泰利福醫療 (TFX) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2006 Teleflex Incorporated earnings conference call. (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's call, Ms. Julie McDowell, Vice President of Corporate Communications.

Thank you. Good morning, everyone. Teleflex issued a news release last evening with our financial results for the fourth quarter and full year 2006. The release is available on the investor relations page of our corporate Web site at Teleflex.com. We've also posted accompanying slides for today's presentation.

I'd like to remind you that today's call is being Webcast in a listen-only mode, and in addition, a replay Webcast will be archived and available for you on our Web site. An audio replay will also be available by dialing the following phone number, 888-286-8010; for international calls, the number is 617-801-6888, and passcode number is 98533145.

Jeff Black, Chairman and Chief Executive Officer of Teleflex, and Martin Headley, Teleflex Executive Vice President and Chief Financial Officer, will outline the details of the information in the press release. After formal comments, as usual, Jeff and Martin will take your questions.

But 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 markets that we serve, and economic assumptions, expected volumes and the like. Comments will certainly contain forward-looking statements relating to business (indiscernible) performance outlook for 2007, forecasted revenue, operating profit margin rates, restructuring charges and cash flow from operations, and expected diluted earnings per share from operations before and after giving the effect of special charges. 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'll turn it over to Jeff.

Thanks, Julie. Good morning, everyone. Overall, 2006 was an excellent year for Teleflex. As slide 5 indicates, we set an all-time company record for revenues, cash flow from operations and asset velocity. We exited the year with our balance sheet in fine shape. We once again increased our dividend from the low double-digits. And we completed a $140 million stock buyback.

All across the Company our business units are realizing efficiencies and cost savings created by our restructuring efforts. We're launching new products, penetrating new markets, and leading to solid core growth and future opportunities. In short, we're delivering record financial results in the near-term, while at the same time positioning the Company for record growth in the future.

Our momentum was evident in the fourth quarter, which was arguably the strongest quarter in the Company's history. Our results in the quarter were driven by our Aerospace and Medical segments, which posted very healthy numbers for revenue growth, core growth, profit and margin increases.

The Medical segment grew the topline by 11%, which included 8% core growth. They increased operating profits by 42% year-over-year, and once again topped its 20% margin goal, with 21.7 operating margins during the quarter.

In Aerospace, revenues were up 4%, 3% from core, profits were up 16% and margins hit 10.8%. This exceeds our goal of 10% margins in Aerospace for the first time in recent history.

Cash flow from operations for the quarter was over $130 million, up 47% year-over-year. (indiscernible) performance balanced out mixed results in the Commercial segment. We still saw good growth. Revenues were up 6%, core growth was 5, but operating profits were down 16% and margins decreased to 5.7%. In short, strong performance by our Power Systems and Industrial businesses balanced out tough automotive market conditions, where customer price reductions and push-outs have created margin pressure.

One of the elements that can get lost in our growth story here at Teleflex is the R&D and new product development efforts that are taking place every day. New product launches contributed in a meaningful way to the strong core growth we are seeing across the business.

In Medical, this includes Humid-Flo, Comfort Flo, respiratory products for ventilation care, hybrid sleep therapy masks, airway management products, urology devices, and the [Mini Sahara] portable chest drainage system.

In Commercial, we added a new generation of APU for trucks and a range of new marine and industrial electronic controls, just to name a few examples, but consistent with our overall strategy to grow organically within our markets.

When we gave our outlook for 2006, we set certain goals that we hoped to accomplish. We did not make our EPS original target, and it was disappointing. That said, we did accomplish many of the goals we set.

We set a goal to deliver record cash flow from operations for the second consecutive year. Our $344 million of cash from operations is an all-time record for Teleflex. We wanted to maintain our strong balance sheet. We exit 2006 with 18.5% net debt to total cap, the lowest level in recent memory.

We wanted to continue our track record of strong core growth, and in 2006 we delivered 5% core growth despite a couple of our end markets being considerably weaker than anticipated.

