Teleflex Incorporated (TFX) Earnings Call Transcript & Summary

All right. So Teleflex requested some smooth jazz to start the session. But I just wanted to introduce the management team here. We have Liam Kelly, the CEO of Teleflex; and Larry Keusch, who runs the IR function and business development for the group. And Liam, maybe you can just give an overview. I know in these sessions, we have a mixture of people who are really in the weeds on the stories, but also some new folks. So talk a little bit about Teleflex's journey and evolution from spin to now and how you've created a lot of value over time through M&A and some of your other strategies, and then we can get more into the details after that.

Yes, for sure. So Teleflex is an over 75-year-old company. But we began in a very different place than we are today as a purely medical device company. We were industrial conglomerate. So there was Teleflex Marine, Teleflex Aerospace, and then Teleflex Medical. We became a pure-play medical device company in 2011. And in 2011, our growth rate was anything from minus 1% to plus 1%. Our gross margins were around 47%, our operating margins were around 17% or 18%, and our free cash flow was less than $100 million. So we made -- began this journey as a pure-play medical device company, sold all the nonmedical assets and I said in 2011, we became a pure-play medical device company. So really, we're only 12 years at pure-play medical device company. And over that time, we've used our balance sheet in a number of ways. We've used it to invest behind restructuring programs. We've used it to invest behind R&D. We've used it for M&A. We have done over 80 transactions since that time frame, from go-directs to tuck-ins to late-stage technologies to scale transactions over that period of time. And if you roll forward to where we are today, our growth rate today is in the -- if you take our most latest guidance, take the midpoint, we're growing 6.5% this year. We've laid out a 3-year plan where we can grow 6%. Our gross margins are in the high 50s from 47% from the beginning point a number of years ago. And our operating margins are around 26%, 27% as a company. And our free cash flow is on average averaging around $550 million a year. So that's been the transformation story of Teleflex over the past 12 years. And we have a long-range plan in front of us today that is that we will grow at 6% on the top line. We'll expand our gross margins by 250 basis points. We'll expand our operating margins at 200 basis points, and we'll generate strong earnings per share growth. As I said, we're 1 year into the plan. This is the first year. But from a revenue growth perspective, we feel we're in a good place. Like I said, the midpoint of our guide is 6.5% in the first year of the 3-year plan. We have some gross margin expansion. Operating margins are under a little bit of pressure in the first year because of inflation. But notwithstanding that, we still feel confident in the long-range plan and we continue to execute against that strategy in the 12th year, so.

Great. Maybe talk about the composition of businesses that you have. What are some of the themes that string them together? And help us understand how you're positioned in each of the core markets.

Yes. So we are really -- if you want to think about Teleflex, for the most part, we're a critical care company. And we have built this company around that critical care aspect. We would see ourselves, our main call point is within the hospital. And my own view is that while there will be fewer hospital beds in the future as procedures get moved out to lower cost site of service, the acuity of the patient that's in the hospital is getting more and more so intensive. Our hospitals in the future are going to be like really large intensive care units with high-dependency units, in all of the other areas. And that's a really, really good place for Teleflex. So we have a Vascular Access business, which is the main call point within the intensive care unit. We have an Interventional unit that's focused on the cath lab. We have a Surgical business that is focused on the surgical portfolio. We have an OEM business that actually provides products to other equipment providers. And we also have an Anesthesia business, which is really focused predominantly within emergency medicine and anesthesia. So if you string all those together, they're really focused on the acute care hospital. The one area where we would have a more of deferability would be in our Interventional Urology business. That's approximately 10% of our revenues through the first 3 quarters of this year. And we've just added another asset to Teleflex within that Interventional Urology space, an asset called Palette Life Sciences, which is there to treat prostate cancer. Again, prostate cancer, it's a slow-growing cancer, but it is nondeferrable. So if you look at the themes around Teleflex is really around acute care, non-deferrability and emergent care. So the option not to use our products is pretty limited because if you don't use our products to treat that patient, the patient is going to have a very bad outcome. And we really like that space, and that's where we continue to put our focus.

And obviously, you're seeing good growth this year throughout the portfolio. Maybe just to address concerns that folks might have about growing through next year. There's a recession, but you're very defensible in those kind of situations. Can you talk about anything you're thinking about in terms of underlying demand, staffing, some of the bigger macro issues that will impact the future years?

