Integra Lifesciences Holdings Corp Q3 FY2022 Earnings Call

Hello and welcome to the Integra LifeScience Third Quarter 2022 Financial Results. My name is Caroline and I’ll be your co-ordinator for today’s event. Please note this call is being recorded. For the duration of the call your lines will be on listen-only. However, you’ll have the opportunity to ask for questions at the end of the call. I will now hand over the call to your host Chris Ward, Senior Director, Investor Relations to begin today’s conference. Thank you.

Thank you, Caroline. Good morning and thank you for joining Integra LifeSciences third quarter 2022 earnings conference call. Joining me on the call are Jan De Witte, President and Chief Executive Officer, Carrie Anderson, Chief Financial Officer. Earlier today, we issued a press release announcing our third quarter 2022 financial results. The release and corresponding earnings presentation, which we will feature during the call, are available at integralife.com under Investors, Events & Presentations and the file named Third 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 Report 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, divestitures, as well as discontinued products. Unless otherwise stated, all disaggregated and franchise-level reporting 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 will turn the call over to Jan.

Thank you, Chris. And good morning everyone. Let me start by reviewing our third quarter and year-to-date business highlights on slide four. We'll come back to Integra’s performance over the past nine months. We started the year strong, building nicely from our first quarter momentum. Despite choppy waters in the macro environment and disruptions within our supply chain, we capitalized on the steady recovery of procedure volumes in our markets while protecting our profitability in an inflationary environment. With the third quarter, we continue to see recovery or procedure volumes leading to solid growth across most of our product portfolio. At the same time, we largely contained the impact of legal challenges, such as increased foreign exchange headwinds and continuing supply challenges. We're also reacting decisively to minimize the technical difficulties of 3.5% and absorbing the impact of the recall of CereLink in the quarter. For a bit more color, we saw organic growth in the third quarter of just over 5% for the remainder of the portfolio, slightly above our performance in the first half of 2022. I'll provide an update on the CereLink recall shortly. Overall, I'm pleased with our sales performance in the quarter. We continue to see solid recovery in our markets, and our diverse portfolio gives us confidence in our ability to grow amid the current challenges and into the future. As expected, supply challenges and elevated back orders have continued through the third quarter. We anticipate these higher levels will remain through the remainder of 2022, with most of the impact felt in our CSS business. We are deploying mitigation strategies to reduce the backorder levels to keep up with strong customer demand, such as increasing raw materials safety stocks on constrained commodities, packing materials, metals, and electronics, and qualifying and validating alternative sources for supply of critical items. Our top priority remains ensuring our patients get the life-saving products that they need. Despite the challenges faced in the quarter, we proactively managed our cost and delivered adjusted earnings per share above the top end of our guidance range at $0.86. As a result of our strong third quarter earnings performance, we are raising our full-year adjusted EPS guidance by $0.15 at the midpoint above the high end of the August range. Moving now on to a number of business highlights for the quarter, and let me start by providing an update on the status of the recall of our CereLink ICP monitor. As a reminder, on August 18, we initiated the voluntary product removal of all CereLink monitors as a result of customer reports about units whose pressure readings were out of range. These out-of-range readings occurred at a low incidence rate and a limited number of sites. However, out of an abundance of caution, we decided to remove CereLink monitors from the field. Over the past two months, we have worked with customers to get loners of the previous generation ICP monitor, the ICP Express, out to them. ICP Express is a less feature-rich monitor, but it’s compatible with our CereLink microsensor. As a result, we’ve been able to provide the large majority of our customers with a solution that secures their continuity of operations and care for their patients. Our engineering team has been working diligently, and we believe we have identified the root cause and technical fix to rework the CereLink product. We are now focused on developing test procedures to validate our remediation plan and meet the regulatory and quality requirements to enable us to start shipping the product again. There’s still some uncertainty as to specific dates, but based on our current pathway, we aim to bring CereLink back into our markets in the first half of next year. As we turn to our portfolio, over the third quarter, we advanced two new CUSA Clarity products, further extending the functionality of our ultrasonic tissue ablation product line. First, we launched CUSA Clarity extended laparoscopic tip in the U.S., bringing the benefits of ultrasonic ablation to minimally invasive laparoscopic liver procedures. Second, we received approval for our CUSA Clarity bone tips used for controlled fragmentation, emulsification, and aspiration of bone as necessary. Additionally, we continue to refine our portfolio with the successful completion of the divestiture of our traditional wound care business. In the third quarter, we also announced organizational changes and new leadership appointments. Please move to Slide five for this. As we eliminated the CEO position, leading to the departure of Glenn Coleman, Operations and Quality now report directly into me. In addition, two new leaders joined our executive leadership team in roles that align with key strategic growth factors of the business. Harvinder Singh joins us as President of International. Harvinder brings 25 years of experience in global healthcare commercial roles, specifically in the medical technology and pharmaceutical industries. With Harvinder, we will look to deepen our focus on developing and executing local product market strategies while continuing to build out Integra’s international commercial capabilities and strengthen our presence in these key strategic markets. Mark Jesser also joins Integra as Chief Digital Officer. Mark has 15 years of experience successfully developing and launching digital platforms and strategies that create transformational solutions for healthcare, customers, and patients. He also has prior experience in consulting, marketing, and product management. Mark is partnering with our commercial strategic marketing and business development teams to define and execute digital proposition strategies that will enhance Integra’s device portfolio and our positioning in the digital health ecosystem. Before I hand it over to Carrie to go deeper into our financials, I'd like to turn to slide six for a progress update about our ESG journey. Sustainability is an integral part of how we do business, and we hold ourselves accountable for being good stewards of our resources for the benefit of our customers, employees, and shareholders. Effective ESG management enables us to produce lifesaving products, reduce business risks, minimize our impact on the planet, and drive strong financial results. In 2022, we have made great strides in formalizing our ESG roadmap. We completed a materiality assessment with our key stakeholders, and continue that feedback to guide our priorities. In the third quarter, we issued our inaugural ESG reports as part of our commitment to transparency in this area. We have invested in our culture of diversity and inclusion and the development of our people. We're excited about the future as we set new targets and measures of accountability to pursue tangible results and benefits for our stakeholders. With that, I will turn the call over to Carrie, who will go into our third quarter performance and updated guidance.

