Teleflex Inc Q2 FY2022 Earnings Call

Good morning, everyone. Welcome to the Teleflex Second Quarter 2022 Earnings Conference Call. Please be aware that this call is being recorded and will soon be available for replay on the company's website. Now, I will hand it over to Mr. Lawrence Keusch, Vice President of Investor Relations and Strategic Development. Please proceed.

Good morning, everyone, and welcome to the Teleflex Incorporated Second Quarter 2022 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. Please refer to our press release from this morning for details on how to access the replay. 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 the call up 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'll now turn the call over to Liam for his remarks.

Thank you, Larry, and good morning, everyone. It's a pleasure to speak with you today. For the second quarter, Teleflex revenues were $704.5 million, a year-over-year decline of 1.3% on a reported basis and an increase of 2.3% on a constant-currency basis. Adjusted earnings per share increased 1.2% year-over-year to $3.39. In reviewing the quarter, we posted solid execution across the vast majority of Teleflex, with nearly 90% of the collective business driving constant-currency revenue ahead of plan. Volumes have continued to recover in the U.S., EMEA, and Latin America as COVID hospital admissions have declined from peak levels earlier this year. However, the revenue results were below our expectations as UroLift sales did not rebound to the level we had anticipated. Excluding UroLift, constant-currency growth in the quarter was 4% year-over-year as the remainder of the business collectively outperformed our forecast for the quarter, albeit with some variations across the portfolio as we navigated a dynamic environment. Moreover, when adjusting for the impact of the Respiratory divestiture and UroLift, the rest of the business grew 5.2% constant currency. This strong performance continues to reflect the benefits of a diversified portfolio that has been purposely built and is primarily targeted to the care of critically ill patients. In the quarter, our high-growth portfolio, which includes UroLift, MANTA, hemostatic products, EZ-IO, OnControl, and PICCs, maintained momentum across the majority of growth drivers. Although UroLift declined 13% year-over-year in the second quarter, the remainder of products in the high-growth portfolio increased in excess of 20%. Although the second quarter presented some additional challenges, we remain confident that the environment will continue to improve over time, including for the most elective surgical procedures like UroLift. Moreover, we will continue to execute against our strategy that we articulated at the May Analyst and Investor Day. We remain focused on strong execution and funding our existing growth drivers. We will drive geographic expansion with a particular emphasis on the Asia Pacific region. Margin expansion remains an opportunity as we improve the mix of our high-growth portfolio and generate cost savings. We remain good stewards of our capital with a prioritization on internal investments to ramp our innovation engine and M&A. Our business development team is active with opportunities in scale acquisitions, late-stage technology, and tuck-ins. We believe that the external environment for deals is improving, and we are prepared with a strong balance sheet to take advantage of opportunities that meet our acquisition criteria. In fact, during the second quarter, we completed a product tuck-in acquisition in our interventional business and closed on a distributor-to-direct conversion early in the third quarter. Although both transactions are immaterial to Teleflex in 2022, we remain committed to continued execution of our M&A strategy. Finally, we will continue to advance our TSR and DE&I initiatives. I would like to draw your attention to our soon-to-be-public 2021 Global Impact Report, which highlights our progress as an organization to advance our corporate social responsibility agenda. Now let's turn to a deeper dive into our second quarter revenue results. I will begin with a review of our reportable segment revenues for the second quarter. All growth rates referenced are on a constant-currency basis unless otherwise noted. Americas revenues were $412.7 million, which represents a 0.3% decline year-over-year against nearly 32% growth in the year-ago period, but reflecting improving growth trends on both a 2-year and 3-year basis in the quarter. Surgical was the biggest contributor to growth, offset by a decline in Interventional Urology. The headwind associated with the Respiratory divestiture to the Americas group was minimal in the quarter. EMEA revenues of $145.2 million increased 3.4% year-over-year. The growth was broad-based during the quarter with Anesthesia, Surgical, and Interventional Products making notable contributions. Once again, procedure volume strengthened year-over-year as countries across the region moved past COVID-related restrictions. Excluding the impact of the Respiratory divestiture, revenues rose 6.7% year-over-year. Turning to Asia. Revenues were $76.6 million, increasing 1.8% year-over-year. Southeast Asia and Korea were strong contributors to the performance in the quarter. Growth in China was negative year-over-year due to the impact of the COVID lockdown during May and June. Excluding the impact of the Respiratory divestiture, Asia revenue for the second quarter rose 7.3% year-over-year. Let's now move to a discussion of our second quarter revenues by global product category. Consistent with the prior comments regarding our reporting segment, commentary on global product category growth for the second quarter will also be on a constant-currency basis and ranked by the size of our business units. Starting with Vascular Access. Revenue increased 