泰利福醫療 (TFX) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2006 Teleflex, Inc. Earnings Conference Call. At this time, all lines are in a listen-only mode and towards the end of the conference call we will be taking questions. [Operator instructions.] At this time, we will turn the call over to your host, Ms. Julie McDowell, VP of Corporate Communications. Ma’am, please proceed.

Thank you, Jean, and good morning everybody. Teleflex issued a news release last evening with our results for Q1 2006. The release is available on the Investor Relations page of our corporate web site at teleflex.com. We have also posted accompanying slides for today’s presentation.

I’d like to remind you that today’s call is being webcast 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 the following phone number, 888-286-8010, or for International calls, 617-801-6888. Pass code number 43683247.

First, Jeff Black, President and CEO of Teleflex will discuss market trends and progress on our strategic initiatives. Then Martin Headley, Teleflex’s EVP and CFO, 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 earnings, conditions in the markets that serve, economic assumptions, expected volumes, and the like. Comments will certainly contain forward-looking statements related to forecast of revenue growth; operating profit margin improvements; stock option expense; restructuring actions; and related charges. Segment performance and expected diluted earnings per share from operations before and after giving the effective 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 contained in compliment [indiscernible] statements. These factors are described in Teleflex’s filings with the SEC. For more information, please review our most recent Form 10-K and other SEC filings.

With that, I will turn it over to Jeff.

Thanks, Julie, and thanks everyone for joining us.

Our first quarter results really illustrate the diversity of our markets and margin levels and the important role that Medical plays in our overall success. During the quarter, the Aerospace Segment continued to execute well, the Commercial Segment was in line with plans, but the Medical Segment experienced a handful of operational issues related to our growth initiatives and the latter phases of our consolidation plans.

Revenues for the quarter were $632 million, up 1.4% from Q1 2005. Solid 4% core growth was offset by the impact of currency exchange rates. Net income from continuing operations was $29 million, a healthy 17% increase from last year’s first quarter. Net income from continuing operations before special charges, gain on sale of assets, and stock option expense was up respectively compared to last year’s first quarter. Cash flow from operations was $36 million, with higher inventory and receivables in our Aerospace Segment.

Good results, which could and should have been a lot better. Overall, despite the ups and downs in the quarter, we’re still in line with our plans for the year and we remain comfortable with the EPS guidance range that we introduced in January of $4.05 to $4.20 per share before special charges and options expense. Let me just give you some perspective on the segment and the market trends.

Obviously, I’ll start with Medical. As we’ve discovered, trying to grow and make operational changes at the same time can create a series of problems. Expediting shipping; problems with freight processing; keeping up the sending and receiving site staff to prevent further customer service problems, costs were higher than expected, as we both ramped up for growth in the Medical OEM and had additional costs related to inefficiencies created by our product line moves.

After currency impact, Medical revenue growth was flat. This really relates to our first quarter capacity and service issues. To generalize, we simply had not planned production schedules to meet the demand of certain disposable products and for micro-introducers, especially OEM devices. At the same time, we anticipated greater demand for certain orthopedic products and surgical instruments than we actually saw in the quarter. Obviously, we’re all disappointed and frustrated to have the biggest bumps in the road towards the end of a large-scale restructuring process, like we’ve gone through here at Teleflex for the past 2 years.

An important thing for you to take away is that we’ve made progress and we are working through these issues one by one. Going forward, we’ve made some organizational changes to strengthen the accountability and the connection between the front-end and the backend of the business. Management is confident that we can maintain this momentum and our current forecast shows a relatively quick recovery.

Aerospace continues to be a great story. Our Aerospace Segment has been performing well for several quarters now and the traction continues with first quarter results up dramatically year-over-year. Revenues and operating profits were up in all 3 businesses and the positive market trends keeping capacity up.

