Integer Holdings Corp (ITGR) 2004 Q4 法說會逐字稿

Welcome everyone to the fourth 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 inner report and Form 10-K. The statements are based upon Wilson Greatbatch Technologies 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 change, assumptions, the occurrence of unanticipated events or changes in the future operating results, financial conditions or prospects.

I would now like to turn the call to today's host, Treasurer and Director of Investor Relations, Tony Borowicz. Please proceed.

Thank you, Andrea, and welcome to the fourth quarter and year end Wilson Greatbatch earnings conference call. We've got a lot of information to cover today so let me quickly introduce Ed Voboril, our chairman, president and CEO, and also Larry Reinhold, our executive VP and chief financial officer.

As always, we're providing slides to go along with the presentation so I encourage you to take a look at those slides, we're going to cover a lot of numbers today and those slides will provide the detail.

So with that quick introduction, let me turn the call over to Ed.

Thanks, Tony. Good morning, everyone. I'll provide an overview of the fourth quarter and full-year financial results.

Next I'll discuss the strategic outlook for 2005 and outline some of the key initiatives that will affect our '05 earnings outlook. Larry will provide a more detailed review of the financial results and provide you with our 2005 sales and earnings guidance along with the detail for the supporting assumptions.

Let's start by having me provide an overview of our fourth quarter financial results. We achieved sales of $46.5 million for the quarter and earnings per share of 9 cents. These results were ahead of internal expectations due to the cost reduction initiatives we implemented throughout the second half of the year.

In addition, the startup expenses for our Tijuana location were also lower than plan. Our leadership team from Mexico continues to do a good job of project management on completion of that facility.

For the full year we achieved sales of $200 million, a decrease of 8% from last year and earnings per share of 75 cents, which was 29% below last year. The major negative impact on our earnings for the year was primarily the lower shipments to a major customer. Compared to last year, sales to this customer were lower by approximately $27 million.

Given that a relatively high portion of our cost structure is fixed, this volume reduction had a significant impact on our earnings. Our results also were impacted by price pressures in the marketplace and by what I will describe as an inefficient manufacturing landscape.

We took the difficult but necessary actions to mitigate this volume reduction. We reduced our workforce by approximately 9% in June 2004 and took further action in January of 2005 and reduced the workforce by an additional 4%. The most significant impact of the lower sales volume has been on our ICD capacitor product line. I'll discuss later how we plan to improve the cost structure of our capacitor manufacturing.

Let me first address the key initiatives that are underway which we believe will strengthen the organization long term. We completed the development of our new QHR battery and began shipping qualified sales to customers in December.

We believe that this technology enhances implantable cardiac defibrillator and TRTD performance due to improved charge times in midlife and from higher relative delivered energy. We have recently completed the construction of our new advanced battery manufacturing facility and a build-out in Alden, New York, which will ultimately house quasar battery production. We are currently in the qualification stage with respect to setting up the automated assembly equipment and expect this process to be completed by midyear.

The manufacturing process at this facility will be substantially more automated than our existing manufacturing process and should result in lower manufacturing costs. We signed the value add supply agreement with Medtronic, the CRM and neurostimulation market leader, and expect to begin providing assembly services in mid March of this year.

We have essentially completed the construction and infrastructure implementation at our assembly facility in Tijuana, Mexico, which will allow us to begin shipment in mid March of 2005.

All of these strategic actions, which we undertook in 2003 or earlier, are essential in positioning the company for long-term growth. Our strategic objectives remain intact to lower our manufacturing costs by creating an efficient manufacturing environment, second to expand our customer base and product offering by providing our customers with a combination of technology leading component and assembly capabilities, and finally to design next generation product manufacturability at six sigma quality levels.

Before I turn the call over to Larry, let me summarize what I think are the key success factors for 2005 and beyond. We must successfully integrate our medical batteries and capacitor production in our new facility at Alden, New York. We will execute on the delivery of our QHR, QMR and IRM development projects for all customers.

We'll fully utilize our new Tijuana manufacturing facility and leverage additional value-add assembly business to pull through proprietary manufacturing components. And finally, we continue to identify new niche markets for our proprietary component products.

Now I'll turn the call over to Larry Reinhold to review our financial results and discuss our financial guidance for 2005.

Thank you, Ed. Taking a look at sales by segment, implantable medical component sales decreased by 7% in the quarter compared to last year, while commercial sales increased by 4%.

Lower sales volume of ICD capacitors accounted for the majority of the medical decrease. This lower volume was partially offset by an increase in volume of other components, which grew by 49%, primarily the result of significant higher sales volume of coated components. Looking at our commercial battery segment, sales increased by 4% in the quarter, mainly due to increased demand in the oil and gas market.

