Good day and welcome to the Integra LifeSciences Fourth Quarter and Full Year 2020 Financial Results Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Mike Beaulieu, Director Investor Relations. Please go ahead, sir.

Thank you, Catherine. Good morning and thank you for joining the Integra LifeSciences Fourth Quarter and Full Year 2020 Earnings Conference call. Joining me on the call are Peter Arduini, President and Chief Executive Officer; Glenn Coleman, Chief Operating Officer; and Carrie Anderson, Chief Financial Officer.

Thank you, Mike and good morning everyone. If you'll turn to slide 4, I'll begin with a review of our performance in 2020. Full year 2020 revenues declined 8.7% on an organic basis to $1.37 billion and adjusted earnings declined 11% to $2.45. These declines were a direct result of COVID-related surgical procedure deferrals and capital spending delays at hospitals. To put our 2020 performance in perspective and illustrate the impact of the pandemic, we've included a side-by-side comparison of revenue and profitability in the first and second half of the year. The biggest impact from COVID was felt during April and May, and as a result, first half organic revenues were down 16% and earnings were down 40% compared to the first half of 2019. As we've discussed on prior calls, we reacted swiftly to the pandemic prioritizing the safety of our employees while implementing protocols to ensure continuity of our supply chain and key R&D and clinical programs. We also protected our financial position by managing costs down sharply. As the recovery begins to take hold, we saw the benefit of our balanced pandemic response. In the second half, we continue to methodically manage expenses while allocating additional funds towards growth and productivity related projects. We generated $150 million in operating cash flow, invested in inventory and improved our leverage ratio from 3.4 times in June to 3 times at the end of the year. We reshaped our portfolio with the divestiture of orthopedics in the acquisition of ACell. Our second half revenues increased $146 million compared to the first half, inorganic revenues declined only 1.5% year-over-year. In the second half EBITDA sequentially increased $77 million and earnings per share increased 20% year-over-year. Our sales recovery persisted despite localized COVID surges and locked downs in the fourth quarter driven by market-leading products such as Integra skin, DuraGen as well as our service portfolio of programmable valves all of which returned to growth in the fourth quarter.

Thanks, Pete and good morning everyone. I'd like to start with a brief summary of our fourth quarter highlights on Slide 6. Fourth quarter total revenues were $388.6 million representing a decline of 1.6 on a reported basis and a decline of 1.5% on an organic basis. Our revenue performance was at the high end of our preliminary range communicated on January 14th. During the quarter COVID surges affected many of our markets resulting in tight ICU bed capacity, but we still managed a 5% improvement in our fourth quarter sales compared to the third quarter. Most of our franchises or products that return to growth in the third quarter sustained that growth into Q4. Sales of capital equipment improved sequentially by over 40%, but we're still down on a year-over-year basis. As we have discussed on prior earnings calls, recovery of capital was expected to lag the rest of the portfolio. So, if we exclude capital, total organic growth was flat in Q4 compared to the prior year. Fourth quarter performance in the US was also flat on an organic basis compared to 2019. By segment US CSS organic growth increased about 2% if we exclude capital and US OTT organic growth was about flat excluding orthopedics. We were also quite pleased with our profitability performance in Q4 showing improvement year-over-year as we continue to manage our spending. Adjusted EBITDA margins in Q4 increased by 320 basis points to 26.4% and adjusted earnings per share increased 24% to $0.84. If you turn to Slide 7, I'll now review the fourth quarter performance of our CSS segment. Reported Q4 revenues were $254 million, a decrease of 1.6% on an organic basis from the prior year. Global neurosurgery sales improved sequentially from the third quarter and were down 1.3% on an organic basis year-over-year. Sales in dural access and repair and CSS management increased low-single digits and mid-single digits respectively. Sales in neuromonitoring increased low-double digits in Q4. All three franchises benefited from strong sales of market-leading products including DuraGen, antimicrobial catheters and service programmable valves. Sales in Advanced Energy, which includes our CUSA capital sales were down mid-teens in the fourth quarter in line with expectations, importantly sales of consumables directly tied to our CUSA equipment increased low-single digits in Q4, a sequential improvement from the third quarter.

