Q2 2022 Integra Lifesciences Holdings Corp Earnings Call

Well Jerry underway come to the Integra Lifesciences second quarter 2022 financial results Conference call.

Today's conference is being recorded at this time I would like to turn the conference over to Chris Watt Senior Director of Investor Relations. Please go ahead Sir.

Thank you.

Good morning, and thank you for joining the Integra Lifesciences second quarter 2022 earnings Conference call. Joining me on the call. This morning are John <unk>, President and Chief Executive Officer, Glenn Coleman, Chief Operating Officer, Gary Anderson, Chief Financial Officer.

Earlier today, we issued a press release announcing our second quarter of 2022 financial results.

Results and corresponding earnings presentation, which we will reference during the call are available at integra lifestyle com under investors events and presentations in the file named <unk>.

Second 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 the 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 a sale of the first 19 days of the year.

Divestitures as well as discontinued products.

Yes, otherwise stated all disaggregated and franchise level revenue growth rates are based on 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 a current report on form 8-K filed today with the SEC.

And with that I will now turn the call over to Jan.

Thank you, Chris and good morning, everyone. Let me start by reviewing our second quarter and first half business highlights on slide four.

To summarize our performance over the past six months.

Parts of the year strongly.

Second quarter building nicely off our first quarter momentum.

Despite choppy waters at the macro environment and plenty of disruptions within our supply chain, we capitalized on the recovery of girlfriend procedures in all markets, while protecting our margins.

Second quarter revenues were $398 million above the midpoint of our guidance range, you'll see organic growth of four 8% and with our strong first quarter performance. This resulted in first half organic growth just north of 5%.

I'm pleased with our sales performance in the quarter as we overcame persistent.

Supply constraints and heightened.

And currency headwinds.

We saw continued strength in our international business, particularly in Japan, China, and Europe , along with strong orders from our private label partners and within our U S instruments business.

Over the course of the second quarter hospital procedures.

<unk> continues to move closer to pre COVID-19 levels.

Our current revenue numbers do not yet fully reflect this market momentum is back order levels increased over Q1 as a result of ongoing supply challenges, particularly in our neuro business.

Nevertheless, we achieved revenues above the midpoint and delivered adjusted earnings per share of 82 cents.

Our guidance range.

Just as importantly, we held our first half adjusted margins relatively flat year over year in line with what we communicated during our April earnings call.

We're very pleased with the team's ability to navigate the challenging supply chain and inflationary environments and deliver profitable growth, while continuing to evolve our team's strategic initiatives.

We intend to maintain this focus in the back half of the year.

Speaking of key strategic initiatives.

We launched two new products in the second quarter.

First we introduced our all right, if actuator, which coagulation capability in the U S.

<unk> is designed to be used with our Aurora search scope to safely address and in fact, we lumped into brain.

Caused by hemorrhagic stroke.

Second we lost <unk> <unk> system, our first external ventricular drain in China.

And then just even the system is manufactured in China by Shanghai, How'd, you Medical technology company and commercialized by Integra under an exclusive distribution arrangement.

The device is used in the management of cerebral spinal fluid and is highly complementary to our back to school calendar and our advanced intracranial pressure monitor on products.

While expanding our resilient portfolio life saving solutions. We also continued to streamline the portfolio in order to enhance profitability.

The second quarter, we signed a definitive agreement to sell our traditional wound care business.

This business consists of slower growth and lower margin wound care dressings, such as Paul just golf and confirming bandages.

We expect this transaction to close by the end of August and our updated 22 guidance. That's carnival detail in a few minutes reflects the expected impact of this divestiture.

The sale of our traditional wound care business is one of a series of steps we have taken over the past two years to optimize our product portfolio, which has enabled us to focus on the integra, <unk> CT market, leading products and neurosurgery surgical instrumentation, and regenerative tissue and moves us closer to achieving our long.

Term organic growth and profitability targets.

In further support of expanding product margins, we closed manufacturing facility in France in the second quarter and are in the process of transferring production to our existing facility in Switzerland.

In addition, we announced plans to outsource certain back office finance and customer service activities in order to enhance customer quality build scale for future growth and capture cost efficiencies.

We expect this transaction to be completed but he handled it yet.

We're extremely proud that our efforts in building a diverse and engaged workforce have resulted in integra being named one of the 2022.

Best places to work in New Jersey, and recognize that as a great place to work certified organization.

China.

So.

There's a lot to be pleased with closeouts in the second quarter and in turn our focus towards the second half of the year and beyond.

We're tightening our full year organic growth guidance at the bottom ends which reflects our solid first half performance, but also recognizes that mix of opportunities and challenges ahead of us in the second half.

With that I'm going to turn the call to carry now will get deeper.

Now into our second quarter performance and updated guidance.

Everyone I'll start with a brief summary of our second quarter financial highlights on slide five.

Second quarter total revenues were $398 million, an increase of 2% on a reported basis and 40.

Growth was impacted by $10 million unfavorable foreign currency exchange rates compared to the prior year, representing a 260 basis point impact.

This headwind in Q2 was $3 million or approximately 90 basis points higher than what was comprehended in our April guidance.

Excluding the impact of FX and discontinued products, we delivered four 8% organic growth in the quarter at the top end of our guidance expectation with global CSS at four 3% growth in global tissue technologies at five 9%.

