Teleflex Incorporated (TFX) Earnings Call Transcript & Summary

Good afternoon. My name is Craig Bijou. I'm one of the analysts here at BofA. It's a pleasure to welcome Teleflex. And from the company, we have Liam Kelly, CEO; Larry Keusch, VP of IR and Strategy Development; and John Hsu, VP of IR. So welcome. Thank you, guys, for coming.

Thanks for having us.

I want to start with UroLift. No big surprise there. But maybe if you can just kind of go back a couple of weeks, you reported, just give us a sense of from the COVID perspective, the procedure trends and just what you saw throughout Q1 and then that's kind of -- what you've seen thus far in April?

Yes. So what we saw in Q1, obviously, Omicron was with us in January and in the first half of February. And I think that -- I think I've said it before, January wasn't that pretty because you had a double impact. Obviously, you had COVID impacting, patients wanting to go and have procedures. And then you had an exacerbation of the staffing shortage in January and early February because you had staff members that either contracted COVID or were close contact. So they were out of work. I was out in the -- on the road, and I'm at 32, urologists, very late in February. And I was encouraged by what I saw. Clearly, there was a distinct feeling of a recovery out the other side of COVID. And we know that it's COVID that has impacted UroLift. And you could see that we're starting to engage with their patient base and with PCPs in order to build some momentum. They were trying to address some of the staffing shortages as well. Clearly, in the office and the ASC, staffing shortage is more pronounced. And then as we got into late March or late February and early March, we saw a marked improvement in procedure volumes that I expected from that time we spend. Then as we go into Q2, we are, of course, expecting a continuation of that improved environment. Again in Q3 and Q4. Quite frankly, nothing has changed since we gave our guidance. We always expected to see a continuing improving environment as we went through the year, and we were happy with the performance in Q1. It was aligned to our expectations, and we believe that Q2 will see another market improvement. Then after that, it kind of gets down to be in math, quite frankly, once you get into the back half of the year.

Okay. And I know you put a strategy change in, and I want to discuss that. But since you did mention Q2 and the second half ramp, we'd love to kind of touch on that a little bit. So the sequential step-up, I think it's 27% from Q1 to Q2, and that's based on low single digits, I believe, is what you expect in Q2 for UroLift sales. But then the second half it's quite a big ramp. And the ramp is somewhat higher than it has been, if you look back at 2019. So appreciating your comments, maybe I just want to understand a little bit more about where that confidence is coming from, and how we should think about that business for the rest of the year?

So the confidence is coming from the improving environment that I'm seeing, and that I saw in March. And what we're expecting as we expected when we gave guidance at the beginning of the year, low single digits in the first half of the year, and low single digits in Q2. If you go to Q2 last year, we did $92 million. So low single digits would obviously be above that. Then you head into Q3, and as I said, it's simply math. Q3 last year, we did $83 million. So you have that run rate that carries you in, that carries the majority of your growth. And then the second element is obviously a continued improving environment as people come back to have this procedure done. And the third, which is the smaller impact is actually the improvement coming from the contributions to overseas markets. So you'll see a little bit coming in from Japan. You'll see a little bit coming from Spain and Italy, and you will see that environment improve in the back half. And then that step-up in Q3, then it's just a normal sequential improvement in Q4 that we have seen for the last 5 years. If you go back and run your analysis on Q3 to Q4, people have finally figured out how Obamacare works and the deductibles that impact. And therefore, people postpone procedures on the late Q3 and Q4, and they have them done at that time because it's not going to cost them any money.

Got it. That's helpful. And last one on this, just the return to normal procedural levels, is that kind of built into your guidance? Do you expect that this year?

So we know that urology procedures, if you compare 2021 to 2019, urology procedures were clearly a category that didn't return to 2019 levels any time during 2021. So the expectation would be that you would begin to see a more normalized environment as you go through 2022. The urology community themselves realized that they're not back to 2019 levels. And indeed, for Teleflex in our entirety, a lot of our overall plan is also a little bit back-end loaded, simply because of that deductible impact. And if you look at any med tech company, you go back and analyze them 5 or 6 years ago, and you do H1 versus H2 and you do it today, there's a distinct shift in H2 versus H1 because of the impact of Obamacare.

