Teleflex Inc Q1 FY2021 Earnings Call

Good day, and thank you for joining us. I would like to welcome you to the Teleflex, Inc. 2021 Conference Call. I now hand the conference over to Jake Elguicze, Treasurer and Vice President of Investor Relations. Please proceed.

Good morning, everyone, and welcome to the Teleflex, Inc., First 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, passcode 6194708. 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’ll open up 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. During this conference call, you will hear management make statements regarding intra-quarter business performance. Management is providing the commentary to provide the investment community with additional insights concerning trends, and these disclosures may not occur in subsequent quarters. With that, I’d like to now turn the call over to Liam.

Thank you, Jake, and good morning, everyone. It’s a pleasure to speak with you today. We are delighted with our first quarter performance, which exceeded the expectations we provided to the investment community on our Q4 call in February and reflected improvements in underlying revenue trends for the product categories most impacted by the postponement of deferrable procedures, most notably, Interventional Urology, Interventional Access, and Surgical. Quarter 1 revenue was $633.9 million, which was down 2.6% as compared to the prior year period on a constant currency basis, driven by continued COVID-19 headwinds. Adjusting for the two less selling days we had during the first quarter of 2021 as compared to the first quarter of 2020, quarter 1 constant currency growth was modestly positive at approximately 0.1%, which marks the third consecutive quarter of improving growth rates and a return to days adjusted constant currency growth for the first time since the beginning of the COVID pandemic in the second quarter of 2020. From an earnings per share perspective, our adjusted earnings per share of $2.87 also significantly exceeded the expectations we provided. This reflects the recovery we saw in monthly procedures as we moved throughout the quarter, coupled with prudent operating expense management. Lastly, during the first quarter of 2021, we committed to a new restructuring plan designed to streamline various business functions. At Teleflex, we value continuous improvement, and continue to execute on new opportunities to improve the efficiency and cost-effectiveness of our business. Turning now to a more detailed review of our first quarter results. As I mentioned, quarter 1 revenue declined 2.6% on a constant currency basis. The decline in revenue was primarily due to lingering COVID-19 headwinds coupled with the impact of two fewer selling days in the quarter compared to the prior year period. When adjusting for selling days, we have experienced positive daily sales adjusted contributions from Vascular, Anesthesia, Surgical and Interventional Urology, offset by declines in Interventional OEM and our Other segment. From a margin perspective, we generated adjusted gross and operating margins of 59.4% and 27.5%, respectively. This translated into a year-over-year increase of 210 basis points at the gross margin line and a 190 basis points at the operating margin line. We were encouraged by our growth and operating margin performance, which demonstrated the ability of our business to generate significant leverage despite the impacts of lingering COVID headwinds on our revenue line. In fact, we continue to show significant leverage across the P&L, as we generated the highest adjusted gross and operating margins since becoming a pure-play medical device company. Quarter 1 adjusted earnings per share was $2.87, up 5.5% year-over-year and well ahead of the expectations we provided. Overall, I am very happy with our first quarter financial performance, which demonstrates the resiliency of the diversified global product portfolio that we have built, 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. The Americas delivered revenues of $375.5 million in the first quarter, which represents growth of 4.7% or 8.3% on a day sales adjusted basis. Growth in the quarter was driven by strength in Vascular, Anesthesia, Surgical and Interventional Urology on a days adjusted basis. EMEA reported revenues of $141.2 million, representing a 16.9% decline or 14.4% on a days adjusted basis. EMEA was impacted by a difficult year-over-year comparable. As the prior year period saw a bolus of ordering ahead of the initial COVID surge as well as a higher level of COVID-related restrictions and elective procedure deferrals that occurred during the first quarter of 2021. Turning to Asia. Revenues totaled $63.7 million, which represents 10.3% growth, with no selling day impact in this region. Importantly, we saw solid double-digit recovery in China, along with double-digit growth in India and Korea. This more than offset declines in Japan and Australia. As we anticipated, the Americas and Asia continue to recover more quickly than Europe. And lastly, our OEM business reported revenues of $53.5 million, which represents a 17.1% decline on a constant currency basis or a 16.3% decline adjusted for selling days. As anticipated, our OEM business continues to see a lagged impact related to COVID recovery. Investors familiar with Teleflex will be aware that our OEM business supplies device companies with complex catheters and surgical sutures, and the first quarter impact reflects reduced orders from these customers whose business is tied to non-emergent procedures. As it relates to the acquisition of HPC, we are pleased that the integration has been completed, and we have additional capacity coming online over the next two months, which should help drive growth in the second half of the year. Let’s now move to a discussion of our 