Q3 2022 Integra Lifesciences Holdings Corp Earnings Call
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Hello, and welcome to the Integra Lifesciences third quarter 2022 financial results. My name is Caroline and I will be your coordinator for today's event. Please note.
This call is being recorded for the duration of the call. Your lines will be on listen only however, you will have the opportunity to ask questions at the end of the Cox. This can be done by pressing star one on your telephone keypad to register your questions. If you require any assistance at any point, Please press star zero and you'll be connected.
And operator, I will now hand over the call to your host Chris Watt Senior director of Investor Relations to begin today's conference. Thank you.
Thank you Carolyn.
Morning, and thank you for joining the Integra Lifesciences third quarter 2022 earnings conference call joining.
Joining me on the call are you onto White, President and Chief Executive Officer, Carrie Anderson, Chief Financial Officer.
Earlier today, we issued a press release announcing our third quarter 2022 financial results.
The release and corresponding earnings presentation, which we will feature during the call are available at integra lifestyle com under investors events and presentations.
Third quarter 2022 earnings call presentation.
Well, we began I would like to remind you that made 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 growth.
Organic revenue growth excludes the effects of foreign currency.
Actions divestitures as well as discontinued products unless otherwise stated all disaggregated and franchise level reported revenue growth rates are based on <unk>.
And lastly, our comments today will include certain non-GAAP financial measures reconciliations of any non-GAAP financial measure can be found in today's press release, which is an exhibit 20 type of a current report on form 8-K filed today with the SEC.
And with that I will turn the call over to you on.
Thank you, Chris and good morning, everyone.
Let's start by reviewing our third quarter and year to date business highlights.
On slide four.
Well come back to in tankers performance over the past nine months.
The strong second quarter building nicely from our first quarter momentum.
And despite choppy waters in the microenvironment and disruptions within our supply chain, we capitalized on the steady recovery of procedures in our markets.
Protecting our profitability in an inflationary environment.
The third quarter, we continued to see a recovery procedure volumes, leading to solid growth across most of our products.
The same time largely contained to the impact of external challenges such as increased foreign exchange headwinds.
And supply challenges.
Well also reacting decisively to minimize the impact from the recall, our Sterling ICP monitor all of our customers and their patients.
So corporate revenues came in above our August guidance at $385 million and within our July revenue guidance range.
You'll need the organic growth of three 5% and absorbing the impact of the recall of selling in the quarter.
So a bit more color.
If you look at our portfolio, excluding shuttling in both periods, we delivered organic growth in the third quarter of just over 5% for the remainder of the portfolio slightly to both our performance through the first half of 2022.
So I'll provide an update on the subtle inquiry called shortly.
Overall, I'm pleased with our sales performance in the quarter.
Continue to see solid recovery in our markets and our diverse portfolio gives us confidence in our ability to grow through the current challenges and into the future.
As expected supply challenges and elevate the back orders have continued through the third quarter.
And we anticipate these higher levels will remain for the remainder of 2022.
Most of the impact felt in our CSS business.
So we're deploying mitigation strategies to reduce the backorder levels to keep up with strong customer demand.
She has increasing raw materials safety stocks on constraints commodities like packing materials metals, and electronics and qualifying a validating alternative sources for supply of critical items.
Our priority remains ensuring that patients get the life saving products that they need.
Despite the challenges faced in the quarter, we proactively managed our cost and delivered adjusted earnings per share above the top end of our guidance range at 86 cents.
And that's as a result of our strong third quarter earnings performance, we are raising our full year adjusted EPS guidance by 15 cents at the midpoint.
Above the high end of the August range.
Well that wasn't true a number of business highlights for the quarter I'll, Let me start by providing an update on the status of the recall of our shuttling ICP moisture.
As a reminder, on August 18, we initiated a voluntary products removal of all settling monitor as a result of customer reports.
Bob's units, whose pressure readings for out of range.
You saw the French readings occurred at the low incidence rates and a limited number of sites.
Ever out of an abundance of caution we decided to remove sounds like more of the fields.
Over the past two months, we have worked with customers to get a loan of the previous generation ICP monitor.
ICP Express after dusk.
Our city Express is a less fee charged monitor, but that's compatible with our shuttling micro sensors.
As a result, we've been able to provide the large majority of our customers with a solution that secured their continuity of operations and care for their patients.
Our engineering team has been working diligently and we believe we have identified the root cause and a technical fix to rework.
Reported.
We're focused on developing test procedures to validate our remediation plan and meet the regulatory and qualitative carbons to enable us to start shipping the product to get.
There's still some uncertainties as to specific dates but based on our current pathway. We aim to bring settling back into our markets in the first half of next year.
Let me turn to our portfolio.
For the third quarter, we advanced two new course that clarity products further extending the functionality of our ultrasonics tissue ablation product line.
First we lost Coosa clarity extend the slip our scoping and U S, bringing the benefits of ultrasonic ablation to minimally invasive laparoscopic liver seizures secondary.
Second we received approval for a course of clarity both hips juiced when controlled fragmentation. It will shift Acacia an aspirational goal is less sorry.
Additionally, we continue to refine our portfolio with <unk>.
Successful completion of the divestiture.
Additional wound care business.
In the third quarter, we also announced organizational changes and new leadership appointments.
Please move to slide five for this.
We eliminated all position leading to the departure of Glenn Coleman.
