Integer Holdings Corporation (ITGR) Earnings Call Transcript & Summary

Hello, and welcome to the Q2 2024 Integer Holdings Corporation Earnings Call. [Operator Instructions] I would now like to turn the conference over to Andrew Senn, Senior Vice President, Strategy, Business Development and Investor Relations. You may begin.

Good morning, everyone. Thank you for joining us, and welcome to Integer's Second Quarter 2024 Earnings Conference Call. With me today are Joe Dziedzic, President and Chief Executive Officer; and Diron 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 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 adjusted financial results for the second quarter of 2024, and provide an update on our full year 2024 outlook. Joe will come back to provide his closing remarks, and then we'll 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. Since our last earnings call, Truist and Oppenheimer have initiated coverage, which brings the total number of sell-side analysts to 9. We appreciate the research coverage from all of our analysts as it gives more investors exposure to our business and the great work that our associates are doing for our customers and the patients that we serve. In the second quarter, we delivered another strong quarter of year-over-year results. Sales grew 9%, and our adjusted operating income grew 20%, while expanding operating margins by 152 basis points compared to last year. In addition, our adjusted earnings per share grew 14% year-over-year. We are raising our full year profit outlook. Our manufacturing excellence initiatives are delivering operational improvements in direct labor turnover, direct material scrap production, lower overtime and direct labor efficiency. Combined with our strong first half OpEx leverage, we are confident in our ability to meet our increased full year profit outlook. At the midpoint of our outlook, we expect 18% adjusted operating income growth on 10% sales growth. We are confident in our ability to deliver strong sales growth given our high visibility to customer demand. including ramping programs in high-growth markets and additional guidewire capacity coming online in Ireland. It is an exciting time at Integer given our strong pipeline of development programs in faster-growing end markets expanding margins and continued execution of our tuck-in acquisition strategy. 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 call. I'll first provide more details on our second quarter 2024 financial results and then provide an update on our 2024 outlook. We continued our 2024 momentum with strong second quarter financial performance. Sales of $436 million delivered 9% year-over-year growth on a reported basis and 5% on an organic basis. which excludes the impact of our recent InNeuroCo and Pulse acquisitions, the strategic exit of the Portable Medical market and foreign currency fluctuations. We delivered $91 million of adjusted EBITDA, up $15 million compared to the prior year or an increase of 19%. Adjusted operating income grew 20% versus last year, more than 2x the rate of sales growth as we continue to make progress on our year-over-year margin expansion. Second quarter 2024 adjusted operating income as a percent of sales was 16.5%, which represents approximately 152 basis points of improvement versus a year ago. Adjusted net income for the second quarter of 2024 is $45 million, delivering $1.30 of adjusted earnings per share, up $0.16 or 14% from the second quarter of 2023. C&V and CRM&N product line sales, which represent approximately 91% of our total sales, continued strong year-over-year growth on a trailing 4-quarter basis in the second quarter of 2024. For Cardio & Vascular product line, trailing 4-quarter sales increased 17% year-over-year. C&V growth is driven by double-digit growth across all markets, new product ramps in electrophysiology and structural heart and the InNeuroCo and Pulse acquisitions. Cardiac Rhythm Management and Neuromodulations trailing 4-quarter sales increased 11% year-over-year, driven by high single-digit CRM growth and double-digit Neuromodulation growth from emerging PMA customers. Further product line details are included in the appendix of the presentation, which can be found on our website at integer.net. In the second quarter 2024, we delivered $7 million more adjusted net income than we did in the second quarter 2023. Strong sales and operational improvements which include improved manufacturing efficiencies and operating cost leverage delivered $10 million versus second quarter 2023, furthered by slightly favorable foreign exchange. This was partially offset by higher interest expense and a slightly higher adjusted effective tax rate totaling approximately $3 million. On a tax-effected basis, adjusted total interest expense was approximately $3 million higher than last year. This is primarily due to a higher average debt balance