Q4 2020 Integra Lifesciences Holdings Corp Earnings Call
Yeah.
Good day, and welcome to day, Integra, Lifesciences fourth quarter, and full year, 'twenty and 'twenty financial results call. Today's conference is being recorded and at this time I'd like to turn the call to Mike Food, Yeah Director of Investor Relations. Please go ahead Sir.
Thank you Catherine good.
Morning, and thank you for joining the Integra Lifesciences fourth quarter and full year 2020 earnings Conference call. Joining me on the call are Peter Arduini, President and Chief Executive Officer, Glenn Coleman, and Chief operating Officer, and Carrie Anderson Chief Financial Officer.
Earlier today, we issued a press release announcing our fourth quarter and full year 2020 financial results.
The release and corresponding earnings presentation, which we'll reference during the call are available and Integra life Dot com under investors events and presentations and the file named fourth quarter and full year 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.
Actors that could cause actual results to differ materially are discussed and the company's exchange Act reports filed with the SEC and in the release.
Lastly, our comments today will include certain non-GAAP financial measures reconciliations of any non-GAAP financial measures can be found in today's press release.
Which is an exhibit to Integra is current report on form 8-K filed today with the SEC.
With that I'll now turn the call over to Pete.
Thank you, Mike and good morning, everyone. If you'll turn to slide four I'll begin with a review of our performance and 'twenty and 'twenty.
Full year, 'twenty and 'twenty revenue declined eight 7% on an organic basis to $1.37 billion.
Adjusted earnings declined 11% to $2.45. These declines were a direct result of COVID-19 related surgical procedure deferrals and capital spending delays and hospitals.
To put our 'twenty and 'twenty performance and perspective and illustrates the impact of the pandemic. We've included a side by side comparison revenue and profitability and the first and second half of the year. The biggest impact from Covid was felt during April and May and as a result first half organic revenues were.
16% and earnings were down 40% compared to the first half of 2019.
As we've discussed on prior calls we reacted swiftly to the pandemic prioritizing the safety of our employees, while implementing protocols to ensure continuity of our supply chain and key R&D and clinical programs. We also protected our financial position by managing costs down sharply.
As the recovery begins to take hold we saw the benefit of our balanced pandemic response and the second half we continue to methodically manage expenses.
While allocating additional funds towards growth and productivity related projects, we generated $150 billion and operating cash flow and invested in inventory and improved our leverage ratio from 3.4 times at June two three times at the end of the year.
We reshaped our portfolio with the divestiture of orthopedics and the acquisition of HL.
Our second half revenues increased $146 million compared to the first half and organic revenues declined one 5% year over year.
And the second half EBITDA sequentially increased $77 million and earnings per share increased 20% year over year.
Our sales recovery persisted, despite localized COVID-19 surges, and Lockdowns and the fourth quarter driven by market, leading products, such as Integra skin durgin as well as our service portfolio a program about all of which returned to growth in the fourth quarter.
If you turn to slide five you can see that we use 'twenty and 'twenty as an opportunity to reinvent the company.
In addition to the strong financial recovery and the second half of the year, we took actions that positioned us to accelerate growth in 'twenty and 'twenty, one and beyond.
So throughout the pandemic, our focus has always been on our employees and patients making sure we can supply critical products, while keeping our employees safe.
We have a one team mindset coming together to do the right things to shore up the business as a management team when the pandemic first yet we acted quickly to prioritize the most important asset our people.
At the same time, we challenged our employees to re imagine how they would do their jobs and a virtual environment, we provide tools and resources and they rose to the occasion, our people made a strong recovery possible.
Moving to global operations, we completed investments and solidifying our tissue supply and also adapted to numerous logistical challenges posed by the pandemic.
We quickly implemented rigorous and consistent protocols across our sites to ensure both the safety of employees and continuity of products supply and.
'twenty and 'twenty, we closed five sites as part of our optimization program that will help us reach our long term profitability targets.
Covid challenge, but it did not impede the progress within our R&D organization on previous earning calls we discussed how we maintained investments and critical growth programs such as the Aurora surges scope keeping them on track with the original development timelines and spot and in spite of the pandemic.
Moving to the Salesforce capabilities, our commercial organization and rapidly adopted a variety of virtual collaboration and digital marketing mechanisms to stay connected with our customers and to ensure adequate support for patients.
Turning to portfolio optimization as I mentioned, our two most transformative actions, where the divestiture of our orthopedics business and the acquisition of day. So the.
The combination of the two of these creates a highly focused tissue technology segment that will be accretive to growth and profitability and it.
And the advance our leadership positions across the portfolio.
We achieved all of these accomplishments, while strengthening our balance sheet and increasing our financial agility and.
And finally during 2020, we benefit greatly from prior investments and our information systems and infrastructure and accelerate our digital transformation within many parts of the company.
So as you can see we did not sit still during the pandemic, we utilized the time to position the company for success and 'twenty, one and beyond and I'm proud of the way. Our colleagues responded we are a stronger more focused company today than when we entered 2020 now.
Now I'd like to turn the call over to carry for a more detailed review of our fourth quarter performance and guidance for 'twenty and 'twenty one Terry.
Thanks, Pete and good morning, everyone I'd like to start with a brief summary of our fourth quarter highlights on slide six.
Fourth quarter total revenues were 388 $6 million, representing a decline of one six on a reported basis.
And the decline of one 5% organic basis.
Our revenue performance was at the high end of our preliminary range coming into play and done generally quite true.
During the quarter Covid surge has occurred and many of our markets, resulting in tight ICU bed capacity, but we still need and I would say, 5% and prism and our fourth quarter sales compared to the third quarter.
Most of our franchises are products that return to growth net growth quarter sustain that growth into Q4.
Sales of capital equipment improved sequentially by over 40%, but were still down on a year over year baseball.
As we have discussed on prior earnings calls and recovery of capital was expected to lag the rest of the portfolio.
So if we exclude capital total organic growth was flat and strip work compared to the prior year.
Fourth quarter performance and the U S was also flat on an organic basis compared to 21 four.
By segment and U S. C. S. That's organic growth increased by 2%, if we exclude capital and U S. O T T organic growth was about flat excluding the orthopedics.
