Integra Lifesciences Holdings Corp (IART) 2023 Q2 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Integra LifeSciences Second Quarter 2023 Financial Results. And now I would like to turn the call over to Chris Ward Sr., Director Investor Relations. Please go ahead.

Thank you, Lisa. Good morning, and thank you for joining the Integra LifeSciences Second Quarter 2023 Earnings Conference Call. Joining me on the call this morning are Jan De Witte, President and Chief Executive Officer; Lea Knight, Chief Financial Officer; and Mathieu Aussermeier, Vice President of Corporate FP&A, Investor Relations and Treasurer. Yesterday evening, we issued a press release announcing our second quarter 2023 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 2023 Earnings Call Presentation.

Before we begin, I would like to remind you that many of the statements made during this call may be considered forward-looking statements. Factors that could cause actual results to differ materially are disclosed in the company's Exchange Act reports filed with the SEC and in the release.

Also in our prepared remarks, we will reference both reported and organic revenue growth. Organic revenue growth excludes the effects of foreign currency, acquisitions, divestitures as well as discontinued products. 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 any non-GAAP financial measures can be found in today's press release, which is an exhibit to Integra's current report Form 8-K filed yesterday with the SEC. And with that, I will now turn the call over to Jan.

Thank you, Chris, and good morning, everyone. When we announced the recall of products from our Boston facility in late May, we committed to sharing the time line for resuming production in Boston during this earnings call. I appreciate that this is top of mind for our investors and analysts as it is for me and our leadership team.

So I would like to address this first before going into the broader business update. So let's turn to Slide 4. As many of you are aware, we initiated after consultation with the FDA, a voluntary global recall of all products manufactured in our Boston facility. This was based on our identification of gaps in our endotoxin testing process, which may have resulted in the release of products with higher levels of endotoxin than permitted by the product specifications.

Recall included our PriMatrix, SurgiMend, Revize, and TissueMend products. We also extended the previously implemented manufacturing parts in Boston to implement additional detection and quality controls. That we found to be necessary in light of both recent FDA inspection results and findings from prior internal and external audits.

It is important to point out that we have no specific indications of any product complaints related to high endotoxin levels. Patient safety is nonnegotiable for us, and we apply an abundance of caution and making tough decisions like the ones we have made over the past few months. We continue to work closely with the FDA.

In June, we submitted an initial response to the audit findings from the Boston inspection that they concluded in May. And we have merged these new actions with the existing work plan into a comprehensive plan that we believe fully and effectively addresses quality system gaps in our Boston operations.

Also, over the past months, we have strengthened our leadership and project management capabilities in the Boston operations with investments in additional internal resources and outside subject matter experts. As part of our remediation plan, we are also bringing in a third-party auditor who will attest to our progress at key milestones over the course of the project.

Based on this project plan, we expect to resume manufacturing by the end of the fourth quarter of this year. Considering cycle time from moving from raw materials to finished goods in the factory, the need to build inventory and the plan to complete a final audit by our outside expert. We expect to initiate a commercial relaunch by the mid to late second quarter 2024. This planning is consistent with what the FDA expects, pursuant to the warning letter we received last week.

We plan to continue working closely with the FDA and provide them with regular updates on our progress. We will also submit to the FDA the final audit report from our outside expert by or before March 31, 2024, as the warning letter requires.

Turning to the right side of the slide. The impact on our financial results for the second quarter was significant, but in line with the estimates we provided in our revised guidance in May. In the second quarter, we saw a negative impact of approximately $23 million from lost revenues and returns and a negative impact to adjusted EPS of roughly $0.20 associated with the recall.

In May, we provided a range of impacts for 2023. And in our updated guidance, you will see that full year negative impact of approximately $60 million in revenues and $0.35 for adjusted EPS. Although we are not providing guidance for 2024 at this time, the manufacturing we start timing and the time required to ramp up inventory and sales will create a headwind for 2024.

We estimate the net impact of the Boston return to market timing and our offsetting actions to negatively impact the 2024 projections. Implied in the long-range plan, which we presented during our May 4 Investor Day. We estimate this negative impact to be around $50 million in revenue and around $0.30 in adjusted EPS.

I want to assure our customers and investors that we are highly focused on our remediation efforts, and we fully expect to complete the remediation and return these critical technologies to the market for our customers and their patients.

