Q4 2022 Integer Holdings Corp Earnings Call

[music].

Okay.

Hello, everyone and welcome to the integer Holdings Corporation fourth quarter 2022 earnings Conference call. All lines have been placed on mute to prevent any background noise.

At this time I would like to hand, the conference over to Mr. Tony Borowicz Senior Vice President of Investor Relations. Please go ahead Sir.

Okay.

Good morning, everyone. Thank you for joining us and welcome to <unk> fourth quarter and full year 2022 earnings Conference call with me today are Joe <unk>, President and Chief Executive Officer, and Jason Garland Executive Vice President and Chief Financial Officer also.

Joining us on the call as Andrew said senior Vice President strategy and business development, Andrew we'll be adding the title of Investor relations when I retire at the end of this month.

During our call we will discuss some non-GAAP financial measures for a reconciliation of these non-GAAP financial measures. Please refer to the appendix of today's presentation today's earnings press release, and the trending schedules, which are available on our website at <unk> dot 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.

On today's call Joe will provide his opening comments and an update on the execution of introduce strategy. Jason will then review our adjusted financial results for the fourth quarter and full year 2022, and provide our full year 2023 guidance.

I will come back on to provide his closing remarks, and then we'll open up the call for your questions with that turn the call over to Joe.

Thank you Tony and as you bring your 21 year career at engineered to a close at the end of this month I would like to take a moment to recognize your significant contributions to answer on behalf of all <unk> associates, including our board of directors and I am confident many investors. We thank you for your leadership and helping.

Shaped the company, we have today and wish you the best as you enter the next phase of your journey.

After this earnings call Tony will officially pass the Investor Relations responsibilities to Anderson, who has been leading our corporate development and business strategy for the last year.

Just you had a strong finish to 2022 with double digit sales growth across all product lines in the fourth quarter. We ended the year with fourth quarter sales up 19% and full year sales up 13%.

In the fourth quarter, we also delivered a 30% improvement in adjusted operating income and a 25% improvement in adjusted EBITDA.

Earlier this month, we strategically replaced about half of our variable rate debt with a 208% fixed coupon convertible bond.

This transaction delivers significant interest cost savings and repositions, our debt to approximately 60% fixed and 40% variable.

Our 2023 sales outlook is what we believe to be an above market, 7% to 9% organic growth rate.

We expect adjusted operating income to grow faster than sales at 10% to 16%.

At the midpoint of our guidance, we are expanding adjusted operating income margins by about 70 basis points.

We believe this will be a strong performance in what remains a challenging supply chain environment.

We have been executing our product line strategies to accelerate our topline growth and now expect to deliver sustained above market growth.

Our strong product development pipeline and high growth markets emerging customer product launches successful tuck in acquisitions and underlying strength of existing programs gives us confidence in this outlook.

We believe 2023 at the beginning of sustained above market sales growth for integer.

We entered your investment thesis summarizes why we believe <unk> is executing a clear and compelling strategy to sustainably outperform.

Our portfolio strategy and product line strategies define how we win in the markets. We serve our operational strategy defines how we achieve excellence in everything we do and our values define how we engage with each other.

This slide articulates the industry and entered your fundamentals that create a resilient business model the elements of our strategy to generate sales growth and the disciplined approach we've taken to develop a performance culture.

Our financial objectives are clear and measurable everything we do on the company is anchored to this strategy, which is why we share it every quarter.

So let's look at some of the important milestones we have achieved in our strategy journey.

The first two years of our strategy and execution delivered margin expansion and the launch of each element of our strategy.

The last three years have been challenging given the macro environment, but we are entering 2023 with a stronger portfolio and our pipeline of new product launches expanding margins and an unmatched capabilities to serve our customers.

As our sales accelerate we are investing in capacity to support this growth and to enable sustained above market growth.

We are pleased to report that the acquisitions of <unk> in December 2021, and Aaron Biomedical in April 2022 are exceeding our deal models through higher sales and operational efficiencies.

