Teleflex Incorporated (TFX) Earnings Call Transcript & Summary

Thanks for joining us. I'm Matt O'Brien, I cover Medtech here at Piper. Really excited to have the Teleflex team here with us. They don't need an introduction. I'll provide one anyway. We've got Liam, who's the CEO; and then Larry, who is the Head of IR, and then John is actually down in the audience as well. John, thanks so much for making the trip up. Appreciate it.

Of course, thanks for having us.

You bet so going into -- we're going to get into UroLift, I swear at some point. But I did want to start off with maybe some other areas of the market, a little bit of the business just to maybe change things up, I'm sure, a little bit from what you're customers talking about. But talk a little bit about the Standard Bariatrics deal. What did you get there? There was another takeout kind of in the space recently. But what do you have there? Why are you so enthusiastic? And then Teleflex historically has been really good at taking these assets that are not well understood and making them much bigger companies and being very successful LMA go on and on. But what kind of characteristics do you see from Standard Bariatrics that could be similar going forward?

Yes. So what we really liked about the company was, first of all, the Titan technology that it had. So it's a single-product company. It is basically a technology that makes the gastric sleeve faster, more efficient and therefore, should increase profitability for the hospital. It's got excellent health care economics argument insofar as that it's reducing time, but it's the same cost of the incumbents that we're replacing. If you think about how the traditional sleeve is done, the surgeon whether they're using a robot or not, they actually have to load a device, go in, cut and fire and do that multiple, multiple times. Now as you're doing that, what can happen is you can cross the staples over each other or what can happen is you can trap air. The biggest complaint the patient has is reflux. So our technology is a single product that fires a complete line of staples to address the sleeve. You pull the stomach walls through the device, you line it up, so you have no trapped air. So therefore, you don't have regurgitation. You don't get crossover on the staple so you have higher burst pressure. So therefore, the chance of a leak afterwards is minimized and you press a button and it releases full line of staples and that's what makes it faster. The technology has IP that runs through to 2035. So it's protected for a long period of time, and it has -- it's growing into a pretty big market. So the potential for multiple years of growth is pretty significant.

And speak a little bit more about that. I think it's about a $30 million business today. And the sleep gastrectomy is 120,000 cases. How big is that market?

Yes. So it was 120,000 cases in 2020, which was slightly depressed because of COVID. So a normalized market is around 150,000, and that would be a $300 million market in the United States. So to grow into that market, it's actually on a pro forma basis, the asset will do around $15 million this year. So it will do 4 or 5 for us in the fourth quarter, and we expect it to do $30 million to $35 million next year. And then investors should expect it to add around 50 basis points to Teleflex over a multiyear period.

Okay and is that just domestic? Or another thing you guys have done really well is on the international side. Is there an international opportunity here?

So for the time of the LRP over the next 3 years, we're going to focus pretty exclusively on the U.S. and get it established on the U.S. and then we'll spend that time also getting it registered because now our good European friends have a thing called MDR. So that takes a little bit longer than it used to take when it was a straightforward CE mark. So we will, after the end of the LRP, bring it into Europe and then bring it into Asia, we'll go through that registration cycle. And we will globalize this. We will definitely globalize this and that will also expand the market.

Got it. And what other products do you sell in combination with Standard Bariatrics? And what other like pull-through opportunities do you see there?

So that's the beauty about this deal. We're already in the bariatric call point every day. We have a mini lab product that is used in bariatric surgery. We have the Weck EFx closure device that we used to close after bariatric surgeries. And we also have a full range of ligation clips that are used in bariatric surgery. So basically, what we're doing is we're taking this tightened product and immediately, we're more than doubling the sales force that are going to be out there positioning it and selling it. If we want to pull in more of our sales force into it, we can actually triple that sales force into that call point. So -- and we shouldn't -- we don't build revenue synergies in our models for acquisitions. If they come great, we'll take them, but we haven't burdened this model with additional revenue coming. But should we expect it? Yes, we should expect some revenue to come from those other technologies.

Excellent. Okay. Good. So what about from a margin perspective? You guys always talk about like the fast growth part of the business or the faster growth part of the business and the margins you get out of those. I mean the standard bariatric gross margin profile fit within that group that's kind of in the 60%, 70%, 80% range?

Yes. It's going to go into the high-growth portfolio. That's where we're going to document Standard Bariatrics. It doesn't -- it's not accretive to our margins right out of the gate. But when you get to 2024, it will become accretive to our gross margins. And that's part of the requisite to be in the high-growth portfolio just through top line leverage that we get there. And then thereafter, it will become quite accretive to our op margins because you're using an existing sales force in combination. So we're very excited about the margin profile, both gross and operating as it grows into the marketplace, and it will be a nice growth asset for Teleflex.