Got it. That's helpful. So maybe now back to the strategy change, and just want a little bit more detail on what exactly the strategy change was? I know you're trying to drive faster utilization. If you look at, you trained 900 surgeons during the pandemic, roughly, those probably didn't have the same amount of touch points as prior surgeons have. So one, when you think about the strategy, changes, how much of it is related to those 900 surgeons versus just driving more utilization with your existing surgeons?

So there are 4 elements to the strategy this year. So we're acutely focused on our champions and interventionalists. A champion is a urologist with the 6 procedures or more in a month, and interventionalist is the one that does 10 or more. As we ran the analysis that we laid out our plan for 2022, we realized that these champions and interventionalists cases per month were not back to the 2019 levels. So the easiest way for us to get 15% growth is to -- and that's the biggest chunk of it, is getting those individuals back to where they were at '19. We know they have the capability. We know they have the patient population, and we know that they have the willingness to do it because we know that, that class of urologists for Teleflex only offers UroLift in the vast, vast majority of cases. So they'll either offer the patient a UroLift, a prescription for a pharma or they'll do a TURP, that's really their toolbox. The second element of that, which is linked to going back to those original urologists is around UL2. So the easiest way to get back in their new product, we want to bring you in the UL2, which is getting incredible feedback, by the way from, the urologist community. And if you get those urologists back focused on stacking cases, so -- the 2 are synced together, if I can put it that way. The third element is the 900 urologists that we trained during COVID. And the urologists that we trained during COVID are not as efficient as those that we trained in pre-COVID level, which actually makes common sense because we didn't have access to them during COVID. So we are going back to those urologists and we have training programs and some other mechanisms in order to reengage with those urologists. And the last element is obviously to onboard physicians. It's not as important as it was in other years. We normally train around 450 on an average year. We still do big -- something similar, but that's not the -- if I was to -- that is the last priority of the sales organization. The first 3 are the 3 main priorities because we know that will get us to 15% growth.

One quick follow-up on that on UroLift 2. I know you've talked extensively about the margin benefit from it. But from a utilization perspective, do you expect to see some uptick in utilization just solely driven by the shift to UL2?

So we haven't -- we don't expect an uptick in utilization per se. One thing that we've realized now that we've rolled it out to a good portion of urologists is that the product is -- the visualization is better. Because the visualization is better, you get fewer bone strikes. So that should help improve the quality of the procedure. We're also seeing that because they can see better, we're getting better tensioning on the implant. So therefore, it's clearing a better channel for the patient. Now it should make the urologist a little bit more efficient, but I think the procedure should still take an hour because of all the prep work, the scope, bring them in, get them set up, they have to recover afterwards. So it should still be on our procedure in total.

Shifting to the international side. You touched on it a little bit. You -- in mid-April, mid early April, you rolled out in Japan. I mean anything -- obviously very early, but I mean, any learnings from that since the rollout?

So we had done a fair amount of prework because we knew we were going to get reimbursement in January. So we actually had our clinical and sales team fully trained on the ground and obviously, engaging with the Top 30 key opinion leader urologists in Japan ahead of time. We started on January 1, the day we got reimbursement -- April 1. Thank you, Larry. April 1, today, we got reimbursement and the feedback has been very, very encouraging. We've done a number of cases. It will still be a slow burn. We'll be ramping up this year. So I wouldn't want the investors to think there's going to be a significant input from Japan to the revenue this year. But it is a market we're very excited about. It's a $2 billion TAM and the connection between the Japan Urology Associations and the American Urology Associations is actually quite tight. So they were already aware of the product, and we're very encouraged by the start. My dad used to say a good start is half the battle, and we had the good start. So we'll continue to build on that.

A couple of follow-ups on there. You mentioned that you invested in the infrastructure prior to the launch, knowing that you're going to get the reimbursement. Are there other investments that you need to make there to penetrate the market like at a similar rate to the U.S?