The following slides outline how we are accelerating sales growth to sustainably grow 200 basis points above the market.

We developed our portfolio strategy in 2017 and formed the growth teams in 2018.

These market focused teams have executed a structured and disciplined approach across the organization to shift our pipeline to high growth products end markets expand our capabilities and ensure our investments are aligned to our strategy.

These product line strategies have generated a strong product development pipeline that are delivering results and position us for sustained above market growth.

The structured and disciplined process has been and will continue to be critical to <unk> achieving sustained outperformance.

This slide illustrates where the CMV end markets are in their growth curve and how they compare in end market size on a relative basis.

The curve represents the growth rate of the end market, which is slower during the emerging and mature phases of the technology maturity timeline.

<unk> is uniquely positioned to serve our customers across all phases of the product lifecycle because of our deep technology breadth of capability and products global manufacturing footprint and strategic focus.

Blue box represents the most significant near term growth opportunities for both our customers and integer, which demonstrates the strong alignment of our strategy with our customers.

The products on the bottom of the slide highlight areas of continued investment in capabilities and capacity that we expect to deliver significant growth to integer.

This slide combines the cardiac rhythm management, and Neuromodulation and markets and demonstrates that there are growth opportunities beyond conventional CRM products and spinal cord stimulation within neuromodulation.

And <unk>, historically deep and differentiated component and sub assembly technology that has positioned us so well in the large but mature conventional CRM markets also positions us extremely well to serve our customers and the smaller emerging and growth CRM markets such as lead list pacing in cardiac monitoring.

The emerging and growth markets within Neuromodulation have significantly more early stage companies than the CMV, our CRM markets because of the number of companies that are investing to develop therapies for currently unmet or underserved patient conditions.

Integer is uniquely positioned to be able to bring full design development and high volume manufacturing to these customers. While also vertically integrating the most technologically advanced components with our own intellectual property from decades of innovation.

Very few other companies have the breadth of design and development capabilities and even fewer offer the depth of component technology that integer offers to our neuromodulation customers.

<unk> is uniquely positioned to enable emerging companies to bring innovative therapies to market.

Which brings us to our third annual update on our emerging customers that we are enabling to bring their therapies to market.

We first presented this slide at our earnings call in the third quarter of 2020, and we've provided an update on our fourth quarter 2021 conference call.

We have been investing in this pipeline of PMA products for many years and the advancement of these programs is a key leading indicator for accelerating our sales growth.

We are proud to report that we have supported the launch of four PMA programs with emerging customers since 2020, and we have five additional programs in what we've defined as the product introduction phase.

Our first update on these customers during our third quarter 2020 earnings call. We projected we would generate about $40 million in sales in 2022 from the product introduction and launched customers, we actually delivered about $50 million.

Last year during our fourth quarter 2021 earnings call. We estimated that we would generate between 60 million and $80 million in 2024 sales from these emerging customers. We are now increasing that projection do between $80 million and $100 million.

Our strong pipeline of emerging customers in this high growth end market as a meaningful contributor to our sustained above market growth.

Entered your partners with our customers to bring innovative medical technologies to market and we are paid for this service throughout the development cycle as.

As these life saving and life enhancing products are introduced to the market and then enter the manufacturing ramp phase integer benefits from accelerated sales growth the.

The amount of product development sales and the growth rate of the products being developed are leading indicators for sustained above market sales growth.

Our product development sales have increased 230% since we launched our strategy in 2017, and we have added 62% more development resources.

This means our pipeline of new programs has grown significantly and as evidenced our customers view <unk> as a partner of choice for innovative medical technologies.

We are also strategically targeted product development opportunities in high growth markets to accelerate our growth rate on a sustainable basis.

80% of our development sales are currently in high growth markets with the remaining 20% in more mature markets. We believe the mix of 80% high growth and 20% mature markets is the appropriate balance to accelerate our sales growth rate, while protecting our mature products for the benefits they delivered to our customers and into <unk>.

Sure.

The development cycle in our industry is relatively long. So it is a meaningful milestone for us to achieve the level of product development sales and program mix necessary to sustain above market growth.

