泰利福醫療 (TFX) 2003 Q2 法說會逐字稿

Ladies and gentlemen, welcome to your Teleflex Inc. Q2 earnings conference call. At this time all lines are in listen-only mode. My name is David and I will be your coordinator. As a reminder, this call is being recorded for replay purposes.

I would now like to turn the program over to your host of today's conference, Ms. Julie McDowell, Vice President of Corporate Communications. Please proceed, ma'am.

Thank you David, and the good morning everybody. This is Julie McDowell. Teleflex released our second quarter results yesterday after the close. The news release is available on the Investor Relations page of our corporate Web site.

Today's call is being webcast in listen-only mode, and in addition, a replay webcast will be archived and available this afternoon on our web site. An audio replay will be available by dialing the following phone number 1-888-286-8010, or for international calls 617-801-6888. The pass code number is 720-810-1012.

This morning Hal Zuber, our Chief Financial Officer, will start off with a review of the second quarter operating and financial results. Then Jeff Black, President and Chief Executive Officer of Teleflex, will share his comments on corporate initiatives and our recent acquisitions. After their formal comments, as usual, we'll take your questions.

We ask that questions be limited to one question and a follow-up. Then we will cycle around again. Before we begin, I want to remind you that our comments today may contain some forward-looking statements concerning earnings, conditions in the market that we serve, economic assumptions, expected volumes and the like. Please remember these statements reflect current conditions and are subject to various factors that could cause actual future results to differ materially from those that may be contemplated in today's statement.

With that, I will turn it over to Hal.

Thanks, Julie. Good morning to all, and thanks for taking the time out of a busy day, I know, to join us. Sales increased 6% in the second quarter to $578m. Net income of $31.8m was 5% lower than a year ago, and earnings per share declined 5% to 80 cents. Typical Teleflex, two up and one down. Strong double-digit performances in the commercial and medical segments were however, more than offset by a severe decline in the Aerospace segment.

Before we go on to the operations, let me touch on a few topside issues generally on people's minds. The revenue growth of 6% was comprised of 3% from acquisitions, 6% currency translation, and a decline in the core business of 3%. The decline in core was largely attributable to the industrial gas turbine product line within the Aerospace segment.

International operations accounted for 47% of sales and an equal percentage of operating profit. Stronger local currencies, notably in the Euro added 6% of our top line, and approximately 4% to the operating profit. While on the international front, one of our areas of emphasis has been a shift of our global manufacturing to low cost areas.

On a pro-forma basis, approximately 13% of our production is derived from low-cost locations. We continue to grow Slovakia, basically to support Europe; we grow Mexico; we now have four sites in China. Overall, we have approximately 5000 Teleflex employees in 10 different countries as a result of these initiatives. It is quite a number, and I believe it is up over 40% over the last couple years.

While this quarter's earnings were less than an all-star performance, similar to Randy Wilks' pitching stint Tuesday night, it certainly, though made the highlight reel for cash generation. Cash flow from operations was $75m compared to $57m a year ago, and year-to-date cash flow from operations was $102m, compared to $85m in '02. Now admittedly, some of the second quarter robust nature of the cash flow was a result of the mediocre first quarter, but some of the year-to-date figures put a stamp on improvement.

Finally, I would like to report that inventories actually came down, as modest progress was made in Medical and Aerospace. We do, however, have a lot of room for improvement.

Debt to total cap improved to 30% from 32% at year-end, despite the negative impact of stronger local currencies. This, of course, is at the low end of our range, it is less than optimum, and gives us plenty of financial flexibility to pursue growth. A couple opportunities that Jeff is going to talk about in his remarks.

Now onto the segment. We continue to bump along the bottom in Aerospace. Sales declined by 8%, and profits by a disproportionate 80% from a year ago. Clearly the prime reasons for the decline are the market conditions in Commercial Aerospace, OEM airlines and power generation. Where seemingly times haven't been this bad since Franklin discovered electricity and the Wright Brothers first flew.

