泰利福醫療 (TFX) 2004 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to your Q1 2004 Teleflex Incorporated Earnings Conference Call. My name is Gina, I'll be your conference coordinator. [Operator Instructions]

Now I'd like to turn the call over to your host, Ms. Julie McDowell, Vice President of Corporate Communications. Ma'am, over to you.

Thank you, Gina. Good morning, everybody. Teleflex released first quarter results yesterday, after the close, for anyone who doesn't have it, the press release is available on the investor relations page of our corporate Web Site.

Today's call is being Web cast in a listen-only mode. But in addition a replay Web cast will be archived and available on our Web Site a little later today. An audio replay will also be available by dialing the following phone number, 1-888-286-8010 or for international calls, 617-801-6888. And the pass code number is 301-362-91.

This morning, Jeff Black, President and CEO of Teleflex will start off with his comments on the quarter.

John Sickler, Vice Chairman and Interim CFO will review our results and outlook in more detail.

After their formal comments, as usual, we will take your questions. And to facilitate the process, please keep your questions to one question and then a follow-up. Then we'll cycle around again, if we have time.

But before we begin, I want to remind you that our comments today will contain some forward-looking statements concerning earnings, conditions in the markets 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.

For more information, please review our recent Form 10K or other SEC filings. And with that I will now turn it over to Jeff.

Thank you, Julie.

Good morning, everyone. I'll begin with a few remarks about the quarter and our strategic direction. And then John will provide you with some more detailed summary of the business segment results for the quarter and our expectations for the remainder of the year.

Overall this was another good quarter for Teleflex. The momentum we saw in the fourth quarter continued into the first, a combination of improving markets and new products driving growth.

Revenue was up across all three segments with solid gains from core growth.

Operating profits and earnings were in line with our plans for the year.

Increased orders gave us some confidence in general improvement in the economy and the macro environment, although we are keeping a watch on material availability as well as commodity pricing.

In Commercial, the stronger re-sales and contributions from new products improving market conditions fueled sales of trucks, agricultural and our new products.

And growth in Automotive came from our new programs in Europe and Asia.

Medical sales growth was across all product lines. New products contributed and we were pleased to see a continued strength in Home, Health and sales of orthopedic and cardiovascular devices to medical device manufacturers.

Aerospace sales were up on mixed results. We had a pickup on somewhat stronger military and aerospace OEM markets. Volume increases, but pricing is not getting any easier.

In Cargo the sales of our wide and narrow body systems to OEMs were up. But after-market sales for parts and containers were weak.

IGT - Industrial Gas Turbine - revenues declined on lower revenue from construction related engineering services. Although weak markets in North America are a factor, low volume here is also the result of our decision to phase out services have not met our profit expectations.

All this played out in orders for the year. Teleflex orders overall were up 23% compared to this time last year.

Commercial and Medical were very strong despite a 14% decline in orders for Aerospace. And again, it was primarily related to reduce orders for IGT after-market engineering service.

Operating profits was impacted by the business dynamics we've discussed on our calls as well as in the release. Launch expenses in Automotive reduced all fuel vehicle production, a facility closure in aerospace, all contributive.

In the coming months we will continue to execute on our strategic initiatives, improve profitability and will be focused, as always on cash generation and driving working capital down.

So overall, a solid quarter, strong sales momentum, progress on our initiatives and we're continuing to execute on the transition to become a more unified global organization.

Sure easy to talk about, but it's a lot of work going on behind the scenes.

Given all we see today, we're on track and continue to expect earnings in the range of 310 to 320 for the year.

John will walk you through our expectations in his remarks.

On our conference call just a few weeks ago, I discussed our strategic initiatives. This year our challenge is to continue to execute on both our initiatives for growth and focus on streamlining and operating more cost effectively.

To give you some perspective on our growth initiatives.

Historically, Teleflex has grown on the average of 50% from core and 50% from acquisitions. I want to see us get back to that ratio. And even though we've had a difficult economy in the last three years, we have continued to grow revenues but not with technology right balance.

To make this sustainable, we need to put our resources, where we can grow most profitably, strengthen the traditional core businesses where we have strong competitive positions, increase our resources for product development and invest in areas like electronics and engine management, advanced driver controls, interventional and diagnostic medical devices and newer technologies for turbine engine manufacture and repair.

