Teleflex Incorporated (TFX) Earnings Call Transcript & Summary

Good morning. I'd like to welcome everyone to the second day of the KeyBank Life Sciences & MedTech Investor Forum. My name is Matt Mishan. I'm our senior med tech analyst, and I'm pleased to be joined by Teleflex, who is represented today by Thomas Powell, EVP and CFO; and Larry Keusch, VP of IR and Strategy Development. For the audience, I'll start us off. [Operator Instructions] Tom, Larry, thank you very much for joining us.

I'll start off with a macro question to start. I believe there's just a lot of disconnected moving pieces right now, and it's hard to see the bigger picture, which is a challenge. And just to level set, what's most important for your business from a macro perspective? And kind of where is management spending the most time at this point?

Well, I think it's obviously a good question given the times and a lot of the variability going on with that macro environment. From our perspective, we would certainly highlight COVID and the ensuing impact on elective surgical procedures as being a key consideration for us. I'd say there are segments of the market that have returned to pre-pandemic levels. However, these tend to be more emergent in nature. For example, our Surgical business has seen a really nice and solid rebound. Our Interventional business has also seen an improvement. On the other hand, BPH procedures have not yet returned to pre-pandemic levels and are still likely 75%, maybe 80%, of normal volumes. So that obviously is a key focus area for us. I'd also say that right now, inflation has been and is a challenge. As we outlined on our fourth quarter earnings conference call, it represents probably about 70 basis points of incremental headwind to our gross margin. And by incremental, I mean, every year, we have a certain level of inflation. This is inflation that's above what we've historically seen in any given year. And key components of the incremental inflation include logistics, most notably sea freight and raw materials. Wage inflation is also an incremental headwind, but less than the other 2 inflationary pressures. I'd also say that supply chain has been a challenge in 2021 and it's not yet normalized in 2022. The movement of product from our manufacturing facilities to our distribution centers has taken longer than historic measures as one example. In addition, raw material procurement has also been somewhat challenged. Nonetheless, we continue to manage the situation very, very closely in order to minimize any disruptions coming out of that. So for where we're spending our time, we're very focused on a number of dashboards that really helps us to identify where issues are and to prioritize, and frankly, provides information so that the decisions we're making are sound ones as we operate in a more fluid and uncertain environment. We certainly had this similar environment in 2021, and the company executed very, very well in 2021, and we'll continue to retain our focus as we go out to 2022.

So just a follow-up on that. It sounds as if when you're saying the Surgical volumes and Interventional volumes, are you talking about it as February and March coming out of December and January normalizing and showing a strong rebound? Or is that a broader comment?

It's more of a reflection on how we saw 2021 playing out for us. It's a little early to get a good read on exactly where we're headed in 2022, though I will say that we did have visibility towards the Omicron impact in January and February before we gave guidance for the year. So we certainly reflected that impact into our guidance. But as I say rebounded, we had a really solid year for Surgical in 2021.

Okay. And then for this year, how did you see COVID coming into the year ? And then how are you thinking about it now? It seems like we're coming out of this a little bit faster than I would have thought.

I'd say that as we entered the year, we had assumed that COVID would be present, but that the environment for elective surgical procedures should improve as we go throughout 2022 relative to what we saw in 2021. So again, we expected it to be there, but also expected an improving environment as we move forward. As I mentioned, as we provided guidance, we had the benefit of seeing Omicron in January and February and found that it was very infectious, although the severity wasn't quite as bad. And so it looks like that's starting to play out as we're starting to see case counts [ that help ] trending down in the U.S. We saw a nice improvement over the last couple of weeks. So we're seeing those case counts come down as anticipated, and we'll continue to watch for any accelerated rates of infection as we go throughout the year.

Okay. Are you seeing similar trends in international markets compared to U.S.? Or are there some difference in how things are coming out of the various markets?

Well, we are seeing a number of similar trends across Europe with many of the major countries, which include France, Italy, Spain and the U.K. showing a very sharp drop in COVID cases similar to what we saw in the U.S. Germany continues to see challenges with COVID and has not yet seen the drop-off in cases that showed up in other European countries. Now with that being said, there has been a bit of a rebound in cases in Europe over the last couple of weeks, so we're watching that data very closely. In Asia, I'd say that there's been a recent increase in cases in parts of China and Hong Kong, and we're watching that data closely as well. Now with that being said, we don't have manufacturing in China, so it's more of a disruption of end market versus supply chain necessarily for us.

Let's talk about the broader growth profile. You have a newer focus on a high-growth portfolio that you quantified as about 25% of your sales with an expectations of mid-teens growth. What's included in that basket? And then we can walk through some of the key pieces later.

