泰利福醫療 (TFX) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the second quarter 2012 Teleflex, Incorporated earnings conference call. At this time all participants are in listen-only mode. Later we will conduct a question and answer session. (Operator Instructions).

And now I have the pleasure in turning the conference over to Mr. Jake Elguicze, Treasurer and Vice President of Investor Relations.

Thank you, operator, and good morning, everyone, and welcome to the second quarter 2012 Teleflex Incorporated 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 617-810-6888, passcode 46362185.

Participating on today's call are Benson Smith, Chairman, President and Chief Executive Officer; and Thomas Powell, Senior Vice President and Chief Financial Officer. Benson and Tom 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 the conference call will contain forward-looking statements regarding future events, as outlined on slide four. Such statements are in fact forward-looking in nature and 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 not are 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.

In addition, I would like to point out that on July 18, 2012, the Company announced that it entered into a definitive agreement to sell its OEM orthopedics business. As such the results for this business are included in discontinued operations for all periods presented.

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

Thanks, Jake, and good morning, everyone. On today's call I will begin with an overview of the results for the second quarter, including some strategic highlights. Then Tom will provide you with a review of our second quarter financial performance, a review of our product line and geographic revenue mix, as well as our outlook for 2012. He will then turn the call back to me for some closing remarks. So let's get started.

Building upon about the solid performance from the first quarter of the year, the second quarter of 2012 was another strong quarter for Teleflex, with revenues reaching $383.3 million. Due to the impact of foreign currency fluctuations, on an as reported basis sales increased 0.6%. However, on a constant currency basis, sales increased 4.7% as compared to the prior year period. Once again, the Company achieved constant currency sales growth in all of its geographic regions as well as all but one of its strategic business unit franchises.

Comparing first quarter to second quarter, it might appear that the constant currency growth is slowing down on a sequential basis. However, because of a difference in days compared to last year and other factors, our quarterly comparisons this year are somewhat lopsided. In context let me say that both our first quarter and our second quarter constant currency revenue attainment are ahead of our initial expectations.

Turning to gross and adjusted operating margins, they were 48.1% and 17% respectively, representing a year-over-year improvement of 50 basis points on the gross margin line and [150] basis points at the operating margin line. And finally, adjusted earnings per share for the second quarter of 2012 was $1.23, an increase of 34% over the prior year period.

Now let's move to some of the strategic highlights for the quarter. I know that many of you are interested in getting an update regarding the price increases that were put in place around the mid year mark of 2011. During the second quarter of 2012 the average selling prices of our products continued to trend in the right direction. Overall, pricing contributed 132 basis points towards our sales growth.

These considerations continued to exceed our initial full year expectations, with much of the favorability being driven by our ability to continue to increase prices in Europe faster than we had initially expected. For the second quarter in a row, European pricing has been positive, this quarter generating 28 basis points of growth. In addition to Europe, we also had positive pricing in the Asia Pacific and Latin America markets of 252 basis points as well as positive pricing in the North American market of 140 basis points.

I can appreciate that some of you are wondering why our pricing strategy is working and wondering if it will continue to work. The reason quite simply is because of the hard work our teams did in identifying those particular areas where we could take price environment, even in a difficult market environment. I'm pleased to tell you that one of the significant culture improvements we have made at Teleflex is a rigorous price is discipline, which in and of itself will benefit us in the future, in good markets and in tough markets.

Turning to R&D, we continue to make investments in our future and see those investments translate into revenue growth. This past quarter spending on R&D initiatives up 10% versus the second quarter of 2011, reaching 3.6% of revenue, while sales of newly introduced products contributed 94 basis points of top line growth.

One franchise in particular that continues to benefit from the launching of new products is our vascular business. During the second quarter we saw a nice increase in sales of our recently introduced ArrowADVANTAGE5 and ArrowEVOLUTION PICC products. And I'm pleased to tell you that another 12 accounts have chosen our VasoNova VPS device to use as their targeting system; seven during the second quarter, and another five in the month of July alone.

In addition to capital being put towards internal R&D investment during the past quarter, we closed on four acquisitions that will significantly augment our R&D pipeline in the future. The first acquisition I would like to talk to you about this morning is Semprus BioSciences. Located in Cambridge, Massachusetts, Semprus is a biomedical company that was spun out of MIT.

This transaction brings to Teleflex an innovative and patented platform technology, Semprus Sustain, that will serve as the basis for many of our next generation medical devices. This technology is designed to provide the benefits of reducing complications such as thrombosis and microbial adhesion over long durations. And while the initial focus will be in vascular device applications, we see this technology being applied across a range of our existing products, including dialysis, Foley catheters and endotracheal tubes.

