Teleflex Inc Q4 FY2021 Earnings Call

Good morning, ladies and gentlemen and welcome to the Teleflex Fourth Quarter of 2021 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 would like to turn the call over to Mr. Lawrence Keusch, Vice President of Investor Relations and Strategy Development.

Good morning, everyone and welcome to the Teleflex Incorporated fourth quarter 2021 earnings conference call. The press release and slides to accompany this call are available on our website at 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 using passcode 1028958. 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 would 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 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.

Thank you, Larry and good morning, everyone. It's a real pleasure to speak with you today. For the fourth quarter, Teleflex generated 7.9% constant currency revenue growth year-over-year and increased 10.4% over the comparable period in 2019. In the quarter, there was one extra shipping day which added approximately 1% to the year-over-year growth rate. Adjusted earnings per share rose 10.8% year-over-year. Our fourth quarter performance was driven by the company's balance of growth drivers, broad portfolio of medically necessary products and category leadership, offset by the impact of COVID-19 and the divestiture of the respiratory assets. As we had anticipated at the time of our third quarter earnings report, COVID-19 remained a headwind during the fourth quarter and elective surgical procedures did not return to comparable 2019 levels. Specifically, COVID cases increased significantly during December in geographies with large populations, including the Northeast, Florida, Texas and California, as COVID spread quickly through these regions. We also saw increased staffing charges as COVID infections accelerated quickly in the latter portion of the quarter. Teleflex executed well in the quarter with dependable service levels to our customers while managing supply chain challenges, freight logistic delays and responding when COVID infection rates began to accelerate. Of note, when excluding UroLift which is the product that was most impacted by the pandemic, revenues from the remaining business grew over 9% on a constant currency basis in the fourth quarter year-over-year. Turning to our performance in 2021. Although the year presented challenges, I am proud to say that Teleflex executed very well. We confronted the unprecedented market disruption head-on as the pandemic continued to ebb and flow. We remained diligent and flexible in order to support our customer needs and keep our workforce safe. We responded effectively as freight and raw material supply challenges escalated through the year. Throughout the year, we stayed true to our objectives by advancing our strategy of driving durable growth, expanding margins and remaining good stewards of our balance sheet. During the year, we invested in our growth drivers, executed on our overseas strategy and rolled out new products. Our customers remained our focus and Teleflex team members enabled us to supply customers with products necessary to care for their patients. We continue to optimize our portfolio with the integration of HPC and Z-Medica acquisitions and we divested certain low growth and low margin respiratory assets. And we did not take our eyes off our people as we fortified our culture and advanced our ESG initiatives. From a financial perspective, we delivered on our full year 2021 financial commitments with constant currency sales growth of 8.8%, adjusted operating margin expansion of 310 basis points and adjusted earnings per share of $13.33, a 24.9% increase year-over-year. None of this would be possible if it were not for the tireless efforts of the global Teleflex team. I would like to thank our employees for their hard work and dedication during 2021 and throughout the pandemic. Turning now to a deeper look at our fourth quarter revenue results. I will begin with a review of our reportable segment revenues. All growth rates that I refer to are on a constant currency basis unless otherwise noted. During the fourth quarter, our Americas, EMEA, Asia and OEM segments demonstrated resilience with all regions showing constant currency revenue growth over 2020 when excluding the impact of the extra shipping day, despite the continued headwinds from COVID. As I mentioned earlier, this underscores the benefits of our diversified product portfolio. Americas revenue was $451.7 million in the fourth quarter which represents 7.6% year-over-year growth. Contributors to the year-over-year growth were Surgical, Vascular and Interventional, partially offset by the impact of COVID-19. EMEA revenues of $164.5 million increased 4.8% year-over-year with Interventional, Surgical and Vascular Access products leading the growth. EMEA continues to face a headwind from COVID-19. Although procedure volumes improved year-over-year as countries across the region continued to open up. Excluding the impact of the respiratory divestiture, revenues rose 8.7%. Turning to Asia; revenues were $78.5 million, increasing 0.5% year-over-year. Excluding the impact of the respiratory divestiture, revenues rose 6.7%. Let's now move to a discussion of our fourth 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 and ranked by size of our business units. Starting with Vascular Access; fourth quarter revenue increased 6.4% to $193 million. Our category leadership in central venous catheters and midlines, along with our novel coated PICC portfolio continued to position us for dependable growth. The PICC portfolio continues to perform well with 11% growth year-over-year as we continue to invest behind our differentiated portfolio and are gaining market share. Intraosseous continues to be a dependable growth driver, with fourth quarter revenues rising approximately 17% year-over-year. Moving to Interventional; fourth quarter revenue was $114.9 million, up 8.2% year-over-year. We executed well during the quarter and saw a strong