Great. Good morning. My name's Matt Taylor. I'm the UBS US Medical Supplies & Devices Analyst and welcome to the next session in our Global Healthcare Virtual Conference, and I'm joined here in the MedTech track by management from Integra LifeSciences Holdings. On the line today, we have Carrie Anderson, the Chief Financial Officer, and Michael Beaulieu who leads the Investor Relations function for Integra, and today we'll have a fireside chat session for about 40 minutes, covering a lot of the key topics. As always, if you want to ask a question or steer the conversation, email me or send that through the webcast. So just to get us started, I'll ask one about some of the recent trends. Carrie, leading into the COVID disruption, it looked like your Q1 trends were nicely above the prior year and expectations.
So I was hoping you could walk us through some of the areas of the business where you're seeing traction on an underlying basis and maybe talk about some of the product lines that you're excited about.
Great, Matt. Happy to be here this morning. And so, yeah, we had a really great start to 2020. And pre-COVID, so I'd characterize that for the first two and a half months of the quarter, we were tracking well ahead of our plans. If I think about the CSS side of the business, our neurosurgery franchises were strong for those two and a half months. And actually, when you consider all of neurosurgery for the whole quarter, even for the dip that we saw in the last two and a half weeks, global neurosurgery was up 4.5% on an organic basis. So we held up quite well. Particular franchises that did well are CSF Management. That's where our Certas valve is doing really well. And an Advanced Energy franchise, that's where our CUSA is. They were also doing very well.
DuraGen continued to have strong receptivity on the revenue side, particularly in Japan. On the OTT side of the business, the wound reconstruction side of our business was tracking ahead of plans. We were tracking low double-digit growth through that first two and a half month period. If you recall, we had made some key investments in capacity in our regenerative tissue supply facilities, Boston and Memphis, last year. This was ramping up really nicely, and we were seeing growth in the first two and a half months of the quarter. In particular, AmnioExcel Plus and SurgiMend all ended the quarter in double-digit growth territory. So then if I turn to more of a geography perspective, China and Japan held up probably the strongest. Japan just very, very resilient during this period of time. China also benefiting from our indirect model.
We do sell through a couple of distributors there, and so we did see some advanced orders come in in Q1. So largely, China was not impacted in the first quarter of any significance at all. So a very nice start to the year, unfortunately, COVID impacting the last two and a half weeks.
Gotcha. Okay. Great. That's a good overview. Yeah. Maybe we can move into what you're seeing with recent trends. You talked about some sequential improvement that you were expecting and hopefully improving again next month. At a high level, can you talk about what you've been seeing in the different businesses or geographies in the past few weeks and the things that you're tracking to understand how the recovery is progressing?
Sure. So if I reference back to our earnings call, we obviously are looking at multiple revenue scenarios just like everyone else. And we reported April numbers for the company that were down 45%. From our perspective, we viewed that as the low during this period of instability. And so we hope to be in a position that we continue to see month-over-month improvement. And I would say, as we look at the trends month-to-date in May, they continue to substantiate that expectation that we would expect a month-over-month improvement. I would say that the pace of recovery, as we think about May into June and subsequently into the other quarters, is going to largely depend on a few key variables. And one is essentially hospital procedure recovery. And that's going to be very dependent on ICU bed availability, operating room capacity.
And then there's another piece that is just the patient's willingness to return to hospitals. As the restrictions, shelter-in-place restrictions, are lifted, the confidence of patients to kind of return to that setting is important as well. And that's going to certainly drive the pace of recovery. But you have seen everything that we're seeing as well. All of the great news that states are gradually lifting shelter-in-place policies, hospitals starting to talk about scheduling elective procedures. So we fundamentally believe that will start to drive some of the month-over-month improvement. And again, our early trends here in May would continue to substantiate that expectation. So we had talked about on the call probably a really large scenario for Q2 because, again, we just don't know how the pace of recovery will look like.
So we talked about if you assume that the April % down lasts for the whole quarter, that would put you at around a low $200 million type of mark for us on the revenue. We see that as very low probability at this point that we would be in a neighborhood of 45% down for the whole quarter because of our expectation of sequential improvements. But that was one bookend. And then the other bookend we set for the quarter was somewhere around that mid-$500s or, I'm sorry, mid-$250 type of level. So mid-200s, around 250 would be the other bookend there. So we would expect somewhere in the quarter to fall. I know that's a large range, but I would say that there's a bit of uncertainty of just how strong of a pace of recovery we could see in May and June.
