泰利福醫療 (TFX) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2013 Teleflex Incorporated earnings conference call. My name's Marie and I will be your operator for today.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes. And now, I'd like to turn the call over to Jake Elguicze, Treasurer and VP of Investor Relations. Please proceed, sir.

Thank you, operator. And good morning, everyone, and welcome to the Teleflex Incorporated fourth-quarter and full-year 2013 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, pass code 68453301.

Participating on today's call are Benson Smith, Chairman, President, and Chief Executive Officer; and Thomas Powell, Executive Vice President and Chief Financial Officer. Benson and Tom 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, 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 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.

Thanks, Jake, and good morning, everyone. It's a pleasure to be with you once again and, similar to other calls, I'll begin with an overview of the Company's results and discuss some highlights.

Let's begin with revenue. Fourth-quarter revenue performance was strong and ahead of our expectations, totaling $450.5 million. This represented an increase of 6.9% versus the prior year on a constant-currency basis. The better-than-expected revenue performance occurred across several of our product lines and geographic regions, as we experienced strong sales during the last two weeks of December.

Revenue growth in the quarter continued to be driven by LMA, as well as from the introduction of new products to the marketplace, and our pricing initiatives. In addition, fourth-quarter revenue was also aided by the acquisition of Vidacare. I am pleased to say that the initial stages of the Vidacare integration have gone quite well. And the Vidacare product line's revenue performance in the quarter also came in ahead of our expectations. We continue to be quite excited about this acquisition, and it is our belief that Vidacare has excellent growth potential in the future.

But before I move on to other highlights in the quarter, I do want to address a couple of questions that I suspect are at least on some of your minds. As you know, we lowered our revenue guidance at our Analyst Day meeting in mid-December. Every forecast we do internally has a worst-case scenario and, in mid-December, there was a plausible worst case that could result in revenue coming in below our previously stated guidance, with the low end at 8.5% in constant currency. As a result, we felt we had an obligation to alert the investment community to this possibility.

Almost as soon as we did that, we began to see an improvement in the revenue across the board. We were able to reduce back orders more than expected. Revenues of some product lines came in better than expected. And we believed there was likely at least a slight uptick in US procedures that helped.

We also saw results from Europe to be much more positive than we anticipated. Now, in Europe it's not unusual for the last week of the year -- that week between Christmas and New Year's -- to be particularly strong. Most European healthcare departments operate somewhat like the US military, in the sense that, if they don't spend the dollars allocated by the end of the year they'll be lost.

However, that pattern is very difficult to forecast. And, this year, because of the many reductions in spending that occurred in Europe, we did not expect that pool of dollars to be there, so we took a conservative view in establishing our revenue range.

We were obviously very pleased to see orders come in much stronger than we anticipated. But a related question is that, sometimes that overperformance in December can come at the expense of January revenue. And, while it is still very early on, this does not seem to be the case, as January revenue was in line with our expectations.

Turning to some other highlights for the quarter. Adjusted gross margin reached 50% and represented an increase of 240 basis points versus the prior year and while adjusted operating margins increased 50 basis points over the prior quarter as well.

I would like to point out that, when we discuss adjusted operating margins in the future, we will no longer include intangible amortization expense. The rationale behind changing the calculation of adjusted operating margins has to do with consistency, allowing for comparability between ourselves and many of our peers, as well as to provide better visibility into the underlying operational improvements we are making at the Company.

Since we do not include intangible amortization expense when we calculate adjusted earnings per share, we believe that it would be a more consistent approach to also exclude the intangible amortization expense from our adjusted operating margins as well. While from a comparability perspective, those of our peers who exclude intangible amortization expense also exclude it when calculating adjusted operating margin.

If we were to exclude intangible amortization expense from our fourth-quarter 2013 adjusted operating margins, they would have been 19%, up 70 basis points from the fourth quarter of 2012. Tom will provide some additional details regarding this change and how we reconcile it to our previously provided longer-term financial goals.

And, finally, before I move on to some other highlights, the Company achieved adjusted earnings per share of $1.36 this quarter, representing an increase of 18.3% versus the prior year.

Next, I would like to discuss fourth-quarter pricing, GPO, and IDN contract awards, and new product introductions in more detail. During the fourth quarter, the average selling prices of our products once again expanded when compared against the prior year. This past quarter, the improved average selling prices of products contributed approximately 86 basis points of revenue growth.

Thanks to some select price increases and a distributor-to-direct conversion in South Africa that occurred earlier this year, our European business saw an improvement in pricing of 129 basis points. That was followed by an increase in Asia, which generated an 89-basis-point improvement, and the Americas, which saw price increases of 86 basis points. Finally, continuing a trend we've seen all year, our OEM business experienced a decline in the average selling prices of their products that totaled 81 basis points.

