All righty. Good morning, everybody. Thank you so much for joining us and coming out to the Piper Sandler Healthcare Conference. My name is Matt O'Brien. I'm one of the med tech analysts here at Piper. Integer is going to start us off here this morning from the company. We've got Payman, who's the CEO, and Diron, who's the CFO of the company. Kristen's down here in the front as well. Thanks so much for coming out to the conference and kicking it off for us.
That's great. Thank you, Matt. It's good to meet all of you. Thanks for having us today. I thought before we get started, I'd give some perspectives on our company and why we're confident that our strategy is going to deliver premium shareholder valuation. For those of you who may not be familiar with Integer, we are one of the largest contract design, contract development, and manufacturing organizations in the world. We are very well positioned and integrated in the medical device ecosystem. We are a partner of choice with the largest, the most innovative medical device companies, as well as many smaller and emerging companies. I'd like to highlight a few things, just maybe just talking at a high level about our company, maybe talking high level about our strategy. We are primarily focused on the four fastest growing markets in our space.
Those are electrophysiology, neurovascular, structural heart, and neuromodulation. Our strategy is to build critical capabilities and differentiated capabilities in engineering, design, and manufacturing so that we can increase our participation in the novel and most innovative therapies that our customers work on. We work to get involved in that design development early so that we can get designed in so that as products grow, obviously, we can succeed with those products. As a result of this strategy, we have a very robust pipeline. A good leading indicator, we believe, is the development sales that we have, which is effectively what we charge our customers to do design development for them. That development, if you will, that we call our pipeline, has grown. We will have grown by the end of this year, we project to have grown 3x what it was in 2017.
Eighty percent of what's in that pipeline is geared towards those faster growing markets that I mentioned. Now we've demonstrated that our strategy works because in recent years, we have delivered growth above market all the while expanding margins. For 2026, we expect our core business to grow at about 4%-7%. This is in line or slightly above our weighted average market growth rate of 4%-6%. This growth of our core business is being partially offset by some headwinds that we have with three specific new products. These headwinds are going to be a little bit more pronounced in the first half of the year. We expect that to abate in the second half of the year so that the second half of the year, on an organic basis, we expect to be at the rate of growth of market.
As we enter 2027, we fully expect to be back to above market performance given the very strong pipeline that we have. To conclude, the headwinds that we have as a result of three products not performing, three significant products not performing well, are highly unusual. It is not something that we see, that I have seen, certainly in my tenure with Integer. We believe that our strategy is working. Our core business continues to perform well despite the headwinds of these new products. We are confident that we are going to get to market growth in the second half of 2026 and to above market performance in 2027. With that, I would be happy to take your questions.
Okay. Let's maybe start then with what happened. You've been there several years. You've never seen three products all at once kind of slow down. Have you ever seen one or two at the same time? It's usually just one, and then you can offset that with the rest of the business. I guess the visibility into those three products, you were just getting orders from your customers and talking through things, and then all of a sudden they came to you kind of all at the same time and said, "Hey, look, this isn't quite playing out as expected." Is that kind of how it played out? Again, have you ever seen something like this before in your tenure?
Yeah. Let me start with your last question. Yeah, I've been with Integer approaching eight years now and been part of developing and executing the strategy with the rest of the leadership team. No, the short answer to your question is this is highly unusual. It's not unusual for a product to not do well in the market, or it's not unusual for demand to shift. That's just business. For three products happening at the same time, we find it highly, highly unusual. It's not something that I've certainly seen in my tenure with Integer, and we expect that to be temporary. We don't expect that to be something that's recurring. You talked about in terms of what occurred. The three products, to be clear, the three products impact 2026. We learned of the two EP products in particular.
We learned about the fact that they will impact negatively 2026 in the third quarter of this year. Now, normally we would issue guidance in February of 2026. In the spirit of transparency, given that we learned something that impacts 2026, we wanted to make sure that we provide that information early, which is why we issued the preliminary guidance that we did.
Okay. Understood. I have never run a business like you guys and the complicated businesses you have, but the visibility that you have for these products, I guess, how did you miss that, okay, these are slowing down or they may not do as well in the marketplace? I mean, do you have some kind of team or is it just based on conversations with the management teams of your customers that you are really relying upon? Because some of them, we are guessing on which ones that are affected here. We could see that they were not doing well. We kind of knew that. I am just wondering with Integer how you guys did not see that coming and then how you can make sure that does not occur in the future, which I guess you have learned from it.
