Good day and welcome to the Integra LifeSciences' Fourth Quarter 2021 Financial Results Call. Today's call is recorded. And I'd now like to turn the conference over to Chris Ward, Senior Director of Investor Relations. Please, go ahead, sir.

Thank you, Emma. Good morning and thank you for joining the Integra LifeSciences' fourth quarter and full year 2021 earnings conference call. Joining me on the call this morning are, Jan De Witte, President and Chief Executive Officer; Glenn Coleman, Chief Operating Officer; and Carrie Anderson, Chief Financial Officer. Earlier today, we issued a press release announcing our fourth quarter and full year 2021 financial results. Our corresponding earnings presentation, which will be referenced during the call, is available at integralife.com under Investors and Events and Presentations. Before we begin, I would like to remind you that 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 make reference to both reported and organic revenue growth for 2021. Organic revenue growth excludes the effects of foreign currency, acquisitions, including ACell, divestitures, including the sale of our Extremity Orthopedics business, as well as discontinued products. Unless otherwise stated, all disaggregated franchise-level revenue growth rates are based on organic performance. And lastly, our comments today will include certain non-GAAP financial measures. Reconciliation of any non-GAAP financial measures can be found in today's press release, which is an exhibit to Integra's current report Form 8-K filed today with the SEC. And with that, I will now turn the call over to Jan.

Thank you, Chris, and good morning, everyone. Thank you for joining us. I would like to make a few brief remarks at the start of this call, my first earnings call with Integra. Let me start with congratulating and thanking our employees. Since I joined the company, our team's dedication and resilience across the globe have been readily apparent to me. I look forward to working alongside this team in the months and years ahead, as we charge our exciting path forward. Through my first few months on board, I'm quite impressed with and proud of what Integra has achieved in recent years. I'm thrilled to be leading this organization with its strong legacy values and capabilities into the future. Integra has a sound business platform with significant untapped future potential. And it will be my focus to lead our team into reaching its full potential. 2021 was a successful year for the company, despite many ongoing challenges from the global pandemic. We've run a steady ship through the rough COVID seas. But while doing so, we've also driven significant changes in the portfolio and strengthened our platform for the future. And throughout this unusual year, our team showed tremendous resilience in serving our customers and patients, while continuing to move our growth priorities forward. During today's presentation, Glenn will go into more detail about 2021 performance and our key accomplishments. And then Carrie will provide a deeper look at our financial performance and we'll share our outlook for 2022. Finally, I will conclude with my thoughts on our key initiatives for accelerating growth in the company's areas for focus for this year. So with that, let me turn it over to Glenn.

Thanks, Jan, and good morning. Please turn to slide six. As Jan mentioned, we made great strides in 2021 and believe we’re at another inflection point for growth. So let me highlight a few of our key accomplishments. First, we transformed our portfolio through the divestiture of our low-growth non-core Orthopedics business and the acquisition of ACell, a faster-growing and more profitable regenerative tissue business. We also continue to optimize our manufacturing footprint, as one of our key levers to improve our gross margins over time. We have substantially completed the manufacturing transfer of the Codman portfolio from J&J into our Mansfield, Massachusetts facility. And we're on track to close our manufacturing site in France and complete the necessary product transfers to another existing location by the end of this year. We also made meaningful progress on several new innovative products in each of our segments. In CSS, we launched CereLink, our advanced monitoring system for measuring intracranial pressure in both the US and Europe in the third quarter of 2021. We will have the full year benefit of CereLink in these two markets in 2022, plus we're also launching in Japan and several other international markets later this year. We also initiated a phased clinical launch of our Aurora surgiscope, proprietary surgical solution for minimally invasive neurosurgery or MIS, with integrated visualization designed specifically for use in deep sea to brain lesions. We are gathering clinical evidence using the same technology for early surgical intervention for the treatment of intracerebral hemorrhages or ICH as well. Together, these two opportunities, MIS and ICH are expected to expand our addressable market in neurosurgery by about $1 billion. In Tissue Technologies, we followed the PMA for SurgiMend and participated in an FDA panel meeting, regarding a specific indication for breast reconstruction. We…

