Teleflex Q2 2021 Earnings Call Transcript

AlphaStreet
Provided by AlphaStreet
July 29, 2021
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Operator

Good morning, ladies and gentlemen, and welcome to the Teleflex, second quarter of 2021 Earnings Conference Call. [Operator Instructions]. And now I would like to turn the call over to Mr Lawrence Keusch, Vice President, Investor Relations and Strategy Development. You may begin, sir.

Lawrence Keusch
Vice President, Investor Relations and Strategy Development at Teleflex

Thank you. Dexter. Good morning everyone and welcome to the Teleflex Incorporated Second Quarter 2021 Earnings Conference Call. The press release and slides to accompany this call are available on our website at www.teleflex.com. As a reminder, this call will be available on our website and a replay will be available by dialing (800) 585-8367 or for international calls (416) 621- 4642 with the passcode 5188749.

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&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 our slides. 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 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-K, which can be accessed on our website. In addition, please note that while we have provided commentary about intra-quarter business performance during the recent earnings calls to provide additional details and insights around trends, we do not intend to provide such commentary on today's call or in connection with future earnings calls.

With that said, I'll now turn the call over to Liam for his remarks.

Liam J. Kelly
Chairman, President and Chief Executive Officer at Teleflex

Thank you, Larry, and good morning everyone. It's a pleasure to speak with you today. We are delighted with our second quarter performance, which exceeded the outlook we provided on the first quarter earnings call reflecting the company's resilient base business and innovative growth drivers, obsessed by varying degrees of COVID-19 challenges on a global basis. The majority of our global product families witnessed constant currency growth over the second quarter of 2019. As anticipated, we witnessed improvements in underlying utilization trends for the product categories most impacted by the postponement of non-emergent procedures. Most notably Interventional Urology, Interventional, and Surgical. We are encouraged with UroLift as momentum continues to build driving 26.0% constant currency revenue growth as compared to the first quarter of 2021. During the second quarter, our Americas, Asia, and OEM segments performed well with constant currency revenues growing over 2019 while EMEA is now back to 2019 revenue levels.

As we anticipated, Americas and Asia continue to recover more quickly than EMEA. Although uncertainties with COVID-19 remain, we continue to anticipate that our revenue performance will improve as we move through the remainder of 2021. For the second quarter, operating margin showed gains over 2020 and 2019 in comparable periods and was driven by gross margin and disciplined expense control. Our continued progress in margin expansion in 2021 has allowed us to increased directed investments towards growth drivers, which is an important component of our long-term strategy to enhance durable growth. Given the strength of the second quarter results, we are maintaining our constant currency revenue guidance, which now includes a $28 million to $32 million sales headwind from the June 28 initial close of the respiratory products divestiture that was not included in our prior guidance. Based on our outlook for the second half of 2021 and our margin improvement in the second quarter, we are increasing our 2021 earnings per share guidance to a range of $12.90 to $13.10 from a previous guidance of $12.65 to $12.85. We continue to execute our strategy to drive durable growth with investment in organic growth opportunities, margin expansion and deployment of capital for M&A.

Turning now to a more detailed review of our second quarter results:

Second quarter revenue was $713.5 million, an increase of 21% year-over-year on a constant currency basis and 6.8% over the comparable period in 2019. The year-over-year increase was driven by contributions from Interventional, Anesthesia Surgical, and Interventional Urology offset by unfavorable year-over-year comparisons due to higher demand for our Vascular Access and respiratory products in Q2 2020 associated with COVID-19. We are also pleased with our second quarter gross and operating margins with sequential improvements over Q1, strong performance. Q2 adjusted an operating margins set new high watermarks for Teleflex as a pure play medical device company, an encouraging sign for our longer-term profitability objectives. Second quarter adjusted earnings per share of $3.35 increased 73.6% and exceeded our internal expectations. The earnings outperformance reflects the recovery in healthcare utilization during the second quarter coupled with improved volume, modest price increases, and prudent operating expense management.

Overall, I am very happy with our second quarter financial performance, which demonstrate the importance of our diversified global product portfolio while also reflecting progress towards our longer-term margin aspirations.

Turning now to a deeper look at revenue results:

I will begin with a review of our reportable segment revenues and unless otherwise noted, the growth rates I will refer to are on a constant currency basis. Americas revenues were $414.8 million in the second quarter, which represents 31.8% growth year-over-year and 10.8% over the comparable period in 2019. Growth was driven by a rebound in procedures following the disruption of COVID earlier in the year, with particular strength in Interventional Urology, Surgical, and Interventional.

EMEA revenues at $157.1 million increased 8.4% year-over-year and was flat over 2019 levels. EMEA benefited from a favorable COVID related comparison as procedures improved year-over-year as countries across the region continued to open up.

Turning to Asia, revenues were $80.6 million, increasing 10.3% year-over-year and consistent with the performance seen in the first quarter of 2021. Asia was up 1.7% as compared to 2019. Importantly, we saw solid double-digit growth in China and high single-digit growth in Japan, more than offsetting declines in Southeast Asia.

And lastly, our OEM business, which accounts for roughly 9.0% of total sales increased 6.9% year-over-year to $61.0 million in the second quarter, OEM was up 6.0% as compared to the comparable period in 2019. Following a 17.1% decline in the first quarter of 2021, the business witnessed a rebound as customers stepped-up orders on signs of increasing health care utilization. We continue to expect a sequential improvement in growth through the second half of 2021, driven in part by incremental capacity.

