Teleflex Inc Q2 FY2023 Earnings Call

Good morning, everyone, and welcome to the Teleflex Incorporated second quarter 2023 earnings conference call. The press release and slides to accompany this call are available on our website at teleflex.com. Please note that webcast viewers will have the ability to advance the presentation slides on their own, simply follow along with the presentation as we proceed through the call. As a reminder, a replay will be available on our website, those wishing to access the replay can refer to our press release from this morning for details. Participating on today's call are Liam Kelly, Chairman, President and Chief Executive Officer; and Thomas Powell, Executive Vice President and Chief Financial Officer. Liam and Tom will provide prepared remarks, and then we will open the call to Q&A. Before we begin, I'd like to remind you that some of the matters discussed in this conference call will contain forward-looking statements regarding future events as outlined in the slides posted to the Investor Relations section of the Teleflex website. We wish to caution you that such statements are, in fact, forward-looking in nature and are subject to risks and uncertainties, and actual events or results may differ materially. The factors that could cause actual results or events to differ materially include, but are not limited to, factors referenced in our press release today as well as our filings with the SEC, including our Form 10-K, which can be accessed on our website. Now, I will turn the call over to Liam for his remarks.

Thank you, Larry, and good morning, everyone. It is a pleasure to speak with you today. On this morning's call, we will discuss the second quarter 2023 results, our pending acquisition of Palette Life Sciences, and our financial guidance for 2023. Turning to the second quarter, Teleflex revenues were $743.3 million, a year-over-year increase of 5.5% on a reported basis and an increase of 5.9% on a constant currency basis. Second quarter adjusted earnings per share was $3.41, a 0.6% increase year-over-year. We saw stable utilization in the acute care setting in our global markets. The balanced performance in the quarter continues to demonstrate the benefits of Teleflex's diversified product portfolio and broad geographic footprint. From a macro perspective, we continue to see sequential stabilization with respect to material inflation, and we'll continue to monitor trends during the second half of 2023. Our supply chain remained stable in the second quarter, although we are still not yet at normal levels. As expected, we witnessed a continued stabilization in hospital staffing. This was evident in our second quarter revenue growth as most Teleflex products are exposed to the hospital setting. Conversely, we are still experiencing geographic pockets that are encountering more persistent staffing disruption in the ASC and office side of service, but note that bottlenecks are seeing some easing. Now let's turn to a deeper dive into our second quarter revenue results. I will begin with a review of our geographic segment revenues for the second quarter. All growth rates that are referred to are on a constant currency basis unless otherwise noted. Americas revenues were $424.7 million, which represents 3% growth year-over-year. In particular, we saw strong performances in our Vascular, Interventional, and Surgical businesses. EMEA revenues of $147.8 million increased 0.7% year-over-year. During the quarter, we saw strength in our vascular and urology drainage businesses. Turning to Asia, revenues were $86.7 million, increasing 19.1% year-over-year. During the second quarter, we saw stable demand across the region, including growth in excess of 20% in China. From a product perspective, we saw strong double-digit growth in Interventional Access and Interventional Urology in the region. Let's now move to a discussion on our second quarter revenues by global product categories. Commentary on global product category growth for the second quarter will also be on a constant currency basis. Starting with Vascular Access, revenue increased 6.6% to $173.8 million. We executed well during the second quarter. Initial launch activities for our next-generation Arrow VPS Rhythm DLX navigation device and the new Arrow PICC pre-loaded with the NaviCurve Stylet have generated a positive customer response. Over the long term, we remain positioned for dependable growth with category leadership in Central Venous Catheters and midlines, anticipated share gains with our novel coated PICC portfolio, and new product introductions. Moving to Interventional Access, revenue was $124.8 million, up 9.6% year-over-year. Procedure volumes remained stable in the quarter, and we continue to benefit from our diversified portfolio. Balloon pumps, right heart catheters, and access and closure all grew at double-digit rates. MANTA continues on a trajectory for strong double-digit growth in 2023. Turning to Anesthesia, revenue was $100.8 million, down 3.6% year-over-year. A tough year-over-year comp due to the timing of military orders in the prior-year period impacted results. In our Surgical business, revenue was $106 million, up 7.7% year-over-year. In the quarter, we advanced our integration of Standard Bariatrics and the training of new surgeons on the use of the Titan SGS Stapler in sleeve gastrorectomy procedures is accelerating. For Interventional Urology, revenue was $77.8 million, representing a decrease of 2.3% year-over-year. Once again, we witnessed year-over-year growth for UroLift in the hospital setting, but the office side of service remains challenging. The overseas launch activities continue to progress in line with expectations with Japan UroLift usage growing in line with our expectations. OEM revenues increased 19.8% year-over-year to $84.1 million. The strength in the quarter was broad-based across our portfolio, with double-digit growth in all of our product categories, including micro catheters. We continue to have good visibility into the business and see solid demand dynamics throughout 2023. Second quarter other revenue increased 4.8% to $76 million year-over-year. We continue to expect all MSA revenues to cease at the end of 2023. That completes my comments on the second quarter revenue performance. Turning to some commercial updates. On July 26, we announced a definitive agreement to acquire privately held Palette Life Sciences for an upfront cash payment of $600 million at closing and up to an additional $50 million on the achievement of certain commercial milestones. The acquisition will expand Teleflex Interventional Urology