Teleflex Incorporated
Q3 2011 Earnings Call Transcript

Published: 25 Oct 2011

[Operator:]

Good day, ladies and gentlemen, and welcome to the Q3 2011 Teleflex Inc. Earnings Conference Call. My name is Lacey and I’ll be your facilitator for today. (Operator instructions.) As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s call, Mr. Jake Elguicze, Treasurer and Vice President of Investor Relations. Please proceed.

[Jake Elguicze:]

Thanks, Operator, and good morning everyone, and welcome to the Teleflex, Inc. Q3 2011 Earnings Conference Call. The press release and slides to accompany this call are available on our website at www.teleflex.com. As a reminder, this call will be available on our website and a replay will be available by dialing 888-286-8010 or for international calls, 617-801-6888; passcode 62497743. Participating on today’s call are Benson Smith, Teleflex’s Chairman, President and Chief Executive Officer; and Randy Meier, Teleflex’s Executive Vice President and Chief Financial Officer. Benson and Randy will make brief prepared remarks and then 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 4. 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 made in our press release today as well as our filings 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.

[Benson Smith:]

Thanks, Jake, and good morning everyone. On today’s call I’ll begin with an overview of the results for Q3, including some strategic highlights; then I’ll discuss some of our new product introductions and recent GPO wins before turning the call over to Randy. Randy will provide you with a detailed review of the financial performance as well as a review of our product line and geographic revenue performance. Finally, before he turns the call back to me, he’ll also update you on our financial outlook for the remainder of 2011. So let’s begin. Q3 2011 revenue was $371.9 million. That represents an increase of 7.8% over Q3 2010. On a constant currency basis, sales in Q3 were up 3.2%, continuing the performance we saw in the first half of the year and within our full-year 2011 constant currency revenue growth expectations. And while Randy will cover this in his prepared remarks, similar to Q1 and Q2, the growth in Q3 came from a variety of our franchises and geographies. Turning to gross and operating margins, they were 47.9% and 17%. This represented a sequential increase of 90 and 170 basis points respectively over Q2. And finally, adjusted earnings per share for Q3 were $1.03, an increase of 4% from Q3 2010. Now, let’s move to some of the strategic highlights for the quarter. First, I would like to provide you with an update regarding our recently-announced pricing initiatives. Even though we are clearly in the very early stages of this process I am pleased to tell you that the initial results are encouraging. Since we only began these for the most part in July, only a modest amount has matriculated into our Q3 2011 results. However, the regions that we expected to be able to drive price – Asia, North and Latin America – did see nice growth from price within the quarter, further indicating to us that our recently-announced price initiatives in these markets are achievable. During Q3 2011, pricing in Asia-Pacific accounted for approximately 260 basis points of their growth, while pricing in Latin and North America accounted for approximately 240 basis points of the sales growth in those regions respectively. This was somewhat offset by a continued difficult European market which saw a decline of approximately 90 basis points in the quarter. Turning to VasoNova, we continued to see additional penetration of this technology and standard of care into US hospitals during the quarter, including most recent wins at Duke University Hospital and GBMC. And while the adoption of this technology is clearly at its infancy, there was a noticeable buzz at the Association of Vascular Access conference that was held in early