泰利福醫療 (TFX) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the first quarter 2013 Teleflex Incorporated earnings conference call. (Operator Instructions). I would now like to turn the call over to Jake Elguicze, Treasurer and Vice President of Investor Relations. Please proceed, sir.

Thank you, operator, and good morning everyone. And welcome to the Teleflex Incorporated first quarter 2013 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 pass code 82225144.

Participating on today's call are Benson Smith, Chairman, President, and Chief Executive Officer, and Thomas Powell, Executive Vice President and Chief Financial Officer. Benson and Tom will make brief prepared remarks and then we'll open up the call to questions.

Before we begin, I'd 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. We wish to caution you that such statements are in fact forward-looking are 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 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'd like to now turn the call over to Benson.

Thanks, Jake, and good morning everyone. On today's call, I'll begin with an overview of the results for the first quarter and discuss some strategic highlights. Tom will then provide you with a more detailed review of our financial performance, including details of our product line and geographic revenue mix and then finally our outlook for 2013.

So beginning with our financial highlights, building upon the momentum generated over the last two years, the first quarter of 2013 was another very solid quarter for Teleflex, with revenues reaching approximately $412 million. This represents an increase of 8.2% versus the prior year quarter on both an as reported and constant currency basis. When adjusting for the impact of two fewer shipping days we had this quarter, our constant currency revenue growth would have been even higher, totaling approximately 10.5% increase.

Turning to adjusted gross and operating margins, they were 48.8% and 14.7% respectively. This represents a year over year improvement of 44 basis points at the gross margin line, but a decline of 119 basis points at the operating margin line. Year over year gross margin improvement was primarily due to the mixed benefit of higher margin LMA product sales, as well as a continued benefit we are seeing from price increases. And while in line with our internal expectations, the decline in year over year adjusted operating margin was due to the inclusion of the medical device excise tax and expenses associated with businesses that were acquired after the first quarter of 2012 that were not in our prior year results.

I'm pleased to say that despite operating in what is a more difficult macro environment, as well as dealing with headwinds such as two fewer shipping days, the medical device excise tax, and the impact of our convertible notes on our weighted average shares calculation due to the appreciation of our stock price, the company was still able to generate adjusted earnings per share of $1.03 representing an increase of 4% over the prior year period.

Let's now move to some of the strategic highlights for the quarter. During the first quarter, the average selling prices of our products continued to expand marking the seventh consecutive quarter that the company has been able to attain positive year over year pricing. And while at slightly lower levels than we've seen recently, this quarter pricing contributed 55 basis points in revenue growth. Our Latin American businesses led the way up 298 basis points. That was followed by our Asian businesses, which achieved price improvements of 130 basis points. Next was our North American business which was up 78 basis points. And finally, our European business experienced a slight decline in average selling prices that total approximately 22 basis points. This marks a reversal in the positive pricing trend we had seen out of Europe during the course of 2012.

During the first quarter of 2013 a few competitors were particularly aggressive in the pricing of some tenders. We are monitoring this situation and want to take a balanced approach towards trying to increase price without giving up future volume in some European countries. As far as our outlook on pricing is concerned, from an overall company perspective, we expect pricing to moderately improve for the remainder of the year from the levels we saw during the first quarter of 2013.

Moving to R&D investment and the sales of recently introduced products. In this past quarter, the company continued to make progress with our internal product development efforts. R&D spending was up 30%, or 60 basis points, from the prior year quarter. From this investment came newly introduced products which contributed 113 basis points of revenue growth for the quarter. New product sales were most significant in Europe, led by sales that were customized-ask product offering.

In addition to new product revenue, we also recently received several market clearances from the FDA. One of the more notable ones was the 510(k) that we received on our next generation vascular positioning system. The ARROW VPS G4 device is the only system to use micro-Doppler ultrasound technology in combination with intravascular ECG. This VasoNova next generation device offers state-of-the-art design and technology, providing easy to follow symbols with further enhancements, such as statement of final catheter position, improved sterile field capability, and Wi-Fi access to enable integration with data management systems. The G4 device is used in conjunction with the accompanying disposable ARROW VPS stylet, and will be available United States in the second quarter of this year. We expect this newly designed product to continue the good adoption we've seen to date with our catheter navigation technology. During the first quarter we closed another 17 accounts and currently have our technology in approximately 80 hospitals.

