Amy Wakeham - VP, IR Joseph W. Dziedzic - President and CEO Gary Haire - EVP and CFO.

Matt Mishan - KeyBanc Capital Markets Jim Sidoti - Sidoti & Company.

Good afternoon. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the Integer Holdings Corporation Second Quarter 2017 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

[Operator Instructions] Thank you. Amy Wakeham, VP, Investor Relations, you may begin your conference..

Great. Thanks, Rob. Good afternoon, everyone. Thanks for joining us and welcome to Integer's second quarter 2017 conference call. The call is being Webcast live and together with our earnings release and conference call presentation is available on the Investor Relations section of our corporate Web-site.

The results and data we discuss today reflect the consolidated results of Integer for the periods indicated. During our call, we will discuss some non-GAAP measures.

For a reconciliation to the most directly comparable GAAP measures, please refer to the appendix of today's presentation and to the notes in the financial statements of today's earnings release. As a reminder, statements made today about expected future events and expected 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, July 27, 2017.

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 and to update you on our business outlook, vision and strategy, are Joe Dziedzic, President and Chief Executive Officer, and Gary Haire, Executive Vice President and Chief Financial Officer. Following the prepared remarks, Rob will come back on the line for Q&A. I'll now turn the call over to Joe..

Thank you, Amy. Welcome and thank you for joining our call to hear about our second quarter results. We had another strong quarter and look forward to discussing our results with you. But first, I want to start by saying how energized I am to be part of Integer today.

The past four months have given me the opportunity to meet many of my Integer colleagues and many of our customers. I continue to be impressed by the passion, the commitment, talent, and capability within Integer, and the opportunities for us to serve our customers even better.

I am humbled and honored to have the opportunity to lead Integer at what I believe is an exciting inflection point in our journey to realize our vision.

We are the largest MDO in our space, we have unrivalled capability, our vision is aligned with our customers, we achieve our vision by serving our customers, and we reach patients by serving our customers. It is truly an exciting time to be at Integer.

Thank you for being part of our journey, and let's now start the review of our second quarter results. We delivered 4.5% organic sales growth in the quarter, and we generated good operating leverage with EBITDA growing 9% organically, double the sales growth. The net income growth was even stronger at 34% organically.

We had another strong quarter of cash flow growth and even stronger debt repayment. So the first half results give us continued confidence in our full-year guidance. We are raising the low end of our sales guidance. Additionally, we are maintaining our adjusted EPS guidance from business operations.

But we're lowering EPS guidance for the non-cash foreign currency losses we've already incurred. On balance, our business is performing in line with our expectations for the full year and we continue to see opportunities for continued revenue growth and improvement in operations.

Turning to Slide 6, we introduced this picture of our sales on a trailing four-quarter basis because our business, as with all MDOs, has inherent variability from quarter to quarter. There are a myriad of reasons why an individual quarter can be higher or lower than expected, and many of them are not within our control.

What is within our control is to successfully deliver innovative and cost-effective products across the full product continuum to our customers to earn the right to grow with them. If we do this, we would demonstrate a growth trajectory over time that will be evident on a rolling four-quarter basis.

Our first half sales give us confidence that we will deliver full-year growth in 2017, after two challenging years. The trailing four-quarter growth is at 2% compared to our current guidance of 1% to 3%. We will continue to show this trend in an effort to eliminate some of the noise that exists in any given quarter.

This slide takes the rolling four-quarter picture one level deeper. It provides a view of the trend for all of our product lines for the last three quarters. The takeaway from this chart is that all the product lines have an upward trajectory on sales.

Even though two are at or slightly below zero, the trend is improving across all of the product lines. It is unusual you see all parts of the business improving at the same time. Albeit some are improving by slowing the decline, it is still improving. Gary is going to provide more insight into our financial results for the quarter..

Thanks, Joe, and good afternoon. I will start by taking you through our second quarter financial results, and then I will take you through our updated 2017 full-year outlook. As we discussed last quarter, 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 non-operating other income/expense. Turning to Slide 9, here is a quick look at our results for the second quarter.

Sales increased 4.1% year-over-year on a reported basis and 4.5% organically. I will cover the sales trends in more detail on the next slide, but I want to highlight that this is our second quarter in a row of solid growth, which gives us confidence around generating positive growth for the year.

