Q3 2020 Integer Holdings Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the integer Holdings Corporation Q3, 2020 earnings Conference call. At this time all participants are in a listen only mode. After the speakers presentation. There will be a question and answer session was.
Good question during the session you'll need to press star one in your telephone. Please be advised that todays conference is being recorded if you require any further assistance. Please press star zero I wouldn't know, let's turn the call over to Anthony Burwitz Senior Vice President of strategy corporate development in the press relations. Please go ahead.
Good morning, everyone. Thank you for joining us and welcome to integers third quarter 2020 earnings Conference call.
With me today are Joe di <unk>, President and Chief Executive Officer, and Jason Carlin Executive Vice President and Chief Financial Officer.
As a reminder, the results and data we discuss today reflect the consolidated results have been in here for their parents indicated.
During our call, we'll discuss non-GAAP measures for reconciliation of these non-GAAP measures. Please see the appendix of today's presentation and then on to the financial statements in todays earnings release, which are available on our website at <unk> Dot net.
Please note that today's presentation includes forward looking statements. Please.
Please refer to the company's FCC filings for a discussion of the risk factors that could cause our actual results to differ materially.
On today's call Joe will provide his opening comments on the third quarter. Jason will then review our financial results and provide an update on the fourth quarter outlook Joe.
I will come back on to discuss the impacts of Cobra and ended yourself and provide a review of our emerging customer portfolio.
He will then provide his closing comments and we will take your questions. At this point I will turn the call over to Joe for his comments.
Tony.
And thanks to everyone for joining the call today.
Throughout the pandemic, we have remained focused on executing our strategy and one of the best examples of this is our manufacturing excellence strategic imperative, which has positioned us incredibly well to be able to navigate the uncertainty that koby created.
The agility the manufacturing team is displayed by being able to adjust to the fluctuating demand throughout our manufacturing footprint has been impressive and our associates continue to deliver for our customers and the patients they serve.
Our associates that come into our manufacturing plants everyday during this pandemic to deliver the products patients need are inspiring and enabling us to realize our vision of enhancing patients' lives.
We've also been very focused on protecting the investment in our strategy, whether it's by adding more R&D resources to continue developing new products for our customers, we're adding additional capabilities that allow us to penetrate faster growing segments.
We continue to add strategic talent to the organization that bring with them the skills necessary for us to accelerate our top line growth.
From a third quarter perspective, what we communicated on our earnings call back at the end of July is fundamentally what we delivered.
We said that our sales would be down slightly from the second quarter and they were $4 million right in line with what we expected internally.
We also expected and communicated that the margin rate would improve in the third quarter versus the second quarter, even though sales were down slightly and that is exactly what happened we expanded margins by 150 basis points versus the second quarter.
We remain incredibly focused on working capital and driving cash flow despite.
Despite the suppress sales due to the pandemic, we were still able to reduce net total debt by $23 million within the quarter.
The team has done a great job of reducing inventory levels and managing overall working capital.
We're providing a high level outlook for the fourth quarter, because we believe we have sufficient visibility and stability in our near term sales to do so.
We expect the fourth quarter to be the start of our sales recovery from the pandemic.
Our margin rate improved in the third quarter versus the second quarter and we expect the fourth quarter to continue this trend.
The rapid decline in volume together with our decision to continue executing our strategy and maintaining the infrastructure to support the return of sales coast Covid. It was improved over the second quarter.
Consistent with our prior communication the second quarter saw our lowest level of profitability, while in the third quarter, our focus on manufacturing excellence improved our ability to adjust variable costs to lower sales volumes and better manage the challenges of operating with social distancing.
We are confident that having maintained strategic and often long term investments throughout the pandemic our customers and the patients we ultimately serve will benefit.
Turning to the next slide we see the graphical representation of the impact of 22% year over year reduction in sales had on our income.
While improved over the second quarter are balanced approach to cost management during a temporary but steep reduction in sales as seen in the operational drivers column and contributes a $29 billion reduction in our adjusted net income in the third quarter versus last year.
