Integer Holdings Corp Q4 FY2023 Earnings Call

Hello, and welcome to the Q4 2023 Integer Holdings Corporation Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session, and if you would like to ask us questions, simply press star 1 on your telephone keypad. I will now turn the conference over to Andrew Sens, Senior Vice President, Strategy and Business Development and Investor Relations. Please go ahead.

Good morning, everyone. Thank you for joining us and welcome to Integer's fourth quarter 2023 earnings conference call. With me today are Joe Dizek, President and Chief Executive Officer, and Dyeron Smith, Executive Vice President and Chief Financial Officer. As a reminder, the results and the data we discussed today reflect the consolidated results of Integer for the periods indicated. During our call, we will discuss some non-GAAP financial measures. For reconciliation of these non-GAAP financial measures, please refer to the appendix of today's presentation, today's earnings press release, and the trending schedules, which are all available on our website at integer.net. Please note that today's presentation includes forward-looking statements. Please refer to the company's SEC filings for a discussion of the risk factors that could cause our actual results to differ materially. On today's call, Joe will provide his opening comments and an update on integer strategy, followed by an overview of how integer will sustain above-market growth. Dyron will then review our adjusted financial results for the fourth quarter and full year 2023 and provide our full year 2024 outlook. Joe will come back to provide his closing remarks, and then we'll open the call for questions. With that, I will turn the call over to Joe.

