Hello, everyone, and welcome to the Integer Holdings Corporation's Fourth Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. At this time, I would like to hand the conference over to Mr. Tony Borowicz, Senior Vice President of Investor Relations. Please go ahead, sir.

Good morning, everyone. Thank you for joining us, and welcome to Integer's fourth quarter and full year 2022 earnings conference call. With me today are Joe Dziedzic, President and Chief Executive Officer; and Jason Garland, Executive Vice President and Chief Financial Officer. Also joining us on the call is Andrew Senn, Senior Vice President, Strategy and Business Development. Andrew will be adding the title of Investor Relations when I retire at the end of this month. 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 a 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 an update on the execution of Integer's strategy. Jason will then review our adjusted financial results for the fourth quarter and full year 2022 and provide our full year 2023 guidance. Joe will come back on to provide his closing remarks, and then we'll open up the call for your questions. With that, I'll turn the call over to Joe.

Thank you, Tony. And as you bring your 21-year career at Integer to a close at the end of this month, I would like to take a moment to recognize your significant contributions to Integer. On behalf of all Integer associates, including our Board of Directors, and I'm confident many investors, we thank you for your leadership in helping to shape the company we have today and wish you the best as you enter the next phase of your journey. After this earnings call, Tony will officially pass the Investor Relations responsibilities to Andrew Senn, who has been leading our corporate development and business strategy for the last year. Integer had a strong finish to 2022 with double-digit sales growth across all product lines in the fourth quarter. We ended the year with fourth quarter sales up 19% and full-year sales up 13%. In the fourth quarter, we also delivered a 30% improvement in adjusted operating income and a 25% improvement in adjusted EBITDA. Earlier this month, we strategically replaced about half of our variable rate debt with a 2% and 8% fixed coupon convertible bond. This transaction delivers significant interest cost savings and repositions our debt to approximately 60% fixed, and 40% variable. Our 2023 sales outlook is what we believe to be an above-market 7% to 9% organic growth rate. We expect adjusted operating income to grow faster than sales at 10% to 16%. At the midpoint of our guidance, we are expanding adjusted operating income margins by about 70 basis points. We believe this will be a strong performance in what remains a challenging supply chain environment. We have been executing our product line strategies to accelerate our top line growth and now expect to deliver sustained above-market growth. Our strong product development pipeline in high-growth markets,…

Thanks, Joe. Good morning, and thank you again for joining today's discussion. I'll provide more details on our fourth quarter and full-year 2022 adjusted financial results and provide our 2023 outlook. We delivered fourth quarter results at the high-end of our October 27, 2022 guidance, reflecting a recovery from the supplier delays we faced in the third quarter. Though it remains challenging, we continue to effectively manage through this environment. In fact, in the fourth quarter, we delivered $11 million of sales above the midpoint of our prior guidance. This resulted in $372 million of fourth quarter sales, up $59 million or 19% over last year. Excluding the impact of acquisitions and currency fluctuations, our organic sales growth was 13% higher than last year. We delivered $73 million of adjusted EBITDA, up $15 million, compared to last year and an increase of 25%. Adjusted operating income was up 30% versus prior year to $57 million, and with adjusted net income at $37 million, we delivered $1.11 of adjusted diluted earnings per share of $0.12 or 12% from the fourth quarter of 2021. Before we go into detail on the full-year financial results, I wanted to transition to a discussion on our product line sales performance. The detailed product line slides that we have traditionally presented can be found in the appendix of this presentation. But this morning, we wanted to focus and summarize our commentary around the fourth quarter highlights across each of the product lines. As you can see in the fourth quarter 2022, we delivered double-digit year-over-year growth across all product lines. Our first product line, Cardio & Vascular, delivered 20% sales growth in the fourth quarter 2022, compared to the fourth quarter of 2021. This was driven by strong organic demand across all markets, especially structural heart…

Thanks, Jason. Integer had a strong finish to 2022 with fourth quarter sales up 19% and adjusted operating income up 30%. Our 2023 outlook is to grow sales high single digits and expand margins in what remains a challenging supply chain environment. Looking beyond 2023, we believe our strong product development pipeline in high-growth markets, combined with our demonstrated emerging customer growth positions us well for sustained above-market growth. We remain focused on executing our strategy to create a premium valuation for our shareholders. I will now turn the call over to the operator for the Q&A portion of our call.

Thank you, sir. [Operator Instructions] We will take a question from Matthew Mishan, KeyBanc.

Hey good morning and thank you for taking the question. I guess first, I just wanted to say thank you to Tony for all the help through the years and wish you the very best in retirement. Thank you, Tony.

Thank you, Matt.

