Good day, and welcome to the Integra LifeSciences' First Quarter 2022 Financial Results. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Chris Ward, Senior Director, Investor Relations. Please go ahead, sir. .

Thank you, Cecilia. Good morning, and thank you for joining the Integra LifeSciences' First Quarter 2022 Earnings Conference Call. Joining me on the call this morning are Jan De Witte, 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 first quarter 2022 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 First Quarter 2022 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 discussed in the company's exchange act reports filed with the SEC and in the release.

Also in our prepared remarks, we'll make reference to both reported and organic revenue growth. .

Organic revenue growth excludes the effects of foreign currency, acquisitions, including [indiscernible] for the first 19 days of the year, divestitures as well as discontinued products. Unless otherwise stated, all disaggregated and franchise level revenue growth rates are based on organic performance. .

And lastly, our comments today will include certain non-GAAP financial measures. Reconciliations of any non-GAAP financial measures can be found in today's press release, which is an exhibit to Integra's current report on Form 8-K filed today with the SEC. And with that, I'll now turn the call over to Jan. .

Thank you, Chris, and good morning, everyone. Let me start by providing a review of our first quarter business highlights on Slide 4. Definitely a quarter we feel good about, and that is reflective of strong starts to the year.

Our first quarter revenues finished at around $377 million, above the high end of our guidance range and with organic growth above 5%. You will remember that in mid-February, we went in with cautious guidance for the first half of the year. .

Although we felt confident about our capabilities at that time, we had very few data points on exactly how and until when our markets and operations would be impacted by the Omicron disruption. .

And also how they would ease towards the next level of normality after the peak of the disruption passed. Our better-than-expected revenue result in Q1 was driven by a stronger-than-expected recovery in surgical procedures across the globe in March as well as by favorable order timing in our private label business.

We saw demand for our products steadily increase, starting in early March, while agility in our commercial teams and operations allowed us to keep up with strengthening demand late in the quarter..

Our growth in the first quarter was broad-based with both our Codman Specialty Surgical and our Tissue Technologies segments at or exceeding 5% organic growth and with strong contributions from both our U.S. and international markets. .

Our first quarter adjusted earnings per share of $0.74 also exceeded the high end of our guidance range, driven by the higher revenue and with gross margins improving 40 basis points compared to Q1 of 2021. .

We're pleased that the increasing utilization of our factories, combined with margin protection measures taken by commercial, supply chain and procurement teams succeeded in protecting our margins despite the inflationary environment. And we intend to maintain this margin focus throughout the year. .

As we think about the full year, we feel more optimistic now, but still tempered with continued caution around macroeconomic-driven uncertainties, including interest rate hikes, geopolitical instability and further risk from COVID disruptions like what we are seeing in China at this moment. .

We expect surgical procedures will continue to steadily improve through the balance of the year with more normal seasonal patterns. And while we anticipate continued ripples on the supply side of our operations, due to some of these macro factors, we should see improving trends in our operations over the balance of the year..

As a result of our strong start and balanced outlook for the remainder of the year, we are increasing our organic growth expectations for the full year to a range of 3.8% to 5.2% compared to our initial range of 3.5% to 5%..

Reported revenue guidance remains the same as our February guidance as we are absorbing additional currency headwinds as the dollar continues to strengthen. We're also reaffirming our full year guidance for adjusted EPS..

Our Q1 performance as well as the resilience in our organization provides us a solid foundation for continuing to invest in our future in order to accelerate the business to a next level of performance over the coming years. .

During the first quarter, we invested in our organizational capabilities and capacities as well as our growth catalysts. And we initiated a number of strategic road map projects. Also, in the first quarter, we launched NeuraGen 3D, our new peripheral nerve repair product.

And we continued our global rollout of CereLink in Canada, Australia and several indirect markets. Finally, we completed the accelerated share repurchase program we previously announced, and as a result, have returned $125 million to our shareholders, keeping up with a track record of strong financial rigor. .

With that, I would like to turn the call over to Carrie now to go deeper into our first quarter performance and our updated guidance. .

Thanks, Jan, and good morning, everyone. I'd like to start with a brief summary of our first quarter financial highlights on Slide 5. .

First quarter total revenues were $377 million, representing an increase of 4.6% on a reported basis and 5.6% on an organic basis. Total revenues were $12 million above the high end of the guidance range communicated on February 23. .

I would characterize the revenue upside is driven largely by the strong recovery of procedures in March, coupled with our ability to maintain our pace with customer deliveries as well as favorable order timing from our private label business. If you recall, we talked about higher levels of back orders during our last earnings call. .

We ended the first quarter in roughly the same backorder position we discussed then, still higher than historical levels but with no increase since our February call.

And when considering the sharp escalation in demand in March, maintaining the same level of back orders was a good outcome, all things considered, as it meant our supply chain kept up with stepped up demand and delivered revenue upside. .

First quarter revenue growth was strong across most of our portfolio. We achieved organic growth at or above 5% in both our Codman Specialty Surgical and Tissue Technologies segments with U.S. organic growth of 6% and international organic growth nearly 5%.

Adjusted EBITDA margin for the quarter was 24.8%, down 20 basis points and adjusted earnings per share increased 7% to $0.74. .

If you turn to Slide 6, I'll now review the first quarter revenue performance of our CSS segment. Reported Q1 revenues in CSS were $247 million, an increase of 2.5% on a reported basis and 5% on an organic basis from the prior year. Global neurosurgery sales were up 5.8% on an organic basis, driven by CSF Management and neuromonitoring.

