Q2 2024 Integra Lifesciences Holdings Corp Earnings Call

Participants

Chris Ward; Investor Relations; Integra Lifesciences Holdings Corp

Stuart Essig; Managing Director, Prettybrook Partners, LLC, and Chairman of the Board; Integra Lifesciences Holdings Corp

Jan De Witte; President, Chief Executive Officer, Director; Integra Lifesciences Holdings Corp

Lea Knight; Chief Financial Officer, Executive Vice President; Integra Lifesciences Holdings Corp

Kristen Stewart; Analyst; CL King & Associates, Inc.

Steven Lichtman; Analyst; Oppenheimer & Co. Inc.

Matt Taylor; Analyst; Jefferies LLC

Ryan Zimmerman; Analyst; BTIG, LLC

Robbie Marcus; Analyst; JPMorgan Chase & Co

Jayson Bedford; Analyst; Raymond James & Associates, Inc.

Craig Bijou; Analyst; BofA Securities

Richard Newitter; Analyst; Truist Securities, Inc.

Joanne Wuensch; Analyst; Citigroup Inc.

Vik Chopra; Analyst; Wells Fargo Securities, LLC

Presentation

Operator

Good day and welcome to the Integra LifeSciences second-quarter 2024 financial results. At this time, all participants are in a listen only mode. (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.

Chris Ward

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 Offier.
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 and 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 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 current -- foreign currency, acquisitions and divestitures. Organic revenue growth, excluding the Boston, excludes revenues from products manufactured in our Boston facility in both periods. Management believes that excluding revenue from all products manufactured at Boston, that the Boston plant provides useful information when evaluating the company's organic growth because of the unusual nature of the manufacturing stoppage in voluntary global recall. Unless otherwise stated, all of this aggregated in 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 in today's press release, which is a limit 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.

Stuart Essig

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 Lea 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 the 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 water 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, a 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 holes 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 reassure 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 target, 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 and given the company's exciting life-saving products, aggressive 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 am very confident we will bring onboard 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

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 or second quarter reflected the 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, the 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. And excluding Boston organic growth plus 0.3%.
We delivered adjusted EPS of $0.63 within our guidance range. Codman Specialty Surgical business saw growth of approximately 1%, with strong growth from our dural access and repair and neuromonitoring franchises offset by significant backorders. It was solid demands once again, in our international markets, but this business was also impacted by the supply by quarters.
And as a consequence, grew low single digits during the quarter. We're seeing a strong uptake of selling following our global relaunch 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've 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. We delivered high double-digit growth in DuraSorb, our resorbable synthetic reconstruction product, which continues to track ahead of our deal model. During the quarter, we also saw continued strong growth from our [micro matrix] family of products as well as Cytal, Gentrix and amniotic.
As we announced on July 15, we plan to restart the manufacture of PriMatrix and SurgiMend 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 the 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 facility that is more conveniently located for the majority of it.
We remain fully committed to bring in PriMatrix and SurgiMend back to the market for 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 SurgiMend to the market.
We remain confident in our multiproduct portfolio strategy in implants based breast reconstructions. I'm pleased to announce today that we received a PMA approval notification from the FDA on the clinical submission for the PMA application for SurgiMend. The FDA has determined that the PMA is approvable subject to an FDA inspection that finds the manufacturing facilities met the same controls in compliance with applicable requirements of the quality system regulation.
Now turning to guidance, we are updating our revenue and adjusted EPS guidance for the year to a range of $1.609 billion to $1.629 billion and $2.41 to $2.57 per share, respectively. The reduction in our guidance reflects the impact of supply holes and backorders 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'll 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

Thank you, Jan. Let's take a more detailed look at our second quarter financial highlights starting on slide 5. 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 points benefit versus the prior year from Boston returns and lower remediation costs.
Our adjusted EBITDA margins were 20%, down 330 basis points compared to 2023. Our decline in adjusted EBITDA margins 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 CSS revenue highlights for the second quarter. Reported Q2 revenues on CSS were $302 million up 11.3% on a reported basis and 0.9% on an organic basis from the prior year. Local sales in neurosurgery grew 1.2% on an organic basis with strong growth in certain franchises, offset by the impact of backorders.
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 CereLink relaunch in our neuro monitoring franchise. However, the growth was offset by backorders that led to a low single digit decline in neuro monitoring and a low double-digit decline in CSF 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 four 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 the success of the integration to date. For the second quarter, our capital sales were up high single digits, driven by CereLink monitors, which are delivering results in line with our expectations for that relaunch.
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 backorders, we discussed earlier in our remarks.
Moving to our Tissue Technology 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 growth in MicroMatrix Cytal and amniotics. Growth and wound reconstruction was partially offset by 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 labels of 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 EUNDR, CapEx and increased working capital, primarily from investments and 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 plan.
As of June 30, net debt was $1.5 billion and our consolidated total leverage ratio was 3.8 times, just above our target range of 2.5 to 3.5 times. 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 under our revolving credit facility.
We are confident that our balance sheet, flexibility, strength and liquidity will allow us to execute our investment and 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 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 hold we have implemented. The 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 backorders. 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% to 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 outlook for 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 the compliance 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 needs 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 timelines to resolve the identified supply issues, we should be able to meet the 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 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 a clearance 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 bringing SurgiMend and PriMatrix back to markets through our new Braintree facility and advancing our SurgiMend PMA for IDDR. The investments 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.

