Integra LifeSciences Holdings Corporation (NASDAQ:IART) Q1 2021 Earnings Conference Call April 28, 2021 8:30 AM ET

Company Participants

Mike Beaulieu – Head of Investor Relations
Peter Arduini – President and Chief Executive Officer
Glenn Coleman – Chief Operating Officer
Carrie Anderson – Chief Financial Officer

Conference Call Participants

Shagun Singh – Wells Fargo
Ryan Zimmerman – BTIG
Dave Turkaly – JPM Securities
Kaila Krum – Truist Securities
Robbie Marcus – JPMorgan
Steven Lichtman – Oppenheimer & Company
Matt Miksic – Credit Suisse
Xuyang Li – UBS
Anthony Petrone – Jefferies
Korinne Wolfmeyer – Piper Sandler
Jayson Bedford – Raymond James

Operator

Ladies and gentlemen, good day, and welcome to the Integra LifeSciences First Quarter 2021 Financial Results Call. At this time, I would like to turn the conference over to Mr. Mike Beaulieu, Head of Investor Relations. Please go ahead, sir.

Mike Beaulieu

Thank you, David. Good morning and thank you for joining the Integra LifeSciences First Quarter 2021 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. Earlier today, we issued a press release announcing our first quarter 2021 financial results. The release and corresponding earnings presentation, which we will reference during the call, are available at integralife.com under Investors, Events and Presentations in the file named First Quarter 2021 Earnings Call Presentation.

Before we begin, I’d like to remind you that many of the statements made during this call may be considered forward-looking statements. Factors that could cause actual results to differ materially are 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. Organic revenue growth excludes the effects of foreign currency, acquisitions, including ACell, divestitures, including the recent sale of our Extremity Orthopedics business as well as discontinued products. Unless otherwise stated, all disaggregated and franchise-level revenue growth rates are based on organic performance.

Lastly, our comments today will include certain non-GAAP financial measures. Reconciliations of any non-GAAP financial measures can be found in today’s press release, which is an exhibit to Integra’s current report on Form 8-K filed today with the SEC. With that, I’ll now turn the call over to Pete.

Peter Arduini

Thank you, Mike, and good morning, everyone. If you turn to Slide 4, I’ll begin with a review of our first quarter performance. Total revenues were $360 million, representing reported growth of 1.6% and organic growth of 2.9% compared to the prior year. And were above the high end of the guidance we provided in February. This also represents organic growth of approximately 3% compared to 2019. First quarter revenues in both our Codman Specialty Surgical and Tissue Technologies segments reflected a gradual recovery in our procedure-based market as well as an improvement in hospital capital spending. Notable strength came from both small capital used in neuro procedures and international sales of CUSA, particularly from Japan and China as well as global sales of instruments.

First quarter adjusted earnings per share were $0.69, representing an increase of over 40% compared to 2020 and 6% compared to 2019. This reflects our prudent spending approach as we navigate the remaining uncertainty related to the pandemic impact on surgical procedure volumes. Taken together, our revenue and earnings for the first quarter represent a very good start towards achieving our 2021 financial targets. Based on our first quarter performance, we’re increasing the low end of our revenue guidance to a new range of $1.525 billion to $1.535 billion and now expect full year 2021 adjusted EPS to be at the higher end of our previous guidance range of $2.86 to $2.93.

Turning to ACell, our most recent acquisition, first quarter sales were in line with expectations and we also completed the commercial integration ahead of our initial plans. We expect to have the remaining critical integration activities behind us by the end of the second quarter. And we continue to be optimistic about the addition of ACell to our tissue technologies portfolio and remain confident in achieving our previously discussed goals for this business. We also continue to prepare our global commercial organizations for the midyear launch of CereLink, our next-generation ICP monitor, which will further enhance our neuromonitoring global portfolio. This launch follows the launch of several other products, including our new hydrocephalus programmable valve for Japan and our new electrosurgery generator and associated irrigator and a number of reusable bipolar forcep products. We expect our new product launches and sales growth of products recently launched to fuel an acceleration in revenue over the course of 2021.

Later this year, we’re also planning a controlled release and clinical evaluation of the Aurora Surgiscope for minimally invasive treatment of brain tumors, an exciting program that has the potential to impact the practice of neurosurgery. With respect to COVID, we’re encouraged by the gradual improvements in procedure volumes and hospital discretionary spending. However, we remain cautious and expect some variability to continue through the second quarter as vaccinations roll out at different rates globally. Nevertheless, we feel confident a global recovery will continue and following our first quarter performance, we remain well positioned to achieve our full year 2021 financial targets.

Finally, as a reminder, we will be hosting a Virtual Investor Day on May 20th. We look forward to providing you with a detailed review of our strategies for both of our global segments and visibility into our path to achieving our long-term financial target. We hope you’re able to join us. And with that, I’d like to turn the call over to Carrie to discuss the details of our first quarter performance. Carrie?

Carrie Anderson

Thanks, Pete, and good morning, everyone. I’d like to start with a brief summary of our first quarter highlights on Slide 5. First quarter total revenues were $360 million, representing an increase of 1.6% on a reported basis and 2.9% on an organic basis. As Pete indicated, total revenues were above the high end of the guidance range communicated on February 18. In the first quarter, we achieved positive organic growth in both our Codman Surgical, Specialty Surgical and Tissue Technology segments as well as in both the U.S. and our international markets. Adjusted EBITDA margins increased 360 basis points to 25% and adjusted earnings per share increased nearly 44% to $0.69. As you will recall, profitability in last year’s first quarter was impacted by COVID disruptions that began in March of 2020.

If you turn to Slide 6, I’ll now review the first quarter performance of our CSS segment. Reported Q1 revenues in CSS were $241 million, an increase of 4.2% on a reported basis and 3.3% on an organic basis from the prior year. Global neurosurgery sales were flat on an organic basis compared to the prior year. Sales in advanced energy increased mid-single digits and were led by the recovery of capital sales in our international markets, driven by Japan, China and other Asia Pacific indirect markets. As a comparison, U.S. capital sales within Advanced Energy were still down double digits compared to the first quarter of 2020.

Our strength in Advanced Energy offset flat-to-low single-digit declines in dural access and repair, CSF management and neuromonitoring. Within these three franchises, while we did see a gradual month-to-month improvement during the quarter, surgical-based procedures did not fully return to pre-COVID levels. Softness here was partially offset by improvements in smaller capital equipment sales, including Mayfield.

