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spk00: Good morning. My name is Joseph, and I will be your conference operator today. At this time, I would like to welcome everyone to the Integer Holdings Corporation Q4 2021 earnings call. All lines have been placed on mute to prevent background noise. After the speaker remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star 1 on the telephone keypad. If you would like to withdraw your question, Press star 1 again. Thank you. I would like to now turn the conference over to Senior Vice President of Investor Relations, Anthony Borowicz. Please go ahead.
spk02: Anthony Borowicz, Senior Vice President of Investor Relations, Good morning, everyone. Thank you for joining us and welcome to Integer's fourth quarter 2021 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 discuss 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 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 filing 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 a timely update to Integer's portfolio and product line strategies. along with our progress towards achieving above-market sales growth. Jason will then review our adjusted financial results for the fourth quarter and total year 2021, provide additional insight on our product line performance, and share our full year 2022 guidance. Joe will come back to provide his closing remarks, and then we'll 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, especially the Integer associates who have continued to develop and manufacture products for our customers so they can provide life-saving and life-enhancing products for patients around the globe during these challenging times. Integer delivered strong fourth quarter and full year results. Sales grew 16% in the quarter and 14% for the full year. Earnings per share grew 39% in the quarter and 47% for the full year. Even with these strong results, we experienced about 200 basis points of unfavorable gross margin impact from the labor and supply chain environment, most of which we believe are temporary. We closed the acquisition of Oscor in December and are well underway with integrating our businesses to deliver a broader and deeper product offering to our customers. We have continued to execute our structured and disciplined process to accelerate top line growth and drive bottom line outperformance. Today I will share a detailed review of our portfolio and product line strategies and provide an update on the great progress we are making. In 2022, we expect to deliver double digit sales and profit growth at the midpoint of our guidance. Despite the continuation of a challenging labor and supply chain environment, The Integer Investment Thesis summarizes why we believe Integer is executing a clear and compelling strategy to sustainably outperform. Our portfolio strategy and product line strategies define how we win in the markets we serve. 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 this slide articulates the industry and integer fundamentals that create a resilient business model, the elements of our strategy to generate sales growth, and the structured approach we've taken to develop a performance culture. Our financial objectives are clear and measurable. Everything we do in the company is anchored to this strategy, which is why we share it every quarter. So let's look at some of the important milestones we've achieved on our strategy journey. We started in March of 2017 by performing our portfolio review and developing the overall integer strategy. We launched the portfolio strategy in January of 2018 and within six months executed the divestiture of our ASNO business for $600 million. As a further evolution of our portfolio strategy, we just initiated in the fourth quarter of last year the partial exit of the portable medical business which I'll discuss in more detail on the next slide. As highlighted in the middle section, we formally launched our operational strategy in the second half of 2018, starting with manufacturing excellence, then followed by the other five strategic imperatives. We saw immediate impact for manufacturing excellence as margins expanded during 2018 and 2019. Not surprisingly, the pandemic and the current labor and supply chain constraints have created margin rate headwinds. We're confident our strategy and operational excellence will overcome these headwinds over time. The bottom row highlights the progression we have made in our product line strategies, which define how we will win in the markets we serve. These strategies were defined by what we call growth teams. The growth teams own the product line strategies in all respects. These teams were launched in the fourth quarter of 2018 and began developing and executing their specific strategies during 2019. The investments we've made, both organically and inorganically, have been driven by the product line strategies. The growth teams are executing a structured and disciplined process to deliver accelerated sales growth. Let's cover an update on our portfolio strategy. Our portable medical product line sales have been flat for the past four years. We've highlighted a few of the many markets we serve with rechargeable battery packs, power supplies, and chargers. The market and product dynamics are generally unfavorable as there is a limited amount of technology differentiation in what is primarily an assembly business with high source material content. Given these dynamics, We communicated to certain customers during the fourth quarter of last year that we were exiting all but two of the markets we serve in this product line. We are working closely with these customers to support the transition of these products to other suppliers. And it will take three to four years to complete this transition due to the quality and regulatory requirements. So even though we're exiting $40 million of sales, we do not expect to see a decline in these sales until around 2026. We are retaining approximately $30 million of sales in the heart failure and cochlear application