Earnings Call Transcript - IART Q2 2023

Operator, Operator

Good day, and thank you for standing by. Welcome to the Integra LifeSciences Second Quarter 2023 Financial Results. And now I would like to hand the call over to Chris Ward, Senior Director, Investor Relations. Please go ahead.

Chris Ward, Senior Director, Investor Relations

Thank you, Lisa. Good morning, and thank you for joining the Integra LifeSciences second quarter 2023 earnings conference call. Joining me on the call this morning are Jan De Witte, President and Chief Executive Officer; Lea Knight, Chief Financial Officer and Mathieu Aussermeier, Vice President of Corporate FP&A, Investor Relations and Treasurer. Earlier this evening, we issued a press release announcing our second quarter 2023 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 a file named Second Quarter 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 disclosed in the company’s Exchange Act reports filed with the SEC and in the release. Also in our prepared remarks, we will reference 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 aggregated 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 yesterday with the SEC. And with that, I will now turn the call over to Jan.

Jan De Witte, President and Chief Executive Officer

Thank you, Chris, and good morning, everyone. To announce the recall of products from our Boston facility in late May, we committed to sharing the timeline for resuming production in Boston during this earnings call. I appreciate that this is top of mind for our investors and analysts as it is for me and our leadership team. So we’d like to address this first before going into the broader business update. We initiated, after consultation with the FDA, a voluntary global recall of all products manufactured in our Boston facility. This was based on our identification of gaps in our endotoxin testing process that may have resulted in the release of products with higher levels of endotoxin than permitted by the product specifications. The recall included our PriMatrix, SurgiMend, Revize, and TissueMend products. We also extended the previously implemented manufacturing pause in Boston to implement additional detection and quality controls. That was found to be necessary in light of both recent FDA inspection results and findings from prior internal and external audits. It is important to point out that we have no specific indications of end product concerns related to high endotoxin levels. Patient safety is non-negotiable for us, and we act with an abundance of caution in making decisions like the ones we have made over the past few months. We continue to work closely with the FDA. In June, we submitted an initial response to the audit findings from the Boston inspection that concluded in May. We have merged these new actions within the existing work plan into a comprehensive plan that we believe fully and effectively addresses quality system gaps in our Boston operations. Over the past months, we have strengthened our leadership and project management capabilities in the Boston operations, adding internal resources and outside subject matter experts. We have begun our remediation plan and are also bringing in a third-party auditor who will assess our progress and key milestones over the course of the project. Based on this project plan, we expect to resume manufacturing by the end of the fourth quarter this year. Considering the cycle time from moving raw materials to finished goods in the factory, that needs to build inventory and for the plant to complete a final audit by our outside experts. We expect to initiate the commercial relaunch by mid to late second quarter 2024. This planning is consistent with what the FDA expects pursuant to the warning letter we received last week. We will continue to work closely with the FDA and provide them with regular updates on our progress. We will submit the final audit report from our outside expert to the FDA by or before March 31st, 2024 as the warning letter advanced. The impact on our financial results for the second quarter was significant and in line with the estimates we provided in our revised guidance in May. In the second quarter, we saw a negative impact of approximately $23 million from lost revenues and returns, resulting in a negative impact to adjusted EPS of roughly $0.20 associated with the recall. In May, we provided a range of impacts for 2023, and in our updated guidance, you will see a full-year negative impact of approximately $60 million in revenues and $0.35 for adjusted EPS. Although we are not providing guidance for 2024 at this time, the manufacturing restart timing and the time required to ramp up inventory for sales will create a headwind for 2024. We estimate that the net impact of the