CSF Management increased high single digits and was led by growth in our programmable valves, while Neuro Monitoring grew low double digits benefiting from the recent launch of CereLink. .

Total capital sales in the quarter grew low single digits driven by smaller capital, including CereLink and MAYFIELD, offsetting lagging sales and larger capital equipment where we saw extended selling cycles linked to the Omicron disruption. .

Q1 sales in instruments grew approximately 2% on an organic basis, in line with our long-term growth expectations for this business. Recall that last year, we saw significant growth in our Instruments business as a result of pent-up demand. International sales in CSS increased mid-single digits led by CereLink in Europe and by growth in Asia.

Performance in China and Japan was strong with low double-digit growth in both countries. .

Moving to our Tissue Technologies segment on Slide 7. Tissue Technologies grew 8.8% on a reported basis and 6.9% on an organic basis compared to the prior year. First quarter sales in wound reconstruction increased 4% on an organic basis, driven by sales in Integra Skin and SurgiMend.

ACell is reported within the wound reconstruction franchise and ACell revenue in the first quarter was consistent with Q3 and Q4 2021 levels, in line with our expectations. .

As we shared on our February 23 call, we plan to hire additional sales colleagues in our wound reconstruction business over the first half of 2022. And in Q1, we hired a total of 15. We intend to hire another 15 in the second quarter and anticipate building momentum with the ACell product portfolio in the second half. .

In our private label franchise, sales grew 15%, driven by higher customer demand and favorable timing of orders as our partners continue to build inventory. And finally, international sales in Tissue Technologies increased mid-single digits on an organic basis, driven by strength in Europe and Canada. .

Turning to Slide 8. I'll now review our first quarter P&L components. Adjusted gross margin was 67.7%, up 40 basis points compared to Q1 of 2021. The improvement was driven by higher revenues and favorable product mix within our neuro and tissue technology businesses. .

Our gross margin, which was in line with expectations, was impacted unfavorably by higher freight costs, material and labor inflation as well as manufacturing and supply chain inefficiencies caused by the Omicron variant. These challenges were offset by our pricing actions, purchasing initiatives and cost improvement activities..

Our guidance for adjusted gross margin for the first half of the year remains unchanged from our February call. For the first half of 2022, we expect adjusted gross margins to be largely in line with first half of 2021 margins at the midpoint of our guidance range. which implies roughly flat adjusted gross margins in Q2 compared to Q1..

Our first quarter adjusted EBITDA margin was down 20 basis points compared to the prior year, which was consistent with our expectations communicated on our February call as we planned for increases in R&D, selling and marketing expenses in support of our key growth priorities. .

Similar to gross margin, we expect first half adjusted EBITDA margins for 2022 to be relatively flat compared to first half of 2021. Adjusted EPS was $0.74 in the quarter compared to $0.69 in the prior year, reflecting an increase of 7%, driven primarily by revenue growth. .

Now if you turn to Slide 9, I'll provide a brief update on our balance sheet, capital structure and cash flow. Operating cash flow in the quarter was $44 million, and free cash flow was $35 million.

Free cash flow conversion was 86% on a trailing 12-month basis, reflecting capital spending at more normal levels and increased spending for EU MDR compliance..

In the first quarter, we completed the previously announced $125 million accelerated share repurchase program, with approximately 1.9 million shares repurchased. Our balance sheet remains strong with ample liquidity to support our short- and long-term plans.

And as March 31, net debt was $1.15 billion, and our consolidated total leverage ratio was 2.5x. The company had total liquidity of $1.66 billion, including $407 million in cash and the remainder available under our revolving credit facility. .

Turning to Slide 10, I'll provide an update to our consolidated revenue and adjusted earnings per share guidance for the second quarter and full year 2022. Second quarter revenues are forecasted to be in the range of $392 million to $400 million, representing reported growth of 0.5% to 2.5% and organic growth of 2.8% to 4.8%.

Our second quarter revenue guidance reflects continued procedure recovery, offset partially by increased FX headwinds and an expected impact in our revenue in China due to the government-mandated COVID lockdowns. .

For the full year 2022, we are raising our organic growth expectations from an initial range of 3.5% to 5% to a new range of 3.8% to 5.2%. The increase reflects our better-than-expected Q1 revenue performance, but also the continued uncertainty of global markets and the expectation of continued supply constraints. .

Our revenue guidance assumes only a modest improvement in back-order levels through the balance of the year as we work to keep pace with anticipated procedure recovery.

Notwithstanding our increase in the guidance for organic growth, guidance for reported revenue growth remains unchanged at $1.58 billion to $1.6 billion, reflecting the absorption of an additional 30 basis points in FX headwinds for the full year. .

Turning to adjusted earnings guidance for the second quarter. We expect adjusted EPS to be in the range of $0.78 to $0.82, roughly flat when compared to the second quarter of 2021 at the midpoint. Again, reflecting continued planned growth investments.

We are holding our full year 2022 adjusted EPS guidance range of $3.27 to $3.35, which reflects additional FX headwinds and continuing macroeconomic uncertainty. .

Now I'd like to turn the call back over to Jan to provide a brief recap of where we stand with our 2022 growth drivers. .

