Morning.
Good morning, everyone. My name is Craig Bijou, one of the medtech analysts here at BofA. It's a pleasure to have Integer Holdings. With me from the company is Joe Dziedzic, CEO, and then Payman Kahles, who's COO and CEO elect.
Kristen Mossel.
Yeah, Kristen Stewart is in the audience here as well. So thank you, guys, for coming.
Thanks for having us. It's been a great day so far.
I'd love to start with kind of the announcement, Joe, CEO transition, your retirement, Payman taking over a little bit later this year. I just wanted to first start with your decision to step away from, I'll joke and say, a PFA company. I know it's much broader than that. To be serious, you've done a lot of work over the last several years, kind of building, focusing on finding the right markets, the next growth markets, PFA being one of them. There's obviously a lot of others. You now kind of seem to be really hitting in your numbers and your business and really accelerating your business. I guess with that in mind, just kind of want to get your sense of, or your rationale for stepping away and why now was the right time for you.
Sure. I've had a little practice at this. It starts with the business is in great shape and executing and delivering on our strategic objectives we set back in 2018. I believe I have a ready now CEO successor in Payman. I just completed earnings call number 62 as a public company CEO, public company CFO. Those are the three macro reasons. To elaborate a little bit, back in 2018, when we established the strategy that we continue to evolve and iterate and execute on, we had three financial objectives: growing faster than the market, expanding margins, and maintaining a debt leverage that we think most investors can be comfortable with and that's prudent for our size and the industry that we're in. I believe we're hitting on all those cylinders. We just had a great start to the year.
I think we've got strong guidance for 2025 sales, reported sales up 8%-10%, organic 6%-8%, net income up 19%-26%, earnings per share 16%-23%, guidance for the year. I think the business is in great shape. I feel like I can reflect I'm now entering year nine as CEO, that we're executing on our strategy that we set out for ourselves. We knew it would take a little while to get the organic sales growth. It's happening. You see that particularly the last three years. I feel like the business is executing. Payman joined the company in 2018. He was the second direct report that I hired one month after I hired the HR leader. He's been running the largest part of our business. Three of our four targeted growth markets are in the business that he's running.
All of our acquisitions have been in the business that Payman's been running. I lead in a very collaborative manner. The leadership team has been part of developing and executing the strategy the entire time I've been with the company. I think we have a very strong leadership team. I'm confident Payman is ready now to step into running the company. The thing he hasn't done as much of is talk to investors. I've tried to shield him and the rest of the team from that activity so they can focus on making the business better every day. He now gets to play that role for the rest of the leadership team. I've been married 33 years, been with my wife 40 years. We've moved eight times in our career.
I'm looking forward to going and spending some time with her and family and friends and moving at the same pace, pursuing things that are non-work related of personal interest.
Great. I appreciate that. Maybe just a follow-up on that. I do not know if it is Payman. I do not know if it is Joe. How do you guys think about what changes with Payman taking over, if anything? I do not know if there will be any changes or big changes since you have been an integral part of what Integer has done over the last seven years. Maybe just touch on that for an investor perspective and understanding if anything could change.
Yeah, sure. Let me take a shot at that. As Joe talked about, by the way, it's great. I look forward to interacting with all of you folks as we go forward. It's something that I haven't done, as Joe said. I'm looking forward to it. It's good to be here. I'll start with maybe a continuation of what Joe said, that I was there in the early days working with Joe and the rest of the leadership team to develop the strategy that we have. We put a structure in place in 2018, what we call the growth teams that we've talked about, folks that really focus on the growth markets that we have. I mean, their job is every day to come in and find winning strategies and execution plans so that we can win.
You talked about PFA. I say electrophysiology is one of those markets. PFA is in EP. We've always had a strong presence in EP, just as part of our strategy. The strategy is working. We've been generating a great pipeline of opportunities, more complex and the higher value products that we've talked about. We've talked about the fact that our pipeline of opportunities has grown 270%. We've talked about the fact that within the funnel of opportunities that we have, 80% of it is focused on the growth markets. The strategy is working. I very much intend to continue doing more of that. Obviously, as we have done in the past seven, eight years, we've changed our strategy depending on market conditions, on longer-term opportunities. I plan very much to do the same thing.
As it relates to running the company and delivering on the commitments that we have, which is growing at a faster pace on market, growing profit at even faster than that, 2X, we've said, and staying within a reasonable 2.5-3.5 leverage, I very much continue to do what we'll want to continue to do that because that is what we believe will deliver a premium valuation. As to what might be different, I don't know. I think I like coffee a little bit more than Joe. But Joe can decide. Look, obviously, we're different people, but I think our strategy is strong.
