泰利福醫療 (TFX) 2003 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to Teleflex Incorporated fiscal quarter 3 earnings conference. My name is Kathleen and I will be your coordinator today. At this time all participants are on a listen only mode. W

e will be facilitating a question and answer session towards the end of this Conference. Is that any time during the call you require assistance, please key star followed by the number "0"and coordinator would be happy to assist you.

As a remainder, this Conference is being recorded. I would like to turn the program over to your host Ms. Julie McDowell, Vice President, Corporate Communication. Ms McDowell, Please go ahead.

Thank you Kathleen and good morning everybody. This is Julie Mc Dowell. We released our third quarter results yesterday after the close the new release is about on your Investor Relations page of (inaudible) Web site.

Today's call is being Web cast on a listen only mode. In addition replay web cast will be achieved on and available on our Web site and final replay will also be available by directly calling so number 1888 286 8210. For international call press 17801 888. The pass code number is 18191444.

This morning Harold Zuber our Chief Financial Officer will start off with a review of third quarter operating and financial results. Then Jeffrey Black, President and Chief Executive Officer of Teleflex will share his comments on the quarter and outlook. A

fter that formal comments, as usual we will take your question. To facilitate the process, please keep questioned to one question and then a follow up. Then we'll go around again if we have time.

Before we begin, I want to remind you that our comments today will contain some forward-looking statements containing earnings in business in the markets we served, economic assumptions, expected buying in the light. Please remember these statements are subject to divisions (inaudible) factors that could cause actual future results to different materially than those may be contemplated in today's statements.

With that, I will now turn over to Harold Zuber.

Thanks, Julie and good morning to all. Of course none of us are very happy but I know there's at least one guy who is more unhappy than I am, I tried to catch a foul ball in Chicago. But other than that, I think that we want to get on with just the numbers. Sales increased 8% in the third quarter to $551 million.

Net income of $18.2 million was 31% lower than a year ago figure of $26 million. The 2002 figure included a benefit of $3.1 million or 8 cents per share from income tax settlements. Earnings per share declined to 32%, the 45 cents.

A strong double-digit earnings increase in medical was more than offset by declines in aerospace and commercial. The usual two segments up and one down was inverted at the operating profit decreased 16%.

Before we go on to operations let me touch on few top side issues generally on people's minds. The revenue growth of 8% was comprised of 6% from acquisitions, 4% currency translation, and a decline in the core business of 2%.

The decline in core was modest as we suffered through market declines and automotive Air space power general marine in excess of the 2% figure.

International operations accounted for 48% of sales and 56% of operating profit, more than one-half of profit and that's probably more than I can remember in the past few years. Stronger local currency, notable to euro, hat its 4% of the top line and approximately 2% to operating profit. Low on the international front one of our areas of emphasis is shift of our global manufacturing to low cost post.

On a proforma basis approximately 15% of our production was derived from low cost locations. We continue to grow in Slovakia, Mexico and now have five sites in China. Overall we have about 6,000 employees in 10 different countries as I result of this initiative.

On the other side of the ledger, we closed or really curtailed nine locations thus far this year at an estimated cost of $7 million, nearly $3 million of which was in the third quarter Cash flow from operations for the third quarter was $53 million compared to $65 million a year ago.

Well, less than a quarter it comes from heels of a much stronger second quarter and year to date cash flow from operations is higher $155 million compared to $151 million in '02.

For the year, reduced work capital demand and higher depreciation offset the lower net income. Debt (inaudible) improved to 31%from 32% at year end and despite in a year the impact of stronger local currencies.

In adjustment we funded $75 million in acquisitions in quart to additional borrowings. The level of leverage remains at the low end of the range, less than optimum and gives us plenty of financial flexibility to pursue growth.

Now on to the segments, we continue to bump along the bottom, minor understatement in aerospace. Sales declined by approximately 1% and profit declined by over 90% from a year ago. The story for aerospace in the quarter, actually for Teleflex in the quarter was the industrial gas turbine product line that experienced $6 millions in losses approximately $4 million on engineering contracts for the design, refurbishment and insulation of turbines.