Our continued focus on that an interest rate management as well as lower LIBOR reduced our interest expense by $2 million and contributed seven cents per share of growth.
The impact from our effective tax rate was significant in the third quarter and contributed $5 million a year over year income growth.
We benefited from discrete items are recorded in the third quarter related to the favorable impact of final tax reform regulation.
The benefit of our tax planning strategy of optimizing foreign tax credits and R&D tax credits on our 2019 returned exceeding our original provision.
This resulted in a negative 15% adjusted effective tax rate in the third quarter and 11% for the third quarter year to date.
We expect our total year 2020, adjusted effective tax rate to be between 12, and 14%, which will likely increase in 2021 back to 2019 levels without a significant benefit indiscreet items seen this year.
And finally foreign exchange was unfavorable 1 million dollar in the third quarter, primarily related to the euro.
I will now transition to providing an update on our third quarter cash flow and continued financial strength as our liquidity continue to increase.
And the third quarter, we continued to strong conversion of income to cash and generated $32 million in cash flow from operating activities and $24 million in free cash flow. Despite the impact of Covid on our sales.
We're reduced our net total debt, which is our total debt minus casual enhanced by $23 million, we continue to steadily reduce our net total debt consistent with our strategy.
However are that leverage ratio increased to three five times adjusted EBITDA as our trailing Forequarter adjusted EBITDA is lower given the impact of the COVID-19 pandemic on the second and third quarter.
In addition to the strength of our operational cash generation I am pleased to share that following a patent litigation judgment being a firm by the United States Court of appeal.
Introduce favor we received $28 million of cash early in the fourth quarter on October 15.
The following day, we repaid are outstanding debt by an equal amount and our net total debt reduced to $719 million down from $770 million at the end of the second quarter. Despite the pandemic, we've reduced our net total debt this year by over $90 million.
In the context of the cash generation in debt payments. We just discussed the next slide provides a holistic view of our financial strength, we have maintained during the pandemic.
As mentioned earlier, we increased our liquidity again in the third quarter at quarter clothes, we had $100 million in cash on hand with $243 million in total liquidity up $13 million from the second quarter.
During the quarter, we paid down $120 million on our revolver as the liquidity markets have remained stable. This.
This is consistent with our expectation to pay the revolver by year end with.
With the patent judgment cash receipt or liquidity increase an additional $28 million in the beginning of the fourth quarter.
We continue to manage are working capital and we expect to continue generating positive cashless for the remainder of 2020.
We believe we have ample EBITDA cushion on our leverage in interest coverage covenants and we continued to meaningfully reduce our debt.
Integer has not only proven its ability to withstand the challenges of the pandemic, but to also maintain critical investments to execute the company strategy and make integers stronger.
I would now like to give you additional detail in context in the fourth quarter outlook that Joe summarized in the opening slot.
First you may recall earlier this year, we suspended our financial guidance due to the significant uncertainty created by the COVID-19 pandemic.
We remain in the midst of the pandemic and we still see considerable uncertainty and therefore, we're not resuming full financial guidance. However, in keeping with our commitment to provide as much clarity and transparency as possible, we want to provide more insight into our fourth quarter expectations.
Our backlog has improved which gives us confidence in our expectation of fourth quarter sales being between 255 and $270 million.
We expect a fourth quarter to be the beginning of the sales recovery for integer due to the industry inventory build in the first half of 2020, and it's depletion in the second half.
This anticipated sequential improvement of $20 million to $35 million in sales from the third to fourth quarter is in line with our prior communication.
We expect adjusted operating income come margin rates to recover as volume recovers, which is also consistent with our prior communication and.
In fact, we expect the fourth quarter adjusted operating income margins to be 200 to 300 basis points higher than the third quarter.
As it relates to the fourth quarter sales still being down 17% to 22% versus prior year I'd like to draw your attention to two items that fall outside of the recovery of the medical device industry.
