Teleflex Incorporated (TFX) Earnings Call Transcript & Summary

Okay. Thanks, everybody. We're ready to start the next fireside chat here at the Bank of America Virtual Health Care Conference. This afternoon, we're really excited to have Teleflex presenting or participating in a fireside chat. On behalf of Teleflex, Liam Kelly, the company's President and CEO, will be our primary discussant. We'll go for roughly half an hour. And I just wanted to express my appreciation for the Teleflex team for joining us here this afternoon. And Liam, again, thanks for being here.

The first question I wanted to ask is one that's kind of a question on 2020, which I know is a very uncertain year. But you've had kind of this interesting dynamic develop where a lot of the medical device CEOs out there have been expressing a level of confidence that by the time we get to the fourth quarter, we -- from an elective procedures perspective, we may be back to something resembling normal demand. And of course, that has impacted kind of sell-side models. And for a lot of companies now, there is a forecast for year-over-year growth in the fourth quarter of this year, and Teleflex is no exception to that. I think consensus model's 7% to 8% growth, perhaps, in the fourth quarter of this year. So I would love to get kind of your preliminary thoughts on, given all the uncertainties that you're seeing in your business and given all the kind of perspective you have, is that notion that's out there you think a reasonable base case, a reasonable kind of place to start in terms of thinking about the fourth quarter of this year? And sorry to start with such a specific question, but it's one that just keeps coming up. So anyway, thanks for being here, and would love any thoughts you have on that topic.

Yes. Thanks, Bob. I guess before we answer on the fourth quarter, I think I'll spend a minute on the quarter that just passed to give some perspective. So if you look at the first quarter, we actually posted constant currency growth of 4%. Now what we need -- what we're trying to do as a management team is step back and try and see the wood from the trees to understand what the underlying business was doing outside of all of the impacts. So the 4% constant currency growth, we had an impact of around $9 million in the shipping day, with 1 less shipping day. And I think if there was ever a year to have 1 less shipping day in the first quarter and get it back in the fourth quarter, this is the year, and we also picked up an additional day in the fourth quarter to address your question. And then we had an $11 million impact from COVID-19 in the first quarter. And we had about $5.5 million, $6 million of an impact because of the sterilization issue that we had in Atlanta in the quarter. So if you strip all that out and try and look through all of that noise to the base business, you actually have a business that grew at 8.2% in the first quarter, excluding those items. So I think that the fundamentals for the end markets that Teleflex are in, the fundamentals for the business growth that we saw and, in particular, one of our big growth drivers, UroLift, in the first quarter, it grew -- through the first 2 months of the quarter, it grew 38%. And but even that doesn't tell the whole story. January, it grew 30%. In February, it grew 47%. So we were building nice momentum as we went through January and February, and then we hit the impact of COVID in March. And of course, we had a decline of 3.3% in March. So that's the way we try and look at the business. Now to answer your question about when things will begin to return to normal, and in order to answer that, we also need to look at what stuff are going to happen and what we expect to happen as we get bill momentum through the years. So what we always expected to happen ending Q1 and entering into Q2 was, early on in Q2, we anticipated that we would continue to see orders for respiratory and vascular products. And then as we saw the flattening of the curve, what we anticipated was they'd go back to a normalized level. That might sound like a bad thing if I wasn't going to tell you what I'm about to tell you right now. What we also anticipated with the flattening of the curve was that we'd see UroLift procedures begin to ramp back up. And as I sit here right now, what we expected to happen in those 2 categories is it is happening in the marketplace right now. And I think to understand what's going to happen in Q3 and Q4, it is heavily dependent on consumer confidence and the -- also, it's heavily dependent on when does the second wave and how big that second wave is. If we follow the examples of New Zealand and Korea, if we put a lot of testing and a lot of tracing and a lot of containment in place to the most vulnerable within our society, within nursing homes and with comorbidities, I think that we can minimize the impact of a second wave, if there is one. If we don't do that, then we will have a more robust second wave, and that could negatively impact the fourth quarter. Now I don't want to give an estimation as to what's going to happen in the fourth quarter, Bob, but those are the gating factors. And I can guarantee you, my crystal ball is as good as anybody's. Everybody can have an assertion. My assertion is that right now we're beginning to see some green shoots. Our body that we're party -- a part of, AdvaMed, they predict that, as of right now or in the coming weeks, 44 states are going to reopen. And of the 44 states that they identified, that represents 90% of the UroLift revenues. So assuming that they start to come back, assuming that it's a controlled second wave, then one could also reach the assumption that when you get back into the fourth quarter, the end markets should behave like they would have in the first quarter without those impacts. And don't forget, we also have 2 extra billing days in the fourth quarter. So if it does get back to normal, I think Teleflex is probably as well positioned as any company to take the benefit from it, if not better.