Operational and quality now reports directly to me.
In addition to new leaders joined our executive leadership team enrolls that aligned with key strategic growth factors.
The business.
Our interesting chances as president of international.
Our vendor brings 25 years of experience at global Health care commercial roles, specifically in the medical technology and pharmaceutical industries.
With harsh winter well look to deepen our focus on developing and executing local product market strategies, while continuing to build out and Tigris international commercial capabilities and strengthen our presence in these key strategic markets.
Mark just some also Johnson tegra as Chief Digital Officer.
Mark has 15 years of experience successfully developing allowing digital platforms and strategies that create transformational solutions for health care customers and patients.
Also has prior experience in consulting marketing and product management market.
Arc is partnering with our commercial strategic marketing and business development teams to define and execute that.
Full proposition strategies that will enhance and Tigris device portfolio and our positioning in the digital health ecosystem.
Now before I hand, it over to Terry to go deeper into our financials I'd like to turn to slide six for a progress update.
<unk> journey.
Sustainability is an integral part of how we do business and we hold ourselves accountable for being good stewards of our resources for the benefit of our customers employees and shareholders.
Effective management enables us to produce a lifesaving products reduced business risks.
Zero impact on the planet.
And drive strong financial results.
In 2022, we have made great strides in formalizing, our ESG roadmap and completed a materiality assessments with our key stakeholders and continue to use that feedback to guide our priorities.
The third quarter, we issued our inaugural ESG report as part of our commitment to transparency in this area.
We have invested in a culture of diversity and inclusion.
And the development of our people.
We are excited about our future as we set new targets and measure accountability to pursue tangible results of benefits for all stakeholders.
With that I will turn the call over to Kerry Who'll go into our third quarter performance and updated guidance. Thank you Jan and good morning, everyone I'll start with a brief summary of our third quarter financial highlights on slide seven.
Third quarter total revenues were $385 million approximately flat on a reported basis inclusive of a TWC divestiture impact of $3 million and a $12 million impact due to unfavorable foreign exchange compared to last year, representing an approximate 300 basis point negative impact to reported.
Growth U S. Dollar further strengthened in the quarter, creating an additional 40 basis points of FX headwinds compared to our guidance.
Excluding the impact of FX and discontinued and divested products, we delivered three 5% organic growth in the quarter as Jan mentioned, excluding sterling organic growth across the remainder of the portfolio.
Just over 5%, which speaks to the diversity of our portfolio and continues to give us confidence in our long term growth expectations as we move past the current macro challenges and target to bring Sarah linked back to market in the first half of next year.
In Q3, we recorded a one and a half million dollars provision for Sarah linked product returns as a reduction in net and net revenue.
This was much lower than initially expected for the quarter as we evaluated customer feedback, including refund request and the timing to return the product to market.
This is very positive as it demonstrates the success of our efforts in assisting our customers and minimizing the disruption in their care for patients to our loan program and even more importantly, it showcases that our customers see differentiation with this airlink product and are willing to wait for its return.
Two highlights in the quarter, where tissue technologies with organic growth above, 7% and international organic growth of four 6%. Despite the impact of this error link recall.
Adjusted EBITDA margin for the quarter was up 30 basis points versus the prior year and adjusted earnings per share was flat at 86.
It's higher than our guidance expectation, reflecting strong operating expense management and a lower Sarah like impact.
If you turn to slide eight I'll review, the third quarter revenue performance of our CSS segment.
Reported Q3 revenues in CSS were $249 million, an increase of one 6% on an organic basis from the prior year.
Excluding Cerro link organic growth was four 3% across the remaining parts of the CSS portfolio in line with our long term growth expectation of three 5%.
Mobile nurse Neurosurgery sales were up two 3% advanced energy increased low double digits, driven by strong <unk> capital sales.
<unk> management grew high single digits, driven by continued growth in our programmable valves and sales in neuro monitoring were down low double digits due to this airlink recall.
Sales in instruments declined approximately 1% in line with expectations as year to date growth of two 8% aligns to our long term expectations of low single digit growth for this franchise.
International sales in CSS increased low single digits led by double digit growth in China, and Japan, and mid single digit growth in our indirect markets.
Growth in China was driven by timing of orders in the third quarter from our distribution partners, who anticipated Covid lockdowns would ease in Q4.
We now expect Lockdowns to continue on a rolling basis, and consequently, we anticipate our fourth quarter sales in China to be sequentially lower than Q3.
Moving to our tissue technologies segment on slide nine.
Global tissue technologies reported revenues of $135 million.
Seven 2% organic growth over the prior year.
Our strength in <unk> was driven by eight 5% organic growth in wound reconstruction led by sales of Integra skin amniotic and ACL micro matrix.
Pleased with the continued momentum of HL, delivering both sequential growth and high single digit year over year growth.
And our private label franchise sales grew two 9%. This result was better than expected as year to date growth of 11% continues to be above our long term expectations for this business we.
We expect full year private label growth should continue to moderate to mid single digits in line with long term expectations.
And finally international sales and tissue technologies increased mid single digits driven by surge amount.
Turning to slide 10, I'll now review, our third quarter and nine month key P&L components.
Adjusted gross margin was 66, 7% down 160 basis points from the prior year.
Gross margin was due in part to unfavorable regional mix driven by higher international sales.
