泰利福醫療 (TFX) 2006 Q2 法說會逐字稿

Good day, ladies and gentleman, and welcome to the Second Quarter 2006 Teleflex Incorporated Earnings Conference Call. My name is Kathy, and I will be your operator for today’s conference. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s conference.

[OPERATOR INSTRUCTIONS].

I would now like to turn the presentation over to your host for today’s conference, Ms. Julie McDowell, Vice President, Corporate Communications. You may proceed.

Thank you, Kathy, and good morning, everyone. Teleflex issued a news release last evening with our financial results for second quarter 2006. This release is available on the Investor Relations page of our corporate website at teleflex.com. We have also posted the covering slides for today’s presentation. I would 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 website.

An audio replay number will also be available by dialing the following phone number 888-286-8010, or for international calls, 617-801-6888, pass code number 97169452. Jeff Black, Chairman and Chief Executive Officer of Teleflex, and Martin Headley, Teleflex’s Executive Vice President and Chief Financial Officer, will add on to the details of the 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 forecast revenue, operating profit, margin rates, stock option expenses, special charges, restructuring activity related charges, segment performance and expected diluted earnings per share from operations before and after, giving the effect of charges related restructuring gain or loss on sale of assets and tax benefits.

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 file with the Securities and Exchange Commission. For more information, please review our most recent Form 10-K and other SEC filings. With that, I will now turn it over to Jeff.

Thanks, Julie. Good morning, everyone. Second quarter results were a bit better than we expected. We have revised our guidance just last month. In particular, the medical segment had a strong comeback late in the quarter. That business has been making a steady progress with a lot of hard work and action on the part of the team that is there.

Likewise, aerospace also outperformed our internal forecast, and commercial delivery results inline with our plans. Revenues for the second quarter up 4% with quarter growth accounting for substantially all of the increase. Excluding special charges¸ loss on sale of assets, and a second quarter tax benefit, income from continuing operations was $0.92 per share, down from last year’s second quarter, but on pace with our revised expectations for the year.

Cash flow from operations continued to be strong in the quarter at nearly $100 million. Given current market trends and recognizing that the third quarter is generally seasonally weak for us, we remain comfortable with the expectations of business performance and the forecast of earnings per share we outlined in our June conference call. Martin will discuss the tax benefit in the quarter and the expected change in tax rates that gets us to our current forecast numbers.

In general, with a few gives and takes, aerospace and commercial delivered in line with our plans, and we saw good progress on our initiatives in medical. Maybe slightly ahead of where we thought we would be just a few weeks ago, but moving forward. We continue to monitor our recovery plans very closely.

Let me give you a few comments on the segment performance. In aerospace, we continued our strong execution in all three businesses. Manufacturing, cargo, and repairs all performed well. The aerospace business is benefiting from strong secular demand for cargo systems with international shipments increasing in an overall cyclical up-turn in the industry.

In commercial, we had a nice revenue increase with flat operating profits on a sequential basis. The $2 million charge for physical inventory adjustment was the culprit here as well as the fact that the mix shift toward auto and industrial business suppressed our operating margins.

The medicals team is taking hold of the business and dealing with the performance issues and making good things happen. We have had consistent steady performance in the distribution centers throughout June as well as into July.

During the quarter, we completed the four facility closures that had been delayed. Backorder numbers and customer deliveries are beginning to show positive trends, and we are taking decisive cost cutting actions. Medical finished June very strong. Obviously, it’s still early, we have more work to do, but we are addressing challenges and getting back on track as we move into the second half of the year.

Our outlook for the second half is sound but cautious. In aerospace, the top line is expected to grow, but we started to see the impact of customer and sourcing initiative in Q2, and this should have an impact in the second half. In addition, a schedule change that benefited Q2 and a mix shift between new build and after-market in our cargo systems group could temper opportunities for margin enhancement a bit in the second half.

Medical -- the story has not changed. We should see steady sequential improvement on the top and bottom line in both Q3 and Q4, and margins of 20% for the year despite the slow start that we had in Q1 and Q2.

And in commercial, we are heading into our seasonally slowest quarter with scheduled shut down and a conservative view of the marine markets. Margins for Q3 should be up over prior year, and we have a strong backlog and strong outlook for Q4 as new platforms begin to come online.