Also contributing the over all Office were weaker markets both the IGT and aerospace OEM markets and continued investment in the replacement parts business and to a lot of the great seasonal nature of the business.

As to the engineering and installation contracts when one loses $4 million the reasons are painful and endless. The simple explanation on the contracts is an ill-defined scope of work. Optimism and inexperience of management. This results in cost over runs and then the inability to capture the over runs under the change management process.

New procedures have been put in place to cure the past deficiencies. There are more people on the up front of review process. New, more experienced people on site and involved. Outside expertise is brought in when necessary. The change order documentation has been improved. The result of these changes is both good and bad news.

New tighter procedures but no new engineering installation contracts to date. The remainder of the ITD business improved in the second quarter and is starting to see increased orders for parts and repairs and the rest of aerospace, (inaudible) assistance and manufacturing product line had declines in volume related to their markets and a corresponding dip in profits.

Also, within cargo systems profitability was eroded by currency, exposure of the service facility and a move to a new plant in Germany. The latter two items certainly will improve efficiencies going forward. Repair services increased volume on the strength of new services albeit at lower margin.

All in all, performance for the three product lines excluding IGT, within a mid single returns.

Looking forward, we expect improvement in the aerospace results with cargo systems lower cross base, continuing success and repairs and improved shipments from the manufacturing groups span modules.

Lastly, an IDT the four plant closings year-to-date and reductions in the fiscal (inaudible) and at the end of the engineering contract losses will certainly provide better results. Medical had a very strong performance as self increase 24% and operating profit 19%.

Sales increased in both hospital supply and surgical devices although the surgical devices grew at a much faster rate. In healthcare supply, the stronger euro made a significant contribution. But new products also added to the increase. Sales in surgical devices were up as a result final instruments acquisition in the third quarter of '02 and the CT acquisition in the beginning of the third quarter of '03.

Operating profits and margins improved in healthcare supply as a result of the continuing shift of reduction of lower cost countries. This was enhanced by the stronger euro. Operating profits and (inaudible) raises increased, but the rate of increase. But the rate of increase in profits lagged sales. This was a result of a lower profitability of the CTX acquisition, which diluted margins for the segment by about 1%. This dilution is expected to diminish over the next 18 months as the next integration process is completed.

Looking forward in medical we expect improved operating profits for the fourth quarter in both healthcare supply and surgical devices and last but not least, the commercial segment. Sales grew 7% as increase is in automotive (inaudible) offset, a slight decline in marine.

Operating profit declined by 16% as automated result relatively flat, while industrial and marine declined. In automotive, sales grew 6% despite a 5% decline in the North American bill rate and allowed to decline in the European bill rate.

Sales increased with electronic driver controls, the new shifter guide control sales in Europe, increased market share with the Asian transplants and the launch of the global forward focus program.

While the launch was costly, this is an important global program where we supplying a rare products including a shifter system cables and pedals for three continents. This program ramped up on third quarter and did hampered profitability with launch cost.

Additionally, we substantially curtailed capacity at yet another North American automotive plant and moved the buying in to our remaining automative locations in Mexico. The costs connected with this curtailment were approximately $2 million.

In marine, sales declined slightly in one end of the market. The news market fish finders continued to gain acceptance and we completed except for launches (inaudible) through fish finder products. The only market acceptance for these products was also encouraging.

For third quarter, profitability in marine decreased more than sales as sales mixed both in marine and the industrial side of the business was unfavorable.

Additionally, we observed a cost of a plant closure in Sweden of about $500,000. The industrial line grew sales as a result of acquisitions, the mega tech and Al tack acquisitions, but profitability was hampered by losses and the alternative fuels product line.

The delay in the passage of the energy bill and the reduced spending for these vehicles at government level resulted in operating losses. The delay was doubly difficult because we have ramped up capacity in anticipation of the energy bill's passage. To compensate, we have expanded a temporary shut down of assembly plant and reduced head count.

Looking forward to the fourth quarter for commercial, automotive production is expected to remain steady with the prior year. The reduction in launch costs and the improvement from the plant curtailment will improve the bottom line. In marine, the new products in the third quarter cost reductions should make a positive contribution. Further these businesses of course are somewhat seasonal.

