Hello and welcome to the Integer Holdings Corporation Third Quarter 2023 Earnings Call. [Operator Instructions] I will now turn the conference over to Mr. Andrew Senn, Senior Vice President Strategy, Business Development and Investor Relations. Please go ahead.

Good morning, everyone. Thank you for joining us and welcome to Integer’s third quarter 2023 earnings conference call. With me today are Joe Dziedzic, President and Chief Executive Officer and Diron Smith, Executive Vice President and Chief Financial Officer. As a reminder, the results and the data we discuss today reflect the consolidated results of Integer for the periods indicated. During our call, we will discuss some non-GAAP financial measures. For 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 will share some exciting news regarding our strategic acquisition. Diron will then review our financial results for the third quarter 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 your questions. With that, I will turn the call over to Joe.

Thank you, Andrew and thank you to everyone for joining the call today. First, I would like to congratulate Diron Smith on being appointed our Chief Financial Officer. Diron joined Integer in 2021 as our global FP&A leader. He brings strong manufacturing and operational finance experience to the CFO role with a leadership style that is collaborative and candid. Diron is focused on enabling the business to deliver excellence for our customers, which will lead to great results for investors. I look forward to partnering with Diron as we execute our strategy to earn a premium valuation. Before I provide an update on Integer, I’d like to take a moment to remember our long-time sell-side analyst from KeyBanc, Matt Mishan, who passed away unexpectedly on September 8. That was greatly respected within our industry. He was always energetic, thoughtful and brought a sense of humor to what we all do everyday. He will be missed and our hearts go out to his family, friends and colleagues. Transitioning to our earnings call, we delivered another quarter of strong year-over-year results. Sales grew 18% organically from robust customer demand across our targeted growth markets. Our adjusted operating income grew 39%, while expanding margins by approximately 240 basis points compared to last year. We were able to deliver more products to our customers than our prior guidance assumed. We expanded margins from volume leverage as well as efficiencies gained from an improving supply chain. Based on continued strong customer demand, we are raising our full year outlook again. At the midpoint of our guidance, we expect full year sales to grow 15% and adjusted operating income to grow 25% year-over-year. The strategy that we began implementing in 2018 is producing above market sales growth, with a pipeline to sustain growth at 200 basis…

Thank you, Joe. Good morning, everyone and thank you again for joining today’s discussion. I will provide more details on our third quarter 2023 financial results and provide an update on our full year 2023 outlook. It is important to note third quarter results are not impacted by our acquisition of InNeuroCo, while the full year outlook includes this acquisition. We continued our first half momentum through the third quarter, delivering another quarter of strong performance. With sales of $405 million, Integer delivered 18% year-over-year sales growth on both reported and an organic basis, which excludes the impact of currency fluctuations. Our sales performance reflects the continued strong customer demand across our targeted growth markets and the ongoing improvements in the supply chain environment. We delivered $81 million of adjusted EBITDA, up $18 million compared to the prior year or an increase of 28% and adjusted operating income increased 39% or $18 million versus last year. As we continue to make progress on our year-over-year margin expansion, adjusted operating income as a percent of sales increased by 240 basis points versus the prior year to 15.9%, driven by volume leverage and efficiencies gained from the continued improvement in the supply chain. With adjusted net income at $43 million, we delivered $1.27 of adjusted diluted earnings per share, up $0.32 or 34% from the third quarter of 2022. I will touch on the year-over-year growth and adjusted net income in a few moments. Diving deeper into our sales by product line, we delivered strong year-over-year growth in our C&V and CRM&N product lines in the third quarter of 2023. Cardio & Vascular delivered 23% sales growth in the third quarter compared to a year ago. This double-digit growth was driven by continued strong demand across all markets, growth in key products…

Thanks, Diron. Integer is having a strong year with third quarter year-to-date sales up 18% and adjusted operating income up 29% including raising guidance the last two quarters. We continue to execute our strategy to deliver sustained above market growth with expanding margins. We have a strong pipeline of new products and continue to invest in differentiated capabilities, both organically and inorganically to sustain above market growth. We closed another accretive tuck-in acquisition in a high growth market. 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'll now turn the call back to our moderator for the Q&A portion of our call.

Thank you. [Operator Instructions] Your first question comes from the line of Craig Bijou with Bank of America. Your line is open.

