Integer Holdings Corp (ITGR) 2010 Q2 法說會逐字稿

Welcome, everyone, to the second-quarter 2010 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 meaning of the Private Securities Litigation Reform Act of 1995. It 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 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 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 and Treasurer, Marco Benedetti.

Hello, everyone, and thank you for joining us for our second-quarter earnings call. With us 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 second-quarter results, and then he will update you on our key strategic initiatives. After that, Tom Mazza will provide further comments on our financial results. We will then open up the call to Q&A. As we have done in the past, we are including slide visuals that go along with this presentation, which you can access on our website at www.greatbatch.com.

Let me now turn the call over to our President and CEO, Tom Hook.

Thank you, Marco, and welcome to all of you who are listening today on the call. We are pleased to be able to share with you our results for the second quarter of 2010.

As you can see from the highlights listed on slide five, we had another strong quarter. Sales for the quarter were $140.8 million, which represented a 5% increase over the prior year and a 7% increase over the sequential quarter. Our growth was broad-based and reflects the benefits of our diversification strategy, as well as the continued recovery of our markets from the difficult condition, which bottomed in the third quarter of 2009.

In particular, we saw significant improvements in our vascular and electrochem markets, which saw 20% and 27% growth over the prior-year, respectively. With that said, further sequential growth may prove to be challenging over the remainder of the year, given our seasonally low third quarter, foreign currency headwinds, and that customers have stabilized their inventory levels.

Similar to sales, our operating results were also strong during the quarter as our adjusted operating margin increased 20% to $17.8 million or 12.7% of sales. This improvement reflects the benefit of the various consolidation and cost-cutting initiatives we implemented over the last several years, as well as sales of higher margin products. Coupled together, these factors drove 150 basis point improvement in our gross margin to 32.3%, and reduced our SG&A costs by 8% over the prior year. We believe these results are indicative of the leverage of our business as with these increasing volumes.

As expected, during the quarter, we continued to pursue our long-term strategic objective of delivering innovative solutions, including system-level projects to our customers. As a result, research, development and engineering costs increased $2.5 million over the prior year and were consistent with the sequential quarter.

Our investment in R&D, particularly related to systems-level projects, is critical to our long-term growth and profitability. We remain confident in this strategy and continue to make significant progress towards the completion of our key initiatives, which I will touch on further in just a moment.

The net result of all this was GAAP and adjusted diluted earnings per share of $0.33 and $0.40, respectively. Given the results for the first half of the year, we remain confident that we are back on track to achieve our annual guidance. Tom Mazza will provide additional detail on our financial results later in the call.

As is customary, I would now like to spend a few minutes updating you on the progress we are making on our strategic initiatives.

With regards to our first long-term strategic initiative, diversification, this quarter was a good example of the benefits. Although our cardiac rhythm management and orthopedic product lines demonstrated moderate growth this quarter, our overall growth was bolstered by double-digit vascular and electrochem product line revenue growth.

As you may recall, only two years ago, we had no sales from our vascular product line and our Electrochem business was almost entirely dependent on the energy markets. Today, our diversified revenue base extends across multiple product lines and industries, and provides us a more stable foundation from which to grow over the long-term.

Driving operating performance is our second strategic initiative and is also a critical part of our long-term plan to create shareholder value. As evidenced by the results we released today, the consolidation initiatives we completed over the last five years are clearly driving improved operating performance and a more scalable business model that will enable us to capture more profitability at higher volumes.

Additionally, our improved operating performance allows us to maintain a higher level of R&D investment, which is critical to driving our future growth.

At this point, we have completed all of our publicly announced consolidation initiatives. With that said, we continue to assess our business to find ways to improve our operational efficiency. One area of focus in particular is our orthopedics product line. Over the last two years, we have taken strides to implement our operating model in this business and it has begun to pay dividends.

We remain committed to this product line and continue to invest in it in order to drive further improvements in growth. This optimization plan continued in the current quarter with our Indianapolis, Indiana facility and it will be ongoing over the next several years.

Our last key strategic initiative is to drive growth through delivering innovative solutions. During this economic downturn when other companies are cutting back on R&D investment, we are increasing our focus in this area. During the quarter, we spent approximately 9.4% of our sales revenue on research and development compared to 8.2% in last year's second quarter. We remain confident that this investment in R&D will enable us to maintain our leadership position in our core markets and drive further growth in margin improvements over the long-term.

