泰利福醫療 (TFX) 2005 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the fourth quarter 2005 and year-end Teleflex Incorporated earnings conference call. My name is Cindy and I will be the coordinator for today. [OPERATOR INSTRUCTIONS] I would now like to turn the call over to Julie McDowell, Vice President of Corporate Communications. Please proceed.

Thank you Cindy and good morning everyone. Teleflex issued a news release, last evening, with our results for fourth quarter and year end 2005. The release is available on the Investor Relations page of our corporate web site at Teleflex.com. We've also posted accompanying slides for today's presentation. I'd like to remind you that today's call is being web cast in a listen-only mode. In addition, a replay webcast will be archived and available on our web site. An audio replay will also be available by dialing -- dialing the following phone number; 888-286-8010 or for international calls, 617-801-6888, pass code number is 63389676. First, Jeff Black President and Chief Executive Officer of Teleflex will discuss progress on our strategic initiatives. Then Martin Headley, Teleflex 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 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 forecast of revenue growth, operating profit growth, margin improvement, stock option expense, restructuring actions, related charges, segment performance, and expected diluting to earnings per share from operations before and after giving the effect of charges related to restructuring and stock option expense. 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. These factors are described in Teleflex's filings with the Security and Exchange Commission. For more information please review our most recent Form 10-K and other SEC filings.

With that I'd like to turn it over to Jeff.

Thanks Julie. Good morning everyone, thanks for joining us today. The fourth quarter provided a great conclusion to what was an active 2005. I'm pleased to say that we delivered on all of our financial and operational objectives during the year. As noted in the overview slide we accomplished a great deal in 2005. We focussed significant resources on the restructuring program that was announced just prior to the start of the year with great results. Today our manufacturing platforms are more scalable and a higher percentage are located in cost effective markets close to the international hubs where our customers do business. There's still some work to do here but we're well on our way. We successfully integrated Hudson RCI, consolidating our manufacturing and distribution platforms and bringing the Company together with our Rusch medical business in a way that unleashes the promise of this large acquisition. We continued to fine tune our business portfolio during the year. We divested non core businesses and we eliminated our loss making businesses. This improved our profit picture and cash flow and positioned us with more focussed platforms from which we can now continue to grow. At the same time we increased our dividend and instituted a stock buyback program. We repatriated 300 million of cash under the American Jobs Creation Act. We repaid debt and ended the year with our strongest balance sheet in two years. Any of these accomplishments would have made 2005 a good year, but I'm most satisfied with the fact that we were able to accomplish all of this while delivering record revenues, earnings and operating cash flow. It's a little like changing tires on the bus while the bus is moving and still arriving at your designation on time.

Let's take a look at where we are today. As slide five says competition is what it's all about. And today we are a tougher, more focussed, nimble competitor. Our global manufacturing and distribution footprint is more rational and cost effective. We exit the year with about 100 facilities, down from a little more than 130 one year ago. This streamlined infrastructure makes us more cost effective and efficient across all of our segments. At the same time we are driving -- we're working to drive further efficiencies across the entire Teleflex organization. The end result is that our portfolio businesses today is profitable and competitive. Our businesses each have a clearly defined business proposition and defined growth strategies.

Financially, 2005 was a solid year with multiple financial records. The 2.5 billion of revenues from continuing operations we posted this year were an all time high for Teleflex. Likewise 265 million of operating profit before special items and 336 million of operating cash flow were high water marks for the Company. Between the cash flow we generated from our operations and the 300 million that we were able to repatriate, our balance sheet is strong and debt has returned to pre Hudson levels. With a 14% dividend increase and a stock buyback we instituted in July we returned a total of 86 million of capital to our shareholders in 2005. These financial accomplishments dovetailed perfectly with our stated objectives. Number one, grow the business, enhance the bottom line, deliver cash flow and return capital to shareholders.

But we're not just going to sit back and rest on last year's success. Going forward we have to complete our restructuring program first and then continue to respond to opportunities and challenges in our marketplace. As we've talked about in the past quarters, we are continuing to look for good acquisitions that can enhance our current business platform. It's competitive out there and a lot of private equity money is chasing deals. Nevertheless we continue to keep our pipeline up and work through the process diligently and conservatively. We are also focussed on new products we can sell through our existing channels as well as new growth platforms that fit our existing businesses and acquisitions that open new geographical markets or channels of distribution. In addition, we are looking more seriously at marketing alliances both to expand the products we sell through our established networks and to get our new products to market more quickly.