Adjusted EBITDA improved 2% year-over-year on a reported basis. In the quarter, we incurred $5.5 million of unrealized FX losses primarily related to inter-company loans, impacted by the strengthening of the euro versus the dollar during Q2.

This FX impact was primarily non-cash and reflects the change in the euro versus dollar exchange rate from our Q1 balance sheet date versus the Q2 ending balance sheet date, which was more than a 7% move during the period and was the largest move that we have seen in any quarter in 2016 or 2017.

Excluding this FX impact, adjusted EBITDA would have increased 9%. Our adjusted net income improved 13% year-over-year on a reported basis, and increased 34% organically when you exclude the impact of the FX I just mentioned.

Taking a closer look at the sales trends for each of our product lines, you can see the trends of our growth rates when comparing each quarter year-over-year. When you look at all product lines, you can see that over the last couple of quarters each has generally moved positive or at a minimum to a less negative change.

As we pointed out earlier, there are variations within product lines and from quarter to quarter. However, this has translated well for the entire Company, showing two quarters in a row of year-over-year growth.

The actions we have taken to focus on business optimization, customer relationships, is allowing us to deepen our partnerships and win new and expanded business opportunities. Moving to Slide 11, you can see our Q2 adjusted EBITDA and adjusted EPS improved versus last year.

On a non-GAAP or an adjusted basis, we saw improvements in both adjusted EBITDA and adjusted diluted earnings per share. Additionally, when we exclude the impact of foreign exchange, which is included in non-operating other income/expenses, both metrics improved even more significantly.

The improvement in our non-GAAP profitability metrics reflect solid year-over-year sales growth as well as operational improvements and cost management. The improvements were partially offset by higher compensation costs for incentives as a result of our improved business results and by the unfavorable foreign exchange impact already mentioned.

On a GAAP basis, our earnings improved primarily due to reduced spending on integration, restructuring, and consolidation and optimization activities.

These improvements were offset by the unfavorable foreign exchange impact of $5.5 million in the quarter and a $5 million impairment of a minority investment that was made back in the 2008 and 2009 timeframe.

Now turning to cash flow, as we mentioned before, generating strong cash flow to reduce leverage and invest for growth remains a top priority for the business. We delivered $39 million of cash flow from operations in the second quarter, our fourth quarter in a row of strong cash flow.

Additionally, we repaid $40 million on our debt obligations in the quarter, including $31 million in accelerated payments, which brings our total repayments for the year to $69 million. Last quarter we amended our Term B Loan to reduce the interest rate on about $1 billion of our debt.

This reduction will save us about $5.5 million of interest expense this year and approximately $7 million annually on a pre-tax basis. With our strong cash flow generation and our efforts to effectively manage working capital, our near-term debt and interest payments are very manageable.

However, I would like to highlight that 67% of our debt is not fixed and is subject to interest rate volatility. We are closely monitoring our debt portfolio and our rates and we will regularly evaluate opportunities to manage it when appropriate.

Now turning to our full year outlook for 2017, we are updating our sales outlook based on the results of sales in our first half and we are updating our adjusted EPS outlook specifically for the impact of the foreign currency losses that we have already incurred in our results.

With sales, we are increasing the low end of our outlook range by $10 million and therefore updating the range to be from 1% to 3% growth. With a solid second quarter following the growth in the first quarter, we have confidence that we are back on an annual growth trajectory for the year.

From a profitability perspective, we are updating our adjusted EPS outlook to reflect the impact of foreign currency losses through the first half of the year. Our adjusted EPS outlook from business operations remains unchanged and we continue to focus on driving efficiencies to deliver results. Lastly, we are reiterating our cash flow outlook.

We had solid cash flows in the first half of the year and we continue to make it a priority, with a focus on working capital management as well as ensuring that our capital spending has appropriate returns. I will now turn the call back to Joe..

Thanks Gary. I'm going to cover our product line sales results, and then close with a few comments about our vision and strategy and what we believe it can deliver. Starting with the Advanced Surgical, Orthopedics & Portable Medical product line, the top left of this chart depicts the growth or decline in the quarterly sales year-over-year.