markets, where technology differentiation and higher growth rates make these products and markets more attractive. And they closely align with the battery expertise and active implantable device technologies of our CRM and N product line. We expect this exit to be margin accretive for reducing overhead and raising prices as we consolidate these products into the CRMNN product line. Another important benefit is that we will be able to reallocate the manufacturing capacity in this Tijuana facility to more profitable growth going forward. To summarize, we are exiting $40 million in sales over the next four years. while improving margins and reallocating low-cost manufacturing space to higher margin growth. This is a great example of how we will continue to evaluate our portfolio for opportunities to create more value. We have talked a lot over the past several years about our operational strategic imperatives, with a focus on how we've been implementing manufacturing excellence to drive margin expansion. We have not spent as much time discussing our growth teams and our product line strategies. There are two reasons for this. First, as we just highlighted on the timeline, we launched manufacturing excellence much earlier than our product line strategies. And second, the manufacturing excellence strategy was able to positively impact the financial results much faster than the product line strategy decisions and actions. Our manufacturing excellence planning started in early 2018. launched in the middle of 2018 and began to have an immediate impact on margin expansion. Contrasting that with our growth teams, which were formed in late 2018 and began developing and executing their strategies during 2019. Another important variable impacting the timing of developing and executing our strategy is getting the right leaders in place. The leaders who have joined Integer since 2018 have very intentionally aligned to specific elements of our strategy. Let's cover what the growth teams do. They are organized around the end markets we serve, and they follow a very structured and disciplined process. Many organizations call this process product management. We like to term growth teams because it starts with the goal in mind, which is growth. The middle of the slide summarizes the process they follow. which I think you'll find very logical and clear. They own understanding our markets, products, customers, and competitors, and they own developing and executing the strategies that will deliver above-market profitable growth, including identifying what capabilities and investments are needed to win. These teams ultimately enable us to maintain and capitalize on the broadest and deepest product offering in the medical device outsourcing industry to deliver sustained growth. This slide summarizes the work of our cardiovascular-focused growth teams, and we have the same slide for cardiac rhythm management and one for neuromodulation. This takes a picture of where the end markets are in their growth curve and how they compare in size on a relative basis. The curve represents the growth rate of the end market, which is slower during the emerging and mature phases of the technology maturity timeline. The size of the bubbles represents the current estimated end market size. The horizontal axis represents the technology maturity of the products in the end market, which range from emerging to growth to mature. Integer is uniquely positioned to serve our customers at each phase of the technology maturity timeline. During the emerging phase, we have the expertise. proprietary technology and design and development capability to de-risk emerging products from concept all the way to commercialization. During the growth phase, we can accelerate the speed to market through collaborative product design and development, leveraging our quick turn capability and manufacturing capacity to deliver seamless transitions to scaled production. And during the mature phase, we bring vertical integration that simplifies our customer supply chains, reduces the number of suppliers they must work with, and lowers their costs. Because of our deep technology, breadth of capability and products, global manufacturing footprint, and strategic focus, we can serve our customers across all phases of the technology maturity timeline, a truly unique customer value proposition that differentiates integers. The blue box in the middle of the slide that encompasses pulse field ablation, structural heart, neurovascular, electrophysiology, and parts of peripheral vascular shows the markets that are receiving a disproportionate share of our customers' investments to address significant unmet patient needs. We have aligned our strategy with our customers to focus our investments on additional capabilities and capacity in these faster-growing end markets. We are excited to be able to enable our customers to bring life-saving and life-enhancing products to market faster than our competitors. Let's drill down into the three fastest-growing markets from the cardiovascular growth curve, structural heart, electrophysiology, and neurovascular, and cover the actions we've taken to expand our ability to serve our customers and thereby accelerate our growth. All three of these markets are growing high single-digit or low double-digits. They are multi-billion dollar end markets for our customers with significant opportunity for us to serve as an outsource partner for both components and finished devices for these medical procedures. Our growth teams understand the technology in the devices and how that technology is evolving. They've identified where Integer has leading technology and where we have gaps, which led directly to the actions highlighted in the middle column. We have invested in critical capabilities such as laser cutting, coatings, and complex braiding that enable us to vertically integrate and accelerate the speed of development for our customers. We have developed these through both organic and inorganic investments, which offer different benefits but