Good morning. My name is Leandra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Integer Holdings Corporation Q4 2018 Earnings 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. Mr. Tony Borowicz, Senior Vice President of Strategy, Corporate Development, Investor Relations, you may begin.

All right. Thank you, Leandra, and good morning, everyone. Thanks for joining us, and welcome to Integer’s Fourth Quarter 2018 Conference Call. The call is being webcast live, and the replay, along with the copy of the press release and earnings presentation, will be available on the Investor Relations section of our corporate website. The results and data today we discuss reflect the consolidated results of Integer for the periods indicated. During our call, we will discuss some non-GAAP measures. For a reconciliation of these non-GAAP measures, please see the appendix of today’s presentation and the notes to the financial 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, our President and Chief Executive Officer, Joe Dziedzic; and Executive Vice President and Chief Financial Officer, Jason Garland. In terms of our agenda, Joe will provide opening comments. Jason will then review our financial and sales results. We will provide a review of our 2019 outlook and provide financial closing remarks before opening up the call for Q&A. Now let me turn the call over to Joe.

Thanks, Tony. Welcome to everyone, and thank you for joining to hear about our fourth quarter results. I’m pleased to report that we delivered another strong quarter despite a difficult prior year comparison. As we’ve highlighted throughout 2018, the fourth quarter of 2017 was the highest sales quarter in the year, due in part to clearing customer backlogs in our cardiac rhythm management product line. Our sales grew 1% in the fourth quarter of 2018 as continued strength in C&V was enough to offset the impact of the anticipated CRM decline. We demonstrated strong operating leverage on the sales growth, with EBITDA increasing by 6%. We also continued to drive improved cash flow and paid down $30 million of debt in the quarter. For the full year, we exceeded the revenue, EPS and cash flow guidance that we established after the AS&O divestiture, and we met the EBITDA guidance, finishing in the middle of the range. We paid down $700 million of debt during 2018, reducing our debt to EBITDA leverage from 5.6x at the beginning of the year to 3.5x at year-end. We closed the year with close to $900 million of debt on the balance sheet, down from over $1.6 billion at the start of the year. This lower leverage allowed us to reduce interest expense and provides increased financial flexibility to invest more aggressively to drive accelerated growth. Jason will provide more color on the financial results in his view – in his review. Let’s cover some of the highlights from 2018 and discuss the status of executing our strategy. In July, we completed the divestiture of the AS&O product line. The strategic portfolio review identified the opportunity to unlock significant value through the product line sale. The transaction was both accretive to earnings per share and…

Thank you, Joe. Good morning, everyone, and thank you again for joining our call. I’ll start with a review of our fourth quarter adjusted financial results. Despite difficult comparables in the fourth quarter 2017, we delivered positive sales growth in the fourth quarter 2018 with sales of $303 million, up 1% on a reported and organic basis. Adjusted EBITDA was $68 million, up 5% organically and up 6% on a reported basis. We delivered $34 million of adjusted net income or $1.04 of adjusted earnings per diluted share, which is up $0.15 on a year-over-year reported and FX-adjusted basis. Integer delivered strong leverage on our sales with adjusted net income and EBITDA growth, primarily driven by SG&A expense management, lower research and development and interest expense. With respect to research and development, we executed and completed more development milestones at year-end in support of critical customer programs, which lowered our net expense. Turning your attention to the left side of Slide 9, you will see that our reported fourth quarter adjusted EBITDA increased $4 million year-over-year or up 6% on a sales growth of 1%. This growth was driven by improved operating leverage on increased sale as well as quarterly timing of incentive compensation expense. Turning to the adjusted net income bridge on the right side of the page. The same EBITDA year-over-year factors affected net income, with additional benefit resulting from a lower adjusted effective tax rate versus last year. Our adjusted effective tax rate was 15.5% versus 18.2% in the prior year. We saw an additional $1 million of improvement in our interest expense as we continue to meaningfully benefit from our ongoing debt deleveraging, which I’ll speak to in greater detail later in the presentation. Looking to Slide 10. For the full year 2018, Integer delivered strong…

Thanks, Jason. Before I discuss our outlook, I want to reflect for a moment on how our business has evolved over the past four years and more importantly, where we are going. At the end of 2015, we completed the transformational acquisition of Lake Region Medical, which doubled the size of the company. At the same time, we were actively engaged in spinning out Nuvectra, our neuromodulation development program. During that time, we became more internally focused on integrating and executing on these transactions and watched the momentum on our sales growth. Revenue declined by an average of 3% over 2015 and 2016. We also ended the year with a debt leverage ratio of approximately 6x, stemming from the Lake Region acquisition. Those were difficult two years for us and our investors. Entering 2017, the priority was restoring our sales growth and getting our leverage to a more manageable level. Additionally, we turned our focus to stabilizing the business, improving our operational performance, including quality and on-time delivery metrics, and on adding key leadership talent. We made meaningful progress and reversed our two-year sales decline, with sales increasing an average of 6% over this two-year period. We also were successful in reducing our debt leverage to 3.5x by the end of 2018 due to a combination of the AS&O divestiture and strong free cash flow generation. Over this two-year period, we stabilized the business and delivered sales growth in line with our overall market, with earnings growth commensurate with sales. Our portfolio, product line and operational strategy was developed in 2017, and we spent the first three quarters of 2018 developing the multiyear plans to execute our strategy. We rolled out this multiyear strategy to our top 100 leaders in September 2018, and we will spend the next three years…