We were pleased with our performance in our international markets, which saw nearly 8% organic growth in the quarter, Japan delivered low double digit growth in China and Europe finished in the high single digits.

Adjusted EBITDA margin for the quarter was about flat versus the prior year and adjusted earnings per share grew approximately 4% to 82 cents.

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

Reported Q2 revenues from CSS were $258 million, an increase of four 3% on an organic basis from the prior year.

Global Neurosurgery sales were up three 4%.

Within Neurosurgery CSF management increased high single digits and was led by growth in our programmable valves, while advanced energy grew mid single digits, driven by Coosa capital and related disposables.

Joe the neuro monitoring on dural access and repair grew low single digits impacted by higher sequential back orders in the quarter, which limited our ability to keep up with demand recovery.

Total capital sales in the quarter grew mid single digits, driven by larger capital and Sarah link.

<unk> instruments came in better than expected with second quarter organic growth of 7.5% driven by broad growth in both hospital and office sites of care.

Instruments growth for the full year is expected to be closer to our long term expectation of low single digits.

International sales in CSS increased high single digits led by thoroughly and our indirect markets in Europe and by growth in Asia.

As mentioned earlier performance was strong in Japan, with low double digit growth in China, which delivered high single digit growth.

As a reminder, in China, we sell through distributors, whose orders had been placed prior to the Lockdowns we.

We believe we have adequately captured the impact of continuing rolling Lockdowns in China, and our third quarter and full year revenue guidance range.

Moving to our tissue technologies segment on slide seven.

Global tissue technologies reported revenues of $140 million with five 9% organic growth over the prior year.

Second quarter sales in wound reconstruction increased three 2% driven by sales and integra skin and surge of man.

Q2 revenue for <unk>, which is reported within the wound reconstruction franchise saw high single digit sequential growth compared to the first quarter.

Completed our plan to hire 30 additional sales colleagues in the first half which contributed to the better than expected results for Asia.

And our private label franchise sales grew 15% similar to what we reported in the first quarter. We attribute this strong result of favorable timing of orders.

For the full year 2022, we expect private label organic growth to moderate to mid single digit range in line with our long term growth expectation for this business as our partners manage their inventories more closely in the second half.

And finally international sales and tissue technologies increased low double digits on an organic basis, driven by a surge of men.

Yes.

Turning to slide eight I'll now review, our second quarter and first half key P&L components.

Recall that during our April earnings call I shared my expectation that first half adjusted gross margins and adjusted EBITDA margins would be relatively flat to the prior year.

Final results for the six months period were in line with those expectations.

As we think about margins for the full year, we expect adjusted gross margins and adjusted EBITDA margins to be generally flat compared to 2021.

To protect our margins given the prevalent macroeconomic headwinds, including higher freight and material and labor inflation and manufacturing and supply chain inefficiencies, we have implemented price increases purchasing initiatives and other operational improvements.

We are also focusing on larger organizational cost opportunities that will benefit margins in 2023 and beyond.

Including the two projects Jan talked about earlier, the closure of a high cost manufacturing site in France, and the planned outsourcing of certain back office activities by the end of this year.

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 $66 million and free cash flow was $57 million.

Cash flow conversion was 76% on a trailing 12 month basis, reflecting higher capital spending compared to the prior 12 month period.

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

As of June 30th net debt was $1 $1 billion and our consolidated total leverage ratio was two and a half times.

The company had total liquidity of $1 $7 billion, including $447 million in cash and the remainder available under our revolving credit facility.

Turning to slide 10, I'll update our consolidated revenue and adjusted earnings per share guidance.

For the full year 2022, we are slightly raising the low end of our organic growth expectations from a prior range of $3 eight to five 2% to an updated range of 4% to five 2%.

We are pleased with our first half revenue performance, which is why we are leaving the high end of our organic guidance range at five 2%.

However, there are still reasons to be cautious about the second half given the continuing supply chain constraints and prevailing macroeconomic uncertainty.

Well your guidance for reported revenue is updated to $155 7 billion to one $5 $75 billion.

<unk> the removal of revenues from the TWC business beginning September one.

And an additional unfavorable 115 basis point impact of FX for the full year.

The unfavorable FX impact is now expected to be $35 million or approximately 225 basis points year over year, primarily driven by a euro U S dollar rate close to parity for the second half and a Japanese yen at 20 year lows.

The revenue impact of the TWC divestiture will be approximately $10 million for the last four months of the year.

Full year 2022, adjusted EPS guidance is updated to a range of $3 21 to.

To $3 29.

<unk>, an incremental three cent headwind on FX and three cent impact due to the sale of the TWC business.

For the third quarter, we expect reported revenues in the range of $383 million to $391 million.

[noise], representing reported growth of approximately minus 1% to plus 1% and organic growth of approximately $2 six to four 8%.

Our Q3 revenue guidance reflects the impact of the planned divestiture of the TWC business, assuming a close at the end of August as well as an updated foreign currency outlook.

Adjusted EPS for Q3 is expected to be in the range of 78 to 82 cents.

Now I'll turn the call back over to John to provide a brief recap of our 2022 growth catalysts and margin drivers.