And by a 30 basis points impact from accruals booked in the quarter for the Cerro link recall, including the returns provision I talked about earlier, and then $800000 rework accrual.
The largest drivers of the lower year over year gross margin, which were expected and included in our guidance where currency impacts as well as higher unfavorable manufacturing variances from earlier in the year moving to the P&L as we sold through our inventory during the quarter.
Q3, adjusted EBITDA margin increased 30 basis points and year to date, adjusted EBITDA margin and EPS finished better than our August expectations.
We actively managed operating expenses through the quarter as we navigated through the uncertainty of the recall and continuing macro challenges while remaining focused on advancing our key growth initiatives.
As we think about margins for the year, we expect adjusted gross margin to be down modestly largely due to the impact of Sarah link recall.
However, we now expect adjusted EBITDA margins to be slightly higher compared to 2021 benefiting from continued cost optimization.
If you turn to slide 11, I'll provide a brief update on our balance sheet capital structure and cash flow.
Operating cash flow in the quarter was $68 million and free cash flow was 69 $59 million.
Free cash flow conversion was 70% 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 plans and that's a September 30th total debt was $1 5 billion of which over 90% was fixed and net debt was $1 billion.
Our consolidated total leverage ratio was two four times.
The company had total liquidity of $1 $75 billion, including $512 million in cash and the remainder available under our revolving credit facility.
Turning to slide 12, I'll update our consolidated revenue and adjusted earnings per share guidance.
For the full year 2022, we are reaffirming our revenue expectations at the midpoint of our August guidance with a tightened range of 1551 to one $5 $63 billion.
The revenue range represents reported growth of 0.5 to one 3% inclusive of the divestiture of the TWC business and an updated foreign currency outlook.
Our full year revenue guidance reflects an additional 25 basis points of unfavorable foreign currency impact relative to guidance provided in August .
Foreign currency is now expected to unfavorably impact full year reported growth by approximately 250 basis points compared to the prior year driven by the continued strength of the U S dollar.
Full year organic growth is expected to be in a range of $3 seven to four 5%.
Organic growth range reflects the impacts of continuing regional Covid lockdowns in China and potential adjustments to this airlink returns accrual that may be necessary in Q4.
Full year 2022, adjusted EPS guidance is being raised to a new range of $3 29 to $3.33.
This represents a 15 cent raise at the midpoint of our August guidance, reflecting our outperformance in the third quarter.
For the fourth quarter, we expect reported revenues in the range of $391 million to $403 million, representing reported growth of approximately minus three five to minus 0.6% and organic growth of approximately $1 three to four 3%.
Adjusted EPS for Q4 is expected to be in the range of 87 to 91.
If you turn to slide 13 to provide further helpful. Context. We've included a reconciliation of our original full year 2022 guidance from February to our current October guidance.
Let's start with the table on the left which shows you the revenue walk.
After adjusting our original February guidance for $27 million from the change in currency rates.
And $10 million from the divestiture of our TWC business. Our October revenue guidance remains above the midpoint of the pro forma February range overcoming additional revenue headwinds related to supply challenges and the Cerro link recall.
We have provided a similar walk on the right side for adjusted EPS by.
By delivering on our revenue and actively managing costs, we expect to fully cover the impact of FX, the TWC divestiture as well as additional inflation and manufacturing inefficiencies this year.
<unk> in an updated earnings outlook above the pro forma February guidance.
I'll now turn the call back over to John to provide a brief recap of our 2022 growth catalyst and margin drivers.
Carrie, let's turn to slide 14, our final slide.
Our year to date organic growth of four 6%, including the subtle Inc. Headwinds approx.
Approximately 5%, excluding sterling reflects the diversity of our portfolio.
<unk> ability to navigate the current unique challenges.
So in addition to delivering our 2022 commitments. We have remained focused on strengthening our key growth catalysts to build towards our long term organic growth target, 5% to 7%.
Our international business, we have delivered just under 6% organic growth year to date.
Plans for 2023 and beyond we have identified investment opportunities in our international markets based on our Roadmaps, we developed earlier this year.
And with an experience that's a national commercial Liza like Heartland of joining the executive leadership team.
Further building out capabilities to capture incremental international opportunities across our business segments.
Several income we're working aggressively to limit the impact of the recall on the operations of our customers and their care for patients and we are pursuing a path to bring shuttling monitor.
Back to the market in the first half of 2023.
Our customers remain excited about the product features that sets the sterling monitor apart from legacy intracranial pressure modules.
We continue to leave shuttling Colby a multiyear growth driver for the company.
As we discussed in our second quarter call. We set a goal to return our ACO portfolio to growth in the second half of 2022.
We have met this objective with our third quarter results with a salt projects now solidly contributing along with our legacy Integra skin portfolio.
Organic growth for all wounds with construction franchise north of 8% for the quarter.
Also looking forward to the launch of a sales spike for matrix in five volt products in several European markets scheduled for the first quarter in 2023.
She will be a great demonstration of our opportunities to take existing products into new international markets.
Our overall searches scopes continues to build momentum with our early adopters are.
<unk> was included for the first time in a peer review publication, we have provided a link in the press release and in <unk>.
Got you to read the article and view the short video vignettes.
With regard to our surge events breast PMA, we continue to work interactively and collaboratively with the FDA. Although response to the feedback we received from the panel meeting prior to submitting a final PMA amendment.