Despite these conditions, our Telair Cargo squeezed by currency the repairs business with a touch of SARS, and manufacturing product line under continuing price pressure performed reasonably well at generating mid single digit returns. The Industrial Gas Turbine Product line, however, was the primary culprit for the Aerospace Segment to decline, both in sales and operating profits.

In the second quarter, we closed an IGT plant, bringing the total to three this year. We continue to right size the organization. On the bright side, we got additional approvals for coatings in the hot section of an engine, and continued to invest in the replacement parts business.

Looking forward, we again expect improvement in the aerospace results. Telair Cargo got a little relief from currency with the fate of the Euro. Repairs is rebounding slightly with the passage of SARS, and the manufacturing group is beginning to ship the fan module for the military engines at an increased rate. Lastly, the plant closings and the employee reductions should provide traction in the Industrial Gas Turbine results.

Well, now that we are done with the doom, we can go on to the more pleasant aspects of the report. The medical segment had a very strong performance and reached double-digit increases in both sales and operating profit. Sales increased in both Hospital Care Supply and Surgical Devices, although the rate of increase was much greater in Health Care Supply. I might also add that in Health Care Supply that the Euro made a significant contribution, but new products also added to the increase. Sales in Surgical Devices were up as a result of this final instruments acquisition in the third quarter of '02.

Operating profits and margins improved in the Health Care Supply as a result of the continuing shift to lower-cost countries. This also was enhanced by the stronger Euro. Operating profit in Surgical Devices increased nearly in line with sales. On a cost reduction side of the equation, another off-site service facility was closed during the quarter, which will enhance future margins.

Looking forward in medical, we expect improved year-over-year operating profit improvement. Not only in Health Care Supply, but Surgical Devices. While the recent acquisition of CT will contribute modestly to profits this year, it will dilute margins until the integration is complete sometime in '04.

Last, but certainly not least is the commercial segment. Sales increased 9% as all three product lines, automotive, industrial and marine contributed. Automotive sales grew despite a 9% decline in the North American build rate, and a lesser decline in Europe. The continued success of the adjustable pedal, now with the embedded electronic control; the new shift or guide control sales in Europe; an increase market share over the Asian transplants; offset the market declines.

Additionally, we continue to invest in the launch of the new forward-focused global platform. We have an array of products including shifter systems, cables and pedals. This program is ramping up in the third and fourth quarters and should contribute in the second half of the year.

Profits and margins improved in not only with volume, but as a result of prior year plant closings. I believe we did three closings in automotive in '02. In marine, sales were up slightly, driven by non-marine products such as the military burner, adjustable pedals for RV, and the new fish finder products. I'd like to comment, though, that did, along with a seemingly every other corporation in the United States, or at least in the Northeast, suffer weather-related shortfalls, and this was particularly in our higher margin, after market accessories business, which dampened profitability somewhat.

The industrial product line grew as a result of the prior-year acquisition and profitability was improved as we combined two facilities in the fluid product line.

The outlooks for commercial were largely dependent on the automotive and marine markets over the remainder of the year. And is certainly clouded by the upcoming automotive labor negotiations. However, we do have a number of new products coming on board throughout the segment to offset a portion of any market declines.

In summary then for the quarter, two segments performed splendidly. We continued to position Aerospace for improvement, and we generated strong cash flow to finance future growth.

Thanks, Hal. Good morning, everyone. I would like to give you an update on some of our new products and the two strategic acquisitions, which we made after the close of the second-quarter. We continue to see slow growth in the economy overall and weakness in several of our end markets.

In this economic climate, we have to create growth by accelerating new product introductions and supplement that with strategic acquisitions. We have to continue to diversify globally and enter into new markets.

But let me update you on just a few of the new product initiatives, which we talked about during the last conference call. We continue to look for broad-based new product sales growth this year. We talked about new products in automotive, the electronic throttle control and the next generation pedals.

