Jul 27, 2011
Executives
Jake Elguicze – Vice President, Investor Relations Benson F. Smith – Chairman, President and Chief Executive Officer Richard A.
Meier – Executive Vice President and Chief Financial Officer
Analysts
Lawrence Keusch – Morgan, Keegan & Company, Inc. Richard Newitter – Leerink Swann LLC Kathleen McGrath – Susquehanna International Group Anthony Petrone – Jefferies & Co.
Operator
Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 Teleflex Incorporated Earnings Call. My name is Modesta and I will be your coordinator for today.
At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session.
(Operator Instructions) I would now like to turn the conference over to your host for today Mr. Jake Elguicze, Treasurer and Vice President of Investor Relations.
Please proceed, sir.
Jake Elguicze
Thank you, operator, and good morning everyone, and welcome to the Teleflex Incorporated second quarter 2011 earnings conference call. The press release and slides to accompany this call are available on our website at www.teleflex.com.
As a reminder, this call will be available on our website and a replay will be available by dialing 888-286-8010 or for international calls 617-801-6888, passcode 66816668. 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 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 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 the 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.
Benson F. Smith
Thanks, Jake, and good morning everyone. On today's call, I'd like to begin with an overview with the results for the second quarter, 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 in the second quarter as well as the review of our product line and geographic revenue performance. Finally, before he turns the call back to me, he will also update you on our financial outlook for the rest of the year.
From a geographic standpoint, Europe and our emerging markets led the way with revenue growth of 4.3% and 12.6% respectively, while North American sales were up 0.4% versus the second quarter of 2010. While our gains in North America are modest on an apples-to-apples comparison, our trend is increasing and in line with our expectations.
While some portions of our U.S. portfolio can be affected by lower procedure rates, we have enough balancing elements that we did not see any impact of this in our overall North American sales in the second quarter and are not expecting to see an observable difference throughout the balance of the year.
Turning to operating margins, they were 15.3% in the quarter, and while Randy will get into more detail about this in a few minutes, it’s important to point out that our results for the second quarter were impacted by approximately $6 million of costs that are not expected to re-incur in the second half of 2011 and were not excluded when arriving at our adjusted earnings per share for the quarter. Approximately $3 million of these costs were recorded in operating expenses, while another $3 million was recorded as impairment expense.
When adjusting for the $3 million of cost that impacted operating profit, operating margins would have been approximately 16% in the quarter. In the quarter also, we also initiated some of our first pricing initiatives, and Randy will discuss the impact of this during his remarks.
And finally adjusted earnings per share for the second quarter were $0.94, and although this was down slightly from last year, it was in line with our expectations. Moving to some of the strategic highlights for the quarter, much was accomplished from a strategic perspective.
We resolved the FDA Corporate Warning Letter related to our Arrow International subsidiary, putting behind us an issue that has existed for about four years. I would like to take a minute to thank all of the Teleflex employees who are involved in seeing this through to a successful resolution.
Your hard work and dedication in the remediation efforts over last several years is deeply appreciated. In addition to getting the Warning Letter resolved, we also completed another item that has been in process for several years.
With the decision to move our last remaining non-medical business to discontinued operations Teleflex is now a pure-play medical technology company. And in conjunction with the transformation from a cyclical diversified industrial conglomerate to a standalone medical device company, we also completed the realignment of our North American structure to be more business unit and product line focused moving away from the regional structures that had previously existed.
I am pleased to report that all necessary leadership positions have been filled, the team is in place, is excited, and driven and well versed in the medical device base. I am confident that this structure will not only be more effective, but allow us to operate more efficiently in 2012.
And finally from a strategic standpoint, Randy and his team completed the $250 million note offering during the second quarter. This transaction has improved our capital structure and it increases our financial flexibility to pursue unique late-stage technology and strategic acquisitions to drive future growth.
With that, I would like to now turn to our new product introductions. During the second quarter, we launched our StimPod Nerve Stimulator, this product which serves the anesthesia market allows clinicians to confirm accurate needle or catheter positioning during peripheral nerve block procedures.
It comes with a clear and concise diagnostic screen, provides clinicians with real-time feedback on the size and shape of the actual pulse delivered to the patient and has a proximity indicator notifying the clinician when the optimal distance between the needle or catheter tip and nerve has been reached. It also has a smart cable, which enables clinicians to educate students about nerve location prior to locating the target nerve with the needle.
In addition to new product introductions, we also earned some recent GPO contract wins. During the quarter we received three new GPO contract wins and two GPO contract extensions.
