Teleflex Q2 2022 Earnings Call Transcript

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July 27, 2022

Key Takeaways

  • Teleflex reported Q2 revenue of $704.5 million, down 1.3% on a reported basis but up 2.3% on a constant currency basis, with ex-divestiture growth of 4% and nearly 90% of its businesses exceeding plan.
  • UroLift sales fell 13.2% year-over-year in Q2 as patient visits and elective procedures lagged, aggravated by staffing shortages and a voluntary UL400 recall, prompting full-year UroLift guidance to be trimmed to flat growth.
  • Adjusted EPS increased 1.2% to $3.39, but full-year constant currency revenue guidance was narrowed to 3.25%–4.25% (from 4%–5.5%) and adjusted EPS guidance was reduced to $13.00–$13.40.
  • Rising raw material, freight and labor costs plus a stronger dollar impose ~100 bps of gross margin headwinds and ~$100 million of revenue pressure, though pricing actions are expected to offset at least 50 bps of inflation.
  • Leadership reaffirms its long-term strategy of geographic expansion (e.g., Japan, China, France), margin improvement, investment in high-growth products (MANTA, hemostats) and targeted M&A, supported by a strong balance sheet and 1.8× leverage.
AI Generated. May Contain Errors.
Earnings Conference Call
Teleflex Q2 2022
00:00 / 00:00

There are 9 speakers on the call.

Operator

Please standby, and good morning, ladies and gentlemen. Welcome to the Teleflex Second Quarter 2022 Earnings Conference Call. And now I'll turn over to Mr. Lawrence Kirsch, Vice President of Investor Relations and Strategy Development. Please go ahead.

Speaker 1

Good morning, everyone, and welcome to the Teleflex Incorporated Second Quarter 2022 Earnings Conference Call. The press release and slides to accompany this call are available on our website at teleflex.com. As a reminder, This call will be available on our website and a replay will be available. Please refer to our press release from this morning for details on how to access the replay. Participating on today's call are Liam Kelly, Chairman, President and Chief Executive Officer And Thomas Powell, Executive Vice President and Chief Financial Officer.

Speaker 1

Liam and Tom will provide prepared remarks, and then we'll open the call up to Q and A. Before we begin, I would like to remind

Speaker 2

you that some of the

Speaker 1

matters discussed The conference call will contain forward looking statements regarding future events as outlined in our slide. 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 ks, which can be accessed on our website. During this conference call, you will hear management make statements regarding intra quarter business Management is providing this commentary to provide the investment community with additional insights concerning trends and these disclosures may not occur in subsequent quarters. With that said, I'll now turn the call over to Liam for his remarks.

Speaker 2

Thank you, Larry, and good morning, everyone. It's a pleasure to speak with you today. For the Q2, Teleflex revenues were 704 point $5,000,000 a year over year decline of 1.3% on a reported basis and an increase of 2.3% on a constant currency basis. Adjusted earnings per share increased 1.2% year over year to $3.39 In reviewing the quarter, we posted solid execution across the vast majority of Teleflex, with nearly 90% of the collective business Driving constant currency revenue ahead of plan. Volumes have continued to recover in the U.

Speaker 2

S, EMEA and Latin America As Corbett Hospital admissions have declined from peak levels earlier this year. However, the revenue results were below our expectations As EuryLift sales did not rebound to the level we had anticipated. Excluding EuryLift, Constant currency growth in the quarter was 4% year over year as the remainder of the business collectively outperformed our forecast for the quarter, albeit with some pluses and minuses across the portfolio as we navigated a dynamic environment. Moreover, When adjusting for the impact of the respiratory divestiture and the EuroLift, the rest of the business grew 5.2% constant currency. This solid performance continues to reflect the benefits of a diversified portfolio that has been profitably built and is primarily targeted to the care of the critically ill patients.

