Amy Wakeham - Vice President, Investor Relations Joseph Dziedzic - President and Chief Executive Officer Gary Haire - Executive Vice President and Chief Financial Officer.

Matthew Mishan - KeyBanc Capital Markets Inc. Lucas Baranowski - Craig-Hallum Capital Group, LLC Jim Sidoti - Sidoti & Company LLC.

Good afternoon. My name is Cheryl, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 2017 Integer Holdings Corporation Earnings 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. Thank you, Cheryl. Good afternoon, everyone. Thanks for joining us and welcome to Integer's third quarter conference call. The call is being webcast live and the webcast replay along with the copy of the press release and the earnings 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. During our call, we will discuss certain non-GAAP measures. For a reconciliation of the 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 the Company’s SEC filings for discussion of the risk factors that could cause our actual results to differ materially.

On the call today to discuss our quarterly results and to update you on our business are Joe Dziedzic, President and Chief Executive Officer, and Gary Haire, Executive Vice President and Chief Financial Officer. Following the prepared remarks, Cheryl will come back on the line for Q&A. I'd now like to turn the call over to Joe..

Thanks, Amy. Welcome everyone. Thank you for joining to hear about our third quarter results. I am happy to share with you what I consider our third quarter in a row of continued improvement.

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 topline and net income growth in addition to generating strong cash flow.

The team clearly has Integer on a positive trajectory and I'm grateful to have joined Integer at such an exciting inflection point. I spent my first full quarter as CEO meeting with customers, visiting some of our manufacturing plants, and getting to know our management team at all levels more deeply.

We've been reviewing the markets we compete in to ensure we are focused on the segment that will enable us to accelerate our growth and capitalize on our differentiated technology and manufacturing capability.

We've been evaluating the current market dynamics for both customers and competitors as well as technology trends to ensure we are allocating our resources in the areas that will deliver on our objectives.

I've been reviewing our strategies across our various product lines to understand where we are achieving our objectives and where we have opportunities to improve.

The results of these discussions will become part of our 2018 operating plan, which will be reflected in our 2018 guidance that will be communicated when we report our fourth quarter 2017 results next February.

It continues to be clear to me, Integer has innovative design and manufacturing capabilities, a global footprint with scalability, high quality and a customer focus that enables us to do more for our customers than anyone else in our space.

I continued to be impressed by the passion, commitment, talent and capability within Integer and the opportunities for us to serve our customers even better. Let's review our third quarter results. Our third quarter results are consistent with our full-year guidance and reflect continued solid revenue growth.

Once again, we generated solid cash flow that enabled accelerated debt repayment. Our full-year outlook has been revised to reflect the year-to-date impact that changes in foreign currency.

Gary will take you through these details and highlight that after adjusting for foreign currency, our current guidance is within the range of the original guidance provided at the beginning of 2017. We recognize that to rebuild our credibility with you, our owners, we must deliver on our guidance.

With three quarters of actuals, we have narrowed the range of our guidance to reflect our current revenue mix and the operational performance of our business. We expect 2.5% to 3.5% sales growth and 9% to 16% adjusted EPS organic growth, demonstrating strong net income leverage on sales growth.

Turning to Slide 6, sales growth on a trailing four quarter basis continues to improve, reflecting the progress that business has made to change the trajectory of our sales back to growth. The trailing four quarter growth is at 3%, compared to our revised guidance of 2.5% to 3.5%.

It is worth highlighting again that the fourth quarter of 2016 is the most difficult comparison this year since it was the highest sales quarter of last year. Slide 7 shows the rolling four quarter picture for all of our product lines. With the exception of Cardiac & Neuro, all of our product lines remain on an upward sales trajectory.

The value of this slide is to demonstrate the trajectory of the business, which is very positive for three of our product lines. The Cardiac & Neuro product line is reflecting the current market realities with the cardiac rhythm management market, where market declines and some customer inventory adjustments are offsetting growth in Neuromodulation.

Gary is now going to provide more insight into our financial results for the quarter..

Thanks, Joe, and good afternoon. I'm going to take you through our third quarter financial results and then I will walk you through our updated 2017 full-year outlook. As a reminder, 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 exclude the impact of foreign currency gains and losses that are reported in non-operating other income or expense. Turning to Slide 9, here's a quick look at our results for the third quarter.

Sales increased 4.8% year-over-year on a reported basis and 4.4% organically, our third quarter in a row of solid growth. To specifically address the impact related to shipments into Puerto Rico, we do have customers with operations in Puerto Rico. However, the impact of Hurricane Maria did not have a significant impact on our results in the quarter.

