Q3 2023 Integra LifeSciences Holdings Corporation Earnings Call
Good day and thank you for standing by welcome to the Integra Lifesciences third quarter 2023 financial results Conference call. At this time, all participants are in listen only mode.
After the Speakers' presentation there'll be a question and answer session to ask a question. During the session you will need to press star one on your telephone and you will then hear an automated message to Boston you hand has raised.
To withdraw your question. Please press star one again.
Please be advised that today's conference is being recorded I would now like to introduce your host for today's call Chris Board Senior Director of Investor Relations. Please go ahead.
Thank you Justin.
Morning, and thank you for joining the Integra Lifesciences third quarter 2023 earnings conference call.
Joining me on the call are Don to wait President and Chief Executive Officer, and he got Knight Chief Financial Officer.
This morning, we issued a press release announcing our third quarter 2023 financial results the.
The release and corresponding earnings presentation, which we will reference during the call are available at Integra life.
Underneath investor events and presentations in a file named third quarter of 2023.
The patient.
Before we begin I would like to remind you that many of the statements made during this call maybe considered forward looking statements factors that could cause actual results to differ materially are discussed in the company's exchange Act reports filed with the SEC and in the release.
Also in our prepared remarks, we will reference reported inorganic revenue growth and organic revenue growth excluding Boston.
Organic revenue growth excludes the effects of foreign currency acquisitions divestitures as well as discontinued products.
Ganic revenue growth, excluding Boston also excludes revenues from products manufactured in our Boston facility in both periods.
Management believes that excluding revenues from all products manufactured at Austin plant provides useful information when evaluating the company's organic growth because of the unusual nature of the manufacturer and the stoppage of voluntary.
Unless otherwise stated all disaggregated enterprise level revenue growth rates are based on.
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 <unk> current report on form 8-K filed today with the SEC.
With that I will now turn the call over to Yahoo.
Thank you, Chris and good morning, everyone.
Once we begin our remarks today with an update on our progress on the quality system remediation at our Boston manufacturing facility.
Now, we turn to market plans for search on prime matrix and our private label.
So we recognize this remains top of mind for investors and analysts as it is for me and our leadership team.
So before going into the broader business update let's turn to slide four.
As a reminder, during our last call. We told you we expect it to resume manufacturing, but yet until the fourth quarter. This year.
We also hired lots without a final external audits.
Good quality system.
We conducted in the first quarter 2024.
With results submitted to the FDA budget.
March 2020 before they're.
Well done paves the way for the resumption of commercial distribution in the midst to late second quarter.
Of 2024.
For the past four months, we have worked diligently on the remediation of our quality system and boss.
Assistant with a holistic plan to be built in alignment with the FDA expectations.
Bolstered our Boston operational leadership expertise.
Check management capabilities and capacity with internal resources.
We further engaged external subject matter experts as well.
We recently completed several interim external reviews that confirmed the adequacy of the changes we are making.
So I'm pleased to report that as a result of all this progress we remain on schedule with the restart timelines, we communicated last quarter.
I also want to provide insight into a couple of critical milestones all the way.
We have plans for an external review shortly after we restarted the factory.
This review will be in addition to and in preparation for the independent audits, we intent to submit to the FDA.
Towards the end of March.
These activities will then cleared the way for us to build sufficient inventory ahead of a re launch into the market.
In the meantime, we have also been working closely with our customers to manage through the recall and have now substantially assessed and reconcile to our customers' inventory.
Our tissue technologies sales team is also working closely with our customers to facilitate product substitutions and about 10% to 50% of cases.
On track with our expectations.
And finally, our manufacturing and clinical progress keeps us in line for PMA approval for <unk> in the first half of 2025.
The right side of the slide shows the updated financial impact.
Financial results for the third quarter before the effect of $7 billion of restarts.
I will discuss in more detail.
In addition to the lost sales for the third quarter, we previously communicated.
Yeah.
The additional returns impacts, albeit it's isolated to the third quarter only.
Impacted our revenues by $7 million adjusted gross margin by 60 basis points and adjusted earnings per share by seven.
In summary.
We're making significant headway towards completing the necessary remediation requirements in Boston to bring these critical technologies back to the markets for our customers and their patients and.
And we are on track with our communicated timelines.
With that let's move to slide five for some overall.
Third quarter business highlights.
And starting on the right side of this page.
Third quarter revenues were $382 4 million.
And decreased by <unk>, 4% on an organic basis.
These results reflects the bottom impacts, including the $7 million return reserve increase.
Which offset.
Otherwise strong organic growth performance.
Our topline performance was below our guidance for the quarter.
I realize this will be frustrating for our investors, but we are making things right with our customers and we're taking the necessary steps to get through this period.
As possible to position our business for long term sustainable growth again.
Our end markets for both CSS and tissue technologies remain strong and continue to grow in line with expectations we outlined.
During our May Investor day.
In the third quarter, we saw strong demand for our unique technologies across the portfolio.
Excluding the Boston impact, we delivered organic growth of seven 1% at the high end of our <unk> range.
And our CSS business, we saw organic growth of seven 4% above our <unk> range for this segment.
Tissue technologies business, we delivered organic growth of six 7%, excluding the Boston impacts.
Our international growth was strong once again at <unk>.
Nearly 12%.
Now turning to our bottom line.
Our third quarter adjusted earnings per share came in at 76 cents.
Within our July guidance range.
This result included the approximate seven cent headwind from the increase in the Boston recall return provision.
As we look beyond our third quarter revenue results and back to the left side of the page.
We continue to deliver several proof points, along our path to growth commitments, we laid out during our investor day.
First on innovating for outcomes, we're excited about the return to market of the settling auditors.
Our customers and their patients.
Re launched in our first international markets and we'll be broadening our reentry.
In the fourth quarter.
We also filed to the updated five 10-K in the U S. In mid September with an expected launch for the product in the U S. In the first quarter early in the first quarter 2020.
In addition to settling can also submit a five 10-K for the next generation rollout searches scope.
Which brings enhanced usability to the H millimeter surgical scope based.
Based on customer learnings from our initial limited releases.
Second we advanced our international growth strategy with further geographic expansions <unk>.
Extensions of our Coosa platform.
And the registration of <unk> seal Mayfield, and our dual lighting system in EMEA and Latin America.
As well as the launch of Georgia, plus in China.
Although each project alone won't be material to our overall revenue growth collectively a showcase our strategy to bring our existing technologies to international markets and leverage our commercial footprint.
We also made a significant step forward with our in China for China strategy by starting to build outs.
<unk> manufacturing facility near Shanghai.
And then thoughts.
Organic opportunities in broadening our impacts on care offerings, we're delivering on the successful integration of the <unk> business with greater than 100% revenue growth year to date and advancement of our clinical program for a second PMA approval in the high growth breast reconstruction market.
We have also expanded our UBM platform with a five 10-K clearance for micro basics flex break.
Breaking the first organic NPI to the Asl UBM portfolio.
We have also strengthened our executive leadership by appointing <unk> as chief Human Resources Officer.
So that will bring so rich experience in driving cultures of talent enrichment leadership development and accountability.
And finally sustainability remains an integral part of how we do business.
Effective ESG management enables us to produce life saving products reduced business risks and minimize our environmental impact and drive strong financial results.
As part of our continued commitment to transparency and accountability, we issued our second annual ESG report for 2022.
This report details the progress we have made particularly in our commitments to our customers and patients building and more rewarding diverse and inclusive workforce and improving our environmental sustainability.
And it also lays out our plans for the coming year.
But thats.
I will now turn it to Leah for updates on our financial results and full year guidance.
Thank you Jan now onto our third quarter financial results and I'll begin on slide six.
Third quarter total revenues were approximately $382 million, representing a decrease of <unk>, 7% on a reported basis and a decrease of <unk>, 4% on an organic basis.
As John mentioned the increase in the basket of returns provision was a headwind to our third quarter results impacting our.
Our revenues and our organic growth and driving declines in our gross margins adjusted EBITDA margin and adjusted EPS.
In the second quarter, we estimate the returns provision based on the best available information we had at that time. However, during the third quarter, while working closely with our customers to SaaS and reconcile their returnable inventory, we recognize the need to make an adjustment to our returns provision.
We believe we have adequately provided for any remaining returns.
Bob also remains a significant headwind there is much more to our results for the quarter.
We continue to see solid performance across our business outside of Boston with organic growth of seven 1% once again, demonstrating the breadth and resilience of our portfolio.
Adjusted gross margin for the quarter was 64, 6% down 210 basis points versus the third quarter of 2022, primarily driven by the Boston impact.
Adjusted EBITDA margin for the quarter was 23% down 430 basis points and adjusted earnings per share were <unk> 76 downturn compared to the prior year.
Gross margin pressures largely driven by Boston, our planned growth investments in the year, one dilution from Lucia acquisition impacted our adjusted EBITDA.
EPS metrics.
If you turn to slide seven I will go deeper into the third quarter revenue performance of our CFS segment.
Reported third quarter revenues in CSS were $268 million, an increase of seven 4% on a reported and organic basis from the prior year.
Overall, the CSS segment delivered quarterly results exceeding the growth range outlined during our Investor day.
Unknown Executive: Good day, and thank you for standing by.
Chris Ward: Welcome to the Integra Life Sciences 3rd quarter, 2023 Financial Results Conference Call. As this time, our participants are in listen only mode.
Well the neurosurgery sales were up 8% with low double digit growth in CSF management, driven by service plus Val <unk>.
Low double digit growth in neuro monitoring driven by ICP micro sensors and high single digit growth in dural access and repair driven by durgin tourist CIL and Macy's.
Unknown Executive: Half of the speaker's presentation, there'll be a question and an intercession. To ask the question during the session, you'll need to press star 1-1 on your telephone, and you will then hear an automated message advised in your hand is raised. To withdraw your question, please press star 1-1 again.
We saw mid single digit decline in advanced energy due to the timing of KUSA capital orders offsetting some favorable timing benefits in the second quarter.
Unknown Executive: Please be advised that today's conference is being recorded.
Chris Ward: I would now like to introduce your host for today's call, Chris Ward, Senior Director of Investor Relations. Please go ahead. Thank you, Justin.
Overall, excluding feral link capital sales for the quarter were down low double digits due to cost of capital.
Chris Ward: Good morning, and thank you for joining the Integra Life Sciences 3rd quarter, 2023 Earnings Conference Call.
To date, our capital sales, excluding thorough link monitors are up mid single digits and we remain encouraged by the continued momentum in the market for capital and the demand funnel for our capital portfolio.
