Q3 2021 Integra Lifesciences Holdings Corp Earnings Call

November 2, 2021

Good day and welcome to the Integra Lifesciences third quarter 2021 financial results call Today's conference is being recorded.

At this time I would like to turn the conference over to Mike Beaulieu Director of Investor Relations. Please go ahead Sir.

Thank you Cecilia good morning, and thank you for joining the Integra Lifesciences third quarter 2021 earnings conference call joining.

Joining me on the call are Peter Arduini, President and Chief Executive Officer, Glenn Coleman, Chief Operating Officer, and Carrie Anderson Chief Financial Officer.

Earlier today, we issued a press release announcing our third quarter 2021 financial results.

Along with the release of corresponding earnings presentation, which we will reference during the call is available at Integra life Dot com under investors events and presentations with the file named third quarter of 2021 earnings call presentation.

Before we begin I'd like to remind you that the statements made during this call maybe considered forward looking.

Factors that could cause actual results to differ materially are discussed in the company's exchange Act reports filed with the SEC and in the release.

Also in our prepared remarks, we will make reference to both reported and organic revenue growth.

Organic revenue growth excludes the effects of foreign currency acquisitions, including HL divestitures, including the sale of our extremity 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 integrity current report on form 8-K filed today with the SEC.

With that I'll turn the call over to Pete. Thank you, Mike and good morning, everyone.

Please turn to slide five I'd like to make a few brief remarks regarding the CEO transition.

Last Thursday, we issued a press release announcing that after a comprehensive search of candidates. Our board has appointed Yanzhou with as its next president and Chief Executive Officer.

He brings significant leadership experience and capabilities, including digital innovation and new product development commercial acceleration in international market expertise and operational excellence as well as the global mindset.

As I noted on our second quarter earnings call Integra has an outstanding leadership team capable of executing our strategic plan with a robust pipeline of innovative new products to drive global growth and market expansion for years to come.

Every confidence John will build on Integra as a strong foundation to drive the next phase of our profitable growth strategy.

Worked closely with him over the coming months to ensure a seamless transition.

John will be joining us prior to the end of the year as we work through the logistics of moving him and his family from to the United States from Belgium.

I'd also like to extend my sincere thanks to Stuart ethnic and the board of Directors Integra is exceptional management team and the more than 3700 employees around the world. It's been an amazing 11 years at Integra and I remain a huge quarter and look forward to yards. Many contributions as the checkers next CEO.

Now I'd like to turn the call over to Glenn to discuss our accomplishments and performance in the third quarter Glenn.

Thanks, Pete and good morning, Please turn to slide seven.

Our third quarter operating performance was strong despite a challenging environment.

I'll highlight a few of the factors that drove our results and provide an update on several of the key catalysts that position the company to achieve its near and longer term financial targets.

Third quarter sales were $387 million near the high end of the guidance we provided in July.

Adjusted earnings per share were <unk> 86 cents compared to 80 cents in the prior year.

<unk> 13 cents above the midpoint of the guidance.

We're pleased with our continued sales recovery across geographies and product lines during the quarter. Despite the impact of the Delta variant and hospital staffing shortages that resulted in procedural deferrals in parts of the U S Europe and Australia.

Sales performance in July was strong continuing the recovery trends seen in the second quarter with the most pronounced COVID-19 impact in August followed by a gradual improvement.

Towards the end of September.

We experienced a strong recovery during the quarter in our indirect markets and benefited from pent up demand in our instruments business.

Despite the variability in deferral and procedures third quarter organic revenue growth was six 7% demonstrating the benefits of our diverse portfolio with products and market leading positions.

In the third quarter, we achieved positive organic growth in each of our businesses include.

Including neurosurgery instruments wound reconstruction and private label when compared to both 2020 in 2019.

Yeah.

Geographically sales in the U S increased mid single digits.

And sales outside the U S increased approximately 10% compared to 2020 with strong growth in Japan and China.

We believe there is significant opportunity in these markets as we continue to introduce new products and expand our commercial presence.

Okay.

Moving to new product updates, we launched Sterling in the U S and Europe in the third quarter.

As a reminder, sterling raises the bar and ICP monitoring through enhanced accuracy usability and advanced data presentation.

Our third quarter sales of Sterling benefited by $5 million and initial orders.

Part of the reason, we laid that near the high end of our July guidance range.

The U S and Europe make up approximately half of the global market for neuro critical care monitors.

It will drive growth for Starlink over the next several years.

During the third quarter, we began a phased market release of your worst or just go to a select group of key opinion leaders for clinical evaluation.

As a reminder, Aurora is a novel and proprietary minimally invasive surgical solution with integrated visualization and capabilities designed specifically for use in neurosurgery.

These key opinion leaders have begun to perform cases, using the horror service scope to remove different types of brain lesions.

Initial feedback has been encouraging and reinforces our excitement about the value of this product offering.

We plan to expand our clinical evaluations to a wider group of Kols during the fourth quarter.

Also during the third quarter, we continued to expand our mirror registry, which is designed to collect data on the use of Aurora.

For early surgical intervention in the treatment of interest cerebral hemorrhage R. I C H.

Look forward to updating you on that progress over the coming months.

Turning to a S. L. We were encouraged to see sequential improvement in the sales of micro matrix.

Powder formulation of our UBM technology.

And growth in accounts, where we have strong existing relationships with providers, who already use integra portfolio of products.

Despite these improvements do it yourself business was slightly below our expectations in the quarter.

But we've put in place we've put in place a plan to drive better performance moving forward.

This includes adding sales resources to select territories, and expanding our training and surgeon education programs.

I'll wrap up my discussion of growth catalyst with our takeaways. Following the recent FDA Advisory Committee meeting for our surgery, and PMA and post mastectomy breast reconstruction.

This panel meeting was held on October 20th It was an important and review of the clinical section of our PMA.

One step in a broader FDA product review and approval process.

To provide some context integrity work with the FDA.

