Good day and thank you for standing by. Welcome to the Integra LifeSciences First Quarter 2025 Financial Results Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host today, Chris Ward, Senior Director of Investor Relations. Please go ahead.

Good morning and thank you for joining the Integra LifeSciences first quarter 2025 earnings conference call. With me on the call are Mojdeh Poul, President and Chief Executive Officer; and Lea Knight, Chief Financial Officer. Earlier this morning, we issued a press release announcing our first quarter 2025 financial results. The release and corresponding earnings presentation, which we will reference during the call, are available at integralife.com under Investors, Events and Presentations in the file named, First Quarter 2025 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. 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. 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. With that, I will now turn the call over to Mojdeh.

Good morning, everyone. Thank you for joining us on the call today. During today's call, I will provide a brief overview of our operating results for the first quarter followed by an update on our compliance master plan, new initiatives, and key leadership appointments that will strengthen our operations, overall execution and enterprise discipline. I will also provide remarks on the recent tariffs. Lea will then walk through our financial results in more detail and provide commentary on our financial outlook for the second quarter and full year. Our year has started out largely as we expected. On our first quarter performance, revenue came in at $383 million, near the top end of our guidance range. Reported revenue grew 3.7%, while organic revenue declined 3.5%, primarily due to the expected impact of ship holds. Even with those constraints, we saw positive reported revenue contribution from Acclarent and solid double-digit growth across many product lines, not impacted by supply availability, which speaks to the strength of our underlying demand for our portfolio. Adjusted EPS for the quarter came in at $0.41, also within our guidance range. We continue to operate in healthy end-markets and remain confident in the long-term growth potential of our specialized product portfolio. While we recognize we're not yet achieving the full potential of this business, our compliance master plan along with targeted investments in our manufacturing infrastructure are positioning us for long-term sustainable growth through improved supply chain excellence. Since our fourth quarter call in February, I've had the opportunity to dig deeper and spend more time with our teams across manufacturing, quality, regulatory and commercial functions as well as our customers. I continue to be impressed by our team's strong commitment to our customers and our customers' consistent positive recognition of the value of our differentiated…

Thank you, Mojdeh. Let's take a more detailed look at our first quarter financial highlights, starting on Slide 5. Total revenues for the first quarter were approximately $383 million, representing growth of 3.7% on a reported basis and a decline of 3.5% on an organic basis compared to the same period last year. Reported revenues include approximately $29 million from the Acclarent acquisition and a 60 basis point FX headwind. Organic revenue performance was negatively impacted by several supply disruptions provided for in our guide, including ship holds amounting to approximately $18 million, production timing impact to Integra Skin of about $5 million and $4 million stemming from a private label component supply issue. Our adjusted EPS for the quarter was $0.41, down 25% compared to 2024. As we look down the P&L, gross margins were 62.2% for the first quarter, down 220 basis points versus 2024. Gross margins in the first quarter were negatively impacted by manufacturing variances carrying over from supply challenges in 2024, inefficiencies related to our private label supply and an increase in network optimization spend. Our adjusted EBITDA margins were 16.6%, down 290 basis points compared to 2024, reflecting the decline in gross margins and increased investment in our quality organization. Operating cash flow for the first quarter was negative $11.3 million. Turning to Slide 6. We'll now discuss revenue highlights from our Codman Specialty Surgical segment. CSS reported first quarter revenues of $281 million, which reflects growth of 9.4% on a reported basis and a decline of 1.1% on an organic basis. Global neurosurgery revenues declined 4.7% organically, largely driven by the impact of ship holds. These holds particularly affected performance across our Advanced Energy, CSS management, dural access and repair and neuromonitoring product lines. However, demand across the neurosurgery portfolio remains strong, particularly…

[Operator Instructions] Our first question comes from Matt Taylor with Jefferies.

All right. Great. Thanks for taking our questions. This is actually Young Li in for Matt. I guess to start maybe just on the 2Q guidance a little bit more than expected, but some of that is related to the shipment delays. I wanted to hear a little bit more about what you found sort of late in 1Q for you to up that number even though it's within the annual guidance. And then just the assumptions for the low-end of 2Q guidance and then just the confidence level for the second half of the year, given that it will be a bigger ramp?