Another recently received clearance was granted to our ARROW JACC with Chloragard technology. This product is a long-term, small-bore antimicrobial and anti-thrombogenic catheter that gives clinicians a single, less-invasive option for critically ill patients for the duration of their therapy. This catheter is specifically designed for the non-position vascular access specialist.

An emerging trend within healthcare is the placement of central venous catheters by non-physicians. The ARROW JACC is another example of how Teleflex continues to innovate and bring products to market that satisfy clinical needs as well as facilitate positive changes we are seeing emerging in the vascular access space. The first insertion of this device occurred recently and we expect full market launch of this product to occur during the fourth quarter of 2013.

And before I move on and provide you with an update on LMA, the last regulatory approval that I would like to call your attention to is the 510(k) received for the ISO-Gard mask with clean air technology. Launching in the second quarter, the ISO-Gard mask could change clinical practice with one of our existing call points. There's a significant body of research pointing to waste anesthetic gas hazards, or WAG, and the impact it has on healthcare workers' safety. According to OSHA, some potential effects include nausea, dizziness, headaches, and fatigue, as well as sterility, miscarriages, and liver and kidney diseases. This has led to WAG scanning in the OR and sophisticated air exchange systems to minimize hazardous gases.

This issue, however, remains largely unaddressed in the post-anesthesia care unit, or PACU, also referred to as the recovery room. Because the patient is the main source of WAG in the recovery room, the systems used in operating rooms really have no application and it's more difficult to control clinician exposure to the breathing zone of the patient. In order to best address care for the patient and manage this risk to the clinician, we've developed the ISO-Gard mask with clean air technology.

Now let's move on to discuss LMA. Teleflex has owned LMA for about six months now, and it continues to do quite well for us. During the first quarter, LMA products contributed approximately $33.5 million in revenue. As you'll recall, LMA provides us with a market share-leading series of products with gross margins in excess of our longer-term corporate wide goal of 55%.

LMA performance and integration efforts continue to run slightly ahead of schedule. As a result, the adjusted earnings per share contribution for LMA in the first quarter was greater than our initial expectations. This was another reason why the company was able to achieve year over year earnings per share expansion despite the additional weighted share averages from the convertible notes.

And before I turn the call over to Tom I would like to provide you with an update on GPOs, IDNs, and the profitability improvement initiatives that are under way at the company. During the past quarter, we continued to expand our GPO and IDN relationships. In Q1 we closed a total of ten agreements, five of these awards were brand-new. These new wins were across several of our product lines includes VasoNova's VPS technology, airway management products, as well as ligation and suture product offerings.

Turning to our profitability initiatives, the reduction of our North American distribution center footprint remains on track. We continue to expect this initiative to be complete by the third quarter of this year. And despite incurring approximately $1.2 million of redundant costs in the quarter, associated with the operation of our legacy distribution facilities, it remains our expectation that the move to a centralized distribution center will be approximately break-even over a full year of 2013 results with additional operating leverage occurring in 2014 and beyond.

Finally, we've had a project underway for quite some time now related to the integration of the legacy ARROW ERP system into the existing Teleflex SAP platform. That project is also on schedule and we anticipate completion at the end of the second quarter. We are in the process of working with our customers and we do not currently anticipate there being any type of service disruption.

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

Thanks Benson, and good morning everyone.

Revenues for the first quarter were $411.9 million. This represents an increase of 8.2% on both an as recorded and constant currency basis versus the first quarter of 2012. The growth in constant currency revenue is largely due to the acquisition of LMA, which contributed approximately 8.8% of growth. In addition, the sales of recently introduced products added approximately 113 basis points of growth, while price increases contributed another 55 basis points of growth. Partially offsetting these gains were lower volumes associated with two fewer shipping days in the first quarter of 2013 as compared to 2012.

