Integer Holdings Corporation (ITGR) Earnings Call Transcript & Summary

All right. Well, everyone, thank you for coming. My name is Zach Conte. I'm with JPMorgan's Healthcare Investment Banking Group. It's my pleasure to introduce Integer Holdings. Today, we're joined by Joe Dziedzic, CEO. There'll be a presentation followed by a short Q&A. Thank you.

Thank you, Zach, appreciate it. All right. Let's see. That works. Welcome, everybody. Thanks for being here. I've got a handful of slides. I'm going to give you a little bit of an overview of Integer. We've got a little bit of new information. I think most of what I'm going to present, you will find we filed a couple of hours ago when the markets closed. So I'll start with Integer is one of the world's -- we think, the world's largest medical device outsourcer at $1.6 billion. About half of our business sales are in the cardio and vascular space and then about 40% of the cardiac rhythm management and neuromodulation space. We have a very global footprint. We have R&D and manufacturing facilities that are colocated in the med tech hubs in the U.S. and Ireland. We have what we think is a very strong low-cost manufacturing footprint around the world that lets us codevelop products with our customers, for our customers, in the locations where they want to do so, and then ramp them in the locations where they want, whether that be colocated, codeveloped or in a low-cost location. Our 500-plus engine R&D engineers enable us to fulfill our vision of enhancing patients' lives, which is very much aligned with our industry and our customers. So maybe just 30 seconds on our investment thesis. So we think we have a strong investment proposition. Our objective is to earn and develop and create a -- earn a valuation premium for and by our investors. We think our strong portfolio strategy and product line strategy which defines how we win in the markets we serve and our operational strategy that defines how we achieve excellence in everything we do, including how we serve our customers, how we manage our cost and how we create and promote the culture, that is defined by our values of how we engage with each other. We've laid out three very clear and specific financial objectives of our strategy. And that is to deliver sales growth. It's at least 200 basis points faster than the markets we serve. In the markets we serve, our WAMGR, is about 4% to 6%. We want to grow our operating profit at least twice as fast as our sales. So if organic sales are 4% to 6% and we're 200 bps faster, that's 6% to 8%, and that means operating profit will be 12% to 16%. That's our strategic objectives while maintaining debt leverage in the 2.5% to 3.5% range, which we think most investors find comfortable enough. We think we have a very resilient business model. We have a compelling growth strategy and growth story and a performance culture that we think will enable us to deliver sustained outperformance, which we expect will then deliver and earn a premium valuation for investors. We've been on a journey to excellence since our strategy development in 2017 and launched in 2018. First thing we did was we looked at the markets we were serving, assessed the attractiveness/unattractiveness, looked at how we were performing in those markets and then decided to what we wanted to do with those markets. The first meaningful step was in 2018. We divested our Advanced Surgical and Orthopedic business. At that time, it was $400 million of our $1.5 billion in sales. That enabled us to focus on the targeted growth markets, the higher end growth -- faster-growing markets as well as meaningfully deleverage after a significant acquisition in 2015. We have a very clear product line strategy. Those product line strategies are developed by what we call growth teams. You can think of them maybe as more traditional product management organizations. They are organized as cross-functional teams. They are aligned and focused on individual, very specific end markets. And what they do is they develop the value proposition. Back in 2017, '18, we did product teardowns to look at the markets we were serving and assessed the differentiated capabilities required to serve our customers in those therapies with those products. And then we set out to systematically close any gaps and capabilities. And that's where you see a little bit of the highlights here on the acquisitions that either compounded existing capability that was needed to serve customers in those faster growing end markets or to add the capabilities that we lacked. I'll talk a little more about acquisitions in a few minutes. We have an operational strategy that's organized around the Integer production system, which is our version of a lean manufacturing, and that's the way in which we expect to be able to grow operating profit twice as fast as sales. Pre-pandemic, we had made meaningful progress in expanding margins, almost 300 basis points from '17 to 2019. Like most manufacturing companies during the pandemic, the supply chain and direct labor inefficiencies impacted us. 2023, we're back on