Integra LifeSciences Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 25, 2025

There are 13 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Integra Lifesciences Fourth Quarter twenty twenty four 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. Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to your speaker today, Chris Ward, Senior Director of Investor Relations. Please go

Speaker 1

ahead.

Speaker 2

Good morning, and thank you for joining the Integra Lifesciences' fourth quarter twenty twenty four earnings conference call. Joining me on the call this morning are Mohit Dapol, President and Chief Executive Officer and Leah Knight, Chief Financial Officer. This morning, we issued a press release announcing our fourth quarter and full year twenty twenty four financial results. The release and corresponding earnings presentation, which we will reference during the call, are available in integralife.com under Investors, Events and Presentations in the file name Fourth Quarter twenty twenty four 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.

Speaker 2

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. Organic revenue growth excludes the effects of foreign currency, acquisitions and divestitures. 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.

Speaker 2

Reconciliations of non GAAP financial measures can be found in today's press release, which is an exhibit to Integra's current report on Form eight K filed today with the SEC. With that, I will now turn the call over to Moshe.

Speaker 1

Thank you, Chris. Good morning, everyone, and thank you for joining us today. Before we begin, I want to take a moment to recognize and thank our employees around the world. Over the past several months, our teams have navigated challenges with dedication and resilience, staying focused on delivering for our customers and patients. Their hard work as reflected in our fourth quarter results is what makes Integra the company it is today, and I am truly grateful for their commitment.

Speaker 1

I'm delighted to be here for my first earnings call as President and CEO of Integra Lifesciences. Before we dive into our results, I want to take a few minutes to introduce myself, share what excites me about Integra and offer some initial thoughts on our opportunities and challenges. I joined Integra last month after nearly thirty years in med tech industry, most recently leading three ms's global healthcare business. Over the years, I have gained deep experience in business strategy and transformation, innovation, operations and commercial excellence. More importantly, I've had the privilege of leading teams through complex challenges and that is exactly what I'm doing here at Integra.

Speaker 1

Let me tell you why I'm excited about joining Integra. I'm drawn to our company's mission, highly committed workforce, differentiated product portfolio and leadership position in highly specialized markets. I see tremendous opportunities to drive growth and innovation, but I also recognize the near term challenges ahead. Our recent performance has not met expectations. We have critical areas that need to be improved and I'm fully committed to making those improvements.

Speaker 1

Since joining, I've spent time listening and learning. I have had conversations with our customers, employees and investors and have visited a number of our manufacturing sites. These discussions have provided me with valuable insights into our strengths and where we need to improve. And here's what I know, Entegra has a strong foundation upon which to build a bright future. Our differentiated portfolio is highly relied upon by surgeons and it is profitable.

Speaker 1

We operate in attractive markets and the demand for our products remains strong. I have no doubt that with the right focus on execution, we can unlock significant value. That said, we have operational challenges to address. Quality, manufacturing and supply chain improvements remain our top priority. We must stabilize our operations and strengthen our quality systems to ensure we reliably meet growing customer demand.

Speaker 1

Once we do that, we will be in a better position to serve our customers, regain momentum and accelerate growth in key markets. We are already making meaningful progress. For the last six months, we have been executing on an enterprise wide compliance master plan to ensure systemic and sustainable improvements to Integra's manufacturing processes and global quality management system. We have prioritized and initiated 10 work streams of the compliance master plan, building a framework that is consistent with industry standard quality system regulations. To develop the framework and governing model, we are partnering with third party consulting firms that bring extensive expertise in quality management system improvement.

Speaker 1

We have committed significant resources to support not only remediation efforts for the FDA Form four eighty three and Wandering Letter observations, but also implementation of Compliance Master Plan. These resources will allow us to sustain the improvements long term across the company. I have already spent a great deal of time with our quality and operations teams and have been encouraged by both the comprehensiveness of their plans and their commitment to execute them. Their efforts have begun to bear fruit. For example, as expected, in the fourth quarter, we successfully cleared many of the third quarter shitholes.

Speaker 1

Beyond compliance, we are investing in our future. We are making facility equipment upgrades to enhance quality, resilience and capacity, so we can better deliver for our customers. In the fourth quarter, we were able to ramp up production of Integra Skin in our collagen manufacturing center. Additionally, we hit key milestones toward bringing our Braintree facility online in the first half of twenty twenty six, which will allow us to restart production of Surgimant and Primetrix. We are confident in our ability to regain share and drive growth with these differentiated products.