Thank you, Andrew, and thank you to everyone for joining the call today. We had a strong fourth quarter and an even stronger full year. 2023 sales were up 16%, and adjusted operating income grew by 26% over 2022. We were able to grow sales at a rate significantly above the market rate, while expanding operating margin by 117 basis points. Adjusted operating income grew at 1.6 times the rate of sales growth, approaching our strategic target of two times. We expect this strong performance to continue in 2024 with an outlook of 9% to 11% sales growth and adjusted operating income growth of 13% to 20%. We are confident in sustaining above-market sales growth in 2024 and beyond. We acquired Pulse Technologies on January 5th, which deepens our precision micromachining capabilities and further strengthens our pipeline in high-growth markets like electrophysiology, structural heart, and heart pumps. The center continues to execute our strategy to deliver sustained outperformance. Our portfolio and product line strategies position us for sustained above-market growth as we continue to shift the mix of our business to higher growth markets. The previously announced exit of our portable medical product line, which has limited technology differentiation and low growth, is proceeding as planned. We continue to make targeted organic and inorganic investments in capabilities and capacity to enable our growth. The supply chain and labor environments have meaningfully improved, and we have refocused our organization to execute our operational strategy to expand margins. During the JPMorgan Healthcare Conference earlier this year, we publicly announced the acquisition of Pulse Technologies, our fourth tuck-in acquisition in 25 months. The acquisitions of Oscorp, Aaron Biomedical, Inuroco, and Pulse Technologies have strengthened its intersposition in high-growth markets while adding differentiated capabilities for our customers. Our acquisitions further our vertical integration strategy and help our customers consolidate and simplify their supply chains. In addition to the strategic benefits, these four acquisitions generate annualized sales of approximately $170 million with accretive margins. Ascor and Aaron were meaningful contributors to our sales and profit growth in 2023, and I look forward to a NeuroCovid Pulse being equally as successful as we integrate these differentiated businesses. Intenture acquired Pulse Technologies on January 5th, 2024 for approximately $140 million, with the potential for an additional earn out in 2025 based on revenue growth. We paid less than 13 times trailing adjusted EBITDA multiple, or just over 11 times after considering the $15 million net present value tax benefit. Pulse deepens integer's capabilities in precision micromachining and further strengthens our pipeline in high growth markets. We welcome the 250 talented associates in Quakertown, Pennsylvania to the Integer family. Pulse has been a longstanding strategic supplier of critical components to leading MedTech OEMs. Their focus on high-growth markets and products, along with excellent customer relationships, align perfectly with Integer's strategy. We developed our portfolio strategy in 2017 and formed the growth teams in 2018. These market-focused teams have executed a structured and disciplined approach across the organization to shift our pipeline to high-growth products and markets, expand our capabilities, and ensure our investments are aligned to our strategy. These product line strategies have generated a strong product development pipeline that is delivering results and positions us for sustained above-market growth. This structured and disciplined process has been and will continue to be critical to Integer achieving sustained outperformance. We continue to invest in the highest growth C&V markets, the same markets where our customers are investing and the areas with the greatest unmet clinical need. Integer is uniquely positioned to serve our customers across all phases of the product lifecycle because of our deep technology, breadth of capabilities and products, global manufacturing footprint, and vertical integration. The products on the bottom of the slide highlight areas of continued investment in capabilities and capacity. Our 2023 CNB growth and product development pipeline are concentrated in these high-growth end markets. We also continue to invest in the differentiated capabilities that serve both our traditional cardiac rhythm management and emerging neuromodulation products, including the high-growth subsegments within cardiac rhythm management. Integer is uniquely positioned to be able to bring full design, development, and high-volume manufacturing to these customers, while also vertically integrating the most technologically advanced components with our own intellectual property from decades of innovation. Very few other companies have the breadth of design and development capabilities, and even fewer offer the depth of component technology that