to include a portfolio of fast-growing Non-Animal Stabilized Hyaluronic Acid or NASHA spacer and tissue bulking products that improve patient outcomes in urology, urogynecology disorders, colorectal conditions, and radiation oncology procedures. Palette is estimated to generate net sales of approximately $56 million on a stand-alone basis in fiscal year 2023. We believe Palette will contribute meaningfully to our growth in the coming years with revenue growth in the high-teens to low-20% range year-over-year in 2024. The strong growth profile for Palette gives us further confidence in our ability to deliver on our 2023 to 2025 LRP growth objectives. The Barrigel rectal spacer is the flagship product for Palette and generates the majority of the company's revenue. Barrigel is a NASHA spacer with a compelling value proposition, driven by a reduction in radiation delivered to the rectum during prostate cancer radiation therapy, while increasing tumor control and patient quality of life. In addition, the Palette Life Sciences portfolio also includes Deflux and Solesta, which are NASHA-based tissue bulking agents designed to treat pediatric vesicoureteral reflux and fecal incontinence, respectively. The acquisition of Palette Life Sciences will allow us to incorporate this exciting high-growth and high-margin technology into our Interventional Urology business units along with our well-established global call points. We are focused on bringing urologists and other specialists more innovative technologies that can positively impact patient care. The acquisition of Palette is attractive for three primary reasons. First, Barrigel is a differentiated rectal spacer with a strong growth profile following FDA clearance in May of 2022 and represents a highly complementary product to our existing Interventional Urology business. In recent years, the treatment of prostate cancer has increasingly utilized hypofractionated radiation therapy, which uses higher doses of radiation in fewer treatments. In order to reduce radiation-associated complications, the usage of temporary rectal spacers has grown as a way to protect healthy rectal tissue from harmful radiation. Barrigel has grown by expanding market adoption since its launch due to its unique product features. Unlike other technologies, Barrigel is easily sculpted when placed between the prostate and rectum, providing comprehensive protection from radiation therapy. The sculptability allows the physician to achieve predictable protection of healthy rectal tissue prior to radiation therapy. Barrigel is also highly visible on transrectal ultrasound, which aids accurate placement; is biodegradable and offers one-step assembly of the delivery device in all sites of service. Second, there is a large and growing global market for rectal spacers. The American Cancer Society estimates that there will be 288,000 new cases of prostate cancer in the United States with the incidents growing 3% a year. In addition, the increasing use of hypofractionated radiation therapy is driving demand for rectal spacers to protect healthy tissue. Barrigel was cleared for marketing in the United States and Australia and is CE marked. We expect to gain market clearance in additional geographies over the coming years. Third, the acquisition of Palette is reflective of our disciplined capital deployment strategy. From a strategic perspective, the addition of Palette's NASHA portfolio complements our strong presence in the treatment of benign prostate enlargement. Of note, urologists perform the majority of rectal space replacements, which will leverage our broad and established sales organization. Today, 97% of physicians using UroLift also treat prostate cancer. In addition, the treatment of prostate cancer is not deferrable. So we are adding another durable growth driver to our portfolio. We also expect interest in rectal spacers to provide opportunities to cross-sell UroLift. From a financial point of view, the transaction is consistent with our strategy to acquire assets that are accretive to Teleflex's growth rate and margins. Palette's adjusted gross margin will be accretive to both the corporate average and the Interventional Urology business unit. In addition, we expect Palette's operating margin to enhance the corporate average in the near term. Finally, post-close, our balance sheet will remain sound, allowing us to continue to execute on our long-term capital deployment strategy. The acquisition is subject to customary closing conditions, including receipts of certain regulatory approvals and is expected to be completed in the fourth quarter of 2023. We look forward to welcoming the Palette employees to Teleflex. Turning to an update on the Titan SGS stapler. We continue to execute on our commercial strategy for the Titan SGS power stapling device for use in sleeve gastrorectomy procedures to treat obesity. Feedback for the Titan stapler remains positive, and we remain confident in the value proposition for the Titan SGS stapler. The 23-centimeter continuous staple line enables ideal pouch creation and no overlapping staples that are common with traditional powered staplers. We are optimistic that over time, we will be able to generate data that shows a reduction in complications and meaningful time savings per procedure. Despite the continued positive feedback from the field, we now expect Titan stapler revenues to be in the high-teens for 2023, which is lower than what our original guidance for 2023 had assumed. Value Analysis Committee clearance has taken longer than we anticipated, which has slowed our ability to train surgeons. We have learned from the early experience and have refined our strategies for gaining VAC approval. Our efforts are taking hold with more than twice the number of surgeons trained in the second quarter of 2023 versus the first quarter of the year. Moreover, we have a strong pipeline of surgeons in queue to be proctored. So we expect further improvement through the year. We continue to monitor the usage of GLP-1 drugs in treating obesity. Based on our market checks, it is our sense that GLP-1s had some impact on bariatric surgery volumes in the second quarter. It remains too early to assess the long-term impact on the market given questions on reimbursement and safety profile. In the interim, we remain acutely focused on penetrating a large sleeve gastrectomy market that is in excess of 120,000 procedures in the United States given the very early stages of the Titan stapler launch. We remain confident that the Titan stapler will be a meaningful contributor to our high-growth portfolio through the LRP period.

