泰利福醫療 (TFX) 2006 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the Quarter 3 2006 Teleflex Incorporated Earnings Conference Call. My name is Katrina, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. [OPERATOR INSTRUCTIONS]. As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today, Ms. Julie McDowell, Vice President of Corporate Communications. Please proceed.

Thank you, Katrina. Good morning everyone. Teleflex issued a news release last evening with our financial results for third quarter 2006. The release is available on the investor relations page of our corporate website. We have also posted accompanying slides for today's presentation. I would 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 website. 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 35748260. Jeff Black, Chairman and Chief Executive Officer of Teleflex; and Martin Headley Teleflex's Executive Vice President and Chief Financial Officer will outline the details of the information in the press release, and 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 of revenue, operating profit, margin rates, stock option expense, special charges, restructuring actions and related charges, segment performance and expected diluted earnings per share from operations before and after giving the effect of charges related to restructuring and 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 filings with the Securities and Exchange Commission and 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, thanks everyone for joining us today. Overall it was a very good quarter for Teleflex. Medical performance continued to strengthen with business and financial performance improving ahead of our plans. Commercial managed to keep pace despite weaker automotive and marine markets. And aerospace executed well capitalizing on strong market conditions. Top line growth and operating profit improved in all three segments and solid working capital management enabled us to drive another quarter of excellent operating cash flow. All of these figures highlighted on slide 5 were up considerably over last year's comps. Revenue up 9%, core growth was 6% with 3% from currency, EPS from continuing operations was up 6%, EPS from continuing operations excluding special charges and gain on sale of assets was up 10%, and cash flow from operations for the quarter was up 10% keeping us in line with our guidance of approximately $300 million for the year.

Before I start my commentary on core growth and market trends in medical I want to mention that earlier this week we announced that Ernest Waaser had joined us as President of Teleflex Medical. Ernest has successfully led medical device equipment and service businesses in multinational organizations. He has extensive experience leading and implementing processes to facilitate growth both internally and through acquisitions and he has a strong operational background. I was very impressed with the discipline that he brings to his work, his past accomplishments and more importantly the perspective he has on the potential for Teleflex Medical. John Sickler who has been serving in an interim role there will work with him through a short transition but we are all pleased to have Ernest on board and hard at work this week.

For the third quarter in medical we're pleased to see solid growth across the major business units. Core growth of 4% brings us back to the level we attained last year before we ran into restructuring and operational issues. Sales were up most significantly in Europe and in the OEM business fueled by sales of specialty products for diagnostics and therapeutic procedures. The new product contribution from fleet market products in North America and from the OEM business were encouraging as well.

In commercial, core growth was 3%. The very strong growth in products to reduce idling emissions and fuel costs offset a slight decline in automotive and positive but relatively flat growth in marine sales. As an example auxiliary power unit production for the heavy truck market is expected to increase by over 50% compared to 2005 rates. And we still see a pick-up for the products used in oil and gas drilling. Marine sales of new products and engine-related products balanced our softness in marine OEM and the aftermarket. The challenge in the automotive end market has been staying ahead of the production changes imposed by our customers and making adjustments in work schedules, hours and the supply chain. The management team here has done a good job of managing through new forecasts for many of our models, controlling costs, and responding quickly. The margin pressure has been tough but that's nothing new for the automotive business.

Aerospace overall had 13% core growth fueled by double-digit percentage growth in sales of cargo systems and solid increases in the other two businesses. In the third quarter we delivered twelve wide-body systems or conversions compared to seven in the prior year, and we continue to see good growth in the cargo aftermarket spares and repairs segment. Orders in our aerospace segment increased double digits, and we continue to have strong year-over-year growth in backlog. Overall aerospace market trends continue to be strong with industry reports are predicting an extended cycle that would be positive for this group. On balance we ended the fourth quarter with positive trends in many of our markets' operational plans to keep pace with the downturn in automotive but overall good momentum.