So with that backdrop, let's now turn to Slide 5 to review our second quarter business highlights. Our second quarter revenue decreased by 2.7% on an organic basis, mainly reflecting the impact of the Boston recall and production halt. However, the second quarter also reflects the strength of our markets and strong demand for our technologies across a diverse portfolio of leading products and brands, which, as you can see on the right-hand side of the page, resulted in total revenue above the high end of the revised guidance we provided in May.

Excluding products manufactured in Boston, our portfolio landed at solid organic growth of 5.5%. In our CSS business, growth was driven by key products like CUSA, Mayfield, DuraGen, Certas Plus, programmable valves, BactiSeal catheters and instruments, several of which delivered double-digit growth in the quarter.

In our Tissue Technologies business, we saw double-digit growth in key products lines like MicroMatrix, Cytal, Nerve products and MediHoney. We also enjoyed strong international growth of above 7%, led by double-digit growth for CSS in China, and high single-digit growth in Canada.

Now turning to our bottom line. Our second quarter adjusted earnings per share came in at $0.71. $0.20 headwind from the Boston recall offset otherwise strong profitability, while the rest of our portfolio drove adjusted EPS above the high end of our revised times range. To look beyond our second quarter revenue results and back to the left side of the page.

We're delivering several positive proof points along our path to the growth commitments we laid out during our Investor Day. We continue to advance our portfolio strategy in the implant-based breast reconstruction market, and we're excited to announce that we have filed the amendment to the clinical section of our PMA application for SurgiMend.

The integration of our recent SIA acquisition is well on track, and our team completed enrollment for the DuraSorb PMA clinical trial. These clinical developments bring us a step closer to having the first and second PMA products in this clinically important and high-growth market.

Moving to CereLink. We've made significant progress toward bringing CereLink back to market. We've completed the technical fix in our finalizing testing and preparing our filing with the FDA, which we intend to make by the end of August. We expect to relaunch the CereLink monitors late in the third quarter of this year in international markets and later in the fourth quarter in the U.S.

We remain excited about CereLink, a differentiated technology in ICP monitoring and an important catalyst to our long-term growth commitments. We also have expanded the international reach of our CUSA and DuraGen portfolios, and we bolstered the clinical evidence for our BactiSeal catheter, in the European market. Further illustrating our opportunities to bring our leading technologies and brands to new international markets.

Also in the second quarter, we opened our new Innovation and Learning Center in Plainsboro, New Jersey. Dedicated to our founder, late Dr. Richard Caruso, highlighting our investments in research, development and clinical education and regenerative technologies.

And last, but certainly not least, we appointed Lea Knight as Integra's new CFO at the end of June. Lea will take us through further details on the financials, our updated guidance and the planned share repurchase. Before going there, let's move to Slide 6 to officially introduce Lea and welcome her to Integra. Lea comes to us with more than 30 years of experience in global companies with significant operating scale and complexity.

Apart from bringing that right mix of operational depth and strategic breadth that we were aiming for during the search, Lea also has a great reputation for leading and developing high-performing teams and a track record of delivering strong business outcomes across the organization supports. We're excited to have Lea on board and look forward to her leadership and contributions to Integra's future.

Before I turn the call over to Lea, I'd like to take this time to acknowledge the contributions and leadership of the finance team, led by Jeff Mosebrook and Mathieu Aussermeier. Jeff and Mathieu have been great partners to me and our leadership team over the past months. And have demonstrated resilience, diligence and financial rigor during the CFO transition point. With that, I would like to turn the call over to Lea.

Good morning, and thank you, Jan for that warm welcome. I'm excited to be part of the Integra team and back in the LifeSciences industry. Over the past 4 weeks, I have taken the opportunity to immerse myself in getting to know our markets, our products and our people. I've also spent considerable time learning about and assessing our Boston remediation plan and time lines.

While there is much more to learn, I'm excited about how we are positioned, our growth potential and the opportunity to leverage my experiences to help Integra and its purpose to restore patient lives.

Now on to our second quarter financial results, and I'll start on Slide 7. As Jan mentioned, the Boston recall weighed heavily on our second quarter results. You will see the Boston recall impacted not only our revenues and organic growth but it also drove declines in our gross margins, adjusted EBITDA margins and adjusted EPS.

Excluding the impact from Boston, our second quarter results reflect solid growth across our diversified portfolio and provides many positive points demonstrating the strength of the underlying business that I will highlight on the coming slides.

If you turn to Slide 8, I will go deeper into the second quarter performance of our CSS segment. Reported second quarter revenues in CSS were $271 million, an increase of 5.1% on a reported basis and 6.3% on an organic basis from the prior year.