Thank you, Carrie, and let's turn to Slide 11. Our first quarter results provide confidence that we can deliver on our 2022 commitments while investing in our growth catalysts and strategic projects. We feel our full year outlook is balanced.

It reflects our focus on commercial and operational execution, but also recognize that a great deal of macro-related uncertainties still exist. And we are diligently working to execute on the levers we can control. .

These levers include price capture, supply chain initiatives and driving efficiencies in our processes and sites, combat inflationary pressure and protect our margins. At the same time, we're providing room to invest behind our key growth catalysts. .

Over the past 2 months, I've continued to spend a significant portion of my time in our factories and in the field with our customers and commercial teams. I can see the growth momentum return as hospitals manage through their staffing shortages and free up capacity for elective procedures. .

At our own sales meetings, I see commercial colleagues who are energized to leverage the strength of our diverse portfolio, including our new products. And I've seen our supply chain teams fully engaged, managing through the many disruptions that continue to be thrown at them. .

We're also excited by our international growth opportunities. Our commercial teams in China and Japan continued to deliver double-digit growth in these markets. And we are also seeing improved procedure volumes in Europe. .

We continue to launch CereLink in new countries as part of our multiyear global growth plan for the product, which includes geographic expansion, a growing recurring revenue stream as our installed base grows, and the addition of digital capabilities. .

The controlled market release of the Aurora Surgiscope for use in minimally invasive neurosurgery continues as planned, as does the MIRROR registry for the surgical treatment of intracerebral hemorrhage or ICH. .

Although the 2022 revenue contribution from the Aurora platform is small, the long-term benefits to surgeons and patients have the potential to change the standard of care in neurosurgery for ICH. And we expect it will be a significant contributor to our long-term growth as well as a place in our product portfolio for further digital innovation. .

In our Tissue Technologies business, we expect to see continued procedure recovery through the balance of the year. The launch of our NeuraGen 3D product targeted for mid-cap peripheral nerve repair should boost this momentum. .

In our ACell business, we clearly have more work to do to achieve the performance that we expected when we acquired the company. As Carrie mentioned, we expect to have hired 30 incremental resources in our wound reconstruction commercial team by the end of June. .

With an expanded commercial team as well as new marketing and digital customer outreach programs and a more focused compensation plan, we anticipate revenue growth for ACell in the second half of 2022. .

In conclusion, we're executing on our 2022 commitments with a strong start to the year. The organization continues to demonstrate resilience in the face of numerous challenges while keeping its focus on near-term execution as well as our long-term growth objectives. So this concludes our prepared remarks. Thank you for listening.

And Cecilia, with this, we can open the lines for questions. .

[Operator Instructions].

We will now take our first question from Steven Lichtman from Oppenheimer & Company. .

And congratulations on the start to the year. I just wanted to start maybe, Carrie, on inflationary pressures.

As you think about the totality of those efforts that you mentioned, how much are you able to offset those pressures? In other words, how much of a net headwind is assumed in your gross margin guidance? And did your assumption of the gross impact from inflation increase since the start of the year?.

Thanks, Steve, and I appreciate the question. I would say that our gross margins came in largely where we expected. So we knew we were going to have some headwinds. I think we properly bake those into our forecast guidance.

But we also started out the year strong with a lot of actions around those areas in terms of price capture in terms of procurement initiatives and just other cost reduction activities that we're doing in our factories as well. .

And I think all of that largely played out as we expected. I think as I think about the balance of the year and part of the reason why we maintain the EPS guidance range where we did is that I don't see those necessarily abating at this particular point. .

I think they largely will get a little worse than they are right now. And as I think about the guidance range we provided for the full year, that does give us some room in case those gross margin headwinds get a little bit worse in the second half.

But I would say we're equally focused on all of those mitigation activities that did bode well for protecting those margins in Q1. .

And we actually saw a little bit of growth in our gross margin line in Q1. So I think they're all there. I think freight, it continues to be a big issue. Rising energy costs, that are finding its way into the supply chain, also are there as well. All of those things, I think, are not going to ease as we move through the year.

But at the same time, we're working just as hard to offset those. .

Great. And then maybe just my second question on just a couple of macro items. I know your capital business doesn't include a lot of big-ticket items, but I was hoping to get your perspective on the health of the capital equipment environment in the U.S. .

And then in China, I know you're still under levered there.

But what's the latest you're seeing in terms of demand impact from the lockdowns?.

Yes. And I'll have Glenn talk about the China -- but maybe I'll hit the capital question first. Overall, I think -- as I think about our performance in Q1 and capital, we did have the contribution of CereLink. So obviously, that was not there. That product was not launched until late last year.

So it was a nice tailwind for us in Q1 as well as some of the smaller capital like MAYFIELD saw some nice growth. .

If you kind of exclude those, the larger capital did see declines, year-over-year. And I think many other companies have seen the same thing, I think, with the Omicron disruption. Those selling cycles just extended a bit longer. So I wouldn't read into it any more than that. Our view of the pipeline is still very strong.

And we do expect to see capital sequentially continue to increase both in absolute dollars but also in terms of year-over-year growth as we move through the quarter. .

Second half of last year was a good capital recovery quarter. So you need to moderate your growth just because of that. But generally, an absolute dollar -- capital dollar growth will continue to increase through the year. And I don't think it's more than just some extended selling cycle with Omicron. .

And then, Glenn, do you want to respond to the China question?.

