Teleflex Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 4, 2023

There are 12 speakers on the call.

Operator

Good morning, ladies and gentlemen. Welcome to the Teleflex First Quarter 2023 Earnings Conference Call. At this time, all participants have been placed in a listen only mode. At the end of the company's prepared remarks, we will conduct a question and answer session. Please note that this conference call is being recorded and will be available on the company's website for replay shortly.

Operator

And now, I will turn the call over to Mr. Lawrence Kirsch, Vice President of Investor Relations and Strategy Development.

Speaker 1

Good morning, everyone, and welcome to the Teleflex Incorporated First Quarter 2023 Earnings Conference Call. The press release and slides to accompany this call are available on our website at teleflex.com. Please note that webcast viewers have the ability to advance the presentation slides on their own. Simply follow along with the presentation Please refer to our press release from this morning for details. Participating on today's call are Liam Kelly, Chairman, President and Chief Executive Officer and Thomas Powell, Executive Vice President and Chief Financial Officer.

Speaker 1

Liam and Tom will provide prepared remarks and then we will open the call to Q and A. Before we begin, I'd like to remind you That some of the matters discussed in the conference call will contain forward looking statements regarding future events as outlined in the slides posted to the Investor Relations section of the Teleflex website. We wish to caution you that such statements are in fact forward looking in nature and are subject to risks and uncertainties and actual events or results may differ materially. The factors that could cause actual results More events to differ materially include, but are not limited to, factors referenced in our press release today as well as our filings with the SEC, including our Form 10 ks, which can be accessed on our website. Now, I will turn the call over to Liam for his remarks.

Speaker 2

Thank you, Larry, and good morning, everyone. It is a pleasure to speak with you today. For the Q1, Teleflex revenues were $710,900,000 a year over year increase Up 10.8 percent on a reported basis and an increase of 13.2% on a constant currency basis. 1st quarter adjusted earnings per share was $3.09 a 7.3% increase year over year. We had a strong start to 2023 as momentum exiting last year continued into the Q1.

Speaker 1

Even when

Speaker 2

excluding the impact of 5 extra shipping days in the Q1, our underlying growth was robust at 7.1%. As a reminder to investors, a day is typically worth approximately 1% revenue growth In a quarter. For the Q1 of 2023, each extra day was in actuality Slightly in excess of 1% growth and when strung together, the 5 extra shipping days added approximately 6% to our constant currency growth. In the quarter, both the high growth portfolio excluding UroLift and the durable core Grew in the low double digits year over year excluding the 5 extra shipping days in the quarter. Behind an improving procedure environment, we executed well during the quarter with all global product categories driving growth.

Speaker 2

The balanced performance in the quarter continues to demonstrate the benefit of Teleflex's diversified product portfolio and broad geographic footprint. In the quarter, we saw strong contributions from our interventional, surgical and OEM product categories. From a geographic perspective, Europe was in line with expectations, while Asia remains a key growth driver. From a macro perspective, we are seeing a stabilization in inflation and supply chain as expected. Of note, We have seen some easing in supply constraints for Tyvek during the Q1 and continue to expect the situation to further improve In the second half of the year, as additional industry capacity comes online.

Speaker 2

We are also seeing a continued improvement in staffing challenges This was evident in our Q1 revenue growth as the majority of Teleflex products are exposed to the hospital setting. Conversely, we are still experiencing geographic pockets that are encountering more persistent staffing disruption in the ASC and Office Site of Service. Now, let's turn to a deeper dive into our Q1 revenue results. I will begin with a review of our geographic segment revenues for the Q1. All growth rates that I refer to are on a constant currency basis unless otherwise noted.

Speaker 2

America's revenues were $411,900,000 which represents 9.2% growth year over year. We saw growth across the majority of our businesses, including double digit increases in Interventional and Surgical revenues. In addition, the results included the impact of the 5 extra shipping days. EMEA revenues of $143,300,000 Increased 10.5 percent year over year. The year over year growth includes the benefit of the 5 extra shipping days in the quarter.

Speaker 2

While the underlying performance reflects continued improvement in the year over year procedure volumes that fueled broad based revenue growth across our product Now turning to Asia. Revenues were $78,700,000 Increasing 22.8 percent year over year. We saw strength across the region with all geographies posting solid growth during the Q1. China remains a solid contributor with very high single digit growth in the quarter. Although surgical procedure activity in China Has not yet returned to normal levels following the termination of the 0 COVID policy in late 2022, We saw improvements as we progressed through the quarter.