The Commercial Segment performed in line with our plans for the year. The story remains very much the same with the wide variety of end markets creating a balancing act. Industrial markets were fairly strong; OEM Marine was solid; Marine after-market picking up with the springtime and improving weather. The Automotive market was mixed, with some weakness in the French market overall and better-than-expected production on some of our North American models.

Our objectives for Q2 are fairly straightforward. First, we have to focus on delivering for our customers in the Medical Segment, keep our supply chain running smoothly and productivity up. We started our Medical IT platform consolidation in Q1. This program will continue throughout 2006 and we are carefully monitoring its costs and we are optimistic that it will drive enhanced efficiencies across the Medical Segment in the future. We need to continue the solid execution that we’ve had in Aerospace. Market trends are positive and we should see good performance for the balance of ’06 with nice operating profit improvement.

In the Commercial Segment, we started to see a seasonal recovery in the Marine after-market late in the first quarter, which has continued on into April. Strength in Marine, a better product mix, and operational effect in this program should drive sequential improvement in Commercial performance.

To date, we’ve invested $64.7 million in our stock buyback program, with $18.2 million of that coming in the first quarter. We have approximately $75 million remaining in our authorization. We continue to believe that buying back Teleflex stock in the open market remains an attractive use of our cash and we will continue to buy shares as the opportunities arise.

In the first quarter, we paid $10.1 million in dividends. Yesterday, we announced that our Board of Directors declared a quarterly dividend of $0.28.5 per share, representing a 14% dividend increase over the prior quarter dividend. This is our 29th consecutive year that the Board has increased the dividend, further illustrating the Company’s commitment on returning capital to our shareholders.

Our plan for Teleflex, as we move forward, continues to be to enhance our global presence, invest in new product development, expand through acquisitions and partnerships, and refine our manufacturing platform. We need to ensure that we have products where the customer wants and when the customer wants it at the most competitive prices. All of the restructuring initiatives, R&D activities, and the M&A pipeline building activities are targeted towards these 4 overarching goals.

We are further along the continuum than we have ever been before. I’m encouraged by our competitive position, our financial fundamentals, and the business portfolio. With all of that, let me turn it over to Martin and he can go over the financials in detail.

Thank you very much, Jeff.

On Slide 11, you will see the EPS reconciliations, which were also presented in our press release. Earnings for the first quarter of 2006, excluding special charges, gains on sales of assets, and stock option expense were up 5.8% on a comparable basis to $32.9 million. 2005’s first quarter comparative was $31.1 million. A gain on a comparable basis, earnings per share were up 6.6% to 81% per diluted share, which represents nice year-over-year progress for the Company. On a go-forward reporting basis, earnings were obviously $0.78 per diluted share.

Results were short of our expectations for the first quarter. This makes 2006 in total a bit more backend loaded than our original thinking. However, with confidence the Medical results will be much improved in the second quarter, we still consider that we will deliver full-year results within our original guidance range.

Looking at Slide 12 and the first quarter comparison, core growth for the first quarter was a solid 4%. The stronger dollar, as compared to the first quarter of 2005, pulled back the reported increase in revenues to 1.4%.

Gross profit margin increased 110 basis points to 29%. Selling, engineering, and administrative expenses increased in the first quarter by $6.8 million, of which $3.2 million was an incremental investment towards future growth by planning and blueprinting for our new IT system in our Medical group. And secondly, selling, engineering, and administrative expenses included $1.6 million for stock options in this quarter, as we adopted FAS 123R. Excluding these 2 items, comparable selling, engineering, and admin expenses increased by 10 basis points as a percentage of revenues.

Operating income before restructuring costs and gain on sale increased by $3.1 million to $60.5 million, while operating margins improved to 9.6% from 9.2% last year. Restructuring charges were $4.5 million in the first quarter, of which $4.3 million was in the Medical Segment. Additionally, we had $199,000 of costs associated with the transfer of operations of an aerospace repair facility in California to our Singapore repair operation. I’ll discuss this a little later. We’ve reduced our expectations for 2006 restructuring costs to a range of $13 to $15 million pre-tax, or $0.20 to $0.23 per fully diluted share. Certain Medical Segment activities have been canceled, given future growth requirements.

