Good day, and thank you for standing by. Welcome to the Integra LifeSciences Q1 2023 financial results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. To ask a question during the session, you'll need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To remove yourself from the queue, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Chris Ward, Senior Director of Investor Relations. Please go ahead, sir.
Thank you, Norma. Good morning, and thank you for joining the Integra LifeSciences Q1 2023 earnings conference call. Joining me on the call this morning are Jan De Witte, President and Chief Executive Officer; Mathieu Aussermeier, Vice President of FP&A, Investor Relations, and Treasurer; and Jeff Mosebrook, Principal Accounting Officer. Earlier today, we issued a press release announcing our Q1 2023 financial results. The release and corresponding earnings presentation, which we'll reference during the call, are available at integralife.com under Investors, Events and Presentations in a file named Q1 2023 Earnings Call Presentation. Before we begin, I would like to remind you that many of the statements made during this call may be considered forward-looking statements. Factors that could cause actual results to differ materially are discussed in the company's Exchange Act report filed with the SEC and in the release.
Also, in our prepared remarks, we will reference both organic and reported revenue growth. Organic revenue growth excludes the effects of foreign currency, acquisitions, divestitures, as well as discontinued products. Unless otherwise stated, all disaggregated and franchise-level revenue growth rates are based on organic performance. Lastly, our comments today will include certain non-GAAP financial measures. Reconciliations of any non-GAAP financial measures can be found in today's press release, which is an exhibit to Integra's current report on Form 8-K filed with the SEC. With that, I will now turn the call over to Jan.
Thank you, Chris, good morning, everyone. Let me start by reviewing our Q1 business highlights on slide four. Q1 revenue performance reflects solid execution by our teams, as well as positive trends in market demands and procedural volumes that we see now nearing pre-COVID levels. Q1 revenues finished at around $381 million, above our February guidance range, with organic growth of 4.6% comprised of Tissue Technologies at 6.8% and Codman Specialty Surgical at 3.5%. Tissue Technologies enjoyed a strong start to the year, including double-digit growth from a number of our leading products in the wound reconstruction franchise, such as Integra Skin, MicroMatrix, Gentrix, and Cytal, along with high single-digit growth from SurgiMend. We also launched MicroMatrix in Europe, where we are seeing positive initial feedbacks from wounds and reconstructive surgeons.
While we are encouraged by the broad strength and demand for our Tissue Technologies products, we are also experiencing the expected revenue pressure from the normalization of private label orders, as we mentioned in our February guidance. Beyond the top-line results in Tissue Technologies, we remain confident in our efforts to obtain a breast reconstruction indication for SurgiMend, and we're on track to file our PMA update this August, as well as completing related work at our Boston facility to upgrade our quality systems. An FDA inspection in March reinforced the urgency of these quality system upgrades. To maximize focus and efficiency in implementing these changes, we have paused production at the Boston site and accelerated certain project work that was originally planned for later in the year. We plan to resume production in early June after the system upgrades are substantially complete.
In the meantime, we are continuing to work with our customers and commercial teams to minimize the supply chain impact as they work through existing finished product stock. Turning to CSS now. Here, we also saw a good start to the year, with double-digit growth in our CUSA product line and our programmable valves, as well as strong performance in instrument sales. We launched the CUSA Clarity Bone Tip in U.S., Canada, Australia, and New Zealand, further expanding the global CUSA portfolio. As expected, we also continued to work through several supply headwinds and backorder levels remain elevated, particularly in our dural access and repair and neuromonitoring franchises. Related to CereLink, we've made progress on resolving the electrical interference issue in our monitors and now expect to relaunch late Q3 of this year.
As we were validating and testing an earlier technical fix, our engineers identify a more robust solution that does not require any change to the monitor. We are currently in verification testing and in the meantime have contacted the FDA to discuss the regulatory pathway to return to the market. Also working with regulatory agencies outside U.S. to finalize the plan in our international markets. Our current technical solution allows us to ramp up distribution faster once we're back in the market. We are excited about the relaunch of CereLink. Our customers' commitment and support during the recall further validates our confidence that CereLink remains an important catalyst to our long-term growth expectations. Turning to our bottom line now.
