Integer Holdings Corporation ($ITGR)

We have Payman Khales, President and CEO; and Darren Smith, Executive VP and CFO.

So maybe just to start out, one question that I get a lot and I don't have a good answer on it. Is this like trends on sourcing from some of the bigger med tech strategics. Is this a trend that's increasing? Or how are strategics thinking about insourcing versus outsourcing some of the manufacturing?

Sure. And thanks for having us, Travis. And you've got most of the letters right in Integer. So yes, it's good to be here.

Apologies.

Yes. No worries at all. So if you really think about what our customers are focused on, the OEMs, their primary focus is to bring, develop and bring to market the next generation of therapies. They need companies like us to help us -- to help them with their design development in terms of the manufacturability in terms of making sure that they are putting their efforts and focus where they can generate the most value, which is getting with physicians, trying to mature the therapies, trying to get over the regulatory hurdles. We don't really see a trend towards in-sourcing. In fact, we see the trends that are more positively towards outsourcing because that companies like us with the scale and breadth of capabilities that we have with the technical expertise that we have that can help them bring all this product together helps them bring products into market faster, which is the reason why we believe that our need companies like us to bring products to market faster. So hence, we see the trend more towards outsourcing than insourcing.

Okay. That's helpful. And when you think about your position in the market, some other -- your competitor, private or part of larger companies. And so just like how do you think about your market position and kind of where you excel and kind of shares increasing or not?

Yes, sure. I mean we are a leader in the industry. We've got tremendous engineering and technical expertise and capability, which is what delivers a lot of value, but we also have a lot of scale in manufacturing. We have a global footprint. So as we think about our focus, which is primarily a the entirety of our focus is to do what we do, which is deliver value to our customers. We're not a division of a bigger company, if you will, the entirety of what we do, the focus the capital allocation, the investments that we have is dedicated towards what we do. So we believe that we are well positioned and to continue to grow in this place.

Okay. That's helpful. And then on the last earnings call, announced a strategic review. Maybe just start out why announce this now and more broadly?

Sure. Integer as a leader in this space, has always had interest by other parties. That interest has been heightened in recent months. So we've had a relatively large number of parties that have expressed interest in Integer. We believe that's because of our leadership position in this space because of how integrated we are in thematic in the metric ecosystem. We are heavily embedded in some of the largest OEMs in this space. We have deep and broad relationships with them. So we are an attractive company and given the level of interest, the high level of interest that I mentioned, our Board, as their primary fiduciary duty, they want to make sure that they look at all ways and all avenues that we can deliver value that our board can deliver value to shareholders. So this is the reason why we're doing this now. I would tell you that -- this means that they're exploring all options with an open mind. It doesn't necessarily mean that there will be a certain outcome, nor is the Board necessarily focus on a certain outcome. We're going to be exploring it. And if there's a path to deliver value to shareholders, our Board would consider that. If the decision is that, look, our stand-alone strategy is a better path to delivering value for shareholders well then we'll do that.

And how are you thinking about timing? I think you said months, not years.

Well, it's actually -- yes, it's certainly not weeks, it's months, but not years, yes. I mean, yes, it's I can't give you a specific time line, but it's not going to be measured in years.

What are some of the steps that kind of need to be taken by the board at this point as part of the strategic review?

Well, we have -- as we mentioned in our press release, we have an adviser that's Goldman. They have launched a process. We are in the early stages of that. And we'll go through the process and evaluate all proposals and make a decision our Board will make a decision as to what it is a path forward.

Okay. So it's basically, you kind of -- you probably have a plan for stand-alone strategic value and kind of where you think your valuation is over time or if you can execute your standard plan versus what the other options are.

Yes. I mean we have a strategy that our Board believes in. We believe that, that strategy has demonstrated that it can deliver value. We continue to be confident in that strategy. This is just about evaluating whether -- another option might be able to enhance that value for shareholders.

Okay. Makes sense. And then what do you think caused the increased interest editor at this stage?

Well, we believe that, as I mentioned earlier, we are an attractive player in the space. We've demonstrated a lot of capability and the ability to to deliver at above-market performance. I mean 2026 is a little bit of a transitory year of headwind, but we fully expect to get back to to above-market performance in 2027, and I believe we're being noticed.

And when you think about the strategic view timing like why not you decide kind of in an air pocket at the moment. Why not wait until you get through the air pocket to do a strategic review?

