Integer Holdings Corp (ITGR) 2012 Q1 法說會逐字稿

Welcome everyone to the First Quarter 2012 Greatbatch Incorporated Conference Call. Before we begin, I would like to read the Safe Harbor statement.

This presentation and our press release contain forward-looking statements within the meaning of the Private Security Litigation Reform Act of 1995 and involve 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 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 now like to turn the call over to your host, Corporate Controller and Treasurer, Marco Benedetti.

Hello, everyone. And thank you for joining us today for our 2012 first quarter earnings call.

With us on the call 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 us off with a few brief comments regarding our first quarter result and will then provide an overview our strategic focus going forward. After that, Tom Mazza will review our first quarter financial result and guidance for 2012. 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 in our website at www.greatbatch.com.

With that, let me now turn the call over to Tom Hook.

Thank you, Marco. And welcome to all of you who are listening to our call today. We are pleased to be able to share with you our results for the first quarter, which as expected was below the 2011 period due to the top comparable and the planned increase investment and in the development of complete medical devices.

Revenue for the quarter was a record $159.1 million and represented a 7% increase over the prior year. This increase was primarily driven by our acquisition of Micro Power, which contributed $20.6 million to sales this quarter and was ahead of our expectation.

On an organic constant-currency basis, revenue declined 6% due to the top comparables that were created by a lower level CRM and Orthopaedic customer product launches relative to last year's first quarter, partially offset by double-digit growth within our vascular access product line.

Adjusted operating income for the quarter decreased $3.2 million to $15.5 million and reflected lower gross profit and increased investment in the development of medical devices. Gross profit for the quarter includes the impact of lower volumes and production and efficiencies at our European Orthopaedic facility.

Since then, we have aggressively gone to rightsize our cost structure. And as previously announced, we have further plans to enhance, optimize and leverage this business, which we begin implementing in 2011. Even though we're off to a slow start, we are reaffirming our full year 2012 guidance.

As we have indicated in our last call, we expect the results to improve as the year progresses driven by moderate growth in our underlying markets in the second half of the year, operational improvements as a result of further integration of our recent acquisitions, consolidation of our Orthopaedic operations, as well as increase sales for medical devices.

Additionally, there are various cost cutting measures at our disposal that we can call upon if our result should fall short of expectation. Tom Mazza will provide a more detailed financial results and guidance for 2012 in just a few moments.

I would like to devote the remainder of my prepared remarks to review our new strategic focus which we introduced internally last quarter and was the theme of this year's annual report -- growth. Over the last eight years, we have been committed to growing and diversifying our revenue, driving operational excellence and delivering innovative solutions to our customers. Following nine acquisitions, nearly two dozen facility consolidations and ERP implementations as well as extensive back office efficiency improvements, we are now near in completion of the stage of our strategic evolution.

We have heavily invested in the global consolidation integration of our operation and have driven extensive cost savings, which has provided the underlying funding mechanism for our medical device strategy as well as allowing us to retire over $200 million of debt.

While operational excellence and innovation will always be core competencies within our company, we are now positioned to implement a more aggressive growth strategy to drive increased revenue and profit. Simply put, as we look ahead, our core strategic platforms will be focused very powerfully in one overarching objective, the area of growth. More specifically, growth in our core business, growth through targeted acquisitions and growth through the commercialization of our innovative medical devices. Similar to previous quarters, we intend to update you in the prior year of making towards achieving these strategic objectives each quarter.

With that, let us now take a look at our accomplishments for this quarter starting on slide seven. As you are all aware over the last several years, we have faced considerable headwinds in our core markets due to flattening customer demand. Our initiatives to improve operations and leverage a strong history of innovation in Greatbatch, have given new breadth and depth to our key OEM customer relationships. All of our top five customers have recently entered into multiyear agreements with us, including two of which were just signed this quarter.

This signifies the world class reputation we have earned to execution in performance, and more importantly secures a significant portion of our revenue over the next four to eight years. Additionally, through a tremendous amount of hard work, we have also earned new discrete component product development opportunities with these same OEM customers which will drive future growth in our core business.

As I mentioned earlier, during the quarter, we also achieved 11% growth in our vascular access product line, mainly through market growth and new business wins. It's our intention to continue to grow this product line organically at a double-digit phase by commercializing the medical devices emanating from the QiG group.