Q1 Adjusted Earnings per share came in at $0.74 within our original guidance range. Despite some temporary pressures to our Adjusted Gross Margin during the quarter from product and geographical mix and the Boston Quality project, we were able to meet our profitability targets and continue to make the necessary investments to fuel our long-term growth plans. During the quarter, we also appointed Dr. Stuart Hart as Chief Medical Officer. Dr. Hart has worked at leading med tech organizations and brings a deep and broad experience in global medical affairs and surgical innovation that will enable him to strengthen our clinical operations and innovations capabilities. Our CFO search continues with a strong slate of candidates. We're close to identifying a great leader who has the right skills and fit for the company.
In the Q1 , we further solidified our balance sheet and liquidity position by amending and extending our credit facility, providing us ample liquidity as we execute our M&A strategies. We also initiated a $150 million accelerated share repurchase to return additional value to shareholders. Overall, the strength demonstrated by our portfolio at the beginning of this year provided us confidence that we will deliver our 2023 commitments. We are reaffirming our original full-year guidance for revenue, organic growth, and Adjusted EPS. Consistent with the guidance we provided in February, we expect to see a clear step-up from our first half to second half revenues. Additionally, we now also expect a larger step-up in gross margin as a result of the Boston Quality Project cost acceleration from the later part of the year into the first half.
With that, I'd like to turn the call over to Mathieu now to go deeper into our Q1 performance and our guidance.
Thank you, Jan. Let me provide you with a more detailed look at our Q1 financial highlights, starting on slide five. As Jan mentioned, Q1 total revenues were approximately $381 million, representing an increase of 1.1% on a reported basis and 4.6% on an organic basis. Total revenues were $5 million above the high end of the guidance range communicated back in February. Q1 revenue growth was strong across many parts of our business, with organic growth of 3.5% in Codman Specialty Surgical and 6.8% in Tissue Technologies. Overall, organic growth was 3.5% in the U.S. and 7.2% in international.
Adjusted Gross Margin for the quarter was 67.3%, up sequentially by 100 basis points versus the Q4 of 2022, but down 40 basis points versus the prior year. Adjusted EBITDA margin for the quarter was 24.2%, down 60 basis points, and Adjusted Earnings per share were flat at $0.74. Both metrics were largely impacted by gross margin pressures, planned growth investments, and year one dilution from the SIA acquisition. If you turn to slide six, I will go deeper into the Q1 revenue performance for our CSS segment. Reported Q1 revenues in CSS were $248 million, flat on a reported basis and up 3.5% on an organic basis from the prior year.
Global neurosurgery sales were up 2.9%, driven by low-double-digit growth in our CUSA Capital and Disposable and mid-single-digit growth in CSF management, including continued strength in our Certas Plus programmable valves. Neuromonitoring declined low double digits primarily because of the lack of CereLink monitor sales in the quarter following its recall in the Q3 last year. Our global neurosurgery performance in the quarter was also impacted by continued supply challenges in our dural access and repair, as well as neuromonitoring. Overall, excluding CereLink, capital sales within the quarter were strong and grew low double digits driven by CUSA with low single-digit growth in smaller capital. We continue to see strong demand funnels for our capital equipment as customers see value, innovation, and additional productivity in these products, particularly our CUSA platform.
Instruments grew approximately 6%, driven by healthy demand and the timing of orders. This result exceeded our low single-digit long-term growth expectations for this business. Shifting to international, sales grew high single-digits in the quarter, led by low double-digit growth in both Japan and China. Japan growth was led by sales in CUSA Capital and Disposables, as well as DuraGen, while China benefited from the recovery of rolling COVID lockdowns in our continued geographic expansion. Moving to our Tissue Technologies segment on slide seven. Tissue Technologies grew 2.6% on a reported basis and 6.8% on an organic basis compared to the prior year. Q1 sales in wound reconstruction increased 11%, driven by strong demand and commercial execution, led by double-digit growth from Integra Skin, MicroMatrix, Gentrix, and Cytal, as well as high single-digit growth in SurgiMend.
