Teleflex Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

There are 15 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Teleflex Second Quarter 2023 Earnings Conference Call. At this time, all participants have been placed on listen only mode. At the end of the company's prepared remarks, we will conduct a question and answer session. Please note that the conference call is being recorded and will be available on the company's website for 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 Q2 2023 Earnings Conference Call. The press release and slides to accompany this call are available on our website atteleflex.com. Please note that webcast viewers will have the ability to advance the presentation slides on their own. Simply follow along with the presentation as we proceed through the call. As a reminder, a replay will be available on our website.

Speaker 1

Those wishing to access the replay can 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. 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 this 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 Sure, and are subject to risks and uncertainties and actual events or results may differ materially.

Speaker 1

The factors that could cause actual results or 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. On this morning's call, we will discuss the Q2 2023 results, our pending acquisition of Palette Life Sciences and our financial guidance for 2023. Turning to the Q2. Teleflex revenues were $743,300,000 A year over year increase of 5.5 percent on a reported basis and an increase of 5.9% on a constant currency basis.

Speaker 2

2nd quarter adjusted earnings per share was $3.41 a 0.6% increase year over year. We saw stable utilization in the acute care setting in our global markets. The balanced performance in the quarter continues to From a macro perspective, we continue to see sequential stabilization with respect to material inflation and will continue to monitor trends during the second half of twenty twenty three. Our supply chain remains stable in the second quarter, although we are still not yet at normal levels. As expected, we witnessed a continued stabilization in This was evident in our 2nd quarter revenue growth as most Teleflex products are exposed to the hospital setting.

Speaker 2

Conversely, we are still experiencing geographic pockets that are encountering more persistent staffing disruption in the ASC and office side of service, but note that bottlenecks are seeing some easing. Now let's turn to a deeper dive into our 2nd quarter revenue results. I will begin with a review of our geographic segment revenues for the Q2. All growth rates that I referred to are on which represents 3% growth year over year. In particular, we saw strong performances in our vascular, interventional and surgical businesses.

Speaker 2

EMEA revenues of $147,800,000 increased 0.7% year over year. During the quarter, we saw strength in our vascular and urology drainage businesses. Turning to Asia. Revenues were $86,700,000 increasing 19.1% year over year. During the Q2, we saw stable demand across the region, including growth in excess of 20% in China.

Speaker 2

From a product perspective, we saw strong double digit growth in Interventional Access and Interventional Urology in the region. Let's now move to a discussion on our 2nd quarter revenues by global product category. Commentary on global product category growth for the 2nd quarter will also be on a constant currency basis. Starting with vascular access. Revenue increased 6.6 percent to $173,800,000 We executed well during the Q2.

Speaker 2

Initial launch activities for our next generation ARO VPS Rhythm DLX navigation device and the new ARO pick preloaded with the NaviCurve stylet have generated a positive customer response. Over the long term, we remain positioned for dependable growth with category leadership in central venous catheters and midlines, anticipated share gains with our novel coated PIC portfolio and new product introductions. Moving to Interventional Access. Revenue was $124,800,000 up 9.6% year over year. Procedure volumes remained stable in the quarter and we continue to benefit from our diversified portfolio.

Speaker 2

Balloon pumps, Bright Heart catheters and access enclosure all grew at double digit rates. MANTA continues on a trajectory for strong double digit growth in 2023. Turning to anesthesia. Revenue was $100,800,000 down 3.6% year over year. A tough year over year comp due to timing of military orders in the prior year period impacted results.

Speaker 2

In our Surgical business, revenue was $106,000,000 up 7.7% year over year. In the quarter, we advanced our integration of Standard Bariatrics and training of new surgeons on the use of the Titan SGS For Interventional Urology, revenue was $77,800,000 representing a decrease of 2.3% year over year. Once again, we witnessed year over year growth for UroLift in the hospital setting, but the office side of service remains challenging. The overseas launch activities continue to progress in line with expectations With Japan UroLift usage growing in line with our expectations, OEM revenues increased 19.8% year over year to $84,100,000 The strength in the quarter was broad based across our portfolio with double digit growth in all of our product categories, including micro catheters. We continue to have good visibility into the business and see solid demand dynamics throughout 2023.

Speaker 2

2nd quarter other revenue increased 4.8% $76,000,000 year over year. We continue to expect all MSA revenues to cease at the end of 2023. That completes my comments on the 2nd quarter revenue performance. Turning to some commercial updates. On July 26, we announced a definitive agreement to acquire privately held Pallet Life Sciences for an upfront cash payment of $600,000,000 at closing and up to an additional $50,000,000 on the achievement of certain commercial milestones.