Speaker 2

Looking forward, we would expect growth in China to accelerate during the remainder of 2023. Let's now move to a discussion on our Q1 revenues by global product category. Commentary on global product category growth for the Q1 will also be on a constant currency basis. Starting with vascular access. Revenue increased 9.2% to $177,700,000 The performance was solid across the portfolio and we are now past the tough COVID comparisons experienced during 2022.

Speaker 2

As I noted earlier in the call, we saw some improvement in Tyvek supply in the Q1 And expect further availability in the second half of the year as additional manufacturing capacity for the industry comes online. Of note, our PIK portfolio returned to double digit growth in the quarter. Over the long term, We remain positioned for dependable growth with category leadership in central venous catheters and midlines, Anticipated share gains from our novel coated PIC portfolio and new product introductions. Moving to interventional access. Revenue was $116,900,000 Up 23.3 percent year over year.

Speaker 2

We continue to benefit from our diversified portfolio And saw strength across our largest product categories, including complex catheters, balloon pumps and OnControl. MANTA continues to penetrate the large foreclosure market globally. Turning to anesthesia, revenue was $93,300,000 Up 9.9% year over year. Of our larger franchises, hemostatic products, regional anesthesia and endotracheal tubes All had strong performances in the Q1, partly offset by LMA single use masks. In our Surgical business, Revenue was $99,000,000 up 14.3% year over year.

Speaker 2

Among our largest product categories, Metal ligation clips and instrument revenue increased double digit year over year. In the quarter, we advanced our integration of Standard Bariatrics and trained new surgeons on the use of the Titan SGS Stabler in sleeve gastrectomy procedures. We showcased Titan at the recent SAGES Medical Conference and the surgeon's feedback was overwhelmingly positive. For Interventional Urology, revenue was $75,400,000 representing an increase of 0.9% year over year. We witnessed growth for UroLift in the hospital setting, but the office side of service continues to be impacted by staffing shortages.

Speaker 2

We continue to expect the U. S. End market for UroLift to continue to improve as we progress through 2023. The overseas launch activity in Japan and China are progressing in line with expectations. OEM revenues increased 34.5 percent year over year to $77,000,000 The strength in the quarter was broad based across our portfolio with double digit growth in all product categories.

Speaker 2

We continue to have good visibility into the business and see solid demand dynamics throughout 2023. 1st quarter other revenue increased 6.4 percent to $71,600,000 year over year. We continue to expect all MSA revenues to cease at the end of 2023, implying no MSA revenue in 2024. That completes my comments on the Q1 revenue performance. Turning to some commercial and clinical updates.

Speaker 2

We continue to execute in our commercial strategy for the TITAN SGS powered stapling device for use in sleeve gastrectomy procedures to treat obesity. We recently announced a supply agreement with W. L. Gore and Associates to use the company's Gore SeamGuard Biosorb will stable line reinforcement material in a stable line reinforcement device designed by Teleflex For use with the Titan SGS stapler. Bootress material is commonly used by surgeons To reduce leaks and bleeding and strengthen the staple line by redistributing the pressure exerted by an individual staple Over a wider area as well as provide reinforcement for friable tissue.

Speaker 2

The ability to offer synthetic buttressing material alongside the unique features of the Titan Stapler Should enable Teleflex to further address surgeon clinical needs and preference in the sleeve gastrectomy market. We anticipate launching the Teleflex applicator with Gord Buteras materials by year end 2023. Moving to our hemostatic product portfolio. We have received FDA 510 clearance for the QuickClot Control Plus The expanded indication follows the completion and analysis of an IDE study that examined The rate at which subjects achieved hemostasis through 10 minutes of hemostatic application and compression at the bleeding site. The study concluded that the Quick Cost Control Plus Hemostatic device was superior in achieving clinical hemostasis In cardiac surgery for mild and moderate bleeding, the expanded indications enable QuickPath Control Plus utilization Across a wider patient population and breadth of surgical procedures and expand our global market opportunity For our portfolio of hemostatic products, we will begin promoting our new indication in the coming months.

Speaker 2

Now moving to an update on the Interventional Access business. We are excited about our building momentum for 2023 We'll be launching a number of new products over the coming years. Augmenting our channel presence in complex PCI, We recently commenced a limited market release for the Guideline or Coast with positive initial feedback from physician users. Guideline or Coats builds upon our successful Guideline or extension catheter franchise with the addition of a hydrophilic coating to improve deliverability. In addition, we will initiate a limited launch for the Triumph Microcatheter during the Q2.