We were also quite pleased with our profitability performance and support showing improvement year over year and.
We can pull to manage our spending.
Adjusted EBITDA margin from Q4 increased by 320 basis points to $26 four per zone and adjusted earnings per share increased 24% to 84 cents.
And he turned to slide seven and I'll review, the fourth quarter performance ever see it that's great and then.
Reported Q4 revenue were $254 million a.
Decrease of one 6% on an organic basis from the prior year.
Global Neurosurgery sales improved sequentially from the third quarter and were down one three percentage on an organic basis year over year.
So it was enduro access.
And repair and C O clock management increased low single digits and mid single digits respectively.
Sales and neuro monitoring increased low double digits and Q4.
All three and franchise has benefited from strong sales and market, leading products, including beverage and antimicrobial catheters and surface programmable valve.
Sales and advanced energy, which includes our Coosa capital sales went down and the pool and the fourth quarter in line with expectation.
Importantly sales of consumables directly tied to our coosa equipment increased low single digits in Q4, its sequential improvement from the third quarter.
Our sales funnel of capital opportunities and strong and we remain confident and our competitive positioning.
However, we do expect capital budgets will continue to be constrained through the first half of 'twenty 'twenty, one and so hospitals have more certainty around COVID-19.
And for sales and our instruments franchise increased sequentially high single digits from Q3, but still saw it's like 2% decline on an organic basis year over year.
International sales and see if that's were down low single digits and a quarter with mixed performance.
And so far we saw a return to growth in several European countries revenues in both China, and Japan increased low double digits.
However, this was offset by a slower recovery and our indirect markets.
Moving to the OTT segment slide on slide eight.
Revenue was $134 million, representing a decline of 1% on a reported basis and.
And a decline of one 3% on an organic basis.
Q4 thousand and wound reconstruction declined one 5% versus the prior year, but sales that surge and then nerve and amniotic all increased double digits and sales.
And with Integra scandal Creek low single digits.
Fourth quarter sales and private label increased 2% inline with expectations.
Well the beauty sales declined mid single digits, and the fourth quarter and as a reminder, we closed the divestiture of the ortho business and January 4th and fifth year.
Turning to slide now nine and I will now show you our fourth quarter performance of the pool P&L components.
Adjusted gross margin was 68, 2% compared to 67, 2% and the fourth quarter of 'twenty two.
Gross margin benefited from cost management stronger performance and the U S and favorable product mix.
Our adjusted EBITDA margin was 26, 4% compared to 23, 2% and Q4 2019.
And by improved gross margins and ongoing cost management measures.
Operating expenses were approximately $12 million below prior year levels.
Fourth quarter, GAAP, EPS was $1 nine compared to 18 cents and the prior year and increase was largely driven by a $59 million one time benefit driven by tax restructuring completed during the quarter.
Adjusted EPS was <unk> 84 cents from the fourth quarter compared to 68 cents and the prior year, reflecting an increase of over 23%.
Diluted shares outstanding were down slightly and the fourth quarter as a result, and the accelerated share repurchase program completed earlier this year.
Turning to slide 10, and I'll now review cash flow pick one.
Operating cash flow was approximately $80 million and the fourth quarter and just over $200 million for the full year.
Free cash flow conversion for the full year, which almost 80% driven by strong second half EBITDA performance improved receivable collection efforts and prioritization of capital expenditure.
And if you turn to slide 11, and I'll provide a brief update on our capital structure.
We ended the year with a strong balance sheet, our cash balance was $470 million wasn't and improvement of $140 million and our net debt position from 2019, and the pro forma levels inclusive of the convertible note.
This translated into a leverage ratio of 3.0 times basically flat with 2019 and on a pro forma basis.
Our targeted leverage ratio range, and two and a half to three and a half times. So we were right in the middle of this window.
Recall that in the second quarter of 2020, and we reached our peak ratio for the year at three four times.
So our second half cash flow moved us squarely within the range by year end.
Turning to slide 12, I'll provide an overview of our consolidated revenue and adjusted earnings per share guidance for the first quarter and full year 2021.
We aren't providing guidance today, but recognize that the course of the pandemic remains uncertain and as a result, the rate of recovery and surgical procedures and capital equipment sales remain variable.
And our full year guidance, we assume a gradual improvement in procedures and the first half with no further setbacks from these surges or new Covid variance.
And as mentioned earlier, we believe capital budgets will continue to be constrained through the first half 2021.
We will continue to assess the current environment and provide updates on our quarterly calls.
First quarter revenues are forecasted to be and the range of 345 million to $355 million.
Presenting on our normal seasonality in Q1.
This represents reported growth of approximately minus 3% to flat and.
And organic growth of flat to up 3% over 'twenty and 'twenty.
For the full year 'twenty 'twenty, one and we expect revenue to be and a range of one five to zero.
$1.535 billion, representing reported growth of 11% to 12% and organic growth of 12% to 13% over 'twenty and 'twenty.
Reported revenues include the first quarter estimates for eight salary and a range of $14 million to $15 million and up.
Full year estimate and a range of $83 million to $88 million.
This estimate is based on 'twenty and 'twenty April revenues of $95 million and.
Late January closing.
Yeah, I'll do it from the continuing COVID-19 impact for HL similar to our existing tissue business as well as typical short term sales disruption as we integrate the business.
As a reminder, 2021 organic growth excludes the impact of foreign currency fluctuation and acquired revenues, including HL.
Divested revenue, including orthopedics and discontinued products and.
And consistent with previous practice, we will include a reconciliation between reported and organic growth.
The impact from discontinued products is expected to continue to decline and we will have a negative impact of approximately 1.3% and full year 2021 reported revenue.
As a reminder, 'twenty 'twenty one should be the last year have any significant impact from a product discontinuation.
SKU rationalization and who's been an important part of how we are simplifying the portfolio and improving overall gross margin.
Turning to the earnings guidance for 'twenty and 'twenty, one and based on the revenue range as I. Just provided we expect first quarter adjusted EPS to be and a range of 54 to 58 cents, which represents double digit year over year growth.
Full year 2021, adjusted EPS is expected to be and a range of $2.86 to $2.93.
