Welcome, everyone. Suraj Kalia, a senior medical device analyst, Oppenheimer. Pleased to have management from Integer with us this afternoon. Payam Khonsari , CEO, Diron Smith, CFO, and Kristen Stewart, IR, here with us. Folks, we do appreciate you taking the time. Thank you so much.
Great to be here. Thanks for having us.
Payman, you guys come up in so many client conversations, so I think most of my questions are not gonna be unheard of or if you haven't tackled it before. Let me start out first, you know, you have been at the helm now a little like six month-ish, give or take. To the extent, obviously there's been a lot that has happened in the last six months, but more fundamentally, what would you say is your own gap analysis, what is it suggesting you? I don't mean about customer losses or anything. We can get to that. Just fundamentally, on Integer, where do you think you would like to emphasize more on a fundamental basis?
Sure. Thank you for the question. Suraj, yes, you're correct. I've been in the seat just under six months, actually about five months. I've been part of Integer and the executive leadership team who has worked on and continued to refine and executed the strategy. I'm a strong believer of our strategy. I believe that we have, you know, built a strong business, but we continue to have opportunities, you know, to keep growing our business. Just maybe I can take a very quick moment, just at a high level what our strategy is.
We, as a leading CDMO, Contract Development Manufacturing Organization, that we deliver value to our customers by making sure that we can help them bring products into market faster. How we help them in that design development stage is a very critical element of our strategy. Of course, as products launch and go in the marketplace, then we would like to be the manufacturer on record so that then we continue to grow with them.
Now to your question, in terms of where we think we can go, that strategy has worked for us, and we've continued to build capabilities in our business that deliver value to our customers, and we continue to have a roadmap of critical capabilities that we will add both either organically or through M&A acquisitions, tuck-in acquisitions, as we've made in the past. For, as you know, we've talked about, we have some headwinds that are as a result of three products in 2026. I am very focused on execution so that we can navigate the next couple of quarters. As I look ahead, I'm very excited about the opportunities that are ahead. We have a very strong foundation.
We have a very strong business, a very strong pipeline that we've talked about has grown substantially over time. I'm very excited about our future.
Payman, one of the thing that is changing day by day, and we are all living through it, is the macro level environment, right? I'm not asking for you to predict how this is, but just, you know, how are you guys navigating? 'cause different companies have different issues like, you know, straight up hormones, shipping, you know, oil and fuel, flow through to capital interest rates. As you guys see it, how should we think about Integer's exposure or sensitivity to macro level as it stands today? Let's say this drags out till summer, then how does the sensitivity change?
Sure. As you pointed out, we have been living in a very dynamic world and there have been things coming at the world from different angles all the time. I mean, one of the first things that I would tell you is that the role that I have and the leadership have is to make sure that we continue to build a resilient business that can weather these things. We've gone through a number of them and we have business continuity plans to the extent that things affect us. When I say we, the world had the challenge of tariffs, if you will, last year. We navigated through those very effectively.
We mentioned that we saw an exposure of maybe $1 million-$5 million. We ended up at the low end of that last year. Now, I believe you might be referring to the tensions in the Middle East. Let me start by saying that we do not have any footprint or people in the Middle East. From that perspective, you know, we don't have any exposure from any manufacturing facilities, whatnot. Our supply base is primarily U.S.-based. We don't believe that we have a supply base either. When we look at the macro, as you know, we manufacture products that we then ship to our customers' manufacturing facilities.
They add value to it and put it in their finished products, and they distribute across the globe. A number of large med tech companies, all of whom are our customers, have recently mentioned that their exposure in terms of sales to the Middle East is very limited. Net-net, we don't anticipate any headwinds or exposure as a result of that. We obviously continue to observe and see if there's anything that we need to navigate. We certainly hope that those tensions subside, you know, sooner than later, but we don't see any notable headwinds.
Fair enough. Payman, the three products that y'all mentioned on your earnings call, you know, obviously you and Diron have been very concise in your commentary that this is the hit of $70-ish million to FY 2026, then growth picks up in H2, and then, you know, 2027 would be more of normalization. What gives you all the confidence currently? And specifically for FY 2027, how do we get back? Is it just the comps becoming easier, or is there a little bit more behind the curtain you could give us a glimpse to?
Sure. Maybe just quickly recap for the audience here. You're talking about three products that are giving us headwinds in 2026. These are three products that were in a ramp phase, a strong ramp phase in 2025, and a bigger part of that ramp was in the H1 of 2025, that are now having a decline in 2026, which is what's giving us headwinds. I would also like to remind our audience that this has to do with the decline is not because of customer resourcing or competitive losses. We are still the supplier of these products, and the products are still in the market. This has to do with the lower rate of adoption of these products in the market than we had hoped and anticipated.