Our primary objective in the second half is to continue to progress in our medical segment operational initiatives. We have made a lot of headway in Q2, and we need to keep it going in Q3 and Q4. I am confident that the team in medical is getting the right people and processes in place to keep these initiatives on track. The sense of urgency in that business is clear, especially considering the significant progress that they have made in a very short time. Another factor that should favorable impact medical is the IT platform consolidation, where we will see lower expenses in the second half as compared to the first.

In Aerospace, nothing much to add, keeping our eye on the ball, continuing to execute and capitalize on the market opportunities as they continue to arise. In commercial, we are staying conservative and keeping a close eye on the market conditions. Our operational effect in these initiatives continue, and we want to see continued results in these main manufacturing programs.

So, we are in good shape executing the second quarter. While I am pleased with the work that’s been done, we still have a lot to still complete. As we continue to complete restructuring and internal initiatives, we have not lost sight of the need to prepare for growth. We have to expand our global presence. I’m more convinced than ever that our biggest market opportunity is in the international markets where we are really looking at this from two different angles -- the top line growth that the international market affords as well as the access to lower cost manufacturing environments. We are working on initiatives on both of these fronts.

New product development continues to be a focus, and we saw results from this in Q2. New products introduced in the medical segment provided a part of the upside performance there and are a factor in our second half outlook. We will continue to invest in R&D initiatives to fuel this growth.

We have talked about our plans to expand for acquisition in partnership. As we mentioned on our last conference call, we had one that got away this quarter after a great deal of due diligence, but there are opportunities across all three segments and we know that we have to proceed with caution and discretion in finding the right deal at the right price for our shareholders. Restructuring programs we have launched over the last 18 months should drive results and have left us with a nimble, flexible platform across a wide range of geographies. We’ll continue to refine the platform as appropriate. With that, let me turn the call over to Martin for his financial remarks.

Thank you, Jeff. Revenues in the second quarter increased 4% from $657 million to $682.6 million with progress of 4%. Nearly 90% of this revenue growth was from commercial segment with a balance from aerospace. Income from continuing operations, excluding special charges, losses under 6.4 million, tax benefits related to other periods was $37.3 million compared to $42.4 million in last year’s second quarter. Aerospace provided the strongest positive comparison here with operating profits up $5 million quarter-over-quarter. In addition, the medical segment had a strong comeback later in the quarter, although down for the quarter as a whole.

Turing slide 12. In our Aerospace, as Jeff mentioned, we saw a progress across all three segments. The new top line growth of 3% was largely a result of the favorable comps with the second quarter of 2005, when accumulation of the [winding] down of the IGT business contributed at 5 million of revenues. Cargo system spares and repairs, the aftermarket parts business there was particularly strong in the second quarter. The second quarter also benefited from a last-minute change in a Cargo system delivery between second and third quarter.

That said, we are monitoring the mix in the second half. For the moment we have a larger preponderance of orders in the backlog from cargo system new builds, typically a lower margin sale for us. We are also assuming some seasonality spares and repairs parts as airlines [stopped] in the second quarter to have spares on hand during the busy flying months of the summer. On the insourcing initiative by key customer for our repairs business that we’ve mentioned in the past, that began in earnest in the second quarter and it should be increasingly significant in Q3.

In the second quarter, our precision machining business dealt with some supply delays which we continue to monitor. We don’t expect a long lasting impact, but we are obviously taking a cautious outlook. We turn, then, to the medical segment on slide 13. Medical segment revenues were relatively flat year-on-year with $217.8 million. Operating profit was down 13% during the same period, was slightly over half the decline attributable to our investment in developing new business systems. The balance represents operational issues and consolidation costs hitting us earlier in the quarter. Sequentially, we saw our significant jump in margins from 14.6% to 17%.

New product sales were particularly strong for medical disposable products in Europe and Asia. In the medical OEM business, we saw good demand for OEM diagnostic and therapeutic devices used in non-invasive or minimally-invasive procedures. These devices include micro [introducors], catheters, and [guide wires] -- products we are adding capacity for earlier in year. On the negative side of the equation, as expected when we issued our outlook, we continued to see weakness in demand for orthopedic instruments in the OEM business.

At this point, we are staying conservative in our assumptions about the market conditions here and any improvements in the second half. Operational issues continued to be monitored closely across the medical segment businesses. We expect improvements in the second half to come from some of the work we have done, getting the full benefits of facility closures and cost actions, consistent blocking and tackling, working down the backorders, maintaining the progress we’ve made in distribution and operational efficiencies, and benefits on the top-line from the new product role-out on the extra week in the year.

