Good day, and thank you for standing by. Welcome to the Integer Holdings Corporation Q3 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, 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 third quarter 2021 earnings conference call. With me today are Joe Dziedzic, President and Chief Executive Officer; and Jason Garland, Executive Vice President and Chief Financial Officer. As a reminder, the results and data we discuss today reflect the consolidated results of Integer for the periods indicated. During our call, we will discuss some non-GAAP measures. For a reconciliation of these non-GAAP 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 more details on the recently announced strategic investments, including the agreement we announced today to acquire Oscor Inc. And then Jason will review our financial results for the third quarter, our benefits from refinancing and will provide an update on our full year guidance. Joe will come back on 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, Tony, and thanks to everyone for joining the call today. Integer's dedicated associates have continued to deliver for our customers during these dynamic times and have also remained focused on executing our strategy. I'm excited to share with you today our strong third quarter results as well as some significant steps we've taken to execute our strategy to accelerate our growth and generate a premium valuation for shareholders. We delivered our second quarter in a row of 30% sales growth versus last year. Our adjusted operating income grew 86% and our adjusted EPS grew 110%. We continued our strong cash flow generation and reduced our debt leverage to 2.6x adjusted EBITDA, the lowest level since 2015. The strength of our third quarter supports our increased full year guidance, with adjusted net income now up 41% to 50% versus last year. Earlier today, we announced our planned acquisition of Oscor, a highly respected and trusted medical device outsourcing company with a 40-year history of designing, developing and manufacturing medical devices for the cardiovascular, cardiac rhythm management and neuromodulation market. Oscor is a clear strategic fit with Integer that adds proprietary products and technologies, complementary capabilities and low-cost manufacturing capacity. We're excited to welcome Oscor to Integer upon closing later this quarter. In addition, last month, we announced the planned construction of a new innovation and manufacturing facility in the med tech hub of Galway, Ireland. This important investment will provide the development and manufacturing capacity needed to support increased demand from our customers that already have a significant presence in the region. We signed the agreement with Oscor yesterday and are excited to welcome their 900 associates to Integer. We have a shared philosophy of delivering innovation and manufacturing excellence to our customers. They have an expansive portfolio of…

Thanks, Joe. Good morning, everyone, and thank you again for joining our call. I'll provide more details on our third quarter 2021 adjusted financial results, talk about the benefits of our recent debt financing, summarize our product line sales trends, and conclude with our increased outlook for 2021. Starting with our third quarter results at $306 million, sales had significant growth over last year of $70 million or 30%. Our adjusted operating income was $47 million, up $22 million compared to the prior year an increase of 86% as we continued to benefit from the leverage associated with higher sales and the ongoing impact of our manufacturing excellence strategic imperative. With adjusted net income at $35 million, we delivered $1.05 of adjusted diluted earnings per share, up $0.55 from the third quarter of last year. Our third quarter financial results represent another strong quarter of growth versus last year. Adjusted net income increased $18 million in the third quarter compared to the prior year driven mostly by our sales volume returning to pre-pandemic levels. Our manufacturing and supply chain teams are doing an excellent job of accelerating production to meet growing demand from industry recovery and new product introduction. We delivered $24 million of operational improvement as compared to last year despite the headwinds of a difficult labor and supply chain environment, and we will continue to prioritize meeting our customer and patient needs even with higher costs. FX was favorable, contributing to $1 million of improvement versus the prior year. Adjusted net income also improved $3 million year-over-year from a reduction of interest expense. This was driven by our continued focus on debt repayment, and realizing approximately one month of savings from the debt refinancing we completed in the third quarter, which I'll cover further in a few slides.…

Thank you, Jason. Integer has a clear vision, a compelling strategy and strong values, combined with the most talented associates amongst all medical device outsourcers. Mid-single-digit industry growth, combined with Integer's breadth of product portfolio creates a very resilient business model. Integer's world-class R&D capabilities at our global manufacturing footprint combined with our deep customer relationships, creates a compelling growth strategy and the investments we discuss today furthers that strategy. Our commitment to our associates and investment in their growth coupled with our focus on building leadership capability to deliver performance excellence instills a performance culture that's creating a competitive advantage. Finally, our track record of delivering on our financial commitments and generating strong cash flow reinforces our financial strength. To wrap up, we delivered strong year-over-year growth during the third quarter and our debt leverage is the lowest it has been since the 2015 Lake Region acquisition. Our recent debt refinancing is expected to increase annualized EPS by $0.15 and contributed to our 2021 EPS outlook increasing by 5% at the midpoint of guidance. We announced a compelling acquisition that is expected to be EPS accretive in 2022 and an ongoing strategy to deploy annual acquisition capacity of $200 million to $250 million. We're building a new innovation and manufacturing facility in Ireland to support our long-term growth outlook as a result of our strategy to win in the markets we serve. I remain confident in our strategy, in our associates and our ability to earn a valuation premium for our shareholders. Thank you for joining our call this morning. I will now turn the call back to our moderator for the Q&A portion of our call.