Yeah. Let me answer your question in a few different parts, and then hopefully I'll bring it together. One part is, again, these products do not impact 2025, right? The impact is on 2026. The orders that we have on hand and everything, that obviously continues. Now, back to how we look at the market, yes, we have product marketing and product management and marketing teams that look at the industry. We're fully aware of how products do in the market. We buy reports. We talk to our customers. We are engaged with the largest OEM, so we see what's kind of happening. At the end of the day, when our customers say, "We want you to launch and ramp this product, and this is the quantity that we want. This is the forecast. This is what we are planning our manufacturing facility.
These are the orders that we have. The orders are not years in advance. They're typically months in advance. We have to abide by that. We have to make sure that we do because they ultimately see what the product is doing in the marketplace. We can't tell our customers, "You say you want 100, but we're really going to plan for 50." We just can't do that. This is something that impacts the future. We learned in the third quarter of something that impacts 2026. We had originally expected previously, given the prior forecast, that we actually have a little bit of a step up from Q4 into 2026. We learned that that's not going to materialize.
Got it. If I think about it, just using an index, if it was 100% of whatever they were ordering this year, next year they've cut that in half, or are they still ordering some of it, or are they just saying, "We're not taking any next year?
No, no. There's still volume in 2026, but it's significantly lower than what it was in 2020.
Got it. Okay. Okay. Makes sense. Is there the potential that they actually come back to you and say, "You know what? We actually do need some of this"? Have you kind of made a worst-case scenario for 2026 in terms of their order of those three products, or is there potential that they come back and say, "You know what? We do need some more of this. There could be some upside"?
Yeah. The range of guidance that we provided, if you look at it, both preliminary for 2026, the range is wider than what we normally would have. The reason is because we wanted to take a wider approach of the different outcomes, right? We still think it's a balanced range, both on the downside and the upside. We expect that our sales to be within that range. Just to maybe explain what the range is on a reported basis, for next year it's going to be down 2% to up 2%. That incorporates 3%-4% of headwind for these three products that we're talking about. I'll just highlight one more thing on the reported. We've been exiting our portable medical business strategically for the past number of years. This concludes this year, the exit.
We're done with it. Then we'll have 2% headwind of that next year as well. I just want to.
It's flat to + 4% next year for the core business, inclusive of.
Organically.
Organically, inclusive of the three. Okay. Okay. The flat would be no orders at all, and then the.
No, we have in that range, we assume there's volume both on the downside and the upside. Now, it's risk-adjusted, more risk-adjusted on the downside, obviously.
Got it. Okay. All right. So.
It is a significantly lower volume in 2026 than it was in 2025.
Understood. Okay. Okay. I'll get to you in a second, Diron, about the gross margin impact then. The comment, and this is a little off script here, but your comment about developmental sales, 3x in 2017, I thought is interesting. I hadn't understood how strong that is. Can you just talk about what that does to you in terms of revenue growth, but also the partnership with your customers? Because if you're doing that much development work, I would imagine you're an extremely important partner for them. Does that help you with pricing or just anything else you can talk about there?
If you look at our customer strategy, I mean, what are they trying to do? Their strategy focus is to bring new therapies in the market and then try to do that as quickly as possible, try to get reimbursement, try to go through all the regulatory clinical hurdles and whatnot. It's always a race, right, because they're almost never alone, right, in what they're trying to do. They're trying to put all their focus, and they're trying to bring products to market faster. It is very difficult for them to do everything in that. They rely on companies like us. We have significant scale, and we built a lot of those critical capabilities that they need, but they don't really want to go invest in, right, because it's outside of the core and whatnot. They engage us early.
We have, I would like to say, the best, but certainly one of the best engineering teams in our industry. Our customers' engineers know our engineers. In some cases, they name them by name, "I want to work with that team," etc. We are heavily integrated with these companies. They engage us early. It helps them, but it, of course, helps us as well. This pipeline is ultimately what has allowed us to deliver above market performance in recent years, but it is also what is going to allow us to get back to above market performance in 2027.
Got it. Okay. All right. That's very helpful. I could keep going down that path. Maybe just talk about the PFA market. I mean, it's all the rage, right? Has that ship sailed in terms of the benefit to Integer, or is that something you're going to continue to see you benefit from over the next several years?
Oh, not at all. I mean, the PFA market, let me just start with saying that we have exposure to the PFA market. I mean, that's not with the different players at different levels. PFA has been driving a lot of growth in the EP space. I’d like to remind you that our exposure to EP is not solely focused on the ablation device itself. We participate across the procedure. In a procedure, you have to access the body. You have to navigate the body. You need a transseptal sheath. You need to do diagnostics. You need to do mapping. We have participation in all of those devices. As the EP market grows, we grow, of course, the ablation piece of it as well. We participate in the ablation device as well. Our EP business has been doing really well.