Speaker 2

The triumph is a unique catheter design that will be supported by a chronic total occlusion clinical study, which is planned to enroll patients in 2023. We also continue to advance our Ringer perfusion balloon catheter with 2 clinical studies currently enrolling patients. Separately, we continue to expand our structural heart presence. Our dedicated sales force is currently selling MANTA and the Langston dual lumen catheter. Looking forward, we are actively engaged In expanding our product portfolio with the Watson, representing the next product anticipated to launch.

Speaker 2

The Watson is a unique dual delivery guide wire and pacing wire for use in TAVR procedures. Lastly, I will provide an update on our vascular access business. We are excited to announce that we have launched 2 new devices designed to enhance PIC insertion procedures and reduce the chance of complications. First, we have launched the next generation ARROW VPS Rhythm DLX device, which provides real time tick catheter tick location information Using a patient's cardiac electrical activity, the device also features an optional integrated ultrasound module To assist with vascular access, coupled with our tick tracker technology, use of the DLX eliminates the need for confirmatory x-ray, which reduces time to therapy and cost. In addition, we have launched the new ARO pick preloaded with the NaviCurve stylet.

Speaker 2

The NaviCurve stylet features an anatomical curve and flexible tip that are designed to self orientate to patient anatomy for enhanced TIC advancement That completes my prepared remarks. Now, I would like to turn the call over to Tom for a more detailed review of our Q1 financial results. Tom?

Speaker 1

Thanks, Liam, and good morning. Given the previous discussion of the company's revenue performance, I'll begin with margins. For the quarter, adjusted gross margin was 59.4%, A 100 basis point increase versus the prior year period. The year over year increase was primarily due to price, Lower logistics and distribution related costs and favorable fluctuations in foreign currency exchange rates, partially offset by continued cost inflation, including raw materials and labor costs. Of note, we maintained our pricing discipline in the Q1 and continue to expect At least 50 basis points of positive price year over year in 2023.

Speaker 1

Adjusted operating margin was 25.8 percent in the Q1. The 10 basis point year over year increase Was the result of the flow through of the gross margin, partially offset by headcount and employee related expenses, Investments to grow the business and the inclusion of standard bariatrics. Net interest expense totaled $17,500,000 in the 1st quarter, an increase from $10,200,000 in the prior year period. The year over year increase in net interest expense reflects higher interest rates versus the prior year, partially offset by a reduction in average debt outstanding. Our adjusted tax rate for the Q1 of 2023 was 11.8% compared to 11.9% in the prior year period.

Speaker 1

At the bottom line, 1st quarter adjusted earnings per share was $3.09 an increase of 7.3% versus prior year. Turning now to select balance sheet and cash flow highlights. Cash flow from operations for the Q1 was $84,300,000 compared to $62,100,000 in the prior year period. The increase was primarily due to favorable changes in working capital, driven by higher accounts receivable collections, partially offset by an increase in inventories to maintain high customer service levels during a period of elevated global supply chain volatility. Moving to the balance sheet.

Speaker 1

Our financial position continues to provide us The flexibility to operate the business and execute on our disciplined capital allocation strategy. At the end of the Q1, Our cash balance was $264,100,000 as compared to $292,000,000 as of year end 2022. The reduction in cash on hand is primarily due to $75,000,000 of payments on our senior credit facility. Net leverage at quarter end was approximately 1.7 times, which remains well below our 4.5 times covenant. Turning now to financial guidance.

Speaker 1

We are very pleased with our Q1 financial performance. Of note, we have seen a recovery in surgical procedures, most notably those that are performed in the hospital, staffing shortages continue to improve in the hospital And inflation and supply chain headwinds have stabilized. Given the solid start to the year, we are updating our 2023 financial guidance. Specifically, we are raising the low end of our 2023 constant currency revenue and now expect growth of 5% to 6.25%. Turning to foreign exchange.

Speaker 1

We now assume a foreign exchange translation headwind of approximately 35 basis points In 2023, our prior guidance of a 50 basis point headwind for 2023 assumed a $14,000,000 Negative impact of foreign exchange for the full year, of which $17,000,000 was expected in the Q1. The actual Q1 headwind was approximately $4,000,000 less than was expected. Our revised foreign exchange guidance for 2023 Captures the actual rates for the Q1, while the foreign exchange assumptions set at the beginning of 2023 remain unchanged for the balance of the year. Considering the revised foreign exchange headwind, we expect reported revenue growth of 4.65% to 5.9 percent in 2023, implying a dollar range of $2,920,000,000 to $2,956,000,000 We are reiterating our 2023 guidance for adjusted earnings per share of $13 to $13.60 We are lowering our GAAP adjusted earnings per share outlook to $8.14 $8.74 primarily due to a one time tax item. All other elements Our adjusted financial guidance for 2023 remain unchanged, including our outlook for adjusted gross and operating margins.