So hopefully that gives you some help.
Yeah. No, thanks for that color. I mean, one follow-up on that. I was just curious because you have now growing and meaningful businesses in China and Japan. You mentioned Japan was resilient. And I know that they opened up a lot of the prefectures this week. Can you give us any updates there in terms of how Japan has been through the whole period?
Yeah. Again, as I mentioned, Japan has really been surprisingly resilient through this. So as we think about the result for Q1 and even as we think about the early trends we're seeing in the quarter, we continue to see very limited impact of our business in Japan. And it continues to remain particularly strong. Our customers are reporting 85% of normal volumes last week. And we continue to monitor this very closely. Our first xenograft that we launched in the market, DuraGen, we launched that mid-2019, continued to be strong for us both in the second half of 2019, but also surprisingly continued to be strong for us here in the first quarter and into the first part of the second quarter. We've also changed our model. In some cases, in some markets in Japan, we're going direct as well.
So that's been helpful to, again, stay very close to the customers. On the China side, again, we were a little bit insulated in the first quarter due to the indirect model that we have in China. We would expect that we would see some impact in the second quarter. But the good news is where ORs were really totally shut down in February and March in China, they're now seeing up to 80% volumes coming back, which is great. It's a very important region for us. We hope to be able to kind of work through some of that distributor inventory that's out there and be able to see an opportunity for additional orders coming in in the quarter. Those are two strong markets for us. I would say, as you think about the rest of the world, maybe a few comments there as well.
We do have a nice presence in Australia and New Zealand, and I would characterize that they just did really fantastic shutdown measures that greatly controlled the spread of the virus. Elective cases are starting back up there last week, and we are expecting some nice return to previous levels there. I think for Canada and the U.S., there's a large geographic region there, and some parts of the country are going to start to return to normalcy before the rest of the country, so we're seeing some improvement, certainly in some of the non-metro areas, particularly in some of our outpatient settings, but there will be still hotspots like New York that will continue to be impacted and may lag some of the other recovery areas, and then Italy, Spain, and U.K., I would say they have been the hardest hit.
And those are going to be ones that we think will be the slowest to recover. We're starting to see some positive signs in southern Italy, but I'd say it's still a little bit early. And I think they're still under a little bit more restrictive measures there. So we have limited visibility in terms of understanding the recovery path in a few of those countries. Anybody there?
Hey, Matt.
Is Mike still there?
Yep. Sorry about that. So I'll just stay on this recovery theme for a second. And you talked about 4Q20 potentially being flat with 4Q19. And nobody has a crystal ball, but some companies have suggested 4Q could grow. I guess I was just hoping you could give us some high-level thoughts on what you think might happen in 2021 and 2022 if we do see a return to more normal conditions towards the end of the year. And when you're talking about that 4Q number, were you just being conservative, or is that your best guess? What informed that kind of statement about the fourth quarter?
Sure. Well, I think it's a bit early for us to comment beyond what we talked about on our earnings call. So I don't have a view that I'm in a position to share on 2021 and 2022. But as we think about the statements we've made on our earnings call, under our base case scenario, we do expect growth in the fourth quarter to be flat compared to the fourth quarter of 2019. Again, this clearly is going to be dependent on a lot of factors that go into that pace of recovery and how Q2 and Q3 unfold. So again, those factors that really will pace that recovery for us are going to be the easing of the shelter-in-place restrictions, which the good news is that's happening on a very broad basis right now.
The second factor would be that resumption of medical and surgical procedures, which again, are very dependent on ICU bed and OR availability, and the last piece is that patient confidence to return, so really, all of those factors are going to play into how fast the recovery is, and certainly, if there's any resurgence of the virus, we do think that the country and many countries outside of the U.S. will be more prepared if there is a resurgence of the virus, so we wouldn't expect to see the dramatic and significant impacts that we saw here in April. We would hope that the country and the rest of the world would be much more prepared in the face of any type of resurgence, so as I think about the fourth quarter, there's multiple scenarios that can happen.
