IART - NASDAQ

Good day, and welcome to the Integra LifeSciences Second Quarter 2024 Financial Results. At this time all participants’ are in a listen-only mode. After the speakers’ presentation there will be a question-and-answer session. [Operator Instructions] As a reminder this call is being recorded. I would now like to turn the call over to Chris Ward, Senior Director, Investor Relations. Please go ahead.

Thank you. Good morning, and thank you for joining the Integra Integra LifeSciences second quarter 2024 earnings conference call. With me on the call are Stuart Essig, Executive Chairman; Jan De Witte, President and Chief Executive Officer; and Lea Knight, Chief Financial Officer. Earlier this morning, we issued a press release announcing our second quarter 2024 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 and a file named second quarter 2024 earnings call presentation. Before we begin, I want to remind you that many of the statements made during this call may be considered forward-looking. Factors that could cause actual results to differ materially are discussed in the company's Exchange Act reports filed with the SEC and in the release. Also in our prepared remarks, we will reference reported and organic revenue growth and organic revenue growth excluding Boston. Organic revenue growth excludes the effects of foreign currency, acquisitions and divestitures. Organic revenue growth, excluding Boston, excludes revenues from products manufactured in our Boston facility in both periods. Management believes that excluding revenue from all products manufactured at Boston at the Boston plant provides useful information when evaluating the company's organic growth, because of the unusual nature of the manufacturing stoppage and voluntary global recall. Unless otherwise stated, all disaggregated and franchise level revenue growth rates are based on organic performance. Lastly, our comments today will include certain non-GAAP financial measures. Reconciliations of 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 with the SEC. And with that, I will now turn the call over to Stuart.

Thank you, Chris. Before Jan and Lea begin with the investor presentation and Q&A, I'd like to say a few words about the business and the path forward. We had a good Q2, which Jan and Lea will cover in more detail shortly. We appreciate, however, that much of your focus today will be on our guidance and performance for the rest of the year and what lies further ahead. So I'll address that first before handing the call to them. Integra has a very strong commercial team armed with a differentiated portfolio. That said, over the last several quarters we've identified a series of operational and quality systems gaps. As a result of both the typical audits by regulatory agencies, as well as our own in-depth reviews of the state-of-the-art broader quality system, it has become clear that there is a need to bolster our manufacturing quality compliance processes across the organization. What has arisen from these evaluations is our compliance master plan, a systemic and holistic approach to improving our quality system and GMP compliance across our manufacturing and supply network. The plan will drive increased spending in the second-half of 2024 and lower revenue and EPS expectations for the year. As reflected in our updated guidance this morning, there are revenue impacts resulting from several shipping holds that we have put into place to assess and confirm product labeling and regulatory compliance. It is worth noting that while this impacts revenue in the third quarter, we are preparing to resume shipping many of those products later in the year. Over the next 18 months, the planned investments will elevate our operations and compliance processes to enable our product supply to match our customer demand and will allow our entire organization to execute to our potential. Additionally, we have formed a quality committee at the Board of Directors level that will have regular direct lines of communication to the ELT members responsible for operations, quality, and regulatory. I want to assure all of our stakeholders that we are giving these issues the attention they deserve. We recognize that this will come at the expense of earnings growth in the near-term, but it is necessary and will support sustainable long-term growth through predictable execution. During this time, we will continue to focus on getting our products into the hands of our customers, growing our business globally, and improving our new product development capabilities. We have continued to make excellent progress on our CEO search and believe we will have a new CEO announced and in place by the end of this year, if not sooner. There has been tremendous interest in the role given the company's exciting life-saving products, aggressive growth strategy, and financial strength. The Board and I, working with Heidrick & Struggles, are spending a significant amount of time interviewing candidates selected from an impressive list. I am very confident we will bring on Board a highly qualified individual capable of both driving our longer-term strategy and executing on our current operating and commercial commitments. Once the new CEO is in place and has had the appropriate time to make an assessment, we'll provide more color on the LRP for the business. The Board and management team believe in our product portfolio and the long-term growth prospects that go along with it. While recently we haven't delivered to our potential, we still believe we can meet or exceed market growth. We are committed to making necessary investments in our quality and manufacturing operations to enable supply to sustainably meet that demand. Integra remains a leader in neurosurgery and tissue technology with the largest regenerative portfolio in the market and we now have a great portfolio of ENT products as a result of the Acclarent acquisition. Over time, we have built a portfolio that not only has significant breadth, as well as valuable technology and commercial synergies but also provides meaningful differentiation to our customers and their patients. I would like to thank and acknowledge our employees for their resilience and thank our customers and shareholders for their continued support of Integra. And with that, I'll turn it over to Jan and Lea to discuss our second quarter and updated guidance in more detail.