Yes. I think if you're in the hospital right now, it's a great place to be. We're back to pre-pandemic levels from a procedural standpoint. And I think that is imminently sustainable. For all the generalists that are in the room, no industry is immune to a recession, no industry. But people get sick in good times and in bad. And people go to a hospital in good times and in bad. And if you look at our portfolio of products, most of them are covered by a general DRG. And the one that isn't would be the Interventional Urology business unit, and about 70% of those patients are in Medicare. So again, we would not see our business being that negatively impacted from that perspective. Other macro topics, I guess, inflation. Inflation has been very real for the last couple of years. We are seeing an improving environment right now. You see freight inflation come right back. That's back to where it was pre-pandemic levels. Material and labor inflation are improving as we've gone right through the year. And we're watching that really, really closely because that jump up into next year is going to be really important for every company within the space, not (sic) [let] alone Teleflex. Staffing levels in acute hospitals is pretty much back to where it was. Still a little bit of pressure on the office side of service from a staffing point of view, having more difficulty getting people to return to that. And that's just economics. And when people talk about staffing, they're always looking at nurses and all, but it's the ancillary staff. It's the person that does the reimbursement. It's the person that brings the patient into the treatment room, preps them, gets them ready, does some of the preliminary testing and all of that. That person in America, they can either work in an office environment, or they can go and work in Target or Walmart. You're going to get $25, $26 an hour working at Target and Walmart, and you're not dealing with the public as much as you are in an office. And sometimes an upset public because they're not well, and they're in for treatment. But I think, all in all, I think the macro is in a pretty good state. I think from a recession standpoint, I think there are parts of Europe that are already in recession candidly, probably the U.K. would be one of them; Germany, a little bit. I'm actually not sure it's going to be a global recession. And I think the U.S., if it does go in, I think it will dip in and out. But if you travel through Asia and you talk to the people in Asia about inflation, they'll look at you as if you come from another country, which you have. But they'll look at you as if what you're talking about. They're not seeing the same inflation broadly in most parts of Asia that we have seen in the United States and that you've seen in Europe. And so I think that this isn't going to be a global inflationary -- or a global recessionary environment like we've seen in the past. And my own sense right now with the -- I know the U.S. consumer pulled back a little bit in the last quarter, but the U.S. consumer is still very, very strong. And I think for health care in particular, I think the environment is pretty solid right now.

Great. Great. We touched on inflation and mentioned labor. Maybe you could just remind us how much inflation pain you've taken over the last couple of years? What the big buckets are? And from here, kind of what could get better or worse?

Yes. Our biggest impact on inflation has been material inflation. Earlier on, it was freight inflation. That's not the case right now. Our normalized inflation in any given year, pre-pandemic was around $20 million. That's normally what we run through our income statement. And we would have offset that with restructuring programs. We would have offset that continuous improvement programs, and we would have offset that with pricing. In the last couple of years, we've seen that triple, really driven by material inflation. A little bit of labor, but the majority will come from material inflation. We've offset as much as we can in pricing. Our pricing has gone from 20 basis points of positive pricing pre-pandemic. We're north of 50 basis points for the last 2 years. And normally, tenders are a 3-year cycle with GPOs are in Europe through tenders. So you won't but anticipate till you get another year of maybe around 50 basis points to help offset that. But the increased inflation, and we've worked to offset it with SIPs and restructuring boots, it's just not possible with the levels that we've seen. Now we have seen, as I said, a stabilizing environment regarding material inflation. We're not anticipating over the next couple of years deflation, but we would anticipate disinflation. And I think that, as I said, we'll watch quarter 4 really closely to watch what the run rate is like as we head into next year. And I think that if you couple that with our ability to push through some pricing, I think next year, from a margin perspective, that could be a little bit better.

And you talked about this pricing dynamic with the tenders and achieving more than 50 basis points next year. How do we view the pricing going forward from that? Is this better pricing that you've been able to achieve durable for the next 5 or 10 years? Or is this unique to this period?