Question and Answer Session

Operator

Thank you. (Operator Instructions)
Kristen Stewart, CL King.

Kristen Stewart

Hi. Thanks for taking my question. I was wondering if you could just provide a little bit more color on the shipping hold that you're taking in third quarter and just kind of confidence and 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 shiphold and the total revenue that these products represent. Thank you.

Lea Knight

Good morning. Thank you for the question, Kristen. Yeah, so the temporary shipping hold, we have in place impact a number of skews 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 holes themselves, they primarily relate to compliance with labeling packaging and IFU, which is instructions 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 -- sorry I just wanted to finish the other part of your question was how are we confident that it doesn't continue into 2025. The answer to that (multiple speakers) 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

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

Lea Knight

Yeah 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 this the plan itself is structured into workstreams that we'll have as their remit to look across the entirety of our manufacturing and supply network and our 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 that does carry us through 2025.

Kristen Stewart

Okay. Thank you very much.

Operator

Thank you. Steve Lichtman, Oppenheimer & Co.

Steven Lichtman

Thank you. Good morning, guys. I 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 this shipholds and how you're addressing that with customers and the commercial organization?

Lea Knight

Yeah, so Stephen, let me start there. So as we look across the whole, as I mentioned, is the 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 hold. From a guidance perspective, as you look at kind of how we've called the Q4 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.

Steven Lichtman

Okay --

Lea Knight

And then I think the other part of your question was related to additional risks for Q4. Is that right?

Steven Lichtman

Yes, yes, just in terms of, obviously customer pushback, anything, any disruption on the commercial organization result of the new the issues here.

Lea Knight

Yeah. And so we've been working with our customers in terms of communication around the nature of these hold, and we'll be proactively working with them to help them understand as we begin to alleviate them what that impact is and when the -- 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

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

Lea Knight

Yeah so as we step through the compliance master plan and address the workstreams that I talked about, we know it's going to mean an increase in internal resources as well as external resources, specifically with expertise in 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 the 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, will be looking at our capacity requirements again in the interest of making sure that versus 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.

Steven Lichtman

Okay. Thank you.

Operator

Thank you. Matt Taylor, Jefferies.

Matt Taylor

Hi, thanks for taking my question. 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 in the second half of '24, I guess, would easy comp. Why wouldn't you grow more in 2025?

Lea Knight

Yeah. 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 on. And on top of that, we are seeing continued strength across the other parts of our business that should continue to grow.
So a player will be in for a full year. We're seeing growth in other parts of our business in terms of UBM and DuraSorb or 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 early thoughts on 2025. And that's principally due 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 potentials, supply disruptions, will it be realized or not.

Matt Taylor

Okay, great. And then I have a similar question line of thinking on just the margin impact. So you're talking about flat to a 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? And when can you actually get back on track with some of your long range plan type margin goals that you've put in place in the past? Or is this going to be kind of a multi-year cost overhang?

Lea Knight

Yeah so let me frame it 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 in 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 merge that to overall EBITDA margin or EPS growth, that's flat to modestly up '25 versus '24.
Beyond that, to your point (multiple speakers) -- 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. So 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.

Matt Taylor

Yeah great. Thank you very much.

Operator

Thank you. Ryan Zimmerman, BTIG.

Ryan Zimmerman

Hey, guys. Thanks for taking the questions. 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 of 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 -- you're already spending time and money? Why not throw more money at that get SurgiMend on? Why is that going to take till '26. So maybe you could kind of unpack this because this is, I think, but doubled investors for a while now, with the quality issues?

