Teleflex Incorporated (NYSE:TFX) Q1 2023 Earnings Call Transcript May 6, 2023

Operator: Good morning, ladies and gentlemen. Welcome to the Teleflex First Quarter 2023 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode. At the end of the company’s prepared remarks, we will conduct a question-and-answer session. Please note that this conference call is being recorded and will be available on the company’s website for replay shortly. And now I will 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 Incorporated first quarter 2023 earnings conference call. The press release and slides to accompany this call are available on our website at teleflex.com. Please note that webcast viewers have the ability to advance the presentation slides on their own, simply follow along with the presentation 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, including our Form 10-K, which can be accessed on our website. Now I will turn the call over to Liam for his remarks.

Liam Kelly: Thank you, Larry, and good morning, everyone. It is a pleasure to speak with you today. For the first quarter, Teleflex revenues were $710.9 million, a year-over-year increase up 10.8% on a reported basis and an increase of 13.2% on a constant currency basis. First quarter adjusted earnings per share was $3.09, a 7.3% increase year-over-year. We had a strong start to 2023 as momentum exiting last year continued into the first quarter. Even when excluding the impact of five extra shipping days in the first quarter, our underlying growth was robust at 7.1%. As a reminder to investors, a day is typically worth approximately 1% revenue growth in a quarter. For the first quarter of 2023, each extra day was in actuality slightly in excess of 1% growth.

And when strung together, the five extra shipping days added approximately 6% to our constant currency growth. In the quarter, both the high-growth portfolio, excluding UroLift, and the durable core grew in the low-double-digits year-over-year, excluding the five extra shipping days in the quarter. Behind an improving procedure environment, we executed well during the quarter with all global product categories driving growth. The balanced performance in the quarter continues to demonstrate the benefit of Teleflex’s diversified product portfolio and broad geographic footprint. In the quarter, we saw strong contributions from our interventional surgical and OEM product categories. From a geographic perspective, Europe was in line with expectations, while Asia remains a key growth driver.

From a macro perspective, we are seeing a stabilization in inflation and supply chain as expected. Of note, we have seen some easing and supply constraints for Tyvek during the first quarter and continue to expect the situation to further improve in the second half of the year as additional industry capacity comes online. We are also seeing a continued improvement in staffing challenges in the hospital setting. This was evident in our first quarter revenue growth as the majority of Teleflex products are exposed to the hospital setting. Conversely, we are still experiencing geographic pockets that are encountering more persistent staffing disruptions in the ASC and office site of service. Now let’s turn to a deeper dive into our first quarter revenue results.

I will begin with a review of our geographic segment revenues for the first quarter. All growth rates that I refer to are on a constant currency basis unless otherwise noted. Americas revenues were $411.9 million, which represents 9.2% growth year-over-year. We saw growth across the majority of our businesses, including double-digit increases in interventional and surgical revenues. In addition, the results included the impact of the five extra shipping days. EMEA revenues of $143.3 million increased 10.5% year-over-year. The year-over-year growth includes the benefit of the five extra shipping days in the quarter, while the underlying performance reflects continued improvement in the year-over-year procedure volumes that fueled broad-based revenue growth across our product portfolio.

Now turning to Asia. Revenues were $78.7 million, increasing 22.8% year-over-year. We saw strength across the region with all geographies posting solid growth during the first quarter. China remained a solid contributor with very high single-digit growth in the quarter. Although surgical procedure activity in China has not yet returned to normal levels following the termination of the zero-COVID policy in late 2022, we saw improvement as we progressed through the quarter. Looking forward, we would expect growth in China to accelerate during the remainder of 2023. Let’s now move to a discussion on our first quarter revenues by global product category. Commentary on global product category growth for the first quarter will also be on a constant currency basis.

Starting with Vascular Access. Revenue increased 9.2% to $177.7 million. The performance was solid across the portfolio, and we are now past the tough COVID comparisons experienced during 2022. As I noted earlier in the call, we saw some improvement in Tyvek supply in the first quarter and expect further availability in the second half of the year as additional manufacturing capacity for the industry comes online. Of note, our PICC portfolio returned to double-digit growth in the quarter. Over the long-term, we remain positioned for dependable growth with category leadership in central venous catheters and midline, anticipated share gains from our novel coated PICC portfolio and new product introductions. Moving to Interventional Access. Revenue was $116.9 million, up 23.3% year-over-year.