Speaker 1

We are also advancing our dual PMA clinical strategy for Surgimen and Durosorb to capitalize on the opportunity in the attractive implant based breast reconstruction market. Additionally, we continue to make progress in driving our global expansion strategy, including the continued market uptake of SIROLINK. We expanded our international commercial footprint in Brazil, India, Korea and China, leveraging key products and strengthening our global presence. Additionally, we continue to build our in China for China manufacturing capability to better serve this important market. We have also strengthened our leadership with recent appointments.

Speaker 1

We appointed a new Chief Quality and Regulatory Officer, a new Chief Quality Officer and strengthened many leadership roles at our manufacturing sites to enhance our operational focus and execution capabilities. Also, as previously announced, our Board has established a new standing quality committee to reinforce oversight and accountability. Looking ahead, our priorities are clear. We will continue executing our compliance master plan and work to resolve our outstanding FDA warning letters. We will remain laser focused on reliable delivery of products to our customers and will continue building trust with our investors through transparency and consistent execution.

Speaker 1

Ultimately, our goal is to deliver strong sustainable growth, earnings and cash flow performance. By strengthening our operations, improving our quality systems and driving meaningful innovation, we will fully capitalize on our market leading portfolio and drive long term value for our customers, employees and shareholders. Turning to our financial results. Total revenue for the fourth quarter was $443,000,000 representing year over year reported growth of 11.5% and landing within our guidance range. Revenue increased by approximately $62,000,000 over the third quarter, driven in part by supply chain recovery, clearance of shopholes and the ramp up of Integra skin production.

Speaker 1

Our fourth quarter performance reflects continued strong growth across many parts of our portfolio and the successful integration of Aclaret. Fourth quarter adjusted EPS was $0.97 which was above our guidance range. Since joining Integra last month, I have gained a better understanding of our quality and operational challenges through my own diligence and discussions with our team and our customers. We still have substantial work ahead of us as we execute our compliance master plan, strengthen our quality systems and improve our operations. While I continue to assess the business, we have elected to use a wider than typical revenue guidance range for 2025.

Speaker 1

First quarter revenues are forecasted to be between $375,000,000 and $385,000,000 representing reported growth in the range of approximately 1.6% to 4.4% with organic growth expected in the range of approximately negative 6.2% to negative 3.5%. For 2025 full year, revenues are projected to be between $1,650,000,000 and $1,720,000,000 We expect adjusted EPS for the first quarter to be in the range of $0.4 to $0.45 For the full year, we anticipate adjusted EPS to be between $2.41 and $2.51 With that, I'll turn the call over to Leah, who will provide more details on our financial results and guidance.

Speaker 3

Thanks Moshe. We'll begin with our full year financial results starting with Slide five. Our 2024 revenues were $1,610,000,000 representing 4.5% growth on a reported basis and a decline of 1.3 on an organic basis. 2024 organic revenue growth was impacted by approximately $90,000,000 in supply challenges and quality related product holds, which more than offset the mid single digit growth we saw on the product portfolio with stable supply. Our net organic decline was offset by an approximate $95,000,000 revenue contribution from the Aclaren acquisition to drive the 4.5% reported revenue growth.

Speaker 3

We saw above market growth across many parts of our portfolio this year in areas unaffected by supply challenges. This continues to give us confidence in the durable strength of our differentiated portfolio. In our CFS business, we delivered performance at or above mid single digits inclusive disposables, Certus plus programmable valve, Duragen and Mayfield Capital. CerebroFlo EVD catheters posted double digit growth results, while Serilink monitors also contributed significant growth. In Tissue Technologies, our wound reconstruction franchise, we have a number of products in our portfolio that delivered double digit growth, including our UBM portfolio, Durazorb and AmneoXL.

Speaker 3

Our adjusted EPS for the year was $2.56 down 17.4% versus 2023. The reduction in EPS was mainly due to supply challenges during the year along with additional investments in the compliance master plan, partially offset by spending reductions implemented during the year. Looking at the middle of the P and L, our gross margins were 64.5% for the year, down 160 basis points versus 2023 due to supply challenges and the second half investments in the compliance master plan. Turning to adjusted EBITDA. Our full year adjusted EBITDA margin was 20%, down 400 basis points compared to 2023.

Speaker 3

Our adjusted EBITDA margin performance reflects the impact of the supply challenges, implementation of the compliance master plan and spending reductions while we maintained investments in key strategic priorities throughout the year. Operating cash flow for the full year was $129,400,000 with a free cash flow conversion of 12.7%. Operating cash flow and free cash flow conversion rate declined versus 2023 as we invested in manufacturing infrastructure to improve supply reliability. On Slide six, I will cover our fourth quarter financial results. Our fourth quarter revenues were $443,000,000 representing an increase of 11.5% on a reported basis and organic growth of 3.5%.

