Q1 2023 Integra LifeSciences Holdings Corporation Earnings Call
Okay.
Good day, and thank you for standing by and welcome to the Integra Lifesciences first quarter 'twenty 'twenty financial results Conference call. At this time, all participants are in a listen only mode.
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Please be advised that today's conference is being recorded.
Now like to hand, the conference over to your Speaker today, Chris Ward Senior director of Investor Relations. Please go ahead Sir.
Thank you Norma.
Good morning, and thank you for joining the Integra Lifesciences first quarter 2023 earnings conference call.
Joining me on the call. This morning, Oregon to White, President and Chief Executive Officer, Matthew Awesome, IR Vice President.
Investor Relations and Treasurer, and Jeff Most Brook principal accounting officer.
Earlier today, we issued a press release announcing our first quarter 2023 financial results.
And corresponding earnings presentation, which we'll reference during the call are available and in fact, we're lifestyle.
Under investors events and presentations in a file named first quarter 2023 earnings call presentation.
Before we begin I would like to remind you that many of the statements made during this call maybe considered forward looking statements factors that could cause actual results to differ materially are discussed in the company's exchange Act reports filed with the SEC.
Please.
Also in our prepared remarks, we will reference both organic and reported revenue.
Organic revenue growth excludes the effects of foreign currency acquisitions divestitures as well as just continued products unless otherwise stated all of this aggregated and franchise level revenue growth rates are based on organic performance.
And 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 with the SEC.
That I will now turn the call over to Jan.
Thank you, Chris and good morning, everyone.
Let me start by reviewing our first quarter business highlights on slide four.
First quarter revenue performance reflects solid execution by our teams as well as positive trends in market demands and procedure volumes that we see now nearing pre COVID-19 levels.
First quarter revenues finished at around $381 billion above.
Hungary gods range.
With organic growth of four 6% comprised of tissue technologies at six 8%.
On specialty surgical at three 5%.
That's your technologies enjoyed a strong start to the year.
Including double digit growth from a number of hobbled heating products once reconstruction franchise, such as integra skin back from matrix Chantix and site, though.
Along with high single digit growth from search much.
We also launched micro matrix in Europe , where we are seeing positive initial feedbacks from once our reconstructive surgeons.
Well, we are encouraged by the broad strength in demand for our tissue technology products.
We are also experiencing the expected revenue pressure from the mobilizations.
Label orders as we mentioned in our February guidance.
They want to top line results and tissue technologies, we remain confident in our efforts to obtain a breast reconstruction indication for <unk>.
We're on track to file our PMA update this August it's about.
Completing related work at our Boston facility upgrades, our quality systems.
And FDA inspection and March really first the urgency of these quality system upgrades.
To maximize focus and efficiency in implementing these changes we have cost protection at the Boston sides of accelerated certain project work.
So the plans for later in the year.
We plan to resume production in early June after the system upgrades are substantially complete.
And in the meantime, there are continuing to work with our customers and commercial teams to minimize the supply chain impact as they worked through existing finished product stock.
Turning to <unk> now here, we also saw a good start to the year with double digit growth across our product lines.
And our programmable valves.
Our strong performance in instrument sales.
We lost Cousar clarity bone chips in U S, Canada, Australia and.
<unk> Zealand further expanding our global cross shop portfolio.
Okay.
As expected. We also continue to work towards several supply headwinds and back order levels remain elevated.
Similarly in our dural access and repair and neuro monitoring franchises.
Related to certainly we've made progress on resolving the electrical interference issue with our monitors and now expect to relaunch late third quarter.
Yeah.
We're validating and testing earlier technical fix our engineers to identify a more robust solution that does not require any change to the monitor.
We are currently in verification testing and in the meantime have contacted the FDA to discuss the regulatory pathway to return to the market.
Also working with regulatory agencies outside your best to finalize the plan.
International markets.
Our current technical solution allows us to ramp up distribution faster once we're back in the market.
We are excited about the re launch of settling our customer's commitment and support during the recall further validates our confidence that settling.
It's an important catalyst to our long term growth expectations.
Turning to our bottom line up.
First quarter adjusted earnings per share came in at 74 cents within our original guidance range.