Combined with this top line growth in our core bossiness is our legacy focus on driving operational efficiencies to improve profitability. Although not yet evident in our financial results, during the quarter we made significant progress on our major operational initiatives. They include the optimization in consolidation of our Orthopaedic operations, expansion of our infrastructure to support the manufacturing and medical devices and the upgrade of our global ERP system.

When complete, these initiatives will improve margins, enable our medical device strategy and provide complete back office integration of our operations and administrative function giving us enhanced oversight of our business performance.

Supplementing our core business growth will be growth through targeted acquisitions. This facet of our strategy was initiated last December with our acquisition of Micro Power. We are pleased to report that the integration of Micro Power in the Electrochem business is progressing ahead of our initial expectation and has been well received by customers and associates.

Our integration is leveraging the core competencies of both organization and is establishing a solid foundation for future growth. Micro Power was a tremendous complement to Electrochem and gave us a leading position and the attractive affordable medical market and a bi-coastal presence from which to serve our customers. We are very pleased with this acquisition in the results thus far.

We quickly followed the Micro Power transaction with the acquisition of NeuroNexus in February of this year. This acquisition gave us access to an extensive intellectual property portfolio as well as core technologies and capabilities to support the development and manufacture of innovative neural interface devices across a wide range of functions include neuromodulation, sensing, optical stimulation and targeted drug delivery application.

We are already incorporating the technology of NeuroNexus in our neuromodulation platform and are very excited that the highly skilled workforce of NeuroNexus has joined our team.

Going forward, we expect to continue to identify and consummate targeted acquisitions that will enhance our growth strategy. Given our track record of executing and integrating acquisitions in the past, we are confident with our ability to be successful in doing so in the future.

Our last strategic objective is to drive growth through innovative medical devices. During the quarter, our medical device initiatives continue to gain traction as program regulatory milestones were achieved and product commercialization efforts continue. More specifically during the quarter, we received five 10-K clearances for a transradio catheter sheath introducer and steerable delivery sheath for AF ablation and receive the CE Mark for distribution of our Taransseptal Needle that supports access and delivery of ablation therapies for atrial fibrillation.

More importantly, commercial sales of these products have already begun. In total we are currently in various stages of production or development on over 15 medical devises either through partnerships with our OEM customers or independently. While these programs create heavy demands on resources with the company and drive increases RD&E expenses, it also will deliver a new organic growth within our Greatbatch Medical and Electrochem business over the longer run.

Going forward, we expect commercialization to meaningfully approve on the remainder of the year. A shipment of these recently improved devices began on the end of the first quarter. We currently expect 2012 sales for medical devices developed under the Greatbatch name to be in the range of $10 to $15 million which is more than double the $5 million we had in 2011.

Finally, with regards to algostim or spinal cord stimulated for treatment of chronic pain of the trunk and limbs, as previously communicated we are now in the final stages of development of this device and are working our way through the design verification testing phase for many of the components.

It's our objective to complete the design verification testing and submit our PMA by the end of the year and our team is working very diligently to meet that objective. With that said, there is still a significant amount of work that remains to be completed. We look forward to updating you on the progress towards achieving these objectives on the remainder of 2012.

And now, with that, let me turn the call over to Tom Mazza for a more detailed review of our first quarter financial results.

Thanks, Tom and good afternoon, everyone.

For the call today, I'm pleased to review with you our results for the first quarter beginning on slide 10. First quarter of 2012 sales increased 77% over the prior year period to a record $159.1 million and included the benefit of $20.6 million of sales from the Micro Power acquisition.

Under the organic constant-currency basis, revenue declined 6% due to lower customer product launches in our Orthopaedic and our CRM product lines. Partially offset by double digit growth from our Vascular Access product line.

Looking at our CRM and neuromodulation product line in comparison to the prior year, sales for the first quarter of 2012 decreased 4% as revenue continue to be impacted by the overall slowdown in the underlying market. Additionally first quarter of 2011 CRM sales included the benefits of customer inventory bills to support their product launches which did not reoccur in 2012 period.

And indicated, last quarter, we expect CRM and neuromodulation revenue for 2012 to be at -- lower in the first half of 2012, but begin to rebound in the second half of the year as comparisons ease and the CRM market improves.

With that said, given the recent negative publicity surrounding CRM devices that has been in the news lately we thought it prudent to reiterate that visibility of customer, order and pattern is over and relatively short period of times and that any significant customer field actions, a relative market shift -- share shifts among EOM manufacturers could have a material impact on our operating results.

