Teleflex Incorporated (TFX) Earnings Call Transcript & Summary

Good afternoon, everyone. We've saved the best for last here. I'm Robbie Marcus, Medtech analyst at JPMorgan. Really happy to introduce Liam Kelly, CEO of Teleflex. Liam will do a presentation followed by some Q&A.

Thank you very much, Robbie. So good evening. It's our pleasure to be the last of the day to send you home safely. We are pleased to be attending the JPMorgan Healthcare Conference, and we genuinely appreciate your interest in Teleflex. Before I begin the presentation, I'd like to remind you that some of the matters discussed today will contain forward-looking statements regarding future events. I wish to caution you that such statements are, in fact, forward-looking in nature and are subject to risks and uncertainties, and that actual events or results may differ materially. So today in Teleflex, we are a company with global scale that is built on innovation and brand power. We have over 18,000 products across 7 clinical areas providing scale and depth, and we employ more than 14,500 employees in over 30 countries around the world. Our 2023 revenue was $3 billion, and we also have industry-leading brands that are highly recognizable by health care providers around the globe, including Arrow, Barrigel, LMA, Weck, QuikClot and, of course, UroLift. Our portfolio adds value to highly relevant clinical areas. We have products with category leadership in 7 key clinical verticals, including Vascular Access, Interventional Cardiology and Radiology, minimally-invasive surgery, Interventional Urology, emergency medicine and Anesthesia. Our portfolio is diverse and its construction has been purposeful. Teleflex is more than just a supplier of quality products. We are a partner to the health care community and can help clinicians treat their patients across key therapeutic areas and specialties. When we look historically at the health care industry from doctor's office, when we look holistically at the health care industry from doctor's office to the emergency room, to the operating room and the intensive care unit, we deliver product, services and education that allow clinicians to deliver quality care and improve patient outcomes. Indeed, over time, we have built a stronger Teleflex and have executed against our strategic initiatives. And as I reflect on our past successes, I believe that we will remain well positioned into the future. Our corporate objectives remain focused on driving sustainable constant currency revenue growth, achieving adjusted margins and earnings expansion, optimizing our product portfolio, and advancing corporate social responsibility and an inclusive culture. So let me expand on a number of strategic priorities that will enable us to deliver on our long-term objectives. The first strategic priority is to drive sustainable constant currency revenue growth. As we look into the future, we are excited about the opportunities in front of us. Our combination of growth drivers and diversified portfolio will be important to growth. While our continued focus on margin expansion and our revenue base will drive attractive free cash flow generation. This will be prioritized for internal growth drivers, inorganic opportunities and returning capital to shareholders. To sustain our momentum, a key building block of Teleflex's long-term growth investment strategy will be to transform our internal development capabilities resulting in an improved new product launch cadence and associated increase in our new product revenue. Turning now to our second strategic priority. We will continue to target adjusted margin and earnings expansion. We are confident that there are several levers to pull that will enhance our margins over time. Importantly, we have a slate of margin expansion drivers that are already in place and complement our methodical approach to consistent productivity initiatives. Mix towards our portfolio of high-growth drivers will be the primary driver of adjusted gross margin expansion over the coming years as their percentage of total sales increases. We will also continue to drive price for our most differentiated products in our portfolio. In addition, our existing restructuring initiatives will be another incremental driver of margin expansion as well as other operating efficiencies, including distributor to direct conversions. Purposeful and disciplined incremental investment to maintain our current momentum would be offsetting a portion of our margin expansion. We will allocate investments to drive global product launches, expand our geographic footprint and develop new products. Although these directed investments will increase operating expense as a percent of sales over time, we will be targeted in our spend. We are confident that our strategy is prudent and we'll continue to position Teleflex for long-term durable growth. Moving to our capital allocation priorities. We are focused on 4 key priorities for our cash generation. First, we will continue to invest in the business as we