Q2 2020 Integer Holdings Corp Earnings Call

July 30, 2020

Operator: Ladies and gentlemen, thank you for standing by, and welcome to Integer Holdings LSV Q2 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded, and if you require any further assistance, please press star zero. I would now like to hand the conference over to Tony Borowicz, Senior Vice President of Investor Relations. Thank you. Please go ahead.

By and woke up to enter holdings, LLC Q2, 2020 <unk> earnings call.

At this time all participants are in a listen only mode.

After the speaker presentation, there will be a question and answer session.

Ask your question during the session you will need to press star one on your telephone.

Be advised that today's conference is being recorded and if you're acquiring any further systems. Please press star zero.

I would Alexander conference over to 20, Burbage Senior Vice President Investor Relations. Thank you. Please go ahead.

Tony Borowicz: Good morning, everyone. Thank you for joining us, and welcome to Integer's Q2 2020 Earnings Conference Call. The call is being webcast live, and 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. The results and data we discuss today reflect the consolidated results of Integer for the periods indicated. During our call, we will discuss some non-GAAP measures. For reconciliation of these non-GAAP measures, please see the appendix of today's presentation and the notes of the financial statement in today's earnings release. As a reminder, 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.

Good morning, everyone. Thank you for joining us and welcome to ended your second quarter 2020 earnings Conference call.

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 corporate website.

The results of data we discussed today reflect the consolidated results a vintage or for the periods indicated.

During our call will discuss some non-GAAP measures.

Reconciliation of these non-GAAP measures. Please see the appendix of today's presentation and the Nazis the financial statements in today's earnings release.

As a reminder.

Today's presentation includes forward looking statements.

Please refer the Companys FCC fives for discussion of the risk factors that could cause our actual results could differ materially.

Tony Borowicz: Joining me on the call to discuss our Q2 results are Joseph Dziedzic, President and Chief Executive Officer. Jason Garland, Executive Vice President and Chief Financial Officer. On today's call, Joe will provide his opening comments and discuss how COVID-19 is impacting our business and how we are managing in this new normal. Jason will review our financial results for the quarter, provide an update on how we are managing costs, and discuss our strong cash position. Joe will come back on to provide his final closing remarks, and we will open it up for your questions. At this point, I'll turn the call over to Joe for his comments.

Joining me on the call to discuss our second quarter results are Jody.

Excellent and Chief Executive Officer.

Jason Garland Executive Vice President and Chief Financial Officer.

Today's call.

Joe will provide his opening comments and discuss how cobot nigerians impacting our business and how we're managing in this new normal.

Jason will review our financial results for the quarter.

Provides an update on how we're managing costs and discuss our strong cash position.

Joe will come back down to provide his final closing remarks, well open it up for your questions.

At this point I'll turn the call over to Joe for his comments.

Joseph Dziedzic: Thank you, Tony, and thanks to everyone for joining the call today. I want to start by reiterating what we said at the beginning of our call last quarter. Creating a safe environment for our associates who have been coming into our manufacturing operations every day during this pandemic continues to be our top priority. By ensuring pandemic safety protocols are in place, our associates are able to focus on manufacturing the products our customers and their patients need every day. Sounds simple. Take care of your associates who take care of your customers. Now that we're operating in this new social distanced environment, we have worked to make it as normal as possible, so we can stay focused on executing our strategy. We have found a cadence and a rhythm that is as normal as one can be during this dynamic period.

Thank you Tony and thanks to everyone for joining the call today.

I want to start by reiterating what we said at the beginning of our call last quarter.

Eating a safe environment for our associates will be coming into our manufacturing operations everyday during this pandemic continues to be our top priority.

Buys shoring pandemic safety protocols are in place our associates are able to focus on manufacturing the product our customers and their patients need everyday sounds simple take care of your associates, who take care of your customers.

Now that we're operating in this new social distanced environment, we have worked to make it as normal as possible. So we can stay focused on executing our strategy.

We have found a cadence and a rhythm that is as normal as one can be during this dynamic period.

Joseph Dziedzic: One step in this process has been increasing our agility to adjust production to the changing needs of our customers and the market demand. We continue to work closely with our customers to meet their needs while also continuing to implement our strategy with an intense focus on our manufacturing excellence, operational strategic imperative. The team has been very creative in their implementation of the Integer production system during the pandemic, as many of our lean experts are working remotely. We are operating as though this is the new normal and remain focused on the execution of our strategy to achieve excellence in everything we do. On our Q1 earnings call in early May, we disclosed that April sales were down approximately 20% and believed it did not reflect the full impact of COVID-19.

Once it up in this process has been increasing our agility to adjust production to the changing needs of our customers and the market demand.

We continue to work closely with our customers to meet their needs. While also continuing to implement our strategy with an intense focus on our manufacturing excellence operational strategic imperative.

The team has been very creative in their implementation of the integer production system during the pandemic.

As many of our lean experts are working remotely.

We are operating as though this is the new normal and remain focused on the execution of our strategy to achieve excellence in everything we do.

Our first quarter earnings call in early May we disclose that April sales were down approximately 20%.

And believed it did not reflect the full impact of cobot 19.

Joseph Dziedzic: We projected our Q2 would be worse than April, and now that the Q2 is complete, sales were down 24%. Even down 24% does not reflect the full impact of COVID, as we believe our Q2 sales were better than the medical device industry sales decline, which is what we expected. I will cover this point in more detail on the following slides. Our profits declined significantly as we expected, because our approach to the expected temporary sales decline from the pandemic has been to adjust the variable cost with sales and not take out infrastructure. We expected to see a significant margin rate contraction as we worked to adjust variable cost to match the lower volumes and preserve our infrastructure to execute our strategy. We fully expect our earnings to come back as volume returns.

We projected our second quarter would be worse than April.

And now that the second quarter is complete sales were down 24%.

And even down 24% does not reflect the full impact of coated.

As we believe our second quarter sales were better than the medical device industry sales decline, which is what we expected.

I will cover this point in more detail on the following slides.

Our profits declined significantly as we expected because our approach to the expected temporary sales decline from the pandemic has been to adjust the variable cost with sales and not take out infrastructure.

We expected to see a significant margin rate contraction as we work to to adjust variable cost to match, the lower volumes and preserve our infrastructure to execute our strategy.

We fully expect our earnings to come back as volume returns.

Joseph Dziedzic: Also, as we expected, our cash flow was solid in Q2 and partially insulated from the profit decline as Q2 cash collections benefited from the higher Q1 sales. Turning to our outlook for H2, we're going to be as transparent as possible on what we expect and how it correlates to the market, but we are not providing quantitative guidance. To that point, we expect Q3 to be relatively similar or even perhaps slightly lower than the Q2. We expect cash flow to remain positive in H2 of 2020, but well below H1 as the lower Q2 and Q3 sales will reduce cash collections.

Also as we expected our cash flow was solid in the second quarter and partially insulated from the profit decline as the second quarter cash collections benefited from the higher first quarter sales.

Turning to our outlook for the second half, we're going to be as transparent as possible and what we expect and how it correlates to the market, but we're not providing quantitative guidance.