First quarter of 2012 sales for our Vascular Access product line increased 11% over the prior year period. This increase is primarily attributable to growth in the underlying market, in new business including sales of complete medical devices. As Tom already mentioned, we currently expect 2012 sales for medical devices developed under the Greatbatch name to be in a range of 10 to $15 million.

Orthopaedic product line sales of $31 million for the first quarter of 2012 represented a 19% constant-currency decline from the first quarter of 2011. Foreign currency exchange rate fluctuations decreased Orthopaedic revenue by approximately $1 million in comparison to the first quarter of 2011. The remaining decline in the first quarter of 2012 Orthopaedic sales in comparison to 2011 was a result of fewer costumer product launches and product development opportunities. I should point out that in comparison to the sequential 2011 four quarter, the constant-currency Orthopaedic revenue decline was only 1%.

Turning now to Electrochem segment, first quarter of 2012 sales for the Electrochem business segment increased $20.6 million to $41.3 million. The Electrochem sales for this quarter included $20.6 million of revenue related to the acquisition of Micro Power in December of 2011.

On an organic basis, Electrochem revenue was consistent with the prior year despite tough comparables with the first quarter of 2011 which included the benefit of customer inventory restocking. With the acquisition of Micro Power, Electrochem is now our second largest product group and provides us with a more stable, and diversified revenue base.

As you can see from slide 11, gross profit of $46.9 million for the first quarter of 2012 was relatively consistent with the comparable 2011 period despite the 7% increase in revenue. First quarter 2012 cost of sales includes $500,000 of acquisition-related inventory step up amortization. Excluding this amortization, gross profit as a percentage of sales was 29.8% compared to 31.7% for the same period of 2011. This decrease in gross profit margin is primarily due to the additional revenue from our acquisitions which had lower gross profit margins in comparison to our legacy business as well as production inefficiencies at our European Orthopaedic facilities.

For the quarter selling, general and administrative expenses increased $400,000 to $19 million or 12% of sales compared to $18.6 million of 12.5% of sales for the same period of 2011. The majority of this increase can be attributed to our acquisitions which added $2.6 million to SG&A partly offset by reduced performance-based compensation.

Net, research development and engineering cost for the 2012 first quarter increased $3.5 million to $13.9 million from $10.4 million for the comparable 2011 period.

RD&E as a percentage of sales was 8.7% for the first quarter of 2012 which is consistent with our long-term guidance of 8.5% to 9% of sales. The first quarter of 2012 results included lower cost imbursements from customers of $1 million primarily due to the timing of the achievement of contractual milestones on customer projects.

Additionally, during the first quarter of 2012 we incurred $7 million of RD&E expenses related to the development of medical devices compared to $4.8 million for 2011. The net result of the above is that our adjusted operating income was $15.5 million or 9.8% of sales in the first quarter of 2012 compared to $18.7 million or 12.6% of sales for the comparable 2011 period. I would like to refer you to the appendix of today's presentation for a reconciliation of adjusted amounts to GAAP.

In 2012, first quarter, effective tax rate was 27.1% compared to 33% for the same period of 2011. In 2012, effective tax rate includes the benefit of the resolution of various tax audits during the quarter partially offset by the lapse of the R&D tax credit at the end of 2011. We currently expect that our 2012 effective tax rate will be approximately 36% for the year which does not include the benefit of the R&D tax credits.

For the quarter, GAAP and adjusted diluted earnings per share were $0.19 and $0.37 per share respectively, compared to $0.51 and $0.46 per share respectively for the first quarter of 2011. I should point out that the 2011 GAAP amounts includes a $4.5 million gain from the sale of a cost-method investment.

Cash flows from the operations for the first quarter of 2012 were $25 million below the prior year, but are expected to return to their normalized level starting with the second quarter of 2012. This decrease was partially due to lower operating income, the payment of a higher level of performance-based compensation and the timing over the receipt of payment from one of our large OEM customers which has been subsequently collected.

Moving on to our 2012 guidance. As you can see from slide 12, we are currently reaffirming our full year 2012 revenue, adjusted operating income as a percentage of sales and adjusted diluted earnings per share of guidance provided earlier this year.

This guidance reflects our expectations that revenue for Greatbatch Medical for the first half of 2012 will be below the 2011 levels. The rebound in the second half of the year as comparisons ease, the underlying markets improve and we further commercialize our medical device pipeline.

