Teleflex Incorporated (TFX) Earnings Call Transcript & Summary

Of the 43rd Annual Raymond James Institutional Investors Conference. My name is Jayson Bedford. I cover medical devices here at Ray Jay. It's really our privilege to have with us the team from Teleflex. We've got the company's CEO, Liam Kelly; and we've got the company's VP of Investor Relations and Strategy, Larry Keusch. So welcome back both. And with that, we're going to open it up with a quick intro, and then we'll jump into Q&A. So Liam, please tell us a bit about your business, why Teleflex adds value to society?

Thank you very much. Thanks, Jayson, and it's a real pleasure to be here today. Interestingly, this was our last live investor conference 2 years ago. So it's a real pleasure to be back here again in person and live. I'll just give you a brief overview of Teleflex and then we'll go to Q&A. Teleflex is a company with global scale that is built on innovation and brand power. In 2021, we generated over $2.8 billion in revenue, an increase of 8.8% constant currency year-over-year. We also posted a 25% year-over-year increase in adjusted earnings per share to reach $13.33. We have over 25,000 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 over 14,000 employees in over 30 countries around the world. All of this would not be possible if it was 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. Just going to give an overview on a few of the business units, and I'm going to start with Vascular Access, which accounts for around 25% of our revenue. We've got a comprehensive range of access portfolio with strong share positions globally across central venous catheters, EZ-IO, and we're rapidly taking share in the PICC market because of our coating technology. 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 and reduction in major complications. Within our anesthesia business, we have an expanding and differentiated emergency medicine portfolio, augmented by hemostats and an exciting opportunity on the horizon, involving potential freeze-dried plasma offering that we are working with the FDA to gain clearance on. Our Surgical business growth is led by our leadership positions in manual triplication and differentiated instruments. In Interventional Urology, which generates approximately 12% of revenues, we sell the UroLift system, a leading minimally invasive treatment option for benign prostate hyperplasia. Finally, our OEM business provides design and manufacturing services for leading medical device companies with expertise in catheters, including thin oil catheters, wires and sutures. Given the strong growth in OEM, the business now accounts for roughly 9% of Teleflex's global revenues. 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 our 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. 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 high-growth portfolio, which is spread across several business units and includes UroLift, MANTA, Hemostat EZ-IO, OnControl and PICCs represents approximately 25% of our total revenue in 2021. As implied in our 2022 Pason revenue guidance, which we provided on February 24, our high-growth portfolio is expected to increase in the mid-teens. Our durable core platform, which accounts for over 60% of revenues are estimated to increase approximately 4% and our other category includes sales of respiratory products not included in the divestiture to Medline, Urology Care and manufacturing and supply transition agreement revenues and account for approximately 12% of total revenue in 2021. For '22, this segment is anticipated to decline in the low to mid-teens year-over-year largely due to the respiratory divestiture. 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 a really 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. Now with that as a little brief introduction, we'll now turn to the fireside chat with Jayson. Thank you very much for your time.

Well done. Thanks, Liam. So I guess, let's just get this question out of the way in terms of your exposure to Russia and the Ukraine and the potential impact on the business.

Yes. I mean it's a tragedy what's going on over that side of the world, first of all, and our hearts go out to the people of Ukraine and Eastern Europe that are dealing with the crisis. For Teleflex, our total revenues in both geographies is roughly 0.2% of our total revenues. We've also looked at our supply chain to see if we have any exposure. And to date, we haven't found any exposure to any element of our supply chain. So not much impact on Teleflex, but significant impact on the people in Ukraine, obviously.

Very good answer. So let's just talk about the investment identity and the growth profile of the business. The last couple of years, there's obviously been a lot of noise. How do you want investors to view the sustainable top line growth profile at Teleflex?

Yes. So I think the way we look at Teleflex is really, if you look at our -- what we executed last year, and I know in your business, you say, past performance is no indication of future performance. In my business is the exact opposite, past performance is the only indication of future performance. So if you go back to last year, we grew 8.8% constant currency. And if you look at this year and you exclude the respiratory divestiture in the day, our guide would tell you that we're going to grow 5.9% to 7.4%. So we're right in that 6% to 7% that we laid out in 2018 for that 3-year plan. And it's clear to me that if it wasn't for COVID that we would have definitely achieved that 3-year plan on all metrics within the income statement. I think that, as I said in my opening comments, we're really proud of that 25% of our portfolio that's growing in the mid-teens. And over time, as we augment our portfolio, we would see ourselves adding to that bucket, and augmenting that bucket together to growing even faster. And within that bucket, you have UroLift, you've got MANTA, you've got our intraosseous portfolio, you've got our PICC portfolio, and you also have our...