Let's now move to the discussion of our second quarter revenues by global product category. Consistent with my prior comments regarding our reportable segments, commentary on global product category growth will also be on a constant currency basis. As a reminder, there were no meaningful differences in year-over-year, selling days in the second quarter.

Starting with Vascular Access, second quarter revenues decreased by 2.1% to $167.7 million although we are facing difficult year-over-year comparisons in Vascular Access due to the higher demand experienced in Q2 2020 associated with COVID-19, the performance of our innovative products remained strong. Our peak portfolio performed well with over 30% growth year-over-year. We continue to invest behind our differentiated peak portfolio and continue to expect share.

[Indecipherable] was also strong in the second quarter, with growth of 15.5% year-over-year.

Moving to Interventional, second quarter revenue was $112.1 million, which rose 30.9% year-over-year. The increase was due to a recovery in certain non-emergent procedures on a year-over-year basis. MANTA our unique large bore closure device grew 160% year-over-year, which keeps us well positioned to reach 8% share in 2021 out of a 200 to 300 million market opportunity.

Turning now to Anesthesia, second quarter revenue was $95.4 million, up 38.8% year-over-year. Z Medica contributed roughly 60% of the growth as the business continues to track to our $60 to $70 million revenue expectation for 2021, partly offset by lower sales of tracheostomy products. Excluding FX and the Z Medica acquisition underlying growth for Anesthesia in the second quarter was approximately 16% year-over-year. The integration of Z Medica is going very well and we are pleased with the progress we are making.

In our Surgical business revenue was $98.2 million, representing 39% growth year-over-year. Increase in revenues was driven by sales of our metal and polymer ligation clips and instruments as elective surgical procedures continue to recover.

For Interventional Urology, second quarter revenue was $92.2 million, an increase of 129.4% year-over-year and 35.6% over the second quarter of 2019 reflecting a move back towards more normalized growth. We are encouraged by the business trends with physicians remaining engaged in the use of UroLift in all care settings and patients increasingly seeking treatment for symptoms of BPH. Our DTC momentum remains solid and we remain comfortable in our 30% plus revenue growth objective for UroLift in 2021. And finally, our other category, which consists of our respiratory and urology care products declined by 9.9% to $86.9 million. The decline reflects difficult comparisons from the prior year related to COVID associated respiratory product demand in Americas and EMEA. That completes my comments on second quarter revenue performance.

Turning to some clinical and commercial updates: In the second quarter, we trained 118 urologists and remain on track to achieve our target to train 450 to 500 urologists in 2021. We continue to execute on our 2021 DTC program. For this year's campaign, we are optimizing our network selection refreshing the ads and working in conjunction with social media campaigns to augment the overall impact. Given the positive awareness from the DTC campaign, we have decided to make incremental investment in the second half of 2021 to tap into this under-penetrated market. We view DTC as a multi-year cavet for UroLift in the US as we are still in the very early innings of market adoption and patient awareness indeed UroLift is leading the way in minimally invasive treatment of BPH. And this is the first time in recent years that a BPH brand is reaching patients directly in a meaningful way. Turning now to UroLift 2 we are in a full rollout in the US, which is consistent with our timing expectations.

We continue to anticipate that the vast majority of physician customers will be converted to UroLift 2 by the end of 2022, paced by advantages in Visualization, reduced storage space, and increased manufacturing capacity we remain positioned to generate significant margin expansion as the revenue base is fully converted. Regarding Japan, we remain on track reimbursement decision in 2021 and view the approximate 2 billion addressable market as an incremental growth driver, that will be a positive catalyst for the foreseeable future. Our submission was not reviewed at the July MHLW meeting and we now expect a review in September with a launch in the fourth quarter of 2021. There is no change to our expectation for UroLift revenues in Japan to ramp up beginning in 2022 with modest contribution in 2021. On the US reimbursement front CMS published its proposed physician fee schedule for calendar 2022 on July 13. The proposed reimbursement rate for UroLift in the physician office setting were reduced by 19% to 21% year-over-year.

A couple of other points I want to make: First, the proposed payment reductions to office based procedures would not go into effect until January 1, 2022 and therefore do not impact our 2021 outlook. Second, the proposed reductions were broad-based across a range of office based procedures in a variety of surgical specialties and to not specific to UroLift. Third, we continue to view the strength of our clinical data, including the LIFT pivotal trial and real world studies as a differentiator versus other BPH treatment modalities and a driver of UroLift adoption between.

Our next steps: Teleflex will engage with key stakeholders during the public common period to reiterate the benefit of UroLift for the treatment of BPH. We would hope that CMS recognizes the importance of maintaining patient access to safe, effective, and less invasive procedures including UroLift in lower cost settings such as the physician's office.

We anticipate the final rules will be published during the fourth quarter 2021 separately, CMS published the proposed outpatient prospective payment system rates on July 19, these rates cover up facility payments for UroLift in the hospital outpatient and ASC settings in this case the proposed payments for UroLift increased by 3% approximately for 2022 versus 2021. investors familiar with Teleflex will know that approximately two-thirds of UroLift revenues are generated in the ASC and outpatient settings.