This was planned for February 2023, However, last week, the FDA propulsion unsolicited COVID-19 related to 180 day extension of the PMA Amendment timeline.
We're still assessing whether we believe the extra time will benefit our submission.
In any case, we continue to feel optimistic we will receive.
The approval of a specific indications for use of <unk> and post mastectomy.
The rest of the construction.
A reminder, the FDA has not cleared or approved any surgical mass device, whether synthetic edible cultural derived or human collagen drive.
Specifically for implant based breast reconstruction.
And today Integra is the only company to file a PMA for a specific indication.
We remain committed to help solve the urgent clinical needs for an FDA approved ATM to help restore quality of life for women undergoing ela plastic breast reconstruction.
In the meantime, surgical continues to be a strong growth contributor in our portfolio with year to date growth of low double digits.
Finally, with newer Gen three D. Our nerve repair products engineered engineered for optimized midcap nerve regeneration.
Our first patient in a row reinvent nerf registry.
The reinvent registry will allow us to gather real world data across our nerve repair portfolio.
Identify key points of clinical differentiation and leverage that database to engage our kols and key customers.
We're also keenly focused on securing our operations and margins for the remainder of the year and on driving margin expansion beyond 2022, as inflationary and supply chain pressures abate.
We have continued our portfolio optimization with the divestiture of our traditional wound care business with the closure of a high cost production sites and we are in the final stages of completing the back office outsourcing initiatives, we announced last quarter.
Also stepping up our focus on driving manufacturing and supply efficiencies optimizing our sales effectiveness and pursuing opportunities to further capture price in order to drive long term margin improvements.
In summary, we continue to drive the business forward at a number of ways by focusing on our customers and their patients.
Strong portfolio of market, leading products are engaged organization.
And it'll be an external environment with its mix of opportunities and challenges.
In parallel with building out capabilities on the vesting of our long term strategic opportunities.
No. It remains focused on executing in the fourth quarter and delivering strong finish to the year.
Sure.
Also before conclude again going into Q&A, we'd like to announce that Integra will host our next investor day in May.
May of 'twenty, two 'twenty three.
With that I'll open the line for questions and Caroline.
Please open the line for Q&A.
Shawn noted as a reminder, if you would like to ask a question I'll make a contribution on todays call. Please press star one on your telephone keypad.
I'll take the first question from Lyne Robbie Marcus from JP Morgan. Your line is open now. Please go ahead.
Hi, This is Allen on for Robbie I had one quick one followed up by another question. Let me start off for your updated guidance. Similarly, clearly came in quite a bit better than expected when they can't get the return provision what are you really baking in for the fourth quarter impact here.
Yeah, we're not providing specific guidance on unfair Lincoln in the in Q4, but I would say that.
We booked a million and a half returns provision in Q3 that was as you said much better than where we expected and we view that very positively as customers continue and are willing to wait for the new sterling to be relaunched. So we view that is as a sticky product which is.
It's great to see and we continue to help them ensure that they've got continuity of care in the interim.
I think in Q4, we have a range of of our guidance for Q4 that would consider both potentially positive and negative adjustments to that accrual. So in Q4, we will assess new information any new trends that we're seeing on customer returns credits process will also us.
Our progress on our return to market.
We will also assess our manufacturing plans and we will take a look at all of that information in Q4 to make an assessment on whether the one and a half million dollar returns provision is sufficient in Q4 or whether we need to make an adjustment plus or minus and the same thing for the rework accrual of 800000, we'll take in all available information.
In Q4, and make a sufficiency assessment there in Q4, so our range or the high end or low end of that range contemplates.
Again potential favorable or unfavorable adjustments to sterling, but overall I think our view is a positive development as we currently assess where we sit on the returns.
Got it and then another question just on SG&A.
Clearly we saw really good leverage this quarter, a very significant step down sequentially of around $50 million from Q3, Q I'm just curious how sustainable that really is going forward is that really kind of you know the kind of down to the $140 that kind of spend that we should expect on SG&A in third quarter was there any kind of.
One time spending items that.
Didn't happen or not I guess, the opposite of onetime spending out of that didn't happened in the quarter that will resume going forward just trying to get an idea of what we should think of as a sustainable SG&A spend level.
Level going forwards. Thank you.
Yeah. It's a it's a great question. Obviously, we worked are actively to manage the spend in Q3, but a couple of things that I would point out normally as you move from Q2 to Q3 Q3, there is a little bit of seasonality of lower Opex. If you look historically Q3 Opex. This is typically a little bit lower than Q2 I would.
Specced in Q4 that our Opex will increase a little bit from Q3 levels and I would expect that our opex opex levels for 'twenty 'twenty. Two are very similar to 2021. So I think we'll be in that same level as we were a year over year one of the things that we've been focused on in the.
First our second half of 2021 and in the first half of 2022, which we brought on a lot of head count and at this point I think we're absorbing that head count we're integrating that head count in and also just watching our expenses and making sure that we'd get the full optimization of the investments that we've made over the last 12 months period.
And I think that's what you're seeing there.
Caroline can we take the next question.
Sure we will take the next question from the line Ryan <unk> from <unk>. The line is open now. Please go ahead.
Oh, Thank you for taking my question.
Couple of questions for me.
John I appreciate the color.
Just to maybe follow up on Alan's question.
I understand Sterling can go in a lot of different directions, but you know the 50 basis point decline in organic growth guidance for the full year.
