Teleflex Incorporated (TFX) Earnings Call Transcript & Summary

Okay. Good morning, and welcome to our healthcare conference. My name is Jayson Bedford. I cover medical devices here at Raymond James. Kicking off this session, I'm really pleased to have with us today the senior management team from Teleflex. We have the company's CFO, Tom Powell; VP of Investor Relations and Strategy Development, Larry Keusch, Larry, I hope I get that title right; and VP of Investor Relations, John Hsu. So we really appreciate your attendance. I'm looking forward to the next 30 minutes. So let's get started.

I really hate to start with COVID discussion but unfortunately I think it's still topical for the group. So with respect to COVID and the broader reopening, I would love if you could break down what you're seeing today in terms of business trends geographically versus pre-COVID levels?

Yes, sure. Well, we currently are winding down on the end of the second quarter, so I'll stay away from specific details. But I do want to point out that, as we said on our first quarter call, it's been our expectation that the U.S. would recover more quickly, followed by Asia and then EMEA. And nothing that we've seen thus far really is changing our sequencing of that recovery. And as you think about the 2021 financial guidance, this assumption really underpins how we built the guidance for the year, is that we expect COVID to continue to be disruptive in the first half, including in the U.S., with a recovery coming in the second half. And certainly, as we've seen the different regions, we are seeing improvements at different paces. And so it's kind of playing out as we had expected from a recovery standpoint.

Okay. That's helpful. And Tom, just at this point are you expecting normal summer seasonality in Europe? Or does kind of the reopen here fight through the typical summer slowness?

Well, as you know, Europe is still struggling with COVID. We've certainly seen some increases in infection rates in different areas. The vaccination rates are below what's been experienced in the U.S. on an overall basis. So we would still expect some level of seasonality to play out as we expect that doctors, as well as the prospective patients, will likely still go on vacation. I'd also say that the EU tends to be less financially incentivized to work through backlog, given that healthcare is nationalized in many of the countries.

Okay. That's fair. In the U.S., do you think there's any issues with hospital or physician capacity at all?

Well, I would say that we're still not at 100% capacity in any region, although we are seeing improvements sequentially. And certainly, we're in a lot better spot today than we were in the first quarter. As I mentioned, we expect the second half to be much closer to normal, in particular in the U.S., which is the baseline assumption that underpins our 2021 financial guidance.

Okay. And Tom, while we're on kind of macro-related factors, can you comment on the impacts on your business from the standpoint of recent inflationary concerns as well as any supply chain risk that may have arisen over the last quarter or 2?

Okay. Well, I would say that first of all, we're always dealing with elements of inflation. At this point, I would call out labor inflation, some raw material inflation, including resins and elevated freight, as the headwinds that really are impacting us this year. Fortunately, we saw a lot of this as we were building the plan for the year, and we incorporated these factors into our plans and assumptions and guidance. Now with that being said, we also have numerous cost improvement programs that we perform on an annual basis in our manufacturing plants, which can help to offset these headwinds. And in addition, we've been able to raise prices selectively on our portfolio, which is providing us with a modest tailwind with this year. I would say that regarding the supply chain, we don't currently have any significant disruptions due to sourcing. I'd say that availability is tight for some products. We continue to manage and monitor the situation very closely to make sure we're able to maintain continuity of supply. And I'd say that, importantly, there is no real ship exposure to speak of for our business.

Was there much pushback on the -- Tom, you mentioned raising pricing on a portion of the portfolio. Was there much pushback there?

Well, it's really done on a selective basis, where we take a look at our positioning in the marketplace and other competitive offerings. And so we've been able to institute pricing actions over the past 8 or so years really by looking very closely at where we are in the marketplace relative to competition and other offerings. And so it's been something that we've been fairly effective at. But again, it is on selective products in selective areas.

Okay. Corporate taxes, just last one on the macro, how are you thinking about potential changes in corporate tax rates and the potential impact to Teleflex?