Speaker 3

We saw a $62,000,000 sequential step up in revenue driven by clearance of the third quarter shipping holds, the return of Integra Skin to historical revenue levels and typical seasonality. Our adjusted EPS for the quarter was $0.97 up 9% compared to 2023 and above our guidance range. Our adjusted EPS includes a $0.1 benefit from a three twenty five basis point reduction in the 2024 adjusted tax rate. Looking at the middle of the P and L, gross margins were 65.2% for the fourth quarter, up 50 basis points versus 2023, primarily due to favorable revenue mix. For the fourth quarter, our adjusted EBITDA margin was 23.7, down 160 basis points compared to 2023.

Speaker 3

Year on year margin decline reflects favorable gross margins offset by a modest temporary impact from the order to cash cutover from McLaren integration and the timing of certain operating expenses. Operating cash flow for the fourth quarter was $50,700,000 with a free cash flow conversion of 28.8%. Turning to Slide seven, we'll take a deeper dive into our CSS revenue highlights for the

Speaker 2

fourth quarter.

Speaker 3

Reported fourth quarter revenues in CSS were $314,700,000 an increase of 15.8% on a reported basis and 4.1% on an organic basis from the prior year. Outsize reported growth was driven by the Aclaren acquisition with integration performance largely in line with our expectations. Global sales in Neurosurgery grew 5.1% on an organic basis as we were able to clear a majority of the shipping holds experienced in the third quarter and deliver growth in line with the market. At the segment level, CSF management grew low double digits, primarily driven by strong performance of our BactoCycle and Certus plus product lines, reflecting the continued strength of our differentiated solutions for the treatment of hydrocephalus. In neuromonitoring, revenue increased by high single digits fueled by strong sales of our Serralink ICP monitors and our bacafacile and cerebro flow EVD catheters.

Speaker 3

We continue to reinforce our leadership position in ICP monitoring and drainage catheters. In Advanced Energy, we experienced low single digit growth, primarily driven by CUSA disposables. Lastly, in our Dural Access and Repair franchise, we saw a low single digit decline largely due to the third quarter recall of our patties and strips. The decline was partially offset by robust performance from Duragen, Duraceal and Mayfield, which continued to generate strong demand. Our capital sales grew mid single digits, reflecting the strong funnels for our capital business.

Speaker 3

In instruments, growth was approximately flat for the quarter as robust sales in hospitals were offset by decreases in alternative site sales due to order timing. Shifting to international, sales were down low single digits as we cleared our shipping holds in international markets later than in The U. S. Moving to our Tissue Technologies segment on Slide eight. Tissue Technologies grew 2% on both a reported and organic basis compared to the prior year.

Speaker 3

Fourth quarter sales in the wound reconstruction franchise increased by 8.2% driven by double digit growth in DURASUR, our UBM portfolio and AmneoExcel. We remain excited by the robust growth we're seeing in DuraSorb, which remains ahead of our deal model and the double digit growth we have seen from our UBM portfolio. We also delivered mid single digit growth in Entegra Skin. We remain encouraged by the broad strength and resilience of our wound reconstruction portfolio, which underscores the long term growth potential of this business. In private label, sales were down 16% versus last year due to component supply delays.

Speaker 3

Finally, international sales in Tissue Technologies were down low double digits due to longer inventory recovery timelines on Entegra Skin. If you turn to Slide nine, I will provide a brief update on our balance sheet, capital structure and cash flow. During the quarter, operating cash flow was $50,700,000 and free cash flow was $21,100,000 reflecting increased investment in CapEx. Free cash flow conversion was 28.8% for the quarter. As of December 31, net debt was $1,500,000,000 and our consolidated total leverage ratio was four times.

Speaker 3

Our current max leverage ratio under our debt covenant is five times through the third quarter of twenty twenty five. The company had total liquidity of $1,200,000,000 including $273,000,000 in cash and short term investments and the remainder available under our revolving credit facility. On Slide 10, I will provide our consolidated revenue and adjusted earnings per share guidance for the first quarter and full year 2025. First quarter revenues are forecasted to be between $375,000,000 to $385,000,000 representing reported growth in the range of 1.6% to 4.4% and includes an approximate 60 basis point headwind versus the prior year from FX. We expect organic growth in the range of minus 6.2% to minus 3.5%.

