Teleflex Incorporated (TFX) Earnings Call Transcript & Summary

Okay. Good afternoon, everyone. Thank you for joining us today at the Raymond James Human Health Innovations Conference. We're extremely pleased to have Teleflex joining us for our virtual fireside chat. With us today is Tom Powell, who is Executive Vice President and Chief Financial Officer. We have Jake Elguicze, who is Treasurer and VP of IR; and then John Hsu, who is the Senior Director of Investor Relations. So welcome, gentlemen. Thank you for your time today.

So Tom, let's start off. And we'll kind of spend the first several minutes of the chat here, a little bit big picture and, obviously, focusing a bit on the pandemic and the implications there. So firstly, I recognize at the time of your 1Q results, you really didn't provide any quantitative metrics on how the business performed in April. Other companies that have reported calendar 1Q results have indicated that they expect April to be the low watermark for the year with a rebound of procedures beginning in May as states initiate reopening activities. We've clearly seen and heard, and I'm sure you guys have as well, that surgical procedures are starting to come back now. And I guess, Tenet yesterday indicated that they are somewhere around 90%, 95% back on their surgical procedures. So just wondering if you can provide any color on your thoughts on the progression of the business with April and May now behind you? And would you concur with what you're seeing that procedures are rebounding nicely here?

Okay. Well, why don't I start with just talking a little bit about what we saw in the first quarter and how we transitioned through kind of that April, May and to where we are now and what we expect for the future. If we go back to the first quarter, our business was doing quite well. And we saw all of our businesses overall tracking in line with our expectations. Margins were aligned as were earnings. And so initially, our expectation was that COVID would be limited to the China market. But as it became more of a global pandemic, what we saw was hospitals being in a position where they postponed nonemergent procedures. And as a result, we saw declines in our interventional urology, interventional access and surgical businesses. Now somewhat offsetting these declines, we saw increases in the sales of our respiratory and vascular access products. And then another portion of our portfolio actually tied to critical care in nature, their revenues really hadn't been impacted at all. So that's kind of what we saw as things were developing. As we think about the second quarter and the remainder of the year, we expect that we'll continue to see elevated ordering patterns for respiratory and vascular access products until the new infection curves start to flatten. And then as more countries and states reopen and additional nonemergent procedures begin to be performed, we expect that we begin to see improvements within our interventional urology, interventional access and surgical business. And this is largely what we're seeing. So we would agree with the point that we are seeing a return to more normalcy. So we're seeing sequential improvements in the revenues for those businesses that were impacted. I would say that interventional urology is perhaps leading the way, as you can expect, just given the fact that, that procedure can be performed outside of the hospital, either in the ASC or perhaps doctor's office. But we're also now seeing those procedures coming back into the hospital, where we're seeing some strength in hospital there as well. So if you understand the impact, just let's talk about UroLift, which was most severely impacted. As we started the year, that business was doing very, very well. Interventional urology grew by 30% in January. It's up 47% in February. But once the COVID hit, we saw a 50% year-over-year decline in the last 2 weeks of the first quarter. Now we've since seen a rebound. So I guess I would agree with the point that kind of that end of March through early April was the low point, and we've seen steady progress since then. Now I'll say that we've seen green shoots. We're not out of the woods yet. There's still more work to be done to get back to more normalized state, but we are encouraged by what we're seeing.

Terrific. I'm pleasantly surprised and happy to hear that you're seeing some activity in the hospital setting. I certainly would have anticipated ASCs and doctors' offices coming back soon or first. But any comments around just what you're seeing relative to the procedures getting done in the hospitals? Is there a geographic theme to think about? Or -- I'm going to assume that states, for example, in the Northeast, may lag a little bit. But anything that you're seeing that you could comment on across the country that would help frame that.

Well, I think that's right. And that's not to be unexpected, is that you're going to see a faster recovery in those states that, frankly, are better positioned for a recovery, and some of those where the infection rate was low to begin with or we've seen a steady decline of new infections, you're going to see those recover more quickly. And so to your point, the exact stats aren't in, but we expect that to continue to be the trend where those types of states are recovering more quickly than perhaps the New York Metro or Philly, Boston markets.

Got it. Okay. Perfect. So one thing I've been thinking a lot about is, so it's quite clear from a variety of data points that we are seeing surgical procedures that were deferred rebounding. I think it's encouraging that some of our conversations indicate that it's not just canceled procedures, that there's actually new patients coming into the funnel, which I think is important to see as well. One thing that I've been trying to think a bit more about is sort of the fourth quarter. And I think there are a variety of schools of thought whether the fourth quarter can actually get back to historic levels, maybe even grow. I'm more of the opinion that I'm not sure that we get back to those levels by the time of the fourth quarter. But just any thoughts as sort of broadly speaking, how you're thinking about the fourth quarter as we kind of see this ramp up? And really come relative to what would be considered to be perhaps a normal period of time for you?

