Teleflex Incorporated (TFX) Earnings Call Transcript & Summary

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Good afternoon, everyone. Welcome to the 2021 Wells Fargo Healthcare Conference. I'm Shagun Singh, part of the medical device team at Wells Fargo, and I'm pleased to host our next fireside chat with Teleflex. Joining us from the company are Liam Kelly, Chairman, President and CEO; Larry Keusch, VP of Investor Relation and Strategy Development; as well as John Hsu, VP of Investor Relations. Thank you, everyone, for joining us today.

Thanks for having us, Shagun.

Great. So let's dive right in. Let's begin with the discussion of key business trends. It appears that COVID remains on the forefront and it is still part of our lives as we sit here today. But the impact moderated from Q1 to Q2. So Liam, I'm hoping you can just level set us here and discuss some of the major trends and themes you saw across the business and geographies in the first half of the year. And let us know where we are relative to baseline, that is 2019, just in terms of procedure recovery.

Yes, Shagun. Well, I think that we were very encouraged by what we saw in the first half of the year. We saw a robust rebound as procedures came back. We grew 6.8% in the second quarter over 2019. And as you said, we saw a nice sequential improvement in growth from Q1 to Q2. By region, over 2019, the Americas obviously led the way, it grew 11%. APAC started to rebound and grew 2% versus 2019. And EMEA started to stabilize. I'm pleased to say that we held our constant currency revenue guidance of 8.5% to 9.75% despite the incremental dilution from the respiratory divestiture. And by any other yardstick, that would have been a $28 million to $32 million called up in the second quarter. And at the same time, we raised our gross and operating margins and targeted a 21% to 23% earnings per share growth versus 2020 in this instance. And with our updated financial guidance and baseline assumptions, we anticipate stability in the environment as we move forward. Now clearly, we've seen an uptick in Delta variant of COVID, as you already noted. Since that -- but notwithstanding that, that's how we performed versus 2019, and our updated guidance associated with a really strong and robust first half of the year.

That's really helpful. And just looking into the back half of the year, how is Q3 shaping out relative to your expectations? And I'm hoping you can discuss a few factors here: firstly, Q3, Q4 seasonality; secondly, the second half backlog, how you're thinking about that; and then definitely, the impact of Delta variant relative to what you previously contemplated in your guidance.

Yes. So we contemplated continuing improvements in Q3 and Q4 as reflected in our updated guidance. If you look at the first half of the year versus 2020, we grew 8.6%. And if you took the midpoint of our guidance, excluding the respiratory divestiture, it would tell you we were going to grow around 9.6%. And indeed, if you included the divested assets, that would have been in excess of 11%. So clearly, we anticipated that improvement when we gave our guidance. And again, as I said earlier, it was based on stability moving forward. We did not bake in any unusual trends relative to seasonality or assume much in the way of backlog conversion. It's really difficult for us to ascertain when that backlog will get burned through, and it's quite dependent on when we get normalcy around Delta. Regarding Delta, honestly, it will be naive to think that there will not be an impact to elective surgical procedures more broadly in med tech, given that we saw an upswing in late July and into August. It began with 10 states canceling some level of procedures, then that went to 20. And then last week, it went to 28. Now having said that, here is the advantage of being a diversified global med tech company. And as I sit here today, I still believe that the book ends of our full year revenue and earnings per share guidance provided on our Q2 call are still very much intact. And I also believe that the current impact of COVID will be transitory. And we will begin to see a recovery in this current month in September, continuing into the remainder of the year.

Okay. That's really helpful. So I guess, can I just -- if we can get a better handle on the Delta variant impact. I think some of the companies have come out and said that just in July and August, the U.S. business -- and it seems like it's -- the impact is localized, but the U.S. business was impacted anywhere between 5% to 10%. Medtronic has come out and said that it would be 150 basis point impact. I'm just wondering, do those ranges seem reasonable to you? And given your ability to offset that, how are you thinking about the impact to your U.S. business? Any color directionally would also be helpful.

