泰利福醫療 (TFX) 2008 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the third quarter, 2008 Teleflex, Incorporated earnings conference call. My name is Erica, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We'll be facilitating a question and answer question 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, Mr. Jake Elguicze, Senior Director of Investor Relations. You may proceed, sir.

Good morning, everyone. The press release and slides to accompany this call are available on our website at www.teleflex.com. And as a reminder, this call will be available on our website and a replay will be available by dialing 888-286-8010, or for international calls, 617-801-6888, pass code 25612541. Participating on today's call are Jeff Black, Teleflex Chairman and Chief Executive Officer, and Kevin Gordon, Teleflex's Executive Vice President and Chief Financial Officer. Jeff and Kevin will make brief prepared remarks, and then we will open up the call to questions.

Before we begin, I would like to remind you that some of the matters discussed in this conference call will contain forward-looking statements regarding future events as outlined on slide 2. We wish to caution you that such statements are in fact forward-looking in nature, and are subject to risks and uncertainties and actual events or results may differ materially. The factors that could cause actual results or events to differ materially include, but are not limited to, factors as made in our price release today, as well as our filing with the SEC, including our form 10-K, which can be accessed a our website. Throughout our presentation and conference call today, we will be using non-GAAP financial measures and the reconciliation of these non-GAAP measures is included in the appendices of the presentation. Now I'm turn over the call to Jeff Black. Jeff?

Good morning, everyone. Thanks, Jake. Results for the third quarter and the first nine months were strong for Teleflex. Our operations continue to deliver solid results. We have made good progress on our strategic initiatives, and we're clearly benefiting from the portfolio changes we made last year. October 1st was the anniversary of the ARROW acquisition and the expansion of our medical segment, as well as the launch of SAP in North America. And we just passed the anniversary of our announcement that we would divest the automotive and industrial businesses. Those actions and our focus on aftermarket and service businesses in the and commercial and aerospace have provided us with a diverse global base, and a portfolio that, although not immune to economic conditions, is less cyclical and better positioned for this economic environment.

To the first nine months we have performed well against the objectives that we set out in our outlook at the beginning of the year. Overall, the segment margins are in the mid-teens. Cash flow is strong, and we're achieving synergies from our acquisitions. We have improved commercial and aerospace margins year-over-year, despite very tough market conditions in Marine and Power and an increased engineering investment in our aerospace businesses, and medical has delivered segment operating margins of 20%. Quite an accomplishment, particularly given the spending on the FDA compliance program, and the significant resources that we have dedicated to it. On the revenue side, our medical segment is reaching our mid-single digit core growth goals in Europe and Asia Latin America, and in the OEM business, but has been challenged in North America. As we progress through remediation efforts and integration, we intend to shore up our competitiveness here.

Cash flow from operations has been strong, up 23%, excluding the $90 million tax payment we made earlier in the year related to the automotive and industrial divestiture, and importantly, we have continued to bring down our debt, paying down more than $100 million so far this year. Let me move on to some of the highlights. Highlights for the third quarter will sound a lot like the second quarter, a sign that we're making steady progress in line with our plans. Revenues grew 30% on acquisitions. Medical segment core growth was 1%, again, international markets had solid core growth, but we had a tough comp with last year when we had higher sales to distributors in North America, prior to our October 2007 launch of SAP.

In aerospace, a favorable mix in both cargo systems and engine repairs resulted in lower core revenues but higher operating margins. Commercial core revenues declined 13% on significantly lower volumes in Marine, and for auxiliary powers, but margins held. As a result, core growth for the company overall declined 4%. Overall operating margins before special charges in the quarter were 16.2%. Nice margins in all three segments, and EPS, excluding special charges, was $1.11, up 41%. And cash flow from operations was up 65% over the prior year quarter, at $76 million for the quarter.