Integer offers to our neuromodulation customers. The products on the bottom of the slide highlight the high-growth areas of CRM and N that contributed to our growth in 2023. Our product development pipeline is concentrated in these same high-growth N markets. Integer partners with our customers to bring innovative medical technologies to market, and we are paid for this service throughout the product development cycle. As lifesaving and life-enhancing products are introduced to the market and enter the manufacturing ramp phase, Integer benefits from accelerated sales growth. The amount of product development sales and the market growth rate of the products being developed are leading indicators for sustained above-market sales growth. Our product development sales have increased 230% since we developed our strategy in 2017, which means our pipeline of new programs has grown significantly, and we are being designed into our customers' novel products. We are confident that the current level of development revenue will continue to deliver sustained above-market growth. We have continued to strategically target product development opportunities in high-growth markets to accelerate our growth rate on a sustainable basis. 80% of our development sales are currently in high-growth markets, with the remaining 20% in more mature markets. We continue to believe the mix of 80% high-growth and 20% mature markets is the appropriate balance to accelerate our sales growth rate while sustaining our mature products for the benefits they deliver to our customers and integer. The development cycle in our industry is relatively long, so it is a meaningful milestone for us to achieve the level of product development sales and program mix necessary to sustain above-market growth. We are excited to share our fourth annual update on emerging PMA customers. We presented this slide for the first time on our earnings call in the third quarter of 2020. These PMA customers are primarily single product, highly novel and innovative, and bring emerging neuromodulation therapies to market. We have been investing in this pipeline of PMA products for many years, and the advancement of these programs is a key contributor to our above-market sales growth. The left-hand side of this slide shows the number of customers we are working with at each phase of the product development process. The right-hand side highlights the actual sales generated in 2018, 2020, and 2022 for the nine customers who are in either product introduction or launched since 2020. We are increasing our 2024 sales projection to a range of $100 to $120 million, which is the second consecutive year we have done so. This is the result of the success in the market for these novel therapies and demonstrates our strong pipeline of high growth products that contribute to sustained above market growth. In addition to our organic pipeline, we have just demonstrated that we can consistently execute tuck-in acquisitions that enhance our capabilities and are accretive to our sales growth rate and profit margins. We are very targeted in the companies that we pursue and have remained disciplined relative to our acquisition criteria. We continue to cultivate relationships with a robust pipeline of founder-led and privately owned businesses. We are confident we can continue to add 200 to 400 basis points of inorganic sales growth on an annual basis by deploying $250 to $300 million on acquisitions while maintaining a debt leverage of two-and-a-half to three-and-a-half times adjusted EBITDA. development and implementation of our strategy, Integer was growing at about the market growth rate of 5%. I have highlighted how growth starts with product development, which is our focus strategy to get designed into our customers' most strategic products in high-growth markets, which is demonstrated by our product development sales growth of 230%, and 80% of our development portfolio is in high growth markets. These key metrics reinforce why we remain confident we have the organic pipeline to deliver sustained organic growth 200 basis points above the market. Our acquisition strategy has added significant capability depth and breadth so we can better serve our customers in high growth markets. Our recent acquisitions have also added to our organic pipeline and provided sales and profit acceleration. Going forward, we expect to add 200 to 400 basis points of growth annually from acquisitions. Our focus strategy, combined with our organic and inorganic investments, have generated a strong product development pipeline and the most vertically integrated provider to our customers in the fastest growing end markets. This gives us confidence we can sustainably grow sales high single digit to low double digit going forward. The strategy that we launched in 2018 is producing results and has helped Integer accomplish its vision of being our customer's partner of choice for innovative medical technologies and services. I'll now turn the call over to Dyrek.

