Earnings Call Transcript
Integer Holdings Corp (ITGR)
Earnings Call Transcript - ITGR Q4 2023
Operator, Operator
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 speakers' remarks, there will be a question-and-answer session. I will now turn the conference over to Andrew Senn, Senior Vice President, Strategy and Business Development and Investor Relations. Please go ahead.
Andrew Senn, Senior Vice President, Strategy and Business Development and Investor Relations
Good morning, everyone. Thank you for joining us, and welcome to Integer's fourth quarter 2023 earnings conference call. With me today are Joe Dziedzic, President and Chief Executive Officer; and Diron Smith, Executive Vice President and Chief Financial Officer. As a reminder, the results and the data we discuss 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's strategy, followed by an overview of how Integer will sustain above-market growth. Diron 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.
Joe Dziedzic, President and Chief Executive Officer
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 2 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 5, which deepens our precision micromachining capabilities and further strengthens our pipeline in high-growth markets like electrophysiology, structural heart, and heart pumps. Integer 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 Oscor, Aran Biomedical, InNeuroCo, and Pulse Technologies have strengthened Integer's position 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. Oscor and Aran were meaningful contributors to our sales and profit growth in 2023, and I look forward to InNeuroCo and Pulse being equally as successful as we integrate these differentiated businesses. Integer acquired Pulse Technologies on January 5, 2024, for approximately $140 million, with the potential for an additional earnout 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 micro machining 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 long-standing strategic supplier of critical components to leading MedTech OEMs. Their focus on high-growth markets and products, along with excellent customer relationships, aligned 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 life cycle 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 C&V 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&N that contributed to our growth in 2023. Our product development pipeline is concentrated in these same high-growth end 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 life-saving 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 companies that 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 million 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 million to $300 million on acquisitions while maintaining a debt leverage of 2.5 times to 3.5 times adjusted EBITDA. Prior to the 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 focused 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 of 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 focused strategy, combined with our organic and inorganic investments have generated a strong product development pipeline and make us the most vertically integrated provider to our customers in the fastest-growing end markets. This gives us confidence we can sustainably grow sales from 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 customers' partner of choice for innovative medical technologies and services.
Diron Smith, Executive Vice President and Chief Financial Officer
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 and InNeuroCo acquisition, 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. We continue 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 $0.28 or 25% from the fourth quarter of 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 billion, 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 $0.79 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 C&V and CRM&N 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 & Vascular product line, trailing four-quarter sales increased 20% year-over-year with double-digit growth across all C&V markets. This was driven by strong demand, acquisition performance, and supply chain improvements. Cardiac Rhythm Management & 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 equivalent to $1.19 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 of 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 InNeuroCo 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 3.5 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 sustained above-market growth with expanding margins. We expect 2024 sales to be in the range of $1.735 billion to $1.770 billion, an increase of 9% to 11% versus last year. Our outlook reflects organic growth of 6% to 8% which is 200 basis points above our underlying market growth rate estimate of 4% to 6%, plus 3% inorganic growth from our InNeuroCo and Pulse acquisitions, partially offset by the portable medical exit. Our outlook for 2024 adjusted EBITDA is between $355 million and $375 million, which is 15% to 21% growth year-over-year. And we expect 2024 adjusted operating income to be between $272 million 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 InNeuroCo 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 the midpoint of outlook. Our outlook for capital expenditures is $90 million to $110 million as we continue to invest in organic capabilities and capacity. At midpoint, this is $15 million lower than 2023 capital expenditures as the spending on our average 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 of this year, we expect our 2024 year-end net total debt to be between $1.010 billion and $1.030 billion, which is up $60 million to $80 million year-over-year. We expect to end the year with our leverage ratio within our target range of 2.5 times and 3.5 times trailing four-quarter adjusted EBITDA.
Joe Dziedzic, President and Chief Executive Officer
Thanks, Diron. 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. I will now turn the call over to the moderator for the Q&A portion of our call.
Operator, Operator
Thank you. Your first question comes from the line of Brett Fishbin with KeyBanc Capital Markets. Your line is open.
Brett Fishbin, Analyst
Hey guys, thanks so much for taking the questions. 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 really tough 2023 comparisons but in context of a still very elevated order book in the range of $1 billion exiting last year?