Your first question comes from the line of Matthew Mishan from KeyBanc.

I offer congratulations on all the work that you are putting together to build the foundation of the thing. Just first, I mean the macro environment we're coming out of in the third quarter where you had about two months across the U.S. of kind of rolling pauses or elective procedure delays. How comfortable are you that your production is matching the demand for your customers, that we're not going to see a one- or two-quarter lag as they saw a pause in their demand, the way you guys may have just continued to produce.

Yes. Thanks for the question, Matt. It's a great question because as you do know, we -- as you know, we do have oftentimes a lag in the impact of in-market medical procedure volumes and our actual production. Our sales link match our customers' manufacturing plans and it matches what they're doing with their inventory levels. And we commented on the second quarter earnings call that our customers we thought had decided they were willing to carry a little extra inventory in an attempt to mitigate supply chain challenges that everyone is experiencing. And so the dip that we've heard all of our customers talk about in August from the COVID resurgence and some of the procedure slowdown. We think that didn't have much of an impact on us in the third quarter. We saw a little bit of it as we looked at September, October, November, December volumes. We have factored that into our fourth quarter outlook. Quite frankly, it's reasonably close to what we were expecting going back to where we were at the end of July. As we look into next year, we don't see our customers at least forecasting any meaningful change in the trajectory and the growth rates in the industry. So we don't see a one or two quarter out into the future impact from the slower procedure volumes that we -- the customers and the market experienced in the August timeframe. So we feel good about our forecast for the rest of this year and as we enter 2022.

Excellent. And do you feel comfortable in your visibility with the supply chain, especially around electronic components, batteries, semiconductors that are necessary for some of your devices.

Yes. It's hard to be comfortable in this environment, Matt, because everybody is dealing with supply chain issues. I don't know that there's an industry who has not been impacted. We're feeling that for sure. Our supply chain and manufacturing teams have done a phenomenal job of getting as far ahead of those issues as you can and then managing the issues when they do arise. And I think we're seeing the same kinds of supply chain constraints and allocations across multiple products in industries that everybody is talking about. You read about in the headlines every day, but the teams have done a phenomenal job of managing that. Our focus is on ensuring we deliver for our customers so they can take care of patients. And we feel we've done a very good job of that, that's the feedback we get from our customers, and we'll continue to focus on that. but it's a heavy lift. And I think you've heard that from everybody. But our teams have done a phenomenal job at managing it, and we feel confident in our process is the capability to continue to do so.

Okay. And the capital allocation with the opportunity for M&A over the next several years, do you have a pipeline of targets that are already within your current verticals that's enough to feed that $200 million, $250 million? Or is at some point, are you looking at having to add like another leg to the growth verticals.

So we like the products in the markets that we're serving today, and we feel we have differentiated capability. And we think Oscor adds to that differentiated capability. We also have a strong pipeline of acquisition opportunities. We've been working on a strong pipeline for a number of years. We feel we have reached the ideal time as a company to begin the regular cadence of doing acquisitions of a more meaningful size and scale. Over the last couple of years, we've done a handful of small $5 million and $15 million acquisitions. Oscor is a bigger acquisition for us, but I would still characterize it more in the bolt-on context at $220 million. It's got basically one location, a couple of buildings for R&D in Florida. It's got a large manufacturing footprint in the Dominican Republic that's low cost with the ability to continue to expand. We're confident that this pipeline of opportunities we have can use the $200 million to $250 million of capital that we think we generate every year going forward. So we're going to stay within the verticals that we have eggs. We think there's plenty of opportunity to continue to grow and find great new additions and partners to join Integer like Oscor.

And bigger picture, when you think about everything that's going on right now around the supply chain and the macro environment, you have to think there's some level of dislocation with the device supply chain. How happy are your customers with their broad supply base? Do you have like -- is this presenting you a significant opportunity to gather more business here as they kind of look at it and says it has got to be one of the toughest manufacturing environment they've ever seen.

I think we are uniquely positioned to benefit and capitalize on the dislocation or the disruption that's occurring in the industry. Our customers want to focus on therapy development. They want to focus on clinical trials. They want to focus on commercialization. They want a smaller supply base. They want fewer suppliers. They want them to be strategic in nature. And when they say strategic, they're thinking, "I want innovation, I want accelerated speed to market, I want high confidence in quality, on-time delivery and I want a competitive price." It's also in the mix. But their focus is on how do they help more patients, which is what we want to be part of and how we're focused on enabling their success. So I think this environment that's more difficult from a manufacturing standpoint globally for everyone plays to our strengths, our scale and breadth and depth, gives us the ability to solve our customers' challenges from a manufacturing, supply chain and innovation perspective in a very unique way. The addition of Oscor brings additional breadth of offering of current products, brings strong development capability. We're excited for their engineering and innovation teams to integrate and become part of Integer and the manufacturing footprint in the Dominican Republic, which we can continue to grow and expand gives us another low-cost location where we can bring volume not only from Oscor's pipeline, but also Integer's pipeline. So we see that as a significant opportunity. We think we're uniquely positioned to capitalize on what you just described as the or disruption that's occurring in manufacturing and supply chains globally.

