Teleflex Incorporated (NYSE:TFX) Q4 2022 Earnings Call Transcript

Teleflex Incorporated (NYSE:TFX) Q4 2022 Earnings Call Transcript February 23, 2023

Operator: Good morning ladies and gentlemen and welcome to the Teleflex Fourth Quarter 2022 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode. At the end of the company’s prepared remarks, we will conduct a question-and-answer session. Please note that this conference call is being recorded and will be available on the company’s website for replay shortly. And now I’ll turn the call over to Mr. Lawrence Keusch, Vice President of Investor Relations and Strategy Development.

Lawrence Keusch: Good morning everyone and welcome to the Teleflex Inc. fourth quarter 2022 earnings conference call. The press release and slides to accompany this call are available on our website at teleflex.com. Please note that webcast viewers have the ability to advance the presentation slides on their own. Simply follow along with the presentation as we proceed through the call. As a reminder a replay will be available on our website. 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&A.

Before we begin I’d like to remind you that some of the matters discussed in the conference call will contain forward-looking statements regarding future events as outlined in the slides posted to the Investor Relations section of the Teleflex website. We wish to caution you that such statements are in fact forward-looking in nature and are subject to risks and uncertainties and actual events or results may differ materially. The factors that could cause actual results 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 included in our Form 10-K which can be accessed on our website. During this conference call, you will hear management make statements regarding intra-quarter business performance.

Management is providing this commentary to provide the investment community with additional insights concerning trends and these disclosures may not occur in subsequent quarters. With that said, I will now turn the call over to Liam for his remarks.

Liam Kelly: Thank you, Larry and good morning everyone. For the fourth quarter, Teleflex revenues were $758 million, a year-over-year decline of 0.5% on a reported basis and an increase of 3.7% on a constant currency basis. Compared to the prior year period, revenue under the manufacturing and supply transition agreement associated with our prior divestiture of our Respiratory assets negatively impacted growth by 0.6% in the quarter, implying underlying constant currency growth of 4.3%. Adjusted earnings per share declined by 2.2% year-over-year to $3.52. In reviewing the quarter, our fourth quarter constant currency revenue growth remained durable despite an unexpected subcomponent supply chain issue in our Surgical business that resulted in an approximately $3.5 million headwind during the quarter.

The solid performance in the quarter continues to demonstrate the benefits of Teleflex’s diversified portfolio that has been purposely built to target the care of critically-ill patients. Of note, our Interventional Surgical and OEM product categories generated double-digit constant currency year-over-year revenue growth during the fourth quarter. Encouragingly, we witnessed improving monthly growth on a sequential basis with December representing the strongest month of the quarter as health care utilization continues to normalize. From a geographic perspective, Asia generated strong results and continues to be an important growth driver for Teleflex. Raw material inflation and supply chain challenges remained headwinds for the business during the fourth quarter.

Tyvek continues to be in short supply and has primarily impacted our Vascular and Interventional businesses. Turning to the full year of 2022. When adjusting for the divestiture of the Respiratory assets and one less shipping day, constant currency revenue growth was 4.3% for 2022 as healthcare utilization improved through the year and demand for Teleflex products accelerated. Our high-growth revenue portfolio maintained momentum across the majority of growth drivers. Although UroLift constant currency revenue declined 5% year-over-year in 2022, the remainder of products in the high-growth portfolio continued to show healthy gains with approximately 14% constant currency growth for the year. Moving over to durable core revenues. In 2022, durable core revenue grew approximately 5% on a constant currency basis as compared to the prior year period, reflecting improvement in procedural volumes, strong global execution, new product introductions and positive price.

Our other category which includes our Respiratory and drainage catheter business as well as revenue from the MSA, we entered into with midlines in connection with the sale of our respiratory business declined just under 10% year-over-year in 2022. Now, let’s turn to a deeper dive into our fourth quarter revenue results. I will begin with a review of our geographic segment revenues for the fourth quarter. All growth rates that are referred to are on a constant currency basis unless otherwise noted. Americas revenues were $458 million which represents 1.7% growth year-over-year against a tough comp in the year ago period. Excluding the impact of the year-over-year decline in MSA sales, Americas revenue grew 2.7% in the quarter. Interventional and Surgical recorded double-digit growth offset by declines in other areas of the business including Interventional Urology.