Speaker 3

Our forecast reflects continued strong global demand for our products, primarily offset by approximately $10,000,000 of quality related shipping holds carried over from 2024 and an incremental $8,000,000 to $10,000,000 in quality related ship holds already identified in the first quarter as part of our compliance master plan. Our first quarter guidance also reflects a slower production ramp for Entegra Skin. While we returned Entegra Skin to historical run rates in Q4 and experienced some catch up, our scheduled maintenance and equipment upgrades combined with the lower than historical safety stock will likely result in some supply constraints that may prevent us from fully meeting demand in Q1. We have planned improvements that are progressing well and we are optimistic about returning Entegris Skin to normal production levels in 2025. For the full year 2025, revenues are forecasted to be in the range of $1,650,000,000 to $1,720,000,000 reflecting continued demand for a differentiated portfolio and a full year of Oclaren revenue, offset by potential for supply disruption from the execution of the compliance master plan.

Speaker 3

We expect full year reported revenue growth of 2.4% to 6.5%, including an approximate 50 basis point FX headwind and an organic growth of approximately 1% to 5%. We expect to see a sequential increase in revenue performance as the year unfolds, primarily driven by demand growth, clearance of our current quality related holds and normal seasonality. Additionally, we expect to see a sequential increase from improvement in Entegra skin production and resolution of the private label component supply issues in the second half. Turning to adjusted earnings guidance. For the first quarter, we expect adjusted EPS to be $0.4 to $0.45 driven by supply challenges and incremental investments in the compliance master plan.

Speaker 3

For the full year, we expect our adjusted EPS to be in the range of $2.41 to $2.51 per share, reflecting the revenue growth of the business, an approximate 70 basis point decrease in gross margin from investments in the compliance master plan and an approximate 300 basis point increase in our adjusted tax rate versus 2024. Our adjusted EPS guidance also reflects our plans for careful cost management to maintain key investments while managing profitability. For your reference, we've included the key assumptions underlying our first quarter and full year guidance as well as key modeling inputs on Slide 11. With that, I will turn the call back to Moshe.

Speaker 1

Thank you, Leah. Please turn to Slide 12. As we conclude our prepared remarks, I want to take a moment to reflect on where we stand and where we're headed. Integra is built on a strong foundation. Our market leading portfolio, talented team and commitment to delivering innovative solutions for our customers and their patients.

Speaker 1

While we acknowledge the operational challenges we are facing, we are actively addressing them with urgency, discipline and focused execution. We are making meaningful progress in stabilizing operations, strengthening quality systems and ensuring supply chain reliability. At the same time, we remain committed to investing in innovation, manufacturing infrastructure and global expansion to better serve our customers and drive sustainable long term growth. Looking ahead, our priorities are clear executing on our compliance master plan, driving operational excellence and delivering sustainable financial performance. We will continue to operate with transparency, accountability and a relentless focus on execution.

Speaker 1

I am confident we will navigate these challenges and seize the opportunities ahead. By staying disciplined, we will unlock Integra's full potential and create lasting value for our customers, employees and shareholders. Thank you for your time today. I look forward to keeping you updated on our progress in the months ahead. Operator, please open the lines for questions.

Operator

Thank you. And our first question comes from Matt Taylor of Jefferies. Your line is open.

Speaker 4

Hi, good morning. Thank you for taking the question. So I wanted to just ask about the issue that you talked about with Integriskin and in some of these shitholds in 2025. I know that you've now baked in some conservatism in your guidance for those problems. And I wanted to know how you approached thinking about the risk of further things happening throughout the year?

Speaker 4

In other words, how de risked is your guidance now that you put these assumptions in it?

Speaker 3

Yes. So Matt, thank you for the question. And you hit on a couple of things. So maybe I'll talk about the guidance approach first and then we'll talk about, Entegra Skin. So from a guidance perspective, as you heard in the remarks, we are taking a wider approach to the guide.

Speaker 3

As you look at the top end or the high end of the guide, we are assuming mid single digit growth compared to 2024, which is consistent with kind of the color of frame that we've provided before. It also includes a full year of a clearance contribution and it does assume an impact from additional shipping holds. At the top end, the assumption is a $60,000,000 impact beyond what we know today. At the midpoint of the range, we've assumed shipping holds of about $90,000,000 beyond what we know today. And at the low end of our guide, we've assumed, shipping holds of about 120,000,000 beyond what we know today.

Speaker 3

So that's how we're baking in the potential for shipping holds recognizing that it's tough for us at this point to pinpoint exactly when they'll happen, but wanted to reflect kind of that thinking in the guide. For Integra Skin, do you have an Israel?

