Ladies and gentlemen, thank you for standing by, and welcome to the Integer Holdings Corporation Q4 2020 Earnings Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Tony Borowicz, Senior Vice President of Strategy, Corporate Development and Investor Relations.

Thank you; please go ahead..

Good morning, everyone. Thank you for joining us, and welcome to Integer's Fourth Quarter 2020 Earnings Conference Call. With me today are Joe Dziedzic, 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 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, which are available on our website at integer.net..

Thank you, Tony, and thanks to everyone for joining the call today. I'd like to start by recognizing the Integer associates who worked every day during 2020 to produce products for our customers and patients.

The dedication and sacrifice they make to deliver for our customers and their patients are the reason I can join this call today with confidence that Integer is well positioned to continue delivering on our commitments. We delivered fourth quarter sales at the high end of our guidance and profit above our guidance.

The fourth quarter was the start of the recovery for Integer, and our sales increased 14% from the third quarter. Our profit margin rate increased 350 basis points from the third quarter, recovering with the expected volume increase, and exceeded our guidance by 50 basis points.

On our last earnings call, we estimated the industry would grow low single digits year-over-year during the fourth quarter, which would have been an improvement from the third quarter. Our view on the fourth quarter today is that the industry declined low single digits on a year-over-year basis, similar to the third quarter industry results.

Since our fourth quarter sales were at the high end of our expectations, we think our customers built some inventory during the fourth quarter. We expect this inventory will be depleted over the first and second quarters of this year, and we have incorporated this impact into our 2021 guidance.

Despite the pandemic, we reduced net total debt by 15% last year, a reduction of $123 million, demonstrating our continued strong focus on cash management. During 2020, we remained focused on executing our strategy, and it delivered for both our associates and our customers through improved safety, quality and on-time delivery.

We increased our overall investment in manufacturing capabilities and capacity, additional R&D engineers and numerous other areas of the business. Our 2021 outlook reflects our view of the trajectory of the industry recovery, including our margins expanding with the volume recovery. Jason will cover this in more detail later..

Thank you, Joe. Good morning, everyone. Thank you again for joining our call. I'll take this time to provide more details on our fourth quarter and full year 2020 adjusted financials. I'll provide an update on our cash flow and conclude with our expectations for 2021.

I'll start with our fourth quarter results, which continued to be meaningfully impacted by the COVID-19 pandemic. Fourth quarter sales were at the high end of our guidance and up $33 million sequentially over the third quarter. At $269 million, this was down 17% versus the prior year.

At $38 million, our adjusted operating income exceeded the high end of our guidance and was up $13 million sequentially over the third quarter. This was 38% lower than prior year.

As projected, our fourth quarter profitability improved significantly over the third quarter on the increased sales, combined with the continued focus on manufacturing excellence and cost containment.

Having maintained strategic investments throughout the pandemic, we remain confident that Integer, our customers and the patients we ultimately serve will benefit. Moving to Slide 20. Our full year financials clearly reflect the impact of the pandemic. Sales decreased by 15% to $1,073,000,000.

Adjusted operating income decreased 39% to $144 million and we reported $92 million of adjusted net income, a decrease of 41%. Turning to Slide 21. We see the graphical representation of the impact that a 15% year-over-year reduction in sales had on our full year 2020 adjusted net income.

Our balanced approach to cost management during a temporary but steep reduction in sales is also included in the operational drivers column. We saw a $76-million reduction in our adjusted net income in 2020 versus the prior year due to the impact COVID had on our volume and deleveraging.

Our strength in cash flow generation, continued focus on debt reduction, along with lower LIBOR, all contributed to the reduction of our interest expense by $10 million and contributed $0.31 per share of growth. The impact from our effective tax rate also contributed $5 million of year-over-year income growth.

2020 benefited from discrete items related to the favorable finalization of 2017 tax reform regulations, tax credits that exceeded our original 2019 return provisions and our tax planning strategy to optimize foreign tax credits.

