泰利福醫療 (TFX) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2011 Teleflex Inc. earnings conference call. My name is Lacey, and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will facilitate a question and answer session towards the end of the presentation. (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, Treasurer and Vice President of Investor Relations. Please proceed.

Thanks, operator. Good morning, everyone.

Welcome to the Teleflex Inc. third quarter 2011 earnings conference call. The press release and slides to accompany this call are available on our website at www.teleflex.com. 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, passcode 62497743. Participating on today's call are Benson Smith, Teleflex Chairman, President, and Chief Executive Officer, and Randy Meier, Teleflex Executive Vice President and Chief Financial Officer. Benson and Randy will make brief prepared remarks and then we'll open up the call to questions.

Before we begin I would like to remind you some of the matters discussed in the conference call will contain forward-looking statements regarding future events as outlined on slide four. 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 are included, but are not limited to, factors made in our press release today, as well as our filing with the SEC including our form 10-K which can be accessed on our website.

With that I would like to now turn the call over to Benson.

Thanks, Jake. Good morning, everyone.

On today's call I will begin with an overview of the results for the third quarter, including some strategic highlights. Then I will discuss some of our new product introductions and recent GPO wins before turning the call over to Randy. Randy will provide you with a detailed review of the financial performance as well as a review of our product line and geographic revenue performance. Finally, before he turns the call back to me, he will also update you on our financial outlook for the remainder of 2011.

Let's begin.

Third quarter 2011 revenue was $371.9 million. That represents an increase of 7.8% over the third quarter of 2010. On a constant currency basis sales in the third quarter were up 3.2%,continuing the performance we saw in the first half of the year and within our full year 2011 constant currency revenue growth expectations. While Randy will cover this in his prepared remarks, similar to quarters one and two, the growth in the third quarter came from a variety of our franchises and geographies.

Turning to gross and operating margins, they were 47.9% and 17%. This represented a sequential increase of 90 and 170 basis points respectively over the second quarter.

Finally, adjusted earnings per share for the third quarter were $1.03, an increase of 4% from the third quarter of 2010.

Now let's move to some of the strategic highlights for the quarter.

First, I would like to provide you with an update regarding our recently announced pricing initiatives. Even though we are clearly in the very early stages of this process, I am pleased to tell you that the initial results are encouraging. Since we only began these for the most part in July, only a modest amount has matriculated into our third quarter 2011 results. However, the regions that we expected to be able to drive price, Asia, North, and Latin America, did see nice growth from price within the quarter, further indicating to us that our recently launched price initiatives in these markets are achievable.

During the third quarter of 2011 pricing in Asia Pacific accounted for approximately 260 basis points of their growth, while pricing in Latin and North America accounted for approximately 240 basis points of these sales growth in those regions respectively. This was somewhat offset by a continued difficult European market which saw a decline of approximately 90 basis points in the quarter.

Turning to VasoNova, we continue to see additional penetration of this technology and standard of care into US hospitals during the quarter, including most recent wins at Duke University hospital and GBMC. While the adoption of this technology is clearly at its infancy, there was a noticeable buzz at the Association of Vascular Access Conference held in early October. Clinicians see the benefits that the VPS technology has to offer and we have several accounts in the sales funnel that we hope to close during the fourth quarter of this year.

Before I shift gears to provide you with a product development update, I am also extremely happy to report that this past Friday we announced a definitive agreement to sell our aerospace businesses for $280 million. While this transaction is subject to certain customary closing conditions, we do expect it to close before the year end.

I would like to take a minute to thank all of the Telair and Nordisk employees for all of their years of service and wish them well. In addition, I would like to thank Randy and our legal and strategic development personnel who spent countless hours seeing this transaction through to a successful resolution. Their hard work and dedication over the last several months is deeply appreciated.

Now let's turn to new product development.

During the third quarter, we launched five new products, three within our Critical Care and two from our Surgical franchise. We also made a handful of 510(k) and CE mark filings with regulatory agencies. Let's begin with the products launched and the filings that occurred within our Critical Care segment.