Thank you, Stuart, and good morning, everyone. Lea and I will update you on our second quarter results and our updated guidance for the year, which reflects many of the themes that Stuart just touched on. Similar to what we saw during the first quarter, our second quarter reflected robust market demand for our products and early success with our integration of Acclarent. If you turn to slide four in our presentation, our second quarter revenues finished at $418 million, a performance that was above our May guidance range on continued strong demands across our entire portfolio. Our organic revenue was up 2.3%, compared to the prior year and excluding Boston, organic growth was 0.3%. We delivered adjusted EPS of $0.63 within our guidance range. Our Codman Specialty Surgical business saw growth of approximately 1% with strong growth from our dural access and repair and neuro monitoring franchises offset by significant backorders. There was solid demand once again in our international markets, but this business was also impacted by the supply backorders and as a consequence, grew low-single-digits during the quarter. We're seeing a strong uptake of CereLink, following our global relapse in the first quarter, demonstrating the customer loyalty and differentiation of our intracranial pressure monitoring portfolio. We also closed our acquisition of Acclarent on April 1, and we've been productively integrating the teams and products into our CSS business. As a reminder, the deal positions Integra as a leader in the ENT segments, expands our addressable markets and provides immediate scale and accretive growth to our portfolio. We're pleased with the progress of the integration, and the Acclarent team more than met our expectations at this point in the integration. The early strategic assessments of our joint teams have further confirmed the strategic opportunities and the complementary benefits of ENT and neurosurgery. Within our tissue technologies business, we continue to see healthy demand for our broad portfolio of wound reconstruction products. We delivered high-double-digit growth in DuraSorb, a resorbable synthetic reconstruction product, which continues to track ahead of our deal model. During the quarter, we also saw continued strong growth from our MicroMatrix family of products, as well as Cytal, Gentrix, and amniotics. As we announced on July 15, we plan to restart the manufacture of PriMatrix and SurgiMend at our new state-of-the-art manufacturing facility in Braintree, Massachusetts, which we expect to operationalize in the first-half of 2026. The timeline to have the projects back on the market would not have been materially different had we decided to move forward in our current Boston facility. And given the limitations of the physical space and layout in Boston, it became clear that Braintree was the right next step for Integra. Consolidating our efforts at Braintree also allows us to focus on starting up production at one facility with an optimized layout and minimizing execution risk. In addition to improving our compliance and efficiency, the shift to Braintree will offer our Boston teammates the opportunity to work in a brand-new facility that is more conveniently located for the majority of it. We remain fully committed to bringing PriMatrix and SurgiMend back to the market for our customers and patients. In the meantime, we have seen good uptake of DuraSorb, allowing our sales force to stay close to our customers and still provide them with a meaningfully differentiated product offering until we return SurgiMend to the market. Remain confident in our multi-product portfolio strategy in implants-based breast reconstruction. I'm pleased to announce today that we received a PMA approval notification from the FDA on the clinical submission for the PMA application for SurgiMend. The FDA has determined that the PMA is approvable subject to an FDA inspection that finds the manufacturing facilities, methods and controls in compliance with the applicable requirements of the quality system regulation. Now turning to guidance. We're updating our revenue and adjusted EPS guidance for the year to a range of $1.609 billion to $1.629 billion and $2.41 to $2.57 per share, respectively. The reduction in our guidance reflects the impact of supply holds and backorders that we are expecting to carry within the CSS business during the third quarter, as well as our plants increase in spending to support the compliance master plan that Stuart mentioned earlier in the call. Lea will provide more color on our guidance for the third quarter and updated guidance for the full-year. Before I turn the call over to Lea, let me assure you that we continue to be deeply focused on fixing our supply issues and bringing Braintree online while strengthening our processes and capabilities. We have learned many significant lessons related to our quality management system that we are applying across our network as part of our compliance master plan. We will continue to take new learnings and put them into practice to ensure we develop top-tier manufacturing and supply chain capabilities. We have the right portfolio and continue to see strong demand from our customers, but we need to strengthen our ability to put product in their hands with predictability in order to deliver on our promise to our customers and their patients, our employees, and our shareholders. Now over to Lea.