I'll touch briefly on the fourth quarter results before moving on to the 2005 guidance discussion. Total sales for the fourth quarter were 46.5 million, a decrease of 6% compared to last year. We reported a gross margin in the quarter of 35.1%, a decline of 510 basis points from the prior year. The year-over-year decline is largely due to lower medical selling prices, charges for increased warranty and obsolescence reserves for 2 non-CRM products, and increased period costs resulting from excess capacity at our wet tantalum capacitor manufacturing plant.

Operating expenses decreased by 2% compared to last year due in part to the aforementioned cost reduction initiatives, coupled with the effects of increased development efforts spent on projects where the company is reimbursed for achieving certain development milestones. The reduction in operating expenses more than offset the significantly increased costs related to Sarbanes-Oxley 404 compliance. We estimate that in 2004 we spent in excess of $1 million on Sarbanes-Oxley related work.

Moving down the income statement, our effective tax rate for the quarter increased as the result of the establishment of a valuation allowance for certain U.S. state deferred tax assets. We expect the tax rate in '05 will not exceed 30%. We reported earnings per share of 9 cents in the quarter, which were higher than we had expected.

The improvement was primarily due to the cost reductions that were put in place in the second quarter and lower than expected spending on the startup of the Tijuana facility. For the quarter, we incurred about $600,000, or 2 cents per share, in Tijuana plant startup costs. The earnings per share of 9 cents reported for the quarter is net of a 2 cent per share charge related to the increase in the effective tax rate. The higher effective tax rate, again, was due to the recording of a valuation allowance against certain state tax assets.

Looking at the full year results, we reported sales of 200.1 million, a decrease of about $16 million, or 8%, from last year. As Ed mentioned earlier, $27 million of that decrease was from sales to a single customer. Sales to all other customers increased by 10% over the same period. We reported a gross margin of 40.3%, a decrease of 120 basis points from last year.

The decrease in the gross margin was primarily related to the unfavorable impact of spreading fixed manufacturing costs over lower production volumes. Operating expenses increased by 4% due to the higher R&D costs resulting from the acquisition of NanoGram Devices in the first quarter and expenses associated with the Sarbanes-Oxley 404 compliance.

These costs were partially offset by various cost restructuring initiatives and increased development efforts on projects where we are reimbursed for achieving development milestones.

Our effective tax rate for the full year was 31.5%, reflecting the increase in the fourth quarter for the valuation allowance for state deferred tax assets. We reported net income of 16.3 million, or 75 cents per diluted share, which includes approximately 12 cents a share in special charges for certain patent acquisition costs earlier in the year, restructuring charges in the second quarter, Tijuana startup costs primarily in the third and fourth quarters, and the 2 cents per share for the higher effective tax rate.

In terms of our customer concentration, we now have 3 customers that represent 10% or more of our sales. In addition to Guidant, which represented 36% of our sales in '04, and St. Jude Medical, which comprised 24% of our sales, the sales to Medtronic reached 10% in 2004.

We have successfully expanded our business with Medtronic in a number of product areas and we expect Medtronic to represent an even higher portion of our business in 2005 as we leverage our value-add capabilities with them.

Turning to the balance sheet, at the end of December 2004 we had cash, cash equivalents and short term investments on hand of $92 million. Compared to last year, this decreased by $39 million. That includes the effect of spending $45 million on the acquisition of NanoGram Devices and $39 million for capital expenditures. Overall, our cash position remains very strong and we expect to be able to fund our strategic initiatives in 2005 from internal cash on hand.

Turning to our financial guidance for 2005, we expect sales will be in the range of 205 to 220 million, an increase of 3 to 10%. We expect the effective tax rate will not exceed 30%. We expect earnings per share to be in the range of 25 to 30 cents, inclusive of 45 cents per share, or $14 million, of special charges. These charges consist of 3 factors, the anticipated Alden and Tijuana startup costs of about $5 million, planned excess capacity costs of about $7 million for Tijuana and the existing capacitor facility, and $2 million of severance costs which were incurred already in the first quarter. We anticipate our capital spending to be in the range of 30 to 25 million, of which about 20 million represents the completion of spending on the Alden and Tijuana facility.

Let me add that we are continuing to evaluate various additional cost reduction initiatives with respect to our facility cost structure. These actions will be reflected in future forward-looking guidance as they are approved. Furthermore, this earnings guidance does not include the impact of expensing share-based compensation, which becomes mandatory in our third quarter of this year pursuant to FASB 123R. We will initiate expensing of stock options at that time and we will provide the estimated impact of this change in accounting treatments on earnings per share guidance on our second quarter earnings call.

Let me now discuss the impact of the aforementioned initiatives on our short-term results. Both the Tijuana and Alden advanced battery facilities will come online beginning in the first quarter of this year. In addition to the fixed costs of these facilities, we have put the staff and associated programs in place to position the company for growth. We're now moving into the execution phase of the project.

We're going through the qualification stage of establishing our various manufacturing and new equipment processes. In order to accomplish this, we will incur significant one-time planned startup costs at these 2 facilities.