Speaker 2

The acquisition will expand Teleflex Interventional Urology to include a portfolio of fast growing Non animal stabilized hyaluronic acid or NASH spacer and tissue bulking products that improve patient outcomes in urology, urogynecology disorders, colorectal conditions and radiation oncology procedures. Palette is estimated to generate net sales of approximately $56,000,000 on a standalone basis in fiscal year 2023. We believe Pallet will contribute meaningfully to our growth in the coming years, with revenue growth in the high teens to low 20% range year over year in 2024. The strong growth profile for Palette gives us further confidence in our ability to deliver on our 2023 to 2025 LRP Growth Objectives. The Baragel Rectal Spacer is the flagship product for Palette Life Sciences and generates the majority of the company's revenue.

Speaker 2

Baragel is a NASH spacer with a compelling value proposition, driven by a reduction in radiation delivered to the rectum during prostate cancer radiation therapy, while increasing tumor control and patient quality of life. In addition, the Pallet Life Sciences portfolio also includes Deflux and Celesta, which are NASH based tissue bulking agents designed to treat pediatric pessicourethral reflux and fecal incontinence, respectively. The acquisition of Palette Life Sciences will allow us to incorporate this exciting High growth and high margin technology into our Interventional Urology business unit, along with our well established global call point. We are focused on bringing urologists and other specialists more innovative technologies that can positively impact patient care. The acquisition of Palette is attractive for 3 primary reasons.

Speaker 2

First, Paragel is a differentiated rectal spacer with a strong growth profile following FDA clearance in May of 2022 and represents a highly complementary product to our existing Interventional Urology Business. In recent years, the treatment of prostate cancer has increasingly utilized hypofractionated radiation therapy, which uses higher doses of radiation in fewer treatments. In order to reduce radiation associated complications, Usage of temporary rectal spacers has grown as a way to protect healthy rectal tissue from harmful radiation. Baragel has grown by expanding market adoption since its launch due to its unique product features. Unlike other technologies, Baragel is easily sculpted when placed between the prostate and rectum, providing comprehensive protection from radiation therapy.

Speaker 2

The sculptability allows the physician to achieve predictable protection of healthy rectal tissue prior to radiation therapy. Baragel is also highly visible on transrectal ultrasound, which aids accurate placements, is biodegradable and offers 1 step assembly of the delivery device in all sites of service. 2nd, there is a large and growing global market for rectal spacers. The American Cancer Society estimates That there will be 288,000 new cases of prostate cancer in the United States, with the incidence growing 3% a year. In addition, the increasing use of hypofractionated radiation therapy is driving demand for rectal spacers to protect healthy tissue.

Speaker 2

Baragel was cleared for marketing in the United States and Australia and is CE marked. We expect to gain market clearance in additional geographies over the coming years. 3rd, The acquisition of Pallet is reflective of our disciplined capital deployment strategy. From a strategic perspective, The addition of Pallet's NASHA portfolio complements our strong presence in the treatment of benign prostate enlargement. Of note, urologists performed the majority of rectal space replacements, which will leverage our broad and established sales organization.

Speaker 2

Today, 97% of physicians using UroLift also treat prostate cancer. In addition, the treatment of prostate cancer is not deferrable. So we are adding another durable growth driver to our portfolio. We also expect interest in rectal spacers to provide opportunities to cross sell UroLift. From a financial point of view, the transaction is consistent with our strategy to acquire assets that are accretive to Teleflex's growth rate and margins.

Speaker 2

Palette's adjusted gross margin will be accretive to both the corporate average and the interventional urology business unit. In addition, we expect Palette operating margin to enhance the corporate average in the near term. Finally, Post close, our balance sheet will remain sound, allowing us to continue to execute on our long term capital deployment strategy. The acquisition is subject to customary closing conditions, including receipt of certain regulatory approvals, and is expected to be completed in the Q4 of 2023. We look forward to welcoming the Pallet employees to Teleflex.

Speaker 2

Turning to an update on the Titan SGS stapler. We continue to execute on our commercial strategy for the Titan SGS powered stapling device for use in sleeve gastrectomy procedures to treat obesity. Feedback for the Titan stapler remains positive, and we remain confident in the value proposition for the Titan SGS Stapler. The 23 centimeter continuous staple line Enables ideal pouch creation and no overlapping staples that are common with traditional powered staplers. We are optimistic that over time, we will be able to generate data that shows a reduction in complications and meaningful time savings per procedure.

Speaker 2

Despite the continued positive feedback from the field, we now expect Titan Statler revenue to be in the high teens for 2023, which is lower than what our original guidance for 2023 had assumed. Value Analysis Committee clearance has taken longer than we anticipated, which has slowed our ability to train surgeons. We have learned from the early experience and have refined our strategies for gaining back approval. Our efforts are taking hold with more than 2 times the number of surgeons trained in the Q2 of 2020 3 versus the Q1 of the year. Moreover, we have a strong pipeline of surgeons in queue to be proctored, So we expect further improvement through the year.

