Teleflex Incorporated (TFX) Earnings Call Transcript & Summary

Good morning. Thanks for joining us. I'm Matt O'Brien. I cover MedTech here at Piper. I know we're running a minute or so late. So we'll get rolling. Really excited to have Liam, who's the Chairman and CEO of Teleflex with us; and then we've got Larry Keusch from Investor Relations. So gentlemen, thanks so much for coming out. I really do appreciate it.

Thanks for having us.

So let's start off with I'm sure the question you're getting tired of answering, which is this OEM business and the softness that we saw in Q3. And just how it surprised you? I'm sure it's kind of end of the quarter with kind of phenomenon. But then just how we know that this is ring-fenced and we're not going to run into more OEM issues in Q4 and then into next year? And then what kind of headwind are we looking at, Liam, for next year in terms of the OEM business?

Yes. So for investors that aren't familiar with the OEM business, it's an original equipment manufacturer. It's where we make products for other companies and they're sold under the other company's brands. So that's that business. Business has been performing exceptionally well through COVID. As it went through COVID, we saw customers having issues with supply chain shortages and that -- and the OEM business has been performing, growing double digits over that period of time. We did the surprise, Matt, as you pointed out in the -- in quarter 3, and it was to the tune of approximately $7 million within the quarter. The bulk of that was as a result of a customer vertically integrating a product that we've been making for them for the past 10 years. A smaller component of that was customers managing inventory. Regarding the product and to answer your question, why should this onetime in transitory in nature, most of the products that we make for other companies are quite complex. They're thin-walled, wire reinforced, complex extrusions that is incredibly difficult for a customer to move in-house because they simply don't have the capabilities. 2/3 of our business are in that category. And the other 1/3 is -- approximately 1/3 are very complex sutures that we manufacture. They're quoted. They're [ graded ] differently and so on and so forth in that area. This one was in the extrusion side of the house, but it was a legacy product that we've been making for 10 years. And most of our complex extrusions, as I said, are very difficult to move in-house because they're extruded vertically. Anyone who's ever been to a factory knows that extrusion is normally done horizontally. And this is what this was. A very simple old technology. The customer, as we understood it, had an absorption issue within one of their factories and wanted to move it in-house. So we don't see contagion from this, but we do expect another $7 million impact to hit us in Q4, and we expect that to be with us for the first half of next year. So a total of $14 million next year to the other part of your question. And we do believe that is transitory.

Got it. So something like a 30 basis point headwind on the top line for next year?

Yes, it's $14 million over $3 billion. So it's almost [ 50 ].

Okay. Got it. And then let's maybe stick a little bit more with some headwinds for a second here.

You're the analyst, Matt.

All right. I appreciate that feedback. But let's just stick in with -- sticking with these headwinds on the UL side of things for a few minutes. You said the source of the headwind is really in the office setting, right?

Yes.

But when I look at the numbers, and we don't have perfect numbers, so forgive me. But I started this year with like $65 million in that business to get to the level of the headwind that we're seeing when you net out Palette as well, I'm getting just a ton of pressure even less than $40 million of revenue here in '24 from the office-based business. So it just seems to me like it's moving outside of the office into the ASC setting into the hospital setting. Is that reasonable? Or is there something I'm missing there in my calculation?

So I think that your starting point might have been a bit low in where you started with the office side of service. You are absolutely accurate, though you're right in the ballpark with the $40 million decline. But the office side of service is a little bit more substantive than I think you have modeled. And I guess it's all down to your starting point from the declines and the split between the office and the other areas. I will say that what we have seen is it's been pretty focused on the office side of service. The reimbursement change was a significant impact. And many investors that know us well know that when this first happened, it was hard to parse apart exactly what was happening because you're coming out the other side of COVID. Was it COVID? Was it the lack of patient flow? Was it the reimbursement or was it the staffing shortages? Now with the benefit of hindsight, you look back and it was the reimbursement change. If you -- the procedure in the office is still profitable in parts of -- fairly substantial parts of America. So in New York, New Jersey, Pennsylvania, Florida, Texas, California. But also, but in the middle of America, there are [ swades ] of the country where the profitability has been severely damaged because reimbursement isn't equal for Medicare and Medicaid globally. You can take one number and say that's the number. If you're in Alabama or Mississippi, this procedure is underwater, and that's a fact of life. Now when you move into the hospital side of settings, our bell curve from prostates that we treat, our sweet spot is right here with the smaller prostate. And they're the bulk of the prostate. Our sweet spot is, call it, 40 grams to 80 grams. That's really where we participate. It's contra -- our product, the UroLift is contraindicative for anything over 100 grams. And that's where you see other technologies doing really well in those larger prostates in that area. So as we look at it, I think your starting point might have been a little bit low, and there's still -- now the good news is next year 2025 is the last year of the reimbursement coming in. So again, investors that aren't familiar with what happened. There was a change in reimbursement that was bled in over 4 years. 2025 next year is the final year of that reimbursement change. So once we get through 2025, our hope would be that the urologists that are doing the procedure in the office at that stage, we would expect there be no more reimbursement -- negative reimbursement changes and they should continue to do the procedure in the office. But the office has been significantly impacted. And to your point, a $40 million impact in this year alone on that.

