Q1 2021 Integra Lifesciences Holdings Corp Earnings Call
Ladies and gentlemen, and good day and welcome to the Integra Lifesciences first quarter, 2020, one financial results call and.
At this time and I'd like to turn the conference over to Mr. Mike <unk> head of Investor Relations. Please go ahead Sir.
Thank you David.
Morning, and thank you for joining the Integra Lifesciences first quarter 2021 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 first quarter 2021 financial results.
The release and corresponding earnings presentation, which we will reference during the call are available and Integra life Dot com under investors events and presentations and the file named first quarter 2021 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 SEC and and the release.
Also in our prepared remarks, we will make reference to both reported and organic revenue growth.
Organic revenue growth excludes the effects of foreign currency acquisitions, including ACL divestitures, including the recent sale of our extremities orthopedics business as well as discontinued products.
Unless otherwise stated all disaggregated and franchise level revenue growth rates are based on organic performance.
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 turn to slide four I'll begin with a review of our first quarter performance.
Total revenues were $360 million, representing reported growth of one 6% and organic growth of two 9% compared to the prior year.
And were above the high end of the guidance we provided in February.
It also represents organic growth of approximately 3% compared to 2019.
First quarter revenues, and both our carbon and specialty surgical and tissue technologies segments reflected a gradual recovery and our procedure based markets as wells and improvement in hospital capital spending notable strength came from both small capital used and neuro procedures and international sales of KUSA.
Secondly, from Japan, and China, as well as global sales of instruments.
First quarter adjusted earnings per share was <unk> 69 cents.
Representing an increase of over 40 per cent compared to 2020 and 6% compared to 2019.
And this reflects our prudent spending approach as we navigate the remaining uncertainty related to the pandemic impact on surgical procedure volumes taken together, our revenue and earnings for the first quarter represent a very good start towards achieving our 2020 one financial targets.
Based on our first quarter performance, we're increasing the low end of our revenue guidance to a new range of 1.525 billion to $1.535 billion and now expect full year 2021, adjusted EPS to be at the higher and of our previous guidance range of two.
$2 86 to $2.93.
Turning to <unk>, our most recent acquisition first quarter sales were in line with expectations and we also completed the commercial integration ahead of our initial plans.
We expect to have the remaining critical integration activities behind us by the end of the second corner and we continue to be optimistic about the addition of a cell to our tissue technologies portfolio and remain confident and achieving our previously discussed goals for this business.
We also continue to prepare our global commercial organizations for the midyear launch of Sara Wang Our next generation ICP monitor which will further enhance our neuro monitoring global portfolio.
This launch follows the launch of several other products, including our new hydrocephalus programmable valve for Japan, and our new Electrosurgery generator and associated Irrigator and a number of reusable bipolar force out products, we expect our new product launches and sales growth of products recently launched a fuel.
And acceleration and revenue over the course of 2021.
Later this year, we're also planning and controlled release and clinical evaluation of the Aurora surge of scope for minimally invasive treatment of brain tumors and exciting program that has the potential to impact the practice of neurosurgery.
With respect to COVID-19, we're encouraged by the gradual improvements and procedure volumes and hospital discretionary spending however, we remain cautious and expect some variability to continue through the second quarter as vaccinations rollout at different rates globally.
Nevertheless, we feel confident a global recovery will continue and following our first quarter performance, we remain well positioned to achieve our full year 2021 financial targets.
And finally as a reminder, we will be hosting a virtual investor day on May 20, and we look forward to providing you with a detailed review of our strategies for both of our global segment and visibility into our path to achieving our long term financial targets, we hope youre able to join us and with that I'd like to turn the call over to Kerry to <unk>.
<unk> the details of our first quarter performance Kerry Thanks, Pete and good morning, everyone I'd like to start with a summary of our first quarter highlights on slide five.
First quarter total revenues were $360 million, representing an increase of one six per sand on a reported basis and two 9% on an organic basis as Peter indicated and total revenues were above the high and yet the guidance range communicated on February eight.
And the first quarter, we achieved positive organic growth and both are todman and surgical specialty surgical and tissue technologies segments, as well and both the U S and on international markets.
Adjusted EBITDA margins increased 360 basis points to 25 per cent and adjusted earnings per share increased nearly 44 per cent of 69 cents and <unk>.
You will recall profitability last year's first coring and was impacted by COVID-19 disruptions that began in March in 2020.
If you turn to slide six on how long do the first quite a performance ever CSS segment.
Reported Q1 revenues and CSS were $241 million and increase of four 2% on a reported basis and three 3% on an organic basis from the prior year.
Global Neurosurgery sales were flat on an organic basis compared to the prior year.
Sales and advanced energy increased mid single digits and were led by the recovery of capital sales and are in international markets, driven by Japan, China, and other Asia Pacific indirect markets.
As a comparison U S capital sales within advanced energy and were still down double digits compared to the first quarter of 2020.
Our strength and advanced energy offset flat to low single digit declines and dural access and repair and CSF management and neuro monitoring.
And then these three franchises, while we did see a gradual month to month improvement during the quarter surgical based procedures did not fully returned to pre COVID-19 levels.
Softness here was partially offset by improvements and smaller capital equipment sales, including Mayfield.
Q1 thousand instruments increased over 15% on an organic basis compared to the prior year on.
Our performance here was largely a result of any improvement and physician office visits relative to the steep COVID-19 related declines experienced in March of last year.
International sales and CSS increased mid single digits led by growth in Asia for free.
Format, and Europe was mixed with strength in Italy, and France, offset by weakness in Spain, and other indirect markets in Europe.
In general outside of Asia, our indirect markets continue to lag due to COVID-19 related deferrals.
Moving to our tissue technologies segment on slide seven.
On a reported basis sales and tissue technologies declined three 2% compared to the prior year.
On an organic basis sales increased two 2% as we exclude both the full quarter of divested orthopedic sales from 'twenty 'twenty and a partial quarter of acquired Asia revenues in 2021.
First quarter sales and wound reconstruction increased three 7% on an organic basis.
And by sales and Integra skin and prime matrix.
