Teleflex Incorporated (TFX) Earnings Call Transcript & Summary

Hi, everyone, thanks for listening in today. My name is Lilia Lozada, and I'm a member of the med tech team here at JPMorgan. It's my pleasure to have a few members of the Teleflex management team with me here today. With CEO, Liam Kelly; CFO; Thomas Powell; and VP of IR and Strategic Development; Larry Keusch with me here today. So -- as a quick reminder, feel free to submit any questions you may have using the conference website and clicking the ask a question button below the video. And with that, I will turn it over to the team for their prepared remarks.

Thank you, Lily. And good afternoon, everyone. Thank you very much for joining me today. As Lily said, my name is Liam Kelly, I'm the Chairman, President and CEO of Teleflex. We are pleased to be able to attend the JPMorgan Healthcare Conference, and we appreciate your interest in Teleflex. Our presentation today will follow the investor slide deck that is posted on the conference website. Before I begin the presentation, I would like to remind you that some of the matters discussed today will contain forward-looking statements regarding future events. I wish to caution you that such statements are, in fact, forward-looking in nature and are subject to risks and uncertainties and that actual events or results may differ materially. On to Slide 3. Our mission at Teleflex is to improve the health and quality of people's lives. Every single day, we estimate that our products are used in over 24,000 surgical procedures in the United States to help more than 2,000 patients who require vascular access intervention, to care for more than 8,000 patients in the intensive care unit, used by emergency responders to treat more than 4,000 patients in the field, to treat patients in over 3,500 interventional cardiology procedures and to help nearly 200 men with benign prostate hyperplasia. Our portfolio also benefits from favorable demographic trends that will continue to drive demand for healthcare, including the aging of baby boomers in the west and maturing Eastern countries, along with increasing consumption from a rising middle class. With 60% of our portfolio either benefiting for or not impacted by COVID, we remain relatively insulated against the impact of the global pandemic as we have many products that are used in situations where the delivery of care is difficult to postpone without creating an adverse event for the patient. Today, Teleflex is a company with global scale that is built on innovation and brand power. In 2020, we generated $2.5 billion in revenue. We have over 30,000 products across 7 global product families, providing scale and depth, and we serve over 100,000 customers worldwide. We have industry-leading brands with category leadership. And we have 14,000 employees in over 30 countries around the world. All of this would not be possible if it were not for the strength of our global team, we are proud of our ability to attract and maintain world-class talent driven by our unique culture. We are a purpose-built company that is defined by our core values with a focus on people at the center of everything we do. The strength of our culture has been exemplified by consistent execution during the global pandemic, and I couldn't be prouder of how our people have come together and performed through a challenging environment. We take our ESG initiatives seriously and continue to make progress towards our objectives. In 2018, we established a Corporate Social Responsibility Committee, led by a cross-functional team to create and execute against our sustainability strategy. Since then, we have invested in numerous programs, including global diversity, equity and inclusion initiatives, donations to various charitable organizations through the Teleflex Foundation and investing in environmental health and safety resources to help reduce and track our carbon footprint. Now to Slide 6 for those following on the deck. While we are excited about the opportunities ahead of us, we also think it's important to provide some perspective on the evolution of Teleflex. When this journey began in 2011, we were a $1.5 billion revenue company with 47.6% in gross margins and $94 million in free cash flow. Over the past decade, we have executed methodically to become a leading medical device company with a broad geographic reach. This transformation was driven in large part by our approach to portfolio optimization, including differentiated technology acquisitions to improve our exposure to higher-growth end markets and the divestiture of noncore businesses including the recent sale of respiratory assets to Medline. Along with our M&A strategy, we have invested internally to improve our innovation pipeline and streamline our key business processes. Now fast forward to 2019, we have become a $2.6 billion revenue company, generating a 58% gross margin and nearly $440 million in operating cash flow. And our adjusted earnings per share increased at a 15% 4-year CAGR. If the evolution of Teleflex was captured in a 10-chapter book, we are only in the third chapter. We see considerable room for growth as we continue to execute and our key drivers for value creation. Slide 7. We are focused on a multifaceted strategy to drive value for our key stakeholders, while empowering clinicians to deliver better patient outcomes. Our first priority is to drive durable revenue growth through our diversified global portfolio with a focus on category leadership with differentiated products. Our second priority is to enhance profitability through gross margin and operating expense leverage as our revenue expands. Our third priority is to expand our cash flow generation as our net income increases, although the gains in free cash flow can, at times, be obscured by contingent consideration payments and restructuring activities, we continue to see a pathway for healthy growth. Our fourth priority is disciplined capital deployment, with internal investments and M&A as the main areas of focus to drive