Q1 2023 Integer Holdings Corporation Earnings Call

Yeah.

Thank you for standing by my name is Michelle and I will be your conference operator today at this time I would like to welcome everyone to the Integrin Holdings Corporation first quarter 2023 earnings release Conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer.

Session. If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question Press Star. One again. Thank you Mr. Andrew <unk> you may begin good morning, everyone. Thank you for joining us and welcome to <unk> first quarter 2023 earnings Conference call.

With me today are Joe <unk>, President and Chief Executive Officer, and Jason Garland Executive Vice President and Chief Financial Officer. As a reminder, the results and data we discussed today reflect the consolidated results of integer for the periods indicated.

During our call we will discuss some non-GAAP financial measures 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 note that todays 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 Jason will then review our financial results for the first quarter 2023, and provide an update on our full year 2023 guidance, Joe will come back to provide his closing remarks, and then we will open up the call for questions with that I will turn it over to Joe.

Thank you Andrew and thank you to everyone for joining the call today.

In addition to Keybank and benchmark we are excited to welcome sell side analyst from Piper Sandler and Bank of America, who have recently initiated coverage on integer. We appreciate the coverage from all the sell side analysts and are excited by the opportunity to reach more potential investors.

In the first quarter, we delivered strong year over year results sales grew 21% organically with strong double digit growth across all product lines.

Our adjusted operating income grew 28% generating nearly 70 basis points expansion of adjusted operating income as a percentage of sales compared to last year.

First quarter sales were stronger than we expected driven primarily by the recovery of the delayed shipments from the second half of last year.

Although we largely caught up on those delayed sales and the supply chain environment remains challenging overall.

On a positive note we are continuing to reduce our direct labor turnover and are largely at the head count levels, we need to deliver on our high single digit organic sales growth this year.

We are reiterating our full year outlook.

We expect our organic sales growth to be 7% to 9%, which is about 300 basis points above the growth rate in the markets we serve.

We expect adjusted operating income to grow 10% to 16% year over year we.

We are also confirming our free cash flow guidance of $70 million to $90 million a strong year over year increase.

The strategy, we developed in 2017 and began implementing in 2018 is now producing projected sustained above market sales growth and margin expansion in what remains a challenging supply chain environment.

It is an exciting time at integer because demand remains incredibly strong we are making the investments needed to deliver sustained growth and we have a strong pipeline of new products concentrated in faster growing end markets.

I'm grateful for all our associates around the world that are delivering for our customers and making a difference for patients.

I'll now turn the call over to Jason Thank.

Thank you Joe Good morning, everyone. Thank you again for joining today's discussion.

I'll provide more details on our first quarter 2023 financial results and provide an update on our 2023 outlook.

We started 2023 with a strong first quarter sales of $379 million delivered growth of 22% year over year and on a reported basis and 21% organically, which excludes the impact of the Aaron acquisition and currency differences.

Our sales growth is indicative of continued demand strength across all product lines and includes the impact of delivering products that have been constrained by supplier delays in the second half of 2022.

Although we did recover these delays and supply chain environment remains challenging.

We delivered $66 million of adjusted EBITDA up $12 million compared to last year or an increase of 22% adjusted operating income was up 28% or $11 million versus last year, and we have made progress on our year over year margin expansion.

With adjusted net income at $29 million, we were able to offset the impact from higher interest rates and deliver 87 <unk> of adjusted diluted earnings per share up <unk> or 11% from the first quarter of 2022.

In the first quarter of 2023 sales for all four product lines grew double digit year over year due to strong customer demand and continued recovery from the previous supplier delivery challenges.

The cardio and vascular product line delivered 20% sales growth.

In the first quarter compared to a year ago, we executed on strong demand in all markets and key products such as guide wires. We also delivered new product ramps in electrophysiology and benefited from strong performance from the recent ask Gordon Aaron acquisitions.