In order to support sustained above market growth it is necessary to invest in manufacturing capability and capacity.

As shown in the chart on the left side of this slide we continue to allocate a higher percentage of our capital budget to equipment and facilities needed for growth.

The right side of this slide highlights our facility footprint growth since 2018, which has primarily come from acquisitions.

The increased spending in 2023 is driven by the previously announced construction of a new facility in Galway, Ireland as well as a significant expansion of our Guidewire manufacturing facility and New Ross Ireland.

In 2024, we expect to be back at normal Capex levels similar to 2022 with some increase in line with our sales growth.

We announced the Galway, Ireland Greenfield facility investment in September 2020, while this new facility will expand our presence in Galway, a global medical device hub by adding 67000 square feet of manufacturing and importantly, R&D space.

This capacity will allow us to better serve our customers in high growth structural heart and neurovascular products because of our new facility is near our customers' development and manufacturing facilities.

We're also expanding our new Ross Ireland facility in 2023 because of increased demand for Guidewire is used in minimally invasive procedures the.

The demand for our proprietary guide wires has accelerated because of additional new business in higher growth submarkets like electrophysiology and our ability to grow through our industry, leading product performance and scale.

The <unk> investment will add 80000 square feet of manufacturing space, We expect the building expansion to be complete by year end 2023, and generating sales in 2024.

We launched our portfolio strategy in 2017 with our strategic objective of sustainably growing sales at least 200 basis points above the market, we implemented a structured and disciplined product line strategy process with our growth teams to develop how we will win in the markets we serve.

We are uniquely positioned to serve our customers across all phases of the technology maturity timeline because of our breadth of capability and products deep technology global manufacturing footprint and strategic focus the 230% growth in our product development revenues demonstrates the strong pipeline that we expect will deliver above market.

<unk> growth for years to come we believe 2023 at the beginning of sustained above market growth for integer and are excited to reach this milestone in our journey to creating a premium valuation for our shareholders.

I'll now turn the call over to Jason.

Thanks, Jill good morning, Thank you again for joining today's discussion.

I'll provide more details on our fourth quarter and full year 2022, adjusted financial results and provide our 2023 outlook.

We delivered fourth quarter results at the high end of our October 27, 2022 guidance, reflecting a recovering from the supplier delays we faced in the third quarter.

So it remains challenging we continue to effectively manage through this environment in fact in the fourth quarter, we delivered $11 million of sales above the midpoint of our prior guidance.

This resulted in $372 million of fourth quarter sales up $59 million or 19% over last year, excluding the impact of acquisitions and currency fluctuations our organic sales growth was 13% higher than last year.

We delivered $73 million of adjusted EBITDA up $15 million compared to last year, and an increase of 25% adjust.

Adjusted operating income was up 30% versus prior year to $57 million and.

With adjusted net income at $37 million, we delivered $1 11 of adjusted diluted earnings per share up 12% or 12% from the fourth quarter of 2021.

Before we go into detail on the full year financial results I wanted to transition to a discussion on our product line sales performance. The detailed product line slides that we had traditionally presented can be found in the appendix of this presentation, but this morning, we wanted to focus and summarize our commentary around the fourth quarter highlights across <unk>.

Each of the product lines.

As you can see in the fourth quarter of 2022, we delivered double digit year over year growth across all product lines.

Our first product line cardio and vascular delivered 20% sales growth in the fourth quarter 2002.

Compared to the fourth quarter of 2021. This was driven by strong organic demand across all markets, especially structural heart and key products, such as Guidewire as well as incremental sales from our score and Aaron acquisition. Additionally.

Additionally, <unk> benefited from the improved delivery performance from the complex catheter supplier that negatively impacted the third quarter of 2022.

Cardiac rhythm management and Neuromodulation as fourth quarter 2022 sales increased 14% over the fourth quarter of 2021, driven by sales growth in <unk>, our recent acquisition and improved supplier delivery performance versus prior quarter, particularly for the Neuromodulation products.

