泰利福醫療 (TFX) 2007 Q1 法說會逐字稿

Good day, ladies and gentleman and welcome to the Teleflex Incorporated 2007 first quarter earnings conference call. My name is [Cami] and it will be my pleasure to be your coordinator today. At this time all participants are in a listen only mode. We will conduct a question and answer session towards the end of this conference. (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. Please proceed, ma'am.

Thank you, [Cami] and good morning everybody. Teleflex issued a news release last evening with our financial results for first quarter. The release is available on the investor relations page of our corporate website, Teleflex.com. We've also posted accompanying slides for today's presentation. Please note that we've also posted an unaudited pro forma segment results schedule to reflect this continued operations. This is in the historical financial information section of the investor site.

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 on our website. An audio replay will also be available by dialing the following phone number, 888 286 8010; for international calls, (617)801 6888 pass code number 69476307.

Jeff Black, Chairman and Chief Executive Officer of Teleflex and Kevin Gordon, 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 Kevin will take your questions.

Before we begin, I want to remind you of 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 business and segment performance outlook for 2007, forecasting revenue, operating profit margin rates, restructuring charges and gains and cash flow from operations, and expected diluted earnings per share from operations before and after giving the effect of special charges and gains.

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 repair our most recent Form 10-K and other SEC filings. With that, I'll turn it over to Jeff.

Thanks, Julie. Good morning, everyone. Teleflex started out the year with a good first quarter with very strong performances all around from both Aerospace and medical and nice revenue growth and solid execution in commercial given some tough end markets.

Overall, revenues were up 11% including core growth of 8%, which was our highest quarterly core growth since the fourth quarter of 2000. Income from continuing operations was $43 million, up 56% compared to last year. Our EPS from continuing operations before special charges and gains was $1.09 per diluted share, an increase of 40% over last year's first quarter. We maintained our solid balance sheet and operating margin strength by a considerable 210 basis points.

From a portfolio management standpoint, we signed an agreement to divest the precision machined components business in Aerospace, and after the quarter we acquired a new OEM product line in medical and a business that extends our wire rope distribution business in commercial. Good momentum starting out the year and a testimony to the earnings power of our company and the hard work that we have done to realign the company over the last two to three years.

Looking into the specifics of each business segment. In commercial, revenues were up 8% with core growth 5%. Operating profits and operating margins were relatively flat year over year in the face of the same issues that have impacted our segment in recent quarters. Customer price reductions in automotive and higher raw material costs in automotive and marine. These were offset by another strong performance in our industrial businesses.

Medical revenues were up 12% with core growth of 7% while operating profits were up 61% and operating margins were 21.4%. Another strong performance compared with the difficulties we faced last year at this time. With this quarter's results, we have now achieved our 20% margin target in the medical segment in five of the last eight quarters and for three quarters in a row. Arguably, a trend.

In Aerospace, revenues were up 20% with powerful core growth of 17%. Operating profits were up 38% and operating margins were 11.4%. We benefited here from higher volumes and from facility consolidation and productivity programs. The first quarter results reflected the market dynamics we outlined in the fourth quarter call.

In the commercial segment, first quarter revenue growth was better than expected led by new product and program launches for truck and bus internationally. We had nice sale increases for our driver control and fluid handling systems. Auxiliary power units for the truck after market also continued to be strong.

In a relatively soft overall marine market, our marine products sales were slightly better than expected. Marine after market international and engine products sales were all up over last year.

In automotive, no dramatic swings or significant production changes but revenue growth was largely from currency. Just comment on the sales side in automotive, once again we had some nice new contract wins for programs launching in the 2008 and 2009 model years. While this is a relatively flat year over year, we're pleased with the progress that we are making to position this business for future growth.

In medical, we had nice revenue growth across our businesses. International sales and newer markets strengthened. We saw a pickup in our major European markets compared to last year and in North America we had a nice up tick in both surgical and medical products sales. In the medical OEM business serving device manufacturers, we have strong sales of diagnostic and therapeutic devices, but the softest we've seen in orthopedic instrument business continued.