Boston return to market timing will negatively affect the 2024 projections implied in the long-range plan presented during our May 4th Investor Day. We estimate this negative impact to be around $50 million in revenue and around $0.30 in adjusted EPS. I want to assure our customers and investors that we are highly focused on our remediation efforts and we fully expect to complete the remediation and return our technologies to market for our customers and their patients. With that backdrop, let’s turn to Slide 5 to review our second quarter business highlights. Our second quarter revenue decreased by 2.7% on an organic basis, mainly reflecting the impact of the Boston recall and production halts. However, the second quarter also reflects the strength of our markets and strong demand for our technologies across a diverse portfolio of leading products and brands, resulting in total revenue above the high end of the revised guidance we provided in May. Excluding products manufactured in Boston, our portfolio experienced solid organic growth of 5.5%. In our CSS business, growth was driven by key products like CUSA, Mayfield, DuraGen, Certas Plus programmable valves, Bactiseal catheters and instruments, several of which delivered double-digit growth in the quarter. In our tissue technologies business, we saw double-digit growth in key product lines like MicroMatrix, Cytal and MediHoney. We also enjoyed strong international growth of above 7%, led by double-digit growth in China and high single-digit growth in Canada. Regarding our bottom line, second quarter adjusted earnings per share came in at $0.71. The $0.20 headwind from the Boston recall offset otherwise strong profitability, while the rest of our portfolio drove adjusted EPS above the high end of our revised guidance range. Looking beyond our second quarter revenue results and back to the left side of the page, we delivered several positive proof points along our path to the growth commitments laid out during our Investor Day. We continue to advance our portfolio strategy in the implant-based breast reconstruction market and are excited to announce that we have filed the amendments to the clinical section of our PMA application for SurgiMend. The integration of our recent SIA acquisition is well on track and our team completed enrollments for the DuraSorb PMA clinical trial. These clinical developments bring us a step closer to having our first and second PMA products and are clinically significant in high-growth markets. Moving to CereLink, we’ve made significant progress toward bringing CereLink back to market. We completed the technical section and finalized testing in preparation for our filing with the FDA, which we intend to make by the end of August. We expect to relaunch the CereLink monitors in international markets late in the third quarter of this year and in the US by late in the fourth quarter. We remain excited about CereLink with its differentiated technology in ICP monitoring and view it as a key catalyst for long-term growth commitments. We also expanded the international reach of our CUSA and DuraGen portfolios and bolstered the clinical evidence for our Bactiseal catheters in the European market, further illustrating our opportunities to bring our leading technologies and brands to new international markets. Additionally, in the second quarter, we opened our new Innovation and Learning Center in Plainsboro, New Jersey, dedicated to our founder, the late Dr. Richard Caruso, emphasizing our investments in research, development, and clinical education in regenerative technologies. Lastly, we appointed Lea Knight as Integra’s new CFO at the end of June. Lea will provide further details on the financials, our updated guidance, and the planned share repurchase. Before going to her, let’s move to Slide 6 to officially introduce Lea and welcome her to Integra. Lea comes to us with over 30 years of experience in global companies with significant operating scale and complexity. She brings the right mix of operational depth and strategic breadth that we were aiming for during the search and has a great reputation for leading and developing high-performing teams and a track record of delivering strong business outcomes across the organization. We’re excited to have Lea on board and look forward to her leadership and contributions to Integra’s future. Before I turn the call over to Lea, I would like to take this time to acknowledge the contributions and leadership of the exceptional team led by Jeff Mosebrook and Mathieu Aussermeier. Jeff and Mathieu have been great partners to me and our leadership team over the past months and have demonstrated resilience, diligence, and financial rigor during the CFO transition. With that, I would like to turn the call over to Lea.