Advanced surgical orthopedics and portable medical fourth quarter, 2022 sales increased 32% year over year on higher demand and price achievement from the start of the multiyear portable medical exit that we announced in 2021 advanced surgical and orthopedics also grew.

With low double digit in the fourth quarter.

And finally in electric <unk>, our non medical segment delivered fourth quarter 2022 sales increase of 41% versus fourth quarter 2021, driven by strong demand across all market segments, and approximately $2 million of incremental sales recovery from the third quarter supplier delivery issues.

Yeah.

And with that I will now transition to our full year financial results.

With the improvement of fourth quarter, our full year financials delivered at the high end of our 2022 earnings guidance.

Sales were $1 $376 million, which is a strong year over year increase of 13% or 6% organically adjusted EBITDA was $256 million up 5% versus last year and adjusted operating income was $192 million up $5 million or 3%.

Bank compared to the prior year, we delivered $130 million of adjusted net income and $3 88 of adjusted diluted earnings per share down <unk> 20 from the prior year.

To provide more color on our full year 2022, adjusted net income performance, we decreased $6 million compared to 2021, primarily due to the increasing interest rates and a slightly higher tax rate, we delivered $4 million of operational improvement as compared to last year.

Ported by strong sales volume and offset by the challenging supply chain and labor environment, FX was favorable contributing $1 million an improvement versus 2020 mile.

And the higher interest rate environment, we incurred adjusted interest expense of approximately $11 million or $9 million tax affected higher than last year now.

Now I will go into more detail of actions, we're taking to manage interest expense during this high rate environment in the coming slides.

Our adjusted effective tax rate was 16, 1% for the full year 2022, and while this remains a favorable rate we saw in year over year headwind of approximately $2 million due to the adjusted effective tax rate in 2021, being 15% 2021 benefited from the impact of certain nonrecurring.

Discrete tax benefits, including favorable settlement of prior year audits for.

For 2023, we expect our adjusted effective tax rate to be between 17% to 19%.

This increase is mostly driven by the expiration of the 10 year Malaysian tax holiday under which we have been operating.

We drove a step up in the conversion of income to cash in the fourth quarter generating $52 million in cash flow from operating activities up 86% sequentially from the third quarter, we generated $20 million in free cash flow inclusive of $32 million of capital expenditures in the fourth quarter.

On a full year basis, this equates to $116 million of cash flow from operating activities inclusive of approximately $50 million increase in inventory to support our manufacturing execution.

Our full year free cash flow of $42 million reflects the impact of $74 million of Capex spend in line with our guidance as Joe mentioned earlier, we will need to continue making focused investments that fuel and fulfill growth consistent with our strategy.

Net total debt decreased $18 million to $907 million for the fourth quarter and our net total debt leverage at the end of the fourth quarter was three five times trailing four quarter adjusted EBITDA back within our strategic target range after stepping slightly above for the last few quarters following the aran.

<unk> in April of 2022.

I will now transition to provide more detail on our guidance for 2023 sales profit and cash.

The full year outlook as summarized earlier remarks that we expect to be the beginning of sustained above market sales growth with that we are forecasting 2023 sales to be in the range of $1 $470 million to $1.500 billion, an increase of 7% to 9% versus last.

Year, well above the underlying market growth rate of 4% to 6%. We expect 2023, adjusted EBITDA to be between $285 million to $296 million, which is 11% to 16% growth year over year, We expect 2023 adjusted operating income.

To be between $211 million to $222 million, reflecting a growth of 10% to 16%, which is one five times to one seven times, our expected sales growth.

We expect to be able to achieve our strategic financial objective of growing adjusted operating income two times, our sales growth rate once the supply chain environment fully stabilizes and we generate more benefits from manufacturing efficiencies.

Adjusted EPS is expected to be between $4 and $4 30.

With represents a 3% to 11% growth year over year. This assumes an adjusted effective tax rate between 17% to 19% as mentioned earlier and assumes our adjusted interest expense will be between $45 million to $50 million.