We anticipate that we will complete the startup phases in the second half of 2005. Once we reach this point, we will focus our efforts on leveraging the additional capacity. This leverage will result from expanding our subassembly capabilities with other CRM companies, increasing manufacturing throughput from incremental new product sales, and from further cost reduction initiatives. One of the cost reduction initiatives planned for 2005 includes the consolidation of our existing medical battery and our existing capacitor facility into the new Alden medical power facility. We expect to complete this move in the second half of 2005.

Let me provide some additional detail on the special charges that are included in our earnings guidance. Again, in '05 we expect to incur the following pre-tax costs; Tijuana and Alden startup costs of $5 million, excess capacity costs of $7 million, and restructuring costs of about $2 million.

The excess capacity costs, comprised of the net cost of the Tijuana operation, which is being built in advance of a 3-year occupancy plan, and the assumption that our capacity -- our capacitor plant will be operating at about 50% capacity for 2005.

As I mentioned a moment ago, we expect to shut down the existing capacitor plant and relocate it into our Alden facility during the second half of 2005. The Tijuana and Alden startup costs include moving and equipment qualification expenses. The restructuring cost represented severance, but was incurred in January of this year. Let me add that all of these future assumptions are dependent on the timing of when the specific actions occur.

In conclusion, our financial performance for last quarter was ahead of our lowered expectations. In 2005 we expect to incur 14 million in one-time costs. Looking ahead, we remain steadfast in our commitment to further improve our cost structure, to increase market share through the introduction of new technologies, and to expand on our six sigma design for manufacturability program.

This concludes our prepared remarks. Let me now turn the call over to the moderator to facilitate the Q&A.

(OPERATOR INSTRUCTIONS)

And our first question comes from Bob Hopkins from Lehman Brothers. Please proceed.

Thank you. I have 2 questions. One, and the more important of the 2, regards the outlook for long term top line growth because I think that while the cost cutting initiatives are critically important given what's going on in your business, to me the key to the stock is the outlook for top line.

So I'm just wondering if you could talk a little bit on the outlook for capacitors and when you might be able to get to a 2 cap per device system, because that seems to me to be a major milestone, and what the outlook is for new battery customers in addition to just sort of upgrading the old customers.

And then on the filtered feed-through side, which is another key area for potential revenue growth, just give us a status update on what the '05 outlook might be from there. And I have 1 follow-up.

That's a multifaceted single question, Bob, but let us try to provide as much input to you with respect to those questions as we can.

First of all, let's just talk about top line overall. Our commitment here is to still grow this business at least as fast as the market in terms of revenues. We believe that we continue to have the leading technology in all product categories and that that will be a solid underpinning to our growth in the future.

Now you mentioned battery technology. Both with regard to our QHR and more importantly our QMR, which is our medium rate battery technology, is increasingly being chosen not just by companies for CRM applications. But also we look into the neuro-stimulator that marketplace is, of course, going to be another rapidly growing marketplace for the future.

And we believe that we're exceptionally well positioned for neuro-stim with our QMR medium rate technologies.

So we're very bullish about the outlook for our new battery technology across a very wide spectrum of applications.

Do you expect new customer wins in neuro-stim this year or next?

Absolutely. Absolutely. And of course in some cases we can announce it. In some cases, depending on the customer, we can't. But we are in active discussions with a number of neuro-stim customers for the medium rate battery technology that we've developed under QMR.

And the capacitor side?

Capacitor side of course that's driven by when our customers introduce new products. But again, we're discussing a number of new customer opportunities.

We're positioning within roughly about a two-year timeframe to have our high voltage 2-cap system. It's still relatively early in the development program. But as of right now it looks about a two-year timeframe.

And with regard to filtered feedthroughs, that continues to be an exceptionally bright spot on the landscape. We believe that government regulations or interference with devices is moving toward I'll call firming up the requirements, which plays right into our strength.

We believe emphatically that we are still both the market leader and technology leader in filtering for feedthroughs on implantable devices. And the adoption of filtered feedthroughs across essentially the entire spectrum of implantable medical technologies continues to drive growth for us in that business.

OK. And then my quick follow-up question relates to Medtronic. Larry, could you tell us how much Medtronic revenue is in your '05 guidance?

And then the second part of the question on Medtronic is obviously they just reported a battery problem with rapid falls in the battery causing the devices to fail earlier than they are anticipating.

Could you help us understand that issue and how that happens? And also, is there any potential direct benefit to Wilson Greatbatch from that problem?

Bob, at least in terms of guidance for '05 as you know, we won't provide the specific guidance for an individual customer or individual product.

I'll let Ed handle the battery technical issue.

Other than we do expect Medtronic to be a larger customer in '05 than they were in '04. In other words, we expect them to be a bigger percentage of our sales than they were in '04.

Now let me talk to this reported battery issue.

