Earnings Call Transcript - TFX Q4 2022

Operator, Operator

Good morning ladies and gentlemen and welcome to the Teleflex Fourth Quarter 2022 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode. At the end of the company's prepared remarks, we will conduct a question-and-answer session. Please note that this conference call is being recorded and will be available on the company's website for replay shortly. And now I'll 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 Inc. fourth quarter 2022 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 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 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 included in our Form 10-K, which can be accessed on our website. During this conference call, you will hear management make statements regarding intra-quarter business performance. Management is providing this commentary to provide the investment community with additional insights concerning trends, and these disclosures may not occur in subsequent quarters. With that said, I will now turn the call over to Liam for his remarks.

Liam Kelly, Chairman, President, and Chief Executive Officer

Thank you, Larry and good morning everyone. For the fourth quarter, Teleflex revenues were $758 million, a year-over-year decline of 0.5% on a reported basis and an increase of 3.7% on a constant currency basis. Compared to the prior year period, revenue under the manufacturing and supply transition agreement associated with our prior divestiture of our Respiratory assets negatively impacted growth by 0.6% in the quarter, implying underlying constant currency growth of 4.3%. Adjusted earnings per share declined by 2.2% year-over-year to $3.52. In reviewing the quarter, our fourth quarter constant currency revenue growth remained durable despite an unexpected subcomponent supply chain issue in our Surgical business that resulted in an approximately $3.5 million headwind during the quarter. The solid performance in the quarter continues to demonstrate the benefits of Teleflex's diversified portfolio that has been purposely built to target the care of critically-ill patients. Of note, our Interventional Surgical and OEM product categories generated double-digit constant currency year-over-year revenue growth during the fourth quarter. Encouragingly, we witnessed improving monthly growth on a sequential basis with December representing the strongest month of the quarter as health care utilization continues to normalize. From a geographic perspective, Asia generated strong results and continues to be an important growth driver for Teleflex. Raw material inflation and supply chain challenges remained headwinds for the business during the fourth quarter. Tyvek continues to be in short supply and has primarily impacted our Vascular and Interventional businesses. Turning to the full year of 2022. When adjusting for the divestiture of the Respiratory assets and one less shipping day, constant currency revenue growth was 4.3% for 2022 as healthcare utilization improved through the year and demand for Teleflex products accelerated. Our high-growth revenue portfolio maintained momentum across the majority of growth drivers. Although UroLift constant currency revenue declined 5% year-over-year in 2022, the remainder of products in the high-growth portfolio continued to show healthy gains with approximately 14% constant currency growth for the year. Moving over to durable core revenues. In 2022, durable core revenue grew approximately 5% on a constant currency basis as compared to the prior year period, reflecting improvement in procedural volumes, strong global execution, new product introductions, and positive price. Our other category which includes our Respiratory and drainage catheter business as well as revenue from the MSA we entered into with midlines in connection with the sale of our respiratory business declined just under 10% year-over-year in 2022. Now, let's turn to a deeper dive into our fourth quarter revenue results. I will begin with a review of our geographic segment revenues for the fourth quarter. All growth rates that are referred to are on a constant currency basis unless otherwise noted. Americas revenues were $458 million which represents 1.7% growth year-over-year against a tough comp in the year ago period. Excluding the impact of the year-over-year decline in MSA sales, Americas revenue grew 2.7% in the quarter. Interventional and Surgical recorded double-digit growth offset by declines in other areas of the business including Interventional Urology. EMEA revenues of $147.8 million increased 1.4% year-over-year. We continue to see procedure volumes improve year-over-year. Now turning to Asia. Revenues were $78.5 million, increasing 13.3% year-over-year. We saw strength across the region with all geographies posting solid growth during the fourth quarter. China growth approached 7% despite COVID-associated disruptions towards the end of the quarter. Let's now move to a discussion of our fourth quarter revenues by global product category. Commentary on global product category growth for the fourth quarter will also be on a constant currency basis. Starting with Vascular Access. Revenue increased 0.5% to $186.4 million. As we anticipated, the performance in the quarter demonstrated a return to growth for Vascular Access despite a tough comp per central venous catheters due to the year-over-year reductions in COVID patients in intensive care units in the United States. Although we made sequential progress on back orders, supply chain is still not yet back to normal. As previously discussed, the vascular business has the greatest exposure to Tyvek packaging for our kits and trays. Tyvek shortages are anticipated to improve in the second half of 2023, as additional supply for the industry comes online. Over the long term, we remain confident that our category leadership in central venous catheters and midlines along with our novel coated PICC portfolio will continue to position us for dependable growth. Moving to Interventional Access. Revenue was $125.1 million, up 13.4% year-over-year. We saw sequential improvements in constant currency revenue growth through 2022 as procedures moved back to pre-pandemic levels. In the quarter, our diversified portfolio served us well with Balloon Pumps, OnControl, and MANTA all contributing to growth. Turning to Anesthesia. Revenue was $99.6 million up 2% year-over-year. Of our larger franchises hemostatic products, LMA single-use masks and endotracheal tubes all had strong performances in the fourth quarter, partially offset by regional anesthesia. In our Surgical business, revenue was $110.4 million representing another solid performance with 10.4% growth year-over-year, despite the aforementioned supply chain disruption due to a specific subcomponent supplier. Among our largest product categories, skin stapling and our ligation portfolio contributed to growth. In other developments, we closed the acquisition of Standard Bariatrics early in the fourth quarter and Titan Stapler revenue drove a significant portion of the year-over-year growth in the Surgical business. For Interventional Urology revenue was $89.2 million, representing an increase of 13.1% sequentially and a decrease of 3.6% year-over-year. Interventional Urology continued to be impacted by a year-over-year decline in patient visits to urologists and staffing shortages. Although, the overall environment for elective BPH procedures has not yet returned to normal, there were signs of improvement during the fourth quarter. Third-party data indicates that overall patient business to urologists were down in the 3% to 4% range year-over-year in the fourth quarter, which marks a sequential improvement from the high single-digit year-over-year decline witnessed in