Integer Holdings Corp (ITGR) 2017 Q4 法說會逐字稿

Good afternoon. My name is Joey, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Integer Holdings Q4 2017 Earnings Conference Call. (Operator Instructions) Thank you. Amy Wakeham, you may begin your conference.

Great. Thanks, Joey. Good afternoon, everyone. Thanks for joining us, and welcome to Integer's Fourth Quarter 2017 Conference Call. The call is being webcast live, and the replay along with the copy of the press release and earnings presentation will be 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.

During our call, we will discuss certain non-GAAP measures. For a reconciliation of these non-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, today's presentation includes forward-looking statements. Please refer to our SEC filings for a discussion of the risk factors that could cause our actual results to differ materially. Unless otherwise noted, our commentary today refers to our organic results, which adjusts for the impact of foreign exchange and any M&A activity during the relevant period.

On our call today to discuss our quarterly results, our 2018 business outlook and our refocused strategy are Joe Dziedzic, President and Chief Executive Officer; and Gary Haire, Executive Vice President and Chief Financial Officer. Following their prepared remarks, the call operator will come back on the line for Q&A.

I'd now like to turn the call over to Joe.

Thanks, Amy. Welcome, everyone, and thank you for joining to hear about our fourth quarter results. I am happy to share with you another quarter of continued improvement, in fact our highest sales and profit quarter since Integer was formed 2.5 years ago. But before we get into the results of the quarter, I want to start by thanking all of our Integer associates for delivering another quarter of strong top line and net income growth and continued strong cash flow. The teams and the manufacturing plants and everyone supporting them delivered not only strong fourth quarter results but a strong 2017 as well. The positive trajectory is clear. Thank you.

Now let's review our fourth quarter results. Our fourth quarter results demonstrate strong revenue growth of 8% and net income growth of 28%. We've continued to generate strong cash flow from operations and paid down $129 million of debt during 2017. Gary will take you through the financials, but I want to highlight that we finished the year above our original guidance on sales and at the high end on EPS. We understand our credibility with our customers is based on delivering on our commitments and it is no different with our investors.

Today, we introduced our new strategy to drive accelerated sales and profit growth. Late last year, we completed a comprehensive strategic review of all aspects of our business and developed our new strategy, which is focused on portfolio management and operational excellence. Within portfolio management, we organized our product lines into 3 groups, which are Invest to Grow, Protect & Preserve, and Improve Profitability. I'll cover our strategy in more detail later in the presentation.

Turning to Slide 6. Annual sales growth consistently improved throughout 2017, and we closed the year with organic growth of 5% for 2017, reflecting the progress we have made to change the trajectory of our sales back to growth. Every product line improved their trajectory, either going from a decline in 2016 to growth in 2017 or slowing the rate of decline. 2017 was an inflection point for Integer back to growth.

Gary will now provide more discussion regarding our financial results for the quarter and the full year.

Thanks, Joe, and good afternoon. I'm going to take you through our fourth quarter and full year 2017 financial results, and I will also take you through our 2018 full year outlook. Consistent with prior quarters, any reference to organic when we are referring to sales excludes the impact of foreign exchange and M&A activity. Any reference to organic as we talk about adjusted EBITDA, adjusted net income and adjusted EPS excludes the impact of foreign currency gains and losses that are reported in nonoperating other income or expense.

Turning to Slide 8. Here's a quick look at our results for the fourth quarter. Sales increased 7.6% organically, closing out the year with record sales in our fourth quarter. In the quarter, we saw growth accelerate in all of our Medical product lines and continued double-digit growth in our Electrochem business. Adjusted EBITDA increased 11% year-over-year. And during the quarter, we incurred just under $1 million of losses due to foreign exchange impacted by the continued strengthening of the euro versus the dollar. However, the impact is lower this quarter due to restructuring actions we took to reduce our exposure. Excluding this FX impact and taking into account the foreign exchange gain in last year's number, which was $3 million, adjusted EBITDA would have been up nearly 17% year-over-year. Our adjusted net income increased 28% organically when you exclude the impact of the FX losses I just mentioned. Adjusted EPS was $0.96 on a reported basis and includes $0.02 related to the FX. And also worth noting is that our EPS was impacted by about $0.04 from share dilution year-over-year for a total of about $0.06 from these 2 items. Overall, we had a really strong finish to the year with solid execution.

