Integer Holdings Corp (ITGR) 2009 Q1 法說會逐字稿

Welcome, everyone, to the first-quarter Greatbatch, Inc. 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 on Form 10-K.

The statements are based upon Greatbatch, Inc.'s current expectation, and actual results could differ materially from those stated or implied. The Company assumes no obligation to update forward-looking information included in the 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, Corporate Controller Marco Benedetti. Please proceed, sir.

Thank you. On the call today are Thomas J. Hook, President and Chief Executive Officer, and Thomas J. Mazza, Senior Vice President and Chief Financial Officer.

In terms of today's agenda, Tom Hook will start by providing a few brief comments regarding our first-quarter results, and then he will update you on our major strategic initiatives. After that, Tom Mazza will provide further comments on our first quarter. We will then open up the floor to Q&A. As we have done in the past, we are including slide visuals that will go along with this presentation, which you can access over our website.

Let me now turn the call over to our President and Chief Executive Officer, Tom Hook.

Thank you, Marco. I would like to thank everyone for joining our earnings call today. We are pleased to be able to share with you our results for the first quarter of 2009. I'm extremely proud of our accomplishments and feel that the first quarter built upon the positive momentum we started in 2008.

Despite the ever-increasing pressure of today's operating environment, we continued to make solid progress towards both our short-term operational and financial goals, as well as our long-term strategic objectives. While we certainly are not immune to the impact of the strained economic environment, particularly as evidenced by the pressure on our Electrochem business, our performance reflects the execution we have made on our strategic goals. I believe that our portfolio of intellectual property, operational excellence and diverse revenue base have given us a solid foundation to weather the current economic storm.

During the quarter, we delivered solid revenue growth once again, with sales increasing 14% over the prior-year period, which correspondingly drove adjusted operating income to increase to $17.6 million or 12.6% of sales. Our operating margin benefited from several factors, including higher volumes, streamlined operation, as well as improved manufacturing and administrative efficiencies.

We remain committed to ongoing improvements in our operating performance through continued facility consolidation and integration, optimizing our production efficiency, and product development activities focused on high-value-added products. Tom Mazza will provide additional detail on our first-quarter financial results later in the call.

During 2008, we took a close look at the brands we acquired over the last few years in order to strategically align them. This analysis resulted in our recently announced new structure and brand identity, which will unify our existing businesses under a common vision while consolidating our medical entities under a single brand, Greatbatch Medical.

Greatbatch Medical, formerly referred to as the Implantable Medical Components, or IMC, encompasses our cardiac rhythm management, neuromodulation, vascular access and orthopedic product lines. This business is committed to the design and manufacture of critical technologies that enhance the reliability and performance of medical devices.

We also realigned a portion of our R&D resources under what we refer to as the QIG Group. This group is charged with facilitating the introduction of new and improved technologies in medical device markets by investing in the development of innovations for our customers. Simply said, we will continue to build on 40 years of success to provide cost-effective technologies to our customers that enable them to bring these solutions to market.

Our third brand, Electrochem, is our commercial business that delivers highly customized and reliable battery-power and wireless-sensing solutions to the energy, security, portable medical and environmental monitoring markets. This business has similarities with and the same operating model as Greatbatch Medical and it further diversifies our business. It has been and will continue to be a critical part of the overall business.

With regards to our logo, the hexagon shapes were chosen because of their ability to connect in the most efficient manner. They are a symbol of how Greatbatch connects with its customers. This symbol is also consistent with the Greatbatch Medical logo. It portrays Greatbatch Medical as what we are, a supportive and critical part of our customers' larger vision.

We feel the new Greatbatch family of companies and the identity system we now have in place will be successful in driving brand awareness, preference and loyalty. The new Greatbatch family of companies is strategically aligned to deliver unprecedented performance, reliability and critical technologies to allow our customers the opportunity to bring solutions to market. Greatbatch now is unifying under a global brand based on our reputation of excellence and reliability.

Through the coming year, I think now more than ever, it's going to be extremely important that we remain focused on our strategic initiatives. In these uncertain economic times, we feel that remaining dedicated to our strategy of diversification, streamlining our operational efficiencies and driving growth through innovation will not only help Greatbatch emerge from this recession as a stronger company, but also better suited to meet the unique customized demands of our customers.

Diversification is one of our key long-term strategic initiatives. It has created multiple opportunities and will help drive our revenue growth. At the same time, it reduces our concentration risk and brings us stability during the various economic and customer cycles.

We have taken great strides in diversifying Greatbatch and will continue to integrate our businesses and look forward to cross-selling opportunities that will drive both near-term and long-term revenue growth.

Driving operating performance is also a critical part of our long-term plan to drive shareholder value. During the quarter, we made progress with a number of ongoing consolidation initiatives as we specifically moved our new acquired businesses to the Greatbatch operating model.