Thank you, Jan. Let's take a more detailed look at our second quarter financial highlights starting on slide five. Second quarter total revenues were approximately $418 million, representing 9.7% growth on a reported basis and 2.3% on an organic basis. Total revenues were approximately $2 million above the high-end of the guidance range communicated back in May. Our adjusted EPS for the quarter was $0.63, down 11% compared to 2023. Looking at the middle of the P&L, gross margins were 65.2% for the second quarter, down 250 basis points versus 2023. The change in gross margins was impacted by approximately 270 basis points from lower utilization and higher scrap, a 100 basis points in unfavorable revenue mix from lower Integra skin and stronger international sales, partially offset by an approximate 120 basis point benefit versus the prior year from Boston returns and lower remediation costs. Our adjusted EBITDA margins were 20%, down 330 basis points, compared to 2023. Our decline in adjusted EBITDA margins primarily reflects the decrease in gross margins. Operating cash flow for the second quarter was $40 million. If you turn to slide six, we'll take a deeper dive into our CSS revenue highlights for the second quarter. We reported Q2 revenues in CSS were $302 million, up 11.3% on a reported basis and 0.9% on an organic basis from the prior year. Global sales in neurosurgery grew 1.2% on an organic basis with strong growth in certain franchises offset by the impact of backorders. We delivered high-single-digit growth in dural access and repair driven by DuraGen and Mayfield. We saw low-single-digit growth in advanced energy driven by Aurora. We also saw strong growth from the CereLink relaunch in our neuro monitoring franchise. However, the growth was offset by backorders that led to a low-single-digit decline in neuro monitoring and a low-double-digit decline in CSF management. In our ENT business, we saw 18% growth for the second quarter. I'd like to highlight that the organic growth in our ENT reporting segment will reflect only the MicroFrance ENT instruments for the first four quarters following the close of the Acclarent acquisition. Even so, this performance reflects early synergies of the acquisition. On a reported basis, Acclarent delivered approximately $30 million which is approximately $5 million ahead of our guidance at the midpoint, reflecting the success of the integration to-date. For the second quarter, our capital sales were up high-single-digits driven by CereLink monitors, which are delivering results in line with our expectations for that relaunch. Turning to instruments, we saw an approximate 3% decline due to a challenging comp versus 2023. Shifting to our international business, we saw low-single-digit growth in the quarter with continued strong demand in many of our international markets. However, we fell short of meeting demand in the quarter due to the increase in backorders we discussed earlier in our remarks. Moving to our Tissue Technologies segment on slide seven. Tissue Technologies increased 5.6% on a reported basis and 5.7% on an organic basis, compared to the prior year. Excluding Boston, organic growth was down 1%. Second quarter sales in wound reconstruction saw broad growth across the franchise including high-double-digit growth for DuraSorb benefiting from increased focus from the surgical reconstruction sales team. We’d also saw mid-double-digit growth in Gentrix and low-double-digit growth in MicroMatrix, Cytal and amniotics. Growth in wound reconstruction was partially offset by low-double-digit decline in Integra Skin, driven by the production challenges we discussed during last quarter's earnings call. While we have continued to ramp production of Integra Skin over the course of the second quarter, we are still not operating at full capacity. We now expect Integra Skin sales to be at normalized run rates during the fourth quarter. In Private Label, sales were up approximately 50% versus last year, primarily due to lapping the prior year returns from the recall. Private Label was up 1.5% excluding Boston. Finally, international sales in Tissue Technologies were up high-double-digits, also due to lapping the prior year returns from Boston. If you turn to slide eight, I will discuss our balance sheet, capital structure, and cash flow. During the quarter, operating cash flow was $40.4 million and free cash flow was $10.7 million, reflecting continued spending on EU MDR, CapEx and increased working capital, primarily from investments in inventory. Free cash flow conversion was 26.6% on a trailing 12-month basis. We have a flexible balance sheet with ample liquidity to support our short and long-term plans. As of June 30, net debt was $1.5 billion and our consolidated total leverage ratio was 3.8 times, just above our target range of 2.5 times to 3.5 times. We are focused on bringing our leverage ratio back within our target range. The company had total liquidity of $1.2 billion, including $297 million in cash and short-term investments and the remainder available under our revolving credit facility. We are confident that our balance sheet flexibility, strength, and liquidity will allow us to execute on our investments in operations improvement and our long-term growth strategy even in the current interest rate environment. With our convertible bond coming due in the third quarter of 2025, we have the flexibility to take the convert to term and fund it using our revolver. Through our interest rate swap portfolio, we would maintain approximately $900 million of fixed-rate debt with all-in rates in the low-3% range through the end of 2027. Our treasury team, along with the Finance Committee of our Board, will continue to work closely to monitor the rate environment and maintain a highly efficient and flexible capital structure. If you turn to slide nine, I will provide our consolidated revenue and adjusted earnings per share guidance for the third quarter and full-year 2024. As we discussed earlier in our remarks, our updated guidance reflects several temporary shipping holds we have implemented, the majority of which will be cleared before the end of the year. Third quarter revenues are forecasted to be between $372 million to $382 million, driven by the impact of the temporary shipping holds and supply backorders. Our updated guidance represents reported revenue growth in the range of approximately flat to down 2.6% and a decline of approximately 6.8% to 9.4% on an organic basis. For the full-year, revenues are forecasted to be in the range of $1.609 billion to $1.629 billion as we expect the temporary holds and backorder levels to abate into the fourth quarter. While many of the cases we can't supply in the third quarter will be lost, we expect a substantial step up in revenue into the fourth quarter as our shipments are able to meet demand with modest backorder clearance providing only a slight tailwind in the period. We expect our reported growth to be in the range of 4.4% to 5.7% and organic growth to be minus 1% to plus 0.3% for the full-year 2024. Turning to adjusted earnings per share guidance. For the third quarter, we expect adjusted EPS to be $0.36 to $0.44. Our third quarter EPS reflects the product holds and higher operations costs due to remediation efforts, investments in quality, scrap, and lower plant utilization resulting from the product holds. For the full-year, we are updating our adjusted EPS to be in the range of $2.41 to $2.57 per share. The full-year EPS contemplates the revenue reduction linked to temporary shipping holds, as well as our planned increase in spending to support the compliance master plan. We anticipate that this increased spending will impact the second-half of 2024 and 2025 as we invest across our network to ensure we can reliably deliver supply at a level that meets demand. I'd like to take you through key considerations for our full-year revenue outlook on slide 10. As you look at the left side of the page, you will find updated key metrics for FX and tax rates as well as our average share count. As we look to the right side, we have key highlights on the drivers of our full year revenue guidance and the third quarter to fourth quarter ramp, as well as the stepped-up investments and impact on COGS and OpEx. Although we are not providing guidance for 2025, we appreciate the need for some context beyond 2024 based on the changes to our 2024 guidance. Based on our expected timelines to resolve the identified supply issues, we should be able to meet demand in the fourth quarter of 2024. For 2025, we expect to see mid-single-digit organic revenue growth over 2024, which takes into account strong demand for our products, but also pockets of supply disruption as we execute the compliance master plan. We also expect to see pressure on our adjusted gross margins as we continue to make key investments. Taking all of this into account, we expect flat to modest adjusted EPS growth in 2025. If you turn to slide 11, I'll wrap up our prepared remarks. We saw continued strong demand for our products during the second quarter including Acclarent and we remain confident that our portfolio and commercial teams can generate sustainable growth over time. In order to do that, we have an organization-wide commitment to improve our quality compliance and supply resilience to better support our customers and meet their needs. We remain committed to bringing SurgiMend and PriMatrix back to market through our new Braintree facility and advancing our SurgiMend PMA for IDDR. The investments required across our manufacturing network are reflected in our updated guidance and we look forward to providing you with updates as we make progress against our compliance master plan. With that, I'd like to open up the line for Q&A. As Stuart is not physically present for the call, Jan and I will facilitate the Q&A. Please open the line for the first question.

