Q1 2022 Integra Lifesciences Holdings Corp Earnings Call

Good day and welcome to the Integra Lifesciences first quarter 2022 financial results. Today's conference is being recorded at this time I would like to turn the conference over to Mr. Chris Ward Senior director of Investor Relations. Please go ahead Sir.

Thank you Cecilia.

Good morning, and thank you for joining the Integra Lifesciences first quarter 2022 earnings Conference call. Joining me on the call. This morning, Oregon to West President and Chief Executive Officer, Glenn Coleman, Chief Operating Officer, Gary Anderson, Chief Financial Officer.

Earlier today, we issued a press release announcing our first quarter 2022 and financial results.

And corresponding earnings presentation, which we will reference during the call are available at Integra like Dot com under investors events and presentations in the file named first quarter 2022 earnings call presentation.

Before we begin I would 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 in the release also in our prepared remarks, we will make reference to both reported and organic revenue.

Organic revenue growth excludes the effects of foreign currency acquisitions, including yourself. The first 19 days of the year divestiture as well as discontinued products.

Otherwise stated all disaggregated and franchise level revenue growth rates are based on organic.

And lastly, our comments today will include certain non-GAAP financial measures.

Conciliations 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.

And with that I'll now turn the call over to Yaniv.

Thank you, Chris and good morning, everyone.

Let me start by providing a review of our first quarter business highlights on slide four.

Definitely a quarter, we feel good about and that is reflective of a strong start.

Yeah.

Our first quarter revenues finished at around $377 million above the high end of our guidance range and with organic growth above 5%.

You'll remember that in mid February we went in with the cautious guidance for the first half of the year.

Although we felt confident about the capabilities at the time, we had very few data points on exactly how and until one our markets and operations would be impacted homochrome disruption.

Also how they would east towards the next level of normality.

After the peak of that disruption.

Our better than expected revenue result, in Q1 was driven by stronger than expected recovery in surgical procedures across the globe in March as.

As well as by favorable order timing in our private label business.

We saw demand for our products steadily increase starting in early March.

While our agility and our commercial teams at operations allowed us to keep up with strengthening demand late in the quarter.

Our growth in the first quarter was broad based with both our carbon and specialty surgical and our tissue technologies segments.

Or exceeding 5% organic growth and strong contributions from both our U S and international markets.

First quarter adjusted earnings per share of 74 cents also exceeded the high end of our guidance range driven by the higher revenue and with gross margins, improving 40 basis points compared to Q1 of 2021.

We're pleased that.

About the increasing utilization of our factories combined with margin protection measures taken by our commercial supply chain and procurement teams succeeded in protecting our margins.

Inflationary environments.

And we intend to maintain this margin focus throughout the year.

As we think about the full year.

We feel more optimistic now, but still pepper with contingent caution around some macroeconomic uncertainties.

Certainties.

Clothing interest rates hikes.

Geopolitical instability and further risk from Covid disruptions like what we are seeing in China at this moment.

We expect surgical procedures will continue to steadily improve through the balance of the year with more normal seasonal pattern.

And while we anticipate continued triples.

Why sides of our operations due to some of these macro factors, we should see improving trends in our operations over the balance of the year.

As a result of our strong start in balanced outlook for the remainder of the year, we are increasing our organic growth expectations for the full year to a range of $3 eight to five 2%.

Compared to our initial range of 2.525%.

Reported revenue guidance remains the same as our February guidance as we are absorbing additional currency headwinds as the dollar continues to strengthen.

We're also reaffirming our full year guidance for adjusted EPS.

Our Q1 performance as well as the resilience in our organization provides us a solid foundation for continuing to invest in our future in order to accelerate the business to a next level of performance over the coming years.

During the first quarter, we invested in our organizational capabilities and capacities as well as our growth catalyst.

We initiated a number of strategic roadmap.

Also in the first quarter, we lost neurogenic treaty, our new peripheral nerve repair products and we continued our global rollout of Sterling in Canada, Australia, and several indirect markets.

Finally, we completed the accelerated share repurchase program, we previously announced and as.

As a result have returned $225 million.

To our shareholders keeping up with our track record of strong financial rigor.

With that I would like to turn the call over to Terry logical deeper into our first quarter performance and our updated guidance.

Thanks, John and good morning, everyone I'd like to start with a brief summary of our first quarter financial highlights on slide five.

First quarter total revenues were $377 million, representing an increase of four 6% on a reported basis and five 6% on an organic basis.

Total revenues were $12 million above the high end of the guidance range communicated on February 23rd.

I would characterize the revenue upside is driven largely by the strong recovery of procedures in March coupled with our ability to maintain our pace with customer deliveries as well as favorable order timing from our private label business.

If you recall, we talked about higher levels of back orders during our last earnings call. We ended the first quarter and roughly the same back order position. We discussed then still higher than historical levels, but with no increase since our February call and when considering the sharp escalation in demand in March maintaining the same level of back orders with.

Hey, good outcomes, all things considered as it meant our supply chain kept up with stepped up demand and delivered revenue upside.

First quarter revenue growth was strong across most of our portfolio, we achieved organic growth at or above 5% in both our carbon and specialty surgical and tissue technologies segments with U S organic growth of 6% and international organic growth nearly 5%.

Adjusted EBITDA margin for the quarter was 24, 8% down 20 basis points and adjusted earnings per share increased 7% to 74 cents.

If you turn to slide six I'll now review the first quarter revenue performance of our CSS segment.