Given the softness that we are seeing on our Orthopaedic product line, achieving the revenue growth assumptions previously provided is proving to be more difficult than originally contemplated. With that said, we still expect to achieve our 13% to 17% growth guidance for total sales set at the beginning of the year given the diversification within our revenue base.

Additionally, we expect to see operational improvements as the year progresses which will come from further integration of all recent acquisitions, optimization of our Orthopaedic operations as well as various cost-cutting measures management has available.

In summary, despite the challenges that our macroeconomic environment is presenting us with, we remain confident that our company is positioned to implement a more aggressive growth strategy to drive increased revenue and profits. More importantly, we are confident that we have the technology, capabilities and world-class reputation we need to make this new strategy successful.

With that, let me turn the call back over to our Moderator to take questions.

(Operator Instructions) Our first question comes from Daniel Garofalo with Piper Jaffray. Please proceed.

Good afternoon, guys. It's Dan Garofalo on for Brooks West.

Hey, Dan.

Hi. Just on the acquisition front, kind of a two-part question. Can you give us some sense of what you're seeing in terms of the quality of opportunities out there? And then secondly, what's your appetizing capacity for additional acquisitions given your recent activity?

Great question, Dan. I'd say in terms of our growth orientation now, we're looking, you know, for quality targets. We've got obviously the financing in place. We've looked at a lot of companies that align with our current product lines, kind of what I would say with just within scope of our current product technologies.

We see a lot of good high quality targets out there. Obviously, evaluation and price negotiation are really always the counterbalance quality. As you're going to expect obviously, you have to pay a higher value for more quality company. So, we're looking for strategic alignment.

But there's definitely deals out there that we not only think are good quality companies, but are very good complements to us.

We're not looking for transformal deals. At this time we're looking for things that a fit gaps in product technologies and capabilities that we'd like to fill that would fit nicely into the operating base. And then also the ones that we can consolidate, integrate and take advantage of cost-out actions like we have done historically.

With our appetite, we have plenty of obviously room of, from a financing standpoint for this. But I think what our appetite really is going to be gauged by our operational appetite given that the work that we're doing in our -- with our core customers because of all these large agreements and product developments, we've started on the great Greatbatch Medic and Electrochem side. We have a very busy tempo.

So we're going to have to really concentrate really on targeted M&A activities because I don't think we're really in a position to take huge bites on big deals because of the tempo being that busy at Greatbatch Medical and Electrochem. And as you know QiG right now is kind of fully loaded across the board on their projects as well. So, I would say that we're going to have kind of a small to medium appetite on deals going forward. So, it will be something that's going to supplement. It's not going to be really a transformal one.

So, hopefully, those pieces answer you question, Dan.

Yes, that's very helpful. You had indicated devices commercialized under the Greatbatch name would be about $10 million to $15 million this year, I think. And I'm just wondering if you can update us on where we could do that go over a multiyear horizon.

Have you laid out some goals internally, or otherwise, on what that number could be that you could share with us?

Sure. We did provide last year some direction at our investor day event what we thought was going to be over time. And we -- as we have said, we kind of made a tentative commitment to provide an investor day around what our products will be towards the end of this year in the fourth quarter. And we will -- at that time, also kind of provide some updated guidance for 2013 and beyond where we think those programs are going to hit.

I think, definitely the timelines that we have working on the regulatory clearances have been a little bit frustrating given reviewed timeline length have been much longer than we originally had planned or like.

We're not necessarily running into challenges getting them through or getting running into challenges with them taking too long, which obviously starts the commercialization phase late. So we're going to be tuning up the guidance we gave in 2011 in our investor day and provide some revised guidance later in this year on that.

But right now, we're targeting $10 million to $15 million range. And obviously, we're aspiring to get to the top of the range or higher.

Sure. And then just one last quick follow-up, if I could, specifically on the Ortho number, is there a degree of seasonality that affected that number? And trend-wise, do you have a sense that there's been any stabilization that's taken place as far in Q2? Thank you.

Well, if you say is there's seasonality in Ortho, yes. But that's not what our challenge was. Certainly, we have half our business is kind of a European operation. It has a third quarter seasonality dip.

Out challenge was in our European operations. We did not execute operationally. It hurt our revenue and profitability. And that's an operational problem. There's plenty of business out there. We won it and we could not operationally complete it and ship it on time. And we have to correct those operational issues.

