Good morning. My name is Jamie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Integer Holdings Corporation Third Quarter 2018 Earnings Call. [Operator Instructions] Thank you.

Tony Borowicz, Senior Vice President of Strategy, Corporate Development and Investor Relations, you may begin your conference..

Thank you, Jamie, and good morning, everyone, and welcome to Integer's third quarter 2018 conference call. This call is being webcast live, and the replay along with the copy of the press release and earnings presentation is available on the Investor Relation 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 some non-GAAP measures. For reconciliation of these non-GAAP measures, please see the appendix of today's presentation and the notes to the financial statement in today's earnings release.

As a reminder, today's presentation includes forward-looking statements. Please refer to the company's SEC filings for a discussion of the risk factors that could cause our results to differ materially.

Joining me on the call today to discuss our quarterly results is our President and Chief Executive Officer, Joe Dziedzic; our newly hired Executive Vice President and Chief Financial Officer, Jason Garland; and our Former Chief Operating Officer and Interim Chief Financial Officer, Jeremy Friedman.

Following our prepared remarks, the call operator will come back on the line for Q&A. Now let me turn the call over to Joe..

Thanks, Tony. Welcome, everyone, and thank you for joining to hear about our third quarter results. Let me start by first welcoming Jason Garland, who joined Integer one month ago as our Chief Financial Officer. I have known Jason for 15 years and have worked with him multiple times at our prior company.

I know Jason brings the operational finance leadership and business decision support that Integer needs to achieve our vision and execute our strategy. He has a diverse background in terms of the roles and the businesses he has worked in, which enables him to bring a broad perspective to our strategy and its execution.

I am confident he will bring the analytical and operational insights to the business that will enable us to drive not only the improvements we are targeting, but the pace of change as well. Equally important to me and the company is the type of leader Jason will be at Integer.

Because I've known and worked with Jason, I know he will be a role model leader that helps to shape the culture at Integer, centered around our operational, strategic imperatives of performance excellence and leadership capability. I am excited to have Jason on the Integer team, and I'm confident you will enjoy getting to know Jason as well.

As Jason joins the team, it moves us one step closer to Jeremy Friedman's previously announced retirement at the end of this year. Jeremy has been our interim CFO since late May. And before that, he was our Chief Operating Officer. Before becoming the Chief Operating Officer, he was President of Cardio & Vascular.

Jeremy has been instrumental in many of the successes at Integer. And I have personally enjoyed learning from Jeremy and partnering with him for the past 1.5 years. Jeremy was integral to the development of the strategy we announced at the beginning of this year as well as the execution of the strategic decision to divest the AS&O product line.

On behalf of all Integer associates and the Board of Directors, I want to publicly thank Jeremy for his immeasurable contributions to Integer and the patients we help. And we wish him the best as he enters retirement. Let's now shift to our third quarter results and the outlook for the rest of the year.

I'm pleased to report that we delivered another strong quarter of sales and earnings growth, which were in line with our expectations. We are making improvements to our revenue and earnings guidance. Our revenue guidance has increased to reflect growth of 6% to 7%.

The range of our adjusted EPS guidance has increased by $0.20 on the low end and $0.05 on the high end, driven primarily by lower taxes and interest expense. During the third quarter, we dramatically reduced our debt balance from both the AS&O divestiture proceeds and the continued strong operational cash generation.

We have reduced our leverage ratio to 3.7x adjusted EBITDA, which is down from 5.6x when we started the year. This lower leverage will allow us to continue to reduce our interest expense to increase earnings and provide added financial flexibility to support our growth objectives.

There were many actions taken in the last quarter to implement our strategy, but there were 2 very significant steps worth discussing on this call. The operational strategic imperative leaders have been working since the first quarter to develop the multiyear plans for each of the 6 imperatives.

The executive leadership team, my direct reports, led the strategy development for each of these imperatives. In September, we launched our operational strategy with the top 100 senior leaders in the company.

The purpose of this meeting was to inform, engage and inspire these leaders, so they can lead all 8,000 of our associates to execute our strategy. We discussed how the cost-focused strategic imperatives will drive improved service to our customers and efficiency in our operations to fuel growth.

The culture strategic imperatives define what we mean by performance excellence and how we develop leadership capability. The customer strategic imperatives define how we will organize to serve our customers and drive above-market growth.

This launch is an important inflection point for Integer, as we have now formally engaged our top 100 leaders to lead the execution of our strategy to achieve excellence in everything we do. I look forward to keeping you updated on our progress.

