Teleflex Incorporated (TFX) Earnings Call Transcript & Summary

All righty. Okay. Welcome, everyone. Happy Friday. It's Patrick from the Medtech team. Before we get started, disclaimers. I'm not even going to read it because you probably heard it 45 times and if you're that interested, it's up there. Much more interestingly, very happy to have Liam Kelly here as CEO and Chair of Teleflex; fun company, a lot going on, very interesting. So massive thank you for agreeing to do this and joining us.

Thanks for having us.

Amazing. I mean may be a predictable one to start, but you guys see quite a broad part of the health care system and a lot of trends in terms of utilization and things like that. Q2 sounded very encouraging. Could you give us an update on what you're seeing in the market in terms of volumes, utilization and how that looks between regions?

Yes, absolutely. So first of all, we're an acute care hospital company, first of all. So that's where we live and breathe every single day. As we look across the world, and we'll start in the United States because it's the biggest part of our business, we see utilization back to where it was in a pre-pandemic level. So that's -- and we see this being very stable over the next period of time. We didn't really benefit -- a lot of our products are used in emergent care, so we didn't really see pent-up demand because even in the middle of the pandemic, people had heart attacks, you have to use an EZ-IO and so on and so forth. But we do see the environment as very stable within the United States. Now if you travel across to Asia, again, and in particular, you mentioned China as we were chatting, our China business actually grew double digits for the first half of the year. Our Asia business grew in the upper single digits in the first half of the year. What we see there is the 1 anomaly has been Korea. So we got the doctor's strike in Korea. Our APAC business grew 4% in Q2, but it would have grown 9% without the impact of that Korean doctor strike. Now that will abate as you go through the remainder of the year. And then you get back to Europe. Europe had a really strong start to the year. They are definitely back to pre-pandemic utilization. I don't anticipate Europe maintaining that very high single-digit growth into 2025. I think it will take a wee bit of a step back because I don't think that level is sustainable. But all in all, if you take a tour around the world, the environment is really stable, back to pre-pandemic utilization. And just a quick back to the United States, and we'll finish there: the move of hospitals to move certain procedures out of the hospital to the ASC is actually benefiting Teleflex because we get the benefit of the products being used in the hospital-owned ASC. But at the same time, it's freeing up capacity in the operating rooms in the hospital to do more procedures. And hospitals are prioritizing the most profitable procedures.

We track it actually in the sector. And at least in my coverage, there were only 2 companies who had a good quarter in China. It was you guys and then [indiscernible]. But yes, a lot of the others had a much tougher time. So it's nice to hear.

Yes. Well, volume-based procurement is a reality in China. And in 2023, we had some volume-based procurement as well. Now every company has their own way of managing it and we manage our way through it, and we only sell our most differentiated part of our portfolio in China.

The point you mentioned there on ASC, I think, is probably an interesting one to dig into a little bit because I think when people -- correct me if I'm wrong, audience, but when people hear ASC, they tend to focus on hip and knee and a couple of other subcategories. Could you maybe delineate for people sort of the advantage that you guys have in the ASC setting relative to inpatient?

So what's happening in the marketplace in the United States is the hospitals are trying to control more of the patient flow. So they don't want the patient coming in through the emergency room or through the admissions area, getting treated within the hospital and then sending them to a doctor surgery or sending them somewhere else. They want to control that patients. What they're doing is they're buying up the ASCs themselves. And any procedure that does not require an overnight stay, they're trying to move that procedure out. The most obvious one is the orthopedics that you mentioned. So now that you can have a knee done in the morning and you can go home that evening and recuperate that makes it a viable option to move that out. And that because they're moving them to their own owned ASCs, it's the same procurement group. So they're using the same Teleflex products in that ASC and it frees up capacity in the hospital for more procedures to come through. So that dynamic is helping Teleflex and indeed helping the overall ecosystem because hospitals are moving to a lower-cost location to free up capacity in the bricks and mortar of the hospital.

Super interesting. Maybe a few on the product-specific landscape. You've had a little bit more time with Palette now under the hood having acquired it and specifically Barrigel. How do you feel things are going? How is it performing in the market? Is it versus your expectations when you acquired it? How is it looking?

