All right, I'd like to welcome everyone to day two of the KBCM Healthcare Forum. I'm Brett Fishpin, MedTech analyst, and I'm pleased to be joined this morning by Integer Holdings, who is represented today by Joe Dziedzic, the President and CEO. I'll start us off with questions, as always, and same as yesterday. It's a 100% Q&A session, and anyone in the audience can feel free to submit questions in the text box below the screen, and I can relay them to Joe. Maybe just getting things started, you hosted the Q4 2024 earnings call pretty recently and gave your initial outlook for 2025. I thought that would kind of be a logical place to start, maybe on the organic growth guidance, specifically 6%-8%.
If you could just unpack that a little bit and touch on what you were looking at as some of the biggest variables like driving low end or high end of that range.
Good morning, Brett. Thanks for having us on the call today. It's been a great set of meetings yesterday and this morning already for having us. We provided guidance of 6%-8% organic growth, which is right in line with our strategic objective of at least 200 basis points above the markets we're serving. The markets we're serving are, in our estimation, growing 4%-6% organically. We delivered 7.3% organic growth last year, right in line with our guidance throughout the year and our strategic objective. Every year, the variable that drives where we land within that range is really ultimately the success of the new products that our customers are introducing into the end market. Our goal is to help our customers get to market first with their therapy so they get first mover advantage.
The end market success of those products is ultimately what drives where we land within that range. We are excited about the pipeline of new programs that we are working with customers on. We had a lot of success last year with new product launches in a number of the key end markets that we are focused on and expect to be able to deliver 6%-8% organic growth again in 2025.
All right, great. Just specific to 1Q 2025 current quarter, facing a little bit of a challenging comp of 9%, and I think you guys alluded to a bit of a calendar headwind maybe with the leap year situation. What should investors expect to see in 1Q when you report earnings? How would you expect the cadence of growth to build from there?
Sure. We tried to be as specific as we could about what we expected the top line to be. To your point, it really is there are a couple fewer manufacturing days for us in our first quarter of 2025 versus first quarter of 2024. For us, we carry very little finished goods. If you look at our finished goods inventory at the end of any quarter, it is $10-$12 million. The only reason we even have that is because it either was not finished packaging or just did not get picked up at the end of the quarter. Anything that we build, we ship to customers. We are a build-to-order, not a build-to-stock kind of model.
The guidance we gave was we expected first quarter to look similar to the full year, which we guided to 8%-10% on a reported basis, less those two days, which is about 3%. Looks like that's pretty much where the sell side landed in consensus or pretty close to that. What we'd also highlighted is the Portable Medical exit that we announced about three plus years ago. That's about $30-$35 million of nominal sales decline in 2025. That's already included in our guidance, so that's been fully factored in. That's much more heavily weighted to the first half. About two-thirds of that decline will happen in the first half of 2025.
We tried to convey that when you look at reported sales growth for the first half, you should expect that to be a little lower than the second because of the Portable Medical exit. Obviously, what that means is if the first quarter is a little bit lower for the number of days, it evens out over the course of the year or balances out the number of days, and it ends up just being the one day from the leap year. It is kind of a push for the latter quarters to be a little bit higher. We would expect the second half to have higher reported sales than the first half, principally driven by that Portable Medical exit.
It makes a lot of sense. Just maybe turning a little bit to profitability, the outlook also includes an adjusted operating income growth range of 11-16%, which is very respectable, but just would note a little bit below what we would consider to be your ambitious target of growing op income at two times the rate of sales. What are you looking at as the key moving pieces holding you back from achieving that target this year? Just generally speaking, when you think about op income at two times the rate of sales, is there a little bit of consideration when you have more inorganic revenue that it gets more challenging to hit that kind of ratio?
