Integra LifeSciences - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 revenue was $442.6M (+11.5% y/y; +3.5% organic) and adjusted EPS was $0.97, above Q4 guidance ($0.81–$0.89); GAAP EPS was $0.25, flat y/y.
• Sequential inflection versus Q3: revenue +$61.8M to $442.6M, gross margin 65.2% (up 50 bps y/y), and adjusted EBITDA margin 23.7% (down 160 bps y/y) on mix and timing impacts.
• 2025 outlook: revenue $1.65–$1.72B (2.4%–6.5% reported; 1%–5% organic) and adjusted EPS $2.41–$2.51; Q1 2025 revenue $375–$385M and adjusted EPS $0.40–$0.45, reflecting supply remediation and compliance plan execution.
• Catalysts: execution on Compliance Master Plan (quality remediation, ship hold resolution), Integra Skin production normalization, Acclarent integration momentum, and progress toward Braintree facility startup in H1 2026.

What Went Well and What Went Wrong

• What Went Well

  • Adjusted EPS beat guidance ($0.97 vs $0.81–$0.89), with gross margin at 65.2% and sequential revenue step-up of ~$62M driven by ship hold clearance and Integra Skin production ramp.
  • CSS segment strength: reported +15.8% y/y; Neurosurgery +5.1% organic with CSF management low double-digit, neuro monitoring high single-digit; ENT reported growth from Acclarent.
  • CEO underscored portfolio strength and global expansion: CereLink uptake; footprint expanded in Brazil, India, Korea, China; in-China-for-China manufacturing build-out.

• What Went Wrong

  • Adjusted EBITDA margin down 160 bps y/y to 23.7% on timing and integration cutover impacts; y/y adjusted EBITDA down at FY level (20.0% FY).
  • Tissue Technologies private label down 16% on component supply delay; international Tissue down low double digits due to longer Integra Skin inventory recovery.
  • Continued near-term supply constraints: Q1 2025 guide embeds ~$18–$20M ship holds, slower Integra Skin production ramp, and FX headwind; wider-than-typical FY 2025 revenue range accommodates potential incremental ship holds ($60–$120M beyond known).

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the Integra LifeSciences Fourth Quarter 2024 Financial Results. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Chris Ward, Senior Director of Investor Relations. Please go ahead.

Chris Ward (Senior Director of Investor Relations)

Good morning, and thank you for joining the Integra LifeSciences Fourth Quarter 2024 Earnings Conference Call. Joining me on the call this morning are 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 the file name 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.

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.

Mojdeh Poul (President and CEO)

Thank you, Chris. Good morning, everyone, and thank you for joining us today. Before we begin, I want to take a moment to recognize and thank our employees around the world. Over the past several months, our teams have navigated challenges with dedication and resilience, staying focused on delivering for our customers and patients. Their hard work, as reflected in our fourth quarter results, is what makes Integra the company it is today, and I am truly grateful for their commitment. 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 30 years in the medtech industry, most recently leading 3M's global healthcare business.

Over the years, I have gained deep experience in business strategy and transformation, innovation, operations, and commercial excellence. More importantly, I've had the privilege of leading teams through complex challenges, and that is exactly what I'm doing here at Integra. 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 need to improve. Here's what I know: Integra has a strong foundation upon which to build a bright future. Our differentiated portfolio is highly relied upon by surgeons, and it is profitable. We operate in attractive markets, and the demand for our products remains strong. I have no doubt that with the right focus on execution, we can unlock significant value. That said, we have operational challenges to address. Quality, manufacturing, and supply chain improvements remain our top priority. We must stabilize our operations and strengthen our quality systems to ensure we reliably meet growing customer demand. Once we do that, we will be in a better position to serve our customers, regain momentum, and accelerate growth in key markets. We are already making meaningful progress.

For the last six months, we have been executing on an enterprise-wide Compliance Master Plan to ensure systemic and sustainable improvements to Integra's manufacturing processes and global quality management system. We have prioritized and initiated 10 work streams of the Compliance Master Plan, building a framework that is consistent with industry-standard quality system regulations. To develop the framework and governing model, we are partnering with third-party consulting firms that bring extensive expertise in quality management system improvement. We have committed significant resources to support not only remediation efforts for the FDA Form 483s and warning letter observations, but also implementation of the Compliance Master Plan. These resources will allow us to sustain the improvements long-term across the company. I have already spent a great deal of time with our quality and operations teams and have been encouraged by both the comprehensiveness of their plans and their commitment to execute them.

