Integra LifeSciences Holdings Corporation

Good day and thank you for standing by. Welcome to the Integra Life Sciences first quarter 2025 financial results call. 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'll need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host today, Chris Ward, Senior Director of Investor Relations. Please go ahead.

Good morning, and thank you for joining the Integral Life Sciences first quarter 2025 earnings conference call. With me on the call are Moses DePaul, President and Chief Executive Officer, and Leah Knight, Chief Financial Officer. Earlier this morning, we issued a press release announcing our first quarter 2025 financial results. The release and corresponding earnings presentation, which we will reference during the call, are available at integralife.com under Investors, Events, and Presentations in the file named First Quarter 2025 Earnings Call Presentation. Before we begin, I want to remind you that many of the statements made during this call may be considered forward-looking. Factors that could cause actual results to differ materially are discussed in the company's Exchange Act reports filed with the SEC and in the release. Also in our prepared remarks, we will reference reported and organic revenue growth. Organic revenue growth excludes the effects of foreign currency, acquisitions, and divestitures. Unless otherwise stated, all disaggregated and franchise-level revenue growth rates are based on organic performance. Lastly, our comments today will include certain non-GAAP financial measures. Reconciliations of non-GAAP financial measures can be found in today's press release, which is an exhibit to Integra's current report on Form 8K filed today with the SEC. With that, I will now turn the call over to Moshe.

