Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q4 2016 Integer Holdings Corporation Earnings Conference Call. [Operator Instructions] I will now turn the call over to Amy Wakeham, Vice President, Investor Relations. You may begin your conference.

Thanks, Mike. Good afternoon, everyone. Thanks for joining us, and welcome to Integer's Fourth Quarter 2016 Conference Call. This call is being webcast live and together with our earnings release and conference call presentation, are available on the Investor Relations section of our corporate website. The results and data we discuss today reflect the consolidated results of Integer for the periods indicated. During our call, we will discuss certain non-GAAP measures. For a reconciliation to the most directly comparable GAAP measure, please see the appendix of today's presentation and the notes to the financial statements in today's earnings release. As a reminder, statements about expected future events and financial results are forward looking and subject to risks and uncertainties. Our actual results may differ. Please refer to the risk factors detailed in our SEC filings for further discussion. For anyone listening to a taped or webcast replay or reviewing a written transcript of this conference call, please note that all information presented is current only as of today's date, February 27, 2017. The company disclaims any duty or obligation to update any forward-looking information, whether as a result of new information, future events or otherwise. On the call today to discuss our quarterly results and to update you on our business outlook and strategic initiatives are Thomas J. Hook, President and Chief Executive Officer; Michael Dinkins, Executive Vice President and Chief Financial Officer. Tom Mazza, Corporate Controller, Treasurer and Interim Chief Financial Officer will join us for the Q&A portion of the call. Following our prepared remarks, the call operator will come back on the line for Q&A. I would now like to turn the call over to Tom Hook.

Thank you, Amy. Welcome and thank you for joining us this afternoon. On today's call, we will review our fourth quarter results, provide our outlook for 2017 and give you an update on our business and product lines. 2016 has been a year full of significant change with good forward progress despite several challenges. Just over a year ago, we completed the combination of Greatbatch and Lake Region Medical, and we have spent the past year successfully integrating the 2 legacy companies, positioning Integer as the global leader in medical device outsource manufacturing. Our broad suite of technologies from discrete products to complete implantable medical device systems, coupled with our expertise in comprehensive capabilities, is allowing us to deepen customer relationships and explore new ways to partner together, both with existing and new customers. Fourth quarter results reflect continued stabilization and the return to a modest growth trajectory in our business. During the quarter, we announced the appointment of Jeremy Friedman as Chief Operating Officer with responsibility for our Medical product lines. His leadership will allow us to strategically align and leverage our integrated capabilities more effectively to expand revenue opportunities with customers. Operationally, we are making continued progress across the organization. Initiatives to reduce inventory levels across all product lines are delivering results. Inventory balances are down in excess of $25 million year-over-year, allowing us to accelerate paydown of debt obligations. We have demonstrated continued fiscal discipline, and operating costs have decreased significantly during the second half of the year through a combination of company-wide cost-reduction programs, realized integration synergies and ongoing continuous improvement initiatives. Additionally, focused efforts to improve and enhance customer relationships are allowing us to better manage our business and product line forecasts. From a financial perspective, revenue was essentially flat year-over-year and slightly up on a sequential quarterly basis. This reflects continued good progress from the decline experienced during the first half of 2016. We made solid progress over the past year, particularly in integration, even as the business has been impacted by customer and industry headwinds. We also addressed internal challenges throughout the year and believe we have a solid foundation to return to revenue growth as we head into 2017. I would like to now turn the call over to Michael to discuss our fourth quarter financial results in more detail and the outlook for the remainder of the year. I'll be back later to discuss product line results and strategic growth initiatives. Michael?

Thanks, Tom, and good afternoon, everyone. Today, I will take you through our fourth quarter financial results, our balance sheet metrics and introduce our 2017 full year guidance. Slide 7 highlights our key results for the quarter and total year. We had solid performance in the quarter, and we end the year on a positive trend as our revenue performance continues to improve, although we acknowledge we still have a lot of work to do. Tom, when he covers the individual product categories, will give further insight on the progress we are making. I want to highlight 2 things on this slide. First, our sales in the fourth quarter of 2016 were flat compared to the prior year at $360 million and increased $13 million sequentially from the third quarter of 2016. Foreign currency exchange rates did not materially impact sales in comparison to the prior year. We ended 2016 with positive momentum, and we believe we are well positioned for incremental revenue growth as we look to 2017. One of our top priorities is increasing our cash flow from operations so that we can reduce our debt as fast as possible. We made progress in 2016 with total cash flow from operations of $106 million, which allowed us to reduce our debt by $46 million. We believe we have the processes and discipline to improve this performance in 2017, as you will see when we cover guidance in a few slides. Let's review our revenue in a bit more detail. On a comparable organic constant currency basis, fourth quarter 2016 revenues were flat compared with the fourth quarter of 2015. On a comparable organic constant currency basis, Cardio & Vascular revenue in the fourth quarter of 2016 increased by 7% over the comparable period of the prior year, primarily…