Certainly. Thank you for the question. So to your point on Q2, it does reflect the newly identified -- the impact of the newly identified ship holds, which did bring down kind of our original expectation of Q2. That said, we did -- as part of our February call and the full year guidance, we did contemplate the risk of finding additional ship holds during the course of the year, right? And that was part of the work we were doing as part of the compliance master plan. So we saw that play out in Q2. It's reflected in the guide that you heard for Q2. At the midpoint, the Q2 guide now reflects a step-up of about $12 million versus Q1. That reflects improved Integra production. So we'll see that step-up in Q2 versus Q1. It does reflect a little bit of normal seasonality that we see in Q2 versus Q1 of about $10 million. And then it is offset by kind of the net incremental shipping holds that I discussed. As it relates to the balance of the year, because I believe your second half of your question was with respect to the second half lift, from a second half perspective, again, at the midpoint, our guide reflects a step-up of about $125 million second half versus first half. Drivers of that are about 30% due to the combination of Integra Skin production continued to improve throughout the balance of the year, along with the resolution of our private label supply constraints. So we'll see a step-up on that part of the business as well. Another 30% of that has to do with stronger demand that we're seeing from parts of our portfolio that have not been impacted by supply. We see about 15% of that lift driven by a net supply improvement. So while we did see supply ship holds in Q1 and Q2, they'll start to abate a bit in the second half. So we will see improvement there and the final 25% driven by our seasonal demand.

No, great. Very helpful. And then I guess a follow up on second question on tariff impact. You called out $22 million, $0.22 impact for '25. And just kind of wondering how much mitigation efforts are built into that and then how should we view that number for 2026? Should we annualize it? Will there be tariff?

Thank you for your question. So we have several mitigations that we're pursuing when it comes to tariffs. In the near-term, obviously, we're continuing to apply for tariff exemptions and we're considering pricing, selective pricing increases as well as surcharges where appropriate and possible. And then when it comes to longer-term actions, it's about sourcing optimization and also optimizing our supply chain network and value streams. And obviously we do have the manufacturing facility in China that we are -- we're building. We are actively pursuing all these mitigations, both short and long-term, but we haven't built the -- an impact of them into our guide at this point. Lea, if you want to.

Yes, let me take the second part of the question. So to your point, the $22 million that we characterize is specific to 2025. At this point, we think it's a little premature to provide guidance specific to 2026. We'll need to wait to understand more about how the tariff policy is finalized in the coming weeks and months.

All right. Thank you very much.

Our next question comes from Ryan Zimmerman with BTIG.

Hi, everyone. This is Izzy on for Ryan. Thanks for taking the questions. I heard your commentary on the expectation for private label to step up in the back half of the year, but I was just curious what kind of line of sight you have into demand and what is contributing to your confidence there?

Thank you for the question. Yes, we do anticipate a second half step up. The order of magnitude is about a $10 million step up second half versus first half. On a full year basis, we are adjusting our private label forecast down a bit. So we are now calling it to be about a low-single-digit decline. Previously, we thought it'd get back to flat. That said, we still believe as this business moves forward into 2026, it will continue to perform at a mid-single-digit growth trajectory.

Thank you. That's helpful. And then instruments had pretty strong growth this quarter with the double-digits. We were curious if there was any pull forward in demand that's -- in that line from tarrif?

So in general, our instruments business tends to be lumpy. So we do have quarter-to-quarter, so we'll see variations in terms of growth and performance, not necessarily driven by tariffs per se. On a full year basis, we would expect that business to continue to be kind of the low mid-single digit growth trajectory that we typically see on that business.

Great. Thanks for taking the questions.

Our next question comes from Vik Chopra with Wells Fargo.

Hey, good morning, and thanks for taking the question. Mojdeh, you've been there for, I guess, about a quarter. And I'd just love to hear what has surprised you to the upside to the downside? And then I had a quick follow-up question, please.

Yes. Hi, Vik, it's good to hear your voice. Yes. I'd like to answer that question with -- in the context of the what and the how. What in the sense of did I know everything that was going on here regarding the supply chain challenges and quality work that's being done? So the answer to what was the part of the challenges that we were facing, yes, that was not the -- that was not a surprise to me. The Board had been very transparent with me about that. I think my findings during the time that I have been here is more around how we operate and move forward our priorities. So to me that's about execution. I think that's where I see the opportunities for significant improvement. And that's why I have actually established the Office of Transformation and Program Management because what I'm trying to derive is to have prioritization of our key initiatives on programs at the enterprise level. So the organization has clarity around what's the most important for us to drive short and long-term performance for the company. And then how do we scope those programs, how do we resource them adequately and how do we put in place the governance that's required to make sure we manage them to the key milestones and deliverables that they have to deliver in order to execute those programs and initiatives on time and in full. So for us, it's about advancing the foundational capabilities that are required to make performance and operational excellence part of the fabric of what we do and how we do things at Integra.

