Integra LifeSciences Holdings Corporation (IART) Earnings Call Transcript & Summary

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Great. Good morning, and welcome to the 2020 Wells Fargo Virtual Healthcare Conference. I'm Shagun Singh, part of the medical device team at Wells Fargo. And today, I'm pleased to have Integra LifeSciences on this call with us. Joining us from the company are Carrie Anderson, Executive Vice President and CFO; as well as Mike Beaulieu from Investor Relations. Carrie, Mike, thank you so much for joining us today.

That's great. Great to be here, Shagun.

Thanks, Shagun.

Great. So let's begin with a discussion of COVID-19. Integra saw a strong recovery in Q2 from April lows and exited the quarter down 13% year-over-year and July improved sequentially as well. Carrie, what trends have you seen in your major business segments, CSF and OTT as well as geographies through September? What can you share?

Yes. Well, I would say that we started with a range for the quarter of down 5% to down 15%. And that was based on -- at the time we did our Q2 earnings call, we had the July numbers under our belt so we had 1/3 of the quarter underway when we provided that guidance. I would say that August has continued to show some nice encouraging trends. And generally, I would say that if you think about the midpoint of that range being down 10%, I would say we're generally comfortable that where the trends have been would give us comfort with -- in the midpoint of that range. And I think consensus is around that midpoint. So generally, with 1/3 left of the quarter to go, September is going to be a month that will be a large month for us. Because normally, historically, September always has the waiting of the quarter. And it's no different this year, especially with the summer holidays, the European holidays, all of that come behind us, September will be one to watch. And obviously, the feedback from the commercial change is that generally, there's a comfort level that the trends have been encouraging such that we could get comfortable with that midpoint of that range.

Got it. That's helpful. Just can you help us understand the company a bit better in terms of -- early in the pandemic you have outlined that the segment is -- that the segment that you had expected would come back faster than others, there were certain sections that would come back faster. So by our mathematics, 1/3 of your business is more urgent, about 50% falls in the moderately urgent category and 15% to 20% is more deferrable. Can you help us understand where each of those buckets are relative to pre-COVID levels? If you can share a percentage of how we should think about those buckets in the recoveries that's occurring at this point.

Yes. I likely won't give recovery percentages by product categories, but just generally, that graphic that we provided in Q1, on our Q1 earnings call, really helped to -- that was our best view of how our business would recover. And I would say largely that has played out with a couple of exceptions. Let's start with the CSF side of the business. The areas that we saw, the -- let's say, the largest recovery from our April lows were in our neurosurgical area that was the CSF Management, dural access and repair, neuromonitoring, as examples. And so I think that continues to show that's where we're seeing some nice recovery as we move from the second quarter to the third quarter. But generally, we're not at pre-COVID levels. Again, our guidance range that we provided for the was not at pre-COVID level. So generally, the portfolio is just not going to be at pre-COVID levels yet, but we're seeing some nice recovery on the neuro side. Instruments on the CSF side was a laggard in terms of recovery. Overall, Instruments was still down about 35% in the month of June. And so that one maybe surprised us just a little. It acted more like capital than maybe what we expected. But we have seen some encouraging trends there in the third quarter as well. But generally, I think it will still lag the average of the portfolio. And then the advanced energy franchise within the neuro side of the business was a bit mixed. And we talked about that, that there's -- in that advanced energy, it's 50-50 split between capital and consumables, the disposable pieces that go to those advanced energy capital units. And so we saw some nice recovery on the consumables side, but capital is certainly the laggard that we have in the portfolio. And we would expect that it continues to lag through the balance of the year, for sure, as it's going to be tied more to economic financial budgets for hospitals. But I would say -- then if you move to the OTT side, the really nice surprise was on the ortho side. It certainly was the most deferrable and had the greatest declines right out of the gate, down 80%. And then -- but it recovered to mid-single digits by the end of June and still see some nice recovery coming there as well as we move into the third quarter. And then the other parts of the business on the TT side, our Wound Reconstruction side of the business, a little bit of mixture there, where we saw the biggest recoveries in the chronic wound. And that's really great to see because those are the folks that, if they don't take care of their wounds, can lead to amputations as an example. So very encouraged to see that, that came back as strong as it did at the end of Q2 and continued nice trends of recovery into Q3. And where we saw late in the second quarter, some improvement was in our inpatient area of Wound Reconstruction, and that's really associated with shelter-in-place restrictions being lifted. And obviously, that has continued -- that trend has continued into Q3 as more people kind of get out and about. And then the other area within the Wound Reconstruction that was a little bit of a laggard was the Surgical Reconstruction in the breast area and the hernia repair area. But still, again, seeing some nice recovery there in the third quarter. But generally, the entire portfolio, as we've talked about, that range of down 5% to down 15%, the midpoint being down 10% from pre-COVID levels, which I'm referring to as more 2019 levels.

Got it. And just in terms of the clarification there, you indicated that the quarter had the highest waiting towards the September month. So -- and you've noted comfort at the 10% midpoint range. Is that based on what you've seen so far? Like what are you modeling into September? How are you thinking -- what's the expectation for how September plays out?