In summary, it was a good quarter for Teleflex with key metrics headed in the right direction, solid execution in all three business segments, continued strong cash flow, and a sound financial position at quarter end. As we finish out the year, our guidance remains unchanged from the second quarter, and we continue to expect to deliver cash flow from operations of approximately $300 million. We need to continue to execute as we did this quarter. In medical we need to deliver consistent results. In commercial we need to balance growth in industrial with challenging conditions in the automotive and marine markets. And in aerospace we need to capitalize on our current market opportunities and execute well on our operating initiatives.

With that, I'll turn it over to Martin and he can go through the financials in more detail. Martin.

Thank you very much, Jeff. Jeff gave you insights as to how revenues in the third quarter increased 9% from $587.4 million to $639.1 million with very healthy core growth of 6%. From a profitability perspective, income from continuing operations excluding special charges and gain on sale of assets was $38 million compared to $35.8 million in last year's third quarter, again an increase of 6%. Both medical and commercial segments increased their operating profits by over $5 million quarter-on-quarter and improved their operating margin rate by over 150 basis points.

Now looking to each of the segments, on slide ten where we turn first to the medical segment. Medical segment revenues increased 6% to $207.7 million during the quarter of which 4% was core growth and 2% due to currency. Jeff gave indication of product line and geographical impacts. We are pleased to see both a revenue increase over prior year and a normalization of the book-to-bill rate which returned to the seasonal levels we saw last year in the third quarter before any back order issues arose.

Operating profits improved sequentially slightly faster than we anticipated to $44.2 million or 21.3% of sales. The medical business has performed in line with our internal recovery plans and are somewhat ahead of our [comfort] expectations for the quarter. We made real progress from correcting operational issues related to the final elements of our restructuring and also from our distribution center consolidation. At this point we see no significant operating moves or consolidations that create risk of similar issues. All told, it was a great quarter for the medical segment, and we are happy to see margins back above the 20% target.

In Q3, we spent $2.2 million on expenses related to our information systems consolidation program in medical that commenced this year. This had an impact to margins of about 100 basis points. As a matter of comparison in the second quarter of 2006 expenses related to this program had 150 basis points impact on margins. Overall this year we have expensed $8.6 million on the information systems program which is in line with our projections earlier in the year of roughly $10 to $15 million of costs this year.

In slide 11, we look at the commercial segment where revenues were up 7% year-over-year with 3% core growth and 4% growth from currency. Operating profit was $14.8 million, up nicely from the $9.2 million last year. Positive drivers in commercial continue to be alternative fuel systems in Europe, auxiliary power units for heavy truck aftermarket retrofits in North America and heavy duty rigging and cable which continues to benefit from Gulf Coast repairs and revisions to rig anchoring requirements. These strong markets have resulted in market expansion in the commercial segment despite softness in automotive and marine.

Turning to slide 12, as we indicated in last quarter's conference call we expected two issues to significantly impact the aerospace segment in the second half of the year, first being the swing towards more cargo system new builds and the second being an insourcing initiative by a key repair customer. So, as expected, aerospace's strong 17% top-line growth was driven by increased installations of new wide-body cargo systems. Sale of cargo systems aftermarket parts, repair products and services and precision machined components also grew albeit to a lesser extent. These factors caused operating margins during the quarter to decrease slightly to 8.7%. With lower margin wide-body system installations increasing over last year, there was a slight mix impact on margins. The increasing installed base expands the potential for future cargo after-market spares and repairs business. This new build revenue is an important indicator of future higher margin spares and repairs business analogous to the razors that sell the blades. So it's a longer term benefit that will be realized well into the future. In addition, our aerospace segment announced this week that Telair systems had been selected by Airbus as the supplier furnished equipment or preferred supplier for the design manufacture and supply of cargo handling systems for the A330 and A340 aircraft -- another indication of Telair's strong market position in the cargo systems market.

Looking at slide 13, asset velocity saw a slight seasonal decline to 16.6% with the lower sales and a modest inventory increase ready for the fourth quarter. Consistent progress continued to be the hallmark of our aerospace segment with nice improvements again this quarter. The medical segment held about flat and commercial was most impacted by the seasonality and downturn in the automotive business. As indicated in previous calls, our long-term goal is to reach asset velocity below 15%.