As compared to the prior year, the fourth quarter of 2020 has 5% fewer day and and also impacted by the downturn in the energy market and in turn on our electric come sail.
Excluding these differences were getting closer to converging with the medical device industry as our customers deplete the inventory they built in the first half of the year when our sales growth outpaced the industry.
Joe will discuss this dynamic in greater detail when you provide the COVID-19 update in the next sections.
We've heard a lot of conversation in the industry and heard a lot of investors ask of how to think about 2021 from a growth rate perspective.
It's the best comparison for 2021 against the Covid impact of 2020 or should we compare 2021 against 2019.
So if we had thought about this and we have begun to build our 2021 budget for planning purposes. We started to look at what 2021 will look like assuming it was the exact same volume unit volume at 2019, what's the same and what's different.
There were four items that jumped out to us that would yield a different dollar amount of sales in 2021, even with the same unit volume at 2019.
But first two items with the same headwinds we discussed when we shared our 2020 pre covid outlook in February and they still apply in the comparison to 2019.
The first one is new vedra.
We're very clear about the impact of new vectors bankruptcy in the fourth quarter of 2019, when we spoke about our 2020 outflow we.
We had $17 million of sales in 2019 that would not repeat in 2020 and nor will it repeat in 2021.
So when compared to 2019 this becomes the first adjustment for comparable of 2021 based on.
The second item relates to fewer calendar days versus 2019 that we'd also discuss when we shared our pre covid 2020 outlook. This creates approximately $10 million of headline.
The third item as the contraction of the energy market in 2020 due to excess supply in oil coupled with the reduced demand from the pandemic. This.
This impacts are nonmedical business, Electrocom, which we expect to be approximately $23 million down in 2020 sales versus 2019.
So we cannot make the claim that we know exactly how the energy markets will look in 2021. It is our operating assumption that there will be no recovery in the energy market or NR electrochemically sales until 2022.
So again this creates an additional adjustments who are 2021 baseline as we compared to 2019.
And last we know that we give 1% to 2% of price reductions to our customers. Every year. These are built into our long term supply agreement, which cover roughly two thirds of our sales to customers.
So we have considered that in 2021 on the same exact production and shipment unit volume at 2019, the cumulative reduction in selling prices for two years.
Will reduce our sales approximately $38 million in 2021.
The some of these four items yields $1.170 billion as comparable 2021 versus 2019.
As we continue our budget process, we will apply our industry growth rate assumption as a starting point against this $1.170 billion in February we expect to share a guidance using this framework.
With that I'll turn the call back to Joe. Thank you.
Thanks, Jason.
Now, let's talk about Covid and the impact it has had on integer in the industry sales.
We believe that whatever impact covid has on our customer sales they will ultimately flow through to integer.
But there will be a difference in timing because of where we are in the supply chain and and how the hospitals and our customers build and reduce inventory.
We've talked about this dynamic on our last two earnings calls in this quarter will be no different what is different is are improved understanding of the timing difference between into juror in the industry sales.
As we have studied the demand from our customers. It has become clear to us that during the first quarter of this year. There was more inventory built in the industry than we initially realized.
This became very evident as we analyze the demand from our customers for the third and fourth quarters.
This caused us to look back at the first quarter when the pandemic had a much smaller impact on the industry sales.
We estimate that the industry declined about 6% an integer grew about 4%, creating a 10 percentage point difference in the first quarter.
This wasn't as evident to us as we entered the second quarter as we were managing through the immediate impacts of the pandemic.
As we studied the demand from our customers began to better understand the impact that industry inventory levels were having on our third and fourth quarter sales the impact from the first quarter became more evident.
We believe the industry inventory build during the first half of 2020 is being depleted potentially to lower levels than pre covid.
This could be better inventory management or an over direction, it's hard to know at this time.
What are the improvements we may there was as a result of Covid as we have meaningfully increased our understanding of near term demand from our customers ill defined near term is somewhere in the 90 to 120 day range more.
