Integra LifeSciences Holdings Corporation (NASDAQ:IART) Q4 2023 Earnings Call Transcript
Integra LifeSciences Holdings Corporation (NASDAQ:IART) Q4 2023 Earnings Call Transcript February 28, 2024
Integra LifeSciences Holdings Corporation misses on earnings expectations. Reported EPS is $0.89 EPS, expectations were $0.9. Integra LifeSciences Holdings Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and thank you for standing by. Welcome to the Integra LifeSciences Fourth Quarter 2023 Financial Results. [Operator Instructions] Please be advised, today's conference is being recorded. I would now like to hand the conference over to your speaker today, Chris Ward, Senior Director of Investor Relations. Please go ahead.
Christopher Ward: Good morning, and thank you for joining the Integra LifeSciences Fourth 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; Mathieu Aussermeier, Senior Vice President of Corporate Finance, Investor Relations and Treasurer. This morning, we issued a press release announcing our fourth 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 Fourth Quarter 2023 Earnings Call Presentation. Before we begin, I want to remind you that many of the statements made during this call may be considered forward-looking.
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 will reference reporting an organic revenue growth and organic revenue growth, excluding Boston. For 2023 results, organic revenue growth excludes the effects of foreign currency, acquisitions, divestitures and discontinued products. For 2024 guidance and reporting, organic revenue growth will no longer exclude discontinued products. Organic revenue growth, excluding Boston excludes the revenues from products manufactured in our Boston facility in both periods. Management believes that excluding revenue from all products manufactured at the Boston plant provides useful information when evaluating the company's organic growth because of the unusual nature of the manufacturing stoppage and voluntary global recall.
Unless otherwise stated, all disaggregated and franchise-level growth rates are based on organic performance. Lastly, our comments today will include certain non-GAAP financial measures. Reconciliations of the non-GAAP financial measures can be found in today's press release, which is an exhibit to Integra's current report on Form 8-K filed with the SEC. And with that, I will now turn the call over to Jan.
Jan De Witte: Thank you, Chris, and good morning, everyone. Before we dive into our financial results, I first want to acknowledge the commitment of our teams working to strengthen our operational capabilities, while capitalizing on the growth of our markets and building out our strategic potential. Total sales for the fourth quarter were $397 million, representing a year-over-year organic decline of 1.2%, or growth of 3.6% if we exclude the Boston products. Our fourth quarter adjusted earnings per share were $0.89. Both results were within our guidance at the low end of the range. For the full year, sales were $1.54 billion, flat on an organic basis and up 5.5%, excluding Boston, with full year adjusted EPS of $3.10 per share, and Lea will take us deeper into these financials in a few minutes.
So let's turn to slide number four to cover an update on Boston and our strategic highlights for the year. Although the Boston recall weighed on our financial results for the year, we're pleased with the significant and steady progress we have made towards bringing the Boston portfolio back on the market by mid to late second quarter. We restarted the factory in November. And in January, we successfully completed an initial external review following the factory restart, the dress rehearsal we referred to in earlier calls. We're now preparing for the external audit, which will take place in March. Successful audit will allow us to start building finished goods inventory to resume distribution mid to late second quarter. When we look at the broader performance of our business, excluding Boston, we are encouraged by our results and resilience of our markets and the strength of our broad portfolio.
Full year growth in Codman Specialty Surgical and Tissue Technologies was approximately 5% and 7%, respectively, in line with our growth expectations. We have made, and we continue to make considerable progress in our strategic initiatives. Our commitment to long-term growth has guided our actions, including the successful global relaunch of CereLink, with the 510(k) clearance in the U.S. earlier this month. We have completed the successful integration of SIA into our Tissue Technology division and advanced our implant-based breast reconstruction PMA strategy for both SurgiMend, our collagen-based mesh; and DuraSorb, our resorbable synthetic mesh. Outside the U.S., we expanded our international portfolio and footprint and strengthened our commercial execution focus, fueling double-digit growth in our international business in 2023.