Speaker 1

That concludes my prepared remarks. I would now like to turn it back to Liam for closing commentary.

Speaker 2

Thanks, Don. In closing, I will highlight our 3 key takeaways from the Q1 of 2023. First, we started 2023 with a strong performance as momentum continued from the end of last year. We executed well across our global business and continued to effectively manage the macro headwind. 2nd, The solid Q1 performance keeps us well positioned to deliver on our financial guidance for 2023.

Speaker 2

We see an increasingly stable environment for healthcare In turn, we expect improving performance of our high growth portfolio as we move Through 2023, in addition to continued strength in our durable core. 3rd, importantly, we will continue to focus on our We will invest in organic growth opportunities and drive innovation, Expand our margins and execute on our disciplined capital allocation strategy to enhance long term value creation. That concludes my prepared remarks. Now, I would like to turn the call back to the operator for Q and A.

Operator

Thank Our first question today comes from Cecilia Thurlong from Morgan Stanley. Cecilia, your line is open. Please go ahead.

Speaker 3

Great. Good morning and thank you for Liam, I wanted to start just some of your comments on what you're seeing from a recovery standpoint hospital versus ASC in office based setting, but specific to YERELIP, can you just speak to what you've seen, where you are from a recovery standpoint in the hospital setting Versus ASC office based. And then as you look through the balance of the year too relative to that 8% to 9% longer term CAGR for the business, how do you Look at where you are today and tracking relative to that growth

Speaker 2

rate. Thanks for the question, Celia. So I will start at the macro level for overall procedures. Obviously, delivering 13.2% Growth in Q1 was ahead of our expectation ex the days that came in over 7%. We're really pleased with the Q1 When our guide at the midpoint was approximately 6%, overall procedure volume within the hospital has continued To move forward and to progress, we're seeing that in particular in the Americas and in EMEA.

Speaker 2

And what we see overseas in APAC is a strong environment and we see, especially as you got through March, We saw China start to pick up. For UroLift specifically, we saw Growth again in the hospital side of service, which is encouraging. This is now sequential quarters of growth in the hospital side of service. In the office side of service, it did show some modest improvement, but it is still challenging due to staffing issues and obviously due to patient flow. Investors familiar with Teleflex will realize that the patient flow dynamic really started to have an impact As you went into the latter half of the year, it began as you went through Q2 into Q3.

Speaker 2

So we would still anticipate An improving environment for UroLift as we go through the year. Within the quarter, UroLift came in as expected in the Q1 of this year, And we feel that we're building good momentum. We had a really strong presence at AUA and we're encouraged by the enthusiasm we see from urologists.

Operator

The next question comes from Shagun Singh from RBC. Shagun, your line is open. Please go ahead.

Speaker 4

Great. Thank you so much for taking the question. So your 2023 revenue guidance, it implies a step down in growth The balance of the year, so what is driving that outlook? Is it conservatism or is there anything else to call out? And how should we think about the cadence for the balance of the year?

Speaker 4

Also as we look at EPS, if you held EPS despite the Q1 beat, I'm just wondering if there are any P and L offsets to consider Due to which you didn't narrow the EPS range.

Speaker 2

Okay. I'll ask Tom to comment on the EPS in a moment. I'll answer your question regarding the revenue. Shagun, we were very clear in the Q1 that our plan is front end loaded. And if I'm an investor, I would want to front end loaded plan from a company rather than a back end loaded plan for a company.

Speaker 2

There are a few dynamics that play into that in certain parts of our businesses. Obviously, as we go through the year, we have some tougher comparables as you get into the back half of the year. Obviously, this is a day's impact. You've got 5 additional days in the Q1. You've got 5 less days in quarter 4.

Speaker 2

But we feel really good about the full year. Starting off strong gives us increased confidence in our ability to deliver on our guidance as we go through the year. And also, it's 1 quarter. It's the Q1 of the year. It's great to have a good solid start.

Speaker 2

We'd like to get another couple of quarters Tucked under our belt and then we'll see where we land. But we do feel that there is an increased momentum behind Teleflex and our momentum within the marketplace Just based on the procedural dynamic, based on some of our key business units and regions performing exceptionally well, Businesses like OEM, Interventional Access had really strong margins at the month of March. It's really good to see vascular get back to growth. As expected, we told investors that vascular will get back to growth. It's great to see it getting back to growth.