Despite some temporary pressures to our adjusted gross margin during the quarter from product and geographical mix and the Boston quality projects.
<unk> able to meet our profitability targets and continue to make the necessary investments to fuel long term growth plans.
During the quarter, we also appointed Dr. Stuart Harvest Chief Medical Officer.
But perhaps has worked at leading organizations and brings a deep and broad experience in global Medical affairs and surgical innovation. That's all enabled him to strengthen our clinical operations and innovation capabilities.
Our CFO search continues with a strong slate of candidates.
Close to identifying a great leader, who has the right skills and fit for the company.
The first quarter refurbished solidified our balance sheet.
Critically position by amending and extending our credit facility.
Providing us ample liquidity as we execute our M&A strategies.
We also initiated the $150 million accelerated share repurchase.
To return additional value to shareholders.
Overall, the strength demonstrates of our portfolio at the beginning of this year provided us confidence.
Liver.
2023 commitments and we are reaffirming our original full year guidance for revenue organic growth and adjusted EPS.
Consistent with the guidance we provided in February we expect to see a clear step up from a first half second.
Second half revenues.
Additionally, we now also expect a larger step up in gross margin as a result of the Boston quality project cost acceleration.
From the later part of the year into the first half.
So with that I'd like to turn the call over to mature enough to go deeper into our first quarter performance and our guidance.
Thank you Jan let me provide you with a more detailed look at our first quarter financial highlights starting on slide five.
As John mentioned first quarter total revenues were approximately $381 million, representing an increase of one 1% on a reported basis and four 6% on an organic basis.
All revenues were $5 million above the high end of the guidance range communicated back in February .
First quarter revenue growth was strong across many parts of our business with organic growth of three 5% in carbon and specialty surgical and six 8% and tissue technologies.
Overall organic growth was three 5% in the U S and seven 2% and international.
Adjusted gross margin for the quarter was 67, 3% up sequentially by 100 basis points versus the fourth quarter of 2022, but down 40 basis points versus the prior year.
Adjusted EBITDA margin for the quarter was 24, 2% down 60 basis points and adjusted earnings per share were flat at 74.
Both metrics were largely impacted by gross margin pressures planned growth investments in year, one dilution from the <unk> acquisition.
If you turn to slide six I will go deeper into the first quarter revenue performance for our CSS segment <unk>.
Reported Q1 revenues in CSS were $248 million flat on a reported basis and up three 5% on organic basis from the prior year.
Global Neurosurgery sales were up two 9% driven by low double digit growth in our crews a capital and disposable and mid single digit growth in CSF management, including continued strength in our service plus programmable valves.
You are monitoring declined low digit low double digits, primarily because of the lack of sterling monitor sales in the quarter.
Following its recall in the third quarter last year.
Our global Neurosurgery performance in the quarter was also impacted by continued supply challenges.
Dual axis and repair as well as near and monitoring.
Overall, excluding Sterling capital sales within the quarter was strong and grew low double digits driven by cruiser with low single digit growth in smaller capital.
We continue to see strong demand funnel for our capital equipment as customers see value innovation and additional productivity in these products, particularly our crews it platform.
Instruments grew approximately 6% driven by healthy demand and the timing of orders.
This result exceeded our low single digit long term growth expectations for this business.
Shifting to international sales grew high single digits in the quarter led by double low double digit growth in both Japan and China.
Japan growth was led by sales include the capital and disposables as well as Georgia.
China benefited from the recovery of Rolling Covid Lockdowns.
Our continued geographic expansion.
Moving to our tissue technology segment on slide seven.
Tissue technologies grew two 6% on a reported basis and six 8% on an organic basis compared to the prior year.
First quarter's end.
First quarter sales in wound reconstruction increased 11% driven by strong demand and commercial execution.
By double digit growth from Integra skin.
Mike from matrix Gen tricks and cycle as well as high single digit growth in search and maps.
In our private label franchise sales declined 5% versus last year I had expected well our partners continued to normalize their inventory levels. Following strong purchases in the first half of 2022.
And finally international sales and tissue technologies were down mid single digits due to supply challenges in certain markets.
Turning to slide eight to review, our first quarter P&L metrics.
Adjusted gross margin for the quarter was 67, 3% down 40 basis points compared to Q1 of 2022.