In parallel, our in-China-for-China strategy is taking shape with the ongoing build-out of our late-stage assembly capabilities in China. We also signed a definitive agreement to acquire the Acclarent ENT business, which we expect to close by the second quarter. With this acquisition, we are adding an adjacent, highly complementary and growth accretive platform to our neurosurgery segment. In addition to the advances in our portfolio and markets, we returned value to shareholders with $270 million of share repurchases. We remain focused on our drive for operational excellence and resiliency and exited 2023 better positioned for the future. We have fortified our quality management system across our manufacturing network and continue to invest in our operations, infrastructure and process capabilities in order to create a more robust supply chain.
This work will also remain in 2024 focus. So with this intro, let me now turn the call over to Lea to provide additional detail on our financial results and guidance for 2024.
Lea Knight: Thanks, Jan. We'll move on to our full year financial results, starting with slide five. Two primary themes characterize our financial results for 2023. First, we have seen a full recovery in our markets and growth in line with our mid-single-digit growth expectation. There is strong demand for our broad and diverse portfolio of products, with several parts of our business growing by double digits, and we continue to make investments that will deliver value to shareholders. The second theme was the impact of the Boston recall, which drove significant operational challenges in 2023. Our full year revenues were $1.542 billion, down approximately 1% on a reported basis, with organic growth flat for the year and within our guidance range communicated in October.
The Boston recall represented an approximate $67 million headwind to our reported revenues. Excluding Boston, organic growth across the remainder of our business was approximately 5.5%, demonstrating the continued robustness of our diverse portfolio and the markets that we serve. We delivered double-digit growth across many product lines in our portfolio. In CSS, we saw double-digit growth in CUSA Clarity disposables, Certas Programmable Valves, DuraGen, Mayfield Capital, BactiSeal, CerebroFlo EVD catheters and ICP microsensors. Our specialty surgical instruments saw double-digit growth in our Jarit and MicroFrance ENT products. In Tissue Technologies, we delivered double-digit growth in DuraSorb, Gentrix and MediHoney. Our adjusted EPS for the year was $3.10, down 7.7% versus 2022 and within the guidance range communicated in October.
The Boston recall negatively impacted full year adjusted EPS by approximately $0.42, including the impact of spending reductions we implemented during the year. Looking at the middle of the P&L, our gross margins were 66.1% for the year, down 110 basis points versus 2022. The Boston recall impacted gross margins by approximately 150 basis points due to roughly $20 million in product returns, unfavorable mix from the lost revenue and remediation costs. To realize our gross margin improvement potential, we are stepping up resources to assess opportunities within our significant manufacturing sites and in our supply chain. We expect to initiate additional projects in 2024 that will have a favorable impact on our margins beginning in 2025. Turning to adjusted EBITDA margins.
Our full year adjusted EBITDA margins were 24%, down 240 basis points compared to 2022. Our adjusted EBITDA margin performance reflects the impact of the Boston recall, along with the investments in key strategic priorities preserved throughout the year and the year one dilution from the SIA acquisition. We continue to make investments in key operational and product development priorities throughout the year to ensure that we are positioned for longer-term success. Operating cash flow for the full year was $140 million with a free cash flow conversion of 29.5%. Our operating cash flow and free cash flow conversion rate declined versus 2022, as we invested in manufacturing infrastructure and inventory to improve supply reliability. If you turn to slide six, I will cover the fourth quarter financial results.
Our fourth quarter revenues were $397 million, approximately flat on a reported basis, with organic growth down 1.2%. Excluding Boston, organic growth was roughly 3.6%. Our adjusted EPS for the quarter was $0.89, down 5.3% compared to 2022. Looking at the middle of the P&L, gross margins were 64.7% for the fourth quarter, down 160 basis points versus 2022. Gross margins were impacted by approximately 50 basis points from the Boston recall and 60 basis points from a supply constraint on Integra Skin. During the second half of 2023, we saw strong demand for Integra Skin, which tightened our inventory. And at the same time, we experienced a capacity constraint on one of the several production lines we have for Integra Skin. While we have continued to produce and ship, we were not able to fully keep up with the strong demand that we saw at the end of Q4.