Their efforts have begun to bear fruit. For example, as expected, in the fourth quarter, we successfully cleared many of the third quarter ship holds. Beyond compliance, we are investing in our future. We are making facility equipment upgrades to enhance quality, resilience, and capacity so we can better deliver for our customers. In the fourth quarter, we were able to ramp up production of Integra Skin in our collagen manufacturing center. Additionally, we hit key milestones toward bringing our Braintree facility online in the first half of 2026, which will allow us to restart production of SurgiMend and PriMatrix. We are confident in our ability to regain share and drive growth with these differentiated products. We are also advancing our dual PMA clinical strategy for SurgiMend and DuraSorb to capitalize on the opportunity in the attractive implant-based breast reconstruction market.

Additionally, we continue to make progress in driving our global expansion strategy, including the continued market uptake of CereLink. We expanded our international commercial footprint in Brazil, India, Korea, and China, leveraging key products and strengthening our global presence. Additionally, we continue to build our in-China, for China manufacturing capability to better serve this important market. We have also strengthened our leadership recent appointments. We appointed a new Chief Quality and Regulatory Officer, a new Chief Quality Officer, and strengthened many leadership roles at our manufacturing sites to enhance our operational focus and execution capabilities. Also, as previously announced, our board has established a new standing Quality Committee to reinforce oversight and accountability. Looking ahead, our priorities are clear. We will continue executing our Compliance Master Plan and work to resolve our outstanding FDA warning letters.

We will remain laser-focused on reliable delivery of products to our customers and will continue building trust with our investors through transparency and consistent execution. Ultimately, our goal is to deliver strong, sustainable growth, earnings, and cash flow performance. By strengthening our operations, improving our quality systems, and driving meaningful innovation, we will fully capitalize on our market-leading portfolio and drive long-term value for our customers, employees, and shareholders. Turning to our financial results, total revenue for the fourth quarter was $443 million, representing year-over-year reported growth of 11.5% and landing within our guidance range. Revenue increased by approximately $62 million over the third quarter, driven in part by supply chain recovery, clearance of ship holds, and the ramp-up of Integra Skin production. Our fourth quarter performance reflects continued strong growth across many parts of our portfolio and the successful integration of Acclarent.

Fourth quarter adjusted EPS was $0.97, which was above our guidance range. Since joining Integra last month, I have gained a better understanding of our quality and operational challenges through my own diligence and discussions with our team and our customers. We still have substantial work ahead of us as we execute our Compliance Master Plan, strengthen our quality systems, and improve our operations. While I continue to assess the business, we have elected to use a wider than typical revenue guidance range for 2025. First quarter revenues are forecasted to be between $375 million-$385 million, representing reported growth in the range of approximately 1.6%-4.4%, with organic growth expected in the range of approximately -6.2% to -3.5%. For 2025 full year, revenues are projected to be between $1.65 billion-$1.72 billion.

We expect Adjusted EPS for the first quarter to be in the range of $0.40-$0.45. For the full year, we anticipate Adjusted EPS to be between $2.41 and $2.51. With that, I'll turn the call over to Lea, who will provide more details on our financial results and guidance.

Lea Knight (CFO)

Thanks, Mojdeh. We'll begin with our full year financial results, starting with slide five. 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 including 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 deliver 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 supply challenges, implementation of the Compliance Master Plan, and spending reductions while we maintained investments in key strategic priorities throughout the year. Operating cash flow for the full year was $129.4 million, with a free cash flow conversion of 12.7%. Our operating cash flow and free cash flow conversion rate declined versus 2023 as we invested in manufacturing infrastructure to improve supply reliability. On slide six, I will cover our fourth quarter financial results. Our fourth quarter revenues were $443 million, representing an increase of 11.5% on a reported basis and organic growth of 3.5%. We saw a $62 million sequential step-up in revenue driven by clearance of the third-quarter shipping holds, the return of Integra Skin to historical revenue levels, and typical seasonality.

Our adjusted EPS for the quarter was $0.97, up 9% compared to 2023 and above our guidance range. Our adjusted EPS includes a $0.10 benefit from a 325 basis point reduction in the 2024 adjusted tax rate. Looking at the middle of the P&L, gross margins were 65.2% for the fourth quarter, up 50 basis points versus 2023, primarily due to favorable revenue mix. For the fourth quarter, our adjusted EBITDA margin was 23.7%, down 160 basis points compared to 2023. The year-on-year margin decline reflects favorable gross margins offset by a modest temporary impact from the order-to-cash cutover from the Acclarent integration and the timing of certain operating expenses. Operating cash flow for the fourth quarter was $50.7 million, with a free cash flow conversion of 28.8%. Turning to slide seven, we'll take a deeper dive into our CSS revenue highlights for the fourth quarter.