With that I'd like to turn the call over to Glenn.
Thanks, Gary and good morning.
You could turn to slide 13, and I'll provide an update on it and sell integration.
Immediately following the January 20th closing, we began the implementation of our integration plans and on boarded conveying and you sell colleagues.
The first three weeks of the integrations have largely been focused on the transition of the commercial organization.
And we're already taken steps to assign sales reps to their territories.
And last quotas and establish and compensation plans.
Okay, Great and then sales reps also completed initial product training and.
We're beginning to cross sell our expanded portfolio.
Last week and tissue technologies team held their annual National sales training meeting with in depth product training.
Well, it's still early edition of the <unk> portfolio and the expansion of our tissue technology platform and generating positive customer feedback.
Unique characteristics and porcine and products.
From a powder and the genco and surgical matrix.
Gaps in our portfolio for clinicians and additional tool to treat the most challenging reconstructive interventions.
It's only been a few weeks since we closed <unk>, we remain confident and the positive financial impact and the returns on investment that will come from this acquisition.
We expect this to be a quick integration with all critical activities completed by the end of the second quarter, including our ERP conversion and handle invoicing and distribution.
We are excited to welcome news and it's all colleagues to Integra.
Forward to providing and integration update on our next quarterly call.
Turning to slide 14, and I'd like to provide a summary of our 2021 and growth drivers starting with new product introductions.
Over the past two years, we launched about seven new products and CSS, which are expected to take several years to reach peak sales.
Performance of all of these products was negatively impacted by Covid during 2020.
And as the recovery takes hold and many of these launches like our service portfolio of programmable valves and.
And in Japan.
Should contribute to growth for CSS and 2021.
In addition, during the second half of 2021, we're planning a global relaunch of <unk>, Our next generation ICP monitor.
When should immediately and benefit our neuro monitoring and franchise.
Later in the year, we'll be launching our new Aurora surge of scope for minimally invasive treatment and brain tumors and an important part of our long term growth plans.
And our tissue technologies segment, we completed investments that were necessary to increase our product supply and <unk>.
And capacity at several of our agenda class and 2020.
These investments will enable us to not only support our existing customers, but actively pursue new business.
Turning to our international markets, Japan, our largest country by revenue outside the U S.
Has achieved six consecutive quarters of double digit revenue growth despite the impact of Covid.
This growth has been driven by our leading neurosurgery portfolio and as an example, Virgin is rapidly becoming the standard of care and Joel grafting procedures.
And 2020 and during the height and the first wave of Covid.
And also successfully launched a new surgical sales team and took our acoustic business direct and the general surgery market.
We have a leadership position and liver surgery.
With this transition we've now converted nearly all of our business in Japan from and distributed model to a direct selling model.
During 2021, we'll be launching a number of new products, including programmable valves that are specific to the Japan market and generator Irrigator and reusable bipolar force ups.
We're also adding hydro specialists and leveraging clinical studies to backfill.
Taken together these channel investments new product introductions, and our broad portfolio of leading products will drive further penetration into the neurosurgery market in Japan and 2021.
Turning to China. After the initial Covid Lockdowns and February and March neurosurgery procedures have steadily recovered.
During 2020, we invested and professional education and market access for key products, which helped drive low double digit organic growth and the fourth quarter, giving us momentum as we begin 2021.
We are expanding our commercial presence in China, and recently entered into our first exclusive licensing and distribution deal with a local Chinese partner, which will result, and the launch of new complementary products later this year.
This partnership represents a great example of how we can fill a gap and our product portfolio, while leveraging our large commercial channel.
On a global basis, we accelerated investments and digital capabilities that will enable our commercial teams to reach a broader customer base.
You bet and specialists and neuro monitoring hydrocephalus and certain regenerative areas.
And 2020, and we created an inside sales team within our <unk> segment, which is a virtual selling organization focused on driving further growth.
And finally the day, so we're bringing together two sales and R&D organizations with deep knowledge and broad experience and regenerative medicine.
The <unk> portfolio is a strong fit with our existing commercial infrastructure and call points.
If you turn to slide 15, I'd like to make some closing remarks.
Despite the challenges of 2020 that Peter outlined at the beginning of the call.
And we took advantage of the current environment to strengthen the company's position and advance towards our long term goals.
Covid forced us to re imagine how we do our jobs and as a result, we optimize many of the functions and operations within the company.
We also accelerated investments and critical programs to drive future growth.
And with the divestiture of Orthopedics and the addition of ACL.
We have a more focused product portfolio.
One of our key objectives last year was to emerge from the pandemic as a stronger company and following our fourth quarter and full year results. We believe we have succeeded.
We remain confident and our long term goals of 5% to 7% organic growth great.
Greater than 70% gross margins.
28% to 30% EBITDA margins and double digit adjusted earnings per share growth.
Before opening the line to Q&A I'd like to close by announcing an exciting event. We have planned. So please turn to slide 16.
We'll be hosting a virtual investor day on May 20th.
The half day event will feature a thorough review of our strategies from both a cotton and specialty surgical and tissue technologies segments and.
And our path to generating 5% to 7% organic growth.
And we'll provide more information as we get closer to the day and we hope you'll be able to join us.
That concludes our prepared remarks, we look forward to providing you with another update on our first quarter earnings call and April thank.
Thank you for listening operator would you. Please open the line for questions.
Thank you if you'd like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please ensure your mute function is turned off to allow the signal to reach our equipment again Thats star one to ask a question, we'll pause just for a second without and from the opportunity to signal for a question and King.
We will now take the first question from Matt Mcclintock from Credit Suisse. Please go ahead.
Good morning, Matt and good morning, Thanks for taking it.
Good morning, and can you hear me okay.
We can.
Terrific, Thanks, and thanks for taking your question so.
And one on just a bigger picture question.
And that business is it's coming together a bigger business for you now and then the other on them and some of the trend line.
Revenue and if your guidance and outlook so and.
And the bigger the true perspective and <unk>.
Talk a little bit about that.
And sort of how you see the region net platform that you have now with Hcl.
And what you'll see is some of the competitive advantages or opportunities there and maybe some of the synergies that you're.