Yes. I mean, I won't get into specifics on September, but again, we have 2/3 of the quarter now under our belt and had visibility, obviously, in the top line, and we're into September. So we do have a pretty robust forecast process with the teams, where they're giving us weekly data points and inputs as to what they expect. And so that comes from just the commercial team's input of their views of how the business is coming back and expectations for the month of September. So that's where we can get some confidence that the midpoint of that guidance range is where we can get comfortable with this because we got 2/3 of the quarter gone and the fact that we've had some good feedback coming back from our field sales team.

Got it. That's really helpful. So with respect to capital, I know you touched on that a little bit. But what does the recovery in capital and Instruments look like? I think you had indicated that small and medium-sized capital would be the first to recover, and CUSA falls within that. What exactly are you seeing? Could you elaborate a little bit more or provide some anecdotal evidence of what you're seeing in the field?

Yes. It's not like capital went to 0 for us. So I don't want to suggest that we're not selling any capital whatsoever. We have a compelling value proposition on the CUSA as an example. And as you indicated, CUSA unit is about $200,000. So we're not talking about $1 million piece of equipment. And when you couple that with a strong value proposition, you think about it from the OR theater perspective, not only can we save OR time by having a very powerful tool and a very selective tissue ablation device, which can speed the actual procedure time in the operating room, but it also has an incredibly simple setup as well. So between procedures you have reduced time there. So it is a compelling business case. In addition, to the extent that our customers are looking for alternate financing options, we can be responsive there. So if they can't get to an outright purchase, we can think about leasing options, rent-to-own options. We'll work with our customers because we do think we've got a really strong value proposition. And I would say, as you think about capital OUS versus U.S. certainly have seen a stronger recovery in -- outside of the U.S. markets compared to the U.S. But I -- no doubt there's still a laggard effect there. And I would guess that it will continue to lag through the balance of the year. But it's -- the pipeline is strong, Shagun, so it's not for -- that we're losing anything to competition at this point. It's just working through that pipeline, getting the customers to find a path that they can finance this. And -- but we're encouraged with the pipeline that we have.

Got it. Just with respect to Q4, I think you've modeled the scenario where revenues could return to pre-COVID level. And part of that is predicated on recovery or continued recovery in capital and Instruments. And you did mention that the funnel is pretty strong. You don't expect a delay for more than 6 months. So you should expect some kind of normalization later in the year or early next year. I'm just curious, what are your latest thoughts on how Q4 shapes out for Integra LifeSciences. I think in general, you also indicated that procedures that you have exposure to are not deferrable by more than 30 to 45 days. So that also points to a more normalized environment in Q4. So just curious to get your thoughts on how you think about approaching normalization and how you are thinking about Q4.

Yes. I think that's all -- everybody wants is normalization and what defines the new normal at this point. And for fourth quarter, there's still a lot of uncertainty out there. And that's the reason why we talked maybe more generically about the fourth quarter that there's lots of scenarios that could play out. And certainly, one of those scenarios, which is the scenario that we hope will play out, will be a fourth quarter in 2020 that gets us back to 2019 levels. But I think we'll obviously be able to provide more clarity on that once we do have the third quarter closed. And so we'll talk more about that on our October earnings call. And I would expect that we would have more clarity on whether or not the pathway of the vaccine, on what's the timing of that. Certainly, as all the schools are back in session, understanding if there is any resurgence concerns there, whether it be universities, going back into classes, all the lower educational levels going back to classes. Everyone returning from Europe, returning from vacations here in the U.S. after -- post Labor Day. So really understanding if we see any material hotspots emerge in the last month here that would give us any pause for the fourth quarter. And also understanding how capital and Instruments performed in September will give us some clarity on what Q4 could look like for us. But I'd say just be a little bit more patient with us. We'll provide you some clarity just like we did in the third quarter, we'll give you more clarity on our fourth quarter expectations in the October earnings call.

I got it. And just in terms of approaching normalization, let's see what the audience has to say. So we do have a polling question. Josh, if you could please put it up on the screen. So when do you expect Integra sales to return to pre-COVID growth levels? And this is on an underlying basis. If everyone could please lock their responses? So the options are by Q3 '20, by Q4. I think Q3 is -- you've indicated that, that would not be the case. But Q4 or by Q1 '21, Q2 '21 or thereafter. Josh, do we have the responses?

Yes. We still have a few more coming in. I'll let it go for another 5 seconds or so.

Sounds good.

I won't share what my answer was.

Okay. So this is interesting. So about 41% have indicated that by Q1 '21 and another 35% by Q2 '21, and this is normalization on an underlying basis. Carrie, any reaction there?

No. I mean, again, I think for the most part, I encourage folks to be prudent. I wouldn't call it conservative, I'd say there's still a lot of unknowns, and we're all searching for the same answers and the same clarity in the impacts to the global economy as well as to our business here at Integra. And we're encouraged by the signs we're seeing definitely. And hope that we can get back to 2019 levels just as quickly as possible. But it doesn't surprise me.