For Teleflex in the fourth quarter we expect operating profit improvement in both medical and commercial segments and the drag on earnings from aerospace will be substantially less, if at all, if only because the contracts are behind us and the comp is easier. Jeff, on to you.

Thanks Hal. Hal reviewed the financial results and operational highlights for the quarter, I would like to spend little time in share of much perspective on the quarter and then address our outlooks for the year.

Earnings results for the third quarter were disappointing not only for Teleflex but for me personally. Hall has already outlined the marketing business challenges we faced in the third quarter and the steps we've taken to address them.

That said, I want to be sure we don't overlook the progress that we are making as a company. This year we've been focused on adding new products and programs and executing a deliberate strategy to expand our low cost manufacturing centers.

We've also implemented strategic development process that is designed to drive operational excellence throughout Teleflex by implementing standard procedures and processes and measurement criteria.

Our goal across your organization is to truly leverage our total power of Teleflex. New products and programs have helped us to stay ahead of the market all years. In the commercial segment for example, we are successfully transitioning the mechanical automotive product lines to provide more advanced systems and electronics.

In North America and Europe we continue to strengthen our lead in electronic throttle control adjustable and fixed pedal systems. Earlier this month we enhanced our product line in sensor technology capability with the acquisition of the passenger and light truck business from Willams controls. Our strategy to expand our global presence to show results in Europe.

Private control sales in Europe as a good volume of share. Our goal is to align our resources to customer needs designing manufacturing, and distributing based on local customer requirements. We had expanded our manufacturing CAPEX in Slovakia for both automotive and industrial products.

Light duty cables for automated and industrial motion control have also expanded in Europe. Earlier this month we announced the purchase of the assets of siemens video automated cable business. We are in the process of transitioning this business to a manufacturing campus in Hungary. We plan to thought shifting to direct the customers in January.

Our presence in China provides us both with manufacturing campuses for a full range of automative and industrial products as well as answering into a growth market.

In third quarter we grew sales of drivers control produced in our Asian facilities. We have also expanded one of our Mexican facilities to create a manufacturing campus for both automotive and medical products. New products and acquisitions have helped to make our medical segment a strong performer all year of course the currencies helped but in the third quarter we had double-digit sales and operating profit growth. In our medical segment we're also transitioning the business by investing in newer technologies and devices for faster growing segments of the medical market.

While no one product has had a major impact on results, we strive for a steady stream of new, innovative products. In July we acquired the new cardiovascular product lines and we are already beginning to see results from our integration efforts.

We have already combined the sales teams and have recently announced plans to consolidate administrative functions and manufacturing operations. And we are working on expanding our distribution channels as well. In the United States we have improved our position with group purchasing organizations by utilizing a Teleflex medical account team.

We also increased our sales of instruments and devices to OEMs. In the aerospace segment we continue to invest in new products and services. Our investments earlier this year in the manufacture capabilities for the products group is beginning to show results and early indication have increased as in order for shipment later this year.

To date, we have acquired business was over $140 million in annual sales. Each of these businesses strengthens our new product strategies and furthers our presence where we expect to see a future growth.

Looking a ahead, Teleflex historically has had a relatively strong fourth quarter. There are number of reasons why we are cautiously optimistic even with the challenges in our end markets. First, I'm not optimistic about the power generation markets turning around soon I do believe that the action we are taking will improve performance in our IGT product line.

We are completing work in process and making the necessary changes to improve results in that business. And again, over the past year, we've also been reducing cost and consolidating operations. On the positive side, IGT typically sees a seasonal pick up in the fourth quarter. In the early indications are that part orders are up. In manufacturing components, a fan blade module production increase will start in the quarter and ramp up next year. In medical, we will continue the momentum, established by acquisitions and new products earlier this year.

Challenges and benefits will come from integration of our surgical products business and the changes we're making to improve the move profitability of the cardiothoracic business. In the commercial segment, we are looking for more of the same from automotive.

