Q1 2021 Integer Holdings Corp Earnings Call

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Okay. And thank God. The integer Holdings Corporation or 2021 this time off the speakers. There will be a question-and-answer session to ask a question during the session, you will need to pack Star One telephone

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And Thursday, Thursday, Thursday.

Georgia Georgia.

Please be in the office today and actually forwards senior Vice President telling us the relations. Thank you, please. Go ahead.

Good morning everyone. Thank you for joining us and welcome changes. Your first quarter 2021 earnings conference. Call with me today are Jodi president and Chief Executive Officer, Jason Garland, Executive Vice President in financial officer as a reminder, the results of data we discussed today, reflect the Consolidated results of integer for the. Indicated clerical. We will discuss some non-gaap measures for reconciliation of these non-gaap measures. Please see the appendix of today's presentation in the notes to the financial statements. In today's earnings release which are available on our website and integer. Net.

Please note that today's presentation includes forward-looking statements, please refer to the company's SEC filings for a discussion of the risk factors that could cause our actual results to differ materially.

Today's call Joel provide his opening. Kevin and Jason will view our financial results for the first quarter and provide an update on our full-year guidance. Joel will come back on to prove his closing remarks and then we will open up the call for your question, but that will turn the call over to Joe. Thank you Tony. And thanks to everyone for joining the call today, took off to a strong start in 2021 because of our dedicated Associates who have continued to deliver for our customers throughout the pandemic during our last earnings. Call I shared with you. How long has managed through the pandemic like taking care of our Associates while remaining focused on executing our strategy, we have continued to invest in our strategy by adding capabilities capacities and talented Associates to lead our product line and operational strategies.

We have continued to strengthen our high-performance culture and it is because of the strength of our Associates that I have confidence in our ability to deliver or all integer stakeholders.

We delivered strong sequential improvement in our first quarter sales and profit and at the high end of our guidance as expected, a reported sales and profit were down from the first quarter of 2028 is Kobe did not impact us until the second quarter of 2020.

We continue to generate strong cash flow and reduce net debt. By another $25 billion dollars, the strength of our first quarter supports the increase in our full-year guidance

We are often asked by investors. When will you get back to pre COVID-19 levels? We developed this chart in an attempt to quantifiably answer, that question for the acknowledgement that this is not a perfect life, but we believe it is a representative and useful analytic. We selected Boston Scientific. An avid as the most representative proxy for the total industry to compare to integer page your service very similar in markets as both oems, with the exception of Abbott, where we removed, they're publicly reported Diabetes Care, sales, from there, reported medical devices, segment sales.

We Believe.

COVID-19 is the fourth quarter of 2019 because we believe there was very little or no code impact. In that quarter just to be clear, we are using sales Republica, Lee reported to investors in the SEC, we graph the reported sales from the first quarter of 2022, the first quarter of 2021, as a percentage of the 4th 2019 to see how the sales in each quarter, compared to the pre-code recorder.

We believe this is a representative measure of the decline and recovery from the impact of COVID-19 on medical device sales in the industry.

There are two ways from this graph but are worth highlighting. The first is to answer the question. In our view, the industry is approximately 5 to 7% below levels based on both Boston, Scientific and Avid first-quarter sales compared to the fourth quarter of 2019, integer is at 11%, but by a percentage points of the decline is explained by our non-gaap segment. Sales decline driven by the energy markets and fewer days and our first quarter 2021 compared to the fourth quarter of 2019.

Integer in about the same level as Boston Scientific and have it again. This is not a perfect metric. Is there are other variables such as currency and Acquisitions and dispositions off could cause variation to the fourth quarter of 2019. But we believe this is a representative measure. There's another take away that I would highlight, which is how the pandemic impacted the industry compared to integer the change in sales for Boston, Scientific. And have it moved very similarly to each other over the last four quarters. But integers did not follow the same pattern. We've done this Dynamic to investors over the last four quarters, but we think this graphic makes it even easier to see that, our first quarter of 2020 was not impacted by coded as our sales rep or 101% of the fourth quarter 2019. Whereas the industry was at about 88%.

Our second quarter, 2012 sales declined but not as much as the industry because our customers did not reduce their orders with us as much as their sales declined.

