Teleflex Incorporated (TFX) Earnings Call Transcript & Summary

Good afternoon, everyone. I am Chris Cooley. I'm the Senior Medical Device Analyst here at Stephens. And on behalf of Stephens and myself, I want to thank everyone for joining us here virtually this year at the Nashville 2020 Investment Conference. We're honored to have the executive management team from Teleflex with us here today to help us kick off our conference today. So joining us, we have Liam Kelly, Company's President, Chief Executive Officer and Chairman; we have Jake Elguicze, the Treasurer and Vice President of Investor Relations; and John Hsu, who's the Senior Director of Investor Relations, all with us. We're going to follow the standard format that we've always used, even though we're virtual. We're going to have a good time, even though we're not live here in Nashville this year. But I'm going to ask Liam to provide a brief overview of the company for those that may not be familiar with Teleflex, and then we'll jump right into Q&A. And I just would remind everyone that you can submit questions to the management team via e-mail, just send those in via the link, which you'll see there at the bottom of the screen. So with that, Liam, Jake and John, if you want to just maybe provide us a brief overview. And again, on behalf of Stephens and myself, thanks so much for joining us here today.

Thanks, Chris. Thanks very much, and thanks, everybody, for your interest in Teleflex. As a brief overview, I would say that Teleflex is a diversified pure-play medical device company. Last year, in 2019, we did approximately $2.6 billion in revenue, and we have been positioning the company from a medium growth company with margin expansion to a high-growth company with margin expansion. Traditionally, our growth rates have been in that 3% to 4%. And more recently, we laid out a long-term plan for the company to grow 6% to 7% on the top, to expand our gross margins to 60% to 61% and to expand our operating margins to 30%, 31%. And we were well on track. We were 1 year into that 3-year plan. And as we all know, then we met with COVID. Now I will have to say that even with the impact of COVID, if we eliminate the impact of COVID from our business and we try and see the wood from the trees and are our growth drivers delivering in the way that we expected, they are. Through the first 3 quarters of the year, ex-COVID, we have grown in that 8-ish percent top line growth. And in the third quarter, even with the impact of COVID, our gross margins in quarter 3 were equivalent to those in Q1, which we were quite encouraged by. We still believe that those longer term plans are the right goals for a company like Teleflex. The question we need to answer is when do we get there, not if we get there. And our key growth drivers have been clearly the: UroLift product that we acquired in 2017; Interventional Access, which is also part of an acquisition, VSI, that we did in 2017; our APAC business, our Vascular business and our OEM business. And most of those 4 out of the 5 have one thing in common, they're all accretive to our longer term gross margin goals. And therefore, that's why we're getting leverage within our income statement once we get back out the other side of COVID. So with that as an overview -- and one last growth driver, I guess, I should mention is Z-Medica, which is one -- just a recent acquisition that we announced signing, and we're expecting to close late November or into December. So with that as an overview, Chris, I think we'll turn it over to Q&A. I'm sure investors are dying to hear your perspective on the Teleflex story.

They want to hear yours, Liam. But I will start with a couple of questions. And again, to remind everyone, feel free to please submit your questions directly via the link. But maybe let's just start off and get kind of some of the housekeeping ones out of the way to begin and, more specifically, let's be [ myopic ] and think about the 4Q guide, let's unpack what is and isn't comprised within that. I know the company provided a baseline of a negative 3% to 4%, even though the October growth was flat year-over-year. And we also then, against that, have 2 extra selling days this quarter. We have a little bit of a lift from favorable FX. And so when we kind of true it all up, help us think about what kind of gets into that low single-digit organic growth guidance when we think about the 4Q, which excludes Z-Medica?

So our direction to investors from the third quarter into the fourth was -- we really took the third quarter as our jump-off point. So if you look at the third quarter, and I should say, excluding the impact of COVID, in the third quarter, our business grew by about 8%. And we had a couple of onetime events like a go-direct in Japan that had a negative impact on a recall. And actually, if I also excluded them, we would have grown at about 9%. So we're actually showing nice progression within our top line growth. But notwithstanding that, COVID is a reality of business. And with that reality, in the third quarter, we actually declined by 4%. Now we did show a nice progression within the quarter. As we look through the quarter, in September, we declined by 2%, which was much better than July and August. So obviously, we made nice progress. And as we went into October, we had said that we were pretty much flat. Actually, October was modestly positive as an entire company. So that was a good sign for us as an organization. Having said all of that, we have been cautious with the upswing in COVID cases as you go into the fourth quarter. So what we did with the -- the advice that we gave investors was, we would see a modest improvement over the negative 4% that we saw in Q3, in Q4, excluding the billing days. But then if you include the billing days, the billing days should add about 3%, which should bring you back to neutral. FX is working in our favor, so that should help. And also, we did not include Z-Medica in that perspective. I would also point out, Chris, that we also did not build in any upswing on UroLift based on the DTC. Simply, we don't have a run rate to understand what that impact could be. Are we positive on the DTC campaign that we're running on Europe? Absolutely. Are the early signs positive? Absolutely. Are patients coming through our website and through our call center to get connected with urologists? Absolutely. Are urologists asking to be trained? Absolutely. So there are some positives there, but it's really difficult for us to include that in a perspective for the fourth quarter. And given the rising cases of COVID, we felt that we should be more cautious than aggressive in directing investors into the fourth quarter. And I think we were probably prudent in that approach. And I think many other companies, I'm sure you're going to hear it over your conference, a lot of companies are moving to the Teleflex thought that might have been a little bit more aggressive than we were at the end of Q2.