the third quarter of 2022. OEM revenues increased 12% year-over-year to $73.7 million despite a very difficult comparison to last year. Our order book remains well positioned, as customers recognize our broad competencies with competitive capabilities, including fast growth markets for thin walls interventional microcatheters to access small vessels and fine wire for sensing and ablation technology. Fourth quarter other revenue declined 7.1% to $73.6 million year-over-year. We continue to expect all MSA revenues to cease at the end of 2023. That completes my comments on the fourth quarter revenue performance. Turning to some commercial and clinical updates. As mentioned earlier we completed the acquisition of Standard Bariatrics early in the fourth quarter of 2022. Standard Bariatrics commercialized the Titan SGS Stapler for use in sleeve gastrectomy procedures to treat morbid obesity, and we are excited to have the product in the Teleflex Surgical portfolio. We are proceeding with our integration activities and remain on track with our objectives. Of note, we have completed the training of the Teleflex sales force on the Titan Stapler enabling us to double the size of the selling organization as compared to Standard Bariatrics on a stand-alone basis. We also recently announced that Teleflex was awarded a group purchasing agreement with Premier for the Titan Stapler. The agreement will make the Titan Stapler available to surgeons affiliated with Premier and provide access to this innovative technology for use in gastric sleeve surgeries. Turning to UroLift. We reached our objective to convert the vast majority of users to UroLift two during 2022, which will free up time for our sales organization to dedicate increased time to market development activities in 2023. Training of new physicians continued in the fourth quarter, and we reached our targets for the year. Of note, the number of physicians trained in 2022 remains largely consistent with historic levels implying continued interest in adding UroLift to the BPH treatment paradigm. To support new physician onboarding for UroLift we hosted live BPH summit training sessions in the US, Australia and Japan during 2022. Our direct-to-consumer program remains an important investment and achieved its pre-specified performance metrics for 2022. We will continue to invest in DTC initiatives for UroLift including a refreshed television and digital campaign that launched in February of 2023. Now moving to an update of our international strategy for UroLift. We made considerable progress in the geographic expansion for UroLift with entry into several new markets during 2022 including Japan and China. Starting with Japan. We had strong launch execution with UroLift gaining sequential traction through 2022. Revenues exceeded our expectations for the year, and we see continued momentum into 2023. Turning to China. We initiated UroLift cases in the fourth quarter as anticipated. We will be methodical in our launch activities and follow a similar playbook to the one that has served us well in Japan. In turn, we will spend 2023 training surgeons, building our presence in key cities and continuing to engage with the Chinese Urological Society to build acceptance. Now for an update on the Vascular business. The Vascular business unit continues to align its portfolio and clinical education offering with the evolving customer needs. Today, Teleflex is well-positioned to serve as a trusted partner with Vascular access clinicians in their goal of zero catheter-related complications. We are helping to standardize outcomes by providing protection during and after vascular access procedures and establishing a predictable insertion process across the hospital. This approach continues to solidify our significant market share in CVCs and drive revenue growth through the highly successful launch of the CVC ErgoPack complete portfolio offering a complete vascular access insertion system designed to help clinicians comply with current guidelines and standards. We also continue to prioritize growth in the PICC and midline categories with the most recent advancement being the launch of the new Arrow Pressure Injectable Midline portfolio in North America in the fourth quarter of 2022. The new offering is designed to help alleviate risk associated with line misidentification. Without quick and easy identification between midlines and PICCs, medication may mistakenly be infused through midlines that should only be infused through a central venous access device potentially causing complications and disruption in patient therapy. We are still in the early phase of the launch, but have seen a great level of interest from customers thus far. Additional innovation and PICC placement and positioning devices can be expected in 2023 as we continue to drive toward growth and share gain in this segment. Turning to the Interventional Access business. I am pleased that the relaunch of the Langston catheter has progressed through the fourth quarter with product availability in the US, Canada Australia and New Zealand. The Langston catheter is a unique diagnostic tool that had clinicians determine the degree of aortic stenosis, which might result in a subsequent TAVR procedure. Our clinical and medical affairs team works to reeducate the market on this product including through a panel discussion at TCT and a webinar held in December. The Langston catheter continues to build value for our customers, enhance our engagement with clinicians in TAVR and demonstrates our relevance in the structural heart space. We expect further product launches in our interventional business over the coming years; including complex catheters in the structural heart market. Finally, some comments on the outlook for 2023. We witnessed improving stabilization in healthcare utilization over the course of 2022 and would expect a further sequential stabilization in healthcare utilization in 2023. Indeed the majority of the procedure markets that we serve are now back at or above 2019 levels. Conversely, some of the more deferrable disease states reflect patient visits to physicians that remain below pre-pandemic levels including urology. We anticipate that as COVID has become increasingly endemic and staffing shortage bottlenecks gradually ease, patients will increasingly seek medical interventions during 2023. Turning to the macro environment. 2022 had its share of operational challenges including inflation and supply chain disruptions. For 2023, we are prepared for some level of continued volatility although we expect incremental inflation to be at levels lower than 2022 and supply chain challenges to improve through the year. We remain focused on our global operations and we'll look for ways to become more efficient as we work through the macro environment. That completes my prepared remarks. Now I would like to turn the call over to Tom for a more detailed review of our fourth 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 totaled 60% a 120 basis point increase versus the prior year period. The year-over-year increase was driven by price, foreign exchange and mix partly offset by incremental inflation. Of note, our price strategy maintained its traction during the fourth quarter, enabling us to drive more than 50 basis points of year-over-year price improvement for 2022. During the quarter, we continued to see an improvement in sea freight costs in line with our expectations. Conversely, raw material and supply chain disruptions remained elevated and have yet to normalize. Adjusted operating margin was 27.9% in the fourth quarter. The 30 basis point year-over-year increase was the result of higher gross margin and disciplined expense management of non-revenue-generating expense, partly offset by deleverage across our