Teleflex Incorporated 2009 Financial Outlook Call Transcript

Teleflex Incorporated (TFX)

2009 Financial Outlook Call

January 8, 2009 9:00 am ET

Executives

Jeffrey Black – CEO

Kevin Gordon – EVP & CFO

Jake Elguicze – Sr. Director IR

Analysts

James Lucas - Janney Montgomery Scott

Christopher Warren – Caris and Company
Paul Mammola – Sidoti & Company

Presentation

Operator

Good day, ladies and gentlemen and welcome to the Teleflex 2009 Business Outlook conference call. (Operator Instruction) I would now like to turn the presentation over to your host for today, Mr. Jake Elguicze, Senior Director of Investor Relations; you may proceed, sir.

Jake Elguicze

Good morning everyone. The press release and slides to accompany this call are available on our website at www.teleflex.com and as a reminder this call will be available on our website and a replay will be available by dialing 888-286-8010 or for international calls 617-801-6888, pass code 95390184.

Participating on today's call are Jeffrey Black, Teleflex Chairman and Chief Executive Officer; and Kevin Gordon, Teleflex Executive Vice President and Chief Financial Officer. Jeffrey and Kevin, will make brief prepared remarks and then we will 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 two. We wish to caution you that such statements are in fact forward-looking in nature and are subject to risks and uncertainties and actual events or results may differ materially.

The factors that could cause actual results or events to differ materially include but are not limited to factors as made in our press release today as well as our filing with the SEC including our Form 10-K which can be accessed on our website.

Now I will turn over the call to Jeffrey Black.

Jeffrey Black

Thanks Jake, good morning everyone. The year 2008 was a strong year for Teleflex as we progressed on our stated goals. It involved a great deal of transition for the organization as we integrated acquisitions, invested in regulatory and quality programs in connection with the FDA warning letter, and invested for future growth.

Although we’ve not completed our year-end results it is notable from reported interim results that we have expanded our operating margins, continue to generate strong cash flow, and we are achieving the operating efficiencies we expected with the changes we made to our portfolio over the last few years.

As we enter 2009 we are in unprecedented global economic environment that includes a great deal of uncertainty. We have a portfolio of businesses that are less cyclical and better positioned to manage through this challenging environment.

We, like many other companies, will experience headwinds with foreign currency translation and increased pension costs. We are taking steps to mitigate the impact of these and other challenges. Although the global economic landscape is extremely fluid we feel really good about our outlook for 2009.

In 2009 we expect revenues to exceed $2.4 billion. We expect to achieve core revenue growth in the low to mid single-digit range with offsets resulting from the strength in US dollar most particularly in relation to the Euro and the recently announced restructuring in the commercial group.

Overall adjusted operating margins are expected to be in the mid-teens for the full year despite the significant increase in pension expense over 2008. Earnings per fully diluted share from continuing operations before special charges are expected to be in the range of $4.10 to $4.40 per share.

A hallmark of Teleflex has been the strong cash flow derived from our operations and we expect this to continue in 2009.

I’ll now provide you with a brief description of the business performance expectations for each of the segments and then Kevin will provide detail on the financial outlook.

The medical segment has been established as the defining business for the company. Sales in 2009 are expected to exceed $1.5 billion including core growth in the low to mid single-digit range. We expect continued revenue growth in our critical care product lines including our Arrow select kits and Maximal Barrier precautionary trays as hospitals continue to focus on eliminating hospital-acquired infections.

We introduced a pressure injectable central venous catheter and a pressure injectable pick to our vascular access offering in 2008 and so far have had good results. We will be launching our new Triple-Lumen pick product in the first quarter of 2009 and expect to continue market penetration in this important product area.

In our respiratory segment the launch of the Neptune Humidification system in 2008 has resulted in strong demand as we work to penetrate new accounts.

We are beginning to shift spending from the FDA remediation program into R&D and will focus our efforts on development of products that improve outcomes, reduce infections, and on expanding on our anti-microbial offerings within the critical care area.