Now moving to Slide 9. You could see that fourth quarter adjusted EBITDA and adjusted net income and EPS all had double-digit growth year-over-year on an organic basis. Organically, adjusted EBITDA increased 17% year-over-year in the quarter. This can be attributed to our stronger sales volumes as well as improved gross margin, which is -- which was up a full percentage point versus last year. Organic growth was up 28% for adjusted net income and up 24% for adjusted EPS. This growth included unfavorable year-over-year impact of higher incentive compensation, which amounted to about $11 million versus last year's Q4. These higher costs were driven by our stronger performance as we finished the year.

On Slide 10, I want to summarize our full year 2017 results. Looking at sales, we had a strong year with 5.3% organic growth. This was led by the Electrochem business growing almost 37% as well as organic growth of 9% in Cardio & Vascular and almost 6% growth in AS&O. This was partially offset by the decline of about 2% in Cardiac & Neuro. Adjusted EBITDA was up 7% organically, which excludes the impact of FX year-over-year. Impacting adjusted EBITDA for the year was a headwind of approximately $14 million of bonus expense or nonstock incentive compensation given the improved performance versus the prior year and the company meeting its operating metrics. Adjusted net income was up 23% organically, which is driven by the improved operating performance, lower interest expense and a lower adjusted effective tax rate, which was about 20% in 2017 versus 23% in 2016.

Now looking at Slide 11. I want to compare our actual results versus our original guidance that was provided at the beginning of 2017. For sales, as we have discussed, we were well above our original guidance range, driven by stronger sales than we expected in both the Medical and Non-Medical business with the combination of better execution across the business and better-than-expected markets, specifically in Electrochem. For adjusted EPS, we are well within the -- we are within the range on a reported basis, but we're near the high end of the range when you exclude the impact of FX -- that FX had on us for the year.

Now turning to cash flow on Slide 12. I want to make a few comments around our 2017 cash flow, our debt, leverage as well as give you some thoughts on our 2018 outlook. As I mentioned before, we are committed to generating continued and sustainable operating cash flow as well as reducing leverage. We finished the year by generating $34 million of operating cash flow during the fourth quarter for a total of $149 million for the full year, and this translated into $103 million of free cash flow. Our strong cash flow allowed us to accelerate debt payment throughout the year, and we repaid $129 million of debt in 2017, consisting of $98 million in accelerated payments. In addition, we reduced our leverage from 6.1 to 5.6 during the year.

Now looking forward to 2018, we will continue to focus our -- on cash flow and reducing our leverage. We anticipate generating over $150 million of operating cash flow and over $100 million of free cash flow in 2018, and we will continue to reduce our leverage with an initial goal of getting below 5.0. With our strong cash flow generation and our efforts to effectively manage working capital, our near-term debt and interest payments remain very manageable. We will continue to monitor markets on a regular basis and evaluate additional opportunities as appropriate, particularly as we move into the back half of the year and look at our existing high-yield notes.

Now turning to Slide 18 (sic) [Slide 13]. I'd like to now discuss our full year outlook for 2018. We expect 2018 full year sales growth to be between 2% and 5% for the year. We believe our revenue outlook appropriately balances product line growth opportunities as well as market realities and our customer programs. For adjusted EBITDA, we're expecting a range of $305 million to $315 million, which will be a growth rate of approximately 7% to 10%. We expect 2018 full year adjusted earnings per share to be in the range of $3.15 to $3.45, an increase of 17% at the midpoint of the guidance.

