Integer Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 15, 2024

There are 9 speakers on the call.

Operator

Hello, and welcome to the Q4 2023 Integer Holdings Corporation Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer I will now turn the conference over to Andrew Senz, Senior Vice President, Strategy and Business Development and Investor Relations. Please go ahead.

Speaker 1

Good morning, everyone. Thank you for joining us, and welcome to Integer's 4th quarter 2023 earnings conference call. With me today are Joe Dzic, President and Chief and Dyran Smith, Executive Vice President and Chief Financial Officer. As a reminder, the results and the data we discuss today reflect the consolidated results of Integer the periods indicated. During our call, we will discuss some non GAAP financial measures.

Speaker 1

For reconciliation of these non GAAP financial measures, Please refer to the appendix of today's presentation, today's earnings press release and the trending schedules, which are all available on our website at anager.net. Please note that today's presentation includes forward looking statements. Please refer to the company's SEC filings for a discussion of the risk factors that could cause our actual results to differ materially. On today's call, Joe will provide his opening comments and an update on Integer's strategy, followed by an overview of how Integer will sustain above market growth. Diren will then review our adjusted financial results for the Q4 and full year 2023 and provide our full year 2024 outlook.

Speaker 1

Joe will come back to provide his closing remarks and then we'll open the call for questions. With that, I will turn the call over to Joe.

Speaker 2

Thank you, Andrew, and thank you to everyone for joining the call today. We had a strong 4th quarter and an even stronger full year. 2023 sales were up 16% And adjusted operating income grew by 26% over 2022. We were able to grow sales at a rate significantly above the market rate, while expanding operating margin by 117 basis points. Adjusted operating income grew at 1.6 times the rate of sales growth, approaching our strategic target of 2 times.

Speaker 2

We expect this strong performance to continue in 2024 with an outlook of 9% to 11% sales growth and adjusted operating income growth of 13% to 20%. We are confident in sustaining above market sales growth in 2024 and beyond. We acquired Pulse Technologies on January 5, which deepens our precision micro machining capabilities and further strengthens our pipeline in high growth markets like electrophysiology, structural heart and heart pumps. Integer continues to execute our strategy to deliver sustained outperformance. Our portfolio and product line strategies position us for sustained above market growth as we continue to shift the mix of our business to higher growth markets.

Speaker 2

The previously announced exit of our Portable Medical product line, which has limited technology differentiation and low growth, is proceeding as planned. We continue to make targeted organic and inorganic investments in capabilities and capacity to enable our growth. The supply chain and labor environments have meaningfully improved and we have refocused our organization to execute our operational strategy to expand margins. During the JPMorgan Healthcare Conference earlier this year, we publicly announced the acquisition of Pulse Technologies, Our 4th tuck in acquisition in 25 months. The acquisitions of Oscorp, Aaron Biomedical, Inuraco and Pulse Technologies strengthened Integer's position in high growth markets while adding differentiated capabilities for our customers.

Speaker 2

Our acquisitions further our vertical integration strategy and help our customers consolidate and simplify their supply chains. In addition to the strategic benefits, these four acquisitions generate annualized sales of approximately $170,000,000 with accretive margins. Ascor and Aaron were meaningful contributors to our sales and profit growth in 2023 and I look forward to Aneuroco and Pulse being equally as successful as we integrate these differentiated businesses. Integer acquired Pulse Technologies on January 5, 2024 for approximately $140,000,000 with the potential for an additional earn out in 2025 based on revenue growth. We paid less than 13 times trailing adjusted EBITDA multiple or just over 11 times after considering the $15,000,000 Net present value tax benefit.

Speaker 2

Pulse deepens Integer's capabilities in precision micro machining and further strengthens our pipeline in high growth markets. We welcome the 250 talented associates in Quakertown, Pennsylvania to the Integer family. Pulse has been a long standing strategic supplier of critical components to leading medtech OEMs. They're focused on high growth markets and products along with excellent customer relationships aligned perfectly with Integer strategy. We developed our portfolio strategy in 2017 and formed the growth teams in 2018.

Speaker 2

These market focused teams have a structured and disciplined approach across the organization to shift our pipeline to high growth products and markets, expand our capabilities and ensure our investments are aligned to our strategy. These product line strategies have generated a strong product development pipeline that is delivering results and positions us for sustained above market growth. This structured and disciplined process has been and will continue to be critical to Integer achieving sustained outperformance. We continue to invest in the highest growth C and B markets, the same markets where our customers are investing and the areas with the greatest unmet clinical need. Integer is uniquely positioned to serve our customers across all phases of the product lifecycle because of our deep technology, breadth of capabilities and products, Global Manufacturing Footprint and Vertical Integration.