Certainly, we do see scenarios where we could see some growth in the fourth quarter, but at this point, our base case scenario is for flat growth compared to 2019, and the other thing I would say, Matt, is if you think about the underlying products and procedures that need our products, we don't see any fundamental change with our markets that we participate. We think that the demand will be there. Fundamentally, there's a part of our portfolio that's really driven by traumatic injuries, and so when you have such restrictive shelter-in-place limits out there, that's going to limit people being out and about, and so that will have an impact, but certainly, as those restrictions lift, you'll see, unfortunately, that level of traumatic injury come back again, and so our products will be in demand at that point.
And then there's a whole part of our portfolio that really is we would never have characterized it as a portfolio that was highly deferable under COVID-19. That lens certainly has changed. But even when you think about some of those procedures that use our products, these are procedures that can only be deferred for a certain period of time. These are disease states such that they will need intervention, whether it be in 30, 60, or 90 days. They cannot be deferred permanently. So that will come back. It's just a matter of time. And so underlying our portfolio fundamentally is we think still good market demand for our products.
Got it. Yeah. You were one of the companies that gave kind of a helpful view on the urgency or deferability of your product lines by different area. I guess I was wondering, as you're starting to get more experience with how things are opening up, has anything surprised you about the way the hospital systems are looking to open up with regards to sites of care or some of the new protocols that are being put in place that are impacting the rate of recovery of some of the different areas of your portfolio?
I would say no real surprises. You're right, so if I reference back to that earnings deck, we did take our revenue profile, and we plotted it on a chart that looked at what part of our portfolio is skewed to more urgent, moderately urgent, or more deferable, and so the things that we expect to recover the fastest and the things that would be less impacted through COVID would be in the neurosurgery side. It's going to be the areas around CSF management and neuromonitoring, and certainly, as these traumatic brain injuries, once those shelter-in-place activities come back, those are the areas where, again, you don't really have an option. You have to treat those immediately, so we would expect those to recover the fastest, especially tied to shelter-in-place restrictions being lifted, but generally, those areas of the portfolio did the best in neurosurgery.
The ones that fared more deeper declines on the CSF portion of the business was the capital piece of the business. And that does represent about 10% of our revenue. So we're not talking about million-dollar pieces of equipment. Our CUSA is around $200,000. And there's other pieces of equipment like lighting and Mayfield that you're talking about $10,000 or $20,000. So not very big capital. The other parts of our business on the OTT side, the ones that, again, we would expect to be less impacted and certainly recover faster would be on the acute burn and wound side of the business. So that's around the inpatient setting for acute wounds using our skin products and PriMatrix as an example. And then the things that kind of fall in the middle that are moderately urgent would be more of those chronic wounds.
The areas that will lag would be, as you've seen from other orthopedic companies, the ortho side of our business that has the most deferability and certainly will lag recovery. I would say, generally, as we think about our trends from where we landed in April and what we're seeing in May and our expectations for the balance of the quarter in Q3, we would largely expect the things that skew to the left on that earnings profile or that revenue profile slide to be the things that recover faster. It's going to be the CSF management. It's going to be neurosurgery. I'd say we're seeing some nice bounce back in the dural access and repair area. Certainly, again, that inpatient burn and acute wounds will come back a bit faster than the rest of the portfolio.
Great. Yeah. That's really helpful color. Then on the capital piece, I wanted to touch on CUSA separate from this deferral issue because it has continued to grow well and it's an important product cycle for the company. So maybe you could just talk about how it stands out versus the older products and some of the competition and talk about the ongoing opportunity for CUSA, both the capital piece and the consumable.
Yeah. You broke up there a little, Matt, at the end, but I think I heard the gist of your question. We have actually had a lot of great success with our CUSA because we believe in the best ultrasonic aspirator on the market. And in this period of time now, as you think about post-COVID, our value proposition actually even is more, I would say, resonating with our customers and our clinicians that use it. It's more powerful. It's more sensitive and can reduce the time it takes to remove a tumor. We think that's really actually quite important. Less time in the OR is an economic save for the hospital. And this is one of the areas that it's going to be. They're going to need products that look at saving time in the OR room.