In addition to this guidance, I also want to provide you with some additional information for 2018. We expect capital expenditures to be in the range of $50 million to $55 million for the year and depreciation and amortization to be in the range of $106 million to $108 million. Stock-based compensation is expected be in the range of $10 million to $12 million for the year. And for other operating expenses, we're expecting to spend approximately $10 million to $15 million, which is a significant reduction from prior years as the majority of our spending on acquisition integration activities is now behind us.

The 2018 adjusted effective tax rate is expected to be in a range of 20% to 25%, and cash tax payments are expected to be between $13 million and $15 million for the year. Now in regards to the tax rate, it is very important to note that we are still in the process of analyzing the implications of the new tax law. Given both the magnitude of the changes involved and that we expect further clarification with regard to the application of certain provisions of the legislation, we are providing a broader range than normal and we have assumed the current target in the middle of this range for our guidance.

Now I want to switch gears and I will cover our product line sales results, and then I will turn it back to Joe to cover our new strategy. First, turning to Advanced Surgical, Orthopedics & Portable Medical. Sales growth year-over-year was up 11% in the fourth quarter, driven by a continued tailwind from one customer accelerating its sales related to one of their initiatives, continued ramping up of new products as well as increased development work, which can be lumpy. We expect that we will see year-over-year sales growth continue into the first quarter, resulting from the completion of plant transfer activity as well as new product ramps. However, we anticipate an offsetting impact in 2018 from the one specific customer's inventory management, which we expect will lead to a more modest overall growth rate for the full year of 2018. Going forward, we believe the large and growing orthopedic and advanced surgical market provides us with significant opportunities to leverage our capabilities in implants, instruments and arthroscopy, in particular.

Turning to Slide 16. The Cardio & Vascular product line has been a significant driver of top line growth for us, and we once again saw strong year-over-year sales growth in the quarter, driven by continued strong demand for existing Integer-owned products and increasing demand from contract-manufactured products, particularly in the areas of vascular access and peripheral vascular. The rolling 4-quarter sales trajectory continues to remain strong, consistently staying in high single digits over the last few quarters, driven by the continued success of our Cardio & Vascular product offering in most markets. Market momentum remains strong, and we continue to have success with both large, well-established customers as well as emerging and fast-growth customers. We are focusing on the faster-growing high-value segments like structural heart, peripheral vascular and electrophysiology. In addition, we are innovating in areas such as developing faster prototyping turnaround capabilities with the goal of accelerating our customers' speed to market and overall success.

Looking at Slide 17. Sales in the fourth quarter for Cardiac & Neuromodulation stabilized during the quarter. For CRM, the market's remained flat. However, our customers experienced a nice return to growth in the quarter. In neuromodulation, sales remained strong, and these products and our customers continue to gain strength in the market. The rolling 4-quarter sales trend further reflects the stabilization we saw in the fourth quarter. We expect to return to growth in the first half of 2018 as midyear 2017 supply constraints have been resolved and customer activity continues to improve. The neuromodulation market remains a key driver of long-term growth for the product line. There are many opportunities for continued growth. As the market-leading medical device outsourcer, we are focused on accelerating neuromodulation sales through the active support of customers of all sizes and the design, development and manufacture of everything from components to full systems for customer applications. We continue to execute on our strategy in cardiac rhythm management and neuro, partnering with customers to provide full component design, development and manufacturing capability that enables success and support growth. We also believe our OEM partners and customers are seeking more comprehensive, value-added solutions and supply chain efficiencies, which Integer is well positioned to provide.

Now on Electrochem. Electrochem delivered another strong quarter of growth on a year-over-year basis, up 30% in the quarter, which translates into 37% for the year. The product line continued to benefit from a recovering energy market as well as share gains made during the downturn. Electrochem's outlook for 2018 is positive as the team executes on new business wins and continues to drive share growth and share gain initiatives. However, we do not expect the same level of high year-over-year growth rates as the energy markets have reached the point of stabilization.

I will now turn the call back to Joe.

