Earnings Call Transcript - TFX Q2 2024

Operator, Operator

Good morning, ladies and gentlemen, and welcome to the Teleflex Second Quarter 2024 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode. At the end of the company’s prepared remarks, we will conduct the question-and-answer session. Please note that this conference call is being recorded and will be available on the company’s website for replay shortly. And now, I will turn the call over to Mr. Lawrence Keusch, Vice President of Investor Relations and Strategy Development.

Lawrence Keusch, Vice President of Investor Relations and Strategy Development

Good morning, everyone, and welcome to the Teleflex Incorporated second quarter 2024 earnings conference call. The press release and slides to accompany this call are available on our website at teleflex.com. 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 detail. Participating on today’s call are Liam Kelly, Chairman, President and Chief Executive Officer; and Thomas Powell, Executive Vice President and Chief Financial Officer. Liam and Tom will provide prepared remarks, and then we will open the call to Q&A. Before we begin, I’d like to remind you that some of the matters discussed in the conference call will contain forward-looking statements regarding future events as outlined in the slides posted to the Investor Relations section of the Teleflex website. We wish to caution you that such statements are, in fact, forward-looking in nature and are subject to risks and uncertainties, and actual events or results may differ materially. The factors that could cause actual results or events to differ materially include, but are not limited to, factors referenced in our press release today as well as our filings with the SEC, including our Form 10-K, which can be accessed on our website. Now, I'll turn the call over to Liam for his remarks.

