per share, where 68 cents and near the high end our guidance range.

Turning to slide five I'll start with a review of our CSS segments.

Reported revenues for CSS, when $259 million in the fourth quarter, an increase of 6.3% on an organic basis.

This strong performance was broad based across our franchises and was driven by commercial execution, new product launches and expansion into faster growing international markets.

Sales in our global Neurosurgery business grew over 7% on an organic basis.

And contributing to this performance was mid single digit growth internal access and repair led by the successful second half launch Dura Jan in Japan.

Additional sales in flowing pressure monitoring increased high single digits driven by momentum in our portfolio of programmable doubts used for hydrocephalus management.

Fourth quarter sales and advanced energy increased mid single digits.

Cost of capital sales and consumables performed well.

Moving to precision tools and instruments organic revenues grew mid single digits slightly above our forecast.

International sales in CSS increased over 10% on an organic basis in the fourth quarter.

I mean by our core neurosurgery portfolio, including new product introductions strength across Europe, as well as double digit growth in China and Japan.

Turning to our segment guidance for the full year 2020, we expect reported sales CSS to be flat to up to 2%.

Organic revenues increased 3% to 5%.

The difference between reported and organic growth rate is related to our portfolio optimization strategy.

Our organic growth guidance reflects balanced growth across our franchises with continued momentum and new product launches.

Moving to our orthopedics and tissue technology or old Chichi segment on slide six.

Fourth quarter revenues were $136 million, an increase of 1.6%.

Organic basis.

Sales and one reconstruction increased low mid single digits in the fourth quarter led by our son patient and plastic and reconstructive portfolios.

Partially offset by weaker sales.

Setting.

Only reconstruction sales were negatively impacted by supply constraints, the fourth quarter sales did improve sequentially from the third quarter.

As Pete mentioned earlier, we are making investments in capacity expansion in quality improvements at two of our regenerative facility.

During the fourth quarter, we decided to extend these investments in order to increase long term capacity at these sites, which limited production.

He supply constraints were the primary reason performance there Oh Gee segment came in below guidance.

Moving to private label fourth quarter sales were down slightly but in line with our expectations.

In our orthopedics business, our U.S. sales increased low single digits.

Driven by double digit growth in our combined ankle and shoulder portfolio.

On a global basis organic sales in orthopedics were slightly down in the fourth quarter driven by weakness in a lower fixation sales in Europe.

Turning to old T. T segment guidance the investments made in our manufacturing facilities will improve supply and as a result, we expect 2020 sales growth to be in the range, 6% to 8%.

Also reported and organic basis.

Turning to slide seven I'll provide an overview of our consolidated revenue guidance.

As previously communicated we expect full year 2020 revenues to be in the range of 1.55 billion to $1.57 billion representing reported growth.

Like 3% and organic growth approximately 5%.

Difference between our reported and organic growth is primarily the year over year change in sales up divested in discontinued products approximately $30 million.

Consistent with previous practice, we will include the reconciliation between reported and organic growth calculations in our quarterly reports.

In terms of phasing of our growth for full year 2020, we expect organic growth in the first half to be slightly below 5% and then the second has to be slightly above 5%.

And for the first quarter of 2020, we are guiding for revenues of between 367 million and $372 million representing organic growth of approximately 4%.

Turning to slide eight I'll now review the rest of PNM components.

Fourth quarter GAAP gross margins improved by 40 basis points and adjusted gross margins improved by 160 basis points.

The improvement here what is primarily a result of increased sales from higher margin products.

On a full year 2020, we expect an adjusted gross margin approximately 69% representing 150 basis point increase.

Driven by continued growth of higher margin products as well as the benefits of portfolio optimization.

Our adjusted EBITDA margin.

23.2% in the fourth quarter unchanged from the prior year.

But a full year 2019, our adjusted EBITDA margin was 24.3%.

110 basis points increase over 2018.

And by higher sales and improved gross margin.

And for the full year 2020, our adjusted EBITDA margin should increase by approximately 100 basis points at the midpoint of our guidance.

Fourth quarter GAAP earnings per share were 18 cents compared to 29 cents in the fourth quarter of 2018.

Adjusted earnings per share were 16 cents compared to 65 cents and the same quarter last year.

And for the full year 2019 adjusted earnings per share increased double digits.

30.2% to $2.74.

For the full year 2020, we expect GAAP earnings per share to more than double and be in the range of $1.40 to $1.45.

Adjusted earnings per share will be in a range of $3 to $3.05.

Which represents approximately 10% growth and assumes a weighted average diluted share count of about 85.5 million.

For the first quarter, we expect adjusted earnings per share to increase approximately 5% over the prior year.

Turning to slide nine I'll walk through our cash flow performance.

For the full year operating cash flow was 230 million SER $231 million increased 16% exceeding the top end of our guidance range.

Cash flow was $162 million.

Or 2020, we are projecting operating cash flow in the range of 240 million did $250 million and free cash flow conversion of over 70%.

Capital expenditures are forecast to declined by approximately $10 million compared to 2019 as result of lower capital investments associated with the cotton and integration.

Turning to slide 10.

I'll provide you a brief update on our capital structure following our recent financing activities.

As of December 31st 2019, we had cash cash equivalents.