Before we get into the specifics of our updated strategy, I want to provide a little background on the strategic review process we went through last year. Shortly after becoming interim CEO, I initiated a very structured, 3-step process to assess the strategy that was in place and determine our go-forward strategy. The 3 steps were very straightforward. The first step was an external assessment of the markets we serve. This included evaluations of the market size, growth rates, customers, competitors, technology trends, outsourcing trends and market share of the various participants. We developed an objective view of the markets we are competing in to determine what to expect from those markets.

The second step was internally focused on Integer. This step was designed to answer the simple question, what is our strategy and is it working? We've reviewed the results of our current strategy to understand our revenue growth rates versus the market, our profitability versus our competitors, our share of wallet with our customers, our technology position and many other success measures. The result of this review, combined with Step 1, shaped our new strategy.

So the final step produced what you see on Slide 20. The knowledge we gained and conclusions drawn from the external and internal assessments formed the basis of this strategy. The left-side groups are product lines into 3 categories: Invest to Grow, Protect & Preserve, and Improve Profitability. The importance of understanding these groupings is clear, what should we expect from the markets we're in given how we are positioned in them, which then leads to very product line specific strategies that enable us to win. The investor growth category includes Cardio & Vascular, Neuromodulation and Electrochem. These markets have inherent tailwinds and are expanding. Our customers are innovating to develop new treatments and procedures that grow these markets beyond the existing products. These are markets that should yield higher-growth rates, and we need to invest accordingly.

The Protect & Preserve category consists of cardiac rhythm management, which is in a low growth end of market. Our Greatbatch-branded product has been and continues to be a strong and well-positioned player in this space. We have and continued to innovate for the next generation of CRM products to enable our customers to improve patients' lives globally.

The Improve Profitability category contains businesses with potential -- with growth potential and includes Orthopedics, Advanced Surgical and Portable Medical. These are strong businesses with differentiated capability that serve our customers very effectively, and they have significant margin expansion potential.

We are confident the plans we have put in place will address this margin expansion opportunity, some of which have already been implemented. We have taken organizational actions that create increased senior executive focus. In November last year, we moved the Portable Medical business to Jennifer Bolt, our President of Electrochem. We did this to create additional senior executive focus for both Portable Medical and the Advanced Surgical and Orthopedic business. Jennifer has done an excellent job of managing the Electrochem business through a market cycle. And after about 3 years in her current role, she has grown to have the capacity for a larger leadership role. The Portable Medical team has already implemented both organization structure changes and headcount reductions that create greater accountability and profitability.

In Advanced Surgical and Orthopedics, we have revenue growth opportunities that we are executing on, which is evident in the 6% revenue growth delivered in 2017. We have already taken very specific actions within Advanced Surgical and Orthopedics to address underperforming investments and increased efficiencies. Additionally, Jeremy Friedman, our COO, will shift more of his focus to improving the profitability of the Advanced Surgical and Orthopedic business. I want to be clear: we are profitable and very competitive in Advanced Surgical, Orthopedic Portable Medical. We have strong growth prospects in both revenue and margin expansion opportunity. We are highlighting the current level of profitability as an area of significant opportunity for Integer. We highlight these opportunities so you, as investors, understand our overall strategy and where to expect improvements.

So I've covered the portfolio strategy and how we are thinking about each of our product lines. Now I want to cover the operational strategy. We have 3 areas of focus, customers, costs and culture, and each area has 2 strategic imperatives.

The first area of focus is customers, which is by design. We believe we have the technology, the manufacturing capability and customer relationships to do more for our customers and win more with our customers than we currently do. In 2017, we made significant progress in growing our business. We need to accelerate and then sustain this growth rate. To accomplish this, we will be committing senior executive focus on the strategic imperative of sales force excellence.

Market-focused innovation is the other customer strategic imperative. Innovation has been and will continue to be a critical part of the DNA of Integer. Innovation drives the breadth of our offering and the customers we serve. We will continue to partner with our customers to support their innovation while also being at the forefront of MDO innovation to extend the reach of our customers beyond their internal capabilities and resources.

