Integer - Q1 2023

Transcript

Operator (participant)

Thank you for standing by. My name is Michelle. I will be your conference operator today. At this time, I would like to welcome everyone to the Integer Holdings Corporation First Quarter 2023 Earnings Release Conference 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. If you would like to ask a question during this time, simply press star followed by one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. Mr. Andrew Senn, you may begin.

Andrew Senn (SVP of Strategy, Business Development, Investor Relations)

Good morning, everyone. Thank you for joining us, and welcome to Integer's First Quarter 2023 Earnings Conference Call. With me today are Joe Dziedzic, President and Chief Executive Officer, and Jason Garland, Executive Vice President and Chief Financial Officer. As a reminder, the results and 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 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 Jason will then review our financial results for the first quarter of 2023 and provide an update on our full year 2023 guidance. Joe will come back to provide his closing remarks, and then we will open up the call for questions. With that, I will turn it over to Joe.

Joe Dziedzic (President and CEO)

Thank you, Andrew, thank you to everyone for joining the call today. In addition to KeyBanc and Benchmark, we are excited to welcome sell-side analysts from Piper Sandler and Bank of America, who have recently initiated coverage on Integer. We appreciate the coverage from all the sell-side analysts and are excited by the opportunity to reach more potential investors. In the first quarter, we delivered strong year-over-year results. Sales grew 21% organically, with strong double-digit growth across all product lines. Our adjusted operating income grew 28%, generating nearly 70 basis points expansion of adjusted operating income as a percentage of sales compared to last year. First quarter sales were stronger than we expected, driven primarily by the recovery of the delayed shipments from the second half of last year. We largely caught up on those delayed sales, the supply chain environment remains challenging overall.

On a positive note, we are continuing to reduce our direct labor turnover and are largely at the headcount levels we need to deliver on our high single-digit organic sales growth this year. We are reiterating our full-year outlook. We expect our organic sales growth to be 7%-9%, which is about 300 basis points above the growth rate in the markets we serve. We expect adjusted operating income to grow 10%-16% year-over-year. We are also confirming our free cash flow guidance of $70 million-$90 million, a strong year-over-year increase. The strategy we developed in 2017 and began implementing in 2018 is now producing projected sustained above-market sales growth and margin expansion in what remains a challenging supply chain environment.

It is an exciting time at Integer because demand remains incredibly strong, we are making the investments needed to deliver sustained growth, and we have a strong pipeline of new products concentrated in faster-growing end markets. I am grateful for our associates around the world that are delivering for our customers and making a difference for patients. I'll now turn the call over to Jason.

Jason Garland (EVP and CFO)

Thank you, Joe. Good morning, everyone, thank you again for joining today's discussion. I'll provide more details on our first quarter 2023 financial results and provide an update on our 2023 outlook. We started 2023 with a strong first quarter. Sales of $379 million delivered growth of 22% year-over-year and on a reported basis, and 21% organically, which excludes the impact of the Aran acquisition and currency differences. Our sales growth is indicative of continued demand strength across all product lines and includes the impact of delivering products that have been constrained by supplier delays in the second half of 2022. We did recover these delays, the supply chain environment remains challenging.

We delivered $66 million of adjusted EBITDA, up $12 million compared to last year or an increase of 22%. Adjusted operating income was up 28% or $11 million versus last year, and we have made progress on our year-over-year margin expansion. With adjusted net income at $29 million, we were able to offset the impact from higher interest rates and deliver $0.87 of adjusted diluted earnings per share, up $0.03 or 11% from the first quarter of 2022. In the first quarter of 2023, sales for all four product lines grew double digit year-over-year due to strong customer demand and continued recovery from the previous supplier delivery challenges. The Cardio & Vascular product line delivered 20% sales growth in the first quarter compared to a year ago.