Speaker 2

The high growth portfolio had a really solid first quarter and durable core, as expected, outperformed in the Q1 just Due to that whole procedural volume, I'll ask Tom to discuss briefly the other part of your question around EPS.

Speaker 1

Okay. Just As it relates to EPS, so keep in mind that, first of all, we didn't provide quarterly EPS guidance for the Q1. And in the quarter, our EPS results came in very much in line with our internal expectations. So we remain very confident in the full year EPS guidance outlook and are very pleased with how the Q1 turned out. So I would say that, as Liam mentioned, stay tuned and we'll continue to monitor

Operator

The next question comes from Chris Campbell from Jefferies. Chris, your line is open. Please go ahead.

Speaker 5

Hey, how are you doing? This is Chris on for Matt Taylor. You touched a little bit on UroLift growth. I was wondering if you could dig a little bit deeper on the high growth portfolio and some of the trends you're seeing there, including the Standard Bariatrics acquisition?

Speaker 2

Yes, absolutely, Chris. Thanks for the question. So I will tell you that Titan had a really strong Start to the year, we still expect to do €30,000,000 €35,000,000 Mantic came in online, is on track for the full year. Hemostats did really, really well in the Q1, came out of the blocks fast and intraosseous and Did in line and PIX great to see PIX come back to growth. As we told investors, once the Tyvek situation started to get better, We would expect PIX to return to growth and that's exactly what happened within the quarter.

Speaker 2

PIX came back with a very solid performance and we would expect that to continue as we go through the year. I would anticipate many of the parts of the high growth portfolio to continue to accelerate as we go through the year. That would speak to Euralift, Manta, Titan, the PIKs and also some of the intraosseous portfolio. So That will be our expectation, and that's what's contemplated within our guide.

Speaker 5

Awesome. Appreciate it. Thanks for taking the question.

Operator

The next question comes from Mike Matson from Needham and Co. Mike, your line is open. Please go ahead.

Speaker 6

Yes, good morning. Thanks for taking my questions. So I wanted to ask one on UroLift. Just Did you see the same degree of selling day impact there that you saw on the rest of the business? Because if you did, that would sort of imply a fairly You have a decent decline again there, kind of mid single digits, I think.

Speaker 6

Or is there some reason that didn't benefit EUROISP?

Speaker 2

Yes. So Mike, the days impact for UroLift is similar to the rest of the business. So that would you're absolutely correct. That would show some modest decline. But Mike, that's what we were expecting in the Q1, and it came in exactly as we would have anticipated.

Speaker 2

We did get some analysis on the day's impact. We have it through January February pardon me, on the patient flow impact, And we have it through January February. And through the 1st 2 months of the quarter, patient flow declined by another 3.7%. As we go through the year, Mike, what we will anticipate seeing is getting over the tough comparable on patient flow. As I said a little earlier, the patient flow dynamic Really started to get notably worst in 2022 as you went through the year beginning in Q2 and Q3 Where we had double digit declines in patient flow.

Speaker 2

Once we get through that comparable, we would anticipate as we go through the year an improving environment for UroLift.

Speaker 6

Okay, understand. And then just the MSA headwind, can you just quantify that for us, Again, just as a reminder, so we can make sure we incorporate that correctly into our models.

Speaker 2

Yes. The MSA headwind as you go from 23 24 is approximately $70,000,000 Mike. So but that's low margin revenue going away. So you lose the $70,000,000 in revenue, but as you go down through the income statement, you will pick up approximately 100 basis points on gross margin As a result of that MSA going away, and of course, that was the whole idea of Teleflex pruning in order to grow. The respiratory assets were lower growth assets.

Speaker 2

There were lower margin assets. And now you the investors will see the benefit of that in 2024 as we that complete low growth area has gone out of our portfolio. The MSA has gone out of our portfolio. Low growth area has gone out of our portfolio. The MSA has gone out of our portfolio and you'll see an impact on gross margins and a chunk of that dropping through to op margins in 2024 as well.

Operator

The next question comes from Jason Bedberg from Raymond James. Jason, your line is open. Please go ahead.

Speaker 7

Good morning. Just a couple of questions here. OEM and Interventional We're quite strong with outsized growth. I just want to make sure there's no kind of one timers in there. And then just secondly on OEM, You mentioned pretty good visibility through 'twenty three.

Speaker 7

What kind of growth are you looking at from this segment?

Speaker 2

Thanks. So our OEM business had a Stellar start, 34.5%. Obviously, you got to take some of the days impact out of It was across the board. We were really strong on catheters. We were really strong on extrusions.