Joe Dziedzic, President and Chief Executive Officer
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 '24 is from ramps that started in 2023 and '22, and they pick up as the year progresses. And so 6% to 8% organic growth for us is exactly 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%. We think 2023 was elevated in end market growth, and 2022 was below average. And so as we look at '24, we're assuming kind of a normal 4% to 6% industry growth, and that's the 6% to 8%. The new products that are ramping give us confidence in being able to do that. And to your question about the order book, 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 a kind of a rolling 12-month basis kind of 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.
Brett Fishbin, Analyst
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 where you're seeing additional upside maybe in terms of product areas? A little extra color there would be really helpful. Thanks so much.
Joe Dziedzic, President and Chief Executive Officer
Sure. Your question is specific to '23 or looking forward to '24?
Brett Fishbin, Analyst
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 guidance from last year?
Joe Dziedzic, President and Chief Executive Officer
Yes, you are referring to the new customers using PMA products. We achieved about 250 basis points of overall growth in '23 compared to 2022 from this customer segment. We had previously projected growth from $50 million in 2022 to between $80 million and $100 million by 2024. While the growth wasn't perfectly linear, we experienced strong progress, surpassing our expectations towards that $80 million to $100 million target. Given customer demand and the success of their products in the market, we are confident in raising the 2024 target by an additional $20 million. Last year, we increased the target from $60 million to $80 million and now to $80 million to $100 million. We are doing this again this year, as we are encouraged by the manufacturing increases and customer demand we are witnessing. We are backing their introduction of these innovative therapies that are making a significant impact for patients. Notably, these are primarily not spinal cord stimulation products but rather other neuromodulation therapies that are addressing many unmet patient needs, and we are eager to support our customers' success, which is reflected in our sales growth.
Brett Fishbin, Analyst
All right, thank you.
Joe Dziedzic, President and Chief Executive Officer
Thanks, Brett.
Operator, Operator
Do you have any further questions, Brett?
Brett Fishbin, Analyst
I can go back in queue if there is anyone else waiting to ask questions. Otherwise, I could ask one or two more.
Operator, Operator
Go ahead.
Brett Fishbin, Analyst
All right. Sure. 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 2 times target into 2025.
Joe Dziedzic, President and Chief Executive Officer
Yes, that's a great question, Brett. Your calculations are correct. At the midpoint, operating profit is expected to grow at a rate 1.7 times that of sales growth. The reason for this is that we are now returning to pre-pandemic levels of direct labor turnover. We had previously discussed that as direct labor turnover improves and supply chain disruptions ease, we could address the inefficiencies we have encountered in manufacturing over the past three years due to those disruptions. I'm pleased to report that our direct labor turnover is now back to 2019 levels as of January. Every quarter in 2023 showed improvement, and we ended the fourth quarter of 2023 slightly above 2019 levels; this positive trend has continued into 2024. This gives us confidence in addressing the inefficiencies arising from direct labor turnover, though it will take some time to resolve. We have various initiatives in our manufacturing operations aimed at achieving these efficiencies, and we expect continuous improvement throughout the year, providing us with momentum as we approach 2025. Our long-term goal remains to achieve operating profit growth at double the rate of sales growth. Additionally, we noticed ongoing improvements in our supply chain throughout last year, and as we entered 2024, we recorded the lowest level of disruption since we began tracking it in mid-2022. Therefore, I would encourage you to monitor our progress throughout the year; we anticipate margin improvements as we realize these efficiencies, and our long-term objective remains to have profit growth at least double that of sales.
Brett Fishbin, Analyst
All right, makes a ton of sense. And then kind of along similar lines, you have some of these cost headwinds starting to subside a little bit. But 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 some of those cost headwinds start to cool down a little bit if pricing can still be a positive lever or at least continue to be more neutral than in the past?
Joe Dziedzic, President and Chief Executive Officer
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.
Brett Fishbin, Analyst
I understand. Regarding the recent Pulse acquisition, it's still early, but how should we approach the integration process considering that InNeuroCo was also acquired recently? What is your prioritization for the level of integration you plan, and what key challenges or success indicators are you focusing on this year? Thank you for addressing my questions.
Joe Dziedzic, President and Chief Executive Officer
As soon as we closed, we began discussions with customers about the commercial synergies and the capabilities we have from both acquisitions. Customers responded positively to these acquisitions as they allow us to provide more for them. These were smaller acquisitions, and customers were pleased to see Integer acquire them, enabling us to scale and integrate their capabilities into our existing programs. This vertical integration sets us apart, and our sales team is already pursuing several commercial synergies. Our operational teams are exchanging best practices, with both sides benefiting from innovative, efficient approaches. Customers are also enthusiastic as our four recent acquisitions have reduced their supplier count by four, and they appreciate our efforts to help streamline and simplify their supply chain.
