Q4 2019 Earnings Call
Time, all participants are in a listen only mode.
After the speakers presentation, there will be a question and answer session.
To ask a question during this session you need to press star one on your telephone if you require any further assistance. Please press star zero I would now like to hand to hand, the conference over to your speaker today Mr. Tony Borowicz. Thank you. Please go ahead Sir.
Great. Thank you Casey and good morning, everyone and thank you for joining us and welcome Janitors fourth quarter and full year 2019 earnings conference call. This.
This 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 corporate website.
Results and David we discuss today reflect the consolidated results in a journey for their pureed syndicated.
During our call we will discuss some non-GAAP measures reconciliation of these non-GAAP measures. Please see the appendix of today's presentation and the notes to the financial statements in today's earnings release.
As a reminder, today's presentation includes forward looking statements. Please refer to the company's FCC filings for a discussion of the risk factors that could cause results to differ materially.
Joining me on the call to discuss our fourth quarter and full year, resulting from DC, President and Chief Executive Officer, and Jason Garland Executive Vice President and Chief Financial Officer.
On today's call Joe will provide open condiments and an update on any of your strategy well he will discuss how we've been delivering on our commitments for the past three years.
Thanks, Jason will review, our financial results and sales results for the quarter. After the year and then provide updated full year 2020 guidance.
Joe will then provide his closing remarks, where he will focus on investments, we've been making to support and driver.
Well then open up the call for your questions.
I'll turn it over to Joe.
Thanks, Tony Thank you everyone.
Joining our call today I'm pleased to report that we have strong finish to 2019 and close the four year with strong profit leverage as demonstrated by 9% EBITDAR growth and 23% adjusted earnings per share growth.
Our fourth quarter delivered a strong 7% sales growth and 20% adjusted earnings per share growth.
We continued our debt de leveraging by paying down 117 million in debt, which yielded a leverage ratio of 2.9 times adjusted EBITDA ending the year slightly below the midpoint of our targeted range up to and a half to three and a half.
Despite a few sales headwinds we still achieved the low end of our original sales growth guidance and we exceeded the original guidance for adjusted EBITDA adjusted earnings per share and debt reduction overall, we're pleased but not satisfied with the progress we made in 2019 and executing our strategy.
And delivering for our customers and investors.
Since we formally launched our strategy back in 2017 September Justice 18.
And our senior leadership team meeting with the theme of aspire to actually lunch I think it is a good time to take a moment and reflect on the progress we've made.
Our current strategy and journey began in 2017, as we were coming out of a period of disruption and focusing on stabilizing the business. After two years of declining sales and profits.
We started by establishing clear financial objectives that we believe will earn a valuation premium for integer shareholders.
These three objectives represent the financial measures of success for our strategy.
Gross sales 200 basis points faster than the markets. We serve deliver profit growth twice the rate of sales growth and achieved debt leverage of two and a half to 3.5 times adjusted EBITDA.
Given the starting point in 2015 in 2016, we had some work to do.
During the second half of 2017, we developed our portfolio strategy for our product lines and initiated the work on developing how we would win in the markets we serve.
Then we turn to developing our operational strategy for how we would achieve excellence in everything we do centered around the three categories of customers cost and culture.
We knew we needed to earn our customers business every day generate the fuel to invest for growth and define and build a high performing culture based on respect and trust.
The strategy had to be in place to know what skills and experiences would be required to execute the strategy you can have a vision and strategy, but without the right leadership it is not sustainable.
The first higher was our chief Human Resources Officer, Kirk door Kirk has been instrumental in identifying and selecting the leaders they both enable our strategy and define and build our culture.
Since early 2018, we have added six new leaders that each bring their own unique experiences and expertise there superpowers. If you will but they all share a common passion for excellence they build our culture of trust and respect and operate as a team.
The three leaders who have been with integer for longer have been instrumental in the development and execution of our strategy, including the culture change as they are a leader leaders, who and body that leadership skills experiences and cultural traits of the team.
Im starting with culture, because it doesn't matter how good your products or your customer service or even your strategy is if you don't have a strong culture you cannot sustainably perform at a high level.
This is why two of our six operational strategic imperatives are focused on culture.
We had been investing in the human resources functional transformation to lead Ensinger build leadership capability to deliver performance excellence.
If we do not attract develop and grow leaders, we cannot deliver sustainable performance excellence.