a balanced growth profile. Slide 8, which is titled Revenue Snapchat. Teleflex generated $2.5 billion in revenue in 2020. We organized our business units by global product categories. Vascular Access accounts for roughly 1/4 of our total revenue. While the balance of our diversified product families each contribute between 9% and 15% of the total. From a geographic perspective, we have a balanced reach in important regions around the globe. Teleflex generates roughly 60% of our revenue in the Americas, about 1/4 in EMEA and 10% in Asia Pacific. We also have a differentiated OEM business that accounts for roughly 9% of total revenue. On Slide 9, you can see that Teleflex looks to drive category leadership across our broad portfolio of products. We have often said that all revenue growth is not created equal, and our preference is to allocate more investment dollars to areas where we see the highest potential for return. Our Vascular Access business growth is driven by a comprehensive access portfolio with strong share positions globally across CVCs and intraosseous while rapidly taking share in PICCs. Within our anesthesia business, we have an expanded and differentiated emergency medicine portfolio augmented by hemostats and freeze-dried plasma as an exciting opportunity on the horizon. Interventional is an attractive segment with leading positions across specialty and complex catheters. Our growth in this segment has been augmented by MANTA, our large-bore closure device. MANTA is seeing increased adoption in TAVR and EVAR procedures due to its quick time to hemostasis. Our surgical business growth is led by our leadership positions in manual clip ligation and instruments. And our Interventional Urology business offers the leading minimally invasive treatment option for benign prostate hyperplasia. As Teleflex has grown in scale, we are increasingly positioned to leverage our global distribution and manufacturing infrastructure. We see opportunities across multiple business units to introduce products into key new geographies augmenting our commercial pipeline and a key tenant to our balanced growth profile. We will continue to invest to increase control over our commercial channels overseas, a strategy that has served us well over the past decade. We are investing in automation and efficiency initiatives in our main manufacturing and distribution centers, which will increase our customer service capabilities and drive cost savings. Now to Slide 11. We also continue to drive utilization of our key growth franchises. Let me highlight some of the key product drivers, starting with interventional urology. The UroLift System addresses a market of over 12 million men in the United States and nearly 100 million worldwide who are currently seeing a physician for BPH. UroLift is a 1-hour procedure that provides rapid symptom relief, no new onset of sustained sexual dysfunction and flexibility to be formed in all sites of service, including the office, the ASC and the hospital. With just over 300,000 cumulative UroLift procedures completed, we believe that there remains a long runway for growth in both the United States and overseas markets. Turning to intraosseous access. The EZ-IO device is a tool that enables clinicians to establish vascular access quickly in trauma or critical care situations, while the uncontrolled powered bone marrow system has revolutionized bone marrow and bone lesion biopsy. We think there is a significant opportunity to increase the utilization for each of these products in the future. Our PICCs and catheter navigation systems continue to benefit from hospitals focus on reducing catheter-related bloodstream infections. And we continue to have the only coated PICC on the market today that helps protect patients against catheter-related complications. Key interventional cardiology products include Turnpike and TrapLiner. These products continue to facilitate physician access through torturous anatomies, enabling them to perform interventional procedures that in many cases prevent a more open surgical procedure. In addition, our MANTA, large-bore closure device, has generated excellent clinical data demonstrating rapid hemostasis and reduction of complications as compared to suture-mediated and surgical closure. We estimate the global addressable market for MANTA is between $200 million and $300 million. Our hemostat portfolio consists of 2 flagship products, including QuikClot and QuikClot Control+. We are excited to continue driving market penetration into a $600 million global TAM across the portfolio. As shown in the slide, we have a number of pipeline products that will augment our long-term durable growth objectives. Importantly, we continue to invest in our innovation, and we'll expand our portfolio of new products over the coming years. On Slide 12, you can see that over the past decade, we have continuously repositioned Teleflex for growth. We have taken the company from $1.5 billion in sales with 3% to 4% growth to $2.6 billion in revenue in 2019, implying a compounded annual growth rate of over 7%. We remain focused on driving durable growth as we believe that is the key metric to delivering value to our key stakeholders. In addition to our strong revenue growth profile, we have consistently improved the profitability of our business through product mix shift, operating expense leverage and restructuring activities aimed at increasing our efficiency. As shown in the slide, in the period preceding the pandemic between 2014 and 2019, we drove more than 650 basis points of gross margin and nearly 600 basis points of operating margin expansion. Looking ahead, we continue to see opportunities to move our margin profile higher through gross margin expansion and operating expense leverage, while also reinvesting in -- to sustain our growth profile. On Slide 14, you can see that we have improved our revenue growth profile and profitability. We have consistently driven double-digit earnings growth. In the period from 2014 to 2019, we increased adjusted