And as you know, Dan, that's the last consolidation opportunity that we have from the acquisitions we did from the 2007 and '08 timeframe when we ran our surgical instruments division out of four facilities globally, three of them in Switzerland. And we need to consolidate that. The products have been planned. We've started it and we need to complete it and finish it to be able to prevent these profitability challenges from hurting us, like they did in Q1.

Great. Thanks for taking the question.

Our next question comes from Glen Navarro with RBC Capital Markets.

Hi.

Hi.

Good afternoon, guys.

A few questions; one, given the Orthopaedic challenges that you mentioned, you still reiterated your revenue guidance of 13% to 17%. Is it fair to assume that we should be really closer to the low end of that range at this point? That's my first question.

Well, Glen, I'd say it's a great question. Obviously, we've got a lot of triggers that we can pull beyond just our Orthopaedics product line to meet our overall revenue guidance. It is certainly, as you know, not on typical. But when we break out guidance in terms of ranges that provides a spread where we have some puts and takes.

We're very disappointed at the European Ortho give-up that we had in the first quarter. We didn't plan for it. We didn't see it coming until it was too late to respond. And we made adjustments late in the quarter to fix the balance of the year.

And we've also had -- we've got the managerial flexibility to reallocate resources to accelerate growth in other areas. And that's -- as we still see signs of stabilization in CRM, recovery in Ortho in the larger markets, we definitely see the business out there.

I think Ortho for us is operational execution. And because we're so deep and tight with our customers in CRM and we've done such a good job of expanding those strategic partnerships, we have to see them execute on their product development activities to pull the volume from us. And with seeing that stabilizing it gives us confidence in our full-year guidance at this time.

So -- well, I think it's going to be a little bit challenged in Ortho. I think we've got other levers that we can pull to still be able to deliver the year as we originally planned.

Okay. And then just a follow-up on Ortho, it seems like in the quarter it was more of a timing issue and it sounds like you weren't able to deliver this in 1Q. Shouldn't that just get in pushed to 2Q or are you saying that's the business that's been officially lost?

I think it's an operational issue in terms of we bit off more than we can chew. We could not perform -- and a lot of it stems from that we have very inefficient operations because we're spread amongst four facilities. As you know, we have a brand new facility that we're just finished completing construction in Fort Wayne, we're just starting to move into. It's going to address some of the challenges we have in the US operations.

We haven't started that project to consolidate our European operations yet. We're behind schedule. We'd planned it out. We had a project approved through our review process internally. And we missed the quarter because we didn't execute operationally for customers. And that's a problem that -- it's internal.

We know how to fix it. And it wasn't due to lack of opportunities with customers. It was literally -- and it wasn't a timing issue either. We just didn't perform. And now we're playing catch up and we have to get more aggressive to meet the objectives that we have set up in the Orthopaedic business in Switzerland and Europe within the year.

So, when you don't deliver on schedule to a customer, what does that customer do? Are they vulnerable in terms of business?

I think it's --

Can I get the same product elsewhere or -- ?

No.

Was this business that was just going to be more additive to that one customer?

Yes. Think of it as kind of fluid, Glen. It's just that -- surgical instruments as you know is more or less one-time time opportunities that you keep earning the next phase of business as you move forward.

When you're late on a project that occupies your resources and ties them up for a longer period of time, and then obviously you can't start new projects and, of course, customers may take in more projects than they outsource or give them to your competition.

So, you've got to remember that it's a combination of missed revenue opportunities, but also cost overruns as well. And so, it's the profitability that hurts more even in the lost revenue when you're looking at missed operational execution like we have.

And I think where we have to get it is we need to consolidate operations and we need to implement -- the only site that we don't have our Oracle ERP system implemented and we've got to do better there.

So, that for us , an impact that was what can -- was at the root cause of why we missed the quarter from our internal plans. And although the Wall Street consensus was pretty balanced over the course of the year, we still obviously underperformed where we should have been from our internal benchmarks as well as

And just on -- thank you. And let me just ask you one quick on CRM because in Tom Mazza's comment he said there still is a little bit of uncertainty in the CRM market kind of highlighting to maybe one of the -- one of your customers having some issues.

Let's just assume that one customer that Tom Mazza was referring to is St. Jude because of their Riata issue. I know St. Jude is an important customer, but you also do business with Boston Scientific. You also do business with Medtronics.