I've said in the past that I'd like to see us double our medical business in the next few years. To do that we need to continue to align our global businesses, streamline our operations and take advantage of the economies of scale. We've seen some of the benefits of this as we've increased our margins in the last several years in this segment.

While our margins are higher than - in medical are higher than most of our Teleflex businesses, they are still not at the medical industry norms. So we need to continue to focus on this by driving out costs out of the backend of our business. Reducing the cost of manufacturing, distribution as well as on the administration services. The new team at Medical is definitely driving these initiatives and we are making progress.

We also have opportunities for growth in the industrial markets, building on the technologies and resources in our other commercial businesses. Again we're realigning our businesses that serve industrial customers to drive the costs out of the operations and invest in product development and customer service.

On the cost and productivity side, we're making changes to improve products -- profitability and position us for the future.

Teleflex today, has a complex and costly infrastructure of over 130 operating units in 27 countries. As I said in the past, our goal is fewer, larger facilities with more flexibility in shared resources.

We're still creating a map to plan and beginning to move product lines in several of our businesses to streamline operations, eliminate redundancy and speed distribution to our customers. While we're still in the midst of this process, we can already begin to see the cost benefits of these moves in the future. But we do want to ensure that we're understanding the ramifications of these moves to our customer base.

We're still investing in programs to streamline and standardize the organization. Strategic development, global sourcing programs, aligning businesses around customers and markets. Just an example, global sourcing and commodity price increases. Monitoring and reviewing contracts at the old steel prices and availabilities.

Historically all of the various Teleflex units, which buy steel, would have developed independent strategies to deal with the situation. Today, all of those efforts have been centralized to not only ensure availability, but to maximize our buying power.

On the last call, I mentioned our efforts to reposition our product lines and portfolio. Business reviews and product assessments continue and we're assessing our options for product lines that are very small profits contributors to the company or serve markets where we have no other presence. We may phase out, reduce SKUs, or even divest where it is the appropriate step.

Yet we're being prudent in this evaluation especially due to the fact of Teleflex being in several hard cycle markets.

Balancing diversification remains an important part of our strategy. We still strongly believe that our combination of Commercial, Medical and Aerospace business segments is one of our strengths and a building block for the future.

However we are focusing on resources to position us for the long-term growth of the organization.

With all that said, let me turn it over to John Sickler for more details on the quarter, the year and our future expectations.

John, all yours.

Thank you, Jeff.

After revealing the press release in Jeff's comments, I decide to alter the information format presented in this portion of the call to expand on specific facts and to summarize the key changes during the quarter.

First, let me give a breakdown of sales growth.

As indicated in the release, the growth of 17% in sales consisted of 5% from core, 6% from currency and 6% from acquisition. The Commercial business experienced a similar revenue increase of 17% -- 6% from core, 6% from currency and 5% from acquisition. The Medical sales growth of 27% consisted of 15% from acquisition, 8% from currency and 4% from core growth.

Finally the 6% Aerospace increase consisted of 4% from core and 2% from currency. On the last call, we mentioned business dynamics we knew would impact this quarter.

Items that occurred during the quarter and which we previously anticipated on our guidance, include the closure of the European aerospace facility with costs of approximately 1.5 million and the carry over of some ramp-up costs at Automotive in Europe for a global platform that had an impact of $1 million. We anticipated somewhat lower production in alternative fuels. What we did not expect in the quarter were the reduced shipments in this product line due to technical problems with a customer-supplied component and the extra costs of integrating two facilities in Europe. Those costs aggregated an additional 1.5 million.

We also did not expect corporate legal costs to be as high as realized in the quarter, which I'll comment on later. Both of these last two costs were more than offset by the strength in the Marine market. So as we think about those items, we don't see many - the costs rolling forward into the second quarter and think that they will be absorbed.

Let me comment specifically about our Aerospace segment - while sales were up, as Jeff indicated, the increase came in product areas where pricing remains an issue and in product mix where low margin products were bundled with our repair services to facilitate customer requirements. For example, in the repairs business we provide customers with material package services related to repairs. This helps us gain market share in a tough market but these services are low margin business.

IGT results were positive compared to the prior year but were not profitable due to the revenue decline, both sequentially and compared to the prior year. A major portion of the decline in Aerospace orders related to our IGT Construction Engineering Services. This was by design as we continue to reduce construction services. We are now focused on outage related parts and repairs. In the quarter we saw a decline in outage related services, which are intended to pull through opportunity for the parts and repair components.