The new contract wins occurred in the anesthesia and surgical areas as we won some additional laryngoscope and ligation contracts, while the contract extensions occurred in the vascular and anesthesia areas. In addition during the quarter, our VasoNova VPS System was included on a pick agreement.
The introduction of our VPS technology to the market continues to go well. Currently, we are either in or completed trials in 36 different hospitals and some of these have already resulted in sales.
We are confident that clinicians will see the value in what we believe is the most user friendly and technology superior product in the market today. With that, I’ll turn you over to Randy, and he can walk you through the financials.
Randy?
Richard A. Meier
Thanks Benson, and good morning everyone. Revenues for the second quarter were $391.3 million, up 9.2% on and as reported basis.
When adjusting for currency fluctuations revenue grew 4%. And looking at how that constant currency revenue growth was achieved, approximately 280 basis points came from increased volume, while 90 basis points came from new product introductions and finally, the last 30 basis points came from improved pricing.
Turning to gross profit and margins, they were $184 million or 47%. This compares to $174.3 million or 48.6% in the prior year quarter.
And although gross profit margins were down year-over-year due to mix of product sales in the quarter and higher raw material and fuel surcharges, they were up 50 basis points sequentially. Our expectations are that gross margins will continue to improve sequentially during the third and fourth quarters of this year.
Moving to operating expenses; selling, general, and administrative expenses were $111.8 million during the quarter, up from $99.8 million last year. And as Benson mentioned in his opening remarks, we incurred approximately $3 million of cost in SG&A that are not expected to reoccur in the second half of 2011.
These cost related to litigation claim and the accelerated amortization of an asset team to have no remaining use for life. These costs were not included when arriving at our adjusted earnings per share for the quarter.
The remainder of the increase in SG&A for the quarter was due to increases in sales, marketing and clinical education activities. R&D in the quarter was $12.5 million, up from $10.3 million last year.
A higher level of R&D expense reflects the increased investments in antimicrobial and catheter tip positioning technologies. Restructuring and impairment charges for the quarter were $3.2 million of which approximately $3 million related to the impairment of certain investments in affiliates.
Once again, these impairment costs were not expected to reoccur in the second half of 2011, but they were not excluded in arriving at our adjusted earnings per share for the quarter. Moving to interest expenses, it was $15.5 million for the quarter down approximately $3.9 million.
The decline in interest expense for the quarter was due to a reduction of approximately $218 million in average outstanding debt. However due to our recent senior subordinated note offering, we expect net interest expense to increase slightly in the third and fourth quarters comparison to the amount incurred in the second quarter.
Tuning to taxes, on a GAAP basis, the effective tax rate in the second quarter was 21.6%. When adjusting for items that affect comparability, our adjusted tax rate was 27.2% for the quarter.
Slightly higher than our full year guidance, which we will provide. On a year-to-date basis, when adjusting for items that affect comparability, our adjusted tax rate was 29.2%, and we continue to project our tax rate between 28% and 30% for the full year.
The combination of all my comments resulted in adjusted earnings per share of $0.94 for the quarter. Now let’s move on to a more detailed review of our constant currency product and geographic revenue results.
Critical care revenue was $253.6 million, up 3.2%. During the quarter respiratory sales grew 6.3%, urology sales grew 5.2%, well vascular and anesthesia sales grew at 1.9%.
Moving to surgical, its revenues were $72.9 million, up 4.3%. Growth in the second quarter was due to increased sales of our ligation products.
Turning to cardiac, its revenues were $22.1 million, up 10.5%. As we stated in our first quarter call, we expected sales of our cardiac product to rebound in the second quarter and this has occurred.
We have passed our backorder situation, which occurred as a result of the recall we announced in December of 2010, and are well positioned to continue to take additional market share in the coming quarters. And before I move on to discussing the top line results from our regional perspective, let me close the discussion of our medical business by talking about our OEM franchise.
OEM revenue was $42.4 million, up 6.8%. During the quarter, we had increased sales of both our specialty products and our orthopedic implant product line.
Now, I’ll walk you through our top line performance from a geographic perspective. Revenue in North America was $156.5 million, up 0.4%.
During the quarter increased sales in our respiratory and cardiac products was offset by declines in our urology and surgical products. In Europe, sales were $137.8 million, up 4.3%.
During the quarter, we achieved increased sales of all major product areas led by sales of cardiac, surgical and urology products. In the Asia-Pacific region, sales were $26 million, up 14.3%.