Thanks Carrie, and good morning. If you turn to Slide 13. I'll provide an update on the ACell integration. Mainly following the January 20th closing we began the implementation of our integration plans and onboarded conveying ACell colleagues. The first three weeks of the integration has largely been focused on the transition of the commercial organization. We've already taken steps to assign sales reps to their territories, formalized quotas and established rollout compensation plans. Integra and ACell sales reps also completed initial product training and are beginning to cross sell our expanded portfolio. Last week the Tissue Technologies team held an annual national sales training meeting with in-depth product training. While it's still early, the addition of the ACell portfolio and expansion of our tissue technology platform is generating positive customer feedback. The unique characteristics of porcine products like to MicroMatrix powder and the Gentrix Surgical Matrix help fill gaps in our portfolio to offer clinicians additional tool to treat the most challenging reconstructive interventions. It's only been a few weeks since we closed the ACell, but we remain confident in the positive financial impact and the returns on investment that will come from this acquisition. We expect it to be a quick integration with all critical activities completed by the end of the second quarter, including our ERP conversion to handle invoicing and distribution. We are excited to welcome new ACell colleagues to Integra and look forward to providing an integration update on our next quarterly call. Turning to Slide 14; I'd like to provide a summary of our 2021 growth drivers starting with new product introductions. Over the past two years, we launched about 7 new products in CSS which are expected to take several years to reach peak sales. Performance of all these products was negatively impacted…

Thank you. We'll now take the first question from Matt Miksic from Credit Suisse. Please go ahead.

Good morning. Can you hear me okay?

We can.

Thanks so much for taking our question. So one on just to add a bigger picture question on the regenerative med businesses, it's coming together and bigger business right now. And the other on and some of the trends you talked about in your guidance and outlook. So in the bigger picture perspective, can you talk a little bit about the sort of how you see in regenerative med platform that you have now, if they sell, what you see as some of the competitive advantages or opportunities there and maybe some of the synergies that you may be able to enjoy just putting more things, running more things across that sort of platform. And then I have one follow-up, as I mentioned.

Yes, Matt. I'll comment and then Glenn, if you want to jump in after. I would say, I mean the first piece is, is that I think you know regenerative medicine is not a precise science, right, it's a little bit of art and it's a lot of science, and having multiple tools or different technologies in that toolkit we believe is a big deal, primarily because our clinicians tell itself. So a wound that's caused from pressure ulcer or caused from a vascular related issue or one that's caused by surgical intervention or one that is caused by trauma, all of those may have very different approaches. And so today, most of these reconstructive surgeons, plastics as well use different platforms already from different companies, but there really hasn't been a company that's had all of these together and I think today at this point in time, we have the most comprehensive portfolio. We may not have the largest share positions with all of them, but I think that's the opportunity that exists. And, particularly in the United States with the consolidating health care system, ANC's and such offices more people becoming part of bigger systems, we believe that contracting with world-class technologies will differentiate. And so, we have this large matrices structure I think then as we go further upstream, we're well positioned to add on to this portfolio with other products that play and potentially into the epidermis, other accelerants to help actually healing, and so we thought that we've got ACell particularly because of its fit within the acute space, but also growing area outside of that was a great fit, particularly for the granulated product that we had no version thereof. And I think that combined with what we think we'll be able to evolve in the portfolio with foreseeing is also there are new Head of R&D. Previously, was it ACell years back and has very good insight into that technology, actually did some of the original work from the University of Pittsburgh. So, we've got some very good retained knowledge as well and investment capabilities to not just have the current products, but to evolve those into a new portfolio. Glenn, you may want to talk a little bit more even about trends and stuff that we see.

Yes, I would just say that first and foremost, when we think about our regenerative platform, it's broader than wound care right. So it's hitting other parts of the body as well and one nice thing about the ACell addition is it did add additional capability in wound care, but also in our plastic and reconstructive business with the Gentrix product. So, we are thinking broader in terms of regenerative medicines outside of wound care, and I think as we look forward, we'll be doing more in other adjacent areas of the body. I feel, trending wise, obviously, our business has been impacted by COVID and we'll probably see additional impact here in the first quarter, maybe first half of the year, but we feel quite good about a few things. Number one, you remember last year we struggled with supply before COVID hit, I think we're in really good shape relative to our plans, and we've now built how the safety stock to support our existing customers, and as I mentioned in prepared remarks going after new accounts, and so, I think we're in a good position to capitalize a lot around that. And I said, I think once we bring this business together with ACell, we are expecting to see synergies. We'll talk more about what that looks like as we get further into the year, but on the commercial front, all the heavy lifting has been done and I think that's really good news that we've got that behind us, we're moving forward. The team has been the trained on the combined product portfolio and we're really excited about just broader bag in toolkit that we now have to provide to our customers and ultimately to patients.