Good morning, everyone. Thank you for joining us on the call today. During today's call, I will provide a brief overview of our operating results for the first quarter, followed by an update on our compliance master plan, new initiatives, and key leadership appointments that will strengthen our operations, overall execution, and enterprise discipline. I will also provide remarks on the recent tariffs. Leah will then walk through our financial results in more detail and provide commentary on our financial outlook for the second quarter and full year. Our year has started out largely as we expected. On our first quarter performance, revenue came in at $383 million, near the top end of our guidance range. Reported revenue grew 3.7 percent, while organic revenue declined 3.5 percent, primarily due to the expected impact of ship hold. Even with those constraints, we saw positive reported revenue contribution from McLaren and solid double-digit growth across many product lines, not impacted by supply availability, which speaks to the strength of our underlying demand for our portfolio. Adjusted EPS for the quarter came in at 41 cents, also within our guidance range. We continue to operate in healthy end markets and remain confident in the long-term growth potential of our specialized product portfolio. While we recognize we're not yet achieving the full potential of this business, our compliance master plan, along with targeted investments in our manufacturing infrastructure, are positioning us for long-term, sustainable growth through improved supply chain excellence. Since our fourth quarter call in February, I've had the opportunity to dig deeper and spend more time with our teams across manufacturing, quality, regulatory, and commercial functions, as well as our customers. I continue to be impressed by our team's strong commitment to our customers and our customers' consistent positive recognition of the value of our differentiated portfolio. I have also gained a more nuanced understanding of where organizational inefficiencies exist and where improvements are needed. As should be evident, we have embarked on a turnaround here at Integra, and I see two foundational elements in executing a successful turnaround. The first element is driving the portfolio prioritization strategy that clearly defines the role and expectations of each part of our portfolio within the enterprise. This is critical as we make intentional capital allocation decisions to drive short and long-term performance by maximizing our portfolio's potential to drive growth and profitability. The second element is embedding discipline program management and execution consistent with our enterprise priorities across operations, quality, and R&D. This alignment and focused execution is the underlying intent for our newly established transformation and program management office. Our future is an organization that is disciplined and unified behind successful execution of the highest, most impactful priorities for the enterprise. We must execute and reliably serve our customers today We must transform our quality management system, and we must create room to selectively invest in a few impactful innovation opportunities. Going forward, these two foundational elements, our portfolio prioritization and program management efforts, must be driven holistically and in relation to one another rather than individually. We made important progress this quarter on the Compliance Master Plan, particularly in plant-level assessments and early stages of remediation. To date, from a site assessment standpoint, we've completed 10 of our manufacturing sites and remain on track to complete the remaining four sites by the end of third quarter. We will need much of the fourth quarter to develop remaining actions from the findings and complete assessments at our key finished goods suppliers. We anticipate that remediations will continue throughout 2025, and based on early findings, Some remediations will continue into 2026. While there is still a significant amount of work to be done, I am encouraged by the rigor of our process and confident in our ability to deliver sustained improvements in compliance and supply reliability. As you may recall, during the Q4 earnings call, we reported we had identified approximately $27 million in shipholds for the full year of 2025 related to the execution of the compliance master plan. We have made meaningful progress in addressing these holds and continue to expect they will be principally remediated in the second half of this year. Late in the first quarter, we identified additional ship holds for certain products within the CSS and tissue technologies businesses. Based on our current assessment, we now expect total ship holds for the year to be between $55 and $70 million, which we are working diligently to resolve. As we've said before, our Compliance Master Plan is designed to address the highest risk areas of our operations and not necessarily prioritized by our highest revenue products first. Our plan is guided to address gaps and findings related to quality system regulations, FDA warning letters, and Form 483 observations. Based on the scope outlined in CMP, we are on track to complete the implementation of our actions outlined in the December warning letter by year-end. In connection with PMA approvals, we are working diligently to resolve all warning letter observations to the FDA's satisfaction. While our quality, resilience, and capacity efforts move forward, my deep engagement across the organization has also revealed the need for more effective prioritization of our programs at the enterprise level and a more disciplined approach to program management and execution. This need spans not only major strategic initiatives, but also the company's broader execution capability. To address this, I have established a transformation and program management office