Integer Holdings Corp (ITGR) 2004 Q2 法說會逐字稿

Welcome, everyone, to the second quarter Wilson Greatbatch Technologies 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 and form 10-K. The statements based upon Wilson Greatbatch Technologies current expectations and actual results could differ materially from those stated or implied. The Company assumes no obligation to update forward-looking information included in this conference call to reflect changed assumptions, the occurance 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, Treasurer and Director of Investor Relations, Tony Borowicz.

Thank you, Liz.

Welcome, everyone, to the second quarter Wilson Greatbatch earnings conference call. With me on the call today are Ed Voboril, our Chairman, President, and Chief Executive Officer, and Larry Reinhold, Executive Vice President and Chief Financial Officer. In terms of the format for today's call, Ed will review the second quarter financial highlights and provide an update on our current business issues and provide an insight in some of our key long and short-term financial initiatives. Larry will follow up with the detailed review of the financials and discuss our 2004 financial guidance and also provide a preliminary outlook into 2005 in terms of top line revenue. At that point, we will open up the call for customary Q&A. Let me remind you that we are providing slide visuals of this call, which can be accessed on our website. We plan to allow about 30 minutes for the Q&A, so please limit your questions.

Now let me turn the call over to Ed.

Good afternoon. Thank you for joining us on the second quarter earnings call.

Let me start by providing a summary of our financial results for the quarter. Sales for the quarter totalled $52.9 million, down approximately 5% compared to the 55.8 million reported in the second quarter of last year. Earnings per share of 22 cents for the second quarter was 4% lower than the 23 cents earned in the second quarter of last year. As discussed in May, we anticipated both our second and third quarter CRM sales would be negatively impacted by a company-wide strategic inventory management initiative by a major customer. Our previous guidance was based on the information provided by the customer at the time. However, the customer has decided to accelerate the timing and size of the reduction. But let me remind you that we remain an important supplier to this customer and will continue to be an important supplier to them in the future. We continue to collaborate on next generation product development in many different product areas, including next generation batteries and capacitors.

Looking ahead to the remainder of the year, we anticipate sales to this customer for the full year 2004 will be approximately 25% lower compared to last year as a result of these strategic inventory initiatives. Looking to next year, we have received preliminary indications from this customer that our sales to them will remain about flat compared to 2004 sales levels. The reduction in sales to this major customer has been partially offset by increased sales to our other CRM customers. For the first six months of this year, sales to our other CRM customers have increased by 31%. In fact, sales to these customers are exceeding our own internal projections. Based on the combination of these factors, we have revised our 2004 sales forecast and now expect our 2004 total sales to be between 195 and $205 million. In conjunction with the lower volume, we have implemented a cost reduction plan, which Larry will describe in greater detail. This action includes a work force reduction. This decision to reduce the work force was difficult to make; however, it was necessary to adjust the business to current sales levels.

Let me now address some longer term strategic initiatives of our company. Clearly, healthcare costs continue to rise. As a result, our customers, the device manufacturers, are under greater pricing pressure than ever before. Our medical customers are seeking opportunities to reduce their costs and gain a competitive advantage. As an important supplier to this marketplace, we must provide value-based solutions to our customers. In response to these global market conditions, we continue to focus on providing the most value to our customers, and building on our value-added strategy, we are aggressively promoting and expanding our internal capabilities. As a testament to our strategic direction, we have entered into an important long-term agreement with a major diversified CRM device manufacturer to partially assemble most of their implantable medical devices for CRM in other applications. While always aiming at providing a volume-based solutions, we continue to invest in technology leadership and have recently signed a development agreement with a new capacitor customer that presents an exciting market opportunity.

Let me touch on these initiatives in greater detail. We initiated a strategic action to aggressively expand our value waited capabilities to enable the production of low cost assemblies -- subassemblies for our customers. We plan on leveraging within and across our component product lines and process capabilities to create integrated system solutions. Our business model is to provide the basis for on springboard into cross selling manufactured components in order to provide a competitive advantage for our customers while integrating our new technology solutions. As you saw in our press release, in conjunction with our value-added strategic direction, we signed the important long-term agreement with a major diversified CRM device manufacturer to provide value-added assembly of -- subassembly of most of their implantable medical devices for CRM and other applications. We look forward to broadening our relationship with this customer across our component product lines. We are extremely excited about the opportunity to strengthen our relationship with this customer, and anticipate they will become a more important part of our continued growth and success.