Yes. So I saw the Medtronic comments on their earnings call, and it's very aligned to what every med tech company is seeing. We saw an increase in Delta variant in the back end of July. And we again saw it continue through August in the same way as Medtronic. I mean this is a med tech impact. As I just said a moment ago, Medtronic is a diversified company, much larger than Teleflex. But Teleflex is a diversified company. And because of that diversity, you will have some impact from elective procedures, but then you will have some offsets in other parts of your business for us in businesses like Vascular. And therefore, the book ends of our full year revenue and earnings per share guidance we provided on the Q2 call, as I said, I still believe that they are intact. My expectation is that this month of September, we'll see a recovery. We're already seeing it in a few of the states. I was just reading a report yesterday that demonstrated that Louisiana, California and Florida have seen the peak, and now we're starting to see some recovery. So my expectation would be that procedures would return in some of those areas. And then as you go into Q4, you would see elective procedures be a little bit stronger. You would probably see Vascular not get the same impact. And that is really the reason that as a diversified med tech company, we feel that our guidance on the 2 most important lines in the income statement are intact. I, again, think it's going to be short term. And it is not going to be nearly the impact that we saw in Q2 of last year when we first saw the impact of COVID. And I think for a company like Teleflex, we're doing our best to manage our way through it and still give an excellent return to our shareholders and still execute to our long-range plan and indeed in our intermediate guidance that we have out there at the moment. So I would be very much in line with what Medtronic are seeing out there in the marketplace.

That's helpful. And can you talk a little bit about the setting? It seems like the impact is more on elective inpatient procedures versus outpatient. What are you seeing in terms of the settings? Or within the outpatient setting, are you seeing nonurgent outpatient procedures being pushed out in favor of more urgent procedures? Any puts and takes in terms of the setting would be helpful.

So I think with regard to the setting, it's a larger impact for sure in the acute hospital environment because they're keeping a watchful eye on intensive care beds. And I think that once the restrictions are in place, that they are -- have to execute against those restrictions. I think that in other sites of service, there's 2 aspects. I think there's a willingness to do the procedures. But then you need to consider if you're in a state like Texas, Florida, Louisiana, Mississippi, where there is an -- over the past number of weeks, there's been an increase in the Delta variant, there's also a shaking of patient confidence in going and getting the procedures done. And I think as we go into this month of September, there's a few things -- few dynamics happening. I see Delta peaking. I also see people returning to a more normalized working environment as people return to work. There's a reduction in stimulus checks. So therefore, staffing shortages that we've seen across all acute and ASC and office environments, we should begin to see some normalcy there. And obviously, people return from the peak vacation time in August, and therefore, any individual that wants to get a procedure done, this should be the time to get it done. So I see a pickup in the current month that we're in. And then I would expect a more normalized environment in Q4 as we continue to progress. But there's definitely been an impact, Shagun, across all med tech from the rising cases of Delta.

Okay. Got it. And just to follow up on what you said earlier. So it seems like Q3, that there could be a greater-than-expected impact or there is some impact. And so that would imply, just given your guidance and where consensus is for Q3, that for Q4, you're assuming a greater-than-expected rebound since you said you're comfortable with the book ends of your guidance. Is that fair? And what level of confidence do you have around that?

So I don't want to get into quarter-on-quarter specifics. I've kind of said that the book ends are intact, and I feel confident on that based on what I'm seeing with regard to the current month that we're in and what I expect to happen. And I expect that COVID infections will decelerate and continue to decelerate as we go through this month into Q4. And that would allow for an improvement in the end customer environment. And obviously, we're not updating our 2021 financial outlook other than what I said earlier. And we will provide a full update on our Q3 earnings call. But again, there are advantages to being a diversified med tech company, as you've seen from Medtronic, and Teleflex definitely fit into that category of a diversified med tech, where 1/3 of our portfolio has 0 impact, 1/3 will have some impact and 1/3 approximately would have a benefit from rising cases. So that's the balance. And you will have seen that yourself, Shagun, during Q2. We saw some of our peer companies with declines of 20%, 30% in Q2 last year. For Teleflex, the decline was 12% because of that portfolio. And I think investors should look at us in our entirety as they look at Medtronic in its entirety and judges on what we said we were going to do and what we actually will do.

That's great. I'm actually getting a lot of [ press time ] questions on your left side of your screen, that end, is that since you talk about comfort within the guidance range that you've laid out, are you still comfortable with the guidance that you've laid out for the full year for your rollout?