So we're trying to shift the discussion to what we value rather than the price of the purchase. Again, it is one that's going to be maybe not as tied to procedure recovery. It's going to be tied more towards the economic health and the financial budgets of the hospitals. But we are encouraged that we are still seeing some nice growth in CUSA around the international markets, in particular our greater Asia area there. So holding up still some nice sales there. And we do expect that we'll see some recovery in CUSA here in the U.S. and some of our other European markets. But it may lag the other parts of our business just because, again, it's tied to more financial health of the hospitals and tied to capital budgets.
Okay. All right. Let's continue on and talk about a couple more product areas, and then I'll move on to some of the operational considerations that you've had to deal with through these challenges. So you talked about wound care, which is an important franchise for the company where you've seen also pretty strong growth. One of the kind of interesting dynamics is that I know you've been capacity constrained, especially in the amniotic space. And I think this could give you some time to catch up there. So I was just hoping you could give us an update on, A, the factors driving the wound business, B, what's going on on the manufacturing side and as it relates to what you're doing during the disruption period.
Sure, Matt. This is an area that we have made investment in for capacity, so if you go back to 2019, it seems so long ago. 2019, we really suffered from capacity constraints all through 2019, so the fundamental demand was there from a market perspective of the wound reconstruction regenerative products, but we had some issues on being able to supply to the level of demand that we were seeing, and so we made key investments in two of our facilities, one being our Memphis facility, which is our amniotic products, and the second is our Boston facility, which makes our SurgiMend and our PriMatrix products there, so I would say that we started the year in really good shape. I would say not yet at a place where I would say that we were comfortable with inventory safety stock levels.
But certainly, as I mentioned at the beginning of the call, tracking overall for the whole wound reconstruction portfolio, we were tracking low double-digit growth before COVID-19 hit. And we ended the quarter with AmnioExcel Plus and SurgiMend being double-digit growth. So really nice performance there. So we're going to use this opportunity. So as we think about the changes we've made to our manufacturing facilities during this period of time, it was very specific plant by plant. We didn't apply a paintbrush to all of the reductions in manufacturing hours. We really looked at specifically which parts of our portfolio did we need to actually build some additional safety stock. So in terms of the Boston facility, that's one that really is untouched from an overall manufacturing plan perspective.
We're continuing to run that factory as before in order for us to use this time to build up safety stock in SurgiMend and PriMatrix. Amniotic also is one that would see less impact in terms of reductions in hours for the exact same reason there. So we're really utilizing this time to build up safety stock levels.
Yeah. That makes sense. And yeah, as you look going forward, maybe we can talk a little bit about margins because this is an important margin driver for the company. And I'll make it kind of a two-part question. Firstly, maybe you could just address how margins are being impacted during this time of disruption and talk about some of the cost-cutting moves that you've made to be able to offset some of the lost revenue. And then I'd like to transition to a discussion to talk about the opportunity for continued margin expansion longer term as we come out of this period and get back to normal operations.
Yeah. Again, a little bit broken up there on it. I don't know if it's just my phone or not. But again, I think I heard the gist of the question there on the margins. So in terms of the decisions we made around cost reduction, the speed at which the revenue decline was really the challenge. And so we did try to act as swiftly as we could to think about what cost we could take out of the system. So we did that in two buckets. First, I already talked about some of the reductions on the manufacturing side. So if you think about we have about 17 manufacturing facilities. So if you look across all 17 of those sites, we took out about an average of about 20%-25% of hours in those facilities. Some, as I mentioned, like Boston, were not impacted.
Some very little, like our Memphis facility, and others would be impacted more greatly, to average about that 20%-25% of the hours being taken out. In addition, we also looked at our operating expenses. So this would be in our selling general and administrative buckets, is also R&D. So we've looked at reducing OpEx by about 30%, whether it be you can use a benchmark of Q1 2020 levels or Q2 of 2019 levels. It's about the same number. It's about 30% down, and that's our target and our ability to flex on that up or down. We went really aggressive because partly we wanted to make sure that we could preserve other areas of the business.
So we went deeper in some areas to allow us to preserve some spending in some other areas, particularly in parts of the R&D that we wanted to protect and in some of the areas of CapEx that we wanted to protect. So we were very thoughtful in terms of the areas that we cut and the areas that we preserved. But even with all of those reductions, you are going to see some margin impact there. I mean, when you talk about our revenue decline in April of 45%, you still have a certain level of fixed cost that proves difficult to be able to offset in the short term. And again, we still want to make sure that we're protecting parts of our business in anticipation of growth coming back in.