From a new product introduction standpoint we introduce the ArrowADVANTAGE pressure injectable PICC. This product represents the next generation of our non-coated pressure injectable PICCs. These products have increased radiopacity for visualization under fluoroscopy and X-ray and have a taper-free catheter design to minimize the risk of catheter-related thrombosis, and they are compatible with the VasoNova VPS styling.

Another launch was the StimuQuik ECHO. This is the latest addition to our clinician-inspired line of single-shot peripheral nerve block needles. It is targeted at anesthesiologists that practice ultrasound-guided regional anesthesia and is an excellent addition to our regional anesthesia product bag.

Before I move onto the recent regulatory filings we made, we also launched a product that expands our existing tracheostomy portfolio --the EasyCric. This is a complete emergency set which provides safer and easier placement and helps improve patient outcomes.

In addition to these product launches, we also filed for CE mark on our VasoNova VPS device in late September and submitted a 510(k) in October to support an anti-thrombogenic claim for antimicrobial coating on our PICCs. We see both of these at important milestones in advancing our vascular access franchise. We're currently awaiting a response on both of these from the regulatory bodies.

Moving to surgical, we launched the Taut Cone access port and the low-flow Pleur Evac. The port expands our line to deliver primary access for initial insertion during laparoscopic surgery with enhanced visualization. It integrates some of our universal seal technology with improved locking clamp and longer cannula option and is ideal for surgeons for initial abdominal access. Our low-flow Pleur Evac is an upgrade in our chest drainage line of products and allows clinicians working in hospitals with low suction to enhance patient safety.

Finally, before I discuss some of our GPO wins in the quarter, within our surgical franchise we also received a 510(k) approval from the FDA in late September on our taut universal balloon open access port. This product provides greater visual access and a better seal as compared to alternatives currently on market, and we expect to launch this product late in the fourth quarter.

Turning to GPOs, during the third quarter we were awarded 11 contracts, three of which were new. That takes us to 21 GPO contracts won on a year-to-date basis, of which nine are new. The contract wins in the quarter occurred across a wide variety of product areas and I am pleased that the work that our national accounts GPO group is doing.

With that I will now turn the call over to Randy and he can walk you through the financials. Randy.

Thanks, Benson. Good morning, everyone.

Revenues for the third quarter were $371.9 million, up 7.8% on an as reported basis. Adjusting for currency, revenue grew at 3.2%. Looking at how the constant currency revenue growth was achieved, approximately 190 basis points came from increased volume, while 120 basis points came from new product introductions. Finally, the last 10 percentage points were came from improved pricing that Benson referred to earlier.

Turning to gross profit and margins, they were $178.3 million or 47.9%. This compares to $166.6 million, or 48.3%,in the prior year ago quarter. And although gross margins were down slightly year-over-year, they were up 90 basis points sequentially. Our expectations are that gross margins will continue to improve sequentially in the fourth quarter.

Moving to operating expenses -- selling, general, and administrative expenses were $102.9 million during the quarter, up from $101.5 million last year. The slight increase in SG&A for the quarter was due to increase in sales, marketing and clinical education activities as well as an increase in the valuation allowance against our Greece government bonds, partially offset by a reduction in our G&A expenses.

R&D in the quarter was $12.3 million, up from $10.6 million last year. A higher level of R&D expense reflects increased investment in our catheter tip positioning technologies.

Moving to interest expense, it was $18.9 million for the quarter, down approximately $0.9 million. The decline in interest expense for the quarter was due to a reduction of approximately $114 million in average outstanding debt. As a reminder, during the third quarter of 2010 we incurred approximately $30.4 million of losses on the extinguishment of debt that did not recur in the third quarter of 2011.

Turning to taxes, the effective income tax rate for the third quarter was 23.9%. On a year-to-date basis when adjusting for items that affect comparability, our adjusted tax rate was 27.3%. The lower effective tax rate is a function of reduced US tax expense with respect to foreign earnings for the year and lower accruals in the quarter resulting from lower than previously expected tax rate for the full year. As a result, we now project a tax rate between 28% and 29% for the full year. This is down slightly from our prior expectations that taxes would be between 28% and 30% for the full year.

