Q4 2024 Integer Holdings Corp Earnings Call
Hello, and welcome to the integer Holdings Corporation fourth quarter 'twenty 'twenty four earnings 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 and if he would like to ask a question. During this time simply press star one on your telephone keypad.
Speaker Change: I would now like to turn the conference over to Andrew son, Senior Vice President of strategy business development and Investor Relations you may begin.
Andrew son: Good morning, everyone. Thank you for joining us and welcome to <unk> fourth quarter 2024 earnings Conference call.
Andrew son: With me today are Joe music, President and Chief Executive Officer, and Darren Smith, Executive Vice President and Chief Financial Officer.
Andrew son: Joining us on the call is Kristen Stewart, our new director of Investor Relations.
Andrew son: As a reminder, the results and data we discussed today reflect the consolidated results of integer for the periods indicated except for cash flow measures. Prior period amounts have been recast to exclude the electric business.
Andrew son: With U S GAAP continuing operations presentation.
Andrew son: 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 trending schedules, which are available on our website at <unk> dot net.
Andrew son: Please note that today's presentation includes forward looking statements.
Andrew son: Please refer to the company's SEC filings for a discussion of the risk factors that could cause our actual results to differ materially.
Andrew son: On today's call Joe will provide his opening comments and an update on <unk> strategy.
Andrew son: Good bye and overview I'll, let andre will sustain above market growth.
IRA: IRA will then review our adjusted financial results for the fourth quarter and full year 2024.
IRA: And provide our full year 2025.
IRA: Joe will come back to provide his closing remarks, and then we'll open the call for your questions.
Joe Music: With that I will turn the call over to Joe.
Speaker Change: You Andrew and thank you to everyone for joining the call. Today is what you finished the year with strong sales growth in the fourth quarter up 11% from both an organic and reported basis for the full year sales grew double digit at 10% and adjusted operating income grew 20% over 2023 levels or two times the <unk>.
Joe Music: Rate of sales growth.
Joe Music: During the fourth quarter, we completed the divestiture of electric Tim for $50 million, making into Europe pure play medical device company we.
Joe Music: We ended the year with a leverage ratio of two six times adjusted EBITDA at the low end of our target range, which creates capacity to continue executing our strategic tuck in acquisitions as.
Joe Music: As we previously announced we acquired precision coding for $152 million in January of 2025, and this morning, We announced we have signed a definitive agreement to acquire DSI purely for $28 million. These two acquisitions further our vertical integration with differentiated and proprietary coating.
Joe Music: <unk>, while maintaining our debt leverage within our strategic target range.
Joe Music: After a strong 2023 and 2024, we expect to continue to grow above the market with expanding margins for 2025, we expect reported sales to grow 8% to 10% and adjusted operating income growth of 11% to 16%, we expect organic sales to <unk>.
Joe Music: So when you're growing above the market at 6% to 8%.
Joe Music: Our clear and compelling strategy continues to be our north star as we relentlessly drive to outperform the market and create a premium valuation for our shareholders.
Joe Music: We continue to optimize our portfolio strategy and execute our product line strategies that enable us to win in the markets we serve.
Joe Music: Our operational strategy defines how we achieve excellence in everything we do and our values define how we engage with each other.
The bottom of the slide articulates the industry, yet integer fundamentals that create a resilient business model.
The elements of our strategy to generate our sales growth and the disciplined approach we've taken to develop a performance culture.
Our financial objectives are clear and measurable sales growth at least 200 basis points above the market operating profit growth twice as fast as sales growth and debt leverage between two and a half to three five times EBITDA everything we do in the company is anchored to this strategy.
Joe Music: This slide summarizes our strategy journey to deliver sustained outperformance and ultimately a premium valuation for investors.
Joe Music: Our portfolio and product line strategies position us for sustained above market growth as we continued to shift the mix of our business to higher growth markets.
Joe Music: The previously announced exit of our portable medical product line, which has limited technology differentiation and low growth is proceeding as planned.
Joe Music: We expect the portable medical exits to be completed in the fourth quarter of 2025.
Joe Music: In October of last year, we completed the divestiture of our electric and business, making integer a pure play medical device company.
Joe Music: We continue to make targeted organic and inorganic investments in capabilities and capacity to enable our growth.
Joe Music: Insistent with our tuck in acquisition strategy, we acquired precision coding and have signed a definitive agreement to acquire DSI purely expanding our coating formulation and coding services capabilities and further strengthening our pipeline.
Joe Music: From an operational perspective, the supply chain and labor environments have stabilized and we have refocused our organization to execute our manufacturing excellence initiatives that expand our margins.
Joe Music: As I previously mentioned, we acquired precision coding earlier this month for $152 million plus.
Joe Music: Plus a contingent consideration representing a purchase price of approximately 10 times trailing 12 month adjusted EBITDA.
Precision coding as a developer and manufacturer of high value surface technology platforms, including floral polymer and coatings, Ireland treatment solutions and laser texturing.
Joe Music: These coating technologies are leveraged for high value applications across our targeted markets such as electrophysiology at neuro vascular amongst many others.
This acquisition brings the opportunity to vertically integrate our high value capability that is widely outsource.
Joe Music: We expect that 2025 sales contribution of approximately $52 million with an accretive margin rates.
Joe Music: We're excited to welcome precision coatings 300 talented associates into the integer family.
Speaker Change: We're also excited to welcome BSI poorly to the answer to your family.
We announced entry into a definitive agreement to acquire BSI apparel line.
Speaker Change: Full service provider of differentiated and proprietary apparently in coating solutions, primarily focused on coding complex medical devices.
Speaker Change: This transaction will build on our precision coding acquisition further expanding our capabilities in coating services across our targeted markets.
Speaker Change: We expect to pay approximately $28 million in cash and stock or approximately nine times trailing 12 months adjusted EBITDA.