In Aerospace, demand was stronger than expected for repair services as we saw a brief surge in repairs for a couple of different engine sites. The major contributor to the quarter's growth was in our cargo systems. Deliveries of wide body systems were up a little more than expected as a customer required early delivery of a system planned for the second quarter. Sales of narrow bodied cargo loading systems were also up compared to last year. We saw a nice pick up in the after market spare sales in the quarter, increasing our installed base of systems position as well for the future after market sales in this key component of our Aerospace portfolio.

With the divestiture of the components business, we are reducing our exposure to the cyclicality of Aerospace engine OEM's and the new build market. We're building our position in branded products like the [TelAir] cargo systems and containers and in the after market services for cargo systems and engines could grow for some time to come. These are businesses where we really believe Teleflex differentiates ourselves from our competitors.

In the first quarter, we were beneficiaries of an overall strong end market environment for substantially all of our businesses. They also demonstrated the kind of results that were made possible by our restructuring in portfolio realignment programs. These programs, while challenging and at times painful, were designed to make us a leaner, more cost effective and competitive player in the markets we serve.

Overall, our business fundamentals are strong as they have been in recent history. Our markets are growing. Core growth is robust. Margins are expanding and bottom line results are healthy. At the same time, the agreement rates for the divestiture of our Aerospace manufacturing group during Q1 demonstrates that we will continue to evaluate the products and businesses in the portfolio and look to where we can create and maintain value.

And while we continue to pursue significant acquisitions that can supplement our current businesses, we are making bolt-on acquisitions in selected markets that help us expand and grow across our segments. With that, I'd like to introduce Kevin Gordon.

Kevin is our new chief financial officer and this is his maiden voyage on this call. Kevin has been with Teleflex for more than 10 years; has been a great leader of our corporate development team. During his tenure with the company, he's been instrumental in formulating our game plan for acquisitions and divestitures. He oversaw the portfolio realignment program which has unlocked significant shareholder value, recast our business portfolio and strengthened our balance sheet since it was launched in 2004.

Oh, by the way, Kevin also brings a strong background in accounting to the table which was honed during his time with KPMG. So quite frankly, he was a natural choice to lead our Finance team at this point of his career. I've already seen many positive changes taking root as a result of his leadership and I look forward to having the opportunity to introduce him to many of our investors face to face. With that, I'll turn it over to Kevin.

Thanks, Jeff. Good morning, everyone. Thanks for joining us on the call. I look for to meeting you in person at future conferences and road shows. As Jeff mentioned, revenues increased 11.2% to $657.3 million in the quarter and core growth was 8%. Gross profit margins increased to 31.4% from 29.8% last year. This increase was in line with the objectives we stated on our fourth quarter conference call.

Operating expenses, special charges and gains were $130.5 million up 4.6% from $124.7 million in last year's first quarter. Sales, engineering and administrative expenses make up the bulk of this and remain relatively stable as a percentage of sales year over year. However, one of our priorities this year will be to reduce corporate spending.

Operating income was $78.9 million in the quarter, up 45.3% from the $54.3 million in last year's first quarter. Restructuring costs were a modest $500,000 compared to $4.5 million last year. Gain on sale of assets was $800,000 compared to $600,000 last year. After adjusting for these items, operating income before restructuring costs and gain on sale was $78.6 million up 35.1% from $58.1 million in the comparable quarter last year. This represents an 11.8% operating margin compared to 9.7% last year, a healthy 210 basis point increase.

For the quarter, income and diluted earnings per share from continuing operations were $43.1 million and $1.09 per share respectively, Compared to $27.5 million or $0.68 per share in the first quarter of 2006. On an after tax basis restructuring costs were just under $300,000 in Q1. This compares to $2.9 million of Q1 last year. Likewise our gain on sale of assets net of tax was $509,000 compared to $331,000 last year.

The first quarter 2006 results included a tax adjustment of $1.5 million, or $0.04 per share. Netting these items, income and diluted earnings per share excluding special charges, gain on sale of assets, and a tax adjustment was $42.9 million or $1.09 per share compared to $31.6 million or $0.78 per share last year. This represents increases of 35.6% and 39.7% respectively.