Another significant step is, we have begun transitioning to a new sales organization structure, which is designed to drive more customer-focused growth strategies and provide increased accountability for driving sales growth.

We will be gradually implementing this new structure with our customers and our increased focus on enabling their growth to position us to earn more of their business. It will take us through the end of the year to effectively transition to this new structure, while continuing to support our customers' needs.

With Jeremy Friedman's upcoming retirement, it is the appropriate time to transition the 2 customer strategic imperatives to Payman Khales, President of Cardio & Vascular; and Tony Gonzalez, President of Cardiac Rhythm Management & Neuromodulation.

As the success of each of these customer imperatives is dependent upon the other, Payman and Tony will continue to work side by side to ensure we deliver the innovation and service that will enable us to win in the markets we serve. Let me now turn the call over to Jason to discuss our financial results.

Afterwards, I will come back on for some concluding remarks and then open the call for your questions.

Jason?.

Thank you, Joe. Good morning, everyone, and thank you, again, for joining our call. I'm truly excited to join the Integer team and to be here today for my first earnings call. And I very much look forward to contributing to our continued performance. Let me start with the review of our third quarter adjusted financial results.

Our growth trend continues this quarter as we delivered $305 million in sales, which is up 7% versus last year on both a reported and organic basis. You'll see shortly that 3 of our 4 product lines are up high single digits in the quarter, all contributing to this performance.

Adjusted EBITDA growth followed at $68 million, up 9% organically and up 10% on a reported basis. And we delivered $35 million of adjusted net income or $1.06 of adjusted earnings per diluted share, which is up $0.12 on a year-over-year FX adjusted basis. Let me provide some color on these results, starting with our sales trends on the next slide.

As a reminder, this page shows trailing 4-quarter organic sales. We believe this is a more meaningful indicator of our growth trend and how we are performing in the market versus an individual quarter that may contain anomalies resulting in the timing of customer purchasing decision.

As mentioned, we show positive trends in all 3 of our medical product lines, building on strong growth in the prior quarters. And though, this is partially offset by a decline in our nonmedical product line, we achieved 9% trailing 4-quarter growth across the Integer enterprise. Now turning your attention to the left side of Slide 9.

You'll see that our reported third quarter adjusted EBITDA increased $7 million year-over-year, or up 10%. $10 million of this growth was driven by improved operating leverage on increased sales as well as $1 million from favorable currency impact versus last year.

These were both partially offset by a $4 million headwind from higher incentive compensation expense. Concurrent with our improved performance, we do expect our total 2018 incentive compensation expense to be higher than 2017.

Turning to the adjusted net income bridge on the right side of the page, you see that EBITDA year-over-year drivers fall through the net income, with an additional $1 million of improvement in interest expense as well as benefit from our continued debt leveraging, that I'll talk to you in more detail on the next slide.

And to complete the bridge, we also take the $1 million headwind in increased tax expenses, but still achieved the 14% tax -- effective tax rate, excuse me, for the quarter. Looking at the Slide 10, I'd like to share our cash flow performance in the third quarter.

As we've been doing for some time now, we continued to pay down debt in excess of our required repayments. Our leverage was substantially reduced to 3.7x adjusted EBITDA by the end of the quarter.

We paid down $595 million of debt, including $548 million from the proceeds of the Advanced Surgical & Orthopedics sale, plus an additional $47 million from free cash flow.

We generated $54 million of cash flow from operations and $40 million of free cash flow during the third quarter, up significantly from the second quarter from improved working capital. Reducing our leverage from 5.6 times at the beginning of the year to 3.7 at the end of the third quarter significantly strengthens our financial position.

With our reduced leverage, we earned a 75 basis point interest rate reduction on our $314 million term loan A. And in addition, we received upgrades from the two major credit rating agencies, which resulted in a 25 basis point interest rate reduction on our $658 million term loan B.

And we remain highly focused on continuing to drive strong operating cash flow and continue this trend. Now let's turn to a review of our product line sales results. Starting with Slide 12, the Cardio & Vascular product line continues to drive strong organic top line growth, delivering 9% year-over-year in the third quarter.

This growth is primarily driven by continued strength in the electrophysiology market with new product launches and the benefit of a key customer inventory replenishment. Our quarterly sales trend continues upward with strong demand across several key segments, including electrophysiology, structural heart and peripheral vascular.

We expect the growth trend to remain above market from increased focus on these high-growth segments. Sales in our Cardiac & Neuromodulation product line were up 8% in the third quarter.