Speaker Change: After the transaction closes we expect DSI to contribute approximately $7 million to sales in 2025, which is a partial year impact.
Speaker Change: Precision coding and DSI poorly and represent our fifth and sixth tuck in acquisitions in the past three years at three months.
Speaker Change: Together with the acquisitions of <unk>, <unk>, biomedical and neuro co and pulse technologies, we have strengthened <unk> position in high growth markets, while adding differentiated capabilities to serve our customers.
Speaker Change: Our acquisitions further vertical integration strategy and help our customers consolidate and simplify their supply chains.
Speaker Change: These six acquisitions generate annualized sales of approximately $240 million with accretive margins.
Speaker Change: I'm pleased to highlight that Oscar Ayrton <unk> and <unk> are all tracking ahead of our original deal models as we've been able to execute on planned operational synergies.
Speaker Change: I look forward to precision coding and DSI poorly and contributing to our growth as we integrate them into our business.
Speaker Change: Over the past several years, we have demonstrated that we can consistently execute tuck in acquisitions that enhance our capabilities and are accretive to our sales growth rate and profit margins we.
Speaker Change: We're very targeted in the companies that we pursue and it remained disciplined relative to our acquisition criteria.
Speaker Change: We continue to cultivate relationships with a robust pipeline of founder led and privately owned businesses.
Speaker Change: We estimate our annual acquisition capacity is now $350 million to $400 million.
Speaker Change: We are confident we can continue to supplement our strong organic growth with tuck in acquisitions to deliver high single digit to low double digit total sales growth.
Speaker Change: In addition to inorganic growth, we have been focused on generating a strong product development pipeline that positions us for sustained above market growth. We developed our portfolio strategy in 2017 and formed the growth teams in 2018.
Speaker Change: These market focused teams have executed a structured and disciplined approach across the organization to shift our pipeline the high growth products end markets expand our capabilities and ensure our investments are aligned to our strategy.
Speaker Change: This structured and disciplined process has been and will continue to be critical to integer achieving sustained outperformance.
Speaker Change: We continue to invest in the highest growth C&D markets. The same markets, where our customers are investing in the areas with the greatest unmet clinical need.
Speaker Change: <unk> is uniquely positioned to serve our customers across all phases of the product lifecycle because of our deep technology breadth of capabilities and products global manufacturing footprint and vertical integration.
Speaker Change: The products on the bottom of the slide highlight areas of continued investment in capabilities and capacity.
Speaker Change: And our product development pipeline is concentrated in these high growth end markets.
Speaker Change: We also continue to invest in that differentiated capabilities that serve both our traditional cardiac rhythm management and emerging neuromodulation products.
Speaker Change: Including the high growth sub segments within cardiac rhythm management and.
Speaker Change: <unk> is uniquely positioned to be able to bring all 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.
Speaker Change: Very few other companies have the breadth of design and development capabilities and even fewer offer the depth of component technology that <unk> offers to our neuromodulation customers.
Speaker Change: The products on the bottom of the slide highlight the high growth areas of CRM and in and where our product development pipeline is concentrated.
Speaker Change: And does your partners with our customers to bring innovative medical technologies to market and we are paid for this service throughout the product development cycle.
Speaker Change: These life saving or life into enhancing products are introduced to the market and enter the manufacturing ramp phase integer benefits from accelerated sales growth.
Speaker Change: The amount of product development sales and the market growth rate of the products being developed are leaking.
Speaker Change: For sustained above market sales growth.
Speaker Change: Our product development sales have increased 270% since we developed our strategy in 2017, which means our pipeline of new programs has grown significantly and we are being designed into our customers novel products.
Speaker Change: We are confident that the current level of development sales will continue to deliver sustained above market growth.
Speaker Change: We have continued to strategically target 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.
Speaker Change: We continue to believe the mix of 80% high growth at 20% mature markets is the appropriate balance to accelerate our sales growth rate, while sustaining our mature products for the benefits they deliver to our customers and integer.
Speaker Change: 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.
Speaker Change: We are excited to share our fifth annual update on emerging PMA customers. We presented this slide for the first time on our earnings call in the third quarter of 2020.
Speaker Change: These PMA customers are primarily focused on a single innovative therapy that is new to the market.
Speaker Change: We have been investing in this pipeline of PMA products for many years and the advancement of these programs is a key contributor to our above market sales growth.
Speaker Change: The left hand side of this slide shows the number of customers, we're working with at each phase of the product development process.
Speaker Change: The right hand side highlights the actual sales generated in 2018, 2000, 22022, and 2024 for the customers in either product introduction or launched.
Speaker Change: In 2024 sales came in above our projected range at approximately $125 million.
Speaker Change: This growth reflects the market success for these novel therapies. As we look ahead, we expect our emerging PMA product sales to grow at a compound annual rate of 15% to 20% over the next three to five years.
Speaker Change: In addition to this above market growth, we have increased our pipeline of customers in the development and clinical phases.
Speaker Change: As we have discussed integer is executing an organic and inorganic sales growth strategy.
Speaker Change: Prior to the development and implementation of our strategy integer was growing at about the market growth rate of 5%.
I have highlighted how growth starts with product development, which is our focused strategy to get designed into our customers. Most strategic products in high growth markets, which is demonstrated by our product development sales growth of 270% and 80% of our development portfolio is in high growth markets.
Speaker Change: These key metrics reinforce why we remain confident we have the organic pipeline to deliver sustained organic growth 200 basis points above the market.
Speaker Change: Our acquisition strategy has added significant capability depth and breadth. So we can better serve our customers in high growth markets.
Speaker Change: Our recent acquisitions have also added to our organic pipeline and provided sales at profit acceleration.