Let me just bring you up to date on some of our strategic initiatives. In the medical segment, we have advanced our compliance programs and are now working extensively with outside consultants and third parties as we enter the latter stages of the program. This has been and continues to be a demand on our resources. The integration of ARROW continues in line with our full plans for the full year and total synergies. We've focused on the corporate administrative and front end functional integration and are now moving into the facility consolidation phase as we enter 2009. The first two facility consolidations are well underway in Europe, but moist of our product moves are in the planning stages for execution in 2009 and 2010. We have just adjusted schedules for some of the moves to assure that we are ready and have the resources available for this transition. Overall, we expect to achieve roughly $40 million in pretax synergies in 2008, and we continue to see ourselves at 70 to 75 million by 2010. On the R&D front, as we move resources from the compliance program, we will add Research and Development professionals and work to accelerate progress on our identified R&D projects.

As I mentioned earlier, we are achieving solid core growth outside of the U.S. and in our OEM business. New product initiatives will enable us to maintain this growth and should help us to improve competitiveness in North America. We have also made some changes in the sales force of North America to focus on certain product areas, creating a dedicated team in anesthesia.

You may have also seen our press release in September when we announced moving Matt Jennings into the new position as President of North America. Matt brings great industry experience with customers and with the sales and marketing organization, and will be much valuable to the organization going forward. The strength of our global operations, we've moved Vince Northfield from President of the commercial segment into a new position as Executive Vic President in the medical business, running the back end operations worldwide. In aerospace, we're benefiting from the investment we've been making in new technologies for engine repairs, and we continue to invest in engineering and capacity for new cargo systems platforms. focus in our commercial system has been managing through fluctuating market conditions, controlling costs, and creating opportunities, and we've been pleased to see the rating services hold up well and a strong backlog of APU orders for the fourth quarter and for the first quarter of 2009.

Today, given the results of our operations in the third quarter, and the first nine months of our current -- and in line with our current order trends, we see hours at the top of the EPS range we provided to you on just our last call. We're forecasting an EPS in the $4 range for the year, excluding special charges. Overall for the year, operations should deliver results that are better than we forecasted last January, and special charges will be slightly lower by approximately $0.50 per diluted share, and we continue to see very strong cash flow generation, typically a hallmark of Teleflex. Obviously, we have our challenges. Market conditions can change, we're keeping an eye on currency fluctuation, and we have work to do to continue improving operational effectiveness while we move forward with integration activities.

That said, I'm pleased with the progress that we've made in our position in this economic environment. We have solid fundamentals, an improving balance sheet, strong cash flow, and the ability to return capital to shareholders in the form of our dividend. Kevin will go into more detail on the financial results for the quarter and then I'll come back and provide some additional commentary on our outlook. Kevin?

Thank you, Jeff. Good morning, everyone. Pleased to have you join us this morning. Slide 9 provides a smear of results from continuing operations, noting the adjustments related to special charges in the quarter. Revenues for the third quarter were $596 million, up 30% over the third quarter last year. Adjusted gross profit for the quarter increased to 40.3%, a 670 basis point improvement over 33.6% in the third quarter of 2007. Reflecting the benefits of the portfolio changes we made last year, and the growth of our medical segment.

Adjusted operating expenses of $143.6 million represented 24.1% of sales, reflecting the expansion of our medical business, and investment and compliance in R&D programs. Operating income before special charges was $96.5 million, up 65% from $58.4 million in 2007, more than double the percentage growth in revenues. Adjusted operating margins of 16.2% reflect an increase of 350 basis points compared to last year. Special charges in the quarter total $2.5 million, and related primarily to the ARROW integration program, and finally operating income was $94 million, up 75%.

Slide 10 provides a reconciliations to EPS number to income from continuing operations before special charges. Restructuring costs in the quarter totaled $1.9 million net of tax. Excluding these charges, income from continuing operations was $44.3 million, or $1.11 per diluted share, compared to $31.4 million, or $0.79 per diluted share in the third quarter last year. You will note the tax adjustment in the third quarter of 2007 that related to 2007 and planned future cash repatriations of foreign earnings. It's also important to note the impact of stronger international sales on profitability in the third quarter 2008 results. We continue to see greater improvement in our businesses outside of North America, resulting in earnings in jurisdictions with lower income tax rates. As a result principally of this, our adjustments in the effective income tax rate added approximately $0.08 in the third quarter of 2008. The overall effective income tax rate for the full year is now expected to be in the range of 24%.

