Ladies and gentlemen, thank you for standing by and welcome to the Integer Holdings LLC Q4 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr.

Tony Borowicz. Thank you. Please go ahead sir..

Great. Thank you, Casey, and good morning, everyone and thank you for joining us and welcome to Integer's fourth quarter and full year 2019 earnings conference call.

This call is being webcast live and the replay along with a copy of the press release and earnings presentation will be available on the Investor Relations section of our corporate website. The results and data we discuss today reflect the consolidated results of Integer for the periods indicated.

During our call, we will discuss some non-GAAP measures. For a reconciliation of these non-GAAP measures, please see the appendix of today's presentation and the notes to the financial statements in today's earnings release. As a reminder, today's presentation includes forward-looking statements.

Please refer to the company's SEC filings for a discussion of the risk factors that could cause our actual results to differ materially. Joining me on the call to discuss our fourth quarter and full year results are Joe Dziedzic, President and Chief Executive Officer; and Jason Garland, Executive Vice President and Chief Financial Officer.

On today's call, Joe will provide his opening comments and an update on Integer's strategy where he will discuss how we've been delivering on our commitments for the past three years. Next Jason will review our financial results and sales results for the quarter and for the year, and then provide updated full year 2020 guidance.

Joe will then provide his closing remarks where he will focus on investments we've been making to support and drive our growth. We will then open up the call for your questions. At this point turn it over to Joe..

Sales growth 200 basis points above market, profit growth 2 times the sales growth rate and debt leverage between 2.5 and 3.5 times adjusted EBITDA. Sales growth objective is very much in process and we are making the necessary investments to achieve this objective, but there is more work to be done.

We have delivered on the other two financial objectives and are positioned to continue to deliver on these objectives. We characterize this phase of our journey as the profit expansion period. I'll now turn the call over to Jason..

Thanks, Joe. Good morning, everyone, and thank you again for joining our call. I'll provide more details regarding our adjusted financial results for 2019 and then share more color on our 2020 outlook. As mentioned, fourth quarter sales increased 7% to $326 million, with more details on our sales to share during the product line discussion.

Adjusted EBITDA increased 8% on a reported basis. We delivered $41 million of adjusted net income, or $1.25 of adjusted earnings per diluted share, up $0.21 or 20% on a year-over-year reported basis. Moving to full year results.

In 2019, Integer delivered adjusted sales growth of $1.258 billion, up 4%, in line with our market and overcoming a significant headwind with a customer filing for Chapter 11 bankruptcy. All four product lines grew sales in 2019.

Our adjusted EBITDA was $284 million, up 9% and achieving our strategic objective of growing profit at least twice the rate of sales growth. We delivered $154 million of adjusted net income or $4.68 of adjusted earnings per diluted share, which is up $0.88 year-over-year. Slide 23 provides more insight on how we grew our adjusted net income.

Adjusted net income increased $30 million 2019 versus 2018, up 24%. This significant increase is generated through sales growth, operational improvements and productivity from continued traction in our manufacturing excellence strategic imperative and consistent operating expense management, which all offset price and inflation headwinds.

Our sustained debt reduction and interest rate management lowered interest expense by $5 million. Additionally, we continued to benefit from strategic tax planning with our adjusted effective tax rate ending at 17.3% in 2019, 120 basis points lower than the prior year.

As we close 2019, it's helpful to reflect on our performance versus the guidance we provided at the start of the year. Earlier Joe highlighted how we -- how our adjusted EBITDA and adjusted earnings per share performance met or exceeded our commitments. This consistent delivery on commitments extends to cash flow and debt reduction.

Cash flow from operating activities and free cash flow finished in the ranges we indicated and debt payments exceeded expectations. This enabled us to finish in the middle of our targeted debt-to-adjusted EBITDA leverage range, while still investing $15 million on our bolt-on acquisition strategy.

Let's turn to a review of our product line sales results. As a reminder, slide 26 reflects trailing four-quarter organic adjusted sales growth rate.

We believe this is a more meaningful indicator of our growth trend and how we're performing in the market, versus any individual quarter, which may contain anomalies resulting from the timing of purchase -- of customer purchasing decision.

As expected, we finished the year with the trailing four-quarter adjusted sales up 4%, in line with our market growth. Starting with Cardio & Vascular. Organic sales were up 6% in the fourth quarter. This was led by a strong increase in peripheral vascular demand from a customer launching an existing program into a new geography and market growth.