To that point, we expect the third quarter to be relatively similar or even perhaps slightly lower than the second quarter.

We expect cash flow to remain positive in the second half of 2020, but well below the first half as the lower second quarter and third quarter sales will reduce cash collections.

Joseph Dziedzic: We would expect to see sequential improvement in sales in the Q4, somewhere in the middle as compared to the Q2 and Q3 run rate and pre-COVID levels. The qualitative information we are hearing from the marketplace and the fact that our order backlog trend is improving supports our view of the H2 outlook. It has taken a total team effort to manage in this new environment, and I am proud of the agility and ingenuity the team has demonstrated to deliver for our customers. Let me provide an update on how we are interpreting the industry volume trends and how they are impacting our results. We believe the industry sales declined in the mid-30% range during the Q2. Abbott reported a 33% reduction in their medical device sales, excluding diabetes products.

We would expect to see sequential improvement in sales in the fourth quarter.

Somewhere in the middle as compared to the second and third quarter run rate and pre co bid levels.

The qualitative information, we're hearing from the marketplace and the fact that our order backlog trend is improving supports our view of the second half outlook.

It has taken a total team effort to managing this new environment and I am proud of the agility and ingenuity. The team has demonstrated to deliver for our customers.

Let me provide an update on how we are interpreting the industry volume trends and how they are impacting our results.

We believe the industry sales declined in the mid 30% range during the second quarter.

Abbott reported a 33% reduction in their medical device sales excluding diabetes products.

Joseph Dziedzic: Johnson & Johnson reported a decline of 34% in their medical device segment. Boston Scientific reported a 29% decline in their medical device sales. We estimate procedure volumes were in the range of 80% to 90% of pre-COVID levels exiting Q2, but that was prior to the recent surge in COVID infections across the southern part of the US. Some of the more critical procedures, such as heart failure, and structural heart, saw slightly better results, whereas the more elective neuromodulation cases experienced Q2 declines in the neighborhood of 50%. On slide nine, you see our current view of the market depicted in the dark blue line compared to the view we presented during our Q1 earnings call, which is shown in light blue.

Onto the Johnson reported a decline of 34% and their medical device segment.

In Boston Scientific reported a 29% decline in their medical device sales.

We estimate procedure volumes were in the range of 80% to 90% of pre coven levels exiting the second quarter.

But that was prior to the recent surgeon cobot infections across the southern part of the U.S.

Some of the more critical procedures, such as heart failure and structural heart, so slightly better results.

Whereas the more elective neuromodulation cases experienced second quarter declines in the neighborhood of 50%.

On slide nine you see our current view of the market.

Depicted in the dark Blue line compared to the view, we presented during our first quarter earnings call, which is shown in light blue.

Joseph Dziedzic: The rate of decline at the beginning of Q2 was steeper than we originally projected, but it also recovered more quickly later in the quarter, leading to a higher exit rate. Although the third quarter is starting at a higher run rate, we expect a flattening during the quarter as the surge of COVID cases in the US has impacted elective medical procedures in certain geographies. We estimate the third quarter industry sales somewhere between 10% and 20% below pre-COVID levels. Barring a further surge in COVID cases, we expect to see improvement in the industry volumes in Q4, but still below pre-COVID levels by 5% to 15%. Similar to our prior view, we expect that the market will return to pre-COVID levels sometime during Q1 of 2021.

The rate of decline at the beginning of the second quarter was steeper than we originally projected.

But it also recovered more quickly later in the quarter.

Leading to a higher exit rate.

Although the third quarter, starting at a higher run rate, we expect a flattening during the quarter as the surge of cobot cases in the U.S. has impacted elective medical procedures in certain geographies.

We estimate the third quarter industry sales somewhere between 10, and 20% below pre co bid levels.

Barring a further surge in koby cases, we expect to see improvement in the industry volumes in the fourth quarter, but still below pre kobin levels by 5% to 15%.

Similar to our prior view, we expect that the market will return to pre covert levels sometime during the first quarter of 2021.

Joseph Dziedzic: When we look at the COVID impact on Integer, we estimate that our Q2 sales decline of 24% was approximately 10 percentage points better than the market decline. There are several reasons for this difference from the industry decline. Some customers reacted in early April and began to reduce orders, whereas for other customers, we did not see meaningful changes until June. There was a pretty wide range of customer response times, but when they did respond, they responded with meaningful reductions. The blend of reaction times and the magnitude of the change was what we expected. It is important to note that we fully expect the 10 percentage point favorability in the Q2 versus the market to reverse in the H2 of the year.

When we look at the cobot impact on integer, we estimate that our second quarter sales decline of 24% was approximately 10 percentage points better than the market decline.

There are several reasons for this difference from the industry decline.

Some customers reacted in early April and began to reduce orders.

Whereas for other customers, we did not see meaningful changes until June.

There was a pretty wide range of customer response times, but when they did respond they responded with meaningful reductions.

The blend of reaction times and the magnitude of the change was what we expected.

It is important to note that we fully expect the 10 percentage point favorability in the second quarter versus the market to reverse in the second half of the year.

Joseph Dziedzic: We anticipate our growth rate converging with the market growth in early 2021 and returning to our more typical level of variation to the overall market growth. Slide 11 shows our current view of the impact on Integer sales and how the curve has changed compared to our prior view. The decline at the beginning of Q2 started a little earlier, but the pace of the decline was slightly slower. We thought that the bottom of the curve was going to be in June, and now we think the bottom will be in July. We have pretty good visibility into the order backlog for Q3, especially since July is almost complete. It doesn't mean customer demand cannot change during the next 60 days, but our order backlog supports this updated curve.

We anticipate our growth rate converging with the market growth in early 2021, and returning to our more typical level of variation to the overall market growth.

Slide 11 shows our current view of the impact on integer sales now the curve has changed compared to our prior view.

The decline at the beginning of the second quarter started a little earlier, but the pace of the decline was slightly slower.

We thought that the bottom of the curve was going to be in June and now we think the bottom will be in July.

We have pretty good visibility into the order backlog for the third quarter, especially since July is almost complete.

It doesn't mean customer demand cannot change during the next 60 days, but our order backlog supports this updated curve.

Joseph Dziedzic: Given our current backlog, we expect the Q3 sales to be about the same as the Q2, with a slight bias to lower, given the bottom of our curve is now in early Q3. Turning to slide 12, this brings together our current view of both industry and Integer sales. A key takeaway is that Integer sales were better in the Q2 than the industry by about 10 percentage points because of the response time of our customers. This is not a criticism of our customers, but an acknowledgment that it takes time to interpret the market change, understand at the procedure level the impact on each medical device, then translate that into a change in their own manufacturing operations, and then communicate that to us in the form of order changes SKU by SKU.

Given our current backlog, we expect a third quarter sales to be about the same as the second quarter with a slight bias to lower given the bottom of our curve is now in early third quarter.

Turning to slide 12. This brings together our current view of both industry and integer sales.

A key takeaways that entered your sales were better and the second quarter than the industry by about 10 percentage points because of the response time of our customers.

This is not a criticism of our customers, but an acknowledgment that it takes time to interpret the market change I understand that the procedure level the impact on each medical device, then translate that into a change in their own manufacturing operations and then communicate that to us in the form of order changes SK.

