Integra Lifesciences Holdings Corp Q2 FY2024 Earnings Call

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. 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 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 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 release 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 them. 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. I 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 plans to increase 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 and $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. 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. 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. 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. 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 during the course of that is when we'll be able to fully assess and implement actions that 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, to begin with, as we look at the holds, there are several SKUs within the CSS portfolio that have different requirements. We are addressing these requirements and implementing corrective actions, which allows us to release them. This is an ongoing process throughout the quarter, and it gives us confidence that moving into Q4, we will be able to release most of those holds. Regarding our guidance for Q4 and the remaining year, while we are at the lower end of our projections, there is a risk related to timing shifts that we can manage as indicated in the guidance. Additionally, if the timeline improves, we have the potential to achieve some upside in our projections.

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 as a 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 constant relationship we maintain with them as a result of the breadth of our portfolio, we're confident we can help manage through this current temporary shipping holds into the fourth quarter.

Okay, understood. Secondly, could you provide more details on the actions being taken? What specific investments are being made? We understand the shipping hold aspect, but what broader investments are planned over the next 18 months?

Yes. As we progress through the compliance master plan and address the various work streams I mentioned, we recognize that this will require an increase in both internal and external resources, particularly in areas involving quality controls and standards. This will be part of our investment strategy. Additionally, we might experience lower utilization at some of our sites while we implement corrective measures, which will negatively affect our gross margin. From a capital standpoint, we will reassess our capacity needs to ensure we can sustainably support the growth of the business. Therefore, you can expect our capital spending in 2024 to remain consistent for the next several years. Ultimately, we believe that these investments will better position us by 2026 to effectively manage and drive growth while staying ahead of recent supply challenges.

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?

Let me provide some clarity regarding our cost assumptions for 2024. The additional investments we are making to implement the compliance master plan are expected to negatively affect margins by approximately 80 basis points. In our previous guidance, we indicated that margins would be slightly lower year-over-year, estimating a decrease of 70 to 90 basis points. The introduction of this master plan will add another 80 basis points to that impact. Looking ahead to 2025, as we fully operate under the compliance master plan, you can expect an additional negative impact on margins of 60 to 80 basis points. This is the scale of the cost investments we are discussing. When considering this, along with the potential supply disruptions I mentioned for 2025, we anticipate that overall EBITDA margins or EPS growth will remain flat to slightly increase in 2025 compared to 2024.

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, we 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 Zimmerman with BTIG. Your line is open.

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 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 afterwards have 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. 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 aligned at the level of our commercial opportunity and the strength of our markets. So that's the decision that we made over the past quarter, setting up to really step up and accelerate many of the activities we had going already over the past few years.

Okay. Why will SurgiMend not be active until '26? If you're already investing a significant amount of money in these issues, what is causing the delay?

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 SurgiMend and PriMatrix. The intention was and still is, of building this Braintree facility is to build a modern factory that's more productive and an attractive place to work for our colleagues. Secondly, to significantly step up our output capacity of that factory. The Boston factory we knew was never going to be big enough 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. 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?

Thank you, Ryan. Regarding 2024, the shipping holds we've mentioned are temporary, and we expect them to ease during Q3 and into Q4. We are definitely committed to keeping our sales force, as they have been a significant asset to our business for a long time. We recognize their importance in getting our products back to customers and driving future growth. This commitment will also extend into 2025 as we work on our master plan and make necessary investments to improve overall quality and compliance. We plan to continue supporting our sales force, understanding that they are essential to unlocking growth for our business moving 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. To clarify, we are not providing guidance on 2025. What we've shared is our preliminary thoughts on how 2025 is developing considering the shipping holds we mentioned for 2024. As you review the factors we outlined, it aligns with what you're referring to. We are using 2024 as our starting point, which already includes about $70 million to $80 million in supply disruptions. Our early projection for 2025 is that we expect to grow the business by mid-single digits from that reduced baseline. Regarding earlier questions, we do anticipate recovering some of the supply disruptions from 2024, but we're not relying on that for our 2025 outlook, as we recognize there may be further disruptions as we implement our compliance master plan. In summary, we are adjusting our guidance strategy based on the compliance master plan and associated requirements as we consider 2025. For 2026, we are not providing guidance at this time. This will be part of our long-range planning, and we will revisit this discussion at the appropriate moment.