To design, a statistical analysis plan for Amrok mastectomy reconstruction outcomes consortium, which was a large multicenter studies that examine outcomes for thousands of breast reconstruction patients.

This analysis demonstrated that results with surgery in Prs and post mastectomy.

Plant based breast reconstruction are superior to the results in such procedures when no acellular dermal matrix issues.

Nevertheless, we've always recognized that there are limitations in the Amdocs study data.

And this was reflected in divided voting results from the panel regarding safety efficacy.

And whether the benefits outweigh the risks.

We appreciate the FDA panel members insights and discussion regarding our PMA we.

We continue to believe there is an urgent clinical need for an FDA approved acellular dermal matrix to.

To help restore quality of life for women following breast reconstruction as today there are no FDA approved products on the market.

We look forward to working with the FDA in the coming months as the agency completes its review of our PMA submission.

And we believe the real world clinical evidence supports approval.

In summary, our third quarter organic growth was strong.

We're on track with our growth initiatives, which will keep us on the path towards achieving our long term targets.

Finally, I'd like to thank Pete for his 11 years of leadership at Integra and the incredibly positive difference. He has made for me.

Thousands of employees here at the company.

As well as our customers and patients around the world.

Pete you will certainly be missed and we were.

Wish you well Itchy health care.

Now I'll turn the call over to Terry to provide a detailed review of our third quarter financial performance Carrie Thanks, Blayne and good morning, everyone.

To start with a summary of our third quarter highlights on slide.

Third quarter total revenues were $387 million, representing an increase of four 5% on a reported basis.

Six 7% on an organic basis compared to the prior year.

With our strong performance in the third quarter and our outlook for the remainder of the year, we expect our organic growth in the second half of 2021 to be approximately 5% over 20 years.

And just your gross margin in the third quarter was 68, 3% down slightly compared to the prior year, but in line with expectations and up slightly when compared to the first half of 2021.

As we discussed on our July earnings call, we continue to monitor material inflationary pressures closely and impacts in the third quarter were largely related to increased freight and packaging costs and some supply chain disruption.

We have supply contracts that help to mitigate near term exposure to these issues and we have an opportunity to recover recoup a portion of increased costs through pricing adjustments as we move into 2022.

Our Q3, adjusted EBITDA margin was 27% compared to 27, 9% in the prior year as the benefit from higher revenue was offset by higher operating cost as our expenses continue to normalize.

As we discussed last quarter, our operating expenses are gradually increasing following the reduced levels of spending we put into place last year in response to the global pandemic.

We continue to prioritize their spend in the second half investing in new product growth strategies further geographic expansion and clinical studies.

Given our year to date spending an outlook for Q4, we now expect full year adjusted EBITDA margins to be above 25%, which was the high end of the range. We provided in July.

Adjusted earnings per share for the third quarter was 86 cents compared to 80 cents a year ago.

The growth in adjusted EPS was largely driven by increased operating leverage on higher revenues and includes a small benefit from a lower tax rate in the quarter.

I'll provide an update on our full year adjusted EPS in a moment.

And finally third quarter operating cash flow was $83 million, representing an increase of 19% from the prior year.

If you turn to slide 10, I'll review, the third quarter performance of our CSS segment.

Q3 revenues in CSS were $257 million, an increase of 7% on a reported basis and 8% on an organic basis from the prior year.

Global Neurosurgery sales increased 6%, while instrument sales increased over 15% on an organic basis compared to 2020.

Geographically sales in both the U S and outside the U S increased approximately 8% compared to the prior year.

Recovery in global Neurosurgery sales was generally broad based and sales in instruments benefited from pent up demand.

As Glenn discussed the launch of Sterling in the third quarter resulted in $5 million benefit from early adopters.

With this order backlog largely met we expect a more modest benefit from Sarah link in the fourth quarter and remain excited about the multiyear growth trajectory.

Excluding several linked sales of capital grew low double digits compared to 2020, but sales are not yet back at 2019 levels.

Sales trends of capital are encouraging and we expect further improvement in the fourth quarter and a return to normalization in 2022, given our very strong order funnel.

International sales in CSS increased across all major regions compared to the prior year.

The comparison to 2019 is more mixed with variability across Europe and growth in Asia Pac.

As Glenn discussed earlier growth in Japan, and China were standouts in the quarter with both countries delivering low double digit growth compared to 2019.

Moving to our tissue technologies segment on slide 11.

Q3 sales and tissue technologies were $130 million approximately flat on a reported basis and increased three 7% on an organic basis from the prior year.

Sales in wound reconstruction increased one 7% on an organic basis compared to 2020 led by Integra skin in search of men in our burn trauma and surgical reconstruction markets.

Compared to 2019 sales in wound reconstruction increased one 5% driven by strong growth in integra skin, partially offset by declines in our plastic and reconstructive surgery franchise, which as a reminder grew double digits in Q3 of 2019.

Sales in private label increased 9% compared to 2020, driven by continued recovery in customer orders and increased 26% compared to 2019, driven by a favorable comparison related to order timing.

If you turn to slide 12, I'll provide a brief update on our balance sheet capital structure and cash flow.

Operating cash flow in the quarter was $83 million and free cash flow was $75 million adjust.

Adjusted free cash flow conversion was 103% in the third quarter, reflecting higher earnings and a more gradual recovery in capital spending driven by extended timelines on key manufacturing and construction projects.

On a trailing 12 month basis, both our operating cash flow or $323 million and our free cash flow of $294 million were record highs.

Net debt at the end of the quarter was $1 $1 billion and our consolidated total leverage ratio was two three times.

As of September 30 at the company had total liquidity of approximately $1 $75 billion, including $470 million in cash and the remainder available under the revolving credit facility.

Turning to slide 13, I'll provide an update to our consolidated revenue and adjusted earnings per share guidance for the full year 2021 and fourth quarter.