We additionally benefited from the incremental sales associated with signing a new long-term customer contract on existing business, which fully offset the impact of an end-of-life electrophysiology program.

The sales recognized on this contract are similar to the incremental sales we reported in the first quarter of 2019, where we recognized revenue for in-process work in line with the contractual terms.

As Joe referenced earlier on the delivering for customers slide, we are working to sign more multi-year contracts that continue to generate new sales on in-process work.

To close Cardio & Vascular, the product line grew 4% for the year and we expect 2020 to deliver mid-single-digit market growth as product launches ramp and the impact of the end-of-life electrophysiology program lessens.

On Slide 28, organic sales in our Cardiac & Neuromodulation product line were up 10% in the fourth quarter, driven by new and next-generation project launches, underlying strength in existing CRM programs and the new customer agreement on existing business. This was partially offset by the Nuvectra Chapter 11 bankruptcy filing.

For the year, Cardiac & Neuromodulation adjusted sales grew 3% despite the headwinds created by Nuvectra's Chapter 11 bankruptcy filing and a slight decline in the overall neuromodulation market.

In 2020, we expect a slight decline, as the double-digit decline in neuromodulation is primarily driven by Nuvectra bankruptcy offsets low single-digit growth in CRM. The next slide shows the final part of our Medical segment. You'll recall in July 2018, Viant acquired our AS&O product line.

The advanced surgical orthopedics and portable medical product line shown today includes sales under supply agreements with Viant. Fourth quarter sales continued to grow up 7% organically versus the fourth quarter prior year, driven by an increased end-market demand for advanced surgical and orthopedic based products.

We expect mid-single-digit growth in 2020 with accelerating portable medical demand. Finally Slide 30 summarizes Electrochem our non-medical segment. As expected Electrochem showed continued strength with sales growing 9% in the fourth quarter, driven by increased military demand and growth in the energy market.

In 2020, we expect high single-digit growth from new product launches and increased military and environmental demand. Now let's review Integer's 2020 outlook, starting with context on sales. We expect 2020 sales to be in the range of $1.290 billion to $1.310 billion, an increase of 3% to 4%. To achieve this, we expect underlying growth to be 5% to 6%.

This is at the high end of our projected market growth of 4% to 6%. However, we will experience a $17 million headwind in sales resulting from Nuvectra's Chapter 11 bankruptcy filing.

And even though we shortened our 2019 fiscal year in October, our 2020 fiscal year will still have fewer days than 2019, creating additional pressure of approximately $10 million. Despite the strong underlying sales growth for 2020, again we expect 3% to 4% reported growth.

With that context on sales, we expect adjusted EBITDA between – to be between $300 million and $307 million, reflecting growth of 6% to 8%, which is twice the sales growth rate as we remain in line with our strategic objective.

We expect adjusted earnings per share to be between $5.10 to $5.30 per diluted share, reflecting an increase of 9% to 13%, which is more than three times the rate of sales growth. This faster-growing adjusted EPS compared to adjusted EBITDA is driven by lower expense – interest expense from continued debt reduction.

Overall, our outlook is a result of the execution of our operational strategic imperatives, which are designed to deliver profit leverage on sales growth. And finally on Slide 34, we expect to generate cash flow from operations and free cash flow in the range of $175 million to $185 million and $105 million to $125 million, respectively.

In 2020, consistent with our strategy to increase our strategic investments in the business to drive growth, we expect to increase capital spending to a range of $60 million to $70 million. Though a meaningful increase this includes approximately $10 million of specific facility expansion projects necessary to support our future growth.

Our outlook already includes approximately $10 million of business development payments, as we continue to expand our capabilities for growth including the Inomec acquisition announced yesterday and the pending transaction.

Given the free cash flow projection and business development activity, we anticipate paying between $90 million to $110 million in debt in 2020 and expect to remain in the target debt-to-adjusted EBITDA leverage range of 2.5 to 3.5 times. I will now turn the call back to Joe..

Thanks, Jason. Coming back to our journey to excellence. We have accomplished two out of our three financial objectives. Last financial objective is delivering sales growth 200 basis points faster than our markets. So let's cover a few of the actions we are taking.

We have been and will continue to make investments necessary to deliver the growth we desire. We have already demonstrated the strong returns we have generated on our investments in culture and manufacturing excellence.

