IART - NASDAQ

Good day, and thank you for standing by. Welcome to the Integra LifeSciences Second Quarter 2023 Financial Results. And now I would like to hand the call over to Chris Ward, Senior Director, Investor Relations. Please go ahead.

Thank you, Lisa. Good morning, and thank you for joining the Integra LifeSciences second quarter 2023 earnings conference call. Joining me on the call this morning are Jan De Witte, President and Chief Executive Officer; Lea Knight, Chief Financial Officer and Mathieu Aussermeier, Vice President of Corporate FP&A, Investor Relations and Treasurer. Earlier evening, we issued a press release announcing our second quarter 2023 financial results. The release and corresponding earnings presentation, which we will reference during the call, are available at integralife.com under Investors, Events and Presentations and a file named Second Quarter 2023 Earnings Call Presentation. Before we begin, I would like to remind you that many of the statements made during this call may be considered forward-looking statements. Factors that could cause actual results to differ materially are disclosed in the company’s Exchange Act reports filed with the SEC and in the release. Also in our prepared remarks, we will reference both reported and organic revenue growth. Organic revenue growth excludes the effects of foreign currency, acquisitions, divestitures as well as discontinued products. Unless otherwise stated, all this aggregated and franchise-level revenue growth rates are based on organic performance. Lastly, our comments today will include certain non-GAAP financial measures. Reconciliations of any non-GAAP financial measures can be found in today’s press release, which is an exhibit to Integra’s current report on Form 8-K filed yesterday with the SEC. And with that, I will now turn the call over to Jan.