So I'll just add on, though, to the capital piece. Outside the U.S., we actually did have growth in our small and large capital businesses, and that was largely driven by Japan, China, Canada and many markets in direct Europe. So it was very encouraging to see that both small and large capital. .

In terms of China, I think as we mentioned before, China is our second largest market in country by revenue outside the U.S. It represents about 3% to 4% of our overall consolidated revenue. So it's not significant yet in terms of dollars, but it's been a key growth driver for us, consistently growing in double digits for the last 5 years or so. .

In terms of the lockdown, clearly, it's had an impact on our business in the second quarter. It could possibly go beyond that. But right now, we've built the expectation in that the lockdown will end kind of in the mid-May time frame. That's what's been built into our guidance. .

One thing to keep in mind when you think about a lockdown is a lot of the procedures that are not happening right now will not come back to us because when you have a lockdown, you don't have a lot of traumatic brain injury, as an example. .

So some of them will come back from a timing perspective, but some of them will not. And so -- we've built that into our guidance for the second quarter and full year. And if it goes beyond, I would say, mid-May, it could have an impact on our business, largely in the third quarter. .

And I say that because the second quarter -- we've got already the commitments with our logistic providers in China. So we pretty much have our revenue locked in to the second quarter, but if it went beyond, say, the May time frame, could have some impact in the third quarter.

But on the whole, I think it's very manageable, and we're still very excited about our opportunity in China. .

We will now take your next question from Robbie Marcus from JPMorgan. .

Great. Congrats on a nice quarter. I was -- you touched on this in the prepared remarks a little bit, but I was hoping to just get a little more detail on how you're sizing up sort of the bottom-line impact from FX and some of the macro cost pressures.

Just thinking about since you've beaten first quarter and you're being conservative, how much is conservatism balanced against incremental headwinds for the bottom line?.

Sure, Robbie. Thanks for the question. And I would say that we started out Q1 with a really nice performance. And so I think consistent with our remarks, we're cautiously optimistic on the balance of the year. but we're only at the end of April. And I think there's just a lot of macro factors that are still swirling about. .

And you can call it conservatism, but I do think it's a pragmatic view to say, still have a whole lot of factors that have to kind of play out to see where they land. And when I think about that, it's not only FX headwinds I didn't see where the rates were this morning, but yesterday the U.S. dollar continued to strengthen. .

So that's even more headwind as we think about the balance of the year. Interest rate hikes, geopolitical instability, obviously, the war in Ukraine, but anything that escalates beyond that, and just overall supply constraints. .

So all of those things have come into play as I -- as we all think about our performance in the balance of the year. And so I think there's a lot to be optimistic here, but a lot of it still has to be kind of shaken out here. And I think our guidance range does give us some room to maneuver within that. .

So as I mentioned to the response to Steve, we're willing to fight like hell to offset all of this inflationary headwind that we had, and we did a really nice job in Q1. That is a real focus for us for the balance of the year. But I do think those may get worse before they get better.

And look, if we can manage successfully in those gross margin headwinds, that does give us the optionality to actually accelerate some increased investments for our growth initiatives in the back half of the year. .

So we'd like a little bit of degrees of freedom here as we think about positioning ourselves in the back half of the year and I think about beyond 2023. .

Great. I appreciate that.

And maybe just to focus in on the Tissue Technologies business a little bit here, how should we think about the balance of private label versus the wound business for the balance of the year?.

I know private label could be a little lumpy.

And if you could just give us an update on the tissue business, where do you think the market growth is and how you think you're doing in terms of share gains there?.

Yes. And maybe I'll hit the first question and then ask Glenn or Jan to talk about the TT in general market question. But in terms of private label, there's -- there definitely was some advancement of orders into Q1 for private labels. .

Our private label partners are building inventory. So as you think about the supply constraints that we've talked about, they have their own supply constraints. So they are building inventory and our Q1 benefited from that. So a little bit of timing advancement from Q2 to Q1. .

So as I think about our guidance for the second quarter, we have assumed that private label, that revenue is going to be lower in the second quarter. as it relates to growth rate. We're going to see much more of a tempering of that growth rate as that got pulled forward. .

So I do believe that as we move through the year, private label, you won't see as much growth as you saw just because of some of the year-over-year comps. If you remember, private label is really strong last year as well as, again, I think our partners were building inventory. .

So that's going to balance out quite a bit here as we move through the balance of the year. And then the balance of the wound reconstruction part of the business, we'll start to see some performance there. .

So maybe I'll turn it over to Glenn or to Jan. .

Yes. So in terms of the overall market for tissue, I think you got to break down some of the segments within it. But overall, it's probably growing in the mid- to high-single-digit range. So consistent with our long-term growth target of 7% to 9%. .

I would say within that, though, peripheral nerve repair and breast reconstruction or plastic and reconstructive procedures are probably growing faster in the low double-digit range. And complex wound is probably in the mid-single-digit range, just breaking it down.

But overall, pretty consistent with what our message has been around how we expect to grow over the next 5 years. .

And maybe on ACell specifically, where we saw ACell in the first quarter pretty much in line with the Q4 and Q3. We are -- that's not where we want to be. We are building up further capacity, sales capacity within wound reconstruction, which will benefit ACell and some of the other products.

ambition there is to show real growth as of the second half of the year in ACell. .

We will now take our next question from Ryan Zimmerman from BTIG. .