Yes. So we already have an office infrastructure. We obviously have an organization ready in Japan. So that's in situ. We will continue to invest behind the sales, marketing, clinical organization. We will do some -- in time, we will do some digital media, not mass TV media, but more Facebook, Google searches and that type of thing. The Japanese market from a reimbursements perspective has a significant advantage. Once you get reimbursed, it's reimbursed everywhere. So you don't have to go to the private payers. And I think the main infrastructure we will be putting in is sales and clinical talent and some marketing.

And I'm going to ask, we did some analysis. If we look at the penetration rate that you had in the U.S. and follow that pathway, it looks like you can add 2 to 3 points of growth maybe in '23, maybe it grows a little bit, and that's to Interventional Urology from -- just from Japan, if it follows that the same U.S. track. Is that the right way to be thinking about it? I mean, would you offer other -- a different way to think about it? Or should investors kind of think of it that way?

So the way I always look at a product, and I've been doing this for 27 years, whatever -- if you have a product that you launch well internationally, and I'm not talking about Japan. I'm talking about all of the international markets. And let's say, at the -- as you ramp up and the product matures, you're doing $100 million in the U.S. market. If you did it well overseas, you should do $100 million overseas as well. It should be comparable in its entirety if you launched well. There are 12 million men in the United States who suffer with BPH. There are 100 million globally who suffer with BPH. Now a large proportion are in Asia, and some of them, it's going to be harder to get to. But a well launched product should actually do compensatory revenue overseas as it would in the U.S. market, if you launch it well in time, once the product starts to gain to its maturity. I think the markets that I'm excited about overseas or obviously Japan because it's a $2 billion market, we expect to have Spain and Italy begin to come on this year. We expect China next year. And China for us is probably as good an opportunity as Japan from the point of view of our infrastructure because our surgical portfolio is very focused on radical prostatectomies. So we already have a very strong access to the urologist in China and in Germany in 2024.

Got it. Helpful. Last one on UroLift. I promise. And I know you have an Analyst Day next week, so we probably will discuss this or you guys will discuss this a lot more next week. But you expect 15% growth this year for UroLift. Is that the right way to think about the durable growth? And then if it is the mix of U.S. growth contribution versus the international as you get into these markets, does the U.S. growth continue to come down, U.S. or international goes up? Is that the right way to think about a longer-term durable growth rate for UroLift?

So I think that the one thing we're focused on straight away is getting to the 15% this year, and that's going to be driven by the U.S. You'll see added contributions from overseas next year and the year after. I think we're so early on the international deployment, we'll probably be -- when we do give guidance, we'll probably be fairly conservative on the overseas input into our overall growth just because of so many uncertainties, you're penetrating your market early days. And I think that we don't want to get over our ski tips in the overseas markets, so the guide that we will probably lay out will be predominantly focused on the U.S. with a smaller contribution to overseas. And the U.S. market is still a massive, massive opportunity. We've trained 3,400 urologists out of 12,000. We've done 350,000 procedures out of 12 million men in the United States, 1.5 million of them in the drug dropout category. So I think it's still a significant opportunity within the United States and the contribution I would expect as we lay it out next week for the overseas market will probably be understated if anything.

Okay. Right. That's it for UroLift. So just kind of moving on to the P&L. I know you've seen some gross margin benefit from -- mix benefit from products. So we'd just love to think or love to ask you how to think about that gross margin benefit from the high-growth mix coming on versus the core? I mean, we have it at 40 basis points of annual margin improvement. Not sure how the benefit from UroLift 2 kind of factors into that, if it's on top of that? Or if it's just included in that mix benefit. But would love to just kind of understand a little bit more about where you see the gross margin expansion specifically?

Yes. So we would see the UroLift upgrades to the UL2 included in our overall mix benefit that we're going to get from our portfolio. I think we look at that 25% of our portfolio that's growing at 14 -- that is growing in the mid-teens, having a margin profile that is accretive to Teleflex overall. The interesting thing that most investors probably don't realize is that UroLift is in the middle of the pack from a gross margin perspective rather than at the top of the pack from a gross margin perspective. And we have this philosophy in Teleflex, and we've always had this philosophy in Teleflex. Not all growth is equal, and we focus our investment behind the parts of the portfolio that are going to drive better top line growth with better gross margin expansion, therefore, getting you better leverage within your income statement. And that's why, as a company, we've been able to expand our gross and operating margin so much since we became a pure-play medical device company back in 2011. So we -- that's how we build our mix of portfolio. That 25% gets the investment and drives a lot of the leverage within the income statement.

