Integra Lifesciences Holdings Corp Q1 FY2022 Earnings Call

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

Thank you, Cecilia. Good morning, and thank you for joining the Integra LifeSciences' First Quarter 2022 Earnings Conference Call. Joining me on the call this morning are Jan De Witte, President and Chief Executive Officer; Glenn Coleman, Chief Operating Officer; and Carrie Anderson, Chief Financial Officer. Earlier today, we issued a press release announcing our first quarter 2022 financial results. The release and corresponding earnings presentation, which we will reference during the call, are available at integralife.com under Investors, Events and Presentations in the file named First Quarter 2022 Earnings Call Presentation. Before we begin, I would like to remind you that many of the statements made during this call may be considered forward-looking statements. Factors that could cause actual results to differ materially are discussed in the company's exchange act reports filed with the SEC and in the release. Also in our prepared remarks, we'll make reference to both reported and organic revenue growth. Organic revenue growth excludes the effects of foreign currency, acquisitions, including contributions for the first 19 days of the year, divestitures as well as discontinued products. Unless otherwise stated, all disaggregated and franchise-level revenue growth rates are based on organic performance. And lastly, our comments today will include certain non-GAAP financial measures. Reconciliations of any non-GAAP financial measures can be found in today's press release, which is an exhibit to Integra's current report on Form 8-K filed today with the SEC. And with that, I'll now turn the call over to Jan.

Thank you, Chris, and good morning, everyone. Let me start by providing a review of our first quarter business highlights on Slide 4. Definitely a quarter we feel good about, and that is reflective of strong starts to the year. Our first quarter revenues finished at around $377 million, above the high end of our guidance range and with organic growth above 5%. You will remember that in mid-February, we went in with cautious guidance for the first half of the year. Although we felt confident about our capabilities at that time, we had very few data points on exactly how and until when our markets and operations would be impacted by the Omicron disruption. And also how they would ease towards the next level of normality after the peak of the disruption passed. Our better-than-expected revenue result in Q1 was driven by a stronger-than-expected recovery in surgical procedures across the globe in March as well as by favorable order timing in our private label business. We saw demand for our products steadily increase, starting in early March, while agility in our commercial teams and operations allowed us to keep up with strengthening demand late in the quarter. Our growth in the first quarter was broad-based with both our Codman Specialty Surgical and our Tissue Technologies segments at or exceeding 5% organic growth and with strong contributions from both our U.S. and international markets. Our first quarter adjusted earnings per share of $0.74 also exceeded the high end of our guidance range, driven by the higher revenue and with gross margins improving 40 basis points compared to Q1 of 2021. We're pleased that the increasing utilization of our factories, combined with margin protection measures taken by commercial, supply chain, and procurement teams succeeded in protecting our margins despite the inflationary environment. And we intend to maintain this margin focus throughout the year. As we think about the full year, we feel more optimistic now, but still tempered with continued caution around macroeconomic-driven uncertainties, including interest rate hikes, geopolitical instability, and further risk from COVID disruptions like what we are seeing in China at this moment. We expect surgical procedures will continue to steadily improve through the balance of the year with more normal seasonal patterns. And while we anticipate continued ripples on the supply side of our operations, due to some of these macro factors, we should see improving trends in our operations over the balance of the year. As a result of our strong start and balanced outlook for the remainder of the year, we are increasing our organic growth expectations for the full year to a range of 3.8% to 5.2% compared to our initial range of 3.5% to 5%. Reported revenue guidance remains the same as our February guidance as we are absorbing additional currency headwinds as the dollar continues to strengthen. We're also reaffirming our full year guidance for adjusted EPS. Our Q1 performance as well as the resilience in our organization provides us a solid foundation for continuing to invest in our future in order to accelerate the business to a next level of performance over the coming years. During the first quarter, we invested in our organizational capabilities and capacities as well as our growth catalysts. And we initiated a number of strategic roadmap projects. Also, in the first quarter, we launched NeuraGen 3D, our new peripheral nerve repair product. And we continued our global rollout of CereLink in Canada, Australia, and several indirect markets. Finally, we completed the accelerated share repurchase program we previously announced, and as a result, have returned $125 million to our shareholders, keeping up with a track record of strong financial rigor. With that, I would like to turn the call over to Carrie now to go deeper into our first quarter performance and our updated guidance.