Cardiac Rhythm Management grew at low single digits, while Neuromodulation was a key revenue growth driver in the third quarter, delivering a year over increase in the high teens, primarily from spinal cord stimulation product demand.

In the fourth quarter, Cardiac Rhythm Management faces a challenging comparable baseline, given the fourth quarter of 2017 was 13% higher than the average of the first 3 quarters of 2018.

And though we will remain very focused on accelerating neuromodulation sales through the active support of customers, and we will deliver growth in the fourth quarter from finished devices and least demand, it will not grow enough to offset the tough CRM comparable. Slide 14 shows the last part of our Medical segment.

As a reminder, Brian acquired our ASO product line. The Advanced Surgical, Orthopedics & Portable Medical product line shown today includes sales under our supply agreements with Brian. The first half saw a strength in Portable Medical, while the third quarter was driven by above-market growth in Advanced Surgical & Orthopedic products.

And sales are expected to level off and be more in line with market trends. And finally, Slide 15 summarizes Electrochem, our nonmedical segment.

Electrochem experienced a year-over-year decline in sales in the third quarter due to the timing of energy customer inventory adjustment and the planned phaseout of certain rechargeable battery pack products.

The trailing four-quarter sales flattens with North American drilling activity, but Electrochem continues to execute its strategy and has several exciting initiatives to expand its product offering, win new business and further penetrate the environmental and military market. Let's now turn to the full year outlook.

As Joe mentioned, we are making an upward revision in our sales and earnings guidance. For adjusted sales, we expect a range of $1.195 billion to $1.21 billion, with a growth of 6% to 7% on a comparable basis to last year. As we have consistently stated, the fourth quarter of 2017 represents a very difficult comparable period.

And despite, there is a full year sales performance reflects strong penetration in our medical market. For adjusted EBITDA, we still expect the range of $255 million to $265 million. Compared to last year, this reflects a growth of 9% to 13%.

At the midpoint of our guidance range, margins are expected to improve 90 basis points over the prior year to 21.6%, primarily from improved foreign currency exchange rates and operating expense leverage.

And we are increasing our full year adjusted EPS guidance by $0.05 to $0.20, and now expected to be in the range of $3.55 to $3.75 per diluted share, up 5% to 20%. Lastly, we made upward revisions in our cash flow from operations and free cash flow by $5 million and $10 million, respectively.

We have increased our full year estimated debt payments by $30 million from prior guidance bringing the total year debt reduction to approximately $695 million, resulting in an estimated leverage ratio of 3.6 times adjusted EBITDA. I'll now turn the call back to Joe..

Thanks, Jason. I'd like to take a moment to reflect on the last 15 months from a strategic perspective. We spent the second half of 2017 developing a comprehensive strategy, including a portfolio strategy to win in the markets we serve and an operational strategy to achieve excellence in everything we do.

The important message is that we developed the strategy and gained approval at our December board meeting. We introduced the strategy internally in January of this year and to investors on our earnings call in February. During the first six months of 2018, we executed the transformative divestiture of AS&O, culminating with the deal closure on July 2.

While executing this divestiture, we also appointed leaders for each of our six operational strategic imperatives and developed the multiyear plans to achieve excellence in everything we do.

We launched the multiyear plans to execute our operational strategic imperatives to our top 100 leaders at our senior leadership team meeting in September of this year.

So in 15 months, we developed the comprehensive strategy, executed an impactful portfolio change, and now, we just formally launched the execution of the operational actions to achieve excellence in everything we do. Our journey to excellence has begun in earnest.

We will keep you posted on our strategic progress and share with you the key milestones as we achieve them. In summary, we had a strong quarter of growth that resulted in an upward revision in our guidance. We also made significant progress in deleveraging from both the divestiture proceeds and operational cash flows.

We are on track to deliver $0.33 higher earnings per share than our original guidance at the beginning of the year, midpoint-to-midpoint, even after divesting $400 million of revenue with the AS&O sale. Thank you for being on our call today. Jamie, let's open up the call for questions..

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

Jumping in on a couple of calls, and I do apologize if I missed it, could you help walk me through the implied guidance in 4Q for organic growth? If I'm doing the math right, it's flat to down 3%. And I just wanted -- just curious to get the drivers of that..

Your analysis is correct. That is the implied growth rate of the fourth quarter consistent with the guidance we've provided all year. We had very strong first half 2018 year-over-year results, which we predicted as part of our internal forecasting.

