Q2 2020 Integra Lifesciences Holdings Corp Earnings Call

Good day welcome to the Tegra life Sciences second quarter Twentytwenty financial results call.

Let's turn the conference over to Mike will you. Please go ahead Sir.

Thank you would work.

Good afternoon. Thank you for joining in check or life Sciences second quarter 2020 earnings conference call joining.

Joining me on the call, our Peter Arduini, President and Chief Executive Officer, When Coleman, Chief Operating Officer, Kari Anderson, Chief Financial Officer.

Earlier today, we issued a press release announcing our second quarter 2020 financial results.

At least a corresponding earnings presentation, which will reference during the call are available at Integra life Dot com under investors events and presentations.

Names second quarter 2020 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 in light of the ongoing cobot 19 uncertainty, we're disclosing more information today for investors about recent current and anticipated future business performance and we would join a typical quarterly earnings call.

In particular, we will refer at times to our June 2020 revenue performance.

When we do show in all cases, our June 2020 average daily sales right, it's been compared to the average daily sales rate for the entirety of the second quarter 2019.

This comparison provides a meaningful mechanism for understanding our actual business performance toward the end of the second quarter in 2020 versus 2019, I normalizing year over year sales activity to account for different isn't monthly customer buying patterns and selling days.

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 example to Entegris current report on form 8-K filed today, what do you see saying.

With that I'll now turn the call over to paid.

Thank you Mike and good afternoon, everyone. Thank you for joining the call and I Hope you and your families are staying safe and healthy during these difficult times.

Turning to slide four I'll begin the presentation.

The second quarter was one of the most extraordinary periods in our company says tree beginning in February and continuing through the shocking corridor health care providers around the world moved quickly to manage the effects of the global pared down it.

Surgical procedure volumes across industry decline materially as the central resources were reallocated to treat koby patients.

The trigger quickly adopted by taking actions to safeguard employees ensure continuity up our supply chain and manufactured manufacturing capabilities they contain cost to protect liquidity and profitability.

He's up are vital to our performance during the second quarter and I'm proud of the resiliency of our global colleagues and their commitment to supporting customers in patients.

Looking at the second quarter total sales were down 31% on an organic basis. However, looking at the monthly sequential trends sales in June improved to a decline of approximately 13% from the prior years average daily rate for the second quarter.

In our global Neurosurgery business sales in each of our major franchises increased on a monthly sequential basis during the second quarter.

Consistent with the outlook, we provided on our last earnings call products used to treat underlying conditions that are considered more urgent such as neural monitoring.

Yes, a management and durable access repair led the improvement in the second quarter.

Second quarter performance outside the U.S., well highly variable was slightly better than the U.S. and was led by our business in Japan, where sales increased double digits over the prior year.

Well this performance can be attributed in part to effective government policies in Japan that mitigated the impact of Cobot 19. The growth is also unquestionably resolve of investments that we have made in our commercial organization a successful launch from Georgia.

Within orthopedics and tissue technology. The most significant recovery came from the orthopedics franchise, which was down more than 80% April but improved to a decline of less than 10% in June.

Well reconstruction also approved on a monthly basis sequentially during the quarter.

Looking at the company as a whole we're confident that our businesses and competitive positions remain strong and our underlying markets were returned to growth overtime.

During the second quarter, we continue to invest in critical parts of the business and launch new digital trading it educational programs.

No surgery, we are leveraging our comprehensive portfolio global leadership position in brand recognition.

We recently announced the FDA clearance of a neurosurgery specific indication for Chris clarity, making it the first and only ultrasonic tissue ablation system clear to treat malignant and benign tumors. This approval was founded upon the abundance of clinical evidence and peer reviewed publications that will allow our commercial.

James to engage in a more detailed and focused conversation about the benefits acoustic clarity.

Additionally, we launched new digital programs in resources that provide health care professionals quick access to product set up training and education through our new Kochman, Scott you covered customer resource out.

In addition to training and education. These programs feature clinical and economic evidence that show your outlook.

Patients reduced risk and more predictable outcomes associated with key products within our neurosurgery portfolio.

These digital tools are enabling an accelerating our business recovery.

In one reconstruction, we've rolled out national education, Webinars and interactive round tables to highlight and differentiate our proven product solutions. We've also watch educational portals and micro sites that leverage social media, taking together, we've developed a suite of virtual tools that enhance our interactive.

And with customers.

As you look towards the third quarter, we had a good start in July showing a sequential improvement over June.

Our business recovery is clearly well underway and we're closely monitoring the scope and location of no new code searches to determine any associated impact on surgical procedure volumes.

Since April hospital systems have adopted.

Expanding I see you bed capacity and creating zones that can be bought a quite quickly to meet covert searches.

We remain optimistic that these measures, which preserves the capacity of hospitals to complete elective surgical procedures will continue to bode well for our business recoveries through the ended the year.

To that Ed we remain confident and a sequential revenue improvement and third quarter, but still expect to be below 2000, a day t. levels. We also continued to bottle scenario that has revenue returning to 2019 levels in fourth quarter, but this will depend largely on recovery rates in our capital and instead.

It's businesses, which rely upon the availability of capital funds at hospitals and health care systems.

As I mentioned in my opening comments, our recovery is being driven in part by the resiliency and commitment of our colleagues around the world given our increased confidence into recovery path recently took steps to ease some of the cost containment programs we implemented in April.

