泰利福醫療 (TFX) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2004 Teleflex Incorporated Earnings Conference Call. My name is Kristy, and I'll be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question–and-answer session towards the end of this conference. If at any time during the call you require assistance, please press "*" followed by a "0" and the coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I'd now like to turn the presentation over to your host for today's call Ms. Julie McDowell, Teleflex's VP of Corporate Communications. Please proceed, Madam.

Thank you, Kristy, and good morning everyone. Teleflex released second quarter results at a press release last night after close. For anyone who doesn't have it, the release is available on the Investor Relations page of our corporate website. Today's call is being webcast in a listen-only mode. In addition, a replay webcast will be archived and available on our website. An audio replay will be available by dialing the following phone numbers -- 1-888-286-8010 or for international calls 617-801-6888. The pass code number is 97427562.

This morning, Jeff Black, President and Chief Executive Officer of Teleflex, will start off with his comments on the quarter and the progress we're making on our strategic initiatives. John Sickler, Vice Chairman and Interim Chief Financial Officer, will review our results and outlook in more detail. After their formal comments, as usual, we will take your questions. To facilitate the process, please keep questions to one question and then a follow-up and we'll cycle around again if we have time.

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 most recent Form 10-K and other SEC filings. And with that, I will now turn it over to Jeff.

Thanks, Julie. Good morning everyone. Second quarter started out with strong momentum and a list of accomplishments. Then, at the end of a quarter, we were hit with higher than expected costs in Aerospace and Auto that impacted the quarter. With raw material cost increase getting a second wind at the end of June and a lower demand forecast for adjustable pedals, we had to adjust our assessment of the impact of our automotive product line for the remainder of the year. John will cover the reasons for the shortfall and action steps we are taking in detail.

But, first, I want to review highlights for the quarter and some of our recent activity. Revenue was up across all three segments with 7% of our 13% increase coming from core growth. Core growth was also up in all three segments, another positive sign. Cash flow from operations for the first six months was $116 million, a nice increase year-over-year.

During the quarter, we continued to see a pickup in activity in many of our end markets. And commercial automotive product line growth again came from shifters and guide controls in Europe as well as products in Asia. Marine benefited from strength in the OEM markets with demand for steering systems continuing to be strong. In the industrial market, we saw another year-over-year increase in the OEM market for pedals, controls, and cables used in trucks, RVs and industrial vehicles. And we saw an increase in sales of auxiliary power units for the trucks after-market.

Medical sales growth came from across its product lines with sales of orthopedic and cardiovascular devices to medical device manufacturers being particularly strong. New products contributed to the increase in disposable medical products as well.

Aerospace sales were up on mixed results and we saw orders up as well. Once again, we had a pickup in some of our product lines on military sales and to a lesser extent new engine sales compared to last year. Repair services' volume increased double digits over last year. The message is the same though, volume increases in areas, but the pricing is not getting any easier.

Cargo Systems' sales for the quarter declined on lower narrow body and container sales when compared to last year. As expected, IGT after-market revenues declined on lower revenue from engineering services.

Orders for Teleflex overall grew 24% on a year-to-date basis. We had increases in all three segments, Medical advanced by 28%, Commercial 27%, and Aerospace turned positive at 9%. Again, the disappointment was in the operating profit and we clearly have to focus our resources for the year, first, on improving our cost structure as well as our operating margins. And finally, then on creating opportunities for future growth.

[Prepared] for today, I look back at my remarks from last February's year-end call; at that time, I said that I would like to see us double our medical business to reach 1 billion in revenue in the next 3-5 years. Today I am committed to accelerating the timetable to achieve this level as we continue to transform the Teleflex portfolio of products markets in which we participate in. This quarter we announced the acquisition of Hudson RCI, growing our medical business to close to 800 million on an annualized basis. The transaction closed last week and the integration plan is now underway. Financially this acquisition should add a few cents in 2004 and we expect more than 25 cents in 2005.

Hudson had revenues of a $185 million in 2003. It's growing sales at an annual rate of around 7% and EBIT was $28 million. The synergies implicit in the share accretion indicated were results primarily from combining European operations admin, as well as distribution. Operationally, Teleflex Medical doubled its healthcare supply business in North America and added higher-tech products for its combined sales team. We see much of our opportunity in Europe where Teleflex Medical has an established distribution network.

Just as importantly, the acquisition added an experienced management team and expertise critical to Teleflex Medical's long-term plans. Obliviously, we are excited to have Hudson employees as part of the Teleflex organization.

