Good morning. My name is Heidi, and I will be your conference operator today. At this time, I would like to welcome everyone to the Integer Holdings Q1 2019 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's there will be a question-and-answer session. [Operator Instructions] Thank you. Tony Borowicz, Senior Vice President, Strategy, Corporate Development and Investor Relations, you may begin your conference.

Thank you, Heidi. And good morning, everyone, and thank you for joining us, and welcome to Integer's First Quarter 2019 Conference Call. This call is being webcast live and a replay, along with the copy of the press release and earnings presentation, will be 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 some non-GAAP measures. For reconciliation of these non-GAAP measures, please see the appendix of today's presentation and the notes to the financial statement in today's earnings release. As a reminder, 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 results to differ materially. Joining me on the call to discuss our first quarter results are Joe Dziedzic, President and Chief Executive Officer; and Jason Garland, Executive Vice President and Chief Financial Officer. In today's call, Joe will provide opening comments. Jason will review our financial results for the quarter and then provide full year 2019 guidance. Joe will come back on to provide his closing remarks, and then we'll take your questions. At this point, I'll turn the call over to Joe for his comments.

Thank you, Tony, and good morning, everyone. I'm pleased to report that we delivered another strong quarter of both sales and earnings growth, thanks to the outstanding work our 8,000 associates are doing for our customers. We continue to make significant strides in advancing our strategic imperatives and we recently announced 3 key leadership changes, all of which will enable us to accelerate the execution of our strategy. In the first quarter, we reported sales growth of 8% and delivered very strong profit growth, with adjusted EBITDA increasing 22% and adjusted EPS increasing 59%. About half of the sales growth in the quarter was driven by a very positive event, the signing of a long-term agreement with a current customer for their existing products. This agreement further deepened and strengthened our long-term relationship with this customer. In recent years, we have not highlighted the signing of long-term agreements because they are part of our ongoing business and we cannot disclose our customer by name. We're highlighting this one because of the lumpiness it creates in our 2019 quarterly sales and we want to provide insight into the sales run rate. The growth and profit was driven by improved operational execution and with strong double-digit growth with or without the incremental sales from the long-term agreement. The first quarter was a strong start to the year and gives us confidence in our guidance, which we increased slightly on both sales and EPS. Daniel will provide more details on the financials in his update. In the last 2 weeks, we have announced 3 leadership changes, starting with Jen Bolt's promotion to Senior Vice President of Global Operations. In this new role, Jen will provide enterprise-wide leadership to our global manufacturing operations to execute our manufacturing excellence strategy, including the Integer production system.…

Thank you, Joe. Good morning, everyone, and thank you again for joining our call. I'll start with the review of our first quarter adjusted financial results. The strong first quarter sales included the positive impact from signing the long-term agreement, resulting in 8% growth in the quarter. Adjusted EBITDA was $66 million, and with strong leverage increased by 19% organically and 22% on a reported basis. This delivered $33 million of adjusted net income or $1 of adjusted earnings per diluted share, which is up $0.37 or 61% on a year-over-year reported basis. I provided some color on our adjusted net income growth. Please turn your attention to Slide 12. Our reported first quarter adjusted net income increased $12 million year-over-year, up 61% on sales growth of 8%. This growth was driven by improved operational leverage on higher sales volume, SG&A expense management and increased customer funding for research and development. In addition, we saw favorable foreign exchange impact, we reduced our interest expense and we lowered our adjusted effective tax rate from 22.8% to 17.3% in the first quarter of 2019. The interest expense improvement of $1 million was driven by our ongoing debt deleveraging and interest rate management. Now we'll turn to a review of our product line sales results. To remind everyone, Slide 14 shows trailing 4 quarter organic sales. We believe this is a more meaningful indicator of our growth trend and how we are performing in the market versus an individual quarter that may contain anomalies resulting from the timing of customer purchasing decisions. We continue to post positive trends in our core medical product line and expect positive growth trends in Electrochem in the second half of 2019. Now let me turn to specific discussions for each product line. Moving to Slide 15, the…