Currently, we are resolving the supply constraint and rebuilding our inventory. Turning to adjusted EBITDA margins for the fourth quarter. Our adjusted EBITDA margins were 25.3%, down 230 basis points compared to 2022. Our decline in adjusted EBITDA margin primarily reflects the decrease in gross margins that I mentioned earlier. Operating cash flow for the fourth quarter was $59 million with a free cash flow conversion of 49.5%. If you turn to slide seven, we'll take a deeper dive into our CSS revenue highlights for the fourth quarter. Reported fourth quarter revenues in CSS were $271.6 million, an increase of 2.7% on a reported basis and 2.3% on an organic basis from the prior year. Global sales in Neurosurgery grew 2% on an organic basis as a result of mid-single-digit growth in CSF management driven by Certas Plus valves; mid-single-digit growth in Dural Access and Repair driven by DuraGen; and low single-digit growth in neuro monitoring driven by BactiSeal catheters and ICP microsensors.
Lower CUSA capital sales in the quarter drove a low single-digit decline in advanced energy. For the full year, our capital sales, excluding CereLink monitors, are up low single digits. With regard to our CUSA Clarity performance in Q4, we are moving into the later stages of the capital refresh cycle, which impacted our year-on-year performance. That said, we have grown our CUSA installed base since the launch of CUSA Clarity, and the funnels for CUSA Clarity capital remains strong. In 2024, we expect to see fewer installs of CUSA Clarity compared to 2023, but still see an increase in our total installed base and growth in our CUSA disposables. Turning to Instruments. We saw approximately 3% growth, in line with our growth expectations for this business.
Shifting to international. We saw another strong quarter from our international business and CSF with low double-digit growth. Strength in the quarter was driven by double-digit growth in China, Canada and Australia and high single-digit growth in Japan. Moving to our Tissue Technologies segment on slide eight. Tissue Technologies was down 6% on a reported basis and 8% on an organic basis compared to the prior year. Excluding Boston, organic growth was up 6.9%. Fourth quarter sales in the Wound Reconstruction franchise decreased by 11%. Excluding the recall products, we experienced organic growth of 5% driven by double-digit growth in Gentrix and amniotics and mid-single-digit growth in Integra Skin and MediHoney. We remain encouraged by the broad resilience of our portfolio, which continues to provide us with confidence in the long-term growth potential of our custom Wound Reconstruction business.
In private label sales grew 2.2% versus last year. Excluding the impact of the Boston recall, private label sales were up 12.5%, reflecting strong demand from our partners in the quarter. Finally, international sales in Tissue Technologies were down low double digits due to the Boston recall. If you turn to slide nine, I will briefly update our balance sheet, capital structure and cash flow. During the quarter, operating cash flow was $58.7 million, and free cash flow was $34.2 million, reflecting increased working capital primarily from investments in inventory and CapEx. Free cash flow conversion was 29.5% on a trailing 12-month basis. Our balance sheet remains strong with ample liquidity to support our short and long-term plans. As of December 31, net debt was $1.2 billion, and our consolidated total leverage ratio was 3 times.
The company had total liquidity of $1.5 billion, including $309 million in cash and short-term investments, and the remainder available under our revolving credit facility. Our balance sheet flexibility enabled us to return value to shareholders in the form of $275 million in accelerated share repurchases in 2023. If you turn to Slide 10, I will provide our consolidated revenue and adjusted earnings per share guidance for the first quarter and full year 2024. First quarter revenues are forecasted to be between $360 million to $365 million, representing reported growth in the range of approximately minus 5.5% to minus 4.1%, and organic growth in the range of approximately minus 5.1% to minus 3.7%. Our forecast performance reflects continued strong global demand for our products, more than offset by an unfavorable $15 million comp in the Q1 2023 Boston revenue and the supply constraint on Integra Skin.
Excluding Boston, we are forecasting organic growth of approximately minus 0.4%. For the full year 2024, revenues are forecasted to be in the range of $1.603 billion to $1.618 billion and includes the return of the Boston portfolio in the second half. At this time, we included only revenues from the SurgiMend and PriMatrix relaunch in the second half of 2024, and we look forward to updating our guidance based on our progress in relaunching the Boston product. Our guidance also reflects the return of CereLink globally, with U.S. revenues included for 10 months as well as current FX rates. As we move past the first quarter headwinds, we expect to see our organic growth improve during the year as we relaunch Boston and resolve the supply constraint on Integra Skin.