We have a five year plan with very specific actions to achieve this strategic imperative.
We're now in year three of this plan and we have highlighted on the right hand side of this slide several of the key actions we have executed in 2018 and 2019.
But first take a moment and review the five work streams under leadership capability and performance excellence. There was a flow in a logic to the sequential the work streams that starts with analytics and planning and moves through evaluation and engagement and ultimately into development in rewards.
We have made impactful progress and I would highlight our talent selection process. What we've trained over 400 leaders on how to conduct a structured interview using a tool that provides questions tailored to the needs of the role and how to assess the candidates skills versus those needs.
We're leveraging sophisticated psychometric test to help us identify strong cultural fits for integer that supports the creation of their individual development plans, even before they join integer because this is required to grow leadership capability to deliver performance excellence.
Could go on but lets move to how we're leveraging this leadership capability, we are developing to deliver excellence and manufacturing.
The objective of our manufacturing excellent strategic imperative is to make manufacturing a competitive advantage for integer by delivering operational excellence for our customers and generating efficiencies that fuel growth in our business.
We have developed the in the integer production system, which defines how we operate our manufacturing plant in a consistent and standard manner lean is our foundation. It is the how.
And we've increased the number of lean experts and resources in the company by 50%.
Our entire manufacturing leadership teams have been through lean leader training and every plant has executed their initial lean diagnosis with many sites already launching additional lean diagnosis and kaizen events.
The results are clear as evidenced by our adjusted EBITDA margins growing 190 basis points since 2017, reaching 22.6% in 2019.
We expect adjusted EBITDA to continue growing twice as fast as sales, which will yield continued margin expansion as a result of our manufacturing excellence strategy.
Manufacturing excellence not only enables margin expansion, but it also deliver tangible improvements for our customers.
The quality of our products has improved by 40%.
Our on time delivery to customers is improved by 10% now approaching world class service levels as we continue to make improvements.
We believe our customers are recognizing our overall improved service relationships and innovation.
As a result, we signed multi year contracts in 2019 that are worth 425 million of sales per year.
These contracts, where with existing customers and on existing products.
But these products are now under long term agreements.
In many cases, we have exclusivity and in most contracts we have structured mutually beneficial terms that include incentives for growth in our business in exchange for price reductions and the sharing of cost efficiencies with our customers.
These agreements strengthen our partnerships and bring increased continuity of supply to our customers and enable us to continue making investments to support our customers innovation and growth strategies.
So as a 19 was a significant here in terms of signing multiyear agreements as nearly two thirds of our business is now under some form of a multiyear contract.
To summarize the status of our strategy execution, let's start with the portfolio and product line strategies.
We executed the divestiture of absent the ethanol business in mid 2018, which was immediately adjusted EPS accretive and cash efficient, enabling us to pay down approximately 550 million of debt.
We also address the profitability challenges in our portable medical business and it moved to the invest to grow category.
We also established in launched the growth teams in the fourth quarter of 2018, which is the defined strategy process we implemented.
The growth teams own the development and the oversight of the execution of our product line strategies.
The strategies are maturing as the growth teams enter their second year of implementing this new process.
Previously we did not have a structure process for developed blinked developing implementing and managing these strategies now we do.
Looking at operational strategic imperatives, we've talked about culture, and how we built the leadership team and have clearly embedded the aspiration for excellence in everything we do.
For the core strategic imperatives, the investments we made in manufacturing excellence, specifically lean expertise and deploying lean across the company have delivered meaningful operational and profit improvements.
For the customer strategic imperatives, we recent recently changed the entire sales leadership.
We have four business units and we now have four new sales leaders three of which were added in the last few months.
We're making tremendous progress on the execution of our strategy. However, we're still in the early innings and see plenty of opportunities in front of us.
In transitioning to how the strategy has delivered for investors I'll start by highlighting how significantly we have reduced our debt leverage over the past four years or.
Our debt has gone from 1.7 billion to about 800 million and our debt leverage has gone from 6.1 times down to 2.9 times adjusted EBITDA.
We continue to manage to our targeted debt leverage range of two and a half to three and a half times as our near term and long term goal.
From an adjusted EPS standpoint, we have made meaningful progress with 67% increase in adjusted EPS over the past two years.
We achieved this trajectory we're growing sales at the market rate and expanding margins in the business, while meaningfully deleveraging the balance sheet.