Q1 sales in instruments increased over 15% on an organic basis compared to the prior year. Our performance here was largely a result of an improvement in physician office visits relative to the steep COVID-related declines experienced in March of last year. International sales in CSS increased mid-single digits led by growth in Asia. Performance in Europe was mixed, with strength in Italy and France, offset by weakness in Spain and other indirect markets in Europe. In general, outside of Asia, our indirect markets continued to lag due to COVID-related deferrals.

Moving to our Tissue Technologies segment on Slide 7. On a reported basis, sales in Tissue Technologies declined 3.2% compared to the prior year. On an organic basis, sales increased 2.2% as we exclude both the full quarter of divested orthopedic sales from 2020 and a partial quarter of acquired ACell revenues in 2021. First quarter sales in wound reconstruction increased 3.7% on an organic basis, driven by sales in Integra Skin and PriMatrix. Sales in private label declined 0.5% in the first quarter. International sales in Tissue Technology increased mid-single digits on an organic basis.

Turning to Slide 8, I’ll now review our first quarter key P&L components and cash flow performance. Adjusted gross margin was 67.3% compared to 68.3% in Q1 of 2020. The year-over-year decline was related to revenue mix and higher manufacturing costs. The product revenue mix was impacted by the timing of the orthopedics divestiture relative to the partial quarter benefit from ACell and a higher mix of international revenue, which has a lower gross margin than of our domestic revenues. The higher manufacturing costs were mainly due to higher idle capacity relating to the impact of COVID resurgences on our workforce.

Our adjusted EBITDA margin was 25% compared to 21.4% in Q1 of 2020. Slightly higher revenue and lower operating expenses drove this year-over-year increase. Given the ongoing risk of COVID, we continue to manage our expenses, expenses closely in the first quarter, which contributed to the stronger profitability. We expect to increase spending in the balance of the year to support key growth initiatives. First quarter GAAP EPS was $0.53 compared to $0.11 in the prior year. GAAP net income for the first quarter included a gain of $42.9 million from the divestiture of the Orthopedics business. Adjusted EPS was $0.69 in the first quarter compared to $0.48 in the prior year, reflecting an increase of 44%. Operating cash flow was $69 million in the first quarter and free cash flow conversion was over 100%, reflecting good working capital and lower capital expenditures. We expect capital expenditures to increase over the balance of the year.

Now if you turn to Slide 9, I’ll provide a brief update on our capital structure. Our balance sheet remains strong after completing the Extremity divestiture and ACell acquisition, with approximately $409 million of cash on hand. Our total debt as of March 31st was unchanged from December 31st, and our leverage ratio improved to 2.8 times. Turning to Slide 10. I’ll provide an update on our consolidated revenue and adjusted earnings per share guidance for the second quarter and full year 2021. Second quarter revenues are forecasted to be in the range of $372 million to $378 million, representing reported growth of 44% to 46% and organic growth of 42% to 44%. Our second quarter revenue guidance reflects some COVID-related variability.

For the full year 2021, we are increasing the bottom end of our revenue guidance to a new range of $1.525 billion to $1.535 billion based on our revenue performance in the first quarter. The new range represents reported growth of approximately 11% to 12% and organic growth of 12% to 13% over 2020. At this time, given some continued COVID variability, we are leaving the top end of the guidance range unchanged. Reported revenue guidance includes a second quarter estimate for ACell of approximately $20 million, with no change to our full-year estimated range of $83 million to $88 million.

Turning to adjusted earnings guidance for 2021, and based on the revenue ranges I just provided, we expect second quarter adjusted EPS to be in the range of $0.63 to $0.67, which represents double-digit year-over-year growth. We now expect full-year 2021 adjusted EPS to be at the higher end of our previous guidance range of $2.86 to $2.93. Now, I’d like to turn the call over to Glenn to provide a brief recap of where we stand with our 2021 growth drivers. Glenn?

Glenn Coleman

Thanks, Carrie, and good morning, everyone. Please turn to Slide 11. As Pete indicated, our strong first quarter results increase our confidence that we’re on track to deliver our 2021 targets. Clear signs indicate the environment is gradually improving, and we were pleased to see the beginning of a recovery in capital and instruments. Our first quarter performance was bolstered by many of the recently launched products, including DuraGen and CUSA Clarity in Japan, new Certus programmable valve configurations, our electrosurgery generator and others. COVID has disrupted what is normally a multiyear benefit from new products, and we’re pleased to see these recently launched products gaining momentum.

As Pete mentioned, we’re on track to introduce several new key products later this year, including the global launch of CereLink, our next-generation ICP monitor, followed by the controlled release of the Aurora Surgiscope, a new platform for minimally invasive treatment of brain tumors. While its revenue contribution will be small in 2021, Aurora addresses an important unmet need for neurosurgery and will be a significant contributor to our long-term growth targets.

In our Tissue Technologies business, we look forward to a more normal environment as we move through Q2 and into the second half of the year. As an example, although surgical reconstruction has not contributed to our growth recovery thus far, we expect that the change in the latter half of the year as a result of the ongoing recovery of elective procedures and our prior investments in manufacturing and supply. The integration of ACell has gone well, and we’re on track to complete all critical integration activities in the second quarter. The complementary nature of this portfolio improves our competitive position. And when coupled with recent commercial investments and new marketing and digital customer outreach programs, strengthens our confidence that revenues will accelerate over the course of 2021. We also view ACell’s core sign-based technology as an expansion platform for future products and clinical indications.

Outside the U.S., we continue to execute well. Our first quarter results were strong and demonstrated a global recovery from the COVID-related deferrals we experienced over the past year. For the balance of 2021, growth will continue to be led by Japan and China, while Europe and our other markets should improve gradually. To wrap up, we’re executing on our 2021 plan with a strong start to the year. We’ve accomplished much across the organization over the last 12 months, and these achievements increase our confidence that we’re on the right path. We look forward to a deep dive into our long-term strategy, our enhanced operating model and detailed market and portfolio segment reviews at our upcoming May 20th Investor Day. That concludes our prepared remarks, thank you for listening. Operator, would you please open the line for questions?

Question-and-Answer Session

Operator

Thank you, ladies and gentlemen, at this time, the floor is open for your questions. [Operator Instructions] Our first question comes from Shagun Singh with Wells Fargo.

