Good day, and welcome to the Integra LifeSciences Third Quarter 2020 Financial Results Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mike Beaulieu, please go ahead, sir. .

Thank you, Samantha. Good morning, and thank you for joining the Integra LifeSciences Third Quarter 2020 Earnings Conference Call. Joining me on the call are Peter Arduini, President and Chief Executive Officer; Glenn Coleman, Chief Operating Officer; and Carrie Anderson, Chief Financial Officer. .

Earlier today, we issued a press release announcing our third quarter 2020 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 in the file named Third Quarter 2020 Earnings Call Presentation. .

Before we begin, I'd 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 discussed in the company's exchange Act reports filed with the SEC and in the release.

Also, in light of the ongoing COVID uncertainty, we are disclosing more information today for investors about recent, current and anticipated future business performance than we would during a typical quarterly earnings call. .

On September 29, the company announced it had entered into a definitive agreement to sell its Extremity Orthopedics business to Smith & Nephew. The transaction is expected to close at or around the end of 2020. Pete will discuss the strategic rationale for this transaction later in the call. .

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 today with the SEC. .

And with that, I'll now turn the call over to Carrie for a review of our third quarter performance.

Carrie?.

Thanks, Mike, and good morning, everyone. I'd like to start with a brief summary of our third quarter highlights on Slide 4. .

Third quarter total revenues were $370 million, representing a decline of 2.3% on a reported basis and a decline of 1.5% on an organic basis compared to the third quarter of 2019. .

Our revenue performance was at the high end of our preliminary range communicated on October 6. Our Q3 revenue represents a 43% sequential increase from the Q2.

And while part of this increase was due to deferred or delayed surgical procedures during the second quarter, we are also confident that much of the strength was a direct result of commercial programs and strategies as well as operational enhancements we put in place to drive more consistent and sustainable growth. .

We saw broad-based improvement across our franchises, but performance did vary by product line. On our second quarter call, we noted that our recovery in capital equipment would lag the rest of the portfolio.

And while Q3 sales of capital did improve by over 50% on a sequential, capital was still down 30% year-over-year as health care systems continue to reallocate resources during the pandemic. If we exclude the impact of capital from our third quarter performance, our total organic growth was roughly flat.

And despite the slower capital recovery, we were quite pleased with our final third quarter sales results, especially in the U.S., where organic growth increased 1.7%, driven by the strength of our OTT business. .

We were also pleased with our profitability measures. Our Q3 EBITDA margin was nearly 28%, an improvement of 370 basis points compared to the prior year, and our adjusted earnings per share of $0.80 represented nearly an 18% increase.

These metrics demonstrate our earnings power as we return to revenue growth, improve our product mix and manage our operating costs. .

Now if you'll turn to Slide 5, I'll review the third quarter performance of our CSS segment. Reported revenues for the third quarter were $239 million, a decrease of 4.2% on an organic basis from the prior year. Global neurosurgery sales were down only 3.4% on an organic basis, a strong recovery from the decline of about 26% in the second quarter. .

Sales in neuromonitoring and CSS management increased low single digits. This growth reflects strong sales of leading products, such as our antimicrobial catheters and our CERTAS programmable valves. Sales in dural access and repair were down low-single digits in Q3, led by a strong sequential recovery in the U.S. .

Advanced energy sales were down mid-teens, primarily as a result of lower capital sales, which, as I discussed earlier, are still being impacted by budget constraints in hospitals deal with the COVID pandemic. So the specific timing of our capital sales recovery remains difficult to forecast, there are positive signs.

First, CUSA capital sales improved on a quarterly sequential basis, and we continue to have a strong funnel of opportunities. And second, sales of consumables directly tied to CUSA capital recovered nearly to 2019 levels, implying improved utilization and the potential for strong future demand. .

Additionally, we do not believe the competitive dynamics of the market have changed meaningfully during the pandemic. Sales in our instruments franchise declined about 7% on an organic basis in Q3, a meaningful improvement compared to the 46% decline in Q2. .

As a reminder, sales of some instruments are most closely tied to hospital budgets and surgical procedure volumes. International sales in CSS were down high-single digits in the quarter. Growth in both Japan and Canada was offset by a slower recovery in our indirect markets, including Latin America and parts of Greater Asia. .

Moving to the OTT segment on Slide 6. Revenues were $131 million, representing an increase of 3.8% on both an organic and reported basis. Sales in the U.S. showed an even stronger recovery and grew over 7%. The third quarter sales and wound reconstruction were flat versus the prior year.

Sales of Integra Skin, PriMatrix, nerve and amniotic tissue used in wound increased in aggregate mid-single digits during the quarter. .

Growth in these products was offset by performance in surgical reconstruction, which declined mid-teens year-over-year, but improved sequentially from Q2. We expected a slower recovery in this part of the business, especially outside the U.S.

as some plastic reconstructive surgeries are treated as less urgent, and therefore, are returning more gradually. .

The strength we saw in our inpatient and outpatient wound reconstruction business was driven in part by programs and strategies we implemented to drive more consistent and sustainable growth in these channels.

For example, we have partnered with leading surgeons across our wound reconstruction segment to both increase our customer engagement through educational webinars and enhance the clinical components of our commercial sales training. .

We've also been working with key opinion leaders to strengthen our positioning of PriMatrix and Integra Skin, helping clinicians differentiate these products relative to others in the market.

We've also introduced risk-sharing programs and contracting strategies, both of which take advantage of the extensive clinical data supporting Integra products and users scale to address the role health economics can play in managing complex wounds. .

What has become clear during COVID, when access to health care facilities that's often limited is that our strong relationships and proven clinical history have become an advantage relative to many competitors who lack or scale and experience. .

Moving to private label, third quarter sales increased 17%, benefiting from both the recovery and procedures as well as timing of customer orders compared to the prior year..

Orthopedic sales increased 5% in Q3. On our August earnings call, we indicated that ortho sales showed the strongest second quarter improvement among our franchises, and this momentum continued into the third quarter as deferred procedures were completed. .

I'll now review our third quarter performance on Slide 7 of our key P&L components and cash flow. Our performance across the P&L in the third quarter represent strong execution by our manufacturing facilities and continued expense management. .

Adjusted gross margins were 68.6% compared to 67% in Q3 of 2019. Gross margin benefited from ongoing cost management measures as well as positive geographic and product mix with notable strength in the U.S. and within our wound reconstruction business. .

We expect our product and geo mix to return to more normal levels, and our manufacturing costs to increase slightly as we continue to ease cost control, all of which will likely result in fourth quarter gross margins that declined sequentially, but remain higher than prior year levels. .

Our adjusted EBITDA margin was 27.9% compared to 24.2% in the prior year. Like our gross margins, our EBITDA margin benefited from revenue mix and ongoing cost management measures. Operating expenses were held below 95% of prior year levels despite revenue coming in stronger than expected.