We are reaffirming our previous full year 2021 revenue guidance of $1.54 billion to $155 billion with an expectation to be at the low end of the range representing reported growth of approximately 12% inorganic growth of approximately 13% compared to the full year 2000.

20.

Embedded in this guidance is an expectation for a sequential quarterly improvement in sales from HL, resulting in slightly more than $65 million in revenue for the partial year of ownership.

We are pleased to report that even at the low end of our full year 2021 revenue guidance range for organic growth for the second half of the year is expected to be approximately 7% compared to 2020 and 5% compared to 2019.

Based on our expectation for the full year, we are targeting fourth quarter revenue of $403 million, which takes into account the risk of ongoing effects of the pandemic and changes in foreign currency.

This target corresponds to reported growth of approximately 3.5% and organic growth of approximately 6.5% compared to 2020.

Turning to adjusted earnings guidance for 2021, we expect fourth quarter adjusted EPS to be in the range of 82 to 86 cents.

For the full year, we are increasing adjusted EPS to a new range of $3.16 to $3 20.

Representing 30% growth at the midpoint compared to 2020 and 16% compared to 2019.

Our full year tax rate is now expected at 18.25% now.

Now I'd like to turn the call back over to Pete for some closing remarks, Pete. Thanks, Kerry if you all turn to slide 14, I'd like to wrap up our prepared remarks with a few key messages.

We're pleased with our performance in the third quarter. Despite the lingering effects of Covid and as growth in many of our businesses exceeded 2019 pre pandemic levels. We expect these positive revenue trends to continue through the fourth quarter and into 'twenty two.

I am confident in achieving our long term gross margins.

We're focused on executing our strategy, which is about leveraging our optimized portfolio ex orthopedics penetrating deeper into our existing markets and expanding into higher growth geographies and market Adjacencies.

Global launch of Sterling, our investments in the development of the awards surges scope nerve three D and the pursuit of a PMA for surgery and breast reconstruction are just a few of the examples of our progress in 2021.

In closing on my last evening the earnings call here at Integra, I'm incredibly humbled by what we've accomplished over the last decade.

And the positive impact we've had on patients lives and that's really what matters doing well by doing good.

The company is in a position of strength with an outstanding leadership team and a deep pipeline of new products and with the appointment of yard was a proven global business executive with deep experience in health care and technology I have no doubt that the company will continue to excel for many years to come.

That concludes our prepared remarks, thank you for listening and operator, if you would now open up our lines for questions.

Thank you if you wish to ask a question. Please press star one on your telephone keypad. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment.

Ken Please press star one to ask a question we will now take our first question from Mark Smith.

Credit Suisse. Please go ahead.

Hey, Matt.

Thanks, so much and good morning.

And.

Congrats on the quarter.

Congrats Pete too.

The new position with its been a.

Pleasure working with you and looking forward to keeping in touch.

Thanks, Matt.

You bet.

So a couple of things I guess I wanted to highlight heading into the quarter.

Everyone the expectation was for.

Trends, particularly in the U S and I think the.

What is the rising.

Rising folks to the upside here a little bit in your results as soon as the.

You know the performance in the U S. Despite I think what everybody understands is the alliance of the business to a large degree.

Our ability to use.

And then and then the outperformance or U S and.

Love to get your.

Additional color on the areas that sort of held in there and outperformed.

As I, just mentioned and I had one follow up on Q4, if I could.

Yeah, Matt.

I'll take a stab at that and then its going wants to add color, but I would say you know as we went through the quarter as as Glen made in his prepared remarks that the COVID-19 impact that we saw certainly peaked in August and we saw some nice recovery and I.

I think as we think.

Think about the past that gave us. The final result of $387 million. We certainly benefited from a late quarter launch of Sterling about $5 million worth of benefit coming from Sterling in the quarter that was towards the end of the quarter and I would say the pent up demand that we talked about up with instruments surely a certain.

<unk> helped us achieve the near the high end of our guidance range. There was still a COVID-19 impact in the quarter. So as I think about procedure deferrals plastics and reconstruction.

Surgical reconstruction did see some procedural deferrals and even in some of our neuro procedures had some deferrals, but overall I think there was some enough diversity in our portfolio that pushed us there and then capital as I mentioned earlier, certainly capital benefit from Sterling, but even when you exclude capital we even saw double digit.

Growth compared to 2020, but when compared to 2019 still not at those same levels. So we still have some full normalization of capital to go that will help us as we move into Q4 and into 2022, so with that Glen anything else that you would want to add just in terms of the international business. Obviously, we saw.

Some of the Covid impacts in Europe, and in Australia, and New Zealand.

But even with that you know, we put up a really strong quarter outside the U S double digit organic growth for the international team So that was outstanding.

A lot of that coming from Japan, and China, I mentioned, both of those markets doing exceptionally well, but do you have in Europe.

Put up mid single digit growth organically versus 2020.

Despite some of the challenges and we did see a bit of a bounce back with our indirect markets as well so on the whole the international performance was quite good and could have been better had we not seen some of the COVID-19 headwinds peak anyway.

Three important that you guys said I think this is the beauty of the Integra motto model a diversified mid cap I think you saw some of the benefits of it this quarter as Kerry mentioned and the fact that life sustaining life supporting products, such as neurosurgery gift prioritize to the top of the heap, even when IC user under pressure and so I think we've.

Benefited from that as well.

Okay.

That's great and then if I could just on Q core.

You've raised on the bottom line could it be mostly and ER.

Got it.

I think the street was looking for maybe a little shallower Q3, and a little steeper increase into Q4, and you've sort of level that I'm just wondering.

What what kinds of things are you contemplating in your Q4 guide.

That theres still some concerns over hospital staffing and some other issues I guess what goes into that assumption.

Organic growth in Q4.

Well, Matt I think you said it exactly in terms of what we're thinking about so as we digest. Our Q3 results certainly there was some impact of COVID-19 in there and and that uncertainty still exists in the fourth quarter. So I'm a bit of caution as we move into the fourth quarter life.