Approximately $200 million net debt of about 1.2 billion and bank leverage ratio of 2.6 times.

As part of our ongoing strategy to optimize our capital structure, we acted on favorable market conditions choke fro, the flexibility of our balance sheet earlier this month.

We renegotiated the terms of our 2.2 billion dollar bank facility and extended the maturity of our credit agreement by two years to 2025 [noise].

We also issued in 575 million dollar convertible note.

And we will use approximately $100 million funny accelerated share repurchase program, we launched earlier this month.

Inclusive of these financing transactions, we estimate a pro forma yearend 2019 cash balance of $321 million net debt of $1.3 billion and the bank leverage ratio of about 3.0 times.

Based on improving cash flows and consistent with our prior messaging, we remain comfortably operating with a bank leverage ratio in the range of two and a half to three and a half time.

And with that I'll turn the call back over to me.

Thanks, Gary if you will turn to slide 11.

This slide really gives you view of the heavy lifting that we've completed in 2018 and 19 positioned us for success and 2020 yacht.

Over the last two years, we completed the largest and most complex integration in the company's history. This was accomplished with an immense amount of focus across our organization and minimal disruption.

We have emerged from the integration as a clear global leader and neurosurgery.

Same time, we expanded and realigned our orthopedics and tissue technologies segment to position the company to become a market leader and regenerative technologies.

2019, we completed a multiyear ERP conversion and now have the entire company on a single global system.

Which increases our agility and improves productivity by leveraging technologies.

We completed initiatives to optimize our manufacturing facilities, including three plant closures invested in capacity and quality improvements and several others and 2020 will be our peak year for portfolio optimization.

We also expanded our senior leadership team by bringing carry on board as CFO and how they're going to assume a newly created role of Chief operating officer.

Ability to increase focused on growth initiatives as opposed to integration activities will enable both topline and bottomline growth acceleration in 20 Twond.

Before turning to slide 12, I'll summarize, our 2020 outlook and close out our our prepared remarks.

Our long term financial goals are listed on the slide and remain intact. Our confidence in 2020 revenue acceleration is based on multiple growth drivers and she has us well realize the full benefit from recently launched products continued growth in higher margin products and expansion into faster growing international markets.

Such as China and Japan.

Oh Gee sales in our regenerative technologies franchises, including private label will accelerate early in the year boosted by the capacity investments being made in 2019.

We also expect the pace of growth in orthopedics franchise to increase over the course of 20 Twond.

Turning to profitability. The 2020 guidance to carry provided includes about a 150 basis points of gross margin expansion and 100 basis points of EBITDA margin expansion driven by improving scale and efficiencies combined these growth drivers give us confidence in achieving our topline and bottom line guidance.

For this year.

That concludes our prepared remarks, thanks for listening and operator would you please open up or lines for questions.

Sorry, if he would like to ask your question. Please signal by pressing star one on your telephone keypad.

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Again, Please press star one to ask a question well pause for just a moment to allow everyone opportunity the signal for questions.

First question will come from David Turkaly with JMP Securities.

Hi, Thanks, good morning.

Just on the the portfolio optimization I think [noise].

Yes, I think he said 30 million in 2020 I think it was 29 last year, maybe maybe 39 year before that and Peter I think you made the comment that you maybe.

And at a point now were where those slow or maybe even stop I was wondering if you could.

Give us.

Comment on that is do what do we still expect some of those.

Divestitures and discontinued ops in 21 and beyond.

Yeah, Dave I'll comment Kerry makes a point I think the points to the prepared comments were for obviously this component.

The products that we've talked about this is really the peak your sales and again to remind everyone products that we had to do best what products that we do divest or products that we actually determined we will take them out of the portfolio to achieve our long term strategy is what were what we're talking about and to the point. We believe that 2020 is really.

The peak year the spread between 19 and 20 is that $30 million. That's the difference that we think that will go down in future years for sure. The point being though is that you know there's always some level of pruning, but post the Cogs, but acquisition.

And taking a look at certain product lines that might have overlapped or we weren't going to invest in any further this happens to be a bigger component of.

The focus and portfolio optimization that it will be going forward. Jerry I don't know if you want to add any more yeah. Just said just to clarify the year over year change is $30 million between a bridge between 2019 and 2020 that comparison in 18 to 19 was about $11 million. So it's going from a year return change.

11 million to about $30 million to Peach point is that piece of that activity and it is a crucial piece.

The value enhancing initiative, it's a driver of our gross margin story for sure. So it is oh pardon or investment thesis and drive some of that gross margin that we expect seen 20 twond.

Great and then as it's quick follow up you know you talked about some of your longer term targets.

And I know one of them was to get to 45% regenerative mixed by 2022 I was wondering if you could comment on where that stands today and then you mentioned the supply constraint obviously some investments on the capacity side, but I guess any additional color on what you think that cost during the quarter and then sort of you know I guess or are there was extended.

Sure. So the two facilities larger largely done now.

Yeah, So Dave all maybe just comment other jarvik submitted Glenn you could talk about some of the supply questions look at this point side, we're probably around 40%.

Not window of our total sales come from products, which regenerate within the body.

Yeah, we were probably a little bit higher for years ago, but the ship. The addition of the carbon products move that down.