Last call we mentioned some of our marine new products. While the rainy spring hurt sales in boat accessories, we were able to make progress with our new products for fishermen on shore. The wristwatch version of Smart Cast, our new remote sonar fish finder started shipping just in time for Father's Day. Both Hal and I have taken this product out for field testing.

Hal took it to New Jersey, and I took it to Rhode Island. The reaction of fishermen was quite interesting. No fisherman wants to be upstaged by someone catching a bigger fish or more fish. Seeing this green, neon float out there got a lot of attention. I told Hal if he would have put a hook and some bait on the line, he could have created some greater demand. Myself, I took it to Rhode Island and within the first 20 minutes I caught a 4 lb. largemouth bass, and of course, everybody wanted to try it.

If I had only been smart enough to pack my trunk full Smartcast, I probably could've made up some of the shortfall in our marine after market sales. But I didn't.

Smartcast is now available in over 4000 retail outlets across the U.S. and Canada and unit sales of the second quarter were strong and continue to be so. Products like these are good examples of our engineering and product innovation and our ability to extend our current market niches.

In medical, we introduced new products in all three specialty areas during the order. I was especially pleased to see our growth in the sales of orthopedic instruments. We acquired very precision medical instruments in the third quarter of last year, adding instruments for the fast-growing spinal surgery market.

These products, combined with our other orthopedic instrument business, have given as a much stronger position with the medical OEMs. This again as a good example of Teleflex capitalizing quickly on an acquisition to bring new products to market. Again, no single product was a big financial impact, but collectively we expect these efforts to strengthen core growth.

Shifting to new acquisitions. At Teleflex, acquisitions have been and will continue to be an important part of our strategy. Year-to-date, we've acquired businesses with total annual revenues of over $130m. Two of these acquisitions were completed after the second-quarter close.

In medical, we acquired that the cardiothoracic devices business from Genzyme Biosurgery to strengthen our position in surgical instrument for cardiovascular procedures. In 2002, the product lines we purchased had annual sales of $76m, and this was a cash transaction of about $32m. With the acquisition we expand medical segment to include industry leading chest drainage systems, cardiovascular sutures, and aortic punches, and a new line of mentally invasive surgical devices for beating heart, coronary artery bypass procedures. The beating heart technique is a relatively recent breakthrough creating a fast-growing market, for these new type instruments.

CT has an outstanding management team and development group. Working with the President of Teleflex Medical, Forrest Whittaker and his team, they will accelerate new product development for instruments. With complementary product lines, common customers and markets, we believe we can improve the profitability of this business and generate revenue growth. This acquisition has the right strategic fit, market potential, and as Teleflex goes, the right price.

Now the work begins. We had a transition team in placed day one, implementing plans to bring the two companies together. Sales and marketing operations, IT, finance and administration, all have specific tasks in reporting requirements. I am confident that we can accomplish the seamless transition for customers, strengthen our surgical product group for the next few quarters. We have committed to make this acquisition accretive to earnings in the first year.

In industrial, we've completed two acquisitions in '03. First quarter, we added Megatech Electro, a manufacturer of electronic and electromechanical systems. This acquisition is expanding, expediting development of our new electronics and engine management applications for both the marine and industrial markets. Over the Fourth of July, we completed the acquisition of Koltec-Necam, a European manufacturer of alternative fuel systems.

Those of you who have followed us for several years know that we have been building our alternative fuel systems business for the focus on both the industrial and the automotive markets. Required Teleflex GFI in 2002 to establish an early position in this market. To date, we have completed four small acquisitions to build a full range of products and services in the global market presence. With the acquisition, Teleflex GFI is now one of the largest suppliers of components in fuel systems throughout the world.

Koltec-Necam had annual sales at $25m, a strong management team, new technology and relationships with European OEMs. This complements the European acquisition we did early in last year and we now have what I refer to as a major market position in Europe in the fuel business. Again, bringing these companies together, we can offer customers components for fully-integrated systems worldwide.