reporting directly to me. This office will lead efforts to instill a more rigorous enterprise-wide program management discipline, ensuring programs are properly prioritized, scoped, and resourced with clear milestones, KPIs, and oversight to ensure timely and complete execution. Rick Mavis will be leading our Enterprise Transformation and Program Management Office and brings with him strong expertise in leading complex business transformations, advancing operational excellence, and driving financial performance. With over 20 years of experience, including leadership roles at 3M and most recently at Solventum, he has a proven track record in business execution planning and program management. This capability will be foundational to how we operate going forward. We have also further strengthened our operations and supply chain organization with the appointment of Valerie Young as Corporate Vice President, Global Operations and Supply Chain. Valerie is a seasoned executive with extensive global operations and supply chain experience across healthcare, automotive, industrial, and consumer goods industries. In addition to her recent work in supply chain strategy and transformation consulting, she served as senior vice president of global supply chain operations at 3M, where she was responsible for manufacturing and supply chain strategy and ERP deployment. I had the privilege of working closely with Valerie during my tenure at 3M, experiencing firsthand her expertise in operation strategy, Lean Six Sigma, as well as driving continuous improvement in safety, quality, service, cost, and working capital. Valerie's mandate is to strengthen the operations and supply chain leadership team and culture while also partnering with our quality organization to ensure successful implementation of the compliance master plan. Valerie is also establishing a continuous improvement organization to drive operational excellence throughout our end-to-end supply chain network optimizing asset management, reducing total deliver costs, and most importantly, delivering quality products to our customers. As part of our investments in operational excellence, we continue to make progress on the Braintree facility, which will enable us to restart production of Surgimen and Primetrix. Our goal is to bring the facility online in the first half of 2026. We plan to provide a project status and launch timeline update for the 510 clear products in Q4 of this year. We are also making investments to enhance production capabilities for Integra skin. As we shared on our fourth quarter call, scheduled maintenance and equipment upgrades prevented us from fully meeting demand in Q1. However, we did deliver production and revenue performance in line with our Q1 expectations. The comprehensive set of integral skin manufacturing resiliency programs initiated last year to improve yields, upgrade equipment, and optimize site utilization are beginning to pay off. We can see this already in Q2 and have experienced steady yield improvements for this product since Q4. We expect production and revenue run rates to return to normal this quarter and begin rebuilding safety stock in the second half of the year. Turning to our guidance, we expect second quarter revenue in the range of 390 to 400 million, representing a reported decline of approximately minus 6.8 to minus 4.4% and includes, based on the recent exchange rate movements, an approximate 80 basis points tailwind versus the prior year due to foreign currency translation. We expect organic decline in the range of minus 7.5 to minus 5.1%. As a reminder, we lapped the acquisition of Aclarence on April 1, so Aclarence revenue will be included in our organic growth metrics beginning in Q2. We are maintaining our full-year revenue guidance of $1.65 billion to $1.72 billion. While the newly identified ship holds at the end of Q1 will have an impact, the anticipated revenue headwinds fall within the assumptions we made when setting the guidance range. we expect adjusted EPS for the second quarter to be in the range of 40 to 45 cents. For the full year, we now expect adjusted EPS between $2.19 and $2.29, with the only adjustment to prior guidance being the impact of the recently announced global tariffs. While the tariff situation continues to rapidly evolve, we have incorporated the financial impact of the tariffs into our updated 2025 guidance based on what we know today, which is obviously subject to change based on any future announcements. Most of our manufacturing takes place in the United States and Europe. Still, we source certain components and finished goods from Canada, Mexico, China, and other countries not subject to new tariffs. Our tariff exposure in China includes reciprocal tariffs on products manufactured in the US and exported into China, as well as tariffs on raw materials and components imported from China into the US. Our China facility, currently under construction, is not yet operational and is designed to serve the local Chinese market. In response to the dynamic tariff environment, we are proactively evaluating and implementing strategies to mitigate the financial impact, including optimizing sourcing, exploring pricing changes and surcharges, managing landed costs, and seeking potential tariff exemptions. In addition, we are carefully managing our expenses to help protect profitability. This includes disciplined expense prioritization, closely monitoring discretionary spending, and strategically allocating resources while continuing to invest in critical business initiatives. These strategies will take time to implement thoughtfully, but our focus remains on minimizing operational disruption and maintaining continuity of supply to our customers during this period of uncertainty. Leah will now provide more specifics on the first quarter financial results and share additional details on our guidance and the impact of tariffs. Leah?