In our private label franchise, sales declined 5% versus last year as expected, while our partners continued to normalize their inventory levels following strong purchases in the first half of 2022. Finally, international sales in Tissue Technologies were down mid-single digits due to supply challenges in certain markets. Turning to slide eight to review our Q1 P&L metrics. Adjusted Gross Margin for the quarter was 67.3%, down 40 basis points compared to Q1 of 2022. The decline of our gross margin year-over-year was primarily driven by unfavorable product and geographic mix, as well as Boston Quality project expenses. These temporary pressures represented a headwind of approximately 120 basis points in the quarter and upset our positive revenue performance and continuous cost improvement activities.
Despite these interim pressures, our gross margin improved sequentially by 100 basis points versus Q4 of 2022, primarily driven by continued strength in our higher gross margin Tissue Technologies business, some improvement in supply, and the passing of one-time cost pressures we saw in the Q4 of last year, all of which were factored in our February guidance. We expect the cost of acceleration of the Boston Quality projects to continue into the Q2 and impact our first half Adjusted Gross Margin unfavorably by approximately 100 basis points compared to our February guidance. This implies flat to marginal improvement in gross margins in Q2 compared to Q1.
Our Q1 Adjusted EBITDA margin was down 60 basis points compared to the prior year, driven by temporary gross margin pressures highlighted earlier, as well as the investment supporting our key strategic priorities discussed during our February call. Our EBITDA margin also reflects the one-year dilution of our SIA acquisition, which closed in December 2022. Our Adjusted EPS was $0.74, flat to prior year, and includes a negative $0.04 impact as a result of the Boston Quality project. If you turn to slide nine for a brief update on our balance sheet, capital structure, and cash flow. In the Q1, we initiated the previously announced $150 million accelerated share repurchase program.
We also amended and extended our $2.1 billion credit facility from 2025 to 2028 on favorable terms, despite the challenging banking environment, providing us strong liquidity to support our M&A game board. During the quarter, operating cash flow was $26 million, and free cash flow was $13 million, reflecting both expected increases in capital and EU MDR compliance spending, as well as increased inventory levels compared to the Q4 of 2022 as we increase our finished goods safety stock levels. Free cash flow conversion was 71% on the trailing twelve-month. Our balance sheet remains strong with ample liquidity to support our short-term and long-term plans. As of March 31st, net debt was $1.1 billion, and our consolidated total leverage ratio was 2.5 times.
The company had total liquidity of $1.6 billion, including $307 million in cash, and the remaining available under our revolving credit facility. Turning to slide 10, I will provide an update to our consolidated revenue and Adjusted Earnings per share guidance for the Q2 and full-year 2023. Q2 revenues are forecasted to be in the range of $396 million-$400 million, representing approximately flat reported growth and organic growth in the range of 1.5%-2.5%. Our Q2 revenue guidance reflects continued procedural recovery and strong demand for our products, but also continuing supply challenges and a modest negative impact of approximately $5 million from the Boston Quality project.
Our organic growth guidance also reflects the higher comps from last year in private label and instruments, as well as the lack of revenue from CereLink monitors in the quarter. For the full-year 2023, we are reaffirming our revenue and organic growth guidance. Our guidance contemplates the strong demand in portfolio performance we demonstrate in the Q1, a slight improved FX outlook, updated timing for the relaunch of CereLink, supply and backorder challenges, and a modest revenue impact from the Boston Quality project. We are also holding our organic growth expectations to approximately 3% in the first half and 6% in the second half, as shared during our February call. As a reminder, the step up from first half to second half is driven by gradual supply improvements, the relaunch of CereLink, and favorable back half comps in China and private label.
Turning to Adjusted Earnings per share guidance for the Q2, we expect Adjusted EPS to be in the range of $0.75-$0.79, up sequentially but down from the prior year, driven by temporary gross margin pressures, including the cost from the Boston Quality project, as well as our planned strategic investments, including the SIA acquisition. This guidance range reflects an approximate $0.06 headwind from the Boston Quality project, but will have a benefit in the second half of the year. We look at the rest of the year, we expect that the acceleration of the project cost, along with other gross margin levers, will contribute to a sequential improvement in gross margin from first half to second half of approximately 100 basis points.