Cardiac rhythm management, and Neuromodulation first quarter sales increased 18% over the first quarter of 2022 with double digit growth in both CRM and Neuromodulation also driven by strong overall demand and particularly strong double digit growth from emerging customers with PMA products.

Advanced surgical orthopedics and portable medical saw 42% growth in the first quarter versus a year ago, driven by increased price and demand as a result of the execution of the multi year portable medical exit announced in 2022. This was partially offset by single digit decline in <unk>.

<unk> surgical and orthopedics.

And finally electric Ken our non medical segment delivered a first quarter sales growth of 63% versus first quarter of 2022, driven by strong demand across all market segments.

Further product line detail is included in the appendix of the presentation.

To provide more color on our first quarter 2023, adjusted net income performance, we increased a total of $3 million compared to first quarter 2022, primarily due to operational improvements and supported by strong sales volume, partially offset by higher interest rates.

And this higher interest rate environment, we incurred interest expense of approximately $7 million or $6 million in tax effected more than last year.

However, on a sequential basis compared to the fourth quarter of 2022, we reduced our interest expense by $1 million tax affected driven by the previously announced convertible notes.

Moving to cash we generated $6 million in cash flow from operating activities in the first quarter of 2023.

Lower nominal level of first quarter cash flow from operations is consistent with our typical annual profile driven primarily by payment of associate short term incentives and rebate payments that said on a year over year basis, we did deliver $12 million less cash flow from operations in the first quarter of 2022.

Despite higher adjusted EBITDA.

We had headwinds from higher interest expense income taxes, and the final payment of the employer social security taxes deferred from 2020 as part of the U S Government Cares Act.

In addition, we were impacted by the timing of customer collections, which pushed into the first week of the second quarter. These are not collectability concerns, but we are working with our customers on improved payment timing or capex spend of $25 million in the first quarter was at a rate in line with our expected annual Capex.

As a result free cash flow was a usage of $19 million.

As an update to the factoring program shared during our fourth quarter 2022 earnings call. We received our first tranche of funding last week totaling $20 million for clarity. This is not in the first quarter results, but we reported in the second quarter and will help fund our one time facility investments needed to support growth.

Net total debt increased $71 million to $978 million.

Driven primarily by fees associated with the $500 million convertible notes and in the $35 million related capped call.

As a result, our net total debt leverage at the end of the first quarter was three six times, our trailing four quarter adjusted EBITDA to slightly above our strategic target range, which remains at two five to three five times.

We will now transition to providing more detail on our guidance for 2023 sales income and cash.

As Joe mentioned in his opening comments, we are reiterating our 2023 outlook with a sales range of $1 $470 million to $1 $500 million, an increase of 7% to 9% versus last year, which is above our underlying market growth rate, we expect margin.

Rates have continued to expand through improved manufacturing efficiencies from greater stability in our direct labor workforce and increased product development sales through the remainder of the year, we generally incur product development costs evenly across the year, while product development sales can be lumpy and are usually weighted towards the end of the year based on miles.

Stone achievement.

Our adjusted operating income should grow through the through the year from higher product development sales, mostly visible as a reduction in R&D and <unk> expenses.

Given these dynamics, we anticipate adjusted EBITDA growth of 11% to 16% adjusted operating income growth of 10% to 16% and adjusted net income growth of 4% to 11% with adjusted earnings per share growth of 12% to 42.

To provide more insight into our outlook first quarter sales of $379 million benefited from the closure of the second half of 2022 supplier delivery constraints of approximately $15 million above an underlying run rate of approximately 365.

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As we begin the second quarter of 2023, we expect sales similar to the first quarter run rate of $365 million as we continue to execute in a challenging supply chain environment. We expect adjusted operating income as a percent of sales to improve throughout the remainder of 2023 as we improve Manny.

<unk> efficiencies and achieve higher product development sales.

Before we close our financial discussion I want to also affirm our cash flow guidance.

As mentioned last week, we received initial funding from the previously announced factoring program for approximately $20 million, which is being used to fund the strategic growth in capital investments. We plan to continue to grow that program through the year to an estimated total of $35 million.