Got it. Speaking of growth assets, and I promise I will get to your left. But I haven't heard much about MANTA recently. How is that product -- I shouldn't say that. I've heard a decent amount about MANTA, but how is that doing, generally speaking? And what's the update on Z-Medica, I haven't heard much on Z-Medica recently.

Yes. They're both doing great. Z-Medica is actually having an outstanding year this year. It's the growth of the asset into a $600 million market is really playing off. We've started to globalize that. We started to bring it into some of the additional markets overseas. You should see more of that to come within the future. Just to level set everybody, it's a $600 million market made up of 2 segments. External hemostasis, which is stab wounds, gunshot wounds about $300 million internal and we have an unique indication for internal. That's about another $300 million. We are doing a clinical trial at the moment, which should give us expanded indications into cardiac and that will help expand that market segment. On to MANTA, MANTA is doing great. It -- normally matters a good sign when you don't hear about a product, that means it's doing really good. And this is a perfect example of that. MANTA is doing great, growing into that market. I know there's been some noise about some slowness in the TAVR market. Just because we're converting the market, we won't see any impact from that at this stage. And I think -- personally, I think that's a very short-lived dynamic just because of profitability in some of those centers. So I think that MANTA is doing well, continue to grow. We're penetrating the market, continuing to get new docks. And the really good thing is that it's growing internationally equally is in the United States. So we began in Europe, and Europe is continuing to track on as is the United States.

Okay. Okay. Is the Z-Medica growing that low double digits that you expected?

Yes, this year doing a little bit better than that. A little bit better.

Okay. Excellent. Okay. And then just lastly, just on RePlas, again, another one I've heard much about recently. I know you've been trying to work with FDA there, and it's a smart approach. I mean what's the latest timing on RePlas?

So we didn't put any revenue for RePlas. Our EZPlaz as we're now calling it, in our LRP just because of the uncertainty of getting the approval. Now the good thing is that when we heard back from the FDA, they didn't ask for any additional clinical data. They were more focused on process. So we're gathering the information. It's like feeding a beast. You give them a bit of information, they ask for a little bit more. But we're working through that dynamic. And to be fair to the FDA, they are very collaborative in working through us. When we do get the BLA resubmitted, we will tell the investment community, and then we should get approval shortly thereafter. So you should look at this that we will get approval during the LRP period. And when we do, it will be upside within the LRP rather than downside.

Okay. Excellent. All right. So let's get into UroLift then. So this year has been disappointing. It's been interesting Liam like there's areas, I cover an abnormal uterine bleeding company, and they're seeing all kinds of volume pressure this year because people did go to work. And so they don't -- they're going to work anyway. And so they can manage it at home. It seems like that's a dynamic that's hitting you. I mean, hernia is the same thing that's all happening. So just talk a little bit about where you're -- what you're seeing from a market perspective on the volume side for BPH. I mean, what have you seen?

So there's 2 main dynamics that we've seen. The first one is patient flow. So we know from 2019 to this year, patient flow is down over 20%. So there are fewer men patients going to the urologist than there were in 2019. I do believe that, that really has to modulate and it should start to modulate as we begin next year. BPH won't kill you, getting up 6x the night is uncomfortable. It's distracting, but it's not going to kill you. And I think that once it gets to a level of unacceptable intrusion, then people will flow back to the urologists and get it done. And then the other impact is staffing shortages. Now we -- earlier in the year, staffing shortages were very huge, in the acute centers and hospitals. I was quite encouraged by what I saw in the rest of our business as we went through the year. And in particular, in Q3, we saw that start to alleviate somewhat. But it still is very relevant in particular, in the office side of service, we did a survey of urologists in Q3. And what it told us was over 60% of them were -- had staffing shortages. Now once it starts to get better in the hospitals, it's only a matter of time before it comes to the ASC and the office. So I'm encouraged by what I see there. And I do see a pathway to UroLift getting back to positive growth in 2023. And to your point about people working from home, I think that if you've got BPH and for those who don't know what BPH is, it's your prospect continues to grow and as it does, it squeezes your urethra and you end up having to go to the restroom a lot. Ladies it's okay. It's a man's condition. So nothing to worry about but for all the men in the room, 50% of men in their 50s get it; 60, in their 60s; and 70, in their 70s. And if you've got BPH and if you're driving to work, and you used to stop twice. That's an inconvenience. And also, if you're to leave a 1-hour meeting and go to the restroom, that's an inconvenience. If you're working from home, you just turn off the camera and the restroom is right beside you. So I have no data, but that's a dynamic that has to be in existence. And I don't know about the audience, but in particular, in the last couple of months, and I live in Philadelphia, despite the accent, but in the Philadelphia area, I can tell you that there is a significant increase in traffic on the roads and I was in New York last weekend, and I'm glad to see New York back to life again. It was back to the old days. Streets were busy, 3 hours queue for every Starbucks and so on and so forth. But it was good to see that normality started to come back. That's going to help UroLift when that normality comes back.

Yes. Okay. I agree. What about on the actual buckets of where procedures are done? Where have you seen the most slowing? Is it hospital, outpatient, office?

So all sites of service have been impacted, slightly more impact in the office, which would stand to reason, given the higher level of staffing issues in that side of service. What was encouraging was to see some improvement in the hospital side of service in Q3, which tells me the staffing is getting better in UroLift as well as the rest of our business. The percent of procedures done in each of the sites of service has been constant all the way along. So it's 30% in the office and the rest done in the ASC and the hospital so that has remained constant. Even with the reimbursement changes in the office, it's remained constant, which tells me that our strategy to overcome that reimbursement change has worked.

Yes. Got it. Okay. Appreciate that. What about some of these other things outside of staffing? Because you hear feedback from people, and I hear it from doctors to be honest. I mean, some say, "Oh, I worry about durability or oh, there's other competitive products that I'm using more and more." What gives you confidence that there's not some competitive share loss that's affecting you as well?

So we know it's not competition. The only other minimally invasive competition, there's 2 products out there, one from Boston Scientific and the i10 from Olympus. So we know for a fact, it's not competition last to either of those 2 individuals. The other company that people may mention is PROCEPT. And PROCEPT is an aquablation technology, great technology for -- in the hospital. And there may be a little bit of crossover between us and them. It would be insincere to say there's none. Our sweet spot is 0 to 100 grams. They probably started 90 and up. And maybe to get a surgeon going that might even go a little bit below that, but it's on the margins. I mean it's really on the margins. And I think they are focused on the turf market and converting that in the hospital, which I think is a clever strategy. And we're really in a different segment. We're really focused on the drug dropout patients that wants a minimally invasive technology with no sexual dysfunction. And as we continue to focus on UroLift, we continue to focus on the things that were in our control and execute against them. So we're continuing with DTC. We have a fully staffed sales organization. We have continued to train docs and I would be concerned if there were any docs putting their hand up to say, I want to get trained. But we're training the same amount of docs now roughly as we were training in 2019. So all of those factors would tell me that it's an encouraging environment for UroLift as we head into 2023 and beyond into the first year of our LRP.

Is there a reason why some of the doctors that were using in 2020 or 2021 are not using -- not performing as frequently? Are there other urology procedures they're doing or something else they're doing more?

No, I don't think they're doing anything more from a BPH perspective. I think it's down to the staffing issues and the patient flow. But I do know, and we know this from our survey of urologists that they are definitely putting more acute procedures in the queue in front of others. So we know for a fact that prostate cancer is getting in ahead of us. We know for a fact that blood in the urine, and we know the kidney stones. And that makes sense because all of those can kill your urine pain. And so we can see the logic in that. But we do believe that as patient flow starts to come back, and in particular, a staffing gets addressed that UroLift will get done. We're hearing very, very little noise around doing another -- another type of BPH procedure, to be honest. And with regard to the DTC, we've seen awareness for UroLift now surpass TERP as a brand that's recognized ahead of actually having a turf, which is very encouraging.

Okay. That is encouraging. What about Japan? I know you guys have told us, say, keep your expectations reasonable. It's 1/3 the size of the U.S. I mean should we expect that to be a $5 million or $10 million business for you next year?

So it is growing in line with what we saw in the U.S. and 1/3 of the size, even though we started almost a half year later within the first year. So that's encouraging. So the U.S. grew $5 million the first year, [indiscernible]. So at 1/3 of that, that's what we expect UroLift to grow. So a few million this year, next year, $5 million the following year, $16-or-so million. So at the -- towards the end of the LRP, it's adding $10 million of growth to UroLift. So it does start to become meaningful to that UroLift franchise. And it's going very well. I was there in July and met with a number of urologists, a lot of enthusiasm for the product. And we have actually preloaded the sales force for next year, where we've recruited them in Q4 in order to be ready for next year and to continue the acceleration. We're still in a few of the Cosmopolitan centers. We're in Osaka, Tokyo, and we're going to expand out beyond that next year and continue to grow.

Okay. Okay. So as far as UroLift goes for next year, The Street's landed at 7.5% for '23. That's below what you've said, kind of 15%. Does that number seem reasonable? And then how do you think about Japan contributing to that?

So I gave the numbers for Japan. So that's -- so it will go from a few million this year to $5 million next year. But the reality is in order for us to get to grow the U.S. has to grow. International as a percent is going to grow faster because it's a smaller base, but the U.S. needs to get back to growth. The good thing is that we'll be giving guidance in February. So we've October, November, December, January and half of February to watch that market dynamic before we give guidance. And for me, when I look at the growth, I look at the overall growth for Teleflex as a company in its entirety. And my perspective on it is if you take the midpoint of our guidance for this year, and if you remove the respiratory divestiture, we're growing approximately 5% as a company this year. That's with UroLift being a 50 basis point drag. So if UroLift just gets to -- and it doesn't have to do a Herculean task for us to get to our LRP. So if UroLift moves from 50 basis points negative to 50 positive, all of a sudden, you've gone from 5% to 6% and then standard bariatrics layers in 50 basis points, you're at 6.5% at the midpoint of your guidance just on that dynamic, but that is not guidance for next year.

That is definitely not guidance for next year.

Yes. Even though you're trying to get me to guide but you're...

I'll just come right out and ask here in a second, but -- so speaking of which, I mean, you've got some currency headwinds for next year, like everybody does. The Street's landed at about 4% for next year, which again is below what you've communicated as far as like top line, 6% to 7%. So it seems to me like that could be conservative? Or is there just like a lot of FX that we should be thinking about as far as the impact to next year?

So FX is definitely an impact for next year. And our greatest exposure is to the euro. So the euro to the dollar was running at about 110 for the first half of this year, and then it's pretty much at parity towards the back half, currently at around 103. So it's moving around a fair bit, but it will definitely be a headwind. And just to give investors a sense of what that would mean, let's say, it was at 103. The average for this year is 105. So each penny of movement negatively as it would be, cost us about $0.05 in earnings. So if it stayed at 103, that will be about $0.10 on earnings. I think that -- most investors will, I believe, tend to look through FX and look at the underlying performance of the business. And I think that's a better guide as to how the company is performing. And I think that our focus is on having a good solid positive first year of our LRP from a top line growth perspective. I don't think we'll be guiding to UroLift at 15% in the first year in the LRP but we would also remind investors, it was a CAGR. It was a 15% CAGR. And with the international markets starting to ramp and if the U.S. market recovers, there is still a distinct possibility of getting to that CAGR, but as I outlined earlier in my little bridge, it doesn't have to be Herculean in order to get to our long-term plan for the 6% to 7%.

Are you comfortable with us just being more in the low double digits for UroLift throughout the LRP given what kind of happened?

Well, I always like to have the analyst community with an assumption that is less than I have internally in my own brain. I think that always helps me.

Sure. Okay. Got it. So what about -- on the -- and 2 kind of minutes left here, but on the margin side of things, I know and this is the thing I think everybody misses about Teleflex is the earnings power of your business is unbelievable. We only have 60 million shares outstanding, everybody else has 1 billion shares outstanding. So what should we think about in terms of the restructuring you just did in terms of how that affects things? And then as you're starting to see some of these costs these inflationary pressures subside, FX pressures subside, how quickly can we see a big pop in that EPS line?

So the way I would frame it up is that we have assumed that there's going to be incremental inflation over the LRP horizon. We've seen additional inflation this year. We started off when we laid out our LRP, we're expecting 70 basis points. Now we're going to have 100 basis points of additional of inflation this year. And I would ask investors to look at the restructuring as Teleflex taking action based on that inflation. So I would encourage you not to layer it in as additional, but to see it as us offsetting the inflation by doing what a good company should do. Look at your cost base and see what you can do to address that. With regard to the LRP margin expansions, you're -- it's 250 to 350 on the gross, and it's 200 to 300 on the operating margin line. What that should mean for Teleflex as a company? This year, we're going to end up at around 59% at the midpoint of our guidance. So that should mean that we're going to get somewhere in that 62-ish percent on the growth at the end of the LRP. And on the op margin, it should mean we'll get to just over 29% on the op margin. And if you think about it, a company growing 6% to 7%, 60% gross margin and getting close to 30% operating margin is a pretty -- I believe, a pretty attractive organization. Now if we see deflation, which is part of your question, if we see deflation, our position would be our investors were hurt by the inflation and they didn't get the earnings that we thought -- that they thought they would get, we would see that flowing through to that investment community if we did see deflation. We're not planning on it, but if we do see investors should expect us to flow that through.

You're not going to be reinvesting it aggressively, then you're going to be light on flow through.

We're going to go into our plan fully invested already, and therefore, we'll be able to let it flow through.

Got it. Understood. All right. It looks like we're out of time, so let the cap it there. Liam, Larry, thanks so much for the time. I appreciate it.

Thank you very much.

Thank you.