Reported Q1 revenues in CSS were $247 million, an increase of two 5% on a reported basis and 5% on an organic basis from the prior year.

Global Neurosurgery sales were up five and you have a five 8% on an organic basis, driven by CSF management and neuro monitoring.

CSF management increased high single digits and was led by growth in our programmable valves, well neuro monitoring grew low double digits benefiting from the recent launch of Sterling.

Total capital sales in the quarter grew low single digits, driven by smaller capital, including Cerro link and Mayfield offsetting lagging sales and larger capital equipment, where we saw extended selling cycles linked to the homework around disruption.

Q1 sales and instruments grew approximately 2% on an organic basis in line with our long term growth expectations for this business.

Recall that last year, we saw significant growth in our instruments business as a result of pent up demand.

International sales in CSS increased mid single digits led by Sir Lincoln Europe and by growth in Asia.

<unk> mentioned, China, and Japan was strong with low double digit growth in both countries.

Moving to our tissue technologies segment on slide seven.

Just your technologies grew eight 8% on a reported basis and six 9% on an organic basis compared to the prior year.

First quarter sales in wound reconstruction increased 4% on an organic basis, driven by sales and integra skin and circumvent.

ACL is reported within the wound reconstruction franchised and <unk> revenue in the first quarter was consistent with Q3 and Q4 2021 levels in line with our expectation.

As we shared on our February 23rd call, we plan to hire additional sales colleagues and our wound reconstruction business over the first half of 2022 and in Q1, we hired a total of 15, we intend to hire another 15 in the second quarter and anticipate building momentum with the ACO product portfolio in the second half.

And our private label franchise sales grew 15% driven by higher customer demand and favorable timing of orders as our partners continue to build inventory.

And finally international sales of tissue technologies increased mid single digits on an organic basis, driven by strength in Europe and Canada.

Turning to slide eight I'll now review, our first quarter peak P&L components.

Adjusted gross margin was 67, 7% up 40 basis points compared to Q1 of 2021.

The improvement was driven by higher revenues and favorable product mix within our neuro and tissue technology businesses.

Our gross margin, which was in line with expectations was impacted unfavorably by higher freight cost material and labor inflation as well as manufacturing and supply chain inefficiencies caused by your work on variant. These challenges were offset by our pricing actions purchasing initiatives and cost improvement activities.

Our guidance for adjusted gross margin for the first half of the year remains unchanged from our February call for.

For the first half of 2022, we expect adjusted gross margins to be largely in line with first half of 2021 margins at the midpoint of our guidance range, which implies roughly flat adjusted gross margins in Q2 compared to Q1.

Our first quarter adjusted EBITDA margin was down 20 basis points compared to the prior year, which was consistent with our expectations communicated on our February call as we planned for increases in R&D, selling and marketing expenses in support of our key growth priorities.

So much of gross margin, we expect first half adjusted EBITDA margins for 2022 to be relatively flat compared to first half of 2021.

Adjusted EPS was <unk> 74 cents in the quarter compared to 69 cents in the prior year, reflecting an increase of 7% driven primarily by revenue growth.

Now if you turn to slide nine I'll provide a brief update on our balance sheet capital structure and cash flow.

Operating cash flow in the quarter was $44 million in free cash flow was $35 million.

Free cash flow conversion was 86% on a trailing 12 month basis, reflecting capital spending and more normal levels and increased spending for <unk> compliance.

In the first quarter, we completed the previously announced $125 million accelerated share repurchase program with approximately one 9 million shares repurchased.

Our balance sheet remains strong with ample liquidity to support our short and long term plans.

And as March 31, net debt was $1.15 billion and our.

<unk> total leverage ratio was two five times.

The company had total liquidity of $166 billion, including $407 million in cash and the remainder available under our revolving credit facility.

Turning to slide 10, I'll provide an update to our consolidated revenue and adjusted earnings per share guidance for the second quarter and full year 2022.

Second quarter revenues are forecasted to be in the range of $392 million to $400 million, representing reported growth of 0.5% to 2.5% inorganic growth of two 8% to four 8%.

Our second quarter revenue guidance reflects continued procedure recovery offset partially by increased FX headwinds and as expected impact in our revenue in China due to the government mandated COVID-19 lockdowns.

For the full year 2022, we are raising our organic growth expectations from an initial range of three 5% to 5% to a new range of $3 eight to five 2%.

The increase reflects our better than expected Q1 revenue performance, but also the continued uncertainty of global markets and the expectation of continued supply constraints.

Our revenue guidance assumes only modest improvement in back order levels through the balance of the year as we work to keep pace with anticipated procedure recovery.

Notwithstanding our increase in the guidance for organic growth guidance for reported revenue growth remains unchanged at $1 five 8 billion to $1 $6 billion, reflecting the absorption of an additional 30 basis points and the FX headwinds for the full year.

Turning to adjusted earnings guidance for the second quarter, we expect adjusted EPS to be in the range of <unk> 78 cents to 82 cents roughly flat when compared to the second quarter of 2021 at the midpoint again, reflecting continued planned growth investments.

We are holding our full year 2022, adjusted EPS guidance range of $3 27 to $3 35, which.

Which reflects additional FX headwinds and continuing macroeconomic uncertainty.

Now I'd like to turn the call back over to John to provide a brief recap of where we stand with our 2022 growth drivers. Thank.

Thank you Carrie.

Turn to slide 11.

Our first quarter results provide confidence that we can deliver on our 2022 commitments, while investing in our growth catalyst and strategic projects.

We feel our full year outlook is balanced it reflects our focus on commercial and operational execution.