So lots of great detail there. I appreciate it. And I know that the longer term is really what matters here. But the kind of expectations around the pacing of recovery also matter just from -- perhaps more from a stock volatility perspective than long-term value creation perspective. But it -- I appreciate those comments because it is important. And maybe just one follow-up. And I hear your -- I mean I totally get the lack of willingness to sort of put a stake in the ground around fourth quarter for Teleflex specifically. But I was just maybe wondering, since again, you do have such a good perspective. Just again, based on all you know and all that you see, is that notion of a returning to relatively normal in fourth quarter feel like a good base assumption? And the reason I kind of repeat the question is that I'm just trying to avoid a scenario where we get excited about what happens in the next 4 months in terms of opening things back up, numbers shoot up, and then we're all expecting 5%, 10% growth out of med tech in the fourth quarter, and then we're just lowering numbers again. And I -- and again, that doesn't matter long term, it does matter near term. And I push on it a little bit and would love your -- a little bit more detail on your views because if you just like look at the record number of unemployment, and we won't have a vaccine by the fourth quarter, we have a ton of uncertainty about just logistics inside of hospitals and how you pay surgeries. And it just doesn't seem to me like a reasonable base case for the fourth quarter. I mean I hope it is. Maybe it's a better base case for Q1 or Q2, and I think we will eventually get there. But I'm just trying to avoid this getting excited in Q2, only to be disappointed in Q4 kind of scenario. So I don't know, just maybe a few more thoughts, not necessarily from a Teleflex-specific perspective but just kind of what you're seeing out there and where your confidence level is.

Yes. So the only predicate that we really have to assess that is China. So China entered into the COVID crisis before we did in America and obviously before Europe. So -- and what we're seeing right now on the ground in China -- and if you think about it, it hit the North American market with great intensity at the end of March. It hit Europe in early March, and it hit in China around Chinese New Year, in and around the second week of February. Right now, what we are seeing in Shanghai, for example, is 80% to 90% normalcy within the hospitals. And I'm not talking about Teleflex, I'm just talking about general procedures in the hospital, Bob. What we're seeing in Beijing is a little bit behind that. Beijing is at about 60-ish percent capacity right now, but ramping. So that's the only predicate we have. Now I guess China has a little bit of an advantage insofar as that they are ramping back up to normalcy in the summer months. In the states, we -- if we follow the trend that we're seeing right now, we will be ramping back to normalcy as we enter into Q3 and Q4 where we will be entering a typical flu season and getting into winter. I think there's a few gating factors that will make it to normalcy. Broader testing is key, absolutely key. If we have broader testing, we can test, trace and isolate. And if we can test, trace and isolate, then we will not be doing what you would -- you see as a possibility, starting, then stopping and readjusting all of our numbers again. We will also -- and I think government agencies have a big part to play in the recovery. Associations such as FEMA need to stockpile products and be prepared, not just on Teleflex respiratory products, vascular products, we need ventilators, we need circuits, we need IV sets, we need infusion pumps, and we need monitors, we need beds available in order to react an awful lot quicker than we did in the first wave. So there's a lot of gating factors. If all of that comes into being, comes into play, if the stimulus package is directed in the right area, we could manage a second wave much better than we managed the first wave, if it does occur. And lastly, I think we need to look at society a little bit differently in how we protect it. If you look at Northern Italy, about 70% of the deaths occurred in nursing homes, and a high percentage of the other deaths are people with comorbidities. So Bob Hopkins, Liam Kelly and Jake Elguicze, no underlying conditions, relatively fit and healthy, we need to be in one category. And then people in nursing homes over the age of 70 with comorbidity conditions, underlying conditions, and now it would seem the very young also seem to have some underlying concerns. I think if we can get that right, Bob, we can really manage the second wave. And then in that -- only in those set of scenarios can quarter 4 be what people think it may be. And if we don't, then I agree with you, it will be a series of stop-starts, and we'll be reflecting on what could have been had we managed it a little bit better.