Okay. Well, obviously, a meaningful increase in the corporate tax rate would be a challenge for any U.S. multinational. We'd encourage the administration to be thoughtful about our competitiveness with other OECD countries to make sure we don't fall behind. And I'd say that, depending on what gets passed into law, and it's clearly too early to make any assessment or provide any level of detail on that, a higher corporate tax rate would provide a notable drag on earnings and cash flows. But it would be a 1-year impact on year-over-year comps. And all U.S. multinational companies would also have the same impact, so Teleflex clearly would not be alone.

Okay. Great.

One potential silver lining we're looking at is that if tax reform were to result in a higher capital gains tax rate, it could potentially benefit acquisitive companies such as Teleflex as a result of certain holders of assets may choose to sell those assets in advance of the tax law change. So it could free up some attractive assets for us.

Okay. Yes. I'd like to revisit that point a little bit later. But let's move on to some more product-oriented questions. UroLift, which is obviously an important growth driver for the business, started to recover in March, April. Can you just provide an update on how the business is performing relative to the 30%-plus growth you talked about coming out of the March quarter?

Sure. Well, as we said on the first quarter call, the March recovery was very encouraging, with growth of roughly 30% over 2019 and 2020. Now I'd say that, moreover, April saw an improvement that was even greater relative to March's. So we continue to feel really good about UroLift continuing to recover, with our expectation for 30% growth for 2021 versus both 2020 and 2019. So we feel as if we're still well on track to accomplish what we're looking for. And I would just provide a reminder that UroLift is a really unique product that provides a meaningful improvement to men with BPH, including immediate symptom relief, low levels of catheterization and no sexual dysfunction. So the product offering is very compelling, and we're very excited to continue the recovery of that product.

As it relates, Tom, to the strength in April, I think you've alluded to a bit of a backlog and quantified a bit of a backlog on UroLift. Do you think April was just the fulfillment of that backlog or are you seeing true demand build?

Well, just on the backlog altogether, why don't I take kind of a comprehensive look at that. If you step back and think about UroLift, we think it falls into the category of a surgical procedure, or there is a potential for a deferral due to COVID and resulting in backlog. BPH is not a terminal illness, and the typical patient is in his mid-60s, implying there is really an ability to defer the procedure. So if a patient and his urologist determine that UroLift is the best treatment option for BPH, I'd say the decision is unlikely to get changed just because the patient defers it due to vaccinations or some other dynamics. So the fact that a patient has taken that step towards scheduling the procedure suggests the underlying condition really warrants treatment, and UroLift was already determined to be the best course of therapy. So with that as background, we actually estimated the backlog to be $8.5 million of deferred procedures above what would normally be deferred kind of from a pre-COVID level, from the fourth quarter of 2020 and the first quarter 2021. So $8.5 million between those 2 quarters combined. I think continued improvements in vaccination rates will be an important catalyst for recovery for UroLift. You couple that with increasing productivity from the doctors and urologists trained in 2020 as well as our objective to train 450 to 500 doctors in 2021 and a national direct-to-consumer marketing campaign, we think, will all be kind of the catalyst to continue to let UroLift recover and grow. And with that being said, I think it's difficult to predict the exact timing of when exactly a deferral will translate into a procedure. And so as a result, we've really assumed very, very little conversion of the backlog into a 30%-plus growth objective for the year.

Okay. Just consensus for UroLift for the quarter, I think, is around $87 million. Is that a fair way to think about the step-up here in 2Q versus 1Q?

Well, I would say that, as we think about UroLift and its growth, we expect that we will see UroLift growing sequentially on a dollar basis quarter-over-quarter. So we expect the business to continue to improve and recover. As you look at the growth rate in the second quarter, we expect it to be fairly robust and high, largely the result of there being a fairly easy comp given last year's COVID pandemic.

Okay. And Tom, the 30%-plus guidance for UroLift, what does that contemplate in terms of U.S. growth versus any contribution from Japan?