Beginning on slide seven, we provide a few examples of how our innovation, combined with our operational excellence and diverse revenue base, is providing us with growth opportunities with our key customers.

As most of you are aware, during the quarter, we issued a press release announcing the extension of our feed-through agreement with one of our strategic customers, St. Jude Medical.

This agreement is significant on multiple levels. First and foremost, this agreement secures a significant revenue stream through 2017. As disclosed in the release, under the terms of this agreement, we are guaranteed 100% of the St. Jude filtered feed-through and feed-through business, and 80% of their implantable pulse generator MRI filtered feed-through business. However, more importantly, this agreement demonstrates the close working relationship we have cultivated with our customers and, more specifically, St. Jude Medical. Additionally, it is a testament to our quality and reliability, as we have been named the exclusive supplier of this key component to St. Jude's devices.

As I have stated many times before, we are committed to working with our customers to enable them to bring solutions to market. We do this by providing innovative and dependable products in a cost-effective manner, which is a direct result of our operational excellence and intellectual capital. This agreement illustrates our ability to deliver on that commitment and is clearly a win-win situation for both Greatbatch and St. Jude Medical.

Over the last few quarters, we outlined the key steps we have taken to deliver innovative solutions to our customers. The outcome of these efforts is that we are now in a position to provide our customers with full system solutions. This includes providing comprehensive products and services from development and regulatory submission through manufacturing and supporting worldwide distribution.

These systems are niche product solutions that complement our customer's products and fit perfectly into our expertise and capabilities. This strategy includes partnering with our customers, including sharing technology and resources in order to bring these solutions to market. The benefits to our customers include shortening the time to market for these products by accelerating the velocity of innovation, optimizing their supply chain, and ultimately, providing them with cost efficiencies.

As indicated on slide eight, some of our key customers are taking advantage of our capabilities of providing these full system solutions. These products are some of Greatbatch medical legacy customers as well as those established with our acquisitions over the past several years. More specifically, this has included being selected to participate in certain key customer supplier-enabled innovation programs.

Under these programs, we are developing new system-level products from development and regulatory submissions through manufacturing and supporting worldwide distribution. While we cannot provide more details on the project at this time due to confidentiality reasons, we expect to be able to make further announcements later this year after 510-K regulatory clearance is received.

The initial product announcements are expected to center around systems we are developing for the vascular market, but longer term will include our cardiac rhythm management, neuromodulation, orthopedic, and electrochem markets. Ultimately, our goal is to establish a cadence of system-level product announcements similar to the OptiSeal Introducer program we discussed last quarter, that will help us achieve our stated goal of growing revenue faster than the underlying markets we serve. Again, these relationships are clearly a win-win situation for both Greatbatch and our strategic customers.

In closing, we are proud of the progress we continue to make on our strategic initiatives. By staying connected, committed, and focused on all aspects of the business, we expect to continue driving value for the shareholders. We are certain that our dedication to improving the business and closely following our strategic priorities has positioned us to experience continued success in 2010 and beyond.

With that, I'll now turn the call over to Tom Mazza for a more detailed review of our second-quarter financial results.

Thanks, Tom, and good afternoon. For the call today, I would like to provide you a quick overview of our results for the quarter in comparison to prior-year amounts. However, when relevant, I will also be discussing sequential variances from the first quarter of 2010.

As shown on slide nine, consolidated sales in the second quarter of 2010 grew to $140.8 million from $134.7 million in the comparable 2009 period. This 5% increase was primarily due to improvements in our vascular and electrochem markets, which were negatively impacted in 2009 by customer inventory adjustments and a contraction in the underlying markets.

In comparison to the sequential 2010 first quarter, sales increased, driven by improvements across all of our product lines. We believe that this sequential revenue growth will be challenging for the remainder of the year, due to our seasonally slow third quarter, foreign currency headwinds, and our customers having now stabilized their inventory levels.

CRM and neuromodulation sales remain consistent with the prior year's second quarter. Current quarter sales include the benefit of further adoption of our Q-series batteries, which empower new device features and reduce the overall size of medical devices. Offsetting these increases were lower feed-through sales, as the second-quarter 2009 included the benefit of customer product launches.

