Integer Holdings Corporation (NYSE:ITGR) Q3 2023 Earnings Call Transcript

Integer Holdings Corporation (NYSE:ITGR) Q3 2023 Earnings Call Transcript October 26, 2023

Integer Holdings Corporation beats earnings expectations. Reported EPS is $1.27, expectations were $1.05.

Operator: Hello and welcome to the Integer Holdings Corporation Third Quarter 2023 Earnings Call. [Operator Instructions] I will now turn the conference over to Mr. Andrew Senn, Senior Vice President Strategy, Business Development and Investor Relations. Please go ahead.

Andrew Senn: Good morning, everyone. Thank you for joining us and welcome to Integer’s third quarter 2023 earnings conference call. With me today are Joe Dziedzic, President and Chief Executive Officer and Diron Smith, Executive Vice President and Chief Financial Officer. As a reminder, the results and the data we discuss today reflect the consolidated results of Integer for the periods indicated. 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 integer.net. Please note that today’s presentation includes forward-looking statements.

Please refer to the company’s SEC filings for a discussion of the risk factors that could cause our actual results to differ materially. On today’s call, Joe will provide his opening comments and will share some exciting news regarding our strategic acquisition. Diron will then review our financial results for the third 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 your questions. With that, I will turn the call over to Joe.

Joe Dziedzic: Thank you, Andrew and thank you to everyone for joining the call today. First, I would like to congratulate Diron Smith on being appointed our Chief Financial Officer. Diron joined Integer in 2021 as our global FP&A leader. He brings strong manufacturing and operational finance experience to the CFO role with a leadership style that is collaborative and candid. Diron is focused on enabling the business to deliver excellence for our customers, which will lead to great results for investors. I look forward to partnering with Diron as we execute our strategy to earn a premium valuation. Before I provide an update on Integer, I’d like to take a moment to remember our long-time sell-side analyst from KeyBanc, Matt Mishan, who passed away unexpectedly on September 8.

That was greatly respected within our industry. He was always energetic, thoughtful and brought a sense of humor to what we all do everyday. He will be missed and our hearts go out to his family, friends and colleagues. Transitioning to our earnings call, we delivered another quarter of strong year-over-year results. Sales grew 18% organically from robust customer demand across our targeted growth markets. Our adjusted operating income grew 39%, while expanding margins by approximately 240 basis points compared to last year. We were able to deliver more products to our customers than our prior guidance assumed. We expanded margins from volume leverage as well as efficiencies gained from an improving supply chain. Based on continued strong customer demand, we are raising our full year outlook again.

At the midpoint of our guidance, we expect full year sales to grow 15% and adjusted operating income to grow 25% year-over-year. The strategy that we began implementing in 2018 is producing above market sales growth, with a pipeline to sustain growth at 200 basis points above the market. We are expanding margins in 2023 and remain confident we can achieve our strategic financial objective of growing operating income at 2x the rate of sales growth. We expect to achieve this through the execution of our manufacturing excellence strategies and further stabilization of the supply chain and direct labor environments. It is an exciting time at Integer, because demand remains incredibly strong. We have a robust pipeline of new products concentrated in faster growing end markets and we are making the investments needed to deliver sustained growth, including tuck-in acquisitions.

Earlier this month, we completed the acquisition of certain assets of InNeuroCo, a company specializing in neurovascular catheters. InNeuroCo brings deep design expertise and manufacturing capabilities in high growth neurovascular catheters that are primarily used in the treatment of ischemic strokes and intracranial aneurysms. They develop and currently manufacture a portfolio of aspiration catheters and a portfolio of neurovascular radial access catheters for the industry leading OEMs. We acquired InNeuroCo for $42 million plus potential earn-outs for achieving specific revenue targets through 2027. The effective purchase price is approximately $5 million lower after considering the net present value of cash tax benefits resulting from the acquisition structure.

We expect sales synergy of approximately $20 million by 2027 from InNeuroCo’s design and development team supporting our existing pipeline of neurovascular catheter opportunities. The transaction is immediately accretive to EPS. Three of the high growth markets that Integer targets are highlighted in the blue box on this chart: structural heart, electrophysiology and neurovascular. We have the breadth and depth of capabilities needed to serve our customers in these faster growth markets. And as the demand for neurovascular catheter outsourcing accelerates, Integer is now even better positioned to capitalize on this high growth market. Neurovascular catheters are technically complex and include neurovascular guide catheters, aspiration catheters and radial access catheters.