1% to $163.9 million. The performance in the quarter in part reflects the year-over-year reduction in COVID intensive care unit patients and a decline in overall intensive care unit visits. Looking forward, our category leadership in central venous catheters and midline, along with our novel coated PICC portfolio, continue to position us for durable growth. Based on our second quarter performance, there is no change to our double-digit growth outlook for PICC in 2022 as we invest behind our differentiated portfolio. Moving to Interventional. Revenue was $114.4 million, up 5.3% year-over-year against a tough comparison of 31% growth in the second quarter a year ago. We are pleased with the performance in light of the industry challenges given the contrast shortage. For Teleflex, the contrast staff shortage impact was immaterial, and we see the situation continuing to improve. We remain on track to achieve high single-digit to low double-digit constant-currency growth in our Interventional business for 2022. For MANTA, our large bore closure device, we see approximately 50% growth on a full-year basis. Now turning to Anesthesia. Revenue was $104.7 million, up 14.4% year-over-year, despite a challenging year-over-year comparison. Of our larger franchises, hemostatic products, atomization, and LMA reusable masks all contributed to growth in the second quarter, partly offset by lower sales of tracheostomy products. Hemostatic product revenue increased sequentially and exceeded expectations for the quarter. In our Surgical business, revenue was $99.6 million, representing 5.9% growth year-over-year after a 39% constant-currency comparison last year. Among our largest product categories, instruments led growth for the quarter. Metal and polymer ligation kits maintained growth despite the tough year-over-year comparisons and the COVID-related lockdown in China during the quarter. For Interventional Urology, revenue was $79.8 million, representing a quarter-over-quarter increase of 6.9% but a decrease of 13.2% year-over-year and below our internal expectations. We did not see the recovery in the operating environment in our Interventional Urology business that we were expecting during the second quarter. April was somewhat faster than our plan. We saw some stabilization in May offset by the COVID-19 impact. But finishing out the quarter, June was unexpectedly weaker and well below our expectations. Looking at the revenue composition of UroLift, we saw year-over-year revenue declines in all sites of service during the quarter, including hospital, ASC, and physician's office. We have identified a number of factors that contributed to the revenue performance in the quarter. First and foremost, the broad-based recovery in overall urology procedures that we assumed in our guidance did not materialize. Most investors familiar with Teleflex will be aware that urology procedures in 2021 remained below 2019 levels. We had anticipated patient visits to urology practices to improve year-over-year as we moved through 2022. However, we actually witnessed a drop in patient flow to urologists in the second quarter, which impacted UroLift procedures. In addition, while BPH remains in the top 4 disease states treated by urologists, higher-acuity conditions that require immediate attention such as kidney stones, blood in the urine, and prostate cancer continue to be prioritized. Second, UroLift procedures continue to be hindered by COVID disruptions, including procedure cancellations in late May and the continuation of staffing shortages. We conducted an internal survey with just over 100 urologists responding in the second quarter. Of the respondents, over 50% indicated that they were understaffed. Third, we initiated a voluntary recall in June of certain identified lots of our UL400 UroLift System, which is a first-generation UL1 device. Although immaterial to Teleflex, this created some disruption for the UroLift sales force during the second quarter as they managed the recall activities. The UroLift issue was brought to our attention through our internal quality monitoring process, which identifies the potential where, upon implant deployment, the affected devices may not properly deliver an implant. The issue is immediately obvious to the surgeons and impacts implant delivery at the time of the procedure. It has no impact on a UroLift implant once it has been properly delivered and tensioned. As a result of our root-cause investigation of the issue, we have isolated an out-of-specification product tool on one production line at one facility. We otherwise remain in production for the UL400 device. We have adequate levels of inventory of unaffected products available, so we do not foresee any supply constraints associated with providing replacement products for our customers affected by the recalls or in satisfying future customer orders. To confirm, the recall has not had and is not expected to have a material impact on our consolidated financial results or operations. Importantly, the UroLift 2 system is not subject to recalls due to a different manufacturing process. OEM revenues increased 17.6% year-over-year to $70 million due to strong double-digit growth across all product categories. Our order book remains well positioned as customers recognize our broad competencies with competitive capabilities across our market. I would like to emphasize that the acquisition of HPC has been an excellent addition to the business. The integration has been completed, and we are participating in fast-growth markets for thin-wall interventional microcatheters to access small vessels and fine wire for sensing and ablating technology. 