Sales and private label declined half of 1% in the first quarter.
International sales and tissue technology increased mid single digits on an organic basis.
Turning to slide eight I'll now review, our first quarter key P&L components and cash flow per appointment.
Adjusted gross margin was 67, 3% compared to 68, 3% and Q1 of 2020.
And year over year decline was it related to revenue mix and higher manufacturing costs and product revenue mix was impacted by the timing of the orthopedics divestiture relative to the partial quarter benefit from my cell.
And a higher mix of international revenue, which has a lower gross margin and all of our domestic RASM.
The higher manufacturing costs were mainly due to I I don't hire idle capacity relating to the impact of COVID-19 resurgence is on our work force.
Our adjusted EBITDA margin was 25 per cent compared to 21, 4% and Q1 of 2020.
Slightly higher revenue and lower operating expenses drove this year over year increase.
Given the ongoing risk of COVID-19, and we continue to manage our expenses and expenses closely and the first quarter, which contributed to the stronger profitability, we expect to increase spending and the balance of the year to support key growth initiatives.
First quarter GAAP EPS was <unk> 53 cents compared to <unk> 11 cents from the prior year.
GAAP net income for the first quarter included a gain of $42 $9 million from the divestiture of the orthopedics business.
Adjusted EPS was <unk> 69 cents and the first quarter compared to 48 cents and the prior year, reflecting an increase of 44 per cent.
Operating cash flow was $69 million and the first quarter and free cash flow conversion was over 100 per cent.
Reflecting good working capital and lower capital expenditures.
We expect capital expenditures to increase over the balance of the year.
Now if you turn to slide nine and I'll provide a brief update on our capital structure.
Our balance sheet remains strong after completing the extremity divestiture and ACL acquisition.
With approximately $409 million of cash on hand.
Our total debt as of March 31st was unchanged from December 31st and our leverage ratio improved to two eight times.
Turning to slide 10, and I'll provide an update on our consolidated revenue and adjusted earnings per share guidance for the second quarter and full year 2021.
Second quarter revenues are forecasted to be and the range of 372 million to 378 million representing reported growth of 44 to 46 per cent and organic growth at 42, and a 44 per cent.
Our second quarter revenue guidance reflects some COVID-19 related variability.
For the full year 2021, we are increasing the bottom end of our revenue guidance to a new range of 152 5 billion to $1.535 billion based on our revenue performance and the first quarter.
And you range represents reported growth of approximately 11 to 12 per cent and organic growth of 12% to 13% over 2020.
At this time, given some continued COVID-19 variability we are leaving the top end of the guidance range unchanged.
Reported revenue guidance includes a second quarter estimate for a sell.
Other approximately $20 million with no change to our full year estimated range of $83 million to $88 million.
Turning to adjusted earnings guidance for 2021 and based on the revenue ranges I just provided we expect second quarter adjusted EPS to be in the range of 63 to 67 cents, which represents double digit year over year growth.
We now expect full year 2021, adjusted EPS to be at the higher and of our previous guidance range of $2.86 to $2 93.
Now I'd like to turn the call over to Glenn to provide a brief recap of where we stand with our 2021 growth drivers Glenn.
Thanks, Jerry and good morning, everyone. Please turn to slide 11.
As Peter indicated our strong first quarter results increase our confidence and we're on track to deliver our 2021 targets.
We are signs indicate the environment is gradually improving and.
We were pleased to see the beginning of a recovery and capital and instruments.
Our first quarter performance was bolstered by many other recently launched products, including Durgin acoustic clarity and Japan.
News service programmable valve configurations are electrosurgery generator and others.
COVID-19 has disrupted what is normally a multiyear benefit from new products and we're pleased to see these recently launched products gaining momentum.
As Pete mentioned, we're on track to introduce several new key products later this year, including the global launch of Sterling on next generation ICP monitor.
Followed by the controlled release of the Aurora a surge of scope.
A new platform for minimally invasive treatment and brain tumors.
Well its revenue contribution will be small and 2021.
Aurora addresses an important unmet need for neurosurgery and won't be a significant contributor to our long term growth targets.
And our tissue technologies business, we look forward to a more normal environment as we move through Q2 and into the second half of the year.
As an example, although surgical reconstruction has not contributed to our growth recovery. Thus far we expect that the change and the latter half of the year as a result of the ongoing recovery of elective procedures and our prior investments and manufacturing and supply.
The integration of based on what's gone well and we're on track to complete all critical integration activities and the second quarter.
The complementary nature of this portfolio improves our competitive position.
And when coupled with recent commercial investments and new marketing and digital customer outreach programs.
And as our confidence that revenues will accelerate over the course of 2021.
We also have U S sales porcine based technology as an expansion platform for future products and clinical indications.
Outside the U S. We continue to execute well our first quarter results were strong and demonstrate a global recovery from the COVID-19 related deferrals, we experienced over the past year.
For the balance of 2021 growth will continue to be led by Japan and China.
Europe, and our other markets should improve gradually.
To wrap up we're executing on our 2021 plants with a strong start to the year.
We have accomplished much across the organization over the last 12 months and these achievements increase our confidence that we're on the right path.
We look forward to a deep dive into our long term strategy, our enhanced operating model and detailed market and portfolio segment reviews at our upcoming May 20th Investor Day.
That concludes our prepared remarks. Thank you for listening operator would you. Please open the line for questions.
Thank you ladies and gentlemen at this time the floor is open for your questions. If you would like to ask a question you may do so by pressing star one now if you're using a speaker phone. Please make sure that your mute function is disabled to allow your signal and to reach on our equipment again to ask a question. Please press star one now our first question comes from shock and sing with wells.
Fargo.
Good morning, Sugar and.
Good morning. Thank you so much thing the question. So I guess, one on guidance and one on capital and so with respect to guidance I believe it implies lower growth on us back to your basis and the second half with us.
And also if you look at seasonality it appears that youre expecting and I, just modestly higher sales and the second half versus the first half and so.
So how are you thinking about second half growth with us.