Speaker 2

We continue to monitor the usage of GLP-one drugs in treating obesity. Based on our market checks, it is our sense that GLP-1s had some impact on bariatric surgery volumes in the second quarter. It remains too early to assess the long term impact on the market given questions on reimbursement and safety profile. In the interim, we remain acutely focused on penetrating a large sleeve gastrectomy market that is in excess of 120,000 procedures in the United States, given the very early stages of the Titan stapler launch. We remain confident that the Titan stapler will be a meaningful contributor to our That completes my prepared remarks.

Speaker 2

Now I would like to turn the call over to Tom for a more detailed review of our Q2 financial results. Tom?

Speaker 3

Thanks, Liam, and good morning. Given the previous discussion of the company's revenue performance, I'll begin with margin. For the quarter, adjusted gross margin was 59%, a 60 basis point decrease versus the prior year period. The year over year decrease was primarily due to continued cost inflation lower logistics and distribution related costs and benefits from cost improvement initiatives. Turning to price, There is no change to our expectation for at least 50 basis points of positive price year over year in 2023.

Speaker 3

Adjusted operating margin was 26.6 percent in the 2nd quarter. The 90 basis point Year over year decrease was the result of flow through of gross margin, increased headcount and employee related expenses, Investments to grow the business and the inclusion of standard bariatrics. Net interest expense totaled $16,600,000 in the 2nd quarter, an increase from $11,200,000 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 Q2 of 2023 was 10.8% compared to 12% in the prior year period.

Speaker 3

The year over year decrease in our adjusted tax rate is primarily due to a reduction in tax costs resulting from U. S. Tax law requiring capitalization of R and D expense. At the bottom line, the 2nd quarter adjusted earnings per share was $3.41 an increase of 0.6% versus prior year. Turning now to select balance sheet and cash flow highlights.

Speaker 3

Cash flow from operations for the 6 months was $170,600,000 compared to 101,900,000 in the prior year period. The increase was primarily attributable to lower tax payments and favorable changes in working capital. Moving to the balance sheet, our financial position continues to provide us flexibility to operate the business and execute on our disciplined capital allocation strategy. At the end of the second quarter, our cash balance was $250,800,000 as compared to $292,000,000 as of year end 2022. The reduction in cash on hand is primarily due to $154,500,000 of payments on our senior credit facility, partially offset by $131,200,000 of free cash flow generated during the 1st 6 months of 2023.

Speaker 3

Net leverage at quarter end was approximately 1.6 times, which remains well below our 4.5 times covenant. Turning to financial guidance. Starting with the acquisition of Allett Life Sciences. As mentioned previously, Allett Life Sciences is expected to generate net sales of approximately $56,000,000 in 2023. Assuming a December 1, 2023 close date, the acquisition is not expected to significantly impact Teleflex's 2023 revenue.

Speaker 3

In 2024, we expect the business will achieve year over year revenue growth in the high teens to low 20% range. Assuming December 1, 2023 close, the transaction is expected to be approximately $0.15 $0.35 dilutive The company's adjusted earnings per share in 2023 2024, respectively. Beginning in fiscal year 2025 and thereafter, the company expects the acquisition to be increasingly accretive to adjusted earnings per share. Halifax plans to finance the acquisitions and borrowings under its revolving credit facilities and cash on hand. At signing of the transaction, we remain in a solid financial position with pro form a net leverage of approximately 2.5 times.

Speaker 3

Accordingly, there is no change to our stated long term capital deployment strategy. Moving to our outlook for 2023. Given our operational performance in the second quarter and our second half outlook, we are revising our 2023 financial guidance. Specifically, we are increasing the bottom end of our 2023 constant currency revenue guidance by 50 basis points to 5.5% to 6.25%. Turning to foreign exchange.

Speaker 3

We now assume a positive impact Foreign exchange translation of approximately $8,000,000 or 30 basis points to GAAP growth in 2023. This compares to our prior guidance, which assumes a $10,000,000 or 35 basis point headwind for 2023. Note, our Q2 revenue results reflect a foreign exchange result that was approximately $6,000,000 favorable to what was previously expected. The balance of the updated full year 2023 impact of changes in foreign exchange rates is expected to hold the second half of twenty twenty three. Our revised foreign exchange guidance for 2023 captures the actual rates for the Q2.

Speaker 3

It now assumes current foreign exchange rates, including a euro to dollar exchange rate of $1.10 in the second half of the year. Considering the revised foreign exchange headwind, we expect reported revenue growth of 5.8%, 6.55 percent in 2023, implying a dollar range of 2,953,000,000

Speaker 2

$2,970,000,000

Speaker 3

and implying an increase to the low end of the dollar range of $32,000,000 and the high end of $18,000,000 There are no changes to our outlook for gross and operating margin in 2023. Below the line, we now expect net interest expense to approximate $77,000,000 in 2023, which reflects net incremental borrowings under our revolver for the acquisition of Polet. We are maintaining our 2023 guidance for adjusted earnings per Share of $13 to $13.60 Our adjusted EPS outlook has been updated to include $0.15 of dilution, the acquisition of Paulette, dollars 0.15 dilution associated with the recall of ET tubes and the Endurance catheter during the Q2, offset by $0.15 of foreign exchange benefit and the balance from favorable operating performance, including better than expected results in the second quarter and higher growth expected in the second half of the year. That concludes my prepared remarks. I would now like to turn it back to Liam for closing commentary.