With the 2004 restructuring program coming to completion, we wanted to expand operating margins. In 2006 we posted a 50 basis point increase in operating margins. We could have done better here. But keep in mind that the medical segment IT consolidation costs had a negative impact, as did the operating issues in medical we experienced during the first half.

Looking back on the year, we made significant progress. Our goals for 2007 remain much the same, we're expecting another year of over 300 million in operating cash flow, which, if achieved, will give us nearly $1 billion of operating cash flow over the past three years. We expect to maintain our strong balance sheet and we have the capacity to maintain it, even if we make a significant acquisition. Our goal is to maintain healthy core growth and margin improvement in '07.

Our new product development efforts and international initiatives are creating opportunities for future growth, while our corporate development team is at the same time exploring acquisition opportunities.

Turning to 2007, I'd like to give you some perspective on how we see the end markets in our three business segments. We see good growth continuing in the Aerospace segment. We're exiting 2006 with a strong backlog in cargo systems and precision machine components, a growing installed base of wide-body cargo systems that should drive spares and repairs business in the future, and, obviously, great industry growth trends.

This is tempered somewhat by a full year's impact of a customer in sourcing initiative in the repairs business that slowed Aerospace segment growth and comps in the back half of 2006.

The positive trends are expected to continue in the Medical segment. Here, new product launches and growth initiatives in Asia are expected to be the big growth drivers in 2007. But industry trends overall are favorable, and our Medical segment is better positioned for growth in the long-term.

In Commercial, we see a flattish year in 2007. We will still see robust trends in Power Systems and Industrial, but 2007 will be a tough comp in the Automotive market.

This is somewhat of a transition year for us. Since the divestiture of pedals, we've had a nice run of contract wins for cables and shifters on platforms rolling out in 2008 and 2009. We don't have the same level of new platform launches in 2007, and, obviously, we have been more selective in the new business book in Automotive. This, obviously, limits revenue opportunity in Automotive in 2007.

In Marine, the market is expected be somewhat soft, but we've been holding our own on revenues with a steady stream of new product introductions, and we expect this to continue in '07.

Overall, we expect good earnings growth in 2007. We expect earnings per share from continuing operations, excluding restructuring charges, to be $4.15 to $4.35 per share, or an increase of between 9 and 14%; nice, healthy growth numbers that are enabled by the efforts of the past 24 months.

With that, I'll turn the call over to Martin to review the financials.

Thank you very much, Jeff, and a very good morning, everybody. Turning to slide 11, let me reiterate, 2006 was a very good year for Teleflex. Revenues were very strong, up 5% to 2.6 billion, with 5% core growth for the year. Revenue growth was very strong in our Cargo Systems, Power Systems and Heavy Lift businesses. In Medical, we had a nice contribution in North America from respiratory care and sleep products launched in the second half of the year.

Income from continuing operations before special items increased 2%, from 149.3 million to 152.5 million, which translated into EPS of 3.65 and 3.81 per diluted share, respectively. Keep in mind that 2006 earnings includes the option expense, whilst 2005 does not. On an apples-to-apples basis, EPS would have increased from $3.57 per share to $3.81 per share, or 7% if both of the periods included accounting for stock option expense.

In addition, more of our revenue growth did not flow to the bottom-line because of a handful of factors. Thus, we paid a heavy price for the oft-discussed missteps in our medical segment consolidation that began in last year's fourth quarter and were resolved in the second quarter of 2006. I don't need to rehash the situation, but suffice to say that we've been back to our 20% margin target in the two quarters since they were resolved.

Second, we expensed 10.5 million of costs related to the Medical segment IT consolidation project that was kicked off early in 2006. Just over 6.4 million of that impacted the first half of 2006.

Thirdly, we've talked at length about the auto business being a tough environment in 2006, with customer price reductions negatively impacting operating margins.

Turning to slide 12 and the fourth quarter, the results in the fourth quarter created good momentum going into the new year. Revenues were up 7%, from 646.6 million to 692.8 million. We generated positive core growth in all three business segments, with Medical and Aerospace delivering record revenues and operating profits in the quarter. Operating profit overall increased 10%, from 40.1 million to 44.1 million, or $1.12 per share.