As we discussed on the last call, corporate expenses were forecast to increase by 15% to 20% over the year, due in part to cost related to Sarbanes-Oxley legislation and high insurance costs for medical and property coverage. As you know, we are also making investments in strategic initiative areas like Global IT and purchasing, where the benefits are reflected in operating income and the costs in corporate. We did not forecast the increased level of legal costs in the quarter as indicated and I would now consider that additive to our forecast.

Speaking of legal, in the press release, we mentioned the trademark infringement case. There has been no decision rendered by the judge. A positive ruling means no impact on our financial statements. A negative ruling will create a charge for the final amount being to be unjust enrichment. In any event, we believe the case will go to appeal not withstanding that decision.

Let me address other specific facts before concluding - gross profit was 26.3% in 2004 and 26.0 in 2003. International operations contributed 52% to sales and 44% to operating profit in the quarter compared to 46% and 48% respectively. Total debt to capital remained at 30% from year's end. Depreciation and amortization were 28.622 million compared to 25.409 million a year ago. Operating working capital remains steady at 25% of sales from year's end.

Receivables increased by 39.25 million with two-thirds coming from the strong sales in our Marine and Aerospace repair business. Inventory increased by $5 million in the quarter with a build up in Marine and Industrial through incoming strong order rate. Speaking of orders, as you know, they increased 23 % in the quarter. Medical was up 29%. Commercial was up 35%. And Aerospace declined by 14%.

As Jeff has said, our guidance for the year remains unchanged after 60 days have passed. We know that Aerospace continues to need attention, but we are very encouraged by the trends in our Medical and Commercial segments. Perhaps it would be useful to repeat that guidance from our last call. Given the actions taken last year, we still see an opportunity for our Aerospace segment to achieve a double from the prior year. And we expect that Commercial and Medical can achieve operating profit growth approximating to 12 and 19% increases those segments had for sales in 2003.

Having reiterated that, we'd point out that the quarterly comps should be stronger in the 2nd half. And with that, I'll turn it back to you, Jeff.

Thanks John. Again, I think our first quarter was solid. Strong sales, which is a very positive factor. We're still making progress on the back-end of our business, continuing to execute to becoming a unified global organization. And really, our challenge, going forward, is -- for the next few years is balancing our growth initiatives as well as ensuring that we are structured to continue to build upon for the long term.

So, again, progress, while some may see it as slow, we feel good that we're moving in the right direction. And again, with strong sales, a very positive sign regarding the strength of our products in our portfolio. Julie?

Operator, we are now ready to take questions. We ask questions be limited to one question and then a follow-up. Then we'll cycle round again.

Thank you, ma'am. [Operator Instructions]. And your first question of the day comes from Cliff Ransom of Ransom Research Inc. Please proceed.

Good morning, folks. Can you expand on the cost and productivity side? What you're doing there? With particular reference to what's different today than before?

Sure, Cliff. I think -- I guess in keeping track of you as well, I think I saw that you went to 1 of the trade shows where -- just an indication on the front-end of the business, where we're now going out as providing a wide range of products, as we do trade shows. Again, we call on a lot of the same customers. So, just coordinating and trying to get some of our products.

And the fact that we're an engineering company that we can offer more products and more sub-systems, I think, is what we're doing on the front-end. When you look at the back-end, obviously, as we continue to look at the size of some of our organizations, what we found is that many of our smaller organizations -- they don't have either the purchasing power, because of their size or some of the skill set that's required in today's global economy.

So, by taking both at the corporate level, what we've done is, we've taken purchasing IT as well as HR. And we're driving almost all of those initiatives out of the corporate office. We've been doing this now, for about four to five months. We've seen some great benefits. But, I think at the end of the day, what we're seeing is some consistency. We're also seeing some areas that we need to focus on. But, I think we're also starting to realize that, again, when you have a lot of small facilities, going in and improving productivity, you have to have the resources to do that because they're not going to truly have those resources within their own -- the SG&A structure.

Thanks, guys.

And your next question comes from Jim Lucas of Janney Montgomery Scott. Please proceed.

Thanks. Good morning. First question, could you give us an update on the integration of CT on the Medical side and what you're seeing there. And what, possibly, you've learned from this process, now that it's really the first formalized one you've had?