Liam Kelly, Chairman, President and Chief Executive Officer

Thank you, Larry, and good morning, everyone. On this morning's call, we will discuss the second quarter results, review some commercial highlights and provide an update on our financial guidance for 2024. Before beginning our normal business review, I wanted to highlight a subsequent event following the end of the second quarter. As we have previously disclosed in our SEC filings, the Italian government introduced legislation back in 2015 requiring medical device companies that supply goods and services to the Italian national healthcare system to pay back a portion of their proportional revenues to contribute to funding any deficit created by government budget overspend for medical devices each year. The payment amounts are calculated based on the amount by which the regional ceilings for that given year were exceeded. We and numerous other medical device companies challenged the enforceability of the law, primarily on the basis that the legislation was unconstitutional. To date, companies have not been required to pay these amounts while the measure was under consideration by the courts. On July 22nd, the Italian constitutional court issued an adverse ruling that supported the legislation related to the payback measure on medical device companies. Although Teleflex has accrued amounts each year since 2015, we are now truing up our reserves to reflect the full amount expected to be invoiced by the Italian government. For the three and six months ended June 30, 2024, we recognized a $15.8 million increase in our reserves and a corresponding reduction to revenue within our EMEA segment related to the Italian payback measure. Of the total increase in our reserves, $13.8 million related to prior years. The amount related to the prior years does not represent normal adjustments to revenue and is not recurring in nature, making it difficult to contribute, to a meaningful evaluation of our operating performance. Accordingly, we have excluded $13.8 million for the prior years in our adjusted second quarter revenues to facilitate an evaluation of our current operating performance and a comparison to our past operating performance. For the second quarter, Teleflex revenues were $749.7 million, up 0.9% year-over-year on a GAAP basis. When excluding the prior year impact of the Italian payback measure, adjusted revenues for the second quarter were $763.5 million, up 2.7% year-over-year on a reported basis and up 3.4% on a constant currency basis. In addition, to the $13.8 million booked in the quarter for prior years, the quarter includes $2 million in increased reserves for this measure to true-up the first and second quarter revenues. Backing out the $2 million in unplanned reserves for the Italian measure implies second quarter revenues came in slightly above the high end of our $760 million to $765 million revenue guidance provided previously. Second quarter adjusted earnings per share was $3.42, a 0.3% increase year-over-year. 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 I refer to are on an adjusted revenue and adjusted constant currency basis, unless otherwise noted. Americas' revenues were $426.8 million, a 0.6% increase year-over-year. Investors familiar with Teleflex will be aware that prior year MSA revenues were booked in the Americas, which results in a difficult year-over-year comparison. The impact from the MSA termination in the second quarter was similar to the first quarter. EMEA revenues of $160.9 million increased 9.8% year-over-year. The growth was driven by a targeted strategy to increase the geographic availability of Teleflex products and improving utilization in Europe. Turning to Asia, revenues were $87 million, a 4% increase year-over-year. The quarter was primarily impacted by a softer performance in South Korea, due to the ongoing impact of the doctors' strike. We estimate that the doctors' strike impacted our APAC growth by approximately 5%. Although we anticipate the doctors' strike headwinds to linger through the remainder of this year, we expect the impact to diminish. We continue to see Asia as a growth driver for Teleflex and expect growth in the region of approximately 10% for 2024. Now let's move to a discussion on our second quarter revenues by global product category. Commentary on global product category growth for the second quarter will be on a year-over-year adjusted revenue and adjusted constant currency basis. Starting with vascular access, revenue increased 4.8% year-over-year to $181.1 million. In the quarter, our broad portfolio of vascular access drove growth, including our PICC portfolio and central access. Of note, the Endurance recall anniversaried towards the end of the quarter, implying normalized comparisons in the second half of 2024. Moving to interventional, revenue was $141.2 million, an increase of 13.8% year-over-year. In the quarter, our geographic regions had high single-digit or better growth, as the broad portfolio continues to perform well, including contributions from growth drivers such as MANTA, complex catheters, right heart catheters and intra-aortic balloon pumps. Turning to anesthesia, revenue increased 2.3% year-over-year to $102.5 million. Growth was led by endotracheal tubes and intraosseous. Of note, we anniversaried the ET tube recalls towards the end of the quarter. In our surgical business, revenue was $111.3 million, an increase of 6.4% year-over-year. Our underlying trends in our core surgical franchise continued to be solid, with growth of our largest franchises led by instrumentation and chest drainage. Although GLP-1s continued to negatively impact sleeve gastrectomy procedures, Titan Stapler revenue growth in the second quarter was accretive to the growth profile of our surgical business as well as the corporate average. Consistent with our strategy, we continued to proctor surgeons and roll out our buttress kit following the launch earlier in 2024. For interventional urology, revenue was $83.1 million, representing an increase of 7.1% year-over-year. Growth was driven by Barrigel revenue following the October 2023 acquisition of Palette Life Sciences. And as anticipated, UroLift growth was impacted by continued challenges in the office side of service and sales force training activities for Barrigel during the quarter. OEM revenues increased 5.8% year-over-year to $88.8 million. The quarter reflects the order timing that we previously communicated with revenue that we had anticipated in the second quarter moving into the first quarter. Second quarter other revenue declined 26.4% to $55.5 million year-over-year. The decline in revenue on a year-over-year basis is primarily due to the planned December 2023 exit of the MSA by Medline. That completes my comments on the second quarter revenue performance. Turning now to some commercial and clinical updates, starting with the intra-aortic balloon pump and catheter market. We are currently experiencing increased quote activity following a May 8 letter from the FDA to healthcare providers regarding pump safety and quality in relation to our primary competitors in the intra-aortic balloon pump market. Intra-aortic balloon pump therapy is used to treat severely ill patients in cardiogenic shock, which is an acute condition where the heart can't pump enough blood to meet the needs of the body. The global intra-aortic balloon pump and catheter market is approximately $250 million a year, with growth in the low single-digit range and consists of balloon pumps which are primarily replacement sales and single-use balloon catheters used to treat patients. The market is a duopoly, with Teleflex having approximately a one-third market share. Based on 2023 market data, Asia is just over one-third of the market. North America is about one-third and EMEA is slightly less than 30%. We are in the process of increasing our manufacturing capacity for pumps and catheters to help customers that are seeking an alternative vendor. Looking forward, we will carefully modulate our manufacturing capacity in accordance with demand signals. We anticipate that the biggest incremental opportunity for Teleflex will be in the US market due to the language in the FDA letter to health care providers. Specifically, the agency recommended that healthcare facilities transition away from the use of competitive devices and seek alternatives if possible. We also expect continued share gains in Asia based on solid execution from the team over the past couple of years. Finally, we are not currently assuming any meaningful share shift in Europe given a temporary suspension of their CE mark. Looking into the second half of 2024, we expect incremental pump revenue in the fourth quarter given the capital equipment sales cycle and customer training. Based on what we are currently seeing in quote activity, we anticipate a continuation of incremental intra-aortic balloon pump and catheter revenue through the first half of 2025 at a minimum. Tom will cover the financial implications of this opportunity when we discuss updated guidance for 2024. Now I will move to an update on Palette, our most recent acquisition. We have now owned Palette Life Sciences for just over nine months, and I am pleased to report that the acquisition is tracking ahead of expectations. First, the integration process continues to progress well, including employee onboarding, training and IT integration. Cross-functional product, sales training and proctoring of the legacy UroLift sales force on the use of Barrigel continued to progress, with the first tranche of our dual-bag reps completed at the end of the second quarter. We remain on track to fully complete the integration of the sales force by the end of 2024. Second, Barrigel continues to gain traction in the US with strong sequential revenue momentum. We are seeing continued penetration of Barrigel into the rectal spacing market, and we anticipate an increasing number of urologists and radiation oncologists will utilize the technology over time. Due to better-than-expected performance in the first half and no change to our second half expectations, we are increasing our 2024 revenue guidance for Palette to $70 million to $72 million from $66 million to $68 million previously. Our full-year 2024 interventional urology total revenue guidance continues to assume approximately 7.5% growth. Finally, I will provide a new product update. In our interventional access business, we recently received FDA clearance for the Ringer perfusion balloon catheter. A limited market release will occur in August, which is on track with our previously communicated second half 2024 timing. As a reminder, Ringer incorporates a unique balloon design that allows blood to flow through a vessel while the balloon is inflated. We expect to initially launch with a PTCA indication, but we'll evaluate opportunities for label expansion following the completion of our vessel perforation trial. 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.

