Teleflex Incorporated (TFX) Earnings Call Transcript & Summary

My name is Craig Bijou, one of the med tech analysts here at BofA. And it's a pleasure to have Teleflex here from the company, Liam Kelly, CEO; and Lawrence Keusch, Vice President, Investor Relations and Strategy Development. Thank you, guys, for coming.

Thanks for having us.

Maybe just start with Q1 results a couple of weeks to move from that. Just talk about, I guess, some of the -- I mean, I guess, how Q1 results played out? If it played out how you expected and some of the things that did weigh on growth during the quarter?

So Q1 played out exactly as we expected. So the growth was minus 3.8%, but there were 2 less selling days within the quarter. So adjusted for selling days, the growth was approximately negative 1.7%. I think that we continue to see good solid performance from the balloon pumps in the Americas. We continued to see progress with Palette and the Barrigel product within the portfolio. Intraosseous performed well. And I think all in all, it played out pretty much exactly as we expected it to play out. So I thought we executed fairly well, came in and hit all of the numbers and margins were in line, earnings were in line. So right down the income statement, it was as we anticipated. The part of your question what weighed on growth. As expected, OEM, we saw a negative growth in OEM. And that was anticipated. It's really 2 factors that are driving that. The first is the last customer from last year, which cost us around $7 million in the quarter. And secondly, as expected, we saw inventory management by our key customer base. UroLift also had some declines, but we had anticipated that as well. So as I said, played out as we expected, though we executed pretty well and started the year in line with expectations.

Great. That's helpful, Liam. And you reiterated your guide as well. So 1% to 2% growth -- and maybe if you could talk about the progression of that growth through the year. I think the Street is modeling 1% in Q2, 3.5% in Q3 and then 6% in Q4. Is that the right way to think about the growth acceleration through the year? And then maybe kind of expand on what are those drivers that would accelerate that growth?

So at the midpoint of our guide for Q2, that would be 1% -- and at the midpoint of our guide for the full year, that would tell you we'd have to accelerate just north of 4% in the back half of the year. So those are the numbers. There are a few uniquenesses to the first half versus second half for Teleflex. Number one, as I mentioned, within OEM, there was a customer loss last year, which began in Q3. So we anniversary that loss at $7 million a quarter to $14 million of comp in the first half versus second half. So obviously, you get that pick up. The second impact, I mentioned there were 2 less days in the first quarter. There's actually an additional day in the back half of the year and it hits us in the fourth quarter. OEM order rate has also progressed well as we got to the end of the first quarter and early into Q2. So we expect that to continue. So that will obviously help in the back end of the year. And also in Asia, the first quarter is the low point for Asia. We've had some volume-based procurement in our surgical business there. So we would anticipate Asia ramping and getting better as we go through from Q2 on. And lastly, we have an endurance catheter that will be returning to the market in the second half of the year, and that will also drive some growth in the back half of the year. But we feel confident in our ability to drive that 1% to 2%.

Got it. That's helpful, Liam. On the EPS side, so let's just talk about you lowered guidance by $0.75. I think it was $105 million of it was a tariff impact. You actually had $0.30 of good guys that offset some of that tariff impact. I do want to -- given I think the tariff impact in total was $55 million. And I guess, how should we think about that number today with some of the -- I know 50% of the tariff was from China both ways bilateral. How do we think about that number today given the recent news from the weekend?

Yes. So first of all, the news from the weekend was encouraging -- not that unexpected because tariffs at that level of in tariffs, they're an embargo. I mean, it's very difficult to have that level of imposition. But your numbers are accurate. So -- it's a $55 million total impact before the change. And we were pretty explicit in how we broke it out, so it will help people with the math. Half of the tariffs were impacted by China. 80% of that half was an impact of goods coming from the United States into China with the other 20% with goods coming from China, mostly raw materials into the United States. Obviously, we'll update the guidance in Q2. And when we do, it will reflect that change in the tariffs. There's a 90-day yeses, I guess, on the tariffs. So our assumption will be that they come back after 90 days, someone tells us differently. Again, in the $55 million, there were some pauses, but we did assume that $55 million that they were coming back. So just -- we'll be absolutely clear as we outlined it. And we're also hopeful that there will be some exemptions for other tariffs for medical devices. Our advocacy groups and our representative groups continue to lobby for an exemption for medical devices. We would believe that somebody lying in a hospital bed will desperately need a central venous catheter to keep them alive. And I don't think it's appropriate to put burden some tariffs on medical devices coming into the United States.

