Teleflex Incorporated (TFX) Earnings Call Transcript & Summary

Amazing. It's amazing. Thank you. Welcome, everybody. Obviously, I'm Patrick, I've run the U.S. medtech team here at Morgan Stanley. I'm delighted to have obviously Liam and Larry here, CEO and Head of IR and Strategy to chat about all things Teleflex. The -- before we get started, I have some fun disclosures, morganstanley.com/researchdisclosures or chat to your sales rep. I managed to go that bit down pretty fast now. So that's pretty good. Thank you so much for agreeing to do this and coming along. And yes, it's been great.

Maybe the best way to do kind of -- you guys have quite a broad view of the health care system overall. And so far, first half of this year has been a lot of procedure volumes. It's been -- volume has been generally pretty strong. How are you thinking about the next 6, 12, 18 months in terms of volumes?

So I think that as we look at the environment that we're in right now, I agree with you, procedure volumes have been robust in the first half of the year. And if you take a step back and think what our goals were at the beginning of the year as a company, what we wanted to do is set out our full year with the potential every quarter to at least achieve our revenue and earnings goals as we went through the year. You go into quarter 1, we had a really good start to the year. Net the days, we grew just over 7%. We were happy with that, and we took up the low end of our guidance at the end of that quarter. We beat earnings, but it was first quarter, so we held firm on our earnings in the first quarter. As we went along into quarter 2, again, we were able to beat our revenue. And again, we were able to take up the low end of our revenue guidance. And while we didn't effectively take up our earnings per share, we had announced an acquisition of a company called Palette Life Sciences. And as part of that acquisition, we covered the $0.15 of dilution, which would have been a -- in any other words to call up on earnings. As we look into the future for the next 6 months and into the next year and as we sit here, we've got our guidance laid out there of 5.5% to 6.25%. So we feel comfortable in that guidance range. The businesses that have performed well for the first half of the year and have driven a lot of the upside for us have been our Interventional Access business our OEM business. And geographically, our Asia Pacific business has done pretty well. And as I sit here today, 2 months into the third quarter, the environment for those businesses continues to be robust. And we do see an environment where procedures are continuing to build that momentum in through the third quarter. So we see the back half of the year as being positive, continue to be positive for Teleflex. We continue to expect those businesses to outperform as we go through the remainder of the year. And as we go into next year, then we envision integrating Palette Life Sciences and continuing that trajectory and continue to achieve the goals of Teleflex as we move forward. If we look at geographically. I know there's been a lot of talk about China. We see our China business is incredibly solid. It's 4% of our overall business. We see that there have been some in the news about clamp downs and all of that. My observation and I've spoken to our team out there is it's very focused on large capital purchases rather than the type of business that we're engaged in. So we don't envision then that having an impact, and we expect China to perform well. And in the pricing environment, we continue to see a positive pricing environment for Teleflex. So all in all, I feel really positive about the year and the remainder of the year. And I also feel really positive about as our trajectory as we go into 2024, bringing in Palette Life Sciences into the business and continuing forward in that trajectory.

The China observation, that is very consistent with what we are hearing from the others as well.

Good.

It's basically just the capital equipment players. I mean, good segue, I guess, into Palette. For those who maybe -- if you could paint the business for those who might not know a lot either radiation oncology or how this product fits within that treatment paradigm? And what was it about Palette that you found interesting as an asset for Europe and...