Speaker Change: Our focused strategy combined with our organic and inorganic investments have generated a strong product development pipeline and the most vertically integrated provider to our customers in the fastest growing end markets.
Speaker Change: This gives us confidence we can sustainably grow sales high single digit to low double digit going forward.
Speaker Change: The strategy that we launched in 2018 is producing results and has helped integer accomplished its vision of being our customer's partner of choice for innovative medical technologies and services.
Darren Smith: I'll now turn the call over to Darren.
Darren Smith: Thank you Joe Good morning, everyone. Thank you again for joining today's discussion.
Darren Smith: I'll first provide more details on our fourth quarter and full year 2024, adjusted financial results and then provide our 2025 outlook.
Darren Smith: It is important to note fourth quarter results are not impacted by our recent acquisitions of precision coating and the pending acquisition of ESI paralleling while the full year 2025 outlook does include these acquisitions.
Darren Smith: We ended the year strong and delivered fourth quarter sales of $449 million integer delivered 11% year over year sales growth on both a reported and an organic basis, the 11% organic sales growth excludes the impact of our January 2020 for pulse acquisition, they're strategic.
Darren Smith: Exit of portable medical market announced in 2022 and foreign currency fluctuations.
Darren Smith: We delivered $95 million of adjusted EBITDA up $9 million compared to the prior year or an increase of 11%.
Darren Smith: Adjusted operating income grew 13% versus last year as we continue to make progress on our year over year margin expansion.
<unk> to the prior year adjusted operating income as a percentage of sales increased to 16, 9%, a 22 basis point improvement, reflecting the continued improvement in our manufacturing efficiency and operating expense leverage.
Darren Smith: Adjusted net income was $51 million in the fourth quarter of 2024 up 6% versus a year ago, delivering $1 43 of adjusted diluted earnings per share.
Darren Smith: Adjusted earnings per share improved year over year with 21 since improvement driven by higher adjusted operating income, mostly offset by higher interest taxes foreign exchange and convertible note share dilution from the higher stock price realized in the fourth quarter of 2024.
Darren Smith: With our strong performance in the fourth quarter, we closed out the full year 2024 with sales of $1.717 billion, representing a strong year over year increase of 10% or 7% organically.
We delivered $361 million of adjusted EBITDA up 19% versus last year adjusted.
Darren Smith: Operating income was $285 million up $48 million or 20.
Darren Smith: 3% compared to the prior year, which is two times our sales growth rate.
Darren Smith: We delivered $184 million of adjusted net income and $5 30 of adjusted diluted earnings per share up 69 or.
Darren Smith: Or 15% from the prior year.
Darren Smith: We'll provide more color around our year over year growth in adjusted net income in a few moments.
Darren Smith: Taking a closer look at our CMV NCR eminent and products line sales, we delivered strong year over year growth on a trailing four quarter basis in the fourth quarter of 2024 for both product lines.
Darren Smith: For our cardio and vascular product line trailing four quarter sales increased 14% year over year with strong growth across targeted CMV markets. This was driven by new product ramps in electrophysiology and structural heart and performance of our <unk> and pulse acquisitions.
Darren Smith: Cardiac rhythm management and Neuromodulation is trailing four quarter sales increased 8% year over year. This was driven by double digit neuromodulation growth from emerging customers and normalized low single digit growth in cardiac rhythm management.
Darren Smith: For further product line details are included in the appendix of the presentation on our website at <unk> Dot net.
Darren Smith: To provide more color on our full year 2020 for performance, we increased adjusted net income by $28 million compared to 2023.
Darren Smith: Strong sales and operational improvements delivered $39 million equivalent to $1 16 per share. This was partially offset by foreign exchange as well as higher interest and taxes.
Darren Smith: We incurred adjusted total interest expense of approximately $10 million or $8 million tax affected higher than last year.
Darren Smith: This is primarily due to a higher debt balance throughout the year driven by the acquisitions of <unk> and pulse technologies in late 2023 in early 2024, respectively.
Darren Smith: Our adjusted effective tax rate was 18, 3% for the full year 2024, compared to 17, 6% in the prior year.
Darren Smith: The primary drivers of our higher adjusted effective tax rate compared to the prior year or the enacted pillar two legislation in Europe, establishing a minimally effective tax rate of 15%.
Darren Smith: And residual impact of the 2023 exploration of our 10 year Malaysian tax holiday.
Darren Smith: It is important to note that our 2024 adjusted earnings per share is impacted by both higher adjusted net income and higher adjusted weighted average shares outstanding the.
Darren Smith: The year over year increase in adjusted weighted average shares outstanding is primarily due to a doubling of the <unk> stock price since the closing of our convertible notes in February 2023, this drove approximately 3% dilution or a 14% reduction to our adjusted earnings per share.
Darren Smith: We delivered another strong quarter of cash generation in the fourth quarter of 2024 with $63 million of cash flow from operations. This strong performance was driven by improved operational execution and continued management of working capital.
Darren Smith: In the fourth quarter, we generated $44 million in free cash flow inclusive of $19 million of capital expenditures.
Darren Smith: On a full year basis, this equates to $205 million in cash flow from operating activities, a 14% increase versus 2023.
Our full year free cash flow of $100 million up 65% versus a year ago reflects $105 million in capital expenditures, which was in line with our outlook throughout 2024.
Darren Smith: Net total debt ended at $954 million for the fourth quarter of 2024, a decrease of $101 million compared to the third quarter ending balance as a result, our net total debt leverage at the end of the fourth quarter 2024 was two six times trailing four quarter adjusted EBITDA, which is at the low end.
Darren Smith: Our strategic target range and down from three one times at the end of 2023.
Darren Smith: We will now transition to providing more detail on our outlook for 2025 sales profit and cash.
Darren Smith: The full year outlook as summarized earlier reflect our strategy to deliver sustained above market growth with expanding margins.