In the third quarter, Boston Scientific Abbott and most other oems in the industry, saw a rapid rebound to about 90% of pre COVID-19 levels and it stayed at that level in June. The first quarter of 2021 integer sales were about the same in the second or third quarter of 2020. And then the fourth quarter started, recovering this pattern for integer, is what we predicted in the beginning of the pandemic, and it's playing out largely. As we expected again, this is not a perfect metric, but we think it frames that the industry is approximately 5 to 7% below pre-crisis levels, and then integer has also recovered to about the same level as the industry.

Modified version of a slide that we've shared with investors, the last four quarters, the Highlight the impact of COVID-19 on Integer relative to the industry, the bars. And the graph on the top half of this line, represent integers reported sales which highlights that our first quarter of 2020 sales were not impacted by koven.

The bottom of the pandemic from a sales perspective, was both the second and third quarters for integer our sales recovery started in the fourth quarter, and has continued into the first quarter of 2021. And I highlighted on the prior slide, we believe we're back to about the same level as the industry relative to the pre COVID-19 sales levels.

Looking forward, we expect to continue growing our sales. As medical procedure volumes fully recover and then resume to at least mid single-digit, pre-code and growth rates.

I'll now turn the call over to Jason to cover our financial results. Good morning, and thank you again, for joining our call. I'll provide more details on our first quarter, 2021 and Justice Financial results, including cash flow summarize our product line sales Trend and conclude with our increased expectations for 2021.

With our first quarter results, which continued to be impacted by the COVID-19, pandemic, first-quarter sales are at the high end of our guidance and up 22 million dollars. Sequentially over the fourth quarter of 2020 and 290 million dollars. This was down, 12% versus the prior-year with our first quarter, 2020 results. Not being impacted by kogan at 46 million dollars are adjusted. Operating income was also at the high end of our guidance and was up eight million dollars. Sequentially over the fourth quarter off.

It was 21% lower than prior year with adjusted, net. Income at $32. We delivered $0.97 adjusted diluted earnings per share.

ASP rejected the trend in sequential profitability Improvement continues as our first quarter adjusted. Operating income as a percentage of sales, improve more than 150 basis points over the fourth quarter of 2020. On the increase sales combined, with the continued, focus on manufacturing. Excellent and cost management. As we mentioned previously wage, we have maintained strategic Investments throughout the pandemic and our confidence a temperature, our customers. And the patients we ultimately serve will traffic.

All right, Justin net income declined in the first quarter of 2021 as compared to the prior-year primarily due to the impact, cobay Pat on our volume and deleveraging be some offset. The reduction of interest expense by two million dollars year-over-year benefited by our cash flow strength. Our continued focus on debt reduction wage-and-hour live work. The impact from foreign exchange in our effective tax rate were both Limited.

And the first quarter, we continue the strong conversion of income to cash, generating $36 in cash flow from operating activities of 12%. Over the first quarter of 2020. This Improvement was driven by continued working Capital Management and decreased year-over-year. Incentive compensation payments as the pandemic driven decline, lower. $1,000.20 of compensation

Generated $29 in free. Cash flow includes eight million of capital expenditures. We still expect the full year Capital expenditures to be in the $50,000 range.

Consistent with our strategy, we continue to steadily reduce our net total debt, and in the first quarter reduced it by $25 billion dollars.

3.7 times adjusted ebitda, we believe our debt. Leverage ratio has peaked after four. Quarters of increase, is caused by the pandemic. The reissue. Now includes COVID-19 in all of the quarters of the leverage calculation, we maintain our Target, net total debt, leverage of 2.5 to 3.5 times adjusted ebit up for this month.

Now, turn to a review of our product line failed results during the majority 2020. We did not cover the product wise sales results in detail given the significant impacts. And how long does the first quarter results are still impacted by koven our sales continue to improve as the pandemic recovery continues. Therefore, we believe it is now important to provide more comfort and insight on the sequential sales recovery. We are seeing in each product line and will review them during this morning's presentation.

Add reminder side, 14 reflects trailing forequarter organic, adjusted sales rates over the past four quarters, including the first quarter of 2021. Chef have been significantly impacted by covet and the results. Reflect this reduction sales are down, 19% over the fourth quarter. Impacted by COVID-19, be consistent with the Industry Recovery.