Thanks, Jan, and good morning, everyone. I'd like to start with a brief summary of our first quarter financial highlights on Slide 5. First quarter total revenues were $377 million, representing an increase of 4.6% on a reported basis and 5.6% on an organic basis. Total revenues were $12 million above the high end of the guidance range communicated on February 23. I would characterize the revenue upside as driven largely by the strong recovery of procedures in March, coupled with our ability to maintain our pace with customer deliveries as well as favorable order timing from our private label business. If you recall, we talked about higher levels of back orders during our last earnings call. We ended the first quarter in roughly the same backorder position we discussed then, still higher than historical levels but with no increase since our February call. And when considering the sharp escalation in demand in March, maintaining the same level of backorders was a good outcome, as it meant our supply chain kept up with stepped-up demand and delivered revenue upside. First quarter revenue growth was strong across most of our portfolio. We achieved organic growth at or above 5% in both our Codman Specialty Surgical and Tissue Technologies segments, with U.S. organic growth of 6% and international organic growth nearly 5%. Adjusted EBITDA margin for the quarter was 24.8%, down 20 basis points, and adjusted earnings per share increased 7% to $0.74. If you turn to Slide 6, I'll now review the first quarter revenue performance of our CSS segment. Reported Q1 revenues in CSS were $247 million, an increase of 2.5% on a reported basis and 5% on an organic basis from the prior year. Global neurosurgery sales were up 5.8% on an organic basis, driven by CSF Management and neuromonitoring. CSF Management increased high single digits and was led by growth in our programmable valves, while Neuro Monitoring grew low double digits benefiting from the recent launch of CereLink. Total capital sales in the quarter grew low single digits driven by smaller capital, including CereLink and MAYFIELD, offsetting lagging sales and larger capital equipment where we saw extended selling cycles linked to the Omicron disruption. Q1 sales in instruments grew approximately 2% on an organic basis, in line with our long-term growth expectations for this business. Recall that last year, we saw significant growth in our Instruments business as a result of pent-up demand. International sales in CSS increased mid-single digits led by CereLink in Europe and by growth in Asia. Performance in China and Japan was strong with low double-digit growth in both countries. Moving to our Tissue Technologies segment on Slide 7. Tissue Technologies grew 8.8% on a reported basis and 6.9% on an organic basis compared to the prior year. First quarter sales in wound reconstruction increased 4% on an organic basis, driven by sales in Integra Skin and SurgiMend. ACell is reported within the wound reconstruction franchise and ACell revenue in the first quarter was consistent with Q3 and Q4 2021 levels, in line with our expectations. As we shared on our February 23 call, we plan to hire additional sales colleagues in our wound reconstruction business over the first half of 2022. And in Q1, we hired a total of 15. We intend to hire another 15 in the second quarter and anticipate building momentum with the ACell product portfolio in the second half. In our private label franchise, sales grew 15%, driven by higher customer demand and favorable timing of orders as our partners continue to build inventory. And finally, international sales in Tissue Technologies increased mid-single digits on an organic basis, driven by strength in Europe and Canada. Turning to Slide 8. I'll now review our first quarter P&L components. Adjusted gross margin was 67.7%, up 40 basis points compared to Q1 of 2021. The improvement was driven by higher revenues and favorable product mix within our neuro and tissue technology businesses. Our gross margin, which was in line with expectations, was impacted unfavorably by higher freight costs, material and labor inflation as well as manufacturing and supply chain inefficiencies caused by the Omicron variant. These challenges were offset by our pricing actions, purchasing initiatives, and cost improvement activities. Our guidance for adjusted gross margin for the first half of the year remains unchanged from our February call. For the first half of 2022, we expect adjusted gross margins to be largely in line with first half of 2021 margins at the midpoint of our guidance range, implying roughly flat adjusted gross margins in Q2 compared to Q1. Our first quarter adjusted EBITDA margin was down 20 basis points compared to the prior year, which was consistent with our expectations communicated on our February call as we planned for increases in R&D, selling, and marketing expenses in support of our key growth priorities. Similar to gross margin, we expect first half adjusted EBITDA margins for 2022 to be relatively flat compared to the first half of 2021. Adjusted EPS was $0.74 in the quarter compared to $0.69 in the prior year, reflecting an increase of 7%, driven primarily by revenue growth. Now if you turn to Slide 9, I'll provide a brief update on our balance sheet, capital structure, and cash flow. Operating cash flow in the quarter was $44 million, and free cash flow was $35 million. Free cash flow conversion was 86% on a trailing 12-month basis, reflecting capital spending at more normal levels and increased spending for EU MDR compliance. In the first quarter, we completed the previously announced $125 million accelerated share repurchase program, with approximately 1.9 million shares repurchased. Our balance sheet remains strong with ample liquidity to support our short- and long-term plans. And as of March 31, net debt was $1.15 billion, and our consolidated total leverage ratio was 2.5x. The company had total liquidity of $1.66 billion, including $407 million in cash and the remainder available under our revolving credit facility. Turning to Slide 10, I'll provide an update to our consolidated revenue and adjusted earnings per share guidance for the second quarter and full year 2022. Second quarter revenues are forecasted to be in the range of $392 million to $400 million, representing reported growth of 0.5% to 2.5% and organic growth of 2.8% to 4.8%. Our second quarter revenue guidance reflects continued procedure recovery, offset partially by increased FX headwinds and an expected impact on our revenue in China due to the government-mandated COVID lockdowns. For the full year 2022, we are raising our organic growth expectations from the initial range of 3.5% to 5% to a new range of 3.8% to 5.2%. The increase reflects our better-than-expected Q1 revenue performance, but also the continued uncertainty of global markets and the expectation of continued supply constraints. Our revenue guidance assumes only a modest improvement in back-order levels through the balance of the year as we work to keep pace with anticipated procedure recovery. Notwithstanding our increase in guidance for organic growth, guidance for reported revenue growth remains unchanged at $1.58 billion to $1.6 billion, reflecting the absorption of an additional 30 basis points in FX headwinds for the full year. Turning to adjusted earnings guidance for the second quarter, we expect adjusted EPS to be in the range of $0.78 to $0.82, roughly flat when compared to the second quarter of 2021 at the midpoint. Again, reflecting continued planned growth investments. We are holding our full year 2022 adjusted EPS guidance range of $3.27 to $3.35, which reflects additional FX headwinds and continuing macroeconomic uncertainty. Now I'd like to turn the call back over to Jan to provide a brief recap of where we stand with our 2022 growth drivers.