Turning to slide 14 on cash flow, after a slow start for the year in the first quarter, cash flow has been strong and in the third quarter we delivered $81.3 million of operating cash flow. This brings us to $213.7 million year-to-date and in position to hit our goal for the year of operating cash flow approximating $300 million.

Our capital expenditures are expected to be a little lower than previously planned at just over $70 million and our depreciation and amortization expense should be around $100 million for the year.

Turning to slide 15, we want to highlight to you Teleflex's cash flow conversion track record. The data on slides 15 and 16 illustrate the magnitude of our current ability to generate cash. As depicted here, you can see in the third quarter of 2006 we generated $67 million of operating cash flow net of capital expenditures on adjusted operating income of $38 million, a conversion rate of 176%. This compares favorably to 2005's already strong conversion rate of 152%.

And turning to slide 16, we also show the year-to-date cash flow conversion. Through the first 9 months of 2006, we generated $170 million of operating cash flow net of capital expenditures on adjusted operating income of $108 million, an excellent cash flow conversion of 158%, comparing to the outstanding 183% in 2005. Our consistent execution with cash conversion rates above levels typical for industrial businesses is proof of our ability to manage cash returns with all facets of profitability, working capital management, and capital spending under close scrutiny.

Slide 17 shows that the balance sheet continues to be strong. Net debt is $342.9 million, up slightly on a sequential basis and net debt to total capital is steady at 22.7%. We're underleveraged, and we'll continue to make good incremental use of our capital either through an acquisition or stronger return of capital to shareholders. The completion of the stock buyback during the third quarter will further reduce fully diluted outstanding share count by approximately 1% in the fourth quarter as compared to the third quarter.

Looking at the outlook, as Jeff stated earlier, our guidance for the year shown on slide 18 remains unchanged. We're forecasting diluted earnings per share from continuing operations before restructuring and impairment charges, gain or loss on sale of assets and tax benefit of $3.75 to $3.90. Special charges forecast have been modified slightly and should be in the range of $0.35 to $0.45 per diluted share.

Our operating cash flow should approximate $300 million and included in our guidance is the impact of the 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.

And now with that I will turn you back to Jeff for closing comments.

Thanks, Martin. Again a good quarter for Teleflex. We are focused on finishing the year in line with our plans, executing well and building momentum going into '07. With much of the restructuring and divesture program we announced in 2004 behind us, we are turning again to growth and opportunities that we see to invest in new products, extend into new markets, and expand through acquisitions. In medical the favorable demographic trends, improving standards of care in international markets and new product development efforts can deliver growth for the foreseeable future. In addition, the medical segment continues to hold significant potential for alliances and acquisitions.

In the commercial segment, our investment in our fuels technology is paying dividends and our new APU products are hitting the market with the right timing, the right price point and the right technology. We are evaluating a number of additional industries beside trucking where these units can be deployed, and we are excited about the growth prospects. New products can and will be a significant part of our growth in marine and industrial as we continue to invest in this marketplace. And in aerospace we are well positioned with the right customers and partners to take advantage of the extended cycle in this market.

Our balance sheet continues to be strong and with the luxury of a solid balance sheet and potent cash flow generation, we have multiple options for deployment of capital. We have the wherewithal and debt capacity to make significant acquisitions and/or we can opt to increase dividends or find other means of returning capital to our shareholders.

With that I will turn it back to Julie.

Thank you. Before we take questions, operator, I would like to ask participants to please limit questions to one and then a follow up and we'll cycle around again. I appreciate your consideration and we'll take your questions.

[OPERATOR INSTRUCTIONS]. Your first question will come from the line of Deane Dray representing Goldman Sachs. Please proceed.

Thank you. Good morning.

Good morning.

Good morning.

Question on the medical margins, I just want to make sure was there any impact from the reduced IT spending? It looked as though that came in late in the quarter and then so does that mean that we are going see higher IT spending in next quarter? And then also for the year I thought that you were tracking something closer to 12 to 15% for the year and it sounds like you are just below that -- you've got the 10 to 15 and is any of that being capitalized now?

