Teleflex Incorporated (TFX) Earnings Call Transcript & Summary

Okay. Okay. We're going to get started. So welcome, everyone. Extremely pleased to have with us Teleflex. We've been extremely lucky to have Teleflex participating in the Raymond James Conference for the last several years and have really been able to witness remarkable transformation in this company. And certainly, as you look at the company today, I think we're looking at an extremely visible revenue growth pipeline here that should drive very consistent 6% to 7% organic constant currency growth. We have a combination of margin expansion and extremely disciplined capital allocation that, again, has been both a growth driver for the company as well as an opportunity to continue to enhance margins as well. So one of the chief architects of this whole strategy is to my right, Liam Kelly, who is the President and CEO; and in the audience we have, Jake Elguicze, who's Treasurer and VP of IR. And I'm proud to say my former colleague, John Hsu, is also here as Senior Director of Investor Relations. So with that, I'll turn it over to Liam. And I don't like the fact that you stole John away from me.

I'm sorry for that, Larry. Hello, everybody. Thanks for joining me today. My name is Liam Kelly, I'm the President and CEO of Teleflex. And we are pleased to be able to attend this conference, and we appreciate your interest in our company. Before I begin the presentation, I'd like to remind you that some of the matters discussed today will contain forward-looking statements regarding future events. I wish to caution you that such statements are, in fact, forward-looking in nature and are subject to risks and uncertainties and that actual events or results may differ materially. So our mission in Teleflex is to improve the health and quality of people's lives. We estimate that every day our products are used in over 31,000 surgical procedures in the United States, to help more than 1,600 patients who require vascular access intervention, to care for more than 6,000 patients in the intensive care unit and by 3,200 emergency respondents to treat patients in the field every day. It is no secret by now the demographics are going to play an important role in the future demand of health care. And one of the things we think is unique about Teleflex is how well we have purposefully aligned our product portfolio to these favorable demographic trends. Let me provide you with a few examples that illustrate why we believe Teleflex will benefit from changes in the current health care landscape. There are 10,000 Americans every day crossing over the 65-year age mark. Most spend about 10% of their total health care expenditure between the ages of 50 and 65. However, between the ages of 65 and 85, they spend 60% of that total. And our view is that future demand for increased health care is inevitable. What we've tried to do as a company is to position our portfolio in what we would classify as nonpostponable procedures, where it is very difficult to cancel the delivery of care and the use of our products without having a very adverse effect on the patient. To illustrate this point, consider a typical patient who enters the hospital through the emergency room with a heart attack. That person might require the use of our EZ-IO product to help get fluids into the body, be fitted with one of our laryngeal masks and ET breathing tubes and a CVC or a PICC catheter. Notably, the hospital reimbursement for this type of patient could run anywhere between $6,000 and $8,000 per day, depending on the number of days spent in the intensive care unit. However, the use of Teleflex products was not optional, and the cost of Teleflex products involved in that care would have a total price tag of approximately $600. Clearly, a very small portion of the overall cost of the procedure and, therefore, not a huge target for pricing pressure. Turning to Asia, one of our fastest-growing geographies. There will be over 1 billion people over the age of 50 by the time we reach 2025. The middle class in China is also growing rapidly and they are demanding better health care, while another important trend we are seeing is the shift to lower-acuity patients, out of the hospital and into lower-cost sites of service, such as the ASC. This benefits Teleflex in 2 ways. First, the hospital is left with a higher-acuity and higher-cost mix of patients, putting more pressure on hospital systems to reduce costs and take actions that shorten the length of stay and reduce hospital-acquired infections. This most obviously benefits our coated catheter products. Second, the products that the lower-cost sites of service utilized are generally the same products used in the hospital, allowing Teleflex to participate in this shift to lower-cost sites of care. So why are we so excited about the opportunities that lie ahead of Teleflex? First, we enjoy leadership positions in growing markets, such as Vascular and Interventional Access as well as Interventional Urology, and we also have a strong presence in the Asia Pacific region. These leadership positions are built on established and well-respected brands that stand for quality and innovation, and our customers trust and respect the clinical value of our products. Next, we are of a unique size, which we believe is an advantage to us. Because we have global scale, we're relevant to every GPO and IDN within the United States, we can apply for tenders within Europe, and we are relevant to Asian markets, with an infrastructure and a footprint in each of those areas. We are also small enough to be nimble and make quick but informed business decisions. For example, we completed several acquisitions over the years that move the needle for Teleflex, whereas those acquisitions may not have had the same impact for other larger companies. We have a track record of execution, delivering a combined -- a combination of constant currency revenue growth with gross and operating margin expansion that has resulted in an adjusted earnings per share 4-year CAGR of approximately 15%, and we have been and will continue to be a serial acquirer. We have completed over 40 transactions since 2011, most of which have added scale, revenue growth, margin expansion and, ultimately, shareholder value. We think our ability to source, research and integrate acquisitions is a