Automotive in solid all year based on the new products and we won't have to launch costs in the fourth quarter. Bill breaks for both North America and Europe have stayed within our planning ranges to date but as you know they're always difficult to call but we still feel comfortable for the remainder of the years.

The marine active market, we should get a boost in the new range of products in our fish finding category that was shift in times for the holiday season. Early orders are in line and we are starting to seeing promotions in holiday catalogs, sporting good, fishing and boating retailers. There's no doubt that conditions in some of our end markets have created a challenge for us.

And we see these conditions continuing into the fourth quarter. Yet, we do not expect to see -- we do expect to see improved results strictly from an operating standpoint over the fourth quarter last year. Again, in the fourth quarter of last year we had a non-operating gain of $10 million or 16 cents per share that brought our earnings per share to 88 cents for the quarter.

At this time, though, we an anticipate earnings for the year will be at the lower end of our range which we gave in September of 275 to 290. As we begin our planning process for the new year, we remain focused on investing and positioning our company's for the long term, even as we address the difficulties of the current market place. Julie?

Operator, we will now take questions. We ask that questions be limited to one question and a follow-up and then we'll cycle around again.

Ladies and gentlemen, if you wish to ask a question at this time, please key star followed by "1" on your touch-tone telephone if your question has been answered or you wish to withdraw your question, please key star followed by the number "2". Questions will be taken in the order received. Please key star, 1 to begin

And your first question ma'am comes from Wendy Caplan.

Good morning. Jeff, over the past 10 quarters, Teleflex has missed expectations by 7 times. This is a sub par performance relative to your diversified industrial peers. For the prior 15 quarters Teleflex missed expectations only once. The period of consistent misses coincides with the sweeping changes in management that were enacted at the end of 2000.

The poor performance since leads us to think that either there were significant legacy issues that we have underestimated, or that the new team strategy is simply not working. Could you please give us your perspective on our perspective, and as a follow-up, comment on where the board is in all of this?

Sure, Wendy. There's no question that we have had weakness in most of our end markets for the last 10 quarters, as you have identified. The one thing that we have continued to try to address is the over capacity issue through the last three years, we have shuttered more than 27 facilities. At the same time, migrating the low cost manufacturing areas.

Whether it be Slovakia, whether it be Mexico, or whether it be China, we have had a great deal of investment to make sure what positioned not only to be in lower cost but also to be positioned where our customers are moving to.

And as we've already addressed, we've had issues in the aerospace side primarily on the industrial gas turbine for the last several quarters, and I think we've got our -- at least we have identified those going forward.

You brought up the sweeping changes and I think we have moved some of the cultures of Teleflex, again, being decentralized was probably a very effective strategies for our first 60 years, but again, we're now competing in a global market place and to do so, I think we've made the necessary changes both in terms of location as well as where ever going with our technologies.

So, again, while we're trying to consolidate and remove a lot of the over capacity, I think we're also trying to drive -- making sure we're getting the efficiencies of scale but again it's a difficult time especially during down markets to do so.

But again, we now are competing in a global environment where several years ago I don't think that was necessarily the case, as Hall identified, you know half of our profits are coming from outside of the USA that's truly is a big change in where we have garnered our profits in the past.

Your comment in regards to the board, the board is very supportive of the directions and understands that we have to continue to migrate our culture to one where we could truly have long-term growth and not necessarily focus on the short term.

As a follow-up, Jeff, the comments that Hall made earlier in terms of the problem with the engineering contracts and mentioned a couple of steps that the company had taken in terms of new procedures, were there management changes because of this? And if not, why not?

Yes, we are in the midst of a management transition and have been for the last 30 to 45 days and we're continuing to manage our way through this process.

Thank you.

The next question is from Steven Colbert.

Good morning. Hal, I think you mentioned that there were -- let's see. nine plants to the close this year. How many of that - how many of those were in the third quarter, how much in the third quarter, you said you had $3 million of closing costs.

Is a plant closing efforts now done? Is there more in the fourth quarter? And also, what kind of benefits can we see either in the fourth quarter from what's been done so far or in effect as well moving into 2004, what kind of benefits and when can we anticipate that?