We will also continue to manage our spending ramp for the remaining of the year while preserving our key growth investments. In summary, we are holding our full-year 2023 Adjusted EPS guidance of $3.43-$3.51 per share. I would like to turn the call back over to Jan.
Thank you, Mathieu. Please turn to slide 11 to conclude our prepared remarks. Our Q1 performance was solid. The results and trends provide confidence that we can deliver on our full-year commitments through market recovery and strong demand for our products while we navigate supply challenges and the acceleration of our quality system project in Boston. In parallel, we continue to progress toward our long-term strategic goals. We strengthened our core business with new product launches in the CUSA platform and in our international Tissue Technologies portfolio with MicroMatrix in Europe. We're advancing our PMA projects, intending to file the SurgiMend PMA amendment this summer, as well as additional modules of the DuraSorb PMA late this year. This keeps us on track to deliver the first two PMAs for an ADM in the high-growth implant-based breast reconstruction market.
The team has also done a tremendous job getting to the root causes on CereLink and developing a robust technical solution to bring the monitor back to the market. In addition, we made continued progress in enhancing our executive leadership team and strengthening our core capabilities in manufacturing, quality assurance, clinical study design, and evidence generation. We have also taken the opportunity to fortify our balance sheet by extending our credit facility, and we returned value to our shareholders through a share repurchase. All of these achievements will enable us to continue to bring innovative and life-saving technologies to market and serve our customers and their patients around the world.
Our full-year outlook is balanced, reflecting our commercial momentum and our focus on improving execution, but also the pulling forward of the Boston quality project costs while we push ahead with investments in critical initiatives that will propel our growth over the long term. Our second half reflects a clear step-up in organic growth and margin expansion, with expected organic growth well above 5%, Adjusted Gross Margins greater than 68%, and Adjusted EPS growth approaching double digits. I believe these metrics for the second half are much more reflective of where we see the business in the near term as we progress towards our LRP commitments. In that context, we look forward to going into more detail on our exciting growth catalysts and providing more clarity on our plans to achieve our long-term targets next week on Thursday, May Fourth, at our Investor Day in New York.
That concludes our prepared remarks. Thank you for joining us this morning. Operator, would you please open the lines for questions.
Thank you. As a reminder, to ask a question, you'll need to press star one one on your telephone. To withdraw your question, please press star one one again. Please wait for your name to be announced. We ask that you please keep it to one question with one follow-up. Please stand by while we compile the Q&A roster. One moment for our first question. Our first question comes from the line of Steve Lichtman with Oppenheimer. Your line is now open.
Thank you. Good morning, guys. I guess just first on CereLink. Can you talk a little bit more about sort of the adjustment in the fix there? I think, Jan, you alluded to the fact that on the back end, that that will help. Just any more color you could provide on sort of what the change in the fix is and why it will help on the back end in terms of ramp.
Good morning. As we were over the past couple of months with our engineers doing the statistical validation and testing of the initial fix, they identified a more robust technical solution that is even more capable to shield away the different electrical interference. Specifically, in this case, one that came from the patient and the table. It's a fix, in addition, that does not require a change to the monitor box, but rather to the sensor connector. It's a cable-type component. The benefit of the solution other than shielding interference better is that it does not require a change to the monitor box, which allows us to ramp up faster the moment we're back in the field. That's the change.
That's also the change that we thought was a better solution, in the medium long term, for the business. It does require us now to restart validation and verification testing with this new solution. That's the main driver why essentially we're slipping out Q1 , yeah, with the plan in terms of going back, to the market.
Okay. Got it. On the Boston manufacturing project, can you just maybe provide a little bit more detail there in terms of, you know, what's being done, how far along you are in that process, and what exactly is being manufactured there? Obviously, it sounds like SurgiMend. Anything else? Thanks.
Yeah. In Boston, the main product there is SurgiMend. There's also one private label product that's being manufactured there. To go back to the Boston production, or the quality project there, we've been working for the past couple of years to upgrade our Boston facility, based on FDA observations in 2018 and 2021. In addition, as we are preparing to have SurgiMend PMA product there, the Boston site requires a quality system that operates at a higher level. That's a project that's been ongoing. We had an audit early in March that confirmed we're on the right track with our execution.