Thanks, Joe. Turning to cash flow. We expect to generate cash flow from operations and free cash flow in the range of $160 million to $170 million and $110 million to $120 million, respectively. This cash flow performance is in line with the amount of cash we generated in 2018. In 2019, we expect slightly higher capital spending in the range of $50 million to $55 million, as compared to $43 million spent in 2018. This increase reflects our plan to invest more aggressively in our strategy to drive accelerated growth. In addition to higher capital spending, we expect cash taxes to increase to $30 million to $40 million compared to $23 million spent in 2018. The increase is primarily due to utilizing nearly all of our net operating loss carryforwards in 2018 on the AS&O divestiture. Together, these two factors offset the additional cash flow generation from volume growth. Given this cash flow projection, we anticipate paying down between $105 million to $115 million in debt in 2019 and, at the end of the year, with a debt leverage in the range of 2.5x to 3.5x EBITDA. The leverage range of 2.5x to 3.5x EBITDA is a new item, so let’s cover that on the next slide. This slide is the outcome of how we’re thinking about our capital structure and leverage ratio. The free cash flow focused on reducing our debt in excess of required payments and with the divestiture of our AS&O product line, we’ve been able to reduce our leverage significantly over the last two years. This increases the financial flexibility we have to invest in ways that will allow us to execute our strategy where we will further add capabilities to better penetrate our growth market and ultimately sign bolt on-sized acquisitions. With continued growth in EBITDA and free cash flow with modestly sized acquisitions, we can expect to maintain a debt to EBITDA leverage in the range of less than where we ended in 2018. We believe that maintaining this disciplined capital deployment will deliver the best valuation premium for investors. Let me turn it back to Joe now for some final comments.

Thanks, Jason. It is the execution of our strategy that will allow us to earn a valuation premium for our shareholders. We have clearly identified portfolio and product line strategies for how we will win in the markets we serve and have developed six operational imperatives that will allow us to achieve excellence in everything we do. We have aggressive growth goals, and with a culture of learning, accountability and excellence, our associates’ personal and professional growth will propel us to our strategic objectives. In summary, we are well into the execution of our portfolio and product strategy and plan to invest more aggressively to deliver on our strategic objectives. We are at the very early stages of executing our operational strategic imperatives. We have worked diligently to deliver on our financial commitment in 2017 and 2018. We have incorporated faster profit growth compared to sales in our 2019 financial guidance. All Integer associates are excited to serve our customers because it is through our customers that we improve patients’ lives. Thank you for joining our call today. Let’s open up the lines for Q&A.

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

Hi, good morning and thank you for taking the questions.

Good morning, Matt.

Joe, I just want to start off. Could you just give like a high-level view of kind of outsourcing trends in the industry? And you said that the market growth rate around this 4% to 6%, is that market growth rate of your customers or market growth rate of like the CMOs?

Matt, thanks for the question. So when we look at market growth and the way we define it is we look at the markets we’re selling into and we look at our customers’ sales and we use that as our proxy for what the market growth is and then how our sales – based upon the mix of those markets, how our sales should be growing to match the market. And then what we do is we look at what are the outsourcing trends that you asked about, and in certain markets, we see significant continued outsourcing. In other markets, we see a balance where it’s a mix between what our customers are doing and what they’re looking for. But here’s what we see in all markets. In all markets, what we see is if we deliver differentiated quality and innovation and on-time delivery to our customers, they want to do more business with us. What we see is customers – our customers do not want to expand their manufacturing footprint. That’s been clear in every discussion I’ve had with customers. You see it in their strategies and in their announcements where they’re reducing their supply chain, often reducing the number of plants they have. And what we’re seeing is increased demand for outsourcing, and we see their growth in certain capabilities and processes that they want to retain in-house, pushing out work out of their plants because they’re constraining their manufacturing footprint. So we continue to see meaningful opportunities for outsourcing. You know the cycle time in the industry for transferring business can be multiple years, and we’re aggressively pursuing those outsourcing opportunities.

Thank you for that. And then around the operational excellence programs that you’re rolling through your footprint at this point, how should we start thinking about the phasing of the return from those programs?