Fourth quarter operating expenses are expected to increase sequentially from the third quarter but still remain below 2019 level. .

As a result, we anticipate our fourth quarter EBITDA margin to be sequentially lower, but still higher than that of Q4, 2019. Third quarter GAAP EPS was $0.38 compared to a GAAP loss of $0.32 in the prior year. Recall that last year's GAAP loss was due to a $60 million in-process R&D expense associated with the Rebound Therapeutics acquisition.

Q3 adjusted EPS was $0.80 compared to $0.68 in the prior year, reflecting an increase of almost 18%. .

The diluted shares outstanding were down slightly in the third quarter, benefiting from the accelerated share repurchase program completed earlier in the year. .

Operating cash flow in the third quarter was approximately $70 million, driven by higher earnings and stronger DSO performance. Now if we turn to Slide 8, I'll provide a brief update on our capital structure.

As of September 30, our net debt was $1.2 billion, and our consolidated total leverage ratio improved to 3.2x compared to 3.4x in Q2, driven by higher earnings and cash flow. .

With the divestiture of the ortho business expected to close at/or around the end of 2020, our consolidated total leverage ratio should improve further, and we expect to be near the low end of our targeted operating range of 2.5x to 3.5x. .

At the end of the third quarter, cash and cash equivalents were $396 million, and we have approximately $1.2 billion in undrawn revolver capacity. The company does not have any credit facility principal repayments due until June of 2021. .

Now with that, I'll turn the call over to Glenn. .

Thanks, Carrie, and good morning. If you turn to Slide 9, I'll provide some additional color on our operations to discuss some of the factors that may affect our performance in the fourth quarter.

Sequentially, organic sales in our international business improved by over 30%, with all major regions showing improvement in the third quarter, though performance varied widely based upon the severity of the pandemic. .

Compared to the prior year, organic sales outside the U.S. decreased 9% due mostly to declines in our indirect markets. Despite the headwinds brought on by COVID, many of the new product introductions from 2019 continue to drive growth for us this year, including CUSA consumables, programmable valves and DuraGen. .

By region, Asia Pacific had the best performance and exceeded the company average. Once again, Japan led the way with growth coming from a number of these new product launches and the successful completion of our General Surgical business from an indirect model to our direct commercial team. .

Sales in China were down slightly in the third quarter compared to the prior year, but improved significantly from Q2. Based on current trends, we expect both Japan and China to show year-over-year growth in the fourth quarter. .

Performance in Europe also improved sequentially but with down high single digits compared to the prior year. All major countries improved off the second quarter lows, led by Germany, which returned to slight growth in the third quarter, driven by strong performance of both DuraGen and Programmable Valves. .

However, Spain and the U.K. lag that these countries had a slower to recover than other parts of Europe. .

Indirect markets declined double digits compared to the prior year, mostly as a result of the severity of the COVID outbreak with Latin America seeing the largest declines. For the remainder of the year, we expect indirect markets to continue to recover slower than our direct markets.

And as a reminder, indirect markets include parts of Greater Asia, Latin America and the Middle East. .

Turning to our operating performance in the third quarter. Our global supply chain and manufacturing facilities completed strategic and operational investments that will improve our supply and order fulfillment capabilities with several tissue manufacturing sites, enabling the company to support future demand and growth. .

I'd also like to highlight a few advances we made in our product pipeline. But before doing so, I want to stress the context in which our teams are succeeding. All of our forward progress is being made in the face of unprecedented headwinds created by COVID.

As we walk through the product pipeline, keep in mind, these advancements have occurred in the midst of moving many product development activities to a hybrid work environment. .

Let's start with the technologies from our Rebound Therapeutics acquisition, which, as a reminder, is an enabler for Integra to enter into both the minimally invasive neurosurgery market and the intracerebral hemorrhage for ICH market. On the minimally invasive side, the development programs for the Aurora Surge scope platform are going well.

We're advancing the next-generation surge scope with a design that has a larger channel for multi-instrument use and improve visualization. .

We recently demonstrated this platform technology with a group of key opinion leaders. We're enthusiastic about the minimally invasive opportunity and the elegantly designed disposable scope. .

For the ICH opportunity, we've also begun work with a group of select KOLs to enhance the design of the device. Both the MIS and ICH programs are on track to our initial program dates, and we expect them to contribute growth within our long-range planning period.

We're also moving forward with our next-generation EVD development program, which came out of the Arcus acquisition.

The initial focus of this technology is on creating a device that combines the benefits of our existing back to seal anti-infection technology with Endexo, a patented technology proven to reduce the potential for catheter obstruction due to thrombus formation We recently moved into the prototyping phase of development.

We're also excited about the potential future applications for this technology and other parts of our product portfolio.

At a later time, we look forward to sharing more details with you about these and other exciting product and clinical developments, such as the launch of CereLink, our new ICP neuromonitor, as well as regenerative tissue research programs that are advancing current technologies and through new clinical studies, expanding utilization options in nerve repair, plastic and reconstructive surgery and wound care.

.

The bottom line here is that the long-term future of Integra is not being compromised by the short-term challenges posed by the pandemic. Looking ahead to our fourth quarter, we're not providing formal guidance, given the ongoing uncertainty. Assuming that pandemic does not worsen significantly, we anticipate the U.S.

Orthopedics and Tissue Technologies business to continue to grow on a year-over-year basis. This growth, along with a steady recovery in neurosurgery, allows us to model a scenario in which the fourth quarter returns to 2019 sales levels for the company as a whole. .

That said, we remain cautious given the current spike in COVID cases in a number of countries, particularly in Europe, including France, Italy and Spain. If hospital capacity becomes constrained, there is risk we could be down mid-single digits year-over-year, which would be approximately flat compared to the third quarter.

While our base case scenario continues to assume that the worst of the COVID impact is behind us, the risk of a slowing recovery will likely continue at least through the first quarter of 2021. This risk of variability is likely higher in some of our indirect markets, to already recovering at a slower rate than other parts of our business. .

Also capital budgets remain constrained in the current environment. As a result, we're modeling capital sales to increase sequentially. However, we do not expect the same level of capital sales in the fourth quarter that we experienced last year. And with that, I would now like to turn the call over to Pete. .

Thanks, Glenn, and good morning, everyone. If you turn to Slide 10, I'd like to start with some comments about the recent announcement to divest our Orthopedics business. On September 29, we announced the signing of a definitive agreement to divest the Extremity Orthopedics business to Smith & Nephew.

As the orthopedics industry consolidates and moves towards bigger and more fully integrated companies, it became evident that divesting our portfolio to a larger company with a highly complementary set of products made the most sense for all parties involved. .