Turning to Slide 13, let’s look at Medical Segment performance. For the first quarter, Medical Segment revenues were $203.1 million, compared to $209.9 million in last year’s first quarter. Excluding the impact of currency, revenues were flat year-over-year. New product growth of 2% was offset by lower OEM sales, particularly orthopedic sales, carried over from the fourth quarter and slower surgical instrument sales, driven in part by a vendor supply issue.

Orthopedic sales reflect the softening in the trajectory of growth rates in the industry. At the same time, we saw robust demands for micro-introducers. These are specialty devices used in minimally invasive diagnostic treatment procedures. In the first quarter, we were limited in supplying this demand by difficulties in bringing up capacity for these products.

Operating profit was $30.3 million, or 14.9% of revenues, compared to $32.9 million, or 15.7% of revenues last year. Exculpatory factors, with the stronger U.S. dollar, reduced the translated operating profits of our European businesses by $1.6 million. And as I previously mentioned, we incurred $3.2 million related to the IT system planning and blueprinting. Excluding these items, the operating margin increased year-over-year, but was shy of the second and third quarter 2005 high.

The quarter was also impacted by operating inefficiencies related to bringing on additional capacity and other cost investments in anticipation of growth that did not arrive, particularly in the surgical instrument and OEM businesses. Order fulfillment issues from unanticipated order patterns also created inefficiencies and expediting costs during the quarter.

As Jeff mentioned, we’re confident that we can get Medical back towards the long-term operating margin goals of 20% later in the year. We may not get back all the way in Q2, but based on what we’ve seen so far in April, we should get close.

On the top line, orders from orthopedic OEM customers have returned closer to planned levels in April. [Canadian] events of 3 additional capacity [tools] somewhat offset continuing issues with bringing additional capacity for micro-introducers. Backorders are being reduced and the surgical instrument vendor, who disrupted supply in the first quarter, is back on line.

On the cost side in April, we substantially completed the plant moves that created manufacturing and distribution inefficiency. We also made changes in logistics, processes, and procedures and we’ve eliminated international expediting. The result of completing both of these activities was a reduction of nearly 50% in freight costs during the first 4 weeks of April. Costing actions include a hiring freeze on filling the positions and cutting back on cost investments in certain areas. Overall, the second quarter should represent quite an advance on the first quarter, if only modestly up over the second quarter of 2005.

On Slide 14, we review the Commercial Segment. Revenues were $304.5 million, and operating profit was $20.4 million, compared to $303.8 million and $24.8 million, respectively, in last year’s first quarter. This was substantially in line with our plans for Commercial in the first quarter.

Automotive continues to be a market-by-market platform-by-platform proposition. The group was hardest hit by a very weak French business and was strongest in the U.S. on some new model releases.

Our industrial products are performing well, and particularly the auxiliary power units and the alterative fuel systems. Additionally, last year’s hurricanes have created lots of activity for our heavy rigging cables used in marine construction and oil and gas drilling.

Marine after-market was a little soft early in the first quarter, although we saw our seasonal uptick in the March/April time frame. We will continue to monitor this market, for the current conventional wisdom with our Commercial Segment management is to expect good things from this critical end-market during spring.

High fuel prices remain an issue, but we think this will be offset by the great weather we’ve had so far this year.

Tough margin comparisons were created by the end of a program providing mobile power units to the U.S. military. Overall, we saw a high mix of sales of lower margin, industrial, and auto products this quarter than in the same time last year.

Looking forward to the second quarter, the Marine business looks solid going into its seasonally peaked quarter. Our power systems business makes sequential improvements on the back of buoyant market conditions, and in key businesses manufacturing improvements continue.