So I think it's going to be slightly elevated for this period. When companies are giving up 100 basis points, Teleflex was able to carve out 20 basis points in positive pricing when it was in the positive pricing market. I think we're also very cognizant of the relationship between pricing and volume. You never want to cross that line where your customer is waiting for you to actually at the next round, when they're issuing that tender, to exclude you because you've gone over that line. I do think that we will hold the 50 basis points for next year. And then after that, you get some carryover, so it might drop down from 50 plus to 30 plus thereafter. But I still think there's going to be an environment over the next 5 years where we will be able to get some positive pricing, probably not at the levels that we've seen for the last 2 years and for next year, but we'll still be in a positive environment, I believe.

Got you. Other big picture items, and then I want to talk about some of the products. But maybe we could just address GLP-1s. You went some detail on your last call about having a small exposure there. What have you been seeing in terms of the impact of GLP-1s in your business and maybe frame the value at risk for people?

Yes. So I think we know that it's important to investors. That's why we spent a fair chunk of time on our last earnings call discussing it. And from what we see here right now, we've done a deep dive into our portfolio. And we think the risk in our portfolio is 1% to 2% of our total revenue. That's if it all goes away. I mean it's not all going to go away. GLP-1s are not the panacea to everything that's wrong with society. And we're talking about GLP-1s as a percent of 1%, which is incredibly dangerous in my mind. So let's look at the facts. the reduction in MACE events goes from 8% to 6.4%. As a percent of 8.4%, that's a 20% reduction. But in absolute terms is 1.6% over a 5-year period. That's 30 basis points per year over a 5-year period if everybody on the planet was taking GLP-1s. The American population as a percentage that is impacted by obesity is 40%. The dropout rate in the study was 16% in a controlled environment. The true dropout rate is more than triple that in real life with people after one year taking GLP-1. So I think the impact has been completely exaggerated for all Medtec right now. And I think the reality is that the impact is going to be much lower. This almost reminds me of when Amazon were coming into Medtec, remember that?

Yes.

Medtec got hammered because Amazon were coming into Medtec. So how many of our customers buy products from Amazon today?

Two.

Must be you and someone else. So this has been, I believe, quite exaggerated in its impact on Medtec. That has -- and it's impacted broadly across that. And I do think that GLP-1s have a place. There's absolutely no doubt about it. I think that they do have an impact. I think if you look at the study that came out in Saturday, stroke and cardiovascular events are in the lower spectrum of MACE events that are impacted. And the reality is that patients will live longer if they're on these GLP-1s, which is actually good for Medtec in the long run. So I think people are looking at GLP-1s as a negative for Medtec when in actual fact, in the longer term, there could be a positive for Medtec in the fullness of time. So -- but our biggest exposure, to come back to Teleflex, is our bariatric business. We bought a company called Standard Bariatrics. But again, it's 1% of our revenues. There is some impact on a little piece of our surgical business potentially. And this is assuming it all goes away, which we all know isn't going to happen. And in our Interventional business, we see very, very little impact. So if GLP-1s was the panacea, if everybody on the planet took them, it would have a 1% to 2% total impact on Teleflex revenues. And we'll continue to monitor it. We're keeping a very close eye on it. And of course, the cost of GLP-1s is also has to be a consideration because it is costing around in the region of about $14,000 per year for this product, which if you look at the cost of gastric sleeve, gastric sleeve costs about $20,000 and it's one and done. It doesn't have to be repeat, repeat, repeat. And if most bariatric surgeons do believe that gastric sleeves, once you go through this air pocket, will return. And if the market is a bit smaller, the market is a bit smaller, and Standard Bariatrics is a share to take. So I think Standard Bariatrics will be fine in the fullness of time.

Got you. That covers the planet. What if they're given an outer space? So let's switch topics and talk about China a little bit. So that's been a hot topic given Becton gave guidance, and they talked about a little bit more of a slowdown than what they went on to a few months ago. So we just love an update on what you're seeing in China in terms of any impact from -- you don't have much capital exposure there. But any effect on the procedures from the anticorruption crackdown?

