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spk01: Hello and welcome to the Q2 2024 Integer Holdings Corporation earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session, and if you would like to ask a question during this time, please press star 1 on your telephone keypad. I would now like to turn the conference over to Andrew Sen, Senior Vice President, Strategy Business Development and Investor Relations. You may begin.
spk00: Good morning, everyone. Thank you for joining us and welcome to Integer's second quarter 2024 earnings conference call. With me today are Joe Dziedzic, President and Chief Executive Officer, and Dyron Smith, Executive Vice President and Chief Financial Officer. As a reminder, the results and the data we discussed today reflect the consolidated results of Integer for the periods indicated. During our call, we will discuss some non-GAAP financial measures. For 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 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 Dyron will then review our adjusted financial results for the second quarter of 2024 and provide an update on our full year 2024 outlook. Joe will come back to provide his closing remarks, and then we'll open up the call for your questions. With that, I will turn the call over to Joe.
spk07: Thank you, Andrew, and thank you to everyone for joining the call today. Since our last earnings call, Truist and Oppenheimer have initiated coverage, which brings the total number of sell-side analysts to nine. We appreciate the research coverage from all of our analysts, as it gives more investors exposure to our business and the great work that our associates are doing for our customers and the patients that we serve. In the second quarter, we delivered another strong quarter of year-over-year results. Sales grew 9% and our adjusted operating income grew 20%, while expanding operating margins by 152 basis points compared to last year. In addition, our adjusted earnings per share grew 14% year-over-year. We are raising our full-year profit outlook. Our manufacturing excellence initiatives are delivering operational improvements in direct labor turnover, direct material scrap production, lower overtime, and direct labor efficiency. Combined with our strong first half OPEX leverage, we are confident in our ability to meet our increased full-year profit outlook. At the midpoint of our outlook, we expect 18% adjusted operating income growth on 10% sales growth. We are confident in our ability to deliver strong sales growth given our high visibility to customer demand, including ramping programs in high growth markets and additional guidewire capacity coming online in Ireland. It is an exciting time at Integer given our strong pipeline of development programs and faster growing in markets, expanding margins, and continued execution of our tuck-in acquisition strategy. I am grateful for our associates around the world that are delivering for our customers and making a difference for patients. I'll now turn the call over to Dyron.
spk12: Thank you, Joe. Good morning, everyone, and thank you again for joining today's call. I'll first provide more details on our second quarter 2024 financial results and then provide an update on our 2024 outlook. We continued our 2024 momentum with strong second quarter financial performance. Sales at $436 million delivered 9% year-over-year growth on a reported basis and 5% on an organic basis, which excludes the impact of our recent Inurico and Pulse acquisitions, the strategic exit of the portable medical market, and foreign currency fluctuations. We delivered $91 million of adjusted EBITDA, up $15 million compared to the prior year, or an increase of 19%. Adjusted operating income grew 20% versus last year, more than two times the rate of sales growth as we continue to make progress on our year-over-year margin expansion. Second quarter 2024 adjusted operating income as a percent of sales was 16.5%, which represents approximately 152 basis points of improvement versus a year ago. Adjusted net income for the second quarter of 2024 is $45 million, delivering $1.30 of adjusted earnings per share, up 16 cents, or 14%, from the second quarter of 2023. DMV and CRM&N product line sales, which represent approximately 91% of our total sales, continued strong year-over-year growth on a trailing four-quarter basis in the second quarter of 2024. For Cardio and Vascular product line, trailing four-quarter sales increased 17% year-over-year. DMV growth is driven by double-digit growth across all markets, new product grants in electrophysiology and structural heart, and the Inurico and Pulse acquisitions. Cardiac rhythm management and neuromodulations trailing four-quarter sales increased 11% year-over-year, driven by high single-digit CRM growth and double-digit neuromodulation growth from emerging PMA customers. Further product line details are included in the appendix of the presentation, which can be found on our website at integer.net. In the second quarter 2024, we delivered $7 million more adjusted net income than we did in the second quarter 2023. Strong sales and operational improvements, which include improved manufacturing efficiencies and operating cost leverage, delivered $10 million versus second quarter 2023, furthered by slightly favorable foreign exchange. This was partially offset by higher interest expense and a slightly higher adjusted effective tax rate, totaling approximately $3 million. On a tax-effective basis, adjusted total interest expense was approximately $3 million