Teleflex Incorporated (TFX) Earnings Call Transcript & Summary

Good afternoon. My name is Craig Bijou. I am one of the medical device analysts here at BofA. And it's a pleasure to have Teleflex with me, and from the company, Liam Kelly, CEO. Welcome. Thank you.

Thank you very much. Glad I got here.

I've heard about the elevator issues. All right. Maybe let's just start with if you could just kind of recap Q1 results and kind of some of the strength that you saw there.

Yes. So we were really happy with our Q1 performance, beginning with revenue. Revenue came in strong. We saw a very strong March, in particular, in some of our business units that I'll get into in a second and ultimately came in $11 million ahead of where we thought we were going to land at the -- in the first quarter. The businesses that outperformed were really our Interventional business. The environment in the cath lab is still globally very attractive, and it's an area of ongoing growth and opportunity for the company. OEM continues to perform well over a multiyear period now as the microcatheters perform well as part of the HPC acquisition but also our general extruded catheters and our suture business performs well. Surgical took a nice step-up within the quarter. So those are the business segments that performed well. Interventional Urology came in, in line with expectations, grew at 6.1%, so very positive start there. And geographically, Asia Pacific, double-digit growth. EMEA came in at 9% growth for the business. So I think all in all, it was a real solid performance. Then you come down to gross margins and op margins. They both come in ahead of expectations. Our gross margins were beyond the high end of our full year guide, so a really good start to the year. Our operating margins were towards the high end of our full year guide in excess of 26%, and earnings grew 3.9%. So anytime you grow earning, your revenue grew by 3.8%, your earnings grew by 3.9%, that's a good start to the year by any yardstick.

Great. That's a great summary. Want to talk about just some of the guidance for the year before kind of diving into some of the specific segments. And I think Q2 -- you expect Q2 growth to decelerate despite easier comps from where it was in Q1. And given some of the strength that you just talked about in Q1, I guess, why may we see a little bit of a pullback in Q2 growth? And then obviously, that implies the second half, a little bit of a ramp there. So I just kind of want to get your thoughts around the full year and how you see the full year playing out.

So first of all, our guidance for the full year is unchanged. We still expect to grow 3.75% to 4.75%. Now investors familiar with Teleflex will know that, within those numbers, there is a headwind of 1% from an inorganic perspective. We exited an MSA, and we anniversaried that and also the acquisition of Palette. So you put those 2 together, so our organic guide, if we want to call it that, is 4.75% to 5.75%. And we still feel confident in our ability to achieve that. We guided to the second quarter to do $760 million to $765 million, which is 3.7% growth. And the seasonality is normal. You normally take a wee bit of a step back in Q2 over Q1, so that would be pretty normal. And -- but you are right. It does imply that the business improves in the back half. And there's a few very simple reasons for that. Number one, Palette, which is our latest acquisition, will continue to ramp as we go through the year. We still expect Palette Life Sciences to do $66 million to $68 million on a full year basis. And 6 months under our ownership, I have to tell you, it's gone very well and coming in, in line with expectations. The -- we also anniversary 2 recalls as we go through the year. So once you get into Q3, we will have fully anniversaried the recall in the vascular business and the recall the anesthesia business. So you should expect to see the vascular business pick up somewhat in the back half of the year. And those are the really, the biggest moving pieces in the second half of the year. But I think we feel confident as a company that we can achieve the goals that we laid out for ourselves at the beginning of the year. And it's 1 quarter in and only 3 more to go, and we'll be there.

Similar question on the EPS line. I apologize given that it's just 1 quarter. But you did allude to your strong beat, I think a beat by $0.15 in Q1. I think the guidance was raised by $0.025 at the midpoint. There is some incremental FX headwind that's kind of built into that. But it still looks like the beat's -- the Q1 beat isn't necessarily fully flowing through to the full year guidance. So I mean anything that -- I mean, again, is that conservatism to start the year? Or is there anything else that we should be thinking about that could impact the margins?