Speaker 1

Yes. So on IntegraSkin, while we return to historical run rates in Q4, our planned maintenance shutdown along with the fact that we have lower than historical levels of safety stock will likely prevent us from being able to meet demand in Q1. We expect the production constraints to diminish as we go throughout the year starting with Q2 as some of the capacity and resiliency projects that we have going on for Integris King come online. We started those projects middle of last year and we may see some variability quarter to quarter. But overall, by year end, we should be able to be at run rates that not only allow us to meet demand, but also to replenish our safety stock.

Speaker 4

Okay, great. Thanks. I'll let some others jump in. Thanks for the color.

Operator

Thank you. Our next question comes from Vikt Soapra of Wells Fargo. Your line is open.

Speaker 5

Hey, good morning and thanks for taking the questions. Two for me. Mohit, maybe just talk about some of your key strategic initiatives as you think about taking the helm in 2025? And can we expect an update to the LRP? And then I had a follow-up, please.

Speaker 1

Okay. Hi, Vik. Thank you for the question. So the priorities for us in 2025, number one is operational excellence. And I put in that both the execution on the compliance master plan, as well as some of the supply resiliency and capacity manufacturing capacity programs that we have going on.

Speaker 1

So that is first and foremost of the highest priority for us. Secondly, I would say continuing to grow in our core, continuing to grow in our core and maintaining our leadership position in the market in The U. S. As well as growing internationally. We have a lot of great opportunities internationally that the team is building upon and that's going to be quite important for us to continue to win on our core.

Speaker 1

And then I would say, lastly, one of the most important things that we're going to be working on and putting focus on is to build our muscles in bringing differentiated new products into the market on time and in full. So those are some of the key priorities that I'm driving. As far as the Long Ridge plan is concerned, as you can imagine over the last couple of months, I have been engaging with internal and external stakeholders, really learning about the business, markets, opportunities, challenges, and I would think that assessment is going to continue throughout the end of the year. So I will need much of the year in order to work with our leadership team as we bring forward a new LRP. And we need to take the time.

Speaker 1

It's really important for us to take the time to ensure that the LRP that we bring forward is going to be informed by internal, external realities and at the same time, reflect the market opportunities. So I would need much of 2025 in order to do that. So it's too early to provide a specific date at this point.

Speaker 5

Understood. Thank you for that comprehensive answer. And my follow-up question was regarding the potential tariffs on Mexico and Canada. Apologies if this has been asked. I was bouncing around on some calls.

Speaker 5

But can you just tell us how much of your manufacturing flexibility do you have to move production elsewhere and to take price to offset any tariff impact? Thank you.

Speaker 1

Yes. So obviously, as we all know, the final outcomes of the tariffs are still uncertain. We do not have any manufacturing facilities in China, Mexico or Canada. Obviously, we're putting a manufacturing facility in China, but it would be to serve China. So it's in China for China.

Speaker 1

But we don't have any manufacturing facilities in those countries today. However, we do source products and components from those countries and we continue to monitor the advance the developments and we're also actively assessing how the impact will be on our business under different scenarios. And we're also formulating plans to be able to offset any negative impacts should those tariffs materialize. But we will provide updates once the administration has made a final decision on tariffs.

Operator

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

Speaker 6

Great. Good morning and thank you for taking the questions. Two for me. First, I wanted to ask, what sort of the thinking of why you're baking in future shitholds in 2025 beyond what you know today? I mean, what's the rationale for expecting more quality issues at this point?

Speaker 6

And are there any you're expecting? It's unusual to see future shitholds at this point given the timelines we've had with remediation. So let me start there and I have one follow-up.

Speaker 3

Certainly. Thank you, Ravi. So if you remember, when we launched the compliance master plan in the middle of last year, what we shared was it was a systemic holistic approach at strengthening our quality management system. And as part of that, we were going to do an assessment across the entirety of our manufacturing network, both internal as well as external. And that work would take through the end of twenty twenty five to complete the assessment.

Speaker 3

And that while we were in this assessment phase, we did have the potential for supply disruption to occur. Not that we were aware of any specifically, but just understanding the work that was to be done, what we had already observed in terms of internal audits as well as observations we've gotten from external regulatory agencies, all kind of inform the thinking of our approach and the potential for supply disruption. So that was the primary driver. And we're quarter end. What we've talked about for Q or sorry, we're two months into 2025.

Speaker 3

What we've talked about in our guide for Q1 reflects what we know about today. But again, because there's more work to be done, there's the risk of potential disruption going forward.