Thanks, Jan. And good morning, everyone. I'll start with a brief summary of our quarter financial highlights on slide seven. Third quarter total revenues were $385 million, approximately flat on a reported basis, inclusive of a TWC divestiture impact of $3 million and a $12 million impact due to unfavorable foreign exchange compared to last year, representing an approximate 300 basis point negative impact to reported growth. The U.S. dollar further strengthened in the quarter, creating an additional 40 basis points of FX headwinds compared to our guidance. Excluding the impact of FX and discontinued and divested products, we delivered 3.5% organic growth in the quarter. As Jan mentioned, excluding CereLink, organic growth across the remainder of the portfolio was just over 5% which speaks to the diversity of our portfolio and continues to give us confidence in our long-term growth expectations as we move past the current macro challenges and target bringing CereLink back to market in the first half of next year. In Q3, we recorded a $1.5 million provision for CereLink product returns as a reduction in net revenue. This was much lower than initially expected for the quarter as we evaluated customer feedback, including refund requests and the timing to return the product to market. We view this as very positive as it demonstrates the success of our efforts in assisting our customers in minimizing the disruption in their care for patients through our loaner program, and even more importantly, it showcases that our customers see differentiation with the CereLink product and are willing to wait for its return. Two highlights in the quarter were tissue technologies with their organic growth above 7% and international organic growth of 4.6% despite the impact of CereLink recall. Adjusted EBITDA margin for the quarter was up 30 basis points versus the prior year, and adjusted earnings per share was flat at $0.86, much higher than our guidance expectation, reflecting strong operating expense management and a lower CereLink impact. If you turn to slide eight, I'll review the third quarter revenue performance of our CSS segment. Reported Q3 revenues in CSS were $240 million, an increase of 1.6% on an organic basis from the prior year. Excluding CereLink, organic growth was 4.3% across the remaining parts of the CSS portfolio in line with our long-term growth expectation of 3% to 5%. Global neurosurgery sales were up 2.3%. Advanced energy increased low double digits driven by strong CUSA capital sales, CSF management grew single digits driven by continued growth in our programmable valves, and sales in neuro monitoring were down low double digits due to the CereLink recall. Sales and instruments declined approximately 1% in line with expectations as year-to-date growth of 2.8% aligns with our long-term expectations of low single-digit growth for this franchise. International sales and CSS increased low single digits led by double-digit growth in China and Japan, and mid-single digit growth in our indirect markets. Growth is just driven by timing of orders in the third quarter from our distribution partners. We anticipated COVID lockdowns would ease in Q4. We now expect lockdowns to continue on a rolling basis and consequently, we anticipate our fourth quarter sales in China to be sequentially lower than in Q3. Moving to our Tissue Technologies segment on slide nine. Global Tissue Technologies reported revenues of $135 million, 7.2% organic growth over the prior year. Our strategy was driven by 8.5% organic growth in wound reconstruction led by sales of Integra skin, amniotics, and ACell MicroMatrix. We were pleased with the continued momentum of ACell delivering both sequential growth and high single-digit year-over-year growth. In our private label franchise, sales grew 2.9%. This result was better than expected as year-to-date growth of 11% continues to be above long-term expectations for this business. We expect full-year private label growth to continue to moderate to mid-single digits in line with long-term expectations. Finally, international sales and Tissue Technologies increased mid-single digits driven by SurgiMend. Turning to slide 10, I’ll now review our third quarter and nine-month key P&L components. Adjusted gross margin was 66.7%, down 180 basis points from the prior year. The lower gross margin was due in part to unfavorable regional mix