Turning to gross profit, adjusted gross profit and margin were $201.1 million and 48.8% respectively. This compares to $184.1 million and 48.4% in the prior year quarter. As Benson mentioned in his opening remarks, the increase in gross profit and margin in the first quarter is primarily due to the acquisition of LMA as well as selective price increases.

Let's now move to a discussion of operating margins. For the first quarter of 2013, adjusted operating margins were 14.7%. This represents a decrease of 119 basis points versus the prior year quarter. The decline in adjusted operating margin can largely be attributed to medical device excise tax and additional amortization and operating expenses associated with the late-stage technology acquisitions which were completed after the first quarter of 2012. If we were to exclude these costs, the adjusted operating margin would have been approximately 16.7%.

Turning now to taxes. The GAAP tax rate for the first quarter of 2013 was 21.7%. Included in the quarterly rate were a discrete tax benefit related to the reinstate of the R&D tax credit, and an improvement in rate as a result of mix. However, on a non-GAAP basis, the tax rate for the quarter was 27.9% and largely in line with our original plan assumptions. While the GAAP rate of 21.7% appears attractive, what is most relevant is the non-GAAP rate of 27.9% as this is a rate implicit in our adjusted earnings per share.

Now turning to earnings per share. Adjusted earnings per share for the first quarter were $1.03, representing an increase of approximately 4% versus the prior year quarter.

Before I move on, I would like to clarify the dilution impact of convertible notes on the first quarter earnings per share. As an outcome of depreciation of the stock price in the first quarter and the accounting mechanics associated with our convertible notes and related warrants, an additional 1.6 million shares were included in the weighted average share count. This dilution negatively impacted our first quarter adjusted earnings per share by approximately $0.04.

As a reminder, there are two components underlying the additional 1.6 million shares. One component is related to dilution from the warrants. During the first quarter, this component increased weighted average share count by approximately 300,000 additional shares. The second component is related to convertible notes themselves. During the first quarter, this component increased weighted average share count by approximately 1.3 million additional shares.

It is relevant to keep in mind that upon maturity, the share dissolution from the convertible notes would be offset by the shares due to Teleflex under the convertible note hedge agreement which we entered into in August of 2010. For accounting purposes, however, since the impact of the convertible note hedge agreement is anti-dilutive, under US GAAP we exclude this offset from the calculation of diluted shares. As a result, the current accounting dilution is greater than the economic dilution because the share count impact and the convertible agreement excluded from diluted share count given their anti-dilutive nature.

Let's now move on to a more detailed review of constant currency product line and disagree geographic revenue results. Critical care revenue in the first quarter was up 12%, totaling $287 million. The increase in constant currency revenue was due to higher sales of urology and anesthesia products, including the addition of LMA. Partially offsetting these growth rates was a decline in sales of respiratory and vascular products, and the impact of having fewer shipping days in the quarter.

Surgical care revenue in the first quarter was up 3.3%, totaling $74.7 million. The growth in surgical products revenue was primarily the result of increased sales of ligation and access products. Partially offsetting this growth was a decline in the sales of chest drainage and general surgical instrument products, as well as the impact of having fewer shipping days.

Cardiac care revenue for the first quarter was down 7.3% in a total of 18.9 million. The decline in cardiac revenue was primarily due to lower sales of balloon pumps in the United States as well as the impact of fewer shipping days.

And lastly, OEM revenue for the quarter was down 1.1% and totaled $31.3 million. The decrease in OEM revenue was largely due to reduced catheter sales -- excuse me, which was largely reduced sales catheter products and the impact of having fewer shipping days.

Next I'll take you to our top line performance from a geographic perspective. Revenue in the Americas segment for the first quarter 2013 was up 8.5% and totaled $195.8 million. The increase in constant currency revenue was due to LMA product sales, new product introductions, and price increases. Offsetting this growth was the impact of having fewer shipping days in the quarter as compared to the prior year.

Moving to EMEA -- revenue in this segment was up 5.4% and totaled $142.4 million in the first quarter. The increase in revenue in EMEA was due to the LMA product sales and new product introductions. This segment was also negatively impacted by fewer shipping days in the quarter, as well as the slight year over year decline in average selling prices.