demand for our complex catheters and balloon pumps. We continue to invest behind our interventional portfolio, including complex catheters and MANTA, our large foreclosure device. MANTA momentum remains strong, both in the U.S. and in international markets, with growth of approximately 45% year-over-year. Of note, we exceeded our objective for 8% share in 2021 of the $200 million to $300 million global market opportunity. Turning to Anesthesia and Emergency Medicine; fourth quarter revenue was $102.8 million, up 20.5% year-over-year. Hemostat products drove the growth in the quarter, offset by tough comparisons in the airway business and lower sales of tracheostomy products. For the full year, Hemostat revenues were approximately $66.5 million and fell squarely into the $60 million to $70 million range that we had established coming into 2021. In our Surgical business, revenue was $106.4 million in the fourth quarter, representing 16.1% growth year-over-year. Among our largest product categories, we continue to witness robust growth in sales of our instruments and ligation clips as the elective surgical procedure environment was stronger than in the prior year period and hospital capital spending increased. For Interventional Urology; fourth quarter revenue was $92.9 million, representing a decrease of 1% year-over-year and a 12% increase sequentially. This result was above the $85 million to $91 million implied guidance for the quarter. We saw a clear improvement in UroLift procedure trends during October and November when compared to the third quarter. However, December was negatively impacted year-over-year by the surge in COVID-19 with continued staffing shortages and an increase in procedure cancellations. Of note, we did not see any pull forward of UroLift procedures into the fourth quarter of 2021 from 2022, resulting from the announcement of the Medicare physician fee schedule final rule in November. OEM revenues increased 3.9% year-over-year to $67.2 million in the fourth quarter as customer demand remains strong across our portfolio. We remain well positioned with broad capabilities in our markets, including faster growth opportunities in thin walls, advanced interventional microcatheters used in neurovascular and other applications. And finally, our other category which incorporates sales of respiratory products not included in the divestiture to Medline, Urology Care and manufacturing and supply transition agreement revenues declined by 12.2% to $84.7 million year-over-year. The decline reflects the loss of revenues due to the divestiture of the respiratory products, partially offset by manufacturing and supply transition agreement revenues and growth in Urology Care. We continue to expect manufacturing and supply transition agreement revenues to phase out at the end of 2023. That completes my comments on fourth quarter revenue performance. Turning now to some commercial updates and starting with UroLift. As we reflect on 2021, we continue to see COVID-19 as being the most disruptive force on the Interventional Urology business. Given the deferrable nature of BPH treatments, patient willingness can modulate depending on the severity of the pandemic. Our experience has shown that when COVID infections pick up, UroLift procedures are negatively impacted and then recover when COVID case counts drop. In addition, staffing charges which we identified in the second quarter created business disruptions, particularly in our office site of service. Importantly, our analysis continues to confirm that we have not lost share completing device-based treatment for BPH. For 2021, UroLift revenues increased 18% year-over-year despite the broader category for urology procedures remaining below pre-pandemic levels. We continue to see UroLift positioned for accelerating growth as pandemic headwinds abate. COVID has remained a headwind early in the first quarter but we anticipate improvement in sales trends throughout the year as elective surgical procedures become less disrupted. UroLift remains differentiated from other outpatient BPH treatments with strong clinical results, studies showing rapid symptom relief and recovery, no new sustained sexual dysfunction and durable results. Investors familiar with Teleflex will be aware that UroLift is being positioned for patients that are suffering with BPH and have failed or are not satisfied with drug therapy. In 2022, we will be intentionally laser-focused on improving utilization of existing UroLift users and driving increased productivity of surgeons that were trained in the midst of the pandemic. We will also fully engage our sales organization to advance the rollout of UroLift 2 with conversion of the vast majority of the U.S. users anticipated by the end of 2022. UroLift 2 remains an important margin driver and we remain positioned to generate 400 basis points of UroLift gross margin expansion once the U.S. user base is fully converted. We believe that a tactical approach to moving our existing UroLift users back towards pre-pandemic procedure levels is the most efficient way to improve growth in 2022. As for our consumer marketing efforts, we continue to view direct-to-consumer as a multiyear catalyst for UroLift in the U.S. For 2021, we exceeded all of our internal targets for the DTC campaign and I would like to share a couple of highlights. Impressions increased nearly 200% year-over-year and exceeded our 150% objective. Likewise, UroLift brand awareness increased 60% year-over-year to 16% and has surpassed 14% per TARP which declined 600 basis points in 2021. Importantly, our DTC programs are extremely focused on driving revenue for Teleflex. Since the vast majority of our customers only offer UroLift for minimally invasive treatment of BPH. We will continue to fund our DTC campaign in 2022 and retain our flexibility to flex up and down depending on the macro environment. Additionally, our international market expansion remains active with several milestones expected for 2022. In Japan, we continue to make progress towards