driven by higher international sales and by 30 basis points impact from accruals booked in the quarter for the CereLink recall, including the returns provision I talked about earlier and an $800,000 rework accrual. The largest drivers of the lower year-over-year gross margin were expected and included in our guidance, were currency impacts as well as higher unfavorable manufacturing variances from earlier in the year moving to the P&L as we sold through our inventory during the quarter. Q3 adjusted EBITDA margin increased 30 basis points and year-to-date adjusted EBITDA margin and EPS finished better than our August expectations. We actively manage operating expenses through the quarter as we navigated through the uncertainty of the recall and continuing macro challenges while remaining focused on advancing our key growth initiatives. As we think about margins for the year, we expect adjusted gross margin to be down modestly, largely due to the impact of CereLink recall. However, we now expect adjusted EBITDA margins to be slightly higher compared to 2021, benefiting from continued cost optimization. If you turn to slide 11, I'll provide a brief update on our balance sheet, capital structure, and cash flow. Operating cash flow in the quarter was $68 million, and free cash flow was $59 million. Free cash flow conversion was 70% on a trailing 12 months, reflecting higher capital spending compared to the prior 12-month period. Our balance sheet remains strong with ample liquidity to support our short- and long-term plans. As of September 30, total debt was $1.5 billion, of which over $0.9 billion was fixed, and net debt was $1 million. Our consolidated total leverage ratio was 2.4 times. The company had total liquidity of $1.75 billion, including $512 million in cash, and the remainder available under our revolving credit facility. Turning to slide 12, I will update our consolidated revenue and adjusted earnings per share guidance. For the full year 2022, we are reaffirming our revenue expectations at the midpoint of our August guidance, with a tightened range of $1.551 billion to $1.563 billion. The revenue range represents reported growth of 0.5% to 1.3%, inclusive of the divestiture of the TWC business and an updated foreign currency outlook. Our full-year revenue guidance reflects an additional 25 basis points of unfavorable foreign currency impact relative to guidance provided in August. Foreign currency is now expected to favorably impact full-year reported growth by approximately 250 basis points compared to the prior year, driven by the continued strength of the U.S. dollar. Full-year organic growth is expected to be in a range of 3.7% to 4.5%. Organic growth range reflects the impacts of continuing regional lockdowns in China, and potential adjustments to the CereLink returns accrual that may be necessary in Q4. Full-year 2022 adjusted EPS guidance is being raised to a new range of $3.29 to $3.33. This represents a $0.18 raise at the midpoint of our August guidance, reflecting our outperformance in the third quarter. For the fourth quarter, we expect reported revenues in the range of $391 million to $403 million, representing reported growth of approximately -0.5% to -0.6% and organic growth of approximately 1.3% to 4.3%. Adjusted EPS for Q4 is expected to be in the range of $0.87 to $0.91. If you turn to slide 13, to provide further helpful context, we've included a reconciliation of our original, full-year 2022 guidance from February to our current October guidance. Let's start with the table on the left, which shows you the revenue walk. After adjusting our original February guidance for $27 million from the change in currency rates and $10 million from the divestiture of our TWC business, our October revenue guidance remains above the midpoint of the pro forma February range, overcoming additional revenue headwinds related to supply challenges and the CereLink recall. The preview probably provided a similar walk on the right side for adjusted EPS. By delivering on our revenue and actively managing costs, we expect to fully cover the impact of FX, the TWC divestiture, as well as additional inflation and manufacturing inefficiencies this year, resulting in an updated earnings outlook above the pro forma February guidance. I'll now turn the call back over to Jan to provide a brief recap of our 2022 growth catalysts and margin drivers.