So we should expect more UroLift office-based pressure in '25?

Yes, it's been really hard to call about it, Matt, as you know. And we haven't said in our hands. I just want people to know that we have moved heaven and earth trying to fix this product. So -- we put in a rebate every year since the reimbursement change came into being. We followed that up with a volume rebate this year. We put in a preauthorization for docs in the office side of service to make sure that they would get paid. We supported the product with clinical data to ensure that the retreatment rates would become a nonissue. And I haven't heard anything about retreatment. I'm sure in your checks, you probably haven't heard much either in the past. And we made changes to the management team. We've got a new President, a new VP of Marketing who came with a history of urology and came from a company that had a big BPH portfolio and we've changed out the VP of sales as well. So we pulled every lever that is there in front of us. We've used pricing. We've done everything. The frustration and the encouragement in both hands -- the frustration is that it continues to decline. But the encouragement is that any third party analysts that is doing research with urologists, the feedback comes back consistently the product works. There's a sweet spot for this product in those smaller glands, and that's the majority of the market. So that's encouraging. But every research that's done that we've read all of them, the final sentence is, but I don't make as much money as I used to. And it's the economics argument that has challenged in the office side of service.

What about ASCs and hospitals? Are you still growing there?

So in ASCs, like I said, and the hospitals, I don't want to parse out every different piece of it, Matt, but in our sweet spot, that's where we're really winning there. And the decline is really all about the office side of service.

Got it. Okay. All right. So let's head over to balloon pumps for a second here. And as usual, with me, there's a lot of the numbers. So you said 1/3 of this $250 -- you have 1/3 of this $250 million market, right? So $170 million left roughly. It's 1/3, 1/3, 1/3, U.S., Europe, APAC. Let's say, 30% in the first 2 because you said you're doing better in APAC, 30% share in the first two. That would equate to a $58 million opportunity here in the U.S. and about the same amount in Europe. How should we think about you getting share domestically for that $58 million that's left here in '25?

Okay. Again, just to reset everybody, we are in a duopoly in an intra-aortic balloon pump market. There's always one other competitor. On the 8th of May, the FDA issued a notice to U.S. customers advising that the customer should stop using the competitor product and switch to an alternative if an alternative was available. Subsequently, the company had -- the competitive company had their CE Mark revoked. And recently, that was extended through to July of next year. We outlined in our Q2 earnings call. We were in a position at that stage to call up our revenue, and we called it up by approximately $15 million, and we said the majority of it was because of the intra-aortic balloon pump business. So you can call it $10 million to $12 million in that regard. The market is, as you outlined it, Matt, is $250 million. We see the opportunity focused in the United States for this opportunity. European customers, we get a small benefit from the replacement cycle, but many of them don't like having 2 models of pumps, so they will wait. And in Europe, just candidly, -- you're not going to get sued in Europe if something happens. As you can probably tell from this accent, I spent all my life in Europe. And I can tell you, I have never seen an ad on a TV for a class action lawsuit. Whereas here, in the United States, you can hardly turn on the TV, but the somebody -- so that's just the fact. So we've isolated this opportunity to the United States, Matt. The $250 million, 1/3 of the market is in the United States, that's $80 million of an opportunity. Half of that market is pumps. So it's $40 million of opportunity in the replacement cycle. There's also an installed base. So we'll do $10 million to $12 million in Q4. We believe that we will be able to do similarly in Q1 and Q2 of next year. So that's what we are understanding as of right now and then the catheters will follow subsequently. There is an incredibly high attachment rate. If you use the competitor's pump, you'll use the competitor's catheter. If you use Teleflex pump, you'll use the Teleflex catheter. And the reason for that is customers want to use what's called fiber optic signaling to trigger the catheter. And our devices work differently. Our trigger is on the tip of the catheter. Theirs is in the pump. So if you use our catheter, which is possible with their pump, you lose fiber optic and vice versa. So that's why there's such a high attachment rate of catheters to pumps. The margins for the catheters are slightly above the corporate average for Teleflex, which is around 60% odd. The pumps are slightly below the corporate average for Teleflex. So that's all the data in that regard.

