Teleflex Incorporated (TFX) Earnings Call Transcript & Summary

But I guess my perspective, and you may agree or not, is that you have a little bit more negative view on margin improvement throughout the year versus some of the other large cap med tech. So second half, I think, margins are supposed to get better. And I was wondering, is that view -- and it kind of shows up in the numbers. I think I actually asked on the call. Like you had a very strong margin quarter, well over what you did year-over-year. I think gross margin was 100 basis points better. But that's higher than the guidance that you're expecting for the full year on a year-over-year basis. So maybe can you frame kind of what you see playing out from a margin perspective throughout the year? And we're talking gross margin, but I mean, on the operating margin side as well.

Yes. And it all starts with gross margin, as we'd all agree. And so our guidance for gross margin was to -- for the full year at 59%, 59.5%. We started off good, solidly at 59.4%, so at the upper end of our guidance range but firmly within our guidance range as an organization. And as you go through the year -- and on a year-over-year basis, there is the phenomenon of FX playing as you go through the year. If you go back to a year-over-year comp, the currencies moved a lot as you went through the year. Excluding the FX impact, the underlying margin expansion is really good as you go through the year. But it is being clouded a little bit because of what's going on with FX, and that's really why the guide is 59%, 59.5% and we delivered a good solid 59.4%. So we feel very comfortable in our 59% to 59.5%, and we feel we'll be in a great position to deliver that. I guess the underlying part of your question, is there anything else that you're worried about the gross margin, and there isn't. There's nothing that would give me a concern on our ability to hit our guidance on gross margins, as I sit here today. Then, from an op margin perspective, we're not getting the leverage you'd normally expect for Teleflex to get on the op margin, and there's a few reasons for that. Even though they did improve by 20 basis points in the first quarter, so it was a good start again across the Board, but there's a few phenomena. Number one, because of the performance of UroLift last year, bonuses were underpaid in the prior year. So we're peanut butter spreading them back to 100% for the year, and that's an impact. You also have the impact of Standard Bariatrics coming into the income statement, and that doesn't really start to leverage until '25. So that has an impact on the deleveraging. And it was tough to recruit people last year and a good bit of our recruitment was in the second half of the year. So there's a little bit of a carryover from that as well. But notwithstanding that, again, I feel confident in our op margin guidance for the full year.

Great. And then maybe take that to the LRP margin expectations. I think it's 250 to 300 basis points by '25 based on the guidance that you gave for '23. So you need 250, 300 basis points in '24, '25 of margin improvement. And I think what probably goes -- or maybe is not fully recognized is the MSA impact and what -- the benefit you're going to see from that. But then, I guess, maybe just kind of walk through how we should be thinking about beyond the MSA. You can certainly comment on what the MSA will be, but beyond the MSA, how -- why should we feel confident that you can actually hit those margin improvement numbers?

Absolutely. So in our Q1 call, we advised the investment community that our margin expansion would actually be 250 basis points on the gross margin line and 200 on the op margin line. So that was our updated long-range plan. And why I think investors should feel fairly comfortable and why we feel comfortable we can get there. So it's 200. And everything again starts with the gross margin line. So it's 250 basis points in the gross margin line. And -- but we pick up 100 basis points from the MSA alone. So -- but the phenomenon that happens is you exit '23 and on the first day of 2024, the MSA that we have with Medline for the divestiture of respiratory assets goes away. So we lose $70 million roughly of revenue on the top line, but it's very low margin revenue. So that actually gives us a full percent. So the gross margin expansion that we, as a company, must deliver it is 150 basis points, which is 75 basis points a year, which just through mix in the high-growth portfolio and our ongoing restructuring plans, we feel we have a really solid path to deliver that. Then you drop to the op margin line of 200 basis points. The 100 basis points doesn't all drop through, but you pick up around 30 or 40 basis points from that. And the onetime phenomenon this year of bonuses getting accrued back in doesn't reoccur. This hiring phenomenon doesn't reoccur. So therefore, we should feel confident in the rest of the gross margin dropping through. And allowing us to achieve that 200 basis points.

One question on that. Obviously, the high-growth products are going to drive some of that growth over your LRP and I think you're getting leverage from the hiring that you mentioned in '22. So you're seeing that leverage in '23. But are you guys -- I guess, in terms of hiring and the ability to leverage your sales force, your existing sales force to get that high-growth product revenue. Is that -- I mean, I guess the question is, are you going to have to add more sales reps in '24, '25 to hit that top line revenue?

So we're always going through every year, fully invested behind our high-growth portfolio. That was our strategy this year, it will be our strategy next year. As products start to ramp the incremental investment gets less and less and less because you've covered the whole country, you've got a sales force calling on that call point. So the need to continue to add gets a little less. On the other side, further down on the income statement, though, we do want to spend a little bit more in R&D. If you exclude OEM, we spend about 4.7% of revenues in R&D, we'd like to tick that up a little bit over the next number of years. And that's the ultimate reason why when you get 250 on the gross line, you're not getting any leverage you're getting 200 on the op line. It's those few phenomena that are driving that. And we think that's the right thing to do for the long-term sustainability of our growth profile.

