Q2 2021 Integer Holdings Corp Earnings Call
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Excuse me. This is the operator today's conference is scheduled to begin momentarily on.
Until that time hearing the lines can be placed on hold it. Thank.
Thank you for your patience.
Once again today's conference is scheduled to begin momentarily until that time your lines when they can be placed on hold thank you for your patience.
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Good morning, everyone. Thank you for joining us and welcome to engineer the second quarter of 2021 earnings Conference call with me today of Joe decent President and Chief Executive Officer, adjacent Garland Executive Vice President and Chief Financial Officer.
As a reminder of the result of the day, we discussed today reflect the consolidate the results of integer for the period of indicators.
3 of our call we were discussing non-GAAP measures for.
Reconciliation of these non-GAAP measures.
Please refer to the the appendix of today's presentation today's earnings press release, and the trending scheduled on which are available on our website integer dot net.
Please note that today's presentation forward looking statements. Please refer to the company's SEC filings for a discussion of the risk factors.
Could cause our actual results of the different materially.
Today's call Joel provided is opening comments on Jason review, our financial results for the second quarter and provided an update on our part of your guidance.
Joel of come back on to provide this closing remarks, then we will open up the call for your questions with that I'll turn the call over to Joe. Thank you Tony and thanks to everyone for joining the call today are second quarter of results demonstrate continued strong recovery from the pandemic.
Are dedicated associates continue to deliver for our customers and patients. Despite the widely recognized manufacturing supply chain constraints and accelerating volumes.
We continue to invest in the execution of our strategy to drive on above market top line growth and continued margin expansion.
Our investments and capabilities capacity and talented associates will enable us to deliver for all integer stakeholders.
We delivered 30 per cent sales growth and 130 per cent profit growth vs last year.
We also continue to grow sequentially as the second quarter drew about 7% from the first quarter.
Our continued get reduction and significant year over year EBITDA growth reduced our net total that leverage ratio to 3.1 times adjusted EBITDA, which is almost back to pre COVID-19 levels and well within our target range of 2 and a half to 3 and a half.
The strength of our second quarter supports the the increase in our full year guidance for sales adjusted operating income and cash.
This slide summarizes our sales recovery from the pandemic starting with the quarterly average from 2019 on the far left and then plotting each quarter since the beginning of 2020.
As we previously highlighted integer sales were not impacted by the pandemic during the first quarter of 2020.
Our customers did not adjusted demand on integer until the second quarter of 2020.
We experienced the bottom of the pandemic during both of the second and third quarters of last year on.
Like our customers, who largely bottomed in the second quarter, and then quickly rebounded in the third quarter.
Our recovery started on the fourth quarter of last year and has continued to progressively increase each quarter.
Although our second quarter sales of 312 million are about the same as of the 2019 quarterly average we believe some customers accelerated volume into the second quarter of this year to mitigate some of the supply chain constraints being experienced across many second and third level of suppliers. We believe this happened in the month of June.
We saw of 50% increase over last year. This has been factored into our increased full year guidance on now turn on the call over to Jason to cover our financial results.
Thank you Joe Good morning, everyone and thank you again for joining our call.
I'll provide more details on our second quarter of 2021 adjusted financial results summarize our product line sales strength and conclude with our increased the outlet for 2021.
I'll start with our second quarter results.
At $312 million sales are up $72 million compared to the prior year, which is a strong 30% increase.
Additionally, sales were of 22 million sequentially compared to the first quarter of 2021.
As Joe mentioned earlier or second quarter sales have essentially returned to prepandemic levels being similar to our quarterly sales average for 2019.
Are adjusted operating income was $50 million up $28 million compared to the prior year, a considerable increase of 130% as we continued to benefit from the leverage associated with higher sales.
With adjusted net income at $36 million, we delivered 1 day and 7 cents of adjusted diluted earnings per share of 75 cents from last year.
Our second quarter of financial results represents strong growth vs last year, and again improve sequentially as our coverage from the pandemic continue.
Are adjusted net income increased $25 million from the second quarter of 2021 as compared to the the prior year driven mostly by our sales volume returning to the prepandemic level.
We continue to manage our supply chain and are hiring process to meet our customer and patient need, but we have had to spend to ramp up our volume and our profitability leverage was dancing.