October. Clinicians see the benefits that the VPS technology has to offer and we have several accounts in the sales funnel that we hope to close during Q4 this year. Before I shift gears to provide you with a product development update, I am also extremely happy to report that this past Friday we announced a definitive agreement to sell our aerospace businesses for $280 million. And while this transaction is subject to certain customary closing conditions, we do expect it to close before the year-end. I’d like to take a minute to thank all of the Telair and Nordisk employees for all of their years of service and wish them well. In addition, I’d like to thank Randy and our Legal and Strategic Development personnel who spent countless hours seeing this transaction through to a successful resolution. Their hard work and dedication over the last several months is deeply appreciated. Now let’s turn to new product development. During Q3 we launched five new products – three within our clinical care and two from our surgical franchise. We also made a handful of 510(k) and CE Mark filings with regulatory agencies. Let’s begin with the products launched and the filings that occurred within our Clinical Care segment. From a new product introduction standpoint, we introduced the ArrowADVANTAGE pressure injectable PICC. This product represents the next generation of our non-coated, pressure injectable PICCs. These products have increased radio-opacity for visualization under fluoroscopy and x-ray and have a taper-free catheter design to minimize the risk of catheter-related thrombosis. And they are compatible with the VasoNova VPS stylet. Another launch was the StimuQuick Echo. This is the latest addition to our clinician-inspired line of single-shot peripheral nerve block needles. It is targeted at anesthesiologists that practice ultrasound-guided regional anesthesia and is an excellent addition to our regional anesthesia product bag. And before I move on to the recent regulatory filings we made, we also launched a product that expands our existing tracheostomy portfolio – the EasyCric. This is a complete emergency set which provides safer and easier placement and helps improve patient outcomes. In addition to these product launches we also filed for a CE Mark on our VasoNova VPS device in late September and submitted a 510(k) in October to support an anti-thrombogenic claim for our anti-microbial coating on our PICCs. We see both of these as important milestones in advancing our vascular access franchise. We are currently awaiting a response to both of these from the regulatory bodies. Moving to Surgical, we launched the Taut Cone Access Port and the Low-flow Pleur Evac. The Port expands our line to delivery primary access for initial insertion during laparoscopic surgery with enhanced visualization. It integrates some of our existing universal seal technology with an improved locking clam and longer [cannular] option, and is ideal for surgeons for initial abdominal access. Our Low-flow Pleur Evac is an upgrade in our chest drainage line of products and allows clinicians working in hospitals with low suction to enhance patient safety. And finally, before I discuss some of our GPO wins in the quarter, within our Surgical franchise we also received a 510(k) approval from the FDA in late September on our Taut Universal Balloon Open Access Port. This product provides greater visual access and a better seal as compared to alternatives currently on the market, and we expect to launch this product late in Q4. Turning to GPOs, during Q3 we were awarded 11 contracts, three of which were new. That takes us to 21 GPO contracts won on a year-to-date basis of which nine are new. The contract wins in the quarter occurred across a wide variety of product areas and I am pleased that the work that our National Accounts GPO Group is doing. With that, I will now turn the call over to Randy and he can walk you through the financials. Randy?