At all assumed to be.
The impact from China is there anything else in there that we need to contemplate in terms of the updated organic guidance and then I have a follow up.
Yeah, I think it's a combination of obviously from a reported let's start with the reported a first because obviously FX is a is a big impact there in the fourth quarter was updated FX information.
But I would say as we move to organic growth considerations of obviously a potential adjustments in <unk> that may be necessary as well as a COVID-19 continued roll rolling Lockdowns in China.
And then the fact I would say also Ryan is that we're not considering any significant improvement in back orders I think when we were sitting probably here in the July timeframe. We had hoped that we would have seen some amount of modest improvement in back orders over the course of Q3 and Q4 at this point, we're seeing continued elevated bad.
Back orders and don't expect any significant improvement in back orders in Q4. So all of that is comprehended and staying at the midpoint of our guidance range that we gave in August .
Okay.
Very helpful. And then just maybe a bigger picture question in terms of procedure recovery.
If I look at kind of where neurosurgery is right now 2.3% you're talking about that in contrast to wound recon I'm wondering you're on if you'd kind of talk about the procedure recovery amongst the two segments and you know two 3% still is under kind of that normal threshold that things that we think are for neurosurgery in that 3% to 5% range.
So how are you thinking about kind of the procedure recovery amongst neurosurgery in and then maybe.
Contrast that with wound recon and then how that's kind of progressed back and how do you think that progresses going forward. Thank you.
I'll take that first and then I'll I'll add ask John to add his comments, but remember that the neuro number there is impacted by the serial link recall. So if you exclude the serial link recall.
For CSS, our number moves to 4% over 4% growth, there's a footnote on that slide that she gives you the the adjustments there. So I would say that excluding the impact of taking Sarah link out in both periods the underlying business of CSS. It was actually right.
In line with our expectations of 3% to 5% so young of Jumbo comments there.
We also see that the broader question I mean, if you look we've seen over 2022.
Procedures recover steadily.
Not at 100% yet neither in.
So she is more in tissue attack.
When we look in U S markets European markets, we estimate were around 95.
Plus months at this point and we expect that between now and the end of the year beginning next year it will be back to normal.
Procedural level.
China.
As long as the Rolling Lockdowns continue in China.
China, it's around 80% of normal procedure lessons, but the rest of the world suddenly going back to the 100%.
Thank you I appreciate the color.
Yeah.
Thank you we will take the next question from line, Dave Duffield from J P. M. The line is open now. Please go ahead.
Hi, good morning.
Just looking at the highlights of some of the initiatives.
Since last quarter.
You sold the nontraditional noncore wound closed the facility in France, and then you mentioned some outsourcing I think back office type stuff in house.
Curious if how those efforts progressed during the quarter.
It looks like Youre able to offset some of the.
Cost increases, but I guess, how should we think about.
That maybe we'll put that impact on gross margin moving ahead.
Yeah, Hey, David I'll take that question. So TWC, we did close that a divestiture at the end of August as we had planned.
And so one of the reasons for that the for the divestiture was that it it was not core to us either from a top line. It certainly was not additive to our 5% to 7% growth ambitions and it was also lower than our corporate average margin as well so moving away from that divesting that business in <unk>.
<unk> on our core portfolio are ultimately, we'll we'll see as we move through more of these macro inflationary challenges, we will start to see the the positive impact of that on our margins into 2023.
So that was completed as planned in the quarter for the facility in France. We closed that production is now moving into our Switzerland facility. There that transfer should be complete by the end of the year. That's a high cost facility. So again as I think about levers are in terms of gross margin improvement.
That continues that cost optimization, and and I would expect you'll see again, a full year benefit of that moving into 2023, and then for outsourcing you will start to see some of that benefit in the fourth quarter. So I know there was a question.
Regarding our Opex expenditures and certainly in the fourth quarter, we will start to see the benefit of the lower cost to serve of some of those outsourced our back office activities and you'll have the full impact of that into 2023. So in my view, there's a lot of underlying levers here for gross margin.
As well as Opex leverage as we move into 2023 and hopefully we're in an environment, where the inflationary increases abate and combined with our other initiatives like price to capture favorable mix as we continue to drive N. P is in T. G growth all of that will be able to.
I'd be more visible in our gross margin and our EBITDA margin lines in 2023.
Great I guess my my very quick follow up with degree it sounds like you're still confident that 70 to 72.
That long term target for gross margin still achievable when we get back to somewhat of a more normal environment is that fair.
I think that's the key is is you know when when do we get back to a more normalized environment Theres nothing that I would say that have had nothing in the business that has been impacted that would suggest that we could not reach 70% to 72% gross margins. It's a question of the timeline to get there and to reach that I think we continue.
To work on a number of visible levers to two to expand our margins. We've just got to get through some of these macro challenges and get to a more normalized environment, but I think all of those drivers are still there, they're just being masked by some of those macro challenges.
Thank you.
Okay.
Thank you we will take that aerospace Joseph.
<unk> Chopra from Wells Fargo. The line is open now please go ahead.
Hey, good morning, and thanks for taking the question. So just a follow up on that Opex question Gary.
I'm just wondering you know if you will be able to get back to the high end of the 5% to 7% growth range.
Managing your expenses.
Appreciate any color you have gone back and my second follow up was on the capital environment the Capex environment.
What are you guys seeing over there.