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Joseph Dziedzic: The time it takes for this sequence of events to occur generates the lag in the impact on Integer and the resulting 10 percentage point favorability versus the industry decline. We expect this favorability to the industry will reverse in H2, with most of the adjustment coming in Q3 and the remainder in Q4. Our ability to predict the reversal with precision is limited, but this is the current view that our order backlog analysis and our qualitative assessment suggests. How are we managing? We are actively managing our variable expenses to align with the volume decline. We continue to execute our strategy and to position the company with ample liquidity to protect our strategic investments and to carry out our bolt-on acquisition strategy while safeguarding the company against a prolonged pandemic.

The time it takes for this sequence of events to occur generates the lag in the impact on integer and the resulting 10 percentage point favorability versus the industry decline.

We expect this favorability to the industry will reverse in the second half.

With most of the adjustment coming in the third quarter and the remainder in the fourth quarter.

Our ability to predict the reversal with precision is limited, but this is the current view that our order backlog analysis and our qualitative assessment suggests.

How are we managing.

We are actively managing our variable expenses to align with the volume decline.

We continue to execute our strategy in a position the company with ample liquidity to protect our strategic investments and to carry out our bolt on acquisition strategy, while safeguarding the company against a prolonged pandemic.

Joseph Dziedzic: I'll now turn the call over to Jason to review the financial results.

I'll now turn the call over to Jason to review the financial results.

Jason Garland: Thank you, Joe. Good morning, everyone, and thank you again for joining our call. I'll provide more highlights on our Q2 2020 adjusted financials, as well as provide an update on our liquidity and the actions we've taken to enhance our ability to continue investing to execute our strategy throughout the pandemic. As Joe highlighted, our Q2 results were significantly impacted by COVID-19. Sales decreased by 24% to $240 million. Adjusted operating income decreased 65% to $22 million. Adjusted EBITDA decreased 56% on a reported basis. As a reminder, we now include adjusted operating income as we believe this metric more comprehensively reflects our performance in managing all operating costs in the business. We'll continue to show EBITDA so that you can see both measures.

Thank you Joe.

Good morning, everyone. Thank you again for joining our call.

I'll provide more highlights on our second quarter 2020, adjusted financials as well as provide an update on our liquidity and the actions we've taken to enhance our ability to continue investing.

Execute our strategy throughout the pandemic.

As Joe highlighted our second quarter results were significantly impacted by coded 19.

Sales decreased by 24% to $240 million adjusted operating income decreased 65% to $22 million.

Adjusted EBITDA decreased 56% on a reported basis.

As a reminder, we now include adjusted operating income as we believe this metric more comprehensively reflects our performance in managing all operating costs in the business.

We continue to show EBITDA, so that you could see but measures.

Jason Garland: Finally, we reported $10 million of adjusted net income, a decrease of 74%, and the adjusted earnings per diluted share declining to $0.32. The profit decline is a direct result of the rapid decline in volume while maintaining infrastructure to support the return of sales post-COVID and continue executing our strategy. We are adjusting variable costs to the new volume levels and working to mitigate COVID-related social distancing cost increases. We anticipate Q2 to be the most challenging from a profitability perspective.

Finally reported $10 million of adjusted net income decreased to 74% and the adjusted earnings per diluted share declining to 32 cents.

The profit declined as a direct result of the rapid decline in volume, while maintaining infrastructure to support the return of sales post code that.

And continue executing our strategy.

We are adjusting variable cost to the new volume levels and working to mitigate co bid related social distancing cost increases we anticipate the second quarter could be the most challenging from a profitability perspective.

The next slide May look familiar as we shut it in our first quarter earnings call to share the approach, we're taking to manage costs during the pandemic.

Jason Garland: The next slide may look familiar as we showed it in our Q1 earnings call to share the approach we are taking to manage costs during the pandemic, and we believe it will help to provide more color on our Q2 income reduction. We are appropriately matching our variable cost reductions to the reduction in sales volume by taking necessary labor reductions and working with suppliers to reduce material input. Our indirect labor and overhead are less variable, and in most cases fixed, but we are actively implementing measures to reduce activities more closely tied to production. We are maintaining support for our continuous improvement programs and our facility infrastructure. In general, we expect fixed costs to continue to remain constant.

And we believe it will help to provide more color on our second quarter income reductions.

We are appropriately matching our variable cost reductions to the reduction in sales volume I, taking necessary labor reduction and working with suppliers to reduce material input.

Our indirect labor and overhead or less variable and in most cases fit but we are actively implementing measures to reduce activities more closely tied to production.

We are maintaining support for our continuous improvement programs and our facility infrastructure in general we expect fixed costs to continue to remain constant.

Jason Garland: We are controlling discretionary spending, but as we noted in the Q1 earnings call, we are maintaining SG&A and RD&E as we continue to believe the sales decline to be temporary. While we have stopped non-critical resource additions, we remain committed to the addition of strategic talent required to execute our long-term strategy. Considering this approach, we want to again be clear that we anticipate a temporary contraction of margin rates on the significant but temporary reduction of sales. We expect margins to improve as sales increase. By protecting our strategic investment areas like lean manufacturing and business process excellence through the pandemic, we believe to be well-positioned post-COVID-19.

We are controlling discretionary spending.

But as we noted in the first quarter earnings call, we are maintaining s. DNA and R&D any as we continue to believe the sales declined to be temporary.

Well, we had stopped noncritical resource additions, we remain committed to the addition of strategic talent required to execute our long term strategy.

Considering this approach we want to again be clear that we anticipate a temporary contraction of margin rate on the significant but temporary reduction themselves, we expect margins to improve its sales increase.

My protecting our strategic investment areas like lean manufacturing and business process excellence to the pandemic, we believed to be well positioned post coded 19.

The impact of Kobe, driving sales down 24% year over year, no meaningful change in infrastructure costs is readily apparent on our bridge.

Jason Garland: The impact of COVID driving sales down 24% year-over-year with no meaningful change in infrastructure costs is readily apparent on our bridge as the operational drivers bucket contributed to a $33 million reduction in our adjusted net income versus last year. Our interest rate management lowered interest expense by $3 million and contributed 9 cents of growth. The impact of our effective tax rate and foreign exchange were negligible in Q2. I'll now turn to a review of our product line sales results. As a reminder, slide 19 reflects trailing 4-quarter organic adjusted sales rate. We believe this is a more meaningful indicator of our sales trend and how we are performing in the market versus looking at an individual quarter which may contain anomalies such as product launches, end of life programs, and customer inventory management actions.

The operational drivers bucket contributed to a 33 million dollar reduction in our adjusted net income versus last year.

Our interest rate management lowered interest expense by $3 million and contributed nine cents of growth the impact of our effective tax rate foreign exchange were negligible in the second quarter.

I'll now turn to review of our product line sales results.

As a reminder, slide 19 reflects trailing four quarter organic adjusted sales rate.

He believed this is a more meaningful indicator of our sales trend and how we're performing in the market versus looking at an individual quarter, which may contain anomalies, such as product launches end of life programs and customer inventory management action.

