Integer Holdings Corporation (ITGR) Q3 2016 Earnings Report, Transcript and Summary

Good day, gentlemen, and welcome to the Integer Holdings Corporation Third Quarter Earnings Conference Call. At this time, all participants are in the listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn today’s conference to Amy Wakeham, Vice President of Investor Relations. Please go ahead.

Thank you. Good afternoon, everyone. Thanks for joining us and welcome to Integer’s Third Quarter 2016 Conference Call. This call is being webcast live as together with our earnings release and conference call presentation is available on the Investor Relations section of our corporate website. The results of data we discuss today reflect the consolidated results of Integer for the periods indicated. I would like to take this opportunity to let you know that beginning with our next quarterly earnings, the Company will be minding the timing of its earnings release and conference call more closely to its SEC filings. As we evolve our business process and procedures, we are making changes to incorporate thus practices and reduce risk by shortening the gap between these two events. During our call, we will discuss certain non-GAAP measures. For reconciliations to the most directly comparable GAAP measure, please see the appendix of today’s presentation and the notes to the financial statements in today’s earnings release. As a reminder statements about expected future events and financial results are forward-looking and subject to risks and uncertainties. Our actual results may differ. Please refer to the risk factors detailed in our SEC filings for further discussion. For anyone listening to a taped or website replay or reviewing a written transcript of this conference call, please note that all information presented is current only as of today’s date October 27th, 2016. The company disclaims any duty or obligation to update any forward-looking information whether and as a result of new information, future events or otherwise. On the call today to discuss our quarterly results, update you on our business outlook and strategic initiative are Thomas J. Hook, President and Chief Executive Officer; and Michael Dinkins, Executive Vice President and Chief Financial Officer. Following our prepared remarks, the call operator will come back on the line for Q&A. I would now like to turn the call over to Tom.

Thanks Amy. Welcome and thank you all for joining us this afternoon. On today call, we will review our third quarter results, provide an update in our product lines, progress and integration and discuss our long term strategic growth initiatives. Integer is a company that is well positioned within the medical technology market and it is up to us to capitalize on the opportunities in front of us. A year ago today, we completed the transformative combination of Greatbatch and Lake Region Medical, the transaction that’s strategically positioned Integer to be a global leader in medical device outsourced manufacturing. We now offer a broad suite of technologies across the entire spectrum from discrete products to complete implantable medical device systems, a comprehensive capabilities and broad product offering allows us to deepen our customer relationship and explore new ways to partner together both with existing and new customers. We believe there is a significant opportunity to expand and grow our business. Today, a relatively low percentage of medical device manufacturing is outsourced and the market is highly fragmented. Our confidences in manufacturing core technologies, quality control and operational excellence will allow our customers to leverage significant benefits provided by Integer. As we review our third quarter results, let me acknowledge upfront and we clearly have work to do in order to further stabilize our business and bring back to predictable revenue growth. As we have discussed in prior quarters, our business has been impacted by headwinds resulting from declining cardiac rhythm management revenues driven by customer changing programs in maturing market conditions and also the downturn of the energy market. As we were closing with our customers and deepen those relationships, we feel we have established a better line of site to our customers programs, demand plans and growth objectives which will help us better manage our business and product line forecasts. We are laser focused internally and improving our operational processes to further support our long term growth initiatives. We are seeing improvements. Revenue is beginning to stabilize across our product lines and are indications that the energy market is bottomed out and is poised for a slow recovery sometime in 2017. Operationally, we are making satisfactory progress. The companywide cost reduction programs we implemented last quarter are generating results and we remained focused on aggressively improving our working capital. However to reduce inventory levels is advancing and we expect we will see continued progress in future quarters. Additionally, we are successfully extended payment terms with many key supply chain partners. From a financial perspective, revenue is essentially flat year-over-year and on a sequential quarterly basis. Good progress and the declines we saw during the first half of the year. We are seeing incremental quarterly improvements in our gross margin and our total operating costs are declining further demonstrating the success of our cost reduction effort. I would like to now turn the call over to Michael to discuss our third quarter results in more detail and our outlook for the remainder of the year. I will be back later to discuss our product line results and our strategic growth initiatives. Michael?

