Integra Lifesciences Holdings Corp

NASDAQ:IART

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and welcome to the Integra LifeSciences Second Quarter 2024 Financial Results. [Operator Instructions]. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the call over to Chris Ward, Senior Director, Investor Relations. Please go ahead.

[Christopher Ward, executive]

Thank you. Good morning, and thank you for joining the Integra LifeSciences Second Quarter 2024 Earnings Conference Call. With me on the call are [ Stuart Essig, ] Executive Chairman; Jan De Witte, President and Chief Executive Officer; and Lea Knight, Chief Financial Officer.

Earlier this morning, we issued a press release announcing our second quarter 2024 financial results. The release and corresponding earnings presentation, which we will reference during the call, are available at integralife.com under Investors, Events & Presentations and a file named Second Quarter 2024 Earnings Call Presentation.

Before we begin, I want to remind you that many of the statements made during this call may be considered forward looking. Factors that could cause [indiscernible] 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 an organic revenue growth and organic revenue growth, excluding Boston.

Organic revenue growth excludes the effects of current foreign currency, acquisitions and divestitures. Organic revenue growth, excluding Boston excludes revenues from products manufactured in our Boston facility in both periods. Management believes that excluding revenue from all products manufactured at Boston at the Boston plant provides useful information when evaluating [indiscernible] company's organic growth because of the unusual nature of the manufacturing stoppage and voluntary global recall. Unless otherwise stated, all disaggregated and franchise-level revenue growth rates are based on organic performance.

Lastly, our comments today will include certain non-GAAP financial measures. Reconciliations of non-GAAP financial [indiscernible] which is an exhibit to Integra's current report on Form 8-K filed with the SEC. And with that, I will now turn the call over to Stuart.

[Unknown Executive]

Thank you, Chris. Before Jan and Lea begin with the investor presentation and Q&A, I'd like to say a few words about the business and the path forward. We had a good second quarter, which Jan and Leo will cover in more detail shortly. We appreciate, however, that much of your focus today will be on our guidance and performance for the rest of the year and what lies further ahead. So I'll address that first before handing the call to them.

Integra has a very strong commercial team armed with a differentiated portfolio. That said, over the last several quarters, we've identified a series of operational and quality systems gaps. As a result of both the typical audit by regulatory agencies as well as our own in-depth reviews of the state of our broader quality system, it has become clear that there is a need to bolster our manufacturing quality compliance processes across the organization.

What has arisen from these evaluations is our compliance master plan. The systemic and holistic approach to improving our quality system and GMP compliance across our manufacturing and supply network. The plan will drive increased spending in the second half of 2024 and lower revenue and EPS expectations for the year.

As reflected in our updated guidance this morning, there are revenue impacts resulting from several shipping holds that we have put into place to assess and confirm product labeling and regulatory compliance. It is worth noting that while this impacts revenue in the third quarter, we are preparing to resume shipping many of those products later in the year.

Over the next 18 months, the planned investments will elevate our operations and compliance processes to enable our product supply to match our customer demand and will allow our entire organization to execute to our potential. Additionally, we have formed a quality committee at the Board of Directors level that will have regular direct lines of communication to the [ ELT ] members responsible for operations, quality and regulatory.

I want to assure all of our stakeholders that we are giving these issues the attention they deserve. We recognize that this will come at the expense of earnings growth in the near term but it is necessary and will support sustainable long-term growth through predictable execution.

During this time, we will continue to focus on getting our products into the hands of our customers growing our business globally and improving our new product development capabilities. We have continued to make excellent progress on our CEO search and believe we will have a new CEO announced and in place by the end of this year, if not sooner. There has been tremendous interest in the role, given the company's exciting life-saving products, best of growth strategy and financial strength.

The Board and I working with [ Heidrick & Struggles ] are spending a significant amount of time interviewing candidates selected from an impressive list. I'm very confident we will bring on board a highly qualified individual capable of both driving our longer-term strategy and executing on our current operating and commercial commitments. Once the new CEO is in place and has had the appropriate time to make an assessment, we'll provide more color on the LRP for the business.

The Board and management team believe in our product portfolio and the long-term growth prospects that go along with it. While recently, we haven't delivered to our potential, we still believe we can meet or exceed market growth. We are committed to making necessary investments in our quality and manufacturing operations to enable supply to sustainably meet that demand.

Integra remains a leader in neurosurgery and tissue technology with the largest regenerative portfolio in the market, and we now have a great portfolio of ENT products as a result of the Acclarent acquisition. Over time, we have built a portfolio that not only has significant breadth as well as valuable technology and commercial synergies, but also provides meaningful differentiation to our customers and their patients.