So I would say that, as we think about that level of growth, our key planning assumption is that we'll see a normalization of elective procedures in the second half of 2021. In addition, we are expecting to see increasing productivity from the 430 doctors trained in 2020 as well as that objective I had mentioned of 450 to 500 surgeons being trained in 2021 and the national impact of our DTC campaign. So as we think about that 30%-plus guidance, it's really primarily driven by the U.S. Revenue from Japan is immaterial to that guidance. So there's really no sales to speak of in Japan for this year. So we're really excited to begin the rollout of UroLift in Japan, which we estimate to be a $2 billion market opportunity. However, given the expected timing of our launch, we really view Japan as a '22 event and beyond.

Okay. And Tom, just the timing on Japan kind of launch, is that -- can we assume that's a late 2021 launch with full realization in '22?

Well, I think the way we're thinking about that is we're expecting to get out in Japan in the end of 2021. But as a reminder, once we finalized reimbursement, we need to conduct a post-market study in Japan, which will take up to a quarter to complete, which is why we're really viewing 2022 as a starting point.

Got you.

As we think about Japan, we've mentioned that we think it could roll out very similar to that in the U.S. in terms of the rollout timing, although at a smaller scale, just given there's a $2 billion market opportunity in Japan versus the $6 billion market opportunity here. And if you just think about the first 3 years of UroLift in the U.S., we did $5 million, followed by $18 million, followed by $50 million, and then began to grow quite a bit following that.

Okay. Very helpful. You're in limited launch right now in the U.S. of UroLift 2. Can you just walk us through the key benefits, design changes of UroLift 2 versus the prior gen?

Sure. Well, I'd start with the legacy UroLift product that fires a single implant and then the whole device is disposed of. The UL2 is a cartridge-based device whereby the same handle is used for the entire procedure and implants are added via single-use cartridges. So as a result, the UL2 requires less physician storage space and reduces medical waste. Additionally, UL2 also includes a redesign of the handle to further simplify the procedure. And the design also offers better visualization for the clinician during the procedure. So a number of benefits for the physician, including less waste, less storage. So we think it's a pretty compelling offering.

And Tom, just the economics for UroLift 2, there's no change to both the physician as well as your economics?

Well, for the physician, we intend to keep the price point the same. So they'll get an improved product at the same price point. For us, the UL2 carries a lower cost of goods as well as lower distribution costs versus the legacy UroLift device. So with a full conversion to the UL2, we see about a 400 basis point gross margin lift over the UroLift product line and would get us up to the high 70% level. Now for the urologist, I mentioned the same price point; however, there is less packaging and waste to dispose of. So there are some cost benefits potentially on the disposal side for them.

Okay. And just in terms of full UroLift 2 launch and conversion, can you just remind us of the timing there?

Well, I would say that right now the UL2 conversion has been limited. We're currently on a controlled launch. I'd say that surgeon feedback has been very positive, with clinicians commenting on the streamlining of the delivery device, triggering mechanism as well as the reduction in waste. We remain on track for a full launch later on in 2021 and are targeting the vast majority of the user base to be converted by the end of 2022. Now we're currently ramping up manufacturing of the UL2 to position us for the full launch later in this year.

Okay. And just -- I realize that the launch is very controlled now, but have you noticed any changes in utilization? Meaning, are these same urologists using UroLift 2 more than they did UroLift 1?

I would say that our utilization currently is staying about at the same level. And we're averaging 3 to 4 procedures per urologist per month. And we think that's really a nice opportunity for growth in the future.

Okay. Got it. When you look at some of the new product drivers, whether it be UroLift in Japan, UroLift maybe in France, EZPlaz, MANTA, how would you rank them in terms of incremental contribution over the next few years?

Well, I would say that MANTA should continue to be a very solid contributor. This year, we're targeting 8% of the market. And I'll remind you that we've sized the market to be about a $200 million to $300 million global TAM. We did $5 million of sales in the first quarter. So we think we're well on track to achieve that 8% of the target market. So we continue to be really excited about this product. In addition, given the double-digit growth of TAVR procedures, we should see a nice increase in the opportunity going forward as well. On the UroLift in Japan, again, we said the initial ramp could look like the U.S. ramp, although at a smaller magnitude given the $2 billion TAM versus the size of the U.S. market. However, that is a very encouraging opportunity for us. I would say that France will also be a nice contributor for UroLift. However, we need to get the reimbursement properly classified. EZPlaz is certainly an exciting development as we near the approval of the BLA later this year. And overall, I'd say we have some real exciting opportunities for growth in the U.S. I'd also want to point out that if you think about these drivers of growth, UroLift, MANTA, EZPlaz, they'll all generate gross margin in excess of our corporate average. So in addition to driving growth, they'll also drive a nice margin mix benefit for us.

