Integer Holdings Corporation (ITGR) Q4 2011 Earnings Report, Transcript and Summary

Welcome everyone to the fourth quarter 2011 Greatbatch Incorporated conference call. Before we begin, I would like to read the Safe Harbor statement. This presentation and our press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and involves a number of risks and uncertainties. These risks and uncertainties are described in the company's annual report on Form 10-K. The statements are based upon Greatbatch Incorporated's current expectations, and actual results could differ materially from those stated or implied. The company assumes no obligations to update forward-looking information included in this conference call to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results, financial conditions or prospects. I would now like to turn the call over to today's host, Corporate Controller and Treasurer, Mr. Marco Benedetti. Please proceed.

Hello everyone and thank you for joining us for 2011 fourth quarter earnings call. With us today are Thomas J. Hook, President and Chief Executive Officer and Thomas J. Mazza, Senior Vice President and Chief Financial Officer. In terms of today's agenda, Tom Hook will start us off with a few brief comments regarding our fourth quarter results, and will then provide an overview of our 2011 accomplishments and strategic focus going forward. After that, Tom Mazza will review our financial results and guidance for 2011. We will then open up the call to Q&A. As we have done in the past we are including slide visuals that go along with this presentation, which you can access on our website at www.greatbatch.com. With that let me now turn the call over to Tom Hook.

Thank you, Marco and welcome all of you who are listening to our call today. We are pleased to be able to share with you our results for the fourth quarter, which marked the completion of a successful year for Greatbatch. During the quarter, revenue was $141.7 million, which represented an increase of 6% over the prior year. This increase was driven by our diversification strategy and included 28% Vascular Access and 27% Electrochem organic growth, which offset a 2% decline in cardiac rhythm management. Also noteworthy, was that the current quarter revenue included approximately $3 million of medical device sales and $2.5 million from the acquisition of Micro Power Electronics, which we completed in December. The strong revenue growth did not translate into decreased operating profitability during the quarter as the results continued to reflect the pricing and mix structures we are experiencing as long as our decreased spend in connection with our medical device strategy, which impacted both SG&A and RD&E. However, we continue to make significant progress in developing the complete medical devices for our customers, which I will highlight to you in more detail in just a few moments. These medical devices will be one of our growth drivers in the future and a critical key to the long-term success of our company. Despite these pressures on our profitability we were still able to generate solid diluted earnings per share growth for the year, which was up 11% on an adjusted basis and it was ahead of the guidance that you provided at the beginning of the year. I would now like to devote the remainder of my prepared remarks to reviewing some of the highlights for 2011 and provide some commentary for our strategic focus going forward. A little over 5 years ago we embarked…

Thanks Tom and good afternoon everyone. For the call today I’m pleased to review with you our results for the fourth quarter beginning on slide 10. Fourth quarter 2011 sales increased 6% over the prior year period to $141.7 million, which was led by 28% Vascular Access and 44% Electrochem growth. Fourth quarter results included the benefit of approximately $3 million for medical device sales and $2.5 million for revenue from the acquisition of Micro Power in December 2011. For the year, sales increased 7% to $568.8 million included the favorable impact of approximately $8 million from the foreign currency exchange rate fluctuations. Excluding the impact of these exchange rate fluctuations as well as the Micro Power acquisition organic revenue growth for 2011 was 5%. This was comprised of Vascular Access growth of 19%, Orthopaedics revenue growth of 11% and Electrochem revenue growth of 6%. Additionally as Tom mentioned, sales for 2011 benefited from the commercialization of medical devices developed under the Greatbatch name, which added $5 million to revenue for the year. I would like to point out that foreign currency exchange rate fluctuations only impact our Orthopaedics product line sales thus for all other product lines the sales growth rates I’m about to discuss are the same on both the reported and constant currency basis. Looking at our CRM and Neuromodulation product line in comparison to prior year, sales for the fourth quarter 2011 decreased 2% but were consistent for the full year period. During the first half of 2011, CRM revenue included the benefit of customer inventory bills and product launches which did not occur in the second half of 2011. Additionally CRM and Neuromodulation sales continued to be impacted by pricing pressures and a slowdown in the underlying market. As a result of these headwinds we…

[Operator Instructions] And our first question will be coming from the line of Brooks West from Piper Jaffray.