I would like to thank and acknowledge our employees for their resilience and thank our customers and shareholders for their continued support of Integra. And with that, I'll turn it over to Jan and Lea to discuss our second quarter and updated guidance in more detail.

[Jan De Witte, executive]

Thank you, [ Stuart, ] and good morning, everyone. Lea and I will update you on our second quarter results and our updated guidance for the year. which reflects many of the themes that [ Stuart ] just touched on.

Similar to what we saw during the first quarter, our second quarter reflected robust market demand for our products. and early success with our integration of Acclarent. If you turn to Slide 4 in our presentation. Our second quarter revenues finished at $418 million performance that was above our May guidance range on continued strong demand across our entire portfolio.

Our organic revenue was up 2.3% compared to the prior year, excluding Boston, organic growth was 0.3%. We delivered adjusted EPS of $0.63 within our guidance range. Our Codman Specialty Surgical business saw growth of approximately 1% with strong growth from our [ dural ] access and repair and neuromonitoring franchises, offset by significant [ bankers. ] There was solid demand once again in our international markets, but this business was also impacted by the supply back orders. And as a consequence, grew low single digits during the quarter.

We're seeing a strong uptake of CereLink following our global relapse in the first quarter, demonstrating the customer loyalty and differentiation of our intracranial pressure monitoring portfolio. We also closed our acquisition of Acclarent on April 1, and we have been productively integrating the teams and products into our CSS business.

As a reminder, deal positions Integra as a leader in the ENT segment, expands our addressable market and provides immediate scale and accretive growth to our portfolio. We're pleased with the progress of the integration and the Acclarent team more than met our expectations at this point in the integration. The early strategic assessments of our joint teams have further confirmed the strategic opportunities and the complementary benefits of ENT and neurosurgery.

Within our Tissue Technologies business, we continue to see healthy demand for our broad portfolio of wound reconstruction products. Delivered high double-digit growth in DuraSorb, a resorbable synthetic reconstruction product, which continues to track ahead of our deal model. During the quarter, we also saw continued strong growth from our MicroMatrix family of products as well as Cytal, Gentrix and [ AMNIOMATRIX ].

As we announced on July 15, we plan to restart the manufacture of PriMatrix and [ Surgements ] at our new state-of-the-art manufacturing facility in Braintree, Massachusetts which we expect to operationalize in the first half of 2026. The time line to have the products back on the market would not have been materially different had we decided to move forward in our current Boston facility. And given the limitations of the physical space and layout in Boston, it became clear that Braintree was the right next step for Integra.

Consolidating our efforts at Braintree also allows us to focus on starting up production at one facility with an optimized layout and minimizing execution risk. In addition to improving our compliance and efficiency, the shift to Braintree will offer our Boston teammates the opportunity to work in a brand-new utility that is more conveniently located for the majority of it. We remain fully committed to bringing PriMatrix and [ surgiment ] back to the market for our customers and patients. In the meantime, we have seen good uptake of DuraSorb, allowing our sales force to stay close to our customers and still provide them with a meaningfully differentiated product offering until we return surgement to the market.

We remain confident in our multiproduct portfolio strategy in implants based [ breast ] to construction. I'm pleased to announce today that we received a PMA approvable notification from the FDA on the clinical submission for the PMA application for [ Surgient. ] The FDA has determined that the PMA is approvable subject to an FDA inspection that finds the manufacturing facilities, methods and controls in compliance with applicable requirements of the quality system regulation.

Now turning to guidance. We're updating our revenue and adjusted EPS guidance for the year to a range of $1.09 billion to $1.629 billion and $2.41 to $2.57 per share, respectively. The reduction in our guidance reflects the impact of supply holds and back orders that we are expecting to carry within the CSS business during the third quarter as well as our planned increase in spending to support the compliance master plan that [ Stuart ] mentioned earlier in the call. Lea will provide more color on our guidance for the third quarter and updated guidance for the full year.

Before I turn the call over to Lea, let me assure you that we continue to be deeply focused on fixing our supply issues and bringing Braintree online while strengthening our processes and capabilities. We have learned many significant lessons related to our quality management system that we're applying across our network as part of our compliance master plan. We will continue to take new learnings and put them into practice to ensure we develop top-tier manufacturing and supply chain capabilities.

We have the right portfolio and continue to see strong demand from our customers. but we need to strengthen our ability to put product in their hands with predictability in order to deliver on our promise to our customers and their patients, our employees and our shareholders. Now over to Lea.

[Lea Knight, executive]

Thank you, Jan. Let's take a more detailed look at our second quarter financial highlights, starting on Slide 5. The second quarter total revenues were approximately $418 million, representing 9.7% growth on a reported basis and 2.3% on an organic basis. Total revenues were approximately $2 million above the high end of the guidance range communicated back in May.