Reported fourth quarter revenues in CSS were $314.7 million, an increase of 15.8% on a reported basis and 4.1% on an organic basis from the prior year. The outsized reported growth was driven by the Acclarent acquisition, with integration performance largely in line with our expectations. Global sales in neurosurgery grew 5.1% on an organic basis as we were able to clear a majority of the shipping holds experienced in the third quarter and deliver growth in line with the market. At the segment level, CSF management grew low double digits, primarily driven by strong performance of our Bactiseal and Certas Plus product lines, reflecting the continued strength of our differentiated solutions for the treatment of hydrocephalus. In neuromonitoring, revenue increased by high single digits fueled by strong sales of our CereLink ICP monitors and our Bactiseal and CerebroFlo EVD catheters.

We continue to reinforce our leadership position in ICP monitoring and drainage catheters. In advanced energy, we experienced low single-digit growth, primarily driven by CUSA disposables. Lastly, in our dural access and repair franchise, we saw a low single-digit decline, largely due to the third quarter recall of our patties and strips. The decline was partially offset by robust performance from DuraGen, DuraSeal, and Mayfield, which continued to generate strong demand. Our capital sales grew mid-single digits, reflecting the strong funnels for our capital business. In instruments, growth was approximately flat for the quarter, as robust sales in hospitals were offset by decreases in alternative site sales due to order timing. Shifting to international, sales were down low single digits as we cleared our shipping holds in international markets later than in the U.S.

Moving to our Tissue Technology segment on slide eight, Tissue Technologies grew 2% on both a reported and organic basis compared to the prior year. Fourth quarter sales in the wound reconstruction franchise increased by 8.2%, driven by double-digit growth in DuraSorb, our UBM portfolio, and AmnioExcel. We remain excited by the robust growth we're seeing in DuraSorb, which remains ahead of our deal model, and the double-digit growth we have seen from our UBM portfolio. We also delivered mid-single digit growth in Integra Skin. We remain encouraged by the broad strength and resilience of our wound reconstruction portfolio, which underscores the long-term growth potential of this business. In Private Label, sales were down 16% versus last year due to component supply delays. Finally, international sales in Tissue Technologies were down low double digits due to longer inventory recovery timelines on Integra Skin.

If you turn to slide nine, I will provide a brief update on our balance sheet, capital structure, and cash flow. During the quarter, operating cash flow was $50.7 million, and free cash flow was $21.1 million, reflecting increased investment in CapEx. Free cash flow conversion was 28.8% for the quarter. As of December 31st, net debt was $1.5 billion, and our consolidated total leverage ratio was 4x. Our current max leverage ratio under our debt covenant is 5x through the third quarter of 2025. The company had total liquidity of $1.2 billion, including $273 million in cash and short-term investments, and the remainder available under our revolving credit facility. On slide 10, I will provide our consolidated revenue and adjusted earnings per share guidance for the first quarter and full year 2025.

First quarter revenues are forecasted to be between $375 million-$385 million, representing reported growth in the range of 1.6%-4.4%, and includes an approximate 60 basis point headwind versus the prior year from FX. We expect organic growth in the range of -6.2% to -3.5%. Our forecast reflects continued strong global demand for our products, primarily offset by approximately $10 million of quality-related shipping holds carried over from 2024, and an incremental $8-$10 million in quality-related ship holds already identified in the first quarter as part of our Compliance Master Plan. Our first quarter guidance also reflects a slower production ramp for Integra Skin.

While we returned Integra Skin to historical run rates in Q4 and experienced some catch-up, our scheduled maintenance and equipment upgrades, combined with a lower-than-historical safety stock, will likely result in some supply constraints that may prevent us from fully meeting demand in Q1. We have planned improvements that are progressing well, and we are optimistic about returning Integra Skin to normal production levels in 2025. For the full year 2025, revenues are forecasted to be in the range of $1.65 billion-$1.72 billion, reflecting continued demand for a differentiated portfolio and a full year of Acclarent revenue, offset by potential for supply disruption from the execution of the Compliance Master Plan. We expect full year reported revenue growth of 2.4%-6.5%, including an approximate 50 basis points FX headwind and an organic growth of approximately 1%-5%.