We are also seeing the emerging headwinds from direct labor constraints and the current global supply chain environment and will speak to these more on our outlook discussion.
It just did net income also improved due to continued reduction of interest expense contributing $1 million year over year, driven by our continued focus on debt reduction.
Are adjusted effective tax rate was $15, 9% in the second quarter. This delivered $1 million an improvement and adjusted net income vs last year. The the adjusted effective tax rate in the second quarter of 2020 was 19.2%.
Moving to slide on 11, we continued solid conversion of income to cash in the second quarter generating $32 million in cash flow from operating activity.
This was for a million dollars lower than the first quarter as we will collect the strong sales growth during the month of June in the third quarter.
The generated $22 million in free cash flow inclusive of $11 million of capital expenditures.
As we continue to invest in our strategy will still expect the full year capital expenditures to be in the $50 million $60 million range.
Consistent with our strategy, we further reduced our net total debt in the second quarter by of $22 million or net total of that leverage ratio is now 3.1 times adjusted EBITDA the.
This is down 0.6 point, which is a significant production from the peak of 3.7 times caused by the pandemic.
As it related update the company expects to refinance the senior secured credit facilities. Prior to October 27th 2021, when the that will become do within 1 year.
As a reminder, slide 13 reflects trailing for quarter organic adjusted sales right through.
Through the first quarter of 2021, our sales were significantly impacted back of it.
As expected the trend has reversed as the second quarter represents the return to Prepandemic sales levels driving the significant improvement in our trailing for quarter of sales growth rate moving.
Moving to the first product line cardiovascular sales were up 17% organically in the second quarter. This is compared to the second quarter of 2020, which was the beginning of Covid impact on our financial results. The second quarter growth was driven in particular by strength in the intervention of cardiology electric.
Physiology and peripheral vascular market.
As expected the trend of sequential improvement continued in sales in our cardiovascular product line have returned to prepandemic levels.
Moving to the next product line cardiac rhythm management of Neuromodulation grew 67% organically in the second quarter as compared to the prior year.
<unk> saw the steepest decline in our medical segment last year in the second quarter, particularly in the markets impacted by more elective procedures like neuromodulation.
This low baseline drive the significant increase in second quarter of 2021 vs second quarter of 2020.
With that said, we experienced very strong growth across all market with sales on the CRM market, increasing high double digits in the sales and the Neuromodulation markley doubling.
Sequentially compared to the first quarter of 2021 sales increased 10% driven by the low double digit growth in the CRM market on Neuromodulation grew high single digit.
On slide 16 will cover the final part of our medical segment as a reminder of the advance surgical orthopedics and portable medical product line shows shown today includes our portable medical sales as well as our sales under supply agreement to the acquire of our former asked the note product line.
Which we divested in July of 2018.
Second quarter of organic sales declined 4% vs. The prior year due to decreased demand for bent on later and patient monetary components from the pandemic driven peak during 2020.
Sequentially second quarter sales also increased 15% from the first quarter of 2021.
The expect trailing for quarter sales for remained flat the slightly declining partially due to the higher sales of the ventilator of patient monitoring component of sales in the prior year.
Finally, slide 17 summarizes the electric Ken are non medical segment.
The electric count the second quarter sales increased 19% organically vs. The prior year driven by evidence of an emerging recovery in the energy market.
The sales run rate continues to remain much slower than our 2019 quarterly sales run range.
The same emerging recovery in the energy market drove second quarter sales to sequentially increased 39% from first quarter of 2021.
We expect the energy market to continue to recover in the second half of 2021 and into 2022.
Now move to our expectations for 2021 for the second consecutive quarter, we are increasing our sales and adjusted operating income outlook.
We now expect 2021 sales to be in the range of $1.200 billion for 1 million $220 million, an increase of 12% to 14% vs..2020. This increases the low end of our range by $25 million and the high end of our range by $15 million.
We delivered strong sales growth in the second quarter growing 30% over the prior year, we expect thoroughly strong year over year growth on the third quarter, but we also expect sales will be slightly lower than the second quarter. As we believe customers built some inventory of the second quarter to protect against potential global.
Supply chain constrained.
With our full year sales expected to now be in the range of $1.200 billion to $1.220 billion. We are also increasing our outlook for adjusted operating income and now expect to be between $180 million into $195 million, reflecting growth of 25% of 36 per.