Moving to the year and date results, revenues for the first nine months excited $1.8 billion, growing 35% compared to the prior year. Adjusted gross profit for the period increased 510 basis points to 40.5%. Adjusted operating expenses of $454.9 million, or 24.9% of sales, increased over the first nine months last year, primarily as a result of our portfolio additions. Operating income before special charges was $284.1 million, up 57% from $181.3 million in 2007. Adjusted operating margins of 15.6% represented an increase of 220 basis points compared to last year, and include medical segment adjusted operating margins over 20%. Special charges before taxes for the first nine months of 2008 totaled $24.7 million, and relate entirely to integration programs within the medical segment, and operating income was $259.3 million, an increase of 49%.

For the first nine months of 2008, income and EPS excluding special charges was $119.8 million, or $3.01 per diluted share, compared to $100.4 million, or $2.53 per diluted share for the corresponding period in 2007. The 2008 special charges as outlined on this slide had a $0.42 per share aggregate impact on diluted EPS. Summarizing the first nine months, as Jeff mentioned in his remarks, we had a very strong showing. We have consistently improved performance on the bottom line, and are executing well against our financial objectives overall for the year.

Let's turn now to specifics on the quarter for each segment, starting with medical. Medical segment revenues for the third quarter increased 61%, to $367.3 million, driven by acquisition. Core revenues grew 1%, currency added 3%. Third quarter of 2007 included orders placed in advance of the October 2007 SAP launch in North America. We estimated the pull forward to be about $5 million. Adjusting for the pull forward, we had core revenue growth of 3% in medical, in line with this year's second quarter. Our strongest sales growth continues to be in Europe and Asia. We also had nice pickup in sales to medical device manufacturers, our OEM business in the past two quarters. Sales in North America were weaker. Last year's increase in orders prior to the SAP launch primary impacted North America, creating a tougher comp. In addition, we had declines in unit volume for respiratory care products, primarily due to the loss of a sole source contract with a large GPO early in the quarter. We are diligently working with that GPO to recover some of that business and are making good progress, but there was an impact in the third quarter.

Globally, the ARROW acquisition contributed a total of $129.6 million to the third quarter growth. Primarily adding to our critical care product line. Operating profit for the segment, excluding acquisition related charges was $73.4 million, compared to $50.4 million in last year's third quarter, adjusted segment operating margins were 20%, a sequential improvement over the 19.3% in the second quarter of this year. Spending on our regulatory compliance program had a negative impact on margins in the quarter. Spending was slightly less than what we incurred in the second quarter, and we expect spending to continue trending down in the fourth quarter. For the full year, we expect to see spending on compliance programs specific to the remediation in the $20 million range. We are on track to achieve $40 million of pre-tax synergies from the ARROW acquisition in 2008, and our expending to achieve the synergies to date has been slightly less than originally planned.

On a year-to-date basis, revenues increased to $1.1 billion, and medical segment adjusted operating margins slightly exceeded 20%. Solid progress on the goals that we set out earlier this year. In our critical care product lines, ARROW vascular access and regional anesthesia products added $113.6 million in the quarter, and vascular access, once again, we had solid growth in North America, Asia, and Latin America. Consistent with our strategic direction, we are maintaining our high CVC market share and we are seeing strength in sales in picks and specialty catheters. For example, hemodialysis, thrombectomy, renal access, and microintroducers. Anesthesia and airway management products had strong percentage growth in Europe and in Asia.

In North America we, increased sales of regional anesthesia products in the quarter, and we are building out a dedicated sales team for combined regional anesthesia airway management sales, to better serve our customers. And we continue to see modest volume growth in Europe, Asia, and Latin America, for our urology product lines. Respiratory care products had strong year-over-year growth in Asia, Latin America, across a number of products. And our surgical product sales grew 5%, largely on favorable currency and core growth and sales to customers in Europe, Asia, and Latin America, with modest year over declines in North America. Closure and ligation have continued to be areas of strength for our us, while some of our niche products had more competitive pressure. Sales to medical device OEMs grew 3% compared to third quarter last year, as we saw higher volumes for our specialty devices and specialty suture products. The ARROW cardiac care product added $16 million to revenue in the quarter. We saw a modest decline in cardiac sales when compared to ARROW sales in the prior year period. We have made progress, but continue to work through the production issues on certain product lines in this product area. Overall, the product line trends are similar to what we have seen all year.

