Integer Holdings Corp (ITGR) 2015 Q2 法說會逐字稿

Welcome, everyone, to the second-quarter 2015 Greatbatch Incorporated 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 Incorporated'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 now like to turn the call over to today's host, Vice President, Finance and Treasurer, Betsy Cowell.

Hello, everyone, and thank you for joining us today for our second-quarter 2015 earnings call. With us on the call are Thomas J. Hook, President and Chief Executive Officer; and Michael Dinkins, Executive Vice President and Chief Financial Officer.

As we have done in the past, we are including slide visuals to accompany this presentation, which you can access at our website, Greatbatch.com. Once Tom and Michael have completed their presentations, we will then open up the call for a Q&A session.

Let me now turn the call over to Tom Hook.

Thank you, Betsy, and good afternoon to everyone joining the call today. We are very satisfied with the second-quarter results, which were consistent with our expectations. As previously communicated, we expect to finish the year strong, based upon new and existing customer business pipelines, and carry this momentum into 2016.

Second-half 2015 customer ramp plans for new products and technologies will offset end-of-life revenue impacts. We are confirming guidance for 2015. And later in this presentation, we will provide some insight on our 2016 expectations.

We continued to make progress during the second quarter against our strategic plan. Earlier today, we filed a Form 10 registration statement with the US Securities and Exchange Commission for the proposed spinoff of Nuvectra. This is an important milestone towards our strategic imperative commercializing complete medical device systems.

Investments in technology, capacity and capabilities are on schedule to deliver improved operating performance into 2016. CCC Medical Devices, acquired in August of 2014, continues to generate an exciting pipeline of neuromodulation opportunities, where we can broadly leverage our integrated engineering services and comprehensive manufacturing capabilities.

Let's turn to the financials starting with slide 6, summarizing our key performance metrics for the second quarter. We delivered solid quarterly performance, which is consistent with our expectations. On a sequential quarter-to-quarter basis, our key measurements improved. For the second quarter we delivered sales growth of 4% on a constant currency organic basis, adjusted operating margins of 12.7%, adjusted earnings per share of $0.64, and adjusted EBITDA of $31.2 million or 17.9%.

An analysis of adjusted earnings per share is also highlighted in the presentation materials. Most notable is the favorable impact of a lower tax rate of 20.7% for the quarter. We believe we can sustain lower tax rates, and our guidance for the total year is approximately 23.6%.

The next several slides will review each product line and provide insight to their performance. Negative mix for products sold to OEM customers resulted in a gross margin decline in the quarter by 90 basis points when compared to the prior year. This is not an issue for the total year results, and we continue to expect gross margin and operating margin improvements for the total year. As expected, second-quarter 2015 operating expenses are higher when compared with the second quarter of 2014 due to the acquisition of the CCC Medical Devices.

Now turning to slide 7, we provide additional details about our revenue performance. For the quarter, revenue totaled $174.9 million, representing an 8% sequential growth versus the first quarter 2015. Compared with second-quarter 2014, revenue expanded by 4.1% on a constant currency organic basis, and 1.6% on a GAAP basis.

The impact from foreign currency exchange rate fluctuations reduced sales in the quarter by approximately $5.5 million due to the strengthening US dollar versus the euro as compared to 2014. We are encouraged by the improvements in our cardiac and portable medical product lines. Cardiac neuromodulation revenue improved 18% compared to the first-quarter 2015, and 12.7% compared to the prior year.

This product line can vary from quarter-to-quarter, so performance of $320 million in revenue on a rolling 12-month basis reflects a 6% decrease. However, we expect total 2015 results to be in the low-single-digit percentage.

We are on schedule moving our production for portable medical to a new production facility. We expect continued improvement in portable medical sales performance as we systematically work with our customers to qualify production with various regulatory bodies around the world.

Moving to slide 8, I will discuss performance of the individual product lines. Cardiac neuromodulation revenue grew 12% in the quarter to $89.5 million, including inter-segment sales. We achieved double-digit growth in three areas -- medical batteries, fuel assemblies, and neuromodulation. We worked closely with customers during the quarter to ensure inventory positions were adequate to facilitate summer holidays and facility shutdowns.