Okay. Well, I would say that our high-growth portfolio encompasses UroLift, MANTA; hemostatic products including Z-Medica; intraosseous products; and PICCs. And we certainly recognize the importance of UroLift as a growth driver. However, we also wanted to highlight for investors that Teleflex really has a number of growth engines, so we thought it would be helpful to aggregate the drivers and emphasize the relative size of the portfolio, which you mentioned now represents about 25% of revenues. And looking forward, we expect to continue to expand the relative size of our high-growth portfolio to the growth of products, internal R&D and M&A. And if you look at a number of those drivers, we got them through acquisitions and that's a key piece of our acquisition criteria, is looking for higher growth, higher-margin products. Now on the margin front, we should note that this high-growth portfolio also carries a higher average margin than the corporate averages. And accordingly, as those sales continue to grow, we'll also see a positive mix benefit from that growth.

And the remaining portfolio, what's the confidence in sustaining 4% to 5% growth of the remaining 75%? I think most companies would be happy to have an entire company growing at 4% to 5%, including the bigger growth drivers.

Okay. Well, just to clarify, what we talked about at the fourth quarter earnings call is that we expect to grow what we characterize as the durable core, which represents just over 60% of our business at a roughly 4% rate. So that 60% is at 4%. We still expect the other category, which includes remaining respiratory products, urology care and the manufacturing supply and transition agreements with Medline, the acquirer of the Respiratory business, to decline in '22. And that's largely due to the sale of the respiratory products in mid-2021. So we still have a difficult comp as a result of that sale for the first half of the year. I'd also like to point out that as you think about the durable core, it includes a number of product areas that are expected to contribute to growth, including our interventional products as well as ligation and instruments in our Surgical business, new products in our vascular business, including some kits that have been very well received and as well as the OEM business, which has been a very stable grower for us throughout the years. Now we also have the opportunity for continued geographic expansion of products into new territories and that will contribute to growth of the durable core portfolio as well. So a number of areas within that durable core to continue to grow at that 4% range.

Moving to UroLift. Can you help us understand the phasing of the 15% UroLift growth for 2022?

Sure. So as mentioned, as we thought about the year and how things would play out, it was our expectation that we'd still see an impact from COVID in the year and expected that to improve as the year went on. And likewise, we expect a similar trend for UroLift. So we had indicated that in the first half of the year, we should have a low single-digit growth, and in the second half, we'd move into the mid-20% range based on our guidance of 15% for the year. So in the first half, we expect UroLift to be flat in the first quarter versus a year ago, in part due to the presence of COVID and the impact on staffing. As we looked at the impact of Omicron, it did impact quite a few people. And as a result, quite a few of the staff that would normally assist in a procedure or perhaps urologists themselves had contracted COVID. And as a result, we saw some issues with staffing. And as we look to the year, we expect that to continue to improve. So for the second half, we had a favorable comp in the third quarter due to the Delta wave last year, and we expect the fourth quarter to continue to benefit from more patients meeting their deductibles in 2022 as compared to 2021. And as mentioned, a key belief is that we'll continue to see an improving COVID environment as we move throughout the year, and as a result, elective procedures should continue to improve as well.

Great. So going back to your previous comment where you said BPH procedures for last year were 80%, 85% of what they were pre-COVID, that sort of environment runs into early '22 before the market starts to recover and you get a broader market recovery for BPH.

Correct. So that's essentially what we're expecting, is that, that continues into the first quarter. And then as the year progresses, we continue to see improving procedure.

So is UroLift 2 -- as I think about it, you're talking about the opportunity to go back to a lot of doctors. And is UroLift 2 an opportunity to go knock on some doors and get back into some offices that you haven't been doing a while?

Well, I would say that as we think about the UroLift 2, that certainly is a benefit. But I think as we think about the product itself, it's really a product that's delivering a nice benefit for the physicians. It's got an improved visualization. And as a result, we're hearing of less bone strikes. Bone strike occurs when the needle hits the pelvis bone, and while it's not painful for the patient, it does require the surgeon to refire the implant. In addition, we're hearing favorable feedback on the fact that there's less storage space required, and there's less medical waste as a result of moving to a cartridge-based system in the UL2. So we'll continue to execute on the conversion of UroLift users to UL2, and we still expect to convert the majority of our customers by the end of 2022. So I would say that as we think about the UL2, we're really continuing to move forward. And as in the meantime, as we're doing that, we can certainly revisit the docs, but our focus right now is getting that launch going and out there.

