泰利福醫療 (TFX) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by and welcome to the Teleflex Incorporated second quarter 2005 earnings release. My name is Carol and I'll be your coordinator today. [CALLER INSTRUCTIONS]

I would now like to turn the presentation over to Ms. Julie McDowell, Vice President of Corporate Communications. Ma'am, please go ahead.

Thank you, Carol, and good morning, everyone. Teleflex issued a news release yesterday reporting financial results for second quarter 2005. The release is available on the Investor Relations page of our corporate website at Teleflex.com. We also have posted accompanying slides and in the historical financial information section, you will find a revised schedule for discontinued operations.

I'd like to remind you that today's call is being webcast in a listen-only mode and in addition, a replay webcast will be archived and available on our site. An audio replay will also be available by dialing the following phone number -- 888-286-8010 or for international calls, 617-801-6888, pass code 64887834.

First, Jeff Black, President and Chief Executive Officer of Teleflex, will discuss the results and update you on Teleflex's strategic initiatives. Then Martin Hadley, Teleflex's Executive Vice President and Chief Financial Officer, will outline the details of the financial information in the press release. 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, including but not limited to, statements regarding earnings conditions in the markets that we serve, economic assumptions, expected volumes and the like. Comments will certainly contain forward-looking statements relating to planned actions under the restructuring program, cost benefits expected, reductions in location and workforce, timing of divestitures, phase-out or consolidation of Teleflex businesses, charges related to the restructuring program and expected diluted earnings per share from operations before and after giving the effect of charges related to restructuring.

Please remember these statements are subject to various factors that could cause actual future results to differ materially from those that may be contemplated in today's statements. Among other things, inability to sell businesses at prices that are within time periods anticipated by management, on interest paid [inaudible] in connection with the effectuation of the restructuring programs, cost and length of time required to comply with legal requirements applicable to certain aspects of the restructuring program, unanticipated difficulties in connection with consolidation, manufacturing and administrative functions and other factors described in Teleflex's filings with the Securities and Exchange Commission. For more information, please review our most recent Form 10K and other SEC filings.

With that, I will now turn it over to Jeff.

Thanks, Julie. Good morning, everyone. Before we get into the details of the quarter, let me comment on the first 6 months and the announcement we made yesterday authorizing a stock repurchase program.

Last year we began an ambitious program to improve profitability and position Teleflex for future growth. The actions we have taken over the past 12 months to eliminate loss-making businesses, consolidate manufacturing facilities, integrate our largest ever acquisition and strengthen all levels of management have begun to take root and deliver good financial results. Now, at the halfway point of the year, the restructuring program is well underway and we have a vast majority of the exit and divestiture activity behind us. We all recognize though that there is still a lot of changes to be made and the restructuring activities to be completed. With that said, the program is clearly working.

Exiting the second quarter, our business fundamentals are improving. EPS from continuing operations, excluding special charges, was $1.81 for the first 6 months of the year and we are on track to meet our financial objectives for the year.

This quarter, we met some significant milestones. Overall, the structuring program has progressed well. Our Medical Segment, which represents the vast majority of our consolidation efforts, has made good progress on facility consolidation and product line moves without major issues. They are controlling costs and executing in a timely fashion.

As we look at the second quarter results, the Medical Segment clearly showed the potential to reach our stated goal of exiting the year with margins of 20%, commercial, and just a few actions still to come and costs expected to be under $2 million. Aerospace restructuring actions are completed.

Just after the quarter closed, we reached an agreement to sell our automotive pedal systems business and we expect the transaction to be completed during the third quarter.

Another milestone, and a first for Teleflex, is the authorization of $140 million stock repurchase program. This program reflects our confidence and the Board's in the long-term growth and strategic direction of the Company.

Throughout our history, Teleflex has been committed to returning value to our shareholders and growing our businesses. Our strong balance sheet and cash flow from operations provide us with the ability to pay dividends to our shareholders and at the same time, invest in our current business and take advantages of opportunities for acquisitions.

I'll move on now to the second quarter results. The big story in the quarter was the Medical Segment progress and the contribution from the integrated HudsonRCI and Rusch businesses. One year after the HudsonRCI acquisition, I would have to say it's been a tremendous success. In commercial, sales were generally in line with expectations. The only disappointment in the quarter was in the commercial margins, which were relatively flat sequentially.

