Q3 2019 Earnings Call
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Not like it and the conference over your Speaker today, 20 bar with senior Vice President strategy corporate development and Investor Relations. Thank you. Please go ahead.
The call is being webcast live in the replay along with a copy of the press release and earnings presentation will be available on the Investor Relations section of our website.
Result, never discussed today reflect the consolidated results of manager for the period syndicated.
As a reminder, today's presentation includes forward looking statements.
Joining me on the call. It just got the reported results because he's the president and Chief Executive Officer, adjacent Garland Executive Vice President and Chief Financial Officer on today's call Joe will provide his opening comments.
Jason will then review our financial results.
For the quarter and then provide updated full year 2019 guidance.
Don't come back out for his closing remarks, and then we'll open it up your question.
Please turn to Colorado.
Thank you Tony and good morning, everyone.
I'm pleased to report the integer delivered another strong quarter earnings and cash as we execute our strategy to win in the markets, we serve and achieve excellence and everything we do.
We delivered 4% gross and adjusted EBITDA and 14% growth and adjusted net income on flat sales, we paid down $36 million of debt and we expect our debt leverage to be below three times by the end of the year.
Our third quarter results give us the confidence so once again increased our full year profit guidance.
We've increased the midpoint of our full year adjusted EBITDA guidance by $3 million and the midpoint of our adjusted earnings per share guidance is now 25 cents higher.
The midpoint of our new EPS guidance is 45 cents higher than our original guidance at the beginning of the year.
We are executing our strategy and it is delivering strong results.
Our full year sales are still within our original 2019 guidance. Despite the end of life over Electrophysiologist program. The recent decline in the Neuromodulation marketplace and the change in our fiscal year end.
Our full year guidance remains unchanged at 4% to 5.5% growth, which is within the growth rate of the market.
On a year to date adjusted basis, our sales are up 2% EBITDA is up 10% and earnings per share is up 24%.
Which is a 150 basis points increase versus last year.
This margin expansion is a direct result of the more than 8000 associates executing our manufacturing excellence strategy and managing SGN day.
I've talked on prior calls about how we launched our manufacturing excellence strategy in July of last year and that we have been implementing it across all of our manufacturing sites and a very structured and rigorous manner I talked about how the benefits of this strategy will build and even accelerate overtime and ultimately.
Reflected in profit growing at least twice the rate of revenue growth, which is evident both on a year to date basis as well as in our full year guidance.
Mosys activities that are improving the safety of our operations for our associates that are increasing the quality of our products for our customers and patients and that are improving the on time delivery of the products to our customers. So they can support the physicians and surgeons performed the medical procedures.
I spent time with the teams to recognize the tremendous progress there, making and to understand where they need additional help to continue our journey to differentiation in our customers eyes.
I came away from each site visit energized by the passion and commitment of our associates and how they're executing our manufacturing excellence strategy to better serve our customers and thereby improving patients lives.
Our strategy will enable our customer success, thereby ensuring our continued success.
I'm confident that the progress we have made in executing our manufacturing imperative will allow us to sustain our goal of growing profit at twice the rate of sales.
I'll turn the call over to Jason out to discuss our financial results in more detail.
I'll provide more details on our sales result, during our product line reviews.
Adjusted EBITDA increased 4% on a reported basis and 1% organically.
We delivered $40 million of adjusted net income or $1.20 cents of adjusted earnings per diluted share up 14 cents or 13% on a year over year reported basis.
And provide some additional detail on our adjusted net income growth, let's turn to slide nine.
Our third quarter adjusted net income increased $5 million year over year up 14% on a reported basis on flat sales.
This growth was generated by operational improvements in productivity driven by traction in our manufacturing excellence strategic imperative and strong operating expense management, both continuing to offset price and inflation headwinds.
Foreign exchange was favorable due to a currency headwind last year that did not repeat.