This was led by increased volume in almost every product area as well as improved pricing I mentioned earlier. Turning to Latin America, sales were $15.4 million in the quarter, up 17.4%.
Similar to the Asia-Pacific market, we saw increases in every major product areas. And finally, in Japan, sales were $13.3 million, up 3.7% reversing the slight decline we saw in the first quarter as a result of the tsunami.
With that, let's move on to our 2011 guidance. Our 2011 full year outlook for our core medical business remained unchanged from the guidance that we set out at the beginning of the year.
We continue to expect revenue to be between $1.44 billion and $1.47 billion. On a constant currency basis, this translate into a full year growth of between 2.5% and 3.5%.
From a product line standpoint, we continue to anticipate sales of our critical care products to grow slightly above the overall growth rates I just referred to. This would be led by increased sales of our vascular products.
In addition, we continue to expect strength in the performance of our urology and respiratory product line, and for our anesthesia business sales to improve from the growth rates posted in the first and second quarters. For our surgical products, we still believe that sales growth in line with the normalized surgical procedure growth, resulting in a growth rate of approximately in the 3% range.
Moving to cardiac, now that we are through our backlog situation, we expect revenue to be up slightly for 2011 as compared to 2010. And finally, turning to our OEM business, we continue to anticipate only a slight improvement in our 2011 compared to 2010.
From an earnings perspective, in 2011, we continue to expect to achieve adjusted earnings per share in the range of $4.05 to $4.25 per share. Turning to cash flow, we now project full year 2011 cash flow from continuing operations to be in the range of $180 million to $210 million, establishing a broader target than our previous expectation of approximately $210 million.
The potential downside risk 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 as well as our desire to continue to improve on-time delivery and customer satisfaction metrics. In future quarters, the company also plans on introducing additional metrics that it believes to be more useful and representative of our company.
One of those metrics will be discussed is, adjusted EBITDA. With that, I’d like to turn call back over to Benson for him to make some closing remarks.
Benson F. Smith
Thanks, Randy. So in closing, I would like to leave you with the following.
I am generally pleased with the results we’ve generated during the first half of 2011. Clearly, there is still more work to be done, but we are heading in the right direction and beginning to build some momentum in the market.
Today, our revenue growth has occurred as a result of a combination of market share gains, select price increases and improved traction of recently introduced products, and we continue to expect nice top line growth to occur in the second half of the year. In addition, we continue to expect both gross and operating margins to continue to expand sequentially as we move throughout the year.
Finally, I once again want to reiterate that I and every member of the Teleflex management team remains committed to the achievement of the high fives. With that, I’d like to turn the call over to the operator for questions.
Operator?
Operator
(Operator Instructions) Your first question today comes from the line of Larry Keusch with Morgan Keegan. Please proceed.
Lawrence Keusch – Morgan, Keegan & Company, Inc.
Yeah. Hi, good morning.
I guess just to start out on the top line growth, you saw 3.5% constant currency in the first half and the guidance imply 2.5% for the second half of the year. I just want to make sure I understand, is that really driven by the cardiac and OEM businesses sort of decelerating from the rates that they’ve been?
Benson F. Smith
Yeah. Hi, Larry.
I think it’s just in consideration we want to maintain the guidance that we have out there although, we’re pleased with the performance that we put out in the first two quarters. We would like to sort of remain sort of consistent with where we’ve been.
And although we are very optimistic about the potential performance in the second half of the year, I think we’d like to get through the third quarter before we might explore increasing any of our guidance.
Lawrence Keusch – Morgan, Keegan & Company, Inc.
Okay. That’s very helpful.
And then just two other ones for you; again, if you look at the operating margin and obviously at those sort of one-time expenses in there, I guess the questions are number one why where those not excluded from your adjusted numbers? Is that sort of you just trying to illustrate that they were these one-timers but it is a cost of doing business, so they stay in the adjusted numbers, and are we still sort of talking about your expectations for that operating margin to kind to be up at the higher end of that 17% to 19% range.
And then lastly, just any thoughts on as you look at your North American business, was there evidence that we did see some sort of slowdown in surgical procedures in the second quarter, that would be great. Thanks?
Benson F. Smith
So, I will start of with the surgical procedure question. Obviously, other companies who might have a product lines that are much more affected by this have reported that there is some initial reports from hospital groups reporting that.
So while we didn’t see it directly in our own product line, we suspect that it’s happening but it’s not having the same effect on us it might have on some others due to the specific nature of our product line. So we suspect it’s happening but it’s not, we don’t expect it to have as much of an effect on us as it might have on others.
