Integer Holdings Corp (ITGR) 2006 Q3 法說會逐字稿

Welcome everyone to the Third Quarter Greatbatch Incorporated Earnings Conference Call. Before we begin I would like to read the Safe Harbor Statement. This presentation in 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 are based upon Greatbatch Incorporated's 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 occurrence of unanticipated events or changes in future operating results, financial conditions or prospects.

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

Thank you, Sharon and welcome everyone to the Third Quarter Greatbatch Earnings Conference Call. On the call today are Tom Hook, President and Chief Executive Officer and Tom Mazza, Senior Vice President and Chief Financial Officer.

In terms of today's agenda, Tom Hook will focus the discussion on the sales growth drivers in the quarter and year-to-date and Tom Mazza will provide an overview of our financial results. As we have done in the past we are including slide visuals that will go along with this presentation which you can access on our website. All those numbers that we are referencing in our prepared remarks today could be viewed on these slides.

Let me now turn the call over to Tom.

Thanks, Tony. It's a pleasure to be joining you in the capacity of CEO. I've been with Greatbatch for about two years now and approximately three months in my current role as the Chief Executive. At this point we are in the early stages of updating our three-year strategic plan. And we are using this opportunity to assess both the strengths and the areas for improvement within the organization and the actions to address these in the near-term.

While advancing our corporate development initiatives remains an important priority, we'll also plan to address ways in which we can optimize our already strong capital structure. I will provide an outline of our strategic plans for the Greatbatch Board by the end of the year.

As stated in our press release, we have delivered six quarters of double-digit top-line growth. As previously disclosed, we did benefit by approximately $10 to $15 million in incremental sales from the marketplace field actions in the second half of 2005. However, what might have been overlooked during this period was our ability to respond quickly and efficiently to the increased demand from our customer base.

From our customer's perspective, I believe this gave us the opportunity to demonstrate our enhanced Lean manufacturing capability. Our year-over-year growth excluding the field actions was approximately 19% in the quarter and 18% year-to-date. The most common question we hear from our current and potential shareholders is how can we grow at double-digit rates when the core ICD market is flat or actually down for the year. I'll try to answer this question in the remarks that follow.

As outlined in our press release, we have focused our growth initiatives in multiple areas to offset the lower volume from the core ICD markets. First, the commercial market has provided significant sales growth. In the quarter, sales were up 49% and 32% year-to-date. In the quarter, we did benefit by approximately $2 million from customer inventory stocking in the oil and gas segment and a favorable seasonality in the seismic market. Looking longer term we are demonstrating the ability to drive sustained growth. The fundamentals in oil and gas, ocean, seismic and military markets remains healthy. In addition, we have a highly motivated sales and management team in place that have effectively positioned our products for continued growth. Furthermore, we continue to add value for our customers by moving from providing discreet cells to more complete battery packages.

Turning to the medical business, approximately half of our business is directly tied to the ICD market. Therefore, correspondingly this means that half of our sales come from areas outside of this market segment which provide the Company plenty of opportunity to drive meaningful growth.

Let me address the ICD side of our business in comparison to last year. Excluding the impact of field actions in 2005, ICD battery sales were up approximately 6% in the quarter and 8% for the year despite the soft ICD market. Our growth is primarily due to increased international volume. The international markets have been somewhat independent of the domestic dynamics and growth in this market has been strong.

In addition to the organic international market growth, we've experienced higher international volume from the increased adoption of our existing battery technology. We are pleased to report that the first ICD device implant with our new QHR battery technology occurred in the quarter. Our Q batteries represent a 30% plus improvement compared to our existing SVO technology and we expect to see increased utilization of the QHR technology throughout 2007.

Partially offsetting our ICD segment growth are lower sales of pacemaker and other batteries. Pacemaker and other battery sales were down 18% in the quarter and for the year are off about 4%. The decrease in the quarter was primarily attributable to lower volume in the international markets which appear to be more of a timing issue. For the year, the decrease is primarily due to lower demand from a single neurostimulator customer.

Turning to ICD capacitors, sales are down 16% in the quarter and 14% year-to-date. Loss of market share from a single customer is accounted for the majority of the decrease for the nine months of 2006. However, increased adoption by international customers of Greatbatch's [wet talon] technology has partially offset the lost share. The catalyst for our continued capacitor growth with both domestic and international customers is the development of our high energy density and high voltage capacitors technology.