Thomas Powell, Executive Vice President and Chief Financial Officer

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 60.8%, a 180 basis point increase versus the prior year period. The year-over-year increase was primarily due to the favorable impact of gross margin from the termination of the MSA and the acquisition of Palette, favorable price, benefits from cost improvement initiatives, partially offset by continued cost inflation. Adjusted operating margin was 26.7% in the second quarter. The 10 basis point year-over-year increase was primarily driven by the flow-through of the year-over-year increase in gross margin, partially offset by the inclusion of Palette life science operating expenses, employee-related expenses and investments to grow the business. Net interest expense totaled $19.4 million in the second quarter, an increase from $16.6 million in the prior year period. The year-over-year increase in net interest expense reflects higher interest rates versus the prior year period and higher average debt outstanding utilized to fund the acquisition of Palette, partly offset by increased interest income. Our adjusted tax rate for the second quarter of 2024 was 12.3% compared to 10.8% in the prior year period. The year-over-year increase in our adjusted tax rate is primarily due to additional costs arising from the enactment of European Pillar 2 tax reform and realization of discrete items in the quarter. At the bottom line, second quarter adjusted earnings per share was $3.42, an increase of 0.3% versus prior year. The year-over-year increase in EPS includes solutions and the acquisition of Palette Life Sciences and the related incremental borrowings, the termination of the MSA, the negative impact of foreign exchange and a higher tax rate. Turning now to select balance sheet and cash flow highlights. Cash flow from operations for the six months was $204.5 million compared to $170.6 million in the prior year period. The $33.9 million increase was primarily attributable to favorable operating results and a decrease in cash outflows from inventories as we moderate our inventory levels due to improving supply chain dynamics. The increase in net cash provided by operating activities was partially offset by higher tax payments. Moving to the balance sheet, at the end of the second quarter, our cash balance was $238.6 million, as compared to $222.8 million as of year-end 2023. The increase in cash on hand is primarily due to operating cash flows, partly offset by CapEx and debt payments. Net leverage at quarter end was approximately 1.6 times. And now, for an update on our capital allocation strategy. In conjunction with our second-quarter earnings release, we announced today that our Board of Directors has authorized a share repurchase program for up to $500 million of our common stock. Under the authorization, we will commence an accelerated share repurchase program for $200 million, which we intend to execute on August 2. Over the years, we have continuously assessed our capital allocation and routinely discussed share repurchase in the past. While investing in the business remains our foremost priority, our business continues to evolve. Today, Teleflex has a broad portfolio of medically necessary products that are tied to critical care procedures. We are investing in growth drivers, launching new products to refresh our portfolio offering and expand our geographic reach. We believe that now is an appropriate time to add another dimension to our disciplined capital allocation process. Our capital allocation strategy is reflective of the strong free cash flow profile over many years and our confidence going forward. Over the years, our capital allocation strategy has been targeted through thoughtful allocation of capital to high-return opportunities, including M&A; strong stewardship of our balance sheet; and consistent payment of the dividend. Today, the share repurchase authorization and ensuing intended initiation of the ASR allows Teleflex to augment our return of capital to shareholders. Importantly, we continue to see opportunities for M&A in the areas of focus that we have articulated previously. And this authorization should be viewed as complementary to our core capital allocation strategy and allows us to leverage our strong balance sheet and cash flow opportunistically to drive shareholder return. Pro forma the $200 million accelerated share repurchase, our Q2 leverage is approximately 1.9 times, which provides a meaningful available capacity for M&A while maintaining a conservative debt profile. Turning to our updated financial guidance for 2024. We are increasing 2024 adjusted constant currency revenue growth to 4.25% to 5.25% from 3.75% to 4.75% previously, which excludes the impact of the Italian measure from prior years. The increase in revenue guidance is driven by better than expected growth in the first half and incremental intra-aortic balloon pump revenues in the fourth quarter. In addition, I will remind investors that our year-over-year comparability is impacted by a loss up to $75.7 million in MSA revenues, partly offset by the incremental revenues from Palette. We are focused on executing on the balloon pump opportunity, but it is evolving in real time. At this point, we are expecting incremental IAB revenue in the fourth quarter, which is contemplated in our updated 2024 revenue guidance. Looking into 2025, we expect incremental IABC and catheter revenue, but the magnitude and duration will depend on how demand develops over the coming quarters. We will provide an update as we get more clarity on this dynamic situation. At this time, we are currently assuming that the balloon pump opportunity will continue at least into the first half of 2025. Turning to foreign exchange, we continue to assume a negative impact from foreign exchange of approximately $12 million, representing a 40 basis point headwind to GAAP growth in 2024. The guidance assumes approximately $1.07 average euro exchange rate for 2024. On a GAAP basis, which includes the impact of foreign currency and the $13.8 million for the Italian measure, we expect reported revenue growth of 3.4% to 4.4% in 2024, implying a dollar range of $3.76 billion to $3.105 billion. Excluding the impact of the Italian measure, we expect reported revenue growth of 3.85% to 4.85% in 2024 or a dollar range of $3.89 billion to $3.119 billion. This revenue range, which excludes the Italian measure, anchors our 2024 guidance. For your modeling purposes, the 2024 outlook includes an assumption for $765 million to $770 million in revenue for the third quarter, representing growth in the range of 3.1% to 3.7% year-over-year, excluding an FX headwind slightly in excess of $4 million. We are raising our 2024 gross margin guidance by 25 basis points at the low and high end, to a range of 60.25% to 61%. The increase reflects the strong operating performance in the first half of 2024 and our expectation for accelerated capital equipment sales in the fourth quarter from intra-aortic balloon pumps. Capital component of pumps is slightly dilutive to our corporate gross margin. However, we expect the margin profile to improve in the future with the accelerated sale of disposables or catheters that carry a more favorable margin profile. We are also raising our operating margin guidance by 25 basis points at the low and high end, to a range of 26.5% to 27% for 2024. Our guidance reflects the flow-through of gross margin and the positive impact of restructuring, offset by the inclusion of the operating expenses for Palette Life Sciences and investments to grow the business. Moving to items below the line, net interest expense is now expected to approximate $81 million for 2024, which assumes the incremental borrowings for today's announcement of a $200 million ASR. The majority of the year-over-year increase in our net interest expense outlook reflects the impact of borrowings associated with the Palette acquisition, higher interest rates, partially offset by planned debt repayments during 2024. We continue to expect our tax rate to be approximately 12% for 2024, which reflects the impact of the Pillar 2 global minimum tax. Turning to earnings, we are raising the low end of guidance by $0.20 and raising the high end of guidance by $0.25, which reflects the previously discussed IABP opportunities in addition to our first half performance. In turn, we now expect 2024 adjusted earnings per share to be in a range of $13.80 to $14.20. Our 2024 adjusted EPS outlook continues to reflect $0.87 in year-over-year headwinds. After adjusting for these headwinds, year-over-year underlying adjusted constant currency EPS growth is approximately 9% on the low-end of guidance and 11% on the high-end of guidance. That concludes my prepared remarks. I would now like to turn it back to Liam for closing commentary.