A decline of our gross margin year over year was primarily driven by unfavorable product and geographic mix as well as Boston quality project expenses.
These temporary pressures represented a headwind of approximately 120 basis points in the quarter and offset our positive revenue performance and continuous cost improvement activities.
Despite these interim pressures our gross margin improved sequentially by 100 basis points versus Q4 of 2022, primarily driven by continued strength in a higher gross margin tissue technology business.
Improvement in supply.
And the passing of onetime cost pressures, we saw in the fourth quarter of last year, all of which were factored in our February guidance.
We expect the cost of acceleration of the Boston quality projects to continue into the second quarter and impact our first half adjusted gross margin unfavorably by approximately 100 basis points compared to our February guidance.
This implies flat to marginal improvement in gross margins in Q2 compared to Q1.
Our first quarter adjusted EBITDA margin was down 60 basis points compared to the prior year driven by temporary gross margin pressure as highlighted earlier as well as the investments supporting our key strategic priorities discussed during our February call.
Our EBITDA margin also reflects the one year dilution of our C acquisition, which closed in December 2022.
Our adjusted EPS was <unk> 74 flat to prior year and includes a negative <unk> impact as a result of the Boston quality project.
If you turn to slide nine for a brief update on our balance sheet capital structure and cash flow.
In the first quarter, we initiated the previously announced $150 million accelerated share repurchase program.
We also amended and extended our $2 $1 billion credit facility from 2025% to 2028 on favorable terms, despite the challenging banking environment.
Providing a strong liquidity to support our M&A gameboard.
During the quarter operating cash flow was $26 million in free cash flow was $13 million, reflecting both expected increases in capital in EU MTR compliance spending as well as increased inventory levels compared to the fourth quarter of 2022.
As we increase our finished goods safety stock levels.
Free cash flow conversion was 71% on a trailing 12 months.
Our balance sheet remains strong with ample liquidity to support our short term and long term plans and as of March 31, 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 6 billion, including $307 million in cash and the remaining available under our revolving credit facility.
Turning to slide 10, I will provide an update to our consolidated revenue and adjusted earnings per share guidance for the second quarter and full year 2023.
Second quarter revenues are forecasted to be in the range of $396 million to $400 million.
Presenting approximately flat reported growth and organic growth in the range of one five to two 5%.
Our second quarter revenue guidance reflects continued procedure recovery and strong demand for our products, but also continuing to supply challenges and a modest negative impact of approximately $5 million from the Boston quality project.
Organic growth guidance also reflects the higher comps from last year in private label and instruments as well as the lack of revenue from Sterling monitors in the quarter.
For the full year 2023, we are reaffirming our revenue and organic growth guidance, our guidance contemplates the strong demand in portfolio performance. We demonstrated in the first quarter, a slight improved FX outlook updated timing for the relaunch of Sterling.
Flying backward of challenges and a modest revenue impact from the Boston quality project.
We are also holding organic growth expectations to approximately 3% in the first half and 6% in the second half I shared during our February call.
A reminder, the step up from first half the second half.
It's driven by gradual supply improvement the relaunch of Sterling and favorable back half comps in China and private label.
Turning to adjusted earnings per share guidance for the second quarter, we expect adjusted EPS to be in the range of 75 to 79 cents up.
But down from the prior year.
Driven by temporary gross margin pressures, including the costs from the Boston quality project as well as our planned strategic investments, including the <unk> acquisition.
This guidance range reflects an approximate <unk> <unk> headwind from the Boston quality project.
But we will have a benefit in the second half of the year as.
As we look at the rest of the year, we expect that the acceleration of the project cost along with other gross margin levers will contribute to a sequential improvement in gross margin from first half the second half of approximately 100 basis points.
We will also continue to manage our spending rab for the remaining of the year, while preserving our key growth investments.
In summary, we are holding our full year 2023, adjusted EPS guidance of $3 43 to $3 51 per share now I would like to turn the call back over to John .
Thank you my children. Please turn to slide 11 to conclude our prepared remarks.
Our first quarter performance was solid and the results and trends provide confidence that we can deliver.
Full year commitments through market recovery and strong demand for our products, while we navigate supply challenges and the acceleration of our quality system project in Boston.