Yes. So we have a criteria when we're looking at assets, and I think if I frame it around that criteria, does it fit within a Teleflex business unit. And absolutely, it does. We have 120, 140 sales reps every day in that urology call point. And it's predominantly a urology call point. It's the urologist that in most places in cases would place this device. What the device is when a man is going through radiation therapy for prostate cancer. Hyperfractionation is smaller dose -- higher doses of radiation therapy over a shorter period of time, which is great because it is much more effective in the treatment of prostate cancer. The bad news is because you're using higher doses, there is the potential to impact ancillary organs. So what this technology is, it's a spacing technology. And it actually creates a space between the prostate and the other organs and thereby protect them. So that's what the technology does. So it fits within a Teleflex portfolio. There are high barriers to entry because of the makeup of the technology and the IP associated with it. It has tremendous value to the urologist. And so far it's much easier to use than any competing technology out there. It's sculptable, and it has a really strong health care economics argument because it prevents the patient having to come back for ancillary procedures, such as incontinence down the road. And this is a product that is rapidly growing within the urology community and has huge potential to grow. Our focus is not to take share from the main competitor. I want to take a little bit, but that's an ancillary point. Our focus here is on growing it. Every day, we are talking to almost 4,000 urologists. Only 20% of those use this Barrigel technology, which is the main state of the technology. So we have 80% white space to grow into with this technology and take it to these customers. We expect that the asset will do about $56 million this year. And then we expect that it will grow in the high teens, low 20s over the next number of years. And I think that one aspect of this that I think is important for investors to understand about Teleflex as our entirety is that people would say, uh, but Liam, this isn't organic growth. You're going to have $67 million or so of revenue that isn't organic. I would just like to remind investors the MSA agreement with the sale of the respiratory assets to Medline goes away next year. So there's $70 million of inorganic growth coming up. So whatever growth we put up for next year, when we give guidance in February, you should look at it as truly organic growth for Teleflex.

And for that 80% white space, what -- why do you think those urologists -- is it just like lack of education at the [indiscernible] they're just unaware? Like what's the barrier been?

So the number one reason that a man will go into see a urologist is for BPH. The number 2 reason is prostate cancer. 97% of urologists who treat BPH also treat prostate cancer. So it is a lack of education and awareness, and it is an opportunity for us to educate those urologists to make them aware of the technology. So many of them wouldn't be aware of this technology being there. And obviously, we have a select number of clinical educators built into our model to also address the rad onc call point, which is the other smaller call point, but we're not ignoring them by any means. So I think we have many education programs laid out. The technology, as I said, much -- works significantly better. There is an opportunity to sculpt then to mold this product and to make sure you have appropriate coverage. And obviously, we have a number of clinical investments within our model to continue to bring clinical data to prove effectiveness of the technology, in particular, around the ability to mold.

And for those who might be less aware, from the economics from the urologist's standpoint, reimbursement that side of things, if you could give some details that would be helpful.

Yes, the product is very well reimbursed in all sites of service. So it is a profitable procedure for the urologist and the rad onc. It is as I said, in all sites of service. And just recently, with the changes of reimbursement, the ASC got a significant uplift in its reimbursement, so -- which makes it even more attractive in the ASC for the LUGPA. LUGPA is, for those who don't know, is a large urology group practices, I just realized that I'm talking you, Patrick, we use acronyms a lot. So I'll try to be more descriptive.

I'm all about acronyms. Maybe outside of that, can you touch maybe on the rest of the sort of high-growth portfolio overall ex that, ex UroLift because assets like MANTA sometimes sort of fly a little bit under the radar, some details on how things are going there?

So I think what's important about the high-growth portfolio, ex Interventional Urology for me is the end markets that they're growing into. So within our high-growth portfolio, you have our PICC portfolio. That's growing into a $400 million to $500 million end market. You have our hemostat portfolio, which is growing into a $600 million end market. You have our intraosseous portfolio, which is also growing into a $600 to $700 million end market. You have the MANTA, which is growing into a $200 million to $300 million end market. And obviously, you have the Titan stapler, which is also growing into a $300 million end market. So there's a lot of room for growth within the end markets. And what every one of those products have in common is their margin profile. And the margin profile, everybody assumes that the UroLift product within that portfolio is the highest margin product within the high growth, it's not. An actual fact, Palette is accretive to the gross margin of UroLift. So Palette in the Interventional Urology business unit will now help move Interventional Urology up into the upper margin portfolio of that. So every dollar we grow in the high-growth bucket gives us leverage within our income statement and obviously helps us to expand our margins over the long term. Our investment is focused behind the high-growth portfolio to ensure that we continue to expand and grow those products in excess of the average of the rest of the portfolio. And it is around 25% of our overall business. And if you look through our LRP, by the time you get to the end of 2025, the high-growth bucket should be about $1 billion. So you've got $1 billion of revenue growing well above the average for Teleflex with greater margins, leveraging the income statement in the longer term.