Thank you, Carrie. Let's turn to slide 14, our final slide. Our year-to-date organic growth of 4.6%, including the CereLink headwinds, and approximately 5% excluding CereLink reflects the diversity of our portfolio, and our team's ability to navigate the current unique challenges. In addition to delivering our 2022 commitments, we have remained focused on strengthening our key growth catalysts to build towards our long-term organic growth target of 7%. In our international business, we have delivered just under 6% organic growth year-to-date. As we plan for 2023 and beyond, we have identified investment opportunities in international markets based on the roadmaps we developed earlier this year. With an experienced international commercial leader like Harvinder joining the executive leadership team, we're further building our capabilities to capture incremental international opportunities across our business segments. CereLink is working aggressively to limit the impact of the recall on the operations of our customers and their care for patients, and we are pursuing a path to bring the CereLink monitor back to the market in the first half of 2023. Our customers remain excited about the product features that set the CereLink Monitor apart from legacy intracranial pressure monitors. We continue to believe it will be a multi-year growth driver for the company. As we discussed in our second quarter call, we set a goal to return our ACell portfolio to growth in the second half of 2022. We have met this objective with our third quarter results. With ACell products now solidly contributing along with our legacy Integra skin portfolio, we enjoyed organic growth for our wounds and reconstruction franchise north of 8% for the quarter. Also looking forward to the launch of ACell MicroMatrix and Cytal products in several European markets, scheduled for the first quarter in 2023, to be a great demonstration of our opportunities to take existing products into new international markets. Aurora Surgiscope is continuing to build its momentum with our early adopters. Aurora was included for the first time in a peer-reviewed publication. We have provided a link in our press and invite you to read the article and view the short video vignettes. Regarding our SurgiMend Breast PMA, we continue to work interactively and collaboratively with the FDA on our response to the feedback we received in the final meeting prior to submitting a final PMA amendment. This was planned for February 2023. However, last week, the FDA proposed an unsolicited COVID-19-related 180-day extension of the PMA amendments timeline. We're still assessing whether we believe the extra time will benefit our submission. In any case, we continue to feel optimistic that we will receive FDA approval for a specific indication for the use of SurgiMend in post-mastectomy reconstruction. As a reminder, the FDA has not cleared or approved any surgical mask device, whether synthetic, animal collagen-derived, or human collagen-derived specifically for implant-based breast reconstruction. Today, Integra is the only company to file a PMA for a specific indication. We remain committed to help solve the urgent clinical need for an FDA-approved ADM to help restore quality of life for women undergoing alloplastic breast reconstruction. In the meantime, SurgiMend continues to be a strong growth contributor in our portfolio with year-to-date growth of low double digits. Finally, with NeuraGen3D, our nerve repair product engineered for optimized mid-gap nerve regeneration. We enrolled our first patient in our REINVENT Nerve Registry. The REINVENT Nerve Registry will allow us to gather real-world data across our nerve repair portfolio, identify key points of clinical differentiation, and leverage a database to engage our key opinion leaders and key customers. We're also keenly focused on securing our operations and margins for the remainder of the year and on driving margin expansion beyond 2022 as inflationary and supply chain pressures abate. We have continued our portfolio optimization with the divestiture of our traditional wound care business, the closure of a high-cost production site, and we are in the final stages of completing the back-office outsourcing initiatives we announced last quarter. Additionally, we are stepping up our focus on driving manufacturing and supply efficiencies, optimizing our sales effectiveness, and pursuing opportunities to further capture price in order to drive long-term margin improvement. In summary, we continue to drive the business forward in several ways by focusing on our customers and their patients. Our strong portfolio of market-leading products, our engaged organization, and the external environment with its mix of opportunities and challenges are all key areas of focus. In parallel, we're building out capabilities and investing in our long-term strategic opportunities. We will remain focused on executing in the fourth quarter and delivering a strong finish to the year. Also, before concluding and going into Q&A, I would like to announce that Integra will host our next Investor Day in May of 2023. So with that, I'll open the line for questions. And Caroline, you please open the line for Q&A.