Following this divestiture, we will have a more focused portfolio that allows us to increase investments in our core neurosurgery and Tissue Technologies businesses. Those investments will strengthen our existing leadership positions and fund pipeline opportunities to drive future growth and expand our addressable markets.

We will also significantly reduce the complexity of the organization and pick up efficiency gains beyond the financial benefits. .

Importantly, exiting orthopedics business is accretive to our organic growth and EBITDA margins, which will enhance shareholder value and keep us on a path towards achieving our long-term growth and profitability targets. And finally, this transaction will improve our financial flexibility.

We will have the ability to meaningfully reduce our leverage ratio and to pursue strategic M&A from a stronger financial position. .

If you turn to Slide 11, I'd like to expand on the benefits of the divestiture from both the financial and business simplification view. This page outlines pro forma financial metrics, excluding the Orthopedics business.

Based on our financial performance over the last 2 years, the exclusion of orthopedics would have added approximately 50 basis points to our organic growth, reduced our operating expenses as a percentage of total sales by approximately 170 basis points and increased our EBITDA margin by over 140 basis points. .

On the right side of the slide, we give examples of how the divestiture will simplify our business. The Orthopedics business generated about 6% of our total revenues but accounted for approximately 15% of our total inventory value and a similar percentage of total company SKUs.

These metrics may not directly translate into accretion to the bottom line but they demonstrate the disproportionate amount of investment in our orthopedics business has required without the benefits of scale. Relative lack of scale has also impacted our sales productivity in orthopedics, which was significantly lower than our other businesses. .

our Codman Specialty Surgical segment, where we already have global scale and tissue technologies where we have a differentiated regenerative portfolio with leadership positions. We are confident that the strategic decision to divest orthopedics and optimize our portfolio result in faster growth, higher profitability and increased agility.

On behalf of everyone at Integra, I'd like to thank Pete Ligotti, Senior Vice President for Orthopedics, all the members of our extremity orthopedics leadership team and our EO colleagues around the world for their dedication and focus over the years.

Even during these challenging times, the orthopedics team has demonstrated an unwavering commitment to our customers and patients. And we wish them well moving forward. .

If you now turn to Slide 12, I'll provide a summary of key messages and a few closing remarks. We're pleased with our performance in the third quarter. We effectively executed multiple strategies and programs, all aimed at driving growth and advancing our leadership positions in both neurosurgery and tissue technologies.

As the company, we've taken advantage of the current environment to reimagine our future by reprioritizing and accelerating select programs that position Integra for growth in 2021 and beyond.

We've implemented digital training and educational platforms, advanced clinical and R&D programs and invested in improvements in multiple manufacturing facilities.

And we accomplished all of this while improving our financial flexibility and bolstering our ability to pursue M&A, which has always been and will remain a core part of our growth strategy. .

As Carrie mentioned in her opening remarks, our third quarter profitability metrics demonstrate our earning power. With the acceleration in growth, improvements in our product mix and the management of our costs, we have a clear path to achieving our long-term targets, which we introduced in 2017.

They include 5% to 7% organic revenue growth, 70% gross margins, 28% to 30% EBITDA margins and double-digit earnings growth. And as I just discussed, the divestiture of Orthopedics business only enhances our collective focus by reducing our complexity and increases our confidence in achieving these goals. .

As I told you last quarter, we intend to emerge from this pandemic as a stronger company. Based on what we've achieved over the last 9 months, we are well positioned for 2021 and beyond. That concludes our prepared remarks this morning. We look forward to providing you with another update on our fourth quarter earnings call in February.

Thanks for listening. And operator, would you now please open up the line for any questions. .

[Operator Instructions].

Our first question will come from Raj Dahi with Jefferies. .

I wonder if maybe I could start with the commentary around the fourth quarter, you mentioned you could possibly get back to 2019 levels, though there's a lot of moving parts we all appreciate. I'm curious as you sit here now looking at how the business has progressed thus far.

What's your level of confidence in getting to that 2019 level? Or do you think there's still a chance we're going to be perhaps negatively growing here in the fourth quarter?.

Yes, Raj, it's Glenn. I would just say our comments on the fourth quarter are really based upon a series of potential outcomes that could play out for us. Obviously, October so far has trended in line with what we were expecting. Obviously, there's uncertainty in November and December.

But I think if trends continue to be positive for us, like we've seen over the last several months, we can get back to 2019 sales levels.

Obviously, if we see a resurgence of the virus, more ICU beds being held for COVID patients, deferral of procedures, we see that potentially putting us into the negative growth year-over-year in the mid-single-digit range potentially if things got worse. But so far, things have trended positively in the month of October.

We're also very positive around our Tissue Technologies business. Keep in mind, a big part of that is outpatient don't require COVID patients to occupy ICU beds. You saw the growth we put up this quarter, we actually feel quite good about the fourth quarter, regardless of how things play out there.

I also think hospitals are much better prepared for this next wave and resurgence between the green zones, actually having more ICU beds. We're also not seeing a direct correlation of the spike in cases to more ICU beds being utilized, meaning a lot of these patients are younger patients and don't require hospitalization.

So we're keeping a close eye on things. Obviously, right now, I wouldn't even call it a range for Q4, but a series of outcomes that could play out. And we do see a scenario that gets us back to flat to 2019 levels. And if things do get worse in the months of November and December, we could be down a few points to down mid-single digits overall.

And again, that would keep us flat to where we landed in Q3. .

I appreciate there's a lot of uncertainty. Maybe keep one for you just on the long-term outlook now that you've divested or you're in the process of divesting orthopedic. I mean you have the slide of your long-term goals, the EBITDA margins are still laid out as 28% to 30%.

But as you've noted, Orthopedics was dilutive to your EBITDA margins up until now.

And so I'm curious whether that represents just you haven't updated it yet or whether this is some indication that you'll perhaps continue to reinvest in the company, perhaps at a higher level, really shouldn't expect the profitability to expand so much beyond what you've outlined already?.

Yes, Raj, thanks for the question. Look, I think to your point, these are the goals that we laid out that have not changed since 2017. And we've always had the range on EBITDA for the point that you're leaning towards, which is we are focused as a growth company, and growth takes investment.

I think the great part about what hopefully, I see investors see in the third quarter is the fact that we were touching the bottom end of the range. Now we obviously were squeezing some expenses. But as you've heard, we also were investing in the most important programs and not starving any of those.

We are making sure that all of that was moving forward at the levels they could. And orthopedics can be a great business if you have the right scale. We unfortunately never achieved it. I think where the business is heading. Obviously, the company has scale and will do well.

But for us, divesting it, it clearly gives us an opportunity to have much higher confidence that we'll be in that 28% to 30% range.

But if I look at our portfolio and you think about [indiscernible] moving neurosurgery into a minimally invasive platform, moving into broader cases into plastic and reconstructive surgery, further upstream into tissue regeneration. Further expansion into nerve, those need to be fed.

