Good day, and welcome to the Integra LifeSciences First Quarter 2024 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Chris Ward, Senior Director, Investor Relations. Please go ahead.

Thank you, Sheri. Good morning, and thank you for joining the Integra LifeSciences First Quarter 2024 Earnings Conference Call. With me on the call are Jan De Witte, President and Chief Executive Officer; and Lea Knight, Chief Financial Officer. Earlier this morning, we issued a press release announcing our first quarter 2024 financials. The release and corresponding earnings presentation, which we will referenced during the call, are available at integralife.com under Investors, Events & Presentations in a file named First Quarter 2024 Earnings Call Presentation. Before we begin, I want to remind you that many of the statements made during this call may be forward-looking. Factors that could cause actual results to differ materially are discussed in the company's Exchange Act reports filed with the SEC and in the release. Also in our prepared remarks, we will reference reported and organic revenue growth and organic revenue growth, excluding Boston. Organic revenue growth excludes the effects of 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 the Boston plant provides useful information when evaluating the 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. And 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 Form 8-K filed with the SEC. And with that, I will now turn the call over to Jan.

Thank you, Chris, and good morning, everyone. It's a pleasure to be here together with Lea to update you on our first quarter results and guidance for the year. Let me start by saying the performance during this period reflected robust market demands, the contribution of having a broad and diversified product portfolio and solid execution by our Integra colleagues around the world to deliver our 2024 key priorities and progress, our strategy. If we move to Slide #4. Our first quarter revenues finished at $369 million above our February guidance range, partially driven by orders that closed earlier than forecasted. Organic revenue was down 2.5% compared to the prior year, primarily due to the Boston revenue included in the first quarter of 2023. Excluding Boston, organic growth was 1.6%. We delivered adjusted EPS of $0.55, within our guidance range. Our Codman Specialty Surgical business saw a strong start to the year, growing 4.1% and in line with our growth expectations for this business. This performance was driven by several of our leading products and brands in CSF management, dural access and repair and neuro monitoring. In addition, we saw continued strength in our international markets, which have delivered consistent high single to low double-digit growth. We expect to continue to build on this momentum in our international markets as we expand access to our products in new markets and broaden our commercial reach and capabilities. We also completed the global relaunch of CereLink in the quarter, and we're pleased with the strong market uptake, demonstrating resilience and differentiation of our intracranial pressure monitoring portfolio. Furthering our legacy of strategic M&A to broaden our impact, we recently closed our acquisition of Acclarent, a pioneer in ear, nose and throat surgical interventions. This deal positions Integra as a leader in the…

Thank you, Jan. Let's take a more detailed look at our first quarter financial highlights, and I'll start on Slide 5. Jan mentioned, first quarter total revenues were approximately $369 million, representing a decrease of 3.1% on a reported basis and 2.5% on an organic basis. Total revenues were approximately $4 million above the high end of the guidance range communicated back in February, primarily driven by favorable order timing. First quarter revenue growth was strong across many parts of our business with organic growth of 4.4% in Codman Specialty Surgical and 8.7% in our international business. Tissue Technologies was down 15.3%, driven by approximately $15 million of Boston revenues in Q1 2023. Our adjusted EPS for the quarter was $0.55, down 25.7% compared to 2023. Looking at the middle of the P&L, gross margins were 64.4% for the first quarter, down 290 basis points versus 2023. Gross margins were impacted by approximately 170 basis points and an unfavorable revenue mix from lower Integra Skin and stronger international sales, and approximately 130 basis points from lower utilization and higher scrap in the quarter. Our adjusted EBITDA margins were 19.5%, down 470 basis points compared to 2023. Our decline in adjusted EBITDA margins primarily reflects the decrease in gross margins. Operating cash flow for the first quarter was $16 million. If you turn to Slide 6, we'll take a deeper dive into our CSS revenue highlights for the first quarter. Reported Q1 revenues in the CSS were $256 million, up 3.4% on a reported basis and 4.4% on an organic basis from the prior year. Global sales in Neurosurgery grew 6.3% on an organic basis as a result of low double-digit growth in neuro monitoring driven by the relaunch of CereLink, mid-single-digit growth in CSF management driven by Certas Plus valves…