Shifting gears, the fourth quarter of 2013 saw a continued expansion of contractual agreements between Teleflex and our GPO and IDN partners. In fact, during this past quarter, Teleflex won a total of 11 agreements. Four of these awards were new and included product categories like pain and airway management as well as intra-aortic balloons and pumps.

Next, I would like to touch on a recent new product launch that we're quite enthusiastic about. During the fourth quarter, new product introductions contributed 102 basis points of revenue growth. And, as many of you are aware, one component of Teleflex's longer-term margin expansion strategy is to introduce new products at higher margins. An example of this is the recent launch of our ISO-Gard Mask with CleanAir Technology.

Designed to help reduce hazardous waste gas within a nurse's breathing zone, the ISO-Gard Mask is the only solution available for source control of waste anesthetic gas in the recovery room. Developed in partnership with clinicians, the ISO-Gard Mask simultaneously delivers oxygen to patients and scavenges those gases to help limit exposure faced by clinicians.

In November, Teleflex announced that the Community Surgery Center North was the first of what we hope to be many, many healthcare facilities to use this product. As I've said in the past when mentioning this product, the issue solved by the ISO-Gard Mask is really a worker's safety-related one, and we commend the Community Surgery Center North for addressing this issue and taking action to comply with OSHA waste anesthetic gas workplace exposure guidelines.

Next, I'd like to take a moment to provide you with an update on LMA. During this past quarter, LMA contributed its highest amount of revenue yet as part of Teleflex, totaling $34.2 million. On a full-year basis, LMA contributed $134.2 million, and had a gross margins that approximated 59%. LMA is truly a success story for Teleflex. It exceeded all of our expectations in 2013.

The execution of our integration plans went smoother and faster than we originally thought, and, as a result, additional synergies were generated during the year. As we enter 2014, we continue to be excited about the product pipeline, which includes the third-generation LMA device, which we expect will bridge the remaining gap with ET tubes and open up a very large number of additional procedures to LMA use.

Finally, clinicians continue to be interested in adding visualization to airway-management devices. We expect placement of LMAs can also benefit from the added comfort and security of visualization of positioning and sealing during or after placement. These are all exciting areas in our approach to enhancing our market leadership in the laryngeal mask arena.

Next, I would like to update you on the status of the Vidacare acquisition. This transaction was closed on December 2, 2013, and, in less than one month that we owned Vidacare, it performed extremely well and exceeded our initial expectations. Yet, despite the strong performance in December, we are not changing our financial projections for Vidacare in 2014 quite yet.

We continue to believe that Vidacare will contribute between $68 million and $72 million in revenue and between $0.10 to $0.15 in adjusted earnings per share. I would like to thank all the employees involved with the Vidacare acquisition for such a smooth integration, as Vidacare's contribution towards our fourth-quarter results provides us with even more confidence that we will achieve the constant-currency revenue growth range that we previously provided for 2014.

Another reason why we remain confident in our ability to achieve 7% to 9% constant-currency revenue growth in 2014 has to do with a recent distributor acquisition which we closed. For those of you who attended or listened to our Analyst Day event in December, you may recall that we mentioned that we finalized negotiations with a key distributor. Now, we are in a position to provide a few more details surrounding that transaction.

A definitive agreement was signed in December 2013 with one of Australia's largest medical device distributors -- that being Mayo Healthcare. Mayo provides high-quality products, educational services, technical services, and customer support to healthcare institutions throughout Australia. This accretive transaction, funded through the use of outside US-based cash, was completed in February of 2014 and represents the major distributor-to-direct conversion that was assumed in our previously provided 2014 financial guidance.

Finally, before I turn the call over to Tom, I would like to briefly summarize Teleflex's full-year 2013 performance. For the full year, Teleflex revenue was just shy of $1.7 billion, up 9% on a constant-currency basis.

Adjusted gross margin also improved versus 2012, reaching 49.6%. This represents an increase of 130 basis points. However, primarily due to the Medical Device Excise Tax, the improvement in gross margin did not materialize to an improvement in the Company's full-year 2013 adjusted operating margin, which totaled 16.3%.

If we were to exclude the impact of intangible amortization expense in our adjusted operating margins, they would have been 19.3% in 2013. This would compare to 2012 adjusted operating margins, excluding intangible amortization expense, which were 19.1%. The aforementioned performance resulted in the achievement of adjusted earnings per share of $5.03 in 2013, or an average increase -- excuse me, or an increase of 13.5% versus 2012.

Moving to some additional full-year highlights. Pricing improved on a full-year basis approximately 1 percentage point. Breaking this down geographically, the Company saw price increases of 122 basis points in the Americas, 111 basis points in Europe, and 66 basis points in Asia, while our OEM business experienced price declines, which totaled 30 basis points.