We saw good margin expansion during the quarter, with double-digit operating margin percentage increases in Aerospace and Medical, partially offset by margin pressure in Commercial. Tax expense and interest expense were about in line with our expectations. Again, on a comparable basis, EPS would have increased roughly 17% if both of the periods included stock option expense.

Turning to slide 13 and the results of our Commercial segment, Commercial segment revenues increased 6% to 318.8 million in the fourth quarter, from 301 million last year. Core growth was 5%, with currency contributing another 1%. Excluding our auto business, core growth for the rest of the segment was 11%. For the year, revenues increased 5%, to 1.25 billion from just under 1.2 billion last year. Core growth for the year was 5%, with no noticeable impact from other factors, i.e. acquisitions, divestitures or currency fluctuations.

We previously pointed out some of the challenges in the automotive business in the second half of the year. [Hence], operating profits in the commercial segment decreased to 18.3 million in the quarter from 21.8 million in the same quarter last year. For the full year, operating profits decreased to 78.4 million from 81.1 million in 2005. Operating margins decreased 150 basis points in the quarter and 50 basis points during the year.

On the positive side of the ledger, I mentioned the strong revenue growth in the Power Systems and Heavy Lift businesses, and also, our other Industrial businesses made headway. We were also able to manage relatively well through a weak Marine market with new product introductions. These were offset by customer price give-backs and push-outs of orders by automotive customers.

Other factors impacting Commercial segment operating results were the flow-through of a differing mix. (indiscernible) impacted at the operating profit line by commodity price increases for zinc and copper, primarily impacting Marine. Also, we took 2.1 million in charges for inventory on hand in excess of projected aftermarket requirements and accelerated fixed asset [depreciation]. Both related to some end-of-life automotive programs.

Looking at the Medical segment on slide 14, we generated 230 million of revenues in the fourth quarter, up 11% from 206.7 million in the comparable prior-year quarter. Operating profits were 49.9 million, or 21.7%, a 42% increase from the fourth quarter of 2005.

In the fourth quarter, revenue growth was largely propelled by growth from new product introductions -- in particular, respiratory care and sleep therapy products and certain medical devices.

For the year, revenues increased 3%, to $858.7 million from $831.1 million last year, with no impact from currency. Full-year operating profits increased 8%, to 161.7 million from 150 million last year, on the strength of a relatively fumble-free second half of the year, with the segment enjoying the full benefits of restructuring actions. These benefits flowed through as improvements to gross margins.

Our full-year operating margin increased 80 basis points to 18.8%. As noted on the slide, second-half operating margins were 21.5%. We clearly have a very nice run rate of operating margins and [a loss] of momentum in this business as we head into 2007. Our margins will be slightly tempered by costs related to our systems conversion project during the first half of 2007, but should continue above the 20% [bogey].

Slide 15 presents our Aerospace segment results. The Aerospace segment had a great year in 2006. Revenues were up 4% in the fourth quarter to 144 million, and up 9% for the year to 537.2 million. Core growth was 3% for the fourth quarter and a healthy 8% for the year.

We saw continued strong demand in the cargo systems market and the containers market, which sustained revenue growth in both the fourth quarter and the year.

In the repairs business, second-half growth was stunted a bit as we finally saw the impact of a customer in-sourcing initiative take effect. Our precision machine components growth was held back somewhat by lower military demand throughout the year.

All told, entering 2007, the backlog for the Aerospace segment was about 4% higher than at the start of 2006. We expect in-sourcing to have a bigger impact in 2006. As the initiatives [slip] for two quarters, the first half will accordingly have tougher comparisons.

Operating margins for the Aerospace segment were 10.8% for the quarter and 9.4% for the year. We've worked hard to drive these northward in '06 with consolidation of capacity and production improvement programs. We benefited in the quarter as compared to our expectations from improvements in the mix of our wide-body cargo business, favoring (indiscernible), and favorable mix yields and pricing on metals recovery in our precision machine parts business. We think that we achieved approximately the margin run rate in Q4 that we can expect for the foreseeable future from these businesses.