We executed on strong demand in all markets and key products such as guidewires. We also delivered new product ramps in electrophysiology and benefited from strong performance from the recent Oscor and Aran acquisitions. Cardiac Rhythm Management & Neuromodulation's first quarter sales increased 18% over the first quarter of 2022, with double-digit growth in both CRM and neuromodulation, also driven by strong overall demand and particularly strong double-digit growth from emerging customers with PMA products. Advanced Surgical, Orthopedics & Portable Medical saw 42% growth in the first quarter versus a year ago, driven by increased price and demand as a result of the execution of the multi-year Portable Medical exit announced in 2022. This was partially offset by a single-digit decline in Advanced Surgical and Orthopedics.

Finally, Electrochem, our non-medical segment, delivered a first quarter sales growth of 63% versus first quarter 2022, driven by strong demand across all market segments. Further product line detail is included in the appendix of the presentation. To provide more color on our first quarter 2023 adjusted net income performance, we increased a total of $3 million compared to first quarter 2022, primarily due to operational improvements and supported by strong sales volume, partially offset by higher interest rates. In this higher interest rate environment, we incurred interest expense of approximately $7 million or $6 million in tax affected more than last year. On a sequential basis compared to the fourth quarter of 2022, we reduced our interest expense by $1 million tax affected, driven by the previously announced convertible notes.

Moving to cash, we generated $6 million in cash flow from operating activities in the first quarter of 2023. The lower nominal level of first quarter cash flow from operations is consistent with our typical annual profile, driven primarily by payment of associate short-term incentives and rebate payments. That said, on a year-over-year basis, we did deliver $12 million less cash flow from operations than the first quarter of 2022. Despite higher adjusted EBITDA, we had headwinds from higher interest expense, income taxes, and the final payment of employer Social Security taxes deferred from 2020 as part of the US Government CARES Act. In addition, we were impacted by the timing of customer collections, which pushed into the first week of the second quarter. These are not collectibility concerns, but we are working with our customers on improved payment timing.

Our CapEx spend of $25 million in the first quarter was at a rate in line with our expected annual CapEx. As a result, free cash flow was a usage of $19 million. As an update to the factoring program shared during our fourth quarter 2022 earnings call, we received our first tranche of funding last week totaling $20 million. For clarity, this is not in the first quarter results, but we will report it in the second quarter and will help fund our one-time facility investments needed to support growth. Net total debt increased $71 million-$978 million, driven primarily by fees associated with the $500 million convertible notes and the $35 million related cash call.

Our net total debt leverage at the end of the first quarter was 3.6x our trailing four quarter adjusted EBITDA, just slightly above our strategic target range, which remains at 2.5-3.5x. We will now transition to providing more detail on our guidance for 2023 sales, income and cash. As Joe mentioned in his opening comments, we are reiterating our 2023 outlook with a sales range of $1.47 billion-$1.5 billion, an increase of 7%-9% versus last year, which is above our underlying market growth rate. We expect margin rates to continue to expand through improved manufacturing efficiencies from greater stability in our direct labor workforce and increased product development sales through the remainder of the year.

We generally incur product development costs evenly across the year, while product development sales can be lumpy and are usually weighted towards the end of the year based on milestone achievement. Our adjusted operating income should grow through the year from higher product development sales, mostly visible as a reduction in RD&E expenses. Given these dynamics, we anticipate adjusted EBITDA growth of 11%-16%, adjusted operating income growth of 10%-16% and adjusted net income growth of 4%-11%, with adjusted earnings per share growth of $0.12-$0.42. To provide more insight into our outlook, first quarter sales of $379 million benefited from the closure of the second half of 2022 supplier delivery constraints of approximately $15 million above an underlying run rate of approximately $365 million.

As we begin the second quarter of 2023, we expect sales similar to the first quarter run rate of $365 million as we continue to execute in a challenging supply chain environment. We expect adjusted operating income as a percent of sales to improve throughout the remainder of 2023 as we improve manufacturing efficiencies and achieve higher product development sales. Before we close our financial discussion, I want to also affirm our cash flow guidance. As mentioned, last week we received initial funding from the previously announced factoring program for approximately $20 million, which is being used to fund the strategic growth in capital investments. We plan to continue to grow that program through the year to an estimated total of $35 million.