Jan De Witte

Thank you, Ryan, for the questions. Let me -- I see there are two questions on okay, why now and then SurgiMend question. So first on the quality, compliance yet gaps. Clearly what we've learned during our Boston remediation activities and some of the analytics officers has made us reevaluate our processes across our manufacturing and supply network.
In particular, what we've learned is the need to be more effective at standardizing our quality system across the company. As a 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 loans this compliance master plan and activating this systemic holistic approach to our quality system, our GMP compliance to essentially step up and get ahead of this and likely indicate 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 here over the past quarter, that's setting up yet to really step up and accelerate many of the activities we have been talking already over the past few years.

Ryan Zimmerman

Okay. Why SurgiMend in '26? I mean, can you if you're ready throwing a ton of money at these problems. Why not? Why is it going to take as long as it is to get the SurgiMend active in '26?

Jan De Witte

Yeah so let me maybe give a bit of context on Braintree and your professionalization. I think some of you'll remember that we communicated in 2022 that we commissioned the building of the Braintree facility with the plan to have that site ready in 2026.
Yeah all of this was part of a long-term manufacturing strategy for SurgiMend and PriMatrix. That intention was and still is building this Braintree facility is to build a modern factory that's more protective, an attractive place to work for our colleagues.
And secondly, to significantly step up our output capacity of that factory at the Boston factory, we knew was never going to be big enough yet to deliver to the growth opportunities, specifically with our breast strategy and SurgiMend. 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, see at this point too early, still yet to be more specific here on the path and the specific dates there, we'll update for sure that once we understand the commercial ramp closer as we get closer to operationalize.

Ryan Zimmerman

Okay. I want to just ask one other question and I'll pop back in queue. In the past, when you've had disruptions to the business, you've actually instituted incentives or retention cost 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 or is there any concern there in terms of sales force retention as a result of some of these shipping holes and the broader issues in supply?

Lea Knight

I mean, I'll start there. I'll start with that. Thank you, Ryan. So for 2024, again, the nature of the shipping hold that we talked about do have their temporary by nature. So we do expect them to alleviate beginning in during the course of Q3 and into Q4.
And as a result, yeah, we absolutely are committed to retaining our sales force because we recognize one that they've been issued 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 clients' 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.

Ryan Zimmerman

Okay. Thank you for taking the questions.

Operator

Thank you. Robbie Marcus, JPMorgan.

Robbie Marcus

Great. Good morning and thank you for taking the questions. Two for me. First, one to ask, how do you get comfortable giving guidance into '25 and '26 to a degree. If I look back over the past one to two 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

Yeah, 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 hold that we talked about for 2024.
And I think 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, at 2024 baseline already has about $70 million to $80 million of shipping -- sorry, supply disruption embedded in it. And our early thoughts on '25 is we're going to be able to grow this business mid-single digit off of that reduced baseline. To the points that were questions that were made earlier.
Yes, we do 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 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

(multiple speakers) Let me add to one thing, Rob, probably because you mentioned you're uncertain times, let me -- maybe focus on a couple of certainties that we have with Integra. Okay. One, okay 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've heard Stuart talk about our strong commercial force, a strong commercial force and Ryan asked a question. We're making sure okay, we are retaining them. Okay, we have our broad portfolio. So not one product will destroy their back, and we see it with DuraSorb today, which is another other 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 shipholds, right. We are building on those trends and we'll bring those products back.

Robbie Marcus

Great. Helpful. Maybe just one follow-up from 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 two 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 a 100% prior dollar run rate in 12 months. Is it now half that when you come back, how do we think about share recapture, if and how long you're going to be off market? Thanks.

Jan De Witte

Yeah. I'll take this one, Robbie, I think you'd probably be first SurgiMend, PriMatrix, which are the two projects that are long of the market. Like I mentioned before, one more confidence you have for the market months yet and the growth from here. But the market for implant-based breast reconstruction for complex hernia, complex wound repair and those markets remained strong.
Now we recognize it's going to take significant work to get back. But the products SurgiMend and PriMatrix are differentiated from that, they fill a clear needs in the markets. And today there's no other competitive products that fill that need. And we do not see that over the next year's competitive products come that really fill out the specifics that SurgiMend and PriMatrix are selling and then back to our relationship and our presence with our customers.
If you look at our surgical reconstruction sales force today, they're very active and very successfully active selling DuraSorb okay and 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 keeps us -- keeps our sales teams get engaged and building that relationship with customers, even if these products are not yet 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

And just to build on that because you mentioned multiple products out for years, I think to Jan's point, yes, that is true with respect to SurgiMend and PriMatrix, but the whole 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.

Robbie Marcus

Thank you.

Operator

Thank you. Jayson Bedford, Raymond James.

Jayson Bedford

Good morning. Just two cookies for me. It sounds like it's your decision on when the shiphold 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

Hi, Jason. Let me take this one. So yes, these shipholds have been put voluntarily in place. It's essentially our quality management system.
Yes, at work driving corrective actions of observations. The path from an observation to a correction is the defined by quality management system. So it's essentially us, yeah, who defined when we're done with that correction on the specific product base.