Got it. Very helpful, Payman. I want to spend a little bit on Q1, just results you just reported a couple of weeks ago. Not too much time, but maybe just talk about you put up 6% organic growth. That included roughly 3% of a headwind from shipping days or manufacturing days. How do you guys talk about it? Maybe just talk about kind of what you saw in the quarter. Was that above expectations? What was really driving that kind of underlying growth?
Sure. It was at the high end of the range we had kind of guided to for sales. Cardiovascular, the business Payman's been running, grew 17%, reported 11% organic. Cardiac rhythm management, neuromodulation grew 2%, which is in that low to mid- single- digit, especially when you consider the sales headwind or the number of days in the quarter headwind. It really was very much within the range of what we expected, which is how we think about the full year with 8%-10% reported growth. We're seeing the growth in the end markets that we've targeted, the new product launches that have been driving the growth, continue to drive the growth, and have confidence as we look forward to the rest of the year. Second quarter, we're expecting high single digit reported growth in Q2.
Got it. You reiterated guidance despite a strong Q1. I know conservatism is a little bit of your style. I did want to talk about maybe just that and kind of thinking about how to think about the cadence. You talked about Q2. Your comps go a little kind of all over the place on a quarterly basis. Maybe just help frame kind of what investors should be thinking about from a growth expectation throughout the year Q2.
Sure. Thinking about quarter splits, we start when we think about quarter splits, we start by looking at last year and look at what were the nominal level of sales and profitability and margin rates. When we think about comps, we think about, well, how did last year compare to the other quarters? The fourth quarter, we had a strong quarter, 11% organic growth in the fourth quarter driven by a number of new product launches. We set expectations of that on the third quarter earnings call. We actually last year landed, I wish we were this good, but we landed at exactly the midpoint sales dollar of our original guidance at the beginning of the year if you adjust for the divestiture that we did. I wish we were that good and could be that good.
The point is we had good visibility to the year. We look at nominal levels last year compared to this year. Last year, the fourth quarter was the highest nominal level of sales of the year. That is something to consider when you're thinking quarter splits. The headwind for the fewer days in the first quarter gets partially offset in the third quarter. Second and fourth quarter do not have that phenomenon. Last year was a leap year. That is the one day that does not fully recover. For the year, it ends up being negligible and you do not notice it.
The other thing I would highlight is we said in the first half, the portable medical business that we're exiting, we said there's $29 million of sales decline year over year from that exit that's offset by the $59 million of sales from the acquisitions. We said two-thirds of that happens in the first half. Of the $29 million, $20 million-ish of that is first and second quarter. That will lower the reported growth rates a little bit. You'd see less of that pressure in the second half of the year. Those are kind of maybe the big picture things to think about when you're thinking about quarterly cadence.
Got it. That's helpful. Maybe just talking about some of the P&L results in Q1, I think operating income grew 14%, which is about two times sales growth. You have the target of two times overall. I think your guidance is a little bit below that. Again, we've seen this before, but you build in some conservatism. Maybe just talk about kind of what's driving some of that operating income leverage that you have.
Sure. Last year, we grew operating margin rate by 140 basis points. Forty basis points was from gross margin. This year, the midpoint of our guidance is 76 basis points of margin rate improvement. We tried to be clear that every year we do expect some of the margin rate improvement to come from gross margin and some to come from leverage on SG&A and R&D. When you think about full year 2025, we do not expect to get as much leverage on SG&A in 2025 because we have acquisitions that bring SG&A. The one thing we do with acquisitions is we work to get to know the business. We do not go in and start cutting cost and structure of the business until we have gotten to know the business to understand it better. We are very thoughtful with the management team that has become part of Integer.
Operationally, we get into the plan and start driving efficiencies right away. Think SG&A and R&D, we really do not touch those initially. That is why we are not going to get much leverage on SG&A costs this year. R&D expense, we do expect to get operating leverage in 2025. That is because when you think about R&D for Integer, think about it very differently than our customers. When our customers spend R&D, it is R&D expense. When we do R&D development, we are getting paid to do that work. If we get paid more and more by our customers, we actually have less expense. We can do more R&D work for our customers and have less expense. We do expect to get leverage in R&D, the R&D expense line item, and then gross margin expansion. That is how we think about it on an ongoing basis.