We signed another important technology agreement in this quarter with a new capacitor customer. This customer is not part of the traditional customer base, but is developing a new therapeutic approach to cardiac rhythm management. We have entered into a technology and development agreement with this customer to design capacitors and batteries for this new CRM therapy. This development requires technologically demanding components, and we are pleased to be part of this emerging technology. We believe that this new technology could represent a very large market segment in the future. In addition to the new technology, we paved the way for further development and adoption of our existing Wet [channel] capacitor technology with the purchase of a number of capacitor patents in the quarter. These patents pertain to the capacitor reforming process. Though we believe that these patents could be successfully challenged, nonetheless, the acquisition of the patents removes these obstacles and paves the way for our existing and potential customers to more fully adopt or initially adopt our capacitor technology.

We are announcing the construction of a low cost manufacturing facility in Tijuana, Mexico. The facility will be approximately 144,000 square feet in size, and we anticipate employing 100 workers by early 2005. We began construction on this facility in the quarter and will take occupancy by year end. This low cost facility will enable us to provide the best value proposition to our customers in terms of technology, cost, and quality.

In terms of our top priority technology development projects, as mentioned earlier, we remain on track to deliver high rate QHR cells by the end of this year. We are in the process of completing a new advanced battery facility that will ultimately house the manufacturing of this next generation technology. We plan on taking beneficial occupancy of the facility late this year. We remain very excited about the features and benefits that this product will bring to the marketplace in terms of improved charge time. In addition to the new high rate battery, we are also developing the next generation medium rate, or QHR cells, that can be used in less demanding voltage applications.

Integration of the NanoGram acquisition is proceeding as scheduled. We have made a number of beneficial development discoveries in the quarter, and we have manufactured the first nano SVO cells in June and have those cells on test. Early indications of that product performance is very promising, and we expect to be in position to deliver qualified batteries in 2005. With our investments in technology and advanced manufacturing facilities, coupled with expanding customer relationships, we are positioned to grow market share in the exciting CRM marketplace. We have and will continue to be a market leader by offering the best technology, the best quality, and the best value to our customers.

Now I'll turn the call over to Larry, who will discuss our financial results and provide guidance for 2004 and a preliminary look at the top line for 2005.

Thank you, Ed.

Sales for the quarter totalled 52.9 million, a decrease of 5% compared to last year, and we reported net income of $4.7 million, or 22 cents in diluted earnings per share. Both of these measures were lower than last year by 4%. It should be noted, however, that the current quarter was impacted by special charges of about 9 cents for the patent writeoff and for the severance charges, while last year's second quarter was impacted by special charges of 5 cents from the writeoff of fees associated with our refinancing.

Turning to our sales detail: Implantable medical component sales decreased by 6% in the second quarter; the direct result of lower sales volumes to a major customer. On a year-to-date basis, implantable medical component sales have decreased by about 3% from last year. This decrease is comprised of a 30% reduction in sales to the major customer, partially offset by a 31% increase in sales to remaining CRM customers. The increase in sales to our other CRM customers is indicative of the strong, underlying growth of this market. Sales of the other implantable medical component category increased by 59% in the quarter to 7.1 million. This increase is primarily due to sales volumes for our coated electrodes, and we expect coated electrode sales will continue to exhibit strong growth for the remainder of the year. Sales of Electrochem commercial products decreased by %1 compared to last year, mainly due to product mix changes. Our outlook for the remainder of the year is that sales will remain relatively flat to those in the second quarter.

Gross margin this quarter was 45.0%, up considerably from the 41.6% achieved last year. During the quarter, we experienced significantly improved scrap rates, efficiencies from the commercial battery plant consolidation, and lower expenses for incentive-based compensation. Looking ahead to the second half of the year, we have right-sized the manufacturing work force due to the expected lower volumes; however, we still expect gross margins will decrease from the current levels, reflecting the arithmetic of spreading fixed manufacturing costs to lower production volume.

The second quarter operating margin was 14.6% compared to 17.1 in last year's second quarter. The current quarter includes two special one-time charges. We incurred a charge of $2 million for the aforementioned patent write off and about $800,000 in expense for severance. These charges had the impact of reducing the operating margins by 530 basis points. In addition, the current quarter includes the full impact of the NanoGram acquisition, which has resulted in an increase in the rate of RD&E spending. RD&E expense as a percent of sales increased to 10.7%, reflecting these additional costs. During the quarter, our cash and cash equivalents increased by about 1 million to $83 million as of June 30th. In the working capital area, day sales outstanding increased by one to 45 days, and days of inventory on hand decreased by three to 91. We increased -- we incurred an increased level of capital spending, about $8.6 million, all of which was funded from operating cash flow.