Also recognizes that the great deal of macro related uncertainties still exists.

We're diligently working to execute on the levers we can control.

These levers include price capture supply chain initiatives and driving efficiencies in our processes and sites.

Combats inflationary pressure and protect our margins at the same time, we're providing room to invest behind our key growth catalysts.

Over the past two months have continued to spend a significant portion of my time in our factories and in the field with our customers on commercial teams.

See the growth momentum return as hospitals manage through their staffing shortages and free up capacity for elective procedures.

One sales meetings I see commercial colleagues, who are energized to leverage the strength of our diverse portfolio, including our new products.

And I've seen our supply chain teams fully engaged messaging to the many disruptions that continued to be true.

We're also excited by our international growth opportunities, our commercial teams in China, and Japan continued to deliver double digit growth in these markets and we are also seeing improved procedure volumes in Europe .

We continue to allow us several new countries as part of our multiyear global growth plan for the product which includes geographic expansion.

Growing recurring revenue stream as our installed base grows and the addition of digital capabilities.

The controlled market release of eurodollar shorts, a scope for use in minimally invasive neurosurgery.

S plans.

As far as the mirror registry for the surgical treatment of intra cerebral hemorrhage or Ics.

Although the 2022 revenue contribution from the Aurora platform is small the long term benefits to surgeons and patients have the potential to change the standard of care in neurosurgery for ICF.

And we expect it will be a significant contributor to our long term growth as well as a place in our product portfolio preferred to digital innovation.

And our tissue technologies business, we expect to see continued procedural recovery towards the balance of the year.

It allows for farm Bureau, Chad <unk> product targeted for mid caps peripheral nerve repair should boost there's momentum.

In our ACO business, we clearly have more work to do to achieve the performance that we expected when we acquired the company.

Scott mentioned, we expect to have hard 30 incremental resources that would.

Reconstruction commercial team by the end of June .

With an expanded commercial team as well as new marketing and digital customer outreach programs and a more focused compensation plan we have.

Revenue growth for each so in the second half of 2022.

In conclusion.

We're executing on our 2022 commitments with a strong start to the year.

The organization continues to demonstrate resilience in the face of numerous challenges.

Keeping its focus on near term execution.

Well as our long term growth objectives.

So this concludes our prepared remarks, thank you for listening and Julia with this we can open the lines for questions.

Thank you Sir as a reminder, if you wish to ask a question. Please press star one on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. We will now take our first question from Steven Lichtman from Oppenheimer and company. Please go ahead.

Thank you good morning, everyone and congratulations on the start to the year.

I just wanted to start maybe carry an uninflated canary pressures.

Think about the totality of those efforts.

You mentioned.

How much are you able to offset those did those pressures in other words, how much of a net headwind is assumed in your gross margin guidance, then and did your assumption of the gross impact from inflation increase since the start of the year.

Thanks Steven.

Appreciate the question I would say that our gross margins came in largely where we expected. So we knew we were going to have some headwinds I think we properly a bake those into our forecast guidance.

But we also started out the year strong with a lot of actions.

Around those areas in terms of price capture in terms of procurement initiatives and just other cost reduction activities that we're doing in our factories.

As well and I think all of that largely played out as we expected I think as I think about the balance of the year and part of the reason why we maintain the EPS guidance a range, where we did is that I don't see those necessarily abating at this at this particular point I think they largely a we'll get a little worse than.

They are right now and I as I think about the guidance range. We provided for the full year that does give us some room in case, there was the gross margin headwinds get a little bit worse in the second half, but I would say we are equally focused on all of those mitigation activities that did bode well.

For protecting those margins in Q1, and we actually saw a little bit of growth in our gross margin line in Q1.

So I think they're all there I think freight it continues to be a big issue rising energy costs that are finding its way into the supply chain also are are there as well and all of those things I think are not going to have to ease as we move through the year, but at the same time, we're working just as hard to offset.

At those.

Great. Thanks, Carrie and then maybe just my second question on the just a couple of macro items.

I know your capital business. It doesn't include a lot of big ticket items, but I was hoping to get your perspective on the health of the capital equipment environment in the U S and then.

I know you're still under Levered, there, but what's the latest you're seeing in terms of of of demand impact from from the Lockdowns.

Yeah, and I'll have Glenn talk about the China, but maybe I'll hit the capital question first.

Overall, I think as I think about our performance in Q1 and capital. We did have the contribution of Sterling. So obviously that was not there that product was not launched until late last year. So it was a nice.

Tailwind for us in Q1 as well as some of the smaller capital like Mayfield saw some nice growth.

If you kind of exclude those the larger capital did see declines year over year.

And I think many other companies have seen the same thing I think with the Omar Khan disruption those selling cycles, just extended a bit longer so I wouldn't read into it any more than that our view of the pipeline is still very strong.

And we do expect to see capital.

Sequentially continued to increase both in absolute dollars, but also in terms of your year over year growth as we move through the quarter second.

Second half of last year was a was a good capital recovery quarter.

So you you know need to moderate your growth just because of that but generally.

In absolute dollar capital dollar growth will continue to increase through the year and I don't think it's more than just some some extended selling cycle with overcrowding and then Glenn do you want to respond to the China question, you're sure I'll just add on to the capital piece outside the U S. We actually did have growth in our small and large capital businesses.

That was largely driven by Japan, China, Canada, and many markets in direct Europe . So it was very encouraging to see that both small and large capital.