Maybe specific to first quarter to your question about operating profit at 14% growth, reported sales at 7%, so growing at 2X. Fourth quarter, we had some gross margin pressure, which we had talked about, which did not surprise us because of the new product launches. We were able to get some of that back in the first quarter as some of those products got to be a little bit more scaled and we worked through some of those inefficiencies. What I would highlight is we want people to think about the full year commitment we have made. We know at any given quarter, the income statement geography is going to move around. As we have launches, some of them are going to be launched really efficiently and some are going to be launched not as efficiently.
We may launch with a line that's underutilized that carries extra cost that'll have some pressure on margin. In any given quarter, we would expect some of that volatility on a quarterly basis. We think the best way to think about our business is look at it on a rolling four-quarter basis to see the sales trajectory. It takes a lot of the noise of quarterly movements out. As we think about profitability and margin rates, think about our guidance for the full year. We have confidence in how we're going to deliver on that. There can be quarterly variation.
Maybe just to follow up on that, just thinking beyond 2025, I know you do not have guidance out there, but there is the goal of 2X operating income growth versus revenue growth. I mean, how should we think about the durability of that? Is there anything that would get you off that goal?
You're going to be here next year. Let me take that because that's my 2026. Look, I'm not planning on changing that trajectory. This is something that we set ourselves as a goal and aspiration many years ago, Joe, when you became CEO in 2017. And we worked to deliver that.
Margin versus up margin going forward, the split, how should we think about where the expansion opportunity comes from?
Yeah. I would rather not necessarily split the geography. I mean, what we said, look, as a business, because any quarter, there can be variability depending on what's going on. I mean, if you look at over time, I mean, we, of course, plan and intend to improve margin and gross profit as well. Really, this is total profit of the company that we're talking about.
Yeah. No, perfect. I want to spend a couple of minutes on tariffs. I know it's not a big deal for you guys, but I have gotten the question from investors, why isn't it a big deal? Why is the number so low? Maybe just explain kind of how you guys get to that $1 million-$5 million of impact that you expect in 2025.
It starts with where we sit in the supply chain. I think you'll find with most manufacturing companies, the company purchasing the material usually takes responsibility to move it from the supplier's plant to wherever they're going to consume the material. They do that because they want to control as many elements of the cost as they can. That gives them the buyer perfect visibility to what that cost is. The supplier cannot try to mark it up. Usually, the buyer has oftentimes more scale and maybe better rates. They also get to manage that part of it. Our customers, when they buy from us, they're responsible for moving it from our plant to wherever they're going to consume that in their manufacturing plant. That means our sales, wherever they go, the customer's managing that. That insulates us.
We then have the same dynamic on what we buy, where we're responsible for picking it up and managing the transportation from our suppliers to us. The vast majority of what we buy are from U.S.-based suppliers. We have a very, very small amount of purchases from Asia broadly and a negligible amount from China specifically, which is what enables us to get to that $1 million-$5 million estimate on tariffs.
Got it. 2026 is, I think I asked you on the call, but 2026 will be a similar number. You do not expect an increase there.
Correct.
Okay. Actually, a follow-up on that is, I mean, you dealt with some of the supply chain issues over the last couple of years. What is your view on tariffs maybe impacting the overall supply chain and driving another inflationary environment like we saw in 2022, 2023?
Yeah. I'm reading what you're reading about the industry describing the tariff impact. If you look at the medical device OEMs and you look at 70-75% gross margins, and then you say, what's the variable cost? Look at the variable cost of goods, so labor, material, and any direct cost consumed in manufacturing. That becomes a pretty small percent of sales when you think about that. They're probably operating at 80-85% variable margin. Their cost of goods sold that's variable is probably that 10-15% of sales. You multiply that by 10%, maybe you get 1-1.5%. I mean, I'm doing real high-level math for thinking about it. I think that's largely what you and others that are kind of analyzing the industry are seeing. Pick your tariff rate.
The other dynamic I would highlight is our industry has a very global footprint. Very similar. I mean, Integer's footprint, manufacturing footprint is very global. About half our sites are in the U.S. We have operations in Ireland, particularly in Western Ireland, Galway, where there is a med tech hub. The entire industry is there. You look at Mexico, Dominican Republic, Costa Rica, Southeast Asia. We are in Malaysia. It is a very global footprint. Even if you say, well, if all 10% or 15% of variable cost for the industry, you cannot really apply a 10% tariff to that because those products are being manufactured all over the world and they are being distributed all over the world. The U.S. is not the only consumer of these products.