We see that demand continues to remain strong and as Joe noted, having a robust development pipeline that is converting to sales.

The challenging labor and supply chain environment, although improving continues to have an impact on our sales and we expect first quarter 2023 sales to be similar to the second half of the 2022 average quarterly sales of $358 million with sequential growth throughout the remainder of two.

'twenty three as we continued to execute on our strategy adjusted operating income as a percent of sales is expected to expand through 2023 as sales grow beyond first quarter and our manufacturing efficiencies improve.

Over the last several years, we have continued to make debt and interest expense management a priority. We continue to be committed to maintaining a two 5% to three five time net total debt leverage to trailing four quarter adjusted EBITDA by balancing our disciplined M&A strategy with consistent debt re.

Payment we.

We have manage interest expense by refinancing our debt in September 2021 to reduce our credit spread and we have maintained a mostly variable interest rate structure is allowed integer to benefit from the low interest rate environment through the beginning of 2022.

With these actions we were able to achieve an average annual effective interest rate of four 1% in 2022 similar to the last two years now.

Now, we face a higher interest rate environment and modeled several scenarios using forward rate estimates that projected our effective interest rate for 2023 would reach 7% or higher.

<unk> that challenge and the headwind it creates on our projected strong operating performance, we strategically partnered with several leading financial firms to close a well received $500 million convertible note offering a fixed rate coupon of 212, 5% for a five year term.

We used the proceeds to pay down our highest variable rate debt the term loan b and paid a portion of our outstanding revolver. After covering all fees. The impact of these actions will save approximately $18 million of interest expense or generate approximately 44 of adjusted EPS accretion based on todays outstanding debt.

<unk> and current market interest rates.

Additionally, with the convertible notes term in line with our previous term loan B. We have now secured a fixed rate of 212, 5%, while maintaining flexibility through 2028.

With a net share settlement structure, we will repay the $500 million principle with cash, which avoids dilution on the principal repayment and.

Any premium or above the principal can be repaid in cash with no dilution or equity at our choice.

With the associated cash call any premium paid with equity would not start until the industry stock reaches approximately $108 59.

Or 65% increase from the closing sale price of <unk> common stock on January 31, 2023.

At a doubling of the stock price of approximately $132 per share dilution would be approximately 3%. If the premium is paid with equity.

Also note we have included an additional slide in the appendix of the presentation that shows the correlation of dilution with potential stock price growth.

In addition to discipline in our interest management, we remain disciplined in our overall capital allocation before summarizing our full cash flow outlook I wanted to share more details on this strategy, we are employing to maintain strong cash flow generation.

In addition to generating $39 million of incremental year over year cash from operational improvement, we expect expect to enter into a receivables factoring program that provides a one time incremental cash benefit of approximately $35 million. This will essentially offset the onetime investment needed to expand match demand.

Factoring capacity in our Irish facilities.

And with this our operational cash improvements fall through to free cash flow and eliminate any pressure on our net total debt to trailing adjusted EBITDA leverage.

Also note that in addition to the cash offset to this onetime capex increase the cost of the factoring program will be slightly favorable to our current effective interest rate providing further earnings benefit.

Because our financial discussion I would like to pull together the impact of the several actions, we're taking and summarize our cash flow generation and our net total debt projections for 2023.

Inclusive of reduced interest payments operational growth and the factoring program, we expect to generate cash flow from operations between $180 million to $200 million.

As discussed earlier, we expect capital expenditures to temporarily increase in 2023 as we invest in critical capacity expansions in our Irish facility of approximately $37 million.

Excluding this temporary increase in spend on building expansion, we estimate our remaining capital expenditures to be between $70 million to $80 million. This resulted in a total estimated capex investment between $100 million to $120 million and free cash flow between $70 million to $90 million.

The free cash flow, we expect to generate will be used to reduce the year end 2022, net total debt by $2 million to $22 million after reducing the additional debt created in early February from the fees associated with the convertible note and capped call we expected to end the year at our leverage ratio.