Chris Ward: Joining me on the call are Jan Witte, President and Chief Executive Officer, and Begin Night Chief Financial Officer. This morning we issued a press release announcing our 3rd quarter, 2023 Financial Results. The release and corresponding earnings presentation, which we will reference during the call, are available in IntegraLife.com under the Investor Events and Presentations in a file named 3rd quarter, 2023 presentation. Before we begin, I would like to remind you that many of the statements made during this call may be considered for the statements.
Instruments grew approximately 5% benefiting from strong demand.
The performance of our instruments business continues to succeed long term growth expectations for the market with high single digit growth year to date as the market remains stable and the team continues to take market share and win new business.
Shifting to international sales grew low double digits in the quarter led by China indirect markets, Australia and Canada.
Chris Ward: Factors that could cause actual results to differ materially or discussed in the company's Exchange Act for the file of the SEC and in the release. Also, in our prepared remarks, we will reference reported and organic revenue growth and organic revenue growth excluding Boston. Organic revenue growth excludes the effects of foreign currency, acquisitions, the best teachers, as well as discontinued products. Organic revenue growth excluding Boston also excludes the revenues from products manufactured in our Boston facility in both periods.
Our growth in China is driven by our regional expansion strategy outlined at our Investor day with our team in China, delivering double digit growth with strong performance across the neuro portfolio as we grow beyond tier one cities.
Moving to our tissue technologies segment on slide eight.
Tissue technologies was down 15, 6% on a reported basis and 15, 1% on an organic basis compared to the prior year exclude.
Chris Ward: Managing believes that excluding revenues from all products manufactured at Boston Planet provides useful information when evaluating the company's organic growth because of the unusual nature of the manufacturing, stopping, and voluntary global income. Unless otherwise stated, all the segregated and franchise level revenue growth rates are based on organic influence. And lastly, in our comments today, we will include certain non-gap financial measures.
Excluding Boston organic growth was six 7%.
Third quarter sales in the wound reconstruction franchise, which includes a majority of the Boston products decreased by 15%.
Excluding the recalled products, we experienced organic growth of seven 5% driven by double digit growth in micro matrix Cytol Gen trucks, and our amniotic portfolio as our sales team refocused their selling efforts this quarter following the recall related activities in the second quarter.
Chris Ward: Reconciliation of any non-gap financial measures can be found and today's press release, which is an exhibit to integrity's current report on form 8K filed today with the SEC.
Unknown Executive: With that, I will now throw the call already on.
We are pleased to see such strong demand and commercial execution in this franchise, which continue to provide us with confidence in the long term growth potential of this business.
Jan Witte: Thank you, Chris, and good morning, everyone. Going to begin our remarks today with an update on our progress on the quality system remediation at our Boston Manufacturing Facility. And now, we turn to market plans for searchman from metrics and our private labor code. We recognize this remains top of mind for investors and analysts as it is for me and our leadership team.
And our private label franchise sales declined 14% versus last year due to lost sales from private label partners associated with the recall.
And finally international sales and tissue technologies were down double digits, due to Boston, which offset double digit growth in integra skin.
Jan Witte: So before going into the broader business updates, let's turn to slide 4. As a reminder, during our last call, we told you we expected to resume manufacturing by the end of the fourth quarter this year. We also highlighted that a final external audit of the updated quality system would be conducted in the first quarter 2024, with results submitted to the FDA by the end of March 2024. It will then pave the way for the resumption of commercial distribution in the mid to late second quarter of 2024.
Micro matrix insightful.
Turning to slide nine I will now review the rest of our third quarter P&L metrics.
As we look at our gross margin and profitability metrics, we continue to see Boston as the primary headwind to our gross margins, representing an approximate 180 basis point impact with 60 basis points coming from the third quarter return provision adjustments and approximately 102.
20 basis points coming from the impact of the lost sales from the recall.
Jan Witte: With the past four months, we have worked diligently on the remediation of our quality system and both consistent with the holistic plan we built in alignment with FDA expectations. We bolstered our Boston Operations Leadership, quality expertise, project management capabilities and capacity with internal resources, and we further engaged external subject matter experts as well. We recently completed several interim external reviews that confirm the adequacy of the changes we are making. So please to report that as a result of all this progress, we remain on schedule with the restart timelines we communicated the last quarter.
The remaining 30 basis point impact is due to production inefficiencies and other sites.
In addition to the impact to gross margins, our adjusted EBITDA margin and adjusted EPS also reflects planned investments in our strategic priorities for the business. We originally outlined in the beginning of the year, including the year one dilution from the <unk> acquisition.
On our second quarter call. We highlighted these investments as critical to our long term growth and we continue to protect them.
Finally, we saw an approximate 150 basis point benefit to our tax rate in the quarter from jurisdictional income mix and improved utilization of R&D and international credits.
Jan Witte: I also want to provide insight into a couple of critical milestones along the way. We have plans for an external review shortly after we restart the factory. This review will be in addition to an in preparation for the independent audit we intend to submit to the FDA before the end of March. These activities will then clear the way for us to build sufficient inventory ahead of our relaunch into the market. In the meantime, we have also been working closely with our customers to manage through the recall and have now substantially assessed and regal styles our customers inventory.
The third quarter tax rate also included a year to date truck.
We expect approximately 50 basis points of the benefit to carry forward beyond 2023.
If you turn to slide 10, I'll provide a brief update on our balance sheet capital structure and cash flow.
During the quarter operating cash flow was $27 million and free cash flow was $14 million, reflecting increased working capital primarily from investments in inventory build.
Jan Witte: Our tissue technology sales team is also working closely with our customers to facilitate product substitutions in about 10 to 15 percent of cases on track with our expectations. And finally, our manufacturing and clinical progress keeps us in line for PMA approval for searchments in the first half of 2025.
Our investment in inventory has to rebuild our safety stock levels and increase inventory for our European markets in preparation for a U M D. R.
Free cash flow conversion was 43% on a trailing 12 month basis.
Our balance sheet remains strong with ample liquidity support our short and long term plan.
As of September 30th net debt was $1 $2 billion and our consolidated total leverage ratio was three times.
Jan Witte: The right side of the slide shows the updated financial impact. The financial results for the third quarter bore the effect of $7 million of returns, which Lea will discuss in more detail. In addition to the last sales for the third quarter, we previously communicated. The additional returns impacts albeit isolated to the third quarter only has impacted our revenues by $7 million, adjusted to those margin by 60 basis points, and adjusted earnings per share by seven cents.
The company had total liquidity of $1 $5 billion, including $274 million in cash and the remainder available under our revolving credit facility.
Our balance sheet flexibility has enabled us to execute the accelerated share repurchase we announced on our July earnings call.
If you turn to slide 11, I'll provide an update to our consolidated revenue and adjusted earnings per share guidance for the fourth quarter and full year 2023.
Fourth quarter revenues are forecasted to be between $397 million to $403 million.
Jan Witte: In summary, we're making significant headway toward completing the necessary remediation requirements in Boston to bring these critical technologies back to the market for our customers and their patients. And we are on track with our communicated timelines.
Resenting reported growth in the range of approximately minus 4% to positive one 1%.
And organic growth in the range of approximately minus <unk>, 8% positive <unk>, 7%.
Jan Witte: With that, let's move to slide five for some overall third quarter business silence. And starting on the right side of this page, our third quarter revenues were $382.4 million and decreased by 0.4 percent on an organic basis. These results reflect the Boston impact, including the $7 million return reserve increase, which offset otherwise strong organic growth performance. Our top line performance was below our guidance for the quarter. And I realize this will be frustrating for our investors, but we are making things right with our customers and we're taking the necessary steps to get through this period as quickly as possible to position our business for long-term sustainable growth, again.
Our reported revenues reflect the strengthening U S dollar.
Excluding Boston, we are forecasting organic growth of approximately five 1% at the midpoint driven by continued strong global demand for our products.
For the full year 2023 revenues are forecasted to be in the range of 1541 to 154 7 billion.
Which reflects the third quarter additional Boston recall returns provision and current FX rates.
The updated guidance represents reported growth of minus one 1% to minus <unk>, 7% and organic growth in the range of approximately positive 1% to 5%.
Excluding Boston, we are forecasting organic growth of approximately 6%, reflecting the stable growth in our markets and strong global demand and performance we have demonstrated year to date.
Jan Witte: Our end mark is for both CSS and tissue technologies remain strong and continue to grow in line with the expectations we outlined during our May investor day. In the third quarter, we saw strong demand for our unique technologies across the portfolio, excluding the Boston impact we delivered organic growth of 7.1% at the high end of our LRP range. In our CSS business, we saw organic growth of 7.4% above our LRP range for this segment. In our tissue technologies business, we delivered organic growth of 6.7% excluding the Boston impact. In our international growth was strong once again at nearly 12%.
Turning to adjusted earnings guidance for the fourth quarter, we expect adjusted EPS to be in the range of 89 to 93.
Down from the prior year, driven by the Boston recall, our planned strategic investments Opex management to offset part of the impact of the recall.
And our tax rate improvements.
During our July earnings call, we estimated a modest improvement in gross margin for the full year.
We saw an impact to our gross margins in the third quarter due to the increased Boston recall returns and unfavorable sales mix driven by stronger international performance.
Jan Witte: Now turning to our bottom line. Our third quarter adjusted earnings per share came in at 76 cents within our July gallon swing. This result included the approximate 7.5% headwind from the increase in the Boston recall return provision. As we look beyond our third quarter revenue results and back to the left side of the page, we continue to deliver several proof points along our path to the growth commitments we laid out during our investment day.
We're also seeing a slower uptake on net productivity and yield improvements.
Now expecting moderate decline in gross margins versus 2022.
Our full year adjusted EPS guidance is being revised to $3 10 to $3 14 per share, reflecting the strength in the U S. Dollar Boston recall returns provision adjusted gross margin outlook second half expense management, our recently completed the ASR and the tag.
Jan Witte: First, on innovating for outcomes, we're invited about return to market of the satellite monitors for our customers and their patients. We relaunched in our first international markets and will be broadening our reentry in the fourth quarter. We also filed the updates 510K in the US in mid-September with an expected launch for the bulletin US in the first quarter early in the first quarter of 2024. In addition to settling, we also submitted 510K for the next generation Aurora surgescope, which brings enhanced usability to the age millimeter surgescope based on customer learnings from our initial limited releases.
Favorability.
Now I will turn the call back over to Jan.
Thank you Leah.
Please turn to slide 13 to conclude our prepared remarks.
And as we wrap up I'd like to cover a few highlights from what Lee and I walked you through.
First our progress in addressing the Boston facility on returning to the market remains on track.
Interim external reviews confirmed the adequacy of our remediation plan and the changes made so far.