As a result of this performance, adjusted earnings per share for the quarter was $1.03, up approximately 4% versus the prior year.

Now let's move onto a more detailed review of the constant currency product and geographic revenue results.

Critical care revenue was $245.1 million, up 3.6%. During the quarter urology sales grew 7.4%, vascular access sales grew 6.5%, and anesthesia sales grew 2.7%, while respiratory sales were down 5.2%. We are particularly pleased with the growth of our vascular franchise, as it improved nicely from 2% growth which it posted in the second quarter of 2011. The performance in the quarter was particularly strong within our CVC and arterial product lines.

Moving to surgical, its revenues were $66 million, up 1.9%. Growth in the quarter was primarily due to an increased sales of our ligation products.

Turning to cardiac, its revenues were $18.1 million, down 1.7%. This slowdown was largely due to the softness in the capital equipment market which the cardiac business is somewhat exposed to, and to the timing of some orders and shipments in the quarter. We do believe this business performance will improve next quarter.

Before I move to discussing the top line results from the regional perspective, let me briefly mention our OEM business. OEM revenue was $42.4 million, up 5.6% with an increase in revenue coming from higher sales of specialty suture, catheter fabrication and orthopedic implant products.

Now I will walk you through our top line performance from a geographic perspective. Revenue in North America was $152.5 million, up 1.4%. During the quarter, increased sales of our vascular access, anesthesia and urology products was offset by slight declines in our respiratory, surgical, and cardiac products. In addition, pricing positively impacted North American sales.

In Europe sales were $127.1 million, up 3.3% and despite a difficult macroeconomic environment, we continue to post sales growth across a variety of product lines including urology, anesthesia, surgical, and vascular access.

In the Asia Pacific region sales were $25.3 million, up 12.7%. This was led by increased volume in vascular, surgical, and cardiac as well as improved pricing.

Turning to Latin America, sales were $14.7 million in the quarter, up 11.1%. Growth in this market led improved -- led by improved pricing, vascular, and urology volumes.

Finally, in Japan, sales were a bit disappointing coming in at only $9.8 million, down 12.3%. The decline in revenue in this area of the world was primarily due to lower sales of respiratory therapy products. We believe this market will rebound in the fourth quarter.

With that let's move to our 2011 guidance.

Based on our nine months of actual performance behind us, we are updating our guidance expectations for 2011. As a result, we now expect full year revenue to be between $1.51 billion and $1.53 billion. This is up from our prior expectations that the range between $1.44 and $1.47 billion. The increase in our revenue expectations are associated with foreign currency fluctuation and the translation of foreign revenues into US dollars. Our revenue assumptions peg the US dollar to euro conversion rate at approximately $1.37 in the fourth quarter. In terms of constant currency revenue growth, we expect to be in a 3% to 3.5% range for the full year 2011. This compares to our prior constant currency full year growth expectations that was in the 2.5%to 3.5% range.

From an earnings perspective in 2011 we are now narrowing our range from $4.05 to $4.25 to $4.05 to $4.10. The reduction in the high-end of the EPS guidance range is due to the Company's nine-month year-to-date performance as well as our expectations in the fourth quarter.

Finally, from a cash flow perspective we're now projecting full year 2011 cash flow from continuing operations to be in the range of $150 million to $180 million, down from our previous expectation of $180 million to $210 million. The decrease in cash flow from operations guidance is associated with Management's intention to increase inventory levels as we continue to focus on gaining additional market share, our desire to continue to improve on time delivery and customer satisfaction metrics, and a projected full year increase in accounts receivable, and made earlier this year to no longer factor certain receivables.

And with that, I would now like to turn the call back over to Benson for some closing remarks.

Thanks, Randy.

