Teleflex Q1 2024 Earnings Call Transcript

Hey, Patrick, thank you very much for the question. I think that OEM was definitely one of the standouts again within the quarter, but there were many standouts for Teleflex in the quarter in my mind. A really strong quarter, great start to the year, growing our revenues at 3.8% and growing our earnings faster than revenues at 3.9% and raising the bottom end of our earnings guide and while covering some FX impact. Onto OEM, I do anticipate the phasing as we go through the year. I think OEM is well capable of doing doubledigit growth in the entirety of the year. It'll probably take a little bit of a step back in Q2 just to the phasing as of the orders as you outlined, but the underlying growth is really strong. The order bank is strong, very strong on tin mold microcatheters, following on from the HPC acquisition a number of years ago. Catheter extrusions continues to be strong. Demand is robust. And I think the environment continues to be good for the OEM business, and even though OEM is dilutive to our gross margins, I would like to remind everybody it is accretive to our operating margins and therefore a good contributor to Teleflex as it grows.

No, that's a fair question, Patrick. I think that the training is going well, so, we are proctoring our sales reps. We have about, as we ended the first quarter, we have roughly around 40% of them trained. That need to be trained in this phase. So this will be completed at the end of Q2 and then over the remainder of the year, we'll take a systematic approach to onboarding additional reps and full bagging them, we would anticipate that the organization will be fully integrated and all the trainings will be pretty much done by the end of this year and Palette will be integrated. The good news is that it has had zero impact while it did have some impact on UroLift, it had zero impact on Palette and Palette again, six months into our ownership is performing very well.

Well, I wouldn't say there's anything that necessarily is pressuring over the next number of quarters other than what we already saw in the first quarter, which we've got inflationary pressures, we've got some FX, although we expect FX to improve as the quarters go on. So obviously, we had a really solid start to the year. And we provided full year guidance and are working towards that. I would say that as a result of the strong start, we feel really good about achieving that guidance, and we'll continue to monitor the situation and provide any updates in the future as the situation warrants.

So I wouldn't exactly call it a new product, but obviously MANTA continues to penetrate the large bore market. Really solid double-digit growth coming from that product specifically complex catheters, which is the bread and butter of this franchise, which is the guideline or trap line or turnpike. They continue to grow within the market. And obviously, then you have our intra-aortic balloon pumps and catheters. Really strong performance from them, in particular overseas. So across the board, I think it's a procedure of volumes globally, in the cath lab are back to pre-pandemic levels. We're getting some benefit from that, but also further penetrating in our accounts, having a suite of products to surround MANTA and now having the Wattson coming to the market in a limited market launch only helps to compound that growth within the cath lab space.

No, absolutely Shagun and thank you very much for the question. So the midpoint of our guide, you're correct, at the midpoint. And now I would remind the investment community, as we laid out, as we gave our guide there is approximately 1% of a headwind from an inorganic with the MSA and Palette so if you look at our guide of 3.75% to 4.75%, The organic growth underlying that is 4.75% to 5.75%. So your jump off into next year will be at a higher rate from a growth level because the MSA will be anniversary in the fourth quarter. I think the outlook for Teleflex from a growth perspective is solid. I think our 6% long range plan. We can see definitely line of sight to get there. I think that the environment is rich.

We have some parts of our business really performing well. We mentioned OEM. We mentioned Interventional Access, Surgical had a really good start of the year. Interventional Urology at 6.1% and then geographically you see EMEA coming in at 9.7% and double-digit growth in APAC. So I will say that the underlying growth algorithm for Teleflex is very much intact. And as we head into, and we're one quarter into the second year of our LRP, and we feel pretty bullish about the outlook for our company.

Yeah, so, obviously the first consideration is it is Q1 and I think you should take that into account. The other consideration is if we give our guide in February, we had a really, really nice March. So that was helpful. And we came in above where we thought based on the performance of March and some of the performances that we spoke about earlier on. And we did have some OEM orders that pulled in from Q2 into Q1 and updated for FX, so we'll continue to monitor the situation as we go into Q2, Q3 and Q4. But again, I feel fairly bullish on our performance. This is our fifth quarter in a row where we've actually been in a position to beat our internal revenue forecast and to be able to provide upside, and it's a nice upside of $11 million. Again a few million was pulled in from orders from OEM that shipped in Q1 rather than Q2 but other than that, the underlying growth of the business is really solid.

Thanks. Yeah. The bulk of the growth for palette is really market expansion. We have continued to bring this product to our existing customer base, and it's being adopted there. I mean there is some share shift, but I would say that. We are more focused on the white space than trying to take share from others within the marketplace. The product is performing exceptionally well. The sales force is very, very bullish. Once we have our additional 50 reps trained, they will now be active in the marketplace in Q3 dual-bags selling that product. So that should also help. And also in order to expand the market even further, we have initiated and agreed and funded an additional study for expanded indications for the Barrigel product. For Palette, we have identified the sites that will conduct the study, and we envision beginning enrollment in the very near future. So not alone -- we're not satisfied with the market of odd $330 million, we want to expand that market even further so that we can create more white space for us to grow into.