Within our target range of two five to three five times adjusted EBITDA with that I'll turn the call back to Joe. Thank you.

Thanks, Jason.

<unk> had a strong finish to 2022 with fourth quarter sales up 19% and adjusted operating income up 30%.

Our 2023 outlook is to grow sales high single digits and expand margins in what remains a challenging supply chain environment.

Looking beyond 2023, we believe our strong product development pipeline in high growth markets combined with our demonstrated emerging customer growth positions us well for sustained above market growth.

We remain focused on executing our strategy to create a premium valuation for our shareholders.

I'll now turn the call over to the operator for the Q&A portion of our call.

Thank you, Sir and everyone that is star one on your telephone keypad. If you have a question today, we will take a question from Matthew <unk> Keybanc.

Hey, good morning, and thank you for taking the questions I guess first I just wanted to say thank you to Tony for all the help through the years.

And wish you the very best.

In retirement, thank you Tony.

Thank you Matt.

And then I'm just going to start off with.

The market, plus 2% to 6%, 6% to 8% growth.

From here on on a sustainable basis.

Is that including I mean, how are you incorporating the exit from portable medical.

And kind of narrow in sourcing over the next leg to this three years.

Within that within that market plus two and then does it also include potential contribution from acquisitions.

Good morning, Matt. Thank you for the question I'll start maybe in reverse order. It does not include acquisition revenues. So any acquisitions would be inorganic on top of our organic growth 200 basis points above the market.

Acquisitions do help when we think about looking forward Oscar and ore and the two acquisitions. We did at the end of 'twenty, One and then the second quarter of 2022, they are contributing to accelerating our revenue growth because they both grew around 20% on a year over year basis pro forma if you look at.

The prior year that was not part of vintage years. So there's strong growers now we don't expect 20% every year, but those two businesses have performed very well on a year over year basis, and we expect strong growth high single digit low double digit from those two acquisitions. So that does contribute to the total company growth rate for sure.

The other question on.

As we think about looking forward, we definitely see <unk>.

Strong growth from the pipeline that we have.

When you think about net ROE, we've already factored in the narrow impact of in sourcing into our guidance.

It's a couple three year transition.

I'll highlight that we do have a long term agreement with net ROE we are their second source for manufacturing.

Second second source for them to their insurers. We also have vertical integration of components that we're selling to them. So that's been factored into our longer term guidance and we've been planning for that for gosh. It feels like a year and a half to two years since they announced their resources. So that's in our 2023 guidance.

Our outlook for the remainder and then your question about portable medical I just want to take another two to three years for those customers Jeff finish the in sourcing that theyre doing.

Because from start to finish it was about four years.

I'll highlight again I think that reinforces this year sticky nature of what we do.

The portable medical products that we were manufacturing we determined we didn't have meaningful differentiation because it was largely assembly.

And of that business.

There was about $70 million of sales in total about 40 of its what were exiting <unk> is what we're retaining we're retaining the part that serves heart failure and hopefully our applications, which we do have vertical integration and we do have points of differentiation. The $40 million. We're exiting that does not have meaningful differentiation from a technology standpoint, which is part of why we're exiting it.

They don't take four years to exit because of the amount of time. It takes our customers to find an alternate supply and then get through the regulatory qualification process. So I'll just I'll just reinforce that was low technology minimal technology differentiation contrast that with what we do in the rest of our business, where we do have points of technological dip.

Origination or manufacturing capability process, knowhow differentiation and the other parts of our business are incredibly sticky and so we think that that's an important point.

Take another at least two to three years for that business.

<unk> transferred away and we feel we can manage that as we look at the growth trajectory that we have particularly with a strong pipeline of development programs that we've provided the leading indicators for the last couple of years, particularly with the emerging customer growth, where we outperformed in 2022 compared to what we thought we were going to do here to <unk>.

<unk> ago, and we've increased our outlook for 2024 based on that strong pipeline.

Okay excellent.

No.

Fully clean number that's fantastic.