First of all, I think the one thought I'd like to leave with people is when it comes to designing and manufacturing implantable batteries. It ain't as easy as it looks. Medtronic's been at this for almost as long as we have, probably 30 plus years. We're approaching 35 years of experience.

And between the 2 of us, between those 2 companies, we design and manufacture most of the implantable lithium batteries being used in the device world.

It's a very complicated and sophisticated undertaking, both with regard to design, to the manufacturing processes and the quality assurance used.

But every now and then you can have a glitch. And again, it's a reminder that with as much experience sometimes something can still happen.

I think the important take-away for this is that with regard to Wilson Greatbatch, as the industry potentially looks to alternative sources for critical components like batteries. It's important to remember that the experience and the know-how and the technology that's gone into building up our position in the marketplace is not easily duplicated. And that probably that experience and that level of commitment to the industry should be a more important and effective barrier to competition than perhaps it's been given credit for.

And by the way, just specifically to our knowledge, we've never had the type of problem that Medtronic has reported. But again, I think the important take-away here is that all this experience could be continue to be a very important barrier to competition for the future as people consider alternative sources for supply.

Thanks so much.

And our next question comes from Glenn Reicin form Morgan Stanley. Please proceed.

Good morning, folks.

Hi, Glenn.

A couple of questions here.

Firstly, I'm just curious on the one-time charges, how are they going to be booked? Are you going to provide a Pro Forma or are you going to just talk conceptually where in the P&L these things can be found?

Yes, Glenn. We, the excess capacity costs, they'll be included in cogs. That's where they'll show up. But we'll report what they are each quarter.

OK.

The other costs between severance, which has already incurred and the start up costs, will show up in other operating expenses. And obviously we'll detail what those are each quarter.

On the press releases or are you just going to walk us through it? Cause it seems to me that I'm just trying to think whether these are really Pro Forma, should be Pro Formad out or not.

But I'll be set to your call, Glenn. We can put those in the press release.

Are these all cash charges?

For the most part they're cash charges.

OK. And I don't understand why you have excess capacity charges on Tijuana, which is a new facility.

Well, as I said Glenn, it's, there's, it's really a 3-year occupancy plan. You can't just, you can't just move into it all at once.

And so while the facility is 144,000 square feet and we are moving in pieces of things into it in step fashion, during 2005 it will not be fully utilized or fully occupied. It will take certainly well into '06 to have the majority of the space filled up.

So it's not really a charge, it's just excess capacity that you need to absorb.

That's correct. That's why it's also, Glenn, it will be reflected in cogs. But it is excess capacity.

Right. OK.

Here's what it is. It's '05 will be burdened with that cost, which is not reflective of its full utilization.

OK. Can you give us any help on the quarterly progressions for '05?

Not really, Glenn.

OK.

Not end of the year.

Well, I mean when you look at the pacemaker, the ICD business, in the fourth quarter -

Well in terms of second half, like all things, second half it looks, we expect growth to be to just come on without any bumps, if you will, early or any specific things. So second half is stronger than first half.

The one time or the charges will hit when they hit.

OK. And then when we get all done with this restructuring, can you give us a sense what the earnings power of this company is?

In other words, if let's say you have an increase of $1 sales in '06 over '05, can you give us any sense of what over state of 70 cents of, well it's sort of 70 cents cause you have some overhead that you're taking out there. Some sense of how much can be brought to the bottom line so we understand the '06 outlook a little better?

Cause clearly no one's going to be able to value the company off of '05.

Yes. Long-term, Glenn, I think as Ed talked about top line objectives. We certainly believe that longer term we're, that growth in the top line should be 10, low teens, if you will at least. We'll grow the bottom line faster than the top line.

We still will have a fixed cost structure like most manufacturers. And that's sort of in general. You could expect that at least 50%. It depends on the product. But at least 50%, maybe as high in some categories as high as 70% of a revenue dollars flows through to the operating income line.

Now that our direct costs, material, and absolutely invariable labor is between 30 and maybe 50% of the total costs.

So, and that's so that in terms of the earnings power of the company, it's not a different equation than it was before. We're going to have, as I said, we have a very leveragable cost structure with these large investments that we've made over the past 2 years between the new battery and now capacitor manufacturing facility. At Tijuana low cost assembly and facility and a few other things there as well as the investments in infrastructure primarily the biggest piece of that was our ERP environment.

We've invested very heavily and the infrastructure we have is highly scalable.

So let me walk through some math with you.

Let's assume that the normalized earnings with the excess of the structure here is like 65 cents. All right? You take out all the restructuring stuff but you still have the excess overhead. So this year you hit your mark and you're at 65 cents.

If we assume that you grow sales by 20 million. And I'm not saying that's the right number or not for'06. And we assume 60% of that falls to the bottom line on an after tax basis that could be as much as 30 cents.

So if I took the 65 cents plus 30, is it right to assume that there's about 90 cents to a buck of earnings power for '06? I mean, are those the right assumptions? Is that the right way of looking at it?