Okay. Remind me, I think you alluded to it, but the timing on EZPlaz approval.

Okay. Well, just to remind investors, EZPlaz is our freeze-dried plasma product that addresses a $100 million market, with $25 million in the military and $75 million expected in the civilian first-responder space. As we previously indicated, we're going to begin commercialization with the military first, given that they've been instrumental in helping us to develop this product. I'd say that we believe the regulatory pathway with the FDA is progressing as anticipated. As we said previously, we received a letter from the FDA following our BLA submission, indicating that the application was sufficiently complete to begin the standard review. And the BLA was assigned a priority review classification, which indicates it's on the fast track for review and approval. And we would comment that we think the process with the FDA is going very well, very collaborative. Although the FDA's timing for approval can be difficult to predict, we would expect clearance sometime before the end of 2021. And I'd also say that EZPlaz really slots in nicely behind Z-Medica, our hemostatic gauze, and EZ-IO, our intraosseous vascular access system. So essentially, we're expanding our presence in hemostasis, leveraging the same call points as EZPlaz and Vidacare. So a real nice addition to the portfolio, both from a revenue as well as leveraging our infrastructure standpoint.

Are there any other -- I mentioned EZPlaz, MANTA, UroLift in Japan and maybe France. Are there any other products that you'd kind of identify that I missed as true drivers?

Well, I think you've hit on the key new product growth drivers for Teleflex. I'd say it's also important to note that we continue to drive a balanced approach towards growth with organic investment as well as M&A. And so on the M&A front, we closed Z-Medica at the very end of 2020. I would say the Z-Medica integration continues to progress very well. We remain confident in the $60 million to $70 million revenue contribution for 2021 and the $10 million of cost synergies that we expect to capture in the next 3 years. Just on Z-Medica. I'd say that Z-Medica brings a portfolio of hemostasis products in a $600 million market, with roughly half being associated with trauma and the remainder for controlling bleeding during surgical procedures. The product portfolio includes QuikClot as well as QuikClot Control+, and so we're really excited about the deal. And as mentioned earlier, this slots in nicely with our other call points.

Okay. Tom, just on M&A, since you've mentioned it a couple times and you did allude earlier to the potential changes in the capital gains tax bringing some assets to the market here, is it fair to assume that you've identified a few here? And should we expect some capital deployment towards M&A near year-end?

Well, I would say that we have a full pipeline of deals across the spectrum of business units in a lot of the typical buckets we've looked at, whether they are late-stage technology, distributor conversions, tuck-ins, scale acquisitions. So the pipeline is full, and we're busy. I think that in the past we've alluded to the fact that some tax law changes could potentially accelerate certain holders of assets to sell those assets to avoid the changing tax law and, as a result, could provide a nice opportunity for us. So one of the benefits of the respiratory divestiture was in fact it does free up additional capital. And if you think on a pro forma basis, at the end of the second quarter, we expect to be around 2x net leverage. So we've got meaningful financial capacity to continue to do acquisitions and look for us to continue to pursue that path for growth.

Okay. And I apologize if you've talked about this more expansively elsewhere, but in terms of areas of the business where you're focused for M&A in terms of segments, where is the focus?

Well, I would say that, as we think about the focus, we're somewhat agnostic towards the exact area. We do have strategic criteria that we focus on. And as mentioned, we're looking for products that fit in with existing call points. We're looking for strong intellectual property. We're looking for products that have got longevity. We're looking for financial returns. And so as we think about the opportunities out there, we aren't as specific on any particular area as we are on making sure the strategic and financial fit is there.

Okay. Okay. Big picture, if I take a step back, you laid out a 6% to 7% top line growth profile back in 2018 at the last Investor Day. Can you just -- from your lens, how is the business tracking relative to that target?