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, with color provided for selling day adjustments as well. Starting with Vascular Access. Quarter 1 revenue increased by 5.8% to $164 million or 9.3% adjusted for selling days, as we had strong contributions from central venous catheters, EZ-IO and PICC product lines. Moving to Interventional Access. First quarter revenue was $96.2 million, which is lower than the prior year by 6.4%. When adjusting for selling days, the year-over-year decline was 3.8%. The decrease was largely due to the delay in the recovery of certain non-emergent procedures due to COVID. The decline was somewhat offset by increases in MANTA large-bore closure revenue, which grew approximately 30% globally adjusted for selling days. Turning to Anesthesia. Quarter 1 revenue was $84.9 million, which represents growth of 7% or 9.9% adjusted for selling days. The revenue growth was due to solid performance of Z-Medica, which performed better-than-anticipated, partly offset by lower sales of laryngeal masks and regional anesthesia products. Shifting to Surgical. Revenue was $80.4 million, representing 2.3% growth or 4.7% adjusted for selling days, driven by sales of our polymer ligation clips and instruments, partly offset by chest drainage and metal ligation decline. Now to Interventional Urology. Quarter 1 revenue was $73.4 million, which was a decline of 1.3%. When adjusting for selling days, the UroLift product grew approximately 1.9%. During the quarter, we continued to see canceled procedures negatively impact growth as COVID case counts surged in January and February. However, as the quarter progressed, we were very encouraged by the strong double-digit growth that occurred in March. The strong growth trends that occurred for UroLift in March continued during April as we continued to see improvements in our average daily sales trends. Importantly, our average daily sales in April were, for the first time, back to pre-COVID daily rates on a consistent basis. We continue to view UroLift as one of the first procedures to be performed as the environment is starting to improve again. We also trained 115 new urologists in quarter 1 and are well on track to achieving our annual target of training between 450 and 500 new urologists during 2021. And finally, our Other category, which consists of our respiratory and urology care products, declined by 15.3% or 12.6% adjusted for selling days, totaling $81.7 million. The decline reflects headwinds to elective procedures as well as difficult comps from the prior year related to COVID ordering in EMEA. That completes my comments on quarter 1 revenue performance. Turning to some clinical and commercial updates. I wanted to provide an update on our direct-to-consumer efforts for UroLift. On the strength of a successful 2020 campaign, where we doubled the awareness for UroLift in the targeted population of men with BPH, and as planned, we have decided to increase our investment in 2021 and run a national campaign for the full year. 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. We continue to view DTC as a multiyear catalyst for UroLift in the United States as we are still in the early innings of market adoption and patient awareness. Indeed, UroLift is leading the way in BPH, and this is the first time in recent years that a BPH brand is reaching patients directly in a meaningful way. Turning to UroLift 2. We continue to make progress with our controlled launch, and we remain on track for a more fulsome rollout beginning in the second half of 2021. We remain confident that conversions to the UroLift 2 will continue over time, and we continue to expect to generate significant margin expansion as the revenue base is fully converted. As it relates to the UroLift ATC device, the launch continues to go very well. As we completed multiple case days and urologists find the use of the device to be intuitive and they seem to appreciate that the device makes it easier to perform procedures with obstructive median lobes. Regarding Japan, we remain on track for a 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. And we continue to work towards commercialization in France. We anticipate performing our first cases during the second quarter. With multiple catalysts in place across key geographies, including the U.S. and Japan, we remain confident that UroLift will become a robust global franchise, addressing a significant multibillion-dollar opportunity. Lastly, before turning the call over to Tom, I would like to provide clinical updates highlighting two recent published studies with our Interventional Access business unit. The MARVEL real-world study was recently published in December of 2020. This study tracked 500 patients across 10 centers globally who underwent transfemoral large bore percutaneous procedures. Primary endpoints of time to hemostasis was a median of 50 seconds. While the primary endpoint of the major vascular complication rate related to the MANTA access site was in line with the safe MANTA IDE pivotal trial. The study concluded that MANTA was a safe and effective device for large bore access closure under real-world conditions. In addition to the registry study I just highlighted, a separate meta-analysis was published in February of 2021. This pooled analysis examines data for nearly 900 patients drawing from the CE mark and SAFE pivotal trial as well as the MARVEL registry study. Key findings included a high technical success rate, rapid hemostasis and low complication rates. In this study, median time to hemostasis was 31 seconds. Overall, we continue to invest in clinical and commercial catalysts that will help to sustain our upper single-digit revenue growth aspirations for this strategic business unit in a normalized environment. 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?