In addition, we are making organic investments in our Salem, Virginia and two of our Minnesota facilities, Plymouth and Chaska in laser machining and quick turn capability for our Cardio & Vascular business.

We also completed two bolt-on acquisitions US BioDesign which adds complex braiding; and Inomec in Israel which brings us delivery systems and catheter supports to growth -- to support growth in that region.

Inomec gives us an entrée into the highly innovative and growing Israeli med tech market where many of our customers operate and have innovation centers.

We have also been investing internally in our organic on our Oracle ERP systems to ensure we can implement standardized processes and have the consistency across all our operations to align with the Integer production system. We are confident in the returns on this $35 million worth of investments.

In order to take full advantage of these capabilities, we have been adding R&D resources to provide more development for our customers as well as our internal innovation. We're investing 30% more in sales and marketing resources to bring more experienced sales leadership from both our industry and others.

This will ensure we have the expertise to fully capitalize on the capabilities we have added and our increased R&D development work.

We are increasing our pipeline of sales opportunities and establishing the necessary rigor and discipline in closing on these opportunities to position us to achieve our last financial objective of growing sales 200 basis points above the market.

To support the growth we have been experiencing and anticipate we are making necessary investments in our facilities. We have highlighted three facilities that we have been expanding.

The Juarez, Mexico; Salem, Virginia; and Montevideo, Uruguay facilities have already or are in the process of expanding their physical footprint to give us additional manufacturing or research and development capacity.

For example, in Montevideo where we focus on neuromodulation IPG development, we are adding additional research and development capacity as the number of opportunities continues to grow. In addition, we have invested in facility build-outs in both of our Tijuana facilities to support specific customer programs and future growth opportunities.

I want to highlight Tijuana-North where we recently were approved by the FDA as the first site in Mexico to manufacture active implantable medical devices. We now have three different countries where we can manufacture IPGs.

This total investment is about $40 million over the time frame 2018 to 2020 and gives us confidence we can support the type of growth we see going forward. We believe the Integer strategy lays out a clear path to sustained outperformance. We have built the leadership team and continue to build and strengthen the culture to execute our strategy.

Our associates are passionate about serving our customers who deliver the therapies to the patients whose lives we enhance. We are delivering on our commitments including profit growth, margin expansion and deleveraging while investing for growth.

As we continue on our journey to excellence, we see tremendous growth ahead for our associates, our customers and our shareholders. Thank you for joining our call today. I'll now turn the call back to the moderator to facilitate Q&A..

Thank you. [Operator Instructions] And your first question here comes from Matthew Mishan with KeyBanc. Please go ahead. Your line is now open..

Great and thank you for taking the questions. Hi, Joe, Jason, Tony..

Good morning. Matt..

Good morning..

Good morning..

I just want to first start off with the headwinds you're pointing to 2020, the $17 million in Nuvectra and then $10 million from fewer days.

I think what's a little confusing on my end was I think you already took out $12 million from your fourth quarter guidance the majority of which would have been Nuvectra and it just seems like the combined $29 million would have been well above what your sales to Nuvectra would have been based upon their cost of goods sold? And then the second question and that is on the fewer days in 2020.

I thought you normalize – if I remember correctly there was some – there was an 8-K where you normalized the end of the year, so you wouldn't have these extra weeks or these extra days.

So why is that impacting 2020 when you already did that?.

Matt, thanks for the questions. I'll start with Nuvectra. Your math is correct. We did ship $17 million worth of product to Nuvectra, mostly in the first half of 2019 and we were planning to ship another $12 million in the fourth quarter.

And so the adjustment that we communicated after Nuvectra's bankruptcy filing was to remove exactly the amount of sales that we were planning to ship to Nuvectra. So it was going to be $29 million but the actual in our reported 2019 sales is in fact $17 million. And so that math is straightforward and you calculated it correctly.

So we are facing year-over-year a $17 million headwind from zero sales in Nuvectra for 2020.

I'll highlight that when we did communicate that shortly after – a few days after their bankruptcy filing, we also conveyed that it did not impact our 2020 outlook at all because we had already factored in zero and we had already factored in zero for Nuvectra because we had visibility into what we thought their inventory balances would be entering 2020 and we did not anticipate much if any demand in 2020.

And so it wasn't a surprise. It's not – it doesn't impact our 2020 outlook at all when that happened but it does in fact lower 2019, which we communicated at that time. So $17 million is the year-over-year impact from Nuvectra on 2020 versus 2019.