Our adjusted EPS for the quarter was $0.63, down 11% compared to 2023. Looking at the middle of the P&L, gross margins were 65.2% for the second quarter, down 250 basis points versus 2023. The change in gross margins was impacted by approximately 270 basis points from lower utilization and higher scrap, 100 basis points in unfavorable revenue mix from lower [ Integra Skin ] and stronger international sales partially offset by an approximate 120 basis point benefit versus the prior year from Boston returns and lower remediation costs.

Our adjusted EBITDA margins were 20% and down 330 basis points compared to 2023. Our decline in adjusted EBITDA margin primarily reflects the decrease in gross margins. Operating cash flow for the second quarter was $40 million.

If you turn to Slide 6, we'll take a deeper dive into our CFS revenue highlights for the second quarter. Reported Q2 revenues in CFS were $302 million up 11.3% on a reported basis and 0.9% on an organic basis from the prior year. Global sales in Neurosurgery grew 1.2% on an organic basis with strong growth in certain franchises, offset by the impact of back orders.

We delivered high single-digit growth in dural access and repair driven by DuraGen and Mayfield. We saw low single-digit growth in Advanced Energy, driven by Aurora. We also saw strong growth from the [ Faralink ] relaunch in our neuromonitoring franchise. However, the growth was offset by back orders that led to a low single-digit decline in neuro monitoring and a low double-digit decline in CFF management.

In our ENT business, we saw 18% growth for the second quarter. I'd like to highlight that the organic growth in our ENT reporting segment will reflect only the MicroFrance ENT instruments for the first 4 quarters following the close of the Acclarent acquisition. Even so, this performance reflects early synergies of the acquisition.

On a reported basis, Acclarent delivered approximately $30 million, which is approximately $5 million ahead of our guidance at the midpoint reflecting [indiscernible] the effect of the integration to date.

For the second quarter, our capital sales were up high single digits, driven by [ Ferlink ] monitors, which are delivering results in line with our expectations for that be launch.

Turning to instruments. We saw an approximate 3% decline due to a challenging comp versus 2023.

Shifting to our international business. we saw low single-digit growth in the quarter with continued strong demand in many of our international markets. However, we fell short of meeting demand in the quarter due to the increase in back orders we discussed earlier in our remarks.

Moving to our Tissue Technologies segment on Slide 7. Tissue Technologies increased 5.6% on a reported basis and 5.7% on an organic basis compared to the prior year. Excluding Boston, organic growth was down 1%. Second quarter sales in wound reconstruction saw broad growth across the franchise, including high double-digit growth for DuraSorb, benefiting from increased focus from the surgical reconstruction sales team. We also saw mid-double-digit growth in Gentrix and low double-digit MicroMatrix, Cytal and [indiscernible].

Growth in wound reconstruction was partially offset by a low double-digit decline in Integra Skin driven by the production challenges we discussed during last quarter's earnings call. While we have continued to ramp production of Integra Skin over the course of the second quarter, we are still not operating at full capacity. We now expect Integra Skin sales to be at normalized run rates during the fourth quarter.

In private label, sales were up approximately 50% versus last year, primarily due to lapping the prior year returns from the recall. Private label is up 1.5%, excluding Boston. Finally, international sales in Tissue Technologies were up high double digits also due to lapping the prior year returns from Boston.

If you turn to Slide 8, I will discuss our balance sheet, capital structure and cash flow. During the quarter, operating cash flow was $40.4 million, and free cash flow was $10.7 million, reflecting continued spending on [ EU MDR ] and CapEx and increased working capital primarily from investments in inventory.

Free cash flow conversion was 26.6% on a trailing 12-month basis. We have a flexible balance sheet with ample liquidity to support our short- and long-term plans. As of June 30, net debt was $1.5 billion, and our consolidated total leverage ratio was 3.8x just above our target range of 2.5x to 3.5x. We are focused on bringing our leverage ratio back within our target range.

The company had total liquidity of $1.2 billion, including $297 million in cash and short-term investments and the remainder available on our revolving credit facility. We are confident that our balance sheet flexibility, strength and liquidity will allow us to execute our investments in operations improvement and our long-term growth strategy even in the current interest rate environment.

With our convertible bond coming due in the third quarter of 2025, we have the flexibility to take the convert to term and fund it using our revolver. Through our interest rate swap portfolio, we would maintain approximately $900 million of fixed rate debt with all-in rates in the low 3% range through the end of 2027. Our treasury team, along with the finance committee of our Board, will continue to work closely to monitor the rate environment and maintain a highly efficient and flexible capital structure.

If you turn to Slide 9, I will provide our consolidated revenue and adjusted earnings per share guidance for the third quarter and full year 2024. As we discussed earlier in our remarks, our updated guidance reflects several temporary shipping holes we have implemented, a majority of which will be cleared before the end of the year.