expense base from lower revenue year-over-year; inflation in our expense base such as wages; and planned investment in the business for our growth drivers. Net interest expense totaled $18.7 million in the fourth quarter, an increase from $11.8 million in the prior year period. The year-over-year increase in net interest expense reflects higher interest rates versus the prior year and increased borrowings on our revolver to fund the purchase of Standard Bariatrics, partially offset by a reduction in average debt outstanding. Our adjusted tax rate for the fourth quarter of 2022 was 13.6% compared to 13.8% in the prior year period. The year-over-year decrease in our adjusted tax rate is primarily due to further enhancements and tax efficiencies in our global structure, partly offset by tax expense arising from the new provision of the US tax law requiring the capitalization of certain R&D expenses. At the bottom line, fourth quarter adjusted earnings per share was $3.52, a decrease of 2.2% versus prior year. Turning now to select balance sheet and cash flow highlights. Cash flow from operations for 2022 was $342.8 million compared to $652.1 million in the prior year period. The decrease was primarily due to lower operating results, higher tax payments, higher payroll and benefit-related payments, and unfavorable changes in working capital driven by an increase in inventory purchases to maintain high customer service levels during a period of elevated global supply chain volatility. Moving to the balance sheet. Our financial position remains healthy. At the end of the fourth quarter, our cash balance was $292 million as compared to $445.1 million as of year-end 2021. Reduction in cash on hand is due to $240 million of payments on our senior credit facility and $73 million for the acquisition of Standard Bariatrics. Additionally, we borrowed $100 million under the senior credit facility for the Standard Bariatrics acquisition. Net leverage at quarter end was approximately 1.8 times, which remains well below our 4.5 times covenant. Now turning to our 2023 guidance update. We expect 2023 constant currency revenue growth of 4.75% to 6.25%. Foreign exchange is expected to be a headwind of approximately 0.5 point in 2023. Considering the foreign exchange headwind, we expect reported revenue growth of 4.25% to 5.75% for 2023, implying a dollar range of $2.91 billion to $2.952 billion. We continue to expect revenue from Standard Bariatrics to be within a range of $30 million to $35 million. Turning to the middle of the income statement. We expect gross margin for 2023 to be 59% to 59.5%. Our gross margin guidance range reflects the positive impacts of year-over-year manufacturing efficiencies, product mix and price, largely offset by inflation. Although, we saw a moderation in sea freight costs during the second half of 2022 in line with our forecast, raw material inflation was greater than expected at the time of our May 2022 Analyst Meeting. And for 2023, we have assumed that macro volatility will persist and continued inflation in raw materials, labor and utilities will represent headwinds to our gross margin this year. Moving to operating margin. We expect a range of 26% to 26.75%. Our guidance reflects the flow-through of gross margin, headcount, employee related expenses, investments to grow the business, and the inclusion of Standard Bariatrics, partly offset by the positive impact of restructuring. Turning to items below the line. We expect an adjusted tax rate in the 10.25% to 10.75% range for 2023. Net interest expense is expected to approximate $67 million for 2023. The majority of the year-over-year increase in our net interest expense outlook reflects higher interest rates partially offset by debt repayment. Moving to earnings. Our adjusted earnings per share guidance for 2023 is $13 to $13.60, which represents a 0.5 point year-over-year decrease at the low end and a 4.1% increase at the high end. When considering your models for 2023, foreign exchange will be a meaningful headwind to revenue in the first half and then increasingly turn to a tailwind in the second half of the year assuming foreign exchange rates as of the beginning of 2023. However, as a result of how foreign exchange flows through our inventory, there will be headwinds to EPS through the third quarter and then it would become neutral in the fourth quarter. We also note that while there is no year-over-year difference in the number of shipping days in 2023 versus 2022, there will be five extra shipping days in the first quarter and five less shipping days in the fourth quarter of this year. Historically the benefit or headwind to our year-over-year GAAP revenue growth from a shipping day change is approximately 1% in a fiscal quarter. Although, we do not provide quarterly guidance for your modeling purposes, we would expect a constant currency revenue growth range in the first quarter of approximately 5.5% to 6.5% when excluding the benefit from five extra shipping days of approximately 5%. Finally, I'll provide some commentary on our long-range plan. We remain confident in the foundational pillars of our durable growth strategy that we provided at our May 2022 Analyst Meeting. Our 2023 to 2025 long-range plans remain anchored on discrete drivers for revenue and earnings per share growth as well as margin expansion. We are long-term focused on achieving our objectives for 2025 and continue to see the opportunity to drive greater scale, improve profitability, execution on a disciplined capital allocation strategy and strong cash flow generation for Teleflex. With that said, the macro environment has been highly dynamic and there have been a number of unanticipated headwinds on our business in the period since May 2022 Analyst Meeting. First, in the second half of 2022, inflation has been persistent and at a higher level than we projected at the time of our 2022 Analyst Meeting, in particular from raw material costs and their related impact on gross margins. Second, although we anticipated a sequential improvement in the procedure environment for UroLift throughout 2022, headwinds persisted through the year. In particular, patient visits to urologists were down year-over-year in 2022 and staffing shortages remained a bottleneck for procedures, especially in the office setting. Third, foreign exchange was a larger headwind than was expected as the dollar strengthened against a broad basket of currencies in the second half of 2022. Interest rates also increased dramatically in the second half of 2022 and are expected to continue rising in 2023. Although, we have not recast the entirety of the LRP provided in May 2022, we have updated assumptions related to inflation, foreign exchange, and interest rates. In addition, we are now assuming a 3-year CAGR in the 8% to 9% range for global UroLift revenues. And finally, since we acquired Standard Bariatrics early in the fourth quarter of 2022, we have incorporated the business into the long-range plan. We continue to view the LRP targets provided at the 2022 Analyst Meeting as the vision for Teleflex in 2025. With 2022 as the base year in incorporating the updates, we now believe that we will deliver at the low end of the ranges for 2023 to 2025, total revenue CAGR and margin expansion. For the high-growth portfolio, which represented a little more than 25% of revenues in 2022, we expect approximately 12% to 13% CAGR for the LRP. For the durable core, which represents slightly over 60% of revenues in 2022, we expect to grow at approximately a 5% CAGR. With respect to the remaining portion of the total revenue, which we refer to as the other category, we expect a negative 6% to 7% CAGR due to the LRP. And that concludes my prepared remarks. I'd now like to turn it back to Liam for closing commentary.