More specifically, we completed the transition of our Blaine, Minnesota, manufacturing facility into our Plymouth, Minnesota, operations ahead of schedule and under budget in April. We consolidated production from our Electrochem facility in Canton, Massachusetts, into our newly constructed Raynham, Massachusetts, facility. This was successfully completed in March.

We continued to transfer operations from our Electrochem facility in Teterboro, New Jersey, into Raynham, Massachusetts, which remains on track with our original plans. We also successfully closed our Exton, Pennsylvania, administrative offices in April. And finally, we completed the Oracle ERP system implementation at our sixth acquired facility.

These initiatives, as well as the consolidations completed last year, will continue to drive improved operating margins throughout the remainder of this year and help us to achieve our goal of improving operating margins by 200 basis points per year. Looking ahead, we still see numerous opportunities that we plan to tap into.

At a high level, we believe we can generate additional sales volume from taking advantage of cross-selling opportunities, creating additional synergies through the implementation of lean manufacturing initiatives and supply chain improvements, and continue to move the Company to a common ERP platform, which will allow us to further centralize our back-office, finance and IT functions.

Our last key strategic initiative is to drive growth through developing new technologies and innovation. During the quarter, we spent approximately 8% of our sales revenue on research and development. We expect this percentage to increase for the remainder of the year as we continue to invest resources into the development of new technologies and solutions for our customers.

This continued investment in research and development will enable us to maintain our leadership position in our core markets and drive further margin improvements once our consolidation initiatives are complete. Ultimately, we believe this investment will facilitate a more diverse product portfolio and multiple future growth platforms. Based on our current portfolio and R&D activities, we feel we are in a strong competitive position for future growth and profitability.

With that, I will turn the call over to Tom Mazza for a review of our first-quarter financial results.

Thanks, Tom, and good morning. Sales for the first quarter were in line with our expectations. We reported $139.8 million in revenue, which included $8 million of incremental revenue from our ortho acquisitions. Organic constant currency growth for the first quarter of 2009 was 10%, which is primarily driven by CRM and neuromodulation revenue.

The CRM and neuromodulation product line reported revenues of $77.3 million for the first quarter, a 19% increase over the prior year. Results for the first quarter benefited from strong feedthrough, coated component and medical battery revenue, partially offset by lower capacitor sales. CRM revenue is significantly impacted each quarter due to the timing of various customer product launches, shifts in customer market share, and customer inventory management initiatives.

First-quarter revenues for the vascular [assets] product line were $10.7 million compared to the prior-quarter revenues of $9.6 million. This increase was primarily due to higher sales of inducer products, partially offset by lower catheter revenue.

The orthopedic product line reported revenues of $34.1 million for the quarter compared to $27.8 million for the first quarter of 2008. First-quarter year-over-year comparisons for orthopedic sales include the benefit of a full quarter of revenues from the acquisitions completed during the first quarter of 2008 of approximately $8 million, partially offset by foreign currency exchange rate fluctuations of approximately $3 million. Organic constant currency growth for the first quarter of 2009 was 4% for our orthopedics product line.

First-quarter sales of our Electrochem business segment were $17.7 million compared to $19.6 million in the first quarter of 2008. This decrease is consistent with a slowdown in the energy markets over the last quarter, which caused customers to reduce inventory levels and push back products. We've continued to actively manage our business so that we will be better prepared to meet the needs of our customers once the markets recover. In the meantime, we are taking steps to help mitigate some of the impact this reduced revenue is having on our operating margins.

Turning now to expenses, cost of sales as a percentage of revenue for the quarter was 68.4% compared to 78.1% for the first quarter of 2008. This improvement was driven by higher production volume as well as the impact of consolidation initiatives completed over the past year. Additionally, first-quarter 2008 cost of sales included $6.4 million or 5.3% of sales of acquisition-related inventory step-up amortization.

Our selling, general and administrative expenses as a percentage of sales decreased to 13.4% compared to 15% for the first quarter of 2008. This improvement reflects the various cost-cutting initiatives, the leverage we are seeing due to the increased volume, as well as lower litigation expenses compared to the 2008 period.

Net research, development and engineering costs for the first quarter were $7.9 million, which, as expected, were lower as a percentage of sales versus the first quarter of 2008 due to the realignment of these operations in 2008. Net research, development and engineering costs as a percentage of sales were consistent with the fourth quarter of 2008. We expect research, development and engineering costs to increase as a percentage of sales for the remainder of 2009 as we continue to invest resources in the development of new technologies in order to provide technology solutions to our customers.

Our operating expenses incurred in the first quarter of 2009 were $2.8 million and primarily included costs incurred in connection with our various consolidation initiatives and the integrations of our acquired businesses. We anticipate that these costs will remain at current levels for the remainder of 2009 as we continue to integrate and consolidate resources across our entire infrastructure.

