Good day. Thank you for standing by. Welcome to Integra LifeSciences Fourth Quarter 2024 Financial Results. [Operator Instructions] Please be advised that today's conference is being recorded. I will now like to hand the conference over to your speaker today, Chris Ward, Senior Director of Investor Relations. Please go ahead.

Good morning and thank you for joining the Integra LifeSciences Fourth Quarter 2024 Earnings Conference Call. Joining me on the call this morning is Mojdeh Poul, President and Chief Executive Officer and Lea Knight, Chief Financial Officer. This morning, we issued a press release announcing our fourth quarter and full year 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 in a file named Fourth 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 the effects of foreign currency, acquisitions, and divestiture. 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 on Form 8-K filed today with the SEC. And with that, I would like to turn the call over to Mojdeh.

Thank you, Chris. Good morning, everyone and thank you for joining us today. Before we begin, I want 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. 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 3M's Global Healthcare business. Over these 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. 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. 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…

Thanks, Mojdeh. We'll begin with our full year financial results starting with Slide 5. Our 2024 revenues were $1.61 billion 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 million 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 million revenue contribution from the Acclarent acquisition to drive the 4.5% reported revenue growth. 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 CSS business, we delivered performance at or above mid-single digits inclusive of disposables, Certas Plus programmable valves, DuraGen and Mayfield Capital. CerebroFlo EVD catheters posted double-digit growth results, while CereLink 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, DuraSorb and AmnioExcel. 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&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. Our adjusted EBITDA margin performance reflects the impact of the…

Thank you, Lea. 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. While we acknowledge the operational challenges we are facing, we are actively addressing them with urgency, discipline and 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. 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.

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

Hi, good morning. Thank you for taking the question. So I wanted to just ask about the issue that you talked about with Integra Skin and in some of these ship holds 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 approach thinking about the risk of further things happening throughout the year? And in other words, how derisked is your guidance now that you put these assumptions in it?

Yeah. 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 Integra Skin. So from a guidance perspective, as you heard in the remarks, we are taking a wider approach to the guide. 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 frame that we've provided before. It also includes a full year of Acclarent contributions, and it does assume an impact from additional shipping holds. At the top end, the assumption is a $60 million impact beyond what we know today. At the midpoint of the range, we've assumed shipping holds of about $90 million beyond what we know today. And at the low end of our guide, we've assumed shipping holds of about 120 million beyond what we know today. 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 Mojdeh?

Yes. On Integra Skin, 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 Integra's can 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.

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

Thank you.

Our next question comes from Vik Chopra of Wells Fargo. Your line is open.

Hey, good morning and thanks for taking the questions. Two for me. Mojdeh, 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.

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. So that is first and foremost of the highest priority for us. Secondly, I would say continuing to grow in 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. 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. 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 opportunity. 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.

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. But can you just tell us how much of your manufacturing is coming from either Mexico or Canada? And how much flexibility do you have to move production elsewhere and to take price to offset any tariff impact? Thank you.

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. 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 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.

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

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'll you're baking in future ship holds in 2025 beyond what you know today? I mean, what's the rationale for expecting more quality issues at this point? And are there any you're expecting? It's unusual to see future ship holds at this point given the timelines we've had with remediation. So let me start there and I have one follow-up.

Certainly. Thank you, Robbie. 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 2025 to complete the assessment. 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 -- sorry, we're two months into 2025. 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.

Got it. Okay. Follow up, I wanted to ask on cash flow. It's been sub 20% free cash flow conversion in the past two years. I didn't see or hear a specific number of conversion rate for 2025. So how do we think about both the conversion and the absolute dollars of free cash flow assumed in 2025? Thanks.

Certainly. Yep. 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 '25 CapEx will remain fairly consistent with 2024 as we continue to build out of Braintree, continue some of the investments and capacity that Mojdeh referenced in her remarks earlier. As you convert that to kind of what you can expect to happen on a free cash flow conversion perspective, from a trailing twelve month, we would expect a step-up kind of once we lap Q3 of 2024. So expect kind of in Q4 of 2025 is when we'll see a step up in free cash flow conversion above that 20% that you referenced. And then as it relates to overall leverage, you didn't ask about this, but I'll put that as well. We were into 2024 at four point zero. We expect leverage to be flat to slightly down by the end of 2025, but seeing more much more notable improvement in leverage as we go into 2026.