And what's baked into your guidance for the company and backlog and I believe it's still got contemplates organic growth of about three to four per cycle with 2019 with us.
We owe five to seven per cent, so any commentary there would be helpful.
And she got and it's Pete I'll start and just say again just to frame up is as we've said from the beginning of the year. You know, we're starting to see month over month improvement and procedures for sure and our confidence is increasing with the vaccination programs, particularly in the United States.
But also confidence that you know, it's going to get addressed around the world at the right level that we're gonna see that and our business and and just to remind you. What we look at in particular and what was the challenge last year was that ICU beds were being held on.
Either and reserve or actually being fully utilized by very sick patients and with two thirds of our business are impacted by the need to have and ICU bed available that had a major impact on us we don't really see scenarios coming back where the ICU beds and the vast majority of our markets where that compromised.
Our perspective, so even if spikes you know do kick up which we think is going to come on and he's going to happen here and there as the vaccines rollout that will so still see and ongoing improvement and the second part to this as well as debt. We've got a strong performance and EPS to begin, but we've been I would say just.
Prudent and are spending approach here until we see the uptick and the good part is we have some exciting long term things to spend money on such as Aurora and the rollout of the monitors a lot of things and a T T portfolio, which we're going to we're going to step up and so Karen maybe you want to address some of other.
Other she guns points, Yeah, I mean, we we continue to expect a gradual recovery for the remainder of the first half so and so we think about Q1 into Q2, we do you expect some sequential improvement says and who.
And I ended the second quarter and after a really nice Q1 performance. So the second half, though and he as you were asking will be sequentially stronger than the first half for sure and I and when we had baseline our guidance back on our February call. We had talked about overall, 3% to 4% growth on an organic basis compared to 2019 and so.
If you look at our Q1 actuals and our Q2 guidance range that we've given you the implied second half.
Guidance, then and compared to 2019 represents about.
5% growth against 2019, and about six a little bit more than 6% growth against the second half of 2000, Twenty's and so we do think where we're positioned well I'm going into the second half of the year.
And that's really helpful. Thank you and then just a follow up on capital could you comment on U S versus international capital dynamics, I think you called out advanced energy was driven by international and then any commentary on large versus small cap and then you know just on the order visibility that you have with the rest of the other thank you.
Yeah, I would say that about 75 per cent of our our beat and and revenue and this quarter was really driven by the better than expected sales performance and both catheter line and instruments and and really saw that in the last part of the quarter, particularly in March on our capital sales and international were quite strong and it was driven by.
<unk>, particularly in Asia, as I mentioned, and Japan, China, and some of our indirect markets and and and Asia as well for Japan, and one other things to point out is there physically have their hospitals fiscal year and in our first quarter. So it was particularly strong as it was there last quarter for their physical.
And year, ending and then for China, and Greater Asia. We go what you really are and indirect model. So our distributors are certainly anticipating the recovery of capital in their markets. So I'm seeing some nice order demand here in Q1 for that capital.
Certainly the international and capital was strong both for small capital as well as KUSA in the U S. Overall on our capital was positive.
Positive, but it was weighted towards small capital so think of our Mayfield two old lighting, those things really bounced back nicely in Q1, but our acoustic sales in Q1 were still down double digits and our pipeline for Qsymia is still incredibly strong. So again, we don't think there's any competitive landscape changes there and mainly.
Just to continue to expect more of a normalization of our capital and the us in the second half of the year anything else you want to add there and yeah I would just add maybe one or two additional points sugar and you'd probably remember, but last year and the first quarter, we changed our go to market strategy with our general surgical business and in our capital business in Japan and.
And that was done really well and that's some of the benefits that we're also seeing here and the first quarter, we actually had a record quarter in Japan and in terms of capital for the reasons Gary mentioned, but we also now have built a commercial team that's selling these general surgical instruments and capital and and we're seeing the benefits of that the other point in terms of some strength and some of our key direct more.
And Europe, we did see an uptick and a recovery and capital Germany would be a good example, and so on.
Our direct markets in Europe are showing a gradual improvement even some other indirect markets, but on the whole we had a really strong quarter outside the us with capital.
And that's really helpful. Thank you for the color.
Thank you.
Thank you. Our next question comes from Ryan Zimmerman with B T I G.
Good morning, Good morning, Matt.
So maybe just a follow up on shotguns question on on EPS guidance. I mean, you beat by about 12 cents you know I appreciate that youre going to come and kind of at the top end of the range there, but you didn't move the range and so maybe just help us understand a little bit of kind of what you think you may give back for the year and if that's just kind of a more normalized cadence of expenses. That's my first.
And I'll have a follow up.
Yeah, I mean, our expenses I would I would say we see.
We did constrain spending we wanted to have line of sight on revenue and as a result of that and spending was a bit slower as we started the year. Obviously had benefited the EPS line, but as we think about our expectations on for the balance of the year spending will move but that is in line with my expectations. So part.
The reason why the Q2 EPS guidance of a range of 63 to 67 percentage below Q1 is that our expectation is that spending is going to start to ramp up here, particularly as we support our second half product launches and debt, both Pete and Glenn talked about and we have a new Sarah link launch that.
It's coming out as well there as well as other long term growth initiatives here. So that's the reason for them being I'm guiding up towards the $2.93 high end of the guidance range that spread is about six cents. So it's about half of the upside that we got in Q1, basically saying that we can be towards the high end of the.
Guidance and and the balances is just you know spending that we are going to do and the balance of the year.
And Ryan as you can imagine you know, we we preserved a significant amount of our R&D programs.
Marketing initiatives, we kicked off a digital platform approach, both internal as well as from market base last year, but we did it on a kind of step one approach enough to get things off the ground or preserve and.
And we wanted to make sure as Jerry mentioned as we went through Q1, we didn't get ahead of ourself and case, the vaccine rollout and the U S wasn't as effective as it seems to be so we we really held back expenses here in Q1, and I think at the Investor day, you'll get a much better insight into where we're going to be applying some of those monies and and how.
Those benefits and 'twenty two 'twenty three will roll out we actually have a really nice lineup.