We will continue to ensure that we are supporting our customers in Puerto Rico and it is too early to say there will be any impact in Q4. I will cover sales trends by product line in more detail on the next slide. Adjusted EBITDA declined 3% year-over-year on a reported basis.

During the quarter, we incurred $2 million of losses due to foreign exchange, primarily related to intercompany loans impacted by the strengthening of the euro versus the dollar. Excluding this FX impact, adjusted EBITDA would have been about flat compared to last year.

Our adjusted net income improved 2% year-over-year on a reported basis and increased 8% organically when you exclude the impact of the FX losses I just mentioned. Adjusted earnings for share was $0.82 on a reported basis. But this included $0.05 related to FX.

Also worth noting is that our EPS was impacted by about $0.03 from share dilution year-over-year. For a total of about $0.08 from just these two items. Now regarding the FX impact you will remember the last quarter I discussed that we would be evaluating opportunities to mitigate the impact of our non-cash FX exposure.

I'm happy to tell you that we recently completed actions restructure several of our intercompany loans and this will significantly reduce the impact of FX on our results going forward, starting in Q4.

On the next Slide, you could see the sales growth rate trends for each of our product lines over the last seven quarters, specifically comparing the year-over-year performance. You could see the positive growth that we saw in the quarter in all of our product lines with the exception of Cardiac & Neuro.

Cardiac & Neuro has been challenged due to a broader market weakness, specifically in CRM and this has had a direct impact on this business. At the total Integer level we have seen solid growth overall, putting us at a growth rate of between 4% and 5% in each of the last three quarters.

We're very pleased with this performance, but we're also pleased that our medical business is a return to growth over the past five quarters after decreases in the first half of 2016. I wanted to highlight that we added a new line to the graph on the right side of this page, which shows the Medical business growth rate for the last seven quarters.

There are two points worth noting. One, the Medical business has had two notable step ups, the first getting back to flat growth since the second half of 2016, and the second in 2017 where we have shown solid growth of around 3% in the last couple quarters.

The second point is the strength in the non-medical business which is evident in the total Integer revenue growth in the last two quarters, which is around 4.5% compared to the medical growth being closer to 3%. Now moving to Slide 11.

You can see that our third quarter adjusted EBITDA and adjusted diluted EPS declined slightly on a year-over-year basis. When we exclude the impact of foreign exchange, which is included in non-operating other income and expenses, adjusted EBITDA was essentially flat year-over-year and adjusted EPS improved approximately 5%.

In the quarter, our profitability was impacted by higher incentive compensation costs versus the prior year quarter, which was almost $4 million headwind in the quarter versus last year's Q3, as well as the timing of research and development spend and the unfavorable foreign currency impacts I already mentioned.

In regards to research and development, while we had a slightly higher spend in Q3 versus last year, we expect this spend to be about flat to last year on a full-year basis.

If you look at the bottom of this page, you can see that on a year-to-date basis through nine months, we have shown nice growth in our non-GAAP adjusted performance, excluding FX.

Comparing to the same nine-month period of 2016, our organic adjusted EBITDA is up about 4%, while our organic adjusted net income is up 20%, and organic adjusted EPS is up over 17%. Now turning to cash flow.

Consistent with our comments in prior quarters, we have remained focused on generating continued and sustainable operating cash flow as well as reducing leverage while continuing to invest for growth. We delivered $38 million in cash flow from operations in the third quarter. Our fifth quarter in a row of strong cash flow.

Once again, our cash flow allowed us to accelerate debt payment. We repaid $38 million of debt in the quarter, consisting of $33 million in accelerated payments. This now brings our total debt repayments to $107 million for the year.

With our strong cash flow generation and our efforts to effectively manage working capital, our near-term debt and interest payments are very manageable. We will continue to monitor markets on a regular basis and evaluate additional opportunities as appropriate. Now turning to our full-year outlook for 2017.

We are updating our sales and adjusted EPS outlook to reflect our progress through the first three quarters of 2017. With sales, we are raising the low end of our outlook range by $20 million, and raising the top end by $5 million, therefore, updating the range to be 2.5% to 3.5% growth for the year.

We had another solid quarter of growth in the third quarter. However, as we mentioned previously, we had much tougher comparisons in the fourth quarter as the fourth quarter last year was our strongest quarter in 2016. From a profitability perspective, we are tightening our adjusted EPS outlook.