In terms of China, I think as we mentioned before China is our second largest market in country by revenue outside the U S. It represents about 3% to 4% of our overall consolidated revenue. So it's not significant yet in terms of dollars, but it's been a key growth driver for us consistently growing in double digits for the last five.

Hours or so.

In terms of a lockdown clearly has had an impact on our business in the second quarter. It could possibly go beyond that but right now we built the expectation and that'd be locked down well and kind of in the mid may timeframe and that's what's been built into our guidance.

One thing to keep in mind, when you think about a lockdown.

There's a lot of the procedures that are not happening right now.

We will not come back to us because when you have a locked down and you don't have a lot of traumatic brain injury. As an example, so some of them will come back from a timing perspective, it but some of them will not and so we built that into our guidance for the second quarter and full year and if it goes beyond I would say mid may it could have impact on our business largely in the third.

Quarter and.

And I say that because the second quarter.

We've got already got commitments with our logistics providers in China. So we pretty much have a revenue locked in for the second quarter, but if it went beyond.

The may timeframe.

Could have some impact in the third quarter, but on the whole I think it's very manageable.

So very excited about our opportunity in China.

Got it thanks Glen Thanks Kerry.

We will now take our next question from Robbie Marcus from JP Morgan. Please go ahead.

Oh, great. Thanks for taking my question and congrats on a nice quarter.

Thanks Ravi.

Yeah I was you touched on this in the prepared remarks.

A little bit, but I was hoping to just get a little more.

Detail on how you're sizing up sort of the bottom line impact from FX and some of the macro cost.

Pressures you know just just thinking about.

Since you've been in first quarter and Youre being conservative how much is conservatism balanced against incremental headwinds to the bottom line.

Sure Robbie Thanks for the question and I would say that.

We started out Q1 with a with a really nice performance and so.

I think consistent with our remarks, we're cautiously optimistic on the balance of the year, but we're only at the end of April and I think there's just a lot of macro factors that are still swirling about and.

You can call it conservatism, but I do think it's a pragmatic view to say, we still have a whole lot of of <unk>.

Factors that have to kind of play out to see where they land and when I think about that is it's not only FX headwinds I didn't see where the rates were this morning, but yesterday. They are the U S. Dollar continued to strengthen.

So that's even more headwind as we think about the balance of the year interest rate hikes geopolitical instability, and obviously, the Warner Ukraine, but anything that escalates beyond that.

And just overall supply constraints. So all of those things are come into play as I and as we all think about our performance in the balance of the year and so I think there's a lot to be optimistic here, but a lot that still has to be kind of shaken out here and and I think our guidance range does give us some.

Room to maneuver within that so as I mentioned to two that response to Steve we're going to fight like Hell to offset all of this inflationary headwind that we have and we did a really nice job in Q1 that is a real focus for us for the balance of the year, but I do think though as.

May get worse before they get better and look if we can manage successfully in the those gross margin headwinds.

That does give us the optionality to actually accelerate some increased investments for our growth initiatives in the back half of the year. So we'd like to you know a little bit of degrees of freedom here as we think about positioning ourselves in the back half of the year as I think about beyond 2023.

Great I appreciate that and maybe just to focus in on the tissue technology business a little bit here.

You know how should we think about the balance of private label versus the one business for the balance of the year.

I know private label it could be a little lumpy in and if you could just.

Give us an update on on the tissue business, where do you think the market growth is and how.

How do you think youre doing in terms of share gains there. Thanks, a lot yeah.

And I'll, maybe I'll hit the first question and then ask Glen or Jan to talk about the T. T. In general market question, but in terms of private label. There's a there definitely was some advancement of orders into Q1 for private labels are private label partners are building inventory. So as you think about the supply constraints.

That we've talked about they have their own supply constraints. So they are building inventory and our Q1 benefited from that so a little bit of timing advancement from Q2 into Q1, so as I think about our guidance for the second quarter, we have assumed that that private label.

But that revenue is going to be lower in in the second quarter.

As it as it relates to growth rate, we're going to see much more of a tempering of that growth rate is that got pulled forward. So I do believe that as we move through the year prior.

Private label, where you won't see as much growth as you saw just because of.

The year over year comps, if you remember private labels really strong last year as well as again I think our partners who are building inventory. So that's going to balance out quite a bit here as we move through the balance of the year and then the balance of the the wound reconstruction part of the business will start to see some performance. There. So maybe I'll turn it over to Glenn are too young.

So in terms of the overall market for tissue I think you've got to break down some of the segments within it but overall, it's probably growing in the mid to high single digit range. So consistent with our long term growth target to 7% and 9% I would say within that though a peripheral nerve repair and breast reconstruction or plastic and.

Trucking procedures, probably growing faster than the low double digit range.

Complex wound is probably in the mid single digit range, just breaking it down but overall pretty consistent with what our message has been.

Around how we expect to grow over the next five years.

And then maybe on <unk>.

So specifically, where we saw in the first quarter pretty much aligned with.

Q4 and Q3.

Our.

That's not where we want to be we are building up further capacity sales capacity within wound reconstruction, which will benefit <unk> and sold the other pollutants.

Mission there is to show real growth as of the second half of the year in that yourself.

Great. Thanks, so much.

Thank you.

We will now take our next question from Ryan Zimmerman from BTG. Please go ahead.

Hi, Thanks for taking the questions I wanted to ask a couple of questions. Gary you talked about the backlog dynamics and you were able to successfully.

If I get that with your supply chain team that's corner.

Can you give us a sense of kind of what that backlog is in terms of size and scale and.

How that could or couldn't be worked down.