Overall, this segment delivered quarterly results exceeding the growth range outlined during our Investor Day. Global neurosurgery sales were up 4.2%, driven by the high single-digit growth in Advanced Energy with CUSA Capital and disposables, mid-single-digit growth in cerebrospinal fluid management, driven by Certas Plus programmable valves and BactiSeal. Mid-single-digit growth in dural access and repair driven by DuraGen and Mayfield and low single-digit decline in neuro monitoring due to the prior year comp from the CereLink recall.

Overall, excluding CereLink, capital sales within the quarter were strong and grew double digits driven by CUSA and Mayfield Capital.

We remain encouraged by the continued momentum and demand funnels for our capital equipment, which have resulted in double-digit growth in capital through the first half of this year. Instruments grew approximately 13% benefiting from continued strong demand and favorable order timing. The performance of our Instruments business continues to exceed long-term growth expectations with near double-digit growth through the first half of this year.

Shifting to international. Sales grew high single digits in the quarter, led by double-digit growth in China, Canada and our indirect markets. Consistent with our Investor Day expectations, the results in China were delivered through strong performance above the neuro portfolio and regional expansion.

Moving to our Tissue Technologies segment on Slide 9. Tissue Technologies was down 21.2% on a reported basis and down 19.7% on an organic basis compared to the prior year. Excluding the Boston products, reported and organic growth was 0.8% and 3.8%, respectively. Second quarter sales in wound reconstruction decreased by 12% due to the Boston recall.

Despite the recall, we saw strong demand in commercial execution and double-digit growth from MicroMatrix, Cytal, MediHoney and our Nerve franchise. We are pleased to see continued strong double-digit growth through the first half from the CUSA portfolio, including MicroMatrix, Cytal and Gentrix, all key growth contributors in our long-range plan.

In our private label franchise, sales declined 43% versus last year due to the lost sales and returns from private label partners associated with the recall. For clarity, approximately half of the returned products from the recall were from private label partners.

And finally, international sales in Tissue Technologies were down double digits due to the recall. In particular, returns from distributor partners, which offset double-digit growth in Integra's and MediHoney. Turning to Slide 10. I will now review our second quarter P&L metrics.

As we have discussed, our second quarter revenue is down 4.2% on a reported basis and 2.7% on an organic basis, driven by the Boston recall, partially offset by solid growth across the remainder of the portfolio. As we look broadly at our gross margins and profitability metrics, we are seeing improvement in our underlying gross margins offset by the impact of the Boston recall.

The Boston headwinds gross margins for the quarter was approximately 100 basis points, which overshadowed approximately 60 basis points of improvement coming from price, mix, volume and efficiency gains. In addition to the impact from gross margins, our adjusted EBITDA margins and adjusted EPS also reflects the planned investments in the strategic priorities that we originally outlined in January, including year one dilution from the SIA acquisition. These investments are critical to our long-term growth, so we are protecting them despite the recall.

If you turn to Slide 11, I will provide a brief update on our balance sheet, capital structure and cash flow. During the quarter, operating cash flow was $28 million and free cash flow was $13 million, reflecting increased inventories as we replenish our safety stock levels. Free cash flow conversion was 57% on a trailing 12-month basis.

Our balance sheet remained strong with ample liquidity to support our short- and long-term plans. As of June 30, net debt was $1.1 billion, and our consolidated total leverage ratio was 2.6x. The company had total liquidity of $1.6 billion, including $309 million in cash and the remainder available under our revolving credit facility.

Given our favorable liquidity position, confidence in our Boston restart plan and continued commitment to our short- and long-term growth objectives, we plan to initiate a share repurchase of $125 million by the end of the third quarter of 2023. The share buyback is expected to contribute to 2023 and 2024 EPS by approximately $0.02 and $0.06, respectively, and is included in our 2023 full year guidance as well as our 2024 full year Boston impact.

If you turn to Slide 12, I will provide an update on our consolidated revenue and adjusted earnings per share guidance for the third quarter and full year 2023. Third quarter revenues are forecasted to be between $386 million to $390 million, representing reported growth and organic growth in the range of approximately 0.2% to 1.3%. Excluding the Boston products, we are forecasting organic growth of approximately 6.7% at the midpoint, driven by continued strong global demand for our products and modest improvement in supply.

For the full year 2023, revenues are forecasted to be in the range of $1.548 billion to $1.56 billion, representing reported growth of minus 0.6% to positive 0.2% and organic growth in the range of approximately 0.3% to 1.1%. Excluding Boston, we are forecasting organic growth of approximately 6%, reflecting the strong global demand and performance we have demonstrated in the first half along with updated timing for the relaunch of CereLink and modest supply and back order improvement.