Year to date, our adjusted effective tax rate is 17.6% and we have lowered our full year guidance to a range of 17.0% to 18.5% from the previous guidance is 17.5% to 19.5 years.
As a reminder, slide 11 reflects trailing four quarter organic sales.
We believe this is a more meaningful indicator of our growth trend in how we're performing in the market versus any individual quarter that may contain anomalies is often the timing of customer purchasing decision.
Our trailing four quarter sales growth slowed in the third quarter, but is expected to turn upward in the fourth quarter, two and outlook of 4% to 5.5% growth.
As you can see in the product line trends. This increase will be driven by significant increase in the fourth quarter and Neuromodulation and growth in CRM product line combined with strength in our advanced surgical orthopedic and portable medical and Electrochem product line.
Cardio and vascular will level off in the fourth quarter on the next I will take a deeper look in cardiovascular.
Cardio and vascular organic sales were down 1% in the third quarter. This strong growth we continue to see in peripheral vascular and structural heart was offset by the largest quarter of decline to date and end of life Electrophysiology program.
We expect low to mid single digit growth for the fourth quarter as the impact of this end of life program lesson and we see strength in structural heart and peripheral vascular.
We expect extremely strong neuromodulation sales in the fourth quarter due to the total year commitments required in our supply agreement.
And we expect strong CRM sales in the fourth quarter due to a favorable year over year comparison.
We estimate that our Neuromodulation sales in 2019 will benefit approximately 10 million dollar from from the supply agreements and therefore, we will not see the full impact of the neuro market slowdown.
This means we could potentially have $10 million lower neuromodulation sales in 2020, thereby creating a 20 million dollar year over year headwinds.
Slide 14 shows the last part of our medical segment, you will recall in July 2018, buying acquired our ads and no product line advanced surgical orthopedics and portable medical medical product line shown today includes sales under supply agreements with volume in the third.
Third quarter advanced surgical orthopedic and portable medical returned to growth up 5% organically versus the third quarter prior year, driven by an increase in advanced surgical based products and new product launches in portable medical.
As expected Electrochem sales grew a strong 14% in third quarter, driven by energy market demand and increased customer market penetration.
We expect strong growth to continue in the fourth quarter from increased military and environmental demand despite a softening energy market.
Slide 17 look at the for Q2 thousand 19 outlook with one quarter last in the year. We have included this additional supply.
The fourth quarter outlook that aligns with our total year guidance.
As discussed we expect this strong finish in our fourth quarter sales growing 10%, 15%.
Adjusted EBITDA is expected to grow 6% for 12% with volume offset by a projected increase in SGN expenses as we continue to selectively add new leadership in resources to execute our strategic imperative.
Adjusted EPS growth follows a 9% to 18%, but that and lift from interest expense and tax favorability.
Turning to the full full year 2019 outlook and following the strong expected fourth quarter, we just outline our forecasted sales growth.
Up 4% to 5.5% for the full year, it's unchanged, though as highlighted we expect to be on the low end of that range.
Action on our manufacturing excellence strategic imperative and strong operating expense management gives us confidence to again increase our adjusted EBITDA guidance to a range of $282 million to $286 million, which increases our low end by $5 million and our high end by 1 million.
At 9% to 10% growth over last year, we will achieve EBITDA growth at approximately two times, our sales growth consistent with our strategic objectives.
Turning to slide 19, our third quarter cash flow was strong in line with our exit expectations as we delivered $44 million in cash flow from operations, bringing the year to date total to $112 million.
We remain on track and our full year cash flow outlook is unchanged, we expect to generate 160 to 170 million of cash flow from operations and a 110 to 120 million of free cash flow.
Capital expenditures are still expected to be in the range of $50 million to $55 million in cash tax payments are now expected to be lower by approximately $5 million.
And with this debt payment outlook, we remain solidly within our debt leverage targeted range of 2.5 to 3.5 times adjusted EBITDA with dry powder to continue our bolt on acquisition strategy to add critical capabilities in our portfolio.