Let me maybe add one thing.

Sorry.

Let me add to one thing, Robbie, because you mentioned uncertain times. Let me focus on a couple of certainties that we have with Integra. Okay? One, we are in strong markets. We're confident about market demand and the growth. Let me focus on a couple of certainties that we have with Integra. One, 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. 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 and continue to build on that relationship. Those are certainties that we have. Right? And while we deal with the temporary impacts of these ship halts, we are building on those strengths, 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 off the market. Like I mentioned before, one, we're confident for the market demand and 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. Today there are 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. Back to our relationship and presence with our customers. If you look at our surgical reconstruction sales force today, they're very active and successfully selling DuraSorb, 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 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. 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 who defined when we're done with that correction on a specific 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? Is there a common thread? Are they manufactured at the same facility? 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. Thank you for taking my questions. I apologize for going over this again, but I would like some clarification on the manufacturing. Are you reviewing the manufacturing processes for the CSS products, and are you considering factors beyond quality management for those products currently on hold? As you plan for the future, are you also evaluating the manufacturing processes across all your facilities?

Yes. So the nature of the temporary shiphold, again relates to quality management systems and control. So it's the nature of the issue themselves, it's labeling, packaging, and instruction for use requirements is 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. This is a follow-up question as well. When I look at the revenue implications for Q4, it seems like most of the lower revenue guidance is coming from Q3. Is there a possibility that the lower end of the guidance accounts for some timing disruptions? Thinking about Q4 revenue and your expectations, do you anticipate a percentage of that revenue from the shipholds returning? Are you factoring in any discounts for Q4? Is there any assumption in your guidance that some of that might come back or be pushed out to 2025?

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. Regarding the shape of 2025, Acclarent performed exceptionally well in Q2. We are pleased with the integration process and optimistic about its contribution to our portfolio and future growth. In Q2, the business surpassed our expectations by about $5 million. As a result, we have updated our guidance, adjusting the Acclarent forecast from approximately $80 million for 2024 to closer to $86 million. This adjustment reflects the $5 million upside we experienced in Q2. Looking ahead to 2025, we believe the business will maintain high single-digit growth, as we will have operated it for a full year by the end of Q1 2025, continuing throughout the remainder of 2025.

Thank you for the insights. Regarding your leverage ratio, which is slightly above your plan, are there any covenants we should know about, and what is the strategy moving forward? Additionally, when will you be able to inform us if you need to hold back some of these shiphold or products from the market for a longer period? Will you have all the necessary information by the end of the third quarter, or will updates be provided periodically in subsequent quarters? Thank you.

Let me address the second question first. We expect to provide a significant update during our Q3 call regarding the timing of the current plan to release shipholds and our progress towards that. Regarding the leverage rate, we are currently at about 3.8 times, which is above our ideal range due to the Acclarent acquisition. In our previous earnings call, we indicated that we would be just above the high end of our targeted range. I also mentioned then that we aim to bring our leverage back within the ideal range by the end of this year. However, with our current call down, this will not occur, and our leverage will remain elevated. As for your question on debt covenants, we do not anticipate any issues from a debt covenant standpoint concerning our guidance or projected EBITDA, alongside the permissible adjustments defined 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. The increase I mentioned for 2024 is an additional 80 basis points, and for 2025, we expect another increase of 60 to 80 basis points as we operate under the compliance master plan for a full year. We shouldn't need to maintain that level long-term. There will likely be higher maintenance costs and an overall elevated cost structure, but it shouldn't be at that scale moving forward. However, we anticipate positive offsets due to improved supply and our ability to better meet the demand in this business. Therefore, as we approach 2026, we will need to outline this in the context of our long-range plan to clarify the ongoing maintenance costs and their impact on 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, 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 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.

Thank you. This concludes the question-and-answer session. Thank you for your participation. You may now disconnect. Everyone, have a great day.