Shagun Singh

Good morning. Thank you so much for taking the question. So I guess one on guidance and one on capital. So with respect to guidance, I believe it implies lower growth on a stacked two-year basis in the second half versus Q2. And also, if you look at seasonality, it appears that you’re expecting just modestly higher sales in the second half versus the first half. So, how are you thinking about second half growth versus Q2? What’s baked into your guidance for recovery and backlog? I believe it still contemplates organic growth of about 3% to 4% over 2019, which is below your LRP of 5% to 7%. So, any commentary there would be helpful.

Peter Arduini

Yes, Shagun, it’s Pete. I’ll start and just say, again, just to frame up, as we’ve said from the beginning of the year, we’re starting to see month-over-month improvement in procedures, for sure. And our confidence is increasing with the vaccination programs, particularly in the United States, but also confidence that it’s going to get addressed around the world at the right level that we’re going to see that in our business. And just to remind, what we look at in particular and what was the challenge last year was that ICU beds were being held either in reserve or actually being fully utilized by very sick patients. And with two-thirds of our business impacted by the need to have an ICU bed available, that had a major impact on us. We don’t really see scenarios coming back where the ICU beds, in the vast majority of our markets, are that compromised from our perspective.

So even if spikes do kick up, which we think is going to come – it’s going to happen here and there as the vaccines roll out, that will still see an ongoing improvement. And the second part to this as well is that we had a strong performance in EPS to begin. But we’ve been, I would say, just prudent in our spending approach here until we see the uptick. And the good part is we have some exciting long-term things to spend money on, such as Aurora, the rollout of the monitors, a lot of things in the TT portfolio, which we’re going to step up. And so Carrie, maybe you want to address some of other Shagun’s points?

Carrie Anderson

Yes. We continue to expect a gradual recovery for the remainder of the first half. So, as we think about Q1 into Q2, we do expect some sequential improvements as we move into the second quarter after a really nice Q1 performance. So the second half, though, as you were asking, will be sequentially stronger than the first half, for sure. When we had baselined our guidance back on our February call, we had talked about overall 3% to 4% growth on an organic basis compared to 2019. And so if you look at our Q1 actuals and our Q2 guidance range that we’ve given you, the implied second half guidance compared to 2019 represents about 5% growth against 2019 and about 6% – a little bit more than 6% growth against the second half of 2020. So, we do think we’re positioned well going into the second half of the year.

Shagun Singh

That’s really helpful, thank you. And then just a follow-up on capital. Could you comment on U.S. versus international capital dynamics? I think you called out Advanced Energy was driven by international. And then any commentary on large versus small cap? And then just the order visibility that you have for the rest of the year. Thank you.

Carrie Anderson

Yes, I would say that about 75% of our beat in revenue in this quarter was really driven by the better-than-expected sales performance in both capital and instruments, and really saw that in the last part of the quarter, particularly in March. Our capital sales in international were quite strong, and it was driven by CUSA, particularly in Asia, as I mentioned, Japan, China and some of our indirect markets in Asia as well. For Japan, one of the things to point out is their fiscal – their hospital’s fiscal year ends in our first quarter. So it was particularly strong as it was their last quarter for their fiscal year ending. And then for China and Greater Asia, we go through an indirect model. So our distributors are certainly anticipating the recovery of capital in their market. So seeing some nice order demand here in Q1 for that capital. Certainly, the international capital was strong both for small capital as well as CUSA.

In the U.S., overall, our capital was positive, but it was weighted to small capital. So think of Mayfield, dual lighting, those things really bounced back nicely in Q1, but our CUSA sales in Q1 were still down double digits. Our pipeline for CUSA is still incredibly strong. So again, we don’t think there’s any competitive landscape changes there. It’s mainly just to continue to expect more of a normalization of capital in the U.S. in the second half of the year. Anything else you want to add there, Glenn?

Glenn Coleman

Yes, I would just add maybe one or two additional points. Shagun, you probably remember, but last year in the first quarter, we changed our go-to-market strategy with our General Surgical business and our capital business in Japan. And that was done really well, and that’s some of the benefits that we’re also seeing here in the first quarter. We actually had a record quarter in Japan in terms of capital for the reasons Carrie mentioned, but we also now have built a commercial team that’s selling these general surgical instruments in capital, and we’re seeing the benefits of that. The other point in terms of some strength is, in some of our key direct markets in Europe, we did see an uptick and a recovery in capital. Germany would be a good example and so our direct markets in Europe are showing a gradual improvement, even some of the indirect markets. But on the whole, we had a really strong quarter outside the U.S. with capital.

Shagun Singh

That’s really helpful, thank you for the color.

Operator

Thank you. Our next question comes from Ryan Zimmerman with BTIG.

Ryan Zimmerman

Good morning. Maybe just a follow-up on Shagun’s question. On EPS guidance, I mean, you beat by about $0.12. I appreciate that you’re going to come in kind of at the top end of the range there, but you didn’t move the range. And so maybe just help us understand a little bit of kind of what you think you may give back for the year and if that’s just kind of a more normalized cadence of expenses. That’s my first question, and I’ll have a follow-up.

Carrie Anderson

Yes, I mean, our expenses, I would say we did constrain spending. We wanted to have line of sight on revenue. And as a result of that, spending was a bit slower as we started the year. Obviously, it benefited the EPS line. But as we think about expectations for the balance of the year, spending will move up. That is in line with my expectations. So, part of the reason why the Q2 EPS guidance of a range of $0.63 to $0.67 is below Q1, is that our expectation is, is that spending is going to start to ramp up here, particularly as we support our second half product launches that both Pete and Glenn have talked about. We have our new CereLink launch that’s coming out as well as other long-term growth initiatives here. So, that’s the reason for being – guiding up toward the $2.93 high end of the guidance range. That spread is about $0.06, so it’s about half of the upside that we got in Q1, basically saying that we can be toward the high end of the guidance. And the balance is just spending that we are going to do in the balance of the year.

Peter Arduini

And Ryan, as you can imagine, we preserved a significant amount of our R&D programs, marketing initiatives. We kicked off a digital platform approach, both internal as well as for market-based last year, but we did it on a kind of step one approach enough to get things off the ground or preserve. And we wanted to make sure, as Carrie mentioned, as we went through Q1, we didn’t get ahead of ourselves in case the vaccine rollout in the U.S. wasn’t as effective as it seems to be. So we really held back expenses here in Q1. And I think at the Investor Day, you’ll get a much better insight into where we’re going to be applying some of those monies and then how those benefits in 2022, 2023 will roll out. We actually have a really nice lineup of products as well as program investments that we’re going to put the money against.