And then when you think about the emerging growth company guidance that you've given us the increase how did you incorporate.

And Oscar into that I think Oscar was close by.

By the time you gave guidance on that last time does that help that number or are those are maybe a little bit longer term as far as emerging customers.

They helped the numbers, particularly in the out years and so it does contribute to the growth and as those businesses are growing faster than the average that contributes to the accelerated growth for sure. We also think the capabilities both of those businesses bring gives us the opportunity to do more and that's really about capital.

<unk> on the commercial synergies now that after an error on our part of integer.

We are having broader discussions with our customers, who now see the strength stability size and scale of <unk> and the ability to vertically integrate those capabilities, we think that will help us accelerate the growth but.

Now what we've incorporated in here is what we have visibility to but we're confident that those commercial synergies will play out over time and give us even faster growth recognizing the development product development <unk>.

Cycle times.

The businesses Aaron in particular was acquired in April of last year Oscar in December 'twenty, one it takes time.

To turn those commercial opportunities into development projects, then become sales and so.

The programs that required product development are probably not meaningful in the 2024 time frame, but theres plenty of off the shelf products within Oscar in particular.

We can capitalize capitalize on sooner.

We're beginning to see.

The growth potential of that so there are opportunities that I would frame them as probably incremental and accretive to what we have on the slide here, but probably in the future years.

Okay.

And then just a near term question before moving onto margins any commentary on the cadence of organic growth and operating margin progression as you move through 2023.

Sure Great Great Great question.

We tried to convey that we expect the first quarter sales compared to fourth quarter debt to first quarter, we expect a little bit of a step down in the first quarter in sales, we highlighted that on our financial outlook.

Slide number 12 I think.

Where the second half of last year.

2022 is about $358 million, that's really what we expect to be in that range. When we look at the first quarter of 'twenty three because the fourth quarter did have some sales in it.

Really we ideally would have shipped in the third quarter and we not had some of the supply chain issues. So we would expect first quarter 'twenty three to look a bit more like the second half averaged 22, and then go from there now thats going to be a really strong year over year first quarter 'twenty three the first one first quarter 'twenty to a really strong year over year.

Right.

Remember what happened in the first quarter of 'twenty, two the world, particularly the U S.

Europe , and Asia had a spike in Covid absenteeism in January that impacted our sales a bit in the first quarter. So I wouldn't expect a very strong year over year first quarter, but the nominal sales will look a bit like the second half of 2022, and then we would expect to build off of that nominal level of sales in the second third and fourth quarter.

And then you would expect margin rate.

Mirror that that growth profile. So the first quarter margin rate would probably be a little lower because the sales were little lower volumes a little lower.

And then picking up as the year progresses.

And just for clarity.

Joe was referencing slide 27, sorry, yes.

Alright. Thanks.

Okay.

And then going back to margins and I appreciate Jason's commentary around.

I think waiting for the supply chain to fully normalize and productivity that Ted.

To be better in the plants, but when you think about where you guys were in.

2019.

And kind of where you are expecting in 2023 to.

To start off and I mean should we be thinking about this as like a new base of margin, where you get two times sales growth from here or do you think you have an ability to recapture some of the lost margin from from 2019 versus versus where you are today at a more accelerated pace as things get a little bit better.

Yes, great Great question, Matt I think you've heard from most of our customers as they talk about what 2023 outlook looks like if you point all the way back to pre Covid 2019, I think you've heard everybody say theres order magnitude about a 300 plus.

Basis point Delta that will take some time to fully get back to that I think one of them.

One of our largest customers said don't expect it anytime soon I'm paraphrasing, but I think that was a clear message on their last earnings call. I think you have to consider the supply disruption that everyone's been through and the material inflation, the labor environment, where wages have gone up and there has been introduced ditch created by.

The environment of the past three years without a doubt we are confident we can expand margins going forward in this environment, which is still a challenging supply chain environment, it's definitely better than it was but recognizing it was an incredibly challenging supply chain environment is improving but it.