higher than last year. This is primarily due to a higher average debt balance during the period driven by the previously discussed acquisitions of Inurico and Pulse Technologies using our available revolver capacity. Our adjusted effective tax rate was 20.7% for the second quarter of 2024, compared to 20.1% in the prior year. Our slightly higher adjusted effective tax rate compared to the prior year was primarily driven by the recent adoption of the OECD Pillar 2 framework by the EU member states, establishing a minimum effective tax rate of 15%, as well as the residual effect of the Malaysian tax holiday expiration. In the second quarter of 2024, we generated $47 million in cash flow from operations. Year-over-year, we generated approximately $10 million more cash from operational execution primarily from higher sales and improved margins. This was offset by the second quarter 2023 accounts receivable factoring of approximately $20 million that did not repeat. As previously mentioned, the factoring was executed to support our capacity investments in Ireland. And in total, second quarter 2024 cash flow from operations was $9 million lower than the prior year. In the second quarter 2024, we continued our organic investments investing $31 million in capital expenditures. Our CapEx investment is on track to our expected full year spend of $90 to $110 million. In the first half of 2024, we have invested approximately $60 million in CapEx, and our CapEx profile for the year is expected to be lower in the second half, as the higher expenditures for the Irish capacity investments are nearly complete. The resulting free cash flow in the second quarter was $16 million, which was primarily used to reduce net total debt, which improved by $15 million compared to the first quarter of 2024. As a result, our net total debt leverage at the end of the second quarter was 3.2 times trailing four-quarter adjusted EBITDA, which is within our strategic target range of 2.5 to 3.5 times. As Joe mentioned earlier, we are reiterating our 2024 sales outlook and raising our 2024 profit outlook. With strong first half margin performance from execution on our manufacturing initiatives, we have increased confidence in raising the adjusted operating income range by $3 million. Starting with sales, we continue to expect to deliver sales in the range of $1,735,000,000 to $1,770,000,000, an increase of 9% to 11% versus last year, with organic growth of 6 to 8%, which is 200 basis points above our underlying market growth rate estimate of 4 to 6%. In addition to our organic growth, we expect the Inurico and Pulse acquisitions, partially offset by the portable medical market exit, to contribute 3% inorganic growth. We are raising our outlook on adjusted EBITDA by $2 million, which now reflects 15 to 22% growth year-over-year, with a range of $357 million to $377 million, up from our previous guidance of 15% to 21% growth. We are raising our adjusted operating income outlook by $3 million and expect 2024 adjusted operating income to be between $275 million and $293 million, reflecting year-over-year growth of 14% to 21%. At $284 million, which is the midpoint, Adjusted operating income as a percent of sales is expected to grow 108 basis points compared to the full year 2023. Adjusted net income is expected to be between $174 million and $189 million, reflecting a year-over-year growth of 11% to 20%, up from our previous guidance of 8% to 18%. This delivers an expected adjusted EPS outlook between $5.07 and $5.49 which is growth of 9% to 18% year-over-year. Our adjusted EPS outlook assumes adjusted weighted average shares outstanding of 34.4 million shares, taking into account an estimated dilutive effect of the convertible notes. This dilution is offset by an improvement in adjusted effective tax rate, which is projected to be between 18% and 20%, down from our initial outlook of 19% to 21%. We expect sales in the second half of 2024 to be higher than the first half of 2024 from new product ramps, increased guidewire capacity as a result of our Ireland expansion and emerging PMA customer growth. We expect third quarter sales to be slightly higher than the second quarter with a further increase in the fourth quarter of 2024. Moving to our 2024 cash outlook, We expect cash flow from operations between $185 million to $205 million, which represents an 8% year-over-year increase at midpoint of outlook. Our outlook for capital expenditures remains at $90 to $110 million as we continue to invest in organic capabilities and capacity. As a result, we expect to generate free cash flow between $85 million and $105 million. We expect our 2024 year-end net total debt to be between $1 billion, $10 million, and $1 billion, $30 million, which is up $60 to $80 million year-over-year. We expect to end the year with our leverage ratio within our target range of 2.5 and 3.5 times trailing four-quarter adjusted EBITDA. And with that, I'll turn the call back to Joe. Thank you. Thanks, Tyron.
spk07: We believe we are delivering a very strong 2024 outlook after a strong 2023. Over these two years combined, we expect to grow sales 27% and grow adjusted operating income 48% at the midpoint of outlook. We are successfully executing our growth strategy both organically and inorganically to meet our strategic financial objectives for sales growth, margin expansion, and debt leverage. We are confident this sustained level of performance will produce a premium valuation for our shareholders. We will now turn the call over to our moderator for the Q&A portion of the call.