Revenue for the first six months of 2015 is flat with the first half of 2014, and in line with our expectations. Revenue patterns have normalized, and with continued success in neuromodulation, we are confident we will deliver on our commitments. Orthopedics product line sales of $35.5 million grew 8% on an organic constant currency basis when compared with the same period 2014. Foreign currency fluctuations impacted as-reported sales by approximately $5.5 million.

Instrument sales remain strong, particularly cup impactors and implants. Throughout the first six months in 2015, organic constant currency revenue growth totaled 13%. We anticipate growth for the year to be in the high-single-digit to low-double-digit range on an organic constant currency basis.

Portable medical sales totaled $17.7 million in the second quarter, growing 6% compared with the second quarter 2014. The manufacturing transition to Mexico is progressing as planned, with initial production slated late in the fourth quarter. We renewed our contract with a major customer this quarter, and expect to introduce proprietary power solutions to drive future organic growth.

Vascular product line sales of $12.9 million were 15% below second-quarter 2014. End-of-life products and customer inventory management initiatives unfavorably impacted sales again, as expected, this quarter. We have seen order patterns improve as customers work off excess inventories. Later in the year, we are introducing several new products into higher growth sectors, and our manufacturing move to Mexico will position us to be more competitive in both new and existing markets.

EME revenue of $16.5 million was 23% behind the same period in 2014, attributable to a strong second quarter in 2014. Year-to-date revenue is 13% below first half 2014. These results were driven by lower energy revenues with the continued weakness in the marketplace. This quarter, we experienced lower demand from our larger customers, as well as slowdown in orders from the smaller operators of outsourced rigs. We are developing products such as wide-range and high-temperature batteries that will improve our customers' efficiency in exploration.

Turning to slide 14, we will update on the proposed Nuvectra spinoff. Earlier today, we filed a Form 10 registration statement with the US Securities and Exchange Commission for a proposed tax-free spinoff of our QiG neuromodulation device business, which will be known as Nuvectra after the spin.

We also announced that Scott Drees has been named Chief Executive Officer of Nuvectra, and Dr. Joseph Miller will step down from Greatbatch's Board of Directors immediately prior to the completion of the spinoff, to accept an appointment as a Director and Chairman of the Board of Nuvectra. Scott Drees has worked 34 years in the implantable medical device industry, 20 of which have been focused on neurostimulation.

He was instrumental in the development of the fast-growing neurostimulation market as an executive at Advanced Neuromodulation Systems, now St. Jude Medical Neurological. Greatbatch has benefited from a long-standing partnership with Scott, through his tenure as a neuromodulation portfolio manager for the QiG Group and as President of QiG's subsidiaries, Algostim LLC and Pelvistim LLC.

Dr. Miller has served as a Greatbatch Director since 2003; chairs the Technology Strategy and Investment Committee, and is a member of the Corporate Governance and Nominating Committee. He retired in 2012 as Executive Vice President and Chief Technology Officer for Corning Incorporated, a position in which he had served since 2001.

Before joining Corning, he served as Senior Vice President of E.I. du Pont de Nemours in addition to other executive leadership roles. Dr. Miller also serves on the Board of Directors of Lightwave Logic, Incorporated. With Scott Drees as CEO and Joe Miller as Board Chairman, Nuvectra will have two capable and experienced leaders, and will be well-positioned for success from day one.

In the next slide, we list the benefits to the Greatbatch shareholders. Shareholders will receive shares of Nuvectra when the spinoff becomes effective. Additionally, Greatbatch estimates that annual operating expenses will be approximately $12 million to $16 million lower post-spin.

Finally, Greatbatch will manufacture the Algovita platform during a long-term manufacturing arrangement with Nuvectra. The spinoff allows investors to separately value Greatbatch and Nuvectra based on their respective unique investment identities, taking into consideration performance, risks, and future growth prospects for each business.