Turning to the next slide on a clinical update for UroLift: On July 9, the largest US Medicare and commercial claims analysis a full BPH procedures was presented at the European Association of Urology meeting. The study, which included reimbursement claims from 2015 to 2019 evaluated Surgical retreatment and post-operative complications endured by patients who underwent TURP, GreenLight laser Rezum and UroLift procedures. At 4 years after the index procedure Surgical retreatment rates were comparable for UroLift TURP and GreenLight laser and highest for Rezum, also at 300 days post-treatment overall complication rates were lowest after UroLift while Rezum had the highest rates these statistically significant results demonstrate the efficacy of UroLift as compared to other therapies for the treatment of BPH in real world settings. We will continue to bolster our body of clinical evidence, which should help to sustain UroLift as the leading minimally invasive procedure to treat BPH and address a multi-billion dollar global market opportunity.

Now, I will provide some background under respiratory divestiture: Consistent with our strategy to drive durable growth and disciplined portfolio review process, we completed the initial phase of the divestiture of a significant portion of our respiratory products to Medline Industries on June 28, the transaction generated $286 million in cash, $12 million in working capital, not transfered to Medline. As noted previously, the product lines that were divested generated $139 million in revenues in 2020. Looking forward, with the divestiture of the respiratory assets will improve our organic growth rate and margins over time and better positions us for internal resource allocation and a focus on our key growth drivers.

That completes my prepared remarks. Now I would like to turn the call over to Tom for a more detailed review of our second quarter financial results. Tom?

Thomas Powell
Executive Vice President and Chief Financial Officer at Teleflex

Thanks, Liam. And good morning everyone. Given the previous discussion of the company's revenue performance. I'll begin at the gross profit line.

For the second quarter adjusted gross margin totaled 29.9%, an increase of 600 basis points versus the prior year period. The increase in gross margin was driven by product and regional mix, benefits from cost improvement initiatives favorable impacts from pricing M&A and foreign exchange, partly offset by logistics and distribution expense. Second quarter adjusted operating margin was 28.2% for a 640 basis point year-over-year increase driven largely by the gross margin improvement as well as disciplined expense management and partially offset by investment in the business. With our revenue base improving and operational efficiencies, we delivered a more typical one to one drop through from gross margin to operating margin during the second quarter. For the quarter, net interest expense totaled $15.9 million, an increase from $15.5 million in the prior year period. As previously mentioned, in the second quarter, we issued a notice of redemption to holders of our outstanding $400 million aggregate principal amount of 4 and 7-eights senior notes due in 2026. The notes were redeemed on June 1 2021 and it was funded using borrowings under our revolving credit agreement and cash on hand. Our adjusted tax rate for the second quarter of 2021 was 14.4% as compared to 15.8% in the prior year period. The year-over-year decrease in our adjusted tax rate is primarily due to geographic mix shift of profits and a larger benefit from stock based compensation as compared to the prior year period.

At the bottom line. Second quarter adjusted earnings per share increased 73.6% to $3.35 included in this result is an estimated favorable impact from foreign exchange of approximately $0.16.

Turning now to select balance sheet and cash flow highlights for the first half of 2021 cash flow from operations totaled $265 million as compared to $134 million in the prior year period and represented a year-over-year increase of $131 million. The increase was primarily attributable to favorable operating results, lower contingent consideration payments, and lower payroll and benefit-related payments partially offset by unfavorable changes in working capital and higher tax payments.

Overall balance sheet remains in good shape. At the end of the second quarter, our cash balance was $361.8 million versus $375.9 million at the end of the fourth quarter of 2020. We paid down $5 million in debt during the second quarter and net leverage at quarter end was approximately 2.5 times.

Post quarter close, we made a $259 million payment against our revolving credit facility, using funds, primarily generated from the initial close of the respiratory business divestiture.

Now, moving onto 2021 guidance: Starting with revenue, we are maintaining our constant currency revenue growth guidance for 2021 of between 8.50% to 9.75% year-over-year. Of note, the strength in the second quarter sales results have allowed us to offset $28 to $32 million revenue headwind in the back half of the year associated with the respiratory divestiture, which was not contemplated in our prior guidance. As you contemplate your model adjustments. Note that the divested respiratory products are in our other revenue category. Please see the investor slide deck for historic revenues with divested respiratory products.

Key contributors to our 2021 constant currency revenue growth outlook, are expected to be Interventional Urology, Interventional, Surgical, and Anesthesia product offerings, where Interventional Urology, there is no change to our expectations for at least 30% growth in 2021. We continue to expect the acquisition of Z Medica to add $60 million to $70 million in sales in 2021.

Turning to currency: We expect foreign exchange rates will be a tailwind to reported revenue growth of approximately 2% as a result, we continue to expect our as-reported revenue to increase between 10.50% to 11.75% over 2020 and this would equate to $1.00 range of between $2.804 billion and $2.835 billion.

Now for some commentary on our margin outlook: We are increasing our adjusted gross margin guidance for 2021 to a range of between 59.25% and 59.75%, representing a raised from the prior guidance of 100 basis points at the low end and 50 basis points at the high end. We expect gross margin expansion to be driven primarily by a favorable mix of high margin products including Interventional Urology, Interventional Access, and Surgical, as well as from manufacturing productivity improvement programs and benefits from previously announced Footprint restructuring programs, partially offset by inflation. There is no change to our expectation that the acquisition of Z Medica will add approximately 50 basis points of gross margin for 2021. For adjusted operating margin, we are increasing our 2021 guidance to a range of between 26.75% and 27.50% representing a raise from the prior guidance of 75 basis points at the low end and 50 basis points at the high end. The increase in adjusted operating margin will largely come from the gross margin line and leverage. Partially offset by the expected increase in spending in the second half of 2021 as we progress towards a more normalized environment as well as incremental strategic investments in UroLift and MANTA.