Good our colleagues for example.

We recently reinstating a 40 hour work week for all employees and restored wages. Accordingly also while we continue to tightly controlled discretionary spending.

Such as travel and culprits expenditures are also increasing investments in certain clinical R&D and marketing programs that will deliver growth for years to come.

As we begin the third quarter, our priorities for the balance of 2020 remain clear and consistent with the same priorities that we did that guidance since the onset of its global crisis first.

Regarding our employees customers and patients second and shrink continuity of our supply chain and manufacturing capabilities and third managing the business for the long term by making critical investments in clinical and R&D programs with that I'd like to turn the call over it carries for a more detailed review.

Two of our second quarter performance Jerry.

Thanks, Pete and good afternoon, there second quarter revenues for the total company were $259 million, representing a decline 33% on a reported basis and 31% on an organic basis compared to the second quarter of 2019.

If I Miss was above the high end of our preliminary range communicated on July nine.

Adjusted earnings per share, what 32 cents compared to 73 cents last year and while revenue and he has declined on a year over year basis due to the adverse impact of code that both came in at the high end up our internal models.

If you turn to slide five I'll start with a review of Rcs segment.

Second quarter CS that's revenues were $170 million decrease of 30% on an organic basis.

The crops Debbie monthly improvement throughout the quarter with sales in churn down 13%.

Global Neurosurgery, Dallas performed better than the segment average with a decline approximately 26% in the second quarter.

Each franchise showing sequential monthly improves then I'll be April loans.

For the month of June Neurosurgery sales were down mid single digits led by strong recovery in Neuromonitoring, CFS management and girl access and repair at these products are used in more urgent procedures.

One is an advanced energy that's mix as capital sales, which are tied to hospital budgets did not see its strong of a bounce back as compared to our consumable sales, which are largely correlated to acoustic procedures and showed very nice sequential monthly improvement.

Sales in our instrument franchise declined 46% on an organic basis.

While we did see monthly improvement throughout the quarter, the month of Jerry but still down approximately 35%.

I Love you discussed last quarter. The instrument business includes small capital instruments sold to alternate site settings, which are less correlated to the pace of surgical procedures.

International sales MTS Asps were down low double digits in the quarter.

International did better than the second the average due to the strong performance in Japan, and as Pete mentioned, our revenues in Japan grew double digits year over year due to a more moderate impact who co that as well as investments we have made in the market over the past year, including the successful 29 to launch a guaranteed.

Moving to our orthopedics and tissue technologies, or Oh chicken segment on slide seven.

Second quarter revenues were $89 million, representing a decline.

Sand on organic basis.

Steady improvement throughout the quarter in this segment as well with sales in the month of Geron down 13%.

Second quarter sales in one week construction declined 31.

One per cent compared to the prior year.

For the month of June sales in one week construction improved to a decline of approximately 10%.

The company rates were particularly strong in our chronic morning product line as well as our nerve repair bears watching.

Yeah, I was in surgical reconstruction, where the slowest you recover as breast reconstruction in hernia repair procedures prove more deferrable compared to other tissue repair procedures.

The other private label were down approximately 29% in the second quarter and performance was more balanced on a monthly basis.

As we previously discussed on our Q1 earnings call Cold that had a minimal impact on first quarter private label sales as the bulk of orders were received in January and February and as such we didn't anticipate a larger impact in the second quarter.

Continued to work with our private label partners than had been encouraged I brought the public procedures that positive momentum late in the second quarter and expect orders to approve an elective areas such as I am backup cases into the third quarter.

Orthopedic sales declined 49% in the quarter, but its peak indicated showed the strongest in pro improvement off a vehicle lows among our franchise that we called that worthless sales were down over 80% in April whereas in June sales would cover to mid single digit decline rate.

That's ever shoulder solution led the recovery and both upper and lower extremities improved on a monthly basis during the quarter.

Turning to slide seven I'll now review, our second quarter performance of our QEPM now components on cash flow.

Our performance across the P. and now in the second quarter was negatively impacted by coal bed and the associated reduction in surgical procedures.

As mentioned earlier, our financial results were better than original expectations.

Second quarter, adjusted gross margins, but 66.2%.

Yeah, just 67 point, what the stack in the prior year.

And I just came in stronger than expected in part due to the higher than expected revenue.

Also due to the great execution of the cost savings measures identified by our global manufacturing teams.

Our adjusted EBITDA margin was 20.4% compared to 25.5% in the prior year.

No EBITDA margins were down year over year that acquiring what's great mitigated by are stronger than expected gross margin results as well as significant reductions in operating expenses.

Well a lot wise.

<unk> containment measures, we initiated in the second quarter contributed to a 28% reduction in operating costs from prior year levels.

Second quarter GAAP bps was zero cents compared to 34 cents is prior year.

Adjusted EPA I swear 33 cents compared to 73 cents and the second quarter last year.

Hi, good shares outstanding were down slightly in the second quarter as we completed the accelerated share repurchase program I must say did in February.

And based on revenue improvement trends over the last few months, we have eased and several other costs are those programs, including as Pete mentioned, we told them all employees to a 40 hour work like that.

That said given the ongoing uncertainty related to the pandemic, we both kitchen, we can manage discretionary spending closely.

We do expect third quarter operating expenses to be higher than Q2 levels, but still lower than prior year spending by about 5%.

Operating cash flow was $33 million into second quarter, driven by lower earnings in higher inventory levels, both of which were impacted by coal bed.