Thank you, Chris, and good morning, everyone. Let me announce the recall of products from our Boston facility in late May, we committed to sharing the timeline for resuming production in Boston during this earnings call. I appreciate that this is top of mind for our investors and analysts as it is for me and our leadership team. So we’d like to address this first before going into the broader business update. So let’s turn to Slide 4. Many of you are aware, we initiated after consultation with the FDA a voluntary global recall of all products manufactured in our Boston facility. This was based on our identification of gaps in our endotoxin testing process which may have resulted in the release of products with higher levels of endotoxin and permitted by the product specifications. Recall included our PriMatrix, SurgiMend, Revize, and TissueMend products. We also extended the previously implemented manufacturing pause in Boston to implement additional detection and quality controls. That was found to be necessary in light of both recent FDA inspection results, and findings from prior internal and external audits. It is important to point out that we have no specific indications of end product companies related to high endotoxin levels. Patient safety is non-negotiable for us and we apply in abundance of caution in making compensations like the ones we have made over the past few months. We continue to work closely with the FDA. In June, we submitted an initial response to the audit findings from the Boston inspection that they concluded in May. And we have merged these new actions within existing work plan into a comprehensive plan that we believe fully and effectively addresses quality system gaps in our Boston operations. Also over the past months, we have strengthened our leadership and project management capabilities in the Boston operations, as investments and additional internal resources and outside subject matter experts. We started our remediation plan, we are also bringing in a third-party auditor who will assess to our progress and key milestones over the course of the project. Based on this project plan, we expect to resume manufacturing by the end of the fourth quarter this year. Considering cycle time from moving from a raw materials to finished goods in the factory, that needs to build inventory and the plant complete a final audit by our outside experts. We expect to initiate the commercial we launch by the mid-to-late second quarter 2024. This planning is consistent with what the FDA expects, pursuant to the warning letter we received last week. We plan to continue working closely with the FDA and provide them with regular updates on our progress. We will also submit to the FDA the final audit report from our outside expert by or before March 31st, 2024 as the warning letter advance. Turning to the right-side of the slide. The impact on our financial results for the second quarter was significant. It’s in line with the estimates we provided in our revised guidance in May. In second quarter we saw negative impact of approximately $23 million from lost revenues and returns. The negative impact to adjusted EPS of roughly $0.20 associated with the recall. In May, we provided a range of impacts for 2023, and in our updated guidance you will see that full year negative impact of approximately $60 million in revenues and $0.35 for adjusted EPS. Although we are not providing guidance for 2024 this time, the manufacturing restart time and the time required to ramp up inventory of sales will create a headwind for 2024. We estimate the net impact of the Boston return to market timing and our offset impact to negatively impact the 2024 projections implied in the long range plan which we presented during our May 4th Investor Day. We estimate this negative impact to be around $50 million in revenue and around $0.30 in adjusted EPS. Want to assure our customers and investors that we are highly focused on our remediation efforts and we fully expect to complete the remediation. And return this crystal technologies to the market for our customers and their patients. So with that backdrop let’s now turn to Slide 5 to review our second quarter business highlights. Our second quarter revenue decreased by 2.7% on an organic basis, mainly reflecting the impact of the Boston recall and protection halts. However, second quarter also reflects the strength of our markets and strong demand for our technologies across a diverse portfolio of leading products and brands, which as you can see on the right-hand side of the page, resulted in total above the high end of the revised guidance we provided in May. Excluding products manufacturer in Boston, our portfolio landed at solid organic growth of 5.5%. in our CSS business, growth was driven by key products like CUSA, Mayfield, DuraGen, Certas Plus programmable valves, Bactiseal catheters and instruments. Several of which delivered double-digit growth in the quarter. Now tissue technologies’ business we saw double-digit growth in key product lines like MicroMatrix, Cytal, both products and MediHoney. We also enjoyed strong international growth of above 7% led by double-digit growth for CSF in China and high single-digit growth in Canada. I’m turning to our bottom line. Second quarter adjusted earnings per share came in at $0.71. $0.20 headwind from the Boston recall offsets otherwise strong profitability, while the rest of our portfolio drove adjusted EPS above the high end of our revised guidance range. To look beyond our second quarter revenue results and back to the left side of the page. Delivering several positive proof points along our path to the growth commitments laid out during our investor day. We continue to advance our portfolio strategy in the implant-based breast reconstruction market and we’re excited to announce that we have filed the amendments to the clinical section of our PMA application for SurgiMend. The integration of our recent SIA acquisition is well on track and our team completed enrollments for the DuraSorb PMA clinical trial. This clinical developments bring us a step closer to having a first and second PMA products and is clinically important in high growth markets. Moving to CereLink. We’ve made significant progress toward bringing the CereLink back to market. Completed the technical section of finalizing, testing and preparing our filing with the FDA, which we intend to make by the end of August. We expect to relaunch the CereLink monitors late in the third quarter of this year and international markets and late in the fourth quarter in the US. Remain excited about CereLink with differentiated technology and ICP monitoring and an important catalyst toward long-term growth commitments. We also have expanded the international reach of our CUSA and DuraGen portfolios and we bolstered the clinical evidence for our Bactiseal catheters into European market. Further illustrating our opportunities to bring our leading technologies and brands to new international markets. Also in the second quarter, we opened our new Innovation and Learning Center in Plainsboro, New Jersey, dedicated to our founder, the late, Dr. Richard Caruso, highlighting on investments and research, development and clinical education in regenerative technologies. And last, but certainly not the least, we appointed Lea Knight as Integra’s new CFO at the end of June. Lea will take us through further details on the financials, our updated guidance and the planned share repurchase. Before going to her, let’s move to Slide 6 to officially introduce Lea and welcome her to Integra. Lea comes to us with more than 30 years of experience in global companies with significant operating scale and complexity. And apart from bringing the right mix of operational depth and strategic breadth that we were aiming for during the search, Lea also has a great reputation for leading a developing high-performing teams and a track record of delivering strong business outcomes across the organizational support. We’re excited to have Lea on board and look forward to the leadership and contributions to Integra’s future. Before I turn the call over to Lea, I would like to take this time to acknowledge the contributions and leadership of the finest team led by Jeff Mosebrook and Mathieu Aussermeier. Jeff and Mathieu have been great partners to me and our leadership team over the past months. And have demonstrated resilience, diligence and financial rigor during the CFO transition point. With that, I would like to turn the call over to Lea.