After a strong first quarter, sales declined slightly in the second quarter. As I mentioned earlier, the variation from quarter to quarter has many reasons. In this case, it was one customer, one product that led to the decline in the quarter. In fact, there was growth across many other customers that reduced the decline to only 1%.

This is an example of why we added a chart in the bottom left of the page, which depicts the rolling four-quarter sales and the year-over-year percentage growth or decline. So despite the current quarter being slightly negative, we're on an improving trajectory on a rolling four-quarter basis.

The Advanced Surgical, Orthopedics & Portable Medical business has new business, that's already won, that is expected to continue to accelerate in the second half of the year. We expect this ramp will enable their continued positive trajectory.

The large and growing orthopedic and advanced surgical market provides us with significant opportunities to leverage our investments in innovation, such as single-use instruments, wireless charging, and robotics, to deliver more value for our customers and accelerate our growth.

The Cardio & Vascular product line continues to drive year-over-year sales growth, with growth of 8% in the quarter, driven by strong demand for existing Integer-owned product lines, contract components and new program launches.

The Cardio & Vascular business is benefiting from the acceleration of previously won business that is further along its growth curve as well as the introduction of new products with our customers, although they have been slower than planned due to slower market acceptance than anticipated.

The rolling four-quarter chart demonstrates the strong performance and success of this product line. We do anticipate slower growth in the second half as the third quarter of 2016 was the highest quarter of the year and some of the products that are ramping up start to level off.

Additionally, some of the year-over-year strength in the fourth quarter of 2016 and first quarter of 2017 was from customer restocking activity driven by product transfers.

We are a clear market leader in this product line and continue to have a wide range of opportunities to leverage our broad capabilities and investments in this large and fast-growing market, especially electrophysiology and structural heart.

Our strong customer relationships combined with targeted investments and innovation in the fastest growth segments position us for continued growth in this market. The Cardiac Rhythm Management & Neuromodulation product line has been on an improving trend since the second quarter of 2016.

This is evident in both the quarterly year-over-year trend as well as the rolling four-quarter trend, which has levelled out to around $435 million in sales.

Although demand has been strengthening across several key products and we have been ramping production in certain areas, we expect the second half to be more challenging on a year-over-year basis as the fourth quarter of 2016 was the strongest quarter of the year.

We continue to execute our strategy in cardiac rhythm management of providing full component design, development and manufacturing capability to our customers to enable their success and our growth together. Despite the low growth in the overall market, we continue to see opportunities for longer-term growth.

The neuromodulation market remains a key driver of long-term growth for the product line. We're the market-leading MDO and are focused on accelerating growth through the active support of neuromodulation customers of all sizes in the design, development and manufacture of everything from components to full systems for customer applications.

Electrochem delivered a strong second quarter on a year-over-year basis, up 60%, and turned the rolling four-quarter trend positive for the first time since the downturn in the energy market.

The combination of a market that has been recovering and market share gains during the downturn have positioned Electrochem to deliver significant growth for this product line.

Electrochem managed the downturn very effectively by not only reducing variable cost but also implementing efficiencies, better enabling them to capitalize on improvement in the energy market, as well as market share gains.

The second half continues to look positive for Electrochem, and although 60% growth is a tough number to repeat, the third quarter of 2016 was the lowest of the year, which provides a slightly easier year-over-year comparison.

After several years of battling the downturn, it is nice to have some tailwind in addition to the successful share gains achieved by the team. Turning to a discussion of our vision and strategy, we are making good progress transitioning our business back to a growth trajectory. We're the market leader in medical device outsource manufacturing.

We have unrivalled capabilities to serve our customers' needs, whether an engineered component or a complete device that we have developed, to anything in between.

Our innovative design and manufacturing capabilities, our global footprint and scalability, our high-quality, and our customer focus, enable us to deliver more for our customers than anyone else in our space.

Over the past four months, I've had the opportunity to meet and spend time with many of my colleagues in Integer from around the world, from the senior management team to the associates manufacturing our products on a shop floor.

I continue to be impressed with their passion and commitment to fulfilling our vision of enhancing patients' lives and their deep industry knowledge and expertise. I am confident about our future because of the team I'm on and the capabilities they have built within Integer.

I've also had the opportunity to meet and talk with many of our customers, from our large long-standing OEM relationships to emerging technology companies, covering the full breadth of our product continuum.