Well, that continues to go well, Jim. In fact, as I said in the last call, the 4th -- in the 4th quarter, we considered ourselves to be ahead of the schedule. Almost all of the synergies in the beginning were accomplished. And we have, yet, one major move when we take some of the product line to Mexico later this year. So, from the standpoint of performance in using the Internet process with our system and all, I think that we consider that a big plus. We use it now, as the standard, going forward, in acquisition integration processes. And it continues to make contributions to the Medical group in the overall. Although, it hasn't yet attained the margin of the total Medical business.

I think, Jim, it also gave us a platform just to look at how we do R&D. Again, historically, Teleflex has done R&D through a wide range of facilities. CT had some wonderful people and some skill sets in the R&D area. And so when we identified that, we said, 'Why don't we take our Medical R&D and centralize it to truly stay focused on R&D, not get taken and pull back into operating issues'. So, for us, it's -- not only in terms of the integration, but also, it's been a great opportunity to say, 'If we're going to get back to growing our business and developing new products, I'm not sure that we can do it as we have, historically, within each of the Divisions'.

And in terms of the margin performance, at what point would you see that approaching the segment average?

Are you talking, in specific, on Medical?

CT, in particular, achieving the Medical.

That would be in the 2nd half of this year.

Ok, that quickly. And in terms of the Marine business, can you talk a little bit about where exactly you're seeing the strength? And what your outlook there is, going forward?

Actually, it's across the border, as we indicated. We're seeing it, both in terms of the OEM and the aftermarket activity. So, right now, that is very strong in terms of the orders. It carries over as well to the Industrial Vehicle products that are manufactured in the same facilities. So, from the standpoint of consumer activity there and what's been indicated about some of the recovery, we think that, and have always said, that Marine is one of our early indicators. It turns off the quickest, but it also is one of the ones that comes back the earliest. So, we see strength going in very strong, continuing right into the 2nd quarter.

I think if you look back on last year, we got off to a slow start in the Marine due to, what we refer to as 'a rainy season,' 'a cold season'. So that hurt our after market. But, I think if you go out and look and I know that the -- both builders are probably not as proficient at publishing their build rates and their inventories, I can tell you that the OEM side of the marine business is very strong. And I will tell you, I think some of that is due to the fact that I think people see an impending rise in interest rates. As well as, I just think that the general market is strong on both the after market as well as the OEM side.

Ok. And big picture question, there's a lot going on behind the scenes. I think many of us recognize that Rome was not built in a day. Progress is being made. Can you talk a little bit about what we, as outsiders, can look at as indicators, given that there are some additional costs being incurred during the short terms, but you're really focusing on generating some benefits longer term? What is it that we, as outsiders, can be pointed to, specifically, to say, 'This is the time that we're finally seeing the stars align at Teleflex'?

It's a great question. I think with -- what you have to look at is, again, as we change both the structural, in terms of getting away from some of these small facilities and getting back and focusing on growth opportunities. As to where those platforms are, I would say, Jim, that you'll see it in margin expansion, as I think the Medical is truly a great example of that. In that, several years ago, we started to really get more focused on margin improvement in Medical.

In the last 12 months, we've brought in a new leadership team in our Medical group that, in reality, didn't miss a beat. Because the strategy and -- was already in place. All they had to do was go in and accelerate some of the executions. So, I -- there's a lot people who would sit there and say, 'Ok, we'll -- well, our Medical margins aren't up to, what we refer to as Medical industry standards'. I think we have seen it. We'll continue to see improvement. And I also think it's going to show itself in cash.

We keep talking about working capital. Again, it's great to have a strong order book. It's great to have some strong sales. But, at the end of the day, we are still working through some of the working capital. And again, it's as much putting the processes in place as it is in terms of the actual numbers. So, I think you hit right on the head that there's a lot of procedural and what I refer to as strategic direction going on behind the scenes. But, at the end of the day, we're paid to make it drop to the bottom line and to see some improvement. I think you'll begin to see that at the back half of the year, both in terms of cash management as well as in operating margins.

Ok. Thanks a lot.

And your next question comes from Deane Dray of Goldman Sachs.

Thank you. Good morning. The question, first question, is in the Aerospace side. Could you give us a sense of where the Commercial Aerospace markets that you serve -- have you seen that stabilize yet? Either -- both from the OEM side and also the aftermarket.