Sent as we expect to return to meaning 1 of the financial objectives of our strategy.
Growing are adjusted operating income at a rate 2 times out of our year over year sales growth rate.
The now expect adjusted net income to be between $122 million for $134 million, reflecting growth of 32% of 46%.
As we look at our second half outlook, we expect to grow profit with sales, but not on a full variable profit margin for 3 primary reasons.
First as we have mentioned previously the impact of the year over year increase of incentive compensation will ramp during the year as of returned to normal levels 2020 variable compensation was commensurate with the reduced pandemic driven payout.
Second to support our volume growth, we're adding back some of the discretionary cost of would be curtailed in 2020.
And third we are managing through the increased costs associated with the direct labor shortages and global supply chain constraints in order to support customer demand.
This may include increased direct labor overtime cost of hiring and training resources higher transportation costs and some temporary inflation in costs to expedite the receipt of material on supplies required will continue to prioritise, serving our customers and patients and believe we're taking the long view, we expect to be able to manage.
These costs out over time the.
Despite these headwinds we have increased our 2021 outlook and now expect to see 100, 160.260 basis points year over year increase in our adjusted operating income as a percentage of sales for the total of year.
And finally commensurate with our increased outlook and income we are also increasing our cash flow outlook and expect to generate between 152.
$2.170 million in cash flow from operations.
Free cash flow is now estimated to be in the range of 95, 2 on $115 million and with net total of debt reduction remaining at the previously expect the range of $90 million to $110 million.
The difference between free cash flow of net Paydown may include the toning on withholding taxes on restricted stock unit acquisition, Earnout payments and the estimated cost of our pending that refinance.
We have returned to the meaning another financial objective of our strategy as our leverage ratio was back within our targeted range of 2.535 times adjusted EBITDA and we expect to continue to improve at the quarters with Covid reduced EBITDA have a diminishing impact on the leverage calculation with.
With that I'll turn the call back the Joe Thank you.
Thank you Jason.
I'd like to reiterate the message we share last quarter, which is that we believe now is a good time to be an integer shareholder.
We have a clear vision of compelling strategy and strong values combined with the most talented associates amongst all medical device Outsourcers the.
The industry dynamics of mid single digit growth and high barriers to entry combined with integer his breath of product portfolio creates a very resilient business model.
Integers World Class research and development capabilities are global manufacturing footprint combined with our deep customer relationships creates a compelling growth strategy or.
Our commitment to our associates and investment in their growth coupled with our focus on building leadership capability to deliver performance excellence creates of performance culture that is creating a competitive advantage finally, our track record of delivering on our financial commitments and generating strong cash flow reinforces on.
Financial strength.
To wrap up we delivered strong year over year results and continued sequential growth during the second quarter, while reducing debt leverage almost back to prepandemic levels. We've.
We've increased all financial metrics or guidance.
I remain confident in our strategy on our associates and our ability to execute our strategy to earn of evaluation premium for our shareholders. Thank.
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.
Thank you at this time, you would like to take any questions to my account for US today and is there a reminder to ask the question you will need the first star then the number 1 and you tell the spelling keep on.
Again that if I want to ask the question can we do on your request you mean price the talent or husky will cost for a moment to compile the acuity of this.
We have on first question comes from the line of Matthew Michelle on your line is open. Please go ahead.
Alright, you're 1 of the guys and really nice clothes on for Ya.
I'm, just trying to get the sense of the commentary.
On on.
On June.
With your sense of some customers, maybe maybe built inventory of what did they tell it what are the telling you about the recovery.
Is it is it better or worse.
Or are they just adjusting other this are they are they just build the inventory because the <unk> the worry of the worried about.
The second half supply chain of issues.
Good morning, Matt day, Thanks for the question on.
So June was it particularly strong month for us on the year over year basis, and we we expected it to be strong because if you rewind back to when the pandemic really started the impact of the industry in March of last year. It took some of our customers many of our customers a month or 2 adjusted their manufacturing schedules before that the the <unk>.
Packed of our sales so our April sales.
Think we're only down 20 per cent last last April on a year over year basis, and so it really wasn't until May and June that we began to see a meaningful impact of more meaningful impact from the pandemic and I think we had communicated June and July those 2 months, where the bottom of our sales when you look at it from a run rate standpoint, So we knew of June.