Thanks, Liam, and good morning. Given the previous discussion of the company's revenue performance, I'll begin with margins. For the quarter, adjusted gross margin was 59%, a 60 basis point decrease versus the prior year period. The year-over-year decrease was primarily due to continued cost inflation, product recalls, and unfavorable impact on productivity due to raw material supply, partially offset by favorable price, lower logistics and distribution-related costs, and benefits from cost improvement initiatives. Turning to price, there is no change to our expectation for at least 50 basis points of positive price year-over-year in 2023. Adjusted operating margin was 26.6% in the second quarter. The 90 basis point year-over-year decrease was the result of flow-through of gross margin, increased headcount and employee-related expenses, investments to grow the business, and the inclusion of Standard Bariatrics. Net interest expense totaled $16.6 million in the second quarter, an increase from $11.2 million in the prior year period. The year-over-year increase in net interest expense reflects higher interest rates versus the prior year, partially offset by a reduction in average debt outstanding. Our adjusted tax rate for the second quarter of 2023 was 10.8% compared to 12% in the prior year period. The year-over-year decrease in our adjusted tax rate is primarily due to a reduction in tax costs resulting from U.S. tax law requiring capitalization of R&D effect. At the bottom line, the second quarter adjusted earnings per share was $3.41 and an increase of 0.6% versus prior year. Turning now to select balance sheet and cash flow highlights. Cash flow from operations for the six months was $170.6 million compared to $101.9 million in the prior year period. The increase was primarily attributable to lower tax payments and favorable changes in working capital. Moving to the balance sheet, our financial position continues to provide its flexibility to operate the business and execute on our disciplined capital allocation strategy. At the end of the second quarter, our cash balance was $250.8 million as compared to $292 million as of year-end 2022. The reduction in cash on hand is primarily due to $154.5 million of payments on our senior credit facility, partially offset by $131.2 million of free cash flow generated during the first six months of 2023. Net leverage at quarter end was approximately 1.6x, which remains well below our 4.5x covenant. Turning to financial guidance. Starting with the acquisition of Palette Life Sciences. As mentioned previously, Palette Life Sciences is expected to generate net sales of approximately $56 million in 2023. Assuming a December 1, 2023 close date, the acquisition is not expected to significantly impact Teleflex's 2023 revenue. In 2024, we expect the business will achieve year-over-year revenue growth in the high-teens to low-20% range. Assuming December 1, 2023 close, the transaction is expected to be approximately $0.15 and $0.35 diluted to the company's adjusted earnings per share in 2023 and in 2024, respectively. Beginning in fiscal year 2025 and thereafter, the company expects the acquisition to be increasingly accretive to adjusted earnings per share. Teleflex plans to finance the acquisition through borrowings under its revolving credit facilities and cash on hand. At signing of the transaction, we remain in a solid financial position with pro forma net leverage of approximately 2.5x. Accordingly, there is no change to our stated long-term capital deployment strategy. Moving to our outlook for 2023. Given our operational performance in the second quarter and our second half outlook, we are revising our 2023 financial guidance. Specifically, we are increasing the bottom end of our 2023 constant currency revenue guidance by 50 basis points to 5.5% to 6.25%. Turning to foreign exchange. We now assume a positive impact from foreign exchange translation of approximately $8 million or 30 basis points to GAAP growth in 2023. This compares to our prior guidance, which assumed that $10 million or a 35 basis point headwind for 2023. Note, our second quarter revenue results reflect a foreign exchange result that was approximately $6 million favorable to what was previously expected. The balance of the updated full-year 2023 impact of changes in foreign exchange rates is expected over the second half of 2023. Our revised foreign exchange guidance for 2023 captures the actual rates in the second quarter and now assumes current foreign exchange rates, including a euro to dollar exchange rate of $1.10 in the second half of the year. Considering the revised foreign exchange headwinds, we expect reported revenue growth of 5.8% to 6.55% in 2023, implying a dollar range of $2.953 billion to $2.974 billion and implying an increase to the low end of the dollar range of $32 million and the high end of $80 million. There are no changes to our outlook for gross and operating margin in 2023. Below the line, we now expect net interest expense to approximate $77 million in 2023, which reflects net incremental borrowings under our revolver for the acquisition of Palette. We are maintaining our 2023 guidance for adjusted earnings per share of $13 to $13.60. Our adjusted EPS outlook has been updated to include $0.15 of dilution from the acquisition of Palette; $0.15 dilution associated with the recall of ET Tubes and the Endurance catheter during the second quarter offset by $0.15 of foreign exchange benefit and the balance from favorable operating performance, including better-than-expected results in the second quarter and higher growth expected in the second half of the year. 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 second quarter of 2023. First, our diversified portfolio and global footprint drove durable growth in the second quarter. Our execution remains strong. We are launching new products and our margins remain healthy. Second, the solid second quarter performance keeps us well positioned to deliver on our financial guidance for 2023. As we look into the second half of 2023, we anticipate stable to improving macro conditions. Third, we will continue to focus on our strategy to drive durable growth. We will invest in organic growth opportunities and drive innovation, expand our margins, and execute on our disciplined capital allocation strategy to enhance long-term value creation. We are excited about the acquisition of Palette Life Sciences. We believe that the acquisition will be a meaningful contributor to our growth in the coming years, be immediately accretive to gross margins, and will enhance our adjusted operating margins in the near term. In turn, we have further confidence in our ability to deliver on our 2023 to 2025 LRP revenue objectives. That concludes my prepared remarks. Now I would like to turn the call back to the operator for Q&A.