At the same time, yeah, it further upped our sense of urgency, yeah, to finish the project, specifically upgrading a number of testing-related processes and infrastructure physical layout changes. In addition, the plan that we have on the table now gets the job finished well before August this summer, which is the timing where we also submit the PMA amendment, yeah, for the SurgiMend breast product. In that context, we elected to pause production as it allows us to more quicker and more efficient, make the changes in process and physical layouts that are needed. We can do that because we have ample inventory in the system that allows us to satisfy current customer demand. This project, that's an 8-week focused project while we keep the factory down.
We're gonna be back up and running early June with the factory. As I said in the meantime, we're living off inventories to satisfy customer demand.
Got it. Thanks, Ron. Thanks, Jan.
Thank you. One moment for our next question. Question comes from the line of Vik Chopra with Wells Fargo. Your line is now open.
Hey, good morning, and thank you for taking my questions. I just had one clarification on gross margins. You know, I think you said, Q2 sort of flat to marginal improvement, Q3 and Q4 step up. You've previously talked about mid 100 basis points of gross margin improvement. Is that still on the table? I had a follow-up.
Good morning, Vik. Yes, we expect to see kind of flat to a moderate increase in gross margin from Q1 to Q2, from first half to second half, as you mentioned, 100 basis points of improvement. From the full-year perspective, we were talking about this mid-100 basis point improvement in gross margin. We're currently looking at more 100 basis points year-over-year of an improvement, approximately 100 basis points at this point in time. The drivers that we had discussed during the February call are very much, I would say, alive, tempered by, I would say, some kind of residual impact coming from the Boston project that we're running right now here in the first half. Hopefully that helps.
That does help. Thank you. My follow-up was, when can we expect to hear an update on the search for a new CFO? Any color on that would also be helpful. Thank you so much.
Seth, back on the CFO search, very happy with the slate we're having. Over the next couple of weeks, we have our board together. We have a little board committee that's part of selection. That's a main step into selecting, yeah, the main candidates out of that slate. I think over the month of May, that's where decision will be made.
Thank you. One moment for our next question. Our next question comes from Rohan Patel with JPMorgan Chase. Your line is now open.
I suggest we go to the next one, right, and Rohan can come back later on.
Thank you. Our next question comes from the line of Ryan Zimmerman with BTIG. Your line is now open.
Good morning, Jan, and everyone on the call. I had a question. I mean, historically, Integra has generated closer to 48%-50% of its EPS, you know, in the first half. If I look back at kind of years past, now you're targeting this year about 57% of the second half of the year since you generate about 43%, you know, in the first half this year. I can appreciate, you know, some of the Boston one-time impact in the first half of the year, but I'm curious if you could kind of help us bridge the dynamic, particularly as revenue increases in the back half of the year.
I would imagine that costs are also going up on the Opex side, and so, you know, just wanna get comfortable with the EPS ramp in the second half of the year.
Yeah. Good morning, Ryan. As you look at the first half, we've also accelerated certain expenses related to the Boston project right now. Part of this acceleration and some of the cost that we're facing here in the Q2, we're going to offset some of this in the second half. Part of that second half improvement, along with the revenue increase that you're going to see first half to second half, this will enable us to generate more EPS contribution to the full-year. And you're correct, we're about 43%-45% in the first half and about just over 50% in the second half.
Then, you know, organic growth in the Q2 is certainly softer than, you know, what you saw this Q1. You know, procedure volumes were good this Q1. I'm curious kinda why, you know, why you think there's either a slowdown or just, you know, that doesn't continue into the Q2. Maybe that's all related to some private label or things like that, you know, help us understand kinda what you're seeing in the Q2 that's maybe tempering your expectations.
I'll hand that to Mathieu to give you some of the movements there.
Again, in the Q2, the Q2 is the quarter we'll be facing, I would say, one, the toughest comps if you think about private label, about instruments. That's definitely softening the growth year-over-year. In addition to that, you know, we have this moderate impact coming from Boston, which is about $5 million here in the quarter. I would say these are the three or the two big elements that are going to be softening the growth. We believe that demand is going to continue to be strong for the remainder of the years. It's again, this temporary comp year-over-year and the Boston that's going to temper a little bit growth here in the Q2 temporarily.