Yes, it's purely because of the level of interest that we find our Board wanted to make sure that there are a lot of interested parties that they evaluate any potential other auction that modest.

Okay. That's sure. And then kind of post Q1, it was kind of a lowered outlook for growth, mostly due to changes in EP products, not PFA, I believe, in some broader risk adjustment adjusting in the numbers. Maybe talk about some of the kind of outperformance in Q1 and explaining the lower outlook.

Yes, sure. For Q1, we delivered in line with expectations. We were on the higher end of the expectations with both our product lines CV and CRM contributing to that. So we delivered in line with expectations. The reason behind the lowering of the guidance was that we had some -- a few of our customers lowering the forecast for a few electrophysiology products, these are products that are primarily used in electrophysiology procedures. There are a number of products that are used in this type of procedure. We participate across all the products in a typical procedure from access to the body to navigating transseptal processing, mapping, diagnostics and and ablation. So these products were more related to all the steps before getting to the ablation. And we believe the reason for that is because after 2 years of really fast growth in the electrophysiology space with the introduction of PFA, go back about a couple of years ago, this technology has very rapidly disrupted this space, we estimate according to what our customers tell us that about, give or take 80% of the procedures in the U.S. are now utilizing PFA as opposed to some legacy products, which is an incredibly fast pace of adoption. So if you think about that level of disruption and what that has brought with all the OEMs try to understand what their needs for products are, we are now -- we believe we are entering a period of stabilization and normalization that allows our OEM customers to have a better view of what products they need and how much of the products that they need and they've decided that they might have a little bit too much product on hand, and they're adjusting that. We believe that to be short term in duration.

And then what kind of gives you the confidence you said kind of stabilizing or the kind of at this point, I can be able to forecast it is not going to get worse from here?

Yes. So we have -- we get forecast from our customers, and this is a forecast reduction for the second half of the year for the reasons that I mentioned for some adjustment. We -- in the discussions that we've had with our customers, we believe that this is a onetime adjustment. And the products, I should mention that the reduction is not a result of a competitive loss or share loss or in-sourcing. We continue to be the supplier for these products. And based on the discussions with our customers, we believe that to be a onetime.

It's multiple customers.

It's multiple customers, multiple products

Okay. And I think one point you wanted to make, it's not really a pulling of business. It's more -- does it change in orders near term, right?

Yes, that's what we believe, yes.

And why do you think customers are doing this now versus kind of 3 months ago?

Yes, it's a great question. We've had those conversations. I believe that it is a result of what I mentioned to you that that with some of the stabilization, normalization and the better visibility that our customers have, they've decided that they need to adjust their production plans. And as a result, they've adjusted their forecast on us based on the products that they have on.

Do you think they're taking a different view of the market, EP market?

No. I mean if you listen to some of the leaders in this space, the growth in this -- in the EP space continues to be strong. the estimate that the leaders have put out there somewhere in the mid- to high teens for 2026. Procedure volumes, that's the total growth rate, which also has the impact of price, PFF price in procedure volumes, there are some commentary either with some of the leaders that are in the low double digits. We believe that the EP market continues to be robust and strong.

Do you think the customers are taking a different view on their share outlook at this point or not related to that?

Yes. I don't believe it is related to the share outlook, I think, because it's a number of customers. And as I mentioned, a number of products, we believe that it's a result of an adjustment that's mostly tied to inventory levels.

Okay. of the lower guide this year, how much was the -- related to the EP versus the broader risk adjustment?

Yes, there were some puts and takes there. I would say that -- more than half of it was EEP, but we also put a layer of risk adjustment additional, as we mentioned.

And why was it there a thought to kind of derisk the rest of the guy on another part of the business?

Well, we don't take a lowering of guidance lightly. Obviously, we've had some variability in the EP space, in particular, since we had an adjustment in October of last year, very different circumstances, of course, we've had an adjustment now. Although we don't have line of sight to any additional pressure either in EP or elsewhere, we thought it was prudent to put a little bit more risk adjustment in the guidance.

When you go back to the guide lower a couple of quarters ago in EP. So this is completely unrelated to that. Those numbers are unchanged and kind of tracking as expected?