Moving down to P&L: We now expect interest expense to be in the range of $60 to $62 million for 2021 versus our previous guidance of $61 to $63 million. The decrease in interest expense largely reflects the reduction in debt funded by proceeds from the respiratory divestiture.

On taxes, we continue to expect our adjusted tax rate will be in the range of 13.0% and 13.50%. Considering all of these elements, we are raising our adjusted EPS outlook for 2021 to a range of $12.90 to $13.10 that represents a 20.9% to 22.8% year-over-year increase. We're pleased to be able to increase our earnings per share guidance by $0.25, while also covering the $0.10 to $0.15 of EPS dilution from the respiratory divestiture that was not reflected in our prior outlook.

And that concludes my prepared remarks, I would now like to turn the call back to Liam for closing commentary. Liam?

Liam J. Kelly
Chairman, President and Chief Executive Officer at Teleflex

Thank you, Tom. In closing, I would highlight our 3 key takeaways from the quarter. First, we delivered a strong second quarter with top and bottom line performance that outpaced our expectations laid out on the Q1 call. Second, we remain encouraged by our growth trajectory with the majority of our global product families posed in constant currency growth over the second quarter of 2019. Third, we maintained our revenue outlook and raise our adjusted margin and earnings per share guidance for 2021 despite headwinds associated with the respiratory divestiture that was not contemplated in our prior guidance.

In closing, we feel good about our solid performance in the quarter and our future growth opportunities when considering the early third quarter close of the respiratory divestiture, our leverage reached 2.3 times, which places us in a positive position with respect to flexibility on our balance sheet.

We will continue meeting our commitments to patients, clinicians communities, and of course our shareholders. That concludes my prepared remarks.

Now I would like to turn the call back to the operator for Q&A.

Skip to Participants
Operator

Thank you. [Operator Instructions]. And your first question comes from the line of Matt Taylor your line is open.

Matt Taylor
at Teleflex

Good morning. Thank you for taking the question. So firstly, I just wanted to ask you about the UroLift trends that you're seeing, if you could describe any trends during the quarter. And then just talk about your confidence to reiterate the guidance for UroLift through the year. And any color on the cadence that we should expect for the RAB for the year.

Liam J. Kelly
Chairman, President and Chief Executive Officer at Teleflex

All right. Not Matt, absolutely and thanks for the question. Now Matt, we are not going to get into inter-quarter details on this quarter is Larry outlined in opening comments. What I will tell you that first of all, we're really pleased with what we saw in UroLift in Q2. We are positively reaffirming our growth expectations at plus 30% for UroLift and we are really pleased with the growth in the quarter of nearly 130% and sequentially quarter-over-quarter plus 26%. Investors familiar with UroLift will recall that UroLift grew around 30% days adjusted in Q1 versus 2019. And in Q2 that growth versus 2019 actually accelerated to around 36% and we continue to expect the total dollar revenues for UroLift to continue to improve in Q3 over Q2 and again in Q4 over Q3. So a good positive message on UroLift Matt.

Matt Taylor
at Teleflex

Thanks Liam. And could you just comment on your overall thoughts on the reimbursement change and talk about your efforts there to get a different outcome in the final rule. And what would happen. I guess the worst case scenario is stiff and you do have these cuts in the office.

Liam J. Kelly
Chairman, President and Chief Executive Officer at Teleflex

So, to be honest, Matt. We're looking forward to engaging with CMS to better understand what their objective was in making such broad-based reductions to over 600 surgical procedures that are performed in the office setting. It will be our goal is to demonstrate both the excellent clinical data that supports UroLift and the healthcare economic data, which is also very compelling. I'm sure they will be attentive to the potential unintended consequence of some procedures being moved to higher costs of care settings.

We believe that the timing of this change, as it is being proposed may be ill advised at a time when most government bodies are trying to promote procedural return post COVID and they are promoting that return to lower cost settings where the patient also views that lower cost setting as being a less risk setting of contracting COVID. So our plan is to engage with the key stakeholders, including other device industry trade groups, Physician Associations, and patient advocacy groups. I think our strategy will depend on the final ruling math as to what decisions that we will take and moving forward. And we believe that CMS will listen, given that there is such a broad comments going to land in regards to this particular ruling.

Operator

Next question is from Cecile with Morgan Stanley, your line is open.

Cecilia Furlong
Analyst at Morgan Stanley

Hi, good morning and thank you for taking the questions. I wanted to continue with UroLift we're just curious. Could you talk about just users trained on UroLift during COVID what you've seen from recent contributions as well as any trends, in your offsite of service and then also just what you're expecting from DTC contributions in the back half of this year?

Liam J. Kelly
Chairman, President and Chief Executive Officer at Teleflex

Yeah. So thanks Cecile. So regarding site of service you know about 30% of procedures have traditionally been done in the office, with the remainder done outside of the office in the AFC and the hospital. As we went through COVID which is the other part of your, of your question. We saw a slight increase in office procedures. And as we come out to the other side of COVID we see that normalizing again and getting back to that more normalized level.