What we're seeing in terms of October it came in as expected our first month of a quarter typically is the lowest of the of the three months. So October came in as expected, but I would say just wanting to reflect the fact that more of a cautious view of continued COVID-19 uncertainty with flu season.

Having challenges are still they're still persisting and likely will persist even into 2022, and then just supply chain disruption certainly you know managing through expedited freight and getting product where it needs to be all those things factor in and a little bit of FX headwinds as we think about where the dollar has has.

And against some of those European currencies.

Reflecting some FX headwinds.

Headwinds there as well so all of those things kind of mixed into the lower end of our guidance range and Matt I would just add to that you know we feel quite good about how the second half of the year has played out I mean, if you think about the organic growth versus 2020 in the third quarter at six 7%. That's a good number we expect Q4 based upon our guidance to be above six.

Per cent. So we're exiting the back half of the year above 6% organic growth and so we feel like that's going to bode well as we go into next year. So I just want to highlight that as well.

Terrific. Thank you.

Yep. Thanks.

We will now take our next question from Stephen Lynch from Oppenheimer. Please go ahead.

Thank you hi, guys and best of luck Pete I'm, just a couple of questions for me first on thorough link outlook.

Certainly understand your your comments about the <unk> dynamics here, but just bigger picture what are you seeing in the early days of the reintroduction.

As you talk to the field.

How are you thinking about thorough link.

The driver in 2022, you know now with it out on the market again.

Yeah. Thanks, Steve I'll take this one this is Glenn again, just why we're excited about sort of like a few things one the new monitor is more accurate than other monitors on the market that has less stressed as edmar compatible.

It's got this wave form on it that it enables.

Continuous monitoring and better clinical decisions and better patient outcomes and so we're real excited about that along with our flexible microsensor that goes with it.

You know we did see some pent up demand when we launched here in the third quarter in the U S and Europe, So we mentioned $5 billion.

We'll see obviously more revenues coming in in the fourth quarter, but not to the extent.

Of the third quarter revenues because of some of those initial waters.

But as we go into next year in the next couple of years, there should be a nice growth driver for us in many markets outside the U S as well.

Longer term, China is a big opportunity for us, but that's still a few years down the road I'll say, but certainly for 2022. This is going to be one of the growth drivers for us and even into 2023.

But.

We're launched we're moving forward and we feel like we've got differentiated capabilities with our monitor versus others on the market.

Great. Thanks, Glenn and then just secondly, you know.

Obviously, the organic business is offsetting a cell coming in light of your initial expectations. Yeah. As you look at that business and how it can be a stronger driver ahead can you talk about what you've identified as potential fixes and what's your outlook for a for a cell is overall over the next say 12 to 18 months.

Sure.

A couple of things I want to highlight in terms of the positives around it yourself, but we still think this is gonna be a great asset in a synergistic fit to our business. If you just look at the third quarter.

I called out in my prepared remarks micro matrix the powder formulation actually growing sequentially that was a good positive sign.

We did grow our ACL sales in a number of our existing accounts, where we already have relationships established and so that was a big positive.

Still have some COVID-19 challenges in terms of getting account access, especially to the new resurgence, but we have put plans in place to get better performance moving forward and a big part of those plans is putting in more.

More resources in getting better coverage, especially around the top 250 accounts.

Across the portfolio and so those plans are underway, we're hiring more people.

I think as we get more access in the fourth quarter here.

You'll see more product trialing, taking place will do more with the value assessment committees.

So we feel like we're on a good path there and then more education and just to give you. Some context around this we completed 13 specific haynesville education events.

Loan in the third quarter, and that's obviously going to have a positive impact as we go forward. So.

We're gonna be adding more resources getting better talent coverage I think access will open up for us better in the fourth quarter.

I'll take a few months to get to where we wanted to be but certainly expecting to see an improvement in the business and we're already starting to see some positive signs, which I'm encouraged by it.

Great. Thanks, Glenn and thanks, everyone.

Thank you.

We will now take our next question from Anthony Petrone from Jefferies. Please go ahead.

Thank you and I want to congratulate you Peter as well on the role of T. E. Good luck and we hope to stay in touch going forward and of course, good luck to the Integra team.

As the transition is finalized here into the end of the year.

Couple of questions just on Covid, and then I'll have a follow up on surgery meant she was on COVID-19 in in the quarter.

[noise] two specific areas related to Delta Hospital access and then maybe even an impact to trauma cases is there sort of a way to quantify your your your sort of lowering a sell here for instance, another $6 million or silver says were $7 million versus the lower end of the range how much is.

Linked to limitations on hospital access and then just going into tissue technologies, specifically did the company see a lower incidence rate of trauma that that led to the Q over Q.

Downtick and then I'll have a follow up on surgeon. Thanks.

Yeah, Anthony I'll I'll take that if you recall our original guidance for the third quarter was 382 million to $389 million and I would say that $389 million, which was about sequentially flat from where we ended up in Q2 really represented you know very little Covid impact essentially.

Continued recut recovery from Covid trends, so I would say that as where we landed certainly we saw the COVID-19 impact it pushed us closer to the mid to slightly higher than the mid point and then we had the <unk> benefit. So if you kind of look at that we probably would have been more closer to the law.

End of our guidance.

Had it not been for the successful launch of Sterling, but all in all as as they go back to my comment in Pete's comment the diversity of the portfolio really showing through with the third quarter and an overall producing a really balanced result of 387 million, but I would largely say that if if the COVID-19 headwinds had not been there we certainly will.

Would have been at the high end of that range for sure and so I would I'd quantify that is is kind of that's the headwind from COVID-19.

As it relates to that the areas that were more impacted certain certainly the surgical and reconstruction area.

Of our tissue.

Technologies business is probably the area that sees the largest impact. These are breast reconstruction. These are complex hernia repair procedures that can be deferred for a period of time. So as I mentioned in my prepared remarks against 2019, surgical plastics and surgical reconstruction was still down compared to <unk>.

