I'm gonna get going here for our next fireside. We have Integer Holdings and CEO Joe Dziedzic. Joe, thanks for joining us, and for those of you in the audience, feel free to make this interactive. You can ask a question. We have two mics up here if you wanna ask, or you can scan the QR code on the presentation screen and ask your question that way, and we will try to get to it. So Joe, maybe start us off. Integer has a very kind of clearly defined strategy to kind of grow into faster-growing med tech subsegments. You've got some M&A execution that you guys can play with to achieve your kind of growth strategy.
Maybe just talk to us a little bit about where, what markets you're playing in, where you sit in the supply chain, and you know, how you plan on driving you know, your growth algorithm over the next several years.
Great. Thanks, Rich. Thanks for having us. It's great to be here. Appreciate the opportunity to talk with you. Let me start with Integer's contract development and manufacturing organization. We serve the medical device marketplace, manufacturing everything from components to subassemblies to finished devices. We serve everyone in the industry.
Our three disclosed, reported customers, more than 10% of sales reported in our 10-K, are Medtronic, Abbott, and Boston Scientific. But you can think of us as serving everyone in the industry in one way, shape, or form. Our sales are. Roughly half of our sales are in the cardiovascular marketplace, about 40% in cardiac rhythm management and neuromodulation.
The remaining 10% are into some segments that, quite frankly, we've been in the process of exiting, and have divested, but we continue to serve the buyer of those business in a very small non-medical segment. We have what we think. We've laid out some very clear financial objectives of our strategy, and I'll talk in a minute about what the component, what the underlying foundation of that strategy is.
But we wanna grow our top-line revenues at least 200 basis points faster, or on an organic basis than the underlying markets we serve. And the markets we serve, based on our sales mix, is about 4%-6% market growth. That's kind of a longer-term growth rate.
Those markets grew much faster than that in 2023, but 2024 and beyond, we're expecting that 4% to 6%. So for us to grow at least 200 basis points faster means we're growing organically 6% to 8%. From a profitability standpoint, our second financial objective is to grow operating profit, so inclusive of SG&A, depreciation, R&D, twice as fast as sales. So if sales are growing 6% to 8%, we want 12% to 16% on operating profit. So that means, by definition, we're outgrowing the markets that we're serving while expanding margins at the same time.
Then the third strategic financial objective is to maintain debt leverage of 2.5 to 3.5, which allows us to do the tuck-in acquisitions that we've been doing, while to support that growth and accelerate their growth, and those acquisitions would be on top of the organic growth of 200% above or 200 basis points above the markets that we're serving. So those are the clear financial objectives.
We've identified four key submarkets within the cardiovascular and cardiac rhythm management neuromodulation space that we are prioritizing, and those are electrophysiology, structural heart, neurovascular, and neuromodulation. So three of those end markets are in cardiovascular. One is in the what we call CRM& N, cardiac rhythm management, neuromodulation.
Our strategy is to build vertical integration capabilities to help our customers accelerate their speed to market while bringing differentiated capabilities to help them consolidate their supply chain. Our strategy is to get designed into our customers' programs. These four markets are where there is a significant amount of innovation occurring in the industry by our customers to serve unmet patient need or underserved patient need.
Over time, as we shift the mix of our sales into these four faster-growing end markets, the 4% to 6% weighted average market growth rate that we have today will gradually increase over time, which will just only accelerate the top-line growth.
It's a great overview. Thanks. Maybe just following up, you know, where, given where you sit in the supply chain, and apologies if this is just an overly simplistic question. You know, on the one hand, positively, it would seem that you have good near-term line of sight to your customers' ordering, right? They're partners, right? So they're providing you good visibility there. So I'd love to hear, you know, how much visibility do you have, and what does that mean for you as you guide to investors?
Should we just, you know, should we assume that line of sight is quite good, and over what time frame? And then on the other side, I would imagine you're quite susceptible to the ordering patterns of your customers. So talk to me a little bit about, you know, where that can sometimes trip you up on, on the same kind of item planning and, you know, and providing an outlook forecast.
Yeah, great, great, great question. So we entered this year with over $900 million of orders that. Think of it as order book. These are orders that customers have placed for a specific SKU, specific quantity, specific delivery date. The bulk of that is to be shipped within the next, say, six months. And there are also pieces of that business that are more than a year out.
Those are unique, unusual circumstances that we expect that to unwind over the next six, 12, 18 months or so. But we have very strong visibility to the next six months, and that's because with the lead times that happened, extended during the pandemic across manufacturing broadly, orders had to be placed further in advance.
Most of that has continued, and so as we enter any given quarter, we can see the next two quarters really, really clearly, from the orders our customers have placed. So think of these as purchase orders placed.