the margin expansion trajectory, and we expect to be able to continue doing that. Again, our strategy is to deliver sustained outperformance and earn that valuation premium. I think it's -- when you think about our journey and you think about accelerating revenue growth, it's helpful to just reflect for a minute on the cycle times: how long does it take from the time you win business to codevelop, codesign products or components, subassemblies with our customers, and then get that through any regulatory approval or clinical, if necessary, and ramp into manufacturing. And so I'll highlight, in the middle of the slide, 510(k) products. Class II products typically take 3 to 5 years from the time you start the development to the time you start to see any meaningful manufacturing revenue. And for our Class III premarket approval, active implantable medical device, you're looking at 5- to 9-plus years. Oftentimes, it can be longer, depending upon the iterative process of demonstrating efficacy. It's important to reflect on this because when you think about our strategy that we developed in 2017 and '18, some of these programs that were from 2019 and '20 that have now been through the development process are now starting to launch into the marketplace. And those programs are what give us the confidence that we can sustain an above-market growth rate. And so these cycle times are impactful and important to understand. So now let me talk about the markets that we're focused on. So this is a growth curve that lays out the cardio and vascular markets. The curve reflects the maturity of the technology. So far left is early maturity, early development of therapies. Far right is much more mature. You can imagine the growth rate is really in the ramp period, which is in the blue box. These are the markets that we're very focused on. You won't be surprised to see on the bottom there the target growth markets, structural heart being one of them. This is an example of a catheter delivery system that we can do full vertical integration of this delivery system based on our capabilities across our global footprint. Electrophysiology is a fast-growing market where, again, we could do full vertical integration and complete finished device assembly of electrophysiology catheters. And then neurovascular is also another area where we can fully vertically integrate and serve our customers in the codevelopment and manufacturing of finished devices. So the blue box is our focus area. We've been very disciplined and structured in everything we do. The growth team's focus is on these markets. They build the value proposition. They assess the market trends. They develop the targeting that we do with customers. All of our acquisitions are aligned with focus on these growth markets. And this is the cardiovascular. Now let me show you the cardiac rhythm management and neuromodulation picture. What you see here, the darker blue, is neuromodulation. And you'll see a lot of the smaller emerging therapies, sleep apnea, you see Parkinson's, incontinence, cochlear, epilepsy, deep brain stim, pain management, spinal cord stim, a much more mature therapy on the far right. In the lighter blue, you see cardiac rhythm management. And all through the far right, you see traditional pacing, which is a very big market but a slower growth, more mature technology. There are growth shoots within cardiac rhythm management. On the far left, you see the dual chamber leadless pacing. Single chamber is closer to the middle. And you see ventricular assist and cardiac monitoring as other growth shoots within cardiac rhythm management. We look at these businesses together because it's the same technology and capability, and our ability to vertically integrate components and design and develop and manufacture complete IPGs for customers, complete lead systems, we can do the full device, the full kit for customers, as well as delivery systems. And so our focus within cardiac rhythm management is to serve our existing customers in the large traditional pacing market while leveraging those existing capabilities to serve early-stage customers, more innovative single-product customers and neuromodulation that are developing new and innovative therapies to meet unmet patient need. So we're excited about the growth spurt with -- the growth shoots within cardiac rhythm management, especially excited about neuromodulation with the number of growth investments that our customers are making and excited to partner with them and bring full end-to-end capabilities to help them design and develop their product, help them through clinical trials, regulatory approvals and to high-volume manufacturing. So let's reflect on now you know the markets and what our objectives are, how are we doing. And so the left side of this page gives you a measure of the number -- of the amount of growth that we've had in programs or products that we're getting designed in to. So this is our development sales from 2017 to '23. And you can see it's growing 230%. This is exactly what our strategy was designed to do. We decided back in 