If you remove the impact of these products, the underlying business continues to be strong and expected to grow at 4%-6%, which is in alignment with our markets. Now to your specific question about what gives us confidence about getting to market growth as we've mentioned, and to above market growth next year. As I mentioned earlier, we have difficult comps in the H1 of this year. In the third quarter and then subsequently in the fourth quarter, these comps become easier. A big element of it is that you know, we weather through those comps, and they become easier, which is why we expect to get to market growth during the course of the H2 of 2026.
For 2027, we have also product launches that are expected to happen later in 2026 and during the course of 2027. When we take our our underlying business, which is expected to grow at our markets 4%-6%, and you add to that the products that are expected to launch, this is what gives us confidence about getting to 200 basis points over market in 2027.
Got it. Payman, if I could. Forgive me for throwing a curveball here. Just given these three products, have you looked at, what's the word I'm looking for? Rewording some of your contracts that, hey, if Suraj Incorporated is your customer, next time you'll say, "Suraj, don't. You know, give us this much visibility. Don't, you know, throw us a, you know, a issue at the last minute." Or do you think these were so one-time-ish there's really no need to change the basic infrastructure or the you know how you structure your contracts?
Let me first start maybe bringing us a little bit of a clarity in terms of what was transpired, and then I, you know, answer your question.
Sure.
When we were ramping in 2025, these were purchase orders that we had from our customers. We were supplying what our customers were asking us to do via purchase orders. I would like to highlight and remind that our forecast for these products in 2026, excuse me, 2025, were per our expectations. We delivered what we had anticipated our customers had forecasted and given us purchase orders for. We are now talking, we learned during the course of the third quarter of last year that the demand for these products in 2026 was going to be less than in 2025 because of market adoption. At that time, there are no purchase orders on hand.
You know, these were future forecasts that our customers adjusted because they give us forecast visibility in advance, and that's the reason why we could come out early and give a preliminary guidance for 2026 because we had early visibility in the future. To your question, there are no contractual needs because whatever contract, quote-unquote, we had with our customers via purchase orders, we fulfilled those, and our customers agreed to those. At that time, it was a future forecast that was going to be less, and then we adjusted our outlook in accordance to that.
Fair enough. Basically, no shift. Payman, one of the other things that whenever, you know, Integer's name comes up in client conversations, there is invariably a dotted line to the whole electrophysiology market, right? You guys have been associated with one of the market leaders on PFA, but are also working with other players. Payman, if you look at Boston Scientific comments recently in terms of how they're looking at the market, and I'm paraphrasing, I think so my numbers are right from what they have said, U.S. market growth around 12%-14%, OUS probably around 20%, and the aggregate weighted average is like 15%-ish% is what has been talked about.
I'd love to get your thoughts, not specifically, this is for Integer, not specifically about one product, but a combination of your end customers in this category. Should we think about you're also tracking 12%-14% in the U.S. and 20%-ish or how should we think about it? Because you guys have many moving parts, not just one customer.
You are correct that we have a strong electrophysiology business, but I would like to also highlight that we have strong business in other markets. We have strength in neuromodulation, in structural heart, in the neurovascular, you know, as well as interventional whatnot. We have exposure to a number of different markets that are very attractive and dynamic. Back to EP, yes, that is a strong market for us. It has been a strong market for a number of years. Obviously, PFA has driven a lot of volume growth. Because our exposure is not only to the ablation device, we also have devices that go into the access, mapping, diagnosis, and of course, the ablation.
When we’ve had tailwinds in that space over the past many years, and even in 2026, where we have headwinds for two products, if you exclude the impact of these two products, we expect the rest of our EP portfolio to grow strongly. Now, you are correct that our estimates are also for 2026, that this market would grow in the mid-teens. We have also heard similar distribution in terms of U.S. and OUS from our customers. Again, as a reminder, we ship our products to our customers’ manufacturing facilities, and they distribute globally. What you mentioned is also consistent with what we also see in terms of where the growth is coming from in the EP space.
The net of all your products, you have a pretty much a parity with the stated growth rates in the EP biz, fair enough. Okay.
Yeah. Yeah. We expect, again, the EP market you mentioned is expected to grow double digits in 2025. If you exclude these two products that are giving us headwinds, the rest of the portfolio is growing at double digits.
Fair enough.
No worries.
Payman, one of the other things that I think all of us are waiting for now is you guys have been relatively active on the M&A side. You know, you all did a few last year, and I think the general expectation is, you know, there should be something on the horizon in the near future. You know, walk us through how you all are looking at the space, especially given how the macro environment is unfolding, your appetite or lack thereof, any additional color you all can provide there.