Thank you, Lea. And please turn to Slide 11 to conclude prepared remarks. In the first quarter, we saw a healthy demand for our portfolio of differentiated products across several parts of our business despite supply headwinds. The first quarter performance, our first half is on track to meet our expectations, and we anticipate returning to a more reliable cadence of mid-single-digit growth in the second half of the year. We have the fast organic and inorganic global growth strategy with the successful global relaunch of CereLink, ongoing international expansion of our portfolio of leading brands and commercial capability and continued execution of our M&A game board, as demonstrated by the integration and outperformance of SIA with its DuraSorb products and the close of the Acclarent acquisition. We understand the frustration that our customers, investors and employees feel about the results of the audit in Boston. But I assure you, we are focused on the additional remediation work and other changes necessary to bring our products back and strengthen our supply chain execution, and this is achievable. I remain confident that Integra has a bright future ahead. We have markets with stable growth, we have strong commercial capabilities and we have a diversified portfolio of leading products to fuel our expansion. Our leadership team, our Board and our employees remain committed to achieving a reliable long-term business performance and to building robust capabilities to deliver life-saving technologies to patients while driving consistent mid-single-digit top line growth, strong profitability and cash flow for our shareholders. With that, I'd like to open the line for Q&A.

[Operator Instructions] And our first question will come from the line of Vik Chopra with Wells Fargo.

So regarding your Boston facility recall and restart, I think the news came today as a surprise to a lot of people. So it sounds like you don't expect to resume commercial distribution in 2024. Can you maybe share some additional details around what the results of the audit revealed? And then does this mean you have to sort of revisit your LRP? And then I had a follow-up, please.

Thanks for that question. So look, when we communicated in February, we believed our timeline was achievable based on plans to satisfy the thresholds of the warning letter. Now despite how much we accomplished leading up to the dress rehearsal, we were not as far along as we thought. The final audit confirmed that there's more to be done. That's a result that we acknowledge and accept as a result of that final audit. Now none of this should cloud the fact that we remain committed to bringing the products back to market for the benefit of our surgeons, our patients and shareholders. So we've made changes to the operations and quality leadership and structure to ensure the right focus and capabilities is applied to Boston, but also our broader quality system and the broader supply improvements there. In terms of the question updating LRP, at this point in time, we don't give any update on LRP. We are working to update the planning for Boston, and we'll I'll probably give updates later in the year as we get there.

Okay. Thank you for the comprehensive update. And then my follow-up question, in late April, 7 MACs published a proposed LCD for the treatment of DFUs and VLUs. Can you just remind us what impact this has on Integra and what percent of your products are exposed to this proposed LCD?

Yes. On the LCD, these new proposed LCDs regarding the coverage for skin substitutes are focused on the DFU and the VLUs, the diabetic foot ulcers and the venous leg ulcer space. The two products that Integra has that are indicated for these wound types are Omnigraft and PriMatrix and they remain covered under those new proposed LCDs. So that's good news for Integra. It is, however, still today, a small part of our business. So on the one hand, we're happy our products remain covered. But for the short term, I would say that the impact to Integra is neutral. But it represents an opportunity for the future, okay? Plus, we like the trends with this LCDs proposal, which seem to support products that deliver strong outcomes and have rich clinical evidence. And that's areas or projects where we feel Integra is positioned strongly.

One moment for our next question. And that will come from the line of Steve Lichtman with Oppenheimer.

I guess first, Jan, if you could talk about the next steps in Boston. What are the milestones that investors should be looking for as you go through the rest of this year?

So at this point, we are, as I said, still determining the work plan. We're translating the observations from the latest audit into a work plan. That's going to determine the milestones. So at this point in time, there's no specific milestones yet. But we know enough yet to come to the conclusion that we are pushing out the PriMatrix and SurgiMend's revenues for this year.

Okay. And then, Lea, can you talk about the gross and operating margin assumptions that are implied in the EPS guidance for 2Q and full year? And any sort of considerations that we should be thinking about on both?

Yes. So thank you, Steve. From a gross margin perspective, let me talk about full year first, and then I'll step back and talk about Q2. On a full year basis, in February, we communicated gross margins that would be flat to modestly up. In light of ongoing remediation costs that we'll incur based on the Boston time line, you should now think about gross margins that will be moderately down year-on-year versus 2023. And again, that's a combination of the additional remediation cost in Boston and then some of the lower utilization and higher scrap that we called out as well. From a Q2 perspective, you'll see a little bit of that same dynamic, right? So we do expect to be up modestly sequentially from Q1, but we will see the impact year-over-year from lower utilization, higher scrap, some of the remediation costs that characterize what we saw year-over-year in Q1.

One moment for our next question and that will come from the line of Kristen Stewart with CL King.

I was wondering if you could just provide an update with Integra Skin, the supply constraints and when we should see those start to ease?