Thank you, Carrie, and let's turn to Slide 11. Our first quarter results provide confidence that we can deliver on our 2022 commitments while investing in our growth catalysts and strategic projects. We feel our full year outlook is balanced. It reflects our focus on commercial and operational execution, but also recognize that a great deal of macro-related uncertainties still exist. And we are diligently working to execute on the levers we can control. These levers include price capture, supply chain initiatives, and driving efficiencies in our processes and sites to combat inflationary pressure and protect our margins. At the same time, we're providing room to invest behind our key growth catalysts. Over the past 2 months, I've continued to spend a significant portion of my time in our factories and in the field with our customers and commercial teams. I can see the growth momentum return as hospitals manage through their staffing shortages and free up capacity for elective procedures. At our own sales meetings, I see commercial colleagues who are energized to leverage the strength of our diverse portfolio, including our new products. And I've seen our supply chain teams fully engaged, managing through the many disruptions that continue to be thrown at them. We're also excited by our international growth opportunities. Our commercial teams in China and Japan continued to deliver double-digit growth in these markets. And we are also seeing improved procedure volumes in Europe. We continue to launch CereLink in new countries as part of our multiyear global growth plan for the product, which includes geographic expansion, a growing recurring revenue stream as our installed base grows, and the addition of digital capabilities. The controlled market release of the Aurora Surgiscope for use in minimally invasive neurosurgery continues as planned, as does the MIRROR registry for the surgical treatment of intracerebral hemorrhage or ICH. Although the 2022 revenue contribution from the Aurora platform is small, the long-term benefits to surgeons and patients have the potential to change the standard of care in neurosurgery for ICH. And we expect it will be a significant contributor to our long-term growth as well as a place in our product portfolio for further digital innovation. In our Tissue Technologies business, we expect to see continued procedure recovery through the balance of the year. The launch of our NeuraGen 3D product targeted for mid-cap peripheral nerve repair should boost this momentum. In our ACell business, we clearly have more work to do to achieve the performance that we expected when we acquired the company. As Carrie mentioned, we expect to have hired 30 incremental resources in our wound reconstruction commercial team by the end of June. With an expanded commercial team as well as new marketing and digital customer outreach programs and a more focused compensation plan, we anticipate revenue growth for ACell in the second half of 2022. In conclusion, we're executing on our 2022 commitments with a strong start to the year. The organization continues to demonstrate resilience in the face of numerous challenges while keeping its focus on near-term execution as well as our long-term growth objectives. So this concludes our prepared remarks. Thank you for listening. And Cecilia, with this, we can open the lines for questions.