Thanks, Tom, and good afternoon, everyone. I am going to take you through our financial results, balance sheet metrics and a discussion of our updated full year guidance. As you’ve heard from Tom, we have made progress both operationally and financially to stabilize our business and this is reflected in our third quarter results. Sales in the third quarter of 2016 were essentially flat at 347 million compared with 348 million in the prior year and in the second quarter of 2016. This is a significant improvement compared to the year-over-year and quarter-over-quarter declines we saw during the first half of the year. Foreign currency exchange rates did not materially impact sales in comparison to the prior year in third quarter. Gross margin of 28.3% remained steady as well. Comparing flat to prior year and a 70 basis point improvement compared to 27.6% in the second quarter of 2016. Our efforts to reduce costs, drive the integration synergies and focus on operating efficiencies are generating results. Operating expenses as a percentage of sales are down 360 basis points from the prior year quarter to 17.6% and down 160 basis points from the last quarter. Taking a closer look at sales, the chart on slide eight provides a quarterly view of sales on a comparable basis over the past several quarters. Year-over-year, quarter-over-quarter and year-to-date product comparisons have improved from the second quarter of 2016, reflecting enhance customer relationships, waning impact of discrete customer programs and the improvements in overall market conditions. Tom will discuss our product lines in more detail later in the call. We are focused on improving our adjusted EBITDA because it provides us benefits and generating cash to pay down debt and meet our loan compliance requirements. Our approach to improving performance is to concentrate on quality metrics that improved customer satisfaction, reduced cost and the system expanding our share wallet with our customers. We achieved this through a culture of continues improvement and an attention to details. We are faced with continued pricing pressure and estimate that our prices are down approximately 1% to 2% for the quarter and year-to-date, which drives the need to focus on quality as a driver of margin expansion. We believe that superior quality is a depreciator in the market that will lead to volume increases and efficiency. Cash flow provided by operating activity for the third quarter and 2016 were approximately 39 million and capital expenditures were approximately 17 million. Cash flow from operations in the third quarter of 2016 were negatively impacted by approximately 13 million of consolidating, IP related litigation, acquisition, integration and spinoff related expenses which are predominantly cash expenditures and $18 million of interest payments on debt. During the third quarter of 2016, we repaid 12 million of our outstanding debt and our cash balances increased $8 million. Year-to-date, we have repaid 29 million of our debt. We are implementing several initiatives to continue to improve cash flow. First, we are targeting continued reduction in our inventory levels, not only for the balance of 2016 but for the 2017 budget it means to generate cash and continue to pay down debt. Second, our supply chain team continues to rationalize the number of vendor we do business with to drive synergies and expand payment terms. In addition, we are looking at reducing our capital expenditures in the integration expenses as we approach to tail end of our integration efforts. Let’s now turn to a discussion of our outlook for the remainder of the year. Our ongoing efforts to collaborate more closely with our customers have improved our understanding of future revenue projections and we are reconfirming the full year revenue guidance range of 1.375 billion to 1.395 billion that we updated last quarter. We are also reconfirming our full year adjusted net income and adjusted diluted EPS guidance. We have updated our full year 2016 adjusted EBITDA guidance to be within the range of 285 million to 295 million, a decrease of 10 million as the midpoint of guidance. This decrease is driven by changes in the estimate that bridge us from gap results to adjusted results, primarily income taxes and depreciation and amortization. With respect to the financial covenants associated with our indebtedness, we remained in compliance with both our net leverage ratio and our interest coverage ratio as of the third quarter 2016. As we look to the end of the year, our current outlook for both revenue and adjusted EBITDA allows us to remain well within the net leverage ratio requirement. Based upon our updated range for adjusted EBITDA for 2016 there is a potential that we may not be able to meet our minimum interest coverage ratio in the future. We are actively monitoring our financial covenant compliance and are taking steps to identify opportunities from proven our financial performance so that we will remain in compliance. However, in order to reduce our risk we are working with the administrative agent under our credit facilities to obtain an amendment or waiver of the financial covenants before year-end. Please see the appendices of this presentation of information regarding how to calculate our financial covenants and more information on our bank facility. I will now turn the call back Tom Hook.