Speaker 2

In the quarter, our high growth portfolio, which includes UroLift, MANTA, Hemostatic Products, EDIO, UNControl and fixed, maintained momentum across Thirdly, our growth drivers. Although UroLift declined 13% year over year in the Q2, the remainder of products in the high growth Portfolio increased in excess of 20%. Although the Q2 presented some additional challenges, We remain confident that the environment will continue to improve over time, including for the most selective surgical procedures like UroLift. Moreover, we will continue to execute against our strategy that we articulated at the May Ambulance and Investor Day. We remain focused on strong execution and funding our existing growth drivers.

Speaker 2

We will drive geographic expansion with a particular emphasis on the Asia Pacific region. Margin Expansion remains an opportunity as we improve the mix of our high growth portfolio and generate cost savings. We remain good stewards of our capital with a prioritization on internal investments to ramp our innovation engine and M and A. Our business development team is active with opportunities in deal acquisitions, late stage technologies and tokens. We believe that the external environment for deals is improving, and we are prepared with a strong balance sheet to on opportunities that meet our acquisition criteria.

Speaker 2

In fact, during the Q2, we completed Product tuck in acquisitions in our interventional business and totaled on a distributor to direct convergence early in the Q3. Although both transactions are immaterial to Teleflex in 2022, we remain committed to continued execution of our M and A strategy. And finally, we will continue to advance our CSR and BE and I initiatives. I would call your attention to our soon to be published 2021 Global Impact Report, which highlights our progress as an organization to advance Our corporate social responsibility agenda. Now let's turn to a deeper dive into our 2nd quarter revenue results.

Speaker 2

I will begin with a review of our reportable segment revenues for the 2nd quarter. All growth rates that are referred to are on a constant currency basis unless otherwise noted. Americas revenues were 412,700,000 which represents a 0.3% decline year over year against nearly 32% growth in the year ago period, Reflecting improving growth trends on both a 2 year and 3 year basis in the quarter. Surgical was the biggest contributor to growth, EMEA revenues of $145,200,000 increased 3.4% year over year. The growth was broad based during the quarter with anesthesia, surgical and interventional products making notable contributions.

Speaker 2

Once again, procedure volumes strengthened year over year as countries across the region Moving past COVID related restrictions, excluding the impact of the Resurgent divestiture, revenues rose 6.7% year over year. Turning to Asia. Revenues were $76,600,000 increasing 1.8% year over year. Southeast Asia and Korea were strong contributors to the performance in the quarter. Growth in China was negative year over year Due to the impact of the COVID lockdown during May June, excluding the impact of the Sprintery divestiture, Asia revenues for the 2nd quarter rose 7.3% year over year.

Speaker 2

Let's now move to a Discussion of our 2nd quarter revenues by global product category. Consistent with my prior comments regarding our reportable segments, Commentary on global product category growth for the Q2 will also be on a constant currency basis and ranked by the size of our business unit. Starting with vascular access. Revenue increased 1% to $163,900,000 The performance in the quarter in part reflects the year over year reduction in COVID intensive care unit patients And a decline in overall intensive care unit visits. Looking forward, our category leadership in central venous catheters and midline, Along with our novel coated FICC portfolio continue to be within us for durable growth.

Speaker 2

Based on our Q2 performance, there is no change to our double digit growth outlook for PIK in 2022 As we invest behind our differentiated portfolio. Moving to Interventional. Revenue was $114,400,000 up 5.3% year over year against a tough comparison of 31% growth In the Q2 a year ago, we are pleased with the performance in light of the industry challenges given the contract shortage. For Tenaflect, the contract shortage impact was immaterial, and we see the situation continuing to improve. We remain on track to achieve high single digit to low double digit constant currency growth in our interventional business For 2022, for MANTA, our large work order device, we see approximately 50% growth on a full year basis.