Yes. The reason for the adjustment of the guidance in October was that we had 3 products that were new to the market. But after a strong period of ramp, our customers told us that those products are not getting the rate of adoption that they had expected. Hence, we had a lowering of the revenues in 2026 in relation in the - when compared to 2025. Those products, the EP products that we're talking about here, but all 3 products are tracking to our forecast and the forecast that we have, the commentary that our customers give us and the purchase order coverage that we have substantially the guide that we have for this product.

And so that lower EP was really related to more share outlook, right, in terms of what those customers thought on the share position in those products.

Are you talking that the 2 EP products..

The 2 EP products from 2 quarters ago.

Yes. Those EP products were not being adopted as well as some other products that were in the market.

Right. Okay. And then how do you think that carries into next year on those products?

We see these products as continuing to be steady. It's continuing to have a place in the market, again, as our customers are telling us. We're not counting on any growth from this product in 2027. We expect them to continue in 2027.

Okay. And then in Walter, do you have some exposure there?

Yes.

And so there's kind of 2 segments of the market on commitment, and there's stand-alone once been slowing dramatically have an impact on the total market. How is that impacting kind of your outlook?

Yes. The exposure that we have to LAAC is smaller. We have some exposure to it, but is not a meaningful contributor to our growth or if you will, have headwinds in this case.

And then same thing in CRM and neuromod and then you kind of said that you had a decent quarter there. in Q1. Just anything to call out there, sustainability there?

Yes. As I mentioned earlier, both of our product lines delivered as expected. We had that came a little bit stronger. As you know, we have some headwinds related to neuromod because of the one product that was offset by CRM. But yes, both product lines did well.

And then the PMA portfolio still expecting 15% to 20% growth there.

Yes. At the end of 2024, we had communicated that the size of that portfolio had reached $125 million from when we started many years earlier in 2018, that was $10 million. So that portfolio has had a very strong growth. We, at that time, communicated that we expect that portfolio to grow at a Ku of 15% to 20%, as you pointed out, over the next 3 to 5 years, that continues to be our expectations.

And what gives you the confidence that, that's going to happen?

We have the performance of the products that are there in that portfolio. We have some new product launches that are scheduled in -- both in 2027 as well as in the coming years. When we look at the potential of those products, -- and even when risk adjusted, we have confidence that we can get to 15% to 20% CAGR.

Are there a lot of new customers coming your way in that market -- in that business? Just thinking about all the new companies launching products and getting approvals and stuff like that.

Yes. We have a group of about 40 customers in that grouping. The development cycle and the sales cycle for this product is quite long. So the products that are that have launched and are expected to launch in the near future or products that have been in development for years and years. Obviously, we have more customers. We have, give or take, 10 of those 40 customers of that product in the market right now. So we have another more than a couple of dozen that are behind this. So we believe we are well positioned for the coming years in terms of new product concise.

And those those customers as they grow to still be reported in that business. So some of those customers are probably more sizable than others.

Yes. Obviously, the plan is and our hope is that all of those products and customers are successful. Some of them have been quite successful, have had a lot of growth, and we hope unexpected that's going to be the case for most.

And how is the pipeline of like kind of new customers I don't know maybe that business or other businesses, too, if you think about signing up, you obviously have your big 3 customers, but the kind of the new start-ups, I guess, in that type.

Yes. So we have -- we are heavily embedded in the largest med techs, but we also have exposure and we focused on some of the emerging innovators because of the opportunity that they have for growth. Rebalance those. We make sure that we put our efforts where we believe with the most opportunity will be with the most innovative and promising technologies. So yes, we -- our pipeline in general, as measured by product development sales has continued to grow over time. Since 2017, that pipeline has grown 300%, which because it's 4x bigger. So with more products and more complex products. And we've communicated at 80% of what's in that pipeline is geared towards the faster growing market. So we're pretty excited about is in our plan.

Any markets you'd call out in terms of like there's -- obviously, RDN could be a bit that you have exposure there, but anything else you'd kind of call out that could be a big growth driver for you.

We have -- so we're not counting on one product to substantially and meaningfully move the needle for us. We have 1 of the strengths that we have in our business is the diversity of our portfolio, both in the existing product portfolio that we have, but also in terms of what's in our pipeline. So not one program in our existing portfolio future is expected to drive more than a few percentage points of our total revenues. -- it's a number of diversity of the products that gives us the confidence that even if 1 or 2 of these products are not successful, there are more behind them that we believe that can be successful.