Liam Kelly, Chairman, President, and Chief Executive Officer

Thank you, Tom. In closing, I will highlight our three key takeaways from the fourth quarter of 2022 and our 2023 outlook. First, our fourth quarter results were solid and driven by an improving end market for the majority of our businesses. Second, we are confident in our outlook for 2023. Our outlook reflects the diversification of the Teleflex portfolio through the combination of our growth drivers and stability of durable core revenues. Importantly, we will continue to focus on investment in our future growth drivers to enhance long-term value creation. Third, we are focused on achieving our objectives in 2025. We have a balanced approach to top line growth as we invest in our growth drivers and optimize the performance of the durable core. We see opportunities to drive margin expansion through mix shift, restructuring, and price. And finally, we will remain disciplined in our capital allocation strategy, with a focus on executing on our M&A strategy. 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 will come from Cecilia Furlong with Morgan Stanley. Please go ahead, Cecilia.

Cecilia Furlong, Analyst

Great. Good morning, and thank you for taking the question. Liam, I wanted to start with '23 guidance and if you could walk through relative to the updated LRP and those CAGRs, how we should think about contributions both from the durable core high-growth assets in UroLift. And specifically on UroLift with the 8% to 9% CAGR, how you're thinking about cadence over the next three years?

Liam Kelly, Chairman, President, and Chief Executive Officer

Yes. Cecilia, thank you for the question, and good morning. So, I'll start with our overarching guidance for '23 on revenue, which is 4.75% to 6.25% with a midpoint at 5.5%. This represents an improvement over 2022, which had an underlying growth rate of 4.3%. And as regards cadence within the year, you obviously heard in Tom's prepared comments, where the quarter one will be 5.5% to 6.5% with a midpoint of 6%, so therefore, obviously, seeing an improvement right out of the gate in core revenue. As a company, we're continuing to focus our efforts on high growth and durable core, to the other part of your question. But the natural evolution for Teleflex is to guide these buckets as they contribute to the overall growth rate of the company. Our guidance assumption for 2023, Cecilia, assumes that high growth will grow 8% to 11%; durable core will grow 4.5% to 5.5%; and the other bucket will be flat to declining in 2023. As you know, we're an incredibly transparent company. And while we will not be guiding specifically to UroLift, we will report Interventional Urology revenues every quarter consistent with all our other product categories. The exception of this, this year will be Standard Bariatrics and the Titan Stapler, as we have guided the full year $30 million to $35 million. This is consistent with our past guidance principles of giving guidance to an acquisition within the first year. Obviously, for UroLift, we would expect an improving environment in 2023, and that would carry on into '24 and '25, Cecilia.

Cecilia Furlong, Analyst

Great. Thank you, Liam. And then if I could follow up on gross margin as well, just the outlook that you put out for '23, if you could walk through both what you're expecting from continued inflation benefit of pricing. And then also just UroLift 2 conversion impact that's having on gross margin alongside Standard Bariatrics?

Liam Kelly, Chairman, President, and Chief Executive Officer

Okay. I'll just cover the conversion of UroLift 2 and Tom will cover the rest of the topics on margins, Cecilia. UroLift 2 we have the US market pretty converted at this stage to the UroLift 2, and Tom will go through your other questions on the gross margin line.

Thomas Powell, Executive Vice President and Chief Financial Officer

Okay. So for 2023, our guidance is 59 to 59.5 or about five basis points at the midpoint. And for 2023 we expect to realize meaningful margin accretion from the combination of mix price manufacturing cost improvement programs and our footprint restructuring programs. However, as we've spoken about in 2022, we continue to expect inflation largely to offset these gains. Additionally, we're expecting a modest gross margin headwind from foreign exchange. If we were to look at what are the drivers of the accretion, the largest being the cost improvement programs accounting for some 40% of the positives and then mix price and the footprint about 20% each of the increase. And then as we look at what is offsetting that, it's largely the inflation, which accounts for 80% of the offset. And then as mentioned it's a little bit from foreign exchange as well and some miscellaneous other items. So really it's a story of really good underlying margin expansion opportunities. As we've mentioned we still feel very good about the long-term prospects. However, inflation is having an impact and largely offsetting those nice gains in the underlying business.

Operator, Operator

Our next question comes from Matt Taylor with Jefferies. Matt, please go ahead.

Mike Sarcone, Analyst

Hey, thank you. This is Mike Sarcone on for Matt today. Good morning, everyone.

Liam Kelly, Chairman, President, and Chief Executive Officer

Good morning.

Mike Sarcone, Analyst

Good morning. So just two follow-ups on Cecilia's questions. Just first on the UroLift growth CAGR of 8% to 9% over the next three years. By any chance could you parse out how you're thinking about US growth versus OUS growth?

Liam Kelly, Chairman, President, and Chief Executive Officer

Yeah. So I will tell you that when it comes to the guidance for UroLift during the LRP over the coming years, we are assuming that UroLift will grow 12% to 13%. So, two comments on that. First is that nothing has changed to our international assumptions. We still are confident in the rollout of the product in Japan. As we said in our prepared remarks, we've begun in China. There are other geographies coming on board such as Brazil, Taiwan, India, France, Italy, Spain, and ultimately Germany as you go through the LRP cadence. I would also say that 2022 played out a little bit differently than we anticipated in the US with procedural recovery a lot slower than we had anticipated due to patient flow and staffing shortages. And I think overarching if you look at Teleflex as a company within that high-growth bucket in 2022, it's 25% of our company growing at 12% to 13%. By 2025, it will be one-third of our company still growing at that 12%, 13%. And I think this along with our growth within UroLift will position Teleflex as for attractive long-term durable growth as a company.