Most of our orders flow like a short cycle business, even though our products have a quality and regulatory cycle the behavior more like a long cycle business.
On our second quarter earnings call at the end of July we had about 30 days of sales already shipped in 60 days and our third quarter estimate.
We finished the third quarter very close to our internal sales estimate.
Our current outlook for the fourth quarter is currently within 2% of our internal estimate from back in late July.
This improved understanding of near term demand and the stabilization of our customer orders has given us confidence and providing a fourth quarter outlook.
This is a slide that we have developed the past two quarters that shows our review of the impact of Covid on both the industry and integer.
The dark Blue line in the graph represents the industry sales and the Orange line represents integer sales.
We have added a table at the bottom of the slide some more clearly quantify the difference in the year over year sales change of integer compared to our estimate of our estimate of the industry.
The first of all the table reflects our estimate of the industry year over year sales growth or decline.
I want to highlight that the industry numbers represents our aggregation of public companies reported sales and the market's we serve.
We tried to correlate our customers reported sales that would match our sales.
The bottom row, and the Orange color.
<unk> reported an estimated year over year sales growth or decline by quarter.
The second and third rows labeled covid timing difference and non Covid are provided to reconcile the industry sales change to the entered your sales change.
We have provided this view for each quarter in the full year to share our review of what caused the difference between our sales change year over year compared to the estimate of the industry.
The second row labeled Covid timing difference is our estimate of the impact on introduced sales calls by the industry building inventory during the first half of 2020 and depleting that inventory during the second half of the year.
The third row labeled non Covid explains the impact that these three items are having on into jurors year over year reported sales.
Jason explain these three items and his 2021 to 2019 sales comparison.
And they also apply to 2020 when comparing to 2019.
These three items represent about four percentage points of sales declined for the full year 2020 versus 2019.
The industry and entered your lines on the graph match the numbers in the table below the graph.
The industry row, and the table at the bottom of the slide shows a 6% decline in the first quarter and a 34% decline in the second quarter.
We are estimating an industry decline of 2% to 7% in the third quarter, an improvement in the fourth quarter of flat to up 5% on a year over year basis.
The third quarter industry estimate is based on your earnings announcements, thus far and we estimate the full year to be down between 10 and 12%.
We estimate that during the first quarter integer sales were 10 percentage points higher on a year over year basis than the industry.
This reconciles the first quarter industry decline of 6% to introduce growth of 4%.
During the second quarter, we estimate that into your sales were 15% higher than the industry due to the industry inventory build.
Into their sales declined 5% year over year due to the non covid items and this reconciles the industry decline of 34% do the integer decline of 24%.
The third quarter shows the industry declining between seven and 2%.
The impact of the Covid timing differences now a negative two integer as the industry is depleting inventory instead of ordering more product.
This call is an estimated unfavourable impact of 12% to 17% on integer sales.
The non covid items had a 3% unfavorable impact.
This reconciled the industry decline of 7% to 2% to the integer decline of 22%.
The fourth quarter follows a similar pattern.
I would like to focus on the full year 2020 column now.
Our estimate of the industry decline in 2020 is 10% to 12%.
We estimate that the impact of the industry inventory build and depletion for the full year will be zero or slightly negative.
We estimate of 4% decline in year over year sales from the non covid items, which represents the difference between introduced 2020 year over year sales decline in the industry declined.
I. Appreciate this slide covers a lot of brown and introduces some new data points.
Hopefully the takeaway is clear for the full year 2020, we expect the entered your sales declined to match the industry decline except for the three non covid items.
Of which were communicated as part of our original 2020 guidance at the beginning of the year.
The next topic I want to cover is our comprehensive capability that enables are emerging customers to develop and bring to market a wide range of innovative therapies across a number of clinical indications.
Part of the reason we think that this is an important topic took over now is that last month, one of our neuromodulation customers never oath announced that they were in sourcing a portion of their finished device assembly.
We have had a very successful longstanding relationship and supporting them through the entire cycle of development Clinical's and regulatory approval to high volume manufacturing.