Thanks Michael. I'd now like to do a quick review of each of our product lines. Starting with our Advanced Surgical and Orthopedics product line which includes Portable Medical, we have made significant progress advancing our wireless power initiative with active programs and engagement from our strategic customers. Overall Advanced Surgical and Orthopedics product line revenues remains a solid contributor to our overall results even as delayed shipments and changes in the timing of new product launches have decreased customer demand throughout the year to quarter driving a slight decline in product line revenues both year-over-year and quarter-over-quarter. Our operational performance remains steady and we continue to see improvements in our customer relationships and continued high levels of collaboration with our top customers. We have multiple continuous improvement initiatives in place across our operations and early indications are showing positive results and key performance indicators. As we look to 2017 we see slight revenue growth opportunities driven by new product launches and acceleration in targeted areas. We will share more details on future calls. Revenues in our Cardio and Vascular product line remain steady increasing about 1% year-over-year and 3% quarter-over-quarter. Our operational performance is trending positively back by strong customer relationships. We anticipate that a previously delayed key customer program will commence commercialization late in the fourth quarter and ramp throughout 2017. As we look to the future we have many opportunities to win new programs and drive revenue growth. We are focused on further enhance sitting and deepening our customer relationships so that we remain the partner of choice as our customers evaluate new product development and manufacturing opportunities. Turning to the Cardiac Rhythm Management & Neuromodulation product line, I believe that the challenges we’ve faced during the first half of the year behind us. Our revenue base is stabilizing and we have visibility to revenue growth opportunities as we expand in deepen relationships with our customers. As we focus on long term business development we are also seeking to accelerate our short and mid-term revenue opportunities. We recently won several new product development and manufacturing programs with leading medical device manufacturers and we have identified additional targets that could provide even further revenue growth. We are also actively seeking several customer contract extensions and recently signed five year and 10 year extensions with two of our key customers. With the combined capabilities of Integer we're able to decrease the total cost of ownership for our customers and enable broader discussions to drive new business opportunities. We are in various stages on the path to future commercialization with several emerging companies and are very excited about the future opportunities to grow our product line revenues even more. With these significant opportunities in front of us, we are driving operational excellence and continuing to shape a customer centric culture within Integer, we look forward to sharing in future quarters as we make progress in these areas. Before I move to our next product line, I like to address a recent concern in the marketplace regarding the potential for premature battery depletion due to short circuits induced by lithium deposits and high rate lithium batteries. We supply lithium based batteries to a wide range of medical device companies. We manufacture and test our batteries to precise specifications provided by our customers to support their FDA approval process and end niche applications. We have received no indication that there have been any failures associated with the phenomena of lithium deposits due to a battering not needing its customer provided design specifications. To lower the best quality possible we provide our customers with ongoing support and extensive technical information and the phenomenon of lithium deposits. We will continue to work close with our customers’ engineers to advance feature battery and device designs and enhancements. Our Electrochem product line rev continues to trend with the oil and gas market. Although we have seen revenue declines throughout the year primarily driven by the prolonged downturn in the energy market, our customers are indicating they believe the market has bottomed out and there are signs of a slow recovery. This leads us further supported by the positive recent quarterly results of a large oilfield services company. However many companies are still struggling to stabilize their business and we do not expect to see revenue improvements until sometime in mid-2017 at the earliest. Electrochem volumes for the military environmental customers do remain as we expected