Strategically, this acquisition moves us towards a more balanced portfolio. As we stand now, we could see as much as 50% of Teleflex's operating profit come from our Medical group in 2005.

In connection with the acquisition, we completed a major financing announcement last week as well. At year–end, I also described our efforts to reposition our product lines and review our portfolio. During the second quarter, we divested three non-strategic businesses in the Commercial segment. We continued the process of reviewing product lines and have identified additional businesses that are not critical to our long-term success. We are assessing our options for these businesses as we speak. To give this some perspective, combined the divested businesses and those under review represent roughly 15% of Teleflex's estimated 2004 revenues. You can't expect this process to be quick. To be successful and to protect the value that we've developed within these businesses, it will take time to divest, phase-out or consolidate these organizations. I also said that we needed to align our global businesses, take advantage of economies of scale and get margins up to industry norms by driving cost of the of the back end of our businesses.

This past quarter, we realigned our marine and industrial businesses, getting us closer to fewer larger business divisions that share services. Both the marine and industrial markets offer great opportunities to grow profitably in the future. And, we just brought on new leadership in two key operating positions -- President of Teleflex Aerospace and President of Teleflex Automotive -- challenging jobs, but the individuals who have joined us both have strong operating experiences and have run sizeable global operations. They are backed up by a solid group of Operating Managers reporting to them. Over the past six months, both of these groups have consumed corporate management time and resources.

Today, we are creating a more unified global organization to position us for future growth. Our challenge this year is to execute on both our initiatives to growth and our efforts to streamline and operate much more cost-effectively. Given what we see today, we expect earnings in the range of $2.90-3 for the year. Obviously, John will walk you through our expectations and provide you with more business segment details in his remarks. At this point, let me turn it over to John for a little more detail. John.

Thank you Jeff. As indicated, the positive trend for revenue growth continued in the quarter. The components of core, currency, and acquisition are as follows. In our Aerospace segment, 4% came from core and one percent from currency for a total of 5%. In our Medical segment, 4% came from core, 3% from currency, and 15% from acquisition for a total of 22%. And finally, in Commercial, the core represented a 10% growth with currency at 3%, and nothing from acquisitions, net of dispositions for a total of 13%. The total for all of Teleflex then was as indicated in the release, 7% from core, 3% from currency and 3% from acquisitions, net for a total of 13%.

Other items of interest include the following -- gross profit in the quarter was 26.3% in 2004 versus 26.8% in 2003. On a year-to-date basis, it was 26.3% and 26.4% respectively. International operations contributed 52% to sales and 49% to operating profit in the quarter compared to 47% and 44% in the prior year period. Depreciation and amortization were $55.162 million for the year-to-date compared to $52.029 million a year ago. Total debt to total capital decreased from 30% to 25% at the end of June. The increase in debt in early July for the Hudson acquisition has expanded that leverage to 43%. On a year-to-date basis, cash has increased by $25 million and debt has been reduced by $80 million. The increase in cash flow from operations was entirely due to our Aerospace group, a small measure of comfort from a tough quarter. And finally, working capital declined to 24% from the 25% level at year-end. Both receivables and inventories declined as a percent of sales.

Now, let's get to the quarter. What happened? Why so late? What's one-time cost versus ongoing? And what makes up your revised guidance? As we entered the quarter, we were feeling fairly good about business trends and activity levels, particularly on our strategic initiatives. Our internal plan was set at 85 cents per share. In early May, we announced the completion of the Techsonic divestiture, which resulted in a gain of $22.3 million. During that same timeframe, we made a conscious decision to accelerate the exit process from the construction service business units in Aerospace with estimated cost of 2.5 million. Thus, when we got to mid-May and we were excited to announce the Hudson transaction, our confidence in the quarter and the year remained steady. During June, however, many changes took place. The material price issues confronting many manufacturers reached the peak. While we continue to work with our supply network and the customer base, the net result is that the Company was negatively impacted with adjustments, some on a retroactive basis and our progress in Europe on product launch slowed in terms of our ability to move some products to other locations. The fact is we have experienced the highest level of cost squeeze in those products lines with the thinnest margins. These costs during June approximated $2 million. At the same time, it became apparent that selective products that were produced at the Aerospace facility closed in the first quarter and transferred to the other locations required rework and adjustment. These costs together with other contract adjustments in the closed facility aggregated $1.5 million.