And the biggest reason for that is, if you look at 2017 quarters -- quarter splits, which you can find on Page 22 in the slide presentation, it's the first page in the appendix, from the -- looking at the 2017 quarter splits, you'll see the first quarter of 2017 was $265 million and the fourth quarter was $300 million.

So a $35 million revenue increase between the first and fourth quarter. So when we look at our 2018 guidance and our internal projections, we saw that we were going to have very strong year-over-year growth in the first half, even solid growth in third quarter. And then in the fourth quarter, we knew we would be flattish on a year-over-year basis.

And if you look at what's driving that, if you look at the product lines, you can see that CRM and Cardiac Rhythm Management & Neuro in the fourth quarter 2017 was $117 million of revenue and that's 13% higher than the first 3 quarter average. So we had a spike in the fourth quarter in Cardiac Rhythm Management & Neuro.

And there's a couple reasons for that. One of the biggest reasons was, we had a supply constraint with a supplier that -- it was customer selected that shrank our first half or reduced our first half 2017 shipments.

And then, we were able to catch up on that supply in the second half of the year, and the fourth quarter ended up being a big part of that. So we know some of the reasons why the CRM, Neuro was higher in the fourth quarter of '17, and we expected it. So this is as we expected.

And I know there's a great focus on discrete quarters in the quarterly results, and that's why we like to look at and focus on the rolling 4 quarters, the trajectory of the business, we think we're on a good trajectory, 6% to 7% full year growth this year, it's higher than our guidance from the beginning of the year by a little bit.

Last year, we were 5% growth. So when we look at our trajectory, we're looking at the trajectory of the business as opposed to the discreet quarters. So the fourth quarter being flattish is no surprise to us, and it was part of our forecast from the beginning of the year..

And then how are you attacking the manufacturing excellence rollout? Should we be thinking about going across all of your manufacturings at one time? Or we're going to do -- you're going to do 1 or 2? And are there any kind of volatility in working capital inventory builds that you might -- that we might be looking for associated with it?.

On the manufacturing excellence, we launched in July the manufacturing excellence imperatives specifically with the manufacturing leaders and the operating leaders. Then in September, we had the complete rollout of all 6 strategic imperatives to the top 100 leaders in the company.

So we took what we did with the manufacturing leaders in July, and then we did it with the top 100 leaders in the company. Because although, there are 6 imperative leaders and 6 very specific strategic actions for each of the strategic imperatives, all of the top 100 leaders play a role in executing on our strategy holistically.

So for manufacturing excellence specifically, there's really 3 or 4 key things. We kind of got a 4-step process.

And it starts by defining with clarity, what is the Integer production system? What are the elements that we're going to focus on? What are the core processes that we need to have? Standardization, consistency, metrics and visibility across the entire enterprise.

And so that's enterprise wide very specifically defining the Integer production system and how we're going to run manufacturing to achieve excellence to serve our customers. The second step in that is, we call, lean diagnosis, which is simply looking at each site, site by site.

And this is maybe to your question, site by site, we analyze the gap between where we are and the desired future state. And that gap analysis fundamentally tells us what we need to go do to achieve the excellence that we have set for ourselves as the goal. And then we develop the prioritization of those actions site by site.

So it is a site-by-site execution, but it does start with an enterprise-wide definition of how we want to run the operations. And then there's a -- third and fourth steps are pretty straightforward.

You got to have visibility, the right KPIs, the right metrics and visibility, so that each site knows and understands the progress they are or are not making, so we can then adjust accordingly. And then once we've done that, the process just rinse and repeat. You just continuously improve and raise the bar on the expectations.

So it is a site-by-site rollout with an enterprise-wide process, and it is a multiyear process, because once we go site by site, then we know what we have to go execute. We're looking at this as a 3-year plan for us to achieve excellence in all the key metrics, service levels, quality, efficiency and how we serve our customers.

So we're accelerating the lean diagnosis, the gap analysis, so that we can drive the improvement as quickly as we can.

Because we launched this with the manufacturing leaders in July, and then with the top 100 leaders in September, we are aggressively implementing the gap analysis, the lean diagnosis, and we would expect to start to see improvement in the financials, in the results next year, probably more in the second half of the year.

And as we enter 2020, we should see meaningful improvement in our productivity. And we've talked a lot about how do we drive profit growth that's twice the rate of revenue growth.