Liam Kelly, Chairman, President and Chief Executive Officer

Thanks, Tom. In closing, I will highlight our three key takeaways from the second quarter of 2024. 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 performance in the first half of the year and the expected contribution from the intra-aortic balloon pumps in the fourth quarter gives us confidence to increase our revenue and earnings per share guidance for 2024. Third, we will continue to focus on our strategy to drive durable growth. Palette is performing above our expectations. We are executing on the intra-aortic balloon pump and catheter opportunity, and Titan is generating solid growth. We will invest in organic growth opportunities and drive innovation and expand our margins. Finally, we will execute on our disciplined capital allocation strategy, which now includes a share repurchase program, to return cash to shareholders and enhance long-term value creation. That concludes my prepared remarks. Now I would like to turn the call back to the operator for Q&A.

Operator, Operator

Thank you. Our first question comes from Anthony Petrone with Mizuho Group. Your line is open.

Anthony Petrone, Analyst

Thank you and congratulations on a great quarter here.

Liam Kelly, Chairman, President and Chief Executive Officer

Thanks, Anthony.

Anthony Petrone, Analyst

Maybe start a little bit with Intra-Aortic Balloon Pumps, a lot of noise out there, Liam. You mentioned the May 8 notice on the competitor. Maybe just what you're hearing on the ground. It seems like, when you look at the results from the competitor, there was not much movement in the second quarter. Your outlook is calling for some market shift, perhaps starting in the second half of this year, extending into 2025. But maybe just what you're hearing on the ground as it relates to Intra-Aortic Balloon Pumps. And if you can, maybe to just size what that opportunity looks like over the next 12 to 18 months. And then, I'll have a follow-up.

Liam Kelly, Chairman, President and Chief Executive Officer

Yeah, Anthony. So first of all, we're really delighted to be able to call up our total revenue guidance for the year by 50 basis points. And a significant contributor to that is the intra-aortic balloon pump opportunity which we expect to hit in the fourth quarter. With regard to the intra-aortic balloon pumps and catheters specifically, over the past 2.5 years, Anthony, we have had a really strong market position; and we've been continuing to take share up until this point. The opportunity is evolving real-time. And based on what we know today and the visibility we have, we do expect the vast majority of those pumps that will ship in Q4, just on the timing, Anthony, within the marketplace as it takes for people to get them through their system and to place the orders. I will tell you that our quote rate has been very, very robust since the announcement from the competitor and is encouraging enough for us to realize this is going to impact at least into the first half of 2025. And you have a variety of reactions on the ground from the customers. The bulk of the inbounds have come from the US specifically, not North America, not too much from Europe because the CE mark right now has only been suspended for a shorter period of time. We were always taking share in Asia Pacific, and we expect that to continue over a multiyear period. Our goal is to ensure that over the longer term, it's not just about pumps, that the catheters that follow those pumps will be with us for over a multiyear period. And our second goal is to ensure that the share that we take, we maintain that over the long-term so we become a more meaningful player in the intra-aortic balloon pump and catheter market.

Anthony Petrone, Analyst

No. That's helpful. A quick follow-up there would just be when we think about share gains in that category, just the margin profile of that incremental share gain. How much of a margin tailwind do you expect from pumps? And then just a quick one, just a quick question on capital allocation, share buyback here; maybe just to recap on the tuck-in M&A strategy relative to buyback. Is this signaling a shift away from the tuck-in strategy, more toward buyback? And how do you balance between those two priorities? Thanks, again. Congratulations.