expand our internal innovation engine with the potential for capital investment to execute on footprint consolidation and other productivity initiatives. Second, portfolio optimization remains a priority with a focus on tailoring our business for long-term growth and profitability. Third, we will maintain our dividend and return capital to shareholders. Our capital allocation strategy has evolved over time, and we now have the ability to opportunistically purchase our stock. Given the strength of our cash flow generation at Teleflex, the Board approved a $500 million share repurchase authorization in the third quarter of 2024. A $200 million ASR has been completed during the fourth quarter of 2024, leaving the company with room for additional share repurchase under the current authorization. And fourth, we will pay down debt when appropriate. We will continue to prioritize our capital allocation to enhance our returns while retaining flexibility should business conditions change. Our third strategic priority is to optimize our product portfolio through increasing our investment in research and development, new product introductions, select mergers and acquisitions and thoughtful divestitures of noncore assets. Of note, we expect to continue to increase our investment in internal innovation over time. We expect R&D to approach 5% of revenues as compared to 4.1% in 2022. We are preferentially investing our R&D resources into our faster-growing businesses and targeting opportunities in higher growth markets. Now I will turn to a brief review of new product developments. Starting with Interventional Access. We received FDA clearance for the Ringer Perfusion Balloon Catheter in the first half of 2024 and initiated a limited market release in the second half of 2024. As a reminder, Ringer incorporates a unique balloon design that allows blood to flow through a vessel while the balloon is inflated. Although the initial indication for Ringer is for angioplasty procedures, we are pursuing a perforation label. The clinical study for this indication is now complete and we will be moving forward with an FDA submission. Moving to our Surgical business. The Titan SGS stapler is now available with GORE seamless Bioabsorbable Staple Line Reinforcement Material. This complementary pairing supports bariatric surgeons by addressing clinical preference in the sleeve gastrectomy market. We have received positive feedback from surgeons and the percentage of Titan staplers with buttress is steadily moving higher as part of our mix. In our Interventional Urology business, the first patient was recently enrolled in a study for Barrigel in men with cancer following the surgical removal of the prostate. The trial will study rectal spacing with Barrigel in patients undergoing hyperfractionated postprostatectomy radiation therapy across the United States and 1 site in Australia. The study endpoints are to demonstrate Barrigel rectal spacer as a safe and effective option that reduces prostate radiation side effects for this patient population. Based on the segmentation of risk groups between low, medium and high, prostate cancer reoccurrence after radical prostatectomy ranges from 16% to 46%. We will continue to optimize our portfolio for growth and profitability through a disciplined review process that considers M&A as well as divestiture opportunities. As we look into the future, we will assess periodic acquisitions to augment our global portfolio and create shareholder value. And we will endeavor to learn from our portfolio moves and be relentless in our focus on continuous process improvement. Teleflex has been a thoughtful acquirer. Since 2018, we have made 5 acquisitions, including: Essential Medical, which brought us the MANTA large bore closure device; HPC, which allows us to enter into faster-growth OEM markets, including thin mold microcatheters; Z-Medica and its portfolio of hemostatic products, standard bariatrics; and, of course, Palette, which positioned Teleflex to compete in the prostate cancer market with the Barrigel rectal spacer for use in radiation therapy. We take a very disciplined approach to identifying and deciding which opportunity fits our key criteria. We are looking for assets with category leadership, obvious clinical benefits, the ability to lower the overall cost of care and strong intellectual property protection. We also pay close attention to opportunities that allow us to leverage our infrastructure and expand our geographic footprint. From a financial perspective, we look for assets that are accretive to growth and operating margins over time with a focus on exceeding our weighted average cost of capital in a reasonable period of time. Our current net leverage is approximately 1.7x. Combined with our outlook for strong free cash flow generation, we remain well positioned and have ample flexibility to execute on our overall capital allocation strategy. Thank you very much for your time and attention today. And now we'll turn it over to Robbie for some Q&A. Thank you.