Second quarter 2010 sales for the vascular product line increased 20% to $11 million compared to prior-year sales of $9.2 million. This increase was primarily due to higher introducer and catheter sales, as customer inventory reduction programs, which began in 2009, are now complete and ordering patterns have returned to a more normalized rate.

Orthopedic product line sales of $30.5 million for the second quarter of 2010 were slightly below the $31.4 million for the comparable 2009 period, and were negatively impacted by the decline in the euro during the period. Excluding the foreign currency exchange differential, which reduced sales by approximately $1 million, orthopedic's revenues were consistent with the prior year. As expected, the impact of customer inventory reduction initiatives and lower procedure volumes continue to ease during the quarter, as orthopedic sales increased 4% over the sequential quarter.

We expect orthopedics revenue to continue to be impacted by the lower euro exchange rate for the remainder of the year -- remainder of 2010, and seasonal slowdowns in the third quarter. However, these fluctuations are not expected to materially impact our operating income.

Second-quarter 2010 sales for Electrochem business segment were $20.5 million compared to $16.2 million in the second quarter of 2009. The increase from the prior year, primarily related to the continued recovery in the energy and portable medical markets. The difficult market conditions experienced in 2009 began to ease in the first quarter of 2010, and the second quarter of 2010 saw a restocking of customer inventory, which is not expected to continue in the next two quarters.

Turning now to expenses. Gross profit as a percentage of sales for the second quarter of 2010 was $32.3 million -- 32.3% compared to 30.8% in the 2009 second quarter. This improvement was primarily due to the benefit from our various consolidation and cost-cutting initiatives, and a better mix of sales of higher margin products. We expect that our gross profit margin will continue around the current level for the remainder of the year.

Selling, general, and administrative expenses of $16.5 million for the second quarter of 2010 were $1.4 million lower than the same period of 2009, and were primarily due to our various consolidation and cost-cutting initiatives.

As expected, net research development and engineering costs for the 2010 second-quarter of $11.2 million were above the comparable 2009 period of $8.7 million; but they were consistent with the sequential first-quarter of 2010 amount of $11 million. The increase from the prior years were primarily due to our strategy of investing resources in the development of new technologies, including system-level projects in order to provide solutions for our customers that ultimately would create long-term growth opportunities.

As expected during the quarter, customer cost reimbursements for development projects returned to a more normalized level. As a result, cost reimbursements, which offset R&D expense, increased by $0.5 million in comparison to the first quarter of 2010. These cost reimbursements can vary significantly from period to period, due to our customers' resources and the timing of the achievement of milestones on development projects.

GAAP operating income for the second quarter of 2010 was $17.3 million compared to $12.5 million for the 2009 second quarter. Similarly, adjusted operating income was $17.8 million or 12.7% of sales in the second quarter of 2010 compared to $14.9 million or 11.1% of sales for the comparable 2009 period.

2010 second-quarter GAAP and adjusted effective tax rates increased to 35%, compared to 19.4% and 24.8%, respectively, for the comparable 2009 period. This increase was primarily due to the favorable impact of the resolution of tax audits during the 2009 second-quarter, and the expiration of the US R&D tax credit at the end of 2009. Current proposed legislations, if enacted, would reinstate this tax credit retroactive to the beginning of the year.

GAAP diluted EPS for the second quarter of 2010 were $0.33 per share compared to $0.28 per share for the second quarter of 2009. Additionally, adjusted diluted EPS were $0.40 per share in the second quarter of 2010 and the comparable 2009 period.

Cash flow from operations for the first six months of 2010 were approximately $44 million compared to $22 million for the 2009 period. This increase from the prior year is due to our strategic initiatives to reduce working capital levels, the timing of payments, and lower consolidation and integration costs. These cash flows from operations were used to repay the current portion of our long-term debt of $30 million, which came due during the second quarter, and make an additional $20 million payment on our outstanding line of credit subsequent to quarter-end.

We continue to take steps to strengthen our balance sheet in order to support future and internal growth. As such, we currently expect that cash flow from operations for the remainder of 2010 will continue to be used to support capital expenditures and to further pay down debt.

Moving on to our 2010 guidance -- as you can see on slide 11, we are reaffirming our full-year product line sales growth rates, and adjusted operating income margin for 2010. Given the results for the first half of the year, we are firmly on track to meet these targets. It's important to note that these annual growth rates are on a constant currency basis. As previously discussed, we expect orthopedics revenue to continue to be negatively impacted by the lower euro foreign currency exchange rate for the remainder of 2010, and could impact full-year 2010 revenue by $5 million.