The acquisition of InNeuroCo is completely aligned with our strategy to add or strengthen differentiated capabilities that enable us to provide innovative solutions to our customers in high growth markets. I will now turn the call over to Diron.

Diron Smith: Thank you, Joe. Good morning, everyone and thank you again for joining today’s discussion. I will provide more details on our third quarter 2023 financial results and provide an update on our full year 2023 outlook. It is important to note third quarter results are not impacted by our acquisition of InNeuroCo, while the full year outlook includes this acquisition. We continued our first half momentum through the third quarter, delivering another quarter of strong performance. With sales of $405 million, Integer delivered 18% year-over-year sales growth on both reported and an organic basis, which excludes the impact of currency fluctuations. Our sales performance reflects the continued strong customer demand across our targeted growth markets and the ongoing improvements in the supply chain environment.

We delivered $81 million of adjusted EBITDA, up $18 million compared to the prior year or an increase of 28% and adjusted operating income increased 39% or $18 million versus last year. As we continue to make progress on our year-over-year margin expansion, adjusted operating income as a percent of sales increased by 240 basis points versus the prior year to 15.9%, driven by volume leverage and efficiencies gained from the continued improvement in the supply chain. With adjusted net income at $43 million, we delivered $1.27 of adjusted diluted earnings per share, up $0.32 or 34% from the third quarter of 2022. I will touch on the year-over-year growth and adjusted net income in a few moments. Diving deeper into our sales by product line, we delivered strong year-over-year growth in our C&V and CRM&N product lines in the third quarter of 2023.

Cardio & Vascular delivered 23% sales growth in the third quarter compared to a year ago. This double-digit growth was driven by continued strong demand across all markets, growth in key products such as guidewires, new product ramps in electrophysiology and structural heart and supply chain improvements. Cardiac Rhythm Management and Neuromodulation’s third quarter sales increased 22% over the third quarter of 2022, with double-digit growth in both cardiac rhythm management and in neuromodulation. This was driven by strong demand, including double-digit growth from emerging customers with PMA products and supply chain improvements. Advanced Surgical, Orthopedics and Portable Medical saw a 13% decline in the third quarter versus a year ago driven by execution of the planned multiyear Portable Medical exit announced in 2022 and low double-digit decline of Advanced Surgical and Orthopedics.

And lastly, Electrochem, our non-medical segment declined 25% from a year ago, returning to a normalized run-rate after previously higher sales from the supply chain recovery. Further product line details are included in the appendix of the presentation on our website at integer.net. Third quarter 2023 adjusted net income increased a total of $11 million compared to the third quarter 2022. Strong sales and related operational improvements delivered $16 million of the increase minimally offset by foreign exchange rate fluctuations as well as higher interest and taxes. Year-over-year interest expense increased only $1 million as the higher market based interest rates were mostly offset by the benefits from the lower fixed interest rate convertible notes issued in January of this year.

Additionally, as we described in the second quarter earnings call, the primary driver of our higher adjusted effective tax rate in third quarter 2023 compared to the prior year is the expiration of the 10-year Malaysian tax holiday. In the third quarter 2023, we generated $62 million in cash flow from operations, up $35 million from a year ago and $6 million higher than the prior quarter. This strong performance was driven by higher sales volumes, improving margins and our continued management of working capital. In the third quarter, we generated $37 million in free cash flow inclusive of $25 million of capital expenditures. Third quarter year-to-date, we have generated $125 million in cash flow from operations and invested $83 million in CapEx. Resulting in $42 million of free cash flow.

Net total debt in the third quarter reduced by $38 million sequentially and our net total debt leverage at the end of the third quarter was 3.1x our trailing four quarter adjusted EBITDA, well within our strategic target range. Now let’s spend some time discussing our updated outlook for the full year 2023. As Joe mentioned in his opening remarks, with our continued strong performance, we are raising our full year 2023 outlook. Our updated outlook is inclusive of our recent acquisition of InNeuroCo. Starting with sales, we are increasing our outlook by $45 million to 15% year-over-year growth at midpoint with a sales range of $1.575 billion to $1.595 billion, an increase of 14% to 16% versus last year, up from our previous guidance of 11% to 13%.

Our outlook for 2023 adjusted EBITDA is 18% to 21% growth year-over-year with a range of $302 million to $310 million, up from our previous guidance of 15% to 18% growth. We are increasing our adjusted operating income outlook by $11 million at midpoint and expect 2023 to be between $235 million and $243 million, reflecting a strong year-over-year growth of 22% to 27%. At the midpoint of 25%, our adjusted operating income is growing at 1.6x the rate of sales growth. Adjusted net income is now expected to be between $151 million and $157 million, reflecting a year-over-year growth of 16% to 22%, up from our previous guidance of 10% to 15%. This delivers an expected adjusted EPS outlook between $4.47 and $4.67, a growth of 15% to 20% year-over-year.