With regard to the DTC, we were really encouraged by the performance of DTC so much so that we've actually increased the investment done in the back half of the year, we had anticipated that we would have about 125% of the impressions in 2021 versus 2020 with this increased investment.

Now, we would think that would be a 150% plus the number of impressions that we're going to gain. I was actually spent a week on the road with the sales team meeting urologists and I met over 20 urologists all and this is only anecdotal and I get that. But all bar one urologist was able to tell me that they've had people turn up into their practice, whether it'd be a hospital AFC or an office, referring to the ad that they saw on television or hit them on Facebook and asking the urologist about UroLift based on that. So that is very encouraging and we continue to see it as an excellent is the return on our, on our investment and therefore we are spending additional dollars in the back half of the year.

Cecilia Furlong
Analyst at Morgan Stanley

Great, thank you. And then just on gross margins as well. There is second half. Could you comment on what is in vide for either. Is it UroLift 2 conversion, or OEM contributions, as well as geographic mix? thank you.

Liam J. Kelly
Chairman, President and Chief Executive Officer at Teleflex

So I'll just touch on UroLift and then I'll ask Tom to comment. So we anticipate the UL2 conversion being completed by the end of 2022 we're in full ramp. Now as we go towards the back end of the year. I'm pleased to confirm that we still anticipate that we will pick up full percentage points of margin from that conversion to the UL2 and and therefore that would add about 40 basis points of the total of Teleflex, so you'll begin to see some of the conversion, as we go through the back end of the year Cecile but you'll see the majority of come through in 2022 and Tom might answer some of the cadence of gross margins if you don't mind, Tom.

Thomas Powell
Executive Vice President and Chief Financial Officer at Teleflex

Sure. Well, I think there is some question about OEM and in other geographies. So as we look at the OEM business. We had a soft first quarter with a nice recovery in the second quarter. So we really saw improving trends there as customers began seeing improvements in procedures and began ordering again. We expect that to continue through the balance of the year.

Then in terms of the various geographies, as we said all along. Our expectation was that the North American region would recover first for the Americas of the cover first followed by Asia and have made and that's still kind of playing out as expected, so we expect all regions to continue to show improvement in the back half of the year relative to the first. But perhaps the Americas, a little bit stronger than some of the others. And then in terms of the overall gross margin. I'd say that, overall, we're really encouraged by what we've seen in the first half of the year, allowing us to take the guidance up at the, at the upper end of the guidance range. We're at 59-3/4 quarters, which is slightly ahead of where we were for the first half of the year. So we are really encouraged by what we're seeing and we're cautiously optimistic about about the back half.

Operator

And we have a question from Shagun Singh with Wells Fargo. Your line is open.

Shagun Singh Chadha
Analyst at Wells Fargo Securities

Great, thank you so much for taking the question. I guess the first one is on UroLift reimbursement. Could you talk about the potential face in of the office rates. It does appear that changes to the labor codes may go into effect, but it may be phased in over a four-year period. Firstly, that your expectation. And secondly, what impact do you expect this to have on procedures in the office setting and your ability to move them to more comfortable settings over time and then even with respect to physician payments, [Indecipherable] setting. I believe it's about 6% in addition to the cuts in the office setting. What impact do you expect that to have on utilization in those settings? And then I have a follow up.

Liam J. Kelly
Chairman, President and Chief Executive Officer at Teleflex

Okay. Shagun. And so, we're really focused on what we can control. Right now, so we are expecting that we'll spend a lot of time working with the key stakeholders in this comment period. I don't want to start second guessing the results to be honest Shagun because depending on the outcome of the final ruling that would depend on one strategy. We're going to continue to work with CMS. Some of our, our industry bodies, patient advocates organizations and obviously there are clinicians themselves putting through comments to CMS in regards to this reimbursement with regard to the site of service. I mean there is a certain amount of flexibility there for physicians and many of the urologists would have part of their workload would be in an office environment perhaps in an AFC, and it's not uncommon for even part to be in a hospital. So that does give the physician to certain amount of flexibility. I believe that CMS will be open to comment period and I believe that they will listen to what all of these individuals have to say with regard to this. With regard to the AFC and the hospital reimbursement, I mean we're very encouraged by that. Overall, is the 3% increase. Again, this will come into effect on January of 2022 Shagun, so actually no impact on anybody until the end of the year and again it was broad based. So there's 600 procedures that are impacted by this Shagun and so you can imagine there's going to be a significant amount of comments during that comment period and you had a second question, Shagun I believe.

Shagun Singh Chadha
Analyst at Wells Fargo Securities

Yes. So. thank you for that. So just with respect to Q3 at the second half of 2021. I was just wondering if you could talk us through the cadence, it doesn't appear that Q3 sales that could be below Q2 levels. EPS is just modestly up. So what are your thoughts on that consensus currently standards, especially with respect to UroLift? I think last I checked consensus was looking for about 105 thank you.

