Integer Holdings Corp (ITGR) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Integer Holdings Corporation third-quarter earnings conference call. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to turn today's conference over to Amy Wakeham, Vice President, Investor Relations. Please go ahead.

Thank you. Good afternoon, everyone. Thanks for joining us, and welcome to Integer's third-quarter 2016 conference call. This call is being webcast live, and together with our earnings release and conference call presentation, are available on the Investor Relations section of our corporate website. The results and data we discuss today reflect the consolidated results of Integer for the periods indicated.

I would like to take this opportunity to let you know that beginning with our next quarterly earnings, the Company will be aligning the timing of its earnings release and conference call more closely to its SEC filings. As we evolve our business processes and procedures, we are making changes to incorporate best practices and reduce risks by shortening the gap between these two events.

During our call, we will discuss certain non-GAAP measures. For a reconciliation to the most directly comparable GAAP measures, please see the appendix of today's presentation and the notes to the financial statements in today's earnings release. As a reminder, statements about expected future events and financial results are forward-looking, and subject to risks and uncertainties. Our actual results may differ. Please refer to the risk factors detailed in our SEC filings for further discussion.

For anyone listening to a taped or webcast replay, or reviewing a written transcript of this conference call, please note that all information presented is current only as of today's date, October 27, 2016. The Company disclaims any duty or obligation to update any forward-looking information, whether as a result of new information, future events, or otherwise.

On the call today to discuss our quarterly results, update you on our business outlook and strategic initiatives are Thomas J. Hook, President and Chief Executive Officer; and Michael Dinkins, Executive Vice President and Chief Financial Officer. Following our prepared remarks, the call operator will come back on the line for Q&A.

I would now like to turn the call over to Tom.

Thanks, Amy. Welcome, and thank you all for joining us this afternoon. On today's call, we will review our third-quarter results, provide an update on our product lines, progress on integration, and discuss our long-term strategic growth initiatives. Integer is a company that is well positioned within the medical technology market, and it is up to us to capitalize on the opportunities in front of us.

A year ago today, we completed the transformative combination of Greatbatch and Lake Region Medical, a transaction that strategically positioned Integer to be a global leader in medical device outsource manufacturing. We now offer a broad suite of technologies across the entire spectrum, from discrete products to complete implantable medical device systems. Our comprehensive capabilities and broad product offering allows us to deepen our customer relationships and explore new ways to partner together, both with existing and new customers.

We believe there is a significant opportunity to expand and grow our business. Today, a relatively low percentage of medical device manufacturing is outsourced, and the market is highly fragmented. Our competencies in manufacturing, core technologies, quality control, and operational excellence will allow our customers to leverage significant benefits provided by Integer.

As we review our third-quarter results, let me acknowledge up front that we clearly have work to do in order to further stabilize our business and bring us back to predictable revenue growth. As we have discussed in prior quarters, our business has been impacted by headwinds resulting from declining cardiac rhythm management revenues driven by customer changing programs and maturing market conditions, and also the downturn of the energy market. As we work closely with our customers and deepen those relationships, we feel we have established a better line of sight to our customers' programs, demand plans, and growth objectives, which will help us better manage our business and product line forecasts. We are laser-focused internally on improving our operational processes to further support our long-term growth initiatives.

We are seeing improvements. Revenue is beginning to stabilize across our product lines and there are indications that the energy market has bottomed out and is poised for a slow recovery sometime in 2017. Operationally, we are making satisfactory progress. The Company-wide cost reduction programs we implemented last quarter are generating results, and we remain focused on aggressively improving our working capital. Our effort to reduce inventory levels is advancing, and we expect we will see continued progress in future quarters.

Additionally, we have successfully extended payment terms with many key supply chain partners. From a financial perspective, revenue is essentially flat year-over-year and on a sequential quarterly basis; good progress from the declines we saw during the first half of the year. We are seeing incremental quarterly improvements in our gross margin, and our total operating costs are declining, further demonstrating the success of our cost reduction efforts.

I would like to now turn the call over to Michael to discuss our third-quarter results in more detail, and our outlook for the remainder of the year. I will be back later to discuss our product line results and our strategic growth initiatives.

Michael?

Thanks, Tom, and good afternoon, everyone. I'm going to take you through our financial results, balance sheet metrics, and a discussion of our updated full-year guidance. As you heard from Tom, we have made progress both operationally and financially to stabilize our business, and this is reflected in our third-quarter results.