Lea Knight, Chief Financial Officer

Good morning and thank you, Jan, for that warm welcome. I’m excited to be part of the Integra team and back in the life sciences industry. In the past four weeks, I have taken the opportunity to immerse myself in getting to know our markets, our products, and our people. I’ve also spent considerable time learning about and assessing our Boston remediation plan and timeline. There’s much more to learn, but I’m excited about how we’re positioned for growth and the opportunity to leverage my experiences to help Integra fulfill its purpose of restoring patient lives. Now, onto our second quarter financial results and I’ll start on Slide 7. As Jan mentioned, the Boston recall weighed heavily on our second quarter results. You will see the Boston recall impacted not only our revenues and organic growth but also drove declines in our gross margins, adjusted EBITDA margins, and adjusted EPS. Excluding the impact from Boston, our second quarter results reflect solid growth across our diversified portfolio and provide many positive points demonstrating the strength of the underlying business that I will highlight in the coming slides. Please turn to Slide 8, where I will go deeper into the second quarter performance of our CSS segment. Reported second quarter revenues in CSS were $271 million, an increase of 5.1% on a reported basis and 6.3% on an organic basis from the prior year. Overall, this segment delivered quarterly results exceeding the growth range outlined during our Investor Day. Global neurosurgery sales rose 4.2%, driven by high single-digit growth in Advanced Energy, CUSA capital and disposables; mid-single-digit growth in Cerebrospinal Fluid management driven by Certas Plus programmable valves and Bactiseal; mid-single-digit growth in Dural Access and Repair driven by DuraGen and Mayfield, and a low single-digit decline in Neuro Monitoring due to the prior year comp of the CereLink recall. Overall, excluding CereLink, capital sales in the quarter were strong and grew double digits, driven by CUSA and Mayfield capital. We remain encouraged by the continued momentum and demand funnels for our capital equipment, resulting in double-digit growth in capital in the first half of this year. Instruments grew approximately 13%, benefiting from sustained strong demand and favorable order timing. The performance of our instruments business continues to exceed long-term growth expectations with near double-digit growth through the first half of this year. Shifting to international sales, we saw high single-digit growth in the quarter, led by double-digit growth in China, Canada, and our indirect markets. Consistent with our Investor Day expectations, the results in China delivered strong performance above the Neuro portfolio and regional expansion. Moving to our Tissue Technologies segment on Slide 9. Tissue Technologies reported a decline of 21.2% on a reported basis and down 19.7% on an organic basis compared to the prior year. Excluding the Boston products, reported and organic growth were 0.8% and 3.8% respectively. Second quarter sales in wound reconstruction decreased by 12% due to the Boston recall. Despite the recall, we saw strong demand in commercial execution and double-digit growth from MicroMatrix, Cytal, MediHoney, and our nerve franchise. We are pleased to see strong double-digit growth through the first half from the SIA portfolio, including MicroMatrix, Cytal, and Gentrix, all key growth contributors in our long-range plan. In our private label franchise, sales declined 43% versus last year due to lost sales and returns from private label partners associated with the recall. For clarity, approximately half of the returned products from the recall were from private label partners. Finally, international sales in tissue technologies were down double digits due to the recall, particularly returns from distributor partners, which offset double-digit growth in Integra Skin and MediHoney. Turning to Slide 10, I will now review our second quarter P&L metrics. As we have discussed, our second quarter revenue is down 4.2% on a reported basis and 2.7% on an organic basis, driven by the Boston recall, partially offset by solid growth across the remainder of our portfolio. Looking at our gross margins and profitability metrics, we are seeing improvement in underlying gross margins offset by the impact of the Boston recall. The Boston headwind to gross margins for the quarter was approximately 100 basis points, overshadowing approximately 60 basis points of improvement from price, mix, volume, and efficiency gains. In addition to the impact on gross margins, our adjusted EBITDA margins and adjusted EPS also reflect the planned investments and strategic priorities we originally outlined in January, including year-one dilution from the SIA acquisition. These investments are critical to our long-term growth, so we are protecting them despite the recall. If you turn to Slide 11, I'll provide a brief update on our balance sheet, capital structure, and cash flow. During the quarter, operating cash flow was $28 million and free cash flow was $13 million, reflecting increased inventories as we replenish our safety stock levels. Free cash flow conversion was 57% on a trailing 12-month basis. Our balance sheet remains strong with ample liquidity to support our short and long-term plans. As of June 30th, net debt was $1.1 billion, and our consolidated total leverage ratio was 2.6 times. The company had total liquidity of $1.6 billion, including $309 million in cash, with the remainder available under our revolving credit facility. Given our favorable liquidity position, confidence in our Boston restart plans, and continued commitment to our short and long-term growth objectives, we plan to initiate a share repurchase of $125 million by the end of the third quarter of 2023. The share buyback is expected to contribute to 2023 and 2024 EPS by approximately $0.02 and $0.06 respectively, and is included in our 2023 full-year guidance as well as our 2024 full-year Boston impact. If you turn to Slide 12, I will provide an update on our consolidated revenue and adjusted earnings per share guidance for the third quarter and full year 2023. Third quarter revenues are forecasted to be between $386 million to $390 million, representing reported growth and organic growth in the range of approximately 0.2% to 1.3%. Excluding the Boston products, we are forecasting organic growth of approximately 6.7% at the midpoint, driven by continued strong global demand for our products and modest improvement in supply. For the full year 2023, revenues are forecasted to be in the range of $1.548 billion to $1.560 billion, representing reported growth of minus 0.6% to positive 0.2%. Organic growth is in the range of approximately 0.3% to 1.1%. Excluding Boston, we are forecasting organic growth of approximately 6%, reflecting strong global demand and performance demonstrated in the first half, along with updated timing for the relaunch of CereLink and modest supply and backorder improvement. I want to highlight that when excluding the impacts from the Boston recall, our full-year revenue guidance remains consistent with our original guidance in February. We also tightened the bottom end of our guidance range to reflect our Q2 performance. Turning to adjusted earnings guidance for the third quarter, we expect adjusted EPS to be in the range of $0.76 to $0.80, up sequentially but down from the prior year, driven by the Boston recall as well as our planned strategic investments in OpEx savings to offset part of the impact of that recall. In April, we estimated an approximate 100 basis point improvement in gross margin for the full year, and now, with the full-year impact of the Boston recall, we expect only a modest improvement in gross margins versus 2022. Our full-year adjusted EPS guidance is being revised to a range of $3.10 to $3.18 per share, reflecting our Boston revised revenue and adjusted gross margin outlook, our second half expense management, as well as the announced share repurchase. Now, I will turn the call back over to Jan.