In 19 levels. So I would say within wound reconstruction that was probably the area that are that was more COVID-19 impacted within tissue anything else Glenn that you want to add no I think that was well so okay.

Just a quick follow up on surge amend I know one of the nuances here was the company was not able to see the real world evidence heading into the AD Comm meeting.

I'm just wondering if if if I believe now the company has actually been able to see that real world evidence. So maybe just to comment on those data and how you think it influenced the outcome of the panel and any early thoughts here on.

How the path forward in breast reconstruction may change thanks.

Yeah. Thanks, Anthony I'll start and then Pete feel.

Feel free to add some comments, let me just give you some context and maybe start off so you have the right framework framing out of the situation and then go through a little bit of a M rocked in the FDA panel discussion.

Just for context purposes, you know the FDA has stated that all adm's, including human Adm's require a PMA and that was actually reiterated last week at the American society of plastic surgeons. So.

That's an important point and to date as I mentioned earlier. There are currently no FDA approved Atms with a specific indication for breast and we are the only company to file a PMA for a breast reconstruction indications. So I wanted to make sure that that context as well understood as it relates to the M rock data.

The clinical data that's part of our PMA is partially based off of M rock and as I mentioned earlier.

It's best in class multi site study.

That's been done looking at the outcomes from thousands of breast reconstruction procedures. This is high quality real world data and the FDA has stated to us that it can be used to support our PMA.

I also indicated that the FDA has worked with us to design a statistical analysis. That's based upon this M rock data.

And in the data demonstrates that the results from surgery and Prs are superior to the results in such procedures, where there's no acellular dermal matrix that's being used.

And as I mentioned earlier, we recognize that there are some limitations to the data and we're working with the FDA to design a post approval study to supplement the existing safety and effectiveness data. So there's a lot of work going on we're still moving forward with it.

The FDA panel itself as a milestone in the process.

Obviously, the panel's decision is important but the FDA is not bound by the committee the recommendation is really advisor.

And so we're going to continue to move forward with the work that's going on here.

The vote from this panel obviously it doesn't change any current practices that are going on amongst surgeons and there is still an urgent critical need for an FDA approved acellular dermal matrix to help restore the quality of life for women following breast reconstruction. So we're confident that the existing clinical evidence supports approval and obviously we remain focused.

The mission to improve outcomes for breast cancer patients I don't know if you want to add.

Just emphasize three points. So it's a we haven't had access with the submission to the a mark David knowing what it says and we know that there are certain limitations to and have been.

Ben and interacting with the agency on it so there's no surprises here and I think you know.

I always expecting coming through a PMA of having some type of data follow up was part of our plan.

That doesn't change I, just want to make that point.

I think the other aspect here about this this is really important is the fact that we believe strongly that surge of men has unique characteristics no other product has including human based kind of bearing product.

And that is two things, it's unbelievable strength that it has and as the procedure volume changes to new procedures with wider coverage and we believe it's going to bear out to be the leading product.

Secondly, our process for how we actually sell you rise its a its acceptance into the body low rejection rate is second to none and the third is its characteristics on revascularization, which again becomes very very important if you want this to be actually an integrated part into the body and so those are the three things.

That we keep is the beacon tied to what Glen said, which is you know.

Fighting for women to have the right product and reconstruction Postmatch struck to me and so it's a really important part of the plan and you know the journeys long, but we think we're on the right path here.

Thanks again.

Lucky Thank you.

Thanks.

We will now take our next question from Sam Brodsky from Trust. Please go ahead.

Hey, Thanks for thanks for taking the questions.

Just I wanted to touch on the supply chain issues that you've talked about and I know you highlighted certainly on the freight side some cost issues, but.

At this point are you seeing anything that's leading to the company not being able to fulfill demand or or any of the street's name as it to that point yet.

Yeah, I'll I'll take that and certainly as we think about the third quarter impacts that we saw I would characterize it is some freight.

Expense increases for US you know that was probably the majority some packaging, particularly on the corrugated side of packaging and then the other supply chain disruptions, so our ability to get product in and get it to where we need to be yes. There has been some challenges.

I would say not to a level in the third quarter were interrupted our our sales performance, but something that we want to continue to watch very closely and we're continuing to manage that very closely but I would say supply chain disruptions are are factoring into our thought process. As we think about Q4 and even as we move into 2022, Glenn anything you wanted to add on that.

I just want to recognize the incredible work that our global operations team and logistics teams have done as well as procurement I mean, it's a challenging environment, but we pushed our way through it and.

I've had some disruption, but it's been very manageable and so I want to recognize are our colleagues that are in these areas because it's it's it's certainly a challenging environment, but we're managing through it.

Got it. Thanks, that's helpful. And then just quickly on the capital market you.

When you talked about getting back to more normalized levels next year, how should we think about the cadence there as it maybe first half is still below historical.

<unk> levels and then the second half that's above that or is it going to be more of a uniform sort of steady.

Steadily improving yeah over here in 2019 thanks.

Yeah, Sam I would say that I would expect continued gradual improvement in.

In the fourth quarter, we are expecting sequential improvement of capital for the third quarter to fourth quarter fourth quarter normally tends to be higher capital because it's the end of the most fiscal year hospital budget. So hopefully you know some of that capital some of that cash will be let loose in into some capital purchases. So that's figuring into our.

Thoughts for the fourth quarter, but as we move into 2022, I think it'll be a continued gradual recovery back to 2019 levels. So I think you're probably thinking about that correctly that you.

More normalization, but when that will happen not for certain but certainly I would expect it to be more gradual.

Yeah, I would just add to that you know a big part of our capital business is outside the U S. I'm very encouraged by what I'm seeing in certain markets like Japan, even in the fourth quarter here in terms of what the capital funnel looks like the customers' willingness to move forward.

