Integer Holdings Corporation (ITGR) Earnings Call Transcript & Summary

Hello. My name is Jeremy, and I will be the conference operator today. At this time, I would like to welcome everyone to the Integer Holdings Corporation Conference Call. [Operator Instructions] I would now like to introduce you to your speaker, Andrew Senn, Senior Vice President of Strategy, Business Development and Investor Relations. Andrew, you may begin.

Good morning, everyone. Thank you for joining us, and welcome to Integer's Second Quarter 2023 Earnings Conference Call. With me today are Joe Dziedzic, President and Chief Executive Officer; and Diron Smith, Vice President, Financial Planning and Analysis and Interim Chief Financial Officer. As a reminder, the results and the data we discuss today reflect the consolidated results of Integer for the periods indicated. During our call, we will discuss some non-GAAP financial measures. For a 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 available on our website at integer.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 Diron will then review our financial results for the second quarter of 2023 and provide an update on our full year 2023 guidance. Joe will come back to provide his closing remarks, and then we will open up the call for your questions. With that, I will turn the call over to Joe.

Thank you, Andrew, and thank you to everyone for joining the call today. In addition to KeyBanc, Benchmark, Piper Sandler and Bank of America, we are excited to welcome sell-side analysts from Citi and Wells Fargo, who initiated coverage on Integer during the second quarter. We appreciate the coverage from all the sell-side analysts and are excited by the opportunity to reach more potential investors. In the second quarter, we delivered another strong quarter of year-over-year results. Sales grew 14% organically from robust customer demand across all product lines. Our adjusted operating income grew 20%, while expanding margins by about 80 basis points compared to last year. We were able to deliver more products to our customers than our prior guidance assumed due to a meaningful improvement in the supply chain environment as well as a stabilizing labor market. We are encouraged by the significant supply chain improvement However, we continue to experience pockets of supply chain risk. Based on continued strong customer demand and the improvements in supply chain and labor, we are raising our full year outlook. We expect sales to grow 11% to 13% and adjusted operating income to grow 17% to 21% year-over-year. Free cash flow guidance is now a range of $75 million to $95 million, a strong year-over-year increase. The strategy that we developed in 2017 and began implementing in 2018 is producing above-market sales growth with a pipeline to sustain growth at 200 basis points above the market. In 2023, we expect to grow operating income at 1.6x the rate of sales growth. We remain confident we can achieve our strategic financial objective of growing operating income at 2x the rate of sales growth through the execution of our manufacturing excellence strategies and when the supply chain and labor environment more fully stabilized. It is an exciting time at Integer because demand remains incredibly strong. We have a robust pipeline of new products concentrated in faster-growing end markets, and we are making the investments needed to deliver sustained growth. I am grateful for our associates around the world that are delivering for our customers and making a difference for patients. I'll now turn the call over to Diron.

