Teleflex Incorporated (NYSE:TFX) Q1 2024 Earnings Call Transcript

Teleflex Incorporated (NYSE:TFX) Q1 2024 Earnings Call Transcript May 2, 2024

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: Please stand by. Good morning, ladies and gentlemen, and welcome to the Teleflex First Quarter 2024 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 the 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. And 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 first quarter 2024 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. Those wishing to access the replay can refer to our press release from this morning for detail. 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 first quarter results, review some commercial highlights and provide an update on our financial guidance for 2024. We had a solid start to 2024 as momentum seen through last year continued into the first quarter. For the quarter, Teleflex revenues were $737.8 million, up 3.8% year-over-year on both a GAAP and constant currency basis. First quarter adjusted earnings per share was $3.21, a 3.9% increase year-over-year. During the quarter, utilization for our products trended positively and tracked to our expectations. While we do not expect a revenue benefit from pent-up demand due to the broad exposure of the Teleflex portfolio to critical care procedures, we are seeing utilization back to pre-pandemic levels.

Turning to raw material inflation. We saw positive trends during the first quarter with year-over-year disinflation tracking towards our expectations for the year. Nonetheless, we continue to expect total inflation to be somewhat higher in 2024 as compared to 2023 in part due to inventory capitalized in 2023, impacting the income statement this year. I would also like to provide an update on our logistics and distribution infrastructure. Our freight expenses continue to show positive trends. Despite the conflict in the Middle East, we continue to maintain customer service levels by successfully diverting shipments to alternative shipping lanes. In addition, I would note that we do not utilize the Port of Baltimore to ship Teleflex products to or from our North American distribution center.

Now let’s turn to a deeper dive into our first quarter revenue results. I will begin with a review of our geographic segment revenues for the first quarter. All growth rates that I referred to are on a constant currency basis unless otherwise noted. Americas revenues were $406.3 million, a 1.5% decrease year-over-year. Investors familiar with Teleflex will be aware that prior year MSA revenues were booked in the Americas. EMEA revenues of $159.6 million increased 9.7% year-over-year. Growth was seen across the majority of our product families, including solid double-digit growth contributions from interventional and interventional urology. The region also benefited from the ongoing recovery of ET tubes following the recall last year. Now turning to Asia.

Revenues were $84.2 million, an 11.2% increase year-over-year. Revenue growth was broad-based across the region with double-digit increases in China, India and Southeast Asia. Let’s now move to a discussion on our first quarter revenues by global product category. Commentary on global product category growth for the first quarter will also be on a year-over-year constant currency basis. Starting with vascular access. Revenue increased 2% year-over-year to $181.4 million. The quarter was led by underlying growth in PICCs, Central Access and EZ-IO partly offset by the impact of the previously announced Endurance catheter recall. We will anniversary the Endurance recall during the second quarter, and we continue to see opportunities for share gains in the peripheral access market.

Moving to interventional. Revenue was $134.7 million, an increase of 15.4% year-over-year. We demonstrated growth across our geographic segments as our portfolio of growth drivers continues to perform well. During the quarter, growth was led by balloon pumps, MANTA and complex catheters. Turning to anesthesia. Revenue increased 3.2% year-over-year to $96.4 million. Growth was balanced across the portfolio. Of note, we continue to recover from the ET Tube recall initiated during the second quarter of 2023 and will fully anniversary the revenue comparisons at the end of next quarter. In our surgical business, revenue was $105.5 million, an increase of 7.1% year-over-year against a tough comparison. Our underlying trends in our core surgical franchise continued to be solid.

Among our largest franchises, growth was led by chest drainage instrumentation and our ligation portfolio. For interventional urology, revenue was $79.7 million, representing an increase of 6.1% year-over-year. Growth was driven by Barrigel revenue following the October 2023 acquisition of Palette Life Sciences. And as anticipated, UroLift growth was impacted by continued challenges in the office side of service and sales force training activities for Barrigel during the quarter. Our full year 2024 interventional urology total revenue guidance continues to assume approximately 7.5% growth, which continues to incorporate Palette revenues in the range of $66 million to $68 million for 2024. OEM had another solid quarter with revenues increasing 13.6% year-over-year to $87.7 million.

Our three largest product categories recorded double-digit growth in the quarter, including continued strength in microcatheters. In addition, we saw some modest benefit from order timing shifting from the second quarter into the first quarter. First quarter other revenue declined 27.1% to $52.4 million year-over-year. The decline in revenue on a year-over-year basis is primarily due to the planned December 2023 exit of the MSA by Medline. That completes my comments on the first quarter revenue performance. Turning to some commercial and clinical updates. Starting with an update on Palette Life Sciences, our most recent acquisition. We have now owned Palette Life Sciences for just over six months, and I am pleased to report that the integration process is meeting our targeted milestones.

Cross-functional product sales training continued to progress throughout the first quarter and the first phase of training for our dual-bag reps will be completed at the end of the second quarter. During the quarter, we were active training and proctoring the legacy UroLift sales force on the use of Barrigel, and we remain on track to fully complete the integration of the sales force by the end of 2024. Moving to a couple of product updates. In our interventional access business, we initiated a limited market release of the Wattson Temporary Pacing Guidewire. Wattson will complement our expanding structural heart portfolio, which already includes the MANTA large bore closure device and the Langston Dual-Lumen for contrast delivery and pressure measurement.