We spent about $6 million to $7 million in the first half on the IT consolidation program. This factor alone reduced second quarter operating margins by about 150 basis points. In the second half, most of our expenditures for this project will qualify to be capitalized, so we’ll see the nice margin benefit here.

In slide 14, we look at the commercial segment, where revenues were up 7% year-over-year with 8% [core] growth offset by 1% decline from currency. Operating profit was 25 million, down slightly from 25.4 million last year. Keep in mind there was the $2 million inventory adjustment in the 2006 second quarter. We have seen good demand for alternative fuels technology products in Europe, and auxiliary power units in North America was the result of rising energy cost in emissions legislation.

The alternative fields momentum is particularly [defined] since this was one of our problem children as recently as a year ago. That business has clearly turned the corner, participating in growth markets in Europe and identifying new opportunities for its technology. and it’s executing well.

Our heavy-lift business, which is used to sell heavy industrial cables used to secure oil rigs, etc. is likewise capitalizing on an excellent market opportunity for repairs in the Gulf region on the impact of the hurricanes last year. And we saw good growth from the North American auto business, as always this is impacted by the popularity of platforms and new contact.

On the negative side, European automakers, particularly the French automakers continue to post [inaudible], and the marine after-market continues to be somewhat soft. Interestingly, new products for engine manufacturers and OEMs have kept the marine business in line with expectations despite what we expect to be a somewhat weaker market condition in the second half.

We look at slide 15 in the [after] philosophy, which we define as networking capital as a percentage of annualized quarterly sales. This continued its strong trend down achieved over the past 2 years. We saw a reversal of some of the working capital issues from the first quarter, in particular account receivable, which had driven asset velocity to just over 16% at the end of the quarter.

This progression is where we want to be to reach our longer-term goals of being below 15%. Our auto heavy-lift and power systems businesses in the commercial segment were strongest in our asset performance during the second quarter. As we work down the backlog in medical and work off associated inventory during the third quarter, we should continue to see progress.

Cash flow, as depicted on slide 16, shows the year-on-year impact with operating cash flow of $96.4 million in the quarter and a $132.4 million for the year. This was good rebound from the first quarter and puts us in a position to hit our goal of approaching 300 million of operating cash flow for the year. Within our cash flow assumptions, our capital expenditures of approximately 3% of sales, and our deprecation and amortization expense should be around $100 million for the year.

The balance sheet is strongest its been in the years. Net debt is down to 322.7 million, and net debt to total capital is down to 21.6%. This all-time low is a function of the continued slow stronger cash flow growth in 2006. We’re under-leveraged and will continue to make good incremental use of our capital, either through an acquisition and / or stronger return of capital to stockholders.

We look to the outlook. Our outlook has been modestly adjusted to account for a lower underlying effective tax-rate for 2006, the reduction in our effective tax-rate as the benefit to the annual outlook. You’ll note here that we had a tax benefit of 6.4 million, or $0.16 per diluted share in the quarter that resulted from over-statements of tax expenses during prior periods.

We’ve excluded that portion relating to prior years, approximately 5 million, from our guidance, continue to provide a simplified comparison. This benefit to Q2 has no cash impact and does not impact any tax filings. It is simply a correction of discreet errors in tax accounting estimates from prior periods. All other elements of our outlook remain the same.

Restructuring charges and gain on a loss on sale of assets should be in the range of $0.45 to $0.55 per diluted share. Our operating cash flow should be approaching 300 million and including in our guidance is a non-cash expense related to the accounting for stock options of $7 to $8 million pre tax, or $0.12 to $0.14 for fully diluted share.

Looking to slide 19, this summarizes the stock buyback activity. We bought back 1.3 million shares for a total of $82.7 million under the 140 million program authorized last July. We have 57 million of authority in place for additional buyback activities, which we will utilize in the market as appropriate. Now with that, I will turn it back to Jeff for closing comments before we take your questions.

Thanks, Martin. Before we open up for questions, just a few comments on the objectives for the remainder of ’06. In medical, we have made good progress in Q2. I am confident that the team is on the right track. And accordingly, we remain convinced that we can get margins back to the 20% level by the end of this year. We also have to work hard to deliver even more performance with greater consistency, one of the challenges that we have had in our medical group.

In the commercial segment, we’ve had a pretty good run of consistent financial performance, we have to keep the effort up here and make sure that it continues even if there are ups and downs due to certain end conditions in our market. And in Aerospace, we have been in the execution mode for four quarters, and as a result of the up-turn in our end markets with steady financial performance. We are working hard to keep this going. Shorter-term Q3 is always a tough one for us, the summer shutdown in automotive and some of the seasonal softness in medical. Our goal is to generate good results, nonetheless, and keep the business on track for our overall 2006 goal.