That you may be able to enjoy it.
Putting more things right and more things and close that bigger platform.
And I had one follow up as I mentioned.
Yeah, Matt and I'll comment and then Glenn if you want to jump in after I would say I mean, the first pieces as I think you know regenerative medicine and Youre not a precise science right, it's a little bit of art and it's a lot of science and having multiple tools.
Or different technologies in that toolkit, we believe it's a big deal primarily because our clinicians tell itself. So a a wound and that's caused from a pressure ulcer or cards from vascular related issue or one that's caused by surgical intervention or one that's caused by trauma.
All of those and they have very different approaches and so today.
Most of these reconstructive surgeons plastics as well use different platforms.
And from different companies.
But there really hasn't been a company that's had all of these together and I and I.
Good day at this point and time, we have the most comprehensive portfolio and may not have the largest share position and all of them, but I think that's the opportunity that exists and particularly in the United States, where they're consolidating health care system.
And CS and such office and more people, becoming part of bigger systems, we believe that contracting with world class technologies will will differentiate and so you know we have this large matrices structure. I think then as we go further upstream we're well positioned to add on to this portfolio.
So with with other products that play and potentially into the epidermis other accelerants to help actually healing and so we thought we got a self particularly because of its debt within the acute space, but also growing area outside of that was a great day.
Particularly for the granulated product that we had no version thereof, and I think.
That combined with what we think we'll be able to evolve and the portfolio with Porsche is also there our new head of R&D.
Previously was a day, so yours back and has very good insight into that technology actually did some of the original work from the University of Pittsburgh. So we've got some very good retained knowledge as well and investing in capabilities to not just have the current products, but to evolve those into a new portfolio Glen and he made.
Wanted to talk a little bit more even about trends and stuff that we see.
Yeah, I would just say that our first and foremost when we think about our regenerative platform, it's broader than wound care right. So it's hitting other parts of the body as well and.
One nice thing about the Asl addition, as it did add additional capability and wound care, but also and our plastic and reconstructive business with the Gen tracks from products. So we.
We are thinking broader in terms of regenerative medicines outside of wound care and I think as we look forward, we will be doing more and other adjacent areas and the body.
Trading wise, obviously, you know our business has been impacted by Covid and.
And we'll probably see and additional impact here and the first quarter and maybe first half of the year, but we feel quite good about a few things number one you remember last year you know we.
Struggled with supply before Covid hit and I think we're in really good shape relative to our plants and we've now built adequate safety stock to support our existing customers as I mentioned in the prepared remarks going after new accounts and so I think we're in a good position to capitalize a lot around that.
And I listen I think once we bring this business together with a S. L. We are expecting to see synergies.
Talk more about what that looks like as we get further into the year.
But on the commercial front all the heavy lifting has been done and I think that's really good news that we've got that behind US we're moving forward and.
The team has been trained on the combined product portfolio and are really excited about this broader bag and tool kit that we now have two yeah.
Ill provide to our customers and ultimately to patients.
Great. Thanks, so much and and the default with it's a great segue to the follow up question I had and Oh.
And as I was just you know the guide that you've given.
The partial Q1 and and it sounded like from your.
Expectation is we'd expect groups and sales disruption during the integration.
And I beg your comments correctly.
And just.
And I hate to say exiting this year because nobody wanted to talk about 'twenty two outlook at the moment, but just as an underlying business.
Net of those kinds of those kinds of attacks as we get into the back half of the year and into the following year.
How how should we think about underlying growth for that for that is all businesses and pulled into the portfolio.
Terry do you want to since you commented in the prepared remarks, you want to frame it up a little bit.
Yeah, I think in terms of our growth expectations for it and so I I think we would expect it to be growing at the same level that we would expect the rest of our tissue business.
And calling out so I think and.
The high single digits.
Definitely is the expectation that we should all have interest and we get more confident with our 5% to 7% with ortho out and ACL coming into tissue technologies as well as what Glenn mentioned on the supply I think that that entire segment has the ability to get back to high single digits or low double digits for sure.
And so that's what that would be my full expectation grey zone.
Thanks, Matt Thanks, so much.
As a reminder, we are taking one question and one follow up question on todays call. We will now take the next question from Dave <unk> from JMP Securities. Please go ahead.
Thanks, guys.
Beginning to forget with guidance.
[laughter], whereas like and we've got a quarter here and there for years and thank you for that.
Maybe one for Peter just on the heels of that and I mean.
Obviously things are changing and fluid world, but you mentioned some of your confidence.
And I'd love to get your thoughts on you know.
What's happening out there, whether you want to talk domestically or internationally as well with the virus and sort of your confidence level, maybe compared to what it was in 2019 and looking forward.
Yeah, and then we start off Glenn and maybe you can frame it out globally and if you've got a really good handle on it and all of that and some other comments on how we see COVID-19 right now.
Yeah, I mean, I would say first and from US our first quarter is going to be impacted by Covid and you saw that in January and early February and.
And we look at some of the hotspots right now I'd say central and Southern California is probably the biggest area of impact at the moment, Texas has been and impact Arizona and those are some of the states and the U S outside the U S. The biggest impact is really a bench and the U K you know there was a significant decline in procedures and the month of June.
January.
And they were actually down and even greater than the levels and <unk>.
So a procedure deferrals versus April and May of last year, or so you can't got hit pretty hard for us, it's not a big market, but one that has been impacted and I think for the most part and the rest of Europe, well, there's been some spots of impact.
Nothing of concern from from our perspective.
We are seeing and impact to and in Asia Pacific Japan is going through a third wave of the virus, but as you've heard me and my prepared remarks, we have so many good things going on there, we're generating consistent double digit growth and the face of even.
And some headwinds from from the pandemic, but.
I would just say that the biggest watch out for US is really the U K and then a lot of our indirect markets that's being impacted the most right now and that would include markets like Spain, Portugal, and Russia, and South Africa and those are the areas that we're keeping a watch out and where we've seen probably the greatest impact outside the U.
Yes.
And and Dave I would say.
Carey mentioned this and our kind of caveat to the the guidance you know look we're we're optimistic that obviously the vaccines are having a very positive effect.
