Teleflex Incorporated (TFX) Earnings Call Transcript & Summary

Good morning, everybody. I'm Travis Steed, the med tech analyst at Barclays. And next up, we have Teleflex. Liam Kelly, Chairman, President and CEO; we also have Jacob Elguicze, Treasurer and Vice President; and John Hsu, Senior Director of Investor Relations, joining us virtually here. Hopefully, next year, we'll be in Miami, but for now, thanks for joining us virtually.

Liam just wanted to kind of start off a little bit talking about some of the COVID and current trends, and then we'll move in to talk about some -- more of the fun stuff, the business outlook ex COVID. Recently reported Q4 results, I think most people came away thinking the guide was prudent, if not even conservative. I believe you're assuming COVID is about the same headwind in the first half of this year as it was in Q4, even though vaccines are coming and some states are kind of fully reopened at this point. So just wanted to kind of open it up here and you want to go and talk about what all went into your thought process around setting the guidance for this year.

Yes. Travis, thank you very much, and thanks for having us here today. It's a pleasure to be with you. I think that as we were looking at our guide for the year, first of all, we're very encouraged by what's happening out there in the marketplace. So 50 million vaccines rolled out already. Hospital systems are -- managed the second wave much better than they did the first wave. We didn't see state-by-state lockdowns. And -- but having said that, I think it's clear to everybody that during the month of January and the first 2 or 3 weeks of February, it was much worse than December from an impact of COVID. Procedures were under severe pressure, in particular, in Europe, where you had many countries in severe lockdowns. And quite frankly, they're still in severe lockdowns in Europe. My view hasn't changed in relation to the recovery from COVID. I still think it's going to be led by the Americas and Asia. And I still think that Europe is going to be a laggard, just the rollout of the vaccine isn't as efficient there, and it's a socialist health care system. So as we started to think about guidance for the year, and we really wanted to get guidance out there to the investment community. I think on a top line level, we feel really good about an absolute growth of 10% to 11.5%, constant currency growth of 8% to 9.5% and EPS growth of 17% to 19%. And we thought it was best to be prudent as we give guidance. At the time as I said, COVID cases were rising, and we just wanted to put out guidance that we were very comfortable that we would be able to achieve and try and derisk our guidance for the investment community. And in that case, we made the assumption, as you rightly said, that the first half of the year we would still have an impact of COVID, and we will begin to see the recovery in the second half of the year. Now if things get better with the rollout of the vaccine and patients come back to have procedures and if it starts earlier than that, of course, Teleflex would be a beneficiary of that, as would the investors. We get more revenue, and that will in turn lead to EPS. But we feel quite comfortable with our guidance range that we put out there. And we feel -- as always, we put out guidance that we believe will be achievable. And the other part of that guidance was that we would get UroLift back to growth in excess of 30% in this year '21 over 2020.

If you look at some of the trends late February, early March, just curious if you can share anything what customers are saying, if things are shaping up relative to your expectations. Are cases still getting canceled at this point because of COVID?

So like I said in the answer to the first question, January and the first 3 weeks of February were not pretty from a case and lots of cancellations. As we've gotten into the last week in February and the first week in March, anecdotally, we're hearing back from the market that things are a little bit better and beginning to modestly move in the right direction. There's a saying in Europe, "One swallow does not a summer make and swallows a bird that flies up from Africa in the late spring." So we -- I'm encouraged by what I hear from customers in the end markets, but I want to see a trend for the whole month of March of that improvement before I get too excited about it. And obviously, when we get to announce our Q1 results, we will have the month of March behind us. And we will assess the situation at that stage.

That's fair. And then looking at the second half of the year, you're basically assuming things are more normal. I can see a scenario where things may actually be better than normal, if there's some potential for backlog coming through. So just curious, are you talking to your hospital customers about the potential for backlog, how much capacity they can actually add on if there is a backlog of patients that want to come through?