Third quarter revenues are forecasted to be between $372 million to $382 million, driven by the impact of the temporary shipping hold and supply back orders. Our updated guidance represents reported revenue growth in the range of approximately flat to down 2.6% and a decline of approximately 6.8% to 9.4% on an organic basis.

For the full year, revenues are forecasted to be in the range of $1.609 billion to $1.629 billion as we expect the temporary hold and backorder levels to abate into the fourth quarter. While many of the cases we can't supply in the third quarter will be lost, we expect a substantial step-up in revenue into the fourth quarter as our shipments are able to meet demand with modest backorder clearance, providing only a slight tailwind in the period. We expect our reported growth to be in the range of 4.4% to 5.7% and organic growth to be minus 1% and plus 0.3% for the full year 2024.

Turning to adjusted earnings per share guidance. For the third quarter, we expect adjusted EPS to be $0.36 to $0.44. Our third quarter EPS reflects the product holds and higher operations costs due to remediation efforts, investments in quality, scrap and lower plant utilization resulting from the product holds.

For the full year, we are updating our adjusted EPS to be in the range of $2.41 to $2.57 per share. The full year EPS contemplates the revenue reduction linked to temporary shipping hold as well as our planned increase in spending to support [indiscernible] master plan. We anticipate that this increased spending will impact the second half of 2024 and 2025 as we invest across our network to ensure we can reliably deliver supply at a level that meets demand.

I'd like to take you through key considerations for our full year revenue outlook on Slide 10. As you look at the left side of the page, you will find updated key metrics for FX and tax rate as well as our average share count. As we look to the right side, we have key highlights on the drivers of our full year revenue guidance and the third quarter to fourth quarter ramp as well as the stepped up investments and impact on COGS and OpEx.

Although we are not providing guidance for 2025, we appreciate the need for some context beyond 2024 based on the changes to our 2024 guidance. Based on our expected time lines to resolve the identified supply issues, we should be able to meet demand in the fourth quarter of 2024.

For 2025, we expect to see mid-single-digit organic revenue growth over 2024, which takes into account strong demand for our products, but also pockets of supply disruption as we execute the compliance master plan. We also expect to see pressure on our adjusted gross margins as we continue to make key investments. Taking all of this into account, we expect flat to modest adjusted EPS growth in 2025.

If you turn to Slide 11, I'll wrap up our prepared remarks. We saw continued strong demand for our products during the second quarter, including Acclarent and we remain confident that our portfolio and commercial teams can generate sustainable growth over time.

In order to do that, we have an organization-wide commitment to improve our quality compliance and supply resilience to better support our customers and meet their needs. We remain committed to bring in [ SurgiMend ] and PriMatrix back to market through our new Braintree facility and advancing our [ SurgumMPMA ] for IBDR.

The investment required across our manufacturing network are reflected in our updated guidance and we look forward to providing you with updates as we make progress against our compliance master plan. With that, I'd like to open up the line for Q&A. As [ Stuart ] is not physically present for the call, Jan and I will facilitate the Q&A. Please open the line for the first question.

[Operator]

Our first question comes from Kristen Stewart with CL King.

[Kristen Stewart, analyst]

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

[Lea Knight, executive]

Thank you for the question, Kristen. Yes, so the temporary shipping holes we have in place impact a number of SKUs across our CSS business segment. We do expect a majority of those holes to be cleared by Q3. And as you -- in terms of the nature of the hold themselves, they primarily relate to compliance with labeling, packaging and IFU, which is instruction for use requirements. These requirements differ across all the markets in which we operate. And so as you can imagine, it will take time to fully assess and implement corrective actions.

The good news is we've already started to clear some of the products to resume shipping and we will continue that course of action throughout Q3 and into Q4. And the other part of your question was -- I'm sorry. I just want to finish the other part of your question was how are we confident that it doesn't continue into 2025?

[Kristen Stewart, analyst]

Yes.

[Lea Knight, executive]

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

[Kristen Stewart, analyst]

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

[Lea Knight, executive]

Yes. So Kristen, I think this goes back to the spirit of why we've implemented the compliance master plan. As [ Stuart ] mentioned in his remarks, this is our systemic holistic approach to improving our overall quality standards and GMP compliance. That is -- the plan itself is structured into work streams that will have as their remit to look across the entirety of our manufacturing and supply network and they'll focus on things like labeling compliance. They'll focus on things like documentation of controls and processes as examples, and they'll identify and implement corrective actions as they progress through the plan.

So the body of this work will be concentrated in the next 18 months. And so during the course of that is when we'll be able to fully assess and implement actions. So that does carry us through 2025.