We did build additional safety stock obscene product lines in the quarter, specifically some of our tissue regeneration products.

Please turn to slide eight I'll provide a brief update on their capital structure.

We ended the quarter with net debt of approximately $1.3 billion slight improvement from March 31st.

Our consolidated total leverage ratio was 3.4 times well below our covenant maximum of five and a half times.

On July 14th the company amended its credit agreement to temporarily increased its maximum consolidating the total leverage ratio from five times to five and a half time through June 30 at the 2021.

We did this purely on a proactive basis to increased financial flexibility in light up the unprecedented impact co bed and there were no uncertainty surrounding the Gulf War economy.

The amendment provides us more optionality as our business improved and increases our confidence about expanding investments for long term growth.

Importantly, we had cash cash equivalents, a $361 million in $1.15 billion on drawn revolver capacity.

The company does not have any credit facilities principal repayments due until June 2021.

Now I'd like to turn the call over to go out and he'll provide some additional insights into our international markets and how we're thinking about her second half recovery Glenn.

Thanks, Gary Good afternoon, everyone. Let me turn to slide nine I'd like to provide further color on our international performance.

Oh, some external factors to consider as we look at the second half 2020.

Oh. This chart, we provided revenue decline rates for each segment, that's all splits for U.S. and Oh U.S. performance.

[laughter] all second quarter in the month in China, which as Mike indicated as a comparison to the average daily sales right on the whole second quarter 2019.

So outside the U.S. declined 30% in the second quarter compared to the prior year.

Our revenue recovery improved each month and in each region during the quarter what changed at all it's down 14%.

By region [laughter] down less than the company average in the second quarter.

So the strongest rates of revenue improvement by Japan.

[laughter] revenue on China was down in the second quarter.

Immigrants work and deliveries taken in the first quarter.

We're confident that decline was largely a matter of timing as China returned to growth in the month of Jim.

[noise] performance in Europe was down slightly more than a company average and varied significantly by country.

Germany, Italy in Federal watch led the recovery, while France, Spain UK life.

Turning to the rest of the world, we've seen mixed results with Brazil, being one of the hardest hit markets and Kansas showing steady improvements in line with the company's monthly sequential recovery for the second quarter.

With that let me know turn on how we're looking at revenue recovery scenarios for the second half 2020.

Yes, I remember factors that can vary widely on will determine the pacing of revenue improvement in the second half.

As Steve discussed earlier regional surgeons on whats going away on a patient's willingness to return to dr. offices or hospitals.

We have factored this into our second half.

Revenue scenarios.

Additionally, we're taking a conservative view at our outlet for recovery in capital in instruments, given the financial stress covert as cost in many hospital systems.

[noise] outside the U.S., we expect some seasonality in the third quarter summer holidays, we just patient demand and staffing levels.

We've also seen countries hold back it's about 10% to 20% bias to you bed capacity or potential surgery Suncoke cases.

Given the ongoing uncertainty, we're not providing third quarter full year guidance at the level. We've traditionally provided.

However, directionally if you take the factors I just discussed into consideration.

We expect revenue in the third quarter to improve sequentially over the second quarter.

I mean, maybe between 5% to 15% below prior year levels.

Also consistent with our messaging last quarter, we continue to model multiple fourth quarter recovery scenarios.

Including those in which we return to fourth quarter 2019 revenue levels, depending on how the factors I just discussed unfold over the coming months.

You mean to understand kind of will provide some closing remarks.

Well she moved the second half of 2020 are adapting quickly to the new environment to capitalize on the recovery and surgical procedures.

During the second quarter, we rolled out were supported many virtual training and education programs.

Our global leadership position in a brand recognition.

These programs are reaching hundreds of practitioners along the care pathway.

Surgeons nurses to patients and caregivers.

These efforts, we are providing important clinical end product information, a timely and convenient manner to the people who need at most.

Our supply chain of manufacturing facilities remain as strong position continue to operate efficiently.

Where appropriate planned maintenance was accelerated into the second quarter.

Her position the company for a second half recovery.

Well, that's the monitoring them and are prepared to allocate additional resources as needed.

Our cash balance in credit availability remains strong.

We recently it seems that flexibility by increasing our allowable leverage ratio, which further boost our confidence as we resume some discretionary spending.

While continuing our disciplined approach to balancing investment profitability.

And finally, we continue to plan for long term growth.

We're taking advantage of the scale, we've built over the last several years and leveraging our leadership position to emerge from this crisis and a stronger position.

We are investing a critical R&D programs that will provide a pipeline of growth opportunity for years to comp.

That concludes our prepared remarks. Thank you for let's say operator would you. Please open the line for questions.

Thank you if you'd like to ask your question. Please signaled by pressing star one on your telephone keypad, if you're using it speakerphone. Please make sure. Your mute function is sort. It also I've seen enough to meet your equipment and that is star went to ask a question will foster just a moment.

[noise], we'll now take our first question from Matt Miksic as credit Suisse. Please go ahead.

Thanks, so much for taking the question and one one question if I could just as I'm sure a lot of folks are wondering about the you've given some color in Q3 and this idea of down you know, 5% to 15% year over year, which suggests this improvement from the exit.

No growth rate of of June could you talk a little bit about you know how to the pieces fit into that Directionally I know last time, we spoke.

