Integer Holdings Corp (ITGR) 2015 Q4 法說會逐字稿

Welcome everyone to the fourth-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 on 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 Business Development and Director of Investor Relations, Tony Borowicz.

Thank you Karen, and hello everyone and thank you for joining us today on our fourth-quarter 2015 earnings call. With us on the call today are Thomas J. Cook, our President and Chief Executive Officer; and Michael Dinkins, Executive Vice President and Chief Financial Officer. As we have done in the past, you can go to our website and see our slide visuals that will accompany the presentation.

Afterwards these will be on our website at www.Greatbatch.com for future viewing. Once Tom and Michael have completed their presentations, we will then open up the call for Q& A. Note that both Michael and I are available to take questions following the call. You can reach me on my mobile afterwards.

So let me turn the call over to Tom Hook.

Thank you, Tony.

Starting on slide 5, 2015 marks the completion of several key strategic milestones. At the top of the list was the completion of the transformative acquisition of Lake Region Medical. The acquisition is highly complementary, with few overlapping products between the company, and was strategic for many reasons. First, it expands our full medical device capabilities by expanding our product offerings in vascular and orthopedics. It also extends our reach into the advanced surgical market, with the portfolio of minimally invasive devices used in laparoscopic and drug delivery applications.

Second, the acquisition has significantly expanded our global manufacturing footprint. This increased scope and scale present a tremendous opportunity to leverage the expertise of both companies. Third, we have a much broader and diversified revenue base, which will provide a greater opportunity to extend our partnerships with our OEM customers. And fourth, the medical device market is growing approximately 4% annually, with many subsectors expanding at an accelerated pace. Our OEM customers have already minimized supply chain and regulatory risk by focusing their supplier base with higher quality partners. Additionally, clinical market pressure is driving OEMs to reduce costs, which drive outsource and demand.

The second major milestone was obtaining an original FDA PMA approval for our Algovita spinal cord stimulation device. This represents the culmination of seven years of dedicated effort by the QiG Group and Greatbatch teams. This active implanted medical device targets the 100 million people who suffer from severe and chronic pain.

We are proud to be one of the handful of companies in the world that is capable of developing complete active implantable medical device systems in-house. Obtaining PMA approval has enabled the spinoff of the technology into a stand-alone publicly traded company which will be called Nuvectra, trading on the NASDAQ exchange. I will talk more about the timing and merits of the proposed spin later in the presentation.

In addition to these two milestones, we have made several key strategic investments that significantly enhance our manufacturing capabilities performance. Most notably, we increased our manufacturing output at CCC Medical Devices in Uraguay fivefold during 2015, to cost effectively meet increased neurostimulation customer demand. It was a remarkable group effort and another example of what the company is capable of accomplishing.

We also expanded our manufacturing capacity in Tijuana, but most importantly, we sustained our culture of quality and continuous improvement. 2015 was a transformative year, and as a result, we are now a much stronger position to sustain long-term growth. On slide 6, and turning to Nuvectra spinoff, as previously discussed, we'll spinoff Nuvectra in March.

Nuvectra common stock will be distributed on March 14, 2016, to Greatbatch stockholders of record as of the close of business on March 7, 2016. Greatbatch shareholders will receive one share of Nuvectra common stock for every three shares of Greatbatch common stock. Nuvectra will begin the launch of their Investor Roadshow on Wednesday of this week in New York City, and will be in Boston on Thursday.

The following week, they're scheduled to have a series of investor meetings covering the Mid-Atlantic, Midwest, and West Coasts. After completion of the road show, Nuvectra is to begin normal trading on March 14, 201,6 on the NASDAQ stock exchange under the trading symbol NVTR. Nuvectra will provide many benefits to GB shareholders.

First, the dividend of Nuvectra shares to our Greatbatch shareholders. Second, reducing Integer's future operating expenses up to $16 million on an annual basis, and a long-term manufacturing agreement for the neurostimulation systems. Its important to reemphasize that we will continue to have full medical device capability resident inside Integer post-spin.

We will retain CCC Medical Devices in Uruguay, which will partner with OEM customers to develop full medical device systems. We plan to continue to expand our capabilities across the Integer organization to advance the strategy and drive long-term growth with the Company.