during the period, driven by the previously discussed acquisitions of InNeuroCo and Pulse Technologies using our available revolver capacity. Our adjusted effective tax rate was 20.7% for the second quarter of 2024 compared to 20.1% in the prior year. Our slightly higher adjusted effective tax rate compared to the prior year was primarily driven by the recent adoption of the OECD Pillar 2 framework by the EU member states, establishing a minimum effective tax rate of 15% as well as the residual effect of the Malaysian tax holiday expiration. In the second quarter of 2024, we generated $47 million in cash flow from operations. Year-over-year, we generated approximately $10 million more cash from operational execution, primarily from higher sales and improved margins. This was offset by the second quarter 2023 accounts receivable factoring of approximately $20 million that did not repeat. As previously mentioned, the factoring was executed to support our capacity investments in Ireland. And in total, second quarter 2024 cash flow from operations was $9 million lower than the prior year. In the second quarter of 2024, we continued our organic investments, investing $31 million in capital expenditures. Our CapEx investment is on track to our expected full year spend of $90 million to $110 million. In the first half 2024, we have invested approximately $60 million in CapEx and our CapEx profile for the year is expected to be lower in the second half as the higher expenditures for the Irish capacity investments are nearly complete. The resulting free cash flow in the second quarter was $16 million, which was primarily used to reduce net total debt, which improved by $15 million compared to the first quarter of 2024. As a result, our net total debt leverage at the end of the second quarter was 3.2x trailing fourth quarter adjusted EBITDA, which is within our strategic target range of 2.5x to 3.5x. As Joe mentioned earlier, we are reiterating our 2024 sales outlook and raising our 2024 profit outlook. With strong first half margin performance from execution on our manufacturing initiatives, we have increased confidence in raising the adjusted operating income range by $3 million. Starting with sales, we continue to expect to deliver sales in the range of $1.735 billion to $1.770 billion, an increase of 9% to 11% versus last year, with organic growth of 6% to 8%, which is 200 basis points above our underlying market growth rate estimate of 4% to 6%. In addition to our organic growth, we expect the InNeuroCo and Pulse acquisitions, partially offset by the Portable Medical market exit to contribute 3% in organic growth. We are raising our outlook on adjusted EBITDA by $2 million, which now reflects 15% to 22% growth year-over-year with a range of $357 million to $377 million. up from our previous guidance of 15% to 21% growth. We are raising our adjusted operating income outlook by $3 million and expect 2024 adjusted operating income to be between $275 million and $293 million, reflecting year-over-year growth of 14% to 21%. At $284 million, which is the midpoint, adjusted operating income as a percent of sales is expected to grow 108 basis points compared to the full year 2023. Adjusted net income is expected to be between $174 million and $189 million reflecting a year-over-year growth of 11% to 20%, up from our previous guidance of 8% to 18%. This delivers an expected adjusted EPS outlook between $5.07 and $5.49, which is growth of 9% to 18% year-over-year. Our adjusted EPS outlook assumes adjusted weighted average shares outstanding of 34.4 million shares taking into account an estimated dilutive effect of the convertible notes. This dilution is offset by an improvement in adjusted effective tax rate, which is projected to be between 18% and 20%, down from our initial outlook of 19% to 21%. We expect sales in the second half of 2024 to be higher than the first half of 2024 from new product ramps, increased guidewire capacity as a result of our Ireland expansion and emerging PMA customer growth. We expect third quarter sales to be slightly higher than the second quarter, with a further increase in the fourth quarter of 2024. Moving to our 2024 cash outlook. We expect cash flow from operations between $185 million to $205 million, which represents an 8% year-over-year increase at midpoint of outlook. Our outlook for capital expenditures remains at $90 million to $110 million as we continue to invest in organic capabilities and capacity. As a result, we expect to generate free cash flow between $85 million and $105 million. We expect our 2024 year-end net total debt to be between $1.010 billion and $1.030 billion, which is up $60 million to $80 million year-over-year. We expect to end the year with our leverage ratio within our target range of 2.5 and 3.5x trailing 4-quarter adjusted EBITDA. And with that, I'll turn the call back to Joe. Thank you.