Fortunately, at month–end, the [Stran] divestiture was completed after an 8-month process and contributed $2.7 million to the month-end quarter. We believe that the Aerospace costs are more reflective as one-time and that the automotive experience fits the ongoing category, which leads us to the year. Material cost issues and related production expenses, predominantly in Automotive, are expected to impact the second half by $5 million. Margin declines from reduced volume in both the pedal and alternate fuel lines add another $4 million and reduced volume in the narrow body cargo line will approximate $2 million. That should translate to the revived guidance.

Jeff has already addressed the focus of the team over the last quarter. Executing this strategic shift will not be done without bumps along the way. On the other hand, the total management is more confident that its plans will result in a stronger and more profitable Teleflex going forward. I'll conclude by making these observations. It remains important that the management team continue to concentrate its focus on the portfolio mix and the business model design. These activities are the key drivers for long-term margin improvement. Also, the divestiture process will enhance our already strong cash flow and open up other options. I'll turn it back to you, Jeff.

Thanks John. Again, we're continuing to execute on our transition to a more unified, global organization. Easy to talk about it, but those of you who are familiar with the organization could understand some of the challenges. Our challenge this year and the next few years is balancing the growth initiatives with the changes we need to make in order to improve profitability and competitiveness. As I stated in the annual meeting, Teleflex will be a much different company by the end of 2005 than it is today. While I can appreciate the need to build your financial models, I look forward to sharing more details of our plan with you by the end of the third quarter. This transformation will not happen overnight. As John stated, Teleflex will be a much stronger organization that provides a higher return to our shareholders than what you currently see today. Julie?

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

Thank you. Ladies and gentlemen, if you wish to ask a question, please press "*" followed by "1" on your touchtone telephone. If your question has been answered or you wish to withdraw your question, press "*" followed by "2". Questions will be taken in the order received. Please stand by for your first question. Your first question comes from Deane Dray of Goldman Sachs. Please proceed.

Yes, good morning. I am going to start with my clarifications first instead of my questions and that would be for on the automotive side. What – and you talked about the volume declines in pedal and the alternate fuel, what is -- how much -- is that a mix of the options or is that a production -- lower production issue?

Well, the in the pedal line, the OEM has changed the nature of the option and so now it's a special order. So we are talking about a different mix as well as a couple of at least one carline that has removed it as an option. And in the alternative fuel thing, we clearly see -- with the different technologies in the marketplace, we see some shift going on with some costumers, the different technologies and as a result, we would have expected some releases by this time for the second quarter and many of those have not been received. So we have adjusted the volume accordingly in both of those. To put that in perspective, the volume for the year we would have reduced in the pedal line by approximately 15% and that for the alternative fuel line it's as high as 20%.

And is that a year-over-year percentage?

Yeah.

Okay. And it was for the pedal and how much for alternative fuel?

20.

20% and then just clarify your, John, your point about describing aerospace and automotive. Aerospace being one-time in nature, automotive being ongoing. When you comment on the narrow body cargo falloff that sounds more of an ongoing issue, could you clarify that please?

Yes sure. What I was talking about with respect to the one-time were those expenses that related to our conscious decision to move faster in exiting part of the construction business and that was 2.5 million. And the other 1.5 had to do with the product transfer issues in our manufacturing group. That occurred in the quarter and we consider those as one-time and won't be repeated. The reference to the narrow body is a prospective change based on what we see is the order trend rates and is part of our call for the remainder of the year.

Okay and then just last question is on the prospective divestitures, 300 million in revenues, any sense of what there might be in the way of dilution and would you consider declaring any of them as discontinued operations?

I will tell you that the guidance that we have provided for takes no consideration for gains or losses and the answer to your second question is no.

No, that you won't or no that's not in your guidance?

No, I said there is no gain and loss in the guidance and I said we have no intent to take a look at discontinued operations as one of the solutions to some of our issues there.

And if there are gains, those are just considered to be one-time in nature?

I don't have -- sure, but I said our guidance provides neither gain nor losses.

Understand, thank you.

And our next question comes from Jim Lucas with Janney Montgomery Scott, please proceed.

Thanks. A couple of quick housekeeping questions. First, with Hudson, how much goodwill will go on the books from the deal?

Well, I think that's -- my guess is that it is a little over $125 million.

Okay.

There's -- I would say that there're three elements of the price difference, Jim, partly relates to the tax issue, part of it relates to goodwill and then the other relates to the fair of value of the existing assets.