Yeah, great, great question. First, thanks for acknowledging that growing profit twice as fast as sales is ambitious. When we launched our strategy, we said we want to demonstrate sustained outperformance, and that starts with organically growing faster than the markets we're serving while expanding margins. We did set what we feel is a really aggressive goal that we achieved last year with 20% operating profit growth on 10% sales growth. We continue to invest in the business for the long haul. We're making investments in acquisition, integration, and the diligence process. It's an important part of our strategy for the long term.
As we continue to make those investments, as we continue to execute the Integer Production System to drive those manufacturing efficiencies, which helps us to offset any wage inflation that we incur on an annual basis and any other of the investments that we want to make in the business, we typically start the year somewhere in that 1.4-1.6 times profit growth compared to sales growth and feel that that's the right place to start. Throughout the year, as we continue to execute on the Integer Production System and drive those efficiencies, we work to then increase our profitability and either reinvest that in the business if we see near-term opportunities there or the need to let that flow through to operating income. The goal is the same. The goal is to drive profit growth twice as fast as sales.
At a minimum, we have to be expanding margins, and we expect to be able to get that margin expansion both some from gross margin, where the manufacturing excellence strategy will contribute to that. We also want to get leverage on SG&A and R&D. We might be a little unique then compared to maybe some of our customers that you look at their R&D expense. We can actually do more R&D development work for our customers and actually have a lower R&D expense line because our customers are paying us to do that development work. The scenario for us of doing more development work, which is the fuel for organic growth, yet having a lower R&D expense is unique, we think, and something to just be aware of as you think about how we get leverage on SG&A and R&D.
Yeah, no, that's definitely a good point. Similarly, just on the guidance, a question that's come up a lot is just around the potential impact of tariffs. I think you had an opportunity to touch on that a little bit a couple of weeks ago, but maybe just reframe how you're currently thinking about tariffs and the impact versus your current guidance.
Certainly. Our estimation of the impact of the tariffs, and I'll be specific, the 25% tariff on imports into the U.S. from Canada, China, and Mexico. Canada and China are negligible for us in terms of an impact. It is really Mexico where we have three manufacturing facilities. We have two in Tijuana. They are two different facilities run by the same management team. They are physically co-located. We have a manufacturing facility in Juarez, just across the border from El Paso. These are set up as maquiladoras, which is a structure that allows you to bring material from the U.S. into Mexico, process it, bring it back into the U.S. If there is a tariff or a duty or taxes, you only pay on the value add. That is the historical structure. With these latest tariffs, that was actually excluded and the maquiladora structure does not bring the same benefit.
We have already implemented operational changes to minimize and mitigate a meaningful amount of the tariffs for both our customers and for ourselves. Our estimate is $1-$5 million of pre-tax income impact from tariffs in 2025. The goal is zero, and that is what we are driving to. The $1-$5 million is based upon the current structure of the 25% import tariffs. We continue to work on that to drive that as close to zero as we can make it. To frame that maybe in the context of our full-year guidance, our full-year guidance for operating income was $315 million-$331 million, so a $16 million range. We view this $1-$5 million potential tariff impact as very much within that $16 million range of guidance we provided.
That's super helpful. Good to hear as well. The other recent topic that's come up and might have an impact on current year guide was the closing of your convertible note. You announced last night an upsized offering. Maybe just first walk through the strategic rationale behind the refinancing moves that you made and then the expected impact to EPS as compared to the prior guidance.
Certainly. Maybe at the highest level, our objective was to create capacity on our revolver within our capital structure to be able to continue executing our strategy. We also saw the opportunity to meaningfully increase the percentage of our debt that's at a very low sub 2% interest rate, thereby reducing 2025 interest expense and our expected interest expense going forward. It's EPS accretive, but it started off with, strategically, we wanted to have the revolver freed up to be able to continue executing our strategy. When we issued the previous convert in early 2023, those bonds were in the money. Because they were in the money, the bondholders had the option to call those bonds. It would be a very poor economic decision to call the bonds because they're worth more trading in the secondary market.