Okay. I backed into a number of procedures per doctor and you have to make some assumptions, but I can get to a number around 30 procedures per doctor annually that you've trained. When you think about your champions of the product that you've talked about, how many procedures do your champion doctors do compared to the average, like, versus the newer docs where you're going to try and improve their productivity?

Well, I would say that for competitive reasons, we're not going to get all that granular on procedures by position, but what I will tell you is that our champions do at least 6 UroLift cases per month, and our interventionalists perform at least 10 cases per month. So as we noted at the time of our fourth quarter earnings call, we're really focused on increasing volume in our existing user base of champions and interventionalists. In addition, we're targeting the roughly 900 surgeons that were trained during the pandemic with the goal of moving their volumes up [ to well ] would be more of a typical cadence. So kind of touching on the question you asked earlier, is there a chance to revisit? We're doing just that as we think that, right now, there's a real good opportunity for us to drive revenues by moving some of these doctors up to a higher level and going deeper into the practices.

With the direct-to-consumer campaign, are you finding ways to support and funnel patients to those champion doctors? Is that campaign targeted enough to do that?

Well, I should start off by saying, first of all, we're really pleased with the impact of our DTC campaign with all the metrics either met or exceeded for 2021. Specifically, impressions increased nearly 200% and outperformed our internal target. In addition, brand awareness for UroLift increased 60% to 16% in 2021 and now exceeds the turf, which was at 14%. So relative to your question on whether the campaign is targeted enough, when we get a prospective inbound from a patient from the DTC campaign, the inquiry is directed towards a surgeon that performs only UroLift procedures. So yes, I think we're getting that connection made very, very well. And given successes we had in 2021 with the campaign, we're continuing that investment into 2022.

How -- when you're able to relay that information to like, say the 900 doctors that you had trained recently are not as productive with the procedure, what is their reaction to your ability to kind of bring them new patients, like to add patients to their practice with the direct to consumers campaign?

Well, I would say that as we look at the traffic hitting the website, we've seen a dramatic increase in the level of prospective patients taking a look at the UroLift. And as a result, we think it's a platform that has really been quite successful in bringing in new prospective customers and educating, building brand awareness. So we believe that the DTC campaign is exactly what we need to keep doing in order to continue to get the number of patients coming in, growing. But in addition to just getting more patients in, there's got to be a better throughput at the urologist's site, and they have been held back somewhat due to staffing shortages or patient lack of willingness to go out and have the procedure given COVID. So we really have seen UroLift be impacted by COVID. It's an elective procedure that is deferrable. And our expectation is as the number of case count or as the case counts continue to decline, we should see an improvement in elective procedures such as UroLift.

Switch over like to emergency care, emergency medicine. I think it's one of the areas of the portfolio that's overlooked given your strength there with EZ-IO, Z-Medica and then eventually like EZPlaz would fall into that category as well. How integrated -- it's a larger portfolio now. It brings a lot of value to a hospital and to emergency group. How integrated is the sales process of that broader portfolio?

Well, I would say one of the clear benefits of the Z-Medica acquisition was that ability to merge their sales team with the existing Teleflex organization and to form a single but enlarged sales force. The integrated sales force now sells our EZ-IO and hemostatic products across all call points, including emergency medicine services in the military. And we'll use that same organization once EZPlaz is cleared for sale in the United States, which will then further leverage our sales force. So I would say that the selling program is very well integrated now and that was a good success in the second quarter of 2021 to make that transition.

Does EZPlaz get some more consideration from the FDA, given the current news? And just -- and any update to the time line there?

Well, let me first start with there is no further update to the time line for EZPlaz. As we disclosed in our fourth quarter earnings call, we have received a complete response letter for EZPlaz. Of note, the FDA has not requested any additional clinical data for the EZPlaz. Their questions are really associated with the manufacturing process at this point. So we still see EZPlaz as a differentiated product with a $100 million TAM, and we'll continue to work with the FDA to gain clearance. Now should the DoD request access to EZPlaz, we would work with all relevant parties to make sure we're able to supply product as requested.

Okay. And I think Z-Medica was overshadowed last year. Could you just remind us of the size of the market? And just importantly, the value proposition and the differentiation of that product.