an upcoming commercial launch for UroLift. We secured reimbursement for UroLift last December and have a team in place to initiate our rollout launch once the reimbursement is implemented on April 1 of this year. Japan remains an important long-term opportunity for UroLift with a $2 billion total addressable market and we are excited for the upcoming launch. We continue to expect our sales in the region to ramp in a similar fashion to the U.S. in a market that is one-third the size. Now, turning to Brazil. We are encouraged by our initial commercial activity with a focus on training surgeons and securing reimbursement in the coming years. Additional UroLift launches could come in the second half of 2022, including in France and initial activities in Italy and Spain. Finally, we remain on track for regulatory clearance in China in 2023. To round out the update on UroLift, President Biden signed into law, the Protecting Medicare and American Farmers from Sequester Cuts Act on December 10, 2021. Among a number of important items, the law increased the conversion factor in the Medicare physician fee schedule by 3% for 2022 versus the final rule issued in November. For UroLift specifically, the change will translate into an incremental $100 to $150 in profitability in the office setting in 2022 as compared to the MPFS final rule. We are encouraged by the improvement in reimbursement and will continue to work with stakeholders to address the unintended consequence of the changes to the physician fee schedule that will limit choice for Medicare recipients and move procedures to higher-cost sites of service. Moving to some updates in our Interventional business unit. We have completed the sales force expansion which is intended to provide additional resources for MANTA training and increase our market penetration. On the clinical front, we recently received 510(k) clearance to extend the indication for our specialty support catheters, guide extension catheters and specialty guidewires to include cross chronic total occlusion. Our FDA filing was based on successful results from a peer-reviewed perspective single-arm IDE study that enrolled 150 patients across 13 investigational centers in the United States. The study met the protocol's primary endpoint of procedural success and achieved technical success which is defined as successful guidewire recanalization in more than 93% of these very complicated chronic total occlusion cases. We view complex PCI and especially CTO-PCI, as high-growth spaces within interventional cardiology. And our new labeled indication keeps us competitively positioned. Lastly, we continue to innovate around the core MANTA platform and initiated a limited market release of the 14 French branch depth locator during the quarter. The depth locator expands the use of the 14 French MANTA closure for Impella in emergent cardiogenic shock procedures. Regarding EZPlas, we have not yet received U.S. regulatory clearance following the receipt of a complete response letter. Importantly, we do not have to collect additional clinical data and we have clear line of sight on the additional information that FDA is requesting. We remain committed to gaining FDA clearance for this novel and innovative product and will work collaboratively with the agency. We will update the investment community when we have additional information to share. Now, turning to our 2022 outlook. Teleflex remains well positioned to drive growth in these challenging times. Although the pandemic and its effect on the health care providers are still with us, we expect the impact to be lower in 2022 versus 2021. We believe that elective surgical procedures should improve in 2022 over 2021. We are seeing excellent progress in the ability of the global health care systems to adapt to the pandemic environment. With each subsequent surge in COVID infections, hospitals continue to improve their ability to treat COVID-19 patients and perform elective surgical procedures. We also expect more people to become fully vaccinated and increasing availability of therapies to treat the virus after infection. Our range of guidance contemplates varying scenarios for the impact of COVID which depending on the level of disruption, informs our view on the top and bottom end of our outlook. In addition, our 2022 guidance assumes a normalization in our operating expense as the impact of the pandemic wanes. We will fund our commercial organization to remain in front of our customers and maintain investment for our growth drivers. It is important that we manage Teleflex for long-term durable growth and we will continue to fund our investments to keep us well positioned. That said, to the extent that COVID is more disruptive to revenues than we have assumed, we will be in a position to modulate our spending while still funding projects for long-term growth. Taking these elements together, we would expect to deliver underlying constant currency growth in 2022 that captures our prior 2019 to 2021 long-range plan growth algorithm of 6% to 7% when adjusting for the 1.6% headwind from the divestiture of the respiratory assets. We have made substantial progress over the past several years in reshaping the Teleflex portfolio by investing behind growth drivers and divesting slower growth respiratory assets. As we look forward, when excluding UroLift and our other business, the remaining three-quarters of our business is positioned to grow 4% to 5%. The growth is propelled by a base of medically necessary products and our high-growth portfolio of products, including MANTA, Hemostats, Intraosseous and PICC. On top of these revenues, UroLift remains a significant opportunity as pandemic-related disruptions recede in the United States and we execute on our multiyear, multi-geography overseas expansion. We will also continue to execute on our M&A strategy to layer in additional growth drivers. That completes my prepared remarks. Now, I'd like to turn the call over to Tom for a more detailed review of our fourth quarter financial results. Tom?