[Operator]

Our next question comes from Steve Lichtman with Oppenheimer & Company

[Steven Lichtman, analyst]

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

[Lea Knight, executive]

Yes. So Steve, let me start there. So as we look across the whole, as I mentioned, it's a number of SKUs across the CSS portfolio that have various requirements. And so as we meet those requirements and implement corrective actions, we're releasing them. So it's really happening as a continuous sort of process throughout the quarter.

And that's what gives us confidence that as we get into Q4, we'll be able to release a majority of those holes. From a guidance perspective, as you look at kind of how we've called the [indiscernible] for the rest of the year, we do have on the lower end of that guide, there is a risk that if the timing shifts a little bit, we can absorb that as reflected in the guide. We do have also at the upside of the guide and ability to realize some upside to the extent that the time line does improve. And then I think the other part of your question was related to additional risks for Q4. Is that right?

[Steven Lichtman, analyst]

Yes. Yes. Just in terms of, obviously, customer pushback, anything. Any disruption on the commercial organization a result of the issues here?

[Lea Knight, executive]

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

[Steven Lichtman, analyst]

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

[Lea Knight, executive]

Yes. So as we step through the compliance master plan and address the work streams that I talked about, we know it's going to mean an increase in internal resources as well as external resources, specifically with expertise and quality controls and standards. So that will necessarily be part of the investments that we're making.

Coupled with that, from a cost perspective, we'll also likely see lower utilization at some of our sites as we implement corrective actions. So that will have a negative pressure or impact on a gross -- from a gross margin perspective.

And then also from a capital perspective, which you can anticipate is that as we -- part of this effort, we'll be looking at our capacity requirements, again, in the interest of making sure that we're positioned to sustainably meet the growth on this business. And so from a capital perspective, you can expect capital to remain at levels that are consistent with what we're spending in 2024 for the next several years.

So that's kind of how you think about it from an investment perspective. I think the most important part of all of this, though, Steve, is that at the end of it, the expectation is as a result of making these investments now and the impact we're forecasting it will have on the business, we'll be in a better position going into 2026 to proactively meet and drive growth on the business and make sure we remain in front of some of the supply challenges we've seen as of late.

[Operator]

Our next question comes from Matt Taylor with Jefferies.

[Matthew Taylor, analyst]

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

[Lea Knight, executive]

Yes. So thanks for that question. And at some level, this is recognition that we are still in the early stages of implementing our compliance master plan. So to your point, as we step through the call down in 2024 much of that supply disruption, we do anticipate coming back. And on top of that, we are seeing continued strength across the other parts of our business that continue to grow.

So Acclarent will be in for a full year. We're seeing growth in other parts of our business in terms of and DuraSorb that should also drive continued growth into 2025. And to your point, that taken together with the supply coming back should drive meaningful growth but we're also providing for the potential of additional supply disruption in how we're thinking about our early thoughts on 2025.

And that's principally because we're still working through the compliance master plan. And so as we do that, we'll be able to better assess whether or not those potential supply disruptions will be realized or not.

[Matthew Taylor, analyst]

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

[Lea Knight, executive]

Yes. So let me frame out a little bit more in terms of cost assumptions. So for 2024, the incremental investments we're making to support the compliance master plan will have a negative impact on margins in the order of magnitude of about 80 basis points.

And if you remember in our original and the last guide we communicated, what we said was margins would be moderately down year-on-year '24 versus '23, and we frame that as kind of 70, 90 basis points. The implementation of this master plan means that it's -- the impact is another 80 basis points on top of that.

As we move into 2025, and now we're operating under the compliance master plan for a full year, you can anticipate another incremental 60 to 80 basis point impact -- negative impact on margins. And so that's -- as you think about kind of the nature of the cost investment, that's the order of magnitude that we're talking about. And so all of that taking into consideration along with the potential of supply disruption that I framed out for 2025 is where you start to get to the overall EBITDA margin or EPS growth that's flat to modestly up '25 versus '24.

Beyond that, to your point, in terms of what happens next, we do anticipate some level of maintenance costs from a gross margin perspective and the impact on gross margins as a result of these investments. But we also anticipate being in a much better supply position. So from an overall kind of profitability and growth perspective should be much better positioned.

At this point, though, I can't say specifically what that would be because we're not providing 2026 guidance at this point, but that will be reflected in the work we're doing around long-range planning.

[Operator]

Our next question comes from Ryan Zimmerman with BTIG.

[Ryan Zimmerman, analyst]

Okay. A lot of questions still, I think, to be answered just based on all these moving dynamics. So I'm sitting here thinking about kind of the start of these tissue issues. Going back over a year or so even more. Now we have obviously some supply dynamics within Codman.