There was a question nice you availability and there were lots of questions around the rebound in some of the elective procedure categories. It seemed like there, they're they're having a favorable impact on the recovery for orthopedics, but maybe if you could just did take through the businesses and get a sense of.

Within that down five to 15.

Where trajectory should should lie across your major businesses no nine one follow up.

Terry do you want to lead us all.

Sure again I think generally you described that we had provided you during our Q1 color that that looked at the spectrum out of our products and what we what they would be laggards and leaders of the recovery is largely intact I think the things that we got would lag like capital group lag.

I would expect that Weve continued to lag into the third quarter and the things that were more tied to more urgent procedures would lead to recover and certainly a lot of buyers I know I'm a in our and our neurosurgical area I did see faster recovery as we exited yet so I think largely.

That's why it's still intact I think there were few surprises warfare really came back much stronger than what we expected to certainly there was some pent up demand.

But I would say that that helped us in the second quarter on worth of sites, but generally we think the ortho side of the business will continue to show some nice recovery, there and I would say they the other surprise was maybe instruments kinda lagged a little bit more than what we expected it to be.

It behaves more like a capital like and and again, we do have some parts of Britain instrument business that are tied to alternate site settings, and so that was with lag.

You know instruments that are more in the surgical setting so largely I would say, that's where where we would lucky state Mike with with a in terms of how we did see Q3 kind of unfold.

Okay. That's helpful and then as a follow up if I could and maybe this is for Glenn and just generally on the geography that.

That seems to be improving across the global carbon footprint I guess, what you you mentioned monitoring some of the trends looking for sort of flare ups across the portfolio.

It's you know given what's happened in the U.S. and what seems to be kind of maybe quieting back down in certain parts of the U.S. you know.

How confident are you at this point that you know we're looking at Uh huh.

Series of sequential improvements or you know if there's some sense that we're likely to see more flare ups and steps back before before we take the final steps forward in some of the other geography is like we've seen in the U.S.

Hey, Matt. Thanks for the question I want I kinda predict where the flare ups are going to happen then when they're going to happen I would say, though that from what we've seen so far.

We've been very delighted with the results in Asia Pacific broadly speaking centric and had a really strong growth quarter, even despite cove in.

Sean Oh, we have some challenges early in the quarter, which they never going to have because of how we ship into China.

You know June was a strong and we're expecting the third quarter and show growth in China, and even greater Asia has held up quite nicely. When we look at the rest of Asia and so right now we don't expect to have any setbacks in that part of the World Australia has been going as far ahead as many other places around the Globe Australia continues.

To be pretty steady for us, but Canada was hard hit in the second quarter I'm expecting to show a nice improvements sequentially in the third quarter.

Latin America, so a bit of a wildcard for us.

We're still seeing some laggards as we used the term.

Relative to Latin American market, and that's probably one market that.

Yeah, what she back closer eye on I would just generally speaking Europe has done kind of a mixed reviews, so and we mentioned some of the strength in Germany, and France and Italy.

At this time, we haven't seen the same level recovery yet from the UK.

Spansion name too so.

The next back there, but we are seeing.

Improvement in Europe.

Although I would say we feel very good about the direction of our direct markets.

And your back where we sell the distributors ethic is gonna be a bit lagging in terms of some of the recovery.

And I'll be part of Latin America, but.

Oh I think that's how I went up pretty set up and then obviously question was very focused on international U.S.

We're seeing positive trends sequentially here in July both for OTI to yeah.

For a C assassin count you know all the points about you know what was going on there.

Yeah. The other thing I would add is certainly yes, we think about the guidance for Q3, we do have the.

The summer holiday season to think about you know broadly across you know the U.S., but particularly in Europe, and and so not sure that well see you know the same sequential month to month improvement definitely from Q2 Q3, we expect sequential improvement, but it may hobby, a different way as it unfolds over the months just because it then.

While European holidays.

That's great. Thanks, so much I'll get back in Q.

Thanks, Matt.

All right well take our next question from Kayla Crum Trust Securities. Please go ahead.

Hi, guys. Thanks for taking your questions and for all the detail this quarter I'm.

You mentioned that that you're optimistic about the ability to respond to pre Cobra revenue about by the fourth quarter. So I mean, I guess its fourth quarter revenue was.

You know this year versus <unk> is it fair to assume that earnings would would also be flat relative to the fourth quarter of 2019 or is there anything in particular, we should consider that would wait or benefit earnings this year as compared with last.

Okay, I'll think I'm excited.

They make a comment caring and then and then maybe you can bring up on the profitability side of it.

Hi, just tends to be clear I I don't say, we think were overly optimistic on getting tech <unk>.

19 levels, we clearly are modeling scenarios, but yet is there I think and I wouldn't say, we lean more toward that scenario that make sense that being said.

You know how the flu season plays out complementing that wouldn't coded and are confident it's really within our institutions I would say our capital panels are actually quite strong, but we need to have hospitals feel like they can see when it ticked up on multiple side of months looks like that I can actually pull the trigger.

Makes the acquisitions and that would clearly yeah, there's room to get to that to the next level. We got the sequential improvement comes down to the fact that everybody's getting smarter I think all of the providers on where we weren't April I mean, you've heard this from other companies as well how people are dealing with this is actually made.

A lot of differences and so I remain confident that we're going to see even if things get more challenging just improved management of patients, which means more procedures, but for us to get to a level of accessing at 19, we need some capital and we need instruments to be improving versus where we are which we see that's.

