Teleflex Incorporated (TFX) Earnings Call Transcript & Summary

Good morning, and welcome to the Bank of America virtual conference. It's a pleasure to have Teleflex presenting. And from the company, Liam Kelly, Chairman, President and CEO; and John Hsu, Vice President of Investor Relations. It's going to be a fireside chat. I have a number of questions here and you can also submit questions via the online chat. And I will kick it over to Liam for some opening comments, and then we'll get started with the questions.

Great. Thank you very much, and it's indeed a great pleasure to be with you and with the investment community at your conference. Just a few opening comments. First of all, I would like to say we are very pleased with the progress we're making on some of our key growth drivers. UroLift, UroLift in Japan, Interventional Access where MANTA is housed, Z-Medica, EZPlaz, APAC and within Vascular, our PICC and Vidacare portfolio. And all of these is -- the investment community will be aware, are accretive to our gross margins. And therefore, [Audio Gap] income statement through that mix effect. And the final growth driver, OEM, will lag recovery by one quarter, but notwithstanding that, it's still a -- will be -- continue to be a significant contributor to our growth. I would say, secondly, we were pleased with our first quarter performance, which enabled us to raise our top and bottom line guidance after just 1 quarter. We also continue to feel confident that UroLift will show a further recovery with another 450 to 500 urologists trained and a full year's DTC campaign as key catalysts. And lastly, I think it's important for us to reiterate, we remain on track to -- for reimbursement for UroLift in Japan. And this remains a tremendous opportunity to unlock that $2 billion TAM in order to have that as an additional catalyst. So all in all, we feel we're coming out the other side of COVID pretty strong. We feel that our overall business is in good shape. We were encouraged by the [Audio Gap], in particular, in March and April, and we feel good about being able to raise our guidance on the top line and on our earnings per share. And we think it was a good solid start to another year for Teleflex. So with that, Craig, I'll throw it back for any further questions.

That's great. Thanks for the opening comments, Liam. I want to start with UroLift. Obviously, you mentioned it in your opening remarks a number -- a couple of different times and really just wanted to start there with the performance that you saw in Q1 given some of the COVID disruption. So maybe if you can just go back to the Q1 results. Can you walk us through what you saw on a sequential monthly basis during the quarter? And then maybe what you saw in April because I know you made some comments there.

I did, Craig. And I think the first thing and the most important point was that we reiterated our plus 30% full year growth for UroLift on the call. And as I also mentioned on our Q1 earnings call [Audio Gap] were down 8% versus 2020 and then March was up 30%. As we went into April, we saw that continued strength that we saw in March, and it was the first time that we saw our average daily sales trending better than March. And what that represented, if you go back to January and February of 2020 versus 2019, at that stage, that business was growing approximately 35%. So that's 2020 over 2019 at that stage. And that was a really encouraging sign for us, and we felt that -- we always felt that UroLift would be one of the first procedures to recover and as we began to come out the other side of COVID in late March and early April, we were very encouraged by those signs.

That's great. That's helpful. And I guess, a little bit more detail into the average daily sales [Audio Gap] and is April -- is the April growth rate a good run rate to think about for the rest of the year? Or is that almost a little bit conservative given that you're likely to see some procedure volume increases as vaccination rollout is broader and people start going back to offices, to hospitals for procedures?

Yes. Just to be absolutely clear, Craig, 35% I mentioned was 2020 over 2019, not '21. But I would say that I was really encouraged by what we saw in April. And I think as we see more people getting vaccinated in the United States and start to reach herd immunity, we do believe that you will see -- continue to see people returning to have these elective procedures done. There's also some element of, I guess, backlog, and we started measuring that in Q4. And in Q4 of last year [Audio Gap] own procedures, the value of about $4 million in Q1, it was about $4.5 million. So one would anticipate at some stage that those procedures would begin to come back into the mix. And then there's all the patients that didn't have any procedure done for almost the entirety of 2020. Now that's the billion-dollar question, Craig. When do those patients come back? When is there capacity within the system for those to come back. But I would say, again, I'm really encouraged by the strong start that we had. And I'm really encouraged by the trends that we're seeing out there as more and more people get vaccinated.