Well, we think very, very well. We grew 8% in 2019, and we're off to a good start in 2020 prior to COVID. Despite a challenging environment related to the global pandemic, we're really pleased with our signs of recovery across the business, really showing improving year-over-year growth in the third and fourth quarter of 2020 and continuing into the first quarter of this year. So we're encouraged by our progress towards that. As you mentioned, our last LRP, which really contemplated 2019 to 2021, reflected 6% to 7% top line growth. And we believe that remains a very appropriate target, and we continue to have high confidence in our ability to achieve that target. So we think we're tracking well towards that objective.

Okay. Tom, when you weigh the portfolio, how quickly do you think the end markets that you serve are growing?

Well, I think the way we look at the business is really twofold. If you think about the legacy Teleflex business, it's largely in established and more mature product categories, while Interventional Urology and Interventional Access are competing in higher-growth markets. So we've got some really nice growers, and we've got some more established product offerings in the portfolio. So it's really bifurcated, if you will.

Okay. And I don't know if you've commented on the durability of UroLift growth, and maybe that's a topic for November, but how do you see the 3-year growth profile of UroLift?

Well, we continue to remain excited about that opportunity. As I mentioned, in the U.S. we've got a couple of drivers. One is the DTC campaign, which will increase awareness. The second is the fact that we continue to train more doctors each year, and we expect to be able to drive a higher level of utilization. As mentioned, currently, we're seeing 3 to 4 procedures done with UroLift per month per trained urologist, while at the same time they're seeing 75 unique BPH patients. So we think there's a lot of growth opportunity there. If you then layer on top of that some of the international opportunities, we've talked a bit about the Japan market and it's a $2 billion TAM. We're also in the throes of getting ready to really launch in earnest in France. We have opportunities in Italy, Spain, Germany, Brazil and China in the future. So we think there is a tremendous opportunity to continue to grow the UroLift. Even taking out international, just going back to the point we talked about earlier, we size that as a $6 billion market opportunity. And last year, we did a little under $300 million in the U.S. So there's a tremendous opportunity out there remaining for us. And we think the UroLift is very, very well positioned to compete into the marketplace given its favorable product characteristics and improved kind of benefits for the BPH patient.

Okay. Maybe in the last minute or 2, I wanted to talk about margins. I think at the last Analyst Day, your gross and operating margin goals were 61% -- or 60%, 61%; op margin 30%, 31%. As a CFO, can you just talk a little bit about the balance between spending levels and revenue growth? And I'm specifically wondering if you need to spend a bit more on R&D or sales and marketing just to generate the level of sustained revenue growth that you're seeing in the business?

Okay. Well, just to focus on the margins, I would say that there are many growth catalysts. UroLift, MANTA, Z-Medica are all gross margin accretive. Similarly, Interventional, Vascular and APAC are segments that are all high margin. So it's really -- it's fair to assume that mix will continue to be a significant driver of our margin expansion over the next couple of years. From an investment perspective, we'll continue to fund those higher-growth, higher-margin opportunities, whether it's through allocating a greater amount of R&D dollars or sales and marketing investment on projects such as the UroLift DTC. So I would say that overall we'll continue to look to balance growth and investment with our focus on durable organic growth that places us in the medium to perhaps high-growth category. And we'll provide a greater outlook on our thoughts on this at the upcoming Analyst Day event in November.

Okay. Tom, I think we're bumping up against our allotted time.

Hey, Jayson?

Yes?

Yes. I just want to mention one thing, if I could.

Sure.

Coming back, Jayson, to your question around the consensus for UroLift in the 2Q, of that $87 million that you talked about, I just want to highlight that Liam in some meetings last week acknowledged that consensus number and indicated that the organization is driving towards that objective for that consensus number.

Okay. That's helpful, Larry. Good clarity. So gentlemen, this has been productive. I've enjoyed the discussion. I appreciate the time. I hope you have a great rest of the day, and have a safe and happy summer.

Thanks, Jayson.

Thank you, Jayson.

Yes. My [ pleasure ].