Speaker 2

Thanks, Tom. In closing, I will highlight our 3 key takeaways from the Q2 of 2023. First, our diversified portfolio and global footprint drove durable growth in the 2nd quarter. Our execution remains strong. We are launching new products and our margins remain healthy.

Speaker 2

2nd, The solid second quarter performance keeps us well positioned to deliver on our financial guidance for 2023. As we look into the second half twenty twenty three, we anticipate stable to improving macro conditions. 3rd, we will continue to focus on our strategy to drive durable growth. 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. We are excited about the acquisition of Pallet Life Sciences.

Speaker 2

We believe that the acquisition will be a meaningful to our growth in the coming years, be immediately accretive to gross margins and will enhance our adjusted operating margins in the near term. In turn, we have further confidence in our ability to deliver on our 2023 to 2025 LRP revenue objectives. That concludes my prepared remarks. Now, I would like to turn the call back to the operator for Q and A.

Operator

Thank And our first question comes from Shagun Singh of RBC. Please go ahead.

Speaker 4

Great. Thank you so much for taking the question. So by our math, the acquisition would add about 50 basis points to overall Teleflex growth and 400 basis points 2 Interventional Urology segment, just is that in the ballpark? And does this help offset some of the weakness in UroLift? Or is your 8% to 9% LRP

Speaker 5

Thank you very much for the question, Shigun. I'll start with your question as it relates to the LRP. As it relates to the LRP, the acquisition of Palette emboldens our In at least achieving the 6% growth as laid out in our LRP. And here are the building blocks. Durable core will grow at 5%.

Speaker 5

I think given the performance so far this year and what we expect for the remainder of the year, we feel super confident in that 5%. The high growth portfolio will be growing at least 12%. And within that, the interventional urology business units, which will include Pallet, We'll be growing at least 8%. So this addition of Palette ensures our ability, we believe, to achieve our 6% LRP Growth that we laid out in our Capital Markets Day. With regard to the addition, what addition that it will make Into the future growth of Teleflex, I mean, your math is pretty spot on.

Speaker 5

It's delivering $56,000,000 this year. It's going to grow in the high teens, the low 20s in 2024. And I do believe that, that kind of a number should be sustainable into 2025 as well. So obviously, your math is pretty right on the money. And I think it's an important point to note, as I outlined in my prepared remarks, The gross margins from Palette is a really important factor insofar as it's not alone accretive to Teleflex, It's accretive to the Interventional Urology Business Unit today and it's accretive to the high growth portfolio.

Speaker 5

Thanks for the question, Shikun.

Speaker 4

And just as a follow-up on UroLift, can you just elaborate on trends you're seeing? I know that the patient volume

Speaker 5

Yes. Thank you, Shagun. We've still seen through the first half of the year a reduction in patient flow to the urologists. I think from within the quarter, there was some green shoots, I guess, when you see that the hospital rate of growth Continued. We still see pressure in the office size of service and that still remains somewhat A challenge to us, we continued to train a robust amount of surgeons.

Speaker 5

And actually, we saw a tick up in the amount of surgeons that we trained in Q2, but the office still remains a troublesome site of service for this product In the quarter, Sjogunn. Thank you.

Operator

Our next question comes from Jayson Bedford of Raymond James. Please go ahead.

Speaker 6

Good morning. I wanted to follow-up on the comments on the Titan Stapler. It seems like the revision in the guide there, you seem to pin it on longer VAT committee approvals. And I'm just wondering What's the source of the pushback there? Do you need more clinical data?

Speaker 6

Is it a price issue? Just love to dig in on that a little bit more.

Speaker 5

Yes, Jason. I mean, obviously, our initial expectation at the low end was $30,000,000 It's now in the high teens. We still expect Titan to be a significant contributor to the LRP. The pushback as we go through the back committees and the back committees have the knock on effect of having an impact on the proctoring. Now as I also said in my prepared remarks, we doubled the number of surgeons we proctored from Q1 to Q2, so that's encouraging.

Speaker 5

It's just time, Jason, is the biggest issue. We would have thought That this product, because it's functioning exceptionally well, that's what's very encouraging. The product is doing exactly what it's supposed to do. I think what's also important is that it's a very, very big end market, dollars 300,000,000. So once we get Through the value analysis committees, the product gets adopted and it's going pretty well.

Speaker 5

It's just taking us longer than we thought. It's early in the ramp. It's a big market. We have a path forward. We know what we need to do.