Thanks Glenn, and good morning, everyone. I'd like to start with a summary of our fourth quarter and full year revenue results on slide 9. Q4, total revenues were $406 million, representing an increase of 4.3% on a reported basis and 8.3% on an organic basis compared to the prior year. Revenues were negatively impacted by approximately $3 million of FX in the quarter. For full year 2021, revenues were just over $1.54 billion, representing reported growth of 12.4% and organic growth of 14.2% compared to 2020. Despite COVID delta impacts in Q3 and Omicron in hospital staffing impacts in Q4, we achieved second half organic growth of 7.5% compared to 2020 and 5.8% compared to 2019. Our strong second half top-line growth was driven in part by a recovery in our capital business, including the benefit of our new CereLink ICP monitor and a recovery in our indirect markets as well as both our instruments and private label businesses. We also continued to benefit from double-digit growth in China and Japan. If you turn to slide 10, we'll take a deeper dive into our CSS revenue highlights for the fourth quarter. Q4 revenues in CSS were $270 million, an increase of 6.4% on a reported basis and 9% on an organic basis over the prior year with equal contribution from both neurosurgery and instruments. Geographically sales in the US grew high single digits and international sales grew low double digits compared to 2020. The recovery in global neurosurgery sales was broad-based and sales and instruments continue to benefit from pent-up demand. We saw continued growth contribution from the launch of CereLink in the US and Europe. And even excluding sales of CereLink, our capital sales grew approximately 30% compared to 2020 and about 4% compared to 2019. The International…

Thank you, Carrie. As was indicated earlier although we start 2022 feeling confident about our capabilities. We still have very few data points on exactly how COVID and the world will fare now that we're getting over Omicron and how our markets and operations will ease towards the next level of normality hence the caution in our outlook for 2022. However, our near-term caution should not obscure our ambition and opportunities to continue to invest in our future and to accelerate the business to a next level of performance over the coming years. If you turn to Slide 16, I would like to outline our expected revenue growth trajectory and how we will accelerate this path. The first factor for growth is the momentum we have today in our core portfolio. When we look back into the results over the past four years, we've delivered historic organic growth between 4% and 5%. We expect this to be a range in 2022 as Carrie mentioned in our guidance, acknowledging that our near-term growth will likely continue to be impacted by COVID. We expect to see the pandemic limited speed with which our customers', staffing returns to normal and worldwide supply chains move back to a steady state. However, as we look past the first half of 2022 we should see a return-to-normal procedure volumes and growth. At the same time, we will begin to see more substantial benefits from our NPIs and growth initiatives which we have continued to invest in during the past two COVID years and will continue to focus on in 2022. These NPIs will allow us to expand our TAM and strengthen positions in existing segments which will get us more solidly above that 5% organic growth mark. The third factor is about expanding our commercial activities…

Thank you. We will now take our first question from Steven Litchman from Oppenheimer & Company. Please go ahead. Your line is open.

Thank you. Good morning. This first question on your revenue outlook for 2022. Any further granularity you could provide in terms of what your outlook is by segment? And Jan, what do you see as the biggest product growth driver opportunities here in the near term for Integra?

Steve, good morning. I'll start the question, and then Jan can hit that back half of your question there. In terms of the segment color, I think, I would say that, both TT and CSS will be largely in line for the full year in line with the corporate averages. Obviously, there will be some pluses and minuses there. But generally, I would say, you should model the segments for the full year to be somewhere in the range of the corporate ranges. In the second half of the year, I would say, you'll probably see more of a pickup in TT, as it should benefit from that ACell acceleration in the back half of the year, and some of our other product launches there. And then Jan, if you want to take that.

Yeah. If you – if you take one, the building up momentum of the core of our business as we get over COVID as one. If you take additional products on top of that like CereLink like ACell, where we are building out our commercial, those are products specific products that will further accelerate over and above this, I would say normal comeback after COVID.

Yes. And I would also say capital is still an area – Jan mentioned, CereLink, but capital in itself I still think has the opportunity to recover further in 2022. We saw a nice rebound in our smaller sized capital in 2021. And but our largest capital is the CUSA unit. And although, we saw some nice recovery in Q4, I think compared to 2019 we still have some opportunity to see some further bounce back as we move through the COVID headwinds.

And Steve, I would just give a little geography color as well. If I look at the fastest-growing market most likely in 2022, it's going to be China. I mean, China we should be putting up over 20% growth organically. We're expanding into these Tier 2 and Tier 3 cities. We've got a really good plan in place for China. So now it's over a $50 million market for us. I'm sure, you're going to hear us talk about pretty consistently in 2022 about the growth coming out of China, which will be a key market for us over the next 5 to 10 years as well. But I would highlight that, as kind of an exceptional growth market for us in 2022.