So, if you lose a little business or there's a slowdown in the St. Jude business, doesn't that business get picked up by Boston and Medtronics so in the end your CRM business still does well?

Yes. It certainly -- there are many theories that surround this, Glen. I tend to ascribe to the theory that bad news is bad for the market and bad for the adoption of technology. So, it hurts -- since we're well represented and have long-term agreements with all of our customers and partner with them strategically, when there is kind of what I'll call sluicing of share between the customers, it tends to be mitigated because we -- one goes down and one goes up if that's how they --

Right.

-- if they pass that through to us and don't buffer it, that affect us on inventory, but over the long run, we'll normally get a mitigating effect.

However, if it's negative news that weighs down the market, which obviously we've seen a lot of negative news come out in the media, it tends to be a drag factor on our CRM business, and obviously, this is why we diversified revenue as a company and have made investments in other areas, so reaffirming our investment in CRM.

But at the bottom line is that we think we have got enough triggers to meet what our guidance was and that we set out at the beginning of the year even though we're going to have some potential loss speed bumps on the CRM side.

Okay. Great. Thanks, Tom.

You're welcome.

Our next question comes from Jason Mills with Canaccord Genuity. Please proceed.

Hi guys. This is Jamar Ismail calling in for Jason.

Hey, good morning.

Hey.

My first question is on medical device revenue, can you give me the number for Q2? And then what have you seen that's caused you to change your guidance? I know in the last quarter you gave a flat $15 million for the year and this quarter you've given a range of $10 million to $15 million.

Yes. So we're going to -- we're just going to stick with what our guidance is on the $10 million to $15 million because we're kind of in the space where we're launching some of the approved products we've got at the beginning of the year.

And then we'll give kind of a more future breakout of the call that we'll have surrounding in potential investor day would be all the QiG products towards the end of the year. But we're targeting $10 million to $15 million.

It's totally driven by really approval timelines that we've got in our plan. And so we definitely see the opportunities. To get to $15 million, there are obviously a lot of review complexities that occurs when we submit things to the regulatory bodies.

The average review times is well documented by AdvoMed and as well as the FDA have been steadily increasing year-over-year. And obviously, that just kind of bleeds revenue opportunities for us going forward.

So it's not a question of whether we will or won't get the revenue, we will. We're just conscious of that since that kind of ramps throughout the year if even there's 30- or a 45-day delay in approval that tends to spill it over in the first quarter of 2013, which is extremely frustrating for us. But it's realistic to expect that pressure.

So the change between our statements of $15 million of revenue and kind of softening that to $10 million to $15 million is really driven by the timing aspect of the regulatory clearances. And as soon as we get them, we've been very quick to ramp up with customers and drive commercialization. And a couple of products that we highlighted, we've been very pleased with how they've been adopted by customers and also the feedback from them on the clinical acceptance has been good.

And that gets better than our anticipated plans for the year in terms of the adoption of those. So we do expect some upside potentially to it, totally driven by timeline approvals.

Okay. So is it fair to say that of the products that were launched in Q1 where you did $3 million there's been sequential growth over that?

What we'll have for the year, we're planning on doubling to tripling the revenue, but I think we're going just try to stay kind of an annual guidance for devices because now they're out of the gate. So we're just going to try to just keep the focus on the bigger picture because we're going to get into too much complexity with ramping, launch volumes and then coming into steady state production in various products. And I think we want to present a little bit more macro view of device revenue rather than getting down to the individual piece parts.

Okay. So in terms of -- ?

So, we're still break out the approvals as we get them individually. So everybody can understand which products are coming on stream, but we're not going to really give much more granularity underneath that in terms of the individual financials.

Okay. And then just one more, in terms of your optimism that CRM is stabilizing, have you seen anything in this first amount of Q2 that you can point to?

Well, I can just say from really the beginning of the year, in the eight years I've been at Greatbatch, I've seen our customer relationships deeper and broader than ever I have in the eight years I've been in this company and reflected by signing and executing multi-year agreements. Just really over the last several quarters with a lot of our very important customers and obviously several, just this quarter alone. We are operationally in the [cardiac] with the management side of our operations performing exceptionally well both in manufacturing as well as on the RD&E side.

The product tempo as witnessed by rather healthy RD&E number that we have as a company from a consolidated standpoint is not just being driven by the QiG medical devices. It's being driven by both Eletrochem and Greatbatch Medical doing a lot of design business for discrete components with customers including our big CRM customers.