Yes. Well, I guess it depends on how you look at the glass. Is it half full or is it half empty? I am really proud of the performance candidly in Q1. I think, as I said earlier, any time you grow your earnings faster than your revenue, that's a good quarter. And as we go through the year, we'll continue to execute. We've been executing well for the last 5 quarters. So I've said to investors many times, Teleflex is going to execute over the period of time. We're now 5 for 5, and we won't be happy until we're 10 for 10 in that regard. Now specifically to EPS, we didn't guide to -- I just want to start there. We didn't guide to a Q2 number. We guided for revenue. We did not guide to earnings per share. Our internal plan, we exceeded by $0.09. So what we rolled through at the bottom end of the range was a $0.05 of that beat, and we're also offsetting $0.05 of headwind from FX. So we actually rolled through $0.01 more at the bottom end than we actually beat by. And one thing I forgot to mention on the revenue line, Craig, that we updated our FX assumptions, and there's a $6 million negative impact in Q2 driven by that update in FX. The biggest impact is a total, I think, of around $10 million. Biggest impact of that is in Q2. And also, there was a little bit of a pull forward in revenue from OEM. We shipped some business in Q1 that we had originally anticipated shipping in Q2 and -- but they're rounding errors in the whole of a $3 billion annual business.

Got it. And maybe getting into some of the segments that you mentioned that have shown some strength. Start with OEM. And there are several, I guess, other businesses or other companies that have an OEM business, talked about inventory work down. And we keep hearing this. It doesn't seem to be impacting you guys that much. And then maybe just -- maybe you can go into a little bit more detail on why your OEM business has been as strong as it has been over the last several years. Can it maintain a double-digit growth trajectory? And is it customer end markets? Is it some of your differentiated products? I would just love to understand kind of how you guys see your business and the impact that it can have on the overall business.

Yes. I mean I think our OEM business traditionally in the past was growing around 4%, 5%. Definitely, over the last number of years, it has accelerated that growth, and there's a few reasons for that. Number one was we acquired a company called HPC, which brought us into the microcatheter area. And you're just in faster growing end markets in that business. So you're in the neuro space, the EP space, so by definition, you get more growth in those spaces. And then the core of the business, the extrusion part of the business and the suture part of the business have also performed well. So we've always said that this business is well capable of doing high single, low double digits with good execution. I think that this year, it'll do that. It had a really strong start. Because of the slight dynamics with the orders, Q1 to Q2, it'll take a little bit of a step back in Q2. But I still think that this is a business that is well capable of driving to that level. And I think this year, we'll demonstrate it yet again that it's a high single, low double-digit grower for the remainder of the year.

Interventional was another business that if you look over the last 5 quarters, a couple of quarters, you've got 20-plus percent growth in that business. So how sustainable is that? Or how should we think about the forward-looking profile of that business? Can that be a double digit? Can it be higher? Or can it be low double digit? Can it be teens? Any way to think about what that business could be?

So there's a few elements within that business that continue to perform very well. Obviously, you have MANTA in there, our large foreclosure product. That had strong double-digit growth in the first quarter, which, again, continues to contribute to the growth of the overall Interventional business. Our complex catheter business, which is from the legacy VSI acquisition back in 2017 continued to perform well. We launched GuideLiner Coast in the beginning of last year. That has performed well. You've got GuideLiner, traditional TrapLiner. You got Turnpike and that range of products that continue to do well. We also launched a new intra-aortic balloon pump a number of years ago. And while that is not a new product anymore in the United States, it went through its registration process overseas and is seen as a new product, in particular, in the overseas markets. And it's getting some traction, and obviously, the balloon catheters that go with that, over a multiyear period, are important. And the lifeblood of that business is new product introductions. So as I said earlier in the year or last year, we launched the GuideLiner Coast. We just watched a limited market launch for the Wattson guidewire, which is -- seems to be being well received by the customers. We have the Ringer, which is a perforation balloon catheter that's going to come through in the back end of this year. And then late in 2025, we'll get the Triumph catheter into the market as well. So we have a cadence of new products coming through in this business. And I think that this business, again, is well capable of that high single, low double-digit growth. And this year, it started fast. So I think it's a business that we're excited about. I mean, the cath lab right now is a good place to be. It's a good place to drive revenue. You get higher growth in that segment. And our business is performing well, and it's good execution by the team.