Nevertheless, one of the most successful neuromodulation startups in the last 15 years and we believe our partnership is help them to reach this level of growth.
We will continue to work with narrowed to support and enable their success and will work to be their second source for future generation products and to continue to provide them with our vertically integrated component technologies.
Our success and enabling a customer like never oath to reach this level of maturity demonstrates the capability, we have to support emerging companies along their journey from ideation through product design development regulatory approval and to launch stage and ultimately to scale to high volume manufacturing.
And revenue.
We have proven our capability would never know, which is created more product development opportunities for us as a result today, we have a strong portfolio of customers that we are working with that are in pursuit of the same success narrow has experienced.
We think it is important to give visibility to end for investors to understand that there's a pipeline of companies that we've been working with for many years.
Customers that are leveraging our unique and comprehensive capabilities to enable their therapies to be developed to meet unmet patient needs an enhanced patients lives.
An important point of differentiation for integer is a set of comprehensive vertically integrated capabilities to help our customers to simplify their supply chain and accelerate time to market for their innovative therapies across a wide range of clinical indications.
The left side of this slide lays out of high level view of the product development through product launch process.
The time from product development clinical trials regulatory approval and to launch and high volume manufacturing is long anywhere from six to 10 years or more not.
Not every concept delivers of therapy. So it's important to have a pipeline of opportunities, which we do.
We have 15 different companies in our pipeline, we are working with to develop a device to trial their therapy.
We have three customers who are in the clinical trial stage three customers that are seeking regulatory approval and five customers who are in the product introduction launch phase, where we are producing products for them to know introduced into the market.
I want to focus on the five emerging customers in the product introduction face. These.
These five customers generated $10 million of sales for into jury a 2018 and in 2020, we're on track to generate about $20 million.
In 2022, we expect our sales to these five customers to double again to about $40 million in sales.
We expect continued growth beyond 2022, and the trajectory of that growth will depend on the success of those therapies in the marketplace.
The important message we want to convey to investors is that there is a pipeline of companies. We have been working with for a long time and that there are six more companies coming behind the five companies that are launching now.
We want to investors to see the magnitude of the sales expected between 2018 in 2022.
We are not providing outlook beyond 2022, but the growth rates can be quite significant as those companies get to market and gain traction.
We continued to lead integer with a priority on taking care of our associates, who take care of our customers and ultimately their patients.
We remain focused on executing our strategy. So that we continue to build sustainable competitive advantages that will deliver on our strategic objectives. We have protected these strategic investments during the Covid and do sales downturn and do so with high confidence that we will be stronger when the volume recovers to free covid levels.
Our profit margin rate began to recover in the third quarter from the low point of the second quarter and we expect sales to begin the recovery during the fourth quarter.
We have reduced our net total debt by more than $90 million a year to date, including the October that payment.
We possessed a unique set of capabilities in our business that enables emerging customers to develop innovative therapies across a wide range of indications to enhance patients lives, which allows us to fulfill our vision.
We have five customers in the product launch phase on a trajectory to double revenues in 2020 and again in 2022.
We are executing our strategy to create long term value and the pandemic will not deter us.
Thank you for joining our call. This morning, I will now turn the call back to our moderator for the Q&A portion of our call.
Ladies and gentlemen to ask a question. Please press star and the number one on your telephone keypad will pause for just a moment to call the Q&A roster.
Your first question comes from Matthew Mitcham with Keybanc. Your line is open.
Okay. Good morning dose.
But a lot to take in here.
First one.
Once we set in 21.
Are we still holding you accountable to our market plus 2% growth is that still the metric you're looking to achieve especially with a customer to open sourcing in the out years now.
Creating upgrading additional hardwoods.
Good morning, Matt. Thanks, Thanks for the question and the answer is yes, absolutely. Our strategic goal is still to accelerate revenue growth to be 200 basis points faster.