These discrete items drove a more pronounced reduction in our effective tax rate as the absolute dollars of tax savings is applied to a greatly reduced income before taxes due to the pandemic. Given this, our full year adjusted effective tax rate was 12.2% for 2020.

As the impact of the discrete items will not repeat, we expect our 2021 effective tax rate will increase over 2020, but will be better than 2019 from our ongoing strategic tax planning actions.

In the fourth quarter, we continued a strong conversion of income to cash and generated $71 million in cash flow from operating activities and $59 million in free cash flow. This included $29 million of cash collected as a result of the patent litigation judgment being affirmed in Integer's favor by the United States courts of appeal.

In the fourth quarter, we reduced our net total debt by $59 million and for the full year by $123 million despite the COVID-19 pandemic. We continued to steadily reduce our net total debt, consistent with our strategy.

However, our debt leverage ratio did increase to 3.6x adjusted EBITDA as our trailing 4-quarter adjusted EBITDA is lower given the impact of the COVID-19 pandemic on the second, third and fourth quarter profit.

We also continued investing in our strategy with $47 million in primarily growth-related capital expenditures in 2020, a level similar to our investment in 2019. Next, we'll talk about our expectations for 2021. You may recall that we suspended our financial guidance in early 2020 due to the significant uncertainty created by the COVID-19 pandemic.

While we remain in the midst of the pandemic and still face considerable uncertainty, we are resuming financial guidance in keeping with our commitment to provide as much clarity and transparency as possible. We will begin with sales on Slide 24.

We expect 2021 sales to be in the range of $1,160,000,000 to $1,200,000,000, an increase of 8% to 12% versus 2020. We project sequential improvement for the second consecutive quarter, with the first quarter of 2021 growing over the fourth quarter of 2020.

This growth is supported by our current orders backlog and incorporates the slower industry recovery during the fourth quarter of 2020. We expect the second quarter to be similar or slightly better than the first quarter, with improvements in the second half of the year to be largely determined by the pace of market recovery.

We also expect that our quarterly year-over-year growth rates will continue to differ from the industry due to the timing differences of the COVID impacts we saw in 2020. Let me now turn to our outlook for the full year 2021.

As shared on the prior page, we expect sales for the full year to be in the range of $1,160,000,000 to $1,200,000,000, an increase of 8% to 12%. We expect 2021 adjusted operating profit to be between $170 million to $190 million, reflecting a growth of 18% to 32%.

We expect adjusted net income to be between $113 million to $130 million, reflecting a growth of 23% to 41%. Our projected profit growth is driven by the expected volume recovery and strong productivity from our manufacturing excellence imperative, partially offset by an estimated increase in costs from incentive compensation.

The stock-based compensation component of this expense is estimated to increase by approximately $9 million from the increased tenure of our leadership team and lower expense in 2020, as the pandemic caused the 2018 organic sales growth equity awards to yield no payout. Turning to Slide 26. I'll provide some color on our first quarter outlook.

Because of the unprecedented impact of the pandemic, we suspended guidance in early 2020. We provided fourth quarter 2020 guidance because we felt we had solid near-term visibility and it would help investors interpret the pace of the recovery on Integer.

We are providing a full year 2021 view of the recovery with specific guidance for the first quarter of 2021 to provide insight into the pace of the recovery as we entered the new year.

We do not intend to provide quarterly guidance as a regular practice, but felt during this period of greater uncertainty, this additional insight would be particularly helpful to investors.

With our backlog continuing to improve, we expect continued sequential improvement in sales, and the first quarter will be between $280 million to $290 million, up approximately $10 million to $20 million over the fourth quarter of 2020.

It is important to highlight, the year-over-year decline of 12% to 15% versus first quarter of 2020 is because Integer sales were not impacted by COVID during the first quarter of last year.