Mike Sarcone, Analyst

Got it. That's very helpful. And then just one follow-up on the gross margins for 2023. Do you think you could help us think about the quarterly cadence through the year and just how we should flow gross margin through?

Thomas Powell, Executive Vice President and Chief Financial Officer

Yeah. So I'd say there's some pluses and minuses with how foreign exchange comes in and others. But what you should expect is a relatively stable gross margin for the first three quarters and then expect to see some margin expansion or further expansion in the fourth quarter as a result of a higher volume more attractive mix expectation.

Operator, Operator

Our next question comes from Shagun Singh with RBC. Please go ahead. Your line is open.

Shagun Singh, Analyst

Great. Thank you so much for taking the question. So just on UroLift, the LRP guidance is about 8% to 9%. Is mid single-digit a reasonable ballpark for this year? And I just wanted to get your thoughts on what gives you the confidence that patients will return. Do you have a backlog to tap into? It is encouraging that physicians are continuing to train. And then with respect to my second question on EPS, it's a pretty wide range. So what gets you to the top versus the bottom end? And what are the biggest swing factors here? Thanks for taking the questions.

Liam Kelly, Chairman, President, and Chief Executive Officer

Thank you for the questions, Shagun. I'll have Tom address the EPS range shortly, but I'll start with UroLift. We are confident in the 8% to 9% growth for UroLift as part of our Long-Range Plan. We expect this to improve over the course of the plan. Our assumptions for international markets remain unchanged, and we anticipate good performance in those markets. We feel positive about the global growth prospects for the UroLift franchise, particularly given the improving environment we foresee. This supports our confidence in achieving 8% to 9% CAGR growth between now and 2025. Regarding patient returns, we need to consider two factors: patient returns and staffing shortages. In the fourth quarter, we experienced a 13% improvement from the third quarter to the fourth. We noted enhancements across all of our businesses during this period, including UroLift, which exceeded our expectations by over $3 million in the fourth quarter, marking the first time we've done so in a while, providing us with encouragement for the future. I spent time last week with our urology sales team and met with customers. Although we see some improving staffing levels in hospitals, they are still lacking in ASCs and office settings. However, I expect these conditions to improve throughout 2023. Additionally, I believe patient flow will start to return to the office. We will support this by continuing our training efforts for urologists, having trained nearly 400 last year. We are effectively managing everything within our control. Our direct-to-consumer campaign is ongoing, and we've just launched a new advertisement. It’s important to remember that benign prostatic hyperplasia is not disappearing; about 12 million men are still affected. While it may be deferrable, it remains an issue. We continue to be the premier product for BPH treatment and hold the market leadership position, which bolsters our confidence in the growth of UroLift within our Long-Range Plan.

Thomas Powell, Executive Vice President and Chief Financial Officer

Regarding EPS, the range of $0.60 represents a spread of just under 5% from top to bottom. The factors that could lead us to the higher end of this range include a favorable sales mix for the year and stable inflation rates. In summary, the most significant variables affecting our guidance appear to be foreign exchange rates, which have shown considerable volatility in the past year, along with the direction of inflation.

Operator, Operator

The next question comes from Mike Polark with Wolfe Research. Please go ahead, Mike.

Mike Polark, Analyst

Good morning. Thank you for taking the questions. I have two on the updated comments around the LRP revenue first and then margin. On revenue, I heard low end the prior CAGR was described as 6% to 7% at the company-wide level. So let's call it 6%. My question is, are there any additional kind of unannounced acquisitions considered in that update? Or is it the base plus Standard Bariatrics now, and no unannounced M&A contribution?

Liam Kelly, Chairman, President, and Chief Executive Officer

So, Mike, thanks for the question. You are absolutely correct. It is the base with the revised UroLift CAGR and the inclusion of Standard Bariatrics. That is the only change we've made. That's accurate.

Mike Polark, Analyst

Cool. The follow-up on margin as it relates to the updated LRP commentary, just to level set low end for the prior goals on gross and operating margin expansion, jumping off from 2022. So 2022 on gross margin 59.2. If I add 250 basis points I'm just south of 62% in 2025 and then on operating margin 27% plus 200 bps and 29% in 2025. Have I done the math correct?

Liam Kelly, Chairman, President, and Chief Executive Officer

You have.

Operator, Operator

Next question comes from Jayson Bedford with Raymond James. Jason, please go ahead.

Jayson Bedford, Analyst

Good morning. So I wanted to ask about operating margin. The fourth quarter was strong, but the 2023 op margin guidance was a bit softer. And the heaviness seems all to be in the operating line OpEx. It implies a pretty sharp step-up in OpEx and I assume some of the restructuring helps this line. But I guess my question is where is the reinvestment occurring. And how much of this is kind of structural inflation-driven or discretionary?

Thomas Powell, Executive Vice President and Chief Financial Officer

Well to your point I think as we look at the op margin for 2023, the first point is that just given the inflationary pressures and foreign exchange we're getting a lesser gross margin benefit than we would typically get. So we're starting off with less benefit from the gross margin. But then, as you look at the OpEx, there are a couple of things that I guess I would characterize as structural in that there are headcount-related expenses that we're adding back in – in 2023 that were not there in 2022. Variable compensation was lower than target and there were a number of open positions, quite a few that took a while to fill given the tight labor market environment and we're we've filled those positions and we're resetting the variable comp back to 100%. So there's a pretty big structural kind of move as a result of that. Now investments to grow we've got some continued investments behind our high-growth drivers. Expansion into international markets would be one as well as continuing to build out the capabilities of our systems and otherwise in 2023. Now, restructuring does provide a benefit. Part of that is in gross margin, part of it is in OpEx, and some is in 2023 and the balance in 2024, about two-thirds of that restructuring will benefit 2023. So I would say, overall the biggest impact is just a structural putting the cost back into the OpEx that were not there in 2022. And that's part of the reason why we benefited in 2022 at a higher margin as these costs were not in the cost structure.