The market's that we serve are growing and yes net narrow is planning to ensure so portion of their finished device assembly and we have a strong pipeline of customers that we believe is going to accept that help us offset more than offset that growth. We thought it was important on this call to lay out some of the.
Pipeline of customers and where they are in their evolution.
Also I'll point out with the customer this good in stores.
Also have vertical integration with components with that customer, they're they're still planning to have a second source for doing finished device assembly. So we will still have complete vertically integrated components as well as hopefully some portion of the finished device assembly. So we remain confident that we can still achieve that 200 basis points above the end markets that we serve.
We have not declared when that will happen and we have a number of strategic imperatives underway and actions we've been taking to achieve that but it does remain the go absolutely.
Okay. Besides the emerging company.
It's good to see a pipeline there.
What what's your understanding of your ability to win business with your largest customers moving forward is there still the level of increased outsourcing in the industry posters and are they still consolidating the largest most strategic vendors.
I mean, just how can you give us confidence in the underlying fundamental positives of your.
Of your business here.
We absolutely see continued growth in fact during the pandemic, we have not seen any slowdown in the amount of development work that we're doing with both the emerging customers or are are larger OEM customers. We've talked about how we've added more R&D engineers this year than what we had in the budget.
So despite the pandemic we've continued to add more engineers than what we had even planned for this year. The development work in the activity level is still very high and in fact, we've actually had several customers come to us to accelerate programs during the pandemic I presume, it's they've had capacity to accelerate the work.
The development work and they also want to try to take advantage of this period, where there is lower volumes. So we're seeing spirit strong development work the quote activity that we see across the whole spectrum of our customer base continues to be very strong we are improving our sales force excellent.
Salesforce capability, we've we've talked about the the changes we've made with our sales leadership, we have entirely new sales leadership with all of our business units and over the past 18 to 24 months, a little more than a third of our sales team has changed as we've gone out and recruited additional talent and capability.
Industry knowledge product knowledge customer knowledge that we believe is going to be very helpful to us achieving our goal of accelerating revenue growth to be 200 basis points above the market and I would also highlight we shared earlier this year that a little more than two thirds of our revenue is under some form of a long term agreement and.
The three largest customers representing about half of our revenues that means that they have to be participating in that so we feel very good about the position that we're in across the full continuum of Oems in the marketplace, whether they're the emerging players that we provide very unique capability to where we accelerate there.
The market, we reduce the risk of of their ability to bring therapies to the market as well as the large Oems who might be looking for something different they may be looking for the the deep component technology that we have or the or the scale or the redundancy that we have with the ability to drive efficiencies in the partner with them to collaborate.
On innovation. So we are very confident in where we are.
With all of the players in the industry and the outsourcing the direction of outsourcing continues we should continue desire to outsource for a multitude of factors.
What is the efficiency and the scale that we can bring relative to us some of our customers have.
Another is the the desire for redundancy and for business continuity planning, that's becoming ever more important.
We continue to see our customers want to invest more in the development of innovative therapies and lessen their physical footprint in manufacturing capability. So we believe all all all indications remain very positive for our ability to achieve our objective and we think we have a unique set of capabilities to capitalize on that.
Okay.
It was very helpful and thank you for that answer could you go a little bit more detail on the minus 8% non covid impact in four Q towards me and and what.
And walk us through how you get there.
Absolutely the single biggest drivers so solicitous summarize it's 4% for the full year two two of those three items, we talked about when we gave our guidance. This year. We explained that we had $70 million a new vector sales in 19 that obviously don't repeat in 20 because of their bankruptcy that impact was primarily first.
A little bit in the third not as much in the fourth.
We talked about the fewer calendar days, we went to a calendar year for our fiscal year. Previously we were on a rotation where every six or seven years. We would at 53 weeks, we made that transition at the end of 19 in the full year of 20. So we highlighted that for the full year, we had about 10 million.
A lower sales in 2020 compared to 19, driven by fewer calendar days in a way that works out by quarter is the first quarter actually had a little bit of a lift in the fourth quarter has actually a bigger than 10 billion dollar.