We expect to see a sequential increase in revenue performance as the year unfolds, primarily driven by demand growth, clearance of our current quality-related holds, and normal seasonality. Additionally, we expect to see a sequential increase from improvement in Integra Skin production and resolution of the private label component supply issues in the second half. Turning to adjusted earnings guidance, for the first quarter, we expect Adjusted EPS to be $0.40-$0.45, driven by supply challenges and incremental investments in the Compliance Master Plan. For the full year, we expect our Adjusted EPS to be in the range of $2.41-$2.51 per share, reflecting the revenue growth of the business, an approximate 70 basis points decrease in gross margins from investments in the Compliance Master Plan, and an approximate 300 basis points increase in our adjusted tax rate versus 2024.

Our adjusted EPS guidance also reflects our plans for careful cost management to maintain key investments while managing profitability. For your reference, we've included the key assumptions underlying our first quarter and full year guidance, as well as key modeling inputs on slide 11. With that, I will turn the call back to Mojdeh.

Mojdeh Poul (President and CEO)

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 focused execution. We are making meaningful progress in stabilizing operations, strengthening quality systems, and ensuring supply chain reliability.

At the same time, we remain committed to investing in innovation, manufacturing infrastructure, and global expansion to better serve our customers and drive sustainable long-term growth. Looking ahead, our priorities are clear: executing on our Compliance Master Plan, driving operational excellence, and delivering sustainable financial performance. We will continue to operate with transparency, accountability, and a relentless focus on execution. I am confident we will navigate these challenges and seize the opportunities ahead. By staying disciplined, we will unlock Integra's full potential and create lasting value for our customers, employees, and shareholders. Thank you for your time today. I look forward to keeping you updated on our progress in the months ahead. Operator, please open the lines for questions.

Operator (participant)

Thank you. As a reminder to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. And our first question comes from Matt Taylor of Jefferies. Your line is open.

Matt Taylor (Managing Director)

Hi, good morning. Thank you for taking the question. So I wanted to just ask about the issues 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 approached thinking about the risk of further things happening throughout the year. In other words, how de-risked is your guidance now that you've put these assumptions in it?

Lea Knight (CFO)

Yeah. So Matt, thank you for the question. 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.

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. 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.

Mojdeh Poul (President and CEO)

For Integra Skin, did I mention that?

Lea Knight (CFO)

Yes.

Mojdeh Poul (President and CEO)

So 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 Skin 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.

Matt Taylor (Managing Director)

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

Operator (participant)

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

Vik Chopra (Equity Research Analyst)

Oh, 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.

Mojdeh Poul (President and CEO)

Okay. Hi, Vik. Thank you for the question. So the priorities for us in 2025, number one, is operational excellence.

I put in that both the execution on the Compliance Master Plan as well as some of the supply resiliency and manufacturing capacity programs that we have going on. That is first and foremost of the highest priority for us. Secondly, I would say continuing to grow in our core, continuing to grow in our core, and maintaining our leadership position in the market in the U.S., as well as growing internationally. We have a lot of great opportunities internationally that the team is building upon, and that's going to be quite important for us to continue to win in our core. 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-range 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 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 opportunities. So I would need much of 2025 in order to do that.

It's too early to provide a specific date at this point.

Vik Chopra (Equity Research Analyst)

Understood. Thank you for that comprehensive answer. 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. 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.

Mojdeh Poul (President and CEO)

Yes. 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. It's in China for China. 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.

Operator (participant)

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

Robbie Marcus (Senior Analyst)

Oh, great. Good morning, and thank you for taking the questions. Two for me. First, I wanted to ask, what's sort of the thinking of why 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.

Lea Knight (CFO)

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 that 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 informed the thinking of our approach and the potential for supply disruption. So that was the primary driver. And we're a quarter in what we've talked about for Q or 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.

Robbie Marcus (Senior Analyst)

Got it. Okay. Follow-up. I wanted to ask on cash flow. It's been sub-20% free cash flow conversion the past two years. I didn't see or hear a specific number 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.

Lea Knight (CFO)

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 2025 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 12 months, 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 of 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 point that out as well. We were into 2024 at 4.0. We expect leverage to be flat to slightly down by the end of 2025, but seeing much more notable improvement in leverage as we go into 2026.

Robbie Marcus (Senior Analyst)

I appreciate it. Thank you very much.

Operator (participant)

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

Ryan Zimmerman (Managing Director and Medical Technology Analyst)

Oh, 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 Lea, 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?

Lea Knight (CFO)

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.

Ryan Zimmerman (Managing Director and Medical Technology Analyst)

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 increased ship holds that you're alluding to? And the second part of the question is just how 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 the context of kind of what you've contemplated for 2025.