earnings per share and operating cash flow by 14% and 9%, respectively. Taking our robust cash flow generation into account, we have a disciplined approach to deploying capital. We view capital allocation as a key vehicle to drive shareholder value creation. First, we look to invest in organic opportunities to sustain our growth profile, our capital investments to enhance the efficiency of our global operations. Second, we will continue to seek strategic acquisitions as an important building block to further build our diversified global product portfolio. Regarding our dividend, we plan to sustain the current level of our dividend as our primary means of returning capital to shareholders. We believe this framework has served our shareholders well and do not anticipate changes to the capital allocation strategy at the present time. Regarding M&A, we will continue to focus on acquisitions to augment our portfolio and drive growth. Our process is disciplined and has enabled us to enhance our growth rates, improve profitability and build shareholder value. Regarding key criteria for M&A, we look to identify companies in secular growth markets, that have a recurring revenue component with strong market positions and proven clinical and economic benefits. With our 6 global product families, we see ample opportunity to build our presence through inorganic means. From a financial standpoint, we see targets that are accretive to revenue growth and margins. Specifically, we will look for assets that are accretive to gross margin, although we could take some dilution on operating margin for a short period as the business scales up. Return on invested capital remains the most important metric that we use to measure our long-term performance. Finally, we continue to view our relative sizes and advantage with a balance sheet that provides ample flexibility and the ability to move quickly. Since 2011, we have deployed more than $4 billion in capital for acquisitions. We have strong core competencies at sourcing, due diligence and integrating acquisitions. Our last 4 scale acquisitions positively impacted our financial profile, generating a robust return on invested capital by year 4 and creating significant shareholder value. Our most recent scale acquisition was Z-Medica, which was completed in late 2020. Z-Medica offers a differentiated portfolio of hemostats addressing a $600 million global TAM. We have executed to plan regarding the integration and see a long runway for growth with a positive impact on corporate margins. Now I would like to touch on a few recent product updates, and I'll start with UroLift. The UroLift 2 conversion is going well. And we still expect to convert the vast majority of accounts by the end of 2022, a positive catalyst for margins and commercial momentum. UroLift 2 provides enhanced visualization, requires less storage space and reduces medical waste. The early feedback on UroLift 2 has been constructive, with surgeons validating these improvements. Turning to Japan. We secured reimbursement for UroLift last December and have a team in place to initiate our commercial launch once the reimbursement is implemented on April 1 this year. In the interim, we will conduct initial training cases in Q1 of 2022. Japan remains an important market opportunity for UroLift with a $2 billion TAM and we expect to meaningfully ramp up our revenues over the next few years. We launched UroLift in Brazil in quarter 3 of 2021, a year earlier than expected. We continue to make progress on securing private reimbursement with recent milestone achievements. Although reimbursement will still likely take at least a couple of years, we are excited about the meaningful opportunity in Brazil for UroLift. We also expect a commercial launch in France in 2022 after UroLift was miscoded in 2021. We continue to invest to commercialize UroLift in other key countries, including China, Italy, Spain and Germany. Given UroLift's strong clinical data, established reimbursement and focused commercial strategy, we expect UroLift overseas to drive a strong second leg of growth. Now to round up on the update on UroLift. I'd like to inform investors that President Biden signed into law the Protecting Medicare and American Farmers from Sequester Cuts Act on December 10. Among several important items, the law increased the conversion factor in the Medicare physician fee schedule by 3% versus the final rule issued in November for office-based procedures. For UroLift, the change translates into a physician office payment that is $100 to $150 higher compared to the MPFS final rule. We are encouraged by the improvement in reimbursement, and we'll continue to work with stakeholders to address the unintended consequence of the changes to the physician fee schedule that will limit choice for Medicare recipients and likely result in procedures moving to higher-cost sites of service over time. Moving over to MANTA. Momentum was strong throughout 2021. We continue to drive market penetration with the vast majority of clinicians using the device for TAVR cases, which remains a growth market. We remain on track in our sales force expansion plans in the second half of 2021, which adds to our confidence to further penetrate the $200 million to $300 million market. Lastly, QuikClot Control+ is performing very well within the hemostat portfolio. We completed enrollment of a cardiac study in late 2021 and remain on track to file a 510(k) for an expanded indication once the study analysis is completed. With over 600,000 cardiac procedures performed annually in the United States, the expanded indication will help us to unlock an incremental market opportunity. Overall, emergency medicine products, including EZ-IO and hemostats, remain an attractive and differentiated portfolio for Teleflex. In summary, we are proud of the execution from the team in 2021, and we'll continue to focus on our key strategic priorities in 2022. I'd like to thank all the investors for their attention today, and thank you, Lily, for hosting the event.