Okay and D&A expectations for this year and any preliminary thoughts on '05?

I am sorry.

D&A for this and '05, Jim?

Yeah, depreciation and amortization.

Right, a $115 million this year.

And any thoughts about preliminary '05?

We haven't looked at that yet Jim.

Okay and then switching gears on Aerospace for a minute that, you know, clearly there still are a lot of moving parts. At what point do you foresee that the puts and takes will begin to subside and we can see a more normalized aerospace business and see the profitability finally start to pick up in the right direction? Is that a two-quarter phenomenon, a six-quarter phenomenon, any type of visibility that you could share on that?

Right now, as we said I think in the press release, we're going to be cautious, but I will tell you that we expect aerospace group to be in the black in the second half of the year.

Okay, and final question, obviously, you're not giving guidance on -- since you're not sure of the timing of divestures, what price etc, is going to happen, but it is -- is it a fair assumption that as gains are taken we can see the traditional Teleflex offset that, you'll continue to look for cost reduction activities where applicable on those gains, will for the most part be offset by other cost actions?

No, I don’t -- I wouldn't jump to that conclusion.

Okay. Alright, thank you.

And your next question comes from Wendy Caplan of Wachovia Securities. Please proceed, Madam.

Thank you. One clarification and one question, as my colleagues have done. First, you said that gains or losses are not in your numbers, yet for the -- in your $2.93 number, yet there was a 7-cent gain this quarter; are we supposed to exclude that when you're talking about $2.90-3 that excludes the 7-cents gain?

I think you know our position here that we have a comprehensive income statement, as we always addressed historically and continue to do so that those gains are reflective as everything else is in our guidance.

I still don't understand the answer then, so?

The 7 cents per share is included in the guidance.

Okay, but the future gains or losses in '04 will not be included in that or will be because I am not -- I am confused.

We have none anticipated in that --

Oh, I see, I see. Okay, thank you. And my question is a more strategic one, over the past 12 months you have made a number of acquisitions in your commercial segment that appeared to be mostly auto-related, kind of, $46 million is the number -- is the revenue number that I sort of added up. Of the $100 million that's been divested, it looked to me as if most of it or more of it was industrial as opposed to auto. Given your long-held view that Teleflex is a balanced company and you mentioned it in the press release and your comments this morning, can you tell me, one, how much of the $100 million divested was auto? Number two, whether significant amount of the 300 that’s also being looked at -- I am sorry, whether the -- how much was auto, how much was industrial and the Future 300, how that’s split out? My concern in asking this question is that we are getting more focused on autos than we are on the other marine and industrial businesses in the segment, can you comment on that please?

Sure, I'll take that one. On the pure auto side, it was about $40 million in revenue and that clearly would have been directly related to our joint venture in Japan. Again, you come back to the industrial and again industrial for us could be marine and industrial, very glad about $55 million in terms of the total revenues. Again, I don't -- what we have invested in some automotive, I think if you take a look at where we have invested, a lot of it has been in what I refer to as the Tier 2 Tier 3 technology, where I believe we have a greater market position, both from a technology standpoint as well as from a global standpoint. So -- and in regard to your last question, I will tell you that the 300 million identified for divestiture is across the entire portfolio.

So you are not concerned that auto appears to be growing because you are saying that it's in a better area for you in terms of Tier 2 Tier 3?

No, obviously, we have our concerns to the automotive as well. I think, again, as we're analyzing the portfolio, I will tell you that all aspects of our business are being analyzed and that's why I am open to say that I think the divestitures will be across our entire group, even segments where we have said we wanted to grow such as medical and industrial because if it doesn't fit strategically, we're dealing with the situation today and in the near future.

Yeah, and I'll just add to that. I think that we're on the record now for several months indicating that our major focus for growth in the near-term is medical and industrial, and so that's where we're spending time with our pipeline with the intend to spend our resources and so while we are on the subject of strategy, that becomes a further note for you as it relates to how the portfolio looks 12 months from now. So, that goes all against the grains that we have any interest for the moment of making the automotive sector a larger piece of our pie?

And I think, Wendy, it also comes back to -- if you look at our CapEx year-over-year, we are down from about 44-30. So, again, where we were allocating capital to has truly changed and where we are going to grow long-term. So, I think in the past we have invested a lot, obviously, in the pedals. And I think we have now said, look, you know, we struggled with some of the market dynamics in automotive, especially as we incur a lot of these material increases and get no relief from our costumers, it absolutely is having an impact on not only where we are investing capital, but our overall long-term strategy.