Thank you, Joe. Good morning, everyone, and thank you again for joining today's discussion. I'll provide more details on the fourth quarter and full year 2023 adjusted financial results and provide our 2024 outlook. It is important to note fourth-quarter results are not impacted by our acquisition of Pulse Technologies, while the full-year 2024 outlook includes this acquisition. We ended our year strong and delivered fourth-quarter results at the high end of our October 26, 2023 outlook. With sales of $413 million, Integer delivered 11% year-over-year sales growth on a reported basis and 9% on an organic basis, which excludes the impact of our fourth quarter in neurocoacquisition, the strategic exit of the portable medical market, and foreign currency fluctuations. Our sales performance reflects the continued strong customer demand across our targeted growth markets and the ongoing improvements in the supply chain environment. We delivered $86 million of adjusted EBITDA, up $13 million compared to the prior year, or an increase of 18%. Adjusted operating income also increased 18% versus last year and continued to make progress on our year-over-year margin expansion. Compared to the prior year, adjusted operating income as a percent of sales increased to 16.4%, a 97 basis point improvement driven by gross margin expansion, volume leverage, and efficiencies gained from the continued improvement in the supply chain. With adjusted net income at $47 million, we delivered $1.39 of adjusted diluted earnings per share, up 28 cents or 25% from the fourth quarter 2022. With our strong performance in the fourth quarter, our full-year financial results were at the high end of our 2023 earnings outlook. Sales were $1,597,000,000, which is a strong year-over-year increase of 16% or 15% organically. Adjusted EBITDA was $309 million, up 21% versus last year, and adjusted operating income was $241 million, up 50 million or 26% compared to the prior year. We delivered $158 million of adjusted net income and $4.67 of adjusted diluted earnings per share, up 79 cents or 20% from the prior year. I will touch on the year-over-year growth in adjusted net income in a few moments. Taking a closer look at our CNV and CRM&M product line sales, we delivered strong year-over-year growth on a trailing four-quarter basis in the fourth quarter of 2023. For our cardio and vascular product line, trailing four-quarter sales increased 20% year-over-year with double-digit growth across all CMV markets. This was driven by strong demand, acquisition performance, and supply chain improvements. CREAC Rhythm Management and Neuromodulation's trailing four-quarter sales increased 15% year-over-year. This was driven by double-digit CRM growth from strong customer demand, double-digit neuromodulation growth from emerging customers and supply chain improvements. Further product line details are included in the appendix of the presentation on our website at integer.net. To provide more color on our full year 2023 performance, we increased adjusted net income by $28 million compared to 2022. Strong sales and operational improvements delivered $42 million, dollars, equivalent to one dollar and 19 cents per share, which was partially offset by foreign exchange, as well as higher interest and taxes. We incurred adjusted total interest expense of approximately $10 million or $9 million tax affected higher than last year. This is due to a combination of higher debt balance driven by $50 million in costs associated with the convertible notes issued in the first quarter of 2023 and overall higher effective interest rates. Our adjusted effective tax rate was 17.7% for the full year 2023, compared to 16.1% in the prior year. As described in last quarter's earnings call, the primary driver of our higher adjusted effective tax rate compared to the prior year is the expiration of the 10-year Malaysian tax holiday. For 2024, we expect our adjusted effective tax rate to be between 19% to 21%. This increase is mostly driven by the recently enacted Pillar 2 legislation in Europe, establishing a minimum effective tax rate of 15% and the residual effect of the Malaysian tax holiday expiration. We delivered another quarter of strong conversion of income to cash in the fourth quarter of 2023 with $56 million of cash flow from operations. This strong performance was driven by high sales volumes and improving margins. In the fourth quarter, we generated $19 million in free cash flow, inclusive of $37 million of capital expenditures. On a full-year basis, this equates to $180 million in cash flow from operating activities, a 55% increase versus 2022. Our full-year free cash flow of $60 million reflects $120 million in capital expenditures, which is in line with our outlook throughout the year. Net total debt ended at $950 million for the fourth quarter 2023, an increase of $26 million compared to the third quarter ending balance. This reflects an increase in debt of $42 million to fund our fourth quarter acquisition of Enurico and another $8 million for earn-out payments on previous acquisitions, partially offset by other decreases of $24 million. Net total debt leverage at the end of the fourth quarter of 2023 was 3.1 times trailing four-quarter adjusted EBITDA, which is within our strategic target range and down from three and a half times at the end of 2022. We will now transition to providing more detail on our outlook for 2024 sales, profit, and cash. The full-year outlook, as summarized earlier, reflects our strategy to deliver versus sustained above market growth with expanding margins. We expect 2024 sales to be in the range of $1,735,000,000 to $1,770,000,000, an increase of nine to 11% versus last year. Our outlook reflects organic growth of six to 8%, which is 200 basis points above our underlying market growth rate estimate of four to 6%, plus 3% inorganic growth from our NeuroCo and Pulse acquisitions, partially offset by the portable medical exit. Our outlook for 2024 adjusted EBITDA is between $355 and $375 million, which is 15% to 21% growth year over year. And we expect 2024 adjusted operating income to be between $272 and $290 million, reflecting growth of 13% to 20%, which is 1.9 times our expected sales growth rate at the high end of our outlook. Adjusted net income is expected to be between $171 million and $185 million, reflecting year-over-year growth of 8% to 18%. This delivers an adjusted EPS outlook between $5.01 and $5.43, a growth of 7% to 16%. This assumes an adjusted effective tax rate between 19% and 21% and higher interest expense compared to 2023, primarily due to a higher debt balance to support the acquisitions of Enurico and Pulse Technologies. We expect sales in the first quarter of 2024 to grow high single-digit year-over-year, with sequential sales acceleration in the second quarter through the fourth quarter from new product introductions and emerging PMA customer growth. We also anticipate our typical quarterly trend for product development revenue, which is generally at its lowest levels in the first quarter and at its highest levels in the fourth quarter. We expect adjusted operating income as a percent of sales to expand throughout 2024 from a significantly improved supply chain, direct labor attrition returning to pre-pandemic levels, and the typical quarterly trend for product development revenue. To close our financial discussion, I would like to summarize our cash flow generation and our net total debt projection for 2024. We expect cash flow from operations between $185 million to $205 million, which represents an 8% year-over-year increase at midpoint of outlook. Our outlook for capital expenditures is $90 to $110 million as we continue to invest in organic capabilities and capacity. At this point, this is $15 million lower than 2023 capital expenditures as the spending on our Irish capacity investments was at its highest in 2023. As a result, we expect to generate free cash flow between $85 million and $105 million. Inclusive of our approximate $140 million acquisition of Pulse Technologies in January this year, we expect our 2024 year-end net total debt to be between $1 billion, $10 million and $1,030,000,000, which is up $60,000 to $80,000,000 year-over-year. We expect to end the year with our leverage ratio within our target range of 2.5 and 3.5 times trailing four-quarter adjusted EBITDA. With that, I'll turn the call back to Joe. Thank you.