Good morning and thank you, Jan for that warm welcome. I’m excited to be part of the Integra team and back in the lifesciences industry. With the past four weeks, I have taken the opportunity to emerge myself and getting to know our markets, our products and our people. I’ve also spent considerable time learning about and assessing our Boston remediation plan and timeline. Others much more to learn, I’m excited about how we’re positioned our growth potential and the opportunity to leverage my experiences to help Integra and its purpose to restore patient lives. Now, onto our second quarter financial results and I’ll start on Slide 7. As Jan mentioned, the Boston recall laid heavily on our second quarter result. You will see the Boston recall impacted not only our revenues and organic growth, but it also drove declines in our gross margins, adjusted EBITDA margins and adjusted EPS. Excluding the impact from Boston, our second quarter result reflects solid growth across our diversified portfolio and provides many positive points demonstrating the strength of the underlying business that I will highlight on the coming slides. Please turn to Slide 8, I will go deeper into the second quarter performance of our CSS segment. Reported second quarter revenues in CSS were $271 million, an increase of 5.1% on a reported basis and 6.3% on an organic basis from the prior year. Overall, this segment delivered quarterly results exceeding the growth range outlined during our Investor Day. Global neurosurgery sales were up 4.2%, driven by the high single-digit growth in Advanced Energy, CUSA capital and disposables; mid-single-digit growth in Cerebrospinal Fluid management driven by Certas Plus programmable valves and Bactiseal; mid-single-digit growth in Dural Access and Repair driven by DuraGen and Mayfield and low single-digit decline in Neuro Monitoring due to the prior year comp of CereLink recall. Overall, excluding CereLink Capital sales in the quarter were strong and grew double-digits, driven by CUSA and Mayfield capital. We remain encouraged by the continued momentum and demand funnels for our capital equipment which have resulted in double-digit growth in capital in the first half this year. Instruments grew approximately 13%, benefiting from continued strong demand and favorable order timing. The performance of our instruments business continues to exceed long term growth expectations with near double digit growth through the first half of this year. Shifting to International, sales grew high single-digit in the quarter, led by double-digit growth in China, Canada and our indirect markets. Consistent with our Investor Day expectations, the results in China were delivered strong performance above the Neuro portfolio and regional expansion. Moving to our Tissue Technologies segment on Slide 9. Tissue Technologies was down 21.2% on a reported basis and down 19.7% on an organic basis compared to the prior year. Excluding the Boston products, reported and organic growth was 0.8% and 3.8% respectively. Second quarter sales in wound reconstruction decreased by 12% due to the Boston recall. Despite the recall, we saw strong demand in commercial execution and double-digit growth from MicroMatrix, Cytal, MediHoney and our nerve franchise. We are pleased to see continued strong double-digit growth through the first half from the [SIA] [ph] portfolio, including MicroMatrix, Cytal and Gentrix. All key growth contributors and are long range plan. In our private label franchise, sales declined 43% versus last year, due to the lost sales and returns from private label partners associated with the recall. For clarity, approximately half of the returned products from the recall were from private label partners. And finally, international sales in tissue technologies were down double-digits due to the recall, in particular, returns from distributor partners which offset double-digit growth in Integra Skin and MediHoney. Turning to Slide 10, I will now review our second quarter P&L metrics. As we have discussed, our second quarter revenue is down 4.2% on a reported basis and 2.7% on an organic basis, driven by the Boston recall partially offset by solid growth across the remainder of the portfolio. As we look broadly at our gross margins and profitability metrics, we are seeing improvement in our underlying gross margins, offset by the impact of the Boston recall. The Boston headwind to gross margins for the quarter was approximately 100 basis points which overshared approximately 60 basis points of improvement coming from price, mix, volume and efficiency gains. In addition to the impact from gross margins, our adjusted EBITDA margins and adjusted EPS also reflect the planned investments and the strategic priorities that we originally outlined in January, including year-one dilution from the SIA acquisition. These investments are critical to our long-term growth, so we are protecting them to site the recall. If you turn to Slide 11, that I will provide a brief update on our balance sheet, capital structure and cash flow. During the quarter, operating cash flow was $28 million and free cash flow was $13 million, reflecting increased inventories as we replenish our safety stock levels. Free cash flow conversion was 57% on the trailing 12-month basis. Our balance sheet remains strong with ample liquidity to support our short and long-term plans. As of June 30th, net debt was $1.1 billion, and our consolidated total leverage ratio was 2.6 times. The company had total liquidity of $1.6 billion, including $309 million in cash and the remainder available under our revolving credit facility. Given our favorable liquidity position, confidence in our Boston restart plans and continued commitment to our short and long-term growth objectives, we plan to initiate a share repurchase of a $125 million by the end of the third quarter of 2023. The share buyback is expected to contribute to 2023 and 2024 EPS by approximately $0.02 and $0.06 respectively, and is included in our 2023 full year guidance as well as our 2024 full year Boston impact. If you turn to Slide 12, I will provide an update on our consolidated revenue and adjusted earnings per share guidance for the third quarter and full year 2023. Third quarter revenues are forecasted to be between $386 million to $390 million, representing reported growth and organic growth in the range of approximately 0.2% to 1.3%. Excluding the Boston products, we are forecasting organic growth of approximately 6.7% at the midpoint driven by continued strong global demand for our products and modest improvement in supply. For the full year 2023, revenues are forecasted to be in the range of $1.548 billion to 1.560 billion, representing reported growth of minus 0.6% to positive 0.2%. An organic growth in the range of approximately 0.3% to 1.1%. Excluding Boston, we are forecasting organic growth of approximately 6%, reflecting the strong global demand and performance that have been demonstrated in the first half, along with updated timing for the relaunch of CereLink and modest supply and backorder improvement. I want to highlight that when excluding the impact from the Boston recall, our full year revenue guidance remains consistent with our original guidance in February. We also tightened the bottom end of our guidance range to reflect our Q2 performance. Turning to adjusted earnings guidance for the third quarter. We expect adjusted EPS to be in the range of $0.76 to $0.80, up sequentially, but down from the prior year driven by the Boston recall as well as our planned strategic investments in OpEx savings to offset part of the impact of that recall. In April, we estimated an approximate 100 basis point improvement in gross margin for the full year, and now, with the full year impact to the Boston recall, we expect only a modest improvement in gross margins versus 2022. Our full year adjusted EPS guidance is being revised to a range of $3.10 to $3.18 per share, which reflects our Boston revised revenue and adjusted gross margin outlook, our second half expense management as well as the announced share repurchase. Now, I would turn the call back over to Jan.