Great. Thank you. Relative to COVID you spoke about the indirect impact, but relative to the direct impact, I wondering, if you could provide, a little bit more color in terms of what you've seen in recent weeks and months, obviously been very dynamic. Any color you could provide on December versus January versus February on that front?

Yes. I'll start and then Carrie and Jan, you can add into this. I think first and foremost, the biggest thing we're seeing in our business is the absentee rates at our facilities. We saw a significant spike up in absentee rates, which has caused manufacturing disruption. Day by day that's getting better. So the good news is that's coming back to a more normal trend, but we're still not going to be normal probably for the rest of this quarter. But nevertheless that did have an impact certainly in January and early February. We're still struggling with supplies in certain cases, whether it be electronic components, packaging materials, plastic moldings, things that get used in our products. And so our supplier consistency is not what it was three to four months ago. I think we're working through that, but that was part of my comments around this record high number in terms of our back orders. And just to put it into quantitative terms, I mean, two and half times, higher than normal means, we got $10 million to $12 million of incremental back orders, we typically wouldn't see. As I think about COVID on procedures, it looks like that's all trending in a positive direction. ICU bed capacity is improving. So, all of that looks like, it's moving in the right direction as well. But these are all things that did have an impact as we exited 2021 and the beginning part of 2022. Carrie, you want to add?

Yes. I would only add, I think that was a pretty comprehensive response. And I would say hospital staffing challenges still are lingering as well. So I think it's a combination, as I think about the dynamics that took place last year in the first quarter to the second quarter and compare it to what we're seeing now. Those are the two biggest pieces -- is continued hospital staffing issues and then the continued supply chain disruption as it relates just to the contagious nature of Omicron and just labor being impacted in our facilities but also in the supply chain as well.

Got it. Thanks everyone. I’ll jump back in queue.

Thanks, Steve

Hey, Steve.

Thank you. We will now take our next question from Matt Miksic from Credit Suisse. Please go ahead. The line is open.

Great. Thanks so much for taking questions. One follow-up on this transition of staffing and COVID-related pressures in Q1. I think Glenn you mentioned that things are starting to get a little bit better. Wondering if you could maybe provide any color as to how this is breaking out US and OUS, just because I think some other elective exposed elective focused names in our liquid surgery-focused names and our universe are sort of seeing an inflection now? And it sounds like you're suggesting that the inflection is beginning but may not be complete until sometime in Q2 and just love to understand the nuance. And one quick follow-up.

Yes. I think the recovery of procedures is clearly happening. So that inflection point is happening. I think the challenge we see is the disruptions to the supply chain are not going to be immediately coming back to normal. So that's going to take us a bit more time to get through. And it really is the two things I mentioned earlier. The absentee rate in our facilities was at very high levels. That's now all trending in the right direction and day-by-day getting better, but we're probably still a ways to go on that through the end of the quarter before we get back to normal staffing levels. The other part of the supply chain is going to take us some time to work through. So, getting components packaging materials and everything else that we need to do to ship product to customers is going to take several more months in my mind at least to get back to a much better rhythm and cadence. So, by geography, obviously these issues affect the globe. I would say from a procedure perspective we still have more challenges in certain markets like Australia where that has not come back yet. That's more of a March discussion. So market-by-market, you'll see some procedure areas that are still not back to normal. But on the whole, the items that we've talked about really impact the globe.

Maybe add from a customer perspective, what we see is that our customers hospitals are still struggling with staffing constraints or staffing moves and they're working through that but we see a steady improvement of that not a step change where suddenly everything is going to be back to normal, okay? Hence, Q1 -- part of Q2, we see it steadily come back but not a step change.

Understood. And then just a follow-up on ACell, up slightly from Q3 to Q4 stable as you pointed out, Gary. Just would love to get an understanding of whether we should expect that business to start growing sequentially again or it's going to be stable here in the near term? And what are some of the drivers that sort of get it moving upward again.