Appreciate it. Thank you very much.

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

Good morning. Thanks for taking our question. I want to talk about Acclarent 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 Acclarent 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?

Yeah. So thank you, Ryan. You are correct. So after the first quarter, we will be fully organic on the Acclarent business. As you heard in our remarks, we were very pleased with kind of the success of the integration to date. We expect growth for Acclarent 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 ENT for the Acclarent business. In principle, we are excited to see the synergies that we've been able to drive with our MicroFrance ENT instruments business, and we would expect that to continue in 2025 as well.

Okay. And then, Lea, for you, P&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 do you think about managing the middle of the P&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? Just want to understand kind of how you're thinking about managing the P&L in context of kind of what you've contemplated for 2025?

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 point. 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 hold. 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. So right now, as we've designed kind of the P&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.

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

Yes. Lower end of our guidance range.

Thank you, Lea.

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

Excuse me. Thank you for taking the questions. First one, just following up to I think it was Robbie's question earlier. So you have a placeholder in there for additional ship hold disruption, I think to the tune of $120 million 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. 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 1Q/first half?

Yeah. So let me step through that. So within Q1, we have two headwinds related to ship holds. First is the carryover from 2024 order of magnitude about $10 million. Second, our new ship holds identified as we've continued to work under the compliance master plan, which is about $8 million to $10 million. So in total, in Q1, it reflects about, call it, $18 million to $20 million of ship holds. We expect those ship holds to be resolved or remediated by the second half. 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 million. With the way the guide is structured is at the high end, in addition to that $27 million it allows for an incremental $60 million in ship holds. And at the low end of the guide, it allows for an incremental $120 million of ship holds.

Okay. That's helpful color. 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? Or is this really just heads down fixing the items that you can right now with the organic core business, digesting Acclarent, getting that to work and build out in front? Or are you going to try to be opportunistic as they present themselves? Thank you.

So thank you for the question, Richard. So M&A has been and will continue to be growth strategy, part of our growth strategy moving forward. And we have a really robust process in evaluating M&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.

Thank you.

Thank you. Our next question comes from Steven Lichtman of Oppenheimer & Company. Line is open.

Guess, Mojdeh and Lea, 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?

Yeah. 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. 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 that component delay will be resolved by the second half of 2025, and we'll be able to resume the business at that point. For full year 2025, that probably means the business is flat to low single digits. But beyond that, would expect it to resume into the mid-single digit growth trajectory.

Got it. Thanks, Lea. And then I guess a similar question on Integra Skin supply since taking a bit longer than expected. Can you talk to what you're hearing from customers in your commercial organization gives you confidence that the demand will be there once you're fully up and running on Integra Skin?

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's 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 back into those indications. They're unique products that serves the entire complex wound procedures and it's very much in demand.

Got it. Appreciate the color. Thank you.

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

Good morning, and thanks for taking the questions. A couple of follow ups here. One on Integra 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. 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?

Yeah. 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. 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 Integra 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.

And so Craig, just to add on to that. As you project through the end of 2025, the difference between 2025 and 2024, 2024 we were managing to get back to historical revenue run rates. 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.

Got it. Okay, that's helpful. And then I recognize that Acclarent has done very well since you guys brought it aboard. But I did want I believe the guidance was for $97 million in '24, and it came in at $95 million. So just wanted to understand what that delta is, that $2 million difference? 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 '25. But any other comments on maybe the cadence of that growth or anything else on your confidence of getting to the Acclarent growth?

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

Okay. Thanks for taking the questions.

Our next question comes from Joanne Wuensch of Citi. Your line is open.

Good morning and thank you so much for taking the questions. I'll just state the two upfront. I'm curious on 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 on how we should think about that ramp, that would be great. Thank you so much.

Yeah. So let me start with the cadence question or the Q1, yeah, 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. 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 Integra Skin production. 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. 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.

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

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

We did not.

Would you care to?

Order of magnitude. No. Order of magnitude, it's about $5 million.

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

That's fair.

Thank you. And just last one if I can. Timeline on Braintree, is it still first half 2026?

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 2026. And we have a rigorous project management process that we put in place to ensure that we stay on timeline.

Great. Thank you.

Thank you. This concludes the question-and-answer session in today's conference call. [Operator Closing Remarks].