OK. Steven, let me address first the three plants that were closed or in one instance severely curtailed is probably the more appropriate label. One was an automotive plant. Second was the plant in Sweden in marine. The third was service facility in tell air.

The costs related were about $2 million for the automative plant, rough order magnitudes $500,000 and $200,000 to 300,000 for the service facility.

I think that generally, though, we don't pre-announce plant closings or those that would happen in the fourth quarter, but I think that we can safely say that this consolidation and the capacity will continue. One of the ones that has been announced is the CT plant closing where we're closing the plant we acquired and moving production to other facilities, most notably in Mexico, again. So did that answer your question?

Well, for the most part. I'm trying to get a sense of how much of these closing costs in this capacity issue has been resolved by now or how much more even not specific plants you have to mention, but sort of just some sense of how much more is there to do going into the fourth quarter or into 2004 in general?

Well, in general.

Have you been doing these things? Or is it still more to do?

We don't have a lot of specificity with what's on the drawing board because we're currently going through the planning process now. So we need to go through the planning process before we start to answer your question with any detail.

Hopefully, the markets will rebound somewhat from the dismal level that they've been and we'll be in a better position to sell plants and sell goods and less inclined to reduce capacity. Is that a good enough now answer?

That's general enough I guess not to answer the question.

Sorry.

What about on the other side of it, the benefits on the expense line reduced closings? Can you give us a number of framework in terms of what's been done so far when there's a pay off on the benefit side going forward?.

Our best estimates are about the annualized savings for the costs thus far this year are probably in the nine to ten range.

and is there any --.

A portion of that has been realized this year. Now we're getting it from nine different plants. A lot of this production has been transferred to some of our other plants so these are certainly rough orders of magnitude but that's our estimate, yes.

OK. Thank you and just a follow-up, on the engineering contract that gave you the problem. Could you give little bit more detail in terms of, this sounds like this would have been something that was going on for more than just a third quarter effect.

Has this been since than a longer-term contract? Is this a contract that you took just more recently? And when did the problem as rise in this contract?

OK. A few things, these contracts, and there's been more than one and there's more than one involved in the losses, but they've been going on for the most part of this year. OK? So they were early on the first six months in the contract and they generally extend about a year. So run throughout the year and they have been running throughout this year.

Let me leap ahead on that first, though, and let me tell you that in each of these three instances, they are supposed to be in start up or commissioned in start up in the end of October or the very beginning of November.

So we are very close to the end. OK. I can say that these contracts have been reviewed at the end of each quarter and the best estimates available were that the contracts were at a marginal break-even line. And then what's happened is -- and I'll give you some specificity on how this happens -- the largest single problem, of course, it's always in the last portion of the contract, but one of the largest problems was -- and I remember the date -- was September 1, we took or presented some of our change orders to one of our customers and they summarily rejected.

That comes under ill designed scope. So that certainly contributed to these losses. We think we've got them all. There is an element of estimated cost to complete but as I said we're very close to the end of these contracts, and the procedure is in place will certainly tighten down this area of business.

Now, let me also say that we have made money in the past and are making money on a contract or two this year. Not all is lost in this area, but generally, it's certainly contributed mightily to our performance in this quarter.

and the contractor or two who caused the problems you said are ending? Or that will be completed here shortly?

Yes.

OK. Thank you very much.

Or it is a very tail end of these contracts so I'm fairly comfortable that the magnitude of error and estimates is but nothing compared to what transpired over the past few months.

Thank you.

Your next question from Jim Lucas.

Thanks. Good morning, all.

Good morning.

Hello, first of all housekeeping question. Cost of goods or gross profit margin, whichever is easiest for you?

Gross profit on sales, James, 25.5% in the quarter.

OK. Then if we look, Jeff, one of your ` comments on the medical outlook was when you were talking about the positives you also said one of the challenges that remains at the integration on acquisitions. Could you expand on that comment? Is that a major challenge or just something you wanted to throw out there?.

I think in the past integration processes have been left up to the operating managers and while they're very much involved in the process, I will tell you it is a much more defined and a system of accountability both in terms of time and ensuring that the synergies take place as well as the actions take place and again, we do this through a web site that's an active Web site so everyone in the corporation at least from the senior staff has access to see where we are with the integration and to see who is a accomplishing what needs to be done and who isn't.