Jason Garland: Our growth rate has been significantly impacted by COVID-19, and our performance is consequently skewed. That said, we are leaving this analysis in our presentation as we believe this still remains the best way to view our performance, and when we return to a more normal environment, it will continue to provide the best insight into our sales trends. The cardio and vascular product line's organic sales were down 15% in Q2. Sales were negatively impacted by the pandemic across almost all of our C&V markets. Structural heart was the exception where we continued to see growth driven by customer development programs. Moving to the next product line, the organic sales in our cardiac and neuromodulation product line were down 37% in Q2 with both neuromodulation and cardiac rhythm management significantly impacted by the pandemic.

Growth rate has been significantly impacted by cobot 19 in our performance is consequently skewed.

That said we are leaving this analysis in our presentation as we believe this still remains the best way to be you are performing.

And when we return to a more normal environment. It will continue to provide the best insight into our sales trend.

The cardio and vascular product lines organic sales were down 15% in the second quarter.

Sales were negatively impacted by the pandemic across almost all of our CNB market structural heart with the exception, where we continued to see growth driven by customer development programs.

Moving to the next product line the organic sales in our cardiac Neuromodulation product line were down 37% in the second quarter with both Neuromodulation and cardiac rhythm management significantly impacted by the pandemic.

Jason Garland: Additionally, neuromodulation was impacted by a $7 million year-over-year headwind from Nuvectra's bankruptcy. Slide 22 shows the final part of our medical segment. Please recall in July 2018, Viant acquired our AS&O product line. The advanced surgical orthopedics and portable medical product line shown today includes sales under supplier agreements with Viant. Sales declined 6% in Q2 versus the prior year driven by the pandemic, partially offset by increased demand for ventilator and patient monitoring components in our portable medical product line. Finally, slide 23 summarizes Electrochem, our non-medical segment. Electrochem sales declined 48% in Q2, driven by the severe decline of the energy market and demand fallout from the COVID-19 pandemic.

Additionally, neuromodulation was impacted by a 7 million dollar year over year headwind from new vectors bankruptcy.

Slide 22 shows the final part of our medical segment.

Please recall in July 2018 buying acquired our answer no product line, the advanced surgical orthopedics and portable medical product line showed today includes sales under supply agreements with Viacom.

Sales declined 6% in the second quarter versus the prior year driven by the pandemic, partially offset by increased demand for ventilator and patient monitoring components in our portable medical product line.

Finally, slide 23 summarizes electrochem, our non medical segment.

Electrochem sales declined 48% in the second quarter, driven by the severe decline of the energy market and demand fallout from the cobot Nike and dynamic.

Jason Garland: We anticipate the market downturn and reduced demand for our products in this segment could be prolonged, which led us to take actions to right size our cost structure. In April, we implemented furloughs and reductions in force in our Electrochem business unit to adjust to this new market environment. Though we suspended guidance in Q1 due to the uncertainty created by the COVID-19 pandemic, we are committed to continue providing transparent communication regarding our financial position and the actions we are taking to not only enhance but to continue to make Integer stronger. Our liquidity has grown in Q2, and with the improvements we have made in increasing our debt covenant leverage cushion, we are well-positioned to continue executing our strategy.

We anticipate the market downturn and reduced demand for our products in this segment could be pro long, which led us to take actions to rightsize our cost structure.

In April we implemented furloughs and reductions in force in our Electrochem business unit to adjust to this new market environment.

So we suspended guidance in the first quarter due to the uncertainty created by the Cobot 19 pandemic, we're committed to continue providing transparent communication regarding our financial position and the actions we are taking to not only in hand, but to continue to make integer stronger.

Our liquidity has grown in the second quarter and with the improvements we have made in increasing our debt covenant leverage cushion, we are well positioned to continue executing our strategy.

Jason Garland: Our liquidity increased in Q2 from our solid cash flow in the quarter, in which we generated $46 million in cash flow from operating activities and $34 million in free cash flow. Cash collections in Q2 were aided by strong sales in Q1, which were not impacted by the COVID-19 pandemic. That also means that our cash flow in Q3 will be lower as we collect on the lower Q2 sales base. CapEx spend was higher in Q2 as compared to the prior year as we remain committed to investing in our strategy.

Our liquidity increase in the second quarter from our solid cash flow in the border and which we generated $46 million in cash flow from operating activities and $34 million in free cash flow cash collections in the second quarter were aided by strong sales in the first quarter, which were not impacted by the covert 19 Ben.

That also means that our cash flow in the third quarter will be lower as we collect on the lower second quarter sales pace.

Capex spend was higher in the second quarter as compared to the prior year as we remain committed to investing in our strategy.

Jason Garland: In Q2, we lowered our net total debt, which is debt minus cash on hand, by $33 million, including paying $15 million on our revolver. Our debt leverage ratio increased to 3.1 times adjusted EBITDA as our trailing four-quarter adjusted EBITDA is lower given the impact of the COVID-19 pandemic on Q2. I'd like to close with reviewing how our financial strength allows us to continue executing our strategy throughout the pandemic. To begin, we increased our liquidity. As a reminder, early in Q2, we executed a $165 million drawdown on our revolver to protect against potential financial market illiquidity in the event of a prolonged pandemic. We continue to view this as an inexpensive insurance and prudent protection against a prolonged pandemic.

And the second quarter, we lowered our net total debt.

Which is debt minus cash on hand by $33 million, including paying 15 million on our revolver.

Our debt leverage ratio increased to 3.1 times adjusted EBITDA as our trailing four quarter adjusted EBITDA as lower given the impact of the coded 19 pandemic on the second quarter.

I'd like to close with reviewing how our financial strength allows us to continue executing our strategy throughout the pandemic.

To begin we increased our liquidity.

As a reminder, early in the second quarter, we executed a 165 million dollar draw down on our revolver to protect against potential financial market liquidity in the event of a prolonged pandemic.

We continue to view this as an inexpensive insurance and prudent protection against the pro long pandemic.

Jason Garland: At the close of the quarter, we had $206 million in cash on hand with $230 million in total liquidity, up $24 million from last quarter. We have historically generated strong cash flows, and we expect to continue generating positive cash flows for the remainder of 2020, albeit at lower levels during H2 of the year. Additionally, we announced early in the month that we worked with our bank group to increase our covenant leverage from 4x to 4.75x from Q3 2020 to Q2 2021. We also added the ability to increase our leverage covenant to 5.25x upon the execution of an eligible M&A transaction. We believe this provides additional protection and flexibility for minimal cost.

The close of the quarter, we had $206 million in cash on hand, but $230 million in total liquidity up $24 million from last quarter.

We have historically generated strong cash flows and we expect to continue generating positive cash flows for the remainder of 2020, albeit at lower levels. During the second half of the year.

Additionally, we announced early in the month that we worked with our bank group to increase our covenant leverage from four times, a 4.75 times from third quarter 2022nd quarter 2021.

We also added the ability to increase our leverage covenant of 5.25 times upon the execution of in eligible M&A transaction.

We believe this provides additional protection and flexibility for minimal cost we want to thank our bank group for their broad support.