Aerospace had a nice turnaround, with core growth and operating profit gains in all three of our businesses, both improved market conditions and the results of changes made during the last year.

Once again, the cash flow was strong in the quarter. The first half, our cash flow from operations increased 48% and our free cash flow rose 71% to $117 million. We exited the quarter with $212 million of cash. More importantly, our net debt to total cap of 28.4% at quarter end was the lowest level since we closed the HudsonRCI acquisition early in the third quarter of 2004.

As you may remember, about a year ago, we stated that 400 million of businesses were being reviewed for transition, sale or shut down as part of our broad portfolio evaluation program. As of today, we have taken action on approximately 360 million of businesses which are outlined on Slide 6 of your presentation. During the quarter, we made the decision to move one small business with just under $6 million in annual revenue to discontinued operations as we prepare for sale. I expect a few additional changes in 2005, as we continue to work through this process and position the Company for greater profitability. We needed to take these actions now to focus all our resources on preparing for future growth.

In summary, we are executing our strategic plan on a number of fronts and the plan is working. Our restructuring actions are moving forward on schedule and we are beginning to see the bottom line results. Please keep in mind that we still have actions to take and moves to complete. The portfolio evaluation program is winding down and making positive changes. In fact, it's worth noting that our corporate development team has begun to shift its vision outward. After a year of focusing largely on divestitures, I've noticed a perceptible change in the tone and the focus of the conversation lately. I'm sure the corporate development team looks forward to being back on the buy side, especially with our current cash position and our strong balance sheet.

At the same time, our core businesses are performing well. There are a few pockets which we are monitoring closely, but the bottom line is that for Teleflex as a whole, margins are improving, cash flow continues to accelerate and our balance sheet is as strong as it's been in the past year.

With all of that positive news, let me turn it back to Martin for the financial review. When he is done, I'll make some quick closing remarks and then we'll move on to your questions. Martin.

Thank you very much, Jeff, and good morning, everybody. I'm going to address my next remarks to Slide 9. As indicated on this slide and on the reconciliation chart within the press release, Teleflex earned a record $38.3 million or $0.93 per diluted share from continuing operations during the second quarter. Excluding special charges, Teleflex earned $42.6 million or $1.04 per fully diluted share from continuing operations during the second quarter, representing a 17% increase in diluted earnings per share from continuing operations over the $0.89 in the second quarter of 2004.

Discontinued operations generated a net loss of $9.3 million or $0.23 per fully diluted share, largely as a result of $7.4 million of after-tax [inaudible] write-downs associated with the July timing of an agreement to sell the automotive pedal systems business and the commencement of a process to sell a smaller [lot] making medical product line. This was an excellent quarter from all perspectives for Teleflex and delivered a number of new financial performance records.

On Slide 10, you can see we demonstrated improvements up and down the income statement. Revenues increased 11% on an overall basis, which included a robust 4% core growth component and 8% from the HudsonRCI acquisition. Revenues in the quarter benefited 2% from the weaker dollar, as compared to the prior year quarter. Our gross margins for the second quarter increased 40 basis points to 29% and would have been higher, but for some non-recurring charges in the Commercial Segment. Otherwise, gross margins would have been much closer to 30%.

More dramatically, selling, engineering and administrative expenses were reduced to 17.7% of sales from 19.2% in the second quarter of 2004. This is a 150 basis points improvement as restructuring, integration and other cost initiatives allow us to limit the net increase in such costs to $2 million when we're increasing revenues by $65 million. As a result, we boosted operating margins after deducting corporate expenses to 11.3%. Comparable margins were 9.4% in the prior year's quarter, excluding the gains from the various asset sales made during last year's second quarter.

Slide 11 shows the comparative performance of our Medical Segment. The segment exceeded our expectations in the quarter with much stronger performance, particularly in Europe. On the revenue side, we had very strong respiratory product sales, particularly for Hudson and Rusch products in Europe. This reflected the success of our integration of the two sales forces, a strong backlog and some seasonality, as respiratory product sales tend to peak in spring and late fall, with flu and allergy season and elective procedures.