Speaker 2

Sutures performed very well. The acquisition we did a couple of years ago, HPC continues to perform exceptionally well and allow us to sell some of our products through to other customers. We would still expect the OEM business to be a high single, low double digit grower, probably now leaning more to the low double digits Given this really strong start to the year, they had a really nice March performance, came in a little bit better than we were expecting. And they did have a prior year easier comping in Q1, which helped them, but the momentum that they carried in from Q4 Continued into Q1 and is performing exceptionally well. And candidly, OEM has been performing exceptionally well for The last 3 years now, this isn't just a 1 quarter phenomenon even though it's a little bit better this quarter.

Speaker 2

Within Interventional Access, Again, a very strong performance over 23% growth. The return of Langston really helps. Complex catheters, the guideline of Trapliner Turnpike performed well. A lot of procedural volume bring us through there. As we go through the year, they in Q3, they'll comp the Langston return to the market.

Speaker 2

But notwithstanding that, this is going to be a nice Solid growth driver, really good margins. And as we went through in our prepared remarks, a really nice Set up with new products coming through with the Guideline or Coast, with the Watson, with the Ringer and with the Triumph now coming to market. So The lifeblood of this business in the past has been new products and we some of the changes we made in our R and D processes I've really started now beginning to show bear fruit as you heard during my prepared comments. So OEM and IA, you're right, Jason, are the ones that Kind of really drove the upside from the expected 6% to 7% within Q1. And the visibility Visibility on OEM is excellent.

Speaker 2

Sorry. Thanks, Barry. Visibility on OEM, it's one of the businesses where we have the longest visibility. So I see a very stable environment for that business over the next period of time.

Operator

The next question comes from Anthony Petrone from Mizuho. Anthony, your line is open. Please go ahead.

Speaker 8

Thanks. Good morning, everyone. Maybe, Liam or Tom, just high level comments on procedure volume. Certainly, we saw it in vascular and Inventral, A lot of data points in the quarter that we've certainly gotten to a new level for procedure volumes in particular, Not necessarily that staffing issues have improved to normal, but that workflow at hospitals Has improved. So maybe just a little bit on the sustainability of procedure volumes broadly as it relates to the other businesses in the hospital, But all not specifically outpatient.

Speaker 8

And then I'll have a follow-up as well. Thanks.

Speaker 2

Yes, Anthony. I mean, obviously, within the quarter growing 7%, Coming off Q4 at 4.3% and a full year last year adjusted at 4.3%. You can see the progress. I mean, it's more than just procedural volumes. A lot of the new products that we're talking about are building momentum within the business.

Speaker 2

Obviously, having standard bariatrics and the Titan product is helping us. But I've been saying this for many quarters now. If you're in the hospital Over the last period of time, and I think it's going to be sustainable for sure over a number of quarters. Procedural volume is really strong. There's a lot of impetus To get procedures done, we're seeing it broadly within EMEA and within the Americas.

Speaker 2

And as I said a little earlier, With China coming back on stream, we would anticipate getting additional growth out of procedure volume coming through from that lockdown practice within APAC and specifically within China. Regarding staffing, it's not back To where it was, it would be my observation, but it is getting better and better and better every quarter. And I think to your comment about the other sites of service, Once it gets better in the hospital, we will see that go through to the ASC and the office in the near term. And I think it's very encouraging what we're seeing in the hospital side of service. So I see it as pretty sustainable over a multi quarter period, Anthony, but I wouldn't want you to go away thinking it's just procedural volume.

Speaker 2

There are some things that we're doing uniquely within Teleflex that's driving a lot of our momentum as well.

Speaker 8

That's great. And then the follow-up would be maybe just your views here most recently on the M and A environment. We're seeing Transactions come through within the space. Maybe just updated thoughts on valuations. And then just also the cost of funding, I mean, how does that change the equation now just where the debt markets are when Teleflex thinks about M and A?

Speaker 8

Thanks.

Speaker 2

Yes, Anthony. So we're very active within the market. Our leverage is now 1.7 times. So We have the most important thing you need when you're doing M and A. We have firepower.

Speaker 2

So right now, we would have the potential, not saying we're going to do this, but we would have the potential To put up to about $2,000,000,000 worth of capital to work, we are really active in all areas of M and A, Really happy with standard bariatrics having brought that in. And I think that we are looking at tuck ins, we're looking at Scale, we're looking at late stage technologies across the board. I'll talk a little bit about the cost of funds, but maybe I'll ask Tom to add a comment as well. But I think what we're seeing is the cost of funds is improving somewhat. So the environment we think is a little bit better than it was even a number of months ago.