So we really haven't seen that. And if you are going to see it, you would have seen it by now. The crackdown has been going on since the early summer. And it has been, to your point, pretty focused on capital equipment and also focused on devices that require a lot of clinical education, a lot of training because the access to the hospital and doctors candidly are afraid to actually go to some events right now just because they don't want to be impacted by that. So we have seen minimal impact from that crackdown. In actual fact, in the last quarter, China for us grew in excess of 20%. And our Asia business grew in the very high teens, driven by some really outstanding performance in China, but in also in other parts of Southeast Asia, Korea, India and Japan. So Japan, predominantly from UroLift, to be honest, but the rest of it is our core business performing exceptionally well. So we see Asia as a really nice opportunity, including China moving forward. And it's really the opportunity to sell old as new. Products that we launched in the United States and in Europe many years ago, companies we bought over the last number of years, registering those products in Asia Pacific and bringing them to the market is a significant opportunity for us.

You touched on UroLift. So I wanted to ask a couple of questions about that and core growth and some of the new growth that you could get from acquisition. So I guess the way I'll frame the question is UroLift used to be a really strong growth driver for the company. It slowed down the last couple of years with some of the issues around deferability and reimbursement and the office pressures that you talked about. And so it hasn't been growing this year, but the core has been growing really nicely, as is your high-growth portfolio. So maybe first, remind us, in your long-range plan, the sources of growth in terms of how you define them from a core perspective and a high-growth perspective. Maybe start there.

So over our long-range plan, as I said, we plan to grow 6% in the first year, at the midpoint of our guidance, we're growing at 6.5%. The components of that growth were that we expected the high growth to grow 12% to 13%. Within the high growth, you had Interventional Urology. UroLift sits in Standard Bariatrics, the PICC portfolio, our hemostatic portfolio, the MANTA and obviously, the intraosseous portfolio. So that was what was in the high growth. Then in the Durable Core, we actually updated our guidance on Durable Core on the LRP as we were leading into the LRP the first year with Durable Core was doing better. So we upgraded from 4% to 5% to actually 5%. And in the first year of the LRP, the high growth ex-UroLift has done exceptionally well, to your point, Matt. And so has the Durable Core. The Durable Core has actually done better than we expected in the first 9 months of the LRP. And I think it's -- that's why our investors own Teleflex because of the portfolio. Not because of one element of it or the other element of it, it's because of the portfolio that we've built of products. And with UroLift being a drag, and you're right, it was a growth driver. But with UroLift being a drag, midpoint of our guidance is still 6.5%. That kind of durable growth is really what we're trying to achieve. Now specifically to UroLift, I'll get into that in a little bit more detail because I know it's a curiosity and an interest to investors. The durable -- the -- what's happening with -- international is doing [ fine ]. Our growth overseas is extremely solid, double-digit growth, really solid double-digit growth. The office side service through 3 -- pardon me, the hospital side of service through 3 quarters, which always been the biggest side of service, is also growing through the 3 quarters. The issue is in the office. The change in reimbursement, the staffing issues, the patient flow issues in the office side of service had made it a real drag on the growth of the of UroLift. At some stage, that has to bottom up. You're just at the point where it's getting to the level where it almost has to bottom out in the office. And once that does occur, then we can see UroLift return to growth. Now in our LRP, as you know, we assume UroLift for that. So we will get to 6% on a flat UroLift number. If UroLift grows, that's just a cherry on top. And I think there is a potential for it to grow through the LRP

Got you. So maybe UroLift growth does improve going forward a bit here. What do you think about the durability of growth in the Durable Core and the high-growth portfolio? Do you think the outperformance that you're seeing this year could continue? Are there puts and takes that we should think about just at a high level over the next couple of years?