So as we think about lifting those restrictions of spending, I tend to think about it that it will lag the revenue recovery. So part of it is wanting to make sure that we absolutely start to see the positive revenue trends that we expect in the business before we let spending come back in. So that's number one. And number two, I would say the areas that we're going to relieve first would be the areas where employees have been impacted. One of the things that we really emphasized was to ensure that we preserved as many full-time jobs as we could. We didn't want our full-time employees to lose employment during this period of time. It was really important to us. So we did do some wage reduction, some shortening of the work week to basically adjust some of that. We've deferred merit increases.
So as we think about the recovery and our ability to bring spending back in, those are the first areas we're going to bring back. We want to make our employees whole again as fast as we can. And then we'll bring in other areas of spend back into the business. And as we think about long-term margins, so fundamentally, as I think about the short-term things that we're doing right now, but fundamentally, as I think about our margin expansion story and the investment thesis we've had, it doesn't change. Fundamentally, the drivers that will expand our margins are still there. So one of the biggest drivers for us, which will not change, is the portfolio shift of the business. And there's two pieces of that. And you can look to our 2019 earnings performance and see the margin expansion happen in 2019.
And it gives you evidence that clearly this is what drives the margin expansion. The first part of the mix shift is that you're getting greater contribution of faster-growing, higher-margin products. A lot of that's driven by our new product introduction growth. We're introducing products that, again, will have a more attractive revenue growth profile. They will also have higher margins. And 2019 was just a banner year for us in introducing over 10 different products. And those didn't even contribute a full year. And you probably won't have peak revenue on those products for another few years. So those will continue to be a driver of our margin expansion. The second piece of the mix shift is our SKU rationalization program.
This takes a little bit more time because in many cases, we are not able to divest of product lines, but we're still making the strategic decision to discontinue certain product lines. It does take a little bit of time to get that entire revenue out of your revenue stream, but in those cases where we've made those decisions to discontinue products, those are because they're just not a strategic fit in the portfolio anymore. They're commodity type of products. They are lower-margin products and certainly lower-growth products. So as we finish that SKU rationalization program and we look at the NPI contributors, that itself is a big proponent of propelling that margin expansion, and then you have the other, I would say, more traditional type of margin levers, which is just manufacturing efficiencies, continued footprint optimization, SG&A productivity.
And then the last piece of our margin expansion story is still yet to come is getting off of the TMA agreement with J&J. And so again, there are parts of our neurosurgical procedure in CSS that are still being manufactured by J&J in their Massachusetts facility. We have stood up our own facility about 30 miles away. That transition is just starting. And so we won't see the end of that transition, the full getting out of that, until the end of 2021 into early 2022. And so as those products shift off of J&J onto our facility and we get out of that TMA agreement, you will see a gross margin lift there because that's at a cost-plus type of contract. So hopefully, Matt, I got all of your questions answered there because there was some static on the line.
Yeah. No, I think that's great. I just switched to my speakerphone. Hopefully, that helps, but that was exactly what I was hoping for, and I think you provided a lot of great context there, so maybe we can also just touch on the balance sheet and liquidity. I think it's more of a check-the-box question, but can you talk about the strength of your balance sheet, your liquidity, anything you're thinking about there, and how that'll help you weather the storm?
Sure. In hindsight, we actually timed some of the things, the moves we made on the balance sheet, actually quite right. So if you recall, in early February, we amended and extended our credit facility. And we issued a $575 million convert. So those things were actually in place before COVID-19 hit. And the great thing about the amended and extended, it pushed out our terms of the revolver to 2025. There's no repayment schedule that's due in the short term. And so it gave us some nice breathing room. And our bank covenant agreement, the leverage ratio there remains at 5.0 times through June of 2022. So I think from our perspective, a nice financing transaction that we got behind us in a timely way. And our liquidity is also really strong.
We have over $380 million of cash on the balance sheet and over $1.15 billion undrawn on the revolver. So we're in a pretty good shape at this point.
Got it. Got it. Okay. And then as you go through this, I would imagine you're going to be fairly prudent with your capital allocation for the next few quarters. But as you get to a more normal period, can you talk about your capital allocation priorities? And what would you need to see to start to turn some of those on?