As a result of the above, GAAP operating income for the first quarter of 2009 increased to $14.8 million compared to a loss of $4.1 million in the first quarter of 2008. Similarly, adjusted operating income was $17.6 million in the first quarter of 2009 compared to $5.6 million for the first quarter of 2008.

More meaningful was the expansion in adjusted operating margin to $10.6 million on a GAAP basis and $12.6 million on an adjusted basis. While this expansion in operating margin is indicative of the type of improvements we're trying to achieve, we do not believe the current quarter's results can be extrapolated to a full-year run rate given the nonlinear nature of our business.

Effective in the first quarter of 2009, the Company was required to adopt FASB Staff Position APB 14-1. This FSP requires issuers of convertible debt to recognize interest costs as nonconvertible debt borrowing rate. The impact of the adoption of this statement was to increase the Company's noncash interest expense by $1.8 million for the first quarter of 2009 or $0.05 per diluted share.

Additionally, FSP APB 14-1 requires the restatement of prior-year financial statements when presented. As a result, 2008 interest expense includes $1.6 million related to this FSP or $0.05 per diluted share.

The effective tax rate for the first quarter was 31.5% compared to 39.6% for the same period in 2008. The 2009 first-quarter effective rate includes a favorable impact of a Swiss tax holiday and federal research and development tax credits. Additionally, the 2008 first-quarter effective rate included the impact of $2.2 million of IPR&D which was not deductible for tax purposes in 2008. The effective tax rate for 2009 is expected to be approximately 32%.

Earnings per diluted share on a GAAP basis were $0.28 per share in the quarter compared to a loss of $0.20 per share in the first quarter of 2008. Adjusted earnings per diluted share were $0.41 in the quarter, an increase from $0.16 per share in the first quarter of 2008.

The progress that we have made on our strategic initiatives and our results for the first quarter put us on track to meet our guidance for the year. Therefore, consistent with the guidance provided last quarter, we currently expect revenues for 2009 to be in the range of $550 million to $600 million, and an 11% to 13% range for adjusted operating margin, which excludes nonrecurring costs associated with plant consolidation and the integration of acquisitions of approximately $10 million to $13 million.

Although we are confident in our guidance, we continually monitor our business due to the current state of the markets. We are in solid financial position, with strong cash flow from operation, access to over $100 million under our existing line of credit and long-term financing in place, which makes us confident we will weather the current storm.

However, factors we see potentially impacting this guidance include a potential softening in the orthopedic and commercial energy markets, potential delays in elective surgeries, foreign currency volatility, changes to the insurance reimbursement policies, as well as potential customer inventory adjustments.

We have worked hard to implement an efficient operating model while making the necessary investments to ensure growth across our various product lines. Despite a difficult operating environment, our strong financial position, the resiliency of our core markets, as well as the benefits of a more diverse revenue stream make us confident in our ability to deliver solid operating performance for the remainder of 2009.

Let me now turn the call over to the moderator to take questions.

(Operator Instructions). Tim Lee, Piper Jaffray.

On the CRM neuro side, at least relative to our thinking, another strong quarter. Was there anything specific? Is this kind of like a new run rate that we should be thinking of, something in that upper 70s? Or were there any one-time impacts that made this quarter particularly strong?

This is Tom Hook talking. As I think -- obviously, our business, a couple factors here. First of all, our business is a little lumpy in terms of the overall flow of the business, especially in cardiac rhythm management. We tend to get large pulls from the big OEMs. I think it's also fair, especially over the year-end points, there's a lot of adjusting that is done to customers' product lines in terms of what they are going to pull on and plan for their plans for the year. As you know, obviously, one of our customers doesn't have a calendar year end, so there tends to be a separate set of dynamics around that fiscal year.

So it was a strong quarter. Obviously, when we look back, there were some -- we are happy with it, but the landscape still looks a little uncertain. So we have picked up a lot of products wins over the last several years with our key customers that kind of underpin it. But we haven't seen a marked or systemic change across cardiac rhythm management that is different from before. We've just been doing a decent job of picking up some wins and especially with some key customers and key product lines.

But we always obviously plan very conservatively, but execute very aggressively for that. So I think because of that, we are not going to change the guidance. We're going to leave it right where it's at, because we think we are going to come in right where we had planned on for the year.

Just two P&L questions, if I may. Just on the tax rate, now you are saying full-year rate of 32%. Has that changed from last quarter? I think last quarter you had said the US corporate rate, so I guess is it -- it hasn't changed from last quarter, and if it isn't changed, what transpired in the last 90 days to take it down to 32%?