Darren Smith: We expect 2025 sales to be in the range of $1.846 billion to $1 $880 million, an increase of 8% to 10% versus last year.
Darren Smith: Our outlook reflects organic growth of 6% to 8%, which is 200 basis points above our underlying market growth rate estimate of 4% to 6%.
Darren Smith: In addition to 6% to 8% organic growth, we expect to deliver approximately 2% of net inorganic growth.
Darren Smith: Inorganic growth is from our precision coding and <unk> acquisitions, partially offset by a decline from the previously announced portable medical exit.
Darren Smith: Our outlook for 2025, adjusted EBITDA is between 401 and $422 million, which is 11% to 17% growth year over year.
Darren Smith: And we expect 2025, adjusted operating income to be between 315, and $331 million, reflecting growth of 11% to 16%, which is one six times, our expected sales growth rate at the midpoint of our outlook.
Darren Smith: Adjusted net income is expected to be between $208 million and $221 million, reflecting year over year growth of 13% to 20%. This assumes an adjusted effective tax rate between 19% and 21% and assumes our adjusted interest expense is between $52 million and $57 million.
This delivers an adjusted EPS outlook between $5 84.
Darren Smith: And $6, two a growth of 10% to 17%.
Darren Smith: It is important to note the strong performance of the <unk> stock price, which is up more than 100%. Since February 2023 does drive some dilution and adjusted weighted average shares outstanding.
Darren Smith: Our EPS outlook includes approximately $35 7 million adjusted weighted average shares outstanding for the full year and an expected 35 5 million shares outstanding for the first quarter of 2025, reflecting the estimated dilution from the convertible notes.
Darren Smith: Year over year that represents approximately 18 or 3% EPS dilution at midpoint.
Darren Smith: Our 2025 outlook of 8% to 10% sales growth is inclusive of inorganic growth of approximately $59 million from the 2025 precision and DSI <unk> acquisitions, we discussed earlier offset by an approximate $29 million decline from the previously announced portable medical exit which is expected.
Darren Smith: To be complete by the end of 2025.
Darren Smith: We ended 2024 with a strong sales backlog of $728 million, which continues to be above the pre pandemic level of approximately $300 million, giving.
Darren Smith: Giving us confidence in our 2025 sales outlook.
Darren Smith: As shared previously we expected the backlog to normalize as we fully complete our Irish capacity expansion fulfill the portable medical last time buys and as lead times continue to improve.
Darren Smith: We anticipate the backlog to further normalize throughout 2025, while remaining nearly two times the prepayment make level.
Darren Smith: We expect reported sales growth in the first quarter of 2025 to approximate the full year sales growth rate of 8% 10%.
Darren Smith: Less approximately 3% due to 3% fewer working days in the first quarter of 2025 versus the first quarter of 2024.
Darren Smith: Most of the first quarter 2025 sales growth is expected to be organic as sales from the recent acquisitions are largely offset by the declining portable medical sales.
Darren Smith: We expect adjusted operating income as a percent of sales to expand throughout 2025 from improved manufacturing efficiencies and operating expense leverage.
Darren Smith: Shifting to our 2025 cash outlook I would like to summarize our cash flow generation and our net total debt projections for 2025.
Darren Smith: We expect cash flow from operations between $225 million to $245 million, which represents a 15% year over year increase at midpoint of outlook.
Darren Smith: Our outlook for capital expenditures is $110 million to $120 million as we continue to invest in capabilities and capacity as a result, we expect to generate free cash flow of between $110 million and $130 million.
Darren Smith: Inclusive of the approximate $175 million for the acquisitions of precision coating and the pending acquisition of DSI, apparently we expect our 2025 year end net total debt to be between $1 billion $30 million and $1.050 billion, which is up 75% to $95 million.
Darren Smith: Year over year.
Darren Smith: We expect to end the year with our leverage ratio within our target range of two 5% to three five times trailing four quarter adjusted EBITDA.
Joe Music: With that I'll turn the call back to Joe. Thank you. Thank you Darren.
Speaker Change: We delivered a very strong 2024 with full year sales up 10% and adjusted operating income improving by 20% over 2023 and.
Speaker Change: In the last two years, we have grown sales, 29% and increased adjusted operating income by 57% we.
Speaker Change: We expect this strong performance to continue into 2025 with an outlook of 8% to 10% sales growth and an 11% to 16% increase in adjusted operating income.
Speaker Change: The execution of our strategy, both organically and Inorganically is producing results as we continue to demonstrate above market sales growth with expanding margins. We remain focused on executing our strategy to create a premium valuation for our shareholders. We will now turn the call over to our moderator for the Q&A portion of the call.
Thank you.
Speaker Change: Like to ask a question. Please press star one on your telephone keypad. If you would like to withdraw your question simply press Star. One again. Please ensure your phone is not on mute when called upon thank you.
Speaker Change: Your first question comes from Brett Fishbein with Keybanc capital markets. Your line is open.
Brett Fishbein: Hey, guys. Thank you very much for taking my questions.
Speaker Change: To start off on the guidance.
On some of the segment moving pieces on cardio and vascular segment was really growing in the low double digit range from 2021 to 2023, and we saw a little bit of deceleration in 2024. So I was just curious if you see potential for a return to that low double digit range in 2025, if things go well and if not if theres anything holding you.
Speaker Change: <unk> that's different from what you were seeing a couple of years ago. Thank you.
Speaker Change: Hey, good morning, Brett Thanks for the question. So yes, so on cardiovascular we actually provided some guidance on the product line slide in the appendix for cardiovascular that we expect the 2025 sales to grow low double digit on a year over year basis. So we absolutely do expect cardiovascular to continue to have very strong.