In our surgical business, we are pleased to share that the Titan SGS Stapler is now available with GORE, SEAMGUARD, Bioabsorbable Staple Line Reinforcement material. This complementary pairing supports Bariatrics surgeons by addressing clinical preferences in the sleeve gastrectomy market. As we look further into 2024, we will continue to advance our new product introductions with a number of launches across our business units. In our interventional access business, there is no change to our expectation for an FDA marketing clearance and a limited market release of 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 expect to initially launch with a PTCA indication, but we’ll evaluate opportunities for label expansion following the completion of our vessel perforation trial.

An engineer observing the inner workings of a medical device during its prototyping phase.

Finally, I will provide a regulatory update. In February, we voluntarily initiated a recall of our quick flash radial artery and radial arterial line catheterization kits after receiving reports of increased resistance in the Guidewire handle and chamber during use. The financial impact from this recall was de minimis. In cooperation with the FDA, Teleflex also recently initiated a voluntary field advisory notice for Arrow, FiberOptix and UltraFLEX Intra-Aortic Balloon catheter kits. Due to reports indicating an infrequent condition, which were not identified and corrected promptly, could result in serious health consequences, including a reduction or loss of the hemodynamic support normally provided by Intra-Aortic Balloon pump therapy. The FDA has not yet designated a recall classification.

But under the field advisory notice, customers may continue to use the products in scope per additional instructions, warnings and cautions. We expect the financial impact from the voluntary field action to be immaterial. That completes my prepared remarks. Now I’d like to turn the call over to Tom for a more detailed review of our first 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 61.1%, a 170 basis point increase versus the prior year period. The year-over-year increase was primarily due to the favorable impact of gross margin from the termination of the MSA the acquisition of Palette, favorable price, benefits from cost improvement initiatives, partially offset by unfavorable fluctuations in foreign exchange rates and continued cost inflation. Adjusted operating margin was 26.6% in the first quarter. The 80 basis point year-over-year increase was primarily driven by the flow-through of the year-over-year increase in gross margin partially offset by the inclusion of Palette Life Science, operating expenses, employee-related expenses and investments to grow the business.

Net interest expense totaled $21 million in the first quarter, an increase from $17.5 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 first quarter of 2024 was 13.2% compared to 11.8% in the prior year period. The year-over-year increase in our adjusted tax rate is primarily due to additional costs arising from the enactment of European Pillar 2 tax reform and realization of discrete items in the quarter. At the bottom line, first quarter adjusted earnings per share was $3.21, an increase of 3.9% versus prior year.

The year-over-year increase 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 first quarter was $112.8 million compared to $84.3 million in the prior year period. The $28.5 million increase was primarily attributable to favorable operating results and a decrease in cash outflows from inventories as we moderate our inventory levels due to improving supply chain dynamics, partially offset by an increase in accounts receivable resulting from higher sales and lower levels of accounts payable and accrued expenses. Moving to the balance sheet. At the end of the first quarter, our cash balance was $237.4 million as compared to $222.8 million as of year-end 2023.

The increase in cash on hand is primarily due to operating cash flows. Net leverage at quarter end was approximately 1.7x. Inclusive of the debt associated with 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 to financial guidance. We are pleased with the solid start to the year and are making select updates to the outlook for 2024. We continue to expect 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 in the range of $66 million to $68 million, which Liam mentioned earlier.

Turning to foreign exchange. We now assume a negative impact from foreign exchange of approximately $12 million, representing a 40 basis point headwind to GAAP growth in 2024. This compares to our prior guidance of approximately $5 million or 15 basis points headwind for 2024. The updated guidance of a $12 million foreign exchange headwind assumes approximately a $1.07 average euro exchange rate for 2024 versus the prior guidance, which had assumed approximately $1.08. Considering the foreign exchange outlook, we expect reported revenue growth of 3.35% to 4.35% in 2024, implying a dollar range of $3.074 billion to $3.104 billion. For your modeling purposes, the 2024 outlook includes an assumption of $760 million to $765 million in revenues for the second quarter, representing growth in the range of 3.1% to 3.8% year-over-year, excluding an FX headwind of approximately $6 million.

We reiterate our expectation for 2024 gross margin to be in the range of 60% to 60.75%. Our gross margin guidance reflects the year-over-year positive impact from the termination of the MSA, manufacturing efficiencies, price and the Palette acquisition partially offset by inflation and the impact of changes in foreign currency exchange rates. We also continue to 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, higher interest rates, 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 the Pillar 2 global minimum tax. Turning to earnings. We are raising the low end of guidance by $0.05, which reflects the strong results in the first quarter and the updated foreign exchange headwind. In turn, we now expect 2024 adjusted earnings per share to be in a range of $13.60 to $13.95. Finally, our 2024 adjusted EPS outlook reflects $0.87 in year-over-year headwinds from incremental dilution associated with the acquisition of Palette, the termination of the MSA, the year-over-year increase in our tax rate, primarily due to the Pillar 2 minimum tax and the updated foreign exchange headwind of $0.28.

After adjusting for these headwinds, year-over-year underlying adjusted constant currency EPS growth is approximately 7% on the low end of guidance and 10% on the high end of guidance. 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 three key takeaways from the first quarter of 2024. First, we started 2024 with a solid performance as momentum continued from the end of last year. Overall, our diversified portfolio and global business units performed well. We managed operating expenses and continued to focus on new product introductions in 2024. Netting the loss of MSA revenues, the incremental Palette sales and the revised foreign exchange headwind, we anticipate an approximately 100 basis points year-over-year headwind to growth in 2024. Second, we are well positioned to deliver on our financial guidance for 2024. We remain highly focused on executing on our plan for the year, just as we did in 2023.

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 Life Sciences 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.

See also

20 Most Profitable Banks in the US in 2024 and

20 Counties with the Highest Cancer Rates in the US.

To continue reading the Q&A session, please click here.