Just to remind everyone again, what we think about nerve repair we think about chronic wounds. We think about acute was big about hernia repair, we think about plastic and reconstructive Oh all of those are derivatives of our core technology platforms, which are regenerative based and so.

We think those markets are going to continue accelerate obviously a 29 he was a slower growth here as we laid out heavily associated with the supply constraints that we had but as we look forward both in acquisitions as well as organics I mean, we remain very optimistic that the regenerative platform.

Well continue to be a big growth driver going for us not only at O.G., but also within the see us outside with our durgin platform our Duraseal platform.

Some other opportunities that we have in front of it's Glenn you may want to talk a little bit more about a supply piece.

But you mentioned I would say that the two areas, where we've been supply constrained I've been in our Memphis facility in Boston, So Memphis makes him the onyx products for us.

The two big efforts, we have ongoing throughout 2019 were around.

Increasing percentto recovery efforts and expanding or hospital network and third party networks and that was a big deal in terms of getting more material into the actual facility.

And then we've also upgraded and expanded the clean rooms on that site to significantly add capacity and so those investments or essentially behind us we have some more plants late in 2020 to add a few more clean rooms, but.

We are very good position on our supply as it relates to any onyx in effect, we're building safety stock as we enter the first quarter of 2020.

So you'll see an improvement in our results and OTI has released their neonics starting here early in 2020.

We've been supply constraint for a different reason you probably remember we wouldn't do it after you what we've been doing quality remediation efforts throughout 2019.

No patient safety issues here, we are continuing to ship at that facility.

But there were changes we had to make to the actual physical.

Facility and those changes required us to actually shut down the plant, which is planned at the end of the third quarter and into the fourth quarter, but as we are going to plant shutdown, we extended that shut down for several weeks to add an additional production line, which is going to get us 50% more capacity as we enter 2020.

So not now plant up and running we have more capacity, we're gonna be building supply, but those are the two plants that are really constrained.

Ourselves and the OTA tea business throughout 2019, but starting here in 2020 goes in a group and both of those facilities.

You'll see that reflected in the ODC better performance starting here in Q1.

Thank you.

Thanks.

Thank you. Our next question will come from Ryan Zimmerman with BP I'd.

Great. Thank you really want a first started on CNS say, hey, guys CSS, so you're guiding to 4% the midpoint.

I think if I recall, you initiate cod men at about three to have to 4% last year and then raised it through the year ending around 5.6% as he said and there was 5% guidance.

Starting the third quarter two me a third quarter call. So first while a wider range here and then you know is this conservatism in your view for the CSS business I hear what you're saying paid in terms of stuff is getting better or is there something structurally that's slowing that down.

In 20 that we need to consider.

So I'll take that this is carry we finished 2019 net at 5.6% organic growth as you mentioned, so definitely a strong year for us on the result was particularly strong for international teams that just had an incredible here. We've always talked about are CSS long term growth range as between 3% to 5%.

And we expect to be in this range for 2020.

I would say that certainly narrowed the neurosurgical area is a competitive area for us we didn't see some of the competition. We thought we would have seen in 2019 with a couple of arts products. So our guidance of 3% to 5% does reflect a I'm worried about competitive landscape for us there and frankly, we're coming off the top tough comp.

Lets say, particularly strong year for us so the 3% to 5% I think on balances is in our guidance range. Our long term guidance range and that's why we'd expect a longer term we had the opportunity to move more consistently to the top end to that guidance range with the contribution to bring new acquisitions rebounded Argus, but those are not a rather.

A new contributors in 2020, and so it will take US a few years for really to see that the the impact that those two acquisitions, but for 2020, we expect to be in that 3% to 5% range.

Yeah, right. So the Kelly's point, there's no real any underlying change or structural change, but again, just think about our who's a franchise.

We're in year three heading towards a year for window, which is kind of as our peak we have a competitor in the space. We actually have outperformed in the second half of 29 team and so we're expecting solid performance, but the carries point on on a much higher base, but I think you know fundamentally there's been no.

Change your outlook on really any bar segments with CSS and we expect to have up a very solid year. This year.

Got it Okay. That's helpful. And then you know as a follow up to that.

You did raise a lot of money through a recent convertible offering and so I would just love to understand I mean.

Currently the asrs going to be in place and that will they account for about 100 million as said, but what the other portion of that available can you talk about your M&A strategy kind of.

What you see out there what the appetite what your appetite is for M&A.

Did make some comments I think in the presentation around you know you're assuming essentially minimal acquisition revenue. This year in 2020 in the guidance, but certainly you have the bandwidth now to do some so no love to just get your thoughts there. Thank you guys.

Yeah. That's right. So you know obviously with the addition to carry and when it does give myself more time to the focus on other parts of our strategy to make sure that we can reach a law the goals. We've laid out for 2022 and as you are well aware I mean, we have been a company that's between organic as well as in.

Again, it got activity, we build out our base.

You know I've been focused on your capital allocation strategy as well first what you know some of the share buyback to leverage the most value, but as our longer term component here is looking at the right tuck in acquisitions I'm you know as we've stated before I mean, the case cognizant was kind of a special situation, where you know the number two.