Oh, sorry, you called out $5 million impact on the Boston quality project for the Q2?
Right. Boston.
Just wanna be clear. Okay.
That is correct. Yes.
Thank you. Thank you.
Part of that line will come back in the second half. That is linked with a private label shipment, which we think we're not gonna be doing in the Q2. That will shift to later second half.
Okay. It sounds like, just to be clear, there's, you know, private label starts to maybe normalize or at least there's a lumpy larger order that picks up in the third or Q4 that can help.
Yeah. Correct.
Okay. Thanks for taking my questions, guys.
Thank you, Ryan.
One moment for our next question. Our next question comes from Matthew O'Brien with Piper Sandler. Your line is now open.
Hey, good morning. This is Phil on for Matt. Thanks for taking our question. For starters on the CereLink relaunch, you know, thanks for the color on the recent breakthrough there and. Given the late Q3 relaunch now, can you let us know what gives you confidence in the steep second half guidance? Not saying the whole thing was based on CereLink, but certainly it's not helping. Just on CereLink, how are those conversations with the FDA going and do you have high visibility in that Q3 timeline at this point?
Maybe your second question first. We have exchanged with the FDA our engineering early test results on this new solution, which look very robust, are quite binary in terms of pass, fail on several dozens of tests. That information we've shared with the FDA, we're gonna discuss that next week to further fine-tune how we set up the validation and verification, say the official testing of that solution. We plan to submit that around mid August. Our timeline at this point in time, the timeline of end Q3 assumes a special 510(k). That also is aligned with the high end of our top line guidance.
This would not end up being a special 510(k), then we're talking, yeah, about two, three months later, yeah, which is aligned with the lower end of our guidance. Our guidance reflects the high and the low scenarios when it comes to settling back to market, and that's pretty much driven by the uncertainty on what regulatory path we will have to follow after we submit in mid, August.
Just to add to Jan's remarks here. If you think about the first half, the second half, we need to realize that CereLink maybe the delay represents maybe $2 million of change. It was a smaller contributor to the second half ramp. Just as a reminder, you know, as we see kind of supply recovering throughout the year, we're expecting to have a bigger contribution in the second half. China normalization post-COVID lockdown is also going to be more of a contributor in the second half, along with kind of growth in some of our NPIs that are going to continue to ramp here in the second half of the year.
Then we're gonna be past also some of the tough comps that we've had from an instrument and from a private label perspective, sorry, both of which are gonna help also the second half growth. That's kind of the first second half walk and the biggest contributors are still very much alive.
No, that's helpful. Thank you. Just shifting gears here, can you kind of flesh out what you see on the international front? I know you just mentioned China, what should we be looking for from Integra here in 2023 and maybe even 2024 as we start to look there as well? Thank you so much.
As I think we indicated, international had a good start of the Q1 with 7+% growth. China and Japan were double-digits. That's where we pretty much expect them to be. Where we expect international to be this year and the next couple of years is in the high single-digits, driven by mid-single-digit Europe and a couple of double-digit drivers in Asia, China.
Thank you. One moment for our next question. Our next question comes from the line of Craig Bijou with Bank of America. Your line is now open.
Good morning, guys. Thanks, thanks for taking the question. A couple follow-ups here. Jan, wanted to circle back to CereLink and the change in the solution and your thoughts that you can distribute it faster. Maybe just ask specifically. If you don't have to change the monitor, I guess, you know, can components be switched out on site? Can they be sent... I think you mentioned a cable, so can that be sent to sites that can then update the system? Just wanted to understand what exactly, you know, the recall consists of now.
Your assumption is right. The monitor does not change. This is about a connector cable, a plug-in cable that plugs in into the monitor. On the other side, plugs into the sensor cable. It's a cable that can be sent as an accessory into our customers. Of course, has to be manufactured, right? And that's being initiated as we speak to have those cables manufactured by one of our suppliers.
Got it. That's helpful. Then, follow up on the Boston project. What requirements, and sorry if I missed it, does the FDA have to come back into the facility and inspect, or are there any other steps once you do finish the project that you need approval or sign off or some other step before you can then submit the SurgiMend PMA?