Yes. Thank you, Kristen. Yes. So from a Integra Skin perspective, our production is running, but we are not at full capacity yet. We have continued throughout Q1 and Q2 to ship to our customers and demand does remain very strong. We'll be working to catch back up to full demand in the second half, and that's what's contemplated in the guide that I provided. I think on the whole, we are really happy with the demand that we're seeing in Integra Skin, and it gives us confidence to continue to make some of the CapEx investments that we've been making to build out capacity to support the long-term growth on that.

Okay. And then just on Acclarent, can you just remind us what your assumptions are in terms of the growth profile of that business going forward under your leadership?

Happy to. First, I'd like to say we are absolutely thrilled at completing the acquisition of Acclarent in April 1 and welcoming that team as part of our Integra family. Just as a general reminder, part of our excitement is the fact that, that acquisition gives us immediate commercial leverage and scale in the ENT specialty device space, which is a national adjacency to our CSS business. It's a category that's growing at 5% to 6%. It's over $1 billion. And we're happy about the product portfolio that comes with it and assets like the TruDi nav offering system as well as the expanded indication that we've gotten in the AERA eustachian tube dilation system. So overall, just again, really happy to have that as part of our product portfolio. From a guidance perspective, we have assumed for the 3 quarters that we'll have Acclarent on board, a revenue of $80 million. That guidance approach does reflect the understanding that with integrations of this sort, there is some uncertainty. And so that has been factored into that assumption. That said, we still believe that this acquisition will be growth accretive to our base business and those capable of operating at high single-digit levels on a year basis.

And one moment for our next question and that will come from the line of Robbie Marcus with JPMorgan.

Great. Two for me. Maybe to start on full year organic sales growth guidance. The first quarter was negative. We see the guidance for second quarter. To me, it implies either something at the high end of mid-single digits or the low end of high single digits. So given the big step-up both in growth rates and in dollars, I realize there's easier comps from last year. How do you think about your ability to not just hit those targets, but exceed those targets, given it does require a pretty good step-up each quarter?

Thanks, Robbie. Yes, from a percentage perspective, you're absolutely right. I think part of the reasons we provided the view that we did on our Slide 10 is to demonstrate that across the portfolio, we are operating or have the ability to operate at mid-single-digit growth or better across many parts of the portfolio. So Robbie, as I look at the second half, what does that mean? It means the international portfolio that -- whose performance we saw on Q1 has to continue the way it's been continuing. From a skin perspective, as I mentioned, we expect to catch up to demand in the second half, and so that will help accelerate the growth from a percentage perspective that you talked about. And then again, from -- across the other parts of the portfolio, we are seeing growth in DuraSorb, Gentrix and there's no reason why those assets won't continue to perform at those levels along with kind of main parts of our CSS business. So I think there's a lot of growth potential that is overshadowed to some degree by some of the challenges that we saw and comp issues that we saw in Q1 that will naturally alleviate themselves as we get into the second half of this year.

Great. Maybe if I move down the P&L on margins. Maybe you could walk us through exactly what you're thinking for the composition of margins, gross and operating margin, in second quarter and what you assume in the guidance there in the full year? And maybe higher level, how you're thinking about the company's ability to expand margins on a go-forward basis given -- I know you've been cutting for a while, and now you have a pullback and probably higher quality spend on manufacturing.

Yes. So as I mentioned to Kristen, from a gross margin perspective on a full year basis, we were forecasting flat to modestly up year-on-year '24 versus '23. We're now closer to moderately down year-on-year. And again, that has to do with the higher remediation costs from Boston along with some of the lower utilization and higher scrap that we've seen. So that's impacting the full year. It's also impacting, as I mentioned, Q2. So similar dynamics from a Q2 stand-alone basis. We will be up modestly, Q2 from Q1. But again, some of the same themes will impact our Q2 results. But addressing your -- the second half of your question in terms of kind of things that we are doing to drive different outcomes. As I mentioned previously in our last call, we are investing in activities to help drive productivity improvements, efficiency improvements, yield improvements across our network and to strengthen overall supply and efficiencies as we interact with kind of our external supplier network as well. That work is still ongoing. And as of now, while we've identified some improvement areas, we do have to start to implement them, and we expect to realize them beginning in 2025 with more impact beyond that as well.

One moment for our next question. That will come from the line of Matt Taylor with Jefferies.

I wanted to follow up on Boston. And maybe I could just ask how you would frame the worst-case scenario now for investors? And I guess when you do get product back, assuming that happens, do you still think you can regain a lot of the share that you've lost?