Tom, I wanted to ask on organic versus overall revenue for next year. What is your, what would your dollar amount be for an organic range, or said another way, what’s the contribution of I guess is primarily the Micro Power acquisition.

Brook this is Tom Mazza. The percentage that we quoted are really done at a pro forma basis assuming we had Micro Power for the full year. And as shown within the so basically we are seeing 5% growth on the combined Electrochem entities all the other growth rates we’ve quoted there are organic growth rates.

Okay, but at a dollar amount isn’t Micro Power contributing about $60 million, $70 million next year?

Yes, starting number is about $65 million to $67 million for Micro Power.

Can you call out the spend associated with QiG in ’12?

Yes, we can. It will be in the range of it’s been the organic numbers in the range of $35 million. 30 to 35.

One more if I could. The ICD guys are cautiously optimistic that the market is going to stabilize in calendar Q2 after we anniversary the DOJ investigation. If that’s the case, shouldn’t you guys front run that a little bit as a supplier?

I think you know obviously we tend to obviously look at a little bit longer runway on the year because we have a significant amount of safety stock between us and customers for testing purposes. I don’t think we really end up seeing quarter at quarter pervasions if there is a stabilization or recovery is dramatically, I think they are a little bit more drawn out. So our expectation will be as we are kind of again probably for the fourth year in a row, planning on fairly flat CRM growth in the market and planning for that operationally as we align our productivity initiatives and not have a lot of push through on volume. And then we will look at any stabilization or recovery to that is an upside and then we will wait for the actual signals to come in with our first quarter results or second quarter results to validate that. But right now we are really not expecting it or planning on it but clearly obviously we are anxious to be able to see that come through and some way to recovery of stabilization in the market but right now we really feel comfortable giving any touch of indication, our visibility to that, because we don’t really have good visibility on it.

Your next question will be coming from the line of Charles Croson from Sidoti & Company.

So a quick couple of questions here. First one is kind of housekeeping, on that $15 million to $20 million adjustment you were talking about, can you kind of break that down further? I guess I’m more interested on where that’s going to hit in 2012.

Are you talking about the other operating expense?

Yes, the $15 million to $20 million in adjustment.

You are quite right. We are starting these projects now that the Orthopaedics projects are well underway and the implementations are, I expect it to be fairly evenly spread over the year. Right now, we are estimating approximately $5 million of that is non-cash charge and that was determined at the point in time where we no longer utilize the assets or we determine that we need to write them off.

Okay, that’s helpful and then another one quick housekeeping one, any idea on debt repayments for the year?

No, I mean we have got a lot of things we are looking at so I don’t have any idea of debt repayments currently.

Okay, and then just one last one. Can you kind of comment on the NeuroNexus acquisition and is this with this kind of augment to the launch of the Algostim is that, what kind I was reading through on the conference call there.

Sure, Charles, it’s Tom Hook. On your debt question I prefer to just pay off the revolver debt as early as possible in the year and just keep leveraging the strong cash flows that we’ve been showing operationally. So we hope to even though we drew on the revolver debt for the Micro Power acquisition is to retire that very early in the year just by strong operating cash flows so like we’ve been able to generate last year. On NeuroNexus we are very excited about both the NeuroNexus as well as the Micro Power deals and they add significant capability to us both operationally and technically. NeuroNexus does have a very successful electrode product line that they sell into animal research applications that we’ve picked up and one of their significant attractions of that acquisitions in working with Dr. Daryl Kipke who is the General Manager of that business has been to apply those thin film electrode technologies into technology that are used for human use. So there is a couple of dozen highly skilled people that are at NeuroNexus to comprise that team plan prominently in both our subsequent generations of our Neuromodulation platforms as well as derivations of the current generation products like Algostim which you provide advanced features on them. So they, we wouldn’t hold up commercialization of the first generation of Algostim technologies but we definitely would be adding to it with other features that would include some of the technical characteristics that the NeuroNexus intellectual property through bias. We will share and we believe as we are in most QiG projects we kind of keep a lot of that those ideas and innovations under the covers until we are ready to talk about them. But the NeuroNexus successes around electrode designs or applications that range from animal research all the way through applicability into humans is -- some of that information is already public and we are going to aggressively build off on that. We are excited to have that team. Just like we are really excited to have the Micro Power team and the capabilities that it brings to the Electrochem business there both of them are really nice acquisitions for us to add capabilities and operating expansion from a revenue and income standpoint and we look for consolidating those. NeuroNexus is going to consolidate with the QiG Group and Micro Power consolidating Electrochem Group and then as we do it normally through a tightening integration and consolidation we will drive profitability’s and cash flows after we finish those programs up.