Great. Thanks, Liam. So maybe just starting off with some near-term trends in COVID. Is there any color you can share on the impact you've seen from Omicron in the last few weeks? And how does that affect how we should be thinking about the growth outlook for the company in 2022?

So obviously, as a company, we gave guidance in Q3 for the remainder of the year. And at that time, we had obviously seen the uptick of the Delta variant in different geographies, it was particularly strong in the Northeast. As we've gone through quarter 4, we obviously saw in December an uptick on COVID cases starting in Europe and ultimately coming to the United States. I have to say that given the prudent guidance that we gave at the time with one eye on the rising cases, we are comfortable with the constant currency revenue guidance we provided during our quarter 3 earnings call. And I guess by definition, we are comfortable with the consensus estimates that remain out there today. We feel that we took a measured approach to that updated guidance, and that's updated guidance for Teleflex and the guidance that we gave for UroLift at that time. Now we're watching as we get into December, Lily, or into January. And we're keeping a really close eye on the trends we see in the U.K. They started to see an uptick of COVID cases a couple of weeks ahead of us. And they have just begun to get over the apex of that peak and early indications are there is a modest decline in the last number of days. Now if that were to continue, that would give us an indication that what we've seen in New York of that peak as well might continue to the broader U.S. market. And I think that hospitals have done a much better job in managing the subsequent waves of coronavirus cases rather than the first wave of coronavirus cases.

So there's a lot of investor focus on UroLift, but can you talk to us about how you're managing the broader portfolio at Teleflex? And what are the growth drivers that get you excited about the outlook for the company over the next several years?

So when you're a CEO of a diversified med tech company, you want lots of levers and lots of growth drivers. And I think I've never seen Teleflex in a position with so many growth drivers. You're right, there's a lot of focus on UroLift. And also, as I stated in my prepared remarks, there's significant opportunity for UroLift expansion overseas, bringing on markets like Japan and Brazil and France in this year 2022, beginning regionally in Italy and Spain. And then next year, bringing on China, Taiwan and later that year or even into the next year, bringing on Germany. But even beyond that, within our vascular business, our intraosseous portfolio and our PICC portfolio are significant growth drivers. Our intraosseous portfolio has been growing double digits for many years. Our PICC portfolio has been growing 15% per quarter as we take share because of our coated technology. We've also seen significant progress within the Z-Medica acquisition that we made, that continues to do very well. And in that call point of emergency medicine, we've got the intraosseous, we've got Z-Medica and we have EZPlaz coming down the pike in the future. So we're really building a portfolio around that. MANTA, as I mentioned in my prepared remarks, is a significant growth driver for us, and we look forward to continuing the progress with MANTA. And the HPC acquisition in our OEM business should bring that to a higher growth profile for us as an organization. And we do believe we're taking some of these products that we're already selling in the United States and bringing them over to Asia Pacific, in particular, and registering them should help us to augment the growth that we're seeing within APAC.