Yes. So that's the, I guess, billion-dollar question, isn't it? When does the backlog get worked through? So as I talk to hospital CEOs and customers, they are keen to get that backlog worked through simply because there is a potential for really bad patient outcomes if we don't work through that backlog. Everybody talks about as an elective and nonelective procedures. I look at it really on a deferrable procedure and how long is that procedure deferrable before you have a very negative outcome to that particular patient. And in some categories of patient, the deferrability rate is right at the tipping point now, where we have to get some of those procedures done, especially in the world of cardiac work and so on, so forth, TAVRs, EVARs and the like. So -- and as I talk to CEOs of hospitals, what they're telling me is, it depends on site of service. Their staff are exhausted from fighting COVID. And they want to add that capacity, but they have a dilemma in that the people that work within their hospital systems are exhausted from the last year fighting COVID. And they -- and you got to give a huge shout-out to frontline medics here because they've done an extraordinary job in incredibly trying times. Now where there is capacity, as they identify it, is in the ASC and in the office environment. And I think that, in particular, for a product like UroLift, that is a nice opportunity for any of that backlog that needs to get worked through that any procedures are going to be done in an ASC in an office, I think, will be done in an ASC in an office. And quite frankly, we even saw that in the height of COVID. We saw a full 4 percentage points of the UroLift revenue move from the hospital to the ASC in the office. And I think the bolus of backlog in a hospital environment is going to take longer to work through. It's -- it will start, I think, at the end of '21, but it's definitely going to bleed into '22, and it could potentially even go into 2023.

That's really helpful. Do you have a sense for, at this point, what percent of your revenues go through an ASC?

So of our UroLift revenues specifically, we do, because that's the one product that you can do in any site of service. So we know that approximately 40% is done in the hospital, and 60% is done outside in either an ASC or an office.

Okay. That's helpful. And then just -- I don't want to think about this a little bit deeper in a bit. But thinking about the setup for Teleflex in 2022, clearly, the backlog is a wild card that you have. But you're probably going to have more normalized growth for UroLift, Japan launching MANTA, EZPlaz, Z-Medica, going organic at this point. Just thinking about how to frame 2022 in our models because there's a lot of positive tailwinds that you have going pushing it forward. So I'm just curious if you have any thoughts broadly on 2022 at this point.

Yes. So I agree with you. I think the setup for Teleflex has never been better as you go through 2021 and 2022. In the first half of '22, you're going to have a weaker comp versus '21 because COVID would still have been a factor as we know in this quarter, for sure. And all of the drivers you're talking about are the correct ones. We should have reimbursement achieved for UroLift in Japan. We should have begun the rollout in late this year. So therefore, '22, we should be ramping. We should be also ramping UroLift 2 in France at that stage. And later on that year, we should be able to bring on additional geographies in '22, such as Italy, Spain and Brazil, as an example. And then into '23, we would be looking at bringing on China. So the overseas expansion is a nice setup. Z-Medica wasn't within our portfolio. You also have MANTA that has the opportunity to continue to convert that market. EZPlaz, we've submitted the BLA. So again, we should be ramping EZPlaz in 2022 and generating some revenue and then the core drivers of Asia Interventional Access and Vidacare. And that's all you want as a CEO of a diversified med tech company. You want to have 5 or 6 levers of growth that you can pull at any stage because there's always the unknowns. Something always happens, whether it's FX in Latin America. So I really like the setup for -- as we go through '21 into '22, and indeed, '23 and beyond. Because at that stage, once we hit '23, we should have the UL2 fully converted and have the margin expansion from that in the rearview mirror and increase that mix profile as every dollar we grow then thereafter in UroLift is in the low -- or in the high 70s from a gross margin perspective. So we continue to get leverage within our income statement.

Yes. I guess 2019, you grew 8.2%; and then 2020, excluding COVID, roughly 8% as well -- 8% plus. You had an LRP that clearly wasn't applicable during COVID, but that was at 6% to 7% before COVID kind of long-term growth rate. So already achieving that excluding COVID. And I think the portfolio looks pretty good from here. So it seems like there's a pretty good runway here for kind of high single-digit growth for many years with Teleflex. Would you agree with that?

Yes. So I think that we're really confident on our long-range plan. As you rightly said, it was 6% to 7%. In the first 2 years, we beat it. And your numbers are absolutely correct. We grew 8.2% in '19. Ex COVID, we would have grown closer to 8.5% this year. So we were in a position, if it hadn't been for COVID, to be really accelerating that growth and bringing in Z-Medica. We'd give long -- an update on our long-range plan. We're planning to have an Investor Day in the fall, and we will give an update on a 3-year plan at that stage and give progress. I still think we would have gotten -- definitely, we had hit the revenue number in our 3-year plan. We would have gotten to the 60%, 61% and 30% plus if it had not been for COVID by the end of '21. And the investment community would have seen the level of execution from Teleflex and delivering to those high standards that we had set for ourselves.

Great. And wanted to dig a little bit into UroLift specifically. 47% growth in 2019, and it was flat in 2020. But if you look at what you did, you really didn't sit still in 2020. Revenues were flat, but you're training more doctors, DTC advertising the new product. So it really feels like to me, like once COVID's over, this thing could really ramp up fairly quickly. And you've set some what looks like conservative guidance again for UroLift for this year, but seems like there's a pretty good opportunity to get back up to that roughly 40% to 50% growth level once we get beyond COVID. Any thoughts on that?