Hemostasis.

Our hemostasis portfolio. Thank you, Larry. And those -- we're very focused on the investments. And the philosophy within Teleflex is I want all investors to hear this. Not all the growth is equal. Those are the higher-margin products. So as we grow those products in the mid-teens, we're going to get leverage within the income statement because they're all above our base gross margin as an organization.

So durable 6% to 7% is kind of the thought process here from a top line perspective?

Yes. So we're going to have an Investor Day in May, and we lay out our 3-year plan. And I think this is a great insight investors are going to get into Teleflex because we've given our guide for this year. So you've got a 1-year view, and then we're going to come in May, and we're going to give a 3-year view into Teleflex. So in totality, investors are actually going to get a 4-year look at what Teleflex is going to do over the next 4 years. So I think it's a good setup and we're hoping to have it live in New York at the end of May.

Okay. I was hoping this would be a little preview for the analysts and investors.

I know.

Just in terms of COVID and the experience of COVID, has it changed your view on the level of investment needed to grow the top line 6% to 7%?

So what we wanted to do this year was come in with our growth franchise as fully funded. So we have some OpEx coming back this year behind those growth algorithms. And Jayson, this is good OpEx. This is the OpEx investors should want coming back. This is the OpEx focused on salespeople being out there on the road. This is the OpEx focused on doing trainings, running BPH summits, running training summits, doing more MANTA in-person trainings, having broader access to the hospitals. So that's what you're seeing coming back this year. With regard to the impact of COVID, I think it has impacted some of our businesses, in particular, Interventional Urology, Interventional Access and Surgical. But overall, we are using more digital technologies in the other side of COVID. We have reduced our real estate footprint in order to become more efficient. We are very disciplined in our OpEx and will always be. So all of the front-facing customer OpEx is within the plan for this year, and we will expect that to be in the plan for next year. Internal meetings I think we're living in a new world now where a lot of our internal meetings, if a function has 4 meetings a year, then maybe 1 of them will be live and the other 3 will be virtuals, cut down on travel costs.

Okay. In terms of -- if the top line is growing 6% to 7%, what does the margin expansion look like on an annual basis? You mentioned that the higher growth businesses, revenue sources capture or hold higher gross margin. Just walk us through the margin profile here. And I think historically, you've talked about aspirational goals of 30%, 31% op margin, is that still on the table?

Yes. I think it all starts at the gross margin line, obviously. So at the end of last year, we hit 59.5% gross margin and 28% operating margin. The gross margin expansion was around 270 basis points. The op margin expansion was around 300 basis points. So we've seen nice expansion last year over the year previously where it was a little bit depressed. And even if you look at the op margin over 2 years, going back to '19, it's 200 basis points of expansion. So clearly, we've demonstrated an ability to expand both gross and operating margins over the last -- through the pandemic. And actually, our goal over the 3 years was to get to 60%, 61%. And even without the couple of hundred million dollars of leverage and even with the increased inflation that we saw, and we're seeing inflation again this year, we got to 59.5% last year, which I think is a tremendous performance by the company. I will say that there is some inflation in the horizon. So we've got about 70 basis points of inflation hitting us this year in the region of about $20 million. Cumulatively, if you're adding what we got last year, we're in that $25 million to $30 million of inflation. We do anticipate that will dissipate in the back half of the year. But I do think that 30% to 31% is imminently achievable for a company like Teleflex with our portfolio. And to your question, where does it come from? Well, we've got about $40 million in restructuring still to come through the income statement. So that's obviously going to help us. We've got the UL2 that we're rolling out, which will add 4 full percentage points to that business unit. We also have diversified -- divested the respiratory assets. And when the supply agreement rolls off at the end of '23 into '24, that will also help expand our margins. And of course, you got that mix element we spoke about that the margins from that 25% of our fastest-growing part of our franchise are all well above that 59.5%. So you get that nice mix algorithm going on in the income statement once you come out the other side or at least have the inflation in your prior year comparison.