Yes. No listen, I think first and foremost, Matt, we love the ACell portfolio. So the MicroMatrix powder product Hiatal and also Gentrix used in laparoscopic procedures. We love the product portfolio. We've made the necessary improvements and changes that I think are going to have a big benefit for us in 2022. So what have we done? I think first and foremost we've added more coverage in territories and added more resources. So you could think of that as we're net-net going to probably add incrementally 15-plus resources in Q1 and then probably double that in Q2. So I think getting better coverage, adding back more resources is going to be important in terms of this revenue recovery plan. We've also done things to change our sales compensation plans, which is going to help as well. And I think the combination of those two items is going to put us on a trajectory where we start talking about growth kind of the mid-year time frame. And I think ultimately we'll be growing this business kind of in line with the overall tissue tech portfolio so call that high single-digits or so. So we think we're on the right path. We like the asset. I would just say the good news is we're adding these resources back in and still achieving our financial models when we bought this business. So it's very accretive to our overall bottom line, you can see that in our EBITDA numbers and our overachievement of EBITDA and margin expansion. So even with adding back the resources, we're still on track to our ROIC targets and our financial measures when we bought this business. So I would just say look for continued improvement here and that's kind of a real return to growth kind of mid-year. This is how it would set the expectation.

Great. Thank you.

Thank you. We will now take our next question from Robbie Marcus from JPMorgan. Please go ahead. The line is open.

Hi. This is actually Lilly, on for Robbie. Thanks for taking the question. By math guidance implies something like 1% to 3% growth in the first half of the year and 5% to 7% in the second half, which is a pretty meaningful step up. So what gives you the confidence in that acceleration in the back half of the year?

Yes I'll take that Lilly. I think in terms of what we see in the first half obviously, it is impacted by COVID-related disruptions. And obviously that's going to tamp down growth in the first half of the year. And as those issues abate, we can see more clearly a stronger faster growth rate in the second half that as I mentioned would be greater than 5%. I think if you think about some of the underlying momentum there that we talked about in Steve's first question, is you have the benefit of the CereLink launch, the full year benefit of that you have what Glenn just mentioned the ACell recovery that will start to pick up in the second half. We will be launching our nerve product here at the end of Q1 that we'll start to add some nice contribution as well as two other areas, I'd see capital recovery that still hasn't – I would say it's gotten fully back on the large capital and then the international growth that Glenn talked about as well with double-digit growth expected in China as well as continued recovery of some of the other markets. So I think it's a combination of all of those things that really then lead us to that momentum in the second half.

And don't forget that we're sitting at this point on significant back orders and we expect in the second half to get back to normal situation. So our supply chain will be catching up with some of the demand that at this point we can't fulfill.

Okay. That's helpful. And then just a quick follow-up. Can you give us any color on how things have trended on the inflationary side and how much pressure from this do you have baked into EPS guidance for the year? Thanks.

Yes. I would say the thing that has changed over the last couple of months is some of the new things we've talked about which is the -- what I would call more temporary impacts as it relates to this high level of absenteeism in our plant that creates this under-absorption part that has to kind of move through our P&L over the period of time their inventory turns. So I'd say that was incrementally new. I'd say the inflation -- that hasn't necessarily changed I would say I was hoping that maybe some of the freight would abate a bit more faster and those freight costs are still with us and certainly we're there in the fourth and will likely continue to be with us into first quarter into the second quarter as we deal with the backorder issue that we've talked about and trying to get product where it needs to be. We have incorporated inflationary pressures working with our global sourcing group. And we have also incorporated commensurate price increases as well. So we have the opportunity to look at price. Obviously that's an annual process for us. We were pretty aggressive in the second half here looking at that and factoring that into our budget ops for 2022. As I think about price not only do they have the opportunity to do list price adjustments obviously looking at your discount levels, but we also have the opportunity as we introduce new products that we can add incremental price. When we bring on new customers we can add incremental price. And then even in our enterprise contracts. Those tend to be a little bit longer term in nature. But a lot of those contracts do have volume commitments as part of those and we have the opportunity to audit those contracts to ensure that those volume commitments are being made. And if they're not that leads us to an opportunity to open negotiations with those. So I think that the -- we've largely tried to offset that inflationary pressures. And I think what's incrementally net new information is some of the back order issues because of some of the levels of high absenteeism that are impacting our gross margins.

That’s helpful. Thanks.

Thank you. We will now take our next question from Ryan Zimmerman from BTIG. Please go ahead.

Good morning. Thanks for taking the questions. So I want to ask Jan, I appreciate the cadence of the business. I appreciate some of the growth drivers here. Are there other areas now you've been in the development process to stay in Integra. Are there other areas of slower growth products or areas that you think makes sense for potentially either divestiture or discontinuation just given that they're kind of dragging down the corporate average?