Speaker Change: Growth given our success in the various targeted high growth markets and for CRM and and we finished the second half of the year very strong on the Neuromodulation side of the business, especially emerging PMA and on cardiac rhythm management, we saw the second half of the year as expected normalized back to it.
Speaker Change: It's more traditional low single digits and that's what we have baked in going forward into 2025.
Speaker Change: Yes. It makes it makes a lot of sense and then on precision coding.
Speaker Change: It seemed like an interesting deal was hoping you could maybe just give a little bit of background on how this specific deal came together how long you've been looking at the asset and why you think it was the right time for both parties.
Speaker Change: Certainly, yes, it's a great. It's a great question and I think Youre point to timing is kind of the story behind most acquisitions.
Speaker Change: We've talked about as part of our our strategy development back in 2017, 2018, and our shift to getting designed into our customers' most important highest growth products.
Speaker Change: We did a capability analysis, we identified where in those targeted high growth markets, where is the most value created from a from a technology or manufacturing knowhow, our capability perspective, and we build that capability roadmap and we have been systematically checking those off both organically and inorganically.
Speaker Change: And in this case, we've had coatings on our list for a very long time, we've been we've been monitoring the market getting to know the different players in the market for very long time, and like all deals as the buyer.
Speaker Change: We have to wait for the seller to be ready and part of what we do is build those relationships. So that sellers know, who we are and what we're trying to do and understand our culture in our company and our strategy and how we think they may fit into that strategy and then when the seller is ready then we're ready and we try to capitalize on that ideally we would like to do that outside of our Prost.
Speaker Change: And so youll see many of our of our acquisitions happened in that way because that's part of our strategy. So in this case coatings as a service.
Speaker Change: As a segment, we've been monitoring and studying for a long time and getting to know the players and we were fortunate to have two opportunities came together around the same time, we're really excited we have great depth in coatings and applications of coatings for products that we manufacture what precision.
Speaker Change: Does and BSI, apparently do is they coat other people's products as a service and they also formulate the coatings themselves very differentiated and proprietary coatings and so we see this as a great step towards vertically integrating our offering and helping our customers again with proprietary.
Speaker Change: <unk> differentiated capabilities that compounds the coding capabilities, we have but now as the formulations and the proprietary differentiated.
Speaker Change: Offering as a service and so we're excited to welcome both both precision coding in BSI poorly to the integer family and look forward to accelerating their growth by leveraging our deep relationships in the industry and all the products that we currently support customers with.
Speaker Change: Alright, and then last one from me just on tariffs was hoping you could just help frame your exposure in this area.
Speaker Change: Given some of the continued uncertainty and particularly in Mexico, given your footprint there thanks very much.
Speaker Change: Certainly well.
Speaker Change: You've nailed it the uncertainty I mean, it's a topic that if I knew what the tariffs were going to be if there's going to be tariffs and I knew what the structure is going to be our operations in Mexico, where maquiladora, which to structure. A maquiladora is are you bring material in and then you're into Mexico you process.
Speaker Change: That add value to it and then you take it out and you would only pay tariffs or taxes or anything on the value added portion.
Obviously, the current environment. It is unclear what the what the tariff structure will be how it will impact maquiladora is will there be exceptions for life saving life enhancing devices in the medical device industry like there were.
Speaker Change: In the prior.
Speaker Change: Our prior experience with tariffs from the current administration.
Speaker Change: Back to the prior administration. So right now our view is we're going to operate as though the parents theyre going to be implemented at some point in time, and we're implementing the operational changes necessary to minimize the impact of the tariffs for both ourselves and our customers, but until we know what the structure of the tariffs are what exceptions there will.
Speaker Change: Will be or won't be and how it will impact the maquiladora structure. It's it's really not possible to quantify it at this time, but I'll reinforce we're operating as though at some point the tariffs are going to ultimately be implemented and we are implementing the mitigation plans that we have at our disposal.
Speaker Change: Okay Super Thank you very much.
Speaker Change: Yes.
Speaker Change: Thanks for the question.
Craig Bijou: The next question comes from Craig Bijou with Bank of America. Your line is open.
Craig Bijou: Good morning, guys. Thanks for thanks for taking the questions.
Craig Bijou: I wanted to ask.
Craig Bijou: Maybe a follow up on the CMV growth trend line and your expectations for 25, if I look at the trailing four quarter growth for CMV. It was 14% in Q4, 15%.
Craig Bijou: In Q3 you.
Craig Bijou: You saw a nice acceleration in the actual Q4 growth.
Craig Bijou: So with some of the high growth markets that you're serving.
Craig Bijou: In EP and structural heart it seems like those markets the underlying growth of those markets continue to accelerate so I guess the question is why Couldnt you maintain CMV growth closer to the mid teens versus the low double digits that you are expecting and I guess, how should we think about.
Craig Bijou: <unk> from those faster growth markets.
Craig Bijou: Versus some of the other markets that you're serving within CEB that may not be growing as fast as your target markets.
Speaker Change: Great Great Great question, Craig. Thank you. So we do expect to continue to see strong growth in cardiovascular in aggregate and especially from those under undergo underlying markets.
Speaker Change: We're still outgrowing the market meaningfully in electrophysiology and structural heart.
Speaker Change: Those are big contributors and so we've given guidance for the full year on cardiovascular to be low double digit.
Speaker Change: Low double digit kind of range that could creep up into the through the range in the area that you're pointing to.
Speaker Change: Well, what I'd say is our goal is to continue to deliver above market growth organic growth in total we're targeting at least 200 basis points above the market.
Speaker Change: We gave guidance at the beginning of 2024 of 6% to 8% we ended up for the year and organic growth into 2024 of seven 3% organic growth as we look at 2025, we are guiding to 6% to 8% organic growth, we are driving to make that as big a number as we can.
Speaker Change: And of course, those faster growing underlying markets that you're referencing are going to be big contributors to that so we do expect <unk> to keep growing in a very strong manner strong strong double digits.