[Randy Meier:]

Thanks, Benson, and good morning everyone. Revenues for Q3 were $371.9 million, up 7.8% on an as-reported basis. When adjusting for currency, revenue grew at 3.2%. In looking at how the constant currency revenue growth was achieved, approximately 190 basis points came from increased volume, while 120 basis points came from new product introductions. And finally the last 10 percentage points or basis points came from improved pricing that Benson referred to earlier. Turning to gross profit and margins they were $178.3 million or 47.9%. This compares to $166.6 million or 48.3% in the prior year-ago quarter. And although gross margins were down slightly year-over-year, they were up 90 basis points sequential. Our expectations are that gross margins will continue to improve sequentially in Q4. Moving to operating expenses, selling, general & administrative expenses were $102.9 million during the quarter, up from $101.5 million last year. The slight increase in SG&A for the quarter was due to an increase in sales, marketing and clinical education activities as well as an increase in the valuation allowance against our Greece government bonds, partially offset by a reduction in our G&A expenses. R&D in the quarter was $12.3 million, up from $10.6 million last year. The higher level of R&D expense reflects increased investments in our catheter tip positioning technologies. Moving to interest expense it was $18.9 million for the quarter, down approximately $0.9 million. The decline in interest expense for the quarter was due to a reduction of approximately $114 million in average outstanding debt. As a reminder, during Q3 2010 we incurred approximately $30.4 million of losses on the extinguishment of debt that did not reoccur in Q3 2011. Turning to taxes, the effective income tax rate for Q3 was 23.9%. On a year-to-date basis, when adjusting for items that affect comparability, our adjusted tax rate was 27.3%. The lower effective tax rate is a function of reduced US tax expense with respect to foreign earnings for the year, and lower accruals in the quarter resulting from a lower than previously expected tax rate for the full year. As a result, we now project a tax rate between 28% and 29% for the full year. This is down slightly from our prior expectation that taxes would be between 28% and 30% for the full year. As a result of this performance, adjusted earnings per share for the quarter was $1.03, up approximately 4% versus the prior year. Now, let’s move on to a more detailed review of our constant currency product and geographic revenue results. Critical care revenue was $245.1 million, up 3.6%. During the quarter, urology sales grew 7.4%; vascular access sales grew 6.5%; anesthesia sales grew 2.7%; while respiratory sales were down 5.2%. We were particularly pleased with the growth of our vascular franchise as it improved nicely from 2% growth which it posted in Q2 2011. The performance in the quarter was particularly strong within our CVC and arterial product lines. Moving to Surgical, its revenues were $66 million, up 1.9%. Growth in the quarter was primarily due to an increase in sales of our ligation products. Turning to Cardiac, its revenues were $18.1 million, down 1.7%. This slowdown was largely due to the softness in the capital equipment market which the cardiac business is somewhat exposed to, and to the timing of some orders and shipments in the quarter. We do believe that this business performance will improve next quarter. And before I move to discussing the top line results from the regional perspective let me briefly mention our OEM business. OEM revenue was $42.4 million, up 5.6% with an increase in revenue coming from higher sales of specialty suture, catheter fabrication, and orthopedic implant products. Now I’ll walk you through our top line performance from a geographic perspective. Revenue in North America was $152.5 million, up 1.4%. During the quarter, increased sales of our vascular access anesthesia and urology products was offset by slight declines in our respiratory, surgical, and cardiac products. In addition, pricing positively impacted North American sales. In Europe, sales were $127.1 million, up 3.3%, and despite a difficult macroeconomic environment we continue to post sales growth across a variety of product lines including urology, anesthesia, surgical and vascular access. In the Asia-Pacific region, sales were $25.3 million, up 12.7%. This was led by an increased volume in vascular, surgical and cardiac as well as improved pricing. Turning to Latin America, sales were $14.7 million in the quarter, up 11.1%. Growth in this market was led by improved pricing and improved vascular and urology volumes. And finally in Japan, sales were a bit disappointing coming in at only $9.8 million, down 12.3%. The decline in revenue in this area of the world was primarily due to lower sales of respiratory therapy products. We believe that this market will rebound in Q4. With that, let’s move to our 2011 guidance. Based on our nine months of actual performance behind us we are updating our guidance expectations for 2011. As a result, we now expect full-year revenue to be between $1.51 billion and $1.53 billion; this is up from our prior expectations of a range between $1.44 billion and $1.47 billion. The increase in our revenue expectations are associated with foreign currency fluctuations and the translation of foreign revenues into US dollars. Our revenue assumptions peg the US Dollar-to-Euro conversion rate at approximately 1.37 in Q4. In terms of constant currency revenue growth, we expect to be in a 3.0% to 3.5% range for the full-year 2011. This compares to our prior constant currency full-year growth expectations that was in the 2.5% to 3.5% range. From an earnings perspective in 2011 we are now forecasting a range from $4.05 to $4.25 to $4.10. The reduction in the high end of the EPS guidance range is due to the company’s nine-month year-to-date performance as well as our expectations in Q4. And finally, from a cash flow perspective we are now projecting full-year 2011 cash flow from continuing operations to be in the range of $150 million to $180 million, down from our previous expectation of $180 million to $210 million. The decrease in cash flow from operations guidance is associated with management’s intention to increase inventory levels as we continue to focus on gaining additional market share, our desire to continue to improve on-time delivery and customer satisfaction metrics, and a projected full-year increase in accounts receivables due to the decision we made earlier this year to no longer factor certain receivables. With that I’d like to now turn the call back over to Benson for some closing remarks.