We expect to generate cash flow from operations between $180 million-$200 million. As previously shared, capital expenditures are expected to temporarily increase in 2023 as we invest in capacity expansions, resulting in a total estimated CapEx investment between $100 million-$120 million, resulting in free cash flow between $70 million and $90 million. The free cash flow generated will be used to reduce our net total debt, and we expect to end the year with our leverage ratio within our target range of 2.5-3.5x adjusted EBITDA. With that, I'll turn the call back to Joe. Thank you.

Joe Dziedzic (President and CEO)

Thanks, Jason. Integer had a strong start to 2023, with 22% year-over-year sales growth and adjusted operating income up 28% versus last year. We are reiterating our 2023 outlook as we continue to successfully execute our strategy to deliver above-market growth with expanding margins. We have a strong pipeline of new products and are investing in the capacity to sustain this growth. We remain focused on delivering for our customers and the patients they serve to generate a premium valuation for our shareholders. Thank you for joining our call this morning. I will now turn the call back to our moderator for the Q&A portion of our call.

Operator (participant)

At this time, if you would like to ask a question, please press star, then one on your telephone keypad. Again, to ask a question, please press star, then one. Your first question comes from the line of Matthew Mishan from KeyBanc. Please go ahead.

Matthew Mishan (Director and Equity Research Analyst of Medical Technology)

Hey, good morning. Thank you for taking the questions.

Joe Dziedzic (President and CEO)

Good morning, Matt.

Jason Garland (EVP and CFO)

Morning, Matt.

Matthew Mishan (Director and Equity Research Analyst of Medical Technology)

Hey. Just the first one on, like what you're seeing around your production schedules. I mean, you kept your revenue guidance the same. 1Q was definitely much better than expected. You know, what are you seeing from your customers and are you seeing, you know, demand increase through the course of the year versus what you initially expected? And are you able to meet that incremental demand?

Jason Garland (EVP and CFO)

Thanks for the question, Matt. You know, we're seeing... You've seen it across the industry that the underlying market seems to have been stronger than everyone expected and projected, and we're seeing that show up in sales. The thing that we're asking ourselves is, was that reflected in our customers' expectations when they placed orders on us, let's say, second half of last year, and they said, "What do we need from Integer in the first quarter, second quarter?" If that underlying strength in the marketplace was in that demand, then we wouldn't expect to see much different than the 7%-9% organic growth that we guided to for the year because that's what we've been planning for.

Given our backlog and the amount of visibility we have to demand over the next six to nine months, unless customers were to adjust the timing of that demand, we won't see it. If the demand that's happening in the underlying markets that we're hearing about from everyone in the industry, if that was unexpected and unplanned for, then we would expect to see customers ask us to pull some of that demand that's on order now. They would ask us to move it to be earlier in the year. That then has the potential then to lift our full-year outlook because obviously we're operating with pretty good visibility to demand with, you know, $900+ million on order, most of it this year.

It really comes down to were our customers expecting this incremental growth that's being observed in the underlying markets in the first quarter? I wish I had a clear answer for you, but we're obviously working with our customers to understand their needs near term, long term. We see this as it's only upside to us because we've got really good visibility to the year. We had a strong start to the year and we're excited about the prospects of the industry becoming even stronger than everyone expected.

Just, Joe and Jason, I guess just the flow-through. If you, if you were to see some incremental, you know, upside, on the revenue, you know, how should we think about the flow-through of that? Is this, is this a situation where you need to hire more people, you need to expedite freight, or is it something which can actually flow through at a, at a higher rate given the volume in the in your plants?

Yeah. Another great question. Maybe I'll start with we have the direct labor. We've been able to hire the direct labor that we need to deliver for this year. We think we can get the 7%-9% organic growth without adding much labor from where we were frankly at the end of last year. Because remember last year, we added 15% more direct labor on 6% sales growth organically. We hired more than we needed last year or more than we could actually ship. As our workforce becomes more proficient at what they're doing, and we work through the continued challenging supply chain environment, that creates more capacity with the existing footprint, with the existing workforce.

