Teleflex Incorporated (TFX) Earnings Call Transcript & Summary

So other than the fact of, as I said already, moving from the early adopter to the fast follower, if you -- this business is such a massive opportunity for us as an organization. In the fourth quarter, we did $90 million. We -- so if you just flatline that, that's $360 million on a run rate. And we had only trained 1/5 of the urologists in America, and we've only scratched the surface overseas. We're only selling in Australia and the U.K. We're bringing on the Netherlands, Singapore, Hong Kong. In 2021, you'll see Japan start to kick in. And later in 2021, you'll probably see France start to kick in, you'll see Italy, Spain and then China added in as well. So I think that there's nothing that would concern me in the end markets with regard to UroLift other than the fact that we're just moving the early adopter to the fast follower, and we trained almost -- around 500 urologists last year, we think we'll train another 500 this year. And with those trained, we think we have enough coverage in the country to do a test, a pilot national DTC. And you're right, it has the potential to be an accelerator. I mean I was -- I spent a whole week in the first quarter on the road with urologists, telling them they should get ready because once this starts to alert men to BPH -- we found a very interesting statistic. We actually surveyed men with BPH. Of the men with BPH that have the conditions that are under the care of urologists, only about 6% of them are aware of UroLift as a treatment option of the patient. So we feel it's our responsibility to educate men that there is a minimally invasive solution, a 1-hour procedure in a doctor's office, no risk of sexual dysfunction, immediate relief. You're not taking a pill for the rest of your life and the side effects that, that brings. So we feel that we need to educate men as to this UroLift procedure being available. You can go in on a Friday, have this done, and you could be sitting at your desk Monday morning not wearing a catheter and instant relief from your condition. A little bit of pain over the weekend, but the doctor will give you Tylenol for it. That's what you have compared to a TURP procedure, which, as you know, is massively invasive.

And you've talked about the middle-adopter cohort and moving from early adopter to middle adopter in the past. But it sounded like you hadn't actually crossed that threshold yet. You're anticipating it, but you're not there yet. I'm just curious if there's anything in the fourth quarter or the early signs in the first quarter to suggest that you are kind of crossing that chasm.

So I think the encouraging sign was the acceleration in growth this year. And what was also encouraging was that the same-store sales continue to ramp, and it has done since we bought this asset, it has continued to ramp. That's encouraging to tell us that we're -- they call it the chasm that you're going through. We're in the chasm, and we're -- I think we're well through the chasm, not quite the other side yet.

I guess I'm talking the chasm from early adopters to middle adopters.

That's what I'm talking about.

You are already there, and it hasn't slowed. Okay. Got it.

It hasn't slowed. So it looks encouraging that we're able -- and what do they -- what do the fast followers want, right? They want to know it's got nationwide coverage. Tick, we've got 350 million lives covered in the United States. They want to know that it's supported by strong clinical data, the L.I.F.T. study does that. They want to know the real-world data is as good or very close to as good as the clinical data. And actually, the real-world data is actually better than the L.I.F.T. data. Fewer men wear a catheter in real world than it was in the original study. They actually want to know they're going to get paid. So they want that reimbursement in place, which is, and actually, it was improved again this year. And they want to know they're going to get great patient outcomes, and they get that. So we have all the metrics that are required. And they also want to feel -- and you won't find this in any textbook, but they almost want to feel like they're being left behind. When they go to urology meetings, all their peers are talking about why I use the UroLift. And they almost want to feel like, oh my gosh, everyone is doing this, and I'm getting left behind. And we're right at that tipping point now. So we feel very enthusiastic about it. It's a massive market opportunity. We've still only scratched the surface. And I think it's going to be a growth driver over a multiyear period for Teleflex.

And UroLift 2. Maybe talk a little bit about the time lines there and when you expect that to be fully rolled out, what do you think that does for you. I guess it's going to be more of a potential margin impact, but talk about how important that is, and maybe a good segue into the margin-expansion story, where that fits in.

Yes. So how this fits in. The UL2, for those who don't know, it's the next generation of the UroLift. It basically will reduce our carbon footprint. It will also reduce the clinical waste from the urologist, and it should give the excellent clinical outcomes. We'll be rolling that out in the second quarter, and we will convert the market. It should take -- we should have a lot of the market converted by the end of 2021, the U.S. market converted by 2021. And the reason I say that is that there isn't a price increase associated with this, so there's no barrier to adoption. It should make it relatively -- a little bit easier for the urologist to use. It's more intuitive how you use the product, still the great patient outcomes, and it does improve our margins from -- in this product from the mid-70s to the high 70s. So -- and it is a part of our margin expansion in 2021 as you roll out that conversion.

But more of a 2021 impact there.

It would be, yes.