So I'm comfortable on our full year book end guidance, as I said, and we'll give further guidance on the Q3 call. I'm not going to slice and dice individual sections of Teleflex. I'm going to look at Teleflex in its entirety.

Okay. Fair enough. So just moving on to the P&L. You delivered record gross margins and operating margins in Q2. And you've guided to about, I believe, about 225 basis points of operating margin expansion at the midpoint for the full year. Can you just help us discuss the drivers of it and really how you're thinking about margins in the back half given the record pace that you delivered in Q2?

Yes. So we're really happy with our margin performance over the year. Obviously, up margin improvement is driven by leverage from the gross margin. As you know, the hardest hit margin part of the portfolio continued to recover outside of COVID. So we saw a nice recovery in UroLift, saw a nice recovery in Interventional Access, a nice recovery in Surgical. And that's partly offset by expenses coming back into the income statement as we continued to move towards a more normalized environment. And also, we have incremental strategic investments that we announced on the Q2 call in regards to UroLift and MANTA, which totaled $10 million. I think I would ask investors to stay tuned for an update on our financial outlook at our Investor Day in November. While we don't want to steal our own thunder at this time, I think it would be fair to expect that we will lay out a multiyear view of our business, including revenue growth, sustainable long-term revenue growth, driven by some strategic investments in our key growth portfolio, and obviously, margin expansion expectations. In the past, 2/3 of our gross margin expansion have come from mix, with a 1/3 coming from our restructuring programs. And we lay out a 3-year plan at our Investor Day in November, and again, give investors a lot of excitement around the long-term revenue growth for Teleflex and the long-term gross and operating margin expansion for Teleflex over a multiyear period.

That's really helpful. Just another question on the P&L. And if you can directionally help us think about the rising material cost this year and into next year, any impact we should expect there? And also with respect to the euro, just the FX rate, anything directionally would be helpful.

Yes, Shagun. We've discussed this a few times. And we have seen some elevated inflation this year across resins, labor and freight. That said, our team has done a really nice job offsetting these headwinds with our continuous improvement initiatives and opportunistic price increases. So as we look ahead, you're correct that the rising material costs could continue and have an impact in 2022. And I would just mention that we still have the same levers available to us to potentially offset inflation, being continuous improvement projects, and obviously, pricing. I think Teleflex is a little bit unique in so far as that we have been able to raise prices over a multiyear period. As you know, we start every year thinking we're going to have a 0 to 10 basis points of pricing. We normally get to 10 or 20 basis points. This year, through the half year, we're at probably 30 or 40 basis points in pricing, which is more than offsetting any inflation that we're seeing from resins, labor or our transportation costs. Regarding the euro, while we have not at this stage provided guidance for '22, it's fair to assume that if rates stay at current levels, a strong dollar would likely be a headwind to the P&L year-over-year basis. But not just for Teleflex, that would be a global impact for all companies that do business within the European Union and the Eurozone. So more to come on that. But I think we feel really comfortable about where we're at, and we really look forward to giving an update at our Analyst Day.

Got it. That's helpful. Let's shift to a discussion of UroLift. I did see the press release out that it seems like you're formally launching UroLift 2.0 as well as the Advanced Tissue Control product. You're introducing it at AUA over the weekend. Just curious, what's the plan for the rollout? And how should we think about revenue contribution from these products?

Yes. So we began with the UroLift 2 at the beginning of the year in a controlled rollout. I mean it was controlled simply because of the impact of COVID. We went to a full rollout in Q2. And you're correct, we're officially launching the UroLift 2 at the AUA. So we've put out a press release to make sure that the clinical community was aware of that. It is our expectation that we will fully convert the North American UroLift volume pretty much by the end of next year. And we will pick up a full 4 percentage basis points of margin in that business unit as a result. From an overall Teleflex perspective, Shagun, that would equate to around 40 basis points for Teleflex once we have that completed. The ATC product is really for addressing the median lobe patients. And that's about 5% of the overall patients with BPH would have a median lobe. And again, that's been a launch since Q2, but we are doing a formal launch at the AUA, and we're really excited about that product. It has a higher margin than the UroLift 1. And therefore, we see it as a nice adjunct. And also, demonstrates the clinical community that we're going to continue to evolve this UroLift portfolio and continue to invest behind R&D to make the procedure even better for the patient, no sexual dysfunction, don't have to wear a catheter, immediate results. And of course, at the AUA, the other press release we announced was the 30,000 clinical data study that clearly demonstrates that the revision rates for UroLift are lower than those for Rezum. After 4 years, UroLift was around 7% revision rates and Rezum was about 9.5%. And this is a 30,000 statistically significant and judging revision rates in the way that they should be judged rather than some of the innocuous studies that were done previously around revision rates for the 2 technologies. And it also shows that UroLift is very similar to the gold standard TURP in regards to revision rates. And all of that is very much in line with our pivotal trial. So I'm glad to see that the data also in real life bears out what happened in the pivotal trial for UroLift.