core competence of Teleflex. And lastly, we created a great deal of momentum in 2019, and we see that occurring in the future, too. We expect a stronger mix of higher-growth, higher-margin products to accelerate our constant currency revenue growth and further expanding margins. Here's a look at our reportable segment revenue performance during 2019. Combined, these segment reported -- segments reported revenues of approximately $2.6 billion, which was an increase of 8.1% on a constant currency basis over the prior year. During 2019, our constant currency revenue growth was broad-based and was quite strong across several geographies. Next, let me dive a bit deeper on some of the drivers of our 2019 revenue performance from a global product category perspective. Like our geographic performance, our revenue growth from our product line standpoint was also broad-based driven primarily by strength in Interventional Access, which grew approximately 10%; by our OEM business, which delivered growth of 8%; and Interventional Urology as UroLift continued to become rapidly adopted by urologists delivering almost 48% growth. When you look at our total revenue trend over a multiyear period, you see we have delivered relatively consistent revenue growth over the long term since 2011, the first year that we operated as a pure-play medical device company. When you look at our annual organic constant currency revenue growth, from 2015 through 2017, we averaged approximately 4%. While during 2018, that accelerated to 5.1%. During 2019, that accelerated even further, reaching 8.1%. Through 2021, we expect to be able to grow our revenues on average between 6% and 7%. In addition to increasing our revenue growth profile, our ability to consistently and meaningfully drive both gross and operating margin expansion continues to be a differentiator for Teleflex as compared to many of our peer companies. To date, we achieved this expansion through nonrevenue-dependent sources, such as restructuring initiatives, and by adding higher-margin products to our portfolio through either scale acquisitions, distributor conversions or internally developed products. Like our thoughts on revenue, during the 2019 through 2021 time period, we anticipate that we will be able to expand our adjusted gross and operating margins, reaching between 60% and 61% and 30% and 31%, respectively, by the year 2021. Our ability to be successful in the future is predicated on 5 strategic building blocks. First is driving revenue growth by addressing major health care challenges, such as through infection prevention, improving outcomes with less invasive, evidence-based products that lower the cost of care and augmenting that internal development growth with strategic M&A. Second is delivering nonrevenue-dependent margin expansion. We believe that we can drive margins higher through the execution of previously announced restructuring initiatives, taking certain portions of our business that today utilize a third-party distributor to a direct sales model as well as leveraging our global infrastructure. Next is being a serial acquirer. To date, most transactions we have completed have added shareholder value, and we think we get better with each deal that we complete. The fourth strategic initiative concerns demographics, and it is our belief that our product portfolio is well aligned to meet the needs of procedures that cannot be postponed as the global population ages. And last is our people. We continue to work hard to make Teleflex a great place to work, offering people career-building opportunities and striving to maintain our core values and, of course, our culture. Let me dive just a little deeper into the first strategic building block of driving accelerated revenue growth. Our goal by the end of 2021 is to further transform Teleflex from a medium-growth company with margin expansion to a high-growth company with gross and operating margin expansion. Our focus is to selectively invest in what we have identified as key disease states and markets, continue the cadence of new product launches, focus our sales and marketing efforts on driving utilization of high-margin products, leverage our global infrastructure for incremental margin expansion and execute strategic M&A as a growth accelerator. We have often said that all revenue growth is not created equal, and our preference is to invest more heavily where we see the highest potential returns on our capital. As we look across our portfolio, we see certain disease states and target markets that rank highest in our evaluation for potential investment. In some of these market segments, such as catheter complications and emergency medicine, we already have significant leadership positions, and the objective is to drive deeper utilization. Another, such as Interventional Cardiology, offers the opportunity to grow our market share significantly. While the Interventional Urology and men's health category is a bit of a unique situation in that while we have a leadership position in the market for the minimally invasive treatment of benign prostate hyperplasia, the global market is massive, and we have only scratched the surface. We have also implemented initiatives to drive utilization of existing products, where in most cases, we have only captured a small share of our customers' total procedures in that area. The products on the upper half of the slide represent products we are currently selling, while the products on the bottom half of the slide are either still in development or have yet -- or have not yet been launched on a full-scale basis. Let me highlight just a few. Starting with Interventional Urology. The UroLift System is addressing a market of over 12 million men in the U.S. and nearly 100 million men worldwide who are currently seeing a physician for BPH. With over 175,000 UroLift procedures completed, we have only scratched the surface of penetrating this large market opportunity. UroLift is a 1-hour procedure that provides rapid relief, 0 incidence of new sustained sexual dysfunction, low risk of needing a catheter and a procedure that can be done in the doctor's office. Given UroLift's unmatched patient experience, excellent clinical data, established reimbursement and focused commercial strategy, we believe it to make strong contributions to our revenue growth rate for the