Ryan Zimmerman

Appreciate that. Maybe turning to the wound care business for a moment. Absent ACell, I think you’re about up about 3% or so. So, I’d love to understand kind of characterize some of the components of your wound care business in relation to the market. I mean, just the puts and takes for inpatient wound, burn, outpatient wound and kind of where you’re at. I mean, whether you’re above that, whether you’re below that within those components, given the 3% growth that we saw this quarter.

Glenn Coleman

Ryan, it’s Glenn. We did see a recovery in our wound care business here in the first quarter. And a lot of our products like PriMatrix are doing well, along with our skin products. I would just say we’ve got increased focus across the team on the inpatient side. So, that’s driving some of this growth. And on the outpatient side, we still have a very strong presence. So, we don’t break down the growth between inpatient and outpatient. But I think some of the changes that we’ve made in having a bigger presence with ACell in the portfolio, has helped us put up some growth organically here in the first quarter, and we would – we expect these trends to continue here into the second quarter.

Carrie Anderson

I would add that if you look inside wound reconstruction, our surgical reconstruction business is inside that number. And we did see still some negative growth there in the first quarter. That – if you think about those procedures as well as hernia and breast reconstruction, those are still more elective in nature. And so we still saw a COVID impact within that piece of the wound reconstruction business. So if you kind of parcel that out, the rest of the business actually did quite well given the fact that we still had some declines in our surgical reconstruction business that we expect in Q2 to get back to just some nice growth.

Ryan Zimmerman

Well, thanks for taking my questions and congrats on the progress.

Operator

Thank you. Our next question comes from Dave Turkaly with JPM Securities.

Dave Turkaly

Great. Good morning. Hey, how are you guys? Good. Just given your position sort of in region and biologics, I’d like to get your thoughts currently on the environment out there. I know we all saw the statement you put out in response to the FDA safety communication. But I’m just curious what you think that means. Is anything changing? And then sort of how doctors are viewing biologics versus, say, synthetics and other options out there. Any shifts or anything you’d note that’s changing or improving? I’d love to get your thoughts.

Peter Arduini

This will clearly be a topic that we’ll spend some time on, on May 20th. So, pardon my advertisement here for you all to join, I think we’ll touch on this. But we’re actually, I would say, moving into a phase within tissue reconstruction, whether it be for a chronic wound, an acute wound, a hernia repair, potentially upper chest wall or breast reconstruction, peripheral nerve that – it’s definitely moving into a phase here where you’re seeing much more acceptance as a primary tool. Even in cases of trauma, where the use might be a flat first, again, using blood flow from another part of the body to patch, now using actually an ADM or some other type of xenograft is being used.

And with the use of synthetics over the past few years in other areas, obviously, there’s some notable notorious areas where there’s been seen body rejections and things, there’s definitely an uptick in the use of a biologic platform that integrates, granulates into the body. And we think we’re just really well positioned to take advantage of it. It’s a really important part of our strategy, is to have that broad portfolio.

To some of the previous questions, I mean, we are still only under 25% outpatient to our doctor’s office focus at the most. Most of ours is inpatient-focused and deals with very sick and complicated cases. And I think you’ll hear more from us, particularly on the May meeting and stuff about how we think we can leverage that platform, either the SurgiMend or the PriMatrix our traditional IDRT platform and now also this UBM ACell platform to touch a lot of these different disease states. And we also believe that, just like in other modalities, you’re going to start seeing combinations, whether it be porcine with bovine, a combination of amniotic with other areas, and this concept of a toolkit that gives a reconstructive surgeon many options is what we’re headed toward. And we just believe that, I think in the next few years, you’re going to start seeing this uptick really enhance here in the use of these products.

Dave Turkaly

Thank you for that, really. Look forward to that meeting. Just a quick follow-up. And Codman, you mentioned that strength internationally was mostly Asia and tissue was more Europe. I’m curious, is that COVID related? Or is that cmore the mix? Or why would – why was international stronger in tissue? Is it because of how sick the patients are? Just your thoughts there. Thank you.

Peter Arduini

Glenn, why don’t you take it?

Glenn Coleman

Sure. So first and foremost, I want to complement our teams outside the U.S. They have been resilient and shown tremendous grit through the last 12 months. And Dave, let me just give you some context. Organically, versus the first quarter of 2019 a non-impacted-COVID quarter, we grew over 11% organically outside the U.S. And so if we look at where the strength is coming from, Japan and China, just off the charts in terms of growth. Japan up over 70%, China up over 20%. But more broadly speaking, we’re even seeing good growth in Canada, Australia, New Zealand and our European direct markets, where those markets actually grew in the mid-single digit range, and strength in the UK and Germany.

So it’s been pretty broad. But when you look at the growth in places like Japan and how do you grow over 70% versus a normalized quarter in 2019, it’s largely driven by these new product launches. We launched DuraGen over a year ago. We’ve launched recently an electrosurgery generator, an irrigator. I mentioned the Go Direct strategy with our General Surgical business. We’ve added more specialists in the CSF management business, and we’re seeing really good growth with our programmable valves. And we have new product launches coming behind us.

And so the growth has been driven really by new product launches, some of the channel changes made and investments. And it’s not just Asia. I mean, our European team is actually driving some really good performance. And yes, we are seeing a gradual recovery in these markets. The one area I would say is still lagging is the indirect markets where we sell to distributors. And that was actually down high-single digits versus 2019, so that has not yet recovered. But you can imagine that once that does come back, which we’re expecting in the second half of this year, we should still see really good momentum with our international business. And I’m really proud of what the team has done. These numbers are stellar from my perspective, given the headwinds of COVID, given the challenges that we’ve seen and just incredible performance.

Dave Turkaly

Thank you.

Operator

Thank you. Our next question comes from Kaila Krum with Truist Securities.

Kaila Krum

Great. Hi, guys, thanks for taking our questions. So I guess if I look at what you guys did in the second quarter of 2019, which I’d say is more of a, I guess, a normal year than 2020, you put up $384 million in sales. Now you’re guiding to $372 million to $378 million in the second quarter. So, obviously, you’ve spun off the Extremity business, you’ve added ACell. Can you just talk about some of the puts and takes though relative to 2019? And just how ultimately you arrived at that second quarter guide?