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 related to the Respiratory business divestiture. Second quarter other revenues declined 10.9% to $72.1 million year-over-year. The decline reflects the loss of revenue due to the divestiture of respiratory products, partly offset by manufacturing and supply transition agreement revenues. We continue to expect all MSA revenues will phase out at the end of 2023. That completes my comments on the second quarter revenue performance. Turning to some commercial and clinical updates, and starting with UroLift. With respect to our market development objective for UroLift, we were pleased with our progress during the quarter. We continue to get excellent feedback from surgeons regarding UroLift 2 as well as the UroLift Advanced Tissue Control for use in obstructive median lobe. We believe that the launch of the UroLift 2 and the Advanced Tissue Control will enable us to further engage with surgeons and drive utilization deeper into our labeled indication. In fact, during the second quarter, we have seen procedure growth in accounts that have converted over to UroLift 2 that is greater than for accounts that have not yet made the switch. Based on our progress at the end of the second quarter, we are confident in our ability to convert the vast majority of our U.S. customers to UroLift 2 by the end of 2022. In turn, we expect a 400 basis point margin expansion for Interventional Urology associated with the UroLift 2 conversion when our U.S. base is fully switched over. In addition, we have seen that our patient response to our direct-to-consumer programs is running ahead of our plan for the first half of 2022. We were also pleased with our new surgeon training in the first half of the year. Of note, during the second quarter, we hosted our first BPH summit since the pandemic began, with over 80 physicians attending the live events. And given that recent success, we will be hosting another BPH summit in the second half of 2022. From a clinical perspective, 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. Our review of the clinical data from recent urology meetings indicates that real-world results continue to approximate the LIFT pivotal trial with regard to the retreatment rate. We recently highlighted a number of studies at the European Association of Urology Annual Meeting. Of note, our real-world retrospective study included patients with varying prostate sizes and morphologies across 22 international sites. Our retrospective review of UroLift cases was performed after subdividing patients according to prostate size, ranging from less than 30 ccs to more than 80 ccs, and obstructive median lobe and lateral lobe obstructions. IPSS improved significantly for all volume groups at 24 months. Now turning to an update on our international expansion strategy for UroLift. We are in the early stages of a multi-year multi-geography international market expansion, which is expected to be a meaningful driver of growth in the coming years. The launch of UroLift in Japan, which began on April 1, is tracking to our plan, and we are very encouraged with the results thus far. We continue to engage with key opinion leaders, and cases are continuing to ramp up. The feedback from these initial cases has been overwhelmingly positive, and we are again getting strong responses to the performance of the UroLift 2. Indeed, I recently met personally with 19 urologists during a recent visit to Japan and was very encouraged by the commentary following their initial UroLift cases. Although we consider 2022 as a building year for Japan, we remain excited about our prospects for 2023 and beyond. Japan remains an important long-term opportunity for UroLift with a $2 billion total addressable market, and we are excited to bring this clinically beneficial treatment to those suffering from BPH. Shifting to other international geographies. We remain on track for our expected UroLift commercial milestones, including the launch of UroLift in China and updated reimbursement in France during the fourth quarter. Moving on to some reimbursement updates. On July 7, CMS issued its 2023 physician fee schedule proposed rule, which was in line with our expectations. CMS proposed a reduction in the conversion factor by 4.4% in 2023 as it continues the four-year phase-in associated with the 2022 final rule. We will continue our efforts to engage CMS alongside a broad number of stakeholders to provide our position that the cut reimbursement for over 600 common office space procedures will result in migrating to higher-cost sites of service and limit options for senior citizens in the United States. CMS also issued its 2023 outpatient prospective payment system proposed rules, which were published on July 15. In this case, the facility fee was increased by an average of 2% in the ASC and 3% in the hospital outpatient setting. These rules are open to public comments through September 2022 and do not come into effect until 2023. Considering the proposed changes to the 2023 physician fee schedule and OPPS, UroLift continues to be the most profitable minimally invasive treatment adoption for BPH that does not require an overnight stay in the hospital. Turning to our Interventional business. We've announced the MANTA Ultra Study in June. This study, which is expected to enroll up to 150 patients in 15 investigational sites, is intended to demonstrate the safety of MANTA ultrasound-guided closure, without dependence on pre-procedural depth locator measurements. As noted in our press release announcing the study, the occurrence of access site complications is known to be associated with higher rates of morbidity and mortality and increased costs associated with prolonged length of stay. In addition, we received Health Canada approval for MANTA in May, which will help us continue to build momentum for our large bore closure device globally. That completes my prepared remarks. Now I would like to turn the call over to Tom for a more detailed review of our second quarter financial results. Tom?