I want to highlight that when excluding the impact from the Boston recall, our full year revenue guidance remains consistent with our original guidance in February. We also tightened the bottom end of our guidance range to reflect our Q2 performance.

Turning to adjusted earnings guidance for the third quarter. We expect adjusted EPS to be in the range of $0.76 to $0.80, up sequentially but down from the prior year, driven by the Boston recall as well as our planned strategic investments and OpEx savings to offset part of the impact of that recall.

In April, we estimated an approximate 100 basis point improvement in gross margin for the full year, and now with the full year impact of the Boston Recall, we expect only a modest improvement in gross margins versus 2022. Our full year adjusted EPS guidance is being revised to a range of $3.10 to $3.18 per share, which reflects our Boston revised revenue and adjusted gross margin outlook, our second half expense management as well as the announced share repurchase. Now I will turn the call back over to Jan.

Thank you, Lea. Please turn to Slide 13 to conclude our prepared remarks. Despite the fact that the Boston recall is requiring enormous focus and effort and is overshadowing our second quarter results. Our Second quarter actually provided many strong positive proof points on our business performance in both CSS and Tissue Technologies.

The underlying trends in our markets are healthy. With procedure volumes largely back to norm. We're continuing to build resilience in our operations and supply chain and the performance of our portfolio with several double-digit drivers provides confidence that we will deliver our long-range growth commitments as we move past the acute impacts of the Boston Recall.

Our teams are intensely focused on completing the remediation and bringing the Boston facility to world-class manufacturing and quality standards. That will support the growth expectation for the products manufactured there. In May, we held an Investor Day showcasing our long-range targets and our path to get there. We continue to drive progress on our long-term growth initiatives.

We're advancing our PMA portfolio strategy an implant-based breast reconstruction, filing the SurgiMend PMA amendment and completed the clinical enrollment in the DuraSorp-PMA trial. CereLink is on the path to start it's return to market by end of the third quarter, and we take its place as a leading innovation in the ICP monitoring segment.

We're also expanding our global portfolio by launching key products from our CUSA and DuraGen platforms in additional international markets, furthering our commitment to international expansion. And with the $125 million share repurchase plan, which we are launching in the third quarter, we're returning value to our shareholders.

In addition, we continue to focus on and to invest in strengthening Integra's commercial and operational capabilities to drive and capture healthy organic growth opportunities in our markets. Committed to ensuring resilience and quality in our manufacturing facilities. Over the past 18 months, we completed the full compliance assessment of our quality systems and our 14 manufacturing facilities using a combination of internal and external auditors.

We're making the necessary investments in processes, people and equipment. And we're confident that as we bring the Boston operation and quality system up to expectations, we will have a global manufacturing footprint with the capabilities to drive liability, quality and efficiency in support of our LRP commitments for growth and margin accretion.

We're also investing in strategic marketing, product management and clinical evidence generation to support stronger end-to-end innovation and commercial success for new product reductions. We continue to develop our international capabilities to fully leverage market penetration and growth acceleration opportunities in several key regions outside the U.S.

All of these measures will allow us to continue bringing innovative and life-saving technologies to market, enabling surgeons worldwide to restore patient lives. The full year outlook remains balanced. Reflecting our commercial progress and improving execution. It also reflects the full year impact of the Boston Recall.

I'm confident and excited about our trajectory. We have the dedicated team and we're focused on driving the improvements needed to unlock the full potential of this business. Thank you for joining us this morning. This concludes our prepared remarks. And operator, we can open the lines for questions.

Thank you. (Operator Instructions) The first question that we have today is coming from Steven Lichtman of Oppenheimer.

I was wondering if you can talk to sort of the 2 parallel things you have going on with Boston with SurgiMend. So you mentioned you filed for IBBR, and then you gave the updated time lines in terms of restart.

How are you anticipating the timing of restart impacting the decision process, the inspection process for the IBBR indication specifically? And what's your latest timing in terms of when you think IBBR could potentially be on market?

Okay. So as you stated, there's 2 parts. There is the clinical part, there is manufacturing parts. On the clinical part, we submitted earlier this week that addendum that we have been talking about for a while and hope to have sign-off from the FDA on that clinical piece of the PMA by the end of the year, early next year.

But then there's the manufacturing part, which is equally critical to get the PMA certification. That part will now shift out as it only starts when we are shipping again. At that point, we can start to do the end-to-end manufacturing and product validation. That is required to then have the FDA come in and do the preapproval inspection.