We feel like we'd be able to get some of that volume out, without having to add more direct labor, and without having to invest more. You know, we also have seen a very significant improvement in our direct labor turnover. I think that's been a challenge for everybody. We see it in our, in our suppliers as well. You know, we improved significantly in the fourth quarter versus third quarter last year. We saw that trend continue. We actually have about a quarter of our manufacturing sites are back to pre-COVID levels of direct labor turnover. I would attribute that to a number of factors. I think our plant leadership teams have done a great job of engaging our workforce. They've made changes in how we onboard, how we train.

I think we've gotten better at identifying through the interview process associates who are ideally suited to work in the manufacturing environment. Then I think the broader labor market has improved in many of the markets. I think it's all of those factors. The continued improvement in turnover, our ability to get our workforce more proficient and efficient at what they do is gonna give us the capacity to meet increasing demand while also generating the efficiencies which ultimately will show up in gross margins. We're excited about that. The supply chain remains challenging. You know, we're taking what we think is a pretty pragmatic approach towards what we expect from supply chain. We're seeing fewer issues.

We're seeing some suppliers improve, but there remains a group of persistently delayed suppliers. We also are seeing in some instances, we're seeing some quality issues start to come from some suppliers who I think are, you know, they're also training their new workforce, and we're identifying it early in the process, but that also ultimately leads to more disruption in efficiency. We're approach the supply chain. If demand is higher or stronger than what we're forecasting and expecting, we feel we have both the workforce and the capacity to deliver on that.

Matthew Mishan (Director and Equity Research Analyst of Medical Technology)

Okay. Excellent. Thank you for taking the questions, and I'll let some of the new guys ask some more.

Joe Dziedzic (President and CEO)

Thank you, Matt.

Operator (participant)

Your next question comes from the line of Craig Bijou with Bank of America. Please go ahead.

Craig Bijou (Equity Research Analyst of Medical Devices and Supplies)

Hey, guys. Thanks. Thanks for taking the questions and obviously congrats on a very strong start to the year. Wanted to follow up on, you know, the demand question, and I appreciate your, you know, your thoughts that you can, you can manage any demand above what you're expecting with your current infrastructure. You know, when does it get to a point, I guess, where, you know, if the underlying procedure volume is, you know, remains strong and maybe was a surprise to some of your customers and, you know, is there a point where, you know, you do have to add people, you know, capacity? I mean, is M&A a part of it?

you know, on the other side, if supply chain, you know, worsens a bit or, you know, some of these quality issues become more pervasive, you know, I guess it's just a follow-up on asking, you know, how, you know, your plan to deal with that and, you know, how nimble, I guess, you guys could be if you do need to add capacity.

Joe Dziedzic (President and CEO)

Great. Great, great question, Craig. Craig, thank you for picking up coverage, and welcome. We look forward to the opportunity to work with you. addressing your question, so maybe I'll frame it with last year we added 15% more direct labor workers, workforce associates, and we only grew sales about 6%. That gives you an idea of the magnitude of the inefficiencies that were caused by the supply chain environment, as well as the level of turnover and the training required. So, I mean, if I just kind of macro level, you know, if you only grew sales 6% and you added 15% more people, that's 9% capacity with your workforce.

This year we're projected to grow 7%-9%, so that you can see how you don't really need to add a lot more direct labor workforce in order to be able to get to 7%-9%. The other thing that we're planning on this year, and we've been very focused on, is reducing overtime because we have worked a lot of overtime due to the supply chain challenges and the training of associates. I think we have the capability to flex. Instead of reducing overtime, we could maintain overtime and where possible and where applicable, maybe even add overtime in order to meet a surge in demand if demand increases.

I also think we're becoming more proficient with our workforce because of the lower turnover and the increased stability and that training and proficiency is pretty impactful. I mean, it's very positive to capacity, not only just efficiencies, but capacity. I also think the supply chain environment, we're being very pragmatic. We're assuming the supply chain environment we're in is what persists for the foreseeable future, and quite frankly, until we can tangibly say, "Yes, we're getting better on time delivery, full quantities," and quite frankly in spec, so the quality that then allows us to fully use that material.