In medical, we've signed a few small alliances for new niche products that we can push through our established global distribution network and we will continue to pursue these type of deals. In commercial, as an example, we just signed an agreement with Carrier for distribution and service of our auxiliary power and climate control units that provide trucker with sleep compartment power. We have a great product for this market at a time when the use of APUs is of growing importance to truckers to help conserve fuel and reduce emissions. Carrier will be the exclusive distributor and service provider for us in the aftermarket. This speeds our ability to grow our product line through Carrier's distribution and service network and provide them with a complimentary product for their network. This will be a great deal for all of us. As it's becoming a way of life here at Teleflex we will balance this focus on growth with a continued diligence in reducing cost, improving productivity, and refining our manufacturing platform as we see market demands change.

With that, let me turn it over to Martin for some of the financial remarks.

Thank you very much, Jeff. On slide nine you will see the bowels of the EPS reconciliations that are also presented in our press release. Earnings for the fourth quarter EPS for 2005 excluding special charges and gains on sales of assets were 26% ahead of 2004's fourth quarter. Meanwhile the full year EPS results of 365 on the same basis were 23% ahead of the 2004 full year. These results were modestly ahead of our expectations expressed during our outlook call nearly eight weeks ago with a result of reduced pension and workers' compensation expenses arising out of the new post restructuring business profile. Fourth quarter gains on sale of assets include a nine million pretax gain on sale of an Esophageal Stent product line to Boston Scientific. We continue to have additional cash flow from this product line as we've retained contract manufacturing rights.

On slide ten we see fourth quarter operating income before restructuring costs and gains on sale increase by 24.1 million on essentially flat revenues and the operating margins improved to 10.5%. [170] million of the advance arises from avoiding [17] million of restructuring related charges incurred in 2004. Underlying revenue increases were much better as the impact of including a 13 month of revenues for certain foreign operations in 2004 as we eliminated like accounting practices and the strengthening of the U.S. dollar made the reported top line performance somewhat misleading. Excluding the approximate $16 million impact for each of these items, core revenue growth was a robust 5%. Accordingly, we estimate that we lost -- additionally we estimate that we lost approximately 80 basis points of growth when the medical segment had issues with the consolidation of certain U.S. distribution facilities. Gross prophets margins were flat with the benefits of avoiding the 17 million restructuring related charges taken in the fourth quarter of 2004 offset by costs associated with the distribution center issues in medical and the relative growth of our lower growth margin Aerospace businesses. Selling, engineering and administrative expenses have reduced as a percentage of revenues by 370 basis points.

Looking to slide 11. For the full year we earned 149.3 million or $3.65 per diluted share before restructuring program, charges and gains from the sale of assets. Gross margins were comparable with 2004 while sales, engineering and administrative expenses have reduced significantly in absolute dollars as a percentage of sales. As a result operating income before -- from continuing operations before interest taxes, minority interest, restructuring expenses, gain on sales, increased by 61.8 million to 261 million or 10.4 million of sales. 15 million of the increase is attributable to lower restructuring related charges to cost of goods sold on a year-over-year basis. The improvement of cost in margins str -- structures is a very strong step forward for our organization and establishes a solid operating base on which to add future growth.

Turning to slide 12, we now move on to the fourth quarter segment highlights and I'll initially review the medical segment. [Air] accounting and currency matters make it challenging to see the true performance, thus we've shown in red the performance in 2004 is the like accounting impact which was most pronounced in the segment and the currency movements are eliminated from the comparison. Excluding these factors, revenues of 206.7 million were down 1.3% and operating profits of 35.1 million were down 2.8%. As we discussed with you on our January call, consolidation of U.S. distribution led to some issues for filling customer orders in the fourth quarter and also additional costs associated with expediting certain shipments. Excluding the estimates of lost sales as a result of this situation and the impact of product lines sold during the year, the segment saw a 2% core revenue growth from the rest of the business. This was lower than historic rates largely because of low demand from some of our OEM customers. The medical segment operating profit margins were 17% with adverse impacts from expedited shipping costs. As we mentioned on our last conference call we've been largely shipping to plan from these distribution centers since the issues earlier in the fourth quarter, although some expediting costs have continued into 2006. These costs together with the expected cost of the information systems and business process integration project in this segment will keep operating margins just under the 20% level in early 2006.

On slide 13, we review the commercial segment where revenues increased to 301 million with core revenue growth 4% offset by a negative 3% impact of foreign currency. In the quarter we had a ramp-up for new programs for our automotive customers who saw continued strength from industrial OEMs. Operating margins rebounded back to [7%] after the margin dip of the third quarter. The two most significant factors initial recovery was first the seasonally typical 11% revenue increase of the fourth quarter over the third quarter, and secondly the completion of the previously problematic transfer of operations between facilities that plagued us in the third quarter of 2005. We would see full year margins for this segment being at these levels or slightly higher going forward.