And so with the time lines that we communicated, we see this preapproval inspection now taking place either Q4 '24 or early in '25. And so with that, because the two are needed in parallel, we see our overall PMA approval shifting towards the first half of '25, with that timing, we still believe it will be early versus any competition.

Okay. Understood. And then just my second question is on gross margin. It did look certainly better than expected. Can you talk to some of the underlying drivers there and the sustainability of those even excluding Boston?

Steven. I'm going to move that question to Lea.

Yes. So a couple of things. So first, with respect to kind of how we landed versus maybe what was originally expected, a couple of drivers I would call out, first, our revenue performance in the quarter was better than anticipated, which -- and the mix on that drove an improvement in margins.

We did also see an experience more favorable manufacturing variances in the quarter. And less E&O than we had originally anticipated. And then there was an element of we had anticipated a blip happening in Q2 from a cost perspective around the remediation and some of that was tempered based on our need to address some of the observations coming from the FDA.

So all of that kind of factored into why our margins in the quarter were better than we originally implied as part of our 8-K discussion. As for -- I think your second question was kind of what do we think the outlook is for the balance of the year. And consistent with -- in my remarks that I shared earlier, at this point, we are anticipating margins that are modestly improved versus where we landed 2022.

(Operator Instructions) Our next question is coming from Robbie Marcus of JPMorgan.

This is Rohin on for Robbie. You discussed some cost savings in the second half of the year, helping to offset some of the dilution from the lost sales. So just want to get a sense for what you're pulling back on in SG&A specifically here? And what projects or spend do you need to make up for potentially next year? So I guess another way of asking that was like we need to increase spend above trend in 2024.

So let me answer this question, sorry. Let me clarify the question. So in our remarks, what we shared is we remain committed to some of the planned strategic investments that we outlined as part of our discussions earlier this year. So that's going to continue to happen-- in the back half.

I guess it's more so like are you cutting expenses in SG&A at all to offset some of the lost sales and kind of improve leverage slightly? Or is that...

Yes. So as part of -- yes, as part of the discussion that we had when we released the 8-K earlier, we talked about we were initiating some cost improvement activities in the back half to mitigate some of the impact of the recall. That's still planned, but we are preserving some of the strategic investments that we feel are necessary for long-term growth.

Okay. Great. And then I just had another question on kind of the share loss as a result of the Boston recall. Could you just elaborate more on what gives you confidence that you'll be able to regain the loss share once you start selling these products again, given it is -- I mean, this is expected to start in the second quarter of next year. And if you can quantify how much share you expect to lose, if at all, and what you're using as a precedent for that?

So let me take that question. Two elements there. One, okay, there's a lot of focus now on working substitution opportunities, both for SurgiMend and PriMatrix. We have other portfolios -- we have other products in the portfolio, okay, and which we are leveraging to try to retain our customers and retain the relationship with customers.

At this point in time, we're assuming that 10% to 15% of the volume can be covered. But we're still learning, and we're still learning and trying to increase that percentage. And then the second part of the question, how quick can we get back to 100% share based on some experience over the past decade with other out-of-market situations. Our sales leadership thinks that within the year, they can get back to the market share where we started and then further build up as with both SurgiMend and PriMatrix, it was not just about holding market share but gaining share in those markets.

So that's based on experience in the past justified by both the strength of our product quality and product capabilities as well as the quality of our commercial team.

(Operator Instructions) And our next question will be coming from Matt Taylor of Jefferies.

Great. This is Xuyang Li in for Matt. I guess maybe just to start, obviously, the Boston restart is really top of mind for investors. I appreciate all the updates there. I guess I wanted to hear a little bit more about the various scenarios that you might have considered and that got you to the 4Q restart.

Obviously, understanding there's no product issues was that the FDA is focused on quality testing validation processes. But maybe if you can share a little bit about the potential for things moving a little bit faster or a little bit slower as it relates to Boston.

Yes. Thank you for that question. The time line that we communication is the translation of a lot of work that was done in May and over most of June, where, on the one hand, we had the observations from the FDA in the Form 483, which they communicated in the second half of May. And we merged those with the worklist, the work plan that we already had in place based on earlier external or internal observations.

So that made a very holistic plan. Because many of the observations that we had already done internally were now translated in an FDA observation, the time line to execute them became longer and heavier given that we have to follow the CAPA process to remedy those observations with significant more work in root cause analysis and validation and verification. So that's one element in the plan.