And maybe you can sort of parse that out between U S and international that would be appreciated. Thank you so much.
Yeah, Let me I'll start with the capital question and then go to your your cost question and then ask John to add some comments there as well in terms of capital.
I think you have to kind of separate out the sterling impacts. So if you take out Sarah link them both from the prior period and this period, our underlying capital was strong. It was it was low double digit growth in the quarter.
And that was the direct result of a very strong growth in cruiser capital.
So we've seen some nice growth year to date, but certainly third quarter showed some so you showed the resiliency of the portfolio in terms of KUSA in that double digit low double digit growth and I would say we saw growth both in international and the U S and that Coosa capital.
We do expect that we would see sequential growth going from Q3 into Q4 and still year over year growth in capital into Q4, but it's probably not as as high as a love a level that we saw here in Q3, it could be timing issue. As we were we were quite surprised at the strength of the of the acoustic capital here in the third.
Quarter, which was nice to see on your question of balancing the opex the operating expenditures against the growth target of 5% to 7%.
Certainly I'd ask John to comment here, but in terms of my view is it's about cost optimization, it's about prioritizing and challenging what we've historically spent on in an environment, where you have lots of macro challenges, including inflationary headwinds.
It is up to us our management team here to really scrutinize, what we're spending on almost apply a zero based budgeting approach and really looking at what we spend and making the hard and tough decisions on pivoting towards what's most important in our spend so maybe I'll ask John to comment there as well, yes, just to build on that.
Yes.
This summer we were looking at.
And to the business.
There ought to be having been here more than six months. It was the right time to.
Challenge all the costs that we have brought on board over the past couple of years.
And question with a zero based approach with question redeploying of resources, rather than continuing to wet and older. So we translated that into a slow down with some of the hirings, but a stepped up activity to redeploy costs from left to right challenging legacy investments challenging the <unk>.
Return on investment of those investments to further.
Strengthen our investments into strategic priorities of the business. So at no point.
Have a carry on I hope, we held back on things that we consider strategic.
<unk> that are behind the growth catalyst in the longer term initiatives, we have going.
Okay.
Thank you we'll take the next question from Matt Taylor from Jefferies. Your line is open. Please go ahead.
Alright. Thank you for taking the question you can hear me okay.
Yes.
Okay great.
So I haven't.
Couple of follow up on some of the macro things you highlighted.
I guess I was wondering you gave us some color on the sequential progression.
The backlog of the supply chain issue could you help just to quantify any of that and talk about that.
Your line of sight over the next few quarters.
What when do you think would most likely see some of that start to alleviate and what would be the catalyst for it.
Okay.
So that's what led me okay.
So that's.
So as Gerry indicated in her prepared remarks.
Our backlog today is more or less at the same level it wasn't the third quarter.
We expect this to continue.
Until the end of the year, we do see it.
Movement as of next year as we execute.
Several levers to get over.
Some of our supply shortages or late supplies.
It's very much focused on building further raw material inventories in areas, where raw materials have been constraint I'm thinking about packaging materials.
Some some metals.
Have been unpredictable in their supply and then second we are developing alternative suppliers second suppliers or third suppliers in those areas that have been constraints all of that is going to start to become a line in the fourth quarter, and that's where we see a further catch up in <unk>.
Quarters as of next year.
Got it thank you for the additional specificity there.
And I just had one for carry on on.
Alta and the earnings from the August updates now.
Is that all the outperformance from Q3, and certainly correct could you unpack that at all crosswalk it to where you got to from where you were before the last update.
Okay.
Yeah, I mean, it really is the Q3 outperformance so we beat that the.
The midpoint in Q3 by about 15 cents and that is essentially the raise for the full year at the midpoint is 15 cents, so where we're really flowing through that outperformance in the third quarter into the into the fourth quarter and into the full year guidance there.
And so as we talked about our revenue as well as our continued cost optimization of our operating expense line items. We believe that we could flow through that entire Q3, which again is is continuing to offset I don't you know that last slide that we added in I hope is helpful. Because I think there's so much noise.
Around around you know the FX and our divestiture and obviously this airlink recall, we wanted to help you provide some additional perspective of that when you unpack all of that our EPS performance has actually been quite strong this year and are flowing through that third quarter performance to the full year.
Year.
Great. Thanks, so much.
Thank you we will take the next question from line Steve from Oppenheimer. Your line is open now. Please go ahead.
Thank you good morning.
So it seems like you have a good line of sight on Sterling here I was wondering if you could talk about the progress. Your sales force you have made this year in terms of driving interest in in Cerro link New orders and maybe you can continue to make.
I'm on the ground as you as you work toward a return of the product next year.
Ken thoroughly sort of being an outsized contributor next year based on any sort of.
Pipeline build them ahead of the Relaunching.
Are we launching in the first half.
Yeah. The feedback we've received on Sterling since that allowance has been postpaid customers do like you got the breadth of the features.
The ease of the user interface that the settling brings to them.
By acting decisively and solving the problem.
For our customers by bringing an ICP Express I think we're definitely.
We have protected the brands off Integra and the breadth of subtle Inc. Is a great partner to work with feedback we keep getting from customers is that.
ICP.
Link is.
A product that's in the market does not have a comparable.
So we're well ahead of the markets.
As we are preserving that relationship with customers yet we feel when we bring the product back in the market.
The first half of next year this.