Well, I would just say, first of all, we raised by $0.09 on the lower end, but $0.05, I should say $0.04 of that was offset by an increase in the foreign exchange rates, so again we feel really good about the results in the first quarter. We've provided full year guidance. It give us improved confidence in our ability to achieve that full year guidance, and we'll continue to monitor the situation and update. But again, we are just getting out of the first quarter and give us a chance to see a little bit more how the year is playing out.

So I'll start with the last part of your question. It's definitely a focus for M&A, Matt. I've said many times that I like the cath lab as a call point. We now have a global franchise with that call point, and it is one of the key areas of focus for us when we're doing M&A. It's not the only area of focus, but it's a key area of focus. With regard to the sustainability of the growth, I think that the interventional portfolio that we have with MANTA in there, with Wattson coming in there. We got Ringer coming down the road. We got Triumph, that's going to be launched in sometime in 2025. So we have a whole suite of products coming into this call point. And we have invested heavily in the R&D organization there to ensure that we have this suite of products coming through. So I think it's well capable of maintaining, well above Teleflex average growth and be a growth driver for Teleflex over a multiyear period just based on that background, but it has come at the back of investment. This is one of our areas where we have invested behind. And the acquisition of MANTA a number of years ago is playing out really well, as we penetrate that large-bore closure market.

Yeah, Anthony. And thank you. I hope you're keeping well as well. Thanks for the question. With regard to the Americas, the biggest impact there, Anthony, was the MSA. If you'll recall, all of the MSA was booked in the Americas. So if you backed out the MSA, from that your growth would have been around 3.5% for the Americas if you took the MSA out. The underlying, there's a few underlying things I want to point out in the Americas as you go through the year. The endurance recall mostly impacted, and that's in vascular, that mostly impacted the Americas. So as you get through Q2 and into Q3, you will have anniversary of that and then if you look into the Q4, we will also have and we will also anniversary the MSA. So you will see an improving environment for the Americas as you go through the year. But please do bear in mind that Msa Anthony it's all booked in the Americas. And it's all coming out of the Americas on a year-over-year basis, and that's really the drag on that one. And you had a follow-up, Anthony.

So I think that for Teleflex, we're really focused on tuck-ins and scale transactions. We have done some late stage technologies and we've done some investments, early stage investments into companies, and we'll continue to do that. We have the most important thing you need, Anthony for M&A, which is firepower. So as Tom said in his prepared remarks, we're 1.7 times leveraged. So we have lots of firepower. We are at the moment chasing lots of assets I will tell you, and they do fit in the range from a tuck-in of revenue of, call it in the tens of millions to scale transactions in the hundreds of millions. We are cognizant of dilution, especially in this year, where if the MSA going away is dilutive you have Palette coming in, that's dilutive. The underlying earnings growth is in that 8% to 10%, as Tom outlined in his remarks. But I think investors want to see that. So we are keeping that in mind. We are disciplined, Anthony and we will remain disciplined.

I think that finally the multiples seem to have tempered somewhat at least. Some of the high growth assets on the public markets are not carrying the value that they were 12 months ago. And obviously that plays into the psyche of the seller as well. And it's, obviously, as a buyer, you can point to really great companies on the public market, super companies but not carrying the value that they held 12 months or 18 months ago, and that should be reflective in private companies as well. So a healthy environment, lots of assets, and a very, very disciplined Teleflex.

Hey, Mike, look we've a lot of data coming out at the AUA, we have five different papers that are being read out, and there are a number of other studies. One in particular that coming from the European group about early intervention on minimally invasive therapies and how that's much better than having individuals on pharma. With regard to the specific one that you're talking about, it's really focused on more rapid symptom relief and quality of life improvement post-treatment comparing UroLift to Rezum and outcomes that can aid healthcare providers and patients in getting a clearer understanding of the post-operative experience that a patient experiences with the product. I think there's a study on retreatment rates, which I'm really looking forward to hearing. I'm actually attending the conference myself. And also there is a real world study on complications of all BPH treatments, and I think that's going to be enlightening as well. So I think we've got a full suite of podium presence at the AUA. And I think that for sure any of these head-to-heads either comparing UroLift to Rezum, comparing it to other technologies, comparing it to drugs will be helpful for the sales force.

Yeah, absolutely. Mike, look, we've discussed this on previous calls. We're going to report on total interventional urology consistent with all of our global product categories and businesses, and we're not going to provide product level revenue details for individual business lines or product categories within those. We have four affordable segments. We've six product segments. So there's 10 ways to slice and dice Teleflex, but let me give you a little bit of color having said that. Let me start with the full year and then I'll go back to the quarter. For the full year, we are expecting and nothing has changed in our expectation for interventional urology. I am extremely confident being able to deliver 7.5% growth in 2024, which was at the midpoint of our guidance. This includes revenue for Palette Life Sciences of $66 million to $68 million, offsetting the year-over-year declines in UroLift.