Jayson Bedford, Analyst

What's the expected dilutive impact from Standard Bariatrics in 2023?

Liam Kelly, Chairman, President, and Chief Executive Officer

So that's – as we stated before Jayson it's $0.10.

Thomas Powell, Executive Vice President and Chief Financial Officer

$0.10 to $0.15.

Operator, Operator

Our next question comes from Lawrence Biegelsen with Wells Fargo. Lawrence, please go ahead.

Lawrence Biegelsen, Analyst

Yeah. Good morning. Thanks for taking the question. One on 2023, one on the LRP. Just on 2023, Tom maybe help me with the math here. The midpoint of the Q1 guidance day adjusted 6%, I think constant currency. It's slightly below the rest of the year. Just why would – why would the growth for Q2 through Q4 be lower than Q1, if I'm doing the math correctly?

Liam Kelly, Chairman, President, and Chief Executive Officer

So I'll take that one instead of Tom, if you don't mind Larry. So really you have a year-over-year comp is one of the reasons for it. If you recall, there was Omicron last year which had a slight impact on some of the procedures that were getting done. We also expect in Q1 to see a good solid performance as – in the overseas markets and in OEMs so – just because of that, that impact in the prior year period. So, that's why it's a little bit front-end loaded in that regard Larry. And I think most investors would prefer to see a front-end loaded revenue plans and a back-end loaded revenue plan in my experience at least. So I think coming out of the blocks pretty well at a 6% growth with the guidance that – with the midpoint of our full year guidance at 5.5% I think should be seen as a positive for the investment community.

Lawrence Biegelsen, Analyst

I agree with your comment about the front-end loading. Thank you, Liam. Regarding the long-range plan, if I’m considering the figures correctly, the revenue midpoint suggests about 5% organic growth this year in 2023, contrasting with the 6% projection for the long-range plan. This indicates an acceleration in 2024 and 2025, if I’m on track. For margins, to follow up on the previous question, the operating margin of 26.3 at the midpoint for 2023 and the approximately 29% goal for 2025 represents a significant increase of about 300 basis points. What gives you confidence in both the revenue acceleration for 2024 and 2025, and the expectation of 150 basis points growth in margins each year for those years? Thank you for addressing my questions.

Liam Kelly, Chairman, President, and Chief Executive Officer

I will discuss the LRP while Tom addresses the margin question. Tom's response will primarily focus on inflation, which is expected given the current environment. Regarding revenue, I will speak in constant currency terms. For the first year of the LRP, we are projecting a revenue increase of 5.5%, guiding towards the lower end of our LRP target of 6%. You are correct that there will be a slight increase in revenue as we transition from 2023 to 2024 and 2025. This is largely due to the anticipated improvement in the macro environment starting in 2023 and continuing into the following years. Additionally, the international growth of our high-growth portfolio will support this increase, including UroLift, PICCs, the intraosseous portfolio, and our hemostatic products, which we expect to see accelerated growth from in the latter half of the LRP. We are confident in this forecast. It’s a shift from a 5.5% to a 6% CAGR over the LRP's duration. Importantly, while our focus has been on a specific area of Teleflex, the durable core has been steadily improving. The durable core for the LRP is now at 5%, which is at the upper end of our previous guidance of 4% to 5%, thanks to great execution by our global businesses. The margins on a significant portion of that durable core are quite substantial and beneficial to Teleflex, with a $14 billion global total addressable market where we are currently only 5% penetrated. There are significant growth opportunities for us here. I will now hand it over to Tom to address your margin question. Thank you for your inquiries.

Thomas Powell, Executive Vice President and Chief Financial Officer

Sure, Larry. The expansion of operational margins will primarily be driven by gross margin improvements. We anticipate continued margin growth due to product mix and pricing strategies. Furthermore, the agreement with Medline will conclude at the end of 2023, contributing nearly a full point to our margin. Additionally, we usually achieve sufficient productivity in our operations to counterbalance inflation; however, this was not true in 2022 and 2023. We expect to see improvements in inflation management as we move into 2024 and 2025, allowing operational productivity to positively impact gross margin, unlike the previous two years. Those are the main factors contributing to gross margin. We also foresee operating margin leverage as increasing revenues enable us to optimize our cost structure. To summarize, those would be the four key components I would highlight.

Operator, Operator

The next question comes from Michael Matson with Needham & Company. Michael, please go ahead.

Michael Matson, Analyst

Yeah, thanks. So I want to ask one on pricing. I think you said you had over 50 basis points, and I think that was for the full year 2022. What have you kind of assumed in the guidance for 2023? Is it kind of remaining at that level? Could it even be higher maybe?

Liam Kelly, Chairman, President, and Chief Executive Officer

So, we began the year in 2022 expecting 50 basis points of positive pricing and we exceeded that goal in 2022, Mike. So we came in comfortably above the 50 basis points. We would expect again to be above 50 basis points and to deliver a minimum of 50 basis points of pricing this year. And we have a pathway to that. We have some carryover from the prior year and we have some additional pricing opportunities that, some of which we've already executed.

Thomas Powell, Executive Vice President and Chief Financial Officer

That is existing programs. We have a number of footprint programs that are still finalizing and will be largely done by 2025. And then we introduced a new program in the fourth quarter of 2022 that will be complete by 2024. So everything I spoke about are known and existing programs that frankly we're managing to expectations.

Operator, Operator

The next question comes from Matthew O'Brien with Piper Sandler. Matthew, please go ahead.