The other standout performer was our specialty device business, as we had another double-digit growth quarter for the ortho spine and orthopedic specialty products. New products introductions in our specialty devices and disposable medical products businesses made a significant contribution to the quarter's growth. Our specialty devices group has opened a new R&D center in the metro Boston area to fuel further growth of this order.

Two concurrent programs were crucial to the operating margin momentum. First, the integration of HudsonRCI and second, the restructuring and divestiture program. These programs have reduced our distribution and sales infrastructure costs, allowing top line strength to flow through to the bottom line. This is an ongoing process with further potential. Also, we continue to make some divestitures of non-core product lines and discontinued a loss-making small business line with revenues of under $6 million.

Manufacturing consolidation moves continue at pace, although higher than expected volumes for certain products resulted in a need to delay a couple of product moves into 2006. Shared service, or back office consolidation, is still in the early phases and will continue to ramp up in the second half of the year, with benefits skewed into 2006.

Medical has made excellent progress in getting to the 20% margin goals earlier than expected. Lower season volumes, particularly in Europe, will pull down these margin rates a trifle in the third quarter. We then expect a strong margin quarter after this business in the fourth quarter.

Turning to the Commercial Segment, the biggest impact on reported revenues and profits was the divestiture of non-core product lines. These had the impact of reducing revenues by 5%. Core growth of 1% was impacted adversely by flat automotive revenues and flat declines in marine and recreational markets. Sales of products for industrial OEM markets continue to be robust with the Class A truck markets on a record pace, heavy lift markets strong driven by oil and gas activity and strength in mobile power equipment. New products for marine markets contributed well to overall sales of marine aftermarket products. And products for recreational vehicles like ATVs and personal watercraft didn't reach the levels we saw last year.

Margins were adversely impacted by mix, currency and higher costs, including some exceptional costs incurred during the introduction of certain products to recreation and industrial markets. Approximately half of the margin rate decline over the prior year was attributable to these exceptional costs, which are not expected to recur in the future and we are addressing the associated profits issues.

Turning to the Aerospace Segment, the segment's turnaround continued with all three of our residual businesses performing well on both the top and bottom lines. Also of note was the sale, shortly after the quarter end, of the last residual assets associated with the industrial gas turbine service business. These assets were reclassified to assets held for sale in our second quarter balance sheet.

The operating highlight was probably the cargo-handling systems business. The quarter benefited from an increase in deliveries for wide-body main and lower deck systems and looking forward, we've had some significant wins, particularly on the special Boeing large cargo freighter. [Pel] Air also had some nice contract wins for narrow body systems and light weight cargo containment. Overall, orders in the cargo business were up again by 38%. Our precision-machined components business posted double-digit revenue on profit gains over the prior year quarter.

Turning to Slide 14, restructuring charges totaled $6.7 million in the quarter, but over 80% of charges incurred in approximately halfway through the restructuring program timeline, we've refined our cost estimates. Although total cost expectations have not changed, but between $203 and $211 million, we now see that cash costs will be reduced through tight control, including the avoidance of certain discretionary costs. Something of the order of 3/4 of the remaining costs of $27 to $36 million will be incurred over the balance of the fiscal 2005.

As I noted earlier, the Medical activities are being deferred into early 2006 and both the annualized benefits in the fourth quarter and the full benefit in 2005 will be toward to the lower end of our prior expectations.

Cash flow, as demonstrated on Slide 15, the improvement on already consistent cash flow story is the cornerstone of our value generation strategy. The slide sets out for you an apples-to-apples trend of trailing 12-month cash flows from the portfolio businesses the Company represents our future, i.e., excluding the various businesses classified as discontinued operations. This shows the 38% increase in operating cash flow and 88% increase in free cash flow over the past 18 months. More importantly, it shows a continued progression as we get closer to our stated goal for 2005 of $310 to $325 million in operating cash flow. We feel very confident of reaching this goal.

These results have been accomplished through a combination of steady operational improvements, capital managements of working capital assets and disciplined analysis of capital expenditures. I have a sign in my office that reminds my visitors that profit is an opinion, but cash is a fact. The fact is, cash generation is the tangible result in the measure of a successful strategy that provides for shareholder value.

On Slide 16, we demonstrate how we continuously improve our discipline relative to capital expenditures, while funneling more of our cash back to shareholders. We've increased our dividends for 28 consecutive years.