This is not really going to be a reliable. This is a continuation of the long ship that we have in place and we do see several anchor as a contribution to 2023.
And there is a backward.
Compatibility to that micro sensors, Steve as well so as the the the good news is you know when you when surgeons are using a microsensor and placing that into our patients.
Ed.
Again, there is a familiarity with that micro sensors. So.
There's a certain stickiness to the product that as we are out of the market for a period of time and they're using the ICP Ah Express again that uses the same Sarah link monitor or I'm, sorry, microsensor. So as we bring the product back and there'll be a continuity of that micro sensor that helps with that.
That are keeping that continuity there.
Great. Thanks, and then just secondly, you've given the year to date performance on free cash flow and as you mentioned the the ample liquidity.
Just wanted your thoughts on on M&A, your appetite for M&A or your ability to to really execute on that right now and.
Should we expect some pick.
Pick up in activity here as we look over the next several quarters.
Yeah definitely M&A remains.
A priority.
Two.
Leveraging our strong balance sheet over the past year.
As we went through strategy.
I think we have clear line of sight.
What type of targets, we're going after you opportunities to broaden our scale up and our current GSS or tissue Tech markets.
Clear line of sight of Adjacencies that we'd like to broaden into or pure technology additions and of course international expansion opportunities. So a four areas, where we're actively looking into opportunities at this time, yes definitely the market is getting more ready and in fluids.
For opportunities to start moving.
Great I appreciate it thanks, Colin Thanks, Kurt.
Thank you we'll take the next question from the line.
Jayson Bedford from Raymond James Your line is open now please go ahead.
How are you doing it's Eric on for Jason This morning.
Just wanted to ask a question on the breast PMA.
Have you generated any more new data to support the submission and do you know if any of your competitors have also filed their plan on filing.
So.
First off to the second question no at this point in time no. Other competitor has filed we expect several competitors too.
B thinking about filing but none of them.
Are you in the filing stage yet.
In terms of further data we're working interactively.
Positively with the FDA to further provides ulcers to hum.
Some of the questions that were asked at the panel. They always have been defined in a deficiency lever. Some of those all sorts are about more data more data from the Embraco database. The other answer is has to do with more GMP manufacturing practices questions. So there's been a.
Steady exchange of additional.
Formation.
And all of that will come together in a.
Amendment submission, which we plan to submit the.
By mid next year.
Okay. Thanks on that.
Separate question, just wondering where you got in terms of your ability to pass on price overall.
So on price, we've been able over this year too.
Which price covered the inflation pressure that we've seen in the in the business over the past years have always been able to get net price. This year, we've got more than the typical years in the past we continue to focus on price also going forwards.
To leverage price getting as a way to deal with inflationary pressures.
Our materials and our label input resources and I would say as we think about price. It. It can take a number of of forms right. There is increases in list price you decrease the level of discounts are you look to increase price on new customers on a new a new product introduction.
Yes.
You had the opportunity in enterprise contracts to negotiate price or volume.
Offsets there in your enterprise contracts. So there's a lot of different levers that we have.
But we're also looking at other things as well beyond price to shore up our margin buffers and those include tightening up our customer returns policy you know that as a source of leakage that if we can ensure that our customers are adhering to our Ts and CS as it relates to returns that's a way to to net capture.
More price on the initial revenue, we're also working on inventory management and more effective.
Inventory management as well as other cost reduction areas and yield manufacturing improvements in our plants as well. So all of those things as we think about levers to offset some of the inflationary pressures and the impacts of FX all come to bear into the solution set that we're that we're leaning out right now.
Okay. Thanks, a lot.
Thank you we will take the next question from the line of Greg from Bank of America. Your line is open now. Please go ahead.
Good morning, Thanks, Thanks for taking the questions.
Wanted to start with with 2023 and I don't expect you guys to provide guidance at this point.
Did want to see if you look at where the street is.
Where the street is theyre expecting above 5% organic growth.
I think over 100 basis points.
Operating margin improvement.
I wanted to see get your thoughts if that's that's reasonable in your view given some of the moving parts.
And if.
If not.
Or if you guys are willing to provide.
Whether thats reasonable or not maybe just some color on how we should be thinking about 'twenty three.
Yeah, I mean I can appreciate the question on 2023, and we're not at a position at this point that we want to comment on 2023, we'll do that in our February earnings call that we'll provide that level of detail certainly like to see how the rest of the year plays out one from a.
From a macro perspective, just from an environment perspective, understanding where our FX rates kind of come out at the end of the year as well as just overall.
You know rest of the business in terms of of macro challenges of a recession risks are that not only impact are our company, but many companies in other industries as well. So I think we'll see how things play out over the next few months. The good news is I think procedure rates continue to improve as Jan mentioned earlier.
And I do think that in.
In a in a recessionary environment I think hospital procedures will continue to hold up.
With our portfolio as you think about or products that are used in the various procedures I think or our revenue has an opportunity to hold up very nicely.
I would say that certainly as we think about 2023 mm will need to advance our return to market for Sterling. So we'll want to be able in February to give you more definitive information of what our timeline looks like for the return of Sterling to the market as that would be a key growth driver for us in 2023.
I think there are a lot of fundamental growth drivers that young took you through one of his last slides that he took you through shows all the various things that are working in our favor as we advance our product portfolio that provide opportunities for our organic growth drivers for next year and then ultimately.