Speaker 6

Got it. Okay. Follow-up, I wanted to ask on cash flow. It's been sub-twenty percent free cash flow conversion in the past two years. I didn't see or hear a specific number conversion rate for 2025.

Speaker 6

So how do we think about both the conversion and the absolute dollars of free cash flow assumed in 2025? Thanks.

Speaker 3

Certainly. Yes. So we expect operating cash flow and free cash flow to sequentially improve in 2025, principally on lower acquisition or integration costs. CapEx will remain consistent. So 2025 CapEx will remain fairly consistent with 2024 as we continue to build out of Braintree, continue some of the investments and capacity that Moshe referenced in her remarks earlier.

Speaker 3

As you convert that to kind of what you can expect happen on a free cash flow conversion perspective, from a trailing twelve months, we would expect a step up kind of once we lap Q3 of twenty twenty four. So expect kind of in Q4 of twenty twenty five is when we'll see a step up from free cash flow conversion above that 20% that you referenced. And then as it relates to overall leverage, NASHCO just put up with that as well. We were end of twenty twenty four at four point zero. We expect leverage to be flat to slightly down by the end of twenty twenty five, but seeing much more notable improvement in leverage as we go into 2026.

Operator

Our next question comes from Ryan Zimmerman of BTIG. Your line is open.

Speaker 7

Good morning. Thanks for taking our questions. I want to talk about a clearance for a minute here and just understand kind of where you're at in the process. And what I mean by that is kind of how you're thinking about the contribution of Aclaren to the business in 2025 now that I guess you'll be lapping it kind of after the first quarter and Leah correct me if I'm wrong on that, but how you're thinking about that growth profile going forward and what you can do to enhance that?

Speaker 3

Yes. So thank you, Ryan. You are correct. So after the first quarter, we will be fully organic on the Aclaren business. As you heard in our remarks, we were very pleased with kind of the success of the integration to date.

Speaker 3

We expect growth for Aclaren in 2025 to align to our business expectations for that business as well as the deal model, which is high single digit growth. And we continue to see strong growth opportunities in E and T for the Aclaren business. In principle, we are excited to see the synergies that we've been able to drive with our Microfrance E and T instruments business, and we would expect that to continue in 2025 as well.

Speaker 7

Okay. And then, Leah, for you, P and L related questions. The 70 basis points of step down in margins, is that inclusive of, I guess, the step the increased shipping hold that you're alluding to? And the second part of the question is just how you think about managing the middle of the P and L in the context of some of these dynamics continuing, meaning could we see you pull back expenses meaningfully? Do you have to again provide incremental, I guess, retention for the sales force?

Speaker 7

Just want to understand kind of how you're thinking about managing the P and L in the context of kind of what you've contemplated for 2025?

Speaker 3

Yes. So to your first point on margins, yes, within the 70 basis point decline that we're calling versus 2024, it does consider the additional shipping holds as well as our remediation efforts as we continue to execute against the compliance master plan. So we'll see additional levels of scrap, we'll see additional underutilization at some sites, but again it's contemplated within the frame of that 70 basis points. From an OpEx perspective to your point, we are taking a very careful approach to managing our operating expenses this year, especially given the potential for additional shipping holes. We're striking a balance between our discretionary spending as well as those essential investments we know we will need to make to align both of delivery of our current earnings as well as our long term goals.

Speaker 3

So right now as we've designed kind of the P and L and how we're managing to that, we're pacing towards the lower end of our range to be able to manage that risk.

Speaker 7

Lower end of your EPS range or I'm sorry, or lower end of your EBITDA margin? Okay. Yes. Thank you.

Speaker 3

Yes. Lower end of our guidance range.

Speaker 2

Thank

Operator

you. Thank you. Our next question comes from Richard Newitter of Truist Securities. Your line is open.

Speaker 8

Excuse me. Thank you for taking the questions. First one, just following up to I think it was Ravi's question earlier. So you have a placeholder in there for additional Shippold disruption, I think to the tune of $120,000,000 in the year. It was really the 1Q outlook that seems to be bearing the brunt of the guidance below consensus at least or below us.

Speaker 8

So I'm just trying to get a sense, you're saying that with the big ramp after the 1Q and there's a placeholder for additional disruption that could materialize in the back half or you've captured all of that or most of that in the 1Qfirst half?

Speaker 3

Yes. So let me step through that. So within Q1, we have two headwinds related to shithold. First is the carryover from 2024 order of magnitude about $10,000,000 Second, our new shithold identified as we've continued to work under the compliance master plan, which is about $8,000,000 to $10,000,000 So in total in Q1, it reflects about, call it, dollars 18,000,000 to 20,000,000 of shithold. We expect those shithold to be resolved or remediated by the second half.