What I would, in core that's certainly a valid way of looking at things in terms of core earnings power that's the way I look at it.

OK.

Less load through on a revenue dollar. Now to the extent we have as we continue to occupy and do things in to utilize our Tijuana facility, there may be one-time things that occur. But whether you consider those Pro Forma or however you want to treat them, they will not recur for years and years.

Right. Last question before I get back in line, and this is a little bit tougher.

How much of your strategic plan depends on Medtronic going beyond your existing agreement in terms of feedthroughs and assembly?

Because there seems to be some sort of disconnect between sort of your outlook for Medtronic's business when you talk to them. They continue to hold the position that the higher value added products are going to continue to be produced internally.

So it seems to me you got the one piece of proprietary business, the one they give you and it sort of stops there.

Glenn, first of all it doesn't assume any hockey stick or any home run. We expect steady growth in the Medtronic business.

We do business with them in several of our component technologies. And so we expect steady growth. And they will become a larger customer as a percentage of sales.

But it's a sequential thing. It's not, it doesn't, there's no step functions out there.

But do you anticipate them being a capacitor or battery customer any time in the next couple of years?

Within our, within the next couple of years that would be upside for us.

OK. Thank you.

Our next question comes from Jason Mills from First Albany. Please proceed.

Thank you. Good morning, guys.

Hi, Jason.

Just wanted to build off of Glenn's math, if you will. And ask about the excess capacity a little bit because I, too, am kind of looking at that as a non-Pro Forma that should be added back, just personally.

And wondering if we kind of look into the back half of '05 and into '06 what sort of visibility you have into possibly having similar charges into '06 where you may not get the type of leverage that you and Glenn were talking about into '06. And therefore the earnings power may not be 95 to $1.00 but closer to 80 to 85.

I'm just trying to ascertain that scenario or the probability of that scenario into '06.

Jason is there a question in there? I mean -

Yes, essentially what sort of, let's just go back to margins. What are your expectations for gross margins in the back half of the year and into '06? I mean essentially this is where the excess capacity charges are hitting. And therefore obviously we've got gross margins not expanding, vis-à-vis the restructuring in the back half of this year into 2006. We may not have the type of leverage from the sales growth that possibly could be the case in '07 or beyond.

OK. I'm going to put that into what I consider to be a question.

The, while we do not guide specifically to gross margins. I believe that in the, as we said, that the excess capacity costs will hit the GAAP cost of sales. And as that capacity is filled up and as, for example, as we relocate and we exit existing facilities and those costs leave the cost structure, the fixed costs that hit cost of sales are going to decrease.

I expect that by the second half of '06 the majority, the bulk of these excess capacity costs will no longer exist. And therefore we could be back into a more normal equation of the kind of math that Glenn was going through earlier where a revenue dollar, now that increases, flows. A significant portion of that flows through the operating income line or gross margin line in that case.

OK. OK, that's helpful. And then just stymied off of that, you mentioned part of your strategy is seeking additional assembly business from other customers.

You've commented that's lower gross margin business. But maybe pretty decent operating margin business relative to where you currently are.

Could you speak about that within the context you've got these fixed costs coming off but you've got lower margin business relative to product sales on the battery and capacitor side?

And how that, I know you don't guide to gross margins but I guess essentially what I'm asking you to do going into 2006 if we look at where you were a couple of years ago on the gross margin line.

I'll ask it this way, do you see as the fix up costs coming off in excess capacity offset by lower margin assembly business?

But yet growth in your higher margin businesses, can we get back up to that level or close to that level in 2006 or will it take more time? Maybe help me out a little bit in that regard.

OK. Let me take this. There's, you've got to very careful in looking back a number of years ago at the gross margins that the company reported. Because what has occurred over the past several years has been the growth both by acquisition and then sort of dramatically higher organic growth of products that inherently carry lower gross margins than used to be the core of the company's business.

The highest, while we don't guide to gross margins, our highly IP centric batteries as we would expect, are the highest gross margin piece of the business.

To the extent there are lower piece of the whole pie, the overall gross margins go down just by arithmetic.

Now assembly by itself is inherently a significantly lower gross margin business than a proprietary component. But we, our assembly strategy is not to just assemble a bunch of purchased things that you get out there.

What we're assembling for the most part, the strategy is around assembly of our own value added higher margin proprietary products.

So if the assembly pulls the higher margin components along with it, it's a much more attractive business than just assembly, which we never set out to do that.

I don't know if that helps or not, but that's the answer.

And our next question comes from Kay Nekay (ph) from Unterberg. Please proceed.

Wanted to talk about your revenue assumptions for '05. First of all, what should we be assuming or what are you assuming for ASP declines?

Fairly modest, Kay. Fairly modest.

Low single digit?

Absolutely low single digit.

OK. And then on the low end of that number, 2005, are you assuming any filter feedthrough sales to Medtronic at the low end of that estimate?