On slide 7, providing an acquisition synergy plan update. At the top of our priorities for 2016 is the successful integration of legacy Greatbatch and Lake Region Medical into one single, cohesive company which we will rename Integer. Our most important objective is to maintain a culture of quality and continuous improvement, motivating our associates to excel and partner with our customers to improve patient lives. A priority is to reduce the debt leverage ratio.

To that end, I am pleased to report integration is well underway, and we are exceeding our initial expectations. We have a clear line of sight to the $25 million in annual savings targeted for 2016, and our long-term goal of synergies of at least $60 million over the next three years. Our near-term savings are driven by organization staffing changes, the most of which have already been implemented.

The next tier of savings is in indirect spend, from the consolidation of our supplier base in order to leverage our purchasing value. Looking forward, we now have 30 plus manufacturing facilities across the globe. Our longer-term focus will be on optimizing this manufacturing footprint and implementing process improvements to leverage our combined expertise.

Overall, our primary focus will be to integrate our cultures and operations into a single integrated entity that maximizes opportunities we have to deepen our partnerships with customers, improve our operating results, and sustain a great work environment for our associates. The key to the success will rest with the new Integer leadership organization. We have a lighter structure to grow our medical device component sales.

Additionally, we will continue to rationalize our manufacturing facilities to drive our medical segment profitability. Each of the three product categories within our medical market have dedicated sales, marketing and research and development teams. Manufacturing and supply chains, quality and regulatory, and ethics and compliance will each operate as global functions across leveraged capabilities and harmonize systems across the company.

On slide 8, the new leadership team that will be responsible for executing our strategic plan will consist of a combination of a legacy Greatbatch and Lake Region Medical executives. Mauricio Arellano will continue to manage our global manufacturing operations. Mauricio successfully led a ten plant integration while at Greatbatch, and will assume the leadership role, along with Chris Ahlers for the lead integration of Lake Region Medical.

Joe Flanagan will lead Integer's quality and regulatory functions. Kristin Trecker is new to Integer. She will serve as our Executive Vice President Chief Human Resources Officer and will take the lead role in creating an integrated company culture.

Michael Spencer, also new to Integer, will lead the implementation of the unified ethics and compliance system across the company. Michael Dinkins will continue to serve as our Executive Vice President and Chief Financial Officer, and will focus on our objective of deleveraging the balance sheet as fast as possible.

We created four new president positions aligned around our four product categories. Each president will be responsible for driving revenue growth for their respective product categories. Two of the presidents, Tony Gonzalez with Cardiac Rhythm Management and Neuro, and Jennifer Bolt with Electrochem, were promoted into these positions. Both Tony and Jen have previously served key operational roles within Integer, and will bring a wealth of experience in driving revenue and profit improvement initiatives.

The remaining two presidents were former Lake Region Medical executives. Jeremy Friedman will have responsibility for the Cardio and Vascular product category, and Declan Smith will assume responsibility for the Orthopedics and Advanced Surgical products. Both Jeremy and Declan had similar positions at Lake Region Medical, and also bring him a wealth of market experience in developing deep partnerships with our customers.

On slide 9, in 2006 we launched the medical device strategy, and over the course of the next nine years we have transformed the company from a $320 million primarily cardiac rhythm management components company to a $1.4 billion fully integrated medical device company. We acquired 10 companies over this period, and successfully integrated these businesses into 1 unified company. With our proven track record of integrating organizations, I'm highly confident that this new Integer leadership team, along with our nearly 10,000 associates, have the drive and the skill set to advance our medical device strategy and create long-term value for our shareholders.

I will now turn the call over to Michael to cover our financial results.

Thank you, Tom, and good afternoon everyone.

My comments today will include our operating performance and balance sheet metrics. We are not providing guidance updates.

The January 11 guidance still stands, as of January 11. Before I begin, I want to take a moment to discuss our updated metrics. Beginning third quarter 2015, Greatbatch reported adjusted diluted earnings per share, excluding amortization of intangible assets.

This change aligns Greatbatch metrics with other medical device companies. Secondly, adjusted EBITDA has been refined to exclude stock-based compensation from this metric. A table on the earnings release outlines GAAP EPS and EBITDA to adjusted diluted EPS and adjusted EBITDA for both the quarter and total year.