Our latest view of the adjusted effective tax rate is projected to be between 17.5% and 18.5%. We continue to see strong performance quarter-after-quarter, which has given us confidence to raise our outlook for sales and adjust operating income as a percent of sales again. Since our initial guidance this year, we have raised our sales outlook at midpoint by $100 million, including $5 million for the InNeuroCo acquisition in the fourth quarter. Additionally, we have increased our adjusted operating income as a percent of sales by 50 basis points since our initial guidance in February and now expect a 113 basis point improvement year-over-year for the full year. We expect cash-flow from operations between $185 million to $205 million. This includes an expected full year impact of approximately $30 million to $35 million from accounts receivable factoring to support capacity investments in our Irish manufacturing facilities which we shared during our February earnings call.

While 2023 sales or $100 million higher than our initial guidance, we are maintaining our outlook on capital expenditures of $100 million to $120 million. Additionally, we expect to generate free cash flow between $75 million and $95 million. Inclusive of our $42 million acquisition of InNeuroCo, we expect our 2023 yearend net total debt to be between $925 million and $945 million, which is approximately flat to up $20 million from the end of third quarter 2023. We expect fourth quarter free cash flow to mostly offset the purchase of InNeuroCo, resulting in an expected net total debt leverage ratio at year end, well within our target range of 2.5x to 3.5x our trailing four quarter adjusted EBITDA. With that, I’ll turn the call back to Joe. Thank you.

Joe Dziedzic: Thanks, Diron. Integer is having a strong year with third quarter year-to-date sales up 18% and adjusted operating income up 29% including raising guidance the last two quarters. We continue to execute our strategy to deliver sustained above market growth with expanding margins. We have a strong pipeline of new products and continue to invest in differentiated capabilities, both organically and inorganically to sustain above market growth. We closed another accretive tuck-in acquisition in a high growth market. 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’ll now turn the call back to our moderator for the Q&A portion of our call.

Operator: Thank you. [Operator Instructions] Your first question comes from the line of Craig Bijou with Bank of America. Your line is open.

See also Hedge Fund Manager Louis Bacon’s Top 12 Stock Picks and Duquesne Family Office’s 15 New Stock Picks.

Q&A Session

Craig Bijou: Good morning, guys. Thanks for taking the question and Diron congrats on making the role permanent. Look forward to working with you and congrats on a great quarter. So, let me start with, the very strong growth that you guys have seen in the quarter and over the last – really several quarters. And I know you’ve talked a little bit about, the drivers of that. But I wanted to see if you maybe expand upon some of your comments, what would you attribute the growth to? Or is it the end markets that are growing faster? Are you – do you think you are being utilized more by existing customers? And/or is it new customer ads?

Joe Dziedzic: Great. Good morning, Craig. I will start with – thank you. And we do have incredibly strong growth 15% growth that midpoint, up from 12% that we had guided to on our last call and, I will point to a number of things, there is not one or two things driving it. And I’ll address the – I do think – we do think the industry is probably growing faster than mid single-digit, which are the market we serve have a long-term growth rate of mid single-digits. We think the industry is growing faster than that, as we get more of our customers reported results will shape our view of what we think the industry is doing for the markets we’re serving. But I point to emerging customers for us which we characterize emerging customers as our earlier stage neuromodulation customers and we’ve highlighted in depth the number of customers we have in early-stage development programs.

And we’ve mapped them out through the clinical regulatory and product introduction phases. We highlighted that last year 2022, we had about $50 million of sales with nine of those customers that are in product introduction or launch phase, and that by next year 2024, we would expect that to be $80 million to $100 million, so doubling. And we’re seeing the growth that we would expect in ‘23 in that mid – in between ‘22 and ‘24 growth rate that we set up double, we’re seeing that growth that’s a couple 2% to 3% of our year-over-year growth this year. All the new products that we’ve been working on from the pipeline of development work that we’ve been doing, we’ve highlighted a number of times now our pipeline of development programs has gone up 230% plus over the last 5 years, and that we’ve shifted that mix to the 80% of those programs in those faster growing in markets that we’re targeting.

structural heart, electrophysiology, neurovascular, neuromodulation, we’re seeing those new products be introduced and launched into the marketplace that’s driving at least a couple 100 basis points of that year-over-year growth. The acquisitions we have done Oscor and Aran, they are accretive to the Integer level of growth rate. So that’s order of magnitude call it 100 basis points roughly. We are making a big investment in our Irish facility that’s focused on guidewires. Because demand in guidewires, which is almost all a minimally invasive procedures require at least one sometimes multiple guidewires, the industry demand is being reflected in the demand on our guidewire business, particularly the facility in Ireland that we’re adding 80,000 square foot expansion to take it to 200,000 plus square feet, we’re seeing strong guidewire demand.