As I mentioned, we had an additional $0.05 of FX impact in Q3 that was not in our previous guidance. However, we are not reducing the bottom end of our range. We are reducing the top end of our range given the impact of the FX as well as our current revenue mix in our expected operational performance.

After adjusting for the impact of FX, this is still well within our original guidance range that we gave at the beginning of the year. And I will show this to you on the next slide. For cash flow, we are reiterating our outlook of approximately $150 million of cash flow from operations.

We continue to generate solid cash flow and it remains a priority with a focus on working capital management as well as ensuring that our capital spending has appropriate returns. On Slide 14, I want to come back and compare our revised outlook to the original outlook that we provided at the beginning of the year. Starting with sales.

We originally said, we would have sales growth of between 0% and 3%. And today we are updating our outlook to 2.5% to 3.5%. So we are now estimating to be between the high-end of that range or above it. In regards the EPS, our original guidance was to be between $2.70 and $3.10 per share.

As we mentioned last quarter this guidance did not anticipate the large FX impact that we have incurred during the year. That impact has been $0.22 during the nine months of the year. When we adjust for the FX only, the original range would have been $2.48 to $2.88.

And today we are updating our outlook to be between $2.55 and $2.75, which is right in the middle of the original outlook after adjusting for the FX. I will now turn the call back to Joe..

Thanks, Gary. I'll cover our product line sales results and then close with a brief discussion about our current vision and strategy and what we believe they can deliver.

Turning to the Advanced Surgical, Orthopedics and Portable Medical product line, sales growth year-over-year improved in the third quarter, driven by the ramping up of new products, further stabilization now that plant transfer activity is complete as well as tailwind from one customer's, inventory management related to one of their initiatives.

We expect that we will see higher sales activity continue into the fourth quarter as a result of the same factors driving the third quarter. However, we anticipate on offsetting impact in 2018 from the one specific customer’s inventory management, which we expect will lead to more modest overall growth rate next year.

The trailing four quarter sales trends improvement is primarily from the completion of the plan transfer activities and new product launches. 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.

The cardiovascular product line continues to drive strong year-over-year sales growth with growth of 7% in the quarter. Driven by strong demand for existing Integer own products and contract manufactured components, particularly in vascular access and peripheral vascular.

The rolling four quarter sales trajectory continues to accelerate up to 9% this quarter, driven by the overall strength of the Cardio & Vascular product offering, especially in vascular access, peripheral vascular, and electrophysiology. Additionally, some of the growth has come from customers rebuilding inventory.

We continue to have success with both large well established customers as well as emerging and faster of customers. We are investing in the faster growing higher value segments like structural heart, peripheral vascular and electrophysiology.

In addition, we're developing faster prototyping turnaround capabilities with the goal of accelerating our customers speed to market and overall success. We expect continued solid growth in the fourth quarter and potentially more from customer inventory rebuilding.

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.

Customer relationships remain strong and our partnership approach is resonating well with new and existing customers, enabling deeper penetration and increased opportunities for future revenue. Sales growth in the Cardiac & Neuromodulation product line declined in the third quarter.

The overall decline in the CRM market and customer inventory management headwinds is resulting in lower sales for Integer. They were not offset by the smaller, but growing Neuromodulation product line. The rolling four quarter sales trend reflects this trend over the last year.

We continue to execute on our strategy in Cardiac with the management of providing full component design, development and manufacturing capability to our customers. We anticipate no growth in the fourth quarter this year against the fourth quarter of 2016 sales they were the highest of the year.

Although a smaller component of the overall product line, but Neuromodulation market remains a key driver of long-term growth for this 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. Our strategy in Cardiac & Neuro is clear.

It is to partner with CRM and Neuro customers to enable their success and to facilitate our own growth in order to outpace the market realities in the cardiac rhythm management market. Electrochem delivered another outstanding quarter of growth on a year-over-year basis, up 71%, and the rolling four quarter growth rate reached 23%.

The combination of a recovering market and share gains during the downturn have enabled Electrochem to deliver significant growth. Electrochem manage the downturn very effectively by not only reducing costs, but also implementing efficiencies that are enabling them to capitalize on the improvement in the energy market on top of share gains.

The outlook for the fourth quarter is positive, but since the third quarter of 2016 was the low point of the energy market downturn for Electrochem. We do not expect the same level of growth after two quarters of 60% plus growth.