We also recognize that delivering for investors means rebuilding credibility after missing our guidance in both 2015 and 2016.
The green Checkmarks represent where we have met or exceeded the guidance. We gave at the beginning of each year.
This is measuring ourselves against the original guidance and in every case, where we have provided guidance, we have met or exceeded with the one exception being sales in 2019.
Where we were within 2 million of achieving the low end of our range.
From an adjusted EPS perspective, we exceeded or were at the high end of the guidance that we provided at the beginning.
Given this performance we believe we are delivering on our annual financial commitments to investors.
The execution of our operational strategic imperatives that we have highlighted have enabled us to achieve the financial objective of delivering profit growth at least two times the sales growth rate.
In 2019, we delivered 9% adjusted EBITDA growth on 4% adjusted sales growth, achieving two and one half times profit leverage.
As we discussed on the third quarter earnings call, we now see ourselves being able to sustainably deliver on this financial objective.
Before handing the call over to Jason to review, our financial results I want to summarize where we are on our journey.
We laid out three financial objectives sales growth 200 basis points above market profit growth two times sales growth rate and debt leverage between two and a half in three NAF times adjusted EBITDA.
Sales growth objective is very much in process and we are making the necessary investments to achieve this objective, but there is more work to be done.
We have delivered on the other two financial objectives, and our position to continue to deliver on these objectives. We characterize this phase of our journey as the profit expansion period.
I'll now turn the call over to Jason.
Thanks, Joe Good morning, everyone and thank you again for joining our call.
I'll provide more details regarding our adjusted financial results for 2019 in there and then share more color on our 2020 outlook.
As mentioned fourth quarter sales increased 7% to $326 million with more details on our sales to share during the product line discussion.
Adjusted EBITDA increased 8% on a reported basis.
We delivered $41 million of adjusted net income or $1.25 cents of adjusted earnings per diluted share up 21 cents or 20% on a year over year reported basis.
Moving to full year results in 2019 integer delivered adjusted sales growth of $1.258 billion up 4% inline with our market in overcoming a significant headwind with the customer filing for.
Chapter 11 bankruptcy all four product lines grew sales in 2019.
Our adjusted EBITDA was $284 million up 9% and achieving our strategic objective of growing profit at least twice the rate of sales growth.
We delivered $154 million of adjusted net income or $4 in 68 cents of adjusted earnings per diluted share, which is up 88 cents year over year.
Slide 23 provides more insight on how we grow our adjusted net income.
Adjusted net income increased $30 million 2019 versus 2018 up 24%.
This significant increase is generated through sales growth.
Operational improvements in productivity from continued traction in our manufacturing excellent strategic imperative and consistent operating expense management, which all offset price and inflation headwinds.
Our sustained debt reduction in interest rate management lowered interest expense by $5 million. Additionally, we continue to benefit from strategic tax planning with our adjusted effective tax rate ending at 17.3% in 2019 120 basis points lower than the prior year.
As we closed 2019, it's helpful to reflect on our performance versus the guidance, we provided that the started the year.
Earlier, Joe highlighted how we how our adjusted EBITDA and adjusted earnings per share performance met or exceeded our commitment.
It's consistent delivery on commitments extends to cash flow and debt reduction cash flow from operating activities and free cash flow finished in the ranges, we indicated and debt payments exceeded expectations. This enabled us to finish in the middle of our targeted debt to adjusted EBITDA leverage range, while still investing $15 million on our book.
It's on acquisition strategy.
Let's turn to our to review of our product line sales results.
As a reminder, slide 26 reflects trailing four quarter organic adjusted sales growth rate.
We believe this is a more meaningful indicator of our growth trend in how we're performing in the market versus any individual quarter, which may contain anomalies, resulting the timing of purchase of customer purchasing decision.
As expected we finished the year with the trailing four quarter adjusted sales up 4% inline with our market growth.
Starting with cardio and vascular organic sales were up 6% in the fourth quarter. This was led by strong increase in peripheral vascular demand from a customer launching an existing program into a new geography and market growth.
We Additionally benefited from the incremental sales associated with signing a new long term customer contracts on existing business, which fully offset the impact of an end of life Electrophysiologist program.
The sales recognized on this contract similar to the incremental sales were reported in the first quarter of 2019, where we recognized revenue for in process work in line with the contractual terms.