So it's going really well. We've now had it for nearly 9 months, and I have to say that the product is performing really well. And just for those who don't know what Barrigel is, it's a spacing technology. So if a man has prostate cancer and they're going through radiation therapy, in order to protect any damage to ancillary organs from the radiation therapy, you actually put some spacing in between the prostate and those organs to make sure that the radiation doesn't hit ancillary tissue. And it's -- there's 2 companies in the marketplace, there's a product called SpaceOAR and then there's Barrigel. We've owned it now, as I said, for that period of time. In the first 6 months of this year, it has outperformed. So we were in the position that we were able to call up our guidance for the year by about $4 million from -- to $70 million to $72 million from $66 million to $68 million. So it is performing exceptionally well. And it's really about growing into the white space. 97% of urologists who do BPH also do prostate cancer. So the call point synergies with this product and our existing product is incredibly strong. And what we have seen is that if we educate the urologist and the radiation oncologists on the need for spacing, they'll start to use it. And the product is performing exceptionally well out there. The product does have an advantage insofar as you can sculpt the Barrigel product. So therefore, yes, it doesn't set -- the competing product sets very quickly, you've got like about 20 seconds to put it in. With our product, you can actually sculpt in there -- and the clinicians call it sculpting where they put in some spacing and then they go back in and they make sure that they get complete coverage. In the key clinical study, we showed that 94% of the time, you get complete coverage, whereas the competing product was in less than 50% where you get complete coverage of the prostate. And coverage is important because if you don't have complete coverage of the prostate, you can still have ancillary damage to the organs. So incredibly happy with its performance. We're working to get the product registered in Japan, which is another big market for this product, and we should have that sometime during late Q2 of next year. So really happy with the performance, and it's been a really good acquisition. And those that don't know, the gross margins on this product are actually accretive to Teleflex and indeed are accretive to the UroLift product as well.

The -- can you maybe touch for those who are less familiar on the midterm opportunity for label expansion using Barrigel?

Absolutely. So at the moment, it's used for prostate cancer. We -- and the total market that -- the addressable market is around $330 million. We have an opportunity to expand the label in another area of cancer at that same call point. So it is the urologist and the radiation oncologist that will expand the market by approximately another $100 million. Now what I like about this label expansion is because you don't need to [indiscernible] to put in Barrigel, only Barrigel would be applicable to this $100 million. We will recruit the first patient into the study this month, and we should have this indication sometime in 2027. We've agreed the protocol with the FDA, and they've approved it. So it's now a question of recruiting the patients, getting the study written and then getting the approval for this area. So we're -- and in the future, there are other cancer areas that we believe will be an opportunity for Barrigel to continue to expand the indication for the product and to continue to expand the TAM with all the new indications.

Maybe to pivot a little bit, and maybe it's worth level setting people on the background of the balloon pump situation and the potential opportunity from some of the competitive disruption there?

Yes. So an intra-aortic balloon pump is a piece of capital equipment that also has a catheter associated with it. And the product gets used in an instance where a patient has cardiogenic shock. So basically, the heart is not functioning is the easiest way to describe that. So what you do is you implant a balloon catheter and essentially, it does the work of the heart. So it stabilizes the patients so that you can actually save their lives and you can move them to a procedure, that be an Impella or whatever the surgeon sees as the appropriate path forward. On the 8th of May -- it's a duopoly, so it's only ourselves and a company called Getinge in this marketplace. The market is approximately $250 million, about half in pumps and about half in catheters. We have about 1/3 of that market share and the rest is with the competing company. On the 8th of May, the FDA issued a notice to customers in the United States, very strongly worded notes, telling them that they should stop using the competing product and move to an alternative as soon as possible. Now it's an evolving situation. Right now, our focus is on the U.S. market. The competitor is telling the customers in Europe, the CE mark will come back this month in September. So we'll watch that closely to see if that happens. As you went through the back end of May, there wasn't that much activity as people were trying to understand exactly what does this mean. Then the quotation requests started in July. Again, they peaked as we went through July and they've continued through the month of August. We were in a position to have booked some orders that we expect to deliver in Q4. And we called up our guidance in the Q2 call by around 50 basis points and the majority of that was due to this pump volume that we are anticipating in Q4. Like I said, it's fairly dynamic out there. We've been working with the FDA and keeping them informed. So we have capacity to supply this market in the United States for the next period of time. We believe the competitor will be out of the market for at least the first 2 quarters of next year. And our goal is to take market share during that period of time. And our goal is to make -- ensure that the catheter volume for the next 8 years, which is the life of a pump, will continue, so we'll have that durable revenue growth over the next 8 years of catheters as well as pumps. And our intention is also to continue to take share. Now if you pivot a little bit to -- that's the U.S. and Europe, not too much activity in Asia. But in Asia, we were already taking share because we just launched a new pump into the market. It's been in the U.S. market for a while, but now it's seen as a new product in Asia. So we've been taking share in Asia anyway with this product, and we envision that to continue over the next period of time in any event. So as I said, currently, it's evolving, but it's definitely an opportunity for Teleflex towards the back end of this year and there will definitely be an opportunity for at least the first half of next year.