And as we see how that portfolio plays out, I think the range of 28% to 30% is to represent that if we see an opportunity to invest in areas that are going to drive us closer to that 7% or higher, we're going to take that opportunity to invest in it.

But the fact that we keep the range says that on today's state, we feel quite confident that we could get to a 30% EBITDA margin and may make the opportunity to run at 28% to 30% if we see faster growth in our future. That's how I'd frame it up for you. .

Our next question will come from Dave Turkaly with JMP Securities. .

Congrats on the sequential improvement. Pete, maybe to follow-up on Raj's question from the hospital side in the slide you mentioned patient confidence. I guess I'd just love to get your thoughts sort of updated for now on where that stands? And obviously, we saw the improvement of 2Q in the numbers.

But I'm curious if you have any comments about where that now stands and what you anticipate moving forward?.

Yes. I'll comment and then see if Glenn or Carrie want to add to it. I think we even think of our own personal views. I think in the second quarter, there was a lot more paranoia about going out and moving around. Obviously, third quarter improved and even fourth quarter.

I think for the good and bad of it, I think people are getting out more and so I think the definite component in today's steady state, we think is reasonably good, meaning that patients aren't afraid to go back and get procedures done at this point.

I think what the concern is, is that if there were a significant increase spikes in related deaths or complications, that moving back into a scenario that folks wouldn't get procedures on, we think, goes up.

But if you look at our TT business as an example, part of that business is emergent procedures, so folks that might have had burns or trauma cases that business obviously doesn't have a huge component that's associated with patient confidence.

But on the wound care chronic side, it does, and I think we're seeing that get back to more normalized level. And on the neurosurgery front, again, from a patient confidence standpoint, there's some there, but there's going to be a whole lot more about what your doctor says is the time horizon, you need to get in.

And that's more predicated on does the hospital system have the availability of ICU bed, which in our neuro business, we've always been open about is heavily correlated. .

Over 70% of the procedures need to have an ICU bed as a follow-up. And what's different about Q2 what changed in Q3.

And we still believe, even with surges that will happen in Q4 is all of our hospital partners have just gotten significantly better about managing the pandemic, either changing their workflows the use of different protocols, the utilization of different pharmaceuticals. And so I think that bodes well for our situation.

But our job here is to kind of paint the picture of what the potential outcomes are based on a very tough situation and maybe something that might be more probable, which is in between, which we think we've done here this morning. .

I know you mentioned for the gross margin, the strength, cost containment and the geographic and product mix.

I was just curious, is there any color or any comments that you'd care to make on pricing, I imagine things haven't changed much, but I was just curious if in this new world, anything had changed that's noteworthy?.

Dave, thanks. Not a lot has changed on the pricing front. I think it's pretty stable. And consistent with what you've seen in the last few quarters. So really no changes on the pricing front. .

Our next question will come from Ryan Zimmerman with BTIG. .

So Glenn, I think you made a comment back in the second quarter. That suggested hospitals were holding about 10% to 20% of their ICU capacity for COVID. And we saw COVID obviously subside in the third quarter, but now starting to pick back up and flare-up again.

So I'm just wondering if you could comment on a follow-up maybe to Raj's and Dave's questions is in third quarter, did you see that dynamic consistently? Because I guess I'm trying to understand whether that was still a material headwind and performance was better in spite of that or partly benefited from the lack of that holding of capacity in that?.

Yes. It's a good question, Ryan. Thanks. I would say we're still seeing ICU beds being held, 10%, 15%, even 20% in certain markets around the world, especially in Europe. So that's really where I'd highlight bids being held for COVID patients. But in many of those systems, they're not at maximum capacity.

So they're holding them, but in many cases, they're not deferring procedures. But yes, they are still, in some cases, holding 15% to 20% of beds, but we're not seeing the impact on our business, just given the fact that they have enough beds today.

And as I mentioned before in my previous comment, in many cases, some of these countries have added a number of additional beds. So they've actually added ICU beds and increase their capacity to handle more patients. So that's pretty much a quick summary of situation there. .

Okay. I appreciate that. And then just a follow-up for me. A few years back, when I think about Integra, you restructured the entire OTT sales force by sales channel. But one of the areas that was always tied to extremity ortho was nerve repair. And so prior to the pandemic, I think you discussed building a separate sales force in this space.

And so I'm curious if you could comment on where that stands and kind of where you think peripheral nerve repair fits in your portfolio today?.

Ryan, it's Pete. Yes. So peripheral nerve, we think, has a very bright future for us. We think there's lots of interesting opportunities out of the traditional upper extremity wounds, as you're well aware of different nerve reanimation opportunities and things in that area.

Earlier this year, really at the end of last year -- earlier this year, we actually had created a dedicated channel. We didn't make a big deal about it at time, but we have a dedicated channel in place. And we also are set up and structured that a scouting and let's say, discovery team is tied into our wound reconstruction group.

So it had been operating separately from our extremity orthopedics team for some time. And your memory is quite good. When we did separate the channels, at first, it was still part of that organization. And then last year, we fully separated it out.

And we're already seeing some good traction relative to the dedication as you well know, even though some of these are orthopedic surgeons, they tend to be more focused on microsurgery and kind of that's what they do for a living. .

Our next question will come from Kaila Krum with Truist Securities. .

So I mean, you grew adjusted EBITDA margin year-over-year. I would just love to get your thoughts about how you're thinking about the company's cost structure going into next year? I mean, it seems like margins may come down a bit in Q4.

But are there areas in the P&L where you cut back costs during the pandemic, that perhaps you've realized you don't need to spend on going forward? And can that provide a benefit to the bottom line as revenue stabilizes into next year?.

Kaila, I'll take your call. And I think it's a good question, and I think it continues to go back to our long-term planning objectives of getting to 28% to 30% margins. Obviously, we demonstrated that we could touch that here in the third quarter, and that certainly was cost management.

I would say, as we turn the corner into 2021, a couple of things number one, the opportunity is for us to continue to manage our costs. In light of remarks that Glenn talked about new digital trends thinking about travel and entertainment differently in this new world. So there are opportunities to think about our costs differently.

The slide that we presented on the ortho business really talks to the fact that there is a large amount of costs that basically go away with that business. And that actually is another boost to our margins as we think about 2021 without the ortho business. .

Couple of other things I would say on the gross margin line. And you saw that here in the third quarter is the significant impact of favorable mix. Both on -- from a geography standpoint, but more importantly, from a product mix standpoint, and also the TT part of OTT, the tissue technology piece, you're talking about gross margins in excess of 80%.

So as we've restored the supply of that product line, and we start to recover here, and we had really great results here in the third quarter. That's the power of favorable product mix that you're seeing come through in the third quarter. So as we think about next year and beyond, we would expect TT to even be stronger than that. .