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

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

Thanks, Steve, and I appreciate the question. I would say that our gross margins came in largely where we expected. So we knew we were going to have some headwinds. I think we properly incorporated those into our forecast guidance. But we also started out the year strong with a lot of actions around those areas in terms of price capture, procurement initiatives, and just other cost reduction activities that we're doing in our factories as well. And I think all of that largely played out as we expected. I think as I think about the balance of the year and part of the reason why we maintain the EPS guidance range is that I don't see those necessarily abating at this particular point. I think they largely will get a little worse than they are right now. And as I think about the guidance range we provided for the full year, that does give us some room in case those gross margin headwinds get a little bit worse in the second half. But I would say we're equally focused on all of those mitigation activities that did bode well for protecting those margins in Q1. And we actually saw a little bit of growth in our gross margin line in Q1. So I think they're all there. I think freight continues to be a big issue. Rising energy costs that are finding their way into the supply chain are also there as well. All of those things, I think, are not going to ease as we move through the year. But at the same time, we're working just as hard to offset those.

Great. And then maybe just my second question on just a couple of macro items. I know your capital business doesn't include a lot of big-ticket items, but I was hoping to get your perspective on the health of the capital equipment environment in the U.S. And then in China, I know you're still under-levered there. But what's the latest you're seeing in terms of demand impact from the lockdowns?

Yes, I'll have Glenn discuss China, but first, let me address the capital question. Reflecting on our Q1 performance and capital, we benefited from the contribution of CereLink, which was launched late last year. This provided a positive boost in Q1, along with some smaller capital projects like MAYFIELD that experienced nice growth. Excluding those factors, larger capital did decline compared to last year. Many other companies experienced similar issues, particularly due to the Omicron disruptions, which extended the selling cycles. I wouldn't read too much into it. We continue to have a strong pipeline and expect capital to sequentially increase in both absolute dollars and year-over-year growth as the quarter progresses. The second half of last year was a solid recovery period for capital, so we need to temper growth expectations accordingly. However, absolute capital growth will keep increasing throughout the year, and I attribute the current situation to the extended selling cycles related to Omicron.