Scenario, but in that scenario and also doesn't have us and October November getting much worse with cold and flu combined meeting people kind of.

About and that's why we're not giving guidance at this point in time on the top insight on what carried comment, but we clearly are keeping an eye on our overall expenses on a same reason and making sure that we on all of them to the most important longer term projects.

As we do have some big name orders in our Hopper that could benefit is on the pack side of 21, and clearly in 22 and keeping our thesis intact. When a company we want to make sure. Those are finding some carry I'll turn it over to you on any comments you'd like to add sure.

If they think about fourth quarter of last year, our P.S. number jumped to bps or what's around 68 times I don't think that's a bad place to think about scenario that if we could get back to fourth quarter 29 came up both in the fourth quarter 2020, I believe we heard I think I think a general area that we.

She bought the geography of the P. and I'll, maybe slightly different I would expect gross margins to be a little better this year compared to last year, just because again a buyer favorable mix as we continue to move on discontinued products will continue to look at new chronic introductions.

In the contributions and those tend to generate good Brooklyn mixed trends as and but I would say you know how your tax rate year over year compared to a this year compared to last year, we just don't pads.

The stock comp expense deductibility that we had last year. So maybe a on favorable on the tax rate year over year, but generally I think operating expenses are going to be lower this year than last year. So we're going to continue to control discretionary spending and I would guide I would definitely expect that operating expenses.

It won't be lighter than last year. So the combination of maybe a little bit better gross margin little bit less operating expenses offset.

For the higher caps rate marketed would get or Directionally in line with where we ended Q4 20 <unk> co 2020.

That's great contacts and color and then not knowing you guys mentioned on the call, but that you're investing in a pipeline of R&D program, which is typical of either what.

I'd like you know if you got to just remind us of any sort of upcoming product launches, you're particularly excited about any update on rebound or ARCUS and product launches no problem I from those two acquisition and then assuming you know I guess are still sort of consistently evaluating M&A.

Panic opportunities at this time can you comment on what you're seeing on M&A landscape and how you're thinking about supplementing some of those organic projects. Thank you.

That's a good question, that's a big what I would say I'll I'll frame a couple points up and then handed over to Glenn but yeah. We clearly are active looking at opportunities in the the M&A World. We think you know any type of disruption or changes, obviously, a good opportunity to take a look at.

Scenarios and how they may play out for us and so we will keep very active and keeping our eyes on bags.

At a high level and I'll, let Glen comment further about somebody other products in near term I think.

You know for big areas that we're focused on that have impact out into away 21, and beyond I'd rebound clearly.

As a is a big opportunity to remind everyone. It brings to products for us it brings a minimally invasive tool or neurosurgery.

Be able to do keyhole access for tumor resections and others. It also brings us into a stroke market for inter schrieber all hemorrhage.

And so both of those areas have different timelines to those but as you know late 21 is when we start testing the water with.

Some commercial capabilities within my Ass, and then I see h. little bit later.

I have some ongoing dialogue with the FDA relative to building out our nerve portfolio and we've been making good progress working in building our portfolio.

Making sure that we've been able to fund that adequately during this time period.

And also on our plastic and reconstructive area I'm, even though some of those businesses have taken probably got stronger had during the cold and window, we still see opportunities with our technologies and regenerative medicine to play a bigger significant role.

We're working with the agency as well as product development strategies to expand our indication portfolio. There Glenn you may want to add some other comments as well sure.

I think first point to emphasize is during the cutbacks have you made from a cost reduction point of view.

We did not really impact any of the long term R&D programs through automation those are funded for the long term viability the company.

So all the things that you mentioned, obviously, we are finding good thing I'd add is we're still investing heavily in clinical studies as well to support reimbursement to support.

Hi, Jason of our product and a lot I isn't the regenerative portfolio area. So primatrix amniotic.

And as another areas of a heavy investment that we've been making.

[noise] free thank you guys.

Alright, well now take our next question from shouldn't Singh.

Well Fargo. Please go ahead.

Thank you so much for taking the question.

Was wondering if you're willing to share it wouldn't be exit of guilt free debate was in July versus the coding for send that you called out in June.

Any differences by segment.

Hey, it seems like what it was pretty similar exiting June and then Mt. Todd on 2021.

Looks like in terms of it looking forward to back sluggish growth in 2021 2019 levels.

And I'm just curious to know what Judy action I know I know, it's a long way between between now and then but you know do you think that retailer pace could be or could it be conservative you know if in fact, even to approach normalized levels in Q4. Thank you for taking the questions.

Yeah. So she got unfortunately, I can't give you a whole lot right now I mean this is the reason that we're not actually giving guidance here, even this year until we.

See how the smoke clears and probably late October early November will have a better view our plans for 21 guidance right now are kind of what we traditionally do which would be out in early Q1, I'm, sorry, I'm not going to comment about that and I think when it comes to our you know jus to exit rates that are.

July we've kind of given about what we want to give at this point time I would say obviously each of our product families and franchises has different.

Levels of that said that that bring got composite for the whole company I think we've given some views here, where orthopedics has the greatest recovery, but it also had the biggest impact and more things like one reconstruction tended to be more steady through throughout the quarter, but I think thats really all the in.

So on those two areas that we want to provide at this point in time.

Thank you.

Right well now take our next question from Robbie Marcus JP Morgan. Please go ahead.

Yeah. Thanks appreciate the question.