And the last piece I would leave you with is the TMA agreement that is, again, a TMA agreement we have with J&J. We will start to move off of that and start to transfer manufacturing here in the fourth quarter, but mainly through 2021, you'll see a list of that as well.

Pete, do you have some more comments?.

Just at a high level, Carrie, just to add is that we, as a leadership team, challenged our whole company. I used the word in the script, reimagine specifically because we actually have every function throughout company to rethink about how they might run their areas, how many they might run it at a lower cost structure.

I think most folks realize we've invested heavily in IT systems the last 5 years. We have one global ERP platform. And I would say during this COVID window, we pressed the envelope on utilizing some of these systems that we put in place that we might not have been as aggressive about maybe in years past.

And I think we've come up with some pretty interesting ideas, whether it be on the commercial front, mentioned digital tools for training and development. And some of those, I think, are going to stay with us for a long time. I don't see us going back.

And I do believe they will have benefits in the future in driving our profitability, but probably even more so in our agility, which is a big part of what we're trying to do to be a company that can move quickly and take advantage of opportunities as they arise. .

Great. Super helpful. And then I guess -- I mean, we're sitting here at the end of October.

I'm just curious if you might be able to provide a little bit more detail on what you saw as you sort of exited Q3 into this month? And then what you're hearing specifically from your customers about the hospital CapEx purchasing environment? I think you guys gave a little bit of detail, but just how they're thinking about sort of budgeting heading into 2021?.

Kaila, it's Glenn. I would say relative to October, I think the only thing we'd say is it pretty much trended in line with our expectations and plans. So we didn't see any difference in terms of the trend lines. Obviously, there's more uncertainty as we look ahead for November and December, but I think October came in as we had expected.

Relative to capital, clearly, that's been an area where we've seen declines even in the third quarter. And as I mentioned in some of my prepared remarks, we do expect capital to improve sequentially in the fourth quarter, however, do expect it to be down year-over-year. The one real big positive on the capital is our funnel. We do see a strong funnel.

There's definitely opportunities for us to move forward. It's really going to be dependent upon when hospitals have budget dollars and see some of the financial constraints lifting. And when that happens, I think we're going to be in a good position to capitalize.

But we are expecting our capital business, which represents maybe 6% to 7% of our global sales to be down in the fourth quarter. So we'll have a this week 2021. .

Our next question will come from Matthew O'brien with Piper Sandler. .

This is actually Andrew on for Matt. I just wanted to push a little bit on the ortho divestiture for a second here. Obviously, when you guys did Codman, part of your reason was that you felt that scale could be a bit of a competitive advantage for Integra.

Obviously, the ortho business is a much smaller chunk of overall Integra, but you do be a little bit of scale there. .

I guess the question is, what made you feel that it was the right time of decision to go forward with that transaction? And then, I guess, does that have anything to do with this variability that business and maybe expectations for a lingering impact from COVID '19?.

I would just say, when we define scale, and I think it's a really important word we always use is we use the word relevant. And so just adding more things into the grocery bag doesn't necessarily give you relevant scale. Relevance here in this case is that you can leverage R&D, you can leverage platforms.

And so we have quite a bit of leverage that takes place between our regenerative platforms between neuro as well as within TT, DuraGen, DuraSeals, the related items in nerve products. So that's the correlation. And we just didn't have that with the Orthopedics business. There's nothing associated with the exit of orthopedics to do with COVID.

I think as you would know, many of these processes don't happen in a 6-month period, there's a lot of foresight and time that goes into that..

And we had clearly allowed ourselves to have optionality over the last couple of years to see if the right assets could come in.

But I think one of the biggest decisions was that applying that investment dollars towards TT or expanding our near neighbor opportunities within neurosurgery or instruments clearly look to be a better return for the company than pursuing a orthopedics play, which would have a much higher investment portfolio based on where we were starting.

As well as the comments that I mentioned, which were about the size and consolidation that's taking place. .

As you -- a few years ago, many of the players within extremity orthopedics were smaller midsized companies. Today with the acquisitions and consolidations that's changing.

And so we felt this was clearly the best thing for those employees and also that business and really positions us well for accelerating growth and profitability over the next couple of years. .

Okay. That makes perfect sense. And then my follow-up is, you've talked a little bit about working to get the supply right sized on your tissue business.

I guess, how would you characterize your ability to meet demand at this point?.

And then how should investors be thinking about the contribution from that tissue business over the next few years? Is it fair to assume it's in that high-single to low double-digit growth in a normalized environment like you've discussed before?.

Yes. I'll say -- and I'll have Glenn comment on supply. But yes, we're high-single low-double digit is what we're definitely positioned for within the TT portfolio. A lot of that is tied to our new products. But specifically, where we are here with supply.

So Glenn, why don't you talk a little bit about supply?.

Yes. I think overall, we're in great shape when you look at our regenerative supply. One of the silver linings of COVID was with the reduced demand, we actually are able to build supply even faster, build safety stock levels up, despite the cost reductions that we went through.

But the other nice thing is we've made some investments in these plants to build more capacity as we move forward.

And when I think about our Waston plan, which makes SurgiMend and PriMatrix, I think about Memphis and the amniotics business, we can actually now build more product, and we've actually built more safety stock for those regenerative products. .

So we're in very good shape. And as Carrie mentioned, as sales start to ramp up with our regenerative products. These are very high-margin products for us, 80% plus. So we're well positioned not just to capitalize on the top line, but also to show that favorable mix and actually drive higher gross margins going forward. .

Our next question will come from Shagun Singh with Wells Fargo. .

I wanted to get your thoughts on 2021, if possible. So consensus is looking for about 50 basis points of growth in 2021 versus 2019 levels. And it looks a little conservative, just given your commentary that your portfolio is not very deferable. I think you said about 30 to 45 days only.

Capital seems to -- it looks like it would continue to improve sequentially into 2021. And then you have fully ramped regen capacity that will allow you to gain back about 100 to 200 basis points of growth that you could not realize in 2019. .

So I'm just curious to get your initial reaction here.

And what would prevent you from growing in line with your LRP outlook over 2019 levels next year?.

Is COVID the only wildcard here?.

So Shagun, I like the way you're thinking, but I think there's a lot of -- there's obviously a lot of risk out there as it goes into the beginning of next year. I mean, for us, as we've outlined for Q4, and we also mentioned about what the first quarter looks like.

I mean, the real question for us for '21 is well we have 11 months, 10 months, 12 months, 6 months of normalcy next year. And I think so much of that is going to be determined between now and mid-December.

I think for us, understanding how well this country, but countries around the world handle the second wave of COVID is going to have a big determination on it. .

Today, as we mentioned, we think that first quarter is not going to be a normal first quarter. What that actually means, I'm not sure we know at this point in time. Clearly, businesses like on our TT side of the business because we're not primarily in hospitals or when we are, it's because of an emergency.