So when I look at UroLift, we're anticipating 30%-plus growth. You're absolutely correct. And that's based on our assumption for UroLift as well that the first half of the year is going to be impacted by COVID. Now clearly, January and most of February, as I said, where there was real pressure on elective procedures. So the first quarter is still going to be under a little bit of pressure. We'll see what March brings and -- but then you're correct. Then as you go through the year, we should be able to ramp off that. We've got a very easy comp in Q2. Now every company has got an easy comp in Q2. But the setup was really good because we trained over 430 docs in 2020 even in the midst of COVID. So we should get a benefit from those docs now ramping up in 2021. The DTC was a huge success from our perspective in relation to raising men's awareness from 4% to 5% to 10%. Our web traffic has increased by 150% to urolift.com. And we see the numbers of men that are now moved under the care of a urologist. And those numbers are incredibly encouraging and give us a really strong return on our investment on the DTC, and we feel really encouraged by all of the metrics that we measure. So I do agree that the setup is good. You can use the word conservative in guidance or prudent in guidance until we get out the other side of COVID. And I think I would view it that, let's get to the 30% growth first, and then we can figure out what we can do after that. But I do agree with you. The setup is pretty good for UroLift, not just in this year but in '20 -- over the next multiple years because we've done 250,000 procedures. We just announced today, we've done 250,000 procedures cumulatively. There are 100 million men on the planet that suffer with BPH. So under any metric, we've only scratched the surface. There are 12 million men in America that suffer with BPH, and most of those procedures we've done have been in America. And so the opportunity is enormous and the ability to continue to have UroLift as a grower. And I would encourage investors to focus this year on the U.S. still. And then obviously, as we get through the back end of this year and particularly into next year, we'll augment that with Japan. We'd be able to augment that with France, and then we'll bring on over other geographies and then DTC as the catalyst to help improve the growth within the United States potentially.

Talking about Japan, is reimbursement pretty much derisked at this point that that's pretty much going to come through later this year? And then if you think about Japan being successful, is that 10 million in 2022? Or is it 50 million in 2022? Just trying to think about how to think about the -- how the successful launch in Japan, what number that would roughly be in 2022.

Yes. Well, reimbursement, we've derisked it as much as we can. We look at ourselves as the paranoid zebra. Paranoid zebra never gets eaten. So we don't take anything for granted as a company. We've derisked it. We've gotten all the information. We've got the health care economics. We have all of the data available to the Japanese authorities, reimbursement authorities to look at this. The real gating factor is they meet once a quarter. So we either hit the June meeting or we hit the September meeting when they will review it, and you have no guarantees as to when they'll review it. And that will be the gating factor as to when we get reimbursement. Japan has a significant advantage over the U.S. in it's a single-payer market. Once you're reimbursed, you are reimbursed throughout the entire market, and there is not really a requirement thereafter to bring on private payers as we had to do in the United States. With regard to the ramp, the only project that we have is the U.S. ramp. And really, that's what we're considering now the Japanese -- the U.S. market is a $6 billion market taking the drug dropout category. The Japanese market is about a $2 billion market. So it's about 1/3 of the size. The way the U.S. market ramped was the first year it did $5 million, then it did $16 million, then it did $50 million. And once you build that base, then you pivot off that base. And then that was the first year of Teleflex ownership. It went from $50 million to $125 million to $200 million to $300 million. So that's the only predicate we have. And as I said, the Japanese market has an advantage that it's a single-payer market. But it does take a period of time to adopt technology. So we have identified the top 20 urologists in Japan, and we already have market development specialists in the marketplace, engaging with them. And we've done a virtual BPH summit, and we've had urologists from the United States to speak Japanese interface with those urologists. So we've set it up the best way we possibly can. We've done all the groundwork. Now we're simply waiting on that reimbursement decision, and we've derisked that as much as we possibly could.

Okay. That's helpful. Is DTC something that you can do in Japan? Or is that more of a U.S. phenomenon?

It's more difficult to do DTC outside of the United States because you just don't have the variety of channels, and it becomes very, very expensive. So right now, we're looking at DTC as a U.S. phenomenon.

That makes sense. And then just looking at UroLift 2. Quickly, just remind us some of the benefits of the second generation product. And if you think about like the timing for more of a full rollout, and at what point can we really see 100% of the business switched over to the new product?

