泰利福醫療 (TFX) 2004 Q3 法說會逐字稿

Welcome to the Teleflex Incorporated Earnings Conference Call. My name is Shawn and I will be your coordinator for today. [OPERATOR INSTRUCTIONS] At this time I would like to turn the presentation over to your host, Ms. Julie McDowell, VP of Corporate Communications for Teleflex. Please go ahead.

Thank you operator and good morning everybody. Teleflex issued a news release announcing financial results for third quarter yesterday after market close. The release is available on the investor relations page of our corporate website at www.teleflex.com. I'd also like to note that slides to accompany the formal remarks on today's call are also available on our website investor relations page.

I want to remind you that today's call is being web cast in a listen-only mode and in addition, a replay webcast will be archived and available on our website. An audio replay will also be available by dialing the following phone number - 888-286-8010, or for international calls - 617-801-6888. The pass code number is 56831934.

This morning, first, Jeff Black, President and CEO of Teleflex, will make formal comments of the market trends and outlook. Then Martin Headley, Teleflex' EVP and CFO will provide comments on the quarter financial results. After formal comments as usual, Jeff and Martin will take your questions.

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 certain conditions, 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 statements. For more information please review our most recent 2003 Form 10K and other SEC filings. And with that, I'll turn it over to Jeff.

Thanks Julie. Good morning everyone. The third quarter finished pretty much as we'd outlined in September. Just to summarize - revenues up 14% over last year's third quarter; operating profit up 12% and a slight decline in earnings. EPS were $.43, with $.39 per share from operations alone - within our pre-announced range. General business conditions were solid. Core growth was a positive 3%. Cash performance was very strong; and we had some positive economic indicators. Orders for Teleflex overall were up 29%. Core order growth was 18%, with aerospace and commercial especially strong. It's satisfying to see the turn-around in our aerospace segment this quarter with positive earnings and orders up compared with third quarter of last year.

As we discussed last month, price reductions, mix and margin pressures hurt the performance of tier one automotive businesses in our commercial segment; in particular, the pedal systems and alternative fuel systems businesses. The aerospace segments industrial gas turbine product line also continued to struggle this quarter. Combined, the pedal systems, alternative fuel, and IGT businesses generated a $17 million operating loss during the third quarter.

As noted in our September 20th press release, these businesses represent just 10% of our annualized sales; and obviously we're evaluating future actions for these businesses, but are also taking immediate cost actions today. The cost of these actions and other one-time costs were $3.3 million in the quarter. However, at the same time, there is quite a bit of good news within the third quarter figures. The balance of Teleflex’s businesses generated very solid operating results. I would characterize these businesses, which represent approximately 90% of our revenues, as performing well, meeting our internal expectations and facing improving prospects and growing order rates, which should be the benefit over the next several quarters.

Core growth was positive in the quarter. Orders were up. These are encouraging indicators as we are working to moderate the operating losses in tier one automotive and IGT. At this time, we expect EPS in the range of $2.64 to $2.74; consistent with our September outlook and reflecting the $.05 tax benefit which we achieved in the third quarter.

The aerospace segment posted its strongest operating results in the year during the third quarter and results improved significantly from last year's third quarter. Keep in mind that the aerospace segment's strong financial performance was negatively impacted by the challenges in the IGT product lines, which reduced the segment's operating profit and the phase-out of engineering and construction services that reduced revenues, as well. Clearly, given that fact, the balance of our aerospace segment had a much-improved quarter.

Most encouraging, the aerospace segment's order rate increased over 70% compared to last year's third quarter when market conditions were especially weak. The largest increase in orders came from the cargo systems business and includes orders from both new main and lower deck 747-400 freighter systems and conversions of 747-400 passenger planes to freighters. While we don't expect a significant impact on fourth quarter, this should be a positive sign for aerospace and cargo markets over the next few years.

The medical segment also continued on its positive track, posting record revenues and operating profits. The Hudson acquisition added revenues and operating income in line with our expectations. Margins were solid despite the negative impact of a $3.2 million of non-cash costs related to the acquisition, inventory re-valuation, costs and the like. Generally speaking, our medical businesses had a good quarter with strong core growth and significant operating income growth.