Liam Kelly, Chairman, President and Chief Executive Officer

Thanks, Anthony. I'm going to cover the second question first, Anthony, because I think it's an important one. And as both Tom and I said in our prepared remarks, this is in addition to our ongoing M&A strategy. Right now, as we look at our company, our free cash flow generation is really, really strong. Our current leverage is 1.6 times. With the $200 million of the ASR, that takes us to 1.9 times, a really healthy position. And we continue to be active out there in the M&A market looking for opportunities. I want to reassure every investor listening to this call that this does not cause us to miss a heartbeat in our M&A strategy and also continuing to invest in the business to improve shareholder return. On the first questions you asked about the margin profile, Anthony, I would say that you should look at it in two buckets really. The first bucket is the pump volume that's going to hit us, in particular beginning in Q4, as I already said. That is dilutive to our corporate average. The catheters that will follow are accretive to our gross margin average, so in its entirety, that business is equal to our corporate average, but it comes in two stages. You'll get the pumps first, and then over the next multiyear period, you will get the catheters that are accretive, so that's how you should model it. And I just want to make an additional point on that: Even despite the pump volume coming in Q4, we have still been able to update our gross margin guidance with an uplift of 25 basis points coming from the core business, so that should really send a strong signal to our investment community that our core business is performing exceptionally well, driving the 25 basis points in gross margin and driving 25 basis points in the operating margin and obviously the EPS that Tom outlined in his comments.

Operator, Operator

And your next question comes from the line of Matthew O'Brien with Piper Sandler. Your line is open.

Matthew O'Brien, Analyst

Hi, thank you for the question. I want to follow up on Anthony's comments regarding IABPs. Liam, is it accurate to say that the guidance range for the year is around $15 million, with approximately $10 million of that coming specifically from IABP in the US? Looking at that market, it seems that there is an opportunity of about $60 million that you currently don't have here in the States. Are you estimating that you'll capture roughly one-sixth of that opportunity in Q4, with more expected next year? Is that the correct perspective on the opportunity? Also, why isn't Europe seen as an opportunity with the CE mark currently on hold? Thank you.

Liam Kelly, Chairman, President and Chief Executive Officer

Thank you. To look at this, Matt, it's important to note that it's evolving in real time. This event just occurred on May 8, and our inbound call volume only began to rise significantly in late June. As we sit here on the first day of August, that provides some context. I see the call-up primarily linked to the intra-aortic balloon pumps, with catheters following later. I agree there is potential to capture more market share at least in the first half of 2025. Regarding your question about Europe, we have experienced short-term suspensions in the past due to competitors being out of the market; for instance, in 2023, they were absent for six months. During such periods, there’s minimal volume shifting, which is why we are cautious about our expectations in Europe unless the CE mark withholding extends. Additionally, we are actively scaling up our manufacturing to meet demand, and I am confident we can handle any demand arising from this opportunity, given the nature of our manufacturing processes for both pumps and catheters.

Operator, Operator

And your next question comes from the line of Jayson Bedford with Raymond James. Your line is open.

Jayson Bedford, Analyst

Good morning. Thanks for taking questions. I hate to continue on this balloon pump trend here, but just quickly, the $250 million market you talked about, is there any way to break out capital versus one-time-use disposables?

Liam Kelly, Chairman, President and Chief Executive Officer

So I would say that, if you wanted to break out the $250 million, the easiest way to look at it, Jayson, is about half and half. Half of it comes from the capital on an annual basis. Because you just remember the pumps will last for about eight years, and the catheters get used over that cycle. So that's a reasonable rule of thumb for the $250 million.

Jayson Bedford, Analyst

Okay. Thanks. And maybe for Tom, on the guidance, EPS. You beat 2Q. You lifted the margin guidance, but of the $0.20 to $0.25 EPS raise, how much of that is related to the buyback? Thanks.

Thomas Powell, Executive Vice President and Chief Financial Officer

Well, just as we think about the $0.20 to $0.25 raise, really that's an organic increase. It's coming from the performance of the underlying business. As we look at some of the pluses and minuses, we're going to get some incremental IABP revenues, which we assume that's going to offset the impact from the Italy payback. And then the increase in the interest expense associated with the buyback is being offset by the reduction in share count. So the buyback itself in 2024 is expected to be EPS neutral as a result of additional interest expense being incurred and that being offset by the reduction in average weighted shares outstanding. So again, the $0.20 to $0.25 is really due to the strength of the underlying organic business.

Liam Kelly, Chairman, President and Chief Executive Officer

I mean, I'll just add, Jayson, that the benefit from the share repurchase would be seen in 2025.

Operator, Operator

And our next question comes from the line of Shagun Singh with RBC. Your line is open.

Shagun Singh, Analyst

Great. Thank you so much. Liam, I was wondering if you can give us an update on the interventional urology business in a little bit more detail. What was contribution from M&A this quarter? And what are you seeing on the doctor's office side for UroLift?

Liam Kelly, Chairman, President and Chief Executive Officer

On the doctor's office side, it continues to face challenges very similar to Q1, with no change in the growth profile at the service sites or in the number of procedures being performed in offices compared to hospitals. The growth profile in the office remains challenged. However, as we mentioned earlier, the most significant change has been in Palette. For the first half of the year, based on the performance of Palette Life Sciences, particularly Barrigel, we're updating our revenue guidance from $66 million to a range of $70 million to $72 million. UroLift has been performing generally in line with expectations, but we are maintaining our full-year guidance at 7.5% for interventional urology. We are very pleased with the performance of Palette and Barrigel. The cross-training of our 50 dual-bag sales representatives is now complete, and as always stated in our full-year guidance with no change, we expect an improvement in the second half of the year as Palette Life Sciences continues to ramp up and those dual-bag sales reps return to the field to sell both products.