I want to add to the discussion about capital. Outside the U.S., we experienced growth in our small and large capital businesses, primarily driven by Japan, China, Canada, and various markets in direct Europe. It's encouraging to see growth in both segments. Regarding China, as we've mentioned previously, it is our second-largest market by revenue outside the U.S., accounting for about 3% to 4% of our overall consolidated revenue. While this isn't a huge figure in terms of dollars, it's been a key growth driver for us, consistently growing in double digits for the past five years. The lockdown has clearly impacted our business in the second quarter, and this may extend further. However, we've planned for the lockdown to end around mid-May, which is reflected in our guidance. It's important to note that not all procedures will return once the lockdown is lifted; for instance, there will be fewer traumatic brain injuries during the lockdown. Some services will resume over time, while others may not, and we've accounted for this in our second-quarter and full-year guidance. If the lockdown extends beyond mid-May, it could affect our business, particularly in the third quarter. Currently, we have commitments with our logistics providers in China, so our revenue for the second quarter is mostly secured. However, if the situation drags on past May, it may influence our third-quarter results. Overall, though, we're optimistic and enthusiastic about our opportunities in China.

Great. Congratulations on a strong quarter. I wanted to ask for more details on how you're evaluating the bottom-line impact from foreign exchange and some of the macro cost pressures. Considering you've exceeded expectations in the first quarter and are taking a conservative approach, how do you balance that conservatism with the additional challenges facing the bottom line?

Sure, Robbie. Thanks for your question. We started Q1 with strong performance, and we're cautiously optimistic about the remainder of the year, though it's still early in April. There are many macro factors at play, and while you may see it as conservatism, I consider it a practical perspective to acknowledge that numerous factors need to unfold before we can determine their impact. It's not just about currency headwinds; the U.S. dollar has continued to strengthen, adding more challenges as we look to the rest of the year. We also face interest rate hikes, geopolitical instability, especially the ongoing conflict in Ukraine, and overall supply constraints. All these elements influence our outlook for the remainder of the year. While there's cause for optimism, a lot is still uncertain. I believe our guidance range allows us some flexibility. As I mentioned earlier, we're committed to addressing the inflationary pressures we've encountered and performed well in Q1. This will remain a primary focus for us moving forward. However, these pressures may worsen before they improve. If we manage to navigate the gross margin challenges effectively, it will provide us the opportunity to increase investments in our growth initiatives later in the year. We want a bit of flexibility to position ourselves for the second half of the year and beyond.

Great. I appreciate that. And maybe just to focus in on the Tissue Technologies business a little bit here, how should we think about the balance of private label versus the wound business for the balance of the year? I know private label could be a little lumpy. And if you could just give us an update on the tissue business, where do you think the market growth is and how you think you're doing in terms of share gains there?

Yes. And maybe I'll hit the first question and then ask Glenn or Jan to talk about the TT in general market question. But in terms of private label, there definitely was some advancement of orders into Q1 for private labels. Our private label partners are building inventory. So as you think about the supply constraints that we've talked about, they have their own supply constraints. So they are building inventory, and our Q1 benefited from that. So as I think about our guidance for the second quarter, we have assumed that private label revenue is going to be lower in the second quarter. As it relates to growth rate, we're going to see much more of a tempering of that growth rate as that got pulled forward. So I do believe that as we move through the year, private label, you won't see as much growth as you saw just because of some of the year-over-year comps. If you remember, private label was really strong last year, as well as, again, I think our partners were building inventory. So that's going to balance out quite a bit here as we move through the balance of the year. And then the balance of the wound reconstruction part of the business, we'll start to see some performance there. So maybe I'll turn it over to Glenn or to Jan.

Yes. So in terms of the overall market for tissue, I think you got to break down some of the segments within it. But overall, it's probably growing in the mid- to high-single-digit range. So consistent with our long-term growth target of 7% to 9%. I would say within that, though, peripheral nerve repair and breast reconstruction or plastic and reconstructive procedures are probably growing faster in the low double-digit range. And complex wound is probably in the mid-single-digit range, just breaking it down. But overall, pretty consistent with what our message has been around how we expect to grow over the next 5 years.

In the first quarter, ACell performed similarly to the previous quarters. This is not our desired outcome. We are increasing our sales capacity in wound reconstruction, which will benefit ACell and other products. Our goal is to demonstrate significant growth in ACell during the second half of the year.