Separately, each company is further enabled to focus their respective attention and financial resources on their distinct operating priorities and strategies, including the different growth opportunities available to each company. We believe that each company will be able to better attract, develop and retain key employees through the use of equity-based and performance-based incentive plans that directly link employee compensation with specific business objectives, financial goals and performance metrics.

With regard to capital markets, we expect each company will have increased flexibility to invest in innovation, product development and marketing, pursue strategic partnerships and establish capital structures tailored to their respective businesses.

I will now turn the call over to Michael to cover our balance sheet and our 2015 guidance.

Thanks, Tom, and good afternoon, everyone. It's my pleasure to discuss our balance sheet metrics and conclude with a discussion of 2015 guidance, which we are reconfirming.

Slide 17 shows the key balance sheet metrics. Greatbatch has a strong balance sheet with positive cash flow totaling $22.5 million for the first six months of 2015, and a leverage ratio below 1.5 to 1. Adjusted EBITDA on a trailing 12-month basis aggregated to $123.8 million. We experienced a slight contraction due to lower adjusted operating income. Similarly, adjusted return on invested capital contracted 40 basis points due to lower 2015 operating income when viewed on a trailing 12-month basis.

As we progress through the year, we expect ROIC to be closer to 9%. Inventory increased $10.9 million for the first six months of 2015, as we built product for second half revenue and safety stock for the startup of the Mexico facility, where our vascular and portable medical products are being transferred. Our days inventory outstanding will move towards more normal levels by the end of the year. CapEx totaled $22.2 million through June 2015, reflecting the investments in our manufacturing facilities, principally Mexico and France.

Turning to slide 19, we are confirming the guidance of 4% to 6% revenue growth and 2X our revenue growth improvement in adjusted diluted earnings-per-share performance. Revenue guidance is $715 million to $730 million. Currency translation is expected to have a negative impact of approximately 2% or $14 million, which is why we are expecting to be at the lower end of our revenue guidance.

Adjusted earnings-per-share guidance is $2.61 to $2.71, assuming fully diluted shares of 26.5 million. Our guidance includes the impact of Nuvectra as if we will continue to run it through the end of 2015. Until the proposed spinoff happens, we will reflect all associated expenses on our GAAP and adjusted results.

Our estimate of other operating expenses totaled $35 million, which includes estimates for the transfer of our vascular and portable medical product lines to Mexico and deal-related costs of the proposed spinoff. The deal-related costs for the proposed spinoff are estimated to be $10 million to $12 million at this time.

This quarter, operating income is adjusted for litigation expenses to defend our intellectual property. These expenses totaled $2.2 million through the first six months and the estimate for the year is $4 million to $5 million. 2015 guidance assumes the following effective tax rates -- GAAP effective tax rate of approximately 23.5%; adjusted effective tax rate of 21% to 24%.

We estimate capital expenditures for the year to be $40 million to $50 million, driven by capital investments in our global manufacturing locations, primarily Mexico and France. Adjusted operating cash flows are expected to be between $80 million and $100 million, although we anticipate being closer to the lower end of our guidance if we go forward with the spinoff. We will incur related expenses for the proposed spinoff which, at this time, we estimate to be $10 million to $12 million.

Tom gave you a status update on the proposed spinoff of Nuvectra. Slide 20 outlines the three ways the spinoff will benefit Greatbatch shareholders. First, each Greatbatch shareholder will receive a dividend of Nuvectra shares. Second, we are expecting our operating expenses on an annualized basis to go down by $12 million to $16 million, and most importantly, Greatbatch will manufacture the Algovita platform for Nuvectra.

We conclude our presentation on slide 21 by reconfirming management focus on driving shareholder value. We are positioned for organic growth because the long-term agreements with emerging neuromodulation companies, and continued investment in R&D to drive innovation that allows our OEM customers to expand market share. We are positioned for margin expansion and continued ROIC improvement because of the investments we are making this year in new facilities and expansions in Mexico and France.

The CCC Medical Devices acquisition has been a great success. And we have a healthy pipeline of targeted acquisitions that will strengthen our competitive position and accelerate our organic growth.