Hi, everybody is the number three and becomes the number one player in the marketplace, we don't necessarily see many of those coming upon us, but we have lots of opportunities for tuck in acquisitions that would be accretive.

I do over long term strategy, particularly G.

Generally within orthopedics, and if you think about CSS as a specialty surgical component that brings expertise in sealing tissues as well as cutting removal, we've got lots of opportunities out there and so now with integration behind US I think expects to see us back in the active again, but stay.

Very discipline into the return metrics that would make sense as well as to our focus on what we want to be in what we don't want today I don't think you're going to see a straight significantly off a bar or strategy and I would just add there in terms of the convert timing it was really market.

Conditions, just being very favorable. We then you know we're in a period of really prolonged global global Bull market and we're always looking for an opportune times to strengthen our balance sheet and frankly saw an opportunity to get really low cost financing ahead of what could be a more volatile year and John you know, it's it was a great structure, we don't get dilutive until the stock.

It was about 113 and it gives us some dry powder to continue to pursue it as a as Pete mentioned, our long term strategy.

Fair enough thanks for the feedback.

Thanks.

Thank you. Our next question comes from Robbie Marcus with JP Morgan.

[noise]. Thanks for taking my questions are two for me on maybe first a if I go back to the JP Morgan Conference you talked about share repurchase not being necessary to hit double digit EPS growth. The guidance range you put out today has nine to 11.

<unk> percent.

Which does include the sarin and as you know a measure of share repurchase so what's the delta between the two when do you still think that you can hit double digit EPS growth. Even if we didn't include the benefit of share repurchase.

So yeah I'll take that question certainly that the share repurchase gives us confidence in our outlook, it's a way to return value to our shareholders.

The way I also characterize it as it gives us flexibility and optionality in our planning for key investments to balance the year.

Our guidance does reflect the benefit of the 100 million share buyback, but it also incorporates a 100 basis points up EBITDA margin expansion as well and we can get to double digits without the share repurchase but when it does again it gets us degrees of freedom I know, how we make decisions on key investments and you know last year, we made.

On the two acquisitions on ARPU as can be found it does expand our addressable market by over a billion dollars and we expect these product lines will help push us consistently to the high end of that growth for CSN, but in the short term, they're not revenue contributors and there's still going to rich fire R&D investments so the buying.

That gives us the flexibility to make the right investment decisions here and frankly, it's still early in the year. Our hope is that we could actually improve on this outlook as the year unfolds, but given the early starts a year, we were taking a more cautious guidance approach.

Okay understood.

Maybe second more a philosophical question you know when I look at all of your Med Tech peers are almost the entirety of med Tech peers.

No one else backs out discontinued products, you know, especially if we look at Cod man that was closed in fourth quarter 2017, and you're still backing out Ah discontinued products and 2020 from it. So as we think about just how you think about organic growth in the business you know ex that.

My math, you're closer to 3% to 3.5% organic when I do apples to apples to your peers. How do you think about the long term you know organic growth rate that med tech industry puts up in around 5% and do you think you can exceed it without backing out discontinued products. Thanks.

So the first part is the growth rate Robbie without a shadow of doubt we believe that we can be a 5% to 7% grower without significant divestitures or or discontinued products, but again, everybody backs out when you actually sell off a product right. When you actually divest it we're very serious about.

Well, we told our long term holders Baskin 17 that we would drive to be 70% gross margins in 28% to 30% EBITDA holding on to products that would create a significant amount of lumpiness that a year and make it challenging to kind of understand how the operating model is working we didn't think was the right way to do we take.

It out we report that very clearly you can see what the reported number is you can see organic you wanted to add some of that backend to factor. It. Obviously you can do that but we think it's a it's the right thing to do is to move out of those and obviously keep a investors informed about what that curve looks like.

You know our point is for this year. This is kind of the peak of it or and then we move beyond that but I still stay about I think it's the right thing to do it again. The reason being is is that this is the way we actually represent what the true or ability of the company is in our profitability and he's really our strategic exits.

They're not just you know the wind down as products, we're making great strategic decisions on the portfolio all over again and what we're not in if we could I found a buyer for these assets we would have.

And treat it looked like invested that we you know in some cases. These are commodity products you can't find a natural buyer, but doesn't change that our decision that we need to exit the when you do discontinue a product. It takes time it doesn't get out of your revenue for awhile because in lot of cases, you have long term customer commitments that you have to honor.

Are there so it takes some time the peak of that activity is in this year in 2020, it'll be a tale of that into 2021, but beyond that I don't think I wouldn't see well be will be through that activity.

As part of that Rob do you know as well I mean, our portfolio is one of either on the O.G. side or on the CSS side that has a component that fundamentally is all the product lines that were in we remain to be a rather you know a business that actually is affected sick.

I forget lay on how economic turns play out and getting the portfolio in a position for one the markets aren't doing as well as a really important part of I would say the cadence and focus that we put in place neurosurgery as an example between traumatic brain injury or tumor resection doesn't change a whole lot.

In a bull market or a bear market as well as chronic or or acute wounds and such and so other parts of our portfolio that again some of these older dental assets as as an example, some product lines that literally we don't see a future because technology has moved on the strategic divestiture route we did.

Felt was the right thing to do indeed, you know to this discussion here be very transparent about what we're doing and why we're doing.