So we're on a controlled launch right now simply because of COVID. It's all a question of access. We would anticipate that we would have the majority of the U.S. market fully converted by the end of next year. And we'll go to a full launch as soon as COVID is behind us. In regard to the advantages, it's got better visualization, number one; and number two, it's a cartridge-based system that actually allows you to make the urologists more efficient. And also, it reduces our carbon footprint. It reduces the disposable cost of clinical waste to the urologist, so therefore should make them a little bit more profitable in their ASC or their office. And it should, as I said, still deliver the excellent procedure as always. So it's the same implant. It's -- man won't have to wear a catheter, no sexual dysfunction, a significant improvement on IPSS scores and a true gold standard in what a minimally invasive procedure should be.

That's great. And just want to quickly talk about MANTA before we run out of time here. It's kind of identified that as a $200 million to $300 million market, 5 points of penetration last year, talking about 8 points. Is that the run rate we should be thinking about over the next 3 to 4 years, roughly 5 to 8 points of market penetration per year?

So I think what one would look at is you need to build the base first, and it's almost like compound interest once you build the base. The base grows, and then you're adding new practices to it all the time. So once you get to that $30 million to $50 million, there's no magic formula, but it's somewhere in that wheelhouse for a product like this, then you would accelerate the growth as your base grows, especially in TAVR at 15% per year, and then you continue to add new practices. And we're really encouraged with how that product was adopted. Even in the midst of COVID, it grew about -- over 30% in the fourth quarter. And we got to just over 5% penetration. And you're right, we are planning to get to 8% penetration this year. Again, that's fairly prudent. If you look at our fourth quarter pro rata, we're probably close to that 8% pro rata in the fourth quarter. And our assumption is based on the fact that we will have COVID impact for the first half of the year. So again, reasonably prudent on our outlook for MANTA, but a very exciting product and being really well accepted by the interventional cardiology community.

Okay. And then quickly on Z-Medica. You closed the acquisition recently, roughly $60 million, $70 million in revenue that you're calling out there. You mentioned that was like very similar to the Vidacare acquisition you've done back in 2013, which you've more than doubled revenue. The market opportunity's probably threefold roughly. Just trying to think about, is that how we should think about the ramp for Z-Medica, roughly double the revenue over the next 5 years?

So the way we look at Z-Medica is that it is -- it's growing into a $600 million market, and it's about $65 million in revenue that we'll deliver this year. Vidacare was about $65 million in revenue, growing into a $250 million market. So similar at the starting point, the difference is it's growing into a much bigger market globally. Very solid on the margin front. Traditionally, it has been growing in the low double digits. So when we bought it, we said we'd grow in the high singles. There's every opportunity for us to get into the low doubles and build off there. And I think what we're really encouraged by is that this fits into our call point perfectly, emergency medicine trauma and the military where we also sell the Vidacare portfolio and our laryngeal LMA portfolio. And then we have EZPlaz coming down the pike that we just submitted our BLA for, that will go through the exact same channel. So we're really building out that channel to be a thought leader in that area of emergency medicine trauma and that really strong military call point.

That's helpful. With the last minute here we have, just to close, looking back, Teleflex has changed quite a bit over the last roughly 10 years since I've followed the company. And if you look forward for the next 10 years, do you think it's more of the same, the similar transformation that you've got just continuing? Or is there something else that you see over the next decade as you look out and think about the future of Teleflex?

So I think we have a formula that works for us. It's not going to work for every med tech company, but works for Teleflex. And I think that we will continue to look at using our balance sheet to do really smart M&A. We're a conservative company. We're not a bet the pharm company. I think we will continue to also to augment our R&D in order to get a better return from the dollars that we spend in R&D. And I think we're not afraid to prune in order to grow. There are many parts of our portfolio that will not be in the next iteration of Teleflex. I look at Teleflex like a book, to be honest. So -- and it's a 10-chapter book, and I think we've written about 3 chapters of the 10 chapters. So there's a long way to go for our company. We've made tremendous progress. But there are also tremendous opportunities in front of us with regard to the opportunities to grow in the current portfolio to add to the different areas that we have, augment R&D and also to look at our overall footprint in order to make ourselves more efficient. So I think as I sit here today, and I've been with Teleflex for 12 years, I've never been as encouraged about the future for Teleflex right now -- as I am right now with all of the opportunities that we have in front of us.

Thanks, Liam. I appreciate that. That's -- the whole conversation really. You've got a prudent outlook in the near term and really setting the company up for a long term of above-market growth rate. So that's coming through pretty loud and clear. So thanks for joining us today. And with that, we'll end, and hopefully, next year, see you in person in Miami.

Well, thank you, Travis. We look forward to getting a suntan.

Yes. Thank you.