In parallel we continue to progress towards our long term strategic goals, we strengthened our core business with new product classes in the Costar platform and in our international tissue technologies portfolio with micro matrix in Europe .
We are advancing our PMA projects intending to file the shorter months PMA Amendment this summer.
As well as additional modules of the <unk> PMA later this year.
This keeps us on track to deliver the first two PMA for ADM in the high growth implants based breast reconstruction market.
The team has also done a tremendous job getting to the root causes of subtle link in developing a robust technical solution to bring the bonds or back to the market.
In addition.
We made continued progress in enhancing our executive leadership team.
Strengthening our core capabilities and manufacturing quality assurance clinical study design and evidence generation.
We are also taking the opportunity to fortify our balance sheet by extending our credit facility.
We returned value to our shareholders.
From a share repurchase.
All of these achievements will enable us to continue to bring innovative and life saving technologies to market.
Serve our customers and their patients around the world.
Our full year outlook is balanced, reflecting our commercial momentum and our focus on improving execution.
It's also the pulling forward of the Boston quality project costs, while we push it hadn't been investments in critical initiatives.
Will propel our growth over the long term.
Our second half reflects a clear step up in organic growth and margin expansion.
With expected organic growth well above 5% adjusted gross margins greater than 68% and adjusted EPS growth approaching double digits.
We believe these metrics for the second half are much more reflective of where do we see the business in the near term.
As we progress towards our SRP commitments.
In that context, we look forward to going into more detail on our <unk>.
Citing growth catalysts and providing more clarity on our plans to achieve our long term targets next week.
Thursday may 4th at all.
Our Investor Day in New York.
That concludes our prepared remarks, thank you for joining us this morning, and operator would you. Please open the lines for questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question. Please press star one again, please wait for your name to be announced we ask that you. Please keep to one question with one follow up please standby.
We compile the Q&A roster.
One moment for your first question.
Our first question comes from the line of Steve Lichtman with Oppenheimer. Your line is now open.
Hey, Good morning, guys I guess, just first on a thoroughly can you talk a little bit more about the adjustment in the in the fix there and I think Jan you alluded to the fact that on the backend that that will help but just any more color you could provide on sort of what the.
The change in the fix is and why it will help on the back end in terms of ramp.
Yeah.
So good morning so.
We were over the past couple of months with our engineers doing the statistical validation and testing.
The initial fix.
They identified a more robust technical solution.
That is even more capable to shield weigh the different electrical interference yet specifically in this case, one that came from the <unk>.
<unk> at the table.
As a fix in addition that does not require a change to the monitor box, but rather to the sensor connector.
Cable type.
Components.
So the benefits of our solution other than shielding interfere is better is that it does not require a change to the monitor box, which allows us to ramp up.
Foster.
Turn it back.
In the field.
So that's the the change that's also to change that.
Thought it was a better solution.
Medium long term for the business. It does require us now to restart validation and verification testing with this new solution.
That's the main driver why.
Essentially we're slipping out one quarter.
The plan in terms of going back to the market.
Okay got it and then on the.
Boston Manufacturing project can you, just maybe probably a little bit more detail there in terms of <unk>.
What's being done how far along you are in that in that process.
And then what exactly is being manufactured there sounds like surge amend anything else. Thanks.
Yes, there shortly in Boston the main product there is search, but there's also that.
One <unk>.
Private label.
Does being manufacturers out there.
If you go back to.
The Boston production.
Or the quality project there.
We've been working for the past couple of years to upgrade our Boston facility.
<unk>.
FDA observations in 2018 and 2021. In addition, as we are preparing to have surge events, a PMA product there.
Boston size requires a quality system that operates at a higher level.
So that's a project that we've been a project that's been ongoing.
Having all that early in March.
That confirms we're on the right track with our execution at the same time, yeah. It further.
Our sense of urgency to finish the project, specifically upgrading a number of testing related processes.
And infrastructure physical layout changes.
In addition.
The plan that we have on the table now.
Catch the chop finished well before August .
This summer, which is the timing where we also.
Submit the PMA.
Amendments for the surge events breast product.
So in that context, we elected to past production.
Is it allows us to more quicker and more efficient make the changes in process and physical layouts that are needed.
Can do that.