It probably has a little bit more consistency in its growth profile.

And neurosurgery has a little bit more of a constraint because of the beds, but I do think one thing that's different about this period of time versus in the spring was that as long as the major metro cities stay reasonably consistent, we're a high percentage of the big neurosurgery facilities are. We think that, that bodes well for our business..

Not to say that, obviously, increases in rural areas are -- don't affect us, but they don't affect at the same level as where the concentration of our big sites are. So I think we're not going to say a whole lot more on '21 right now, mainly because it's not really the time.

But honestly, it really comes down to seeing how the next 2 months kind of play out. Just because of, obviously, everything we're all reading with in the world news. .

Got it. That's helpful. And then my other question is on M&A and capital allocation.

I believe you have indicated that you're looking for technology tuck-ins in neuro and you've made reference to distribution partnerships, especially in Asia that you were evaluating, could you give us an update there? And then on the region side, could you discuss the current landscape? And if you think COVID has the potential to act as a consolidator in this highly fragmented market?.

So I'll comment just on the region and then -- and maybe, Glenn, you can take the other question. But I would say, look, I think I don't know if region is any different than any other markets within COVID relative to consolidation.

I think, for the most part, as I look at peer companies and everyone in Medtech are even touching into the bio area that folks are going to come out of this fine within this sector. So I don't know if this is necessarily going to be a component for that.

For us, as a company, clearly having a more focused portfolio and looking for acquisitions to plug into it. I mean it's rather evident. We will be focusing on tissue technologies and also technologies and/or products that will fit within the the bag of neurosurgery.

And so to that point, Glenn, you may want to talk about some of the partnerships and things we've been thinking about. .

Yes. As you mentioned, Shagun, we are working on some distribution partnerships outside the U.S. and one of the nice things about the Codman acquisition is it's really given us scale in a number of markets, big channels, direct channels, and that would include both Japan and China.

I'm pleased to say that we actually just closed and signed our first distribution deal for a neuro product in China.

And so that's going to be launched here as we move into 2021, and it will be a nice complementary product with back to [indiscernible] that we're already selling in the country and will have a differentiated offering versus what's on the market today. So we've actually got some success that will help us go into 2021.

We are working on other deals within China, and I would expect we'll have more to share in the near future around that. .

In addition, we're working on some distribution deals on the regenerative side as well in Europe. And we're getting close to getting a couple of those completed.

But again, I think it's important to note, we're able to now leverage these larger channels, these larger in-country presents we have because of the scale that we have in certain places around the world, and we plan on capitalizing that and filling in the bag for our reps.

So in many cases, we're not adding a lot of incremental resources but adding revenue and profitability as we drop these products to the bank. .

Our next question will come from Steven Lichtman with Oppenheimer. .

You talked about the building pipeline, and I realize several of them are medium to longer term.

I was wondering for 2021, what new product drivers would you say are sort of standout opportunities as you look out over the next 12 to 18 months?.

Yes, Steve, I'd say, first and foremost, we intend on relaunching CereLink, our ICP neuromonitor in the first half of 2021. So that's going to be a nice contributor to growth for us. We're actually going to be launching at the end of this year, a new lumbar chunk for the Japanese market called Lapis.

So that's going to be a nice contributor for our international team moving into 2021. And we talked about some of these platforms being longer term, and that's really we're going to see some of the benefits you think about the Rebound acquisition as an example.

But we do intend on doing a commercial launch for the tumor area and having a minimally invasive surgical product and a surge scope at the end of 2021. So we'll see some of those benefits roll through in 2022.

And then shortly after that, we plan on having an ICH commercial launch with that same technology platform when we roll out the new surge scope. So these are not that far out there where we're going to start to see the benefit of some of the revenues coming in from these 2 products. But those would be the ones that I would highlight.

On the tissue side, we're working on getting more clinical data pulled together, more indications for some of our tissue products. I think that's going to help as well when you look at -- we call it new product launches, but also new indications for existing products.

And more to come on that, but we're quite excited about a couple of things we have working, which should start to benefit us towards the latter half of 2021. I don't know if... .

And I think it's fair to say, Glenn, just point off your tissue comment that AMNIOEXCEL Plus is a new launch product. That now has adequate supply. We're getting really good feedback on the product. This is the 3-ply product, which there really isn't a comparator product out in the marketplace for handling and healing characteristics.

And then our SurgiMend microporous product, which is a larger size sheet versions of this bovine dermis product that actually increases vascularization. And so it's been a little sluggish this year primarily because it's in the plastic and reconstructive area and hernia, upper chest [indiscernible] reconstruction.

But we clearly see this product is being received very well and believe that, that will be a driver in the future, as Glenn mentioned. .

Got it. And then, Carrie, free cash flow was solid and still a tough end market in 3Q. Can you talk about your outlook there and the drivers you're seeing? Certainly, you talk to margin expansion.

What other activities you have going on that's sort of keeping that free cash flow conversion at a very high level?.

Yes. Well, certainly, the margin performance and the higher revenue and earnings level was a significant contributor to Q3 cash flow. DSO performance was actually quite strong. Our DSOs were below 60 and haven't been below 60 since the Codman acquisition. So real nice performance there on the collection side as well.

I do expect Q4 cash flow to come down sequentially, as again, as we moderate a bit more there on the DSO performance. But overall, I would say the cash contributions or the cash requirement of some of the Codman integration now are behind us. Now as I think about 2021, Steve, you're going to have that replaced by some cash needs of EU MDR.

But the good news is that's not forever. That's a couple of year push to get EU MDR compliant there. But I would say that the free cash flow power of the company, definitely, you could see that in Q3, would just be earnings conversion there on the higher earnings there.

So managed working capital, continue to focus on that, not just on DSOs, but inventory turns and DPOs, we're actively working on extending supplier payments there proactively with our suppliers. But just the higher earnings power, I think, will come through and continue to show well on our cash flow. .

Our next question will come from Robbie Marcus with JP Morgan. .

I was wondering if you could talk about the current thoughts about future M&A here. You have the divestiture coming up. It's been a while since the Codman deal, the business has been nicely integrated. In this environment where prices are pretty high, but you have a balance sheet in good shape.

How should we think about M&A going forward?.

Yes, Robbie, thanks for the question. So as you recall, last year, we did 2 small deals. We did probably the biggest technology platform deal, that was the Rebound and the Aurora scope that will now have 2 products coming out of that are advancing well. I would say we wouldn't rule out deals as such if they enhance the overall capability.

But we're taking a look, both in private and public opportunities. As we've talked about in the past, many of the opportunities that do arise for us are build over a long-term relationship with principles that we've been talking to. It's not unlike us to actually, in a given month, to have multiple discussions ongoing with different folks.