Again, transition team is in place, detailed plans are there, and there is a process for reporting and tracking the integration efforts. This acquisition is also expected to be accretive to earnings in the first year. Although it is still a relatively small business, Teleflex GFI is a good example of how we are continuing to invest in the future in niche markets where we can be a global leader.

I'm excited about the acquisitions we've made and the potential that they bring to Teleflex. More importantly, I am encouraged by the acquisition pipeline and the level of activity that we see today.

Looking ahead, we continue to execute other operating plans for the year despite ongoing weakness in some our end markets. We've already discussed the challenges in Aerospace and the Industrial Gas Turbine Markets. Industrial Gas Turbine volumes and demand for services will not improve quickly. Commercial airlines continue to struggle financially, and SARS has had an impact on flight hours in Asian carriers. While we are cautious on the outlook for our Commercial Segment market, particularly automotive, we certainly see opportunity for Teleflex to outperform the market with new products and platforms.

We look for continued steady growth in Medical as we integrate the recent acquisition and roll out new products. That said, we now anticipate Teleflex's earnings outlook for the full year 2003 to be in the range of $3.05 to $3.20. As always, we're focused on continuing to strengthen our business, invest in new products and most importantly, deliver value to our customers worldwide.

That concludes our remarks. Operator, we will now take questions. But we ask the questions be limited to one question and a follow-up, and then we will cycle around again.

Jim Lucas from Janney Montgomery Scott.

Good morning everyone. Two questions. First, could you talk a little bit more within the Aerospace, the first half? Obviously we know what is going on with the top-line, but we've seen a lot of the rightsizing costs impact profitability there. Could you expand a little bit more, maybe not so much in terms of the cost, but the actions you are taking, the benefits you see and when you expect to get back to a more normalized profitability level?

Yes, Jim. I will take this opportunity to describe what happened in the second-quarter with respect to your question. Within Aerospace we did close a plant. We had about 600,000 plant closing costs, and in addition, throughout Aerospace, we closed a plant in IGT, throughout Aerospace we had about another 400,000 severance. The best way to describe it is just to look year-over-year in overall employment.

Year-over-year in overall employment was down 9% from the second-quarter last year. So the employee count, more or less trends with sales. We've had additionally, we closed, in addition to the plant in the second-quarter, we closed 3 plants in Aerospace in the first quarter, which cost us between $2 and $3m. And so what we have hoped for was a little more traction from those closings. But what we found is because they were service facilities, one in Telair, and two in Industrial Gas Turbine that we also lost volume with it. So we didn't get quite the traction that we had hoped.

Now some of this might just be an adjustment, and some of it might be permanent and in a down market such as this, it is very difficult to tell. So if we look forward, we are looking for improvement to kind of, the mid single range over the rest of the year. Some of these things should give us some enhanced profitability going forward.

The savings, for instance this year or this quarter that we think from the severance and the plant closing should be approximately $1.6m. That's our estimate today. So for an investment of roughly $1m over the next annual period, we should get about $1.6m in savings. So some of these things are going to come to fruition. Where we got squeezed is also in a down market, the margins are just a lot lower, particularly in some of the services we provide in the utility area. So that is why it is not just right-sizing. It is margin, as well.

So when you look at year-over-year, a roughly $9m profit erosion, $1m related to these right-sizing costs, but the other $8m is just more or less, that's how unfavorable the mix is?

Three of that, roughly is just volume. That's down. Two of it approximately is currency in the Telair product line. Maybe a little less. So we have those two, and then the rest of it would be mix. Or margins.

Okay.

In other words we have pricing pressures in the OEM group. You're not going to get the margins you got five years ago in the boom.

And another question is Jeff, or Hal, can you provide a little bit more color. If you look at this guidance that you provided of $3.05 to $3.20, clearly that implies that the track record that has been a hallmark Teleflex has the potential of possibly ending this year, but what are the assumptions that is going into that range? Can you talk a little bit about what you're expecting in the second half?