Great. Let me have one quick follow-up on that. When you think about the cancel procedures, and I know that this is probably hard to tease out, but from your perspective, do you think some of those makeup procedures were in those April numbers? Or is that kind of a normalized base procedure level?

So it's impossible for us to tell, Craig, quite frankly. You'd have to imagine that some of those elective procedures, some of them would probably have come back if those individuals got vaccinated. We did see and we did hear anecdotally back from the field that there was a little bit of an air pocket with men as they started to get vaccinated. I've had my one shot, I'm not going to go ahead and get a procedure. I'll wait for 3 or 4 weeks, and I'll get my second shot, I'm fully vaccinated, and then I'll go in and get the procedure. But you'd have to think that some of those were represented there, but also then you've got that much bigger backlog going back to 2020 and procedures that weren't performed. And I think that the -- I think that as we look at these procedures getting worked through, I think size of service is going to be really important, Craig, because if your product is predominantly going to recover in a hospital environment, then you're a little bit more restricted because, let's face it, the staff in the hospital are exhausted from fighting COVID for the last 1.5 years, whereas as with UroLift, with 60% of the procedures done in an ASC or an office, [Audio Gap] you can put capacity there. So we would expect to see some of that volume flush through in the back half of the year. And -- but it's really hard for us to model that as it is for you, Craig, to model what backlog will come back. And I'm sure you're having the same conundrum we're having, when will it come back? And when will we see it? You would imagine it will come back, and I would imagine for products like UroLift, we'll begin to see it in Q3 and Q4, but for hospital-based procedures, I think it will be Q4 and into 2022 before you start to see some of that come back, quite frankly.

Got it. That's helpful. And sticking with UroLift, obviously, competition for the procedure, for BPH procedures, is a significant question that you guys get often. So maybe just if you can just talk about the competition that you saw in Q1. Do you see any of the competitors really gaining share? How do you think [Audio Gap]. And any comments on what you're seeing from a competitive perspective in the marketplace?

So I think with regard to your question, are there any changes in the competitive landscape, in a word, Craig, no. There's no changes in the competitive landscape. And in the Medtech space, things don't change one quarter to another that dramatically. It takes multiple, multiple, multiple quarters. And what we're focused on is making UroLift the standard of care. And I think UroLift is fast becoming the standard of care. And I also believe that everybody looks at this market like it's a 2-horse race that there's the UroLift product and there's the Rezum product. And it is, in effect, a 2-horse race in that regard. But I think that the UroLift product is dominant within the marketplace and is leading the charge to make it the standard of care. And it's no harm to have another company out there talking about BPH, raising awareness for BPH [Audio Gap] significant change in the competitive environment, Craig. And we like to refer to ourselves as the paranoid zebra. The paranoid zebra never gets eaten. So we're not complacent by any regard, but to answer your question directly, no, there's no change in the end market competitive dynamic.

Got it. And then maybe just on a couple of other UroLift questions. So I'd love to hear about the UroLift 2 launch and how that can impact adoption overall? And then also want to hear about Japan and the opportunity there, just a little bit more discussion there. But maybe start with UroLift and where you are in that launch?

Yes. With regard to UroLift 2, we're in a controlled launch mode right now. That is -- we're in a controlled launch really because of COVID because it's more difficult to get access to the patient. We will go into a full launch later on in the year. With regard to, will it drive top line growth? It could, but we're not baking that in. [Audio Gap] It does reduce our clinical waste. It does reduce the clinical waste for the urologist. But again, if you peel back all of the -- and back to your competition question, UL2 question, it's all about patient outcomes, Craig. Our product just has the best patient outcomes. The option for a man 0 sexual dysfunction, immediate relief, revision rates very similar to TURP, not having to wear a catheter and all of those aspects. I mean, you can have a UroLift procedure done on a Friday, and you can be sitting at your desk Monday morning not wearing a catheter, symptom-free. All the other technologies are ablated. And if you burn steam, whatever you want to do to the prostate, it swells, and therefore, it takes a period of time for it to heal, you'll have to wear a catheter at the end of the day. But -- so I think that dynamic will continue to exist. And the UL 2 just makes it easier for the urologist to do the procedure. Procedure will still take an hour end-to-end. But notwithstanding that, I think that the launch of the UL 2 [Audio Gap], of course, it does as well as reducing our carbon footprint, it does actually expand our margins. So we should move the UroLift gross margin from the mid-70s to the high 70s, which would be approximately 40 basis points of margin expansion for Teleflex in our entirety. And also, we anticipate having the full U.S. market, which is the main market, over 95% of our revenue comes from that, we should have it converted by the end of next year.