This is Tom Mazza. We do believe we're going to have a current rate for -- a current estimate based on our current forecast is 32%. Part of it is our tax planning with overseas as well, and being able to firm up on some of the items that we had questions on previously this time and really just firm up our estimates.

Got it. And then just one last one on the R&D side. You had talked about R&D ticking up through the balance of the year. I appreciate that just to mean the gross R&D number, but should we think about net R&D ticking up through the balance of the year as well?

Yes. It should be -- assume that the net is running about 2% less than the gross, more or less, on a total basis of sales.

Great. Thank you very much.

Jason Mills, Canaccord Adams.

Congrats on a good quarter. Tom, I'll start with a just a housekeeping question on CapEx spending for the year. What are your current expectations there? And what does that translate to in terms of free cash flow expectations for you? It looks like to us, perhaps, could be a pretty good year for free cash flow generation.

Yes. We're estimating EBITDA to be in excess of $100 million this year. And we are expecting capital investment to be in the $30 million to $40 million range.

$30 million to $40 million?

Yes.

And remind me where that relates to last year.

Last year was about $45 million.

Right. So it is down.

It should be less -- should be less. We still have the consolidation efforts we are going through and the final buildouts of the corporate center here as well.

Right. And Tom, you held your operating expenses very well in check, notwithstanding a better topline result than we were modeling. Is the middle of the P&L an area that you can continue to leverage going forward, pending solid topline performance? Is that the area perhaps even more than gross margin percentage where you see the most leverage in your model?

I think it's one of the leverage points. Driving efficiencies is critical. I think philosophically, the operating teams in this area are doing a very good job. We have a lot of consolidation projects, both at the manufacturing and the administrative levels, that are occurring simultaneously. We've done a very good job of squeezing out the efficiencies, and the functional groups have been very good at squeezing out the back office.

We have another solid year on back-office compression that still needs to get done. Productivity is a word that just doesn't apply to manufacturing. It applies to all the administrative functions, from sales and marketing and finance IT, human resources. So we're going to leverage those resources quite a bit to hold those expense items.

And absolutely, the expectation is to grow revenue. And the only line item on expense that we want to see is the area of investments in research/development that feeds innovation that brings us the higher-value products. But we're going to keep a lid on expenses by forcing the consolidation and to keep them growing at a -- if growing at all -- by just compressing into the back office and streamlining efficiencies. And there is more room to go there. We've picked a lot of low-hanging fruit and we've got into the meat of things now, but we've still got a hard year of work left to finish up into 2010.

So that sounds fairly positive, but if I'm hearing you right, Tom, you're saying that -- well, you didn't say this, but I should expect that as sales grow, perhaps selling and marketing expenses grow, but that should be at least offset by the compression you could have on the G&A side of SG&A?

Yes, it's a fair way to look at it. As I say all the time is, we are committing to increase operating margins by 200 basis points. To be able to do that, we have to increase more than 200 basis points because we have to take and fund more research and development. So that productivity has to come from somewhere. And your statement is correct, is we have to manage all those expense line items, the SG&A line items that deliver some of that. And we have to get a lot of it from manufacturing. The combination of the two lets us fund R&D at an increasing level.

Got it. And I know that you expected, given you posted an operating margin in the quarter towards the high end of your range, you expected folks to push you a bit on why not raise that expectation? Having covered the Company for a while, I'm not surprised. But perhaps with that being said, perhaps you could sort of, Tom, talk to us a little bit about the quarterly progression of your operating margins in 2009.

And following on Tim's question, was there anything in the first quarter that drove the strong operating margin that perhaps may not recur in the balance of the year? What I'm hearing from you is we expect R&D to tick up. However, there is some low-hanging fruit left on the SG&A side. And you are continuing to consolidate in cost of goods sold in one area ahead of schedule. So it seems to me like, at least at this point in the year, given the strength in the first quarter, that you may be comfortable with more the top end of your range as opposed to the bottom end of your range. Insofar as you are willing to go that far, we would love to hear it.

Jason, I always love it when you are aggressive. Obviously, we're going to stick to the guidance that we have out there. I am very comfortable with that. And as you know, as we put a lot of pressure on the back-office consolidation and manufacturing efficiencies, and that can be lumpy because of mix and volume, but we make sure we have locked in our ability for profitability before we unleash the research and development spending.

Well, when we met those objectives in 2008 at the end of the year, we started more concentrated work in the QIG Group and more in R&D. That spending takes a little time to ramp up. So we are making some concentrated investments here.

I don't want to get ahead of myself. We thought long and hard last year at planning out 2009. We feel we are right in the sweet spot. Clearly, we're going to always force the operating teams to overperform, not underdeliver. So it's critical for us that they maintain momentum in the year and ahead of the game. But we're actively taking some of our windage and we're pushing it down into the investments and those key initiatives, because that's what's going to get us the higher-value products and more key projects with our core customers in the out years, is by winning them right now.