How do we think about you touched on this before but how do we think about the impact on forward growth from capital equipment.

Who said been up a pretty big driver growth I know, it's it's a capital, but then a disposable component afterwards, how should we think about this environment where may be capital units are in.

Being placed as much having an impact on forward growth.

Yeah, well be I'll take a shot and then Terry if you want to ask for Glenn as to what I think again about half of our portfolio.

When you think or something like KUSA again, which is typically use in tumors actions or broadly in.

Liver surgery round the world.

His and consuming out the actual tips to being the whole concepts that are used in we're seeing that surge quite bad.

In some of this is you know as an incumbent in an area, where there is it a lot of new equipment being brought in an incumbent in a given area, which we tend to be a significant one in neurosurgery you tend to benefit from from had cases. So we're seeing that come through I think again capital as to be framed up enough.

Coos about what because we're not talking that this is a linear accelerator or.

Hi that may cause multiple million dollars. These are $200000 devices and so I think we believe that uncertainty settles. They are products that clearly enable procedures to be done that are still very profitable sprays situations around the United States and.

And obviously very necessary in markets outside the U.S. and we you know we're seeing a reasonable.

Transactions take place outside the United States in markets that started improving so as we see a market get better this level of capital purchases with some companies they describe as smaller cap or mid sized capital expenditures. We think are going to be some of the first ones coming back so I think lobby the law.

And with a shorter the question is I think our our final has it decreased our funnel has actually been growing.

I don't see people, saying in six months, if it's even challenging well I don't need this product anymore, I'd say, they're going to buy it when they can afford to buy it and we're going to be able to see that have an impact at that point in time I don't know Glenn if you want to comment or Jerry if you have some other yeah maybe.

Oh I had just a couple of things again capitals only about 10% of our total revenue.

And I would say as Pete mentioned here. The finally, if it's still quite healthy.

I would say, we're obviously working like where customers as they have the financial wherewithal on different options, whether it's not like purchase whether it's different financing model was right on leasing model says well, let's just say, let's take that sad that capital purchase on how it makes sense to them.

Generally haven't seen any change in competitive landscape, either so I can get it it largely has been paying much it's got like anything else.

[laughter] don't don't forget Ravi we also just got a no indication for who said what you think is a differentiator.

And there's significant savings to hospitals and using our KUSA device with significant reduction in your theater.

And the fact that we are.

Precision cutting and only cutting out the tissue.

That's the bad tissue the hard to remove tissue and so we believe this differentiation in the product. We've just got a new indication for two sets and again the funnel is strong we think it'll come back once the actual hospitals get some dollars freed up.

That's really great color or maybe just a follow up Kerry. This is one of your that are free cash flow conversion quarters, obviously, it was a little unusual.

But what did you undertake anything in the quarter that can increase free cash flow conversion going forward and how do we think about that maybe as the at the top line and some of the expenses come back in thanks.

Yeah, I would expect second half cash flow to improve sequentially from my perspective as revenue continues to increase you know one of.

The levers we did see from inventory build in the second quarter. So I wouldn't expect as revenue continues to recover we'll be able to work through some of that inventory.

Well incrementally how cash flow and in addition from a free cash flow perspective capital expenditures were told the in areas that we well.

Manage tightly so you know if you think about our first quarter Capex. It was around 16 17 million, we obviously control that very tightly in second quarter Capex in Q2, with only about 7 million and largely I think if you think about that second half I would say income naturally will be higher than where we ended in Q2 I capex.

In the quarters and the second half, but certainly probably not at the levels. We were at Q1, So I think capex all continued to be outsourced.

Free cash flow conversion to last a long way just generally working for inventory levels down and improved on the data associated with higher sequential revenue.

Great. Thanks, a lot.

Alright, well take our next question from Prostanoid Jefferies. Please go ahead.

Hi, good afternoon.

Okay back it up a couple on the expense lines. I think you noted that gross margin was quite good in the quarter like quite a bit better than I think most people were modeling.

Sounds like you're comfortable with that continuing for the balance of the year. So wondering if that's in fact correct and then the second question was really around the other operating expenses I get you mentioned you expect operating expenses only be down about 5% in the third quarter.

In the second question is that correct, what's the outlook really for spending on those lines and kinda they roll up of all that is when one thinks about.

EBITDA.

Your your leverage ratio here, and we're and ultimately peaks out the sense because read about is probably going to be little lower for the next several quarters. So how much capacity do you.

Do you think about doing deals over the next two two quarters here.

Yeah. So let me let me take that question on in different parts of start with the gross margin question. So I'd expect HM claim likely to be <unk> gross margin neighborhood that somewhere in between Q1 in Q2 will obviously Q3 revenue well likely in the range, we provide it'll be being lower than Q2.

But higher than I'm, sorry, higher than that in Q2, but lower than Q1, So I'd expect gross margin to be somewhere in between she wants you to actual it's for Q3, so that that bodes well and and in terms of the operating expenses.

We gave guidance a in my prepared remarks said Q3 operating expenses will be down about 5% from last year I think it's more interesting to compare it to our Q4 2019 run rate. So we can have I consider without really in our run rate numbers until the Q until Q4 2019, we did those to act.

Positions late very late third quarter, so any compared to more of like Q4 2019 operating expense run rate on our Q3 2020 operating expenses are probably more down like 10% just as a as a as a rough magnitude.