We are investing further in our sales and marketing functions including strengthening our clinical educational programs and continuing our investment in dedicated sales and marketing for our anesthesia lines.

With a product line that expands both general and regional anesthesia and a dedicated market channel focused in this area we expect to see continued market penetration in 2009.

We experienced nice growth in our international business and expect this trend to continue in 2009. We are particularly excited about the growth potential in Asia and in some of the European markets where combining the Arrow and Teleflex product lines has created strong cross selling and distributor to direct conversion opportunities.

Our OEM business experienced a recovery in 2008 and is expected continued growth in 2009 as it enters the year in a strong backlog position in both specialty and orthopedic product lines. Kevin will discuss the 2009 integration costs and synergy expectations in more detail but we expect to see adjusted medical segment operating margins over 20% for the full year.

We’ve dedicated significant resources and made good progress in 2008 in connection with the remediation efforts related to the Arrow FDA corporate warning letter we received in October of 2007. In 2009 we expect the required investment to range between $5 million and $7 million for the medical segment compared with approximately $20 million spent in 2008.

In addition we are investing in internal regulatory and quality infrastructure to ensure compliance in the future.

As is the case with these things it takes time to work through but we’re pleased with the progress we’ve made. It is important to note that our 2009 outlook assumes a clearance of the FDA restrictions in the second half of the year.

With the shift of some of the spending reduction on FDA remediation to R&D we expect to spend approximately 4% of revenues in the R&D area. This requires adding new talent and capabilities to the team and focusing them on our key product initiatives.

We will continue our focus on the integration plans and the remediation programs in 2009. However the foundation is in place and we expect to turn more energy towards growth.

In our aerospace segment we expect net sales in the range of $480 million to $500 million. Although the aerospace industry appears to be heading for more difficult conditions then it has seen in some time we continue to be well positioned as market leaders in the product areas in which we participate; cargo systems, containers, after market engine repairs.

We have key differentiators in each of our business creating value for our customers. Our wide body and narrow body cargo systems allow customers to load and unload planes faster, increasing turnaround times.

Our repairs business proprietary technologies achieve truer shapes for airfoils making engines more fuel-efficient and our lightweight containers save fuel and require less maintenance. Core revenue in the business is expected to be down approximately 2%. This is primarily attributable to the delay in the launch of the 747-8 by Boeing and a reduction in 747-400 conversions.

We continue to build on our market leading position with investment in new platform in the cargo systems business and the expansion of the installed base. We are pleased with our position as [inaudible] furnished equipment provider for the Airbus 330, 340 platforms and the new Boeing 747-8 and the Airbus A350 platforms.

Although the first deliveries of the 747-8 have been delayed until later this year, and the first system of the A350 is not expected to ship at least until 2011, we are well positioned for future growth for the coming years.

We strengthened our relationship with the major aircraft OEMs and continue as an important strategic partner to them. Core revenue growth are expected to be flat with 2008 as the positive margin mix of repair versus replacement continues and certain older engines are reaching the end of their life cycle.

As a result of technology investments we’ve made to enjoy the move positive repair and mix will have an improved margin in this business. We are focusing our investment on additional automated repair capabilities for existing engine types and on obtaining the related licenses and certifications on newer engine types to ensure as the fleets age we are well positioned with the capabilities required to perform future engine repairs.

We expect to further invest in our PTI joint venture with Snecma Services including facility and repair technology. This venture has moved us into new markets and provided additional scale in the US positioning the unconsolidated venture for future growth.

Overall the aerospace segment has positioned itself as a leader in technology and value added products and services generating low double-digit segment operating margins.

In the commercial segment we expect to achieve revenues of $410 million to $425 million. We expect to continue to see steady performance from our rigging services business and an improved outlook in the truck and rail auxiliary power unit businesses in the first half of the year including a strong backlog of orders entering the first quarter.