Got it. So want to talk about UroLift, and the math suggests maybe low teens growth for UroLift specifically in Q1. By our math, I think your guidance implies that it might be down 10% for the full year. And I guess the question here is when do you think we can see some stabilization in that business, particularly in the U.S. I think that's where -- what investors are looking for. I think that, I mean, in my opinion, it does a lot for you guys once we kind of hit that baseline. So how do think about -- like how do you think about when that can happen?

So first of all, Interventional Urology grew 6.1% in the quarter. Still feel confident in the guide that we gave at the beginning of the year. I think Interventional Urology will grow 7.5%. Palette life Science is going well. It came in, in line with our expectation in Q1, as did UroLift. It delivered what we expected within the quarter. A couple of things within that. The office side of service continues to be a challenge and also the training of the 50 reps. So we're cross training 50 reps that are our best UroLift sales force, and they are now being trained on Barrigel. So once we get to end of Q2 and into Q3, all of those -- that training will be completed, and those individuals will be back in the marketplace. I still think that there's a cohort of urologists that want to do this procedure in the office side of service. And it's really all about the office side of service. That's where the decline and the change in reimbursement definitely had an impact. At some stage, it will bottom out, and as soon as the office side of service bottoms out, then UroLift will grow because, for the entirety of last year, it grew in the hospital side of service, and it's growing in the international markets. So we will continue to manage what's within our control. We -- in last year, we trained as many urologists as we trained during the peak in 2019. We have a volume rebate program in place in the office side of service. We have continued to put a focus on the clinical aspect of the product. And at AUA, we had 5 key papers that were published. I guess a few of the noteworthy ones was the patient satisfaction with UroLift following the procedure compared to being on meds and also the comparison between all of the BPH procedures based on stats from the MAUDE database based on complications from many of these other procedures. And coupled with that, there was another study we presented on readmission rates for all of the BPH procedures, and it demonstrated the lowest readmission rate back into a hospital after you've had a BPH therapy is for UroLift. So the product continues to perform well. International is going well. Japan is performing well. And it's really about bottoming out the office side of service. And I do believe that we do feel confident that, that will happen at some stage. And we also feel confident in our guide as we have it right now.

Got it. Maybe on international, so I guess, Japan is obviously a big market. So -- and I know at one point, you had said you expected a similar ramp to the U.S., roughly 1/3 of the size, same timing. So one, does that -- is that still your view of the Japan market?

Yes. In a word, yes. Yes.

Okay. And I mean, I guess, what other international countries are you seeing a pickup?

Yes. So really, when you look internationally, you want to look at the markets that are going to move the needle. And the markets that are going to move the needle are right now Japan. It doesn't mean we're not doing business in other parts of Asia. We are in India. We're in Taiwan. We're in Korea. We're in other parts of Southeast Asia. And we began in Australia with one of the very first market. But the needle movers are really going to be Japan and ultimately, China. And where we're at in China is we have got the product registered. We are currently trialing the product to get it listed on the tenders in Shanghai and in Beijing because they're the 2 biggest provinces. As we go through that process and get it listed, we should get that listed as we go through this year. And then in late '25, '26, we would hope to get reimbursement for the product in a more broader area of Mainland China. And that would then allow us to make sure the out-of-pocket expense, because it's a pay-for-play model there even if you have insurance, the out-of-pocket expense for the patient that would be receiving the procedure would be much less.