Okay. And the roughly 170 basis points, 360 basis points that's implied by guidance for operating margin expansion in 2020, that -- how reliant are you on UL2 there? Not much or...

There isn't much reliance on the UL2 in that expansion, a little bit in the fourth quarter. But -- and the other thing that we've done since we acquired the asset is we make the UL2 in 2 sites. As the UL1 ramp, all of the volume will, for the UL1 or a lot of it will transfer to the other site, which actually will give us the margin improvement as well.

Okay. Interesting.

I was just going to say, I think from a margin standpoint, I think we were extremely pleased to see the margin progression during the course of the year in 2019. In particular, in the fourth quarter, we exited the year with the highest-ever attained adjusted gross and adjusted operating margins and -- since we became a pure-play medical device company. I think to your point, in 2020, we're calling for, at the midpoints of our guidance ranges, around a 90 basis point increase in gross margins and around 170 basis points at the operating margin line. And I think we have tried to talk to the investment community about that they should expect to see further acceleration and more drop-through from gross margin to adjusted operating margin as we move into 2020 as compared to what we saw in 2019 because we chose to make some proactive investments in 2019 to accelerate that top line, which is occurring, and we'll pay a benefit moving forward. So in addition to that gross margin drop-through this year, we are getting better leverage at the OpEx line. And even the acquisition that we recently announced will be accretive at the operating margin line as well. So as we're looking forward here, as we move throughout the year, I think the investment community should think about continual ramps each and every quarter at the gross margin line and at the operating margin line, ultimately, exiting the year. And I think it will provide the investment community with a greater sense that we can achieve those 30% to 31% operating margins that we put forward for 2021 because we still feel very confident in our ability to do that.

Very helpful. I want to touch on MANTA and the acquisition that you did in the OEM division. So just on MANTA, your -- the amount of contribution that it sounds like you've baked in, it doesn't sound like it's that much more than what you're already doing annually -- excuse me, internationally, and this is your first year of the U.S. launch. To my math, it works out to an implied roughly $10 million to $12 million first year U.S. incremental contribution, which strikes me, especially worldwide market opportunity, $250 million at the midpoint, it strikes me as a very, very conservative year 1 launch. I'm just wondering, is the rollout continuing to be controlled? You did all your price discovery in the last year. Is it just it's going to be much, much more weighted to the back half, and that's why we won't see as much U.S. contribution? Just walk me through why that number makes sense because it seems conservative.

Yes. So your math is good. We did about $11 million last year. We obviously were selling in Europe. And in our limited launch in the U.S., we also generated some revenue in Q2, 3 and 4, and we expect to double that revenue, add another $11 million to that next year as we go from 4% penetration to 8% penetration. I think you're right. What you will see -- we're in full launch as of January 1, so what you will see is you will see it ramp as you go through the year. And then as you get into 2021, you'll be exiting on a good solid run rate, and you should be able to accelerate the growth thereafter in 2021. When you go to Economics 101, everything is explained to kids in a straight line. You got the x-axis, the y-axis and everything is in a straight line. In life, everything is an s-curve. You got to build a base of business, and then as you build that base of business, then it starts to accelerate off that base. And I think UroLift is a great example. The way it ramped was $5 million in the first year, $16 million, $50 million. And once you got that base around $50 million, then it went to $125 million, $200 million. So that's the way medical devices ramp. It's just a fact of life. Everything is an s-curve. So we should go in and talk to some of these economic majors and tell them nothing's a straight line in life, everything works that way.

And there's probably not enough time here, but we have just under 2 minutes. So maybe just talk through the rationale for the HPC acquisition in OEM.

So we're really excited about it. It's a great acquisition. It's accretive to our top line. It's even accretive to OEM's top line. This is well capable of doing low double-digit growth. It will definitely get through the 10% line, I think. On the adjusted EBITDA, it is very accretive to Teleflex.

Can I ask, like, 40% margin?

That would be a -- that would be a good number and maybe a little bit better. And I think that -- and I know everybody says multiples are -- and I've always said, because Teleflex looks so broadly, that we'll be able to carve out value out there in that world. And this is a great example. And the technology this brings, half of our OEM business is catheters and the other half is in the surgical side. The half that's in catheters -- catheters today are getting narrower walls, thinner, and if the catheter gets thinner, you can't get torque. This company brings the technology that allows you to put a thin-walled wire catheter, so now we can open up our OEM business to more interventional cardiology, radiology, ET procedures as well as neuro procedures because you get a thin-walled catheter with torque that we can sell to our customer base. And we're really excited about it. It's one of those right-down-the-fairway transactions for Teleflex, accretive top line, accretive top margin, the 2 key lines in our income statement.

Excellent. Well, we're at the time marker here, but thank you very much, Liam and Jake. Appreciate it.

Thanks, Rich. Cheers.