Thank you, Mojda. Let's take a more detailed look at our first quarter financial highlights, starting on slide five. Total revenues for the first quarter were approximately $383 million, representing growth of 3.7% on a reported basis and a decline of 3.5% on an organic basis compared to the same period last year. Reported revenues include approximately $29 million from the aquarant acquisition and a 60 basis point FX headwind. Organic revenue performance was negatively impacted by several supply disruptions provided for in our guide, including ship holds amounting to approximately $18 million production timing impact to Integra Skin of about 5 million, and 4 million stemming from a private label component supply issue. Our adjusted EPS for the quarter was 41 cents, down 25% compared to 2024. As we look down the P&L, growth margins were 52.2% for the first quarter, down 220 basis points versus 2024. Gross margins in the first quarter were negatively impacted by manufacturing variances carrying over from supply challenges in 2024, inefficiencies related to our private label supply, and an increase in network optimization spend. Our adjusted EBITDA margins were 16.6%, down 290 basis points compared to 2024, reflecting the decline in gross margins and increased investment in our quality organization. Operating cash flow for the first quarter was negative, $11.3 million. Turning to slide six, we'll now discuss revenue highlights from our common specialty surgical segment. CSS reported first quarter revenues of $281 million, which reflects growth of 9.4% on a reported basis and a decline of 1.1% on an organic basis. Global neurosurgery revenues declined 4.7% organically, largely driven by the impact of ship hulls. These holds particularly affected performance across our advanced energy, CSF management, dual access and repair, and neuromonitoring product lines. However, demand across the neurosurgery portfolio remains strong, particularly in areas not affected by these holds. We were encouraged to see double-digit growth in key products such as Duragen and Mayfield Capital Equipments. In our ENT business, we continue to be pleased with the progress of the Eclarent integration, which contributed approximately $29 million in revenue for the quarter. Organic growth in our ENT reporting segment was approximately flat due to supply constraints of Microfrance ENT. As a reminder, this organic growth reflects only the performance of the Microfrance ENT instrument portfolio for the first 12 months following the close of the Eclarent acquisition. First quarter capital sales declined by low single digits, primarily due to a tough prior year comparison from Saralink. Excluding Saralink, the remainder of the capital portfolio delivered low single digit growth. Our global capital funnel remains strong and well positioned to support future growth. We also saw strong performance in our instruments portfolio, which delivered 15% growth driven by continued demand in both the hospital and alternate site settings as well as a favorable prior year comparable. International performance within CSS declined by high single digits, with the decline primarily attributable to the timing and duration of a ship hold. The resolution of these holds has taken longer in the international markets than in the U.S., limiting our ability to fulfill customer demand. Addressing these international delays is among our highest operational priorities, and we have directed significant resources to meet the continued underlying demand from our international customers. Moving to our tissue technology segment on slide seven. Tissue technology's revenues were 102 million, down approximately 9% on a reported and organic basis compared to the prior year. Sales in wound reconstruction were down due to Integra Skin and chip holds on other products which were implemented late in the first quarter. We continue to see double digit growth for Durazurb and our UDM platform. In private label, Sales were down 13% versus last year due to component supply delays. Finally, international sales and tissue technologies were down low double digits due to the forecasted production ramp up on Integra Skin. Moving to slide eight, I will now review our balance sheet, capital structure, and cash flow. During the first quarter, our operating cash flow was negative 11.3 million and free cash flow was negative 40.2 million. reflecting higher capital expenditures as we continue to invest in key infrastructure. As of March 31st, net debt was $1.6 billion, and our consolidated total leverage ratio was 4.3 times within our current maximum allowable leverage ratio of five times. The current maximum allowable leverage ratio will remain at five through the third quarter of 2025, stepping down to 4.25 for Q4 of 2025. We ended the first quarter with total liquidity of $1.2 billion, including $273 million in cash and short-term investments with the remaining liquidity available under our revolving credit facility. If you turn to slide nine, I will provide our consolidated revenue and adjusted earnings per share guidance for the second quarter and full year 2025. Before doing so, I'd like to take a moment to provide some background on the recently announced tariffs and how we're approaching them in our outlook. Although there is still uncertainty surrounding the administration's ongoing global trade negotiations, we have included the impact of the new tariffs in our second quarter and full year guidance. We also believe it's helpful to quantify the specific effects and highlight the key drivers of the tariffs in our guide. To provide context, We operate a global manufacturing network consisting of 14 facilities. The majority of our manufacturing occurs in the United States and Europe with key international sites in Ireland, Switzerland, France, and Israel. We also contract a portion of manufacturing in Germany, Costa Rica, Japan, Mexico, and Canada. Approximately half of our global revenue is generated from products manufactured in the United States. In China, which accounts for approximately 5% of our total revenue, roughly half of the products we sell are manufactured in the United States. While we are building a China-based manufacturing facility to support long-term growth in the region, it is not expected to be operational in 2025. We estimate an impact of approximately $22 million in 2025, or 22 cents per share, on an after-tax basis. This estimate assumes the application of the global 10% tariff on goods entering the United States, with rates increasing to various country-specific rates following the 90-day pause on July 9th. The estimate also includes the new China-specific tariffs of 125% on U.S. exports to China and 145% on Chinese exports to the United States. Our teams are focused on developing and implementing mitigation solutions that are both timely and sustainable. Tariff costs will be accounted for within our cost of goods sold and will be capitalized in inventory and recognized as those products are sold. Inventory associated with products manufactured outside the U.S. and imported into the U.S. turn over in approximately four to seven months. Finished goods imported into China from the U.S. turn over in approximately one month. We expect a progressive impact to our growth margin and adjusted EPS across the final three quarters of 2025 with an adjusted EPS impact in the second quarter of approximately 4 cents. Turning to our guidance for the second quarter of 2025, we expect revenues to be in the range of $390 million to $400 million, representing a reported decline between minus 6.8 percent and minus 4.4 percent and based on a recent exchange rate movement, includes an estimated 80 basis point tailwind versus the prior year from foreign currency translation. We expect an organic decline between minus 7.5% and minus 5.1%. Our forecast reflects continued strong global demand for our products, normal seasonal sequential improvement, and the benefit of improved production yields for Integra skin. These gains will be more than offset by approximately $25 million in expected revenue impact from ship holds in the quarter related to execution of the compliance master plan. For the full year, we are reaffirming our revenue guidance in the range of $1.65 billion to $1.72 billion. This forecast reflects sustained demand for our portfolio and remains consistent with our original guidance assumptions around the potential impact of ship holds. To date, cumulative full-year revenue impact of identified shipholds is approximately $55 to $70 million. As a reminder, our full-year guidance range contemplated between $90 and $150 million of shipholds associated with the Compliance Master Plan. Our updated guidance also reflects an approximate $10 million benefit from FX since our February earnings call. Based on our guidance range, we expect full-year reported revenue growth of 2.4 to 6.5 percent and organic growth of approximately 0.4 percent to 4.4 percent. Our 2025 revenue forecast assumes four primary drivers of sequential improvement throughout the year. First, we expect a benefit from typical seasonal volume increases. Second, we expect a moderating impact from the currently known ship holds later in the year. Third, we anticipate a step up in integral skin sales as production continues to ramp. Finally, we project stronger private label sales in the second half of the year. Turning to adjusted earnings per share, for the second quarter, we expect EPS to be in the range of 40 to 45 cents, reflecting the effects of the ship holds, increased investments tied to compliance initiatives, and the tariff impact. For the full year, 2025, we expect adjusted earnings per share in the range of $2.19 to $2.29. This outlook reflects the underlying revenue growth of the business, compliance investments, and manufacturing variances, and our commitment to careful cost management to preserve key strategic priorities while maintaining profitability. The only change to the full-year EPS outlook from prior guidance is to account for the impact of the recently announced tariff, which we estimate may be up to 22 cents per share. For your reference, slide 10 outlines the key assumptions supporting both our second quarter and full-year guidance, along with relevant modeling inputs and initial assumptions regarding tariff-related impacts in our guidance. Before we move to Q&A, we want to take a moment to thank all of our employees for their hard work and the progress we continue to make together. Your dedication and perseverance are critical to driving our momentum and strengthening our foundation for the future. We would also like to thank our investors for joining us today and for your continued support and partnership. With that, we'll now open the line for questions. Operator, please open the line.