Overall, we remain focused on our strategic objectives, on track to achieve our long-term goals. We have worked hard to implement our strategic plan and are now beginning to see some of its benefits. Our strong financial position and efficient operating model has enabled us to make -- continue to make the necessary investments to ensure our future growth. These investments, combined with our diverse revenue stream, make us confident in our ability to deliver results going forward, as we now have multiple levers to drive profitability.

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

(Operator Instructions). Tim Lee, Piper Jaffray.

Thanks for taking the question here. A couple of things. I guess, just first, on the R&D line, I think you had said it was expected relative to your internal thinking, but I guess it was a little more than our thinking. Is this kind of the new baseline that we should be thinking about here on a going-forward basis?

Tim, this is Tom Hook. Yes, it is a new baseline. I think, clearly, as we ramp up on doing the more system-level projects with customers, while they have not precipitated off into the revenue stream, we've been funding those projects, which has been the biggest contributing factor to the increase in the overall spend on a percentage of revenue basis.

And we do intend to push those projects to produce revenues. There will be a new class of revenues for us that we don't enjoy today, though we'll also use the component technologies we currently manufacture. And then we plan on maintaining that level of R&D spend to support those systems for the foreseeable future.

Got it. And in terms of the return on this investment, is this a 12-month proposition? Because I'm assuming a lot of these things that you talked about on the call in terms of some of these new system-levels, those are investments that you made last year and the year before that. When can we see some of the impact from the R&D dollars today hitting the top line?

I think they're going to be very consistent with other medical device technologies that we make components for, where we have to make multiple years of investments, say, two years of investment, and then proceed with a component level in partnership with our customers to get regulatory approval. When we're doing these system projects, we'll actually be doing the regulatory, submissions, and approvals on their behalf.

So still we're in that two-year range. I will point out that we started this several years ago, so the OptiSeal Valved Introducer is the first product that's coming out. Our expectations are we're starting to receive 510-K clearances through the end of the year and into next year, and we'll have a cadence of this happening on a routine basis, as these projects start to waterfall off into the commercialization phase. So that two to three-year range for each of these projects is typical of the medical device segment.

Got it. And then one last one here, I mean, without getting into any type of long-term guidance, but -- as we look out three, four, five years, what percentage of revenue will be system-type sales contribute? Will they be 5% of sales? 10% of sales? How should we think about that product category?

I think in the -- and certainly on the short run today, it's zero, but I think every quarter, system-level sales will continue to increase. And depending how successful we are rolling it out, ultimately, that would be a higher percentage of revenue than just the discreet components. The reason why it's fairly logical is for a lot of the niche products, we'll just assemble some of our components into systems and then provide those off as assemblies to customers.

So we'll just recognize -- we'll still recognize the component revenue but part of the system sales. So we see a progressive shift over the long run towards effectively doing more for the customers in a lot of areas.

Would you care to provide a ballpark number we could be at in three, four, five years?

They're larger than the numbers you're quoting.

(Laughter) Alright. Fair enough. I'll --

It will certainly be north of 10% when you get out in the five-year range, Tim, no doubt.

Great. Thank you. I'll get back in line.

Jason Mills, Canaccord Genuity.

Congrats on a good quarter. (multiple speakers) So, first question, on the systems level side again, congratulations on the expanded St. Jude relationship and the additional information with respect to what you're guaranteed. Obviously, part of that, 80% guaranteed as it relates to the MRI filtered feed-through technology.

I'm wondering if that is one of the systems level initiatives you hope to garner over the next couple of years, in terms of their entire lead system? Is that something you've talked about or have the opportunity to win?

Well, Jason, first of all, I'll say just for clarity, the MRI filtered feed-through, as well as the unfiltered and filtered feed-throughs we consider component sales. When we get to the point of actually working and winning a system-level that may incorporate multiple MRI compatible components, it will be under a separate contract. We'd announce that separately.

And we would actually clarify that that's a system, like an MRI lead wire system, so to speak. But what we announced with the St. Jude partnership here really is just a component-level product. It's not a system-level product.

No, I understand, but getting access to that business, even on a component level, would seem to imply you have a decent chance at a systems-level project win down the line, I guess is what I'm asking, first off.