On slide 14, we see the Aerospace performance continues to improve rapidly with both strong revenue growth and margin expansion. Core revenue growth for the quarter was 19%, up sequentially from an already robust 15% in the third quarter. All three of our businesses, repairs, machine components, and cargo systems had double digit increases in the quarter. [How Argo] systems continue to significantly out perform last year. This quarter we delivered the first three new built Boeing 747 special freighter systems to add to our numerous 747 passenger to freighter conversions. The 22.4 million turn around from a loss position in 2004 to strong profitability in 2005 is a realization of both strategic actions in closing the loss making IGT business as well as solid operating fundamentals instilled by group management. The traction in this group a is such that we foresee achieving double digit margins in the segment during 2006.

Slide 15 depicts the powerful cash flow generation of Teleflex that provides the financial advantage for growth and shareholder value generation. Operating cash flow performance significantly exceeded our expectations with strong focus into year-end and resulted in an increase of 32% for 2005 over 2004 and 49% since 2003. Free cash flow growth has been even stronger as we rigorously control our cash investments in fixed assets through capital expenditures.This performance is the result of an appreciation of focus throughout our operations of cash flow improvement. Improvement has thus far risen mostly from better managing accounts receivable and accounts payable. With restructuring activities behind us in most of our operations, we expect greater focus on inventory reduction. Looking ahead to 2006, we expect that we should exceed 330 million in operating cash flow from operations with continued generation of cash-outs of our balance sheet but not quite at the dramatic levels achieved during 2005.

Turning to slide 16, we've made significant progress in the continual reduction of networking capital. We ended the year with our networking capital as a percent of annualized sales at 18%. To show trends, the graph on slide 16 eliminates current deferred tax balances from networking capital and shows our asset velocity on the comparable basis reducing to 15.5% as compared to 22.3% of the adjusted annualized fourth quarter sales. Those sales being adjusted to exclude like effects. During the fourth quarter of 2005 alone we generated $26.5 million after the balance sheet. Taken as a whole, our improvements in asset velocity over 2005 avoided an investment over -- of over 170 million in working capital as we grew. In the medium term, we're looking to reduce new working capital down -- networking capital down to 15% of annualized revenues with close to half of that improvement coming in the next 18 months.

We've also escalated our cash returns back to shareholders. On slide 17 we show [inaudible] to substantial dividend increase of 14%. We initiated our first stock buyback program. In 2006 we anticipate completing the balance of that $140 million stock buyback program of which $46.5 million was executed in 2005. We believe that this is an excellent return to all of our shareholders at recent marketplace prices. We've increased our dividends for 28 consecutive years generally with double digit percentage increases. Would not be surprised if our board elects to take similar actions in 2006.

Slide 18 shows how our balance sheet has shown steady improvement over the past two years. Net debt of just over $390 million at year-end is a reduction of 280 million over the prior year-end. Net debt to capital was a very reasonable 25.6%. Our balance sheet is very strong and we certainly have the capacity from a financial standpoint to make substantial acquisitions in [inaudible].

Summarizing the outlook on slide 19, we continue to see 2006 earnings in the range of $4.05 to $4.25 for diluted EPS from continuing operations before restructuring charges, gains on sales of assets, and options expense. We're currently forecasting options expense of seven to eight million or $0.12 to $0.14 per share in 2006. And restructuring charges are forecast at 18 to $23 million or $0.28 to $0.37 per fully diluted share. Reiterating my earlier comments regarding segment margins, we expect to see area -- Aerospace margins drive forward to double digit levels, medical margins will stay close to 20% levels as we invest between 10 to $15 million in a significant [ITM] business systems consolidation, and commercial margins are expected to increase slightly but remain below 10%. For cash flow modeling purposes, we believe the charge appreciation and [amortization] will be in the range of 100 to $110 million, and that our capital expenditures should be around 3.5% of sales. Further improvements in asset loss [these projective], all be it at moderated rates of improvement as compared to our achievements in 2005. [Roughing] this all up, we have confidence in cash flows from operations being above 330 million.