Even today, Teleflex has a pretty attractive margin structure. And so I guess there's also an interplay for you between reinvesting to keep driving the growth and then allowing some of the margin to drop down. How do you guys think about that in terms of like the relative puts and takes between those 2?

Yes. And we have given a lot of thought of that. And as was demonstrated within our long-range plan and over the first 6 months into our long-range plan right now, and if you look at the long-range plan, we had communicated that we grow the top line by 6%. And the high-growth bucket would grow in excess of 12%. So that helps with your margin profile. What we also communicated was our gross margins over that period of time would expand by 250 basis points. But the op margin would expand by 200 basis points, thereby allowing us to reinvest exactly to your point, Patrick, allowing us to reinvest so that we could all continue to augment the growth of the high-growth portfolio, but also invest in R&D for future growth and to invest behind some new technologies that we want to bring to the market.

And then the inevitable question just because it's a hot button topic. GLP-1s. Bariatrics, I think, is a comparatively small part of the business overall. But just any thoughts you have about that asset class long term and what it means for the business?

So there's no doubt that GLP-1s will have some impact on Bariatric surgeries. My own view is that it's -- and I've spoken to many Bariatric surgeons around this. And if you talk to them, it's going to be somewhat of an air pocket in the shorter term where individuals will be taking the GLP-1s. But do bear in mind that we are talking -- when we're talking about gastric sleeve, we're talking about the morbidly obese patients. And for those to have an impact, they need a significant weight loss. So a gastric sleeve normally gets about a 30% weight loss. The weight loss in GLP-1s is much smaller than that. So a lot of times, these people need a more drastic intervention in order to have an impact on them. I think the other impact is that the payers ensure these products for a period of time and then it stops. And the data will tell you, once you stop taking them, the weight loss that you benefited from comes back and potentially more. And that's why a lot of Bariatric surgeons are saying this is an air pocket because not all of their patients are going to be able to afford to spend, whatever it is, $14,000 to $20,000 a year for these pharmaceuticals. So I think -- and also in the health care economics environment, $14,000 to $20,000 a year forever to gain a 20% loss or a surgery that's probably going to cost $15,000 to the system for a 30% loss that should be maintainable over the long term, at some stage, there has to be a balancing here of is it surgical intervention what's better for the patient, but also better for the ecosystem and the health care environment. So there is a lot of enthusiasm for GLP-1s. But if you speak to the surgeons themselves who are dealing with these patients, they all seem to think that it is somewhat of an air pocket right now in relation to Bariatric surgery. But your point is absolutely correct, Patrick. I mean Bariatrics is a very, very small part of our overall portfolio.

We spoke to one Bariatric surgeon who got a panic call from his administrator because they were spending just in its hospital $1.4 million a quarter on GLP-1s just for their own employees. And they're trying to work to spend not that much as well.

Well -- and I think that speaks to the point that some of this has been taken as a lifestyle growth. I'm sure that -- I'm not sure, but I would make an assumption that $1.4 million, they didn't have that many morbidly obese patients in their hospital, I'm assuming. But -- so that's part of what needs to be addressed as well.

The -- we've come out and gone through a very aggressive cost inflation environment, which has been a little tricky for I think everybody. I guess 2 questions: one, very recently, how have you seen that sort of trend for your business? And in connection with that, you've perhaps been somewhat less aggressive than a couple of your peers in terms of taking price. How do you think about the interplay between volume share and price? And -- yes.