Lawrence Keusch – Morgan, Keegan & Company, Inc.
Okay.
Richard A. Meier
And Larry, I guess with the first half of your question relating to operating margins, I think you stated it very nicely. I think we want to highlight the fact that there was some normal what we would characterize as operating expenses and charges in the quarter that we would not typically back out but highlight the fact that the nature of these few expenses would not be recurring in nature to give you and the rest of the investor’s sense of what the ongoing run rate looks like in terms of our operating margin.
In terms of our full year guidance, I think we’re probably looking at in that 16% slightly ahead of 16% range for the full year, but we would expect to end the year, I think well above that 16% range. So as we moved into next year, our operating margins would be targeted certainly above this year.
So again, I think we’ve always suggested that we would end the year in that 17% to 19% range, but for the full year given where we are today, I think we will be in that 16%, 17% range.
Lawrence Keusch – Morgan, Keegan & Company, Inc.
Okay. Randy, I’m sorry not to push you on this, but I think in the first quarter you guys sort of said that you anticipated exiting at the high end of that range, should we sort of think about that maybe it’s moderated a little bit?
Richard A. Meier
Lawrence Keusch – Morgan, Keegan & Company, Inc.
Okay, terrific. Thanks very much guys.
Operator
Your next question today comes from the line of Rich Newitter with Leerink Swann. Please proceed.
Richard Newitter – Leerink Swann LLC
Hey guys. Thanks for taking the question.
Benson F. Smith
Good morning.
Richard Newitter – Leerink Swann LLC
Maybe I could just start on, I think Benson, you made some comments or maybe it was Randy about pricing during the quarter specifically being up 30 basis points. I just want to be sure; one, was that up sequentially or on a year-over-year basis; and then two, what was that kind of price contribution last quarter, and did we see that kind of as an up-tick this quarter, and where do you think that that should continue to go?
Benson F. Smith
So, sequentially we were flat in the first quarter, so that 30 basis points is a year-over-year comparison to the second quarter last year. On several conversations, we’ve talked about the fact that Teleflex is sort of in the unique situation that we’ve got about a third of our product line that we have historically been somewhat neglectable off in terms of taking appropriate price actions and we are correcting during the course of this year, the next several years.
So what we saw in the second quarter was just the result of the earliest of some of those efforts, more are going to roll out in the second quarter. And it will take a while for some of these increases to filter through to a variety of contracts, which they are going to effect overtime.
But generally, that’s where it’s coming from, and I think a good signal for us because we are able to get some traction early on, which gives us confidence and that segment of the product line that we've identified we think is amendable to some better pricing.
Richard Newitter – Leerink Swann LLC
Okay, that’s helpful. And just maybe by region, was that more kind of bias towards some of the areas that you posted really strong, Latin American, Asia versus the US or was it pretty much across-the-board?
Benson F. Smith
So the first initiatives were really in the Asia-Pacific region, so that’s what you saw in the second quarter more of the US price rollout that takes place in the third quarter.
Richard Newitter – Leerink Swann LLC
Okay, so we should expect that perhaps, you know, accelerate going forward throughout the year?
Benson F. Smith
Yes.
Richard Newitter – Leerink Swann LLC
And maybe one last one, just on your overall vascular growth rate; you know, you’re growing just under 2% on a constant currency basis this quarter, I think that’s slightly below last quarter. When do we really start to see maybe a little bit more than a flexion point in this business, just given, this is one of your higher margin categories and I would imagine this is pretty important for the positive mix shift gross margin expansion story?
Benson F. Smith
So the result you’re seeing right now, are still largely driven by a relatively static CVC market. We would expect that by the fourth quarter of this year, and certainly into the first quarter of next year, we’ll start to see the impact of the antimicrobial tech and the VasoNova technology also spiking up or pick sales somewhat.
During the course of the year, we have had some good extensions, some GPO extensions. Putting those products on the contracts although in many cases, we’ve received the awards, the actual execution dates for those haven’t arrived yet, so we’re not in a position to convert those hospitals at this point in time.
So, I think that last quarter of this year, first quarter of the next year is about our anticipated timeframe in terms of seeing some of those results come in.
Richard Newitter – Leerink Swann LLC
Thanks a lot guys.
Operator
Your next question comes from the line of Kathleen McGrath with SIG. Please proceed.
Kathleen McGrath – Susquehanna International Group
Hi, guys. Congrats on a great quarter.
I only have one question, everything else has been covered. With VasoNova, do you think you’re taking any share from Bard at this point or do you think you’re going to end up getting more of the share from the smaller players out there that don’t have the duplication technology?