Thanks, Tyron. We delivered a very strong 2023 with full-year sales up 16% and adjusted operating income improving by 26% over 2022. We expect this strong performance to continue in 2024 with an outlook of 9% to 11% sales growth and a 13% to 20% increase in adjusted operating income. The execution of our strategy, both organically and inorganically, is producing results as we continue to demonstrate above-market sales growth with expanding margins. We remain focused on executing our strategy to create a premium valuation for our shareholders. So now I'll turn the call over to the moderator for the Q&A portion of our call.

Thank you. To ask a question, please press star 1 on your telephone keypad. Please feel free to ask multiple questions. Your first question comes from the line of Brett Fishman with KeyBank Capital Markets. Your line is open.

Hey, guys. Thanks so much for taking the questions. I just wanted to start off quickly with one on the 2024 guidance. Maybe if you could just walk through a bit of the philosophy and then moving pieces around the 6% to 8% starting point for organic revenue growth, and then just how you're balancing the thinking around, you know, really tough 2023 comparisons, but in context of, you know, a still very elevated order book in the range of a billion dollars exiting last year.

Great. Hey, Brett, thanks for the question. So as we look at 2024 sales, the 6% to 8% organic is consistent with our product development pipeline that gives us great visibility into new programs that are ramping in 2024. Some of the growth in 2024 is from ramps that started in 2023 and 22, and they pick up as the year progresses. And so what we've been talking about as our strategic objective, and we're confident in being able to do that. Maybe to correlate that, we think the market in 2024 would be more similar to kind of a longer-term outlook of 4% to 6%. Your question about the order book, that over $900 million of orders on hand with customers gives us tremendous visibility into what customers are requesting from us, both in the near term and out into the second half of the year. And that's on top of what they give us on kind of a rolling 12-month basis, kind of manufacturing plant to manufacturing plant, where they tell us what they're planning to produce for the next 12 months, which allows us to plan beyond that $900 million order book.

All right, great. And then maybe just following up on some of the comments around new product revenue, you did increase the outlook a little bit for this year, which was great to see by approximately $20 million. I was just curious, you know, where you're seeing additional upside, maybe in terms of product areas. A little extra color there would be really helpful. Thanks so much.

Is your question specific to 23 or looking forward to 24?

No, just looking at the 2024 estimate of $100 million to $120 million of new product revenue, just where you were seeing the additional upside relative to the prior guy last year.

Yeah, you're referring to the emerging customers with PMA products.

Yeah, exactly.

Okay, great. Yeah, so we delivered about 250 basis points of total integer level growth in 23 versus 2022 from this customer base. And so, you know, if you triangulate that, you know, we had previously said we'd grow from 50 million in 2022 to 80 to 100 by 2024. And although it's not perfectly linear, we did see strong progression. we actually were ahead of kind of a linear progression towards that 80 to 100. And based upon the demand from customers and the success of their products in the marketplace, it gives us confidence in increasing the 2024 by another $20 million. We increased it last year. You can see on the bottom right of the chart, we increased it last year from these novel therapies that are making a difference for patients. And I'll just highlight these are mostly not spinal cord stem. So these are other neuromodulation emerging therapies that are meeting a lot of unmet patient need, and so we're excited to support these customers in their success.

All right. Thanks, Brett.

Do you have any further questions, Brett?

I can go back in queue if there is anyone else waiting to ask questions. Otherwise, I could ask one or two more.

Go ahead.