Our first question comes from Shagun Singh of RBC.

So by our math, the acquisition would add about 50 basis points to overall Teleflex growth and 400 basis points to Interventional Urology segment. Just is that in the ballpark? And does this help offset some of the weakness in UroLift? Or is your 8% to 9% LRP still intact?

Thank you very much for the question, Shagun. I'll start with your question as it relates to the LRP. As it relates to the LRP, the acquisition of Palette emboldens our confidence in at least achieving the 6% growth as laid out in our LRP. And here are the building blocks. Durable core will grow at 5%. I think given the performance so far this year and what we expect for the remainder of the year, we feel super confident in that 5%. The high-growth portfolio will be growing at least 12%. And within that, the Interventional Urology business unit, which will include Palette, will be growing at least 8%. So this addition of Palette ensures our ability, we believe, to achieve our 6% LRP growth that we laid out in our Capital Markets Day. With regards to the addition of what it will make into the future growth of Teleflex, your math is pretty spot on. It's delivering $56 million this year. It's going to grow in the high-teens to low-20s in 2024. And I do believe that kind of a number should be sustainable into 2025 as well. So obviously, your math is pretty right on the money. I think it's an important point to note, as I outlined in my prepared remarks, the gross margins from Palette is a really important factor. And so far as it's not alone accretive to Teleflex. It's accretive to the Interventional Urology business unit today and is accretive to the high-growth portfolio. Thanks for the question, Shagun.