Yes the spending that we made reference to, the 10 to 15 million is the expense portion of the project that we anticipated for the year and we are tracking to be in towards the lower end of that range in all probability. The impact if you go Q2 to Q3 from the amount that was expensed as opposed to capitalized was an impact of 50 basis points. I think as we indicated the impact on expensing would have its greatest impact in Q1 and Q2. So this will not be a trend that will reverse on itself, this would be something going forward that we would expect this lower rate of impact until we see the project finished.

And the timing for the finish is year end?

No, it will extend into next year. The current plan is for the largest portion of the medical group to go live early in the third quarter of next year.

I understand. And then where would we see that software being capitalized on the balance sheet, is that show up in that increase in your prepaid expense account?

It does at this time because of it being construction in progress yes.

And is that just -- is that a change in accounting treatment for you or was that the plan the whole time to capitalize?

No it's not a change, no.

Okay, good. And then if I look at business the business mix for the quarter in medical. You cited some of this coming from the disposables and special, and my understanding is some of the disposable equipment comes at lower margin. So I wouldn't expect to see as big operating income increase from that, is that the right way to think about the business mix this quarter?

No the mix was not much impacted during the course of the quarter. Most of them -- the margin expansion if you look at sequentially with a 420 point basis expansion in the medical segment, 150 points of that came from gross profits expansion and that's from all the various things that we've talked about in the past that we've recovered from completing the closures of the various manufacturing facilities, completing line moves to low-cost environments, resolving the demand planning and logistics planning impacts that impacted our distribution center and various other operating inefficiencies that were related to bringing online capacity at specialty products. We have then the 50 basis points that were related to the IT system and the balance comes from our SG&A spending, and again you get the benefit from not being in the whole sets of facilities and resolving other issues as we went along and as laid out in the past. So the mix was not anywhere near as significant as these other factors.

I think Deane just to touch on that, I think we said both after the first and the second quarters, we knew what our issues were. I think, really under the leadership of John Sickler and the medical team, they are really focused on resolving a lot of these issues, getting back, filling out customers orders and I think again while we see some core growth in the quarter, it takes a while to regain the confidence of your customer. So I guess I'm more optimistic going forward but I would also say that I think we were quite open with what our issues were, and quite frankly they have been closed out for the most part and that's why we refer to this as a recovery, because we've been to 20% margins on two occasions in '05.

That's right. Just to finish up here, could you comment on the medical backlog and what was the contribution for the new products. You cited some of the new [suite] products, do you have a sense of what they contributed in the quarter?

It was relatively modest. It was a contributory factor, it wasn't a significant driving factor there. In terms of the backlog situation I would put it back to a normalized level at this juncture.

Which is about what Martin in terms of weeks?

No, it varies, it's days in terms of most of the consumable products.

Okay, but there is not -- there is no back order problem --?

There are no back order problems.

Terrific. Thank you.

your next question will come from the Wendy Caplan representing Wachovia Securities. Please proceed.

Hello.

Hello.

Hello.

Hi, good morning. Quick question on the new management in medical. Could you talk about how -- Mr. Waaser's experience in terms of acquisitions and also notice that your -- the financial person left the division as well recently and wondered whether there had been a replacement yet on that?

No, there has not been a replacement on that one and I'll talk a little about Ernest, I think you know Wendy if we go back and look at where we have been with the medical organization, I think the one thing that I found as I was out doing a very extensive search was what we needed was we needed a proven leader, we needed someone who has the international experience. Ernest has been involved in several acquisitions and has successfully integrated and we truly see that as the key to our future. The real strength that he also brings is he has a very strong -- he came up through the DuPont organization in R&D and I will tell you one of the strengths is both in terms of R&D process and pipeline and getting those out into the market place which we have made investments for the last 12 to 18 months. So we anticipate that that's an area that Ernest can add some value as well. The other that -- I am not sure we have publicized in our press releases, Ernest has been involved in several SAP implementations, which again is critical for our organization going forward. So I am thrilled to have him on board. I think he fits in both from a culture standpoint, but I think at this point John did a great job of transitioning the organization and getting it ready and one of the reasons why we did not replace the CFO was really because a new guy is going to come in, we want to give him the opportunity to put some of his own team in place.