Liam J. Kelly
Chairman, President and Chief Executive Officer at Teleflex

Yeah. So things are kind of playing out as we expected Shagun, the recovery has been led by the Americas and Asia and Europe are lagging. So I'll start with overall Teleflex so and this COVID has not gone away and we're monitoring the situation very closely and I. for what it's worth, will add my voice of encouragement for people to please get vaccinated. The key here is getting people vaccinated because the second there are third or fourth wave we're on now is not impacting, those that are vaccinated and not impacting geographies where people I have vaccinated. So we remain cautiously optimistic and we're very encouraged by the trends that we saw from Q1 to Q2 and we expect the stability of Q2 to continue and that has given us the confidence to maintain our full year revenue guidance despite the respiratory divestiture headwind in any of the language that would be seen in the call up of between $28 and $32 million on the revenue and obviously a significant a call up on our EPS as well. So for overall Teleflex what I expect is our growth to accelerate in the back half of the year versus the first half, we grew 8.6% constant currency in the first half of the year. If you take the midpoint of our revenue guidance range, inclusive of the 4.6% divestiture headwind that would imply acceleration in the second half to 9.6%, inclusive of that if you exclude the divestiture headwind. It's about 11.2% in the back half versus the 8.6%. So full year, we have effectively has had raised our revenue guidance and our strong EPS and this is the second quarter again as investors will know that we have raised both our revenue and EPS.

With regard to UroLift as I said a few moments ago, I expect the absolute dollar values of UroLift to increase in Q3 versus Q2 and again in Q4 versus Q3. In that regard. So thank you for the questions Shagun.

Operator

We have a question from Matthew O'Brien with Piper Sandler. Your line is open.

Matthew O'Brien
Analyst at Piper Sandler Companies

Good morning. And thank you for taking the questions. And I'm going to stick on UroLift as well for give all the questions here, but Liam, there's a proposal for down roughly 20%. In addition to of that you talked about if it ends up being down 10% in the final rule. Would you have to cut your price and by how much in that setting. And then do you think clinicians will start to deploy last staples per case if that were the situation?

Liam J. Kelly
Chairman, President and Chief Executive Officer at Teleflex

So would have no impact on the number of staples Matt because the [Indecipherable] for staples and the other done is for all additional staples thereafter. So it wouldn't and it's the cuts have been defined across the board on all of the different categories. I think that we will assess what we will do once we get the final ruling obviously a 10% reduction is a lot less draconian than a 20% reduction. But one would imagine that common sense will prevail. If you look at what CMS did in the prior ruling, they added a COVID impact of about 3.50% and speaking with the members of the key associations their expectation was that that would be removed in this ruling and nothing more than that. So we'll see how it plays out, but I don't see it having a significant impact or having to make all any changes to our overall pricing structure because we have strength in all care settings in the AFC, in the office, in the hospital and in all of those areas. So we probably have an advantage with that certain amount of flexibility Matt that other companies don't.

Matthew O'Brien
Analyst at Piper Sandler Companies

Got it. Very helpful. And then the follow-up is on I think competitive side of things, I would just love to get your view on surgical robots for BPH and the pros and cons of that, is that an area that you think you need to eventually have a presence in?

Liam J. Kelly
Chairman, President and Chief Executive Officer at Teleflex

Yeah, there is one out there. The pro separable about out there. Matt, the-- it is getting some utilizations robots are seen as being somewhat easy right now, but it's really treating TARP and what we hear in the feedback is it requires a secondary procedure because it doesn't use heat, it actually uses the jet of water and when you use water, it doesn't coagulate because you don't have any heat to stop the bleeding. So, therefore, it requires a second procedure by the surgeon to go in afterwards and stop the bleeding. And In a recent podiums speech that was raised by a number of urologists and in their pivotal trial, there were a number of patients that had to had blood transfusions where there were issues with excessive bleeding. So I think it's-- I don't see it as really a treatment for BPH or the technology that's going to impact on UroLift and our clinical data is rock solid. It's ours the minimally invasive procedure, no catheter, no sexual dysfunction and we have a, large bowl of trained physicians that are rolling out UroLift so we're aware of it Matt, but I don't see it as the need for us to get into robotics would be the direct answer to your question.

Matthew O'Brien
Analyst at Piper Sandler Companies

Great, thank you very much.

Liam J. Kelly
Chairman, President and Chief Executive Officer at Teleflex

Thanks, Matt.

Operator

The next question is from Mike. Your line is open.

Michael Stephen Matson
at Teleflex

Yeah, hi, thanks for taking my questions. I have another one on the UroLift reimbursement. So I think you said around 30% of the procedures were being done in the office setting. So I guess what I was wondering is, what was the growth in that setting. I mean is that a bigger contributor to growth or has kind of been growing in line with the rest of the business?

Liam J. Kelly
Chairman, President and Chief Executive Officer at Teleflex

So thanks for the question, Mike. There has been growing in line with the rest of the business during COVID there was a little bit of a shift to more procedures to the office. But that's the only impact that you could take into consideration, but very much in line with our other sites of service in the business.

Michael Stephen Matson
at Teleflex

Okay. So it's not like the the reimbursement level was creating some significant incentive to do more procedures in that setting or something like that. Right.

Liam J. Kelly
Chairman, President and Chief Executive Officer at Teleflex

No, the UroLift was profitable in all sites of service and I said earlier, that's an advantage that we have over almost every other treatment modality. We have flexibility, whereas others don't. And again, it's 30% of the procedures in approximately 70.0% of those, of that 30.0%. Mike is Medicare mitigate.