And that reflects significant steps towards the resumption of manufacturing by the end of the fourth quarter to 93 and commercial distribution in mid to late second quarter 'twenty four.
Jan Witte: Second, we advanced our international growth strategy with further geographic expansions, expansions of our coosa platform, and registrations of duragen, the received mayfields and our dual lighting system in EMEA and Latin America, as well as the launch of duragen plus in China. Though each project alone won't be material to our overall revenue growth collectively, they showcase our strategy to bring our existing technologies to international markets and leverage our commercial footprint. We also made a significant step forward with our in-China for China strategy by starting the buildouts of a least manufacturing facility near Shanghai.
Product substitutions are within the expected range of 10% to 15% highlighting the breadth and depth of our tissue technologies portfolio.
And we remain on target for surgeons PMA approval in the first half 'twenty five.
Second.
Despite the Boston recalls impact and the additional returns provision our underlying third quarter growth performance has been strong.
Our global CSS and tissue technologies segments, excluding Boston.
Well, if it's over 7% organic growth.
Many of our product clients exhibited double digit growth underscoring the appeal of our diversified portfolio and the health of our markets.
Jan Witte: And then third, on an inorganic opportunities and broadening our impacts on care pathways, we're delivering on the successful integration of the SEA business with greater than 100% revenue growth year-to-date and advancement of our clinical program for a second PMA approval in the high growth breast little section market. We have also expanded our UBM platform with a 510k clearance for micrometrics flex, bringing the first organic NPI to the ASL UBM portfolio.
Additionally, our entire international business has delivered strong growth again.
And finally related to a long range commitments.
We've taken a big step, bringing settling back in our international markets and with our regulatory filings. So link should be back in the U S. Early first quarter.
Recall cigar growth drivers with a five K submission for the next generation Aurora Suzhou scope.
We're continuing progress on our breast reconstruction PMA.
We're also continuing to expand our international presence and portfolio and we are investing to capture future international potential.
Jan Witte: We have also strengthened our executive leadership by appointing the central venue as chief human resources. Schottow brings a rich experience in driving cultures of talent enrichment, leadership development, and accountability.
In conclusion, our journey has been marked by both significant achievements and significant challenges.
The originations and improvements, we're bringing to integra are making us stronger.
Jan Witte: And finally, sustainability remains an integral part of how we do business. Effective ESG management enables us to produce live-saving products, reduce business risks, minimize our environmental impact and drive strong financial results. As part of our continued commitment to transparency and accountability, we issued our second annual ESG report for 2022. This report details the progress we have made, particularly in our commitments to our customers and patients, building a more rewarding diverse and inclusive workforce, and improving our environmental sustainability. And it also lays out our plans for the coming year.
Our de risking the path toward L RFP and will enable us to consistently deliver our financial commitments.
As an organization, we remain dedicated to our purpose of advancing healthcare to restore patients lives.
I would like to thank our dedicated teams for their unwavering support and hard work.
Together, we are shaping our future and which we continue to make a meaningful impact on patients.
And deliver lasting value to our shareholders.
Thank you for your time. This morning. This concludes our prepared remarks.
Operator, we can open the lines for questions. Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby we compile the Q&A roster and we ask that you limit yourself to one question and one follow up again, that's one question.
Lea Knight: I will now turn it to Lea for updates on our financial results and full year science. Thank you, Jan. Now onto our third quarter of financial results, and I'll begin on slide six. Our third quarter total revenues were approximately $382 million, representing a decrease of 0.7% on a reported basis and a decrease of 0.4% on an organic basis. As Jan mentioned, the increase of the Boston Returns Revision was a headwind to our third quarter results, impacting our revenues and our grant organic growth and driving declines in our gross margins, adjusted EBITDA margins, and adjusted EPS.
And one follow up and one moment for our first question.
Yeah.
And our first question comes from Matt Taylor from Jefferies. Your line is now open.
Alright, great. Thanks, so much for taking our questions.
Is actually young in for Matt.
I guess, maybe to start system, Boston I mean, it seemed like it had a bigger impact than expected good to hear the substitution rates are in line, but maybe if you can provide a little bit more color on.
Lea Knight: In the second quarter, we estimated the returns provision based on the best available information we had at that time. However, during the third quarter, while working closely with our customers to assess and reconcile their returnable inventory, we recognized the need to make an adjustment to our returns provision. We believe we have adequately provided for any remaining returns. While Boston remains a significant headwind, there is much more to our results for the quarter.
Why the $7 million increase in return provisions.
And as Youre going for Boston impact assumptions right sized maybe.
Maybe you can also talk a little bit about customer attrition and.
However, you can regain their business posted remediation.
Yeah. So why don't I talk about kind of the impact that we saw in Q3, and then Jan and can turn it over to you for any sort of customer dynamics.
Lea Knight: We continue to see solid performance across our business outside of Boston with organic growth of 7.1%, once again demonstrating the breadth and resilience of our portfolio. Adjust the gross margin for the quarter was 64.6%, down 210 basis points versus the third quarter of 2022, primarily driven by the Boston impact. Adjust the EBITDA margin for the quarter was 23%, down 430 basis points, and adjusted earnings per share were 76 cents, down 10 cents compared to the prior year. Gross margin pressures larger driven by Boston are planned growth investments, and the year-one dilution from the SEA acquisition impacted are adjust EBITDA and EPS metrics.
For the question so as we mentioned when we announced the recall and then in our Q2 call. We were about call. It 45 days post the recall so at that point, while we had obviously already done some initial work working with customers, we had limited visibility to all.
The inventory that was out there and potentially returnable. So based on the information we had at that time, we projected what the appropriate provision would be for returns.
Since that time as you can imagine we've had an opportunity to now work with substantially all of our customers and get more even more insight and visibility into their inventory to be able to more accurately assess what's returnable and so that's the incremental $7 million.
Lea Knight: If you turn to side 7, I will go deeper into the third quarter revenue performance of our CFS segment. Reported third quarter revenues in CFS were 268 million dollars, an increase of 7.4% on a reported and organic basis from the prior year. Overall, the CFS segment delivered quarterly results exceeding the growth range outlined during our investor day. Global neurosurgery sales were up 8% with low-double-digit growth in CSF management driven by service plus valves, low-double-digit growth in neuro-monitoring driven by ICP micro sensors, and high single-digit growth in dual-accessive repair driven by duragen, duracyl and mafiel.
That you saw impact our Q3 results.
And so we're confident based on the work that we've done that and the visibility that we now have that we've accurately captured that and provide it for it in our reserve as of the end of September. So what that means is as we move forward, we wouldn't expect to see any impact from a P&L.
<unk> for any future returns because it's been provided for us as part of our reserves.
And that's the only incremental Boston impact we saw for Q3.
Lea Knight: We saw a mid-single-digit decline in advanced energy due to the timing of CUSA capital orders, offsetting some favorable timing benefits in the second quarter. Overall, excluding Cerelink, capital sales for the quarter were down low double digits due to CUSA capital. Year-to-date, our capital sales excluding Cerelink monitors are up mid-single digits, and we remain encouraged by the continued momentum in the market for capital and the demand funnel for our capital portfolio. Instruments grew approximately 5% benefiting from strong demand.
So as you think about the full year dynamic for 2023, we had originally called out of Boston impacted about $60 million topline.
That number is now $67 million top line.
We had called out an EPS impact of <unk> 35 cents.
That number is now 42 cents.
But it is isolated to 2023 and our July call. We had mentioned that you called out Bobby do not provide guidance on 2024, we did articulate our expectations of the Boston impact on 2024 and at that time, we had communicated an impact of $50 million.
Lea Knight: The performance of our instrument's business continues to exceed long-term growth expectations for the market with high single-digit growth year-to-date as the market remains stable and the team continues to take market share and win new business. Shifting to international, sales grew low double digits in the quarter led by China and direct markets Australia and Canada. Our growth in China is driven by our regional expansion strategy outlined at our investor day with our team in China delivering double-digit growth with strong performance across the normal portfolio as we grow beyond Tier 1 cities.
Top line and 30 cents to EPS that projection remains unchanged as I mentioned the nature of what happened in Q3 really was isolated to returns.
Returns and does not have an impact on what we called in 2024, So hopefully that answers your question.
Yeah, that's very clear I appreciate the color there.
I guess maybe.
Yes, Matt.
But you had your second question, Okay, if I answered that one.
Lea Knight: Moving to our tissue technology segment on flight aid, tissue technologies live down 15.6% on a reported basis and 15.1% on an organic basis compared to the prior year, excluding Boston organic growth was 6.7%. Third quarter sales in the Wound Reconstruction franchise, which includes a majority of the Boston products decreased by 15%. Excluding the recalled products, we experienced organic growth of 7.5% driven by double-digit growth and micrometrics, cytol, generics and our amniotic portfolio as our sales team refocus their selling efforts this quarter following recall related activities in the second quarter.
Yes.
So thanks for that so for the follow up question.
I guess was wondering.
In terms of share loss, how much do you expect to recapture.
Following the relaunch in mid 'twenty four and.
How are the impacted reps doing during this time, if you can comment about what they're focused on what they're doing.
Okay.
So.
Let me.
<unk> spreads all linked to how our reprocessing for commercial return first.
The salesforce the reps.
A lot of attention.
From a perspective of communication, but also compensation.
Lea Knight: We are pleased to see such strong demand and commercial execution in this franchise, which continue to provide us with confidence in the long-term growth potential of this business. In our private label franchise, sales declined 14% versus last year due to lost sales from private label partners associated with the recall. And finally, international sales and tissue technologies were down double-digits due to Boston, which offset double-digit growth and impact risk in micrometrics and cytol.
Planning with them.
Stay close to them keeping closely informed.
We have some higher.
And then.
Normal.
But well in control I would say.
Second that Salesforce remains in touch with our customers and Thats, where the substitution is important both in the wound reconstruction as well as in the surgical reconstruction, we have substitute products, which allows our sales force to be in the door via the procedures.
Lea Knight: Turning to slide 9, I will now review the rest of our third quarter P&L metric. As we look at our growth margin and profitability metrics, we continue to see Boston as the primary headwind to our growth margins representing an approximate 180 basis point impact with 60 basis points coming from the third quarter return provision adjustment and approximately 120 basis points coming from the impact of the lost sales from the recall. The remaining 30 basis point impact is due to production and efficiencies in other sites.
And work with customers to maintain.
<unk> maintained the relationships.
As we indicated and between 10% to 15% of the procedures you have half of substitutes.
And then third from a.
Relaunched perspective.
Our sales teams and sales leadership.
The estimate that.
We won't be back to about 100%.
Our business in about 12 months after the allowance and Thats really driven by two elements one the strength of the relationship and then second the merits of the products that come out of our Boston facility. These were projects that were getting.