If I'm in a U.S. hospital and I've got a pump that's -- yes, the replacement cycle you said is 8 years, but it's 6 years old and the competing pump, is it likely that I would wait and leave that pump an extra 2 years or is there a chance that the replacement cycle gets a little bit pulled forward as people pivot because this is the prompt?

So we are seeing that dynamic. We are seeing that replacement cycle moving forward. And it's really nothing to do with the age of the pump. It's really driven by the compliance department within the hospital. They are concerned that they're going to get sued, if they do have -- because these are really sick patients. So if you have -- the outcome is not good if a pump or a catheter fails to work. So if you have a death within the hospital, I think their compliance group are telling the hospitals, you need to fix this now. And the letter from the FDA -- I mean, it's on the FDA website, if anyone who wants to look at it, it was very strongly worded. And it didn't leave much room for doubt as to what hospitals should do in this situation.

Probably worth. I mean the pump as well as comparatively for a hospital, it's not a $200,000 piece of capital equipment. And so the relative cost of flipping it over is...

The cost compared to the risk is -- should be well manageable by a hospital, to be honest. So a pump costs around $50,000. The margins of this business are equal to Teleflex in its totality to our gross margins. The pump is a little bit below, and the catheter is a little bit above. So the initial bolus of pump revenue that we're going to get will be modestly dilutive to our gross margins. But then the catheter volume over the next 8 years will be accretive to our gross margins over that period of time. But even with that in our recent guidance update, we were still in a position to call up our gross margins by about 25 basis points based on the performance of our business in the first half of the year.

Last one on this topic. You used the word dynamic a few times in reference to how the situation is evolving. Any sort of more recent updated views on what you're seeing in the field?

So the most recent views is that the -- and it's encouraging for us is that the quote volume continues to flow in. I would have thought what could have happened is it could have peaked in August and could have just gotten back to where it was a year ago -- or peaked in July and got back to that, but it has continued through the month of August, so that is encouraging. And I think as more and more customers are learning about the issue, I think more and more customers are making a decision. Now it's tough on the hospitals because if you just bought -- if you just replaced your fleet last year, that's a tougher decision because you've got 20 new pumps sitting there that you've just commissioned and now you're in a tough spot because you shouldn't really use them.

Yes. I don't envy them that. Maybe flipping to another specific product. UroLift side of things, maybe again can quickly level set people on what the product is, BPH? And then as my specific question within that, maybe worth updating people the rebate action that you guys took and if that's having an effect in the market...