Jason Garland: We want to thank our bank group for their broad support. We believe we are well-positioned to withstand a prolonged pandemic, and our strong financials afford us the ability to maintain critical investments that will make us stronger post-COVID-19. With that, I'll turn the call back to Joe. Thank you.

We believe we're well positioned to withstand a prolonged pandemic and our strong financials afford us the ability to maintain critical investment that will make a stronger post cobot 19 with that I'll turn the call back Joe. Thank you.

Joseph Dziedzic: Thank you, Jason. We continue to lead Integer with a priority on taking care of our associates during these uncertain times. Our manufacturing associates continue to build products that patients need every day throughout the pandemic. They are delivering for our customers and ensuring they have the highest quality products where they need them, and on time. We continue to experience strong demand in product development and have expanded our engineering team during the pandemic. Our sales pipeline activity also remains robust, including customer outsourcing opportunities. We are approaching each day as the new normal by increasing our agility to respond to the changing needs of our customers and the volume changes in the marketplace. We are remaining focused on executing our strategy. Our lean experts have been extremely creative in implementing the Integer production system while working remotely, and we continue to move forward with a sense of urgency.

Thank you Jason.

We continue to lead integer with a priority on taking care of our associates. During these uncertain times.

Our manufacturing associates continued to build products that patients need every day throughout the pandemic.

They are delivering for our customers and ensuring they have the highest quality products, where they need them and on time.

We continue to experience strong demand in product development and have expanded our engineering team during the pandemic.

Our sales pipeline activity also remains robust including customer outsourcing opportunities.

We are approaching each day as the new normal by increasing our agility to respond to the changing needs of our customers and the volume changes in the marketplace.

Remaining focused on executing our strategy.

Our lean experts have been extremely creative and implementing the integer production system, while working remotely and we continue to move forward with a sense of urgency.

Joseph Dziedzic: The sales leadership is accelerating the execution of our sales force excellence operational strategic imperative despite the pandemic, and we continue to make the necessary investments in our capabilities to deliver differentiated products to our customers. The impact of COVID is real and significant, but we remain focused on executing our strategy through the pandemic so that when volumes return to normal, we are back on the growth trajectory we were on pre-COVID. Thank you for joining our call this morning. I will now turn the call back to our operator for the Q&A portion.

Sales leadership is accelerating the execution of our Salesforce excellent operational strategic imperative, despite dependent Mick and we continue to make the necessary investments and our capabilities to deliver differentiated products to our customers.

The impact of Cobot is real insignificant, but we remain focused on executing our strategy through the pandemic. So that when volumes returned to normal we're back on the growth trajectory we were on pre coated.

Thank you for joining our call. This morning, I'll now turn the call back to our operator for the acuity portion.

Operator: Ladies and gentlemen, in order to ask a question, you will need to press star and then one on your telephone. Please stand by while we compile the Q&A roster. Our first question comes from the line of Matthew Mishan with KeyBank. Your line is open.

Ladies and gentlemen in order to ask a question you will need to press star and one on your telephone please stand by what we called acuity roster.

Our first question comes from line of Matthew Michelle with Keybanc. Your line is open.

Matthew Mishan: Great, thank you for taking the questions. Hey, Joe, I just want to clarify some of the commentary between market sales and your sales. I think you are very consistent with how you've approached it from last quarter call to this quarter call. What I'm not sure about is where you captured for Integer the higher trough of industry sales in Q2. It's pretty clear that May, June trends from the customer were stronger than they had anticipated back in April and back when you were communicating your forward outlook. Where did that change apply to Integer?

Great. Thank you for taking the questions I'm Joe.

Clarify or some of the commentary a between between market <unk> market sales and your and your sales.

I think.

Our very consistent with how you've approached it from last quarter called the this quarter call, what I'm not well I'm not sure about is.

Where you where you captured for integer the higher trough.

Industry sales in Twoq, So it's pretty clear that May June trends from the customer worst works were stronger than the they had anticipated and it back it back in April it back when you were communicating a youre your.

Forward outlook.

Where did that where did that change applied to integer.

Well, Matt it it showed up both in our second quarter results as well as in our and our current view of what where we think the third and fourth quarter will land I think we didnt provide specific revenue guidance or quantitative guidance for the second or third quarter what.

Joseph Dziedzic: Well, Matt, it showed up both in our Q2 results as well as in our current view of where we think the Q3 and Q4 will land. I think we didn't provide specific revenue guidance or quantitative guidance for the Q2 or Q3. But what we saw on our earnings call, what we conveyed on our earnings call was we were down about 20% in the month of April. By all previous communications, and now it's been communicated more clearly, the industry appears to have been down in the order of magnitude of 55% in the month of April. We knew in the month of April that we weren't down as much as the industry, and we expected the lag that we've described.

What we what we what we saw on our earnings call. What we conveyed on earnings call was we were down about 20% in the month of April and by all previous communications and now it's been it's been communicating more clearly the industry appears to have been down in the order of magnitude of 50, 55% in the month of April.

So we knew in the month of April that we weren't down as much as the industry and we expected the lag that we've described so I think the best way to look at our sales is this correlating it to the industry with this lag we've tried to portray that is clearly as we could we didn't know what the second quarter sales were gonna be.

Joseph Dziedzic: I think the best way to look at our sales is correlating it to the industry with this lag, and we've tried to portray that as clearly as we could. We didn't know what the Q2 sales were gonna be. You know, we knew orders were declining. We were studying our backlog and what customers were communicating to us, but we knew that it would take our customers time to assess the impact of the market and then translate that into changes in their production plans, and then translate that into order changes for us. We fully expected this lag. I wouldn't say that our sales is higher or lower than what we expected, because what we expected in the Q2 was dependent upon what happened in the market.

You know we knew orders were declining we were studying our backlogging what customers work in beauty catering to us, but we knew that there would there would it would take our customers time to assess the impact of the market and then translate that into changes in their production plans and then translate that into border changes for us. So we fully expect.

Affected this lag I wouldn't say that ourselves is higher or lower than what we expected because what we expected in the second quarter was dependent upon what happened in the market, but we knew there would be a lag and that lag has played out and we think it we think it's very clear its order of magnitude 10 percentage points I, we can't be.

Joseph Dziedzic: We knew there would be a lag, and that lag has played out, and we think it's very clear it's order of magnitude 10 percentage points. We can't be as precise as we'd love to be, but when we look at J&J and Abbott, for example, down 33-34% in their med device sales, Abbott, we're excluding their diabetes business, and we see that we were down 24%. The lag is evident. You just have to look at April, with the industry down 50+% and we were down about 20%. We expected to hit the bottom of our curve, the trough, sometime in late Q2 based on what at the time everybody was thinking. That shifted a little bit based upon the actual orders.

As precise as we'd love to be but when we look at JNJ. It habit for example, down 33, 34% and their med device sales ADVATE were excluding their diabetes business and we see that we were down 24%. The lag is evident but you just have to look at April with the industry down 50, plus percent and we were down about 20.

8% and we expected to hit the bottom of our curve the trough sometime in late Twoq you based on what at the time, everybody was thinking that shifted a little bit based upon the actual orders. We've studied our order pattern in our backlog from our customers and tried to core.