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 quarter, adjusted gross margin was the highest since Teleflex became a pure-play medical device company, totaling 59.4% or an increase of 210 basis points versus the prior year period. The increase in gross margin was primarily attributable to product mix, M&A and restructuring benefits, which were partially offset by foreign exchange headwinds. Similarly, first quarter adjusted operating margin of 27.5% was also the highest since Teleflex became a pure-play medical device company and represented an increase of 190 basis points versus the prior year period. The increase was driven largely by the gross margin improvement, partially offset by a normalization of compensation expense accruals. Continuing down to P&L. For the quarter, net interest expense totaled $16.1 million, which is a slight increase from $14.9 million in the prior year period, reflecting higher average debt outstanding. Post quarter close, we issued a notice of redemption to holders of our outstanding $400 million aggregate principal amount of 4 and 7/8% senior notes due in 2026. We plan to fund the redemption using available borrowings under our revolving credit agreement. Moving to taxes. For the first quarter, our adjusted tax rate was 13.9% which is up 140 basis points as compared to the prior year period. The year-over-year increase in our adjusted tax rate is primarily due to less benefit from stock-based compensation as compared to the prior year period. At the bottom line, first quarter adjusted earnings per share increased 5.5% to $2.87. Included in this result is an estimated positive impact from foreign exchange of approximately $0.13. Now I’d like to highlight another restructuring program that we recently announced. During the first quarter of 2021, we committed to a restructuring plan designed to streamline various business functions. We estimate that we will incur aggregate pretax restructuring charges between $7 million and $9 million, consisting primarily of termination benefits and between $3 million and $4 million in restructuring-related charges. We expect to begin realizing plan-related savings in 2021, with total annual pretax savings of between $13 million and $16 million once the plan is fully implemented. To summarize all of our ongoing restructuring and cost-saving programs, the total remaining pretax savings across all current active programs are expected to be between $53 million and $67 million. And further details of the programs are available in the appendix to the earnings presentation. Approximately half of the remaining savings are expected to be realized during 2021 and 2022, with the bulk realized by 2024. As such, we have good line of sight to non-revenue-dependent margin expansion for the foreseeable future. Turning to select balance sheet and cash flow highlights. For the first quarter of 2021, cash flow from operations totaled $110.8 million as compared to $11.5 million net use of cash in the prior year period or a year-over-year increase of $122.3 million. The year-over-year increase was driven by lower contingent consideration payments, lower payroll and benefit-related payments and higher accounts receivable collections as compared to the prior year. Overall, the balance sheet remains in good shape. At the end of the first quarter, our cash balance was $324.6 million. And during the quarter, we paid down $100 million in debt and our net leverage at quarter end was approximately 2.9 times. Subsequent to quarter end, we repaid an additional $25 million in revolver borrowings. Moving on to guidance. Starting with our revenue expectation for 2021, we now expect constant currency revenue growth between 8.5% and 9.75% as compared to 2020. This compares to our initial guidance, which called for constant currency revenue growth of between 8% and 9.5%. The increase in guidance reflects our confidence in the business, including first quarter results, which were better than we anticipated. We expect our Interventional Urology, Interventional Surgical and Anesthesia product offerings to be key contributors to our constant currency revenue growth during 2021. Additionally, we continue to expect our Interventional Urology business will increase at least 30% over 2020 levels. The midpoint of our constant currency guidance range also assumes approximately 2.5% contribution from the acquisition of Z-Medica. Turning to currency. We continue to expect foreign exchange rates will be a tailwind to revenue growth of approximately 2%. And as a result, we now expect our as-reported revenue to increase between 10.5% and 11.75% over 2020. This would equate to a dollar range of between $2.804 billion and $2.835 billion. Turning next to gross margin. During 2021, we now anticipate adjusted gross margin to increase between 155 and 255 basis points to a range of between 58.25 and 59.25, and this is an increase of 25 basis points versus our prior forecast. We expect gross margin expansion to be driven primarily by a favorable mix of high-margin products, including Interventional Urology, Interventional Access and Surgical. Also contributing are benefits from manufacturing productivity improvement programs, benefits from previously announced footprint restructuring programs and the acquisition of Z-Medica. Year-over-year gross margins expansion is expected to be somewhat offset by inflation. Turning to adjusted operating margin. We continue to expect that adjusted operating margin will increase between 110 basis points and 210 basis points to a range of between 26% and 27%. The increase in adjusted operating margin will largely come from the gross margin line, partially offset by normalization of spending associated with items including management compensation, commissions, targeted headcount additions, and the potential for further strategic investments in support of key growth drivers such as UroLift and MANTA. Continuing down the P&L. We now expect interest expense to range between $61 million and $63 million. This compares to our initial guide, which called for interest expense of between $63 million and $65 million. The reduction in interest expense is primarily due to faster-than-originally anticipated debt reductions, coupled with lower-than-expected LIBOR rates. The early retirement of the 2026 notes was always part of our full year interest expense assumptions. Moving to taxes, we now expect our adjusted rate will be in the range of between 13% and 13.5% or a 50 basis point reduction versus our prior guidance. Considering all of these elements, we are pleased to be able to raise our adjusted EPS outlook to between $12.65 and $12.85 for an expected increase of between 18.6% and 20.4%. Lastly, while it is not our normal practice to provide quarterly financial guidance, given the ongoing situation with COVID, I would like to provide some color regarding what we expect to occur in the second quarter of the year. At the midpoint of our new guidance ranges, during the second quarter of 2021, we expect to realize approximately 24.5% of full year reported revenue and approximately 22.5% of our full year adjusted earnings per share. Our outlook is predicated on the assumption that COVID will continue to cause disruption during the first half of the year.