I want to ask a couple of questions. Carrie, you talked about the backlog dynamics, and you were able to successfully navigate that with your supply chain team this quarter.

Can you give us a sense of kind of what that backlog is in terms of size and scale? And how that could or couldn't be worked down -- I guess, your ability to titrate that backlog to the balance of the year would be helpful. .

Ryan, it's Glenn. I'll take a crack at this one. In terms of our back orders, we ended the quarter pretty consistent with where we ended at the end of last year. So we're probably about 2 to 2.5x above normal levels. And it's mostly within our CSS business where we're seeing in the back order. .

So that just gives you an idea about where we are in terms of back orders. But considering the sharp increase that we saw in demand during the quarter and in March specifically, just maintaining the same level of back order.

It was really a good outcome for us as essentially meant that our supply chain kept up with the higher demand, and we're able to deliver the revenue upside. .

So we actually thought we did a nice job of managing through supply in the first quarter. Moving forward, in Carrie's prepared remarks, we talked about some modest reductions in the back-order levels for the rest of this year, but still supporting expectations for increased demand, especially in the second half of the year.

So we do expect to see improvements in our back orders, they should come down. .

But we're going to be pretty much dealing with the back order situation and supply constraints for the rest of this year, but it should get modestly better as we move forward. .

So hopefully, that gives you some context. I would just say on a positive note, look, taking a glass half-full approach. We're seeing improvements in lead times with suppliers. However, I would just say things are still far from normal. We've seen improvements in the apps and rates in our manufacturing facilities. .

That was an area of concern early in Q1, that's coming back to much more normalized levels. And so those items are going to help us to get more throughput and more output from our manufacturing sites and help to improve the back order situation. So things are trending in a positive direction, but still far from normal. .

Okay. That's helpful, Glenn.

And given the balance sheet position, the leverage ratio and also the share repurchases that you did this quarter -- this past quarter, I should say, what's your view on the M&A landscape? I mean, it seems like with the share repurchase dynamics, maybe there's not as much out there that's kind of striking you guys as attractive.

But I want to get both Jan and Carrie's thoughts on that, please?.

Yes. In terms of M&A, Ryan, I think we're -- remain the same [indiscernible] as before. And we are actively looking at opportunities. I think what is maybe different in the past couple of months compared to before was here is that in parallel to scouting the market. .

I am running with the different divisions, a deeper strategic look into where exactly in the care pathway, which adjacencies do we feel we have a strong logic and a strong position to 1 to spread our wings. So we're adding a somewhat more strategic filter on to the broad set of opportunities that we are looking at. .

Yes. And Ryan, I would just add, on the balance sheet, we do have lots of flexibility there. So we definitely want to be active on the M&A side, obviously, as we continue to look at opportunities. But we're a disciplined acquirer. And so we're going to wait until we find the right target before we jump on that opportunity. .

In the meantime, always looking for opportunities to allocate our capital. And opportunistically, the share buyback worked out very, very well, and we were able to buy back 1.9 million shares. But our leverage ratio had dropped below our window. .

We'd like to target 2.5 to 3.5. And so at the end of last year, we were at 2.3x. So little bit of excess cash there, so we deployed it in an opportunistic way. So I think that's still open, but certainly, we'd like to be active on the M&A side. .

We will now take our next question from Vik Chopra from Wells Fargo. .

And congrats on the quarter. So just 2 for me. First, I guess, is on the capital environment. When do you expect it to return to 2019 levels? And then I was just wondering if you could provide us with an update on the PMA for SurgiMend -- I don't think I heard anything on the prepared remarks about that. But that would be super helpful. .

Sure. Great. I'll take the first part of that question, and I'll ask Glenn to take the PMA question. On capital, again, I look at the Q1 capital performance as a little bit of mix. .

As I mentioned, the smaller capital did well. We have the contribution of CereLink coming in. As you heard from Glenn earlier on the international markets, both the small and large capital did well in Q1 as well. And it was really more of that U.S. market, the larger capital that saw a bit of lagging. .

And I attribute that to just the longer selling extension of selling cycles, nothing more than that. And I do think that we'll start to see some continued growth year-over-year in the remaining parts of the quarter. And from a dollar perspective, we'll start to see continued trends up in capital. I think we're still can be bullish on capital.

I think it's just a selling cycle extension that's driving that. .

So Glenn, if you want to take the SurgiMend question?.

Sure. So Vik, on SurgiMend, I don't have a lot to update. I think it's still too early to speculate on any approval timing. We're continuing to follow the process that we're working with the FDA on as they're reviewing our submission.

So I would just say, we remain hopeful that SurgiMend will ultimately receive the approval for the specific indication for use of post-mastectomy breast reconstruction, but don't have any real updates. .

I would expect probably late this year, we'll give you a better indication of where we are and the timing. But nothing really new to report on that front. .

And I would just say that if you look back to our prepared remarks, we had commented that some of the strength in Tissue Technologies on the wound reconstruction side was SurgiMend.

So even without the indication, we do have some very nice growth in SurgiMend there as the properties of that product really lend themselves to be revascularization and postmastectomy breast reconstruction. .

What the indication does allow us is to essentially train and to promote for that specific indication. But without it, we still have a general indication, and we still see some nice growth in SurgiMend. .

Yes. And just as a reminder, we do have a specific indication for rest -- breast outside the U.S. and Europe. And so we do have that ability to market and so forth. The biggest opportunity still resides in the U.S. .