So it's absolutely pivotal that we are not going to get ahead of ourselves by overcommitting to things and then quenching the R&D effort. We want to maintain a balance. It can get jumpy quarter to quarter, and we feel very confident in the 11% to 13% range where we are targeting. And that's how we're going to manage the business.

Very fair. One last one and I'll get back in queue. Can you give us an update -- and you spoke of your R&D pipeline and your plans to add resources there. You've clearly done that in the past. And we have some products coming that could be really positive for the Company, one of those being your MRI technology.

Could you also update us on where customers may be in the evaluation cycle of wet tantalum capacitors? You mentioned capacitors was a little light this quarter. I'm wondering if that could change in the next couple of years. You've got some customers out there, large customers that don't use your capacitor technology. And then obviously, your high-grade Q series batteries, maybe where folks are in the evaluation there, and update us. And that's it. Thanks. Good quarter.

It's a fair question. We've been satisfied with our technology implementation. Obviously, we've been having so much resource in the Company focused on the consolidations and integrations of the acquired companies. Putting all these pieces together has put a lot of strain on the research and development groups to cross-link and coordinate. And obviously, we just completed the research and development facility here in Western New York to move all of these groups together.

We have just had some recent hires in the orthopedics group. They will be moving to Western New York to finish out the research and development center. So we're really on the research and development side still suboptimal, in my opinion. But in the core business, cardiac rhythm management and the neuromodulation pieces and the vascular pieces in Minneapolis, we look very good.

So by the component areas, you look strong. And the newer technology areas, the ones you mentioned like MRI, Q, wet tantalum, a lot of that stuff has been funded and has been running for years. We are in very good positions. We have multiple programs running right now. We're getting a lot of traction. We obviously don't have any revenue, but it's a significant amount of R&D and engineering expense right now.

We're very confident those are going to pay off. A lot of the revenue we are harvesting now in our business is really the bets we made in 2004 or 2005 and won programs that are reaching commercialization. It's hard for me to say -- I guess I'm satisfied with what progress we make, but I'm never really satisfied because I look at all the technologies we have that we could work with more customers.

I am particularly excited about the orthopedics business opportunities. There's a lot of exciting things that we can do for customers in that area. We've spent several very hard and focused years acquiring the operations there to really professionalize, like we have in the rest of Greatbatch, how we run manufacturing, how the systems of how we do things. There is undoubtedly going to be more investments this year and in 2010 to continue the capability and capacity expansion. I'm very excited about that. It will link very nicely with a lot of key customers and their strategic plans.

So overall on a technology front, I still think we have, despite the economic conditions, I still think we've got a very good landscape to run and grow through innovation at the technology level.

Unfortunately, the frustrating thing is, obviously, because all of our contracts end up being confidential with our customers, as much as we would like to brag about where we are winning -- we don't win 100% of the time, but we're obviously growing the business faster than the market -- we know we're winning in places with our key customers and enjoying that growth, but we are always short of our ability to brag about it. That's just the fact -- that's the way we're going to continue to run the business.

But we definitely think we are on the right track. And in general, the technologies, certainly Q, certainly MRI, are going well. And we've got some work to do on the capacitor side, but I am still very excited about the programs we are in and look forward to those achieving a revenue production milestone, which will come up in the near future.

Very helpful color. Thanks, guys. Good quarter.

Jeff Englander, Standard & Poor's.

I wonder if you can just give me maybe a little color on what you are seeing in terms of the CRM and the orthopedic business in the current quarter? You did a nice job there. And just any sense of how things are looking?

I think -- this is Tom Hook talking again. I will cover orthopedic as there's obviously a lot of concerns about the softness in the market. I think at the end of 2008, when we were planning 2009, we were looking at 2009 being challenging with regards to everything that is happening globally. So I think we've been very careful with regards to how we look at 2009.

The other big change that took place is there is a fairly large shift in the foreign currency translation impact, which is a headwind that affects the revenue line for us a little bit on the operating income line. That changes, since we mostly have our operations in orthopedic in Europe, that FX adjustment is unfavorable to us in 2009, which hurts revenue growth percentages.

I think in the cardiac rhythm management side of the business, we probably have been the pessimistic view of the market for the last three years, since a lot of the dynamics in the market -- I don't think we've really changed our view. There's obviously a lot of activity going on in the market right now. We obviously have close partnerships with multiple OEMs that we are deeply invested into.

So we think we have a broad cross-section in that. There's still a lot more opportunities to grow. But I don't think fundamentally our view of the underlying cardiac rhythm management market has changed much since last year or even 2007. I think it's consistent. And I think while it's evolving because of technologies and competitive dynamics, I think that that it pretty much is consistent as we had planned, and we don't really view it making any dramatic shifts at this point.