ultimately give us access to a greater portion of the device for design, development, and manufacturing. Our success in building a pipeline of development programs for our customers has generated the need to increase capacity to support our growth in these fast-growing markets. This slide summarizes the cardiac rhythm management growth curve, and I don't think it will surprise anyone to see the largest segment of this market concentrated in the conventional CRM bubble on the far right. But there are emerging and growth products in CRM, as highlighted in the light blue box on this slide. Integer's ability to support our customers across the technology maturity curve applies to CRM as well, but is more focused on the higher technology components and sub-assemblies of these devices, as the finished devices are primarily assembled by our OEM customers. Our historically deep and differentiated component in subassembly technology that has positioned us so well in conventional CRM also positions us extremely well to serve our customers in the emerging and growth markets, such as leadless pacemakers and cardiac monitoring. The neuromodulation growth curve is comprised of emerging and growth markets. Even the traditional spinal cord stimulation market is estimated to grow at high single digits from the continued innovation in this space. These markets have significantly more early-stage companies than the CMV or CRM markets because of the significant number of companies that are investing to develop treatments for currently unmet or underserved patient conditions. Integer is uniquely positioned to be able to bring the full 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. Very few other companies have the breadth of design and development capability and even fewer offer the depth of component technology that Integer offers to our customers. Integer is uniquely positioned to enable emerging companies to bring innovative therapies to market. The CRMNN growth markets play to the strengths of Integer's technologies as they benefit from our extensive intellectual property portfolio and component technology and our strong design development capability for finished devices. We continue to strengthen our position by developing novel batteries, miniaturizing the technologies we possess, and developing platforms and designs that enable the emerging and growth products to come to market. We have been investing in our battery facility to add capacity to support the increased demand for neuromodulation and cochlear applications. Our Tijuana facility was the first Class III active implantable medical device manufacturing site in Mexico to receive FDA approval. This augments the significant implantable pulse generator, or IPG, manufacturing capacity already available in two other facilities. We already manufacture several components for IPGs in our Tijuana facility, and this furthers our vertical integration capability for IPGs. The recently completed acquisition of OSCOR expands our implantable lead design and development capabilities while adding additional low-cost manufacturing of leads in the Dominican Republic. The expansion of our end-to-end capabilities, platform technologies, and capacity positions us well to accelerate our growth in these faster-growing end markets. Earlier in the presentation, I highlighted on our strategy journey that we developed a portfolio strategy in 2017 and launched our operational and product line strategies in 2018 and 2019. At the end of 2019, less than two years into our strategy execution, We had achieved two of the three financial objectives of our strategy. Our debt leverage was 2.9 times EBITDA, and our profit was growing twice as fast as sales. The third financial objective is accelerating sales to grow 200 basis points above the market. The strategy to deliver this third objective resides with our growth teams. I highlighted earlier that our growth teams, who own the development and oversight of the execution of our product line strategies, were formed in late 2018 and began developing and implementing them in 2019. So we have been developing and implementing these strategies for less than three years. This is an important point because of how long it takes to convert new business into revenue in the income statements. To help investors understand the time it takes to convert new business into sales and income statement, we developed this slide to summarize the approximate cycle times required for products to go through the product development phase, through the clinical or regulatory phase, and then introduce these products into the market. It is important to highlight this process doesn't start until after Integer has already won the business with customers, which has a cycle time that happens prior to what is highlighted on this slide. We broke the new revenue down into three types of products. The first one is existing product transfers. These are products that are already being manufactured by either our customer or a competitor. These products generally require Integer to develop manufacturing processes to produce the components or finished device. This generally takes somewhere between one to two years. Then the regulatory phase, when required, could take up to six months, after which the manufacturing ramp starts. The entire cycle time for existing product transfers generally average somewhere between one and two and a half years. The second type of product is a new 510 product developed with a customer. This includes product development, potentially clinical and regulatory, market introduction, and then manufacturing ramp. It is common for this entire process to take somewhere between three years and more than five years. The third category is new PMA product developed with customers. This is the same process as a 510 , but the product development, clinical, and regulatory generally take much longer. The total cycle time is generally somewhere between five and more than nine years. but some products can take significantly longer as the product development