Looking forward, I'll first discuss the details of our cost reduction program. In response to the reduction in sales volume, we implemented a cost reduction program, and we expect savings of approximately $8.5 million for the balance of the year. These actions included a 7% reduction in work force and the elimination of about $1.9 million in discretionary spending. In conjunction with this action, we incurred a pretax severance charge of about $800,000 in the second quarter. It is important to note that we continue to invest in our top priority projects, and these development programs were not impacted. Two of our top priorities for 2004 and '05 remain delivering the next generation QHR high rate battery by the end of the year and continuing the development of next generation nano SVO batteries, and we remain on track on both of these important technology developments.

Turning to our financial guidance for 2004, we are now expecting total sales between 195 and $205 million, down from 220 to 230 that we had previously guided. The entire amount of this reduction is due to the further sales decreases by one customer. As indicated, we have a long-standing and excellent relationship with this customer and expect that they will remain our largest customer in 2005. The Company expects 2004 diluted earnings per share in the range of 51-58 cents, again, inclusive of $2.8 million in patent and severance charges that we incurred in the first half, and $3 million in pretax costs associated with the startup of the Tijuana facility, which will be incurred in the second half.

We're also expecting our capital spending to be in the range of 47 to $52 million for the year, due to the increased spending for key strategic initiatives, primarily the buildout of the advanced battery manufacturing facility, lease hold improvements on our new Tijuana facility, and spending on IT projects. In preparing our earnings per share guidance, we have assumed an impact of 19 cents from the aforementioned special Mexico startup, patent writeoff, and severance charges. If we excluded these charges, our adjusted EPS estimate would be between 69 and 76 cents. Our previous guidance that we issued was $1.14 to $1.22. Reduction to our current range is directly attributable to the lower economies of scale, as a result of the second half sales reduction from a major customer. As volumes increase in 2005, we expect margins will improve.

Beyond 2004, based on preliminary discussions with our one -- our major customers, we have assumed sales to this customer will remain flat to current levels in 2004. We anticipate sales to all other CRM customers will grow at market rates. Based on these assumptions, our preliminary view for 2005 is that sales will be between 207 and $230 million, and we anticipate updating this projection and providing profitability and capital spending guidance for 2005 at a later date.

In summary, we've lowered our financial guidance as a result of further reductions in anticipated sales to a major customer. As stated, our relationship with this customer is still strong, and the reductions were related to that customer's strategic inventory initiatives. Based on our preliminary discussions, we expect sales to the customer in '05 will remain flat to 2004 levels. And sales to our other CRM customers continue to exceed our internal projections and will be bolstered by the broadening of our relationship with a major CRM device manufacturer. Going forward, we have implemented a number of near-term and long-term strategic actions besides, designed to achieve future success.

In summary, these actions included: implementation of the cost reduction program, the right size the business to current sales levels, signing of an important long-term agreement with the major CRM device manufacturer, pursuing additional value-added subassembly work with other device companies, acquired capacitor patents in order to remove obstacles that have impacted current and potential customers from utilizing or fully adopting our technology. We began construction of a low cost value-added manufacturing facility in Tijuana, and we have continued development of the next generation battery and emerging capacitor technologies.

This ends our prepared remarks. I will now turn the call over to the moderator to facilitate Q&A.

Ladies and gentlemen, at this time, we will begin the question and answer session. If you wish to ask a question or make a comment on today's presentation, please press star, followed by 1. If your question has been answered and you wish to withdraw your registration, please key star followed by 2. Your first question comes from the line of Mark Landy of Susquehanna Financial. Please go ahead. Mr. Mark Landy, your line is open. Please feel free to ask your question. And your next question comes from the line of Tom J. Gunderson of Piper Jaffray. Please go ahead.

Hi. On just a quick one on cap spending year-to-date; what was that again?

About 15.