Joseph Dziedzic: We've studied our order pattern and our backlog from our customers and tried to correlate that to the industry dynamic, and this lag is very clear. Our backlog declined during the months of April and May, commensurate with our sales decline. In June, our backlog was flat. There wasn't much increase or decrease. In July, the first three weeks, we've seen our backlog grow, in a way that's consistent with the curve that we're portraying. I guess I don't have an answer to why it's different than the industry view, because we were correlating our expectation against the industry view, because we are a reflection of the industry just with a lag.

Yeah that to the industry dynamic and this lag is very clear.

Our backlog declined during the months of April and May commensurate with our sales decline in the month of July or June in June our backlog was flat there wasn't much increase or decrease in July the first week three weeks, we've seen our backlog ROE in a way that's consistent with the curve.

That were portraying so I guess I don't have an answer to why it's different than the industry view, because we were correlating our expectation against the industry view, because we are a reflection of the industry just with a lag.

Matthew Mishan: Yeah, I think to sum it up, I think what it looks like is, you know, when you communicated Q2 at that down 20, I had modeled, I think down 25% for Q2. I don't think that probably accurately reflected, you know, some of what you were thinking Q2 could have been, could have actually been down. Then Q2 actually came in better than your internal expectations based upon customer orders.

No I think I talked to.

To sum it up I think what it looks like is.

When you communicated to Q that down 20, I I I had modeled heading down 25% for Twoq you I don't think that probably accurately reflected you know some with some sub sub or what you were thinking too cute could have been could or could have actually been down and then twoq you actually came in better than your internal expectations based upon based upon.

Takes the place one customer orders.

I, Yeah, let me if I go back to first quarter. We had said April was down 20% and and we knew that did not reflect the full impact.

Joseph Dziedzic: If I go back to Q1, we had said April was down 20% and we knew that did not reflect the full impact of COVID because at that time there were indications and communications about the industry being down order of magnitude 50% in April. We knew 20% wasn't the full impact, and we tried to convey that we expected Q2 to be worse than 20% on April down 20%. We tried to portray it on the Q1 with our bottom of the curve for Integer sales being in late Q2, while the industry would be in early to mid Q2. Everything just kind of shifted to the right for us based upon the actual order pattern.

Of Kobe because at that time, they were they were indications that communications about the industry being down order of magnitude 50% in April. So we we do 20% wasn't the full impact and we tried to convey that that we expected second quarter to be worse than 20%.

How much money.

And we tried to portrayed on the first quarter with with our bottom of the of the curve for integer sales being in late two Q.

While the industry would be an early to mid to Q everything just kind of shifted to the right for us based upon the actual order pattern.

Joseph Dziedzic: I think the thing I would convey is relative to the industry, we think our sales in Q2 were about 10 percentage points. This is a range, this is an order of magnitude, it's not a precise number, but about 10 percentage points better than the industry volumes. Which means in H2 that has to unwind. What I'm confident of is, we continue to win business with customers. We are a reflection of the market during this dynamic, during the pandemic. As volumes go down and come back up, we're going to be a reflection of the market. We're just going to have this lag based upon the time it takes for customers to absorb the market impact, translate that into changes in their production, and translate that into a change in demand on us. We're a reflection of the market with just a lag.

But but I think the thing I would I would convey is relative to the industry. We think our sales in the same quarter were about 10 percentage points. This is a rate. This is an order of magnitude it's not a precise number what about 10 percentage points better than the industry volumes, which means that the second half that has to unwind.

And what I, what I am confident of is aren't we continue to win business with customers. We are a reflection of the market. During this dynamic during a pandemic and as volumes go down and come back up we're going to be a reflection of the market. We're just going to have this lag based upon the time it takes for customers to absorb the mark.

Joseph Dziedzic: We're just going to have this lag based upon the time it takes for customers to absorb the market impact, translate that into changes in their production, and translate that into a change in demand on us. We're a reflection of the market with just a lag.

Can impact translate that into changes in their production and translate that into a change in demand on us. So we are a reflection of the market with just a lag.

Matthew Mishan: Okay. I think that's all very fair. Are your customers... When you're talking about the Q4 forecast and moving forward, are your customers just factoring in the coronavirus at this point? Or are they starting to take into account some other factors like unemployment? Have you had some broader conversations about how they're seeing the recovery?

I think that's all I think that's all very fair.

[music].

Our your cost when you when you're talking about the Fourq you forecasted and moving forward are your customers just factoring in the quota virus at this point or are they starting to take into account. Some other factors like unemployment have you had some broader conversations about how there how that how they're seeing the recovery.

Great Great question I, I think I think everyone is built and as much as they can projected given a high degree of uncertainty.

Joseph Dziedzic: Yeah. Great question. I think everyone has built in as much as they can project given the high degree of uncertainty. What I am more confident in is the near term and the near term orders that we have with customers recognizing that reaction time that it takes for them. I do believe our customers have factored in some underlying assumption for the impact of unemployment, the impact of what you know, potentially another federal government stimulus or CARES Act package could be. I think that's all factored in. From a practical perspective, looking six to nine months out, our demand is gonna be what our customers see closer to that time period.

But what I, what I, what I am more confident in is the near term and the near term orders that we have with customers recognizing that reaction time that it takes for them I do believe our customers have factored in some underlying assumption for the impact of unemployment the impact of what potentially another federal.

So a government stimulus or or cares act a package it could be I think that's all factored in but more practical perspective looking six to nine months out our demand is going to be what what's what's.

What our customers see closer to that time period.

Joseph Dziedzic: We really have pretty good visibility to the next 2, 3 months. When you get beyond 3 months, it's really dependent upon what they see come August. September will determine what they do for Q4 demand on us.

We really have pretty good visibility. So the next two three months when you get beyond three months. The it really does really dependent upon what they see come August September will determine what they do for fourth quarter demand on us.

Matthew Mishan: Okay. All right. Then the decremental margin I think in the quarter was a little steeper than we had modeled. Can you talk through some of the investments that you might have been making in the quarter to help strengthen the relationship with your customers for the long term?

Okay.

All right and then the decremental margin I think in the quarter was it was it was a little steeper than we had modeled can you talk through some some of the investments that you you might have been baking in the quarter helps strengthen the relationship with with your customers and the for the long term.

Joseph Dziedzic: Absolutely. I'll start with when you can't see this because we don't. We publish gross profit, which includes the infrastructure in our manufacturing operations. The gross profit includes the fixed cost in every plant, the building itself, the overhead, the maintenance, the equipment. What we do is we look at the variable profit, which is the variable margin, variable cost, and we work really hard to match that variable cost to our sales change. Obviously, I think you've seen this in every company that's reported a meaningful drop in sales, you need some amount of time to be able to adjust your variable cost, and you need even more time to adjust that fixed cost. When we look at our variable profit or variable margin, we saw a slight deterioration in that.

Absolutely. So let me I'll start with when you you can't see this because because we don't we published gross profit which includes the infrastructure in our manufacturing operations.

The gross profit includes the fixed cost and every plant the building itself the overhead the maintenance the equipment when we so what we do as we look at the variable profit, which is the variable margin variable costs and we've worked really hard to match that variable cost to our sales change.