Speaker 2

The products on the bottom of the slide highlight areas of continued investment in capabilities and capacity. Our 2023 CNV growth and product development pipeline traded in these high growth end markets. We also continue to invest in the differentiated capabilities that both our traditional cardiac rhythm management and emerging neuromodulation products, including the high growth sub segments within cardiac rhythm management. Integer is uniquely positioned to be able to bring full design, development and high volume manufacturing to these customers, while also vertically integrating the most technologically advanced components with our own intellectual property from decades of innovation. Very few other companies have the breadth of design and development capabilities and even fewer offer the depth of component technology that Integer offers to our Neuromodulation customers.

Speaker 2

The products on the bottom of the slide highlight the high growth areas of CRM and N that contributed to our growth in 2023. Our product development pipeline is concentrated in these same high growth end markets. Integer partners with our customers to bring innovative medical technologies to market and we are paid for this service throughout the product development cycle. As life saving and life enhancing products are introduced to the market and enter the manufacturing ramp phase, Integer benefits from accelerated sales growth. The amount of product development sales and the market growth rate of the products being developed are leading indicators for sustained above market sales growth.

Speaker 2

Our product development sales have increased 2 30% since we developed our strategy in 2017, which means our pipeline of new programs has grown significantly and we are being designed into our customers' novel products. We are confident that the current level of development revenue will continue to deliver sustained above market growth. We have continued to strategically target product development opportunities in high growth markets to accelerate our growth rate on a sustainable basis. 80% of our development sales are currently in high growth markets with the remaining 20% in more mature markets. We continue to believe the mix of 80% high growth and 20% mature markets is the appropriate balance to accelerate our sales growth rate, while sustaining our mature products for the benefits they deliver to our customers and Integer.

Speaker 2

The development cycle in our industry is relatively long. So it is a meaningful milestone for us to achieve the level of product development sales and program mix necessary to sustain above market growth. We are excited to share our 4th annual update on emerging PMA customers. We presented this slide for the first time on our earnings call in the Q3 of 2020. These PMA customers are primarily single product, highly novel and innovative and bring emerging neuromodulation therapies to market.

Speaker 2

We have been investing in this pipeline of PMA products for many years And the advancement of these programs is a key contributor to our above market sales growth. The left hand side of this slide shows the number of customers we are working with at each phase of the product development process. The right hand side highlights the actual sales generated 2018, 2020, 2022 for the 9 customers who are in either product introduction or launched since 2020. We are increasing our 2024 sales projection to a range of $100,000,000 to $120,000,000 which is the 2nd consecutive year we have done so. This is the result of the success in the market for these novel therapies and demonstrates our strong pipeline of high growth products that contribute to sustained above market growth.

Speaker 2

In addition to our organic pipeline, We have just demonstrated that we can consistently execute tuck in acquisitions that enhance our capabilities and are accretive to our sales growth rate and profit margins. We are very targeted in the companies that we pursue and have remained disciplined relative to our acquisition criteria. We continue to cultivate relationships with a robust pipeline of founder led and privately owned businesses. We are confident we can continue to add 200 to 400 basis points of inorganic sales growth on an annual basis by deploying $250,000,000 to $300,000,000 on acquisitions, while maintaining a debt leverage of 2.5x to 3.5x adjusted EBITDA. Prior to the development and implementation of our strategy, Integer was growing at about the market growth rate of 5%.

Speaker 2

I have highlighted how growth starts with product development, which is our focused strategy to get designed into our customers' most strategic products in high growth markets, which is demonstrated by our product development sales growth of 2 30 percent and 80% of our development portfolio is in high growth markets. These key metrics reinforce why we remain confident we have the organic pipeline to deliver sustained organic growth 200 basis points above the market. Our acquisition strategy has added significant capability depth and breadth, so we can better serve our customers in high growth markets. Our recent acquisitions have also added to our organic pipeline and provided sales and profit acceleration. Going forward, we expect to add 200 to 400 basis points of growth annually from acquisitions.

Speaker 2

Our focus strategy combined with our organic and inorganic investments have generated a strong product development pipeline and the most vertically integrated provider to our customers in the fastest growing end markets. This gives us confidence we can sustainably grow sales high single digit to low double digit going forward. The strategy that we launched in 2018 is producing results and has helped Integer accomplish its vision of being our customers' partner of choice Innovative Medical Technologies and Services.

Speaker 3

I'll now turn the call over to Diren. Thank you, Joe. Good morning, everyone, and thank you again for joining today's discussion. I'll provide more details on the 4th quarter and full year 2023 adjusted financial results and provide our 2024 outlook. It is important to note 4th quarter results are not impacted by our acquisition of Pulse Technologies, while the full year 2024 outlook includes this acquisition.