Negative impact so the biggest driver of that 8% is the calendar days on a year over year basis.
As of the two items, we talked about at the beginning of the year and in the third item that we are aware of at that time was the energy market contraction and so that's fairly even throughout each of the quarters. When you look at the nonmedical business and the year over year sales for nonmedical. So the biggest driver over the fourth quarter is the number of calendar days.
And I would just point to in summary on a full year basis, we expect the impact of Covid, an integer to be the same as the industry and we think the industry will have depleted the inventory that built in the first half we think it will be depleted by year end up maybe even a little more than depleted below three covid levels.
Because the inventory levels seemed to be aggressively coming down which is a good thing. It also could be because the industry seem to have better sales in the third quarter than what they were projecting which accelerated the inventory depletion.
So for the full year, we think that the difference between us in the industry are these three items that we've laid out.
Okay understood.
And then just two more things first of all your customers managing their inventory differently.
Then they have been in the past are they are running at lower plenty of the lower levels of inventory given given the uncertainty.
That they are seeing over the next couple of quarters.
It's it's hard to tell him and I wish we had we had very we I wish we had clarity on that to give you a direct answer.
What is clear is our customers reacted.
To the pandemic in different ways, some shut down their manufacturing plants very quickly very deeply.
We all know and in April customers, we're talking about a 50% reduction in sales due to the shutdown in the US well most of our customers did not shut their manufacturing down Ah reduced manufacturing by 50%. They chose to run at higher levels to maintain some level of efficiency will that was building inventory and it was a very conscious decision. We believe they made with.
There is a trade off between operational manufacturing efficiencies and building inventory and so our customers are very different positions from a from a financial strength cash flow liquidity perspective, and they made different decisions on that trade off of cash flow and operational efficiencies, but what was very clear to us there was <unk>.
Venturi built in the first and second quarter you see it in their external reported inventory balances and then it's also clear to us in the third and fourth quarter. They are depleting that.
<unk>. This is what we're seeing is Ah rapid depletion of that inventory, which will either be a new a new level of inventory or it'll be at overcorrection and it may it may inventory levels may come back up this is not across the entire industry. It's pockets, but it's why we show on on our slide except.
Waning, the the potential impact on industry and.
An integer that's why we chose <unk> wrote a negative one for the impact of Covid, because inventory levels might be going a little bit below.
Wish I had a direct answer for you I don't know that they articulated their strategies and that way I know everybody wants to reduce inventory control inventory, but I also know that none of our customers want to miss an opportunity to ship a product or to support a patient in need and so that's why they have inventory returns of two to three times. So time will tell but in the end it's round.
Being noise when you look at it on an annual basis.
On a multi year basis.
Okay and last question.
I think you're starting to see some some funding long term fundamental changes in how people view the.
Oil and gas industry do you could do you still consider the energy business in the non medical businesses core two integer.
I like the business because even when it's down that has a strong larger right and returns and when it's up it as great returns and great margin rates and cash flow.
Of the things that we need to do a better job of is we need to better diversify the markets in the region that we participate in which would help to mute some of the volatility that we see when they are meaningful changes in that very cyclical industry.
Part of what we're doing internally as we're looking for ways to diversify two thirds of that business serves the energy market and then the other third serves a multitude of other applications.
Government and environmental applications that we think there's opportunities to grow there. So I love the profitability and the technology and the physician we have in that in that market, we need we need to work to diversify it to mute some of the cyclicality of it.
Alright, Thank you for taking all the questions.
Thank you Matt.
Again to ask a question. Please press star one and your telephone keypad here next question from Jim Sony with stability Company. Your line is open.
Good morning can you hear me.
Yes, Jim good morning.
Great well first off.
You seem to be right on the forecast to put out three months ago, and even with the pandemic you've been able to to hit the numbers that you put out which is a big change from.
Two or three years ago are you <unk>, what what's responsible for that.
Joe.