Speaker 5

It's just taking us longer to get there as we go through that adoption curve. And I think that it's also having the buttress material for the entirety of 2024 Will be an important factor for us. Technically, our product doesn't need buttress because it's a complete line of staples, but 60% of bariatric surgeons use buttress when they do a gastric sleeve and it is the standard of care. And a surgeon will tell you,

Speaker 2

I use buttress because I want

Speaker 5

to sleep at night And it's just a standard of care. And I think having that in 2024 will also help get us through. But it's simply time, Jason. There's no major pushback. It's not a pricing issue.

Speaker 5

It's not a product performance issue. We've got the clinical data that we need. So we have everything that we need to get through, but it's just taking longer for these Back committees to come together and allow us through the system.

Speaker 6

Okay. Liam, that's very helpful. Thanks. And just Quickly as a follow-up, OEM continues to be strong there. Can we assume there's nothing kind of one time or stocking in that number and you're So confident in what should be a strong double digit growth outlook for OEM?

Speaker 5

Yes. I think OEM has performed exceptionally well, Not just this year, but over the last 2 years as well, coming in just shy of 20%, stellar performance. This is a business that we have really good visibility into. There are no one time stocking major items to answer your question directly. This is pure performance.

Speaker 5

It's taking share from other competitors in the market. It is also That acquisition that we did a number of years ago really helping us go along, but it's really good performance by Greg and the entire team in the OEM division. And I do believe that OEM will have good solid double digit growth this year. And I do believe that the future is good for that over the foreseeable future with the visibility we have.

Operator

Our next question comes from Anthony Petrone of Mizuho Americas. Please go ahead.

Speaker 7

Thanks and good morning everyone. Maybe Liam just go pivot to standard bariatrics. Just an update on traction in the quarter, expectations through the end of the year for standard, we've been hearing obviously Some noise on the GLP-1s impacting bariatric from Intuitive. So just an update on bariatric and then I'll have a follow-up on earnings.

Speaker 5

Yes, absolutely, Anthony. And as we said during our prepared remarks, we're now expecting the high teens for standard bariatrics. I think that there's some impact from GLP-1s, but the main issue is getting through these VAC committees. And therefore, have to get through the VAC committees before you proctor. And as I answered to Jason's question, we doubled the number of surgeons that we proctored from Q2 to Q1.

Speaker 5

Product is performing very, very well. The introduction of buttress will help us. I do believe that GLP-1s Have some impact, but it's not a big impact. I mean, we're just starting to ramp within this curve. And I do think that there's mixed views on GLP-1s.

Speaker 5

They get The reimbursement is for a shorter period of time. And therefore, if you talk to most bariatric surgeons, They think it's having a shorter term impact, but in the longer term, they don't see it having a long term impact on gastric sleeve surgeries. Just the weight loss from gastric sleeve is so more significant than it is from the GLP-1s. But we're watching it very, very closely, Anthony, and thanks for the question.

Speaker 7

And then maybe for Tom, just on margins and the progression here, revised 26% to 26.75 and maybe just a recap on looking out through the LRP as we look forward to 24, 25, just how we should be layering margin expansion in according to or Based on what's still out there for the LRP and how we can translate that into earnings power, now it's a little bit confounded down to the earnings line with the Palad acquisition and some of the below the line sort of moving parts. So how do we layer in, how do we think about margin expansion From here, based on the current guidance out through the LRP and how does that play in the earnings power now that we have an Additional drivers in the non operating lines. Thank you.

Speaker 8

Okay. Well, as we We spoke earlier in the year. We reaffirmed the LRP guidance at that point in time. The way I would think about the addition of Pallet It is a product that we expect to do about $56,000,000 in revenue this year on a full year basis. Obviously, We wouldn't have it for the entire year, but then to grow in the high teens to low 20s over the next couple of years.

Speaker 8

And as we had mentioned, we expect it to be margin accretive to the IUBU business unit, to all of Teleflex and the high growth portfolio. So we see this as slotting in very nicely and providing some additional comfort as we look out into the future years in our margin progression.

Operator

Our next question will come from Larry Bergstein of WF. Please go ahead.

Speaker 9

Hi. This is Nathan Trebek on for Larry. Can you just talk about Paulette, like the overlap with your Lyft position? How penetrated is the U. S.

Speaker 9

Market? And So far, is Baragel expanding the market or taking share? Thanks.

Speaker 5

Yes. Nathan, thank you very much for the So we see this as a market development opportunity. If you look at our existing interventional urology customer base, Only 20% of them use the Baragel spacing technology today and 97% of them actually treat prostate So this is a market expansion opportunity for us in the domestic market within the United States. The product is approved in EMEA and it's also approved in Australia. We will be expanding approvals into other geographies As we take this under our wing, but we definitely see this as a margin expansion opportunity.

Speaker 5

And we definitely see there's an opportunity To leverage our existing sales force, leverage that channel, we have a superb global channel now into the urologist, And we believe that we can expand the market. There's other spacing technologies out there. I think between having another company talking about spacing, another company raising awareness, We believe we have a better product than anything that's out in the market today. It's sculptable. It is visible.