I have a couple of questions. Carrie, you discussed the backlog dynamics, and how your supply chain team effectively managed it this quarter. Could you provide some insight into the size and scale of that backlog? Also, how feasible is it to reduce that backlog throughout the remainder of the year? Your perspective on managing that backlog would be appreciated.

Ryan, it's Glenn. I'll take a crack at this one. In terms of our backorders, we ended the quarter pretty consistent with where we ended at the end of last year. So we're probably about 2 to 2.5x above normal levels. And it's mostly within our CSS business where we're seeing back orders. So that just gives you an idea about where we are in terms of back orders. But considering the sharp increase that we saw in demand during the quarter and in March specifically, just maintaining the same level of back orders was really a good outcome for us as it essentially meant that our supply chain kept up with the higher demand and delivered the revenue upside. So we actually thought we did a nice job of managing through supply in the first quarter. Moving forward, in Carrie's prepared remarks, we talked about some modest reductions in back order levels for the rest of this year, but still supporting expectations for increased demand, especially in the second half of the year. So we do expect to see improvements in our back orders; they should come down. But we're going to be pretty much dealing with the back order situation and supply constraints for the rest of this year, but it should get modestly better as we move forward. So hopefully, that gives you some context. I would just say on a positive note, look, taking a glass half-full approach. We're seeing improvements in lead times with suppliers. However, I would just say things are still far from normal. We've seen improvements in the apps and rates in our manufacturing facilities. That was an area of concern early in Q1; that's coming back to much more normalized levels. And so those items are going to help us to get more throughput and more output from our manufacturing sites and help to improve the back order situation. So things are trending in a positive direction, but still far from normal.

Thank you, Glenn. Considering the balance sheet, the leverage ratio, and the share buybacks from last quarter, what is your perspective on the M&A landscape? It seems that with the dynamics of share repurchases, there may not be as many opportunities that you find appealing. I would like to hear both Jan and Carrie's opinions on this, please.

Yes. In terms of M&A, Ryan, I think we remain the same as before. And we are actively looking at opportunities. I think what is maybe different in the past couple of months compared to before was here is that in parallel to scouting the market, I am running with the different divisions, a deeper strategic look into where exactly in the care pathway we feel we have a strong logic and a strong position to spread our wings. So we're adding a somewhat more strategic filter onto the broad set of opportunities that we are looking at.

Yes. And Ryan, I would just add, on the balance sheet, we do have lots of flexibility there. So we definitely want to be active on the M&A side, obviously, as we continue to look at opportunities. But we're a disciplined acquirer. And so we're going to wait until we find the right target before we jump on that opportunity. In the meantime, we're always looking for opportunities to allocate our capital. And opportunistically, the share buyback worked out very, very well, and we were able to buy back 1.9 million shares. But our leverage ratio had dropped below our window. We'd like to target 2.5 to 3.5. And so at the end of last year, we were at 2.3x. So a little bit of excess cash there, so we deployed it in an opportunistic way. So I think that's still open, but certainly, we'd like to be active on the M&A side.

Congratulations on the quarter. I have two questions. First, when do you anticipate the capital environment returning to 2019 levels? Second, could you provide an update on the PMA for SurgiMend? I didn't hear anything about that in the prepared remarks, and any information would be very helpful.

Sure. Great. I'll take the first part of that question, and I'll ask Glenn to take the PMA question. On capital, again, I look at the Q1 capital performance as a little bit of mix. As I mentioned, the smaller capital did well. We have the contribution of CereLink coming in. As you heard from Glenn earlier, on the international markets, both the small and large capital did well in Q1 as well. And it was really more of that U.S. market, the larger capital that saw a bit of lagging. And I attribute that to just the longer selling extension of selling cycles; nothing more than that. And I do think that we'll start to see some continued growth year-over-year in the remaining parts of the quarter. From a dollar perspective, we'll start to see continued trends up in capital. I think we still can be bullish on capital. I think it's just a selling cycle extension that's driving that.