Shagun Singh, Analyst

Got it. And just as a follow-up for Tom: Can you help us with the cadence of margins in the back half? Especially, you mentioned IABP. The capital component is going to have an impact. And then where do you stand relative to your prior LRP, which was at the low end for gross margins and operating margins, 61.5% and 28.75%? Thank you.

Thomas Powell, Executive Vice President and Chief Financial Officer

To Liam's point, the margin profile from the incremental revenue generated by IABPs slightly dilutes our overall average. We expect the gross margin to remain fairly stable in the third and fourth quarters. Additionally, we anticipate further leverage on the operating margin in the fourth quarter due to stronger revenues. In the longer term, particularly in 2025 as we increase catheter sales, we expect to see an improved margin profile from that segment. Regarding the LRP, we still believe the targets are suitable for the company. There is a feasible path to achieve the gross margin goals, but we need to see a strong product mix, good performance from our manufacturing sites, and continued inflation improvement to reach those targets. We will provide updates as we approach the 2025 guidance.

Operator, Operator

And our next question comes from the line of George Sellers with Stephens Inc. Your line is open.

George Sellers, Analyst

Good morning and thanks for taking the question. Maybe on the Ringer balloon catheter discussion. Could you just give us a little more detail on maybe how that augments your existing device portfolio; sort of where that, what that fits; and what your expectations are for maybe share shifts over time and any cannibalization to your existing portfolio of balloon catheters?

Liam Kelly, Chairman, President and Chief Executive Officer

Thank you, George, and good morning. The Ringer has a PTCA indication that aligns perfectly with the primary focus of our sales force selling complex catheters. This segment is growing into a market worth approximately $40 million. We believe there may be additional uses in the peripheral area, which is significant since we have one heart and two legs, making the peripheral market even larger. I expect that surgeons and interventional cardiologists will guide us on where future applications will arise. Once they use this innovative product, it's designed to assist interventional cardiologists in cases of accidental vessel puncture, allowing them to proceed with the procedure using the Ringer catheter. There will be no cannibalization of our current portfolio. Additionally, we just finished a study on perforation, which will be the next indication for this product as we expand into the $40 million market. This is yet another example of innovation within the interventional access business. New products are essential for interventional cardiology. Being present with clinicians in the cath lab and having new products in your lineup facilitates ongoing interaction. We've seen this with MANTA and the Wattson wire, and now we anticipate similar success with Ringer. We're pleased that this product's development was ahead of schedule, reflecting positively on our R&D team's execution in that business unit.

George Sellers, Analyst

Okay, great. That's really helpful color. I appreciate that. And maybe switching back to the interventional urology segment, I'm just curious if there's any quantifiable impact to that training that you talked about that's now complete. How much of a headwind, if any, was that? How should we think about potential headwinds or sequential tailwinds with training in that segment going forward?

Liam Kelly, Chairman, President and Chief Executive Officer

I find it difficult to quantify what we've experienced in the first half of the year, but we anticipated the effects of the cross-training. We expected it to have an impact, and we believe that interventional urology will improve in the latter half of the year. I see two main factors contributing to this improvement. First, there are more sales reps discussing Barrigel, which presents an opportunity. Additionally, Barrigel and the Palette portfolio are expected to gain traction in the latter part of the year. I'm pleased to report that we achieved 4 million in Barrigel sales based on first half performance. Another factor that should contribute to improvement is that the sales reps who were occupied with training in the first and second quarters will now be back on the road, promoting UroLift to their surgeons. We have kept our guidance for interventional urology at 7.5%, and I'm confident in our ability to meet that target.

Operator, Operator

And our next question comes from the line of Larry Biegelsen with WF. Your line is open.

Unidentified Analyst, Analyst

Hey, good morning. This is Vik in for Larry. Thanks for taking the questions. First one, M&A has been a major contributor to your revenue growth historically. Can you just talk about what you're seeing on the M&A front? And are you more focused on price-to-sales or EBIT-to-EBITDA deals? And if so, what areas? And then I had a follow-up. Thank you.

Liam Kelly, Chairman, President and Chief Executive Officer

Yes, Vik. We are actively pursuing opportunities and constantly monitoring several assets at any given time. Our leverage, currently at 1.9 times pro forma even after the $200 million on the ASR, is beneficial. I believe the M&A landscape for private assets has improved, with a noticeable moderation in valuation expectations. We have a keen interest in cath labs and emergency medicine, and our vascular team's focus on intensive care units remains consistent. We also see potential in tuck-ins within OEM and surgical areas. I want to emphasize that share repurchase is not a replacement for M&A; we plan to pursue both simultaneously, and we have the cash flow to support it. The share repurchase is simply a means of returning capital to shareholders. We remain committed to our dividend, continue to reinvest in our business, and are determined to engage in meaningful M&A activities. Regarding your question about whether we are targeting dilutive or accretive assets, we acknowledge that dilution is undesirable. We are focused on acquiring assets that enhance value on both the top line and earnings, and there are valuable assets available to us.