Turning to review our vision and strategy, we are pleased to see sustained quarterly growth, demonstrating our progress in transitioning our business back to a long-term growth trajectory. As we look forward, we believe we have significant opportunities to further expand and grow our business.

As the market leader in medical device outsourced manufacturing, we have a unique breath of capability to serve our customers across the entire product continuum and across multiple product lines, whether a customer needs an engineered component or a complete device that we've developed or anything in between, we can deliver.

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.

As we continue to execute our strategy to realize our vision, we expect to deliver long-term 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.

We recognized we earn credibility by consistently delivering on our commitments, to our customers, to each other and to our shareholders. We are excited about the future and remain focused on delivering on the remainder of 2017. It is truly an exciting time to be part of Integer. Cheryl, we will now open the call for questions..

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

Good afternoon, and thank you for taking the questions..

Hey, Matt..

Hey. I think it’s been really a similar story for the last three quarters, you've generated very solid revenue growth, free cash flow has been positive and all that's good.

But I think that for me, I've been looking to see whether or not you could generate more leverage, more operating leverage, and I'm just curious like you mentioned mix in operational performance.

You had some certain factors driving the flattish EBITDA in the first half, and you had thought that you’re going to correct that in the second half, why are we not seeing more leverage in the business?.

Hey, Matt, it’s Gary. Great question, and you're absolutely right that we are definitely looking to drive more leverage in the business. On a quarter-to-quarter basis, there are going to be certain items that happened that don't make that drop through look as good as what it should. This particular quarter, I’ll just point you to a couple items.

The first one is incentive compensation, year-over-year that was a $4 million headwind. And in particular part of that goes through gross profit. So it is 50 basis points year-over-year headwind used on the gross profit margin. I think we like that because the business is performing better within targets, and be in targets than it did last year.

So I don't like to drop through, but I like the reason why that one is there. The second one is just some timing around our research and development. It’s a $2 million headwind year-over-year in the quarter, but on a full-year basis it’s going to be about flat.

With those two items alone would be $6 million and would've had showed our drop through as much more improved than it actually was..

Okay, and on your guidance, I think that the share comp is similar to the range you would forecast in the beginning for the full-year. But you have actually outperformed on the revenue side, but you're not able to raise the EPS and I'm just curious is what's driving that..

Yes. So another great question, and thank you for that. On the guidance, on the full-year basis, so if you look back to last quarter, we had a midpoint of $2.75, so we’re at $2.55 to $2.95, and the midpoint was $2.75.

Now we have our midpoint at $2.65, so we are down $0.10 after that FX because we had another $0.05 of FX in the quarter which if I make sure that you heard the comment, we took actions to mitigate that as I said before, so we will not have that significant impact going forward.

But the other portion is just looking at our gross margins and our revenue mix, we felt like it was appropriate to move the guidance to have that midpoint at $2.65. If I just kind of let you with the last thing is, it’s still well within our guidance of what we had provided at the beginning of the year as I outlined on my last slide.

And we’re really focused on reestablishing our credibility and making sure we deliver within our guidance..

Okay. And then the fourth quarter – and this is my last question. In the fourth quarter, if you back into what it implies it's sort of in the midpoint, it sounds like a minus 1% or so on the organic growth side.

But it sounded as if Advanced Surgical, Orthopedics and Portable Medical that that should still be positive, Cardio and Vascular should still be positive, Electrochem should still be positive.

Is the way we should look at it in the fourth quarter being that those segments are positive just not as positive as they were previously, and is the headwind that you are expecting in cardiac neuromodulation getting worse in the fourth quarter?.

Yes. I think you're looking at it at the right way Matt. I think we definitely see the headwind in the CRM/N, the Cardiac & Neuro business overall.

And the other businesses should be positive, I mean certainly Electrochem is not going to be up 70% again, so we won’t have that kind of an uptick and that’s the reason we're trying to separate that on the Slide 4 to show that medical is more or like around 3%.

And the other thing that is when you look at the fourth quarter of last year, the big increase versus the prior quarters was really in CRM/N and so that's why we don't expect growth in CRM/N. It was about 7% or 8% higher in the fourth quarter of last year than any of the prior quarters.

So that's a big part of why the fourth quarter of last year was the strongest quarter in the year. So that's the product line, that it's not going to be – should not be, we don't expect to see growth on a year-over-year basis due to the really tough comps..

Great. Thank you very much..

Sure. Thanks Matt..

Your next question comes from the line of Lucas Baranowski of Craig-Hallum Capital. Your line is open..