Our product set as well as program investments that we're going to put the money against.
I appreciate that.
Maybe turning to the wound care business from for a moment apps and I saw I think are about up about 30 per cent ourselves. So love to understand kind of characterize from a components of your wound care business.
In relation to the market I mean.
Just the puts and takes you know for inpatient wound and burn outpatient wound and and kind of where you're at.
And I mean, whether you're above that or below that within those components are given the 3% growth that we saw this this quarter.
Your line is Glenn I'm, you know, we did see a recovery and our wound care business here and in the first quarter and you know a lot of our products I've, probably makes us are doing well with our skin products.
And I would just say we've got a increased focus across the team on the inpatient side. So that's.
Driving some of this growth and then on the outpatient side, we still have a very strong presence. So we don't break down the growth between inpatient and outpatient but.
Some of the changes that we've made and having a bigger presence with a cell and the portfolio.
And that has helped us put up some growth organically here and the first quarter and we expect these strength to continue here into the second quarter I would add debt. If you look inside wound reconstruction and our surgical reconstruction business is inside that number and us and we did see a still some negative growth there and the first quarter that you know if you think about those.
Procedure as well as its hernia and breast reconstruction and was there.
We're still a more elective in nature and so we still saw a COVID-19 impact and in and within that piece of the wound reconstruction business. So if you kind of parcel that out the rest of the business actually did quite well given the fact that we still had some some declines and our surgical reconstruction business that we expect in Q2 to get back to just a nice growth.
Well, thanks for taking the questions and congrats on the progress.
Thanks Ryan.
Thank you. Our next question comes from David Kelley with J P M Securities.
Alright, great and good morning.
Hey, how are you guys.
And.
And.
And just given your position sort of and in region and biologics.
I'd like to get your thoughts currently on on the environment out there I know, we all saw the statement you put out and response to the FDA safety communication, but I'm.
And I'm just curious are you know what do you what do you think that means there's anything changing and then.
Sort of how doctors are viewing you know.
Biologics versus say synthetics and other options out there.
And he shifts or anything you'd note that are changing and improving love to get your thoughts.
This will clearly be a topic that we will spend some time on on may 20th So part of my advertisement here for it for you all to join I think will touch on this but you know where were actually I would say moving into a phase within tissue reconstruction, whether it would be for a chronic.
Wound and acute wound hernia repair and potentially upper chest wall or breast reconstruction and peripheral nerve that it's definitely moving into a phase here, where you're seeing us much more acceptance as a primary tool.
And you know even in cases of trauma, where they use might be a flat first and using blood flow from another part of the body to patch now using actually I E. A D M or some other type of xenograft is being used and and.
And with the use of synthetics over the past few years and other areas. Obviously, some notable notorious areas.
And where there's been seen body.
<unk> and think there's definitely an uptick and the use of a biologic platform that integrates granulate and two to the body and we think we're just really well positioned to take advantage of it and it's a really important part of our strategy is to have that broad portfolio. You know to some of the previous questions. I mean, we are still only.
You know under 25 per cent outpatient or Doctor's office focus at the most most of ours is inpatient focus and deals with very sick and complicated cases, and I think you'll hear more from us, particularly on the May meeting and stuff about how we think we can leverage that platform either the surge him and her primary.
Tricks, our traditional I D. R. T platform and now also this U b M and you sell platform to touch a lot of these different disease States and we also believe that just like and other modalities, you're going to start seeing combinations, whether it'd be foreseen with bovine and combination of amniotic with other areas and this.
Concept of a tool kit that gives us a reconstructive surgeon. Many options is what we're headed towards and and we just believe that Ah I think and the next few years youre going to start seeing this uptick really enhance here and the use of these products.
Thank you for that and look for the look forward to meeting them just a quick follow up.
You know and cod, but he mentioned that our strength in and actually it was mostly Asian and tissue was was more Europe.
Curious is that COVID-19 related or is that more of the mixture and why would why was international.
Stronger and tissue was it because.
Because how sick their patients are just just your thoughts there. Thank you.
And you want to take US sure. So first and foremost I want to compliment our teams outside the us they've been resilient and shown tremendous grit through the last 12 months and Dave Let me just give you some context organically versus the first quarter of 2019, a non impacted COVID-19 quarter, we grew over 11.
And it organically outside the us and so if we look at where the strength is coming from.
Japan, and China, you know just off the charts in terms of growth, Japan up over 70% and China up over 20%, but more broadly speaking, we're even seeing good growth and Canada, Australia, and New Zealand and our European direct markets, where those markets actually grew and the mid single digit range and strength and the U K and germ.
So it's been pretty broad.
But when you look at the growth and places like Japan, and how do you grow and over 70% versus a normalized quarter and 2019, it's largely driven by these new product launches, we watched sturgeon and over a year ago, We've launched recently and electro surgery generator and Irrigator I've mentioned the go direct strategy with our general surgical business.
And we've added more specialists and the CSF management business and we're seeing really good growth with our programmable valves and we have new product launches coming behind us and so the growth has been driven really by new product launches and some of the channel changes made and investments and its not just Asia I mean, our European team is actually driving some really good performance.
And yes, we are seeing a gradual recovery in these markets. The one area I would say, it's still lagging is the indirect markets where yourself the distributors and that was actually down high single digits versus 2019. So that has not yet recovered, but you can imagine that once that does come back, which we're expecting and the second half of this year.
We should still see really good momentum with our international business and I'm really proud of what the team has done and these numbers are stellar from my perspective, given the headwinds of COVID-19 given the challenges that we've seen and.
And just incredible performance.
Thank you.
Thank you. Our next question comes from cable and Crum with Truth Securities.
Hi, guys.
Hi, guys. Thanks for taking our questions and so I guess, if I look at what you guys did and in the second quarter of 2019, which I'd say is more of a I guess a normal year, and then 2020 you put up you know $384 million and sales now.
And now you're guiding to 372 to 378 million and the second quarter and so obviously you spun off the extremity business you've added <unk>. So can you just talk about some of the puts and takes so and relative to 2019 and just how ultimately you arrived at that second quarter Guide.