Thank you. [Operator Instructions] Our first question comes from Kristen Stewart with C.L. King. Your line is open.

Hi, thanks for taking the question. I was wondering if you could just provide a little bit more color on the shipping holds that you're taking in the third quarter and just kind of confidence in why it's just going to be the third quarter and not expand into 2025. And if you could also provide us with what specific products are under ship hold and the total revenue that these products represent? Thank you.

Good morning. Thank you for the question, Kristen. Yes, so the temporary shipping holds we have in place impact a number of SKUs across our CSS business segment. We do expect a majority of those holds to be cleared by Q3. And as you -- in terms of the nature of the holds themselves, they primarily relate to compliance with labeling, packaging, and IFU which is instructions for use requirements. These requirements differ across all the markets in which we operate, and so as you can imagine, it will take time to fully assess and implement corrective actions. The good news is we've already started to clear some of the products to resume shipping, and we will continue that course of action throughout Q3 and into Q4.

Okay.

I think the other part of your question was -- I'm sorry, I just want to finish the other part of your question was, how are we confident that it doesn't continue into 2025?

Yes.

To that end, right now, based on our plan, we do get through clearance of majority of those into 2024. So the magnitude of the call down that we had should be isolated related to this issue in 2024.

And how are you comfortable that this is just the end of the quality issues of the company? Is it just isolated only in CSF and any additional color on that?

Yes. So, Kristen, I think this goes back to the spirit of why we've implemented the compliance master plan. As Stuart mentioned in his remarks, this is our systemic, holistic approach to improving our overall quality standards and GMP compliance. That -- this -- the plan itself is structured into work streams that will have, as their remit, to look across the entirety of our manufacturing and supply network. And they'll focus on things like labeling compliance. They'll focus on things like documentation of controls and processes as examples, and they'll identify and implement corrective actions as they progress through the plan. So the body of this work will be concentrated in the next 18 months. And so during the course of that is when we'll be able to fully assess and implement actions that does carry us through 2025.

Okay. Thank you very much.

Thank you. Our next question comes from Steve Lichtman with Oppenheimer and Company. Your line is open.

Thank you. Good morning, guys. So just wanted to ask a little bit more about the anticipated step up in the fourth quarter. Can you talk a little bit more about your visibility level on that potential for more sustainable share loss as a result of these ship holds and how you're addressing that with customers and the commercial organization?

So, Steve, let me start there. So as we look across the holds, as I mentioned, it's a number of SKUs across the CSS portfolio that have various requirements. And so as we meet those requirements and implement corrective actions, we're releasing them. So it's really happening as a continuous sort of process throughout the quarter, and that's what gives us confidence that as we get into Q4, we'll be able to release a majority of those holds. From a guidance perspective, as you look at kind of how we've called the Q4 -- the rest of the year, we do have on the lower end of that guide, there is a risk that if the timing shifts a little bit, we can absorb that as reflected in the guide. We do have also at the upside of the guide an ability to realize some upside to the extent that the timeline does improve.

Okay, got it.

And then I think the other part of your question was related to additional risks for Q4. Is that right?

Yes, yes, just in terms of, obviously customer pushback, anything, any disruption in the commercial organization result of the issues here.

Yes. And so we've been working with our customers in terms of communication around the nature of these holds, and we'll be proactively working with them to help them understand, as we begin to alleviate them, what that impact is and when our products will become available. And so through that, and through the kind of the constant relationship we maintain with them as a result of the breadth of our portfolio, we're confident we can help manage through this -- the current temporary shipping holds into fourth quarter.

Okay, got it. And then I guess, just secondly, can you provide a little more detail on what the actions are here? What are the investments being made? Just to provide a little -- obviously, we understand the sort of this ship hold aspect, but what are the sort of broader investments that are going to be made specifically here over the next 18 months?