Coming to our first product line. Cardiovascular sales were down 17% organically in the first quarter. This is compared to the first quarter of 2020 which was not impact. I could it Additionally, the first quarter 2020 sales also included the discreet benefit of signing, a customer contract on existing business.

Evidence of recovery sales increased 9% sequentially compared to the fourth quarter of 2022, structural heart Market increase, single digits, sequentially and the electrophysiology and peripheral. Vascular, increase low, double digits sequentially. This trend of sequential Improvement is in line with our expectation as we have continued to see an increase from the lowest point in the third quarter of 2020, moving to the next product line, cardiac and neuromodulation grew, 1% organically in the first quarter as compared to the page as the negative impact of COVID-19 was partially offset by CRM. Customers increasing inventory levels in the first quarter of 2021, compared with the fourth quarter, 2020 sales increased 16%. Sequentially driven by double-digit growth and the CRM Market on neuromodulation grew single digits.

Cardio.

Neuromodulation sales to grow over the first half of the Year mainly driven by neuromodulation demand.

17 shows the final part of our medical statement, the advanced surgical Orthopedics and portable medical product line. Shown today includes our portable medical sales jobs was our sales under Supply agreement, to the acquire of our former ads. And product line, which we divested in July of 2018 first quarter, organic sales are negative or impacted by COVID-19 and declined 19% versus the prior-year sequentially. First quarter sales. Also decreased 15% in the fourth quarter of 2020 at portable sales decline after a high demand for ventilator and patient monitoring components and tire. Supporting the pandemic.

Fourth quarter sales to remain flat to slightly declining, partially due to higher sales of ventilators, and patient monitoring component sales in the prior year.

Finally sliding teens summarizes electrochem are non-medical. Segment. Electric comes first quarter sales. Decreased 26% organically versus the first quarter of two thousand bucks on a decline in the energy market and demand reduction due to COVID-19. First-quarter sales also decreased 10% sequentially from the fourth quarter of 2020 Jeep driven. By a client, our military Market or our energy Market, increased High single-digit versus the fourth quarter of 2020. Who continue to monitor the impact that the energy Market will have on our 2021 sales. However, we expect at the energy Market recovery in 2022.

We will move to our expectations for 2021 blue. Increasing both sales and profit Outlook and tightening the range. Starting with 5:20, we now expect 5021 sales is being the range of 1.175 billion dollars but one point two zero five billion dollars an increase of ten to twelve percent versus 2028 Mazda sequential Improvement in the second quarter with this Pro supported by our current orders back law. We expect continued Improvement in the second half of the year, which will largely be determined by the market recovery. We also expect that our quarterly year-over-year growth rates will continue to differ from the industry due to the timing differences of a Covent impacts. We saw in 2020

With our full-year sales, expected to now be in the range of 1.175 billion to 1.205 million dollars. We are also increasing the low end of our range for adjusted operating income. Now expect to be between $175 and $190, billion dollars reflecting and growth of 22 to 32%.

An updated range for adjusted net income and expect to be between $117 and $130, reflecting a growth of 28 to 41% off. And we looking are estimated Prophet for the remaining quarters of 2021 is important to note that while we expect profits to grow with revenues, the Run rate of our operating, expenses will increase in the rest of the year above the first quarter spending level. Our strategic Investments, including are indeed to support future growth. Rams through the year and his life continues to increase. Some of the discretionary spending that we reduced to mitigate some of the impact of the pandemic will need to be replaced. Additionally, as we mentioned in the prior rank, all the impact of the year-over-year increase of incentive compensation will ramp during the air as the return to

Pharma level, the 2020 variable compensation was commensurate with a reduced. Pandemic driven pay out the expect to see a 150 to 200 a month year over year, increase in our area as a percentage of sales for the total year.

And finally, we maintained our Outlet to generate cash flow from operations. And what we expect to be in the range of 145, to $165 free cash flow of life, to be in the range of 90 to 110 million, with an equivalent amount of net, total debt reduction and expect to return to our targeted debt to adjusted ebitda leverage range of 2 and 1/2 3 and 1/2 time with that. I'll turn the call back to Joe, thank you and delivered back to quench Improvement. Compared to the fourth quarter of 2020. We continue to generate strong cash flow and reduced. Net debt, the strength of the first quarter enables us to increase our sales and profits. Just look for the year and positions as well to continue investing and executing our strategy.