Speaker 3

We ended our year strong and delivered 4th quarter results at the high end of our October 26, 2023, outlook. With sales of $413,000,000 Energir delivered 11% year over year sales growth on a reported basis and 9% on an organic basis, which excludes the impact of our 4th quarter InurowCo acquisition, the strategic exit of the portable medical market and foreign currency fluctuations. Our sales performance reflects the continued strong customer demand across our targeted growth markets and the ongoing improvements in the supply chain environment. We delivered $86,000,000 of adjusted EBITDA, up $13,000,000 compared to the prior year or an increase of 18%. Adjusted operating income also increased 18% versus last year.

Speaker 3

We continue to make progress on our year over year margin expansion. Compared to the prior year, adjusted operating income as a percent of sales increased to 16.4%, a 97 basis point improvement driven by gross margin expansion, volume leverage and efficiencies gained from the continued improvement in the supply chain. With adjusted net income at $47,000,000 we delivered $1.39 of adjusted diluted earnings per share, up $0.28 or 25 percent from the Q4 2022. With our strong performance in the 4th quarter, Our full year financial results were at the high end of our 2023 earnings outlook. Sales were $1,597,000,000 which is a strong year over year increase of 16% or 15% organically.

Speaker 3

Adjusted EBITDA was $309,000,000 up 21% versus last year and adjusted operating income was $241,000,000 up $50,000,000 or 26% compared to the prior year. We delivered $158,000,000 of adjusted net income and $4.67 of adjusted diluted earnings per share, up $0.79 or 20% from the prior year. I will touch on the year over year growth and adjusted net income in a few moments. Taking a closer look at our C and V and CRM and N product line sales, we delivered strong year over year growth on a trailing 4 quarter basis in the Q4 of 2023. For our cardio and vascular product line, trailing 4 quarter sales increased 20% year over year with double digit growth across all C and D markets.

Speaker 3

This was driven by strong demand, acquisition performance and supply chain improvements. Crite Acrythem Management neuromodulation's trailing 4 quarter sales increased 15% year over year. This was driven by double digit CRM growth from strong customer demand, double digit neuromodulation growth from emerging customers and supply chain improvements. Further product line details are included in the appendix of presentation on our website at energer.net. To provide more color on our full year 2023 performance, We increased adjusted net income by $28,000,000 compared to 2022.

Speaker 3

Strong sales and operational improvements delivered $42,000,000 equivalent to $1.19 per share, which was partially offset by foreign exchange as well as higher interest and taxes. We incurred adjusted total interest expense of approximately $10,000,000 or $9,000,000 tax affected higher than last year. This is due to a combination of higher debt balance driven by $50,000,000 in costs associated with the convertible notes issued in the Q1 of 2023 and overall higher effective interest rates. Our adjusted effective tax rate was 17.7% for the full year 2023 compared to 16.1% in the prior year. As described in last quarter's earnings call, the primary driver of our higher adjusted effective tax rate compared to the prior year is the expiration of the 10 year Malaysian tax holiday.

Speaker 3

For 2024, We expect our adjusted effective tax rate to be between 19% to 21%. This increase is mostly driven by the recently enacted Pillar 2 legislation in Europe, establishing a minimum effective tax rate of 15% and the residual effect of the Malaysian tax holiday expiration. We delivered another quarter of strong conversion of income to cash in the Q4 of 2023 with $56,000,000 of cash flow from operations. This strong performance was driven by high sales volumes and improving margins. In the Q4, we generated $19,000,000 in free cash flow, inclusive of $37,000,000 of capital expenditures.

Speaker 3

On a full year basis, this equates to $180,000,000 in cash flow from operating activities, a 55% increase versus 2022. Our full year free cash flow of $60,000,000 reflects $120,000,000 in capital expenditures, which is in line with our outlook throughout the year. Net total debt ended at $950,000,000 for the Q4 of 2023, an increase of $26,000,000 compared to the 3rd quarter ending balance. This reflects an increase in debt of $42,000,000 to fund our 4th quarter acquisition of Inuraco and another $8,000,000 for earn out payments on previous acquisitions, partially offset by other decreases of $24,000,000 Net total debt leverage at the end of the Q4 of 20 was 3.1 times trailing 4 quarter adjusted EBITDA, which is within our strategic target range and down from 3.5 times at the end of 2022. We will now transition to providing more detail on our outlook for 2024 sales, profit and cash.

Speaker 3

The full year outlook, as summarized earlier, reflects our strategy to deliver sustained above market growth with expanding margins. We expect 2024 sales to be in the range of $1,735,000,000 to $1,770,000,000 an increase of 9% to 11% versus last year. Our outlook reflects organic growth of 6% to 8%, which is 200 basis points above our underlying market growth rate estimate of 4% to 6%, plus 3% inorganic growth from our NeuroCo and Pulse acquisitions, partially offset by the Portable Medical exit. Our outlook for 2024 adjusted EBITDA is between $355,000,000 $375,000,000 which is 15% to 21% growth year over year. And we expect 2024 adjusted operating income to be between $272,000,000 $290,000,000 reflecting growth of 13% to 20%, which is 1.9 times our expected sales growth rate at the high end of our outlook.