Great, thanks so much. And the follow-up question I have, on ACell, it's just the guidance that you've given includes obviously a partial Q1 and it sounded like some expectation as we'd expect for some sales disruption during integration. if I heard Carrie's comments correctly. Just, I hate to say exiting this year as nobody wants to talk about 2022 outlook at the moment, but just an underlying business, net of those kinds of effect as we get into the back half of the year and into the following year, how should we think about underlying growth for that ACell business we sold into the portfolio.

Carrie, do you want to since you commented in the prepared remarks, you want to frame it up a little bit?

Yes, I think in terms of growth expectations for ACell, I think we would expect it to be growing at the same level that we would expect the rest of our tissue business to be growing out. So, I think that the high-single digits, definitely is the expectation that we should all have as we get more confident with our 5% to 7% with ortho out and ACell coming into Tissue Technologies as well as what Glenn mentioned on the supply, I think that that entire segment has the ability to get back to high-single digits, low double digits for sure. And so, that's what that would be my same expectation for ACell.

Thanks.

Thanks so much.

As a reminder, we are taking one question and one follow-up question on today's call. We'll now take the next question from Dave Turkaly from JMP Securities. Please go ahead.

Thanks. I was beginning to forget with guidance, was like and we got a quarter here and the full year. So thank you for that. Maybe one for future. I mean, obviously things are changing with the fluid world, but you mentioned some of your confidence. I'd love to get your thoughts on what's happening out there whether you want to talk domestically or internationally as well with the virus and sort of your confidence level, maybe compared to what it was in 2019 looking forward.

Yes. Let me start it off, Glenn maybe you can frame it up globally. I think you've got it really good add a lot and I will add some other comments and how we see COVID right now.

Yes. I mean, I would say first and from us. Our first quarter is going to be impacted COVID, you saw that in January and early February. If we look at some of the hot spots right now and say Central Southern California is probably the biggest area of impact at the moment. Texas has been an impact, Arizona, those are some of the states in the US. Outside the US, the biggest impact has really been to the UK. There was a significant decline in procedures in the month of January that were actually down an even greater than the levels in terms of procedure deferrals versus April and May of last year. So UK got pretty hard for us, it's not a big market, but one that has been impacted. I think for the most part, the rest of Europe where there has been some spots of impact, nothing of concern from our perspective. We are seeing an impact too in Asia Pacific, Japan is going through the third wave of the virus, but as you heard me in my prepared remarks, we have so many good things going on there. We're generating consistent double-digit growth in the face of even some headwinds from the pandemic, but I would just say that the biggest watch out for us is really the UK and then a lot of our indirect markets that's being impacted the most right now and that would include markets like Spain, Portugal, Russia and South Africa and those are the areas that we're keeping a watch out and where we've seen probably the greatest impact outside the US.

And Dave, I would say as Carrie mentioned this in our kind of caveats to the guidance. Look, we're optimistic that obviously the vaccines are having a very positive effect. We believe something like the J&J and additions to other vaccines are going to have a big effect as well, but customers are clearly a little skittish and holding back some reserves relative to these added South African and in UK variance and others that may arise. And so that's why we think this is not going to be a big step up, we think it's going to be linear in the first half. As I've reminded others before. I mean, we don't need to be at herd immunity in our business to start seeing a pickup. We just need to have the ICUs not heavily burdened, and that's either combination of people holding reserve bed back or them fully opening up, and we are seeing those beds to begin opening up and that has a direct correlation with neurosurgery and in many cases some of our more invasive procedures on the tissue technology side but we're cautiously optimistic. We don't see a significant amount of business tend up. I think the only caveat to that would be Carrie probably on our capital business, which is, is still under 6% of the business, you can add on probably a few points or so of our instruments business. But again when capital budgets free up. I think that's still kind of a question that's beyond just, but it's also with the cash flow looking like for the different institutions.