And was there any reason that you can discuss that the CFO left other than a different opportunity?

It was completely a different opportunity, the third instance where in a very tight market for good financial people I have had people leave to become public company CFOs which is obviously a challenge they want to take up.

Okay, thanks, Martin. And the auto business, do you -- are you sensing since the end of the quarter any kind of stability in production, is it same, is it a little different, could you describe that please?

Stability and automotive I think are oxymorons right now. I think what we see and we track now on a weekly basis is all the major platforms versus what we forecast is versus what they are and I think again as long as you can manage some of those major platforms you can pretty much have your hands around the business. I think right now our attitude is we have just got to continue to manage as our customers regain and put forth their strategy going forward. I think the one thing is, everyone reads in the paper on a daily basis the inventory that is out there. So, I think, one of the reasons for our optimism as we look out is, it's really a wild card. We are not sure where the automotive industry is going to go in the fourth quarter, but again, we are in constant communication with all of our customers trying to ascertain both information so that we can manage our business accordingly.

Can you remind us how much of the customer base is Big Three, please?

Roughly, out of the automotive business just over half of the customer base is Big Three, that's just not North American customer base, that's global and a good portion of that is in Europe.

Thanks Martin, and one more question on aerospace mix. As you become the preferred supplier or have become the preferred supplier for Airbus and the customer insourcing [assume] continues, do we -- should we assume that the negative mix shift is with us for a while and what is that mix at this point in time versus year ago in terms of aftermarket versus OEM?

The mix is continued just by the volume of new systems that we're shipping at the moment. I don't know that we can say exactly how the Airbus announcement is really going to impact us at this juncture. I would say that it would be -- within the cargo business, the mix that we saw in this quarter is probably something more typical that we should see in the near-term upcoming quarter. We're going through an in-depth dive of this during the course of our planning process over the next few weeks, and we'll be able to give you a much better and clearer picture of that at the next time we have a call.

And again, on the in-sourcing, this is really one customer that we've been aware of the situation now for probably two quarters that it was going to happen. So, it really wasn't a surprise to us. It's really the timing of them actually being able to execute on this.

And do you have a sense whether this is -- industry trend, or whether it's just customer specific?

I think Wendy, it's funny. I mean we supply the OEM businesses in a lot of our markets. It's -- as the aerospace market goes up, I think a lot of these companies, and I refer to these as the bigger companies are looking at saying, some of these things we'd like to bring in-house, and I think with the extended cycle, I think they're probably saying we can get a longer run out of that investment internally. But I don't think that we see this as a trend. Again, what we do, we are very specific in our niche, and we don't see a lot of people saying, yeah, we want to bring that in-house, because quite frankly I think in our repair business, I think we are state-of-the-art there.

Okay. And then, one more, just to clarify the current mix of OEM versus aftermarket on the cargo side, are we giving that up?

No, we have a little bit of mix data, so it would be misleading to give you the way I've currently got it split.

Okay. Thanks very much.

Your next question comes from Jim Lucas representing Janney Montgomery Scott. Please proceed.

Good morning folks.

Good morning Jim.

Good morning Jim.

Martin, on the share count, could you go back and give us a little more clarity on what you're looking at in your guidance for the fourth quarter and full year now that the share repurchase is complete?

I said -- you know, as I said in my prepared remarks, Jim, that the fully diluted share counts should be approximately 1% lower than the 39566 that we had in as the third quarter diluted share account.

Okay, just wanted to verify that number. Thank you. And I think we've thoroughly covered the aerospace structures commercial. Two unrelated questions on medical, one could you walk us through the pretty dramatic improvement in a relatively short time, was this just really fundamental blocking and tackling that the wrong management team was in there before and you were able to get the margins recovered that quickly? And secondly as we look at the overall mix of the portfolio today how many stable quarters do you need to see at medical before you divert the new management's attention to acquisitions?