Slide 16 shows the remarkable improvements in asset velocity. At 13.7% at December 2006, it was well below our medium-term target. The pace of our improvements in reducing receivables was ahead of expectations for the fourth quarter.

We finished the year at 53 days sales outstanding, and this without any further utilization of the securitization facility. We have reached this goal earlier than expected, and would expect our improvements to be incremental going forward.

Our cash flow performance is summarized on slide 17. Cash flow was exceptionally strong in 2006, with operating cash flow of 130.2 million in Q4 and 343.9 million for the year. Management throughout the organization really stepped up to the plate to generate cash from working capital. We even exceeded last year's annual record for cash flow from operations. This was a great job by all involved.

Slide 18 shows what this cash flow performance represents as a conversion of adjusted operating income. [To put] this into perspective, the ratio of converting income to cash was 248% in the fourth quarter. This is an eye-popping number, and, I suggest, one that would match against almost any other company in your investment portfolio.

Slide 19 presents that full-year cash conversion. For the full year, cash conversion was 184% -- clearly, first-quartile performance. This compares favorably to 170% last year.

Slide 20 demonstrates our strong balance sheet for future growth. Our strong cash flow drove debt levels to multiyear lows. At year end, our net debt to capitalization dropped to 18.5%. Clearly, we have significant debt capacity, and are working diligently to utilize this capacity in the future.

Looking forward to 2007 on slide 21, our outlook for the year is adjusted earnings per share of 4.15 to 4.35, which represents a healthy increase of between 9% and 14% over the 2006 results. We expect special charges to be between $0.11 and $0.16 per diluted share for the full year. The net of these two numbers yields an EPS forecast on a GAAP basis of between 3.99 and 4.24. We are once again forecasting operating cash flow in excess of 300 million, with similar cash flow patterns to what we saw in 2006.

Slide 22 shows our assumptions in building our forecast. From a macro standpoint, we're expecting stable economic conditions, we see modest weakening of the dollar, and we are not projecting any Fed actions one way or another in 2007. Overall, we expect mid single-digit core growth, with Aerospace and Medical providing good growth that will offset a flat Commercial segment.

With a full year of restructuring actions under our belt, we believe that the consolidated gross margins will achieve 30% for the year. We're modeling our effective tax rate to between 28% and 29%, and expect approximately $75 million to $80 million of capital expenditures and approximately 100 million of depreciation and amortization expense. Interest expense is expected to be lower in 2007, due to our continued repayments of debt.

I will now turn the call back to Jeff Black for closing comments before our Q&A session.

Thanks, Martin. While 2006 was a roller coaster ride, it turned out to be a very successful year for Teleflex. We accomplished a great deal. We posted solid core growth and grew our operating margins. Our Medical businesses now represent over 30% of our revenues and almost 60% of our operating profits.

We have a nice portfolio of growing niche businesses -- Cargo, Power Systems, Marine, Heavy Lift, Aerospace Repairs -- and we've established businesses with strong cash flow generation capability. We've also made improvements in our working capital management, and the cash flow generated by these initiatives enabled us to end the year with our balance sheet in great shape.

Our growth strategy is threefold. Acquisitions have always been a major part of the Teleflex growth story, and will continue to do so. But, we're also committed to core growth and the opportunity to grow our existing portfolio of businesses.

Our international opportunity is vast, and have a nice global footprint. In particular, we're working to capitalize on this in growing markets like China and India, and in newer markets for our products, like Japan and Latin America. This will be a more important component of our growth strategy in 2007 and beyond.

Even though the acquisition market was competitive in 2006, we have the capital, debt capacity, cash flow and will to make significant acquisitions, and we continue to work hard to find the right opportunities. While there were no big splash acquisitions in 2006, we did make two smaller deals that will add value and fit nicely and strategically. And our corporate development team is exploring a number of interesting opportunities, some larger, some smaller. With that, I'll turn it back over to Julie.

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

(OPERATOR INSTRUCTIONS). Jim Lucas, Janney Montgomery.