Okay. So if I kind of sum that all together, the assumption is that you feel comfortable with double-digit EPS growth, if the top line has grown 6% to 7%, is that fair?

So I didn't actually -- I don't remember saying an EPS number...

You didn't.

And you're really trying to get to my Investor Day in March. And I know it's getting near St. Patrick's Day, but we're going to we're going to hold off on the crop of gold for a couple -- or another little while.

Yes. Shame on me, shame on me. Okay. So let's just discuss the growth drivers a little bit. UroLift, it's 12% of sales, but it's historically accounted for a disproportionate amount of the company's growth over the last few years. So you've talked about COVID being the largest weight on growth over the last couple of years. Can you just walk through, one, is there anything you've learned over the last couple of months that would lead you to believe that COVID wasn't the way? Is there anything else you can identify, whether it be competition, internal issues, marketing message, et cetera?

So we know it's COVID as the largest impact. And what we've learned is that the UroLift procedure has an inverse relationship to COVID cases rising. As COVID cases rising, UroLift procedures drop. What we saw was during the rise in COVID cases, in particular, in July and August. We saw a recovery in September. We saw a recovery in October and November, and we really saw the procedures begin to come back. Along came December, and we had the next outbreak of COVID, and that continued through January through the first half of February, and we saw a drop off again in a direct inverse relationship, the number of COVID cases. And we've seen it begin to pick up again then in the latter half of February. So we know that it's COVID. Now akin to that, and this is particularly acute in the last outbreak of COVID is in relation to staffing shortages. We see staffing shortages in hospitals. We see staffing charges in the ASC in the office. Hospitals are managing it a little bit better. They're releasing nursing grades a little bit earlier from their cycle and get them into the system. They're doing the last part of their -- some hospitals are doing this. The last part of their degree is being executed on practical experience. And I think that, that's the other gating factor is the staffing shortages, and it was made more acute because of the Omicron because it was much more contagious. So you had staff that had to isolate for the 5 to 10 days, depending on whether they had themselves or they were a close contact during that outbreak. So it exacerbated it. And let's not forget that, again, last year, UroLift grew 18%. It had a good solid year last year in the middle of 3 COVID outbreaks. So I think that the product did well. We know that there's no competitive dynamics, Jayson, we've run the numbers, and we know that it is really down to those 2 factors, the biggest one being COVID and the second one being staffing shortages.

Do you see the staffing shortages start to abate, if I compare today versus January?

Yes. I think that it's abating somewhat because of the Omicron has dropped, so that segment of it with people being isolating. I think this is going to be with us for a little while. When everyone thinks of staffing shortages, they think of doctors and high-level nurses. But it goes much deeper in the ecosystem than that, you're talking about ancillary staff. You're talking about reimbursement staff. Some of these members were -- especially in the office and the ASC, there were furloughed during the middle of COVID. So you can get $16 an hour working in Chick-fil-A instead of being an ancillary staff in an office environment. So that's the competitive dynamics that are going on. What's going to alleviate it is some of the tactics the hospitals are using to release the nursing element earlier. And Jayson, you know when you're getting old, when you think the police man is getting younger and you think that the dock is getting younger. Well, get ready, the head of the nursing ward is going to be much younger now because of that dynamic. So we're all going to feel an off lot older, and we go in to visit hospitals from here on in.

You've talked about a vision of UroLift being a $1 billion product at some point. Is that still on the table?

No, absolutely. I mean we did $340 million last year. We would be knocking on the door of $400 million this year. We have very early in the penetration curve. We've only trained less than 30% of the docs. We've only done cumulatively over 300,000 procedures, almost all of them in the United States out of 12 million men. So no matter what the yardstick you use, we're very early in the adoption curve. And then we've just started overseas, bringing on Japan from the 1st April. Brazil, we've started in Brazil in the private pay market. We've got France coming on in the back half of the year. We've got easily starting region by region, and we've got Spain starting region by region. And if you bring a product to the market and if you do it well, even though for BPH, there are a lot more men overseas with BPH than in the domestic market. So we got 12 million here, you got 100 million globally. But if you roll out a product globally well, your revenue in the U.S., you should be doing the equivalent of that in the overseas markets. Just even on that benchmark and based on the lower level of penetration, I firmly believe it will be $1 billion product for Teleflex.