The integration of Hudson is progressing well. European integration is slightly ahead of plan. We're in the process of closing a European office, consolidating direct sales teams in four countries and transitioning some distributor relationships. Domestically, the integrated sales team is now out in the field and we have successfully transitioned all key contracts with group purchasing organizations. While we are still early in the process, we expect to see opportunities for margin improvement as integration programs progress.

Within the commercial segment the issues in our tier one automotive businesses were discussed on the last conference call. As we have said, price reductions, mix and margin issues in our pedal business and the cancellation of the program in our alternative fuel business are expected to impact the third, as well as the fourth quarter results. The balance of the segment, which includes tier two automotive and our other industrial and marine businesses, posted double digit revenue gains and solid operating profits. Marine performed extremely well despite softening in the aftermarket sales in the Southeast US during the September hurricane season. Marine revenues overall were buoyed by a strong OEM sales.

Going forward, our game plan for building shareholder value at Teleflex is straightforward. Job number one is to deal with our problem businesses and we have initiatives well underway. We are taking action to improve our profitability in these businesses. The new management is focused on making change to reduce costs and improve productivity.

Portfolio evaluation continues. At the end of the third quarter we completed the sale of two small product lines. A product line associated with our alternative fuel business and a product line related to the IGT business. We are continuing our portfolio evaluation process, reviewing product lines to phase out, divest, maintain or grow; and we're actively working with our investment bankers to determine the right approach for our problematic businesses.

Teleflex is continuing to work towards our goal of building a more unified global organization to position us for future growth. Our game plan here is to establish a common platform for shared administrative services such as human resources, finance, marketing and other administrative functions, so we can leverage the purchasing power of the global Teleflex organization. Around the globe we have over 130 facilities and we expect this number to decrease significantly as we expand our consolidation and rationalization efforts. This should help unlock value for our shareholders as we streamline our operations and reduce the number of facilities and the associated overhead costs.

Finally, Martin Headley our new CFO, has been on the job for all of two months now. He is already making significant contributions and helping us in our drive to a different business model. With that said, let me turn the call over to Martin who will discuss the financial results in more detail. Martin.

Thank you, Jack. You will have noted that we have included rather more information in our press release regarding the BS and cash flow statements. In part, this reflects our increasing focus on cash flow returns and additionally provides greater transparency in our financial reporting. Our cash flows from operations were very strong at $68.8 million in the quarter - an increase of 29% over the 2003 comparatives, and nearly four times our earnings in the period. The strong cash flow from operations includes $33.2 million of depreciation and amortization and $17.6 million of cash generated from the BS. This is very good, but there remains further opportunity. In terms of asset velocity or working capital management, we are defining this as net working capital excluding cash and debt with the function of annualized current quarter sales. Our performance ratio of 21.8% falls short of what we think can be achieved in these businesses. An intermediate goal is to be below 20%, and move down towards the mid teens on a medium-term basis. We're actively developing people and processes to help us drive towards these goals.

We're also looking aggressively at where and how we invest in capital equipment. New approval and evaluation processes have trimmed back marginal spending and focus on operations and product lines where we can and wish to build growth with the greatest returns.

Capital expenditures were $13.8 million in the quarter. That's compared to $23 million in the prior year quarter. So far this year, capital expenditures on fixed assets have been $43.9 million, or 65% of prior year levels. We see no reason why our businesses cannot continue to grow and improve profitability with capital expenditure rates of between 2.5% and 3% of revenue.

We also generated $20 million of cash from disposition activities which includes the cash from the sale of two small product lines in the aerospace and commercial segments during the quarter. Our various product rationalization activities have an impact of reducing sales by approximately $20 million in the quarter - up compared to the prior year, with a small favorable impact to operating profits.

As a result of the above, we've driven down our net debt to total capitalization ratio to 38.2%. That's compared to 40% early in the quarter; after we spent $48 million on the largest acquisition in Teleflex's history. This strong and strengthening BS allows for continued discipline acquisitions in the future.

One of the attractions of Teleflex when Jeff approached me to join the company was the strong top-line growth records and the potential for continuing up into the future. This is again demonstrated by our third quarter performance with a 14% increase in revenues in the quarter, and for the YTD. Within this growth were part-year benefits of our 2003 and 2004 acquisitions, which net of the impact of product line disposals contributed 8% in the quarter and 6% YTD. Also, the weakening dollar - particularly against the Euro, Sterling and Swedish Crown was a 3% component of the growth in the quarter and similarly 3% YTD. Excluding these elements, our core growth was 3% in the quarter and 5% YTD. Core growth in reality was somewhat stronger in the quarter at 5% if one excludes the reduction in industrial gas turbine revenues from the phase-out of the troubled construction and engineering services businesses.