I guess your ability to titrate that backlog through the balance of the year would be helpful.

Yeah, Brian It's Glenn I'll take a crack at this one.

Those are our back orders, we ended the quarter pretty consistent with where we ended at the end of last year or so.

About two to two and a half times above normal levels and.

And it's mostly within our CSS business, where we're seeing the back orders. So that just gives you an idea about where we are in terms of back orders.

But considering the sharp increase that we saw in demand during the quarter and in March specifically, just maintaining the same level of Backorder was really a good outcome for us essentially meant that our supply chain.

Kept up with the higher demand and we're able to deliver the revenue upside. So we actually thought we did a nice job of managing through supply.

In the first quarter.

Moving forward in Gary's prepared remarks, you talked about some modest reductions in the back order levels for the rest of this year, but still supporting.

Expectations for increased demand, especially in the second half of the year. So we do expect to see improvements in our back orders they should come down.

But we're going to be pretty much dealing with a back order situation and supply constraints.

The rest of this year, but it should get modestly better.

Move forward.

Hopefully that gives you some context I would just say on a positive note.

Let's taking a glass half full approach.

We're seeing improvements in lead times with suppliers. However, I would just say things are still far from normal.

We've seen improvements in the absentee rates in our manufacturing facilities that was an area of concern early in Q1.

Coming back to much more normalized levels.

So those items are going to help us to get more throughput more output from our manufacturing sites and help to improve the back order situations. So things are trending in a positive direction, but still far from normal.

Okay.

That's helpful Glenn.

You know given the balance sheet position the leverage ratio and also the share repurchases that you did this corner this past quarter I should say.

What's your view on the M&A landscape I mean, it seems like with the share repurchase dynamics, maybe there's not as much out there that's kind of striking the balance is attractive but want to get both Jan and I'm curious thoughts on that please.

Yeah and in terms of.

Hey, Brian I think we are.

Remained the same posture.

As before and we are.

Actively looking at opportunities I think what is maybe different to past couple of months compared to before was here was that in.

In parallel to discounting the markets I am running with two different divisions, a deeper strategic look into where exactly in the care pathway, which adjacencies do we feel we have a strong.

Strong logic in a strong position to want to spread our wings. So we're adding.

What more strategic filter.

Two the broad set of opportunities that we are looking at.

And Ryan I would just add on.

On the balance sheet, we do have lots of flexibility. There. So we definitely want to be active on the M&A side and obviously, we continue to look at opportunities, but we're very disciplined acquirer.

And so we're going to wait until we find the right target before we jump on that that opportunity in the meantime are always looking for opportunities to allocate.

Our capital and are Opportunistically the share buyback.

Worked out very very well and Ah, we're able to buy back $1 9 million shares, but our leverage ratio has dropped below our our window, we'd like to target two and a half to three and a happen. So at the end of last year. We were at two three times, so little bit of excess cash there. So we deployed it in in opportunistic way.

So I think that's still open, but certainly we'd like to be active on the on the M&A side.

Got it okay. Thanks for taking the questions.

We will now take our next question from Nick <unk> from Wells Fargo. Please go ahead.

Hey, good morning, and thanks for taking the question and congrats on the quarter.

So just two from me first I guess is on the capital environment. When do you expect it to return to 2019 levels.

And then I was just wondering if you could provide us with an update on the PMA or go to demand I don't think that it's been on the prepared remarks about that.

So that would be super helpful. Thanks, So much.

Sure Doug I'll take the first part of that question and Oh as Glenn to take the PMA question on the capital.

Again, I I look at the Q1.

Capital performance as a little bit of a mixed.

As I mentioned, the smaller capital did well we had the contribution of Sterling coming in as you heard from Glenn earlier on the international markets, both the small and large capital.

Did did well in Q1 as well.

It's really more of that U S market on the larger capital that saw a bit of a lagging and I attribute that to just the the longer selling extension of selling cycles, nothing more than that and I do think that will we will start to see some continued growth.

Year over year in the remaining parts of the quarter and from a dollar perspective, we'll start to see a continued trends up in capital I think we're still can be bullish on capital I think it's just a selling cycle extension that that's driving that so Glenn if you want to take the search of my questions sure. So Vic on surge amount don't have a lot to update.

I think it's still too early to speculate on any approval timing for continuing to follow the process that we're working with the FDA on as of reviewing our submission. So I would just say we are.

Hopeful that surgeon and will ultimately receive the approval for the specific indication for use of post mastectomy breast reconstruction, but don't have any real updates I would expect probably late this year, we will give you a better indication of where we are and the timing.

Nothing really new to report on that front and I would just say that you know if you look back through our prepared remarks, we did comment that some of the strength in tissue technology on the wound reconstruction side, what surge events. So even without the indication we do have some very nice growth in search of men's there as the properties of that product really lend themselves to be.

Revascularization and post mastectomy breast reconstruction with the indication does allow us is.

<unk> train and to promote for that specific Ah indication, but without it we still have a general indication and are we still see some nice growth from searching that yeah and just as a reminder, we do have a specific indication for breast breast outside the U S and Europe and so we do have the ability to market and so forth, but the biggest.

'twenty still resides in the U S.

Thank you.

We will now take our next question from Greg did you from Bank of America. Please go ahead.

Okay.

Good morning, everyone. Thanks for taking the questions.

Maybe just to follow up on sort of demand for her breast in on your comments, Gary and Glen.

Maybe just to understand the underlying demand.

Your comments are interesting and.

I did wanted to see if you are seeing greater use in.