The second area of focus is costs. In addition to delivering innovative, high-quality product on time, we must generate greater efficiency in our operations to increase capacity and lower cost. To accomplish this, we are initiating 2 strategic imperatives focused on manufacturing excellence and business process excellence. The manufacturing excellence strategic imperative will create the Integer production system, a single manufacturing approach used across Integer that standardizes and deploys consistent capabilities, tools and processes and ultimately creates an even greater competitive advantage for Integer.

The other cost strategic imperative is business process excellence. We have integrated many businesses over the past 5 years to become Integer. Now we are taking a very structured approach to create single standard processes across all of Integer. This will generate increased efficiencies and create capacity to focus even more resources to invest to grow with our customers.

The third focus area is culture. Performance excellence to us is a mindset. It's about the level of performance we expect. Excellence must be the standard, but excellence doesn't happen on its own. So we are developing or enhancing necessary processes and programs to create a culture of performance excellence, including strategic workforce planning, performance differentiation, incentive compensation changes and high-potential employee development.

The long-term success of Integer is dependent on our ability to increase our leadership capability. Leadership capability is about developing leaders at all levels of the company who can grow as fast or faster than Integer. It's about succession planning, individual development plans and the selection process. We are committing the necessary focus and investments to building leadership capability for the long-term success of Integer.

I've summarized our overall strategy and the strategic imperatives within the strategy. Now let's cover who on the executive team will lead each of the strategic imperatives. But first, I have a few updates on the executive leadership team. Jeremy Friedman, our Chief Operating Officer, has informed us of his intent to retire at the end of 2018. I want to thank Jeremy for his more than 10 years of service to Integer and the significant positive impact he has had on our company. I have enjoyed learning from and partnering with Jeremy over the past 11 months, and I look forward to his continued partnership. As part of Jeremy transitioning into retirement at year-end, we are moving the Cardio & Vascular and the Cardiac Rhythm Management & Neuromodulation businesses to report directly to me. This would create capacity for Jeremy to focus on 2 important elements of our strategy, which are improving the profitability of the Advanced Surgical and Orthopedic business and leading our customer strategic imperatives.

Our new President of the Cardio & Vascular business is Payman Khales, who joined us this week and brings a strong commercial and general management background to Integer. I am confident Payman is the right person to lead our Cardio & Vascular business as we work to accelerate the cardiovascular business to double-digit growth. I want to take a moment to thank John Harris, who has been leading the cardiovascular business as Interim President very well for more than a year. I am grateful for John's leadership and the progress that cardiovascular business made under his guidance. John is staying with the company in his prior role of Vice President of Operations for Cardio & Vascular, and he will be a vitally important partner with Payman.

Kirk Thor joined Integer at the beginning of the year as the Chief Human Resources Officer. Kirk brings more than 25 years of talent management and leadership development expertise, and I look forward to partnering with Kirk to drive our culture of strategic imperatives.

The right-hand side of this slide highlights the executive leaders who are leading the strategic imperatives. I've already mentioned that Jeremy is leading customer strategic imperatives and Kirk is leading the culture strategic imperatives. The manufacturing excellence strategic imperative is being led by Jennifer Bolt. Prior to the acquisition of Lake Region, Jennifer led operational excellence for Greatbatch and brings a deep manufacturing background in the automotive industry. Business process excellence is being co-led by our Executive Vice President of Quality and Regulatory, Joe Flanagan; and our Chief Information Officer, Mary Holler. Both Joe and Mary have deep expertise in process excellence that positions them well to lead this important strategic imperative across Integer.