We expect adjusted operating income margin rates to continue to grow with increased volume, consistent with the 2 prior quarters, including our strategic investments. As a result, we expect the first quarter 2021 adjusted operating income margins to be 90 to 210 basis points higher than the fourth quarter of 2020.

Finally, on Slide 27, we expect to generate cash flow from operations and free cash flow in the range of $145 million to $165 million and $90 million to $110 million, respectively.

In 2021, 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 $50 million to $60 million.

Given the free cash flow projection, we anticipate a reduction of net total debt between $90 million to $110 million in 2021 and expect to return to a target debt to adjusted EBITDA leverage range of 2.5x to 3.5x. With that, I'll turn the call back to Joe. Thank you..

Thank you, Jason. Our journey to excellence slide has been updated to reflect our 2021 outlook that Jason just explained.

Our strategic objectives remain the same, and I believe that despite the disruption of last year, we strengthened our company, and we are well positioned to resume our march to our long-term objective of sales growth that is 200 basis points above the market and to deliver sustained operating profit that is 2x the sales growth rate, all while maintaining a debt leverage ratio between 2.5% and 3.5%.

I'll conclude our remarks today by offering our view on why now is a good time to be an Integer shareholder. We believe we have a clear vision, a compelling strategy and strong values, combined with the most talented associates amongst all medical device outsourcers.

The industry dynamics of mid- single-digit growth and high barriers to entry, combined with Integer's breadth of product portfolio, creates a very resilient business model.

Integer's world-class research and development capabilities, our global manufacturing footprint, combined with our deep customer relationships, creates a compelling growth strategy.

Our commitment to our associates and investment in their growth, coupled with our focus on building leadership capability to deliver performance excellence, creates a performance culture that is creating a competitive advantage.

Finally, our recent track record of delivering on our financial commitments and generating strong cash flow reinforces our financial strength. I am confident in our strategy, in 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. Thank you..

Your first question comes from Jim Sidoti with Sidoti & Company..

I hope you all have power and are feeling well. I know it seems like it's a rough week to be in Texas..

We are managing through, Jim. Thanks for the greetings..

Okay. As far as the guidance goes, and I was pleasantly surprised at the fact that you were able to give both quarterly and annual guidance for 2021 -- I think that's a good sign.

What are you assuming for the nonmedical piece of the business in terms of revenue? Do you think that will grow at a faster rate, slower rate? And is that more second half growth?.

Jim, I think you just called it. Good summary. We -- our expectation for Electrochem on our last earnings call was we expected no growth in 2021 versus 2020. And as you've seen in the financial results, the business declined from $58 million to $35 million in sales due to the oil and gas energy decline.

What we're seeing right now is we really expect the first half to continue in the same trajectory that it's been on throughout 2020, so little to no growth in the first half of 2021. We do anticipate some uptick in the second half of the year. Maybe we get a little bit of growth in that business.

But even a 10% growth on a $35-million business is only $3 million, so it's not meaningful to the total company growth rate or sales, but it would be nice to see the beginning of the recovery in the oil and gas industry. So our expectation is the second half, we begin to see some sort of a pickup in volumes.

So maybe there's a few million dollars of year-over-year revenue growth for the full year '21 versus '20..

And on the medical side, are there any key new products in the industry that you think will help drive the recovery? Maybe the neuromodulation business or one of the other businesses that you think are going to drive the growth for 2021?.

We would point to all of the areas that we've been focused on. I think neuromod is a great example, where they were particularly impacted by the pandemic in 2020. We saw that almost immediately back in March when the pandemic hit because it's such an elective surgery.

And we saw neuromod start to really come back strongly in the June, July time frame last year. And we saw really, really good growth or volume return in the third quarter, early fourth quarter. And then, unfortunately, with the increased hospitalizations and infection rate in mid-fourth quarter, we saw that pullback.

And I think you've heard that from all of our customers that have talked about their neuro business. I think it points to just how elective that surgery is in the short term. As we think about that business and that product, it's not elective in the long-term in the sense that there's tremendous patient need.