Now in the quarter, Interventional Urology grew 6.1%. Palette came in in line with our expectations and continues to perform very well. UroLift performance was also within our expectations and as we expected, UroLift was impacted by the declines in the upper side of service, but also from the cross-training. And your insights are correct, Mike, as we go through the year, that cross- training will be more or less completed for those 50 once you get into Q3 and beyond. So feel good about the 7.5% on a full year basis for the Interventional Urology business unit.

Well, I think, Craig, it all starts with the gross margin line. And if you look at this year we're at the midpoint. We're going to expand our gross margins by about 100 basis points. We've had a really good start to the year. Gross margins expanded 170 basis points in the first quarter of the year. So God rest my mother, she used to say a good start is half the battle, and we've had a really good start on the gross margin line. As you look forward, we have a number of catalysts for the gross margin line to come into being. We continue to have continuous improvement programs within our global supply chain team. We'll have Palette, the MSA will be behind us when we get into 2025.

Palette will be continuing to ramp when we get into 2025. So those two factors will obviously help our gross margins, and I believe we'll continue to have positive pricing in '25. So that mix the positive pricing, continuous improvement programs. And then for Palette specifically, you'll begin to get leverage to the up margin line where it becomes accretive to the up margin and we're a very disciplined company on our opex. So I do believe that it all begins and ends with the gross margin line and it'll drop through to operating margin into the future, and I feel good about our prospects to continue to drive both growth in operating margin leverage on a solid 6% top-line growth for Teleflex and underlying 10% EPS growth, which is pretty much what we're delivering this year.

Yeah. Thanks, Craig. So first of all, on the product, expansion. Having buttress is an important addon to the Titan product. 60% of surgeons who do bariatric gastric sleeves use buttress and technically, the Titan product doesn't need buttress because of the seal pressure and very high burst pressure. But it's what they want to use. So we have given them what they want to use, and it's been very well received by the bariatric community. I will tell you that in Q1 Titan came in line with our expectations. So that was good to start the year out in that regard. And I do still believe that it's going to be a contributor to growth this year and in future years.

Just to give some color on what's happening with gastric sleeves on a macro level, I think investors would be interested in that. So in the second half of the year we saw gastric sleeve procedures down 10% to 15%. So I think what that means for Teleflex is the market we're growing into is a little bit smaller potentially, than the $250 million plus that we outlined at. But at the end of the day, it's still a big market to grow into with lots of opportunity for us to penetrate the Titan product into that gastric sleeve market.

And I would just, I would just add Craig, sorry, I just want to add one other thing, Craig. Again in the quarter, we had a robust proctoring and training of surgeons in the quarter. My apologies to cut you across that, operator.

No, they're the two big buckets, Sam. There's about $6 million of FX in Q2 and also there's a few million of OEM products that were originally planned to be shipped in Q2. Just bear in mind that the MSA was slightly higher in Q2. That's something just to bear in mind. And as we go through the year, you've got that dynamic of the MSA and you also have the dynamic of Palette ramping as you go through the year. So you've hit on the two main impacts on Q2, $760 million, $765 million, you know 3% to 3.7%. And we feel good in our ability to deliver that.

Yes Sam, so it started very well. That's first thing I would say. The second thing I would say, there's a lot of enthusiasm for the product. The third thing, I would say the expanding of the indications is a key strategy for us not for this year but in outer years to continue to grow that. And that will be a unique indication that no other spacing technology will be able to address. I think that the product, the fact that you can actually, the product is very visible. The fact that you can mold the product, the fact that you don't have to rush with the product is really -- landing really well with both the radiation oncology community and the urology community. So we'll get another quarter or two tucked under our belt Sam, and then we'll come back to the investment community with our thoughts on the $66 million to $68 million. But as I sit here today, feel really good about the $66 million to $68 million.

Yeah, Kristen, that's a good observation and a good question. The endurance recall impacted the vascular business in Q1 and we'll anniversary that as we go through Q2, so when you get into Q3, you'll have a clean look at vascular, so you should see vascular improve as you go through the year. The other thing I would say on the vascular business, the underlying PICC growth was really solid, but that will improve too as we go through the year. I would anticipate seeing PICC volumes pick up as we go through the year. The underlying CVC growth is really solid. And we're really happy with how that's performing. So all in all, it's really the endurance anniversarying that and an improved environment for PICC continuing to grow as you go through the year.

Cheers, Kristen.

Thank you, Polly, and thank you to everyone that joined us on the call today. This concludes the Teleflex Incorporated first quarter 2024 earnings conference call.