Carrie let's turn to slide 11, the final slide.

Our first half results delivering greater than 5% organic growth and protecting margins in a tough environment.

Flex the diversity of our portfolio and our team's resilience and navigating don't go in choppy waters as well as our increasing agility to capture new opportunities.

In addition to delivering solid first half.

We continue to advance our key growth catalysts and builds towards a long term organic growth rates in the 5% to 7% range.

First in our international business, we delivered above 6% organic growth in the first half of the year, reflecting deeper penetration in our international markets, particularly China and Japan.

You heard me talk six months ago about our roadmap we're building to drive further momentum in our international business.

So with that project, we haven't done to find several opportunities within both CSS and tissue technologies to further accelerate our growth in the EMEA and Asian markets.

These are now being translated into our long range plan.

2022 is an important year for new products.

While the immediate revenue contribution of some of these products will be limited.

Early indicators of the market potential and future commercial success.

Positive.

<unk> link our new intracranial pressure monitoring platform, which launched late last year is continuing to show steady adoption and our global markets with a growing installed base across 25 countries now.

Customers appreciate the Ballston Olympics, and the more intuitive user interface.

With a strong sales opportunity funnel, we're excited about the multiyear global growth trajectory for settling.

As Gary mentioned earlier, we expanded our wound reconstruction sales force in the first half of the year and.

These new sales reps are ramping up their effectiveness with a focus on surgeons new two peso.

In the second quarter, we added over 200, new HL users and we're pleased with our progress building commercial momentum.

We believe Aurora, our new search scope technology will drive a step change in the standard of care for minimally invasive neurosurgery and the surgical treatment of intra cerebral brain hemorrhage.

We are continuing to build out an early adopter base through our mirror registry and U S.

The Aurora evacuate or which correlation functionality was launched and mirrors sides and your initial cases have shown the device works well in conjunction with all sorts of scope.

Further validating the promise of Aurora.

We're continuing to expand reimbursement coverage for prime matrix, we have now secured coverage by three of the five largest U S payers and we remain focused on further growing the corporate population for matrix.

We also continue predictive engagement with the FDA regarding our <unk> breast PMA to address questions and further data requests raised during our October panel meeting.

And finally, neurogenic treaty, our nerve repair products engineered for optimized midcap nerve regeneration is making steady progress through early T. O L experiences and we continue to add first time users and when the value analysis Committee approvals.

In addition to accelerating our growth catalysts, we're keenly focused on securing our operations and margins for the remainder of the year and on driving margin expansion beyond 2022, as inflationary on supply chain pressures abate.

We continue to take actions to simplify and optimize our portfolio, while driving efficiency in our manufacturing facilities sales channels and back office operations.

We are managing input costs with our suppliers and our manufacturing plants.

And we're working to keep pace with increasing demands and reducing our backorder levels, while maintaining our focus on price realization to drive long term margin improvements.

We have a broad set of efficiency levers and we are confident that as the short term supply and inflationary pressures subside, we will deliver on our long term profitability targets.

In conclusion the.

First of all the year has been solid in the face of a myriad of global challenges.

We are not for a while we are not in a steady waters yet given the continued macro.

Certainties.

<unk> has demonstrated we're well positioned to weather these challenges, but our strong portfolio of products are engaged talent.

Understood.

And we expect to continue to deliver solid and consistent growth profitability and cash flow.

And so with that I will open the floor for questions.

Or would you. Please open the line for Q&A.

Certainly thank you, Sir ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad. Please ensure that the mute function on your telephone is switched off.

Oh your signal to reach our equipment that is star one to ask a question.

And we take our first question from Steve Lichtman with Oppenheimer. Please go ahead, Sir your line is open.

Oh, great. Thanks, good morning.

I guess I'll start with this.

Touch on inflation, it looks like EPS guidance.

It didn't change from ongoing inflation pressures.

As you look at guidance now versus where you were at one <unk> would you say your estimates for that you've created headwind has stayed basically the same or has it hasnt gone up over the last few months, what youre finding offsets.

In the P&L.

Hi, Steve I'll take that call I I would say generally the good news is and I think you've read that guidance correctly and that we are managing those inflationary pressures.

We're doing that through a number of initiatives and our initiatives as I mentioned before whether that's priced purchasing initiatives and other cost elements. Our improvement actions that we're taking I would largely say for the bulk of the inflationary pressures, we haven't seen them getting get any worse with the exception of a couple of areas certainly freight <unk>.

Cost and energy cost are probably the two that continue to to to increase a bit from earlier in the year, but I think imbalance I think between the initiatives that we have as well as you know the general levers that we have a part of our margin improvement, which is new product introduction, which.

Bring better margins actions that we're continuing to do on the portfolio continued to allow us to at least keep our margins this year relatively flat.

Okay great.

My second question just on the capital environment from your.

Perspective.

Particularly in the U S are you seeing any changes there in terms of appetite from hospitals, who are.

Are things pretty steady on that.

Yeah, I'll I'll start and certainly Glenn can can add some color here I would say capital came in largely where we expected it to in that mid single digit range, but I still see longer selling cycle. So that extended selling cycle trend is still prevalent we actually saw.

A little bit better.

Yes.