Speaker 2

Now turning to anesthesia. Revenue was $104,700,000 up 14.4% year over year, Despite a challenging year over year comparison, of our larger franchises, hemostatic product, Atomization and LMA, reusable mat all contributed to growth in the Q2, partly offset by lower sales of tracheostomy products. Hemostatic product revenue increased sequentially and exceeded expectations for the quarter. In our Surgical business, revenue was $99,600,000 representing 5.9% growth year over year, At the 39% constant currency comp last year, among our largest product categories, instruments led the growth for the quarter. Metal and Polymer Ligation Kits maintained growth despite the tough year over year comps and the COVID related found in China during the quarter.

Speaker 2

For Interventional Urology, revenue was $79,800,000 Representing a quarter over quarter increase of 6.9% but a decrease of 13.2% year over year and below our internal expectations. We did not see the recovery in the operating environment our Interventional Urology business that we were expecting during the Q2. April was somewhat softer than our plan. We saw some stabilization in May offset by the COVID-nineteen impact, but finishing out the quarter, June was Looking at the revenue composition of EuroLift, we saw year over year revenue declines in all sites During the quarter, including the hospital, ASC and physicians Aacob. We have identified a number of factors That contributed to the revenue performance in the quarter.

Speaker 2

1st and foremost, the broad based recovery in overall urology Procedures that we assumed in our guidance did not materialize. Most investors familiar with Teleflex will be aware The urology procedures in 2021 remained below 2019 level. We had anticipated patient visits This is to improve year over year as we move through 2022. However, We actually witnessed a drop in patient's load to UroLift in the Q2, which impacted UroLift procedures. In addition, while BPH remain in the top four disease states treated by urologists, higher 2nd, yearly procedures continue to be hindered by COVID disruptions, including procedure cancellations in late May And the continuation of staffing charges.

Speaker 2

We conducted an internal survey with just over 100 virologists responding in the 2nd quarter. Of the respondents, over 50% indicated that they were understaffed. 3rd, We initiated a voluntary recall in June on certain identified loss of our UL400 Uralift system, which is the Parts generate an UL1 device. Although immature is a Teleflex, it created some disruption for the UroLift sales force during the Which identifies the potential where upon implant deployment, the affected devices may not properly deliver an implant. The issue is immediately obvious to the surgeon and impact implant delivery at the time of the procedure.

Speaker 2

It has no impact on a UroLift implant once it is being properly delivered and patented. As a result of our reclass investigation of the issue, we have isolated an out of specification product tool On one production line at one facility. We otherwise remain in production for the UL400 device. We have adequate levels of inventory of unaffected products available, so we do not foresee any supply constraints associated With providing replacement products for our customers affected by the recall, aren't satisfying future customer orders. To confirm, the recall has not had and is not expected to have a material impact on our consolidated financial results or operations.

Speaker 2

Importantly, the UroLift 2 system is not subject to recall due to a different manufacturing process. OEM revenues increased 17.6 percent year over year to $70,000,000 Due to strong double digit growth across all product categories, our order book remains well positioned As customers recognize our broad competencies with competitive capabilities across our markets, I would like to emphasize that the acquisition of HPC has been an excellent addition to the business. The integration has been completed and we are participating in fast growth markets for thin walled interventional microcatheters to access small vessels and fine wire for sensing and ablating technology. And finally, our other categories, which are incorporate sales of respiratory products not included in the divestiture to Medline, Urology Care and Manufacturing and Supply and Vacuum Agreement revenues related to the respiratory business divestiture, 2nd quarter other revenues declined 10.9 percent to $72,100,000 year over year. The decline reflects the loss of revenue due to the divestiture of the respiratory product, currently offset by manufacturing and supply transition agreement revenues.

Speaker 2

We continue to expect all MSA revenues will phase out at the end of 2023. That completes my comments on the Q2 revenue performance. Turning to some commercial and clinical updates and starting with UroLift. With respect to our market development objective for Eurylicht, we were pleased with our progress during the quarter. We We continue to get excellent feedback from surgeons regarding the UroLift 2 as well as the UroLift advanced safety controls for use in obstructive median load.