Aerospace continues its exceptional improvement, generating $9.4 million more operating profit than in the prior year. Revenues were $124.5 million, up 13% from last year’s first quarter, and operating profits were $11.4 million, which were 9.2% of sales. Business conditions are strong in each of the 3 product areas. We continue to have a dominating share of wide-body cargo system markets. This quarter saw the shipments of the hardware for the first of the Boeing large [breakers]. Sales of our Ultralight containers highlight the product, very robust. Repair volumes were strongest out of our Singapore facility. The segment is benefiting from strong management fundamentals – cost controls, pricing increases, and garnering the benefits of restructuring – although they stumbled a little on working capital this quarter.

Orders continue to grow with backlog climbing. This gives confidence for the balance of 2006. One break on this dimension being the in-sourcing of certain repair activities that will take increasing hold during the second quarter. [This] reacted to this situation, we have initiated a small restructuring of $1.5 million that will cover the closure of one of our repair facilities. We incurred $199,000, as I previously stated, related to this closure during the quarter.

Looking at Slide 16, our net working capital, as a percentage of annualized sales, was largely in line with our plan of 17.3%. We’d expected some increase over the year-end position, as we built inventories for the seasonally strong second quarter. It represents a 430-basis point improvement over March of 2005. Additionally, one of our Aerospace businesses had some challenges in executing continual improvement. A new general manager and controller are now tackling the issues.

On Slide 17, we show our year-over-year cash flow for Teleflex, with operating cash flow of $36 million and free cash flow of $11.7 million. Cash-outs of working capital were reduced by the factors previously mentioned. CapEx were $14.2 million, slightly higher than last year’s first quarter. We continue to have expectations that full-year CapEx will be in the $80 to $90 million range, and full-year depreciation and amortization expectations are in the range of $100 to $105 million.

We’re moderating our view of cash flow for 2006, largely as the result of the Medical Segment pushing sales out into the fourth quarter that will result in some profits being locked in year-end receivables. We now expect cash flow approaching $300 million, as compared to our original January forecast of $330 million. Still a healthy figure, although it’s unlikely we will top last year’s record operating cash flow.

On Slide 18, it shows how our balance sheet has shown steady improvements over the past year. Net debt of just over $400 million at quarter-end is a reduction of $145 million over the first quarter of 2005. Net debt-to-capital continues in its historic low range and ended the quarter at 25.7%. Our balance sheet continues to be very strong and we have the capacity from a financial standpoint to support the additional leverage required to secure strategically sound growth.

If you turn to Slide 19, as Jeff mentioned, for the full year, we expect diluted earnings per share from continuing operations before restructuring charges and options expense of $4.05 to $4.25. Non-cash expense related to accounting for stock options is expected to be $7 to $8 million pre-tax, or $0.12 to $0.14 per fully diluted share. That then gives us guidance of $3.91 to $4.12 before restructuring charges. These restructuring charges are expected to be $13 to $15 million, or $0.20 to $0.23 per fully diluted share.

With that, let me turn back to Jeff for closing comments before we take your questions.

Thanks, Martin.

Obviously, we’ve got a lot of work to do in Q2 and for the balance of 2006, but for those of you who have followed us for a few years that’s nothing new for Teleflex. In Medical, the job is clear cut. We’ve got to keep our focus on the customer, monitor order demand more closely, and keep our productivity and service levels up. Getting the Medical Segment back to 20% operating margin level will cover a lot of the issues for Teleflex.

In Commercial, we need to stay on plan. There will always be puts and takes within this business portfolio. And with the signs of life in the Marine after-market, we have confidence going into the second quarter.

In Aerospace, we have a significant opportunity to capitalize on the across-the-board strength in the end-markets which we serve. This is a notoriously cyclical market, so we are grateful that the restructuring that we did early last year in this segment has positioned us to make hay while the sun is still shining.

Our confidence and our ability to execute are demonstrated by our continued significant investment in the stock buyback program. We’ve committed a major chunk of capital in this initiative. We continue to believe that we are creating significant value with the restructuring and portfolio actions we have taken and we will continue to support the stock as appropriate.