EMEA revenues of $147.8 million increased 1.4% year-over-year. We continue to see procedure volumes improve year-over-year. Now turning to Asia. Revenues were $78.5 million increasing 13.3% year-over-year. We saw strength across the region with all geographies posting solid growth during the fourth quarter. China growth approached 7% despite COVID-associated disruptions towards the end of the quarter. Let’s now move to a discussion of our fourth quarter revenues by global product category. Commentary on global product category growth for the fourth quarter will also be on a constant currency basis. Starting with Vascular Access. Revenue increased 0.5% to $186.4 million. As we anticipated, the performance in the quarter demonstrated a return to growth for Vascular Access despite a tough comp per central venous catheters due to the year-over-year reductions in COVID patients in intensive care units in the United States.

Although we made sequential progress on back orders, supply chain is still not yet back to normal. As previously discussed, the vascular business has the greatest exposure to Tyvek packaging for our kits and trays. Tyvek shortages are anticipated to improve in the second half of 2023, as additional supply for the industry comes online. Over the long-term, we remain confident that our category leadership in central venous catheters and midlines along with our novel coated PICC portfolio continued to position us for dependable growth. Moving to Interventional Access. Revenue was $125.1 million, up 13.4% year-over-year. We saw sequential improvements in constant currency revenue growth through 2022 as procedures moved back to pre-pandemic levels.

In the quarter, our diversified portfolio served us well with Balloon Pumps, OnControl and MANTA all contributing to growth. Turning to Anesthesia. Revenue was $99.6 million up 2% year-over-year. Of our larger franchises hemostatic products, LMA single-use masks and endotracheal tubes all had strong performances in the fourth quarter, partially offset by regional anesthesia. In our Surgical business, revenue was $110.4 million representing another solid performance with 10.4% growth year-over-year, despite the aforementioned supply chain disruption due to a specific subcomponent supplier. Among our largest product categories, skin stapling and our ligation portfolio contributed to growth. In other developments, we closed the acquisition of Standard Bariatrics early in the fourth quarter and Titan Stapler revenue drove a significant portion of the year-over-year growth in the Surgical business.

For Interventional Urology revenue was $89.2 million, representing an increase of 13.1% sequentially and a decrease of 3.6% year-over-year. Interventional Urology continued to be impacted by a year-over-year decline in patient visits to urologists and staffing shortages. Although, the overall environment for elective BPH procedures has not yet returned to normal, there were signs of improvement during the fourth quarter. Third-party data indicates that overall patient business to urologists were down in the 3% to 4% range year-over-year in the fourth quarter, which marks a sequential improvement from the high single-digit year-over-year decline witnessed in the third quarter of 2022. OEM revenues increased 12% year-over-year to $73.7 million despite a very difficult comparison to last year.

Our order book remains well positioned, as customers recognize our broad competencies with competitive capabilities, including fast growth markets for thin walls interventional microcatheters to access small vessels and fine wire for sensing and ablation technology. Fourth quarter other revenue declined 7.1% to $73.6 million year-over-year. We continue to expect all MSA revenues to cease at the end of 2023. That completes my comments on the fourth quarter revenue performance. Turning to some commercial and clinical updates. As mentioned earlier we completed the acquisition of Standard Bariatrics early in the fourth quarter of 2022. Standard Bariatrics commercialized the Titan SGS Stapler for use in sleeve gastrectomy procedures to treat morbid obesity, and we are excited to have the product in the Teleflex Surgical portfolio.