Yeah. The second quarter of 2019 was a really strong quarter for Integra, we had over 6% organic growth. So it's a really tough comp Kayla. So a couple of things just to remember when you look at the Q2 2019 numbers is that we had really and and private label was particularly strong and the second quarter it can be rather lumpy.
And so on Q2 was was really strong and 2019 was private label and really nice quarter for our wound reconstruction and channel and that was our original launch of Sterling was also and the second quarter of 2019 and honestly, our relaunch and serial link is happening here and the mid year for 2021 so.
And you don't have any sterling sales to compare again, so and it's just a really tough comp and so like I can appreciate the question, but I would say and as we think about Q1 into Q2, and that's where we're focused and continuing to drive some of that recovery trend and and many of our procedure base businesses that were still a little bit weaker and.
And Q1, and we see those starting to come back and a recovery into Q2 and overall I think on those trends will continue as we move into the second half of the year, but to answer your questions are really tough comp.
Relative to Q2 of 2019, and I think to carry US points, you made earlier and Glen and I mean, we're still cautious about COVID-19 and certain obviously countries and there.
Our ability to kind of bounce back even with the capital performance, we had and the first quarter.
Still not seeing the floodgates open on capital spending and U S hospitals, yet either and so yeah. That's what leads to that point, we do expect a sequential decrease and capital from Q1 to Q2 I mean, there was just US you know we get questions about pent up demand and and certainly I would say there certainly was some pent up demand as it relates to capital.
In the late Q1 here in March and particularly as we talked about I think our capital sales will moderate slightly as we move from Q1 into Q2, particularly and the international sales and but I still think we will expect a gradual recovery and the second quarter. So we're being prudent on and I mean, let's hope that it picks up faster, but we think this is the appropriate.
To call at this point.
Great now that makes a ton of sense and that's that's all really great color and so just I guess a follow up on on <unk>. So can you.
Talk about how that integration is going so far relative to your earlier expectations and then just what sort of blocking and tackling items and you still have to work work through in the coming quarter. Thanks for taking the questions.
Yeah, Thanks, Hey, I'll I'll take this one you know the integration of a cell is going pretty much as we expected. So if we look at the first quarter, we did accelerate a lot of the commercial activities and that's now complete obviously when you do that you do see some disruption, but we had factored into our expectations and our guidance for the first quarter. So.
We were pleased with how we ended up the quarter we're.
We're still seeing a COVID-19 impact on this part of our business as well and that will continue into the second quarter and.
Based upon our guidance I would say for for Q2, we are expecting to see a sequential improvement obviously, partly due to the fact, we had a full quarter, but we're also showing oh and it.
And the base business as well sequentially. So we are expecting to see this pick up and we'll see better growth certainly and in the back half of the year.
We just recently completed the order to cash conversion that was a big milestone for US here in April what that means us all orders are now going through our common ERP platform and we're also now shipping products out of our centralized distribution center and so that's really good work very fast integration and.
And so all of the big milestones are here essentially behind US Yeah, we still have a few things to get done but the commercial integration is complete a lot of the heavy lifting around the I T conversion is now done.
And we essentially be complete with everything by E on.
At the end of the second quarter.
But so far.
Everything is pretty much as we had expected in terms of this acquisition, we're really excited about potentially leveraging some of these products in terms of new indications.
Down the road. So we're looking at the R&D pipeline to figure out how we can take some of us <unk> technology.
And build out a broader platform across our business as well yeah I would have to say this is probably one of our fastest well executed integrations. We've captured all the synergies that we had intended to capture.
And and we're on our way here as far as the ramp ups.
Great. Thank you.
Yeah.
Thank you. Our next question comes from Robbie Marcus with JP Morgan.
Good morning, Rob and thanks for Hey, good morning, and congrats on a nice quarter and I want to spend a minute on free cash flow you touched on it briefly but it looks like Capex was at a really low level. So I was just hoping to get some thoughts on how you see free cash flow progressing for the year and where you think it is.
Should settle out as a percentage of adjusted net income for 2020 one.
Yeah, Youre right and our Capex, just like our Opex us started a little bit slow and some of that was intentional as again, we wanted to get more clarity on our top line is as the revenue recovers. So it was certainly the free cash flow benefit from that so I would expect our capital and.
Expenditures will start to move upwards as we move through the balance of the year as we have some nice projects and.
And I would I would say my my capital expectation for the year is probably around $70 million on and that's that's really in line with 2019 levels. So that's kind of where I'm shooting for US is we only had a less and $40 million of spend and capital last year because of COVID-19. So there certainly is some pent up demand from the teams.
And on wanting to do some improvements and some of our key facilities to support our growth. So it will be allowing that to come back in as we our balance sheet a year here in terms of free cash flow conversion and I'll talk more about that and does the may 20th events.
But I do expect that a we can get upwards of about 70% free cash flow conversion for the year Rocky.
Oh, good and and maybe just a quick follow up and I know someone asked on it before I just wanted to try and get a little more color on the operating margin progression throughout the year. It looks like if I'm doing my rough math right that the full year operating margin to get to the top.
And then the EPS guidance will be somewhere around the first quarter and maybe even a little lower for the balance of the year. So just any thoughts on cadence as he moved to Q3 Q4 Q just so we could all get on model straight.
Yeah for sure I mean, certainly as part of the guidance for for EPS and the second quarter I mentioned that are spending on.
He is going to increase and so that's going to put some pressure on the EBITDA margins from sequentially from Q1 to Q2. So I wouldn't expect you should you should look at it at a lower and your your your EBIT margins are in Q2 relative to Q1, I think a couple of factors that I wanted to maybe talk through for the first half we.
Have seen some impact on gross margin as it relates to COVID-19. So on and my February call for gross margins, we I hadn't expected gross margins to be lower than 2019, and 2020, mainly because of the timing of the ACL on acquisition and the divestiture of ourselves and but I would say there was a.
A couple of other elements that were drivers of our Q1 gross margins.