Matthew O'Brien, Analyst

Good morning. Thanks for taking the question. So, Liam, as I think about UroLift and this new 8% to 9% CAGR through the LRP, I think that's about $90 million to $100 million of incremental revenue through that time frame by 2025. So if I remember correctly, Japan and China were supposed to be pretty sizable contributors, I think, in the out years, maybe half of that $90 million to $100 million, maybe a little bit more than. So it would imply some fairly modest improvement here domestically. First of all, am I right about that? And then, secondly, how conservative is that? Does it make sense to be doing these DTC, or making this DTC spend, if you don't think the domestic business can really accelerate over the next several years?

Liam Kelly, Chairman, President, and Chief Executive Officer

So, Matt, your calculations regarding the growth in UroLift over the next three years look good. We still depend heavily on the US for most of our growth, as the international markets are not large enough at this stage. However, we are encouraged by our international efforts, and by the end of 2025, those markets should contribute a larger share of our revenue. Additionally, with a smaller base, the percentage growth will be more pronounced. We've seen success in Japan and expect to perform well in China, Taiwan, India, France, Spain, Italy, Germany, Brazil, and more, but these markets alone cannot drive the growth needed to achieve our CAGR target of 8% to 11%. Regarding the direct-to-consumer strategy, it is indeed a sensible approach. Looking back at 2022, we saw a 27% increase in impressions and a significant rise in responses. This is encouraging. Conversations with urologists confirm that many patients are requesting UroLift after seeing our advertisements. Therefore, we plan to continue our DTC campaign and believe that achieving an 8% to 11% growth is realistic for us as a company.

Matthew O'Brien, Analyst

Thank you, Liam. Regarding the high-growth portfolio, it has decreased slightly from 14% to 15% to 12% to 13%, which still indicates that the rest of the portfolio outside of UL is performing well. Could you discuss some of the components like MANTA, EZ-IO, PICCs, etc., that are contributing to your confidence in the strength of that segment of the business in the coming years? Thank you.

Liam Kelly, Chairman, President, and Chief Executive Officer

Yes. So the high growth is doing really well. In the fourth quarter, it grew approximately 14%. The full year it grew approximately 14%, ex the contributions of UroLift. So, obviously, there are elements within the high growth that are above the average that we expect and there are elements of the high growth that will be slightly below it. Obviously, now the Titan, which comes from Standard Bariatrics, will be the fastest-growing. Then you have MANTA which will grow above the average. So we feel really good about the high-growth portfolio. We feel really good about being able to deliver the high growth of 12% to 13% over the LRP and we feel really good about being able to deliver 8% to 11% from the high growth in 2023. And the performance of all other aspects of the high growth, except for one, have been right in line, if not ahead of our expectations for the entirety of 2022. And there's nothing better than momentum, as you know Matt, as you head into 2023, 2024, and 2025 as you continue to build that out. And I know we talk a lot about international expansion with UroLift, but it is also the same for the rest of the high growth. There is international expansion as well as domestic sales growth as we tap into that market. And the encouraging thing is as I said earlier all of this high growth is growing into a massive market TAM where we're very underpenetrated, but significant opportunities for growth.

Operator, Operator

Our next question comes from Anthony Petrone with Mizuho. Please go ahead, Anthony.

Anthony Petrone, Analyst

Thanks. Hope everyone is doing well. Maybe just in the LRP Standard Bariatrics just to kind of clean that up a bit in terms of the top-line contribution, it rolls into organic I would assume sometime later this year or early next year. So maybe the contribution from Standard Bariatrics within the LRP and can that actually be margin accretive by the end of the LRP? And I'll have a couple of follow-ups.

Liam Kelly, Chairman, President, and Chief Executive Officer

Yes. And well done Anthony. Thanks for asking. So I'll answer the last part of your question first. Yes, it will be margin-accretive by the end of the LRP. We expect it to become margin-accretive as we exit 2024. What you should expect from Standard Bariatrics is that it will deliver between $30 million and $35 million this year as we stated in our prepared remarks. And then as we said previously it should add approximately 50 basis points of growth to Teleflex year-over-year thereafter from an organic perspective. So that's what you should expect from Standard Bariatrics. Rough math should be around $60 million by the end of 2025.

Anthony Petrone, Analyst

And then a quick follow-up two I'll throw in there and I'll get back in queue. One just on UroLift when we think about it through 2025. Obviously, we saw some shifts in patient behavior. At what point do you think things sort of normalize here? Is there a path to normalization, let's say at the end of this year early next year? I'm talking about US patient behavior. And then maybe just your updated views on the M&A landscape sort of what level of discussions is Teleflex having and just maybe your high-level views on M&A? Thanks.

Liam Kelly, Chairman, President, and Chief Executive Officer

Yes. Sure, Anthony. So I expect the overall environment for urology patients and staffing to continue to improve as we go through 2023. When it's going to be 100% normal Anthony, it's difficult for me to actually pinpoint that right now in all fairness. But I do anticipate to continue to improve. And why do I say that? The staffing levels in hospitals began to improve in Q4. I expect that to continue into Q1 this year. And once staffing levels start to improve in hospitals it will ultimately then begin to improve in ASCs and ultimately in offices thereafter. And I think the patient flow as I said earlier there's still 12 million men suffering from BPH. If you walk into a urologist office and there's 100 men in the urology waiting room, 40 of them are there because they got BPH roughly. So it's still the number one reason why a man goes to the urologist. So the size of the market is a significant driver to my belief that it will return to normal as we go through the LRP at some stage. With regard to M&A, clearly, we have the most important thing that you need. We have a very strong balance sheet. For M&A, we're about 1.75 times levered at the end of the fourth quarter. We are active out there looking at opportunities. We have a lot of lines in the water. We're fishing hard Anthony. Very difficult for me to say and we're going to get a fish on the hook and into the boat. But there are targets out there that we are interested in. There are targets out there that we are actively pursuing. And we do believe that we are an attractive acquirer and there are assets that we feel would fit very well in the Teleflex family.