Performance out of our larger capital compared to smaller capital in the second quarter, where that was a little bit reverse in the first quarter. So maybe more timing related than anything on some of that larger capital coming through on KUSA in second quarter.

But still some some good demand on the serial link as well in the second quarter and but overall generally holding up I think as they think about full year and certainly that's a reason to be still cautious.

And certainly that factors into our overall guidance for the full year is that we don't necessarily see that capital.

Selling cycle shortening at this point so you know.

Looking at a scratch or capital improvement as we move through the second half of the year, but not a a bolus of of our increase in capital Glenn anything you wanted to add there you know I would just say we feel really good about the funnel of the phone was strong but as Cary mentioned, the selling cycles are a bit longer but even with that.

Both large and small capital did well in the quarter I would just highlight though international had.

Really strong performance on the capital front, we've actually grew double digits outside the U S.

A lot of that coming from Japan, and you probably remember about a year and a half ago or so we took our business our capital business direct in Japan, and we've built that team up nicely and we're seeing some really strong growth.

Some of the additional dollars in government spring up for capital. So I would just highlight the strong performance internationally on capital we did see growth in the U S, but not to the extent of international.

Got it thanks, Darren Thanks, Glenn.

Thank you and ladies and gentlemen, if you find that your question has already been answered you may remove yourself from the queue by pressing star two.

And we are taking our next question from Vik Chopra with Wells Fargo. Please go ahead. Your line is open.

Hey, good morning, and thanks, so much for taking the question.

I guess, one perhaps M&A.

Portfolio optimization.

Can you give us an update on how youre thinking about M&A, including the largest transaction at this time, especially with the pullback in valuations and then I had a follow up thank you.

Thank you Vic I'll I'll take this question. So yeah, we finished over the past couple of months.

Our broad strategic scan both nerve tissue technology.

GSS business and today have a broad set of opportunities, where we think we can organically and inorganically broaden.

Our position in the care pathways and.

And increase our scale.

At this point in time, we have a very good view of where we want to go leveraging our M&A capability leveraging our balance sheet.

We definitely have.

A number of opportunities in sites in terms of the timing.

I think we're still a bit in that phase where a while.

Some of the multiples look attractive D. The willingness to transact is not there yet so that's something that.

I assume over the next couple of months May start to change and I would just add on that to John's point on the balance sheet, obviously very strong a balance sheet that provides us lots of flexibility as we think about.

Being active on M&A and that M&A will still remain a top priority for capital allocation, but our our net a total consolidated debt ratio was two and a half times and our range is like we target out in two and a half to three and a half and so we're at the low end of that range, which is great to have that flexibility as we move into.

The second half and into 2023.

Great. Thank you and just one follow up Gary maybe for you how should we think about growth by segment with the second quarter now behind US. Thanks, so much.

Yeah, I would say generally for the full year, both segments will will will likely be in that corporate range I think as I think about the second half.

You'll you'll probably see some things to moderate a bit as I mentioned before in my prepared remarks private label was a standout obviously, 15% growth both for Q1 and Q2, so that's going to move a little bit lower into the second quarter as we moved to more of that mid single digit range for.

The first half or so sorry for the full year same thing with instruments that will moderate in the second half, but generally I would say.

Both of them will be in in that corporate that corporate average mix, but a little bit of pluses and minuses with T T probably doing a little bit better than the corporate average and C. S as doing a little bit less but generally CSS still being in its 3% to 5% organic growth range expectation.

Thank you.

And we are taking our next question from Ryan Zimmerman with B T. I G. Please go ahead your line is open.

Good morning, and thanks for taking my questions, Yeah, I'm carrying Glenn I wanted to talk about guidance for a moment, if we could I appreciate the color on the third quarter and I can see you know the street's kind of sit in I think a little bit higher at 399, but when you account for FX and the divestiture.

Common line closer to the third quarter, but if you think about the fourth quarter guidance implied from that I think you know you're looking for something in the streets at around 421, but when you account for the higher FX and the divestiture.

Still leaving a little bit of room, I think between the implied guidance, which comes out I think by my math wrong four O five maybe four O seven ish, so help us understand kind of the puts and takes.

As you think about the contribution of our or the organic growth contribution of the business and the implied fourth quarter guide now coming out into the third quarter.

Yeah, and you know in terms of our full year guidance again, I think we have a lot to be reasons to be optimistic on our marketing capabilities to capture growth and that's why we left the top end.

Our full year guidance at a five 2% organic growth, but there are still reasons to be cautious as you know Ryan on still supply constrained persisting and macro uncertainties.

I would say that fourth quarter, specifically as you kind of back into that from the third quarter and our full year guidance, which obviously are usually the strongest quarter of the year as we think about end of the fiscal year for many of our hospitals. So I still believe that capital will.

Normally it's the strongest quarter of the year and so I would expect to see that normal pick up in capital as well and obviously continued momentum in other areas of the business like some of the new products that Jan talked about neuro near a gen. Three D. ACL, we've got it moving in the right direction. So.

The combination of those things and more stability out of China as we move to the to the fourth quarter kind of emerging from some of these lockdowns all of those things I think bode well for continuing momentum as we move into the fourth quarter.

Okay, and then just as you're thinking about Q2 I'll squeeze two quick ones. In here. One is do you think about the legacy Derma science business, which is now part of the tissue technology business.