I think there's opportunity there that that'll create more capacity because we're still dealing with supplier deliveries that are not on time and quite frankly having to realign schedules. I think there's improvement potential there as supply chain improves and, you know, broader market indicates supply chain is improving. We, you know, we have our own unique suppliers who serve us, and it's not the macro picture, it's the micro picture that does or doesn't make a difference. You know, the other thing I maybe would highlight is in the first quarter, you know, our sales were about $15 million higher than what we had kind of guided to for the first quarter, and that was really, we were able to catch up on the sales from the second half of last year where we had supply chain challenges.

You know, that's a good indicator of some surge capacity that we were able to deliver on in the first quarter. I think there's a lot of moving parts there, but I maybe just summarize your answer. I feel like given the workforce we have now and the improved training and proficiency gives us some of that surge capacity. We have assumed supply chain, I would maybe say just pragmatically, we're not counting on it to get better in a meaningful way. That if that does get better, that gives us additional capacity. We will figure out how to meet our customers' needs in the same way that we have throughout the last couple years with the labor and supply chain environments.

Craig Bijou (Equity Research Analyst of Medical Devices and Supplies)

Got it. Very, very helpful. If I can ask, and I apologize if I missed it in the prepared remarks, you know, just the pricing environment for you guys. I don't know, if you disclose how much price contributed to the sales growth in the quarter, but, if you don't provide a specific number, maybe just, you know, talk about your ability to take some price, how durable you see that, you know, through 2023 and then, even in, you know, 2024 or 2025 as we start looking at the out years.

Jason Garland (EVP and CFO)

Sure. We have positive price this year. It's low, but it is positive and maybe the importance of that is to contrast that we've historically been 1%-2% price down. Historically, that as far back as we can see, that's been our typical pricing. Last year, 2022, we were about 1% price down, and that's because we were able to pass through some of the material and wage inflation that we incurred, really starting in the middle of 2021. We began to pass some of that through in 2022. We've been successful at passing more of that through in 2023.

I think the reason you don't hear us highlighting the price increase as it impacts margins is because it's really designed, and the way we negotiated it with our customers, is to cover the cost increases. We aren't raising prices in this environment necessarily to expand margins. It's really to cover cost. We think that's why our customers have been willing to work with us on that because they've been able to see the impact of those inflationary pressures. They're experiencing them. Quite frankly, we've got to go work on efficiencies that we can then share with our customers as part of both of us improving our operations.

We think of the price, and we think this is the spirit of strategic partnership and why we have the long-term agreements we have is that we've been able to pass through some of those inflationary pressures. It is a bit of an increase. It's not meaningful when you look at either the 22% growth in the first quarter, and it's not really meaningful in the full 7%-9% organic for the year. We also think that to get to your question about, well, how durable is it? We believe we're now in an environment and that we have a structure with our customers that going forward, we can be price neutral-ish. That any given year, we're gonna be somewhere around flattish.

Maybe some years it'll round down, and other years it'll round up. We, we think that's a meaningful change in our model. As long as inflation and labor ultimately go back to kind of historic levels, we think that's an ideal place to be. Then we can focus on growth with our customers and enabling their success and sharing synergies that we get from working together to make changes to drive efficiencies. We're excited about the ability to be able to pass through those inflationary pressures in 2023, and then looking forward being a neutral-ish pricing environment for us.

Craig Bijou (Equity Research Analyst of Medical Devices and Supplies)

Great. Very helpful. Thanks for taking the questions and look forward to the ongoing discussion.

Joe Dziedzic (President and CEO)

Great. Thank you, Craig. Thanks again for picking up coverage.

Operator (participant)

Your next question comes from the line of Phillip Dantoin with Piper Sandler. Please go ahead.

Phillip Dantoin (Assistant VP)

Hey, this is Phil on for Matt. He sends his apologies as he's currently in Europe and was worried about his connection here. Just a few from us, I appreciate the commentary on the delayed sales recoup here, you know, the $15 million in the quarter. That's totally behind you at this point. Is that correct? Then that $15 million, is that derived from any segment in particular, or is it spread broadly across all segments?