Sometimes they lead to some of the partnerships that Glenn had mentioned, where we might be a distribution partner, and sometimes they may end up in advancing this closer towards an acquisition. So it's been important for us to be able to get the balance sheet in a position where we can move on some of those opportunities.

And we believe we're at that point. I would say that clearly, within neurosurgery, things that completely keep building out that portfolio are of interest. We still have many products that could plug into that business area. And then our [indiscernible], things similar to what we had talked about with what the surge scope enables us to do.

I think in our instruments portfolio, there are clearly other handheld instruments. There's instruments that move further up the value chain. There's other ways of taking a look at how we could actually help a hospital manage and operate in that space as well.

And in Tissue technologies, when you play in an area that touches into [indiscernible] reconstruction, upper chest reconstruction, wound care, plastics area, we actually have quite a few different areas that we could move to.

And so I would say, in all of these, we're clearly looking for deals that would be accretive to our overall growth as well as our profit. But we wouldn't shy away from a technology that may have a short-term dip that then could give us really increased confidence in our longer-term goals.

So I would say over the next year or so, I think it's going to be important for us, particularly with our focus to be able to keep bringing in tuck-in deals into the fold. And that's really what our key focus is, is tuck-in acquisitions. .

Great. Appreciate the color. And maybe just a quick follow-up on Raj's question earlier. On the adjusted EBITDA guidance at the JPMorgan conference this year, you did put out 30%, up from the 28% to 30%, and now it's moving back down even with the orthopedic divestiture.

So how should we think about the difference in thinking from January to now? Is it all due to COVID? Or are there other fundamentals involved?.

Yes. Robin, there's no change in our numbers. I mean, we've used charts that said 30% aspiration or 28%, 30%. Our commentary has always been 28% to 30% from, I think, December of 2017 when we had the actual meeting. So your takeaway should be exit of orthopedics only helps us get closer to 30%.

We may run closer to 28%, if we find some investments that drive us closer to the 7% or even better organic growth range. But if we're running in that 5% to 6% range, our probability of getting to 30% EBITDA margins, I think, are higher today, for sure, without orthopedics than they were when we had it. So that's kind of how I would frame it up. .

Our next question will come from Matt Miksic with Crédit Suisse. .

So just one on your OTT or orthopedic divestiture, so you had highlighted the greater impact on your business from inventories related to this orthopedics business, which is true. I think even for scale models in those end markets, it's kind of an inventory heavy model due to consignment, et cetera.

I was wondering if you could provide any directional color on the other potential benefits for the model going forward in terms of working capital burden, inventory turns, maybe free cash flow conversion as it pertains to your long-term targets there? And then I had one follow-up. .

Yes. I would say, Matt, definitely, not only from a P&L perspective that we'll see the benefit. And we obviously highlighted that on the slide that the amount of OpEx, operating expenses that went towards this business I certainly -- that burden goes away a lot lower.

The overall efficiencies of the individuals in terms of just the amount of workload that the team had with the ortho business. All that focus now turns to the 2 core businesses. But the reason why we highlighted inventory is exactly that point in terms of some of the free cash flow conversion, that it did.

If you think about the investment, not only in inventory, but the investment in fixed assets, including instrument set, and you take that into consideration, divesting that business and freeing up that investment cycle is significant. And so it will help not only from an EBITDA profile perspective, but also from a free cash flow perspective, Matt. .

Great. And then just maybe 1 follow-up. You touched on this earlier in Q&A about the surge in COVID cases and what that might mean, et cetera.

But maybe just simply, if you could talk about what -- not that we're expecting anything like Q2, but what were some of the effects on sort of wound and outpatient? And how might that be different this time? Or maybe how was it different in July and August and some of the hotspots we saw a flare up? And then kind of the same, Pete, I think you mentioned the fact that many hospitals are sort of built out their ICU capacity in the interim in addition to all the other things that they've learned and changed in the way they deal with these patients.

So maybe what's different this time, potentially, particularly in wound, but anything else incremental in neuro?.

Yes. I think we kind of touched on this one a little bit already, but I would just say hospitals being much better prepared, having more actual ICU beds available. To me, that's made a huge difference.

And so even though there's a resurgence in the spike in cases, and you've seen some of that over the summer months, we did not see the impact on our business of procedures getting deferred, things continue to trend along as we had expected. Does that mean it could change in November and December? Of course, it could.

But I think this preparedness by hospitals, the fact there's more ICU beds. Patients' willingness to come back into the system. I think all have been positive trends that we don't expect to get back to those Q2 levels and don't expect to see broad lockdowns and shutdowns and procedures being deferred in any meaningful way.

You may see some of those take place in certain countries and certain spots in the country or a certain hospital system within the U.S., but they seem to be more selective, very isolated at the moment. And we'll have to see how that plays out over the next couple of months. But to me, that's what's different. .

And I would just add, I think we've mentioned this. But within the second quarter, orthopedics might have had a little bit more pent-up demand in maybe some of the instrument areas. But a lot of our other business has been a run rate business for the most part.

There's clearly -- all the businesses had some pent-up business from Q2, but not a significant amount. And the better operations within all the health systems just gives us confidence. Clearly, a lot of TT is in a non-hospital environment. So that has its benefits.

But even in the hospital environment, take telemedicine now with the visits going through the roof. If you have a chronic wound or you have an issue that may need to have an MRI and you may need to come in for something related to neurosurgery.

The fact that you can now have more televisits and the doctor can have an eye-to-eye discussion with you to talk to it, you need to come in. We do think that's also increased and will change kind of [indiscernible] of how people react here, even if it does get much tougher within the fourth quarter. .

Our next question will come from Travis Steed with Bank of America. .

Just one quick clarification. I think earlier in the Q&A, I heard you say October was actually positive.

Just wanted to clarify that? I know there's still uncertainty for November and December, but did you actually see some growth in October?.

Yes. Relative to October, I think the only thing I said was it's trending in line with our plans. So we didn't see any difference in terms of what we were expecting in October versus how October has played out. We're not commenting specifically on any numbers for the month of October. .

Okay. That's fair. And then if you look at the new Integra portfolio, excluding the ortho business, where do you think your new weighted average market growth is today excluding the ortho business? And just how that compares to the 5% to 7% long-term growth target that you have? And I'm assuming that your [indiscernible] is a little bit below that.

So what gives you confidence that you can outgrow your market over the long term?.

Well, again, I think if we look at our neurosurgery, our CSS business, we've indicated we think we can grow at 3% to 5% over the long term.

And with these new product launches and all the work we've done around our channel, I would say that we would expect to hopefully be at the higher end of that range, given some of the opportunities we have with MIS, along with ICH. So we still see that as kind of a 3% to 5% overall growth rate, but are targeting the higher end of that range. .