Thanks, Liam, and good morning. Given the previous discussion of the company's revenue performance, I will begin with margin. For the quarter, adjusted gross margin totaled 59.6%, a 30 basis point decrease versus the prior year period. The year-over-year decrease was a result of volume and mix; incremental inflation in freight, raw materials, and labor; partly offset by favorable pricing. Of note, our price strategy continues to maintain its traction in the second quarter. Adjusted operating margin was 27.5% in the second quarter. The 70 basis point year-over-year decline was the result of the lower gross margin, lower leverage across our expense base, and planned investments in the business for our growth drivers. Net interest expense totaled $11.2 million in the second quarter, a decrease from $15.9 million in the prior year period. The year-over-year decrease in net interest expense reflects savings from the early redemption of the 2026 senior notes and the impact of reductions in outstanding debt using proceeds from the Respiratory divestiture and operating cash flow. Our adjusted tax rate for the second quarter of 2022 was 12% compared to 14.4% in the prior year period. The year-over-year decrease in adjusted tax rate is primarily due to further enhancements through tax efficiencies of our global structure, partly offset by tax expense arising from the new provision of the U.S. tax law requiring the capitalization of certain R&D expenses. At the bottom line, second quarter adjusted earnings per share was $3.39 or an increase of 1.2% versus the prior year. Normalizing for foreign exchange, incremental inflation, and the Respiratory divestiture implies underlying adjusted EPS growth in the low double-digit range year-over-year. Turning to balance sheet and cash flow highlights. Cash flow from operations in the first half was $101.9 million compared to $265.1 million in the prior year period. The decrease was primarily attributable to higher tax payments and unfavorable changes in working capital driven by higher payroll and benefit-related payments. Also impacting cash flow was an increase in our inventory level to provide support for future growth and to minimize the potential impact from the supply chain disruption. Moving to the balance sheet. Our financial position remains healthy. At the end of the second quarter, our cash balance was $308.1 million as compared to $445.1 million at the end of 2021. The reduction in cash on hand is due to a $135.5 million payment in the second quarter to reduce our revolver borrowing. Subsequent to the debt payment, our floating rate debt now accounts for 42% of the total debt outstanding. Net leverage at quarter end was approximately 1.8x, which remains well below our 4.5x covenant. Now moving on to our 2022 guidance. We are reducing our 2022 constant-currency revenue growth guidance to 3.25% to 4.25% versus 4% to 5.5% previously. The revised constant-currency revenue range represents a $21 million to $35 million reduction versus our prior rate or $28 million at the midpoint. This contemplates a reduction in our outlook for UroLift revenue partially offset by strength in the remaining businesses. When including the impact of the Respiratory divestiture and normalizing for one less trading day, the underlying growth projection of the business remains over 5% year-over-year when considering the midpoint of our 2022 constant-currency revenue growth guidance. On foreign exchange, the dollar has been meaningfully strengthening in the second quarter, including the euro exchange rate where we are most exposed. Our initial guidance for 2022 assumed a dollar to euro exchange rate of 1.12 for the year. Our guidance now assumes an average euro exchange rate of 1.05 for the full year 2022 with parity for the second half. Our guidance now also assumes that other exchange rates have been adjusted to reflect the current rate environment. Revised foreign exchange assumptions represent an additional $55 million headwind to reported revenue. For the year, the expected impact of foreign exchange is now a revenue headwind of approximately 3.7% or $100 million versus 1.7% and $45 million previously. We now expect reported revenue growth of negative 0.45% to positive 0.55% in 2022, implying a dollar range of $2.797 billion to $2.825 billion. I will now turn to our outlook for UroLift. Given the first half results and our expectation for a sequential revenue increase in the second half of the year, we are now assuming that 2022 UroLift revenue will be down slightly year-over-year or approximately $335 million versus the prior guidance for 15% growth. This revised assumption reflects a $58 million reduction in UroLift revenue compared to what our prior guidance range had assumed. As we look into the second half of 2022, we expect an improving environment for UroLift as the macro environment improves, utilization picks up, and newly trained surgeons ramp up. Of note, our current UroLift revenue outlook for 2022 assumes growth in the second half with a sequential revenue increase in the third quarter and a further sequential increase in the fourth quarter. We have not made any changes in assumptions for the international UroLift outlook as we remain on track with our rollout in Japan, the launch in China, and the reimbursement update in France. Turning to the middle of the income statement. We expect gross margin of 59% to 59.5% for 2022. Although freight and labor inflation remained largely in line with our expectations, raw material costs are turning out to be higher than previously projected. Accordingly, we are now projecting an inflation headwind in 2022 of 100 basis points versus 70 basis points previously. Recall this is over and above what we typically see for inflation in any given year. Our latest outlook captures our view for the remainder of the year and does not assume a significant improvement in overall material inflation. Importantly, price remains an inflation offset, and we are confident in our ability to achieve at least 50 basis points of price per year. As a matter of course, we will continue to assess our global pricing and make adjustments as opportunities arise. Relative to operating margin, we now expect operating margin to fall within the range of 26.75% to 27.25%. Our guidance reflects the anticipated gross margin and lower leverage across our operating expense base. Moving to earnings. We are reducing our adjusted earnings per share guidance for 2022 to $13 to $13.40 from a previous range of $13.70 to $14.30, which amounts to a 2.5% decline at the low end and a 0.5 point increase year-over-year at the high end. In bridging from our previous adjusted EPS guidance, we note a $0.50 reduction associated with our revised outlook for UroLift, foreign exchange is now a headwind of $0.46 versus prior assumption of $0.20 and incremental inflation is now a headwind of $0.47 versus $0.33 previously due to the increased raw material costs. The additional headwinds are partially offset by an improved operational outlook for other areas of our business. Additionally, our guidance includes a headwind for the Respiratory divestiture of $0.15. Normalizing for incremental inflation, foreign exchange, and the Respiratory divestiture, implied underlying adjusted EPS growth at the midpoint of guidance is a high single-digit range year-over-year for 2022 and reflects the benefits of our diverse growth drivers and ability to grow earnings in a period of significant macro challenges. That concludes my prepared remarks. I'd now like to turn it back to Liam for closing commentary.