Why has it taken in your view as long as it has to resolve the issues? And why will it still take through the course of 2025 to resolve these issues? And I think about that in the context of like [ SurgiMend, ] why not just throw some more money? I mean you're already spending a ton of money, why not throw more money at that, get [indiscernible] why is that going to take till '26? So maybe if you could kind of unpack this because this is, I think, [ bedeviled ] investors for a while now with the quality issues.

[Jan De Witte, executive]

Thank you, Ryan, for the questions. Let me -- I see there are 2 questions on okay, why, why now and then [indiscernible] question. So first on the quality compliance gaps. Clearly, what we've learned during our [ postal ] remediation activities and some of the analytics offers has made us reevaluate our processes across our manufacturing and supply network.

In particular, what we learned is the need to be more effective at standardizing our quality system across the company. And so while we have invested and improved our quality system over the last couple of years, we continue to see the need for more areas of improvement. And so that's why we decided with our Board to launch this compliance master plan, activating this systemic holistic approach to our quality system and our GMP compliance to essentially step up and get ahead of this. And like Lea indicated before to create our supply capability, to be in line at the level of our commercial opportunity and the strength of our markets.

So that's the decision that we made over the past quarter setting up to really step up and accelerate many of the activities we had going already over the past few years. Question [indiscernible]?

[Ryan Zimmerman, analyst]

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

[Jan De Witte, executive]

Yes. So let me maybe give a bit of context on Braintree and the rationalization. I think some of you will remember that we communicated in 2022 that we commissioned the building of that Braintree facility with the plan to have that site ready in 2026. All of this was part of our long-term manufacturing strategy for [ Surgimen ] and PriMatrix.

Intention was and still is of building this Braintree facility is to build a modern factory that's more productive and attractive place to work for our colleagues. And secondly, to significantly step up our output capacity of that factory. In the Boston factory, we knew was never going to be big enough to deliver to the growth opportunities, specifically with our breast strategy and [indiscernible]. So we have started building that Braintree facility in 2023.

And currently, this year, we're still in the building, the construction phase of that site. As communicated, we expect the Braintree facility to be operational in the first half of 2026. At this point, too early still to be more specific on the path and the specific days there. We'll update for sure, that once we understand the commercial ramp closer as we get closer to operationalizing.

[Ryan Zimmerman, analyst]

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

[Lea Knight, executive]

I'll start with that. Thank you, Ryan. So for 2024, again, the nature of the shipping holds that we talked about do have -- they're temporary by nature. So we do expect them to alleviate beginning during the course of Q3 and into Q4. And as a result, yes, we absolutely are committed to retaining our sales force because we recognize, one, there's been a huge strength in terms of an asset for this business for a very long time, and we understand their value in terms of helping us to be able to get our products not only back in the hands of our customers, but driving growth going forward.

So that same sentiment carries into 2025. As we continue to work through this master plan and making the necessary investments to strengthen our overall quality and client environment, we also plan to continue to support our sales force because we understand, again, they're the key to helping us unlock growth on this business as we move forward.

[Operator]

Our next question comes from Robbie Marcus with JPMorgan.

[Robert Marcus, analyst]

Great. 2 for me. First, I wanted to ask, how do you get comfortable giving guidance into '25 and '26 to a degree? If I look back over the past 1 to 2 years, there's been just so many changes, mostly downgrades to forward guidance. I guess, how confident and how responsible do you think it is to give a long-term view here when it's clearly an uncertain time at the company?

[Lea Knight, executive]

Yes, Robbie. Thank you for the question. So just a point of clarification. We are not providing guidance on 2025. What we provided was our early thinking on how 2025 is shaping up in light of the shipping holds that we talked about for 2024. And as you step through kind of the considerations that we laid out, it allows for exactly what you're talking about, Robbie.

So we're starting with 2024 as a baseline. That 2024 baseline already has about $70 million to $80 million of shipping -- sorry, supply disruption embedded in it. And our early thoughts on 2025 is we're going to be able to grow this business mid-single digit off of that reduced baseline. To the points that -- or questions that were made earlier, yes, we do expect to get back some of the supply disruption we experienced in 2024 but fundamentally, we're not counting on it as we think about the direction for 2025 because we understand there could be the potential for additional disruption as we continue to execute against our compliance master plan.

So in short, Robbie, we are adjusting from kind of the approach we've taken in the past around guidance in light of the compliance master plan, the requirements and what's still to come and be assessed as part of that in our considerations for 2025.

And then clearly, for 2026, we absolutely are not providing guidance at this point. We are including that and the work to be done on our long-range plan, and we'll come back at the appropriate time to have that conversation.