Unidentified Analyst, Analyst

Great. Thank you. I just had a follow-up on the ASR. When do you expect that to be completed? I think I heard you say, or maybe I heard Tom say, it's more of an impact in 2025. And does the ASR get you to double-digit growth next year? Thanks for taking the questions.

Thomas Powell, Executive Vice President and Chief Financial Officer

So we expect it to take two to potentially three months to complete the ASR. And we expect to kick that off pretty quickly here. So as far as the growth for next year, we're going to wait until 2025 guidance to talk about that in its entirety, but just the point that more benefit in 2025, that's really due to just how weighted average shares are calculated just given it wasn't in our beginning number. As we get into 2025, I'll see more of a share impact than we are seeing in 2024, but again as Liam pointed out, the benefit to earnings will be in 2025. And we'll discuss that comprehensively at our fourth-quarter earnings call as we provide guidance for the year.

Operator, Operator

And our next question comes from the line of Rich Newitter with Truist. Your line is open.

Rich Newitter, Analyst

Hi. Thanks for taking the questions. So I'm juggling a couple of calls. If this was answered, I apologize, but just on the pumps, to start, the IABP opportunity, you talked about strong quote activity. What is your confidence you could convert that quote activity into actual conversions or share gains? I would love to just hear that. And then I just want to make sure I'm understanding on the margin impact versus the earnings and revenue impact. So IABP share gains are going to be lower margin upfront because of the capital piece. Is that right?

Liam Kelly, Chairman, President and Chief Executive Officer

Yes, that's correct. The overall business aligns with the company's gross margins, with capital slightly below and catheters slightly above. In total, everything balances out, but the increase in gross margins of 25 basis points is not linked to the intra-aortic balloon pumps; it is actually despite them. This slight downturn is not a significant concern, but I want to emphasize that the improvement in gross and operational margins primarily stems from the core business performance. Regarding your question on converting quotes, historically, there were two potential suppliers in the marketplace, and our conversion rate matched our market share while also showing growth. The overall market is expanding at about 3% or 4%, but our intra-aortic balloon pump and catheter business has been growing at more than double that rate. We have continued to gain market share, particularly in the US and Asia Pacific. The quote volume I mentioned is solely from the United States, where customers have been strongly encouraged by the FDA to look for alternative suppliers. Our confidence in converting that quote volume from the call-up in Q4 is extremely high, based on the activities we're observing.

Rich Newitter, Analyst

Okay. Thanks. And then just on the payback add-back, the Italian item that's getting added back to adjusted revenue. Can you just explain the mechanics of that, why you're adding back a reserve adjustment?

Thomas Powell, Executive Vice President and Chief Financial Officer

Yes, sure. So Rich, in total in the second quarter, we are taking additional reserves that total $15.8 million. $13.8 million of that is related to the true-up of reserves that are from prior year periods. The remaining $2 million is related to additional reserves related to 2024, so the add-back adds back the prior-period impact to the reserve, the $13.8 million. It's being done largely because we don't see this as part of the ongoing operating performance of 2024. And we wanted to be able to provide visibility to how the business is performing this year. And that's kind of the logic behind it and then it can excel and hopefully that answers your question. If not, I'm happy to provide more color.

Liam Kelly, Chairman, President and Chief Executive Officer

And Rich, I just want to add to what Tom said to ensure everyone knows that in the current year, in Q2, when we finalized our numbers, we were above the top end of our guidance range of $760 million to $765 million. After closing the quarter in late July, we recorded an additional booking of $2 million. There is another $2 million impact we are recognizing in the second half of the year. This should be reflected in real time by the company. As Tom mentioned, the $13.8 million relates to prior year periods and does not accurately represent the company's performance.

Operator, Operator

And our next question comes from the line of Mike Polark with Wolfe. Your line is open.

Mike Polark, Analyst

Good morning. Thank you for taking the question. A follow-up on balloon pumps and then one other. On the balloon pump, is the consumable captive to the pumps, or is the consumable market open? That's one question. And then given the market is kind of teetering on sole sourcing here, with your competitor's challenges, do you expect there to be a price component as you convert these orders relative to history for this market?

Liam Kelly, Chairman, President and Chief Executive Officer

First of all, on the catheters, the attachment rate to the actual brand of the pump is incredibly high. If you use a competitor pump traditionally, you used the competitor catheter. It's all part of the decision-making process. And if you used the Teleflex pump, you used the Teleflex catheter. Both companies have adapters that work reasonably well converting catheters, not as good, because the catheters work differently. What I mean by that is our fiber optic catheter has a sensor at the tip of the catheter and that's how it pulses. The competitor catheter has the sensor within the pump, and that's how it syncs. So they don't work as well on the fiber optic lasers, so therefore, the attachment rate for the catheter brand is incredibly high to the brand of pump that the customer uses. In relation to price, we are normally dual sourced on many of these IDNs, where you'll have hospitals within an IDN. Some will use competitor pumps. Some will use our pump. So we already have pricing agreements in place, so I'm not anticipating significant price increases as we convert the market. And really we're trying to look at this long-term in relation to converting the market and maintaining a much stronger share position over a 12-month period and maintaining that position and maintaining the catheters over a multiyear period.