Okay. And even though [indiscernible] is going to be off the market until at least the middle of next year, you don't think you can start to move some of that share your way?

So our goal is to take as much share as possible with all the best strategies any CEO lines out. This is really a land grab for want of a better description. And it's a question of converting as many customers as possible so that you have the tail, which is the catheter revenue over the next 8 years. And that's how long a pump lasts for. What we're seeing right now with the orders that we've received so far. And our quotation levels peaked in Q3 but have been fairly stable now through Q4. It obviously taken a little bit of a step back, but they've been stable all the way through Q4. And we monitor this on a weekly basis. so that's quite encouraging from our perspective. And what we've seen so far in the orders that we booked and that we're going to ship in Q4, we've seen a proportion of it, the large portion is the ongoing replacement cycle. But we have seen at least one system change out completely. They're one IDN -- in Europe specifically, though.

What about -- yes, Europe is -- good question. Sorry, I mean anything -- again, they're off the market, I think until at least July 1 of next year.

Correct.

That's the latest. So why wouldn't some systems over there? And I get the litigation component, but why wouldn't some be interested in switching over?

So you'll get a small benefit in that period of time, Matt, but it's not going to be that significant. Now if, if the CE Mark is extended beyond July, that will really start to put pressure on capital budgets in Europe because as most people who have followed MedTech for a while, it's use it or lose it. If you've got a capital budget allocated to you for that year, you either spend it or it's gone for the following year. So if it goes beyond July, I could then see a lot of hospitals that have a replacement budget allocated for this getting nervous. And then it could be an opportunity. But we have, in fact -- we probably won't factor that in when we guide in February.

Got it. Okay. Bounce around here a little more, too. But just over to Barrigel, which is doing great. I think that product is going to grow about 30% this year. Is that right? And then how do we think about the growth trajectory of that business going forward? I think you said 20%-ish when you bought them. Can it stay closer to 30% for a while even before you get the new indications?

So again, your numbers are accurate. It is growing 30%. We called it up twice. We called it up in Q2. We called it up in Q3. Again, what Barrigel is, it's a spacing technology when men are going through prostate cancer. You can have ancillary damage to other tissues unless you create some space. And this technology works incredibly well and gets really good coverage of the prostate, which is key. And it's so much easier to use than the existing technology that's on the marketplace today. Our goal is to convert the white space. This is a $300 million market right now, $320 actually million market. And we're growing into that white space. Same customer base, urologists place this product almost 80% of the time. The other time is placed by radiation oncologists. It has done exceptionally well. It did in excess of $56 million last year. And this year, the midpoint of our guidance is going to do $74 million. The gross margins on this are in excess of the corporate average, but they're also more accretive than even UroLift gross margins. And UroLift gross margins as most people would be aware, are in the high 70s. So it's a great product for us and has done exceptionally well this year. When we bought the company, our expectation was that it would grow high teens, low 20s. And that would still be our expectation with an opportunity to do better as we go forward. And we have exciting plans for that product to expand the indications and what not, and we think we can expand the market even further by doing so.

Got it. Okay. I wanted to head over to intraosseous products for a second. I think Becton just introduced a new one there. When you bought Vidacare back in '13, I know it's a while ago, that was a $70 million revenue business. I'm assuming you've grown that nicely and it's probably over $100 million in revenue now. I have to opine on that. But with them introducing that product now, is that an area that we could think about some headwind next year?

So just to clarify, they are reintroducing that product. That product was in the market 2 years ago. So they were on the market 2 years ago with that product. And that product was on the market for approximately a year and had to be withdrawn. They had some issues and it had to be removed from the marketplace at that time. But you are absolutely correct. They have reentered the market. The last time they entered the market, we were quite successful in defending our position. The fact that no expert analysts or investor realize they're in the market for a year is testament to how sticky this product is. We knew that they would come back, and we have continued to reinforce with that product, the clinical data. We've launched a new product, a tray system for the hospital market to differentiate ourselves. And we have contracted all of the GPOs, IDNs and all of our larger customers in anticipation of that. So we feel we're in a really strong position to defend ourselves, Matt. Will there be -- I mean, the last time I think they took that after a year. So we're monitoring it closely, but we feel we're in a very strong position to defend our market share. This product, we invented intraosseous. We own it.