Yes.

That's certainly in our plans, yes.

Even at 205?

Yes.

OK, and then a question on the QMR battery customers going back to Ed's earlier comments.

While we certainly understand the sensitivity that you can't announce who a customer might be, did I hear you right, Ed, in saying that you also may not be able to see if you've signed up a new customer? Or if you do, you will announce it but just not who, as you've typically -?

As you know, Kay, there are a couple of considerations. If it's a significantly large requirement that we sign up for, where we have to disclose the contract, of course, we'd have to disclose that, but in terms of let's say some smaller companies, where it might be a startup or it might start out to be a relatively small piece of business, even though there's a big potential, the company may not want us to disclose. The customer may not want us to disclose. So it's kind of a mixed bag in that regard.

Kay, obviously, there's 8-K rules on these material contract that within four days you have to file an 8-K. There is things can be redacted from those 8-Ks, including names obviously the pricing is redacted, and other sensitive terms, but absent that, then that's our decision that we have to make. Other than that, whether a customer allows us to mention their name or not, that's their decision.

OK, and then just a final question about the capacitor business, since you're in this process of shutting down the existing facility and you've lost a lot of those sales to your primary customer, is that a business that you have at all considered exiting?

We have not considered exiting that business.

OK, so you're still fully committed to taking that forward?

The best technology available to the marketplace period.

OK, thank you.

Down next question comes from Alex Arrow, from Lazard. Please proceed.

Thank you. Good morning. On the oil and gas contribution, given that that was a material contributor and I don't think, you know, most of us on this call analyze oil and gas trends, could you give us any words on how you see that coming out in 05 and what in particular are the drivers behind whether that business is doing well or not, and how ...

Yes, well first of all, our commercial battery business is doing very well. It's kind of a little jewel in the rest of you know the battery portfolio, and you're absolutely right, in that of course we've seen all the articles about concern about reserves and so forth, and we believe that in 05 we'll experience you know some fairly attractive growth, in terms of batteries sold into the oilfield services market. So we're fairly optimistic about the outlook for that business in the near term.

Would that the appropriate to forecast growth similar to what you saw this year, when you say fairly optimistic? Or would you look for something even more than that?

Probably similar to this year, but it's a little early in the year, and as you know, this is the one area that's affected by macroeconomics and so forth, but again, the factors look fairly positive.

OK, thanks. Next question, on the inventory reduction program that Guidant underwent that resulted in that $27 million decrease, is that inventory reduction program complete, and can you say now, you know, whether you're confident that it was in fact entirely and inventory reduction program and what's the outlook for further inventory reductions, or inventory scale up?

Yes Alex, you know again, we believe that it is done, it is over, and we're not -- we don't expect any additional significant changes to that to affect us on the downside.

Could help you on the upside though, if -- now that they're growing more, they're going to be part of J&J?

Of course, it's simple math, if a customer decides it wants to change its inventory management practices, to the extent they decide that for whatever reason they want to hold more, then the suppliers make more and sell more to them.

OK, and then last question, I know we've already touched on the ASP issue, you mentioned you're forecasting low single digit ASP declined. Occasionally you talk about or you put out a press release about a new contract that has prices specified in the contract or purchasing agreement, and yet there have been these ASP declines last year. Is that -- you know, are your current contract, with your three main customers, do they specify pricing in such an extent that it's less likely that there would the ASP declines, or is there anything else that we could read out of your current purchasing agreements with your largest customers, about whether there would be ASP declines? It seems like it would be hard for them to have leverage on you, given the competitive areas you've described at the beginning of this call, and the lack of options that they would likely have to extract any further declines in the prices that you're selling them to them, but yet they did do that in 2004. What can you tell us, if anything, about their ability to extract any further declines?

We are -- our relationships with our customers are like customer supplier relationships in every other business. Both sides have their positions of power, and short-term versus long-term issues come into the play.

Different customers -- certain customers have -- where we have very comprehensive agreements with minimums and specify pricing and a long-term multiyear, that it's not uncommon in ours or any other long-term arrangement like that, for there to be some level of both volume discounts, breaks, in any particular measurement period, like a year, or year to year for older you know existing price -- existing products to have an expectation that there's a lower sales price, that the sales price comes down, and the expectation that the suppliers going to lower their costs.

Some of our customers, we have other types of relationships with, where maybe we have pricing set and volume set and no minimum. Other customers by things from us on a PO to PO basis, so they're all over the board and without getting into all the details of this things, which is inappropriate, what we've experienced over the past couple years is very low on a composite basis very low single digit price declines, which may be different than ASP declines, because that's mix, but very low single digit price reduction across our portfolio of businesses, and that's net of maybe price increases on certain new things and maybe larger price decreases on all things, but it net's out to be a very modest price reduction environment for us. That's also what we forecast for 2005.