Oh, I understand -- absolutely. Our hope is, is that by winning the underlying technologies and doing a good job, that the relationship can be expanded to the systems level. So you're absolutely correct. We haven't reached that threshold yet, but you're correct. Our goals are to use both the component technology and capability along with our manufacturing capability to step up the food chain and do more comprehensively up to and including the full system.

With respect to your timeline, you mentioned that in the next, sounds like 12 to 18 months, it's going to be heavily focused on vascular. So, on this example, the same example we were just talking about, is that -- would that be sort of 2012 and beyond? Is that a fair assessment of the timeline with respect to (inaudible) neuro in the systems level side?

Jason, I think you're absolutely, directly accurate. As we started this initiative with vascular, simpler systems with customers. That was going to be a second half 2010 rolling out other system-level projects, and niche systems in 2011. Then moving on to cardiac rhythm management and neurostimulation applications.

We've already said that we're working on some lead wire projects with some key customers that are niche-ier projects, like MRI compatible, lead wires, et cetera. So you're right, the timeline for those is more 2012, correct.

Okay. Just a couple of other questions, back to the P&L quickly. Just to clarify first, Tim's question on the R&D level and your comment about it being the new baseline, you're referring to that in terms of this 8% of revenue on a net basis? Or the nominal level of around $11 million, $11.5 million?

It's going to be $11 million-plus, yes.

(multiple speakers) So you're more looking at it from a percentage of revenue standpoint around 8%?

Yes.

That's correct. I think we have to remember is right now, we're mostly on the systems side, Jason, is it's all seeds and no fruit. Clearly, when we get some of the revenue spillover, we'll end up having, on a percentage basis, a little more coverage for it. But our intention is still to aggressively fund the systems projects because it feeds our ability to grow faster than the market.

So how the percentage works out, may depress a little bit, but we're still going to do the model of getting non-recurring engineering payments on these projects, just like we do components. And we're still going to take a little bit of our capacity to do the programs, fund them and work with customers on them.

Now, Jason, that we're at this stage, though, it's really almost a dollar spend on it, where we're going as opposed to being a percentage.

Got it, okay. So that clears that up. That paves the way for the next question, which is -- Tom, you've often talked about, at that 5%-plus revenue growth level, which you achieved this quarter, that you would see some robust operating margin expansion. That seemed to be the line of demarcation in terms of revenue growth above and below that level. You showed that this quarter.

In the back half of the year, you have -- well, your comments with respect to sequential growth are well-taken. Year-over-year, you have some easy comps. The third quarter of last year wasn't your best, admittedly. So as we look at -- as we think about that commentary, operating margin expansion on revenue growth of 5% in the back half of the year, should we expect to see a fairly significant year-on-year growth similar to what we saw here in the second quarter, with perhaps the caveat being in the fourth quarter, given that you had a very low R&D level?

How should we think about that -- over 5%? Can you talk about what kind of incremental operating margin gain you get at 6%, 7%? Maybe help us with quantifying the leverage.

Yes. I can -- I'll try to do it qualitatively. Tom can put a little bit more of a hard edge on it.

I'll say just in general that you're right, when we get up above 5% revenue growth, we really do have very good leverage on incremental profitability. The plants are running at a levelized load very efficiently. And we do a very good job of being able to push out the incremental sales volume much more effectively.

I don't really see us, as we drive that productivity, ramping up our R&D spending accordingly. We more ramp R&D based on SG&A productivity. So we try to save in SG&A and have that fund the RD&E lines. We're always looking for the appropriate coverage on engineering and our repayments.

So we really like to see the productivity produced out of manufacturing to wash cleanly through the P&L. And that's what we keep the operating groups focused on. So our expectations are we still can outgrow the market. We're shooting for 5%-plus on a run rate basis. If we can meet that, we will get good productivity down the P&L; if we come up short, it does tend to bleed off starting around that 5% level.

Got it. And so -- and not -- that your grading of 2011 guidance, but I assume the same methodology applies to 2011. So if we're modeling in our own due diligence your end markets and, therefore, you to grow over 5%, you often talked about, that will give you leverage of over 100 basis points, perhaps as much as 150. Does that methodology still apply?

It still applies and your statement is very accurate, yes.

Okay, fair enough. I'll get back (multiple speakers) --

Let me just qualify that a little bit. I mean, it depends where the growth comes to, right? I mean, Tom is absolutely correct in what he's saying, but we have to understand that not all product lines are equal, right?