And one of those relates to the the strong international sales that it makes and unfavorable mix and our gross margins because the international margins are lower than our U S based margins, but the other factor was related to COVID-19 and and this is going to have a little bit of lingering impact as we move into the second quarter. So when we talk about COVID-19 and a couple of impact.
And first of all on as it relates to our employees and some cases, there there's been an impact with COVID-19 and there's quarantine and yet that needs to happen, whether it's a direct exposure or or a family member. That's exposed. So we've had a fair amount of disruption as it relates to your home and work force dealing with COVID-19 and the.
First quarter that I think will hopefully improve and the second quarter, but we're still seeing some lingering impacts there.
Second piece and then I wanted to mention is related to staffing and.
And you know I'll I'll use Mansfield as an example, or our path for Nashville, This to get off that TMA agreement, but and you ended the year. Our expectation is that we will move off of that at the end of the year as timed but in patchy COVID-19 has impacted our ability to ramp them as fast as we wanted because we simply.
We can't get enough folks to staff the the facility and in some cases the government extension of benefits has impacted our ability to find qualified folks now we are rectifying that and we've got our own incentives in place now and Ah I think we'll be back and full staffing there at the end of the second quarter, but I think gross.
And it will be a little bit tempered here in the and the first half of the year on and so as you think about your modeling just keep that and mine too as you think about the Q2 guidance I gave you for E. P. S.
That's really helpful. Thanks for all the color.
Yeah.
Thank you. Our next question comes from Steven Lichtman with Oppenheimer and company.
Thank you good morning, guys wanted.
One of us to get your latest thoughts on Cerro languished the launch happening coming up here and the second half of the year can.
Can you give us sort of and updated thoughts on the market opportunity there and how should we be thinking about from the ramp of that opportunity and the second half and and as we go into 2020 two.
And Steve It's Glenn and obviously I'll take this and just give you a little bit of perspective here. It's a mid year launch for us and so global launch a good news is we just got the CE Mark for Europe, just a day or two ago. So that's good news and we'll be launching in Europe first before the U S market.
But again, if we look at this product. This is one we've long weighted to launch because we divested Camino back when we bought the cabinet business. So I mean.
And if you just look at that particular product when we sold it it was about $30 million of annualized sales just to put this into perspective. So obviously, it's going to take us time to ramp and that just gives you. Some sizing of what we would expect here, but clearly this is going to be one of the key growth drivers for us for the CSS business and the back half of this year and then going into next year.
But it got us a mid year launch it on ramping in Q3 and Q4, we're going to launch in Europe first.
But it's it's it's a product that should be driving you know tens of millions of dollars once it hits full peak year sales.
And if you remember Steve I mean, you know our previous platform is probably about $30 million on an annual and kind of level, what that generated but I think the interesting thing about here is is that you know.
And whether it'd be our legacy installed base that we picked up as part of J&J, which is probably 15 to 20 years old and it.
He competitive installed base is the youngest us probably eight to 10 years, there really is and any other new competitive products coming out and this window of time and we believe the installed base is as you know hungry for obviously, new technology that can allow data transfer can allow other.
Billy's and and the neuro ICU interest rebuild pressure monitoring and he was kind of the gold standard and being able to integrate that data and other reports and things that we'll be able to do on a new platform or our very important it is a capital acquisition.
But it's smaller capital and typically you know if you're on a large right. So you don't just buy one you may outfit your old department could be 810, and 20. So Oh, we have good feedback on it we had a obviously a challenge last year with some componentry all that's been corrected. So we're really excited about us getting off and <unk>.
And here on the second half.
Great. That's helpful. And then just secondly, you may see it a horror service scope on track as well limited launch and he mentioned the back half of this year what are the types of things you're looking at doing this limited launch from a clinical or procedure perspective, and should we be thinking about this potentially turning into a full on.
To me as we we turned into 'twenty two.
Yes, Steve So so again another advertisement for our Investor day on May 20th will spend some time, specifically, Mike Mcbreen will go into it in more detail, but again just to remind you. We do have two key clinical platforms that will come out of that act.
Position that we have now developed a much further and turn away. One is the price to be used for industry broke hemorrhage. That's a product. That's a few years away from being ready to be and full launch and the near term product, which we're discussing is to provide access for minimally invasive nerve.
Surgery, and and again the point here is almost all of the key procedures today and ball a craniotomy of some scale and so the trauma created to get to the tumor and some cases can be as invasive as the removal of the tumor itself.
And what this product is going to be focused on this study is particularly deep seated tumors are the deeper into the brain intuitively you would appreciate the more healthy tissue one needs to access to remove.
The challenge area and so a product like this debt will allow us working through a small channel is a big deal. So describing defining protocols around those types of tumors will be and important part of it as well as evolving the instrumentation and it works out well to our favor that we have and.
Instruments business and customization of instruments to work through this channel customization of chips for and ablation device like Coosa all of that will be part of this first level. This is all covered under the DRG. So we don't believe there's a big reimbursement debate, but it as you could imagine.
And it's a it's quite a change and practice for neurosurgery and so we don't want to underestimate the time it will take to do the conversion, but a lot of our you know what we're gonna be looking at and understanding is going to be focused on that I would say also we are you know high hopes that this will very much be a.
Our global platform that will have as much flexibility and Asia, and in China, or Japan market or Western Europe as it is and the United States and as you know many of the products that are launched that have high tech to them typically end up being a U S. Only because of the cost base. There's lots of reasons will go into further we think this is actually just the.
The opposite and can be equated enabler for emerging markets. So.
Stay tuned for my 20th.
Great. Thanks, Scott.
Thank you. Our next question comes from Matt Mexican with Credit Suisse.
And then hey, Matt.
Hey, good morning. Thanks, so much for taking our question so and one follow up on on the cash flow conversion and and the dynamics of sort of your cash flow working capital profile.
After exiting and the extremities orthopedics business wondering if you could talk a little bit about.
What that does if anything in terms of flexibility or conversion or <unk>.
Efficiencies are around your your your capital and consignment and so on and then I had one follow up on on wound care.