I appreciate that. And so maybe just to put a little bit finer view on that, when we look at consensus right now on The Street, essentially implies about a 1% growth rate year-over-year. So rough math, it looks like The Street is landed in appropriate ZIP code when we just think about the components of the guide that you've provided.

Yes. I mean we don't normally discuss an external consensus number. But given our guide, that would be fairly consistent.

Understood. And I just want to touch base on Z-Medica as well. I'll go into more detail on that, I'm sure, in the call a little bit later on. But that, as you mentioned, is to close during the fourth quarter. Anything that's changed in that regard, if we think about maybe from COVID or just timing relations there? Or Z-Medica still looks like it's on track here for the fourth quarter for the close?

Yes. So Z-Medica looks pretty much to be on track. I don't believe COVID is going to have a significant impact on the close. And actually, what's really nice about this business, it really fits into our thought process of emergent procedures. This product is used in trauma cases. And therefore, the number of trauma cases, regardless of whether it's COVID or non-COVID, are pretty consistent. And what I like about this business was even as we went through COVID, it didn't have a significant an impact as it did on other parts of our business. And that's always encouraging to see this type of a product that is right down the fairway from a Teleflex perspective in regard to emergent procedures, non-postponable procedures. And we were thinking that way long before COVID. We were thinking that way based on economic cycles that we saw out there in the marketplace and also a product that will benefit being in the hands of Teleflex because of our global footprint.

Superb. So if we maybe take a step back, you touched on this earlier, and I applaud you for this, you all were consistently and early in indicating that you thought it would be early calendar '21 before all surgical volumes started to get back to more of a pre-COVID level. And with the rise that we have been seeing, unfortunately these last few weeks, that view looks increasingly prescient. But help us think now, we have Pfizer, with Moderna out today, Lilly with some antibodies, has your posture on how you looked at the back half of this year changed at all based upon the news? I realize these are all news items to date that have yet to be implemented in the end markets. But does this maybe give you a little bit more optimism as we start the calendar year, maybe for the 1Q more so than here in the fourth calendar quarter?

Yes. So -- I mean I think -- to your earlier comment, I think due to our diversified portfolio, we are pretty close to many areas of the patient care, which gives us, we believe, pretty good insight into what's happening. And that's why we were probably a little bit more conservative than others just based on what we saw and, of course, the rising cases are worrying, and -- when we see what's happening in Europe and happening in the United States. Asia seems to be managing pretty well, though, as a general statement. I agree with you that there are very positive developments, especially with Pfizer, Moderna, Eli Lilly and so on and so forth. I mean to have an efficacy rate for Pfizer of 90%, Moderna at 94%, I wasn't expecting that. That's incredibly encouraging, in my mind. The standard flu vaccine on any given year moves from 40%, 50% to 70-plus percent. And to have this type of efficacy is very encouraging. Having said that, it still doesn't alter my thinking that it's going to be earlier in 2021 before we really get to see a recovery. We need to go through emergency authorization approvals for these drugs. We need to get them broadly dispensed. I think that as long as we are thoughtful in how we dispense them, the elderly, health care workers, so the patient population can feel confident going into that hospital being treated by a health care worker who has had the vaccine. And I think that hospitals would probably make it a must-do for their workforce to have taken the vaccine in order to be able to treat patients. I think then the patient population early in 2021 with a vaccine getting rolled out would feel more and more confident in going back in and having those procedures done. And also, as you get through the year, as the weather improves, you'll see COVID do what it normally does, start to relapse, people start to move outside, then you have a vaccine. So all in all, I think it still bodes well for what we've always said in regard to an early 2021 recovery back to pre-COVID levels.

