Good afternoon. I'm Larry Biegelsen, the medical device analyst at Wells Fargo, and it's my pleasure to host this session with the management team from Integra LifeSciences. With us, we have Glenn Coleman, the Chief Operating Officer; Carrie Anderson, the new CFO; and Mike Beaulieu, Investor Relations. Glenn and Carrie, thank you very much for coming.
Thanks for having us.
The format's gonna be a fireside chat. If anybody in the audience has a question, please raise your hand. Glenn and Carrie, why don't we start with some of the recent executive changes and the, you know, changes maybe in the strategy? Glenn, you were recently promoted to Chief Operating Officer.
Mm-hmm.
Hopefully, I'm getting that right.
Yes.
Carrie, you just came in as CFO.
Yes.
So it appears from Pete's comments, the CEO's comments on the Q2 call, it's gonna be a little bit of shift in his focus, toward portfolio management, and trying to improve the company's growth profile. So Glenn, why was this the right time to make this change, and what impact should we expect?
Yeah. I think first and foremost, let me just say I'm really excited about my new role as COO, and Carrie, great addition to our executive team as CFO. You know, why do we make this change now? I think the main reason behind it is we believe we're at an inflection point as a company. We've now moved past the most complicated acquisition integration over the last two years that we've ever done as a company. We believe we're in position now to move towards our vision of becoming a multi-billion dollar company, and having Pete focus more on the longer-term strategy, achieving the vision that we've outlined, spending more time with customers is where he's gonna spend his time on it, and myself really managing more of the day-to-day operations, driving and executing our operating plans, ensuring our new product launches are done on time.
Once they're launched, we get the actual traction we expect. We have all the right commercial activities in place to be successful. Continue to make sure we got supply to the field where we need it in, you know, particular areas of regenerative technologies where we're seeing really strong demand, and obviously making sure we finish up with the Codman integration. So we feel like now is the right time to make the changes. We feel like we're poised and positioned now to focus on growth versus acquisition integration, and we're excited about where we're going in the future.
Perfect. And, Carrie, what are your, you know, top priorities over the next 12-24 months? And I guess I should also ask, kind of what attracted you to Integra? I think this is your first kind of formal, fireside chat.
Yeah. So I came from the industrial manufacturing space, so the med tech industry is new, and a significant amount of onboarding for me. But I'm fortunate enough to join Integra with Glenn moving over to the COO role, but still having that base of knowledge there as I come in. And it's been a very seamless transition. As I think about what the finance function needs going forward, I think, again, fortunate that Glenn has put in a really good staff. My initial impressions of the finance function are very strong. It's really elevating the finance function, taking it to the next level, really focused on decision support. We've over the last several years under Glenn's leadership went from 30 ERPs down to a single ERP, and that should drive some simplification in our decision-making and our thought process, our analytics.
And so it's maximizing that, and it's really to maintain flexibility on the balance sheet, drive cash flow, visibility, and, in order for us to keep the flexibility on the M&A side.
Perfect.
Mm-hmm.
So why don't we kind of transition to kind of the outlook for this year and some of the color commentary you gave on next year and maybe dive into kind of the individual segments? You know, I think, Glenn, you came in in the second quarter, you know, with about 6.6% organic growth, better than expectations. But you left the outlook unchanged at 5%, I think, organic growth, which implies a little bit of a deceleration in the second half of the year. So I guess the question is kind of why would we see that given a lot of the risks around the Codman integration, or, you know, less and less as we go through the year?
I'll take that question, and then Glenn can add some color. I would say for the full year, our outlook was reaffirmed. So we reaffirmed at 5%. Our outperformance in the second quarter, some of that was driven by timing. About half of that upside was driven by timing, both on our private label business as well as some early adopters on one of our new products. Then we saw some outperformance in some of our other CSS products. But I would say that how we characterize the year is it gives us more confidence in the second half. First half, about 5%; second half, now about 5%. Much more evenly balanced where I think originally our path was for a much more aggressive second half. We've kind of de-risked the second half.