Thank you, Joe. Good morning, everyone, and thank you again for joining today's discussion. I'll provide more details on our second quarter 2023 financial results and provide an update on our 2023 outlook. In the second quarter, we continued our strong start to 2023 with sales of $400 million, Integer delivered 14% year-over-year sales growth on both a reported and an organic basis, which excludes the impact of currency fluctuations. Our sales performance reflects the continued strong customer demand across all product lines and the meaningful improvements in supply chain and direct labor. We delivered $76 million of adjusted EBITDA, up $10 million compared to last year or an increase of 16%. Adjusted operating income was up 20% or $10 million versus last year as we continue to make progress on our year-over-year margin expansion. Adjusted operating income as a percent of sales increased by 76 basis points since the prior year to 15%, driven by operational efficiency improvements, offsetting material inflation and annual merit increases. With adjusted net income at $38 million, we delivered $1.14 of adjusted diluted earnings per share, up $0.10 or 10% from the second quarter of 2022, benefiting from the lower fixed interest convertible notes issued in January of this year. I will share a bit more detail on the year-over-year growth and adjusted net income in a few moments. In the second quarter of 2023, sales for all 4 product lines delivered strong year-over-year growth due to strong customer demand and improvements in the supply chain. The Cardio & Vascular product line delivered 15% sales growth in the second quarter compared to a year ago. Continued strong demand across all markets, growth in key products such as guide-wires, new product ramps in electrophysiology and supply chain improvements were drivers of the strong performance. Cardiac Rhythm Management and Neuro-modulation second quarter sales increased 13% over the second quarter of 2022, with double-digit growth in both cardiac rhythm management and in neuromodulation. This was driven by strong demand, including double-digit growth from emerging customers with PMA products and supply chain improvements. Advanced Surgical, Orthopedics and Portable Medical saw 17% growth in the second quarter versus a year ago, driven by increased price and demand as a result of the continued execution of the multiyear portable medical exit announced in 2022. Additionally, Advanced Surgical and Orthopedics grew low single digit year-over-year. And lastly, Electrochem, our Non-Medical segment grew 7% from a year ago, driven by strong demand in military and environmental market segments, partially offset by a decline in the energy market. Further product line details are included in the appendix of the presentation on our website at integer.net. Second quarter 2023 adjusted net income increased a total of $4 million compared to second quarter 2022, primarily due to strong sales and related operational improvements, partially offset by higher interest and taxes. In this higher interest rate environment, we incurred interest expense of approximately $4 million or $3 million tax affected more than last year. However, on a sequential basis compared to the first quarter 2023, we reduced our interest expense by $1 million tax effected, driven by the January convertible notes issuance. Additionally, the expiration of the 10-year Malaysian tax holiday under which we have been operating is the primary driver of a higher adjusted effective tax rate for second quarter 2023 compared to the prior year. In the second quarter 2023, we generated $56 million in cash flow from operations, up $37 million from a year ago. This strong performance is driven by higher sales volumes, improving margins, our effective management of working capital and approximately $20 million from our previously discussed accounts receivable factoring program. In the second quarter, we generated $23 million in free cash flow, inclusive of $33 million of capital expenditures. With year-to-date capital expenditures of $57 million, we are attracting to our full year guidance of $100 million to $120 million. Net total debt in the second quarter improved by $15 million sequentially. And as a result, our net total debt leverage at the end of the second quarter was 3.5x our trailing 4 quarter adjusted EBITDA, back within our strategic target range. We will now transition to providing an update on our full year outlook for 2023 sales, profit and cash. As Joe mentioned in his opening remarks, with strong performance through the first half of 2023 and second quarter supply chain improvements, we are raising our full year 2023 outlook. Starting with sales, we are increasing our outlook to 12% year-over-year growth at midpoint with a sales range of $1.530 billion to $1.550 billion, an increase of 11% to 13% versus last year, up from our previous guidance of 7% to 9%. Our outlook for 2023 adjusted EBITDA is 15% to 18% growth year-over-year with a range of $294 million to $302 million, up from our previous guidance of 11% to 16% growth. We are increasing our adjusted operating income outlook by $11 million at midpoint and expect 2023 adjusted operating income to be between $224 million and $232 million reflecting year-over-year growth of 17% to 21%. Adjusted net income is now expected to be between $143 million and $149 million, reflecting a year-over-year growth of 10% to 15%. And up from our previous guidance of 4% to 11%. This delivers an expected adjusted EPS outlook between $4.23 and $4.43, a growth of 9% to 14% year-over-year. Our adjusted effective tax rate remains unchanged from our previous outlook and is projected to be between 17% and 19%. To provide more color into our outlook, our first half 2023 sales averaged $389 million, comprised of an approximately $380 million quarterly run rate plus the recovery of the prior year supply chain delays, which were discussed in our call in April. As we enter the second half of 2023, we expect sales similar to the first half run rate of $380 million. We continue to expect adjusted operating income as a percent of sales to improve throughout the remainder of 2023 as we continue to improve manufacturing efficiencies and operate in a stabilizing direct labor environment. Moving to our 2023 cash outlook. We expect cash flow from operations between $185 million to $205 million, an increase of $5 million from our prior outlook, consistent with our increase in adjusted EBITDA. Our cash flow from operations outlook includes an expected full year impact of $35 million from accounts receivable factoring to support our Irish manufacturing facility capacity investments, which we shared during our February earnings call. Consistent with our strategy, we are maintaining our outlook on capital expenditures of $100 million to $120 million as we continue to invest in capacity expansion. As a result, we expect to generate free cash flow between $75 million and $95 million. The free cash flow generated will be used to reduce our net total debt, and we expect to end the year with our leverage ratio within our target range of 2.5 to 3.5x our trailing 4 quarter adjusted EBITDA. Thank you for your time, and I'll now turn the call back to Joe.