Understand. That's helpful. And I think you -- so because they do run through the balance sheet, I think you expect most of that impact to come in the second half. And I just -- and I think it's modestly more in Q4 than Q3. So when we think about what the potential impact for '26 may be, I mean, should we take -- should we assume that it's a little bit more than half. So I don't know, $30 million for Q4 and then annualize that. And think of that as where to think about the potential impact for '26, and I know that doesn't have any mitigation strategies in the numbers. So maybe 2 pieces of that. Is that the right way to think about it from a financial perspective, and then I'll let you talk about some of the potential mitigation strategies that you do have.

So you're absolutely correct. There's practically 0 impact anticipated in Q2 and Q4 will have a larger impact than in Q3. Given the volatility in tariffs and given that -- it's only a few weeks since we had our earnings call and even since then, we've had this massive change. I don't think it's probably to look into 2026. Whatever we think today will not be what's in place in 2026. That's just a fact of life. So I think we're better off living in the here and now. We've given very clear guidance as about the impact is in '25. And obviously, we've given very clear guidance as to what the change would impact on Teleflex in 2025. Now with regard to the mitigations, obviously, within the $0.55, and you are right, it's $1.05. We've already circumvented about $0.30 of that. This latest change will obviously help as well. But there are other things that we're doing. Number one, we are looking at the U.S. MCA compliance of our products. Today, about 50% of our products are USMCA compliant. So we're working to improve on that number. Now I don't think we're ever going to get to 100% just because of some of the components and where they come from. But we will -- we believe there's a possibility for us to improve beyond that 50%. Secondly is pricing. We're looking at pricing mitigation strategies to offset it. Clearly, our business is heavily contracted. So we have to wait for the opportunity for those pricings to those contracts to come up to push through those pricing differentials. And thirdly is supply chain changes that we're looking to make, where we manufacture products in dual locations. And we're looking at how can we change our supply chain in order to mitigate some of these strategies. And I think lastly, we're looking at strategies for products that we manufacture in Mexico. They move into the United States, but they're destined for other countries, and we're looking at strategies to overcome some of those tariffs if they remain. But it's -- as you see, Craig, it's pretty volatile, and it changes at least day-to-day, if not week to week.

Craig, if I could just clarify on 1 point, the $1.05 associated with the $55 million of tariffs, you accurately pointed out there were $0.30 of benefits, if you will, none of that associated with any mitigation efforts yet. So that was all pre-mitigation. And again, the components of that $0.30 roughly $0.20 was associated with the lower share count and mostly due to the accelerated share repurchase of $300 million that was completed in April. And then the remaining $0.10 there was a portion in there of expense control, again, not associated with tariff mitigation and some positive FX.

Okay. Helpful. So I wanted to get that financial -- the financial piece out of the way, and it's going to get to the big news for you guys this year. Earlier in the year, you announced that you're going to separate into 2 different companies. So maybe if we can just kind of start with the rationale for separating the company's or separating into 2 and kind of, I guess, your vision of the shareholder value creation from that separation?

Yes. So really, the decision we've been working on this for well over a year before we announced it. Over that year period of time, too, we were also working on the acquisition of the BIOTRONIK BI assets. So we were contemplating all of this in our decision-making process. It seems clear to us that there were -- 2 entities living within Teleflex that could benefit from different capital allocation strategies, different growth strategies -- and as we went through the overview of our portfolio, it became clear that we could do with simplifying our business in order to unlock shareholder value. I'll just give you a very simple example. Today, Teleflex, the 7 business units, we've got 19 manufacturing plants. Teleflex RemainCo -- when we complete the separation through either a spin or a sale, Teleflex RemainCo will have 3 business units, and it will have 7 manufacturing plants. So that's just 1 little example of how this simplification can help streamline decision-making in RemainCo and continue to add value. From a financial perspective, there's 2 different growth modalities within the 2 entities. So you've got 1 entity that is going to grow at low single digits, be in the mid-50s gross margin. And then you have Teleflex RemainCo, it's going to grow at 6% plus. It's going to be mid-60s gross margin. It's going to have operating margins similar to Teleflex today. And that takes into account dis-synergies because of the spin that I think is important that people realize and additional investment in R&D and it is going to drive double-digit earnings growth. I think neither company could truly realize the value as 1 company. And I think from a financial perspective by separating them into 2 different entities, it can help release that value to the shareholders. And whether we execute on the separation through a spin or a sale, we're pretty agnostic to that as long as we maximize the shareholder value in either process.

That's helpful. It's helpful explanation. So I do want to ask the separation and the assets that went where they went. It's a question that, I mean, I've asked, I think investors are asking the urology business, the OEM business, the acute care business, I think many investors think that they're not necessarily tied together to compose a separate stand-alone company. So I guess I guess why am I wrong? Or why -- how should we think about that and why you chose to put those businesses where they were?