spk01: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. Simply press star 1 again. Please ensure that your phone is not on mute when called upon. Your first question comes from the line of Brett Fishman with KeyBank Capital Markets. Your line is open.
spk06: Hey, guys. Thank you so much for taking the questions. I just wanted to start off on one of the moving pieces here in cardiovascular segment. We can definitely appreciate that there were, again, very challenging comparisons, but just given the sequential decline in organic growth in that segment, was curious if you could provide a little bit more detail around any moving pieces impacting the quarter. And then just looking ahead, if you think investors should expect some type of recovery there into 2H.
spk07: Morning, Brett. Thanks for the question. So I'll start with, if you look at the cardiovascular product line sales on a rolling four-quarter basis, trailing four-quarter basis, cardiovascular is up 17%. And reported in the quarter was up 11%. You noted the organic growth of 4%. I'll call out the first quarter for cardiovascular organic growth was 9%. And for the full year, we're expecting high single-digit organic growth for CMV. So when you look at the pieces, you know, we think about the business on a rolling four-quarter basis. I wish life were linear, and I wish our customers' manufacturing plans were perfectly linear, but they're not. And so we think the rolling four-quarter basis is the best way to look at it. And if you look at our past four quarters, our electrophysiology business, although we don't report the specific number, it's growing at one and a half times the market growth rate. If you look at our structural heart sales, those are also growing very strongly, almost twice the market growth rate, recognizing that structural heart is a slightly lower piece of our overall business. And I think we've also been clear that we're under indexed to TAVR, and we're really more focused in our growth is in mitral and tricuspid. And our guideline business there has remained very strong. So when we look at cardiovascular on a rolling four-quarter basis, historically, we continue to see very strong growth. When we look at for the full year, we expect to see high single-digit organic growth. And on a reported basis, we expect that to be in the low double digit, call it low teens to mid teens, which is the guidance we provide on the product line slides for cardiovascular at slide 27.
spk06: All right. Thank you so much for that caller. Quick follow up. On the positive side, we're really impressed by some of the operating margin progression this quarter. And guidance for the full year now implies off-income growth at a multiple closer to 1.8x compared to 1.7x exiting last quarter. But just looking at the range, it's still fairly wide. So just at this point in the year, I was curious what you think of as the biggest swing factors driving margin expansion to the low end versus the high end of the range. Thank you very much for taking the questions.
spk07: Sure. Well, I'll start with we still have a very strong order book or backlog. It's still close to $900 million. That gives us tremendous visibility. We look at our first half sales. We guided 9 to 11 for the year. We're at 9.3% growth in the first half. We're doing exactly what we said we would do from a sales growth rate perspective. Margins were a little better in the second quarter, so we've updated the full year. outlook to be slightly higher. We didn't update the range. We were halfway through the year. Strong visibility to the top line. We have confidence in our ability to continue to expand margins. So we felt like updating the profit guidance was the right thing to do at this point. Variability, when we think about the things that have caused that in the past, it's been supply chain disruptions. We feel like we're beyond that. We have a very stable supply chain environment at the moment, which is great. Our direct labor turnover continues to improve, and our focus on our manufacturing excellence initiatives and our operational improvements continue to gain traction, which is what gave us the confidence to increase the profit outlook.
spk01: Your next question comes from the line of Craig Bijoux with Bank of America. Your line is open.
spk03: Good morning, guys. Thanks for taking the questions. I wanted to ask, maybe drill down a little bit deeper on the cardiovascular segment. It came in below street expectations, but I wanted to know if it was below your expectations. If it was kind of what areas were below. And then when you talk about the acceleration that you're expecting in the second half of business to get to that high single digit number, growth number, maybe just talk about your visibility into your second half revenue for that segment specifically.