Great, thank you for that. Maybe just a quick follow-up for Carrie, obviously great performance on the gross margin and EBITDA side, the 320 bps improvement. I'm just curious how sustainable some of those increases are. I know your long-term targets are still higher, but that's an impressive bump in a tough time. So, and there some of the spending might come back, but just your thoughts on that level given the environment we're in today, and what we should sort of expect moving ahead would be great. Thank you.

Yes, I would say that as you think about 2021, certainly, our operating expenses are going to trend up. They were obviously very low in 2020 as we responded to COVID. And as I mentioned in my prepared remarks, our fourth quarter operating expenses were still about $12 million, lower than they were last year. So I do you expect to, for OpEx to move us in 2021, just as we get back to more run rate levels. So, but I would say that net-net, if you use the fourth quarter 2019 as a good run rate level. So fourth quarter 2019 still had obviously that worth doing it, but it had Arkis and rebounded in as well and annualize that fourth OpEx spend, it's essentially about $735 million of annual OpEx spend. I think we'll beat that, I don't think you'll see that level of spend in the business in 2021. I think we're obviously playing more smart spending, prioritizing as we've been spending back. So I would say that will be lower than that. I also think that we'll see some gross margin improvement between 2020 in 2021. I think some of the levers that you saw benefiting us in 2021, even though revenue was down 10% is still going to produce some nice gross margin benefit as we move into 2021 and those are things like tissue supply with ACell in there now and supply addressed and as tissue comes back into a growth mode, that will help our gross margins, but continued leaning out of discontinued products will continue to help our gross margin. And don't forget about this is the year that the end of the year we'll move off the TMA agreement with J&J. So, I would expect some gross margin improvement year-over-year as well as the modest EBITDA improvement with OpEx still coming back a little bit higher, but with the gross margin line kind of helping to offset that.

Thank you.

We will now take the next question from Kaila Krum, Truist Securities, please go ahead.

Hi guys, thanks for taking our questions. So 2021 guidance basically assumes revenue will be flat or in 2019 levels just on a dollar basis, and obviously you guys are swapping up the ortho extremity business for ACell, but they are about equal size businesses. So, I guess can you just help us understand what your assumptions are for the rest of the business this year, and it seems like you guys are considering that COVID will continue to impact things in the first half, which is any more additional detail you could provide would be helpful.

Sure, I will take that that one. Yes. Thanks, Kaila. I would say that as you think about comparison to 2019, you're right, it's about flat. So, 2019 the organic growth is about 3% to 4% compared to 2019 when you remove the impact of ortho divestiture and add in ACell, remove that it's about as organic growth of 3% to 4%. And if you go back to the remarks that I said when I described our expectations for the year, we talked about a gradual first half recovery which implies that the second half is going to be stronger than the first half. So, we'll be able to give you a bit more color on first half versus second half when we get to April, our Q1 earnings call, which will be giving some guidance around Q2 at that time. I would expect that you should be thinking about a second half stronger than first half in line with the comments of a first half gradual recovery in COVID impacts assuming to be largely behind us in the second half. And, then in terms of just any segment color I would expect that the segments would largely would perform around the same on an organic basis. So, not a lot of difference in the segment performance at the midpoint on an organic basis.

Okay, that makes that makes a lot of sense. Thanks, Carrie. And then, just in terms of new product launches coming this year with CereLink and Aurora. I mean how meaningful can those new products be and how are you thinking about those contributing in the second half. Thank you.

Do you want to take this, Glenn?

Sure. So clearly, the biggest impact from the new product launch point of view, as it relates to 2021 is going to be CereLink. It's a global launch. That will be the most meaningful contributor to NPIs in 2021. Aurora is really going to be controlled market release for tumor, probably around the third quarter and then some other areas that we'll be launching in the fourth quarter, but won't contribute a lot to revenues in 2021, that's more of a 2022 and 2023 revenue growth driver for us. Having said that, I think it's important to reflect on the new products we've launched the last few years. So, you think about the service programmable valve enhancements, new sizes, the toolkit we rolled out, additional tips we put on CUSA, our surgical head ramp, there is a lot of new products that were launched before October that we never saw that the ramp and the demand for that and I think you're going to see a bigger contribution coming from those products in 2021. So it's not a new product, we're launching in 2021, it's definitely going to be a contributor to growth. And then, a new product, we are actually launching this year is a lot more shunt that's very specific to the Japan market along with some other products there. So we do have a nice cadence of new products for launching this year coupled with the fact we have other products launched in the last couple of years that will ramp in 2021, and again that's going to be a big part of our growth story for 2021 when we pass the COVID headwinds.