Sales in the third quarter of 2016 were essentially flat, at $347 million, compared with $348 million in the prior year and in the second quarter of 2016. This is a significant improvement compared to the year-over-year and quarter-over-quarter declines we saw during the first half of the year. Foreign currency exchange rates did not materially impact sales in comparison to the prior year and third quarter. Gross margin of 28.3% remained steady, as well, comparing flat to prior year, and a 70 basis point improvement compared to 27.6% in the second quarter of 2016.

Our efforts to reduce costs, drive integration synergies, and focus on operating efficiencies are generating results. Operating expenses as a percentage of sales are down 360 basis points from the prior-year quarter to 17.6%, and down 160 basis points from the last quarter.

Taking a closer look at sales, the chart on slide 8 provides a quarterly view of sales on a comparable basis over the past seven quarters. Several of our year-over-year, quarter-over-quarter, and year-to-date product line comparisons have improved from the second quarter of 2016, reflecting the enhanced customer relationships, waning impact of discrete customer programs, and improvements in overall marketing conditions. Tom will discuss our product lines in more detail later in the call.

We are focused on improving our adjusted EBITDA because it provides us benefits in generating cash to pay down debt and meet our loan compliance requirements. Our approach to improving performance is to concentrate on quality metrics that improve customer satisfaction, reduce costs, and assist in expanding our share of wallet with our customers. We achieve this through a culture of continuous improvement and attention to details.

We are faced with continued pricing pressure, and estimate that our prices are down approximately 1% to 2% for the quarter and year to date, which drives the need to focus on quality as a driver of margin expansion. We believe that superior quality is a differentiator in the market that will lead to volume increases and efficiency.

Cash flow provided by operating activities for the third quarter of 2016 were approximately $38 million, and capital expenditures were approximately $17 million. Cash flow from operations during the third quarter of 2016 were negatively impacted by approximately $13 million of consolidation, IP-related litigation, acquisitions, integration and spinoff-related expenses, which are predominantly cash expenditures; and $18 million of interest payments on debt. During the third quarter 2016, we repaid $12 million of our outstanding debt, and our cash balances increased $8 million. Year-to-date, we have repaid $29 million of our debt.

We are implementing several initiatives to continue to improve cash flow. First, we are targeting continued reduction in our inventory levels, not only for the balance of 2016, but for the 2017 budget, as a means to generate cash and continue to pay down debt. Second, our supply chain team continues to rationalize the number of vendors we do business with to drive synergies and extend payment terms. In addition, we are looking at reducing our capital expenditures and integration expenses as we approach the tail end of our integration efforts.

Let's now turn to a discussion of our outlook for the remainder of the year. Our ongoing efforts to collaborate more closely with our customers has improved our understanding of future revenue projections. And we are reconfirming the full-year revenue guidance range of $1.375 billion to $1.395 billion that we updated last quarter.

We are also reconfirming our full-year adjusted net income and adjusted diluted EPS guidance. We have updated our full-year 2016 adjusted EBITDA guidance to be within the range of $285 million to $295 million, a decrease of $10 million at the midpoint of guidance. This decrease is driven by changes in the estimates that bridge us from GAAP results to adjusted results, primarily income taxes and depreciation and amortization.

With respect to the financial covenants associated with our indebtedness, we remain in compliance with both our net leverage ratio and our interest coverage ratio as of the third quarter of 2016. As we look to the end of the year, our current outlook for both revenue and adjusted EBITDA allows us to remain well within the net leverage ratio requirement. Based upon our updated range for adjusted EBITDA for 2016, there is a potential that we may not be able to meet our minimum interest coverage ratio in the future. We are actively monitoring our financial covenant compliance and are taking steps to identify opportunities for improving our financial performance so that we will remain in compliance.

However, in order to reduce our risks, we are working with the administrative agent under our credit facility to obtain an amendment or waiver of the financial covenants before year-end. Please see the appendix of this presentation for information regarding how to calculate our financial covenants, and more information on our bank facility.

I will now turn the call back to Tom Hook.

Thanks, Michael. I would now like to do a quick review of each of our product lines. Starting with our advanced surgical and orthopedics product line, which includes portable medical, we have made significant progress advancing our wireless power initiative with active programs and engagement from our strategic customers. Overall, advanced surgical and orthopedic's product line revenues remain a solid contributor to our overall results, even as delayed shipments and changes in the timing of new product launches have decreased customer demand throughout the year [to quarter], driving a slight decline in product line revenues both year-over-year and quarter-over-quarter.