Great. I have a bunch of questions, but if anyone in the audience has one, just raise your hand and we'll get a mic to you. Maybe we could start off with a high-level question. What elements of the business do you see as the main drivers of growth for Teleflex in the near and midterm?

Yes. So as I spoke about in the presentation, we have a number of products within our high-growth portfolio that will be driving our -- both our revenue growth and our margins over a period of time. Within that, obviously, you have the Palette Barrigel product that came to us through that recent acquisition. We have the MANTA product, which is penetrating the large bore market very successfully. We have our PICC portfolio within our vascular business. And that is a significant opportunity for us because of the coating technology within our PICC catheters. We have our hemostatic portfolio that came through us through the acquisition of Z-Medica. These are hemostatic products that are used on every ambulance, every crash cart throughout the America in order to stop bleeding. And it has a unique indication for internal bleeding as well. And we have our intraosseous portfolio, the EZ-IO and OnControl, that continue to penetrate those markets. And lastly, we have Titan that I just spoke about, where we've added buttress to that product. And all of these have 1 thing -- 2 things in common. They're the faster-growing parts of Teleflex, but also they have higher margins than the rest of Teleflex. So we get that leverage every time we grow in these areas. And from a business unit perspective, I think that the business units, the Interventional Access business unit with a complex catheter, with MANTA in there as well, combined with the opportunity we have for balloon pumps in the near term is a good opportunity for us. I think our Vascular business has been performing well where the PICCs reside, but also continuing to expand central venous catheters. And our Surgical portfolio has also been performing very well over the past period of time. So you combine all of that, you combine that with the high-growth portfolio as -- view the business is performing well, and the ability for international expansion, I think those are the areas where I'm most excited about for longer-term growth.

Maybe speaking of international expansion. When you look around the world, what are the geographies you see for the biggest opportunities? And what are the investments you're putting behind them?

So the biggest opportunity we would see for international expansion would have to be within Asia Pacific. Some expansion in Eastern Europe as well, but predominantly within Asia Pacific. Currently, APAC is approximately 12% of our revenues. And we're launching products there that are within the high-growth portfolio, and they're seen as new products within Asia Pacific. Whereas in the Americas, they've been in the market for a number of years. It just takes a few years longer to get it -- get the products registered and growing. And we are investing behind the headcount and the sales infrastructure in order to penetrate those products within the market. So a few key areas where the APAC team is focused on is the expansion of PICCs, in particular, and the intraosseous portfolio. They see that as a big opportunity. And indeed, UroLift in Asia Pacific continues to perform well, in particular within Japan and we're seeding the market in China for future growth.

You've done a number of deals, but when you look internally at your R&D portfolio and pipeline, what are you most excited about? What should investors be looking forward to?

Yes. We have purposefully put a focus on internal R&D as part of our strategy. If you go back to 2021, 2022, we were spending approximately 4.1% of our revenue in R&D. We always thought that was a little bit light for a company with our growth aspirations. And you'll see that we increased our investment through 2024 to approximately now around 5% of revenue invested in R&D. That is delivering on some key products even in this cycle through '24 and '25. So if you look at that, I mentioned the Ringer Catheter in the presentation. The Ringer perforation catheter has been launched. It is an exciting product. It's going to have expanded indications into the future. We've also got a range of products around the PICC portfolio and the Tip positioning portfolio to accompany the PICC. On the Titan stapler, we launched the buttress material. 60% Of surgeons use buttress on the competing technologies. They technically don't need buttress for the Titan stapler because of the seal pressure within the Titan. But an actual fact, after just a few quarters of launch, 45% of our customers are using buttress. So it was always our intent to launch that, but it has been adopted pretty broadly. And in the future years, we have the Endurance catheter. Just submitted for a 510(k) coming back to the market. We have the Triumph catheter within the Interventional business that will be launched in late '25, early 2026. And we have EZPlaz, which is a freeze-dried plasma that we're still working on to bring to the market in the next period of time. So the current portfolio is solid, and the future portfolio also shows promise.

Maybe spend a minute on the Palette acquisition. How that stands? Any updates?

Yes. We're really happy with that acquisition. We closed Palette in the fourth quarter of 2023. Now we've had it for over a year. We initially thought that the asset would grow at approximately 20%. In actual fact, the asset has grown approximately 30% with our updated guidance on the asset. It continues to allow us to grow into the white space in that market. And we're continuing to convert urologists and radiation oncologists to spacing. And really, just to explain what the product actually does. You're a man, you've got prostate cancer and you're going to have to go through some form of radiation therapy. There is a risk of ancillary damage to organs. And this product simply creates space between the prostate and those organs to make sure there is no ancillary damage. Our product is simple, easy to use, and will penetrate that market segment. We have just begun to recruit patients for an expanded indication for that product. The current market, addressable market for spacing globally is around $330 million. We have an opportunity to expand the indication for postradical prostatectomy. So you've had your prostate removed. And after that, you have a reoccurrence of cancer. Now the beauty about this indication is that the Barrigel will be the only product that is indicated for this use. So it will allow us a unique opportunity to address that approximately $100 million market exclusively for the Barrigel product. So 1.25 year into ownership, Robbie, I think we're incredibly happy with the performance of that acquisition. And of course, its gross margins are better than UroLift margins, and the UroLift margins were already above the corporate average.