And breast, even though you don't have the label in.

In the U S. So basically our docs using it ultimately will more than they were say last year.

Yeah, again surge demand gets used for plastic and reconstructive procedures, along with hernia and have all procedures and.

We don't specifically sell into the breast area today, because we're not allowed to weeks, but all the indications. So we don't necessarily have a good way to track, what's being used for breadth versus other areas, where surge of men gets used but.

Clearly seeing an overall uptake.

On our <unk> product both in the U S and outside the U S. Yeah to follow up on Glenn's play in both of those areas and in our plastic and reconstruction as well as the hernia side, we've seen a very nice growth in both of those areas.

Got it okay.

And then you guys.

I don't think.

I don't think we talked about pricing that much.

You guys and having over the last several years, but I did want to ask a question given some of the supply chain inflationary pressures.

What what have you been able to get well on pricing and have you been able to get good at.

Price on your product.

If not do you think that's an option for you.

If the supply chain.

Sure.

Don.

Later, this year or even the following year.

Yeah, I would say that our price capture has always been a it.

Certainly it's top of mind as we think about 2022, but it's we've always had the ability to to capture some amount of price. So if we look back at our history.

We've always been had an opportunity to capture some level of price and I look at it a number of different ways. You have your annual price increases you have an opportunity to look at discount rates do you have an opportunity to when you knew when you get new customers to think about pricing with new customers different than maybe older customers.

You also have the opportunity with new product introductions.

To increase prices, so think about <unk> going into the market. So there's always a number of opportunities that we can think about a price capture.

You know a lot of the work that we thought about four.

Or 2022 began and in a in the fall thinking about we knew some of these headwinds were coming in so there was a very.

Very active dialogue with our commercial teams about price price capture.

And I think I've commented on this before that.

A fair amount of our U S revenue that falls under enterprise contracts.

And those typically are two to three years in duration and sometimes you don't have an annual a bite at the Apple per se on those because they're they are they can be a little bit longer.

But obviously, knowing when those contracts expire.

It gives you an opportunity to renegotiate, but also most of those contracts have volume commitments in them. So even if you are not able to reopen the contract you can audit for volume and understand are they living up to the volume commitments, which is another opportunity to re engage in a discussion.

With our customers. So all of those things are there.

Where we sit as you think about even on the CSS side, where we sit in in the total operating theatre bill of the cost of our products relative to the overall cost of our neuro surgical procedure, it's not the highest cost so.

Again, there are opportunities to capture price and I think with our innovations that we've done in our product portfolio. It does give us that are that opportunity on an annual basis.

Maybe Greg to to make it clear we did start the year.

A number of price increases where we recruit.

We're working now to make sure we capture that price at the same time.

Keep a close eye on the different inflationary pressures.

How we.

Compensate some of that with operational measures or what additional price levers that we can use to pass some of that through so therefore, the remainder of the year.

Terry and myself and Glenn This is one of our top priorities to stay very very close to our gross margin and the different up and down pressures.

Great. Thank you for taking the questions.

We will now take our next question from Dave <unk> from G. M. P Securities. Please go ahead.

Good morning.

Maybe one for you Ed.

You mentioned the rep hiring them asos.

It seemed like such a complementary deal to the plug and play sort of bag I guess I'm just curious.

Is there something additional on the training side that they they need for those products or why would.

Additional reps sort of be the solution to.

Driving that given the portfolio you already have.

Hey, Dave It's Glenn I'll give you some color around this and we actually bought the business.

We had to go through some compliance related matters and actually reduced the workforce and we did that.

And probably went too deep on some of the costs as it relates to the sales reps.

Well, we came to learn.

During the process post the acquisition was in many cases. These reps are calling on more than just complex wounds that were pulling out other parts of the hospital.

And so we are now adding back many other perhaps 15 in the first quarter, probably another 15 or so in the second quarter to get better account coverage now. It also cover a complex wounds in areas outside of complex bonds, which we don't have adequate coverage today. So that's kind of a first thing.

The second thing is we're really going hard after some of the bigger accounts now.

And then lastly, as we've done some things to change our sales compensation plans to drive more.

Positive behavior and selling in the ESL portfolio. So we feel really good about the momentum in the business right now like we said earlier.

Our revenues have been pretty consistent the last couple of quarters I'm expecting in the second half of the year. So we're going to see an uptick in revenues and growth.

We feel quite confident that that's going to happen and I think that's a more of a timing relative to the fact that you you're adding a few more heads you gotta get them productive right you've got to get them trained.

Not dedicated to just as all of these these incremental head count. These are head count that are being added to the entire wound reconstruction sales channel.

So they will be just a little bit of time to get them up and productive in selling and that's why we've talked about a second half momentum in our expectation.

Takes about three to six months between hiring a person in getting full productivity.

How does it person.

And then.

You may say, it's only towards the headcounts, but I would say if I look back over the past six months in the.

The mobility and the workforce.

That is not an easy job to bring 30 great to.

She also it's important that we have good momentum.

We bought a week, where we're bringing them in and get into predictive.

We feel about the second half of the year, we should see the food.

The full productivity of that capacity.

The detail I guess as a quick follow up an easy one.

Does that your authorization right now for buybacks is $325 million is that correct.

No. So if you go to the press release on that one we had so the original authorization was 225 million from the board and we used $125 million of that up. So we had a balance of 100 lap. So essentially we've canceled the remaining 100 and kind of re up to the historical level.

25, so just kind of reset that authorization authorization level back at 225.

Just to give us some additional flexibility and optionality there.