Our operational performance remains steady, and we continue to see improvements in our customer relationships, and continued high levels of collaboration with our top customers. We have multiple continuous improvement initiatives in place across our operations, and early indications are showing positive results in key performance indicators.

As we look to 2017, we see slight revenue growth opportunities, driven by new product launches and acceleration in targeted areas. We will share more details on future calls.

Revenues in our cardio and vascular product line remained steady, increasing about 1% year-over-year and 3% quarter-over-quarter. Our operational performance is trending positively, backed by strong customer relationships. We anticipate that a previously delayed key customer program will commence commercialization late in the fourth quarter, and will ramp throughout 2017.

As we look to the future, we have many opportunities to win new programs and drive revenue growth. We are focused on further enhancing and deepening our customer relationships so that we remain the partner of choice as our customers evaluate new product development and manufacturing opportunities.

Turning to the cardiac rhythm management and neuromodulation product line, I believe that the challenges we faced during the first half of the year are behind us. Our revenue base is stabilizing, and we have visibility to revenue growth opportunities as we expand and deepen relationships with our customers.

As we focus on long-term business development, we are also seeking to accelerate our short- and mid-term revenue opportunities. We recently won several new product development and manufacturing programs with leading medical device manufacturers, and we have identified additional targets that could provide even further revenue growth. We are also actively seeking several customer contract extensions, and recently signed five-year and 10-year extensions with two of our key customers.

With the combined capabilities of Integer, we are able to decrease the total cost of ownership for our customers and enable broader discussions to drive new business opportunities. We are in various stages on the path to future commercialization with several emerging companies, and are very excited about the future opportunities to grow our product line revenues even more. With these significant opportunities in front of us, we are driving operational excellence and continuing to shape a customer-centric culture within Integer. We look forward to sharing in future quarters as we make progress in these areas.

Before I move to our next product line, I would like to address a recent concern in the marketplace regarding the potential for premature battery depletion due to short circuits induced by lithium deposits in high-rate lithium batteries. We supply lithium-based batteries to a wide range of medical device companies. We manufacture and test our batteries to precise specifications provided by our customers to support their FDA approval process and end-use application.

We have received no indication that there have been any failures associated with the phenomenon of lithium deposits due to a battery not meeting its customer-provided design specifications. To deliver the best quality possible, we provide our customers with ongoing support and extensive technical information on the phenomenon of lithium deposits. We will continue to work closely with our customers' engineers to advance future battery and device designs and enhancements.

Our Electrochem product line [rep] continues to trend with the oil and gas market. Although we have seen revenue declines throughout the year, primarily driven by the prolonged downturn in the energy market, our customers are indicating they believe the market has bottomed out, and there are signs of a slow recovery. This belief is further supported by the positive recent quarterly results of a large oilfield services company. However, many companies are still struggling to stabilize their business, and we do not expect to see revenue improvements until sometime in mid-2017, at the earliest. Electrochem volumes with our military and environmental customers do remain as we expected, and in line with internal forecasts.

Despite the headwinds in the market, we have maintained and even grown our market share within this space. We have a very strong and positive customer relationships across all market segments we serve, which has been facilitated by our strong operational and quality performance. As the market has contracted, we have been able to advance our competitive position with key strategic customers, resulting in multi-year supply agreements and the opportunity to quote on significant new business opportunities.

We are also not standing still. While we hope to see recovery in the energy segment, we see a great opportunity to further grow our market share and better position ourselves for future revenue growth when the oil and gas market does turn around. We are the leader in providing energy solutions for critical applications. And we are actively pursuing new customer and market opportunities, developing new product solutions and investing in R&D to advance our technology. As we manage the Electrochem product line through this challenging revenue period, we are rationalizing our cost structure and maintaining inventory at appropriate levels to improve our return on invested capital.

I would now like to review our high-level strategic objectives as we look towards the future and deliver on our vision to enhance the lives of patients worldwide by being our customers' partner of choice for innovative medical technologies and services.

First, we will invest to drive growth with our customers across the full spectrum of our product and system capabilities. Second, we will deliver shareholder returns through growth and profitability and cash generation to drive accelerated repayment of our debt obligations. Finally, we will continue to cultivate an ethical, value-driven culture that optimizes the commitment and contribution of our exceptional associate team.