And your next question comes [inaudible]. Please proceed sir.

Yes, hi, speaking of CapEx, could you tell us what your CapEx plans are for '04 and '05 if you've gone that far out? And the second part of my question would be, can you talk about of the 300 million slated for potential divestiture, what kind of operating profit or margin collectively might that have? Thank you.

Yeah, Dan, [I will be] along the CapEx. I think we had forecasted for our coverage about 80 million in CapEx. Obliviously, our run rate is substantially less than that. But I also don’t want to mislead people that I think we may still get to that 80, so there are possibilities that we will see an increasing CapEx going forward as we continue to make strategic positions. John, do you want to touch on that?

With respect to the divestitures, the best I can give you there is that the margin contribution is less than the Company as a whole.

Okay, thank you.

Your next question comes from Jim Lucas of Janney Montgomery Scott. Please proceed sir.

Thanks. Two other questions, with regards to the balance sheet still having some flexibility and with the divestitures possibly adding more fund, more cash, could you speak to what the acquisition environment is looking for you and since you are in a digestive mood right now with Hudson, how quickly could we expect to see further deal activity?

Jim, I think again just to reiterate what John said, you know, between the industrial and the medical, we are active out in the marketplace. Well, I will say that the Hudson acquisition has truly had our focus really here from a financing stand point as well as from an operating strong point. We have already proven that we can successfully integrate, and that’s why I think we are still very bullish on 25 cents next year accretion from the deal. So I will tell you that we are actively back out in the marketplace seeking deals in those two segments and again I -- to be honest with you, I am pleased with the cash where we are. I felt that would have been a little higher on our debt going forward, but to me, again, we're going to continue to generate cash flow and we are going to use it accordingly .

Okay and second question, could you just give us an update on the CFO search?

Yes, the CFO search continues. I will tell you that we are near the end of the process and feel fairly comfortable with where we are and we hope that we would have an announcement in the very near future.

Okay great. No offence, John?

John -- John is (multiple speakers)

We will have an announcement --

Alright, thanks a lot.

We have a follow-up question from Deane Dray of Goldman Sachs. Please receive sir.

Hey, thank you. If we could go back to your earlier comment on Hudson, and the guidance of 25 cents accretion for ’05 and you gave some color regarding what the potential synergies are, both cost and revenue synergies. So how would with that 25-cent break out if you -- if we are thinking about cost synergies, revenue synergies, and then the potential idea of improving margins in your existing businesses? How will that break out 25 cents?

I will tell you how it breaks out first by telling you that there is no assumption for revenue synergies. It’s all cost-driven. Secondly, I would tell you that the attractiveness of this acquisition is that their strength in the product line is two-thirds in North America and our strength is overseas and so we would see in the beginning 60% of the synergies coming from the European side of the equation with 40% coming over here and given the fact that they’ve been fairly well-structured in this side of the, you know, this side of the water. So, it’s all cost-driven.

So, when you say it’s all cost-driven, is that coming cost being where you are improving existing margins of you businesses? I am not really following why you would characterize that as if you are doing more selling from Europe into the U.S., that sounds more like a revenue synergy, but may be I am missing something?

Oh, no. I mean, they’ve got a number of sales centers. We’ve got sales centers and distribution. So it is getting worse -- our assumption for the moment is taking the existing -- we’ve taking the existing combined revenues across the smaller cost structure because of redundancies. We have not incorporated into that 25 cents the upside potential from the ability to cover more of the marketplace.

Okay, and then what about -- if we just separate out the existing medical business, what would be the target margin improvement year-over-year, let's say, at the end of '05? Or are you going to combine that, so you would not be able to say what the apples-to-apples were on the existing business?

No, I would tell you that number one, we're going to combine them; number two, we're actually feeling fairly reasonable because there were a number of skeptics out in the marketplace when we said two years ago about what our direction was for growth and margin improvement in this sector; and so, the first [inaudible] next year will tell you that we're looking to growth the margins in that business assuming we get all these things done close to the 19% area.

19. Okay, thank you.

And we have no other questions from queue. Again, that is "*" followed by "1" for any questions.

Operator.

Yes, Madam. We have no questions at the time.

Alright, thank you. Again, a replay of the call will be available on the Teleflex website or by phone for those of you who may have dialed in late or would like to review. The replay number is 1-888-286-8010 or for international calls, 617-801-6888. The pass code number is 97427562 and thanks for joining us.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.