Well, as we think about the business, we don't have visibility quite yet to exactly what's going to happen in the fourth quarter. But with that being said, it would not be our expectation that come the fourth quarter, we would necessarily see everything at a normalized level. I think you're going to see some procedures coming back more quickly than others. I would expect, as mentioned, that the UroLift procedure would come back more quickly than perhaps some of the surgical or interventional access-oriented procedures and products. But that being said, we don't know exactly what's going to happen. And I think it's going to take some time to get that clarity. I have heard a number of questions about will there be potentially a bolus factor, if you will, where we're seeing a spike happening now; and as a result, we're going to see a fall off come in the third or fourth quarter. And as we look at that and we think about our own particular portfolio, I'd say that as we move out into the year, respiratory and vascular have seen a step-up in volumes as a result of those products being used to treat COVID patients. We expect that to return to a more normalized level as the infection rates decline. As mentioned earlier, other parts of our portfolio are tied to intensive care and really haven't been adversely impacted. So I'd expect those to see or to be more in kind of the normal run rate, if you will. So those 2 segments, perhaps as planned. We're going to have to see what happens with those other areas that were impacted. I would say that we're seeing sequential revenue improvements and things are looking promising, but we're going to have to see. Now as for this bolus factor, we think, if, in fact, there has been a spike recently as we're making up for some of the procedures that were put off, we think we can manage through that. If you take UroLift, for example, we think it will continue to recover. If you think about the market size, there's 12 million men right now who are engaging with their urologists regarding BPH. So there's a very large pool to draw from. I would say the reimbursement is attractive and the urologists have indicated that BPH treatment is 1 of the top 4 procedures that we'll focus on. And this is based on a survey we've done with a number of urologists. The procedure doesn't require general anesthesia or intubation. And we have plans to resume consumer marketing this summer with direct-to-consumer campaigns focused first on a regional basis, and assuming we're getting the uplift that we expect and makes those investments profitable, we'd continue to move forward with a potential pilot national DTC program later on in the year. So again, there could be this bolus factor, but we think it's manageable. Our expectation is that we'll continue to see steadily improving trends in those businesses that have been adversely impacted. And those that haven't, we'll see those trending in line with our expectations. Now again, I put out the caveat there, this is assuming there isn't a large resurgence of infections from this fall and winter.

Yes. Okay. No, that's very helpful. One thing that I wanted to touch on and you sort of alluded to it a little bit was UroLift, in addition to the sales mix, has reduced some of your exposure to distributor-driven revenues in the United States. But some of that -- some of those distributor challenges have come up with stocking and destocking, et cetera. And I'm just wondering, if the COVID pandemic exacerbates some of that to some extent, should we be conscious or cognizant of some potentially odd distributor stocking patterns going on?

Well, I will say that given the kind of surge in demand for some of the products used to treat patients with COVID, we have seen supplies and inventories being drawn down. And so as a result, the channel is lean on those, and there's going to be a need to rebuild that. I would say overall, Larry, we don't expect a significant fluctuation one way or another as we move through the year. There may be some movement. We've talked about in the past that kind of the impact potentially coming out of the flu season is maybe a $5 million to $10 million swing. So there could be some impact, but I don't think it's going to be all that significant and manageable. As we look at kind of what happened to us, actually, we've had greater sell-through than we sold in to the distributors. And so if anything, maybe there's a little opportunity to restock, and that's in part due to, as I mentioned, the strong demand for some of our respiratory and vascular products as a result of using those in the treatment of patients with coronavirus.

Okay. Great. Just a quick update on the -- on, Tom, how you're feeling about the supply chain and your ability to keep your manufacturing going. I believe that you manufacture in Mexico, and there is some incremental challenges there. But again, just -- maybe just provide a quick update on how you're feeling about the supply chain from your seat?

Okay. Well, we have not yet seen any major disruptions to supply as a result of supply chain challenges. As we talked on our first quarter earnings call, the governments of Malaysia and India required us to limit or shutdown manufacturing for a period of time. That's now been reopened, and we're back and operating in those 2 regions. We have had some disruptions where employees became ill in other facilities. And as a result, we've taken steps to quarantine and take care of those issues. But overall, we have not seen a disruption in our supply as a result of COVID-related shutdowns. Now we'll hope that continues. But we have, as an organization, taken steps to protect our employees and to prevent the spread. So we've taken all of the precautions outlined, and we're doing things such as social distancing and creating more teams that work together, and we're splitting shifts and taking all the necessary steps to limit the potential impact. And as mentioned, nothing significant has come about as a result. Now as a result of some of the increased demand in some of the product offerings, we have seen back orders increase. And we've had to actually limit allocations to customers as we work through the increased demand for some of our product offerings, but we continue to do everything we can to supply those products as quickly as possible.