Capital expenditures are now expected to be in the range of $70 to $75 million; spending as being approximately $26 million through the first half of the year. The pace of spending picks up in the second half, with some capacity additions in the Aerospace and Medical Segments. On the [inaudible] capital spending on the number of significant IT projects, but it's part of our structure to reduce the number of IT platforms to support our backup and consolidation in various shared services divisions.

As demonstrated on Slide 17, Teleflex's balance sheet continues to strengthen. Early in the third quarter of 2004, we acquired HudsonRCI, the largest acquisition to date. And at that point, we had debt net of cash in excess of $750 million. We've driven that down to a net debt position of just under $450 million during the 12 month period. In doing so, we've returned the balance sheet leverage back to the levels we had when Jeff decided to pursue the HudsonRCI acquisition. We're clearly well placed to both pursue significant acquisitions and execute the stock buy-back program announced last night.

On Slide 18, we look at working capital management. This a concept increasingly ingrained in Teleflex's management. It is the concept of asset philosophy, making your working capital assets move quickly. We measured components as a percentage of annualized quarterly sales. Our accounts receivable improved considerably to 16.5% from 19.5% of sales at the end of the first quarter and 20.1% of sales at the end of March, 2004.

Cash collection practices are improving, including making tough decisions in dealing with your power customers. Additionally, we increased the utilization of our off-balance sheet receivables securitization program by $10 million, given the favorable commercial paper rates on the program.

Our inventory velocity reduced to 15.7% from 16.9% last quarter and 18.6% at the end of March, 2004. Given the manufacturing and distribution consolidation activities outstanding in the Medical Segment, the inventory bank builds to facilitate product line moves, we see these improvements as a step on the way to more significant improvements.

Net working capital, as a percentage to sales, are at a velocity measure, but improved markedly over the last 6 quarters from 24.6% to 18.7%. The third quarter will be a challenge for us, as it always is, with ratios upset by imbalance of activity in the quarter from your summer shutdowns. But our ratio should rebound and improve further by year-end.

On Slide 19, we'll consider the second half outlook. Some of the factors we are monitoring for the balance of the year and which are factored into our view of earnings expectations reflect out on this slide. So far, our restructuring program has been executed well. There remains a significant volume of activity for our Medical group. The second half of the year is when more significant savings should come through. But so far, so good with a couple of exceptions that have been covered by our exceptional performance elsewhere. We are confident in projecting benefits at the bottom end of our initial guidance for the program that we gave back in November.

On the macro-economic front, the dollar has been strengthening of late. With the strength of our profitability in Europe, if current rates persist, we'll have an asset currently translation, in fact, on the profits in the second half. The impact of current returns applying to the rest of the year has been effectively covered by a favorable medical performance in the second quarter.

Raw materials supply and pricing have to be monitored closely. The supply issues are tight just with titanium, but we have secured sourcing through the balance of the year. Pricing pressures for steel and resins have largely abated in part from our global sourcing activities. Demands for products into marine and recreational markets have softened up for a record year in 2004. We currently see these as flat at best for the balance of the year, as we have seen them to be in the first half of the year.

As usual, potential for disruption in our auto markets occurs with model year shifts where old models are cycled out. Currently, we're seeing an orderly transition in these programs that we support, but it clearly is an area that could be a [inaudible]. Our assumptions, as they have been [inaudible] in the year, are for no net growth in these markets.

Any market seasonality in the medical business is relatively new to Teleflex and arises from increased respiratory market penetration and growth in Europe, where even the docs take month-long vacations.

With earnings before special charges of $1.81 for the first half of the year, an increasing benefit from the restructuring program in the second half of the year, we're increasingly confident that we'll be in the higher end of the range we previously gave you for the year. Accordingly, we've tightened up stated guidance for diluted earnings per share from continuing operations, excluding special charges, to $3.65 to $3.80 per share. Earnings could be expected to have a profile between the quarters very similar to the Q1 versus Q2 profits.

We now expected diluted of EPS, including special charges, to be in the range of $3.06 to $3.25, reflecting our control of program cash costs in the program as a whole.

With that, I'll turn it back to Jeff for closing comments.