Carrie Anderson

Yes. The second quarter of 2019 was a really strong quarter for Integra. We had over 6% organic growth. So it’s a really tough comp, Kaila. So a couple of things just to remember when you look at the Q2 2019 numbers, is that we had really – and private label was particularly strong in the second quarter. It can be rather lumpy.

And so Q2 was really strong in 2019 with private label, a really nice quarter for our wound reconstruction channel. And that was our original launch of CereLink, was also in the second quarter of 2019. And obviously, our relaunch of CereLink is happening here in the mid-year for 2021, so you don’t have any CereLink sales to compare against.

So it’s just a really tough comp, so I can appreciate the question, but I would say, as we think about Q1 into Q2, that’s where we’re focused and continuing to drive some of that – those recovery trends in many of our procedure-based businesses that were still a little bit weaker in Q1, and we see those starting to come back in a recovery into Q2. And overall, I think those trends will continue as we move into the second half of the year. But to answer your questions, it’s a really tough comp relative to Q2 of 2019.

Peter Arduini

And I think to Carrie, your point you made earlier, and Glenn. I mean, we’re still cautious about COVID and certain, obviously, countries and their ability to kind of bounce back. Even with the capital performance we had in the first quarter we’re still not seeing the floodgates open on capital spending in U.S. hospitals yet either. And so…

Carrie Anderson

Yes, to that point, we do expect a sequential decrease in capital from Q1 to Q2. I mean, there was just a – we get questions about pent-up demand. And certainly, I would say there’s certainly was some pent-up demand as it relates to capital in the late Q1 here in March, in particular, as we talked about. I think our capital sales will moderate slightly as we move from Q1 into Q2, particularly in the international sales. But I still think we’ll expect a gradual recovery in the second quarter.

Peter Arduini

Yes. So we’re being prudent on it. I mean, let’s hope that it picks up faster, but we think this is the appropriate call at this point.

Kaila Krum

Great. No, that makes a ton of sense, and that’s all really great color. So, just I guess a follow-up on Acell. Can you just talk about how that integration is going so far relative to your earlier expectations? And then just what sort of blocking and tackling items you still have to work through in the coming quarter. Thanks for taking the questions.

Glenn Coleman

Thanks, Kaila. I’ll take this one. The integration of Acell is going pretty much as we expected. So, if we look at the first quarter, we did accelerate a lot of the commercial activities, and that’s now complete. Obviously, when you do that, you do see some disruption, but we head back into our expectations and our guidance for the first quarter. So, we were pleased with how we ended up the quarter.

We’re still seeing a COVID impact on this part of our business as well, and that will continue into the second quarter. And based upon our guidance, I would say for Q2, we are expecting to see a sequential improvement, obviously, partly due to the fact we had a full quarter, but we’re also showing an improvement in the base business as well sequentially. So, we are expecting to see this pick up, and we’ll see better growth certainly in the back half of the year.

We just recently completed the order-to-cash conversion. That was a big milestone for us here in April. What that means is all orders are now going through our common ERP platform. And we’re also now shipping products out of our centralized distribution center. And so, that’s really good work, very fast integration. And so all of the big milestones are here essentially behind us. We still have a few things to get done, but the commercial integration is complete, a lot of the heavy lifting around the IT conversion is now done and we essentially be complete with everything by the end of the second quarter. But so far, everything is pretty much as we had expected in terms of this acquisition.

We’re really excited about potentially leveraging some of these products in terms of new indications down the road. So, we’re looking at the R&D pipeline to figure out how we can take some of this porcine technology and build out a broader platform across our business as well. Yes, I would have to say this is probably one of our fastest, well-executed integrations. We’ve captured all the synergies that we had intended to capture, and we’re on our way here as far as the ramp-ups.

Kaila Krum

All right, thank you.

Operator

Thank you. Our next question comes from Robbie Marcus with JPMorgan.

Glenn Coleman

Good morning, Robbie.

Robbie Marcus

Hey, good morning. Congrats on a nice quarter. I want to spend a minute on free cash flow. You touched on it briefly, but it looks like CapEx was at a really low level. So was just hoping to get some thoughts on how you see free cash flow progressing for the year and where you think it should settle out as a percentage of adjusted net income for 2021.

Carrie Anderson

Yes. You’re right. Our CapEx, just like our OpEx, started a little bit slow, and some of that was intentional as, again, we wanted to give more clarity on our top line as the revenue recovers. So certainly, the free cash flow benefit from that. So I would expect our capital expenditures will start to move upward as we move through the balance of the year as we have some nice projects. And I would say my capital expectation for the year is probably around $70 million.

And that’s really in line with 2019 levels. So, that’s kind of where I’m shooting for, is we only had less than $40 million of spend in capital last year because of COVID. So there certainly is some pent-up demand from the teams on wanting to do some improvements in some of our key facilities to support our growth. So we’ll be allowing that to come back in as we balance through the year here. In terms of free cash flow conversion, I’ll talk more about that at the May 20^th event. But I do expect that we can get upwards above 70% free cash flow conversion for the year, Robbie.

Robbie Marcus

Okay, and maybe just a quick follow-up. And I know someone asked on it before, I just wanted to try and get a little more color, on operating margin progression throughout the year. It looks like, if I’m doing my rough math right, that the full year operating margin to get to the top end of the EPS guidance will be somewhere around the first quarter or maybe even a little lower for the balance of the year. So just any thoughts on cadence as you move to Q3, Q4, just so we could all get our models straight. Thanks.

Carrie Anderson

Yes, for sure. I mean, certainly, as part of the guidance for EPS in the second quarter, I mentioned that spending is going to increase, and so that’s going to put some pressure on the EBITDA margins from – sequentially from Q1 to Q2. So, I would expect you should look at lowering your EBITDA margins in Q2 relative to Q1. I think a couple of factors that I wanted to maybe talk through. For the first half, we have seen some impact on gross margin as it relates to COVID.

So on my February call for gross margins, we – I had expected gross margins to be lower than 2019 and 2020, mainly because of the timing of the Acell acquisition and the divestiture of Ortho. But I would say there was a couple of other elements that were drivers of our Q1 gross margins, and one of those relates to the strong international sales that makes an unfavorable mix in our gross margins because the international margins are lower than our U.S. base margins. But the other factor was related to COVID, and this is going to have a little bit of lingering impact as we move into the second quarter. So when we talk about COVID, a couple of impacts.