Great. Thanks very much. The other quick question is, you mentioned in your response the $3 million of FX impact on orthopedics. Can you give us an idea of what you're forecasting internally on the currency?

Somewhere around $15 million for the year, assuming the current rates.

Great. Thanks very much. I appreciate it.

Keay Nakae, Collins Stewart.

Couple questions for you, Tom. First of all, in CRM, you've continued to show some nice gains with filtered feedthroughs. How much further can that go? Or will that driver start to temper?

I think it's really fair to say is that I've always said that is we can pick up projects with specific customers at specific times, but we cannot outpace what the market is going to grow at. We are reaching some good success there, but we are also reaching maturity. And there is a ceiling on how much we can do in this area.

So I think what we have to be pretty careful is, we benefited from a lot of hard work in the 2005 timeframe to win projects. And we are enjoying these product launches. But underlying that, the market just isn't going to magically allow us to keep growing that type of product line because our market share is quite high now. So we're just going to run out of legroom to be able to drive improvements -- just going to be a glass ceiling.

Okay. And then you mentioned some improvement in coated electrode revenue. Are you seeing a rebound with your customer where you had lost sales due to their product recall?

No. I think it's -- we have to be, again, this very much is a launch-driven model on this stuff. So as we pick up product lines, we will pick back up. But the big bolus of business that was lost there has not come back yet. But obviously, we are tightly linked with that customer, and all our customers, as they requalify products and relaunch them. It will come back to us. It's a timing question. So I'm confident there, but that wasn't the effect. It was other products.

Okay. And those other products, is that sustainable growth, or was that more one-time in nature?

It's sustainable. It is nice -- the launch -- one thing about the -- I think the business is sustainable. The growth rate change is not going to be sustainable. But when you go through a launch cycle is you are going to go through kind of a build inventory, get the product launched and then the growth rate will temper. But usually if the product launch is successful, we will still get some nice growth continuing and steadily building, especially if it is cannibalizing or swapping out another product that we make. There's usually kind of a sluicing effect from one product line to the other. But usually it's more dramatically in our favor in terms of the changeover.

Okay. And then on the commercial side, you talked about some inventory drawdown by customers. How much of that is left to go before we start to see some resumption of pullthrough?

I think you've got to look the way -- I've seen the oil -- we are very tightly linked, as you know, to oil services. Obviously, with all the gyrations in that market and the global energy markets, their business activity is off precipitously. So it usually takes a couple of quarters for them to make inventory adjustments. So we have ratcheted down the rate at which we are sending them product. And obviously, they are chewing up their high levels of inventory in the field.

Really, I think what we're looking at is kind of the half-year point, we will start bleeding back in the other direction. We'll stop the downward pressure. So we're very carefully watching how those customers are managing their products. Obviously, they can't complete their inventory to zero. So there is limited -- the downside is limited here.

And what I'll also say is that it's a great opportunity. I love the Electrochem business. It's a great opportunity for them to really focus on the consolidation projects -- and they have a lot of them going right now -- to finish those up on schedule, which is a huge accomplishment for us, moving all of those facilities, five facilities, into one.

I think it gives them an opportunity to really operationally get all that stuff done. And also, I think in the marketplace, as they are making -- they are making increasing investments in sales and marketing right now. We're going to be able to use some of the weaker market conditions to get new partnerships. And when the market does come back, which it inevitably will, the energy markets -- they have some vicious cycles, but they will come back -- is we will be in a better position to exploit growth again.

So for us, right now, it's all about repositioning in a down market. There's a lot of pressure on Susan Bratton and the Electrochem team to do that. It's a very good operating team. They've got new facilities, good engineering resources and an expanding sales team. And we're going to use them the next couple of quarters to reposition and come out smoking.

Okay. So kind of adding everything up, given your near-term visibility is better than your longer-term visibility, and given that your comparable in Q2 is a little more difficult, we really shouldn't expect to see much sequential revenue growth in Q2, I would imagine.

That's, I think, you know -- as we're trying to keep our expectations contained, given a lot of these uncertainties, and we're trying to manage conservatively and outperform. And I think your comment is completely accurate and very fair. And that's, pretty much, we're trying to just run with the hatches battened down, but run hard.

Okay, very good. Thanks.

Gregory Macosko, Lord Abbett.

Could you talk, if you would, a little bit about the -- you mentioned 200-basis-point margin range. As I remember, I thought it was more in the line of 150 to 200. Is that 200 kind of the standard now, at least for the coming year?

Well, I would say since really the beginning of 2008, we have talked about -- the first quarter of 2008, we kind of talked and benchmarked where we were for the year, which was going to be we were going to target around 10% in '08. And we said the trajectory is to improve over each of the next three years by 200 basis points.