On top of that, our customers' manufacturing plants are giving us a view of their rolling 12-month demand, because most of the product we ship, we're shipping to one of our customers' manufacturing facilities, and they have laid out their manufacturing plan for the next year, and it's helpful to them and their entire supply base to share that with them, and they have been doing that for a very long time. So we have visibility on a rolling 12-month basis, with actual purchase orders placed, for most of the next six months, and some beyond that.
So two follow-up questions to that. One, when a customer is providing you their manufacturing and commercialization plans, I would imagine, unlike the way they talk to the investment community, they're trying to give you as realistic a view, maybe even a bullish view, right? To make sure you can supply and keep up with what they envision their demand to be. So how do you kind of bridge from what they give you, down to how you manage your, your inventory, to what you tell us?
We use the term risk-adjusted. We've obviously experienced a lot of new product launches into the marketplace across a lot of different end markets, across a lot of customers across the entire industry. And so we use our historical analysis, and we risk-adjust what we count on when we provide financial guidance. But we always prepare to be able to deliver what the customer needs and believes they're going to be able to achieve.
So to your point, they want us to be prepared to deliver the best possible, highest possible case possible, so that they have the availability for the sales. But in our guidance, we risk-adjust that, and we do that across all of our customers. We're indiscriminate, and it's not personal, it's just that the data shows us that there's oftentimes a more optimistic outlook than reality plays out.
So, if and when you've been taken by surprise relative to your guidance, or things didn't go as planned, given that level of visibility you have, especially on a, you know, six-month or two-quarter basis, where has that o r where should investors think, like, okay, if there is gonna be an unintended-
Mm-hmm.
Where does that happen and how?
Sure. So it’s not that customers don’t change the orders they place. They do, and we work with them, and we’re flexible. And those orders change because our customers have changed their production, their manufacturing plans, because their success in the marketplace maybe hasn’t been what they needed it to be, or maybe it has been really successful, and they’ve chosen to bleed inventory in one area to create capacity to build in another.
So they could potentially move orders around for a very positive reason, that they’re just trying to create capacity in their own manufacturing plants for a different product that they’ve been really successful with, and they’re willing to lower inventory somewhere else. So customers change production plans for a whole range of reasons. It’s not always because their sales came in shorter.
And we work with customers, and we're flexible with them because no one can predict the future perfectly. But I would characterize that as mostly rounding noise in general, and I think given our visibility, we've been pretty effective at in the near term being able to see what our sales are gonna be.
So just, I'm relatively new to the story. We just launched coverage a few months ago. So I guess as we think of the, you know, your approach to guidance, should we think of that as already in handicapping for the possibility that that might happen in any given quarter, that your visibility isn't necessarily 100%, but you've already handicapped for that? So, you know, what, what you say you're gonna deliver is a bare minimum, and you strive to outperform it, but you shouldn't really miss it. Is that the, the way to think of it, or?
I would frame the near-term guidance as we're giving you our best view with a plus or minus. And because we think it would be meaningfully outperform in any given quarter, we have to be able to explain why we did that and what happened. So near term, you're getting our best view with a plus or minus. Over time, for the year, we've risk-adjusted a little more in the out quarters. And then, as we get closer to the year-end, obviously you tighten that risk adjustment. But think of it as full year, there's more risk adjustment than in the near term.
Got it. Maybe on a more micro level, can you walk us through some puts and takes to consider for 1Q versus 2Q? And, you know, what you've called out and whatever we should be thinking about, and same thing for the-
Sure.
First half or second half?
Sure. Sure, so we gave guidance of 9% to 11% for the full year, and, the Q1 was, I think it was 9.5% rounded up to 10%, so it was right in that range. And for the first half, we've said we expect first half to be high single digits, so it's right in that 9, 9% to 10% ish range. And then for the full year, 9% to 11%. We know in the second half of this year, we're gonna have more output from our Irish facility we've been investing in. We get possession of that new facility or that expansion here in the near term, and we know that's going to give us more output in the second half of the year.
We know we have a number of new products that are launching with customers that are in the ramp phase that'll position us to be able to ship more product in the second half. So we expect the second half to have a couple of tailwinds that weren't there in the first half that'll keep us in that 9% to 11% range for the year.
What about the PMA portfolio? With respect to the second half versus first half, and then, you know, anything you're willing to share as we look beyond 25.
Sure. So, part of the new programs that are launching or ramping more output in the second half compared to the first half-
That's the-
-are in the PMA program.
Okay. Yep.
And that we've shared some details on that. Every couple of years, the sales, we've been able to double them, and we continue to be on a very strong trajectory with that customer base. I mean, we've got over 30 programs that we're working on with the emerging customers with some very exciting therapies.
Yep. And what's coming into that portfolio versus what's coming out? Should we kind of think of that as continually building? You know, you're replenishing what's coming in at the same pace as what-
Right.