We expect to generate cash flow from operations between 180 million to $200 million.

As previously shared cap capital expenditures are expected to temporarily increase in 2023 as we invest in capacity expansions, resulting in a total estimated capex investment between $100 million to $120 million, resulting in free cash flow between $70 million.

And $90 million.

The free cash flow generated will be used to reduce our net total debt and we expect to end the year with our leverage ratio within our target range of two 5% to three five times adjusted EBITDA.

With that I'll turn the call back to Joe. Thank you.

Thanks, Jason.

<unk> had a strong start to 2023 with 22% year over year sales growth and adjusted operating income up 28% versus last year. We are reiterating our 2023 outlook as we continue to successfully execute our strategy to deliver above market growth with expanding margins.

We have a strong pipeline of new products and are investing in the capacity to sustain this growth we remain focused on delivering for our customers and the patients they serve to generate a premium valuation for our shareholders. 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 <unk>.

Yeah.

At this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad again to ask a question. Please press Star then the number one and your first question comes from the line of Matthew <unk> from Keybanc. Please go ahead.

Hey, good morning, and thank you for taking the questions.

Yes.

Good morning, Matt.

Just first wanted to like what Youre seeing around your production schedules. I mean, you kept your revenue guidance, let's say <unk> was definitely much better than expected.

What are you seeing from your customers and.

And are you seeing.

Demand increase through the course of.

Of the year versus what you initially expected.

And are you able to meet that incremental demand.

Thanks for the question Matt.

We are seeing you've seen it across the industry that the underlying market seems to have been stronger than everyone, everyone expected and projected and youre seeing that show up in sales.

That we are asking ourselves is was that reflected in our customers' expectations. When they place orders on us, let's say second half of last year and they said what do we need from integer and the first quarter second quarter.

That underlying strength in the marketplace was in that demand.

We wouldn't expect to see much different than the 7% to 9% organic growth that we guided to for the year because that's what we've been what we've been planning for.

And given up the site given our backlog and the amount of visibility we have to demand over the next six to nine months.

Unless unless customers were to adjust the timing of that demand.

We won't see it.

The demand that's happening in the underlying markets that we're hearing about from from everyone. In the industry. If that was unexpected and unplanned floor than we would expect to see customers ask us to pull some of that demand. This on an order now they would ask us to move it to be earlier in the year and that then has the potential then so lift our full year outlook because.

Obviously, we're operating with with really good visibility to demand with <unk>.

900, plus million dollars on order most of it this year and so it really comes down to where customers where our customers expecting this incremental growth that's being observed in the underlying markets in the first quarter I wish I had a clear answer for you, but we're obviously working with our customers to understand their needs near term long term.

We see this as its only upside to us because we've got really good visibility through the year, we had a strong strong start to the year end and we're excited about the prospects of the industry, becoming even stronger than everyone expected.

And then just.

So Jason I guess, just the flow through if you were to see some incremental upside on.

On the revenue.

How should we think about the flow through of that is this is this a situation where you need to hire more people you need to.

Expedite freight or is it something which can actually flows through at a higher rate given the volume in your plants.

Yes.

Another great question, So maybe I'll start with we have the direct labor, we've been able to hire the direct labor that we need to deliver for this year. We think we can get the 7% to 9% organic growth without adding much labor from where we were quite frankly at the end of last year, because remember last year, we added 15% more direct labor on 6% sale.

<unk> growth organically and so we hired more than we needed last year or more than we could actually shift and so as that as our workforce becomes more proficient at what theyre doing and we work through the continued challenging supply chain environment that creates more capacity with the existing footprint with the existing workforce and we feel.

Like we'd be able to get some of that volume out without having to add more direct labor.

And without having to invest more.

We also have been have seen a very significant improvement in our direct labor turnover.

That's been a challenge for everybody, we see it in our in our suppliers as well.