Thanks, Michael. I'd now like to do a quick review of each of our product lines. Turning to the Advanced Surgical and Orthopedics product line, which includes Portable Medical. Operationally, we closed out 2016 on a strong note. Customer relationships are advancing, and we have made improvements in quality performance and inventory management practices, which have positively contributed to total company cash flows. Last quarter, we talked about the significant progress we have made advancing the wireless power initiative. During the fourth quarter, we shipped the first wireless prototype. Additionally, we are making good progress advancing a second customer relationship while continuing conversations with a broad group of potential wireless customers. The Advanced Surgical and Orthopedics product line revenues remain a solid contributor to overall results. Product line revenues declined when compared to the fourth quarter of 2015. However, in the prior year, several customers increased demand at the end of the year in advance of product line transfers to our facility in Tijuana. As these product lines are fully qualified, we expect that revenue will return to normalized levels. Additionally, the Advanced Surgical and Orthopedics product line is driven by customer product launches, and 2016 has been a slower launch year when compared to 2015. Operational performance remained steady, and we continued to see improving relationships at high levels of collaboration with our top customers. Multiple continuous improvement initiatives advancing across our operations are driving incremental cost savings. Additionally, operational and quality programs are in progress to standardize and harmonize our systems and processes across the product line. In 2017, we expect incremental revenue growth opportunities driven by new product launches and acceleration in targeted areas. We believe there are multiple opportunities for Integer to successfully partner with customers to help them streamline and mitigate cost pressures by providing…

[Operator Instructions] Your first question is from Matthew Mishan from KeyBanc.

Mike, Tom, could you go into a little bit more detail on the EBITDA miss versus your guidance? The sales were excellent and right in the midpoint, but looks like EBITDA came in about $10 million below at the end -- at the midpoint.

The primary driver for the reduction in the EBITDA was both a mix of business that we have that drove the increase. It was a little bit lower-margin business than some of the others and the increase that we had in the fourth quarter with some warranty and inventory reserve that we set up, reflecting some field actions in terms of how our products have been performing in the marketplace. Those were the 2 drivers that were different than what we have provided in the guidance.

Could you quantify the higher warranty reserves and like how much longer you expect to realize that?

The warranty reserve was approximately about half of the mix, roughly around $5 million, and the other was the mix of business in terms of lower margins. We believe that we have reflected on our balance sheet all the known items and do not expect that we will be materially different on reserves going forward.

Okay, great. That's very helpful. And then how should we be thinking about pricing on an annual basis kind of moving forward for you guys? I think you've been locking in longer-term contracts with your customers. Are you close to finishing doing that? Is that an ongoing process that's going to go on for you over time? Or is this -- how should we be thinking about that moving forward?

Matt, this is Tom Hook. It's a question that I believe is inherent in medical device outsourcing at an annual basis. As we continue to engage customers, I believe that between 1% to 2% per year in price productivity in exchange for locking in development contracts and longer-term agreements is typically the expected norm. And then we work with our customers to bring, obviously, new revenue streams online to compensate for those price productivities that we provide them. So that product pricing in the range of 1% to 2% is consistent over the future as it has been over the past.

Okay. And then you -- we have a rising interest rate environment going into next year. How are you thinking about mitigating the interest rate volatility on the floating rate debt?

Roughly about 80% of our debt is fixed up to a LIBOR of 1% because we have gone in and put in hedges in place for the term loan A, and the term loan B has a floor of 1%. We're monitoring interest rates. At this point in time, we have not put any hedge on the term loan B, but we'll continue to monitor it. The pricing right now on that was something we didn't feel was a good course of action that we should take. But until LIBOR goes above 1%, we're about almost 80% fixed.

All right. Perfect. And last question, can you talk about how you are improving customer satisfaction, maybe some of the metrics that you're using and how they've trended over the last several years?

Yes. Is we have a series of measures that would be -- from a service perspective that would be based on on-time delivery and quality performance, and we track those by product line -- actually, by SKU and roll them up into each location, each product line and each customer. And we report on those actively in operating review meetings both internally and directly with customers. We share the data openly with them. Beyond that, we also work on partnerships and co-developments. As you know, we're active innovators, and we want to take those innovations and deploy them with customers into active product development programs that they are running. So we're opening up our portfolio of capabilities to them to be able to partner with. So we have measures from a technology standpoint that are internal of how we're partnering with customers to be able to, whether on a component or a subassembly or a full system, be able to ingrain that co-development together to be able to have a partner -- true partnership between the customer and Integer. And we openly track and report that with customers. And then ultimately, as you know, Matt, that all precipitates out into revenues as a customer launched that product and demand that we provide to them. So our ability to deliver that with flawless levels of quality is critical for us to get the revenues and profitability that we deserve, and of course, we track that at the end of the project and on an ongoing basis.