Second element that we worked into the plan is additional in process external audits and a final audits. And those are a couple of times in the process where we will take a stop and audit the work done so far that make the corrections where we find them and then we move on, okay? There may be some opportunity to do some of that in parallel to continuing to work.

But today, we expect those timings to add to the timing. And then the third element which has also worked into the timing and somewhat different than what we assumed in mid-May. As we were defining the scope of the recall and the translation of the regulation, we also think to the conclusion that we had to scrap the work in progress, take the half finished products in the factory, which adds significantly to the start of length from the moment we start up to the moment where we have finished products.

So all these elements added up to a restart of the factory before the end of the year. Of course, as we go along, we'll be discovering opportunities to either pull some of their timing in. But at this point in time, we should also consider that there may be moments where there's new work that we discover or work that we need to redo if a validation does not lead to the required outcomes.

So I would say that the plan that we're communicating has some contingency in it, but also, I would say, some risk that some new things may be discovered in -- of course, we're trying to discover this as early as we can to give ourselves enough time to adjust.

All right. Great. That's really helpful color. I guess a follow-up, just on M&A, a key strategic pillar for Integra. How should we think about your interest or ability to do deals while working on the Boston remediation? Will you be approaching M&A any differently through the next year?

Yes. Let me answer. I would say somewhat, but let me tell you how we are thinking about M&A as -- you've heard us talk about our game board. Our game board is there with strategic opportunities. There's 2 types of deals on that game board. There's deals where we pretty much control the timing and we definitely are taking a pushout mindset, specifically in Tissue Technologies, given that from an organization and leadership, we are definitely fully engaged on the Boston execution.

But also there are some deals on there, which are strategically important and where we may not control the timing. And when those opportunities will come on the radar screen, we will evaluate them with all the realities of the strategic importance and the short-term remediation realities.

And I would just build on that. Our balance sheet remains strong with available liquidity to execute in the event we do find those strategic opportunities that allow us to move into kind of our long-term growth commitments.

And our next question will be coming from David Turkaly of JMP Securities.

I know you mentioned the FDA is going to come in for a pre-approval inspection. But I'm just curious for you to start manufacturing and then commercialization out of that plant. Are you assuming right now that you'll have another FDA inspection for those 2 things or either of those to happen.

So let me clarify. I think you're mixing some of the PMA discussion with you restart discussion. The FDA has confirmed that restarting manufacturing is done at our own decision. And so we decide when we will restart. And we will then also pull in an external audit and based on our decision with the auditor consultants.

If that is successful, we'll restart shipping the product, okay? So there's no audits in FDA audit involved in restarting manufacturing or restarting the shipping. And I was talking about the pre-approval inspection that is specifically as part of the PMA trajectory, the manufacturing PMA trajectory. And there, we foresee that with shipping planning that we will do that preapproval inspection audit by the FDA, that one will take place near the end of '24 and possibly early 2025.

Yes. No. I understand. I was just trying to -- I was -- yes, I understand what the preapproval one is. I was just -- I was wondering if they needed to be back in before you could have an additional inspection, before you could do either manufacture or ship. And I want to say thanks for the detail on '24. If we look at the $50 million and $0.30 -- would it be prudent for us to pull that out sort of the first half of the year given that you think you'd be selling? Or will there be any lingering impacts that we should be thinking about as we look out to next year?

Yes. I'll take that one. So from a 2024 perspective for the Boston impact that we communicated, again, this assumes that we still resume shipping mid to late Q2. But to your point, much of that impact will be reflected in the first half or so of the year, recognizing that there will be a natural ramp up, right, to get back into market back up to full distribution as we discussed earlier.

And our next question will be coming from Vik Chopra of -- Wells Fargo.

I guess just -- Lea welcome, looking forward to working with you. Thanks for providing the color of the 2024 guidance. So I'm just curious, how does the preliminary 2024 guidance impact the LRP goals you provided in May? How confident are you in that 5% to 6% '24 to '25 LRP growth algorithm? And then I had a follow-up, please.

So let me start, and then I'll let Jan chime in. And Vik, it's good to hear from you again as well. So for -- from an LRP perspective, we are not officially providing any guidance or update with respect to our LRP. But let me tell you some of the things that I'm excited about in terms of what we saw in this quarter that I think bear witness on what we have the potential to do consistent with what we outlined in our LRP.