Benson F. Smith
So, at this point, I would say it’s hard to answer that. Certainly, there’s a good mix of Bard accounts in those early trial locations.
However, 36 accounts, the actual potential that has to move much in a way of share points is going to be almost negligible. At this point, I think we’re seeing interest in the product tend to be sort of across the board and not necessarily driven by whose pick they happened to be using.
Kathleen McGrath – Susquehanna International Group
All right, that’s all I’ve got. Thank you so much.
Operator
(Operator Instructions) Your next question comes from the line of Anthony Petrone with Jefferies. Please proceed.
Anthony Petrone – Jefferies & Co.
Benson F. Smith
Yeah. So once the CFGs were issued, we were allowed to reinitiate the process of shipping to those companies even without the warning letter.
That process can and often is affected by the local requirements of just submitting the paper work and getting the product eligible from the receiver country’s perspective. And there is some lag in terms of getting the FDA’s permission to ship and getting the local country’s permission to receive it.
And so that’s under process. That process however is really has no, is not materially affected at all by the receipt of the warning letter.
At this point, the letter from the FDA is just icing on the cake it doesn’t have a particular impact on our operations.
Anthony Petrone – Jefferies & Co.
So just a follow up there, I mean, what is the time line for I guess the actual revenue events from these CFGs in these various locations?
Benson F. Smith
Yeah. Go ahead, Randy.
Richard A. Meier
Yeah. Hi, Tony.
As you know, we had all of our CFGs restored last August, and as we’ve commented over the past couple of quarters that depending on the jurisdiction and location, the re-registration of our products could take anywhere from in some places, it’s just an immediate opportunity putting the files together to upwards to 18 to 24 months and some of the larger regions most notably China. I think some of the growth that you’ve seen in our [OUS] business particularly in the Asia-Pacific and Latin America markets you’re seeing some of the impact of as we begin to distribute some of those products that we had fallen off registrations.
So again, we’re going to continue this momentum probably at least for the next year as we begin, continue to get product back into specific markets. But as Benson indicated, we started that process, the moment we received the restoration of the CFGs.
And while we probably didn’t experience too much of an impact in the third and fourth quarters of last year, we’re beginning to see some of the benefits of that restoration this year and certainly into the second half in 2012.
Anthony Petrone – Jefferies & Co.
That’s helpful. Just one on the contract wins, and then one just on strategy.
So the two premier contracts, Amerine they both include VasoNova. Can you just give us an idea of the differences and sizes of those contracts and just a competitive situation in those contract wins?
Benson F. Smith
So for the most part, I think we’re finding a high degree of receptivity in groups to be, I think more open minded even in the past in terms of allowing the early introduction of new technology for their members. And generally speaking, the VasoNova product in and of itself I think it’s been the thing that makes the difference.
I personally I’ve been involved in some presentations, the GPOs and they quickly see the benefits that this technology has over what’s out there, it’s been, they’ve been relatively straightforward and enthusiastic about having this technology available to their members, and so I don’t want to describe it as easy, but that the climate has been quite right I think, for the introduction of competitive technology particularly in this space driven a lot just by the obvious benefits that this has compared to what’s out there already. So we have been quite optimistic I think about their enthusiasm about the product.
Anthony Petrone – Jefferies & Co.
And then just on contract links and values, was there much different there, much difference or…
Benson F. Smith
Most cases these tend to be either add-ons through existing contract, so no.
Anthony Petrone – Jefferies & Co.
All right. Great, and then last on the strategy, just you have cargo and discontinued, can give an update on where the divestiture process is there and just how you’re looking at acquisitions going forward?
Thanks a lot.
Benson F. Smith
Well, we certainly found the divestiture that can process, that continues to move very nicely. You know, we are sort of mid point of our process; we’ve received bids for the two assets and are evaluating them.
We continue to feel comfortable, but this process will be concluded before year end. So again, I think it’s going along very nicely and valuations that we’re seeing it’s something that are inline with some of the guidance that we’ve suggested and we’re very pleased with where we’re coming.
That’s in terms of the acquisition.
Richard A. Meier
I would say generally, I’m going to just reiterate some comments we’ve made before. We think that first of all, we like their franchises that we are in now and most of our acquisition activities in terms of the investigation stage have to do for identifying things within those existing franchises to buffer them up, either buffer them up from a share perspective or buffer them up from a technology perspective.