And then, also within the segment, do you anticipate more restructurings? Are there more plants that need to be closed? What sort of charges might we be expecting to flow through on that segment? That's the first question, please.

Ok. Yes, we definitely see stabilization in the Commercial market. As we said, in certain portions of our business, we saw an uptake at the OEM level. I think, where ourselves as well as many other companies are a bit surprised as that there's not as much after market activity. Nonetheless, we feel pretty good about that.

In terms of restructuring, going forward, on the last call we said that the European facility was the only one that was in our guidance. Clearly given the circumstances we see here there will be - there is a likelihood that there will be more activity and we would say that the strength in some of our other businesses will tend to offset those costs.

Yes Deane, I think it's the pricing on the OEM side but I think we're also seeing a new wage in the airline industry and that you have a lot of these discount airliners who are coming out - and again, they're coming out with new equipment, they're not taking stuff off of the desert. So I think that indicates that the OEM will probably continue to be there and obviously, as they continue to put more flight hours on there, hopefully we'll continue to see after market opportunities as well.

Where's the pricing pressure? Is that related to IGT but are you also seeing it on the commercial OEM or aftermarket?

I think we're seeing some of that in - directly at the OEM level in manufactured products as an example.

OK, and then - a separate question is on raw materials. Give us a sense of how much of costs of goods sold is raw materials? And what you're anticipating for a year-over-year increase collectively - steel, resin, copper et cetera for '04 versus '03?

Well, the first part of that answer is that our materials are in the 50% to 52% range of total cost of goods sold. And I would say that for the moment, we're not looking for more than high, single digits in that area because in some of the more topical subjects, such as, "Steel and the like" we tend to have had either material pasture clauses in our contract as well as longer term contracts.

So, I think, whereas -- as Jeff has just said -- while we know that there's a movement there, we have our productivity action that's going on at the same time and that we're as concerned about availability affecting deliveries as we are at the rate of increase.

So when you say you have past (inaudible) capabilities, you're talking about being able to get price?

Yes, in some of our markets Deane.

Which markets do you have the most opportunity to get price and which are the least?

Well, you know which is the least, which would be probably the Automotive side. And I would say, again, probably, in the industrial, I think we have some opportunities to pass through. And on the medical, again I think it really depends on our mix of products - some of it again is highly engineered where we also have come commodities that I'm not sure we'll be able to guard our pricing. But I will tell you, I think we've been fairly aggressive going out looking for pricing increases as we've started to see them and our customers are never happy but they're also seeing them from other aspects. So it's not a surprise; it's just a matter of working your way through the negotiations.

Thank you.

And your the next question comes from Wendy Caplan of Wachovia Securities.

Good morning. Your comments about working capital improvement - right now it's about in the mid-20% range, again as a percentage of revenue. Could you talk about where you expect to be by year-end, and how you're going to get there?

Sure. I think that, as we said on the last call -- that our goal was to start to drive down to the low 20s, and specifically to be at 20% -- would be our first phase of a long return reduction there.

I think, one of the things that we've seen in some of our early successes, for example, when you look at a Medical, that's had a strategic plan in moving forward with the program for the last 6-12 months, we've had 27% increase in sales, and yet, at the same time, in Medical, both receivables and inventories are down in the quarter.

So we think that as we can't expect success at each operating level, simultaneously. So we know that some of the things that we have in our program have been successful. We can see tangible results for - from it, and so, we carry that across the rest of the organization. I think we'll be partway through our goal by the end of the year.

I don't -- obviously we're not going to get all the way down to the low 20s. So to think (ph) that the priority will go back to the top line, I think Jeff indicated in his comments on some - and some of his answers to your questions already. The two things that this organization's focused on is improving operating margins and working capital.

We think that those things will enhance shareholder valuation. It's the area where - the only area, in our minds, where we're not at the same levels with some of our peer groups and so that's on a highest level of priority and that's our program.

Just to clarify, so that I understand, when you talk about the working capital improvements for this year, will you be focused on a particular segment, or will you be focused on a particular component of working capital, that is receivables, inventories payable?

Well I think that the user is both, obviously. We want to get both levels down, and this quarter, as I said, receivables were up substantially because of the shipment level.

