Teleflex Incorporated (NYSE:TFX) Q4 2023 Earnings Call Transcript

Teleflex Incorporated (NYSE:TFX) Q4 2023 Earnings Call Transcript February 22, 2024

Teleflex Incorporated beats earnings expectations. Reported EPS is $3.38, expectations were $3.26. Teleflex Incorporated isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen, and welcome to the Teleflex Fourth Quarter 2023 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode. At the end of the company's prepared remarks, we will conduct a question-and-answer session. Please note that this conference call is being recorded and will be available on the company's website for replay shortly. Now, I will turn the call over to Mr. Lawrence Keusch, Vice President of Investor Relations and Strategy Development.

Lawrence Keusch: Good morning, everyone, and welcome to the Teleflex Incorporated fourth quarter 2023 earnings conference call. The press release and slides to accompany this call are available on our website at teleflex.com. As a reminder, a replay will be available on our website. And for those wishing to access the replay you can refer to our press release from this morning for details. Participating on today's call are Liam Kelly, Chairman, President and Chief Executive Officer; and Thomas Powell, Executive Vice President and Chief Financial Officer. Liam and Tom will provide prepared remarks and then we will open the call to Q&A. 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 in the slides posted to the Investor Relations section of the Teleflex website.

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 referenced 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. Now, I'll turn the call over to Liam for his remarks.

Liam Kelly: Thank you, Larry, and good morning, everyone. On this morning's call, we will discuss the fourth quarter results, provide some commercial updates and introduce our financial guidance for 2024. We had a solid finish to 2023 as momentum seen through the year continued into the fourth quarter. For the quarter, Teleflex revenues were $773.9 million a year-over-year increase of 2.1% and an increase of 0.7% on a constant currency basis. As a reminder to investors, there were 5 fewer shipping days year-over-year in the fourth quarter. The shipping day impact in the quarter was an estimated $57 million or approximately a 7.4 percentage point reduction in constant currency growth year-over-year. When adjusting for the shipping day impact, the implied constant currency growth was 8.1% year-over-year.

A person wearing a state-of-the-art medical device for nerve conduction tests.

Fourth quarter adjusted earnings per share was $3.38 a 4% decrease year-over-year. During the quarter, utilization continued to return towards normal seasonality. From a macro perspective, we witnessed a stable to improving environment for material inflation and supply chain. These dynamics generally track to our expectations for the full year. For the full year 2023, we had a strong performance with revenues reaching $2.975 billion, which represents 6.5% constant currency growth year-over-year, while adjusted earnings per share was $13.52. As we look to 2024, we anticipate a stable procedure environment with seasonality in line with pre-pandemic levels. Although the Teleflex portfolio is not likely to benefit from pent-up demand due to the focus on critical care procedures, we would anticipate that staffing will continue to see improvements during the year.

Supply chain dynamics largely stabilized through 2023, and we expect to see continued improvements in 2024. Teleflex has broad global manufacturing capabilities and we continue to assess vertical integration opportunities to gain further control of our supply chain. Turning to inflation. There were elements of improvement during 2023, including sea freight and raw materials. For 2024, we are assuming some further disinflation, but note that costs remain somewhat elevated relative to historic levels and are above 2023. Now let's turn to a deeper dive into our fourth quarter revenue results. I will begin with a review of our geographic segment revenues for the fourth quarter. All growth rates that I refer to are on a constant currency basis and reflect the negative impact of 5 fewer shipping days year-over-year, unless otherwise noted.

Americas revenues were $450.6 million, a 1.9% decrease year-over-year, driven by Surgical and Vascular and reflective of the 5 fewer shipping days in the quarter. In particular, we saw year-over-year growth in our Interventional Anesthesia and Interventional Urology businesses despite the fewer shipping days in the quarter. EMEA revenues of $152.4 million decreased 2.7% year-over-year, driven by Anesthesia and Surgical and reflective of the impact of the fewer shipping days. Urology products, Interventional and Vascular businesses generated the highest shipping days adjusted growth in the quarter. Turning to Asia. Revenues were $88.3 million, increasing 12.6% year-over-year. Revenue growth was broad-based across the region, with strong double-digit increases in Korea, India and China.