New product introductions were also a highlight during 2013, contributing 124 basis points of revenue growth. Our R&D initiatives focused on the development of new innovative products for existing and new therapeutic applications. This translated into the introduction of 27 new products and line extensions in 2013. These product introductions should position Teleflex nicely for future revenue growth and margin expansion.

Another item that should position the Company for sustainable and profitable future growth is the 37 GPO and IDN contracts Teleflex was awarded during the year. These agreements spanned across all of our product lines.

We also continue to broaden our portfolio and strengthen our margin profile with select acquisitions. During 2013, this included Vidacare, which complements our vascular access and specialty-product portfolios; Ultimate Medical, with its variety of airway-management devices, which complements our anesthesia portfolio; and Eon Surgical, which complements our surgical-product portfolio with its minimally invasive micro-laparoscopic platform technology.

All totaled, 2013 was a successful year for Teleflex. It certainly wasn't some without some issues that we needed to overcome. However, it is our belief that Teleflex has a well-positioned, diverse product portfolio that is capable of above-market growth rates and one that is able to successfully navigate through a shifting healthcare market.

In 2014, we plan to make focused areas of additional investment targeted to select distributor-to-direct conversions, investments in sales and marketing in China and Latin America, and some R&D investments in higher-margin product opportunities. All of these investments will pay a benefit and help drive sustainable and profitable growth in the future.

Yet Teleflex's success is not solely dependent on our ability to outpace our market in terms of revenue growth. And we are committed to improving operating leverage over a multi-year period from a non-revenue dependent items.

To that point, I also want to comment on where we stand with our facility rationalization plans. Presently, we are in the final stages of validating all of our assumptions and we expect that we will be in a position to provide you with an update in the near future. These plans are complex in nature. However, we still anticipate reaching the 55% gross margin level by the time we exit in 2015.

And, as I've said previously, if there's a risk associated with this, it relates to timing and not to our ability to drive operational improvements in our gross margin. In addition, we don't plan on stopping once we reach that 55% goal and believe that additional gross margin improvement gains could subsequently follow.

With that, I will now turn the call over to Tom and he can walk you through our most recent quarterly financial performance and outlook for 2014 in more detail. Tom?

Thanks, Benson, and good morning, everyone. Revenues for the fourth quarter were $450.5 million, which represents an increase of 6.9% on a constant-currency basis. When taking into consideration the impact of foreign exchange, revenues in the fourth quarter increased 7.5% versus the fourth quarter of 2012.

The growth in constant-currency revenue is largely attributed to favorable comps on LMA and the acquisition of Vidacare. In addition, new products contributed approximately 1 point of growth and pricing added another 86 basis points of growth.

Also during the fourth quarter of 2013, we had one additional shipping day as compared to the fourth quarter of 2012. We estimate that this one additional day contributed approximately 1 point to revenue growth.

Turning now to gross profit. For the fourth quarter, adjusted gross profit was $225.2 million, versus $199.6 million in the prior-year quarter. And adjusted gross margin increased 240 basis points to 50%. This marks the first time since becoming a pure-play medical equipment company that a 50% gross margin was attained for a quarter. The increase in adjusted gross margin was primarily due to price increases and higher-margin product offerings from LMA, Vidacare, and new products.

Turning next to adjusted operating margin. For the fourth quarter of 2013, the adjusted operating margin was 16%. This represents a 50-basis-point improvement when compared to the fourth quarter of 2012. The improvement was the outcome of the gross margin gain, coupled with tight SG&A cost control initiatives.

Somewhat tempering the gains in operating margin were the Medical Device Excise Tax, additional intangible amortization expense, and the acquisition of Vidacare, which carries a higher level of operating expenses. If we were to exclude intangible amortization expense from the calculation, adjusted operating margin would have been 19% in the fourth quarter of 2013, or a 70-basis-point increase from the fourth quarter of 2012.

On the bottom line, adjusted earnings per share was $1.36 for the fourth quarter of 2013. This compares to adjusted earnings per share of $1.15 in the fourth quarter of 2012, or an increase of 18.3%.

Moving next to product line and geographic revenue results. Critical care revenue in the fourth quarter was up 10.2%, totaling $316.7 million. The increase in critical care revenue was due to the addition of LMA and Vidacare as well as higher sales of vascular, urology, and interventional access products.

Partially offsetting these growth areas was a decline in sales of respiratory products. The decline came in the areas of oxygen and aerosol therapy product sales, as well as the planned rationalization of lower-margin, non-invasive ventilation products.