[Jan De Witte, executive]

Let me add in -- sorry, Yes. No, let me add one thing, Rob, because you mentioned uncertain times. -- maybe focus on a couple of certainties that we have within [indiscernible]. One, we are in strong markets, we're confident about market demand and the growth. We know that our products are differentiated products, I mean great clinical outcomes, strong competitive positioning. And then third, you heard [ Stuart ] talk about our strong commercial force.

A strong commercial force, and Ryan asked that question, okay. We're making sure we are retaining them we have our broad portfolio. So not one product will destroy their back. We see it with DuraSorb today, we see it in other products in CSS. So there's the breadth of commercial opportunities to keep our commercial force engaged, productive and continue to serve our customers and continue to build on that relationship. Those are certainties that we have, right? And while we deal with the temporary impacts of the ship holds, right, we are building on those strengths, and we'll bring those products back.

[Robert Marcus, analyst]

Great. Helpful. Maybe just one follow-up for me. You'll have had multiple products out of the market for well over a year, by the time they get back up and running potentially even 2 years. How do you feel about the ability to regain share there? I have to imagine doctors will have moved on to other products, other companies, other contracts. So when it comes back, I know the original guidance with shorter time lines was to get to 100% of the prior dollar run rate in 12 months. Is it now half that when you come back? How do we think about share recapture given how long you're going to be off market?

[Jan De Witte, executive]

Yes. I'll take this one, Robbie. I think you probably refer to [indiscernible] into PriMatrix, which are the 2 projects that are long of the market. Like I mentioned before, one, we're confident for the market months and the growth, we're talking here about the market for implant-based breast reconstruction for complex hernia complex wound repair. And those markets remains strong.

Now we recognize it's going to take significant work to get back. But the products, [ SurgiMend ] and PriMatrix are differentiated. They fill a clear need in the market. And today, there's no other competitive products that fill that need, and we do not see over the next years, competitive products come that really fill the specifics that [indiscernible] and [indiscernible] are filling.

And then back to our relationship and our presence with our customers. If you look at our surgical reconstruction sales force, today, there very active and very successfully active selling DuraSorb, that resorbable synthetic which we acquired more than a year ago. It's the breadth of the portfolio that keeps us in front of our customers and keep our sales teams engaged and building that relationship with customers even if these products are not of the market. It's -- that foundation that we'll use to drive an impactful relaunch once we get the products back in the market.

[Lea Knight, executive]

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

[Operator]

Our next question comes from Jayson Bedford with Raymond James.

[Jayson Bedford, analyst]

Good morning. Just 2 quickies for me. It sounds like it's your decision on when the ship hold products get released. Just for clarity, do you need any third-party opinion? Do you anticipate that any of these products will need additional regulatory approval?

[Jan De Witte, executive]

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

[Jayson Bedford, analyst]

Okay. And just as a related question on the master plan, it sounds like all these products are in CSS. Why were these products selected? Is part of this ship [indiscernible]? Or is there a common thread or they manufacture the same facility? Is there -- is it based on the age of the label? I'm just curious on how you decided on these products.

[Lea Knight, executive]

Yes. So the compliance master plan itself is a plan that cuts across the entirety of our business, right? So all of the divisions within the temporary shipping hold that we've talked about is affecting uniquely the CSS business. Within that though, this is not a facility manufacturing gap per se. This is a quality management system gap and so that's why the emphasis of the compliance master plan is exactly on quality management systems and GMP compliance.

And so we've incorporated observations that we've gotten from regulatory authority along with our own internal investments and shaping the scope of the compliance master plan and that's what we're executing against to remediate this issue and also make sure that we're strengthening the robustness of our quality systems more broadly.

[Operator]

Our next question comes from Craig Bijou with Bank of America Securities.

[Craig Bijou, analyst]

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

[Lea Knight, executive]

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

[Craig Bijou, analyst]

Got it. Okay. And then I guess this is a follow-up question as well. But when I look at what's implied the step-up in Q4 on a revenue basis, I guess I just -- it seems like most of the revenue, lower revenue guide is getting taken out of Q3. So I mean is there a -- and I think I heard you say that the lower end of the guidance may account for some timing disruption or the timing not going as planned.

But -- just thinking about Q4 revenue and what you're expecting there. I mean is there a percentage of that revenue from the ship holds that you expect to come back? Are you discounting that at all for Q4? And is it assumed anywhere in your guidance that maybe that does come back or a portion of that is pushed out to '25?

[Lea Knight, executive]

Yes. So yes, let me step through the ramp. So as you look from Q3 to Q4, the ramp is about just under $80 million. 2/3 of that will be driven by addressing the shipping hold. So again, because most of them will be addressed by the end of Q3, we start -- we're in better supply position across the products that are currently on ship hold polled, and that should address about 2/3 of that.