And we were actually pleased that inventory did not move much at all, on the basis of the sales increase. Taking out goods from finished goods level on the one hand, and then removing it into the raw material area, where we're getting ready for production in the second and the third quarters.

So I think that we'll work - the answer is, we're working on both. Clearly, we see the emphasis in some of our activities with the strategic initiatives, to look at some shared service things in the administrative area, particularly in Europe, where we can have a more focused activity level on the receivables side, and where those areas tend to have longer days than they do in the U.S. market.

And inventories, we tend to have a better turnover rate in the commercial side. So, as that activity goes, all of things should play well into the program. I think, Wendy, we actually - I feel actually pretty good about our inventory, because I know many of our groups did bring in substantial material, both to protect some of the pricing, as well as the availability.

So to see it just go up a few million dollars, knowing, you know, I think we did make some progress and while it may not be obvious, I think that's what took place in the first quarter.

Thank you. And the drop off in operating cash flow this quarter versus the year ago quarter, is that as well, primarily related to working capital?

Actually it is, but it's a specific element of working capital that we have not yet addressed. 100% of that change resulted from a drop in accounts payable and accrued expenses. And so as we -- two things happened.

One is that we had a high level of shipments, as you know, and so the other side of that was the increase in receivables. But the net drop off was in payables, part of that is because one of the major strategic initiatives, is working in global purchasing, where we're developing partnership programs with many of our suppliers, and the like, and so, as you deal with delivery, as well as appropriate pricing challenges, you also work with the economics of a reasonable payments schedule, and also that it's a win for everyone.

So all the change was not due to - it was due, specifically, to a drop in accounts payable and accrued expenses in this particular quarter.

Thank you. And one more question. When you talk about second half earnings improvement, I assume you're speaking specifically about the third quarter, in large part, which seems likely to benefit from fairly easy comparisons on the margin line, particularly Aerospace, and commercial and to a lesser extent, Medical. Is that what you're referring to?

In part, yes. Let me address a couple of things though. I think that - there seems to be a sense that our year is really tail-ended, and I would tell you that, our expectations as we look at it, are that the front half and the back half should not differ materially, in terms of our contribution, on an earnings per share basis.

Secondly, there's no question that we expect a margin improvement in all of our segments, in second half of the year.

And lastly, I did indicate in my comments that there's no question that the cogs (ph) in particularly the third quarter, where Julie reminds me that we had a perfect storm last year, with all of our segments being on, that all those things factor into the equation.

Thanks very much.

And your next question comes from David Durke (ph) from P. Roe Price (ph). I apologize. Did I say your name wrong?

That's Ok. Couple of questions, first, could you give us - John could you give a break down of the - sort of, the components or if the core commercial business is, sort of, up by 5%, what were, sort of, the components? I mean how strong was Marine, how strong was Auto, how strong was general, that's on an organic core basis?

And I was hoping you could do the same thing for the Aero segment, to break it to four big pieces of Aero.

Ok, I'll try my best. I think that Auto had a reasonable - a core growth that was similar to the segment. Marine, of course, was up substantially and industrial was a push, given where we were with alt (ph) fuels.

So, Marine we're a bit up over - would have been over 10%, would have been 20% or --?

(inaudible) Jeff.

Ok. How about --?

The Aerospace on the core growth side - we had increases in manufacturing and repair and some decrease, phenomenal decrease in Telair with a greater portion of the decrease coming in IGT.

Ok. Can I also ask, is we think about sort of the Aero segment excluding some of the one time items, the second half of last year, the commentary has been that, all the other businesses are, sort of, operating in that mid single digit size operating margins, and the IGT business is really losing a lot of money.

I was just wondering, as you look at Q1 today, is that IGT business losing as much money, as it was in Q3 and Q4? Or, has the profitability of the other Aero side, other Aero businesses come down from the sort of Q3, Q4 levels?

Now that's a good question. Number one I would tell you that - what we've said in the fourth quarter was that the business essentially achieved a break even. We see some negatives -- and not significant, but some negative red ink in the first quarter. But it was much improved from a year ago. That decline came from a 10% revenue drop, in that particular product line.

And while 75% of the revenue drop was in construction services, which is, as we said we planned for, the remainder 25% was in orders, and business relating to allied services.

And as I said earlier those allied services are actually important to us, because they're a pull through component for our parts business, on our repair business, in that particular segment in the market. So, I think that it's not a - it's a fair shift, and reduction from the cogs a year ago, and it's a slight hiccup here, in the first quarter, based on revenue.