Thank you, Lea. Please turn to Slide 13 to conclude our prepared remarks. Despite the fact that the Boston recall is requiring enormous focus and efforts and is overshadowing of our second quarter results. Second quarter actually provided many strong positive proof points on our business performance, in both CSS and Tissue Technologies. The underlying trends in our markets are healthy, that proceed the volumes largely back to normal. Continuing to build resilience in our operational and supply chain, and the performance of our portfolio several double-digit drivers provides confidence that we will deliver in a long range growth commitments as we move past a cute impact of Boston recall. Our teams are intensely focused on completing the remediation and bringing the Boston facility to world-class manufacturing and quality standards that will support the growth expectation for the products manufactured there. In May, we held an Investor Day showcasing our long range targets and our path to get there. Continue to drive progress on our long-term growth initiatives. We’re advancing our PMA portfolio strategy and implant-based breast reconstruction. We’re filing the SurgiMend PMA amendment and completed the clinical enrollment in the DuraSorb PMA trial. CereLink is on a path to start its return to market by end of third quarter and retake its place as a leading innovation in the ICP monitoring segment. We’re also expanding our global portfolio by launching key products from our CUSA and DuraGen platforms in additional international markets, furthering our commitments to international expansion. And with the $125 million share repurchase plan which we are launching in the third quarter, we’re returning value to our shareholders. In addition, we continue to focus on and to invest and strengthening Integra’s commercial and operational capabilities, to drive and capture healthy organic growth opportunities in our markets. Committed to ensuring the resilience and quality at our manufacturing facilities. For the past 18 months, we completed the full compliance assessment of our quality systems in our 14 manufacturing facilities using a combination of internal and external auditors. We’re making the necessary investments and processes, people and equipment and we’re confident that as we bring the Boston operation and quality system up to expectations, we’ll have a global manufacturing footprint with the capabilities to drive liability, quality and efficiency in support of our LRP commitments for growth and margin increase. We’re also investing in strategic marketing, product management and clinical evidence generation to support stronger end-to-end innovation and commercial success for new product introductions. We continue to develop our international capabilities to fully leverage market penetration and growth acceleration opportunities in several key regions outside the US. All of these measures will allow us to continue bringing innovative and lifesaving technologies to market, enabling researchers worldwide to restore patient lives. The full year outlook remains balanced, reflecting our commercial progress and improving execution, and also reflects the full year impact of the Boston recall. I am confident and excited about our trajectory. We have the dedicated team and we’re focused on driving the improvements needed to unlock the full potential of this business. Thank you for joining us this morning. This concludes our prepared remarks. And operator, we can open the lines for questions.

Thank you. [Operator Instructions] The first question that we have today is coming from Steve Lichtman with Oppenheimer. Your line is open.

Thank you. Good morning, guys. Jan, I was wondering if you can talk to sort of the two parallel things you have going on with Boston with SurgiMend, so you mentioned new file per IBBR and then you gave the updated timelines in terms of restart. How are you anticipating the timing of restart impacting the decision process, the inspection process for the IBBR indications specifically and so what’s your latest timing in terms of when you think IBBR could potentially beyond market?

Okay. So as you stated, there’s two parts. There’s a clinical part, there’s a manufacturing part. On the clinical part, we submitted earlier this week that in tandem that we have been talking about for a while. And hope to have signed from the FDA on that clinical piece of the PMA by the end of the year, early next year. But then there’s the manufacturing part that which is equally critical to get the PMA certification. That part will now shift out as it only starts when we are shipping again. At that point, we can start to do the end-to-end manufacturing and product validation that is required to then have the FDA come in and do the preapproval inspection. And so with the timelines that we communicated, we see this preapproval inspection now taking place either Q4 ‘24 or early in ‘25. And so with that, you know because the two are needed in parallel, we see our overall PMA approval shifting towards the first half of ’25. Okay, with that timing, we still believe that’ll be early versus any competition.

Okay. Understood. And then just my second question is on gross margin. It did look certainly better than expected. Can you talk to you know some of the underlying drivers there sustainability of those you know even excluding Boston? Thanks.