Because we have ample.
Inventory in the system that allows us to satisfy current customer demand.
This project that's an eight week focused project, while we keep the factory Tom Mcdonough be back up and running early June with the factory and as I said in the meantime, we're living off inventories to satisfy customer demand.
Got it thanks, Ron Thanks, Sean.
Yeah.
Thank you.
One moment for our next question.
Yeah.
Question comes from the line of Vic Joe Pratt with Wells Fargo. Your line is now open.
Hey, good morning, and thank you for taking my question. So I just had one clarification on gross margin I think you said Q2 sort of flat to marginally improve made in Q3 and Q4 step up.
You've previously talked about mid 100 basis points of gross margin improvement is that still on the table and then I had a follow up.
Good morning, Big So so yes will we expect to see kind of flat to a moderate increase in gross margin from Q1 to Q2, and then from first half to second half as you mentioned, the 100 basis points of improvement on.
On a full year perspective, we were talking about this mid 100 <unk>.
The basis point improvement in gross margin were currently looking at more 100 basis points year over year of and improvements of approximately 100 basis points at this point in time and the drivers that we had discussed during the February call.
Very much I would say alive.
Temporary by I would say some kind of residual impact coming from that.
The Boston project that we're running right now here in the first half so hopefully that helps.
Thank you and then my follow up was when can we expect to hear an update on the purchase of our new CFO .
Any color on that would also be helpful. Thank you so much.
Specific on the CFO search very happy with the slate that we're having.
The next couple of weeks.
We have boards.
Bought together, we have a little Board committee, that's part of the selection so.
That's the main step into selecting.
The main candidates out of that slates.
And so I think over the month of May that's where a decision will be.
Okay.
Thank you one moment for our next question.
Our next question comes from <unk> Patel with <unk>.
J P. Morgan Chase your line is now open.
Yeah.
Yeah.
Okay.
Rohit <unk> your line is now open.
<unk> Your line is now open.
I suggest we go to the next one right.
I'll come back later on.
Yeah.
Thank you. Our next question comes from the line of Ryan Zimmerman with <unk>. Your line is now open.
Good morning, John and everyone on the call I had a question I mean, historically integra has generated closer to 48% to 50% with TPS.
In the first half and if I look at kind of.
I look back at kind of years past.
Targeting this year about 57% in the second half of the year since you generate.
43% in the first half this year and so.
I can appreciate some of the Boston one time impact in the first half of the year, but I'm curious if you could kind of help us bridge the dynamic, particularly as revenue increases in the back half of the year.
The costs are also going up on the Opex side, and so just wanted to get comfortable with the.
The EPS ramp in the second half of the year.
Hey, good morning, Ryan So as you as you look at the first half we've also accelerated certain expenses related to our to the Boston.
Project right now so.
Part of this acceleration in some of the.
The cost that we're facing here in the second quarter, we are going to offset some of this in the second half and so part of that second half improvement along with the revenue increase that you're going to see first half. The second half this will enable us to generate more EPS contribution to the full year and you are correct, we're about $43 45.
5% in the first half and about just over 50%.
In the second half.
Yeah Okay.
And then.
Organic growth and the SEC.
<unk> quarter is certainly softer than what you saw this first quarter.
Procedure volumes have more good news first quarter I'm curious kind of why you know why do you think there is either.
Slow down or just.
That doesn't continue in the second quarter, and maybe Thats all related to some private label or things like that but.
Help us understand kind of what you are saying that second quarter that maybe temporary in your expectations.
Yeah.
I'll hand that to too much here to give you some of the movements. There. So again in the second quarter. The second quarter is a quarter, where we have facing I would say one of the toughest comps. If you think about private label about instruments. So that's definitely something yet the growth year over year.
In addition to that you know we have this moderate impact coming from from Boston, which is about $5 million here in in the quarter. So I would say these are the three or the two big elements that I'm gonna be softening. The growth. We believe that demand is going to continue to be strong.
For the remainder of the years, but it's again, there's temporary comp year over year and and the Boston, That's got a temporary little bit growth here in the second quarter temporarily.
And that was how you called out $5 million impact on the Boston a quality project.
I want to be clear, okay. If that is correct yes.
Thank you.
Okay.