You might want to mention China, too.

Yes. And China is in the outer year. So next year, we should be -- get our registration in China, and we'll also bring on Taiwan. And then the year after, in '24, you should think that we'll bring on Germany.

What's the biggest risk to the $1 billion? Is it slower uptake internationally? Is it pricing reimbursement concerns in the U.S.?

So for sure, a stable reimbursement environment will help us because all around the world, we need to get reimbursement. So that was the gating factor to beginning in Japan, was getting that reimbursement. It will be the gating factor for Germany. It was the gating factor for France because it's such a unique product, we need to get our own specific reimbursement code in every country we go into. But once you start getting it in a few of the countries in Europe, it makes it easier the next country you go to. The gating factor, the gating factor, though, is COVID. That's the gating factor, is getting out the other side of COVID and getting that -- those procedures getting done again.

Well, the fact that we're all here together tells me that COVID is maybe in the rearview mirror.

Well, I firmly believe we're in endemic stage myself as well, and I'm looking forward to it.

Okay. You alluded to tweaking the UroLift strategy in the U.S. on the last quarter call. Can you just talk about kind of what changes you made and how that will impact the business?

Yes. So sometimes you just need to be tactical and this is a year where we need to be tactical in order to get the UroLift growth and ensure that we get to that 15%. And there's 3 elements to the strategy. Now we will train docs this year, but it's not going to be as much of a focus, and here's why. Through the COVID times, our champions, and the champions are the urologists that do 6 procedures are more every month. And the interventionists are those that do 10 procedures or more every month. What we saw through COVID is that their cases per month dipped because of COVID. So the quickest way to get UroLift about 15% is to focus on those champions. The vast, vast, vast majority of them don't offer any competing products for minimally invasive treating for BPH. They're either going to do a UroLift or they're they going to do a turf or they're they going to leave demand on pharma. That's the 3 options for the vast, vast majority. That's number one. And we know that's going to make a significant difference to the revenue ramp this year. The second one is to revisit the 900 docs that we trained through COVID. Because we didn't have as much access because of the COVID environment, those docs are not as effective as docs that we would have trained pre-COVID. So refocusing on them, getting more champions out of that cohort adopt is another gating factor. And the third one is to roll out the UL2 throughout the United States and to penetrate that market because we pick up 4 percentage points in growth. And that's the U.S. And obviously, overseas are the markets that I discussed, Jayson, that ramping in Japan and so on and so forth. So you combine those 2 strategies. The domestic strategy is a change from 1 year because it's the right thing to do in the shorter term to get it ramped up to that 15% growth. And if we do this well, we will get to 15% growth. And as long as we don't have a severe COVID outbreak, we'll be in good shape for that.

Have you added to the sales team? I'm just trying to figure out kind of what you've done a little differently in terms of, you're supporting the champions here, is it more clinic support? Is it DTC? Is it just more face time with additional reps?

So it is all of that. It's more face time. It's working with them to ensure that they are following the protocol, getting IPSS score and IPSS score is how you measure flow from AMA BPH, getting IPSS score for every man that has BPH following through the protocol, running BPH summits, doing treatment are doing training on median lobe, refreshing on the UL2. The UL2 has better visualization. And so therefore, it's -- you're getting fewer bone strikes. So bringing that concept. And I'm glad you mentioned DTC because DTC has had a phenomenal result last year. We got 200% increase in the number of impressions and a similar number of transfers from our third-party call centers, a similar increase from our third-party call center and from our digital campaign. And yes, on the sales force, we are adding another 15 to 20 again this year, consistent with what we've done every year since this product has been -- this company has been in our ownership. And we're working to go deeper into the urology practices, train those 900 and do all the other things that I said.

Is UroLift 2 on its own, a driver of increased utilization?