And then I'm just going to start off with the market plus to the 6% – 6% to 8% growth from here on, on a sustainable basis. Is that including, I mean how are you incorporating the exit from portable medical and kind of Nevro in-sourcing over the next, like 2 to 3 years within that market plus 2? And then does it also include potential contribution from acquisitions?

Good morning, Matt. Thank you for the question. I'll start maybe in a reverse order. It does not include acquisition revenues. So any acquisitions would be inorganic on top of our organic growth of 200 basis points above the market. Acquisitions do help when we think about looking forward, Oscor and Aran, the two acquisitions we did at the end of 2021 and in the second quarter of 2022. They are contributing to accelerating our revenue growth because they both grew around 20% on a year-over-year basis pro forma, if you look at the part of the prior year that was not part of Integer. So, they're strong growers. Now, we [don't] [ph] expect 20% every year, but those two businesses have performed very well on a year-over-year basis, and we expect strong growth, high single digit, low double digit from those two acquisitions. So that does contribute to the total company growth rate for sure. Your other question on – as we think about looking forward, we definitely see strong growth from the pipeline that we have. When you think about Nevro, we've already factored in the Nevro impact of them in-sourcing into our guidance. That's – it's a couple of three-year transition. And I'll highlight that we do have a long-term agreement with Nevro. We are their second source for manufacturing, second source for them to their in-source. We also have vertical integration of components that we're selling to them. So that's been factored into our longer-term guidance. And we've been planning for that for, gosh, it feels like 1.5 years to 2 years since they announced their in-sourcing. So, that's in our 2023 guidance. That's in our outlook for the remainder. And then your question about portable medical, it's going to take another two to three years…

Okay. Excellent. So, that's a clear – that was a fully clean number, that's fantastic. And then when you think about the emerging growth company guidance that you've given and the increase, how did you incorporate Aran and Oscor into that? I think Oscor was closed by the time you gave guidance on that last time. Did that help the number or are those maybe a little bit longer term as far as emerging customers?

They help the numbers, particularly in the out years. And so, it does contribute to the growth. And as those businesses are growing faster than the average, that contributes to the accelerated growth for sure. We also think the capabilities both of those businesses bring gives us the opportunity to do more, and that's really from about capitalizing on the commercial synergies. Now that Oscor and Aran are part of Integer, we are having broader discussions with our customers who now see the strength, stability, size and scale of Integer and the ability to vertically integrate those capabilities. We think that will help us accelerate the growth. But right now, what we've incorporated in here is what we have visibility too, but we're confident that those commercial synergies will play out over time and give us even faster growth. Recognizing the development – product development cycle times, the businesses Aran, in particular, was acquired in April of last year, Oscor in December of 2021, it takes time then to turn those commercial opportunities into development projects then become sales. And so, the programs that require product development are probably not meaningful in the 2024 time frame, but there's plenty of off-the-shelf products within Oscor in particular, that we can capitalize on sooner. And we're beginning to see the growth potential of that. So, there are opportunities, and I would frame them as probably incremental and accretive to what we have on the slide here, but probably in the future years.

Okay. And then just a near-term question before moving on to margins. Just any commentary on the cadence of organic growth and operating margin progression as you move through 2023?

Sure. Great question. We tried to convey that we expect the first quarter to sales compared to fourth quarter deck to first quarter, we expect a little bit of a step down in the first quarter in sales. We highlighted that on our financial outlook. I think it was Slide number 12, I think, where with the second half of last year was – 2022 was about 358 million. That's really what we expect to be in that range when we look at the first quarter of 2023 because the fourth quarter did have some sales in it that really we ideally would have shipped in the third quarter had we not had some of the supply chain issues. So, we would expect first quarter 2023 to look a bit more like the second half average of 2022 and then go from there. Now that's going to be a really strong year-over-year, first quarter 2023 to first quarter 2022, a really strong year-over-year growth rate, remembering what happened in the first quarter of 2022, the world, particularly the U.S. and Europe and Asia had a spike in COVID absenteeism. In January that impacted our sales a bit in the first quarter. So, I would expect a very strong year-over-year first quarter, but the nominal sales will look a bit like the second half of 2022. And then we would expect to build off of that nominal level of sales in the second, third and fourth quarter. And then you would expect margin rates to mirror that growth profile. So, the first quarter margin rate will probably be a little lower because the sales are a little lower, volume is a little lower and then picking up as the year progresses.

And just for clarity, Joe is referencing Slide 27. Sorry.

Okay. And then going back to margins, and I appreciate Jason's commentary around like waiting for the supply chain to fully normalize and productivity to be better in the plans. But when you think about where you guys were in kind of 2019 and kind of where you are expecting 2023 to start off. And I mean should we be thinking about this as like a new base of margin where you get 2x sales growth from here? Or do you think you have an ability to recapture some of the lost margin from 2019 versus where you are today at a more accelerated pace as things get a little bit better?