I see the activity level high there and that's our most important leading indicator in terms of our ability to roll revenue. So I'm very confident that even with some kind of flat to slightly negative view of CRM as an industry that with even that kind of tough really market reality, I see plenty of opportunities for us to still grow that franchise by winning projects with customers and continuing to expand it.

And I think right now, it's just a question of getting these projects, helping customers get through their regulatory approval time lines and start commercializing these projects. We won them. We have the contracts, their long-term agreements for supply. We just got to finish them and get them out.

So I am optimistic, I don't want to say bullish, but I'll say optimistic on Greatbatch's CRM trajectory as we move forward in 2012 and 2013.

Okay, thank you very much.

Our next question comes from Charles Croson with Sidoti, please proceed.

Hi, guys. How's it going?

Hey, Charles. How are you today?

Not too bad. Not too bad. A quick question on guidance again, here. You had some operational efficiencies here particularly in Ortho. As we look at the EPS guidance, given the number this quarter, it seems like you've put a lot more pressure on the other three.

I guess I'm just trying to figure out where you think you're going to get this bump in EPS somewhere because of the issues with the Ortho itself?

Charles, great question. It's one of the things that Tom Mazza in the finance team have done well with the operating teams here in Greatbatch is been the managing of internal process on a quarter-to-quarter, year-to-year basis in which we actively manage the business and allocate resources and investment decisions based on where we are as a company.

So while we had a miss in the first quarter that is due to our European Orthaepedic operations, we've got the triggers in order to deliver our guidance for the year. We've got the -- what -- well on the majority of the year remaining.

We knew that in the first quarter it was going to be challenging. We made cost rationalization decisions in the European Orthopaedic business later in the quarter, so we'll get a full quarter and the rest of the year effect for those changes. And we're going out and securing business relationships that can be more productive.

So we've got plenty of triggers and we're a much larger company than our just European Orthopaedic operation. So while it was unplanned what occurred there, we have the ability and a great deal of resources to focus other areas to deliver the year. And that's what we're doing.

I see. Okay, that's helpful. If I may just dig a look a little bit deeper into that then. Are we expecting the gross margin to come back towards more levels back in the prior quarters? And then on the SG&A side as well, should we expect that for this quarter to continue on for the subsequent quarters? And it looks like you guys had done a decent job there of integrating Micro Power.

It's -- just remember there's a little bit of a math exercise with Micro Power on the gross margins. So we're not going to get quarter rebound from that. But I mean, from the majority of the effect on gross margin was a Swiss Ortho, you know, at a European Orthopaedic miss that we had, and that obviously is, we're already putting corrective action plan and we'll also be laying out the consolidation plans which we've talked about before, but haven't really fully disclosed.

We're going to put those into the implementation phase here very shortly. And then we'll be at a much better position obviously to have the rebound from that as the quarters roll out -- and improve upon that as we get into the 2013 and beyond timeframe when we finish the consolidation.

So we're going to be moving in the right direction over the course of the year. And underneath the guidance that we've laid out, we're going to have to rebound in gross margin period.

Exactly, Charles. This is Tom Mazza. Yes, I mean we're still predicting that the margins will be close -- the gross margin will be close to last year as Thomas is saying adjusted slightly for the Micro Power acquisition.

Okay, that's helpful. And then just last part then on the SG&A question.

Yes, the SG&A should be pretty similar to the current quarterly run rate slightly.

Yes. Just remember Charles, this is Tom Hook again -- is -- our SG&A side, just remember is that we have a performance-based comp plan which is fairly significant leverage. So when we're not hitting our internal operating plans, it's a significant buffer.

So that's the big variable that sits with an SG&A. We're very tight in terms of SG&A, in terms of management of that number. The big variable that moves is where are we at relative to where our financial results are. And as the better we perform, obviously, we tend to have increasing SG&A because we start to accrue more comp expense.

So, obviously as we miss, that is the downside buffer to the same. So that's the one variable that I think is -- you have to kind of crawl into the proxy material and kind of understand how those programs work which is a little bit of a yeoman's task, but that's the big task, the big variable that SG&A fluctuates on.

Okay. Thanks, Tom and I'll hop back into queue. Thank you again.

Thank you.

Our next question comes from Charles Haff with Craig-Hallum, please proceed.

Hi. Thanks, guys. A question first on Orthopaedics. On the EU Orthopaedics issue, you mentioned that you caught it late in the quarter. I'm wondering how long it takes to get that turned around, is that one-quarter turnaround or is it a multi-quarter turnaround?