We've talked a lot about improving and enhancing customer relationships. And as you have heard throughout the call, we are making good progress here. Longer-term, we have a funnel of development programs underway across all of our product lines. These programs, which take 3 to 4 years to fully develop and obtain FDA approval, are examples of how our expanded research and development capabilities will drive growth over the longer term. We will continue to invest in R&D to drive robust product pipelines of future growth opportunities.

Our integration efforts continue to go very well, and we remain on track to exceed our original 2016 net synergies target of $25 million. We now expect to realize net synergy savings between $30 million and $35 million for the year. Our productivity initiatives and efforts to reduce direct and indirect spend, primarily through supplier negotiations and vendor consolidation, are generating the desired results. Upcoming critical milestones, including the consolidation of our IP systems, a comprehensive integration of associate benefit plans, and process optimization within our sales and operating planning processes, all remain on schedule and will further support our ability to successfully integrate our Company.

We seek to create an optimized manufacturing footprint, leveraging our increased scale and product capabilities while also supporting the needs of our customers. Our efforts will include potential manufacturing consolidation, continuous improvement, productivity initiatives, direct material and indirect expense savings opportunities, and the establishment of centers of excellence around the world.

We announced the first step of our manufacturing optimization efforts with the closure and transfer of our Clarence, New York, facility. We will be transferring these machine component product lines to other integer locations in the United States. The project is expected to take 12 to 18 months, and will generate estimated annual synergies of about $4 million starting in 2018.

Let me conclude by reiterating what I said at the beginning of the call. Integer is a company that is well positioned within the medical technology market. And it is up to us to capitalize on the opportunities in front of us. We have expanded our medical device capabilities, and are excited about the opportunities to partner with our customers to drive innovation. We have the scale and global presence, supported by world-class manufacturing and quality capabilities.

We are confident in our abilities as one of the largest outsource medical device manufacturers, with a long history of successfully integrating companies, driving costs down, and growing revenues over the longer term. We will continue to create shareholder value by enhancing the lives of patients worldwide by being our customers' partner of choice for innovative medical technologies and services.

Operator, we will now turn to the question-and-answer portion of the call.

(Operator Instructions). Matt Mishan, KeyBanc.

Mike, could you give us a little bit more color around the change in adjusted EBITDA, and exactly what were the moving pieces of that $10 million?

The moving pieces of the $10 million -- as we bridge from the GAAP EBITDA that we have calculated to the adjusted EBITDA, and updated our estimates, we made changes in terms of the income taxes and depreciation and amortization. Roughly about $6 million of it is associated with the depreciation and amortization, as we reconciled that and updated our estimate; and the balance of it is how we have to recognize for adjusted, based on our income taxes. We continue to believe that our cash taxes for the year will be in the $8 million to $10 million range. In fact, we think we will be a little bit closer to the $8 million range. So that tax change really did not impact our expectation in terms of how much cash we will pay.

I think I'm going to have to follow-up with you off-line on that one. All right. I kind of understand the issues with the cardiac rhythm management and Electrochem. I think those were pretty well explained. I'm not fully sure why some of the other segments, the other two segments, are flat to down, given the robustness of the end markets. Could you put a little bit more color around why orthopedic, advanced surgical, portable medical is down, and why cardio and vascular is relatively flat this year?

Well, I'll start with our advanced surgical and portable medical product line, Matt. As you know, we have been actively moving this product line from our Beaverton, Oregon, operations down to our operations in Tijuana at Integer. To accomplish that change, we had to do a ramp and last-time manufacturing in our Beaverton operations, and did make available those last-time purchases from that location. That flattened out our revenue opportunities in 2016 until we had our Mexican facility in Tijuana online to be able to ship portable medical products.

So as we look at the product lines for advanced surgical and portable medical, in combination, it's suffering from having some of those product shipments being lighter in 2016 than they were in the 2015 time frame. Our expectation is, as the facility that's brand-new down in Tijuana is fully qualified, which will happen between now and the end of 2016, that 2017 will be a year that's returning back to normal in growth; and that, hence, will then help that product line, in totality, show a more normal revenue trajectory.

The second point that you'd pick up from advanced surgical and orthopedics is variable -- is both advanced surgical and orthopedics are a product line that's prone to launch-driven revenue. We did not have many launches for advanced surgical or orthopedics in 2016. We've won several product and project wins with key customers for 2017. We expect launches to be more of a driver for growth next year.