We improved significantly in the fourth quarter versus third quarter last year. We saw that trend continue we actually have about a quarter of our manufacturing sites are back to pre COVID-19 levels of direct labor turnover I would attribute that to a number of factors I think are plant leadership teams have done a great job of engaging our.

Workforce.

Made changes and how we onboard how we train.

We've gotten better at identifying through the interview process associates, who are ideally suited to work in the manufacturing environment and then I think the broader the broader labor market has improved in many of the market. So I think it's all of those factors, but the continued improvement in turnover our ability to.

Get our workforce more proficient and efficient at what they do is going to give us the capacity to meet increasing demand while also generating the efficiencies, which ultimately will show up in gross margins. So we're excited about that supply chain remains challenging.

We're taking what we think is a pretty pragmatic approach towards what we expect from supply chain, we're seeing fewer and fewer issues. We're seeing some suppliers improve but there remains a group of persistent lead delayed <unk>.

Suppliers. We also are seeing in some instances we are seeing some quality issues start to come from some suppliers, who I think are they're also training their new workforce and we're identifying that early in the process, but that also ultimately leads to the more disruption and efficiency. So.

Approach to supply chain, but if demand if demand is higher or stronger than what we are forecasting and expecting we feel we have both the workforce and the capacity to deliver on that.

Okay excellent. Thank you for taking the questions.

I'll, let some of the new guys ask.

Sure.

Thank you Matt.

Your next question comes from the line of Greg <unk> with Bank of America. Please go ahead.

Hey, guys. Thanks, Thanks for taking the questions and obviously congrats on a very strong start to the year.

I wanted to follow up on the demand question and I appreciate your time.

Your your.

Your thoughts that you can you can manage any demand above what you're expecting.

With the current.

With your current infrastructure, but when does it get to a point I guess, where if the perceived underlying procedure volume has remained strong and maybe it was a surprise to some of your customers.

Is there a point, where you do have to add people.

Capacity is M&A part of it or on the other side its supply chain worsens bed or some of these quality issues become more pervasive.

I guess, just a follow up on asking.

Do you plan to deal with that and how how nimble I guess you guys can be if you do need to add capacity.

Great Great Great question, Craig and Craig. Thank you for picking up coverage and welcome we look forward to the opportunity to work with you.

Addressing your question, so maybe I'll frame it with last year, we added 15% more direct labor workers workforce associates and we only grew sales about 6%. So that gives you an idea of the magnitude of the inefficiencies that.

Caused by the supply chain environment as well as the level of turnover in the training required and so I mean, if I just kind of macro level.

You only grew sales, 6% and you had a 15% more people at 9% capacity with your workforce and in this year, we're projected to grow 7% to 9%. So you can see how you don't really need to add a lot more direct labor workforce in order to be able to get to seven to nine the other thing that we're planning on this year and we've been very focused on it.

Reducing overtime, because we have worked a lot of over time due to the supply chain challenges and the training of associates and so I think we have the capability to flex instead of reducing overtime, we could maintain overtime and where possible and where applicable maybe even add over time in order to meet a surge in demand if demand increases.

I also think we're becoming more proficient with our workforce because of the lower turnover and the increased stability and that training and proficiency is pretty impactful and there is very very positive.

Passing modeling just efficiencies, but capacity I also think the supply chain environment. We've been we're being very pragmatic, we're assuming the supply chain environment. We're in is what persists for the foreseeable future and quite frankly until we can tangibly say, yes, we're getting.

Better on time delivery for quantities and quite frankly in spec so the quality.

Then allows us to fully use that material I think theres opportunity there that will create more capacity because we're still dealing with with supplier deliveries that are not on time and quite frankly, having to realign schedule. So I think there is improvement potential there as supply chain improves and broader market indicate supply chain is improving.

We are we have our own unique suppliers some serve Austin, it's not the macro picture. It's the micro picture that does or doesn't make a difference.

And this does conclude today's conference call you may now disconnect.

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