Okay. Well, we've sized the market for our hemostatic product set $600 million worldwide. Half the market is associated with stab and gunshot wounds, while the other half is for use in trauma. In the trauma space, QuikClot Control+ has a unique indication for temporary control of Class 3 or Class 4 bleeding in the internal organ space. The value proposition is that the QuikClot products or gauze that is impregnated with kaolin, which activates and accelerates the body's natural clotting ability. So there's a real benefit in being able to speed up the downtime on bleeding. We're now in the second year following the acquisition of Z-Medica. We've met or exceeded our internal integration targets. In addition, the hemostatic portfolio generated some $66.5 million in revenue in 2021. Just kind of square really in the middle of our $60 million to $70 million guidance range that we had established at the beginning of the year. So I'd say that the integration has gone well, and we're very pleased with the product looking forward. We've completed patient enrollment in an IDE study evaluating the performance of QuikClot Control+ for mild to moderate bleeding in cardiac procedures as compared to just using standard gauze. And we intend to file a 510(k) for extended use of QuikClot Control+ following the completion of this study. So overall, as mentioned, we're really pleased with the acquisition and how the integration has gone so far.

Okay. Excellent. Excellent. Do you think it was -- so the $60 million to $70 million, you did $66 million. Do you think the environment held it back somewhat last year? You acquired it sort of at the end of '20. You didn't -- you probably didn't realize that we were going to extend so far with the impact of the hospital from the variants. Do you think it sort of created a headwind to it and the growth could have been even greater had you had more hospital access?

Well, it certainly could have had an impact. I will say that we tended to see more of an impact in those elective and deferrable procedures. As you can imagine, this product is used in a fairly emergent situation. And so you probably have not as much interruption of procedures given the nature of the emergency, but there could have been a disruption in the ability to go out and sell and otherwise. And certainly, we could have performed better, but we're really pleased with what we did regardless. So we're, again, really happy with the acquisition and the revenue it generated.

And then just MANTA, last on the growth products. Is this one of those areas that accelerates in a post-COVID environment? Or is anything else holding it back?

Well, I would say that although TAVR procedures were impacted by COVID during 2021, we're still pleased with the performance from MANTA last year. As we continue to penetrate the market, MANTA revenues increased 65% over 2021, and we exceeded our 8% penetration target to the midpoint of the $200 million to $300 million market opportunity that we've spoken about. In fact, if you look at what we did, we actually got to the upper end of that range at 8% penetration. Recall again that MANTA was one of our growth drivers that we allocated additional internal investment during the second half of the year to augment our training capabilities. So we continue to expect further penetration into the market in 2022 with more feet on the street and anticipate the environment will continue to improve throughout the year as COVID becomes more of an endemic and we'll look for continued growth throughout the year and the following.

Okay. On the gross margins, your resiliency last year was very impressive. Just can you start off with -- you've had restructuring initiatives in place that have driven layered cost savings over many years. Just kind of where are you with those initiatives? And what savings are you able to achieve in '22?

Okay. Well, I would say that based on the restructuring programs announced, we have roughly $40 million to $45 million in savings remaining. And we expect to realize the vast majority of those savings in 2022 and 2023 with a small tail in 2024. For 2022, we're currently expecting to be in the range of $20 million in savings. And I will say that despite the COVID situation in 2021, we're still able to deliver on our projected savings, so we feel good about these programs and our ability to deliver.

Yes. And then on the other side of that, we're dealing with inflationary pressures. The last couple of weeks have obviously been fairly challenging. How comfortable are you that you've captured what we're seeing in inflation in the current guidance?

Well, I will start by saying that we provided our 2022 guidance on the morning of February 24, which happened to be the day that Russia invaded Ukraine. Since then, the price of oil has been quite volatile and the impact to supply chain will likely add even more challenges as a result of that. So I'd say the situation remains very fluid, and we're going to have to wait and see which inflationary pressures are temporary and what may be longer lasting. I'd say that, of course, this isn't a unique situation for Teleflex as many companies are dealing with uncertainty around inflationary pressures. But as we talked about in our fourth quarter earnings call, we had evaluated what we saw at the time and certainly incorporated that into our guidance.

Okay. You've had a lot of success in pricing over the years. How are the conversations on pricing with customers? Are they accepting of price increases and understanding of the current environment?

Well, I would say that we have been successful over the past decade with pricing. It hasn't just been in response to an inflationary environment. But rather, we've taken a very disciplined approach in how we go about pricing. We've been consistently able to take price on our differentiated products and in select geographies. We initiated our pricing early for 2022 and are confident in our ability to execute on that strategy. I'd say in 2021, our pricing was in excess of 50 basis points and we're expecting to be at a similar level for 2022. Of note, we have not chosen to take inflation-related surcharges as those tend to be more temporary in nature. However, we're going to continue to monitor it. And depending what happens with energy prices or other areas of inflation over the coming months, it is something that we may consider implementing in the future.