Even though it's highly remote that they would have, we had to, as a public company, have $500 million of available credit capacity to protect against that. That was tying up $500 million of our revolver, which we would rather have available to continue executing our strategy. The strategy started with, let's create that capacity. When we evaluated the market, we saw the opportunity to lower the interest rate we were already paying. We went from two and an eighth on the previous bond that we were able to repurchase the majority of. Seventy-four, five-ish percent of that was repurchased. We lowered that from two and a quarter down to 1.875% interest, so 50 basis points reduction. We also increased the proportion or the percentage of our debt that's now sub 2%.
We paid off the revolver balance that we had from the acquisitions over this year. We paid off part of the term loan A balance. Those were at about 5.9% floating rate. We went from roughly 6% down to sub 2%. We have accomplished our goal strategically of creating that revolver capacity to keep executing our strategy. I'll reiterate, we remain very committed to our two and a half to three and a half times leverage. Doing this does not change anything about our strategy or how we are executing our strategy. It creates that capacity. While doing all of this, we were able to reduce our 2025 estimated interest expense by about $12 million. That is just a little more than three quarters of the year. When you annualize that, it is a bigger number.
We are excited about creating that capacity strategically on the revolver, excited to have a very high percentage of our debt balance, sub 2% interest rates, and lowering interest costs and increasing EPS in 2025.
All right, great. I'm getting just a couple of questions from the audience. I'll ask one here since it's a little bit related to the setup for this year. Are you seeing a margin benefit from the divestiture of non-medical in 2025 relative to 2024? If so, can you directionally frame how much of a benefit that might be?
Sure. The non-medical business margin rate at the operating margin was similar to the company, so not a meaningful change. It was about $34 million in sales is what we divested. From a margin rate standpoint, it was not a meaningful impact. It is also a relatively small dollar amount. The divestiture was really more about strategically becoming just a pure play medical device company. We were able to sell it for $50 million. You saw we were able to redeploy that $50 million to what we think were strategic and important acquisitions that added additional capabilities. This is the coatings as a service acquisitions we closed in January and February of this year.
I would think of that divestiture as not impactful to kind of margin rates or to the overall trajectory of the company, but really a redeployment of capital into pure play medical. And we redeployed that into the acquisitions that we did earlier this year.
Got it. I'm going to shift the conversation a little bit like longer term. Getting a couple of different questions here on EP and PFA. I'm going to kind of merge them. Really the nature of the questions is you have a very diversified portfolio and you've framed total end market growth in the range of 4%-6%. Just thinking about the acceleration that we've seen in electrophysiology, specifically tied to the PFA market, is that maybe contributing to a little bit of a higher end market CAGR, or is there opportunity for that end market to help shift the total weighted average market growth for Integer, or is it not sizable enough at this point?
Yeah, it's a great question. When we come up with the weighted average market growth rate for Integer, we're weighting that based upon our sales across the whole company. Electrophysiology is an important, impactful part of our portfolio, but it's also still a small piece of the portfolio. It's one of the pieces of the portfolio growing very fast. Individually, standalone, the electrophysiology end market growth does increase the weighted average market growth rate, but it's back to looking at the whole portfolio and how that whole portfolio is performing. We still estimate that in aggregate, the end markets we're serving are growing 4%-6%.
To answer your question, yes, electrophysiology does, end market growth does help increase the WAMGR over time as we continue to execute on the development programs where 80% of our development programs are in those faster growing end markets. It absolutely should increase the WAMGR for the markets that we're serving and thereby increasing ultimately our sales into those markets.
We've spoken a lot about that growth strategy and how you define faster growing end markets, which four or five different markets are included in that bucket. Do you have directionally a sense of how much of the Integer portfolio falls into any of those higher growth markets on a combined basis at this point and maybe how that's trended over the past couple of years?