The way we do it is by driving enough productivity and efficiency in our operations, not just the manufacturing but all processes, to offset selling price and wage inflation. And that's a key part of our strategy. Specifically getting to your question about working capital, I would expect working capital to improve.

If we run the operations more efficiently and we have the better controls over our processes, I would expect to see working capital improvements. We've not quantified that.

We will have a better quantification to that when we finish the lean diagnosis, and we've completed our gap analysis versus the desired state, and we determine the prioritization of the steps we're going to take in each site, which will then drive those efficiencies both in cost and in working capital.

So I'm expecting to see an impact from this strategic imperative by the second half of 2019. And I'm looking for the working capital improvement, and we will be incorporating that into our future guidance to you..

Okay. That's great. And then, I welcome Jason to these calls with a question on the remainder of the debt.

What could you guys potentially do to offset rising rates going into 2019 and 2020?.

Well, certainly, we'll continue to look at our capital structure and evaluate the options that we have, and as I mentioned on the call, continue to drive the -- just the strong operating cash flow that we've been able to achieve over the last several years.

I think all those pieces will be an important part of how we start to manage that overall expense that we've done. And then -- and look, we'll continue to leverage the fact that we have reduced our debt, and that, again, I think the other thing I mentioned is that we've got about $200 million of our debt, which is at a fixed rate.

So that does reduce some of the volatility that we've got in the total balance sheet..

[Operator Instructions] Your next question comes from Jim Sidoti with Sidoti & Company..

Can you hear me. Jason. I hope you're up for the task. It seems like there's a lot of pressure there to succeed. So good luck with that..

I am. Thank you, Jim..

All right. You've put out now several pretty good quarters on the Cardio & Vascular front with high single-digit top line growth there.

Is -- are there any particular products -- new products that are driving that? Or is that just growth in the industry in general? And do you expect that trend to continue in '19?.

Jim, thanks for the question. And you have noted very clearly the Cardio & Vascular business continues to perform very well. We're -- we've been running at a 10% or 11% rolling 4-quarter growth rate for the last 4 quarters, which is great performance. And that is -- some of that's obviously the industry.

We think the industry and Cardio & Vascular is growing in the 6-, 7-plus percent range. And we think right now, we're outperforming the industry. And we see that from not one product but many products and not one customer but many customers.

And we've clearly been very focused, over the last few years, on the higher growth segments within Cardio & Vascular. We look at the Cardio & Vascular market and kind of breaking it down into -- we've broke it down into 4 key segments for us.

And that's structural heart, electrophysiology and then peripheral vascular, which is a broad and pretty inclusive definition. And then we have the other markets, which are more mature in nature and slower growths.

But we've been focusing on those 3 structural heart, EP and peripheral vascular markets to accelerate our growth and to increase our penetration in those markets, so that we can benefit from the faster growth rate. I think we've been successful with that with a number of products and a number of customers.

And the beauty of the business in Cardio & Vascular is, we serve a lot of customers. We think there's more opportunity with a number of customers. And part of our sales organization change is to increase the coverage of some of those customers that were not as close to today and that we think there's more opportunity to support.

And so we would expect to see Cardio & Vascular continue to grow nicely because of the markets. But our success in the markets, we do expect to continue to allow us to benefit from the focus in the higher growth segments..

Okay.

And then, is the focus over the next three or four quarters going to be strictly on the manufacturing side of the business? Or are you going to make changes on the distribution as well?.

Great question, Jim. Our focus right now is the strategy that we've laid out. The portfolio strategy, by market, it's looking at the products like the Cardio & Vascular segmentation that I just described. We're doing the same thing in Cardiac Rhythm Management & Neuromodulation, in Electrochem and as well as the Portable Medical business.

And on an operational side, we have six operational strategic imperatives. One focus area is customers, then cost and culture. And to your point, maybe your comment to Jason, yes, the expectations are high. And I do expect the leaders of Integer to be able to do everything that's part of our strategy.

We've laid out a strategy that we think is going to lead us, enable us to win in the markets we serve and achieve excellence in everything we do. And so we are executing all six operational strategic imperatives, while executing on our portfolio and product strategies.

So yes, Jim, the expectations are high, and I'm confident not only Jason, but the rest of the leadership team is up for it and they're excited about it. There was a lot of energy at our leadership team meeting in September and a lot of excitement around the clear strategy we've laid out and the execution of it.

But to your point, yes, we set a high bar, and that's what we're driving towards..

There are no further questions at this time. Ladies and gentlemen, thank you for your participation. This concludes today's conference call. You may now disconnect..