next several years. Turning to intraosseous access. The EZ-IO device is a tool that enables clinicians to establish Vascular Access quickly in trauma or critical care situations, while the OnControl Powered Bone Marrow Access System (sic) [ OnControl Powered Bone Access System ] has revolutionized bone marrow and bone lesion biopsy. We think there is a significant opportunity to increase the utilization of each of these products in the future. In Vascular Access, our PICCs and catheter navigation systems continue to benefit from hospital's focus on reducing catheter-related bloodstream infections, and we continue to have the only antimicrobial and antithrombogenic-coated PICC on the market today. Key Interventional Cardiology products include Turnpike and TrapLiner. These products continue to facilitate physicians' access through tortuous anatomies, enable -- enabling them to perform interventional procedures that in many cases prevent a more open surgical procedure. While through the acquisition of Essential Medical in October of 2018, we obtained the MANTA Vascular Closure Device. MANTA is the first and only FDA-approved device specifically designed for large bore closure. MANTA has excellent clinical data demonstrating rapid hemostasis and the reduction of complications as compared to suture-mediated and surgical closure. Our initial target market for MANTA will be TAVR and EVAR procedures, and we estimate the global addressable market for MANTA based on just those 2 procedures to be between $200 million and $300 million. Moving to the bottom half of the slide. We have a pipeline of products we feel will further augment our long-term constant currency revenue growth objectives. EZPlaz is our freeze-dried plasma product currently on a fast-track BLA regulatory pathway. This is another highly innovative product in our new product pipeline that we are extremely excited about. We believe it addresses the issue with availability and waste in the market today by providing a plasma solution that does not need to be thawed and can be quickly reconstituted within minutes in a trauma situation. UroLift 2 offers a cartridge-based system for physicians that reduces shelf space and waste, further simplifies the procedure and increases gross margins in our Interventional Urology business unit. We believe leveraging our global infrastructure is one of our core competencies, especially as it relates to our M&A strategy. There are several opportunities to enter new markets with existing high-margin products. We also see opportunities across other business units to collaborate for the introductions of new and existing products into new geographies. Dealer-to-direct conversions have been a significant driver of value over the past several years as the ability to gain better control of the commercial channel has obvious long-term benefits. And while not every market is a fit for a dealer-to-direct conversion, we believe there's incremental dry powder to take businesses direct in countries outside of the key North American market. Turning to mergers and acquisitions. We will continue to be a serial acquirer and have our M&A focus across 4 categories. The first is scale acquisitions. Each of the scale acquisitions completed to date have very similar characteristics. They have market leadership positions, present obvious clinical benefits, lower the overall cost of care, have strong IP, afforded us ability to leverage our sales force and allow us to take those technologies to new geographies and leverage our pre-existing infrastructure. Our target for scale acquisitions continues to be in that $50 million to $200 million in annual revenue range. We think our size is a unique advantage here, in that not only can we move quickly on these types of transactions, but the completion of these types of acquisitions moves the needle for us and it may not for larger companies. Dealer-to-direct opportunities will remain in focus. And often when we complete a scale acquisition, that refills the bucket for new opportunities to go direct. Late-stage technology acquisitions also continue to interest us if they fit in our strict criteria. And lastly, sometimes, we will opportunistically buy a supplier and reverse-integrate them. We believe we are best-in-class at sourcing, researching and integrating acquisitions, and our track record speaks for itself. Our last 4 scale acquisitions positively impacted our financial profile and created significant shareholder value. LMA, which we acquired in 2012, is a global market leader in laryngeal masks, with a portfolio of innovative airway products. By purchasing Vidacare in 2013, we acquired the leading provider in intraosseous or inside-the-bone access devices. This transaction continues to contribute to our revenue growth and gross margin expansion. Vascular Solutions, acquired in early 2017, provides a broad range of products in the Interventional Cardiology and Interventional Radiology space with strong clinical benefits and very strong IP production. And of course, NeoTract, acquired late in 2017, provided us an extremely high-growth asset with an innovative technology that is creating a new category of minimally invasive treatment for BPH. More recently, we completed the acquisition of privately held IWG High Performance Conductors, Inc., or HPC, an industry-leading manufacturer of highly engineered, minimally invasive medical solutions. We anticipate each of these acquisitions will continue to make a positive contribution to our revenue growth, adjusted gross and operating margin expansion over the next several years. In closing, we believe Teleflex is a rare and differentiated asset in the medical device space, with an accelerating revenue growth profile, incremental nonrevenue-dependent margin expansion opportunities, strong free cash flow and robust adjusted earnings per share growth. We believe our diversified product portfolio positioned against the backdrop of strong demographic trends and being led by an experienced management team will help us achieve our goal of further transforming Teleflex from a medium-growth company with gross and operating margin expansion to a high-growth company with gross and operating margin expansion. Thank you very much for your time and attention today. That completes my prepared remarks, and we'll now enter into a Q&A session.