Right, if only if you're growing 10 or 15 -- if your growth is coming from supply -- component supply and assembly, probably not going to get it. Is that what you're talking about?

I wouldn't say that for a fact, but I mean, it depends on -- we know that we haven't got orthopedics at the same level where we've got the CRM marketplace. And there's a different mix there of products and profitability, as we spoken in the past.

Okay. I could stay here for another 20 minutes but I'm not going to. I'll get back in queue.

Glenn Navarro, RBC Capital.

A couple of questions. First, can you guys quantify what the restocking was in 2Q?

You mean the overall --?

On the Electrochem, probably a couple million in Electrochem.

And then you also mentioned vascular was restocking as well, correct?

No, vascular was not really. No, I think vascular, the improvement was last year; there was an inventory control on it.

So as I think about 3Q revenues, right, we want to start at a 2Q base kind of in the $139 million range, right? It sounds like FX is going to take, what, $2 million off your top line in 3Q? Is that fair?

Yes, that's probably fair.

Okay. So then we're down to $137 million -- $137 million and at that point then we just have to make our guess as to the best seasonality, correct?

Correct. Yes, that's probably about right. Yes, you're some place between the first and second quarter.

Okay. I'm just trying to get -- I just want to try to see if I can model correctly 3Q, taking into account the seasonality, taking into account the currency, and then taking into account what the restocking was in 2Q.

I think you have the issues --

You've got it bracketed, Glenn.

Okay. The second question is vascular was very strong but then I heard you made a comment and said that you didn't have any OptiSeal in the quarter, because I thought you launched it early in 2Q, so there was no OptiSeal?

OptiSeal was launched in the first quarter but it was mostly launched to provide samples to customers for their evaluations. So it doesn't really result in material sales. So although we've got our clearance, it does require the customers to actually do training and roll it out. And that takes a couple of quarters to push that through the system.

So we didn't plan on an appreciable amount of sales this quarter. Want to see that obviously as it gains individual account acceptance and approval of each customer, will push that out into the market and it will start driving material sales. But Q2, nothing significant.

Okay. So the strength in vascular, some of it was in easy comp. And then the other was just regular ordering patterns, correct?

Correct.

Vascular, okay. One last question and I'll jump back into queue. You mentioned ortho in the back end of the year would be impacted by currency. But I'm wondering if you can give us additional commentary on ortho -- I cover the big orthopedic players, and everyone missed numbers recently in the quarter, and we had to lower our revenue forecasts for the back end of the year. Are you anticipating that orthopedic volumes slow in the back end of the year and that your business slows as well?

Comparable to the second quarter as we said, the sequential growth it is, but we're confident in our initial guidance of [2 to 7] -- [3 to 7], sorry.

I think based off -- I think, Glenn, just to help out, provide a little more color here is, based on some of the headwinds and struggles we had in 2009, we tried to just plan on a gradual recovery in 2010. We did not plan on any type of rapid uptick.

So we've kept our plans fairly conservative, given that we've got a lot of work to do in that business. And we tried not to overheat our expectations in our guidance. So even though the numbers from other public company reporting have come in lighter, we've never really had a strong recovery in our plans for the year anyways.

Okay, that's fair. Thank you very much.

There are no further questions at this time. (Operator Instructions). Your next question will come from the line of Gregory Macosko from Lord Abbett.

Just with regard to the restocking of inventory, you mentioned that in Electrochem, it's completed and you won't -- don't expect it further. Are you looking out and seeing that the market -- those end markets will -- or I mean, how do those end markets look, is I guess the way to look at it?

Greg, we're pretty pessimistic on the end markets being challenged, given these -- that we obviously sell to companies that do external medical devices as well as energy products. Those, the capital markets in medical are very slow growth and under a lot of pressure. The energy markets are under a lot of pressure because of the overall economy.

And I think while there's a lot of uncertainty in there, we don't really expect any types of strong recoveries. We just predicted stabilization for the year. And we're really orienting with doing deeper projects with our current customers and winning market share by doing more work for them to grow, and not depending on the market really, to give us anything at all.

So while there's been some adjustments in the second quarter with people returning inventory back to normal historical levels, we don't really expect to see any of that affect going forward for the balance of the year. We're going to have to fight for everything we get because the market we don't expect to give us much at all.