So I will tell you the level of doing this is something new to the organization and I think it's been one of the positives, especially with the CT integration. That's really helped us bring some of those profits a lot quicker and than we would normally have seen in the past.

OK. Then if we switch to the over capacity issue that you eluded to, if we take a look at Teleflex historically, we don't have to rehash the whole decentralized model, but you know, I think you would agree that your manufacturing footprint is still in need of some major overhaul. Is this something we will continue to see more of a couple of facilities, a quarter or at some point do you have to make some sort of dramatic change because of the absence of any true operating leverage to the general economic environment?

Well, again, Jim, I think we're in the planning process now, getting a greater, trying to get some perspective on next year. I don't think we're talking about a major issue in terms of our over capacity. I think we continue to manage that through the years.

Again, I think having the campuses whether they are being in Slovakia, Mexico or elsewhere now gives us an opportunity to obviously have a single overhead structure and a lot more volume through it as well as realize some savings both in terms of material and labor.

But I appreciate your comment that there continues to be probably an area that we need to address and we are continually evaluating that. As we finish the planning process, I am sure that we'll continue to look at that whole process.

And when you look at your CAPEX dollars that are being spent now, how is that being distributed between maintenance, new products, new tooling associated there, and new facilities and in low cost countries?

I can answer the latter, readily about 15, 20% of our expenditures for CAPEX are in low cost countries there. So that's how that's distributed. On the other three categories Jim, we just capture it that way. Historically, we run about 4% of sales, 4 to 5, and we're in that range again this year. So I think that's about that.

OK. Thanks.

That's about all I can give you.

OK. Thanks.

Your next question from Deane Dray.

Yes, good morning. Just couple of follow-up questions related to the IGT contracts. You said these were done on fixed costs or is there cost plus? How do you structure these?

Yes. I wish they were cost plus but they were fixed.

So, you are not doing fixed costs anymore, what's the process, you said you are part of the new procedures in place, in your review process.

Well, I think what we've done is we tightened up the discipline in terms of the affirmation, in terms of legal review. It's interesting, one of the issues was the scope of the contract wasn't defined very well and the people involved from our side, you know, probably were over zealous in their attempt to complete the job and please the customer.

So I think that's part of it as the early review and enough people involved

So if these had been all written up in their entirety in terms of what we see any residual expenses against these contracts?

I can tell you they're written off in their entirety. I feel good about that because we're very close to the end of the contracts and the commissioning of the units, but I cannot offer a 100% guarantee. But I would be very close to giving that.

OK. And then If we look at the other three businesses within the aerospace, you said that you -- that they collectively were operating around the mid single digit returns. So kind of step is through based on what you're saying now, based on order rates, customer inquiries, and so forth, how should we think about the aerospace recovering in its profitability? What sort of time frame and what are you looking for?

OK. I am looking for an improvement in the cargo business because of -- we could be solemn dated a plant in Germany. We moved our plant in Germany to a new plant. That caused disruption in the third quarter. It will give use efficiency over time.

So we're looking for profitability to be improved in the cargo area in the fourth quarter. Likewise, in manufacturing, we're starting to ship modules. The backlog manufacturing - we have some good are there and repairs are done very well.

Our partner GE continues to expand their overhaul business so that's as steady as you go may be a slight increase. So I expect as it improved from second to third slightly, I expect those to improve from third to fourth.

And within cargo, you said there were some costs or structuring there. Could you quantify that for this quarter?

I think in the third quarter we said 2 to 300,000 on the closure on the move of the plant, but do I think they quote it all? Absolutely not. It's impossible to have the efficiencies of picking up the engineering staff and moving it.

OK. If we look at the first quarter, in the press release you talked about IGT. We've gone through that. When you say IGT and engineering services, they're one and the same?

Yes.

Then leisure, marine, some of this you just don't recoup. How about fuel cells? I think that was a surprise to us about why that would have been weighted ads something that would have contributed to the earnings short fall. Just take us through quickly where you are positioned, what sort of economic exposure you have going forward.