Speaker Change: And the emerging PMA customers will also continue to grow so we're excited about the products that we're on and the new products, we're introducing and expect to continue to outgrow the markets on an organic basis, and then supplement that with our top strategic tuck ins on the acquisition side with the goal ultimately of always delivering high single digit low.
Speaker Change: Double digit topline with expanding margins.
Speaker Change: Got it that's helpful. Thanks, Thanks, Jeff.
Speaker Change: Joan.
Speaker Change: Apologize, but I'm going to push it a little bit on the Mexico tariff impact so I.
Speaker Change: I think what investors are just trying to understand is what is the exposure and then understanding that there is uncertainty that the actual value add piece of.
Speaker Change: Or a component of the tariff is yet to be determined. So is there any way that you can help frame the amount of sales from Mexico that come into the U S. Even in some general terms I know in your filings you have percentage of employees their percentage of warm.
Speaker Change: Assets.
Speaker Change: Thing that you can say or direct investors to to have some understanding of potential exposure recognizing that there is still a lot of uncertainty around it.
Speaker Change: Yes.
Speaker Change: Without without being really really granular and specific on the underlying assumptions about the tariffs and the structure of the tariffs it's hard to quantify a number and the reality is as the specifics of any potential tariff change the number changes what I can say is this.
Speaker Change: We may we manufactured product all over the World and then we ship it to our customers manufacturing plants all over the world and so every one of our plants are shipping product all over the world wherever our customers manufacturing plants are nuno are customers you know the industry has manufacturing hubs in Minneapolis the northeast.
Speaker Change: In the U S. Some in California, Costa Rica, Puerto Rico, Mexico.
Speaker Change: And in Ireland Southeast Asia So.
Speaker Change: The industry manufacturing footprint is global the vast majority of the products that we manufacture go to one of our customers manufacturing plants. So they go all over the globe. So you should not assume that that any one of our plants ships everything to one country because there.
Speaker Change: There is a myriad of destinations and so we've done we've done the analysis on our on our operations to look at where we're shipping we're implementing any any shipping logistics changes to mitigate or minimize any potential impact of tariffs. We're operating as though at some point tariffs will be implemented and.
Speaker Change: Putting mitigation plans in place and until we have more certainty about what the tariffs could be it's just not there's really wouldn't be credible to put a number on it because it requires a number of variables that are uncertain and that do seem to be changing regularly.
Speaker Change: Okay. Thanks for the color Joe I'll, let others jump in thanks.
Speaker Change: Thanks, Greg Thanks Blake.
Speaker Change: The next question comes from Matthew O'brien with Piper Sandler Your line is open.
Matthew O'brien: Good morning, Thanks for taking my questions, maybe just a follow up a little bit on <unk> question to start with on the acquisition side just these new homelink.
Speaker Change: <unk> technologies that you have just talk a little bit about you mentioned I think EP and theyre in neurovascular fast growth areas, what other kind of Halo effect can you get from these <unk>.
Speaker Change: Applications are these applications for.
Speaker Change: For the rest of the business on top of what Youre already seeing our new areas, that's going to push you into.
Speaker Change: Certainly so its coatings as a service and so it tends to be something that the customers have to look at and think about early in the process of designing and developing products and so what that means is then we are engaging with customers very early in the process and it's giving us.
Speaker Change: Visibility to the products, they're working on because this is primarily an outsourced.
Speaker Change: Outsource process. So most of it most of what the coatings are done as a service in the industry.
Speaker Change: We see this as really vertically integrating and allowing us to take the coding application processes that we use today for products, we manufacture and now now expand what we can do and offer that as a service in and simplify our customer supply chain by by allowing us to be involved earlier in the process.
Speaker Change: Yes.
Speaker Change: With us to offer coatings as a service.
Speaker Change: Or in addition to like what we already do where we coat the <unk>.
Speaker Change: Products that we manufacture today, so we have deep expertise in coatings today as a process.
Speaker Change: Other thing that this allows us to get into or some of the other faster growing end markets that maybe we don't have products in today, but that required coatings and so this is a service that can tap into those faster growing end markets, where maybe we arent, making product today, but the coding service allows us to participate in those faster.
Speaker Change: <unk> end markets. We we listed a couple of those on the on the summary slides. So we see this as a service.
Speaker Change: That allows us to go where the fastest growth is it allows us to engage more deeply with our customers earlier in the process that we think is beneficial to both of us and again, it's about simplifying their supply chain and allowing them to work with fewer suppliers and allow us to help them get products to the market faster.
Speaker Change: That first mover advantage.
Speaker Change: I appreciate that and then as a follow up and this might be a little bit of a stretch.
Speaker Change: But you know.
Speaker Change: One of your big customers mentioned, a new manufacturing facility in Galway, that's now up and running obviously you have a facility. There I'm just wondering if youre going to potentially benefit from.
Speaker Change: That new manufacturing facility for one of your big customers or if it's a headwind.
It's an area that I think they are expecting a lot of growth out of so I'm, just wondering what kind of benefit integer bite fee from that.
Speaker Change: Over the next couple of years. Thanks.
Speaker Change: I'd Love to give you a list of all the programs, we're on and the new products that we're launching with customers that supports our 6% to 8% organic growth guidance for 2025 that they delivered on the seven 3% organic growth that we had in 2024 and it gives us confidence that we're going to continue to be able to outgrow the markets when it began.
Speaker Change: Basis, but our customers really don't want us talking about their products and the things that they're doing and so.
Speaker Change: We're focused on continuing to do the development work in growing the development work.
Speaker Change: We continue to grow.
Speaker Change: And making sure that we can we can deliver on the organic growth in the tuck in acquisitions that we've included in our guidance and so maybe the closing point as we.