Surgical revenue in the fourth quarter was up 4%, totaling $80.5 million. The growth in Surgical revenue was primarily the result of increased sales of ligation access and suture products. Partially offsetting this growth was a decline in the sales of general surgical instrument and chest drainage products.

Cardiac care revenue in the fourth quarter was down 6% and totaled $19.2 million. Similar to recent quarters, the decline in cardiac revenue was primarily due to lower sales of intra-aortic balloon pumps. And, lastly, OEM revenue for the quarter was down 5.7% and totaled $34.1 million. The decrease in OEM revenue was largely due to reduced sales of performance fiber products and catheters, with a decrease in part caused by the in-sourcing of catheter production by select customers.

Next, I'll take you through our top-line performance from a geographic perspective. Revenue in the Americas segment for the fourth quarter was up 6.6% and totaled $212.4 million. The increase in revenue was due to LMA and Vidacare product sales, new product introductions, and price increases.

Moving to EMEA. Revenue in this segment was up 5.2% and totaled $144.9 million in the fourth quarter. The increase in revenue was due to LMA and Vidacare product sales, higher sales volumes of existing products, and price increases, including the margin we capture by selling direct to customer versus through a third-party distributor.

Finally, sales in the Asia segment were up 21.6%, totaling $59.1 million. The increase in this segment was due to LMA product sales, price increases, and higher sales volume of existing products.

Finally, I'd like to provide you with an update regarding our full-year 2014 financial outlook. Today, we are reaffirming the 2014 financial outlook that we provided at our Analyst Day event this past December. For 2014, we continue to expect constant-currency revenue growth of between 7% and 9%. We expect that approximately 75% of our projected 2014 constant-currency growth will be sourced from a combination of the recently closed Vidacare acquisition and distributor-to-direct conversions.

New product introductions are expected to make up the majority of the remaining 25% of revenue growth, with only modest expectations for volume gains and product price increases. As a reminder, in 2014, we continue to expect approximately 100 basis points of total pricing. However, the majority of that pricing is projected to come in distributor-to-direct conversions, while pure product price increases are expected to be much more selective.

And now, turning to adjusted gross margin. We are also reaffirming our 2014 projections, which call for adjusted gross margin to be in the range between 52% and 52.5% for the year. The projected 2014 improvement represents an increase of approximately 240 to 290 basis points over 2013, and the projected rate of increase is approximately twice that achieved in 2013.

We expect that three key actions will drive the 2014 expansion in adjusted gross margin. First, we project that the addition of Vidacare's high-margin portfolio will increase gross margin by approximately 150 basis points. Next, distributor-to-direct conversions are expected to add another 40 basis points. And then, third, continued investment and focus on manufacturing and operations efficiency programs are expected to yield an additional gain of up to 100 basis points. This is a real good story here that we'll keep you posted on as the year develops.

Moving on to adjusted operating margin and earnings per share. As Benson stated earlier, when discussing adjusted operating margin, we will now exclude the impact of intangible amortization expense so that we are consistent with the way we calculate adjusted earnings per share. This approach provides for improved comparability between ourselves and many of our peers, and allows our investors to better track the operational performance of the Company.

It is important to understand that we are not changing any of the underlying assumptions from what we previously provided regarding 2014 operating margins, except for the impact of intangible amortization expense. For the full year 2014, we expect adjusted operating margin, excluding intangible amortization expense, to increase by approximately 100 basis points to between 20% and 21%. Further gains in adjusted operating margin are being tempered by investments to support the distributor-to-direct strategy and the addition of Vidacare, which carries a much higher relative level of SG&A.

I would also like to address what this change means in terms of the calculation of our adjusted operating margin, in terms of our previously provided longer-term goals. If you recall, we previously said we thought it was possible to exit 2015 at around 21% adjusted operating margin. The 21% that we previously mentioned included approximately 300 basis points of intangible amortization expense. With this change to exclude intangible amortization expense, we now believe that we will exit 2015 with adjusted operating margin of approximately 24%.

Moving on to taxes. Similar to gross margin, we look at taxes as another opportunity area, and as a result of planning activities, we expect to be able to further reduce the non-GAAP tax rate to a range of 22.5% to 23.5% for 2014. While from an adjusted interest expense standpoint, we currently anticipate a weighted average interest expense rate -- excuse me, average interest rate of approximately 4.6%, and we expect to have approximately the same amount of debt outstanding during the course of 2014 as we did at year end 2013.

I would like to add that we still plan on financing the Vidacare acquisition through the issuance of a longer-term instrument, and our assumptions regarding a weighted average interest rate of 4.6% for 2014 reflect that longer-term financing being put in place.