Thanks, Diron. We believe we are delivering a very strong 2024 outlook after a strong 2023. Over these 2-years combined, we expect to grow sales 27% and grow adjusted operating income 48% at the midpoint of outlook. We are successfully executing our growth strategy both organically and inorganically to meet our strategic financial objectives for sales growth, margin expansion and debt leverage. We are confident this sustained level of performance will produce a premium valuation for our shareholders. We will now turn the call over to our moderator for the Q&A portion of the call.

[Operator Instructions] Your first question comes from the line of Brett Fishbin with KeyBanc Capital Markets.

I just wanted to start off on one of the moving cases here in Cardio & Vascular segment. We can definitely appreciate that there were, again, very challenging comparisons, but just given the sequential decline in organic growth in that segment, I was curious if you could provide a little bit more detail around any moving pieces impacting the quarter? And then just looking ahead, if you think investors should expect some type of recovery there into 2H.

Brett, thanks for the question. So I'll start with if you look at the Cardio & Vascular product line sales on a rolling quarter basis, trailing 4-quarter basis were -- starting last year was up 17%, and reported in the quarter was up 11%. You noted the organic growth of 4%. I'll call out the first quarter for Cardio & Vascular organic growth was 9%. And for the full year, we're expecting high single-digit organic growth for C&V. So when you look at the pieces, we think about the business on a rolling 4-quarter basis. I wish [ life ] were linear, and I wish our customers manufacturing plans were perfectly linear, but they're not. And so we think the rolling 4-quarter basis is the best way to look at it. And if you look at our past 4 quarters, our electrophysiology business, although we don't report the specific number, it's growing at 1.5x the market growth rate. If you look at our structural heart sales, those are also growing very strongly, almost twice the market growth rate, recognizing that structural heart is a slightly a lower piece of our overall business. And I think we've also been clear that we're under-indexed to TAVR, and we're really more focused in -- our growth is in mitral and tricuspid, and our guidewire business there has remained very strong. So when we look at cardiovascular on a rolling 4-quarter basis, historically, we continue to see very strong growth when we look at for the full year, we expect to see high single-digit organic growth and on a reported basis, we expect that to be in the low double digit, call it, low-teens to mid-teens, which is the guidance we provided on the product line slides for cardiovascular at Slide 27.

All right. A quick follow-up. On the positive side, we're really impressed by some of the operating margin progression this quarter and guidance for the full year now implies op income growth at a multiple closer to 1.8x compared to 1.7x exiting last quarter. But just looking at the range, it's still fairly wide. So just at this point in the year, I was curious what you think of as the biggest swing factors driving multiple -- or sorry, margin expansion to the low end versus the high end of the range?

Sure. We -- well, I'll start with we still have a very strong order book or backlog, it's still close to $900 million. That gives us tremendous visibility. We look at our first half sales. We guided 9% to 11% for the year. We're at 9.3% growth in the first half. We're doing exactly what we said we would do from a sales growth rate perspective. Margins were a little better in the second quarter. So we've upgraded -- updated the full year outlook to be slightly higher. We didn't update the range. We're halfway through the year. Strong visibility to the top line. We have confidence in our ability to continue to expand margins. So we felt like updating the profit guidance was the right thing to do at this point. variability when we think about the things that have caused that in the past, it's been supply chain disruptions. We feel like we're -- we're beyond -- we have a very stable supply chain environment at the moment, which is great. Our direct labor turnover continues to improve and our focus on our manufacturing excellence initiatives and our operational improvements continue to gain traction, which is what gave us the confidence to increase the profit outlook.

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

I wanted to ask -- maybe drill down a little bit deeper on the Cardio & Vascular segment. It came in below Street expectations, but I wanted to know if it was below your expectations. And if it was, kind of what areas were below. And then when you talk about the acceleration that you're expecting in the second half of that business to get to that high single-digit number growth number, maybe just talk about your visibility into your second half revenue for that segment specifically?