And just as a follow-up on UroLift, can you just elaborate on trends you're seeing? I know that the patient volume comps were a little easier this quarter. But just on a comp-adjusted basis, can you elaborate on trends you are seeing?

Yes, we are still experiencing a decrease in patient flow to urologists in the first half of the year. However, within the quarter, we noticed some positive signs, particularly with the continued growth in hospital rates. The office side of services continues to face challenges, and that remains an issue for us. We are training a significant number of surgeons, and we did see an increase in the number of surgeons trained in Q2. Nevertheless, the office side of service for this product still presents difficulties this quarter.

Our next question comes from Jayson Bedford of Raymond James.

I wanted to follow up on the comments on the Titan Stapler. It seemed like the revision in the guide there, you seem depended on longer VAC committee approvals. And I'm just wondering, kind of what's the source of the pushback there? Do you need more clinical data? Is it a price issue? Just love to dig in on that a little bit more.

Yes, Jayson. Our initial expectation at the low end was $30 million, and it's now in the high-teens. We still anticipate Titan to play a major role in the long-range plan. The delays we are experiencing with the value analysis committees have affected proctoring. As mentioned in my prepared remarks, we doubled the number of surgeons we proctored from Q1 to Q2, which is encouraging. The main issue is simply time; we believed this product, which is performing exceptionally well, would be adopted more quickly. The product is meeting its intended purpose. Additionally, it's important to note that the market for this product is quite large, around $300 million. Once we navigate the value analysis committees and the product gains traction, we expect progress. It is taking longer than anticipated, but it's still early in the ramp-up period, and we have a clear path forward. We are aware of our necessary steps, but the adoption curve is taking more time than we expected. Having buttress material available for the entire year of 2024 will also be crucial for us. While our product doesn't technically require buttress, since it has a complete line of staples, about 60% of bariatric surgeons opt to use it during gastric sleeve procedures as it is a standard practice. Surgeons often say they prefer to use buttress for peace of mind as it is standard of care. Having that available in 2024 will assist us in moving forward. Ultimately, it's just a matter of time, Jayson. There’s no significant pushback—it's neither a pricing concern nor a product performance issue. We possess the necessary clinical data, and while we have everything we need to move forward, the value analysis committees are just taking longer to integrate us into their systems.

Okay. Liam, that's very helpful. And just quickly as a follow-up. OEM continues to be strong there. Can we assume there's nothing kind of one-time or stocking in that number and you're still confident in which should be a strong double-digit growth outlook for OEM?

Yes. I think OEM has performed exceptionally well, not just this year, but over the last two years as well, coming in just shy of 20% stellar performance. This is a business that we have really good visibility into. There are no one-time stocking major items to answer your question directly. This is pure performance. It's taking share from other competitors in the market. It is also that acquisition that we did a number of years ago, really helping us go along, but it's really good performance by Greg and the entire team in the OEM division. And I do believe that OEM will have good solid double-digit growth this year, and I do believe that the future is good for that over the foreseeable future with the visibility we have.

Our next question comes from Anthony Petrone of Mizuho Americas.

Maybe, Liam, just to pivot to Standard Bariatrics. Just an update on traction in the quarter, expectations through the end of the year for Standard. We've been hearing obviously some noise on the GLP-1s impacting Bariatric from Intuitive. So just an update on bariatric and then I'll have a follow-up on earnings.

Yes, absolutely, Anthony. And as we said during our prepared remarks, we're now expecting the high-teens for our Standard Bariatrics. I think that there's some impact from GLP-1s. But the main issue is getting through these VAC committees. And therefore, you have to get through the VAC committee before you proctor. And as I answered to Jayson's question, we doubled the number of surgeons that we proctored from Q2 to Q1. The product is performing very, very well. The introduction of buttress will help us. I do believe that GLP-1s have some impact, but it's not the big impact. I mean we're just stacking to ramp within this curve. And I do think that there's mixed views on GLP-1s; they get the reimbursements, it is for a shorter period of time. And therefore, if you talk to most Bariatric Surgeons, they think it's having a shorter-term impact. But in the longer term, they don't see it having a long-term impact on gastric sleeve surgeries. Just the weight loss from gastric sleeve is so much more significant than it is from the GLP-1s. But we're watching it very, very closely, Anthony, and thanks for the question.