Okay. That's really helpful. And then maybe kind of following along then we -- looks like we're going to have a new administration in the White House here in the start of the year. COVID may or may not be on the wane. Hopefully, it's on the downside here with some new vaccines in the making. Do you see your -- I'm curious, what do you think the key priorities are of your core customers? And when we think about that as both the acute care providers, the ASCs and the surgeons, I don't know if you want to break it up amongst them or just do it in the aggregate, but I'm just curious with the changes that we're seeing take place, when do you see some of the key priorities being for your end markets here over the next 12 months? And how, if at all, has that changed the way you go to market in those key channels?

So I don't think it's going to make an abundant amount of difference as to how we go to market. The method of which we go to market will be more digital in the future than it has been in-person, in particular, in some of our key products. I think if we look at the customers in different buckets, if you look at the customers in the hospital system, they, I think, are really looking at how they can continue to operate over the next quarter or so in the COVID world. And I think that they're managing these patients much better this time. You don't hear right now the same outcry for ventilators as you did hear in the first instance. Now why is that? That's because they're treating patients better. They're treating them differently. They've got more knowledge of the COVID virus, and they realized using other treatment modalities, rather than going straight to a ventilator, gets much better patient outcomes. What's very encouraging is the fact that now -- in the initial stages of COVID, the death rate was about 3% or 4%. Now the death rate has gone down to 1%. That's really down to the hospitals and the systems treating them better. And what the hospitals are really working on doing is now addressing these procedures that have been postponed. Procedures cannot get postponed for a long time, and I am very, very comfortable that we will not go down -- go into lockdowns in hospitals again during the second outbreak of COVID. Then if you look at the step down areas, the ASC and the office, there's an advantage there because patients feel much more confident going to these areas. And we even see that in our UroLift business where we're seeing patients about a 4% swing from the hospital to the ASC and the office. And that makes logical sense because patients feel more comfortable getting treatment in that area. And we think that's an opportunity because we are agnostic as to where the treatment takes place. And if we move more patients to the ASC and the office, we think there's an opportunity there for UroLift to continue to come back out the other side of COVID much quicker than most procedures, and we've already seen that with the 11% growth in Q3. So the only change that would happen in Teleflex structurally would be the use of more digital tools, I think, to engage those customers over a period of time. But some of the high-touch products will always need somebody there in the hospital or the office of the ASC having a conversation with a doctor.

I appreciate that color. Let's talk about UroLift because that's probably one of the most exciting product lines that you have right now. You've got UL2 launching in early calendar '21, and that period is looking increasingly more positive just from a macro backdrop now. Help us think a little bit about the growth rates because UL2, you have a broader label. You have greater ease for the clinician now. Does UL2 actually accelerate the growth rate ex-COVID in terms of adoption? Or do we just think about that more as an incremental driver that -- and more so from a margin perspective? I think historically, you all have talked about 400 basis points approximately of the gross margin line. So does it accelerate the growth of adoption? Or is this more just continued growth with much better margin?

So I think that there are a number of growth drivers for the UroLift, and this growth can be captured in many different ways. The UL2 is -- it makes the procedure easier for the urologists to perform. It's easier to use. It's got better visualization. And importantly to us, it reduces our carbon footprint. It will also reduce the carbon footprint of the actual urologist itself, as we reduce the waste by -- in the region of about 50% to 60%. I don't see the UroLift 2 as an accelerator to the top line growth, but it will expand our margins by about 4%. And those familiar with Teleflex will know that we did approximately $300 million with the UroLift last year. So that will give you an indication as to what it can do to our company from an overall margin expansion perspective. The growth drivers for UroLift, I see, as multifold. Number one, the number of men in the United States with BPH is 12 million. We've treated just over 200,000. So we've only scratched the surface. Again, sticking in the United States, we've only trained 3,000 urologists out of 12,000. So therefore, that's a nice opportunity for growth. Again, in the United States, the urologist does on -- our average urologist does 4 treatments in a month, but that same urologist is seeing 75 unique BPH patients in that month. And that's where our direct-to-consumer campaign comes in because we feel it's our responsibility to raise awareness to the patients that the UroLift is a viable procedure. Then if we pivot to some of the other growth drivers, it's really -- a lot of the other growth drivers are overseas expansion. So you take Japan, the U.S. is a $12 billion market, Japan is a $4 billion market. We will be generating revenue in Japan in 2021. Late in 2021, we would think that we'd be able to generate revenue in France as the clinical study finishes in France. And then as you get into 2022, you'll see geographies like Italy, Spain come on board. Then after that, you'll see China and Germany come on board. So we have significant opportunity to expand this product globally. As I said earlier, there are 12 million men in the United States that suffer from BPH. There are 100 million globally that suffer with this condition. So we have a massive opportunity in front of us, very strong IP and a wide moat behind us. So we'll continue to build this out and make this a standard of care for the treatment of BPH.