Yes. So our goal is always to grow at 6% in any given year. Just because we grew at 6.5% in the first year doesn't mean that we're going to average that out, even though it was a CAGR. Our goal is to continue to deliver. I think there's elements of the high growth that are imminently sustainable through the life of the LRP. I mean, MANTA is going to continue to penetrate that market. The intraosseous portfolio will benefit -- will continue to drive growth. And I think bringing in Palette and Z-Medica as well and the high growth been performing well. And then bringing in Palette into that mix. And Palette, we haven't built this into our acquisition model. But it could have a halo effect to UroLift as well, where you're in talking to urologists who traditionally would not have used UroLift, but the 97% of urologists that do BPH also do prostate cancer. So the synergies here are tremendous. And as you know, we expect Palette in a full year this year, it grew $56 million, and we expect it to grow high teens, low 20s over a multiyear period. So that is, in effect, completely replacing the $80 million of growth that we had from UroLift over the LRP. And as I said earlier, if UroLift recovers, then that's only great for our investors and it's great for Teleflex. The Durable Core, I think there are components of it. Some pieces of our business will take a modest step back as you go through the LRP. But other parts of our business would take an uptick. I would expect Vascular to improve as we go through the LRP. They were impacted by a recall this year. I would say the same for Anesthesia. It will pick up as we go through the LRP. And I think that the Interventional business, with the new products coming through in that area, I'm really excited for our Interventional business. I think that does a really strong potential through the LRP. And geographically, as I said earlier, I'm enthusiastic for Asia through the LRP.

Got you. Maybe we could double-click on Palette and talk a little bit about -- you just mentioned the growth opportunity. But also talk about the margin profile and the kind of returns that you expect on that acquisition, and I wanted to roll that into maybe a question about how you think about acquisitions in general.

Yes. So I'll start with the return profile. We will get above our internal cost of capital by year 5 on the Palette acquisition. For those of you who don't know what Palette is, it's a spacing technology when men are getting prostate cancer treatment. The current treatment is to get radiation therapy. When you get radiation therapy, there can be ancillary damage to some of the other organs. And this is a spacing technology that pushes the other organs away to protect them from that impact. The reason this was incredibly attractive to us is because of the call point. We have a very strong sales force in that urology call point every day. And the vast majority of spacing is placed by the urologist and the remainder, about 20%, is done by rad oncs, radiology oncologists. So 2 really strong call points that we're really focused on. I think that the margin profile also made it incredibly attractive as well as the market profile. There's about 290,000 new cases every year. So that's the area we're going to grow into. 20% of our current UroLift customers, 20% use Barrigel. So it's -- we've got a lot of white space. This is not about taking share from any other product in the marketplace for us. This is about expanding the market. And as I said earlier, 97% of customers that treat BPH also do prostate cancer. The other really attractive thing about this asset is the margin profile. Not alone is a gross margin accretive to Teleflex, it's gross margin accretive to the Interventional Urology business unit. And most investors familiar with Teleflex will know that the Interventional Urology gross margins are in the high 70s percent. So it ticks all of the boxes for us. It's a better technology. You can scope this technology. It actually will stay in the body a little bit longer than the existing technologies that are on the marketplace. You -- it's a simple one-step process instead of 14 steps. So when you're converting a customer in that white space, it's easier for us to convert them than the competing technology. And if you add all that together, the return profile, the gross margin profile, it will become op margin accretive in '25. It's a little bit dilutive this year, $0.35 -- or next year, $0.35. But in reality, the returns on this will be significant thereafter.

Great. And maybe you could just talk about your acquisition strategy and capital allocation strategy in general. You've done a lot of acquisitions over time. What do you see in the current environment with the way asset prices have been stressed, and maybe remind us how much dry powder you have to be able to do deals at this point?

Yes. So I think that the good quality assets are never inexpensive. On the surface, Palette did not look inexpensive. But once people understand the gross margin profile in the [ fifth ], then it looks like a good deal for Teleflex and the growth profile as well. What we're seeing out there right now is there are assets available, many assets available, and we are currently very active. I think we're very cognizant of our leverage. Our leverage right now is 2.1x net. In the past, I was talking about it 4x net. And at 4x net, we probably have over $2 billion of dry powder. The reality is I think 3 is the new 4 right now. So we're acutely aware of our leverage profile as a company. And if you look at our recent acquisition strategy, we did Palette, we did Standard Bariatrics, and we've discussed that, that will be fine in the long run. We did HBC, and we did Z-Medica. That's a really nice string of pearls. They're all accretive to our gross margin. They are all accretive to our op margin in a very short period of time. They all have a very nice growth profile. They all have a really nice EBITDA profile. And that little string of pearls with the cash generation that we have is something that we're imminently capable of continuing over a multiyear period.

Right. I think we should probably end there. Thanks so much for your time, and thanks for your interest in Teleflex.

Thank you very much. Cheers.