Okay. I'll deal on the first one. I don't think this -- I would not make the comment that it's in indication of the past management. I think as I've said in the past is we did a lot in that group whether it was shutting facilities, relocating facilities. We had new management. So I think a lot of it was again -- I'll throw myself on my own sword, I think we tried to do too much too quickly but we knew what the issues were and I think to the medical management's credit, they have all stepped up and really helped continue to deal with some of those issues. So I think everyone -- I would sit there and like many of you when you see going from 14% operating margins and going up to 20, I think our goal is still Jim is to be in the 20 plus. I think again what we are looking for is the same thing our investors are -- is the consistency. I think with the structure and changes that John Sickler put into place I feel very confidant that we can continue to execute at that level. And now I think the issue is getting back to growth. So while a lot of it was blocking and tackling you don't get to just do one thing in life. You've got to do blocking and tackling and you've got to grow and that's really what we task our management with.

So I don't want to leave the impression that we haven't been looking at growth opportunities in the medical industry. I will tell you that you've got to have stability before you start putting more on their plate. So I think Ernest is going through his honeymoon, and again I'm sure he will be back with his assessment and at the same time we are still working on growth in that segment.

So to the second question I had in terms of seeing that stability, granted no one would think that you've taken your eye off of growth because the pipeline you are keeping that filled, there is a lot of opportunities there but at what point does a management go from -- alright we've got all the issues resolved here to okay we need to start growing again and use your line not trying to do too much, too quick?

Well, I think we've been there. To be honest with you, I think we've got to get back to the growth side. I think fulfilling our customers' expectations gets you back into the good graces where you can depend upon your core business. But I think we realize that we have to have -- we've got a great distribution channel in Europe so putting more products through there and looking at procedures, where are the procedures going to go, medical procedures going to go in the future. We want to make sure that we are a part of that. So Martin, do you want to --?

I think we see that we are very close to a position and it would depend upon the nature of the acquisition and what was entailed towards integrating that into the medical segment. So we are placing that very much front and foremost in our consideration of pipeline issues as well, Jim. So for the right acquisition we are pretty much ready. For something that lot -- needs a huge amount of heavy listing, there might be a little bit of a pause.

Okay thank you.

[OPERATOR INSTRUCTIONS]. Your next question comes from the line of Dan Rutter representing WHV please proceed.

Hi nice performance this quarter gentlemen. Would you do two things. One is I'd like to get a breakdown of the D&A in the quarter if possible and the second part is can you talk a little bit about the visibility or longevity of continued revenue growth in alternative fuels in Europe and other issues in that commercial sector that can offset the weakness in auto and marine.

Yeah, Dan, I will touch on the second. It was just a few years ago where our alt fuels business was really struggling, yet we continued to make commitments to the industry. In Europe I think a few years ago we did two acquisitions in Europe and quite frankly with their fuel prices and the government support, I think those markets continue to grow. I will tell you I think the bigger markets are in the Asian communities. You could either go to China, you could go to India. So I think those are growth areas for us. Again, having proven technology that we've supplied to the car manufacturers whether that be Ford, GM or Volvo, I think really gives us a competitive advantage in proven technology as we go into some of these emerging markets. But one of the areas that we believe that we add a lot of value is both in the area of reducing fuel consumption whether that be in the alt fuels, whether that be in the marine business or whether it be in our auxiliary power. So for us you're not just driving lower fuel but you're also reducing emissions and I think that continues to be a trend in many parts of the world that that's as important as the reduced fuel consumption. So I think again, the technology we bring and our reputation should give us continued growth opportunities in those segments.

Dan, were you looking at the split between D and A or --?

Yes, thanks, Martin.

In the quarter depreciation was $21.3 million and amortization was $4.7 million.

Okay. Thank you very much.

Thank you.

There are no further questions at this time. I would now like to turn the presentation back over to Julie McDowell for closing remarks.

Thank you. A replay of the call will be available on the Teleflex website or by phone. For those of you who may have joined late or would like to review I'll give you the numbers. The replay number is 888-286-8010 or for international calls 617-801-6888, pass code number 35748260. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Please have a good day.