As Joe referenced earlier on delivered on a on the delivering for customer slide we are working to sign more multi year contract that could can continue to generate new sales on in process work.
To close cardio and vascular product line grew 4% for the year and we expect 2020 to deliver mid single digit market growth as product launches ramp and the impact of the end of life Electrophysiologist program.
On slide 28 organic sales in our cardiac Neuromodulation product line were up 10% in the fourth quarter, driven by new and next generation project launches underlying strength in existing CRM program and the new customer agreement on existing business.
This was partially offset by the Nuvectra chapter 11 bankruptcy filings for the year cardiac Neuromodulation adjusted sales grew 3%. Despite the headwinds created by Nuvectra chapter 11 bankruptcy filing and a slight decline in the overall neuromodulation market in 2020, we expect a slight decline.
And as the double digit decline in Neuromodulation is primarily driven by Nuvectra bankruptcy offsets low single digit growth in CRM.
Okay.
The next slide shows the final part of our medical segment.
Recall in July 2018 buying acquired are asked to know product line.
The advanced surgical orthopedics and portable medical product line shown today includes sales under supplier agreements with volume.
Fourth quarter sales continued to grow up 7% organically versus the fourth quarter. Prior year, driven by increased end market demand for advanced surgical and orthopedic based products. We expect mid single digit growth in 2020 with accelerating portable medical demand.
Finally, fivethirty summarizes electrochem, our non medical segment as expected Electrochem showed continued strength with sales growing 9% in the fourth quarter driven by increased military demand and growth in the energy market. In 2020, we expect high single digit growth from new product launches and increase.
Military and environmental them.
Now, let's review enters 2020 outlook, starting with context on sales, we expect 2020 sales to be in the range of $1.290 billion to $1.310 billion, an increase of 3% to 4%.
To achieve this we expect underlying growth to be 5% to 6% that the high end of our projected market growth of four to six however, we will experience a $17 million headwind in sales, resulting from new Vectrus chapter 11 bankruptcy filing.
And even though we shortened our 2019 fiscal year in October our 2020 fiscal year, we'll still have fewer days in 2019, creating additional pressure of approximately $10 million. Despite the strong underlying sales growth for 2020 again, we expect 3% to 4% reported growth.
With that context on sales, we expect adjusted EBITDA between to be between 300 million and $307 million, reflecting growth of 6% to 8% which is.
Which is twice the tries to sales growth rate as we remain in line with our strategic objective.
We expect adjusted earnings per share to be between $5.10, a $5.03 per diluted share, reflecting an increase of 9% to 13%, which is more than three times the rate of sales growth.
This faster growing adjusted EPS compared to adjusted EBITDA is driven by lower expense interest expense from continued debt reduction overall, our outlook as a result, the execution of our operational strategic imperative, which are designed to deliver profit leverage on sales growth.
And finally on slide 34.
We expect to generate cash flow from operations and free cash flow in the range of $175 million to $185 million and $105 million to $125 million respectively.
In 2020, consistent with our strategy to increase our strategic investments in the business to drive growth, we expect increased capital spending to a range of $60 million to $70 million.
Though a meaningful increase this includes approximately $10 million of specific facility expansion projects necessary to support our future growth.
Our outlook already includes approximately $10 million of business development payments as we continue to expand our capabilities for growth, including the Mac acquisition announced yesterday and the pending transaction.
Given the free cash flow projection and business development activity, we anticipate paying between 92 million $90 million to $110 million in debt in 2020 and expect to remain in the target debt to adjusted EBITDA leverage range of 2.5 to 3.5 times I'll now turn the call back.
And Joe Thanks, Jason.
Coming back to our journey to excellence, we've accomplished two out of our three financial objectives last financial objective is delivering sales growth 200 basis points faster than our markets. So let's cover a few of the actions we are taking.
We have been and we'll continue to make investments necessary to deliver the growth. We desire we have already demonstrated the strong returns we have generated on our investments in culture and manufacturing Excellence. In addition, we are making organic investments in our Salem, Virginia, and two of our Minnesota facilities Platte limit and chaska.
In laser machining and quick turn capability for our cardio and vascular business.
We also completed to bolt on acquisitions us vial design, which adds complex rating and INOMAX in Israel, which brings us delivery systems and catheter supports to grow to support growth in that region.