Turning to slide 11, we have a summary of our fourth quarter revenue performance. The fourth quarter was a record quarter for legacy Greatbatch. We had organic revenue growth of 7%, primarily because of growth in our neuromodulation.

As you know, we began several years ago to focus on developing full medical devices for the neuromodulator market, where we had virtually no sales. We expect continued success because of the growth of the existing customers, and the prospects of the 15 customers that are in various stages of approval. Although we delivered a very strong quarter, we did miss our expectations primarily because of drivers that impacted our total year performance.

End-of-life products of our [stair end] customers, inventory reductions by the same customers, delays in new product introductions, changing customer market shares that negatively impacted sales, and although we did see some [by folus] of product of vascular and portable medical, in advance of the startup of production in Mexico, it was lower than expected. We added 7% organic growth quarter, and success with meeting the demands of the growing neuromodulation customers. We note that the drivers of the shortfall are not the product categories that we expect to lead our future growth: neuromodulation, cardiovascular, and orthopedics. Though we continue to be challenged with near-term growth, we are excited about our long-term revenue growth prospects.

Turning to slide 12, I want to highlight two things. First, we were able to leverage our neuromodulation revenue growth to the bottom line, as shown by the $0.29 upside from legacy Greatbatch gross profits. And second, Lake Region Medical is performing as planned, and their operations contribute $0.57 of upside. As expected, including the impact of the incremental interest expense and share count, Lake Region Medical was $0.08 diluted for the quarter.

Slide 13 shows our total year results. Sales decreased 2%, from a constant currency organic growth basis. Medical product sales increased by 1% on a constant currency organic basis, while our Electrochem sales declined by 27% year over year, due to the downturn in the energy market. This lower energy market demand, coupled with the headwinds we experienced with our [stair end] customers, were the main reasons for the decline compared to last year.

The other key item that jumps out is the $0.40 contribution because of lower performance compensation. Our compensation is tied to achieving our goals of 5% organic growth at 2X of the bottom line. And since we fell short of our goal -- our performance compensation work as planned and resulted in a lower payment.

As stated, when we looked at the fourth quarter slide, we are pleased with the performance of Lake Region Medical, and as Tom mentioned, the integration of our cultures and the achievement of synergy is going very well.

Slide 14 outlines key balance sheet metrics. We are very aware that the interest [carry of] Lake Region and a negative Greatbatch organic growth has taken our ROI below an acceptable level. And that is the reason why we are focused on realizing our synergy targets and using the cash flow to pay down debt, so we can improve our ROIC, while sustaining our R&D efforts to improve our future revenue performance. The decline in operating cash flow is driven by higher than other -- other operating expenses, primarily because of acquisition costs, integration efforts, and the expansion of our Mexico facility. CapEx expenditures of $46.6 million for 2015 reflects investments in our manufacturing facilities, principally in Mexico and France.

On slide 15, we secured $1.76 billion for the finance of Lake Region Medical. The [financial] structures are outlined on slide 15. We have clear line of sight to the committed acquisition of synergy and believe we are able to service our debt, and delever the Company to 3.5X to 3X over the next two to three years.

I will now turn the call back over to Tom Hook to introduce Integer.

Thank you, Mike.

In May of this year, we will formally change the name of the Company to Integer. The Integer name signals the transformation we have made in becoming the world's leading medical device outsource partner. It is only appropriate that we rebrand ourselves to reflect the single, unified, complete medical device system company we have become. On slide 17, we can see with our global presence and proprietary price offerings, we are positioned to deliver everything from critical components to full systems to enable both emerging and established OEM customers to succeed. Again, it is worth noting that we can enable both the emerging startup companies and well-established OEMs. The investments we have made in our quality systems, global supply chain, and proprietary product portfolio are difficult to replicate - it has clearly distanced ourselves from our competition.

Slide 18 highlights that Integer's revenue is diversified across the four product categories. Our largest product line is Cardio and Vascular, which comprises 39% of our total company sales.

Within this market we have strong growth areas such as Structural Heart and Urology. We estimate market growth in this category to be around 5%. The Advanced Surgical and Orthopedic market represents 29% of our total sales with marked growth at approximately 3% to 5%.