[Benson Smith:]

Thanks, Randy. So in closing I would like to leave you with the following

[Operator:]

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

[Thomas Kouchoukos:]

Hey, good morning guys. Congratulations on a nice quarter. A couple here, one maybe from a macro perspective

[Benson Smith:]

To take your last question, I’m not sure that our particular results are a good mirror of general procedure conditions. We haven’t seen the same sort of fluctuation in our own product lines that some other people have seen, so I’m not sure our results are a good mirror of what’s happening generally procedurally. We’ve commented before that we think a number of our product lines are in that critically ill patient area, that it’s hard to postpone therapy in a lot of those areas. We’re certainly starting to see some traction in our US vascular access business. I think that is in part a result of the focus that’s coming from our strategic business units and in part coming from I think some good acceptance and enthusiasm around the VasoNova product introduction, that aside from its own merits is also creating kind of a good talking opportunity and access point with those clinicians. In Europe it’s a little bit different story. We’re seeing largely good growth across the board in most of our product areas, so it’s a little bit of a different picture from region to region. But I think it’s a combination of new product entries and a renewed sales focus that’s helping us.

[Thomas Kouchoukos:]

Okay, great, that’s real helpful. If I can just follow up with one more for Randy

[Randy Meier:]

Sure. As we look out into Q4 we’re not expecting to realize as much as a tailwind as we have in the first three quarters of this year. Certainly the economic situation in Europe, I’m sure everybody’s watching fairly closely to gauge some impact. As everyone knows, we are fairly well hedged as we continue to, at least for the time being, operate our aerospace business, but certainly as we look into next year we’re going to have to be a bit more cognizant of our hedging strategy with the outlook for at least greater volatility in the Euro for next year. So while we remain very confident in some of our organic or constant currency growth continuing to improve on a going forward basis I think we’ll probably experience a few more headwinds in terms of our currency improvement next year.

[Thomas Kouchoukos:]

Okay, that’s helpful. Thank you.

[Operator:]

And our next question will come from the line of John Demchak with Morgan Stanley. Please proceed.

[John Demchak:]

Good morning. This is John Demchak in for David. I wanted to touch on expectations moving into Q4. When looking at the results and some of the changes in guidance, I don’t really see any significant changes. Guidance increase in revenue and narrowing EPS down seem to be within what you would have expected from the first half or the first three quarters. Were there any surprises you’d like to point out and also how is the balance of the year shaping up versus the expectations?

[Randy Meier:]

I guess from a guidance perspective I think we look at this as pretty consistent with the guidance we’ve provided all year and just sort of tightening the range with only a quarter left to go. We thought the quarter was a fairly clean one and gave a good indication of the performance of the company and our ability to continue to improve our top line results and continue to see margin improvement. So I wouldn’t expect there to be too much changes as we move into Q4 here.

[John Demchak:]

Okay, great, and just one quick follow-up. Can you discuss the potential uses of cash from the divestiture? Is it now more likely for these to be for strategic acquisition? And also where on the list of priorities does reducing debt lie?

[Benson Smith:]

Well, as I think we’ve indicated all year long, that the two primary uses of cash, whether it was from the bond offering earlier in the year or from the remaining divestitures, were to retire debt and look at strategic opportunities to continue to improve growth. And those continue to be the priorities. I don’t think there’s any one that take priority. I think now though with a lot of the discussion around repatriation of funds, we are now more likely to see how that discussion continues to unfold in the first half of next year rather than just try to bring back cash from outside the United States. As some of you may know, the divestiture of the aerospace business, the majority of that cash will be outside the United States so we’ll continue to review some of our repatriation issues.

[John Demchak:]

Okay, thanks.