And down next question comes from Mark Landy from Susquehanna Financial Group. Please proceed.

Good morning folks.

Hi Mark.

Hey Mark.

Hi guys. Just wondering maybe just shag along (ph) I think the question that Bob raised, with respect to growth as we go forward, is there any specific catalyst that we're going to see a meaningful pickup in growth over the next say 18, 24 months, or is it just going to be a gradual pickup as things come online?

Well Mark, I think two things. First of all, we're still well positioned in every product category, so with the continuing growth that we see in the market, we certainly should see growth that's at least as fast as the market overall. I think also what happens in the short-term midterm, depending on the schedule for new product introductions, where some of our new or technologies might be implemented, that typically might have a little higher selling price, that would affect perhaps the rate to some extent.

So that's more of an 06 than an 05 event, is that fair to say?

Probably, yes, probably.

If I can just drill down a little bit into the neurostim business, you know, currently your -- now this is probably excluding the carkli (ph) implant business, you know, your main customer in that business I think currently does about 7000 units a year, using CFX batteries. The question is is are they planning on moving out to QMR or are they happy with CFX?

I think it's safe to say that every company that we are discussing new products with is going to consider QMR. You obviously know that when a customer considers you know a technology platform change that kind of opens it up for consideration. I don't think QMR is being considered as a drop in ...

OK. Bed panning (ph) and news to me I'd assume (ph) (inaudible) ...

Yes, I mean to be honest with you I'm not privy to the exact timelines, but certainly when customers would be looking at a new platform they would be looking at a chance to benefit from the most advanced technology.

You know, the customers well had mentioned that they are in discussions or looking to do some OEM manufacturing for others wanting to get into the neurostim space. You know, how do your contract to deal with OEM manufacturing?

You mean with third parties?

Yes, so they would manufacture for their parties.

Well of course, we would be -- we'd be designed in by the customer, and then where they chose to have it assembled would be their decision. Now of course, increasingly we believe that our facility and Mexico, we are positioning ourselves to be the supplier of choice if someone chooses to go out, you know, to outsource the assembly of a device. That's what we're positioning to do, Mark.

Yes no, it's not more the outsource, it's if they're actually going to provide the device for different applications. And manufacture it for a third party customer.

I'm not sure I get the question ...

Yes, they basically manufacture stimulator for their own use. There are others wanting to get into the space, but designing and manufacturing their own stimulator, your customer will manufacture and provide them with stimulators for alternative uses.

Oh, I see.

So you know, the question is, will they just get -- where you get designed into that or does your contract with them only allow them to use your product in specific indications that day, you know, specifically use, or ...

Yes, I -- you know what, let me get back to you on that, because I want to give you a good answer to that, and I'm not sure exactly what the exact precise answer would be.

OK. Filters and neurostim, is that scenario that's being discussed now or is that a little layoff?

Filtering on neurostim devices?

Yes.

Absolutely people are looking at that.

Those customers in neurostim right now, are any of them using filters or is this going to be a brand-new indication in the near future?

Yes, I think there are some customers that are using it right now. There's no question though that the big driver, in terms of the volume, is both CRM.

Sure, but you know as we look out the next few years ...

Neuro's going to be an important addition ...

Exactly, so you know, may be we can just get some of the ground rules now. And the last kind of you know questions around neurostim is, you know, obviously your one large customer just got a huge approval, and if you believe their numbers, you know, they're going to do $1 billion in five years, so you know, doing the math, you know, their unit volume increases almost tenfold. You know, you're in discussions with some other companies, and you probably add a whole bunch of units there, so you know, currently, you probably over the next three to five years could see a 10 to 15 fold increase in the units of those you know customers that you supply. You know, how do we start thinking about these numbers? Because you know, you really said that it's going to be a small ramp in neurostim, but you know, the ramp in neurostim could be ahead of your expectations, and I don't know how we bake these into your numbers.

To be honest with you again, similar to the question that was asked about Medtronic, we haven't assumed any hockey stick in there for neurostim, but it's certainly going to be an area that we're looking at very closely because as this market grows, of course, we intend to continue positioning ourselves as the primary supplier for the critical components, but we haven't factored these new applications into our growth rates going forward yet.

OK, maybe we'll ask those questions on the next call.

Keep asking, keep asking.

And our next question comes from Tim Nelson, from Piper Jaffrey. Please proceed.

Hi guys, I've got a couple questions here. First of all, on feed throughs, I was impressed with the sequential improvement there. Has that resulted in just increased volume from current customers or did you get any new customer wins in the quarter?

Well, I think we're still seeing an adoption phenomenon, where people are adding them to devices that haven't been filtered before, and really the industry model that we projected a couple years ago, after the Seer acquisition in fact is taking place as planned.

Tim, that is existing customers. That's not any individual significant new customer.