We also continue to keep building an acquisition pipeline, carefully evaluating acquisition opportunities. As Martin mentioned, we have the capital and the capacity to execute as we find good strategic opportunities.

With that, I’ll turn it back to Julie and get on with your questions.

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

[Operator instructions.] Jim Lucas, Janney Montgomery Scott

First question, restructuring. You’ve come a long way over last year, and in your prepared remarks you talk about that it’s somewhat unfortunate to have these hiccups towards the latter stage of the restructuring. Can you talk a little bit about what you think, in hindsight, has led to these hiccups in the road, and then going forward, maybe just what lessons have been learned here?

I’ve got deep scars, so I’ll say this, Jim, as we went through the restructuring again, it was well-documented, well-executed. I think the reality was we had a lot going on, as you know. In our restructuring, a lot of it was geared towards the Medical group. In looking back, I will probably say we tried to tackle maybe a little too much too quickly. But at the end of the day, I think the disappointment is -- you know we’re building this organization not just for margins but to have market growth and when you can’t support your customer and you’ve got to expedite, Jim, I will say this, the senior management, both at the Corporate and the Medical level, made a decision that we were going to deal with all of the expedited freight charges because my attitude was we can’t afford to lose customers as we’re building this segment. So, again, a lot of movement.

I still think, and I made this comment in the first quarter, the distribution challenges were ones that I will honestly say I think we underestimated. You well know it comes back to supply chain and the whole value chain and I think, to be honest with you, distribution was one of our issues. So I think that only exasperated some of our other issues. But, in total, there is no question that as we went through Aerospace restructures and went through Commercial, we were right on. And, again, I think it was the magnitude of Medical and the fact that it was across a variety of different businesses that created this self-inflicted wound.

And on that self-inflicted theme, when you look at Medical, kind of the sluggishness, in particular what happened in the orthopedic side, as well as on hospital supply, can you characterize self-inflicted versus external factors? I mean, was it 50/50 in your opinion or was it 80/20?

I think, Jim, it was probably about 50/50. If I were to say really there was about 40% that was about the market and the balance resulted out of us underestimating the impacts of some of the restructuring issues and some of our issues in terms of being responsive to different profile of customer demands, as compared to what we’d set out in the quarter forecasting and being sufficiently responsive to that on a timely basis.

I think, Jim, we’ve talked about, I mean, that group has been one of our fastest growing groups for the last few years, and, obviously, we went into the year figuring we were going to be seeing double-digit growth on the top. We didn’t see that. And then you couple that with some of our inefficiencies, I would concur with Martin that the market is one thing, but to have the market drop off and then self-inflicted wounds is like something I hope not to experience anytime again soon.

Okay. And switching to the glass is half-full now, with looking at growth, it looks like you’ve got the plans in place to get back on track in the second quarter. The Marine after-market showing signs of life. But then you have this strong balance sheet. You’ve been talking the last couple of quarters about building the acquisition pipeline. Can you just give us an update on what you’re seeing there?

Yeah. As I said on the last is, I think we’ve moved our sites down to what I consider to be smaller acquisitions; because of the competition, it’s a bigger. But, again, part of the issue is you’ve still got to be responsive to the opportunities as they arise. So I still feel good that we have an acquisition pipeline. Most of you know, the Aerospace, there are a lot of people who are trying to moving properties at the top of the market. That’s not typically our buying strategy.

In the Commercial, again, because we’re in such a wide range of businesses, I think you will see some acquisition opportunities there. In Medical, we think there are opportunities, but I will tell you that we’ve also got to have some stability. You sit there and think -- I think we believe -- we have our issues identified in the areas, so we still believe in the Medical there are opportunities to add acquisitions there going forward.