And I would think sequentially will likely in it continued to increase that in Q4 as long as revenue continues to Ah two recovery, but won't obviously manage that quite a bit.

And then what was your last question Raj I I missed that one.

Sorry, just one when one thinks about your your your your debt ratio right now given Oh, yeah. How expenses are going to trend just where do you think that peaks out before it starts to improve yeah, well well remember that the way that the net other total consolidated leverage works. It's based on a trailing 12 month EBITDA number and look that.

And it's a build to EBITDA numbers might be different than the adjusted EBITDA numbers that we've acquired but it but it triggering so you know that the second quarter, we'll we'll see more of the keep because you're losing the last two quarters of 29.

The other quarters kind of we're wanting to that one Iraq and so it's certainly I would expect I could you know that got glacier to pick a little bit more in the third quarter in fourth quarter. However, we still have lots of capacity as you think about this amendment. We did on July 14, without a temporary amendments it brings up the five at half time.

In Q2, we were only up 3.4 times so.

You know ample opportunity there to be cost and putting on spending back again as I read a revenue recoveries and making sure that where we're on what we're thinking about long term growth.

And investments there and probably you know we still have lots of ample room on our our debt.

Revolver as well, so I'll, maybe like job Pete comments on thinking through M&A opportunities people want to set a little bit a light on that.

Yeah, I mean, just just to the fact that you know right yeah that as I mentioned earlier in these times, there's all types of opportunities that come up I would say, we're keeping an eye on opportunities within the tissue portfolio.

We clearly got opportunities that could start to build out further.

Some of the missing puzzle pieces within our broader neuro portfolio.

And those could be small plug ins that are profitable singles.

Doubles I don't I don't know think of any large kind of transactional work that we're thinking about there's lots of interesting opportunities to plug into keep talking out the portfolio and we've been you know again, a big part of what we've been focused on during the time, Bruce thinking about a portfolio and how we continually optimize it obviously SKU rationalization has been a big.

Part of it but thinking about other things that we can plug into it and keeping the dialogue moving forward. Most of deals. We do we probably have entertainer and engaging some dialogue with a with a partner or a an opportunity years in advance and.

So we're using this time period as well to make sure that we advance those relationships. So on the times right. When we had a good position to add key assets.

No that's very helpful. Thank you.

Thanks.

We'll now take our next question from Steven Lichtman Oppenheimer. Please go ahead.

Hey, Thanks for taking the question that too.

He.

So no problem.

So could you provide any color on the recoveries during Q2, how much of it went from previously deferred feature.

A new patient though.

Thanks.

Yeah, I would say, we haven't honestly I don't have an all you've broken out in order to we have a perfect handle on it ourselves, but clearly there was a recovery component that was that was built into it.

If you take about orthopedics as an example that would probably be clear as an example, where we know shoulder procedures were delayed and we saw that I come back much more strongly so across the board. We clearly had some recovery that was built in there, but I would say.

I don't think we're in a position really characterize exactly how much that was were.

Then second half a day or within within Jude.

Okay, that's fair.

Question on your Threeq, you estimate of downside, 60% year over year, it that an organic basis or a reported number and what's your what's really be factoring in for FX and discontinued products for Threeq, you and the full year. Thank you.

Are you want to take that.

Yeah that that's more on a on.

Reported basis.

So I don't have the breakout between FX and and and discontinued products, but that's more on <unk> on a reported basis.

Okay. Thanks.

Thank you.

No not take our next question from Matthew O'brien of Piper Sandler. Please go ahead.

Have you made thanks for taking my questions and pizzeria pushed a little bit here that everybody is trying to get their head around backlog versus you know you patient growth. So was July better than June as far as the.

Overall growth rate goes for the company.

Maybe Pete let me take I'll take a stab at that you know again in <unk> prepared remarks, we talked about July down sequentially stronger then Jim and I do think and and she can kind of I ask that little bit about this says wow that.

You know certainly you know I still think there is some some pent up demand some backlog. We're working through is as we go to recalibrate, but remember also there's parts of our business, but I'd have to traumatic injury that I really notch tied to pent up demand either happy injury or you down you don't have a backlog of those and so as well.

Friction shelter in place restriction leave and people out and about a bit more than they werent. In Q2, you will start to see sound <unk>. Some someone recovery in those areas and I would say we started a generally to see some you know it's I think about EUR. One reconstruction are our area that performed the best.

For us was our chronic worried but as we move into the pit that third quarter I do think with.

Some of the restrictions I shall complaints restrictions down we'll see the continued recovery.

Our acute I've done in World area I was again those are tied to maybe more dramatic what was happening in the same thing with our neurosurgery.

TV I type of brain injury that well benefit from some sell translates restrictions goal.

Yeah. It carries mad catz carry covered and I mean again do you really if you sit I would add to it is the fact that.

Yeah, when we take a look here coming into the fall or as we're exiting right now.

You know theres only so much you can delay certain procedures in everything that we do outside of the items that carry commented on.

And so you know we're seeing a continual ticking along of those and there is offset by as you know many high spill still reserving some I see you bed capacity and that's one of the thing. That's clearly you know test where in some of our recovery in neurosurgery, because they're being cautious and.

So I do think I stayed should get through and continually see a window when they're going to have.

You know cases below 5% as an example is being used in the media, we do see correlations with procedures going So we were to look at New Jersey in New York now our procedures growth versus Florida, Arizona, you would see big difference just based on what the hot spots are and so you know part of our Crystal ball.