I appreciate the thoughts thank you.

Thank you.

Thank you. Our next question comes from Raj Denhoy with Jefferies.

Hi, This is a Anthony parag adds up to in the revenue side and then one on on the margin. So I just.

Obviously, a a there's this growth in China double digit growth, maybe just any any comments on on Corona virus certainly from the calls through earnings season. So far most recently Medtronic there commenting on slower procedure volume. So just wondering how that plays out.

The second revenue question would be under agendas in Japan, It's out there for now the third quarter I'm just wondering how penetrated the region is in Japan, and what what the expectation is you know as we head into the back into the year. The last question on margins would just be yeah can you help us walk to the bridge at the EBITDA line just from 23.

<unk> percent.

Exiting for acute is a 30% targets. So this significant.

Room in front of the company I'm just wondering what the key drivers are there as it is it see assess upside is it isn't new products is a mix just some detail there would be great. Thanks.

So I say this is Glenn I'll take the first to encourage can answer the margin question.

In China, we had another strong fourth quarter double digit growth Oh frame that business out. So you have a better understanding about the size of the business and what we do in China.

First and foremost our top priority at the moment is ensuring the safety of 120 employees in China.

To date, none of contracted the virus nor have they are immediate family members. So that is obviously top of mind and top priority for us.

Commercial business in China today is about $50 million or 3% of our consolidated sales keep in mind almost everything in China is neurosurgery related.

That's important because most of the procedures are not elective and so we're hearing the same thing in terms of a slowdown in hospital procedures. We think it's probably less of an impact on us because our procedures are not elective, but clearly that's something that we're seeing on the ground in terms of slowing procedures. Both here in the first quarter in second quarter, but we don't think it's going to have a bit.

Going back on our business given what I just mentioned.

Oh, we also have a small manufacturing site.

Nantong, which is about 100 miles from Shanghai It supports.

Less than $25 million about traditional wound care business.

The good news around that as we shipped a bunch of product prior to the Chinese new year to support our first quarter forecast.

And to date, we've been able to get that facility up and running or back to normal operations. So we don't expect much of a disruption from our small plant and then Tom.

And then third when you look at suppliers, we do source from China, a small portion of our products we've been in contact with our suppliers on the ground.

Or up and running for all of our key products at the moment and as long as doesn't turn into a long period of time with this corona virus, we feel like we've got the situation under control.

Overly concerned around the supply chain I would add on epic for either on the Terence Chen said, our Q1 revenue guidance does factor in some conservatism around China, but nothing up a significant nature asset right now if something changes that but that you know it's more significant we wouldn't have that comprehend and beyond Q1, it's a bit more unknown. So there's nothing.

Specifically factored in for anything beyond Q1.

Yes, but I think we've got the situation well under control and it got most of our procedures are not elective.

As it relates to durgin in Japan could not be more pleased with the start of the launch of that product really into our third quarter now of the launch already seeing very good momentum and yeah. This is a product in my mind in 18 to 24 months no should be north of $10 million annual cells. So seeing a good ramp.

Exciting products, we have other.

Really nice initiatives going on in Japan, as well in terms of moving some of the remaining indirect business to a direct channel, creating a general surgical team I think that's also going to goes better growth in Japan. In addition to the new product introduction that we just much dr. Jeff.

And then on your question on the E.

He they can margin expansion 900, that's there it's really a factor at its improving gross margins. So that's where that lift is really coming from and it's driven by that favorable product mix. It's the combination of faster growth in higher margin products, which certainly that new product introductions are a big component of that and it's also.

This portfolio optimization piece, it's a critical piece of that gross margin story is getting out of discontinuing into basking products that are lower growth lower margin type products. So it's a combination if those hotels that are really driving that EBITDA margin expansion coming through the gross margin line.

Yeah. It's it carries point when you think about that over the next few years. It's more of the same so the 500 basis points improvement over that time period is it's that'll play of taking lower margin products out of portfolio all of our new product introductions up come in that replaced products have come in at equal or higher gross.

Margins.

Around the World, which is a benefit and then our structural size now we're at this point and what the common ERP system that we can actually grow or sales pretty significantly without the same ratio of employee additions that we've had to have in our past when we had many other platforms. So we're out of kind of critical window here.

Over the next two three years that helped drive.

That's helpful. And then just just a quick follow up just want to regenerate.

Just to be clear in Japan, Yeah, just in terms of sizing of the matrices cleared I mean do you have is the entire portfolio available. There now you still have other sizes that you'll bring in.

[noise] funder, Jim full point.

We have the full portfolio of sizes for Durgin is oh.

Okay.

Got it ready to go it's a an off and running in worthy only xenograft, it's actually out there on the marketplace and you know as you guys know Glenns comment we've got a a rural deep.

Set of clinical data from around the world, which is helping the Japanese team bring it into you know what industrialized market converted so I think you know we've got multiple years in front of ASM growth here in Japan.

Okay. Thanks question, yes.

Thank you. Our next question comes from Steven Lichtman with Oppenheimer <unk> company.

Thank you hi, guys <unk> due to the 2020 guidance.

It looks like you are bouncing you're dropping through some of the gross margin strength, you're seeing and reinvesting and as we think about Reinvestments you should we be thinking about that more on the R&D line or are you taking the opportunity to expand the sales force is it both you know any color there with would be great.