Speaker 3

Adjusted net income is expected to be between $71,185,000,000 reflecting year over year growth of 8% to 18%. This delivers an adjusted EPS outlook between $5.01 $5.43 a growth of 7% to 16%. This assumes an adjusted effective tax rate between 19% 21% and higher interest expense compared to 2023, primarily due to a higher debt balance to support the acquisitions of Inuraco and Pulse Technologies. We expect sales in the Q1 of 2024 to grow high single digit year over year with sequential sales acceleration in the quarter through the Q4 from new product introductions and emerging PMA customer growth. We also anticipate our typical quarterly trend for product development revenue, which is generally at its lowest levels in the Q1 and at its highest levels in the 4th quarter.

Speaker 3

We expect adjusted operating income as a percent of sales to expand throughout 2024 from a significantly improved supply chain, direct labor attrition returning to pre pandemic levels and the typical quarterly trend for product development revenue. To close our financial discussion, I would like to summarize our cash flow generation and our net total debt projection for 2024. We expect cash flow from operations between 185,000,000 to $205,000,000 which represents an 8% year over year increase at midpoint of outlook. Our outlook for capital expenditures is 90 $110,000,000 as we continue to invest in organic capabilities and capacity. At midpoint, this is $15,000,000 lower than 2023 capital expenditures as the spending on our Irish capacity investments was at its highest in 2023.

Speaker 3

As a result, we expect to generate free cash flow between $85,000,000 $105,000,000 Inclusive of our approximate $140,000,000 acquisition of Pulse Technologies in January of this year, we expect our 2024 year end net total debt to be between $10,000,000,000 $10,000,000 $1,301,000,000 which is up $60,000,000 to $80,000,000 year over year. We expect to end the year with our leverage ratio within our target range of 2.5x and 3.5x trailing 4 quarter adjusted EBITDA. With that, I'll turn the call back to Joe. Thank you.

Speaker 2

Thanks, Byron. We delivered a very strong 2023 with full year sales up 16% and adjusted operating income improving by 26% over 2022. We expect this strong performance to continue in 2024 with an outlook of 9% to 11% sales growth and a 13% to 20% increase in adjusted operating income. The execution of our strategy both organically and inorganically is producing results as we continue to demonstrate above market sales growth with expanding margins. We remain focused on executing our strategy to a premium valuation for our shareholders.

Speaker 2

I will now turn the call over to the moderator for

Speaker 3

the Q and A portion of our call.

Operator

Your first question comes from the line of Brett Fishman with KeyBanc Capital Markets. Your line is open.

Speaker 4

Hey guys, thanks so much for taking the questions. Just wanted to start off quickly with 1 on the 2024 guidance. Maybe if you could just walk through a bit of the philosophy and then moving pieces around the 6% to 8% starting point for organic revenue growth. And then just how you're balancing the thinking around really tough 2023 comparisons, but in context of It's still very elevated order book in the range of $1,000,000,000 exiting last year.

Speaker 2

Great. Hey, Brett. Thanks for the question. So as we look at 2024 sales, the 6% to 8% organic is consistent with our product development pipeline that gives us great visibility into new programs that are ramping in 2024. Some of the growth in 'twenty four is from ramps that started in 2023 'twenty two and they pick up as the year progresses.

Speaker 2

And so 6% to 8% organic growth for us is exactly what we've been talking about as our strategic objective and we're confident in being able to do that. Maybe to correlate that, we think the market in 2024 would be more similar to kind of a longer term outlook of 4% to 6%. We think 2023 was elevated the end market growth and 2022 was below average. And so as we look at 2024, we're assuming kind of a normal 4% to 6% industry growth and that's the 6% to 8%. The new products that are ramping gives us confidence in being able to do that.

Speaker 2

And to your question about the order book, over $900,000,000 of orders on hand with customers gives us tremendous visibility into what customers are requesting from us, both in the near term and out into the second half of the year. And that's on top of What they give us on a kind of a rolling 12 month basis, kind of manufacturing plant to manufacturing plant where they tell us what they're planning to produce for the next 12 months, which allows us to plan beyond that $900,000,000 order book.

Speaker 4

All right, great. And then maybe just following up on some of the comments around new product revenue. You did increase The outlook a little bit for this year, which was great to see by approximately $20,000,000 I was just curious where you're seeing additional upside maybe in terms of product areas, A little extra color there would be really helpful. Thanks so much.

Speaker 2

Sure. Your question is specific to 2023 or looking forward to 2024?