Speaker 2

And with regard to valuations, I think valuations are where they were over the last number of quarters. They've come back from the heady days Halfway through 2021, and I think it's an environment that's very attractive to Teleflex. But Anthony, we will continue to be disciplined. Investors should know that when we do announce a deal and we bring something into Teleflex, we've done our appropriate work and it's the right deal for Teleflex. Anthony, you want to add on the cost of funds, Tom?

Speaker 1

Well, I was just going to say that, yes, well, certainly the cost of funds are up from where they were a couple of years ago or just a year ago, they're still at fairly reasonable levels overall Based on where we're currently looking at as a cost of funds relative to where it's been over the past 10 or 20 years, so I don't believe right now that that will be an inhibitor to our ability to identify assets. So right now our focus is Really as Liam put on finding the right strategic fit, that makes sense for us. And the cost of funds will certainly be a component, but Not a limiting component.

Operator

The next question comes from Craig Bisson from Bank of America. Craig, your line is open. Please go ahead.

Speaker 9

Good morning, guys. Thanks for taking the question. Wanted to touch on margins. Obviously, you raised revenue guidance, Margin guidance didn't change. So wanted to see if you could walk through the cadence of gross margin and operating margin throughout the year.

Speaker 9

And then given the Q1 performance in both gross margin and operating margin seem to be better than the prior year, which is trending ahead of your overall guidance for 2023. So why couldn't we potentially see upside to your margin guidance? And what are some of the things that we should be considering with margins for the rest of the year?

Speaker 2

Yes, Craig, thanks for the question. I think One thing I would just like to point out is it's May. So it's very early in the year. We're really happy with the start that we had to the year, Both on revenue, on margins and on earnings, my mother God rest her used to say a good start is half the battle, And we've had a good start, but I'll let Tom give you a little bit more details on some

Speaker 1

of the margin impacts, if you don't mind Tom. Sure. So on the gross margin front, you should To see a pretty stable gross margin throughout the remainder of the year. It will move up and down, but not significantly from where it is right now. On the op margin, What you should expect to see is a sequentially improving operating margin as we go throughout the year.

Speaker 1

A couple of things you probably want to keep in mind is that As you look at the kind of comparison to prior year or for the gross margin, We had a more favorable comp in the Q1 than we're going to have for the balance of the year. So when looking at Year over year comparisons, that certainly comes into play. We also are expecting foreign exchange headwinds on gross margin as we go throughout The year. In the Q1, we actually had a nice benefit. But if you recall last year, the dollar moved significantly beginning in 2nd and third quarters.

Speaker 1

And That's going to prove to have a more difficult comparison. So those are some of the factors I think about. But again, gross margin is pretty stable throughout The year and operating margin shows sequential improvement.

Operator

The next question comes from George Sellers from Stephens. George, your line is open. Please go ahead.

Speaker 10

Hey, good morning. Congrats on the quarter and thanks for taking the question. I guess maybe a smaller question on the Titan Stapler. I know it's still a relatively small piece of the business, but with the gore buttress material, what are some of the implications On the gross margin for that device and also for the manufacturing of that, is there an opportunity to over time bring that in house? Thanks for the question.

Speaker 2

Yes, George, thank you very much. So first of all, I'd say we're really pleased with the performance of Titan in the Q1. It drove A lot of the positivity on the Surgical business and saw our Surgical business perform really, really well As a result, coming in at 14% growth, the buttress material will have no impact On the margin expectations for this business, we still expect this business as we go through 'twenty four become accretive to Teleflex's gross margin And then to really leverage thereafter, our expectation is to continue to have this party or have this product Manufactured in the as we have right now, and we have no plans to make any changes to that at this stage. Obviously, It's ramping pretty rapidly. We don't want to disrupt it.

Speaker 2

And the 3rd party that we're working with is incredibly reliable and really doing a solid job. So Long may that continue, and we'll continue to ramp this product through this year, and we still expect it to do 30,000,000 to 35,000,000 In revenue this year and that volume will help us obviously leverage the gross margin as we go into 'twenty four, George. And thanks for the question.

Operator

And the next question comes from Mike Polar from Wolfe Research. Mike, your line is open. Please go ahead.

Speaker 11

Hey, good morning. Thank you. Maybe follow-up there on standard bariatric If you said it, I missed it. But can you quantify revenue contribution in the quarter? I know what the full year outlook is for 2023, but I just want to understand where 1Q started so we can have a better sense for the ramp

Speaker 1

through the rest of the year?