Finally, on the bottom line, we are reaffirming our previously provided 2014 adjusted earnings per share range of between $5.35 and $5.55 per share. This adjusted earnings per share range assumes an adjusted weighted average share count of approximately 44 million shares. And, although we do not provide quarterly financial guidance, it is important to understand that we are projecting revenue and adjusted earnings per share to be greater in the second half of 2014 as compared to the first half, with particular strength in the fourth quarter.

Due to our calendar, which calls for one fewer shipping day in the second quarter of 2014 as compared to the second quarter of 2013, along with what we believe to be continued near-term uncertainty in the first quarter of 2014 associated with the implementation of the Affordable Care Act, we have planned our 2014 revenue cadence with a more cautious approach. Currently we project that our first-quarter 2014 revenue and adjusted earnings per share will only be moderately higher than the results we achieved in the first quarter of 2013.

We expect that any disruption coming from the roll-out of the Affordable Care Act will be resolved by the beginning of the second half of the year. This assumption, along with the fact that we will have one additional selling day in the fourth quarter of 2014 as compared to the fourth quarter of 2013, leads us to believe that the second half of 2014 revenue will be more heavily weighted than the first half of the year.

In addition, we expect the second half of 2014 earnings to be positively impacted by the manufacturing cost improvement plans that our operations team is working on right now. As a result, we believe that the overall weighting of our earnings contribution will be heavier in the second half of 2014.

That completes my prepared remarks. With that, I would like to now turn the call back over to the operator for questions. Operator?

(Operator Instructions)

And our first question comes from the line of David Lewis from Morgan Stanley. Please proceed.

Good morning.

Good morning, David.

Just two questions this morning. I guess Benson, I appreciate your commentary around margins. I think we got probably more visibility on the margin story over the next 18 months than we had in the past. That was certainly encouraging.

I do want to go back to the fourth quarter here a second. It does look like the underlying SG&A numbers were higher than we were expecting, and I'm just sort of wondering given the tax rate in the quarter, was there any element of reinvesting in the fourth quarter here given the upside from tax? And Tom, I didn't hear specifically one-timers of SG&A that would have explained why you came in a little lower than we would have expected on margins in the fourth quarter, so any insight you can give us on the fourth quarter would be great, and then I have a follow-up.

Yes, sure. Well Vidacare certainly came into the equation in the fourth quarter and that carries a higher level of SG&A expense. I'm not able to obviously understand what was in your model. That was a driver. Then we also had a number of factors that we had during the year which included Medical Device Excise Tax.

And we had made some investments in the business. I'm trying to think of the timing, were any of those captured in the third quarter or just solely the fourth quarter. But there was nothing that was unusual in nature. As you know that the first I would say nine months or so of the year we were pretty aggressive in looking at cost reduction opportunities given the softness in revenue. As we began to see that we felt we could cover that revenue downside, perhaps we weren't as aggressive in the fourth quarter, but nothing that I would point to as an unusual or one-time spending level.

Okay. Helpful. And then Benson, you made some commentary around fourth-quarter trends on utilization coming in stronger than you expected, and it sounds like based on guidance, you're not getting as aggressive on those trends in the first quarter, but doesn't sound like you expect those trends to fade.

Maybe you can talk to us about the improvement in the underlying business; across the segments of your business, where do you see that improvement and have you seen that improvement be sustained here in the early part of the first quarter in those same segments? Thank you.

So just relative to US utilization rates, there is some indication that there was somewhat of a rush to get procedures taken care of towards the end of the year. It looks to us like the best explanation of that was concern about what was going to happen to either people's deductibles or to their overall policies as they approached the new year. There's some indication that there's going to be perhaps some retraction I think in utilization I think the first couple of months as a result of the issues relative to people's insurance coverage sorting themselves out.

That, although could have been a part of our December results, we don't believe it was a significant part. And again, relative to the US, we had already trimmed back our revenue estimates for the first half of the year, assuming some confusion around insurance. So that singly really isn't changing our viewpoint of what the first half of the year's going to look like. And in fact, we didn't see anything out of the ordinary in January that would suggest that's the case, and January results were right in line with our expectations.

The bigger driver really for the unexpected overperformance in December had to do with back order reduction in part, and the biggest thing I mentioned in my remarks was that European customer kind of having quite heavy orders in the last week of the year.

But once again, I would say when we looked at January results, that does not seem to have come at the expense of January results. So I would say we're pretty optimistic that even if there is some confusion in insurance coverage in the United States, that we've already factored that into our revenue estimates.

Okay. Thank you very much.

Our next question comes from the line of Jason Wittes from Brean Capital. Please proceed.

Hi. Thank you very much. Another question that came up was distributor conversions. It sounds like the large one that you did in Australia went by pretty smoothly, but my sense from just your estimates is that there's quite a few more to be expected this year. Have you built in some kind of cushion for that, and how should we be thinking about the risk involved with converting those distributorships?