So let me talk about that segment, for the year, as of what we'd see for the revenue. We would say that the revenue forecast in the IGT segment, will be off 10%, for the total year, the top line. And as a result of that, then we see the revenue in the overall Aerospace area being flat for the year. That means that the other three will all be up, taking care of the decline in that one particular segment.

But John, you would think that the core Aero business, excluding IGT is still operating. The three segments but then the other three businesses within Aero are all operating sort of still in that mid single digit type operating margin range.

They - they are all in the mid digit range, with the exception that we have to take into consideration the impact of the plant closure ...

Sure.

... And a couple of other things. But on that basis, yes, I think that that's there.

It's just one last question, this is - question is on the idea about SKU reduction hitting other non-core businesses and may be, Jeff, you just talked about - what percentage of Teleflex today here in revenue, or businesses, could be either divested, just reduced in terms of SKUs.

I mean what - are we talking about 5% percent of the company, to like 20% of the company, to like 2% percent of the company. Can you just give us a little bit of -- more clarity on that?

Yes, I love to David but I don't think we're ready to do that at this point again. I think we're still in the analysis stage, where - it's an interesting process to go through after being a growth company for all these years and continuing to invest and have the decentralized strategy that we've had for as long as we have. But I will tell you, again, it's a process that with John being the interim CFO, we're trying to stay focused on the issues at hand, which again is cash as well as trying to grow the top line. So, I wouldn't be ready to talk about what percentage that is.

First, it would literally - my employees who listen to this call would all be sitting there going, "I wonder if that's us." So again, for the analysis stage, I think, when we're ready, we'll come out and it'll be fairly obvious but I think, everyone who follows Teleflex and some of these calls - I mean, there's some translator (ph) apparently obvious to all.

Ok, and when do you think that will be things (ph) that you'll do this year, Jeff, that'll you'll come out with this year. Can you give us some details on that? Is that a 2004 event?

Yes, it is.

Ok, thank you very much.

And your next question comes from Steven Lewis of Lewis Capital Management.

Good morning.

Good morning.

I had a question about the increase in receivables? What is the seasonality of the marine and aerospace and will we actually see a dramatic change in the second quarter?

Marine has a strong at-the-market program in the fourth and first quarter. So, the fact of the matter is that one half of the entire increase on receivables came from the marine area. And then, another 15% or so came from our repairs business, where we had some of these material packaging programs for customers. So that just happened to be a timing issue as it related to when it occurred near the end of the quarter.

Is there a reasonable rate of working capital requirements as a percentage of sales over the whole year? I mean, is it 10 or 12% -- that sort of thing?

Can you clarify that for me?

Working capital requirements for incremental sales.

Ok. Yes, I would say that that's going to be, obviously, less than our average. And we think that it would be probably, in the area of the mid-teens.

It's not an area of looking at - carefully enough to have a figure more than just mid-teens?

Well, I don't have - I'll give you that offline if I go back and take a harder look at what the components of that are, where we see the sales increase.

Is it part of anybody's bonus program?

It sure is.

How much of a bonus for an operator?

Typically, about 20%. Steven.

Ok, thank you. And has there been any change in the outlook for total capital expenditures and total depreciation?

I'm glad you mentioned that. I think, that's the one thing we said all along is that we're getting back to it, specially as we're looking at our overall structure in terms of number of facilities that if you look at year over year, about five million decreased and again, I think, it's not only the decrease but more importantly, where that capital is being spent.

So, I will tell you, there's a lot of focus on that and I actually - to be honest, I thought it would have been better but we also had some working capital carry over from projects that we had started last year as well.

So what is the capital expenditure program outlook?

Well, I think we have said on our last call that it was 80 million and I will tell you that my goal is to get less than that.

Ok, and then the final question. I noticed in the proxy that there was a sale of 416,000 in goods and services from Sovereign Capital to Teleflex. What is Sovereign Capital and what are the goods?

If you were referring it to my ...

Right.

... my disclosure. Before I became president of Teleflex, my brother and I had purchased a business. It's in the medical fiber optic business. My brother is not employed here at Teleflex - let me make that clear, right off the back. So before I even became involved at the corporate level, we had made an investment - if you remember, back at - and I believe it's a year and a half if not two years ago, Pilling instruments, which was a distributor and marketer of fiber optic products had a flood which basically rendered most of the inventory obsolete and so that is really what that has been is, fiber optic cables and headlights and lights versus to the Pilling Group.