Yes. So as we step through the compliance master plan and address the work streams that I talked about, we know it's going to mean an increase in internal resources as well as external resources, specifically with expertise in quality controls and standards. So that will necessarily be part of the investments that we're making. Coupled with that, from a cost perspective, we'll also likely see lower utilization at some of our sites as we implement corrective actions. So that will have a negative pressure or impact on a gross -- from a gross margin perspective. And then also from a capital perspective, which you can anticipate, is that as we -- part of this effort, we'll be looking at our capacity requirements again in the interest of making sure that we're positioned to sustainably meet the growth on this business. And so from a capital perspective, you can expect capital to remain at levels that are consistent with what we're spending in 2024 for the next several years. So that's kind of how you think about it from an investment perspective. I think the most important part of all of this, though, Steve, is that at the end of it, the expectation is as a result of making these investments now, and the impact we're forecasting it'll have on the business, we'll be in a better position going into 2026 to proactively meet and drive growth on the business and make sure we remain in front of some of the supply challenges we've seen as of late.

Okay, thank you.

Thank you. Our next question comes from Matt Taylor with Jefferies. Your line is open.

Hi, thanks for taking the question. I wanted to ask you a little bit more about your assumptions for 2025. I guess, can you help us understand you're going to clear up a lot of these issues in Q3 and the second-half of '24, I guess, with easy comp, why wouldn't you grow more in 2025?

Yes, so thanks for that question. And at some level, this is recognition that we are still in the early stages of implementing our compliance master plan. So, to your point, as we step through the call down in 2024, much of that supply disruption, we do anticipate coming back. And on top of that, we are seeing continued strength across the other parts of our business that should continue to grow. So Acclarent will be in for a full year. We're seeing growth in other parts of our business in terms of UBM and DuraSorb. That should also drive continued growth into 2025. And to your point, that, taken together with the supply coming back, should drive meaningful growth. But we're also providing for the potential of additional supply disruption in how we're thinking about our early thoughts on 2025. And that's principally because we're still working through the compliance master plan. And so as we do that, we'll be able to better assess whether or not those potential supply disruptions will be realized or not.

Okay, great. And I have a similar question lineup on just the margin impact. So you're talking about flat to modest adjusted EPS growth next year. So there's obviously ongoing costs that you're contemplating in that guidance. Can you help us understand, do you think this will be all resolved in 2025? I mean, when can you actually get back on track with some of the long-range plan-type margin goals that you've put in place in the past? Or is this going to be kind of a multiyear cost overhang?

Yes. So let me frame that a little bit more in terms of cost assumptions. So for 2024, the incremental investments we're making to support the compliance master plan will have a negative impact on margins in the order of magnitude of about 80 basis points. And if you remember in our original -- in the last guide we communicated, what we said was margins would be moderately down year-on-year, 2024 versus 2023. And we frame that as kind of 70 basis points, 90 basis points. The implementation of this master plan means that -- it's -- the impact is another 80 basis points on top of that. As we move into 2025 and now we're operating under the compliance master plan for a full-year, you can anticipate another incremental 60 basis point to 80 basis negative impact on margins. And so that's -- as you think about kind of the nature of the cost investment, that's the order of magnitude that we're talking about. And so all of that taking into consideration, along with the potential of supply disruption that I framed out for 2025, is where you start to get to overall EBITDA margin or EPS growth that's flat to modestly up ‘25 versus ‘24. Beyond that, to your point…

Sorry, go ahead, Lea.

Beyond that, to your point, in terms of what happens next, we do anticipate some level of maintenance costs from a gross margin perspective and the impact on gross margins as a result of these investments. But we also anticipate being in a much better supply position. So from an overall kind of profitability and growth perspective, should be much better positioned. At this point, though I can't say specifically what that would be, because we're not providing 2026 guidance at this point, but that will be reflected in the work we're doing around long-range planning.

Okay, great. Thank you very much.

Thank you. Our next question comes from Ryan

Hey, guys, thanks for taking the questions. Okay, a lot of questions still, I think, to be answered just based on all these moving dynamics. So I'm sitting here thinking about kind of the start of these tissue issues going back over a year or so, even more. Now we have obviously some supply dynamics within Codman. Why has it taken in your view as long as it has to resolve the issues, and why will it still take through the course of 2025 to resolve these issues? And I think about that in the context of like, SurgiMend, why not just throw some more money? I mean, you're already spending a ton of money. Why not throw more money at that, get SurgiMend on? Why is that going to take until '26? So maybe if you can kind of unpack this because this is, I think, bedeviled investors for a while now with the quality issues.

Thank you, Ryan, for the questions. Let me see, there are two questions on, okay, why now and then SurgiMend question.

Yes.

So, first on the quality compliance gaps. Clearly, what we've learned during our Boston remediation activities and some of the analytics afters, has made us reevaluate our processes across our manufacturing and supply network. In particular, what we learned is the need to be more effective at standardizing our quality system across the company. So while we have invested and improved our quality system over the last couple of years, we continue to see the need for more areas of improvement. And so that's why we decided with our Board to launch this compliance master plan in activating this systemic, holistic approach to our quality system and our GMP compliance, to essentially step up and get ahead of this and like Lea indicated before, to create our supply capability to be in line at the level of our commercial opportunity and the strength of our markets. So that's the decision that we made over, yes, the past quarter, setting up, yes, to really step up and accelerate many of the activities we had going already over the past few years.