Speaker 5

It is easy to inject. It doesn't solidify overly quickly. It's a one step Process is reversible. We've had excellent clinical data. There have been 0 embolisms.

Speaker 5

There have been 0 Device related adverse events and we have robust clinical data to support the product. We love the growth profile. We love the margin profile And we love the synergies within our sales force and we're not going to build this into our model, but there is the potential That it could have also a halo effect for UroLift in expanding into urologists that previously may not have been open to trying a new technology like UroLift.

Speaker 9

Okay. Thanks. And if you could just give us your high level thoughts on 2024 in light of the acquisition, which is expected to be $0.35 dilutive. Like what is your ability to absorb this dilution? I mean, The Street has you at $14.52 in EPS next year?

Speaker 9

Thanks.

Speaker 5

Yes. Nathan, we're not going to get into 2024 on today's call. We're halfway through the year. We've raised Our revenue guidance for the Q2 in a row, we feel really confident about where we're at as a company. We've also we've maintained this year's earnings per share guidance even with the $0.15 dilution that's coming from Pallet.

Speaker 5

So we feel really good about where we're at and we'll get into 2024 guidance when we get to February next year. I've already made comments on the LRP about our belief and confidence In being able to achieve all aspects of the revenue profile with Pallet within our LRP 6% and all the components within that I just laid out.

Operator

Our next question comes from the line of Matthew O'Brien of Piper Sandler. Please go ahead.

Speaker 10

Good morning. Thanks for taking the questions. Liam, just in talking about Paulette a little bit here that the Baragel product got approved May of last year, you're saying it's at least the majority of revenue total for Pallet now. So I don't have the numbers, but I'm assuming it's $30,000,000 or $40,000,000 of revenue in a year basically that they've generated already. And then you're saying kind of high teens to low 20% growth for next year.

Speaker 10

I would think that just they've been able to grow it that quickly that You guys at Teleflex should be able to grow it at a similar rate. So why is high teens, low 20s the right number? Why isn't it 30%, 40%, 50%, I know you have to integrate it, but why wouldn't it be significantly higher than that just given how well they did with it on their own?

Speaker 5

Well, I think, Matt, everything you say, it's hard for me to push back too hard. We're definitely going to have more sales reps out there. We've got a very strong sales force within the United And globally for this call point. I mean, I think the high teens, low 20s is probably the right number for us right now. If it's better than that, it's better than that and everyone's happy.

Speaker 5

I think for us, we feel right now that that's the right number. You're correct. We've got it integrated. It's not the toughest integration on the planet in all transparency. It's one call point One big large call point and then obviously the radoncs, we have a methodology to address that through the addition of clinical trainers.

Speaker 5

And this is an investment hypothesis for us. With the addition of Pallet, we are going to continue to expand this market and grow this market. And if it's better than the high teens and low 20s, we'll let you know and we'll grow it from there. But it's a we feel it's a great transaction. And if it's better than we expect, then the multiple is better than we expect and everything within the dynamics of

Speaker 8

it is better than we expect.

Speaker 10

Got it. That's understandable. Appreciate that. And then just back to UroLift. I know it's getting to be a smaller part of the overall business, but there's other of med tech that just have not recovered from the pandemic.

Speaker 10

I can think of women's health as one area. Is this The category that especially in the outpatient setting and the physician's office setting that is just probably structurally Different from now on and most likely will not reaccelerate, hence the 8% to 9% that you talked about last quarter. Probably is it going to happen in the future? Thanks.

Speaker 5

Yes. Cheers, Matt. Now in all transparency, when we began the year, I thought that UroLift was going to recover. I expected it to grow somewhere in the region of around 3%. Now as I look forward to the full year, I would expect Interventional urology, which would include Pallet to have a low single digit decline, something around 3% right now.

Speaker 5

I think what's changed, the market is huge. The condition is progressive. There are loads of men out there that have BPH. I think the pressure in the office, Matt, as I look at it today is the real issue. If you go back to 2017, 2018, 2019, We were growing the market because we were using the office call point to bring men in from the drug dropout and the drug category.

Speaker 5

And we were able to convert those men during that period of time. With the change in reimbursement, with the patient flow, with the lack of staffing, That channel for now is challenged in pulling those men in and expanding the market. So I think that we need to get The office channel addressed and I just can't see that getting addressed in the next two quarters being totally honest. So I think it's going to take it some time to recover. Now having said that, this quarter we trained more docs Then we had the quarter before for a number of quarters.

Speaker 5

So docs are putting their hands up to get trained. The international profile is excellent. I couldn't be happier what's happening overseas. And domestically, I think that for the remainder of the year, I think it's going to do what I said it's going to There are a couple of green shoots. It was minus 5%.

Speaker 5

Last year, it was minus 5% in the Q1. It was minus 2.5% this quarter. So there's a couple of green shoots. There's some Positivity there, but I think that it's a challenge call point in that office right now with all of the factors that are playing into it.

Operator

Our next question will come from Craig Bijou of Bank of America Securities. Please go ahead.