I come away from those discussions with a healthy dose of reality and clear optimism about the potential of Integer to be their partner of choice for innovative technologies and services. Integer has the capability to serve our customers in a manner that enables their strategy and their success, and if we do that, we will succeed together.

As we execute our strategy and realize our vision, we expect to deliver sales growth that is above the market growth rate. We expect to accelerate our EBITDA and cash flow growth, and we desire to earn a valuation premium from our shareholders.

Given it has only been a few days since the interim pilot was removed, I'm not putting a timeframe on the delivery of these results. For the moment, we remain focused on delivering on our 2017 commitments to our customers, to each other, and to our shareholders.

It is an exciting time to be part of Integer and I hope you share that view as an investor. Rob, we will now open up the call for questions..

[Operator Instructions] Your first question comes from the line of Matthew Mishan from KeyBanc. Your line is open..

I just want to start off with gross margin. It improved sequentially but it was still down year-over-year. I think last quarter you talked about a couple of transitory issues that would be impacting the first half and then they start to mitigate towards the back half.

Could you go back through that and let us know like sequentially how you're doing with those?.

Matt, it's Gary. I'd be happy to do that. There's a few items that definitely are having somewhat impact, and you're right, we had some nice improvement sequentially. Some of that is volume leverage and some of it is operational improvement.

The items that you're referring to specifically are related to a transfer of some products from Minnesota down into Mexico. That is still having an impact on us in the second quarter, but to a lesser impact than it did in Q1.

So we're on track with that and we'll continue to have some of a headwind that will become less and less through the second half of the year.

The second item was related to a customer that asked us to ramp up some production very rapidly, and we again did still have some of that impact in the quarter, similar to the first quarter actually, but we also expect that to – we've stopped part of it where those costs will start to go away here in the third quarter.

So those are the two primary items. There is also an item that we had mentioned around a little bit of a delay with a customer that we're back on track with, with the supplier that they had picked. But we're back on track with that and the second quarter is better than the first, and the third will definitely be better than the second..

Okay, that's helpful. And then on the EPS guidance, you moved it down specifically for the nonoperational FX I think you've already incurred.

Do you expect to incur – I mean the euro continues to move higher, do you expect to incur more costs, more FX nonoperational costs, in 3Q and 4Q if rates stay the same? And then just some of the other moving pieces, because you do have sales growth that's coming in at the high end of where your expectations are, you were able to lower the interest rate on your loans in mid-March, shouldn't like the operational EPS be moving up a little bit, offsetting some of the FX?.

Matt, this is Gary. I'll cover the FX piece and then I'll let Joe talk to the bottoming of a little bit on the sales side. On the FX item, we've actually incurred $0.17 year-to-date on that. So, we talked about $0.03 in the first quarter, and there's $0.14 in the second quarter.

And then you're correct that the rate at the end of Q2 was between 1.14 and 1.15 exchange rate and it's a little bit worse now. So, that is going to be a little bit of a headwind assuming no change in the third quarter. But what I'll point out is we're not just letting it flow through. It's a non-cash item.

It doesn't have a lot of economic value change to us at all. But with that being said, we're looking at our inter-company loan portfolio and seeing if we can do something by the end of the year that can mitigate some of that at least going forward. And then I'll let Joe answer the question around the sales side..

So Matt, on the sales, given our first half performance, we did increase the low end of our range, but we're sticking with the high end of the range.

As we look into the second half and we just watch the variability of our customers' success with the products they are launching that we are serving them on, and we look at what the second half volumes look like, and we look at the changes that our customers are making in their inventory levels and their business, we feel confident about the range of 1% to 3%.

Gary and I have been here now a whole quarter together and we're understanding the variation, the variability that occurs in our business, and we feel 1% to 3% is the right range right now. I will point out that last year was the highest quarter sales in the fourth quarter.

It was $360 million during the fourth quarter compared to $330 million in the first quarter for example. So we did have an easier comp when you look at first half year-over-year. So the second half year-over-year comps get tougher. So when you think about the year-over-year growth rate, you do have to look at the quarter splits last year..

Okay.

And then last question, the bigger picture question, could you just talk about like outsourcing trends in the industry, is it still increasing and kind of where you see the most opportunities?.

We absolutely see significant opportunity. We see our customers looking to us.