And I would just add to Glenn's comments that we clearly had that we've addressed the Tissue Technologies supply issue in 2020, but if you think about 2019, we struggled to bring on new customers because we wouldn't have enough, I'm going supply, 2020 obviously because COVID that we didn't reach lot of customers. So, I would argue 2021 and 2022 with that one of the larger growth opportunities, is just the ability to expand that base of products, and now let's something interesting and new and the portfolio such as ACell product line that's going to be also a nice driver for us here over the next couple of years.

Great. Thank you, guys.

Thanks.

We'll now take the next question from Robbie Marcus with JPMorgan. Please go ahead.

Great, thanks for taking the questions. So Carrie you guys had a really good free cash flow conversion in fourth quarter here, I noticed that CapEx was probably a bit lower than you normally would have, and I didn't hear guidance for 2021 on for cash flow, so I was just wondering if you could give us thoughts around how that will trend over the coming year.

Sure, Robbie. We will start with operating cash flow and then I'll work my way to free cash flow. For 2020 we did just over $200 million in operating cash flow, so a nice robust cash flow even despite, again a COVID-impacted year. I would expect that our operating cash flow will increase into 2021. So, I do expect a modest improvement in operating cash flow. Free cash flow is going to be a little bit lower though than 2020 just because of the fact that CapEx as you mentioned, is going to normalize. So CapEx in 2020 was $39 million and that was the result of us really taking prioritized view of CapEx and really trying to preserve cash as much as we could in 2020 as we weathered COVID. So I would expect that our capital expenditures for 2021 will float up of probably be in the neighborhood of where 2019 was, the 2019 was around $70 million of CapEx spend. So, I think you can peg it around that or maybe a little bit higher just because there is some pent-up demand. So I would say, operating cash flow year-over-year higher, free cash flow a little bit lower just because of the differential in the CapEx spend.

Great. And maybe a quick follow-up just staying on free cash flow. The old guidance was for greater than 95% free cash flow conversion. I'm guessing will get an update at the May Analyst Day, but how are you thinking about, we have a couple, I'd say more impactful acquisitions in the short term. How are you thinking about that over just the course of the long-term and where the business sits right now? Thanks.

Yes. I mean, Robbie, you're correct in that as we do additional acquisitions that's when we take a little bit of cash to do some integration work that will ultimately benefit and drive our topline faster for us. So, we think it's a good trade off in terms of making those right investments to integrate the businesses. So certainly for from our 2021 perspective, I don't expect to see a free cash flow conversion of 80% like I got in 2020, because again the normalization of some of the numbers including CapEx. But I do think in a normal type of environment where we're steady state, I think those types of cash flow conversions can be there, but in the years where we're going to do an acquisition, and you're going to see us obviously go into that in different to the 60s and maybe be in the 70%-80% range, but I think, and a year where we're in steady state mode, I think a 90% cash flow conversion is possible.

Great. I appreciate the thoughts.

We'll now take the next question from Matthew O'Brien at Piper Sandler. Please go ahead.

Good morning, thanks for taking the questions. I guess one for Glenn and one for Carrie Gary. Sorry, Pete. Glenn. As far as ACell goes, you know you did a $101 million and 90-95 last year. And now, on a pro forma full year basis we looking for something like 92 this year. And I guess there is some COVID impact, some disruption from integration impact, but why wouldn't that full year pro forma number this year just given that all the heavy lifting is kind of behind you, not be really conservative, and then, when do you think the real big synergistic opportunity from a contracting and cross-selling perspective really kicks in? Is it more like 2022 or 2023 or is that even later this year?

Yes, no, I just as we think about the guidance for ACell as Carrie had outlined. Obviously, we've got 11 months versus a full year as part of our guidance, we've considered COVID impact that similar to the rest of our tissue business and any time you go through integration like this, you have some typical disruption that takes place with respect to the sales force. And so, that's all factored into our guidance of 83 to 88 for this year. And so, that's how we've looked at our guidance, hopefully we can outperform that number. And to your point around cross selling, when we start to see some of the opportunities materialize, I think it's probably late this year, early 2022. It will take us a couple of quarters to get these products fully rolled out, continuing to cross-sell the entire bag. So I think it's going to take us a couple of quarters to get through that. So we're probably looking at seeing some upside late this year and then moving into 2022

Okay. Glenn, I mean until like 83 and 88 is really kind of a floor as far as that business grows in your view.