and the clinical phases can be extended or iterative to develop a device that delivers the desired therapeutic benefits, which may ultimately not achieve market acceptance. The chart on the top right of this slide demonstrates that integer generates revenue throughout the entire cycle. The revenue from process or product development is for the engineering work and is generally the lowest amount of revenue in the cycle. The clinical or regulatory phase includes components or devices needed to perform the SSA trials to gain approval of the product and usually generates more revenue than the process or product development phase. Once market introduction starts and we move into manufacturing ramp, we experience significant growth in revenues until we reach market penetration, at which point we grow with the market and market share changes of our customer. The importance of this slide is to demonstrate the time it takes to convert new business into revenues at manufacturing ramp. It also illustrates the resiliency of our business model, because a combination of integers, proprietary technologies, a long development cycle, and a substantial regulatory approval process leads to high switching costs for our customers. I suspect you might be thinking, well, that's interesting enough, but when will sales grow 200 basis points above the market? The short answer is we're getting closer, but we're not ready to provide a specific date. But there are several leading indicators that we are tracking to measure the success of our product line strategies and understand when sales will accelerate. Let's start by looking at the new PMA products we are developing with customers, which have the longest cycle time. This is an update from a slide we shared on our third quarter 2020 earnings column. and demonstrates that we have a strong pipeline of customers moving through the product development to launch process. This slide only covers emerging customers and does not include the components or devices we are working on with larger, more established OEMs. These customers are primarily in the neuromodulation markets and have generally followed the new business timelines shared on the prior slide. We have highlighted the changes on the left-hand side of this slide as more customers have moved into product introduction and into the launch phase. On the right-hand side, we achieved the estimated sales of approximately $20 million during 2020, and our 2022 estimate of $40 million of sales is still on track. We are adding a new estimate for 2024 that projects these customers growing to somewhere between $60 and $80 billion, with possibly more depending upon the success of their product launches. This slide demonstrates that we've been working this strong pipeline for many years, and we are entering a phase where we will see revenue acceleration from the manufacturing ramp phase for these customers. Accelerating growth starts with product development. So we have a rigorous process to target the opportunities that have the strongest market potential. Let's look at some additional in process metrics that we believe demonstrate our significant progress towards accelerating our revenue growth. We have grown our development revenue by 150% over the last four years. This is measuring actual revenue in 2021 compared to actual revenue in 2017. We have also added 54% more R&D resources to support this revenue growth. We believe this is an important measure of the volume we're adding to the pipeline to drive accelerated growth. Another important measure is the quality of the revenue we're developing. Our product line strategies had very clearly targeted faster growth markets, the ones we define as emerging or growing on the growth curve. we have shifted the mix to significantly more emerging and growing markets in 2021 compared to 2017. So not only have we increased the volume of development revenue, but we've also shifted the mix too. This gives us confidence in our ability to deliver on our third financial objective of growing sales 200 basis points faster than the market. As we prepare for accelerated growth from the development opportunities highlighted in our leading indicators, We have been investing to both fuel and fulfill this growth. We have increased our growth CapEx by 60% over the last four years, totaling approximately $100 million. We have also added 32% more capacity, primarily through acquisitions and some targeted expansions of existing facilities. We also have plans to reallocate space in our Tijuana facility related to the partial exit of our portable medical product line discussed earlier. We're also building a greenfield facility in Galway to support growth in the fast-growing structural art and neurovascular markets based on the development projects underway. In summary, we have been executing product line strategies since 2019 to maximize our unique position to serve customers across the entire product lifecycle. We have been focusing our investments on faster growing in markets in a very structured and disciplined manner. The execution of our strategy and the in-process metrics we are tracking give us confidence in our ability to deliver on our financial objective of accelerating revenue growth to 200 basis points above the markets we serve. I'll now hand the call over to Jason. Thanks, Joe. Good morning, everyone, and thank you again for joining our call. I'll provide more details on our fourth quarter and full year 2021 adjusted financial results summarize our product line sales trends, and conclude with our expectations for 2022. Starting with our fourth quarter results, at $313 million, our sales delivered strong growth over last year, up $44 million, or 16%, and that included $5 million of sales from one month of Osport. Organic sales growth, which excludes the impact of the acquisition, and currency differences is 15% higher than last year. Our adjusted EBITDA was $58 million, up $9 million compared to last year, an increase of 19%. And adjusted operating income was up 16% versus prior year. With