We will take the question from Lyon Rami Maks from JPMorgan. The line is open, now please go ahead.

Hi, this is Alan on for Ravi. I had one quick one and followed up by another question. But just to start off, for your updated guidance, similar to what you clearly came in quite a bit better than expected when it came to the return provision. What are you really baking in for the fourth quarter impact here?

Yes, we're not providing specific guidance on CereLink in Q4. But I would say that we booked a $1.5 million returns provision in Q3. That was, as you said, much better than we expected, and we view that very positively as customers continue and are willing to wait for the new CereLink to be re-launched. So we view that as a sticky product, which is great to see, and we continue to help them ensure that they've got continuity of care in the interim. I think in Q4, we have a range of our guidance for Q4 that would consider both potentially positive and negative adjustments to that accrual. So in Q4, we will assess new information, any new trends that we're seeing on customer returns, credit processes, and we'll also assess our progress on our return to market. We'll also look into our manufacturing plans. We'll take a look at all that information in Q4 to assess whether the $1.5 million returns provision is sufficient in Q4 or whether we need to make an adjustment plus or minus. The same thing for the rework accrual of $800,000; we'll take in all available information in Q4 and make a sufficiency assessment there in Q4. So our range, the high and the low end of that range contemplates again, potential favorable or unfavorable adjustments to CereLink. But overall, I think our view is a positive development as we currently assess where we sit on the returns.

Got it. And then another question just on SG&A. We clearly saw really good leverage this quarter, a very significant step down sequentially of around $15 million from Q2 to Q3. I'm just curious how sustainable that really is going forward. Is that really kind of down to the $140 million, the kind of spend that we should expect on SG&A in the third quarter? Was there any kind of one-time spending items that didn't happen or not, I guess, the opposite of one-time spending that didn't happen in the quarter that will resume going forward? Just trying to get an idea of what we should think of as a sustainable SG&A spend level going forward? Thank you.

Yes. It's a great question. Obviously, we worked actively to manage the spend in Q3, but a couple of things to point out. Normally, as you move from Q2 to Q3, there is a little bit of seasonality of lower OpEx. If you look historically, Q3 OpEx is typically a little bit lower than Q2. I would expect in Q4 that our OpEx will increase a little bit from the Q3 levels. And I would expect that our OpEx levels for 2022 are very similar to 2021. One of the things we've been focusing on in the first and second half of 2021 and in the first half of 2022 is that we brought on a lot of headcount. At this point, we’re absorbing that headcount, integrating that headcount, and also just watching our expenses to ensure that we get the full optimization of those investments made over the last 12 months. I think that's what you're seeing there. Caroline, can we take the next question?

Sure. We will take the next question from Ryan from BTIG. Your line is open, now please go ahead.

Thank you for taking my question. A couple of questions for me, Carrie and Jan, I appreciate the color. Just to maybe follow up on Alan's question, I understand CereLink can go in a lot of different directions. But the 50 basis point decline in organic growth guidance for the full year, is that all assumed to be the impact from China? Is there anything else in there that we need to contemplate in terms of the updated organic guidance? And then I have a follow-up.

Yes, I believe it's a mix of factors starting with the impact of currency exchange rates in the fourth quarter, especially with the latest FX data. Moving on to organic growth, we might need to consider potential adjustments related to CereLink, as well as the ongoing COVID lockdowns in China. Additionally, I want to emphasize that we do not anticipate any significant improvement in back orders. Back in July, we hoped to see some modest progress in reducing back orders over Q3 and Q4. However, we are currently experiencing persistently high back orders and do not expect any notable improvement in Q4. All of this is factored into maintaining the midpoint of our guidance range that we shared in August.

Okay. Very helpful. And then just maybe a bigger picture question in terms of procedure recovery. If you look at kind of where neurosurgery is right now, 2.3%, you think about that in contrast to Wound Recon. I'm wondering, Jan, if you kind of talk about the procedure recovery amongst the two segments. 2.3% still is under kind of that normal threshold I think, that we think of for neurosurgery in that 3% to 5% range. How are you thinking about the procedure recovery amongst neurosurgery and then maybe contrast that with Wound Recon and how that's kind of progressed back? How do you think that progresses going forward?