spk07: Sure, I'll start with cardiovascular and for that matter, cardiac rhythm management, the rest of the business was was in line with our expectations in the first first quarter second quarter and our visibility given the order book we have to the second half gives us great confidence and our ability to deliver on our guidance. So I appreciate there might have been some some exuberance and excitement around around a particular segment electrophysiology within cardiovascular after First quarter results and the dialogue around some of the emerging products there. But like I said, we look at a rolling four quarter basis. We look at what customer's demand is. I wish it were perfectly linear and customers ran their manufacturing plants in a linear fashion. They don't. Recognizing most of what we build, we shift to our customer's manufacturing sites. So it's dependent upon what they're building that determines our sales in the short term. recognizing we're mostly sole source. So most of what we do, we're going to get whatever the market demand is over time, which is why we think the rolling four-quarter view is the most representative. So we were not surprised by the second quarter geography of the sales. We're very much in line with the year. Again, I'll point you to slide 26 in our presentation, which lays out medical sales and non-medical sales. So when you look at organic growth rate, our medical sales are up 7% organically. the year i'm sorry for the first half on an actual basis that's very much in line with our full year guidance and full year expectation for organic growth and medical um and cnb and crmn are very much in line with our expectations so as we look at second half we've talked a lot about the investments we made in our new ross ireland facility we now have possession of that expansion so we're now building more guide wires because we have more capacity. We expect that to fuel additional growth in the second half of the year. We have a number of electrophysiology and structural heart programs that are in production and are ramping. I'll contrast that with a scenario where you might expect something to start to go into production. These are programs and products that are already in production, and now the volume is ramping based upon customer demand and the ramp plans. When we look at the second half of the year, we're confident in our ability to step up the growth in the third quarter. So our guidance is sales likely higher in the third quarter compared to second with continued nominal increase from third to fourth quarter and very much within the range of the 9% to 11% growth for the full year. That would put us right in the middle of our 6% to 8% organic growth for the year. So second quarter is as expected for us on the top line, a little better on the bottom line, which is why we increased the operating profit guidance.
spk03: Got it. Thanks for that, Joe. Very thorough answer. And I know we've talked a lot about PFA and you guys have talked about it as a tailwind. So I wanted to ask a specific question here. So a number of the players in that space, they're talking about insourcing manufacturing. And I know that that doesn't necessarily mean that you're not going to be making product for those players. But I guess I wanted to gauge your level of concern or visibility as these companies are talking about insourcing their PFA manufacturing. What's the potential that that disrupts the tailwind that you guys have talked about from PFA in moving forward?
spk07: So I'll start with, we've shared over time the cycle times in our industry. We've shared how long the development processes are with the devices that we support our customers on. And so when we're talking about sales in the near term, in the next year or two or three, it's because those programs have been in development for that long, and they're actually in manufacturing and or ramping in manufacturing. And so the conversation there is, We have very long lead times and visibility to what we're going to manufacture for our customers on the most important products that they make. And I'll point to, we've continued to grow our product development pipeline. We continue to have very strong visibility to that pipeline and the timelines on it. And then the order book gives us incredible visibility to what our customer's demand is, because especially with programs products that are introducing into the marketplace and ramping customers give us very strong visibility to that because they're looking for us to support their ramp plans so we have very strong visibility to new product introduction um so we we i'll close with um multi-year visibility on product development programs and new products and so we we know and understand what components of these devices our customers are insourcing versus outsourcing, and we factor that into our guidance.
spk01: Your next question comes from the line of Matthew O'Brien with Piper Sandler. Your line is open.
spk11: Morning. Thanks for taking the questions. Joe, sorry to push you a little bit on the PFA side, but do you have direct exposure to the growth of that category as we think about it over the next several years? It should be dramatic.
spk07: I don't know that I would characterize dramatic because I'm reflecting on total integer and our commentary that no one part of our business or one program is going to materially meaningfully drive the company. I will say, yes, PFA, we have strong visibility to the pipeline, multi-generation product development plans, and we know which ones we're on and which ones we're working to get on. So we do have very strong visibility, and we absolutely expect PFA as a therapy to be a tailwind. And I'll come back to what I think we've talked about a handful of times. It's not only the ablation and the therapy itself, but it's also the access and the diagnostics and the guiding sheaths, the transeptal crossing. needles um it's it's the full full procedure that we're able to participate in in the industry and so as as electrophysiology procedures grow we're able to participate in all elements of that and pfa if it accelerates the overall number of procedures we'll benefit from that generally speaking with pfa we have a higher content on those devices than some of the other ones and so we benefit from that so i i would absolutely expect it to be an important, meaningful part of integers of continued organic growth and being able to grow above the markets that we serve on an organic basis.
spk11: Got it. Very helpful. Appreciate that. And then on cardiovascular, just in aggregate, you know, the back half ramp, the comps are tougher in the back half of this year. And I know You know, you said this visibility into the back half of the tour is what you've got. But can you talk a little bit about, you know, I think what's tripping up everybody today is Q2 is a little softer on a two-year stack basis. It has to pop back up in the back half. So I don't know if it's Ireland or other things you can point to specifically that give people comfort that, hey, you know, getting to the back half performance is attainable versus what I think is a little bit of skepticism just based on the Q2 two-year stack performance.