It's a -- we think and we believe it's highly underpenetrated, and we think the amount of innovation that is happening in that space, not just with the emerging players, but also the large players now are beginning to introduce more innovation this year and into next year.

We absolutely expect the neuromod business to recover and to have high-single-digit, low-double-digit growth looking forward.

We love how we're positioned to support both the large players with component technology and with the smaller emerging players with full system design and development in high-volume manufacturing, so neuromod is definitely an area that we would expect to see recover earlier than some of the other segments.

So we're actually pretty excited about 2021 and putting 2020 behind us more broadly. And we think that, as you've heard from others in the industry, we will continue to see linear sequential improvement month-over-month, quarter-over-quarter. And I point to -- if you contrast Integer with the industry, the industry's bottom was 2Q of 2020.

It was very much a V-shaped recovery, down 35%-ish in the second quarter, down low single digits third quarter. We actually had 2 quarters that we were at the bottom because of how our customers managed their inventory. The fourth quarter was the beginning of the recovery for us.

You've seen in our very specific guidance for the first quarter of '21, we expect a continuation of that improvement on a sequential basis. Fourth quarter was up $33 million over the third. First quarter, we're guiding to be up $10 million to $20 million over the fourth quarter.

Second quarter, maybe not as much of an improvement, but by the second half, we should start to see even more improvement. So we're excited about 2021 and putting 2020 behind us, and getting back on the growth trajectory that we and the industry were on pre-COVID..

All right. And the last one for me, if you look at your EPS guidance, the non-GAAP versus the GAAP guidance, really the biggest delta there is the amortization expense. And then the other one-time charges really trickled down to less than $0.20 annually.

Does that indicate that at this point you're done with the restructuring?.

Jim, we reduced the non-GAAP adjustments to, like you said, it's single-digit, kind of, millions, single-digit millions. Maybe you're thinking back to 4 or 5 years ago when that number was $40 million to $50 million that was related to the integration of Greatbatch and Lake Region.

We've gotten that number down to -- as you described, it's the amortization. It's the stock-based comp that's very commonly adjusted out in the industry metrics. The restructuring that we have now is more selective, more very targeted. And I think you'll continue to see it in the single-digit millions of dollars..

Your next question comes from Matthew Mishan with KeyBanc..

Hey, Joe, just bigger picture, after the last couple of very strange years, what kind of changes are your medical device customers thinking through with their supply chain and how they manage that supply chain over the long run after this last couple of years? And how does that benefit you? Or how could that benefit you?.

Great. Thanks for the question, Matt. I think the thing that the pandemic as well as some of the national disasters that have occurred over the past 2 to 3 years have done is, it's reinforced the importance of the supply chain, both from a resiliency, from a financial stream, and I think even more so from the innovation perspective.

Our customers are looking to us to do more innovation, to bring more technology to the table. And then they expect us to be able to perform and deliver for them in the same way that their own plants do. What is clear from all of our customers, they want to spend more money developing therapies. They want to spend more money on clinical trials.

They want to spend more money commercializing products and putting them in the hands of hospitals and doctors to help patients. They don't want to invest in manufacturing. Although you can get a good return on investing in manufacturing, on a relative basis, the returns are much higher on therapy development, clinical trials and commercialization.

So they're looking for us to do more, and they're looking for us to cover the full suite of capabilities, which we can provide today. So the reason we continue to invest in the technologies that we do is to ensure that we can fulfill -- enable their strategy and help them focus on therapy development.

We see that in their desire for redundancy and business continuity plans. We see that in their desire for quick-turn prototyping. We've invested in a number of our locations to add dedicated lines for quick-turn capability. We've invested in adding specific technologies in order to be able to support their needs and accelerate their time to market.

They are looking for more outsourcing, and they want to partner with people who they know and trust, and they know that can deliver for them on a sustainable basis.