Jayson Bedford

Okay. And just 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 all tiers or common thread? Are they manufactured the same facility? Is there -- is it based on the age of the label and just curious on how you decided on these products?

Lea Knight

Yeah 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. With in 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 authorities along with our own internal assessments 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.

Jayson Bedford

Okay. Thank you.

Operator

Thank you. Craig Bijou, Bank of America Securities.

Craig Bijou

Good morning. Thanks for taking the questions. 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 shiphold. And as you think about the broader plan going forward, are you taking a look at even broader manufacturing processes at all your facilities?

Kristen Stewart

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

Craig Bijou

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 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 shipholds that you expect to come back and like, are you discounting that at all for Q4? And is it assumed in any way in your guidance and maybe that does come back or a portion of that is pushed out to '25?

Lea Knight

Yeah so yeah, let me step through the ramp. So as you look from Q3 to Q4, the ramp is about just under $80 million on two-thirds of that will be driven by addressing the shipping home. So again, because most of them will be addressed by the end of Q3, we start and we're in better supply position across the products that are currently on shiphold. And that should address about two-thirds of that.
The other third is primarily two things. It is skin now being back towards normalized run rate in Q4 along with just a little seasonality. So that makes up the last third.
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 shifts. On the shipping hold, but it also allows for some of the strength that we've been seeing in other parts of the business, like Acclarent, for example, doors or as well as our UBM franchise to keep continue to drive on the strong growth that we've seen to date.

Craig Bijou

Okay. Thanks for taking the questions.

Lea Knight

You're welcome.

Operator

Thank you. Richard Newitter, Truist Securities.

Richard Newitter

Hi, thanks for taking the questions. Maybe just the first one with 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

Yeah so for, in terms of the shape of 2025, again, a clear and agenda I should step back and talk about the fact that Q2 was really strong performance on that business. We were 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 it 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'll be closer to $86 million and that's contemplated in the guide that I provided earlier. So it's really dropping 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'll be operating at for kind of a full year by the end of Q1 of 2025, throughout the balance of 2025.

Richard Newitter

Okay. Thank you. That's helpful color and maybe 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 or update us if you need to keep some of these shiphold or products off the market longer? Will everything that you need by the end of third quarter? Or could this be something that you'll have a periodic update on each subsequent quarter? Thanks.

Lea Knight

Yeah, let me take the second question first. We do anticipate, again, based on the timing of the current plan to release the polls that we'd have -- we'd be able to provide a meaningful update as part of our Q3 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 3.8 times, 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, right.
Our leverage will continue to remain elevated. But to your question, on debt covenants no, we don't have a concern at this point that you will have a problem from a debt covenant perspective. As you look at the guide or projected EBITDA along with the allowable adjustments as determined in our bank agreements.

Operator

Thank you. Joanne Wuensch, Citi.

Joanne Wuensch

Thank you very much. Can you hear me? Okay. Again, perfect. I don't want to sort of stick on this, but I'm a little confused on one thing, which is the shiphold and the implementation of the global compliance program for 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 shiphold came from.

Lea Knight

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

Joanne Wuensch

Thank you. And when you talk about the gross margins pressures this year, that sounds like it's going to roll into next year. What's stage is there maybe relief from some of these expenses? Or is this sort of a new go forward gross margin rate, given that the oversight is going to have to be in place for a while? And thank you for taking the questions.

Lea Knight

Yeah, certainly. So there will be the magnitude of the increase that I characterized 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 full year. We should 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 kind of frame that out in the context of LRP to be able to speak explicitly to what the ongoing or maintenance kind of cost or impact will be for the business.

Joanne Wuensch

Thank you very much.

Operator

Thank you. Vik Chopra, Wells Fargo.

Vik Chopra

Hey, thank you for taking the question. So on the shipping hold, does that also apply to your ENT business in Q3?

Lea Knight

No. So as we look across so on Acclarent right now, we have in the ENT business is clear along with our MicroFinance business, they were not impacted by the temporary shipping hold.

Vik Chopra

Okay. Got it. That's helpful. Thank you. And then my follow-up question was on Integra skin, please. I think you said you expect the sales to normalize in Q4 now. Can you just provide an update as to where you are and why the timing was pushed out? Thanks for taking the questions.

Lea Knight

Yeah. Thank you, Vik. So if you recall in our call in May, we had anticipated we've gotten started resuming production. We weren't operating at capacity. We had 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 need it to be in order to operate at the normalized run rate 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.