spk07: Well, let me start with we said we'd be high single-digit growth for the first half, and we're at 9.3% for the first half, reported basis. So how you break that down between organic and inorganic, we've got very strong visibility to customer demand. We have almost a $900 million order book. And so when we look at the business, I think we've been reasonably good at predicting the level of sales. We know, we understand the pieces of those sales because we have specific orders from customers. We know the reasons that second half steps up a little bit. We tried to be clear that we expect third quarter sales to be a little higher nominally than second quarter. Then we expect fourth quarter to be even higher. A meaningful part of that is the Irish facility that is now online in our possession. We're building more guide wires. We've talked for the last two and a half years, the strong demand and our Guidewire business, and so that's a part of it, but we also have programs in electrophysiology, structural heart in particular, also in our emerging PMA customers, mostly neuromodulation. There are programs that are in production and ramping, so it's not going to go into production. These programs are in production, and they're ramping, and they step up based on customer demand in the second half, and that's what gives us confidence.
spk10: our ability to hit the second half sales numbers as well as the profitability which which we did increase this quarter got it thanks so much your next question comes from the line of richard newiter with truth your line is open hi thanks for taking the questions um maybe maybe just to start a little higher level um has anything changed at your OEM customers with respect to their end market demand curves or what their kind of intermediate to longer-term ordering patterns look like, you know, any downward revisions or upward? From their outlook, that kind of flows down to you. We would love to hear any color there, and then have a follow-up.
spk07: We have not seen any material meaningful change in customer expectation when you look out I'll frame it into 25 and beyond, given your question about longer term. I mean, sitting here with almost $900 million of order book, we were expecting that order book to start to come down because there are some components or some elements of that higher order book that are connected to the exit of our portable medical business, to the strong demand and guide wires that we ask customers to place orders much further in advance. given the capacity coming on. We still expect the order book to come down. I would have expected the order book to come down a little sooner than it has. And I think that points to the continued strength in the market, continued high expectations of our customers for growth. They continue to place orders out further into the future, and it gives us tremendous visibility. So I think our customers remain very, very optimistic about their most exciting programs that they're bringing to the marketplace and the overall market growth rates uh continue to to to show optimism and i i look to our order book and i look to the order patterns very much in line with what we expected entering the year and they've continued if anything the order book might be a little a little higher than what i would have expected at this point in the year given some of the the things that we knew were going to come down in the order book okay thanks for that and then
spk10: Just making sure, you know, it sounds like everything's trending the way you expected, at least internally. And that's the reason you're reiterating your fully organic outlook. Maybe a little more second half weighted or acceleration weighted relative to the street. So I'm just curious, within that second half kind of outlook, Just reach that $448 million roughly for 3Q on revenue and about $458 million on 4Q. I guess, is that the right pacing of cadence just to make sure we're a little more appropriately calibrated with your internal expectations? Thanks.
spk07: So our view is third quarter sales nominally is a little bit higher than second quarter, and then fourth quarter is higher than third quarter. So we see that kind of continued trajectory. If you look at last year, 2023, there was a step up between second and third quarter of 5 million in sales, and then between third and fourth quarter, I'm talking 2023, an 8 million step up. So it continued to grow as the year progressed, and that's what we would expect to happen in 2024 as well. And to your comment about organic growth, I guess I would ask folks to kind of stare at slide 26 in our presentation. which shows medical, non-medical. The non-medical business, it's only 2% of our total sales. But in the first half, the non-medical was down 36%. So even though it's only 2%, it does create a little bit of drag on the organic growth. And that normalizes in the second half of the year. So you won't see non-medical being down as much in the second half year over year, which allows the total integer organic growth rate to lift. But if you look at medical, medical is 7% organic growth in the first half, and that's what we expect for the full year. So medical continues to perform at that 7-ish percent organic growth, and then the non-medical has less of an impact in the second half. And I think that's an important thing to focus on when you're looking at the organic growth quarter by quarter and then half by half.
spk10: Wait, can I just follow up on that? So it sounds like the medical is right on track and it's maybe just the non-medical that is really what you're relying on for the acceleration. And you have increased competence in that because of what you just called out in the backlog.
spk07: Well, I guess depending on the term acceleration, I mean, our reported sales in the first half are 9.3. The guidance for the year is 9 to 11. So there is a step up. on a year-over-year basis, so a slight step up in the growth rate. It is coming from medical as well. I highlighted the ramping programs in electrophysiology, structural heart, emerging customer, PMA, the neuromodulation. But there was a step up in sales last year from second to third, third to fourth quarter, and so nominally the sales have to grow to maintain the growth rate on a year-over-year basis. I'm just highlighting that the organic growth in the first half for medical is 7%. We expect to maintain that for the rest of the year, the second half. Medical is less of a drag, and so the total integer gets a little better in the second half. But the organic growth in medical continues to improve as we roll into the second half because of the new programs, the ramping programs.