We did have a little bit of volume we talked about at the end of last year, beginning of this year that shifted out of out of ‘22 and into 2023. That was about $15 million to $20 million. So you add up all these things, and you get to 15% for the year, which we think is incredibly strong growth. We think we are growing faster than the market and we think we are growing meaningfully faster than our targeted 200 basis points in 2023. When we think about long-term growth rate, we still think the markets we are serving are growing in that mid single-digit over the long-term. We will have a better view at the end of this year when we see all of our customers reporting by the markets that they report in. We’ll have a view of what we think the market is, but I’ll close with its widespread strengths across a number of different elements of our strategy that we are executing.

We believe we are outperforming both the industry and our targeted 200 basis points above the market. And your question about new or existing customers, its existing customers and the early stage customers. I won’t say they are new they might be new to introducing something to the market, but we have been working with them for a number of years in particularly the emerging customer neuromod space. So the strength is widespread. And we think it’s demonstrated outperformance versus both the industry and versus our targeted 200 basis points faster than the markets.

Craig Bijou: Great. Thanks. Thanks for all the detail, Joe. My second question, there is a thought that a lot of the OEMs built up inventory to higher than traditional levels over the last couple of years mainly to protect against some supply chain disruptions. And that inventory will eventually be worked down. So I guess my question to you is I just – I guess I wanted to get your reactions to that thought process and that may just be an investor perspective, but wanted to get your reaction? And then is that a potential risk as you look out several quarters or into next year to your growth?

Joe Dziedzic: So, we don’t see it as a risk, because we believe we have built in exactly that already into our fourth quarter guidance. When we studied, we have studied the orders we received from customers in a pretty granular level by plant, by product, by customer, SKU level and then we work with our customers to interpret and understand what that signal means. The good news is we are still sitting on about $1.0 billion of orders in hand that ship over the next mostly 12 to 15 months. So that gives us pretty good visibility. And one thing we are seeing here with our fourth quarter and we have incorporated this already into our guidance, we are seeing what we would characterize as a normal pre-pandemic level of year-end inventory planning by customers.

Every year, we see in certain products, certain parts of our customers businesses what we interpret as they are managing inventory, because they have got goals and targets and metrics to hit. And we are seeing what we would characterize as a normal level of that activity, which to us is a good sign, because it signals that inventory levels might be at a healthy level for our customers and they are doing what they used to do before the pandemic. And so, we feel like we have already built that into our fourth quarter guidance and that’s been factored in. And so, we don’t see a risk of a meaningful maybe correction that there might be a concern about with inventory levels potentially being higher than customers would like.

Craig Bijou: Thanks. Thanks for taking the questions, Joe and congrats on the quarter.

Joe Dziedzic: Thanks, Craig.

Operator: Thank you. Your next question comes from the line of Matthew O’Brien with Piper Sandler. Your line is open.

Phillip Dantoin: Hey, this is Phil on for Matt. Congrats on the outstanding quarter and Diron congrats, I know we are looking forward to working with you. For starters, I think just on the pricing environment for you guys. I don’t know if you disclosed how much price contributed to the growth in the quarter, but if you don’t want to provide a specific number and I apologize for putting you on the spot, can you just talk about your ability to take price, how durable you see this moving forward as we look at 2024 and beyond?

Joe Dziedzic: Phil thanks for the question. Thanks for joining. And no worries, I’m putting you on the spot. It’s our job to tell you our strategy and how we are executing it. From a pricing standpoint, what we have conveyed, communicated this year is we have positive price. I would characterize it as it’s an increase year-over-year, which is very different than what we have historically had. Typically, we have been a 1% to 2% price down business. In 2022, we were right at 1% down and this year, we are actually positive. But the reason we haven’t quantified it or emphasize it is we raise prices very specifically to cover the cost increases or some of the cost increases we have experienced in both labor and material. That’s how we explain it to investor – I am sorry to customers.