Thanks, Jason. Our first quarter was a strong start to the year, and we are well positioned to deliver on our increased 2019 guidance. I'm excited to say that our senior leadership team is now complete. In the last 16 months, we have added 3 new presidents, a new CFO and a new Chief Human Resources Officer. All 3 of the remaining original senior leaders from when I joined Integer have expanded their responsibilities meaningfully. Jen Bolt is now leading our manufacturing excellence strategic imperative across all 15 of our manufacturing sites. Tony Borowicz has added Investor Relations and Strategy to his previous Business Development responsibilities, and Joe Flanagan has added Business Process Excellence leadership to his existing Quality and Regulatory responsibilities. I am confident we have built a leadership team that will execute our strategy to realize our vision of improving patients' lives, while delivering for our customers, associates and shareholders. I want to publicly and personally thank Tony Gonzalez for his dedication and commitment to Integer over the past 14 years and more specifically, for his leadership of the CRMN product line for the past 3.5 years. Tony stepped into an extremely challenging customer and operating environment and has both developed and deepened customer relationships in a way that would be felt for many years to come. Tony exemplifies customer focus and will be missed. Tony will remain available for the rest of this year to ensure a smooth transition for customers, for Joel and the CRMN team. We wish Tony the best in the next phase of his personal and professional life. In closing, I am confident we have the product line and operational strategy and the leadership team in place to deliver on our clear financial objectives to earn a valuation premium for our shareholders. Thank you. I will now turn the call back over to the moderator to facilitate the Q&A. Heidi?

[Operator instructions] And your first question comes from the line of Matthew Mishan with KeyBanc.

What was the -- let's just start with the long-term agreement. What was the impact of the agreement to EBITDA and net income in the quarter? How does that $11.7 million kind of flow through?

We look at that as really flowing through at our average rates for the year. They'll be in line with that as the contract flows through the P&L.

But for the quarter, like, what did the $11.7 million contribute to EBITDA net income for the quarter?

There's a fairly marginal impact. Again, the contract, as it flows through the year, will be at our average rates. But for the first quarter, where we get a little bit less profitability due to the fact that we're getting revenue on the work we perform through the process. But look, it's -- in the end, we see this an extremely positive sign for us. Again, a great example of deepening relationship we're getting with our customers, and it's where we want to continue to drive our focus.

Okay. So there were costs associated with that in the quarter, like minimal impact on EBITDA net income?

Absolutely.

Okay. Excellent. And then as you've gone through and conducted the lean diagnosis, are there common issues you're finding in the plans? Is there a low-hanging fruit in certain areas?

Absolutely, Matt. There's a wide range of operating opportunities in each of our sites. We -- last summer, or the first half of 2018, Jen led an assessment of all of our 15 operating -- 15 manufacturing sites. And there were absolutely themes that came through in that assessment. As you can imagine, some sites are more sophisticated, more developed in their application of lean practices than others. And ultimately, what we're driving for is a very consistent, standardized approach to how we run our manufacturing plants. We've laid out a very clear strategy. It's about a 2.5-year plan to implement our Integer production system across all of our 15 sites where we're going to end up with the 16 core manufacturing process elements or Integer production system elements will be performed the same way across all of our sites. So the impact of implementing the Integer production system will vary across the sites, but one thing we know is ultimately, it will lead to excellence in safety, quality, on-time delivery and efficiencies. And we have to be excellent at all four of those to deliver for patients, for our customers and, ultimately, for shareholders through the efficiency measure. So there's opportunity in every site. We're about 8 sites into the lean diagnosis process. And the results are meaningful. When you look at our 2019 guidance, we're showing EBITDA growth that's 1.5x the sales growth. So we've got 6% to 9% EBITDA growth on 4% to 6% sales growth. That's a direct result of the early, early contributions of the manufacturing excellence strategic imperative. As we look out into the future, 2020 and beyond, a critical -- the most important element of our strategy that's going to get us to growing profit at twice the rate of sales is the manufacturing excellence strategy. That's exactly why Jen is being freed up to focus 100% of her time on driving this imperative.

And then you've seen some deceleration in neuromodulation growth from some of your customers. Could you comment a little bit on what you guys are seeing? I mean it was really interesting to hear that you're seeing increasingly strong revenue from early-stage neuromodulation. Are you seeing someone like the private guys come in and maybe take some share?

