Integer Holdings Corp (ITGR) May 12, 2026 Conference Transcript

We have Payman Kels, president and CEO, and Darren Speth, 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, is this like trends on insourcing from some of the bigger medtech 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 got most of the letters right in integer. So, yeah, it's good to be here. Yeah, no worries at all. So, if you really think about what our customers are focused on, you know, 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 that 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, you know, getting with physicians, you know, trying to mature the therapies, you know, trying to get over the regulatory hurdles. We don't really see a trend towards insourcing. In fact, we see the trends that are more positively towards outsourcing because 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 OEMs 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, you know, some other, your competitors are 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?

Yeah, 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 CDMO, 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 to continue to grow in this space.

Okay, that's helpful. And then on the last earnings call, announced a strategic review. Maybe just start out, you know, 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. 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 the METIC ecosystem. You know, 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 heightened level of interest that I mentioned, our board, as their primary fiduciary duty, You know, 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 focused on a certain outcome. We're going to be exploring it. And, you know, if there's a path to deliver value to shareholders, our board would consider that. If the decision is that, look, you know, our standalone 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 months. It's certainly not weeks. It's months, but not years. Yeah, I mean, yeah, it's a, I can't give you a specific timeline, 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 advisor 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 whether there's a path forward.

So it's basically you probably have a plan for standalone strategic value and kind of where you think your valuation is over time. or if you execute your standalone plan versus what the other options are?

Yeah, 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. You know, 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 in integer 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 ability 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 above market performance in 2027. And I believe we're being noticed.

I mean, when you think about the strategic view timing, like, why not, you're kind of in an air pocket at the moment, you know, why not wait until you get through the air pocket to do a strategic review?

Yeah, it's purely because of the level of interest that we've had. Our board wanted to make sure that, you know, if there are a lot of interested parties that they evaluate any potential other option that might exist.

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

Yeah, sure. For Q1, we delivered in line with expectations. We were on the higher end of the expectations with both of our product lines, CV and CRMN, contributing to that. So we delivered in line with expectations. The reason behind the lowering of the guidance was that we had 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 the typical procedure, from access to the body to navigating, transeptal crossing, mapping, diagnostics, 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 two 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 trying to understand what their needs for products are, we are now, 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 and duration.

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

Yeah, so we get forecasts from our customers, and, you know, this is a forecast reduction for the second half of the year for the reasons that are mentioned, for some adjustment. We, in the discussions that we've had with our customers, we believe that this is a one-time adjustment And the products, I should mention that the reduction is not a result of a competitive loss or share loss or insourcing. We continue to be the supplier for these products. And, you know, based on the discussions with our customers, we believe that to be a one-time.

And it's multiple customers?

Multiple customers, multiple products, yeah.

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

Yes, that's what we believe, yes. Awesome.

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

Yeah, it's a great question. We've had those conversations. I believe that it is a result of what I mentioned to you, that with some of the civilization, 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 hand.

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 is somewhere in the mid to high teens for 2026. Procedure volumes, that's a total growth rate, which also has the impact of price, PFF price in it. procedure volumes. There are some commentary out there by some of the leaders that are in the low double digits. We believe that the P 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?

Yeah, I don't believe it is related to the share outlook, I think, because it's a number of customers, and as I mentioned, the number of products that 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 related to the EP versus the broader risk adjustment?

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

And why was it there a thought to kind of de-risk the rest of the guide on the other part of the business?

Well, Well, we don't take 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 circumstance, 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 guide.

You go back to the guide lower a couple of quarters ago in EP. So this is completely unrelated to that, 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 three products that were new to the market, that 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 when compared to 2025. Those products, you know, the EP products that we're talking about here, but also all three 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 to substantiate the guide that we have for this product.

And so that lower in 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 the two EP products?

The two EP products from two quarters ago?

Yeah, 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, as continuing to have a place in the market. Again, as our customers are telling us, we're not counting on any growth from these products in 2027. We expect them to continue in 2027.

And then in left-hand drop, you do have some exposure there.

Oh, yeah, yeah.

And so there's kind of two segments of the market, you know, concomitment, and there's standalone. One's been slowing dramatically, having an impact on the total market. You know, how is that impacting kind of your outlook?

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

And then same thing in CRM and Neuromod. Anything to kind of say that you have a decent quarter there in Q1? Just anything to call out there and sustainability there?

Yeah, as I mentioned earlier, both of our product lines delivered as expected. it. We had CRM 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 yeah, both product lines did well.

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

Yeah. 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, you know, 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 scale of 15% to 20%, as you pointed out, over the next three to five 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 We have some new product launches that are scheduled both in 2027 as well as in the coming years. When we look at, you know, the potential of those products and even when risk adjusted, you know, 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 think about all the new companies launching products and getting approvals and stuff like that.

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

And those customers, as they grow, it would still be reported in that business.