Thank you, Steven. And I’m going to move that question to Lea.

Yes, thank you. Good morning, Steven. So a couple of things. So first with respect to kind of how we landed versus maybe what was originally expected. Couple drivers, I would call out first, our revenue performance in the quarter was better than anticipated which and the mix on that drove an improvement in margins. We did also see an experience more favorable manufacturing variances in the quarter and less you know than we had originally anticipated. And then there was an element of we had anticipated a bliss happening in Q2 from a cost perspective around the remediation and some of that was tampered based on our need to address some of the observations coming from the FDA. So all of that kind of factored in to why our margins in the quarter were better than we originally implied is part of our 8-K discussion. As far, I think your second question was kind of what do we think the outlook is for the balance of the year. And consistent with in my remarks that I shared earlier at this point we are anticipating margins that are modestly improves versus where we landed in 2022.

Great. Thanks so much.

Thank you for your question. [Operator Instructions] Our next question is coming from Robbie Marcus of JP Morgan. Your line is open.

Hi. This is Rohan on for Robbie. Thanks for taking the question. You’re discussing cost savings in the second half of the year helping to offset some of the dilution from the lost sales. I just want to get a sense for what you’re pulling back on in SG&A specifically here? And what projects your spend can you make up for potentially next year, so I guess another way of asking that was, is like where you need to increase spend above trend in 2024?

So let me – and I’ll take those questions, sorry. Let me clarify the questions. So in our remarks what we shared is, we’ve remain committed to some of the planned strategic investments that we outlined as part of our discussions earlier this year. So that’s going to continue to happen in the back half.

I guess it’s more or so like, are you cutting expenses in SG&A at all to offset some of the lost sales and kind of improve leverage slightly or is that –

Yes, yes –

Of the –

So it’s part of I think what – yeah was part of the discussion that we had, when we had – when we released the 8-K earlier, we talked about we were initiating some cost improvement activities in the back half to mitigate some of the impact of the recall. That’s still planned but we are preserving some of the strategic investments that we saw are necessary for long-term growth.

Okay, great. And then I just had another question on kind of the share loss as a result of the Boston recall. Could you just elaborate more on what gives you confidence that you’ll be able to regain the lost share once you start selling these products again given it is I mean this is expected to start in the second quarter of next year and if you can quantify how much share you expect to lose, if at all, and why you’re using as a precedent for that?

So let me take that question, Rohan. Two elements there, one, okay, is a lot of folks now on working substitution opportunities both for SurgiMend and PriMatrix we have other portfolios and we have other products in the portfolio, okay. And you know which we are leveraging to try to retain our customers and retain the relationship with customers. At this point in time, we’re assuming that 10% to 15% of the volume can be covered and but we’re still learning. That we’re still learning and trying to, got to increase that percentage. And then the second part of the question, how quick can we get back to you know 100% of share, based on some experience over the past decade with other out of market situations, our sales leadership thinks that within the year, we can get back to the market share of where we started you know and then further build up as with both SurgiMend and PriMatrix. It was you know just about holding market share, but gaining share to market. So that’s based on experience in the past justified by both the strength of our product quality and product capabilities as well as the quality of our commercial team.

Great. Thank you.

Thank you. [Operator Instructions] And our next question will be coming from Matt Taylor of Jefferies. Your line is open.

All right, great. Thanks, guys. This is Young Li in for Matt. I guess maybe just to start you know obviously the Boston restart is really top of mind for investors, appreciate all the updates there. I guess one is to hear a little bit more about the various scenarios that you know you might have considered and you know in that regard you to the 4Q restart you know obviously understanding there’s no product issues was that the FDA’s focus on quality, testing, validation processes. But maybe if you can now share a little bit about you know the potential for things moving a little bit faster or a little bit slower as it relates to the Boston?

Yeah, thanks for that question. The timeline for communication is translation of a lot of work that was done end of May and over most of June, okay, where on the one hand, we had the observations from the FDA in the forms 483 which they communicated in the second half of May. And we merged those with the work list to work plan that we already had in place yeah based on earlier external or internal observation. So that made a very holistic plan. Because many of the observations that we had already done internally were now translated in a FDA observation. The timeline to execute them became longer and heavier given that we have to follow the CAPA process to remedy those observations with significant more work, the root cause analysis and validation and verification, okay. So that’s one element in the plan. So, second element that we’ve worked into the plan is additional in process, external audits and a final audits. And those are a couple of times in the process where you know we will take a stop and audit the work done so far, make the corrections where we find them and then we’ll move on, okay. There may be some opportunity to do some of that in parallel that are continuing to work but today we expect those timings to add to the timing. And then the third elements which is also worked into the timing and somewhat different than what we assumed in mid-May. As we were defining the scope of the recall, and the translation of the regulation, we also think to the conclusion that we had to scrap the work in progress into half finished products in the factory, which adds significantly to the startup length – from the moment we start up to the moment when we have finished products. So now all these elements added up to a restart of the factory before the end of the year. Of course, as we go along, okay, we’ll be discovering opportunities to either pull some of that timing in, but at this point in time, we should also consider that maybe moments where there’s new work that we discover or work that we need to redo if a validation does not lead to the required outcomes. And so I would say that the plan that we communicate in yeah has some contingency in it, because I would say some risk that yeah some new things maybe discovered and of course we’re trying to discover this as early as we can to give ourselves enough time to adjust.