We continue to benefit from our diversified portfolio and saw strength across our largest product categories, including complex catheters, balloon pumps and OnControl. MANTA continues to penetrate the large foreclosure market globally. Turning to Anesthesia. Revenue was $93.3 million, up 9.9% year-over-year. Of our larger franchises, hemostatic products, regional anesthesia, and endotracheal tubes all had strong performances in the first quarter, partly offset by LMA single-use masks. In our Surgical business, revenue was $99 million, up 14.3% year-over-year. Among our largest product categories, metal ligation clips and instrument revenue increased double digits year-over-year. In the quarter, we advanced our integration of Standard Bariatrics and trained new surgeons on the use of the Titan SGS Stapler in sleeve gastrectomy procedures.

We showcased Titan at the recent Sages Medical Conference, and the surgeon feedback was overwhelmingly positive. For Interventional Urology, revenue was $75.4 million, representing an increase of 0.9% year-over-year. We witnessed growth for UroLift in the hospital setting, but the opposite of service continues to be impacted by staffing shortages. We continue to expect the U.S. end market for UroLift continue to improve as we progress through 2023. The overseas launch activity in Japan and China are progressing in line with expectations. OEM revenues increased 34.5% year-over-year to $77 million. The strength in the quarter was broad-based across our portfolio with double-digit growth in all product categories. We continue to have good visibility into the business and see solid demand dynamics throughout 2023.

First quarter other revenue increased 6.4% to $71.6 million year-over-year. We continue to expect all MSA revenues to cease at the end of 2023, implying no MSA revenue in 2024. That completes my comments on the first quarter revenue performance. Turning to some commercial and clinical updates. We continue to execute in our commercial strategy for the Titan SGS powered stapling device for use in sleeve gastrectomy procedures to treat obesity. We recently announced a supply agreement with W. L. Gore & Associates to use the company’s GORE, SEAMGUARD Bioabsorbable Staple line reinforcement materials in a staple line reinforcement device designed by Teleflex for use with the Titan SGS stapler. Buttress material is commonly used by surgeons to reduce leaks and bleeding and strengthen the staple line by redistributing the pressure exerted by an individual staple over a wider area as well as provide reinforcement for friable tissue.

The ability to offer synthetic buttressing materials alongside the unique features of the Titan stapler should enable Teleflex to further address surgeon clinical needs and preference in the sleeve gastrectomy market. We anticipate launching the Teleflex applicator with Gore buttress materials by year-end 2023. Moving to our hemostatic product portfolio. We have received FDA 510(k) clearance for the QuikCLot Control+ for minor to moderate bleeding in cardiac procedures and bone bleeding following sternotomy. This new indication expands upon the prior indication for temporary control of internal organ space bleeding for patients displaying severe bleeding. The expanded indication follows the completion and analysis of an IDE study that examined the rate at which subjects achieve hemostasis through 10 minutes of hemostatic application and compression at the bleeding site.

The study concluded that the quick cost controls plus hemostatic device was superior in achieving clinical hemostasis in cardiac surgery for mild and moderate bleeding. The expanded indications enable QuikClot Control+ utilization across a wider patient population and breath of surgical procedures and expand our global market opportunity for our portfolio of hemostatic products. We will begin promoting our new indication in the coming month. Now moving to an update on the Interventional Access business. We are excited about our building momentum for 2023 with a focus on complex PCI and structural heart. Of note, we continue to focus on driving our innovation engine, and we’ll be launching a number of new products over the coming years. Augmenting our channel presence in complex PCI, we recently commenced a limited market release for the GuideLineor Coast with positive initial feedback from physician users.

GuideLiner Coast builds upon our successful GuideLiner extension catheter franchise with the addition of a hydrophilic coating to improve deliverability. In addition, we will initiate a limited launch for the Triumph micro-catheter during the second quarter. The Triumph is a unique catheter design that will be supported by a chronic total occlusion clinical study which is planned to enroll patients in 2023. We also continue to advance our Ringer perfusion balloon catheter with two clinical studies currently enrolling patients. Separately, we continue to expand our structural heart presence. Our dedicated salesforce is currently selling MANTA and the Langston dual lumen catheter. Looking forward, we are actively engaged in expanding our product portfolio with the Watson, representing the next product anticipated to launch.

The Waston is a unique dual delivery guidewire and pacing wire for use in TAVR procedures. Lastly, I will provide an update on our Vascular Access business. We are excited to announce that we have launched two new devices designed to enhance PICC insertion procedures and reduce the chance of complications. First, we have launched the next-generation Arrow VPS Rhythm DLX device, which provides real-time PICC catheter tip location information using a patient’s cardiac electrical activity. The device also features an optional integrated ultrasound module to assist with vascular access, coupled with our tip tracker technology, use of the DLX eliminates the need for confirmatory x-ray, which reduces time to therapy and cost. In addition, we have launched a new Arrow PICC preloaded with the NaviCurve Stylet.