Sure. So Vik, on SurgiMend, I don't have a lot to update. I think it's still too early to speculate on any approval timing. We're continuing to follow the process that we're working with the FDA on as they're reviewing our submission. So I would just say we remain hopeful that SurgiMend will ultimately receive the approval for the specific indication for use of post-mastectomy breast reconstruction, but don't have any real updates. I would expect probably late this year, we'll give you a better indication of where we are and the timing. But nothing really new to report on that front.

And I would just say that if you look back to our prepared remarks, we had commented that some of the strength in Tissue Technologies on the wound reconstruction side was SurgiMend. So even without the indication, we do have some very nice growth in SurgiMend there as the properties of that product really lend themselves to be revascularization and postmastectomy breast reconstruction. What the indication does allow us is to essentially train and to promote for that specific indication. But without it, we still have a general indication, and we still see some nice growth in SurgiMend.

Yes. Just as a reminder, we have a specific indication for breast outside the U.S. and Europe, allowing us to market accordingly. However, the greatest opportunity still lies within the U.S.

Maybe just a follow-up on SurgiMend for breast and on your comments, Carrie and Glenn. Maybe just to understand the underlying demand and your comments are interesting, and I did want to see if you are seeing greater use in breast, even though you don't have the label in the U.S. So basically are docs using it off-label more than they were, say, last year?

Yes. Again, SurgiMend gets used for plastic and reconstructive procedures along with hernia repair procedures. And we don't specifically sell into the breast area today because we're not allowed to because we don't have the indication. So we don't necessarily have a good way to track what's being used for breast versus other areas where SurgiMend gets used. But we're clearly seeing an overall uptake on our SurgiMend product both in the U.S. and outside the U.S.

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

Got it. Okay. I don't think we've discussed pricing much in recent years, but I wanted to ask about the impact of supply chain inflation. What has been your experience with pricing? Have you been able to adjust the prices of your products? If not, do you believe that becoming an option might be necessary if supply chain issues persist later this year or into next year?

Yes. Price capture has always been important to us as we consider our strategy for 2022. Historically, we have had the ability to secure some level of price. Looking back, we've consistently had opportunities to implement standard price increases, evaluate discount rates, and adjust pricing for new customers compared to existing ones. Additionally, launching new products provides us with a chance to increase prices, such as with CereLink entering the market. There are various ways we can approach price capture. A significant amount of our U.S. revenue comes from enterprise contracts, which typically last two to three years. These contracts may not allow for annual adjustments, but knowing when they expire enables us to renegotiate. Furthermore, most contracts include volume commitments, allowing us to assess whether customers are meeting those commitments and reengage in discussions with them. In relation to our costs in the total operating expenses of neurosurgical procedures, our products are not the highest expenses, indicating that we still have room to capture price. With the innovations in our product portfolio, we believe we can pursue this opportunity annually.

Yes. Maybe to make it clear, we did start the year with a number of price increases where we could, and we're working now to make sure we capture that price. At the same time, we keep a close eye on the different inflationary pressures, how we compensate some of that with operational measures or what additional price levers we can use to pass some of that through. So for the remainder of the year, from Carrie and myself and Glenn, this is one of our top priorities to stay very, very close to our gross margin, and the different up and down pressures.

Maybe one for Jan. You mentioned the rep hiring on the ACell side. That seems like such a complementary deal, such a plug-and-play sort of bag. I guess I'm just curious, is there something additional on the training side that they need for those products? Or why would additional reps sort of be the solution to driving that given the portfolio you already have?

Dave, it's Glenn. I'll give you some color around this. So when we actually bought the business, we had to go through some compliance-related matters, and we actually reduced the workforce. And we did that and probably went too deep on some of the content it relates to the sales reps. What we came to learn during the process post the acquisition was in many cases, these reps are calling on more than just complex wounds; they were calling on other parts of the hospital. And so we are now adding back many other reps, 15 in the first quarter, probably another 15 or so in the second quarter to get better account coverage now and also cover complex wounds in areas outside of complex wounds, which we don't have adequate coverage today. So that's kind of the first thing. The second thing is we're really going hard after some of the bigger accounts now. And then lastly, as we've done some things to change our sales compensation plans to drive more positive behavior in selling in the ACell portfolio. So we feel really good about the momentum in the business right now. Like we've said earlier, the revenues have been pretty consistent over the last couple of quarters. I'm expecting in the second half of the year. So we're going to see an uptick in revenues and growth we feel quite confident that, that's going to happen.