Lea Knight (CFO)

Yeah. To your first point on margins, yes, within the 70 basis points 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. We'll see additional levels of scrap. We'll see additional underutilization at some sites. But again, it's contemplated within the frame of that 70 basis points. From an OpEx perspective, to your point, we are taking a very careful approach to managing our operating expenses this year, especially given the potential for additional shipping holds. We're striking a balance between our discretionary spending as well as those essential investments we know we'll need to make to align both the 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.

Ryan Zimmerman (Managing Director and Medical Technology Analyst)

Lower end of your EPS range? I'm sorry, or lower end of your EBITDA margin?

Lea Knight (CFO)

Correct.

Ryan Zimmerman (Managing Director and Medical Technology Analyst)

Okay. Yes. Thank you.

Lea Knight (CFO)

Yep. Yep. Lower end of our guidance range.

Ryan Zimmerman (Managing Director and Medical Technology Analyst)

Thank you, Lea.

Operator (participant)

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

Richard Newitter (Managing Director)

Excuse me. Thank you for taking the questions. First one, just following up to, I think, with 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.

I'm just trying to get a sense. You're saying that with so 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?

Lea Knight (CFO)

Yeah. Let me step through that. 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-$10 million. In total, in Q1, it reflects about, call it, $18 million-$20 million of ship holds. We expect those ship holds to be resolved or remediated by the second half. You'll see some progressive improvement in Q2, but principally remediated by the second half.

On an annual impact, the impact of what we know today, which is impacting Q1, we expect it to be about $27 million. 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.

Richard Newitter (Managing Director)

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

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 deals are out in front? Or are you going to try to be opportunistic as they present themselves? Thank you.

Mojdeh Poul (President and CEO)

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

Richard Newitter (Managing Director)

Thank you.

Operator (participant)

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

Steve Lichtman (Managing Director and Senior Equity Research Analyst)

Thank you. Good morning. 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?

Lea Knight (CFO)

Yeah. So maybe a little bit of background because we did see volatility in terms of our private label results in Q4. But 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, we'd expect it to resume into the mid-single-digit growth trajectory.

Steve Lichtman (Managing Director and Senior Equity Research Analyst)

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 and your commercial organization gives you confidence that the demand will be there once you're fully up and running on Integra Skin?

Mojdeh Poul (President and CEO)

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 are 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 serve the entire complex wound procedures, and it's very much in demand.

Steve Lichtman (Managing Director and Senior Equity Research Analyst)

Got it. Appreciate the color. Thank you.

Operator (participant)

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

Craig Bijou (Equity Research Analyst)

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.

Mojdeh Poul (President and CEO)

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 scheduled thing.

I think the thing that complicated the picture 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 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 the 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.

Lea Knight (CFO)

And so, Craig, just to add on to that. I'm sorry. Just to add on to that, as you project through the end of 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 to 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.

Craig Bijou (Equity Research Analyst)

Got it. Okay. That's helpful. And then I recognize that Acclarent has done very well since you guys brought it aboard. But I believe the guidance was for $97 million in 2024, 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 2025? But any other comments on maybe the cadence of that growth or anything else on your confidence of getting to the Acclarent growth?

Lea Knight (CFO)

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

Craig Bijou (Equity Research Analyst)

Okay. Thanks for taking the questions.

Lea Knight (CFO)

Yep.

Operator (participant)

Thank you. And our next question comes from Joanne Wuensch of Citi. Your line is open.

Joanne Wuensch (Managing Director)

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 and your full-year guide would imply a pretty steep ramp over the remaining three quarters, if you could sort of just sort of level set us in how we should think about that ramp, that would be great. Thank you so much.

Lea Knight (CFO)

Yeah. So let me start with the cadence question or the Q1, yeah, and 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 ship 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 shipping holds, 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.

Joanne Wuensch (Managing Director)

Thank you.

Operator (participant)

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

Jayson Bedford (Managing Director)

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

Lea Knight (CFO)

We did not.

Jayson Bedford (Managing Director)

Would you care to? Or is it in terms of material?

Lea Knight (CFO)

Yeah. No, order of magnitude is about $5 million.

Jayson Bedford (Managing Director)

Okay. 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 the $27 million I think you identified plus an incremental $60 million, and we can apply similar math for the mid and low end of the guide. Is that fair?

Lea Knight (CFO)

That's fair.

Jayson Bedford (Managing Director)

Thank you. And this last one, if I can, timeline on Braintree, is it still first half of 2026?

Mojdeh Poul (President and CEO)

Yeah. 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 timelines.

Jayson Bedford (Managing Director)

Great. Thank you.

Operator (participant)

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