Finally, sales in the Asia segment were up 26.8%, totaling $42.4 million. The increase in this segment was due to LMA product sales and price increases.

Next, I'd like to provide you with an update regarding our full year 2013 financial outlook. Let me begin with reaffirming the 2013 constant currency revenue growth and adjusted earnings per share ranges that we initially provided last December. In 2013, we continue to expect constant currency revenue growth of between 11% and 13%.

Similar to our revenue projections, our expectation for growth and adjusted operating margins remain as previously communicated. We continue to project gross margin to be in a range between 50% and 51% for the year. It's our expectation that year over year gross margin expansion will be driven by pricing initiatives, improved product mix, and cost reduction programs. In addition, in 2013, we will have the benefit of a full year's contribution of LMA product sales, which carry an above-average margin.

We continue to project adjusted operating margins to be in a range between 16% and 17% for 2013. This range includes the impact of the medical device tax. Without the medical device tax, our adjusted operating margins are projected to be between 17% and 18%. Finally, we continue to expect 2013 adjusted earnings per share to be in the range of $4.70 to $4.90.

And similar to the remarks I made in our last earnings conference call, from a cadence perspective, we continue to project adjusted earnings per share to be greater in the second half of 2013 versus the first half with particular strength in the fourth quarter. The first half of 2013 earnings will be impacted by the following -- the amortization and operating expenses associated with the late-stage technology acquisitions which were completed mid-2012 and, therefore, the expenses are not in the prior year run rate until the second half, additional costs associated with the transition of the new distribution center, which is projected to turn accretive in the second half, and the impact of the medical device tax.

Finally, as I mentioned earlier, our share prices appreciated nicely. As a result our weighted average share account will also increase to account for convertible notes and this will have a dilutive effect on our earnings. Currently offset the per share impact on convertible notes are modestly improved expectations for foreign currency, slight improvements in LMA business expectation, and good overall operating expense control. In total, the puts and the takes are about equal and we continue to project 2013 adjusted earnings per share in the range of $4.70 and $4.90.

That completes my prepared remarks. With that, I'll now turn the call back to the operator for questions. Operator?

Thank you. (Operator Instructions). Your first question comes from the line of Larry Keusch from Raymond James. Please go ahead, sir.

I guess, Benson, first question is on price. Obviously, the 55 basis points was below what you were trending last year. I recognize that. You are now, obviously, anniversarying a bunch of the price increases. But how was that relative to your expectations in the quarter, and if it was different what may have changed? How should we think about that going forward? I know you indicated that you expected to step up some, but just some color on why that would happen and where we should be thinking about it for the year.

So we began to see some more competitive pricing show up on European tenders and we gave our European managers the flexibility to be able to respond to that. I think our overarching goal with pricing, not just this year but really for the next several years, is to push our pricing to the extent that we can without putting volume at risk. So we wanted to be responsive to some of those tenders that were coming in in Europe.

The second area which also had an impact on it was we were in the midst of a changeover of our general manager in Japan. We had a significant price increase scheduled on the calendar for Japan, didn't want to go through that without a manager -- without the new manager in place there. So we expect to move forward on that. And our current expectation is that we'll see some improvement overall -- in our overall pricing through the balance of the year.

And any sense of -- I know internally you do, but externally, can you give us any sense of where you think it can be for the year?

Yes. So we started off this year in the -- in the expectation of about 100 basis points. We think that's going to be a little bit more difficult to get to because of the situation in Europe right now. So I think we expect somewhere in the 70 basis point range right now from what we can tell. But again, our key goal here is to be -- continue to be competitive in the marketplace as well.

Yes. Understood. Okay. And then two other just quick ones. Number one, can you give us a feel for the organic growth when you try to adjust for the days? And then I think if I got this right, the free cash flow, it looked like there wasn't a whole lot this quarter. It looked like working capital was up in the quarter, so any thoughts around how we should think about free cash flow generation for the year?

I'll let Tom take care of that question first and then I'll get back to you on the revenue number.