We will now take your next question from Craig Bijou from Bank of America. .

Maybe just a follow-up on SurgiMend for breast and on your comments, Carrie and Glenn. Maybe just to understand the underlying demand and your comments are interesting, and I did want to see if you are seeing greater use in breast, even though you don't have the label in the U.S.

So basically are docs using it off-label more than they were, say, last year?.

Yes. Again, SurgiMend gets used for plastic and reconstructive procedures along with hernia and [indiscernible] procedures. And we don't specifically sell into the breast area today because we're not allowed to because we don't have the indication.

So we don't necessarily have a good way to track what's being used for breast versus other areas where SurgiMend gets used. But we're clearly seeing an overall uptake on our SurgiMend product both in the U.S. and outside the U.S. .

Yes. And to follow up on Glenn's point in both of those areas in plastics and reconstruction as well as the hernia side, we've seen very nice growth in both of those areas. .

Got it. Okay. And then you guys -- I don't think we talked about pricing that much with you guys are having over the last several years.

But I did want to ask a question given some of the supply chain inflationary pressures, what have you been able to get on pricing? And have you been able to get price on your products?.

And if not, do you think that's an option for you if the supply chain pressures don't abate later this year or even the following year?.

Yes. I would say that the price capture has always been -- certainly, it's top of mind as we think about 2022. But we've always had the ability to capture some amount of price. .

So as we look back at our history, we've always been -- had an opportunity to capture some normal price, and I look at it a number of different ways.

You have your annual price increases, you have an opportunity to look at discount rates you have an opportunity to -- when you get new customers to think about pricing with new customers different than maybe older customers. .

You also have the opportunity with new product introductions to increase prices. So think about CereLink going into the market. So there's always a number of opportunities that we can think about price capture. A lot of the work that we thought about for 2022 began in the fall. .

Thinking about -- we knew some of these headwinds were coming, and so there was a very active dialogue with our commercial teams about price capture. And I think I've commented on this before that there's a fair amount of our U.S. revenue that falls under enterprise contracts. And those typically are 2 to 3 years in duration.

And sometimes you don't have an annual bite at the apple per se on those because they are -- they can be a little bit longer. .

But obviously, knowing when those contracts expire gives you an opportunity to renegotiate. But also most of those contracts have volume commitments in them.

So even if you are not able to reopen the contract, you can audit for volume and understand are they living up to the volume commitments, which is another opportunity to reengage in a discussion with our customers. .

So all of those things are there. Where we sit, as you think about even on the CSS side, where we sit in the total operating feeder bill of the cost of our products relative to the overall cost of a neurosurgical procedure, it's not the highest cost. .

So again, there are opportunities to capture price. And I think with our innovations that we've done in our product portfolio, it does give us that opportunity on the annual basis. .

Yes. Maybe to make it clear, we did start the year with a number of price increases where we could, and we're working now to make sure we capture that price.

At the same time, we keep a close eye on the different inflationary pressures, how we compensate some of that with operational measures or what additional price levers that we can use to pass some of that through. .

So for the remainder of the year, from Carrie and myself and Glenn, this is one of our top priorities to stay very, very close to our gross margin, and the different up and down pressures. .

We will now take our next question from David Turkaly from JMP Securities. .

Maybe one for Jan. You mentioned the rep hiring on the ACell side. That seems like such a complementary deal, such a plug-and-play sort of bag.

I guess I'm just curious, is there something additional on the training side that they need for those products? Or why would additional reps sort of be the solution to driving that given the portfolio you already have?.

Dave, it's Glenn. I'll give you some color around this. So when we actually bought the business, we had to go through some compliance-related matters and actually reduced the workforce. And we did that and probably went too deep on some of the content it relates to the sales reps. .

What we came to learn during the process post the acquisition was in many cases, these reps are calling on more than just complex wounds, they were calling on other parts of the hospital.

And so we are now adding back many other reps, 15 in the first quarter, probably another 15 or so in the second quarter to get better account coverage now and also cover complex wounds in areas outside of complex wounds, which we don't have adequate coverage today. So that's kind of the first thing. .

The second thing is we're really going hard after some of the bigger accounts now. And then lastly, as we've done some things to change our sales compensation plans to drive more positive behavior in selling in the ACell portfolio. .

So -- we feel really good about the momentum in the business right now. Like we've said earlier, the revenues have been pretty consistent the last couple of quarters. I'm expecting in the second half of the year. So we're going to see an uptick in revenues and growth we feel quite confident that, that's going to happen. .

And I think that's more of a timing relative to the fact that you're adding a few more heads. You've got to get them productive, right? You got to get them trained. They're not dedicated to just ACell, these incremental headcount. These are headcount that are being added to the entire wound reconstruction sales channel.

So they will be just a little bit of time to get them up and productive in selling, and that's why we've talked about a second half momentum expectation. .

It takes about 3 to 6 months between hiring a person and getting full productivity out of that person. And then I may say it's only 30 headcounts, but I would say -- if I look back over the past 6 months in the mobility in the workforce, I mean, that is not an easy job to bring 30 great sales talents on board. .

Now we have good momentum week by week, we're bringing them in and getting them productive now. And we feel by the second half of the year, we should see the full productivity of that added capacity. .

I guess as a quick follow-up, an easy one. Does that -- your authorization right now for buybacks is $325 million.