Obviously I think you've seen this in every every company. This reported a meaningful drop in sales you you need some amount of time to be able to adjust your variable costs and you need even more time to adjust that fixed costs. When we look at our variable profit or variable margin, we saw a slight deterioration in that.

Joseph Dziedzic: We had some inefficiencies in implementing social distancing and being able to react to the meaningful volume decline. Overall, I think in the quarter, we were pretty effective at matching our variable costs to the sales decline. It's the fixed cost in the plants, the overhead, the infrastructure, is what drove the majority of the gross profit decline. So that's why you see the decremental margin being as big as it is. The reverse of that is when sales grow and you get growth on top of that fixed cost, you get leverage on the other side, which is why growth is so important.

We had some inefficiencies in implementing social distances and being able to react to the meaningful volume decline, but overall I think in the quarter, we were pretty effective at matching our variable cost to the sales decline. It's the fixed cost in the plants. The overhead the infrastructure is what drove the majority of.

The gross profit decline and so Thats why you see the decremental margin being as big as it is the reverse of that is when sales grow and you get growth on top of that fixed costs you get leverage on in the other side, which is why growth is so important but to your question about the investments that we've made we made a conscious.

Joseph Dziedzic: To your question about the investments that we've made, we made a conscious decision when we were, like everyone, faced with what to do during the pandemic, that we viewed this as a 6 to 9, maybe now it's a 12-month temporary decline, and that we were going to continue executing our strategy and play the long game. We were gonna continue investing because the things that we've succeeded in accomplishing thus far with our customers, two-thirds of our business under multi-year agreements. We have a meaningful amount of opportunities with our customers. Our commercial activity, when you look at the quote volume and the amount of opportunities we have with our customers, continues to grow. We've added salespeople.

Decision when when we were like everyone faced with what to do during the pandemic that we view this as a six to nine maybe now it's a 12 month decline temporary decline and that we were going to continue executing our strategy play. The long game, we were going to continue investing because the things that we've done this what we've seen.

Exceeded in accomplishing thus far with our customers two thirds of our business under multiyear agreements, we have a meaningful amount of opportunities with our customers are our commercial activity. When you look at the quote volume in the amount of opportunities we have with our customers continues to grow we've added salespeople you, we I talked in the last call about.

Joseph Dziedzic: I talked on the last call about the new sales leadership team and the processes we're putting in place there. Our development of new program activities, the R&D work we're doing with customers, continues to grow. That demand continues to grow. We've been adding engineers during the pandemic to support that development work because we have growth opportunities. Once the market recovers, those will become more visible. They're not visible today because of the pandemic, but the pipeline is very robust, and that gives us great optimism. We didn't want to hit pause on that and allow those to go somewhere else because we've worked really hard to build the relationships with our customers, get multi-year agreements, and we're confident in the future growth. We've decided to play the long game, which reflects in some of our margins.

The new sales leadership team in the process is we're putting in place there our development of new program activities. The R&D work, we're doing with customers continues to grow that demand continues to go we've been adding engineers during a pandemic to support that development work, because we have growth opportunities and once the market recovers those and become more.

Visible, they're not visible today because of the pandemic, but the pipeline is very robust and that gives us great optimism, we didnt want to hit pause on that and allow those to go somewhere else because we've worked really hard to build the relationships with our customers get multiyear agreements and we're confident in the future growth and so we decided to.

Play the long game, which.

Reflects in some of our margins we might have been able to take another $235 million a cost out but that would have come at the expense of executing the strategy and we chose consciously display the long game.

Joseph Dziedzic: We might have been able to take another $2, 3, 5 million dollars of cost out, but that would have come at the expense of executing the strategy, and we chose consciously to play the long game.

Matthew Mishan: Okay, excellent. This is just a follow-up to that. This is the last question, then I'll jump out. Apologies to the guys behind me. Are your customers making changes or thinking about changes around business continuity and redundancy coming out of this and how does that you know potentially impact Integer? Thanks for taking all the questions.

Actually this is and this is just a follow up to that and that's last question and I'll jump back and apologies to the guys behind me or are your customers, making changes or thinking about changes around around business continuity and redundancy coming out of this and how does that potentially impact insured.

And thanks for taking my questions.

Oh, no nowhere is one of which Matt. Thank you for the questions. I think it's funny question that our customers are looking at the pandemic and asking themselves how do they take advantage of this what what is what are the opportunities that this this creates and I do we do believe that they are really looking at.

Joseph Dziedzic: No worries, Matt. Thank you for the questions. I think it's unquestioned that our customers are looking at the pandemic and asking themselves, how do they take advantage of this? What are the opportunities that this creates? We do believe that they are relooking at what infrastructure they have, what infrastructure investments they want to make in their own manufacturing, and they're making those trade-offs, and we're seeing opportunities. You know, on the last call, I was asked a question, well, what's COVID done to their insourcing, outsourcing decisions? At that time, I thought it was way too early to have an indication. You know, there are indications that our customers are in fact thinking about what is it that they want that's most strategic.

What infrastructure they have what infrastructure investments they want to make in their own manufacturing and they're making those trade offs and we're seeing opportunities.

On the last call I was asked the question whats cobot done to their insourcing outsourcing decisions that I could that time I thought it was way too early to have an indication.

There are indications that our customers are in fact thinking about what is it that they want this most strategic as we look at it and an environment, where cash is important and cap capital investments are more constrained there's more opportunity for us than we've seen those opportunities and we think outsourcing will continue.

Joseph Dziedzic: As we look at it in an environment where cash is important and capital investments are more constrained, there's more opportunity for us, and we've seen those opportunities. We think outsourcing will continue to grow and accelerate. Business continuity was important going into COVID. I think in the environment where there's excess capacity, you know, it's less of a concern. As we ramp back up, it's going to be even more important, especially when we get on the other side and we see the growth and the pent-up demand that's happening in the market at the moment. Thanks for the questions, Matt.

To grow and accelerate business continuity was was important going into cobot.

I think it in the environment, where there's excess capacity, which is less of a concern, but as we ramp back up it's going to be it's going to be even more important, especially when we get on the other side and we see the growth in the pent up demand that that's happening in the market at the moment.

Thanks for the questions Matt.

Our next question is from Jim Sidoti with Sidoti and company. Your line is open.

Operator: Our next question is from James Sidoti with Sidoti & Company. Your line is open.

James Sidoti: Good morning. Can you hear me?

Good morning can you hear me.

Joseph Dziedzic: Yes, Jim. Good morning.

Yes, Jim good morning.

James Sidoti: You know, you did a pretty good job, I think, saying you know explaining how basically you're seeing the same trends as the industry, only your trends are shifted a little bit to the right, you know, lagged a little bit because of the delay in orders. You seem to indicate that Q3 will be your lowest quarter on sales, but not on profitability. Did I hear that correctly, and why would that be?

So you did a pretty good job I think say, explaining how basically you're saying the same trends as the industrial your turns or shifted a little bit to the right lagged a little bit because of the delayed orders but.

We seem to indicate the Q3 will be your lowest quarter on cells, but not on profitability did I hear that correctly and why would that be.