Yes. This is Lucas Baranowski on for Charles Haff. Just had one quick question here. Abbott recently received a high-voltage MRI safe approval. I believe it was for the [indiscernible] and Biotronik as well recently received an MRI safe approval.

So with all of these approvals, do you anticipate any impact on your business?.

We are always glad to see our customers receive approval, so that they can accelerate their growth so that can continue to serve them. And you can imagine, each customer – they plan ahead and expect and set expectations or have expectations of their own as to win overseas these approvals and they prepare for that.

So as we look at our business, we serve everybody in the industry and each of those customers we serve them in different ways with different components for those devices. And so in aggregate, we like to see all of them growing. That's not the reality of that marketplace as you're looking at their results as well.

So we participate with every customer, obviously we have some customers with more, but you've got to recognize sometimes those customers plan in advanced and they prepare for that so when you get your approval that might not actually change our revenues or change our outlook because it is possible that it was already part of the run rate or not even planned for by the customer.

But we're always glad to see them get those approvals and get the growth of the industry back on track..

Okay. Thank you very much. That's all I had..

Thanks Lucas..

Thanks Lucas..

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

Hi, good afternoon.

Can you hear me now?.

We can hear you. Great Jim..

Hi, Jim..

All right. Great.

You talked a little about the Hurricane in Puerto Rico, just curious, do you think the Hurricanes had any impact that the Hurricane in Florida and Texas if there was any impact from that quarter or will there be any in the fourth quarter?.

Jim, we don't see any impact let me just say if there is any impact is not significant from it we have very few it is actually very few employees in Houston area and Florida, we do have a customer and employees, but we don’t see any impact on our results..

Jim, we certainly did have customers that had us either redirection and whole shipments and so they could expect and receive them, but that seem to be either to be managed very well, by our customers or they were able to redeploy the product to other facilities..

Okay.

And I just want to be clear on the change the guidance? Or you saying that if you don't have the FX effect and the impact on the intercompany loans that your guidance would have basically been unchanged from where it was at the beginning of the year?.

Not I mean yes and no Jim. So let me just explain. So original guidance was $2.70 to $3.10, the FX is $0.22 year-to-date for nine months that is primarily related to the intercompany loans is not all.

But if you exclude that FX, it would have $2.48 to $2.88 and we’re just saying that our range now is $2.55 to $2.75, which is right in the middle of that..

Okay, so the lion's share of the adjustment is due to the intercompany loans.

Is that correct?.

That's correct statement..

Okay.

And then if you look at the CRM Neuromodulation business, at one point is Neuromodulation become a big enough part of that business that growth in Neuromodulation will offset the headwinds in the CRM business, 2018, 2019 or is that still four years or five years away?.

It is a great question Jim. And I wish Neuromodulation was even bigger than it is today. We are incredibly well-positioned in that space and participating with a lot of emerging companies that when they bring products to market will be able to participate and get significant market share and growth from Neuromod.

When will it be big enough to compensate for the market realities in CRM. I wish I had a clear answer. It’s really dependent up on how quickly some of these emerging Neuromod companies can bring products to market.

The Neuromod company customers were serving today or doing extremely well, they continue to grow, but we are fighting the rate of the realities in the CRM markets. We participate with everybody in CRM somewhere and we see opportunities to grow particularly and lead to lead components.

We’re investing to make sure participating in the next-generation for batteries, and feed-throughs and capacitors, we think we're really well-positioned there and we continue to work towards growth in CRM, but there is that market headwind that we're facing.

So I don't have a clear answer for you, but you should know we're doing everything we can to accelerate that timeline..

Okay. And then the last one for me cash flows definitely picked up the past couple quarters, it sounds like you’re expecting another good quarter in December. But is the primary use of cash flow going to continue to be to pay down debt or do you see other opportunities..

Jim, it’s Gary, I would say that the primary use of our excess cash is going to be – just definitely going to be pay down debt which is slightly or definitely the next several quarters. Obviously we're going to reinvest in the business and think that are going to help us grow on an appropriate level as well as really good returns.

But those are going to be primary uses of cash in the near-term..

Okay. Thank you..

You’re welcome. End of Q&A.

That concludes the question-and-answer session. I will turn the call back over to the presenters..

Thanks Cheryl and thank you everyone for taking the time to join our call and for your continued interest in Integer. If you have any follow-up questions, please feel free to contact me Investor Relations directly. We look forward to updating on our full-year results and fiscal 2018 outlook in February. Have a great evening..

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