Lea Knight: In addition to the impact to growth margins, our adjusted EBITDA margins and adjusted EPS also reflect planned investments and the strategic priorities for the business we originally outlined in the beginning of the year, including the year one dilution from the SEA acquisition. On our second quarter call, we highlighted these investments as critical to our long-term growth and we continue to protect them. Finally, we saw an approximate 150 basis point benefit to our tax rate in the quarter from jurisdictional income mix and improved utilization of R&D and international credits. The third quarter tax rate also included a year-to-date true. We expect approximately 50 basis points of the benefit to carry forward beyond 2023.
Getting market share before we did the recall.
All for good reasons, and those reasons will be still there and read rebounds.
Poets.
Alright, thank you so much.
And thank you.
And one moment for our next question.
And our next question comes from <unk> Chopra from Wells Fargo. Your line is now open.
Hey, good morning, and thanks, so much for taking the questions two for me I'll start with the first one.
We've heard about increased anti corruption issues in China that could make access to hospitals more difficult, maybe just remind us what percentage of sales are in China and what impact. This could have on Integra and then I just had a follow up.
Lea Knight: If you turn to side 10, I will provide a brief update on our balance sheet, capital structure and cash flow. During the quarter operating cash flow was $27 million and free cash flow was $14 million reflecting increased working capital primarily from investments in inventory bills. Our investment inventory is to rebuild our safety stock levels and increase inventory for our European markets and preparation for EMDR. Free cash flow conversion was 43% on a trailing 12 month basis.
Okay. So.
I'll take that.
Our China sales about five 6%.
Of our total.
Specifically to your question on the Anticorruption I think like many med tech companies that.
We've seen confusion in some freezing of some commercial and professional education activities in the first week and specifically in the month of August we see that improve.
Lea Knight: Our balance sheet remains strong, with ample liquidity support our short and long-term plans. As of September 30, net debt was $1.2 billion and our consolidated total leverage ratio was three times. The company had total liquidity of $1.5 billion including 274 million in cash and the remainder available under a revolving credit facility. Our balance sheet flexibility has enabled us to execute the accelerated share repurchase we announced on our July earnings call.
Over September and then continued to significantly improve over October when do we look.
That's our.
At our impact on the business.
It's not material.
And that is linked to our portfolio, we have in China that 5%, 6% of total is essentially neurosurgery.
Portfolio a lot of consumables.
Lea Knight: If you turn to side 11, I will provide an update to our consolidated revenue and adjusted earnings per share guidance for the fourth quarter in full year 2023. Fourth quarter revenues are forecasted to be between $397 to $403 million, representing reported growth in the range of approximately minus 0.4% to positive 1.1%. And organic growth in the range of approximately minus 0.8% to positive 0.7%. Our reported revenues reflect the strengthening US dollar.
And therefore linked with procedure.
Yep.
Surgery procedures are cannot be delayed.
Four significant times, we've seen that also during COVID-19.
And in addition, the procedures themselves delete themselves too much judgments or over use case, so the tightening of some controls it doesn't translate into tightening.
Goes on with neuro procedures.
And in addition, we have.
<unk> internal controls and policies in place so from a how we operate there is no need or no change that we're using in our process. So that overall that we've seen some of the ways in August.
Lea Knight: Excluding Boston, we are forecasting organic growth of approximately 5.1% at the midpoint driven by continued strong global demand for our products. For the full year 2023, revenues are forecasted to be in the range of 1.541 to 1.547 billion dollars, which reflects the third quarter additional Boston recall returns provisions and current effects rates. The updated guidance represents reported growth of minus 1.1% to minus 0.7%, and organic growth in the range of approximately positive 0.1% to 0.5%. Excluding Boston, we are forecasting organic growth of approximately 6% reflecting the stable growth in our markets and strong global demand and performance we have demonstrated year to date.
As you see in our third quarter numbers and what we expect is that no material impact on our business.
Great. Thank you for that color within my follow up question.
Pretty topical I guess your thoughts on DLP one.
Maybe just any thoughts on what you have.
<unk>, one near term and long term kind of what it means for integra.
I, just don't think that the impact of that clear for integra as for some other companies. Thanks, so much for taking the questions.
Yep.
So Jill P. One we have not seen or we don't foresee any material.
Impact that's also what we do.
Lea Knight: Turning to adjusted earnings guidance for the fourth quarter, we expected just the EPS to be in the range of 89 to 93 cents, down from the prior year driven by the Boston recall, our plans for strategic investments, optics management to offset part of the impact of the recall, and our tax rate improvements. During our July earnings call, we estimated a modest improvement in gross margin for the full year. We saw an impact to our gross margins in the third quarter due to the increased Boston Recall returns and unfavorable sales mix driven by stronger international performance. We are also seeing a slower uptake on that productivity and yield improvement. We now expect a moderate decline in gross margins versus 2022.
Hear back from interactions with our customers.
If you look at our business and our <unk> growth drivers.
And then the link.
<unk> won it.
Very limited right if you look at <unk>.
The oral surgery, it's difficult to argue argue that the incident rates of traumatic brain injuries to more worse.
<unk> would be impacted by decline.
And the prevalence of diabetes or obesity and I would say the same for tissue technologies. The vast majority of our sales.
Our India acute settings and for non diabetic foot ulcer linked wound care. So again he is difficult to see the link.
Between incidents Rachel Burns traumatic wounds and breast reconstruction <unk>.
Lea Knight: Our full year adjusted SEPF guidance is being revised to $3.10 to $3.14 per share, reflecting the strengths in the US dollar, Boston Recall returns provision, adjusted gross margin outlook, second half expense management, are recently completed ASR and the tax favorability.
Indeed, the impact of the G. L. P. One so as I said, we have not seen and we don't foresee any material impact.
Yeah.
And thank you.
Okay.
And one moment for our next question.
Jan Witte: Now I will turn the call back over to Jan. Thank you, Lea.
And our next question comes from Robbie Marcus from JP Morgan. Your line is now open.
Jan Witte: Please turn to slide 13 to conclude our prepared remarks. And as you wrap up, I'd like to cover a few highlights from Lea and I. Walks you through. First, our progress in addressing the Boston facility and returning to the market remains on track. Interim external reviews confirm the adequacy of our remediation plan and the changes made so far. And they reflect significant steps made towards the resumption of manufacturing by the end of the fourth quarter, 23, and commercial distribution in mid to late second quarter, 24.
Oh great.
Morning, Thanks for taking the questions.
I wanted to start with.
'twenty 'twenty four and how we should think about the recovery of the lost sales from the Boston products and one clarification is the 50 million dollar headwind Aqua.
Reported 23 or ask.
You know what you would have done without the recall.
And how do we think about lost sales and the recovery there.
It would have been off the market for a long time. This is a highly competitive market factors will likely have moved on and tried other devices. How do we think about the ability to regain share is at 25 50, 75% of the lost sales and how long do you think that'll take.
Jan Witte: Probe executions are within the expected range of 10 to 15% highlighting the breadth and depth of our tissue technologies before. And will remain on target for judgments, PMA approval in the first half, 25. Second, despite the Boston Recall's impacts and the additional returns provision, our underlying third quarter growth performance has been strong. Our global CSS and tissue technology segments, excluding Boston, delivered over 7% organic growth. Many of our product lines exhibit double digit growth, underscoring the appeal of our diversified portfolio and the health of our markets.
So Ravi I'll start with just framing kind of what the $50 million relates to and so really just to ground. You. If you take a look at our the guidance that we provided going back to April fell on a full year basis.
But we thought that.
The business is going to be you apply the growth factor that we assumed as part of our Investor day in terms of how we projected the business to grow.
Jan Witte: Additionally, our intern international business has delivered strong growth again. And finally, related to our long range commitments, we've taken a big step bringing settling back in our international markets and with the regulatory filing selling should be back in US early first quarter. We're advancing our growth drivers with a 15 case of mission for the next generation or all of us to scope. And we continue in progress on our breast reconstruction, PMAs. We're also continuing to expand our international presence and portfolio and we're investing to capture future international potential.
The $50 million is off of that.
So that's that's how to think about the.
The impact that we can to rise from Boston in 2024.
And then I'll, let Jan maybe some of the questions around <unk>.
Any of that into the market.
Okay.
So Ravi as I also touched upon I think matts question.
If you look to our.
Boston portfolio portfolio, we're building share.
Jan Witte: In conclusion, our journey has been marked by both significant achievements and significant challenges. The radiations and improvements we're bringing to Integra are making us stronger and are de-risking the path to our LRP and will enable us to consistently deliver our financial commitments. As an organization, we remain dedicated to our purpose of advancing healthcare to restore nation's lives and would like to thank our dedicated teams for their unwavering support and hard work. Together, we're shaping a future in which we continue to make a meaningful impact on patients and deliver lasting value to our shareholders.
And so getting back in the market as first getting back to where we were and then getting beyond that in terms of.
Getting back to where we were.
Say mid 2023, that's where our sales force.
Is planning in and assuming it will take them one year to get back to where we were and then continue to build that share beyond as I indicated based on the merits.
Those exceptional products that we're making.
Sure.
Great and then if I could just squeeze one more in as you think about your forecasting your modeling it looks like.
Is there a link is moving back a little bit in the U S. How conservative should we think about that $50 million is that something that may move around up or down as we move through next year or is that a number you think will will not move any lower thanks.
Unknown Executive: We ask that you limit yourself to one question and one follow-up. Again, that's one question and one follow-up and one moment for our first question.
Thanks, a lot.
Okay.
With that so this is Jay.
Asking about Sterling. So sterling we are anticipating an early Q1 launch I think.
What we've said in the in the past in terms of as you think about the size of that business and then once we've relaunched in all markets.
Matthew Taylor: And our first question comes from Matt Taylor from Jeffries. Your line is now open. All right, great. Thanks so much for taking our questions. This is actually young and from Matt. I guess maybe to start, just on Boston, I mean, it seemed like it had a bigger impact than expected. You know, good to hear the substitution rates are in line, but maybe if you can provide a little bit more color on, you know, why the 7 million increase in return provisions. And, you know, as you're going forward, Boston impact assumptions, right size. Maybe you can also talk a little bit about customer attrition and, you know, how you can regain their business post-immediation.
For monitors, we'd expect that business to be kind of back at the run rates. We saw previously which is about $12 million.
Annually. So that's thorough link the 50 million impact that I characterized earlier to your first question was specific to kind of Boston based product portfolio and the impact to that portfolio as a result of coming back into commercial distribution in the mid to late Q2 timeframe.
So that would be kind of independent of Centurylink, So I'm not sure if I missed part of your question there.