From a tariff standpoint, it does matter if there are retaliatory tariffs against the U.S., just to frame it, other countries applying tariffs on stuff coming from the U.S. Maybe then you get closer to being able to apply kind of a macro tariff to the whole industry cost of goods sold. The way I think about it is if it's 10% or 15% variable cost at the OEM level, it's probably not 100% of that that's getting a tariff because at least at the moment, everybody hasn't put a reciprocal tariff on the U.S. I think you're probably smarter than me on that because you're studying and talking to everybody.
I don't know about that, Jeff. I don't think anyone knows what's going on. Maybe, sorry, one other follow-up on this. The pricing is obviously something that's important for you guys. The risk that there could be a pricing impact on you guys specifically because of where you sit within the supply chain and working with customers. I guess just, is that a risk that you worry about or is it something that we shouldn't really consider?
To be sure I'm answering your question, you're thinking of our customers saying, hey, Integer, we've got this cost that's being imposed on us and we want you to share in that. 70% of our sales are under some form of a multi-year agreement. During the pandemic, we were very clear with our customers. We weren't going to break contracts. We honored our contracts through the pandemic. We were very clear with our customers when the contracts are up for renewal, we're going to look to pass through. We restructured a lot of our contracts to where we have very little price down. We have incentives for growth. That's the structure going forward. We believe we're price neutral-ish if you look at us on a go-forward basis. In the same way that we honored our contracts, I have confidence our customers will honor our agreements.
We think we have strategic partnerships and we will work very closely with our customers to help them mitigate the tariffs to the extent we can contribute. There are ways we can help them do that. We are working on that and we will collaborate with them to ensure that we are keeping the cost low for everybody.
Let me just add to that. I think independent of tariffs, if you forget tariffs, at any given time, we're working with our customers to take costs out of our business and their business. We do this in a collaborative manner and we share those savings. At any given time, we're working on different activities because this is how we deliver value to our customers. We can also work to expand our margin. That collaborative nature allows us to kind of tell our customers, look, what we kind of cannot do. Everybody understands that if there is cost as a result of this, which we've talked about for us and negligible, I mean, we have those very good close relationships with our customers that we can navigate with them.
Great. I want to shift over to, let's talk about the cardiovascular business. It's now a billion-dollar business. It's growing double- digits organically, even more with all the acquisitions that you're layering on. One question that I have and I think investors have is maybe the growth algorithm for that business. We've talked about EP and PFA and the growth that that represents, but that's also a larger portion of your business than maybe, say, structural heart or RDN, which I know you added recently. When investors are thinking about kind of what drives that growth to that level, where is that contribution coming from? Is it the trade-off from PFA versus RF in EP and that's a bigger business for you? Is it the getting into the structural heart areas, getting into RDN? I think that's one question that investors have. Really, what's driving?
It's impressive growth, right? The markets are growing. How are you guys capitalizing? I know you're not going to get very specific, but how are you capitalizing on that very strong underlying growth? Yeah.
Let me take that. I think just as a context, we have a very broad range of capabilities and a broad range of participation in the different products and in the core markets that we participate. Why that matters is you give the example of PFA. Obviously, that is a general grower in the market right now. Let me talk about that for a moment. PFA is a tailwind for us because it is driving growth in the market. We participate in almost every aspect of a procedure. Anything from access from the beginning to when you do a transseptal crossing, we have participation in that with different customers. When you do diagnostics, for example, when you do the actual ablation itself, we participate in all of that.
When that industry grows, and again, that's all part of our strategy to make sure that we are a very strong player in those core markets. We've had these participations for a number of years. When there's a tailwind, obviously, that drives growth everywhere across that market. That's just one example of the market. In structural heart, we've mentioned that we are under-indexed in TAVR, but we are more heavily indexed in the tricuspid and mitral. Now, that's from a smaller base, but it's going to be driving growth and also neurovascular, whatnot. RDN, we recently started talking about it because we think that the technology is at a place that it can gain some momentum. The capabilities that are needed to bring that product into market and for us working with our customers is actually not that dissimilar from what's in EP.
We think we have the capabilities to be able to be a participant of that. We believe and our customers believe, those who participate in it, that this could have the potential to be a $1 billion market. We see this as a potential future growth.
Any kind of directional color on those markets versus maybe some more mature markets within CNV? Like some of the growth areas versus.
Just to further your question.
Yeah, I'll give you an answer without being specific, which is I don't know what you're not asking, but if you really think.
Used to it.
Yeah.
If you really think about it, if we are more heavily focused on the growth markets and if 80% of our development pipeline is in the growth markets, well, by definition, obviously, that's going to change. These things take time. These things take years, right? Because just the product life cycles and whatnot. But we believe that over time, we're going to be more heavily indexed on that.