So I'll take the first part of that. And in terms of -- and just to give you kind of from a grounding perspective, based on the recall, the returns that we accrued for in 2023, we exited 2023 with Boston essentially in and around kind of low single million dollars, like $1 million or $2 million. So from a year-on-year perspective, there is -- it's neutralized from a growth perspective. So in 2024, what you'll see is organic growth that we're forecasting a 3.3% to 4.3%, which essentially relates to the performance across the rest of our portfolio. As we take our time to evaluate what the next steps are required to bring SurgiMend and PriMatrix back into the market, one, we are committed to do just that. But from a growth perspective, those -- the reentry of those products are not impacting our 2024 guidance as of now. And so from our perspective, it does represent upside as we reintroduce those products back into the market. I'll let Jan address from a relaunch perspective what we think the prospects are.

Yes. Just briefly on that, right? SurgiMend and PriMatrix are differentiated products. They're chosen for specific reasons and not easily replaced. So we believe customer preference will fundamentally remain and we also continue to have access and relationships with those customers through our broader portfolio. So the elements to, at one point, get back in the market are still going to be there.

Got it. I'm just trying to understand what is the worst-case scenario? Is it just a further delay? You still have confidence these will be back, but it may be another 6 months or something? I mean, it's just difficult with it being so open ended.

Yes. Like I said, at this point, we don't give any further guidance on the Boston return.

And one moment for our next question and that will come from the line of Ryan Zimmerman with BTIG.

I want to -- I mean there's a lot going on here, and there's a lot, I think, for investors to interpret in terms of moving parts. Number one, Jan, you were asked about the LCDs and I appreciate that Omnigraft and PriMatrix are on the list of approved products. But there's a number of other products that Integra has including the whole ACell portfolio that were not on the LCD list. And so what considerations do you have built in for that? Or are they just not used in the chronic wound market? I'm talking like Cytal and the MatriDerm products and so forth?

Yes. So it's the second part of your question, Ryan, these are products that are not applied in the VLU and DFU areas. So it's almost by definition that it does not impact any of our current business or potential.

Okay. And then, Lea, on margins, I think Robbie was trying to get at this, but I recognize the full year margins are going down. And sequentially, they're holding steady. What's driving the second half step-up in margins, though, if there is one? Because it can still -- I mean it can still step up in the second half from some improvement, but still be down year-on-year. And so I'm just trying to understand with PriMatrix and Omnigraft removed -- or SurgiMend and PriMatrix removed, excuse me, what allows you to drive that step-up in margins. And the flip side of it is, how are you managing your costs from Acclarent acquisition? Just help us understand kind of some of these moving parts a little further.

Yes. So Ryan, from -- again, from a full year basis, right, we'll be down moderately. So there is a little bit of a step-up required in the second half, but not significant. And a lot of that has to do with skin being back at meeting full demand. We will see an improvement in margins. That's a high-margin product for us. So that's a key contributing factor. And then from an Acclarent -- I think the other part of your question was on Acclarent. As I mentioned, we still expect that business to be EPS neutral in 2024 for us. So -- and that's reflected in the guide as well. And overall, that portfolio, again, if we just talk gross margins, that portfolio is in and around our kind of base business gross margins. So that's not having a factor per se.

And one moment for our next question and that will come from the line of Joanne Wuensch with Citi.

I have two. When you start reporting Acclarent, will that be called out as a separate subdivision under neuro? Or where will that be tucked into?

Yes. So as part of our disaggregated revenues, we will see a separate segment for Acclarent or for ENT. I should say specifically ENT.

Okay. So that will be called out separately. And where are you...

As ENT.

I'm sorry, what?

As ENT. As a category of ENT.

And where are you in terms of a CEO search?

Yes. So the Board is -- remains on track with our original plans to identify as well as hire a new CEO by year-end, if not sooner. So that is progressing.

And one moment for our next question and that will come from the line of Rich Newitter with Truist.

Maybe just first, are you comfortable with consensus, including Boston contribution in 2025?

Are we comfortable with consensus, including what contribution, Boston?

Boston restart. Incremental contribution from a Boston restart. I guess, right now, there's that contemplation, I appreciate you've guided to '24, but just a level set. I mean, is this something that we should just take out of '25 or the first half of '25. Anything you can comment on there so that number can get right?

Yes, I understand the question. Unfortunately, we are not providing guidance with respect to 2025. As Jan mentioned, our work is ongoing to digest fully the findings coming out of the most recent audit to determine what the appropriate timeline is to bring back SurgiMend and PriMatrix. So we can't provide more additional information beyond that other than the fact that we are committed to bringing those products back to the market.