The start of the plant is up to us, yeah, when we have finished the project that we do. We're sharing that work and that planning with the FDA, but pretty much when we're done, yeah, we start and restart the factory.
Okay, thanks for taking the questions.
Thank you. One moment for our next question. Our next question comes from the line of Joanne Wuensch with Citi. Your line is now open.
Good morning. This is actually Anthony on for Joanne. Thanks for taking our question. In the presentation, you mentioned your M&A game board. Just with SIA in the bag now, can you just maybe refresh us on thoughts around M&A?
I think your question is overall thoughts for M&A?
Yep.
As I mentioned, sometimes before, the strategic work we've done, last year has translated into a clear M&A game board. We definitely have the balance sheet, capacity to execute on that. At this point in time, we have several of our targets, in process, in discussion, and that's, as far as I can give you any insight in further execution.
Got it. That's helpful. On the backlog, I think you said it was elevated, but could you maybe provide any more color on how it trended? Has it gone down materially during the quarter? Has it sort of stayed flat? Just curious if you could provide any more commentary on that.
Back orders are still elevated $10 million-$15 million higher than what we consider as normal. We had not expected over the first half for this to materially come down. That's playing out as we assumed. The challenges here are twofold. One, we keep dealing with several challenges of suppliers that are either not delivering on time or discontinuing components, which drives us to recertify new components or build up last time buy inventory stock. That's one factor, fiscal factor, that's driving the back orders. Second, we are in several factories stepping up work on builds to keep up with the increased demands with the factory capacity that we have.
Thank you.
Thank you. One moment for our next question. Next question comes from the line of Richard Newitter with Truist. Your line is now open.
Hi, this is Sam on for Rich. Thanks for taking our questions and appreciate the commentary on the backlog there. Can you just remind us when you think about the second half ramp, does that include realization of that backlog at all? Can you kind of give us any confidence into the dynamic you expect there for the second half?
Yeah. Definitely we expect an improvement, and it's part of it. I would say again, as we think overall about all the different elements that contribute to the second half, I talked about NPI, I talked about the China normalization, about the private label, about the instruments. The other component as I mentioned early on is this kind of supply recovery. We're definitely seeing more than we would like on the dural access and repair side as well as on the neuro monitoring side, and we hope for this to continue and contribute also in the second half.
Just to clarify, Tim, when I mentioned it's $10 million-$15 million higher than what we consider normal, we do not expect in our guidance that this $10 million-$15 million will be fully solved, okay. We count on about half of that. So that's potential upside or downside in function of how, you know, we get over the different supply challenges.
Again, if you look at our guidance range, right, these are things that we're contemplating as well, right? Some of those factors, between our low end and our high end of the guidance range are elements that we're factoring in as well.
Okay. That's helpful. Just one more on the Boston factory change and how that impacts the margin. It sounds like this was more pull forward than unexpected. Was this the $0.06 impact in 2Q? Was that factored into the full-year guide and now it's just being more realized in 2Q? Then with the lower sorta expansion on GM for the year, can you kinda walk us through the levers on the P&L you have that helps you maintain full-year EPS? Thanks.
Yeah. I'll give this to Mathieu. I think overall your assumption is right, but Mathieu gets you one level more detail.
Yeah, Tim, I agree with what you said. We need to look at it as a little bit of a shifting in expense and I would say impact to gross margin here into the Q2. Let me take you maybe a step back. In Q1, we saw about 120 basis points of an impact related to the Boston quality project itself. We saw some benefit coming from manufacturing efficiency, favorable effects and product mix as we expected originally, which is resulting in the net-net about 40 basis points down year-over-year.
As you shift to Q2, we expecting a modest improvement in, you know, supply, but still an impact of about 100 basis points, I would say in Q2 and for the first half, you know, really driven by the timing, this acceleration of the Boston quality project. As we turn into the second half of the year, we're expecting to offset part of this. Again, the Boston impact has really three components to it. It has the idle capacity, it has the project cost, and it has some revenue impact. As you go into the second half, we'll gain back some of the revenue that we lost in the first half. You're gonna gain back some of the gross margin because of the timing of the expenses. Then you asked about leverage.