We are however becoming more cautious about the APU business in the latter part of the year as the cost of fuel continues to decline. Based upon our delivery of CNG conversion kits in South America in 2008 our power systems business has experienced an increased interest in the kits for further orders in 2009.

We expect a further reduction in revenues from our marine business in 2009. This market declined significantly in 2008 forcing us to take actions to mitigate the impact of the decline including our recent announcement of a restructuring program expected to be completed by the end of 2009.

However partially offsetting this decline in marine in late 2008 after a several year period with no orders for new units we are pleased to receive an order from the US Military for our modern burner units which is a stove used out in the field. This product has been developed, manufactured, and sold by our marine business in previous years.

We expect that 2009 revenues associated with this order are between $10 million and $20 million. We see 2009 commercial group segment operating margins consistent with 2008 levels.

With that let me turn it over to Kevin to give you a little more input into the financial outlook.

Kevin Gordon

Thanks Jeffrey, and thanks everyone for joining us this morning. First let’s note, its important to note and understand that we won’t be discussing expectations for the fourth quarter or 2008 year end results on this call.

We are early in our year-end close process and look forward to reporting the results to you in February.

First our financial goals and metrics, as we look ahead to 2009 we project revenues for Teleflex to exceed $2.4 billion despite foreign currency headwinds. As Jeffrey indicated earlier we expect to see core growth in low to mid single-digits in both the medical and commercial groups, and the aerospace segment is expected to experience a decline in core revenues of approximately 2%.

We expect to generate cash flow from operations of between $280 million to $290 million as a result of our expect mid-teens adjusted segment operating margins and continued improvement in working capital management. We are focused on reducing our debt and expect to reduce the outstanding borrowings by at least the required payments of slightly more then $100 million.

As we enter 2009 we have two significant items impacting the year-over-year results. First pension assets values and discount rate and asset return assumptions have been materially impacted by the financial crisis.

We have frozen principally all of our US based defined benefit pension plans and other post retirement benefit plans as of the end of 2008. However due to the above factors the company expects to record approximately $11 million more in pension expense in 2009 then in 2008. Of course this is subject to the completion of our actuarial valuations in this area.

Second foreign currency translation due to the strengthening US dollar in comparison to other currencies, most notably the Euro in our case, is expected to have an overall negative impact on both revenues and profitability compared with 2008.

Our 2009 outlook assumes there will not be a significant change in the Euro exchange rate from where it is currently. Given the positioning of our businesses globally we expect the effective tax rate to be between 24% and 25% for the year.

We are planning to invest capital in our medical R&D needs and additional capacity for future growth principally in medical and aerospace. We expect capital expenditure requirements to be $55 million to $65 million, something in the range of 2.5% of sales.

Assuming these capital investment amounts we expect depreciation and amortization to be approximately $120 million in 2009. Debt reduction continues to be a high priority to reduce leverage and interest expense and to strengthen the capital structure for future growth opportunities.

The planned reduction of debt coupled with the lower expected interest rates on the floating rate portion of borrowings under our credit agreement is expected to result in an overall reduction in interest expense of 6% to 10%.

Outstanding borrowings as of December 31, 2008 were approximately $1.54 billion with only $37 million borrowed on the $400 million available under the revolver portion of the agreement. We expect to enter 2009 with cash of approximately $95 million.

We made significant progress on the Arrow integration during 2008 despite delays resulting from some of the limitations from the FDA remediation efforts. As a result we continue to expect to achieve annual pre-tax synergies in the range of $70 million to $75 million by the end of 2010.

The incremental pre-tax synergies to be achieved in 2009 are estimated at $18 million to $20 million putting us at a cumulative annual run rate of approximately $60 million to $62 million by the end of 2009.

The key areas of synergy benefits ahead of us include the completion of facility consolidations, further distribution conversions, sourcing, and benefit costs.