Sure. I'll start with Cardio & Vascular and for that matter, Cardiac Rhythm Management and the rest of the business was in line with our expectations in the first quarter, second quarter. And our visibility given the order book we have to the second half gives us great confidence in our ability to deliver on our guidance. So I appreciate, there might have been some exuberance and excitement around a particular segment, Electrophysiology within Cardio & Vascular after first quarter results and the dialogue around some of the emerging products there, but -- like I said, we look at a rolling 4-quarter basis. We look at what customers' demand is. I wish it were perfectly linear and customers ran their manufacturing plants in a linear fashion, they don't, recognizing most of what we build, we ship to our customers' manufacturing sites. So it's dependent upon what they're building that determines our sales in the short term, recognizing we're mostly sole sourced. So most of what we do, we're going to get whatever the market demand is over time, which is why we think the rolling 4-quarter view is the most representative. So we were not surprised by the second quarter geography of the sales. We're very much in line with the year. Again, I -- I'll [ put you ] to Slide 26 in our presentation, which lays out Medical sales and Non-Medical sales. So when you look at our organic growth rate, our Medical sales are up 7% organically for the year -- I'm sorry, for the first half on an actual basis, that's very much in line with our full year guidance and full year expectation for organic growth in Medical. And C&V and CRM&N are very much in line with our expectations. So as we look at second half, we've talked a lot about the investments we made in our New Ross Ireland facility. We now have possession of that expansion. So we're now building more guidewires because we have more capacity. We expect that to fuel additional growth in the second half of the year. We have a number of electrophysiology and structural heart programs that are in production and are ramping I'll contrast that with something with a scenario where you might expect something to start to go into production. These are programs and products that are already in production and now the volume is ramping based upon customer demand and the ramp plans. And so when we look at the second half of the year, we're confident in our ability to step up the growth in the third quarter. So our guidance is, sales slightly higher in the third quarter compared to second with continued nominal increase from third to fourth quarter and very much within the range of the 9% to 11% growth for the full year. That would put us right in the middle of our 6% to 8% organic growth for the year. So second quarter is as expected for us on the top line a little better on the bottom line, which is why we increased the operating profit guidance.

Got it. Very thorough answer. And I know we've talked a lot about PFA, and you guys have talked about it as a tailwind. So I wanted to ask a specific question here. So a number of the players in that space, they're talking about in-sourcing manufacturing. And I know that, that doesn't necessarily mean that you're not going to be making product for those players. But I guess I wanted to gauge your level of concern or visibility as these companies are talking about in-sourcing their PFA manufacturing, what's the potential that, that disrupts the tailwind that you guys have talked about from PFA and moving forward.

So I'll start with we've shared -- we've shared over time the cycle times in our industry. We've shared how long the development processes are in the -- with the devices that we support our customers on -- and so when we're talking about sales in the near term in the next year or 2 or 3, it's because those programs have been in development for that long, and they're actually in manufacturing and/or ramping in manufacturing. And so the conversation here is, we have very long lead times and visibility to what we're going to manufacture for our customers on the most important products that they make. And I'll point to -- we've continued to grow our product development pipeline. We continue to have very strong visibility to that pipeline and the time lines on it. And then the order book gives us incredible visibility to what our customers' demand is because especially with programs, products that are introducing into the marketplace and ramping customers give us very strong visibility to that because looking for us to support their ramp plans. So we have very strong visibility to new product introduction. So we -- I'll close with multiyear visibility on product development programs and new products. And so we know and understand what components of these devices our customers are insourcing versus outsourcing, and we factor that into our guidance.

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

Joe, sorry to push it a little bit on the PFA side, but do you have direct exposure to the growth of that category as we think about it over the next several years, it should be dramatic?

I don't know that I would characterize dramatic because I'm reflecting on total Integer and our commentary that no one part of our business or one program is going to materially meaningfully drive the company. I will say, yes, PFA, we have strong visibility to the pipeline, multi-generation product development plans, and we know which ones we're on and which ones we're working to get on, so we do have very strong visibility, and we absolutely expect PFA as a therapy to be at tailwind. And I'll come back to what I think we've talked about a handful of times. It's not only the ablation and the therapy itself, but it's also the access and the diagnostics and the guiding [ sees ] the transseptal crossing needles. It's the full procedure that we're able to participate in, in the industry. And so as electrophysiology procedures grow, we're able to participate in all elements of that. And PFA, if it accelerates the overall number of procedures, we'll benefit from that. Generally speaking, with PFA, we have a higher content on those devices than some of the other ones. And so we benefit from that. So I would absolutely expect it to be an important meaningful part of Integer's continued organic growth and being able to grow above the markets that we serve on an organic basis.