As we talked about there were some other questions on some of the margin drivers that I think in combination with a more conducive environment to revenue growth as macro challenges abate combined with the levers that we have on the cost side ultimately would lead to some margin expansion in 2023, you on any comments there.
I think just summarized it well if you look at this year I think.
The markets the markets are good yeah, we have momentum we have been.
Investing and continuing to invest into catalysts.
Next year, we should start to see the return of that momentum and deferred or persons.
Yeah.
Great. Thanks, Thanks for that.
Just as a follow up on on the Sterling recall.
Maybe just a little bit if you guys could provide a little bit more color on the steps necessary for the recall and I understand the timing is still uncertain.
If you could just kind of walk through the steps of I believe you said that you are close to identifying the root cause.
So maybe when will that be finalized and then any other regulatory or quality steps that need to go.
Need to do to hit that mid 2023 <unk>.
<unk> launch.
Okay.
So at this point, we have identified the root cause and also the technical fix for.
The root cause so as of this point there's trees.
Parallel work streams could the first one.
It's too.
The validation and verification.
Place, we need to now provides a statistical number of tests that.
That's the fix.
Is it true fixed that data is important.
For submission to the regulatory authorities.
In parallel we're.
Implementing the work procedures in our manufacturing.
Two two.
To fix.
The technical.
To bring the technical fix into our into the product.
As well as our supply.
Number of new components that will be added to.
To the product and then the third stream.
It is to submit the data.
To the regulatory authorities.
And that's where the.
The timeline is not fully clear.
Clear, yet what that's going to be a short or longer submission. Okay. So it's the submission to regulatory authorities that drives a bit of certainty in the timeline more than the technical and the manufacturing execution.
Great. Thanks for taking the questions.
Thank you we will take the next question from line drew <unk> from Morgan Stanley . Your line is open now. Please go ahead.
Hi.
Just I'll ask one question just.
For time sake, but John as you were kind of talking about you're continuing to invest in your strategic priorities. You just brought on a head of international and head of digital but I'd be curious just to see how maybe your R&D or really your opex spending has maybe evolved over the past quarter or two and how youre going to kind of reposition R&D spend.
Maybe going into next year, if you can give us any sense of how much youre going to be spending on those initiatives first what's kind of core in the portfolio today. Thank you.
I can't give you a specific guidance to that but we definitely oh.
We are on track to further step up our R&D spend as a percent of topline, yes, some of that additional R&D spend.
It'll be either used for digital features to be added to our products, but also steps up pulling Nicole research that is a key element in accessing new international markets from a further building out of SG&A or Oh opex.
Support stuff I think that's gonna be marginal given that.
If I look at the international organization, we have a solid footprint.
Foot print and we're gonna be redeploying rather than adding a lot of opex too.
The organization.
Thank you we'll take the next question from the line Richard from Trust. Your line is open now. Please go ahead.
Hi, Thanks for taking my questions just on one on capital and one on the procedure environment I guess on capital it sounds like the underlying environment is pretty benign for now on the pressures hospitals may be feeling and how it relates to your business or I guess, if you could clarify is that just integra specific cruises.
What can you comment on the environment relative to your specific <unk> performance and how you are feeling about your customers kind of capital spending health as we look forward into the next budget here and then I'll just ask the second one on procedures any comments you can offer on the exit trajectory from <unk> in September .
What you're seeing into <unk> and kind of how that specifically for the procedure part that is factored into your guidance. Thanks.
Yeah, just on your capital question, which as a reminder, our capitals is roughly about 6% of our total revenue. So it's not a significant portion of our total revenue.
But are you know we saw some really nice growth coming out of KUSA as I mentioned low double digits and I think what that shows that even when there are perhaps budget constraints that if you have a compelling value proposition that you can offer hospitals and operating theaters.
That ultimately drive the efficiency of their operating theatre.
And there is room there is a place for capital to be spent and that's what I think we continue to see with our Coosa capital. There's no doubt that the the the selling cycles are longer than they have been in the last couple of years because of Covid and the fact that there is more scrutiny on capital budgets as hospitals, but I think just continues to.
To demonstrate that if you have a great product and a compelling value proposition there is room for hospitals to spend and that's what I think we continue to see on Coosa and as as Jan mentioned earlier, we did some line extensions on tusa to continue to.
To add a few more chips to the portfolio that continues to to help with the utilization of that investment for our for our surgeons going forward.
And then I think you had a question on the exit rate procedure rates, maybe I'll have Jan maybe just comment on that.
Yeah, I'll take the questions about how we see procedures further default for us like I said.
Before.
Over the past five months, we've seen every quarter steady improvement in procedures going back towards the pre COVID-19.
Levels.
As hospitals.
Either sole situational nurture soldiers or learn to organize to deal with a different.
Nurse staffing as well as of course COVID-19 capacity utilization.
It's more and more a non factor we've seen this in.
In pretty much every country across the world.
Some are a bit of had some are a bit behind but all move in the same direction.
And as I indicated the one outlier.
Is China, where with your rolling.
Covid Lockdowns.
We still only see procedure levels at around 8%.
Pre COVID-19 normal levels.
Thank you.
Thank you. This now concludes our call. Thank you for Johnny the Integra Lifesciences third quarter 2022 earnings call.
Thank you.
[music].
Yes.
[music].
Okay.
Mhm.