Ryan, I'll take that first, and then I'll ask Jan to add his comments. But remember that the Neurosurgery number there is impacted by the CereLink recall. So if you exclude the CereLink recall for CSS, our number moves to over 4% growth. There’s a footnote on that slide that gives you the adjustments there. I would say that excluding the impact of taking CereLink out in both periods, the underlying business of CSS is actually right in line with our expectations of 3% to 5%. So Jan, additional comments there?

It partly answers the broader question. If you look, we've seen over in 2022, procedures recover steadily. We're not at 100% yet, neither in CSS nor in tissue tech. When we look in U.S. markets, European markets, we estimate we're around 95 plus minus at this point. We expect that between now and the end of the year, beginning of next year, it will be back to normal procedure levels, except China, right? As long as the rolling lockdowns continue in China, we see China at around 80% of normal procedure levels, but the rest of the world steadily going back to the 100%.

Hi, good morning. Looking at the highlights of some of the initiatives you announced last quarter, you sold the non-traditional non-core wound, and closed the facility in France. You mentioned some outsourcing, I think, back-office type stuff. How have those efforts progressed during the quarter? It looks like you're able to offset some of the cost increases. How should we think about that and maybe the impact on gross margin moving ahead?

Yes. Hey David, I'll take that question. So TWC, we did close that divestiture at the end of August as we had planned. One of the reasons for the divestiture was that it was not core to us either from a top line; it certainly was not additive to our 5% to 7% growth ambitions. It was also lower than our corporate average margin as well. So moving away from that, divesting that business and focusing on our core portfolio will yield positive impact on our margins as we move through more of these macro inflationary challenges, and we expect to start seeing that impact into 2023. For the facility in France, we closed that. The production is moving into our Switzerland facility; that transfer should be complete by the end of the year. That's a high-cost facility. So again, as I think about levers in terms of gross margin improvement, that continues to contribute to cost optimization. I expect you'll see a full-year benefit of that moving into 2023. And then for outsourcing, you will start seeing some of that benefit in the fourth quarter. So there are a lot of underlying levers here for gross margin improvement as well as OpEx leverage as we move into 2023. Hopefully, we're in an environment where the inflationary increases abate. Combined with our other initiatives like price capture, favorable mix as we continue to drive NPIs and Tissue Technologies growth, all of that will be more visible in our gross margin and EBITDA margin lines in 2023.

Great. I guess my very quick follow-up would just be—it sounds like you’re still confident that the $70 million to $72 million long-term target for gross margin is still achievable when we get back to somewhat of a more normal environment. Is that fair?

I think that’s the key: when do we get back to a more normalized environment. There’s nothing in the business that has been impacted that would suggest that we cannot reach 70% to 72% gross margins. It’s a question of the timeline to get there and to reach that. We continue to work on a number of visible levers to expand our margins. We’ve just got to get through some of these macro challenges and get to a more normalized environment. But I think all of those drivers are still there—they’re just being masked by some of those macro challenges.

Hey good morning and thanks for taking the question. So just a follow-up on the OpEx question, Carrie. I’m just wondering if you'll be able to get back to the high end of the 5% to 7% growth range while managing your expenses. So I appreciate any color you have on that. And my second follow-up was on the capital environment, the CapEx environment. What are you guys seeing over there? Maybe you can sort of parse that out between the U.S. and international that will be appreciated. Thank you so much.

Yes. Let me start with the capital question and then go to your cost question and then I'll ask Jan to add some comments there as well. In terms of capital, I think you have to kind of separate out the CereLink impact. So if you take out CereLink both from the prior period and this period, our underlying capital was strong. It was low double-digit growth in the quarter. That was the direct result of a very strong growth in CUSA Capital. We’ve seen some nice growth year-to-date, but certainly third quarter showed the resiliency of the portfolio in terms of CUSA and that double-digit low growth. I’d say we saw growth both in international and the U.S. in that CUSA capital. We do expect that we would see sequential growth going from Q3 into Q4 and still year-over-year growth in capital into Q4, but probably not as high as a level that we saw here in Q3. It could be timing issues. We were quite surprised at the strength of the CUSA capital here in the third quarter, which was nice to see. On your question of balancing the OpEx, the operating expenditures against the growth target of 5% to 7%. Certainly, I’d ask Jan to comment here. But in terms of my view, it’s about cost optimization. It’s about prioritizing and challenging what we’ve historically spent on. In an environment where you have lots of macro challenges, including inflationary headwinds, it’s up to us, our management team here to really scrutinize what we’re spending on, almost apply a zero-based budgeting approach and really look at what we spend, making the hard and tough decisions on pivoting towards what’s most important in our spending. So maybe I’ll ask Jan to comment there as well.