And then maybe for Tom, just on margins and the progression here, revised 26% to 26.75%. And maybe just a recap on looking out through the LRP as we look forward to '24, '25, just how we should be layering margin expansion in according to or based on what's still out there for the LRP and how we can translate that into earnings power? Now it's a little bit confounded down to the earnings line with the Palette acquisition and some of the below-the-line sort of moving parts. So how do we layer in? How do we think about margin expansion from here based on the current guidance out through the LRP? And how does that play in the earnings power now that we have additional drivers in the nonoperating lines?

Okay. Well, as we spoke earlier in the year, we reaffirmed the LRP guidance at that point in time. The way I would think about the addition of Palette is that it is a product that we expect to do about $56 million in revenue this year on a full-year basis. Obviously, we wouldn't have it for the entire year. But then to grow in the high-teens to low-20s over the next couple of years. And as we had mentioned, we expect it to be margin accretive to the IUBU business units to all of Teleflex in the high-growth portfolio. So we see this as slotting in very nicely and providing some additional comfort as we look out into the future years in our margin progression.

Our next question will come from Larry Biegelsen of W. F.

This is Nathan Treybeck on for Larry. Can you just talk about Palette like the overlap with UroLift position, how penetrated is the U.S. market? And so far, is Barrigel expanding the market or taking share?

Yes, Nathan, thank you very much for the question. So we see this as a market development opportunity. If you look at our existing interventional urology customer base, only 20% of them use the Barrigel spacing technology today, and 97% of them actually treat prostate cancer. So this is a market expansion opportunity for us in the domestic market within the United States. The product is approved in EMEA, and it's also approved in Australia. We will be expanding approvals into other geographies as we take this under our wing. But we definitely see this as a margin expansion opportunity. And we definitely see there's an opportunity to leverage our existing sales force and leverage that channel. We have a super global channel now into the urologist, and we believe that we can expand the market. There are other spacing technologies out there. I think between having another company talking about spacing and another company raising awareness. We believe we have a better product than anything that's out in the market today. It's sculptable. It is visible. It is easy to inject. It doesn't solidify overly quickly. It's a one-step process. It’s reversible. We've had excellent clinical data. There have been zero embolisms that have been zero device-related adverse events, and we have robust clinical data to support the product. We love the growth profile. We love the margin profile, and we love the synergies within our sales force. And we're not going to build this into our model, but there is the potential that it could have also a halo effect for UroLift in expanding into urologists that previously may not have been open to trying a new technology like UroLift.

Okay. And if you could just give us your high-level thoughts on 2024 in light of the acquisition, which is expected to be $0.35 dilutive, like what is your ability to absorb this dilution? I mean, the street has you at $14.50 to an EPS next year?

Yes, Nathan, we're not discussing 2024 on today's call. We're halfway through the year and have raised our revenue guidance for the second consecutive quarter. We are confident about our current position as a company. We've also maintained this year's earnings per share guidance despite the $0.15 dilution from Palette. We feel positive about our trajectory and will address 2024 guidance in February next year. I have already commented on the long-range plan regarding our confidence in achieving all aspects of the revenue profile with Palette within our LRP target of 6%, including all the components I previously mentioned.

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

Liam, just in talking about Palette a little bit here that the Barrigel product got approved in May of last year. You're saying it at least the majority of revenue total per Palette now. So I don't have the numbers, but I'm assuming it's $30 million or $40 million of revenue in a year basically that they've generated already. And then you're saying kind of in high-teens to low-20% growth for next year. I would think that just if they've been able to grow that quickly that you guys at Teleflex to be able to grow it at a similar rate. So why is high-teens, low-20% the right number? Why isn't it 30%, 40%, 50%? I know you have to integrate it, but why wouldn't it be significantly higher than that, just given how well they did with it on their own?