We believe something like the J&J and additions and other vaccines are going to have a big impact as well.
You know customers are clearly a little skittish and holding back some reserves relative to these added.
South African and the U K variance and others that may arise and so that's why we think this is not going to be a big step up we think it's going to be linear and the first half and as I reminded others before I mean, we don't need to be a herd immunity and our business to start seeing a pick up we just need to have the ice to use not.
Heavily burdened.
And thats, either a combination of people holding reserve bad backs beds back or them fully opening up and we are seeing those beds to begin opening up and that has a direct correlation with neurosurgery and.
And in many cases, some of our more invasive procedures on the tissue technology side, but.
But we're cautiously optimistic and I didn't.
We don't see significant amount of business turns out, but I think the only caveat to that would be carried probably on our capital business, which as you know cruise is still under 6% of the business you can add on and probably a few points yourself, our instruments business, but again when capital budgets free up and we've got still kind of a question.
And it's beyond just Covid, it's also with the cash flow looking like from the different institutions.
Great. Thank you for that and maybe just a quick follow up for carry them.
You know obviously, great performance on the gross and and even gross margin EBITDA side.
320 bps improvement I'm just.
Curious.
How sustainable some of those increases are I know your long term targets are still higher but.
And that's an impressive.
And a tough time so.
And if some of the spending might come back, but just your thoughts on that level and given the environment. We're in today and what we should sort of.
Expect moving ahead would be great. Thank you.
Yeah.
I would say that there's as you think about 'twenty 'twenty, one and certainly our operating expenses are going to trend up over obviously very low and 2020th and we responded to COVID-19.
And as I mentioned in my prepared remarks from fourth quarter operating expenses were still about $12 million lower than over last year. So I do expect Q2 opex to move up in 'twenty 'twenty, one and just as when you get back to more run rate levels. So, but I would say that you know net net.
You use the fourth quarter 2019, and a good run rate level and so fourth quarter 2019, still had obviously had to ortho and it but it had ARCUS and rebounded and as well and then annualize that fourth quarter Opex spend it's just essentially about $735 million of annual Opex spend I think we'll beat that I don't think he.
You'll see that level of spend and the business from 2021, and I think we're obviously applying more smart spending and prioritizing hazards been spending back.
So I would say that will be lower than that and I also think that we'll see some gross margin improvement between 'twenty and 'twenty and 'twenty 'twenty. One I think some of the levers that you saw benefiting us in 'twenty and 'twenty, one even though revenue was down 10% is still going to produce a nice gross margin and if it has to move.
And into 'twenty and 'twenty, one and.
And and those are things like.
Tissue supply.
So and in there now and and supply are addressed and and as tissue comes back into a growth mode that will help our gross margins.
And the continued moving out of discontinued products will continue to help our gross margin and don't forget about this is the year that at the end of the year will move off the TMA agreement with J&J and so I would expect from from gross margin improvement year over year as well as from modest EBITDA improvement.
And with our with Opex still coming back a little bit higher but with the gross margin line kind of helping to offset that.
Thank you.
Well now take the next question from Kyle of climate True Securities. Please go ahead.
Great Hi, guys. Thanks for taking our questions for 'twenty and 'twenty, one guidance basically assumes revenue will be flat with 2019 levels just on a dollar basis and obviously you guys are swapping out that works out like Germany does and it's fair for a seller, but now they are about equal size businesses. So I guess can you just.
Help us understand what your assumptions are for the rest of the business this year and and net.
It seems like you guys are considering that that Covid will continue to impact things and the first half, but just any more additional detail you could provide would be helpful.
Sure I'll take that one yeah. Thanks, Kayla I would say that and you think about you know comparison day 2019.
And you're right. It's it's about flat for 2019, the organic growth is about 3% to 4% compared to 2019, when you remove the impact of the divestiture and adding eight salary and remove that it's about it and organic growth of 3% to 4% and if you could go back to the remarks that I said one.
And I described our expectations for the year, we talked about a gradual first half recovery.
And which implies that the second half is going to be stronger than the first half. So I won't be able to give you a bit more color on first half versus second half, we get and when we get to April our Q1 earnings call because we'll be giving some guidance around Q2 at that time, Okay, and what I would I would expect that you should be thinking about a second half stronger than first half and.
And with the comments out of it.
Our first half gradual recovery and Covid impacts.
And largely behind us and the second half and then in terms of just any segment color and I wouldn't expect that.
Segment would largely be a little form around the same on an organic basis, so not a lot of different and the segment performance at the midpoint on an organic basis.
Right. Okay that makes that makes a lot of sense. Thanks, Gary and then just in terms of and as new product launches coming this year with zero Lincoln are right I mean, how meaningful can that was new product b and how are you thinking about about those contributing and the second half. Thank you.
And do you want to take Jonathan.
Sure. So you know clearly the biggest impact from a new product launch point of view as it relates to 'twenty and 'twenty, one is going to be sort of like it's a global watch and that'll be the most meaningful contributor to a and b is in 2021.
Lora is really going to be a controlled market release.
For tumor probably around the third quarter and then some other areas that we'll be watching and a fourth quarter, but.
Won't contribute a lot to revenues in 2021, that's more of a 2022 and 2023 revenue growth driver for us.
He said that and I think it's important to reflect on the new products. We've launched the last few years. So you think about the serious programmable valve enhancements new sizes the tool can be rolled out.
Additional tips, we've put on crews.
Or surgical headlamp duo and Theres a lot of new products that were launched before Covid and we never saw the ramp and the demand for that and I think you're going to see a bigger contribution coming from those products in 'twenty and 'twenty. One so it's not a new product, we're launching in 'twenty and 'twenty, one and it's definitely going to be a contributor to growth.
And then a new product we are actually launching this year is a.
Lot more shot that's very specific to the Japan market along with some other products. There. So we do have a nice cadence of new products. We're launching this year coupled with the fact, we have other products lost the last couple of years that will ramp.
And 2021, and again, that's going to be a big part of our growth story for 'twenty and 'twenty, one and we move pass these COVID-19 headwinds.
And I would just add scale and speed.
And that's that.