Yeah, I mean, I certainly think it at our strength is our opportunity on the cash flow side without the ortho business do you Arthur business was was it a pretty big uses of cash and as we think about and managing that business. So as they think about 'twenty 'twenty. One I do expect my cash flow to be higher or both.
And on operating basis and.
On certainly for 'twenty, and 'twenty, one and over 2020 and so I think we'll see some nice recovery there as I mentioned to Ravi and we'll see some capex increasing relative to 2020. So maybe free cash flow won't be as strong, but still I would say a strong for us the other thing and needed to remember and many other companies are.
Seeing this is we do have some cash requirements as it relates to E. M D. R.
That's a big initiative over the next few years so on.
And just need to factor and consideration that some of our casual and going for that new direct debt, but I think in terms of where we are on our balance sheet at two eight times and lots of flexibility as we think about our capital allocation whether that is reinvestments in our business and important pieces is continuing to invest in R&D and or.
Clinical studies and as it relates to some other things that Pete talked about but also part of our tissue technologies side of the business and certainly want to be opportunistic on the M&A side, and we think the the cash flow strength that we've had here early in the year, coupled with my expectations for the balance of the year, even with funding E O N D. Our.
And so it gives us a lot of options and in terms of thinking about capital allocation going forward.
That's great and very helpful. Thanks, and then just a follow up on wound and maybe the the market landscape. There are you know the.
Competitive dynamics, there and particular around some of the changes that are that have been and sort of put it you know coming coming slowly, but but being put in place more sort of.
And specifically in the next six to 12 months around non enforcement to exploration and on enforcement of some of the injectable products and manipulated products I know that that doesn't necessarily cross over maybe some of your your biggest.
Current products currently, but but I'm. Just wondering is there anything that you can speak to that other than it would describe you know and we think consolidation of vendors are we seeing folks dropping out or are we seeing a higher.
On barrier to entry evolving and the space or a or a greater focus on and outcomes based payments Peter talked about some of these things and the past would love to just get your perspective on on.
Those market dynamics, and where you stand.
Yeah, Matt I think again, if you think of our make up a two day on.
You know unlike some other slightly.
Smaller public companies us that are focused specifically on wound care.
We're on.
Definitely more diverse platform again, so we play and the chronic wound space, but it's still a quite a small part of our business or our acute space on our burn trauma and then other areas out of wound care as we talked about hernia repair nerve all those I think look the reality of it is there's definitely.
Lee and up regulation, that's happening around the world and and it may not specifically b and regulatory requirements all over although the points that you made relative to D O as for amniotic products and things of that nature is a good example, there's also just the desire for more enhanced.
Clinical data and so yeah I do think the water will continue to get deeper meaning on the spend rate for both of those and and again for us it's really about focusing on areas, where we have differentiated technologies and I do think this combination of technologies is going on.
Continue to play out and the future whether it would be and amniotic with the dermal matrices and it might be actually some type of epidermal acquisition complemented with a dermal structure it might be the patients that taller yourselves that the doctor actually integrates back in all of those are things that are evolving which.
It comes back to the point that having multiple platforms that you can be in a position to offer different solutions. We think is going to be a quite important for us.
Think there will be some opportunities that open up as regulatory us.
No requirements change, who has water products available and we've obviously seen certain communications by the F. D. A most recently to areas, where there are no indications and Theres significant off label use I think all of those over time are going to move towards on label indications and different companies will be performing studies and that include.
US so we think that you know the dynamic change is obviously one of those things that if you make the right moves this could be a very profitable and a fast growth area for those companies that can move that way and obviously us exact accident and orthopedics and focusing on T. G. That's really one of our.
Key drivers and the future and again, we'll spend more time on this and detail on may 20th virtual Investor day.
Thanks, so much.
Thank you. Our next question comes from Matt Taylor with UBS.
Hey, guys.
And this is actually young and to Matt. Thanks for taking our question maybe on the other thing environment I guess you know.
On M&A and travel and good to hear and sound to me and saying that Oh go on ahead of schedule was curious on your views on your interest and ability and doing more deals. This year and also thoughts on a value share about factset that's out there.
Yeah, I mean, it just you know again as part of the Integra strategy, which we've talked quite a bit about Kerry mentioned 2.8 times. We're in really good shape to be able to do tuck in deals.
And so we're clearly looking at technologies that could build out our capability both technology deals that may be pre revenue, but obviously as well as deals that look a lot like and they sell to your point you know some of the valuations and the public markets are quite high.
And so that's a consideration and and and obviously at some level a governor on what we're willing to do or not do but we also have strong relationships within the whole private market area. It's one of the things that we've focused on as a leadership team is to continue to develop those and and I would say, we see some nice opportunities this year.
<unk> four tuck in deals to either add to our existing portfolio or enhance the edges of clinical areas that we believe we've got nice synergies with the with the core of our business. So I believe this year I mean, I think you'll you'll see us continue to us to focus on opportunities to.
To bring and products are going to be able to grow the top line for us Glenn and you may want to add some other comments yeah. No I would just add that are outside the us. We're also looking at doing exclusive distribution partnerships, which really helped to fill gaps in our portfolio, where we have those gets us to market much faster and.
It really requires no upfront investment and so this is gonna be a key part of our international strategy and we've done two already and the past six months I am expecting that we're going to have hopefully a couple more of those done and again the nice thing about it is you get product quickly to market, we can leverage our large commercial teams like in Japan, and China as an example.
So a lot of really good benefits of this strategy and so we're just starting to scratch the surface on that we got two done one on the tissue business, what other neuro business and I'm expecting we're going to do.
And do a few more here hopefully in 2020 one.
Alright, great. Thanks for the color.
Yeah.
Thank you.
Thank you next question is from Anthony Petrone with Jefferies.
Hi, Thanks, Good morning, one follow up on on tissue products, and then and then a follow up on ACL on on tissue products, Peter just kind of want to confirm on the more supplies amniotic products.
If the integra products actually fall under that.
The 36 months day option at the FDA has out there.
And and and if not you know or are those products included.
And guidance that'd be the first question I have a follow up on and so so just to repeat and I know it has when it makes sense.