Thanks, Liam and good morning. Given the previous discussion of the company's revenue performance, I'll begin with margins. Gross and operating margins remained strong in the fourth quarter and exceeded levels achieved in the 2020 comparable period. Our continued progress in margin expansion in 2021 has allowed us to increase investments toward growth drivers which is an important component of our long-term strategy to enhance durable growth. For the quarter, adjusted gross margin totaled 58.8%, an 80 basis point increase versus the prior year period. The year-over-year increase in gross margin was driven by product and regional mix, restructuring benefits, operational efficiency programs, favorable impacts from pricing, M&A and foreign exchange, partly offset by inflation in freight, raw materials and labor. Fourth quarter adjusted operating margin was 27.6% or a 100 basis point year-over-year increase, driven by the gross margin improvement as well as disciplined expense management and partially offset by planned investments in the business and a partial normalization of expenses following deep reductions in discretionary spending during the prior year as a result of the COVID pandemic. Net interest expense totaled $11.8 million in the fourth quarter, a decrease from $18.5 million in the prior year period. The year-over-year decrease in net interest reflects savings from the early redemption of the 2026 senior notes and the impact of reductions of outstanding debt using the proceeds of the respiratory divestiture and operating cash flows. Our adjusted tax rate for the fourth quarter of 2021 was 13.8% compared to 10.1% in the prior year period. The year-over-year increase in our adjusted tax rate is primarily due to a lower benefit from stock-based compensation as compared to the prior year period. At the bottom line, fourth quarter adjusted earnings per share increased 10.8% to $3.60 and exceeded our internal expectations. Turning to select balance sheet and cash flow highlights. Cash flow from operations for 2021 totaled $652.1 million compared to $437.1 million in 2020. This represents a year-over-year increase of roughly $215 million. The increase was primarily attributable to favorable operating results, lower contingent consideration payments and proceeds received from the respiratory business divestiture that were attributed to performance obligations under the manufacturing and supply transition agreement. Moving to the balance sheet. Our financial position remains sound. At the end of the fourth quarter 2021, our cash balance was $445.1 million versus $375.9 million at the end of the fourth quarter of 2020. During the fourth quarter, we repaid $200.5 million of revolving credit facility borrowings. And at the end of the fourth quarter, $141 million was outstanding on our revolver. Net leverage at quarter end was approximately 1.7x which remains well below our 4.5x covenant. Lastly, we have no debt maturities of material size in 2022 or 2023. Now moving on to our 2022 guidance. To begin, I'll provide a framework of key planning assumptions underpinning our financial guidance. Although hard to predict in the current environment, our outlook for 2022 assumes that elective surgical procedures improve over 2021 but reflect COVID disruption in the first quarter. We also expect inflation to be greater in 2022 than 2021 with a larger impact in the first half of the year as compared to the second half. Our 2022 guidance ranges account for uncertainty on the severity of COVID, the impact of staffing shortages and inflationary pressures. The high end of the range assumes less impact from these factors but not a totally normal environment. In addition, our planning assumptions exclude any material regulatory or healthcare reforms as well as any future M&A that has not been disclosed. Now for the key elements of our 2022 guidance, starting with revenue. We remain confident in our portfolio of high-growth drivers and the durable growth core. We are taking a measured approach to begin the year, given expected near-term pressure from the recent COVID surge. We expect constant currency revenue growth of 4% to 5.5% in 2022. Excluding a 1.6% headwind from the sale of the respiratory assets last year, our constant currency revenue growth is expected to be 5.6% and 7.1%, capturing our prior growth algorithm in the 2019 to 2021 long-range plan. Our high-growth portfolio, which is spread across several business units and includes UroLift, MANTA, Hemostats, EZ-IO, OnControl and PICCs, represents approximately 25% of total revenues in 2021. As implied by our 2022 constant currency revenue guidance, our high-growth portfolio is expected to increase in the mid-teens with UroLift growth of approximately 15%. Our durable core platforms, which account for over 60% of revenues, are estimated to increase approximately 4%. Our other category includes sales of respiratory products not included in the divestiture to Medline. Manufacturing supply transition agreement revenues, and Urology Care accounted for approximately 12% of total revenues in 2021. For 2022, this segment is anticipated to decline in the low to mid-teens year-over-year largely due to the respiratory divestiture. Now turning to currency. We expect foreign exchange rates will be a headwind to revenue growth of approximately 1.7%. As a result, we expect our reported revenue growth to be 2.3% to 3.8% year-over-year, implying a dollar range of $2.874 billion to $2.917 billion. Moving to gross margin. We anticipate that adjusted gross margin will be in a range of 59.75% to 60.25%. We continue to benefit from mix shift towards higher-margin products, restructuring and operational efficiencies, partly offset by incremental inflation. The incremental inflation is estimated to be a headwind of approximately 70 basis points in 2022, due primarily to elevated freight costs, raw materials and direct labor. Our guidance assumes that the elevated freight costs will show improvement in the second half of the year. Regarding operating margin, we expect adjusted operating margin to be in the range of 27.75% to 28.25%. Our 2022 guidance assumes incremental investments to support our key growth drivers, including UroLift, MANTA, intraosseous in the Asia Pacific region. In addition, as we have previously indicated, we continue to expect a normalization of operating expenses as COVID disruptions abate. Keep in mind that discretionary operating expenses, including travel and entertainment and open headcount were significantly curtailed in 2020 due to the impact of the pandemic on revenues and commercial activities. Although operating expenses increased in 2021, they were not yet fully restored to pre-COVID levels. As we plan for an improving environment in 2022, we are assuming a normalization of our operating expenses as well as investments for our growth drivers. Despite the disruptions over the past two years, we continue to make considerable progress on our margin expansion initiatives. Of note, a comparison of the midpoint of the 2022 guidance versus the 2019 pre-pandemic levels, reveals a healthy 190 basis point increase in gross margin and a 220 basis point increase in operating margin. We believe our incremental investment is prudent to fuel our long-term durable growth initiatives, especially as we see the disruption from the current COVID surge improving over time. In turn, we view 2022 as a transition year for margins as it remains multiple levers to drive profitability higher over the coming years, including product mix shift, manufacturing efficiencies and announced restructurings, partially offset by continued investments in the business to sustain our durable growth profile. Moving down the P&L. We expect net interest expense to be approximately $51 million. The year-over-year decrease in interest expense largely reflects reductions in debt funded by proceeds from the respiratory divestiture and strong cash flow generation. Turning to taxes. We project that our adjusted tax rate will be in the range of 10.5% to 12.5% for 2022. Of note, the high end of the range reflects the change to the tax deductibility of certain R&D expenses beginning 2022 under the 2017 Tax Cuts and Jobs Act. We understand there is bipartisan support for these R&D tax benefits, leading to the potential that the provisions that became law for 2022 could be reversed at some point during the year. If the law is repealed, we would anticipate that our tax rate to be towards the lower end of the guidance range. Considering these elements, our adjusted earnings per share guidance for 2022 is $13.70 to $14.30, a 2.8% to 7.3% year-over-year increase. Inclusive in the guidance is an approximately $0.17 headwind associated with the divested respiratory business and approximately $0.33 for incremental inflation. Earnings per share growth, excluding the respiratory divestiture and incremental inflation is expected to be approximately 7% to 11%. As a reminder, the low end of our adjusted EPS growth range reflects the change in the R&D expense deductibility for tax purposes. We estimate that weighted average shares outstanding will increase to 47.7 million for the full year 2022. Lastly, I want to provide some additional color on the cadence of our 2022 financial results. Specifically, three items impacting our first quarter results. First, as I mentioned previously, our first quarter results are expected to be impacted by continued COVID-related headwinds on elective surgical procedures, similar to what many medical device companies are experiencing to date. Second, note that the first quarter has one less selling day as compared to the same period of 2021. Third, we expect the headwind from foreign exchange rates to be higher in the first and second quarters before moderating in the second half of 2022. Accordingly, we expect our reported revenue to be approximately flat year-over-year in the first quarter. On a days adjusted constant currency basis, our first quarter growth is expected to be approximately 3% to 3.5%. And when excluding the impact of the respiratory divestiture, our days adjusted constant currency growth is expected to be roughly 5.5% to 6% in the first quarter. We also expect our adjusted gross and operating margin to decline year-over-year in the first quarter driven by incremental inflation and a normalization of operating expenses. That concludes my prepared remarks. I would now like to turn it back to Liam for closing commentary.