Share buybacks nothing nothing that we've announced further.

I appreciate the help on the simple math I got wrong. Thank you for that.

Have a good one.

We will now take our next question from Rich New is her from trust. Please go ahead.

Hi, guys. Thanks for taking the questions.

And congrats on seeing some improvement.

In the quarter here nice to see.

Maybe just to start I was hopping around calls, but I think an earlier question was on the M&A front.

Just wondering you know I appreciate you're doing you know.

More strategic deep dives on the various units.

Your.

You've been there relatively short, while but I'm curious you know any any any sense as to kind of when do you think all of that work will start to come to a head there or any timing on when do you think there'll be a little bit more.

A little bit more aggressively focused on filling holes or or identified.

Where do you want to kind of deploy capital.

So we plan.

Until this summer to be fully ready with our.

David Long range plan.

Including.

Clear direction for strategic acquisitions.

In the Meanwhile, when it comes to tuck in acquisitions that can fully leverage our strong sales force.

That is of a different nature. So we're we're not holding back to that type of opportunities.

Okay. That's helpful. Thanks, So so not too far from now and then.

On T cell.

I think you said to expect improvement in the second half I. Appreciate you have you have some rep adds that you're waiting for I'm curious what what if any.

Contribution can we expect from.

The increasing presence in the office setting how does that factor into the strategy. There I think you're more indexed to two inpatient maybe just level set us on kind of what the mix is in that business and kind of how you see it.

A potential.

Site of care mix evolving over time, there and if the rep strategy plays into that at all thanks.

Yeah no. Thanks for the question clearly the esol business and our wound reconstruction business in general is all on the acute hospital side, so very little in the outpatient side.

In the physician office.

Is there is there opportunity to do.

To expand or to move in that direction I guess, it's just a quick question.

Sure I think it does create an opportunity for us, but right now our focus is really on the acute hospital side and that'll be our focus for sure at least for the next 12 months.

Okay, That's fair and maybe if I can just one last one you mentioned.

Yes, the supply issues could you be a little more specific on on how that's.

How that's hitting is that you have an issue with fulfilling demand or is it just more you're able to fulfill the demand you just have to go to spot purchasing and Ambac just comes at a higher higher.

Their price.

You know I think in terms of our supply we are doing a good job of meeting demand, we haven't actually reduce your overall backorder levels, but the good news is we're seeing a pickup in procedures and we're seeing a recovery and we're able to keep up with that increased demand I think as we move forward, we will not only keep up with the demand.

The higher procedure rates, but we'll also start to eat into that back order and backlog so that should come down.

Modestly over the next several quarters.

But when I look at our supply chain.

Do not see us have structural shortages like you'll hear about in the electronics space yet with what do we do see is just ripples where yeah.

Delivery times are not matched because suppliers.

Issues with with their supply but.

Yeah, it's more ripples into supply chain, which I expect will continue for the remainder of the year as the world tries to come to somewhat of a more steady state.

Thank you.

We will now take our next question from Matt <unk> from Credit Suisse. Please go ahead.

Hey, thanks, so much for taking the question.

We're a little late in the call here. So just maybe just one on a topic that we haven't talked about in a while I don't think as a sort of your progress through.

This sort of mid European.

Med device regulation and D R.

Environment that you've that you've been investing in you know when we see the charges come through and then we talked about it kind of at the outset.

Consolidated some of the Skus in your portfolio investing behind some of the some of the products they're facing other products out can you maybe just touch on where you are in that process and.

Maybe talk a little bit about some of the benefits, you're seeing or if any of sort of consolidation around key products.

Where you've made the investment and maybe other smaller players have just opted to get out.

<unk>.

Yeah, Matt It's Glenn I'll take a shot at this one so I think first and foremost we've.

Still a lot of work over the last couple of years around you have you already got an early start but still a lot to go but we're compliant with the class one products that was may of last year.

We're continuing to work to get compliant on class II and class III products and while the data is still a ways out there being may of 2024.

There was a lot of work that has to happen. This year. So that we can do the submission to the notified body, which we don't require at least 12 months for many of our products for animal based products is 24 months that means that we have to submit this year for those types of products. So a lot of the work effort and a lot of the costs that you see coming through our for efforts that are currently ongoing.

<unk>.

And will take place in 2022, but we think we're on track.

To meeting those deadlines are theirs.

Quite a bit of activity happening as we speak.

We've done a lot of the work around the portfolio rationalization prior to this year. So that was all done the files are meeting our our files and products are going to sell going forward and we think if we do this right. It actually could be a competitive advantage, where many other products may be pulled from the market. So.

You know more to come but this is obviously an important here when you're thinking about U M. D. R and all the work that has to take place.

Great, Thanks, Glenn and a nice quarter.

Thank you.

We will now take our next question from Frank <unk> from Jefferies. Please go ahead.

Hey, guys. Congrats on a nice quarter, just picking up on the on the M&A questions I think Jan last quarter you commented.

The co sort of filling out adjacencies and focusing on digital.

I'm just curious if you've identified.

A particular segment to focus on.

On digital right out of the gate number one and then I have.

A follow up after that.

There's.

Let's say, there's a few.

There's a few.

Opportunity area that are matching where we play with rates in our cold weather business or in a tissue.

Technology setting both are linked into enabling.

The care pathway, where today, we are a part of.

And then in our <unk> business.

Now, whether it's our civil link where our Aurora platform, we are de facto into data and analytics and augmented.

Because utilization so those are other areas where.