Cardiac Management and Neuro represents 28% of total sales, with the slower growth CRM market comprising approximately 20% of our total company sales. This year our market growth is flat, with Neuro demonstrating 6% to 8% growth. Our nonmedical Electrochem business rounds out the remaining 4% of sales. This market, as we all know, is down to 30% for the year is expected to remain flat in 2016.

Slide 19 - in summary, you can see we believe that we are now well-positioned to grow alongside of our customers. We have expanded our medical device capabilities, which will facilitate customer innovation. We have the scale and global presence, which is supported by our world-class manufacturing and quality standards. We remain true to our vision to enhance the lives of patients worldwide, by being our customers' partner of choice for innovative medical technology and services. To conclude, we are confident in our abilities as one of the largest outsourced medical device manufacturers. We will continue to create shareholder value by enhancing the lives of patients worldwide by being our customers' partner of choice for integrated medical device technology and services.

I will now turn the call back over to the moderator, and we will take questions and answers.

(Operator Instructions)

Our first question comes from the line of Charles Haff from Craig Hallum

Hi, thank you for taking my questions. My first question is on the guidance for 2016, did I hear you right, that you are suspending your guidance that you gave on January 11? Or what is that exactly?

No, we are not suspending our guidance on January 11. That guidance, as of January 11 still stands. We are not providing a new update guidance on this call, as we work through the process of integrating Lake Region and Greatbatch and our presidents have been in position for approximately one month.

So are you reiterating the guidance that you gave on January 11, then?

No the guidance on January 11 still stands, as of January 11.

Okay. I heard you say that you had 28 facilities -- I am sorry, 30 facilities, and then when you announced the deal with Lake Region on August 27, you said you had 28 combined facilities? So did you add two additional facilities?

Some of the facilities, as you know, Charles, are in transition right now due to some of the consolidation projects. So, we have, three facilities right now in a state of manufacturing wind-down, the Arvada facility, the Beaverton facility and pieces of the Plymouth facility. The number we gave today includes those, even though they are on the tail of winding down and overwhelmingly, those productions have transferred, they're still somewhat limited in production there, just to support customer regulatory changeovers.

For the various entities outside the United States, for inventory bills. So the two numbers are the same, just one includes the transition facilities and one does not.

Okay. My last question, and I will jump back in the queue here. For CRM Neuro, did I hear you right, saying that CRM -- you are expecting that to be flat?

Or it is currently flat? And Neuro is at 6% to 8%? I didn't catch the time period that you are referencing there when you said flat and 6% to 8%.

That would pertain to our view of Neuromodulation being 6% to 8%.

Market growth.

From a market growth perspective.

Then, our CRM view is that it will be flat.

For market growth?

For market growth.

Okay, thank you.

Our next question comes from Glenn Novarro from RBC Capital Markets.

Hi guys, this is George, on for Glenn. Thank you for taking my questions. I wanted to start with CRM -- I appreciate that you're not going to give out any segment-level guidance for 2016.

But qualitatively, can you help us understand what level growth we can expect from that business in 2016?

George, thank you for the question. I think, is where we are at right now on, try to go to management is -- from the historical perspective, we have all of our customers on long-term agreements and deep partnerships. However, as our end customers are adjusting their inventories, what they have, and the timing of new product introductions, has changed slightly.

Its had an effect on us, as well as some of the share shifts that have occurred. So, we are not really prepared to provide any additional color at this time, with regards to Cardiac Rhythm Management. But we absolutely understand, as we go forward, we finish our top customer meetings with each of those Cardiac Rhythm Management customers and will be updating you in the future.

But, right now we just do not have any new information to report, and don't have any segment detail to give you any more detailed guidance at this time.

Okay, thank you that is helpful. Now that you have closed this deal, and you have a bigger presence in several growth businesses including Neurostem and some segments of Vascular, but you also have Electrochem, which is expected to continue to be a headwind in 2016, given on what is going on in the energy space at the moment. Can you discuss your strategy in that business this year?

What kind of level of growth can we expect there? Are you still seeing struggles in the end market?

Certainly Electrochem is in the market because it has -- a large majority of this business in the oil and gas market, is going to suffer from those headwinds. However, I would also say that it is a very good time for strategic repositioning in that market, to do more for our customers. So somewhat paradoxically, while the market is down, that flows through to us.

