Q4 2023 Earnings Summary
- Strong growth in the Interventional business with 15% full-year constant currency growth, driven by a robust pipeline of new products like the GuideLiner Coast and upcoming Ringer, indicating sustained future performance.
- Expansion of Barrigel indications to other cancers, with clinical trials being planned, which could significantly boost future growth stemming from the Palette acquisition.
- International expansion of UroLift, particularly in Japan performing exceptionally well and growth initiatives in China, coupled with solid procedure volumes returning to pre-pandemic levels in the acute care hospital, suggests positive momentum.
- The company's key growth drivers are facing headwinds, with the OEM business expected to decelerate from previous growth rates of around 18-19% to "low double digits," indicating a slowdown in growth. The Interventional business is also expected to "take a modest step back" due to tough comparisons and the return of competitors to the market.
- Margins are under pressure from persistent inflation higher than pre-pandemic levels and foreign exchange headwinds. Despite cost-saving initiatives, these factors are adversely impacting gross margins, and the company acknowledges that achieving operating margin targets by 2025 will be challenging and may take longer than previously anticipated.
- Challenges persist with the UroLift system, particularly in the U.S. office setting due to reimbursement changes, leading to modest improvements and cautious growth outlooks. Additionally, international expansion faces hurdles, such as in China where reimbursement does not cover the full cost and patients often pay out-of-pocket, potentially delaying market penetration until 2025.
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Confidence in 2025 LRP
Q: Are you confident in achieving the 2025 long-range plan targets?
A: Management expressed strong confidence in meeting the revenue and gross margin goals of the 2025 long-range plan. They acknowledged that while achieving the operating margin targets will be more challenging due to increased inflation and the impact of acquisitions like Palette, they still see a path to reach those targets, possibly beyond 2025. -
2024 EPS Growth and Headwinds
Q: How are 2024 headwinds affecting EPS growth and implications for 2025?
A: The company expects underlying EPS growth of 7% to 10% in 2024, excluding headwinds from the MSA exit and the Palette acquisition. They anticipate these headwinds will subside, leading to stronger EPS growth in 2025, with contributions from lower interest expense and Palette turning profitable. -
Gross Margin Guidance
Q: What is the gross margin outlook for 2024?
A: Gross margins are expected to improve in 2024 due to benefits from the Palette acquisition and the MSA exit. However, inflationary pressures and foreign exchange headwinds are offsetting some gains. The company anticipates taking another step up in gross margins but acknowledges challenges in achieving long-term margin goals due to higher-than-expected inflation. -
M&A Strategy and Dilution
Q: How is the company approaching M&A given concerns about P&L dilution?
A: With leverage at 1.9x, the company has significant firepower for acquisitions. They are actively seeking attractive assets that fit their portfolio but are conscious of dilution and investor feedback, especially given the dilution from the MSA exit and the Palette acquisition in 2024. Future M&A will consider the impact on dilution to avoid significant near-term P&L effects. -
Procedure Volumes
Q: How are procedure volumes trending, especially in the U.S.?
A: Procedure volumes in the acute care hospital setting have returned to pre-pandemic levels and remain solid. The company benefits from this positive environment and expects continued growth supported by a robust pipeline of new product launches in 2024. -
Pricing Strategy
Q: What are the pricing expectations for 2024?
A: The company exceeded its pricing goal in 2023, achieving over 50 basis points of price improvement. For 2024, they aim for another 50 basis points and are hopeful to at least deliver that amount, marking the third consecutive year of positive pricing contributions. -
High-Growth Products
Q: How did high-growth products perform and what's the outlook?
A: High-growth products performed very well in 2023, with standouts like intraosseous devices and the hemostatic portfolio. For 2024, the company expects this segment to grow around 10% to 12% and continues to invest behind these products due to their strong margin profiles. -
China Market Outlook
Q: How is VBP affecting China sales and what's the medium-term outlook?
A: While acknowledging challenges from volume-based procurement (VBP) in China, the company expects growth to continue due to their differentiated products. They have strategies to manage VBP effects and view China as a positive geography for long-term growth. -
UroLift Performance and Outlook
Q: What is the outlook for UroLift and its synergy with Barrigel?
A: UroLift saw modest improvement in Q4 over Q3, with expectations of approximately 7.5% revenue growth for Interventional Urology in 2024. No synergies between Barrigel and UroLift are baked into the guidance, but management is monitoring potential cross-selling opportunities. Internationally, UroLift is performing well in Japan and other markets, with growth anticipated as they expand into China. -
Supply Chain Management
Q: What are the plans for vertical integration in the supply chain?
A: The company plans to bring certain subcomponents in-house to gain better control over the supply chain and improve margins. This initiative stems from lessons learned during the pandemic, emphasizing the benefits of internal control over external dependencies. -
Pension Plan Exit
Q: What is the $150 million pension charge in 2024 guidance?
A: The company is exiting one of its fully funded pension plans by offering buyouts to pensioners and arranging annuities for the remainder. This results in a non-cash charge of $2.85 per share, impacting 2024 guidance but not affecting cash flow.
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