Good day, ladies and gentlemen, and welcome to the Q4 2013 Teleflex Incorporated Earnings Conference Call. My name is Marie, and I'll 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, passcode 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. So 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 geographical 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,…

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 from 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 offering from LMA, Vidacare and new products. Turning next to adjusted operating margin, for the fourth quarter 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 was 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…

(Operator Instructions) And our first question comes from the line of David Lewis from Morgan Stanley.

Just two questions this morning. Benson, I appreciate your commentary around margins. I think we've got more visibility on the margin story over the next 18 months than we had in the past. That was certainly encouraging. But 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 it came in a little lower than we would expect in our margins in the fourth quarter. So any insight you can give us on the fourth quarter will be great.

Yeah, sure. Well, Vidacare certainly came into the equation in the fourth quarter and that carried the higher level of SG&A expense. I'm not able to obviously understand what was in your model, but 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 a time when those were captured, the third quarter or just sort of the fourth quarter. But there was nothing that was unusual in nature. As you know that, first I would say, the nine months or so, we were pretty aggressive in looking at cost reduction opportunities, given the softness in revenue. As we began to see that we felt that 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.

Benson, you made some commentary around the fourth quarter trends on utilization coming in stronger than you expected. And it sounds like based on guidance that you're not getting as aggressive in those trends in the first quarter, but doesn't sound like you expect those trends to fade. I mean maybe you can just talk to us about the improvement in the underlying business. Across the segments of your business, where did 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?

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. And it looks to us like the best explanation of that was concerned about what was going to happen to either people's deductibles or to their overall policies as they approached the new year. There is some indication that there's going to be a 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 orders 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 is 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 quarter reduction in part. And the biggest thing I mentioned in my remarks was that European customers kind of had a 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 were pretty optimistic that even if there is some confusion in insurance coverage in the United States, that we already factored that into our revenue estimates.

And our next question comes from the line of Jason Wittes from Brean Capital.

Another question that came up was distributor conversion. It sounds like the large one 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 sort of the risk involved with converting those distributorships?

Yeah. So 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, the potential that they have to negative impact the results is quite minimal compared to what might have happened had we not been successful in coursing the Australian distributorship. So there are some, but I don't think they'll have the potential of significant impact on our 2014 results.

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

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

It sounds to me like thus far the impact hasn't really been felt, but your continued impression is 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 it would happen certainly by the second half of the year.

One last question just on Vidacare. It seems like it's going very well. Is there some pull-through of the products of Vidacare that you're seeing or is it just sort of continuity of the sales force that is driving the good performance?

So, as you know, there are different factors. When we acquired LMA, there is 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. If you just look at the impact in hospital segment for vascular access, it provides another product area to talk about besides CDCs and picks and really enhances our strategy around putting the right product in the right patient at the right time. And I would say there is 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. They're also purchasers of other vascular access products.

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

So I just want to ask a question on one of the things you told at the Analyst Day. Your surgical performance was pretty good this quarter and it had been good all year. Can you just talk about some of the new surgery products that will be coming through the pipeline in 2014? And was there any impact it can have on financial?

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. That division has made some particularly good strides in improving its sales force effectiveness and in 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's just additional focus on surgery has helped drive that. We are a benefitor of robotic surgery and that's helped. And then as I think we look forward, the inclusion of Eon Surgical in that microlaparoscopic 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.

I just wanted to make sure that I was clear with what you're saying about volume in the first half. To your point, do you think that there could be some uncertainty for people in the US in terms of coverage and that may cause them to delay procedures and that could be evolved by the second half of the year, or are you talking about seasonality or both?

Our commentary just really primarily stems from some confusion around people whose coverage was canceled 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 position. The latest information we have about primary care and especially 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.

And our next question comes from the line of Matthew O'Brien from William Blair.

Was Vidacare integration a little bit better than you expected? Is it fair for us to assume that you feel a little bit more comfortable towards the higher end of the revenue range, (technical difficulty) that you're expecting for 2014 given what you see so far?

I think there is some safety in that estimation, yes.

(technical difficulty) position to provide a little bit better view on the operating margin opportunity which should be there and the cost synergy opportunities? Do you see a little bit a longer-term view that you might provide some of that (technical difficulty)?

I think we 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 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 for the next couple of years after that as well.

You mentioned the (technical difficulty) and rationalization plan which you're going through right now and you have the (technical difficulty). Should we expect to hear something more definitive on a joint conference call?

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

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

The Vidacare contribution in the fourth quarter, can you quantify that both on the topline and whatever it was from a cost standpoint incrementally above maybe what you'd forecast?

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 also our expectation at this point is that we're going to achieve all the synergies that we expected to achieve during 2014.

And just, Tom, the commentary you gave exiting the year for the new operating margin guidance and now that you're backing out amortization from that, for the long term kind of goal that you had said out previously, 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 is 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 have been thinking we could be at the 21% range. As you include those 300 basis points, it'll get you up to 24%. So 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. This is the way I would think about it.

Yeah, 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 the benefit of that change in accounting on top of that. It represents no real long change in our underlying expectation about operating margin expansion. It's just we think a more consistent way of calculating it.

And what was the organic growth in the fourth quarter, topline 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.

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 volume was negative, but also included an extra selling day, so would have been even more negative with an 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, yeah.

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

I just want to come back to the adjusted gross margin that you're anticipating for 2014. And in that, Tom, you mentioned the manufacturing cost improvement programs of adding roughly 100 basis points. But I want to understand, is that associated with the manufacturing footprint rationalization that you are 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 '14, but I'm assuming more so in '15? I just want to make sure I'm understanding that.

Sure. So 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 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 '14.

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're 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?

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 to lower. And as we start putting those pieces into place and opportunity presented itself for us to accelerate from benefit into the fourth quarter of 2013, and so we took advantage of that. And so that's really the driver. It was 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.

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 M&A, does that suggest that deals are off the table for the time being or could you do something if the right asset and 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 by the same token, we don't feel some compulsion to ask to do one in the next calendar year either. 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 we'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 some of those larger acquisitions and continued emphasis on late-stage technology acquisitions as they become available. And some of these are distributor-to-direct conversions.

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

I was just wondering how that will play out relative to the leverage now that you have on calculating I guess a little north of 3.5x, perhaps approaching 4x. So 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?

I think you raised 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 for a detailed answer to that to Tom.

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, now this year we generated about $230 million cash flow from operations. If I think about a 10% or so increase in cash flow from ops, next year we're going to hold the dividend the same and 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 and productivity that we spoke about. And those investments and productivity will help us drive up to 100 basis points of additional gross margin expansion. And so to 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.

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?

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

Yeah, sure. So as mentioned, we do intend to primarily 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 a 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.

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 Inc. 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.