adjusted net income at $33 million, we delivered 99 cents of adjusted diluted earnings per share, up 28 cents, or 39% from the fourth quarter of 2020. Our fourth quarter results represent another quarter of strong financial performance versus last year. Again, our 2021 reported financial results include one month of OSCOR. Our full year sales were $1,221,000,000, an increase of $148 million compared to the prior year, which is a strong increase of 14% or 13% organically. Adjusted EBITDA was $243 million, up 28% versus last year, and adjusted operating income was $187 million, up $43 million compared to the prior year, an increase of 30%. Our adjusted net income was $136 million, and we delivered $4.08 of adjusted diluting earnings per share of $1.31 from prior year. These strong year-over-year results were achieved while overcoming an extremely difficult labor and supply chain environment. As Joe mentioned, we have been committed to delivering the products needed by our customers and ultimately the patients they serve. This has required the teams working a great deal of overtime to cover labor gaps, incentivizing associates and new hires, incurring significant training costs, managing the inefficiencies of redirecting production to match material availability, and incurring inflation costs in our supply chain. We estimate these additional costs contributed to approximately 200 basis points of erosion in our gross margin for the full year. The constraints were more significant in the third and fourth quarters, and as a result, the gross margin impact was more pronounced in the second half of 2021. The good news is that we believe the majority of these incremental costs are temporary in nature and will subside. That said, we do expect these incremental costs to remain through at least the first half of 2022. We are proud of Integer's dedicated associates for continuing to deliver product during these dynamic times. To provide more color on our full year 2021 adjusted net income, we increased $44 million compared to 2020. We delivered $38 million of operational improvement as compared to last year, driven by our sales volume returning to pre-pandemic levels and by our manufacturing and supply chain team doing an excellent job of accelerating production to meet demand from industry recovery and new product introductions, while, of course, managing through the labor and supply chain headwinds that began primarily in the second half of the year. In addition, FX was favorable, contributing $1 million in improvement versus 2020. Lower adjusted interest expense delivered a $9 million improvement in adjusted net income compared to last year, driven by our continued focus on debt repayment and the savings captured with our debt refinancing in the third quarter. Our adjusted effective tax rate was 15% for the full year 2021. While this is a very favorable rate, we saw a year-over-year headwind of $4 million due to the adjusted effective tax rate in 2020 being 12.2%. You may recall that 2020 benefited from the rate impact of lower pandemic-driven pre-tax income, as well as from several significant discrete items recorded in 2020 related to the favorable impact of final tax reform regulations and our tax plan strategy. Discrete items in 2021 were also favorable, but not as significant as the prior year. For 2022, we expect our adjusted effective tax rate to be between 16% to 17.5%, as we expect lower benefits from tax return closures and deductions from stock-based compensation. We continued a strong conversion of income to cash in the fourth quarter, generating $39 million in cash flow from operating activity. We generated $16 million of free cash flow, inclusive of $23 million of capital expenditures in the fourth quarter, in line with our total year guidance of $50 to $60 million. As Joe shared with you earlier, we continue to ensure we are making focused investments to fuel and fulfill growth consistent with our product line strategy. Net total debt increased $206 million to $818 million, which includes the impact of $220 million in new borrowings to fund the acquisition of Oscorp. Excluding the new borrowings, our net total debt reduction was $14 million in the fourth quarter. Our debt leverage at the end of the fourth quarter was 3.4 times adjusted EBITDA, This leverage ratio includes the impact of the new borrowings to fund the October acquisition while remaining within our target ratio range. We'll now transition to a discussion of our product line sales. Please note that these product line sales are consistent with the product classifications we have used historically and do not yet include the product line reporting changes associated with the portable medical update Joe shared earlier. I will close with a summary of the impact of this portfolio update on our product line reporting and some additional improvements we are making at the end of this session. Slide 29 reflects trailing four-quarter reported sales year-over-year changes. Through the first quarter of 2021, our sales were significantly impacted by the COVID pandemic. The trend reversed in the second quarter of 2021 and continued to improve in the third and fourth quarters as reflected in the significant increase in our trailing four-quarter sales growth rates. I'll also note that we added an indication of the percentage of sales that each product line contributes to total integer. This should provide additional insight on the impact each has on our total growth rate. Beginning with our first product line, Cardio and vascular sales were up 19% in the fourth quarter compared to the fourth quarter of 2020. The fourth quarter growth was driven by double-digit sales increases across all cardio and vascular markets, with the neurovascular market delivering particularly strong year-over-year growth despite supply chain constraints, trailing four-quarter sales through 10% year-over-year in the fourth quarter. Moving to cardiac rhythm management and neuromodulation, sales grew 19% in the fourth quarter, with both cardiac rhythm management