Now let me turn to the medical components business. The medical component sales are up 27% in the quarter and 28% year-to-date, adjusted for the sales benefit from the field actions they received in 2005. About one-third of the component growth has come from the assembly business which we commenced shipments in March 2005. As noted in our press release, we have just completed our ISO 1345 audit process and have been recommended for certification by the International Standards Organization. This is a key advancement in our strategic direction and gives us the ability to serve as a manufacturing partner to the medical device manufacturers which we believe will improve our competitive position in both the CRM and emerging neurostimulation market. We are currently working with dozens of neurostim customers that can benefit from our expanded capabilities. Providing device level manufacturing capability allows us to move up the supply chain and helps to drive both component and subassembly growth opportunities for the Company.

The remaining two-thirds of the medical component sales increase were due to higher volume on feedthroughs, code electrodes and machine components. Feedthroughs adjusted for the field actions were up 24% in the quarter and 11% for the year. This growth is indicative of our increased competitive wins and from a mix shift to Greatbatch's filtering technology.

Turning to our machine parts and code electrode products, together these products are up 35% in the quarter and 32% year-to-date. First of all, we have benefited from increased adoption of our technology by domestic customers. Secondly, we have also benefited from the device customer market share shifts. We have picked up incremental volume by virtue of customer's pulling through our products where we did not have business previously.

As I have outlined, we have been able to achieve organic growth during a dynamic period in the marketplace. Growth that has occurred over the past nine months has also come during a period in which our customers have been systematically drawing down their inventory levels to manage the lower level of ICD growth. I believe our results demonstrate our multi-faceted strategy is achieving long-term growth in the markets we serve.

Finally, let me switch gears and comment on the status of our medical battery business going forward. We're aware of multiple competitive battery technologies in the implantable battery market. I will say that we remain confident that our new Q technology for both high rate and medium rate applications will continue to gain market acceptance. We are in confidentiality agreements with customers which prohibit us from talking about specific development plans; however, these products are being evaluated by our customer base and we believe the enhanced products are the most advanced technologies available on the market today.

As I indicated in our press release, we are targeting 10% sales growth in 2007 in both our medical and commercial businesses. Given the continued uncertainty in the ICD market, this level of growth speaks to our focus on maintaining our market share across the product portfolio including our ICD battery sales for 2007. We have multiple avenues for growth over the long-term which should allow us to meet our goal of growing sales faster than the markets we participate in.

Now let me turn the call over to Tom Mazza to review the financial results for the quarter.

Thanks, Tom. I will keep my remarks brief and address those issues that are important to understand in reviewing our results. The third quarter we reported GAAP earnings per share of $0.15. This includes $0.21 per share for other operating costs, primarily asset dispositions, and $0.03 per share for the incremental impact of expensing stock based compensation. Excluding these items, we earned $0.39 per share versus $0.28 in 2005 on a comparable basis.

As we noted in our press release, we adjusted our tax accounts to reflect completion of our 2005 tax return which we filed in September; this reduction of our effective tax rate in the quarter to 24.3% and to 32.5% for the year. The lower effective tax rate added approximately $0.02 per share to GAAP EPS in the quarter and accounted for $0.04 in total favorable impact to the adjusted EPS reported. Going forward we expect our effective tax rate in the fourth quarter will be 32.5% and in the range of 34 to 35% longer term.

Operating income adjusted for moving asset disposition costs along with stock based compensation, increased by 23% in the quarter. This increase was achieved on a top-line growth of 11%. We were able to grow adjusted earnings faster than sales by leveraging the high sales volume of our relatively flat operating expenses.

Turning to other operating expenses, we took a charge of $4.4 million in the quarter for the write-off of a battery test system that was under development. Associated with the move to our new battery facility in Alden, we embarked on a project to develop a new system of testing the longevity of our CM batteries. After a thorough analysis we determined in the quarter that the risk of moving forward with this project was too great and decided to terminate the project. The charge was contemplated in our previous guidance that was provided.

In terms of full year guidance, we are maintaining both our sales range of $270 to $280 million and our adjusted EPS of $1.18 to $1.30. We have increased the commercial revenue by $3 million and adjusted the medical revenue down by the same amount. Looking at EPS on a GAAP basis, we tightened the rings to $0.71 to $0.77 per share from our previous range of $0.70 to $0.83 per share. The revised guidance includes the negative impact of higher move and asset disposition costs along with the additional cost of keeping the Carson City facility open. As we disclosed in our press release, this facility closure has been delayed to accommodate our customer receiving final regulatory approval. The costs of keeping this facility open are significant and we are discussing the timing and financial impact with our customer. Offsetting these higher costs are the favorable benefit of our lower expected tax rate and discretionary expense reductions.

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

Thank you, Mr. Mazza. [OPERATOR INSTRUCTIONS] And our first question will come from the line of Tim Nelson from Piper Jaffray. Please proceed.

Hi, Tom and Tony and Tom.

How are you doing?