Intimate gives us an entre into the highly innovative and growing Israeli med tech market, where many of our customers operate and have innovation centers. We've also been investing internally in our organic or in our Oracle ERP systems to ensure we can implement standardized processes and have the consistency.
Across all our operations to align with the integer production system.
We are confident in the returns on this $35 million worth of investments.
In order to take full advantage of these capabilities, we have been adding R&D resources to provide more development for our customers as well as our internal innovation.
We are investing 30% more in sales and marketing resources to bring more experienced sales leadership from both our industry and others. This will ensure we have the expertise to fully capitalize on the capabilities. We have added and our increased R&D development work.
We are increasing our pipeline of sales opportunities and establishing the necessary rigor and discipline in closing on these opportunities to position us to achieve our last financial objective of growing sales 200 basis points above the market.
To support the growth, we've been experiencing and anticipate we're making necessary investments in our facilities. We have highlighted three facilities that we have been expanding the war as Mexico sale in Virginia, and Montevideo earthquake facilities have already or are in the process of expanding their physical footprint to go.
Give us additional manufacturing or research and development capacity.
For example, in Montevideo, where we focus on neuro modulation EPG development, we are adding additional research and development capacity as the number of opportunities continues to grow.
In addition, we have invested in facility build outs in both of our tier one up facilities to support specific customer programs and future growth opportunities.
To highlight to you want to North where we recently were approved by the FDA as the first site in Mexico to manufacture active implantable medical devices.
We now have three different countries, where we can manufacture.
Yes.
This total investment is about 40 million over that timeframe 2018, 2020 and gives us confidence we can support the type of growth, we see going forward.
We believe the integer strategy lays out a clear path to sustain the outperformance we have built the leadership team and continue to build and strengthen the culture to execute our strategy.
Our associates are passionate about serving our customers who deliver the therapies to patients whose lives we enhance.
We are delivering on our commitments, including profit growth margin expansion and deleveraging while investing for growth.
As we continue on our journey to excellence, we see tremendous growth ahead for our associates, our customers and our shareholders. Thank you for joining our call today.
Ill now turn the call back to the moderator to facilitate una.
Thank you as a reminder to ask a question you need to press star one on your telephone.
Your question please.
Please press the pound or hash key please standby well, we compile the Kenny roster.
And your first question here comes from Matthew Mission with Keybanc. Please go ahead. Your line is now open.
Great. Thank you for taking the questions.
Jason Tony.
Good morning mounting.
I just want for start up with with the headwinds are pointing to 2020.
To $17 billion Nuvectra, and then $10 million from fewer days I think with a little confusing on my end was I think you already took out 12 million from your fourth quarter guidance. The majority of which would have would have been nuvectra and it just it just seems like the combined $29 million would have been well above.
What new backed with what your sales ended extra what would it would have been.
Based upon their cost of goods sold and then the second question and that is on the fewer days in 2020, I thought you'd normally if I remember correctly. There was some there was an 8-K, where you normalize the multi year. So you will see wouldn't have these these extra weeks are these extra days.
So why why is that impacting 2020, when you already did that.
Hi, Matt Thanks for the questions.
I'll start with Nuvectra. Your math is direct we did ship $17 million worth of product to Nuvectra, mostly in the first half of 2019, and we were planning to ship another 12 million in the fourth quarter and so the adjustment that we communicated after new vectors bankruptcy filing was to remove.
Exactly the amount of sales that we were planning to ship to Nuvectra. So it was going to be 29, but the actual in our reported 2019 sales is in fact 17 and so so that math is straightforward and you calculated it correctly. So we are facing year over year, a 17 million dollar head.
Wind from zero sales in Nuvectra for 2020, I'll highlight that when when we did communicate that shortly after a few days after their bankruptcy filing. We also conveyed that it did not impact our 2020 outlook at all because we had already factored in zero and we had already factored in.
Zero for Nuvectra, because we had visibility into what we thought their inventory balances would be entering 2020, and we did not anticipate much if any demand in 2020 and so it wasn't a surprise it's not it doesn't impact our 2020 outlook at all when that happened, but it does in fact lower to that.
As a 19, which we communicated at that time, some 17 million as the year over year impact from Nuvectra on 2020 versus 19, and Thats as I as I referenced thats, mostly going to be a first half 2020 impact because most of what we shipped in 19 was in the first half.