Okay.

Yes. You are correct. In the first quarter, free cash flow was a little bit lower than we've seen in the past. That's in part due to working capital, most notably inventories. We had mentioned that we are in the process of rolling out a SAP project to some sites and we're building up some inventories just to safety stock in connection with that. So on a full year basis we don't anticipate inventories will be up markedly, other than the addition of bringing obviously the LMA business into ours. So we expect free cash flow on a full-year basis to be relatively comparable to what we had last year and up slightly given a little larger revenue base.

Okay.

So getting to the revenue projections, as I mentioned in my remarks, just accounting for the extra two days would have brought both our constant currency and as-reported revenue up above that 10.5% number. It was just a series of one-time events that contributed probably to another 50 basis points. So I think that the run rate for revenue taking those things out of -- or putting it into context, would have been about 11% number, which from our perspective put us where we felt we needed to be first quarter. I would remind you that we were of the opinion that the first half of this year was going to be a little bit less favorable comparisons than the second half.

Does that imply that organic growth when I remove LMA specifically was sort of in the low single digit range? Is that fair?

Yes.

Okay. Perfect. Thank you very much.

Next question comes from David Lewis from Morgan Stanley. Please go ahead.

Good morning.

Good morning.

A couple questions here. I guess first going back to last quarter and some of the details you provided. You said LMA was ahead of schedule. I think last quarter, you tried to quantify what you think the relative earnings accretion was for LMA -- can you reset us again? Where you first stated LMA accretion could be which I think was $0.31 to $0.37, and in terms of what you saw in the fourth quarter versus first quarter impact and how LMA is trending versus that range?

So I think the numbers that we have used and have been consistent around have been $0.35 to $0.40 accretion this year. I would say that we feel quite comfortable that those numbers are going to be attained. There is some puts and takes in some other parts of the P&L that would lead us to probably kind of keep that expectation corralled and around that range still. Most of the things that have been happening up to this point that are ahead of schedule actually affect moving forward some of the accretion in 2015 into 2014. So we would expect to see most of the accretion that we have been planning in 2015 to roll into 2014. So instead of $0.15 in 2014, we think it's going to be closer to $0.30 in 2014. And that's where the biggest sort of ahead of schedule kind of comments really apply as opposed to this year.

And just kind of the $0.31 to $0.37 you referenced versus the $0.35 to $0.40 that Benson did. We had assumed $0.03 to $0.04 that we are going to get in 2012 associated with the acquisition. So the $0.31 to $0.37 that you referenced would be the incremental this year. $0.35 to $0.40 would be that in total. So --

Understood. And the commentary in the call here, maybe you can talk about the back half of the year outlook in two specific buckets, one margins. You had been very explicit this would be the toughest margin quarter of the year maybe Tom could talk about the balance trends for the year and specifically as relates to organic growth trends, factors we should be considering. It sounds like price will get better across the quarter with Japan but specifically organic growth. Is it just a series of comp adjustments throughout the back half of the year that get you more comfortable with growth improvement or are there other dynamics we may be missing? So just your thoughts on organic growth and maybe Tom's thoughts on margin progression. Thank you.

Addressing the organic growth numbers -- again without trying to get too much into the weeds, there were a number of kind of unique situations first quarter. For instance, in OEM sales, we actually had a decline of 1% in revenue versus their typical 3% to 5% revenue growth. A lot of that had to do with a Pvax back order last year which elevated their sales growth for the first half of the year. They were responding to that back order, which shows up as an unfavorable comparison this year to last year. And without trying to go through all of those, there's sort of five or six things that fall into that kind of bucket that have a more negative effect and go aren't likely to persist.

There has been a fair amount of conversation about decreased utilization. And again, I think this affects us less than other competitors. But where that happened in the first quarter was a relatively precipitous decline in position calls. And our experience here is that does tend to have an immediate impact and then usually what happens is there's an increase in acuity three to six months down the road. It's an area where we're watching pretty closely, but we would expect to see that mitigate quite a bit by the end of the year. There's only a certain amount of time you can postpone the kind of conditions where most of our products are used in.