2017 and '18 the way in which we were going to deliver sustainable growth year after year was getting designed in to programs. I shared with you the cycle times: 3- to 5-plus years for a 510(k), 5- to 9-plus years for a PMA Class III. It takes time. So when I said we are on a journey of executing our strategy, this is an example. Those are now starting to come to fruition, and this is evidence of getting designed in to more of our customers' products. And we've done that by demonstrating to them the capabilities, adding capabilities, helping them with vertical integration, speed to market, and enabling their success. The left side is the quantity measure. The right side is the quality measure. We wanted to shift the focus and the number of programs into higher-growth markets. So in 2017, roughly half of our programs were in faster growing end markets, half of our programs were in the more mature, slower-growth markets. That is now 80% in the faster-growing end markets. That is by design. That is evidence of the discipline and rigor of our strategy. So our strategy of being designed in to more of our customers' programs, on the left; and the higher-growth end markets, the targeted growth markets that have inherent tailwinds that meet greater patient need, on the right. These are the programs our customers are innovating the most in, investing the most in, and that drive their growth. So we're enabling their success by participating in more of their most critical programs. So that was the organic story, now let's talk for a couple of minutes maybe about the inorganic story. So on the left-hand side, when you look at the free cash flow that we generate every year, you look at the organic growth in EBITDA and you look at the acquired EBITDA from acquisitions, we estimate we have between $200 million and $250 million and $300 million of available acquisition capacity every year. And we can spend that while maintaining our debt leverage in the 2.5% to 3.5% range that we think is so important for investors. The acquisition criteria, we have a very disciplined acquisition targeting process, and we start by we need the acquisition targets to have differentiated capability. And if they have differentiated capability, then they're going to be focusing in on the targeted growth markets because it's the capabilities that serve those markets that are most important to us. Of course, we want accretive growth on the top line. We want accretive margins on the bottom line. If we don't have those at the time of acquisition, we need a very clear path through commercial and operational synergies to achieve that. We have found, with the tuck-in size acquisitions that we do, we do bring significant commercial and operational synergies to these acquisitions. Many times, they can't scale to high volume. Customers won't trust them with critical programs scaling them. Oftentimes, we will see the smaller customers doing development work. And then when it comes time for ramping into production, the customer will oftentimes look for somewhere else. With Integer as the owner, we can scale that, and we find that customers are very receptive and want us to help companies, and they love the technology that they have, but the scalability of them is oftentimes a concern. And so we get significant operational synergies and commercial synergies. We oftentimes have pipelines that we can funnel into these businesses to help them grow even faster than what they were growing before. So we see $250 million to $300 million of acquisition capacity every year to keep executing on the tuck-in acquisitions that we sell value. So how are we doing with our acquisition strategy? We've closed 4 acquisitions in the last 25 months. I'll start on the right-hand side of the page. Oscor was an acquisition in December of 2021. We've shown you the focus, the primary markets where their sales were concentrated. Again, electrophysiology, neuromodulation, peripheral vascular, structural heart. Our target growth markets is where Oscor was. It was a steerable sheath, introducer, implantable leads, design, development, manufacturing company that has their own products that they bring to market, branded with -- through them or branded with the customer. It's been a highly successful acquisition for us. We brought significant commercial and operational synergies to that business. Really excited about the performance of Oscor. Aran Biomedical we closed in April 2022, a biomaterials business that enabled us to now get designed in to the implant. We've been very good with access and delivery systems in that space. But now we have biomaterials that can be designed in to the implant that gets us on the actual implant. You can see structural heart, neurovascular, being the key focus markets for Aran Biomedical. It's also been a great acquisition, strong technology, very differentiated capabilities. In October of last year, 3-plus months ago, we closed on InNeuroCo. This is a neurovascular design and development company that's prior strategy have been to design and develop and bring to market complete devices