First of all, as it relates to our employees, In some cases, there’s been an impact with COVID and there’s quarantining that needs to happen, whether it’s a direct exposure or a family member that’s exposed. So we’ve had a fair amount of disruption as it relates to our own workforce dealing with COVID in the first quarter that I think will, hopefully, improve in the second quarter, but we’re still seeing some lingering impacts there. The second piece that I wanted to mention is related to staffing.

I’ll use Mansfield as an example. Our path from Mansfield is to get off that TMA agreement by the end of the year. Our expectation is that we will move off of that at the end of the year as timed. But it is impact – COVID has impacted our ability to ramp as fast as we wanted because we simply can’t get enough folks to staff the facility.

And in some cases, the government extension of benefits has impacted our ability to find qualified folks. Now, we are rectifying that. We’ve got our own incentives in place now, and I think we’ll be back in full staffing there at the end of the second quarter. But I think gross margins will be a little bit tempered here in the first half of the year. And so as you think about your modeling, just keep that in mind, too, as you think about the Q2 guidance I gave you for EPS.

Robbie Marcus

That’s really helpful. Thanks for all the color.

Operator

Thank you. Our next question comes from Steven Lichtman with Oppenheimer & Company.

Steven Lichtman

Thank you. Good morning guys. I wanted just to get your latest thoughts on CereLink with the launch happening, coming up here in the second half of the year. Can you give us just sort of updated thoughts on the market opportunity there? And how should we be thinking about sort of the ramp of that opportunity in the second half and then as we go into 2022?

Glenn Coleman

Steve, it’s Glenn. And obviously, I’ll take this and just give you a little bit of perspective here. It’s a midyear launch for us. It’s a global launch. Good news is we just got the CE mark for Europe just a day or two ago, so that’s good news. And we’ll be launching in Europe first before the U.S. market. But again, if we look at this product, this is one we’ve long-waited to launch because we divested Camino back when we bought the Codman business.

So, if you just look at that particular product when we sold it, it was about $30 million of annualized sales, just to put this into perspective. So obviously, it’s going to take us time to ramp, but that just gives you some sizing of what we would expect here. But clearly, this is going to be 1 of the key growth drivers for us for the CSS business in the back half of this year and then going into next year. But again, it’s a midyear launch, it will ramp in Q3 and Q4. We’re going to launch in Europe first. But it’s a product that should be driving tens of millions of dollars once it hits full peak year sales.

Peter Arduini

Yes. And if you remember, Steve, I mean our previous platform was probably about $30 million at – on an annual kind of level, what that generated. But I think the interesting thing about here is that, whether it be our legacy installed base that we picked up as part of J&J, which is probably 15 to 20 years old, and any competitive installed base is youngest is probably eight to 10 years. There really isn’t any other new competitive products coming out in this window of time. And we believe the installed base is hungry for, obviously, new technology that can allow data transfer, that can allow other capabilities.

And in the neuro ICU, intra-cerebral pressure monitoring is kind of the gold standard and being able to integrate that data and other reports, things that we’ll be able to do on a new platform, are very important. It is a capital acquisition, but it’s smaller-capital. And typically, if you’re in a larger ICU, you don’t just buy one, you may outfit your whole department, could be eight, 10, 20. So we have good feedback on it. We had obviously a challenge last year with some componentry, All that’s been corrected. So, we’re really excited about getting up and running here in the second half.

Steven Lichtman

Great. That’s helpful. And then just secondly, you mentioned Aurora Surgiscope on track as well. Limited launches, you mentioned in the back half of this year. What are the types of things you’re looking at during this limited launch from a clinical or procedure perspective? And should we be thinking about this potentially turning into full launch as we turn into 2022?

Peter Arduini

Yes, Steve. So again, another advertisement for our Investor Day in May 20. We’ll spend some time, specifically, Mike McBrain will go into it in more detail. But again, just to remind you, we do have two key clinical platforms that will come out of that acquisition that we have now developed much further internally. One is a product to be used for intracerebral hemorrhage. That’s a product that’s a few years away from being ready to be in full launch.

And the near-term product, which we’re discussing, is to provide access for minimally invasive neurosurgery. And again, the point here is, almost all of the key procedures today involve a craniotomy of some scale. And so the trauma created to get to the tumor, in some cases, can be as invasive as the removal of the tumor itself. And what this product is going to be focused on, the study, is particularly deep-seated tumors. The deeper into the brain, intuitively, you would appreciate, the more healthy tissue one needs to access to remove the challenged area. And so a product like this, that will allow working through a small channel, is a big deal.

So describing, defining protocols around those types of tumors will be an important part of it as well as evolving the instrumentation. It works out well to our favor, that we have an instruments business. And customization of instruments to work through this channel, customization of tips for an ablation device like CUSA, all that will be part of this first level. This is all covered under the DRG, so we don’t believe there’s a big reimbursement debate. But as you can imagine, it’s quite a change in practice for a neurosurgeon. And so we don’t want to underestimate the time it will take to do the conversion. But a lot of our – what we’re going to be looking at and understanding is going to be focused on that.

I would say also, we have high hopes that this will very much be a global platform that will have as much applicability in Asia and in China or Japan market or Western Europe as it is in the United States. And as you know, many of the products that are launched that have high tech to them typically end up being a U.S.only because of the cost base. There’s lots of reasons we’ll go into further we think this is actually just the opposite and can be quite an enabler for emerging markets. So stay tuned for May 20^th, Steve.

Steven Lichtman

Great. Thanks, guys.

Operator

Thank you. Our next question comes from Matt Miksic with Credit Suisse.

Glenn Coleman

Hey, Matt.

Matt Miksic

Hey, good morning. Thanks so much for taking the question. So I had one follow-up on the cash flow conversion and the dynamics of sort of your cash flow, working capital profile after exiting the Extremities Orthopedics business. Wonder if you could talk a little bit about what that does, if anything, in terms of flexibility or conversion or efficiencies around your capital and consignment and so on? And then I had 1 follow-up on wound care.

Carrie Anderson

Yes. I mean, I certainly think it strengthens our opportunity on the cash flow side without the Ortho business. The Ortho business was a pretty big use of cash as we think about managing that business. So, as I think about 2021, I do expect my cash flow to be higher, both on an operating basis certainly for 2021 over 2020. So, I think we’ll see some nice recovery there.