Thank you, Tom. In closing, I would highlight our key – our three key takeaways from the quarter. First, we delivered a strong first quarter with top and bottom line performance better than our expectations. Second, we announced another restructuring program that reflects our organizational efforts for continuous improvement. This action also contributes to our confidence in long-term margin expansion efforts. And third, we raised our revenue and adjusted earnings per share guidance, reflecting a strong quarter 1 and our outlook for the remainder of the year. I would like to finish by thanking the entire Teleflex team around the world who have worked tirelessly through the pandemic. As we begin to come out the other side of COVID, we will continue to meet our commitments to our 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.

Your first question comes from the line of Richard Newitter with SVB Leerink.

Thanks for the color on the trends on UroLift. Maybe just to start off there. So you mentioned that you’ve returned to pre-COVID UroLift or Interventional Urology growth levels. I’m just curious, is that – you had different growth rates in the first half of 2020 of 40% and then rose to 50%, and in the first quarter of 2020, it was about 20%. Which kind of those growth trajectories should we use as a reference point for the early trends that you’re citing here in 2Q?

Yes, Rich, thank you very much for the question. So we are quoting the trends in 2020 pre-COVID. On a days adjusted basis in Q1 2020, even with the impact of COVID in the last few days of – or the last week of March, we grew approximately 26-plus percent in the prior year. So we are very encouraged by the trends that we saw in the month of April. So at different times through the impact of COVID as we got into November last year, Rich, we did see days that we got back to a pre-COVID level on an average daily sales basis. But we have not seen the consistency where it remains for a sequential number of weeks until the month of April and that is very, very encouraging to us. And I will say – and the other data point, I think, is worth looking at is if you compare UroLift growth in this Q1 of 2021 and you compare that back to Q1 of 2019, that is approximately 30%. So we’re very pleased to be able to reiterate our full year expectation for UroLift, a plus 30% growth, and the trends that we’ve seen in the last few weeks of March, but more importantly, in the first few weeks of April, have given us the confidence that we will definitely be able to reiterate that long-term – or that full year guidance.

