Integer Holdings Corporation

Ladies and gentlemen, thank you for standing by and welcome to the Integer Holdings Corporation Q4 2020 earnings call. At this time, all participants are in a listen-only mode. After the speaker's 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. If you require any further assistance, please press star 0.

i would now like to hand the conference over to your speaker today tony borowicks senior vice president of strategy corporate development and investor relations thank you please go ahead good morning everyone thank you for joining us and welcome to integers fourth quarter 2020 earnings conference call with me today are joe disick 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 measures. For reconciliation of these non-GAAP measures, please see the appendix of today's presentation and the notes to the financial statements in today's earnings release, 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 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 review the status of our long-range strategy. Jason will then review our financial results for the fourth quarter and for the full year and provide our outlook on both the full year and first quarter of 2021. Joe will come back on to provide his closing remarks. and then we will open up the call for your questions. With that, I'll turn the call over to Joe.

Thank you, Tony, and thanks to everyone for joining the call today. I'd like to start by recognizing the Integer Associates who worked every day during 2020 to produce products for our customers and patients. The dedication and sacrifice they make to deliver for our customers and their patients are the reason I can join this call today with confidence that Integer is well positioned to continue delivering on our commitments. We delivered fourth quarter sales at the high end of our guidance and profit above our guidance. The fourth quarter was the start of the recovery for Integer and our sales increased 14% from the third quarter. Our profit margin rate increased 350 basis points from the third quarter. recovering with the expected volume increase and exceeded our guidance by 50 basis points. On our last earnings call, we estimated the industry would grow low single digits year over year during the fourth quarter, which would have been an improvement from the third quarter. Our view of the fourth quarter today is that the industry declined low single digits on a year over year basis, similar to the third quarter industry results. Since our fourth quarter sales were at the high end of our expectations, we think our customers built some inventory during the fourth quarter. We expect this inventory will be depleted over the first and second quarters of this year, and we have incorporated this impact into our 2021 guidance. Despite the pandemic, we reduced net total debt by 15% last year, a reduction of $123 million. demonstrating our continued strong focus on cash management. During 2020, we remained focused on executing our strategy and it delivered for both our associates and our customers through improved safety, quality, and on-time delivery. We increased our overall investment in manufacturing capabilities and capacity, additional R&D engineers, and numerous other areas of the business. Our 2021 outlook reflects our view of the trajectory of the industry recovery, including our margins expanding with the volume recovery. Jason will cover this in more detail later. I presented this slide one year ago to highlight the strong trajectory we were on after 2019. We had achieved two of the three financial objectives of our strategy, operating profit growth at twice the sales growth rate and debt leverage between two and a half to three and a half. This pre-COVID view demonstrated that our strategy was delivering the intended results. Just a few weeks after presenting this slide, we were all in lockdown due to COVID. We've added 2020 to this slide to reflect the impact the pandemic had on our sales and profit. Our priorities during the pandemic were clear, and we shared them throughout the year. Protect our associates, execute our strategy, and continue paying down debt. Although the financials don't reflect it because of the pandemic, we made meaningful progress improving integer last year. But first, let's cover our view of the COVID impact on the industry and integer sales during 2020. This is the fourth time we've shown this quarterly graph and possibly will be the last. We believe this graph has been helpful to depict the timing difference of COVID's impact on our customers and Integer. The dark blue line in the graph represents the industry sales and the orange line represents Integer sales. The table at the bottom of the slide reconciles our estimated industry decline to Integer's growth or decline. The first of the two rows in the middle represents our estimates of the COVID timing difference And the second row labeled non-COVID quantifies three integer-specific items. I need to highlight that the industry estimates represent our aggregation of public companies' reported sales in the markets we serve. We tried to correlate our customers' reported sales by end market that would match our sales in those end markets. A quick recap of how to interpret the table at the bottom is as follows. In the first quarter of 2020, we estimate the industry declined 6% and integer grew 4% on a year-over-year basis. Because our customers did not change their orders to integer during the first quarter of 2020, integer did not have any impact from the pandemic. This created a COVID-driven 10 percentage point difference between the industry results and integers results. Each quarter can be interpreted in this manner. with the non-COVID line representing the impact of the new vector bankruptcy, fewer days in the fiscal 2020 versus fiscal 2019, and the electric and business units sales decline from the oil and gas industry decline. The full year column reflects an industry decline of about 12% compared to an integer decline of 15%. The non-COVID impact was a negative 4%, and the estimated timing difference impact of COVID was a positive 1% on integers year-over-year sales. Our estimate of why COVID had a 1% positive impact on the full year points specifically to the fourth quarter. As I mentioned earlier, on our third quarter earnings call, we estimated the industry would grow low single digits in the fourth quarter, and our sales guidance reflected that growth. Our current view is the industry declined low single digits in the fourth quarter, whereas integer sales were at the high end of our guidance. Our conclusion is the industry built some inventory during the fourth quarter versus our prior expectations, and we have incorporated this into our 2021 sales guidance. I appreciate this slide has a lot of moving parts. Hopefully the takeaway is clear. For the full year 2020, We believe the integer sales decline was about the same as the industry sales decline when considering the non-COVID items. We expect our full year 2021 sales growth versus 2020 to track the industry growth. But we expect the quarterly year-over-year growth rates to be very different than the industry because of the timing differences COVID had during 2020. We expect the sequential growth during 2021 to be more consistent with the industry. This reflects our view of the COVID impact on both the industry and integer sales last year. Despite this difficult environment, integer has continued to lead through the