Operator, Operator
Your next question comes from the line of Matthew O'Brien with Piper Sandler. Your line is open.
Matthew O'Brien, Analyst
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 mentioned a more normalized environment this year, although we're hearing 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, 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.
Joe Dziedzic, President and Chief Executive Officer
Certainly, on the stock price, I'll let you figure that one out. We're just going to keep executing our strategy and delivering on our financial objectives. In terms of growth, we have great visibility to 2024 because of the $900 million order book and the success our customers are having with their novel therapies that they're bringing to the marketplace. And so we always come out with what we think is a balanced view that ensures that we can deliver on this growth. We have rolling 12-month forecasts 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 '24 and '25 and beyond. So we feel like this is a really balanced view of 2024, and we're excited to get into the year and execute on the first quarter.
Matthew O'Brien, Analyst
Got it. From the acquisitions, are you entering new areas that you hadn't explored before, or are you simply enhancing existing ones? Specifically, there have been recent approvals related to tricuspids. Is this an area where you could engage if it were to grow over the next few years? I have one final question. Thanks.
Joe Dziedzic, President and Chief Executive Officer
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 scale is an area that they're excited for Integer to own them. It has gotten exposure to maybe a couple of areas, more so heart pumps being one example with Pulse Technologies where it deepens our position in that space. And the broader capabilities and capacity enable us to move faster with our customers. So we're excited about having both the InNeuroCo and Pulse Technologies on the team.
Matthew O'Brien, Analyst
Congratulations on your permanent title, Diron. I have one last question regarding the deleveraging we observe in the income statement from top to bottom, particularly at the lower end of the range. Can you elaborate on this? Is it related specifically to interest expense? Additionally, the range is quite broad, which seemed reasonable earlier in the year. What factors influence reaching the low end versus the high end of that range? Thank you.
Diron Smith, Executive Vice President and Chief Financial Officer
Yes. Just to clarify, you're referring to the adjusted net income and EPS numbers.
Matthew O'Brien, Analyst
That's right. The EPS numbers.
Diron Smith, Executive Vice President and Chief Financial Officer
Okay. Yes, on EPS, I just wanted to confirm. Yes. So interest expense, we're up about $9 million midpoint on interest expense, and that's primarily related to the acquisitions of InNeuroCo and Pulse. So that drives about $13 million on the interest expense, and then the reduction is some additional pay down in debt. And then when you look at the tax rate, we're up about two percentage points on our adjusted tax rate year-over-year. That's primarily two points. One is the global Pillar 2 minimum tax rate impact. That's about a point-ish of tax rate and then another just less than a point related to our Malaysian tax holiday expiration that expired in 2023. And so there's some residual carryover impact of that. And then the other kind of other points would be a little bit of jurisdictional mix on the tax rate. So those two points are the primary drivers related to the EPS.
Matthew O'Brien, Analyst
Got it, thank you.
Operator, Operator
Your next question comes from the line of Craig Bijou with Bank of America. Your line is open.
Craig Bijou, Analyst
Good morning guys. Thanks for taking the questions. So I just want to start, we spent a lot of '23 talking about customer inventory work down. 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 just wanted to hear kind of your thoughts there and if that is, in fact, true, and '24 is going to be a normal year from that perspective.
Joe Dziedzic, President and Chief Executive Officer
Yes, Craig, it wouldn't be an earnings call without that question, so thank you. I'll begin by stating that we believe 2022 was a below-average growth year due to hospital staffing shortages, while 2023 experienced higher than average growth. When we consider both years, it appears to average out to more normal conditions overall. In 2022, as orders surged, we collaborated closely with customers to manage capacity in order to accommodate medical procedure volumes, addressing our concerns about significant order patterns that deviated from observable trends. The advantage of serving a diverse range of customers across various therapies and products allows us to gain a comprehensive view of the overall market. We discussed our holistic observations with customers. While order patterns may not have been typical, we felt that our shipments were more closely aligned with end-market demand. I mentioned during the third-quarter earnings call that we observed typical supplier adjustments, including inventory letters from customers, especially last summer. Additionally, I noted that we were experiencing standard year-end inventory management in certain locations, which we factored into our guidance. These adjustments reflected in our fourth quarter. Given our order book, we have strong visibility for at least the next six months, and even for some longer-term orders. We have incorporated all these factors into our guidance and feel confident about the projections we've provided for the full year and for the first quarter.