Overall, I would characterize that our outlook for the full year hasn't changed. It gave us just more certainty on the full year path.
And Larry, I would just add, you know, when we look at the back half of the year, we do have some more competition coming in in the neuro space. We have a big competitor that's launching several products. So we're being cautious around, you know, expectations in our capital business, expectations around our dural sealant business. At the same time, we still gotta get off the TSA in Japan. We've just exited that in the month of August. You know, I think we're seeing the expected level of disruption, I'll say, relative to that exit. So we're just being cautious around some of the things in the back half of the year. But, you know, we are expecting a slight acceleration second half versus the first half when you look at half of the year, first half, second half.
Remind us of what was the expected disruption for the TSA's rolling off in Japan that you kind of embedded in the guidance?
We didn't quantify the amount, but obviously, you know, when you look at what happened in Europe when we did this back in the first quarter, you know, we saw a slight decline in the overall business environment as our reps are spending a lot of time doing administrative tasks to track down orders, find out where shipments are, make sure orders are processed correctly, and all those types of things, and we're modeling something very similar in Japan here in the third quarter, and then we'll expect to see our normal level of growth as we go into Q4.
Japan is much smaller than Europe for you guys.
Yeah.
Is that fair? I can't remember. Japan $50 million for you guys?
Roughly $45 million-$50 million. Yeah.
Okay. And Europe is orders of magnitude bigger. So the impact on the overall Integra would be smaller?
Correct.
Right.
Got it. And you also talked about on the Q2 call, 2020 growing faster than 2019. Is that accurate, and what are the drivers of that?
Yeah. I'll answer that. I would say, yes, Pete did talk about his expectation that 2020 would grow faster than the 5%, and I would say I would interpret that we're not prepared to give guidance at this point for 2020, but I would say something higher than 5% is our expectation. As we think about the drivers of that growth from 2019 - 2020, I'd characterize it a few different ways. One is new product introductions. We've essentially had a half a year contribution of those new product innovations here in 2019, and we'll have a full-year benefit in 2020. In addition, we're making some incremental capacity investments in our regenerative tissue technology facilities in the U.S. Those will benefit beginning in 2020 and towards the end of 2020.
So the demand for those products remains strong, and we have our own supply constraints there, so if we can add some additional capacity there, that should drive some growth in 2020, and I would say, in addition, our international markets continue to be very strong for us, but particularly on the CSS side, so Europe, as we think about getting past the Codman integration distraction and the noise there, seeing stability in the European market, and then some really nice growth in both China and Japan, with Japan in particular on some of those new products.
When we look at sticking with 2020, when we look at EPS growth, this year it's 12%-14%, I think, for the EPS guidance range. You guys historically have targeted, I think, about 12%, Glenn, in the LRP.
Yep.
But I think that was predated you.
Mm-hmm.
But, when you look at next year, you have some tailwinds, you know, with the TSAs rolling off. Can you do better than 12%, or are there some headwinds that at this point we should be aware of, such as currency?
I would say, our expectation is still double-digit EPS growth. And so that is what we're planning for, we would expect. And as I think about the drivers of that long-term, you know, what drives our ability to say double-digit growth would be a couple of things, particularly on the gross margin line. It's positive, favorable mix shift. So our higher growth products, which have higher margins, would be driving some of that favorable mix, particularly some of our new products in our Codman surgical business, and then some of the regenerative tissue side, some of that growth or higher margin products. A second contributor would be some of the SKU rationalization we're doing. You saw some of that. We made an announcement in the second quarter about getting out of some higher commodity dental instrument-type businesses.