I think even if you take a look at the auto build, I think we are still anticipating at $16m -- but again that is still dependent upon the labor negotiations. I think we all believe that we are starting to see some rebound on the marine side, as well. So I think from the commercial side we feel pretty good where things are. Obviously medical, some of the traction and obviously Forrest Whittaker and his team, what they are doing, we will continue to see some benefits from that.

So I think Hal has already talked about the Aerospace, so Jim, I think at the end of the day, while we have taken the range to $3.05 to $3.20, let me just confer from our perspective we are still looking at an increase this year off of what we did last year. And that is not only senior management, but the entire management of Teleflex. So there has been no waving of the white towel or no throw in.

Fair enough. Thank you.

Deane Dray from Goldman Sachs.

Just a follow-up on the guidance assumption. What about the prospects for any sort of onetime gains in the balance of the second half in terms of, in your guidance?

I think I said before we didn't anticipate any, and then we had one, so I guess my track record is probably not stellar there, but I think at this point, again we don't anticipate any, but again, the portfolio of our diversity if opportunity arises we will absolutely take advantage of it.

Okay, and just a clarification on the outlook for the Aerospace side, the question earlier was, what is the expectation to get back to sort of normalized margins? Now the margins peaked in that business in '98 around 12% EBIT. Is there anything structurally that has changed within the Aerospace businesses that would -- either new competition that would suggest you are in some sort of secular decline, or what would be the timeframe that you could get back to those levels?

I guess we're dealing, Dean, with a couple of markets that are as dreary as one can describe. If I look at some of our markets, I mean Boeing's, I believe, build rate is down 35%. The engine build rate is down this year about 19%. IGT market if you look just as an indicator, that market GE, they built 86 a year ago, and I think 22% or 24%. The airlines are down 5% to 10%. So I think if we look through some of these markets, that would be for me the prime answer as to why we are where we are. Also, there is always an inherent lag in cost reduction.

As far as your question, how do we get back to there? If we get a buoyant market over the next few years, which I guess people are anticipating, but they keep pushing it out, then I see that the Telair cargo business is in great shape, and with more installed systems. Therefore, more spares in the aftermarket, margins should return. The repairs business continues to do well as GE overhauls Morse and does power by the hour. Manufacturing should respond somewhat, although I'm sure that will be more difficult than before. Then we come back down to the IGT and turbine businesses, and of course '98 was one heck of a year in that industry. So we might be a little lower than the peak at that year.

But we have now, if you talk about the IGT business, it started as kind of a commonsense migration of our coatings and repairs from flight turbines to industrial ground turbines. And some of the industrial ground turbines they are so similar, at least to the non-engineer, that they are called aero derivatives. So that common sense migration of those technologies and proprietary know-how and repairs then spawned us investing in an array of services, repairs, coatings, engineering services, to provide a basket and to be an independent provider other than the OEM, a basket of goods to the PowerGen market. And we all know what happened to the PowerGen market. You can look at Enron as the worst example.

So we are here with our array of products and very little market. Now everyone in that organization is scrambling for sales. Ironically, we make money in Europe in this group, because they aren't as devastated as the market is over here. So I wouldn't say that it is a lost cause completely if we just look across the pond. So the answer to your question is, it will be difficult, but I think it is possible.

Okay and then -- but can't really give a time frame?

Well, I think they're calling for the rebound in these markets out far enough that I would really rather not go there.

That's fair. Just if you could clarify that $1.6m in savings from the rightsizing, does that include you netting out any of the lost service business for that, or is that strictly unfixed?

Well, this current plant moved down the road. If we're losing it, we're losing it for other reasons as opposed to some of the other plants which were regional in nature. So, no.

Is there any rightsizing embedded in your guidance for the third quarter in aerospace?