We are proceeding with our integration activities and remain on track with our objectives. Of note, we have completed the training of the Teleflex sales force on the Titan Stapler enabling us to double the size of the selling organization as compared to Standard Bariatrics on a stand-alone basis. We also recently announced that Teleflex was rewarded a group purchasing agreement with Premier for the Titan Stapler. The agreement will make the Titan Stapler available to surgeons affiliated with Premier and provide access to this innovative technology for use in gastric sleeve surgeries. Turning to UroLift. We reached our objective to convert the vast majority of users to UroLift two during 2022, which will free up time for our sales organization to dedicate increased time to market development activities in 2023.

Training of new physicians continued in the fourth quarter, and we reached our targets for the year. Of note, the number of physicians trained in 2022 remains largely consistent with historic levels implying continued interest in adding UroLift to the BPH treatment paradigm. To support new physician onboarding for UroLift we hosted live BPH summit training sessions in the US, Australia and Japan during 2022. Our direct-to-consumer program remains an important investment and achieved its pre-specified performance metrics for 2022. We will continue to invest in DTC initiatives for UroLift including a refreshed television and digital campaign that launched in February of 2023. Now moving to an update of our international strategy for UroLift. We made considerable progress in the geographic expansion for UroLift with entry into several new markets during 2022 including Japan and China.

Starting with Japan. We had strong launch execution with UroLift gaining sequential traction through 2022. Revenues exceeded our expectations for the year, and we see continued momentum into 2023. Turning to China. We initiated UroLift cases in the fourth quarter as anticipated. We will be methodical in our launch activities and follow a similar playbook to the one that has served us well in Japan. In turn, we will spend 2023 training surgeons, building our presence in key cities and continuing to engage with the Chinese Urological Society to build acceptance. Now for an update on Vascular business. The Vascular business unit continues to align its portfolio and clinical education offering with the evolving customer needs. Today, Teleflex is well-positioned to serve as a trusted partner with Vascular access clinicians in their goal of zero catheter-related complications.

We are helping to standardize outcomes by providing protection during and after vascular access procedures and establishing a predictable insertion process across the hospital. This approach continues to solidify our significant market share in CVCs and drive revenue growth through the highly successful launch of the CVC ErgoPack complete portfolio offering a complete vascular access insertion system designed to help clinicians comply with current guidelines and standards. We also continue to prioritize growth in the PICC and midline categories with the most recent advancement being the launch of the new Arrow Pressure Injectable Midline portfolio in North America in the fourth quarter of 2022. The new offering is designed to help alleviate risk associated with line misidentification.

Without quick and easy identification between midlines and PICCs, medication may mistakenly be infused through midlines that should only be infused through a central venous access device potentially causing complications and disruption in patient therapy. We are still in the early phase of the launch, but have seen a great level of interest from customers thus far. Additional innovation and PICC placement and positioning devices can be expected in 2023 as we continue to drive toward growth and share gain in this segment. Turning to the Interventional Access business. I am pleased that the relaunch of the Langston catheter has progressed through the fourth quarter with product availability in the US, Canada Australia and New Zealand. The Langston catheter is a unique diagnostic tool that has clinicians determine the degree of aortic stenosis, which might result in a subsequent TAVR procedure.

Our clinical and medical affairs team works to reeducate the market on this product including through a panel discussion at TCT and a webinar held in December. The Langston catheter continues to build value for our customers, enhance our engagement with clinicians in TAVR and demonstrates our relevance in the structural heart space. We expect further product launches in our interventional business over the coming years; including complex catheters in the structural part market. Finally, some comments on the outlook for 2023. We witnessed improving stabilization in healthcare utilization over the course of 2022 and would expect a further sequential stabilization in healthcare utilization in 2023. Indeed the majority of the procedure markets that we serve are now back at or above 2019 levels.

Conversely, some of the more deferrable disease states reflects patient visits to physicians that remain below pre-pandemic levels including urology. We anticipate that as COVID has become increasingly endemic and staffing shortage bottlenecks gradually ease patients will increasingly seek medical interventions during 2023. Turning to the macro environment. 2022 had its share of operational challenges including inflation and supply chain disruptions. For 2023, we are prepared for some level of continued volatility although we would expect incremental inflation to be at levels lower than 2022 and supply chain challenges to improve through the year. We remain focused on our global operations and we’ll look for ways to become more efficient as we work through the macro environment.