Thanks, Tom. In closing, I will highlight our three key takeaways from the quarter and our 2022 outlook. First, our diversified product portfolio enables Teleflex to deliver constant currency growth of 7.9% in the fourth quarter and 8.8% for 2021 despite the significant disruption from COVID during the year. Second, we continue to execute on our strategy to drive durable growth across our diversified portfolio with investment in organic growth opportunities, margin expansion and deployment of capital for M&A. Third, we remain confident in our growth strategy. We see our core growth platforms driving 4% to 5% growth, with the additional growth coming from UroLift as pandemic headwinds subside. We have levers in place to drive further expansion in our margins. And our balance sheet is in a solid position with leverage of 1.7x, providing ample financial flexibility for our capital allocation priorities. We remain confident in our future and our ability to continue to meet our commitments to patients, clinicians, communities and shareholders. That concludes my prepared remarks. Now, I would like to turn the call back to the operator for Q&A.

Thank you. Your first question comes from Jayson Bedford with Raymond James.

Good morning and thanks for taking the questions and the comprehensive review here. So I guess just to start and I hate to be too granular here. But maybe can you comment on what you're seeing in the environment today versus, let's call it, a month ago? And I just want to feel a little comforted that you are seeing a little bit of a pickup as COVID wanes.

Yes. Across our business, we have both winners and losers depending on COVID outbreaks. Some areas perform better, while others experience challenges. Vascular and certain respiratory filters tend to do well, while elective procedures, particularly UroLift, along with Surgical and Interventional services, may struggle. After the last outbreak at the end of August, we noticed UroLift procedures increase in September, October, and November. However, they were affected in December and continued to see impacts into January. We expect to see improvements as hospitals reopen and more people feel assured about undergoing these procedures. We anticipate better conditions in February and March. I also want to commend hospitals, doctor’s offices, and ASCs for managing the recent outbreaks more effectively. The challenge with Omicron was its higher transmissibility, which contributed to staffing shortages, as individuals had to isolate for five days if exposed due to its infectious nature. Overall, we are seeing an improving environment as we move through February.