We clearly had that we've addressed the tissue technologies supply issue in 'twenty and 'twenty.
But if you think about it and 19, we struggled to bring on new customers, because we wouldn't have enough ongoing and supply 2020, obviously because of Covid, we didn't reach likely customers. So you know I would argue 21 and 22 with one of the.
Larger growth opportunities is just the ability to expand that base of products and now with something interesting and new and the portfolio such as the ACO product line.
And that's gonna be also a nice driver force here over the next couple of years.
Great. Thank you guys.
Thanks.
Thanks Bill.
And I'll take the next question from Robbie Marcus with Jpmorgan. Please go ahead.
Oh, great and thanks for taking the questions.
Terry you guys had a really good the free cash flow conversion and fourth quarter here I noticed that.
Capex was probably a bit lower than you normally would have and I didnt hear guidance for 'twenty, one on free cash flow.
So I was just wondering if you could give us thoughts around how that will trend over the coming year.
Sure Robbie and let me start with operating cash flow and then I'll work my way down to free cash flow.
And for 'twenty, 'twenty, and we did a just over $200 million and operating cash flow and so on.
<unk> gross.
<unk> cash flow, even despite again, a COVID-19 impacted year I would expect that our operating cash flow will increase into 'twenty and 'twenty, one and so I do expect a modest improvement and operating cash flow.
Free cash flow is going to be a little bit lower that would and than 'twenty and 'twenty just because of the fact that capex as you mentioned and it's going to normalize so capex and 2020 was $39 million and.
And that was the result of us really kick in and prioritized and view of Capex and and really trying to preserve cash as much as we could in 2020 as well.
Covid, so I would expect that our capital expenditures for 'twenty and 'twenty, one will float up they'll probably be in the neighborhood of where 2019 was for 2019 was around $70 million of cap ex spend so I think he can target around that or a little maybe a little bit higher just because there's some pent up demand.
I would say operating cash flow year over year higher free cash flow a little bit lower just because of growth differential in the capex spend.
Great and maybe a quick follow up just staying on free cash flow of the old guidance was for greater than 95% free cash flow conversion and I'm guessing we will get an update at.
At the May analyst day, but you know how are you thinking about it we have a couple and I'd say more impactful acquisitions and the short term how are you thinking about that over just the course of the long term and where the business sits right now thanks.
Yeah, and then Ravi and you're correct and that as we do additional acquisitions and trying to take a little bit of cash to do some integration work that will ultimately benefit and and drive our top line Oh faster for us. So we think it's a good trade off in terms of making those right investments.
And to integrate the business and so certainly for from a 'twenty and 'twenty one perspective, I don't expect to see a free cash flow conversion of 80% like I got and in 2020.
Because again the normalization of some of the numbers I am quoting capex, but I do think and are in a normal type of environment, where we're steady state I think those types of cash flow conversions can be there, but in years, where we're gonna do and acquisition and Ah you're going to see us obviously go into that and.
And you know getting into the sixties, and and maybe being a 17, 8% range, but I think and and a year, where we're in steady state mode, I think and 90% cash and cash flow conversion as possible.
Great I appreciate the thoughts.
Yeah.
We'll now take the next question from Matthew O'brien of Piper Sandler. Please go ahead.
Good morning, Thanks for taking the questions I guess, one for Glenn and and one for Terry sorry, Pete.
Glenn as far as a sell goes you know they did 101 million and 1995 last year and now and a pro forma full year basis here and looking for something like 92, this year and I get and Theres Some COVID-19 impact.
You know.
Disruption from the integration impact, but why wouldn't that that full year pro forma number. This year, just given that all the heavy lifting and kind of behind you not be really conservative and then when do you think the real big synergistic opportunity from a contracting and cross selling perspective really kicks in and is it more like 'twenty two 'twenty three.
Or is it even later this year.
You know and just as we think about the guidance for every cell that carry had outlined.
And obviously, we've got 11 months versus a full year as part of our guidance. We've considered COVID-19 impact is similar to the rest of our tissue business and anytime you go through.
<unk> like this you have some typical disruption that takes place with with respect and our sales force and so that's all factored into our guidance of 83 to 88 and four were this year and so that's how we've looked at our guidance you know hopefully we can outperform that number and to your point around cross selling and when do we start to see some of the opportunities.
You realize I think it's probably late this year.
Early 'twenty and 'twenty, two and it will take US a couple of quarters to get you know these products fully rolled out continuing to cross sell the entire bag. So I think it's going to take US a couple of quarters to get through that so we're probably looking at seeing some upside late this year and then moving into 'twenty and 'twenty two.
Okay Glen I mean, it feels like the 83 to 88 is really kind of a floor as far as that business grows and you argue.
And you know we have.
The uncertainty with respect to how long Covid is going to last and we've got to get through and the rest of the integration. So I would just say hopefully and as conservative and that's kind of Oh, we have how we felt like it.
Okay Fair enough and then Terry you know.
I understand Q1, I think all med tech companies and talking about a big ramp throughout the course of the year, but historically, you've done and 75 percentage of your earnings and the last three quarters and this time around.
And we're looking for you know 80, 81% of your earnings and the last three quarters with Q1 being impacted by a lot of things.
So what gives you guys. The confidence that you can get that level of earnings power and the last three quarters of the year. You know can you just give us some levers that you have to pull on in case. Some of these other issues COVID-19 related or whatnot pop up.
Sure well certainly Covid is and you know and impacting Q1 for sure and so that that factors into part of our EPS Guide for Q1, just given where the revenue ranges, but the other thing I would say is that.
And as I think about Q1 gross margins and they're going to be a little bit lower than Q1 of 'twenty and 'twenty just because of the that the whole portfolio timing change and you have ortho coming out which is a higher gross margins and the corporate average that comes out for a full three months you have and sell.
And for only two thirds of a quarter, that's been and create a little bit of a margin mix. There in Q1, and it'll take margins down a little bit compared to Q1, and 'twenty and 'twenty, but.
But I do expect that that you'll see from lower opex spend year over year and Q1 because of the fact that again you had the ortho out which was heavy burdens and.