and neuromodulation markets increasing double digits, again, overcoming end-market demand fluctuations and supply chain challenges. Trailing four-quarter sales continued with strong year-over-year growth, up 29%. As a reminder, The advanced surgical, orthopedics, and portable medical product line includes sales under supply agreement to the acquirer of our divested ASNO product line, in addition to our portable medical sales as reported historically. Fourth quarter sales declined 10% versus the prior year, mostly due to the decreased demand for ventilator and patient monitoring components that peaked last year during the pandemic. Trailing four-quarter sales declined 10% year-over-year due to the decline in advanced surgical and orthopedics, and as previously noted, a decline in portable medical, driven by the lower demand for COVID-related ventilators and patient monitoring components. Finally, wrapping up with Electrochem, our non-medical segment, Fourth quarter sales increased 34% as we continue to see improvement in the energy market that began a recovery in the first half of 2021. Trailing fourth quarter sales grew 8% year over year. As I just mentioned a few moments ago, I wanted to share changes we're making in our product line sales classification as we move into 2022. There are two changes. with our discussion on portable medical, we will move active implantable medical device components into CRMN from their current alignment in the ASNO and portable medical product line. Second, we are moving access and delivery products associated with CRM and neuromodulation procedures in the CRMN product line from their current alignment with cardio and vascular. We're making these changes because we believe these new product line classifications are better aligned to our end market and our product line strategies. Again, the preceding slides just reviewed do not reflect these changes, and we will begin using this alignment in the first quarter of 2022. However, in the appendix of this presentation, we have provided a version of these product line slides using the new realigned product line classifications. We're hopeful this provides a clear and smooth transition. We now like to talk about our expectations for 2022. As summarized earlier, we expect 2022 sales, including $66 million of Oscorp, to be in the range of $1,340,000,000 to $1,365,000,000, an increase of 10 to 12% compared to 2021. On an organic basis, we expect sales to grow 5% to 7% compared to 2021. We see strengthening demand as evidenced by our firm backlog orders, which have grown meaningfully since the end of 2020. However, the difficult labor and supply chain environment continues to impact our sales, and we expect the first quarter of 2022 2022 to be sequentially better than the first quarter as we believe the impacts from both the COVID surge in January and supply chain volatility will improve. We expect sales growth in the second half of the year to steadily improve as we believe labor and supply chain challenges will subside and we will realize the impact of growth from new product introductions. Following the sales range we just discussed, We expect 2022 adjusted EBITDA to be between $270 million to $282 million, which is 11% to 16% year-over-year growth. This includes an estimated $12 million of EBITDA for Oscorp. We expect 2022 adjusted operating income to be between $201 million to $213 million, reflecting growth of 7% to 14%. These growth rates incorporate the continuation of cost pressures associated with labor and supply chain challenges through the first half of the year. Adjusted EPS is expected to be between $4.35 to $4.65 reflecting growth of 7% to 14%. This assumes an adjusted effective tax rate between 16% to 17.5%, as mentioned earlier, and assumes our adjusted interest expense to be between $24 to $28 million. As I close, We anticipate another strong year of cash flow, generating between $160 million to $175 million in cash flow from operations and between $90 million to $105 million of pre-cash flow. Consistent with our strategy, we are increasing and concentrating our investments in the business to drive growth, and we expect to spend between $65 million to $75 million on capital expenditures, which is an increase in the run rate of our prior year spending. We expect to reduce net total debt $85 to $100 million and expect to be at the end of the year within our target leverage ratio of 2.5 to 3.5 times the adjusted EBITDA. With that, I'll turn the call back to Joe. Thank you. Thank you, Jason. We deliver a strong 2021 coming off the depths of the pandemic. We expect to grow 2022 revenues and profit low double digits at the midpoint of our guidance as we manage to both labor and supply chain constraints. Integer is uniquely positioned to serve our customers across all phases of their product life cycles. Through the execution of our product line strategies, we have demonstrated progress by increasing customer development program revenue by 150% and shifting the mix of these programs to 80% higher growth markets. We have a strong pipeline of emerging customers with PMA products that is expected to grow from $20 million in 2020 to $40 million this year and to between $60 and $80 million in 2024. I remain confident in our strategy and our associates and our ability to earn a valuation premium for our shareholders. Thank you for joining our call this morning. I will now turn the call back to our moderator for the Q&A portion of our call.
spk00: At this time, I would like to remind everyone, in order to ask a question, press star and then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Matt Michon. Your line is now open.
spk03: Hey, guys. This is Brett Fishpin on today for Matt. Just wanted to start off on the supply chain issues. Could you provide some more color from a revenue perspective on how the current situation is impacting trends, just given lower than ideal inventory levels at some of your customers? And then as a follow-up, does this dynamic add to a potential backlog into 2H22 and 2H23?