Operating margins were roughly comparable with the prior year quarter at 7%, but this is actually influenced by a number of factors running both directions.

First, our phase-out of the troubled construction and engineering services business in IGT helped our margins, as our productivity programs and the continuing facility [retroazation] activity. Second however, the squeeze in our tier one automotive businesses and to a lesser extent in some other businesses from increasing raw material pricing and price reduction programs with original equipment manufacturers, has more than overtaken the significant productivity benefits generated in the operations. Thirdly, we also lost 30 BP in margin from the profile of our regional profitability that resulted in a small loss on translation of foreign currency denominated results, when that same translation effect boosted revenues significantly.

How do we reverse these negative factors? Clearly, as Jeff mentioned, judicious portfolio pruning will address those businesses that have lower cash returns, higher asset investments and market pressures on margins. Equally, we are in the process of carefully screening and evaluating the cost benefit attributes of certain activities to streamline facilities and services. The underlying projects touch all aspects of our business and include shared service opportunities for back office activities, consolidation of manufacturing facilities to eliminate the necessary infrastructure investments and costs and the consolidation of front office support to drive efficiencies and gain similar investments and cost benefits.

None of the costs of implementing these programs are included in our earnings estimates, and the timing and finalizing and implementing the programs has not been finally determined. A clear consideration in this evaluation is determining what the organization can carry out effectively, with certainty and with minimal execution risks.

As you can imagine, in the environment post-Sarbanes-Oxley, control activity is high. The cost of soft compliance is a principle driver of the quarter's $2.2 million increase in corporate expenses year-on-year. In addition to [Brian] devoting significant time and resources to the Sarbanes-Oxley activities, I have changed the financial reporting and control structures to better align communications and reporting.

We go to the tax rate. You will note in the press release that we recognized a $.05 pickup in earnings as a result of a lower effective tax rate. While our basic tax rate for the full quarter has been approximately 28%, and it is anticipated to be so in the fourth quarter, we booked a $2 million release in tax reserves during the quarter [as a tax-free limitation] period on an old issue left during September.

Looking into our likely effective tax rate beyond 2004 contains uncertainty, as we are reviewing the impact on our tax plans with the recently passed tax bill. We would expect that we will take advantage of certain provisions to repatriate certain foreign cash balances. This may result in a slight increase in the effective tax rate but we cannot be sure of the impact at this time. Similarly, the impact of a phase-out of the ETR and the introduction of manufacturing credits cannot be established with certainty at this time.

Some commentary on segment results at this juncture. Our medical segment performed a strong core growth rate in the quarter despite some softer than project business levels in the US surgical market. Margins remain strong at 16.4% excluding the impact of $3.2 million of purchase accounting-related impact to Hudson in the quarter. Increased pace of change included in the Hudson integration plan gives us opportunity to improve on these margin levels forward.

In our aerospace segment we returned to profitability despite lower revenues within the profitable business was pruned away. Excluding the phase-out of construction and engineering services at IGT, core growth in the revenue was in the 3-4% range and orders were strong, with an increase of over 70% in the quarter. Again, this does compare to a weaker quarter last year. Although some of these orders have a longer delivery timeframe, they provide a strong underpinning to continued recovery in the segment in 2005.

Operating margins reflect continuing losses of the IGT business but reductions in the levels of these losses and improvements in cargo margins offset factors such as the adverse currency impact from most of the repair revenues being U.S. dollar denominated, with significant foreign currency cost content. We also see some continuing OEM pressures for cost reduction.

Within the commercial segment our greatest challenges clearly lie with the tier one automotive businesses, especially with the pedals and the alternative fuel businesses. Excluding the margin declines in these businesses, the segment would have reported operating margins of approximately 8%, with revenue growth and margin expansion particularly in marine and electronic product lines. With that overview, I'd like to hand the call back over to Jeff, who's going to give you some flavor regarding our current outlook.