And the and the Opex line, and then replacing it with and how that comes in but realize that and so we're not going to realize all of the synergies there until kind of by the time, we get to the fourth quarter and so part of Q1 also is requesting this portfolio timing change and the fact that insulted.
And cost synergies will be realized gradually over the course of the year. So that will be part of the build as well as as I mentioned is that we expect that certainly the second half.
And most of the Covid impact should be behind us at that point, So we would see a.
Heavier.
The contribution of our revenue and the second half versus first half.
Yes.
Thank you we'll now take the next question from Matt Taylor UBS. Please go ahead.
Hi, Thank you for taking the question.
So the first of all I wanted to ask was just a follow up on it and they sell you've made a number of comments on the integration here I just wanted to know.
And now that you've brought it in house.
And anything that surprised you positively or negatively and IV.
Have you.
Thought about the outlook for that.
Longer term and.
And and different material way given some of these opportunities for synergies.
Well and wanted to ask.
Yeah, I would just say, we haven't really seen any surprises I think the good news is we've.
Got the commercial integration.
Well under way and so from my perspective, we've been impressed with the.
And the product portfolio that came over and it's what we thought it was added a number of a sales specialists.
And that are focused and the wound reconstruction space and that would be around the micro matrix powder and a seinfeld products and so you know I think the specialization that they bring.
The team has a really high caliber team that we have a range over.
The product portfolio and what we thought it was.
So really no surprises I would say and.
Yeah, we're really happy where he and great feedback from customers already so we feel really good about it.
And my and my view would be that.
And they didn't do a lot of contracting and so I think that's going to be a nice addition, and what we do with our enterprise team and.
And the second part would be as I mentioned and.
Some of the comments before.
On the scientific side I think you know and their last few years, there wasn't a significant focus on new derivative products for a lot of reasons and with the leadership team. We have on the R&D side and clinical we clearly think there's some opportunities with other derivative products that.
Aren't a significant.
To the to bring out to the market so stay tuned on that as well.
Okay great.
And then I have one follow up on staff and I know you've been talking about and the.
And I'm going capital pressure, it's not too surprising and I was wondering if you could characterize that anymore.
And in terms of the trends that you've seen over time and how are hospitals starting to open up there.
Wallets and and now that there's kind of a light at the end of the tunnel how would you predict that that's going to progress over the next couple of quarters.
Terry do you want to take a shot at it and when and I can add any color. After you do comment.
No I mean, it and and again I would say that we we've seen sequential improvement and capital wisely is gone.
And as I think about Q3 to Q4 capital that was about a 40% sequential improvement and our capital sales, so really nice, but still it's still capital was still about 18% down year over year and the fourth quarter. So it certainly still lagged and all of the portfolio was only down to 1.5% in.
In Q4, and capital was down 18% and it's still obviously quite a lag and the recovery piece and so we think it's going to take some time, we are encouraged by the discussions we're having the pipeline remains really strong.
And we have brought to the table different options to start those conversations back out financing options rent to own type of models and things like that to get those and those discussions are going I would say and a smaller capital needs and I don't think of us as a very large cap at all I mean, our largest Ah Ah Ah.
Price of a catheter or qusay, you're talking about a couple of hundred thousand.
And then we have smaller capital units like Mayfield or our duo lighting headset.
The smaller pieces of capital are responding better or coming back a little bit stronger and even though the instruments business that can be capital light with only 2% down and the fourth quarter. So the good news and some other smaller capital pieces are are coming back and it's the larger ones that that will continue to do you expect.
They lag, but it's not a competitive issue it's more of just a.
And when the budget and what kind of rehab. So we're still encouraged by the discussions we're having that we think that will continue to see from capital sales or just continue to be a little bit lighter than the rest of the portfolio at this point.
Okay, great Thanks and color.
Yeah.
And we just had as you know we've talked about in the past, it's only 67% of our revenue. So it's not a big part of our business.
And then the price.
Silver lining here is the funnel is really strong with our capital business and when it does come back we actually feel like well, we'll turn the corner pretty quickly, but it's probably going to be and the second half of this year.
Oh, thanks, so much.
Well now take the next question from Sharpens thing at Wells Fargo. Please go ahead.
Oh, Thank you so much for taking my questions.
A couple here.
And.
For backlog.
'twenty 'twenty one guidance.
By August.
Be about 9% of sales and.
And also.
Are you assuming for normalized and supply coming back Hum.
And our fourth 15 to 20 already and I think.
And I should get 200 basis points from 2019 sales are you expecting cornerback be dialing it back and your guy.
Items, and then also and what are you assuming and your guidance for Rguest and feedback from <unk> contribution.
Gary.
Yeah, She got and I I I would say that overall I'm you know.
Whether or not we have a backlog I think it's going to be highly dependent on just a course of COVID-19 here, we are assuming a gradual recovery and the first half. So I would say that we don't see a big bolus impact of a pent up demand a big bubble coming through I think it's gonna be a slow and steady grad.
While an improvement.
Improvements over the course of the first half with was an expectation that largely COVID-19 is behind us and the second half.
So I I I I don't have a calculation for backlog to provide you that says this is what we've assumed in our and our numbers.
Certainly I I hope there is a little bit of backlog help in in 2021, but again at this point, where we're assuming kind of slow and steady improvement over the course of the first half.
And I don't have the specific breakdowns of ARCUS and rebound at this point I think rebound we do.
Have some contribution of rebound and ARCUS and our 2021 numbers I still think the larger impact certainly for rebound a bit too is going to be Ah Ah Ah.
A larger opportunity for us and 2022 and beyond.
Yeah.
Okay got it and whatnot.
Supply do you expect.
Okay.
And I'm, sorry, I can't I can't see what you're saying, there what kind of supply.
And so given given the normal life.
Supply I think in fact, all sides and 500 to 200 basis points, Oh, right and we get any of the older here Yeah. Yeah sure. Yeah. I mean at this point I would say and certainly our expectations is that the supply issues have been addressed.
And that we are at a point, where we can meet any unconstrained demand as the business recovers so as I think through them and the opportunities and 'twenty 'twenty, one I would assume that and tissue technologies will be contributing very similar to what we expect for CFS as I mentioned before and one of the questions that somewhat.