Fifteen. And then Ed, could you help me out a little bit? I think I know this, but I just want to hear it in your words. On the new battery technology, the project's done at the end of the year meant new manufacturing in early '05. Is there a switchoff from, sort of, prepro manufacturing that goes into the new building? Is that the--

Yeah, let me-- Gundy, let me cover that in a little bit of detail. We've got-- of course, we've got actually three advanced battery technology initiatives. The first in terms of both when we'll start shipping qualified batteries to customers is what we call 2 HR. That's the quasar technology, what we had referred to as quasar high rate, tremendous interest. We will be in a position-- we are manufacturing that product. We've actually accelerated our delivery plans. We'll be delivering that product before year end from our existing factory, and then we'll have a phase-in of the new factory sometime around the end of the first quarter of '05, and at that point in time, we'll be shipping qualified batteries to two customers with the third one waiting in the queue for a little later in the summer. Then, of course, we have our-- we acquired NanoGram Devices, as you know, and we have refined a battery development that they had in progress with our own design improvements, and in the second half of '05, we'll be delivering to our first customer, a nanotechnology-based battery. And then in addition to that, we have what we call the QMR, which is the medium rate quasar technology, which will be used in a variety of advanced pacing, cardiac synchronization, and so forth, and that is teed up for deliveries beginning in the second half of '05 as well. And all of those programs are on track.

Okay. Thanks for the clarification, Ed. And then quick question and I'll get back in line. And that is, is the new capacitor customer and the new subassembly work customer, are those two different customers?

They are two different customers.

All right. Thanks.

And your next question comes from the line of [Glenn Navarro] of Bank of American Securities. Please go ahead, sir.

Sure. Two questions. One, I guess we all know that, you know, the customer is Guidant that hasn't been ordering so far and won't be ordering for the rest of the year, but what you said is for 2005 that customer guided is going to be purchasing at similar levels to 2004. Now, if the market's going keep growing 15%, why shouldn't the order levels be growing at above what we have seen in 2004? That's my first question. And then maybe this has something to do with it. I think the capacitor contract with Guidant is up at the end of this year. Any clarity on whether that's going get renewed? Thanks.

Okay. Two things. First of all, we're going on the basis of-- I mean it's a little early to be forecasting '05, so maybe we're being a bit conservative. Don't read too much into that, but the customer has told us that the business would be at least flat, at least flat. So there could be some upside, and we have multiple capacitor development programs in place with this customer, so we foresee a continuation of the relationship across the product line, including capacitors.

Well, the reason I asked the first question is because we all know that Guidant has said publicly that they are looking at making, you know, batteries or pursuing that in-house. So I guess, maybe, do you want to comment on that, where Guidant is, what they have told you about pursuing battery manufacturing in-house? Thanks.

I'm not gonna -- we don't talk about what any customer is doing or what any customer is telling us. We don't like to disclose that other than we did get Guidant's permission to acknowledge the fact that the business would be at least flat. We discussed that with them or we wouldn't have even mentioned that. There isn't any question, [Glenn], that across the business we're seeing more competition. What I said earlier, however, is that we are positioning ourselves to be the most competitive supplier to the entire industry. We have got the most advanced technology, the best technology available in every category. We believe we have outstanding quality, and with some of the other initiatives that we have in place, we also are making sure that we can always offer our customers the best value.

Just lastly. When do you think you'll be in a position to announce an extension of the capacitor contract with Guidant?

Well, you know, I-- you're calling it a contract, but in a sense, it really is just a pricing agreement.

Okay. So when will-- would you be in a position to announce an extension of that?

I'm not sure we would announce anything really. I don't think we-- have we ever announced-- I don't recall that we've ever announced the fact that we had an agreement on that.

Not that I'm aware of.

Yeah, I'm not aware that we've ever announced anything on that.

Okay. So on the next quarterly conference-- so -- the first quarter of next year, I'll be able to ask, you know, gee, are you still shipping the capacitors to Guidant?

You will absolutely be able to ask that, and I can almost assure you right now that the answer will be yes.

Okay. Great. Thank you.

And your next question comes from the line of Mark Landy of [inaudible] Financial. Please go ahead, sir.

Sorry about that, guys. Modern technology. Good evening. How are you?

Hi, Mark.

Hi, Mark.

Good, good. Guys, just following up maybe on the agreement that you have signed with this diversified customer. Could you discuss the margins that could be coming out of that agreement? Would those typically be lower than your current, you know, the current corporate average? What should we think about the margins from those?

I'm going let Larry take that one.

Yeah, Mark, I think that you can look at this as the first step of a long-term, deep and broad relationship. The first stages of this relationship will involve what we call value-added subassembly. I think you could probably anticipate that for assembly margin would be lower than our corporate average. That's a safe assumption.