Thanks Martin. Looking ahead as we close out the year, our objectives are very clear. In the commercial segment we're working to improve the results of our tier one automotive businesses. In the fourth quarter cost actions will continue. We are working closely with customers and do not believe there will be additional price reductions similar to those taken in the second quarter and third quarter of this year. Our marine and industrial businesses continue to enjoy relatively strong global markets. In the medical segment markets have been consistent with our plans and we should begin to see a little margin expansion from the integration of Hudson. And in aerospace we see gradual improvement in the marketplace and the potential for productivity and margin improvement going forward.

At this time we are not prepared to provide guidance on 2005 given the dynamic nature of our various strategic activities. At a tactical level we are involved in the profit planning process and need to digest the risks and opportunities that will come out of that process. We would anticipate giving some clear indications to the market at around our year-end. With that I'll turn it back to Julie.

Before we take questions I would like to ask participants to please limit questions to one and then a follow-up, and if we have time we'll cycle around again. I appreciate your consideration on this and we will take your questions now. Operator.

(OPERATOR INSTRUCTIONS) Deane Dray, Goldman Sachs.

First question would be for Martin. Very interested in hearing what you thought fourth quarter tax rate might be because historically it's always been an adventure as to what the true up might be. So itsit’s been anywhere between 3 and 5 percentage points lower than the first three quarter run rate. So, how is that changing and can you give any more precision as to what we might be thinking given the kind of historical trends for fourth quarters?

I think a distinction being is the profit post-Sarbanes-Oxley is a little different now where leaving it to a year-end true up is no longer appropriate. So we've been considering the appropriate prospective tax rates on a quarter-by-quarter basis, and that's the reason one saw the exceptional tax item of $.05 in the current quarter. As I said, I would anticipate that 28% is what we can see in the fourth quarter.

That's very good news. And then the follow-up question would be related to the marine business and the commentaries that there was some softness related to the hurricane impacts. To kind of look at it going forward, would there not be some replacement cycle that would be triggered as a result of hurricane damage and what are you estimating in terms of that potential benefit?

Deane, let me just talk in an overview. I think we've been actively tracking that both between some of our larger customers - we'll probably get a much better feel for that. One of the big marine shows actually starts this weekend, but you know there is a quandering between with a number of folks that were damaged down in the Southeast of - do they get replaced or do they get repaired. Frankly, I think we feel we're in a good position either way - if there's new boats obviously we've got a strong position at the OEM level or if they do a fair amount of repair - I also believe that with our aftermarket position, we're well positioned. But, I think we're kind of still trying to get a feel from the market, but I'll let Martin comment on his outlook.

I think Deane, what we were indicating is that we see some immediate short-term softness. We saw a little bit in September and that would obviously translate into the situation we're seeing now. I don't think we have a clear picture as Jeff said at this juncture of the timing of when a recovery will be. What we've assumed is that there will perhaps be a slightly enhanced moderation of marine results in the fourth vs. the third this year as compared to last year.

Could you remind us, given the run-rate of - in the commercial business, how much marine represents of revenues on a run-rate basis now?

I still believe that we typically have not broken that out accordingly as just pure marine. So I think we would prefer not to get into that level of detail right now, Deane.

Eric Landry, Morningstar.

Why is cost of goods sold not disclosed in the quarterlies and if there is any thought to disclosing that in the future?

It's not been a historical practice to disclose that. We will obviously give that consideration if it enhances shareholder value, but at this juncture we'll just continue historic practice.

I mean any reason besides just that its historic practice?

No. There was no either positive noreither positive or negative consideration given to that by me as we developed this third quarter release.

How about disaggregating AP and accrueds. Is there - are any thoughts of doing that?

I don't know that it provides any great utility to do that since they're very often very inter-related. But, we can certainly give that consideration.

Dan Rutter, WHB.

I'm curious about the $17 million in losses that you referred to in the press release. Is that pre-tax, I presume?

That is pre-tax. Yes.

And can you give us a feel for how much of that $17 million is attributable to the operations that were sold late in the quarter?

A very small amount was attributable to the operations sold late in the quarter. So, maybe within the quarter something less than 5% of that.

Wendy Caplan, Wachovia Securities.

Could you comment please on the margin of Hudson in the quarter? I know when you acquired it you were particularly excited because you felt that it had a higher margin than your own; in fact, when we looked at the public filings that had happened for one quarter. Is it performing better than your own businesses at this point, or is there still room to - has it fallen back to its earlier levels?