The short answer is that I do not see an obvious slow growth area where we should take immediate action. We are of course -- first my focus is on looking how can we accelerate across the board and is leveraging international it's focused on NPIs and make sure they get the full attention. There's one area where we are discussing it's a classic area where -- but relatively small.

I would say that we continuously Ryan look at the portfolio. So I think that is one thing Integra has done well even before I joined Integra was this continued review of the portfolio. I think to Jan's point we've gotten the portfolio largely to where we want it to be. But I would say that that review is continuous and we will continue to look at opportunities to refine the portfolio spending that to more faster growth type of opportunities.

Yes, Ryan, the heavy lift was obviously divesting orthopedic. So that's now done. It was done last year. That was really the last big piece of the portfolio. There's always going to be some pruning. But I think as it relates to the go-forward portfolio and business we like the portfolio we have.

Okay. And then just on the guide, Carrie, I appreciate your comments about some of the new product contributions like say the NeuraGen 3D product. What's assumed in guidance for Surgiscope, for SurgiMend and of these other kind of bigger profile growth initiatives for 2022? And if you could just comment on kind of each of those and their contribution in 2022 would be appreciated.

Thanks Ryan for the question. I think for -- we certainly see Surgiscope -- or Surgiscope and SurgiMend as part of our near to midterm drivers for us. I would say that as it relates to the Aurora Surgiscope, we started with a limited clinical-based launch in the third quarter of 2021. And it's really being placed with KOLs that can help us inform ourselves of in our hope to do a randomized control trial initiation later in the year. And so you'll start to see some sales from the Aurora Surgiscope as it relates to this limited clinical launch. And it's really concentrated in this minimally evasive part of the opportunity. At the same time, we've also launched a Mira Registry that is looking to capture information and data regarding our other opportunity for the Aurora Surgiscope which is the ICH opportunity. So, not a lot of revenue that's going to come from the Aurora Surgiscope in 2022. Some revenue, yes. But I'd say the bigger opportunity is beyond 2022. And then relating to SurgiMend remember that product we are selling it today. We cannot specifically advertise and promote for breast reconstruction, but we are -- that product has been on the market for over 15 years and gaining some nice traction in both the complex hernia as well as the breast reconstruction market. We just can't promote for it. So, our opportunity and I'll let Glenn maybe talk about the opportunity for PMA here. But I would say it doesn't impact our growth for 2022 as we think about our guidance right now.

Yes, the only thing I'd add to Carrie's comments is we've talked about new product introductions contributing about 25% of our organic growth. So, you could think of that as about point and a half of organic growth. I think this year will be consistent with that when you look at the new product launches with CereLink Aurora, the nerve product that we're launching. So, that's the way to think about it. We're not going to break out the revenues for each individual piece but we certainly feel quite good that NPI is going to contribute at least point and a half of growth given the products that we're launching this year. On SurgiMend, we're not counting on any incremental revenue from the breast indication in 2022. I think once we get later into the year we'll give you more color on how we see this rolling out in 2023 as we advance this with the FDA. But I think for now nothing has been included relative to incremental growth in 2022 for SurgiMend.

Thank you guys.

Thanks.

We will now take our next question from Samuel Brodovsky from Truist. Go ahead, your line is open.

All right. Thanks for taking the question. Just a few on the new products here. Starting with NeuraGen 3D, I'd be curious to hear a little bit more detail about the go-to-market strategy there and specifically with regards to a potential competitive data readout in the space? And how do you think about positioning the product if that data potentially comes back positively?

Yes. So I think first and foremost keep in mind, we already have a nerve product on the market urgent. It's been in the market for many, many years. it's relatively small. It's 1% of our consolidated revenues when you think about our nerve business only addressing short gap nerve repair. And so what NeuraGen 3D does for us, it takes us from short gap to mid-cap, gives us some more addressable market opportunity. And basically, it's the collagen hollow conduit, but included in that conduit is chondroitin sulfate, chondroitin-6-sulfate. And so it helps to accelerate growth of the nerve for these mid-GAAP nerve repair issues. And so we're very excited about it. We've got a dedicated team that will be selling the products. We've got a team that's already hired and ready to go that will be selling our nerve portfolio. And then the longer term, we've got some additional things in the pipeline that will hopefully further expand our nerve portfolio. So that's the way we're thinking about it. It's one of a number of growth drivers for us. But again, I think the key thing to keep in mind is we've always had a nerve portfolio really addressing short gap. I think what we're moving to now is how do we get to mid- and long gap nerve repair which is a bigger part of the overall market opportunity.