And one of their benefits that we expect to see and I think are seeing already in this divisionalization structure, business unit structure, is now each one of these units independently are really creating their own list in terms of where they think their gaps are and identifying. Generally, smaller, more technology based acquisitions than what we might have noticed or seen here at their corporate.
But our strategy is to use acquisitions really to build up those franchises over the next several years.
Operator
Your next question comes from the line of (inaudible) with Goldman Sachs. Please proceed.
Unidentified Analyst
Yeah. Hi, guys thanks for taking the question.
I just want to get back to kind of a surgery trends if I could, I’m just trying to pass out you know what business lines you guys are currently in that you’re seeing inflation from any sort of slowdown. And then from taking a look at your competitors, which business lines are you seeing a slowdown.
For them, it just seems like some of, I guess some more basic product like I call that would be broad based across kind of all surgical segments. I’m just trying to figure out where you guys are seeing more of the pressure and then subsequently why you guys are more inflated from that?
Thanks.
Benson F. Smith
So, so generally we have some products like our ligation products that obviously tend to be used in sort of a specific nature of surgical procedures. Our take on this is that generally anesthesia products by way of example are going to be used sort of across the board.
So if there is some decline in surgical procedures and I’ll sort of describe and that’s either elective or maybe a better word is even postponable surgical procedures, it’s going to affect us in that business obviously. Other businesses, let’s just say, hemodialysis catheter use isn’t affected all by a decline in surgical procedures.
Our OEM business typically isn’t affected or it’s affected, it’s effect is going to be several quarters out before we see the impact of that in some of the areas of our OEM business I think are much less acceptable to that. So it really gets down to somewhat of a granular product line by product line consideration.
Respiratory therapy is probably driven a lot more by a strong floozies in surgical procedures. So the dynamics of this can be somewhat different as you go from product line to product line.
Unidentified Analyst
Okay, that’s helpful. Thank you very much.
Operator
Your next question is a follow-up from the line of Larry Keusch with Morgan Keegan. Please proceed.
Lawrence Keusch – Morgan, Keegan & Company, Inc.
Hey guys. Just two other ones, Benson now that you’re sort been there for a better part of six plus months.
I was just curious as you think about the R&D capabilities at the company, and clearly, new product flow is an important driver to your high fives, just talk a little bit about how you think what is your appropriate level for R&D spending and where do you think realistically it should go over the next couple of years. And then just separately for Randy, I’m just wondering d if you could take us through the FX impact on gross margin and earnings, that would be helpful?
Benson F. Smith
So I think given the nature of our portfolio, you almost see a direct relationship between what you’re spending and what your growth is going to be, so if we want to grow at 6% our R&D expenditures are going to need to somewhat be close to that. Given our portfolio I think that’s true up until maybe the 7% range and then it becomes from my perspective, harder and harder to find good R&D projects to invest in.
Right now, though our immediate strategy is to make sure that our R&D dollars are going to the best projects we have in our list and we have spent some time over the last quarter consolidating that list to make sure that a shorter list of more impactful products gets done rather than working on more of a laundry list. But clearly overtime, we need to drive this up from and I don’t think there is anything that’s changed from Randy’s high fives that we need to get up to that 5% range and then, look at gradual expansion of that as we’re growing our portfolio a little bit beyond that 5% range.
Richard A. Meier
Hi, Larry, with regard to the currency and how it sort of the positive currency impact and the quarter sort of flows through the income statement as you know, we are fairly naturally hedged in a variety of our markets around the world given the global nature of our manufacturing and sort of how we source and distribute product. Particularly with regard to rising labor costs, the trend a decade ago was to locate a lot of production in sort of low labor cost markets and distribute those products around the world, that phenomena is some like going away and in fact, we’re experiencing a fair amount of labor cost inflation on the manufacturing side, which is in many parts offsetting some of the currency upside that we’re seeing on the top line.
So, as you go through the income statements, we’re really not seeing too much benefit falling down to net income with regard to our currency, so from a net income or earnings per share base it’s somewhat neutral at this point to earnings.
Lawrence Keusch – Morgan, Keegan & Company, Inc.
Okay. Terrific, thanks very much.
Operator
(Operator Instructions) It appears there are no further questions. This does conclude our question and answer portion of the call.
I would now like to turn it back to Mr. Jake Elguicze for closing remarks.
Jake Elguicze
Thanks, operator and thank you everyone for joining us today. This concludes the Teleflex Incorporated second quarter earnings conference call.
Operator
Ladies and gentlemen, that concludes today’s conference. Thank you for your participation.
You may now disconnect. Have a great day.