I think its, Wendy - it's performing in line with our other businesses in the segment. It does have opportunity, as we referred to. There are a lot of integration activities to extract the synergies between that and our existing businesses and we would, as we stated in the script, anticipate the margins will improve slightly in the fourth quarter and there is potential for further improvement beyond that.

And as a follow-up, you don't sound as worried as most folks do in terms of the declining auto production picture and certainly marine, RV - any of those consumer-driven businesses look like they're going to at the very least fall off a cliff next year. Can you address that in terms of your assumptions?

Well I don't think we've given any guidance or assumptions as it relates to 2005 here, Wendy. We've been fairly explicit that we're still digesting that at this juncture. As it relates to the fourth quarter in terms of the current business activity and auto profiles, we feel comfortable with the guidance we gave just a few weeks ago is appropriate for our fourth quarter.

As we've indicated, we have assumed within that guidance some slight weakening in the marine business. Most of our industrial businesses are remaining solid and as it relates to the auto businesses, confirmed again this morning by calling around all of those businesses that the picture remains solid as we've assumed.

And finally, since there may not be anyone behind me, I have a question about management credibility. I've been enormously disappointed with the earnings performance of this company, Jeff, since you came on board and I've been reluctant to say that I think it's - to put the two events together in terms of the missing the numbers and you're coming on board. But it seems clear to me that those two events are correlated highly. I'm having trouble because the old Teleflex as we knew it never missed numbers; was always very steady in terms of the company, and it seems like we've lost that steadiness. Can you help me understand why that is and what we should expect strategically going forward.

Sure, Wendy. I think the - if you go back and see where we had invested and, again I would say even long before I took the role of our heavy investment in IGT and some of these other market opportunities. I would say pedals was long an investment before I sat in here. We've invested a lot of time, resources and capital and have obviously not gotten the type of returns we had anticipated. No question the market conditions have changed dramatically. Again, I'm not looking to make excuses, but I believe I came right in at the top of the market and as you know, our markets that we participate in are very cyclical.

There's no question that I think the model that got Teleflex to where we were in 2000 was not a model that I believed, nor our Board believed, was a sustainable model going forward. Hence you see the management transition and I think you see us now making portfolio decisions that frankly Teleflex had never made before I said that the transition was critical to our ongoing business.

So, again the correlation you can say it's a direct one with me stepping into the role. I will tell you look at the - obviously our performance is what it is. Our credibility in terms of being able to hit the numbers - I think it's a different age, it's a different world. I think our decentralized approach - I think some of the checks and balances - I think Sarbanes. Again, we're now trying to make sure we have the right foundation for the future and frankly the past is the past. We're not paid for the past - we're paid for the future and I will tell you that I think I struggle and I think many of our managers struggle with the pace at which the transition is taking. But again, I will tell you - knowing how we've grown over the years, you have to do it systematically. You can't just go and say we're going to do this in one fell swoop.

I guess that makes me think about the move toward being less - very decentralized, to being more centralized and whether that makes sense for this group of businesses. Could you comment on that strategically please?

Absolutely. I think in today's environment four or five years ago China was just on the horizon. I think the emerging dynamics of the competitive global marketplace now with Eastern Europe only will continue to drive - that we need to have larger facilities that have greater ability to deal with some of these factors. And, of course being an engineering company we have to insure that we get value up front with our customers. You know, when you talk about dealing with the OEMs and the automotive, it's a price-down mentality. So, we've been trying to change our footprint moving towards more lowered costs. But, the structure - again people think that we're centralizing everything. That is absolutely not the case. Our front-end of our business where we're in communication and working with our customers either on the sales side or on the engineering side, has basically remained fairly status quo. It's the back-end of our business where we had too many locations, fairly small locations that really created to a proliferation of overhead that we have to deal with going forward.

(OPERATOR INSTRUCTIONS) And with no further questions, I'll turn it back to Julie for your closing remarks.

Thank you. We'll close. It's a busy day today for people. Again, a replay of this call will be available on Teleflex website or by phone. For those of you who may have dialed in late or would like a review, the replay number is 888-286-8010, or for our international callers 617-801-6888 and the pass code number is 56831934. Thank you everyone.

Ladies and gentlemen, this concludes today's presentation. You may now disconnect your lines. Have a great day.