Getting rid of that old you know that.

Divest the TWC business, what's the growth profile of kind of that legacy AWAC business with the divest the TWC business off the books now.

And what kind of margin impact are we talking about that you should see as a result of the divestiture.

Yeah, Brian it's Glenn good morning, So I would say the profile of the derma business. Excluding TWC is in the mid single digit range.

And we're talking about advanced wound care products, such as better honey, our amniotic portfolio, we're still keeping our core to our business. So call. It mid single digits in some cases, it could be a little bit higher but that's the way that's the way I would frame out the growth.

One of the reasons why we divested the TWC business was it was not growing number one.

Second is the gross margins are very low and you can think of that as you know in the 20% mid.

Mid twenties range and so from a gross margin perspective, it would obviously be accretive to us. It did have EBITDA positive dollars and that's why it was somewhat dilutive by divesting of I think we still got some work to do to get some of the stranded cost out for 2023.

On the whole it should help our overall profitability metrics help our growth rates.

And hopefully that gives you a good indication about the.

Go forward portfolio with.

The Derma Sciences business.

Back several years ago.

Thanks for taking the questions guys I'll hop back in queue.

Thank you.

And we are taking our next question from Joanne Wuensch with Citi. Please go ahead. Your line is open.

Good morning, and thank you for taking the question.

I was interested if you can give us an update on where certain then is for the PMA for breast reconstruction.

Yeah.

Thanks Glenn.

What I would say is we continue to work with the FDA on their questions regarding our PMA submission and really we're probably not going to have any updates until the end of the year. We can give you some more guidance about you know.

What do you expect that approval looks like.

Open questions or items with the FDA. So don't have any real update other than we're working with the FDA and probably later this year, we'll give you a more detailed update.

And then you know it doesn't impact our ability to sell a surge and then obviously we cannot promote for a specific indication in breast, but we do have a general surgical a plastic and reconstructive.

Indication and therefore, it's still it still can see you know very nice growth coming out of a surge in that.

Thank you very much.

Yeah.

Thank you.

And we take our next question from Sam Brodsky with twist. Please go ahead. Your line is open.

Alright, thanks for taking the questions Sam on for rich here.

Yes.

First one I just kind of wanted to tease out the pricing commentary a little bit how should we think about the timing of pricing increases getting into.

To the P&L and sort of you know in terms of scale should we think about that mirroring inflation or maybe being a little bit lower than that.

So pricing actions, we actually took earlier in the year. So this was a body of work that we undertook a in the fall as we prepared for our budget for 2022, you know new that those inflationary pressures. So we're going to be present and those trends. There. So the team's worked very closely with our all of our.

Our commercial leaders are to to basically put in a round of price increases, which those went into effect and in some cases.

We're moving on additional price increases as we move to the back half of the year. So it's a continual process and end of <unk>.

Warm or price increases I think about it as a number of different ways that we can affect price that getting to the same angle, which is additional gross margin opportunity as you have obviously opportunities to raise list prices you have the ability to change the level of discounting that you're doing all off those list prices.

You have the ability to think about.

Raising new prices to brand new customers, introducing new products that have higher prices better margins as well on enterprise contracts are some of those a portion of those are.

Contracts that you can't open up they they have longer term multiyear contracts that go for two to three years and so obviously when those contracts come up for renewal, where we're obviously looking at opportunities to increase price, but even the contracts that are not up for renewal the opportunity that you have there is to look at volumes. So in most key.

<unk> there is a volume commitment that you have with the hospital on those and you have the right to audit that to ensure that you're getting the volume that contractually you were entitled to and so that's an opportunity to open up now in negotiations, but in addition, as I mentioned it doesn't stop there. It also you're also doing.

Purchasing initiatives, so as supplier price increases come into the door pushing those back obviously, leveraging our supply base looking for opportunities to move volume to other suppliers to gain synergies there and also working within the factory, whether it's reducing.

Reducing waste in our factories improving yields all of those things we have hired more continuous improvement black belt Green belt and our factories to go after more manufacturing inefficiencies. So all of those kind of are brought to bear on the things that we do to protect our margins.

Great. Thanks for that Gary and then second one from US just thinking more longer term in and around the L. R. P goals.

Any changes in the beginning of the year, whether it's top or bottom line either in terms of.

How quickly they can be achieved or what target Amanda let's talk it may end up here.

Some oh I'll take this one.

As you heard me say, probably beginning of the year.

When I looked at our long term, 5% to 7% growth range targets.

The increasing profitability I mean, those remain very valid and deeper.

I get into the business understanding the levers and strengthening the levers.

The more confident you feel about the trajectory. The key question is a bit how has COVID-19 and some of the microenvironment realities of today, how does that affect.

Some of the timeline and when we expect to get there.

At this point in time, we're not giving.

'twenty three or longer guidance, yet that's going to be focused.

In the second half of the year to really translate.

A lot of the strategic initiatives, we have now whether it's international whether it's broadening.

Our scale and breadth in our two divisions are translating that into a longer range plan.

Yeah, It will be we'll be sharing our views updated views on that timeline.

End of the year beginning next year, yeah. The other thing I would add to John's comment is on the margin side, obviously in 2022 the margin.