I believe everything you mentioned is valid, and I can't strongly disagree. We plan to increase our sales representatives. Our sales force is robust both in the U.S. and globally for this call point. Right now, I think aiming for growth in the high-teens to low-20s range is appropriate for us. If we exceed that, we will all benefit. At this time, we feel this is the right target. You are correct that integration is necessary, but it’s not an extremely challenging integration since it involves one major call point. We have a strategy to address any issues with the addition of clinical trainers. This is a strategic investment for us with Palette, and we will keep expanding and growing in this market. If we achieve better results in the high-teens to low-20s range, we will keep you informed and continue to build from there. We believe this is a significant transaction, and if the results surpass our expectations, then the multiple will also be more favorable, along with all related dynamics.

Got it. That's understandable. I appreciate that. And then just back to UroLift, I know it's getting to be a smaller part of the overall business, but there's other areas of med tech that just have not recovered from the pandemic. I can think of women's health as one area. Is this a category that especially in the outpatient setting and the physician's office setting that is just probably structurally different from now on and likely will not reaccelerate? Hence, the 8% to 9% that you talked about last quarter probably is it going to happen in the future?

Yes. Now, in all transparency, when we began the year, I thought that UroLift was going to recover. I expected it to grow somewhere in the region of around 3%. Now, as I look forward to the full year, I would expect Interventional Urology, which would include Palette, to have a low single-digit decline, something around 3% right now. I think what's changed. The market is huge. The condition is progressive. There are loads of men out there that have BPH. I think the pressure in the office, Matt, as I look at it today, is the real issue. If you go back to '17, '18, '19, we were growing the market because we were using the office call point to bring men in from the drug dropout and the drug category, and we were able to convert those men during that period of time. With the change in reimbursement, with the patient flow, with the lack of staffing, that channel for now is challenged in pulling those men in and expanding the market. So I think that we need to get the office channel addressed. And I just can't see that getting addressed in the next two quarters, being totally honest. So I think it's going to take some time to recover. Now, having said that, this quarter, we trained more docs than we had the quarter before for a number of quarters. So docs are putting their hands up to get trained. The international profile is excellent. I couldn't be happier with what's happening overseas. And domestically, I think that for the remainder of the year, I think it's going to do what I said it's going to do. There are a couple of green shoots. It was minus 5%. Last year, it was minus 5% in the first quarter, it was minus 2.5% this quarter. So there's a couple of green shoots here, some positivity there. But I think that it's a challenged call point in that office right now with all of the factors that are playing into it.

Our next question will come from Craig Bijou of Bank of America Securities.

I wanted to start with some components of the long-range plan. Liam, I believe you mentioned that you now expect Interventional Urology, including Palette, to grow at least 8%, which would indicate that the long-term growth for UroLift is expected to slow down. I just wanted to confirm if that's correct and what might be driving that change, particularly on the U.S. side. Could you provide more insight into what you foresee for UroLift over the coming years? Additionally, regarding Standard Bariatrics, I understand you anticipate significant growth in the next few years. I'm interested in how we should view that growth level for 2024 and 2025 compared to your previous expectations.

Yes, I'll begin by addressing the first part of your question. Your assumption and calculations are spot on. That's why I have strong confidence in the 6% Long Range Plan. I don't anticipate anything from UroLift contributing to the LRP right now. The international market is performing well, and if the domestic market rebounds, it will benefit investors, Teleflex, and our LRP. The margin profile remains robust. In my view, this essentially removes UroLift from consideration regarding the LRP. Regarding Standard Bariatrics, as I mentioned earlier, it's a significant market. Once we navigate the VAC committees and complete surgeon proctoring, our aim is to enhance product performance and increase our share of the bariatric sleeve market. The bariatric sleeve market will continue to exist despite GLP-1s; it will remain relevant. Surgeons will affirm this. Therefore, I believe it will be a substantial contributor to our LRP for 2024 and 2025 as we expand into this large market.

Okay. Well, as we spoke earlier in the year, we reaffirmed the LRP guidance at that point in time. The way I would think about the addition of Palette is that it is a product that we expect to do about $56 million in revenue this year on a full-year basis. Obviously, we wouldn't have it for the entire year. But then to grow in the high-teens to low-20s over the next couple of years. And as we had mentioned, we expect it to be margin accretive to the IUBU business units to all of Teleflex in the high-growth portfolio. So we see this as slotting in very nicely and providing some additional comfort as we look out into the future years in our margin progression.