Part of that dry and won't come back in the second half is linked to it.
Private label shipments, which we think we're not going to be doing.
Second quarter, but.
That will shift to later second half.
Okay. So it sounds like just to be clear.
There is private label starts and maybe normalize or at least Theres a lumpy.
Larger order that picks up in the third or fourth quarter second half.
Yeah.
Okay.
Thanks for taking my questions guys.
Thank you Ryan.
One moment for our next question.
Our next question comes from Matthew O'brien with Piper Sandler Your line is now open.
Hey, Good morning. This is bill on for Matt. Thanks for taking our question for starters on the thoroughly prelaunch. Thanks for the color on the recent breakthrough there.
But given the late Q3 relaunch now can you let us know what gives you confidence in the second half guidance not playing the whole thing was based on they're linked but certainly it.
Not not helping in and just zero length, how are those conversations with the FDA going and do you have high visibility in that in that Q3 timeline at this point.
Yeah.
Hum.
Somebody your second.
A question first.
Yeah, we.
Half exchange with the FDA are engineering.
Early test results on these new solutions, which look very robust are quite binary in terms of pass fail.
Several dozens of tests, so that information we've shared with you have to be able to discuss that next week referred to fine tune, how we set up the validation and verification.
Safety official testing of that solution.
We plan to submit that.
Around Smit August .
Our timeline at this point in time to timeline of third.
Third quarter assumes a special five 10-K.
And that's also aligns with the high end of our topline guidance.
If this would not end up being a special five 10-K that we're talking about two to three months later, which is aligned with the lower end of our guidance and.
So our guidance reflects.
The high and the low scenarios when it comes to settling back to market and that's pretty much driven by the uncertainty on what's the regulatory path, we will have to follow.
After we submit in mid August .
So just to add to John's remarks.
Remarks here, if you think about the first half to second half.
We need to realize that that Sterling, maybe delay represents maybe a couple of million dollars of change. So it was a smaller contributor to the second half ramp and just as a reminder.
As we see kind of supply recovering throughout the year, we expecting to have a bigger contribution in the second half China normalization post Covid locked down is also going to be at more of a contributor in the second half.
Along with kind of growth.
In some of our N P eyes that are going to continue to ramp here in in in the second half of the year and then we're gonna be pass, though so some of the tough comps that we've had from an instrument.
And from.
And from and from a private label perspective, sorry.
Both of which are going to help also the second half growth. So that's kind of the first to second half walk in and the biggest contributors I still very much alive.
No. That's helpful. Thank you and then just shifting gears here can you kind of flush out what you see on the international front I know you just mentioned, China, but what should we be looking for from Integra here in 2023, and maybe even 2024 as we start to look there as well. Thank you so much.
Paul.
Yeah. So as I think we indicated international had a good start of.
The first quarter with seven plus percent growth.
Yes.
China, Japan or double digits, that's where.
It's much expect them to be.
We expect.
International to be this year.
The next couple of years is in the high single digits.
Driven by.
Yes, mid single digits Europe and.
A couple of double digit drivers in Asia.
China.
Yeah.
Thank you.
One moment for our next question.
Our next question comes from the line of Craig Bijou with Bank of America. Your line is now open.
Okay.
Good morning, guys. Thanks, Thanks for taking the question a couple of follow ups here. So.
Wanted to circle back to Sterling and.
The change in the solution in.
Your your thoughts that you can.
Distributed it faster so.
Maybe just ask specifically.
If you don't have to change the monitor I guess.
Ken.
Ken components be switched out.
On site can maybe scent I think you mentioned cable so can that be sent to the sites that can then update.
The system just wanted to understand what exactly.
The recall consists of now.
Yes.
So so your assumption is right.
So the monitor does not change this is about a connector cable and plug in cable that plugs in.
Into the more mature on the other side flexing to the.
The sensors cables.
Yeah, it's a cable that can be sent as an accessory into.
Into our customers.
Of course has to be has to.
The manufacturer.
Thats being.
Initiate it as we speak to have those cables manufactured by one of our suppliers.
Got it that's helpful and then.
Hum.
Follow up on the Boston project.
What requirements.
Sorry, if I missed it does the FDA have to come back into the facility.