And we have continued that trajectory through 2008. We are in that direction in 2009. And I see that continuing on. That's our plan, is to go from a 10% operating income to 16% operating income by driving the top line, driving aggressively the consolidation and integration and back-office elimination, and also the funding of R&D.

The only way we can get from 16% operating income to 20% operating income is literally to have an ever-increasing shift of our product innovations reach the revenue line item. So it's critical in last year, this year and next year to drive that 200 points of operating income improvement in these multiple fashions so that we can fund R&D and drive the outer-year operating income improvement. And that pretty much is -- that 200 basis points is pretty much the direction we are driving the business towards right now.

You also mentioned margin improvement from our new products' R&D. So I assume that would be incorporated in that 200?

No, that's actually -- that actually talks to the out-years. Last year, from 2008 to 2010, we need to fund our key R&D programs to produce revenue out in the 2012 timeframe. Those higher-margin products, higher-value products, more comprehensive sets of technology from Greatbatch, allow us to not only grow the top line but operating income at an increasing rate.

So without spending on -- without producing all this productivity in this 2008 to 2010 period, we can't fund the R&D programs to get the higher-margin products in those out-years out in 2012. So we have been outperforming productivity so that we can deliver 200 basis points' improvement and also fund the increasing R&D expense so that we can get operating income higher through these innovative products out in the 2012 period.

And so, then, the 200 basically comes from sort of efficiencies, restructuring, consolidation of facilities, etc.?

That's volume, along with what you just mentioned, efficiencies across the entire P&L. That's correct.

Okay. And then, you mentioned cross-selling in your opening remarks relative to revenue growth. Could you talk a little bit about that and, as much as you can, give us a sense of where that cross-selling has happened between kind of product areas or anything?

Well, one of the nice things about -- I can't talk to any one specific customer, but I know you understand a lot of the customers in this space have multiple operating businesses in various markets, be it cardiac rhythm management, vascular, orthopedic, spine, etc.

Greatbatch has a very sophisticated operating model and a lot of highly capable individuals that work within those businesses. That reputation helps us in businesses and OEMs that we don't do business with today. It allows us to get introductions. It allows us to be considered a credible player, since we do extensive amounts of business with other operating divisions of those OEMs. And it allows us an opportunity to present proposals that are received as a credible alternative.

That's helped us in orthopedic. It's helped us in neuromodulation. And it's also helped us in the vascular access areas. So we still have to win the opportunities. We still have to be competitive. We still have to bid and make a proposal. But rather than just kind of being a cold knock on the door, we have a much more broader base of operations and capability, and we look much more credible as a unified company at Greatbatch because of our success with other divisions' businesses within those key OEMs.

Would you say that the cross-selling opportunity is far from realized, and/or should we see some real results -- strong results in the current year, fiscal '10?

It is far from realized. It follows the same business model of everything else within Greatbatch. It takes several years to win a project and get it qualified and reach commercialization phase. So there is nothing that just is picked up and realized instantaneously.

I am not satisfied that we have exploited all the opportunities with our key customers to sell to their multiple divisions. We just completed these acquisitions at the beginning of 2008. We have not finished integrating them yet. Our performance in terms of both operations, manufacturing, etc. need to continue to improve. We are investing the resources to make sure that we achieve that level, both from a facility standpoint as well as from an equipment capability standpoint.

And there's a lot of pressure on the businesses, particularly the sales teams, to open those cross-selling opportunities with key customers and win the business. But we've got to do the hard work for that, and we have not -- we have won some, but we haven't won enough to get anybody here overly satisfied that we are really good at it.

Okay. Thank you. And last question -- you mentioned in guidance, you talked about softness in some of the markets. And one that you mentioned was orthopedics. And yet, you talked as pretty positively about product development. I assume, then, you are talking much further out and we may, perhaps, see some near-term weakness in that sector?

I think it's fair as we kind of -- there's orthopedics is kind of -- I will look at the end clinical market level as it's -- the growth has abated with some of the global economic environment. But for us, we're a small player as a key supplier in the orthopedics market. There's a lot of opportunity for us whether the market is growing slow or fast. We have an opportunity to do a good job for our customers and grow this business.

We don't have high percent market shares of any product area and we've got a lot of room for performing for our customers to pick up new projects. It takes several years to do that, but is, on an opportunity basis, it's a very opportunity-rich landscape, even despite the industry having slowed down. So it just means we need to be more aggressive.

So I'm still going to be bullish on orthopedics. And my expectations are that the investments in that area we have made and will make are going to pay off in the out-years as we gain more traction and win more opportunities with key customers.

Stan Mann, Mann Family Investments.

Good job, gentlemen. I have a couple of questions. One, your plans for the use of free cash flow, is it still on target to use it for debt paydown after CapEx?