with regulatory approval and then sell them and perform the manufacturing. Our strategy with them will be to codevelop and design devices for our customers for the leading players in that space: aspiration catheters, thrombectomy, delivery catheters, steerable micro catheters, a wide range of capabilities that's very unique in the space. As neurovascular products become more and more outsourced, we're really excited about InNeuroCo's capability and the very strong pipeline we have of programs that we can leverage their capability and drive operational and commercial synergies. Pulse Technologies is an acquisition that a couple of hours ago, when we filed this slide in the press release, we announced that we closed last Friday. So it's a brand-new acquisition for us. You can see the markets. Again, it's right in our wheelhouse for the targeted high-growth markets, leadless pacing, neuromodulation, heart pumps, electrophysiology, structural heart, peripheral vascular. So these 4 acquisitions will generate about $170 million on an annualized basis, and we believe we can continue to execute on these acquisitions at very fair competitive prices and allows us to drive operational and commercial synergies and get significant return on these investments. Compounding capability, we already have, or adding new capability, but always focused in those targeted growth end markets and getting either an acquisition or shortly after acquisition, being accretive to both the growth rate and the margin rate. So let's take a minute on Pulse. Pulse Technology is a leader in precision micro machining. Closed on Friday. They finished 2023 with $42 million in sales, $11 million in EBITDA. We paid $140 million. That's before the $15 million of net present value of tax benefits, so $125 million after you factor in the $15 million of tax benefits. We'll stay within our 2.5 to 3.5x leverage when we close. First quarter is our expectation. So you can see this is a really good entry multiple for us. It's already accretive on the EBITDA margin rates. We have a significant pipeline of precision micro machining business that we can funnel into the existing capacity that this customer -- that Pulse Technologies has. They're working, and they've been long-standing partners with the leading customers in our space. Our customers have been very excited to hear about us acquiring them. And we expect that to open up even more capabilities for them because, again, as a $42 million company, there was only so much concentration some of our customers were willing to put with a company that size. With Integer's backing now, lots of confidence in their ability now to scale, and we will be helping them accelerate their growth. And we expect this to be accretive to sales and EBITDA, obviously, day 1 in 2024. So we're really excited, and I'm excited to welcome the 250 Pulse Technologies associates that are based in Pennsylvania. So let me just reinforce for you. This is -- I just showed you the growth curves for cardiac rhythm management, neuromodulation, as well as for cardiovascular. The green circles around these bars just reinforces these are the markets that Pulse Technologies sales are concentrated in today. This is where they're winning business and the customers they're serving. You can see it's right in the targeted blue box. They do have customers on the far right that they've been serving for a long time. So a great customer overlap, great technology and capability. We look forward to helping Pulse Technologies accelerate their growth and expand margins through our operational synergies. Very excited to welcome Pulse Technologies to the Integer family. So let me wrap up with, if you looked at Integer before the pandemic, 2016 to '19, we were growing at about 5%. 5% is right in the middle of that 4% to 6% market growth when you do the weighted average market growth rates. In the middle here, what you see, the top slide is where I showed you that we have increased the number of programs we're being designed in to with our customers by 230% in the last 6 years. On the right side, it shows you that 80% of those programs that we're working on today are in the targeted faster growth end markets. The bottom half -- the bottom slide is the organic -- I'm sorry, inorganic acquisition strategy that I just laid out for you that we are executing very successfully with 4 acquisitions in the last 25 months, staying within our 2.5 to 3.5x leverage, generating $170 million of annualized sales, bringing accretive sales growth rate and accretive margins to Integer. 2022, we grew 13%. That was roughly half-and-half organic, inorganic. 2023, we've grown 15%, rounded up maybe 16%. We believe looking forward, we can be a very consistent, high single-digit, low double-digit grower on the top line as you consider both organic and inorganic strategies that we have in place, that we believe we're demonstrating successfully that we can execute. That's what we expect to be able to do going forward. Thank you for your time. And maybe I'll turn it over to Zach to see what questions the audience has.