[Operator:]

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

[Dave Turkaly:]

Thanks. Quickly on the cash flow side, say $165 million for your cash flow from operations guidance is the midpoint now, and with $65 million in year-to-date, in Q4… I mean should we be looking at the inventory and the accounts receivable base build as things that happened this quarter and kind of are more one-time in nature? Or help us get to the big sequential increase that you’re going to show in Q4.

[Randy Meier:]

Well, I think we’ve been talking about the build in inventory and sequentially some of the rise in our receivables throughout the year as a result of two actions – predominantly the discontinuance of our factoring last year. We have now come full circle around that so I wouldn’t expect any significant increase in receivables on a going forward basis; and I think inventory levels, which are up reasonably well and we’ve seen a nice improvement in our service levels, we wouldn’t expect any dramatic rise from the current levels through the end of the year. So I think we are positioned to generate fairly significant amounts of cash as we move into Q4.

[Dave Turkaly:]

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

[Benson Smith:]

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

[Dave Turkaly:]

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

[Randy Meier:]

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

[Dave Turkaly:]

Thank you.

[Operator:]

And our next question will come from the line of Rich Newitter with Leerink Swann. Please proceed.

[Rich Newitter:]

Hey guys, thank you for taking the questions. I just wanted to start on currency. Can you just tell us, you may have even mentioned it, what the EPS impact was from currency in Q3?

[Randy Meier:]

You know, when we look at our currency we are fairly naturally hedged. We had obviously some nice benefit from our top line growth and that does flow through so we did see some tailwind as we moved, coming through in the quarter and for the full year. What that results in is approximately about $1.5 million to $2 million in pre-tax benefit, so we do experience some but it is largely offset by the currency expenses that we have from both our manufacturing and operations. So we would expect some of that to be mitigated as we move forward with some of the currency headwinds we’re projecting.

[Rich Newitter:]

Okay, thanks for that. And just going back to pricing, thanks again for the breakout there by region; and on the product categories specifically, maybe even within North America, I think last quarter you talked about a 30-basis point contribution from price and now it’s at about 10 basis points for this quarter. What kind of acceleration in pricing contribution should we be expecting versus new products which seem to be the bigger contributor to the acceleration in critical care this quarter? Can you help us think about that moving forward? Should this be something going from 10 basis points in Q3 to 20 basis points in Q4 and then increasing thereafter, or is this going to be more gradual?

[Benson Smith:]

So I think where we’re seeing the positive contributions come in from North and South America and Asia-Pacific, essentially I think we are convinced that those prices are sticking and that part of the plan is working. Those increases are working against some negative pricing in Europe and I’m sure as you’re aware that for the most part European pricing in Q3 is the result of tender bids that were generated anywhere from three months ago, six months ago, nine months ago. So while we have modest expectations for pricing in Europe, I think part of the plan is over the next twelve months to mitigate that decline in Europe which will start to get a more favorable overall meta effect in the range that we’ve been talking about earlier. It’s just that it just takes longer in Europe and I don’t think there’s the same opportunity for increases there. It’s more a matter of slowing down the decline. Certainly a new product introduction will play an increasingly bigger role in 2012 and in 2013 than pricing as responsible primarily I think for our growth above the pricing contribution.

[Rich Newitter:]

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

[Benson Smith:]

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

[Rich Newitter:]

Okay, that’s great color. Thank you.

[Operator:]

And our next question will come from the line of Larry Keusch of Morgan Keegan. Please proceed.

[Larry Keusch:]

Hi, good morning. Randy, a question for you

[Randy Meier:]

First just to give everybody a sense of timing, we don’t expect to close this transaction probably until the December timeframe. So the opportunity to, you know, if we did choose to repatriate or pay down debt really wouldn’t present itself until at best just before year-end. Second, I think when we look at it we have provided in prior periods for some significant repatriation through the income statement to bring back some cash to the United States for further deleveraging, although we haven’t provided the cash aspect of that. So if we were to bring some cash back it would not have a P&L impact but would have a cash impact on a going forward basis. But to your question, debt retirement versus acquisitions – obviously some of that is just as we look out at the various opportunities that exist, I think there’s a number of things that we look at both domestically and abroad. And we continue to see a lot of very interesting opportunities to add technology and some products overseas, so I wouldn’t think there would be a difficulty in leaving a sufficient amount of cash overseas and being able to deploy that effectively for growth opportunities. And again, I think from a timing perspective we’ll evaluate this towards the end of this year and into the first half of next year in terms of whatever both the tax and macroeconomic environments present us with.