There's also at the same time, with our key oil and gas services customers who are looking for cost reduction strategies, we actually can do more for them. In other words, they can outsource more to us, so we can do more work. Then it presents these growth opportunities in the next couple of years.

We plan on leveraging those. I'm not prepared to provide any detailed guidance with regards to our outlook yet, because we are meeting with those customers. But for public information, that is disclosed from our customers in that segment, the oil and gas services companies, they are aggressively cutting costs and outsourcing right now.

And we feel that we are really nicely positioned in Electrochem to pick up that work. And obviously, we do not suffer from the regulatory headwinds of the medical device market, and being able to pick up that work, so it's much quicker to outsource it. We expect to have some ability to mitigate the market pressures that we have seen that have hit the Electrochem business on the top line, and reposition that for other growth opportunities, even though the market is down.

We will provide more information as the year goes on.

That is helpful. That is all for me, thank you.

The next question comes from the line of Matt Mishan from KeyBanc.

Hi good evening, and thank you for taking my questions.

Good evening.

Hi guys, I think people generally understand you are going through two major events with the integration of Lake Region and the spin of Nuvectra? My question for you on the guidance -- has anything changed for the better, or for the worse, since you've given guidance on January 11? Why should we have confidence in the January 11 guidance?

Matt, this is Tom Hook, thank you for the question. Where we stand as a business strategically, obviously, is we are becoming very highly focused as a medical device outsourcing partner for our customer. At the same time, we've combined the top two medical device outsourcing companies, combining product lines.

There is a lot to interface with our customers on, from a strategic and a project perspective. And many times we are taking portfolios in which we each made half of the portfolio for customers, and now we are entertaining doing larger subassemblies and complete devices for customers going forward.

So it opens up a lot of new opportunities. Strategically the deal is a big win. Actually spinning out Nuvectra provides much clearer focus, with regards to our customers, as it pertains to serving our customers' medical device needs and not commercializing medical devices into the market directly.

So we're going to partner through our customers. There is a lot of moving pieces with the spin, as well as the combination of these product lines. Everything we have seen in terms of our initial guidance for the year, is following through per our expectations.

And we still have a lot of work to do in terms of identifying each individual specific product line. And since the product category presidents are in place for only about a month; its still a large work in progress. And we will come back, once we have all of that digested, and we will provide updated information in the future.

So, as of the January guidance, we're staying with it. We will update it in the future, once we have completed more of the leadership integration and we've had all the top customer meetings, bracket all the opportunities and we will be able to provide more color at that time.

In regards to confidence in the guidance, we recognize that nothing we say is going to re-win our confidence. So we recommend that we have to execute if we want people to have confidence in our guidance going forward. So that will be our focus.

Okay, got it, that is helpful. Then, with the management team of Nuvectra are actually going on the road and talking to investors beginning on Wednesday -- can you maybe talk a little bit about the valuation you are expect for the spin?

I think in terms of the evaluation, we will let the market determine that. We are quite excited about the product that we are bringing, that they are bringing to the marketplace and they will be manufacturing for them. But there is a lot of different factors that come into how a startup company will be valued and we will let the markets speak on that.

But we are encouraged, and think that we are bringing a very great product to the marketplace, led by a leadership team that many of the leaders, including the president, brought AMF to the marketplace. And have experience in doing this before. A great leadership team, and what we think, and we're probably biased here, a great product.

Okay. Last question for me would be on free cash flow expectations for 2016. What should we expect in 2016 for your ability to generate cash and repay debt?

And then what would normalize -- what do you think would normalize free cash flow for this business? What you think it's going to look like?

The way that the working capital works for Lake Region is not materially different than it is for legacy Greatbatch. I am not surprised by that, because we are selling to the same customers. Although we are not providing guidance at this point in time, I think if you look at our historical run-rate for [podcast, flobat] is where I would be.

I would note that there's two things that would impact that, in terms of our free cash flow. So I think we would be in line with historical performance, minus the $75 million that we will be putting in initial capital for Nuvetra, minus roughly $50 million to $60 million that we will spend executing synergies that will drive future synergies for this business in 2016. So adjust with those two, and the historical rates, and I think you can get a feel for our cash flow.