Very helpful perspective. And I apologize for the short-term nature of the question. I want to ask another question along a similar line, except this time extend it out a little bit longer term to perhaps a much more important question for long-term-oriented investors is -- Liam, I'd love to get your perspective on kind of the medical device ecosystem as it relates to Teleflex on the other side of COVID. What changes do you think might take place? And I guess, a more -- a better way of phrasing the question is, you have a certain stated outlook for the growth opportunity for your company. When we get through COVID, do you think that the growth opportunity, as you thought it existed beforehand, is pretty much the same on the other side of it? Or because of some of the changes with COVID, whatever they might be, more pricing pressure, a different way of go-to-hospital strategies, could it be a little bit lower? Could it be greater? Just curious how your long-term growth -- or how you think your growth will be affected by COVID as we get beyond it and in the years to come?

So I think that fundamentally, after we come out the other side of COVID, my perspective would be that very little would have changed in the end markets, in our key growth drivers. So out the other side of COVID, if you look at where Teleflex is growing, Interventional Urology, there are still 12 million men in America suffering from BPH. We have still done less than 200,000 procedures with the UroLift. There's still massive market and a significant opportunity for us to continue to grow. You look at our vascular portfolio, our vascular portfolio should benefit even more post-COVID because of some instances I'm going to say in a couple of minutes with regard to what I think will be a little bit different out the other side of COVID. But vascular, we continue to take PICC share because of our coated catheter. We'll continue to grow on CVCs and Vidacare in that area. Our Interventional business, post-COVID, you still have an aging population. You still have a population that will continue to have heart attacks, will continue to need -- require TAVRs. And even though we don't -- we're not specifically in the TAVR market, we -- MANTA is a closure device for TAVR, and most of our accessories are used within that TAVR market. In Asia, the Asian population is still -- the middle class is still growing. And in Japan, you still got the aging demographics going on there. So the market dynamics within China should still continue and in Japan should still continue post-COVID. So we should still be able to get that business into the high single-digit growers. And our OEM business, especially with the acquisition that we added to it, which is a high single-digit grower with 40%-plus operating margins, we should still be able to grow that business in the high single digits. Now a few things that will change, I think, Bob -- and this extends to, in particular, Europe and North America. You just can't run a health system with intensive care units at 99% capacity. You simply have no flex. A lot of our products are sold within the intensive care units. And I've been in medical devices for 27 years, and for 27 years, the focus has been to reduce high-acuity intensive care beds. And what we've seen during the COVID crisis is that we just didn't have enough flex capacity. So something is going to have to change within the ecosystem, and it's going to require federal reimbursement help because hospitals can't have beds laying idle. They're encouraged to run their hospitals efficiently. So there's going to have to be some change with reimbursement in order to allow hospitals to have latent capacity within their -- in particular, within their intensive care unit because we don't know what the next pandemic could be. It could be a bloodstream pandemic. But every pandemic that could come would require a patient to end up in a critical bed in an intensive care unit. So that would seem logical to me. I also think that there will be stockpiling of specific products in case of a pandemic, and I think FEMA has a role to play here. I think there will be a requirement for -- and this will impact Teleflex along the lines of having respiratory products, vascular products, airway products held in America, held in countries within Europe, so that we can -- because the shelf life on these things are pretty long. So it is possible for stockpiles to be made available to protect ourselves. And then hospitals, I believe, and distributors in America will hold more inventory. They will hold more products to allow them to be flexible in the environment. And this needs to go beyond the next year. This needs to run over a multiyear period and be a strategic approach by the deliverers of care to ensure that they don't leave patients without certain products. Regarding the pricing pressure, I mean, again, in 27 years, I've never seen a market that didn't have pricing pressure in med tech. But med tech is a small percentage of the overall spend in a hospital. It's something in the region of a total of around 6%. If you want to reduce costs, I mean, you've got to make the hospital system a little bit more efficient from a labor delivery perspective and so on and so forth. And with regard to Teleflex, I think what has always set us apart is that we've been able to carve out positive pricing in that ecosystem. And the reason we've been able to do that, we have only got -- there's only 2% of our portfolio that our products -- singular products are priced at over $1,000. The majority of our portfolio, 98%, is below that $1,000. And actually, 50% of it is something like below $50 of a cost per use. So if you're going to take cost out of the system, it's difficult to find it in the low-cost product that isn't a big part of the DRG, and I think that it bodes well for Teleflex from a pricing perspective and from the future ecosystem with more intensive care beds where we sell an awful lot of our products.