Okay.

Question on sort of…

Again, yes, why SurgiMend in '26? I mean, can you -- if you're already throwing a ton of money at these problems, why not -- why is it going to take as long as it is to get SurgiMend active in '26?

Yes. So let me maybe give a bit of context on Braintree and the operationalization. I think some of you will remember that we communicated in 2022 that we commissioned the building of that Braintree facility with the plan to have that site ready in 2026. All of this was part of our long-term manufacturing strategy for SurgiMends and PriMatrix. The intention was and still is, of building this Braintree facility is to build a modern factory that's more productive and attractive place to work for our colleagues. And secondly, to significantly step up our output capacity of that factory. The Boston factory we knew was never going to be big enough yet to deliver to the growth opportunities, specifically with our breast strategy in SurgiMend. So we have started building that Braintree facility in 2023, and currently this year we're still in the building, the construction phase of that site. As communicated, we expect the Braintree facility to be operational in the first-half of 2026. Okay? At this point, too early still to be more specific on the path and the specific days there. We'll update for sure that once we understand the commercial ramp closer, as we get closer to operationalize.

Okay, I want to just ask one other question and I'll hop back in queue. In the past, when you've had disruptions to the business, you've actually instituted incentives or retention costs for preserving the stability of your sales force. I'm wondering, when you think about what you're proposing in '25, have you contemplated that? Are you instituting that? Is there any concern there in terms of sales force retention as a result of some of these shipping holds and the broader issues in supply?

I'll start there. I'll start with that. Thank you, Ryan. So for 2024, again, the nature of the shipping holds that we talked about do have -- they're temporary by nature. So we do expect them to alleviate beginning during the course of Q3 and into Q4. And as a result, yes, we absolutely are committed to retaining our sales force, because we recognize: one, that they've been a huge strength in terms of an asset for this business for a very long time. And we understand their value in terms of helping us to be able to get our products not only back in the hands of our customers, but driving growth going forward. So that same sentiment carries into 2025. As we continue to work through this master plan and making the necessary investments to strengthen in overall quality and compliance environment, we also plan to continue to support our sales force because we understand, again, they're the key to helping us unlock growth on this business as we move forward.

Okay, thank you for taking the questions.

Thank you. Our next question comes from Robbie Marcus with JPMorgan. Your line is open.

Oh, great. Good morning, and thank you for taking the questions. Two for me. First, I want to ask, how do you get comfortable giving guidance into '25 and '26 to a degree? If I look back over the past one to two years, there's been just so many changes, mostly downgrades to forward guidance. I guess, how confident and how responsible do you think it is to give a long-term view here when it's clearly an uncertain time at the company?

Yes, Robbie, thank you for the question. So, just a point of clarification, we are not providing guidance on 2025. What we provided was our early thinking on how 2025 is shaping up in light of the shipping holds that we talked about for 2024. And I think as you step through kind of the considerations that we laid out, it allows for exactly what you're talking about, Robbie. So we're starting with 2024 as a baseline. That 2024 baseline already has about $70 million to $80 million of shipping, or, sorry, supply disruption embedded in it. And our early thoughts on 2025 is we're going to be able to grow this business mid-single-digit off of that reduced baseline. To the points that were -- questions that were made earlier, yes, we do expect to get back some of the supply disruptions we experienced in 2024. But fundamentally, we're not counting on it as we think about the direction for 2025 because we understand there could be the potential for additional disruption as we continue to execute against our compliance master plan. So, in short, Robbie, we are adjusting from kind of the approach we've taken in the past around guidance in light of the compliance master plan, the requirements, and what's still to come and be assessed as part of that in our considerations for 2025. And then clearly for 2026, we absolutely are not providing guidance at this point. We are including that in the work to be done on our long-range plan, and we'll come back at the appropriate time to have that conversation.

Let me maybe add one thing.

Sorry.

No, let me add to one thing, Robbie, because you mentioned uncertain times. Let me -- maybe focus on a couple of certainties that we have with Integra. Okay. One, okay, we are in strong markets. We're confident about market demand and the growth. Let me -- maybe focus on a couple of certainties that we have with Integra. Okay. One, okay, we are in strong markets. We're confident about market demand and the growth. We know that our products are differentiated products, I mean, great clinical outcomes, strong competitive positioning. And then third, you heard Stuart talk about our strong commercial force. Our strong commercial force, and Ryan asked that question. Okay? We're making sure we are retaining them. We have our broad portfolio, so not one product will destroy their back. We see it with DuraSorb today. We see it in other products in CSS. So there's the breadth of commercial opportunities to keep our commercial force engaged, productive, and continue to serve our customers, continue to build on that relationship. Those are certainties that we have. Right? And while we deal with the temporary, yes, impacts of these ship halts, right, we are building on those strengths, yes, and we'll bring those products back.

Great. Helpful. Maybe just one follow-up for me. You'll have had multiple products out of the market for well over a year by the time they get back up and running, potentially even two years. How do you feel about the ability to regain share there? I have to imagine doctors will have moved on to other products, other companies, and other contracts. So, when it comes back, I know the original guidance with shorter timelines was to get to 100% of the prior dollar run rate in 12 months. Is it now half that when you come back? How do we think about share recapture given how long you're going to be off-market? Thanks.