To your point, if you look at our results in Q2, ex Boston, what you saw is through the first half, both neurosurgery as well as Tissue Tech performance levels that are consistent with the growth expectations that we outlined in the LRP, which [Shumi] says, there's the potential to live into exactly what we already communicated as part of our Investor Day. I think what you also saw was we advanced our commitments around the clinical filing for the SurgiMend PMA. We completed our DuraSorb clinical enrollment, all of which were critical steps in terms of us being able to once again drive some of the growth that we communicated as part of our Investor Day.

So I think all of that underlying strength is there, but what will happen over the next couple of months as we do an annual update to the LRP. So we will have to factor in everything we've talked about, the Boston impact to understand what the broader trajectory impact is across the LRP, and we'll come back to have that conversation. But I still think there's lots of good reasons to believe that the strength is still there. And we have the potential to deliver as we discussed.

Great. And then just need one high-level question for me. What are your assumptions for macro headwinds in the back half of the year? Maybe just talk about what's getting better and what's getting worse -- thank you.

So let me start there. I shared in my prepared remarks that from a market dynamic procedures perspective, we see good dynamic pretty much across the world. I mean, Europe is doing solid strength in Asia and the U.S. market, yes, we see pretty much coming in as we expected it.

And we see that, and we expect it to continue over the year. Also when we talk outside U.S., part of our opportunities is deeper penetration in markets. So independent of what the market growth is, we have our penetration opportunities to grow faster than the market.

From a supply situation, which over the past year, we've often talked about here we've seen the gradual improvement. I would consider we're relatively back to normal, tough world. But I think that's the new normal with suppliers that are not sitting on overcapacity are a bit less reliable than before. And we'll continue to see some discontinuation of products of components will lead to recertification of new components that adds work to our organization.

But at this point in time, we have the process and the resourcing to take up that additional work. So we've seen over the first half some improvement in our own execution on yields and see the results of that in the second half in terms of lowering back orders. So from that perspective, in the second half, we see more, say, tailwinds than the headwinds for the business.

(Operator Instructions) And our next question will be coming from Richard Newitter of Truist Securities.

This is Sam on for Rich. Just that's the first one on the time line for the facility. How confident are you in that time line holding to plan? Is there anything in the process that could cause the restart timing to change, whether that be earlier or later. Yes.

Thank you, Sam, for the question. As I indicated before, this is a holistic plan with all the breadth and the depth of observations over the past year different work stream, the resourcing there. So in that sense, it has some contingency in it for unforeseen things that may happen.

The biggest elements that we are watching closely would be elements of validation and verification, which does succeed in the first time and would need a second try to get there. So we built some of that contingency in -- but the risk is there. And as I said before, we're trying over the month of August and September to really put down those areas that where we may have risk, and we're trying to pull in resources as well as that work as early as can to give us a buffer to deal with it if that would risk [for deals].

And so maybe to build on that. If I can just build on that a point that Jan made with respect to the time line, which I fully agree with, I think what's interesting, what you have to understand about the plan, this is a rather large remediation. But to Jan's point, as the way we structure the plan and how we plan to execute against this -- to the extent we do realize some of the opportunities or challenges that Jan mentioned, where we might have to rework or reposition.

That would occur in all likelihood earlier in the time line versus later. So that as we progress through, we'll have more information to be able to understand better the exact timing, which is why we've also strategically layered in independent reviews along the way. To help mitigate some of that risk and take advantage of opportunities to pull forward where we can to keep the time line hold.

Okay. So maybe on the third quarter call, we could have a better idea of how solid that time line is that a correct characterization? .

Yes. Definitely, definitely.

And then with regards to the OpEx ramp, should we, one, what do you think you need to see to get confident in ramping OpEx back to a normalized level? And should we expect that to happen through the first half '24? Or is that not going to happen until after manufacturing resumes.

So let me start there, and you can build on. From an OpEx perspective, as we move into 2024, and we continue to kind of evaluate what's needed to make sure we get the plant restarted. We have commercial distribution, we start regaining our share. We will have to continue to temper some of our OpEx spending.

Again, we will always prioritize the strategic investments that are fueling our long-term growth consistent with what we did this year. So that behavior will continue to progress in 2024. And then as we start shipping and start realizing kind of the return to market that we anticipate, that's when I would also expect a more normal return to our OpEx levels.

(Operator Instructions) And our next question will be coming from Ryan Zimmerman of BTIG.

Great. A couple for me. So we've obviously talked enough about the Boston facility. But I do have one question on Tissue Technologies and one on CSS. And so -- the first one related to Tissue Technologies is just we've -- given the recall, given the impact to private label, I'm curious kind of how are your private label customers seeking alternative sources in this period? And what does that present in your guys' view as a risk longer term to recruitment of the private label business.