Inorganically, but possibly also organically that we have opportunities to further broaden our value added with digital.

Great. Thanks, Jan and just a just a final one here.

Just hoping you can give some feedback on are on the neuro <unk> three D J.

<unk>.

Launch and maybe Aurora.

Are you sort of seeing in limited launches there and how should we think about.

Timing and what you expect to see having the full scale launch.

Yeah, I'll, let Glenn give some color there yes sure. So nerve three D was launched at the end of the first quarter. So we're starting to see the pick up of momentum here into Q2 very excited about it. It opens up now the mid gap nerve repair market for us, which previously were only addressing the short gap nerve repair market. So we've.

Got a team in place with a group of specialists that are selling this product along with our other nerve products and so this will be a nice growth driver for us I would say not so much this year because it can be partial year launch, but certainly in 2023.

So more to come on that will give regular updates on how we're doing with.

With the nerve launch on Aurora continue to get really good feedback from our Kols.

This is a platform technology, that's going to be used for minimally invasive surgery and interest repo hemorrhage, and we see big opportunities in both areas. Both in the U S and down the road outside the U S.

Have some very good momentum in both of these spaces in the revenues.

In terms of what's going to happen.

And our actual results will really come from the mix side of it.

In the near term and then over time I've CH full.

Hopefully have the clinical evaluation support that we need and demonstrate the differentiation where.

Where we can actually drive significant revenues, but that's still a few years down the road, yeah, and I would just say, it's not a it's not an issue of reimbursing for reimbursement is there it is more of a.

Just converting converting surgeons to do their approach a bit differently. So instead of an open craniotomy too to use this tool to do a minimally invasive approach.

And for the I th market, it's a really it's changing the standard of care, where deep bleeds in the brain.

<unk> had in the past there hasn't really been any surgical interventions are it's mainly medical management and so this is a really exciting area, where we can we can change the standard of care for IC H. So it is really about this limited clinical launch getting access and getting our products in the hands of our Kols here.

Ed can influence.

The adoption of this technology.

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

Hi, good morning.

I jumped on a little late so I apologize.

Questions that are redundant, but did you quantify the level of thorough link revenue in the quarter.

No Jason we did it but I would say that it was a very nice contributor to.

Two our growth I think last year, we had about $9 million worth of capital sales in the second half of the year.

And so we haven't disclosed airline for Q1, but it is it's certainly as I think about 2022 to 2021, obviously youll have the full year benefit of it and it did.

It was a nice growth contributor in Q1 for us and it's I remember this is our aim.

A multiyear growth opportunity for us and it has a recurring revenue stream. So as you see the market with the the capital unit, which.

Which is more of like a small to mid sized capital purchase it's not a I wouldn't consider it large capital you also have the micro sensors, which is a nice recurring revenue stream for us so as the capital sell goes youll start to see the buildup of the recurring revenue and that's as I think about the continued year over year opportunity for Sterling as I think about it is the combination of.

Capital and recurring revenue and Jason keep in mind.

Still launching sort of length and new markets.

Outside the U S in 2022 and beyond so this year, we'll launch it some of the indirect markets, we're launching in Japan.

By 2025 are expected to launch in China. So.

Even though we've launched the product when we say launch that we've launched in major markets like the U S. Europe , Canada, Australia, there's other markets that are going to be new in 2022 and beyond.

Right Okay.

Yes.

Okay, and just the second one here low single digit growth in dural access.

Kind of a level of growth we should expect for this segment or are there other dynamics going on in the market.

So I think it's what we expected I mean overall CSS with talked about 3% to 5% growth instruments is going to be on the lower side of that spectrum.

And the rest of the neurosurgical will be a little bit higher, but I would say nothing nothing unusual here I think again it was a it was a very nice quarter all things considered in the TSS group.

Okay. Thanks.

We will now take our next question from Marsh O'brien from Piper Sandler. Please go ahead.

Hi, Good morning. This is drew on for Matt and thanks for taking the questions.

Sorry to ask the 100 supply chain question here, but like Gary in your.

Your comment that some pressures may from a margin perspective may get a little worse throughout the year is that related to anything in particular that freight raw material staffing anything like that.

And then just.

Related.

Okay go ahead.

Yeah.

And then just probably just related to the backlog are you able to quantify the revenue impact in the quarter due to issues sourcing anything up or down the supply chain.

<unk>.

Yeah, I'll have Glenn talked about the backlog, but on the specific comments on gross margin a headwind I'd say, it's more of a generic comment through there was nothing in particular other than what I'd say is you know.

The supply chain challenges continue material pressures around energy input costs as well as just overall freight cost and just other material pressure. So I think these are subsiding I think they are still prevalent and the question will be is will they get any worse than they have.

But I think we've done a very nice job of keeping them at bay, and working and our actions to offset them very nicely here in Q1, and that's our intent for the balance of the year, but generally I would say.

We hear more about these then less about them and so it's more of a general comment rather than anything in specific.

And then in terms of backwater quantification I think the way we look at back orders and a normal year, we'd have about $4 million to $5 million of back orders and right now we're at $15 million.

So if we were down to a normal level, we'd have $10 million of incremental revenue as the way to think about it but again relative to year end, we are pretty consistent with that back order number we were around $15 million at the end of the year were 15 million now.

The good news is as we start to eat into that back orders.

Uhm later this year, obviously, that's incremental revenue for us, but again, that's all built into the guidance for card provider.

Thank you.

Okay.

This now concludes the Integra Lifesciences first quarter 2022 earnings call. Thank you for joining.

Thank you.

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