Okay. The one thing that strikes me about Teleflex as an organization throughout the entire pandemic is you have operated remarkably well. You've been able to pivot, address the challenges and certainly, from an outsider looking in, have very effectively gotten through this situation. And hopefully, things get easier, not more difficult. One thing I wanted to ask you about, Tom, was, as the organization has adapted to this, what parts of the organization do you feel come out stronger the other end of this, whether it's in the ability to capture more cost savings or work more effectively? Sort of what comes out here that actually is a positive from this experience and that's durable, I guess?

Sure. Sure. Well, I would agree. I think the company overall has done a really good job in responding to the pandemic. We are fortunate that in the fall of 2019, we took on a major effort to revisit our business continuity, contingency planning. And while we didn't specifically update protocol for a pandemic, we had the framework, which would be drawn and very quickly implemented. So we put in crisis management teams at all of the various sites and empowered them to make decisions at the site level and respond quickly. And so I would say that having that framework in place really is something that works well, and it can be used not just for this crisis, but for others as well. I'd also say that we have effectively found a way to work either from a home setting or modified setups in our plants and DCs. And I have to give employees a tremendous amount of credit for the flexibility and creativity that they've demonstrated because there's been a lot involved. You can imagine somebody who is used to sending their kids off to school and going to work. And suddenly, the 2 working spouses are at home with 3 little kids, and people have found a way to make it all work. And so it's really impressed all of the senior management as to just the flexibility of the organization. And frankly, it provides the opportunity that maybe we can have a more flexible work environment going forward. And we've made some technology investments that will benefit us in the future in terms of providing that greater workforce flexibility and candidly, greater business continuity planning and capabilities. I'd also like to point out that just our portfolio, as you think about it, while 1/3 of the portfolio is negatively impacted as we saw elective surgeries get taken off the schedule; however, another 1/3 benefited from the rise in demand. And then there's a significant part of our portfolio that really wasn't impacted. So I think the recognition is that having a diversified portfolio really is important and has helped us to navigate through this. But again, I would really call out the employees who thought through the challenges and found creative solutions to continue servicing our customers and the patients.

And Larry, this is Jake. Just to add to that. I mean, I think our operations team has just done a tremendous job. I mean, I think, as you know, from time to time, just given flare-ups in potential cases and such at different like manufacturing facilities, we've had to deal with shutting down some plants for some period of time. And -- but they've done a tremendous job in navigating a very, very difficult situation. And as Tom said, no material impact at this point in time.

Got it. And that's super helpful, Jake. And Tom, to just sort of finish the thought there. So are there some cost savings that, as you look across the organization, that you think can be durable?

Well, I would say that as we approach the COVID situation, our approach was to look at cost savings that we could take out that would help offset the COVID impact but wouldn't adversely impact operations or the long-term trajectory of the business. And so we really focused on discretionary spend, whether it were travel, entertainments, conferences, some performance-based and variable management compensation. And so as you look at those, a lot of that will get put back into the equation as things recover. Ultimately, our focus was to position the company, so that it was well positioned for a rapid recovery once elective procedures resume. So for us, we are fortunate that our cash flows are strong, our balance sheet was in good shape, and we really didn't have to make any dramatic reductions to our longer-term strategic investments and plans. Now with that being said, I think there's always opportunity to find additional savings in these worlds as we've looked for areas to save money. We've identified things that, frankly, we just don't need to be doing, and we'll continue to keep that discretionary spend out of the equation. But overall, our cuts were not deep, but rather a means to reduce some cost to offset the earnings impact of COVID.

Okay. Great. Let's switch gears just for a couple of minutes to UroLift, if we could. Picking up on a comment that you made earlier, it sounds like you are seeing procedures start to pick up in hospitals. Obviously, they are occurring in ASCs and doctors' offices. What's happening with access for the reps into those care settings? Are they back in there being able to detail the product?

Yes. So as states are reopening, it's somewhat dependent, as we talked about earlier, on the location, but our reps are getting back into the hospital setting. We've resumed training to bring on new physicians for the urology or UroLift practice. So we are getting back into the hospitals and other settings.

Okay, great. Another thing that people think a lot about is obviously the economic repercussions of everything that's happened here. And I guess, technically, we've entered into a recession, who knows how long, what shape of the recovery is going to be. But one item I want to pick up on in terms of the UroLift patient mix is how do we think about the patient mix relative to those that fall under government pay, Medicare, et cetera, versus private pay? Because my sense is that, that franchise might be a little more durable from a payment perspective than people consider?