Martin, first question. Corporate expense in the fourth quarter looked to have a nice jump. Could you talk about what is going in that, what contributed to that, and what kind of run rate to expect going forward?

The principal reasons behind that increase on a run rate basis were increases in professional fees as we addressed some tax projects that had to be addressed during the fourth quarter. We also are recognizing on a year-over-year basis the full impact of the options expense that we previously didn't have in the income statement. And we also, by virtue of our favorable relative stock performance, had to make a fairly significant accrual under our long-term incentive program during the quarter. I would say, on a run rate basis, the fourth quarter of this year was slightly on the high side compared to what you should expect going forward.

Jeff, bigger picture. If we look at both Medical and Aerospace, Medical in particular -- dramatic turnaround. One quarter is a data point, two quarters is a coincidence, three quarters is a trend, so we're getting close to having an actual trend line here. You've got new leadership in place. With the new leadership, has the vision changed? Or can you talk about how the overall Medical group is coming together? And then, within Aerospace, very positive surprise, at least to me, on the margin front. Can you talk about the margin outlook for Aerospace going forward?

I'll start on the Medical. One, the vision has not changed. We're still committed to the three segments which we have today, which is the OEM business, which, again -- where we provide our engineering value to many of those large device customers; the medical side itself, which is really our respiratory and disposable piece. There's still a very solid platform to build off of; and our surgical piece -- we're now looking for opportunities to grow that as well.

So I would say the vision hasn't changed. Will it become more refined? I would think it would, as it does under any new leadership. Ernest Waaser has come in and hit the ground running. I believe he's racked up more air miles than anyone I know. But again, I think what he wanted to do was go out and ensure that we had a solid foundation from which we could start to grow on, both organically and through acquisitions.

So, no; we're still very committed to that marketplace. We believe there are some opportunities to grow through acquisition there. But, no; our vision is to continue to try to build upon that foundation. But I would take some difference as to the credibility of the management of what we've gotten in terms of improved margins there. I think we've done even beyond what we had committed to the Street as being around 21-plus% for the last two quarters. People have said we're managing costs; well, that's part of the business. But I will tell you, the investments we've made back in Medical, with our IT infrastructure and the R&D, is critical to getting the organic growth rates up where they were for this quarter.

So I'm actually pretty comfortable. The management team is responding. We've got a solid team. We have had a fair amount of turnover in that team, but, I think, we feel good that we're ready to take that organization to the next level.

In regard to the Aerospace margins, it wasn't long ago when I had no margins. So, to be honest with you, we get to the 10% in the quarter, and we're not satisfied. We believe there is margin expansion opportunity. We've got the right leadership. We've got a nice portfolio there. But as Martin identified, some of our customers are in-sourcing as they see this -- the trajectory of the markets. And that creates challenges for us, both on a revenue standpoint in the repairs business, and on the profit standpoint. But I think our cargo business, again, is something we've been building now for 16 years, and we feel pretty positive about it. So I think the Aerospace margins, I think at one point we had gotten up to 13%. And I've got to tell you, I think it was before my time, but I believe that we can continue to drive north of what we've done in the fourth quarter.

With the joint venture within Aerospace, does that -- does the accounting treatment have any impact on the reported margins for Aerospace?

I will tell you from my perspective it does, because we have to account for -- I'll let Martin deal with it. How's that?

We basically -- in the numbers that we provide you here, it shows you after the minority interest deduction. So, it does show you less than the full potential of the margin of the business. So if you were to add that back, the margin rates of the business will be substantially better. The revenues, basically, are [in at] 100%, the profit's in (indiscernible) just over 50%.

Deane Dray, Goldman Sachs.

A question on the Medical business. Wasn't there some additional days, maybe even an additional week, this quarter? And how much do you think that boosted the topline and the returns for this segment this quarter?

The volume billing day impact, we believe, was something about $5 million. So it had a small impact, relative modest impact on the Medical business.

And for the first quarter, will there be any difference in days?

No. It's a regular 90-day or 91-day quarter, Deane.