As I mentioned to Robbie, we’ll see some CapEx increasing relative to 2020. So maybe free cash flow won’t be as strong, but still, I would say, strong for us. The other thing you needed to remember, and many other companies are seeing this, is we do have some cash requirements as it relates to EU-MDR. That’s a big initiative over the next few years. So, you just need to factor in consideration that some of our cash will be going for that new directive. But I think in terms of where we are on our balance sheet at 2.8 times, lots of flexibility as we think about capital allocation, whether that is reinvestments in our business.

An important piece is continuing to invest in R&D in our clinical studies as it relates to some of the things that Pete talked about, but also part of our tissue technology side of the business and certainly want to be opportunistic on the M&A side. And we think the cash flow strength that we’ve had here early in the year, coupled with my expectations for the balance of the year, even with funding EU-MDR requirements, gives us a lot of options in terms of thinking about capital allocation going forward.

Matt Miksic

That’s great and very helpful, thanks. And then just a follow-up on wound, and maybe the market landscape there, the competitive dynamics there. In particular around some of the changes that have been sort of – coming slowly, but being put in place more sort of specifically in the next six to 12 months around non-enforcement – expiration of non-enforcement of some of the injectable products and manipulated products. I know that, that doesn’t necessarily cross over maybe some of your biggest current – products currently.

But I’m just wondering, is there anything that you can speak to that would describe? Are we seeing consolidation of vendors? Are we seeing folks dropping out? Are we seeing a higher barrier to entry evolving in the space? Or a greater focus on outcomes-based payments? Pete, you’ve talked about some of these things in the past, so would love to just get your perspective on those market dynamics and where you stand.

Peter Arduini

Yes, Matt, I think, again, if you think of our makeup today, unlike some other slightly smaller public companies than us that are focused specifically in wound care, we’re definitely a more diverse platform. Again, so we play in the chronic wound space, but it’s still quite a small part of our business. Our acute space, our burn, trauma, and then other areas out of wound care, as we talked about, hernia repair, nerve, all those. I think, look, the reality of it is there’s definitely an up-regulation that’s happening around the world. And it may not specifically be in regulatory requirements, although the points that you made relative to BLAs for amniotic products and things of that nature, is a good example.

There’s also just the desire for more enhanced clinical data. And so yes, I do think the water will continue to get deeper, meaning on the spend rate for both of those. And again, for us, it’s really about focusing on areas where we have differentiated technologies. And I do think this combination of technologies is going to continue to play out in the future, whether it be an amniotic with the dermal matrices. It might be actually some type of epidermal acquisition complemented with a dermal structure. It might be the patient’s autologous cells that the doctor actually integrates back in. All of those are things that are evolving, which comes back to the point that having multiple platforms that you can be in a position to offer different solutions, we think, is going to be quite important for us.

I think there will be some opportunities that open up as regulatory requirements change, who has what are products available. We’ve obviously seen certain communications by the FDA most recently to areas where there are no indications and there’s significant off-label use. I think all of those, over time, are going to move toward on-label indications, and different companies will be performing studies in that, including us.

So, we think the dynamic change is obviously one of those things that, if you make the right moves, this could be a very profitable and fast-growth area for those companies that can move that way. And obviously, us exiting Orthopedics and focusing on TT, that’s really one of our key drivers in the future. And again, we’ll spend more time on this in detail on the May 20^th Virtual Investor Day.

Operator

Thank you. Our next question comes from Matt Taylor with UBS.

Glenn Coleman

Hi, Matt.

Xuyang Li

Hey, guys, This is actually Xuyang in for Matt. Thanks for taking that question. Maybe just on the M&A environment. I guess just on M&A in general, good to hear the Acell integration is going ahead of schedule. I was curious on your views on your interest and ability in doing more deals this year. And also thoughts on valuation of assets that’s out there.

Peter Arduini

Yes. I mean, just again, as part of the Integra strategy, which we’ve talked quite a bit about, Carrie mentioned 2.8 times, we’re in really good shape to be able to do tuck-in deals. And so we’re clearly looking at technologies that could build out our capability. Both technology deals that may be pre-revenue, but obviously as well as deals that look a lot like an Acell. To your point, some of the valuations in the public markets are quite high, and so that’s a consideration, and obviously, at some level, a governor on what we’re willing to do or not do, but we also have strong relationships within the whole private market area.

It’s one of the things that we’ve focused on as a leadership team, is to continue to develop those. And I would say we see some nice opportunity this year for tuck-in deals to either add to our existing portfolio or enhance the edges of clinical areas that we believe we’ve got nice synergies with the core of our business. So I believe this year, I mean, I think you’ll see us continue to focus on opportunities to bring in products that are going to be able to grow the top line for us. Glenn, you may want to add some other comments?

Glenn Coleman

Yes. No, I would just add that outside the U.S., we’re also looking at doing exclusive distribution partnerships, which really help to fill gaps in our portfolio where we have those, get this to market much faster and really requires no upfront investment. So this is going to be a key part of our international strategy. And we’ve done two already in the past six months. I’m expecting that we’re going to have hopefully a couple of more of those done.

And again, the nice thing about it is you get products quickly to market, we can leverage our large commercial teams, like in Japan and China, as an example. So a lot of really good benefits of this strategy. And so we’re just starting to scratch the surface. I know we’ve got two done, one in the Tissue business, one on the neuro business. And I’m expecting we’re going to do a few more here, hopefully in 2021.

Xuyang Li

Great. Thanks for the color.

Glenn Coleman

Thank you.

Operator

Thank you. Next question is from Anthony Petrone with Jefferies.

Anthony Petrone

Thanks, good morning. One follow-up on Tissue products and then a follow-up on ACell. On Tissue products, Pete, just kind of want to confirm on the morselized amniotic products, if the Integra products actually fall under the 36-month stay option that the FDA has out there. And if not, are those products included in guidance? That would be the first question. I have a follow-up on ACell. So just to repeat. I know I have –

Peter Arduini

I just want to make sure you’re okay there.

Anthony Petrone

Yes. That’s the work-from-home situation in Astoria, Queens here. So, I apologize for that.