I'll touch on that one. I think if you look year over year in terms of the out fuel deliveries that we've had, we were down almost 50% in the third quarter.

And for a variety, obviously, the energy bill is one that continues to be one of the reasons, you know, the legislation is still pending. State spending obviously due it some of the deficits in some of the states has affected their budgets.

The reality is we've had a very difficult time with our customers in getting accurate forecasts because it is such a very dependent market on government funding and state funding. So again, we've taken head count out. We have slowed down one of our facilities.

I think we believe we're well positioned, but it's a question of if and when the energy bill passes, again, I think we're in a leading market position with the OEM's to support them but as you well know, this energy bill with all the attachments to it has some work to be done still.

and Jeff, just synthesize this for us. How big is fuel cell at its peak?

I wish it was full cell but it's really not. Fuel cell would help. We do have some components in that market, but it's about $75 million in revenue.

OK. Thank you.

Your next question is from Steve Wilson (ph).

Few questions. You were nice enough to outline the losses we're seeing in IGT in the quarter. Could you talk about the losses that have been generated there for the full year and do the same for the alternative fuels business? What kind of losses are we seeing in that business for the year?

Sure, Steve. The year-to-date losses in the IGT business are in the range of $20 million. And in the alt fuels, it's around $4 million.

For the year? And most of that in the quarter?.

Harold Zuber yes. Over half of it in the quarter.

OK Second question is for Jeff. If you go back when you had your analyst meeting couple years back, the two exciting growth areas just happened to be IGT and alternative fuels and obviously both of them have taken a sharp turn for the worse.

Could you talk about where we are today, whether you still believe those businesses have growth potential or whether you've now sort of point to other areas to carry the load going forward above and beyond cyclical recovery?

Yes, Let me interrupt one Steve, because I was looking at the change in those businesses. The losses for IGT are about $14 million and GFI about well over a million dollars but the impact every year over year was what I described originally just now. I'm sorry. But I wanted to...

Harold Zuber On the alt fuels business, Steve, as you know, we've tried to expand into the European market in the last year. We still feel very strongly that there are opportunities.

And again, our approach there is while we continue to try to look for systems and opportunities, we want to ensure that if the market continues to grow, especially in Europe, that will be a component supplier as much a systems supplier. So Again, I think we feel pretty good especially with our OEM contracts that we have both here in the states. It's just a matter of the volume.

And I will tell you that I think we ramped up in anticipation of the energy bill and we are now in a ramping down and in a holding pattern awaiting to see what happens with that bill but I think we still feel that the business is a viable business. It is truly a very much of a niche business.

There is really only one other player in that market, so I would say for alt fuels, we still feel that, again, depending on the energy -- even without the energy bill, Steve, we are expanded into the industrial business, so again, we're not just dependent on the auto maker OEM's. We've really expanded into portfolios and some of the other opportunities.

So, again it's the typical Teleflex play of diversification outside of a single market focus.

In the IGT, I think, again, our strategy was provide a wide range of services and I think what we -- while we have a full range of services, when the market started to change and get into these lump sum contracts while we have a lot of experience, ours is more in the parts, the maintenance, the monitoring, and not necessarily we're not necessarily experts when it comes to opening up everybody's turbine.

So I think it's been a, obviously humbling experience for everyone but I think we have also learned from our mistakes. Instead, We need to stay focused on our core competency is and even the mark while at down at the lowest point, we still believe that there are some growth opportunities not only in the parts but also in providing some of those services.

And from the stand standpoint of going forward, are those still the lead growth areas in the company portfolio or would you now appoint some others to sort of take that place?

Harold Zuber I wouldn't say there's a lead after the results that we've just had, Steve. That would be taking a big step there. I think we still believe medical has some great growth opportunities, as well as surprising enough that in the industrial and even in the automotive with some of the migration of our products. We're still seeing growth opportunities. Again, it's new product growth as much as it is new regional growth as well.