That's very encouraging. So I guess let's discuss the reimbursement environment for UroLift. CMS has proposed reimbursement cuts of about 20% in the office setting and about 6% in the hospital outpatient and ASC setting for FY '22. So can you just help us handicap the risk here? Firstly, what is the probability of its implementation? And then how should we think about if -- any impact on utilization, especially in the near term, and your ability to offset that?

Yes, absolutely. Obviously, it's front in mind right now. And you are correct, Shagun. The CMS proposed rate for 2022 does contemplate a reduction in payment for the office setting only, and it's in the magnitude you called out. For the hospital and ASC, the payment is roughly flat, with a modest increase year-over-year. I'm going to steer clear of the probabilities, but I'm happy to share our position on this matter, which was made public in a comment letter to CMS posted at the end of August, and it is available on the CMS website. Our comments as well as 19,000 other comments as of last week and rising sharply. So clearly, there is a lot of individuals, groups that want to have their voice heard. So first off, we view the proposed changes as somewhat confusing from a CMS strategy perspective as they are disproportionately targeting office-based procedures across specialties and including UroLift. So 600 procedures will be impacted. We believe that the rule could limit patient access to procedures in the lower cost side of care, thereby increasing cost to the system at a time when patients are more willing to return to an office side of service that they view as safer from a COVID infection perspective. And that is contrary to what CMS' goals normally are. They normally want to encourage treatment at the lower cost side of service. So as such, our main focus is to engage with key stakeholders, including the major industry societies, clinicians, patient groups, patients themselves, and make sure that CMS understands the unintended consequence of the proposed rule from a broad coalition of constituents. Regarding timing, the final PFS will go into effect starting in 2022. So there is 0 impact to this year 2021. And also, given that UroLift is performed in hospital, outpatient, ASC and office settings, we are confident in our ability to work with clinicians to ensure continued patient access to a leading minimally invasive treatment option for BPH. And just as an aside, we're very proud to announce that we have just surpassed 300,000 cumulative UroLift procedures. And with 12 million men that are treated for BPH, we have just scratched the surface of this opportunity.

That's helpful. I'm just curious, so it seems like the AMA, the RVU update committee, they are supporting a 4-year phase-in for these cuts. So does that help or hurt you? And like do you think -- you do think that is a possibility -- a possible outcome?

So again, I -- the likelihood, there's better people out there that can judge that rather than me. But I'm going to share my position and Teleflex's position. We are strongly opposed to the proposed 2022 rulings. And we have asked CMS to postpone implementation of the proposed labor cost update until they can properly assess the impact of a rule and -- that we believe could threaten its goals to improve health equity and patient access for Medicare beneficiaries. And you will also see from our submission that we are opposed to the phasing in of these changes because that simply kicks the can down the road. And whether Medicare, Medicaid patients are limited now, immediately are limited in 4 years' time to appropriate access, I think, is irrelevant. I think the important factor here is we want to make sure that this patient group has access to all levels of procedures in all cost settings, and in particular, in the lower cost settings, which ultimately will save the ecosystem money and CMS help them achieve their goals of reducing overall health care costs to their patient groups.

Got it. I'll just squeeze in a client question. Given UroLift reimbursement update, how are you factoring that in for your Analyst Day targets?