I'll now turn the call back to Joe for his final comments. Thanks, Jason.
This slide summarizes our strategy to win in the markets, we serve and achieve excellence and everything we do.
We develop this strategy during the second half of 2017, we built out the multiyear plans during the first half of 2018 and formally launched this strategy in September of 2018.
So we're just now entering the second year of executing our operational strategy.
We have been making the necessary investments in both human and financial capital to ensure the successful execution of our strategy I told you back in May about the two new business Presidents, Joe Becker, and Carter Hotan as well as the internal promotion of Gen bolt do leadership role of our global operations.
During the third quarter, we made additional investments by adding more lean manufacturing and business process experts to further accelerate our plans.
We've strengthened our manufacturing leadership with several leaders, who bring deep expertise experience and expertise in lean manufacturing strong automation and robotics backgrounds and medical device manufacturing experience. In addition to the two new leaders, we continue to make the necessary investments.
And our operations to develop and expand both capability and capacity to support our product lines strategies.
We anticipate investing approximately $50 million in Capex this year to support the innovation and growth in our strategy.
Additionally, I'm happy to say that we have hired Elizabeth Giddens, as our general counsel and cheap ethics and compliance officer.
Her expertise in the areas of securities law, mergers and acquisitions and corporate governance bring the skills, we need to accelerate our strategy.
The integer executive leadership team is now complete.
Our full year guidance is to grow sales, 4% to 5.5%.
The sales guidance is about in the middle of our original guidance.
And the adjusted EBITDA and adjusted earnings per share are both above the original guidance.
We expect our debt leverage to be slightly below three times adjusted EBITDA by yearend.
From the first time, we introduced the financial objectives of our strategy to grow sales 200 basis points above the market and grow profit at twice the rate of sales.
Said, we could achieve the profit growth faster than the sales growth.
This is a function of the time to win and transfer new business and the regulatory environment in which we operate.
Regarding profit growth, we are now growing at twice the rate of sales and believe that is sustainable.
The acquisition of us by on design assets, which we closed earlier. This month is one example of adding capability to our product portfolio.
We can now offer our customers complex rating capability for high growth cardiovascular markets.
This is a bolt on acquisition that immediately becomes a technology center of excellence for us and we expect to deliver revenue synergies when combined with our existing technology and customer relationships.
We continue to work a robust pipeline of bolt on opportunities that would bring additional capabilities for high growth into markets.
One of the areas. We continue invest heavily in is our customer relationships and sales team.
We're building on our long history together to make integer their most strategic outsource partner.
I believe we're making significant progress and developing deeper relationships that can lead to integer participating in their growth and a much more meaningful way as a strategic partner.
In addition to investing time and deepening our customer relationships, we are expanding our reach by adding sales leaders outside the us.
We have a new cardiac rhythm management, and Neuromodulation sales leader and have been adding new sales members to both the cardiac rhythm management in neuro modulation and the cardiovascular teams.
I know I speak from 8000 plus of my integer colleagues when I say I'm excited to serve our customers because it is through our customers that we approved patients' lives.
In summary, I am confident we have the leadership team in place and with the entire organization aligned on executing our long term strategy, we are well positioned to deliver on our financial objectives and earn evaluation premium for our shareholders.
I'll now turn the call back to the moderator Rob to facilitate the today.
Thank you as a reminder to ask a question you will need to press star one on your telephone.
Withdraw your question press, the pound or cash.
Please standby, while we compile documenting roster.
Your first question comes from Atlanta met Michelin from Keybanc. Your line is open.
Great. Thanks for taking the questions.
Good morning.
Morning.
Get there's inherent volatility in your business.
But you're also the largest CDMO.
Your customers are booming and I feel like you in the new management team has made significant positive changes to your business into your relationships with your customers.
I mean.
I guess the question is are you seeing enough tailwinds to your business and the changes you made to kind of push through a potential headwind next year from neuromodulation and still deliver that mid single digit market growth.