We have a clear strategy to accelerate growth, both from a portfolio perspective and an operational perspective. The strategic imperatives are clear. We have the management team in place with the recent additions of Kirk and Payman. We have clear executive ownership of the strategic imperatives. More importantly, the executive leaders have deep domain expertise in the strategic imperatives they are leading. We have clear financial measures of success: sales growth above the market and profit growth at least 2x sales growth, which we believe will earn a valuation premium. I am confident we have the right strategy and the right team in place to deliver for our customers and to realize our vision of enhancing patients' lives worldwide.

Joey, let's open it up for questions.

(Operator Instructions) Your first question comes from the line of Matthew Mishan from KeyBanc.

I guess, first off, congratulations on presenting a very thorough and a really well-thought-out plan to grow the business. Have you had the opportunity to present this to some of your customers? And I just wanted to get their first reaction to it.

We -- I will have the chance to do that on Tuesday of next week when I'm meeting with a customer. We have just unveiled this publicly today. We've been working on this, obviously, since the middle of last year internally. We've been rolling this out over the past couple of weeks. So this is the first public announcement of this. So next week, on Tuesday, I'll be with a customer and I'll get some initial impressions.

Okay. And on the last slide, you put clear objectives over there, and the objectives are to grow faster than the market and to earn a valuation premium. What is your sense of what the market is now growing at? What has it been growing at? And then who are you trying to earn a valuation premium to?

Great question. So we think the markets, when you look at all of the markets that we're competing in and you aggregate them, we think it's mid-single digits, maybe somewhere in the 4% to 5% range. And we're looking at this and thinking about it over a long time period, not a discrete quarter or year. So as we think about over time, we're thinking 4% to 5% is the market. So we aspire to be excellent, which is above the market, above average. And when we think about earning a valuation premium, there's not a lot of clear MDO public company comps. So as we look at companies that we think might be similar to us on other factors, whether it's size or being in the industry but not the specific markets or we look at other deals that have occurred and we look at the value, we think market for us is somewhere in the low to mid-teens in terms of multiple of EBITDA. We're trading at a discount to that today, and our objective is to earn a premium. We believe if we deliver above-market growth and we bring profit through at least 2x the revenue growth that, that will earn a premium.

And then how much visibility do you have to growth? I mean, do you have any idea of how much is -- of the plan of the 2% to 5% next year, how much of that is new business wins or core volumes? And have you better aligned with your customers so that you're able to plan alongside them? Better so than you had over like the previous several years.

So if your question is more about short-term understanding our customers' needs and their volume demands, I think we've made tremendous progress in the past couple of years. And I'll specifically point to what Jeremy Friedman, our COO, has done in building that process out to work with customers for our sales and operations planning process. I think we're well aligned with our customers and we understand their near-term needs from a production and delivery perspective. And I think we delivered very effectively in the fourth quarter, and that was part of our success in the fourth quarter. What you may be asking more of is as we look beyond 2018 and how do we earn an above-market growth rate, that's where our strategic imperatives for customers comes into play. The sales force excellence is about us making sure that we're getting full value for what we currently have in terms of technology, manufacturing capability and how we can support our customers' growth. I think what we have today should allow us to grow at, at least the market rate, which we did in 2017. Looking backwards over time, we have it, but I think 2017, we are and we expect to figure that out going forward to grow at least the market rate. And I think sales force excellence can get us there. The market-focused innovation is how we get to grow above the market, above what the market rate is by partnering with our customers and bringing innovative products and solutions with them -- or to them. Jeremy is going to spend the rest of 2018 focused on these 2 strategic imperatives to ensure that as we go into 2019, we have clear line of sight as to how we're going to deliver above-market growth.

Okay, excellent. Just last question for Gary. On -- how should we -- maybe I missed it in the presentation, but how should we be thinking about interest expense in 2018, especially in a kind of a rising rate environment?

Yes. It's a great question, Matt. So from an interest expense standpoint -- and I'll just stay to the cash side, the amortization of the deferred cost is going to be flat. It's around $7 million. But the cash side interest, we earned about $96 million of cash interest in 2017. And as we look forward, we expect the cash interest to be down just a little bit. And really, it's -- if you think about it as we have, obviously, heavy debt paydown. So we have a lower balance. But certainly, the LIBOR is up. Right now, what we're modeling is about kind of a weighted average rate up around 40 basis points year-over-year due to the LIBOR increases. And that's -- so that's the way I would look at it.