The biggest risk was actually tied to concluding the Australian distributorship both from a standpoint of size and when it was planned for in the course of the year. So I would just say there are others that are projected during the course of the year. They are smaller in size and later in the year, and so if there is some delay there, the potential that they have to negatively impact the results is quite minimal compared to what might have happened had we not been successful in closing the Australia distributorship. There are some but I don't think they'll have the potential of having significant impact on our 2014 results.

Okay. Go ahead.

In terms of the revenue that we've been expecting out of that distributor to direct conversion that we completed accounts for over 80% of what we were looking for. So in terms of risk, we've captured the big piece of that revenue with closing this deal.

Okay.

I would just add, from an overall risk perspective, I think the performance we've seen out of Vidacare, both in December and then in January again has us feeling a lot more comfortable. And then the closure of the Australian distributorship again is another thing that's now in the bag and locked down. I think those two events have derisked our revenue profile quite a bit for 2014.

Okay. Very helpful. And actually if I could just follow up on -- I'm sure you'll get other questions on Affordable Care's impact. Sounds to me thus far the impact really hasn't been felt, but your continued impression is it's kind of a first half sort of disorganization/perturbation effect that you're kind of anticipating in the numbers right now. Is that the right way to characterize it?

Yes. We took a conservative view to that certainly in the first half. I would say it's probably the cloudiest part of our forecasting, how this is really going to roll out. But again, we said at the Analyst Day meeting and reiterated here, we've taken a pretty conservative view in terms of the potential for some negative impact here, and we would expect that ultimately it will be resolved and we think that's likely to happen certainly by the second half of the year.

Then one last question, just on Vidacare. Seems like it's going very well. Is there some pull-through of other products with Vidacare that you're seeing, or is it just sort of continuity of the sales force and execution on your part that's just driving the good performance?

So it's a number of different factors. When we acquired LMA, there's also an ambulance utilization of that product. The addition of Vidacare to our product line really gives us a strong enough call point there to represent LMA, which was sort of a weak link in our LMA business.

I think that the -- if you just look at the impact in hospital segment for Vascular Access, it provides another product area to talk about besides CBCs and PICCs, and really enhances our strategy around putting the right product in the right patient at the right time. And there's -- I would say there's a lot of enthusiasm about learning about that product within the hospital segment. So it's a little easier to get into see people as a result of having that product in our bag that are also purchasers of other Vascular Access products.

Thank you very much.

And our next question comes from the line of Matt Taylor from Barclays. Please proceed.

Thanks for taking the question. Can you hear me okay?

Yes.

Great. So I just wanted to ask a question on one of the things that you covered at the Analyst Day. Your Surgical performance was pretty good this quarter, had been good all year. Can you just talk about some of the new surgery products that could be coming through the pipeline in 2014, and what if any impact they could have on the financials?

So to a certain extent, Matt, our improvement in the Surgical business over the last several years has been in part due just to a revival of attention around that product line. Post ARROW acquisition, there just wasn't much attention from a product development standpoint, from a sales force penetration standpoint on that, and that division has made some particularly good strides in improving its sales force effectiveness and its coverage.

EFX certainly has been a product, one of the late-stage technology acquisitions that gave them a very new, innovative product to talk about. Our business in ligation has always been strong and I think that just additional focus on surgery has helped drive that. We are a benefiter of robotic surgery and that's helped.

And then as I think we look forward, the inclusion of Eon Surgical in that micro-laparoscopic arena is quite exciting. We're not going to see a lot of benefit of that in 2014. We'll start to see that show up in a much more significant way in 2015.

Okay. Great. And not to harp on this but I just wanted to make sure that I was clear with what you were saying about ACA and volume in the first half. Is your point just that you think that there could be some uncertainty for people in the US in terms of their coverage, and that may cause them to delay procedures and that could be resolved by the second half of the year, or are you talking about seasonality or both? Can you just clarify exactly what you're expecting?

Our commentary just really primarily results in or stems from some confusion around people whose coverage was cancelled last year and may not have been restored by January of this year. Our sense is to the extent that there was an uptick in December, that probably was a bit of a rush for people to get things covered under their old plan.

As we understand the details, more people are having somewhat higher deductibles which can be a deterrent particularly early in the year to visit that primary care physician. The latest information we have about primary care and specialist visits in January seems to be on the downside. So it's mainly driven by some of the confusion around coverage and some of the time it may take to get that resolved for people who intend to and want to have insurance coverage.

Okay. Very helpful. Thanks, Benson.

Our next question comes from the line of Matthew O'Brien from William Blair. Please proceed.

Good morning. Can you guys hear me okay?

Yes.