Got it. That's helpful. And thinking about that and the higher growth products, they typically take a little bit more investment, whether a product cycle, so R&D investment, whether it's adding sales force or marketing. So how should we think about the benefit you're going to get on the gross margin line, but maybe potential more spending needed in some of the operating lines and the balance that you are going to kind of strike between the 2?

Yes, you're correct. There is modestly more spending behind those portfolios, but the investment follows the growth and the margin profile is much better than the Teleflex average. So you do get leverage within your income statement, like I said. And I think that philosophy, of not all growth being equal, will stand to us. Has stood to us in the past, and will stand to us in the future. And again, as we use our balance sheet and bring in more high-growth assets, they will be included in that 25% bucket and the expectation is that would get larger and larger over time, and you'd even get more leverage from that part of the business within Teleflex. In the past, everyone looked at Teleflex as UroLift, and not UroLift. They built their algorithm around -- Teleflex is going to grow 4% a year and UroLift is going to grow 2% and 3%. I think with the acute focus on UroLift has demonstrated in the first 20 minutes of our chat, I think people have lost cited the fact that the 4% is actually growing faster because we've divested the respiratory business. We brought in Z-Medica, and we brought in HPC. So we actually continue to transform the core of Teleflex as we've invested behind high-growth portfolio. So I think that's the piece of the story that got lost with that acute focus on the 10% of our company.

I'm certainly guilty of that.

You're not alone.

So let me ask maybe on the P&L a little bit more specifically with regard to this year and some of the supply chain challenges and inflationary pressures. Notably, you guys called out a headwind on the supply chain, and didn't change it your estimate, called it out when you initially provided guidance for '22, 70 basis points and the same with FX impact. So -- and you didn't change that where several other companies changed it. So -- maybe if you could just expand on what you're expecting for the rest of the year? And if you're seeing something if you expect some easing in the back half, which made you more confident to not adjust the impact from some of those pressures?

So let me deal with effects, first of all. So the main currency that we look at is the euro to dollar. We laid out our plan at 112, and it was at 106 when we announced our first quarter call. And we reiterated our guidance, knowing that it's 106. So that change would normally cost us around $10 million on the top, $0.24 in earnings per share. We believe -- we beat the first quarter by $10 million on the top. So we reiterated our guidance, knowing that, that could be an impact from FX and we reiterate the rest of our guidance knowing that we had a $0.16 beat and we felt that we had a good trajectory to cover that as we went through the year. So I want to be specifically clear here because I don't think we were on the call. we reiterated our guidance, knowing the FX of $106 million versus $112 in our plan, so there can be no confusion. The second element here you're talking is the inflation. And yes, we had built in 70 basis points of inflation for the entirety of the year. We had also built in 50 basis points of positive pricing. We still feel that the 70 basis points of inflation is sufficient for the entirety of the year, and we will be able to deliver on that. If it gets worse, we have the flexibility on pricing. We're always a company that can take price, and we will continue to look at that option. The way that inflation works for Teleflex, investors familiar with us will realize that we had a lot of our freight lanes on fixed contracts until Q3 of last year. And so we began to see the impact of inflation in Q4. So as you go through the year, a couple of dynamics are happening on the margin side. Obviously, you've got UroLift volume coming back, so that's accretive to our margin and our mix. You've got an improving environment in general for our portfolio of products in the back half, which will help. And then you're overcoming comparable in Q4, so you should see that margin benefit from that. And we're also anticipating in our guide that the freight lanes will improve as we go through the year, and we've also seen -- we've already seen some early signs of that, in particular, sea freight lanes from Asia into Europe and the United States. So we feel confident the 70 basis points that we outlined in our plan will be the inflation in its entirety for us for the full year.

Got it. Helpful. You alluded to acquisition capacity using your balance sheet. I know you guys have done a lot of acquisitions, brought in a lot -- many of the high-growth assets that you do have. So I want to talk about kind of what you see in the environment valuations, your perspective on valuations? They've come down -- notwithstanding the last couple of days, but prior to that, they've come down from where they were a year ago. So I guess, what are you seeing in the market? Is there still a disconnect between buyers and sellers? I think you've mentioned on the call that you're chasing assets. So maybe talk a little bit about how competitive these processes are?