So zero to [5] for the year is the total even with this nice increase for the quarter?

That's correct.

Jason Mills, Canaccord Genuity.

You figured I'd be back, didn't you? (Laughter). So actually just one set of questions.

The more specific question is regards to the comment you made in the press release, Tom, about uptake -- a little bit uptake, and I don't think you said robust uptake, but uptick nonetheless on your Q-series batteries. I'm wondering if you could put a finer point on that?

And the broader question as it relates to that one, we've talked a lot about the systems-level initiatives going forward, both near and long-term for the business, but I'm wondering if you see any component discreet-level opportunities that we're not talking about, that could get you either to the top end of your guidance or even above the top end of your guidance constant currency, that we should be maybe focusing on a little bit more?

Yes, I think to help out here is like, all these types of projects are really long-term. And they're not going to really help us from a 2010 perspective as much as set us up for a stronger growth going out in '11 and '12.

There are -- although we're talking quite a bit about systems and the funding of systems initiatives, which drive revenue because effectively, today, we have zero revenue dollars in that, is when we do look at the component-level technologies, like the Q-series battery uptake, that's a decade-long product development initiative that's been done in the Company well before I joined the Company.

That technology has been developed and perfected. It's been sold out to several customers. It's gaining acceptance. It has exceptional performance characteristics, both in low-rate applications and in high-rate applications. And as those initial projects that we've done, say, two, three years ago, have gained acceptance and are being rolled out into the markets, they definitely are causing a competitive interest standpoint in that technology. So we're winning now more programs.

In addition to that, that lets us talk with more customers, more platforms. It doesn't necessarily mean we win every single deal to develop, but it gives us more consideration as Q-series technology as a candidate.

Obviously, there's a cost-benefit analysis that has to get done by any customer on any platform, based on what the requirements are needed; but when they're needing that small size, high-power, extra-long life, where they want it, just drives size down, it's a tremendous option. And we've just seen increased interest and take-up by customers wanting to roll that into their projects.

Now with that, we obviously have to fund those projects. It increases our RD&E expense. We get some incremental, non-reoccurring engineering payments with customers. And we expect those, as their timelines for their projects complete, they'll move into commercialization. So we've seen some nice pickups on the project side for Q-series, but it will take a little while for those actually to get in the revenue stream -- late 2011 into 2012.

Great. And then staying right here for the last question on the component side, moving to the neuromodulation space, it seems to be a big opportunity for you guys. I'm wondering if the opportunity in neuro from a discreet component, batteries and other components, are more with existing customers or with new customers on the neuro side?

Well, I think it is -- in neurostimulation, clearly, we are not a big player on the component side; largely the Company is very cardiac-focused and missed many of the early neurostimulation opportunities for component sales. So, over the last two to three years in particular, we've done a very nice job of winning neurostimulation products and we're moving those into their commercialization phase with customers.

So by definition, we're really not cannibalizing any current sales when we get into their new platforms. And cardiac rhythm management is more of a cannibalization game, where we're one product line is reaching fruition and end-of-life, and we're into the next program too. So we're swapping a revenue dollar for a revenue dollar but the technology is moving upward.

In neurostimulation, when we win an opportunity, we typically are displacing an internal project or a third-party competitor. And it's a revenue pickup for us with very little cannibalization. So we expect neurostimulation to be a bigger opportunity for us over the next three years. And we've done kind of the two-plus years of hard work to earn our way in there, and it's going to show in the results as we continue to show that spill out to commercialization.

Thanks. That's helpful. Appreciate it, guys.

Tom Stamataky, Omni Investors Group.

I think this would go to Tom Mazza. The systems sales development and logic sales developments, and actual sales is very exciting, but I want to turn to a little different direction, and that is -- how long will it take to pay off the remaining debt? You've done a very good job to this date, but there's something like $264 million, as I read the balance sheet, left to go. How long do you think it will take for this payment to be made?

We have really no intention of paying it totally down. We're comfortable with our levels. I mean, our intentions over the next thing is to continue to reduce it. It doesn't mature until 2013 -- $200 million of it is convertible bonds that we have at an extremely cheap rate and they're below -- we have a strike price for the stock price.

So we won't pay it down on a selective basis, that is our primary use of cash over the short-term; but probably it will be 2010 or beyond before we make an attempt to try to pay it off totally.

Thank you.

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

Thank you. 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 conference call.