Okay. I dropped off a couple of times here, so you may have covered some of this. With Vidacare specifically, given the integration's going a little better than you expected, it is fair for us to assume that you feel a little bit more comfortable towards the higher end of the revenue range that you're expecting for 2014, given what you've seen so far?

I think there's some safety in that estimation, yes.

Okay. And then again you may have covered this and I may have missed it. But I think you said before the deal closed, that you'd be in a better position to provide a little bit better view on the operating margin opportunity that you see there, and the cost synergy opportunity that you see a little bit longer term. Would you mind providing some of that detail?

So I think we've probably said as much as we can say at the current time. I will tell you that since our Analyst Day meeting, there has been nothing that has come out that causes us to have any lack of confidence in hitting that 55% goal by the time we exit 2015. Most of the work that's being done is simply making sure we understand the entire task involved to get things done and we have adequately planned for resources to be able to address those issues.

I will also reiterate the fact that we will not, by the close of 2015, be able to receive all of the benefit that comes from that effort. And so I'll just reiterate that 55% is kind of the starting point for that. We expect that to subsequently improve over the next couple years after that as well.

Okay. Then just one more real quick if I may. You mentioned the facility consolidation and rationalization plan that you're going through right now. You haven't quite [bite the bucket]. Should we expect to hear something more definitive on the Q1 conference call?

So I think the near future is the phrase we've used in our script today and I think that's about as definitive as we can be at this point in time.

Got it. Thank you.

And our next question comes from the line of Richard Newitter from Leerink Partners. Please proceed.

Hi, thanks for taking the questions. I was just hoping you could or maybe you already provided this and I missed it. I apologize if that's the case. The Vidacare contribution in the fourth quarter, could you quantify that both on the top line and whatever it was from the EPS standpoint or cost standpoint incrementally above maybe what you were forecasting?

So typically we don't and didn't plan to release actual sales numbers simply on a single month basis, but I'll just reiterate that it was ahead of what we expected in December and ahead of what we expected in January.

And our viewpoint at this point is is that we certainly have a high level of confidence we're going to achieve that annual range we provided as guidance. Should our viewpoint change in either one direction or another, we'll certainly provide that information, and it's also our expectation at this point that we're going to achieve all the synergies that we expected to achieve during 2014.

Okay. Thank you. And just Tom, the commentary you gave exiting the year for the new operating margin guidance, now that you're backing out amortization from that, for the long-term kind of goal that you had set out previously, the [high 5s], I think you had said 25% operating margin over time, do we just add the same amount to that long-term goal as well?

Well, here's how you should be thinking about it. As we look at the amortization impact, it's about 300 basis points. We had talked about as we exit 2015, we had been thinking we could be at the 21% range. As you include those 300 basis points, it would get you up to 24%.

We're obviously still pushing to get ourselves to that longer-term goal of what was 25%, which would now be 300 basis points greater. But that's somewhere off in the distance. We think that by the end of 2015 we can be at that 24% range once you make this adjustment, is the way I would think about it.

So that calibrates to the 21% we have been guiding people to that if our gross margin is 55%, our operating margin should be in that 21% or slightly higher number. And so this is just adding that -- the benefit of that change in accounting on top of that. It represents no real long change in the our underlying expectation about operating margin expansion. It's just we think a more consistent way of calculating it.

Great. And just what was organic growth in the fourth quarter, top line growth?

So our organic growth is probably best represented by adding our pricing increases and our new product entries. Actual volume growth was in slightly negative territory compared to the prior quarter. And again, we think the biggest driver for that.

So I would just say, Rich. I think our organic excluding any impact from any M&A was somewhere around maybe that 2%, maybe a little north of 2% type level, and that's primarily new pricing and new product introductions.

Okay. And that volume negative -- was negative but also included an extra selling day so it would have been even more negative if not for the extra selling day?

We're slightly negative on a full year basis on volume alone. In the fourth quarter, it ticked up as we discussed and I think it's closer to flat to up slightly positive.

Excluding the selling day benefit?

Excluding the selling day benefit it would be about flat, yes.

Okay. Great. Thank you very much. Appreciate it.

And our next question comes from the line of Larry Keusch from Raymond James. Please proceed.

Hi, good morning. I just wanted to come back to the adjusted gross margin that you're anticipating for 2014 and in there, Tom, you mentioned the manufacturing cost improvement programs of adding roughly 100 basis points.

But I wanted to understand, is that associated with the manufacturing footprint rationalization that you're going to unveil at some point here? Or are those things being done outside of that, and then once we get the details of the impact of the rationalization, that may have some impact in 2014, but I'm assuming more so in 2015? I want to make sure I'm understanding that.

What we're referencing in these numbers that we just cited were projects outside of any footprint rationalization. So in our current planning we are making some fairly significant investments in productivity and other cost improvement programs that will drive this 100 basis points.