With that, let me now turn the call back over to the moderator to take questions.

(Operator Instructions) Greg Chodaczek, CRT Capital.

Congratulations. Just a quick question on QiG -- hopefully, you will answer it. In terms of revenue for QiG, what is in that number for the second quarter?

The QiG revenues for the second quarter consist of our revenues for our NeuroNexus business in Ann Arbor, and a little bit of revenue that we have for our Algovita business, because we are selling the product in Europe. And then the last piece of it also consists of the revenues from CCC Medical, our acquisition that we did August of last year.

Okay. So CCC Medical is put into QiG hopefully starting January 1, 2016. I'm assuming that's going to end up somewhere else, is that correct? Still on the Greatbatch P&L?

No. Where it will be in terms of segments, we will decide that after we've done the spinoff. But CCC Medical, through engineering services and development work, will continue to have customers and continue to have revenue even post the spinoff of Nuvectra.

We have taken customers as CCC Medical as they finished their clinical trials and start doing their production -- more high-volume production, beyond what CCC Medical is doing. We are going to report those revenues in our Greatbatch Medical segment, because they are being manufactured in the facilities -- in the Greatbatch Medical [run]. So we will continue on neuromodulation and Greatbatch Medical, and we'll continue to have engineering services in QiG.

Okay. So that's all staying within the Greatbatch Medical parent? None of it goes with Nuvectra?

That is correct. We are keeping CCC Medical, and we are entering into agreements with customers as they finish their trials at CCC Medical to do manufacturing within the Greatbatch Medical segment.

Perfect. And in terms of expenses for QiG that will move over to Nuvectra, you talked about $12 million to $16 million.

Million. Million, not billions. (laughter)

Yes, if I said billion, excuse me. Million. I wish my checking account was that way. But where is -- where should we -- as we model or we think about going forward, where is the majority of that expense being pulled out of? I'm assuming a lot of it is R&D; some will be SG&A and some will be COGS. Can you break that down at all?

I can give you a little bit of guidance on it. Roughly I would say about two-thirds of it will be R&D and one-third would be sales and marketing. That would be the breakdown that I would give you as guidance.

There are some sales and marketing people that are running through our P&L now, that are obviously supporting the sales that we have in Europe, and preparing for FDA approval in sales that we expect to have in the US. And they will be spun out as part of Nuvectra. And there's R&D expenditures that will go as part of Nuvectra also.

Fantastic. Thank you, Michael.

So as rough guidance, I would say one-third/two-thirds.

Okay, great. I'll jump back in the queue. Thank you again.

Glenn Novarro, RBC Capital Markets.

Two questions. First, with the $12 million to $16 million that won't be spent on Algostim in 2016, Tom, I was hoping you maybe can help us think about what do you do with that in 2016? Does that fall to the bottom line? Do you reinvest? Any color would be appreciated. And then I had a follow-up.

I just think, Glenn, it's very simple. Our intentions are to let that fall to the bottom line from a Greatbatch perspective.

Okay, great. And then in your prepared remarks, you talked about you had a strong pipeline of new products or your customers had a strong pipeline of new products, and you expected revenues to pick up in the second half of the year. Can you maybe just give us some color behind this pipeline, the timing? Does it immediately hit in 3Q? Is it more 4Q back-end loaded? And which divisions do we see it in? Thanks.

Certainly, Glenn. As you know, our pipeline takes a long time to develop, so the development agreements that represent that pipeline are years prior to this ramping period. While the ramps of those products will commence to a small degree in the third quarter, really a full quarter effect of those ramps will really start to appear for us into the fourth quarter timeframe throughout the fourth quarter.

Neuromodulation -- that obviously we report in the cardiac neuromodulation line -- is going to be a significant pickup for us, because of those wins that we have had. And I think that as we made in the comments, as we recover in portable medical will pick up, and then also in vascular, as we have a product launch in the fourth quarter. So I am still -- because of macro market conditions and the energy product line a little bit more bearish, we are doing a good job of launching products there, but they are just facing the headwinds of the market, which has not recovered.