Could you let us know whether there was any impact in the quarter on medical revenues from the BSX recall? You mentioned a benefit in 2005. Was there also benefits from replacement sales in this quarter?

In -- we can't elucidate any effect. We don't think that the signal is large enough to really show us that that was something that we could call out specifically. That was not large enough to do that.

Okay. I was really quite surprised by the robustness of the non-medical business. You are obviously talking about 10% growth for next year. Can you talk about the pluses and minuses there? Is that really related to just a stronger marketing and sales effort or is there some risk to that given -- maybe the price of oil stays down in the 50's and we do less exploration or transmission or something.

Certainly, Tim. We've made big investments in the management team and in the sales and marketing team of the commercial power business. It's really generated a lot of excitement within the Company and really it's the focus on growing that business, the sales and marketing aggressiveness when we went to a very highly capable team, we're elevating the products we sell into the marketplace beyond just individual electrical chemical cells to battery solutions and we've worked with our distribution partners as well as selling directly into the marketplace. So the team there has done a really good job of putting that business on a growth trajectory. Obviously, the business base has grown. We've tempered down the expectations on growth rates slightly looking into 2007 but there is no diminishment of the excitement behind that business and we think that we can continue to do a very good job at selling our technology into the applications in a very diverse set of markets.

Okay. The Carson City impact, is that in your Q4 guidance and can you let us know kind of a ballpark magnitude of it?

It is in our Q4 guidance. We haven't broken it out specifically. We have managed that project right up until the final project line item which is one approval step away from being completed which we're projecting comes very quickly here. So we have guided -- in our guidance we've included the expenses for the fourth quarter and we're actively working with a specific customer to finish that off. We don't expect it to be a protracted item and we've managed it very well up to this point and then we're in good shape here to the completion of the project.

That's -- part of the extraordinary items is $0.21, isn't it? I this quarter?

No. It is not. We didn't call it out specifically. We're -- we don't have that in extraordinary items.

Okay. And let's see -- the tax rate of 32.5% for Q4 and the year, Tom, is that something we can think about for next year as well?

No. As we've guided, Tim, it's basically -- we're seeing that this is a one-time benefit due to some of the initiatives we had ongoing. We see it coming back to around 34% in the future.

Okay. And then last question on revenue. Tom, you mentioned emerging neuro demand a couple of times - or one time - disappointing neuro demand for the quarter but emerging neuro demand for Q4 and beyond. Is that a new product that we're talking about or is that the core products you're selling today?

It's certainly the core product lines that we're selling today but clearly with the exception of high energy capacitors that aren't really product line deployed in neurostimulation. It's generally the core technologies we sell within the CRM market applied to neurostimulator customers and clearly those customers aren't as large as the CRM players; but the number of opportunities are much greater.

Okay. And then finally when you referred to international pacer and CRM revenues, I assume you're talking about companies that are internationally based customers versus --

That is correct. They are European manufacturers, correct.

Okay. Thanks. I'll get back in the queue.

Thank you.

And our next question will come from the line of Bob Hopkins from Lehman Brothers. Please proceed.

Hi. Thank you and good afternoon. I'm out of the office and I'm not sure I heard some of what you said at the beginning of the call so please bear with me, but it looks like you exceeded the street's expectations by $0.08 or $0.09 this particular quarter and for the fourth quarter you're keeping the guidance the same so essentially on a full-year basis just sort of taking down fourth quarter. Is that the right --? Am I reading this correctly or no?

No. I think it's -- I mean it's consistent with our guidance we've given all the time. What we do have, Bob, is part of it is in the current quarter unfortunately we have the converts out this quarter based upon the $0.15 a share. So there is some math involved in this and also the tax rate helped us a bit in this quarter by about $0.04 a share.

Okay.

I think if you look at the models all and the year is based, the year's guidance we've given is based on the 26.2 million shares so I think if you look at it all on a year basis I think we're pretty consistent.

Okay. And then as you guys know, Boston Scientific has said publicly that with their next generation ICD, they plan on bringing some percentage of their battery business in-house and I also believe at the end of this year a contract that you have with Guide and Boston Scientific expires. I'm wondering if you -- have you signed a new contract with Boston Scientific? And given their public disclosure of where they are headed, what have they been willing to communicate with you as far as where the relationship stands and the degree to which you'll be a battery supplier to them for that next generation ICD platform?

Certainly. The contract does expire that we have with Boston Scientific at the completion of this calendar year and we have not signed a new agreement with them. As you know Boston is a critically important customer for Greatbatch and will continue to be so going forward in the future of all our product technologies. We, of course, on a multitude of product programs including ICD batteries are involved in discussions and qualifications with them on a regular basis - really, I'd say, a daily/weekly basis. Our expectations are that's going to continue and we're going to have a healthy relationship going forward with them. You'd have to, obviously, ask them specifically with regards to what their specific plans are because under the confidentiality provisions we have with them we just won't comment on a specific customer or a specific program or a specific product and won't really break that out even though in certain instances they've given certain information out to that respect.