Speaker 4

No, just looking at the 2024 estimate of $100,000,000 to $120,000,000 of new product revenue, just where you were seeing the additional upside relative to the prior guidance you've made here.

Speaker 2

Yes, you're referring to the emerging customers with PMA products?

Speaker 5

Yes, exactly. Okay,

Speaker 2

Great. Yes. So we delivered about 250 basis points of total Integer level growth in 2023 versus 2022 from this customer base. And so if you triangulate that, we had previously said we'd grow from $50,000,000 in 20.22 to 80 to 100 by 2024. And although it's not perfectly linear, we did see strong progression.

Speaker 2

We actually were ahead of kind of a linear progression towards that 80 to 100. And based upon the demand from customers and the success of their products in the marketplace, it gives us confidence in increasing the 2024 by another $20,000,000 We increased it last year. You can see on the bottom right of the chart, we increased it last year from 60 to 80 to 80 to 100. We're doing that again this year because we have confidence now given The manufacturing ramps and the demand that customers are seeing in the marketplace. So we're supporting their launch into the marketplace of these therapies that are making a difference for patients.

Speaker 2

And I'll just highlight these are mostly not spinal cord stim. So these are other Neuromodulation emerging therapies that are meeting a lot of unmet patient need and so we're excited to support these customers in their success And you see that in our sales growth.

Speaker 4

All right. Thank you.

Speaker 2

Thanks, Brett.

Operator

Do you have any further questions, Brett?

Speaker 4

I can go back in queue if there is anyone else waiting to ask questions. Otherwise, I could

Speaker 5

ask 1 or 2 more.

Operator

Go ahead.

Speaker 5

All right, sure. How about just

Speaker 4

a quick follow-up around the starting range for operating margins? I think I was calculating around 1.7 times or so at the midpoint compared to the sales growth rate, which seems a little bit better than last year, but still a little bit below the long term target. So maybe just a little bit around the key headwinds you're still seeing and then how you see those progressing as the year continues. And It might be a little early, but whether you see some opportunity to continue pushing toward that 2 times target into 2025?

Speaker 2

Yes, great question, Brett. Your math is correct. At midpoint, it is operating profit growing 1.7 times the growth rate of sales. And what the reason for that is we are just now getting back to The same level of direct labor turnover that we were at pre pandemic, we had talked about that when the direct labor turnover improves and supply chain disruption improves, we felt like then we could work out the inefficiencies that we've experienced in manufacturing over the last 3 years driven by those disruptions. And so I'm excited to say that our direct labor turnover is now in the 1st month of January, we're actually back 2019 levels, every quarter in 2023 got better and better and we exited the 4th quarter But 23% slightly above 2019, that positive trend line has continued into 2024.

Speaker 2

And so that gives us confidence that we can work out the inefficiencies that we've experienced from directly a return over, But it will take us some time to work that out. It won't happen immediately. We have a number of different initiatives in the manufacturing operations to deliver that those But we expect that to continuously improve throughout the year. And that gives us momentum going into 2025. Our long term objective absolutely remains the 2 times operating profit growth, 2 times the sales growth rate.

Speaker 2

The other thing I'll highlight is on supply chain. We saw continued improvement in supply chain throughout last year And we entered 2024 with the lowest measure of disruption the way we measure it, the lowest since we started measuring it in early or in mid-twenty 22. So I would say watch throughout the year. We expect margins to improve throughout the year as we get those efficiencies. And our long term objective remains getting profit growing at least twice as fast as sales.

Speaker 5

All right. Makes a ton of sense. And then kind

Speaker 4

of along similar lines, You have some of these cost headwinds starting to subside a little bit, but then there's also the flip side around pricing, which I know is a little bit of a modest positive to growth in 2023, which was a little bit different than in the past. So just curious on your thoughts here for 2024 As some of those cost headwinds start to cool down a little bit, if pricing can still be a positive lever or at least continue to be more neutral than in the past?

Speaker 2

Sure. Pricing was a slight positive in 2023, which was really just sharing some of the material and wage inflation with our customers in a very collaborative partnership manner. As we look forward to 2024 and beyond, we expect pricing to be flattish And that's what we're modeling and assuming in 2024 based upon our agreements with our customers.

Speaker 4

All right, got it. And then last one, I know you just completed the deal, the Pulse acquisition and it's a little bit early, but just how folks should be thinking about the integration process For that deal in context of Indoreco also being pretty recent, just how you're prioritizing that like level of integration you're planning and maybe some of the key hurdles or just marks of success you're looking for this year? And thanks so much for taking the questions.