Michael Stephen Matson
at Teleflex

Okay, got it. And then my second question which is be on pricing. I don't know if you quantify the pricing benefit but I guess, just stepping back in terms of pricing, just given what's happening in the broader economy with inflation and things like that. Do you think it's getting any maybe any easier to get some pricing increases to their products.

Liam J. Kelly
Chairman, President and Chief Executive Officer at Teleflex

So Mike, I've been doing this a long time and I can tell you I can count on no hands, no fingers. no toes, the amount of times the customer call me up and ask me for a price increase. And so it's a tough environment, always looking for pricing. But as I said on the last earnings call, we got out ahead of this early, we anticipated that there might be some movement in price momentum and we had about 20 basis points of positive pricing in Q1 that actually accelerated in Q2, we took some additional opportunities in Q2 and we continue to view that very closely. On the other side of the ledger, on the inflation side, we feel we have that very much under control within our, --in particular in our global supply chain. Any inflation that we saw it begin last year in transportation and that was already in our run rate and we saw some modest inflation in some of our resins. But it was pretty, it's been very manageable and we're going to get more than offset it with really positive pricing and building momentum in the quarter with that positive pricing.

Michael Stephen Matson
at Teleflex

Okay, great. Thanks.

Liam J. Kelly
Chairman, President and Chief Executive Officer at Teleflex

Thanks, Mike.

Operator

[Indecipherable].

Anthony Charles Petrone
at Teleflex

Hi, great, thanks. And I want to say congratulations to Larry. On the new role at the company. Couple of questions here, one Liam is just the overall procedure backlog sort of environment. A lot of chatter on that this earnings season certainly hard to quantify, but as you look across the portfolios is there any way to sort of view how much deferred procedure backlog is still out there and perhaps which segments with a benefit most into the back end of the year, and I'll have one follow-up.

Liam J. Kelly
Chairman, President and Chief Executive Officer at Teleflex

So, Anthony. Thank you for acknowledging, Larry. We're happy to have them on the Teleflex ship. Regarding the backlog, it's hard for us to quantify in all transparency, there has to be a backlog of procedures out there because for almost a year. There were very few procedures done and I think that any backlog of procedures will be dependent on site of service and customer confidence in coming back. So therefore, again back to the CMS decision that I mentioned, this would not be. I think the most appropriate time to make that change that they're talking about because patients themselves see an office or an AFC environment is a much safer place to go and get a procedure done and it's a lower cost side of service for the person, getting them, but I would imagine that there has to be backlog in particular in our UroLift business, there has to be a backlog in our surgical business and there has to be a backlog on our Interventional business, it's hard for us to map out, I don't think we've seen much of it yet, aren't any come through the system because there just isn't that additional capacity in the half. In they're probably going to do some of those more acute procedure first, we're not baking heat that in any significant backlog into our thinking in the back half of the year. I can tell you.

Anthony Charles Petrone
at Teleflex

Okay. And then the follow up would be on on UroLift in, I'm just going to sneak one in a month or so on UroLift. Can you just level-set on how many procedures your active users are doing on a monthly basis and the average number of implants, we're assuming it's still 4.5 implants and then that was a breakout. Just some color on it. Was that new center usage share gain or just kind of a rebound from backlog. Thanks again.

Liam J. Kelly
Chairman, President and Chief Executive Officer at Teleflex

Yeah. So I'll start with the UroLift, so the UroLift, the average still is about 4.5 implants. And as we recover out of COVID were just around that that for procedures per average urologist. With regards to MANTA, we continue to see MANTA grow it had an outstanding quarter. And the areas that we're seeing procedures come in is still predominantly in that TAVR area, about 84% of them were in TAVR in that quarter consistent with Q1 but 11.0% in EVAR and a modest 40% in PVAT. So we continue to train physicians, we're penetrating more accounts and it is one of the areas Anthony that we're going to put some investment in the back half of the year because we want to actually train more Interventionalists and we see this is an as future catalysts for Teleflex growth, good solid sustainable growth for the company like Teleflex and you should expect to see us put more feet on the street in doing more additional training and bring more docs on at a faster pace.

Operator

Thank you. Next is from Richard Newitter from Leerink Partners. Your line is open.

Richard S. Newitter
at Teleflex

Hi, thanks for taking the questions. I just had a couple of hit more here on UroLift. I know it's got a lot of attention, but I think it's important. First is on price, what are your options Liam? The price differentiate by care setting. If you had, you just, is there a way to use rebates where you keep pricing and one setting at one level. And then if you needed to keep to keep the doctor hold should there be any cuts. And then I have a follow-up.

Liam J. Kelly
Chairman, President and Chief Executive Officer at Teleflex

Yeah, Rich, obviously with the finer pricing strategy once we get the final ruling but to answer your question, yes, we have flexibility based on site of service and based on the individual contracts that are in existence. So that flexibility remains with us. As you know, we are not a price reducing company and I never have been and it is not our intention to be that. It is our expectation that we will maintain our overall average selling price for all of our product categories. But we do have a certain amount of flexibility to answer your question directly.

