Integer Holdings Corporation

Again, my name is Savannah and I will be your conference operator for today. At this time, I would like to welcome everyone to the Integer Holdings Corporation first quarter 2022 earnings call. All lines will insist on mute to prevent any background noise. And after the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, please press star one. If you would like to withdraw your question, please press star one again. Thank you. And I would now like to turn the conference over to Tony Borowitz. Please go ahead.

Good morning, everyone. Thank you for joining us, and welcome to Integer's first quarter 2022 earnings conference call. With me today are Joe Disick, President and Chief Executive Officer, and Jason Garland, Executive Vice President and Chief Financial Officer. As a reminder, the results and data we discussed today reflect the consolidated results of Integer for the periods indicated. During our call, we will discuss some non-GAAP measures For 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 detail on the recently announced acquisition of Aaron Biomedical. Jason will then review our adjusted financial results for the first quarter of 2022, provide additional insight on our product line performance, and review our full year 2022 guidance. Joe will come back to provide his closing remarks, and then we'll open up the call for your questions. With that, I'll turn the call over to Joe.

Thank you, Tony, and thanks to everyone for joining the call today, especially the Integer associates who have continued to deliver for our customers during these dynamic times while also remaining focused on executing our strategy. Our first quarter results were consistent with our expectations when we provided full-year guidance on our last earnings call. We told investors that we expected our first quarter sales to be about the same as the fourth quarter of last year, they were within $2 million of that guidance. We did not provide profit guidance for the first quarter, but I can share that we delivered the exact adjusted operating income we were projecting, which was $39 million. We've shared on prior calls that we have good visibility to the demand from customers for the current quarter, and we believe we continue to demonstrate that with our guidance. The first quarter sales were about flat organically on a year-over-year basis, largely due to the high January COVID-related absenteeism and supply chain constraints. This was incorporated into our guidance for both the first quarter and the full year. Our adjusted operating income declined 16% year over year as we grew our direct labor associates 10% and invested in training and overtime to ramp up to meet the growing demand from our customers. We also increased inventory in the first quarter by about $20 million to support our sales growth for the remainder of the year. We feel our staffing and inventory levels are well positioned to deliver approximately double-digit sales growth in the second quarter and the rest of the year, while also improving gross margins through the remainder of the year. We are excited that Arum Biomedical joined Integer earlier this month, and we're confident that together we can deliver even more innovation for our customers. We updated our 2022 financial guidance to include Aaron's sales and profit. Our two recent acquisitions have added differentiated capabilities in high growth markets, while also adding approximately $90 million of annualized sales at accretive growth rates. I'm excited to share more about Aaron Biomedical on the next few slides. On April 6th, we acquired Aaron Biomedical, an industry leader in biomaterial technologies used in cardiovascular implants. We're excited to welcome their 130 associates to Integer and add Aaron's proprietary technologies to Integer's portfolio of innovative solutions. This acquisition is accretive to sales growth and gross margin and fits perfectly with our strategy to offer end-to-end differentiated capabilities in high-growth markets. Erin was a privately owned medical device outsourcer located in the medical device hub of Galway, Ireland, and has been serving leading medical device companies for over 20 years. Their focus has been on developing highly differentiated capabilities that are designed into customers' implanted devices. Aaron is a fast-growing business with 17 million of sales in 2021 and a strong development pipeline of new products, which gives us confidence in our projection they will grow 20% to 30% annually over at least the next few years. Erin's differentiated capabilities in proprietary medical textiles, high-precision biomaterial coverings and coatings, and advanced braiding solutions, combined with Integra's broad capabilities, will expand our offering to provide end-to-end solutions for access devices, delivery systems, and implants for complex medical devices. We believe this combination creates the most comprehensive outsourced offering in our targeted high-growth end markets. With Aaron's strong sales pipeline, the acquisition deal model includes limited commercial synergies, but we are confident our combined offering will deliver upside to the model. We paid 120 million euros with an earn out of up to another 10 million euros for meeting 2022 sales targets. Our leverage will rise above our target range for one quarter, but we expect to be back within that range by the third quarter of this year. From a return perspective, we expect ARIN to be EPS accretive in 2023 and our return on invested capital for the acquisition to be greater than our weighted average cost of capital by year five. During our last earnings call, we highlighted how we serve our customers across the entire product life cycle for each of the markets we serve. The emerging phase through growth and into the maturity phase. We also shared how we are focusing our investments on the procedures that are receiving the most innovation funding by our customers and should therefore generate accelerated growth. The green circles on this chart highlight the markets where Aaron's differentiated capabilities are focused and where we see significant opportunity to accelerate our growth together. On the right side of the slide, we've highlighted more detail than usual to demonstrate the markets, procedures, and specific products that Aaron has the capabilities to deliver in these high-growth markets. The focus on structural heart, neurovascular, and peripheral vascular is by design and demonstrates Aaron's alignment with the strategy we have been executing. Aaron and Integer together create a more comprehensive outsourced offering to enable our customers' innovation in our targeted high-growth markets. I'll offer one more example of how Aaron and Integer together create what we believe is one of the broadest portfolios of access devices, delivery systems, and implants for our customers in the medical device outsourced market. This slide is an example of a structural heart device where Integer can now provide all of the outsourced components and sub-assemblies. This same value proposition applies to other complex devices in high-growth markets like neurovascular and peripheral vascular. Thanks to Aaron, Integer can now offer customers full end-to-end capabilities on high-growth cardiovascular devices. I'll now hand the call over to Jason.