Moving to the operating segments. Commercial segment revenues increased 8% to $330.2 million in the first quarter from $304.5 million last year. Core growth was 5% with currency contributing another 3%. Jeff outlined the dynamics earlier. International truck markets were strong. APUs contributed to sales growth and the marine business benefited from stronger after market and international sales as well as sales of engine related products.

Despite the strong growth on the top line, operating profits were relatively flat. Operating margin was down 60 basis points. This was driven by the usual suspects, customer price reductions in automotive and raw material costs in automotive and marine. Overall, we continue to see industrial and marine balancing out the weaker performance we have expected in automotive.

In the medical segment, we generated $226.9 million in revenue in the first quarter up 12% from $203.1 million in the comparable prior year period. Core growth was 7%, currency contributed 4% and the acquisition of a laparoscopic devices business in our surgical business contributed another 1%.

Revenue growth was strong across all businesses and international markets were particularly robust in the quarter. We were strongest globally in the hospital based sales which is the vast majority of our revenue. We did continue to experience some weakness in revenues from our OEM orthopedic instrument business while diagnostic and therapeutic specialty devices for OEMs remains strong. Operating profits were $48.6 million or 21.4%, a 61% increase from the first quarter 2006, above our 20% of our target for the third consecutive quarter.

Costs associated with our IT consolidation program impacted margins to a lesser extent in the first quarter than they are expected to for the remainder of the year. With the IT consolidation cut over expected to begin late in the second quarter, we would expect higher costs for staffing, training and related costs as the year progresses. Total program costs to be expensed in 2007 are expected to be in the range of $14 to $16 million with most of the spending occurring in connection with and following the cut over.

As a reminder, as I move to Aerospace, the components business has moved discontinued operations and the results for our Aerospace group that I will be discussing represent continuing operations. The Aerospace segment had a great first quarter continuing its recent track record for strong growth and profitability. Revenues were up 20% in the first quarter to $110.3 million from $92.2 million last year. Core growth was a healthy 17% for the first quarter.

We saw continued strong demand across the businesses. Wide and narrow body cargo systems, cargo after market and a strong repairs business. The entire Aerospace business is in execution mode and we are enjoying an extended cycle. We also like the strength of the cargo business because of the new installs we are doing today which have higher margins spares and repairs business in the future.

Operating profits were $12.6 million up 38.5% from $9.1 million last year. Operating margins for the Aerospace segment were 11.4% for the quarter up from 9.9% last year. This was a result of cost and productivity improvements in cargo, as well as restructuring benefits and repairs and higher production volumes across the Aerospace segment which drove manufacturing efficiencies.

As Jeff mentioned, we had a search and repair services that offset the impact of last year's insourcing initiative and very active new build cargo delivery schedule in the quarter. The result was a particular strong margin quarter for Aerospace. We believe operating margins are likely to temper a bit going forward. But overall, Aerospace is executing well in good market conditions.

On a sequential basis, we saw an unfavorable shift in asset velocity in Q1. This is in line with the seasonal trends in each of the last three fiscal years. It's important to note that the first quarter asset velocity has improved in each of the years shown here, including improvement of 16.7% in Q1 2007 from 18.9% in Q1 2006 as we have continued our focus on effective asset management. We've also adjusted the metric a bit to more precisely focus on working capital factors including accounts receivable, accounts payable and inventory removing any tax related items from the calculation.

Cash flow from operations was only $28 million in the first quarter; this is relatively in line with the first quarter of 2006. Our experience in 2005 and 2006 was that cash flow accelerated as the year progressed with much of the strength in the fourth quarter. We expect a similar pattern in 2007. The components business that has been moved to discontinued operations was expected to contribute roughly $15 to $20 million of operating cash flow in 2007.

The bottom line is that after adjusting for the divestiture of this business, we're forecasting operating cash flow for the year of just under $300 million. The trend of an improving balance sheet continued in the first quarter. Our net debt to capital decreased again to 17.3% from 18.5% at year end. We are well positioned with the capital liquidity and debt capacity to invest in growth opportunities. We put some of this capacity to work in April with two previously mentioned acquisitions.