spk10: Very helpful caller. Thank you for that.
spk01: Your next question comes from the line of Kristen Stewart with CL King. Your line is open.
spk05: Hi. Thanks for taking the question. It looks like the contribution from acquisitions was a little bit stronger in the quarter. I was just wondering if you could provide us an update on how the acquisitions have been going and then just looking ahead how you're feeling about M&A in general.
spk07: Great. Sure. Thanks for the question, Kristen. The acquisitions are doing very well. They're slightly ahead of what we had modeled for the first half. We're excited to have both the NeuroCo and Pulse Technologies be part of the portfolio. The organic growth, or it's not organic, but the top line growth in that business is because of the programs they had. We've been able to identify really good operational synergies. They've had good ideas that we've been able to learn from. We've had ideas we've been able to share, and we're getting strong operational synergies and margin improvement there. We would expect over time to be able to get commercial synergies and get the top line growing even faster, but that takes a little longer given the cycle time. So we're very happy with the acquisitions and excited for them to continue to grow both operational and commercial synergies. From an M&A perspective, it's been a pretty active first half overall. If you look at the industry with the number of acquisitions that have happened, some larger dollar acquisitions compared to maybe historical average. But, you know, we're focused on tuck-in acquisitions that allow us to maintain our 2.5 to 3.5 times debt leverage. We continue to have a very robust pipeline of opportunities. Our debt leverage is at 3.2 at the end of the second quarter. I'll highlight, you know, we've done almost $550 million worth of acquisitions in the last two and a half years while maintaining our debt leverage sitting at 3.2 at this point. So we do, as the year progresses, pay down more debt, generate more EBITDA. So our capacity, our capital available for acquisitions does increase as the year progresses. And we don't get to choose when acquisitions want to sell or when they want to transact, but we've got a very robust pipeline that We continue to nurture and curate and are excited to be able to continue to identify tuck-ins that fit within our strategy. And just reiterating on an acquisition front, we're looking for acquisitions that are very much aligned with our targeted growth markets and have an accretive growth rate or a clear path to an accretive growth rate and have accretive margins or a clear path to accretive margins. We've been able to identify those in the past and expect to be able to do that going forward for the size of acquisitions that we're looking for.
spk05: Perfect. Thanks for taking my questions.
spk07: Thanks, Kristen.
spk01: Your next question comes from the line of Suraj Kalia with Oppenheimer. Your line is open.
spk08: Good morning, Joe. Thanks for taking my questions. So, Joe, a lot has been asked about PFA, and sorry for belaboring this. Multi-part first question. Obviously, you know, I know you all can give specifics, but FerroPulse is reflected, so we get that. Joe, in terms of the organic growth of 4% or so in cardiovascular, right, how should we think about incremental contribution from PFA? Okay. And the second part of my question, Joe, would be, even if a client wants to insource, from the point that they start the whole program, how much of a time does it take for them to completely insource and get to the quality levels that are necessary? It's not going to happen overnight, but just if you could characterize the timeframe.
spk07: Sure, so maybe I'll just on the organic growth for CMV of 4% in the second quarter. This was very much expected by us. The order book we have gives us great visibility. There were no surprises in that. I wish our customers' manufacturing plans were perfectly linear. I wish that as the lumpiness that occurs in our customers' production schedules didn't exist, but it does. And I would point to and reiterate that we expect high single-digit organic growth in CME. If you look at the trailing four quarters, the CME business is growing at 17% reported. We've given guidance of low double-digit, call it low to mid-teens. So we're very excited about our CME business. Electrophysiology and structural art in particular, they're growing faster than the market. We measure our customer sales, we aggregate that, we look at what the market's growing at, and we're growing faster than the market in those two important segments. To your question about insourcing specifically, you know, we've tried to lay out the cycle times on development programs. You know, if it's a 510 program from start to finish, it could be two to three years of development, three to five years from the time we start a program until it turns into manufacturing revenues. And so to the earlier question that was asked about visibility to customers insourcing or outsourcing, those are the lead times. So it gives us tremendous visibility to our growth and the programs that we're designed into. And we see that as a huge advantage for us because you want us to be very predictable in our guidance and in our growth rates. To your other question, on looking at the insourcing and the timeframes. You know, it's three to five years. We've got great visibility with our customers, and we're excited about the growth in PFA given our vertical integration and our ability to support the entire procedure. And, you know, when you... When you look at overall, just one last comment, overall trends are towards outsourcing, not insourcing. And the reason for that is our customers are looking for help in getting to the market faster. And given our level of vertical integration, we can manage a lot of the supply chain for them. And we see that as a competitive advantage of ours.