Sure. We haven't disclosed that percentage. It absolutely has increased, and it is increasing the weighted average market growth rate. We have modeled that out over the next five years. Every year we do a long-range forecast. We have our model of how the WAMGR shifts over time. As we continue to execute on 80% of our development pipeline in those faster growing end markets, when those turn into manufacturing sales, it absolutely increases the WAMGR. I'm excited for the day where I can tell you that the underlying market growth rate is faster than 4%-6% because that then translates into ultimately faster growth for Integer.
Not asking for a specific year or time, but how close might we be to Integer, like redefining market growth at 5%-7%?
We're working on it. We're excited for the day to come when we can definitively say that we've shifted to a higher weighted average market growth rate. We're higher in the range than we were when we started in 2018. That's for sure. In 2018, we didn't have the size of the development pipeline. We highlighted a month or so ago, a month and a half ago on our fourth quarter earnings call that our development pipeline's up 270% since we launched this strategy, and we've shifted the mix to being 80% in those faster growing end markets. We have definitely seen kind of where we would peg kind of if you calculated a specific number within that range, the average has moved up. We still use the range because in any given year, you've got markets moving at different rates in different ways.
We feel like that range allows for the imperfection of actually quantifying every end market. We come up with that by studying our customers' end market sales. Unfortunately, not everybody reports everything in the same buckets. There is a little bit of art that goes into that with the science.
I had one more question come in. This is a pretty quick one. Are you guys included in the USMCA exemptions in context of the Mexico tariffs?
We absolutely have a meaningful part of our production in Mexico that is eligible for USMCA exemption, yes. That's been incorporated into the $1-$5 million estimate. Maybe I'll add the potential follow-up question. If USMCA is no longer applicable, it's currently scheduled to expire April 2. We stand by our $1-$5 million estimate. It does not change the estimated impact on Integer.
One to five with the information we know. If that were to be extended, start pushing that maybe a little bit lower into the range. If not, maybe a little bit higher. We'll see what happens there.
Fair. That's fair.
All right. Back to the fourth Q call, we always look forward to the year-end calls because you typically give a much broader update around the growth strategy. One metric that definitely has stood out is, and you've alluded to it, the 270% increase in production development sales. Just wondering how material this production development revenue has become for Integer and what have been the biggest drivers of that 270% increase that we've seen.
Yeah. We talk a lot about it because it is the foundation of our strategy shift. Our strategy shift back in 2018 was to focus on getting designed into the end markets where our customers were innovating. The markets where there are unmet or underserved patients. The markets where when our customers develop a new therapy, they are expanding the total available market. They are increasing the number of patients served, which is what is enabling our customers to grow faster in those markets. Our strategy shift was to get designed into new programs that are entering the market, help our customers by offering our vertically integrated solution of capabilities and global manufacturing footprint to help them get to market faster so that they get first mover advantage and that they expand the number of patients that are served.
Because at the end of the day, we all have a vision and a mission of helping patients improve their lives. It is foundational to our strategy, and it is why we often start with that. The 270% increase is what has enabled us to increase the shots on goal. Highlighting the quality of those shots, which is really targeting the markets that are getting that innovation, a big shift was we said, what are the markets that are most attractive and why, and which are the markets that are not? You have seen us manage our portfolio. The exits that we have done have been very intentional. The Advanced Surgical and Orthopedic divestiture in 2018 was because we did not see the technology differentiation. The margins reflected that lack of differentiation. The portable medical exit, same thing. There was not enough technology differentiation there.
We exited that just in a slightly different manner. The Electrochem business, non-medical, and reallocating the capital that was tied up in that business to reallocate that into the faster growing end markets. The strategy of what are the markets we want to focus on and being very intentional about the ones we do not, and then getting designed into those markets. We have been doing that. The reason I believe we have had that success is the clarity of focus, as well as the understanding of where the value is added in the manufacturing process, where the value is added in the design development. We have been adding those capabilities both organically and inorganically.
Recent acquisitions are great examples of how we've taken a capability, coatings, which we had, and expanded it by buying companies, two companies that have the ability to formulate their own coatings and then offer that as a service. I would just reinforce every action you see us take is very much aligned with that strategy of getting designed in to the faster growing end markets where there's innovation and bringing differentiated vertically integrated capabilities to our customers to help them win in the marketplace.