Operator, Operator

Our next question comes from Craig Bijou with Bank of America Merrill Lynch. Craig, please go ahead.

Craig Bijou, Analyst

Good morning, everyone. Thank you for taking questions. Let me start with UroLift. I wanted to ask about Japan, which performed better than expected. Was the 89 in the quarter, compared to the 86 implied by your guidance, due to Japan? Also, could you comment on what contributed to the slight beat of a few million? Was that from the US or the international side?

Liam Kelly, Chairman, President, and Chief Executive Officer

So we saw improvement in both sides of the Atlantic. I keep getting back to the point that the international markets at this stage are not substantive enough to carry the can for the overall UroLift growth. And we would not have been able to beat by $3.3 million Craig the US delivering a good proportion of that. I am encouraged though as I said earlier on what we're doing in regards to the expansion overseas. Japan has gone exceptionally well. We did our first cases in China. We're starting to roll out in India and other geographies. I won't go through them all again, but we are encouraged by what we see with regards to that rollout.

Craig Bijou, Analyst

Thanks, Liam. Regarding your comments on the durable core, I appreciate how that has increased in relation to LRP growth. Could you share which products or categories are driving this and what you anticipate will continue to support LRP growth in the coming years?

Liam Kelly, Chairman, President, and Chief Executive Officer

I believe that we are starting to see improvements as the environment gets better. It's important to note that in 2022, we faced significant supply chain challenges, including shortages of Tyvek and other essential components. These issues will contribute to some of the early improvements you can expect. We should see growth in our Vascular business moving forward. Throughout 2023, Vascular grew by about 1% in constant currency, whereas the typical growth rate for this sector is in the mid-single digits. Additionally, we have an array of new products being introduced in Interventional Access, which I believe will enhance growth in that area. One of our valuable and perhaps underappreciated assets is our OEM business. We acquired a company called HPC a few years ago that specializes in thin-walled catheters. This segment, along with our overall OEM business, has been experiencing growth in the high single to low double digits, a notable increase from the historical growth rate of around 3% or 4%. I expect that the OEM business will continue to thrive and contribute significantly going forward while positively impacting our operating margin. Furthermore, the APAC region represents a vital growth opportunity for us, as we are launching numerous products there that we anticipate will be very successful. These are some of the main areas I think will continue to expand. Moreover, as we progress through our long-range plan, we also expect improvements in Interventional Urology.

Operator, Operator

Our next question comes from George Sellers with Stephens. George, please go ahead.

George Sellers, Analyst

Hi. Thanks for squeezing me in here. I'll just ask one quick one. Could you give us a little color on what you're seeing in terms of private market valuations and how those have trended here recently? And maybe how confident are you that you could potentially deploy some capital here in the near term? Thank you.

Liam Kelly, Chairman, President, and Chief Executive Officer

So, George, as you know, it takes two to get married. We are ready to engage, and now it's about finding the right partner. I want to point out that valuations from the peak in 2021 have cooled off a bit. High-quality assets are still on the expensive side, which is expected for such assets, and that's what we're targeting. We will continue to be disciplined, and investors can count on that. Our focus will be on assets that enhance our top-line growth, improve our gross margins, and quickly contribute to our operating margins and earnings post-acquisition. We maintain a strict approach to our return on capital, aiming to exceed our internal cost of capital by at least year five. Historically, we've achieved this by year four. The criteria for Teleflex in acquiring suitable assets, integrating them effectively, and ensuring they are unique and in growing market segments will remain unchanged.

Operator, Operator

Our next question comes from Matt Mishan with KeyBanc. Please go ahead. Your line is open.

Matt Mishan, Analyst

Great, thanks for taking the questions. Just a quick clarification for Liam, and then I'll have a follow-up for Tom. On the low end of the 6% to 7% from '22 to '25, does that include the inorganic contribution of Standard Bariatrics in 2023?

Liam Kelly, Chairman, President, and Chief Executive Officer

Yes. As we said in our prepared remarks, and as I said a couple of times already, the changes that we're making is we're revising the high-growth bucket and the UroLift component of that high-growth bucket, and we're adding Standard Bariatrics. So that's it. That's correct.

Matt Mishan, Analyst

Okay. And then just for Tom, on the tax rate, 10.25% to 10.75% for 2023 is pretty low, especially compared to historical standards. What's driving that for 2023? And how should people think about the sustainability of that tax rate moving forward into the next couple of years?

Thomas Powell, Executive Vice President and Chief Financial Officer

Well, I would say that, as you look at 2023, there are two drivers of the tax rate. One is the change in the tax law related to the capitalization of R&D expenses. We'll start to provide some ability to amortize in 2023. So we have a less of an expense impact as a result of that. And the other driver would be the IT consolidation projects or consolidation projects that we've undertaken will begin to show a higher benefit in 2023. And those benefits will continue throughout the LRP time frame. So you should think about the rate as being sustainable. I would say that there is one caveat in that the EU is currently assessing a minimum tax, if that were to become legislation, that could have an adverse impact on our tax rate.

Liam Kelly, Chairman, President, and Chief Executive Officer

And Matt, I just want to circle back on the Standard Bariatrics question. The difference between pro forma and Standard Bariatrics as is isn't that significant, given that the product is only recently on the market and the growth has been driven by Teleflex, following the training of our sales force. So we've doubled the sales force. So, it isn't that significant, the difference one way or the other, Matt, is what I would tell you.

Operator, Operator

Those are all the questions we have time for today. So I'll now turn the call back to Lawrence for any concluding remarks.

Lawrence Keusch, Vice President of Investor Relations and Strategy Development

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

Operator, Operator

Thank you, everyone, for joining us today. Our conference call for today is now concluded. Thank you for your participation. You may now disconnect your lines.