Deane Dray, Goldman Sachs

Just if we could go back to the margins in Medical. And I know you’ve given some detail about what the issues are. If you could help us size, in order of magnitude, these on how they weighed on operating margins. So is the freight and expediting, do you want to include those together and the vendor supply issues separately. But just take us from the largest issue and work down that 300 basis points. That may help us size it.

Well, if you go through those, the largest issue would be related to distribution, which is a matter of both inefficiencies that we underestimated by having more plants having supply chain supplied into the distribution facility at that point by virtue of having product lines in 2 places during transition, as well as the fact that we misestimated the profile of the order demands for the quarter, which resulted in a lot of the expediting facts. That was by far the largest item.

Are you including that in distribution, Martin?

Yes. It comes through our numbers as distribution. If I look at the root causes, the root causes are different.

Okay.

The root cause isn’t a failure of the distribution center to perform, the root cause is demand destination and demand forecasting.

These were the orders that you couldn’t fill?

They were orders that we ended up expediting because we, as Jeff said, made the determination we’re going to satisfy our customers and because we are behind in manufacturing for those customers because we’ve got the profile of our manufacturing wrong. Secondly, would be the inefficiencies and outsourcing that had to occur because of the problems with bringing up additional capacity for the micro-introducer. And so that was a very significant item.

And, Martin, to help us size this, you said distribution was first, so approximately how many basis points?

I’m not willing to disclose that, Deane.

Okay. All right. So let’s just continue then, so inefficiencies and capacity.

This is presuming that IT and currency have come first. We’re talking about -- after we’ve talked through those, then we talk about the issues associated with distribution. And then we will be the issues with inefficiencies and bringing on the capacity for the micro-introducer would be the next item. And then we’ll be getting down to the miscellany of things, the most significant of which would be the vendor issue that we had in our surgical business that put us into a backorder situation there.

Okay, I think those were all of the items, with the exception -- how about the orthopedic? I would attribute that -- that’s sort of mix, but you said the orders fell off.

Well, not really, but those are the cost -- the volume issue, obviously, pulls us down as well. And I was just addressing the true margin situation. The OEM situation had very little situation on the actual margin rate.

I understand.

Other than the fact that we have invested more resource into the business, assuming a ramp up in the business. So from that point of view, we’ve [got] cost into the business that was ahead of the revenue coming through.

All right. So those are the primary factors, the way you would size them, correct?

Yes.

And then, also, in lowering your free cash flow estimate for the year, the one factor that you called out was also Medical. And to make sure we understand this, is that you’re saying that you expect more sales in the fourth quarter, which will then be tied up in year-end receivables?

Yes.

Now, is that a -- how would we see that? Is that a backlog and is there something different this year where you’re expecting order patterns?

It’s a difference in order patterns with a number of new products going into the channel that are going to have a greater impact towards the end of the year and also from the fact that the assumption here is that now we’ve got our capacity issues behind us on some of the capital-related businesses. That will be a very strong business going towards the end of the year. So the profile of our medical businesses is very much changed from our initial expectations.

Hey, Martin, we should probably talk about this offline because it just seems to me if we’re in April right now and you’ve got new products coming on, for you to bring your cash flow target down this much with the expectations of [tying into] receivables. Is there any other factor there? It just seems like that would not be big enough to warrant that kind of cash flow change.

There are a number of other minor factors, but there is nothing significant individually.

Okay, and then just last question on the stock options. If I heard you correctly in the prepared remarks, you consider your operating results to be $0.78, and that includes stock option events.

Yeah. We have shown the 81 was a comparable on a like accounting manner.

Good.

The 76 versus last year. Now, obviously, the market has got to make what the market has got to make of whatever happens with a non-cash charge going through the income statement, particularly one which is also double counted by included in the denominator of the EPS. But that’s a personal opinion.

Right. I understand. But just in terms of convention, you’re going about it the right way of recognizing that’s part of your operating results. That’s the way the industrials are looking at it and that’s the way we’ll be looking at your guidance going forward as well. But I appreciate that.