So moving on to some specific products. Obviously, a lot of attention on UroLift given its historic growth profile and revenue growth of about 2% in the third quarter of 2021. So first, do you have any updated thoughts on the competitive environment for UroLift and whether there's been share loss? And second, what feedback are you getting from doctors regarding how they're thinking about any changes from the physician fee scheduled final rule?

So we're seeing no share loss. We're still the dominant player within the marketplace. We have run the analysis by customer, and we know there are no share loss situation for Teleflex. We know that the impact on this growth asset is coronavirus. It is, first of all, coronavirus impacting surgical procedures. And secondly, it's the reluctance of patients to actually go and get a procedure done. Our typical male is elderly and may have comorbidities. So they are quite risk averse to catching a -- the disease. With regard to the CMS ruling and rolling out with new doctors and so on. I think we've continued to make progress in the fourth quarter with regard to new docs. We onboarded 107 new docs in the quarter and also an additional 20 in Brazil, which shows nice progress in that market space. And with regard to the final CMS ruling, I think that with what I just announced with the conversion factor, the net payment to the urologist by that simple act has increased by $100 to $150. So therefore, it's still a very -- it's -- first of all, it's a great procedure. So no unsatisfaction or dysfunction, immediate clinical benefits, the man doesn't have to wear a catheter. You can go in and have this procedure done on a Thursday and be sitting at your desk on a Monday morning symptom-free with no side effects and no catheter that has remained after the procedure. And the docs get that, that it's a wonderful procedure. So I would envision very little movement from the office site of service, which was impacted by the reimbursement in this year 2022 to the ASC in particular. But I would envision that over the coming years, you will begin to see some of that. Now the good thing, Lily, is we are working with our urology community. We are determining how to keep the overall UroLift price intact, but with some price discretion at different sites of service. And that will allow us to give the urologists a number of years if they do wish to move that procedure to an ASC plan. So therefore, because of that dynamic, we don't believe it's going to have a significant impact on UroLift volumes once we get out the other side of the coronavirus.

Okay. So you recently received reimbursement approval for the product in Japan with an implementation date of April 1 of this year. So can you walk us through the launch plans for UroLift in this region? And do you have any thoughts on the cadence for revenues in Japan over the next couple of years and the starting point we should be thinking about for 2022?

So first of all, the size of the Japanese market as compared to the U.S. market is normally a good starting point. The U.S. market is approximately $6 billion, taking into account the drug dropout category, which is where we draw most of our patients from. So the Japanese market using the same criteria is approximately $2 billion of a market size. We've already done a lot of the pre-market work. We've identified some of the key opinion leaders, and we will be doing a mandated PMDA study in the initial launch. We will do some cases, some training cases in this quarter, in quarter 1, but we'll really begin to ramp in the second quarter. We believe that the U.S. cadence is the predicate that we have. And in the U.S., at 3x size of the market, in the first full year, did $5 million, then it did $16 million, then it went to $50 million, $125 million, $200 million and so on and so forth. So we think that that's the predicate that we have at 1/3 of the size. But the most important thing is this is a really exciting market opportunity for us. It's going to be one of the larger international markets we're going to launch UroLift to. And it is really another leg of the growth stool for UroLift to continue to expand and it's the thin end of the wedge as we then start to expand the product into other geographies, as I outlined in my prepared remarks.

Great. A question just came in from the audience here. While your firm is expanding globally, what are your strategies on newly released medical device regulations such as the EU MDR and Japan's PMD Act, et cetera?

Yes. I mean the most significant one is the MDR regulation. And obviously, we've been working for the past couple of years in ensuring that our products are compliant to that. We have a full team engaged in it. And we believe that we will be fully compliant by the deadline of 2024. So we think we're in good shape to become compliant to that and any other global regulation, including the one in Japan. We -- the advantage of being a global med tech company is that we have individuals based in all of the geographies to make sure that all of our products are compliant and available for sale in each of the different markets.

Great. Maybe moving on to some other products in the portfolio. MANTA is another discrete growth driver that's important for the company. You've indicated in the past that you expect to reach 8% penetration. This $200 million to $300 million opportunity in 2021, so how should we be thinking about the growth drivers for the product moving forward?