So we would be hopeful that by the time we get to our Analyst Day, if CMS stick to their guidelines, that the final ruling should be in by the time we get there. I have spoken to a number of clinicians on this topic. And I think clinicians are going to -- a vast majority of them are going to sit into one bucket, where a number of clinicians have told me that based on their math on the CMS ruling, that their thought would be -- and these are clinicians that exclusively do UroLift in the office and some of them also do Rezum for larger prostate patients rather than do a TURP, they have told me that they would move both procedures from an ASC -- or pardon me, from an office to an ASC. And we've made that clear, I think, to CMS that, that is what we're hearing from the field, and therefore, cost the overall system additional dollars to treat those patients because of the size of service. And also, we are aware that the vast, vast majority of nonacademic urologists are part owners or have access to an ASC. So we think the biggest pool is going to be in that bucket if this final ruling remains. And that's why we're trying to bring these facts to the attention of CMS because we believe this would be bad for patients, bad for clinicians and bad for CMS.

Got it. So I guess let's discuss your DTC efforts. We haven't seen the kind of uplift to UroLift volumes as we had expected from your national DTC initiative since you began in July. And I think part of that is COVID, and it's probably helping offset some of that impact. And also you've had some leadership changes. So can you just help us understand ? Can you parse out the impact of the pandemic from DTC in recent quarters? And just help us think through how you're thinking about the ramp from here on out.

Yes. So we're very pleased with our DTC campaign. And we think that you're absolutely correct, that the impact to overall elective procedures -- not to our DTC, but to elective procedures is driven by COVID and right now the second phase of COVID. The 2021 campaign was really built upon the success of the initial launch, which began in the second half of 2020. The campaign has continued to meet and exceed its preset performance objectives. One of those is to raise brand awareness for UroLift, which has actually increased from 4% pre the campaign to 10% at the end of the 2020 campaign. And that for us is a big watershed moment. And it is surprising to me that in the age of the Internet, Dr. Google and so many areas, that only 4% of men pre the campaign who had BPH were actually aware of UroLift given that it was fast becoming the standard of care for the treatment. We are seeing even greater response rates in 2021 as we progress with the full year campaign. And we are increasing our spend versus 2020. Currently, we are focused on weekly optimization of networks and programs, which has enabled greater efficiencies while staying ahead of ad wear out. So you don't want people to become worn out with the same ad. So our team has done a fantastic job there. And early data shows very high response rates from broadcast news programs. Regarding your question on DTC relative to pandemic, I mean, again, it's fair to assume that COVID has masked some of the benefit. But we're looking at this in the long term. And we're looking at it that this patient who has BPH is now under the care of urologists whose primary treatment option is UroLift. And we also think it is important to continue to fund the outreach to consumers. And as COVID infection rates decline, we should continue to benefit from that heightened awareness from COVID.

Got it. So I guess we're almost out of time here. So I'll give the floor to you for any last minute comments.

So I think my last minute comments would focus on Teleflex as we continue to execute. I think we went through Q1, we were in a position to raise revenue and EPS following Q1. Again, we had an excellent execution quarter in Q2. We didn't raise revenue, but we covered the $28 million to $32 million revenue from the respiratory divestiture. We raised our gross margin, op margin. And again, we raised our earnings per share. As I said earlier, as I sit here today, I see the book ends of our full year revenue and EPS, in my view, the 2 most important lines in the income statement, very much intact, even despite the resurgence of COVID in late July and through the month of August. I think that the long-term plan for Teleflex is still very much intact. We're looking forward to our Investor Day where we will lay out our plans for long-term durable and sustainable growth for the entire Teleflex portfolio, obviously, focused on the overseas expansion of UroLift, but broader than that, within intraosseous and the PICC portfolio within Vascular, continuing to execute against MANTA, Z-Medica and EZPlaz coming down the horizon and obviously accelerated growth overseas. So we think that the long-range prognosis for Teleflex is very much intact. That, coupled with nonrevenue-dependent margin expansion, mix playing through the income statement, we believe that the long-term future for Teleflex is as bright as the short-term future for Teleflex as we as an organization continue to execute. And I'll finish by thanking our 15,000 employees throughout the world who continue every day to deliver products to our patients and continue to execute at an incredibly high level. And Shagun, thank you again for having Teleflex attend your conference. It has been an excellent conference.

Great. Thank you so much. Liam, Larry and John, thank you. Have a good day.

Thank you.