All right, great. That’s really helpful color. I guess my follow-up just on M&A you know the key strategic pillar for Integra. How should we think about your interest or ability to do deals while working on the Boston remediation? Will you be approaching M&A any differently through the next year?

Yeah, let me answer. I would say somewhat – but let me tell you how we are thinking about M&A. As you’ve heard us talk about our game board, our game board is there with strategic opportunities. There’s two types of deals on that game board, there’s deals where we pretty much control the timing and we’re definitely are taking a push out mindset specifically in Tissue Technologies given that from an organizational leadership we are definitely fully engaged on the Boston execution. But also there are some deals on their regards strategically important, and where we may not control the timing and when those opportunities will come on that radar screen we will evaluate them. But with all the realities of the strategic importance in the short term remediation realities.

And I would just fill it on that. You know our balance sheet remains strong with available liquidity to execute in the event we do find those strategic opportunities that allow us to move into kind of our long-term growth commitment.

All right, great. Thank you so much.

Thank you for your question. [Operator Instructions] And our next question will be coming from David Turkaly of JMP Securities. Your line is open.

Great. Good morning. Jan, and I know you mentioned the FDA is going to come in for a preapproval inspection and I’m just curious for you to start manufacturing and then commercialization out of that plant. Are you assuming right now that you will have another FDA inspection for those two things or either of those to happen?

So let me clarify. I think you’re mixing somewhat of the PMA discussion with the restart discussion. The FDA has confirmed that restarting manufacturing is done at our own decision. So we decide when we’ll restart and we will then also pull in an external audits and based on our decision with the like our auditor consultant if that is successful, we’ll restart shipping the product. Okay, so there’s no audits in FDA audit involved in restarting, manufacturing we’ll be restarting the shipping. And I was talking about the preapproval inspection that is specifically as part of the PMA trajectory to manufacturing PMA trajectory. And there you foresee that you know with shipping planning that we will do that preapproval inspection audit by the FDA that one will take place at the end of ‘24 or be early in ‘25.

Jan, actually I understand. I was just trying to make – I was yeah I understand what the preapproval one is, I was just – I was wondering if they need to be back in before you could you know have an additional inspection before you could do either manufacture or ship. And I want to say you know thanks to the detail on ‘24 you know if we look at the $50 million and the $0.30 would it be prudent for us to pull that out sort of the first half of the year given that you know you think you’ll be selling or there would be any lingering impacts that we should be thinking about as we look out to next year? Thank you.

Yeah, thanks. I’ll take that one. So from a 2024 perspective with the Boston impact that we communicated, again, this assumes that we still resume shipping mid to late Q2 to your point, much of that impact will be reflected in the first half or so of the year, recognizing that there will be a natural ramp up right to get back into market and back up to full distribution as we discussed earlier.

Thank you.

Thank you for your question. [Operator Instructions] And our next question will be coming from Vik Chopra of Wells Fargo. Your line is open.

Hey, good morning and thank you for taking the questions. I guess just, Lea, welcome, looking forward to working with you. Thanks for providing the color of the 2024 guidance. So I’m just curious how does the preliminary 2024 guidance impacts the LRP goals you provided in May? How confident are you in that 5% to 6%, ‘24 to ‘25 LRP growth algorithm? And then I have a follow-up, please.

So let me start and then I’ll let Jan chime in and Vik, it’s good to hear from you again as well. So for – from a LRP perspective, we are not officially providing any guidance or update with respect to our LRP. But let me tell you some of the things that I’m excited about in terms of what we saw in this quarter that I think bear witness on what we have substantial to consistent with what we outlined in our LRP. To your point, if you look at our results in Q2 ex-Boston what you saw is through the first half, both Neurosurgery as well as Tissue Tech performed at levels that are consistent with the growth expectations that we outlined in the LRP. Which to me, that there is the potential to live in to exactly what we already communicated as part of our Investor Day. I think what you also saw was, we advanced our commitments around the clinical filing from the SurgiMend PMA, we completed DuraSorb clinical enrollment all of which were critical steps in terms of us being able to once again drive some of the growth that we communicated as part of our Investor Day. So I think all of that underlying strength in there, but what will happen over the next couple of months is, we’re doing annual update that they’ll update so we will have to factor in everything we’ve talked about the Boston impact to understand what that the broader or stricter impact is above the LRP, it will come back to have that conversation but I still think there’s some lots of good reason to believe that the strength is still there, and we have the potential to deliver as we discussed.