Got it. Thank you. That's very insightful. My follow-up question is for Lea. You have a convert maturing in August of this year. Any thoughts on how you plan to satisfy that commitment? Thanks for taking the questions.

Thanks, Vik. Appreciate the question. Yes, so the convert that is maturing in August, we intend to satisfy that maturity on our revolver. We do also have a swap portfolio that comes online around that time as well. That portfolio will allow us to fix about over half of our debt outstanding at that time with an interest rate that will be in the low 3% range. So that's how we'll manage that and we'll have that position through the end of 2027. We'll then look to determine a more permanent financing structure in 2026.

Our next question comes from Robbie Marcus with JPMorgan.

Hi. This is actually Lily on for Robbie. Thanks for taking the question. One follow-up on tariffs. I was wondering if you could break down the different components of the tariff impact and what's assumed in the guide. How much of that $22 million is from your exposure to China and how much of it is from Europe and other international imports?

Yes. So let me answer that by giving you kind of a sense of how we -- how tariffs are showing up in the P&L. And I think that will give you a sense of kind of relative sizing. So first the product -- the costs associated with products manufactured outside the US and imported into the US, we capitalize that into inventory and we recognize that cost through the P&L and cost of goods sold typically over a four to seven month kind of horizon. Second, the tariffs on goods imported into China from the US, we recognize also through cost of goods sold as those products are sold and that's typically with a one month horizon. So as you'll see, the cost associated with goods exported to China will be realized on a much more immediate basis. In Q2, we're seeing about a $0.04 impact, which is largely China. As we progress throughout the balance of the year, you'll see more of that start -- cost start to be reflected from the goods that we import into the US, but in the immediate, it will be more so China based.

Got it. And just as a follow-up on the guide, the $55 million to $70 million in ship holds is a pretty big step-up from the $27 million previously. So I'm just trying to get a sense for how conservative you feel this guide is, how de-risked do you think this updated outlook is and what gives you the confidence in the ramp over the rest of the year? Thanks so much.

Yes, no worries. So to your point, our guide that we communicated back in February did allow us -- was constructed with the intent to allow us to absorb about $90 million to $150 million in supply disruptions. Based on that and where we currently are, we could absorb an incremental $20 million in supply disruptions for the balance of the year and still hit the high end of our guide. So the high end remains possible from us. As we look across the other parts of the business, we're also seeing strong momentum from an Integra Skin production perspective. Our expectations on how private label supply constraints will be alleviated along with strength in demand that we're seeing from other parts of our portfolio that aren't impacted by supply. That momentum also gives us confidence that the high-end of our range is still possible. So in short, just felt it was too premature at this point to bring down the high end of the guide.

Great. Thank you.

Our next question comes from Richard Newitter with Truist.

Hi. Good morning. This is Ravi for Rich. Thank you for taking the questions. I guess my first question is around some of the remediation commentary that you're talking about. It sounds like, Mojdeh, you put in some of the personnel that are needed to kind of take this to the finish line. But regarding the 2026 commentary around that, is there a goal or is there any color that you can give around remediation being completed by the time Braintree goes live? Like can we have -- I guess what I'm trying to ask is, can we have a clearing event by that time potentially? And then I have a follow-up.

Yes. Thank you for your question. So a couple of parts to your question. Regarding our efforts on compliance master plan and remediations, as stated, we have completed the assessments in 10 of our 14 manufacturing sites and the remaining four are going to be completed by the end of the third quarter. And then in the fourth quarter is where we will be evaluating the findings as well as strategizing with the remediation plans. And then also in Q4, we are doing the assessments in our key finished goods suppliers. And so all the assessments are going to be completed by the end of the year and most of the remediations we plan on completing by year end, a few of them that may require process remediations may take into 2026. But that's more broadly around the remediation planning. Now when it comes to the warning letter and the resolution of the warning letter, we are working very diligently to do our part in making sure that we complete our implementation actions in time for the FDA. And we are already working towards making sure that by the time that the manufacturing site is up and running in Braintree that we will have resolved the FDA warning letters. However, there's only certain parts of it that's in our control, which is us doing our part with delivering to the key action items that we have provided to FDA that's outlined in the warning letter and we are running on track with those. And we have been in regular dialog with the FDA. We have submitted one update to them in -- actually in March and there's another update that we're providing to them on our progress in the middle of May. So we've been in dialog with them working diligently to address all the findings.

Great. Thank you. That was super helpful commentary. And then I guess my second one is on skin substitutes and LCD pushouts, I guess, that were supposed to go into effect about a month ago, but not anymore. So can you maybe talk about what you're seeing in that space, maybe what the -- the overall kind of view of the industry looks like right now, what you may be doing to get some more of your products on that list if you think that it's going to be coming back into effect potentially next year or later on in the future? Thank you.