Moving to aerospace, in this segment, third quarter revenues were $126.9 million, up 12%, principally as a result of a $14 million contribution from the Nordisk acquisition, which expanded our cargo containers business. Operating profit rose to $16.8 million, a significant increase compared to the $7.5 million in last year's third quarter. Segment operating margins rose to 13.2% in the quarter, the highest segment operating margins we have seen in some time. A margin favorable mix of sales in both the cargo systems and the engine repair businesses saw a 2% decline in core revenue, but how much higher operating margins.

Let me explain the dynamics at play here during the quarter. In the engine repair business, the favorable mix is really the result of then investments we have made in new technologies. Similar to last quarter, we saw a higher mix of repairable engine components generating value added margin compared to the replacements parts. We expect to continue to invest in new technologies for the newer more fuel efficient engines to further advance -- enhance our strong position in the engine repairs market. The cargo systems business, we once again gad near record sales of narrow body cargo loading systems, and we had another year-over-year increase in higher margin cargo after market spares. For narrow body cargo loading systems, unit volume more than doubled in the quarter when compared to the third quarter last year. Also, it was another record quarter for cargo after market repairs. A reflection of our growing install base. At the same time, when compared with prior year, we had fewer deliveries of new wide body systems scheduled for the quarter we and a higher number scheduled for the fourth quarter, so timing and mix had a positive impact on margins.

On a year-to-date basis, revenues were $385.8 million reflecting a 16% increase over the first nine months of 2007. The growth is principally from the Nordisk acquisition, and 1% core growth, resulting from the growth in the cargo systems business, offset by the mix-related revenue decline in the engine repairs business. Segment operating profit it increased to $45.9 million, compared to $32.2 million in 2007, and segment operating margins were 11.9% on a year-to-date basis, a 210 basis point improvement over 2007. Turning to the commercial segment. As expected, third quarter revenues declined on lower volumes in both Marine and power compared to prior year. Revenues in the quarter were $101.6 million, compared to $117 million in the prior year. Marine sales declined significantly compared to prior year as OEM customers extended shut downs and cut back production levels during the summer months.

Marine OEM and engine sales were down as they have been all year. We saw somewhat of the list a market in aftermarket and international sale,, but declines here as well. During the quarter, our Marine group responded with shut downs and reduced production schedules. We do not see a turnaround in this market in the near term. However, we will continue to adjust to market conditions, and at the same time, work to position ourselves to continue new product development and maintain market share for the future.

Power systems had another difficult comp as revenues decreased most notably for the truck APUs. On more positive note, as we said last quarter, order trends for truck APUs rebounded, and we have a increase in schedule delivers for Q4 2008, and Q1 2009 compared to the prior year. During the third quarter, we also continued shipments of alternative fuel conversion kits to South America under a $5 million contract with additional systems to be shipped over the remainder of the a year. Once again, the rigging services business had another great quarter. Core revenues increased on stronger sales to wholesale customers and a range of industrial and Marine transportation markets. Storms in the Gulf region during September closed some of our sites, or prevented shipping, but did not cause a significant interruption. We also did not see the level of damage and need for future repair work for oil rigs that we have seen in some previous storms.

Overall, commercial segment operating profit rose, in part due to favorable mix and cost containment, but also a result of costs for warranty and engineering experience in the third quarter of 2007 that did not recur in 2008. Operating profit increased to $7.1 million from $2.3 million for the plier year quarter. Segment operating margins were 7%, considering the in the overall market conditions and good performance by the group. On a year-to-date basis, revenues were $313 million, compared to $338.7 million in 2007. Operating profit of $19.4 million in 2008 increased compared with $18 million in 2007.