Yes. We have uncertainty with respect to how COVID is going to last and we've got to get through the rest of the integration. So I would just say hopefully it is conservative, and that's kind of how we've outlined it.

Okay, fair enough. And then, Carrie, I understandQ1, I think I'll let the come into talking about a big ramp throughout the course of the year. but historically you've done 75% of your earnings in the last three quarters and this time around, we are looking for 80% - 81% of your earnings in the last three quarters with Q1 being impacted by a lot of things. So what gives you guys the confidence that you can get that level of earnings power in the last three quarters of the year. Can you just give us some levers that you have to pull on in case some of these other issues COVID related or whatnot pop up? Thanks.

Sure. Well, certainly COVID is an impact in Q1 for sure, so that factors into part of our EPS guide for Q1 just given where the revenue ranges, but the other thing I would say is that, as I think about Q1 gross margins, they're going to be a little bit lower than Q1 of 2020 just because that the whole portfolio timing change and you have ortho coming out, which is higher gross margins in the corporate average that comes out for the full three months, yet ACell going in for only two thirds of the quarter. That's going to create a little bit of margin mix there in Q1, that will take margins down a little bit compared to Q1 of 2020. But I do expect that you'll see some lower OpEx spend year-over-year in Q1 because of the fact that again, you have the ortho out which was heavy burden in the OpEx line and then replacing it with ACell that comes in. But realize that ACell, we're not going to realize all of the synergies there until kind of by the time we get to the fourth quarter. So, part of Q1 also is reflecting this portfolio timing change and the fact that ACell cost synergies will be realized gradually over the course of the year. So that will be part of the build as well as, as I mentioned is that we expect that certainly second half, most of the COVID impact should be behind us at that point. So we would see a heavier contribution of our revenue in the second half versus first half.

Thank you. We will now take the next question from Matt Taylor, UBS. Please go ahead.

Hi, thank you for taking the question. Yes. So the first one I wanted to ask was just a follow-up on ACell, you've made a number of comments on the integration here, I just wanted to know, now your products in house positively or negatively. And have we thought about the outlook for longer-term and in different material way given some of these opportunities for synergies.

Yes. I would just say we haven't really seen any surprises. I think the good news is we've got the commercial integration well underway. And so, from my perspective, we've been impressed with the product portfolio that came over, it's what we thought it was. We've added a number of ACell specialists that are focused in the wound reconstruction space that would be around the MicroMatrix powder and the Sitel products. And so I think the specialization that they bring, the team is really high-caliber team that we bringing over, the product portfolio is what we thought it was. So really no surprises. I would say, and we're really happy. We're getting great feedback from customers are ready. So we feel really good about it.

I might do add to it would be the fact that they did do a lot of contracting and so I think that's going to be a nice addition in what we do with our products. And the second part would be, as I mentioned in some of the comments before we're with on the scientific side, I think in their last few years there wasn't a significant focus on new derivative products for a lot of reasons. And with the leadership team we have on the R&D side, clinical, we clearly think there is some opportunities with other derivative products that aren't significant to bring out to the market. So stay tuned on that as well.

Okay, great. And then, I have one follow-up on the capital. I know you've been talking about in the ongoing capital pressure. It's not too surprising. I was wondering if you could characterize that any more precisely in terms of the trends that you've seen overtime and how our hospital starting to open up there, the wallets and now that kind of a light at the end of the tunnel, how would you predict that that's going to progress over the next couple of quarters.

Carrie do you want to take a shot at it and Glenn and I can add any color after you comment.