Got it. That's helpful. And then...

And NeuraGen 3D is obviously the first step in that direction.

Got it. So switching to ACell, just as we think about the growth this year and that sort of second half inflection I mean, how much of that is reliant on that adding reps to that product there? And then can you kind of -- with the labor shortages we're seeing sort of all over the place now these days, can you characterize what you're seeing in terms of ability to add reps to that franchise and how that may impact growth?

I think a key part of the growth for ACell is getting more coverage. And we've made really good progress here in the first quarter. I mentioned net meaning when you look at the ads and anybody that's left, we're plus probably 15% for the first quarter here just gives you an idea that we are ramping even though we've had some attrition and that should continue into the second quarter. So I'd like to see us be net 30 people up, as we get into later stages of Q2 and that's going to really help to grow the overall ACell portfolio along with other parts of our wound reconstruction business, right? They're not just selling the ACell products. So it's important that we continue to ramp this part of our business. I feel really good about it. And we've been very fortunate to be able to bring in a lot of talent. I think a lot of that goes to a lot of these external recognitions we've been getting as a company, top diversity company, top 100 Medtech company. These are all positive things when people look at Integra and why they want to come to work here. And so we are making good progress. It's important we continue that and I expect that you're going to hear more positive stories around ACell and what we're doing in particular as you get to midyear and get these jobs filled in these territories filled.

Got it. Thanks.

Thanks.

Thank you. We will now take our next question from Larry Biegelsen from Wells Fargo. Please go ahead.

Good morning. Thanks for taking the question. Good morning, Carrie. One for you on the P&L. Maybe it would be helpful if you could provide a little bit more color on the gross margin and operating margin for the year that's implied. I thought I heard your comments were on the gross margin were more specific to the second half of the year? And any color on just EPS cadence and I had one follow-up.

Yes. Sure, Larry. And I think you heard those remarks correct in that my specifics was a modest level of improvement in margins on gross margin and EBITDA margins in the second half of the year. So you should interpret that as flat margins in the first half on gross margins and OpEx, EBITDA margins and modest growth in the second half of the year. I think it's important and I just want to again go back to the fact that it's going to take us a little bit of time to work through some of the headwinds on these high levels of absenteeism and the impact that has in the factories. And it will take some time until that inventory turns and gets that full under absorption out of the P&L. In addition, I would say, that we are really wanting to make sure that we are prioritizing our OpEx investments. That's something that we did in 2021 where we gradually brought OpEx investments back in. And I think as you think about next year, Larry, I would look at our Q4 of 2021 number of OpEx and annualize that. That's probably a good number to think about how we're thinking about OpEx for the year, and that will gradually increase over the year there. But it is something that we're not going to sacrifice prioritizing our long-term investment plans at the expense of really kind of optimizing gross margin right now. We want to make sure through this temporary COVID disruption that we're still prioritizing those OpEx investments, because we have a lot to be excited about in terms of the long-term growth momentum of the business. And then I would say that should flow through EPS as well very similarly.

Sorry about that. Yes. Thanks. That's super helpful. And just one quick follow-up. Carrie, are you suggesting kind of that the second quarter and the first quarter organic growth should be pretty similar. Is that kind of the message here, or do you expect an improvement in Q2 over Q1? Thanks for taking the questions.

Yes. I mean, I would expect to see sequential revenue growth from Q1 to Q2, right? I do hope that some of the things that are impacting more acutely in Q1 will start to abate, but it will still be with us. What I think our comments are if you compare last year and you look at what happened between the first quarter and second quarter of 2021, there was a substantial kind of spring back a bounce back in Q2. I don't think we're expecting that here this year. And I think it's because of some of these lingering impacts of back orders, staffing challenges at hospitals that I think you should expect a gradual sequential recovery, but not maybe the same level of bounce back that we saw last year.

Thanks for taking the questions.

We will now take our next question from Craig Bijou from Bank of America. Please go ahead.