From a capital usage stand point, as Martin mentioned, we will continue to find prudent use of our shareholders’ capital, whether it be through additional acquisitions or our stock buyback program. With that, I will turn it back over to Julie.

Thank you. Operator, we will take questions in just a minute. But before we take questions, I would like to ask the participants to please limit questions to one and a follow-up, and then we will cycle around again. We will take questions now, thanks.

Thank you, Julie.

[OPERATOR INSTRUCTIONS].

Wendy Caplan from Wachovia Securities. You may proceed Wendy.

Thank you. Good morning.

Good morning.

Could you give us an update on where we are in terms of management on the medical segment and say something about the acquisition that you described in your last conference call that you did not complete. Are we far enough away from that to get a little more detail; and if not, what are we focused on in terms of acquisitions in medical?

Okay, I will first talk with your management question. We have begun a search and have been engaged in that for a short time period. I am very comfortable [John Sykler] has spent a lot of time out in the field as many of us have at a corporate level into the operating issues we have had. So I would say that our goal is to define the leader of our medical group, hopefully, within the next few months, but, again, I think we are going to make sure that we are prudent in finding the right individual, not being pressed by any timeline.

In regard to the acquisition, we do not comment on failed acquisitions as to either the segment or the reasons for it, and I think we prefer to keep with that process, but I think, Wendy, in terms of acquisitions, I think we are out there on all three segments. We have a pipeline that covers the range of our products. Some of these might be smaller than what we would like, but, again, at this point, that’s what available to us in the marketplace, so we are going to continue down that path.

Thanks. I will get back in the queue.

Deane Dray from Goldman Sachs. You may proceed, Deane.

Thank you. Good morning.

Good morning, Deane.

Just a follow-up on medical. Jeff, you talked a bit earlier about the exiting. Was that an exit run-rate for medical at 20%? Just want to make sure we are clear on that.

Yes, that’s an exit run-rate.

Okay, good. And then, how about an update on some of the quality measures within medical with regard to bill rates, there were items that were back ordered. Where does that stand today, and what are the expectations for improvement over the next couple of quarters?

The medical backlog was taken down some as part of their over-achievement vs. our expectations in the month of June, and with the progress that we are making, we see ourselves getting down to a normalized kind of backlog within the next three to four months kind of timeframe. So clearly, be back in a much more stable position as we go into the early parts of the fourth quarter.

How about the quality measure in terms of [bill] rates, I mean, you had some logistical issues earlier, have those at all been addressed?

They have. I would say we are not totally where we would like to be, Deane, but I know I have been into one of the distribution centers and seen some of the progress that they have made. Again, we have corporate resources really running in tandem with the medical group running the distribution centers, so I think while we have tried to deal with dealing with the backlog at the same time, we are really trying to make sure we have the right processes in place to ensure that we don’t run into this issue in the future.

I understand. And then, you talked about June being stronger in medical versus expectations or they came in the strongest month of the quarter. Could you give some color there, you know; was it new product contribution geographically, and so forth?

Well, I think it was the mix to be actually I think there was some new product contribution in there, but I think if I break it down, we did make a dent into the backlog, and I think a focused effort on the backlog really made a difference. And, again, John Sykler he knows the business, and I will openly say this, I think at some point, we had too many initiatives going on in medical, and I think at this point, John’s really brought a very focused approach towards “lets deal with our current business issues which is really backlog, getting the R&D pipeline, continuing to have that as well as pricing issues.”

Just to make sure I heard that correctly, was the June strength as a result of taking backlog down, or was there incremental demand?

I think there was both, Deane.

And did the incremental demand come from new products, or is that a split geographically?

It was pretty much across the board geographically and may be a tiny bit from new products, but mostly just core demand order rates being slightly ahead of our projections going into the month.

But I think, Deane, we saw the same thing last year where people are actually taking an inventory to build up for the summer, especially in Europe. That’s a typical trend that we all often see.

Ok, thank you.

Jim Lucas from Janney Montgomery Scott. You may proceed, Jim.

Thanks. Good morning.

Good morning.

Two quick housekeeping questions, Martin -- CapEx for the full year and tax rate in the second half? I am sorry if you have given those already, I missed them.