We were closing two facilities in Mexico and one in Pennsylvania, and those are low growth, gross margin products, so getting out of those will drive some mix shift as well, and then we talked about, again, just, some additional footprint optimization, so as Glenn is in his new role as COO, he's gonna be really focused on that, so part of that was that initial announcement we did make on the Mexico and Pennsylvania facilities, but I do think we'll continue to look at portfolio and footprint rationalization as part of that, and then just beyond the gross margin piece, it's thinking about the G&A line, and we do expect to see leverage there as we grow.
We'll have opportunities, you know, right now we're at 13% of sales on the G&A line, and I think over the next couple of years we expect to be able to leverage that down to about 11% of sales.
That's helpful. Any headwinds to think about? Tax, FX, tariffs? Fairly common themes here.
Yeah. I would say those are things that would be, you know, common things that we'll think about. We're not, again, not ready to give guidance there, but on the medical device tax, your bet is as good as mine in terms of what that means, and so those will be issues that we'll stay close to. You know, it's a difficult environment to try to predict whether that will continue to be suspended or eliminated, but that could have an impact, certainly a significant impact, if that were to happen.
EUMDR, certainly as we think about thinking through that, some of that thought process will feed into our rationalization on the SKUs, on thinking about our portfolio and is there a cost benefit of continuing some of these products and thinking about the cost to be compliant with the new regulations there. We would special charge those. We would separate those out. There's a number of companies that are doing the same, so we would be capturing any incremental EU MDR cost and separating those out.
Got it, then just kind of drilling down on the different businesses, starting with Codman, the guidance calls for slightly greater than 4% growth this year, I believe. You did a little low before in the first half, so relative stability going forward.
Mm-hmm.
Two questions. One is you do have some new products coming out there, so why not a little better in the second half? And long-term, can this business, you know, grow mid-single digits?
Yeah. I think long-term we've been very clear 3%-5% is how we would model the growth rates for the CSS segment. And obviously our goal is to drive towards the higher end of that range, but we see it as a 3%-5% growth business. You know, in terms of the performance, you know, year to date, a little over 4% organic growth. We modeled about 4% for the year. We got a bit of a bump in the second quarter on new product launches, in particular CereLink, and that's part of you know, early adopters really buying this product without even trialing it. So these are you know, 15-20-year veterans in the field. They're used to our existing product, so they bought kind of onsite, on scene without doing any trialing.
So we got a bit of a bump in the second quarter. Now we're gonna go through more of the normal selling cycle of 90-120 days before somebody's gonna actually purchase the product. And so we'll see a bit of a lull on new products in the third quarter. One of the reasons why our guidance is around 4% organic for Q3. And then we'll start to see that pick up in the fourth quarter and then more impactfully, in 2020.
So, CereLink and CERTAS Plus, the two new products that you guys are excited about. Maybe I'm not sure everybody knows what they are, so.
Yeah.
Maybe it would be helpful to tell us why they're, you know, important new products.
Yeah. So CereLink is an ICP monitor, measures ICP pressure, after a patient goes through a neurosurgical procedure. We had a product called Camino, which we had to divest as part of the FTC review when we purchased Codman. We had a choice of divesting the existing product on the market, which was Camino, or the product in development, which is CereLink. We chose to keep CereLink knowing that we thought it'd be a better product once it was launched. And so now we've just launched this product in the second quarter, seeing some really good positive feedback from surgeons and KOLs around that product. And so that's an exciting new product launch. It'll probably be the most impactful launch, I would say, in 2020 when you look at the 10 or so products that we're launching here, in 2019.
CERTAS Plus is a product or the flagship product that we got from the Codman acquisition. We've just now launched, though, a smaller size configuration used in the pediatric market, and so that's getting good receptivity. We've also launched a toolkit which makes it very easy to program and change the valve settings. And so, that's really driving some very strong growth out of the programmable valve portfolio. And, those are probably the two biggest impactful product launches so far. But there's a list of 10 or so that are kind of singles and doubles overall that's gonna drive about a point and a half of organic growth in the back half of this year, and then something that's probably north of that in 2020.
You touched upon some headwinds in that business from competitor launches that primarily in energy and dural repair.