and in line with internal forecasts. Despite the headwinds in the market, we have maintained and even grown our market share within the space. We have a very strong and positive customer relationships across all market segments we serve which has been facilitate of our strong operational and quality performance. As the market has contracted, we have been able to advance our competitive position with key strategic customers, resulting in multi-year supply agreements in the opportunity to quote and significant new business opportunities. We are also not standing still while we hope to see recovery in the energy segment, we see a great opportunity to further grow our market share and better position ourselves for future revenue growth when the oil and gas market does turn around. We are the leader in providing energy solutions for critical applications and we are actively pursuing new customer and market opportunities developing new products solutions and investing in R&D to advance our technology. As we manage the Electrochem product line through this challenging revenue period, we are rationalizing our cost structure and maintaining inventory at appropriate levels to improve our return on invested capital. I’d now like to review our high level strategic objectives as we look towards the future and deliver on our vision to enhance the lives of patients worldwide by being our customers’ partner of choice for innovative medical technologies and services. First, we will invest to drive growth with our customers across the full spectrum of our product and system capabilities. Second, we will deliver shareholder returns through growth and profitability and cash generation to drive accelerated repayment of our debt obligations. Finally, we will continue to cultivate an ethical values driven culture that optimizes the commitment and contribution of our exceptional associate team. We've talked a lot about improving enhancing customer relationship and as you have heard throughout the call we are making good progress here. Longer term, we have a funnel of development programs underway across all of our product line, these programs which take three to four years to fully develop and obtain FDA approval are examples of how our expanded research development capabilities would drive growth over the longer term. We will continue to invest in R&D to drive robust product pipelines for future growth opportunities. Our integration efforts continue to go very well and we remain on track to exceed our original 2016 net synergies target of $25 million. We now expect to realize net synergy savings between $30 million and $35 million for the year. Our productivity initiatives and efforts to reduce direct and indirect spend, primarily through supplier negotiations and vendor consolidation are generating the desired results. Upcoming critical milestones including the consolidation of our IP systems, a comprehensive integration of associate benefit plans and process optimization within our sales and operating planning processes all remain on schedule and we’ll further support our ability to successfully integrate our company. We seek to create an optimized manufacturing footprint, leveraging our increased scale and product capabilities while also supporting the needs of our customers. Our efforts will include potential manufacturing consolidation, continuous improvement, productivity initiatives, direct material and indirect expense savings opportunities, and the establishment of centers of excellence around the world. We announced the first step of our manufacturing optimization efforts with the closure in transfer of our Clarence, New York facility. We will be transferring these machine component product lines to other Integer locations in the United States. The product is expected to take 12 to 18 months and will generate estimated annual synergies of about $4 million starting in 2018. Let me conclude by reiterating what I said at beginning of the call. Integer is a company that has well positioned within the medical technology market, and it is up to us to capitalize the opportunities in front of us. We have expanded our medical device capabilities and are excited about the opportunity to partner with our customers to drive innovation. We have the scale and global presence supported by world class manufacturing and quality capabilities. We are confident in our abilities as one of the largest outsourced medical device manufacturers with a one history of successfully integrating companies driving cost down and growing revenues over the longer term. We’ll continue to create shareholder value by enhancing the lives of patients worldwide by being our customers’ partner of choice for innovative medical technologies and services. Operator, we’ll now turn to the question and answer portion the call.