Richard S. Newitter
at Teleflex

That's helpful and then just maybe two quick ones here. So on the third quarter commentary, especially with respect to UroLift feel free to answer. Total company as well. I just, if you look at the UroLift ramp the consensus is that I think someone mentioned $103, 1$04 million, a sequential improvement off of [Indecipherable]. It leaves a wide range between the possibilities of where consensus is, and what that could mean. I think it will be helpful for investors to just give a sense relative to the consensus, is it just right a little conservative little too aggressive for the ramp. I think any color there would be helpful. And then. While I have you just on Japan. Is there any Japan contribution assumed in that 30% for the back half of the year. What's definition of modest and how do we think about a year one kind of contribution case for Japan. When and if you get approval for reverse and thanks.

Liam J. Kelly
Chairman, President and Chief Executive Officer at Teleflex

So let me start and Rich, because I'm not going to comment on consensus. So on Japan we modest means modest Rich, we have a very modest amount of dollars in the quarter 4 number for UroLift. It's a $2 billion market, the only predicate we have for a ramp is what happened in the United States and think of Japan is about a third of the size of the United States market and what happened in the US in the very first year we did buy them, we did 16 and then we had 50 and once you had built that base of $50 million, then it accelerated to over $100 million then $200 and $300 so on so forth.

Now Japan has an advantage in that it's a single-payer market. So once we get reimbursement, we can sell it all sites of service it is also the conservative market. We've already identified the 20 top key opinion leaders in order to start driving adoption and the way it works there it's quite hierarchical, once you get those key opinion leaders, you get them training speaking on the podium, then it will start to trickle down to the other urology practice, we will start in the tertiary hospitals, they are the key thought leaders and build it out from there and we give a lot more detail on the size of the different markets in Japan and other geographies that we're intending on the tagging once we get our Investor Day later in the year. I will say that we will be in Japan, before any of our competitors will get there we're well ahead of the market in regards to that. And we also believe will be in the China market, well ahead of any of our following competitors. So, we have time to build a market, make this a standard of care. That's also an advantage compared to the US because as you know, both competing technologies Rezume and UroLift were in the market around the same time, actually Rezume was probably there just a little bit before, and back to the UroLift rather than talking about the consensus, I'll just reiterate what I said earlier, Rich, we expect sequential improvement in absolute dollars in Q3 over Q2 and in Q4 over Q3. Thank you.

Operator

[Indecipherable]

Matthew Mishan
at Teleflex

Good thank you for taking the questions. I'm a bigger picture question, what is your sense of why CMS can make these changes, specifically to the physician office and then how many, how feasible is it for 30% of the procedure that you're talking back to just switched from a physician office to an ASC setting.

Liam J. Kelly
Chairman, President and Chief Executive Officer at Teleflex

So I think Matt just don't ever forget that first of all urologists duty of care is for the patient and they will do the right thing by the patient and give the best procedures of that patient. So I think the one thing to make note of is that UroLift is a minimally invasive procedure instant relief, no sexual dysfunction, no side effects and the patient will not have to to wear a catheter in the event that --once they have the procedures. So we made it an easy decision for the clinician to actually pick UroLift over any of the technology and that's why we are the dominant player in the space.

With regards to shift site of service, I don't think we're, once we get the final rule, I'm hopeful that once we get the final ruling that that may become a mute point as to shifting site of service from one area to another in that regard, and I think the motivation behind CMS is difficult for me to ascertain at this stage in all transparency and, but we will engage with them and as we engage with them we will obviously listen to what they have to see, and that's what I said earlier on, we need to understand what their motivation because it is not clear to us at this stage what drove this change on 600 surgical procedures performed in an office.

Matthew Mishan
at Teleflex

Fair enough. And then for Tom, just on the margin profile that's an effectively a major change first half versus kind of what we were thinking. Are you managing costs effectively here is it mix or this is a structural improvement towards your previous long-term targets on higher sales.

Thomas Powell
Executive Vice President and Chief Financial Officer at Teleflex

So, I would say, as we think about the margin improvement in the guidance. I think that's what you're asking is, what's driving that, is that, yes, we obviously are managing expenses and costs. But I would say that, really what we saw is very nice. I would say manufacturing efficiency throughout the first half of the year with the expectation that will continue into the back half of the year. We've also seen a lot of the businesses recover from their COVID kind of depressed levels and those businesses that recovered well are some of our higher-margin brands. So we saw our Surgical, our Interventional -- Interventional Urology all move upwards in terms of their recovery and that helped drive the margin as well. If you think about just kind of a first half-second half, we do expect in the second half of the year that there will be incremental expense associated with running the business as we continue to see our business and really the industry returns to more of a normalized state. We expect our people to be out traveling more. We expect to resume hiring etc. And so we will see if some additional operating expenses in the second half of the year relative to the first half and we also have some investment. As we mentioned we've put some investment into the plan that's incremental to what we previously had and that's behind UroLift as well as MANTA. So I would say that overall we're really encouraged by gross margin and where that's going. And then based on the success in the first half of the year it affords us the opportunity to put little more investment in the back half.

Operator

[Indecipherable].

Liam J. Kelly
Chairman, President and Chief Executive Officer at Teleflex

Thank you. Dexter and thank you to everyone that joined us on the call today, we appreciate it, this concludes the Teleflex Incorporated Second Quarter 2021 Earnings Conference Call. Have a good day.

Corporate Executives
  • Lawrence Keusch
    Vice President, Investor Relations and Strategy Development
  • Liam J. Kelly
    Chairman, President and Chief Executive Officer
  • Thomas Powell
    Executive Vice President and Chief Financial Officer
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