If you take the impact of these two products for next year, our EP business, the rest of our EP business is still growing at the rate of market, which is growing very fast. That book of business is very healthy. Again, our core business is very healthy. It is just the negative impact of these three products that are giving us short-term headwinds.
Got it. Okay. Understood there. What about within the market? We've got a bunch of entrants coming in, Abbott's coming in, Kardium's coming into the space. If there starts to be shifting market shares, does that benefit you, or are you kind of agnostic to all these different new entrants that are coming in? What I'm asking is, is there another shoe to drop if somebody comes in and does really well and starts taking share from an incumbent?
I would answer it by, as the EP market continues to do well and other companies come in and they drive more procedures, we do well in general. It gives us tailwinds just because of the participation that we have across the whole procedure in the EP space. We also have participation with the different players in different PFA technologies at different levels. Overall, we continue to believe that PFA will be a tailwind for us.
Tailwind for you. Okay. Similarly, left atrial appendage closure, that market's been on fire for a while now. There's some data coming out next year that could even accelerate growth there. Is that a category that you guys are wedded to that could really help drive growth over the next several years?
The category is certainly very strong. Our exposure to that is a little bit more limited. It is a smaller part of our business. We have some components in there, but it is not a major part of our business.
Okay. What about renal denervation then?
Yeah. Renal denervation, we believe, has a lot of potential. It's still early, obviously, but we have exposure to RDN. We believe that over time, as the market grows and the technology gets adopted, it's going to give us tailwinds.
How do you think about the progression of growth for RDN? Because I know the reimbursement's in place now, getting better. I mean, is it something that could be a big contributor next year, or is it more towards the end of the decade where you think it's going to be more of a contributor?
I would say that over the coming years, we don't see a meaningful contribution of RDN in the next year.
Got it. Okay. Okay. Understood. When it comes to RDN, it's always difficult to know what exactly you're making of the products. Are you making this little component or the whole thing? How do we think about your exposure to renal denervation? Are you going to be making a lot of the catheters, or just componentry of the catheter?
Yeah. I wish I could be more specific. I can't, Matt. I will tell you that if you think about an RDN catheter, the technology that goes in it is very similar to that in other electrophysiology products. We are very well positioned in that. We have significant capability and scale. I would answer that we have good participation in that catheter.
Okay. Okay. Got it. All right. Diron, I do want to grab you for a few questions here because I do not want to leave you out. Can you just talk about the guide maybe a little bit for next year? You usually step down from Q4 to Q1, which makes sense. Should that be a lot more pronounced in 2026 given these headwinds? I just want to make sure that we have got the cadence right for next year.
Yeah. Matt, I'll start by saying that in our CDMO business, we typically don't have true seasonality with a fourth quarter and first quarter step down. I mean, we deliver to manufacturing sites. The manufacturing sites want to level load. There isn't typically true seasonality in our business. We see some lumpiness based on quarter-to-quarter lumpiness based on product launches and how manufacturing is loaded by our customers. If you look back at the recent years, we've seen some variability. Sometimes we've gone up a little bit, fourth quarter to first quarter, sometimes down a little bit. When you really kind of dig into the organic piece and kind of take out some of the variables, you're right. Over the last couple of years, there's been typically a step down.
As you look at our guidance, and we've said first half of next year, we expect to be flat to down low single digits. Then you incorporate even a couple of basis points or a couple of percentage points of the portable medical exit. We would expect first quarter to be a more pronounced reduction versus fourth quarter. We intend to give more guidance, more color, as we typically do in our February earnings.
Got it. Okay. Understood. How do we think about that back half recovery? I think there's some people that are worried about that. Is that just, "Look, we're going to have easier comps in the back half of next year, somewhat easier comps in the back half of next year"? Are you expecting a lot of these new products to get approved and then start to see a ramp in order to hit those numbers? I think there's some concern out there, like, "Oh, there could be another shoe to drop that we just don't know about.
Yeah. Yeah. When you kind of segment it really first half story, second half story, that's really primarily related to the contribution these three products have had in the first half of 2025 versus the contribution they're having in the second half of 2025. As a result, when you look at the comps, yeah, the first half comps are definitely much tougher for us because of these three products having a significant kind of ramp profile in the first half of 2025. Lower sales in the first half of 2026 creates a much tougher comp in that year over year, which is why we think first half will be flat to down low digits organically with organic recovering in the second half of 2026, not as a result of these programs then beginning to ramp again, but really just because of the 2025 comps being lower.