The next step following production revenue, you also have reported metrics around actual pipeline products that are moving through different stages of development. Maybe just talk a little bit about the pre-market approval process and where you stand with some of those updates. Just specifically, where are you seeing the most activity in regards to these PMA projects?
Sure. The emerging PMA customers, which we started showing that slide back in 2020 for the first time, third quarter of 2020. What I'd highlight, you referenced the different phases of the development. We had 27 customers that were in one of those five phases of development when we shared that slide for the first time in third quarter 2020. When we shared it a month and a half ago, we have 39 customers. We have gone from 27 to 39 customers, which reinforces the shots on goal that we're taking. We're taking those in those higher growth end markets within the neuromodulation space. Whether it's an application in maybe an emerging spinal cord stim therapy or sleep apnea or DBS or Parkinson's, I mean, there's a wide range of therapies being developed there.
We have shown how we have grown from in 2018, $10 million of sales, doubled it by 2020 to $20 million, more than doubled it by 2022 to $50 million, and $125 million last year. You see the results of those customers moving through the development, right, clinical regulatory phase and into market introduction. We are now out there with a 15%-20% growth rate. We felt like given that now it is a sizable piece of business at $125 million, and 15%-20% growth is still going to outgrow the end markets, which are more in the high single digit kind of in aggregate. We are excited about the pipeline of customers. We continue to increase the pipeline of customers that we are working with up to 39 now in one of those five phases.
It gives us confidence that we can continue to grow above at a faster rate than the markets.
Yeah. Just following up on that, I imagine it's challenging enough to set annual guidance with existing products, much less things that are maybe years away from reaching the market. Just curious how you kind of get to that 15%-20% outlook. Just wondering if things go well, maybe how you think about upside against that range.
Yeah. Our customers always give us their view of what their growth rate's going to be. Most of the time, they're thinking that every product is going to be a grand slam and it's going to take meaningful market share. We have a lot of experience in new product introductions, supporting our customers in launching programs. We always put some factor of a risk adjustment on that when we're thinking about where this could go. When it gets down to the actual, we need to build a certain amount of product and the customer's bringing, they're hiring a salesforce or they're expanding the jurisdictions where the product is approved.
That's when we get down to, well, if we're going to invest and add resources and add equipment, then we get very tight on the demand and what our customers are going to buy in the near term. In these particular products, I'll say near term is 6-12-18 months based upon the investments that we have to make. I'd say in the near term, we've got really good visibility based on our customers' commitments and the investments they're making in their business to grow their business. Over the longer term, it really just comes down to the success of those therapies in the marketplace. If they help patients the way they're expected to and they're expanding the patient population that's being served, that's what's going to give us the opportunity to grow with our customers.
If we're helping our customers succeed and win in the marketplace, then we're earning the right to grow with them. That's how we think about it.
We talked a little bit about PFA a moment ago and contribution from the EP market to your weighted average market growth. Another question that comes up a lot is about what manufacturers you're most tied to in that market. I know that's a little bit of a challenge since you can't speak about specific customers one by one. Maybe just asking a little bit of a different way, can you just qualitatively discuss how agnostic you are to potential changes in market share in PFA as more new products reach the market? Just wondering, is there a major difference for Integer depending on who captures the most incremental share going forward?
Sure. I will start by just reiterating that we support multiple steps of the procedure, whether it is access, transseptal crossing, or diagnostics, or the ablation step itself. We have been serving this market for a very, very long time. We have highly vertically integrated capabilities. We can do everything from components to finished devices. We serve the industry in a wide range of ways. We are agnostic to how we are helping customers or whose device it is. We believe we have the capability to help everyone in the industry accelerate the introduction of pulse field ablation and EP more broadly. At the end of the day, electrophysiology is no different than any of the other end markets we serve. We have different amounts of content on different customers' devices. The direct answer is it always matters who wins in terms of the content we have.