I want to shift to M&A and even some optimization questions. But -- so you guys obviously have talked about M&A for a while. You did the Standard Bariatrics deal, but I think investors probably would have expected more, and there's probably a lot of reasons why that's the case. So I guess when you look at the environment, have you been close on deals? I know you're looking at a lot of deals, and I would just love to understand kind of how you see -- is there a disconnect between valuations?

I don't think it's a valuation disconnect. I think we've been holding a lot of hands. We've been active out there in the marketplace. For me, it's about bringing the right asset into Teleflex, and I think investors should be secure in the knowledge that we will be incredibly disciplined as a company when it comes to M&A. Are we active? We're active. Are we looking at late-stage technologies? Yes. Are we looking at tuck-ins right now? Yes, we are. Are we looking at scale right now? We are. We're looking at every aspect of M&A right now. We do want to bring in the right asset. And as I said, I think the investors should be securing the knowledge that we will remain disciplined and we bring something in, you can be sure we have turned over every rock. We've done our due diligence, we're certain that this is the right product to bring into the Teleflex family. I think there are enough assets out there for us to either put a string of pearls together and do a number of tuck-ins in different business units are do a large-scale transaction. And it's a question of which fish we can get in the boat, candidly, not, rather, are we fishing.

So a follow-up on that scale. How do you guys define a scale acquisition? I mean what's the size? I know you probably have -- or I think you've said you have $2 billion in firepower.

Yes.

But from a revenue perspective, what is a scale acquisition by your definition? And maybe following on that, what areas of the business do you think would lend itself more to a scale acquisition versus tuck-ins?

Absolutely. So for us, when we're talking about scale, we're talking about [indiscernible], let's call it, $80 million to $250 million, $300 million in revenue. We look for assets that are immediately accretive to our gross margin, and we look for assets that we can leverage to get accretive to our op margin in a reasonable amount of time. We'll accept some dilution in the shorter term as long as we see an ability to get there in a reasonable amount of time. The areas of the business for scale versus tuck-in, I think that I like the cath lab. I mean there's no getting away from it. You normally get higher-margin products. It's normally a growth segment. You're moving patients from an operating room to a much more efficient site of service so you get paid more to do that. I think the intensive care call point is a really important one for us. That's where our vascular team are every single day. Emergency medicine has been a great opportunity for us. And at the right time, urology is an area where we should bring something in. Once we see UroLift return to growth, bringing something in there would be appropriate, I believe. From a tuck-in, I'd do another tuck-in in surgical once they've integrated Standard Bariatrics. I'd do a tuck-in in the morning for OEMs if I could find it. HPC was a win-win-win, a fantastic acquisition for us. So those are the areas I think we would look. And for me, it's all about call point. Where are we going to leverage our call point either within the United States or how can we globalize that product? If you look at VSI and NeoTract when we acquired them, they had very, very little revenue outside of the United States. And we took all of that business direct overseas. We launched UroLift in countries that it might never have gotten launched had it not been for Teleflex. And that's a lot of the value creation that we bring, putting a focus in the U.S. and then globalizing the product and bringing it to a worldwide patient population.

Just a follow-up on urology, I guess. I mean you can go a number of different directions beyond UroLift today. I mean any thoughts on -- specifically, is it BPH or just it's broader urology?

So I think it's men's health, I would say. It would probably be a broader category. I think that there's a number of exciting areas in the area of men's health. Our sales force today globally is focused on the urologists that's focused on men. But there's a lot more than BPH in that space. I mean if you could find something in the BPH, that would be marvelous. But there's a lot more there than just BPH. There's a lot of really exciting technologies in the urology call point.

We have about a minute left. But I wanted to touch on the strong OEM growth, very strong. Maybe remind us of the areas that you're manufacturing, what end markets you're supplying. And is there any read-through -- you're not -- you're one of many OEMs that have done extremely well this quarter. Any read-through for procedure growth later on in the year?

So our OEM business is a fantastic, fantastic business, and it's incredibly well run by Greg and his team. The areas that we are in, we are in -- we spend a lot of our portfolio is in complex catheters, extrusions. And we're -- what we did about 4 years ago was we built these innovation centers in our OEM plants, and that is where our customers come with their ideas. And they've come to us for 2 days. And they will come with an idea, and they will leave with a prototype. And they'll go back to their sales and marketing teams and their customers. They'll present that to them, and then you have buy-in. So a lot of our OEM expansion is because of new business that we brought in over a period of time. We're definitely getting a bounce from procedures as well in the core business. And what we really saw in the first Q was our catheter business and a strong rebound in our suture business. Those are the 2 main catheters. And investors who knows will be familiar that we did HPC acquisition a couple of years ago. That has continued to perform exceptionally well. And that's why I said, Craig, if I could find another tuck-in to give those guys, I'd give it to them in the morning. But we have good visibility, to the other part of your question, on our OEM business. And it's not going to be 34% every quarter. But I think it's going to continue to perform very well for the whole year and into next year, easily. That's going to be a big driver in our LRP, Craig.

Okay. I think we're out of time. So thank you, Liam, Larry.

Thank you very much. Appreciate it. Cheers.