Jan De Witte, President and Chief Executive Officer

Thank you, Lea. Please turn to Slide 13 to conclude our prepared remarks. Despite the fact that the Boston recall requires enormous focus and effort and overshadows our second quarter results, the second quarter actually provided many strong positive proof points on our business performance in both CSS and Tissue Technologies. The underlying trends in our markets are healthy, with volumes returning largely to normal. We are building resilience in our operational and supply chains, and the performance of our portfolio with several double-digit drivers provides confidence that we will deliver on long-range growth commitments as we move past the acute impact of the Boston recall. Our teams are extremely focused on completing the remediation and bringing the Boston facility to world-class manufacturing and quality standards that will support the growth expectations for the products manufactured there. In May, we held an Investor Day showcasing our long-range targets and our path to get there, and we continue to drive progress on our long-term growth initiatives. We are advancing our PMA portfolio strategy in implant-based breast reconstruction, and we are filing the SurgiMend PMA amendment along with completing the clinical enrollment for the DuraSorb PMA trial. CereLink is on track to start its return to market by the end of the third quarter, reclaiming its position as a leading innovation in the ICP monitoring segment. Additionally, we are expanding our global portfolio by launching key products from our CUSA and DuraGen platforms in new international markets, furthering our commitments to international expansion. Moreover, we opened our new Innovation and Learning Center in Plainsboro, New Jersey, dedicated to our founder, the late Dr. Richard Caruso, accentuating our investments in research, development, and clinical education in regenerative technologies. Lastly, but certainly not least, we are initiating a share repurchase plan of $125 million in the third quarter, returning value to our shareholders. We're committed to investing and strengthening Integra’s commercial and operational capabilities to drive and capture healthy organic growth opportunities in our markets while maintaining resilience and quality across our manufacturing facilities. For the past 18 months, we have completed a full compliance assessment of our quality systems in our 14 manufacturing facilities using a combination of internal and external auditors. We are making the necessary investments in processes, people, and equipment, and we’re confident that as we enhance the Boston operation and quality system, we’ll achieve a global manufacturing footprint that can drive reliability, quality, and efficiency in support of our long-range plan commitments for growth and margin increase. We’re also investing in strategic marketing, product management, and clinical evidence generation to support stronger end-to-end innovation and commercial success for new product introductions. We are continuing to develop our international capabilities to fully leverage market penetration and growth acceleration opportunities in several key regions outside the US. All these measures will continue to allow us to bring innovative and lifesaving technologies to market, enabling researchers worldwide to restore patient lives. Our full-year outlook remains balanced, reflecting our commercial progress and improving execution, while also considering the full-year impact of the Boston recall. I am confident and excited about our trajectory. We have a dedicated team focused on driving the improvements needed to unlock the full potential of this business. Thank you for joining us this morning. This concludes our prepared remarks, and operator, we can open the lines for questions.

Operator, Operator

Thank you. The first question today comes from Steve Lichtman with Oppenheimer. Your line is open.

Steven Lichtman, Analyst

Thank you. Good morning, guys. Jan, I was wondering if you can talk to the two parallel things you have going on with Boston with SurgiMend. You mentioned the new file for IBBR, and then you gave the updated timelines in terms of restart. How are you anticipating the timing of the restart impacting the decision process, the inspection process for the IBBR indications specifically, and what’s your latest timing in terms of when you think IBBR could potentially be on the market?