Is that correct?.

No. So if you go to the press release on that one, we had -- so the original authorization was $225 million from the Board. And we used $125 million of that up. So we had a balance of $100 million left. So essentially, we've canceled the remaining $100 million and kind of re-upped to the historical level of $225 million.

So just kind of reset that authorization level back at $225 million, just to give us additional flexibility and optionality there for share buyback. Nothing that we've announced further though. .

We will now take our next question from Rich Newitter from Trust. .

And congrats on seeing some improvement in the quarter here. Nice to see. Maybe just to start, I was hopping around calls, but I think an earlier question was on the M&A front. Jan, just wondering, I appreciate you're doing more strategic deep dives on the various units. You've been there a relatively short while. .

But I'm curious, any sense as to kind of when you think all of that work will start to come to a head? Or any timing on when you think they'll be a little bit more aggressive and focused on filling holes or identifying where you want to kind of deploy capital?.

So we plan by the end of the summer to be fully ready with our updated long-range plan, including clear direction for strategic acquisitions. In the meanwhile, when it comes to tuck-ins acquisitions that can fully leverage our strong sales force that is of a different nature. So we're not holding back to that type of opportunities. .

Okay. That's helpful. So not too far from now. And then on ACell, I think you said to expect improvement in the second half. I appreciate you have some rep adds that you're waiting for.

I'm curious, what is any contribution should we expect from increasing presence in the office setting? How does that factor into the strategy there?.

I think you're more indexed to inpatients.

Maybe just level set us on kind of what the mix is in that business and kind of how you see a potential site of care mix evolving over time there? And if that strategy plays into that at all?.

Thanks for the question. Clearly, the ACell business and our wound reconstruction business, in general, is all on the acute or hospital side. So very little in the outpatient side in the physician offices. .

Is there opportunity to expand or to move in that direction, I guess, is the question. .

Sure. I think it does create an opportunity for us. But right now, our focus is really on the acute and hospital side. And that will be our focus for sure, at least for the next 12 months. .

Okay. That's fair. And maybe if I can, just 1 last one. You mentioned, I guess, some supply issues.

Can you be a little more specific on how that's hitting? Is that an issue with fulfilling demand? Or is it just more are you able to fulfill the demand? You just have to go to spot purchasing and that just comes at a higher price?.

I think in terms of supply, we are doing a good job meeting demand. We haven't actually reduced the overall back-order levels. But the good news is we're seeing a pickup in procedures. We're seeing a recovery, and we're able to keep up with that increased demand.

I think as we move forward, we'll not only keep up with the demand and the higher procedure rates, but we'll also start to eat into that back order in backlog. So that should come down modestly over the next several quarters. .

When I look at our supply chain, I do not see us have structural shortages like you hear about in the electronics space. But what we do see is that ripples where delivery times are not met because suppliers have issues with their supply.

But it's more ripples in the supply chain, which I expect will continue for the remainder of the year as the world tries to come to somewhat of a more steady state. .

We will now take our next question from Matt Miksic from Credit Suisse. .

We're a little late in the call here. So maybe just one on a topic that we haven't talked about in a while, I don't think is sort of your progress through the sort of mid European med device regulation and DR environment that you've been investing in.

We see the charges come through, and then we talked about it kind of at the outset, consolidating some of the SKUs in your portfolio, investing behind some of the products there and phasing other products out. .

Can you maybe just touch on where you are in that process and maybe talk a little bit about some of the benefits you're seeing or if any, of sort of consolidation around key products where you've made the investment and maybe other smaller players have just opted to get out?.

Yes, Matt, it's Glenn. I'll take a shot at this one. So I think, first and foremost, we've done a lot of work over the last couple of years around EU MDR. We got an early start, but still a lot to go. But we're compliant with the Class 1 products, that was May of last year, are continuing to work to get compliant on Class II and Class III products.

And while the date is still a ways out there being May of 2024, there's a lot of work that has to happen this year so that we can do the submissions to the notified body, which we require at least 12 months for -- many of our products for animal-based products is 24 months. .

That means that we have to submit this year for those types of products. So a lot of the work effort and a lot of the costs that you see coming through are for efforts that are currently ongoing, it will take place in 2022. But we think we're on track to meeting those deadlines. There's quite a bit of activity happening as we speak. .

And -- we've done a lot of the work around the portfolio rationalization prior to this year. So that was all done that follows our median, our files and products that we're going to sell going forward. And we think if we do this right, it actually could be a competitive advantage where many other products may be pulled from the market.

So more to come, but this is obviously an important year when you think about EU MDR and all the work that has to take place. .

We will now take our next question from Frank Pinal from Jefferies. .

Just picking up on the M&A questions. I think Jan last quarter, you commented on the cost sort of filling out adjacencies and focusing on digital. I'm just curious if you've identified a particular segment to focus on, on digital right out of the gate, number one. And then I have a follow-up after that. .

There's -- I'd say there's a few that -- there's a few opportunity here that are matching where we play, whether it's in our Codman business or in our Tissue Technologies setting. Both are linked into enabling the care pathway where today we are part of. .

And then in our Codman business, whether it's our CereLink or our rollout platform, we are de facto into data and analytics and augmented visualization. So those are other areas where inorganically, but possibly also organically, we have opportunities to further broaden our value-added with digital. .