Turning to the outlook, we remain comfortable with the outlook for the year we gave in April. Diluted earnings per share before special charges and gains of $4.05 to $4.25 per share. This was adjusted in April to reflect our strong first quarter performance, offset by the divestiture of the components business which has an approximate $0.25 impact on our original 2007 guidance.

We expect special charges to be between $0.11 and $0.15 per diluted share for the year. The net of these two numbers yields an EPS forecast for 2007 on a GAAP basis of $3.89 to $4.14 per share. Assuming a second quarter close, we expect to gain on sales components business to be approximately $1.25 per share. I'll now turn it back over to Jeff for closing comments.

Thanks, Kevin. That wraps up our presentation of a solid quarter. Core growth was strong in all segments, gross margin and operating margins are expanding. All of our businesses are generating profits. From balance sheet standpoint, we have minimal debt. Our cash flow generating capability has always been potent and remains so.

With the actions we have taken and the results we are generating, shareholders can now see us more clearly as a growth company. This is an aspect of our story that we will be highlighting going forward. We have consistently made the investments necessary to move the top line for. We've continue to drive our R&D and new product development efforts. We strengthened our position in Asia by expanding our product offerings, distribution network and operating presence, especially in China.

We have a strong corporate development team that is evaluating opportunities in all three segments and the geographic regions around the globe. Stay tuned. With that, I'll turn it back over to Julie.

Before we take questions, I'd like to ask participants to limit questions to one and then a follow up. As we get to the queue, we'll cycle around again. Operator?

(Operator instructions). Your first question comes from the line of Deane Dray with Goldman Sachs. Please proceed.

Thank you. Good morning. I don't know if you mentioned this in the prepared remarks, but core growth of 8%. Do you have a sense of how that splits between your domestic businesses and international businesses?

If you hear a silence, there is a reason, Deane.

I was wondering there for a moment. Do you want to work on that and I'll ask my follow up?

Yes.

The expectation is that the pattern we've seen from the first quarter is that the U.S. businesses are actually slowing and it's being made up by a stronger growth outside the U.S. and I suspect that will be reflected in your numbers, but I'd love to get that detail.

I think that's a fair assessment. As we said in the remarks, our international medical business was very strong and we were also aided in the marine business with strong international sales.

Good. So while you work on the number on the medical side, do you have a sense of the contribution from new products? That's where you get the pricing. This is now the third quarter in the row you hit that above the 20% operating margin. Can we get a sense of what the new product introduction contribution?

We don't have the specifics on the new product contribution. We did have new products that were introduced last year in therapy and medical and [C Path]. We had some in the surgical device area as well. Typically, with us we have a larger number of new products individually. They're relatively small contributors.

Deane, it comes out about $12 million on the top line for those new products.

Okay. Then, last question. With the given progress that you've made in bringing down net debt total cap to 17%, it begs the question why isn't there more use of the balance sheet and would you be re upping a buyback program at this stage?

I think it's a great question. Obviously, we're trying to do our best to put the cash to work, both through acquisitions and finding other means. I think as we have shown before, we're willing to do a stock buyback. We have a board meeting scheduled for the latter part of this week and I'm sure that will be one of the agenda items. I think our attitude is that we would prefer given the opportunity to go out and do acquisitions. I think as you're well aware, Deane, that environment continues to remain a tough one. I think we are looking at all our options there.

Just to clarify the use of capital. In the past couple of calls, Jeff, you have given a sense in terms of acquisition you might be willing to do something and bigger and bolder. In this quarter it really sounds like you're focusing more on bolt-ons and value added acquisitions. Has there been any change here? Are you still willing to do something bigger?

I think we're willing to do something bigger. As I said, the market is still challenging, but I think what we've said and I think we realize that probably the second quarter of last year is we've got to get back to growth. That's what we're all here for. I think we've got to find growth where growth can be found. At this point I think the smaller deals that strategically are very nice additions to our portfolio are a good message both for our employees and our investors that we are getting back to growth. Obviously, we'd like to do bigger deals, but as you know, the competition there is fairly intense.

Thank you.

Your next question comes from the line of Jim Lucas with Janney Montgomery. Please proceed.

Thanks. Good morning. I thought the smaller deals were the training wheels for Kevin's first official quarter. Congratulations, by the way, Kevin.