Joe Dziedzic (President and CEO)

Yeah. Phillip, welcome, and thank you as well, and Matt for picking up coverage. We look forward to working with you. To answer your question, the $15 million does mostly capture. There's a few million left in a few spots to complete what was pushed out late last year. It does almost entirely capture that. It was spread across both the cardiovascular and the mostly Neuromod segments that lands in the cardiac and neuromodulation segment. I think it was about evenly balanced.

It might have leaned a little more heavily in the cardiovascular side, but that's the sales explanation or the answer to the question. We're glad to get that behind us. There are still pockets where customers need and want more product, where we know they need to replenish inventory, and there are very specific supplier constraints that we're working to resolve in order to be able to do that. For sure, versus our guidance there's product that last year pushed out that's been addressed. There are still definitely pockets with certain customers where we know they need more inventory, and we're working to replenish that inventory.

That's been factored into our guidance in the 7%-9% organic growth because we fully expect to be able to fully replenish those customers' inventories this year.

Phillip Dantoin (Assistant VP)

No, that's helpful. I'm just trying to parse out. I mean, you said that your underlying markets are strong. Is there any particular market, you know, even with the bolus of this backlog in Cardio and Neuromod, they both grew nicely. Is there any particular market that you'd call out as being stronger compared to the others? Is it just, you know, broadly speaking, every market is doing well?

Jason Garland (EVP and CFO)

Well, without a doubt, every market, all of our product lines were up double-digit, and we saw that in many areas. Unquestionably, electrophysiology strength is there in the underlying market. You saw that in almost all of the industry and certainly our customers. We saw that flow through to us, which, you know, as we try to triangulate, well, how much of this demand that our customers see, sometimes it's a little hard to tell because they may pull more from us, but that might be to replenish inventories, and or it might be to meet the demand to try to keep their inventory levels up. They may or may not have anticipated that and therefore had the demand on us.

We're definitely seeing neuromodulation growth and strength, but I'll characterize that. It's not just in spinal cord stim. It's across all segments. The spinal cord stim is less than half of our neuromod sales today. You know, the pipeline of emerging customers that we have, we have been able to diversify into end markets beyond spinal cord stim. That's helped us in a meaningful way to have more opportunities, but not also be dependent upon just pain management. Whether it's epilepsy or sleep apnea or incontinence or Parkinson's, you know, various therapies, we've been able to diversify. So that gives us confidence in our ability for our emerging customers to continue to grow.

We had shared on our last earnings call that we had about $50 million from that bucket of mostly neuro emerging customers, and we expect that to grow to $80 million-$100 million in two years in 2024. That's across a wide range of therapies and end markets. Electrophysiology for sure, strength, Neuromod, but for us, more broad-based as we have new launches. You know, we did see the underlying strength kind of across the board. You see that in our double-digit growth across all the end markets. You know, we announced on our last call that we're making a significant investment in our one of our Irish facilities where we make guidewires.

Joe Dziedzic (President and CEO)

The demand for guidewires, which just points to the minimally invasive procedure growth in the industry, particularly some of the new therapies, tremendous demand, tremendous growth there. I think we may have shared on the last call that we're maxed out in that facility. We were last year, we are this year, and that's why we're making the investment to expand the capacity in a meaningful way.

Phillip Dantoin (Assistant VP)

Great. Just shifting gears here really quickly. I mean, you've been targeting operating income about 2x revenue growth. Given you've maintained guidance for the year here, you're close but not fully all the way there yet. What's kind of holding you back? And how did quarter one go in terms of your own, you know, internal expectations in terms of kind of getting to this 2x op income versus revenue growth down the road?