Yes. So the UroLift is a product that treats benign prostate hyperplasia. So for all the gentlemen in the room as you get older, your prostate continues to grow, and as it grows, it squeezes your urethra. That's what you got to look forward to all your young chaps in here. So what happens is you start getting up to go to the bathroom at night, start 2 times a night and next thing you're getting up 5 times a night. Up until now, the solution has been to cut your prostate to do some form of surgery, but what the UroLift is, it's a device that implants clips and it simply moves the prostate out of the way and clears that channel. The results have been phenomenal with the product. There was a change to reimbursement a few years ago in the office side of service and ever since then, the office side of the service has been extremely challenged from a growth perspective. So what we've done as a company is we've taken some actions to assist that. So first of all, we put a general rebate in place in certain geographies. If you're doing this procedure in California or New York or New Jersey or Texas or Florida, it's still quite a profitable procedure. But if you're in Alabama or Mississippi, it's not a profitable procedure anymore. So we put a rebate in place, a general rebate to make the product more profitable in the office side of service. We've also put a scheme in place for preauthorization approval for a doc. So in these office practices, if you outlay $4,000 for the equipment to do a procedure and you don't get paid, that's a big dent in your profitability in a small doctor's office. So having a preauthorization would mean that you're almost guaranteed that the private insurer will actually pay you for the work that you've done, which you should -- which they should. And then the last thing we put in place and we put this in place in Q2, we put in place an additional rebate. So if you're Dr. Patrick, and you did 100 UroLifts last year, if you do 100 plus X, you get the base rebate, but you get an additional volume rebate based on that. We should begin to see the impact of that, if it's going to have an impact, in this quarter Q3 and definitely in Q4 because it takes that amount of time to get people contracted and for a doc to bring patient flow into their office side of service. So we're monitoring that very, very closely. The product is performing exceptionally well overseas, and by overseas, it's really about Japan. In Q2, the interventional urology growth in Japan was really strong double-digit growth. So we continue to penetrate that market, and that continues to be a big opportunity, and we are in the very early stages in China in bringing the product to the market in China. And that will also be an opportunity down the road. And in the United States, we are acutely focused on getting this product to bottom out in the office side of service. We're not going to call the bottom because as you know and I know, if I call it, I'm going to be wrong, I'm going to be too early or too late. So -- but we will be very transparent with the investment community, and we'll keep you informed as we go through, and we will continue to pull every lever that we have to make sure that we address the office side of service in the fullness of time.

Japan, China and some of those other markets, are they -- of the surgical intervention -- of the interventions that happen, are they mainly TURP markets or is there something else that's going on?

They're predominantly TURP markets. But if you go to China, for example, all of the -- if you go to Japan, I should have said, most of the technologies are already there as well. So it's very similar to the competitive environment that we have in the United States. You've got -- Rezum is in the marketplace, we're in the marketplace, PROCEPT is in the marketplace. So everybody is there, but we're -- the idea of having no sexual dysfunction is really resonating with men in Japan, as it should. And also the minimally invasiveness of the procedure; you come in, it's a 1-hour procedure and you walk out and you're symptom-free. You don't have bleeding, you don't have to go under a general anesthesia. And again, the lack of sexual dysfunction is pretty important.

Maybe thinking about, at the group level, 2025. There's a lot of moving parts. Barrigel still ramping, you've got the situation [indiscernible]. Do you feel comfortable with where The Street is generally sat right now? I know you not wanting to guide [indiscernible], but the general view of '25 as a year?

Yes. So look, we feel good about how we're operating as a company. You're right, I don't want to get into specific Street -- our guidance for 2025. But I will tell you this as we sit here today, I think Teleflex as a company is performing very well. Our underlying earnings per share growth, if you exclude some of the onetime impacts that are impacting us this year, is 9% to 11%. And I think that we are well capable of continuing to drive real solid earnings per share. I think that our portfolio of products, when you look at Barrigel, you look at our vascular portfolio, our interventional portfolio, our surgical portfolio, all of these are going to continue to perform well through the back end of 2024 and continue into 2025. And geographically, both APAC and EMEA are performing very, very well. So as we sit here today, I think we feel incredibly confident in our ability to hit our numbers towards the remainder of this year, and we feel really confident in being able to drive good solid performance on the top line and on the bottom line into 2025 because of the dynamic of those businesses performing very well. And we're a portfolio company. We're not a single product company. Sometimes I felt a couple of years ago like we were a single-product company with the acute focus on 1 particular product, but we are a portfolio company. And that minimizes risk because if one part of it isn't doing what one would have thought, there are other levers that you can pull in order to ensure that you get to your goals.