Yes. Got it. Okay. So then, Liam, I'm listening to a couple of headwinds out there, UroLift and OEM, but then there's some other areas like Barrigel that are doing well and PICCs are doing great. MANTA still seems like it's doing well. When you had your Analyst Day a few years ago, you said you're a 6% to 7% grower that was before UroLift kind of slowed down. It's about 100 basis points of that 6% to 7%. So how do we think about the growth trajectory for Teleflex going forward? Are you a 4% to 5% grower, 5% to 6%, somewhere in that range? How do we think about when we add it all together?

So you're absolutely correct. We outlined the strategy to grow 6% to 7%. And part of the assumption when we outlined that strategy was that UroLift will grow 15%. At the time, UroLift was approximately -- it was over $300 million, probably around $320 million. So 15%, you're in the high 40s. So that's 1.5% of a drag to that 6% to 7%, just if it went to 0, but it didn't go to 0. UroLift because of the discussion we had in the office side of service has actually been a 1% drag. So that's actually 3.5% of a drag to the 6% to 7%. And if you look at what we've done, and I'm going to go to an organic number now because there have been some moving pieces. So just to help people. In the first year, organically, we grew approximately 6%. This year, organically, we're going to grow 4.5%. So our business has been growing in that 5%-plus range, even with that assumption that we were incorrect, I'd be the first to hold my hand up when we gave that guidance that UroLift will grow 15%, people were calling saying we were overly conservative when we called that out first, if you recall, because of the growth that it had previously. But that was -- so that was a 2.5% drag on that 6% to 7%. And our performance to date has been an organic in excess of 5%. So the rest of the business has performed better to offset as much of that UroLift drag as we possibly could.

Got it. Okay. Speaking of organic versus inorganic, are you guys still only considering non-dilutive deals? And I guess with all of these tailwinds that you have next year on the profitability side of things, with the MSAs going away, et cetera, why not be a little more aggressive on the deal side, given the strength of your balance sheet and taking out something a little bit dilutive if it bumps the top line?

So I think we're in a position where we can do both. We can -- I think there are assets out there that, first of all, fit within one of our verticals. We're not going to do anything transformative. We're not going to go and bet the farm because when you bet the farm, you can lose the firm. So we're not going to do that. We're going to stick within our verticals within our pillars because you have call point synergies, you have opportunities within that. There are areas that we are -- we think are attractive to us to build up even more scale, like the cath lab, like the intensive care unit, like emergency medicine that we were just talking about, where we already have scale, but adding to it, you get more synergies. I think our capital deployment strategy has been very disciplined. And our M&A strategy has been very disciplined. Matt, if you go back to when I took over as CEO, we bought MANTA right out of the gate, which as we just discussed is doing very well. We followed that up with Z-Medica, which has performed exceptionally well for us. HPC and OEM has done exceptionally well for us. We then bought Titan in the bariatric space which is now back growing above the corporate average. So -- and it was a $200 million acquisition. So it's now back in an area where it's going to contribute to the company, and it was the smallest of all those acquisitions. And we followed that up with Palette Life Sciences that we've just gone through that have done exceptionally well. So I mean, I know UroLift didn't turn out the way we thought in the latter years. But in the first few years, people were throwing out rose petals because it was so attractive. But I will tell you that we believe that we can add value and create shareholder value by doing disciplined M&A, by returning capital to shareholders through a share repurchase. We've just completed a $200 million ASR. We had $500 million approved by our Board. So we still have $300 million of firepower. Our leverage is at 1.7x. We'll generate approximately $500 million in cash flow from operations with net free cash flow of approximately $400 million this year. So our balance sheet is in great shape. Our leverage is in great shape. And I think that -- but we are focused on non-dilutive transactions because our underlying EPS is in that 9% to 11%, excluding some of those headwinds that you discussed. So I think we're -- feedback from investors has been look at -- you deserve the right to do M&A, be disciplined and please try and watch the dilution. That's been strong feedback from some of our key shareholders.

Got it. Okay. That all makes sense. I look at the clock, I think we're all out of time, so I have to cap it there. Liam, Larry, thanks so much for being out here today. I appreciate it.

Matt, thanks very much. Thank you.