As a reminder, if you'd like to ask a question at this time, please press star 1-1 on your touchtone phone. and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster.

Our first question comes from Matt Taylor with Jefferies.

Matt Taylor All right, great. Thanks for taking our questions. This is actually Younglee and for Matt. I guess to start maybe just on the two-queue guidance, you know, a little bit better than expected, but, you know, some of that is related to the shipping delay. I wanted to hear a little bit more about, you know, what you found sort of late in one queue for you to up that number, even though it's within annual guidance. And then just the assumptions for... end of 2Q's items, and then the confidence level for the second half of the year, given that it will be a bigger ramp.

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

No, you're very helpful. And then I guess to follow up on a second question on tariff impact, you know, you called out $22 million, $0.22 impact for 25. And I'm just kind of wondering, you know, how much mitigation efforts are built into that? And then how should we do that number for 2026? Should we annualize it? Or there be...

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

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

All right. Thank you very much.

Our next question comes from Ryan Zimmerman with BTIG.

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

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

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

So in general, our instruments business tends to be lumpy.

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

Great. Thanks for taking the questions. Our next question comes from Vic Chopra with Wells Fargo.

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

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

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

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

Our next question comes from Robbie Marcus with JP Morgan.

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

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

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

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

Great. Thank you.

Our next question comes from Richard Newiter with Truist.

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

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

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

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

Our next question comes from Joanne Wunsch with Citi.

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

Yeah, Anthony, thanks for the question.

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

Our next question comes from Jason Bedford with Raymond James.

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

For 2025, directionally, that's close.

That's about right. Yeah.

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

No, not based on what we see right now.

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

So for Q2, actually for Integra Skin, that's when we'll start to see a pickup based on the production that we're seeing already. So we'll start to see that business pickup compared to Q1. Private label, though, we'll still not see the lift in Q2. That lift will begin in Q3.

Thank you.

As a reminder, to ask a question, please press star 11 on your touchtone phone. Our next question comes from a line of Craig Bijou with Bank of America.

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

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

Yeah, organic growth, I think in the bridge it goes from 3 to 2.4, so is that just the ship hold impact?

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

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

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

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

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

Great. Thanks for taking the questions.

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