OK, good. And then on batteries, I've asked this question before, but you're starting to ship some of the Q. batteries now. It's clearly a big technology initiative, and a lot of the hope for the future rests on it, would you care to hazard a guess at your exit rate, in terms of mix? I mean what percentage of your batteries will be Q. batteries say by the end of the year or into 05, what's your objective?

It's still too early to tell, Tim, because it depends on how our customers ramp up their new product programs, and we don't have enough visibility on that yet to give (inaudible) as Mark said, that's a good question you could ask on the next call.

OK.

We'll have more clarity on that.

And then here and even longer-term question, one of the big technology initiatives in the (inaudible) CRM industry I think is to get their devices MRI compatible. How can you play in that equation? What technologies can you bring to that effort?

Well, we're certainly working with our see-through filtering technology. Our newest technologies could be an important what we call our inductors led (ph) technology for filtering, and I have to be careful here because there's still patent disclosures being written, but we believe that that could be an important element in MRI safety and MRI compatibility for implantable devices.

And the timeframe is obviously several years out.

Well, it's not that far out. Certainly you know within the next couple of years.

Yes. And one more question on excess capacity, I'm a little bit confused. Is this depreciation a component of your excess capacity charges? You'd mentioned it was mostly cash charges and I'm a little bit confused by that.

Yes, it's yes and yes. It is mostly cash, but depreciation is an element of it.

But it's not -- most of them are cash. Most of it is a cash charge.

And our next question comes from Aaron Lindberg, from William Smith and Company. Please proceed.

Couple of quick questions. Do you anticipate additional subassembly contracts in 2005?

Not in 2005. We've been very emphatic we've got our first customer that we're ramping up on, and we don't want anything to defocus us in terms of getting that completely underway, which certainly by the early third quarter we should be completely implemented and through the startup phase on that, and if we look into 06 we certainly anticipate other customers in the chute (ph).

And that's mainly as you try to control your movement of the Tijuana facility?

Absolutely.

OK. Following up on that earlier question regarding capacitor growth, do you expect capacitor growth to be at a similar rate as the Company's overall growth rate in 05?

It depends on some new -- the rate at which some customers bring on new product programs. (inaudible) let's be clear. In terms of the measurement period, if you have to look at the fourth quarter or the second half of '04, not the full year '04, because the capacitor volume in the first half was dramatically higher than in the second half. So if you look at '04 in total compared to 05, I would not expect -- I think it would be a mistake to expect growth measured on a full year in that product line, but if you base it off sort of a run rate for second half of the year, then the normal growth is appropriate.

OK. From your vantage point, what do you believe an appropriate timeframe is as it relates to demand for the components pulling through from the ICD market expansion from Scout Hoeft (ph), and you know, procedure volumes starting to grow and your customers building devices in advance of that. What does that time horizon look like?

Well I think we're still seeing valid growth in the ICD market place, and we'll continue to see that growth stimulated by increasing penetration of the, you know, prospective patient population. Absolutely.

And how next question comes from Eli Kammerman from Cathay Financial. Please proceed.

Yes thank you, good morning. First, what does your full year 2005 net income estimate assume in terms of end of year headcount related to the '04 end of year headcount?

Well we haven't disclosed that number. We had a four percent headcount reduction in January. I would expect it would be in the ballpark of that. We ...

OK, can you tell us what you're headcount was at the end of '04? And then how much it went down with the January reduction.

It was about 1300. I mean this will be a 10-K disclosure, I just -- I didn't have the number brought in here with me. About 1300 and then about 50 people in January, so it's probably down around 1250, and in the ballpark, but as we ramp again, that's correct, -- as we ramp up activity in Tijuana we will be hiring people there.

OK. So does that mean that you expect to end 05 a greater or lesser headcount than that the end of '04?

It'll be a greater -- it'll be -- well, I think it'll be higher than we are today, but I don't have the exact number, and that's sort of -- I want to hesitate here. We're not going to guide to that. I'm not sure how meaningful a number that is anyway, we're going to have a very different mix of employees at the end of the year than we have today because of labor rate differences between various territories.

OK, and based on your current move in plans for the Auburn (ph) facility, can you give us your most updated thinking on prototype reduction for the nanogram batteries, if that's where they will be made?

Yes, we will manufacture all of our implantable medical batteries in Auburn (ph), and we continue to do development work in Fremont, but all the manufacturing activity is in western New York, and it will be focused in Auburn.

We expect again by the end of 2005 all capacitor manufacturing, all implantable medical battery manufacturing will be in our new Auburn facility.

And that does conclude today's question and answer session. I'd like to turn the call back to Tony Borowicz, for any closing remarks.

Great, thanks. I know we had a number of questions there in the queue, but we wanted to keep the call to one hour.

Again, thanks everyone for joining us. I'd like to remind you that both the audio portion as well as the slide visuals will be archived on our web site at Greatbatch.com for the next 90 days.

Thanks everyone for joining us today.

Thank you for your participation, that does conclude today's conference. You may now disconnect.