Also, in closing I would like to leave you with the following --

As we have now completed nine months of 2011, I am pleased with the results that we generated. The environment that healthcare companies are currently operating in are challenging. However, we are well positioned and are clearly moving in the right direction.

As I stated on our last quarterly earnings call, our revenue growth occurred as a result of a combination of market share gains, select price increases, and the improved traction of recently introduced products, and we will continue to expect a top line growth in the fourth quarter. In addition, we continue to expect both gross and operating margins to continue to expand sequentially from the levels we posted this past quarter.

With that I would like to turn the call over to the operator for questions. Operator.

Thank you. Thank you. (Operator Instructions). Our first question will come from the line of Thomas Kouchoukos with Stifel Nicolaus. Please proceed.

Good morning, guys. Congratulations on the nice quarter.

Thank you.

Maybe from a macro perspective, Benson, you talked about share gains and clearly your growth rates picked up a bit this quarter. You have had a lot of new product flow coming out and I know there is a lot going on that's more positive operationally, but what are you seeing big picture?

How meaningful are the share gains and can you contrast those versus maybe what you are seeing in the environment? Are we also seeing benefit of maybe procedure volumes not being as bad as some people feared during the quarter?

So to take your last question, I am not sure that our particular results are a good mirror of general procedure conditions. We haven't seen the same sort of fluctuations in our own product lines that some other people have seen, so I am not sure our results are a good mirror of what's happening generally procedurally. We have commented before that we think a number of our product lines are in that critically ill patient area that it is hard to postpone therapy in a lot of those areas.

We're certainly starting to see some traction in our US vascular access business. I think that it is in part a result of the focus that's coming from our strategic business units and in part coming from, I think, some good acceptance and enthusiasm around the VasoNova product introduction that, aside from its own merits, is also creating kind of a good talking opportunity and access point with those clinicians.

In Europe it is a little different story. We're seeing largely good growth across the board in most of our product areas, so it is a little bit of a different picture from region to region. But I think it is a combination of new product entries and sales focus that's helping us.

That's great. That's helpful. If I can follow up with one more for Randy.

Obviously, you haven't not given guidance yet for next year but with the swing we have seen in currency more recently, can you talk about how we should think about the currency situation on Q4 and on a larger note going into next year?

Sure. As we look out to the fourth quarter, we're not expecting to realize as much of a tailwind as we have in the first three quarters of this year. Certainly the economic situation in Europe is, I'm sure, everybody is watching fairly closely to gauge some impact.

As everyone knows, we are fairly well hedged as we continue to at least for the time being operate our aerospace business. But certainly as we look into next year we're going to have to be a bit more cognizant of our hedging strategy with the outlook for at least greater volatility in the euro for next year. So while we remain very confident in some of our organic or constant currency growth continuing to improve on a going forward basis, I think we'll probably experience a few more headwinds in terms of our currency improvement next year.

Okay. That's helpful. Thank you.

Our next question will come from the line of David Lewis with Morgan Stanley. Please proceed.

Good morning. This is John Demchick in for David.

Good morning.

Good morning.

I wanted to touch on expectations moving into the fourth quarter.

When looking at the results and even some of the changes in guidance, I don't really see any significant changes, guidance increases in revenue, and narrowing EPS down seem to be within what you would have expected from the first half or the first three quarters. Were there any surprises you would like to point out? And also, how is the balance of the year shaping up versus the expectations?

I guess from a guidance perspective I think we look at this as pretty consistent with the guidance we provided all year and just sort of tightening a range with only a quarter left to go.

We thought the quarter was a fairly clean one and gave a good indication of performance of the Company, and our ability to continue to improve our top line results and continue to see margin improvement. So I wouldn't expect there to be too much changes as we move into the fourth quarter here.

Okay. Great. Just one quick follow-up.

Can you discuss the potential uses of cash from the divestiture? Is it now more likely for these to be for a strategic acquisition? And also where on the list of priorities does reducing debt lie?