Integration costs for the three-year plan are in line with our original three-year estimate. We estimate such costs to total $14 million to $16 million in 2009 with $9 million to $10 million treated as restructuring and the remaining amount of approximately $5 million to $6 million booked in operating costs but treated as restructuring related costs.

Turning to the earnings outlook, prior to special charges we are forecasting the fully diluted EPS range of $4.10 to $4.40 per share for 2009. Special charges which principally relate to the Arrow integration and the recently announced commercial group restructuring are currently forecasted at $0.30 to $0.40 per share.

Earnings per share from continuing operations including these special charges are expected to be in the range of $3.70 to $4.10 per share in 2009.

I will now turn it back to Jeffrey for his closing remarks.

Jeffrey Black

Thanks Kevin, we move into 2009 with our priorities in focus. Certainly in this challenging economic environment we are being vigilant with our cost structure and we’re focused on investing in areas with long-term growth potential.

We have strong financial fundamentals and feel good about the position where we are headed going into 2009 and beyond.

With that we will now deal with your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of James Lucas - Janney Montgomery Scott

James Lucas - Janney Montgomery Scott

First a little shocked with your comment about the strength in the APU markets, can you talk a bit about what you’re seeing there. Granted there’s some easier comparisons but differentiating truck versus rail, if you could give us any color of what you’re seeing in the APU.

Kevin Gordon

As you know we distribute our product through exclusive arrangement with Carrier and they are representing us in this market. I think what you saw is a particular weakness in the first three quarters of 2008 and as we’ve told you coming out of the third quarter we expected both the fourth and the first to have good results.

So that order input from Carrier I think as they’re building up their supply for their distribution network, we’re seeing particular strength and we have booked orders for that through the first quarter and into the second quarter.

But we did again caution the second half of the year because where fuel is we have a bit of uncertainty.

James Lucas - Janney Montgomery Scott

But this is specifically on the truck, nothing of note on the rail side?

Kevin Gordon

On the rail side I think again our expectation right now as you can see here is we’ll have an improved year over 2008. We’ve seen good demand there and we’ve actually been able to expand the interest in that market beyond the North American market.

So as we’re looking into some of the foreign markets there’s more opportunity there and we’re also potentially working on some relationships with OEMs.

Jeffrey Black

And that business, it’s a fairly long selling cycle. Most rails are going to bring it in, they’re going to run it for four to six months before they make a commitment and then they’ve got to get it in their budgets so I think we feel pretty good about the work we’ve done over the last 18 months to better position that business and I think at the end of the day that there are going to continue to be opportunities at both the rail line and the OEM line for that product line.

James Lucas - Janney Montgomery Scott

Your comment about the commercial outlook of actually being up low single-digits, how does that work out from a quarterly basis because given those end markets, the fact that that business can potentially grow is a little surprising.

Jeffrey Black

Well again remember we have new leadership with me running the group after Vince moved over to medical, I think it shows one, the diversity of our portfolio. The MBU is truly the differentiator in terms of potentially going from a revenue decline to at least being slightly up so its nice to see that business come back and we feel pretty positive that we’ve really kind of handicapped that group pretty well.

Again I will tell you that we’re managing our costs there and being optimistic where we think we can generate some revenues but at the end of the day we’re not out there on a limb we don’t think on the commercial side.

James Lucas - Janney Montgomery Scott

Switching gears to the medical segment, as outsiders what should we be looking for with regards to knowing about the FDA issue starting to go away for lack of a better term, and secondly one of the big areas that you’ve talked about since the Arrow acquisition has been the anti-microbial and the infection prevention and granted Arrow is very strong there already, but how long of a cycle can you just bring us up to date about when we start to see some of the traditionally Teleflex medical products have some of this technology hitting the marketplace.

Jeffrey Black

I would think once we get to a resolution with the FDA they would remove the restrictions on our CFGs which are a certificate for foreign governments. They’re not going to issue a letter and again I think our attitude is when you see the CFGs get released which I think just happened with their Boston Scientific and their warning letter, that’s an indication that the FDA has removed the letter.