Mm-hmm.
What are you seeing there from a competitive standpoint?
Yeah, so on the capital side, we feel we got a great product in CUSA Clarity, number one device when you look at removal of tissue, the fibrous tissue, the hard to remove tissue. We've also got a bone-cutting capability now with our CUSA device. And we know that one of our competitors is launching a next-generation box into the field as well. We don't expect to lose really any market share, but what's likely to happen is there'll be extended selling cycles as customers potentially trial their product. And so we've kind of factored some of that caution and some of that extended selling cycle time into our guidance, in the back half of this year. On the dural sealant side, you know, a competitor came to market last year.
They were purchased by one of our big competitors, and, you know, we're starting to see them enter the marketplace now. I think the good news here is having two large companies talking about dural sealants versus fibrin glues, which get used in off-label indications for neurosurgery, could actually, you know, increase the potential to broaden the pie for dural sealants. But I would expect we lose some market share to a, you know, formidable competitor in the space, but hopefully we'll still be able to generate growth in the dural sealant part of our portfolio as we take more share from the fibrin area. I would just say, Larry, you know, our product does have some differentiation versus the product that's competing against us. So we have both a spinal and cranial indication. They only have a cranial indication, and about half the market is cranial versus spinal.
Just putting some context and color around, you know, the impact that could potentially have here.
Perfect. Why don't we transition to OTT? Guidance is, I think, 6%-8% growth. You did about 6% in the first half, so you're assuming a little bit of an acceleration in the second half for that business. Hope, hopefully my math is right.
Yep.
And so I guess the question is what drives the acceleration in the second half there?
Yeah. I guess a couple of things. One, we're very pleased with the first-half performance in orthopedics business. So for the first time in a long time, we've actually seen growth in the first half of the year, albeit low single-digit growth. We expect that growth to ramp faster in the back half of the year, but probably more significantly is the growth we're gonna see out of the regenerative portfolio. And we're seeing really strong demand in our outpatient, or what we call our advanced wound care business, so our amniotics, our PriMatrix product, which is a bovine fetal dermis product that gets used with diabetic foot ulcers, venous leg ulcers, hard-to-heal wounds, seeing some really nice growth, though, coming out of the outpatient setting. And, you know, you can look at that as kind of a mid-teens growth for us so far this year.
So, really excited about that. On the inpatient side, still seeing some very good growth as well when you look at trauma and burns. And so for us overall, when we look at regenerative technologies, should see some very healthy growth in the back half of the year.
Glenn, on the outpatient side, I mean, how are you starting to see a benefit from competitive issues? I don't remember exactly what you said on the Q2 call, but we've been, everybody's been following these competitive issues now for a while. From what I can remember, you guys saying is you haven't seen much of an impact yet.
Yeah. Listen, when we look at the competitive landscape, what I would say is we're seeing really strong demand in our amniotic tissue portfolio, generally speaking. And so we're seeing very good growth rates. It's still a relatively small part of our business, but clearly the demand is there for us. The challenge for us is to increase capacity out of our amniotic facility. And so we're doing what we can to increase capacity at that facility, but candidly, you know, as fast as we can make the product is as fast as it's getting shipped to customers. So the short answer is yes, we're seeing good demand. We're seeing traction being made. We've won a couple of large contracts, as you know, with Healogics as an example.
And we'd expect to see some very good growth coming out of our amniotics portfolio for the back half of this year and certainly for 2020.
And, Glenn, private label is almost a quarter of OTT. We don't have a lot of visibility on that.
Mm-hmm.
And it tends to be a little lumpy. How do you want people to think about that business, you know, kind of on a consistent basis?