The next is Hotspur Technologies. Hotspur, base in Mountain View, California, is a leading developer of innovative catheter based technologies aimed at restoring blood flow for patients with obstructed vessels. With this acquisition, Teleflex broadens and strengthens its product portfolio that addresses its the estimated $1 billion market opportunity for dialysis access and peripheral PTA balloons worldwide. We believe the Hotspur multifunction catheters are the most innovative in the PTA balloon market and provide clear advantages over current treatment options.

Continuing on, during the quarter we also closed on the acquisition of the EFx family of laparoscopic fascial closure products. This product portfolio Includes both FDA-cleared and pipeline products designed for safe and simple closure of abdominal trocar defects through which access ports and instruments used during laparoscopic surgeries. For than 750 clinical cases have been performed with the device in the United States, and currently this product is being prepared for CE mark review.

When we acquired the EFx product line, we were obviously impressed with its design, but it is always great to get some additional customer confirmation. And we were pleased to get a notification from the Society of Laparendoscopic Surgeons that the Weck EFx endo fascial closure system will be recognized at the opening session of their annual meeting as one of the 2012 innovations of the year.

And finally on the acquisition front, we acquired the EZ-Blocker single use catheter product line. This brings to Teleflex an innovative technology used for lung isolation and one lung ventilation procedures. Currently has a CE mark in Europe, and 510k application submitted to the FDA and is pending clearance. This product line is designed to provide benefits that overcome the significant drawbacks of currently used products for lung isolation procedures, namely its use in combination with standard endotracheal tube and its easy and intuitive position. This product line will strengthen our anesthesia and respiratory franchise, and although it is very early on, the integration of all these acquisitions are going very well.

In addition to acquiring some innovative technologies that will position Teleflex for future growth, during the second quarter we reached a definitive agreement to sell our OEM orthopedics is business for $45.2 million. This transaction is expected to close during the third quarter of the year, and although it comprised approximately $0.13 of earnings on an annual basis, its revenues growth rates and margin profile were not consistent with our Company's longer term goals and objectives. I would like to thank a take a moment to thank all of the employees from this business for all their hard work and dedication over the years and wish them well in the future.

In addition to changing the future margin profile of the Company through recently announced M&A, I'm pleased to tell you that we are also taking steps to reduce our operational footprint. Currently we occupy and operate three US-based distribution centers. During the course of next year these three distribution centers will be consolidated into one centralized distribution center. This will lead to improved operating efficiencies, improve service to our customers, and will help expand our future gross and operating margins.

And before I turn the call over to Tom, let's briefly review our accomplishments this past quarter from a GPO and IDN perspective. During the second quarter, Teleflex was awarded seven GPO contracts. Of those GPO awards, three were brand new, including a thrombectomy award with HealthTrust, as well as a vascular and anesthesia with [Amerinay].

And although you haven't heard me talk much about integrated delivery networks in the past, you will hear me speak of them more in the future. This past quarter Teleflex was awarded 11 IDN contracts, five of which we were not previously on. On the year-to-date global basis we have been awarded 24 GPO and IDN contracts. Accumulatively, all of these contracts will help position oak to achieve sustainable and profitable growth in the future.

With that, I will now turn the call over to Tom, and he can walk you through our most recent quarterly financial performance in more detail. Tom?

Thanks, Benson, and good morning, everyone. Revenues for the second quarter were $383.3 million, up 0.6% on an as reported basis. When adjusting for currency fluctuations, revenue grew 4.7%. In looking at how this constant currency revenue growth was achieved, 132 basis points came from improved pricing, while 94 basis points came from new product introductions and approximately 240 basis point came from increased volume.

Turning to gross profit and margins. They were $184.4 million or 48.1% in the second quarter of 2012. This compares to $181.4 million or 47.6% in the prior year quarter. Gross profit and margins were up year-over-year due to the impact of improved pricing and increased volumes, which occurred across all geographic areas, as well as from lower manufacturing costs in North America and Europe.

Our ability to further expand gross profits was some what limited by foreign currency translation headwinds, which had a negative impact of approximately $7.7 million in the quarter. In addition, during the second quarter of 2012 we wrote off approximately $2.8 million of excess and damaged inventory within our Singapore distribution center. We attribute the write-off to first year startup learnings and do not expect a similar write-off to occur in the second half of 2012.