The performance in the quarter was driven by strong commercial execution and solid underlying demand. Let's now move to a discussion on our fourth quarter revenue by global product category. Commentary on global product category growth for the fourth quarter will also be on a year-over-year constant currency basis and reflects the impact of the 5 fewer shipping days. On a shipping days adjusted basis, the sequential growth in the fourth quarter trended in line with our expectations with Vascular and Anesthesia growth rates improving, while Interventional and Surgical slowed. Starting with Vascular Access. Revenue decreased 1.2% to $186.7 million. Along with the fewer shipping days, the year-over-year growth also reflected the impact of the previously announced Endurance catheter recall.

The quarter was led by year-over-year growth for EZ-IO and other access despite headwinds from the fewer shipping days. Of note, we achieved double-digit growth in our underlying PICC business when excluding the negative impact of the Endurance recall. We continue to see opportunities for share gains in the peripheral access markets and our new product initiatives will help play a role. During the quarter, we continued to execute on our launch activities for our next-generation navigation device and new PICC stylets. Moving to Interventional. Revenue was $135.6 million, up 7.2% year-over-year. Despite the impact of the fewer selling days, we demonstrated solid growth, which underscores our positive momentum as we continue to make good progress with our growth drivers.

Turning to Anesthesia. Revenue declined 3.4% year-over-year to $98.2 million. Among our larger product categories, hemostatic products performed well in the quarter, with strong double-digit growth, partially offset by declines in atomization and ET Tubes, as we recover from the recall, which occurred earlier in 2023. In our Surgical business, revenue was $109.6 million, down 2% year-over-year against a tough comparison. Our underlying trends in our core surgical franchise continue to be solid, including our ligation portfolio. For 2023, Titan generated revenues in excess of $12 million. For International Urology, revenue was $93 million, representing an increase of 4.2%, starting with Palette, which we acquired in October 2023. Revenues in the fourth quarter were modestly better than expectations with outperformance of Barrigel.

For UroLift, the office remains a challenge as we continue our efforts to stabilize this size of service. In the international markets, UroLift revenue saw a healthy growth in Japan, while in China, our initial launch activities remain on plan with a focus on training surgeons and gaining reimbursement. OEM had another solid quarter, with revenues increasing 10.9% year-over-year to $82.6 million. The strength in the quarter was broad-based across our portfolio, with all product categories recording year-over-year growth, including continued strength in microcatheters. Fourth quarter Other revenue declined 10.2% to $68.2 million year-over-year. As previously disclosed, fourth quarter Other revenues reflects the early December 2023 exit of the MSA by Medline and accounted for the majority of the year-over-year revenue decline.

That completes my comments on the fourth quarter revenue performance. Turning to some commercial and clinical updates. Following the acquisition of Palette Life Sciences on October 10, 2023, I am pleased to report that the integration is tracking to our expectations. We have completed and issued cross-functional product sales training for selected members of our legacy UroLift sales force, and our dual-bag reps are now interacting with clinicians in the field. Our focus remains on expanding the use of rectal spacing in the treatment of prostate cancer, and we are engaging with urologists and radiation oncologists. Barrigel is a differentiated rectal spacer that is clinically proven to significantly reduce unwanted radiation exposure. Moving to UroLift.

We continue to expand our foundation of clinical data that supports the use of UroLift as a safe and effective minimally invasive treatment for BPH. In November 2023, we highlighted a new peer review study in the Nature Journal, Prostate Cancer and Prosthetic Diseases, that reinforces the position of the UroLift system as the goal standard in minimally invasive surgical treatment for BPH. Results suggested that within 1 year of BPH surgery, 1 in 20 patients may require retreatment regardless of whether they receive a TURP, GreenLight, Rezum or UroLift. Additionally, at 1 year, procedural complications requiring a return procedure in the outpatient setting was lowest following UroLift and highest following Rezum. The average time to the first complication was the longest for UroLift.