Thank you, Tom. In closing, I will highlight our three key takeaways for the second quarter and our 2022 outlook. First, our diversified product portfolio enables Teleflex to deliver constant-currency growth of 2.3% in the second quarter despite meaningful macroeconomic headwinds. Moreover, when adjusting for the headwind from the Respiratory divestiture, the underlying business growth was 3.5%. Second, we will continue to effectively manage the business and look for ways to minimize incremental headwinds from inflation and supply chain challenges. While the near-term UroLift revenue results are disappointing, our guidance implies an improving growth trajectory in the second half of the year. Moreover, we are well positioned when the macro headwinds for the urology market abate. Third, we continue to execute against our long-term growth strategy. We will continue to incrementally invest in our high-growth portfolio and drive dependable expansion in our durable core portfolio. We have levers in place to drive further expansion in our margins, and our balance sheet is in a solid position with leverage at 1.8x, providing ample financial flexibility for our capital allocation priorities, including mergers and acquisitions. That concludes my prepared remarks. Now I would like to turn the call back to the operator for Q&A.

Our first question will come from Cecilia Furlong from Morgan Stanley.

Liam, I did want to start with UroLift. And really looking to just get a bit more color in terms of how you're thinking about the back half, the revised guidance, but either contributions from backlog coming back in, either ramping volumes under your prior high-volume utilizers, DTC, just kind of a balance of how you're thinking about the environment and then really also just your longer-term view on that 15% growth for the overall business, how you're thinking about potential backlog recapture in '22 and beyond.

Okay, Cecilia. So let's start with the full year outlook for UroLift. Obviously, our prior guidance assumed 15% growth, which would have revenue of $393 million. And due to the current market environment that I went through in my prepared remarks, we are now expecting $335 million, representing a reduction of $58 million or approximately 2% for Teleflex in its entirety. I would like to point out, before I get into the pieces of UroLift, that our constant-currency call-down at the midpoint is 1%, which is an indication that the rest of the portfolio is outperforming by approximately $30 million. And I would also point out that a good portion of this outperformance is coming from the high-growth, high-margin portfolio such as hemostats, intraosseous, and PICCs and the like. The UroLift updated guidance, to answer your question, is not assuming any significant improvement in the operating environment. Essentially, we are taking our Q2 revenue run rate and assuming sequential improvement into Q3 and further sequential improvement into Q4. This would obviously imply positive growth in the back half of 2022. Now I would like to point out as well that the updated guidance for UroLift is based on slower urology procedural recovery trends in the U.S. Our assumptions for OUS have not changed in that regard. Regarding the backlog, we are not assuming that there is a backlog that will come back in, in the latter half of the year. I think our observation is that the UroLift procedure is still a very postponable procedure and there's a reluctance of patients still to come back to the urologists. And there's also a staffing shortage, as I went through in my prepared remarks. So that's our assumptions in the back half, Cecilia, for UroLift and an update on the call-down for the full year.

Our next question comes from Jayson Bedford from Raymond James.

Can you hear me okay?

Yes, we can hear you, Jayson. Thank you.

Could you provide some information about UroLift? You mentioned in your remarks that accounts using UL2 are experiencing better utilization. I'm curious what initiatives you've implemented to encourage more conversions to UL2.

We’re very pleased with the current conversion rate, which is slightly ahead of our internal plan from the beginning of the year. When surgeons switch to the UL2, it provides us with a chance to introduce the Advanced Tissue Control. The combination of these two products is resulting in increased throughput in those practices. This is due to our sales team reengaging with the surgeons and also because surgeons are now treating larger and more complex prostates, thanks to better outcomes with the UL2 compared to the UL1. They also feel more comfortable handling median lobes using the Advanced Tissue Control. We anticipate completing the bulk of the conversion in the North American market by the end of this year, which will contribute to a 400 basis points margin expansion for the UroLift products.