Expect or are there any other steps once you do finish the project that we would need approval or sign off or some other some other step before you can then submit the <unk> PMA.
So the startup of the plant is up to us when we have finished the project that we do we're sharing that.
That would work and planning with the FDA, but pretty much when we're done.
Arts and restarts.
The factory.
Okay. Thanks for taking the questions.
Thank you one moment for our next question.
Yeah.
Our next question comes from the line of Joanne Wuensch with Citi. Your line is now open.
Good morning. This is actually Anthony on for Joanne Thanks for taking our question.
In the presentation you mentioned your M&A gameboard so just.
And then bad now can you just maybe refresh us on thoughts around M&A.
I think your question is overall thoughts for M&A.
Yes.
So as I had mentioned several times before the strategic work we've done.
Yeah last year has translated into a clear M&A game.
<unk>.
Yeah, we definitely have the balance sheet.
Capacity to execute on that at this point in time that we have several of our targets.
In in process in that discussion and that's as.
As far as I can give you any insight in for direction.
Got it that's helpful on the backlog it.
Thank you said it was elevated but could you maybe provide any more color on how it trended.
Has it gone down materially during the quarter as it sort of stayed flat just curious if you could provide any more commentary on that.
Yes.
Orders are still.
Elevated.
$10 million to $15 million higher than what we consider as normal.
We have not.
Expected over the first half for dish to materially come down Thats playing out.
As we assumed the challenges here are twofold, one we keep.
We keep dealing with several challenges of suppliers that are either.
Not delivering on time or discontinuing.
Components, which.
It drives us to.
Recertified, new components or buildup last time buy inventory stops. So that's one fact for physical factor Thats driving.
The tobacco orders and then second.
We are in the several factories stepping up work.
To keep up with increased demands.
With the factory capacity that we have.
Thank you.
Thank you one moment for our next question.
Next question comes from the line of Richard <unk> with <unk>. Your line is now open.
Hi, This is Sam on for rich Thanks for taking my questions and I appreciate the commentary on the backlog there, but can you just remind us when you think about the second half ramp does that include.
Realization of that backlog at all and can you kind of give us any confidence into the dynamic you expect there for the second half.
Sure.
So yes, so definitely we expect an improvement in its part of it I would say again as we think overall about all of the different elements that contribute to the second half I talked about NPI as I talked about the the China normalization about the private label, but the instruments.
And then the other component as I mentioned early on is this kind of supply recovery, we definitely seen more than we would like on the dural access and repair side as well as on the neuro monitoring side and we hope for this to continuing contributor also in the second half.
But just took too.
Clarify, Tim when I mentioned, it's $10 million to $15 million.
Higher than where what we consider normal we do not expect in our guidance that this $10 billion to $15 billion will be.
Fully solved.
We count on about half half of that.
So thats potential potential upside or downside in function of how we get over the different supply challenges and again, if you look at our guidance range right. These are things that we're contemplating as well right. So some of those factors.
Between our low end at the high end of the guidance range are elements that we're factoring in as well.
Okay. That's helpful. Thanks for that.
One more on the Boston fact.
Factory change and.
The impact from the margin it sounds like this was more pull forward than unexpected.
So was this the <unk> impact.
<unk> was that factored into the full year guide and now it's just being more realized in <unk>.
And then with the lower sort of expansion on GM for the year can you kind of walk us through the levers on the P&L you have that helps you maintain.
Maintain full year EPS.
Yes, I'll give this to too much I think overall your assumption is right, but mature pits.
One level more detail yeah, Tim So I I agree with what you said, so we need to look at it as a little bit of a shifting an inexpensive I would say impacted gross margin here into the second quarter. So let me take you maybe a step back in Q1.
So about 120 basis points of an impact related to the Boston quality.
The project itself and we saw some benefit coming from manufacturing efficiencies favorable FX and product mix as we expected originally which is resulting in the net net about 40 basis points down year over year as you shift to Q2.
We expecting a modest improvement in.
Supply, but still an impact of about 100 basis points I would say in Q2 and for the first half really driven by the timing this acceleration of the Boston quality project.
As we turn into the second half.
The second half of the year, we expecting to offset part of this again the Boston impact is really three components to it. It has the idle capacity that has the project cost and it has some revenue impact. So as you go into the second half will gain back some of the revenue that we lost in the first half.