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

Thomas Powell: Thanks, Liam and good morning. Given the previous discussion of the company’s revenue performance, I’ll begin with margins. For the quarter, adjusted gross margin totaled 60% a 120 basis point increase versus the prior year period. The year-over-year increase was driven by price, foreign exchange and mix partly offset by incremental inflation. Of note, our price strategy maintained its traction during the fourth quarter, enabling us to drive more than 50 basis points of year-over-year price improvement for 2022. During the quarter, we continued to see an improvement in sea freight costs in line with our expectations. Conversely, raw material and supply chain disruption remained elevated and have yet to normalize.

Adjusted operating margin was 27.9% in the fourth quarter. The 30 basis point year-over-year increase was the result of higher gross margin and disciplined expense management of non-revenue-generating expense, partly offset by deleverage across our expense base from lower revenue year-over-year; inflation in our expense base such as wages; and planned investment in the business for our growth drivers. Net interest expense totaled $18.7 million in the fourth quarter, an increase from $11.8 million in the prior year period. The year-over-year increase in net interest expense reflects higher interest rates versus the prior year and increased borrowings on our revolver to fund the purchase of Standard Bariatrics, partially offset by a reduction in average debt outstanding.

Our adjusted tax rate for the fourth quarter of 2022 was 13.6% compared to 13.8% in the prior year period. The year-over-year decrease in our adjusted tax rate is primarily due to further enhancements and tax efficiencies and of our global structure, partly offset by tax expense arising from the new provision of the US tax law requiring the capitalization of certain R&D expenses. At the bottom line, fourth quarter adjusted earnings per share was $3.52, a decrease of 2.2% versus prior year. Turning now to select balance sheet and cash flow highlights. Cash flow from operations for 2022 was $342.8 million compared to $652.1 million in the prior year period. The decrease was primarily due to lower operating results, higher tax payments, higher payroll and benefit-related payments, and unfavorable changes in working capital driven by an increase in inventory purchases to maintain high customer service levels during a period of elevated global supply chain volatility.

Moving to the balance sheet. Our financial position remains healthy. At the end of the fourth quarter, our cash balance was $292 million as compared to $445.1 million as of year-end 2021. Reduction in cash on hand is due to $240 million of payments on our senior credit facility and $73 million for the acquisition of Standard Bariatrics. Additionally, we borrowed $100 million under the senior credit facility for the Standard Bariatrics acquisition. Net leverage at quarter end was approximately 1.8 times, which remains well below our 4.5 times covenant. Now turning to our 2023 guidance update. We expect 2023 constant currency revenue growth of 4.75% to 6.25%. Foreign exchange is expected to be a headwind of approximately 0.5 point in 2023. Considering the foreign exchange headwind, we expect reported revenue growth of 4.25% to 5.75% for 2023, implying a dollar range of $2.91 billion to $2.952 billion.

We continue to expect revenue from Standard Bariatrics to be within a range of $30 million to $35 million. Turning to the middle of the income statement. We expect gross margin for 2023 to be 59% to 59.5%. Our gross margin guidance range reflects the positive impacts of year-over-year manufacturing efficiencies, product mix and price, largely offset by inflation. Although, we saw a moderation in sea freight costs during the second half of 2022 in line with our forecast, raw material inflation was greater than expected at the time of our May 2022 Analyst Meeting. And for 2023, we have assumed that macro volatility will persist and continued inflation in raw materials, labor and utilities to represent headwinds to our gross margin this year. Moving to operating margin.