Has the UroLift strategy changed at all over the last six months? You introduced a newer strategy at the beginning of the year, and it seems to have slowed down a bit. Has there been any adjustment to the strategy?

The strategy remains the same because it is effective, as evidenced by the sequential improvement from Q1 to Q2. UroLift grew 7% quarter-over-quarter, despite facing a tough comparison from the previous year where it grew over 120, which was below our expectations. We're observing that new physicians who have been trained are improving their case numbers, and we have also onboarded more high-volume doctors in Q2. This gives us confidence in continued improvement in Q3 and Q4.

Our next question comes from Matthew O'Brien from Piper Sandler.

Continuing with the UroLift discussion, I have a couple of questions. Liam, regarding the approximate $60 million decline for UroLift this year, can you break down how much of that is attributed to the volume impact from patients visiting urologists compared to any loss due to the recall or competition, as well as reimbursement challenges? Additionally, can you clarify if you still anticipate growing UroLift by 15% in 2023, 2024, and 2025 as you indicated during the Analyst Day?

There's a lot to unpack in that question. We don't believe that reimbursement is affecting us, and we know competitive pressures are not the cause of any impact. The recall's effect was quite limited, although there was some disruption within our sales force. We had to replace some products for customers and manage the transition, which caused a bit of disruption. When I examine UroLift's performance this year, I see a decline in patient throughput and in-person visits to urologists in the second quarter compared to the same period last year, which compounds the drop we experienced in 2021 compared to 2019. We are also facing staffing shortages; over 50% of more than 100 urologists we surveyed reported staffing issues in their practices, adding to the challenges we face. We strongly believe that the market conditions are driving the volatility. As I mentioned before, this is a procedure that can be postponed, as it is not life-threatening to delay treating BPH. Regarding the long-term outlook, the long-range plan anticipates a compound annual growth rate of 6% to 7% for Teleflex and 15% for UroLift, with 2022 serving as our baseline, which is an important detail. I'm still confident in the plans we shared on Investor Day. Excluding UroLift and the Respiratory divestiture, our core business grew by 4% in the second quarter. Also, if we look at the second quarter without UroLift, we saw an acceleration in actual growth, moving from 4.5% in the first quarter to 5.2% in the second quarter, indicating that the rest of the business is performing strongly. Although UroLift did see a decline in the second quarter, I believe Teleflex is well positioned for recovery in the BPH market. Our sales team is fully staffed and ready for market recovery, and the market remains substantial, with a total size of $6 billion in the U.S. and another $6 billion internationally. We have a leading minimally invasive technology that offers immediate improvement, no sexual dysfunction, and doesn't require a catheter. I expect sequential improvement in the third quarter and further improvement in the fourth quarter, which will support our performance into 2023. While we haven't adjusted our guidance for international markets this year, we're continuing our international expansion. Japan is progressing well, and we expect developments in China and France in the fourth quarter, including reimbursement in France. We're also monitoring markets in Italy and Spain. In 2023 and 2024, we plan to enter Germany, Taiwan, and India, and we anticipate reimbursement in Brazil by the end of 2024. This is why I feel confident about the long-range plan we established, including the anticipated growth for UroLift in that plan.

Our next question comes from Shagun Singh from RBC Capital Markets.

Liam, Tom, I know it's early, but could you provide some color beyond 2022? UroLift has been a major growth driver for you guys. It's part of the thesis that gets you to your target of 6% to 7%. How concerned are you about an economic slowdown and the impact on that business? How are you thinking about M&A to further boost or even maintain this growth trajectory longer term? And then if I could just ask a question on the macro items, FX, and inflation. What have you assumed? What impact does it have on EPS in 2022? And how much of it flows through into '23?

I’ll ask Tom to address the foreign exchange and inflation questions. I’ll take a few macro-related questions. Regarding the possibility of a recession, I believe Teleflex is well prepared. While no industry is immune to a recession and its effects, I think the medical device sector, in general, has some cushioning against such impacts. Teleflex, in particular, is likely to be more insulated than other medical device companies. This is due to our portfolio being primarily focused on the elderly population. Historically, when economic downturns occur, as evidenced in the last recession, unemployment rates rise, which affects insurance for individuals. In the last recession, unemployment peaked at around 11%, but for those aged 55 and older, it was about 7%, while it was nearly double that for those younger than 55. Because our portfolio targets that older demographic, I feel we would be somewhat sheltered, if not completely, from a recession. As for your question about UroLift, with 12 million men in the U.S. suffering from benign prostatic hyperplasia and 100 million worldwide, there is a sufficient patient population to support continued growth for UroLift, even in challenging economic conditions. Regarding mergers and acquisitions in the current market, interest rates have risen, increasing the cost of funding. However, I believe the market is currently more receptive to fairer valuations than it has been in the past. As I mentioned earlier, we are actively pursuing opportunities and are quite optimistic about the market environment. Our leverage stands at 1.8 times, giving us the capacity to pursue assets. We are searching for both substantial and smaller transactions. As indicated in my previous remarks, we announced a late-stage technology and a direct dealer acquisition, which, while not significant for Teleflex, demonstrates our active presence in the M&A market right now. Now, I’ll turn it over to Tom to discuss the foreign exchange and inflation matters.