Great. Thank you for the color. And then just need one high level question from me. What your assumptions for macro headwind in the back half of the year maybe just talk about what’s getting better and what’s getting worse? Thank you.

So let me start here. I shared my prepared remarks that from a market dynamic procedures perspective, you see good dynamic pretty much across the world. Europe is doing solid strength and Asia and US markets that we see pretty much coming in as we expected. And we see that and we expect that to continue over the year. Also when we talk outside US, part of our opportunity is deeper penetration in markets. So independent of what the market growth is, we have our penetration opportunities to move faster than the market. From a supply situation, we showed that past year, we also talked about here seeing the gradual improvements and I will consider we’re relatively back to new normal and tough world but I think that’s the new normal with as suppliers that are now sitting on overcapacity are bit less liable than before and continue to see got some discontinuation of products or components where it leads to a recertification of new components that has worked to at our organization but at this point in time, we have to process and resourcing to take up that additional work. So, we’ve seen that over the first half some improvement in our own execution on yields and see the results of that in the second half, that in terms of lowering back orders. So from that perspective, the second half we see more say tailwinds than headwinds businesses.

Thank you for your question. [Operator Instructions] And our next question will be coming from Richard Newitter of Truist Securities. Your line is open.

Hi. Thanks for taking the question. This is Sam on for Rich. I’ll just ask the first one on the timeline for the facility. How confident are you in that timeline holding the plan? Is there anything in the process that could cause the restart timing to change whether that’d be earlier or later? Thanks.

Yeah, thank you. Thank you, Sam for the question. As I indicated before, that this is a holistic plan with all the breadth and the depth of observations of past year that the different product stream, the resourcing there. So in that sense, it has some contingency limits for the unforeseen things that may happen and the biggest elements that we are watching closely would be elements of validation and verification here which now succeeds in the first time and we care a second try to get there. So we’ve built some of that contingency in, but the risk is there and as I said before, we’re trying of the month of August and September to really button down those areas and where we may risk and we’re trying to pull in resources as well as yeah that work has early as we can to give a self-buffer and to deal with it if that list is to be raised.

Okay so –

If I may to build on that. If I can just build on that, a point that Jan made with respect to the timeline, which I fully agree with. I think what’s interesting and what you have to understand about the plan, this is the a rather and large remediation but to Jan’s point, as the way we structured the plan and we plan to execute against those to the extent we do realize some of the opportunities or challenges that Jan mentioned where we might have to rework or reposition that would occur in all likelihood earlier in the timeline versus later. So that as we progressed through we’ll have more information to be able to understand better the exact timing which is why we’ve also strategically layered in independent reviews along the way to help mitigate some of that risks, and take advantage of opportunities to pull forward where we can to keep the timeline hold.

Okay, so maybe on the third quarter call we could have a better idea of how solid that timeline is at the correct characterization.

Yeah, definitely. Definitely.

And then with regards to the OpEx line. Should we one, what do you think you need to see to get confident in ramping up OpEx on a normalized level? And should we expect that to happen in the first half ‘24 or is that not going to happen until after a manufacturing [inaudible]? Thanks for taking the questions.

So Jan let me start there and you can build on. From an OpEx perspective, as we move into 2024 and we continue to kind of evaluate what’s needed to make sure we get to the plan restarted, we have commercial distribution, we start regaining our share, we will have to continue to temper some of our OpEx spending. Again, we will always prioritize the strategic investments that are fueling our long-term growth consistent with what we did this year so that behavior will continue to progress in 2024. And then I – you know as we start shipping and start realizing kind of the return to market that we anticipate that’s when I would also expect that a more normal return to our OpEx level.

Thank you for your question. [Operator Instructions] And our next question will be coming from Ryan

Great. Thanks for taking my question. Couple from me. So we’ve obviously talked enough about the Boston facility. But I do have one question on Tissue Technologies and one on CSS. And so, the first one related to Tissue Technologies is just you know we’ve given the recall, given the impact to private label, I’m curious kind of how are your private label customers seeking alternative sources in this period? And what does that present in your guys’ view as a risk longer-term to recoupment of the private label business? And just the impact on margins for that private label business? I know there isn’t lot of operating expenses associated with it, but it does, it is quite profitable on the EBITDA margin line. So, curious that if you could speak on that? And then I’ll just ask that other question, which CSS was very nice this quarter I think you know in the Neuro market relative to what the comp last year and so, Jan, I’d like your perspective on the Neuro market the health of it, how you’d characterize it and why you know it was strong as it was this quarter? Thanks for taking the question.