Well, we closed a number of plants thus far across this corporation, and I don't want to touch on that. But I don't think we are right now in the aerospace group, no, and I don't think that we care to preannounce anything that we might be contemplating, because we are always contemplating capacity reduction. In other words, this forum would be somewhat inappropriate for that, and contemplated the answer is no.

But is it fair to say there is more work to be done there?

Yes.

That's fair. Thank you.

Steven Colbert from JMP Securities.

Thank you. Hal, I think you said that your core business in the quarter was down 3%. Could you give us a breakout by the three segments in terms of how you came up with that down 3%?

Sure, Steven, and thanks for an easy question. We suffered about a 10% core decline in aerospace. And that was predominantly industrial gas turbine, as I indicated. Medical was up a couple, and commercial was down a couple at core. So that nets out to a minus $3m for the corporation.

In terms of the medical, it sounds like you've gotten big help there this year from foreign currency. And I presume it's on the European operations that you've been doing that. To what extent is that helping your profitability this year stay up at that level? If we start to get more parity to dollar and the Euro, how vulnerable are you in terms of margins going forward in that business?

You're right. We get a kick on translation, which is higher sales and higher profits. So that does not necessarily enhance margins. But we are producing in low-cost countries, one of which Malaysia, which is peg to the dollar. Now it's very difficult for me to say, other than to say is to quantify. I know we shifted more production there; I know we're shifting more goods there, but how that works through the inventory and all our distribution sites is an impossibility to answer at this point in time. So what I say is, at this point in time, I don't think we have completely seen the benefit of the Euro. So if the Euro fades a little, I don't think we've gotten to that point in our margins.

Because of the low-cost --

We cranked through on a weighted average cost basis the lower cost of the imported goods from the low-cost countries at the then current. So it would go into the inventory and it rolls through.

Okay.

I think we have seen some of it, but not a lot of it, okay? It's kind of averaged out.

Has the Euro been a help also in your commercial segment in the automotive side as well?

Yes, because we have about the same weight of sales non-U.S. I'll be glad to give it to you. The currency contributed 2% in aerospace, 9% in medical, and 6% in commercial for 6%.

Thank you. I'll get back in the queue. Thank you.

Troy Lahr from Legg Mason.

Good afternoon. Just have one question here. On IGT, can you talk a little bit about the mix between OEM and aftermarket? I guess I kind of understand that it is possibly or it was around 2/3 aftermarket, 1/3 OEM. Is that still around the same mix, or has that kind of shifted more one way or the other?

If I look at it, it is about half and half OEM and aftermarket still.

Okay. What's your outlook for the aftermarket business? Is that holding up about as well as the OEMs or --

Well, that is very difficult to call because it's service business and we are certainly not projecting a bounce-back over the next couple of quarters. We are hoping for status quo. So a lot of maintenance has been deferred. Sooner or later, it has to be done. That is the best outlook I can give you.

One other quick question on the marine business. You kind of talked about some lost business due to weather conditions. Do you kind of think you can make that up in the second half, or do you think that is pretty much gone and kind of move on from there?

I think we lost maybe -- and I'm loathe to try and say exactly about how much sales we didn't have. So that's a difficult one, but it's only in the couple, $3m range as best we can tell or the best estimate we can get, and that would be fuzzy logic, I assure you. So I would think some of it will be back, but I don't think it will all come back at this point in time. People just didn't think about their boats, and then they slapped them in the water.

Okay. Thanks, guys.

Wendy Caplan from Wachovia Securities.

Good morning. Could you talk a little bit about some of the geographic markets in which you participate? We've been hearing on some other of your diversified industrial brethren's' calls that Europe seems to have deteriorated in the quarter. Can you comment on -- yet China continues to be a good market. Can you just sort of walk through the world and give us some indication as to what you saw sequentially in the quarter?