We expect a range of 26% to 26.75%. Our guidance reflects the flow through of gross margin, headcount and employee related expenses, investments to grow the business and the inclusion of Standard Bariatrics, partly offset by the positive impact of restructuring. Turning to items below the line. We expect an adjusted tax rate in the 10.25% to 10.75% range for 2023. Net interest expense is expected to approximate $67 million for 2023. The majority of the year-over-year increase in our net interest expense outlook reflects higher interest rates partially offset by debt repayment. Moving to earnings. Our adjusted earnings per share guidance for 2023 is $13 to $13.60, which represents a 0.5 point year-over-year decrease at the low end and a 4.1% increase at the high end.

When considering your models for 2023 foreign exchange will be a meaningful headwind to revenue in the first half and then increasingly turn to a tailwind in the second half of the year assuming foreign exchange rates as of the beginning of 2023. However as a result of how foreign exchange flows through our inventory, there will be headwinds to EPS through the third quarter and then it would become neutral in the fourth quarter. We also note that while there is no year-over-year difference in the number of shipping days in 2023 versus 2022, there will be five extra shipping days in the first quarter and five less shipping days in the fourth quarter of this year. Historically the benefit or headwind to our year-over-year GAAP revenue growth from a shipping day change is approximately 1% in a fiscal quarter.

Although, we do not provide quarterly guidance for your modeling purposes, we would expect a constant currency revenue growth range in the first quarter of approximately 5.5% to 6.5% when excluding the benefit from five extra shipping days of approximately 5%. Finally, I’ll provide some commentary on our long-range plan. We remain confident in the foundational pillars of our durable growth strategy that we provided at our May 2022 Analyst Meeting. Our 2023 to 2025 long-range plans remain anchored on discrete drivers for revenue and earnings per share growth as well as margin expansion. We are long-term focused on achieving our objectives for 2025 and continue to see the opportunity to drive greater scale, improve profitability, execution on a disciplined capital allocation strategy and strong cash flow generation for Teleflex.

With that said, the macro environment has been highly dynamic and there have been a number of unanticipated headwinds on our business in the period since May 2022 Analyst Meeting. First, in the second half of 2022, Inflation has been persistent and at a higher level than we projected at the time of our 2022 Analyst Meeting, in particular from raw material costs and their related impact on gross margins. Second, although we anticipated a sequential improvement in the procedure environment for UroLift throughout 2022, headwinds persisted through the year. In particular, patient visits to urologists were down year-over-year in 2022 and staffing shortages remained a bottleneck for procedures, especially in the office setting. Third, foreign exchange was a larger headwind than was expected as the dollar strengthened against a broad basket of currencies in the second half of 2022.

Interest rates also increased dramatically in the second half of 2022 and are expected to continue rising in 2023. Although, we have not recast the entirety of the LRP provided in May 2022, we have updated assumptions related to inflation, foreign exchange and interest rates. In addition, we are now assuming a 3-year CAGR in the 8% to 9% range for global UroLift revenues. And finally, since we acquired Standard Bariatrics early in the fourth quarter of 2022, we have incorporated the business into the long-range plan. We continue to view the LRP targets provided at the 2022 Analyst Meeting as the vision for Teleflex in 2025. With 2022 as the base year in incorporating the updates, we now believe that we will deliver at the low end of the ranges for 2023 to 2025, total revenue CAGR and margin expansion.

For the high-growth portfolio, which represented a little more than 25% of revenues in 2022, we expect approximately 12% to 13% CAGR for the LRP. For the durable core, which represents slightly over 60% of revenues in 2022, we expect to grow at approximately a 5% CAGR. With respect to the remaining portion of the total revenue, which we refer to as the other category, we expect a negative 6% to 7% CAGR due to the LRP. And that concludes my prepared remarks. I’d now like to turn it back to Liam for closing commentary.

Liam Kelly: Thank you, Tom. In closing, I will highlight our three key takeaways from the fourth quarter of 2022 and our 2023outlook. First, our fourth quarter results were solid and driven by an improving end market for the majority of our businesses. Second, we are confident in our outlook for 2023. Our outlook reflects the diversification of the Teleflex portfolio through the combination of our growth drivers and stability of durable core revenues. Importantly, we will continue to focus on investment in our future growth drivers to enhance long-term value creation. Third, we are focused on achieving our objectives in 2025. We have a balanced approach to top line growth as we invest in our growth drivers and optimize the performance of the durable core.