To the extent we move forward with any footprint rationalization, that would be incremental, and to your point, the majority of that impact would be 2015 and later. We wouldn't have a significant impact in 2014.

Okay. Perfect. And then two other quick ones for you, if I could. On the tax rate, I may have missed this, but what were the items that drove the lower tax rate in the quarter? Because I believe on the third-quarter call you were sort of anticipating that the tax rate would tick up a little bit here. So perhaps you can just help us understand what drove that lower rate.

Sure. Well, as we talked about, in 2014 we've got a number of initiatives that we're putting forward to drive our sustainable tax rate lower, and as we started putting those pieces into place an opportunity presented itself for us to accelerate some benefit into the fourth quarter of 2013.

And so we took advantage of that and so that's really the driver. It was a single opportunity that we took advantage of. As we continue to look at 2014 as mentioned, we're looking to take our sustainable adjusted tax rate down to a level of about 23%, plus or minus 50 basis points.

Okay. Great. And then lastly, Benson, just any thoughts on M&A, the competition for assets out there, valuations, and since you're integrating Vidacare and still working through some LMA, does that suggest that deals are off the table for the time being, or could you do something if the right asking price came along?

We consistently have taken an opportunistic viewpoint towards acquisitions. You can't time when something that's quite attractive to you comes along. And at the same -- by the same token, we don't feel some compulsion to have to do one in the next calendar year either.

We've got a pretty -- I would say that we are satisfied to the degree to which acquisitions like Vidacare and LMA have improved our overall business portfolio, but a lot of that has come from picking very carefully acquisitions that have that potential for us. And often acquisitions that are particularly good for us don't make as much sense to somebody else who might not be able to have the same synergies that they're able to generate.

So the best I can tell you is over the next several years at least, I think you could expect to see more of what you've seen in the past several years from us, which includes both some of those larger acquisitions and continued emphasis on late-stage technology acquisitions as they become available, and some of these dealer to direct conversions.

Okay. Great. Thanks very much.

And our next question comes from Anthony Petrone from Jefferies Group. Please proceed.

Thanks and good morning. Maybe Benson just on the M&A question for a second, I'm just wondering how that all plays out relative to the leverage now that you have calculating I guess a little north of a 3.5X debt ratio, perhaps approaching 4X. Maybe just a talk on the capital structure and debt service as you go forward and the ability to finance deals, should an attractive one come along in the near term.

So I think you raise a good point. And that is as that creeps up, the more cautious we are about looking at any individual property. I'll turn over the detailed answer to that to Tom.

Okay. Well, as we look at our balance sheet at the end of 2013, we've got around $430 million of cash sitting on the balance sheet. As we look at 2014, we're expecting to generate again some additional free cash flow, which could be combined with that money already on the balance sheet. So to the point you're raising, our ability to take on additional debt will be somewhat limited until we grow a bit and reduce our leverage levels.

As we look at 2014 and think about capital allocation, this year we generated about $230 million cash flow from operations. Should probably think about a 10% or so increase in cash flow from ops. Next year we're going to hold the dividend the same. That will consume $57 million or so of that cash.

In terms of CapEx, this year we spent right around $63 million, $64 million. Next year we'll take that up a little bit. In fact, up about $25 million, largely to facilitate the investments in productivity that we spoke about, and those investments in productivity will help us drive that up to 100 basis points of additional gross margin expansion.

And so as you net those all out, that leaves about $100 million left over for investment in addition to the $400 million that we currently have on the balance sheet.

Very helpful. And in the past the Company has also exercised on asset sales. I'm just wondering as you look at the portfolio today, are there potential for additional asset sales going forward?

So I think our consistent answer here is just as any business would, we routinely look at our overall portfolio and make strategic assessments about those businesses that we're most interested in or less interested in in the future moving forward.

And then the last one, just on Vidacare and as relates to the balance sheet, have you announced how the total purchase price was financed? I don't believe that there was any impact in your interest expense this quarter but maybe just an update there.

Yes, sure. So we, as mentioned, we do intend to permanently finance that. That has not yet been done. So what you'll see in the interest expense in the fourth quarter is that funding on the revolver, and we're currently working towards a more permanent financing solution. So our 2014 financial assumptions have made room for that higher level of interest assumed in a fixed rate financing relative to what we're currently getting on the revolver rate.

Okay. Thanks a lot.

(Operator Instructions)

Sir, we have no more questions at this time. So I'd now like to turn the call back to Jake Elguicze.

Thanks, operator. And thanks everyone for joining us today on the call. This concludes the Teleflex Incorporated fourth-quarter and full-year 2013 earnings conference call. Have a good day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Good day.