Sure. Thank you for your question. Just a reminder that majority of our business is on the -- in the inpatient and not outpatient. Even though we have products that are on the list, but a majority of our revenue is inpatient. However, we definitely think this is a positive that the products with the proven clinical evidence would be -- would be called out for being the products that you use. We think that's a great move and we look forward to the implementation of it in January, hopefully.

Our next question comes from Joanne Wuensch with Citi.

Hi, everyone. This is Anthony on for Joanne. Just one from us. With the tariff mitigation strategies, particularly the more disciplined expense management, how confident are you that this isn't going to impact any of your remediation efforts and the ability to get Braintree up by next year? Thanks.

Yes, Anthony, thanks for the question. So to your point, again, we are in the process of implementing those tariff mitigation actions. And given kind of the nature and materiality of it, there definitely is a high priority for us. At this point, we don't believe it will get in the way of our ability to do that as well as continue our progress on the CMP or those remediation efforts. Again, as a reminder, our tariff mitigation actions are around pricing, sourcing, logistics, some local in China for China production ultimately. So we see those as initiatives or measures that we can take in incremental to CMP measures without conflict.

Our next question comes from Jason Bedford with Raymond James.

Good morning. Just a couple of questions that probably require quick answers. I think they're all for Lea. First, on the $22 million in tariffs, is it fair to say that half of the impact is China, if I just carry the $0.04 through the year?

For 2025, directionally, that's closed. That's about right, yes.

Okay. And then on the guide for the year, the revenue guide, Lea, I think you mentioned a change in expectations for private label. Any other notable segment changes embedded in the '25 revenue guide?

No, not based on what we see right now.

Okay. And then last one is there a 2Q revenue impact from skin and private label that component? Apologize if I missed it earlier.

No. So for Q2, actually for Integra Skin, that's when we'll start to see a pickup based on the production that we're seeing already. So we'll start to see that business pick-up compared to Q1. Private label, though, we'll still not see the lift in Q2. That lift will begin in Q3.

Thank you.

[Operator Instructions] Our next question comes from the line of Craig Bijou with Bank of America.

Good morning. Thanks for taking the questions. A couple of follow-ups for me. So Lea, I guess I just wanted to understand, so is the ship hold increase that you guys saw or that you're expecting this year, is that roughly $10 million? And then I did notice that organic growth for the full year in the guide came down by 60 basis points. So is that the -- is it just from the ship holds?

So thanks for the question, Craig. So the incremental ship holds that we identified late in Q1 have an annual impact that's projected to be $28 million to $43 million. So if you recall in our February call, at that point in time, we had identified annual impacts of about $27 million. When you add on top of that what was newly identified, that's how you get to the range that we called out in our prepared remarks of about $55 million to $70 million is what we're currently projecting as the annual impact for ship holds. So I hope that answers that part of the question. And then your second question, Craig, the second part of your question?

Yes, organic growth, I think in the bridge, it goes from 3% to 2.4%. So I was just -- is that just the ship hold impact?

Yes. So we held the reported range of our February guide flat. And it does reflect a $10 million tailwind from FX, that was absorbed into the organic piece.

Okay. But the organic, I guess I'm just asking because I think in the bridge, you have organic growth, you had organic growth of 3% for '25 and now it's 2.4%. So I didn't know if it was just the ship hold or if there was something else that we should be considering on the underlying growth.

Yes, it was more just -- we kept our reported range flat and the offset is FX became a tailwind. So the offset is the organic growth did come down slightly.

Okay. And then one quick follow-up. And on the -- on your debt leverage and I believe that you said that the covenant goes to 4%, 4.25% in Q4. And I think you said at the end of Q1, you were at 4.3%. So maybe just help us think about how you're thinking about to define the capital structure, the debt structure going forward?

Certainly. So first, we fully expect to remain within our covenant levels through the end of the year. We are managing our OpEx spend at the low end of our revenue range. So we're pacing our spend to manage profitability very closely. We do have the ability, if necessary, to drive incremental OpEx reductions should that become necessary. And then we're also keeping open transparent dialogues with our bank partners and lending groups, long-standing investors that we've had to make sure that they also understand how we're closely managing the business for profitability this year. And so for all those reasons, fully believe we'll be able to remain within our covenant levels even with the step down that you noted in Q4.

Great. Thanks for taking the questions.

I'm showing no further questions in queue at this time. This concludes today's conference call. Thank you for participating. You may now disconnect.