spk08: Fair enough. And Joe, the tangential question is, Obviously, one of the TAVR companies yesterday was highlighting about constraints on cap lab time, given everything from left atrial appendage to TAVR to this and that, to being thrown in the cap lab. I'm curious if through derivative commentary from your end customers, if you could opine on what y'all are picking up in terms of cap lab constraints. I guess a lot of your products obviously in CNV are going through the same port of entry, so to speak, right? I'm curious if you could shed any color through your end customer discussions. Thank you so much for taking my question.
spk07: Yeah, that's a very front-end question that our customers continue to place very high, strong demand on us, particularly for their newest, most exciting programs and therapies. But we're not involved in touching that part of the cycle, the process to understand their constraints on cath labs. Recognizing our demand is coming from their production of products, which is three to six, nine months ahead of the actual procedure. And so by the time we get demand and orders from our customers, they've already factored whatever the hospital cath lab constraints are into the demand they're placing on us. So we really don't have a real-time visibility or insight into that.
spk08: Fair enough.
spk07: Thank you. Shiraz, you had asked a question about ramps and maybe yields or quality. There absolutely is a learning curve. on ramping new programs. And the thing we focus on is ensuring we've got the highest possible yields when we do ramp and launch a program. But to your point, there is a learning curve on that, especially as the volumes ramp up. And the margins typically get better over time as you improve yields.
spk04: Great. Thanks.
spk01: Your next question comes from the line of Nathan Trebek with Wells Fargo. Your line is open.
spk09: Great. Thanks for taking the question. You brought down CRM and neuromodulation guidance to high single digits from low double digits. Can you talk about what you're seeing in this business, and is there any change in the implied outlook for your TMA portfolio?
spk07: Great. Thanks for the question, Nathan. So on CRM, we had said at the beginning of the year that we expected to continue to see fairly robust CRM specific, not neuro, but cardiac with the management growth. And then we would expect it, we were expecting it to normalize in the second half of the year, meaning lower growth rates. That's what we saw based upon the order book and based upon conversations with customers. If you look at, I'll just point to two of the industry players who reported results. Abbott CRM growth rate from the first to second quarter stepped down a couple hundred basis points. I still think Abbott's got a really strong growth rate. I think it was just under 6% in CRM. But the second quarter growth rate for Abbott and CRM was lower than first quarter, specifically because we're seeing and expecting that markets are normalizing. Abbott's still very strong with, they called out their Avere Leadless Pacemaker program. Boston also had a step down in their growth rate. I think it was 5% to 3%. First quarter was 5% growth. Second quarter was 3%. So we look at that data. We look at what our customers are ordering from us, and we look at what that translates to. And so we do for us, for our sales, expect to see the CRM segment normalized more in the second half, i.e., lower growth rates than in the first half. on your question, and so that's happening as expected. It's very much following what we saw at the beginning of the year and what we were hearing. On the emerging PMA customers, you know, we gave guidance for the year of 100 to 120 million of sales for that group of customers. That's up from 50 million two years ago, 50 million in 2022, so very strong growth. We're very much on a trajectory to deliver on that. Those sales are a little more back half, second half weighted than first half. So that's where you'll see some additional sales in the second half is with that group of customers. That's because those programs are in production and we're ramping the output based upon their forecast plans and how they're introducing those products into the marketplace. So we do expect to see slightly higher emerging PMA customer sales in the second half of the year. compared to the first half, and we're very much on a trajectory to deliver that 100 to 120 million of sales that we had guided to its beginning of the year.
spk09: Okay, thank you for that. And just a two-part question on PSA. Can you speak to the net benefit that you get from PSA in the context of cannibalizing your non-PSA ablation business? And then the second part would be, you know, we're hearing that the EP market growth is accelerating in part driven by increased procedures. But there's also the price premium for PFA, and I'm just wondering, to what extent are you able to capture, you know, those economics as a contract manufacturer? Thanks.