All right. All right, how about just a quick follow-up around the starting range for operating margins? I think I was calculating around 1.7 times or so at the midpoint compared to the sales growth rate, which seems a little bit better than last year, but still a little bit below the long-term target. So maybe just a little bit around the key headwinds you're still seeing, and then how you see those progressing as the year continues. and it might be a little early, but whether you see some opportunity to continue pushing toward

that two times target into 2025? Yeah, great, great, great, great question, Brett. Your math is correct. At midpoint, it is operating profit growing 1.7 times the growth rate of sales. And what the reason for that is, we are just now getting back to the same level of direct labor turnover that we were at pre-pandemic. We had talked about that when the direct labor turnover improves and supply chain disruption improves, we felt like then we could work out the inefficiencies that we've experienced in manufacturing over the last three years driven by those disruptions. And so I'm excited to say that our direct labor turnover is now in the first month of January, we're actually back to inefficiencies that won't happen immediately. We have a number of different initiatives in the manufacturing operations to deliver that those efficient proof throughout the year. And that gives us momentum going into 2025. Our long-term objective absolutely remains the two times improvement in supply chain throughout last year. And in the way we measure it, the low early or in mid 2022. So I would say watch throughout the year. We expect margins to improve throughout the year as we get those efficiencies. And our long-term objective remains getting profit. All right, makes a ton of sense. And then kind of along similar lines,

you know, you have some of these cost headwinds starting to subside a little bit. But, you know, then there's also the flip side around pricing, which I know is a little bit of a modest positive to growth in 2023, which was a little bit different than in the past. So just curious on your thoughts here for 2024, as you know, some of those cost headwinds start to cool down a little bit if pricing can still be a positive lever or at least, you know, continue to be more neutral

than in the past? Sure. Pricing was a slight positive in 23, which was really just sharing some of the material and wage inflation with our customers in a very collaborative partnership manner. As we look forward to 2024 and beyond, we expect pricing to be flattish, and that's what we're modeling and assuming in 2024 based upon our agreements with our customers.

I got it. And then last one, I know you just, you know, completed the deal, the post-acquisition, and it's a little bit early, but just how folks should be thinking about the integration process for that deal in context of InNeroCo also being pretty recent, just how you're, you know, prioritizing that, like, level of integration you're planning and maybe some of the key hurdles or, you know, just marks of success you're looking for this year? And thanks so much for taking the questions.

So as soon as we closed, we immediately started talking to customers about commercial synergies and the capabilities and the capacity that we have with both of those acquisitions. We found great reception and a very positive reaction from customers on those acquisitions because it enables us to do more for our customers. Those were smaller customer tuck-ins synergies and best practices. And the great thing about it is the best practices are shared both ways. The companies also find great ways to be efficient and low cost. And so they're sharing some of their practices with us. And also, their acquisitions in the last 25 months reduces the number of suppliers for them by four. And they're excited to see us continue to do that. and we're happy to help them consolidate and simplify their supply chain.

Your next question comes from the line of Matthew O'Brien with Piper Sandler. Your line is open.

Good morning. Thanks for taking my questions. Maybe, Joe, just as I look at the stock opening up down a little bit this morning, I'm thinking it's probably due to the organic growth outlook for the business. And to follow up on Brett's question a little bit, I'm curious what's built in in terms of buffer, because, you know, you mentioned more of a normalized environment this year, although we're hearing, you know, volumes are still very good. I don't know if it's just because the comp was tough last year. New product launches, there's some big ones in areas where you guys are really strong, and then obviously supply has gotten better as well. So I'm just wondering, you know, just some of the buffers that you're building in on the top line where there potentially could be a little bit better organic performance versus how you've guided.

certainly um on the stock price i'll let i'll let you figure that one out um we're just going to keep executing our strategy and and and and delivering on on our financial objectives um in terms of growth we we have great visibility to 2024 because of the 900 million dollar order book um the the success our customers are having with their their novel therapies that they're bringing to the marketplace and so we we always come out with what we think is a is a balanced view that has the ability to ensure that we can deliver on this growth, holding 12-month forecast from our customers. And so as we look at 2024, we think this is higher than the market growth, which we think, again, will be 4% to 6%. So we think our organic growth is delivering on our at least 200 basis points above, and we're excited about the acquisitions and the additional commercial synergies that we can get when we get to later 2024 and 2025 and beyond.