Yeah. We look at private label as kind of a mid- to high single-digit growth rate overall. The nice thing about private label, it's fairly predictable. It can be lumpy between quarters, but it's made up of a couple of large customers that we do business with. And so we usually get a forecast in advance. Sometimes you have a shift between quarters if you're able to ship product out sooner. But I would just say it's quarter what we do. We see some good growth opportunities this year as well as next year. Having said that, you know, we did have a really stellar second quarter. We grew 15% in private label as a result of that and some of the timing between what happened with shipments between the second and third quarter. We'd expect to see an actual decline in private label in the third quarter.
And that's probably due to $3 million that was recognized sooner than we had budgeted in terms of Q2 versus Q3. So overall, you know, kind of mid to high single digits, but Q3 will clearly be a quarter where you see a decline in private label. Not indicative of any problems there, but just timing of, you know, Q2 to Q3 shipments. And then overall, we'd expect to see a pickup in Q4. I think the really good news is, and Carrie commented more around 2020 and some of the growth drivers, but we have some good line of sight to some good growth opportunities with our existing private label partners in 2020. So you may see a little bit faster growth than you're seeing in private label in 2020 versus 2019.
In 2019, you've said high single digits?
Mid to high. Mid to high.
Okay. That's helpful. Ortho Extremities, it's actually a relatively small business for you, 20% of OTT, but it gets a lot of focus because it's been, you know, it's been relatively flat, and I guess the, you know, really two-part question. One is you do expect some growth in the second half. What drives that of 2019? And then, you know, that's the one where I think people, investors really focus on kind of strategic options there. Are you gonna get bigger or you're gonna get out of it, for lack of a better phrase?
Mm-hmm.
Given that you don't have scale there and you kind of acknowledge that, you know, you're not, you don't have the scale that you want.
You know, it's a good question. When we look at our orthopedics or extremity metal business, I think we've done a lot of things to position the business for success and growth both this year and then going forward. So what have we done? First, back in the early part of 2017, we separated our inpatient channel between metal and our tissue business. So we were selling the combined portfolio. We believe the focus strategy on just selling metal was the right strategy to how our competition goes to market. And so we made the investments in the channel side to be successful over the long term. Second, we built a new facility down in Austin, Texas. We've co-located the R&D resources there.
We've now got a regular cadence of new product launches that are being put into the market on time and having the effect that we're hoping that they would have, and so that's good news. Third, we've got new products being launched, so we got a Panta 2 Nail, which is an arthrodesis nail for ankle fusion. We've got a small post base plate for shoulder, and we think when we look at our extremities business now, we're in a good position to now put up growth. And I say that, Larry, because in the arthroplasty areas of shoulder and ankle, we have a really good portfolio. Ankle, we've got our Cadence Ankle, kind of slicker design, the newer design, spares more bone in the procedures, very replicatable, repeatable, makes it very easy for surgeons to do many procedures.
We also have the ankle with long clinical history and data with Salto, and we've got an ankle revision product called XT that can be used on our ankle as well as others, so you look at ankle, we're a top three player, got a great portfolio, quite excited about the growth profile there, and in shoulder, we're a small player, but we have a really great portfolio when you look at our total shoulder, our reverse shoulder. We don't play today in a big part of the market in short stem and stemless, but we've got an agreement that we signed with a consortium of focused orthopedic surgeons, key KOLs, and now we've got a path in the next 18 months or so to have a short stem or a stemless shoulder to market, which we're quite excited about, and then longer term, we talk about pyrolytic carbon.
When we look at orthopedics, we've got a couple of good anchors that could drive growth. You know, the area that's still declining, but we're slowing the decline is in our foot system. But we look at the total portfolio to say, "Now we can grow it. We're positioned to grow it." To your point, we're not at scale yet. We'll see where we are as we exit this year, and we'll figure out what our plan is to get more relevant scale as we go into 2020.
So, I mean, when, if I ask about the EBITDA question, you know, the Codman integration's coming to close. So how are you thinking about M&A, and, you know, areas of focus, deal size, etc.?