Moving to cash flow. As we previously discussed, we made income tax payments in the first two quarters of 2008 of approximately $90 million related to the December 2007 gain on sale that resulted from the divestiture of our auto motive and industrial businesses. Excluding the impact of these tax payments, cash flow from operations was $188 million in the first five months of 2008, up 23% over the same period in 2007. Free cash flow was $121 million, an increase of 39% over the comparable period in '07. On a working capital front, we are seeing customers particularly if the aerospace and commercial businesses looking to stretch terms on receivable balances. However, we are monitoring our credit risk closely in the current economic environment and have done a nice job on our accounts receivable.

On slide 15, you'll note we have made progress to reduce our debt and improve our capital structure in 2008. Strong cash flows has enabled us to reduce outstanding debt by over $100 million this year. Net debt to capital has declined to 51.7%, and as we continue to improve the structure, it provides additional opportunities to invest in growth initiatives. In light of the current status of the capital markets, like many others, we have been asked questions about our structure and availability of capital. When we acquired ARROW last year, we entered into a five-year borrowing arrangement that expires in 2012. The require payments under this agreement approximate $100 million in each of the next two years. Given the strong cash flow of our businesses and the availability provided under our revolving credit agreement, we believe were are well-positioned and have an appropriate structure to allow us to execute our plans.

As Jeff discussed, we now see ourselves at the top of the guidance range we provided last quarter, as a result of the strong performance in the first nine months, and the current trends we see in our businesses. Special charges which principally relate to charges for the ARROW integration at fair market value adjustments to inventory are currently forecast at a range of $0.49 to $0.52 per share. On a GAAP basis, our EPS is expected to be $3.38, to $3.51. Results from our operations are ahead of our earlier expectations. We expect special charges to be slightly lower this year than we had planned. Overall, fourth quarter earnings should look a lot like the third quarter, exclusive of the tax catch up that we saw in Q3. We expect cash flow from operations of approximately $260 million for the full year, excluding the tax payments, and with that, let me turn it back to Jeff with more on the outlook.

Thanks, Kevin.

In summary, strong results to date. We're executing consistently and moving forward with our strategic initiatives. Looking ahead, let me just make a few comments on expectations given the current market and the businesses that we have to manage. In medical, we expect continued international sales growth, particularly in Asia. In North America, we're instituting sales programs and continuing to expand our sales initiatives with GPOs and IDMs. The CMS reimbursement changes for hospital acquired infections went into effect October 1st. We are continuing to work on awareness and support campaigns for customers, particularly related to ARROW products and catheter-related blood stream infections, and on the OEM side, we continue to see positive order trends.

Our compliance initiatives will be ongoing, with spending on these initiatives and the ARROW integration activities on track to achieve pretax synergies for 2008. We continue to expect medical operating margins of 20% for the year. In aerospace, we expect strong sales of narrow body systems and cargo after market components to continue. In addition, we should see revenue growth based on the ramp up of scheduled deliveries for wide body systems, and we're pleased to see that Boeing and the union have come to a tentative agreement. Engine repair trends to have some of the seasonality with fewer engines for repairs during the peak flight time around the holidays. At the same time, this business has been a consistent performer, executing well, expanding margins through the use of more efficient repair technologies. We continue to invest here for new engines and technologies.

We remain cautious on commercial with the down cycle in Marine, and will continue to adjust our plans going forward to address market conditions, but that business is managed fairly well in tough markets, be and we continue to win new business and future platforms. And the power systems business should start to move out of its downcycle in the fourth quarter. We've already seen an improvement in the order rate for auxiliary power units for both truck and rail. We continue to emphasize cash flow priorities in our businesses, and are focused on the reduction in our borrowings. Overall, we're pleased with our progress for the first nine months, although we're understandably cautious with current financial and economic climate, we're executing well against our plans for the year, and continue to position the company for the long term.

With that we'll take some questions.

(OPERATOR INSTRUCTIONS). Your first question comes from the line of Deane Dray. You may proceed.

Thank you, good morning, everyone.