Maybe same question on Titan stapler. An update there and how that's progressing.

As I said a little earlier, the combination of the buttress material and kind of anniversarying the GLP-1 phenomenon in regard to bariatric surgeries. That combination has really helped us to execute very well on Titan. We continue to proctor surgeons. We continue to take share within that market of gastric sleeves. But I know people thought there was never going to be a gastric sleeve done again when GLP-1s came along. But some of these patients need a surgical intervention in order to get the impact that they need. And that combined with some of the clinical evidence that we put out there to support this product has been very compelling. We've put out a few clinical papers that show that the patient gets released from the hospital a little bit earlier than with existing modalities of doing this gastric sleeve. And also -- we've also seen a reduction in time to do the procedure. So if you're a hospital administrator, there's 2 elements of patient care that you want. You want to use less time to use a very expensive operating room, and then you want the patient to go home as soon as you can because you don't have the -- so those 2 combined have been quite compelling for our customer base. And the product through 3 quarters is growing well in excess of the company average.

How are you thinking about the IABP market? And has there been any update or change in thinking since the original assessment?

So just to refresh everyone's memory, the intra-aortic balloon pump market is approximately $250 million market. It's a duopoly. Teleflex had approximately a 1/3 share. 1/3 in the U.S., a little less than 1/3 in EMEA and more than 1/3 in Asia. The competing company has had a couple of quality issues and the FDA issued a notice in May to advise customers in the United States, not to use the product. So we immediately obviously ramped up our manufacturing capacity for pumps to take full advantage of this opportunity. And our assessment hasn't changed from when we gave that assessment. If you recall, at the end -- in our Quarter 2 earnings call, we updated our guidance and called it up by approximately $15 million, with the majority of it being as a result of the intra-aortic balloon pump opportunity. So we're continuing to execute against that. We believe that the competing technology will be off the market for at least the first 2 quarters of 2025, and we expect to have a similar opportunity in each quarter until they come back. And our goal is obviously to grow into that market to take a larger market share position than the 1/3 that we have and then to hold on to that market share. In the fourth quarter, we ramped up our manufacturing of the catheters because the $250 million market is half pumps and half catheters. So now as we sit here in Q1 of 2025, we also have catheters to support those additional pumps that we're putting into the marketplace. So we're executing against the opportunity and our thinking is very similar as it was when we gave that guidance in the Q2 earnings call, into Q3 and 4.

Great. As you continue to assess the outlook for UroLift, what are you doing to drive stabilization in that business? And then part 2 of the question, how are the international markets performing in particular?

Yes. So let me start with the international markets. The international markets are performing very well. Japan continues to perform very well. We're driving good solid growth there. We continue to seed the Chinese market. We have the product in some of the key geographies in order to get it on to the tenders there. And of course, Europe, even though small base continues to grow. The pressure on the product has been within the United States and within the office side of service due to the change in reimbursement that occurred 3 years ago. What have we done? We pretty much turned over every stone we can, Robbie, to stabilize the growth. We've, first of all, put in a volume -- a rebate scheme. We followed that up with a volume rebate scheme for the office side of service. The good news is that the volume rebate scheme in the office side of service showed a tempering of the rate of decline with the customers that took that up. So we're going to double down on that in 2025 in an attempt to stabilize the office side of service. We put in a preauthorization for the doctors to make sure that if they did the procedure that they would get paid for it. We supported the product of clinical data to keep it relevant. And the product is working perfectly well. The outcomes from the patients, the results are exceptional from the UroLift product. It's just a change in reimbursement has made it challenged in that office side of service. We did make some changes to the management team. We brought in a new President of the division. I brought in a new VP of Sales, new VP of Marketing. We restructured the division insofar as that we could get more focus on the 2 products within their bag, which is the Barrigel product and the UroLift product. We did think when we brought Barrigel and we get a halo effect for the UroLift just having another call point in that urology call point. The halo effect actually went to Barrigel to increase performance. But we continue to work on UroLift and that this year 2025 is the last year of the reimbursement change. So we would be hopeful that we'd begin to see stabilization from '26 on or at least a bottoming from '26 on in the office side of service.

Maybe looking forward, there's no formal guidance yet for 2025, but any puts and takes we should be keeping in mind as we look out to the new year?