Speaker 2

So as soon as we closed, we immediately started talking to customers about commercial synergies and the capabilities and the capacity that we have with both of those acquisitions. We found great reception and a Very positive reaction from customers on those acquisitions because it enables us to do more for our customers. Those were smaller customer tuck ins. They were excited to see us enter by them to bring the scalability that we can and to integrate their capabilities into the programs we already have with those customers and it gives us more capabilities to do even more for them. And vertical integration is a key point of differentiation that we bring.

Speaker 2

And we already are the sales team is already working on a number of commercial synergies and our operating teams are already sharing best practices. And the great thing about it is the best practices are shared both ways because these smaller entrepreneurial innovative companies also find great ways to be efficient and low cost. And so they're sharing some of their practices with us, which is great. And also this Our customers were excited because the 4 acquisitions in the last 25 months reduces the number of suppliers for them by 4 And they're excited to see us continue to do that and we're happy to help them consolidate and simplify their supply chain.

Operator

Your next question comes from the line of Matthew O'Brien with Piper Sandler. Your line is open.

Speaker 5

Good morning. Thanks for taking my questions. Maybe Joe, just as I look at the stock opening up down a little bit This morning, I'm thinking it's probably due to the organic growth outlook for the business. And to follow-up on Brett's question a little bit, I'm Curious what's built in, in terms of buffer because you mentioned more of a normalized environment this year, although we're hearing volumes still very good. I don't know if it's just because the comp was tough last year.

Speaker 5

New product launches, there's some big ones in areas where you guys are really strong. And then obviously supply has gotten better as well. So I'm just wondering, just some of the buffers that you're building in on the top line where there potentially could be a little bit better organic performance versus How you guided?

Speaker 2

Certainly, on the stock price, I'll let you figure that one out. We're just going to keep executing our strategy and delivering on our financial objectives. In terms of growth, we have great visibility 2024 because of the $900,000,000 order book, the success our customers are having with their novel therapies that they're bringing to the marketplace. And so we always come out with what we think is a balanced view that has the ability to ensure that we can deliver on this growth. We have rolling 12 month forecast from our customers.

Speaker 2

And so as we look at 2024, we think this is Higher than the market growth, which we think again will be 4% to 6%. So we think our organic growth is delivering on our at least 200 basis points above. We're excited about the acquisitions and the additional commercial synergies that we can get when we get to later 2024 and 2025 and beyond. We feel like this is a really balanced view of 2024 and we're excited to get into the year and execute on the Q1.

Speaker 5

Got it. And then from the acquisitions, are you able to get into new areas that you hadn't been in before or are you just And then specifically, tricuspids have been getting there's been some approvals there recently. Is this an area where you can If that were to expand over the next several years? And then I have one final question. Thanks.

Speaker 2

Certainly. So one of the great synergies These acquisitions is they're serving the leading medtech OEMs as well. So our customers know them and know them well and trust them For the design and development, the ability for them to ramp and scale is an area that they're excited for Integer to own them. It has gotten us exposure to maybe a couple of areas, more so heart pumps being one example with Pulse Technologies, where it deepens our position in that space. And the broader capabilities and capacity Enables us to move faster with our customers, so we're excited about having both the Neuroco and Pulse Technologies on the team.

Speaker 5

Got it. And last question for Dyeran and congrats on the permanent title. Just the deleveraging that we're seeing on the income statement from top to bottom line, especially the low end of the range, can you just maybe just I don't know if that's interest expense specifically, but just talk about that. And then it is a pretty broad range, which makes sense early in the year, but just What gets you to the low end? What gets you to the high end of that range?

Speaker 5

Thanks.

Speaker 3

Yes. And just to clarify, you're referring to the adjusted net income that's?

Speaker 5

That's right, the EPS numbers. Okay. Yes, and the EPS just wanted

Speaker 3

to confirm. Yes, so interest expense, we're up about $9,000,000 midpoint on interest expense and that's primarily related

Speaker 6

to the acquisitions of Inuraco and Pulse. So that drives about $13,000,000 on the interest expense and then the reduction is some additional pay down in debt.

Speaker 3

And then when you look at the tax rate, we're up about 2 percentage points on our adjusted tax rate year over year. That's Primarily two points. 1 is the Global Pillar 2 minimum tax rate impact that's about a point ish of tax rate. And then another just less than

Speaker 6

a point related to our Malaysian tax holiday expiration that expired in 2023. And so there's some residual carryover impact of that. And then the other kind of other points would be a little bit of jurisdictional mix on the tax rate. So those two points are the primary drivers related to the EPS.

Speaker 5

Got it. Thank you.

Operator

Your next question comes from the line of Craig Bijou with Bank of America. Your line is open.

Speaker 7

Good morning, guys. Thanks for taking the questions. So just want to start, we spent a lot of 23 talking about customer inventory work down. So I do apologize for asking this question again, but maybe we can kind of put it to rest. But it sounds like inventory order patterns as your customers are getting to a more normal level.