Thanks, Martin. And then, for the Medical IT spending, I know you discussed this before, and the previous range had been 10 to 15 million; looks like you came in towards the lower end of that range. Did that get deferred and up being -- not costing you as much, or will we see that in the first quarter?

It's deferred into the first half of 2007. So, we deferred some of our timing on certain activities that had previously been anticipated to be 2007 activities. And as you can kind of guess from the range and the number we've given to the actual about the amount of that impact.

And then, on the cash side, you've done some terrific work on the working capital management, absolutely. What was going on specifically on the working capital side? It looks like Accounts Receivable saw a big decrease. Was there anything unique going on in the quarter there, or was it just good collections?

Just good collections and a lot of diligence around pretty much the whole organization. I think the message has really caught on, and people are understanding how they need to manage their receivables. Our next challenge for the organization is to attack inventory with the same gusto. And of course, that's always an increased challenge, because it involves the smooth interaction of the whole organization to achieve that.

Martin, what kind of goal can you talk about in terms of potential cash that you'll generate out of better inventory management in '07?

I think it's more in the longer-term. I think we've indicated that in terms of our asset velocity, we think making incremental progress is the realistic expectation, given that we've got there sooner on our where we've got to on our Accounts Receivable performance.

I think, if I look back, in the first quarter we only generated 39 million in cash flow from operations. And, I think, for the management team, with all of the other moving parts going on in the organization, it was somewhat difficult to get our hands around. I think you saw improvement. To come out of the 130 million in the fourth quarter -- again, I think some of that is making up through now having a stable manufacturing and getting our people in the right place.

So, I agree with Martin. We've made incremental improvement. And receivables is typically the first place you're going to go to. From the IT standpoint of getting our systems and, getting the right information, I think there's opportunity there. But again, a lot of this is going to depend on some of the medical transition to the IT platform in the middle of the year.

And while we're on the cash topic, I know it was a minor factor here, but it looks like you came in on the lower end on CapEx for the year. Is that -- is there projects that were deferred, and what's the CapEx outlook for '07?

I don't think there were any noticeable products that were deferred. We always adjust our plans as we go through the year and see how we're adjusting to the underlying business conditions of the different pieces of our business. As we've said, $75 million to $80 million is our expectation for next year.

I think Deane, one of the differences is -- and you can see the trend in the reduced spending on CapEx for the last few years here at Teleflex -- we have made a concerted effort to move to outsource more things as opposed to try to make them. And I think that has benefited us from the capital spending as well.

Just in terms of your capital structure, one of the consequences of being able to generate as much cash as you have is you've been able to work the net debt to total cap down now below 20%. It's interesting at this stage there's not a buyback program in place. So I'd like to address that. But also, Jeff, to use your own words, you have the capability to do a significant acquisition. So where do we stand on buybacks? And then, what expectations do you want to set regarding acquisitions and the size of acquisitions in '07?

I'll start on the buyback. The Board of Directors has been very supportive as we've gone to them. And again, we completed the 140 million. I think it's a subject that we continue to monitor, and I think we actually have the capacity to do a buyback and also do acquisitions of size when you look at our overall capacity. So, I think, we continually monitor it. And quite frankly, I know the Board will be proactive and supportive if we move forward with that. So --

And then, in regards to deals, it's fairly obvious out there to everyone that the larger deals are getting a fair amount of attention from private equity. I think while we're still looking at some deals of size, and I will quantify that of 200 to 500 million, we're really spending a lot of our effort on what I would refer to as the deals that are probably in the 75 million and less. Because, one, they fit strategically. Number two, they're available. And number three is the kind of price you have to pay is more in line with what we believe is appropriate for our organization.

I think the organization, looking across it, is ready for acquisitions. We have put strategies in place. We have a lot of conversations going on. But as you can imagine, when you start talking to companies in the $25 million to $50 million, these are family businesses, and you've got to do a lot of romancing and make them comfortable with where you're going to take this business. Because the money is nice, but most people look at it as their legacy. And that becomes something that you've got to get people comfortable with.

(OPERATOR INSTRUCTIONS). Wendy Caplan, Wachovia Securities.

A couple things here. First, given the good sales environment, are you currently selling receivables?