That's a great question. I think what it does is it makes the procedure a little easier to perform for the urologist. It should make it easier for us to train the urologists. And it also for all of the ESG funds out there, it reduces our carbon footprint significantly. So we reduced our waste by around 50% because instead of having each individual UroLift in a tray, now you'll have 4 cartridges in a tray and 1 handle that the doc can use. We do know that docs are having fewer bones strike, and a bone strike is where you fire an implant through the prostate and it hits the pelvis. And you have to pull that implant back, and we do know because of the better visualization that they are having fewer bone strikes, and that's really encouraging and the docs love that because it's a little bit of a hassle for them to pull the implant back.

Last question on UroLift. There's been some changes to reimbursement in the office. The potential here is that reimbursement gets a little worse in each of the next couple of years? How are you preparing the business for that outcome?

Yes. So our reimbursement, pre the change, a doc would have net of the cost of product, just north of $1,200 approximately. With the change, and now with the change in the conversion factor because of that law that was passed, it's roughly $1,000. So it isn't that significant to change this year, but not to be complacent we always look at ourselves as the paranoid Zebra, the paranoid Zebra never gets eaten. So -- and we're constantly paranoid in this area. So what we've done is we've made modest price changes. So in the office, and the reimbursement only impacted the offices, I want all the investment communities to realize that. And it impacts approximately 21% of our total UroLift revenue in the United States. So what we've done is we've made modest price increases to the office on top of what's changed with the Biden law, and we've made modest price increases in other sites of service. So therefore, the overall price of the product, the average selling price will remain the same. The margin will remain the same and they'll be augmented with the UL2, but it does give us some more flexibility as you go into '23, '24 and '25. Now if a doc wants to move from an office to an ASC, of course, we'll facilitate that.

Okay. Perfect. Just in the 25% of the pie that's deemed high growth, UroLift, I think, accounts for roughly half of it. Can you just talk about some of the other products in that category? You mentioned them earlier, but I'm just curious, are they addressing markets growing at 15%? Are they capturing share? How does the rest of that pie grow at 15% if UroLift is half, and it's growing 15%, it implies the other half are growing 15%?

Yes. So it's a mixed bag as it always is. So at the top end of the growth profile, you have MANAT. MANTA will grow north of 50% this year. The next in the bag is our PICC portfolio that's been growing at 15% a year-over-year. So we think that's consistent. And the reason we're taking share in PICCs -- sorry, MANAT is converting a market. So it's converting. There is no large bore closure product out there. They're using single, 2 to 3 single bore or smaller bore closures. So we're converting that. PICC is taking share, and the reason we're taking share is we have an antithrombogenic and antimicrobial coating, and hospitals now have to document infections on PICCs. And that's why we have a significant market share in the U.S. on CVCs because of our coating technology. And infections on PICCs are approximately 4%. It will cost a hospital over $30,000 to address an infection, a CLABSI, they call it, to address a CLABSI, and they won't get reimbursed for that. So this is saving the hospital's money and the ecosystem money. Then you've got, obviously, UroLift growing at 15%. And then you've got our hemostatic portfolio and our intraosseous portfolio, and both of those are growing high single, low double-digit growth. So that's the composite of the pie and it all averages out to that kind of mid-teens level growth.

And then just on...

Jayson, I want to reinforce again all of the margins in that pie are accretive to Teleflex. And there are a number in -- a couple in there that are even more accretive than UroLift.

Okay. Okay. Helpful. And then I think we've got a minute left. The durable core, the 60%, 65% of the business is durable, 4% growth. Is that -- what's the collective end market growth of that bucket of revenue?

So the collective end market is -- it's a mixed bag, as you can [indiscernible]. It's around that 2-ish percent. And in many of those areas, we continue to take share. We launch new products into the segment, and we take some price. Our Vascular Access business is always a good hunting ground for price. Our Surgical business is always good hunting ground for price and our interventional business traditionally has been a good opportunity for us. So we take a little bit of price, and we have approximately 50 basis points in total built into our plan for this year. And Teleflex has always been a company that's able to take price. But it's that combined with the launch of new products like the Ergopack that I mentioned it's an upgrade to the existing CVC platform. It makes it easier for the clinician to insert a CVC, and that's being adopted rapidly within the United States, and you're converting from a base of product to a higher base of product, and that helps the growth profile, of course.

Okay. Well, may we all be paranoid Zebras. Liam, thank you for the time. Larry, thank you for the time. The breakout session will be downstairs.

Thanks, Jayson.

Thanks, Jayson.