We also will continue new product launches throughout the balance of the year. And again, expect some -- expect some modest improvements in pricing. But I would say on that point, we are moving very aggressively into longer term gross margin improvements that are not revenue-dependent and are not pricing-dependent. I think we're taking a pretty conservative view of the market and overall aren't anticipating an uptick in the macro conditions to get the improvement we're trying to get at.

Great.

Just a little bit on margins. So for the first quarter, gross margin came in or adjusted gross margin came in at 48.8%. A couple things that you want to understand in those numbers. First of all, we talked about some of the investments we're making to consolidate facilities. So in the first quarter, we had some expense associated with the consolidation of our North American distribution sales. We're essentially consolidating three distribution centers into one as well as consolidating the LMA distribution center into that one. And we're pretty much completed through three of the four initiatives. We expect to wrap that up in the early Q3 time frame. So there's expense this quarter. We expect that to turn accretive in the back half of the year.

In addition, we also had some expenses associated with could consolidation of a distribution center in Europe and the exit of a warehouse in Asia. So some costs that we incurred in the first quarter that we don't expect to reoccur in the back half of the year. And also, we expect that North American distribution center to turn accretive in the back half.

We also had some unfavorable performance in the first quarter from a manufacturing perspective that actually occurred in the fourth quarter and rolled out in inventory in the first quarter. We don't expect that to continue in the second based on what we saw. Manufacturing performance was pretty good in Q1 and don't expect to have some unfavorable variances rolling out in the second quarter related to that which we, again, saw in Q1.

In addition, some additional drivers to the back half that will help us increase margins, we will continue to put cost improvement programs into place that will help drive costs down. We also have generally higher levels of revenues in the second and third quarter and even higher level in the fourth quarter which will help us further leverage our fixed overhead costs. And we're also projecting some more positive mix in the back half of the year as a result of some stronger growth in some higher-margin regions and businesses.

So as we look at the margin throughout the year, we expect it to continue to build quarter after quarter throughout the year and still get to our kind of gross margin target of 50% to 51% on a full-year basis.

Great. Thank you very much.

Thank you. Next question comes from Matt Taylor from Barclays. Please go ahead.

Good morning, guys. Thank you for taking the question. So I wanted to just ask about the guidance. You talked about keeping guidance the same and just modestly lower pricing. Is there any other change in assumptions with regards to either LMA, new products or volume growth?

with regard to guidance, we really are staying the same range in terms of volume growth. Pricing is mentioned, it's a little bit softer than what was initially expected, although not markedly. Offsetting that, we've got a little bit better performance in execution on LMA through the first quarter. We also are doing a nice job in managing our operating expenses. And so those are the real drivers of kind of the pluses and minuses, if you will, to help offset some of the downside from issues such as the dilutions to the converts and, obviously, the lesser pricing.

Okay. And just to be clear, in terms of your three-year outlook, do you -- does the change in pricing this quarter change how you think pricing trends will occur next year at all, or is this just more of a one-time thing?

Yes. So that's -- I would say the answer to that, Matt, is we don't necessarily see this as a linear progression. There are different kinds of opportunities that present themselves to us, and a lot of these have to do with our pushing margins in some of the areas where we still use distributors. So because it's at 55% this quarter doesn't necessarily mean we're projecting it to stay at that level as we look over the next couple of years. But I would say it would take a fairly significant change in our pricing assumptions to start to have much of an impact of what we expect to be our overall gross margin improvements over the next three years.

And those gross margin improvements will start to provide, I think, more clarity as the year rolls out. But we now start to get into the phase where they are less revenue-dependent and less pricing-dependent and really just a matter of execution in terms of our consolidation of our manufacturing footprint.

Okay. Thanks. Very clear. Thanks.

Thank you. Next question comes from Jonathan Palmer from CLSA. Please go ahead.

Good morning. Thank you for taking my question. Tom, you mentioned in the prepared remarks the increased share count. Is there an explicit number we should be modeling here or a range?