Absolutely. So on the FX front first. So the impact for the year right now is to reduce our revenue by approximately $100 million. We had previously expected it to be a $45 million impact, so you've got an incremental $55 million as we think about rates where they currently are as of this week. On the earnings impact from FX, that's up to $0.46 for the full year. It was $0.20 previously. As we think about next year, obviously, I'm not able to estimate what currencies will become early next year. But assuming they're at the same level as they are today, what we'd see is a little bit of an incremental impact because the first quarter was stronger and the second quarter was stronger than where they are today. Again, we'll have to wait and see what currencies do next year to answer that question. On the incremental inflation, we're now expecting an inflationary impact of $0.47 to earnings versus $0.33 previously. And that's largely due to raw material inflation continuing to increase. We're actually seeing some stabilization in some of the logistics and sea freight, so encouraging sign there.

Our next question comes from Matthew Mishan from KeyBanc.

I have two questions about UroLift. First, what do you expect to see in Interventional in the second half to achieve high single-digit to double-digit growth for the year?

Okay. So on Interventional, you are correct, it's an accelerating back half of the year. Obviously, one of the contributors to that is MANTA. As we said, we expect MANTA to grow in and around that 50% mark and will drive a significant proportion of the growth. We also have some supply chain disruption for some of our products in the second quarter that will flush out in the back half of the year. The Langston product is returning to the market also in the back half of the year, which drives that acceleration. And there's a little bit of comp year-over-year that helps as well, Matt, but we're confident that Interventional access will get to high single digits, low double digits in the back half of the year from a revenue perspective.

Okay. Excellent. And then on free cash flow, Tom, you were walking through some of the moving pieces of the first half. And I think everyone has been talking about the higher working capital. As you think about the full year, how should we be thinking about full year expectations for free cash flow at this point?

Well, for the full year, right now, cash flow from operations is in the $400 million to $450 million range, with CapEx in the $75 million to $80 million range. Some of the things that impacted the first quarter and the first half will also play out in the full year as to why it isn't as strong as last year: so an incremental tax payment this year that's actually recouped over the next two years, it's pretty significant; and also some of the changes in working capital where we've taken up inventories to make certain we've got adequate supply to provide a buffer against supply chain disruptions. We also had a really, really strong accounts receivable collection last year that's not expected to reoccur this year. It's right at the end of last year that we don't expect to reoccur. And then also mentioned, there's increased compensation related to payroll. Just the payouts in early 2021 were depressed given 2020's performance, and we're back to a normalized level of payout for this year. So those are some of the big drivers as to why the cash flow isn't as strong this year as it had been previously.

Our next question comes from Mike Polark from Wolfe Research.

I have a couple of quick follow-up questions on UroLift and then one broader question. First, was the recall fully resolved by the end of June, or is there still some lingering impact into July and August? Additionally, can you provide any insight on UroLift volume in July so far? On a larger scale, you've mentioned experiencing some favorable benefits from recent pricing actions. Could you give us an overview of what you're doing across the portfolio, what kind of benefits you expect, and over what time frame we might start to see these benefits reflected in the numbers?

Okay. I will begin with pricing. When we outlined our plan, our pricing was set to be 50 basis points. We are currently ahead of that target. The areas where we have increased prices include our Surgical business, which is performing well, our Vascular business, and our Anesthesia business, which has contributed to this pricing increase. Regarding the recall, it is fully resolved for the quarter. We accounted for all the reserves related to the inventory we recalled in the second quarter, and this is reflected in our financial results. As for your question about future UroLift growth and the situation in July, I prefer not to go into specifics about July, but what I mentioned earlier reflects our expectations. We anticipate sequential improvement in Q3 followed by further sequential improvement in Q4, which provides you with our current outlook.

Our next question comes from Craig Bijou from BofA Securities.

I have one on UroLift and then a follow-up on margins. So at the Analyst Day end of May, you guys seemed pretty confident. And I apologize for asking such a granular question, and Liam, I know you provided a little bit of detail on the monthly performance. But I mean how did June sequentially compare to May? It seems you guys felt pretty strong at the Analyst Day, and then there's a decent-sized miss here. And I understand you didn't get the expected revenue in June from UroLift. But I was hoping just to maybe understand a little bit about the sequential growth kind of within the quarter, if you would.