Going to gain back some of the gross margin because of the timing of the expenses.
And then you asked about leverage the other lever is that we are continuously just looking at being good stewards of our P&L and looking at our investments in the second half and in prioritizing some of them.
Well really focusing on our key strategic priorities and spending in the second half.
Got it thanks for taking the questions.
Yeah.
Thank you.
One moment for our next question.
Our next question comes from Eric Fleming with Raymond James Your line is now open.
Hey, guys its Eric on for Jayson Bedford.
Couple of quick questions on the private label with the comps on the private label, where there any account losses in there or is that just straight down.
No no no account losses I mean.
You know I think a lot of our partners last year built inventory based on certain assumptions around U M D or with the change in the U M D. Our assumptions and kind of later date.
We just see them actively managing their inventory levels and these are coming down. So this is part of the prioritization I would say with the kind of normalization I I should say of inventory levels that we're seeing and again the impact is going to be heavier in the first half than in the second half.
Okay.
One follow up on Sterling.
Before we were expecting a $6 million to $7 million contribution in the second half is that we're now looking at about half of that now with the delay.
Yeah, I think that's roughly roughly correct.
Okay. Thanks, a lot.
Thank you.
One moment for our next question.
Our next question comes from Ryan <unk> with Jpmorgan Chase. Your line is now open.
Hi, sorry can you hear me.
Yes.
Can you hear me now.
Sorry about the confusion I'm on for Robbie Marcus.
Just a quick one on free cash flow definitely looks that converted.
It'll soft.
In the first quarter.
Much of that is related to the Boston manufacturing.
Quality issue and.
Is there anything else driving that kind of weak conversion and what should we expect for the balance of the year.
So so we definitely expect it from a cash flow perspective, you know our ramp in capital spend as well as the U M D or spend that that's the first thing second of all we've we've started also building more.
Inventory and so you will see that a portion of our cash flow at this point in time is also driven by higher inventory levels at the end of Q1, some of which which will continue throughout the year as we kind of rebuilding our stock levels and some of it be.
Kind of in with and all of this that will flush through for the remainder of the year.
So really no connection to the Boston project correct. There is nothing.
Yes.
Got it and then just.
When we look forward to your analyst day, what are the main things you highlight for us to inspect what are the most exciting things should we think of.
New new products, we think LLP, just kind of a preview that would be helpful. Thank you.
Yeah. Thanks, So hope to see you next week by Radiohead, but that's the way we've set it up is to really give.
Insights into how we get from where we are today to the long term targets set forth many of you.
Past years have.
I have asked before whereas the plan and how do you get.
What are the contributors so we'll spend most of our time, making sure that not only do we explained why we feel great about several of our innovations our markets, but how does that translate into.
Into topline topline growth acceleration in gross margin acceleration, we also give further.
Further insight into when we talk about M&A game board what directions.
Looking into.
Thank you.
Yeah.
And our last question.
Will come from the line of Dew ordinary with Morgan Stanley . Your line is now open.
Hi, John .
A couple of questions on maybe the forward guidance, but.
I appreciate all of the second half ramp for for revenue and for earnings but as you are thinking about upside for the year are you more inclined to drop that through to the bottom line or are you looking more to reinvest in the middle of the P&L just given some of the growth initiatives ahead.
Just as a second question I'll, just ask them both upfront.
As you are reaffirming the 'twenty three guidance is there any change necessarily in the composition of how youre thinking about.
CSS first tissue technology growth. Thank you.
Yeah on your first.
Questions.
Sure.
Our guidance that we are protecting.
Our key strategic.
Growth investments, so I would say if we have topline upsides.
A lot of that will flow down to the bottom line given again that we are making sure that the projects we want to redo in the case of Boston, We do it earlier than planned. So we are really determined in 2023 to execute on our growth investments.
So top line impact should Roger translate into bottom line.
And then to your second question around CSS and tissue tech growth in in our guidance.
We expect this very much to be in line with our expectation of the February call. So no change and there are we still expecting a good growth coming from both CSS and tissue Tech here in 2023.
And thank you for your questions. This concludes Integra Lifesciences first quarter earnings conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.
Okay.
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