Speaker Change: We benefit from any consolidation in the industry. You know, we built a brand new Greenfield facility in Norway. We have we have a smaller operation is completely out of capacity, we built a whole new facility in Norway because of the amount of development work, that's happening in Galway and customers want to co develop <unk>.
Speaker Change: <unk> together in Norway, and we think that's going to be a big contributor to our growth over time and so we're excited about the programs that we're on I wish I could share them in more detail with you.
Speaker Change: But any anything like that that's happening in the industry.
Speaker Change: We're aware of it and it's factored into our 2025 guidance and we think 8% to 10% growth in this environment with six to eight organic has a strong outlook for the year.
Speaker Change: Yes.
Speaker Change: Understood. Thank you.
Speaker Change: Thanks for the questions.
Speaker Change: The next question comes from Richard <unk> with <unk> Securities. Your line is open.
Richard: Hi, Thanks for taking the question.
I'm wondering on gross margin in the fourth quarter.
Richard: It came in a little bit shy of our expectations. Despite the.
Richard: The better revenue performance.
Richard: Versus our forecast at least.
Richard: Anything to call out there and I'm curious if you could talk to the gross margin trend or how we should think about that improving or not and moving into 'twenty and what's baked into the from a gross margin standpoint into your 76 basis point operating margin expansion target.
Speaker Change: Great. Good morning, rich. Thanks, Thanks for the question. So let me start with <unk>.
Speaker Change: We had 11% organic growth in the fourth quarter, which is exactly what we guided to we actually land like landed right at the midpoint of our sales guidance and I know on the third quarter call. There were there were a few people asking while that's a pretty big step up in organic growth and we said hey, we're already four weeks into the quarter.
We've been planning for this all year long, we know what what customers.
Speaker Change: Demand is and so I'll start with we delivered very strong 11% organic growth in the quarter right at the midpoint of our guidance operating profit was a little better and so I know the geography of the income statement might look a little different in the actuals versus what what folks were expecting but it was very much in line with what we were.
Speaker Change: <unk> and the thing I'll point to is we highlighted that we add some significant new product ramps in the quarter, we highlighted that our emerging PMA customers, we're going to be at the high end of the range. We had provided you may have seen on the slide we came in slightly above the high end of the range. So we had strong growth there and other new products that we can.
Speaker Change: To launch so what happens when you launch a lot of new programs in any given quarter.
Speaker Change: You have to hire a lot of people train a lot of people and there is always some level of inefficiencies during those those ramp periods. It may it may take us a few quarters to work out some of those inefficiencies.
Speaker Change: So we either get the lines up to low debts more balanced with the amount of resources. We have because we are preparing for that growth, which is part of what's fueling the 6% to 8% organic growth in 2025, so we weren't surprised by that.
I would characterize it maybe summarize it as 11% organic growth a lot of new programs you hire people you got to get them trained theyre not as proficient in the early phases, we'll do what we always do which is continue to improve those processes and as the volumes ramp the lines become more a more balanced and level loaded and efficient associates become more proficient at.
Speaker Change: What theyre doing.
Speaker Change: And it's a great problem to have when you've got 11% organic growth with lots of new associates building new products.
Speaker Change: Okay I guess.
Speaker Change: Gross margin direction was down it sounds like there were some efficiency productivity things that sound transient.
Speaker Change: And it came in line with your expectations, maybe just because you just issued 25 guidance can you give us a ballpark of.
Speaker Change: How we Directionally you should think of gross margin on a full year basis year over year should it be roughly.
Speaker Change: In line with 24 above 24 below just how are you.
Speaker Change: How you get to the operating margin improvement and how we should think about the gross margin direction.
Speaker Change: Sure. So maybe I'll start with the way, we think about our overall strategy of growing operating profit twice as fast as sales is we want some contribution from gross margins because thats our integer production system. The manufacturing excellence driving a culture of continuous improvement in all areas of the business and then we want operating leverage.
We don't want to grow our operating cost as fast as our sales. So we expect to get operating leverage every year, we expect to get gross margin expansion every year and in any given year, depending upon what programs, we're launching and what products, we're introducing and the and how fast we implement the continuous improvement.
Speaker Change: We expect there it will vary from year to year, how much of our operating margin expansion comes from operating leverage and gross margins. In 2024, we had 140 basis points of operating margin expansion. We think that's a great year with sales up 10% and operating profit up 20%.
Speaker Change: That came from 40 basis points from gross margins and a 100 basis points from from operating margin operating cost leverage as we look into next year, we would expect our R&D costs as we continue to grow the development sales that will lower the R&D line item, but we're doing more work next year. So we would expect R&D to either.
Speaker Change: To grow less than the rate of sales, we would expect it to be nominally a little higher on a year over year basis, but well below the sales growth rate, we expect SG&A to grow something closer to the sales rate the acquisitions bring in some SG&A and we'll always work going on continuing to leverage our SG&A infrastructure across the <unk>.
Speaker Change: Company, but we would expect SG&A to be more aligned with with overall sales and so then we will get some gross margin expansion and that mix of it is going to is going to vary across the year I wish. It was always perfectly linear, but we would expect to get some gross margin expansion, while continuing to leverage our opex on a go forward basis.
Speaker Change: Okay.
Speaker Change: Okay. Thank you.
Speaker Change: The next question comes from Nathan <unk> with Wells Fargo. Your line is open.
Speaker Change: Great. Thanks for taking the question.
Speaker Change: Your slide deck called out renal denervation has a target growth market.
Speaker Change: Can you disclose what it is your manufacturing whether it's components for final product and arguing working with both Medtronic and <unk> core and further we expect a significant a significant ramp.
Speaker Change: In renal denervation following its mcd do you feel comfortable you will have the capacity to supply that.
Speaker Change: Yes.