We've got just over 5 minutes to ask a couple of questions here. So maybe I'll just kick off relative to coronavirus. So you guys reported your fourth quarter earnings about a week and change ago. And you indicated that in the first quarter, there would be an impact of roughly $5 million to $10 million from a revenue perspective associated with coronavirus. So on a base of revenues that's nearly $2.6 billion, that's obviously a very small number. So help us think about where you are insulated from coronavirus?

So as we see our $5 million to $10 million, it will be at the lower end if things get back to pretty much business as normal in China right about now, in early March. The impact will be $10 million -- $5 million and $0.05, $10 million and $0.10 on the EPS if the uncertainty continues in China and procedures don't get back to normal in -- until the end of March, early April. I guess where we're a little bit insulated is the portfolio that we sell in China and also there is, ironically, a little bit of upside also baked into that $5 million to $10 million, where we would envision that some of our CVC coated catheters would get used as some of these patients would get admitted into the intensive care unit because of the condition. And I think that once people return to work, which from our intel, at least, is happening right about now, one would imagine that the procedures would then start flowing through the hospitals. Again, at least by the end of the month, we'd get back to business as usual. Now the virus has gone beyond the shores of China, as we all know, and is now having some impact in South Korea and Italy. And I think that it is tragic, and I'm not trying to take away from the tragic nature of it, and it is quite infectious, but I would also remind the audience that the general flu in America, just in America, has had 16,800 fatalities already this year in the general flu, and the coronavirus has also tragically had 3,000 fatalities. I think also coming outside of the Chinese health care system moving into a more developed health care systems, like you have in Western Europe and in the Americas, we should be better prepared to contain the virus as long as we're diligent.