Thanks, Martin. The entire Teleflex team has worked hard to execute on a number of fronts over the past year, to take action on our problem businesses, to integrate our facilities and ring leverage from our operating model and to make sure that we have the right portfolio of businesses to deliver solid results and returns for our shareholders. I think this quarter can best be categorized as a turning point for the Company. Our hard work is paying off and our focus is returning to the important question of how we can drive continued long-term growth of our business.

For the second half, our objectives are very straightforward, to finish the job while keeping our eye on the ball from an execution standpoint. I'm very confident in our ability to continue to get the job done.

With that, we'll take any questions which you may have. Julie.

Thank you. Operator, before we take questions I would like to ask participants to please limit questions to one and a follow-up and we will cycle around again. I appreciate your consideration and we'll take your questions now.

Thank you, Julie. [CALLER INSTRUCTIONS] Today's first question comes from the line of Jim Lucas of Janney Montgomery. Please go ahead.

Thanks. First off, the transparency of the numbers when going back and looking at press releases over the last couple of years has improved greatly and those of us that have been around the Company for a long time appreciate it. So I wanted to throw that out there.

Thanks.

Thank you.

And two questions, first on the restructuring. Martin, in your comments, you mentioned that you were controlling certain discretionary costs and that's led to the lower cash spending. And I was wondering if you could expand on that? And secondly, a lot of the restructuring that's left appears to be in the medical business. Can you talk about systemically why so much more of the listing seems to be going on longer in the medical business? And once these moves are done, is there another leg of action still to come?

Okay, Jim. First, as it relates to the questions of components of restructuring cost savings, the biggest elements of savings do come from just being very tight in our control of costs, and so whether our travel and training costs continue to ratchet down and control those, let's say, a very significant level. Another benefit comes from the fact that our severance costs have been lower in part because we have favorable negotiation of some work account agreements and because, in fact, we've made [inaudible] assumptions regarding how long people would stay before the [inaudible] and how they would leave the Company. And we've also been very careful to have very focused productivity since that's another area of savings. That's been kind of offset by a leasehold improvement [inaudible] being a bit higher and actions of that nature.

As it relates to the timing of the program, as I made reference to in my comments, there are two major problems here that are really ongoing concurrently within the Medical Segment and management is clearly juggling the two programs. One is the integration of the HudsonRCI acquisition and secondly is the restructuring and divestiture program. They've put some of the Hudson integration moves slightly ahead of the restructuring moves and that, in part, is what pushes half of the program out. And secondly, we have always had a good part of the medical program pushed out to the latter part of the year with some part flowing into 2006. It's always been envisaged, for instance, that a significant part of the shared services consolidation and the Segment would be a 2006 activity. So those are really the dynamics that are going on there in the Medical Segment.

Okay. And in terms then of Medical where -- you've made good progress here with operating margins flirting with that 20%. You've got more actions yet to come. When you take a look with the momentum that you have going and where you see this medical business entering '06, is it where you want to be or do you see -- anticipate further actions?

I don't know that we anticipate further actions. There are always continued activities going on and will be activities associated with consolidation of IT systems that will be ongoing there. But we don't see anything of a significant restructuring program that's going to be required on that facility in this segment. We should be going out of the year with margins north of 20% and I think, if anything, we're feeling more bullish on the capabilities here.

Okay.

Yeah, Jim, it's hard to believe it was just a quarter ago when we were at 16.5 and there was a fair amount of question as to could we get to 20. Now I'll admit, 19.8 is not at 20, but the way I round, I consider it to be a real feather in the cap of the management of our medical team, both in terms of the Hudson, as well as the restructuring going on. You've got to remember that we've brought in a lot of management and I will refer to them as very skilled management, who have really stepped up to a very high level and demonstrated not only cost control, but as well as -- part of this is manging the customer. So I don't want to diminish it. I think the open communication we've had with the customers have also kept us in good standing in terms of supply. So again, they deserve a lot of credit and do we have higher expectations? Yes, we do.

Okay. Thanks a lot.

Thank you, Mr. Lucas. Your next question comes to you from the line of Wendy Caplan of Wachovia Securities. Please go ahead.

Good morning.

Hi, Wendy.

Can you address for us whether there are any facilities from which you have either moved or discontinued product lines and, therefore, are currently facing absorption issues? And if so, what are your plans in terms of proceeding with these issues?