I'm expecting in places like Japan, as an example to see maybe even a faster.

A recovery and hopefully some good news as we exit the year relative to our capital business you may remember.

This part of our business used to be sold through a distributor and now we're selling through our direct sales force we have a dedicated channel.

Specifically selling capital and we're seeing some really good benefits as a result of that change we made about 12 to 15 months ago. So yeah, and I would say that that the smaller capital small to mid sized capital is is seeing a faster recovery relative to the larger capital and for US larger capital is a couple of hundred thousand dollars. It's it's our coosa.

So that's the one that's probably slower to come back even though we had a good.

And again, even if you excluded sterling, which is our new ICP monitor our capital do see double digit growth low double digit growth in the third quarter onto some nice recovery, even on the larger capital, but certainly smaller and mid sized capital them are bouncing back even stronger and as Glenn mentioned are really strong.

Long funnel that we have good visibility on them. So our our view is that capital Lance our competitive landscape has not changed it's more of just an extent extended selling cycle.

Next question operator, we will now take our next question from Robbie Marcus from Jpmorgan. Please go ahead.

Oh, great. Thanks for taking my question and congrats on a good quarter and Pete I'll add we'll we'll Miss you and best of luck.

And Ravi.

Maybe to start off I was hoping you could spend a minute on a cell. It looks like the guidance is moving down again would just love to hear sort of what's going on there why the step down and also if you could touch on just quickly.

You know what's assumed for some of the onetime items in fourth quarter is there.

Any any further Sarah land purchases in bulk or restocking or just how do we think about what's assumed in the guidance there.

Youre always Glenn in terms of as Bill as I mentioned, we are seeing some positives here as we are as we exit the third quarter, it's just going to take us a little bit more time too.

Make more progress on the salt business, a big part of that is getting better account coverage that I mentioned earlier, it getting better access as COVID-19, hopefully dissipates a bit here as we get towards the end of the year. So it's going to take us a little bit more time, but we should see a sequential improvement in the <unk> business in the fourth quarter.

We do expect that we'll see much better results as we go into 2022.

You know as it relates to kind of go.

One time items in Q4 of this we're still expecting to see more sterling purchases.

In the fourth quarter, but not to the same extent as we saw in the third quarter because of the initial orders that we receive so that would be one.

That I would call out carryout or if there's anything else you want to call. Yeah, I would say, obviously instruments at 15.5% gross in the third quarter was a bit of a step up so I wouldn't expect instruments to be as strong in the fourth quarter.

But as I mentioned earlier.

Sequentially capital should be stronger than the third quarter as fourth quarter normally is.

So I don't think theres much lumpiness other than just continued gradual recovery I think our fourth quarter guidance at the low end at four O. Three basically reflects the fact that we would expect continued gradual improvement in revenue from Q3 to Q4.

Got it and carry on SG&A, you know that that was a big Delta came in a lot lower than what the street was thinking how do you think about you know what percentage of normal year at on spending how much was held back how much.

Might've been faster at a sell synergy capture just trying to get a sense you know as we all start thinking about next year, how much of that spending has to come back how much is structurally lower.

Yeah, I certainly do agree that there was a benefit of faster HL a synergy capture in our results definitely that is what you're seeing is part of our of some of that improvement in SG&A, but we are not at normalized levels. So I would expect that that are.

S. G&A areas will continue to move up sequentially from Q3 to Q4, I'd expect a step up in our quarterly spend and that will likely continue into 2022 and I think as we think about the the growth catalyst that that Glenn had updated on in his prepared remarks there was.

A lot of great things.

Going in our favor as we think about our new product introductions and some of those exciting products like the Aurora Aurora searches scopes. So we want to make sure that we're supporting those market launches.

As well as looking at further N. P is we've got narrowed and your Gen. Three D coming into the market early 2022, so a lot of really important projects moving forward clinical studies that we want to make sure that we're supporting so I do expect that our Opex will move gradually up from Q3 to Q4 and continue into 'twenty two.

22, I still think we can manage them some margin expansion into 2022.

But we want to make sure that we are supporting that top line revenue growth because I think it bodes really well as we think about our long term, 5% to 7% organic growth.

Great. Thanks, a lot.

We will now take our next question from Craig Bijou from Bank of America. Please go ahead.

Good morning, everyone. Thanks, Thanks for taking the question.

I'll add good luck Pete.

You're on your next endeavor.

A couple of follow ups here just wanted to ask on the Asl access issues. So I don't know if this is for you Glenn but.

Really just wanted to understand the access issues so is it.

Not being able to get to some new physicians.

Get the products there or is it.

Vac issue.

In the hospitals, so just wanted a little bit more color on what those.

This issues exactly are.

Yeah. So the reality of it is with Covid, where we have existing relationships, we're actually seeing really good progress on those particular territories in those particular accounts it's really.

We're a seller selling prior where you don't have an existing relationship where we're struggling.

To build those relationships in a COVID-19 world, having said that I think that will start to improve here in the fourth quarter and.

It's not just a COVID-19 issue I think we have to add more resources.

We get better coverage and do more educational events and so that's a big part about what we're gonna be doing so.

Probably half of it's an access issue and half of it's a coverage issue.

But that's the way we think about it here so they've got it we're expecting to see a sequential improvement in the fourth quarter and a better performance going into 2022, I feel confident we're going to see that with the plans we have in place.

Got it that's helpful in any way.

Any way to quantify or to understand where you guys see sales going on obviously the you know.

The expectations have come down from the low or mid eighties from where you were when you first made the deal a lot of moving pieces COVID-19 in there but.

I mean any way to understand how we should expect that business to grow in 'twenty, two or beyond when can it get back to that original your original guidance for the business.

Yeah, I I would generally say that you know we would expect that ACL will grow at in line with the rest of the Chi Chi business. So our expectations for tissue technologies of 7% to 9% organic growth. So our expectation long term is for <unk> to grow at that at that type of rate and I'm encouraged as as Glenn mentioned that.