We've done a very good job in that business mitigating those pressures, but it's going to offset the effect of some of the technology launches there. And they will nullify each other. And that would give you kind of the macro view of how we think the variables will play out.

Okay, great. Thanks, Tom.

Charles Haff, Craig-Hallum.

Thanks for taking my questions and congratulations on the progress with Nuvectra. A question for you on the Algostim platform. Will that continue to be sold to CCC customers? And what's the structure for that?

The structure for that, Charles, is the Algovita platform for broad use in neurostimulation would spin out with Nuvectra, and Nuvectra would commercialize that technology. The technologies that we have within the Greatbatch are retained, which is our traditional engineering services work we do with other customers in neurostimulation, would not use the Algovita platform.

We would use other neurostimulation platforms that we have developed along with the CCC Medical Devices to be able to commercialize in partnership with our customers that are in other disease states. So the therapy for channel for commercialization for that Algovita platform would be done through the spinout of Nuvectra.

So could you envision a scenario where CCC customers may be a customer of Nuvectra?

Nuvectra will have the ability to run itself as an independent company, and it is -- there would be no restrictions on them to be able to form downstream partnerships within the neurostimulation industries, not only with Greatbatch, but they could with CCC Medical Device customers. It's feasible.

But clearly because their first targeted indication for the Algovita platform is spinal cord stimulation for intractable pain, that we believe that that's what they will focus on initially. And then potentially downstream, they could get into other areas that could provide some overlap. But I don't -- wouldn't expect that immediately.

Okay. And then would you be willing to share how long the manufacturing contract will be between Greatbatch and Nuvectra? Is it in perpetuity? Or does it have some finite term to it?

It would not be in perpetuity. It would have a finite term, but we have not yet fully disclosed what the terms of that agreement would be. But it would allow Greatbatch to manufacture for a defined period of time for Nuvectra. And as Nuvectra ran itself as an independent company, it could feasibly be able to leverage other resources and other companies for technology and manufacturing services.

And obviously we would compete for that. And we are quite confident in our ability to delight the new -- prospective Nuvectra management team with our capabilities.

Okay. And then one more question on the EME slide number 8, it looks like you added a bullet for remote monitoring. I know that's a growing trend in the med device industry. How should we think about remote monitoring in terms of materiality? Is it still in its infancy for you guys? Or how far along, how many products? Any way you want to characterize it. I'm just trying to get a sense for how material this may be over the next couple of years? Thank you.

Certainly, Charles. That's very observant of you. As more and more is, operators and energy services are trying to understand how to better utilize the products we sell to them, they are interested in collecting data -- not just on the battery longevity and performance, but on a broader set of parameters for the downhole tools they are using.

So by enabling data collection needs, we can end up providing them a data service in addition to their portable power needs. And the intention is to integrate those together to have a more integrated sale in the energy space. So that's a phenomenon that's emerging now.

And we feel that we've been able to gain access to very good capabilities for monitoring, data monitoring. And our intention is to continue to integrate those with our battery technologies in partnership through custom designs with our energy customers, and integrate those solutions into their tools that they are using.

So I think it is not a mainstream adoption across the industry today. It is going to be driven by the major players first, and then it will slowly trickle down, except in the broader industry, as there is more comfort with it. But it will be more of an evolution than a complete overhaul of the industry.

And would this be monitoring within medical devices in the future? Or is this going to just be confined to energy?

Well, as you know, the Algovita platform has the ability for an incredible amount of data collection and that's being leveraged in that platform. So for implantable medical devices, those technologies do exist.

I think in the energy sector, collecting data was historically more oriented towards the geological aspects of exploration, not on the tool performance -- vibration, battery life, battery turn output, et cetera. And that's just changing in that industry.

But in implantable medical, I think the devices are already at that level of sophistication, if not more. And I think they're moving on to more physiological sensing and detection now, which is obviously much more complicated than you're going to find in the oil and gas industry.

Great. I have more questions but I'll jump back in queue. Thank you.

Matt Mishan, KeyBanc.