Good morning. Thanks for taking my questions. Just a couple of quick follow-ups here. Carrie, on your comments on the capital markets, I just want to make sure that I am clear. And are the smaller capital markets, or are they kind of -- are they back to a normal level? And then I know you mentioned the larger ones are probably not quite back. What do you think needs to happen before those get back to a normal level? And when do you kind of foresee that within 2022?

Yes, Craig. So let me start with first a reference of capital as a percent of our total sales. It's only about 6% of our total sales, including our new CereLink. So if I look at where we came in for 2021, capital was about 6% of revenue. So not a big driver. But certainly, as I think about opportunities to see a broader recovery in 2022, the larger capital, which is really the CUSA for us. So CUSA, the unit price is a couple of hundred thousand dollars. And then everything else falls into that smaller capital which is, you're talking, 40,000 or less in that neighborhood of what small capital is. And as we look at how capital trended in 2021, we saw a nice bounce back in the smaller capital. So think of that as our lighting systems, as our cranial stabilization systems, as our generators, as our Licox units. And obviously, we did see some nice CereLink launch momentum here in the second half. And even with that, I would say, fourth quarter still proved to be a nice quarter for us. So we expected to see a rebound from three quarter -- third quarter to the fourth quarter, as most hospitals fiscal years end in the fourth quarter, we did see that. Our capital sales were up probably about $5 million from Q3 to Q4. CUSA was part of that recovery in the fourth quarter as well. But I do think that, as I look at CUSA relative to 2019, I think there's further opportunities to see some recovery and bounce back in 2022. I think it's going to take a little bit of time. Q1 has started out slow. And I think we owe that to the Omicron variant, the contagious nature of that, impacting staffing shortages and VAC committees and so forth. So it is one of these things where we're going to have to get past some of those items before we start to see the funnel. The funnel is still very, very strong. We have great visibility to the CUSA funnel. We do not believe that anything has fundamentally changed in the competitive landscape. It's just an extension of the selling cycle.

And Craig, just keep in mind, I know we're talking capital, but with these capital sales, you get the recurring revenue stream for disposables. So as procedures recover, we'll see faster disposable growth on CUSA on CereLink, because every time our procedure gets done, you get a recurring revenue. So just something to note as well that, as procedures get back to normal, we'll see an uptick in revenue in our disposal -- in our disposals business, that's very much attached to capital.

Got it. That's helpful. Next one, just on SurgiMend. Just wanted to follow-up here. I wanted to know if you guys had any more color or any additional discussions kind of with the FDA? And maybe remind us of the approval timing for the breast recon indication and if you still kind of -- if you're still planning and expecting that, I believe, it was the second half of this year, but please correct me if I'm incorrect.

Yes. So first and foremost, we're continuing to work with the FDA. We're doing additional analysis around the data. I think, you know, we submitted the PMA, we've had the panel discussion. And so, we're continuing to work through the necessary things to get the approval, but it's obviously going to take us some time to get there. I think we need to get further into 2022 before talking about when we would expect an approval for the PMA, but it's not a 2022 approval. I can say that. It will be a 2023 approval, is what we're shooting for and we'll give you a better idea of timing once we get later into this year.

Great. Thanks for taking the questions.

Thanks.

Thank you. We will now take our next question from Jayson Bedford from Raymond James. Please go ahead.

Good morning. Thanks for the questions. Just a couple of quick ones. Getting back to your gross margin commentary, Carrie, I think, you said flat in the first half. I was just curious is that relative to first half 2021 or flat relative to the fourth quarter number?

No. It's first quarter of 2021, Jayson.

Okay. Okay. And then what is the gross margin implied in your EPS guidance for 2022?

Yes. I would say again you roughly think about it as -- again gross margins that are roughly flat compared to first half of 2021 slight margin improvement compared to second half 2021 gross margins.

Okay. Okay. That's helpful. And then just in terms of -- you mentioned price what is the net impact of price in 2022 on the top-line?

Yes. We don't necessarily provide that level of breakdown. But I would say that that is something that we have been working very actively with our commercial teams and we have reflected that into our numbers. So it is definitely part of our guidance.

Okay. And in which areas of the business are you seeing the biggest back order meaning how much of the $10 million to $12 million that Glenn mentioned is CSS versus TT. And can we assume by the third quarter you've kind of exhausted that back order?

Yes. It's mostly CSS and the CSS products. So obviously that impacts both our US and our international business because we're heavily concentrated in CSS in the international business. We don't expect the back orders to be normal as we exit Q2. It certainly should be better than where we are in Q1. But we're probably not going to be back to a normal state until later in the year.