We do have our second half 2025 comps being a little bit lower. We do have some new product launches kind of happening in the second half of 2026 that will continue to help with the recovery to market growth in the second half of 2026 and then drive.
The contribution of that is minimal in the second half. Yeah, it's mostly the product launches that are coming in the second half of 2026 and 2027 are what we believe is going to get us to above market performance in 2027. The contribution of that is minimal in 2026. It's really the comps. Again, our core business is doing well. It's the impact of these three products that's a lot more pronounced. We have very tough comps in the first half. Once we weather that, then we get back to market growth.
Okay. I promise this is the last question on these three companies, but maybe. It's hard for people that have not covered the space for a long time. There's not a lot of public companies out there that are contract manufacturers for OEMs. Does this happen to your competitors? I guess the reason I'm asking this question is because I know the answer, because I've talked to a lot of your competitors, and they run into this all the time. They see this big ebb and flow all the time. I think it's just hard for us to get our head around because we don't typically see this that much. These private companies deal with it all the time. I mean, these shortfalls happen. Then is it virtually every time that you get the recovery?
Because I kind of think that's what happens and is going to happen here.
I would point us to a few things. If you look at our performance in recent years, I mean, we've continued to perform very well. Yes. I mean, we are in tune to the industry. We kind of see what's happening. Some of our competitors are part of bigger companies that do not necessarily share their P&L, but we see the revenue growth profile. Look, we've been outperforming all of them over time. I guess the bigger point that you're making is there variability in the business? Of course, there is. Companies adjust their production plans, and we follow that. We are mostly sole sourced. Not all of it, but most of our business is sole sourced. Ultimately, what our customers need, we get to see. If there's an adjustment, whatever, a quarter or a month, whatnot, yeah, that's just business.
We're talking about a very unusual situation here, Matt. It's three products. As I mentioned earlier, one product not doing well, but that's just life. It just happens. Three products at the same time, it's highly unusual.
Yeah. Okay. Diron, how do we think about the impact to gross margins? You've got this fixed overhead. How do we think about the impact to gross margins from this slowdown? Just the algorithm on the EBIT growth side of things because you've been trying to get to this 1.5x revenue growth plus, and you've done that. How do we think about that algorithm going forward?
Yeah. I mean, if you look at our typical margin expansion growth algorithm, it's going to come from two variables. It's going to be driving gross margin expansion using our Integer Production System, our version of lean, which is eliminating waste and driving efficiency in the manufacturing space. Then fixed cost leverage across overhead and operating expense. Those are the two main levers and how we drive that. When we look at 2026, we intend to continue to drive our variable cost efficiencies and removing waste with our driving the continuous improvement culture through our Integer Production System. We do expect to see contribution grow at a variable cost level. The volume will put more pressure on being able to drive fixed cost leverage across OpEx and overhead because of the lower sales volumes.
That's why we've provided our operating margin guidance of being down 5% to up 4%, very closely aligned with what the sales volume would drive around the operating expense leverage. That's the part that's going to be a little bit more of a challenge to drive in 2026.
How do we think about the, you've got the share repurchase in place now and then the cash flow of the business. A part of the story and a part of the strategy has been acquisitions. I mean, can you continue to execute on acquisitions, sizable acquisitions, things that you really want to get a hold of in this current situation that you're in?
Yeah. We believe we can. I mean, the $200 million share repurchase that the board authorized, we believe, gives us another lever to drive capital allocation and ultimately generate shareholder value. It gives us the ability to now balance the three elements. We still believe that driving organic investment in the business and continuing our tuck-in acquisition strategy are critically important. This really gives us a third lever to enable us to balance that. As we said in our press release, we intend to use our cash on hand and free cash flow to fund any opportunistic share repurchases in the market.
Got it. Okay. Just a few seconds left here. I'm curious, Payman. I think you mentioned you have 39 emerging customers of the PMA product. I think 10 of those are in the market. The other 29, when should we expect those within the next two years?
Yeah. Of the 29, about 10 of them are in the regulatory and clinical stage, and the other 19 are earlier. These are PMA products, so give them as longer. I would answer your question by we would expect a few of the 29 to get into commercialization in the next couple of years.
Got it. Okay. All right. As I'm looking at the clock here, I think we're just about out of time. We'll cap it there. Thank you so much for all the feedback here. Really appreciate it.
It's good to be here. Thanks, everybody.
Thank you, everyone.