We think we can enter 2017, if we execute all our synergies, way above our historical cash flows, and then will start paying down our debt at that time.

Okay, great, thank you very much, guys.

(Operator Instructions)

Next question comes from the line of Greg Chodaczek from CRT Capital.

Thank you. Tom, Michael talked about looking back at 2015, citing inventory reduction, delay in products, end-of-life, change in market share. I guess my first question is -- you have a long-term contract with most of your large OEM partners, did you see that coming?

Based on these long-term contracts and I know you cannot talk about what is exactly in the contracts, but can you help us understand those a little bit and how this crept up on you in 2015?

I think, Greg, one thing I can help is the big strategic transition here. We bet heavily, seven or eight years ago, on neurostimulation. We've obviously, seen the maturation [part of] where the management markets, as it applies to legacy Greatbatch, coming. We made investments to enter into higher growth areas. We are starting to see that neurostimulation market emerge. It has come slower than we'd wanted.

We have seen some of the effects of the flattening of the Cardiac Rhythm Management markets from our perspective. Products on a clinical basis are more commodotized and less technically differentiated. Our customers are very focused on cost. We're in deep partnerships with all five of them. But as we cross-rationalize components out, as they are tighter on inventory, paradoxically, because we are performing for them it puts a lot of pressure on our revenues and its not being replaced by neurostimulation opportunities at the same rate.

So it presents a bit of a delta in this. Some of these things we have seen, some of them that are just marketable share shifts in the clinical market, because we have richer mixes with certain customers that also affect us. So some of these effects we can see.

Some of the effects we have seen for years, coming. And, neurostimulation investments we've made have mitigated a very large percentage of them. And these products -- this market analysis we have done, took years for us to do and execute again.

So, I think we are strategically very well-positioned for the realities of the Cardiac Rhythm Management markets and also some of the pressures that will come forward; and I think we have invested correctly in neuromodulation. They add on a whole other level to this which is now that we have both a combined portfolio of technologies between both Lake Region Medical and Greatbatch, we can serve both of those markets more apprehensively and drive more productivity for our customers.

So we're actually, not only in a better position in regards to neuromodulation, but also Cardiac Rhythm Management. We still think Cardiac Rhythm Management is very cost-focused across, all the way from clinical all the way down to medical device outsourcer. So we feel it could be very challenging growing that segment.

And we feel that in neuromodulation, because of the innovation and the systems strategy, and now the combination of our product portfolios with Lake Region and Greatbatch that, that is going to be the growth driver for that product category for us. Very similar technologies, in terms of the underlying components and subsystems -- inflammable false generators -- bead wires. We just think we can attack it more comprehensively, so we try to hold our position in Cardiac Rhythm Management with our five partners and our long-term agreements. Even though they're going to be very cost rationalization focused, and we're going to maximize our opportunities, developing systems and ramping revenues and getting them and neuromodulation customers through their regulatory windows, so we can enjoy the benefits of all the investments that we have made. It is kind of a very different tale between those two markets, even though we have them in the same product category, because they're the same technology.

Hopefully, Greg, that helps.

And it does, Tom, what I am hearing from you is for the CRM business, to use a baseball analogy, we're in the late innings here. Neurostem is very early on, and then a follow-up question is -- if I look at Cardiovascular and the Advanced Surgical Orthopedics and Portable -- where do you see those businesses? Somewhere in the middle of the two?

Before I come off Cardiac Rhythm Management, I am going to give you an X factor, here Greg, to think about. The miniaturization of Cardiac Rhythm Management devices as you know, from various products that have been in the process of launching both on the monitoring side as well as pacing and undoubtedly, will go to other areas; are a really -- some breakthrough innovations that could significantly change how Cardiac Rhythm Management therapies and monitoring, deliver diagnostics are delivered. That presents opportunities akin to neuromodulation that are really some breakthrough innovations that could potentially change the demand for technologies and also the prospects for us.

That would reinvigorate some of the Cardiac Rhythm Management product line going forward. Now, being a bit of a pessimist, we're not planning on those things. We see that there is a lot of very innovative work that we are involved in, in those areas.