Yeah sure you're okay.
Yeah, Yeah, Yeah, that's the work from home our situation and in a story of Queens herself apologize for that.
No no no problem just just kidding with you look we we are we are not a factory and a relative to the injectable products that theres going to be any type of extension and our fourth and and our way we've been forecasting I mean, if and extension did play out it would have some small benefit.
To us, but us unlike maybe some of the other players that are more focused specifically and the amniotic space and that's their primary platform, it's still rather small component of our business, but we haven't factored in any extension benefit at this point and time.
Got it got it and then on on a sell the follow up would be when we sort of look at that business exiting 2019 around $100 million. It. It it had a 13% growth rate and the guide here is 80 83 are and I think last quarter guide was five 7% growth. So maybe just a recap on.
You know how much was COVID-19 related and that Delta how much is us is dis synergy if any and sort of what is the path to getting that business back to low double digits.
Yeah, and maybe I'll start with just the math on that so 100 million Western and 2019 sales about 95 million with their 2020 sales and where you know we got comfortable with the guidance range of 83 day 88 US is essentially understanding we didnt have a cell for the whole year, our transaction closed on January <unk>.
20th so effectively 11 and 12.
On 11, and 12 says of 95 million us roughly 87, and so we bracketed a range of 83 to 88 are based on the fact that yes. It you know we're still impacted by COVID-19, but also we were we knew we were going to try to move fast on on the commercial integration activities and so we wanted to anticipate a within those guidance ranges some and.
Dissipated sales disruption so with that maybe I'll ask Glenn and maybe to comment well you know I mean, and I think the point is you. Obviously you have some disruption as you go through a channel integration, but it's been quick and it's been as we expected and.
And keep in mind. This was a business that was not making money as a standalone company and so on.
In our hands, if you'd look at their total operating expenses of $80 million. We think we can take out about 40% of that and we've taken out a big chunk of that are ready and through the commercial integration.
So we will see a return to growth we expect this over the long term to be growing and they do mid to high single digits. I would say you know once we get fully integrated and <unk>.
Start selling you know on a normal environment post COVID-19, but nothing has changed relative to how he sees us business yeah just two.
Two points to add I think you know over a third of that business ties into hernia, which our hernia business as well as theirs has been slower to recover because those patients tend to be more elective. Obviously, there's a lot of other things. We do we see that all coming back and one thing that's super exciting is the fact that.
A big part of this acquisition was this micro matrix or powder format.
Is that are we are the indications to be able to communicate and promote us with not only the T cell and tissue based products, but also with I D. R T with prime matrix and used in conjunction and so again. Another example of how a multiple products can be used together depending on the type of the wound.
And that's really just starting to take place as you know we've completed integration have people trained realigned whatever territory work, we needed to realign on the sell side into our business and so we will see that acceleration take place more so and the second half.
Alright, Thank you very much.
Okay.
Thank you. Our next question comes from Matt O'brien with Piper Sandler.
Good morning, Matt.
And this is carrying on for Matt. Thanks for squeezing me in the ground. So.
Following up on debt necessarily launch thanks for all the color earlier, but is there any way you can quantify how much of that is actually baked into guidance for the year.
And I would say that we typically wouldn't talk about on specific products, but I would say generally our expectation is that new products taken and in aggregate with all the new products you should represent about 25 per cent of organic growth and so that's our anticipation and the second half is that combined with share.
And our link as well as the other products that we launched free 2020, one and many of those being launched and the middle of 2019 will continue to be and parts of our new.
And you know NPI, new product introduction type of us amount and it's about 25 per cent of our organic growth.
Awesome. Thank you that's really helpful. And then just lastly on the private label business can you provide some color on what the growth outlook looks like there.
Yeah, I mean generally its private label will grow and you know mid single digits is what we you know I would say normal run rate and it can be lumpy and Q1, obviously, our private label business was slightly down I wouldn't attribute that to anything else. Other than just you know some COVID-19 impact and then just some timing of schedules.
But I would expect that you'll you'll continue to see some recovery there and private label, but nothing there to call out is any particular item that's driving that to negative growth, it's more of a a little bit more lumpy.
Thank you.
Thank you. Our next question comes from Jason Bedford with Raymond James.
Hi, Good morning, I, just thought just a couple of cleanup questions that require quick answers.
Have you filed for serial link and the U S.
Yes.
Okay, and then you're still on board with the 83 to 88 million and a sell revenue for the quarter. It sounded like it but I didn't hear it in the prepared comments yeah. So we've reconfirmed that 83 to 88 million and we provided they are and estimate for Q2 and about $20 million.
And so that I again, and anticipate some sequential improvement on a pro rata basis from Q1 to Q2.
But you know still generally it.
It takes into consideration and we're still integrating the businesses and so there could be some additional sales interruption, there and Q2 and then we'll start to get more normalized rates in the back half of the year.
Okay.
And a little just a little more color on Sterling I think Glen mentioned earlier, we actually have and CE Mark already and we're in dialogue with the agency and don't foresee any issues with a five 10-K.
Gotcha, Okay, and then just lastly, what's the expected revenue level of discontinued products and in 'twenty, one that it's kind of used and the 12% to 13% organic growth calculation.
Yeah. It was and it's it's probably trending a little higher than I expected I was thinking it would be about 5 million for the year and it and we actually had about $5 million and discontinued product revenue in Q1. Some of that's attributable to last time buys on with these products that we saw so I do think it'll moderate and lower and subsequent quarters, but I would say Jason about think about.
$8 million to $9 million of discontinued products.
Thank you.
Yeah.
At this time, we have no further questioners and the queue. So I'll turn it back to Mr. Berger for closing comments.
Thank you David and thanks, everybody for joining our call. This morning as you've heard we're.
We're excited about the and virtual Investor day on May 20th and we'll be making more information available on our Investor Relations website at Integra and lifestyle Com will also be sending out a registration link via email and the coming days. So that concludes our call. Thank you very much and have a nice day.
Thank you.
Ladies and gentlemen that concludes our presentation. Thank you for participation you may now disconnect.
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