I think one of the businesses that gets sometimes skipped over feels to me like a bit of a hidden gem is the OEM business, actually. Again, for people in the room who are less familiar, maybe explain the work that you guys are doing there and what the setup is going forwards?

Yes. So OEM obviously stands for original equipment manufacturers. So we make products for other companies. 60% of that business is extrusion catheters with complex catheters being a significant growing part of that. And the other 40% is complex sutures for the orthopedic sector that we were talking about earlier. The business has been compounding growth over the last number of years, growing double digits. I think this business is well capable in the longer -- it's really hard to keep compounding year over year over year, so I think this business is well capable of that mid- to upper single digits on a sustainable basis over a multiyear period. And the acquisition of HPC, a few years ago that brought us into these complex catheters, really brought us into faster-growing segments. So we are now making catheters for the neuro companies, the EP companies and those end markets are faster growing. The whole goal in the world today is to make catheters smaller, but you also want to steer them. So these thin-walled reinforced catheters are really finding great opportunities for growth where you have a small catheter that is steerable to get into complex parts of the body. So that has really helped the business and the team has done a really solid job in executing over the past number of years, and it will be a contributor over the next coming years. Regarding expanding that and doing acquisitions within this space, if we could find a tuck-in there, we would execute on it. And we are out actively looking for OEM tuck-ins to bring into that business and to, again, expand into aligned spaces so that you can take our technologies to the acquired customers and take their technologies to our existing customers.

I think within OEM, maybe it's also helpful to sort of explain a little bit about the competitive environment for people because I think it's 1 that most people don't feel like they have a lot of visibility on.

Yes. So for us, the OEM business is the business we have the greatest visibility on because normally, it kind of operates almost like a capital piece of a company. So we would have strong visibility into the upcoming quarter. It would normally be pretty heavily booked. So as you get into the end of Q3, you'd normally have Q4 fairly heavily booked at that stage. With regard to the competitive dynamics, we did have nice opportunities over the last couple of years where some of our competitors, as they went through COVID, laid off a significant number of their workforce. We did not do that. We maintained our capacity, and I'm glad that we did because as you came out through COVID, then companies started to request new products coming through, and that was an opportunity for us and we took advantage of that. And we would be seen as the preeminent catheter extrusion company, I think, in the space with, in particular, the cardiology companies. That's really our sweet spot as well as EP and uro now.

Presumably, this is one of those businesses where from the cardiology company perspective, it's a modest input cost and an extraordinarily high ASP product from their perspective. So they're fairly priced in elastic, but trust in the OEM manufacturer is critical, right? So...

So the real gem here is the complexity of the extrusions. So most products are extruded laterally. The complex extrusions are extruded vertically. So you actually have vertical towers to extrude these products. And it is incredibly difficult for some of these companies, as great as they are, to have that technology and the ability to develop that type of extrusion. And that's what makes the business, more so than anything, really sticky. Yes, they've got great margins. It will be difficult for them to have the same cost base as Teleflex to make these, but it's really the know-how and the technology to develop those, in particular, the thin-walled. One of the catheters actually gets extruded, I think it's around 6x as it goes through its process. And that's difficult to do.

You mentioned M&A. Teleflex has a rich history of deals of varying sizes. I know you've got your finger on the pulse. I remember Palette, you guys have been speaking for a long time. How do you see the environment out there in terms of assets, asset quality, the kind of pricing the private market is expecting? How is that looking?