Opportunities are hidden because of some of the inflationary pressures in some of the FX headwinds, but all of those levers are there and and so hopefully as evidenced by some of the things we talked about on our call today.

You see that that the integra team is hard at work and really driving those margin levers so that as those inflationary pressures abate, you'll start to see that margin expansion and working on big projects. So not just the what I would say that the the day to day kind of fighting off those inflationary pressures, but really fundamentally driving longer term.

Margin opportunities by continuing to optimize our manufacturing footprint.

Obviously, the TWC divestiture closure of Ah Ah Ah Ah inexpensive plant in France, as well as moving on some SG&A initiatives like outsourcing back office activities. All of those are focused on driving that long term margin expansion that will provide that.

You know hopefully you'll be able to see those things start to take hold in the margins as those inflationary pressures abate.

Alright, thank you.

Take our next question from Matt <unk> with Barclays. Please go ahead. Your line is open.

Ah. Thanks, Thanks, so much for fitting me in.

So I had a follow up question on the wound care business. If I could just the work that you're doing there to kind of expand coverage.

Just to help us understand if you could when and if that's true that's true in inflection you're during 2022 or just remind us are you know.

How do you expect that to affect the business over the longer term and I had one follow up.

Good morning, Matt It's Glenn Thanks for the question. So when we talk about our expanded sales force, we're really referencing some of the actions we took to get better sales field coverage.

Whether you sell a portfolio of these are more general wound care reps, but obviously haynesville as part of the portfolio and for the first half of the year.

We added about 30 incremental resources and so the good news is we already are seeing the momentum here in the second quarter.

We gave in our prepared remarks, some color around what you saw with sequential improvement from Q2.

From Q1 into Q2, which is a very positive sign we actually added over 200, new users in the second quarter.

The thing that's really positive, though is we're still onboarding and training allow these reps they want at full productivity until later this year, probably around Q4, and so have really good momentum nowadays so saw a nice sequential improvement I would also tell you we expect better second half performance versus first half performance so on the whole.

Feel really good about the esol business that even though the overall tissue business.

We had a really strong quarter overall, which we feel quite good about them, so putting up the numbers, we put up here.

Strong second quarter expect to see.

Stronger performance in the second half of year with our tissue business, including yourself.

Great and one follow up just on the portfolio and growth drivers in general and it just comes from a question that I think investors.

Investors have asked over the years as other.

Other folks may have gotten the same question is is just looking for sort of that stand out.

Growth driver I think everyone appreciates the portfolio management and the additional acquisitions.

And you know.

Operational management that you've delivered.

As you point out in the slides solid solid delivery of exit and execution, but just what can you point to maybe in the next.

12, 18 months that you'd say you know this look for this to be a you know.

An important growth driver and something we're excited about.

Yes, I'll take that one.

I mean, several things we're excited about but.

Yes, it's all about.

The standouts are about where we expand our current markets.

One is international.

There we have a good track records, but the work we've done over the past months shows theres several more opportunities in.

In Europe and outside of Europe to build more market presence not just in our.

Neuro business.

And even more in our tissue technology business. So that's that's one okay and you'll see us focus on several specific opportunities in specific countries and China, Japan definitely are key.

The key in there.

And then you have the.

The near term catalyst as we called him yet whether it's.

T cell settle link Aurora.

Neurogenic <unk> D, which all are.

The opportunities to really capture either market share or capture new adjacent markets.

And so its focus this year to make sure we execute well we get into markets.

Get the first users we get the kols behind us yet to as of next year. She real commercial momentum behind these products and then the third aspect is more on the inorganic side, where we continue to look for accretive growth accretive opportunities in it.

Jason sees.

Around our two divisions.

Yeah. The only other thing I would add John is obviously, we're dealing with some very challenging.

Items and supply and so I think as we look at our back order situation. While we don't expect much improvement. This year certainly we would expect improvements in 2023 would be a nice tailwind for us and again. These are orders we have from customers that will ultimately be delivered but again I think we'll see more of that benefit in 2023 versus this year in that procedure.

Procedures getting back to more of a normalized rate.

Places like China, and other parts of the world will be a nice tailwind for us as we go into next year.

Great. Thanks, so much.

Thank you and we take our next question from Craig Bijou with Bank of America. Please go ahead, Sir your line is open.

Great. Good morning, everyone. Thank you for taking the questions maybe just a couple of follow ups.

Specifically on back orders, John I think you said that back orders got a little bit larger than they were relative to Q1. So wanted to see if you guys would be willing to quantify that.

And then you know how how are you thinking about back orders in the second half do you expect the supply chain to it.

Still pressure.

Back orders and maybe increase even from from where they were in Q2.

Craig It's Glenn I'll I'll take this one I think the positive is customer demand.

Really strong, but it is a very challenging supply environment and so we did see some.

The higher back orders in the second quarter versus Q1.

And the way I would describe it is we're essentially meeting normal demand, but we're not producing enough yet.

Meet surge capacity requirements from the procedure recovery and so.

Second half of the year I'd say, we still expect to see elevated back order levels and if we do see any improvement is going to be gradual so I don't expect to see significant cigarettes.

Significant reductions in backwards, if anything it would be just gradual but.