Moving to adjusted operating expenses. Selling, general and administrative expenses were $105.3 million during the quarter, down from $109.8 million last year. The current year amount is adjusted to exclude approximately $600,000 worth of costs associated with the acquisitions we announced this quarter.

The decrease in SG&A for the quarter was largely due to foreign currency fluctuations and costs that were incurred during the second quarter of 2011 that did not repeat this year. The [reference] second quarter of 2011 costs include $1 million increase in the valuation allowance against three government bonds that's the Company held at the time, and a $1.7 million increase in litigation reserves.

Turning to R&D. In the quarter research and development spending was $13.7 million, up from $12.5 million last year. A higher level of R&D expense principally reflects increased investments related to vascular access products in North America and new technologies obtained in the second quarter of 2012 through acquisitions.

For the second quarter adjusted operating margins improved 150 basis points from the prior year quarter to 17%. The improvement in adjusted operating margins was the result of a 50 basis point improvement in gross margin combined with a 2.7% reduction in adjusted operating expense.

Moving to interest. Second quarter net interest expense was $17.7 million, an increase of approximately $2.2 million. The increase in interest expense reflects higher average outstanding debt of approximately $68 million, currently offset by lower average interest rates.

Turning to taxes. The GAAP tax amount this quarter was income of approximately $300,000. The tax rate for the quarter was substantially influenced by benefits related to two items. The first was the resolution of prior year tax audits in Germany and Italy that resulted in a discrete net tax benefit of approximately $7.7 million. This discrete net benefit was is treated, consistent with prior practice, as a reduction to our adjusted earnings results.

The second item that is favorably impacted our tax rate this quarter with a change in the Company's estimate of tax expense associated with potential future repatriation of non-permanently reinvested foreign earnings. This item contributed approximately $0.12 to earnings per share.

And finally adjusted earnings per share for the second quarter were $1.23, an increase of approximately 34 %versus the prior year.

Now let's move to a more detailed review of our constant currency product and geographic revenue results. Critical care revenue $254.1 million, up 4.4%. During the quarter, anesthesia product sales increased 7.8%, while urology and vascular access sales increased 6.9% and 3.8% respectively. Respiratory sales, on the other hand, were down 0.4%.

Moving to surgical, revenue was $72.5 million, up 3.8%. Growth in surgical product sales was the result of increased sales of ligature and closure devise products.

Turning to cardiac, revenue was $20.5 million, down 2.3%. The decline in revenue during the second quarter occurred in both the capital equipment portion of the business as well as the single use disposable catheter side. And lastly, OEM revenue for the quarter was $36 million, up 13.6%. The referenced OEM figures exclude any orthopedic revenues for all periods presented, as that business has now been classified as discontinued operations in anticipation of closing the sale later this year.

Now I will walk you through our top line performance from a geographic perspective. Revenue in North America $160.3 million, up 2.7%. Sales growth was the result of improved volumes, the introduction of new products to the market and improved pricing. In Europe, sales were $126.9 million, up 2.3%, with revenue increases coming from volume growth, new product and modestly improving pricing. In the Asia Pacific and Latin America markets sales were $60.1 million, up 11.1%. In these markets increased revenues were principally the result of higher volumes and improved pricing.

And before I turn the call over to Benson for some closing remarks, I would like to provide you with an update regarding our full year 2012 financial outlook. Despite operating within a very difficult macroenvironment, Teleflex has performed quite well for the first six months of the year, and as a result we are maintaining our previously provided 2011 outlook for constant currency revenue growth and adjusted earnings per share.

All of our geographic regions as well as most of our product lines have performed extremely well on a constant currency revenue basis for the first six months of the year. And as a result, although we are not adjusting our full year 2012 constant currency revenue growth range, we believe that we will be closer to achieving the higher end of the 4% to 6% range previously provided.

Given where exchange rates are today, we now expect foreign currency fluctuations to be a headwind to revenue of approximately 3.5%. Our original expectations provided at the beginning of 2012 were that foreign currency fluctuations to we a headwind of slightly more than 1%.

Turning to operating margins. Our outlook -- our original outlook called for operating margin expansion of approximately 100 basis points over 2011. However, due to the recently completed acquisitions, and the resulting additional research and development and operating expenses we will now be incurring for the second half of the year, as well as the impact of greater foreign currency fluctuations, we are now expecting operating margins to be approximately 16.5% for the full year of 2012. This translates into approximately 30 basis points of year-over-year growth. However, excluding the impact acquisitions, the increase is approximately 110 basis points and in line with our original estimates.