Matt Matt has a great great question. So we are absolutely, making tremendous strides with our customers to ensure that that we are there first choice for for outsourcing their their medical device manufacturing needs and I believe where we're beginning to get into the pipeline over those deals and those.
Products that take longer to get designed into go through clinicals or qualification and then position us to accelerate above the market.
Right now where we see ourselves is we've achieved the goal of growing profit at twice the rate of revenue. There is still more work to be done to get sales to grow above the market, which you said all along we will take longer and the reality is with the Neuromodulation market as best we can tell the spinal cord stem piece, so that market has.
Declined mid single digit in the first half of this year. We're just looking at what the industry players are reporting and we have not felt the impact of that this year because of our supply agreement. So we're still growing high single digit low double digit in our Neuromod business, we think thats about a 10 million dollar.
$10 million a revenue this over and above that market growth rate and we do see that as something that is a potential headwind next year. As we look into 2020 were kind of assuming a flat neuro market kind of the end markets. If the market growth rate is faster that would obviously helped us offset some of that $10 million.
In the absence of that we do see about a $20 million year over year head headwind.
The rest of the business is still growing at about the market rate and until we can see a pipeline of deals and products that we believe are going to push us to be above the market rate. That's the market rate that are that's the growth rate that we'll have so we look at the neuro decline as a market reality, so the market rate in fact.
Act has declined this year and the benefit for US is we won't feel that impact until next year, which may be to your point gives us time to work to do address that but we're not immune to the markets that we serve and we do see the neuro market decline this year after growing in the strong double digit range.
Okay and.
And then you also talked a big news here about sort of the breadth of your neuromodulation customers.
Hey, which included a lot a lot of.
I don't want to come early stage companies, but a lot of early commercialization type stage customers have had those progressed as you expected this year as they expected or or is there also been some modest slowdown or moderation in their expectations.
We see great Great question, Matt we have not seen any change whatsoever in that segment of the market. We've seen most of the decline in the spinal cord stem.
The company's we're working with that or early stage, all the way through through their clinicals and working on commercialization plans. We continue to be extremely excited about about the growth prospects and we're making the necessary investments in capacity to ensure we can support their growth and we're working with a number of those customers.
That that we feel have the potential to drive meaningful growth in the market and for us and we will incorporate that in our future guidance as those plans from up.
Okay, and then on the more on the margin side first off the product. That's rolling off was that it was that I was at a margin accretive or dilutive product for you and then as you move as you move forward into into 2000, 2021, how durable or some of these improvements you're seeing.
You are kind of moving forward.
So the given the size of the ERP program, it's not a meaningful impact on on the margin rate. It's not it's not meaningfully different from the total enough to have to have an impact in and it's also not meaningful enough dollars on the on the 300 million dollar quarterly EUR 1 billion three full year revenue Dabaa mix impact. So it is.
Not really impacting the rate much.
With respect to your question about the durability of our margin expansion, we feel it's very durable we feel that we sit here today, we were in the six the quarter of our manufacturing excellence.
His strategic imperative, we launched in July of 2018, So we've got five quarters under our belt, where in the six quarter, we feel thats going to continue to be durable it'll continue to build and is going to enable us to continue to expand margins and we expect to be able to grow profit at twice the rate of revenue.
Going forward. So we feel as though we have achieved that critical element the financial element of our strategy in terms of the increased profitability and cash flow that allows us to reinvest more aggressively in the business. So we see ourselves growing at twice the rate of revenue for profit going forward.
Okay.
I have two more and I apologize to the people who are behind me, but I'm going ask anyways.
First off.
How interested are you in another leg of the stool.
And then specifically asking strategic question around potentially building out a diabetes platform. It would seem to align very well with your customers and as an area growth and devices.
Great Great question again, Matt what I can say about our strategy at the moment is we launched our strategy in September of last year, we're very focused on executing this strategy and ensuring that we get revenue to be growing faster than the market by at least 200 basis points and what we do that we cry.