[Operator Instructions] your next question will be coming from the line of Jamar Ismail from Canaccord.

I have a couple of questions for you. The first one is on your Orthopaedics business can you give more color on the trends that you are seeing underlying that business in 2011 the first 2 quarters were stronger than second 2. Should we see that same seasonality in 2012?

Sure, this is Tom Hook again. I think, if we look at 2011 there is 2 forms of I think growth in Orthopaedics one is kind of growing with the trends of the market and the OEMs, which tended to be strong the beginning of 2011 and then weakened as the course of the year went along. And then because we are a fairly small player in Orthopaedics we obviously have our own sales tempo that we’ve been able to create by working hard to win business with customers. So, you can see certainly the effect -- and obviously you’ve seen some of the competitors in Orthopaedics announced the results already, is the year and 2011 definitely from a market perspective tend to do what I call tail off in 2011. And we tailed off with it but we are still able to maintain some stability because we are still have been successful picking up projects in Orthopaedics and it kind of offset some of that market decline. I think the story in 2012 is going to be a little bit flipped upside down I think we will see the stabilization that’s already started to occur in the first half of the year. And I believe as you can see from our guidance is some of that market is going to come back in the second half and also we are just going to continue to execute on programs for our customers, and underlying that is the investments we’ve made and in our Indianapolis facility and if completed will be moving into our Fort Wayne facility that’s half finished under construction moving to the second half of this year. And we also have plans to consolidate our European operation so we provide a little info on all those will help us with capabilities and pick up business. So I think the 2 factors -- I would like to think our ability to pick up projects is kind of a, we are going to steadily build that capability and hence steadily build that type of business with our key customers. But the market is going to have definitely some of its ups and downs. And then the last thing I will point out, which is not a factor yet in Orthopaedics is in the QiG Group we have an active Neuromodulation and an active Cardio Vascular form we do not yet have an active Orthopaedics funnel and we will not start that until we finish the operating investments in Greatbatch Medical. Even though that won’t help us in 2013 when we look out several years from now innovating on the medical device level on Orthopaedics and providing those solutions out through our OEM customers on a partnership basis will also provide us a longer term growth driver to Ortho we are trying to do a Neuromod and Cardio Vascular. So hopefully that helps.

Okay, but just a follow up and to be clear when we are looking at the low to a decent level for those at least in the first quarter and then build from there?

Yes, we are really not going to give quarterly guidance but I think the comparables for the first quarter and the first half as we said overall are going to be difficult because as Tom mentioned it was a building in a market there but there was also significant amount of product launches in the first half of last year. Which we quoted, so the comparables for the first half are difficult.

Okay and then just one final question just on the time line you gave for some of your medical device project at the Analyst Day. Has there been any significant push back in any of those?

No, not really, no we’ve had to do some follow up submissions on some of the regulatory clearances we got so cost this another say 30 to 60 days at most. But most part on these smaller Cardio Vascular products where we are cutting our teeth and kind of building our capabilities, they’ve come in on time or a few months late. As I think the as we move towards the more sophisticated products that like Algostim I say we’ve taken a fairly conservative approach to how we are approaching that project and the data that we are collecting. So we have more robust submissions and more proactive at engaging into discussions with the FDA proactive basis. So I say that we are where even valued more flexibility into the time lines that provide us the ability to reach to additional data requests. But right now I’m still confident that on the milestone performance basis we are going to continue the projects as we outlined in Investor Day to completion, including Algostim sometime at the end of this year beginning in early next year we will file that submission to the FDA and then we will be moving on that system and obviously there is many other systems past that we will have time line from 2013.

[Operator Instructions] and at this time that concludes today's question-and-answer session. I'd like to turn the call back over the Mr. Marco Benedetti for any closing remarks.

Thank you. I would like to remind you that both the audio portion of this call and the slide visuals will be archived on our website at greatbatch.com and will be accessible for 30 days. Thank you, everyone, for joining us today.

Ladies and gentlemen, that concludes today’s conference. We thank you for your participation. You may now disconnect. Have a great week.