So I'll start with the price and then I'll turn to the inflation part of the question. I think in relation to price, price is a tricky one. I've been in medical devices for almost 30 years, and I've never had a customer call me up and say, hey, Liam, where's my price increase. And in an environment where there was no pricing, I can tell you there's an incredible price discipline within Teleflex. When no company was taking pricing, we were eking out 20 basis points a year, year after year after year on our most differentiated portfolio. We're taking a very measured approach to pricing in this environment because we want to ensure that it doesn't impact volume. We have a 6% CAGR over the LRP that we are going to hit. And we're going to hit that, and that needs volume in order to hit it. We are confident we are able to deliver in excess of 50 basis points this year as we did in excess of 50 basis points last year. I think you'll see around 50 again next year, and then it will taper back a little bit back down to that 20 or 30 in the years after. But we'll be able to maintain pricing, I believe, over a multiyear period. And we're thoughtful in so far as that we want to make sure that it doesn't ultimately impact our volumes in the longer term. So we're acutely focused on that. With regard to inflation, we have seen improvements as we've gone through the year, in particular, in freight inflation. Freight inflation is back to where it was. Wage inflation was never that big of an impact for us, candidly, as we went through the cycle it was really material inflation. Material inflation really peaked around quarter 4, and stabilized for those 2 quarters. We are watching it very closely between now and the end of the year to see do we get some disinflation. Not deflation, but disinflation, in the remainder of the year, which is a potential, I believe because resin prices have started to come back down on the indices. And I think the environment for suppliers to push on excess pricing, the labor market has expanded a little bit. So I feel that we'll be monitoring that closely, but it is very stable right now and an improving trend that we're seeing as we sit here 2 months through quarter 3.

That makes sense. And then you obviously -- for both of you, there's a lot of projects internally if you -- a bit of a mean question, but if you couldn't pick Palette, you had to pick one of the project each that you sort of -- you've seen internally, doesn't even have to be material, but like you find interesting or excited to you. And I'm not asking me to pick your favorite child, but like what project -- like is there something that kind of gets you going in suddenly?

So I think as we looked at Palette, and I think we were not just looking at one asset when we looked at Palette, we were probably, at the time, looking at in excess of 8 assets at that time. And they arranged in valuation from anything from $300 million to over $1 billion. Now we were really lucky to get Palette. Very happy to have that in the family. But we're still talking to some of those other assets. I can't tell you what the error obviously, but we are still in conversations because we still have lots of firepower. Our leverage right now, pro forma, is about 2.5x. By the end of the year, we'll be at about 2x. So we still have lots of firepower. And I think the environment is still very positive for private companies, in particular, where we're focused and our ability to execute against that. Internally, I think increasing some spend in R&D is important. And I think there are some very exciting opportunities in front of Teleflex. We just launched the new PICC positioning system, the RITZ will help augment the PICC portfolio. We have a number of new projects that we're working on in relation to our EZ-IO portfolio, the intraosseus portfolio that I'm quite excited about that we're investing behind. And also, we'll continue to invest behind EZPlaz. That still is a product that we're investing behind to bring us to the future. So there's never a shortage of opportunities to invest in, Patrick, within Teleflex. And I think some of the areas where we're putting our capital to work will definitely give longer-term returns to the shareholders and be quite exciting for our investors.

Larry. Any internal ones?

Yes. Just the one thing I would add is within the Interventional Access business, that's an area that we continue to see as ripe for opportunity. We've got a lot of projects. You're kind of seeing the tip of the iceberg right now. But that's another area that we're certainly investing in because we think there's real opportunity around both where we sit today in complex PCI intervention as well as in structural heart.

And then you obviously talked about capital deployment and extra firepower. What kind of rough areas you're very generally thinking about? And I guess that's from a business perspective, but then also how do you ensure the -- like the culture fit is good? Because I've seen stuff go badly wrong in culture, which -- everyone always rolls their eyes when you mentioned it because kind of intangible, but how do you make that work?