Speaker Change: I really wish I could give you a list of all the programs rolling in all of the individual customers. We're on we're excited about.
Speaker Change: About this market as well, we it's getting a lot more visibility lately, it's a huge opportunity.
Speaker Change: In terms of helping patients and we've been we've been working on in this space for a very very long time, we think it leverages our core capabilities that we have in the business incredibly well.
Speaker Change: And if you look at it.
Speaker Change: It's a bit like the the electrophysiology and the ablation catheters. The diagnostic catheters were leveraging that core capability, we think it fits really well with our capabilities and it's an exciting end market and we're excited to see the potential for helping more patients and to participate and help our customers participate in.
And helping more patients and growing both of our businesses.
Speaker Change: Okay. Thanks for that and as a follow up so you know three to five year outlook for your TMA portfolio at a 15%, 20% CAGR can you talk about the sequencing of this growth should we expect next year and the year after that to be in line above or below this growth.
Speaker Change: Yes, great question.
Speaker Change: We did pivot to growing at what we think is still well above the market at 15% to 20%, we characterize that closer to <unk> the market.
Speaker Change: We love the portfolio of companies that we're serving there.
Speaker Change: We would I wish I could say it was perfectly linear I mean part of the reason that we were showing two year increments is as programs launch. They can have some lumpiness in the launch and the initial loading of inventory. The nice thing is we've gone from a business that six years ago was $10 million. So it was a rounding error to 125.
Speaker Change: <unk> portfolio of products, which is awesome.
Speaker Change: We'll have a little more predictability in the growth rate because now there's a base of business there.
Speaker Change: I don't think it will be perfectly linear because there'll continue to be launches and what I'll highlight is if you look on the on that particular slide in the deck. We've got the number of customers that we're working with in the different phases of the product development and launch here's what I'll highlight in the third quarter of 2020. The first time, we showed this slide we had.
Speaker Change: 27 customers, we were working with across those five phases now we have 39, so as part of our our development revenues continuing to grow and we highlighted that we've grown 270% since we launched our strategy last year that chart said, 230%. So you see we continue to grow at an accelerated rate.
Speaker Change: Which helps to lower that R&D any line item because we're getting we're getting paid for that work.
Speaker Change: We're excited about the pipeline of customers. We're excited about $125 million portfolio that is growing at <unk> the market rate and we would expect it to be a little more.
Speaker Change: Linear than what it had been.
Speaker Change: But there'll still be some lumpiness, just because of the nature of product launches.
Speaker Change: Great. Thank you.
Speaker Change: Thanks for the question.
Speaker Change: The next question comes from Suraj Kalia with Oppenheimer. Your line is open.
Speaker Change: Okay.
Suraj Kalia: Good morning, Joe diagram can you hear me all right.
Speaker Change: Yes, good morning Suraj.
Perfect. So.
Joe One question for you and one for Dion first for you.
Darren Smith: Maybe I'm doing something wrong, Keith forgive me on this so darrin if I look at the two acquisitions and now precision coating.
Darren Smith: And the other one announced this morning, right and I strip that out.
Darren Smith: From your guide as reported.
Darren Smith: I'm getting somewhere close to 4% in the lower end can you help us reconcile that 6% to 8% organic growth that you mentioned.
Darren Smith: Versus the LSD that we're getting doing this Matt I'm, certainly screwing it up some barriers and show to you I know a lot of questions have been asked about EP and CRM and so on and so forth.
Darren Smith: And even renal denervation.
Speaker Change: Maybe if I could push you on Transcatheter tricuspid therapies.
Darren Smith: I know that is a core focus for you guys.
Speaker Change: Our math is roughly.
Speaker Change: Three or 4000 cases done in 2024.
Speaker Change: As you enter 2025.
Speaker Change: Can you give us some guideposts on how youre thinking.
Speaker Change: ZIP manufacturing outlook any additional color would be greatly appreciated gentlemen, thank you for taking my questions.
Speaker Change: Yes, Raj just on the on the inorganic piece of the calculation.
Speaker Change: You have to look at is the.
Speaker Change: The portable medical market exits that we announced back in 2022 and its effect on the on.
Speaker Change: On the growth versus 2024, so the portable medical is down about $29 million a year year over year 25 versus 24, and you need to back out in 'twenty for the $58 million of sales that we had in 2004. So when you adjust 'twenty four and 'twenty five.
Speaker Change: To exclude portable medical Thats, where youll be able to calculate in the 6% to 8% organic growth.
Speaker Change: Okay.
Speaker Change: This concludes.
Andy: Question and answer session I will turn the call to Andy <unk> for closing remarks.
Suraj Kalia: Yes, let me let me just answer Suraj as other question about <unk>.
Suraj Kalia: I'll start with we continue to outgrow the market in structural heart.
Suraj Kalia: We said on the last call, we were drilling one and a half or faster than one five times or faster than that than the market overall structural heart I'd love to get into specifics on individual programs, but we continue to have a strong development pipeline and structural heart feel that we're well prepared to support and serve that market as our customers.
Suraj Kalia: Produce new products and as they accelerate and ramp those programs feel like we're really well positioned if that was part of what you are asking so we're excited about the structural heart market is as one of our multiple growth drivers and delivering on that organic growth.
Suraj Kalia: Thank you.
Speaker Change: Great. Thanks Raj Thanks for the question.
Speaker Change: This concludes the question and answer session I will turn the call to Andrew for closing remarks.
Andrew: Okay, great. Thank you everyone for joining the call today as always you can access a replay of the call and the presentation on our website. Thank you for your interest in editor and that concludes our call.
Andrew: This concludes today's conference call. Thank you for joining you may now disconnect.
Andrew: [music].
Andrew: Yeah.
Andrew: Yes.
Andrew: Yes.
Andrew: Yeah.
Andrew: [music].