The final and third variable would be the constant price pressure that -- this is a very competitive space; in particular, orthopedics, medical device outsource manufacturing. So we've seen a lot of price pressure in this space. We have seen some other medical device outsource manufacturers being sold to new buyers in this space, so it's a changing landscape. But the pricing pressure in this market is still very high. And it's a very competitive marketplace. So that's a third variable that is a constant. And it did hurt our ability to grow in 2016, and we expect that to be a variable going forward, as well.

And the cardio and vascular?

Cardio and vascular is -- the cardio and vascular segment is traditionally a low-single-digit grower from a medical device outsourcing perspective. It has a very small effect in that we are finishing up our transition from our Plymouth, Minnesota, facility to -- also down to Mexico operation for manufacturing. That has largely been completed, as well as our facility in Arvada, Colorado, being transitioned to our Juarez, Mexico, facility. Those moves have taken place throughout 2016. There has been some shipments of that product throughout 2016. But in the production -- in the new facilities that's just coming online it has stunted growth somewhat. So the moves of both our Arvada and Plymouth facility is that first variable in cardio and vascular.

The second variable is really regarding a major product launch that we had won at Integer years ago that has already completed development, and is just waiting on launching from a customer. That program that was set to launch at the beginning of the year was delayed progressively to the end of the year. However, we have received the green light to commence manufacturing ramp for commercialization, and will be, late in the fourth quarter. So that has been a revenue drag for us in the cardiovascular product line all year because the facility has been built; it's qualified. The production team is on board and waiting to build product. But we are unable to start because the customer's regulatory process has not been completed. So that's the second variable.

The third variable is also price in the cardio and vascular segment. It has traditionally been a variable that we fight across that product line. It's not any higher than has been normally. But it's still -- as a medical device outsourcer, it is a barrier to revenue growth that we have to overcome.

Okay, great. That's very insightful. And then just last question for me, and maybe a multi-part question, but around your net debt level. Are you confident, given all the moving pieces, that the net debt has peaked and should be moving lower sequentially now from here? And then also, are there any asset sales that you could pursue that would help you de-lever more quickly?

Yes. We are reasonably confident that from here, our net debt should go down sequentially. Every quarter, we are a positive cash flower. Plus there are some scheduled payments which we are well positioned to make throughout 2017 to bring that debt down. And then as we set our targets for working capital, particularly focusing on inventory reductions, we are hoping that we can make some significant reductions. We will update that in the early part of 2017 when we come out with our guidance on 2017. But you should see our net debt continue to go down.

And what was the second part of your question?

Are there any asset sales that could help you de-lever more quickly?

We are exploring all opportunities, including asset sales. We have some investments on our balance sheet and other things that we can look at. So they are being looked at, as we speak.

All right. Thank you very much, guys.

Jim Sidoti, Sidoti & Company.

Can you just give us some sense on the timeline for the integration for Lake Region -- how many more quarters you think it will take?

Yes, Jim. This is Tom Hook. We are targeting to complete our integration program, the formality of the program, in mid-2017, in its totality. Any tailing activities or programs would be picked up by individual operating managers in functional areas to continue their implementation.

For example, our IP plans and strategies have been laid out across all of Integer. We are actively in implementation of these systems already, and we will continue to do so. And the majority of them will get implemented in 2017. So we feel that once that plan is out and running in deployment mode, the functional leaders and the Chief Information Officer can take leadership for that and fully implement it, after we close integration, mid-2017. So our objective is to have it completed by the second quarter of 2017 and allow the tails of any programs to run out from there.

One portion of integration that's a very long-standing operating mechanism we have used at Integer is plant consolidations and productivity improvements. We've used some portion of that as part of integration. But, largely, that will stretch well beyond the formal integration closure, mid-next year. And we'll proceed via each project that would be running that's applicable for whatever period of time that it pertains to. So we view that it will be fully integrated across the franchise within the next nine months.

All right. And now that we are three months down the road, do you have any further insight on the acquisition, or proposed acquisition, of St. Jude, and how that will impact your business?

I don't have any more insights other than what is publicly available; but St. Jude is a major customer of ours. We do also have -- Abbott is a customer of Integer's, but not as large. We do view that there's tremendous opportunities for the combination of those companies. And we are very excited at Integer to be able to continue to drive our existing business; but, more importantly, expand our business with the combination of Abbott and St. Jude.