Sure. Well, let's first start with the share repurchase program. So we had announced a share repurchase program in February that was executed through an ASR agreement. It was about a $100 million program. And that program is pretty much on autopilot. So the way the program works is that about 80% of the shares are delivered upfront. And then the balance of the 20% are finished out through the execution of that program. And we used a third-party bank basically to facilitate that program. And so that's continuing. We haven't halted that because the majority of the program was done. So that will finish up. And again, we don't feel like we have any near-term liquidity issues whatsoever with having plenty of cash on the balance sheet there. So we're going to allow that to finish out per our original plans there.
This year, obviously, we'll see a reduction in operating cash flow. We hope and my expectation is we will still be cash flow positive in 2020. But in terms of capital allocation, again, I would say our focus is getting through this period of instability as healthy as we can. And that's one of the things that we're focused on and obviously the reason for some of the cost actions we've done. But we are still maintaining capital expenditures where we think it's prudent to. So certainly, we've reduced capital expenditures in the second quarter, but still keeping some what I call higher-prioritized capital still going. And then as I think about M&A opportunities, I would say before COVID-19 happened, we had a very full pipeline of opportunities. We've talked about before that our focus has been on tuck-in acquisitions. And I don't see that changing.
Again, I would say the most immediate focus right now is getting through this period of instability. But I would say we're always going to be looking at opportunities. We do believe we have a good balance sheet to weather the impact here. And M&A is going to continue to be a core competency of actually participating in and helping us with our growth. And it's part of our long-term growth strategy. So hopefully, we'll be in a place that we can resume that activity. But I'd say right now, more near-term, we're focused on getting us through this. But certainly, we've got the strength of the balance sheet to continue that activity.
Gotcha. Okay. And then I did want to ask a couple about your commercial strategy, both now and going forward. So the first part of that I'll ask about is you mentioned that you're doing things to try to engage your sales force, make sure they're ready to go. Can you talk about the efforts that you're making there and helping to enable them to connect with customers and get back into the flow and make sure that they're really motivated?
I think there's others that have commented on this that I do think one of the lasting impacts of COVID-19 is shifts of the way that our field sales and our reps access their customers. I think it's a positive change. I think it adds to our toolkit in terms of the way that we can approach clinicians and doctors and other medical professionals is through the use of digital technology. So certainly, that's where we've had to go, where you have very limited access to being able to get into hospitals and to other surgical centers. You've had to rely on more digital means. So I would say that that's going to be a permanent change to the business models. I think it's a welcome change.
I think that we've used this opportunity to really go digital on professional education in reaching out to calls. We've actually used a lot of this as an opportunity to check the pulse of what's going on in the hospital. So it's a way for us to continue to engage with our customers by really fundamentally understanding how procedures are coming back into the hospital setting and the medical setting. So really using this as an opportunity to engage in two-way conversation, which is really helpful. I think that as we think about post-COVID and as hospitals reopen, there are going to be some permanent changes into the way our reps access these medical facilities. There's going to be new protocols. There's going to be masks. There's going to be testing that are required.
I'd say, especially in inpatient settings, surgeons are still going to drive their ability to have our reps have access if they want or need them there. It's important for us to be able to support those surgeons. And so we do expect to still have access, but it'll be different. It'll be a different access point that we'll have to comply with different protocols there. On the outpatient setting, access will be maybe less limited than inpatient. But again, the surgeons will drive that rep interaction for case support there. And sales presentations will probably continue to move virtual whenever possible. We'll still have access to, again, our customers maybe, but just in a different way. Conferences and trade shows will likely be reduced or eliminated and go more towards, again, virtual type of settings. So I think a lot will change.
I think we're excited and we're prepared to move with those changes.
Gotcha. Okay. I think that's probably a good place to end. We're at the time. And there's some good thoughts on how you're going to streamline and change your business going forward. So I just want to thank you for joining us for all the time and insights. I know it's a very demanding time for everybody. So spending time with us is much appreciated by us and the investors on the line. And just want to wish you and Integra a lot of good luck as you work through a challenging period here.
Thanks, Matt. And I appreciate you still having the conference, even though virtually. I think it's really important to keep in contact. So I appreciate it. And thank you for the opportunity.
Thanks. Thanks, Carrie. Thanks, Mike.
Bye.
Thanks, Matt.