I think as we indicated all year long, that the two primary uses of cash whether it was from the bond offering earlier in the year or from the remaining divestitures were to retire debt and sort of look at strategic opportunities to continue to improve growth. Those continue to be the priorities. I don't think there is any one that takes priority.

I think right now, though, with a lot of the discussion around repatriation of funds, we are probably more likely to see how that discussion continues to unfold in the first half of next year rather than just try to bring back cash from outside the United States.

As some of you may know, the divestiture of the aerospace business regarding that cash will be outside the United States, so we'll continue to have -- to review some of our repatriation issues.

All right. Thanks.

(Operator Instructions). Our next question will come from the line of Dave Turkaly with SIG. Please proceed.

Thanks. Quickly on the cash flow side, $165 million for your operation -- cash from operations guidance is the midpoint, now and with, $65 million in in kind of year-to-date in this fourth quarter, should we be looking at the inventory and the accounts receivable build as things that happen this quarter and kind of are more one time in nature? Or help us get to that big sequential increase that you're going to show in the fourth quarter?

I think, you know, we have been talking about the build in inventory and sequentially some of the rise in our receivables throughout the year as a result of two actions, predominantly the discontinuance of our factoring last year. We have now come full circle around that, so I wouldn't expect any significant increase in receivables on a going forward basis. I think inventory levels which are up reasonably well and we have seen a nice improvement in our service levels. We wouldn't expect any dramatic rise from the current levels through the end of the year. So I think we are positioned to generate fairly significant amounts of cash as we move into the fourth quarter.

Great. As we look at the price increases, certainly not common theme in the space, but the detail there, thanks for that. If we look at specifically what businesses, if you could give us any granular detail, I am just curious because Critical Care looked like it was pretty strong in the quarter. Could you tell us the contribution to Critical Care growth from a pricing or generally if you look at your increases you saw in North America and Asia Pacific -- was it primarily weighted to that bigger component of that Critical Care part?

So specifically in the Critical Care business, we have been moving some of our CVC customers into an Ergopack kit that has additional components and also sells for a higher unit value. That has value from a standpoint of price in that category. And then the other area has probably benefited the most has been in the surgical area.

Last one -- I know with the cash proceeds we talked a little bit about M&A and debt paydown, Randy, could you walk us through the swap agreement? I think it expires in 2012 and exactly what that means for that component of your debt, what the interest rate would go to from where it stands today. Thanks a lot.

As many of you know, we have an interest rate swap that was put in place a number of years ago as a result of the Arrow acquisition to create some certainty around interest expense. This swap expires, as indicated, in October of next year. The net result of the expiration will realize about a 4% benefit moving down from about an effective rate of about 7% on $350 million of our term loan to approximately the 3% level. Our term loan is a LIBOR plus approximately 250 basis points, so we should enjoy some benefit moving forward from that.

Thank you.

Our next question will come from the line of Rich Newitter with Leerink Swann.

Thank you for taking the questions.

Just wanted to start on currency. Can you just tell us -- you might have mentioned it, what the EPS impact was from currency in the third quarter?

You know, when we look at our currency, we are fairly naturally hedged. We had obviously some nice benefit from our top line growth, and that does flow through, so we did see some tailwind as we moved coming through in the quarter, and for the full year.

What that results in is approximately about $1.5 million to $2 million in pretax benefit, so we do experience some, but it is largely offset by the currency expenses that we have from both our manufacturing and operations. So we would expect some of that to be mitigated as we move forward with some of the currency headwinds we're projecting.

Okay. Thanks for that.

Going back to pricing, thanks again for the breakout there by region. And on the product categories specifically, maybe even within North America, I think last quarter you talked about a 30 basis points contribution from price and now it is at about 10 basis points for this quarter. What kind of acceleration in pricing contributions should we be expecting versus new products which seem to be the bigger contributor to the acceleration in Critical Care this quarter?

Can you help us think about that moving forward? Should this be something going from 10 basis points in the third quarter to 20 in the fourth quarter and then increasing thereafter or is this going to be more gradual?