That's great perspective. Covered a lot of ground there. But it is incredibly helpful. Wanted to ask maybe a couple of product-specific questions on MANTA, just maybe how your view of that product has kind of evolved given the current situation. Just maybe some thoughts on the prospects for that business in the current environment.

Yes. So MANTA, for those that don't know, is our large bore closure device for, in particular, TAVR and EVAR procedures. It's the first and only single-use device approved in the U.S. market. It is -- has excellent clinical outcomes, so it reduces major complications by 70%, and it reduces the mean time to closure from that 12 to 20 minutes, right down to less than 20 seconds. So it saves time, it's more efficient and reduces major complications. And major complications will cost a hospital $18,000 according to a recent JAMA report. So we do save the ecosystem money. We had converted -- the global market for this, we estimate to be $200 million to $300 million. So if you take the midpoint of that at $250 million, we had converted around 4% of the market last year, mostly in Europe and with some revenue coming from our limited launch in North America in -- for 0.5 years last year. As we went into this year, 2020, our goal was to convert 8% of the market. So basically, to go from around $10 million or $11 million to $20 million, $21 million. And through January and February, we were doing really well. The product was absolutely doing well, and it had exceeded our expectations. So if you took January and February, and if you pro forma-ed that $250 million market over those 2 months, we had actually close to 6% penetration of the market after 2 months. And obviously, then we saw procedures drop-off in March as TAVR procedures were postponed. Now in the short term, what stands to us is that our growth within the first quarter, 80% of it, was coming from existing users that we had converted in our limited launch -- in the previous limited launch in Q2 and Q3. In the longer term, it is proving to be broadly adopted within the TAVR centers in particular. Well over 80% of our procedures in Q1 were coming from TAVR procedures in North America, and that's very encouraging for us because, obviously, that's a faster-growing market. And it's a market where we think we bring the best clinical outcomes for the patients. So still very excited about it. There's no doubt, Bob, but it was negatively impacted in the last month of the quarter. For example, if you look at our order rate for the previous weeks, and then you look at the order rate in the last 2 weeks, it dropped off by 35% the last 2 weeks compared to the number of weeks before it. So -- and we would anticipate that, that would continue. For much of the second quarter, we would see reduced rates. But then we would expect to see TAVR procedures begin to return as we get through this quarter and continue to ramp through Q2 because the long-term negative impact for patients that need to a TAVR procedure are far greater than the risk of a patient contacting COVID while they're in the cath lab.