Jan De Witte, President and Chief Executive Officer

Okay. As you stated, there are two parts: the clinical part and the manufacturing part. On the clinical part, we submitted earlier this week regarding the tandem we have been discussing for a while. We hope to have a signed agreement from the FDA on that clinical piece of the PMA by the end of this year or early next year. However, the manufacturing part is equally critical for obtaining the PMA certification, which only begins once we are shipping again. Once we do start, we can commence the end-to-end manufacturing and product validation necessary for the FDA to conduct the preapproval inspection. Based on the timelines we communicated, we now see this preapproval inspection occurring either in Q4 of '24 or early '25. Thus, with the two processes needed in parallel, we anticipate that our overall PMA approval shifting towards the first half of '25 will still be early compared to our competition.

Steven Lichtman, Analyst

Understood. And then just my second question is on gross margin. It did look certainly better than expected. Can you talk about some of the underlying drivers there and the sustainability of those excluding Boston? Thanks.

Jan De Witte, President and Chief Executive Officer

Thank you, Steven. I'm going to hand that question over to Lea.

Lea Knight, Chief Financial Officer

Yes, thank you. Good morning, Steven. A couple of things. First, regarding how we landed versus expectations, a couple of key drivers I would highlight: our revenue performance in the quarter came in better than anticipated, which combined with our product mix drove an improvement in margins. We also experienced more favorable manufacturing variances in the quarter and less cost pressure than we originally projected. Additionally, we anticipated a backlog in Q2 from a cost perspective around remediation, but some of that was mitigated based on our need to address the observations coming from the FDA. All of these factors contributed to why our margins in the quarter were better than we originally communicated as part of our 8-K discussion. As for the second part of your question regarding our outlook for the balance of the year, we expect moderate improvements in margins compared to where we landed in 2022.

Operator, Operator

Thank you for your question. Our next question comes from Robbie Marcus of JPMorgan. Your line is open.

Rohan Patel, Analyst

Hi, this is Rohan on for Robbie. Thanks for taking the question. You're discussing cost savings in the second half of the year that will help offset some of the dilution from lost sales. I just want to get a sense of what you’re pulling back on in SG&A specifically here? What projects do you think you might be able to make up for in 2024? Essentially, is there any area where you expect to increase spending beyond trend in 2024?

Lea Knight, Chief Financial Officer

Let me clarify the questions. In our remarks, we shared that we remain committed to some of the planned strategic investments we outlined earlier this year. While we’re committed to those, as we’ve communicated, we are initiating some cost improvement activities in the second half to mitigate some of the impact of the recall. That’s still planned, but we are preserving some of the strategic investments we believe are necessary for long-term growth.

Rohan Patel, Analyst

Okay, great. And then I just had another question on the potential for share loss as a result of the Boston recall. Could you elaborate on what gives you confidence that you’ll be able to regain the lost share once you start selling these products again, given that this is expected to start in the second quarter of next year? Can you quantify how much share you expect to lose, if at all, and what precedents you’re using for that?

Jan De Witte, President and Chief Executive Officer

Let me take that question, Rohan. There are two components: one is that many customers are currently seeking substitution options both for SurgiMend and PriMatrix with other products in our portfolio, which we are leveraging to maintain our customer relationships. Currently, we assume that we can cover about 10% to 15% of the volume, but we are still evaluating and seeking ways to increase that percentage. The second part concerns how quickly we can regain 100% of our market share. Based on our experience over the past decade with other instances of temporary market absences, our sales leadership believes that we can recover our lost market share within about a year, and then continue to grow share with both SurgiMend and PriMatrix. This belief is based on our product quality, capabilities, and the strength of our commercial team.

Operator, Operator

Thank you. Our next question will come from Matt Taylor of Jefferies. Your line is open.

Young Li, Analyst

All right, great. Thanks, guys. This is Young Li in for Matt. I guess to start, you know, obviously the Boston restart is really top of mind for investors, and I appreciate all the updates there. I guess one is to hear more about the various scenarios that you know you might have considered; in that regard, you know, with the 4Q restart, understanding there’s no product issues, was that the FDA’s focus on quality testing and validation processes? But maybe if you can share about the potential for things to move a little faster or slower relating to Boston?