Great. Thanks, Jan. And just a final one here. Just hoping you can give some feedback on the NeuraGen 3D launch and maybe Aurora.

What are you sort of seeing in limited launches there? And how should we think about timing and what you expect to see ahead of full-scale launch?.

I'll let Glenn give some color there. .

Yes, sure. So NeuraGen 3D was launched at the end of the first quarter. So we're starting to see the pickup of momentum here into Q2. Very excited about it. It opens up now the mid-gap nerve repair market for us, which previously, we're only addressing the short gap in nerve repair market. So we've got a team in place. .

We've got a group of specialists that are selling this product along with our other nerve products. And so this will be a nice growth driver for us I'd say not so much this year because it's going to be a partial year launch, but certainly in 2023. So more to come on that. And we'll give regular updates on how we're doing with the Neura launch. .

On Aurora continue to get really good feedback from our KOLs. And again, this is a platform technology that's going to be used for minimally invasive surgery and intracerebral hemorrhage. And -- we see big opportunities in both areas, both in the U.S. and down the road outside the U.S., but have some very good momentum in both of these spaces.

And the revenues in terms of what's going to happen our actual results will really come from the MIS side of it in the near term and then over time, ICH will hopefully have the clinical evaluation support that we need and demonstrate the differentiation where we can actually drive significant revenues, but that's still a few years down the road. .

Yes. And I would just say it's not an issue of reimbursing, the reimbursement is there. It is more of just converting surgeons to do their approach a bit differently. And so instead of an open craniotomy, to use this tool to do a minimally invasive approach.

And for the ICH market, it's -- really it's changing the standard of care where deep bleeds in the brain have -- in the past, there hasn't really been any surgical intervention. It's mainly medical management. .

And so this is a really exciting area where we can change the standard of care for ICH. So it is really about this limited clinical launch, getting access in getting our products in the hands of KOLs here that can influence the adoption of this technology. .

We will now take our next question from Jayson Bedford from Raymond James. .

I jumped on a little late, so I apologize if these questions are redundant.

But did you quantify the level of CereLink revenue in the quarter?.

No, Jayson, we didn't. But I would say that it was a very nice contributor to our growth. I think last year, we had about $9 million worth of capital sales in the second half of the year. And so we haven't disclosed CereLink for Q1, but it certainly -- as I think about 2022 to 2021, obviously, you'll have the full year benefit of it.

And it did -- it was a nice growth contributor in Q1 for us. .

And it's -- remember, this is a multiyear growth opportunity for us, and it has a recurring revenue stream. So as you see the market with the capital unit, which is more like a small to midsized capital purchase. It's not a -- I wouldn't consider it large capital. You also have the micro sensors, which is a nice recurring revenue stream for us. .

So as the capital sale goes, you'll start to see the buildup of the recurring revenue, and that's as I think about the continued year-over-year opportunity for CereLink and as I think about it, it's the combination of capital and recurring revenue. .

And Jayson, keep in mind, we're still launching CereLink in new markets outside the U.S. in 2022 and beyond. So this year, we'll launch in some of the indirect markets, we're launching in Japan. By 2025, we're expecting to launch in China.

So even though we've launched a product -- when we say we've launched it, we've launched it in major markets like the U.S., Europe, Canada, Australia. There's other markets that are going to be new in 2022 and beyond. .

Right. Okay. And just the second one here, low single-digit growth in Dural Access.

Is this kind of the level of growth that we should expect for this segment? Or are there other dynamics going on in the market?.

I think it's what we expected. I mean, overall, CSS, we've talked about 3% to 5% growth. Instruments is going to be on the lower side of that spectrum. And the rest of the neurosurgical will be a little bit higher. But I would say nothing unusual here. I think, again, it was a very nice quarter, all things considered in the CSS group. .

We will now take our next question from Matt O'Brien from Piper Sandler. .

This is Drew on from Matt. Sorry to ask the 100 supply chain question here, but Carrie, your comment that some pressures may -- from a margin perspective, may get a little worse throughout the year, is that related to anything in particular? Is that freight, raw material staffing, anything like that? And then... .

No. Go ahead. .

And then just probably just related to the backlog, are you able to quantify the revenue impact in the quarter due to issues sourcing anything up or down the supply chain?.

Yes, I'll have Glenn talk about the backlog. But on the specific comments on gross margin headwind, I think it's more of a generic comment through.

There's something in particular other than what I'd say is continued supply chain challenges, continue material pressures around energy input costs as well as just overall freight cost and just other material pressures. .

So I don't think these are subsiding. I think they are still prevalent, and the question will be is, will they get any worse than they have been. I think we've done a very nice job of keeping them at bay and working at actions to offset them very nicely here in Q1, and that's our intent for the balance of the year. .

But generally, I would say we hear more about these than less about them. And so it's more of a general comment rather than anything in specific. .

And then in terms of back-order quantification, I think the way we look at back orders is in a normal year, we'd have about $4 million to $5 million of back orders. And right now, we're around $15 million. .

So if we were down to a normal level, we'd have $10 million of incremental revenue is the way to think about it. But again, relative to year-end, we're pretty consistent with that back order number. We were around $15 million at the end of the year. We're $15 million now.

I think the good news is as we start to get into that backorder situation later this year, obviously, that's incremental revenue for us. But again, that's all built into the guidance that Carrie provided. .

This now concludes the Integra LifeSciences First Quarter 2022 Earnings Call. Thank you for joining..