Got it. At the end of '22, that is right?

The end of '22, correct.

Great. And then maybe just moving on to Japan. Obviously, it's a significant opportunity. You alluded to you're still on track in your opening comments. So any -- I guess, just a little bit deeper there, any questions or concerns about the reimbursement there. And then what's the best way -- you've said that, I think Japan is about 1/3 of the opportunity of the U.S. from a penetration acceleration standpoint [Audio Gap] and you won't see the same numbers or the same ramp that you saw in the U.S. if you go back to 2015. So maybe just kind of -- and then trying to understand the contribution that Japan could have in '22.

Yes. So we're very excited about the Japan opportunity. It's a $2 billion market as compared to the $6 billion market in the United States. It has one advantage in so far is that it's a single-payer market. So once you get reimbursement, you will have reimbursement across all sites of service within Japan. Whereas in the United States, it took us 2.5, 3 years to bring on all the private payers here in the United States market. The way the U.S. ramped and take into account that Japan is about 1/3 of the size of the U.S. market, the way the U.S. market ramped, it went $5 million, $16 million, $50 million, then once you built the base around $50 million, then it had accelerated under the first year of our ownership to $125 million to $200 million. So that's the [Audio Gap] feel good about the reimbursement. We will have the documentation submitted for the reimbursement group to look at it. They meet once a quarter. The gating factor for us, Craig, is will they review it at the June meeting or will they review it at the September meeting? And that will be the gating factor as to when we will get reimbursement. We are already putting resources and have put resources into the Japanese market. We've had a number of market development specialists on the ground, interfacing with the top 20 key opinion leaders in anticipation of this product. And we've also begun the recruitment process for additional sales reps to be ready when we do get that reimbursement decision. And we do anticipate a positive reimbursement decision because we've registered the UL2, and again, the only predicate for a market price is the U.S. market, which is normally a higher-priced market for the UroLift.

Great. Helpful. And let me end, at least for now, the UroLift questions with a little bit more specific on -- how should we think about the cadence throughout the year? I think if you look it at versus 2019, I believe it was 22% growth. Obviously, for the full year, 2019 was the same as 2020 for your interventional urology, but a different cadence from a quarter's perspective. So I think the Street is modeling roughly $90 million or high 80s in Q2, which is almost, I believe, 30% over 2019. So just trying to -- I mean, any color you can provide in terms of how we should be thinking about interventional urology throughout the year?

Well, I think there would be -- and as I began in my opening, the most important thing is that we were able to reiterate our plus 30% growth for the full year. Clearly, the first quarter on a days adjusted was plus 2%. So it's not that difficult to do the math. You would expect to begin to see the recovery in Q2 [Audio Gap] is really -- Q2, every company has got an easier comp. Every company's got an easier comp in Q2 because of the impact of COVID. So I think what investors would be focused on and what we'd be focused on is but what's the baseline growth over 2019. And if you look at Q1, on a days adjusted basis, growth in Q1 2021 over Q1 2019 was approximately 30%. That's very encouraging for us because that tells us that back to baseline, the product is performing well even in the midst of a COVID pandemic that was raging in January and February. So we would expect to see continued acceleration in Q2 and further as we go Q3 and Q4. Now obviously, in Q2, we've got an easier comp. So the growth levels are going to be significant in Q2. But I'm with you, I think the Street is modeling $85 million to $87 million, somewhere in that wheelhouse. And I think that's what we'd be considering as a goal for this quarter -- this year -- in this quarter. [Audio Gap] And don't forget, we did in Q4 last year, hit our highest revenue dollar for UroLift ever at $93 million. So even in the midst of COVID, this product has been able to execute really well.