Now that we are a larger MDO, the largest MDO, they are looking to us, at our capability, and trying to find ways to help serve them better and help them rationalize their manufacturing footprint, free up capacity for them to focus on even higher value-added activities in their business that they can then outsource to us.

So, we see continued interest in outsourcing. We see it across all of the product lines. Clearly there are some that have more opportunities than others, particularly in neuromodulation, we see significant opportunity there, but there's a range of anywhere from 25% to 40% of the market that's outsourced.

I know 25% is kind of the number that's been out there in the industry for a long time and we continue to see interest from our customers for more and we believe we are perfectly positioned to capitalize on that and serve them in a very differentiated way..

All right. Thank you very much..

Your next question comes from the line of Jim Sidoti from Sidoti & Company. Your line is open..

Can you just give me a little more color on why the shift in exchange rates has such a negative effect on your inter-company loans?.

Jim, it's Gary. Those inter-company loans, I think the first thing to think about is most of them or all of these loans that are affecting us came over from the Lake Region side at the time of the integration or the merger, and if you remember, that was private equity owned.

So, they were a lot less worried about a reported earnings number than they would have been focused on cash optimization on their loans.

We have an imbalance basically between euro-dollar and dollar-euro inter-company loans, and that's just the way it is, and you measure that on a quarter to quarter, actually a month-to-month basis based on the end of month balance sheet rates. And there's no cash involved at all.

It's just the way that you have to adjust for the change in the value on your balance sheet of those loans..

Jim, when that was inside of a private equity company, it was focused on cash flows. It didn't get any visibility because it didn't affect the economics of the business. Now that it's part of a public company, it still doesn't have any meaningful economic impact to us, but it does affect our reported results.

So, Gary and the team are working to restructure those inter-company loans to mitigate, ideally over time eliminate, that reported impact that you'll see in our results.

But in the interim until we complete that exercise, we will spell out very clearly for you what the impact of it is, so that you can see and focus on the operational performance of the business. I do appreciate that this may distract from the operational results, but our operational guidance, the performance of the business, is unchanged.

The only change we made was for the FX that we've already incurred in the first half of the year..

All right. And then if I look at the guidance, it seems like maybe you see a little more modest growth on the top line in the second half of the year, but much stronger EPS growth in the back of the year.

Can we assume that those improving margin trends will continue through 2019 – or 2018?.

So I'll start with the top line. The year-over-year performance is impacted significantly by the 2016 quarter splits. The fourth quarter was far and away the largest quarter of the year, $360 million of revenue in the fourth quarter last year compared to $330 million in the first quarter.

So when you look year-over-year, we can have a linear sales of the same for the rest of this year and still be down on a year-over-year basis within the quarter. So, our revenue, we expect to continue to perform well, we just have a tougher comp in the fourth quarter.

So, full year revenue guidance there's impact, we raise the lower end because we have greater confidence in our full year revenue guidance based on first half. In terms of earnings, we continue to have confidence in our EPS earnings.

We have throughout the year expected the second half margins to be stronger as we begin to realize more the savings from some of the facility transfer activity that Gary talked about earlier, as we realize more of the synergy savings from activities late last year, early-half of this year, and then as we look at some of the product mix that we expect in the second half of the year, we get a little favorability there, not to mention just the general productivity efforts and initiatives underway in the Company.

We haven't given any guidance on 2018 and beyond. That's something that we typically do with our fourth quarter earnings release, and for now, I don't see any change in that practice..

Okay, but there's no reason to think you would take a step backward on operating margins in AOP?.

Our objective is to continue to grow. We think about the business, we think about executing every day and delivering for our customers and executing at the highest level possible. But when we measure the business, we think it's appropriate to look at the business on a rolling four-quarter basis.

It takes some of the noise out of individual quarter-points. So, our objective is to go to business on a year-over-year basis. So, yes, we would expect to continue to improve..

Okay. Thank you..

[Operator Instructions] There are no further questions at this time. I will turn the call back over to the presenters..

Thanks Rob. Thank you everyone for joining us today. As always, if you have any questions, please feel free to contact Investor Relations directly. With a new CEO and CFO, the management team is more than happy to spend time with our investors going over our results and our outlook for the business. Thanks again for joining us today.

Rob?.

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