Good morning, Deane.

A question, first, in the medical side on the R&D spending in the quarter and the outlook, and, specifically, Jeff it sounded like that you had done some diverting of what would have been R&D funds that had to go into the FDA compliance program, and did I understand that correctly? and just want to understand your thinking here, because if you're looking at an 18 to 24 month pay back, why would you not want to still fund that R&D spending now in order to start getting the results from that sooner, and what's the outlook on the ramp down in that FDA compliance program?

Yes, Deane, let me just touch on that. One, we are not diverting funds away from R&D. Part of it is, is just using our resources to get through and of the February nickel issues on the remediation, but I will tell you that we are actively increasing our R&D spend. Part of that is getting the people on board and getting them up to speed, but I think we've committed to that. I want to say, Kevin, after the efficient of increasing our R&D, so if to I gave the impress that we're making a judgment between investing in R&D and working on remediation, that is not the case. We are working on both of them, but there is some overlap on those resources, but we do appreciate that if we take away from R&D now, it's only going to impact our future growth rates.

Sure. What was it on a percent of sales basis, and what's the target rate?

Yes, the target over the long term, Dean, is to get ourselves up to, you know, the 5% to 6% range. That's going to take us a bit of time to get there. In the quarter, we're still at about the 4% or just under the 4% range on spending, but again a chunk of that is related to the remediation efforts and the R&D -- and the compliance efforts.

Okay. And then broadly, could you give us an update on what you're seeing on the spending pattern across North America hospitals? A lot of focus on what would be the big ticket items, CapEx squeezes, it doesn't seem to be in your particular product line, but what are you seeing in terms of change and spending patterns?

Yes, clearly I think you identified it right on the big ticket things. I think there has been and will continue to be in this environment pressure on capital equipment suppliers that we've seen. From a disposable medical product where it isn't such an elective procedure, which is the markets we tend to participate in, we haven't seen any significant impact. A couple of areas of our business may be more susceptible to some of that. For instance the orthopedic OEM side, but to date, that has not had a major impact on us.

That's very helpful, Kevin. What about -- the idea is, I know about 80% of the products are considered disposable, but across the portfolio, how much might be considered more discretionary, within medical spending? What we're trying to do is figure out how susceptible or resilient the portfolio in a deeper recession

I guess that's what I was trying to get at with that last remark, Deane, and on the OEM side of our business, we have orthopedic instrumentation. That may be considered more of an elective type thing to support that, but our OEM business today, as you see in the disclosure, is about 10%, 11% of the overall business, and maybe a third of that relates to the orthopedics side of the business. For the most part, if we're looking at the disposals around urology, anesthesia, respiratory, even CBC, they don't tend to be an elective procedure, they tend to be more of a required.

Great. And then just clarification. Did you take advantage of the R&D tax credit this quarter?

We did not. We're very aware of the -- the bailout program that the government put in, and renewing that R&D proposal, bit that will actually be a fourth quarter event for us.

Can you quantify that at this stage?

I don't know that I want to get out to a specific number. We're still working through our analysis on that, but it could be -- well, I would rather just not do it at this point.

Okay. but that will be a fourth quarter event for you

Yes, it will.

Great. Thank you.

Your next question comes from the line of Jim Lucas. You may proceed.

All right, thanks. Good morning, guys.

Good morning.

First question I wanted to focus on the nonmedical side. Within aerospace, on the cargo, where do you stand currently in terms of OE versus aftermarket today?

From a spares basis, Jim, the revenue that's driven by our spares business is just under 30% of the total overall cargo business revenue.

Okay.

And, just to clarify OEM versus aftermarket, when you look at the cargo business, you also have to consider --

The retrofit.

Is a conversion in the market an OE or an aftermarket, and I think we look at that much more than as an aftermarket opportunity.

Okay. So semantics there. Imbedded in your guidance, what assumption are you making with the euro? Not to put you on the spot.

Well, I would tell you that we're somewhere in the 130 to 135 range with our guidance at the moment, and as you know, there's some fluctuation there, and there's some hedge between our businesses that help offset some, so we can kind of balance and of that risk out.