On the orthopedic and tissue business, I think we've talked about high single to low double-digit range, and ortho was obviously part of that. And yes, the end markets for ortho are growing quite nicely, but we have not -- and have not demonstrated our ability to grow that business in the past.

I mean if I look at our results, I think the last time we posted growth was back in 2017, and that was kind of low single-digit growth. 2018, we were down; 2019, we were kind of flattish. So while the end markets were growing, in our hands, the ortho business was not growing.

And I think if we just look at now our tissue business and the increased focus we're going to have on tissue and regenerative technologies, we should see an opportunity to grow that business in that high single-digit range and maybe even double digits in certain years. And that blended mix would get us into that 5% to 7% range overall.

So our view on organic growth, long-term targets and our ability to get there has not changed with divesting ortho. .

Our next question will come from Jayson Bedford with Raymond James. .

I joined the call late, so I apologize if these questions were covered earlier, if they were, you can honestly just kick me back to the transcript. So private label you mentioned the timing of orders in the deck.

Did you quantify this in the third quarter, I'm just wondering if there were kind of stocking or catch up orders that may not recur?.

Yes, we didn't quantify it other than to say, yes, the business we've historically characterized as lumpy. If you go back to the second quarter and the third quarter of last year, we were up in the second quarter, like 15%, we were down in the third quarter.

So certainly, part of the performance in Q3 was an easy comp because we were negative growth last year in the third quarter and coming in strong. But certainly, there was some pent-up demand benefit in private label as well as some of the surgical and dental procedures and spine procedures recovered nicely here in the third quarter.

So it will be a little bit lumpy as we normally would expect. But other than that, it's just some differences in timing orders, but mainly because of last year's negative growth. .

Is this a good base to build on?.

Yes. I mean, we would still expect sequential growth in Q3 and Q4, again, not barring a huge change in the senior externally on the COVID outbreaks overall. But I would say, sequentially, we would still expect to see improvement from Q3 into Q4. But again, you'll have some lumpiness in that business.

But we've always characterized it as kind of that mid- single-digit type of grower. And absent COVID, that's what we would expect. Some quarters will be higher, some quarters will be lower. .

Okay.

And then just from a big picture standpoint, do you feel like you've exhausted the patient backlog? Or do you still think there's patients on the sidelines waiting to benefit from Integra Technology?.

No. I think there's still more backlog that we'll probably see in the fourth quarter, depending upon how things play out. There's definitely still some more procedures that have not been completed that have been deferred previously. So there is still some more backlog.

Again, for us, it hasn't been a significant number, I would say, most of it has been around good execution, but we did see some backlog pull-through in the third quarter. I would expect both things being equal, if we don't see resurgence of the virus of any meaningful way, we'll see some of that kind of pull-through in the fourth quarter.

But there clearly is some areas of backlog. I point out the U.K. is an example where they haven't gone back to a normal recovery. There is some procedures that are being deferred. And at some point, those will move forward. So just use that as 1 example, but there are others as well. .

Our next question will come from Matt Taylor with UBS. .

I just wanted to ask you, one about the geographic trends and how that plays into your scenarios for Q4 and looking forward? Looking at your comments in the script, it looks like you're expecting some of the markets in Asia to do a little bit better. Maybe there's some risk in Europe, but you haven't seen it yet, and U.S. is a little uncertain.

Is that a fair characterization? Or can you talk about any of the recovery trends geographically?.

Yes, I think you're correct in how you've looked at it. I mean, Japan and China, again, we'd expect to see growth in the fourth quarter even though COVID is still impacting the business there, it's done quite well. And this past quarter, in Japan, as an example, we posted another quarter of double-digit growth.

So the business there is doing quite well. We would expect to see growth in both Japan and China. And those are obviously important markets for us in Asia. In Europe, in our direct markets, it will probably be a bit of a mixed bag. We have to see how things kind of play out here.

We did see some growth in Germany in Q3, but certain markets like the U.K., Spain, Italy, to a lesser extent, are actually down year-over-year. I think our biggest concern outside U.S. continues to be the indirect markets. And in particular, Latin America. So those are still down double digits.

And keep in mind, in total, it represents probably 6% of our global sales. When you look at our indirect business, business we sell to distributors. So that's the area we're looking at very closely. But other areas like Canada, Australia are continuing to show good progress. .

In the U.S., I think OTT will continue to show growth in the fourth quarter. We made that comment in our prepared remarks. So OTT, and in particular, TT, we'd expect to grow here in Q4. And then CSS will have to see how things play out.

We did make some really good progress sequentially in the third quarter, we were down slightly year-over-year, and we'll have to see how the fourth quarter plays out. But all in all, the U.S. continues to hold up quite well. We'll have to see how things play out. But that's how we look at it geographically. .

I had 1 follow-up. Just totally different topic. I wanted to ask you about tax.

And specifically, if you've looked at what the impact could be if the Democrat tax plan is put in place, ballpark numbers? And what strategies could you use to mitigate some increases in tax if that were to come to pass?.

Yes. I mean, it's difficult to know exactly what will happen on the tax side, but if the Democrats do take office, I would expect that the U.S. tax rate would move higher. And that that could be 28% type of cash going to tax rate in the U.S.

And so obviously, we have different tax strategies different structures around the world to take advantage of and look at forward-looking planning, and we'll take advantage of those. We're actively working, though some of those this year to try to minimize that impact.

But certainly, that would have an impact as it would most of our competitors and other peers in the space here. .

Our last question will come from Ryan Zimmerman with BTIG. .

Yes. Just a quick follow-up, sorry, to run the call on. You guys did complete an ASR earlier this year. And I know we've talked a lot about growth on the top line.

But with the capital with the dollars you do have from the divestiture and where the stock price has gone, is there any consideration? I think there might still be some room on the repurchase.

And just wanted to get your thoughts on share repurchase looking ahead over the coming quarters?.

Yes, you're right. We still have some capacity left, about $125 million of capacity on the share buyback that we could do. I would say we've completed what we expected to do and what we've announced and I think to be consistent with Pete in his remarks, we do really like to be interested in some strategic M&A.

So I think in terms of a priority, that's where we'd like to focus. But I would say with the improvement in the consolidated net leverage that we've had going from 3.4 to 3.2 and then thinking about the ortho proceeds coming here at year-end, we get into a range towards the end of that window.

So we talked about a sweet spot in our leverage ratio of 2.5x to 3.5x. It really gets us down to that low end of that targeted range, which gives us a lot more optionality to think about what we want to do in terms of whether we have something in the pipeline to execute on, whether we want to do something else.

And again, we do have that as a lever because we still have capacity left. .

That concludes today's question-and-answer session. Mr. Beaulieu, at this time, I would like to turn the conference back to you for any additional or closing remarks. .

No. Thank you all for joining us today, and we look forward to catching up in the near future. .

Thank you. This concludes today's call. Thank you for your participation. You may now disconnect..