He was going to be strong it came in stronger than we had anticipated and as best we can decide for again, because our customers carry a lot of inventory and there's always movements. It felt like our customers pulled a little bit of inventories sooner than they had originally anticipated and a nice day originally I'm gauging. This based on the beginning of the.
Quarter for us and we of turf for that as they just wanted to make sure that they had inventory in case, there were supply chain constraints, where they saw of spike in demand.
I would characterize it is within the range of normal variability volatility, but I know with the intense focus on the the rate of recovery what happens each quarter each months the drives the interpretation of it. So the way we interpret it is the the quarter was a little better than what we had anticipated at the beginning of those I think we had said something.
Like modest improvement in second quarter vs. First obviously of $22 million of improvements more than modest and we do think there was some that came out of the third quarter end of the second.
We still raised our full year guidance on both of the top line and the bottom line. So we think things are better than where we had fall in aggregate entering the second quarter and this is just part of the normal variability that we have within the industry I think by and large our customers remain optimistic.
But also aware of of the potential impact of of the Delta variant on on on procedure volumes, Although I think it's just been universally.
State of the hospitals are in much better position to manage through any any potential increase in COVID-19 nations than they were before and there's cautious optimism across the board and we share of that.
Okay excellent on and I'm happy we're not going to have to argue about the definition of models.
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And I believe I heard you correctly when you I believe the herd that you thought that second half the profit growth would be lower than the second half revenue growth could you kind of.
Could you could you the elaborate a little bit more on on on.
The reason.
So what's going on there.
Sure we look at all I'll use the midpoint of our guidance for the full year. As an example, if you if you look at the midpoint of on.
Our revenue and adjusted operating profit guidance on a year over year basis of our sales are up 20 per cent and are adjusted operating profits up about 45% on a year over year basis. So we think on a year over year basis. There is very strong operating profit fall through on the growth on a year over year basis, you might be pointing to the maybe the sequential prophet.
Adjusted operating profit margins and quite frankly, we're looking at the trying to be objective about the supply chain pressures the direct labor hiring pressures of as we rack and stack the impact of all of those we do see some cost pressures. We we believe they're very manageable, we're still delivering meaningful of year over.
A year growth and the the trend line. We think is very positive, but we do feel of impact from some of those costs and we think we will for the rest of this year as soon as some of those constraints.
Related to a little bit we are confident we can manage those costs out we're confident over time, we're going to be able to overcome the impact of those costs, but but I would also point, we're still we're still growing meaningfully on the year over year basis, and and believe that our manufacturing excellent strategic imperative will in fact manage these these cost effectively of we will over.
Calm them over time.
Okay.
Last question could you talk a little bit about the increase of of the number of of engineers that you are higher.
I think that's probably the best leading indicator of what kind of.
How how you're expecting growth in the out years.
With your development pipeline is talk a little bit about where you're at with the number of like engineers in the in.
The pipeline your your your of developing for for long term growth.
Net madness, it's a it's a very insightful question, you're absolutely dialed into of leading indicator for what's going to of fuel our ability to achieve or above market growth and when we look at the number of engineers. We have at the end of the second quarter compared to the end of the last year were up 7%, we've added 7% for years and the first of all.
For this year, you don't see a meaningful increase in the total R&D spend although it is up in it we expect it to continue going up and that's because of our customers are paying for the development work we're doing.
We have we have more than doubled the number of development programs in the business and the last 3 years and that is because we've got customer demand for the innovation that we're delivering and when you. When you look at where we're focusing those engineers, where we're focusing our efforts to grow in the faster growing and.
Markets and we've talked a lot about display of cardiovascular the.
Almost all of our development programs. It's certainly all of the growth are in the faster growing in markets like structural heart electrophysiology peripheral vascular and so the engineering spend the R&D investment the customer demand and the innovation, we're delivering are in the Bachelor growing in markets that will.
Deliver faster growth once these products come the market and begin to be commercialized we've talked about the the cycle times on those development program. Some of them can be assured of as a few years others can take as much as 567 years, if there's clinical trials involved.