Maybe just a quick follow on to that. When we think about the expansion of the direct-to-consumer efforts that you've put forth here very recently, obviously, you've had great response to that. Could you maybe just remind us what you're seeing in terms of the response rate on the new DTC initiative? And also, does that initiative provide a way to help you shorten the time line from awareness scheduling for the exam and then actually converting to a procedure? Just help us think maybe how that time line has changed since you launched the original UroLift?

Yes. I mean that's a really good -- great observation. So the UroLift product, when we launched it only a few short years ago, there was 0 awareness of the product in the marketplace. Our research tells us that less than 5% of men today are aware that UroLift is a possibility. So the first thing we wanted to do is set about getting what we call the catcher's mitt. So we've got 3,000 urologists trained, and they are now available to do the procedure with these patients. We granted multiple regional campaigns over the last number of years to get an understanding of the dynamic that would allow us to accelerate patient awareness and then the utilization of the UroLift based on that patient awareness. And as we look at it, to shorten the cycle, men have to be going into the urologist practice asking for the UroLift. So the DTC campaign has had a significant impact on that, insofar as we now have a 150% uplift on the traffic coming to our website. In August, for the first time in the history, the Google searches for UroLift were greater than the Google searches for TURP, which up to now has been seen as the gold standard. And we do track the number of patients that go on to our website as a direct result of clicking after the ad to look for a doctor. We do monitor the number of patients that go through our third-party call center and are put through to a urology practice. And I'd tell you because I won't disclose the numbers for competitive reasons, but it is very exciting. And the number of urologists that are now coming to us looking for training because patients are going into their practice, that, for sure, will shorten the cycle time to bring a urologist onboard and also shorten the cycle time post-COVID to a patient opting for the procedure, getting it booked and getting the procedure done in a shorter period of time. So all of those make us really, really confident that the DTC is working and will continue to work in the post-COVID era even better.

Right. Let's keep talking about new products because that's always fun and that is, I think, part of the Teleflex's growth story going forward. You have a nice portfolio out there today that are ramping up. When we think about, in particular, MANTA and then you have RePlas, of course, on the frontier later on. Could you just maybe update us first there on where you are in both of those and then similarly, others in the pipeline? Just both in terms of the ramp on MANTA now and similarly, just an update on RePlas as well in terms of timing?

Yes, absolutely. So MANTA in the third quarter in the U.S. market performed exceptionally well. As you know, we just started to get back into a growth profile in North America in Q2, having had the impact of COVID. And in the third quarter, we saw MANTA get back up into that 30-ish percent growth. Not quite to where it was before COVID, but at least we're making progress in the right areas. And of course, it was a contributor to Teleflex as our entirety, in the month of October, getting into that positive growth in the month of October. So MANTA is progressing really well. Interventionalists will allow us access to the cath lab to do training on this product because they see that it's an innovative product. So I think it is, for sure, going to be part of our growth story over a multiyear period given how well it's performing even in the midst of COVID. Any products that can grow at 30% in the midst of COVID can surely do significantly better at the other side. With regard to RePlas, or EZPlaz is its new name today, we've had really constructive meetings with the FDA and the military. We've decided that rather than go for an emergency use authorization, we will now proceed down the root of a BLA submission. This is better for Teleflex and better for our patients because it will mean that we will also get approvals for not just the military but we get approvals for civilian at the same time. So we're going to work through that BLA submission process with the FDA. And then they don't tell you what a fast track means. A normal track is about 9 months. But once we get that submission in, then less than 9 months after that, we should get approval for that product. And I know we mentioned Z-Medica a couple of times, but this is like playing chess, where you're trying to think 5 moves ahead on the chessboard, and that's what we're trying to do. We're working through EZPlaz. We've got the EZ-IO and that whole portfolio of products. And now we're going to add Z-Medica to strengthen that call point. And they all have a similar channel, they can all augment each other in that final sales process. So the timing looks really, really good to bring in Z-Medica, submit a BLA for EZPlaz and have this whole suite of products there available for that really strong call point of emergency medicine and military, which is a strong call point for our organization.

Got it. So we haven't really gone into Z-Medica yet. So probably now is the best time for that. You offered $525 million for that business. I think you've talked about the upper bound of guidance, roughly $70 million in revenue and $0.15 in incremental earnings in 2021. This really, though, looks much like a Vidacare or other previous acquisitions where we've seen a lot greater leverage than what you initially articulated, which I think it's always been a little bit of a hallmark of the company. What, outside of that portfolio, gives you confidence, just outside of the breadth of the portfolio, gives you confidence that there's great opportunity here to integrate and move forward with Z-Medica at this time?