Speaker 11

Good morning, guys. Thanks for taking the questions. So I wanted to start with some of the components of the LRP. And namely, Liam, I think you said that you now expect interventional urology, including Pallet, to grow at least 8%, which would mean underlying euro lift longer term growth Takes a step down. So I just wanted to make sure that that's correct and maybe what's driving that is that the sounds like it's the U.

Speaker 11

S. Side, but Maybe a little bit more color on what you see over the next several years for UroLift. And then also, standard bariatrics. So I know you expected some pretty good growth for the next several years. Just wanted to understand how we should think about That growth level in 2024, 2025 relative to what you had expected before?

Speaker 5

Yes. I mean, I think I'll start with the first part of your question. And your assumption in your math is I can't fault it. You're absolutely correct. But that's why I'm so confident in the 6% LRP.

Speaker 5

I'm not expecting any heroics. I'm not expecting anything from UroLift within the LRP right now. The international market is strong. If the domestic market recovers, it's great for investors, it's great for Teleflex and it's great for our LRP. The margin profile is strong.

Speaker 5

So in effect, in my mind, this basically takes UroLift off the table in regards to the LRP. With regard to standard bariatrics, like I said earlier, it's a huge market. Once we get through the VAC committees And the proctoring of the surgeons, our goal here is to continue With the performance of the product to continue to take our appreciated share in the bariatric sleeve market. Bariatric sleeve market isn't going away The GLP-1s, it's going to be there forever. There is a place for this.

Speaker 5

If you talk to any surgeons, they'll tell you that. So I do believe that it's going to be a meaningful contributor to the LRP for 2024 and 2025 as we grow into that huge market.

Speaker 11

Got it. And Just as a follow-up on 24, I know you guys aren't going to provide guidance or talk about what the Street has estimated, but Would love to hear any of the puts and takes that are going to affect 2024. Obviously, you have the Poet acquisition, Yes, the MSA rolling off. So I just want to ask you specifically on what we should be thinking about when we're thinking about 24 EPS and if maybe the messaging that you guys have given previously is not fully quite reflected in The Street's estimates.

Speaker 5

So, I'll let Tom comment on the EPS. I mean, I think you've hit the 2 main ones That I think the Street needs to think about. Obviously, the MSA, the $70,000,000 of revenue that goes away next year, then you layer in And that's at very low margins and has an impact on EPS of about $0.25 But then you layer in the Pallet acquisition. And of course, Pallet acquisition adds back in $56,000,000 of revenue on the base year and obviously then growing at high teens to low 20s. So Those are the puts and takes on the top line.

Speaker 5

And I'm not expecting Tom to We'll give you any real details about 2024 EPS, but I think those are the

Speaker 2

2 main ones, Tom, aren't they?

Speaker 8

They are. I will say that a couple of things that we're watching as well are Foreign exchange rates, which have shown a nice improvement recently, and so that should give us half year And we're also starting to see some improvements in the areas of inflation. So we're seeing our sea freight has already come back and Shipping times are improving dramatically, which will allow us to be able to do a couple of things, including bringing down our level of inventories, which will obviously help out cash flows as we continue to manage those down. But I think, yes, the Key things that are changing are the MSA, Pollet and then we're watching FX and inflation closely, but those could be Some tailwinds for us.

Operator

Our next question comes from Kristen Stewart of CL King. Please go ahead.

Speaker 12

Hi. Thanks for taking my question. Tom, I was just wondering on the bottom line, why just reiterate the guidance rather than tightening the range?

Speaker 8

Well, it's a fair question. As we think about what's happened is that We looked at all the puts and takes of the quarter and there are end of the year. And so if you think about what we've commented on, the PS range was really driven by adding in the incremental dilution from Pallet of $0.15 And then associated with the recalls in the second quarter, we had another $0.15 of expense. The FX, as I mentioned, Has improved and as a result of both second quarter and full year expected benefit that actually is an offset of And then the balance is a combination of improved operating performance in the second quarter and second half. So essentially, A number of changes since our last guidance that pretty much net out.

Speaker 8

As Liam commented, we are covering the dilution associated with the Paulette acquisition and still maintaining guidance. So we're effectively raising, if you will, from that standpoint that we're covering something new. But But as we continue to monitor the year, we'll look at it and reevaluate the range at the Q3.

Speaker 12

Okay. Thanks very much.

Operator

Our next question will come from Richard Newitter of Trust Truist Securities. Please go ahead.

Speaker 13

Hi. It's Ling on for Goodrich. So maybe I'm wondering if you could provide some color on the trends in your high growth portfolio, like including MANTA,

Speaker 5

As I said in my prepared remarks, MANTA continues to penetrate the market, is on track for real solid Double digit growth. If you look at the other areas of the high growth portfolio, we've discussed 2 of them already. And we would expect ex UroLift for the high growth portfolio to be well within those high single digit growth. I do want to take a moment on the durable core, if you don't mind. I think that the durable core has been performing really, really solidly.