Well, let me give you our thoughts on how to approach that. Obviously, the share count will change depending on the stock price, and what we attempted to do was to provide in our 10-K filing a pretty comprehensive disclosure of how the share count will change based on the stock price given, the warrants, and the convertible notes. So as a suggestion, one approach might be to think about as you're thinking about price targets for the year, you could then tie that into the share dilution that we provided in the 10-K filing. So you could use that as a basis for establishing share count dilution.

All right. Benson, there's one quarter behind you here and some puts and takes in the first half with a ramp in the margins in the second, what are some of the headwinds that would conceivably take you to the bottom of your guidance range for the year?

So I think probably the geography that we continue to monitor most closely is Europe. I think it's fair to say that the economic situation in Europe does not appear to be getting any better during the course of the year, so we have -- we have, I think, somewhat scaled down our pricing expectations in Europe. Other aspects of our business in Europe are actually doing quite well. So that's probably the area where we just are monitoring it quite closely.

We believe that if there was some good news in this, it's that the apparent downfall in the utilization rates have, even though we think we have got some immunity from that, have caused us to take a very, very close look at our spending and planned spending for the balance of the year. So we think we have some pretty good visibility in terms of how we would adjust our operations based on if the market turns out to be more conservative than we think we're going to be.

So I guess the short answer is probably Europe is the biggest area where we have some concern about continuing volatility there. We think we've got a pretty good understanding. We've got good European managers on the ground. But it remains an area for us that we have, I think, are watching more closely than other places.

That's very helpful. I'll jump back in the queue.

Thank you. Next question comes from Anthony Petrone from Jefferies Group. Please go ahead.

Thanks. I have a question on R&D in the quarter. Actually, it seemed a little bit light versus our model. And we know you have a number of late-stage acquisitions, R&D programs that are going on among Semprus, Hotspur, et cetera. Can you elaborate -- have some of those projects reached a level of maturity or did the company elect to actually slow some of those investments in the queue? And I have a couple of follow-ups. Thanks.

So I think there's just an ongoing prioritization basis of which projects make the most sense for us to continue. We don't expect significant revenue contributions out of Semprus or out of Hotspur until mid-2014. We are continuing to spend on both those projects as per plan. The -- some of the shortfall in spending really came out of some internal R&D projects that -- for a variety of reasons became lower priorities for us.

That's helpful. If we move over to cardiac, you mentioned weakness in intra-aortic balloon pump volumes. There was some chatter about weak PCI volumes in the quarter from some of your competitors. I'm just wondering how much was related to slower overall PCI volumes versus perhaps competitive share losses.

So we don't attribute any of our slowdown to competitive share losses. There is a couple of different things going on here. There is relatively slow capital markets in the US and in Europe, accompanied by relatively brisk capital markets in China, for the pumps and sales. It appears that the Shock II trial has had an impact on balloon utilization in Germany. So far it's largely contained to Germany. The results of that trial were more negative than most people's expectations about the effect of the use of balloons. There's a lot of questions about whether the control group was a good representation. But so far, Germany has been the only noticeable place that seems to have been -- that seems to have changed there their practice or utilization of balloons as a result of that study.

So there's a couple of things going on there. But I'm at least not aware that we lost any pump accounts or lost any balloon accounts to competitive activity that would have been the reason for the comparative slowdown.

That's very helpful the last one for me and I'll jump back in, can you give an update Benson on the capital allocation policy? Is M&A still on the top of the list or do you envision maybe allocating more capital to offset dilution from the convert? And then maybe just to touch on where you stand on debt service. Thanks a lot.

So the -- I would say that generally speaking this year, our capital allocation thinking is quite similar to what it was last year. You could expect to see some continued efforts in acquisitions this year in the late-stage technology area primarily. We are continuing to look at the best way to manage and deal with the dilution issue. The big complication there, I think, from our perspective is that the end result is much different than how we're reporting it on a quarter, and we're trying understand how we can do a better job explaining that.

Anthony, I think the other important thing is really going back to Benson and Tom's remarks, that LMA and overall opex cost controls not associated even with R&D but just in the SG&A line is really also helping to mitigate the impact of the additional weighted average shares from the convert.