The NaviCurve Stylet features an anatomical curb and flexible tip that are designed to self-orientate to patient’s anatomy for enhanced PICC advancement into the superior vena cava for successful insertion. That completes my prepared remarks. Now I would like to turn the call over to Tom for a more detailed review of our first 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 was 59.4%, a 100 basis point increase versus the prior year period. The year-over-year increase was primarily due to price, lower logistics and distribution-related costs and favorable fluctuations in foreign currency exchange rates, partially offset by continued cost inflation including raw materials and labor costs. Of note, we maintained our pricing discipline in the first quarter and continue to expect at least 50 basis points of positive price year-over-year in 2023. Adjusted operating margin was 25.8% in the first quarter. The 10 basis point year-over-year increase was the result of the flow-through of the gross margin, partially offset by headcount and employee-related expenses, investments to grow the business and the inclusion of standard bariatrics.

Net interest expense totaled $17.5 million in the first quarter, an increase from $10.2 million 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 first quarter of 2023 was 11.8%, compared to 11.9% in the prior year period. At the bottom line, first quarter adjusted earnings per share was $3.09, an increase of 7.3% versus prior year. Turning now to select balance sheet and cash flow highlights. Cash flow from operations for the first quarter was $84.3 million, compared to $62.1 million in the prior year period. The increase was primarily due to favorable changes in working capital driven by higher accounts receivable collections, partially offset by an increase in inventories to maintain high customer service levels during a period of elevated global supply chain volatility.

Moving to the balance sheet. Our financial position continues to provide us the flexibility to operate the business and execute on our disciplined capital allocation strategy. At the end of the first quarter, our cash balance was $264.1 million as compared to $292 million as of year-end 2022. The reduction in cash on hand is primarily due to $75 million of payments on our senior credit facility. Net leverage at quarter end was approximately 1.7 times, which remains well below our 4.5 times covenant. Turning now to financial guidance. We are very pleased with our first quarter financial performance. Of note, we have seen a recovery in surgical procedures, most notably those that are performed in the hospital, staffing shortages continue to improve in the hospital and inflation and supply chain headwinds have stabilized.

Given the solid start to the year, we are updating our 2023 financial guidance. Specifically, we are raising the low-end of our 2023 constant currency revenue and now expect growth of 5% to 6.25%. Turning to foreign exchange. We now assume a foreign exchange translation headwind of approximately 35 basis points in 2023. Our prior guidance of a 50 basis point headwind for 2023 assumed a $14 million negative impact of foreign exchange for the full-year, of which $17 million was expected in the first quarter. The actual first quarter headwind was approximately $4 million less than was expected. Our revised foreign exchange guidance for 2023 captures the actual rates for the first quarter while the foreign exchange assumptions set at the beginning of 2023 remain unchanged for the balance of the year.

Considering the revised foreign exchange headwind, we expect reported revenue growth of 4.65% to 5.9% in 2023, implying a dollar range of $2.921 billion to $2.956 billion. We are reiterating our 2023 guidance for adjusted earnings per share of $13 to $13.60. We are lowering our GAAP adjusted earnings per share outlook to $8.14 to $8.74, primarily due to a one-time tax item. All other elements of our adjusted financial guidance for 2023 remain unchanged, including our outlook for adjusted gross and operating margins. That concludes my prepared remarks. I would now like to turn it back to Liam for closing commentary.

Liam Kelly: Thanks, Tom. In closing, I will highlight our three key takeaways from the first quarter of 2023. First, we started 2023 with a strong performance as momentum continued from the end of last year. We executed well across our global business and continued to effectively manage the macro headwind. Second, the solid first quarter performance keeps us well positioned to deliver on our financial guidance for 2023. We see an increasingly stable environment for health care utilization. In turn, we expect improving performance of our high-growth portfolio as we move through 2023 in addition to continued strength in our durable core. Third, importantly, 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.

That concludes my prepared remarks. Now I would like to turn the call back to the operator for Q&A.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question today comes from Cecilia Furlong from Morgan Stanley. Cecilia your line is open. Please go ahead.

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

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

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

Operator: The next question comes from Jayson Bedford from Raymond James. Jason, your line is open. Please go ahead.

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

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

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

Operator: [Operator Instructions] And the next question comes from Mike Polark from Wolfe Research. Mike, your line is open. Please go ahead.

Operator: The next question comes from Richard Newitter from Truist. Richard, your line is open. Please go ahead.

Operator: [Operator Instructions] As we have no further questions, I’ll hand the call back to Lawrence Keusch for any concluding remarks.

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