Thank you. [Operator Instructions] Our first question comes from line of Matt Mishan from KeyBanc. Your line is open. Please go ahead.

Hi good afternoon and thank you for taking my questions.

Good afternoon.

Good afternoon.

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

Moving pieces of the $10 million as we've bridged from the GAAP EBITA that we have calculated to the adjusted EBITDA and updated our estimates. We made changes in terms of the income taxes and the depreciation & amortization roughly about $6 million of it is associated with the depreciation & amortization as we reconcile that and updated our estimate, and the balance of it is how we have to recognize for adjusted basis in our income taxes. We continue to believe that our cash taxes for the year will be in the $8 to $10 million dollars range in fact we think will be a little bit closer to $8 million range, so that tax change really did not impact our expectation to almost cash movement.

And I think I have to follow-up for the online and offline on that one. And I can’t understand the issues with the kind of the management and Electrochem, I think those are pretty well explained. And I'm not fully sure why some of the other segments - the other three segments are flat to down given the robustness of the end markets. Could you put a little bit more color around why Orthopedics, Advanced Surgical part of medical is down and why Cardio and Vascular is relatively flat this year?

Well I’ll start with our Advanced Surgical and portable medical product line that as you know we've been actively moving this product line from our viewer to an organ operations down to our operations in Tijuana at Integer to accomplish that change we had to do a ramp in last time manufacturing in our Beaverton operations and did make available those who last time purchases from that location that flattened out our revenue opportunities in 2016 until we had our Mexican facility in Tijuana online to be able to ship portable medical products. So as we look at the product lines for Advanced Surgical and Portable Medical and combination it's suffering from having some of those products shipments being wider in 2016. Then they were in the 2015 timeframe. Our expectation is as the facility that’s brand new down in Tijuana is fully qualified, which will happen between now and the end of 2016, the 2017 will be a year that's returning back to normal and growth and that hence will then help that product line into totality show a more normal revenue trajectory. The second point that you pick up from Advanced Surgical and Orthopedics is variable is both Advanced Surgical and Orthopedics are a product line that's prone to launch driven revenue. We did not have many launches for Advanced Surgical or Orthopedics in 2016. We’ve won several products and project wins with key customers for 2017 we expect launches to be more of a driver for growth next year. The file and third variable would be the constant price pressure that is a very competitive space and particular orthopedics medical device outsource manufacturing. So we’ve seen a lot of price pressure in this space. We have seen some other medical device outsourced manufacturers being sold to new buyers in the space, so it’s a changing landscape. But the pricing pressure I mean in this market is still very high and it’s a very competitive marketplace. So that’s a third variable that is constant and it did hurt our ability to grow in 2016 and we expect that to be a variable going forward as well.

And the cardio and vascular?

Cardio and vascular is - the cardio and vascular segment is traditionally a low single-digit grower from a medical device outsourcing perspective. It has a very small effect in that we are finishing up our transition from our Plymouth, Minnesota facility to also down to Mexico operation for manufacturing. That is largely been completed as well as our facility in Arvada, Colorado being transition to our Aura’s Mexico facility. Those moves has taken place throughout 2016. There has been some shipments of that product throughout 2016, but in the production - and the new facility is just coming online. It is stunted growth somewhat. So the moves both Arvada facility is that first variable in Cardio and vascular. The second variable is really regarding a major product launch that we had won Integer years ago. That has already been completed development and it’s just waiting on launching from a customer. That program that was set to launch at the beginning of the year was delayed progressively to the end of the year. However, we received the green light to commence manufacturing ramp for commercialization and will be late in the fourth quarter. So that has been a revenue drag for us in the cardio and vascular product line all year because that so is been built, it’s qualified, the production team is on board and waiting to build product, but we’re unable to start because the customers regulatory processes not been completed. So that’s the second variable. Third variable is also price in the cardio and vascular segment and is traditionally been a variable that we fight and then across that product line, it’s not any higher than it has been normally but it still is a medical device outsourcer, it is a varied revenue growth that we have to overcome.

Okay, great. That’s very insightful. And then just last question for me and kind of multipart question but around your net debt level, are you confident given all the moving pieces that the net debt has peaked and should be moving lower sequentially now from here and then also are there any asset sales that you could pursue that would help you deliver more quickly.

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

Are there any asset sales that can help you deliver more quickly?

We are exploring all opportunities including asset sales. You know we have some investments on our balance sheet and another thing is that we can look at. So they are being looked at as we speak.

All right, thank you very much, guys.

Our next question comes from the line of Jim Sidoti from Sidoti & Co. Your line is open. Please go ahead. Mr. Sidoti, your line is open.

You just say, we can hear you.

Yes. Can you hear me now?

Yes, we can.

Okay, sorry about that. Can you just give us some sense on the timeline for the integration region, how many more quarters you think it will take?

Yes, Jim. This is Tom Hood. We are targeting to complete our integration program the formality of the program in mid-2017 in its totality. Any tailing activities or programs would be picked up by individual operating managers and functional areas they continue their implementation. For example, our IP plans and strategies have been laid out across all of Integer, we’re actively in implementation of these systems already and we’ll continue to do so and the majority of them will get implemented 2017. So we feel that once that plan is out and running in deployment mode, the functional leaders can achieve information officer can take leadership for that and fully implement it after we close integration mid-2017. So our objective is to have it completed by the second quarter of 2017 and allow the tails of any programs that run out from there. One portion of integration that is a very long standing operating mechanism we used it Integer is plant consolidations and productivity improvements. We view some portion of that as part of integration but largely that will stretch well beyond the formal integration closure mid next year and will proceed via each project it would be running that applicable for whatever period of time that it pertains to. So we view that it will be fully integrated across the franchise within the next nine months.