Finally, moving to adjusted earnings per share. In addition to reaffirming our full year expectations for constant currency revenue growth, we are also reaffirming our previously provided full year expectations for adjusted earnings per share in the range of $4.25 to $4.45 per share.

The strength of underlying operations and tax benefit received in the second quarter have allowed us to offset significant foreign currency headwinds, additional unplanned expense from the four recent acquisitions, and the removal of about $0.13 per share associated with the orthopedics business.

Finally, I should note that our adjusted earnings per share projections are based upon an assumed US dollar to euro exchange rate of $1.25 through the balance of 2012.

With that I would like to turn the call back over to Benson for some closing remarks. Benson?

Thanks, Tom. In closing, I would like to say that I'm pleased with our performance to date, particularly in the second quarter. We are in the process of creating a platform that will allow for consistent sustainable and profitable revenue growth for many years to come. We certainly recognize that the market conditions are tough. In fact, tougher than what we planned on as regards to currency and the overall economy. However, when you find yourself having to swim upstream in a difficult market, sometimes you just need to paddle harder, and I appreciate the effort of many, many Teleflex employees around the world who are helping us do just that.

In spite of these tougher circumstances, I believe we have crafted a more detailed pathway to the achievement of our high-five objectives. Price has helped and will continue to help.

Product mix will help as we eliminate slow-growth low-margin product lines and replace them through R&D and acquisitions with higher growth, higher margin products. Improvements in our manufacturing cost structures and distribution facilities will also play a critical role. If the market conditions result in our falling short in one area, I believe we have enough compensatory room in the other areas to make up for the short fall and still achieve our objects.

And before I turn the call over for Q&A, I would like to tell you that we plan on doing a first ever analyst day this fall. We will provide further details surrounding this event in the not too distant future, but webelieve that this will serve as a great opportunity for the investment community to meet a new Teleflex.

That concludes the formal prepared remarks section of the presentation. With that I would like to turn the call back to the operator for questions. Operator?

(Operator Instructions). Your first question comes from the line of Lawrence Keusch with Ray Monday James. Please proceed.

This is [Constantine] for Larry. I was wondering if you could first comment -- just comments about price. I understand your kind of strategy laid out, where the next kind of three years you wanted to increase by price by 100 basis points, and we have kind of finished year one. Can you just speak of your confidence going forward that in this challenging environment you are still able to achieve this goal?

So, we are in the process of going through the same kind of analysis we went through last year in identifying the particular products where we think we are underpriced in the marketplace. We are in the middle of the process actually of implementing that second round of price adjustments. I think our analysis at this point is that we have a good degree of confidence this will continue through the next year, and next July we will be in the same position again of going through our product line and looking for the most obvious opportunities that the point in time.

I think our overall reaction is that the first year pricing improvements went some what better than what we expected, and so based on that we do have a relatively high degree of confidence that we are going to see that perpetuate, certainly through the next 12 months.

If you were to assess the first year how much of the price increase was due to you guys putting kind of better controls in place for the sales force versus really going kind of and [saying] -- kind of asking customers to really start to pay more for the products?

Yes, so the better controls certainly was an element of it, but the substantial part of the price increases came from actual increases in prices communicated to customers.

Got you. My other question had to do with you guys consolidating your distributions in the US. Can you quantify what kind of EPS accretion are you expecting from it, and when we will start to see that?

Sure. So as we spoke, we were looking to consolidate three distribution facilities into one. We expect that the consolidation will be completed by this summer. For this year it is actually dilutive about $0.03 for the year, so that is included in our estimate for earnings for the year. Next year there [won't] be substantive costs or benefit, but starting in 2014 we expect the benefit to be in the range of $4.5 million to $5 million. So prettysignificant improvement in our margins going forward as a result of that consolidation.

Great, thank you.

Your next question comes from the line of David Lewis with Morgan Stanley. Please proceed.

Hello. This is actually [John] in for David. You started mentioned IDN contracts this quarter, and I believe you said you signed 11? Can you just give a little more detail on the importance of these? And also, how many IDN contracts do you currently have?

So there are -- I think I would say just in general we attach quite a bit of significance to these IDN contracts. They tend to be largest hospital managed groups in the country, so they are in many cases our largest customers. And they operate in proximity with but often somewhat independently with GPO contracts, and so they just are an important in ingredient in getting at I think the largest group of hospital customers.

We started putting more and more focus on that as a customer base last year when we expanded our sales force, covering those accounts we started to see some benefit from that in the first quarter where we got a new IDN contract. This year-to-date we have gotten 12, but 11 of those are just in Q2 alone. So there has been quite a good ramp up in terms of these really large customers for us as a result of our sales effort directed directly at them.