We said the CapEx should be about 3% of sales, so that will be around the $80 million level, plus or minus. The revised tax rate as we have corrected for this in our guidance is about just over 26.5%. Now, let me be careful. That effective tax rate is on our earnings before minority interest is deducted, to apply that rate correctly. So, just wanted to be sure we were clear there.

Okay, thanks on that clarification. And two bigger-picture issues. Could you give a little bit more color on the alternative fuel side in terms of what you are seeing from a growth standpoint and what kind of potential, both internally as well as any external opportunities, you might have there.

And then, with regards to commercial and aerospace margin, can you expand it a little bit, give a little bit more color on what’s happening, capping your Aerospace margins here in your near-term, as well as talk about commercial longer-term what you can do to leverage that top line growth that’s been in place but has been a weak margin picture for years now?

Yes, Jim, I have to comment on the [out fuel] since its still my baby. The business has truly evolved over the last few years from where Ford and GM were doing their own [out fuel] systems with ours. Today, effectively, I think the only large OEM manufacturer that we supply is Volvo. Other than that, we are finding strength in Europe due to the rising price of fuel in a lot of what I would refer to as the conservation kits. So, we are seeing that strength there.

We also are seeing strength here in the US, in the industrial side, where for last few years we have been trying to diversify the business away from the automotive towards the industrial, and I think we have seen some good progress there. So, we are optimistic, and I also believe that there are opportunities in the Asian market that we are starting to see, who are looking for both improved efficiencies as well as lower admissions. So from that standpoint, I feel good about it, which I can’t say I could comment on that for the last few years, so I’ll take it while I got it. I will let Martin talk on the margins.

The commercial margins -- we would expect to see some slight incremental gains from what you might refer to as an adjusted margin level there, Jim, when you take into account the inventory hit that hits us in the quarter. And so, we would expect to be exiting the year kind of in the 8% to 10% range.

Okay, and in terms of Aerospace?

In Aerospace, I would say that you should expect the balance of the year to be somewhat similar to the first half of the year with progression in performance, offset slightly by the mix characteristics that were in my prepared commentary.

And, I guess, following up on that is what steps are you taking with regards to the mix issue that you can potentially improve those margins going into next year?

Well, as always, we’re influenced by new programs, the special freights of program that impacts us here, it’s a newer program. There are two things we do. We have been working on our pricing characteristics aggressively as well as the fact that we get some substantial efficiencies as a new program goes through production over a series of months. And we’ve typically seen a very nice performance in driving down the cost of those systems; we’re seeing that trend begin, and that should start to see some further benefits into 2007.

We should also, Jim -- some of the restructuring which we announced in June is taking place in that Aerospace due to customers moving to different regions of the world, so we’re also taking capacity out in higher cost areas and putting it back into lower cost, so that should also help drive margin enhancement.

Okay, thank you.

[OPERATOR INSTRUCTIONS].

Follow-up question from Wendy Caplan from Wachovia Securities.

Thank you. Your cash flow comments -- expecting to hit your $300 million target for operating cash flow for the year. You’re at 132 for the six months. My math says you need to get to over 165 or so for the full year. How much of that is working capital gains relative to third quarter seasonal weakness, or there are other factors that we should be aware of?

It’s a mixture of improved second half performance vs. first half in terms of our income statement profile, and it’s also, then, a mixture of improved working capital, as we said. Our medical segment should in a position now [that it’s] through its facility moves. With improvements occurring in the distribution center to improve our mix working capital performance, as compared to the first half, the seasonal factors tend to give us a better view on cash flow -- working capital performance in the second half than it does in the first half, as you mentioned. So, it would be a contribution from both sides of the equation there to get close to that 300 million.

Okay. And could you remind us -- I am little confused -- your minority interest, the block of which is the GE business, can you outline for us how much that is of the total and what the other pieces are, please?

We’ve not said exactly what that is, and I don’t think that’s appropriate to pick out one single piece of business. It’s substantially most. The other pieces of the business are some joint ventures that we have in both our medical and commercial segments. In our commercial segment, we have a joint venture. In our marine business for activities in Asia, and we have some ventures, mostly in Europe, in our medical business. The contributions from those are relatively modest.

Thank you.

And, ladies and gentlemen, at this time, you have no further questions. So I will turn the call back over to management for closing comments.

Thank you. Again, the 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, or for international calls, 617-801-6888, pass code number 97169452. Thank you, and have a nice day.

Thank you, ladies and gentlemen, for your participation in today’s presentation. You may now disconnect and have a wonderful day.