The other leverage that we're continuously just looking at being good stewards of our P&L and looking at our investments in the second half and prioritizing some of them, while really focusing on our key strategic priorities and spending in the second half.
Got it. Thanks for taking the questions.
Sure.
Thank you. One moment for our next question. Our next question comes from Eric Fleming with Raymond James. Your line is now open.
Hey, guys, it's Eric. I'm on for Jayson Bedford. just had a couple quick questions. On the private label, with the comps on the private label, were there any account losses in there or is that just straight down?
No, no account losses. I mean, you know, I think a lot of our partners last year built inventory based on certain assumptions around EU MDR. With the change in the EU MDR assumptions and kind of later dates, we just see them, you know, actively managing their inventory levels and these are coming down. This is part of the prioritization, I would say, or the kind of normalization I should say of inventory levels that we're seeing. Again, the impact is gonna be heavier in the first half than in the second half.
Okay. Just one follow-up on CereLink. Before we were expecting a $6 million-$7 million contribution in the second half. Are we now looking at about half of that now with the delay?
Yeah, I think that's roughly correct.
Okay. Thanks a lot.
Great.
Thank you. One moment for our next question. Our next question comes from Rohan Patel with JPMorgan Chase. Your line is now open.
Hi. Sorry, can you hear me?
Yes.
I can hear you now.
Sorry about the earlier confusion. I'm on for Robbie Marcus. Just a quick one on, you know, free cash flow. Definitely looks like conversion looked a little soft in the Q1. How much of that is related to the Boston manufacturing, you know, quality issue? You know, is there anything else driving that kind of weak conversion, and what should we expect for the balance of the year?
We definitely expected from a cash flow perspective, you know, a ramp in capital spend as well as EU MDR spend. That's the first thing. Second of all, we've started also building more inventory. You'll see that a portion of our cash flow at this point in time is also driven by higher inventory levels at the end of Q1, some of which will continue throughout the year as we kind of rebuilding our stock levels and some of it being kind of in whip and all this that will flush through for the remainder of the year.
Rohan, no connection to the Boston project, right? There is nothing there.
Got it. Then, just, you know, when we look forward to your analyst day, what are, you know, the main things you would highlight for us to inspect? What are the most exciting things? You know, should we think of, you know, new products? Should we think of, you know, updated LRP? Just kind of a preview, that would be helpful. Thank you.
Yeah, thanks. Hope to see you next week, by the way, Rohan. The way we've set it up is to really give the insights into how we get from where we are today to the long-term targets that we set forward. Many of you over the past years have asked me for where's the plan and how do you get to what are the contributors. We'll spend most of our time making sure that not only do we explain why we feel great about several of our innovations or our markets, but how does that translate into top line growth acceleration, and gross margin acceleration. We also give further insight into when we talk about M&A game board, what directions are we looking into.
Thank you. Our last question will come from the line of Drew Ranieri with Morgan Stanley. Your line is now open.
Hi, Jan. A couple of questions on maybe the forward guidance. I appreciate on the second half ramp for revenue and for earnings. As you are thinking about upside for the year, are you more inclined to drop that through to the bottom line, or are you looking more to reinvest in the middle of the P&L, just given some of the growth initiatives ahead? Just as a second question, I'll just ask them both up front. As you are reaffirming the 23 guidance, is there any change necessarily in the composition of how you're thinking about CSS versus Tissue Technologies growth? Thank you.
On your first questions, in our guidance, we are protecting our key strategic growth investments. I would say if we have top line upside, a lot of that will flow down to the bottom line, okay. Given again, that we are, you know, making sure that the projects we want to do, we do. In the case of Boston, we do it earlier than planned. We're really determined in 2023 to execute on our growth investments. Top line impact should rather translate into bottom line.
To your second question around CSS and Tissue Tech growth in our guidance, we expect this very much to be in line with our expectation of the February call. No change in there. We're still expecting good growth coming from both CSS and Tissue Tech here in 2023.
Thank you for your questions. This concludes Integra LifeSciences Q1 earnings conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.