So I think on where we're seeing the positive contributions come in from North, South America, and Asia Pacific, essentially I think we are convinced that those prices are sticking and that part of the plan is working. Those increases are working against some negative pricing in Europe and I am sure as you are aware that for the most part European pricing in the third quarter is the result of tender bids that were generated anywhere from three months ago, six months ago, nine months ago. So while we have modest expectations for pricing in Europe, I think part of the plan is over the next twelve months to mitigate the decline in Europe which will start to get more favorable overall net effect in the range we have been talking about earlier. And it is just that it just takes longer in Europe, and I don't think there is the same opportunity for increases there. It is more a matter of slowing down the decline.

Certainly new product introduction will play an increasingly bigger role in 2012 and 2013 than pricing is responsible, I think primarily for our growth above the pricing contribution.

Okay. And just to make sure I am hearing you correctly, this is a correct summarization -- you think it is about the European regions maybe on a pricing perspective getting less bad and perhaps accelerating pricing in the regions that you're already seeing good price increases in?

I think that -- so I think the pricing increases in the regions where we're seeing them are essentially in place now and we don't foresee making additional adjustments to those numbers until the midpart of next year again. So for 2012 our expectations is we'll still see a net gain of about 1 percentage point as a result of pricing and that's going to come substantially from first of all seeing the full impact of what we initiated this July and we have only seen the partial impact of that so far, so seeing the full impact of what was initiated in July and then mitigating the decline in Europe by about half that amount that we're seeing decline now.

That's great color. Thank you.

Our next question will come from the line of Larry Keusch with Morgan Keegan.

Good morning. Randy, question for you.

I am just trying to understand how you are thinking about the proceeds from the aerospace asset sale, as you indicated the majority of them sit overseas in Europe. If you don't have a repatriation event here -- just again sort of from a corporate perspective, how do you think about whether you bring that cash back? And if you don't, are there are there opportunities over there that you think in M&A where you can use the proceeds? Those will be pretty high, those proceeds relative to the sales price.

First, just to give everybody a sense of timing, we don't expect to close this transaction probably in the December timeframe so the opportunity if we did choose to repatriate or pay down debt really wouldn't present itself until at best just before year end.

Second, I think when we look at it, we have provided in prior periods for some significant repatriation through the income statement to bring back some cash to the United States for further deleveraging, although we haven't provided the cash aspect of that, so it shouldn't have if we were to bring some cash back, would not have a P&L impact but would have a cash impact on a going forward basis.

To your question in regard to debt retirement versus acquisitions, obviously some of that is just as we look out at the various opportunities that exist. I think there is a number of things that we look at both domestically and abroad, and we continue to see a lot of very interesting opportunities to add technology and some products overseas. So I wouldn't think there would be a difficulty in leaving a sufficient amount of cash overseas and being able to deploy that effectively for growth opportunities.

Okay.

Again, I think from a timing perspective we'll evaluate this towards the end of this year and into the first half of next year in terms of whatever the both the tax and macroeconomic environment present us with.

Great. I know you're obviously not providing 2012 guidance yet.

I am just wondering if you can help us think through a little bit of the puts and takes that you foresee in the operating margin expansion for the coming year just so we can start to kind of think about what's sort of positive in the mix and what is perhaps negative in the mix.

I think as we suggested to everybody, you know, longer term going out three to five years, we talked about the fives and they're out there, so I don't think directionally that would come as a surprise to everyone. And this year we talked, you know, that we would feel fairly confident being in that mid-single digits top line growth and sort of being in the 20% range by 2013. And in addition, we have talked about generally seeing operating margins expand about 150 to 200 basis points a year. So I think those would continue to be some of the guidance that we would have out there about future performance until we get to some more explicit 2012 guidance.

And, Randy, just broadly and thanks for that, but broadly new products, price, are going to be positives there. FX, does that impact you from a gross margin operating margin perspective? Again, I am just trying to understand what's positive, what's potentially negative as we work through this.