Well, there are no facilities that we have moved product from where I think with significant under-absorption from capacity. We have a few facilities that are in the assets held for sale at the end of the quarter. With the exception of one of those, though, those have all actually sold in the early part of the third quarter. So our real estate activities are subject with the program I think are moving well. Frankly, at the moment, one of the areas of potential improvements in our Medical Segment is the fact that the receiving plants from some of the profit lines moves in Nuevo Loredo, Mexico is under-absorbing its overhead. And so we have the potential for further upside as we get things moving there, Wendy.

Thanks, Martin. And as a follow-up, you mentioned that in the Commercial Segment that half of the margin decline was due to some exceptional cost. I think you mentioned currency, introductory costs and mix. Although you can't do anything about currency, can you address the other issues in terms of how you're tackling these costs?

Right. I think on the introductory costs, which represent about half of that decline, we've changed the way in which we handle certain of our warranty and customer complaint procedures in one of our businesses to really flag issues at a much earlier stage. So we'll work with our customers at a much earlier stage.

The second issue, in part, goes from the way that a product line was handed off from an acquisition and I think the processes that we've already put in place after that clearly address that issue with our integration procedures. As it realtes to themix, some parts of the mix I think will be ongoing. Clearly, as I think we've made reference to in the past, our marine business tends to have higher margin products and we've talked about the softness of that compared to the industrial market, whose margins are slightly lower. With current market conditions, a good portion of that mix situation is likely to continue in the short term.

Thank you, Martin.

Thank you.

Thank you very much, Ms. Caplan. Your next question comes to you from the line of Deane Dray of Goldman Sachs. Please go ahead.

Thank you. Good morning. If we could go back to the Medical improvement and just try to gauge, because it was certainly an upside surprise in delivering and, Jeff, we'll allow you to round that to 20 if you'd like.

Thank you.

But if you think about -- go back to the last quarter and, Martin, I asked you specifically what you thought the expectation is and how quickly you could get, at that point, was -- you were talking about 350 basis points in margin improvement in Medical. And you said, "Expect it to come along roughly equally over the next 3 quarters." So, I mean, the good news for you all is that you did it in one quarter, but what I'd like to do is kind of drill down and if we could segment out that margin improvement and identify the factors? It sounded like you had a discontinued business? That would be one factor. But if you'd just walk us through?

The discontinued business was incidental to that. That might be, at most, 10 or 15 basis points, Deane. The answer really is that we had a much higher revenue base on actually a slightly lower cost base than we projected. And in terms of the cost base, there was a lot of discretionary spending that we pulled back on in the Medical Segment because we felt that we needed to show more momentum than they were projecting at that time.

And so the mixture of pulling back a couple of million or so of spending that was of a more discretionary nature, as well as the fact that the revenues as I made reference to earlier, were much stronger, particularly in Europe, than we projected going into forecast. And the fact is, with the actions that we've already taken, a good chunk of that falls to the bottom line because of the distribution and selling infrastructure that we put in place.

Deane, I think if you remember back when we acquired Hudson, one of the things we were trying to develop our creation model was we weren't sure how much we were going to penetrate Europe with the Hudson products, even though we've got a solid distribution and sales force there. I think really, again, to their credit, they've really been able to take the product and run with it, and while I don't wish that on anybody, allergy season has been a fairly strong one and, therefore, the demand for our products has also been fairly strong in Europe.

So I think we always look at that as the upside and again, I'm not sure -- I will tell you, management even here at corporate was a little surprised at the revenue number when it came through. So but it was a pleasant surprise and we haven't had many of those, so I think we enjoyed it and we did go back and validate it just to make sure.

Just on that point, I know it doesn't count towards your organic growth but if you -- and you're probably able to say, all right, Hudson last year, last quarter, a year ago this quarter, how much organic growth did Hudson get specifically selling into Europe?

Specifically into Europe, I don't have to hand. It's somewhat difficult because we have to split it out, given it's now completely integrated sales channels.

But you probably know it's a Hudson product. But you want to -- maybe we'll go off line on that.

Okay. No, it's not something I have immediately to hand, Deane.