Yes. Great question, Matt. I think you've heard from most of our customers, as they talk about what 2023 outlook looks like, if you point all the way back to pre-COVID 2019. I think you've heard everybody say there's order of magnitude about a 300-plus basis point delta that will take some time to fully get back to that. I think one of our largest customers said don't expect it anytime soon. I'm paraphrasing, but I think that was a clear message. On their last earnings call, I think you have to consider those supply disruption that everyone's been through and the material inflation of the labor environment where wages have gone up and there has been inefficiencies created by the environment of the past three years. Without a doubt, we are confident we can expand margins going forward in this environment, which is still a challenging supply chain environment. It's definitely better than it was, but recognizing it was an incredibly challenging supply chain environment. It's improving, but it remains challenging. And so, we're confident we can expand margins in 2023. And as the macro environment for labor and supply chain continue to improve and stabilize, we believe we can continue to expand margins. So, without putting a time frame on getting back to 2019 margins as we continuously expand margins, we believe we will get back there. I can't put a time frame on it because the labor environment and the supply chain environment matter with respect to getting back to those levels of efficiency. I'll also highlight we have been able to successfully pass through some of the labor and wage – some of the wage inflation and material inflation to our customers. We did that last year. Historically, we've been a 1% to 2% price down company. Last year, we were at the low-end of that range. In 2022, we were at the low end. In 2023, we expect to be slightly positive in price on a year-over-year basis, which captures the improvement in 2022, and that will continue into 2023. So that helps. But I can't put a time frame like getting back to 2019, but if we continuously expand margins, I'm confident we will.

Okay. And then just last question, and then I'll jump out. As you think about your M&A strategy and your M&A plan, you introduced like 1.5 years or 2 years ago at this point, how does it change with the CapEx investments you're making and the higher interest rates? Just how are you thinking about the dollar figure of potential M&A moving forward? I mean the $250 million, I think it is much greater than where, but free cash flow is coming in this year. I mean are you willing to go more on the variable rate debt side in a 7% interest rate environment if you do see the right type of acquisition?

Yes. So, it's a great question. So, we closed Oscor [220-ish million] [ph] in December of 2021. We closed Aran, USD 130-ish million in April of 2022. So, if you think about our cadence, the cadence would put it in the second half of the year, just thinking about a flow from a cadence standpoint. But your question about, well, how do we think about nominal dollars. We look at what our debt leverage is, and we remain very committed to 2.5x to 3.5x our debt leverage. The convertible bond issue we just did, I think, is a phenomenal example of how we continue to manage interest expense. We're [60-ish percent] [ph] fixed right now and about 40% floating, and our weighted average interest cost, this year, we estimate it's going to be a little over 4%, which matches where we were for the last 2 or 3 years. So, even in this high-rate environment, we've got interest expense in the P&L that it's at about the same weighted average interest rate. So, reflect on acquisitions, we're balancing all of that, obviously, with the higher variable rates, you're going to incur higher borrowing costs in the short-term, but there is a weighted average interest rate here that's very consistent over the past three years and what we expect in 2023 and potentially coming down as depending on what interest rates do in 2024 and beyond. So, I'd say, think of it in the context of maintaining our commitment to 2.5x to 3.5x debt leverage. We did bump above 3.5x when we did the Aran acquisition. That was second quarter. But by the fourth quarter, a couple of quarters later, we're right now at 3.5x, right, right at the top end of our 2.5x to 3.5x range. So, we really think of it in the context of our debt leverage and maintaining our commitment to that range. Maybe it can bump up a little bit for a few quarters with a very clear path and near-term plan to get back within the range. There is a robust pipeline that might be one of your next questions, the pipeline remains robust. Valuations haven't meaningfully materially changed for the high-value assets that we target when we think about what we're looking for. We want a business with an accretive growth rate, ideally either accretive margins to Integer or something that we can make accretive to Integer in relative near term given our operational and commercial synergies, and we want differentiated capability or we want to compound the capability we already have and further grow in the faster-growing end markets that we've been targeting. So, maybe in summary to all of that, think about our leverage and we're committed to maintaining our leverage while continuing to do accretive acquisitions for the company.

Given that you are answering the questions before I even ask them, I will jump out of the queue and let somebody else ask.

Thank you, Matt.

[Operator Instructions] At this time, there appear to be no more questions in the queue.

Great. Thank you, everyone, for joining today's call. I think over my career, I've done 50 of these earnings calls. It's been a pleasure – my absolute pleasure to interact with all the shareholders that have and rest assured you be in great hands with Andrew going forward. And with that, for the last time, you can access the replay of this call on our website, as well as the presentation we just covered. Thank you.

Once again, everyone, that does conclude today's conference. We would like to thank you all for your participation today. You may now disconnect.