I'd love to say we have 100% with everybody. That's just not realistic. It certainly does matter, but we feel we are well-positioned to continue to support the electrophysiology market growth. We're well-positioned to help our customers continue to evolve the therapy, specifically pulse field ablation, and that it's a tailwind for us. We've been outgrowing the market, and we expect to continue to outgrow the market in electrophysiology.
All right. That's super helpful. Maybe switching gears just a little bit in our last five minutes or so to M&A topics. You've completed a couple of deals in the recent months, Precision Coating and BSI. Just maybe taking a step back, could you just talk a little bit about why those were the best opportunities for Integer and what they bring to the platform that you guys didn't currently have?
Certainly. We talked a few minutes ago about the development pipeline, and we talked about the strategy of getting designed into our customers' most important fast-growing products. The acquisitions are really about what capabilities can we add that allow us to further vertically integrate. By vertically integrating, what we're effectively doing is we're simplifying our customer supply chain. We're making their job easier because Integer can deliver more for them under one roof. You've heard every one of our customers talk about wanting to work with fewer suppliers. They want to work with bigger, more capable suppliers that can do more for them. At the end of the day, they want to get to market as fast as possible. What they're great at is developing therapies and commercializing those therapies.
Yes, they can be great at manufacturing too, but they'd much rather allocate their capital into those other end markets or into therapy development commercialization. For us, as we look at the capabilities that allow us to vertically integrate, we have a list of them, and we've been studying those potential acquisition targets for a long time. Almost every acquisition that we do, we've known them for a very long time. In this case, we were actually a customer for Precision Coating, and so we know them very well. We do a significant amount of coatings ourselves where we're applying coatings, but we're applying them to products that we are manufacturing. We know coating as a process very, very well. What these acquisitions bring to us is the ability to develop and formulate proprietary coatings, customized coatings for our customers' applications, which we don't do.
Today, we don't actually develop or formulate the coating. BSI and Precision Coating, they do that. They also offer the coating as a service. Other people ship their products to them. They coat those products and ship them back. This gives us the opportunity to further vertically integrate, further offer a customized coating solution to our customers. We can then serve the customer in whatever way they want. If they want us to build the product and coat it and then assemble it and ship them a finished product, we can do that, which we do today. If they want us to take their product, coat that, maybe then incorporate that into a subassembly or a finished device, we can do that.
We view this as expanding the offering that we have for our customers, simplify their supply chain, bring more proprietary capabilities to bear to help them get to market fastest. We're excited about these two acquisitions and the growth that they can bring to us. They're EPS accretive day one. We highlighted that on the call. They're accretive from a margin rate standpoint, and we see significant opportunities with the recent acquisitions.
All right. I'm just going to ask one more question on M&A, and then I'll let you conclude with any other remarks that you want to leave the audience with as we wrap up here. A lot of your recent deals have been logically beefing up your vertical integration in Cardio and Vascular. Makes a lot of sense. Just curious if you've thought at all about maybe expanding the purview or breadth of focus from potential acquisitions to additional high-growth markets that you're not currently in or in in a material way. If not, what it would take for you to start thinking about looking a little bit further out.
Sure. A definitive answer is we absolutely think about it. We absolutely study it as part of our strategy process. Right now, we're very happy with the end markets we're serving and feel that there is a substantial amount of growth potential there still, and that we're very focused on ensuring that we continue to add capabilities and we help our customers get to market first and help them win. We feel like the markets we're in today and that we're serving, which we've been very focused on since 2018, are the right markets and that they can continue to support us or enable us to outgrow the markets that we're serving while continuously expanding margins. We're happy with the markets we're in. We do continuously evaluate what other options there are, but right now, there's no plan to move into a different space or different end market.
All right. Thank you so much, Joe. It was a great conversation. Thank you to everyone in the audience for attending and listening in.
Thanks.