No.
Okay. Thanks, a lot.
Jan Witte: Yeah, so why don't I talk about kind of the impact that we saw in Q3, Lea Knight, Conternative, Q for any sort of customer dynamics. And thank you for the question. So as we mentioned, so when we announced the recall and then in our Q2 call, we were about, call it 45 days post the recall. So at that point, while we had obviously already done some initial work working with customers, we had limited visibility to all of the inventory that was out there potentially returnable.
And thank you.
Yeah.
Okay.
And one moment for our next question.
And our next question comes from Ryan Zimmerman from <unk>. Your line is now open.
Good morning, Thanks for taking the questions I wanted to ask about the tissue technologies business for a moment if I could.
You guys did six 7% organic growth ex Boston.
I am not mistaken, though you estimate the markets are growing at 7% to 9%.
Jan Witte: So based on the information we had at that time, we projected what the appropriate provision would be for returns. Since that time, as you can imagine, we've had an opportunity to now work with substantially all of our customers and get even more insight and visibility into their inventory to be able to more accurately assess what's returnable. And so that's the incremental $7 million that you saw impact our Q3 results. And so we're confident based on the work that we've done and the visibility that we now have, that we've accurately captured that and provided for it in our reserve as of the end of September.
From the analyst day, and so help me understand I mean, even if we remove Boston is the market getting worse in the third quarter.
That spillover from Boston, and just how you're thinking about your growth in tissue ex Boston relative to the market.
Yeah. So maybe I'll start and then we can have on Jan chime in so and thank you for the question of mine. So again, if you think about from a tissue Tech perspective, we saw in Q2.
Boston, we saw that business grow at about three 8%.
And we knew at that time that we had even though we had that's the X.
Jan Witte: So what that means is as we move forward, we wouldn't expect to see any impact from a P&L perspective for any future returns because it's been provided for us as part of our reserve. And that's the only incremental Boston impact we saw for Q3. So as you think about the full year dynamic for 2023, we had originally caught out a Boston impact of about $60 million top line, and that number is now $67 million top line.
Boston portfolio, there was some distraction in the sales force as they were.
Part of the efforts to.
Manage the recall and we had anticipated that that that growth would accelerate into Q3 as we started to reposition the sales team.
Is exactly what we saw happen right so that growth accelerated from three 8% what we we talked about which is the six 7% to your point, it's not quite at the LR P kind of rate, but I think a lot of that has to do with the fact that again for Q3, we were still in the process of repositioning developing our substitute.
Jan Witte: We had called out an EPS impact of $0.35. That number is now $0.42, but it is isolated to 2023. In our July call, we had mentioned that we had called out Moby, did not provide guidance on 2024. We did articulate our expectations of the Boston impact on 2024. And at that time, we had communicated an impact of $50 million top line and 30 cents to EPS. That projection remains unchanged. As I mentioned, the nature of what happened in Q3 really was isolated to returns and does not have an impact on what we called in 2024. So hopefully that answers your question.
<unk> strategy executing on that and so I don't know that we're necessarily hitting on all cylinders from the absolute beginning of the quarter to the end, but I think the clear momentum pick up that we saw in Q3 versus Q2 illustrates what we have the potential that this business has in terms of what we can drive and deliver it.
Growth.
And as we look out to Q4, we would expect that to continue such that on a full year basis, we would expect again ex Boston to be in that kind of 7% to 9% range that we communicated at Investor day.
And I know there was a second part of your question I don't know if I answered that fully Brian well well that got me, yes. Thanks Lou.
Matthew Taylor: Yeah, that's a very clear, appreciate the color of you. I guess maybe, Matthew. You had your second question, okay, if I answered that one. Yep, so thanks for that. So for the follow-up question, I guess what was wondering in terms of share loss, how much do you expect to recapture following the relaunch in May 24? And, you know, how are the impacted reps doing this time if you can comment about what they're focused on, what they're doing?
It was just kind of how you're thinking about the growth and the impact as you Remediated in Boston, We all can see kind of what the growth is.
Ex Boston, but but what kind of spillover impact does that have any.
And the other businesses I mean, you would think.
I am sorry acquisitions growing 100%, so clearly, it's making up for some of the losses on Boston.
Can you grow at or above market rate ex Boston.
With everything going on there and that's that's kind of the point of that question.
Yeah, So sorry, if I may adopt the deeper right. So one seven.
Jan Witte: So, let me cut in three, three parts, right? All linked to how are we prepping for commercial returns? First, the sales force that the reps, a lot of attention, both from a perspective of communication, with also compensation planning with them. We stay close to them, keep them closely informed. We definitely have some higher attrition than rural, but well in control, I would say. Second, yeah, that sales force remains in touch with our customers, and that's where the substitution is important, both in the wounds, retal extraction as well as in the surgical retal extraction.
Seven to nine.
Definitely our breast strategy and therefore, most of it is a growth accretive dryer within the mix. So the come back next year further.
Put that portfolio into the right mix that Seth when we look at the rest of the portfolio.
Our ACL mitral matrix Gentex auto portfolio, I mean very strong.
<unk> double digit growth that we continue to deliver their demand for our integra skin.
A strong part of that is substitution yes.
From <unk> so.
Jan Witte: We have substitute products, which allows sales force to be in the door, be in the procedures, and work with customers to maintain relationships, and as we indicate in between 10 to 15% of the procedures, have substitutes. And then third, from a reliance perspective, our sales teams and sales leadership, they estimate that we will be back to about 100% of our business in about 12 months, yeah, off the belongs, and they're really driven by two elements, one, the strength of the relationship.
When you look at the portfolio and how it performed or third quarter.
<unk> dealt with that portfolio, we feel good with the markets.
Of course, we are missing at the Boston products like Lea SaaS July from a sales perspective they were.
It's still very much chasing what percentage of inventory.
And drive the recalls back from the field. Congrats as of August that came became a lot more back to work tomorrow.
Okay.
That's very helpful. And then the final question just just to be clear because I think there's some fears out there that this is a potential what if but if there is a government shutdown later this year does that impact the ability of the FDA to come into your facilities.
Jan Witte: And then second, the merits of the products that come out of our Boston facility, these were products that were getting market share, before we did the report, all for good reasons, and those reasons will be still there when we reach out.
So just to kind of be clear. It could you just very specifically walk us through kind of what's required to get the Boston facility.
Given the Green light.
It is normal to manufacture again.
It just external third party reviewers does the FDA need to come in.
Any point.
Unknown Executive: And one moment for our next question.
It would be helpful just to understand that more specifically.
Sure. So the shorts Ryan is that the FDA does not have to comment.
Vik Chopra: And our next question comes from Vik Chopra, from Wells Fargo.
So D. The requirements from the FDA is that.
Vik Chopra: Your line is not open. Hey, good morning and thanks so much for taking the questions. Two for me, I'll start with the first one. So, you know, we've heard about increased anti-corruption issues in China that could make access to hospitals more difficult. Maybe just remind us what percent of your sales are from China and what impact this could have on Integra, and then I just had to follow up.
When we decide that we're substantially complete with the remediation.
We bring in an external auditor.
Sure that name of the company with the FDA has approved to that so.
They will come in.
Do the audits, we assume that given all the preparation we've done that with this will be a satisfactory audits.
Jan Witte: Okay, so I'll take that, Vik. Our China sales about five, six percent of our totals, specifically to your question on the anti-corruption. I think like many, many companies that we've seen confusion and some freezing of some commercial and professional education activities in the first week, specifically in the month of August, we've seen it in September and then continue to significantly improve over October. When we look at our impact on the business, it's not material.
We decided on our own terms to restart the factory. The only thing that you have today. Once is that we spent our share. That's all these reports with the FDA.
Okay, but.
There is no goal or check.
By the FDA before we start the factory or start shipping against certain.
Very helpful. Thank you.
And then just Ryan if I could.
I'm sorry, one other clarification or just a final point on that so that's with respect to Boston. The one other thing is with respect to our fighting K submission for clarity for in the U S for sterile link because that submission occurred prior.
Jan Witte: And that's linked to our portfolio we have in China, that five, six percent of total is essentially neurosurgery. A portfolio, a lot of consumables and therefore linked with procedures. Now, you know, neurosurgery procedures cannot be delayed for significant times. We've seen it also during COVID. And in addition, the procedures themselves don't lead themselves to much judgments or overuse. So the tightening of some controls doesn't translate into tightening what goes on with neuro procedures. And in addition, we have strong internal controls and policies in place. So from a how we operate, there's no need or no change that we're using in our process.
Two any official government shutdown, our understanding is that timeline will remain unpack. It so that we won't see an impact from that either if we had submitted post the government shut down then we would be at risk, but our understanding is at this point.
Our timeline for that is still tracking to what we communicated.
Thank you Ed.
And thank you.
And one moment for our next question.
And our next question comes from Craig Bijou from Bank of America Securities. Your line is now open.
Good morning, everyone. Thanks for taking the questions.
To ask on serial link so you.
You started the relaunch in.
I guess a couple of international markets. So maybe just talk a little bit about kind of the strategy.
Jan Witte: So overall, that we've seen some of the ways in August, but as you see in our third quarter numbers and what we expect is no material impacts on our business. Great. Thank you for that color.
When you get to the full international relaunch and then.
I know, it's been asked before but how to think about any contribution from from either the international launch or U S launch and how it could potentially ramp once.
Jan Witte: Then my color question. Pretty topical, I guess it's on GLB1. Maybe just any thoughts on what you have about GLB1 near term and long term, you know, kind of what it means for integral. I just don't think the impact is as clear or integral as for some other companies. Thanks so much for taking the questions.
Once it's fully launched.
Both here and outside the U S.
First on the year on the international outside Youre correct. So end of the third quarter September we launched.
Jan Witte: So GLB1, we have not seen and we don't foresee any material impacts. That's also what we hear back from interactions with our customers. If you look at our business and our LRP world drivers and then the link, with GLP1, it's very limited, right? If you look at neural surgeries, it's difficult to argue, argue that the incidence rates of traumatic brain injuries, two more other settlers would be impacted by decline in the prevalence of diabetes or obesity.
Several countries, Canada, South Africa, the Nordics countries deep.
The priority is very much determined by two factors.
John.
There is the timeline of.
The local regulators, which go from <unk> to the reasonably short.
And then secondary couple of basic logistics.
Our assumptions there.
In the month of October yet, we're relaunching several other.
In the countries Southern Europe.
Jan Witte: And I would say the same for tissue technologies, the vast majority of our sales are in the acute settings and for non-liobatic foot ulcer linked wounds. So again, here difficult to see the link between incidence rates of burns, traumatic wounds and breast reconstruction, and the impact of GLP1.