Ok, thank you.

Folks (ph) I do have a follow-up question from Cliff Ransom. I do have the list (inaudible) would you like to take the question?

Yes.

Mr. Ransom, please go ahead, sir.

I'm glad I'm asking this question last because it's the hardest one to answer. Jeff, the history of Teleflex and it's tremendous success and the history of your own successful career path is that this was a highly entrepreneurial, decentralized company and now you're talking about a unified global structure and purchasing. Can you talk about two issues that relate to that?

One, how you convincing your managers who've been in place 10/20/30 years that this is a good idea? And what challenges have you faced in trying to implement this major strategic cultural change?

What a great way to end the call. I have only 10 minutes but I think I can work through this.

Well, first and foremost, it was probably about 18 months ago when myself and the senior management identified the direction that I think - the structure and our history has been a wonderful one, which has served us well but I also believe that when I looked at it 18 months ago, having been in this role for about a year at that point that it wasn't necessarily a structure that we could continue to build upon to get to $4 billion to $6 billion.

So the first thing was, where do we want to go? And then trying to figure out the avenues to get there. And most of you I think are familiar now - when you have 130 facilities divided into 2.2 billion means you have some relatively small facilities. Part of the issue Cliff, is that most of our products are safety and reliability-oriented, which means the regulatory impact you have to have in place regardless of size.

And as I started to look at the organization and with John's help especially in the medical, we started to sit there and say, "Great strategy but the world's changed and I think we need to get back to larger facilities, where you can take that infrastructure and spread it over more revenue and also have greater flexibility. So convincing it has been in some regards, it's been a challenge; I've had a lot of employees who have said, this is fairly obvious and to me, I've never been called the brightest guy so to have them kind of say yes, this is the right strategy, and we've also said that we've had to bring in some skill sets that may have not been in our organization in the past and with those skill sets, we've made some management changes.

But I will say, it's been challenging. The victories while at this point are still relatively small, you can start to begin to see the culture and the people who are in leadership positions all understand that this isn't about having a bunch of very small empires, this is about what's good for Teleflex and all of our shareholders.

So the challenge going forward is really how quickly can you move from the past organization and structure, which has been highly decentralized to somewhat of a more centralized structure going forward. I do want to emphasize we are still entrepreneurial, we are not trying to diminish the front-end and our product development, but I think that we're trying to say with the resources we have, how can we be more effective in today's environment?

So the challenges, ongoing, I think, when you have so many small facilities you have a tendency to as you get in, and really start to dissect them, you see a lot of the positives, but you also see some issues that have to be addressed, so my job is unfortunately, like a roller coaster. You know, I get great news and then 10 minutes later I get someone kind of telling me, well, let me give you the other side of the ledger.

So it really is a process, but I will tell you, I'm pleased that we're in the process, because frankly, for us to get the four or five billion, and again, I want to reemphasize, I really am not that, we're going to continue to grow, but I think we're focused on the bottom line.

We've got to get our margins up, we've got to get our net income up to a more respectable rate, because we are an engineering company and if you look at a lot of our margins, I would say that they have some commodity hangover to them, and probably not the engineering that we put into the products, but also we're dealing with some pretty difficult OEM's and engineering products don't have the same effect. Before if we had something patented, we would get a few years before we start to deal with some of the commoditization.

Well, today's world, you get out, you bring a product to market, and right off the bat, within a year, you're looking at pretty difficult pricing. So in a long-winded way, we are changing. Is it as fast as I would like? I will tell you no. But I also believe that we have the right leadership and we're putting the right leadership in place and I will continue to make those changes as necessary.

Thanks, I'll address my follow-up questions to Julie. Thank you very much guys.

Thanks.

Ladies and gentlemen, I have today's 10:55; would you like to make your closing remarks?

Thank you, operator. Again, a replay of the call will be available on the Teleflex Web site or by phone. For those of you that may have dialed in late, or would like to review, let me give you the numbers again. The replay number is 1888-286-8010 or for international calls, 617-801-6888. The pass code number is 301-362-91 and thank you for joining us.

Ladies and gentlemen, thank you for joining the call. You may now disconnect your lines.