But we're not counting on it for the future. We could expect that could get positive influence, but due to the size of that market and obviously, a very mature market in the late innings. Innovation at that level, especially miniaturization is very exciting.

But due to the magnitude of that market relative to the neuromodulation, its hard to make the deal move at high rates. Where I see areas like vascular, cardiovascular business, is I see an enormous opportunity for medical device outsourcing from those market areas. Clearly Lake Region Medical was very well positioned in those market areas.

Traditionally, legacy Greatbatch was an extremely small player of only a couple of product lines. So the combination of those product lines, along with the legacy Lake Region product line, gives us a commanding product offering to attack a very mature markets, like interventional cardiology. But also growing markets in structural heart, where we can end up picking up a lot of medical device outsourcing business with our customers, not only at the component level, but at the integrated medical device level.

So there, we see, while we're a much bigger company with full product capabilities from components to devices, we see that the opportunity to partner with customers in mature markets as well as high-growth markets -- is the ceiling, the ceiling is very high with a lot of room to grow. I saw a similar scenario with Orthopedics, while we do not have full device capabilities in Orthopedics, we have a lot of growth opportunities with customers, with the combined portfolio.

Its about even between the legacy Greatbatch and legacy Lake Region, and putting our portfolios together. And we had some key enabling technology that can move us up the food chain in Orthopedics. So there we are not evolved integrated methodologies with our customers yet.

We have to do that over time. But again, it is an opportunity in Orthopedics to really -- it doesn't really have any limits, like it does in Cardiac Rhythm Management. We already have all the CRM customers on contracts. We do a lot for them already and there is less opportunity to grow. I also think that health of the orthopedics business, given innovation and the trend in outsourcing, driven by the combination of a lot of OEM companies is going to continue to drive growth in medical device outsourcing business, which helps us.

One quick follow-up Tom, In terms of synergistic revenue opportunities, how long do you think that takes? I know this is a month into it but how long do you think it takes to actually gain some of those?

We originally will provided information on the deal (inaudible) and action. That is probably being a bit conservative, so we are actively very engaged with customers right now. But because of the nature of having to qualify, get regulatory approval, those revenue synergies will tend to come out in year three and beyond.

We see a host of opportunities to do that, it's just that kind of a 12- and 24-month regulatory cycle is kind of the headwind. We know the demand is there for it, we just have to get the -- it somewhat does not even require technical development. It just requires legacy Greatbatch and legacy Lake Region to put the product line together into subassemblies, and sometimes devices, and go through regulatory journey with the customers and get the individual facilities approved.

So we have pushed those revenue synergies out, past year three, for conservativeness. But we see a host of opportunities in most of the product categories with regards to this. I'd even include Electrochem in there, which was the first question that came from Charles, I see the opportunity to do that in the nonmedical business as well.

Thank you, the next question from Jim Sidoti from Sidoti & Company.

Good afternoon, can you hear me?

We can Jim.

Great, I joined the call a little late. Did you give a pro-forma operating margin for the quarter?

Pro-forma operating margins, for the first --

For the fourth quarter.

No I did not, but I can get that for you.

How about a pro-forma tax rate?

Again, we have not given out fourth quarter pro-forma data yet, but we can get that for you.

Okay, great. Can you tell me, I understand you are a little hesitant to update the guidance at this point because you have a lot going on. But just on a more general basis, I know your leverage ratio is up over five times now?

How many years do you think it will take to get it down to less than three?

We are targeting that sometime during the second, third year, that we can get it back to that type of rate. We will not see a lot of progress in 2016, because of the dividend of capital into Nuvectra. And we spent to implement the synergies, but then because we have implemented those synergies, and obviously without Nuvectra next year, that will be the focus to delever the balance sheet as fast as possible.

Said you think you will get there by 2018?

We didn't put a precise year on it, but we're going to get there as fast as possible.

Okay, thank you.

Thank you and that concludes our question-and-answer session for today. I would like to turn the call back over to Tony Borowicz for any closing remarks.

Thank you, Karen. Again, I would like to remind everybody that you can access the audio portion of this call, and the slides on our website at www.Greatbatch.com. It will be there for the next 30 days.

Thank you all for joining the call today.

Thank you for your participation, that concludes today's conference call. You may now disconnect.