spk02: Thanks, Brad. Thanks for the question. So what we're seeing in supply chain is really our Tier 2, 3, and 4 suppliers who are seeing the ripple effect of whether it's force majeures or labor shortages or tools that break or them just trying to deal with the volumes and then having struggles. And I think our supply chain teams have done a phenomenal job of managing that and working to be as far in advance of that as we can you know we're doing things to help help our suppliers be able to supply us and ultimately enable us to continue to meet the needs of our of our customers so that they can serve patients and the feedback we're getting from our customers is we're meeting patient needs but but we do believe that there is some inventory that's been depleted at our customers that's in the in the supply chain so we do think there's order magnitude it's hard to it's hard to estimate but maybe it's in the 10 to 15 million dollar range worth of sales that that maybe have been inventory depletion and so we would expect to see some increase um in future sales as that inventory gets replenished whether that gets replenished in the second quarter or second half is hard to tell it'll likely be dependent upon the labor environment in the supply chain environment but we have already incorporated that order of magnitude for inventory replenishment in our future guidance So that's been factored into the outlook that you see. And we provided a qualitative assessment of the quarterly profile for the year where, look, we expect first quarter 2022 to look a lot like the fourth quarter of 2021. And that's really a function of the COVID surge. You know, we saw pretty significant absenteeism there. particularly in Europe and our island facilities in the fourth quarter. But we saw much, much more dramatic impact from absenteeism in January from the COVID surge. I think we've heard that and seen that across all of our customers as well as our suppliers. That was a pretty significant impact in January, which is why we think there's at least this $10 million to $15 million worth of inventory depletion that's occurred in the system. So that's really our outlook. We would expect second quarter to get progressively or on a sequential basis better than first quarter. And in the second half, we really expect the volume to begin to accelerate because there's very strong demand, very strong demand. And as you can imagine, with that level of absenteeism in the supply chain, challenges, when material arrives, what arrives, that that's also driving cost. And you see that reflected in the margins, both particularly in the fourth quarter, but also I would expect to see that similar impact in the first quarter. And that will get progressively better as we get into the second quarter and second half of the year.
spk03: All right. Thanks for that, caller. And then just wanted to move on to some of the longer-term elements. Given the starting point for guidance of 5% to 7% was a little bit above your traditional starting point for a year, is it fair to think of that as kind of the sustainable go-forward organic growth rate for Integer? And would that kind of imply that you're about halfway to your goal of market growth plus 2%?
spk02: Great question, Brad. And the short answer is yes to both of those. But I would add to it and say, you know, we set our goal, which we think at the time four years ago was ambitious to say 200 basis points above the markets we serve, the growth rate. But We think that's at least the goal. We want to get at least. We want to grow sustainably faster than our markets. We pick 200 basis points because when we do that consistently, sustainably, we believe we'll be viewed as an outperformer in a consistent, sustainable basis that ultimately should lead to a valuation premium. The reason we took the time today to go through our product line strategies, give the overview of our strategy journey, is we wanted to frame for investors what our journey has been. In 2017, we did the portfolio analysis. 2018, we started recruiting the leaders and developing the elements and the specific actions of the strategy. It was really the end of 18, beginning of 19 that I would say we got into full execution mode. And so if we're in full execution mode for 19, 20, 21, we're really three years into our strategy. And we thought it was important to share with investors how to think about the revenue generation cycle times. We shared that on one of the slides because it gives you some perspective on the business that we're seeing show up in sales in 2022, the new business, new product introduction that's driving the slightly faster growth, the 100 basis points faster than where we've been historically. That was business that we targeted and won back in 18 and 19. And then it took us 19, 20, 21 to go through the process or product development cycle, market and regulatory, market introduction and ramp. And so we're starting to see some of those strategies begin to deliver and show in our sales acceleration. And so we thought it was important to see kind of the journey. understand where we are in that journey. And yes, seeing the 5% to 7% growth is a step up from 4% to 6%. And it's because we have in-process metrics that we're monitoring to track our progress. And we think it's demonstrating that our sales are growing, employees to continue growing at a faster rate.
spk03: Very excellent. And then lastly, from me, can you just provide an update on how you're seeing the M&A pipeline at this point, where you might be seeing some more opportunities, and then just your overall level of optimism around the ability to deploy 200 to 250 million this year, just based on the current landscape? Thank you very much.
spk02: Certainly, thank you. We've had a robust pipeline from a number of years. Throughout the pandemic, the team was vigilant and diligent in continuing to assess opportunities. We love the Oscar acquisition. The integration process is going incredibly well. We're more excited today than ever. we've ever been now that we've gotten a chance to work more closely with our new associates and colleagues, and we see tremendous growth potential and synergies from working together. We believe we are stronger together. When we look at the pipeline of opportunities, it's robust. You know, unfortunately, deals have a life of their own and a timing of their own that the seller is in more control of than the buyer, but we like the opportunities we have in the pipeline. And I'll just reiterate, What we're looking for is very specific capabilities that fill out our portfolio that complete our ability to vertically integrate. We are very focused and targeted on the faster growing in markets. You've heard us say this. We went through it on the growth curves. whether it's structural heart, electrophysiology, or neurovascular, or neuromodulation. Those are the faster growing in markets where there's unmet patient need, where our customers are disproportionately investing. And so those are the types of companies and capabilities we're looking to acquire. We feel like there's a very strong pipeline of those, and we're confident we can deploy that capital in a prudent, cost-effective way that will help accelerate our growth and generate returns. So we're We're confident that we can execute on our capital deployment strategy. Thanks for the questions, Brett.