Art with I believe we've we've done a really good job of getting our arms around what our customers needs are and then meeting those needs and better understanding those needs on both the short and long term basis, and I think we're partnering with our customers really well to understand those needs and be able to meet them.
I would say very specifically in the last three to six months over the last three months with the pandemic. What we've seen is a stabilization of our customers short term needs. We've gotten we've done I think a really good job of getting our arms around the next 90 to 120 days and what our customers need an understanding.
That there is fluctuation in that window, but outside of the pandemic like event, we think that visibility is pretty good and we thank our customers manufacturing plans, which ultimately drive the demand on us is pretty good and we've been able to dial that in in the last three or four months I also think that.
Amount of inventory our customers have had has given them a buffer to not need to make meaningful changes in the third quarter or even maybe the fourth quarter of this year when they get back to maybe more normal levels of inventory and a steady state. We may go back to seeing a little more of the previous normal variation that we had for a gym I think it get.
Down to how we are running our business the manufacturing excellent strategic imperative has has helped us to develop that predictability and I think the closest with our customers is also improve dramatically and is also helping us.
Alright, and then a couple of questions.
Does that announcement affect anything you're doing to them right now or is that future generation products that they decided to go go pills.
Great question, Great pointed future generation product.
Current current generation is still under contract with us.
And they also were clear that they plan to have a second source for the future generations. We are working to ensure that we are vertically integrated with our our high technology components on that on that do those future generation devices and we're also working to ensure that we are the second source doing the finished twice somewhere.
Right.
So even if they start to to build some of those products themselves. You. So it looks like we are able to be a customer in 2022 2023.
Jim.
It will be their primary provider, who probably 22 and beyond for a number of years. They communicated their plants should be qualified in 2022, which means they will start to ramp sometime in 2022 and 2023 recognize they don't they don't do any manufacturing or assemblies today.
And so there'll be a ramp period. So 2023 2024 is when we think we'll see the impact of that but at the same time, it's future generation products and.
In the future generation product isn't in the market yet. So we believe we still got a nice runway here. We're also partnering with the online on the vertical integration of components and being the second source. So we think it's 2023 and beyond gym. We also thought it was important to highlight the pipeline our customers that we have.
That are now entering the product launch phase and the revenues that we think they will generate in 2022 and then the success of those therapies will dictate how much they grow beyond that.
Alright, and then the last one for me.
You're obviously not the only come.
Company affected by the pandemic and <unk>, there's a lot of smaller private suppliers.
That probably been of the balance sheet you have in the flexibility you have.
Are you able to pick up some of that business or maybe even pick up do some acquisitions as a result of of Covid.
Great Great question Jim.
Say that we've seen any acquisitions given that our focus has been very clearly on differentiated technology.
Fits into our portfolio and helps us to accelerate growth and penetration into the faster growing and market. So because we are so maybe laser focused on the technologies that we want I think those other companies that might've been negatively impacted by the pandemic are less within.
Less within our scope and so I think that that that hasn't been a.
Focus area for us.
In terms of the pandemic, our financial strength I believe is absolutely helped us our customers look at the landscape and they see the differentiation of a player like us that's got the breath and the scale.
The capability across multiple.
And markets and the breath of technologies technologies, we have we all know every one of our big customers have said they want to reduce the number of suppliers for months. They want strategic partners. They want people that that can do development work for them that they can rely on as their primary outsource partner that gives them. It makes it easier for them to.
Manage their supply chain, we think that's a strength of ours is managing a supply chain and our vertical integration, we think differentiates us. So we think this just reinforces what we believe is our strength and it just it just accelerates what's been a long term trend to consolidate the the supply bass into your stronger and more capable.
Partners, and we think that represents us.
No.
Alright, thank you.
Thank you Jeff accident.
There are no further questions cannot this time I turn the call back over to Anthony Berlin.
Great. Thank you everyone for joining us on today's call and your continued interest in integer is always this conference call will be available for a play out our web site again. Thank you that concludes our call.
This concludes today's conference call you may now disconnect.
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