I'd say in the issue of area of tissue technology we'll see some of that backorder issue in our private label business as well. Obviously, we work to prioritize different parts of the business there. And private label will be one of the areas that could be impacted by back orders on the tissue technology side.

Okay. Thank you.

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

Hi. Thank you for taking the question.

Good morning.

Good morning. I wanted to ask you kind of a higher level strategic question. I mean you had some time under your belt now in your new role. And I just wanted to -- if you could give us some assessment of label of the land? What do you like about Integra's strategy? Are there things that you might tweak or change or emphasize differently? And what are some of the key strengths from your experience that you think you can bring to the role?

Yeah. Thank you for the question. I mean, first, I very much like the portfolio like Glenn said earlier, I mean the heavy lifting in terms of shifting the portfolio towards a higher growth, higher profitability portfolio has been done. So my first part is make sure to build out the portfolio that we have, yeah, there's clearly the international dimension where despite having some great successes and great cases from the past there's way more we can do. And we started a few weeks back a project to really lay out that road map, which countries, which products and what are the investment need is to really sell more of what we have in more countries. I mean second discussion I have with the divisional leaders is about what do we represent within care pathways and with the portfolio we have, how can we broaden into adjacencies to be more of a solutions player, more of a partner to the health care professionals that we serve today. So that will guide organic as well as inorganic investments to broaden our portfolio including digital capabilities. I mean, any technology, any process business has opportunities to enhance its value proposition by building more digital capabilities. So those are two and that's what I try to reflect in those different vectors. And then, of course, this is an acquisitive business with great potential to do acquisitions. And so we're continuing to look into near and further adjacencies as opportunities to further build out the portfolio of businesses that make sense within the Integra family.

Thanks. I’ll leave it there.

Thank you. We will now take a question from Matthew O'Brien from Piper Sandler. Please go ahead.

Thanks for the question, and I'll just stick with one given that we're getting late here. On the commentary about the back half increase in -- or the back half loading of guidance here. Your commentary about Q1 is a little bit worse than we've heard from other companies. So I'm just -- you've got -- it just puts more pressure on the back half of the year. And so I'm just wondering what really needs to go right to hit these numbers. And I know you talked about the new products, but how much you have to get through all the backlog? Do the ACell new reps need to be very productive? Does the absenteeism need to come down meaningfully to hit these back half numbers, or have you built in enough conservatism that you feel comfortable in that big spike in the back half of the year? Thanks.

I think we've got the right level of conservatism built into our forecast. At the same time, when we look at the back half of the year, we're confident we're going to get there. When you look at the back orders, they're going to be clearing. So, that's going to help us as a starting point supply is going to get better. That's going to be a nice tailwind for us getting procedures more back to normal from an overall COVID perspective is going to be a positive for us. And then these new product launches are going to continue to ramp. So, we're just launching our nerve product here at the end of the first quarter. That's going to be a contributor obviously more so in the back half of the year. CereLink, obviously, having a full year benefit in the US and Europe. We'll continue to ramp. We've launched now in Canada, Australia. We're going to be launching in Japan midyear, which is a good opportunity for us along with a number of indirect markets. And so these NPI launches should be a nice tailwind for us more so in the back half of the year. And then ACell as we add these resources should show sequential and year-over-year improvement as well. And so those are the key growth drivers for us. We feel quite good about it. Understand it, it looks like it's got risk to it anytime you have a back half-loaded year but we feel quite good about it quite frankly.

Maybe I think one I think we're appropriately cautious. One underlying assumption is that we see gradual steady improvement. We're not counting on any step change snapback both I would say in the staffing situations on our customers. On our own internal we do see steady improvement. The question was asked on the ACell staffing up. I'm following that since December we've drawn a line from December to end of second quarter where we want to be. We're nicely tracking two deadline despite the challenges that there are in the market. So, appropriately to come and assumption of steady improvements.

Got it. Appreciate it.

Thank you. I will now turn the call back to your host for some closing remarks.

Well, thank you for joining us for the conference call today. Going over our 2021 fourth quarter results. We'll have a follow-up questions. If you need to reach us please feel free to reach out to me directly at investorrelations@integralife.com or you can find my contact information post release today. Thank you very much.

Thank you very much.

Ladies and gentlemen, that will conclude today's call. You may now all disconnect.