But of Eastern Europe U K is going on Switzerland is going up and so every months yet over the next two to three months, we were bringing on more countries in Europe.
And that brings us to January one.
We.
Should start to be launched in the market.
Again on the question on ramp up.
Jan Witte: So as I said, we have not seen and we don't foresee any material impact. And thank you.
What we picture is a ramp up comparable to the first year. After severing launch in 2021 22 were in the first 12 months that we were 12 months of the markets.
Unknown Executive: And one moment for our next question.
Before the recalls that we.
We sold yet.
Robbie Marcus: And our next question comes from Robbie Marcus from JP Morgan, your line is now open. Great. Good morning. Thanks for taking the questions. I wanted to start with 2024 and how we should think about the recovery of the lost sales from the Boston products. And one clarification is the $50 million headwind off of the reported 23 or ex, you know, what you would have done without the recall. And how do we think about lost sales and the recovery there, you know, you'll, you'll have been off the market for a long time.
Almost 12 million, so roughly $1 billion of months and so we.
Yeah, we modeled.
And function of that ramp up in.
Robbie Marcus: The highly competitive market doctors will likely have moved on and tried other devices. How do we think about the ability to regain share is it 25, 50, 75% of the lost sales and how long you think that'll take?
In 'twenty, one 'twenty two.
Got it that's helpful and then on the on the Boston facility wanted to see.
I understand the process there, but wanted to see have you had any additional.
Our incremental conversations with the FDA on your plan.
And if not.
Do you plan to.
Recognizing that you guys have already been set.
We set out the plan with the with a third party, but just wanted to see if there was going to be any other additional conversations that you would expect with the FDA.
Yeah.
So the short answer is yes, right. So remember we in end of July got this warning letter.
Jan Witte: So Robbie, I'll start with just framing kind of what the 50 million relates to. And so really just to ground you, if you take a look at our, the guidance that we provided going back to April, so the full year basis. What we thought the business is going to be, you apply the growth factor that we assumed as part of our investor day in terms of how we projected the business to grow.
We responded to the warning letter within two weeks, which are planned to address those issues.
And the broader holistic plan.
You've got a confirmation from the FDA that they are aligned with this and this goes back to some of the dates that the FDA has.
Download Mike.
Jan Witte: So the 50 million is off of that. So that's, that's how to think about, you know, the impact that we can't have to rise from Boston in 2024. And then I'll let y'all maybe some of the questions around getting back into the market. Robbie, as I also touched when with I think Matt's question, if you look to our Boston portfolio, we were building share. And so getting back in the market is first getting back to where we were and then getting beyond that.
Do we that the external audit before March 31.
Next year.
Also had a.
Telephone call with the FDA to make sure that we have.
Charles.
Each other well plus we shared.
Some of the external companies were using and we will use for external audits. So we wanted to have done that's aligned with the FDA and which they are for your lines.
As of that point every two to three months we do.
Center updates to the FDA, so we keep them.
Informed.
But the major stages of progress.
And actions on the buses.
Yeah.
Jan Witte: In terms of getting back to where we were, say, mid 2023. That's where our sales force is planning in and assuming it will take them one year to get back to where we were and then continue to build that share beyond as indicated based on the merits. Yeah, all those exceptional components that we're making in that.
Great. Thanks.
And thank you.
And one moment for our next question.
And our next question comes from Richard <unk> from <unk> Securities. Your line is now open.
Hi, Thanks for taking my questions.
I was wondering if I could just ask on Thursday, and we're getting close to the FDA I think providing feedback on the clinical abandon that you had filed for that product.
Lea Knight: Great, and if I could just squeeze one more in, as you think about your forecasting, your modeling, it looks like Sarah Link is moving back a little bit in the US, you know, how conservative should we think about that 50 million, and is that something that may move around or down as we move through next year, or is that a number you think will not move any lower? Thanks a lot. You're asking about Sarah Link, so Sarah Link, we are anticipating an early Q1 launch.
Hum.
What can we expect to come out of that and was there anything in there that could potentially delay timelines for that.
Okay.
So expectations.
I think we communicated we submit it in July.
Doug.
And there are some further information that's being shared.
We expect early.
Early next year to get.
Feedback and the goal of that political part of the PMA.
Now let's.
Lea Knight: I think what we've said in the past, and as you think about the size of that business, kind of once we've relaunched in all markets, for monitors, we'd expect the business to be kind of back at the run rates we saw previously, which is about 12 million. Annually, so that's Sarah Link, the 50 million impact that I characterized earlier to your first question was specific to kind of Boston based product portfolio, and the impacts to that portfolio as a result of coming back into commercial distribution in the mid to late you to timeframe. So that would be kind of independent of Sarah Link, so I'm not sure if I missed part of your question in there. Now it's okay. Thanks a lot. And thank you.
I tried to explain last time is that the critical path for the PMA.
Because most of the pre market inspection of the Boston facility, which can only happen.
When the factory and the commercial is fully up and running and so we expect that.
Unknown Executive: And one moment for our next question.
The market's audits to happen either.
And <unk> of 2024 or early 2025.
Which leads us to PMA approval in the first half of 'twenty five.
Okay.
And then.
The second question.
Can you just bridges.
Between the gross margin from <unk> to <unk>, just one more time I just want to make sure I have all of the components right there.
To get there and then also any any comment on M&A just just.
Capital deployment given the.
Ryan Zimmerman: And our next question comes from Ryan Zimmerman from BTIG. Your line is now open. Good morning. Thanks for taking the questions.
The space and valuation compression over the last few months.
Yeah.
Yeah happy to take the question and so let me provide a couple a couple of data points.
Ryan Zimmerman: I want to talk about the tissue technologies business for a moment if I could. You guys did 6.7% organic growth X Boston. If I'm not mistaken, though, you estimate the markets are growing at 7 to 9% from the analyst day. And so help me understand, I mean, even if we remove Boston is the market getting worse in the third quarter, is that still over from Boston and just how you think about your growth in tissue X Boston relative to the market.
So as we looked at our gross margin was 64.6.
6% for the quarter. It was down about 250 basis points from kind of internally, where we had been tracking.
And that's made up of three three elements first the boss.
The impact on margins and that was about.
60 basis points, but then we also saw an acceleration of growth internationally that was higher than we had anticipated and that did have a negative margin impact coupled with some within the U S. Some product mix dynamics that also had a negative margin impact and that was about <unk> 90.
Jan Witte: Yeah, so maybe I'll start and then we can have a yon time time in so and thank you for the question of mine. So again, if you think about from a tissue tech perspective, we saw in Q2 X Boston, we saw that this is growing at about 3.8%. And we knew at that time that we had even though we had that's the X Boston portfolio, there was some distraction in the Salesforce as they were, you know, part of the efforts to manage the recall.
Basis points together and the remaining 100 basis points is driven by kind of the slower uptake unpredicted productivity improvements that we had anticipated so.
So that's that's the dynamic that played out in Q3 relative to what we were expecting as we move into Q4, we will see a couple of things one we won't have the bus return repeat rate so that 60 basis points comes back.
Jan Witte: And we had anticipated that that growth would accelerate into Q3 as we started to reposition the sales team, which is exactly what we saw happen. So that growth accelerated from 3.8% to what we talked about, which is the 6.7%. To your point, it's not quite at the LRP kind of rate, but I think a lot of that has to do with the fact that again for Q3, we were still in the process of repositioning, developing our substitution strategy executing on that.
We also would expect to see more normalized kind of a revenue mix grow.
<unk> dynamics between International U S and some of the product timing that gave rise to negative margin and dynamics should should alleviate so that should come back as well.
Likely won't come back in the Q4 timeframe is the.
Net improvement productivity.
Initiatives that we had outlined so that will likely to continue to be a gap and that's why we're now calling a moderate decline year on year.
Jan Witte: And so I don't know that we're necessarily hitting on all cylinders from the absolute beginning of the quarter to the end, but I think the clear momentum pickup that we saw in Q3 versus Q2 illustrates what we have the potential that this business has in terms of what we can drive and deliver in growth. And as we looked out to Q4, we would expect that to continue such that on a full year basis, we would expect again, X Boston to be in that kind of 7-9% range that we communicated at investor day.
Full year 'twenty three versus full year 'twenty two.
As I characterize kind of the nature of of that net productivity uptake or slower uptake a lot of it is we you know we've talked about we see opportunity to drive improvement in our gross margins. We've deployed teams to go after not only identifying initiatives but start.
To execute but we started to do it kind of in small pilot areas and what we've been able to confirm is that the value is there greatest value being in some of the <unk> sites that we have.
Jan Witte: And I know there was a second part of your question out, and if I answered that fully, Brian, you go back at me. Yeah, no thanks, Lynn. It was just kind of how you think about the growth and the impact, you know, as you're mediating Boston, we all can see kind of what the growth is, X Boston, but, you know, what kind of spillover impact does that have in the other businesses.
But the expertise needed to execute on those initiatives is the same expertise that we need to help support the Boston.
Start plan and so we were not able to deploy as many resources against that effort as we have anticipated and so that's that's what's causing the slower uptake versus what we had anticipated.
Jan Witte: I mean, you would think, you know, the SIA, SIA, the acquisition is growing 100%. So clearly, it's making up for some of the losses on Boston, but can you grow at or above market rate, X Boston, you know, with everything going on there. And that's, that that's kind of the point of that question. So sorry, I need to go deeper, Ryan. So one, when we said seven to nine, definitely, our rest strategy, and therefore, Boston, is a growth, a creative dryer within the next one.
I'll pause there on gross margins.
And I can go into M&A, if you if you want.
That was very helpful. Thank you.
Perhaps.
And rich on your M&A question.
I mean.
We will continue to be a priority for capital allocation as part of our long range planning, though at this point I would say even temporarily are tempering somewhat.
Specifically the tissue Tech, which I think is.
Quite obviously given that management.
Jan Witte: So the come back next year, we're further put that portfolio into the right mix. That said, when we look at the rest of the portfolio, our A cell, micrometrics, genetics, I tell you, I mean, very strong, strong double digit growth that we continue to deliver there, demand for antegroskin is strong part of that is substitution, yeah, from prime agents away. So we, when we look at the portfolio and how it performed with, you know, with that portfolio with good with the markets.
It's focused on getting Boston.
That said, we have our strategic game boards awesome.
Not fully control the timing.
So we are continuing to explore and then primarily on our CSS, our carbon and specialty.
Surgical site.
But I would say mid size towards tuck in deals that.
Meet our return.
On the investment requirements are strategically.
Yeah.
Switching to our business and also fit within all of our.
Financial discipline, which remains strong.