I certainly think that as we have talked about at great length this year, sort of pricing and product mix and some new product introductions, will certainly drive most of the improved profitability as we get into the next year. Better execution and continued awareness on the cost side is also going to be something that we take into consideration.

Obviously we are levered to currency with 50% of our revenue being generated offshore, so if currency does turn around, there will be a little bit of headwind there, but that shouldn't have a significant impact on our gross margins. It will probably manifest itself more in our operating margins if we move forward.

Great. And then the last one and you mentioned it very quickly, but just on the just any details on that Greece exposure that you mentioned in the prepared comments.

You know, I think we're fairly well reserved at this point for our exposure to the Greek bonds. We generally speaking have about 50% of that exposure reserved.

I think as we move forward this week and over the next couple of weeks we'll get a better indication of whether that is adequate or not. But I think as we go forward we continue to watch, you know, all of our receivables in Europe and the business environment over there, but again I think we continue to position ourselves well. Healthcare spending in Europe is one of those things that we do expect to continue, so while we may see a little bit of extension of some of our days sales outstanding, we continue to believe that the vast majority of our receivables are quality receivables.

Terrific. Thanks very much.

(Operator Instructions). Our next question will come from the line of Chris Cooley with Stephens Inc. Please proceed.

Good morning and thank you for taking my questions. Could you maybe just briefly address the contribution both from a more favorable product mix relative to just absolute price increases when you think about that step up in guidance to 3.5%?

And then as a follow-up, help us think about the progression of margin expansion. I understand the aggregate targets on annualized basis. But is anything changing as you see it kind of intrayear versus what maybe you thought about initially when you started this fiscal year? Thank you.

So certainly some of the margin expansion does come from mix. The first quarter, for example, saw heavier than expected sales in our respiratory therapy product line. In the third quarter, respiratory sales were down versus what they were a year ago, and so that change alone was helpful in terms of the overall product mix, which was certainly a responsible for some of the improvement in gross margin.

The rest of it comes to a certain part from new products that generally speaking have a higher gross margin than the products they're replacing. So it is a combination of mix and new products that's contributing to that, and then some assistance obviously from price improvements.

Okay. Thank you.

Our next question will come from the line of James Sidoti with Sidoti and Company. Please proceed.

Good morning. Can you hear me?

Yes, we can. Good morning.

I know there is a lot of talk about currency already, but I just want to go over -- you are going to be a little less -- you will be less hedged next year once the aerospace businesses are divested. You still have some international operations on the medical side, right?

Yes.

And so can you just give us an idea what percentage are you manufacturing will be done overseas once the aerospace business is divested?

We generate about half of our manufactured products outside the United States -- or outside of North America I should say. We do have a fair amount of manufacturing down in Mexico. We would continue to have a reasonable hedge although I will tell you that two years ago we moved to a functional currency perspective at our plant, so we utilize more forward contracts for labor costs. Most of our raw materials are bought in euros or dollars, so again we're probably from an exposure perspective predominantly exposed to the euro. We enjoyed a natural hedge because of the aerospace business, obviously year end that's going away. And we already began hedging a hedging program to account for the loss of that business. So I wouldn't expect that we're going to see any dramatic change in the overall performance on a pretax basis with the hedging program put in place.

I know it is early with the VasoNova but is there any anecdotal evidence you're gaining share as a result of having that on the some of the Critical Care catheters?

So the short answer is yes. I was personally at the AVA conference a couple weeks ago, and I would say the booth was extremely well attended. I saw a lot of first hand interest in both explanation and then people sitting through the educational seminars about it. We have had a number of, I will describe them as high profile comparisons between ourselves and competitive systems, and we have fared extremely well in those profiles. Duke is a good example of an account that's just converted, a sizable account at that.

And I certainly think our major competitor here has some advantages in terms of their share in the PICC market, but we are faring very, very well in those situations where we can get a head to head comparison of those two systems, and there is just some advantages that we have that they're not able to compete against. We're quite encouraged by the progress with that product.

All right. Thank you.

(Operator Instructions). Your next question will come from the line of Gregory Hertz with Citi. Please proceed.