And he asked.
And I asked was about you know I do.
And expect to be.
Big differences and the segment performance at this point and as I look at the year. So I think tissue technology will be equal.
Equal contributor to our growth and goes back to in 'twenty and 'twenty, one and certainly as I think about our gross margin story.
And between 'twenty to 2021, that's a benefit of tissue technologies and the restoration of the regenerative tissue supply certainly will help my gross margin throughout the year as well.
Thank you so much I believe index.
Well now take the next question from rushed and Hawaii of Jefferies. Please go ahead.
Hi, Greg This is Anthony for Raj and I hope everyone's doing well.
Question is on margin progression and specifically adjusted margin progression and so the company and last fiscal year at 24, four but it has ortho and there and it does not have a sell some sort of look into the <unk> adjusted EBITDA margin and sort of blended number and it looks like that settles out and the $25.
<unk> range.
And make sure that we're thinking about that correctly and then when we think about the bridge from 25% to the 20% to 30% range and how do we think about that in terms of progression. It seems that you can actually get there faster and now with the mix, meaning that a seller has a higher margin and ortho.
So how do we think about margin progression from where we are today to the 28% to 30% range and I'll have one quick follow up.
Yeah, I think you're thinking about that really are in line with what I would say as well I think you know where we finished in 2020, we'll see a little bit of of EBITDA margin improvement in 'twenty and 'twenty, one and just a couple of factors and as you think about that.
In 2021, obviously I my expectation is we'll still be able to deliver some nice gross margin improvement year over year, that's gonna be moderated backed by our operating expenditures coming back up and coming from a pretty low here in 'twenty and 'twenty gradually moving up but net net I think we'll still be able to deliver a little.
And of EBITDA margin improvement year over year, and I think you pegged it right and in that you know that are at 25% type of range and but remember what I want to draw you back to that one of the slides that Glenn had at his back and we've shown this slide before when we announced the ACL acquisition, where.
We did a pro forma look back at 2019 and instead, if you took 2019 and took ortho out and you added a sell in and the first year and the impact our EBITDA margins would be about neutral and so I still think we can squeak out some margin improvement between 'twenty and 'twenty and 'twenty two.
And one with a sell in.
But you will pop is gonna be and into the next year and 2022, when you realize the full synergies or they sell and you've got ortho out and that that's that that swap there were really show a nice benefit in 2022. So I think we'll make some really nice inroads in 2022 are all along the R. R.
To get to 28% EBITDA margin.
The fault there would be I guess, you mentioned and synergies and so.
And I guess to quantify the synergies I mean on the cost side, specifically is there a number out there we should be thinking about and then when we think about synergies and and.
And cross selling and just wondering if it's a so is it all complementary to the nerve repair channel and you spoke about last quarter or are those still going to be too.
Separate and dedicated selling efforts thanks again.
Yeah, I'll I'll talk about the the synergies that they sell and then maybe ask Glenn to talk a little bit about your second question on there.
And so synergies and.
And then you can go back to their 2019 and public statements and they they had about $80 million of operating expenditures and in their business that was $100 million of revenue. So essentially the business was that a breakeven and so our opportunity is to bring that revenue into integra and to really synergize.
And we certainly think we have a lot of opportunity because it's the same call points and we think.
There are some some nice synergies on the infrastructure side. There. So as I think about that I think our and you know our goal is to get about 40% of that of that opex out and by the end of the year and so there's some nice synergies there as I mentioned as they think about full run rate realization of those synergies going into 2000 and <unk>.
22.
And then Glenn you want to tackle the no question.
And just think if you look at the Ada yourself portfolio it really.
Impacts the wound reconstruction business and the surgical reconstruction business and those channels and I'll keep in mind, we have nerve being sold by the wound reconstruction team today, but we have a specialist group that focuses on it. So I don't see a lot of synergies per se as it relates to the nurse business.
That's helpful. Thanks.
Well now take the next question from Jason Bedford with Raymond James. Please go ahead.
Hi, Good morning, just a couple of modeling questions. If you could.
The discussion of moving here.
And 2020 revenue what was the incremental revenue contribution from the increase and tissue supply and the move from distributor to direct and Japan.
Yeah.
So the tissue business was not the business that was moved it was general surgical business, So think of that as Coosa excel and other instruments.
We haven't specifically quantified how much that is but it's one of the contributors to Japan and driving double digit growth.
And keep in mind, Japan today, just to put it into context as a market that's above $60 million of annual revenue.
So.
So and I've got it.
I guess sorry. It was two items that you helped me with the Japan dynamics and the other one was just you had your supply from Australia and two side in 2019 and I'm just wondering what was the incremental <unk> and <unk>.
<unk>.
It's hard to know and 2020, because it was it was a COVID-19 impacted your overall you know our our business was down.
And because of Covid so.
Well, how I would look at 'twenty and 'twenty is a year that we recalibrated and and and put safety stock back into a supply chain that that really was was below where we wanted it to be so in 2019. It was missed opportunity. So the demand was there we just didn't have the supply.
To go and chase that demand in 2020, while Covid was was impacting our overall top line. We took that the approach that we're going to have had and have a couple of our factories continued to build and.
And bring inventory levels up on some of these critical skus such that when the recovery happens that we can then take advantage of that so.
It's not there's no way I can quantify the impact of overall 2020 was still down across the board and and in our business because of Covid.
Okay is there any way to quantify the.
They're all could between demand and supply and 19 or is that just too far back.
Well.
What what that's what I think chagrin was getting after and her question. We had talked about that it probably was a point to two points of growth that that cost us by not having the supply in 2019 to meet the demand.
Well, certainly we missed and the opportunity to grow revenue and and OTT because of the fact that we didn't have the supply. So we talked about it being about a one to two percentage points of our growth and noting that it cost us.
It depends and no further questions at this time, Mr. Bewley I'd like to turn the conference back to you Sir.
Okay. Thank you.
Thank you.
Thank you everyone for listening in today, and we look forward to updating you up and our next calls and please make sure that you take note of our Investor day coming up on May 20, and thanks, everyone.
Thank you.
That concludes today's call. Thank you for your participation you may now disconnect.