Jan Witte: Of course, we're missing the Boston projects. And like Leah said, July from a sales perspective, they were still very much chasing through the century and entry and drive the recalls back from the field. And that's as if August came in a lot more back to the moment.
Yes.
Okay.
Okay very helpful. Thank you.
And thank you.
And one moment for our next question.
And our next question comes from Steve Lichtman from Oppenheimer <unk> Company. Your line is now open.
Jan Witte: Okay, that's very helpful. And then the follow question just, just to be clear, because I think there's, you know, some fears out there that, and this is a potential. What if, but if there isn't government shutdown later this year, does that impact the ability of the FDA to come into your facilities. And so just to kind of be clear, can you just very specifically walk us through kind of what's required to get the Boston facility, given the green light to proceed as normal to manufacture again.
Thank you and good morning, everyone.
Wanted to follow up on gross margin.
Can you talk about some of the near term dynamics in and the efficiency opportunities you see I guess, you've certainly as.
Boston becomes less of a focus for the team, but can you give us your updated thoughts overall, where you see gross margin tracking over the next couple of years I mean update if you could on other drivers that you see.
Jan Witte: Do you, is it just external third party reviewers with the FDA need to come in at any point, it would be helpful to understand that more specifically. [inaudible] Okay, but there's no go or check on your FDA before we start to defect or start shipping again, sorry. Okay, very, very helpful, Jan, thank you. And thank you. And just Ryan, if I could, I'm sorry, one other clarification or just a final point on that.
For gross margin you know, particularly now with you having more time in D cfo's seat.
Yes, Steve happy to take the question.
So so bigger picture longer term, so and just to be clear, we're not providing an update on any L. R. P guidance at this point, but to your point I have taken additional time to drill into the opportunities that we have to improve gross margin.
I remain convinced that there is value there for us to create but it's a lot to unpack and so if you recall at Investor Day, We said, there's about a 300 to 300 to 500 basis point opportunity for improvement in gross margin over our L. P period, and it was coming from <unk>.
Primary places volume mix price was kind of one bucket that productivity yield initiatives that I referenced earlier was just kind of bucket two and then footprint optimization was a third bucket that we had articulated and I would tell you the volume mix price is totally embedded in how we are driving revenue and bringing MTI.
To market and so that still remains very valuable.
And as you saw based on our results in Q3 in terms of the business outside of outside of Boston that business is growing at our L. A P investor day levels and so as that continues to happen I think bring MTI to to market, we will realize that the gross margin improvements related to that.
Jan Witte: So that's the respect of Boston, the one other thing is with respect to our fighting in case the mission for clearance for in the US for Sarah Link, because that submission occurred prior to any official government shutdown, our understanding is that timeline will remain impacted so that we won't see an impact from that either. If we had submitted it post the government shutdown, then we would be at risk, but our understanding that this point, we are timeline for that is still tracking to what we communicated. Thank you, Liz.
The second piece that I articulated around productivity yield those are the areas, where it's a slower uptake, but the opportunity is still there we will need to redeploy resources or accelerate the deployment of resources against those efforts in order to extract it and so that's what we're looking at now to understand from a timing.
Unknown Executive: And thank you.
You know when that happens and the overall magnitude.
So that's how we're thinking about it right now and and you know more to come we will have an official update as he finished going through our <unk> process.
Craig Beezhu: And one moment for our next question. And our next question comes from Craig Beezhu from Bank of America Securities. Your line is now open.
Okay understood and then.
Jan Witte: Good morning, everyone. Thanks for taking the questions. I wanted to ask on Sarah Link, so you started the relaunch in, I guess, a couple of international markets. So, Jan, maybe just talk a little bit about kind of the strategy and when you'll get to the full international relaunch. And then I know it's been asked before, but, you know, how to think about any contribution from from either the international launch or US launch and how it could potentially ramp once it's fully launched both here and outside the US.
Just a follow up on I don't think we touch much on Aurora five 10-K filed I think you gave some long term.
Thoughts on the market opportunity or the product opportunity for you guys in 'twenty seven.
What are you thinking about sort of a ramp of that product as we go through a through 2024. Thanks.
Yep.
So as we communicated in the past the past couple of years, yet were limited release to learn.
<unk> of the searches come to eight millimeter scope that has led to some upgrades to the product and it's a five 10-K, we consider that 2024.
Jan Witte: So, first on the international launch, the correct so end of the third quarter, September, we launched several countries, Canada, South Africa, the lowest countries. The, the priority is very much turned by two factors. One, there's the timeline of the local regulators, which go from very short to that reasonably short, and then second, there's a couple of basic logistics assumptions there. In the month of October, we're launching several other countries, southern Europe, a bit of Eastern Europe, UK is going on, Switzerland is going on.
As the first real commercial year, where we have.
The product sets that we have to Salesforce and will start to go into the market we're not sharing.
Jackson's where guidance yet on what we expect there, but there's definitely a different a different rhythm different slope in terms of.
Commercial.
Community on commercial drive.
Just looking to put a point on that is and within Q3, we did see strong growth on our where it was.
Was up high double digits for the quarter. So so some momentum building there.
Great. Thank you.
And thank you.
Okay.
And one moment for our next question.
Okay.
Jan Witte: And so every, every month, yeah, over the next two, three months, we were bringing on more countries in Europe. And that brings us to January when we should start to be launched in March. Again, from the question on ramp up, what we picture is a ramp up comparable to the first year of the searing launch in 2021, 22, where in the first 12 months, maybe we were 12 months on the market before we recalls.
And our next question comes from Matthew O'brien from Piper Sandler Your line is now open.
Good morning, Thanks for taking my questions real quick don't you need the warning letter lifted.
At the Boston facility before you can submit this regimen TMA.
Yes, and so that's the.
The reason why after we get going that will have.
Ian two audits both.
Those are the things linked to the warning letter and the other thing to the pre market audits for the PMA.
And so between say mid next year and next year, there will be FDA audits.
Jan Witte: Yeah, we saw all of that. Almost 12 million. So roughly 1 million a month. And so we model in function of that ramp up in 21-22. Got it, that's helpful. And then on the Boston facility, wanted to see, you know, understand the process there, but wanted to see, have you had any additional or incremental conversations with the FDA on, on your plan. And if not, it would do you plan to, you know, recognizing that you guys have already set out the plan with the third party, but just wanted to see if there's going to be any other additional conversations that you expect with the FDA.
In there.
Okay, but you need to have it must be before you can submit okay. Okay.
And then.
Well, so we can sort of imagine we can't submit before the audits FDA will only approve.
After successful.
Yeah.
Lifted the warning letter got it.
Okay, and then on the Boston impact can you can I tease that out a little bit more just in terms of is that impact the gross impact or a net impact that includes positive offsets from the substitute products that youre selling in the kind of 10% to 15% of your cases.
Jan Witte: So the short on this, yes. Right. So remember, we in end of July got this warning letter. We responded to that warning letter within two weeks, which are planned to address those issues and the broader holistic plan. We got a confirmation from the FDA that they are aligned with this and this goes back to some of the dates that the FDA has put down like doing that external audit before March 31st next year.
Yes, so that it does not include the substitution impact.
Okay. So it's just it's a gross impact it's not a negative.
Yeah, correct, correct not noticeably location correct.
Got it okay that was it for me thank you.
And thank you thanks, Matt.
And one moment for our next question.
And our next question comes from Jayson Bedford from Raymond James Your line is now open.
Thanks, and good morning, just a couple of cookies.
Jan Witte: We also had a telephone call with the FDA to make sure that we each other know to stand each other well, plus we shared some of the external companies we're using and will use for that external audit. So we wanted to have that aligned with the FDA in which they are fully aligned. As of that point, every two, three months, we do send updates to the FDA. So we keep informed on the major stages of progress in actions on the Boston Senate.
On the timelines.
To return to market John you mentioned in line with previously communicated timelines just to be clear. Your expectation is late second quarter 'twenty four is that correct.
Mid mid mid May two and second floor.
Unknown Executive: Great. Thank you. And thank you. And one moment for our next question.
Okay. So that's.
Timeline.
We project and plan for it and that's also as we communicated three months ago.
Just to be clear thank you.
And then can you just remind me of the revenue breakout between private label and the rest of tissue Tech from the Boston facility.
Can we assume that the private label component and it's pretty sticky in the challenge will be more on the rest of the business.
Yeah. So in terms of kind of dimensionalize in yet so our private label business is within the Boston portfolio is about 20%.
Richard Newitter: And our next question comes from Richard Newwitter from Truist Securities. Your line is now open. Hi. Thanks for taking the questions. We're getting close to the FDA, I think, providing feedback on the clinical abandon that you had filed for that product. What can we expect to come out of that? And is there anything in there that could potentially delay timelines for that? So expectations, I think we communicate, we submit it in July that at them.
Of the Boston portfolio, and if you recall Boston, we we dimensionalize it about 5% of our total revenue base.
And so.
Obviously, we are continuing to work with our private label partners. During this time.
You know to help them understand our remediation plans give them as much insight and collaboration throughout the process. Obviously, you know they have to make the kind of their own determination at the end of the day in terms of the path that they will take.
Richard Newitter: And there's some further information that's being shared. We expect early next year to get feedback and the goal of that full clinical part of the PMA. Now what you tried to explain last time is that the critical part for the PMA becomes the pre-market inspection of the Boston facility, which can only happen, when the factory and the commercial is fully up and running. And so we expect that the market audits to happen either end of 2024 or early 2025, which leads us to PMA approval in the first half of 25.
But we are being very collaborative in terms of our interactions with them.
And is it your expectation when we can't keep.
100% of that private label business.
Okay.
I think Jason as you said it is sticky in the sense that for private label.
Customer to develop a new supply.
Validate it takes significant time and effort.
So I mean definitely at this point in time.
<unk>.
Enable customers are frustrated with us.
Staying close to make sure information wise they have.
And they can have their planning I think as we get closer to <unk>.
Lea Knight: Okay, and then the second question, can you just bridge us between the gross margin from 2Q to 3Q just one more time? I just want to make sure I have all of the components right there to get there. And then also any comments on M&A just you know and capital deployment given the you know the space and evaluation compression over the last few months. Thanks. Yeah, happy to take the question. And so let me provide a couple of data points.
Commercial release, that's where we'll see.
And where we would have impact on our private label.
This is Ford.
Yes.
Okay. Thank you.
And thank you.
Yeah.
And one moment for our next question.
And our next question comes from David <unk> from JMP Securities. Your line is now open.
Hey, good morning, just a quick one on the guidance.