Are the IDN contracts inherently different than GPO ones? Obviously, if you go into a GPO contract, you are typically a list of a few different vendors for specific products. For IDN is it just you guys, or is it more broad based still?

Is can be both. I think when they are committed volume contracts, it is just much easier to be able to go into that IDN and get them to move , because the commitment is from the hospital themselves. But there certainly are cases where they have awarded dual vendors as well where, you have to battle it out with another competitor.

Thank you, very helpful. And also just one quick one on Europe. Looks like it did slow overall sequentially even when you adjust for I guess the extra selling days last quarter, but pricing doesn't appear to be part of the slowdown as you guys kind of mentioned you are still getting the benefit there. So can you discuss the overall environment in Europe a bit and what your expectations are over there for the future?

So, it, as you can imagine, varies somewhat from country to country. We have seen some very, very modest slowdown in our accounts receivable,actually, but not as much of a slowdown as we might have feared or expected. It is obviously an area that we watch quite closely. There has been some reports of a slowdown in procedures because of the economy in Greece for example. I think the concern of the moment right now is in Spain, but it is hard for us to put a real precise quantitative number on that.

It obviously remains an area of watchfulness for us. Other countries like Germany seem much less affected right now. So it differs somewhat in terms of country by country. And I -- think that there is in all probability some at least slight slowdown in procedure utilization as a result of the uncertainty.

Thank you very much.

Your next question comes from the line of Rich Newitter with Leerink Swann. Please proceed.

Hi, gentlemen. Thanks for taking the questions. Just if I could maybe start with currency. I think you guys have talked about in the past, can you just remind me what the flow-through down to EPS was that quarter. and generally how you guys get there? Where are the natural hedges versus any synthetic hedging that you do?

Sure. From this quarter we had an impact from currency on revenue of about 4.1% headwind versus a year-ago. So that as about$15.7 million. On the gross margin about a $7.7 million impact,and then operating profit I believe was about $1.1 million.

In terms of the place where we have natural hedges versus synthetic, we actually hedge a good portion of our transactional exposure. Where we are exposed is our translation. So from an accounting perspective we do about 30% of our business or our revenues are conducted in euro, and that is our greatest exposure. A little over 50% is in US dollar, and so that is where we are going to see the greatest impact going forward.

When we started the year, we were expecting the euro to be in the $1.35 range, and we are now expecting it to be in the $1.25 range for the year. If you look at rates this morning, I think you'd see it's a little under the $1.25, but it has been moving around for the past month.

That is really helpful. Just taking the incremental -- sounds like at least a couple of pennies of incremental dilution for the year for FX. Can you help me bridge once more -- your guidance is basically maintain, but there is some moving parts and some incremental dilution. I guess you said $0.13 from the OEM divestiture being moved to discontinued ops. You've got another$0.03 of dilution from the consolidation. That is $0.16 there. Is the remainder just generally that you make up for that from an improved EBIT margin assumption in the base business and gross margin improvement.

You are correct in there are a lot of things moving through our projections for the quarter. So there's a lot of activity, both in the economic environment as well as internally. So let me help you with that.

So if we were just to kind of start with ortho, for the full year we expect that to be about a $0.13 negative impact. The M&A is in the neighborhood of $0.16 negative for the year. The DC consolidation another $0.03 or so. Then on a full year basis we expect currency to have a greater impact than what we saw in the second quarter.

So we expect that the net impact of the transaction and translation would be a net $0.09 or $0.10 to the negative. Helping to offset some of that is the upside that we saw in taxes that I referenced, and that is about $0.20, $0.22 for the year.

So overall there is a number of negative impacts flowing through. Offsetting that are some of our internal cost actions and other improvements that we are seeing in the gross margin. We have got a number of cost improvements going through the manufacturing side as well as ongoing cost savings initiatives in overhead. So those would balance out to help offset the negative impact. So we -- while there is a negative impact from the currency, we feel pretty good that we have been able to largely offset that as well as investments we are making with internal productivity and other measures.

Thanks for the clarity there. And if I could squeeze two more follow-ups on that. What is your back half tax assumption, or what should we be modeling there? Andsecondly, if you could talk to time lines -- you might have mentioned this in your earlier remarks -- time lines for when we can see the recent acquisitions turn accretive?

Well, in terms of the back half of the year on taxes I would be assuming the 25% to 26% effective tax rate.