Yes. And I think there was touristic getting more visibility in the growth algo, a couple of, I guess, guidance lowers over the last year, maybe questions that. So just if you think about the go forward and you're predicting the business and I guess you have the pipeline that you can see that we can't see. But anything else you can kind of call out that kind of gives you confidence that this revenue growth that you're forecasting in the out years is going to sustain?

Yes, maybe just a comment on the customer concentration. Our -- we have disclosed that our top 3 customers in alphabetical order are Abbott, Boston Scientific and Medtronic. And the other customers that we haven't disclosed 4, 5, 6 and 7 or some of the very big names that you would recognize. So obviously, as a leader in the space, in the CDMO space, we have to have a big presence with the leading companies on the globe because otherwise, we can be a leader in this space. But what I would highlight is that with these customers, we have hundreds of different programs. We participate in most, if not all of their businesses, be it cardiovascular cardiac with a management neuromodulation and we have a variety of different programs, anything from components to complex subassemblies to complete finished products. So we have a very highly diversified portfolio with these customers. We're heavily embedded in them. Yes. So that's, I think, when we look at the diversity that we have with the leaders in the industry, and we continue to expand our businesses with them. When we look at the strength of the emerging customers and the numbers that we have, we are pretty excited about the potential of our business.

Okay. That's fair. And then maybe more of a 2026 question. So decline in revenues, low single digits in the first half and expect a return to market growth in Q4. So just help us understand that transition in '26.

Sure. So we -- the biggest part of the headwind that we have is in the first half of 2026 because there are 3 products that are given us headwinds in particularly grew very strongly in the first half. As we go through 2026, that headwind becomes less and less, and it becomes substantially less in the fourth quarter. So that's what gives us confidence that we will get to market growth. When you adjust for production days, we have an unusual calendarization where we have 5% less production days in the fourth quarter, 5% more in the first quarter. So when you adjust for production days, we expect to get to market growth rate. And that would be our exit rate into 20 which with the launch of new products that we expect, we are confident that we can get to 200 basis points over market.

Yes. Why go ahead and say 200 basis points above market in '27 at this stage?

Well, this is our strategic objective. One of our strategic objectives to outgrow the market, we have delivered on the strategic objective in recent years. 2026, we believe, is a transition year. And given what we have visibility to, we are confident that we can get to this level 200 basis points over market in '27. So we thought it was important to communicate that.

And then when you think about the 200 basis points above market in '27, you obviously have an easier comp as well. And when you think about new products launching, what are kind of the underlying drivers of how much of share gains versus market versus easy comp? .

Well, the algorithm that we have is that our WAMGR, weighted average market growth rate is 4% to 6%. This is our market. And our underlying business performs at that level. We expect it to perform at this level in 2027, which is going to be our exit rate in -- when we exit the fourth quarter in 2026. And we have new product launches that when you layer that on top of it, we believe that we'll get to 200 basis points.

Okay. That's fair. And then it's all CPI today, inflation a little higher and there's obviously a lot of or in medtech on inflation and supply chain again after 2022 and the memory is there. Just Curious what you're seeing in your business from all the all the stuff that's going on in the macro.

Yes, sure. I mean we are watching, as everybody is the conflict in the Middle East that's causing some inflation. So the most obvious, I guess, source of inflation would be fuel prices on freight. We have limited exposure there because a lot of our customers are big companies and they have their own logistics. So typically, they pick our products from our manufacturing facility. So our exposure to the products that we ship is limited. We have more incoming freight, which is again, in the whole scheme of things, it's not material. We are watching very closely and inflation related to resin-based on plastic-based product. We're also looking at potential disruption in supply. We don't believe that there is a high risk of supply disruption for those just given the diversity of the supply base that we have. And we don't believe that any inflation at this point to be is going to be material for 2026.

What percent of resins is your cost of goods sold? -- low single digits or mid-single digits, something like that?

Yes. We haven't disclosed it in that, but what I would tell you is that we have the components, the raw material that we use is both resin-based and metal-based as well as others, but we haven't really broken it out in that that way.

And then computer chips or memory or anything like that, there's no exposure there, right?

No. I mean, we don't -- we primarily do not manufacture hardware. If you think about, we are more ore on the disposable side, the catheters, whatnot. There are some, for example, PCBAs and some of the products that we manufacture, but generally speaking, our exposure to chips is limited.