Good morning, guys. Thanks for taking the question and Diron congrats on making the role permanent. Look forward to working with you and congrats on a great quarter. So, let me start with, the very strong growth that you guys have seen in the quarter and over the last – really several quarters. And I know you’ve talked a little bit about, the drivers of that. But I wanted to see if you maybe expand upon some of your comments, what would you attribute the growth to? Or is it the end markets that are growing faster? Are you – do you think you are being utilized more by existing customers? And/or is it new customer ads?

Great. Good morning, Craig. I will start with – thank you. And we do have incredibly strong growth 15% growth that midpoint, up from 12% that we had guided to on our last call and, I will point to a number of things, there is not one or two things driving it. And I’ll address the – I do think – we do think the industry is probably growing faster than mid single-digit, which are the market we serve have a long-term growth rate of mid single-digits. We think the industry is growing faster than that, as we get more of our customers reported results will shape our view of what we think the industry is doing for the markets we’re serving. But I point to emerging customers for us which we characterize emerging customers as our earlier stage neuromodulation customers and we’ve highlighted in depth the number of customers we have in early-stage development programs. And we’ve mapped them out through the clinical regulatory and product introduction phases. We highlighted that last year 2022, we had about $50 million of sales with nine of those customers that are in product introduction or launch phase, and that by next year 2024, we would expect that to be $80 million to $100 million, so doubling. And we’re seeing the growth that we would expect in ‘23 in that mid – in between ‘22 and ‘24 growth rate that we set up double, we’re seeing that growth that’s a couple 2% to 3% of our year-over-year growth this year. All the new products that we’ve been working on from the pipeline of development work that we’ve been doing, we’ve highlighted a number of times now our pipeline of development programs has gone up 230% plus over the last 5 years, and that…

Great. Thanks. Thanks for all the detail, Joe. My second question, there is a thought that a lot of the OEMs built up inventory to higher than traditional levels over the last couple of years mainly to protect against some supply chain disruptions. And that inventory will eventually be worked down. So I guess my question to you is I just – I guess I wanted to get your reactions to that thought process and that may just be an investor perspective, but wanted to get your reaction? And then is that a potential risk as you look out several quarters or into next year to your growth?

So, we don’t see it as a risk, because we believe we have built in exactly that already into our fourth quarter guidance. When we studied, we have studied the orders we received from customers in a pretty granular level by plant, by product, by customer, SKU level and then we work with our customers to interpret and understand what that signal means. The good news is we are still sitting on about $1.0 billion of orders in hand that ship over the next mostly 12 to 15 months. So that gives us pretty good visibility. And one thing we are seeing here with our fourth quarter and we have incorporated this already into our guidance, we are seeing what we would characterize as a normal pre-pandemic level of year-end inventory planning by customers. Every year, we see in certain products, certain parts of our customers businesses what we interpret as they are managing inventory, because they have got goals and targets and metrics to hit. And we are seeing what we would characterize as a normal level of that activity, which to us is a good sign, because it signals that inventory levels might be at a healthy level for our customers and they are doing what they used to do before the pandemic. And so, we feel like we have already built that into our fourth quarter guidance and that’s been factored in. And so, we don’t see a risk of a meaningful maybe correction that there might be a concern about with inventory levels potentially being higher than customers would like.

Thanks. Thanks for taking the questions, Joe and congrats on the quarter.

Thanks, Craig.

Thank you. Your next question comes from the line of Matthew O’Brien with Piper Sandler. Your line is open.

Hey, this is Phil on for Matt. Congrats on the outstanding quarter and Diron congrats, I know we are looking forward to working with you. For starters, I think just on the pricing environment for you guys. I don’t know if you disclosed how much price contributed to the growth in the quarter, but if you don’t want to provide a specific number and I apologize for putting you on the spot, can you just talk about your ability to take price, how durable you see this moving forward as we look at 2024 and beyond?