And if we just maybe have a look at, you know, the potential revenues from that deal maybe next, you know, for the second half of next year, and would they be large enough to impact the gross margin, or would you have other programs that could offset that impact?

I do not believe that the margin impact of this business will be so large that it will be able to have visibility to it. I mean we will have-- we have a broad range of initiatives under way that you've seen evidence of how they are paying off in the second quarter in terms of what our gross margin that we reported was, and then we've got a lot more head room to grow. So adding any business that has a slightly lower margin than average is -- of current average, I don't think is going to be visible.

And then from this, from this customer, you mentioned other business outside of CRM. Would that just be current business that you guys currently have that would be collapsed into that agreement, or is this new business outside of CRM?

Well, let me be clear [inaudible]. It is primarily CRM, but there are some other activities that would be related, yes.

But am I correct in saying that you currently have business in other areas with this customer?

Yeah, I mean we do business with every CRM customer. Every CRM device is out there has at least one component made by us.

No, no, the business with this customer outside of CRM.

Yeah, yeah.

So that -- that business is not being collapsed into this agreement, right?

No. This is a standalone agreement.

Okay. Thanks very much.

Your next question comes from the line of Bob Hopkins of Lehman Brothers. Please go ahead, sir.

Thank you. Just a question on the new diversified CRM relationship. Does that company currently buy ICD batteries or pacemaker batteries from you today?

We can't, we can't talk about that, Bob.

Could you bracket the revenue opportunity for us in any way? I mean for -- in terms of subassembly, is this, you know, if we look out 18 months, is this a $10 million opportunity or 50 or 100 or how should we think about that?

Well, Bob, I, I think if you look, we're going to get started on this in second quarter to, you know, to mid '05. I don't know -- we've contemplated the effect of -- of this and are currently contemplating a ramp in the broad range of financial -- top line guidance that we've given.

Okay. No, but I was asking long -- so let's just think longer term and go out, then, to 2006 or 2007 -- excuse me -- just bracket the opportunity for us. Is it a 10 million or 50 million, 100, I mean some sense would be helpful and appreciated.

Bob, I don't want to bracket it in numbers, but we think it will be a fairly significant opportunity. This is a non-trivial opportunity.

Okay, and then, Larry, is there a reason why you're giving us top line guidance in '05 and not any directional bottom line guidance in '05?

The-- this is a-- obviously, Bob, this is a break from tradition that we are guiding -- providing some guidance on top line for a specific reason. Obviously, we've had two reductions in top line guidance during the year, and so we thought that it was important to communicate to our investors what, you know, the status is of our current expectations of the business, and we, we-- it's too early and there are too many moving parts to -- for me to feel comfortable in guiding to the bottom line yet. Having said that, we certainly expect that gross margins in 2005 are going to be equal to or greater than the margins we'll experience in the second half of '04.

Okay, and what were those-- what are your gross margins and expectations in the second half of '04?

You'll have your own model on those, Bob, that you can back into.

Right, okay.

-- provide, but it's not something that we're going to explicitly call out here.

Okay. In terms of the-- so, obviously, you're more confident in the top line in '05 than the bottom line in '05. Just talk about --

I don't want to characterize it that way, Bob. We're certainly confident in the bottom line. We're just -- it's too early for us to be -- to be looking at. We have not finished our operating plan for 2005. When we are in a position to go through the operating plan, which it certainly involves continued cost reduction activities and manufacturing and other -- other programs, we'll be in a position to -- to guide the bottom line for '05. Let me reemphasize that we took a very painful head count reduction in June of this year, and we did that to get -- to have the right cost structure for the size of the business. And so we -- we believe that in the size of the business, we have already given you some indication of what the size of the business will be in the future, and we think that we'll be-- we'll certainly be confident in our bottom line estimates when we're in a position to have a narrower top line that we're looking at.

Okay, and then just last question, in terms of the discussions that you've had with Guidant, following up on the earlier question. Just curious, I mean how frank was that discussion? Do you feel like you've really got a good sense as to exactly what they are up to in terms of vertical integration? Because, obviously, if they're guiding you to flat revenues and the market's going to grow and they are telling us they are going to grow, then they're cutting back from you guys, to some degree, how -- just to help us get confidence in that flat year-over-year number and how frank the discussion are -- have been, or is it more been kind of -- just general guidance we think you're going to be flat or have they told you specifically we're taking in-house this, that, and that and leaving you guys with this?