Got it. Very helpful. Appreciate that. And then on Cardio & Vascular, just in aggregate, the back half ramp, the comps are tougher in the back half of this year. And I know you said, this visibility into the back half of the terms what you've got. But can you talk a little bit about -- I think what's tripped up everybody today is Q2 is a little softer on a 2-year stack basis, and that's to pop back up in the back half. So -- so I don't know if it's Ireland or other things you could point to specifically to give people comfort that, hey, getting to the back half performance is attainable versus what I think is a little bit of skepticism just based on the Q2 2-year stack performance.

Well, let me start with -- we said we'd be high single-digit growth for the first half and we're at 9.3% for the first half, reported basis. So how you break that down between organic, inorganic, we've got very strong visibility to customer demand. We have almost a $900 million order book. And so when we look at the business, I think we've been reasonably good at predicting the level of sales. We know -- we understand the pieces of those sales because we have specific orders from customers. We know the reasons that second half steps up a little bit. We tried to be clear that we expect third quarter sales to be a little higher nominally than second quarter, then we expect fourth quarter to be even higher. A meaningful part of that is the Irish facility that is now online in our possession. We're building more guidewires. We've talked for the last 2.5 years, the strong demand in our guidewire business. And so that's a part of it. But we also have programs in electrophysiology, structural heart in particular, also in our emerging PMA customers, mostly neuromodulation. There are programs that are in production and ramping. So it's not going to go into production. These programs are in production and they're ramping and they step up based on customer demand in the second half, and that's what gives us confidence and our ability to hit the second half sales numbers as well as the profitability, which we did increase this quarter.

Your next question comes from the line of Richard Newitter with Truist.

Maybe just to start a little higher level. Has anything changed at your OEM customers with respect to their end market demand curves or what their kind of intermediate to longer-term ordering patterns look like, any downward revisions or upwards from their outlook that kind of flows down to you? Would love to hear any color there. And then I have a follow-up.

We have not seen any material meaningful change in customer expectation when you look out, I'll frame it into '25 and beyond, given your question about longer term. I mean sitting here with almost $900 million of order book, we were expecting that order book to start to come down because there are some components or some elements of that higher order book that are connected to the exit of our Portable Medical business, due to the strong demand in guidewires that we ask customers to place orders much further in advance given the capacity coming on. We still expect the order book to come down. I would have expected the order book to come down a little sooner than it has. And I think that points to the continued strength in the market, continued high expectations of our customers for growth. They continue to place orders out further into the future, and it gives us tremendous visibility. So I think our customers remain very, very optimistic about their most exciting programs that they're bringing to the marketplace. And the overall market growth rates continue to show optimism. And I look to our order book and I look at the order patterns, very much in line with what we expected entering the year and they've continued. If anything, the order book might be a little higher than what I would have expected at this point in the year given some of the things that we knew were going to come down in the order book.

Okay. And then just making sure it sounds like everything is trending the way you expected at least internally. And that's the reason you're reiterating your full year organic outlook, a little -- maybe a little more second half weighted or acceleration weighted relative to the Street. So I'm just curious, within that second half kind of outlook, just reached that $448 million roughly for 3Q on revenue and about $458 million on 4Q. I guess is that the right pacing of cadence just to make sure we're a little more appropriately calibrated with your internal expectations?

So our view is third quarter sales nominally is a little bit higher than second quarter. And then fourth quarter is higher than third quarter. So we see that kind of continued trajectory. If you look at last year 2023, there was a step-up between second and third quarter of $5 million of sales. And then in between third and fourth quarter, I'm talking 2023, an $8 million step-up. So it continued to grow as the year progressed, and that's what we would expect to happen in 2024 as well. And to your comment about organic growth, I guess I would ask -- I would ask folks to kind of stare at Slide 26 in our presentation, which shows Medical Non-medical. The Non-Medical business, it's only 2% of our total sales. But in the first half, the Non-Medical was down 36%. So even though it's only 2%, it does create -- creates a little bit of a drag on the organic growth and that normalizes in the second half of the year. So you won't see Non-Medical being down as much in the second half year-over-year, which allows the total into your organic growth rate to lift. But if you look at Medical, Medical was 7% organic growth in the first half, and that's what we expect for the full year. So Medical continues to perform at that 7-ish percent organic growth and then the Non-Medical has less of an impact in the second half. And I think that's an important thing to point to focus on when you're looking at the organic growth quarter-by-quarter and then half by half.