On on the fewer days, our fiscal calendar year, our fiscal year for Jos a 19. Originally was December 28 2018. The January 3rd 2020. So it was actually 53 weeks and when we shortened the fiscal 2019, we cut it off on December 31.
First so we still had December 29, Thirtyth in 30, Onest of 18, plus the calendar year of 19. So we still had those extra three days in 2018 that was part of our fiscal 19, and 2020 and going forward. It will be a calendar year. So it will be really easy it'll be calendar year over calendar year into other than leap year we.
We won't see any variation, but we do have a couple of days still still in 2020 versus 2019.
So I'll I'll add a little more to that Matt. We had also referenced the even after the nuvectra bankruptcy and removing the 12 million theres still about a $10 million headwind in neuro lied. That's all written it was always always in already in our 2020 view of sales and when you.
See our guidance here I think it's fairly consist it is consistent with what we indicated on the third quarter call, but theres, a $10 million narrow headwind still from inventory that we think will will affect 2020 versus 19, but that's been baked in now for a long time.
So so the way to say the way to think about that would would be if theres $10 million. If there's 10 billion baked in from inventory.
That's really all do better I think nuvectra all it is all in Columbus, and compare compared compared to.
The rest of your customer base at this point there would be.
Yes. It is 10 from all the other customers. So it's on top of the 17.
It is on top of the 17 for Nuvectra.
And we did we didnt put that on this line as a headwind because theres inventory fluctuations that our customers across the whole business across all products.
We just im just calling that out because weve talk specifically about neuro.
Remember, Matt the initially that headwind from the contractual obligations in the inventory was going to be 20.
All right until the two until Nuvectra file to that reduce the 10.
And.
Phil, though what we sold to them in the first part of the year remain that way.
Okay.
And the electrophysiology contract that debt.
That's.
Fully and the one which you lost last year that fully annualized isn't the in the first part in the first quarter.
And won't be a headwind again into Q3 Q4 Q.
That's the right way to think about it there will be a first quarter impact and then it and then it does in fact level off for the rest of the year, it's still down for 2020 versus 2019, it's just not nowhere near as significant as it was in 2019 versus 18.
Yes, and looking at that so the fewer days would also be at a one Q 20 tough comp.
The middle Georgia.
The majority of any better I'm, assuming is going to be is his first half weighted and then the electrophysiology as first quarter.
How should we be thinking about the phasing of the 3% to 4% growth through the course through the course of the year.
Because it seems like a bunch and seems like a bunch of that a bunch of the headwind is going is going to comment in one Q there.
Yes, great great Great question.
I'll answer that this way there's a couple of things with when we look at the number of days it actually ends up being four to where we come up short on days in 2020 versus 19.
And it's because in the first quarter of.
Of 19, we had a normal number of days because of the way we were doing the fiscal calendar. It was a normal number a week's normal number of days and so what what you end up with his for Q 20 ends up with fewer days against Fourq. You 19, so that makes it a little bit of a tougher comp.
It also when when you look at our sales by by quarter. The fourth quarter of 19 was the strongest.
Nominally at 326 million. So is the strongest quarter out of all four so it makes it a tougher comp on a year over year basis, and then when you look at third quarter of 19 at 304 billion. It was by far the lowest quarter. So just looking at the comps you would expect third quarter 20 to be any.
The comp fourth quarter of 20 to be a more difficult comp because it's it was the highest prior year and you've got fewer days and then the first half we would expect to be kind of a flow consistent with our full year, but we would expect third quarter, just because it's an easier comp to be stronger fourth quarter tougher comp to be lower.
First half more consistent with full year.
Okay fair enough.
And then last question you've done us by design and INOMAX here.
What what is the trajectory towards revenue growth for for these two acquisitions.
This something what is this something where and 21 they start coming on or is this something 20 to 23.
We see we see significant opportunity with the capability they have and the platform. They give us beginning that gives us access to a really innovative.
Fast growing market in Israel, where there are a lot theres a lot of innovation a lot of our customers have operations, there and getting into that ecosystem lets us tap into that pipeline, we think as we combine into jurors scale and breadth and access to customers with with us bile ducts.
Okay, and INOMAX capabilities, we think it opens up a tremendous number of opportunities to capitalize on their strengths. We all know it takes time to get to get into the development cycle translate that into sales. So we see enormous opportunity. It's is it is though the reality of the market cycle.