We find that we are extremely well positioned to help them drive across their product continuum, and drive a lot of value as they are integrating their company and looking for synergies. So we view that as a potential future catalyst. We are not counting on it, but we are positioning ourselves to take advantage of it. And we have very strong and healthy relationships with both Abbott and St. Jude. And we look forward to working with the management team that runs the company, going forward in the future.

And then in general terms, do you think you have hit the bottom now in terms of the sales declines in the CRM and the Electrochem businesses? Do you think you will start to move up, starting in the fourth quarter? Or do you think you still could have some ups and downs over the next few quarters?

Jim, there's two sides to your question. First of all, I think we've absorbed all of the bad impacts that we have had to -- on customer programs, end-of-lifes, and inventory rationalization or market declines. So Electrochem, the inventory from our customers has been pinched out of the system and the market has stabilized. In cardiac rhythm management, we have already bled off the end-of-life products out of our revenue stream. I see both Electrochem and cardiac rhythm management product lines to be slow growers in 2017; so low single digits, as the markets for us have recovered in energy, and our customer programs start to reach commercialization.

As you know, in cardiac rhythm management and neuromodulation product line, the big growth driver for us is neuromodulation. We have deep relationships with the neuromodulation companies, from a component level all the way to a complete medical device system level. And our expectations for those products is although they are on a much lower basis, they will be net growers in 2017. And while that won't make an inflection point in the growth for that product line in totality, it will be a positive variable that will continue to grow in importance as we get out over the next 3 to 5 years. So I believe we have, to your question, bottomed out both in Electrochem and in cardiac rhythm management. And our expectations are to drive growth in that, starting in the fourth quarter and out into the next year.

All right, thank you.

(Operator Instructions). Charles Haff, Craig-Hallum.

This is actually Johnny in for Charles. I just had a couple questions for you guys. Just getting back to the Electrochem, so I just want to make sure I heard this correctly. But you are thinking low- to single-digits in 2017, and then kind of flat sequentially?

Yes. So Electrochem -- there's two effects when the oil and gas market was in downturn. The first effect is that the overall demand is lower, John. And the second effect is that any inventory customers have, they reduce.

Okay.

So coming in the future, you would expect that as inventories have stabilized already, and demand -- because of the price of oil and oil services companies -- the demand is slowly increasing, we are going to be very tightly coupled with customers. We are not planning on any inventory build with customers in 2017. And there will just be a slow recovery over the course of the year.

Okay. And then just to touch on the synergies, you guys said that you are accelerating synergies to now $30 million to $35 million for 2016. Have you changed your outlook of hopefully above $60 million in 2018, or by 2018?

It's a great question. We definitely have accelerated synergies. We have not provided an updated outlook for synergies in 2018 or 2019. But as you know -- you are correct, John -- that we do, and have started, the manufacturing consolidation and continuous improvement activities within our manufacturing base. And while we are not updating that guidance for 2018 and 2019, we will in future calls be providing more guidance on that as we give more line of sight to what the broader strategy is. But for right now, we have enhanced strategies for 2016; and we will, with our guidance information for 2017, give updated information, at that time, on 2017 synergies and 2018.

Okay. I was just going to ask that. And one more question. You mentioned that part of your guys' cost-saving strategies is working on reducing your direct and indirect materials costs. And I was just curious if you -- how are you guys working on doing that, and if you could elaborate on that?

I'll start with indirect spend first. So we have -- both legacy companies had many contracts for service providers that would be anything from telecom to office supplies. Many of those contracts have a one-year period of time in which we have to wait for that contract to end for us to negotiate an Integer level with more savings embodied into the contract, due to the magnitude of our purchases. The same effect for direct materials also exists. We have current contracts that are reaching maturity. And they are being replaced by centrally negotiated, leveraging the broader manufacturing output the Company has in demand levels, and negotiating better prices in terms of their key supply chain partners.

So, while that effect has not been a large effect for our 2016 synergies, it is growing in importance as we bring the synergy level in 2017 up to a higher level. The direct material spend from renegotiating contracts that are reaching fruition, and indirect spend and more services type agreements are being negotiated to provide more productivity. So we still will have benefits from other areas to drive synergies, but the direct material and indirect spend are planned prominently in our 2017 synergy plans.

Okay, great. Thank you. That's all I have.

That is all the time we have for questions today. Thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone have a great day.