Thanks, Diron. Integer is on track for a strong year with 22% sales growth in the first quarter and 14% sales growth in the second quarter. Adjusted operating income was up 28% in the first quarter and 20% in the second quarter. We are raising our 2023 outlook as we continue to execute our strategy to deliver sustained above-market growth with expanding margins. We have a strong pipeline of new products and are investing in the capacity to sustain above-market growth. We remain focused on delivering for our customers and the patients they serve to generate a premium valuation for our shareholders. Thank you for joining our call this morning. I will now turn the call back to our moderator for the Q&A portion of our call.

Awesome. Thank you so much. [Operator Instructions] Now it's ready for our first question. Our first question comes from Matthew Mishan.

I just wanted to start with the drivers of the revenue be -- are you guys seeing -- are you guys just experiencing a level of supply chain relief that's enabling you to pull forward some sales into 2023? Or are just the procedural volume environment like that much better than you thought it would be going into the year? Or are some new products ramping like faster than expected?

Thank you for the questions. I'll start with the simple answer is we're meeting the procedural demand and volume that our customers have placed on us. We're in no way pulling anything forward. And we -- I'm not convinced that there was necessarily a meaningful increase in demand. We've got really good visibility to the demand for our customers. We've talked about how our backlog is now approaching just right at $1 billion compared to $300 million pre-pandemic, which is a function of lead times being longer across the industry and everybody placing orders further into the future. The take away is that gives us really good visibility in the next 6 to 9 months. And so the increase in output in the second quarter was very much a function of supply chain improvement. We've talked about how we track supply chain on a daily, weekly basis. We track the number of issues, they quantify the impact. Throughout the quarter, we saw continued improvement and that enabled us to meet more of the demand that we've had. We've been communicating now for 6 to 12 months, we had very strong demand in our backlog, and it's really a function of how much of it can we meet. And our focus has been ensuring that procedure volumes have been meeting procedure volumes. But -- so we don't see any of this revenue is coming from the future. We see it as meeting the demand that's been there because supply chain has improved. We did highlight that we still have pockets of supply chain challenges, which we're managing, and we have factored into our second half outlook. Now to get to the other things you asked about, we absolutely have new products from the strong product development pipeline that we've talked about and shared some of our in-process metrics. That pipeline of new products, combined with our emerging customers that we've talked about, and we've highlighted the growth that we've been experiencing there. All of that's contributing to the strong demand that we've been experiencing and had visibility to. But it's really a supply chain that enable us ultimately to get more product out the door in the second quarter. And we had shared or have been sharing over the last 3 months since our last earnings call. The demand is there, and it's really about our ability to continue to improve the supply chain and stabilize direct labor to meet more of it with our customers. And so what you're seeing is you're seeing us being able to meet the demand that's been there. And the demand remains strong, and we have confidence in our 12% sales growth at midpoint for the full year.

All right. And then our next question comes from the line of Matthew O'Brien. Matthew, please go ahead.

This is Phil on for Matt. Congrats on a great quarter and thanks for taking our question. [indiscernible] but on the updated guide, great to see that it's coming up more than the beat here in Q2, where is that confidence coming from? And what I'm really trying to get at is taking the guide up to, let's say, 12% at the midpoint, and you've indicated your intention is to grow 200 basis points above the market. Do we think about the underlying market this year growing about 10%? Or are you growing above that 200 bps guidance that you set?