[Larry Keusch:]

Okay, great. And then I know you’re obviously not providing 2012 guidance yet but I’m just wondering if you could help us think through a little bit of the puts and takes that you foresee in the operating margin expansion for the coming year, just so we can start to kind of think about what’s sort of positive in the mix and what’s perhaps negative in the mix.

[Randy Meier:]

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

[Larry Keusch:]

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

[Randy Meier:]

I certainly think that as we’ve talked about at great length this year, sort of pricing and product mix and some new product introductions will certainly drive most of the improved profitability as we get into the next year; but better execution and continued awareness on the cost side is also going to be something that we take into consideration. Obviously we are levered to currency with 50% of our revenue being generated offshore, so if currency does turn around there’ll be a little bit of headwinds there but that shouldn’t have a significant impact on our gross margins; it’ll probably manifest itself more in our operating margins if we move forward.

[Larry Keusch:]

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

[Randy Meier:]

I think we’re fairly well reserved at this point for our exposure to the Greek bonds. We generally speaking have about 50% of that exposure reserved. I think as we move forward this week and over the next couple of weeks we’ll get a better indication of whether that’s adequate or not, but I think as we move forward we continue to watch all of our receivables in Europe and the business environment over there, but again, I think we continue to position ourselves well. Healthcare spending in Europe is one of those things that we do expect to continue so while we may see a little bit of extension of some of our days sales outstanding, we continue to believe that the vast majority of our receivables are quality receivables.

[Larry Keusch:]

Okay, terrific. Thanks very much.

[Operator:]

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

[Chris Cooley:]

Good morning, and thank you for taking my questions. Could you maybe just briefly address the contribution both from a more favorable product mix relative to just absolute price increases when you think about that step up in guidance to the 3.5%? And then as a follow-up help us think about the progression of margin expansion. I mean I understand the aggregate targets on an annualized basis but is anything changing as you see it, kind of intra-year versus what maybe you thought about initially when you started this fiscal year? Thank you.

[Benson Smith:]

Certainly some of the margin expansion does come from mix. Q1 for example saw heavier than expected sales in our respiratory therapy product line. In Q3 respiratory sales were down versus what they were a year ago. And so that change alone was helpful in terms of both the overall product mix which was certainly responsible for some of the improvement in gross margin. The rest of it comes to a certain part from new products that generally speaking have a higher gross margin than the products that they’re replacing. So it’s a combination of mix and new products that’s contributing to that, and then some assistance obviously from price improvements.

[Chris Cooley:]

Okay, thank you.

[Operator:]

And our next question will come from the line of James Sidoti with Sidoti & Company. Please proceed.

[James Sidoti:]

Good morning. I know there’s been a lot of talk about currency already but I just want to go over… You’ll be less hedged next year once the aerospace businesses are divested, but you still have some international operations on the medical side, right?

[Benson Smith:]

Yes.

[James Sidoti:]

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

[Randy Meier:]

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

[James Sidoti:]

All right. And then I know it’s early with the VasoNova but is there any anecdotal evidence that you’re gaining some share as a result of having that on some of the critical care catheters?