(Operator Instructions) Your next question comes from the line of Jim Sidoti from Sidoti.

If we go back 3 months and we listen to the tone on the call there, it sounded like you expected top line growth to moderate a little bit in the fourth quarter. And the numbers you reported today were very, very strong. Were you surprised to see how the business grew in the fourth quarter?

Jim, thanks for the question. We absolutely did see stronger demand from customers in the fourth quarter than what we were anticipating. There's -- I'd say there were multiple factors that led to our outperformance in the fourth quarter versus our guidance, and it started with we executed. We fulfilled everything our customer ordered and what they needed. The customer demand was stronger. You see the stronger revenues in their results based on their releases. And as we were entering the fourth quarter, we were looking at 2016, and the fourth quarter of 2016 was by far the biggest quarter of the year. And so as we were looking at our fourth quarter 2017 demand, to think that we were going to be 8% over the highest quarter of '16 was not what we were expecting, obviously, given our guidance. So we did perform better in terms of delivery in the fourth quarter, and our customer demand was better. So we feel really good about entering 2018 with the momentum we have.

And then other than that one customer that was rebuilding some inventory in the quarter, I mean, were there any one -- any sales that you would consider pulled forward or onetime in the quarter? Or do you think that...

No, there was not. In fact, the one customer, that was something we actually knew about early in the third quarter because it was a specific program for something that they're working on. So we knew about that going into the third quarter. So that impact was customer driven, and it was in our guidance going into the fourth quarter.

Okay. And then this is the same question I asked you 3 months ago. That was, when do you think that the declines in the CRM business will be more than offset by the growth in the -- in neuro business?

I know every day we were getting more and more traction in neuro. And every day, our neuro customers continue to grow and perform well. I don't know when that tipping point comes, but I want it sooner than you do.

Well, based on your guidance for 2018, it sounds like we're pretty close.

We believe there's opportunity for us in the cardiac rhythm management business to actually make some inroads in certain segments that can allow us to get some growth despite the low growth in CRM in total. So even though it's in the Protect & Preserve because we're currently well positioned, we do see some segments of growth opportunity. We have to go execute and deliver for our customers, which we're working on. So we're not giving up on growth in CRM but we recognize the realities of that market. And in neuro, we're going to be very focused on accelerating the growth there and serving the high-growth customers in that space. We don't know exactly when that tipping point is going to come, but we're focused on it.

Right. And then the last question for me is on debt paydown. It sounds like you're going to pay a little bit less debt in 2018 than you did in 2017 even though EPS should be greater. Is there a reason for that? Is that cash being used for investments? Or what's going on there?

Yes. Jim, it's Gary. So I think that what you're seeing is $100 million plus on the debt paydown. I don't know that I'd directly interpret that as we're going to pay down less. We generated really solid cash flow in 2017. On top of the cash flow that we generated operationally or free cash flow in 2017, we had a couple other things that went to the debt payment, which was one, we effectively used a little bit more cash to draw our cash balance down, which we think is a prudent thing and we'll continue to do. And also, we got some cash in from stock option exercises probably more than a normal rate during this last year. So we had that excess cash. But I don't know that I would interpret it as we're going to reduce our debt paydown from '17 to '18. Maybe it's just I'm not giving specific guidance around it just for some flexibility, but I wouldn't say that it's a change in the investments. That level should be pretty comparable, as I said, on the capital investments. But I don't think you should read too much into that.

There are no further questions at this time. I'll turn the call back over to presenters.

Great. Thanks, Joey. Thanks for taking time to join our call and for your continued interest in Integer. If you have any follow-up questions, please contact Investor Relations directly. Have a great evening.

This concludes today's conference call. You may now disconnect.