So I think we look forward to that and I will tell you we will be sure to let our investors know when that has occurred.

In regards to the anti-microbial, our focus is still prioritized to spread the anti-microbial across some of the Arrow products especially the pick line before we start moving it into some of the Teleflex products so I think its probably going to be at before you see it go over to the Teleflex historical portfolio I would see that starting to probably happen in, sometime in 2010.

James Lucas - Janney Montgomery Scott

With regards to the R&D and the new product pipeline, you talked about accelerating the investment in the past, you’ve talked about this long cycle in terms of roughly 18 months before you see the new products, can you just talk about in terms of whether it’s a stage gate process how you’re looking at prioritizing the R&D pipeline.

Jeffrey Black

I think we’ve been pretty clear with the three or four products we’ve identified. We do use a stage gate process. We are continuing to always review that. I think Ernest is well engaged in working with R&D with his own background in R&D to ensure that we are staying on track. So I actually feel good about the process and I think it is, it is a fairly lengthy process, but its one that I think considering where we’re spending our money and where the returns are going to be is well worth it.

Operator

Your next question comes from the line of Christopher Warren – Caris and Company

Christopher Warren – Caris and Company

Just wanted to make sure I understood, you said on the pension expense there was going to be an incremental $11 million or a total of $18 million expected in 2009?

Kevin Gordon

That’s right, its an incremental $11 million over 2008.

Christopher Warren – Caris and Company

I wanted to ask, perhaps there’s a willingness here or a time period between FDA resolution and the ramp up of R&D, could you speak to management’s intentions for essentially the gap there in terms of the $20 million spent in 2008 and whether or not that might drop, some of that might drop to the bottom line as R&D ramps in 2009.

Jeffrey Black

We might see some of that drop, if it does we think it would be a short-term as we continue to ramp up in that R&D so our plans really do not anticipate a lot of that dropping in 2009.

Kevin Gordon

There’s three components there of that, I think you may have heard in the remarks. Number one, is the ramp up in R&D, number two is the increased investment in the sales, and marketing piece of what we’re doing and then number three was positioning the [RAQA] infrastructure within the organization going forward appropriately.

So there won’t be a lot of that differential that drops through but we’re investing it in the right areas.

Christopher Warren – Caris and Company

Bigger picture, could you help us understand what sort of needs to happen for you to hit the bottom of your $4.10 pro forma EPS range versus the top at $4.40, where in your minds is the pivot there?

Kevin Gordon

I guess there could be any number of factors that could make us go one way or the other right. For me to pick out one or two that are going to push me down there, certainly currency is a big factor for us right now. Each of our businesses, Jim’s questions were good questions about certainly in commercial markets are out there, but for me to point my finger at one particular thing is difficult.

If I could do that, I guess my range would be much smaller.

Christopher Warren – Caris and Company

In your 2009 medical guidance could you talk a bit about perhaps incremental assumptions and penetration of your anti-infective central venous catheters for instance.

Jeffrey Black

I think as we’ve said, we believe that the central venous is about 60% penetrated in the North American market to date, about 20% in European markets so we continue to expect to get incremental penetration this year, but if you’re looking really at what have we seen to this point as an impact from the CMS regulations, I don’t think its been significant to this point.

I think we’ll start to see more of that as we exit the first quarter and maybe into the second quarter.

Christopher Warren – Caris and Company

What about the barrier kit side of things, as a less expensive maybe alternative for a hospital.

Jeffrey Black

That continues to do well. I think you heard that in the remarks, as we continue to provide solutions that provide the full compliment of devices needed to do a procedure in a [inaudible] based precaution kit we continue to penetrate further there.

So I think that’s a bit of a differentiator for us.

Christopher Warren – Caris and Company

Could you help us understand how your 2009 guidance with regards to commercial changes if at all versus the current fundamentals in that marine business. Do you assume any improvement in marine in 2009 implicit in your guidance or deterioration?