Phil thanks for the question. Thanks for joining. And no worries, I’m putting you on the spot. It’s our job to tell you our strategy and how we are executing it. From a pricing standpoint, what we have conveyed, communicated this year is we have positive price. I would characterize it as it’s an increase year-over-year, which is very different than what we have historically had. Typically, we have been a 1% to 2% price down business. In 2022, we were right at 1% down and this year, we are actually positive. But the reason we haven’t quantified it or emphasize it is we raise prices very specifically to cover the cost increases or some of the cost increases we have experienced in both labor and material. That’s how we explain it to investor – I am sorry to customers. That’s how we quantified it. And ultimately that was our objective is to get enough price to cover some or all of that material and wage inflation. And that’s what we have done. It hasn’t been to expand margins in the spirit of strategic partnership and ensuring we maintain a strong new product development pipeline with customers. That’s how we approach pricing. We expect going forward we are a fresh neutralist business. We believe going forward based on the agreements we have in place that we can manage that on a looking forward basis, which is a meaningful change from where we have been historically. So, that’s how we think about price looking forward.

Thanks for the color. And I guess just one last quick one for me, given the investor interest in this category, how do you think of GLP-1 impacting some of your end markets and businesses in both the near-term and longer terms if at all?

Great question. Well, I will start with since the select trial was announced in early August, the medtech space looks like it’s down 15% to 20%. So, I think there has certainly been an investor impact and perception. When we studied the markets that we believe and that our customers say, will be more heavily impacted by GLPs, it points to Bariatric Surgery and diabetes, which are negligible. In fact, we didn’t really choose anything just support diabetes and indoor Bariatric Surgery. And when we look at the markets, we are focusing on to drive growth structural heart and neuro vascular, neuro neuromodulation, electrophysiology, they would appear to have meant at least based on what our customers say, and what the analysis thus far has been done, they would appear to be minimally impacted by GLPs. Our demand remains strong and in our targeted growth markets, we are not hearing or seeing customers say that they are either changing orders or demand on us or expect to because of GLPs, you are hearing that on their earnings calls. And I can tell you in our order book and the demand we are seeing, we are not seeing that impact. And again, it’s we are focused on procedures that treat structural heart defects arrhythmias, cerebral aneurysms, pain management in neuromodulation. We are just not seeing an impact. Maybe it’s too early, but our customers are not telling us they are expecting and we are not seeing any impact in both the order book or the development pipeline that we are working on. But it’s certainly having an impact on the valuation of medtech, that’s clear.

That’s an understatement. But thanks so much. And I have that one.

Thank you. Your next question comes from the line of Nathan Treybeck with Wells Fargo. Your line is open.

Hi guys. Dziedzic, great quarter and Diron, congrats, I look forward to working with you. So just starting, we calculate your guidance implies Q4 growth of 7% to 8% reported, this includes InNeuroCo. One is this about right? And then in light of the strong growth in Q1 to Q3, is there conservatism built into the Q4 guidance?

Great. Thanks Nathan for the questions. So, you are right that it does imply 7% and about 8% at midpoint growth on year-over-year basis InNeuroCo is $5 million of that. So, it’s 100 basis points year-over-year. I would highlight if you look at the quarter splits for 2022. The fourth quarter of ‘22 was about 11% higher than the average of the first three quarters. So, we are just thinking about comps on a year-over-year basis. The fourth quarter last year was the highest. Year-to-date, we have got 18% growth. For the third quarter year-to-date, we are going to be fifth, we are estimating 15% of midpoint for the year. And we think that’s an incredibly strong year. I wish everything in life were linear. And we could just have the exact state same steady growth rate every quarter year-over-year, but life doesn’t work that way. And so I think you are right in terms of the midpoint interpretation. We feel like we have got pretty good handle on the fourth quarter given that we are sitting here at the end of October. We have got a much more stable supply chain environment, still some pockets of disruption that we are working on. So, we feel pretty good about our 400ish midpoint of guidance sales for the fourth quarter. The demand remains very strong from customers. Again, I highlighted that we are seeing customers make their – what we think are historically normal year-end inventory adjustments, and we have got that baked into our fourth quarter. We still think it’s a strong year-over-year fourth quarter at high-single digits. It’s just not as strong as the first three quarters, but 15% for the year on the top line and 25% on the operating profit we feel is a pretty strong year of outperformance.

Okay. Thanks for that. And just in terms of so you have noted that the supply chain has continued to improve, I guess how would you characterize the supply chain and maybe the inflation environment relative to the first half and maybe your expectations for one and normalizes that could happen in 2024. Thanks.