Thank you for that, Payman. Thank you for dealing with me. It's CRM and Neuromod. Slower growth in CNV, aspects of it, especially the emerging PMA customers, obviously growing faster than that CRM business. Maybe just talk about a little bit the growth algorithm for that business. I know it's a low- single-digit, mid-single-digit growth, but maybe how does that change or can it change over time as that emerging business really ramps up?
Cardiac rhythm management is what it is. It is a large, well-established, lower growth, maybe more demographic kind of unit volume growth. Dual chamber, leadless pacing, single and dual chamber leadless pacing is where there is more growth as that market transitions. Implantable cardiac monitors is another area that is growing faster in the cardiac rhythm management. The neuromodulation is where we are going, where we expect to get the growth. We have gone from $10 million of sales in the emerging PMA customer group that we have talked about to $125 million from 2018 to 2024. Now our guidance is 15%-20% growth on a forward basis. We bracketed it three to five years, but just as we think about going forward, growing. In that case, 15%-20%, we would peg at probably twice the overall market.
There's a number of different therapies there, whether it's incontinence or epilepsy, or we put sleep apnea and cochlear in there, and then other emerging therapies that many of the startups and emerging companies are working on. We have a pipeline of now we have 39 different customers and products that we're working with in that emerging customer bucket. If you go back to when we first started sharing that information, we had 27. This was back in 2020. In five years, we've gone from 27 to 39. We've got a 44% growth. That's really very much consistent with how we've grown our overall development sales. We're taking a lot more shots on goal. We now have 10 of those customers that are in the commercialization phase that's driving that growth.
We would absolutely expect the emerging PMA customers and neuromodulation more broadly to drive the growth of cardiac rhythm management and neuromodulation in total.
Yeah. I want to touch on portfolio management. You guys have divested assets that you deem non-core. I think the other market's business was 100-200 basis points drag on growth. So just thoughts on would you get out of, continue to get out of some of the non-core businesses?
Sure. If I go all the way back to the portfolio analysis we did in 2017, that led to the divestiture of Advanced Surgical and Orthopedic business because we did not see the strategic differentiation. We did not see technology differentiation in those markets. That was $400 million of what was then a $1.5 billion business. We went down to $1.1 billion, and now we have grown back to the $1.9-ish at midpoint this year. At that time, we reflected on the Advanced Surgical and Ortho business. We reflected on the portable medical that we are exiting, and we reflected on Electrom. Those were all things that we said, hey, we should be looking and monitoring these. We did the Advanced Surgical and Ortho in 2018. We made the decision to exit portable medical in 2021.
It's taking customers four years to move this low to no technology differentiation products away from us, which is indicative of the stickiness of what we do because what we still do today or what we kept is the stuff that's very sticky with real technology differentiation. From a stickiness perspective, that gives you context. Electrom was also something we were continuously evaluating, and we saw the opportunity last year to execute on that. To answer your question, we love the markets we're in in cardiovascular. Although cardiac rhythm management is a slower growth, we love the technology that we bring to the industry, and we love the cash that it generates and the predictability of it because that supports investing in the faster growing parts of the business.
When you have a portfolio, it's nice to have stuff that's throwing off good, strong cash because it's deep technology that's been embedded in the industry for decades, which is cardiac rhythm management. That same technology that's been deeply embedded in cardiac rhythm management is what we leverage in neuromodulation to do complete implantable pulse generators. Same technology, which is why cardiac rhythm management is so important to the neuromodulation business and enabling us to fully vertically integrate an implantable pulse generator in neuromodulation. We, in fact, love our cardiac rhythm management business for that reason, and that enables the neuromodulation growth and the holistic vertically integrated offering that we have there. We love cardiac rhythm management, neuromodulation, the cardiovascular segments we're in. The other markets, when we're done with portable medical, it'll be about $40 million.
What that represents is mostly what we're still doing for the company that bought our Advanced Surgical and Orthopedic business. That activity was in the plants that we kept. We agreed to keep doing that for them as part of a long-term agreement because it didn't make sense for them or us to disrupt our customers because moving that product would require the customers to engage. It's $40 million that'll be flattish to slightly declining over time, but it's become such a small piece of the business that it's pretty immaterial. The focus is on the cardiovascular and cardiac rhythm management, neuromodulation, and the four targeted growth markets.
Great. I think with that, we're out of time. So, Payman, Joe, really appreciate you guys coming.
Excellent. Thanks for having us.
Thanks, everbody