Well, you are giving us a matrix of product line and region. And generally, we look at region, but at least as far as I can see, the medical market maintains status quo in Europe. In fact, we have had slight increases, both to new products in this. In the automotive market, it is down roughly small single digits. Some say flat, but if you look at the production build, we think it was down small single digits. In aerospace, you can look at Airbus and know that's down about 10%, whereas Boeing is down over 30.

So if I look at it, I more or less have to look at the markets we are in, Wendy, as opposed to some consumer-related market or across the entire continent. And I think in so far as China, what we sell into the Chinese market really is insignificant to the overall Teleflex.

Jeff, do you have anything to add?

I think he's hit it right there. Obviously, we've just really invested in China in the last few years while the market is growing, and I think we are well positioned. But in terms of in country, are revenues are small, but we are doing a fair amount of export back into our European and U.S., and even into Japan, out of China.

So, I guess the answer to my question is that you didn't see deterioration in your specific niches in Europe over the quarter. Okay. My second question is, my follow-up question is, a remembering that self-side analysts are paid to be cynical, if we look back over the past five years of your results, you have never posted a better second half than first.

In order to get to the bottom end of your outlook for '03, you have to do that. Can you just sort of walk through for us in a consolidated way -- I know you talked about new products, you talked about some cost-cutting. Can you talk about specifically, what gives you the confidence that this year, second half results will be better than first?

I'm sure you are statistically correct, Wendy. Let me take off a few of the things. One is, of course, we added two acquisitions, and we've never done this, at virtually July 1. So that is going to be some accretion, although modest. So I don't think we've ever been that fortunate with respect to your question. So if I go there, then I have to break it back down into the markets.

I believe today we're going to get some traction out of the Aerospace or get some increase improved margins in Aerospace over the next six months. We've done a lot of work there the first six, so we've absorbed the first six cost, and we're going to get the second six-month benefit. So certainly, if I sit here, I don't think Teleflex has ever closed six plants in the first six months, either, which we've done.

If I go to Health Care Supply, we think that is steady-Eddy, with a modest contribution from the acquisitions. And then it comes down to the automotive market more or less, and marine. And we have a little help from new products in automotive and new products in marine.

So that is the way we are looking at it today. If the automotive market is down 15%, we're not estimating 15%. We are still in that single digit range at this point in time, even though that would be more pessimistic than some of the overall forecast.

Thank you. That was helpful.

Jim Bessoni from Delphi Management.

Earlier in the call you said debt to cap is at 30%, and that's at the low-end of your range, so what is your comfort range there, considering future acquisitions?

I think we prefer to be at about 40%, okay? But of course fluctuate on either side, depending on where we are in our inquisitive cycle and I believe we go up as high as 50% for the right acquisition, acquisitions has been our history. So that would be my answer to that one. And of course, at these low interest rates, very tempting.

Okay. Thank you.

David Gerue from T. Rowe Price.

I just want to delve into this Aerospace question. Sort of, if we think about sequentially sales were relatively flattish, and yet profits were also roughly flattish. You had $1 to $2m lower restructuring costs, and yet the profits didn't go up, you should've gotten some of the benefits from the first quarter restructuring in the second quarter. I guess what I am struggling a little bit with this why, what's going to happen all of a sudden, if we didn't get that from Q1 to 2Q and restructure is less and you didn't get any of the benefits from Q1 to Q2, why do we go to mid single digits in Q3 and Q4?

That's a pretty good question, David.

Well, thank you.

But I guess if I look at the margins on some of the volume that we had in Q2, some of the, particularly services we provided in the Industrial Guess Turbine businesses were more or less, when I say benefit to the customer, I mean really to their complete financial benefit. We had on some of those services very slim, or in some cases, negative margins. A lot of that has been cured. A lot of cost has been taken out, and while 1 to 2 didn't show it, I believe 2 to 3 should have some modest improvements because of everything that has been done. That is the best way I can kind of allude to it that if we think will have a little better performance in the Industrial Gas Turbine business as long as the market doesn't fall completely away.