All right. One last question. The first question on the call raised an interesting point but I guess I'll ask the question differently. It's not a surprise that when the economy is strong it's easy to make numbers, but the fact that it's been repeatedly coming in under, you know, the guidance, I guess the question is more is that a question of being too optimistic within the company or not managing the budgeting forecasting process tightly enough?

Or what do you attribute that to? Because the reality that it's a tough environment is well known. The ability is to predict and forecast has obviously been flawed over the last couple of years in the tougher environment.

Harold Zuber It's an interesting question, Steve. Let me say, as we go through the planning process over the past couple of years, we've been in compiling the plans, reasonably closed, overall, which is always had ups and downs in Teleflex.

Overall in the revenue line, I'm going to have to say if you press me that we plan for the weaker markets, but we've kind of missed something between the revenue number and the bottom line, which really follows the execution.

Additionally, these markets are difficult not only in volume but in margin because we are experiencing with the OEM's continual erosion of price. But if you ask me that question, I would kind of go to the execution. Jeff, do you have anything to add?

I would agree with him. I think execution has been an issue. I think some of the putting in more definitive systems throughout the organization to measure some of those things, Steve, were probably now nine or ten months into it. It is a change to this culture but I will tell you, as with any new system, especially a decentralized organization, most people don't readily accept it but I think now that many have struggled both in terms of the profit line, they have seen some benefits to running a more structured and accountable organization, so I couldn't agree more with Hal. It's been execution. I think there is some optimism in there as well. But I think we try to drum some of that out during the profit planning process.

Your next question from Wendy Caplan.

Hi, just a clarification on these contracts. They all end in the fall and we knew that we were losing money before this quarter, we the management, knew you were losing money before this quarter. You mentioned that you just put some things into place or changed management over the past 30 to 40 months or 40 days, rather. The question of execution, again, comes up. You know, why am I more worried about this than you are? And are they still fixed cost contracts and, you know, what kind of margin do we typically bid on or get on these things?

All right. Let me start with we lost only a miniscule amount of money in the second quarter and our estimates at that point in time didn't indicate, Wendy, on the estimates that we were given, the estimates management had from the people on site, didn't indicate anymore losses.

Additionally, a lot went wrong in the third quarter particularly as it related to for instance the change orders. So I want to kind of clear that up. If we would have known, we are going to lose this money, we would have booked it in the second quarter because -- completed for the year. So after that, what was your follow on question?

Well, you know, what do we typically -- what kind of margin do we typically get on these contracts rather and do the procedures still -- are they still going to be fixed cost contracts? And, you know, are we comfortable at this point that we've solved the problem?

We've made money historically on these fixed cost contracts. They run about a year for the installation of a turbine. We've done that. We haven't done a lot of these in the past. The margins generally are reasonably thin and product is 10% range and that's because a lot of your costs are pass through costs for that turbine or the parts. OK. So they are slimmer margins because your value add is not overly -- not a significant part of the contract.

OK. Thanks, Hal.

Your final question is from Chuck Karenina (ph).

Hello, good morning. Noticing your consolidated balance cheat figures here, I have a question regarding accounts receivables, which appear to have risen three and four times respectively. Could you give us a breakdown as to which segments are causing the rise in receivables and inventories and what you can do about it?

It depends on what you're talking about, but let me say a few things with respect to the rise in receivables and inventory `. Certainly, as it relates, if I might, from December, frame it from December to September, about $20 million in each of the classifications is Fed Ex and then acquisitions account for about 30 to $35 million or $35 million of the increase in inventory and about $16 million in receivables.

So receivables, if we start to look quarter to quart quarter and business to business have increased in automotive in Europe for the increase in sales and are well basically in automotive and also a slight increase because the terms are longer for medical in Europe. We sell in to the public hospitals. They take forever to pay. So I think that explains it in one way, is that what you were looking for?

Yes. Thank you

If there are any further questions, please key star, 1 now. At this time, there are no further questions.

Thank you, operator. Again, a replay of the call will be available on the Teleflex web site or by phone. To those of you who dialed in late or would like to review, the replay number is 1-888-286-8010, for international prior is 617-801-688; the pass code number is 18191444.

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Ladies and gentlemen, this concludes your program for today. You may now disconnect.