No, absolutely. To clarify, we were off the quarter by around $14 million. When we provided our guidance at the start of the year, we reaffirmed it at the Analyst Day in the second quarter, anticipating an improving environment from April to June. April was slightly below our expectations. May showed improvement despite some cancellations, but we didn't see the expected progress in June, which turned out to be worse than the previous two months. June actually experienced a decline. We were affected somewhat by the recall, which impacted sales timings, but the more significant issues were the decrease in in-person visits to urologists compared to the previous year and staffing shortages in urology practices that limited patient throughput. In our survey conducted during the quarter, which reflected the COVID environment, urologists reported cancellations due to COVID, either from patients who had it or were close contacts. It's a fair question, and June was indeed much worse than the other two months.

Great. And then just thinking about margins really on '23 or going forward. And I know you're not going to provide guidance, but given some of the pressures that are bringing down margins this year, the lower just nominal amount of UroLift revenue this year, how should we think about your ability to expand margins looking ahead into '23?

So I might ask Tom to cover that. If you don't mind, Tom.

Yes. Sure. As we look ahead, there are several factors that will influence margin improvement in the future. One significant factor is product mix. As we've mentioned, our high-growth product portfolio also includes higher-margin offerings. As these products continue to expand, they will positively impact our overall mix since they represent a substantial portion of business growth. Additionally, we need to focus on UroLift to regain its growth trajectory, which is essential for meeting the objectives outlined during our Analyst Day. Furthermore, we have restructuring programs in place that are expected to yield about $45 million in savings based on current active initiatives. We also implement various cost improvement strategies annually across our plants and distribution centers that enhance productivity, many of which involve Six Sigma methodologies. These are the primary drivers for us. In regard to the guidance we provided at the Analyst Day, we anticipated ongoing inflationary pressures throughout our long-range planning period. Although we expect the inflation rate to be less than this year, we still foresee some degree of inflationary impact moving forward, based on current observations.

Our next question comes from Richard Newitter from Truist.

Just going back to UroLift for a minute. I'm just curious. I totally appreciate that it's mostly the underlying environment, office visits aren't kind of back to where you needed them to be, staffing shortages, maybe a little bit of recall impact. But is there anything else that you guys are picking up in the field with respect to potential share shifting to other types of minimally invasive or even more invasive types of procedures? Is there anything going on there? And anything with respect to retreatment rates and changes in views on the way doctors are kind of doing even more traditional types of surgical approaches?

Yes. So I'll start with retreatment rates. The Kaplan study, which was a 35,000-patient retrospective study clearly demonstrated that retreatment rates for UroLift were very similar to TURP and were well below the retreatment rates for other technologies that are out there in the marketplace. With regard to share shift, no, Rich, plain and honest answer, we haven't seen any share shift in the marketplace. We've analyzed all of the accounts that do business with UroLift and Teleflex, and we have not seen share shift within our existing accounts. We firmly believe that it is end market dynamics that are having the impact on UroLift and the postponable nature of the procedure. So yes, I think that would be the case.

Our next question comes from Mike Matson from Needham.

I have two questions that I’d like to ask. First, regarding UroLift, you mentioned metrics that are exceeding expectations. However, it’s been nearly a year now, and I’m curious about the patients. Shouldn’t the main indicator be the growth in procedures, which appears to be declining? Are these patients simply not scheduling appointments with their urologists, or are the urologists too busy with other procedures to accommodate them?

Yes, Mike. Thank you. So with regard to DTC, we're very pleased with the performance of DTC. At the half-year stage, we're ahead of all of our metrics regarding patients that we're sending on to urologists through all the different media. We do know from our survey it is taking urologists much longer to schedule these patients. That time frame has elongated. But we see the role of DTC is to make men aware that UroLift exists and move those men on to the care of urologists so that the procedure can get done. You are correct, the ultimate measure should be the patient flow on volume. But unfortunately, in the current environment, patient flow into urologists is down. And also, the capacity of urologists to do these procedures because of staffing shortages is also impacted. With regard to your question on Vascular Access. So Vascular Access grew 1% in the quarter. What we saw was fewer intensive care patient visits because of COVID. And this is one of the businesses that is seeing some supply chain disruption. So we've got a modestly heightened back order situation with our Vascular Access portfolio in the second quarter. We still expect it to grow mid-single digits for the full year, Mike.

Thank you, Darius, and thank you to everyone that joined us on the call today. This concludes the Teleflex Incorporated Second Quarter 2022 Earnings Conference Call.

Our conference call for today is now concluded. Thank you all for your participation. You may now disconnect.