Of course. Maybe just if you would indulge me, maybe very quickly, I'll go to our role of strategy, which is what drives our M&A strategy. We have our growth teams that we've talked about that each are focused on one of our growth markets. They continue to refine our strategy and look at how we can deliver more value to our customers and where do we need to bring more value add capabilities that allow us to continue to outperform. Those capabilities, we then decide whether we wanna invest in them organically or go acquire them. When we decide that certain capabilities are things that we wanna go acquire, that's what drives our M&A list.
Our business development team then goes and looks at what are the, you know, those entities, companies that might be, you know, the right entities for us to go acquire. We work with them in many cases for years just to make sure that we build those relationships, get to know them better so that when they are ready and we are ready, we then go make the acquisition. As you pointed out, we've been very active with acquisitions. That's been part of our strategy. We continue to have a very active pipeline of acquisitions that at the right time we expect to continue to make acquisitions. As you can imagine and anticipate, our focus and my focus over the next couple of quarters is on execution so that we can navigate some of the headwinds that we have.
M&A continues to be an important element of our strategy. We've invested $700 million in acquisitions since 2021. Those acquisitions have been working well, and they're contributing to our growth. Our strategy with M&A has not changed in terms of tuck-in acquisitions and staying within our leverage ratio of 2.5x-3.5x .
Payman, one of the things that you and Diron and Joe in on past calls have consistently talked about your new PMA customer pipeline, you know, how you all think about these high growth categories. How, if I could, right, even if you have the same customer, but you could have a new PMA product, right? So I'll just categorize this as new products versus mature products, right? How should we think about the balance between these two, let's say for 2026 and then going into 2027? Where are, you know, where are the stress points in the system so that we can, you know, better understand how you all are thinking about guidance and the cadence of numbers through the quarters?
Let me talk about our pipeline in general, and then I will talk about a subset of it, which is the PMA, the emerging customers with PMA products, because that's a subset of our total pipeline. Our total pipeline, which we measure it and we've reported it by our product development sales. When we work with our customers on new products, we charge for that service, we get compensated. As we charge more, you can then imagine that we are working on more programs or larger programs or more complex programs. It's usually a combination of all three. As our product development sales, you know, grows, you can take that as a correlation that our pipeline is growing.
That pipeline has continued to strengthen since our measurement point of 2017 is four times bigger at the end of last year. It's grown by 300%. We've also talked about the fact that 80% of what's in that pipeline is geared toward the faster-growing markets. That's the bigger picture of our total pipeline. Now, you talked about a subset of what's in our pipeline, which is what we call emerging customers with PMA products. We have 40 customers that we have been working with that have PMA novel therapies that are in different stages of development. Five are in introduction, and six are in the launch phase. This is. The majority of these products are in the neuromodulation space.
We've had this subset of customers that are in our pipeline have had strong growth. Since our measurement point of 2018, where the revenue from this group of customer was $10 million, up to the end of 2024, which was $125 million, it has had a strong growth. We expect that from 2024, the $125 million over the next three to five years, this revenue from this subset to grow at about 15%-20% CAGR over the next three to five years.
We're excited about what's in that, because it's our focus on the emerging innovators, which is again, the subset of the total portfolio, which also includes the majority of it is the large existing customers that we've had relationship with for years and decades.
Yeah. Payman, forgive me if this comes as a curveball, but if you look at. While you were talking, I was thinking about four categories. Let's say you talk about structural heart, which you have brought up. You have leadless pacemakers, you have percutaneous heart assist pumps, and then IVL. How would the Venn diagram look like for Integer versus these specific products? Because as you know, some of the bigger companies, it's in their roadmap for, you know, growth in the next few years. To the extent that you can say, I'd love to understand the Venn diagram and any additional color you can provide us.
Sure. I won't be able to specifically break out, you know, the percentages and whatnot, but what I can say is this. As I mentioned a minute ago, 80% of what's in our pipeline is geared toward the faster-growing markets. Here's how we define that. There are markets that are inherently growing fast, things that are in electrophysiology, structural heart, you know, neurovascular, neuromodulation. These are dynamic, fast-growing markets. But even when you have mature, more mature markets, like for example, cardiac rhythm management, well, within that, leadless pacing is a fast-growing sub-market. To the extent that there are programs in our pipeline that are in those faster-growing sub-markets, we categorize that as part of the faster-growing markets.
When we say 80% of what's in our pipeline is in the faster-growing markets, is by that definition that it is expected to grow at a rate above our markets. That's how we define it.
Fair enough. Okay. Diron, if I could, ask you a couple of, you know, just modeling questions that come up in client conversations. Obviously, you know, in your commentary on the call, there was a little bit of decline in margins, especially in the early part of the year, but then you could recoup it later. Help us understand the cadence and the drivers for the latter half improvement?