Yeah, Steve it's quite I think a couple of things R&D is obviously, a big component with the rebound and ARCUS acquisitions, So you're going to kinda definitely see an uptick in the R&D spend.

Relative to the commercial channels, we are adding more resource and investment I would highlight we're adding more nervous specialists.

All right anymore, so should sales reps in our own reconstruction business.

And then outside the U.S., we're gonna be adding more people in Japan to support the indirect and direct channel move I mentioned earlier, so creating a general surgical team and also more neurosurgical specialists in Japan as well given the strong momentum we have so it's a combination of both.

So R&D as well as expanding our commercial channel and I would say teavana presenter sales basis, you will see an increase of R&D year over year. I think we ended the year 29 can't about 5.1% you're going to have that move up.

Somewhere between five and a half and 6% somewhere in that and that point there on and it's it's the into the work that that can Glen mentioned at the Argus and rebound being added into the portfolio. Some R&D spend their clinical study work there that we'll be focusing on well.

Well that would be the primary driver and that was in its a very conscious decision. So again, it's we think about the choices that we want to making 2020 R&D is one of those choices that we want to invest in.

To both carry and Glenn's point I think the exciting part for US is you know we've got a really well laid out plan for R&D pipeline and new products. This is a really pivotal year for as for certain clinical studies to and based on feedback that we receive from the agency domestically.

Globally.

You're going how some of that news plays out for the most part it's you know structured in our plans to be a that we would view it as positive news depending on how some of these feedbacks come back we have different opportunities throughout the whole TT portfolio as well as was she has us and from a funding standpoint, it's one of the rain read.

Isn't that we've kinda basically said, let's see how the year plays out we want to make sure that we have adequate.

Our ability to fund those if we receive more positive news and I'm, referring to studies that show proof on why our products performed better than others.

Indications that may allow us to open up markets that we have not significantly penetrated at this point and so there's been a lot of great work in that area and again I'd say in future calls, we'll talk more about the portfolio and how that mix of R&D investment will play out or not but I think what we've laid out our guide for the.

This year, we feel very good based on what however, those play out that we'll have adequate quite capabilities to address those.

Great. Thanks, guys and then secondly on the longer term pipeline can you talk a little bit about the milestones ahead on on rebound in and on the shoulder products. It you know that you're working on and maybe just a quick update on your thoughts on the opportunity for rebound long term.

Yeah, I would just say at a high level for the ER our platform that allows us to go into interest free abroad hemorrhage, as well as minimally invasive neurosurgery, they're two different.

Fundamental timelines I think we'll be able to start doing some fundamental research work was the final products. Your later this year in the next year, but as far as indications for IC age or something like that we're talking out a few years until we actually have a clinical studies in the research work done.

I'm quite excited about where that many changes and obviously barlage right into the stroke market from a neurosurgery standpoint, we think is quite an interesting opportunity for us the other aspect of it though minimally invasive which takes a ah this type of a product and enables us to adopt.

Our instrumentation to work in a smaller channel that has high illumination as well as video capabilities. We think is quite interesting it actually might be able to address certain disease stage in a closer window time say 24 months, but those are all proceeding well a the team.

Sitting in very well or game I think the group as a a at this point is obviously achieved their milestones we have some more challenging ones in front of us, but as far as indications and having the product ready.

We're we're well aligned to do that the other one is on the anti thrombin technology part of that is a a science work relative to its integration is a different types of catheter types, whether it be silicone or or polypropylene and such and a good advancements there we have a first generation product.

In the market today and up before the end of the year, we'll have a really well thought out insides onto other materials and that will obviously determine how big the market opportunity is for us, but all is on track.

Steve I was just added relative to shoulder since you brought it up you know today, we think we've got a very strong shoulder portfolio, both the total and reverse shoulder.

The instrumentation is differentiated versus others that are on the market or simplified instrumentation set and we are working towards getting a short stevena stem a shoulder in place here over the next 18 to 24 months and then down the road longer term pyro hemi shoulder. So we have a very nice R&D pipeline for shoulder and a pathway.

For success in what is a very big shoulder market today.

Great. Thanks, guys.

Your next question comes from Matt Miksic with credit Suisse.

Hi, Thanks for taking the questions I'm. So I had I had one if I could just to kind of go back a bit and one sort of looking forward. So the first question just to maybe revisit some of the things speed or a that you've talked a little bit about a in terms of the supply issues and.

So that affected Q4 versus expectations. If you could maybe just talk a little bit about a you know having seen these kinds of things before you know increases and capacity working in a plants regulatory remediation and so on sometimes those things.

Can get handled a little bit more smoothly with.

Safety stocks are some some planning that less than a end market disruption to your numbers.

And sometimes they can't and so maybe if you could talk a little bit about.

Why it was that that impacted and maybe.

When you can do attitude to reduce that in the future.

And then just on I also in this kind of you know I know there's been a lot to talk about it already but this discontinued products just maybe historically and maybe from a rationale perspective, where in the business lines to these things land most often as.

You know the crossover between then and a legacy Integra or is it you know, which business lines, which geographies I know that the kind of a long question about this past quarter, but I did have one follow up just looking forward if I could.