Lea Knight: So as we looked at our gross margin was 64.6% for the quarter, it was down about 250 basis points from kind of internally where we had been tracking. And that's made up of three elements. First, the boss turned direct impact on margins and that was about 60 basis points. But then we also saw an acceleration of growth internationally that was higher than we had anticipated. And that did have a negative margin impact coupled with some within the US some product mix dynamics that also had a negative margin impact.
It looks like the updated 23.
If youre able to offset some of the Boston impact with.
The lower tax and the lower share count and I know, it's probably just high level 24, but.
You reiterated the impact in the EPS of <unk> 30 cents.
Lea Knight: And that was about 90 basis points together. And the remaining 100 basis points is driven by kind of a slower uptake on productivity productivity improvements that we had anticipated. So that's that's the dynamic that played out in Q3 relative to what we were expecting. As we move into Q4, we'll see a couple things. One, we won't have the boss return repeat, right? So that 60 basis points comes back. We also would expect to see more normalized kind of revenue mixed growth dynamics between international US and some of the product timing that gave rise to negative margin and dynamics should should alleviate.
Should we view that as possibly conservative given that some of those.
Share count specifically in the tax me carry through.
Yeah. So yeah, so just to be clear the we do not provide guidance for 'twenty four but to your point when we quantified the Boston impact.
For 24 that was only looking at Boston in isolation. So I think to your point as we had tax benefit that will carry forward that is not reflected in that EPS number that I gave you because that was Boston only.
And the share count as well right I mean, I imagine that's fair.
Okay.
And then just one quick follow up please.
15%.
You guys have so many options there synthetics in biologics.
I'm curious if you think that that might be.
Too low.
I know you said that you're in line with that now, but given the options you have could that change.
But the answer is yes. This is a learning process both for our Salesforce as for our customers and definitely from a salesforce perspective, we've seen them every month getting better at understanding what we're.
Lea Knight: So that should come back as well. What likely won't come back in the Q4 time frame is the net improvement and productivity initiatives that we had outlined. So that won't likely continue to be a gap. And that's why we're now calling a moderate decline year on year, full year 23 versus full year 22. As I characterized kind of the nature of that net productivity uptake or slower uptake, a lot of it is we, you know, we've talked about we see opportunity to drive improvement in our gross margins.
How to bring that portfolio too so.
We are driving to hopefully be at the higher rent or above the higher rental.
Thank you.
Yeah.
And thank you.
Yeah.
And I am showing no further questions. This concludes today's conference call. Thank you for participating you may now disconnect.
Yeah.
Lea Knight: We've deployed teams to go after not only identifying initiatives but starting to execute, but we started to do it kind of in small pilot areas. And what we've been able to confirm is that the value is there, the greatest value being in some of the Tissue Tech sites that we have. But the expertise needed to execute on those initiatives is the same expertise that we need to help support the Boston restart plan.
Okay.
[music].
Okay.
Okay.
Okay.
[music].
Lea Knight: And so we were not able to deploy as many resources against that effort as we have anticipated. And so that's with causing the slower uptake versus what we had anticipated. So I'll pause there on gross margins.
Lea Knight: And I can go into M&A if you want. That was very helpful. Thank you. And let's on your M&A question. I mean, M&A will continue to be a priority for capital allocation as part of our long range planning. So at this point, I would say we temporarily are tempering somewhat. And specifically in tissue tech, which I think is quite obvious, given that management is very focused on getting Boston back. That said, we have our strategic game boards often fully control the timing.
Lea Knight: So we are continuing to explore. And then primarily on our CSS are called the specialty surgical site. And specifically, we say mid-sized or tupling deals that meet our return on investment requirements are strategically fitting to our business and also fit within our financial discipline, which remains strong. Okay, very helpful. Thank you.
Unknown Executive: And thank you.
Steve Elishman: And one moment for our next question. And our next question comes from Steve Elishman from Oppenheimer and Company. Your line is not open.
Jan Witte: Thank you. Good morning, everyone. Leah, just wanted to follow up on gross margin. You talk about some of the near term dynamics and the efficiency opportunities you see. I guess you certainly as Boston becomes less of a focus for the team. Can you give us your updated thoughts overall where you see gross margin tracking over the next couple of years? I mean, update if you could on other drivers that you see for gross margin, particularly now with you having more time in CFOC.
Jan Witte: Yes, Steve. Happy to take the question. So, so be your picture longer term. So, A, just to be clear, we're not providing an update on any LRP guidance at this point. But to your point, I have taken additional time to drill into the opportunities that we have to improve gross margin. I remain convinced that there is value there for us to create, but it's a lot to unpack. And so if you recall at investor day, we said there's about 300 to 500 basis point opportunity for improvement in gross margin over our LRP period.
Jan Witte: And it was coming from three primary places. Volume mixed price was kind of one bucket. The productivity yield initiatives that I referenced earlier was kind of bucket two. And then footprint optimization was a third bucket that we had articulated. And I would tell you the volume mixed price is totally embedded in how we are driving revenue and bringing MPI to market. And so that still remains very viable. And as you saw, based on our results in Q3 in terms of the business outside of outside of Boston, that business is growing at our LRP investor day levels.
Jan Witte: And so as that continues to happen, as we bring MPI to market, we will realize that the gross margin improvements related to that. The second piece that I articulate around productivity yield, those are the areas where it's a slower uptake, but the opportunity is still there. We will need to redeploy resources or accelerate the deployment of resources against those efforts in order to extract it. And so that's what we're looking at now to understand from a timing perspective, you know, when that happens and the overall magnitude.
Jan Witte: So that's how we're thinking about it right now. And, you know, more to come, we'll have an official update, you know, as we finish going through our LRP process. Okay, understood. And then just a follow up on, I don't think we talked much on Aurora in the 510K file that you gave some long term thoughts on the market opportunity or the product opportunity for you guys in 27. How are you thinking about sort of a ramp of that product as we go through through 2024.
Jan Witte: Thanks. So as we're communicating the past, right, the past couple of years, we're limited release to learn in the case of the surgescope, the eight millimeter surgescope that has led to some upgrades to the product. And that's the 510K. We consider that 2024 is the first real commercial year where we have, we have the sales force and both start to go into the market. We're not sharing projections or guidance yet on what we expect there, but definitely a different, a different rhythm, a different slope in terms of commercial opportunity and commercial drive. Just to put a point on that and within Q3, we did see strong growth on Aurora. It was up high double digits for the quarter. So some momentum building there.
Unknown Executive: Great, thank you. And thank you. And one moment for our next question.
Matthew O'brien: And our next question comes from Matthew O'Brien from Piper Sandler. Your line is now open. Morning, thanks for taking the questions.
Jan Witte: Real quick, don't you need the warning letter listed at the Boston facility before you can submit the surge event TMA? Yes, and so that's the, the reason why, after we get going, we'll have. Evian to audits, right, both auditing link to the warning letter and auditing to the pre markets audit for the FMA. So between, say, mid, mid next year and end next year, there will be FDA audits in there.
Jan Witte: Okay, but you need to have it listed before you can submit. Okay. And then we can submit, we can submit, sorry, Matt, we can submit before the audits, but the FDA will only approve after the after successful. Left to the warning letter, got it. Okay.
Matthew O'brien: And then on the Boston impact, can you can I tease that out a little bit more just in terms of is that impact a gross impact or a net impact that includes positive offsets from the substitute products that you're selling and kind of 10 to 15% of your cases? Yeah, so that's it does not include the substitution impact. Okay, so it's just it's a gross impact. It's not a net impact. Yeah. Correct. Not net. Okay.
Unknown Executive: That was it for me. Thank you. And thank you.
Jason Bedford: And one moment for our next question.
Jason Bedford: And our next question comes from Jason Bedford from Raymond James.
Jason Bedford: Your line is not open. Thanks. Good morning, just a couple of cookies. On the timelines to return to market, Jan, you mentioned in line with previously communicated timelines, just to be clear, the expectation is late, second quarter, 24 is that correct? Yes, it's correct. Myth, myth, myth made to and second fourth. Okay, so that's the timeline we, we project and plan for it as well as we communicate the three months ago.
Jan Witte: Yep, just to be clear, thank you. And then can you just remind me of the revenue breakout between private label and the rest of tissue tech from the Boston facility and can we assume that the private label component is pretty sticky and the challenge will be more on the rest of the business? Yeah. So in terms of kind of dimensionizing it, so our private label business is within the Boston portfolio is about 20% of the Boston portfolio.
Jan Witte: And if you recall, Boston, we, we dimensionize it about 5% of our total revenue base. And so obviously we are continuing to work with our private label partners during this time, you know, to help them understand our remediation plan, and give them as much insight and collaboration throughout the process. Obviously, you know, they have to make the kind of their own determination at the end of the day in terms of the path that they will take.
Jan Witte: But we are being very collaborative in terms of our interactions with them. And is it your express case only keep 100% of that private label business? I think Jason, as you said, it is sticky in the sense that for a private label customer to develop a new supply, validate, it takes significant time and efforts. That's it. I mean, definitely at this point in time, our private label customers are frustrated with us.
Jan Witte: We're staying close to make sure information lies. They know what to have and they can have their planning. I think as we get closer to commercial release, that's where we'll see if and where we would have impact on our private label.
Jan Witte: Who is this for? Okay, thank you. And thank you.
Unknown Executive: And one moment for our next question.
David Turkaly: And our next question comes from David Turkaly, from JMP Security.
David Turkaly: Your line is not open. Hey, good morning. Just a quick one on the guidance. It looks like the updated 23, you know, you're able to offset some of the Boston impact with the lower tax and the lower share count. And I know it's probably just high level 24, but you reiterated the impact and the EPS of 30 cents. Could we view that as possibly conservative given that some of those the share count specifically in the tax may carry through?
David Turkaly: Yeah, so yeah, so just to be clear, we did not provide guidance for 24, but to your point, when we quantified the Boston impact for 24, that was only looking at Boston in isolation. So I think to your point, as we have tax benefit that will carry forward, that is not reflected in that EPS number that I gave you because that was Boston only. And the share count as well, right? I mean, imagine it's fair.
Jan Witte: And then just one quick follow up, please, the 10 to 15%. You know, you guys have so many options there, you know, synthetics and biological. I'm curious if you think that that might be too low. I know you said that you're in line with that now, but given the options you have, could that change? But the else is yet for this is a learning process both for our Salesforce as for our customers and definitely from from a Salesforce perspective. Yeah, we've seen them every month getting better at understanding what we're and how to bring that portfolio to. So we are driving to hopefully be at the higher end or above the higher end of the.
Unknown Executive: Thank you. And thank you.
Unknown Executive: And I am showing no further questions. This includes today's conference call. Thanks for participating.
Unknown Executive: You may now disconnect.
Unknown Executive: Thank you.