Thank you for taking my questions. Just a couple on CRM before moving on to Nuvectra. Tom, I guess the tone in the press release towards CRM I think was a little more bearish than your tone on the call. And I couldn't tell whether or not you think that your new programs would be able to offset, like you've said, and grow for the full year, or whether or not they can mitigate it and maybe just decline a little bit less?

I think, Matt, the way to think is that when you look in the short run for CRM, is it can be a lot of quarterly variation. So depending on the frame of time you can hear my voice or a press release intonate bearish or bullish sentiments, I think when you look at the rolling 12-month period of time, there is definitely winds that we end up having to face in terms of products that are being end-of-life. But we also have major technology launches as well as we've done a much better job in neuromodulation in expanding that product line.

So I think in the longer run, you're hearing my voice with much more bullish sentiments across the opportunity. And I think as we continue to move forward, we have a very good idea of the projects that we have won over the past two to three years. We have a very good idea of when customers are commercializing those technologies.

So it's a lot easier to be bullish over the long run, because we have that visibility. It's just a question of timing. And of course, we also feel that with the work that we have done out of CCC Medical Devices on the systems side, and prospectively, the Algovita launch through Nuvectra, we expect those to also provide significant acceleration into the cardiac neuromodulation area once we get beyond a spin and the FDA approval of the Algovita platform.

So for those reasons, you're going to pick up my voice -- I am bullish on the prospects there. Recognizing it is a lower growth industry, but there's still many growth avenues for us going forward. But I can't ignore the short-term bumpiness that the typical end-of-life transitioning to new technology ramps tend to bring through the quarterly numbers.

Okay. That was helpful. And then you had a great quarter in cardiac neuromodulation. I'm just trying -- and I know Michael was talking about once Nevros moves from low-volume to high-volume, you'd potentially move that into that segment. But did you do that this quarter? Because it seems like part of the bump may have been moving some of the production from QiG and some of the sales out of QiG into cardiac neuromodulation.

Yes. This quarter, we are starting to see some revenue that has moved up into the CN line, is less than $5 million, but that is part of the reason for the second half that we feel will have continued better performance. And we will also be reporting the Algovita manufacturing revenues in that line, so we look forward to moving Nuvectra forward and getting FDA approval. And again that creates, as Tom indicated, one of the reasons why, long-term, we feel pretty good about our cardiac neuromodulation product line and its ability to grow.

Okay. And then moving onto Nuvectra -- first off, thank you for the additional color and the clarity. I think it's great. If you look at the $12 million to $16 million in savings you are expecting, I read -- I was able to get through the Form 10 really quickly this morning -- in the middle of earnings season, but I was able to get through it.

It looked as if the losses associated with the assets you are spinning out were a little bit more sizable in the losses and more equivalent to what you've been -- more equivalent to the costs that you've had in QiG. So maybe just the difference between the $12 million to $16 million in savings, and the losses that you've been incurring in QiG over the past couple years.

The amount that we have given guidance on is the amount that we are very comfortable will fall to the bottom line and improve our performance going forward. The total amount of loss, as you noted in the Form 10, is actually more than that.

We are in the process of working through our strategic plan and preliminary plan for next year, and doing our bottoms-up roll-up to estimate all of the research and development expenses it will take to have a healthy pipeline to sustain our revenue growth going forward. For that reason, rather than reflect all of the cost that is associated with Nuvectra falling to the bottom line, we gave guidance to the amount that we are very comfortable will fall to the bottom line.

And then as we work with our Board of Directors -- we actually have a meeting coming up in a couple weeks -- and lock off on our strategy, we will determine our numbers, and we will update accordingly as we go forward.

That's great. And my assumption is that you're going to have to obviously fund Nuvectra, and you also have to think about the liquidity of shares post-spin. So my thought has always been you're going to roadshow and do an IPO at some point in the back half.

One, is that correct? And two, if so, what is the appropriate valuation that you would be willing to accept in that situation for Nuvectra? And generally what do you think the value of it is?