No, I think, Bob, first of all, they understand the importance of our being able to give some outlook for '05. So, again, as Larry mentioned, it would be unusual for us to give top line guidance normally at this time of year, but because we know there was a concern because of the reduction in sales for '04 that we had to take a look at this. So we've had those discussions with senior folks at that customer, and like I said, for now we're assuming that we're looking at a flat outlook. I think there is always opportunities to see that outlook improve, but we are trying to be conservative at this point in time.

Okay. But I was just curious if the discussions have been very specific or whether they have been broad in terms of the guidance that they have given you.

The guidance that they have given us is fairly broad.

Thank you very much.

And your next question comes from the line of Glenn Reicin of Morgan Stanley. Please go ahead, sir.

Good afternoon. Excuse the cell phone here and I came in late, so I hope what I'm asking was not brought up earlier. Two questions. On the new customer, are they buying value-added subassemblies today from anyone, or is this something new that they are trying?

I don't think they are doing anything with another supplier that would be on the scale that we're doing with them, Glenn. Because we are going to be providing subassembly or partial assembly to almost all of the devices they make, certainly the CRM.

Also in the quarter, and I'm trying to understand the gross margins a little bit better. I don't know if you discussed the mix at all and how the various [inaudible] in the quarter. Can you talk to that a little bit?

I'll let Larry take that one.

And if you're willing to do it, maybe talk a little bit about where it goes in the second half, because that obviously drives a lot of this gross margin erosion in the second half.

I'm-- start again. Glenn, can you repeat your question.

Obviously, mix has a big influence on gross margins, so I'm just trying to understand, (a), what did these various products grow at in the quarter, and (b), what is the general direction in the back half of the year from each of these products?

Well, you know, the product sales revenue was broken out in the press release. You have that there, okay. You know, the -- the margin improved significantly by -- the overall margin improved significantly by the effect -- the biggest contributors were scrap reduction and the significant efficiencies from the consolidation of the commercial battery operation, this year versus last year, and then there were, relatively speaking, mix changes that are dictated by the, you know, the revenue category differences.

So I mean I guess what I'm looking at is, in order for gross margins to grow to the back half of the year, I assume you are looking for your higher margins businesses, which are battery businesses--

Glenn?

We -- you must have missed us in the call. We do not expect gross margins to grow in the second half of this year. We expect they will be lower in the second half of this year versus -- because of lower production volumes in the second half.

I understand. I understand that, but is it mainly concentrated in the battery area as opposed to [inaudible] in the closure area?

No, it's across -- Glenn, the sales reductions to the customer were across all product categories.

Thank you very much.

And your next question comes from the line of Mr. Alex Arrow of Lazard. Please go ahead.

Thanks very much for taking my question. First one, just a quick question for Larry. The 9 cents special charges that you referenced in the call and then there is 2.8 million of special charges and pretax. So if we just divide that we get 13 cents. Can you tell us what we're doing wrong? How did you get 9 cents?

It's post tax. I'm sorry, Alex. Can you-- what did you do again?

Well, you're saying 2.8 million that's in the operating line, so it's a pretax special charge, and then Larry's comment was we had about 9 cents worth of special charges in this quarter.

Yeah, you got a tax effect to get to earnings -- to get anything on a per share basis has to be tax affected.

Okay. Okay. Number two. On your timing of the layoffs --

-- yes.

-- the -- as I understand it, the-- you had these two reductions from Guidant, and the first reduction happening in, you know, in the last quarter, approximately May, and then you had the layoff in June, and then I believe the first time you've announced this 7% work force reduction is just today's press release.

No.

Well, we -- this is -- well, go ahead and ask your question, Alex.

So I'm just confused on the cause and effect of that. Was it from the initial Guidant reduction that the 7% work force reduction happened, and if that's the case, you know, why just bring it up now? Or is it because of the second one, and you weren't actually laying them off at first?

There was a -- the -- there was a -- the additional reduction notification was received, and that-- both, if you will, notifications were factored in to the head count reduction action that we took.

Okay. So -- but you laid off 7% in June.

That's correct.

I mean isn't that a material event to layoff 7% of the company? I mean we couldn't-- did you announce that back in June?

We are announcing it -- we announced it today.

In August. Something that happened in June.

We are -- we have announced it. We've put it in our press release that went out today.