Okay. And then just away from the medical products, what's the plan for the buy-back program? If you look at -- your shares have done very well this year, up 19%. Is the expectation that you would be looking to do buy-backs to make up the share creep or are you looking to go beyond that?

We're looking to execute the program that we announced, which is more than just a share creep, which clearly, 140 million leaves a substantial percentage of the outstanding stock. We clearly believe with the potential in the full year numbers, but we feel very confident in and the progression going forward and the strength of our cash flow that we remain under-valued. And we think that our long-term shareholders are rewarded from a program of this nature. So we can't, for various reasons, be too specific about the points at which we'll be in and out of the markets, obviously. We will be executing a summer open market basis in accordance with Rule 10B18.

And that won't take away any of your powder for acquisitions going forward?

One of the things we specifically considered the other day is we went through the presentation where the Board approved this program, was how executing $140 million program was actually largely incidental to our total acquisition capabilities. And that was very much borne in mind before making the decision to do this program.

Great. Thank you.

Thank you, Mr. Dray. Your next question comes to you from the line of David [Jarell] of T. Rowe Price. Please go ahead.

Hi. Congratulations on a really superior quarter here, not only on the earnings, but I think, more importantly, on the cash flow. It's very impressive.

Thank you.

I want to follow-up on Deane's question a little bit. Just on the buy-back, would you guys see yourselves being relatively aggressive on the buy-back in the near term or is this actually a program that in a year from now that you'd hope to have done, or is this sort of a -- we're going to have this out over a multi-year period? How do you think about that?

It's a 12 month program, David. It's not an evergreen program and we would see ourselves being more aggressive, rather than less aggressive, on executing the program. It's not here for show.

Okay. That's great. And I guess the other thing, can you just talk a little bit about -- like you said, we're halfway through the restructuring. The earnings and the cash is coming in. The balance sheet is under leveraged. We have more benefits, I guess, coming in from asset sales in Q3. On a traditional free cash flow metric, you're generating $6.00 per share of free cash flow this year. And the balance sheet, at 28%, is sort of underleveraged, you could say, even before we talk about this buy-back. It seems like you have a lot of excess capital today. You're going to have more excess capital next year. You didn't talk about the allocation of that excess capital even beyond the $140 million. How aggressive can we be thinking about acquisitions beause if we don't start spending some money, you're going to run out of debt here in about 18, 24 months.

Yeah, David. I think we plan on being fairly aggressive out in the acquisition market. The pipeline we've seen this summer has been fairly strong, but it's amazing when you have cash, how quickly people are attracted to you. So I think that and our capacity -- I think we're really -- the last thing we want to do is -- again, we want to get back to -- we have the platforms for growth. We want to continue to build upon them. And I think when Martin talked about capacity, just to give you an idea, we believe that with the cash flow and the balance sheet, we probably have $1 billion of capacity. Now, I can hardly say $1 billion of capacity, but again, I think that only -- as we're out doing strategic planning, which is the process we're in through the summer, I think we've told people. If we're going to go, we're going to go for larger deals.

Now, obviously, we'll continue to do the small bolt-ons where they're strategically appropriate. But I think in terms of size, strategy and I think with the solid foundation we have, we believe we can go out and execute. And again, I think it comes back to Hudson. There was a fair amount of people who didn't necessarily see value in Hudson. Again, I think we know our markets very well and we can see where it's accretive, so I will say it's a great opportunity for us and the management teams who spend a lot of time on the structure and strategy side to go out and really start getting more aggressive in the marketplace.

Can I ask you about that, Jeff? Just since you've had so much success in the medical business and I guess the HudsonRCI is sort of now taking over half your earnings or coming from the more stable medical business. Can you -- I mean, as we think about that pipeline and we think about over a 3 to 5 year time horizon, should we expect for a sort of your medical, maybe given the organic growth as well as the acquisition opportunities out there, and your execution on the Hudson deal, that we'll basically see more deals in medical on a proportional basis? Is that a fair conclusion to arrive at?

No, I wouldn't necessarily say so, David. I think again, what got Teleflex to where we've been for a long time is having balance in our portfolio. We appreciate, even though medical is still 30, 35% of the revenues, it does contribute a lot. But I think we want to ensure that we still have balance through the Aerospace, Commercial Segment, and obviously, we feel pretty good about the Aerospace business right now, having come out of really being what I consider about a 3 year trough of slogging it out and reducing capacity.