Great. Well, thank you for all the answers to the UroLift. So I know you have a number of other key products. So maybe just want to touch on some of them. MANTA, EZPlaz, Z-Medica, the acquisition that you just made. So would love to understand how you see those contributing in '21. How the products are doing? And then what could be the contribution in '22?

Yes. So I think that, first of all, I'll start with MANTA. So we're really pleased with how MANTA is performing. Even in the midst of COVID in the first quarter, we generated approximately $5 million in revenue, growing nearly 30%, [Audio Gap] we can convert 8% of that market, that's a $200 million to $300 million market. So to get 8% converted at the $250 million midpoint is what we're targeting this year. And I think there's a relative amount of conservatism built into that number. If you take the first quarter revenue and just prorate it, we're probably almost at 8% penetration now. So I think we have some nice opportunities within the MANTA product to continue to execute against that. And we'll -- we expect to continue to see that ramp as we go into Q2, Q3 and Q4. Regarding future years, I mean, it's growing into a big market, Craig, $250 million at the midpoint, and we continue to convert that market. We think we've got about 2 years before we're going to have a competitor. We do expect competitors to enter the space because we've identified a significant space in the market. And our acquisition hypothesis was that we wouldn't be alone, but we would be the dominant player within the market and hold [Audio Gap] the view that our product is, we believe, going to be the best technology. It's very difficult to close a large [ board ] with a surety while reducing major complications at the same time. And MANTA does that, it moves the mean time to closure from 12 minutes down to less than a minute. And it also reduces major complications by 70%. And a major complication will cost a hospital around $16,000 according to a JAMA study. Moving to EZPlaz. EZPlaz is a $100 million market, $25 million in the military, $75 million civilian. The military have helped us develop this product. So therefore, we're going to address the military segment right out of the gate once we get it through the BLA submission. The FDA have been really collaborative. It's very encouraging to work with them. They have identified that our submission is complete, and they've also informed us that it is getting an accelerated process. We've had a few rounds of questions with them and [Audio Gap] how quickly they're getting through the number of questions. So we should have Z-Medica in the market some time in Q4 and if the Fast Track brings it earlier, then that's obviously an area of upside for us. With regard to Z-Medica, Craig, my mother used to say one time, a good start is half the battle. And with Z-Medica in the first quarter under our ownership, the integration is going really well. And we've given our guidance of the revenue of $60 million to $70 million this year based on the first quarter, which exceeded our internal expectation, we think we're going to be comfortably within that $60 million to $70 million guidance that we've given to the Street. And it also has delivered significant earnings per share to the company in excess of $0.20 that we were able to take up as well from our initial acquisition model right out of the gate. The QuikClot -- and the QuikClot Control+ [Audio Gap] $1 million market, $300 million for the QuikClot, which is external lacerations, and $300 million TAM for the QuikClot Control+, which is for internal -- and we have a unique indication for trauma internal. We're putting the sales organizations together. The integration is going really well. No regrettable losses within the organization, and we feel really confident on Z-Medica. I think it's a really nice acquisition for Teleflex.

Great. And maybe moving on to margins and the P&L a little bit. You have a -- in 2018, you guys put out a long-range plan. 60%, 61% gross margin, 30%, 31% operating margin in '21 was the goal. Obviously, COVID disrupted that. So how should we think about your ability to get to those levels in '22? Is COVID a lost year? I think the Street has you at the -- maybe the lower end of that [Audio Gap] and below the operating margin probably more in the [ high ] 29% range. So just would love to get your thoughts on how to think about the COVID disruption impacting those goals. And maybe how you guys can progress into '22?