Some of the supply chain disruptions that have occurred over the past couple of years, whether it's the pandemic, whether it's suppliers in Asia, whether it's natural disasters, redundancy and business continuity is paramount to them. They know that if they can't supply and meet market demand, there's someone else in the industry who will step in.

And so that's foundational. And so a company like ours that have -- has the redundancy and the financial strength, the technology, the proven quality, the proven capability to deliver on time, and that's continuing to invest and has the financial wherewithal to do so, is putting us in, we think, a very differentiated position.

And so we feel that our strategy is very clear about enabling their success. We feel our strategy is very clear to understanding their technology needs and then delivering from and being the best manufacturer in the industry.

So we think we're well positioned to meet their needs and to meet how they're thinking about their investment allocation going forward..

Joe, as you see this recovery progress for you guys on a sequential basis from here, how do you -- how are you thinking about commodity prices or potential supply chain shortages through the industry? Do you think the industry can handle the pace of change?.

I know Integer can. I'm confident we can. I'm confident that we've demonstrated the agility during COVID to address the potential supply chain disruptions, to modify how we've run our business, protected our associates and still delivered for our customers. I think this is a strong industry. It's mid-single-digit tailwinds across the industry.

I think the providers like us, who understand our customers are investing in the innovation, investing in manufacturing and being great at manufacturing, while delivering innovation, are the ones who are going to succeed and who are going to be able to enable our customers' growth and deal with whatever challenges that the environment presents to us.

So I'm confident that we have the agility. The industry, I think, has proven to be fairly resilient during the pandemic. I think that the hospitals have done a phenomenal job of adapting and adjusting. And I think supply chains overall have held up reasonably well in the med device sector..

Okay. And I'll combine the last 2 questions into one. You made 2 smaller acquisitions in US BioDesign and then.

First, how have those acquisitions contributed to the new product introductions or the backlog of companies under development that you were talking about last quarter? And then also, just trying to understand what the pipeline looks for you guys into '21, and if you have -- and if you're getting closer towards your target debt to EBITDA, does that mean you can be a little bit more acquisitive next year?.

So then specific to the 2 acquisitions we've done, they've delivered exactly what we had hoped they would and expected they would. They've brought differentiated capability. They've bought the ability to enable our customers' design development and speed to market.

We've made and are making investments in both of those acquisitions to add capacity and capability so that they can serve our customers more broadly and address and support the increased demand. We've talked about the increased development work we're doing for our customers.

And even though we were in the midst of a pandemic last year, we added more R&D engineers that we had in our budget because the customer demand was there. And we've continued to do that. We've added 18% more -- or 15% more R&D engineers since 2018 because the demand is so strong. And so we feel that we're incredibly well positioned there.

And those 2 acquisitions are just examples of how we've continued to add capability that our customers want and that our customers need. So we're filling not only gaps in our capability, but in the industry, and closing needs there.

We absolutely -- given our ability to continue paying down debt, where we paid down 15% -- or reduced net debt 15% more in the midst of the pandemic, over $120 million. When our EBITDA is back to a pre-COVID or even a 2021 guidance level, we're at the low end of our range of 2.5x to 3.5x leverage. And so we continue to look for acquisitions.

We've been very targeted and focused on specific capabilities, but as the leverage goes lower, that does create the capability to do more significant acquisitions, if the right acquisition at the right price presents itself. But it's all about the returns.

And if you overpay on the way in, you'll never generate the return all the way out when you own it. So we are absolutely continuing to focus on those specific capabilities, and if we can find a business that is bigger than a tuck-in, that fits, and at the right price, we certainly have the capability to do more than just a tuck-in these days..

There are no further questions at this time. I will now turn the call back to Tony Borowicz for closing remarks..

Great, thank you, Mariana, and thanks, everyone, for joining us on today's call and your continued interest in Integer. Please note this conference call is available on our website. Thanks again, and that concludes our call..

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