Our next question will come from Richard Newitter of Truist Securities.

It's Ling on for Rich. So maybe I'm wondering if you could provide some color on the trends in your high-growth portfolio, like including MANTA thermostatic devices, et cetera.

Yes. As I mentioned in my prepared remarks, MANTA is effectively entering the market and is on course for solid double-digit growth. Looking at other segments of the high-growth portfolio, we've already covered two of them. We expect UroLift to be within the range of high single-digit growth. I'd like to highlight the durable core, which has been performing exceptionally well. We've seen strong performance from OEM, as previously mentioned, and Interventional Access has also excelled, along with the Asia Pacific region. Investors familiar with Teleflex know that both Interventional and APAC report very strong gross margins. Overall, Teleflex's entire portfolio appears to be functioning well, from the durable core to high-growth areas. For two consecutive quarters, we've raised our revenue forecast, showing considerable improvement from last year. Last year, our growth was 4.3%, and this year, our guidance midpoint indicates almost 5.9%. This reflects significant advancement. The benefit of being a diversified global company is clear; not everything will go as anticipated, but collectively, it all adds up to a solid performance. The acquisition of Palette is also expected to contribute positively.

That's great. So maybe I'll follow-up on margins. Could you walk us through the cadence of gross margin operating margin throughout the year?

You want the cadence of gross margin and operating margin throughout this year?

Yes, certainly. First, it's important to note that foreign exchange has a significant effect on our margins. In the first quarter, we experienced a notable positive impact from foreign exchange, but it turned slightly negative in the second quarter affecting our gross margin. For the third and fourth quarters, we expect the foreign exchange impact to increase our gross margins even more. If you exclude the foreign exchange effects, you would see a steady improvement in gross margin throughout the year, with a considerable gain from the first to the second quarter and again from the third to the fourth. However, when considering the foreign exchange, gross margins will appear relatively flat each quarter, with a slight dip in the third and a slight gain in the fourth, similar to what we observed in the second quarter. In the second quarter, we faced some variations due to recall expenses and the previously mentioned minor negative impact from foreign exchange. Nevertheless, we also benefited from favorable pricing and credits from international operations. Therefore, it’s crucial to monitor the foreign exchange impact. If we exclude it, we would see improving gross margins as well as operating margins over the year. We do need to take foreign exchange into account, which results in a slightly lower gross margin for the third quarter and a similar or slightly higher margin in the fourth quarter compared to the second.

Our next question will come from George Sellers of Stephens.

I guess switching back to Palette quickly. With 97% of UroLift users that are also treating prostate cancer. And I believe you said 20% already used Barrigel. Are they also already using a spacer product? Or is this more of a white space opportunity?

There is a significant opportunity in the market, estimated at about 60%. Currently, around 40% are using some form of a spacing product, with 20% specifically utilizing Barrigel. This indicates that approximately 60% of the market remains untapped. It's important to note that our focus is not on the other 20%, but rather on educating physicians about the advantages of spacing and Barrigel as a spacer, particularly highlighting the benefits of reducing toxicity to surrounding organs around the prostate. We're looking to expand our reach into the existing customer base of urology oncologists, where some products are already in use. Overall, I'm optimistic about this opportunity.

Okay. That's really helpful. Switching to the OEM segment, this continues to really perform exceptionally well. And it sounds like you've got visibility to that continuing the remainder of the year. But could you just give some additional detail on the pieces driving that outperformance? And how should we be thinking about that sustainability over the LRP?

Yes, that's a great question, George. The advantage of the OEM businesses is that we're seeing strong double-digit growth across the board. Our catheter business, suture business, and completed product business are all performing exceptionally well, particularly the complex catheters within our catheter offerings. You're right; we have excellent visibility into this sector. Customers tend to place orders well in advance to secure their capacity. We're quite encouraged by the results, even though it does put some pressure on our gross margins, it significantly benefits our operating margins. This business is thriving, with long-term visibility. If I could find another acquisition to enhance our OEM segment, I would do so immediately, as we have solid growth and a strong customer base in this area.

That is all the time that we have for questions this morning. I would like to turn the conference back to Lawrence Keusch for closing remarks.

Thank you, Jayal, and thank you to everyone that joined us on the call today. This concludes the Teleflex Incorporated Second Quarter 2023 Earnings Conference Call.

You may now disconnect.