Thank you, Jim.

Jeff, following up on your prepared remarks, when you first introduced Kevin, you talked about some positive changes that you've seen already on the finance side. Could you add a little bit more color to that comment?

I think, again, Kevin comes in through his ten years, not only has he worked throughout the operations, but he's also he knows our businesses because he's worked with them on both their current strategy and our future strategy. So I think that's been helpful. I'll also say that to Kevin's credit, he spent a lot of time in the corporate development side out in the marketplace. So he's got the relationships there. So I think that's been as opposed to people being fairly concerned with the new CFO, I think Kevin being a known player and I also think he brings a lot of skills as we're getting back to growth that are needed in the financial leadership position as well.

Okay. On the Aerospace side, I thought it was interesting on the cargo that you saw narrow body growth in the quarter. Could you give a little bit of color of where exactly you're seeing that? What you think might be driving the narrow body side?

There's actually two components to it, Jim. First is obviously the cargo systems themselves. Second is a cargo loading device that we have for the aircraft, not necessarily a sliding carpet system that would go in the aircraft, but it's the on ground component in the aircraft. We're seeing some nice up tick in that. That principally is going into the Asian markets.

This is where we've invested for probably the last three years in this loading device. Again, one of the things we saw was while we're well situated on the plane, loading the plane we were not well positioned and again the demographics and safety becoming an issue with people loading baggage, we developed a technology that's patented that quite frankly, we see opportunities for this technology outside of the Aerospace and out of the commercial airline loading business. For us, it's a small investment but one that has really gotten it's been out in the field for about 18 months now being tested by some of our customers and the response has been very positive.

Okay. And finally, on the medical side, a lot of good news there, but the one laggard is the orthopedics side in OEM. Can you provide a little color of what exactly you're seeing there? Where you think that weakness coming from? And is that a trend you expect reversing any time soon?

If you look at that segment as the whole, I think everyone is pointing to the back half of this year. I would only caution you that they were looking to the back half of last year at this time as well. I think our attitude is I know the supply chain has truly been shortened, and so many of our customers are doing a better job and I also don't think that they're kind of filling the pipeline as well. While I think we're well positioned and again our newest acquisition of HDJ only adds to some of our offerings to support that customer base.

Okay. Great. Thank you.

(Operator instructions). Once again there's a follow up question from the line of Jim Lucas. Please go ahead.

I was trying to follow directions. On the commercial side, I wanted to follow up. Automotive you talked for a couple quarters now about some contract win '08, '09. When you look at how you're bidding the contracts, the question I have would be number one, geographically where are these wins taking place? And number two, from a pricing perspective are there any changes in the way that you're bidding contracts now?

Jim, the contracts are really global. As the automaker's become more global, it's been important to be positioned to supply them on a global basis. If you look at larger platforms going across the globe, we are certainly seeing a lot more opportunities within China and the Asian market as a result of our presence there and also across Europe. But as we approach these things, given the nature of the industry, we're obviously approaching them and attempting to get the better program where we can generate the best margins.

I think in regards to price, Jim, one of the reasons why our revenues in that specific segment are going to drop off a little this year is because we walked away from low margin, low contributing business and I think we've kind of I give Peter Spencer and the group of lot of credit when you going out to try and grow the business and you've got to walk away from business, it can send some mixed messages to customers. at the same time I think it's the strategy we put forth and said we're going to grow and we're going to grow profitably, and we'll let the rest of it kind of play itself out.

Okay. And on the marine side of the business, the international growth that you're seeing, what geography is that is that predominantly after market that you're seeing at this point?

It's predominantly the European markets and it's both OEM and after market.

Okay. All right. That's all I have.

At this time we have no more questions in the queue. I would now like to turn the call back over to Ms. McDowell for closing remarks.

Thank you, everyone, for joining us this morning. For those of you who may have dialed in late, I will give you the replay number again. The replay webcast was archived and available on the website and an audio replay will also be available by dialing the following phone numbers; (888)286 8010 or for international calls (617)801 6888, pass code number 69476307. Thank you.

Thank you for attending today's conference. This concludes the presentation. You may now disconnect. Have a great day.