Yeah. Thanks, Suraj. Yeah, look, when you look at our overall guidance for the year, on an operating margin basis, at the high end of our guidance, so high sales, high operating margin, we're holding our operating margin for the year. At the lower end, we're seeing some compression on the margin rate. Right? That really is when you look at our total, you know, sales forecast being kind of flattish on a reported basis, you know, creates a little bit of pressure on our margin expansion goals, our normal strategic objective of expanding gross margins or expanding margins in total, some of which would come from gross margin.
As you look at it on a kind of a cadence basis, the first quarter is gonna see the more significant pressure, right? We talked about being down 200-250 basis points on operating margin in terms of our compression in the first quarter. That's primarily, you know, as we think about the overall cost structure of our business. We've talked about the new product or the products being kind of an air pocket for us, and that we're not looking to make structural changes in our business structure, and making sure that we're able to support the growth, the return-to-market growth in the H2 and the above-market growth in 2027.
As a result, what we're seeing is some deleveraging on some of our costs, fixed cost, and some of which, if you look year-over-year, it's things like merit increases and depreciation increases on capital that we've employed throughout the year. As you come off a fourth quarter with a much higher sales number and you see a lower sales number in the first quarter, that's what's driving really the compression in the first quarter.
As you then navigate throughout the remainder part of the year, we've talked about our nominal sales every quarter being higher each quarter, and that will allow us to then leverage some of the fixed cost and the disciplined cost control that we're deploying here in the early part of the year to enable us to expand the margin sequentially throughout the year, so quarter to quarter seeing some margin improvement. Again, as you then bring it back to the full year, being at the high end with a bit higher sales volume, that will allow us to hold our operating margin rate. Then at the lower end, we'll see some pressure on that in the year.
For your capital allocation, obviously, Diron is a pretty important topic. How should we think in mind that we are in a dynamic environment right now, right? Things can change. How are you all thinking? Obviously, M&A is one component, share repurchase is another component, debt repayment is another component. Just kinda walk us through how y'all are thinking, you know, through the rest of the year. Maybe even if you could give some color on the cadence, should we expect towards the latter half of the pickup, or how should we think about it?
Yeah. Let me talk maybe a little bit broadly first about just our overall views and philosophy around capital allocation. We certainly believe the best return for shareholders and to support our customers is really investing both organically and inorganically with tuck-in acquisitions. We still see that fundamentally as being the highest priority for our capital allocation. As you look at what we delivered in 2025 on our capital expenditures as an example, or you look at where our guidance is for 2026, we feel that our outlook is appropriately funding our investment in our organic growth. As well as we've talked about not making structural changes in the business, right? That area of organic growth investment we feel is in the right space.
You move to tuck-in acquisitions, and I lumped the debt repayment in the tuck-in acquisition bucket because ultimately our debt repayment allows us capacity to drive for or to deliver on tuck-in acquisitions. As you look at where we ended the year, right at the middle of our leverage between 2.5-3.5, that gives us capacity. Between that and incremental free cash flow generation in 2026, we believe that actually gives us the right amount of capacity to fulfill any future tuck-in acquisitions that we may have. You know, Payman spoke earlier about the robustness of the pipeline, but also the focus on delivering and executing of it on the next several quarters.
M&A continues to be a priority, so we wanna make sure we have the right capacity set aside for that, and we believe we do. That then ultimately leaves either share repurchase or dividends. Dividends is not something that we have done in the past. Share repurchase, we thought, was a much more opportunistic approach to deliver and deploy capital and shareholder return that way. We did a $50 million repurchase in the fourth quarter of 2025, and then we also announced the accelerated share repurchase here in the first quarter as well. We continue to think about share repurchase more of an opportunistic approach after we've made sure that we've covered the previous two priorities around capital allocation.
Fair enough. Payman, we're up on time, and just briefly in the last minute and a half or so, obviously there's been a dislocation in the last six months, right? You all have been pretty transparent and consistent about why the dislocation happened. We're all gonna keep looking at the top-line numbers, but what would you say is the one thing that the Street has missed that you would say, "You know what? Keep an eye out for this." That is gonna be either a leading indicator or whatever, something that the Street has fundamentally missed in this dislocation or the extent of the dislocation.
Well, we've communicated, and that we've highlighted the two main things, if you will, that the three products that we're talking about, you know, strong growth and are declining. The fact that they're happening at the same time is very unusual. I mean, you know, this is not something that we expect to happen. The underlying business continues to be strong that we keep talking about and the fact that our pipeline is very robust. If I wanna really sum this up, there's nothing that has changed structurally with our business, with our strategy. We have an event which we believe is short in duration, over the next, you know, couple or so quarters, you know, we will navigate through that.
We expect to get back to above-market growth as our strategy says we should, and we've demonstrated that, we've delivered that, and we expect to deliver that in the future as well.
Folks, we appreciate your time, helping answer a lot of questions that normally come up in client conversation. Thank you so much. We do appreciate it.
Thank you.
Thanks, everybody.
Thank you, Suraj. Appreciate it.