Well, so those 2 businesses are pretty much in an acute care call point based in the hospital, the ASC and in the office side of service. So they're an acute care element of it. The other element of it is the OEM business. And as we were looking at bringing in the BIOTRONIK BI product into Teleflex, it became clear we were going to become a bigger competitor on the branded side to some of our main customers on the OEM side. So this would -- by putting combining OEM with a large acute care franchise, this allowed OEM to have pretty much untethered access to their current customers and to access broader customers without having that sense of competition from the owners as in Teleflex of that OEM business. So -- and I think that, that is probably a nuance that many investors our analysts probably didn't truly get as we were looking at that separation. And again, it goes back to the growth profile of the combined assets in both sides, as I went through earlier, that you've got a an incredibly good future for SpinCo as a slightly lower growth value asset that will generate significant cash flows, and then you've got value creation through Teleflex RemainCo is going to have a higher growth, double-digit earnings horsepower and the ability to invest more in R&D in order to sustain that organic top line growth over the longer term.

And one other question on this, and you said you've been working on it for more than a year. I guess with OEM, you talked about the struggles that OEM had, the temporary struggles. UroLift has been under pressure or Urology is -- Palette's done well, UroLift, which makes up the majority of the urology business has been under pressure. I guess why was earlier this year, the right time to separate those businesses given the prospect or forecast for growth or negative growth for both of those businesses in '25 recognizing that the spin is not supposed to happen until '26. So things could turn around. But I guess just in terms of timing and those businesses specifically, maybe just provide a little bit of color on the thought there.

Yes. I think the important part of your question is what you said in the middle of it. It's happening in '26 and they could turn around. So -- and that is the reality. If you look at the OEM business, it will have negative growth this year in the region of about 10% to 12%. But that's transitory. The last customer, as we spoke about it earlier, we'll anniversary that in the second half of the year the destocking that we're seeing in the inventory management by our customers is in the front half of the year front-loaded, and that will normalize as we go through the year and OEM will return to growth in 2026 and will be a significant growth driver for this company for NewCo. The other side of it is, you're right, UroLift has been challenged over the last number of years. But complementing that Barrigel has been a massive growth driver with very solid margins and cash flow. UroLift, this is the last year of the reimbursement change. So again, as you head into 2026, you will be in a different environment for UroLift where there will be no further cuts to reimbursement in the office side of service. And the product has been challenged because that -- because of that reimbursement change in the office side of a service. So that's why the timing to announce this was appropriate because a lot of these things are transitory. And as you move into 2026, it gives us significant opportunity for NewCo to overcome on a year-over-year comp basis and get back to growth.

Helpful. I think on the Q1 call, I think a lot of investors and analysts probably -- I know I was surprised by your comments about significant interest in NewCo -- in the acquisition of the NewCo assets. So maybe if you can just talk about, and I believe the significant is relevant, the wording that you chose to use. So I guess maybe if you can just talk a little bit about what interest you are seeing to the extent that you can talk about it? And then I think the bigger picture question is how you think about what's better for both companies, the sale versus the spin, there's a lot of different factors, timing. So maybe just kind of start with what you can share about the inbounds and then we'll kind of go from there?

Yes. So the word significant was picked on purpose. We were expecting inbound interest when we announced the spin, we said that at the time we announced the spin that we would entertain inbound interest. What we're impressed by is not alone the quantity, but the quality of the interest is both financial and strategic in the mix in relation to interest within the assets. I think that it somewhat validates what we've been talking about for the last few minutes is that these are quality assets that people are attributing a value to. Now it's early days and we'll begin to engage with these interested priorities over the coming weeks and months. But we feel that this is a positive path to run the parallel process, and we are going to continue with parallel process. We're going to continue with the sale and simultaneously, we're going to continue with the activity to spin the asset. Regarding your other part of your question, how do you make a determination as to which to switch that will exclusively be cited as to what's better for our shareholders. We began this process to increase shareholder value. We're focused on that. And this will be determined by the financial metrics of what is in the best interest of our stockholders of Teleflex to release that value.

Got it. And I guess, what would you be willing to do? Obviously, there's a lot of different permutations that could happen. You could sell the entire thing. You can sell pieces of the business. So there's probably -- there's likely interested buyers in parts of it and not other parts. There's -- so I guess in terms of what could happen or what could the result, could you sell the parts, are you going to hold out for selling at all? Like would you then -- if you sold 2, resorb 1 back into RemainCo. I mean a lot -- obviously, there's no definitive answer yet. But I mean, how do you think about it? Or how should investors think that you're thinking about it?

So it's early days, Craig, I'll start by saying there. But I will tell you that the majority of the interest has been on the entirety of NewCo and that's encouraging. We have had interest also expressed in parts of it. As I said earlier, both inbounds are both financial sponsors and strategics. What's encouraging for us is it looks like with the amount of inbound is going to be competitive. And again, we'll be led by that principle of releasing shareholder value. Your question on this piece, that piece, the other piece -- we'll do what makes sense for our shareholders ultimately. We will continue, as I said earlier, down the spin path and we'll continue the parallel process to engage with these interested parties. But seeing that there are -- the majority of them interested in the entirety of NewCo, I think, is encouraging.