Got it. And then from the acquisitions, are you able to get into new areas that you hadn't been in before, or are you just strengthening existing areas? And then specifically, Crest Cuspids have been getting this and some approvals there recently. Is this an area where you can participate if that were to expand over the next several years? And then I have one final question. Thanks.

Certainly. So one of the great synergies with these acquisitions is they're serving the leading MedTech OEMs as well. So our customers know them and know them well and trust them for the design and development, the ability for them to ramp and we're excited for Integer to own them. It has gotten this exposure in that space, abilities, and we're excited about having both the Neuroco and Pulse technologies on the team.

Got it. And last question for Dyron, and congrats on the permanent title. Just the deleveraging that we're seeing on the income statement from top to bottom line, especially the low end of the range, can you just maybe just – I don't know if that's interest expense specifically, but just talk about that. And then it is a pretty broad range, which makes sense early in the year. But just what gets you to the low end, what gets you to the high end of that range?

And just to clarify, you're referring to the adjusted net income.

That's right, the EPS numbers, yeah.

Yeah, and the EPS, just wanted to confirm. Yeah, so we're up about $9 million at midpoint on interest expense, so that drives us. And then when you like.

Thank you.

Your next question comes from the line of Craig Bijoux with Bank of America. Your line is open.

Good morning, guys. Thanks for taking the questions. So I just want to start. We spent a lot of 23 talking about customer inventory workdown. So I do apologize for asking this question again, but maybe we can kind of put it to rest. But it sounds like inventory order patterns at your customers are getting to a more normal level. So, you know, just wanted to hear kind of your thoughts there and if that is, in fact, true. And, you know, 24 is going to be a normal year from that perspective.

Yeah. Hey, Greg, it wouldn't be an earnings call without that question. So thank you. So maybe I'll start with this. You know, our view of the end market is 2022 was a below average growth year because of hospital staffing shortages, and 2023 was a higher than average. And if you look at the two years, it looks to us like it kind of averages out to maybe more normal over the two years. And we worked closely with customers back in 2022 when orders were coming in fast and furious and high. We work close with customers to allocate capacity where they were meaningfully above any pattern in the end markets, and we can get a pretty good view of the overall market for different sub-markets pretty comprehensively given our sole source, not what we were seeing more holistically, and order patterns, maybe ordering was not normal, but what we shipped was maybe more aligned to end markets. I shared on the third quarter earnings call, we saw some of the supplier adjustments. The Deere supplier were adjusting inventory letters that, you know, their customers oftentimes send out when they do things en masse. We saw some of that last summer. I said on the third quarter earnings call that we were seeing what we would characterize as kind of typical year-end inventory management in some locations, and we had incorporated both of those into our guidance. So it was in our third quarter, that those adjustments were in our fourth quarter, And I think given our order book, we've got really good visibility on the longer-term orders we have. So we've baked all that in. We've got all that factored into our guidance, and we're confident in the guidance that we've provided both for the full year and the qualitative color that we've provided on the first quarter.

Got it. Thanks for the thorough answer. I wanted to follow up on the higher guidance for emerging customers. And, you know, sorry if I missed this, you know, the specifics, But, you know, what's driving that raise, you know, to the $20 million? So, you know, was that outperformance versus what you were expecting, you know, through 23? Or is it a better, you know, higher expectations for 24 for those products?

Yes, it's a great question. I mean, the very nature of these customers are the success or failure in the marketplace will determine the success or failure on the slide 17 in our presentation. that shows the growth in those sales. And so, look, we risk adjust the forecast from our customers because we know that they're going to plan for the best they can do to make sure that they've got product to hit the most aggressive sales forecast that they have. Well, we risk adjust that because we've got customers. And so what you're seeing is 100. And so now we're seeing those customers' success 250 basis points from these customers confidence to raise the 100 to 100 marketplace.