And that's – as I referenced that's mostly going to be a first half 2020 impact because most of what we shipped in 2019 was in the first half. On the fewer days, our fiscal calendar year – our fiscal year for 2019 originally was December 28, 2018 to January 3, 2020. So it was actually 53 weeks.

And when we shortened the fiscal 2019, we cut it off on December 31, so we still had December 29, 30 and 31 of 2018 plus the calendar year of 2019. So we still had those extra three days in 2018 that was part of our fiscal 2019. In 2020 and going forward, it will be a calendar year. So it will be really easy. It will be calendar year over calendar year.

And so other than leap year we won't see any variation but we do have a couple of days still in 2020 versus 2019. So I'll add a little more to that Matt. We also referenced that even after the Nuvectra bankruptcy and removing the $12 million, there's still about a $10 million headwind in Neuromod that was always in already in our 2020 view of sales.

And when you see our guidance here I think it's fairly consistent – it is consistent with what we indicated on the third quarter call but there's a $10 million neuro headwind still from inventory that we think will affect 2020 versus 2019. But that's been baked in now for a long time..

So the way to think about that would be if there's $10 million baked in from inventory, that's really all Nuvectra. I think Nuvectra is all-encompassing compared to the rest of your customer base at this point.

So that would be plus $10 million?.

Yes It's $10 million from all the other customers. So it's on top of the $17 million. It's on top of the $17 million for Nuvectra. And we didn't put that on the slide as a headwind because there's inventory fluctuations at our customers across the whole business, across all products.

We – I'm just calling that out because we've talked specifically about neuro..

And remember, Matt initially that headwind from the contractual obligations and inventory was going to be $20 million right until the Nuvectra file so that reduced to $10 million and still though what we sold to them in the first part of the year remains a headwind..

Fair.

And the electrophysiology contract that fully – the one which you lost last year that fully annualizes in the first quarter and won't be a headwind again in 2Q, 3Q, 4Q?.

That's the right way to think about it. There will be a first quarter impact. And then it does in fact level off for the rest of the year. It's still down for 2020 versus 2019. It's just nowhere near as significant as it was in 2019 versus 2018..

And just looking at that so the fewer days would also be a 1Q 2020 tough comp, the majority of the Nuvectra, I'm assuming is going to be is – is first half weighted and then the electrophysiology is the first quarter.

How should we be thinking about the phasing of the 3% to 4% growth through the course of the year? It just seems like a bunch – it seems like a bunch of the headwind is going to come in 1Q here?.

Yeah, great question. I'll answer that this way. There's a couple of things. When we look at the number of days, it actually ends up being 4Q where we come up short on days in 2020 versus 2019. And it's because in the first quarter of 2019, we had a normal number of days, because of the way we were doing the fiscal calendar.

It was a normal number of weeks, normal number of days. And so what you end up with is 4Q 2020 ends up with fewer days against 4Q 2019. So that makes it a little bit of a tougher comp. And also when you look at our sales by quarter, the fourth quarter of 2019 was the strongest nominally at $326 million. So it was the strongest quarter out of all four.

So that makes it a tougher comp on a year-over-year basis. And then when you look at third quarter of 2019 at $304 million, it was by far the lowest quarter.

So just looking at the comps you would expect third quarter 2020 to be an easy comp, fourth quarter of 2020 to be a more difficult comp, because it's – it was the highest prior year and you've got fewer days. And then the first half, we would expect to be kind of a flow consistent with our full year.

But we would expect third quarter just because it's an easier comp to be stronger; fourth quarter tougher comp to be lower; first half more consistent with full year..

Okay. Fair enough. And then the last question. You've done US BioDesign and Inomec here.

What is the trajectory towards revenue growth for these two acquisitions? I mean, is this something where in 2021 they start coming on? Or is this something 2022, 2023?.

We see significant opportunity with the capability they have and the platform they give us. Inomec gives us access to a really innovative fast-growing market in Israel, where there's a lot of innovation, a lot of our customers have operations there. And getting into that ecosystem lets us tap into that pipeline.

We think as we combine Integer's scale and breadth, and access to customers with US BioDesign and Inomec's capabilities, we think it opens up a tremendous number of opportunities to capitalize on their strengths. We all know it takes time to get into the development cycle translate that into sales. So we see enormous opportunity.