pandemic and the next slide covers how. It starts by taking care of our associates who take care of our customers and patients. We continued to deliver for our customers, and despite the pandemic, we won more product development programs than we projected and further expanded our pipeline of new opportunities. We adjusted cost with volume and protected our infrastructure so we could continue executing on our imperatives. Our focus on cash generation enabled us to spend a similar amount on CapEx in 2020 as we did in 2019, while increasing investments in R&D, SG&A, and operations to execute our strategic comparatives. Our ability to continue serving our customers and delivering for patients during the pandemic is a testament to the dedication and commitment of our associates. I remain convinced that if we equip and empower our associates with the tools they need to serve our customers, our shareholders will reap strong returns. The pandemic definitely consumed a significant amount of energy in 2020, but it did not stop us from continuing to execute our strategy. In the next few slides, I'm going to share some of the highlights on how we strengthened Integer in 2020 and built on the strong trajectory we had entering the year. which I'm confident will enable us to deliver on our financial objectives. It starts with our culture. Two of our six operational strategic imperatives are focused on building leadership capability to deliver performance excellence. This slide explains how we are going to accelerate the growth of integer. If you think about what you want as an investor, sales growth and cost reduction at the same time, or at least you want sales growing faster than cost. This means one must do more with less or deliver more with the same amount of resources. But how do we do that? It starts with a commitment to personal and professional growth. The five work streams under each of these imperatives outline how we are going to accelerate the growth of the leaders and the associates at Integer. The four examples underneath each imperative demonstrate the ways we are growing our leadership. We've summarized the results in four areas for each imperative to provide examples of how we're turning the intangible word culture into something very measurable and impactful. We are improving our selection process through interviewer training and psychometric assessments, which enables us to develop more clear and effective individual development plans for associates once they join Integer. We've trained frontline supervisors and develop tools to assess performance and provide coaching and mentoring. We measure associate engagement to know whether we're succeeding, and we're differentiating pay based on performance. We've hired a senior leader to accelerate our diversity and inclusion efforts to enable every associate to bring their full selves to work, which will lead them to making their maximum possible contribution to Integer. By growing our leaders and associates, we propel the growth in integer and deliver sustained outperformance. Manufacturing excellence is another imperative that made significant progress in 2020. We've previously shared the four work streams of this imperative shown on the left side of this slide, highlighting that it all starts with the integer production system. The integer production system consists of five categories with 16 elements, all built on the foundation of our values at the bottom of the pyramid. We are systematically and rigorously implementing each of these 16 elements across the integer manufacturing sites based on the prioritization for each site that will accelerate their achievement of excellence in everything they do. We have added the lean expertise and continuous improvement resources across the organization to provide the training and tools that empower our frontline associates to improve the safety, quality, on-time delivery, and efficiency in our operations all over the world. The operational results demonstrate we are making manufacturing a competitive advantage for Integer. We have initiated the next evolution of our manufacturing excellence strategy by launching our first implementation of a manufacturing execution system. This implementation will enable us to eliminate manual processes and paperwork, provide real-time data analytics, and ultimately drive increased quality and efficiency in our operations. This is another transformative investment that will further differentiate our manufacturing capability from our competitors. Another evolution of our strategy is our investment in mechatronics. which combines the utilization of collaborative robots, automation, vision, and the overall mechanization of work currently being performed manually. We are in the early stages of both of these strategies and expect to see efficiencies grow throughout 2021 and accelerate into 2022 and beyond. The results of our manufacturing excellence efforts are demonstrated in the results we're delivering for customers. Since the implementation of our strategy in 2018, we have improved quality by 49% and on-time delivery by 12%. We have reached a level of excellence for on-time delivery where there isn't much room left to improve. So we are redefining the measure to be even more customer-centric to drive greater customer satisfaction in how we serve them. Customers are recognizing our improvement, and I would point to the 70% of sales we have under multi-year agreements as evidence that we're being recognized and rewarded for our improved service levels. Our strong cash generation has enabled us to continue investing in the manufacturing capabilities and capacity needed to accelerate top-line growth at Integer. The manufacturing execution system implementation I referenced earlier is included under the capabilities investments column. In terms of capacity expansion, I would highlight the Galway Ireland R&D Center we opened last year as another way we're supporting our customers' demand for more product development work. Furthermore, we have recently invested in the expansion of our Alden New York implantable battery facility, where we recently broke ground on a project to significantly increase our capacity to manufacture lithium ion batteries to support the increasing demand for these products. The far right column highlights the talent additions we made during 2020 to enable and accelerate the execution of our strategy. These additions support all six of our operational strategic imperatives, and demonstrate the investment we're making in human capital at Integer. I am confident these carefully selected leaders will accelerate our journey to excellence. Even while we weathered a 15% decline in sales and continued to accelerate investments in our strategy, we reduced our net debt by 15%, another $123 million during 2020. Although our leverage ratio went up because of the EBITDA reduction caused by COVID, I'm confident we will get back within our targeted range of 2.5 to 3.5 during 2021. I'll conclude my summary by highlighting that we were on a strong trajectory exiting 2019 after expanding our margins and continued debt deleveraging. During the pandemic, we protected our associates and continued our journey to excellence by investing in the business, both in our associates and in our manufacturing plants. Our strategic objectives have not changed and know that our pursuit of these objectives has only accelerated. I'll now turn the call over to Jason to discuss our financial results.