The next question is from Jim Sidoti from Sidoti & Company.

I'm sorry if you covered this already. I joined a little late. But if you look at the 2 businesses that were down the most in 2016, the neuromodulation and the Electrochem businesses, do you think you've bottomed out at this point? And do you expect -- I know you said Electrochem should be growing next year. Do you expect neuromodulation to be growing next year as well or this year, 2017, as well?

Jim, thanks for the question. Yes, clearly, Electrochem, because the oil and gas industry bottomed out in 2016 and is beginning a modest recovery, we expect that customers will start drawing more demand from us and have in the fourth quarter, both to respond to their own market demands in the industry as well as replenishing their inventory, both of which are positive to us. As a correction, we report cardiac rhythm management and neuromodulation together as a product line. Our cardiac rhythm management products have seen most of the pressure in 2016. Neuromodulation has been a positive influence and growing for us. So our -- we expect that as we continue through into 2017, neuromodulation will continue to grow because of the market size and high growth rate, and we intend to capitalize on that because of the customer base we have and the success we've been enjoying. We expect, obviously, cardiac rhythm management, while a mature market, we still feel that it's opportunity rich with our current customers. It's just not [ph] anywhere near the high growth rate as neuromodulation.

All right. And have you seen any major changes, material changes from your largest customer, St. Jude, as a result of the acquisition from -- by Abbott?

We have not seen any material changes other than the obvious publicly disclosed ones around the management of how they're going to run their combined company. There's obviously some news with some recent product approvals that they've had. Beyond that, as it applies to Integer, both Abbott and St. Jude are very strong customers for us. We have deep relationships with both. And as they're making transition plans of how they're managing the business, we're working in concert with them. And just to remind you, Jim, the legacy companies with Integer have long-term agreements and arrangements with St. Jude and Abbott that allow for a large amount of predictability to the business going forward. And because of our tight partnerships, we have very active funnels in development and co-development projects with both Abbott and St. Jude that are feeding the funnel for future revenue opportunities. So we're bullish for the prospects going forward of the combination of the 2 companies as 1 of our largest customers.

The next question is from Charles Haff from Craig-Hallum.

I wanted to step back for a minute and just kind of think about your business from a long-term normalized basis on revenue growth. Med device volume growth, I guess, I think about as kind of a 3% kind of business for OEMs in the aggregate but realize that you guys have individual business lines and segments that you are in, but I'm curious to hear your thoughts on where you think volume growth should be for your business. And then if I layer in the 1% to 2% price decline per year in exchange for the long-term agreements, is it kind of -- is it correct to kind of think about this as a 2% normalized revenue growth business? Or are there volume growth differences or mix benefits that you get from moving higher up the value chain? Just trying to understand the long-term revenue growth picture.

Charles, I think you described 2 of those variables correctly. I think there is 2 other variables that have to be included in the longer-term growth prospects. The first one I will say is what we'll call the product continuum. Today, Integer sells everything from discrete products and components all the way to complete systems. So even if the market is at the -- our end customers growing low single digit, if we can capture a higher percent of content of the devices and sell more subassemblies and complete medical devices to a customer, even in a low-growth market, we can continue to grow at a higher rate than the end markets that they're selling in. Additionally is -- fourth variable is technologic breakthroughs. We actively spend tens of millions of dollars a year in research and development and fundamental technologies that are not represented in the end markets today, where we can codevelop those products with customers and have new product offerings that transcend what's available today, many time, opening up new market opportunities and new technologies that actually create new markets or create new opportunities in existing markets. Each of the 4 pieces that are highlighted here, unit growth, obviously price exposure, technological improvements as well as selling a richer mix in the product continuum, all 4 of those pieces will result in the longer-term growth trajectory. We don't provide, obviously, long-term guidance, but we felt, historically, the mid-single-digit revenue growth range is a good target for us over the longer run. And that's what it's been historically. 2017 is a recovery year for us given the challenges of 2016, but our plans are obviously, over the longer run, is to get back to that trajectory and be able to leverage that stronger to the bottom line in the way we partner with our customers.

Okay. And then a follow-up to that. So for the long-term volume commitments that you have been getting recently in exchange for price then, is that targeted towards getting this higher share of wallet? Are these new programs that you've -- seeing yourself then starting with the OEMs? Or is this just keeping what you have if you will?