Well, first, let me start with we're obviously watching and hearing all the results for the first quarter, and our view, I think, is quite consistent with everything we -- you've heard from our customers, in that the long-term prospects for neuromodulation remain very positive. No one's view has changed on that. There's so much investment in new therapies that creates more opportunities to help patients with neuromodulation. We don't see any difference in the long-term prospects. Growth is not linear in any company, in any industry, with any technology. So as we look at neuro and you think about Integer for neuro, you have to consider our portfolio. We serve the big players that we're hearing the news from. We also serve the emerging companies that already have product and commercialization. But we also have a strong portfolio of early-stage companies that we're working with on designs, prototype, development clinical trials and right now we're experiencing some growth in some of those early-stage companies where they're getting through their trial -- their clinical trials and starting to commercialize. And so when you look at our total portfolio, we see double-digit growth in neuro for as far as we can look. And we're not dependent upon any one or a few players. We have a nice strong, diverse mix of players that we're serving in the market. I'll add one more thing, Matt. As we look at what we were planning for neuro at the beginning of the year and late last year for 2019, we're actually slightly ahead when we look at our forecast for the year of what we were expecting going in -- exiting last year and entering this year.

All right, that's very helpful. And then last one, and then I'll jump back in the queue. You were talking a little bit about M&A last quarter. What does the pipeline look like for M&A? And how active are you in that at this point?

It's incredibly active, and it's a long list of opportunities. I'll just reiterate what we talked about on the last call. We are not looking for revenue. We are not acquiring to get scale. We're looking for very specific targeted technologies and capability that will allow us to accelerate the penetration into the faster-growing markets that we're targeting. So we're looking at very specific technologies. In some cases, we're knocking on doors that aren't for sale because we're looking for specific capabilities that will help us penetrate the faster growing markets. It's a long list. We've been very focused on it. There's a number of opportunities in the pipeline. We're hopeful that we can get something done soon. It's critical to our longer-term growth. At this point [indiscernible].

And your next question comes from the line of Jim Sidoti with Sidoti & Company.

Back to the signing of the agreement and that $11 million boost in the quarter. Will that impact your second, third and fourth quarters? Should those numbers come down a little because you recognized that revenue in the first quarter?

No, Jim. That lumpiness is what we saw. The lumpiness we saw in the first quarter is really the transition to this new contract, and we don't expect any meaningful variation to the future quarters as related to that.

Okay. And then one more on that. I saw your accounts receivable kind of ticked up a little bit. Is that in part due to the -- recognizing of that net revenue?

No, actually, we classified that in prepaid, so that's there. I mean we've got several things going on with AR, but I mentioned it on -- just a minute ago that if you look at our first quarter, we ended up with a dynamic where we started off a little bit slow and we ended up with a lot of sales in the back half. And so, of course, as you know that's going to cycle through collections within the period. So you've got that dynamic as well. So that's actually sitting in a different account.

Okay. And then you mentioned Portable Medical is now in the Invest to Grow category or product line. Does that mean new product development, acquisitions, or improvement in manufacturing efficiency [indiscernible]?

Jim, great question. So when we went through our strategy process in the second half of 2017, one of the things we identified was our Portable Medical business. The way it was being managed, we had design and development and the sales commercial marketing side run by one of our presidents, and then the manufacturing and supply chain was managed by a different President. And so we put the business together in late 2017. And what was clear to us is we were under -- we were not capitalizing on the growth opportunities in the end markets that we're serving, whether it's the cardiac assist or hearing therapy or emergency care and resuscitation end markets. And when we looked at the profitability of the business, quite frankly, it was unacceptable. The profitability was well below anything that we would accept and not generating an acceptable return. So we asked Jen to step in and take over that business. She's done a phenomenal job of leading the team to streamlining the organization, removing the redundancies and driving really quite frankly, some of the manufacturing -- strategic imperative elements into that business on an accelerated manner. And so we've improved the profitability to the point now where we can focus on that growth, where we have operations that are capable of absorbing growth. And so now we're shifting the focus in that business from purely operational improvement and driving increased yields and better on-time delivery and serving customers. Now the business is ready to absorb growth. So it's -- right now, we're looking at organic growth, Jim. There's lots of opportunities with the customers that we're serving. They look to us as a company that has the depth and capability and scale. We have an operation in a low-cost country that allows us to be very competitive in this space. So we're looking at organic growth, and so we're making investments to accelerate that growth quite organically because the opportunity is there and that'll generate the best returns for us.

[Operator Instructions] And there are no further questions in the queue. I turn the call back over to the presenters.

Thank you, everyone, for joining us on the call today. We stand by ready to answer any follow-up questions. Again, thanks for your attendance.

And this concludes today's conference call. You may now disconnect.