-comes out, or is there going to be like a period where, you know, we could get 3 or 4 of those programs just hitting at the same time, and it's, it's not quite as, you know-
Well, we have nine of those 30 to 35-ish programs that are in some form of launch or market introduction or ramp phase now. There's, I think the last time we shared this, there were 17 that were in the development phase. Some of those programs, products won't make it out of development. They'll disappear, and there's a line of ideas and opportunities that are looking to backfill that that we're continuously evaluating.
So it's, think of it as a funnel. Starts with 17 to 20 in development, and then it funnels down to the few that make it in the marketplace. But we have nine that are entering, in or entering the market now, which is what's fueling the growth from the emerging customers. That's now gonna be, I think we gave 90 to 110 guidance, if I remember that correctly.
Yes. Okay. You gave, you gave us four kind of focus areas, right? And electrophysiology is, is one of them. Not the only one by any stretch, but it's one that's getting a lot of focus and heightened focus, especially in light of pulsed field ablation. And we know, you know, we're starting to see some big ramps in PFA revenue dollars from some of the initial players there, like Boston Scientific and, and Medtronic coming in from behind.
Maybe just describe for us the ways you're involved in PFA product manufacturing, or, or the ancillary products and components. Just where do you have exposure today, and where will you have exposure going forward?
Right. So thank you for first noting that it's one of many growth avenues, growth programs that we have, and electrophysiology broadly is one of many, and PFA specifically is a kind of a component of electrophysiology, but as you noted, it's not the whole marketplace. So, we are highly vertically integrated and have capabilities to support our customers throughout most steps of the procedure.
Absolutely, on the ablation therapy itself, RF, cryo, and now pulsed field ablation, but also on diagnostic and mapping catheters, as well as access devices, whether it's a steerable introducer or a transseptal system, a guidewire. So we have participation in the procedure in multiple places.
I know PFA, the ablation catheter, has gotten most of the conversation, but as electrophysiology procedures grow, we benefit and grow because we have products that are agnostic to the ablation therapy itself. We've been working in serving customers in this space, the leaders in this space, for a very long time, so we're well-positioned to participate in new therapies, new catheters that come out. We have different content on different devices.
I'd love to be able to show you all of our products we're working on with customers to introduce and show you the map, like our customers do, which gets you very excited about their growth and their innovation. Unfortunately, our customers want to control and manage the messaging and the explanation for their growth, and so therefore, I can't.
But what I can tell you is we're highly vertically integrated. We've been serving customers in this space for a very long time. We continue to innovate and support them in their growth. And as electrophysiology broadly grows, we participate in many, most steps of the procedure, and we are getting more and more content on the ablation catheters themselves, dollars per unit content increase for us, and we see pulsed field ablation broadly as a tailwind for Integer. Our electrophysiology business has been growing faster than the market-
Yeah
... for the last few years, and we expect that to continue going forward.
So we tried to put some quantification around it. You know, we model about a 10% or a 10% to 11% baseline electrophysiology growth rate. We layer in some PFA incremental contribution on top of that, we get you to call it an, you know, a teens kind of growth. There's a few hundred basis points of incremental contribution, 25, call it. I guess, is that a reasonable way to be thinking about it? You know, everything else, and then PFA layered on top.
And the second part of that question is, you know, is it even possible that PFA could have a disproportionate amount of upside potential or relative to what you could get from other categories? Or is this just one of five shots on goal that you have, and each one of them is equally as exciting from an upside potential? I'm trying to just-
So, without endorsing the specific numbers, I thought it was a very thoughtful process, and I appreciated the quantification that you provided investors because you if you just take the numbers that you showed, I think you would conclude that that is not a game changer for Integer top-line sales growth.
And that connects to the statement we've made many times, is there isn't one program or one therapy that's going to materially change Integer's growth trajectory, which is why it's important what you noted at the beginning is that we're focused on electrophysiology, structural heart, neuromodulation, neurovascular. Those are four end markets that are getting an outsized amount of innovation from the industry, from our customers, because of the unmet, underserved patients.
And so we're taking lots of shots on goal within those four, and pulsed field ablation is a new and emerging one. And to answer your question, pulsed field ablation could have a bigger impact than what you modeled. I'm not endorsing the number specifically, but it has the potential to. But I'll stand behind the statement, there really isn't one therapy across the diversity of our portfolio that's gonna change the trajectory of Integer.
And that I think that plays to our strength from a diversification standpoint, because it reduces some of the volatility that might occur from one program being that big or meaningful of a driver. But it's an exciting therapy that's safer. It appears like it's going to become a prominent ablation therapy very quickly, and we're excited to be serving and helping our customers do that.