Okay. And then just wondering what -- why are you so confident that skin capacity will be back -- or fully back online in the second half? And then if I could just one more. Have you contemplated going down -- not going down the PMA pathway with SurgiMend? And if not, would you be comfortable restarting the Boston facility if you chose not to go down that pathway?

So let me take the PMA question first because obtaining the SurgiMend PMA absolutely remains a key priority for us, and it is absolutely consistent with our IBBR strategy. We have not yet determined at this point whether or not the Boston timeline, if or how it will implicate the PMA time line for SurgiMend. So that piece is still out there, but what is absolutely clear is that the need for SurgiMend in IBBR has not diminished. And so for us, that means our opportunities to capitalize remain robust in that space. From -- I think your -- the other part of your question was related to skin and our assumptions in the back half. Again, because our production lines are up and running and we're not -- but we're not at capacity, the work that we have underway has a plan that will allow us to get back to meeting demand. And so that's what's assumed in our guide.

And one moment for our next question. That will come from the line of Craig Bijou with Bank of America.

So I want to start with Boston. I know you've gotten a lot of questions on it. I know you guys aren't providing a ton of information here. But is there any way you can talk about if you've had discussions with the FDA or the external auditor that did the review? And I mean I know you're not providing what's happening, but I think it would be helpful to understand, at least from that perspective, if you are working with the FDA at this point moving forward.

So look, like I said, I mean there's a little we can update further. I definitely can't speak on behalf of the FDA. We are working to plan. And that's where we are focused on at this point in time, but no further updates that we can give on Boston.

Okay. And then maybe a follow-up to Rich's question on SurgiMend and the PMA there. And I appreciate you're not changing timelines, and it's still important to you guys. But I mean, is it fair to assume that, that pushed out -- that timeline needs to be pushed out that you have to remediate the issues at Boston before you'll kind of move forward with that process?

Yes. I'll take that. As I mentioned, we are still doing the evaluation coming out of the report that we got on Boston to understand if or how the SurgiMend PMA timeline will be implicated. And so that work is still ongoing. So again, when we know more, we'll share more, but that's where we stand right now.

And one moment for our next question and that will come from the line of Jayson Bedford with Raymond James.

So you've kind of stressed the commitment to getting SurgiMend and PriMatrix back on the market. Have you started looking at manufacturing these products at another facility?

Look, Jayson, we are in our planning and not excluding any option. And so that's where we'll leave it at this point.

How long would it take to get up and running at a new facility or another facility?

Again, we're looking at what our options are and we're committed to bring these products back to the market. There's a great market opportunity for us. So if there are options, we will take them into account.

I think the only thing I would add to that is, I think as we've talked about in the past, we do have been building out capacity at another site in Boston called Braintree. And so to Jan's point, as we evaluate options, we're looking at options across the board from Braintree and Boston, respectively.

And we do have time for one final question and that will come from the line of Drew Ranieri with Morgan Stanley.

Just on the Acclarent. It looks like your guidance is kind of implying the same revenue base for 2022 for 2024. And I can understand some of the -- there could be integration challenges. So maybe just talk about what investments you are making in Acclarent today and what you have to make to get that business up to being a high single-digit grower over the next year or 2? And second, just remind us on your deleveraging plans with leverage ticking up here post deal?

Yes. So thank you for the question. From a Acclarent perspective, as I mentioned, we absolutely believe that business can be growth accretive to our base. As it relates to 2024, we're continuing to invest behind the sales force, again, to tap into that commercial leverage as well as the R&D portfolio. Some of the new offerings we believe will represent great opportunity for us to deliver some of that high single-digit growth, so offerings in their TruDi nav system area. We have an expanded indication for eustachian tubes that will also help facilitate driving differentiated growth. And so those are the areas we're going to continue to build out during this course of this year as we're doing the integration that will position us well in 2025 to get to that point. I think your other question was with respect to leverage and how we -- what our outlook is there. So following the close of Acclarent and with all the upfront integration costs, we expect by the end of Q2 that our leverage will be slightly above our typical range of 2.5 to 3.5. So it will be slightly above the 3.5 range. But over the course of the back half of the year as we again start realizing cash flows from Acclarent and other parts of our business continue to come online, we'll be able to drive that back down below the 3.5x. So we'll be within our normal range of 2.5 to 3.5 by year-end.

This concludes today's program. Thank you all for participating. You may now disconnect, and have a wonderful day.