Two other questions on the Aerospace side. Historically, at least if I look back the last four or five years, it seems like on the Aerospace side that Q3 is sequentially worse than Q2, just from a volume standpoint I think every year except for one year here that has been the case. Should that be true this year as well on the volume side, or some of the issues that negatively impacted the Q2 maybe repeat in Q3?

I think it can be down slightly and we can still achieve our results. And as I said, there is currency with Telair, the Euro stays at its lower range we are going to do a little better there. We know we have the cost reductions in IGT and hopefully some better margin. Manufacturing shift into modules, that going to be a positive, and repairs, well they were touched by SARS, so while I don't anticipate that to come back, we do see the level of business increasing slightly.

That's fine.

I can give you that litany, and then I don't know at some point if someone got on the phone and said they were somewhat cynical. I'll match them for some of the stuff. I don't think there is probably -- I'm cynical internally also. To some of the stuff, so there is real reason to be why it should improve.

Let me ask you another question on the commercial side. Maybe this is an area where performance was a little bit stronger here. If you look at sort of the spread between your commercial results in North American auto production, it seemed like the spread this quarter was a little stronger than normal, strong in the last couple of quarters with North American (indiscernible) being down 9, your largest customer being down in the mid to high teens, I believe.

Can you just talk about, is there something as you come on line in Q2, were they're unusually strong adjustable pedal shipments in the quarter, anything like that that positively impacted and should continue to positively impact the results?

Well, we did have some transplant business that kind of offset why we are not down in line more. I think the big three was down 15% or 20%. We do have some increased sales adjustable pedals, including the electronic throttle. So we had some new products that went along.

Also we're getting traction from some of the closings which we made.

On the bottom line?

Yes.

Is it -- in the new business, is that stopping -- a series of spread between North American auto production and your sales, did your new do business come on, it doesn't go away in Q3 and Q4. That spread should continue to maybe be stronger than what it has been in the last three or four quarters because of new business coming on board?

Let me add we've done in automotive, which is not a domestic market anywhere, we've done very well in Europe with our new products. And a credit to Mark Simon and his team, they've enhanced profitability from what was a very low jump off point, so they have done quite well. So our automotive business globally has done much better by that.

Thank you very much.

Steven Colbert from JMP Securities.

I just wondering, in terms of speaking about the possibility of an automotive strike, is the company planning to do its hedging going forward in inventories? In the marketplace.

When you say hedging, you mean are we being cautious insofar as our inventory management?

Building up strike inventories as a hedge.

It is not our negotiation. It is big three.

I realize that, but will that affect at all your inventory build as well?

No, I wouldn't know how -- we turned that inventory, depending on where, 12 to 14 times. So I think we're going to turn it until they turn us off, or turn us on. So it will not, except on the margin, impact us.

Okay.

I can tell you, we will have an orderly, if there is a strike and I doubt it would be across all three, but we would have an orderly shutdown of production. We just wouldn't pick up and move away, so we might finish what we started as a common sense answer. So I won't say completely, but only on the margin, particularly when you look at inventories across this corporation.

I think, Steven, normally you are working off a 13 weeks billed schedule, and if we were going to a buildup or a strike bank, we would have anticipated already starting to see that, and at this point we have not seen that yet. For the industry.

When, given the timing of the negotiations, when do you think that would sort of take place if that was going to happen?

It's hard and I think we've been down this road a number of times through our cycle in automotive, and it really does fluctuate all over the place depending on who they pick and what their target is. So I don't think we can identify that time frame.

Okay. Thank you.

There are no further questions that this time. I would like to turn back to you, Ms. McDowell.

Thank you, David. Again the replay of the call will be available on the Teleflex website or by phone, for those of you who dialed in late, and would like to review. The replay number is 1-888-286-8010, or for international calls 617-801-6888, pass code, 720-81012. Thanks everybody for joining us.

Thank you, ma'am. Thank you ladies and gentlemen for your participation. This concludes or conference call. You may now disconnect.