And I know that the timing of when you see inventory build and recognize revenue versus when the end markets are, when we're seeing the end market, you know, demand translate to revenue for your customers is different. I guess, you know, we did see a pretty significant amount of above-trend revenue growth between 2Q and 4Q of last year.
And I'm assuming it wasn't attributable only to one thing, but is it possible that some of the inventory build from PFA launches into 2024 last year contributed to that? Or am I overstating what PFA means to your business? And what if it wasn't just PFA, what drove that revenue up?
Well, first, let me answer what drove our outsized growth last year was, you know, I said that we thought our underlying markets were growing 4% to 6%, call it 5% midpoint. Our view is the markets last year grew more like 8%. So, let's say 8% came from the market, which was 2022 backlog, hospital backlog that got fulfilled in 2023. And then you add in emerging customer growth.
You've seen some of the numbers there. We had strong continued growth in emerging customers to PMA. We actually increased the 2024 outlook for those customers based on the 2023 performance. Our guidewire business in Ireland that I just referenced the expansion and getting possession of that facility here shortly.
That contributed over 100 basis points of total Integer growth from growth in that business. We had other new products that were being introduced. We also had some price increase last year that was passing through some inflation that had accumulated. So there were lots of drivers to the outperformance in 2023.
So now to come specifically to your question, different customers have different approaches for new product launches. Some customers want to build inventory and think of it as building inventory at risk, because when you build inventory before you have regulatory approval, you don't know if you're gonna have to potentially rework that product, or you don't know and you don't know exactly when you're gonna get regulatory approval.
And so some customers want to be very aggressive, and they're willing to carry the inventory and take the risk of having to rework the product. Other customers prefer to wait until they have higher certainty on when the regulatory approval is gonna occur. Then there's also the supply chain variable, and it's can you get the whole supply chain ramped up at an accelerated rate?
That's where we think we help in that we can do more for our customers, keep it under one roof, and be the supply chain consolidator manager for them. We think that's a competitive advantage of ours. So different customers have different approaches, and at the end of the day, I'll come back to there isn't any one program or therapy that's going to be a meaningful driver of total Integer sales. So, we're excited about pulsed field ablation. We're also excited about the other new programs that we're helping customers bring innovative therapies to market.
Wanna touch on profitability, the last couple of minutes here. You've committed to 1.5 to 2 times, I think, your reported revenue growth on the bottom line, right? Can you just walk us through the underlying margin expansion that's implied in being able to deliver that, where the buckets are? And you know, in 2024 specifically, is there any cadence timing of when that shows up in the P&L we should be thinking about?
Sure, sure. So, 2024 specifically, we're working to recover the inefficiencies that occurred from the supply chain disruptions, constraints we had in 2022 and throughout 2023. They got better, and we entered 2024 with a much, much improved supply chain environment. Direct labor is a similar story. Our direct labor turnover peaked in 2022. It was also very disruptive in that we were having to hire lots of associates while we were growing, train new associates. And now we saw continuous improvement throughout 2023.
And where we sit today on direct labor, almost all of our sites are at or below where they were from a pre-pandemic turnover perspective. At the company level, we're slightly below, so we're very much back into a very good spot with supply chain and direct labor disruption. Now, what we have to do is we have to work out the inefficiencies that occurred during that time period.
And another way to think about it, too, is the management teams in the manufacturing plants were dealing with that disruption, so they weren't able to spend as much time and energy on good old-fashioned Lean Six Sigma, Kaizen activity, continuous improvement.
And so now we have a very strong focus on driving those inefficiencies out, getting back to what we were doing pre-pandemic to take cost out of the business. Another variable that we observed during the direct labor turnover disruption was we had more material scrapped or wasted during the manufacturing process because we had less experienced associates.
Mm.
And so that's an opportunity that we're very focused on and have specific programs around. So 2024, it's work out the inefficiencies that occurred during 2022 and 2023. And as we look forward, there's things like automation, there's things like moving to a paperless factory. There's lots of opportunities for us to implement additional process improvements in the plant to drive that margin expansion.
We should think of that 1.5 to 2 times earnings growth rate relative to revenue growth rate as very, you know, independent of or inclusive of whatever you may continue to do on the M&A front?
Absolutely.
Okay.
Absolutely. Yeah, our strategy with acquisitions is to get acquisitions that are, they already have a presence in those four focus markets. They have a pipeline of programs in those four markets. We love to buy companies that have been, they're already one, two, three, four years into the development cycle, in those four markets. We want companies with a growth rate that's accretive and a margin rate that's accretive, and if not accretive, we have a clear path through operational synergies to get there. We've been able to do that with the acquisitions that we've added over the last three years.
Great. All right. Well, thank you. We're at the time limit here, but thank you, Joe. Really appreciate your time.
Great. Thank you, Rich.