Yes, I'll take this one. Robbie, I think you probably referred to SurgiMend and PriMatrix which are the two projects that are long of the market. Like I mentioned before, one, we're confident for the market demand and the growth. We're talking here about the market for implant-based breast reconstruction for complex hernia. Complex wound repair at those markets remains strong. Now we recognize it's going to take significant work to get back, but the products, SurgiMend and PriMatrix are differentiated. They fill a clear need in the market. And today there is no other competitive products that fill that need and we do not see over the next years, competitive products come that really fill the specifics that SurgiMend and PriMatrix are filling. And then back to our relationship and our presence with our customers. If you look at our surgical reconstruction sales force today, they're very active and very successfully active selling DuraSorb, okay, that resorbable synthetic which we acquired more than a year ago. It's the breadth of the portfolio that keeps us in front of our customers and keeps us -- keeps our sales teams engaged and building that relationship with customers even if these products are not off the market. It's -- that foundation that we'll use to drive an impactful relaunch once we get the products back in the market.

Thanks so much.

And just to build on that, because you mentioned multiple products out for years, I think, to Jan's point, yes, that is true with respect to SurgiMend and PriMatrix, but the holds we're talking about across the CSS portion of the portfolio, that's been a 2024 dynamic. So it's been a matter of weeks. Maybe it'll add up to months, but it's isolated to 2024.

Thank you.

Thank you. Our next question comes from Jayson Bedford with Raymond James. Your line is open.

Good morning. Just two quickies for me. It sounds like it's your decision on when the shiphold products get released. Just for clarity, do you need any third-party opinion? Do you anticipate that any of these products will need additional regulatory approval?

Hi, Jayson, let me take this one. So, yes, these shipholds have been put voluntarily in place. Okay? It's essentially our quality management system at work, driving corrective actions on observations. The path from an observation to a correction is defined by our quality management system. So it's essentially us, yes, who defined when we're done with that correction on a specific, yes, product basis.

Okay. And just as a related question on the master plan. It sounds like all these products are in CSS. Why were these products selected as part of this shiphold here? Is there a common thread? Are they manufactured at the same facility? Is there -- is it based on the age of the label? I'm just curious on how you decided on these products.

Yes. So the compliance master plan itself is a plan that cuts across the entirety of our business, right? So all of the divisions within the temporary shipping holds that we've talked about is affecting uniquely the CSS business. Within that, though, this is not a facility manufacturing gap per se, this is a quality management system gap. And so that's why the emphasis of the compliance master plan is exactly on quality management systems and GMP compliance. And so we've incorporated observations that we've gotten from regulatory authorities along with our own internal assessments in shaping the scope of the compliance master plan. And that's what we're executing against to remediate this issue and also make sure that we're strengthening the robustness of our quality systems more broadly.

Okay. Thank you.

Thank you. Our next question comes from Craig Bijou with Bank of America Securities. Your line is open.

Good morning. Thanks for taking the questions. Sorry to belabor the point, but I did want to ask just on, I guess, a clarification, maybe on a follow-up to what you just said on the manufacturing. So are you looking at the manufacturing processes for the CSS products, and maybe just are you looking beyond the quality management for those products that are on the shiphold? And you -- as you think about the broader plan going forward, are you taking a look at even broader manufacturing processes at all your facilities?

Yes. So the -- yes. Just to clarify, the nature of the temporary shiphold, again relates to quality management systems and control. So it's -- again, the nature of -- the issue themselves, it's labeling, packaging, and instruction for use requirements is kind of most of the temporary hold that we're talking about. And so that's included in the scope. The compliance master plan itself does go more broadly to look at things like capacity to ensure supply resilience. Right. So to make sure that as we move forward, we're not only strengthening our quality control systems but we're also getting in front of the growth needs of the business and making sure that we're adequately providing for capacity. So through that lens, yes, we'll be looking at sites and capacity to support our future growth needs.

Got it. Okay. And then I guess this is a follow-up question as well. But when I look at what's implied, the step up in Q4 on a revenue basis, I guess, I just, it seems like most of the revenue -- lower revenue guide is getting taken out of Q3. So, I mean, is there a -- and I think I heard you say that the lower end of the guidance may account for some timing disruption or the timing not going as planned? But just thinking about Q4 revenue and what you're expecting there, I mean, is there a percentage of that revenue from the shipholds that you expect to come back? Are you discounting that at all for Q4? And is it assumed in -- anywhere in your guidance that maybe that does come back or a portion of that is pushed out to '25?

Yes. So, yes, let me step through the ramp. So, as you look from Q3 to Q4, the ramp is about just under $80 million. Two-thirds of that will be driven by addressing the shipping hold. So, again, because most of them will be addressed by the end of Q3, we're in better supply position across the products that are currently on shiphold, and that should address about two-thirds of that. The other third is primarily two things. It is skin now being back towards normalized run rates in Q4 along with just a little seasonality. So that makes up the last third. And then to your point earlier, as we contemplated kind of the low end and the high end around the guide, it does allow for some timing shift on the shipping holds, but it also allows for some of the strength that we've been seeing in other parts of the business, like Acclarent, for example, DuraSorb, as well as our UBM franchise, to continue to drive the strong growth that we've seen to-date.