Yeah, Matt It's Glenn let me start off with the supply situation and what happened in the fourth quarter and why there was a delta versus our forecast. It was really our Boston facility. So as we were going through the plant shutdown and physically making the changes to the facilities from a quality perspective, we made an intentional decision to extend the shut down.

I had another production line so that once we got up and running it would actually result, and 50% more capacity generated out of that facility and what the reasons why we're seeing a bit of a backlog. Today is these are some of the fastest growing products. We have in our portfolio. So our plastic and reconstructive own care products have very good growth profiles right now.

And we did everything we possibly could to build as much safety stock prior to the shutdown as possible to minimize the impact in the fourth quarter, but nevertheless, there was an impact the good news is as we started off here in 2020, we now have more capacity want a better path forward in terms of supply of Boston and we expect.

To have the remediation efforts complete in the short term and then get the warning letter lifted in 2020. So yeah. That's a situation and why we had a bit of a miss on the ODP side in the fourth quarter in general, though our supply is going to be much better across the board starting in the first quarter of 2020 I think Kerry.

Some prepared remarks around that but are we still have a few more months in Boston to get to safety stock levels, but all in all I'm quite confident we're not gonna be talking about supply as he moves through 2020, telling me want to comment on discontinued products. Yeah, I would say certainly and you go back to the prepared remarks or the bulk of.

The impact in the C. S. S. A segment on very little write down L. T cell, it's really concentrate didn't see aside and it's predominantly in the precision to on instruments portfolio. So it's it's really mean, we talked about dental instrument last year, we got out of that and closed three facilities down it's your brain.

Mapping and Stereotaxis, it's really concentrated on the P.T. and I type of the as our portfolio there.

Yes, I mean, just feeling confident that just color I mean things like dental mirrors are filed that aren't strategic for us that.

You know we look to sell.

We didn't really find the right via word was too much work to do it.

Roughly 10 million so revenue low margin no growth does it make sense to waste to energy on it consuming a higher percentage of based cost as well and so we're able to take the stranded costs out as well by addressing those any gerry's point other things you know that their time has passed those things such as started.

Taxi and bring mapping that had been bypassed bye.

Hello, less types of procedures or other advanced planning situations and tools and so you know completely eliminating knows and not backfilling. Those were were not going into that area. Those are the key decisions, we made and again as opposed to helping them languishing the portfolio be decisive get them out and have a.

Cleaner organization going forward that gives us great confidence, we get hit our profitability goal that's the driver of it.

Got it and so those might have been things going way back it might have been reported like in handheld instruments or things that folks might have been asking some time ago as to why why you were in these.

Business lines.

And the first yes.

Well, so like doing about that.

Yes, let me to do more focusing focusing strategy and margin emerging growth.

Okay. So then looking forward I guess, a part of this is a comment I guess on some of the feedback I get from investors.

And part of it is a good question around sort of cadence and guidance and how to think about the your head is I.

I guess you know one one common question that I get or it seems like a <unk> that's not so much concern, but a challenge that investors have when they come to integra is it sort of looking at you get a lot of great products is a lot of innovation and product launch is happening obviously continent.

This is a big big [noise].

That's all kinds of downstream benefits, but you know there's no. There's no one thing that we can focus that we can get excited about goose or get excited about the shoulder excited about Japan or wound care business, but but none of those as important as they are really the key big variable, it's going to drive the equation, which kind of.

Which really leaves us to sort of this a composite growth a in your two major businesses and.

Which is which is great you know and and impressive to kind of break into this mid single digits in driving double digit earnings growth, but you know confidence in that re acceleration.

On the.

He otcs side of the business I guess, especially given some of the bumpiness in and and private label or you know is something that I wanted to just make sure we understand how to think about sort of the beginning of the year in and we're in that model is there's some opportunity for variability and what has to happen to kind of.

Reaccelerate to that.

To your guided range of six to eight or for that line of business.

So Matt I think there's two big questions in there what about the diversification and why that versus being able to follow one or two big product families and the other one is our confidence on the rebound in.

Oh TJ. So I think look on the first part we think the diversification as long as its focused into areas, where you can be a top three player is a great thing. So you know everything from a reimbursement structure, where we don't have one device. That's the most expensive thing in the procedure.

In the neural procedure there might be 15 integra items that are used throughout that procedure that work together connected together that give us a sticky connection. Unlike a lot of other both the same thing is true within the regenerative side. We're building it out for those franchises, where we were diversified but we're a top you know we were number five.

Six or seven or the cases dental maybe we were a number 10, we're getting out that's part of the strategy. So we think that diversification can mean a lot. If it's concentrated on areas, where you are a top player not there yet, but that's where we're moving towards on the supply on the on the growth back in C.G. When you look at the underlying.

Our kids in chronic you won't burn nerve breast hernia, all those markets out there potentially be everywhere from mid single digit do I double digit growth, we completely stunted our growth in 19 with supply and I feel very confident now with supply back we'll be able to get back.

Back to our growth rates that that we had expected and you know now with GLADO COO, whose sole focus has been really the second half the year on supply and I think with him in the operations team they've done a really nice job getting us back in a position to be successful not just compete but successful would be able to grow here.