Jan De Witte, President and Chief Executive Officer

Thanks for that question. The timeline shared reflects extensive work done at the end of May and throughout June. On one hand, we had FDA observations in the form of a 483 communicated in late May. By merging those with the previously established work plan based on earlier internal or external observations, we created a holistic plan. Many of our internal observations coincided with the FDA's observations. Consequently, the timeline to execute them extended due to the need to follow our CAPA process to rectify these observations, which entails significant work for root cause analysis, validation, and verification. This is one element influencing the plan. A second is additional in-process external audits and a final audit. There will be several points where we will pause and reevaluate our progress, making necessary corrections before proceeding. While we can look for opportunities to expedite some aspects of this work, we now believe that the timeline we communicated will take time. Furthermore, there is a possibility of uncovering new challenges that we must address. Therefore, although some of the plan allows for contingencies, we have to remain cautious about unexpected discoveries. So, to respond directly, our expectation is that we will maintain our previously outlined timeline. As we move through August and September, we intend to solidify those areas and recruit additional resources to potentially expedite progress whenever possible.

Young Li, Analyst

All right, great. That’s really helpful color. I guess my follow-up is just regarding M&A – a key strategic pillar for Integra. How should we think about your interest or ability to pursue deals while working on the Boston remediation? Will you approach M&A any differently over the next year?

Jan De Witte, President and Chief Executive Officer

Let me answer that. We will remain open to opportunities but will alter our approach as required. As you’ve heard us discuss, our strategic opportunity game board encompasses two types of deals. Deals we can control the timing of, and those that we cannot. Specifically regarding Tissue Technologies, given our current focus on the Boston execution, we are taking a cautious approach. However, for strategically important deals that emerge, if they come into focus, we will evaluate them on a case-by-case basis, while managing the strategic significance of our immediate goals.

Lea Knight, Chief Financial Officer

To expand on that, our balance sheet remains strong, with sufficient liquidity to follow through on any strategic opportunities that arise, helping us maintain our long-term growth focus.

Operator, Operator

Thank you. Our next question comes from David Turkaly of JMP Securities. Your line is open.

David Turkaly, Analyst

Great. Good morning. Jan, I know you mentioned the FDA is going to come in for a pre-approval inspection, and I’m just curious: for you to start manufacturing and then commercialize out of that plant, are you assuming right now that you will have another FDA inspection for that to happen?

Jan De Witte, President and Chief Executive Officer

Allow me to clarify. I think you’re mixing up the PMA discussion with the restart discussion. The FDA has confirmed that restarting manufacturing is a decision we make independently. We will decide when to restart and will bring in external auditors at our discretion. If that is successful, we’ll begin shipping the product. The preapproval inspection I mentioned is specifically part of the PMA trajectory – and that audit will take place by the end of '24 or early in '25.

David Turkaly, Analyst

I understand. I was just trying to ensure I’m clear on that point. And I wanted to say thanks for the details on 2024. If we look at the $50 million and the $0.30 impact, would it be prudent for us to expect that the majority of that would be reflected in the first half of the year, given you expect sales to be back up by mid next year?

Lea Knight, Chief Financial Officer

Yes, thanks. I’ll take that. From a 2024 perspective, with the Boston impact that we communicated, this assumes we will resume shipping by mid to late Q2. Much of that impact will indeed be reflected primarily in the first half, with the understanding there will be a natural ramp-up as we work back to full distribution.

Operator, Operator

Thank you for your question. Our next question will come from Vik Chopra of Wells Fargo. Your line is open.

Vik Chopra, Analyst

Hey, good morning and thank you for taking the questions. I guess just to Lea, welcome, looking forward to working with you. Thanks for providing the color of the 2024 guidance. So I’m just curious how does the preliminary 2024 guidance impacts the LRP goals you provided in May? Additionally, how confident are you in that 5% to 6% growth algorithm from '24 to '25 LRP? I have a follow-up, please.

Lea Knight, Chief Financial Officer

Let me start, and then I’ll allow Jan to add. From an LRP perspective, we are not officially providing any updates at this time. However, I want to note that based on the data from this quarter, we saw both Neurosurgery and Tissue Tech performing consistently with our growth expectations outlined in the LRP. That indicates strong potential for us to meet what we initially communicated during our Investor Day. It’s worth mentioning that we advanced our commitments around the clinical filing for the SurgiMend PMA, and completed DuraSorb clinical enrollment, which are critical steps we require to initiate driving growth objectives post-recovery. Hence, the underlying strength indicates promising potential for our long-term commitments.

Vik Chopra, Analyst

Great. Thank you for the color. And then just one high-level question: what are your assumptions on macro headwinds in the back half of the year? Can you talk about what’s getting better and what’s getting worse?