Yes. Please, if you have any questions, just raise your hand and there's a mic going around.

It seems like you have an acquisition target. So in terms of the criteria screening, the target on the page #10, which one would be like the most -- the best criteria that you use? You put it as the highest priority.

I think I missed part of it.

I mean, when you're screening the acquisition target, which criteria do you think is the most important when you're screening?

When you say category, you mean...

Yes, that's right.

Which of these criteria.

Yes.

Well, they have to have differentiated technology, differentiated capability. Without differentiated technology, differentiated capability, they're not going to be able to deliver innovation to customers and not going to be able to get designed in to the targeted growth markets. The targeted growth markets require a level of innovation and a level of differentiation. So without that, then that's a go/no go. That's a binary. We also need them to be focused and designed in to or have a pipeline in the faster-growing end markets. And maybe they could have maybe a lower mix of the faster-growing end markets but differentiated capability, and we could accelerate that transition, like we have with an Integer, to accelerate the transition to more development programs and more manufacturing sales into those faster-growing end markets. But it starts with differentiation and innovation capability. That's binary. We obviously want those faster-growing end markets on the pipeline because that's your growth pipeline. And I shared with you the cycle times. If it's 3 to 5 years on a 510(k) to get designed in, developed and get to manufacturing, it's a much longer payback if you're not already in those markets, and it's a much longer payback if you're not already in that development cycle. And so those both could become somewhat binary, but it starts with differentiation. If we have differentiated capability and they're designed in to the faster-growing end markets, maybe those programs haven't matured to the point where they're ramping the sales, but you can see that. You can see the pathway to it. Well, then that could still be a great acquisition. But it would be tough to buy a company with just great technology and then start that 3- to 5- or 5- to 9-year cycle, that would be very, very challenging to do to get an acceptable return.

I guess I have one question. You talked a lot about the targeted growth markets -- targeted growth end markets. Are there any, like, submarkets within those that you guys are kind of honing in on and really focusing for growth? And then part two would be, within those submarkets, do you see that it's more advantageous to go at that organically versus inorganically? Or is there no real difference?

Yes, great question. So I'll just point to the cardio and vascular. I mean pulse field ablation is an emerging technology that 3 or 4 years ago we were working on. But what recent clinical data says now this has the potential to be a much more significant share of ablation technology capability, so our growth teams are studying where our customers are investing. They're working with our customers to understand where they're investing, where they're innovating. And it really starts by where is their unmet patient need, which is where they start, where they can introduce the therapy, expand a TAM by bringing a new therapy to market that currently wasn't available. And so structural heart has significant opportunities there with tricuspid repair replacement, as an example. So we are studying with our customer where they're innovating and where they need help, and we're targeting getting in, designed in early in those faster-growing submarkets. We feel like we already have a strong position in electrophysiology. Our capabilities to vertically integrate and design and assemble a finished device and deliver that for our customers exist today. When you think about pulse field ablation, those capabilities really are the same capabilities. We're working on a number of different programs, and we feel that pulse field ablation can be a strong tailwind for us as that comes into the marketplace. If you think about neuromodulation and just stare at the different innovative therapies that are coming to market here, we have a process where we have 15 to 20 different customers that are in development stage, where they're working to prove efficacy on devices. And once they get through that phase, we'll then help them, take them through clinical trials, build the clinical units for them, support them through regulatory, to high-volume manufacturing. And we have expanded to be much, much more than just spinal cord stim. If you go 5 or 6 years ago, we were predominantly spinal cord stim in neuromod. And now spinal cord stim is only about half of our neuro business, and the majority of our bets are with non-SCS customers and therapy. So we're incredibly excited about those customers. We call them our emerging customers in premarket approval, PMA, and we've shared the historical revenue growth on those. And we have 9 -- I think it's 9 customers that are in manufacturing launch or ramp or launch phase. And we had shared that in 2020, we had, I think it was $20 million of sales with that group. In 2022, we had $50 million of sales with those 9 customers. And we have a forecast that we provided for 2024 that's $80 million to $100 million. The idea is just to show that as those customers get to their products to market, they begin to accelerate and ramp. And we're on a trajectory to deliver on that $80 million to $100 million. And so we have a lot of different submarkets that we're focused on, and that's what's guiding the programs we're getting designed in to. And I'll just reiterate the 230% growth in the number of programs or the dollars of revenue. It's a proxy for a number of programs. And 80% is in the faster-growing end markets with those very specific submarkets. Neurovascular is another one, especially with the acquisition of InNeuroCo, the capability they bring. We had a strong development pipeline. And the expertise with InNeuroCo is also a big enabler for us to capitalize on that strong pipeline.