Okay. On the manufacturing facility, you had the, you know, the comment today about your new Tijuana manufacturing facility with 100 or so workers. Can you give us some color on the strategy as far as automating. I know the quasar production plant that's on schedule is, you know, highly automated, and that's consistent with the way the industry seems to be going. Now it sounds like a very manual facility with 100 workers in Tijuana. What products are you making in each of those facilities and how does that work?

Well, first of all, you're correct, Alex. In our advanced battery manufacturing facility we are employing a lot of automation in that production process. The initial utilization for Tijuana will be this subassembly or partial assembly of devices. So it is very labor intensive. It's very manual in terms of, you know, picking up components and assembling them into enclosures and so forth. So, obviously, the benefits of the reduced labor costs and reduced overhead will facilitate a low cost solution for us in taking that on for our customers in Mexico.

And can you say which devices you would be making in Mexico?

Well, as we said, the first agreement we have with a large company is for primarily CRM devices, but also, you know, some other -- some other device categories, but primarily CRM devices.

So it's -- I mean is going to be -- is it more automated than it sounds? It just doesn't sound like it's an automated facility.

In Mexico, it's not an automated facility. Now, it has to be fixtured and when you set up any factory, you're always having some fixturing and some, you know, some appropriate layout of the lines. We're certainly going to employ our lead manufacturing techniques down there and so forth. But it's, it's really, it's really -- you couldn't call it automated in any sense of the word.

Okay. And then last, your -- the new customer for capacitors that is the new therapeutic approach, can you say whether that is the leadless ICD's or are we barking up the wrong tree thinking it's leadless ICD?

We -- we can't disclose anything about that device or the way this technology is deployed until our customer makes their announcements in terms of what they are doing.

Okay. Thank you.

Your next question comes from the line of Eli Kammerman of Cathay Financial. Please go ahead.

Thanks very much. Firstly, regarding your expectations for gaining market share, can you specify exactly which products and which product features you think are going to result in a gain of market share, and how much of a competitive advantage those specific features have over the products which will lose market share?

Well, we, we have the best technology in every category. We're assuming that we'll continue to be the technology leader, which, in the past for us, has correlated with market share, and now that we're adding value through assembly, which includes purchasing some component that we then put into assemblies or subassemblies for our customers, the total value that we add including components that we make as part of the real estate of the device, if you look at the total market being what -- what is the total value being added for devices, we will certainly be growing market share.

Okay. So does that mean that your expectations for battery sales or that your market share will remain stable because of equivalent performance to competitors?

Not at all. No, our battery technology performs better than competitors.

Okay. When you say performance, can you get give a little bit more detail about what exactly is going to drive the market share gains over the next year or so?

Longevity, size, charge time, all the things that we typically provide with advance technology as far as the product specifications that customers are looking for.

Okay. And --

Your next question comes from the line of [Joe Main] of Main Investments. Please go ahead, sir.

Well, hello. I have a question -- two questions. One, can you elaborate a little more on your market share percentage approximately, and, secondly, does the Tijuana plant mean that you will be closing down another facility?

We have-- let me answer the first one. We have no plans to close any of our facilities at the present time.

Okay. What about market share, can you speak to approximate market share in batteries?

In batteries?

Pacemakers, yes.

Just ball park, I'd say we probably have approximately half.

Half.

Approximately.

Next nearest competitor has approximately?

Well, next nearest competitor really is, you know, Medtronic [inaudible] Integrated and makes -- at present makes most of their own batteries, so if -- if we think about competitors including people who are making their own batteries, they wouldn't -- after us, they would make the -- they would be the company that makes the next highest number of compatible batteries after us.

But they only make them for their own consumption.

Your new technology patentable or protected?

I'm sorry. I didn't understand the question.

Is your new technology, new technology batteries, are they patent protected?

Bullet proof.

Meaning they --

Heavily protected by intellectual property.

Good. Okay. Thank you .

And your last question comes from the line of Robert Hallisey of Black Rock Capital. Please go ahead, sir.

My question has been answered. Thank you.

That concludes the question and answer portion for today. You may proceed with your closing remarks.

Okay. Thank you. I would like to remind everybody that both the audio portion of this call and the slide visuals will be archived on our website at greatbatch.com and will be acceptable for 90 days. Thanks, everyone, for joining us on the call today.

Ladies and gentlemen, this brings your conference call to a close. You may feel free to disconnect at any time.