The other 1/3 is primarily 2 things. It is a skin now being back towards normalized run rates in Q4 along with just a little seasonality. So that makes up the last 1/3. And then to your point earlier, as we contemplated kind of the low end and the high end around the guide. It does allow for some timing shift on the shipping holds, but it also allows for some of the strength that we've been being in other parts of the business, like Acclarent, for example, with DuraSorb as well as our UBM franchise to keep -- continue to drive the strong growth that we've seen to date.

[Operator]

And our next question comes from Richard Newitter with Truth Securities.

[Richard Newitter, analyst]

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

[Lea Knight, executive]

Yes. So for -- in terms of the shape of 2025, again, Acclarent in general, I just step back and talk about the fact that Q2 was a really strong performance on that business. We're excited. The integration is proceeding well.

We're excited about having that business as part of our portfolio and the future growth it will drive -- in Q2, we did see that business exceed our thinking for Q2 by about $5 million. And so we have reflected in our guide, we were originally calling Acclarent at about $80 million for 2024, and we now think it will be closer to $86 million, and that's contemplated in the guide that I provided earlier. So it's really being out that $5 million upside performance that we saw in Q2.

As we move into 2025, we continue to believe the business will be able to drive high single-digit growth as we are -- we will be operating it for kind of a full year by the end of Q1 of 2025 throughout the balance of 2025.

[Richard Newitter, analyst]

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

[Lea Knight, executive]

Yes. So let me take the second question first. We do anticipate, again, based on the timing of the current plan to release ship holds that we'd have -- we'd be able to provide a meaningful update as part of our call in terms of how we're progressing against that expectation. So I would anticipate that.

In terms of the leverage rate, you asked about kind of leverage and where we are. We're at about 3.8x which we knew we would be above kind of our deal range as a result of the Acclarent acquisition. So in our last earnings call, we communicated that we'd likely be just above the high end of the range.

I did also communicate at that time that we expect to drive our leverage back down within our ideal range by the end of this year with our current call down that will not happen. Our leverage will continue to remain elevated. But to your question on debt covenants no, but we don't have a concern at this point that we'll have a problem from a debt covenant perspective as you look at the guide, our projected EBITDA, along with the allowable adjustments as determined in our bank agreement.

[Operator]

Our next question comes from Joanne Wuensch with Citi.

[Joanne Wuensch, analyst]

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

[Lea Knight, executive]

So yes, just to underscore the remarks that I made, we Integra voluntarily initiated the shipping holds across the SKUs that were impacted. Now the nature of that or how it came about was a result of observations that we've received, both internally as a result of internal assessment that we do across our network as well as regulatory authorities externally. So a combination of those 2 is what's informed the broader compliance master plan, but also the current temporary shipping holes.

[Joanne Wuensch, analyst]

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

[Lea Knight, executive]

Yes, certainly. So there will be the magnitude of the increase that I characterize in '24 was an incremental 80 basis points and then on top of that, another 60 to 80 basis points in 2025 as we are now operating under a full year. We wish not have to sustain at that level, right? There will likely be a higher cost from a maintenance perspective from an overall cost structure, but it shouldn't be that order of magnitude going forward.

That said, we should actually see positive offset as a result of being in better supply and being better positioned to meet the demand that we're seeing on this business. And so that's why as we push into 2026, we'll need to kind of frame that out in the context of our LRP to be able to speak explicitly to what the ongoing or maintenance kind of cost or impact will be for the business.

[Operator]

Our next question comes from Vik Chopra with Wells Fargo.

[Vikramjeet Chopra, analyst]

So on this shipping hold, does that also apply to your ENT business in Q3?

[Lea Knight, executive]

No. So as we look across Acclarent. Right now, we have in the ENT business is Acclarent, along with our microfrance business. They were not impacted by the [ bar ] shipping level.

[Vikramjeet Chopra, analyst]

Okay. Got it. That's helpful. And then my follow-up question was on Integra Skin please. I think you said that you expect the sales to normalize in Q4 now. Can you just provide an update as to where you are and why the time line was pushed out?

[Lea Knight, executive]

Yes. Thank you, Vik. So if you recall in our call in May, we had anticipated we've got -- started resuming production. We weren't operating at capacity. We anticipated being able to operate at capacity that would allow us to meet demand for the full back half of 2024. Since then, while we continue to operate and produce, we're still not at those capacity levels. Our current production schedule and pacing does have us improving to get there. And now the current thinking is by Q4, we'll be able to be at normalized run rates for that business.

In the interim, I think what -- I think it's fair to characterize, we've had some timing delays associated with getting our yields to where we needed to be in order to operate at those normalized run rates. And that drives the shift that I just talked about.

[Operator]

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