Speaker 7

So just wanted to hear kind of your thoughts there and if that is in fact true and 2024 is going to be a normal year from that perspective?

Speaker 2

Yes. Hey, Greg, it wouldn't be an earnings call without that question. So thank you. So maybe I'll start with this. Our view of the end market is 2022 was a below average Growth year because of hospital staffing shortages in 2023 was a higher than average.

Speaker 2

And if you look at the 2 years, it looks to us like it kind of averages out to maybe more normal over the 2 years. And we work closely with customers back in 2022 when orders were coming in Fast and furious and high. We work close with customers to allocate capacity in order to support medical procedure volumes. And that was our first question to customers when we saw orders that look like they were meaningfully above any pattern or trend that we could observe in the end markets. And The nice thing is we're on we're serving so many customers on so many different therapies and products.

Speaker 2

We can get a pretty good view of overall market for different submarkets pretty comprehensively given our sole source nature. And so we were able to talk to customers about what we were seeing more holistically. And we think for the most part that order patterns, Maybe ordering was not normal, but what we shipped was maybe more aligned to end markets. I shared on the 3rd quarter earnings call, We saw some of the supplier adjustments, the Deere supplier were adjusting inventory letters that customers oftentimes send out when they do things in mass. We saw some of that last summer.

Speaker 2

I said on the Q3 earnings call that we were seeing what we would characterize as kind of typical year end inventory management in some locations and we had incorporated that both of those into our guidance. So it was in our Q3 that those adjustments were in our Q4. And I think given our order book, we've got really good visibility to the next at least 6 months and even beyond with some of the longer term orders we have. So we've baked all that in. We've got all that factored into our guidance and we're confident in the guidance we provided both for the full year and the qualitative color that we provided on the Q1.

Speaker 7

Got it. Thanks for the thorough answer. I wanted to follow-up on the higher guidance for emerging customers. And sorry if I missed this, the specifics, What's driving that raise to the $20,000,000 So was that outperformance versus what you were expecting through 'twenty three or is it a better, higher expectations for 'twenty four for those products?

Speaker 2

Yes, it's a great question. I mean the very nature of these customers are the success or failure in the marketplace will determine The success or failure on the Slide 17 in our presentation that shows those the growth in those sales. And so look, we risk adjust the forecast And from our customers because we know that they're going to plan for the best they can do to make sure that they've got product To hit the most aggressive sales forecast that they have, well, we risk adjust that because we've got 40 plus years of doing this kind of IPG and lead development for neuromodulation customers. And so what you're seeing is you're seeing stronger success in the marketplace than what we risk adjusted the growth pattern here. And quite frankly, you can look at it and see in Q4 of 2021, we were saying 2024 was going to be 60 to 80 Because when we did that, we were still 2 years away.

Speaker 2

We got one more year of knowledge and at the end of 4th end of 2022, we said 80 to 100 And that risk adjustment proved to be overly conservative. And so now we're seeing those customers' success in the marketplace. We said, I commented earlier that our 2023 versus 2022 growth for Integer was about 2 50 basis points from these customers. So you can do the math and extrapolate. We're ahead of the midpoint of 50 to 100, which gave us confidence to raise the 100 to 120.

Speaker 2

Ultimately, it's the success of the products in the marketplace and our risk adjustment proved conservative.

Speaker 7

Got it. That's helpful. And last one for me. It sounds like you guys are modeling in a decent amount of contribution from new acquisitions. So Wanted to get your sense for the end market in acquisitions for you guys, I guess.

Speaker 7

Are there that many Smaller deals to be done, and how's the pricing or valuation expectations on some of those deals?

Speaker 2

So there is a very robust pipeline of acquisition, tuck in acquisitions for us. The team continues to do a phenomenal job of identifying opportunities. We think we're in a very unique position In the marketplace to be able to identify these tuck in acquisitions, we are oftentimes a supplier to these targets Or we might actually be partnering or working on a product that they're working on as well. Customers come to us and suggest to us acquisition opportunities where they may love the technology and the design development capability, but they look at them and say they're not big enough to scale or they don't want to take too much risk in some of the smaller customers on their most important high growth programs. Sometimes we actually get calls from targets themselves who've seen what we've done with other acquisitions because they've heard and they know from that network of other entrepreneurs, founder led companies that we invest and grow the business.

Speaker 2

We bring commercial synergies. So we accelerate the growth of their business, we invest in their business and the vertical integration just helps them accelerate the impact they're having in the marketplace and with patients. So they're excited about that. So we think we're a unique position to be able to identify these tuck in acquisitions relative to others in the market who are pursuing them. Your question on pricing, well, of course, everybody wants the highest possible price, but these entrepreneurs and founder led Companies care about lots of things when they make those decisions and we think we get to a fair price for them.