Yes. So most processes tend to be competitive if I start there. When we bought NeoTract, that was a competitive process. When we bought Z-Medica, that was a competitive process. HPC was a competitive process. So -- but we tend to focus on the assets where we are the most logical buyer. So we're more likely to be able to get enough synergies so that we are going to be successful. The other point I would make is that we look fairly broadly across our portfolio. So we'll always be able to find assets within our portfolio that fit our strategic criteria. And really, if you look at Teleflex, if we're looking for an asset that's going to drive top line growth with margin expansion, for us as a percent of top line growth is $30 million, whereas some of the larger players, they need an awful lot more to make a difference. So it will move the needle for us, but it won't move the needle to these larger companies. With regard to your question on valuations, valuations were pretty heavy last year. And then in late Q3, Q4, we saw a real tightening in particular on the IPO market, which really helps companies like Teleflex. So I think that the valuations are more reasonable now. And the most important thing that you need in order to be successful with M&A is to have firepower. And we have firepower, as you rightly pointed out, we're at 1.7x levered, which gives us capacity. And we are active, and we are looking. We're sticking to our core strategic criteria. We will remain financially disciplined in order to make sure that we bring in the right company into Teleflex to continue to augment our portfolio and deliver shareholder return.

Great. That's helpful. How does the rising interest rate environment impact? How you guys think about acquisitions? Obviously, it changes the -- or it has the potential to change the accretion dilution impact.

It does, but you have 2 dynamics. You've got the valuation that's coming down. You've got interest rates going up. And if your hypothesis on the acquisition was that tight that a percent of interest rate is going to make the big difference to it, then it probably wasn't the right asset to start with. You've got to leave yourself more headroom than that for success. But clearly, interest rates are rising. It's going to cost more to fund, but you offset that with the cash flow generation that we're going to demonstrate at our Investor Day a week from Friday. I think people will be fairly encouraged by what they see.

Got it. You mentioned it earlier, you divested the respiratory assets. It's a process to divest. But you're clearly taking a look at what's in your portfolio? So from that lens, I mean, are there other businesses -- are you constantly evaluating the businesses within the entire company? And are there other opportunities that you see in a more near-term perspective to potential to divest?

So you're right, we contently evaluate our portfolio, and we look at what will fit within Teleflex in the long term and what may not fit within Teleflex in the long term. I don't think there's anything right now in the short term that we want to divest. I'd like to bring some assets into Teleflex first and then have a relook at the overall jigsaw. And with that changing environment of what we brought in, now does everything fit together is the focus on all of these areas equal to each other or is there something else we need to look at. So I think in the short to medium term, I think we would be looking at bringing something in before we'd look at -- relooking at our overall portfolio. But you are correct, we do it systematically on an ongoing basis in order to make sure that we have the right mix of products to ensure that we're going to be successful and give a good return to the shareholder base.

We have a little bit over a minute left. Wanted to ask anything that you want to preview for the Analyst Day? What are some of the things that we can expect to learn in a week?

Yes. So we want to reinforce the growth algorithm for Teleflex. We want to look at long-term durable growth within the company. We want to present to investors that a high-growth portfolio of 25% of our revenue in order to broaden the appeal of the company. We clearly want to talk about gross and operating margin expansion. We want to talk about capital deployment, cash flow duration over the next number of years. And we do want to spend some time on ESG. We have a path forward and making some significant improvements on ESG. And I think it's beholden on us to present that to the investment community. I'm quite excited about the next number of years albeit with the pressures within the markets today. I think if we do his -- a period of economic turmoil, Medtech is a very, say -- no industry is immune to any type of recession or whatever. But Medtech is fairly resilient when it comes to that, whether you're in a boom economy or a flat economy, people still get sick and have to go to the doctor, and it's fairly safe haven in turbulent times. Not a safe haven right now, but I think it's safe haven for the longer term.

Well, great. I think we're just about out of time, and thank you for coming.

Thank you very much.

Thank you, Craig.