spk07: So, I'll start. The price premium is on the finished device, and a lot of what we're doing for our customers is similar capabilities as what we're providing on current ablation technologies. And so it's not like if our customers are getting a meaningful price premium that that necessarily is flowing through to us. But that's okay because this is a strong business and a strong portfolio with differentiated technologies already. And applying them to a faster growing new therapy is a great thing for us. So that's how I think about the price premium. From a cannibalizing, cannibalization of current therapies, you know, it's hard to determine what that cannibalization is going to be. But net, net, net, I think everyone believes PFA is ultimately going to accelerate the growth in the marketplace from a procedure volume perspective. And given our participation across the full procedure on multiple platforms, we see that as a tailwind for us in aggregate.
spk10: Thank you.
spk01: Your final question comes from the line of Joanne Wench with Citigroup. Your line is open.
spk02: Hi, this is Felipe on for Joanne. Just looking back to the back half of 23, I'm thinking about orderly times for your electrophysiology franchise. I'm just wondering if you could remind us of what those look like from your customers. And I guess with the strong start to the first half of 24, have you seen any change in lead times and Is there any amount of seasonality that's kind of baked into your guidance? Thanks so much.
spk07: So, Felipe, I heard the second part. I didn't hear the first part, but let me answer the seasonality about the second half there. There really isn't any meaningful seasonality in our sales. We used to. The last couple of years, we had talked about our engineering revenues or the product development revenues that we generate from customers for developing products for them. We had talked about how that was oftentimes back-end loaded. It was heavier in the third and fourth quarter, lighter in the first quarter, second quarter in particular. In 2024, we've actually seen a much more balanced profile on our engineering revenues. And the reason that's relevant is if you think about the cost of doing development work, they're engineers and they're engineers who are on the payroll 365 days a year. So the cost is fairly evenly loaded across the quarters. And when the revenue was back half loaded, you had a little bit of a mix shift there to less margin in the first half, more in the second half. For 2024, we've actually seen a much more balanced which is something we've been working on, and we've been accomplishing that. So we don't really have any meaningful or identifiable seasonality baked into our second half. Our second half, slightly higher sales and growth rate is coming from new programs being introduced. They're already in production, they're ramping, as well as the Irish facility coming online and giving us more capacity. And I apologize, I couldn't hear the first part of your question, if you could state that again.
spk02: No problem at all. I'm just wondering on like orderly times for electrophysiology devices. I'm trying to understand like how long it takes from order to actually being used in a procedure. If you're seeing any change in cadence from your customers in terms of order timing, if it's happening more frequently just with like the first half of 24. Okay, yeah.
spk07: Okay, so two things. Lead times in general, we haven't seen a meaningful change in lead times. And I point to our order book. When lead times come down, which we do expect over time they will, naturally the order book comes down because of that. And so we would expect to see the order book come down with lead times and a couple other specific things. In terms of ramps of new programs and electrophysiology, different customers have different approaches to how they approach their buildup of inventory in advance of approval or waiting for approval before they want to ramp. But we oftentimes do get more orders for new programs further into the future so that we have even better visibility to the ramp plans of our customers. But that actually helps us. It gives us much better visibility and clarity on what the next three, six, nine months look like. And then as you accelerate that ramp, you clearly get synergies per the earlier question and the efficiencies that come with that. The yields improve over time as well.
spk02: Thank you. And then just on operating leverage, what gives you the confidence that you can continue to deliver leverage at the rate that you've been doing the first half of the year and the back half of the year? Thanks so much for taking the questions.
spk07: Sure. So we've continued to see strong operational execution across our manufacturing facilities. We're executing on our manufacturing excellence initiatives, which gave us the gross margin improvement that we saw in the second quarter and first half year over year. We expect that to continue. We're executing on reducing scrap, reducing overtime, continued improvement in operator efficiency, and really it's calling back some of the inefficiencies that occurred because of the supply chain disruption and the direct labor turnover that we had during the the growth years after the pandemic. We're now at the company level. We're below the levels of turnover we had prior to the pandemic, which is helping us because our associates become more proficient at what they're doing. That helps to reduce scrap, reduce waste. And so that gives us the confidence in continuing to expand margins the rest of the year. It's also very much aligned with our strategy of growing operating profit twice as fast as sales, which leads to margin expansion.
spk01: There are no further questions at this time. I will turn the call back to you for closing remarks.
spk00: Great. Thank you, Sarah, and everyone who joined the call today. As always, you can access the replay of this call as well as the presentation on our website. Thank you for your interest in Integer, and that concludes our call today.
spk01: This concludes today's conference call. Thank you for joining. You may now disconnect.
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