Great question because we laid out our objectives very clearly to get to profit growing twice the rate of revenue. And then, what you see in our 2019 guidance is the first step, the first phasing of us making our way towards getting profit growth at 2x the rate of revenue. In our guidance, it was intentional. You see we’ve got EBITDA growing at 1.5x the rate of sales, 4% to 6% on sales and 6% to 9% on EBITDA. That was intentional. It’s intentional because the operational changes we’re making, specifically manufacturing excellence, is well underway. We’ve already implemented or performed the lean diagnosis workshops at five of our manufacturing sites. We have two more starting in March. And by the end of August, we will have been through some part of our operations in every single one of our plants. And a refresher, lean diagnosis is where we go in and assess a portion of the operation, a portion of the plant, look at how it’s performing on quality, on-time delivery, scrap, operator utilization, and then we set goals to achieve excellence in those measures, and we build out a six-month improvement plan in that plant. And so we will have been through every one of our plants by August. And I’ll say that’s not 100% of every plant. That’s a portion of every plant. This is a multiyear journey where we’re going to get through 100% of our operations over the next 2 years to 2.5 years, but it’s a very rigorous disciplined approach. And I’ll give you highlights. For example, in the very first site that we went to, we were looking at on-time delivery of around 80% in a specific process, and obviously, that’s a problem. We’ve implemented changes, and we’re already well into the mid-90s for on-time delivery. We were looking at our scrap rate, and our objective was to cut the scrap rate in half, and we’re well on our way to achieving that. And this was our first lean diagnosis event that was late in the third quarter. And that’s just one example of one small piece of our manufacturing operations, but that’s how this works. You go one portion of our operations at a time and follow the rigor and discipline of the Lean Six Sigma processes. So in terms of when we get to the destination of our journey, that’s what we’re working aggressively to realize, but 2019 is a clear step towards that destination by showing profit growth of 1.5x sales.

Okay. And then last question for me, and I’ll jump back in the queue. It sounds that you’re getting more comfortable around M&A and where your debt levels are. How should we think about your M&A criteria going forward?

So Jason framed for you how we’re thinking about leverage, which is kind of the starting point, the bracket. And we’re communicating 2.5x to 3.5x debt leverages is the world we want to live in. We realized when we were 5x or 6x debt, that was a penalty for us on our valuation and that many investors deemed that to be too risky. So what we did was we looked at the market and we said 2.5x to 3.5x looks like a range that most investors are comfortable with. We looked at where we are and what we need in the business, and we said we can very much live within 2.5x to 3.5x debt leverage. Given the EBITDA growth, given the cash flow generation we have, we can go do bolt-on acquisitions. And when we say bolt-on, here’s how we’re thinking about it. We’re looking very specifically at the markets we want to grow in. Take C&V, for example. We look at structural heart, electrophysiology, peripheral vascular. We’re looking at what are the capabilities, what are the technologies that we need to be able to accelerate the growth in those higher-growth end markets, and that’s what we’re going after. We’re going after capabilities that will allow us to penetrate our higher-growth end markets faster. So bolt-ons, you can do the math that it frames the amount of acquisition dollars we can spend. It’s in the $100 million to $150 million range that allows us to stay within the 2.5x to 3.5x debt leverage. But that’s how we’re thinking about leverage in general. That’s how we’re thinking about – what we’re thinking about acquiring.

Thank you very much.

Thanks for questions, Matt.

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

Good morning. Can you hear me?

Yes, Jim. Good morning.

Great, great. Quick question on pricing. The guidance you have of approximately 4% top line growth in 2019, are you assuming pricing is relatively flat or if there’s some pressure there or possible tailwind?

We’ve seen 1% to 2% pressure in the past years, and we baked in that continued headwind, if you will, in our outlook for 2019.

Okay. And when you talked about slight increase in capital spending to help fuel the top line growth, is that more software systems? Is that – what is that?

Yes, we have, certainly, opportunities for customer programs, right, as we find solutions and grow new products or programs for customers. That, of course, requires our investment. So that’s a piece of our capital story for 2019. In addition, Joe talked a lot about the manufacturing excellence efforts, and so that will be another area of focus of organic investment for CapEx as we drive our continuous improvement projects.

So there are more automation then?

It could be automation. It could be the advancement of equipment efficiencies, right, as aging equipment – or as equipment ages, we lose efficiency, so it could be a little mix of the two.

Okay. And then finally, accounts receivable under $200 million – I’m sorry, I don’t know how long it’s been since I covered you guys, under $200 million for the – at the end – I know you get a lift in that a little bit when you did the divestiture, but do you think you’ll stay in this range? Or do you expect that number to creep back up in 2019?

Certainly, to your point, it’s affected by the divestiture in terms of sort of the year-over-year comparisons. We’ll continue to put higher focus on our working capital and driving efficiency there. So we see that sort of in line, certainly, with the modest growth with sales, but it will be an area that we’ll continue to – or that we’ll put some greater focus around working capital, both AR as well as on the payable side.

All right. Thank you.

Thanks, Jim.

[Operator Instructions] And we have no further questions at this time. This will conclude today’s conference call. You may now disconnect.