Do you expect to have a new contract signed with them shortly?

I wouldn't -- I think you're referring to ICD batteries?

Right. Sorry. Yes.

We actively negotiate contracts with them all the time and undoubtedly given that there's a lot of complexity to these technologies there's always a desire to have them covered -- the time frames by contractual commitments between the organizations. So certainly don't want to get ahead of myself in committing to something but generally that's the business direction for both companies that we've historically done and certainly would have plans to do in the future.

And then one -- just one final one in terms of the 10% top-line expectations for 2007, can you just give us a sense as to what the contribution might look like in terms of the ICD battery business relative to the other businesses? Are you modeling in growth for ICD batteries in 2007 just to keep it broad?

Sure. Obviously we take a lot of factors in to deciding how to target our growth for the year. Some of them are kind of the market forecast and that really comes from a variety of sources from our customers as well as the market in general as well as other forecasting methods and data that people put out there. We corroborate that with our own internal data and then we obviously have management projects to gain business at various product lines and kind of comprehending all of that data including where we think the range of ICD battery growth would be as where we derived the 10%; and although we won't specifically break that out into chunks or pieces, that's where we're going to run the Company to deliver.

So you won't comment on whether you're forecasting growth and ICD business next year -- ICD batteries are not?

That's right.

Okay.

We won't [inaudible].

Thank you.

And our next question will come from the company of Morgan Stanley, Glenn Reicin. Please proceed.

Hi. It's David Roman for Glenn. Just a couple of quick questions. One is on the commercial business. Can you help us understand the fourth quarter, does the -- how does the stock impact the fourth quarter revenues? Will we see that unwind in the fourth quarter or will that take longer?

I think you'll have some effect that will occur. Nobody is going to drive up their inventory just to purposely drive it down. I think there is seasonality in all these businesses. We look at it very carefully. We wanted to call it out because obviously the growth rate in that business is extremely healthy quarter to quarter. We did not want to confuse the picture for the 49% quarterly growth rate without an explanation so we took kind of an unusual step here of calling that $2 million out of seasonality and of stocking to kind of clarify that. I think you can see that the full year guidance that we broke out is adjusted up to the $42 to $44 million range for that business so we kind of comprehended the $2 million but it still guided up a little bit from there and we just think the inherent growth rate of that business is still very healthy. The management team and the sales team are doing exceptional jobs; but, although we don't count on the inventory repeating, we don't really expect it to come back and bite us either.

Okay. And then I know this has bounced back and forth a little bit but longer term you've talked a little bit about the expectations for this business being a mid-teens, low-teens grower. Is that still the case?

Well, I think I focus less on just the growth rate percentages. I do on the number of units that we sell in that market as well as the raw growth. Obviously as that business is kind of getting larger in its business base it affects the math a little bit but from an opportunity standpoint we're still staffing up in that business and we still think there's very healthy growth prospects. We've looked out into the markets also. We're pegging targeted growth at 10% and we're going to manage the business to deliver that or north of it. But certainly the opportunities are there to grow that business north of 10%.

Okay. And last quick question on the asset write-down in the quarter. How does that -- will that have any impact on income on a go-forward basis and what can we look for in terms of that impact?

No. It won't have an impact on go-forward basis. It's a one-time write-off only to stop the projects and write-off the equipment that we had already built.

Okay. Thank you.

And our next question will come from the line of Derrick Wenger from Jefferies and Company.

Yes, thank you. Just some cash flow details. What was depreciation and amortization for the quarter and the capital expenditures for the quarter?

The capital expenditures were around $12 million and about $14 to $15 million for depreciation and amortization.

Those are the quarterly numbers?

I'm sorry. For the year-to-dates; those are the nine months numbers. Sorry.

Okay. So you don't have the quarters broken out yet?

We do but I don't have them with me.

$14 to $15 million for DNA and $12 million for CapEx for nine months?

That's correct.

Thank you.

[OPERATOR INSTRUCTIONS] And at this time, gentlemen, no one has queued up for a question. [OPERATOR INSTRUCTIONS]

Okay. I guess if we do not have any other questions I guess we're -- TCT is kind of getting the way a little bit here. And maybe, also, we were able to fully address all your questions. So with that I'll just remind everybody that the audio portion of this call is on our website. It's going to be archived there for 90 days and thank you for keeping this short and sweet.

Thank you for your participation in today's conference. This does conclude the conference; you may now disconnect.