It is though the reality of the market cycle, where it will take a few years for that to show up in revenue, but we're already seeing strong customer interest in their capability, and the development opportunities are accelerating. It's also part of, why we've increased the number of R&D resources.

We highlighted on one of our slides that, we've added R&D resources to the tune of 25% in the last few years in order to do more development work. Those R&D resources are on top of the acquisitions for – of Inomec and US BioDesign, and we're capitalizing on their capability.

So it takes a couple of years for that to translate into sales that you're going to see. But when we see it in that pipeline and we win the business we're in the process of validating we'll see the future revenue growth and be able to tell you when it's coming..

Thank you very much and congratulations on a nice quarter..

Thanks, Matt..

Thanks, Matt..

[Operator Instructions] Your next question comes from the line of James Sidoti with Sidoti & Company. Please go ahead. Your line is now open..

Good morning.

Can you hear me?.

Yes. Good morning, Jim..

Great. A couple of balance sheet questions. Pretty impressive quarter, but you were still able to cut down your working capital both on the accounts receivable and the inventory.

Is that a new trend that we – should we think that you'll stay at these levels going forward?.

Jim, let me highlight that with the Nuvectra bankruptcy, we removed $24 million -- we wrote off $24 million. So the biggest chunk of that was in inventory. And then there was $2 million in AR. So that's, part of that. So we need to now with this new baseline, continue to focus on the things we've talked a lot about, in terms of driving working capital.

But again, we've talked a lot about lean, in addition to efficiencies in operational excellence, that's going to drive inventory improvement as well. But I wanted to just call out that there was the dynamic on Nuvectra, just for those accounts you called out..

Okay.

And then, on 2020 guidance, can you give us some color on, where you think the tax rate will windup? And what interest expense will be?.

Yeah. So for tax rate, we've guided to a midpoint that basically stays consistent with where we're at this year. I mean, I couldn't be happier with what the team has been doing, on strategic tax planning. As you know, tax reform the dust continues to settle.

And so as we've understood that, we're going through in understanding some of the changes we need to make to take a better advantage of foreign tax credit and foreign-derived income deduction. So, that's what the team has been able to execute. We'll continue to drive some of those. But again, midpoint it's, flat year-over-year.

And then interest expense, we – again, we'll continue to reduce that with the balance. And some favorability on rate that we still sees with the repricing. And so, I would say, we're at a magnitude. We continued to drop, almost what we did, year-over-year 2019 versus 2018. So hopefully that gives you some color..

Okay. And then, Medtronic did their call yesterday, they called out the effect -- they called out that they will be affected by the coronavirus in China. But they didn't quantify it.

Are you putting anything in your guidance for that? And do you think that could impact you in the first or second half of 2020?.

Jim, obviously, it affects our customer sales that will eventually flow through to us. We have not seen at this point, any meaningful impact in our customers,' ordering patterns at least as best we can tell related to the coronavirus.

We've obviously been working closely with our supply chain, and managing inventory levels to ensure that, we can continue to supply. And at the moment, we do not see a meaningful impact, from the coronavirus. But it's obviously, out there for everybody to deal with and manage..

All right, and then, my last question is on, seasonality. I know you don't want to give quarterly guidance and get too deep into the weeds. But Q1 of last year was a particularly good quarter. And you won't have near the neuromodulation business, in Q1 of this year. I mean, don't you think that that number will be flat to down slightly..

Yeah, Jim, we -- you're right, we don't give quarterly guidance. The color I can give you is, when we look at the 2019, nominal sales, what we see is, we see, the third quarter was clearly the lowest quarter of the year, so that makes the third quarter of 2020 an easier comparison.

And then, clearly the fourth quarter 2019 was the highest sales in the year nominally. So that makes the fourth quarter of 2020, a more difficult comparison. We referenced the incremental -- the fewer days that, we'll have in 2020 versus 2019. And we see that impacting the fourth quarter. You're right.

Though, there's other moving parts quarter-by-quarter, but we would expect the first half to be somewhere in the neighborhood of our full year outlook. But third quarter should be stronger just because of the comp. And fourth quarter should be lower and more challenging, just because of the comp..

Okay, right. Thank you..

Thanks, James..

Thanks, James..

And there are no further questions, at this time. I will turn the call back over to, Tony Borowicz for closing remarks..

Great. And thank you, for joining us on today's call. And your continued interest in Integer. Remember, this conference call will be available for replay on our -- on Integer website. Thank you. And that concludes our call..

And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect..