Teleflex Incorporated (TFX) Earnings Call Transcript & Summary

Good afternoon. I'd like to welcome everyone to the KeyBanc 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 Tom Powell, Executive Vice President and CFO; as well as Larry Keusch, VP of IR and Strategy Development. For the audience, I'm going to start this off, but questions can be submitted directly to me by typing in the box below on the video screen and I can relay. Tom, Larry, thank you very much for joining us.

I think my opening question is pretty straightforward. Just how would you compare the current environment and your level of visibility at the start of 2023 to what you saw over the last couple of years?

Sure. Well, we, first of all, expect to see several dynamics that should improve in 2023 as compared to 2022 and 2021. Certainly, the divestiture of the Respiratory assets removed a portion of the business that was subject to price pressure. So we're probably in a little bit better position now to continue to drive price in 2023 versus where we were a couple of years ago. Broadly speaking, we saw an improvement in health care utilization as we progressed through 2022. The majority of markets that we participate in are now back at or above 2019 levels. And we expect continued demand improvements in 2023. We also see a stabilization in the operating environment following periods of inflation and supply chain challenges during 2022. As for 2023, we remain very focused on our manufacturing operations and addressing supply chain challenges that emerged in 2022. Additionally, we'll focus on new product launches and the training of physicians. So I do want to point out that we are fully invested in our growth initiatives as we enter 2023 to drive durable growth for the longer term. And we continue to expand our presence in Asia and really drive opportunities in that marketplace.

Okay. You just put out 2023 guidance as well as updating your long-term targets or 3-year targets. Just coming off of last year, how did you try to, call it balance derisking some of the key uncertainties while also putting out reasonable assumptions that -- where you expect the business to be?

Sure. Well, overall, we feel very good about our outlook for growth and for margin expansion as we look out through 2025 and believe we've put out a balanced view that incorporates some of the headwinds that we saw over the past year. Starting with 2023, we're confident in our guidance, about 5.5% constant currency revenue growth at the midpoint of the range. We are focused on hitting a 6% constant currency days-adjusted growth at the midpoint of the range for the first quarter. I'll say that inflation, supply chain, interest rates and foreign exchange remain somewhat dynamic. As you're aware, we introduced our 2023 to 2025 LRP at our May '22 Analyst Meeting. Since then, the macro environment has changed considerably, which prompted us to update our assumptions for inflation and foreign exchange. And those updates reflect the current environment that we're seeing. In addition, we moderated our assumption for UroLift growth to an 8% to 9% CAGR over the LRP to reflect improvements in patient visits to urologists and staffing shortages over time in the U.S. On the other hand, we feel really good about our growth drivers throughout the remainder of the business and geographic expansion opportunities.

What gets you to -- I think for the 3 years, you're low end of 6% to 7% and you're 5.5% for 2023, which means '24 and '25 are above the 6% range to some extent -- or at or above the 6%. What gets you back within that 6% to 7% range over the next couple of years? I don't think investors have really kind of priced that in.

Okay. Well, as previously mentioned, we're very confident in our constant currency revenue outlook over the LRP. We're very focused on achieving the forecast growth rate for the totality of Teleflex, recognizing there will be areas that will grow faster and some will have more modest growth. The midpoint of our constant currency revenue guidance for '23 is 5.5%, which represents an acceleration from 4.3% in 2022 when adjusting for the Respiratory divestiture. As previously disclosed, we indicated that we expect to deliver the lower end of the range for constant currency revenue in the LRP and at that 6% growth level. In turn, we expect modest acceleration in growth as we move throughout the LRP time frame. And the accelerating growth in the high-growth portfolio will be a key driver in driving the growth to 6% on a compounded basis over the LRP from 5.5% expected in 2023. In addition, we expect consistent growth of the durable core of 5% throughout the LRP, driven largely by our Interventional portfolio, Vascular product launches, OEM and expansion in Asia Pacific.

Okay. I wanted to hit first on the Interventional portfolio, mostly part of that durable core. Are you seeing a resurgence in R&D from kind of vascular solutions in that very complex Interventional space? Just for some history, I mean, I feel like it ages me but it was a pretty sizable and important acquisition. What happened to the GuideLiner, TrapLiner franchise? And just why wasn't that part of the high growth portfolio?

Well, I would say that we remain very excited on the outlook for Interventional business. As far as R&D, 7 -- or I should say, several years ago, we took on an initiative to improve our R&D productivity across Teleflex in a program called concept to commercialization or C2C. And we're now starting to see the first products coming through that C2C process and expect the flow of new products for the entirety of Teleflex to improve as a result in the next several years. In the Interventional business, we have a nice suite of new products with GuideLiner Coast, which is a hydrophilic-coated guide extension catheter; Triumph, which is a CTO catheter; and Wattson, which is a guidewire and pacing combo product, which we are launching during 2023. And we've also relaunched the Langston catheter after more than a year off of market. So we continue to focus on complex PCI and are building a presence in structural heart. As for the extension catheter family, including GuideLiner, we're pleased with the performance of the portfolio and it is a driver of our growth in our durable core. And just as a reminder, the durable core makes up about 65% of total revenues. And of note, we have increased our outlook for the durable core to the upper end of 4.5% to 5% -- excuse me, to the upper end of 4% to 5% over the LRP. And so as we think about the Interventional portfolio, it's a key driver of that durable core and part of the reason why we're able to take that guidance up to the upper end of the range.

What else is driving improvement in the durable core portfolio to that 5% -- from the 4% to 5%?

Well, we have several areas of growth within the durable core, which is driving our outlook, about 5% over the LRP. First of all, I'd say we've been executing well across our businesses that drive the durable core. The drivers of above-average growth in the durable core include Interventional as just discussed, select Vascular Access products, our OEM business in Asia Pacific. And so there's really a broad growth opportunity and performance that's driving that.

What is going on outside of Japan and UroLift? Just what is going on in Asia Pac as far as your ability to kind of drive growth over there? Is that just a good end market for you? Or is there something -- are you making significant investments there that's driving your growth?

Well, we continue to invest in Asia. It's a good market opportunity for us, so we're largely working to build out our channels, to get products registered. Obviously, you're aware of the UroLift launch in Japan and China, and we'll continue to launch throughout Asia. So it's a really a nice market for us and we'll continue to invest in that area because we think it's a key driver of growth for us.

Got it. On the high-growth portfolio, the 12% to 13%, what's above that 12% -- what's above the 12%, 13%? What's a little bit below at this point?

Well, I'm not going to get into all the specifics, the relative growth of the high-growth portfolio. Rather, I'd say that we should really be focusing on the totality of the growth for that portfolio.

Okay. I'll take 1 shot at it. What about Z-Medica? Is Z-Medica driving growth above? How important is the scale you have in emergency medicine, so like -- with Vidacare and Z-Medica? It just seems -- I don't want to choose favorites for Teleflex, but it seems like the most durable growth vertical for Teleflex with those 2 products in the emergency channel, based on what you guys do.

Well, I would say that, first of all, Z-Medica has proven to be a tremendous acquisition for us and it's a good example of our M&A strategy. Now at the time of the acquisition back in 2020, we sized the market at $600 million, with half driven by trauma wounds and half from internal uses. As a reminder, we indicated that hemostatic product sales were just over $66 million in 2021 and then we generated very healthy growth in 2022. We did benefit somewhat from some stocking orders from military. In turn, we see a significant runway for growth as we gain market share. As an example of 1 area, we're currently pursuing a cardiac indication from the FDA for moderate to severe bleeding, which will help expand our market penetration opportunity. And we're also pursuing product registration to the international markets, to expand our geographic footprint with the product. So overall, really happy with it, certainly a good contributor to the high-growth portfolio.

Okay. I promise not to ask this question if it doesn't come through again in next year and I don't want to get my hopes up. But what are the odds EZPlaz kind of makes it through the FDA in 2023? It just seems like such a good logical extension to what you guys do.

Well, we too believe it makes a good sense. I'll say that, as far as odds, I'm not an odds maker, but I will say that I can give you an update as to where we are. And we continue to address the FDA questions following the Complete Response Letter we received in 2021. And we believe we have a good understanding of the pathway to marketing clearance. We're working through the questions from the FDA and they're related to our manufacturing process. As a reminder, we don't need to collect additional clinical data. It's rather documentation of that manufacturing process. And we'll keep you updated on FDA clearance, but I wouldn't assume necessarily that it's going to happen in 2023. Again, not an odds maker but I wouldn't assume that. I'd also remind you that EZPlaz is not assumed to have any revenues in the LRP, so anything generated would be incremental to that LRP revenue.

Okay. And how is Standard Bariatrics progressing so far? Did you have a good position in that channel prior to the deal?

So I would say that we are making good progress following the close of the acquisition early in the fourth quarter. The sleeve gastrectomy market is large with over 120,000 procedures in the U.S. in 2020. That was obviously impacted by COVID and we estimate that the underlying business is actually larger with a $300 million potential opportunity. I'd say integration activities are on track with the sales force already trained. And now we have double the salespeople as compared to the Standard Bariatrics sales force on a stand-alone basis. So a nice increase in the number of people out selling the products. We've had success with our channel building activities. For example, we recently announced a GPO agreement for the Titan stapler with Premier. And we're also achieving good progress in our surgeon pipeline for proctoring on the use of the Titan stapler. I'd say that relative to our position in bariatric surgery prior the acquisition of Standard Bariatrics, we had an established [ call point ] with our market-leading ligation clips as well as fascial closure and instruments. I'd say the value proposition for the Titan stapler is its unique design that is optimized for sleeve gastrectomy procedures for the treatment of morbidly obese patients. Over time, we expect clinical experience to show a reduction in stapling time and improved patient outcomes. And I would say that just given the key differentiation of the stapler, it's really a purpose-built design for sleeve gastrectomy procedures. Importantly, I wouldn't expect the Titan technology to be used on other general surgery applications or procedures.

All right. People want me to ask this question so I'm going to ask it. Ozempic, over the last week, I think I've heard that at least 4 or 5 times. What is the thought process on the addressable market as Ozempic kind of rolls out and seems to have taken sort of a unique pathway towards penetration of the weight loss market?

I can.

Larry is going to jump in here.

Yes, I'm going to just quickly jump in, Matt. So obviously, we're aware of the GLP-1s. It was certainly considered in our due diligence of Standard Bariatrics. And look, I guess the way that we think about it is, we are really targeting the very morbidly obese patients. You're aware that the guidelines came out recently that had been changed, really have been sort of 30 years old and the BMI was reduced from 40 to 35 without complications and the 30 BMI range for patients with complications. So that certainly helps open up the market more to surgery. You're also aware that there's been some recent guideline changes on the pediatric side, again, opening the door for surgical procedures in kids that are 13 years and above. So history has a -- the history with surgery is very deep. There's a lot of clinical knowledge behind it. And as good as the GLP-1s have been, we know that bariatric surgery has a greater reduction on a percentage basis in weight loss than the drug. So we think that they can coexist. But again, we're really just targeting the very morbidly obese that drives that market consumption.

Thank you for addressing that. So I'll take another one. And then MANTA. Is MANTA a little bit shy of expectations versus previously planned, as kind of TAVR procedures were growing at a modestly softer pace? Are you seeing any improvement in that market?

Well, I'd say that MANTA continues to grow at a healthy pace. It really hasn't been impacted by the slowdown in TAVR procedures. As we remain pretty early in the adoption of the technology, so as we look at the business, the real growth opportunity currently is more about account penetration versus the market growth per se. And we still believe we're in the early stages in penetration of what could be a $200 million to $300 million market opportunity for us. So again, we're pretty bullish on MANTA and we're seeing good growth out of that product offering.

Okay. And then shifting to UroLift. Last year, you rolled out UroLift 2. Did that enable you to go back to a lot of docs and kind of knock on some doors with that?