In 2020, starting in Q1.

Well, thanks to the color that's helpful.

Thanks.

Thank you. Our next question comes from Matt Briand with Piper stand there.

Hi, Good morning. This is I drew on for Matt. Thank you for taking the question.

But just kind of wanted to go back to extremity sent the improved a little bit this quarter, you called out children ankle as pockets of strength in the quarter I.

I guess just given some consolidation we've seen in the space just wanted to get your updated thoughts on whether you've been benefiting from any disruption there.

Andrew It's Glenn I'll take this one you know overall I would say we were very pleased with the performance of orthopedics business in 2019, we stabilized the business, we actually got some growth in the first time in four years and in the U.S., we actually saw kind of mid single digit growth throughout the year.

Driven largely by our arthroplasty product lines and Angolan shoulder.

As we look forward I would say, we haven't seen any disruption benefit yet, but obviously that could be something that happens later this year, depending upon how things play out, but I don't think we've seen any benefit yet relative to disruption on some of the consolidation taking place in the space, but.

As we look forward, we are expecting to see an improvement in orthopedics business from what you saw in 2019 are quite excited about both are at going shoulder portfolio. I think it's fair to say Glenn a big piece look gotti in our commercial team have just done a great job for us a particularly in the United States and if you recall, we had a lot of channel changes always change.

Every territory Bakken 18 to 19 now you're starting to see the benefit of his strong leadership team and stable accrue in 19, and we expect that are improving 2020, and if there is a little bit of disruption by some other folks you know will be hanging around the hope to take advantage of whatever may come our way.

We feel pretty good about position where.

Okay very helpful. Thank you and then just a real quick modeling question can you quantify or any selling day benefit you include in your your Q on organic guidance, if there's anything.

Yeah, I mean, I would say that are our guidance is inclusive of the days and acquire so about 4% is our organic growth for Q1.

Okay. Thank you thanks for your questions.

Thank you. Our next question comes from Travis Steed with Bank of America.

Hi, good morning, Thanks for taking my question.

Sounds like you're you're dialing in about a 100 million of the $225 million buyback in the earnings going into this year.

The way to think about it but under other hundred 25 million, it's really interesting for dry powder in case, you do other acquisition.

Dilutive over the year and I know if you do a couple other dilutive I wasn't something you can still get to the but double digit EPS growth.

I would say we committed to the 100 million you are correct. There's additional capacity left on the board approval wave 125 million.

Additional capacity there I can administer it's 100 and obviously, we launched its hard to execute that I would say that Oh well. It's early in the year, we'll continue to assess our capital allocation of capital strategy here and well make the right decisions as the year unfolds, but yeah locking that that convert a tracker.

Financing got to answer going so feel good about how we started here.

Okay. That's helpful and then.

On the the 5% revenue growth for this year you know.

Last year, I think you said new products out at about one point of growth is that how I didn't know turning out Im just curious how much new products are gonna have done in 2020 in terms of the 5%.

I think it's not fair yeah.

A rough target of one point.

Yeah sure I was talking about that might have from new product introduction, each and every year.

Given some of the commiserate around durgin, Japan, that's going to be a nice contributor to organic growth from a new product introduction in 2020, and then some of these other products were going to get a full year benefit in the neuro portfolio will get us arrested away there as well. So just think of it has appointed a half in 2020 and pretty much each and every year that's our goal.

Okay, and then last quick one on it given the changes in the balance sheet of course is going to help with what you're pointing on interest another and tax rate for 2020.

Yeah. So just on those modeling questions I would say net interest expense will benefit from obviously lower debt levels and a better.

Financing cost so I would say, it's not about $5 million lower net interest expense. Other income it's not a big big number for US I'd say about 5 million income there for your models and tax guidance.

We finished 2019 at about 18.3% tax rate for the year it'll move up for 2020, I model somewhere around 19% and that's really driven by lower expected tax benefits from lower stock comp expense.

Okay, great. Thanks for taking my question.

Thank you.

Thank you. Our next question comes from Matt Taylor with yes.

I think you predicting the question I just had one clarification question first so on a.

Organic growth guidance for Q1, do you have an extra selling days to the 4% is actually last I wasn't clear on the prior answer.

It's all in there, it's 4% for that for the quarter seasonally our first quarter is the lowest corner of the year. It is better than last year last year, we were about 3% organic growth. This year were expecting about 4% organic growth in as I mentioned before whereas.

Factoring in some caution some conservatism around China in that number as well.

Okay, and then just on the gross margin guidance could you could you parse out for us how much of the benefit is due to the divested products versus the new ones. Another thing.

We haven't provided that but again, it's gonna be a good mix between the two it's really driven combination of both at that was factors on the next I [noise].

Okay and last follow up on the 3% to 5% for CFS.

You mentioned, there's some conservatism in there for for competition could you talk about how much can turn conservatism there isn't a in the guy.

Again, I characterize our long term guidance range for see assessed to be 3% to 5% and basically we're saying we expect 2020 to be in that guidance range at 3% to 5%. So we would expect you know I normal amount of competition and 3% to 5% is consistent with our long term guidance range.

Okay. Thank you very much.

Yeah.

Thank you. This concludes today's conference call. Thank you for joining us and have a great day.

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