Speaker 2

Yes, Mike, we don't break it out specifically in revenue terms. Obviously, we are confident on the €30,000,000 to €35,000,000 For the product, and I will tell you, as I said a little earlier, it is one of those Products that will continue to ramp as you go through the year. But again, we had a really nice start In quarter 1, so therefore, it reinforces our confidence on the €30,000,000 €35,000,000 for the full year. And the product Performing very well. We actually showed it at SAGES, and we had a lot of really, really positive feedback from the product at SAGES.

Speaker 2

It is addressing a lot of the unmet needs that bariatric surgeons has and the bootress That we're adding to it just overcomes one of those hurdles. Some surgeons just like to use buttress when they're sealing. And it's probably not as much needed with the Titan as it is with the other technologies. But if that's the process they want to use, then we're going to support them in doing that. So I think that it all bodes well for the Titan over a multiyear period.

Speaker 11

Thank you. If I can follow-up, my other topic was Tyvek. If memory serves, I thought maybe the second half of the year is when that Situation might get a little bit better for the industry. It sounds like it's improving in real time. So what's driving that?

Speaker 11

Are you just seeing kind of more supply Come online and how was it kind of how has it trended and are you back to Normal there or pretty darn close, any kind of framework for where we are? And then the related question is, can you just remind us that The revenue the segment lines that are most impact have been most impacted by that situation and so the comps are where the comps are easiest as that as supply improves. Thank you.

Speaker 2

Yes. I'll use your expression. It's pretty darn close to getting back to normal. It's not quite back to normal yet, Mike, But it is moving positively in the right direction and it is better than we had anticipated in the Q1. You are correct.

Speaker 2

Once we get to the back half of the year, new supply comes on from the provider of Tyvek and that will eliminate the issue. The two lines that are impacted, the 2 is really in our vascular business. It's to a lesser extent our CVCs because we prioritize The supply we had to keep our market share position in CBCs, what it has done, it has prevented us from converting pick accounts. And as you heard in my prepared comments, it was nice to see PIKs getting back to double digit growth in the quarter As we're able to go back out and start converting those accounts, just to remind investors, our PIK portfolio is unique insofar as that it has an antimicrobial and an So therefore, that's why we're getting broad adoption for that portfolio Globally, and in particular in the United States, where we're not the market leader, we see a great opportunity to continue to take share.

Operator

The next question comes from Richard Novitter from Tremont. Richard, your line is open. Please go ahead.

Speaker 1

Hi, thanks for taking the question. Just one for me on UroLift. I guess the comments about still some lag on patient flow. I guess even some of the other subcategories in medtech that improved but are lagging things like elective procedures Like knees and hips, even those kind of saw some of the patients coming back into the channel for doctor visits and things of that sort. I'm just curious, is there anything specific about UroLift that contrasts to some of those other Procedures, not UroLift, sorry, but the doctor visit and patient flow.

Speaker 1

Just trying to get a sense for why maybe certain urological procedures like this Would be still lagging to such an extent versus the rest of the kind of the medtech environment? Thanks.

Speaker 2

Well, there's a couple of things I'd point out, Rich. First of all, when you're doing hips and knees, you're not doing them to urology patients. So it is unique to the urology specialty. There's a few things with urologists. The average age of a urologist within the United States is 55.

Speaker 2

So it's an aging demographic For the delivery of care. And it's we're probably more exposed to the office side of service Then any of the hips and knees guys or any other or even any of our peers in the urology call point, as investors familiar with Teleflex will know, About 30% of our UroLift revenue is generated within the office. And I can tell you that the data that we have will tell us that Patient flow declined 3.7% through January February. Now the good news, Rich, is that once we get into the Later half of the year, when we progress, the toughest comp on patient flow would be behind us as we go through the year. So we do anticipate an improving environment from that perspective.

Speaker 2

And it was almost palpable The enthusiasm for UroLift with urologists at AUA, I was there in Chicago earlier this in late April. And compared to a year ago, there was way more attendees. It really felt good. It was buoyant. We had a lot of education Seminars with a lot of podium presence at that.

Speaker 2

And it was almost it was Back to the good old days of UroLift, I would say at that conference. So we do anticipate somewhat of a bounce from that and we do anticipate the back half of the year being better.

Operator

As we have no further questions, I'll hand the call back to Lawrence Cash for any

Speaker 1

Thank you, Adam, and thank you to everyone that joined us on the call today. This concludes the Teleflex Incorporated Q1 of 2023 Earnings Conference Call.

Operator

This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.

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Earnings Conference Call
Teleflex Q1 2023
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