Yes. Have you -- I know this is a dynamic situation and things change day by day, but you do have a large presence in Europe. You clearly have a large presence in the U.S. Have -- I know you're not necessarily really exposed to elective procedures. You are a little bit more critical care in nature. But have you seen any wiggling in procedures in Europe or in the U.S. yet?

Definitely not in the U.S. and really not in Europe. We have heard some noise coming out of Northern Italy on the basis that people are not inclined to go directly to the hospital. But I will -- you're absolutely correct. We are not really a procedure-driven company. Most of our products are used in emergent care. And also, we don't sell many of our respiratory products in China, but we do sell more respiratory products in Europe. So therefore, there is the potential that more of those will be required. And again, on China, we're probably under-penetrated. Only 4% of our revenues are generated out of China as a company.

Okay. Perfect. Turning to UroLift and, I guess, just a 2-part question here. So you had a phenomenal 2019. You grew 48% on a year-over-year basis. Really, the growth has been concentrated in the United States thus far, but your guidance was for 25% growth in 2020. So the first part of the question is, help us understand how you're thinking about that deceleration from nearly 50% to 25%. I get it, there's a law of larger numbers (sic) [ law of large numbers ], but help us think about that deceleration. And then on the back end of the question, getting into the fast follower population is important for this to continue to keep going. Are there any metrics that you can share with us to give us some sense of how that's progressing?

So to the 25% guide, and traditionally, we've been relatively cautious right out of the gate with our guidance on UroLift. And I'm not saying this is going to happen this year. But if you look at last year, we initially guided to 30%, halfway through the year, then we increased our guidance to 40%, and we finished at 48%. And we're always reasonably cautious that we move from the early adopter to the fast follower, it just takes a little bit more time to bring that patient or that customer on board and to get them engaged and to adopt the technology. Now the second part of your question is the metrics that we look at, there's really 2 that we look at. How much of our growth is coming from urologists that we have trained already, and that continues to be 60% of the revenue growth comes from utilization within previously trained urologists. And then same-store sales, a slightly different way of looking at the same metric, but do you see your same-store sales increase quarter after quarter after quarter after quarter. And that is also a -- since we bought this asset, we've seen same-store sales continue. And then how many procedures does our average urologists do if you look right across the board, and that has improved. It was 4 in 2018, and it's gone up to about 4.5 now in 2019. And that is, again, as urologists become more comfortable with the procedure, as you remove the median lobe indication, of course, they're able to use the product for that. And now as you move to the indication for a larger prostate, they're able to use the UroLift for patients with a bigger prostate as well.

And just to finish off on that thought, that 4.5, what's the right way to think about the range? Because, certainly, the high-volume guys are doing much more than that, I would think.

They are. I mean the high-volume guys have broke through the teens and into the 20s. And I think that the right way and the way we look at it is really -- and if you look at North America, where most of our procedures have been done. And as I said during my prepared remarks, we have done less than 200,000 procedures out of 12 million men that suffer with the condition in North America. If you look at quarter 4, we did $90 million in quarter 4, with 1/5 of urology population trained. So if you just flat line that on a run rate, that's $360 million of a flat line run rate with 1/5 of the population trained that could possibly be trained and do the procedure. So I think we've got a very wide moat behind us, Larry, and a significant opportunity in front of us. And what you'll see is Japan kick in, in 2021, which wasn't in our LRP. You'll also see later in 2021 places like France coming in. And in 2022, you'll probably see China and hopefully, at that stage, the coronavirus will be a distant memory, and we'd be back to business as usual in that country.

Very good. Thank you very much, Liam. We'll adjourn here. And we will pick it up in a breakout session in the Cordova 3 room.

Thank you. Thank you very much.