Speaker 3

So you'll see some progressive improvement in Q2, but principally remediated by the second half. So on an annual impact, the impact of what we know today, which is impacting Q1, we expect it to be about $27,000,000 With the guide the way the guide is structured is that the high end in addition to that $27,000,000 it allows for an incremental $60,000,000 dollars in shithold and at the low end of the guide it allows for an incremental $120,000,000 of shithold.

Speaker 8

Okay. That's helpful color. Thank you for that. And then, look, I know you guys are dealing with a lot with kind of what you have in hand with all the regulatory and private label items. But just curious, is there any view on how we should be prepared for you to think about deals on the near to intermediate term horizon?

Speaker 8

Or just really just heads down fixing the items that you can right now with the organic core business, digesting a clearance, getting that to work and deals are out in front? Or are you going to try to be opportunistic as they present themselves? Thank you.

Speaker 1

So thank you for the question, Richard. So M and A has been and will continue to be a growth strategy part of our growth strategy moving forward. And we have a really robust process in evaluating M and A opportunities and assessing their strategic fit and value creation thesis. Having said all of that, our focus really this year is to execute our compliance master plan and continue with our manufacturing capacity and resiliency programs and also bring down our leverage. So those are the key focus that we have this year.

Speaker 5

Thank you.

Operator

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

Speaker 9

Thank you. Good morning. I guess, Mocha and Leah, in private label, what is your visibility level on getting component supply up to where it needs to be in the second half of the year and your confidence in not losing customer demand in the interim?

Speaker 3

Yes. So maybe a little bit of background, so because we did see volatility in terms of our private label results in Q4. But, we historically, our revenue from private label has been a bit variable. So that volatility or variability is not entirely new. In general, across the year, we would expect the private label business to grow at mid single digit rates.

Speaker 3

That said, we did have an issue in Q4 with respect to a component delay from a supplier that many companies faced as well, so including us. At this point, we anticipate that component delay will be resolved by the second half of twenty twenty five, and we'll be able to resume the business at that point. For a full year twenty twenty five, that probably means the business is flat to low single digits, but beyond that, we'd expect it to resume into the mid single digit growth trajectory.

Speaker 9

Supply since taking a bit longer than expected. Can you talk to what you're hearing from customers in your commercial organization? It gives you confidence that the demand will be there once you're fully up and running on Integriskin?

Speaker 1

Yes. So Steve, I can tell you that since I have joined, I hear repeatedly from the surgeons and the customers that I have met that the product is there is very few products exactly like it out there in the market. So the demand for Integra Skin is extremely, extremely high and there is a need for it in the market. We hear that every day and we are confident that when we get back and we have sufficient supply that we can get the get back into those indications. They're unique products that serves the entire complex wound procedures and it's very much in demand.

Speaker 9

Got it. Appreciate the color. Thank you.

Operator

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

Speaker 10

Good morning and thanks for taking the questions. A couple of follow ups here. One on Entegra Skin, I guess I just wanted to understand a little bit more why production isn't back to normal. I think that was the goal of Q4 and it sounds like you might have gotten there. But then I think you guys mentioned scheduled maintenance and updates.

Speaker 10

So presumably, you would have had visibility into those when you talked to us last. So just want to understand if there's something else that happened within the production line that may have caused a little bit of the delay that you're talking about?

Speaker 1

Yes. So as we explained, it's really the planned maintenance. We have maintenance shutdowns twice a year as it's required to do equipment calibration, any preventative maintenance you have to do on the line. So that's a schedule thing. I think the thing that complicated the factor a little bit for us is the fact that we're not to our full safety stock levels.

Speaker 1

I think that has been the one that has caused us to prevent us from being able to meet demand most likely in Q1. However, we have a comprehensive set of projects that we're working on, on integrated skin manufacturing to address the capacity and resiliency. And these projects span anywhere from yield improvements to equipment upgrades to optimizing the utilization of the three facilities that we have that manufacture Integra Skin. So some of our investments in these initiatives started really back in middle of last year, and we should be able to see the impact of those coming online as we go throughout the year starting in Q2.

Speaker 3

And so Craig, just to add on to that I'm sorry, just to add on to that. As you project through the end of twenty twenty five, the difference between 2025 and 2024, '20 '20 '4, we were managing to get back to historical revenue run rate. In 2025, we'll get beyond that not only on a full year basis be able to meet demand, but also be able to reestablish our safety stock. And so until we get to that safety stock point, that's where we will see quarter to quarter variability, but on a full year basis do expect to hold normal demand.