And then if you were to go down the sale path, I guess, what would be the use of the proceeds of the sale? How would you allocate those?

Yes. So clearly, there's some covenants with regard to some of our debt. So we'd have to pay some of our debt, but it would be our intent then to return capital to our shareholders as part of our capital deployment strategy and continue to execute on that.

Okay. Okay. Maybe moving on to some of the businesses. We talked about OEM a little bit. I think the -- while I know you guys -- Q1 came in as expected. I think it was a surprise to a number of investors, the level of the decrease in Q1, the 27% down. So maybe just kind of walk through -- you did it a little bit earlier, but the confidence that you have. And I know you talked about seeing some orders come back in Q1 -- and I don't know if you're willing to comment about if that's kind of continued or accelerated thus far in April. But maybe just kind of talk about your confidence in why you do feel so confident that it's not a lost customer, it's just a temporary -- it's not a permanent impact on the business, and it's more temporary.

So we're very confident that it's temporary. We had that 1 last customer, but it's not an impact of losing a customer, Craig, in that regard. It is inventory management by our customers. And when we spoke about the increase in order rate. What we were talking about was order rate picking up late in the first quarter as you got into March and continuing through April. So we feel very confident that we're going to see our OEM business progress well as we go through the quarters and as we anniversary that $7 million a quarter last customer -- the business would still be negative in Q2. It was negative at 27% in Q1, and it will be negative 10% to 12% in the full year. So you can obviously see there's going to be an improvement as you go through the quarters. Our flow of new business is also very encouraging. We've just recently gone through a review with the team, and they've got nice inflows of new business as you get into the back half of 2025 and into 2026. And we feel very confident that our OEM business is going to return to a more normalized growth as we get into 2026.

And expectation, I think -- the Street is like negative 13% in Q2. And I don't know if we're willing to comment on that, but just given the surprise that happened in Q1, is there I mean, is that the right way to think about it, low double digits? I mean, any directional help for the Street?

Yes. So I think we've given -- I've given a fair amount of color there. I might expect with regard to the full year with regard to the fact that the second quarter will still be negative. And so I think there's a fair amount of color there for people to work with.

But I would say, I think it is fair to assume in Q2, double-digit negative.

Okay.

What double digit means, but not single digits.

Maybe Palette has done extremely well. You talked about that. Maybe just -- I think when you initially bought it, it was going to be high teens to low 20s growth. It's kind of -- it came in above that. It seems like it's trending even higher than that. I know you're not going to say what it is, but it seems like it's trending higher what's going better than what you expected with that business?

So last year, the business grew approximately 30%. So I will tell you, in Q1, that cadence continued on a much bigger base of business. So it's trending significantly above the high teens, low 20s. Now the high teens, lower 20s was a multiyear outlook, and we would always expect to start somewhat stronger. But I'm really encouraged by how that business is performing. And it's really a testament to continuing to convert the white space. There's only 40% of urologists who treat prostate cancer that actually use spacing so the 60% still available to us to go after, and that's really what we're targeting. There are some competitive conversions is bound to be when you're growing that fast, but our focus is really on that white space in converting that. We're also in the recruitment phase for patients for the clinical study that will expand the market by approximately 1/3, and that is for post-radical prostatectomy spacing. What we like about that application is that it is only applicable to the Barrigel product. The other technologies that are in the marketplace cannot be used for post-radical prostatectomy spacing. So that will take the market from $330 million, add another $100 million to the total addressable market. But that $100 million can only be addressed by the Barrigel product. So we should see that indication will finish the enrollment in the clinical study. So we should see that at the back end of 2026. We should get that indication, and then we'll be able to continue to convert that market for post radical prostatectomy. So all in all, I think Barrigel, Palette is performing exceptionally well. Great acquisition -- and benefiting greatly from the sales force that we were able to ascribe to it.

And the indication -- sorry, just clarifying the indication you expect in the end of '26.

Post-radical prostatectomy. So when somebody has a radical prostatectomy, and normally, that's -- you have that because you have prostate cancer in anything from 15% to 70% of the time, the cancer returns and therefore, you need more radiation therapy. Now it's even more critical you have spacing because you don't have a prostate creating that additional space. So that's where the spacing would be used before you do the radiation therapy, so you don't do any ancillary damage.

That's a $100 million market just you're the only spacer that's going to be there. .

That's correct.

Okay. With that, we're out of time. So Liam, Larry, thank you.

Thank you.