Jan De Witte, President and Chief Executive Officer

Let me start here. I shared in my prepared remarks that from a market dynamics perspective, we see strong performance broadly across the world. Europe is showing solid strength, and the Asian and US markets are performing largely as expected. We anticipate this trend will continue throughout the year. Furthermore, outside the US, we see deeper penetration opportunities regardless of market growth dynamics. Even with macro fluctuations, we aim to penetrate faster than the market. From a supply situation, we have observed gradual improvements, and I believe we are returning to a new normal. Suppliers are facing overcapacity, making them less reliable than before, and output discontinuations compel us to pursue recertification processes for new components, which has added some challenge. Overall, we’re seeing improvements in our execution and yields and anticipate positive results in our second-half performance.

Operator, Operator

Thank you for your question. Our next question will come from Richard Newitter of Truist Securities. Your line is open.

Samuel Brodovsky, Analyst

Hi. Thanks for taking the question. This is Sam on for Rich. I’ll just ask the first one on the timeline for the facility. How confident are you in that timeline holding up? Is there anything in the process that could cause the restart timing to change, whether that be earlier or later?

Jan De Witte, President and Chief Executive Officer

Thank you. Thank you, Sam for the question. As I indicated before, this is a comprehensive plan that incorporates all observations based on last year's audits and product streams. As such, it carries contingency plans for unforeseen circumstances, and the major focus is on validation and verification elements that are critical to our success. We've built contingencies into our timeline but remain cautious about unexpected challenges.

Lea Knight, Chief Financial Officer

If I may build on that point made by Jan about the timeline, the way we established the plan allows us to be agile, and if we uncover challenges or opportunities, we can address them proactively. That means that if we identify anything requiring a focus or rework, we are more likely to handle it early in the timeline rather than later. As we make progress, we’ll have clearer insights on timing, so we strategically layered in independent reviews throughout to mitigate risks.

Samuel Brodovsky, Analyst

Okay, so maybe on the third-quarter call we can get a better idea of how solid that timeline is. Is that a correct characterization?

Jan De Witte, President and Chief Executive Officer

Yes, definitely.

Samuel Brodovsky, Analyst

And then regarding the OpEx line: Should we one, what do you think you need to see to get confident in ramping up OpEx to a normalized level? Should we expect that to happen in the first half of '24 or is that not going to happen until after the manufacturing?

Lea Knight, Chief Financial Officer

Let me start with that one, and Jan can add. From an OpEx perspective, as we progress into 2024, we will evaluate what’s needed to ensure we achieve our plan restart and regain market share. We will have to continue to temper some of our OpEx spending. We’ll prioritize strategic investments in long-term growth, consistent with what we’ve done this year, and will do that through 2024. Ultimately, as demand recovers and we begin shipping more products again, I also expect a more normalized return to those OpEx levels.

Operator, Operator

Thank you for your question. Our next question will be coming from Ryan Zimmerman of BTIG. Your line is open.

Ryan Zimmerman, Analyst

Great. Thanks for taking my question. A couple from me. So we’ve talked extensively about the Boston facility. But I do have one regarding Tissue Technologies and another on CSS. The first one related to Tissue Technologies is, given the recall and the impact on private label, I’m curious how your private label customers are seeking alternative sources during this period. What does that present as a risk for recouping the private label business longer-term? And what could be the impact on margins for that private label business? I know there’s not a lot of operating expenses associated with it, but it’s quite profitable from an EBITDA margin perspective. So I'm curious to hear your insights on that. And then I’ll just ask the question regarding CSS; CSS performed impressively this quarter compared to the previous year, so I’d like your perspective on the health of the Neuro market and why it was so strong this quarter.

Jan De Witte, President and Chief Executive Officer

Excellent question by the way. On private label, we’re actively working with our partners to provide assistance and ensure transparency regarding our timelines. For private label partners, switching to other technologies or providers is typically challenging. Our focus is on collaboration to facilitate getting them back as soon as possible, as we anticipate resumed sales will be beneficial for all. As for the CSS markets, it's healthy. Many procedures in CSS are not elective, so as market distractions diminish and we resolve backlogs within our operations, we see improvements in sales that reflect a full market dynamic. So, it’s the coupling of both elements driving our solid CSS performance in the second quarter.

Rohan Patel, Analyst

Great. I’ll leave it there. Thanks for taking the question.

Operator, Operator

Thank you. This does conclude our conference for today. Thank you all for your questions. You may all disconnect, and everyone, have a great day.