And I think that's more of a timing relative to the fact that you're adding a few more heads. You've got to get them productive, right? You've got to get them trained. They're not dedicated to just ACell; these incremental headcount are being added to the entire wound reconstruction sales channel. So it will take a little bit of time to get them up and productive in selling, and that's why we've talked about a second-half momentum expectation.

It takes about 3 to 6 months to reach full productivity after hiring someone. While it may seem like we are only adding 30 headcounts, bringing in 30 talented salespeople over the past 6 months has been quite challenging. We are gaining momentum each week by bringing them on board and helping them become productive. We expect to see the full productivity from this increased capacity in the second half of the year.

I have a quick follow-up question. Is your current authorization for buybacks $325 million?

No. If you refer to the press release, the original authorization from the Board was $225 million, and we utilized $125 million of that. This left us with a balance of $100 million, which we have now canceled. We have reinstated the authorization to the historical level of $225 million to provide us with more flexibility for share buybacks. However, we have not announced anything further at this time.

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

And congrats on seeing some improvement in the quarter here. Nice to see. Maybe just to start, I was hopping around calls, but I think an earlier question was on the M&A front. Jan, just wondering, I appreciate you're doing more strategic deep dives on the various units. You've been there a relatively short while. But I'm curious, any sense as to kind of when you think all of that work will start to come to a head? Or any timing on when you think they'll be a little bit more aggressive and focused on filling holes or identifying where you want to kind of deploy capital?

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

Okay. That's helpful. So not too far from now. And then on ACell, I think you said to expect improvement in the second half. I appreciate you have some rep adds that you're waiting for. I'm curious, what is any contribution should we expect from increasing presence in the office setting? How does that factor into the strategy there? I think you're more indexed to inpatients. Maybe just level set us on kind of what the mix is in that business and kind of how you see a potential site of care mix evolving over time there? And if that strategy plays into that at all?

Sure. So the ACell business and our wound reconstruction business, in general, is all on the acute or hospital side. So very little in the outpatient side in the physician offices. However, I think it does create an opportunity for us. But right now, our focus is really on the acute and hospital side. And that will be our focus for sure, at least for the next 12 months.

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

We're a little late in the call here. So maybe just one on a topic that we haven't talked about in a while, I don't think is sort of your progress through the sort of mid-European med device regulation and DR environment that you've been investing in. We see the charges come through, and then we talked about it kind of at the outset, consolidating some of the SKUs in your portfolio, investing behind some of the products there, and phasing other products out. Can you maybe just touch on where you are in that process and maybe talk a little bit about some of the benefits you're seeing or if any, of sort of consolidation around key products where you've made the investment and maybe other smaller players have just opted to get out?

Yes, Matt, it's Glenn. I'll address this. First, we've made significant progress on EU MDR over the past couple of years. We started early, but there’s still much to accomplish. We achieved compliance with Class 1 products last May and are working towards compliance for Class II and Class III products. Although the deadline is May 2024, there's considerable work to do this year to prepare our submissions to the notified body, requiring at least 12 months notice for many products and up to 24 months for some animal-based products. This means we need to submit this year for those items. Much of the ongoing work and costs you see are related to efforts in 2022, but we believe we are on track to meet these deadlines. There’s significant activity happening right now, and we have completed a lot of the portfolio rationalization before this year, aligning it with our files and the products we plan to offer going forward. If executed well, this could provide us with a competitive advantage, especially as other products may be removed from the market. There's more to come, but this year is crucial for EU MDR and the necessary work ahead.