Yes. Just to build on that, over the summer, we were looking into the business. After I had been here for more than six months, it was the right time to challenge all the costs that we had brought on board over the past couple of years. I questioned it with a zero-based approach, challenged the redeployment of resources rather than continuing to add in all those areas. We translated that into a slowdown of some of the hirings, but a stepped-up activity to redeploy costs from left to right, challenging legacy investments, and questioning the return on investment of those investments to further strengthen our investment in the strategic priorities of the business.

Thank you for taking the question. Can you hear me okay?

Yes.

I have a couple of follow-up questions regarding the macro trends you mentioned. You provided some insight on the sequential progress of the backlog related to supply chain issues. Can you quantify that and give us some perspective on what we can expect over the next few quarters? When do you anticipate we will start to see some improvement, and what factors will drive that change?

Let me answer that. As Carrie indicated in her prepared remarks, our backlog today is more or less at the same level as it was in the third quarter. We expect this to continue until the end of the year. We do see improvement as of next year as we execute on several levers to get over some of our supply shortages or late supplies. We’re very much focused on building further raw material inventories in areas where raw materials have been constrained. Think about packaging materials; some metals have been unpredictable in their supply. Second, we are developing alternative suppliers, second suppliers or third suppliers in those areas that have been constrained. All of that is going to start to become online in the fourth quarter, and that’s where we see a further catch-up in back orders as we move into next year.

Got it. Thank you for the additional specificity there. I just had one for Carrie on delta in earnings from the August update now. Is that all the outperformance from Q3 in CereLink or could you unpack that at all crosswalk to where you got to from where you were before at the last update?

Yes. I mean, it really is the Q3 outperformance. So we beat the midpoint in Q3 by about $0.15, and that is essentially the raise for the full year at the midpoint is $0.15. So we’re really flowing through that outperformance in the third quarter into the fourth quarter and into the full-year guidance there. As we talked about our revenue as well as our continued cost optimization of our operating expense line items, we believe that we could flow through that entire Q3, which, again, is continuing to offset. That last slide that we added in, I hope, is helpful because there’s so much noise around the FX and our divestiture and obviously, the CereLink recall. We wanted to provide some additional perspective that when you unpack all of that, our EPS performance has actually been quite strong this year and flowing through that third quarter performance to the full year.

Thank you, good morning. It seems like you have a good line of sight on CereLink here. I was wondering if you could talk about the progress our sales force has made this year in terms of driving interest in CereLink new orders? As you continue to make on the ground as you work toward a return of the product next year, can CereLink sort of be an outsized contributor next year based on any sort of pipeline build ahead of the product re-launching in the first half?

Yes. The feedback we’ve received on CereLink since the launch has been positive. Customers do like the breadth of the features and the ease of the user interface that CereLink brings to them. By acting decisively and solving the problem for our customers by bringing ICP Express, I think we definitely have protected the brand of Integra and the brand of CereLink as a great partner to work with. The feedback we keep getting from customers is that ICP CereLink is a product in the market that does not have a comparable yet, so we’re well ahead of the market. As we preserve that relationship with customers, we feel when we bring the product back in the market in the first half of next year, this is not really going to be a relapse; this is a continuation of the launch that we have in place, and we do see CereLink as a contribution to 2023.

There is a backward compatibility to that microsensor, Steve, as well. The good news is when surgeons are using a microsensor and placing that into a patient’s head, there’s a certain stickiness to the product that as we are out of the market for a period of time, and they’re using the ICP Express, again, that uses the same CereLink monitor or, I’m sorry, microsensor. When we bring the product back in, there will be continuity of that microsensor that helps with keeping that continuity.

Definitely, M&A remains a priority to leverage our strong balance sheet. Over the past year, as we went through strategy, I think we have clear line of sight on what type of targets we’re going after. We have opportunities to broaden our scale in our current CSS or tissue tech markets. We have clear line of sights of adjacencies that we’d like to broaden into or pure technology additions, and of course, international expansion opportunities. So four areas where we’re actively looking into opportunities at this time, and definitely, the market is getting more ready and fluid for opportunities to start moving.