<unk> challenging and so we're confident we can expand margins in 2023, and then as the macro environment for labor and supply chain continue to improve and stabilize we believe we can continue to expand margins so without putting a timeframe on getting back to 2019 margins as we continuously expand margins we believe.

We will get back there I can't put a timeframe on it because the labor environment and the supply chain environment matter with respect to getting back to those levels of efficiency.

I'll also highlight we have been able to successfully pass through some of the labor and wage some of the wage inflation and material inflation to our customers we did that last year.

Historically, we've been a 1% to 2% price down company last year, we were at the low end of that range. In 2022, we were the low end and 2023, we expect to be slightly positive in price on a year over year basis basis, which captures the improvement in 'twenty, two and that'll continue into 'twenty three so that helps.

But I can't put a timeframe on getting back to 2019, but if we continuously expand margins I'm confident we will.

Okay and then just last question and then I'll jump out.

As you think about your M&A strategy. Your M&A plan, you introduced a year and a half two years ago at this point in time.

Does it change with with.

With the Capex investments Youre, making and the higher interest rates can you just how are you thinking about the dollar figure of potential M&A.

Moving forward I mean.

That $250 million I think.

Is much greater than where but free cash flow is coming down.

This year I mean are you willing to go more on the variable rate debt side.

In a 7% interest rate environment.

We do see the right the right type of acquisition.

Yes.

Great question. So we closed Oscar 200 Twentyish million in December of 'twenty. One we closed around 130 ish million U S. In April of 'twenty. Two so if you think about our our cadence.

This would put it in the second half of the year, just thinking about a flow from a cadence standpoint, but your question about well how do we think about nominal dollars, we look at what our debt leverages.

We remain very committed to two five to three five times net leverage the convertible bond issue. We just did I think.

As a phenomenal example of how we continue to manage interest expense were 60 ish percent fixed right now and about 40% floating and our weighted average interest cost. This year, we estimate is going to be a little over 4%, which matches, where we were for the last two or three years. So even in this high rate environment. We've got.

Interest expense in the P&L, but it's in about the same weighted average interest rate so.

On acquisitions, we're balancing all of that obviously with the higher variable rates youre going to incur higher borrowing cost in the short term, but there is a weighted average interest rate here, that's very consistent over the past three years and what we expect in 'twenty, three and particularly coming down depending on what interest rates do in 'twenty four and beyond.

So I would say think of it in the context of maintaining our commitment to two five to three five times net leverage.

We did bump up above three five when we did the <unk> acquisition.

Our second quarter, but by the fourth quarter couple of quarters. Later, we're right now at three five right.

Top end of our two and a half to three and a half range. So we really think of it in the context of our debt leverage and maintaining our commitment to that range, maybe a bump up a little bit for a few quarters with a very clear path and near term plan to get back within the range. There is a robust pipeline that might be for your next questions.

Pipeline remains robust valuations haven't meaningfully materially change for the high value assets that we target when we think about what we're looking for we want a business, where it's been accretive growth rates ideally either accretive margins to integer or something that we can make accretive to engineer in the relative near term given our.

Operational and commercial synergies.

And we want differentiated capability.

To compound the capability, we already have and further grow and the faster growing end markets that we've been targeting so maybe in summary to all of that thinking about our leverage and we are committed to maintaining our leverage while continuing to do accretive acquisitions for the company.

Given that Joe your answering the questions before I, even ask them all I will jump out of the queue.

Yes.

Thank you Matt.

Well.

At this time no one else has signaled that once again, everyone that is star one if you have a question Paul.

At this time there appear to be no more questions in the queue.

Yes.

Okay great. Thank.

Thank you everyone for joining today's call I think over my career have done 50 of these earnings calls and a pleasure my absolute pleasure to interact with all of the shareholders. The habit rest assured Julian great hands with Andrew going forward with.

And with that for the last time, you can access the replay of this call on our website.

As well as the presentation, we just covered thank you.

Once again, everyone that does conclude today's conference we would like to thank you all for your participation you may now disconnect.

Yes.

Okay.

Yes.

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