Well, as you're aware, UroLift 2 is a more refined product than the original UroLift device. It's got improved visualization and the ability for tighter tensioning on the suture holding, so in order to hold the prostate tighter. So the feedback from the field has been very positive on UL 2. The training of surgeons on UL 2 created a bit of a halo as they completed their cases to be certified. I'd say importantly, UroLift 2 conversion is now completed and we're focused on training of new surgeons to expand usage of the UroLift throughout the United States. We trained about 400 surgeons in the U.S. in 2022 and we'll continue to focus on training in 2023. Again, I should just remind you that, that training metric is U.S.-only. There are no foreign surgeons included in the tally but we continue to develop the international markets as well.

Okay. So UL 2 is moving in the right direction. You have a new or updated direct-to-consumer campaign. Kind of what have you learned from the previous campaigns and how have you kind of tweaked it?

Well, first of all, I'd say that there's no change to the DTC strategy overall. We launched a new TV digital campaign in February that replaces the previous advertising. The new campaign drives patient awareness for UroLift similar to the old one. And we continue to see it as an important investment from that regard. So we came out with a new campaign, largely to refresh the prior campaign, to reach or continue to reach new prospective candidates. And the new theme for the advertising is a NASCAR driver having too many pit stops due to his BPH. And if you want to see the advertising, you could see it on urolift.com. But overall, I think what our takeaway is that the DTC has been very valuable in building awareness about the product offering, and in fact, has had a number of patients going in to see their urologist asking for the UroLift as a result. So no real change, just a new campaign.

So with UroLift 2 and with the DTC campaign still driving it, it really is just dependent upon the market coming back to more of a pre-COVID level. Just how has that been progressing over the last couple of quarters?

Well, we did see some improvement as we got through the back half of 2022 with staffing levels in hospitals and improvements overall in some trends. We're not quite back to where we were pre-COVID levels, and our expectation is we'll continue to see improvements as we go throughout 2023 and frankly, the LRP.

Okay. And then internationally, I think you guys made it clear on the earnings call that the scale is just not there yet, so like in fact overall in 2023, sort of what percentage is international at this point, first? And then the second follow-up would be that does something need to happen in Japan for 2024 to be more meaningful?

Well, I would say that, first of all, we don't disclose U.S./overseas mix for any of our business units or individual products. Now with that being said, we have indicated that Japan and China would be kind of the foundation for international revenues for UroLift during the LRP, with the potential for Germany to gain reimbursement sometime in 2025. We provided some perspective on what to expect in Japan. So to help you think about international contribution, you may recall that we said Japan is estimated to have about 1/3 the size of addressable market as the U.S. In the U.S., we ramped up sales at $15 million in the second year and $50 million in the third year. So we're assuming a similar type of ramp in Japan, although at 1/3 of the size. I should say as for Japan, we're really pleased with the execution in 2022. Reimbursement is in place. We're scaling our sales organization. So the pieces for the ramp in 2023 and into 2024 and '25 are clearly there. In addition, we're focused on ramping up for UroLift in China, following initial cases that we did in the fourth quarter of 2022. So we're excited about the opportunities internationally. But really in 2023, it's largely a U.S. story on UroLift growth.

Okay. Switching over to gross margin. You have about 250 basis points implied versus 2022 in the long-range plan. How much of that do you simply get from the Respiratory divestiture being completed at the end of this year?

Well, as far as the MSA with Medline, that does cease at the end of 2023. And that's a little over $70 million of revenue and that's in the other revenue line that will go away. And given the very low margin profile on that MSA revenue, the elimination of it will drive about 100 basis points increase in gross margin in 2024. But when we're looking at the 250 basis points gross margin expansion, it implies roughly 150 basis points in '24 and '25 from the underlying business. And really the way we'll drive that margin expansion is through mix shift, the announced restructuring program activities, as well as price.

Is there a lot of room to improve the manufacturing footprint with restructuring beyond what you guys already have planned?

Well, I would say that what's already been announced still has meaningful benefit forthcoming. We estimate $45 million to $51 million in savings between 2023 and 2025, so a meaningful amount of savings yet to be realized. I would say that the majority of the restructuring is associated with manufacturing efficiencies, over 70% of it hitting the gross margin line. And looking forward, we'll continue to seek out opportunities to drive efficiency across our existing global infrastructure. And as we continue on our M&A strategy, we'll assess the acquired assets, whether or not there's additional manufacturing footprint consolidation opportunities associated with any future deals.