spk03: Thank you.
spk00: Our next question comes from the line of Jim Sidoti. Your line is open.
spk01: Hi, good morning, and thanks for taking the questions. Good morning, Jim. Good morning. So you talked about the decision to exit some of the portable medical business, and it seems to make a lot of sense from a margin and growth point of view. But can you just give us a little more color why it will take four years to exit that business?
spk02: Jim, it's a great question, and I would simply say it's the stickiness of medical device, highly regulated medical device products. I'd also emphasize it's a partial exit, so of the 70, we're exiting 40, retaining 30, and so a summary is It's 40 million of products that are largely undifferentiated from a technology standpoint. We went to our customers and said, this business isn't profitable enough. We would rather redeploy all of the resources supporting this business, including freeing up manufacturing space for more profitable growth in a low-cost country. And those customers came back to us and said, it's going to take a while to move that business, two, three, in some cases, four years. And so we look at this and say, this is how all of our products are, with the distinction being this is undifferentiated from a technology standpoint. And now when you think about most of our business that has integer proprietary technologies or manufacturing processes, the stickiness is even higher. And so we look at this and say this is indicative or representative of the industry. We're going to support these customers. We absolutely are. We've accepted the timelines that they've given us. We're getting paid for it because we're raising the prices to make sure that it's profitable and worth spending the resources on doing. But it's going to take four years. When you look at that $40 million, it's going to be there for another four years. It'll be 2025 or 2026 before you begin to see any decline in those sales. And quite frankly, it'll also all be dependent on the ability and the effectiveness of the transfers to those suppliers. So it's out there, but the good news... In the short term, we're going to support them, serve them, and ensure that they can meet patient need. But we're also going to make this more profitable for us through the price increases and the overhead reductions. And that gives us the ability to now start planning to move business into that low-cost manufacturing location and take advantage of the growth we see elsewhere, more profitable growth in that location without any meaningful capital investment in the facility.
spk01: And then the other thing you spent a lot of time today talking about was the product development cycle. And, you know, you pointed out how so many cycles can be up to five years long. So when you're in the early part of that process, how do you measure your progress? How are you sure you're on time when, you know, it's such a long development process?
spk02: Yeah, that's a great question, Jim. We tried to highlight a few of those in terms of the amount of product development revenue we're generating, so what we're getting paid to do development. And then we showed how we've shifted the mix To be 80% the faster growing in markets. So we've been very targeted at what business we're winning. We've been very targeted at what business we're going after. And in fact, oftentimes it's saying no to business that's in the maybe more mature, less differentiated, less attractive markets. in order to shift that mix. So we've been able to grow the volume of development work by 150% while shifting the mix to faster growth. 80% is in the faster growing in markets that we've been targeting. Those are our in-process metrics. We monitor the development and the timeline of these development programs. The good news is, particularly on the PMA customers or PMA products with the longest cycle, we've been at this a long time, particularly in the emerging customer space. And we've got a robust pipeline. We updated the slide we shared in third quarter of 2020. And you see we've seen progression of more customers moving into product introduction and launch. You see the progression of the sales, the 10 million in 18 to 20 in 2020, 40 in 2021. 2022 and we added a new 2024 going to 60 to 80 or even higher depending upon introduction so these are the end process metrics that we're monitoring it also you know the new product introductions that are happening in 2022 from business that we won in 1819 and we spent the last three years um doing the development and and and transferred to production um that's what's giving us the confidence is our organic growth to five to seven percent but it's what gives us confidence in our ability to to get our third financial objective of at least 200 basis points above the markets.
spk01: Thank you.
spk02: Thanks for the question, Jim.
spk00: Again, if you would like to ask a question, press star and then the number one on your telephone keypad. There are no further questions at this time. Mr. Borlix, I turn the call back over to you.
spk02: Great. I know we presented a lot of content today for everyone to absorb, so I want to remind you that you can find the audio replay and today's slides on our website at integer.net. So thank you for your interest in Integer, and that concludes the call for today.
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