Peter Arduini

No, no. No problem, just kidding with you. Look, we are not factoring in that, relative to the injectable products that there’s going to be any type of extension in our – in our way we’ve been forecasting. I mean, if an extension did play out, it would have some small benefit to us. But us, unlike maybe some of the other players that are more focused specifically in the amniotic space, and that’s their primary platform, it’s still a rather small component of our business. But we haven’t factored in any extension benefit at this point in time.

Anthony Petrone

Got it. Got it. And then on ACell, the follow-up would be when we sort of look at that business exiting in 2019, around $100 million. It had a 13% growth rate and the guide here is $80 million, $83 million. And I think last quarter, guide was 5% to 7% growth. So maybe just a recap on how much was COVID-related in that delta? How much is dis-synergy, if any? And sort of what is the path to getting that business back to low-double digits?

Carrie Anderson

Yes. Maybe I’ll start with just the math on this. So $100 million was their 2019 sales. About $95 million was their 2020 sales. And where we got comfortable with the guidance range of $83 million to $88 million is essentially understanding we didn’t have ACell for the whole year. Our transaction closed on January 20, so effectively 11/12 of $95 million is roughly $87 million.

And so, we bracketed our range of $83 million to $88 million based on the fact that, yes, we’re still impacted by COVID. But also, we knew we were going to try to move fast on the commercial integration activities. And so we wanted to anticipate within those guidance ranges some anticipated sales disruption. So with that, maybe I’ll ask Glenn maybe to comment as well.

Glenn Coleman

Yes. No. I mean I think the point is, yes, obviously, you have some disruption as you go through a channel integration, but it’s been quick, it’s been as we expected. And keep in mind, this was a business that was not making money as a stand-alone company. And so in our hands, if you look at their total operating expenses of $80 million, we think we could take out about 40% of that, and we’ve taken out a big chunk of that already through the commercial integration.

So we will see a return to growth. We expect this over the long term to be growing in mid-to-high single digits, I would say, once we get fully integrated and start selling in a normal environment post-COVID. But nothing has changed relative to how we see this business.

Peter Arduini

Yes. Just two points to add. I think over a third of that business ties into hernia, which, our hernia business, as well as theirs, has been slower to recovery because those patients tend to be more selective, obviously, than a lot of other things we do. We see that all coming back. And one thing that’s super exciting is the fact that a big part of this acquisition was this micro matrix or powdered format is that we have the indications to be able to communicate and promote this with not only the ACell tissue-based products, but also with IDRT, PriMatrix and used in conjunction. And so again, another example of how multiple products can be used together, depending on the type of the wound. And that’s really just starting to take place as we’ve completed integration, have people trained, realigned whatever territory work we need to realign on the ACell side into our business. And so we will see that acceleration take place more so in the second half.

Anthony Petrone

All right. Thank you very much.

Operator

Thank you. Our next question comes from Matt O’Brien with Piper Sandler.

Glenn Coleman

Good morning Matt.

Korinne Wolfmeyer

Hi, this is – good morning. This is Korinne on for Matt. Thanks for squeezing me in.

Glenn Coleman

Hi, Korinne.

Korinne Wolfmeyer

So following up on the CereLink launch, thanks for all the color earlier, but is there any way you can quantify how much of that is actually baked into guidance for the year?

Carrie Anderson

I would say that – we typically wouldn’t talk about a specific product, but I would say, generally, our expectation is that new products, taken in aggregate with all the new products, should represent about 25% of our organic growth. And so that’s our anticipation in the second half, is that combined with CereLink as well as the other products that we launched pre-2021, many of those being launched in the middle of 2019, will continue to be part of our new – NPI, new product introduction, type of amount. It’s about 25% of our organic growth.

Korinne Wolfmeyer

Awesome, thank you. That’s really helpful. And then just lastly, on the private label business, could you provide some color on what the growth outlook looks like there?

Carrie Anderson

Yes. I mean, generally, private label will grow mid-single digits is what we – I would say, normal run rate. It can be lumpy. In Q1, obviously, our private label business was slightly down. I wouldn’t attribute that to anything else other than just some COVID impact and then just some timing of schedules. But I would expect that you’ll continue to see some recovery there in private label, but nothing there to call out as any particular item that’s driving that to negative growth. It’s more of – a little bit of more lumpy.

Korinne Wolfmeyer

Thank you.

Operator

Thank you. Our next question comes from Jayson Bedford with Raymond James.

Jayson Bedford

Hi, good morning. Just a couple of cleanup questions that require quick answers. Have you filed for CereLink in the U.S.?

Glenn Coleman

Yes.

Jayson Bedford

Okay. And then you’re still on board with the $83 million to $88 million in ACell revenue for the quarter. It sounded like it, but I didn’t hear it in the prepared comments.

Carrie Anderson

Yes. So we’ve reconfirmed that $83 million to $88 million. We provided an estimate for Q2 at about $20 million. And so that, again, anticipate some sequential improvement on a pro rata basis from Q1 to Q2, but still generally takes into consideration that we’re still integrating the businesses, and so there could be some additional sales interruption there in Q2. And then we’ll start to get more normalized rates in the back half of the year.

Peter Arduini

And Jay, just a little more color on CereLink. I think Glenn mentioned earlier, we actually have the CE Mark already. And we’re in dialog with the agency and don’t foresee any issues with the 510k.

Jayson Bedford

Got you, okay. And then just lastly, what’s the expected revenue level of discontinued products in 2021 that’s kind of used in the 12% to 13% organic growth calculation? Thanks.

Carrie Anderson

Yes. It was – it’s probably trending a little higher than I expected. I was thinking it would be about $5 million for the year, and we actually had about $5 million of discontinued product revenue in Q1. Some of that’s attributable to last-time buys with these products that we saw. So, I do think it will moderate lower in the subsequent quarters. But I would say, Jayson, about think about $8 million to $9 million of discontinued products.

Jayson Bedford

Thank you.

Operator

At this time, we have no further questioners in the queue, so I’ll turn it back to Mr. Beaulieu for the closing comments.

Mike Beaulieu

Thank you, David, and thanks, everybody, for joining our call this morning. As you heard, we’re excited about the Virtual Investor Day on May 20. And we’ll be making more information available on our Investor Relations website at integralife.com. We’ll also be sending out a registration link via email in the coming days. So that concludes our call. Thank you very much, and have a nice day.

Peter Arduini

Thank you.

Operator

Ladies and gentlemen that concludes our presentation. Thank you for your presentation. You may now disconnect.