Speaker 2

And often times we'll put an earn out in there if they outperform over the 1st couple of years of ownership, they can get more. But we've been able to get these acquisitions we think at a fair price, a price that lets us then bring commercial and operational synergies and get a great return. And we built that muscle of Diligencing and integrating, we're excited about the progress that we've already made with the NeuroCo and Pulse. We've already got commercial opportunities that are in process and the operational synergies also they start day 1 because They're doing a lot of the same work, serving the same customers and so it's pretty quick and pretty easy. And so they're also to maybe your question, They're serving the same end markets.

Speaker 2

They're targeting the same higher growth markets as us. So it's a they're great strategic bids, which is the discipline of following our criteria for acquisitions. Great. Thanks, guys. Thank you.

Operator

Your next question comes from the line of Joanne Wuensch with Citi. Your line is open.

Speaker 8

Good morning and thank you very much for taking the question. As I'm running through my model, it looks It's like you have about somewhere between 5070 basis points of operating margin expansion, mostly coming from gross margins. Just Curious if I'm looking at this the right way. And if so, if we go back to sort of a pre pandemic operating margin, Is that the right way to think about the world or is it just the business and the model has changed so much since then?

Speaker 2

Good morning, Joanne. Your question was specific to Q4 or forecast, I'm sorry. For 2024, sorry. That's okay. That's okay.

Speaker 2

2024. So 2024 at midpoint on the adjusted operating income were up 91 basis points At midpoint, that I think it was commented earlier that that's operating profit growing 1.7 times as fast as the sales growth rate. That's our 2024 guidance. We're still driving towards the profit growing twice as fast. And so this is above market sales growth With margin expansion and the 91 basis points is the midpoint of our guidance.

Speaker 2

And referencing back to kind of pre pandemic, That is still slightly below where we were pre pandemic. And the biggest driver that has to do with the direct labor attrition and the supply chain disruptions that we experienced heavily in 2022 and even throughout 2023. And the good news is With more than half of our sites now, their turnover is back to pre pandemic levels or better. We're confident that we'll keep improving that throughout 2024, we'll work out those inefficiencies from before the pandemic and we're confident that we're going to get back to and exceed the margins that we had pre pandemic.

Speaker 8

Thank you for that. My second question has to do somewhat with sort of looking at the 2 segments in the two sections of CRM and neuromod. If I'm doing my math correctly, in the Q4, one segment probably did better than the other. Is it a comp issue or is it something else we should be thinking about? Thank you.

Speaker 2

Sure. So in cardiac rhythm management in NeuroMind. NeuroMind continues to grow very strongly driven by the emerging PMA customers we've talked a little bit about on this call. Cardiac Rhythm Management has actually grown very strongly throughout 2023. And at some point, it's going to revert back to its more historical levels.

Speaker 2

Our view is there were fewer procedures during the pandemic and the staffing shortages in hospitals in 2022, we saw very strong growth in the early part of 2023 and we think what you're seeing with the Q4 is Cardiac Rhythm Management reverting back to a more historical low single digit, while neuromodulation continues to grow at a very strong level driven primarily by non spinal cord stim, the other emerging therapies in neuro with our emerging PMA customers.

Speaker 8

Terrific. Thank you very much. Have a great day.

Speaker 2

Great. Thanks, Joanne.

Operator

There are no further questions at this time. I will turn the call to Andrew for closing remarks.

Speaker 1

Great. Thank you, everyone, for joining the call today. As always, you can access the replay of this call on our website as well as the presentation that we just covered. Thank you for your interest in Integer and that concludes our call today.

Operator

This concludes today's conference call. We thank you for joining. You may now disconnect your lines.

Powered by Quartr

Key Takeaways

  • In 2023, Integer delivered 16% sales growth and 26% adjusted operating income growth, expanding operating margin by 117 basis points and nearing its strategic target of 2× operating leverage.
  • For 2024, the company forecasts 9%–11% sales growth (6%–8% organic plus ~3% inorganic) and 13%–20% adjusted operating income growth, aiming to sustain above-market performance.
  • Recent tuck-in acquisitions—including Pulse Technologies—add ~$170 million in annualized revenue at accretive margins, and Integer plans to deploy $250–300 million in M&A annually to generate 200–400 basis points of inorganic growth while keeping leverage at 2.5×–3.5× EBITDA.
  • Integer’s product development pipeline has grown 230% since 2017 with 80% of development revenue in high-growth markets, driving a projected $100–120 million in sales from emerging neuromodulation PMA customers in 2024.
  • Operational headwinds from supply chain and labor have meaningfully improved, with direct labor attrition back to pre-pandemic levels and further margin expansion expected through efficiency gains.
A.I. generated. May contain errors.
Earnings Conference Call
Integer Q4 2023
00:00 / 00:00