Congratulations, Joe and Jason and Tony.

Your next question comes from the line of Jim Sidoti from Sidoti & Company.

It sounds like you guys are entering the next phase of growth with this deal. Can you give us a little more detail about Oscor? You said $57 million of revenue in 2020. But as we all know, 2020 wasn't a typical year, what was that compared to 2019?

They actually did well versus 2019. They have a strong pipeline of new development, new programs and versus '19 -- 2020 versus '19, they did not see the significant decline that the rest of the industry did. They did well 2020 versus 2019. They've historically grown high single digits. We would expect given the pipeline they have and the strong customer relationships that they have that, that will continue. And what we're looking to do is to integrate the breadth of their portfolio of product offering into Integer. And with our combined strength both from a development and a manufacturing and customer relationship standpoint, grow both of our businesses at an even faster rate. Oscor brings differentiated cardiovascular access capabilities, both development as well as existing strong portfolio. They hold over 40 patents on their product offering today. They also bring strong neurostimulation lead wire capability, an integrated capability to serve, particularly focused on emerging customers, but they also can support the large OEMs. So they -- in terms of what they do in the markets they serve, it's a very strong fit with our strategy, and we see great alignment. I mean, additionally, I'd offer their culture, we think, is a great fit here. We think we have a very common shared focus on innovation and taking care of customers and we look forward to the deal closing and being able to start to work more closely with them.

And I imagine there are a lot of customers that they deal with that you're already dealing with, but are there some that are new to you and some that are new to them so that you possibly have some cross-selling opportunities?

Absolutely, Jim. There are some customers that Oscor has a strong relationship with that they're growing with, that will give us the opportunity to tap into that customer base and the reverse is true as well. We think we have some customers that we could potentially bring their product offering into as well. We think it's a great fit from a technology standpoint, maybe at a macro level, the best way to frame it is we think this is right in our wheelhouse. It's products, we know, it's markets, we know. We share the value, we share the focus on innovation and the customer. They have development in the U.S. They have low-cost manufacturing. We see a lot of synergies here.

And can you give us a little color on margins? What do you think gross margins will be after the deal? Will they be up, down or about the same?

Well, what we anticipate is we're going to be able to come in and help with some of our manufacturing excellence, lean manufacturing practices and bring some of the scale and leverage that we have in that area to help them drive additional efficiencies. We think their innovation, their engineering team and their fast prototyping and NPI, we think that's going to help us accelerate our growth in those same areas. So we think it's a great combination. So we absolutely expect margins to grow, and that's where the synergies come in. Right now, their margins are less than Integer's, but we believe we can absolutely improve and expand those margins, and we've got a -- we've got a plan to do that. And once we close the deal and can work more closely with them, we'll be able to accelerate that. The other -- The other key point I'd make is they've been investing and expanding in the Dominican Republic, and they've been transferring manufacturing of product from Florida to the DR, which has given them a margin expansion. And we've seen that. That's occurring currently in their results. We can see that trajectory and trend. And so that will be an additional benefit to their margins as they continue that transfer of production to the DR.

Right. And then I just want to be clear about something you said at the beginning of the Q&A. Assuming that there's no additional surge in COVID, there's no new variant comes out that spikes, do you think your customer inventory levels are about where they should be at this point? Or do you think that there's a chance that there -- they have a lot of inventory in hand?

We do not see broadly excess inventory in the supply chain of the system. We're not maybe getting at the question, we don't foresee customers suddenly saying, "I have too much inventory, stop production or slow production". In this environment, what we see is we're meeting demand. In fact, customers probably -- may even want to build inventories more, they'll mitigate against some of the risk that exists throughout the supply chain. So we're not seeing the customers have too much inventory right now. We've got, as you know, a pretty good visibility demand for the rest of the year. Our shipments line up with what our customers' manufacturing plans are. We feel pretty -- we feel really good about those the rest of this year, and we think the industry growth going into 2022 will support our continued growth.

And there are no further questions at this time. I would now like to turn the call back to Mr. Tony Borowicz for closing remarks. Please go ahead, sir.

Great. Thank you, Lisa. These are certainly exciting times, and we appreciate your interest. As always, the replay of this call is going to be available on our website in addition to the presentation we just covered. So, thanks again for your interest, and that concludes today's call.

Thank you. And this concludes today's conference call. Thank you all for participating. You may now disconnect.