At 5 years, retreatment was lowest for TERP and statistically similar between GreenLight and UroLift. The retreatment rate for UroLift is comparable to publish controlled trial rates, thereby underscoring the durability of the UroLift system. We continue to focus on supporting UroLift with clinical data, and note that we have 8 sponsored research abstracts that have been accepted for presentation at major urological meetings in 2024. Turning to an update related to our surgical business unit. We have completed the launch activities for the Gore Seamguard Bioabsorbable staple line reinforcement material to be used with the Titan Stapler. The ability to offer synthetic buttressing material alongside the unique features of the Titan Stapler should enable Teleflex to further address surgeon clinical needs and preferences in the sleeve gastrectomy market.

Lastly, as we look into 2024, we will continue to advance our new product introductions with a number of launches across our business units. In our interventional business, we expect to receive FDA marketing clearance and launch the Ringer Catheter in the second half of 2024. Ringer incorporates a unique balloon design that allows blood to flow through a vessel while the balloon is inflated. We will initially launch with a PTCA indication, but we have completed enrollment in a vessel perforation trial that will be utilized to seek FDA label expansion. In our surgical business, we anticipate launching new ligation products, including an automated polymer clip applier in the second half of 2024. We will also continue to refresh our laryngoscope families with a series of launches during the year.

Our anesthesia business unit is also on track for new product launches, including updated technology in our EZ-IO business that would enable expansion of our user base, for which we expect FDA approval in 2024. We will provide more details upon launch. That completes my prepared remarks. Now, I would like to turn the call over to Tom for a more detailed review of our fourth quarter financial results. Tom?

Thomas Powell : Thanks, Liam, and good morning. Given the previous discussion of the company's revenue performance, I'll begin with margins. For the quarter, adjusted gross margin was 60.1%, a 10 basis point increase versus the prior year period. The year-over-year increase was primarily due to favorable price, benefits from cost improvement initiatives, lower logistics and distribution-related costs and the Palette acquisition, partially offset by continued cost inflation and unfavorable fluctuations in foreign exchange rates. Adjusted operating margin was 26.3% in the fourth quarter. The 160 basis point year-over-year decrease was primarily driven by the inclusion of Palette Life Sciences operating expenses, employee-related expenses and investments to grow the business, partially offset by the flow-through of the year-over-year increase in gross margin.

Net interest expense totaled $22.5 million in the fourth quarter, an increase from $18.7 million in the prior year period. The year-over-year increase in net interest expense reflects higher interest rates versus the prior year and higher average debt outstanding utilized to fund the acquisition of Palette, partially offset by increased interest income. Our adjusted tax rate for the fourth quarter of 2023 was 11.6% compared to 13.6% in the prior year period. The year-over-year decrease in our adjusted tax rate is primarily due to an increase in tax deductions as a result of additional amortization of R&D costs, which as a result of the U.S. tax law change, resulted in capitalization of such costs starting in 2022. At the bottom line, fourth quarter adjusted earnings per share was $3.38, a decrease of 4% versus prior year.

The year-over-year decrease in EPS reflects dilution from the acquisition of Palette Life Sciences and the related incremental borrowings. Turning now to select balance sheet and cash flow highlights. Cash flow from operations for the 12 months was $511.7 million compared to $342.8 million in the prior year period. The $168.9 million increase was primarily attributable to lower tax payments, favorable changes in working capital and favorable operating results. The favorable changes in working capital were primarily driven by lower inventory purchases stemming from the buildup of inventory in the prior year due to elevated global supply chain volatility. Moving to the balance sheet. At the end of the fourth quarter, our cash balance was $222.8 million as compared to $292 million as of the end of 2022.

For the 12 months, the decrease in cash is primarily due to payments to fund the Palette acquisition, partially offset by net proceeds from borrowings and operating cash flow. Net leverage at quarter end was approximately 1.9x. Inclusive of the acquisition of Palette Life Sciences, our financial position remains sound and continues to provide us flexibility to execute on our long-term capital allocation strategy. Turning now to financial guidance. Starting with a couple of discrete items for 2024. First, we continue to expect the Palette acquisition to be $0.35 dilutive to the company's adjusted earnings per share in 2024. Beginning in fiscal year 2025, the transaction is expected to be increasingly accretive to adjusted EPS. Second, as previously disclosed, the manufacturing transition services agreement with Medline associated with our sale of certain respiratory assets included in December 2023.