I -- Matt, I think the best way to think about it, your general outline is correct, is we are approaching complete the Algovita PMA approval will be set up for the Nuvectra management team, and sponsor them at a roadshow to go out and speak with prospective investors in advance of the spin. And you're correct, and we'll -- following the review of the Board of Directors, we will do the final reviews and approvals of that.

And I'll let Mike make a commentary on the valuation side.

You are also correct in that we will put some amount of capital into the business to get them started. And we will work with -- as you know, we've engaged Piper Jaffray as our bankers to help us with the valuation.

I believe that at this point in time, it's premature to speculate on exactly what we think the value of the business will be. And obviously, it is a decision of the Board of Directors on what is acceptable. So that's why we refer to this as a proposed spinoff.

As we work through the final numbers, and present to our Board a capitalization plan and a valuation plan, they then will make the decision whether or not we will actually spin the business. And they may modify the amount of the capitalization, et cetera. So, it's going to be a Board-driven decision that we will be making over the next few months.

Okay, great. Thank you very much for taking my questions.

Jim Sidoti, Sidoti & Company.

On the quarter, the neuromodulation in cardiac sales came in much stronger than I had expected. And I think you would have been a little bit more pessimistic for that business on the last quarter. Were there some sales that got pulled in from possibly the third quarter that resulted in that? Or are you just seeing a general pickup in that market?

Well, we are definitely benefiting in the CN line from the commercialization of medical device systems. But we also see the quarters do have some variability to them. And so you saw in our second-quarter performance that, compared to our first-quarter performance, that we were stronger, and that some of that is just the quarterly variability that we experienced.

As some of the launches and the end-of-life phase in and phase out, it leads to those. But also, when we get to end of quarters around fiscal year-ends for customers or vacation periods, it could have an effect. So, we tend to look at the rolling 12-month data, Jim, as you know, to provide more of the macro indicator.

And consistent with my commentary from before is, in the longer run, we are bullish on the CN line because of we are retaining and building on our core component franchise. But then we are launching the system sales in particular in neuromodulation that will continue to build strength for Greatbatch, both pre and post the spin out of Nuvectra.

To get to the midpoint of your revenue guidance for 2015, you are looking at a sizable pickup in the third and fourth quarters. Is that mostly the CN line where you see that? Or is that across your other product lines as well?

I think you will see, with the exception of energy, improvement in all of our product lines in the second half of the year. But a good portion of that is driven by cardiac and neuromodulation. And they drive -- one of the drivers of the improvement is a new contract that we have started production from a CCC customer that has now introduced their product into the US.

Okay. All right. And then I just want to be clear -- the $12 million to $16 million in cost savings from the spinout, that's a pretax number, correct?

That is a pretax number.

That's tax -- that's a US tax rate?

Yes.

Okay, thank you.

Thank you, Jim.

(Operator Instructions) Charles Haff, Craig-Hallum.

Thanks for taking my follow-up questions. So for portable medical, you had a relatively easy year-over-year comparison there. Is the $17.7 million number kind of a sustainable quarterly revenue for the remaining quarters of the year? Or do you think it's going to be pretty variable?

This is -- Charles, you have to remember that the unique nature of the portable medical line is we are moving the entire production facility from our Beaverton, Oregon, operation to a new Mexico facility. So we would end up expecting, because of the move, we are going to end up trying to keep that business reasonably stable. But it will, as it moves to Mexico, in production launches in Mexico, it will start to pick up.

So, yes, you are correct. There is an easy comparable for it, which will be technically easy comparables going forward. But we are very diligent in the move process not to try to accelerate or overheat a business. So we'll be very diligent over the next two quarters until we get to 2016 in that product line, so that we are not interrupting or disturbing any customers.

And largely, the launches that are occurring in that business have to be approved by regulatory bodies around the world, so that tends to be a little bit of a drag on accelerating the business because of the move and those regulatory approvals. So it's a pretty decent normalization level to use. And then our plans are, with the new production capabilities and our New Mexico facility, is to start accelerating that business more significantly next year.

Okay, thank you. And same question for vascular. That one has bounced around a lot, and I know you've had recalls in the past and now those are behind you. But because that line moves around so much over the last few quarters, I wanted to ask you the same question. Is a $13 million quarterly number kind of the right way to think about the back half of this year for vascular?

