Integer Holdings Corporation

Ladies and gentlemen, thank you for standing by and welcome to Integer Holdings LLC Q2 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded, and if you require any further assistance, please press star 0. I would now like to hand the conference over to Tony Borowitz, Senior Vice President of Investor Relations. Thank you. Please go ahead.

Good morning, everyone. Thank you for joining us and welcome to Integer's second quarter 2020 earnings conference call. The calls being webcast live in the replay along with a copy of the press release and earnings presentation will be available on the Investor Relations section of our corporate website. 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 measures. For reconciliation of these non-GAAP measures, please see the appendix of today's presentation and the notes of the financial statement in today's earnings release. As a reminder, today's presentation includes forward-looking statements. Please refer the company's SEC filings for discussion of the risk factors that could cause our actual results to differ materially. Joining me on the call to discuss our second quarter results are Joe Dietzik, President and Chief Executive Officer, and Jason Garland, Executive Vice President and Chief Financial Officer. On today's call, Joe will provide his opening comments and discuss how COVID-19 is impacting our business and how we are managing in this new normal. Jason will review our financial results for the quarter, provide an update on how we are managing costs, and discuss our strong cash position. Joe will come back on to provide his final closing remarks, and we will open it up for your questions. At this point, I'll turn the call over to Joe for his comments.

Thank you, Tony, and thanks to everyone for joining the call today. I want to start by reiterating what we said at the beginning of our call last quarter. Creating a safe environment for our associates who have been coming into our manufacturing operations every day during this pandemic continues to be our top priority. By ensuring pandemic safety protocols are in place, our associates are able to focus on manufacturing the products our customers and their patients need every day. Sounds simple. Take care of your associates who take care of your customers. Now that we're operating in this new social distanced environment, we have worked to make it as normal as possible so we can stay focused on executing our strategy. We have found a cadence and a rhythm that is as normal as one can be during this dynamic period. One step in this process has been increasing our agility to adjust production to the changing needs of our customers and the market demand. We continue to work closely with our customers to meet their needs while also continuing to implement our strategy with an intense focus on our manufacturing excellence operational strategic imperative. The team has been very creative in their implementation of the integer production system during the pandemic. As many of our lean experts are working remotely, we are operating as though this is the new normal. and remain focused on the execution of our strategy to achieve excellence in everything we do. On our first quarter earnings call in early May, we disclosed that April sales were down approximately 20%, and believed it did not reflect the full impact of COVID-19. We projected our second quarter would be worse than April, and now that the second quarter is complete, sales were down 24%. And even down 24% does not reflect the full impact of COVID, as we believe our second quarter sales were better than the medical device industry sales decline, which is what we expected. I will cover this point in more detail on the following slides. Our profits declined significantly, as we expected, because our approach to the expected temporary sales decline from the pandemic has been to adjust the variable cost with sales and not take out infrastructure. We expected to see a significant margin rate contraction as we worked to adjust variable cost to match the lower volumes and preserve our infrastructure to execute our strategy. We fully expect our earnings to come back as volume returns. Also, as we expected, our cash flow was solid in the second quarter and partially insulated from the profit decline as the second quarter cash collections benefited from the higher first quarter sales. Turning to our outlook for the second half, we're going to be as transparent as possible on what we expect and how it correlates to the market, but we are not providing quantitative guidance. To that point, we expect the third quarter to be relatively similar or even perhaps slightly lower than the second quarter. We expect cash flow to remain positive in the second half of 2020, but well below the first half as the lower second quarter and third quarter sales will reduce cash collections. We would expect to see sequential improvement in sales in the fourth quarter, somewhere in the middle as compared to the second and third quarter run rate and pre-COVID levels. The qualitative information we are hearing from the marketplace and the fact that our order backlog trend is improving supports our view of the second half outlook. It has taken a total team effort to manage in this new environment, and I am proud of the agility and ingenuity the team has demonstrated to deliver for our customers. Let me provide an update on how we are interpreting the industry volume trends and how they are impacting our results. We believe the industry sales declined in the mid-30% range during the second quarter. Abbott reported a 33% reduction in their medical device sales, excluding diabetes products. Johnson & Johnson reported a decline of 34% in their medical device segment. And Boston Scientific reported a 29% decline in their medical device sales. We estimate procedure volumes were in the range of 80 to 90% of pre-COVID levels exiting the second quarter. but that was prior to the recent surge in COVID infections across the southern part of the U.S. Some of the more critical procedures, such as heart failure and structural heart, saw slightly better results, whereas the more elective neuromodulation cases experienced second quarter declines in the neighborhood of 50 percent. On slide nine, you see our current view of the market, depicted in the dark blue line, compared to the view we presented during our first quarter earnings call. which is shown in light blue. The rate of decline at the beginning of the second quarter was steeper than we originally projected, but it also recovered more quickly later in the quarter, leading to a higher exit rate. Although the third quarter is starting at a higher run rate, we expect a flattening during the quarter as the surge of COVID cases in the U.S. has impacted elective medical procedures in certain geographies. We estimate the third quarter industry sales somewhere between 10 and 20% below pre-COVID levels. Barring a further surge in COVID cases, we expect to see improvement in the industry volumes in the fourth quarter, but still below pre-COVID levels by 5 to 15%. Similar to our prior review, we expect that the market will return to pre-COVID levels sometime during the first quarter of 2021. When we look at the COVID impact on Integer, we estimate that our second quarter sales decline of 24% was approximately 10 percentage points better than the market decline. There are several reasons for this difference from the industry decline. Some customers reacted in early April and began to reduce orders, whereas for other customers, we did not see meaningful changes until June. There was a pretty wide range of customer response times, But when they did respond, they responded with meaningful reductions. The blend of reaction times and the magnitude of the change was what we expected. It is important to note that we fully expect the 10 percentage point favorability in the second quarter versus the market to reverse in the second half of the year. We anticipate our growth rate converging with the market growth in early 2021, and returning to our more typical level of variation to the overall market growth. Slide 11 shows our current view of the impact on integer sales and how the curve has changed compared to our prior view. The decline at the beginning of the second quarter started a little earlier, but the pace of the decline was slightly slower. We thought that the bottom of the curve was going to be in June, and now we think the bottom will be in July. We have pretty good visibility into the order backlog for the third quarter, especially since July is almost complete. It doesn't mean customer demand cannot change during the next 60 days, but our order backlog supports this updated curve. Given our current backlog, we expect the third quarter sales to be about the same as the second quarter with a slight bias to lower given the bottom of our curve is now in early third quarter. Turning to slide 12, this brings together our current view of both industry and integer sales. A key takeaway is that integer sales were better in the second quarter than the industry by about 10 percentage points because of the response time of our customers. This is not a criticism of our customers, but an acknowledgment that it takes time to interpret the market change, understand at the procedure level the impact on each medical device, then translate that into a change in their own manufacturing operations, and then communicate that to us in the form of order changes SKU by SKU. The time it takes for this sequence of events to occur generates the lag in the impact on integer and the resulting 10 percentage point favorability versus the industry decline. We expect this favorability to the industry will reverse in the second half. With most of the adjustment coming in the third quarter, and the remainder in the fourth quarter. Our ability to predict the reversal with precision is limited, but this is the current view that our order backlog analysis and our qualitative assessment suggests. How are we managing? We are actively managing our variable expenses to align with the volume decline. We continue to execute our strategy and to position the company with ample liquidity to protect our strategic investments and to carry out our bolt-on acquisition strategy, while safeguarding the company against a prolonged pandemic. I'll now turn the call over to Jason to review the financial results.