Got it. And last one for me, it sounds like you guys are modeling in, you know, a decent amount of contribution from new acquisitions. So I wanted to get your sense for the end market in acquisitions for you guys, I guess. You know, are there, you know, that many smaller deals to be done? and, you know, how's the pricing or valuation expectations on some of those deals?

So there is a very robust pipeline of acquisition, tuck-in acquisitions for us. The team continues to do a phenomenal job of identifying opportunities. You know, we think we're in a very – in the marketplace to be able to identify these tuck-in acquisitions. We are oftentimes a supplier to these targets. Or we might actually be partnering or working on a product that they're working on as well and suggest to us technology and what we've done with other acquisitions, work of other entrepreneurs, founder-led companies that bring commercial synergies. So we accelerate the growth of their business. We invest in their business. And the vertical integration just helps them accelerate the impact they're having in the marketplace and with patients. So they're excited about that. to be able to identify these tuck-in acquisitions relative to others in the market who are pursuing them. Any other question on pricing? Well, of course, everybody wants the highest possible price, but these entrepreneurs and founder-led companies care about lots of things when they make those decisions, and we think we get to a fair price for them. And oftentimes, we'll put an earn out in there if they outperform over the first couple of years of ownership. They can get more. But we've been able to get these acquisitions, we think, at a fair price, a price that lets us then bring commercial and operational synergies and get a great return. And we've built that muscle of integrating. We're excited about the progress that we've already made with the Neuroco and Pulse. We've already got commercial opportunities that are in process. And the operational synergies also, they start day one because they're doing a lot of the same work, serving the same customers, and so it's pretty quick and pretty easy. And so they're also, to maybe your question, they're targeting the same higher growth markets as us. So they're great strategic bids.

Great. Thank you.

Once again, ladies and gentlemen, if you have a question, it is star one. Your next question comes from the line of Joanne Wench with Citi. Your line is open.

Good morning, and thank you very much for taking the question. As I'm running through my model, it looks like you have about somewhere between 50 and 70 basis points of operating margin expansion, mostly coming from gross margins. Just curious if I'm looking at this the right way. And if so, if we go back to sort of a pre-pandemic operating margin, is that the right way to think about the world, or is it just the business and the model has changed so much since then?

Good morning, Joanne. Your question was specific to fourth quarter or forecast.

No, for 2024, sorry.

No, it's okay. No, it's okay, 2024. So 2024 at midpoint on the adjusted operating income, we're up 91 basis points at midpoint. I think it was commented earlier that that's operating profit growing 1.7 times as fast as the sales growth rate. That's our 2024 guidance. We're still driving towards the profit growing twice as fast. And so this is above market sales growth with margin expansion, and the 91 basis points is the midpoint of our guidance. And referencing back to kind of pre-pandemic, that is still slightly below where we were pre-pandemic. and the biggest driver of that has to do with the direct labor attrition and the supply chain disruptions that we experienced heavily in 20 years that we're going to get back to.

Thank you for that. My second question has to do somewhat with sort of looking at the two segments in the two sections of CRM and Neuromob. If I'm doing my math correctly, in the fourth quarter, one segment probably did better than the other. Is it a comp issue or is it something else we should be thinking about? And thank you.

Sure. So in cardiac rhythm management and Neuromind, Neuromind continues to grow very strongly, driven by the emerging PMA customers we've talked a little bit about on this call. Cardiac rhythm management has actually grown very strongly throughout 2023, and at some point, it's going to revert back to its more historical levels. Our view is in the pandemic and the staffing shortages in hospitals at 22, historical low single-digit, while barely by 19 PMA customers.

Terrific. Thank you very much. Have a great day.

Thanks, Joanne.

There are no further questions at this time. I will turn the call to Andrew for closing remarks.

Thank you, everyone, for joining the call today. As always, you can access the replay of this call on our website as well as the presentation that we just covered. Thank you for your interest in integer, and that concludes our call today.

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