I'll start with that, and Glenn can add color. You know, I think we've talked about tuck-in acquisitions. From a net debt leverage, we're at about 2.8 times, and our target range is to be between 2.5 and 3.5. So we're right in the middle of that. So we feel good about where our balance sheet is and the flexibility that we have to do incremental M&A. I would say that our focus is tuck-in acquisitions. I don't think you'll see, at least in the pipeline, you know, a big acquisition like Codman that was a kind of a once-in-a-lifetime opportunity was really transformational for us, and it exceeded all of our expectations. But I think our focus right now is M&A, tuck-ins, and particularly focused in CSS on differentiating technology.
So where we have the scale in the you know Codman surgical area, what we're looking for is differentiated technology. And we did a small investment acquisition a couple of weeks ago called Arkis, and I'll have you know Glenn can talk a bit about that and how that's meaningful to us. Maybe not a lot of revenue right now, but should drive longer-term growth for CSS. And then the spaces that we like on the OTT side would be in the regenerative tissue side where we don't have scale, but we have a really great platform on regenerative technology where we want to add to in the advanced wound care area for sure. So Glenn you want to talk a little bit about the Arkis acquisition in particular?
Yeah. Really exciting, and as Carrie mentioned, part of our strategy now is to look at some earlier-stage companies, evolving technologies that get us access to places that could be disruptive, you know, to the competitive landscape. And Arkis is a great example, a company that has an anti-clogging EVD catheter, which complements very nicely our existing portfolio, which is Bactiseal, where we have an antimicrobial catheter. And as you can imagine, down the road, you can see us having a catheter that has both antimicrobial, as well as anti-clogging, which is a differentiated offering. Today, it's an unmet need, and the biggest issue that neurosurgeons have when it comes to EVDs is blockage. And so this is a great opportunity. It's almost an extension of our R&D platform internally.
We go out, buy a new technology platform, and then develop this into a nice growth driver for us, you know, next three, four, five years out.
The thing that's ideal with that is it's a great differentiating technology, and we put it in our CSS channel where we have scale, where we have the call points. So when it is ready to be commercially launched, we have the right place to get it out into the marketplace. We have a great distribution channel to do that.
That makes sense. I was a little intrigued by the comments on the outpatient wound care side for M&A because I felt that you guys have a pretty comprehensive portfolio today. So what am I not thinking of? What are the gaps? I know you can't be too specific, but it does feel like you have a kind of a pretty comprehensive portfolio.
Yeah. We have a comprehensive portfolio, but I would say there's other technology platforms that we're looking at without being too specific. You know, I think Carrie's comment, broadly speaking, is regenerative areas are going to be areas we're going to invest in for the long term, both organically through R&D and through acquisitions. But to your point, we have a strong portfolio, but there's certainly opportunities for tuck-in acquisitions, interesting technology plays that we can make in the regenerative space.
I didn't hear Ortho Extremities as an area of focus. Is that?
From an M&A perspective for us, Larry, this year, it's about getting the house in order, getting the growth with the changes that I just mentioned in place. I think once we have that and we start to see the, you know, increases that we're expecting, you know, then we'll look at and evaluate the acquisition strategy for our Ortho business.
I know we only have about a minute and a half left, so I have a couple more, but let me just scan the audience here. So, you know, Glenn or Carrie, you know, there you have 2022 financial goals that you laid out in 2017. Are we going to get an update, you know, on those later this year? Are those kind of still intact? You know, any comments on that?
I'll let you speak.
Yeah, certainly the targets are still intact. We're making progress towards those. We're very committed to driving 5-7% organic growth, gross margins, you know, 70-72%, EBITDA margins above 28%. So the key metrics are all still intact. What I'd say is you're probably getting a more comprehensive update at some point in 2020. We're probably doing another investor day. It's the right time given that we're kind of halfway through our long-term plan. And I think that'll be a good touch point to give you an update, Larry, on, you know, where we're at, what we're doing going forward, and how we're going to continue to drive more long-term financial performance for Integra.
Perfect. Thank you very much. Appreciate you guys being here.