So where it'll take a few years for that to show up in revenue, but we're already seeing strong customer interest in their capability and the development operates our opportunities are accelerating. It is also part of why we have increased the number of R&D resources, we highlighted.
One of our slides that we've added we've added R&D resources to the tune of 25% in the last few years in order to do more development work that up those R&D resources or on top of the acquisitions before of in American us while design and we're capitalizing on their capability. So it takes a couple of years.
For that to translate into sales that youre going to see but when we see it in that pipeline and we when the business when the process of validating we'll see the red future revenue growth and be able to tell you when it's coming.
Okay. Thank you very much and congratulations on the next quarter.
Thanks, Matt Thanks, Matt.
And once again, if you like to ask a question. Please press star one on your telephone. Your next question comes from the line of James Sidoti with Sidoti and company. Please go ahead. Your line is now open.
Good morning can you hear me.
Yes, good morning, Jim.
Great a couple balance sheet questions.
Pretty impressive quarter, but.
You were still able to cut down your working capital.
Both on the accounts receivable and the inventory.
Is that a new trend that we should we think that.
We will stay at these levels going forward.
Jim Let me highlight that with with the new vector of bankruptcy, we we.
Removed 24 million, we wrote off $24 million. So the biggest chunk of that was an inventory and then there was.
2 million in a entresto, so that part of part of that so we need to now with this new baseline continue to focus on on the things we've talked a lot about in terms of driving working capital but.
Again, we've talked a lot about lean in addition to efficiencies in and operational excellence, that's going to drive inventory improvement as well, but I want to this call out that there was the dynamic on Nuvectra just for those accounts you called out.
Okay and then on.
2020 guidance can you give us.
Some color on where you think the tax rate will wind up and what interest expense will be.
Yes, so for tax rate.
We guided to.
Midpoint that basically stays consistent with where we're at this year I mean I couldn't be happier with what the team has been doing on strategic tax planning as you know tax reform.
The dust continues to settle and so as we understood that we're going through in understanding some of that the changes we need to make to take better advantage of.
Foreign tax credit and for foreign derived.
Income deduction. So so thats the teams need would execute will continue to drive some of those but but again midpoint is five year over year and then interest.
Expense we.
Again, we will continue to to reduce that with the balance.
You know and some favorability on rate that we still see with the repricing.
So I would say order of magnitude we continue to drop hummus, what we did.
Year over year 19 versus is a 18, so hopefully that gives you some color.
Okay and then.
Well Medtronic did their call yesterday, they called out the effect they call back that they will be affected by the court of ours in China, but they didn't quantify or are you putting any any anything in your guidance for that.
Hey, Matt do you think that could impact you.
The first you start thinking into 2020.
Jim I, obviously, it affects our customer sales that will eventually flow through to US we have not seen at this point any meaningful impact in our customers ordering patterns at least as best we can tell related due to the grown a virus. We've obviously been working closely with our supply chain and managing inventory.
Three levels to ensure that we can continue supply and at the moment, we do not see a meaningful impact from from the krona virus, but it's obviously out there for everybody to deal with the manage.
Alright, and then my last question about seasonality I know you don't want to give quarterly guidance and get too deep into the weeds, but Q1 of last year was a particularly good quarter you would have.
Near the Neuromodulation business.
In Q1 of this year I mean.
So do you think that that number will be flat to down slightly.
Jim week, you're right, we don't give quarterly guidance. The color I can give you is when we look at the 2019 nominal sales what we see as we see that third quarter was clearly the lowest quarter of the year. So that makes the third quarter of 20, an easier comparison and then clearly the fourth quarter 19 was the high.
Sales of the year nominally so that makes the fourth quarter 20 or more difficult comparison, we we referenced the incremental or the the fewer days that we'll have in 20 versus 19, and we see that impacting the fourth quarter.
You're right, though theres other moving parts quarter by quarter, but we would expect the first half to be somewhere in the neighborhood of our of our full year outlook, but third quarter should be stronger just because of the comp and fourth quarter should be lower more challenging just because of the comp.
Okay all right. Thank you.
Thanks, Jim Thanks, Jim.
And there are no further questions at this time I will turn the call back over to Tony Board for closing remarks.
Thank you joining us in today's call and continued interest in integer remember that this conference call will be available for replay.
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And ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
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