Okay. As a general follow-up, Liam, you mentioned in the release about optimizing the portfolio for growth, which aligns with your previous comments. The question is whether the current environment is more or less favorable for your strategy. In other words, can you be more proactive in this environment?

We have significant resources available, with leverage levels at 1.7x. I feel much more optimistic about valuations today compared to a year ago. We continuously enhance our portfolio, having acquired HPC and Z-Medica while divesting of our respiratory assets in the last 24 months. We're actively purchasing assets, and it seems that valuation expectations have shifted alongside changes in the IPO market. This insight is not only coming from us but is also being communicated by the banking community to private companies. I'm pleased that we maintained financial discipline over the past year, which has led to more productive conversations with private companies. They now view a strategic exit as more attractive than an IPO at this time.

Good morning. Thank you for the questions and congratulations on a successful year-end. Liam, regarding UroLift, what insights do you have about the recent reimbursement change? Looking at the broader picture, how do you assess its contribution to growth? You mentioned a shift from 4% to 5% with UroLift moving towards your long-term target of 6% to 7%. Where do you anticipate that additional growth will originate from? How much of it will come from international markets, and what other factors are influencing this growth? I have one follow-up question.

Yes, Larry. So with UroLift, first of all, we're really pleased with the strong finish to the year, $93 million in the fourth quarter. And indeed, our overall performance in the year and thank you for acknowledging it. I think we're really proud of what we did. We delivered revenue growth of 8.8% versus our original guidance of 8% to 9.5%. And don't forget, the original guide of $28 million to $32 million of respiratory revenue that we divested, delivered gross margins of 59.4%, 270 basis points of expansion, up margin 310 basis points of expansion. And earnings per share, 25% growth in earnings per share while also losing $0.10 to $0.15 in the respiratory divestiture. Looking forward, we've obviously communicated that we expect UroLift to grow 15% this year. We feel that that's very achievable in the current environment. We expect it's going to be impacted by COVID in the first quarter as one would anticipate. And then we would anticipate lower single digits in the first half of the year and then picking up strongly in the back half of the year, obviously, an easier comp in Q3. And then going into Q4, as people work through their deductibles, you'd expect it to continue along that vein. We're really confident on our core business being well capable of 4% to 5%, Larry. And with good execution, I think we should be at the upper end of that range. So our growth algorithm of 6% to 7% is very, very much intact, as demonstrated in our guide today. So our constant currency guide is 4% to 5.5%. But there's 1.6% of a headwind from the respiratory divestiture, that's 30 basis points from the loss of a day which is in Q1 which actually gets you to 5.9% to 7.4%. So if anything, the algorithm has improved because of the base, our core business doing even better through good execution and really solid investment behind some of our good growth assets such as Intraosseous, such as our PICC portfolio, such as MANTA and such as our hemostasis portfolio.

That's helpful. And for my follow-up, Liam, just to follow up on Jayson's question earlier on M&A. What are your criteria deal size? How are you thinking about deal size? And any areas of interest you can share? Thanks for taking the questions.

Certainly, Larry. We focus on assets generating between $60 million and $300 million in revenue. Our strategic criteria require that they align with one of our core pillars or a related area. They must possess strong intellectual property and offer significant value within the hospital setting. Additionally, these products should be clinically superior to other market options and demonstrate high usage, creating a strong customer reliance. We also prioritize assets that enhance our gross margin and aim for those that can improve our operating margin over time. Although we are willing to accept some short-term dilution in operating margin, like we did with NeoTract, as long as future leverage is evident. These represent our primary financial and strategic considerations, Larry, and I appreciate your questions.

Hey, thank you for taking the questions. Good morning.

Good morning, Matt.

Good morning.

I just wanted to ask specifically on UroLift, the 15% guidance. Two things. One, could you help us a little bit more with the cadence of UroLift growth that you expect through the year? And how much contribution from Japan are you anticipating?

Yes. Good question, Matt. So as I answered Larry, the first half will grow in the lower single digits due to the impact of COVID-19 through the first quarter and obviously, staffing shortages, while the second half of the year will grow really strong double digits. The contributions will be small from the international markets. You've got Japan, Brazil and France. They'll ramp in the second half of the year but they won't really become meaningful math until 2023 and beyond. So for this year, 2022, the main growth driver for UroLift will continue to be the United States. And I'll just add to that, Matt and I mentioned this in my prepared remarks that we trained through the pandemic. That is the most strategic way to drive growth in UroLift in 2022 and then bring on the international markets in 2023 and beyond. And obviously, you'll see places like China come into play in 2023 and so we've got a great algorithm for growth for all of Teleflex and also from UroLift. And as Tom outlined in his prepared remarks, we've got 25% of our total revenue that is in that mid-teens growth which includes UroLift but as well as that, you've got MANTA and Hemostat and intraosseous and PICC, all driving that real solid top line growth for Teleflex.