So I think our attitude is we are a diversified industrial company. We want to continue to remain with a balanced portfolio. But I've also said openly, is we're committed to getting medical to about a billion dollars, and I think our run-rate, we're at 860 to 880. But again, that's only going to happen through the right strategic moves. So we're not hard pressed to continue to focus on medical and frankly, the management there assume they have the capacity. But again, we're going to be very strategic.

I just got to ask one last quick question. If we can get the operating cash for the first half of the year, I think that $163 million, up very nicely. I know your goal is 310 to 325, but I look back at like the last 4 years, you've always generated more operating cash flow in the second half of the year than in the first half of the year. And if you just take the first half pace, you're already at sort of a high-end of that $325 million run-rate. Are you being conservative on the $310 to $325 million or is there some real reason why we should be in that $310 to $325 million range?

I would not say we're being conservative, David. I clearly would hope the higher end is more likely than the lower end from your analysis. Clearly, I think in the earlier parts of the year, though, because there's now continual focus on the balance sheet and on cash flow management, we're probably achieving more in the earlier parts of the year and not just leaving it to, "Oh, let's look at the year-end cleanup." So maybe proportionally some of the working capital advances that have been made in the past four quarters versus the earlier quarters, might not be as [inaudible]. So I still think our guidance is appropriate.

Okay. Congratulations.

Thank you.

Thank you, Mr. [Jarell]. [CALLER INSTRUCTIONS] Your next question will come from as a follow-up question from Jim Lucas at Janney Montgomery. Please go ahead.

Thanks. Jeff, could you give a little bit more color on what you're seeing in Aerospace? Now that the restructuring is done, your end markets are rebounding. The portfolio, you've got a pretty good mix of businesses now. Where do you see those margins, over what time frame and give a little bit more color on the various components of Aerospace, what you're seeing, especially from a backlog?

Yeah, I'll start with the margins. To actually have positive margins is a move in the right direction. I think if people want to go back to our historical margins, and they always want to pick the high point which, I believe, was about a 13%. I think, realistically, Jim, we believe we can get to the high single digits. Again, it's going to take some time. The market has to continue to remain buoyant. I think the one thing we've seen in the Aerospace is the cycle has gotten much more condensed. You used to get a fairly good 7 years out of the cycle. I think that's probably going to be a little compressed. But I think the positive thing is everywhere I travel, I see more and more low cost airlines, whether it be in Europe, whether it be here in the U.S. Our Asian market is strong.

So whether it be a manufactured product, whether it be in our cargo systems, or whether it be in the repair, which is really based upon flight hours, we feel really good that we're in the right position. And I think more importantly, we have manufacturing situated in the right locations, as well. So overall, I think there is opportunity. There's still a lot of -- you probably haven't seen the consolidation in Aerospace that you've seen in some of our other markets and I think you're starting to see some of that externally. The big boys are going to continue to get bigger and I think in the markets that we participate, which is typically the engine compartment and the cargo and repair side, we continue to look for opportunities to grow there.

Okay. And then just from a backlog order standpoint, by the three businesses, what you're seeing out there?

Obviously, if we talked about the orders on backlog, they're very strong in the Aerospace. We have multi-year backlogs in the cargo business. Clearly, the repair business has virtually no backlog. It's a, as Jeff said, a flight hour position. And we've had increasing backlog, although not with longer-term visibility to us in the manufacturing side. The order situation in the Commercial group has been much softer, but we're seeing orders consistent with our expectations of low growth that I made reference to earlier in the call.

And as it relates to our medical business, again, it's an order situation that doesn't develop a long backlog. Basically, that backlog situation is down very slightly from where it was at the end of the first quarter and the sales today and the orders today pretty much track. So that's being a nice growth, a robust growth rate there.

Okay. Thanks a lot.

Ladies and gentlemen, this concludes the question and answer portion of today's presentation. I'm now going to turn the call back to Julie McDowell for her closing remarks. Ma'am.

Okay, thanks. Thank you, everyone. 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 888-286-8010. The pass code number is 64887834. Thank you.

Ladies and gentlemen, this concludes your presentation for today and you may now disconnect. Have yourself a great day.