Thanks for that color. Maybe just two follow-ups on UroLift there. One, I know there have been some management changes in the organization, the Head of – the President of UroLift, as expected and consistent with timing, you’ve said in the past, retired at the end of the year. Can you just talk a little bit about that? I think, ultimately, it would help just to hear if there’s anything potentially changing with the way you’re viewing the market, the direct-to-consumer initiatives, management changes that may be impacting the business? Or if this is just purely COVID that led to the still sluggish trend in the first quarter?

Yes. So I wouldn’t call the trend sluggish in the first quarter. Let’s not forget, in January and February, COVID was much more severe than it was in the fourth quarter. And for us to be able to deliver a growth of approximately 2% in Q1 compared – consistent with Q4, I would see that as an achievement. Another little bit of color I would give you, Rich, is that in the first two months, January and February, we had a decline of approximately minus 8% for UroLift. And in the month of March, it was positive north of 30% in absolute growth year-over-year in the month of March. And we continued, as I said earlier, to see that improving trend as we went into April. So we feel really positive about UroLift. Nothing has changed in the end markets, and we’re still very positive. As anticipated, the President of the business units did leave at the end of the year, but we have an industry veteran coming in to take over that business unit, and the core team is still there. Our turnover in that business unit is significantly less than our turnover in any other part of Teleflex. And Teleflex turnover is well below industry averages. I’ve said it many times, Rich, you just can’t beat culture and our people will stay within Teleflex because of the culture and because of the significant opportunities within there. So no significant changes within the organization below the President level.

Great. Thanks for taking questions. I guess I did want to continue with UroLift. You talked about ex U.S. expansion into France as well as Japan coming online in the back half of this year. I guess just as we’re thinking about guidance and recovery from COVID, can you talk a little bit about what you’re expecting from the U.S. market recovery from the DTC campaign as that flows in OUS? And then kind of just layering that on it, as you look at gross margin impact from UL2 rolling out, just would love your thoughts on the cadence for the year?

Okay. So again, we’ve reiterated our plus 30% growth for UroLift in the year. And regarding the growth in France and Japan, we see those as incremental growth to our normalized growth levels for UroLift. We see that the growth and the recovery in our UroLift is going to be really a U.S. phenomenon this year, and we would advise the investment community to focus on the U.S. market. We will generate some revenue in Japan, but we have a mandated registration study to complete and gather some data. So I would really see Japan ramp and France ramp for that matter, as really being a 2022 story, where you see the incremental revenue really start to gain momentum. And as I said earlier, I would see that as an incremental growth driver into the future. With regard to the UL2, we still expect that we will have the key North American market pretty much converted by the end of 2022, and we will have an uptick in our gross margins of 4-fold percentage points, which will account for about 40 basis points for Teleflex in our entirety. Regarding DTC, we are very encouraged by what we saw last year with our DTC campaign. And as I said in my prepared remarks, we are planning to run the DTC campaign for a full year. Because of some of the learnings that we’ve made during that time, we’re doubling the spend, but we’re more than doubling the number of impressions we anticipate making. So we expect to make about 125%-plus additional impressions with the campaign in 2021 as compared to 2020. We are also very encouraged by the number of patients that engage with the urologist and encouraged by what we – the appointment levels that we see being generated out of that. So we are investing more heavily behind DTC by rolling it out for a full year in 2021 compared to 2020. So – and in a recovering COVID environment, there are many patients that we have put under the care of a urologist through the DTC campaign that should turn into procedures now that people feel more confident to go back in and get procedures done in the back half of this year, 2021. Thank you, Tom. In closing, I would highlight our key – our three key takeaways from the quarter. First, we delivered a strong first quarter with top and bottom line performance better than our expectations. Second, we announced another restructuring program that reflects our organizational efforts for continuous improvement. This action also contributes to our confidence in long-term margin expansion efforts. And third, we raised our revenue and adjusted earnings per share guidance, reflecting a strong quarter 1 and our outlook for the remainder of the year. I would like to finish by thanking the entire Teleflex team around the world who have worked tirelessly through the pandemic. As we begin to come out the other side of COVID, we will continue to meet our commitments to our 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.

Thank you, operator, and thank you to everyone that joined us on the call today. This concludes the Teleflex Inc. First Quarter 2021 Earnings Conference Call. Have a nice day.

Ladies and gentlemen, thank you for participating. You may now disconnect your lines.