So are they going to be at elevated levels through.

The rest of this year and then probably any significant improvements would be in 2023, but on the whole we're doing our best to manage through this situation is just slightly higher than Q1, and I think we called out $15 million type number in Q1, so they're going to continue to give a number but it is slightly higher than Q1 number.

Got it thank you for that Glenn.

Maybe a follow up on an ACL maybe for you Glenn.

Obviously, recognizing sequential strength that you guys saw there I believe that means it's kind of mid single digit growth your year over year.

And obviously with.

The productivity ramp in the second half I was wondering if you guys could maybe refresh kind of thoughts on your growth rate for a cell can you get to the high single digits in the second half in your longer term, how should we think about the growth of E cells specifically.

Yeah, I'll start with that and Glenn can add some comments and Craig. So I would expect for the full year that we would see high single digit growth year over year and remember obviously that in Q3 of last year, we kind of stabilized at that $16 million level and then for Q3 Q4 in <unk>.

One we were in that $16 million level, and then from there we reported high single digit growth from Q1 into Q2.

And as as Glenn has already mentioned and building some momentum there is such that the second half should show sequential growth from the first half and as I think about the first of the whole year compared to what we did in 2021 it should be high single digit growth and then I think from there long term expectation it would be.

That it continues to support our tissue technologies long term organic growth rate our goal of being in that you know that that seven to 10, 9% organic growth.

Great. Thanks for thanks for the color.

Thank you.

And we take our next question from Matthew O'brien with Piper Sandler. Please go ahead. Your line is open.

Hey, this is still on for Matt can you hear me all right.

Yes.

Thanks for fitting me in here and taking my questions I'll keep it just to one I understand you mentioned this in your prepared remarks, but could you characterize what youre seeing in China, given the recent lockdown Tobin spikes and maybe specifically capital side.

O U S environment.

Typically in China, how does that look given some of these headwinds alongside some recessionary headwinds in there.

Yes.

Thanks, Phil This is Glenn so relative to China, I think first and foremost I would just highlight the performance in the second quarter being.

Strong growth you know we were still high single digit growth in China. Despite some of these challenges and the Lockdowns.

If I look at procedure rates, obviously traumatic brain injury was way down when you look at early in the quarter. So April .

With the Lockdowns.

You could think of it that is almost 50% of normalized procedures that improved.

In in May and then we're probably 85% to 90% of normalized procedures. In June you don't see the full impact, though in our results ex some of the points that carry made earlier.

We do sell through distributors and logistic providers and so a lot of our orders are already.

And are committed to for Q2, so we'll see some impact in Q3 and Q4, but even with that impact we are seeing really strong growth in China with these lockdowns and so on.

I feel really good about.

We have there a big part of that is obviously capital and so capital continues to do well just keep in mind. When you talk about capital in China, We have not launched sort of like in that market that will still be several years from now because of the long regulatory pathway. So really it's coosa when we talk about capital that continues to do quite well.

But as we look forward to continue to hear more and more about growth coming from China, which is likely going to be our largest market by revenues outside the U S. Probably in 2023 with a growth profile that we see.

And there's a huge opportunity for us over the next decade.

So that's the way we frame up China kind of obviously got some headwinds right now with the lockdowns, but even with that still seeing really strong growth overall and what that translates to for the total international business you don't have to.

Say that you would all these challenges international organically grew 8% in the second quarter and we did over 6% for the first half of the year. Despite a really challenging environment I know many of my team members out of the class I wanted to give them kudos.

And I a acknowledgment of the great work, that's gone on with our O U S business and our growth there. Thanks.

Thanks for the question.

Thank you.

Thank you.

And we take our next question from Jason Bedford with Raymond James. Please go ahead. Your line is open.

Good morning can you hear me okay.

Yes.

Okay. Thanks.

Apologize if I missed these but a couple of questions first maybe just to dovetail on the last question on the capital environment. It was.

Solid sales here in to Q4.

But just wondering more on the U S side, just given the economic environment, a higher level of wage pressure are you seeing any softness or slowing of order growth on the capital side.

I would say again capital came in where we expected it to and internally that even our larger capital KUSA.

Did very nicely both in the U S as well as internationally I would say that what we continue to see which is factored into our guidance expectations is longer selling cycle. So Jason to your point, yes, there has been an impact but it's not.

The the funnels are changing the funnels are very very full the competitive landscape has not changed it's just putting a longer selling cycle that you need to account for in your guidance and we've done that I think the normal patterns are still there as we move through the balance of the year I would expect a normal pick up in capital ended up.

Fourth quarter, but certainly within our guidance, we've accounted for that extension of that selling cycle there.

Okay, Okay, that's clear.

On private label 15.

15% quite strong I think it was mentioned.

Favorable order timing I'm just wondering if you could quantify this and then maybe talk about private label growth through the rest of the year. Thank you.

Yeah, and Jason I did I did share. This in my prepared remarks. So you can certainly go back for color on that as well, but I'll I'll I'll reinforce that that's private label our long term expectation for private label is mid single digits and I think for the full year you should assume mid single digits for the full year first half.

Been at 15%. So you can you can kind of do the math on what that implies for the second half but growth is going to is obviously going to moderate it it's going to it's going to go with a lower much lower in the second half in order to get to mid single digits for the year and think about our our discussions on supply chain constraints those things to Viking.