Thanks for taking my questions.

Just the first one the revised guidance for the cash flow from operations -- you mentioned some of that is due to decision to stop factoring accounts receivable. I am wondering, you know, has that decision affected any of your client relationships? And how much of that is a direct response to what's going on in Europe? If you can just give a little bit more on that, I would appreciate it.

Sure. The actual decision was made more of a result of historically being a fairly diversified company than some of the other industries that we were in, the need to accelerate the cash conversion cycle to generate cash flow was a little bit greater than it is in the healthcare business. So as we began to reduce some of our exposure to other industries, we made the decision that it wasn't the cost of factoring wasn't an effective tool as we move forward, so it was actually a year ago that we made the decision to stop factoring.

So we continue to believe that the quality of our receivables in Europe where a majority of the factoring was going on are still very high. The cash flow that we general rate there and continue to believe is very sound, but as I am sure you recognize, some of the length of the receivables it takes about a year to work through that when you stop factoring, and we're just about at that point. That's why we continue to be confident in our ability to generate cash in the fourth quarter.

Appreciate that.

And then just looking more specifically at the within your vascular access business, can you maybe characterize maybe in volume or sales dollar terms the growth and PICC in CVCs respectively?

That's it for me. Thank you very much.

Greg, let me grab the PICC and CVC growth and as we take this next question I will give you an answer.

Thanks a lot.

Our next question will come from the line of Anthony Petrone with Jefferies. Please proceed.

Thanks, gentlemen.

Just to go back to gross margin, two questions there.

One on the price initiative -- I recall last quarter that the increases in price were mostly in Asia and that was still ongoing and moving through the system. I am just wondering what percentage of the portfolio in China specifically the APAC region overall -- have you implemented the price increases? And where are you in other regions of the world, North America and Europe? and then I have a follow-up to that one as well.

So the price increases in Asia with the exception of Japan have been largely throughout the rest of the region.

In North America although on a basis point improvement although it is the smallest because the volume of sales is so much greater, that's tied with Asia in terms of the kind of actual contribution that it is making to our price increases, and although we have a much larger percentage increase in Latin America, the volume is much smaller. So North America and Asia are principally producing most of the net dollars in the pricing equation.

So in other words on a product by product basis the intentions to increase price has been implemented across all products? Or is there still some products that still are awaiting price increases?

So there is one correction I would say is -- we are of the opinion it is about two-thirds of our product line where price increases would be quite constrained, about half of that just comes across all product areas in Europe where we think it would be difficult to do better than simply mitigate the decline. The other third we just don't think is really not in the same position to be able to withstand the price increase. So it hasn't been across the board.

But the first part of your question is have we put into place what our plan is to put into place this year? And the answer is yes. Some of that is obviously in the early very early initiation stage, particularly in North America, but most of or substantially all of I should say the price increases we plan to initiate have been initiated.

All right. Great.

Just one follow-up there would be the new GPO contracts and how that plays into gross margin, so, Benson, you mentioned earlier the mix of respiratory to vascular, switch towards more vascular was a gross margin tailwind and the new GPO contracts seem to be heavily weighted towards respiratory.

I am just wondering as you look out how does that factor into the gross margin outlook? And even though more contracts are weighted towards respiratory on a product basis, do you still have more exposure to some of the other areas such as vascular or cardiac once again?

Most of the respiratory therapy contracts are renewals, and I would say we already pretty much have taken the price beating for those product areas. They don't represent a decline over prior year.

Okay.

To answer quickly the question on CVC and PICC growth during the quarter, both were up on a constant currency basis in Q3 versus the third quarter of 2010. CVC growth clearly led the way for overall vascular in the quarter, but both were up.

(Operator Instructions).

At this time I show we have no further questions in queue. I would like to turn the call back over to Mr. Jake Elguicze for any closing remarks.

Thanks, operator. Thanks, everyone, for joining us today. That concludes the Teleflex Inc. third quarter earnings conference call. Have a good day.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day, everyone.