Yes, I mean, and again I would say that we've seen sequential improvement in capital as we've gone so is, they think about Q3 to Q4, capital that was about a 40% sequential improvement and our capital sales that really nice, but still capital was still about 80% down year-over-year in the fourth quarter. So it's certainly still lag. It's all of the portfolio was only down 1.5% in Q4 and capital is down 18%, it's still obviously quite a lag in the recovery piece. And so we think it's going to take some time. We are encouraged by the discussions we're having, the pipeline remains really strong. We have brought to the table different options to start those conversations, back up financing options, rent-to-own type of models and things like that to get those discussions going. I would say in the smaller capital, I mean I don't think of us is very large capital. I mean, our largest price of a capital you're talking about a couple of hundred thousand. And then we have smaller capital units like Mayfield or our dual lighting headset. Those the smaller pieces of capital are responding better, are coming back a little bit stronger and even our instruments business that can be capital like was only 2% down in the fourth quarter. So the good news is some of the smaller capital pieces are coming back. It's the larger ones that will continue to expect that they lag, but it's not a competitive issue. It's more of just when the budget, what kind of free up. So we're still encouraged by the discussions we're having that we think that will continue to see some capital sales of just continue to be a little bit lighter than the rest of the portfolio at this point.

Okay, great. Thanks.

I think I would just add is, we've talked about in the past, it's only 6% to 7% of our revenues. So it's not a big part of our business and the bright silver lining, here is the funnel is really strong with our capital business, and when it does come back, we actually feel like we'll turn the corner pretty quickly, but it's probably going to be in the second half of this year.

Thanks so much.

We'll now take the next question from Shagun Singh, Wells Fargo. Please go ahead.

Thank you so much for taking the questions. A couple of on guidance, what have you assumed for backlog in your 2021 guidance? By our estimate, it could be about 9% of sales. And then also what are you assuming for normalizing regen supply coming back, are you in the range of $30 million . I think you have delegated 100 or 200 basis points of 2019 sales, are you expecting all of that to dial in, is that in your guidance. And then also what are you assuming in your guidance for Arcus and Rebound growth contribution?

Carrie?

Yes, I would say that overall whether or not we have backlog. I think it's going to be highly dependent on just the course of COVID here. We are assuming a gradual recovery in the first half. So I would say that we don't see a big bolus impact of pent-up demand, a big bubble coming through, I think it's going to be a slow and steady gradual improvement over the course of the first half with an expectation that largely COVID is behind us in the second half. So I don't have a calculation for backlog to provide you that says this is what we've assumed in our numbers. Certainly. I hope there is a little bit of backlog help in 2021, but again at this point, we're seeing the kind of slow and steady improvement over the course of the first half and I don't have the specific breakdowns of Arcus and Rebound at this point. I think Rebound, we do have some contribution of Rebound and Arcus in our 2021 numbers. I still think the larger impact certainly for Rebound of the two is going to be a larger opportunity for us in 2022 and beyond.

I got it. And what about the demand supply? do you expect all of a during included in your guidance.

I am sorry I can't hear what you're seeing there and what kind of supply?

So given the normalized regen supply, I think the impact of that was the about 100 to 200 basis points

Yes, the regenerative tissue - yes, Shagun. Yes, I mean at this point, I would say it's certainly our expectations is that the supply issues have been addressed, and that we are at a point where we can meet any of unconstrained demand as the business recovers. So as I think through the opportunities in 2021. I would assume that Tissue Technologies will be contributing very similar to what we expect for CSS as I mentioned before in one of the questions that somebody asked. I don't expect to be a big difference in the segment performance at this point as I look at the year. So I think tissue technology will be an equal contributor to our growth, goes back to in 2021 and certainly as I think about our gross margin story year-over-year between 2020 and 2021 that benefit of Tissue Technologies and in restoration of the regenerative tissue supply certainly will help my gross margins year-over-year as well.

Thank you so much. I will leave with this.

We will have the next question from Raj Dahi of Jefferies. Please go ahead.

Hi, this is Anthony for Raj. I hope everyone is doing well, my question is on margin progression, specifically adjusted margin progression. And so the company ends last fiscal year at 2044, but it has ortho in there and it does not have ACell, some sort of look into the 1Q adjusted EBITDA margin sort of blended number and then it looks like that settles out in the 25% range. So want to make sure that we're thinking about that correctly. And then when we think about the bridge from 25% to the 28 to 30% % range, so how do we think about that in terms of progression. It seems that you can actually get there faster now with the mix meaning that ACell has a higher margin than ortho. So how do we think about margin progression from where we are today to the 28% to 30% range. And I will have one quick follow.