And then in terms of the four acquisitions that we closed this quarter, as Benson mentioned, they are late stage technology [pre-revenue], and so we look at those transactions as a complement to our internal R&D spending. As we look in the next year, some of them will be accretive, some will still be dilutive. And as we approach next year, the way we are going to look at that is effectively an extension of our current R&D spending.

We will look to balance that total portfolio of spending to accomplish both our longer term strategic objectives, but at the same time recognizing that we have to deliver on kind of nearer term financial and profit objectives. So we haven't worked through the detailed planning process to give you a specific number, but we do look to kind of balance and integrate those acquisitions into our existing portfolio and drive some synergies as a result of that integration.

And, sorry, just one last one. As we think about the incremental dilution, we should primarily be thinking about kind of a bump up to the R&D line, if that -- if we were going to put it some where from the acquisitions?

It would be a bump up to the R&D line, although there is some SG&A expense as well.

Thank you very much.

You're welcome.

And your next question comes from the line of Anthony Petrone with Jefferies Group. Please proceed.

Thank you. Good morning. A few financial questions for Tom, and then some questions for Benson as well. Just to start with the financial questions, Tom, was there any contribution actually in the quarter from the EFx and EZ-Blocker technologies this quarter? I know that closed before the end of the quarter, so I'm wondering if there is anything in there.

And then on the tax rate again, can you give us the normalized tax rate this quarter? And on a go-forward basis what is the benefit in the change of the tax estimate on future repatriations? How does that benefit not only this year but next year? And then give a rundown on the med tech tax, how you're looking at that next year. Then I will go on to the next questions.

Okay, so a number of questions there. In terms of the tax rate going forward, I think that, as I mentioned, we are looking to be in kind of the 25% to 26% range back half of the year. Remind me of the first question you threw out there?

So, a couple there. One on the repatriation, specifically that you mentioned in your prepared comments, I'm wondering what the benefit is specifically from that in the tax rate going forward.

Okay, so you had asked kind of a normalized rate. Excluding those impacts, we would expect it to be more in the 28% range for the quarter. Now, in terms of the prepared remark comment, there will be a benefit for the back half of this year, with a little bit going into subsequent years. However, I wouldn't assume a significant improvement as a result of that going forward. (Inaudible -- multiple speakers) 2012 impact.

So in future years it would be fair to say 28% is fair to model in for the effective tax rate?

It would. And obviously we are always looking for ways to become more tax efficient, so we will continue to look for those opportunities, but that is a fair assumption to start with, yes.

And then on the med tech tax next year, how you are thinking about the excise tax, assuming it goes through as is? How you model that in next year? Some companies are adjusting for the definition of service . I'm not sure particularly applies to Teleflex, but how should we think of that for 2013.

It is our assumption that it is going forward, and it will be an impact for us until we hear otherwise. And what we are working to do is offset that impact through both continued cost productivity actions as well as some of the pricing initiatives that Benson outlined.

All right. Great. And then for Benson, just one on strategy and one on vascular. For strategy overall you have been repositioning the portfolio for some time now with additions and divestitures. So as you look forward I'm wondering, to give us an overview again, of where we can see potential additions to the portfolio, and if there are any additional did divestitures that we should be expecting going forward?

So the additional improvements in our franchises, I think that for the most part you are going to see some more of what we have been doing in the context of late stage technology acquisitions. I think from -- just from a longer term perspective, getting a more robust product pipeline is just an important gap that we need to fill. And even with late stage technology acquisitions, those products -- it takes a couple of years even for products in that category to start to have some substantial impact on your revenue.

So we are going to be continuing to do that within the confines of our current business units. We do not see, at least for the next several years, any reason to have to go beyond our current business portfolio. We do expect and believe that we can find some other acquisitions within -- again, within the confines of our current franchises, which I will describe as share enhancers, which give us a much firmer position in some of our existing franchises. And that is something -- that basic strategy is something we have been articulating I think over the last year or so.

Excuse me, the second part of your question was?

Last was actually on vascular for VasoNova actually. In prior quarters you have given us an update on the pipeline there. I think you started the year with 360 leads, and you were trialing something to the tune of 30 sites per month with a pretty high win rate. So I am wondering if there is any update on those numbers? Thanks again.

I think that we are continuing to be quite pleased with the ratio of trials to win rates. The actual length of time it is taking an account to go through that trial process is a little bit longer than what we had thought and maybe a couple of months ago. So it has been difficult for us to keep up with 30 new trials a month, not because of accounts that aren't willing to start the trials, but just our own selling headcount capacity to keep up with those.