Great. Thanks, Liam. And just a follow-up on the pipeline. Did you give an update on the RFP? Or could you give us an update on that, where that is?

Yes. I did in the prepared remarks, Matt. So as I said in the prepared remarks, we've received the complete response letter and we are working on the information requested. The good news is the request from the FDA is not focused on clinical data and with a clear line of sight on the additional information that the FDA is requesting. We will continue to interface with the FDA and it is very collaborative. But it's clear to us, Matt, this is also the first time the FDA has approved a biologic product such as this. So we're breaking new ground together. And as you're aware, Matt, the RFP from the military within that $3 million to $4 million, it's a nice market in the future, it's $100 million that we'll grow into. But that $3 million to $4 million is not in our guidance for this year.

Great. Thank you for taking the questions. I was just wondering if you could just let us know what the impact is of inflation and FX on margins and EPS in Q4. And then what have you assumed in 2022? And then just with respect to margins, can you bridge us from '21 to '22? I'm just trying to understand the puts and takes. So as it relates to, I guess, UroLift 2.0 conversion, we have slightly less than 40 basis points inflation. I think you called out 70 basis points on the call, annual pretax savings. I think you have about $40 million in '22 and '23. And then just higher level of investments. If you can just bridge that, that would be helpful.

Thank you, Shagun. That level of detail requires somebody called Thomas Powell. So Tom?

In the fourth quarter, we observed some changes in exchange rates that led to a decrease in the tailwinds we had enjoyed earlier in the year, negatively impacting our margins compared to the previous year, although they remained slightly up year-over-year. Inflation also increased in the fourth quarter, rising to about $4.5 million, which was higher than our estimate of $3 million. We anticipate that this trend will continue into next year. Looking ahead to margins, I want to remind everyone that our gross margin had improved by 270 basis points in 2021 compared to 2020, showing robust growth despite inflation. For 2022, our guidance for gross margin is between 59.75% to 60.25%, which is a 60 basis point increase at the midpoint. This expected increase is largely due to the product mix, particularly UroLift, along with restructuring and operational efficiency initiatives, though it will be partially offset by inflation. We estimate that supply chain inflation will be about $20 million higher than in 2021, representing an additional impact of roughly 70 basis points. If we exclude this inflation effect from our gross margin guidance, we are looking at an increase of around 130 basis points at the midpoint. We expect gross margins to strengthen throughout 2022, with our guidance factoring in anticipated improvements in raw materials and logistics inflation during the latter half of the year, along with a favorable product mix as UroLift takes on a larger share. Overall, inflation and mix will influence our gross margins and the timing of quarterly margin improvements. For operating margin, we are guiding between 27.75% and 28.25%, which is flat compared to 2021 at the midpoint. The rise in supply chain inflation will adversely affect gross margins, which will subsequently impact operating margins. Additionally, in 2020, we cut operating expenses significantly due to the COVID pandemic, which limited our commercial activities and drove us to reduce costs to mitigate revenue losses. In 2021, we began to restore some activities and spending but hadn’t returned to pre-pandemic levels. For 2022, we expect to largely resume normal commercial activities, leading to an additional $20 million or 70 basis points in operating expenses. Excluding the impacts of supply chain inflation and the normalization of expenses, we anticipate a 140 basis point improvement in operating margin at the midpoint. Furthermore, in 2022, we plan to continue investing in key growth areas such as UroLift, MANTA, and EZ-IO, especially given the positive results from the UroLift direct-to-consumer program and the expansion of our salesforce, with ongoing investments in MANTA as well. We expect to see improvements in operating margin throughout the year, driven by similar factors contributing to gross margin enhancements.

Yes. Thank you for all your color.

Hopefully, I answered all your questions.

Yes. Appreciate it.

Hi, good morning and thank you for the questions. Liam, I wanted to begin with UroLift. You mentioned efforts to increase UroLift usage among your current position base and also to boost adoption in recently trained positions. Could you highlight some key points you are concentrating on this year? Additionally, as you move beyond COVID and consider the reopening of international markets like Japan, China, Brazil, and Europe, how do you view the long-term growth potential for UroLift?