It's a good approximation. That's a little different story in vascular because the move will stretch into the beginning of 2016. But in general, the end-of-life, and the customer inventory management items that we've experienced in the first half, will abate. So there will be a slight recovery in vascular over the course of 2015 into 2016, mitigated by the move stabilization. But you are correct -- as a smaller business of Greatbatch, the materiality of that on the overall Company is fairly small.

Okay. And then for Algovita sales in Europe so far, I wonder if you could kind of give us an approximation on how many units you've sold over there? Or any -- characterize kind of the launch so far to give us a handle on how we should be thinking about that.

I think the way you want to think about that, Charles, is we purposely launched in Europe as a opportunity to clinically assess the system in a controlled clinical environments to build our infrastructure and team capabilities. We have not done a large launch there. It's been primarily to test and perfect the Algovita system itself, which it has done. It's performed as we'd expected and we are very happy with it.

But for us, the prize is the PMA approval in the US and the US market launch, and the leveraging of that system in indications beyond spinal cord stimulation, which clearly will be done now post-spin by Nuvectra Corporation. So it's been a limited clinical launch in Europe on purpose, expressly to collect information to prepare for the US launch.

Okay. Fair enough. And my last question is on slide 21 of your presentation. I appreciate that you showed the chart here on the approximate time that -- when Craig-Hallum picked up coverage of your Company. Thank you for that. (laughter)

But the -- in all seriousness, my question is on the bullet point for margin expansion under Strategic Initiatives. Mike, I was wondering if you could kind of expand on that a little bit more. What are you going for when you think about strategic initiatives for margin expansion? You know, just in terms of size and so forth. I mean, is this -- any kind of help there you could give us would be great.

Well, I think there's a couple of drivers of our margin expansion that I'll start with first. There's one that -- you would note that in our other operating expenses this year, we are spending money to build out both our Mexico and France operations.

We know that we will have margin expansions compared to the yields and cost structure that we had when we were producing that in the US. So we believe that's going to be a driver. We had historically talked about $17 million of improvement that we will pick up once that -- those projects are completed on an annualized basis.

And as Tom indicated, they will come into the P&L based upon the pace that we can get approval for products with our customers in various regulatory agencies. So it's kind of hard to say how fast that will come in, but it will improve our operations there.

The second piece that will drive our margin expansion is just leveraging volume. As we pick up in portable medical and other business, orthopedics and neuromodulation volume, obviously that leverage is your overhead and will help improve your margins also.

We have said that we would like to consistently improve our return on invested capital. We've been improving that return on invested capital anywhere from 50 to 100 basis points annually. And we think we can sustain that type of improvement going forward over the next few years. And that's going to be a key measurement for us, is to make sure that the return on invested capital keeps improving.

Okay. That's very helpful, thank you.

Matt Mishan, KeyBanc.

Just a couple of quick follow-ups. First, any updates or thoughts on go-to-market strategy for Algovita, whether it be direct sales or through a commercialization partner?

No comments, Matt, other than that would be now the responsibility of the Nuvectra management team. And they'll -- very shortly here as part of the spin communications and roadshow, will be sharing their plans for that. But right now we are not sharing that information.

Okay. And then on -- I mean, you guys have made a lot of acquisitions over the last four or five years. You're also one of the few companies in the medical device industry that doesn't exclude acquisition-related amortization. Do you have a sense of what that number is, and what that would mean to EPS if you were to exclude that?

Off the top of my head, I don't know what that number is, Matt. But we will get it for you and share it with the team; we'll put it out on our site.

All right. Thank you, guys.

Thanks, Matt.

Thank you. This concludes today's question-and-answer session. I would like to turn the call back to Betsy Cowell for any closing remarks.

Thank you, Amanda. I would like to remind each of you that both the audio portion of the call and the visual slides will be archived on our website, www.Greatbatch.com, and also will be accessible for the next 30 days. Thanks, everyone, for joining us and have a great evening.

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