Yes. So we are definitely focused on the private markets, much more so than public companies. That's been a very rich hunting ground for us. You're also very accurate, you don't find a company today and buy it tomorrow. This is a process and it takes a long period of time and a lot of work, and it's where we spend a lot of our focus. And it's a big part of our capital deployment strategy. We did add a share repurchase to our capital deployment just recently. We announced a $500 million share repurchase with a $200 million accelerated plan, and we want to do that alongside M&A. What we've seen from valuations, in particular, in the last 6 months is, we have seen valuation expectations come down a little bit because a lot of companies -- really great companies in the public markets have seen their valuations come down as well. And that does [ temper ] the private companies because they look at that and there -- when public market companies valuations were high, they were very quick to point to that, that I should be worth X because of this company. So in this current environment, I think there's an opportunity there, and we are actively out there looking at companies. We are focused in a few key areas. Unashamedly, we like the cath lab. It's a high-growth area. You get normally -- for being in that space, you would get 4% growth for being there right out of the gate. I would love to find another emergency medicine product. I think our vascular business is our biggest business unit. We're in that ICU call point every day, that's an opportunity for us. And as I said, I do a tuck-in in an OEM in surgical, probably not do anything in the urology space for about another 6 months. Just we want to get Palette embedded. We want to continue the focus that we have there. And we're looking for assets that are accretive to our top line growth, clearly. We're looking for assets that are accretive to our gross margins and that will be accretive to our operating margins in a reasonable amount of time. We are aware of dilution in this environment. So we would be thoughtful about bringing in assets that wouldn't carry dilution with them in 2025. I think it's important in '25 that we demonstrate our earnings horsepower, as I said a couple of moments ago. But there are a number of assets out there that we're interested in. And when I was a young fellow, you'd go fishing, and you never know when you're going to catch the fish, but I'll tell you, we're fishing. And there are assets out there that we're interested in.

There goes my theory that you're going to buy a urethral bulking business if it was forced to be sold. You gave some financial metrics on the kinds of things and assets you're interested in looking at. But obviously competing in good growth areas, but are there like product characteristics or like company characteristics in terms of who owns it, like whether it's the culture, who the -- like a single owner or the sort of taste of the business, for lack of a better word, that get you interested?

Well, first of all, I think we're broad enough right now. So we look for something that fits within our existing because you'll get leverage from the call point and it's always better to be in an area that you know really well. Obviously, IP is really important. So you want to get a business that's protected longer term. Health care economics today are really important. You need a product that will save the health care system money and also product categories that are clinically differentiated, that you're better than the other guy. Culture is important when you're bringing it into a company. I've always thought that the Teleflex culture is our real strength. We -- and our ability to bring companies into our culture has been a real strength. And our core values are key to that. Now ownership, private equity has always been a really good hunting ground for us. They have a defined time period normally when they want to exit. And we're in an election cycle. One of the candidates are saying that they want to put up exit taxes. So will that bring forth more opportunities? Potentially. It did in the last cycle. When we acquired Z-Medica that was the nudge we were able to give the private equity group to engage was that they would have a much higher capital gains tax exit if 1 particular candidate got into office. And we used that at the time. So that is also an impact out there. So -- but the good news is there are a number of these assets out there. I think that's the important message I would like to leave with investors today.

I never would have thought about that private equity tax thing. That was really interesting.

Yes.

I guess, last one, you do a lot of these meetings and things like that. What are you surprised that you're not asked about more? What are people, not missing exactly, but stuff that takes up our time internally but never resonates externally?

Well, we generate over $3 billion in revenue. And like I said earlier, for the last few years, I feel like we were a single-product company almost. And being a portfolio company has significant benefits and it derisks the execution of the company. Our biggest business is our vascular business. Biggest business is vascular. And vascular has significant opportunities in front of it with regard to the PICC opportunity, the intraosseous opportunity. And they will have anniversaried the endurance recall this quarter, quarter 3. So we should see that begin to move in a positive way. We don't expect OEM to continue to grow at 13%. But that's the beauty about a portfolio company. You'll have vascular, interventional, surgical, Asia Pacific, OEM and then it's easier, all contributing to the growth of the company, interventional urology with Barrigel and UroLift contributing to the company. So I think that portfolio view sometimes doesn't get enough attention. In my view, people get acutely focused. And sometimes that's our own fault. We -- as a company, it's UroLift, it's pumps, it's Barrigel. But we also, as a company, need to communicate more broadly about our entire portfolio. But I spend my time equally in those businesses. And I spend a lot of my time actually on the M&A side because it's such a value creator for Teleflex, has been in the past and will continue to be in the future. So I think that's the 1 thing that whole portfolio, the fact that we built this company and continue to invest in R&D across the entire portfolio to bring new products to the market is a key element that I think doesn't get the attention that it should.

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

Thank you, Patrick. All the best, mate.