We expect our reported and organic growth for the full year to be 4% to 5%. This guidance excludes the expected acquisition of Acclarent. Turning to adjusted earnings guidance. For the first quarter, we expect adjusted EPS to be $0.53 to $0.57, down from the prior year, driven by the supply constraints referenced previously. For the full year, we expect our adjusted EPS to be in the range of $3.15 to $3.25 per share, reflecting the positive organic growth of the business, first quarter impact from the supply constraints, modest gross margin improvement and OpEx normalization. Slide 11 shows our key guidance considerations. During my first six months as Integra CFO, I have heard our investors and analysts request additional detail into our financial results and projections.
The following summarizes our guidance assumptions and modeling inputs. On the left side of the page, you'll see key metrics, including FX rates, share count and adjusted tax rates for your models. On the right side of the page, we highlight the main drivers of Q1 revenues, organic growth progression throughout the year, key gross margin and OpEx assumptions. With that, I will turn the call back over to Jan.
Jan De Witte: Thank you, Lea. Please turn to Slide 12 to conclude our prepared remarks. Looking back at 2023, we saw our unique technologies and commercial strength deliver resilient growth across several parts of our portfolio. However, this achievement was obscured by the Boston recall. Organic growth, excluding the impact from Boston, which landed at 5.5% for the year, continues to give us confidence in the growth potential of our markets and our portfolio. Although the recall has required a significant amount of our team's focus and attention, we are confident we will bring this part of our portfolio back to our customers and their patients in mid to late second quarter. We remain committed to delivering reliable long-term business performance, consistently executing our commercial and operational plans and building our capabilities to achieve profitable growth.
We have strengthened our quality management system with critical investments in talent and process capabilities across our manufacturing network. We're also making investments across our manufacturing plants and supply chain to ensure reliable supply for our commercial teams, our customers and their patients. In parallel, we launched projects to realize our operational efficiency opportunities and achieve sustainable margin expansion. We also continued building out our new product development capabilities and remain focused on leveraging organic and inorganic projects to drive improved business performance. We're executing our implant-based breast reconstruction strategy, progressing the Aurora minimally invasive neurosurgery platform and preparing to launch the BactiSeal-Endexo combo catheter.
We continue to expand our international portfolio and commercial capabilities. And the work to close the Acclarent acquisition by second quarter remains on track, and we look forward to welcoming the Acclarent team to Integra. As we strengthen our operational resilience, advance our organic portfolio and successfully execute on our M&A imports we're well positioned to deliver strong top and bottom line growth and realize our full potential as a profitable innovator of life-saving technologies worldwide. Let me again take a moment to acknowledge the broader Integra organization for their dedication to our customers and patients and for delivering on the accomplishments that position Integra for a strong future. Now before opening the call for questions, I'd like to take a moment to briefly touch on the leadership transition announcement we made earlier this morning.
As you've seen by now, I have informed the Board of my intention to retire as President and CEO of Integra by the end of the year and move back to Europe. While we believe this is an important decision that we wanted to communicate as early as we could, it does not change any of the focus that I and our executive leadership team will have over 2024. I'm firmly committed to ensuring a seamless transition and will stay on with the company until a successor is named. In the meantime, we look forward to delivering on our objectives for 2024 with an immediate focus on further enhancing operational execution, particularly in our manufacturing and supply chain. We will continue to execute on our integrated growth strategy, while building capabilities and investing in our programs to achieve commercial acceleration through improved product development and digital innovation, strategic acquisitions and international market growth.
The Board has engaged executive search firm Heidrick & Struggles for support in identifying a highly qualified leader and expect a new CEO to be named by the end of this calendar year. As part of this announcement, in order to drive improved shareholder value and ensure an effective transition, Board Chairman, Stuart Essig, has been appointed Executive Chairman effective immediately. Stuart, with whom most of you are very familiar, is uniquely suited to take on this additional responsibility, having served as our Non-Executive Chairman for the past 12 years and as COO prior to that. We look forward to updating you on the CEO search later this year. So I'll close by saying that it's an honor and privilege to lead this fine organization, and I look forward to a seamless transition.
I remain firmly committed to this company, our dedicated employees and the patients we serve. Thank you for joining us this morning. This concludes our prepared remarks, and operator can open the lines for questions.
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