And just the impact on margins for that private label business. I know there isn't a lot of operating expense associated with it, but it does -- it is quite profitable on the EBITDA margin line. So curious if you could speak on that. And then I'll just ask the other question, which CSS was very nice this quarter, I think, in the neuro market relative to the comp last year. And so Jan, I'd like your perspective on the neuro market, the health of it, how you'd characterize it, why it was as strong as it was this quarter?

Let me answer both Ryan. Great question by the way. So on private label, we're working very closely with our partners to understand where we can help them and make sure that they have full transparency on the time lines. For private label partners within the time lines that we talk it's not easy to switch to other technologies or providers.

And hence, the big focus on making sure we work with them and make sure they get back as soon as we get other customers back.

And then second, your question on the CSS markets good markets. I think as you know, -- many of our procedures in CSS are not elective procedures. And so as the distractions get out of to markets, but also distractions in our own operation that has led to some back orders are getting out of the world. We are really seeing the full dynamic of the market to translate into our sales. And so it's those 2 elements conjoined that are driving a good CSS performance over the second quarter.

Okay. I'll sneak one more in, just for Lea, I don't want to leave her out. Just we called out the leverage ratio. You called out the leverage ratio, I think I had 2.6x, if I'm not mistaken. What -- given you're new in the seat, maybe just helping investors understand what's your comfort with leverage. I mean, obviously, Integra took on a lot of debt during the Codman deal years ago and then work to pay that down. But -- what's the comfort -- what's the right range for you in terms of leverage for the company?

Yes. Thank you, Ryan. I appreciate the question. And I think we've had a fairly disciplined kind of capital allocation methodology. And as we think about leverage, we've been disciplined in that regard as well. Right now, the range that we tend to operate in is 2.5 to 3.5x. It's kind of the range we want to be. And so with that as a guide, we're actually at the low end of what we would deem acceptable and appropriate for this business.

And our next question will be coming from Drew Ranieri of Morgan Stanley.

Maybe just for Lea to start. Maybe a couple of quick ones here. But when we're looking at your '23 guidance, I understand that there's a lot going on particularly in Tissue Technology business, a lot to slice out, but can you maybe help us with your expectations for growth in those 2 segments? I would imagine maybe CSS might be closer to your long-range plan, which help us frame that. .

And then second, just on the Instruments performance in CSS, you touched on neurosurgery a bit in the prior question. But just anything driving the strength there. You called out kind of a favorable order timing, just any expectations on the back half there for the business? And then I have a follow-up.

Thank you. So for Tissue Technologies, I think consistent with what we saw in Q2, where the underlying performance in that business I should say, through the first half in Tissue Technologies, the underlying performance of that business was, I call it, high single digits. For the second half, I would anticipate its being in the same range again ex Boston, right? And we've already framed out for you kind of what we anticipate the Boston impact to be for the full year.

On the CSS side, I think you had a similar question in terms of for the balance of the year, Again, I believe the strength in that business will continue to persist much like what Jan already referenced in answer to the previous question.

And so I would expect that performance to hold through the balance of the year. And then I think your final question was with respect to...

Instruments.

Instruments, strong double-digit growth in the quarter. I think in the past, we've seen some lumpiness in that business. I think you'll see that moderate back to its kind of typical long-term growth rates. We will continue to experience it necessarily at the same degree that we saw it in this quarter.

Let me add a couple of things, Drew, which are specific. What we do see is one of the strength of the specialty instruments in that portfolio. And then second, for more than a year, we have strengthened our commercial dynamic there, focusing on signing up new accounts. And I think part of that, we're seeing the fruits of that investment last year in broadening our commercial footprint, our commercial dynamic on the instruments.

Got it. I appreciate the color there. And I know you touched on M&A a bit earlier -- and again, I appreciate the dynamics happening in tissue technology. But with the PFS rule, the proposal that came out a few weeks ago, Jan, -- is there any kind of change in your view strategically longer term about entering more the non-acute setting in Tissue Tech more in force? Are you more open to doing M&A in this category. Have you kind of seen like what you need to see to be more aggressive in getting into the non-acute space.

Yes. As we communicated during Investor Day, the non-acute space is a strategic place to be. The question is when is the right timing giving some of the remaining uncertainties in that space, right? I consider that some decisions have been pushed out. And so we will continue to watch that area closely and both internal and external, what would be the right time to move here.

Thank you. And this does conclude our conference for today. Thank you all for your questions. You may all disconnect, and everyone, have a great day.