No. As I made a statement in my prepared remarks, Wendy, we did not make any adjustment to the securitization of receivables.

And do you anticipate that in '07?

We would currently, given the strength of our cash position, not be continuing to extend the use of that facility at this juncture, absent doing something such as a transaction.

I think if you look at year-over-year, last year we did factor, I believe it was, approximately 40 million. So, our absolute improvement in cash flow was about 50 million, and I think we feel pretty good about that.

You mentioned new product launches in a couple different areas. Is there a measure that you use that might be helpful for us to know about in terms of tracking that with like a vitality index, or R&D as a percentage of sales, any of those measures?

Because those new products can come from internal development or through alliances and affiliations we have been looking into with other folks, we haven't necessarily found that a R&D target percentage is necessarily the best measure of how to generate that core growth, because we're looking a bit more broadly than that. So we aren't using that kind of index to measure that. Clearly, we're looking to increase and grow the business along the lines that we've indicated in our prepared remarks. And a lot of that comes from new products in the current environment.

I guess to kind of track this, Martin, how much -- most companies talk about x percent of sales come from products that weren't in the portfolio three years ago. Is there some way to measure that, or is it just kind of are we at the beginning of all that?

I think that we're at the beginning of being able to accurately measure such a statistic, and I could not give that with any great credence at this juncture. And you get into definitional issues between is it a new product or is it just an amendment to an existing product that you do for a new customer? We've got to work our way through that as we go forward.

Okay. I get confused about your corporate expense line, specifically, because I'm never sure kind of what you allocate to the segments themselves versus what's in corporate. Can you give me some sense -- I would assume the SG&A stuff is in corporate. But, like IT programs -- is that across the board, or is it kind of primarily in the segment to which it belongs.

All R&D is in the segment to which it belongs. In terms of the infrastructure of SG&A support that might be provided on a corporate-wide basis, that is allocated between what represents a stewardship function, which stays within the corporate expense. And that which is supporting the operations and is sustainable under our normal tax allocation policies goes to the segments.

So, in corporate expense, is only those -- is none of that stuff that is directly related to the segments themselves?

Nothing that's directly related to the segment is in corporate expense.

Thank you. One more question. Another one of my -- another confusing one for me. I look back, and it's been quarters and quarters and quarters, since '04, that we've been adjusting members every quarter for restructuring. And I'm not saying that it's inappropriate to be doing it, I'm simply asking if this is part of doing business at Teleflex. And it appears, given that you've suggested $0.11 to $0.16 more in '07, which is now the four, five, six -- fourth year of restructuring, should we be thinking about it in terms of just part of doing business, like we --?

All this relates to two very well and separately defined programs. None of this is any adjustments that we make in reductions in force or other amendments as we go along. These are two well-defined programs. The size of the 2004 program was such that it was, clearly, a multiyear project. That program comes to an end during this year with the final relatively small piece. We also have run out, though, of expenses, which under the accounting rules we may have people who have been gone from our organization for a while now. But we don't take the expense -- or we'll be going after the organization, which will only be taking the expense at that juncture. So that's what gives rise to the elongation as compared to the old accounting rules. We don't see this as part of the normal ongoing part of the business.

Maybe I don't understand this accounting rule, but it sure seems to me that other companies that embark on very aggressive restructuring programs consider that "part of doing business." And I'm just -- maybe you can think of a way to explain it to me better later. But I just -- I don't understand why it's different for Teleflex.

I don't think it is different. I'll tell you, I've had a lot of feedback that, one, when we first announced restructuring we were late to restructure, and now that we've announced very definitive restructuring plans, they're well communicated, they're well accounted for, that -- again, we do not see this. But again, the accounting rules have changed, and therefore, we've got to abide by the rules. But to me, I think what we feel good about is the '04 restructuring is almost complete, what we announced last year. And I will tell you, I do not have an intention of announcing another restructuring plan in '07.

Okay. So in your opinion, this is it?

This is it for the time being. If market conditions change dramatically, we will have to adjust, like any other company would.

Jim Lucas, Janney Montgomery.