So you haven't started to see that business rebound yet. It's still down as much as it was a couple of weeks ago?

Yes, the green shoots that we've seen, Bob, are really in the Interventional Urology business, the UroLift so far. Our expectation is that Interventional Access will come a little later. And we're watching Edwards pretty carefully to see what they're seeing because they're the market leader clearly in the TAVR market. And then we would expect our surgical procedure to come thereafter. So your question -- you're correct, we have not seen that yet. But we do anticipate that later in this quarter, we would expect that to begin to come back.

Okay. And then last question before we run out of time is just a quick update maybe on the supply chain, both in terms of your ability to kind of manage through the kind of the next 3 to 6 months and then any changes you might consider to your supply chain longer term and specifically asking about India and Malaysia.

Absolutely, Bob. So Malaysia is now up to 100% capacity. The government changed their order and allowed us to go from 50% to 100%, and we are currently running at 100%. We have 2 small factories in India, one in the South, one in the North. The one in the South is at 60%, and we expect to ramp that to 100% over the coming weeks. The one in the North is around 40%. And again, in the coming weeks, we expect to ramp that to 100%. And so we don't see any supply chain disruptions as a result of either of those. We had enough inventory in the system in order to cover us as we got those facilities back up and running. Our footprint and our supply chain has been an area of focus for Teleflex, not because of COVID, but over the last number of years, as we try to consolidate into strategic existing sites, in particular, in places like Malaysia, Czech Republic and Mexico. That will continue to drive that cadence, and we'll continue to drive efficiencies in these areas. And we would be doing that regardless of COVID. I think the COVID crisis has given us an opportunity to build up some inventory of the UroLift product. We were down to 10 to 15 days of inventory, and we would try to hold 6 weeks for fast-moving products, but this was growing so fast, we had difficulty in building enough inventory to hold it on the shelf for contingencies. And we're taking this opportunity with a slowdown in Q2 to build about 6 weeks of inventory and to be prepared to recover quickly once these procedures start to reoccur as they're beginning to right now. And if that continues, we'll be well positioned to take advantage of that with the inventory that we will have built.

And then maybe I'll sneak in just one more. You guys do appear to have some flexibility on your balance sheet, and liquidity position seems good. Is -- are there opportunities that you see out there? Or is there just kind of too much uncertainty to go try to be proactive from a strategic business development perspective?

So any tuck-ins are go-directs that we would have been working on and we've continued to work on. We've also kept in contact with any opportunities larger than that, that we may have been engaging with pre-COVID. Obviously, our leverage is a distinct advantage to us right now. From a liquidity perspective, we're at 2.6x. Our strictest covenants restrict us to going above 4.5x. So we're clearly in a good place with regard to breaching any covenants or anything like that. I think in the short term, we would like to see a -- some sense of normalcy the other side of COVID. So I'd like to see what's going to happen as we ramp and go through Q2 into Q3 and ensure there wouldn't be a significant resurgence of COVID. But in the medium and longer term, I think this is an opportunity for Teleflex. Our leverage is in a good place. And post-COVID, valuations are probably going to be more realistic than they were pre-COVID. And post-COVID, I think a lot of companies may reflect on an IPO market that might not be as welcoming and therefore, an opportunity to exit to a company like Teleflex as a serial acquirer could be a nice opportunity. The investors should expect us to continue with the discipline we've always demonstrated when it comes to M&A. Good quality M&A, driving longer-term investor returns, solid growth, good margins, and that's what the investment community should continue to expect from Teleflex moving forward.

Great. Well, this is -- I mean I really appreciate your opinion, Liam. This has been a great discussion. Lots of data points to chew on. Unfortunately, we are out of time. But I appreciate your willingness to come converse with us during a crazy time. And unfortunately, that wraps up this fireside chat with Teleflex. So again, thank you for being here. I really appreciate it.

Bob, thank you very much.

Okay. Thank you.