Let me ask [inaudible] great question by the way. So on private label we’re working very closely with our partners to understand where we can help them and make sure that they have full transparency on the timelines. For private label partners when in the timelines that we talk, it’s not easy to switch to other technologies or providers. And hence, the big focus on making sure we work with them and make sure they get back as soon as we get other customers back. And then second your question on the CSS markets. Good market. I think as you know, many of our procedures in CSS are not elective procedures. And so as the distractions get out of the markets but also distractions in our own operation that has led to some backorders are getting out of the world. But we are really seeing the full dynamic of the market translates into our sales. And so it goes two elements conjoined it that are driving a good CSS performance of the second quarter.

Okay. I’ll sneak one more in just for Lea, I don’t want to leave her out. Just you know where you called out the leverage ratio, you called out the leverage ratio I think at 2.6 times if I’m not mistaken. What you know given your new in the seat, maybe just help investors understand what’s your comfort with leverage? I mean you know obviously Integra took on a lot of debt during the Codman deal years ago and then you know worked to pay that down. But what’s the comfort – what’s the right range for you in terms of leverage for the company?

Yeah. Thank you, Ryan. Appreciate the question. And I think you know we’ve had a fairly disciplined kind of capital, allocation methodology and as we think about leverage, we’ve been just spending that regard as well right now the range that we tend to operate in is 2.5 to 3.5 times is kind of the range we want to be. And so with that as a guide we’re actually at the low end of what we would deem acceptable and appropriate for this business.

Okay. I’ll leave it there. Thanks for taking the question.

Thank you –

Thanks, Ryan.

[Operator Instructions] And our next question will be coming from Drew Ranieri of Morgan Stanley. Your line is open.

Hi. Thanks for taking the questions. Maybe just for Lea to start that maybe a couple of quick ones here. But when we’re looking at your ’23 guidance I understand that there’s a lot going on particularly in the Tissue Technology business. Lot to slice out. But can you maybe help us with your expectations for growth in those two segments? I would imagine maybe CSS might be closer to your long range plan, but help us frame that? And then second, just on the instrumentation – instruments performance in CSS that you touched on neurosurgery a bit in the prior question. But just anything driving the strength there you called out kind of favorable order timing just any expectations to the back half there for the business? And then I have a follow-up. Thanks.

Thank you. So for Tissue Technologies I think consistent with what we saw in Q2 where the underlying performance in that business ex – I shouldn’t say consistent through the first half in Tissue Technologies, the underlying performance in that business was you know I call it high single-digits. For the second half, I would anticipate it being in the same range again ex-Boston, right and we’ve already framed out for you kind of what we anticipate the Boston impact to be for the full year. On the CSS side, I think you had a similar question in terms of, when the balance of the year again believe the strength in that business will continue to persist much like where Jan already referenced and answered to the previous question. And so, you know I would expect that performance to hold through the balance of the year. And then, I think your final question was with respect to Instrument –

Just on Instruments –

On Instruments – yeah Instruments strong double-digit growth in the quarter, I think in the past we’ve seen some lumpiness in that business. I think you’ll see that moderate back to its kind of typical long-term growth rates. We will continue to experience necessarily at the same degree that we saw it in this quarter.

Let me add couple of things there, Drew on just for specific. What we do see is one of the strengths of the specialty instruments in that portfolio, and then second, for more than a year we have strengthened our commercial dynamic there, focusing on signing up new accounts and that I think part of that we’re seeing the fruits of that investment last year in broadening our commercial footprints are commercial dynamic on Instruments.

Got it. Thanks. I appreciate the color there and I know you touched on M&A a bit earlier. And again, appreciate the dynamics happening in Tissue Technology. But with PFS rule, the proposal that came out a few weeks ago, Jan, is there any kind of the change in your views strategically longer-term about entering more the non-acute setting in Tissue Tech more in force, and are you more open to doing M&A in this category? Have you kind of seen like what you need to see to be more aggressive in getting into the non-acute space? But thanks for taking the question.

Yeah, as we communicated during the Investor Day and these non-acute space is strategic place to be. The question is when is the right timing given some of the remaining uncertainties in that space. Right, I consider that some decisions have been pushed out and so we’ll continue to watch that area closely and both internal and external what would be the right time to move there.