Okay. And from a supply chain perspective, is Tyvek still like probably the most visible supply chain constraint? And does that facility coming online really alleviate some of the concerns as you go through the rest of this year?

So I would say that Tyvek is stable to improving versus a more challenging environment in 2022. So it's clearly been a notable supply constraint for both Vascular Access and the Interventional business due to the types of packages used for those products, but we're starting to see some signs of improvement. And we really are looking forward to a significant improvement in the second half of 2023 as new capacity comes online for the industry.

Okay. And then on the operating margin side, over the past couple of years, I felt you had pretty good control over discretionary spending that would support EPS. Do you still have pretty good flexibility on what you're spending in any given year based upon -- that gives you a little bit of cushion?

Well, I'd say that we continue to tightly monitor and manage our discretionary spending and we'll modulate the level of our spending, depending on the operating environment. We continue to have flexibility in this area and can exercise that flexibility if need be. And I would also say that although operating expense is expected to grow faster than revenue in 2023, which is pretty unusual for Teleflex, there's a couple of things that I wanted to point out. First of all, really 2 headwinds -- onetime headwinds that are impacting the 2023 growth rate. During COVID, we had a number of open positions that we didn't fill and kept them open largely through the end of 2022. And now as a result of fully staffing up those positions, we'll have a full year's worth of expense in 2023 associated with that. And then also in 2022, we underperformed relative to our expectations. And as a result, variable-based compensation paid out at less than 100% target and we'll reset those targets in 2023. And those are creating a meaningful headwind against OpEx growth for this year.

Okay. I think you brought it up earlier, there's a definitive program to improve R&D. What's the right level of R&D as a percentage of sales for Teleflex over time?

Well, I'd say that when assessing spending, 1 thing that, first of all, I'd point out is that you don't want to remove OEM sales since those R&D expenses are billed to the customer. And after excluding that, our spending right now is about 4.5% of revenues. So over the next 3 years, we expect to continue to increase our R&D spend at rates greater than revenue growth. I should also point out that, that concept to commercialization program that I spoke about earlier, is focused on increasing the number of projects in our R&D funnel and funding those that buy the greatest returns to the company. So while we're going to look to increase the spending, we're also looking to increase the efficiency of that spend. And I would say that we'll continue to manage the R&D process to consistently increase the number of projects moving through that C2C process.

Okay. And with the divestiture of the Respiratory also have a -- would that also push R&D up a little bit higher in out years?

It does. As you appropriately point out, just given the lower growth, lower margin profile of that business, we were not aggressively investing in R&D for Respiratory.

Okay. So the R&D -- I think the R&D, it looks as if R&D as a percentage of sales is going to move up a little bit, so that makes a lot of sense actually based on the profile. On M&A, what's the likelihood Teleflex completes a meaningful deal in kind of 2023? Just how much more scrutiny do you guys place on ROIC and valuation in this current interest rate environment?

Well, I would say that despite the environment, our business development team remains very busy. Our pipeline remains active on opportunities we're assessing and investigating. We continue to evaluate late-stage technologies, tuck-ins and scale transactions. So we're looking at all sizes. It's difficult to predict the timing, but again, we're quite active. We do want to emphasize that we'll remain disciplined on the M&A process regardless of the environment. So no change to the strategic screens or the financial analytics that we'll run the opportunities through. And while the cost of borrowing has increased, we've also seen, at the same time, some moderation in asset valuations. So we will look aggressively for opportunities through 2023, and we're hopeful that we find the right opportunity for us and can move forward with it.

Okay. With that, Tom, we're brushing up right against the time. Thank you and Larry, both, for supporting the conference and hope the rest of the day goes well. Thanks.

Well, thank you. It's a pleasure to be here and good to spend the time with you, Matt.

Definitely.

Thanks, Matt.

Thanks, Larry.