So, it's clear to me regarding your question that UroLift's growth has been affected by COVID. We've noticed this during each outbreak of COVID. As I mentioned earlier, we observed significant growth in UroLift from September to November. However, in December, we experienced a decline due to the COVID outbreak. Despite this setback, we exceeded our internal expectations thanks to strong growth in the first two months of the quarter. We're focusing on a few growth pillars for UroLift. The first is to increase utilization among existing doctors over the coming years. During COVID, our champions and interventionists, who primarily offer UroLift, saw their utilization decline due to patient reluctance and staffing shortages. To drive a 15% growth, we need to enhance utilization in this area. The second point is to expand internationally. We'll be entering Japan starting April 1, followed by France later this year, continued progress in Brazil, and eventual entry into China next year, along with potential expansions into Italy and Spain. Typically, companies expect that the revenue generated in the U.S. should be matched overseas if executed well over several years. Lastly, we’re continuing to train new doctors throughout the year. It’s crucial to note that we haven't fully penetrated this market. We've trained around 3,400 doctors out of 12,000 and completed about 300,000 procedures, predominantly in the U.S., while there are 12 million eligible men in the U.S. and 100 million globally. I am very optimistic about the long-term growth opportunities, and we look forward to moving past COVID to truly demonstrate the growth potential of this product.

And Cecilia, it's Larry. I would just mention that we will obviously provide a longer-term view of our outlook for UroLift at our May Analyst Meeting.

Hi, thanks for taking my questions. I wanted to ask about the UroLift reimbursement changes that happened. I think that went into effect at the beginning of the year. So can you maybe talk about what you're seeing there? Have you seen maybe the physicians changing site of care or anything else? And with the 15% guidance, how much have you factored in, if anything, for that issue?

We haven't noticed any changes in the site of service and I don't expect changes in the coming year. The law signed by President Biden has actually improved the reimbursement for the UroLift office procedure by adjusting the conversion factor by around 3%, which adds an additional $100 to $150 net to the urologist for performing this procedure. We have also implemented our own pricing strategy in the market, which has been very well received. Just six weeks in, a significant percentage of our customers have signed up for our plan. Therefore, I do not foresee much shifting in the site of service. Also, it's important to note that 70% of our UroLift cases are performed outside of the office. The CMS ruling only affected Medicare and Medicaid patients in the office, which accounts for about 20% of the total. We have strategies in place, the team is executing well, and our 15% growth projection is based on our current understanding of the situation and our insights regarding the ongoing impact of COVID as we move forward throughout the year.

So the currency impact that we've assumed in our guidance is about $0.20.

Hi, can you hear me?

Yes.

Okay, excellent. Just the first question on Vascular Access. That continues to exceed our expectations and it's about $100 million above where you were at in 2019. It seems like you're pretty confident around PICC and Vidacare as you're kind of moving those into the high-growth category. I'm just curious, how should we think about the durability of the improvement in Vascular Access versus maybe some of the other areas that may have been COVID-related beneficiaries?

For Vascular Access, we anticipate mid-single-digit growth this year. Our CVC portfolio has gained from COVID in the past few years, but the real growth is driven by our intraosseous and PICC portfolios as we continue to capture market share due to our coating technology. This is a global initiative for us. We recently launched a new CBC kit that is gaining significant momentum in the global market, which is also enhancing our customers' investments in our CBCs, particularly in key North American markets. We're very optimistic about this area, which is our largest franchise and is performing exceptionally well. In addition to the new product, we have another exciting new offering related to our PICC positioning. Not all growth is created equal, and this business receives more R&D investment than others, enabling us to maintain innovation and differentiation. It’s a strong franchise.

Great, thanks. Maybe just a couple of quick product one to follow up on that. The PICC side, would you notice anything on the competitive front, there was a bigger player there that grew for years at the rate that you seem to be now. Has anything changed there? Or would you actually point to the differentiated coatings as sort of how you're maintaining that?

So for us, it's all about the coatings. And what changed, Dave, was in the past, hospitals didn't have to report infections on PICCs. And the assumption was when they weren't measuring it, the assumption was that the PICC infections were lower. PICC infections on CBCs used to be at 4% before we launched our coated technology on the CBCs. And many studies have shown we've been able to bring it down practically to 0. And of course, once they started measuring PICC infections, they were around 4%. So now hospitals don't get reimbursed for those infections. And that's why we're being so successful with our PICC technologies. It's really around our coatings that are both antithrombogenic and anti-infectious. So we have some nice pipeline of products coming through there and we've expanded our vascular closure. We've really like working on our instruments. And of course, it holds like as we continue to perform exceptionally well globally. And quite frankly, the team in Surgical has done an outstanding job in executing as procedures have returned. And also an area that we take price, I should mention that. It's a nice opportunity for us. And on pricing I think it's important that we did mention, we anticipate having positive pricing this year on that 50 basis points consistent with what we drove last year in order to offset some of the inflationary pressures. And it's for a company by Teleflex, I believe that will be successful because we're used to taking prices out of our DNA and we'll continue to execute on that price, in particular, with Surgical within our Vascular business unit and also overseas in Asia and Europe. So, I just want to make a point as well before we close. Thank you.

Thank you, April and thank you to everyone that joined us on the call today. This concludes the Teleflex Incorporated Fourth Quarter 2021 Earnings Conference Call.

This does conclude our conference for today. Thank you for your participation. You may now disconnect.