We view of the number of engineers the number of development programs in the end markets that we're supporting innovation for it with our customers as of great signed towards the progress, we're making the team achieving our of market growth and we of confidence that we will get there, but the development sucked cycles and timelines are what they are in the industry.
Well, Thank you Joe Jason.
Thanks for the effects.
Once again I would like to remind everyone. If you wish to ask the question the first time.
We have our next question comes from the line of Tin Sidoti. Your line is open. Please go ahead.
Your morning can you hear me.
Oregon more on them.
Great. So the on the news here lots about the increase cases of of Delta very at least here in New York.
Or for any of your customers concerned about that or is the fact that the vaccines around and hospitalizations of of down is that the.
The offsetting the increase in cases and he's already with the towards the procedure is Rhode Island again in the back of the year.
Great Great question, Jim I think we probably share the universal view the hospitals are so much better equipped to manage through any any surgeon and patience and I think when you look at the guidance that the most people in the industry of given there's a little bit of maybe caution and the guidance.
With the maybe more of the month may not be as linear as we would all like it to be but by the large I think there's optimism that that the hospital network can handle it.
And so we continue to see positive optimistic outlooks for the second half we of confidence in our guidance and the blue or guidance for the rest of the year is very much aligned with 1 of our customers are seeing and there are certainly correlated to the demand that they've placed on us the orders and the backlog that they've placed on US we've talked about we've got.
Pretty good visibility to the next 60 to 90 day. So we feel good about about where we sit for the rest of the year and we think it's very much aligned with customers expectations, and they're obviously closer to hospitals and doctors and patients that we are so we we believe the second half is going to be strong we expect to have a really strong third quarter.
When you look at what our sales were last year the bottom for US was the second and third quarter. So our third quarter of this year should be another order of magnitude 30 per cent year over year growth and so we we feel good about the trajectory that were on in our ability of the industry's ability to support that growth.
So you are pretty confident that all of those new product launches that got postpone because of the pandemic rows of back on track and those of continue throughout the second day of the 2021.
Absolutely gym, but I think many of those product launches will spread out over the over the next 612.18 months.
Wish they were fully back on track to where they were prepandemic, but there definitely was an impact of those launches, but we're seeing those those launches now re engage and start start to be executed and that will be of contributed to our growth with the development programs that we're working on with our customers.
And then you mentioned, you'll likely to refinance the day it over the next few months.
You know should we expect interest rates and covenant day about where they are now or do you anticipate any changes there.
There were still actively evaluating our options and working with our partners Jim and.
We'll share of 1 weekend, but the.
We will certainly be able to to follow where the market is in rates are in.
And the optimises than that.
Alright, and then you talk about your customers inventory levels.
They might be adding inventory of ahead of the possible.
The supply shortages, but I'm looking at your inventory level of it's below where it was 28.2.
Is that just because you're you're better of doing things or do you anticipate having a minute.
The inventory over the cash half of the year.
Hi, Jim I think we are definitely better and how we're running the plants compared to 2018.3 years ago, I think our manufacturing excellent strategic imperative has.
Number of focuses on on the inventory management and efficiency in the optimization of of our supply chain and I think the teams done of but a really good job of that I also take some some of our second quarter of inventory balance was we had product ready that we thought was going to probably go in the third quarter that our customer.
For has decided to take a little bit early again I attribute that to just the normal ebb and flow and maybe this quarter of the customer said I'll take it in case, there is of spike in demand or to make sure of that they had their hands on the product. If there were any supply chain constraints. They felt the other places, but by and large we are definitely much more.
<unk> and how we're managing.
Not just inventory of it all working capital of but I think our manufacturing actual of strategic imperative is definitely having the positive impact on cash flow and you are seeing it in the working capital of numbers.
Okay.
Just check it because it's the 1.2 billion dollar business and you know what Jason of any cash just making sure you. The next little bits of inventories of stolen.
[laughter].
So.
Alright, thank you.
Great. Thank thank Joseph.
Once again I would like to remind everyone. If you wish to ask the question. The first time line.
No no my phone questions I'll turn back of the call over to you Tony.
Okay, great. Thank you very much for joining today's call is always the replay of this call is going to be available on our website as well as the presentation that we just covered so thank you for your interest in energy and that concludes today's call.
That this includes the conference for today. Thank you all for participating you may Nowadays can I have a great day.
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