We have our plans in place we know what we need to do and it will take a little bit of time, but my expectation is is that it will be a full contributor and just remember that it turns to organic next year. So we made the acquisition on January 20th and even if with a lower start as we think about moving into 2022 and get.

All of those plans in place we will see a pickup in organic growth with HL are back on track. So the expectation is is that we will see some nice a nice growth in 2022.

Great. Thanks, Gary Thanks for taking the questions and good luck.

Thanks.

We will now take our next question from Ryan Zimmerman from D. T N I G. Please go ahead.

Alright, Thank you and good luck it was a pleasure working with you maybe just wanted to circle back on certain amount for a moment.

Listening to the agent or the outcomes comments, you know one of the things that they were talking about was kind of longer term follow up data before approval or or that they were looking for a longer term follow up data and so you know I just wanted to understand you know is there any chance that you think that the agency would want to see longer term follow up data before approval.

All as the committee was kind of most focus on that and could that you know in any way prohibit approval at this point based on your discussions and then as a corollary to that you know.

Just to be clear this is for a specific label on breast utilization, but there is some utilization amongst surgeons today, maybe using the tournament.

For breast reconstruction, just not with a specific label.

Yeah.

Yeah. So so to the last part Ryan the answer is yes, there is clearly utilization in multiple plastic and reconstructive procedures, but with an on label indication.

We would obviously be able to promote it focus on it and grow the market and I think as you know we're fundamentally have the access outside the United States and some markets like the U K. There is a pretty evolving approach to doing these procedures. So yeah, we would hope to reach an approval here.

And then be able to do follow along studies to open up a different approaches this sub pack and prepack approaches the point, but to your question on the on the panel itself I think the reality of it is theres a lot of different ways. This could go with the agency. We think there's a preponderance of direction that would go towards that we have a path.

Way to get there and it ties back to we knew what we were coming in with the M rock data.

We've been working with the agency are quite closely.

As well as other companies have as well there's been a lot of debate about the EM rock data, but it's the best that's out there and I think with no products approved having that data that shows high safety levels, having European real world experience of really positive outcomes in procedures, and then being able to do.

The appropriate follow up study along with the approval. We think is a very realistic case not to your point could it be that there needs to be a perspective study done I am sure. That's one of the options that's out there, but we believe that the pathway without having to do a randomized prospective study preapproval.

It's very much within our hands and so we've got work to do with the agency over the coming months.

As more data comes out we will be chatting with you about the progress on it.

Okay, and then just a follow up this is I'm sure John will have his views on this but for Glenn and Carrie you know there's been significant dislocation in valuation in the chronic wound market as of late and so I wanted to just get your perspective on kind of how your views or maybe your appetite to get in more to the chronic wound market separate from Raycom.

Struction and.

If that's something I guess of interest to you based on you know.

On the balance sheet strength and profile you have today.

Yeah, no. So I think one of the big benefits. We have Ryan is the breadth of our portfolio and these are products that get sold both inpatient and outpatient today and.

Obviously, we've got a big inpatient presence.

But we do sell in the outpatient setting as well and you know we'd like that to become a bigger part of our business.

So it's still a focus for us, but I would just say that.

Primary focus continues to be our inpatient business, but we have products that really fit both.

The inpatient and outpatient setting I would just add you know Ryan you mentioned the the balance sheet strength. So I think we've done a really great job of managing and generating cash flow as you as I mentioned in my prepared remarks 12 trail.

Trailing 12 months at record highs both for operating cash flow and free cash flow and so we talk about a targeted leverage ratio of two and a half to three and a half and were at two three times. So certainly M&A is going to continue to be a priority for capital allocation. It gives us a lot of degrees of freedom to continue to be opportunistic.

And finding pockets of opportunities to expand not only on the tissue regeneration side, but also on the the neuro side as well. So we'll continue to do you want it to be active there on the M&A side, but we also want to use that cash for internal investments as well as we think about some of the new product innovation opportunity.

These that we have.

One of the big growth catalyst, we've talked about Brian is the.

Reimbursement study that we have for prime matrix. So we're working forward with commercial payers now are they significantly get more coverage with respect to that product and so that'll be a big win for us as we get into 2022 and 2020.

Got it.

Thank you.

Thanks.

We will now take our next question from Jayson Bedford from Raymond James. Please go ahead.

Good morning, and before I forget Pete Good luck at D. A.

Thanks for the questions you're welcome.

A few questions just you mentioned the pent up demand in instruments.

I'm guessing the market's not growing 15%. So can you just quantify the level of pent up demand in instrument sales in the third quarter.

Yeah, Jason you know I mean instruments I I'd say when you go back to our May Investor day, we expected instruments to grow probably a.

You know, 3% or so so the fact that we came in at 15 and a half I can articulate it.

We did see an incredible amount of pent up demand in the third quarter I would say a lot of that demand is what's coming from the alternative sites. So kind of outside inpatient settings outside the hospital is seeing a nice bounce back of order demand recovery in that alternative site.

So I sites of care.

And Kerry just thinking fourth quarter and beyond.

Can the instruments grow 10% plus for the next few quarters or when does this died down.

Yeah, I mean, it's hard to know how much.

You know, we'll continue to see but I would say that I am with the performance in the third quarter I think a lot of the pent up demand as is now satisfied and so I would certainly think that fourth quarter will normalize and and our long term expectations for instruments is around that 3%. So I would say as we moved to more of a normalized.

Level I think that's what you should expect instruments to be so both in the second quarter and the third quarter. We saw some healthy rebound in instruments business that I would attribute that largely to pent up demand.

Okay, and I apologize if I missed this but what was capital as a percent of sales. If we include silver Lake.

Catheter I don't have the exact number for the third quarter, but it's roughly about 7% of our revenue ourselves. So it's not a significant amount and as I mentioned, even excluding <unk>, we saw double digit low double digit growth in the third quarter compared to 2020, so its a nice performance in the capital.