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

Thanks, Martin. With a strong wrap-up 2005 we're now well positioned to build on our successes. We have a few actions to complete in '06 relative to the restructuring program. But given how much we've accomplished in 2005 for a restructuring standpoint, I'm confident that we can get the job done. Now that the infrastructure's in place and rationalized we've turned our attention to consolidating I.T. platforms. This is a multi-year project to consolidate a number of separate and distinct platforms. This year we'll do a lot of the advance work on this project before the actual conversion takes place. We continue to build and work through the acquisition pipeline. We're -- we're looking to both what for us are somewhat larger deals as well as smaller product line extensions. New product development remains a focus for the Company. In 2006 I want to see us continue to track our record of developing new technology that can differentiate the Company with our customers and prospects. Also we need to continue to focus on opening new geographic markets around the globe. That said, we're getting on with 2006 and working towards the goals we've outlined last month. The Teleflex team performed well in 2005, but as I remind them frequently, we've got to keep going. With that, I'll turn it back over to Julie.

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

[OPERATOR INSTRUCTIONS] Deane Dray, Goldman Sachs

Good morning Jeff, Martin and Julie. Question would be on your comments on acquisitions and your -- and it's a two part question. One, you give us an update as to -- You said that you have more competition from private equity. Have you lost out on any deals recently? And then secondly, give us a sense on how the platform looks today in especially with regard to your -- your comments that you might be interested in some new platforms.

Yes, Deane, we've been up there as I think we've communicated that while we were still trying to go through our restructuring and the efforts of last year, we have been focussed on trying to grow. I can tell you that we did lose a few deals. Quite frankly it pains me because I hate losing. But more importantly when I saw the value at which we lost, I just -- we struggled to get to some of those valuations even where we believed we had synergies that the potential acquire would not have. So I will say that it's hard to be a conservative yet aggressive buyer when you're dealing with some irrational competition. So I think we have lost some deals that we thought would have been both strategically and financially beneficial. But again, we just have to keep moving on. I think the reality is everyone's looking for the big deals. So as we moved our targets towards deals in the 100 to 400 million, we're finding competition there that is nonstrategic. And so I think we've said, look, we're going to continue to focus there but at the same time we're going to continue to do the smaller deals that are going to be -- and I don't want to go to the [bolt-ons], but smaller deals that are going to create shareholder value over the long-term. So I think our attitude is we're still going to have a dual approach but, boy, I struggle with the new math that these deals are providing because the multiples are -- are quite -- quite confusing me to be honest with you.

Just on that point regarding interest still in doing some of the small deals, what about the new platforms? Are these adjacent strategic markets or would this be a potential fourth segment for Teleflex?

No, these are really adjacent markets again either using our current technology or our distribution network to get at some of these markets. I think a fine example is -- is the Carrier deal. We've had what I consider to be the lead market position with that technology for the last few years. And as we looked at -- at the -- at the world, part of the issue is when you get into that segment, you have to have an infrastructure network for service and delivery. Of course, our attitude is, well let's go look at who has the best position. We believe Carrier does. They came, and I mean it was the due diligence level on both parties was fairly extreme because, frankly, they want to be perceived as the premium provider of this product. So I think there are opportunities as we continue to develop these technologies or we approve the technologies and the regulatory effects take -- take hold, that we think there's more opportunities to partner with people as opposed to us spending capital to -- to get into these positions.

Great. Thank you.

Jim Lucas, Janney Montgomery Scott

Thanks. Good morning. One housekeeping question first. Martin, tax rate, looking into '06, what is your initial thinking there?

Our initial thinking is consistent with our January outlook call of between 28 and 29%, Jim.

Okay. And if we take a step back and look at two of your bigger end markets, Jeff, can you give us a little bit of color? One, on medical, you -- you've addressed kind of the step backwards you took on the margin front in the fourth quarter. Can you talk a little bit about what you're seeing now with the restructuring coming to a close for the most part and where you see the top line acceleration and margins setting number one? And number two, can you talk a little bit on the automotive side given there's a lot of front page coverage on that in the market these days?