Wendy Caplan, Wachovia Securities

A couple of more medical questions, just so that I understand, because there is a lot of moving parts here. You spoke about some of the issues in the past tense when you were talking about the self-inflicted versus the market-inflicted issues. Those are not going away. Those are not 1-quarter issues; they have been now 2-quarter issues. We should expect that those will continue through the year, partially, or when do we get those -- the inflicted ones behind us, the self-inflicted ones?

As I’ve said, we’re behind in quite a number of them at this juncture, Wendy, as I’ve said in my prepared remarks. The [Canadian] events have got us beyond some of the capacity issues for the micro-introducer. We’ve seen a halving in the freight costs in the U.S. in the first 4 weeks of April. So we’re getting beyond a good portion of those distribution issues. We have completed the closure of 2 of the facilities that gave rise to a lot of the distribution center inefficiencies. And so we are now having full shipments and we’re reducing the headcount in the distribution center and we’re getting beyond some of those. The extent that there are remaining issues, which there clearly are, we’ve got remedial plans and actions in detail in place. We’ve had a lot of activity with our Medical group regarding the definition of that. And in addition, we’re taking other costs moves to kind of shore ourselves up and take a conservative position against the impacts of those continuing issues.

Yeah. Wendy, I think, I mean, the distribution is still one that I will tell you is not fixed. It is better, but it is not fixed. But, again, when we talk self-inflicted, management is now into wound care. So we’re trying to fix these things and the ones that we’ve either added corporate resources to, but I will tell you we were actually, from a corporate perspective on the distribution, we were not happy. And, again, the problem is when you run a warehouse the size we do, moving things around and getting it to a more efficient warehouse will take some time. So while I think we’ve seen the freight costs and what I consider to be the variable costs are better controlled, I will tell you that I think the distribution issue will still have an impact on Q2.

Okay, that’s helpful. And in your slides you say that you expect Medical to get to 20% margin overall for the year. It was 14.9% posted this quarter. My calculator tells me that the average would have to be 21.7 to get to 20% for the balance of the year for the next 3 quarters. Is that something we can do on average?

Yes, because, Wendy, as I said, we see ourselves getting closer to the 20% mark in the second quarter and that we have a profile that is backend loaded. We also then start to see coming through savings from some of these restructuring activities, as I’ve said, that have just been completed. By the time those roll through the inventory, which will prevent some of those benefits coming through in Q2, they start to flow through into Q3 and into Q4. We also have a benefit in Q4 of having an extra week of sales because of our funny fiscal year, which is a 53-week fiscal year this year. This gives us an extra week of sales in the fourth quarter. We can --provides a lot variable contribution against the fixed costs.

Okay, that’s helpful. One more question, or actually a couple on Medical. How much of the problem in Medical is related to Hudson Systems?

Almost none. To be honest with you, I’ll take that as a positive and then I see the other as a negative. I think all of the questions today, rightfully so, have been geared towards Medical. I go back to Q2 last year where we ended the quarter at about 19.8%, whether that’s in a false positive, both internally, to our people, I think -- I still look back and say maybe we got ahead of ourselves and didn’t follow through on some of the details like we should have. But, again, my confidence level in getting back to a 20%, I realize it is a dramatic step from where we ended Q1, but I think we have everything in place to get there.

Okay. And just to make you happy, Jeff, and I’ll ask a question about the Aerospace business.

Oh, thank you, Wendy.

I know you appreciate it. You mentioned in your remarks about some problems -- a problem company, a change in management. Can you just kind of give us a little color on that and how we should view it as part of the pressure on -- if there was pressure on margin because of that?