Speaker 10

Got it. Okay. That's helpful. And then I recognize that Eclaren has done very well since you guys brought it aboard. But I did want I believe the guidance was for for $97,000,000 in $24,000,000 and it came in at $95,000,000 So just wanted to understand what that delta is, that $2,000,000 difference?

Speaker 10

I recognize it's small. And then is there any reason to think it sounds like you still believe you can get to the high single digit growth rate in 2025, but any other comments on maybe the cadence of that growth or anything else on your confidence of getting to the Aclaren growth?

Speaker 3

Yes. So just to backtrack, when we initially acquired Aclaren, we our initial guide for that business was $80,000,000 And then if you recall, as we actualized Q2 and Q3, we were trending above that. In Q4, we did adjust guidance up on the business to be at I think it was closer to about $95 ish million. And we were just a few million off of that. That's largely attributable in Q4.

Speaker 3

We actually migrated a clearance ERP environment from their existing one to our Oracle. And so we did have a little bit of, I'll call it, operational disruption as a result of that, that had a relatively minor impact on the business. So we don't expect that to repeat. As I mentioned earlier, I think in response to Ryan's question, we do anticipate for 2025, Acclarent will grow at high single digits, which is consistent with our expectations and our deal model.

Speaker 10

Okay. Thanks for taking the questions.

Speaker 1

Yes.

Operator

Thank you.

Speaker 1

Yes, absolutely.

Operator

And our next question comes from Joanne Wuens of Citi. Your line is open.

Speaker 11

Good morning and thank you so much for taking the questions. I'll just state the two upfront. I'm curious the recovery pathway for private label and how you think about that returning to sort of positive growth over time? And then second of all, given where your first quarter is in your full year guide, it would imply a pretty steep ramp over the remaining three quarters. If you could sort of just sort of level set us and how we should think about that ramp, that would be great.

Speaker 11

Thank you so much.

Speaker 3

Yes. So let me start with the cadence question or the Q1, yes, revenue cadence question. Given some of the supply disruptions that happened in 2024 and the concentration in certain quarters, when you look at our organic growth, year on year, there's noise in it, right? So it's more instructive I think to think about our revenue cadence in terms of absolute revenue that will deliver quarter to quarter. Q1, as I mentioned, does reflect kind of the headwinds of the shipping holds.

Speaker 3

It reflects the decline on Integra Skin due to production variability as well as the private label component supply delay. As we get out of Q1 and move into Q2 from an absolute revenue perspective, we do expect a step up driven in part by some remediation against the existing ship and hold also driven by higher entire skin production. Q2, Q3 will then be kind of at slightly above Q2 levels. And then in Q4, we would expect kind of our typical seasonal step up. And that's kind of the glide path, if you will, that allows you to get to the guide considerations that I shared earlier.

Speaker 3

From going back to your original question around private label, as I mentioned, because the dynamic that we saw in Q4 was specifically related to a component supply delay and we do have line of sight to when that supply delay will be resolved. We don't anticipate any kind of long term or permanent negative impacts to the business as a result.

Operator

Thank you. Our next question comes from Jason Bedford of Raymond James and Associates. Your line is open.

Speaker 12

Good morning. Just a couple of quick ones here. On private label, the component delay, did you quantify the impact in the fourth quarter?

Speaker 3

We did not.

Speaker 12

Would you care to?

Speaker 1

Or

Speaker 3

is it the amount of material? Yes. The order of magnitude is about $5,000,000

Speaker 12

Okay. And just to wrap up on the shippold impact on revenue. So the high end assumes roughly $87,000,000 in shippold impacts, meaning that the $27,000,000 I think you identified plus an incremental $60,000,000 and we can apply similar math for the mid and low end of the guide. Is that fair?

Speaker 3

That's fair.

Speaker 12

Thank you. And just last one, if I can. Timeline on Braintree, is it still first half twenty twenty six?

Speaker 1

Yes. So we're pleased with the progress that we're making in Braintree. The construction is completed and we are in the process of installing and qualifying equipment. And we're on track for resuming production in first half of twenty twenty six. And we have a rigorous project management process that we put in place to ensure that we stay on timelines.

Speaker 12

Great. Thank you.

Operator

Thank you. This concludes the question and answer session in today's conference call. Thank you for participating and you may now disconnect.

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Earnings Conference Call
Integra LifeSciences Q4 2024
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