So obviously one of the issues for us to address as we look into next year is finding a way to accommodate those customers that are keenly interested in trying the VasoNova system. So we're -- we continue to be quite enthusiastic about the revenue contributions that's going to make starting -- certainly starting in 2013.

Thanks again.

And your next question comes from the line of Jonathan Palmer with CLSA. Please proceed.

Good morning, gentlemen, can you hear me?

Yes, we can.

Good morning.

First one for Benson, could you talk about the strength you are seeing out of Asia and Latin America, and maybe talk about the incremental investments and the magnitude and timing of those going forward?

So, we have a -- I think we have quite good ground games in both Asia and Latin America. We are continuing to benefit from the expansion of healthcare utilization, particularly in China and Brazil I think are the two real leaders for us in that area. In both cases there is a -- there is an effort on our part to expand our direct selling capability. That is particularly true in China, so every year we are adding to the sales head count that we have. We certainly have a strategy to also expand our local manufacturing in China, which will not just provide us with some cost advantages in that particular market, but also some speedier reviews on the regular regulatory front.

I think a very similar strategy can be articulated for Brazil. In both cases there is much more favorable treatment, either from a regulatory or from a tariff perspective for manufacturers that have some local presence there. Even in spite of some apparent slowdown in GDP growth for both those markets, they still in our view you remain conspicuous growers over the next five to ten years. And so we are continuing to make an investment in those regions.

Is there any opportunity to accelerate those investments?

So the answer so to that is probably always yes. I think that the at least one thing to understand is that from the time we design a new product here and get it ready to go, there is often an 18 month to 24 month lag before it actually works its way through the Chinese regulatory department.

So we are -- right now, our focus is on getting more of those products into the system sooner, and then our decision around head count really relates to what things are we able to sell in that particular year in China as a result of registrations submitted earlier. So it is not quite as easy as just turning on the spigot and adding head count. You have to do the work upfront to get all of the products register.

That was very helpful. One question for Tom. You talked about cost savings in manufacture, and also some programs in OpEx. Could you remind us some of the details in terms of the size there and again the timing?

Well, we are continually looking for programs that we can put into our manufacturing operations,whether it is automation or other purchasing opportunities. So we haven't given specific details on any of the programs, and I'm a little reluctant to go through all of the details just because there is so many different initiatives.

But I think it is fair to say that as a result of some of the kind of the adverse outcomes from FX and some of the investments we chose to make, we took some pretty swift and decisive actions to offset those negative impacts with cost savings within the Company. And it is both in the manufacturing and the kind of overhead side of the business. So we will continue to watch what is happening externally and make certain that we are taking appropriate cost actions to keep ourselves on track for the year.

Thank you for taking my questions.

Your next question comes from the line of Jim Sidoti with Sidoti & Company. Please proceed.

Good morning, can you hear me?

Yes.

Great. I know -- I don't want to beat a dead horse, but I just want to iron out these tax issues. You said there was a $0.12 benefit from the way you are going to handle the repatriation of overseas funds, is that correct?

Yes.

And then there was another benefit from the resolution of the issues in Germany. What was the impact of that on EPS?

It was a roughly $7.7 million impact. [If you] do the math --

So about $0.19?

Jim, just to be clear, the $7.7 million was excluded from our adjusted earnings of $1.23.

Okay. So the $0.12 was in the $1.23.

That's correct, that's correct.

Okay. And so for your annual guidance, is that only the $0.12 in the annual guidance, or is the other one in the annual guidance as well?

The way you should think about it is that $0.12 was really a second quarter impact, and there were also a couple of other pennies of benefit from the second quarter. That will become around $0.20, $0.22 on a full year basis for us. We would not include that German and Italian settlement in the full year number either. So essentially the way we are looking at that is that is a discrete benefit that we he realized during the quarter, consistent with our practice in the past, we would exclude that in calculating adjusted earnings and adjusted earnings per share.

So essentially the $0.12, if you combine all of the other miscellaneous upsides, is about $0.15 in the quarter from taxes. And that becomes $0.20, $0.22 for the full year.

Okay. So you have a $0.22 gain, but then that is offset by about $0.42 of headwinds due to the currency, the divestiture and then the acquisition. So you really -- you have maintained your guidance with an additional $0.20 of expenses. Is that correct?

Yes, so the way to think about it is we recognized some time ago that currencies were not going in the direction that we had hoped at the beginning of the year. And also we wanted to make some investments, both in the acquisitions as well as the DC consolidation, largely because we view those as critical to our future you success in driving margin improvements and pricing and other actions. So we began to look for ways to offset those investments and those impacts, because we also wanted to maintain our current financial performance for the year.