We see opportunities to drive margin expansion through mix shift, restructuring and price. And finally, we will remain disciplined in our capital allocation strategy, with a focus on executing on our M&A strategy. That concludes my prepared remarks. Now, I would like to turn the call back to the operator for Q&A.

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Q&A Session

Operator: Thank you. Our first question will come from Cecilia Furlong with Morgan Stanley. Please go ahead, Cecilia.

Cecilia Furlong: Great. Good morning, and thank you for taking the question. Liam, I wanted to start with ’23 guidance and if you could walk through relative to the updated LRP and those CAGRs, how we should think about contributions both from the durable core high-growth assets in UroLift. And specifically on UroLift with the 8% to 9% CAGR, how you’re thinking about cadence over the next three years?

Liam Kelly: Yes. Cecilia, thank you for the question, and good morning. So, I’ll start with our overarching guidance for ’23 on revenue, which is 4.75% to 6.25% with a midpoint at 5.5%. This represents an improvement over 2022, which had an underlying growth rate of 4.3%. And as regards cadence within the year, you obviously heard in Tom’s prepared comments, where the quarter one will be 5.5% to 6.5% with a midpoint of 6%, so therefore, obviously, seeing an improvement right out of the gate in core revenue. As a company, we’re continuing to focus our efforts on high growth and durable core, to the other part of your question. But the natural evolution for Teleflex is to guide these buckets as they contribute to the overall growth rate of the company.

Our guidance assumption for 2023, Cecilia, assumes that high growth will grow 8% to 11%; durable core will grow 4.5% to 5.5%; and the other bucket will be flat to declining in 2023. As you know, we’re an incredibly transparent company. And while we will not be guiding specifically to UroLift, we will report Interventional Urology revenues every quarter consistent with all our other product categories. The exception of this, this year will be Standard Bariatrics and the Titan Stapler, as we have guided the full year $30 million to $35 million. This is consistent with our past guidance principles of giving guidance to an acquisition within the first year. Obviously, for UroLift, we would expect an improving environment in 2023, and that would carry on into ’24 and ’25, Cecilia.

Cecilia Furlong: Great. Thank you, Liam. And then if I could follow up on gross margin as well, just the outlook that you put out for ’23, if you could walk through both what you’re expecting from continued inflation benefit of pricing. And then also just UroLift 2 conversion impact that’s having on gross margin alongside Standard Bariatrics?

Liam Kelly: Okay. I’ll just cover the conversion of UroLift 2 and Tom will cover the rest of the topics on margins, Cecilia. UroLift 2 we have the US market pretty converted at this stage to the UroLift 2, and Tom will go through your other questions on the gross margin line.

Thomas Powell: Okay. So for 2023, our guidance is 59 to 59.5 or about five basis points at the midpoint. And for 2023 we expect to realize meaningful margin accretion from the combination of mix price manufacturing cost improvement programs and our footprint restructuring programs. However as we’ve spoken about in 2022, we continue to expect inflation largely to offset these gains. And additionally we’re expecting a modest gross margin headwind from foreign exchange. If we were to look at what are the drivers of the accretion, the largest being the cost improvement programs accounting for some 40% of the positives and then mix price and the footprint about 20% each of the increase. And then as we look at what is offsetting that, it’s largely the inflation, which accounts for 80% of the offset.

And then as mentioned it’s a little bit from foreign exchange as well and some miscellaneous other items. So really it’s a story of really good underlying margin expansion opportunities. As we’ve mentioned we still feel very good about the long-term prospects. However, inflation is having an impact and largely offsetting those nice gains in the underlying business.

Operator: Our next question comes from Matt Taylor with Jefferies. Matt, please go ahead.

Mike Sarcone: Hey, thank you. This is Mike Sarcone on for Matt today. Good morning, everyone.

Liam Kelly: Good morning.