Yes, I think you're thinking about that really in line with what I would say as well. I think where we finished in 2020, we'll see a little bit of EBITDA margin improvement in 2021. And just a couple of factors as you think about that. In 2020-2021 obviously, my expectation is, we'll still be able to deliver some nice gross margin improvement year-over-year, that's going to be moderated backed by our operating expenditures coming back up and coming from a pretty low year 2020 gradually moving up, but net-net, I think we'll still be able to deliver a little bit of EBITDA margin improvement year-over-year and I think you pegged it right in that 25% type of range, and, but remember what I want to draw you back to that one of the slides that Glenn had in his deck and we've shown this slide before, when we announced the ACell acquisition where we did a pro forma look back at 2019 and said if you took 2019 you took ortho out and we added ACell, in the first year the impact EBITDA margins would be about neutral. And so, I still think we can tweak out to margin improvement between 2020 and 2021 with a sell-in. But the real path is going to be into the next year in 2020 when you realize the full synergies of ACell, and you've got ortho out and that's swap there will really show a nice benefit in 2022. So, I think we'll make some really nice inroads in 2022 along our path to get to 28% EBITDA margin.

The fault there would be, I guess you mentioned synergies. And so I guess to quantify the synergies, I mean on the cost side, specifically, is there a number out there we should be thinking about. And then when we think about synergies and in cross-selling. I'm just wondering if ACell is it all complementary to the nerve repair channel you spoke about last quarter, are those still going to be two separate and dedicated selling efforts. Thanks again.

Yes, I'll talk about the synergies of ACell and maybe ask Glenn to talk a little bit about your second question on there. The ACell synergies you can go back to their 2019 public statements and they had about $80 million of operating expenditures in their business, that was $100 million of revenue. So, essentially the business was at breakeven. So our opportunity is to bring that revenue into Integra and to really synergize and we certainly think we have a lot of opportunity because of the same call points and we think that there is some nice synergies on the infrastructure side there. So, as I think about that I think are our goal is to get about 40% of that OpEx out by the end of the year. And so, there is some nice synergies there. As I mentioned, is I think about full run rate realization of those synergies going into 2022. And then Glenn, you want to tackle the neuro question?

Yes. If you think - if you look at the ACell portfolio, it really impacts the wound reconstruction business and the surgical reconstruction business and those channels. Now keep in mind we have nerve being sold by the wound reconstruction team today, but we have a specialist group that focuses on it. So I don't see a lot of synergies per se, as it relates to the nerve business.

That's helpful. Thanks.

We'll now take the next question from Jayson Bedford at Raymond James, please go ahead.

Hi, good morning. Just a couple of modeling questions to keep the discussion moving here. In 2020 revenue what was the incremental revenue contribution from the increase in tissue supply and then move from distributor to direct

So the tissue business was not the business that was moved it was the general surgical business. So I think of that as CUSA excel and other instruments. We haven't specifically quantified how much that is, but it's one of the contributors to Japan driving double-digit growth. And keep in my Japan today to put in the context is a market that's above $60 million of annual revenue.

I guess, sorry, it was two items that you're helping with the Japan dynamics, but and the other one was just you had your supply on strain in Q2 side in 2019. And I'm just wondering what was the incremental field in 2020.

It's hard to know, in 2020 because it was a COVID impacted year. Overall, our business was down because of COVID. So how I would look at 2020 is a year that we recalibrated and put safety stock back into a supply chain that really was below where we wanted to be. So in 2019, it was missed opportunities, so the demand was there, we just didn't have the supply to go and chase that demand. In 2020 while COVID was impacting our overall top line, we took the approach that we're going to have a couple of our factories, continue to build and bring inventory levels up on some of these critical SKUs such that when the recovery happens that we can then take advantage of it. So it's now there is no way I could quantify the impact as overall 2020 we're still down across the board in our businesses because of the COVID.

Okay. Is there any way to quantify the delta between demand and supply in 2019 or is that just too far back?

Well what, that's what I think Shagun was getting after in her question, we had talked about that, it probably was a point to two points of growth that cost us by not having the supply in 2019 to meet the demand. So, certainly we missed an opportunity to grow revenue in OTT because of the fact that we didn't have the supply. So we talked about it being about a 1% to 2% points of our growth in 2019 that it cost us.

It appears there are no further questions at this time. Mr., Beaulieu. I'd like to turn the conference back to you, sir.

Thank you, everyone for listening in today and we look forward to updating you up in our next calls and please make sure that you take note of our Investor Day coming up on May 20th. Thanks everyone.

Thank you.

This concludes today's call. Thank you for your participation. You may now disconnect.