Two parts, you could fix your costs much faster than you can fix your revenue. So we'll have to look for the revenue fix from the broader business which is typical. And in any area you have a problem you can usually rationalize. We're very good at rationalizing the cost out and deploying resources to other projects that can cover. Which is what we've already done.

I mean in this case, because we already has plans for our Swiss Orthopaedics consolidations, already planned out over the last year and a half and ready to implement. And they're already really moving towards the implementation space that actually started late in 2011.

We just coincidentally happened to be in the configuration where you get the -- not only take some short-term actions but also the ultimate longer term actions that we still have communicate out to the investment community a little bit more fully. We're just a little bit short of prepared to do that until we do some final internal transitions and moves that we've planned.

Okay. And without getting into specific timelines of that -- those consolidations within Ortho, is it fair to say that you're timelines haven't changed or have they -- have they changed because of these operational missteps?

I think of anything that just -- that timelines will remain the same as we've laid out. We just may want to accelerate some of those pieces based on where we're at in that business. And so it -- they won't push out. They just may accelerate and we may make some adjustments to those plans but that thing would end being -- so we'll just move towards execution phase as soon as possible.

Okay. That sounds good. And then my next question was on Electrochem, do you give the growth number X Micro Power or do you break that up for us?

We did. It was flat, Charles.

Okay. Thank you. And so you originally guided Micro Power to be neutral to 2012, is it fair to say because you're maintaining your guidance that perhaps Micro Power could be accretive to 2012 given the performance that we've seen this quarter, the strong performance?

Yes. And I think that's a fair statement, Charles, is that I think the Electrochem and Micro Power teams jumped on the integration initiative extremely quickly in Q1, and they got some very nice gains not so much on the cost side but more on the strategic side and customer interface side.

They've unified the management team over there to run as a single business. So it's going to get a little muddy in terms of kind of what is Electrochem and Micro Power. We're going to be rolling out kind of a unified branding, messaging an identity for that combined organization, but they've just done a tremendous job executing operationally. And Micro Power was a bright spot and the operating teams are crisp and they get on top of those challenges and they execute.

We've always been able to show very strong results. Electrochem is an integrated multiple acquisitions in multiple locations over the past several years. They're very good at it. The operating team there is very good. And the complement of a lot of the leadership that have stayed onboard in Micro Power really is peak of the opportunities there and they're combining the skill of Micro Power and Electrochem very effectively. So it's a -- it's a significant upside for the year for more original plans were laid out.

Okay. Yes, it's very impressive to see the diversification of your business and even though you've had this big hit in Orthopaedics to see this many levers in your business. That's very encouraging. I applaud you for the diversification there. I'm sure it's not an easy task.

The other question I had was regarding the AF steerable catheter sheet, what kind of stocking patterns would you typically have? I assumed that was the -- I know you don't want to name customers, but I saw that BSC had announced an AF steerable catheter. I assume this is theirs. But what kind of stocking patterns do you typically see when you launch a new innovative product like this?

I'd say on any form of product that's kind of -- and I'll just novel was a fair amount of trepidation around making large ramps. Everybody wants the control and get certain amount of data back. Soon thereafter, when the initial feedback from first and human work has been done, it generates a lot of excitement and of course everybody wants to increase production demand.

So it doesn't so much ramp up inventory in preparation of a launch like many traditional OEMs do. It tends to just build in intensity and we, in our operations, have to keep pace with that increased demand and that works well with our operational plan.

It's a good partnership with customers to do it this way so that we don't end up with building a massive inventory bubble before we get some new market feedback, understand what the true demand is going to be.

So I expect when we look at the sales number of medical devices out of the -- out of Greatbatch, its true demand that we're actually seeing. It's not push/pulling at inventory. It's pretty much a straight pull right out of Greatbatch to meet that raw demand coming from the market.

And as that, we get bigger, we potentially have other effects, but right now that's pretty much the direction I see in all these projects for the next several years.

Okay. And then just my last question is on QiG. When should be the next project that you would expect approval and when -- I know your timelines are a little bit fuzzy, but when would be the next project we should expect to see?

Some time in 2012, Charles.

Okay, fair enough. Thank you.

You're welcome.

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'd 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.

Thank you, everyone for joining us.

Thank you for your participation. That concludes today's conference call.