So essentially a lot of negative impacts hitting is. We have been fortunate to be able to identify programs to offset them and feel pretty good about where we are right now.

Okay. So what really has allowed you to maintain guidance? Is it increased cost savings, or better than expected performance in certain areas?

This is Benson. It is really a combination of all of those elements. Take the benefit from the taxes out of it, all the rest is being made up from a series of contributions that come from a different -- from different areas. So it is almost evenly he split among a variety of different sources.

And just -- I don't know if this is helpful or not, but if you just look at second quarter in isolation, consensus was about I think $1.10 for us this quarter. That included $0.04 from ortho, so removing that, that would put consensus down at $1.06. When you take out all of the effect of taxes, our EPS was $1.08. In spite of all those negatives we still came in $0.02 ahead, and that is I think a good barometer in terms of being able to make up for some of those negatives.

In addition, on to the cost [action], Jim, you asked are there other thing going well. In fact, we spoke earlier, pricing is going wellfor the first half of the year. I think overall we had about 110 basis points in Q1 and another 130 roughly in Q2, and that a running a little bit ahead of where we initially had expected. So we do have benefits other than just cost in terms of executing this year. It is probably a long list of actions, and it is hard to isolate into one in particular, but we feel pretty good that we have been able to offset some of the investments and adverse FX impact through internal actions.

All right. And then just a follow up on the med device tax. Assuming that you are not able to pass that through, what do you expect the impact will be, and how will you account for it? On which line item of the income statement?

Well, assuming it can't be passed through, then the impact -- we say the upper end impact is $15 million, although based on some of the nuances and the calculations on what is included and what is excluded, we believe that is the upper end and could be 10%, 15%, perhaps 20% lower. We will have to work through that as the final legislation is put out. And that would be recorded in the operating expense section of our income statement.

Okay. Would that be a gross margin impact or an SG&A?

No, it would be in the SG&A.

Okay. All right. Thank you.

You're welcome.

(Operator Instructions). We do have a follow-up question from the line of Laurence Keusch with Raymond James. Please proceed.

This is Constantine again for Larry. I just want to come back to -- I want to get just greater clarity on the tax repatriation. So is -- I guess, can you explain how it works? Is it basically management decision saying, okay for this year we are not going to bring as much cash from overseas as we thought, so as a result the tax rate is going to be lower?

And then also just part of that question if I look at your $0.20 to $0.22 benefit from tax, and you have got $0.12 of benefit this quarter, is -- the $0.12 benefit that you got this quarter, is it basically also includes benefit from Q1?

Okay. So in answer to your question, the benefit this quarter would also include some impact or kind of catch-up for Q1, so some of that is looking at first half versus second half.

Okay and what about -- is it basically just at management's discretion as you see your capital needs throughout the year?

It is really not based on management discretion, but rather as an outcome of some specific actions. Some of it comes from a credit that we are able to get as a result of the settlement of the German and Italian audits. We paid some money in connection with that, which provides a credit against future repatriation. So there is a number of things that actually happened that resulted in the benefit.

Got you, okay. And then I guess if I can just get your latest thoughts on uses of cash. Cash is more than 20% of your market cap. Can you just update kind of what your thinking is in terms of uses? M&A, dividend increase, share repurchase, any kind of capital allocation update would be great.

We currently have about $545 million of cash. The majority of it sits outside the US. In terms of our number one priority, we continue to look for strategic acquisitions as the first use of that cash. Obviously given where the cash resides, an international acquisition would be looked favorably upon.

The other option would be to potentially consider repayment of debt, but given the fact that the cash does reside outside of the US and that our average pretax interest -- or average debt expense is around 4%, I would feel comfortable leaving that cash out there to look for potential acquisition targets and put it to work that way.

And how confident -- I know you can't necessarily predict timing of deals, but if you can really deploy that cash versus just sitting on the balance sheet?

We are actively looking to deploy, and to your point you can't always predict that. But that is something that we have been looking at, and based on our screening process we see a number of interesting opportunities for us. So we demonstrated in the second quarter that we put some of that cash to use with the four acquisitions that we referenced, and there is a greater pipeline out there that we continue investing in.

Terrific. Thank you.

With no further questions in queue, I would like to turn the conference back to Jake over for further closing remarks.

Thank you, operator, and thank you all for joining us today. This concludes the Teleflex second quarter earnings conference call. Have a good day.

Ladies and gentlemen, that concludes your conference. You may now disconnect. Have a great day.