Jeffrey Black

No, you actually have to go back, remember the first six months or the first five months of 2008 were pretty strong in marine. We don’t see a very strong beginning. I think they’re going to be very tentative in getting boats starting to be built again so I think we’ve taken a pretty conservative approach.

Again that’s the nice thing about our marine portfolio, is the balance we have of the after market versus the OEM. While the after market is down is it no where near down as far as the OEM and again depending upon where fuel prices end up come spring and summer, we would expect if fuel prices are reasonable that people will be out boating again which quite frankly a lot of people did not boat in 2008.

Christopher Warren – Caris and Company

So it sounds like you’re sort of anticipating a flattish demand versus present condition.

Kevin Gordon

Actually from a marine perspective we expect the marine business to further decline, the incremental benefit that’s offsetting that decline is the military order which is as we said is a $10 to $20 million. So basically that’s going from zero in 2008 to $10 to $20 million so that’s offsetting what we believe will be the decline that we see in marine.

Operator

Your next question comes from the line of Paul Mammola – Sidoti & Company

Paul Mammola – Sidoti & Company

I think you mentioned CFGs, are there any meaningful CFGs being excluded through the first half with that FDA warning, and maybe could them coming back on in the second half contribute to stronger growth.

Jeffrey Black

No we see no impact in the first half.

Paul Mammola – Sidoti & Company

In terms of general speaking in medical is North America somewhat weaker in price and volume as compared to the rest of the world with the strength coming from overseas.

Jeffrey Black

Yes. Its been a continued trend for some time.

Paul Mammola – Sidoti & Company

Is there a sense of how much you can save or apply to the 2009 R&D tax credit program?

Kevin Gordon

Let’s keep in mind I don’t you’ll find that 2009 is going to be any more incremental necessarily to 2008 significantly. That tax credit was extended for 2008 and as I think we talked about on our third quarter call we expect the positive impact from that in our tax rate in the fourth quarter.

The additional investment in R&D in medical will add incrementally to that but I wouldn’t consider it to be material.

Paul Mammola – Sidoti & Company

On the forecast for ATI is it your expectation that air traffic declines and that’s somewhat contributing to the 2% decline in core revenue growth.

Kevin Gordon

Its not necessarily, the ATI repairs business we’re expecting to be about flat on a core revenue basis for the year and again that’s more driven by the mix of repair versus replacement. We actually have seen increased repair volume and the revenue is impacted negatively by the fact that we are repairing more.

The real impact of the 2% decline is that delay in the 747-8. We invested heavily in that program latter 2007 and most part of 2008 to prepare for that launch which we expected to be Q4 and Boeing announced that delay. So it will be more of a latter part of 2009 and that’s what’s impacted the top line.

Operator

Your next question is a follow-up from the line of Christopher Warren – Caris and Company

Christopher Warren – Caris and Company

Just wanted to drill in a little bit on the heavy lift business as well and to get your thoughts on how your forecast for that unit impacted the 2009 guidance versus the recent past.

Kevin Gordon

We’ve had very positive results from the heavy lift business as you know and we expect to see that continue into 2009. So when you look at the overall commercial group we talked about marine where that is, we talked about our expectation on the power business but heavy lift will again, in our view drive top line growth of mid single-digit type basis in 2009.

And again it’s a bit of the diversity of their end markets right, it’s the oil and gas piece, the wholesale piece, its marine construction, and infrastructure. So there may be some incremental benefits as a result depending upon what our new President elect does in terms of infrastructure spending.

Christopher Warren – Caris and Company

Is the wholesale part of that business and the secular expansion on the West Coast really expected to lead the effort there in 2009 on the growth side.

Jeffrey Black

Its going to be incremental but I wouldn’t say it’s the biggest piece of the growth, no.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Jake Elguicze

Thank you for joining us today. That concludes the Teleflex Incorporated 2009 financial outlook conference call.

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