Okay. My sense with Teleflex is there's some flexibility over discretionary spending levels. And as moving pieces go up and down, you can adjust as the year progresses on certain expenses. Is that kind of a fair characterization of some of your flexibility?

That certainly is a fair characterization. And you saw us modulate spending in 2021 and 2020 as we assess changes in the revenue environment. So we do have some flexibility there. I will say that our 2022 guidance assumes incremental investment to support our key growth drivers, including UroLift, MANTA as well as R&D to keep our products competitive, and the Asia Pacific reach. In addition, we've previously indicated that we will continue to expect a normalization of operating expenses as COVID disruptions abate. We'll start to see travel meetings, et cetera, return to a more normalized level. We also believe that the incremental investment is prudent to fuel our long-term growth, especially as we see the disruption from COVID improving over time. And so we'll want to continue to invest behind that. And while there's flexibility, we're really managing towards the longer term. So we'll need to balance that. Now should COVID disruptions prove to be greater than expected, as mentioned, we do have flexibility to reduce discretionary expense to some level, and we've obviously proven we can do that as we've done it many times in the past 2 years to help offset revenue softness.

Is 4% of sales the right way to look at R&D over the long run? Or at some point, are you going to have to accelerate some investments organically given the size of your portfolio?

Well, I'd say that, first of all, we should keep in mind the OEM business. And if you exclude revenues from OEM, the R&D as a percentage of sales gets to about 5%. So R&D in our OEM business is built to the client. So there really isn't any direct investment by us. We'll provide more context on R&D spending at the upcoming Analyst Day meeting, but we would anticipate that we'll continue to fund internal development on new products. In turn, R&D spend as a percentage of sales is likely to creep higher over time. But I'd also like to say that we've remained very disciplined on how we allocate R&D investment. We've made considerable progress over the past couple of years regarding our internal processes for selecting which R&D projects get priority, and as a result, we feel we're much more efficient in our spend.

I stayed away from questions that I know you would answer that we're going to give an outlook at our May 20 Investor Day. But what should investors expect out of that day on May 20?

Well, I think we're going to focus on what investors are looking for, which is really to talk about what are the drivers of growth. We'll focus on some of those key strategic growth drivers in the high-growth portfolio. We'll talk about the durable core business and how that plays into a longer-term sustainable growth model. We'll also speak about the implications for margins. And what we see is the potential to continue to expand margins through mix, through restructuring programs, et cetera. And then we'll obviously speak to profitability and some other areas. But the key focus is really to talk about some of the things that have propelled Teleflex over the past decade, and we expect to continue to drive into the future years, which is acceleration of top line growth and continued margin expansion.

And last question on M&A. It seems like the willingness is there, the ability is there. And then the question is, do you find good targets at a reasonable valuation? What's the likelihood that Teleflex can complete like a meaningful deal in '22?

Well, obviously, assessing a probability is imprecise at best, but let me just say that our capital allocation priorities for 2022 remain unchanged from prior years with the priority around internal investment and growth drivers and restructuring, in M&A and debt pay-down and maintaining our dividend. And those are the priorities that we've maintained over the past number of years, and we expect to continue into 2022. I'd say we're really well positioned right now with leverage at 1.7x and implying $1.5 billion to $2 billion of available capital for M&A. I'd say our business development team is very active and continues to look across the business units. We are very focused on a number of call points as we evaluate M&A. We continue to favor the cath lab given our presence in interventional cardiology and radiology, the ICU through the vascular business, men's health, surgical and emergency medicine. And we also have been successful with some tuck-ins for OEM, and we'll continue to look for those opportunities. I would say that our M&A criteria remains centered on the same things we've focused on in the past in that the assets are strategic to Teleflex. They are largely single-use products. They provide clinical value. They've got strong intellectual property protection and incorporate a sound economic basis for their use. From a size perspective, we're targeting companies kind of in the $50 million to $250 million in revenue range. And I'd say finally, from a focus, we're looking for assets that are accretive to growth. They also are accretive to gross margin and operating margin. And we could accept some margin dilution in the near term while business scales up, but typically, we look to find assets that have got a nice accretion over time. And if you look at, again, some of the acquisitions we've done, they've been very accretive to top line and margins. And so we think there are continued opportunities to follow that same playbook, and we're working hard to find the right acquisition that makes sense. I just want to emphasize that we will remain disciplined to make sure that any acquisition we do makes good strategic sense and makes good financial sense as well.

All right. That's a perfect ending. Thank you, Tom. Thank you, Larry. And thanks, everyone, for joining us.

All right.

Thank you, Matt.