Yes, I would tend to agree with that. So as we think about the UroLift and its recovery, there's really 2 dimensions that we've focused on. One is just the willingness of the patient to go back and get an elective procedure performed. And the survey we've done with 500 patients indicated that 9 of the 10 patients who had a procedure postponed chose to reschedule versus cancel it. So there's a willingness out there. And is -- as we know, it's a very large addressable market. Now from the financial standpoint, the average age of the UroLift patient is in the mid-60s. 70% are covered by Medicare and Medicaid and another 30% from private pay. So we would expect that, that -- as a result, it's a pretty durable product offering and should be able to navigate any downturn in the economy fairly well.

Okay. Great. What about just switching gears to one of the key growth drivers for UroLift as we enter '21 and '22, which is Japan. Is there -- does COVID and the virus over there slow down your ability to get those activities off the ground and get yourself positioned for what I always thought of as a more substantial launch as you come into '21?

Well, what our approach is to launch in Japan is, first, to get the 510(k) approval on the UL2 in the U.S., and we're expecting to get that end of Q3, perhaps early Q4. After that, we'll shift our focus to reimbursement with the hope of obtaining that by mid-2021, obviously, beginning work with key opinion leaders and whatnot. I would say that, to your point, Japan is a very attractive market for us. It's a $2 billion total addressable market. We expect that the take-up in Japan could actually be a little bit quicker than what we saw in the U.S. because if you think about the insurance providers essentially are dealing with one versus all that we had to deal with in the U.S. in the 3 to 5 years. And it took the team to get to the point where we had 300 million lives covered. So it's an important market, it's a big market, and we're working to get there as quickly as possible. Right now, we haven't seen the COVID necessarily slow us down. Our first step is that we've got to get the 510(k) approved here in the U.S. on the UL2, and then we'll move on reimbursement over there. But that really won't be until months from now, and hopefully, things will settle down by that.

So I just want to make sure I'm clear, and maybe, Jake, you can fill in here. So I always thought that the expectation was reimbursement would come in the second half of '20, and you'd really sort of get going in early '21. Now it sounds like maybe that's 6 months later. Is that the right way to interpret this?

Yes. So Larry, I think because of the fact that FDA has obviously reprioritized things and resources because of COVID, we're thinking that we're going to be submitting the 510(k), as Tom outlined, then start a launch of the UL2 in the U.S. in hopefully, the very latter part of this year and then reimbursement in Japan would then come sometime next year. And then…

Okay. But it sounds like the launch of UL2 and the 510(k) approval of UL2 is the key gating factor here?

Well, we -- it's important because that's the product. We need to get the 510(k) approval in the United States because that's the product that we will be launching ultimately in Japan.

Okay. Got it. Okay. Perfect. We just have a couple of moments left here. So I guess, Tom, obviously, the balance sheet is in very good shape. I recognize that all companies are probably fiscally tighter right now. But how are you thinking about capital deployment and potential for M&A as we're sitting here in the current environment?

Well, to your point, our balance sheet is in good shape. We were at 2.6x net leverage at the end of the first quarter. So our priority for capital allocation remains as it has been in the past. So we're going to prioritize organic opportunities, whether it's restructuring programs, investments in new products, other efficiency programs as well as M&A. And we'll continue to apply our strategic and financial screens. And we believe that if we stay true to our strategy, we can create value through acquisitions. And so that's where our focus will remain with capital deployment. Now given where we are in the COVID situation, we do want to make sure that we maintain adequate liquidity and provide perhaps extra cushion. And so we're probably going to stay away from a large transaction in the near term, but we'll continue to be very active and looking for opportunities out there that are kind of a smaller or tuck-in size.

Okay. Last one for you. Is there any reason once we get on the other side of COVID that you would think that Teleflex is not a 6% to 7% grower? Is there anything changed in the algorithm? I would suspect not, but I figure I'd ask.

We don't think that there is a change in the algorithm, if you will. As we look at the opportunity out there, we believe that UroLift will recover. And as mentioned, it's a very big addressable market in the U.S. We also have opportunities in Japan and other markets where we can continue to grow. We also have the opportunity for additional growth as a result of some of our new products, whether it's MANTA or EZPlaz. So we don't see anything right now that would cause us to think that 6% to 7% is not achievable for the business going forward.

Okay. Terrific. Well, thank you, gentlemen, for your time. I really appreciate the opportunity to chat this afternoon. As always, the insights are extremely helpful on our end. And good to see everybody, and I hope everyone stays safe, and we'll be in touch. So thanks again. Appreciate the chat.

Thanks, Larry.

Thanks, Larry.