I think the cultural aspect is more pronounced when you're doing transformational deals. And when you have seen it hit a rock it's normally the bigger deals. I think that the most important thing when you're bringing an asset in is to be respectful. I mean you take a step back, and you're buying this asset. Why the heck are you buying this asset? Because they have done an extraordinary job, and you're interested in it because of the extraordinary job that they've done with that asset. It's the same with Palette. And I think one of the things I'm probably proudest about within Teleflex is our own culture. Our core values resonate throughout the organization. They're not stuck up in my office on the wall. But if you go to any factory in Teleflex or you go to any of our offices around the world and you ask an associate what are the core values of Teleflex, they will tell you that it's entrepreneurial spirit, make it fun, building trust with people at the center of everything we do. And I think as you're bringing companies in that cultural aspect, you want people to align to that. Now who doesn't want be aligned to having an entrepreneurial spirit, making it fun, building trust and focusing on people and the patients. So I think the cultural aspect, we're able to manage very, very well. And by gosh, we're good at finding assets, and we're good at integrating them into Teleflex. With regard to your question on areas that we'd like to focus on. For me, it's a lot of about call point. Where have you got an existing relationship that you can leverage it? Unashamedly, I like the cath lab. Anything within the cath lab to me is an attractive position. Larry mentioned Interventional Access. It's an area of growth for us this year for sure and continues to grow and will grow over a multiyear period. I really like the intensive care unit as a call point. Our vascular team are there every single day. Emergency Medicine, Z-Medica has been a tremendous asset for us as an organization. And I think we'll integrate Palette, and then we'll look for something else in the men's health arena thereafter. I do a tuck-in an OEM in the morning, I do a tuck-in surgical once we've got Sander Bariatrics fully integrated. But our integration of assets, I think, has been stellar. We've done really -- the team has done an exceptional job in integrating the assets. I mean Z-Medica continues to perform exceptionally well. We've integrated our ERP system and nobody even noticed. And that's what you want. You want to implement an ERP system without hitting a blip on the road. And we've also integrated the sales forces together and continue the growth.

And Patrick, sorry, I would just add one other item there, which is we're really not looking to add another leg to the stool. We're really happy with the businesses that we participate in, the call points that we have, and we feel that there's enough white space in there to bring things in and leverage the relationships and call points that we have.

Got it. It's a consistent strategic direction.

Exactly.

Yes. The -- have you seen private asset valuations become a little more realistic because it always takes time for that lag effect? How are those discussions?

I hate to answer it this way, but it depends on the assets. Look at -- Palette wasn't inexpensive as an asset, but it's a great asset. And what makes it a great asset is the growth profile, the channel that we have into it and the margin profile. If you think about it having a margin profile in excess of UroLift margins is pretty compelling. If you look at other assets out there that might not have that compelling, yes, the valuations have come back on those. And some of them actually have failed to trade. There have been a number of assets that have come to the market that have not actually executed on their exit strategy because of the valuation dynamic out there. The IPO market, I believe, remains closed. You'd know better than me, but I think it does still remain firmly closed. And look, at the first IPO that comes out there is going to have to be a pink unicorn, and it's going to have to get discounted to get attention. That's just the reality of it. So who wants to be the pink unicorn that's going in there first. Well, at discounted value, you're much better coming to Teleflex and making a definitive exit. So I think the market remains robust. As I said, we were looking at a number of assets at the time we executed on Palette, and we're still looking at them. And those are all attractive to us. Now like everything in life, there's a few up at the top end that I like better, back to your favorite children comment. There are -- I have a few favorites within there and the team does, and we're working to execute against that.

I guess finally, outside of the fact that the market's been too obsessed over UroLift, outside of that, what aspects of like Teleflex and the story and the thing do you feel is potentially underappreciated in the market?

So I think that 90% of Teleflex has performed exceptionally well over the last 2 years. I think that the organic growth that we mentioned that whatever growth that we target for next year will be organic. And therefore, by definition, the 6% within the LRP is organic. And I think that the parts of our portfolio that continue to perform exceptionally well. The bulk of our portfolio is operating well, but in particular, our Interventional Access, as I mentioned, our OEM business and also our Asia Pacific from a regional perspective, businesses have been performing very well. Obviously, our vascular business and anesthesia is also doing well. But I think what's misunderstood is that -- we are going to grow 6%. We will expand our margins. We will drive earnings growth. If that comes from this bucket or that bucket, as long as we get to those overall goals, I think that's what should be important rather than the fact that 10% of our business is not doing as we would have thought 2 years ago. And I think that's probably the most misunderstood. I think the top line growth that we're going to drive is organic, and we will drive a 6% CAGR over the period, and we will begin to demonstrate that in year 1 of the 3-year plan.

Amazing. Perfect timing as well. Liam, Larry, thank you so much.

Excellent.

Cheers.