[Benson Smith:]

The short answer is yes. I was personally at the ABA conference a couple weeks ago and I would say the booth was extremely well-attended. I saw a lot of firsthand interest in both the explanation and then people sitting through the educational seminars about it. We have had a number of, I’ll describe them as high-profile comparisons between ourselves and competitive systems and we have fared extremely well in those profiles – Duke is a good example of an account that’s just converted and a sizable account at that. And I certainly think our major competitor here has some advantages in terms of their share in the PICC market but we are faring very, very well in those situations where we can get a head-to-head comparison of those two systems. And there’s just some advantages that we have that they’re not able to compete against. So we’re quite encouraged about the progress with that product.

[James Sidoti:]

Okay, thank you.

[Operator:]

(Operator Instructions.) And our next question will come from the line of Gregory Hertz at Citi. Please proceed.

[Gregory Hertz:]

Hi, thanks for taking my questions. Just the first one

[Randy Meier:]

Sure. The actual decision was made more as a result of historically being a fairly diversified company. In some of the other industries that we were in, the need to accelerate the cash conversion cycle, to generate cash flow was a little bit greater than it is in the healthcare business so as we began to reduce some of our exposure to other industries we made a decision that the cost of factoring wasn’t an effective tool as we moved forward. It was actually a year ago that we made the decision to stop factoring. We continue to believe that the quality of our receivables in Europe where a majority of the factoring was going on is still very high. The cash flow that we generate there, we continue to believe is very sound, but as I’m sure you recognize some of the length of the receivables, it takes about a year to work through that when you stop factoring. And we’re just about at that point – that’s why we continue to be confident in our ability to generate cash in Q4.

[Gregory Hertz:]

Appreciate that. And then just looking more specifically within your vascular access business, can you maybe characterize maybe in volume or sales dollars terms the growth in PICCs and CVCs respectively? And that’s it for me, thank you very much.

[Benson Smith:]

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

[Gregory Hertz:]

Thanks a lot.

[Operator:]

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

[Anthony Petrone:]

Thanks, gentlemen. Just to go back to gross margin, two questions there – one on the price initiative. I recall last quarter that the increases in price were mostly in Asia and that was still ongoing and moving through the system. I’m just wondering what percentage of the portfolio in China specifically, the A-Pac region overall, have you implemented the price increases, and where are you in other regions of the world – North America and Europe. And then I have a follow-up to that one as well.

[Benson Smith:]

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

[Anthony Petrone:]

So in other words, on a product-by-product basis, the intention to increase price has been implemented across all products; or are there some products that still are awaiting price increases?

[Benson Smith:]

There’s one correction I would say, is we are of the opinion that there’s about two-thirds of our product line where price increases would be quite constrained. About half of that just comes across all product areas in Europe where we think it would be difficult to do better than simply mitigate the decline. The other third we just don’t think are really in the same position to be able to withstand a price increase. So it hasn’t been across the board but the first part of your question is have we put into place what our plan is to put into place this year and the answer is yes. Some of that is obviously in the very early initiation stage, particularly in North America, but most of or substantially all of, I should say, the price increases we planned to initiate have been initiated.

[Anthony Petrone:]

All right, great, and then just one follow-up there would be the new GPO contracts and how that plays into gross margins. So Benson, you mentioned earlier just the mix of respiratory to vascular, a switchover to more vascular was a gross margin tailwind. The new GPO contracts seem to be heavily weighted towards respiratory… I’m just wondering as you look out how does that factor into the gross margin outlook, and even though more contracts are weighted towards respiratory on a product basis do you still have more exposure to some of the other areas such as vascular or cardiac? Thanks again.

[Benson Smith:]

Yeah. Most of the respiratory therapy contracts are renewals and I would say we’ve already pretty much taken the price beating for those product areas. So they don’t represent a decline over prior year.

[Anthony Petrone:]

Okay.

[Randy Meier:]

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

[Operator:]

(Operator Instructions.) And at this time I show that we have no further questions in queue. I would like to turn the call back over to Mr. Jake Elguicze for any closing remarks.

[Jake Elguicze:]

Thanks, Operator. And thanks everyone for joining us today. That concludes the Teleflex Inc. Q3 Earnings Conference Call. Have a good day.

[Operator:]

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