The capacity to make bigger investments and to branch outside potentially of our existing markets that we serve but to your point, we do think about and explore.
And contemplate what are some other adjacent products in the medical device industry, where we think we could bring a point of differentiation, but but I can tell you for the near term. We're very focused on executing this strategy and demonstrating that we are growing 200 basis points are more above the market growing profit at twice that rate and then that earn.
Thus the right to place bets and other areas.
Okay got it and lastly on.
When you're in your revenue that's exposed to the energy patch Annalect electrochem.
It seems like some of your customers are our and seems like.
Some of some of the producers are actually kind of manufacturing very are producing oil very productively.
And not necessarily investing a ton in capex here, how confident are you that the non medical piece.
Can't sustain at current level and not and not have a drop off in in 2020.
Yes, one of the interesting developments in the energy market is our customers they seem to have become much more responsive to changes in market demand.
The recent disruption in Saudi Arabia, and supply was almost immediately met with additional supplied from other other parts of the world and so there really wasn't the sustained price increase in oil and it seems as though our customers in that space and adjusted their investment profile there they're investing.
Its strategy due to react very quickly much more quickly than they have in prior cycles. So we expect there to be a much less pronounced.
Both decline or growth during the future energy cycles, and as we look at the market, we see it softening a little bit but we're also confident given some of the new products that we're introducing in that space and some opportunities that we have that will still be able to grow above that market, but we're not seeing looking forward the sale.
Same magnitude of of Spike in decline because the customer seem to be reacting much more responsively to slight changes in this in that sector.
Excellent thanks for bearing with me through all the questions.
Thank you Matt.
Your next question comes from line of Jim Sidoti from Sidoti and company. Your line is open.
Hi, Good morning can you hear me.
Yes, Jim good morning.
Great great.
Apologize in advance and trying to listen to call the ones, who will never goes well, but.
From a from what you guys reported that you're basically on track with a lot of the.
Initiatives that you put in place over the past couple of you're the one question I had two question have you would.
Revenue guide into the year implies double digit growth in the fourth quarter, what what picks up there so much.
You know the if you look at the fourth quarter.
Number one we've got we still have a couple of extra days versus last year.
Despite the fiscal year change that we made that the lift for the we've talked about the end of life Electrophysiology program that that drag lessons in the fourth quarter.
We've also highlighted the significant growth that will see from neuro.
CRM is Scott a low comp from last year, and then and then we also highlighted just the strength. We see also in answer to know and the Electrochem product lines. We really just had a lot of things going in the right direction to the great News Jim is that the plants are in factories are geared up to execute the backlog we've got so.
So we're looking for a strong sales quarter for Fourq you.
Okay, Yes that was lower as we said, let's move let a lot of progress on the margins.
Made an acquisition in the quarter, you take a little bit of a step back as you integrate that are equal to keep going.
Look the same momentum that you.
Core.
So Jim we expect to keep going it's it's a small bolt on acquisition. It really brings defect expertise for us in complex breeding night, and all each setting testing electro polishing and some other capabilities, but it's really about adding capability. It's today, a small operation with de Minimis sales, but they are in the pipe.
Wind for for a number of products with our customers that are really exciting for us and for for US bile design. So we don't expect any any impact whatsoever on our ability to continue executing on our manufacturing excellence to drive the margin expansion and keep the momentum that we have going.
Right. Thank you.
Thanks, Jim Thanks, and again that star one if you would like to ask a question.
And we have no further questions I'll turn the call back to Tony Bar, which for closing remarks.
Thank you, Rob and thanks, everyone for joining us on today's call and your continued interest in injure. Please note that this conference call will be available for replay of the website and into web site.
Thanks, again that concludes the call happy Halloween and be that.
Ladies and gentlemen, thank you for your participation. This concludes today's conference call you may now disconnect.
Okay.