All right, and now that we’re three months down the road, do you have any further inside on the acquisition or proposed acquisition and how that will impact your business?

I have any more insights other than what’s publicly available but St. Jude is a major customer of ours. We do also have Abbott is a customer of Integer, but not as large. We do view that there’s tremendous opportunities for the combinations of those companies and we’re very excited at Integer to be able to continue to driver existing business but more importantly expand our business with the combination of Abbot and the St. Jude. We find that we’re extremely well positioned to help them drive across their product continuum and drive a lot of value as they’re integrating their company and looking for synergy. So we view that as a as a potential future catalyst. We’re not counting on it, but we’re positioning ourselves to take advantage of it and we have very strong and healthy relationships with Abbott and St. Jude, and we look forward to working with the management team that runs with the company going forward in the future.

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

Jim, there’s two sides to your question. First of all, I think we’ve absorbed all of the bad impacts that we have had to and customer programs, end of life and inventory rationalization or market declines. So Electrochem, the inventory from our customers has been pinched out of the system and the market is stabilized. And cardiac rhythm management, we have already bled off the end of life products out of our revenue stream. I see both Electrochem and cardiac rhythm management product lines is to be slow growers in 2017, so low single-digits as the market for us recovered in energy and our customer program start to reach commercialization. As you know in cardiac rhythm management and neuromodulation product line, the big growth driver for us is neuromodulation. We have deep relationships with the neuromodulation companies from a component level all the way to a complete medical device system level. And our expectations for those products is although there on a much lower basis, they will be net growers in 2017. And while they won’t make an inflection point in the growth through that product line in totality will be a positive variable that will continue to grow in importance as we get out over the next three to five years. So I believe we have your question bottomed out both in Electrochem and in Cardiac Rhythm Management and our expectations are to drive growth in that starting in the fourth quarter and out into the next year.

Right, thank you.

Thank you. [Operator Instructions] Our next question is from Charles Haff from Craig-Hallum. Your line is open.

Hi there, this is actually Johnnie Meeker in for Charles. I just had a couple of questions for you guys, just kind of given back to the Electrochem. So I just want to make sure, I heard this correctly, but you're thinking low-to-single digits in 2017 and then kind of flat sequentially?

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

Okay.

So coming in the future you would expect as inventories have stabilized already. In demand because of the price of oil and oil services companies the demand is slowly increasing, we're going to be very tightly coupled with customers. We're not planning on any inventory build with customers in 2017 and no they'll just be a slow recovery over the course of the year.

Okay. And then just to touch on the synergies, you guys that you are accelerating synergies to now $30 million to $35 million for 2016, have you changed your outlook thus hopefully above $60 million in 2018 or by 2108?

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

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

I'll start with indirect spend first, so we have more legacy companies had many contracts for service providers that would be anything from Telecom to office supplies. Many of those contracts have a one year period of time in which we have to wait for that contract and for us to negotiate and Integer level with more savings in bodies into the contract due to the magnitude of our purchases. The same fact for direct materials also exists. We have current contracts that are reaching maturity and they're being replaced by centrally negotiated leveraging the broader manufacturing output the company has in demand levels, and negotiating better prices in terms of their key supply chain partners. So while that effect has not been a large effect for 2016 synergies. It is growing and importance as we bring the synergy level in 2017 up to a higher level. The direct material spend from negotiating contracts that are reaching provision [ph] and indirect spend hence more services type agreements are being negotiated to provide more productivity. So we still have benefits from other areas to drive synergies, but the direct material and indirect spend are planned prominently in our 2017 synergy plans.

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

You’re welcome.

That's all the time we have our question today. Thank you for participating in today's conference. This does concludes today program and you may all disconnect. Everyone have great day.