Yes, great question on supply chain. So, third quarter average supply chain impact versus to do was probably marginally better, only because the second quarter was a meaningful improvement, so we entered the second quarter in a tougher environment, exited in a better environment. And the third quarter average was about – was better than second quarter. But there are still pockets of supply chain, we think this is probably the new normal, and we are getting better and better every day on how we manage that. And the mitigation actions that we started a 1.5 years ago, or some of those are starting to move into the execution phase and bring some of those benefits. So, we do think we are getting better at managing supply chain. We think going forward we will continue to improve on that, but we are operating as though this is the supply chain environment going forward from a supply chain standpoint. Our focus is on making sure that as our direct labor turnover has improved that we continue to train our associates and become more proficient in what we do. And we think there is significant opportunity to gain greater efficiencies as we move into 2024 with current supply chain levels as well as improving execution in our manufacturing facilities and better trained associates that can drive the efficiencies that we expect to grow our margins.

Thanks guys.

Nathan, do you have any follow-up questions at this time?

No, I am all good. Thank you.

[Operator Instructions] Your next question comes from the line of Joanne Wuensch of Citi. Your line is open.

Hi, this is Felipe Lamar on for Joanne. Thanks for taking the question and congrats on the quarter. Just quickly as it relates to the use of cash, congrats on the acquisition of InNeuroCo. But I am just curious moving forward, how are you thinking about cash allocation as you think about M&A, or debt pay down? And then looking forward, are there any age segments that you think are particularly attractive for as tuck-in M&A opportunities? Thank you.

Hi. Good morning Felipe. Thank you for the question. We are – I will start with we remain very committed to our 2.5x to 3.5x debt leverage. We ended the third quarter at 3.1x with the expected cash flow generation in the fourth quarter, and InNeuroCo acquisition, which occurred in the fourth quarter, so that $42 million outflows in the fourth quarter. If you look at the midpoint of our EBITDA guidance and the midpoint of the debt levels guidance that we gave, you will see, at year end, we still expect to be at midpoint at 3.1x leverage. And so we feel like we have the capacity to spend $200 to $250 million a year on tuck-in acquisitions. We have a robust pipeline of tuck-in acquisitions that we are nurturing at any point in time. We are very excited about InNeuroCo. We think they bring very differentiated design and development capability in the neurovascular market, which is a market that is we believe is transitioning to significantly more outsourcing, that has been the historical norm in that space. So, we think that’s a pocket of accelerated outsourcing. And we think adding InNeuroCo team and their tremendous engineering group that has tremendous experience at designing and developing finished devices, and then manufacturing them, we think that contributes to our pipeline of development programs very symbiotically. And we are expecting to double the size of that business in the next 3 years to 4 years based upon that pipeline that we think they can help us accelerate and execute. So, we continue to look at it tuck-in acquisitions at 3.1 now and 3.1 at year end that gives us additional capacity. And maybe a simple way to think about it is if we grow EBITDA at the targeted growth rate of profit growing twice as fast as sales, that creates order magnitude $140 million to $150 million worth of debt capacity for acquisitions generating $100 million of free cash flow years, an $100 million that’s where you get the $200 million to $250 million of capacity every year and still maintaining the 2.5x to 3.5x debt leverage. So, we are excited about InNeuroCo and excited about the opportunities in front of us for additional tuck-ins. Thanks for the question, Felipe.

That’s helpful. Just on PFA continues to be a hot topic, so I would just be curious if you can give us an update on where you are in developing those platforms and when you might expect meaningful revenue contribution? Thank you.

Okay, absolutely. We think we are incredibly well positioned in electrophysiology. We are highly vertically integrated today. We have significant experience in scaling complex EP products. We do everything from components to sub-assemblies to finish device manufacturing today. We think we are – what we do today is incredibly applicable to PFA and the new therapy that’s coming out. We are excited about the new therapy. We are working on a number of programs in the space. We are excited for the therapy to come to market. We think it will have a tremendous impact on patients both safety and potentially efficacy as well. We are well-positioned and believe that it has the strong potential to be a tailwind for us. Like anything in life, it all comes down to who gets to market first and who gets the most market share and what share of wallet we have with that particular customer. But we think we are incredibly well positioned for it to be a tailwind for us.

Phillip, do you have any further questions at this time? [Operator Instructions] There are no further questions at this time. I will turn the call back to Andrew Senn.

Thanks, Sara. Thank you everyone for joining the call today. As always, you can access the replay of this call on our website as well as the presentation that we just covered. Thank you for your interest in Integer and that concludes our call today.

Thank you for joining. This concludes today’s conference call. You may now disconnect your lines.