Yeah, I think, last year, in part of our consolidation, we took 2 of our facilities in California and consolidated them into one. One was our container business, which we had acquired over the last 5 or 6 years. The other was our actuator business, which has long been part of the Teleflex organization. So we put those two together in a new location, so we didn’t put them into one of the two locations and what we started to find was there is no question, actuators is a totally different mindset than containers, and as our container business started to grow, we started to take resources that we now had one overhead and moved them towards containers and found that, again, the skill set is a totally different skill set in trying to deal with machining versus assembly and putting together these types of containers. So we made the move and, frankly, I think we’ve got the right individual. But, again, to me, there is upside there from my perspective.

[Operator instructions.] [Keith Davis], [Flower Miller & Washington]

My major questions on cash flow have been answered, but let me beat a dead horse on the Medical Segment here. After you get through all of these issues and integration of Hudson and everything, what is the longer-term outlook for organic growth in the Medical Segment?

Yeah, Keith, I think if you look across again, we’ve got 3 distinct segments in that group. You have the OEM group, which we’ve talked about, where we believe the orthopedics will continue to be a driver for growth. That market, I will tell you, is probably low double-digits. We’re probably a little less bullish on that and probably in the high-single digits. We think our Medical group has a variety of growth opportunities, probably above the market, and a lot of that is due to truly getting a lot of the synergies with Hudson and the workforce, not just here but in the distribution channel in Europe.

The surgical instrument business, historically, has been a fairly slow grower, probably in the 1 to 3, 2 to 4%, and we don’t see us growing beyond that. That type of growth rate.

Okay. So, on a blended business, mid-single digits organic growth?

I think so.

Jim Lucas, Janney Montgomery Scott

Commercial, if we could just focus on that for a second. Can you characterize what you’re seeing in the U.S., in your opinion, automotive markets? In particular, one of the things we’re hearing is first quarter strong North America, looking for a slowdown in the second half. If you could just give us a little bit of color on what you’re seeing in the 2 geographies.

I think in the 2 geographies, and again it gets to be very much platform-by-platform and some of our customers have warned us about being able to discuss some of those. We see that our -- the French business is being particularly weak in the first quarter. Generally, the rest of Europe, you’re seeing pretty reasonable strength, more so on the smaller end vehicles.

In North America, I think what we’ve seen would pretty much fit with your profile. I think some of our positioning on new models for the next model year probably we believe cushions us somewhat from some of those factors in the North American markets for the back half of the year.

Yeah, Jim, we’ve got a very strong position in France and this is just not a Q1. This is really a hangover from Q4. The French automotive market has just been really struggling for the last 6 months. They’ve got some new models coming out. They’ve also gone through some restructuring and moving towards what is now referred to as central Europe, where I think we are well-positioned to support them. So, again, I think our attitude is if the French market picks up, we believe there is probably upside; if the French market doesn’t, then we’ll stay with where we’ve kind of forecasted. And it’s scary for me to depend upon the French for my career.

You always have to be concerned about that.

Yeah. But they are very optimistic, so that’s what I love.

You talked about Marine after-market. Can you shed a little light on the OEM Marine market?

Yeah, I will tell you the tradeshows and everything we’ve seen so far, as most people have seen, it’s been a very strong springtime, both in March and now into April. We see that there is good movement at the OEM levels. And, again, we’ve got some new products going in there once the season fully kicks in. So we’re pretty good at the OEM level, it’s really the after-market is that proverbial if it rains, I’m not going -- and fuel prices. There is no question that fuel prices impact that marketplace fairly dramatically.

Jim, I mean, within the OEM business, what we’re clearly seeing is a profile of favors – large boats rather than small boats. And that’s another factor that we’re well-positioned on with our products.

Okay. And, finally, embedded in your guidance for the full year, Martin, what tax rate are you using?

Embedded in our guidance is a tax rate consistent with the first quarter, which you will have seen is about 28%.

I’m showing no questions at this time. I’ll turn the call back over to the presenters for closing remarks.

This is Julie McDowell. 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 or would like to review, the replay number is 888-286-8010, or for International calls, 617-801-6888. Pass code number 43683247. Thank you.

Ladies and gentlemen, thank you for joining us on the call today.