Of note, Teleflex generated $75.7 million in revenues from the MSA in 2023, which will not repeat to 2024. Moving to our outlook for 2024. We are expecting 2024 constant currency revenue growth of 3.75% to 4.75%. The year-over-year growth includes the loss of the $75.7 million in MSA revenues, partly offset by the incremental revenues from Palette. Turning to foreign exchange. We assume approximately $5 million or 15 basis points headwind to revenue from foreign exchange translation in 2024. Our outlook for foreign exchange includes a euro to dollar exchange rate of approximately $1.08. Netting the loss of MSA revenues, the incremental Palette sales and foreign exchange headwinds represents an approximately 100 basis point year-over-year headwind to growth in 2024.

Considering the foreign exchange outlook, we expect reported revenue growth of 3.6% to 4.6% in 2024, implying a dollar range of $3.082 billion to $3.111 billion. Turning to margins. We expect 2024 gross margin to be in the range of 60% to 60.75%. Our gross margin guidance reflects the year-over-year positive impacts from the termination of the MSA, manufacturing efficiencies, rights and the Palette acquisition, partially offset by inflation and the impact of changes in foreign currency exchange rates. We expect operating margin to be in the range of 26.25% to 26.75% for 2024. Our guidance reflects the flow-through of gross margin and the positive impact of restructuring, offset by the inclusion of operating expenses for Palette Life Sciences and investments to grow the business.

Moving to items below the line. Net interest expense is expected to approximate $78 million for 2024. The majority of the year-over-year increase in our net interest expense outlook reflects the impact of borrowings associated with the Palette acquisition, partially offset by planned debt repayments during 2024. Our tax rate is expected to be approximately 12% for 2024, which reflects favorable mix offset by discrete items in 2023 that will not repeat in 2024, and the impact of Pillar 2 global minimum tax. We estimate the impact of Pillar 2 to add approximately 150 basis points to the 2024 tax rate. Turning to earnings. We expect 2024 adjusted earnings per share be in a range of $13.55 to $13.95. Our adjusted EPS outlook reflects $0.35 of dilution from the acquisition of Palette, $0.26 of dilution from the termination of the MSA and a $0.23 headwind associated with the year-over-year increase in our tax rate, primarily due to the Pillar 2 minimum tax.

Relative to foreign exchange, although there is a negligible impact on revenue, the headwind to earnings per share is approximately $0.24 year-over-year. Based on current foreign exchange rates, we expect roughly half of the headwind to EPS to fall into the first quarter of 2024. When adjusting for these items, including the negative impact of foreign exchange, the underlying adjusted constant currency EPS growth is approximately 7% at the low end of guidance and 10% at the high end of guidance. Although we do not provide quarterly guidance for your modeling purposes, we expect reported revenues for the first quarter to be in a range of $725 million to $730 million, including a negligible foreign exchange impact year-over-year. That concludes my prepared remarks.

I would now like to turn it back to Liam for closing commentary.

Liam Kelly : Thanks, Tom. In closing, I will highlight our 3 key takeaways from the fourth quarter of 2023. First, we delivered on our financial commitments for 2023. For the year, constant currency revenues increased 6.5% and adjusted earnings per share were $13.52. Compared to our initial 2023 guidance, constant currency revenue growth exceeded our guidance, while adjusted earnings per share was at the high end of our range. Our execution remains strong. We are launching new products and our margins remain healthy. Second, the fourth quarter performance and stable to improving macro environment provides a solid foundation for growth as we head into 2024. Third, we will continue to focus on our strategy to drive durable growth.

We will invest in organic growth opportunities and drive innovation over time, expand our margins and execute on our disciplined capital allocation strategy to enhance long-term value creation. The integration of Palette is progressing well and we expect the acquisition to be a meaningful contributor to our growth in the coming years. That concludes my prepared remarks. Now I would like to turn the call back to the operator for Q&A.

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