Joe Dziedzic (President and CEO)

Great question. You're getting at one of our three financial objectives or our strategy, which is to grow profit twice as fast as sales. you know, the big impediment this year is both supply chain and continuing to get direct labor turnover back to levels we were previously when we were growing profit twice as fast as sales. In 2018, 2019, we achieved that financial objective. you know, we have a quarter of our manufacturing facilities that their direct labor turnover is at or below pre-COVID levels. We need to get the rest of our facilities back to those levels. That'll naturally bring greater proficiency with our associates and therefore efficiencies.

Then on the supply chain, we do need suppliers to deliver on schedule, in full, and in spec. You know, when the supply chain environment does normalize, and I'll say normalize this back to pre-COVID, we're confident we can deliver operating profit that's twice as growth twice as fast as sales. So it's really those external factors. That's kind of the macro picture on 2023 and going forward, how do we get back to that level? Quite frankly, I think, you know, we gave a 7%-9% organic growth guidance for 2023 in October of last year. You know, seven months ago, we guided to 7%-9% organic growth because we could see that.

With the underlying strength in the marketplace, if that drives incremental volume, then that should help us, but that's to be determined. We'll have to see how those markets play out. You know, that's for the full year, we're confident as direct labor continues to improve, supply chain will get back to growing profit twice as fast as sales. On top of that, I would point to, you know, our strategic objective of growing profit twice as fast as sales was in an environment where we had 1%-2% price down. It actually should be easier for us to get to that profit twice as fast as sales now that we don't have 1%-2% price down, and we expect to be price neutral-ish going forward.

That's kind of the bigger picture, but maybe I'll speak to the first quarter specifically. When you think about the full year, our first quarter typically has the lowest amount of product development revenue in it. You know, we've shared how robust and strong our product development pipeline is and how we've shifted that from being 50/50% in, you know, high growth markets and 50% in lower growth or more mature markets. Now it's 80% in faster-growing markets. We've almost tripled the amount of development revenues or development sales that customers are paying us to do that work for. When you think about the timing of those revenues over the course of the year, it's much more heavily weighted to the fourth quarter and lower in the first quarter.

It's just a natural cycle of both the customer and us driving to meet milestones and finish programs at year-end. It's in their budgets, it's in our budgets, and they want to move the products forward. We typically have a heavier fourth quarter and a lighter first quarter. Why that's important is the cost to do this work, it's mostly R&D engineers and some material. The cost is there, whether the revenue is being recognized or not. If you think about cost being level loaded across the year, but more of the sales in the fourth quarter than the first quarter, you get a naturally lower margin rate for the total company in the first quarter to naturally higher in the fourth quarter.

It's a bit of seasonality that I'd say wasn't there three to five years ago, but there to five years ago, the amount of product development sales we had wasn't big enough to really be impactful to the company. This is really a new phenomenon for us that as we've gotten to such a strong level of product development sales, there is some I dare say seasonality, but it's more of the cycle of when programs reach milestones and get completed and allows us to then recognize the sales. I would expect to see margin improve through the rest of the year. That's one of the factors.

As direct labor turnover continues to improve, it's on that strong trajectory of improving, we'll see what happens with supply chain. I would say we're being pretty pragmatic about supply chain improving or we're not counting on it to improve a lot. We think that'll help us with margins as the year progresses. Hopefully by sometime in 2024 or 2025, we're back to a pre-COVID level of turnover and supply chain, and we're back on the growing profit twice as fast as sales. Sales are higher because now we believe we can do 6%-8% organically, which is 200 basis points above the markets we serve, which is one of our other financial objectives.

Phillip Dantoin (Assistant VP)

that was my next question, but, thank you so much for taking all of our questions, and then I'll hop back in queue. Thank you so much.

Joe Dziedzic (President and CEO)

Great. Phillip, thank you very much for the coverage. Look forward to working with you.

Operator (participant)

Once again, if you would like to ask a question, please press star, then the number one on your telephone keypad. I'm showing there are no further questions at this time. I'll turn the call over to Mr. Senn.

Andrew Senn (SVP of Strategy, Business Development, Investor Relations)

Great. Thank you everyone for joining today's call. 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 today's call.

Operator (participant)

This does conclude today's conference call. You may now disconnect.