Craig Bijou, Analyst
Got it. Thanks for the thorough answer. I wanted to follow-up on the higher guidance for emerging customers. And sorry if I missed this, the specifics, but what's driving that raise to the $20 million? So was that outperformance versus what you were expecting through '23? Or is it better/higher expectations for '24 for those products?
Joe Dziedzic, President and Chief Executive Officer
It's a great question. The nature of our customers means their success or failure in the marketplace will directly impact the sales growth we presented. We adjust our forecasts based on risk because we anticipate that our customers will try to reach their most ambitious sales forecasts. Our over 40 years of experience in IPG and lead development for neuromodulation customers informs this approach. Recently, we've observed more significant success in the marketplace than our risk-adjusted growth predicted. For example, in the fourth quarter of 2021, we projected 2024 sales would be between $60 million and $80 million, but by the end of 2022, we adjusted that to $80 million to $100 million, which turned out to be conservative. Now, with our customers achieving success, we noted that for Integer, the growth from 2022 to 2023 was about 250 basis points from these customers. We are currently confident we’re exceeding the midpoint of the $50 million to $100 million range, which led us to raise our guidance to $100 million to $120 million. Ultimately, the success of our products in the marketplace has validated our conservative risk adjustments.
Craig Bijou, Analyst
Got it. That's helpful. And last one for me. It sounds like you guys are modeling in a decent amount of contribution from new acquisitions. So I wanted to get your sense for the end market acquisitions for you guys, I guess. Are there that many smaller deals to be done? And how is the pricing or valuation expectations on some of those deals?
Joe Dziedzic, President and Chief Executive Officer
We have a strong pipeline of tuck-in acquisitions. The team is doing an excellent job of finding opportunities. We believe we are uniquely positioned in the market to identify these acquisitions, often acting as a supplier to the targets or collaborating on their projects. Customers frequently propose acquisition opportunities to us, expressing admiration for the technology and design capabilities of smaller companies that they feel are not large enough to scale or that carry too much risk in critical high-growth programs. Sometimes, we receive inquiries directly from targets who are aware of our success with our previous acquisitions, thanks to our network of entrepreneurs and founder-led companies that we support and grow. We provide commercial synergies that help accelerate their business growth. Our investment and vertical integration enable them to enhance their impact in the marketplace. Therefore, they are thrilled with these prospects. Relative to others pursuing similar acquisitions, we believe we are in a unique position to identify these opportunities. As for pricing, while everyone desires the highest value, these entrepreneurs consider various factors in their decisions. We believe we can reach a fair price, often including earnouts for exceeding performance in the first few years, allowing them the potential for greater returns. We have successfully managed to acquire these companies at a fair price, enabling us to deliver commercial and operational synergies while achieving strong returns. Our diligence and integration practices are well-established, and we are enthusiastic about the progress with InNeuroCo and Pulse. We already have commercial opportunities underway, and the operational synergies begin immediately since they serve the same customers. Additionally, they target similar high-growth markets as us, making them excellent strategic fits, following our acquisition criteria.
Craig Bijou, Analyst
Great, thanks guys.
Joe Dziedzic, President and Chief Executive Officer
Thank you.
Operator, Operator
Your next question comes from the line of Joanne Wuensch with Citi. Your line is open.
Joanne Wuensch, Analyst
Good morning, and thank you very much for taking the questions. 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 just the business and the model has changed so much since then?
Joe Dziedzic, President and Chief Executive Officer
Good morning, Joanne. Your question was specific to fourth quarter or forecast, I'm sorry.
Joanne Wuensch, Analyst
No, for 2024, sorry.
Joe Dziedzic, President and Chief Executive Officer
That's okay. 2024. So 2024 at midpoint on the adjusted operating income were up 91 basis points at midpoint that 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 2022 and even throughout 2023. The good news is more than half of our sites now, their turnover is back to pre-pandemic levels or better. We're confident that we'll keep improving that throughout 2024. We'll work out those inefficiencies from before the pandemic, and we're confident that we're going to get back to and exceed the margins that we had pre-pandemic.
Joanne Wuensch, Analyst
Terrific, thank you very much. Have a great day.
Joe Dziedzic, President and Chief Executive Officer
Great, thanks Joanne.
Operator, Operator
There are no further questions at this time. I will turn the call to Andrew for closing remarks.
Andrew Senn, Senior Vice President, Strategy and Business Development and Investor Relations
Great. 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.
Operator, Operator
This concludes today's conference call. We thank you for joining. You may now disconnect your lines.