Speaker 5

We've had excellent performance from OEM that was mentioned earlier, But Interventional Access has had a great performance as has Asia Pacific. And as investors familiar with Teleflex will be aware, both Interventional and APAC A very strong gross margins for the company. So the whole portfolio of Teleflex, we believe, is working really, really well From the durable core to the high growth, and we believe that for 2 quarters in a row, We called up our revenue forecast 2 quarters in a row and we have seen significant improvement From last year, think back last year, we grew 4.3%. Look at our guidance for this year, the midpoint houses at Almost 5.9%. So we've seen significant improvement.

Speaker 5

And again, this is the advantage of a diversified global company. Not everything is going to go the way you think. But when you add it all together, it all makes sense. And it's I think it's a solid performance. And the addition of Pallet is really going to help us.

Speaker 13

That's great. So maybe a follow-up on margins. Could you walk us through the cadence of gross margin, operating margin throughout the year? Thank you.

Speaker 5

You want the cadence of gross margin and operating margin throughout this year?

Speaker 2

Correct. Okay. I might ask Tom

Speaker 8

to cover that. Yes, absolutely. Well, I think, first of all, one thing that you may want to understand is just that FX A meaningful positive impact in the Q1, it turned slightly negative in the second quarter as It impacts gross margin. And then the 3rd Q4, we expect after the FX impact or I should say, we expect the FX Impact to be even greater to gross margins. So if you were to strip out the foreign exchange impact, what you'd see is a sequentially improving Gross margin throughout the year with a fairly sizable improvement from the 1st to the 2nd quarter and then again from the 3rd to the 4th quarter.

Speaker 8

If you were to maintain the FX in there, what you're going to see is a gross margin that It's about the same each quarter, a little bit softer in the 3rd, a little bit stronger in the 4th as what we experienced here In the Q2, we had a couple of puts and takes. Obviously, we had the recall expense. Foreign exchange, as I mentioned, was Modestly negative impact, but we also had favorable pricing and some credits from foreign countries that provided some benefit. So Overall, I would say that pay attention to how FX may play out. And if you were to strip that out, you'd see a sequentially improving gross margin.

Speaker 8

It's very similar on the operating margin. If you strip out the FX impact, you would see sequentially improving op margin throughout the year. Obviously, we do have to consider FX. And as a result, what you're going to see is by a little bit softer gross margin in the 3rd quarter and Something the same or a little bit stronger in the Q4 as what we saw in the second.

Operator

Our next question will come from George sellers of Stephens, please go ahead.

Speaker 14

Good morning and thanks for taking the question. I guess switching back to Paulette, quickly, with the 97% of your Lyft users that are also treating prostate Cancer and I believe you said 20% already use Baragel. Are they also already using a spacer product or is this more of a white space

Speaker 5

So there would George, great question. There would be a white space opportunity of about 60%. So in addition, in total, about 40% of them are using a spacing product of some sort, 20% of them using Barrigel. And so therefore, you would be left around 60% of white space. And again, I will reiterate, for us, this is not about attacking the other 20%.

Speaker 5

This is about attacking the 60%, educating the physicians on the benefits of using spacing, the benefits Baragel as a space are the ones I outlined already, and to remove that toxicity from other organs around the prostate. So it's really around white space, George, growing into an existing customer that we know, engaging with the radiology oncologists, which is An excellent call point for us to get into, where some of the product is used by those individuals. So really encouraged by that and I think it's a nice

Speaker 14

Okay. Thank you for that detail. That's really helpful. Switching to the OEM segment, this continues to really perform exceptionally well. And it sounds like you've got visibility to that continuing through the remainder of the year.

Speaker 14

But could you just give some additional detail on The pieces driving that outperformance and how should we be thinking about that sustainability over the LRP?

Speaker 5

Yes. I think, great question again, George. I think that's the beauty about the OEM business is right across the board. We've got a really strong double digit in the catheter business. We've got a really strong double digit in the suture business.

Speaker 5

We've got really strong double digit in the completed product business. And obviously, the complex catheters within those catheters are performing exceptionally well. It's right across the board. You're correct. We have great visibility to this business.

Speaker 5

This is one business where the customers Order well ahead in advance to make sure that they have capacity booked. And again, I think we have We're really encouraged by what we see. It is dilutive to our gross margins, but God is it accretive to our op margins. This is a great business for us and one that's performing exceptionally well With long visibility and if I could find another tuck in to put into OEM, we've got Capital available, I do it in the morning, because it's we've got solid growth within there and a really strong customer base.

Operator

That is all the time that we have for questions this morning. I would like to turn the conference back to Lawrence Kirsch for closing remarks.

Speaker 1

Thank you, JL, and thank you to everyone that joined us on the call today. This concludes the Teleflex Incorporated 2nd Quarter 2023 Earnings Conference Call.

Operator

You may now disconnect.

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Earnings Conference Call
Teleflex Q2 2023
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