[noise], Jim we do think that second quarter will be the lowest on profitability. We think third quarter is likely even if third quarters are similar would you expect this second quarter.

Joseph Dziedzic: Jim, we do think that Q2 will be the lowest on profitability. We think Q3 is likely even if Q3s are similar.

James Sidoti: Yeah.

Joseph Dziedzic: which we expect is Q2

James Sidoti: I'm sorry. Yeah.

Joseph Dziedzic: It might be a tad.

That's what I meant I'm, sorry, third quarter would be lowest on sales, but not on profitability.

James Sidoti: That's what I meant. I'm sorry.

Joseph Dziedzic: Yeah.

James Sidoti: Q3 would be lowest on sales, but not on profitability.

Joseph Dziedzic: Yes. Part of that is in Q2, we had inefficiencies related to implementing the social distancing environment. We had some inefficiencies from a variable cost perspective, the ability to react as quick as the volume declined. We also continue to execute our manufacturing excellence strategy to drive savings and efficiency into the business. We expect of ourselves to get better every quarter on both a year-over-year on a linear basis. We expect Q2 to be the bottom from a margin rate or a profitability measured by margin rate perspective. You know, we expect it to be a little better in Q3.

Yes, it's a part of that is in the second quarter, we had inefficiencies related to implementing the social distancing environment. We had in some inefficiencies from a variable cost perspective, the ability to react as quick as the volume decline and we also continue to execute our manufacturing next.

On strategy to drive savings efficiency into the business. So we expect of ourselves to get better every quarter on both a year over year on a linear basis and so we expect the second quarter to be the the bottom from a margin rate or a profitability measured by margin rate perspective, we expected to be a.

A little better and a third quarter there were inefficiencies in the second quarter, but I think we manage them pretty effectively so we'll get some help there and then it's just a continuous improvement efforts in the business should drive improvement in the third quarter and just let me frame when we say third quarter sales might be a little lower than second quarter make order of magnitude.

Joseph Dziedzic: There were inefficiencies in the Q2, but I think we managed them pretty effectively, so we'll get some help there. Then it's just the continuous improvement efforts in the business to drive improvement in the Q3. Just let me frame. When we say Q3 sales might be a little lower than Q2, I mean, order of magnitude, we're in low single digit, you know, percentages. The single digit dollars of revenue. We're not talking meaningful. At least that's what we see sitting here today. Obviously, July sales are almost complete and we've got a really good visibility into August and September orders and demand from our customers.

We're in low single digit you know percentages single digit dollars of revenue, what we're not talking meaningful at least that's what we see sitting here today and obviously July sales are almost complete and we've got really good visibility into August and September orders and demand from our customers that's not to say that can't change.

Joseph Dziedzic: That's not to say that can't change, but the picture we're looking at today, we feel like we've got pretty good visibility to Q3.

Page, but the picture we're looking at today, we feel like we've got pretty good visibility to the third quarter.

Okay, and then you did.

James Sidoti: Okay. You did take on some more debt in the quarter. Can you let us know what you think interest expense will be over the next couple quarters?

Take on some more debt in the quarter can you.

Can you let us know what you think interest expense will be over the next couple of quarters.

So we are you know we are about an average three 3.6% print to Q and and you know again barring any real big changes with live where we expect to keep that consistent right to the second half.

Jason Garland: We, you know, are about an average 3.6% for Q2. You know, again, barring any real big changes with LIBOR, we expect to keep that consistent really for H2, Jim.

James Sidoti: 3.6% on the new balance.

So 3.6% on this on the new balance.

Jason Garland: Yeah.

Yeah.

Joseph Dziedzic: The debt increase, Jim, was from the revolver draw down, which we would expect to repay the revolver as the environment continues to stabilize.

Joseph Dziedzic: The debt increase, Jim, was from the revolver draw down, which we would expect to repay the revolver as the environment continues to stabilize. We actually paid down-

The debt increased Jim what was from the revolver draw down, which we would expect to repay the revolver as the environment continues to stabilize that we actually were actually paid down on on the.

Jason Garland: We actually paid down-

Joseph Dziedzic: Right.

Jason Garland: On the Term Loan A.

On the eight terminate yes, we are required debt payment and then we also paid back with within the quarter or by the end of quarter 15 million on the revolver. So we drew it late <unk> early in the quarter in April and with the cash we generated we actually paid some of that back even with them, but to your point.

Joseph Dziedzic: Yep.

Jason Garland: We had our required debt payment, and then we also paid back within the quarter or by the end of the quarter, $15 million on the revolver. You know, we drew it early in the quarter in April. And with the cash we generated, we actually paid some of that back even within. To your point, quarter over quarter, you see the net increase from the revolver draw.

Quarter over quarter, and you see the net increase from the revolver draw.

James Sidoti: Yeah. Well, you know, Jason-

Well you know again, so anything that just to be prudent and you know and prevent against any risk in a case the market became illiquid and you know and this thing for a long. So we're watching that you know we believe that that.

Jason Garland: Again, we do that just to be prudent and, you know, and prevent against any risk in case the market became illiquid and, you know, and this thing is prolonged. We're watching that. You know, we believe that, you know, the situation in the credit markets is certainly stabilizing. You know, we'll continue to look at that balance and likely bring down that through H2.

Yeah the situation in the credit markets, it's certainly stabilizing and and we'll continue to look at that balancing likely bring down that through the second half.

Joseph Dziedzic: Jim, the net debt in Q2 went down $33 million. When you look at cash and debt combined, it was down $33 million in Q2.

Jim the net debt in the second quarter went down $33 million. So when you look at cash and debt combined it was down 33 in the quarter.

James Sidoti: Okay. Yeah. You know, I know Jason's used to running the business with less than $20 million of cash, you know, in the bank. I would expect you can make some changes over the next couple quarters.

Okay.

Jason you start in the business with less than 20 million a cash no in the bank. So I would expect.

I would expect you can make some changes over the next couple of quarters.

Joseph Dziedzic: Yes. We will definitely get back to that level when we get to a more normal environment.

Yes, we will definitely get back to that level with when we get to a more normal environment.

James Sidoti: All right. Thank you.

Thank you.

Joseph Dziedzic: Thank you, Jim.

Thank you gentlemen, thanks.

Jason Garland: All right. Thanks, Jim.

Operator: Again, it is star and then one. Thank you for your question. At this time, there are no further questions. I will now turn the call back over to Tony Borowicz for any closing remarks.

And again it is star and then one thank you for a question.

No Thats done there no further questions I'll now turn the call back over to 20 for what's for any closing remarks.

Tony Borowicz: All right. Thank you everyone for joining us on today's Q2 call and for your continued interest in Integer. Note that this conference call is gonna be available for replay on our website. Thank you. That concludes the call today, and stay safe everyone.

Thank you. Thank you everyone for joining us on today second quarter call.

And for your continued interest in under note that this conference call is going to be.

Available for replay on their website.

Thank you that concludes the call today and they say for everybody.

Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.

Ladies and gentlemen, this concludes todays conference call. Thank you for your participation and you may now disconnect.

[music].

Q2 2020 Integer Holdings Corp Earnings Call

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