Okay. Thanks for taking the questions.

You're welcome.

Thank you. And our next question comes from Richard Newitter with Truist Securities. Your line is open.

Hi. Thanks for taking the questions. Maybe just the first one. With Acclarent turning organic next year, I'm just curious, what's the embedded growth expectation for that business or contribution to that mid-single-digit growth outlook for next year? And then I have a follow-up.

Yes. So for, in terms of the shape of 2025, again, Acclarent in general, I should step back and talk about the fact that Q2 was really strong performance on that business. We were excited. The integration is proceeding well. We're excited about having that business as part of our portfolio and the future growth it will drive. In Q2, we did see that business exceed its -- our thinking for Q2 by about $5 million. And so we have reflected in our guide, we were originally calling Acclarent at about $80 million for 2024, and we now think it will be closer to $86 million. And that's contemplated in the guide that I provided earlier. So it's really dropping out that $5 million upside performance that we saw in Q2. As we move into 2025, we continue to believe the business will be able to drive high single-digit growth as we are -- we will be operating it for kind of a full year by the end of Q1 of 2025, throughout the balance of 2025.

Okay, thank you. That's a helpful color. And then maybe just to -- just with your leverage ratio where it is a little above your plan, are there any covenants that we need to be aware of, and what's the plan there? And then maybe just in addition to that, when will you know or update us if you need to keep some of these shiphold or products off the market longer? Will you know everything that you need by the end of third quarter, or could this be something that you'll have a periodic update on each subsequent quarter? Thanks.

Yes. so let me take the second question first. We do anticipate, again, based on the timing of the current plan to release shipholds that we'd have -- we'd be able to provide a meaningful update as part of our Q3 call in terms of how we're progressing against that expectation. So I would anticipate that. In terms of the leverage rate, you asked about kind of leverage, and where we are, we're at about 3.8 times which we knew we would be above kind of our ideal range as a result of the Acclarent acquisition. So in our last earnings call, we communicated that we'd likely be just above the high end of the range. I did also communicate at that time that we expect to drive our leverage back down within our ideal range by the end of this year. With our current call down, that will not happen. Right? Our leverage will continue to remain elevated. But to your question on debt covenants, no, we don't have a concern at this point that we'll have a problem from a debt covenant perspective as you look at the guide or projected EBITDA along with the allowable adjustments as determined in our bank agreement.

Thank you. Our next question comes from Joanne Wuensch with Citi. Your line is open.

Thank you very much. Can you hear me okay?

I can.

Perfect. I don't want to sort of stick on this, but I'm a little confused on one thing, which is the shiphold and the implementation of the global compliance program. Were those things that the FDA asked you to do, or were those things that you chose to do? And I'm trying to understand where the shiphold came from.

So, yes. Just to underscore the remarks that Jan made, we, Integra voluntarily initiated the shipping holds across the SKUs that were impacted. Now the nature of that or how it came about was a result of observations that we've received, both internally, as a result of internal assessments that we do across our network, as well as regulatory authorities externally. So a combination of those two is what's informed the broader compliance master plan, but also the current temporary shipping holds.

Thank you. And when you talk about the gross margins pressures this year, that sound like they're going to roll into next year. At what stage is there maybe relief from some of these expenses, or is this sort of a new go-forward gross margin rate, given that the oversight is going to have to be in place for a while? And thank you for taking the questions.

Yes, certainly. So there will be -- the magnitude of the increase that I characterized in '24 was an incremental 80 basis points, and then on top of that, another 60 basis points to 80 basis points in 2025, as we are now operating under a full-year. We should -- we wish not have to sustain at that level, right? There will likely be a higher cost from a maintenance perspective, from an overall cost structure, but it shouldn't be that order of magnitude going forward. That said, we should actually see positive offset as a result of being in better supply and being better positioned to meet the demand that we're seeing on this business. And so that's why, as we push into 2026, we'll need to kind of frame that out in the context of our LRP to be able to speak explicitly to what the ongoing or maintenance kind of cost or impact will be for the business.

Thank you very much.

Thank you. Our next question comes from Vik Chopra with Wells Fargo. Your line is open.

Hey, thank you for taking the question. So, on this shipping hold, does that also apply to your ENT business in Q3?

No. So, as we look across Acclarent right now, we have in the ENT business is Acclarent along with our MicroFrance business. They were not impacted by the temporary shipping hold.

Okay, got it. That's helpful. Thank you. And then my follow-up question was on Integra skin, please. I think you said you expect the sales to normalize in Q4 now. Can you just provide an update as to where you are and why the timeline was pushed out? Thanks for taking the questions.

Yes, thank you, Vik. So, if you recall in our call in May. we had anticipated, we got started resuming production. We weren't operating at capacity. We had anticipated being able to operate at capacity that would allow us to meet demand for the full-back half of 2024. Since then, while we continue to operate and produce, we're still not at those capacity levels. Our current production schedule and pacing does have us improving to get there. And now the current thinking is by Q4, we'll be able to be at normalized run rates for that business. In the interim, I think what -- I think, it's fair to characterize we've had some timing delays associated with getting our yields to where we need to be in order to operate at those normalized run rates, and that drives the shift that I just talked about.