Fair enough. Thanks.

Thank you. (Operator Instructions). The next question comes from Chris Cooley from Stephens. Please go ahead.

Thank you and good morning.

Good morning.

Benson and Tom, could you walk us through some of the expectations you have that pertains to organic growth in the back half? And specifically what I'm trying to get at here is it looks like you have some secular themes that are dragging down a number of your businesses. So if we think about that organic growth, obviously, ex-LMA, what can we focus on to give us confidence that you can see acceleration from those single digits in the back half, especially depressed volumes in the US? And I just got one follow-up after that. Thanks.

So the most direct way that I can answer that is we've tried to filter through what first quarter would have looked like without some of these extraneous events and without the two days' loss of shipping days. And have factored that into our reforecasting of what the balance of the year looks like. And I think across most of our product line, we're relatively comfortable that the forecasts that have been resubmitted are quite in line with what we see as sort of average daily order rate moving forward.

There are a couple of areas that are dependent on improvements in the vascular business in particular. We expect to see continued growth in the PICC line and in the DPS number. We expect the JACC product to start to take off as a product line for us. So I would say if you ask me to quantify the biggest risk, it really has to do with some every the acceptance of some of the new products that we're introducing during the course of the year versus concern about the underlying kind of market utilization rates. And again, I don't want to say we're completely immune from it, but we do not see that that has been a big factor in our first quarter results.

Okay. Super. And then similarly, I think you mentioned early on, if I can look back at my notes, duplicative costs in the quarter that I think approximately $1.2 million as it pertains to North American distribution consolidation efforts. When we think about those costs continuing into the early part of the third calendar quarter, is that a number that we should be kind of assuming in terms of the weight versus the P&L here in the second quarter, or does that number get bigger, smaller? Just trying to think about gauging that as it winds down.

No. Right now that represents the costs of operating duplicate centers until we're out of that, and our expectation is we're out of that early in the third quarter. So most of those costs should disappear.

Yes. So in terms of order of magnitude, you should probably think that as we move to the second quarter and continue to have costs, about at the same level as we saw in the first quarter, perhaps a little bit less. As we then go kind of into full operation in the third quarter, we expect to be at kind of the break-even point and then accretive in the fourth quarter is how you should think about this cost.

Okay. Thank you very much.

(Operator Instructions). Thank you. We have a question from Jim Sidoti from Sidoti & Company. Please go ahead.

Good morning. Can you hear me?

We can.

Great. I want to confirm the medical device tax -- that was put in the SG&A line, correct?

Yes.

Okay. And then on the approval for the new VasoNova system -- what's the strategy for rolling that out? Do you go back to your existing customers and upgrade them, and what do you do with the previous generation unit? Or will you market it more towards new users?

So there's a mix of answers to that question. Some of the accounts that have recently converted have -- were encouraged to convert early with the expectation that they would get some assistance with moving into the new pump. Our general expectation is we'll not do that across the board. It depends really on the discussion with the individual account.

From a -- purely from a functional standpoint, the existing units in the field work well. To a certain extent, we'd like to get some of those back at the hospitals because they work well in a trial situation, as they're just testing out the general technology. So there's a little bit of a mixed answer to that based on the circumstances that have been discussed with accounts as they've been converting.

Okay. And then some of the other companies in your space that have reported have been attributing a little bit of the slowdown to the timing of Easter during the quarter. Do you think that affected your business at all?

We looked at that, and the answer we came back with was no. The biggest single factor for us was just the two less shipping days. I think you could make an argument that the fact that the last day of the month fell on a holiday, had some negative influence. But when we looked at order patterns the first couple of days of April, we didn't see that as a big factor.

Okay. Thank you.

Thank you. (Operator Instructions). As we have no questions at this time. I'd now like to hand the call back to Jake for closing remarks. Thank you.

Thank you, operator. And thanks to everyone that joined us for the call today. This concludes the Teleflex Incorporated first quarter 2013 earnings conference call. Have a nice day.

Thank you. Ladies and gentlemen, that concludes your call for today. You may now disconnect. Thank you for joining and have a good day.