Supply chain constraints, often impact our private label partners as well so they're all doing what what everyone is doing which is looking at safety stock levels are managing their own inventory levels to ensure that they have a continuity of supply. So I think what we've seen is the benefit in the first half.

With some of the timing of orders and as we think about the second half our expectations is that our partners will more closely manage that inventory and that's why we would expect it to moderate to mid single digits for the full year.

And you know a lot of our private label partners are in the dental and in the spine area and so you know as you think about our trends in those businesses that they they tend to go with a you know we tend to align with that that spine and dental market trends and in the private label business.

Okay.

Dollar amount assigned to the favorable order timing.

No, but certainly as I think about the guidance for the third quarter.

Jason It's it's comprehended in that so as we think about the updated guidance for the third quarter as for the balance of the year, we've assumed that for the full year that private label growth moderates to mid single digits for the whole year, which implies a negative growth for private label in the second half and that is embedded in our guidance range.

Okay. Thank you.

Yeah.

Thank you and we take our next question from drew Ranieri with Morgan Stanley . Please go ahead. Your line is open.

Hi, everyone. Thanks for taking the questions maybe maybe Kerry for you just hoping to kind of get a better sense of where free cash flow should shake out for the year and maybe what your expectations are there I think youre running kind of in the low eighties for free cash flow conversion I think the LR Pete was something to get to like 90, 90% over the longer term, which is how.

You're kind of thinking about about free cash flow this year, maybe into the future.

Yeah for for free cash flow I would say that last year, we had record cash flow. So I don't expect to to be at those levels. As we were in 2021, so lower than that but better than our than the prior year. So I'd say, probably you know very similar to where we did for 2019.

And our Capex as we think about operating cash flow or free cash flow. Your capex requirement is it's going to move up higher from 2021 as are some capital was constrained in 2021 by your own decisions, but also just to just to constraints on capital just you know.

When you order things you weren't getting it when you need it to so that pushed some capital into 2020 to them and so we would expect the second half to see higher capital spending levels compared to the first half and spending likely to be in that 65 million 70 million type of range for the full year, but.

A nice cash flow year, all things considered a higher spending as it relates to E. M D or that's the other thing to think about as as we think about operating cash flow that's different from 2021 to 2022 a lot of the peak activity from many of the companies that need to be complying with E. M. D. R.

And Ah the timelines over the next couple of years that activity will start to peak here in 2022 into 2023, and so the cash requirements for that remediation move up for many companies like Integra.

Got it thank you and maybe this might be for Glenn but.

You've talked about adding 200 U S. All users in the second quarter.

The productivity ramp that you're expecting in the back half just kind of curious as you're looking at maybe those 200, new ways hold users where.

Were they legacy Integra users at all and maybe how do we think about.

The overall cross selling opportunity as you're ramping up the a cell sales force. Thank you.

Yeah, I think many of them are current users of our skin products are tied to prime matrix. There is some subset I don't have the split out but there is some subset that doesn't use our current products that are not using it yourself out.

Outside of the wound care and so.

It's a mix I don't have the split but.

I think we are seeing some leverage and cross selling synergies certainly from our current portfolio and then this expanded coverage is also having a benefit by.

Getting to new users.

Thank you for your question we are moving.

Moving to the last question for today, that's a follow up question from Sam <unk> with twist. Please go ahead. Your line is open.

Hey, Thanks for squeezing me back in here I guess, just a broader one on wound care as it relates to the new proposed the TFS rule I know, who the Tigers in a little more inpatient focus, but any thoughts on whether there could be a shift in inside of care with a new.

Yeah first rule on reimbursement for skin substitutes.

Whether that could be just like one time.

Benefit for the industry.

You know Sam Thanks for the question I think first and foremost you hit the nail on the head.

It's Evan.

Current proposed rule, that's really the only for the physician office setting.

It is not.

Having anything to do with the inpatient or even the outpatient hospital setting and that's obviously, where the bulk of our business is we have a very small presence in the physician offices. So for us really very minimal impact to our portfolio I think if anything there.

There may be a benefit to us given our broad portfolio of lower pricing.

As the playing field gets leveled in this space and so.

If anything I think we view it as a positive change for us in our business, but we don't expect it to have any short term impact on our.

Our wound care business.

Maybe one thing to add.

At this time.

I'll look at it as a further shift towards paying for outcomes being for prophage.

The value.

Which is our suggestions and as as Glenn said at this point in time.

It's is mainly in the physician office, but yeah.

Looking at our portfolio and the quality.

The products, we have and quality defined as delivering real outcomes. This type of shifts are pleased to the strength.

Of Integra, and so while it doesn't affect us directly in the market's movie play, it's definitely a trend, which I think over the long term should help companies like at Integra.

Great. Thanks.

Thank you and with that I'm handing the call back over to Omar panel of speakers for any additional or closing remarks.

Yes, we'd like to thank you all for joining us.

Second quarter 2022 earnings calls this concludes our call.

Follow up on our website or through the Investor relations with any follow up questions.

Thank you and that concludes today's conference call. Thank you for your participation ladies and gentlemen, you may now disconnect.

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Yeah.

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