It's -- this is our way -- I think, if you step back to the bigger picture question, Charles, is customers obviously want to launch new products, and they also want to have some level of productivity in their current products because they're facing price pressure in the clinical medical device market. Well, in forming a long-term agreement, we work together with the customer to work on cost reduction opportunities where we're both saving money. So while we're passing price to the customer from Integer, we're also cutting our own costs that we pass on to the customers. The importance of a long-term agreement is it gives us a longer period of time to make those investments and returns, and it allows us to have certainty that those investments will pay off when we perform. So the best way to look at that long-term agreements is we're doing them in partnerships with customers. We're not bartering back and forth between us. The long-term agreements cover, many times, the existing book of business, but it also cover the next-generation sets of product lines that would be added over the term of the agreement, which are sometimes 5, 8, sometimes as long as 10 years in place. That way, a customer knows that we're incentivized to not only just drive new technologies, but as those technologies are introduced into the market, by driving business and volume, we can also do active cost-reduction projects, give price productivity to them and drive efficiencies for them downstream. And that's all comprehended in those long-term agreements. So we view and our customers view it's good business. It's a close partnership. We've been highly successful with this in both legacy companies, and we intend to continue to use the practice. And we'll -- as we win them, we'll continue to report them out to investors.

Okay, great. And then 2 more quick ones and I'll jump back in the queue. For gross margin guidance for 2017, what do you anticipate a range of gross margins could be?

The guidance that we provided the level of detail is what we like to stay at, Charles. We really don't go down to a guidance on a gross margin basis.

Okay. And then lastly on Mexico, you've obviously been increasing your production in Tijuana for the last few years, and there's been a lot of rhetoric coming out in terms of equalization taxes and so forth. I'm wondering if you could kind of just help me understand what types of tactical changes that you're contemplating. And if you know your product mix of products that come out of Mexico, that would be helpful as well.

Certainly, Charles. This is Tom, and I'll let Mike chime in here. We are very committed to our teams, both in Juarez and both facilities we have in Tijuana and the Integer team, and we work very closely with customer operations all over the world. We are, from those operations, importing into the U.S. but also exporting to other countries a substantial portion of that production. Both of our operations there function as maquiladoras. We are very closely tracking the new U.S. administration's policies on how that would work. It's a bit premature to comment on what we plan to do until we understand what those policies will be, but they potentially could have an effect on us. But we feel confident we can still leverage the capabilities we have there very effectively in the future.

Yes. I'll cosign what Thomas is saying that a good portion of what we could produce at the facility are being shipped other than to the U.S., and a significant portion of what is being produced at those facilities is actually for a split entity that would not necessarily be covered with the things that are proposed at this particular point in time. But we're going to continue to monitor it, but we don't see any major issues at this particular point in time. And most importantly, as Tom emphasized, our facilities in Mexico are really doing a fantastic job for us and great quality for our customers.

And the last piece of your question, Charles, with regard to a breakout, we don't provide a breakout, and -- but we know qualitatively you understand what products we've moved down to our facilities over time over the past decade, but we don't provide any breakdown of what we do down in our Mexico facilities from a revenue basis.

[Operator Instructions] The next question is from Matt Mishan from KeyBanc.

Could you guys talk about the cadence of revenue growth in 2017? I think the last couple of years at least are around the initial revenue growth guidance. It was more back half weighted. How should we think about it this year, especially with potentially a major product launch for you guys in the first quarter from a major OEM customer and CRM?

You -- I mean, Matt, you have a lot you're asking underneath that question. We're going to not provide quarterly revenue guidance this year, but yes, it's true. There is a periodicity to quarterly revenues with customers. They order on different cycles because of year ends are not always annual year ends. If you look to our historical periods of time, you can get a flavor of what some of those cadences are, Q1, Q2, Q3, Q4. And we feel that 2017 will be a net 2% growth rate, but there will be variation between the quarters. And traditionally, we have slight variations. We have European businesses that tend to ebb in the third quarter. We tend to ebb in the first quarter, is not necessarily our strongest. It -- we have stronger second and fourth quarters. The same periodicity, historically, will tend to apply going forward that we don't feel that, that's going to be much different.

Okay. That's fair. And then what was the strategic rationale to focus on adjusted EBIT -- EPS for guidance versus adjusted EBITDA like you have in the past?

We felt that, that adjusted EBITDA was a transition year reporting mechanism during a period of time when we were quickly and aggressively integrating the companies and had a lot of information to convey. We feel now that typical to most other public companies, the reporting revenues and adjusted EPS is the proper way forward now that we're an integrated entity under one brand, one operating team. So we feel that's the better way to give information from a performance standpoint to investors prospectively.

Okay. And then lastly, what is the free cash flow expectation for 2017?

We believe that the details that we gave in the guidance will allow them to kind of give some indication of that, but it will be somewhere -- right around $150 million cash flow from operations.

$115 million or $150 million?

I just realized you said free cash flow. So then subtract from that, as we've indicated, about $50 million to $60 million for CapEx.

Mike, did you say $115 million or $150 million for operating cash flow?

Closer to $150 million.

That is all the time we have for questions today. Thank you for participating in today's conference. That does conclude today's program, and you may all disconnect. Everyone, have a great day.