Good. And same kind of rare earth, I guess metals, there's some inflation there. Is it really more resins, not nearly on the metal side?

In normal metals, what we use in our products is both pressure metals and nonprecious -- excuse me, precious metals and not precious metals. The precious metals are either buy forward or spot market price that get passed on to our customers. Obviously, we wouldn't buy precious metal only to sell that a loss. So that's a pass-through. And we're not seeing any unusual inflation in non-precious metals.

Okay. And then how are contract structures that you can pass through and do pricing increases for higher cost.

So what 70%, give or take, of our business is under some sort of a long-term agreement. And we usually have mechanisms in those agreements that are different based on the contract, but there are usually mechanisms that stipulate when and how cost inflation can be passed on. There's typically a threshold that if we go above which then now we trigger some other calculation as to how you pass on. And I would highlight that about 30% of our business that is not under contract will, we do have more flexibility there.

Okay. Makes sense. And then just bigger picture on the margin outlook. You're still below kind of precut levels. Is there a path to get back to those 2019 levels and how.

Yes, Travis, I'll step in here. Yes, we definitely see a path to returning back to, call it, 2019 levels. At that time, our gross margin was kind of in the 30% range and our operating margin was in the 18% range. And we see no structural reason why we're not able to return to that. Our focus on growing the margin is kind of 2 key pieces. One is our energy production system, which is where we have continuous improvement, our version of Lean reducing direct material costs through scrap reductions as well as direct labor efficiency and improvement and that's where we expect to see gross margin expansion in that area as well as through fixed cost leverage, both in the overhead as well in the OpEx line. So at this time, we don't see any hurdles or obstacles to returning to that. We haven't shared kind of what the time line for that specifically looks like. But we also don't see that as a limiting factor where we will potentially be able to exceed that as we continue down our efficiency path.

And how do you think about like before you were talking about op income growth, 2x revenue growth?

Yes. Payman had mentioned our -- 1 of our strategic financial objectives is growing sales at 200 basis points above the market. Our second strategic financial objective that we have reiterated as recently as February was to grow our operating income at twice the rate of sales growth, and that is still a strategic objective. Again, from a process and how we look at that from an algorithm perspective, it's a volume leverage intraterproduction system as well as maintaining a relatively flattish outlook on price as well.

And then how much investment you did in the SG&A line our R&D line on the OpEx side.

On those 2 lines, we grow those -- our outlook would say we would grow the significantly lower than sales growth. in the RD&E line, what that really is fundamentally is our customer supported and funded development where we work with them. So a lot of our incremental growth in the development pipeline has brought higher cost but also more reimbursement and funding as well. So that line, we see being relatively flat, growing much lower than the rate of sales. And then SG&A, we're fairly well funded there. It's not a -- we don't have a large sales force as an example. So it's also another area that we're able to grow slower than the rate of sales.

And how do you think about kind of free cash flow generation and improving that.

Yes, free cash flow generation for us, there's a couple of key pieces. One is certainly our level of capital expenditures. We feel that the organic spend in our CapEx is at kind of the right level for a growing business kind of in that 5% to 6% range. And then the fall-through from there on free cash flow, one of the areas that we're focused on is our working capital improvement, particularly around some of the accounts receivable areas. So that's an area of improvement for us. And then gross margin expansion as we see our operating margin and gross margin expand, we expect to see that improve our free cash flow as well.

And then use of free cash flow proceeds like returning capital to shareholders? Or how do you think about buyback versus M&A and all the other avenues Yes.

Just from an overall capital allocation, our priorities have been organic first and foremost, we feel that that's the best return. Secondly, around M&A, primarily tuck-in M&A to build further capacity or capabilities to support the long-term growth of the business. That remains a priority for us. And then share repurchase has been a more opportunistic approach, which we or took in fourth quarter as well as first quarter of this year doing $100 million repurchase on our $200 million authorization. As of right now, we have no further share repurchase currently in the outlook.

Okay. It was my list of questions. I don't know payment if you have anything I wanted to close with.

No. Well, thanks again to you and the whole view of for hosting I would just reiterate that we have built over the past 8, 9 years, a very robust and resilient business. We have continued to grow in this space and above market rates. We believe that the 2026 headwinds are transient in the short term. We look forward to getting through the next few quarters and getting back to above market performance in '27.

Great. Thanks for coming.

Thanks for having, thank.