Yes. I mean MANTA is a very exciting opportunity. Again, it all starts with the clinical efficacy of the product. It's mean time to hemostasis is much quicker than existing technologies and also it reduces major applications. And according to JAMA, a major complication would cost the hospital $16,000. We are really happy with the ramp of the product even in a COVID environment. We began with 4% penetration 2 years ago. Last year, 2021, we anticipate getting to 8%, and we feel that we will get to that 8%. We have invested in the product in the back half of 2021 in order to ensure that we have more clinical educators, clinical trainers in order to accelerate the growth in '22, this year. And obviously, we'll get into specifics of that growth when we give guidance in February for the full year.

Maybe moving on to some of the financials in the last few minutes that we have here. Another near-term dynamic investors are focused on is inflationary pressures. So to what extent has this put pressure on margins in recent months? How has it trended? And how long are you expecting these headwinds to linger into 2022?

Yes. I'll ask Tom to contribute to this, but I'll begin by saying I was really proud of our margin performance in Q3. In Q3, we hit 59.5% gross margin, 28.5% operating margin. So I think that we've really shown strong progress. We do have an opportunity to pass on some of the inflation we're seeing through pricing initiatives that we have -- we will be rolling out and are beginning to communicate on to the marketplace right about now. But I'll ask Tom to just give some insights into some inflationary aspects if you don't mind. Tom?

Sure. What we've talked about is that we have seen inflation impact us in 2021 to a level higher than what we had seen in previous years. And it really hit into 3 key areas. One is logistics, primarily sea freight, also in raw materials and then direct and indirect labor. In terms of the trending, we saw an uptick in the inflation cost for us from the third to the fourth quarter, largely the result of some longer-term contracts that we had entered into for sea freight were expiring. And so we added then contract at the at the then market rate. As we look to how these trends of inflation are in the marketplace, I'd say that from a raw material standpoint, they're pretty stable or have been fairly stable. But we're starting to see some early signals of some improvement on the sea freight expense. And then labor has been fairly known and predictable. We get a pretty good advance warning on that. And our expectation is that we're going to continue to see inflation into 2022. We have a number of initiatives in place, working to offset that inflationary impact. But it will be another drag on margins in 2022.

Maybe I can try to squeeze in 1 or 2 more in the few minutes that we have left. But can you talk about your capital allocation priorities for the year? And given the recent pressure on the stock, is a share repurchase in the cards?

So I think as we said in our prepared remarks that our focus on capital allocation is, first of all, to invest on some of the internal initiatives such as the restructuring programs we have in place, R&D augmentation. And then I think some really smart M&A. We've been able to give a significant return to our shareholders in the past through M&A. And I think with the current environment, the IPO market seems to have some pressure on it right now, which is good for companies like Teleflex as a strategic exit now that will probably look even more attractive to some of these assets and these targets that we would have. And then we do intend to continue our dividend at the current level as a means to return capital to shareholders. If something dramatically changed within the M&A world, then I think we would probably look at that stage to consider other options such as share buybacks. But as we sit here today, we don't have an improved program through the board. So we'll continue to deploy as we have done in the past and as we have successfully executed against in the past.

Yes. So I think it's fair to say that our focus is to continue to build the business for long-term sustainable growth and then obviously maintaining the dividend as it is currently.

Maybe one last one here, a question from the audience. Do you believe you have recovered the COVID headwinds seen in 2020, the 11-point revenue headwind? And is there any pent-up demand, particularly for UroLift?

So philosophically, one would have to believe that there is pent-up demand for UroLift and for other products out there because there's a number of procedures that were not done in 2020. We have been running a direct-to-consumer campaign for the entirety of 2020, which should add to that pent-up demand. We had thought that we would get to approximately 150% improvement on impressions from 2020 to '21. But actually, as we ended up the year, we actually got to almost 200% improvement on impressions and also almost 200% in transfers through our third-party call center and to our website to urologists. And the vast majority of those urologists offer only UroLift as a minimally invasive treatment for BPH. So you add that to the mix compounded by what one would believe would have to be an additional pent-up demand from just procedures that didn't happen in 2020, and indeed in 2021. Now it's really difficult for companies to forecast that or to build that into any plan, but if it does arrive, it could be a compounder onto any growth that a company might put forward when they do give guidance.

Great. Well, it looks like we're at the top of our time window here. So thanks, Liam, and the rest of the Teleflex team for joining us, and thanks, everyone, for listening in.

Thank you very much, and happy new year again.

Happy new year.