Okay. With regards to the arrow integration, you talked about the back end side, making good progress, starting down the facility side you alluded in your prepared remarks about the new anesthesia dedicated sales force. Can you give a little more color from an update perspective of the sales integration, as well as the R&D side, and, if we could look at both North America and Europe on th sell side side of how the integration is going?

Yes, Jim, I'm talk on the sales. Kevin can talk on the other, and, I think we continue to make progress, a year later. I would be remiss if I said that, some of our decisions when we did the deal on some of our initial thoughts haven't changed, because they absolutely have changed, but over all, I think at which still feel good about the sales force integration. I think Matt Jennings, for those who didn't know, Matt has been with Teleflex for four years in a variety of different positions. Matt came out of the Cardinal Organization. Again, he has the skills, he knows our portfolio, so so we feel pretty good about having him.

And which the past, what used to happen in that North American job is you had front end and back end, Jim, you know Vince. Vince is probably one of the best operating guys that I've ever come across. So we felt that what we really wanted to do was put our people back on to the growth, and Matt really can go out and grow the business, while Vince can support him on the back end, and so our structural change really comes back to dealing with our growth issue of both are having to invest in R&D, but we have to look at how we go tow the market a little differently as we see some of these opportunities above rise. Kevin, you want to touch on that?

Yes, from an R&D interperspective, Jim, we are -- I think we have talked a lot about making the Redding facility our global R&D headquarters, which we are continuing to invest there and put the right people in place, but have also moved forward with having the right R&D or development folks at large local facilities. For instance in our Malaysian facilities and the Czech Republic facilities. So we all we have a centralized place for R&D, we're putting it very local as well, and all of that structure is going in place. Just to touch a little bit on the distributor conversion, I think that was part of your question, as well. We're making good progress on that particularly in the European markets, and the central European markets, to do some of those conversions, so we're doing those at a -- you know, at a tempered pace to make sure that there's no individual significant impact on any one particular region.

Okay. Great. Thanks a lot.

Your next question comes from the line of [Dan Ruder. ] You may proceed.

Good morning.

Good morning.

Great-looking quarter. To follow up on Jim's question real quick to clarify, did you say you consider 30% of the spares to be after market this quarter?

No, what I was suggesting, Dan, was that of the total cargo business revenues, 30% of those revenues are spare sales. The other component that would make an additional aftermarket sale would be a conversion of an existing aircraft from a passenger aircraft to a freighter.

Okay. Thanks for the clarification on that. What is it about APUs that seem to be turning around so quickly. I didn't perceive that the truck engine or the locomotive businesses getting off all that much better all of a sudden.

I think some of it is just distribution channel, Dan. We had -- had very strong sales at the end of last year. We saw some softness in the market. You do know that we exclusively distribute through carrier. I think they had some inventory levels that maybe were a bit higher. We are now refilling that distribution channel, and with fuel prices jumping up the way they did over the course of the summer, I think created some pretty significant design and for the product.

Okay. Great. And can you quantify the year over year delta on warranty y expense this quarter?

We took about a $4 million one-time charge on a catchup basis if the third quarter of last year related in the power business.

Great. All right. Thank you very much.

Okay.

(OPERATOR INSTRUCTIONS). Your next question comes from the line of Tom Maher. You may proceed.

Hello?

Good morning, Tom,

Hey, how are you guys. actually that it was my question on the APU, but, just to follow up in terms of the ARROW integration savings, I believe you said you were slightly behind the pace you anticipated. Could you clarify those comments and some

No, think we're actually on the synergies we're getting, be we're civil at at that $40 million for this year. Think what we were trying to let the auditors know is that we're just moving it out on the -- in terms of some of these product moves, and so therefore the spending was slightly less than we would have anticipated had we made some of the moves.

Oh, I see. Okay. So we're still on track, just a matter of the timing of those moves?

Absolutely.

Very good. Thank you.

This concludes our question-and-answer portion of the call. Everyone have a wonderful day. And thank you for your participation.

Thanks, everybody.

Thank you.