Yes. For sure, COVID had an impact. I mean we were missing -- even if you normalize for all the acquisitions and the OpEx that came in with the acquisitions, we managed our OpEx spend pretty well. But the main difference was $250 million of leverage from revenue that was missing because of COVID and that would have made the big difference. Our portfolio, we believe, is well capable of delivering 60%, 61%, 30%, 31%. We are planning to have an Analyst Day later in the autumn. I think it's on November 11. And we are planning at that stage to lay out a 3-year plan for the investment community because a lot has changed since we laid out our first plan. We didn't have MANTA within our company at that time. We didn't have Z-Medica within our company at that time. We've done a couple of tuck-in go directs during that time. So we want to update the community on some of the changes that have occurred. And I think the investment community shouldn't forget either, in Q1 and again, I'm going back to even in the midst of COVID, in Q1, we hit our highest gross and operating margin ever since we became a pure-play medical device company at 59.5 -- 59.4% and 27.5%. So we're really encouraged by the leverage we can get from our income statement and a lot of it being driven from mix and then the rest of it coming from our restructuring programs and our manufacturing and operations group were able to continue to execute on the restructuring programs even in the midst of COVID, which was a good benefit to us as we go into the next few years.

Great. Helpful. I look forward to the Investor Day later this year. Maybe just a couple of specific current impacts or current items that could have an impact on your margins today, just some of the macro issues that are going on, inflation, any supply chain issues. And then also, tax rate, the potential for Biden corporate tax reform. We'd love to hear your comments on, I guess, if you're seeing any impact from any of these? Do you expect the same impact? And if it's quantifiable at all at this point? Maybe some thoughts there.

Yes. So I'll start with the Biden tax plan. Obviously, it's not quantifiable because we don't have any details as to what it's going to be. Obviously, it won't be good for Corporate America. If the U.S. rate goes from 21% to 28%, that won't be good for Teleflex. It won't be good for any company within the United States. It will be a drag on earnings. But it is a 1-year impact, and then you move on from that. And then if they make the changes to the GILTI tax, that won't be good for any global company in that regard. Regarding supply chain, we've done a complete review of our supply chain. We really don't have any significant impact that we're aware of today, and we feel really confident on that. With regards to some inflation, yes, like every company, we're seeing some inflation. But I think we got out ahead of that inflation, we pulled together our pricing strategy committee about 9 months ago in anticipation of inflation. And most investors that follow us closely will have noticed that in the first quarter of this year, we had 20 basis points of positive pricing as a result of actions we took in -- about 9 months ago in anticipation of some inflation. So we are seeing some inflation on resins, and we are seeing some inflation on transportation channels, in particular, the lanes that come from Asia to Europe and the Americas. But every company will be experiencing that right now. Anybody -- we have significant manufacturing in Malaysia in particular. So those lanes, we have begun to see some inflation. But we've been more than able to offset it by strategic pricing and being ahead of the curve in anticipation of some of that coming. So we don't see it being a drag on earnings into the future because of the actions we've taken.

Got it. Only have a couple of minutes left. Maybe just want to touch on M&A. You guys have a history of M&A, recent M&A. Would love to get a little bit more color on your appetite, what you're seeing in the market in terms of valuations and the opportunities to bring on new exciting companies.

Yes. I mean, any company can have a history of M&A, Craig. So it would not be it for me to correct you, we have a history of good M&A, really good M&A, which I think is the differentiator for Teleflex. And right now, our leverage has gone -- is below 3x. We've said many times, we'll lever up to the high 3s in order to do a transaction as long as we have line of sight to 3 and below within approximately 18 months through EBITDA expansion. And I think the Biden tax plan is going to help companies like Teleflex because capital gains tax changes, will, I think, bring some assets to the market, especially those held by private equity groups. So I would anticipate some assets coming out in this next 6 to 12 months. That would be of interest to Teleflex for sure. And we're always active, Craig, as you can imagine, we're always watching the environment. And we've said before, we're not afraid to prune to grow as well at the appropriate time in order to continue to evolve. I always think of Teleflex as a book. And if we were a book, I'd say we're on Chapter 3 of about a 10-chapter book. And our M&A strategy is clearly a big part of that. No doubt, IPO valuations have gone up. But the Biden plan, I think, would be a counter to that with private equity assets coming out, Craig.

Great. I think with that, we're just about out of time. So I want to thank you again, Liam and John. It was a pleasure having you, and thank you for participating.

Thank you very much, Craig, and the best of luck at the rest of your conference.

Great. Thank you.