Syed I, good trends that encouraging trends not yet back to 2019 levels and as I think about 2022 that can continue to be a bit of a wind in our sale as we move into 2022 as capital continues to normalize and we can start to see growth compared to 2019 levels, but are encouraging.

Trends Nonetheless for sure and in the third quarter on capital.

Okay and then just a quick quick question on surge of men I assume.

The FDA will opine over the next few months is it your expectation that the FDA doesn't follow the panel recommendation and you'll receive the PMA next year.

Yeah.

Well I think in terms of timing and it's really the FDA will decide when and if we get the approval, but I think at this point in time.

Yeah, I mean, just keep in mind the panel voted positive that was safe.

There was a question jump ball relative to affected us based on what they could read through on the I'm rock data.

So I think very much there's clearly an opportunity for the agency with the right caveat some follow ups to find a pathway for approval. So that's what we believe in it we're focused on it so.

Clearly, there's other components that we will need to prove out.

For the most part we had.

Felt that there would clearly be some type of a follow up study that would be involved with this always just again because of the age of the M rock data, even though it's a high quality study and the end level of surge you man used in it.

That was always in consideration.

Yes.

Okay. Thank you.

What are they now take our next question from Matt Taylor from UBS. Please go ahead.

Hi, Thanks for taking the question.

And congrats and good luck to you and talking with the transition.

I just wanted to ask.

Clarification.

Clarification on Q4 because.

You got it to the low end of the range. It sounds like October was that as expected.

So.

Is that guidance, implying that you'd see some degradation in the environment through the last two months of the quarter with those risks that you called out around Covid fluid staffing.

Oh Man I would say again for over three years the guidance call for Q4, and so as I think about October relative to that four three came in line with expectations, but remember first month of a quarter always is the lower the lowest of the three months.

If I look at any quarter in any given year COVID-19 or non COVID-19 typically the first month out of the gate as is typically lower so and then you usually ramp your second month in your your third months. So as I think about October relative to that four O. Three my expectation is is October came in generally in line with those expectations.

Yeah.

Okay, Great and then I have a follow up on the you know the spending or what it means for margin growth in the neck.

You're in a couple of years.

You've been with you've come in I guess now above the high end of the EBITDA range.

The analyst day, you talked about you know 28%.

EBITDA margins in 2023.

I guess can you answer two questions related to this topic one is yes.

If youre going to continue to ramp spending into 2022 can you still grow earnings double digits next year or are you committed to that.

And then help us understand whether you still feel confident in the bridge to the 2023 guidance.

At the analyst day.

Yeah, I would say, we're not providing 'twenty two 2022 guidance at this time, we would expect to provide guidance in February as part of our year end earnings call. Certainly we are focused on what we can control and and we've got a clear execution focus at this point as Glenn and he had have shared we've had the most robust.

The pipeline of catalysts that we've ever had as a company. So you know as I think about 2022, there's a lot of things to be positive about them and when it comes to spending a couple of things that I think as you think about where we are on our spending levels today and as we move into 2022, there's no doubt that the staffing situation.

And hospitals is also affecting many companies like Integra, where we have open positions were not able to fill every role that we have and certainly COVID-19 is still restricting spending. The you know we're not traveling as much we're not going to as many shows so all of those things result in spending that is below what I call normal I.

This levels and also full of realization faster realization of the ACL synergies have all benefited a 2021 in terms of lower opex spend and higher margins and as they move into 2020. Two we will normalize that spending it's too important as we think about that opportunity to grow our revenue 5%.

7% that we've got to make sure that we're positioned to support that revenue growth because there's a lot of great things in the pipeline coming so I'm not going to comment at this point in terms of specific guidance on margins I think I can still see some increase in margin expansion even into 2022 but we're still factoring.

A number of considerations in here over the next couple of months until we're ready to give more specific guidance in February.

Okay, alright, thanks for the color.

Thanks.

We've been now take our next question from Dave <unk> from G. N P Securities. Please go ahead.

Congrats Pete and I will just try to make this quick back surgery and if I could.

I think there were several iterations of the device and I'm just curious if it were you able to see the efficacy data for both and did you have sort of your best option.

In the a M rock program, where have you reiterated it again and I'm just trying to get a sense of whether the product might be a little different now than what they looked at years ago.

So it is the product is fundamentally the same from from that study that that going forward. We do have derivative approaches and things that could build this out but when you speak about that study and what we're talking about today.

They are apples to apples comparison.

Theres different sizes and things of that nature, but the tissue processing and all of those is actually quite consistent.

Okay.

Dave any other questions.

We've been now take our final question from Larry.

We will go to them from Wells Fargo. Please go ahead.

Hey, guys. Good morning, Thanks for taking the question I wanted to ask a question just so I could wish Pete well in his new job.

Just one question the cognizant T S. A R T M a X.

Buyers are I think at the end of Q4, you guys have said it's material.

Is there any chance, maybe Pete as a parting gift, you'll you'll give us a little bit of quantification.

How beneficial.

That might be thanks for taking the question.

Larry that's above my pay grade, but I'll, let I'll, let Jim.

Jim Your comment just about how they are thinking about the TMA exits.

I'd, just say Larry to the point, where probably a year ahead of schedule from our initial plans and the CMA transfer is all going to be completed here. Shortly so the quantification. We haven't said specifically what it means other than its one of the key drivers of our gross margin story over the next several years so.

Plant optimization plan transfers. This is one of them we have another one in France as well that we're working on so.

It's all part of our gross margin improvement plans for the next couple of years.

Thanks Glenn.

Gosh, we will conclude today's conference call, ladies and gentlemen, thank you for connecting you may now disconnect.

[music].

Good day and welcome to the Integra Lifesciences third quarter 2021 financial results call. Today's conference is being recorded at this time I would like to turn the conference over to Mike Beaulieu Director of Investor Relations. Please go ahead Sir.