I'll conclude on remarks today with the same message of lack order which is by offering our view on why now is a good time to be an integer shareholder. We believe we have a Clear Vision, a compelling strategy game and strong values. Combined with the most talented Associates, amongst all medical device, outsourcers the industry dynamics of mid, single-digit growth and high, barriers-to-entry combined with integers. The product portfolio creates a very resilient business model integers, world-class research and development capabilities. Our Global manufacturing footprint. Combined with our deep customer, relationships creates a compelling growth strategy. Our commitment to our Associates and investment in their growth. Coupled, with our focus on building leadership capability to deliver performance package. Once praised, the performance culture that is creating a competitive advantage,

Finally our track record of delivering, our financial commitments and generating strong, cash flow, reinforces our financial stream. I am confident in our strategy and our Associates and our ability to execute our strategy, to earn a valuation premium for our shareholders.

Thank you for joining, I'll call this morning. I'll now turn the call back to our moderator, for the Q&A portion of our call,

That's remind you to ask a question. You will need to press star one on your telephone to drive or press the pound key. We will pause for a moment to compile. The Q&A roster off your first question comes from Matthew mishan from Quebec.

Okay. Good morning guys. And it's good to see everything moving in in in the right direction here. So I really appreciate you doing versus versus your customer. But what I think it does is it assumes that you're static with with the industry. So when do you think you can start showing a level of outperformance versus what the industry is doing? And it goes off the back to the question of in the first quarter numbers came in and at the higher end of what you were thinking is the outperformance in a first-quarter, a tribute able to integer the market or the inventory bill

Bose.

Thank you for the question and I love your focus on on us, accelerating our growth to the outperformed, the industry and outperform the market for serving, cuz that is absolutely our strategy. We remain focused on Thursday. We're making a lot of Investments and taking all the, what we believe are the necessary steps to deliver on that if we've talked a lot about our growth team structure. And we talked about the sales team and wage and how we reorganized and brought in different leaders. We've talked about the robustness of our pipeline of opportunities, and in the increase in the number of Engineers, we have that are in a meeting more and more development programs. And we continue to add more Engineers this year as those development programs are the precursor to what's going to deliver that accelerated growth. So we're really focused on on that as as you are we don't have the time frame but we're confident we can get there and once we see enough of those those development programs converting to to sales and when they're ready to hit the club,

We'll see that in advance of you and investors and, and will communicate, once we're within a reasonable enough time. Framed, to make that commitment because we we will deliver on on our financial package to, to investors. And so, do your question about the first quarter. We were at the high end of our range in the first quarter, because we, we had accounted for, it allowed, for some degree of Industry, pull back from the higher hospitalizations that, that we all saw particularly in the u.s. in the November December time frame that carried over into January February, when we had our earnings call in mid February, so we had some visibility. So, we allowed for some of that potential customer to pull back. We did not experience that. That pullback, we we, in fact were wage is very much where we expected, we would when we gave the guidance, it's beginning of the quarter. And so we do that at the positive, but we also view it as, you know, the, the our customers may have a little bit more inventory than wage.

Then what they actually were planning on because of the pullback, but it gives us confidence in the year because as we look at the orders from customers, and the backlog of, of what our customers that were ordered for for us during the second quarter and into the second half of the Year, we're very confident in our guidance. We we raised the low end because the higher performance in the first quarter of increased that confidence. We raised our hands a little bit. And if you look at our guidance, you know, the the low end of our guidance would assume that the industry does not improve meaningfully from where we are. You know, we we we see that with most of our customers and and their Commerce, there's commentary around the rest of the year. Cautious. Optimism is is the way we frame it. And so I I would say the the variation are being at the high end of our guidance was just the normal variation that happens in any given quarter for us. So I I would not attribute it to us. I would not say we're outperforming the industry from a growth rate. I think we're we're tracking the industry. We think will suck.

the industry going forward, quarter-to-quarter on a sequential basis and as soon as we're we can, we have disability and outperforming the industry on the top line we will keep

Communicate that excellent and you seriously communicated potential for Accelerated revenue from from some early commercialization customers.