Mike Polark, Analyst

Helpful, Liam. Thank you. For the follow-up, I just want to understand the reduction in GAAP earnings per share guidance. It looks to be an increase in the restructuring line, so is there anything to call out there of substance? Thank you so much.

Liam Kelly, Chairman, President and Chief Executive Officer

I'll ask Tom just to go over the gap, if you don't mind.

Thomas Powell, Executive Vice President and Chief Financial Officer

No, there's nothing really to call out, yeah, yeah.

Liam Kelly, Chairman, President and Chief Executive Officer

Okay, business as usual, Mike. Thanks for the questions.

Operator, Operator

And our next question is from the line of Craig Bijou with BofA. Your line is open.

Craig Bijou, Analyst

Thank you for addressing my questions. I have a follow-up regarding interventional urology and a quick inquiry about M&A. With Palette's success and the increased guidance, I’m curious if the growth profile of that business, which you anticipated to be in the mid-20s at the midpoint, has changed. I appreciate that you have maintained flat guidance for interventional urology, but since Palette added $4 million, it implies that UroLift might decrease by that amount, or there could be potential for growth. Is there anything noteworthy about the international side of UroLift that you could mention?

Liam Kelly, Chairman, President and Chief Executive Officer

So Craig, your calculation is accurate. We are very encouraged by Palette's performance. You are also correct in saying that the growth rate this year will be higher than what we initially expected. We were anticipating growth in the high teens to low twenties. Looking at the pro forma, last year we achieved over $56 million. Taking the midpoint, we are aiming for $71 million, which translates to about 25% growth, making that very encouraging. It’s important to note that we are continuing to tap into the white space, introducing this product to our current customer base, and educating radiation oncologists on the importance of spacing, which is growing overall, so that’s a positive sign. Regarding interventional urology overseas, the results we are seeing in Japan for UroLift are very promising. We are making good inroads into that market. Specifically, Japan is our biggest upcoming international market. We expect to have Barrigel approved there in the first half of 2025, presenting a great opportunity for continued expansion of Barrigel. Additionally, we are starting to enroll patients for a study to seek an expanded indication, which could increase the market for Barrigel by about $100 million. The next largest overseas market with potential is likely China, where we are actively trialing the product in major provinces to get it onto the tender system. Thanks for the question.

Craig Bijou, Analyst

I would like to add a quick point about mergers and acquisitions. In light of Vik's question, how does the share repurchase impact your willingness to accept some dilution from M&A, considering you could offset the effect on the bottom line? Thank you.

Liam Kelly, Chairman, President and Chief Executive Officer

If you've seen one merger and acquisition, you've seen one merger and acquisition, Craig, and that's just the reality. We are always pursuing a few different assets at any given time, and each one is unique. We assess every asset based on its individual qualities. We're not considering share repurchases as a way to counterbalance this; instead, we evaluate each asset independently and focus on specific return metrics. We're also very attentive to how these acquisitions affect earnings per share, considering both accretion and dilution. While Palette was initially dilutive, it has now improved, achieving 4 million in sales at margins that surpass those of UroLift and significantly exceed the company average. Therefore, Palette is expected to contribute positively to earnings per share starting in 2025. We apologize to our shareholders for the wait for that accretion, but as Tom mentioned in his remarks, our underlying earnings per share growth is currently between 9% and 11%, which gives us a clear outlook for solid earnings in the market. Thank you for the questions, Craig.

Operator, Operator

And our next question comes from the line of Dave Turkaly with Citizens JMP. Your line is open.

Dave Turkaly, Analyst

Hey, thanks. Just two quick ones on your second largest geography, EMEA. I think you called out either increased capacity or supply and then better utilization, yes. I was wondering how and where, if you could comment on that. And then, I guess, that growth rate you posted, like, how sustainable do you think that is? Thank you.

Liam Kelly, Chairman, President and Chief Executive Officer

Thank you, Dave. EMEA had a strong quarter with growth of 9.8%. The growth was primarily driven by strong performance in Germany, France, Spain, and Italy. We also booked $2 million during the quarter, which affected our overall numbers. In terms of product performance, we saw significant success in emergency medicine, interventional urology, and interventional access. It's encouraging to see that MANTA is continuing to make inroads into the interventional access market, especially since we established our presence there before entering the United States. As for sustainability, EMEA's growth hasn't been at these levels indefinitely. We anticipate a strong performance for the remainder of the year, though possibly not at the same rate. Over the long term, we expect mid-single-digit growth for EMEA, and with our team's execution, there may be potential for higher mid-single-digit growth. We will provide further guidance as we approach next year. Overall, I'm really encouraged by our progress in these regions.

Operator, Operator

And I will now turn the call back over to Mr. Lawrence Keusch.

Lawrence Keusch, Vice President of Investor Relations and Strategy Development

Thank you, Kayla. And thank you to everyone that joined us on the call today. This concludes the Teleflex Incorporated Second Quarter 2024 Earnings Conference Call.

Operator, Operator

And you may now disconnect your lines.