So some of those customers are probably more sizable than others? uh yeah obviously um the plan is you know and uh and our hope is that that all of those products and customers are are successful uh some of them have been quite successful have had a lot of growth and uh we hope unexpected that's going to be the case for most and how's the pipeline of like kind of new customers and i don't know maybe that business or other businesses too if you think about signing up you always have your big three customers but then like some of the new startups Yeah, so we are heavily embedded in the largest medtechs, but we also have exposure and we focus on some of the emerging innovators because of the opportunity that they have for growth. We balance those. We make sure that we put our efforts where we believe where the most opportunity will be with the most innovative and promising technologies. So, yeah, our pipeline in general, as measured by product development sales, has continued to grow over time. Since 2017, that pipeline has grown 300%, which is four times bigger. So with more products and the more complex products, and we've communicated that 80% of what's in that pipeline is geared towards the faster-growing market. So we're pretty excited about what's in our pipeline.

Any markets you'd call out in terms of, like, there's obviously RDN could be a bit, 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, one of the strengths that we have in our business is a 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 one or two of these products are not successful, there are more behind them that we believe that can be successful.

Yeah, and I think there was a lot of focus on reducing customer concentration risk and getting more visibility in the growth algo. A couple, you know, 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'd kind of call it, it kind of gives you confidence that, you know, this revenue growth that you're forecasting in the out years is, you know, going to sustain.

Maybe just a comment on the customer concentration. we have disclosed that our top three customers in alphabetical order are Abbott, Boston Scientific, and Medtronic. And the other customers that we haven't disclosed, four, five, six, and seven, are 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't be a leader in the 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 rhythm management, neuromodulation, and we have a variety of different programs, anything from components to complex sub-assemblies to complete finished products. So we have a very highly diversified portfolio with these customers. We're heavily embedded in them. Go ahead. Yeah, 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. Thank you. And then maybe more of a 2026 question. So, decline in revenues, low single digits in the first half and expect to 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 the three products that are giving us headwinds in particularly grew very strongly in the first half of 2025. 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 a market growth rate. And that would be our exit rate into 2027, which with the launch of new products that we expect, we are confident that we can get to 200 basis points over market.

Yeah, why go ahead and say 200 basis points over market in 2027 at this stage?

Well, this is our strategic objective, one of our strategic objectives to outgrow the market. We have delivered on this strategic objective in recent years. 2026, we believe, is a transition year. And, you know, 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 that 200 basis points above market in 27, you have an easier comp as well. And when you think about you have new products launching, what are kind of the underlying drivers of how much of it share gains versus market versus easy comp?

Well, the algorithm that we have is that our WAMGAR, weighted average market growth rate, is 4% to 6%. This is our markets. 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 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 20 basis points.

Okay, that's fair. And then it's all CPI today, inflation a little higher, and there's obviously a lot of worry in MedTech on inflation and supply chain again after 2022 and the memories there. I'm just curious what you're seeing in your business from all the stuff that's going on in the macro.

Yeah, 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 up products from our manufacturing facility so our exposure to the products that we ship is limited we have more more of incoming freight, which is, again, in the whole scheme of things, it's not material. We are watching very closely any inflation related to resin-based and 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, what we know now, 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?

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

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

No. No, I mean, we primarily do not manufacture hardware, if you think about it. We are more 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.

And same kind of rare earth metals, there's some inflation there.

Is it really more resins, not really on the metal side? um in in in normal metals uh you know what we use in our products is both pressure metals and non-precious excuse me precious metals and non-precious metals the precious metals are are are either buy forward or spot market price that that they get passed on to our customers obviously we wouldn't buy precious metal only to sell it at a loss um so that's a pass through and and we're not seeing any unusual inflation in non-precious metals okay and then how How are contract structures that you can pass through and do pricing increases for higher cost? So about 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 they're usually mechanisms that stipulate when and how cost inflation can be passed on. There's typically a threshold that if you go above which, then now it triggers some other calculation as to how you pass on. And I would highlight that about 30% of our business that is not under contract, well, we do have more flexibility there.

Okay, makes sense. And then just bigger picture on the margin outlook. You're still below kind of pre-COVID levels. Is there a path to get back to those 2019 levels and how?

Yeah, 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 two key pieces. One is our integer 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 improvements. 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 timeline 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 paths. How do you think about, like, before you were talking about OpIncome growth, 2x revenue Yeah, Payman had mentioned one of our strategic financial objectives is growing sales at 200 basic 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, integer production system, as well as maintaining a relatively flattish outlook on price as well.

And then how much investment needed in the SG&A line or R&D line on the OPEC side? Yeah.

On those two lines, we grow those. Our outlook would say we would grow those significantly lower than sales growth. Take the R&D 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 costs, 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. We don't have 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 free cash flow generation and improving that?

Yeah, 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. 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 shareholders, or how do you think about buyback versus M&A and all the other avenues?

Yeah, 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 partook 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.

That was my list of questions on the payment. If you had anything I wanted to close with.

No. Well, thanks again to you and the whole VFA team for hosting us. I would just reiterate that we have built over the past eight, nine years, a very robust and resilient business. We have continued to grow in this space and at the above market rates. We believe that the 2026 headwinds are transient in the short term. And 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 us.