Sure. Let me -- let me first talk on the medical. I lived in Texas for a long time, so down there they they dance a little differently. They dance around this pole. And so at times you feel like you're moving forward but you're actually -- you don't know if it's one step forward and two steps back. And I think -- when I look at what we did last year in medical, the number of transitions that we went through, there's no question that I think that we're a little disappointed to see the margins go back from the 19.5% where we were before. Now, I think to be honest with you, I think as management said before, we were surprised how quickly we got there, and I go back to the second quarter of last year. So -- in -- if we're going to change and if we're going to solidify our foundation, there are going to be these type of -- of where I consider to be corrections. We still feel very confident we can get to 20% margins. And I think, again, we believe it may -- it may not be if the first quarter, but probably by the second quarter we should see much more improvement. But, again, distribution issues are not readily fixed overnight. And I think, again, we're waiting to see that -- that we're moving in the right direction. We saw compression last year in the Urology business. We still see that pricing issue where it is. We still think we're winning some of that business back. Frankly, what we saw in the fourth quarter on -- on our fastest growth segment, which is the OEM side, was a lot of inventory management by the OEMs where not just ourselves but other OEM suppliers found that they weren't taking in product at the rate that they had anticipated in terms of managing their -- their inventory. So I think we still feel very positive about medical. When you take a look, it is a big part of our portfolio. Our attitude is we have to build this right, and so I think we're going to take the right time to do it. But obviously 20% margins are still very much within our target. You talked a little about automotive. Again, I may be the only guy who feels strongly about automotive. But again, when you look at our market position, our products, our global customer base, while there is daily challenges in automotive, we still feel that we're well positioned to potentially end up in a better place when the survivor series is over. Now, of course we are being very pragmatic in our approach there, both in terms of spending. But we have the right leadership, we have the right products and, frankly, we have the right global foot print. So we still feel pretty solid about what we bring to that marketplace.

And if you look at the margins, within commercial, that -- that is potentially exiting '06, your only business that will not have double digit margins, what is it going to take to get that business to a little bit more respectable profitability level?

I think, Jim, that moving forward we have to go through some more processes of realignment, which we're going through at the moment, as we become more customer focussed on our smaller foot print and be very rigorous in our pricing approach particularly in our OEM relationships. We're continuing to do that by realigning our back -- basically our back process at the moment. We are going to be in a position to source from alternative sources and really leverage our buying power. That process has already started. We expect that it always takes a period of time to execute. You have to qualify the sources. You have your customers to qualify the sources. So I think we'd be saying that we should start to see those benefits pull through in the lat -- latter part of 2006 and beyond.

Yes, I mean, Jim, we spent the last few years really focusing on procurement and logistics. And again, A, first identifying where you are and then putting the processes in place in which you can build off of has been fairly time consuming. But I think we feel much better positioned today. Those are what I refer to as -- there's some hidden costs that never hits your bill of materials that I think we've really started to get our hands around. So I would agree with Martin that it's a relative world in automotive. If you look at who our competitors are, they are struggling mightily. To me, it's a great opportunity to go out there and be aggressive. I've always said, the happiest day is when you see the body of your competitor floating down the river knowing that you've been the one to push them over the edge. So will we be aggressive? You bet.

Okay. Thanks.

[OPERATOR INSTRUCTIONS] [Dan Rutter, WHB]

Yes, good morning. Could you talk a little bit about the economics on the Carrier deal and how you see similar arrangements in the future? What exactly -- you're not putting capital in, can you talk a little bit more about what the impact on the P&L is then?

Yes. Dan, I mean this is -- I think the announcement was just released today. So I feel like, we're still on our honeymoon and you're asking me what the dowry looks like. I have to tell you that we feel very strongly that the market over the next five to seven years is going to be a very strong market both as regulatory effects take hold. And more importantly, I think it allows Teleflex to do what we do best, which is manufacturing and bringing technology to meet some of these regulated requirements. So again, this is one where I would sit there and say, we all have -- we have great expectations, yet, in the near term future, I don't think it's going to have a huge impact because Teleflex is already out in the marketplace place today selling under the Teleflex brand name and now moving it over to Carrier, there's probably not that big a change in the near future.

Okay. If I can follow up one for Martin possibly, would you elaborate more on the [lag] accounting issue? That's a new -- that's a new reference to me.

Okay, in -- in the fourth -- in the fourth --prior to December of 2004, a number of our international businesses were reporting their results to us for consolidation purposes one month lag of actual. What we did at the end of 2004 was eliminate that practice as we brought in better controls. In doing so, our fourth quarter of 2004 essentially included an extra month for certain operations. As I said, that was approximately 16 million of sales that was essentially in addition to the normal run rate for that quarter.

Okay so that's across all -- all the segments or -- ?

It was principally in the medical segment. There was a very minor impact in the Aerospace segment. There was nothing in our commercial segment.

Wonderful. Okay, thank you very much.

Thank you.

And there are no other questions left in the queue. So this will conclude our Q&A session. And I will turn the call back over to Julie McDowell.

Thank you. Thanks everyone. Again a replay of the call will be available on the Teleflex web site or by phone. For those of you who may have dialed in late I would like to review. Replay number 888-286-8010, and International calls 617-801-6888 and the pass code is 63389676. Thank you.

Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect your lines. Have a great day.