Jeff, speaking of market conditions changing and needing to adjust, from a portfolio standpoint, you guys have come a very long way the last few years, through a lot of heavy lifting. But there's one area that still sticks out like a sore thumb, and that's the automotive business. Can you talk about your thoughts of that business longer-term? One question in particular I have is, when was the last time that business earned at cost of capital, just out of curiosity?

Martin can comment on the cost of capital. But I'll tell you, Jim, it's a difficult market. And I try to look at it and take it into perspective. I think we've cleaned up some of our portfolio in automotive, getting out of the adjustable pedals business. Everyone knew both the amount of capital we were putting in there and our resources. I think the fact that we've gone back and focused on the shifter cable business, seat actuation, fluid handling, I think, is a very positive thing.

I will tell you, some of this is our largest competitor has their own financial problems. I think we feel pretty good about what we have in automotive considering the market conditions. Now, I will give a lot of credit to the management team there, that despite the pressures on profit last year, they generated more cash flow than we had anticipated. Because when they knew they couldn't make the profit aspect, they said we can generate cash that the Company can use elsewhere.

So my attitude is, the market is in a state of flux. You read about it every day. But at the end of the day, I think, we're well positioned. If the market comes back, I can't tell you, Jim. But I've just got to tell you that I think we've done a good job. I try to look at it in the bigger picture of this is typical Teleflex. We always have two up and one down. This time it's the Automotive that's down. In 2001 it was the Aerospace that was down. So that's the beauty of our diversified portfolio is we can manage through some of these market changes. And even though everyone understands that auto is a fairly large section, I think we've done a nice job. Can there be improvement? Absolutely.

From an end-market standpoint -- and granted, I hear what you're saying about the portfolio moves and being more focused there -- but when you look at the margin trend, and if anything, the cost pressures from the customers are only getting increasingly worse, just wondering strategically how you think about that business.

I think about it the way I've thought about automotive. It's a tough business. You've got to be disciplined, you've got to be a global player, and you've got to continue to bring new technology to the marketplace. But again, I think we're committed to saying we're in the marketplace. We're going to work through some of these challenges. And quite frankly, that's why you see some of the lack of growth in Commercial this year, is because when we got out of the pedals business, we decided to take a harder position on cost-downs and pricing with our customers. Have we lost some revenue? You bet we have. But that's a strategic decision that, I think, the senior management was comfortable in making.

In terms of cost of capital, clearly, the Automotive business hasn't made its cost -- covered its cost of capital since I've been here. I haven't gone back in detail prior to that, Jim. And thus, it's always on our watchlist, and always being reconsidered as to what direction we take that business. Obviously, Jeff set out for you what we're trying to do with it at the current moment.

And they haven't made their cost of capital since I was here either. So it's been a long time, Jim.

Switching to following up on Deane's question, of this wonderful problem you have of generating all this cash and looking at it, your color on the acquisition environment. You've stated in the past that, clearly, Medical is your number-one focus. We've seen a couple bolt-ons in the Power System area. Can you talk about, within Commercial and Aerospace, what the acquisition opportunities look like? And particularly Aerospace. Is there a potential to add a new technology, or do you like where the Aerospace portfolio is today?

I think at this point we like where the technology is in the Aerospace. Again, we've worked on strategic planning for the last few years. We know what our strategy is. So in Aerospace, we actually feel pretty good. Again, can we build upon the components that we already have? Yes. We believe that we can, and we are actively in that segment today.

On the Commercial, again, the power business for us is a growth opportunity, both organically and through acquisitions. Heavy Lift is an area that we've done very well and continue to look to expand. And obviously, our Marine position is very strong, both at the OEM level and the aftermarket level. And to be honest with you -- I've said this before -- to have a little downturn in the marine market; it's probably not a bad thing for us to go out and do some acquisitions of technology.

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

Thank you, everyone. A replay of the call will be available on the Teleflex Web site or by phone. For those of you who dialed in late or would like to review the replay number, 888-286-8010. For international calls, 617-801-6888, and passcode number is 98533145. Thank you.

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