Yes.

Yes, Stan.

Okay. The second question is, where are we? We had a -- we started with a revolver and two converts. And we are at $315 million, which was flat with the beginning of the year. Can you kind of give us a picture of where we are and if you have some plans on paydown this year?

Well, we currently have about -- in excess of $100 million available under our current revolver.

So that nets to what? It was $132 million last year.

Yes. And part of the things in the fourth quarter, you will remember we bought down approximately $20 million worth of the convertible debts back. So there's $30 million of the first convertibles and $197 million worth of the second set of convertibles.

Where are we now? That's (multiple speakers)

That's where we are.

That's where we are now.

That's where we are.

You are at $30 million and $197 million?

$30 million -- and par value now, I'm talking about. $30 million, $197 million and approximately $115 million under the -- I'm sorry, $131 million under the line of credit.

Is where we are?

Is where we are.

Outstanding. So what are our plans for the year? Have we got a tentative schedule (multiple speakers)

We haven't given that information out, Stan.

We have a plan. Stan, there is a plan internally on what we are targeting, but we just haven't communicated it. We don't want to get ahead of ourselves, but --

You've already said you've got over $100 million of EBITDA, so that's a lot of theoretical cash flow. That's why I asked the question.

You know we're going to make positive progress on it.

Okay, so we are not looking for any large acquisitions. Our main goal this year is to pay down debt?

I think that's a very fair --

After capital.

That's a very fair question, Stan. We are not in active acquisition mode. We have been evaluating carefully opportunities that are out there, but we don't see the pressing need to do anything. We are very focused on consolidation and integrations. It's a top priority, and we are not going to change that for 2009. We're going to be very focused on crunching down and consolidating what we've already acquired. But we're going to keep our eyes open, too. But right now, we don't see anything that we need to move on.

Okay. International sales, you've not mentioned it at all. We now have an international sales division. And where are -- what percentage of our sales are international? And are they growing? Have you seen the ability to move some of the other product lines into international?

We are roughly split 50-50, so we are kind of evenly balanced, I think. We have to remember we've got this foreign currency effect in the orthopedic product lines in particular that affect that. That's probably the big factor. But we are very consistent with what's seen in the underlying markets, is that the growth rates that our customers see wash down to us. And it's fairly consistent with what we see. So in certain market segments that are growing faster outside the United States, we see a consistent internally to that with our product demand. It's consistent.

What I was asking is, has the acquisition of a foreign sub, has ortho helped us in getting international sales growth accelerated in some of the other product lines?

It will in the longer run. But again, in the shorter run, we can't -- because of the regulated nature of the products and needing to get qualified, we can't turn it on that quickly. The only area that we have some ability to do that is in the commercial business, Electrochem. And there, the international businesses held in there a little bit better than the domestic business. But obviously, just globally, since oil and gas is under pressure, the overall business is under pressure and down.

And our percentage of international sales you said is 50-50? I don't think so.

Stan, there's two numbers that are important. What Tom is saying, what we sell -- deliver overseas is approximately 50-50. What is generated from our overseas operations is approximately 15% to 20% of the top revenue line.

Okay. And you do expect that to grow a little more rapidly in the future?

It has the opportunity to. But the rate at which it grows is a question that we don't really give a lot of color on, because --

We don't know where the end customer is.

Yes, we don't know where the end customer will end up being, is part of the problem. Just we could ship to a US company overseas, and obviously that's an international shipment. The products could come back into the United States after we ship them. So it's very challenging for us sometimes to track that after it leaves our facilities.

Okay. Last question is, the Electrochem plant expansion, the new plant, can you kind of give us some more detail on what the status is?

Okay. The plant is done. The existing facility we had in Canton, Massachusetts, we've ran with for a decade has been shut down and it's all moved into the new Raynham, Massachusetts, facility. We have also shut down our Orchard Park facility and we have moved that to Raynham. We're in the progress of transitioning -- well, we already did transition our Suzhou, China, operations here to the continental United States.

And then the last move is to move the Teterboro, New Jersey, facility to Raynham. That is ongoing right now, scheduled to complete by the end of the year. And that will complete all the implementations into the Raynham, Massachusetts, the brand-new facility. And we're going to use a little bit of the down market opportunity here to just really get these consolidations finished and in on time. But we've made great progress there. The operating team at Electrochem has done a great job in consolidating those businesses.

That concludes today's question-and-answer session. I would like to turn the call back over to Marco Benedetti for any closing remarks.

Thanks. I would like to remind you that both the audio portion of this call and the slide visuals will be archived on our website at greatbatch.com and will be accessible for 30 days. Thanks, everyone, for joining us.

Thank you for your participation. That concludes today's presentation. You may now disconnect. Have a good day.