Discussion, we have internally is what's going to happen in September October November with masks with better protocols that are taking place and honestly, how well the seasonal flu is managed not because it has the specific back but because it causes you know so called false positives or.

Loads on the institution, which may actually have a focus be continually cautious. So yeah. We are optimistic that there's opportunities to actually see more upside, but again much of it we have to see I think with a consistent result state by state rather for the United States.

The that you know the code is being Meritage consistently.

Okay, that's very I'll pull him I appreciate that.

There.

As a follow up I'm curious about what under the Hood that that you know we can't see investors can't see at the moment.

Yes, you could kind of benefit coming out of this this dynamic you know what kind of being mass to know the it sounds like the Opex side of things is somewhat variable you know are your competitors less focused right now are they going to be unable to invest in their inventory channel. Their sales forces are you doing more virtual training anywhere near a couple of things.

Peter and winter here, you can point to that or Kevin Keyes Kinda honor that maybe you can see that could be some meaningful tailwinds for the business as we ought to be 21.

I'll call it a glendale and add to it I mean look I think well we were behind in inventory glad it is broader team have done a great job using this window of west demand to get our inventory status on all of our products, where they need to be so that's a big deal and integra specific item, particularly in <unk>.

Regenerative medicine second item is like everybody. We found out to do things differently that otherwise were thought maybe she couldn't do them that way. Many of those things has the potential to give us greater flexibility or agility, but they also have the opportunity to do it in a more cost effective.

Way and so we're thinking about those things longer term about what they mean from the impact of the company and I would say the third what is that from day, one and one of the raises that we actually pulled back on ours and reduce the wages and cut expenses are we wanted to preserve the critical.

Grounds that really around our gross thesis for the next multiple years I mentioned some of them earlier around rebound some of the broader indications I think we've done a very good job being able to focus on those having R&D people coming into environments advancing those programs why we budget.

Good stuff the coded and so you know again it was we come out of this towards you ended the year into next year I think we'll be able to talk more about those specific programs and how we did again to see our future growth and what else would would you.

Hey, obviously, we're being much more efficient with our expenses you know virtual selling big thing for US now virtual marketing we've set up.

A number of a macro sites across all of our key products are doing first felt professional education. Our sales meetings in our sales training is are all going to be done virtual and it's a little bit cost savings for us obviously, we want to reinvest some of that in other parts of the business but.

Those things coupled with even in the R&D area. How you can do clinical studies virtually to a certain extent.

So all things, we think will help our cost structure over the long term.

Got it thank you.

Thanks.

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We'll now take or next question from Matt Taylor.

Please go ahead.

I think I'll follow up that.

So question so be it.

Help us understand if you do get to let's say that's exactly the number of dollars 21 versus 19.

Are these changes that you're talking about on discretionary spending in the virtual training.

<unk>.

Nothing material difference in the margins that you'd see some distance they'll be 21 versus 19 or is it more incremental.

So I'll comment that carry you know you can jump because I think you've been doing some really good thoughts to how we think about so I would say well, we'll see yeah. We've laid out our longer term goals a few years back around 5% to 7% longer term growth I mean.

We don't think that that's changing we've talked about EBITDA margins of 28, 30%. We still see that is a very viable goal. The question is how long, it's cold that impacted our ability to get there and so that will be part of our focus area around that and so we've looked at programs.

And in areas that we're talking about that could be incremental adds obviously, but there are some things we could have a good have bigger impact in that I mentioned some of them or on the R&D freight, which could help accelerate growth at a faster level, but many of those are thinking about our cost structure differently.

And and how we might be able to leverage those things in ways that we weren't in the past whether it be how we have customers be able to service and help themselves more because the investments we've made into customer portals and tools as an example.

To actually having the capabilities to share resources around the globe more effectively between countries, which today were rather binary and Glenn and the team are looking at those examples as well. The carry you may want to frame up your thoughts on how you think about incremental versa. We clearly have some things that could.

Make a bigger difference for sure.

Yeah, I mean, I still believe that that opportunity our biggest lever is on the gross margin line and it has to be wells are continuing portfolio shift on on growing our higher margin pastor growing products that are really led by our new product introduction and continuing I was discontinued product Oh excuse.

Rationalization. So that's that's still a hobby large majority of what drives or margin expansion and don't forget we still has the thing, but generally agreements what changed about that term will come off those at the end up 2021, much <unk> will drive margin expansion as well.

And I I think on the operating model questions you know the opportunity for Cobra to accelerate different thinking about how we drive expenses and manage expenses I think that does become you know I've no incremental into Glenn's point difference, maybe the opportunity to reinvest in other areas of the big who are.

But maybe we have.

Enough room for so so we'll utilize the opportunity to maybe training some of the needs more traditional expense areas like travel and entertainment topic, just one thing to think about potentially what else do we want to add in R&D and critical to drive long term growth. So I look at that piece is more incremental in Lilly.

Where some of the big movement as well as well continue being the gross margin line.

Okay, great. Thanks, very much Waco.

[noise] [noise] appears to be no further questions as of right now I'll turn it back to the speakers for any additional or closing remarks. Please go ahead.

Got it. Thank you for joining the call today, and we look forward to update you here on our future updates. Thanks again for joining have a nice evening.

Thank you Stacy.

So stays call. Thanks, you for your participation you may now disconnect.

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