Speaker 2

We believe that the launch of the UroLift 2 and the advanced PIPI control will enable us to further engage with surgeons And drive utilization deeper into our labeled indication. In fact, during the second quarter, We have seen procedure growth in accounts that have converted over to the euro that 2 that is greater than for accounts that have not yet made the switch. Based on our progress at the end of the second quarter, we are confident in our ability to convert the vast majority of our U. S. Customers to EuryLift to by the end of 2022.

Speaker 2

In turn, we expect a 400 basis point margin expansion In addition, We have seen that our patients' response to our direct to consumer program are running ahead of our plan for the first half of twenty twenty two. We were also pleased with our new surgeon training in the first half of the year. Of note, during the Q2, we Hosted our first BPH Summit since the pandemic began with over 80 physicians attending the live event. And given that recent success, we will be hosting another BPH summit in the second half of twenty twenty two. From a clinical perspective, UroLift remains differentiated from other outpatient BPH treatment with strong clinical results, Studies showing rapid symptom relief and recovery, no near sustained sexual dysfunction and durable results.

Speaker 2

Our review of the clinical data from recent urology meeting indicates that real world results continue to approximate The Litt pivotal trial with regard to recruitment rate. We recently highlighted a number of studies at the European Association of Urology Annual Meeting. Of note, a real world retrospective study included patients with varying prostate sizes and morphologies across 22 international sites. A retrospective review of UroLift cases was performed after subdividing patients according to prostate size, Ranging from the less than 30 bps to more than 80 bps and obstructive median load and lateral load obstructions. IPSF improved significantly for all volume group at 24 months.

Speaker 2

Now turning to an update on our international expansion strategy for Eurolip. We are in the early stages of a multiyear, multi geography international expansion, which is expected to be a meaningful driver of growth in the coming years. The launch of UroLift in Japan, which began on April 1, It's tracking to our plan, and we are very encouraged with the results thus far. We continue to engage with key opinion leaders, And cases are continuing to ramp up. The feedback from these initial cases has been overwhelmingly positive, And we are again getting strong responses to the performance of the UroLift students.

Speaker 2

Indeed, I recently met personally With 19 urologists during a recent visit to Japan, I was very encouraged by the commentary following their initial UroLift cases. Although we consider 2022 as a building year for Japan, we remain excited about our prospects for 2023 and beyond. Japan remains an important long term opportunity for UroLift with a $2,000,000,000 TAM, and we are We remain on track for our expected UroLift commercial milestones, including the launch of UroLift in China and updated reimbursement in France during the Q4. Moving on to some reimbursement update. On July 7, CMS issued a 2023 physician fee schedule proposed rule, which was in line with our expectations.

Speaker 2

CMS proposed a reduction in the conversion factor by 4.4% in 2023 as it continues the full year Associated with the 2022 final ruling, we will continue our efforts to engage CMS alongside a broad number of Stakeholders provide our position that the cuts reimbursement for over 600 common office based procedures will result in migrating to higher cost size of service and limit options for senior citizens in the United States. CLF also issued its 2023 outstanding prospective payment system proposed rule, which was published on July 15. In this case, the facility fee was increased by an average of 2% in the ASC and 3% in the hospital outpatient setting. These rules are open for public comments through September 2022 and do not come into effect until 2023. Considering the proposed changes to the 2023 physician fee schedule and OPPS, UroLift continues to be most profitable minimally Turning to our Interventional business.

Speaker 2

We announced the MANTA Ultra study in June. This study, which is expected to enroll up to 100 and The patients in 15 investigational sites is intended to demonstrate the safety of MANTA Ultrasound guided closure without dependence on pre procedural depth locating measurements. As noted in our press release announcing the study, the occurrence of Access by complication is known to be associated with higher rates of morbidity and mortality and increased costs associated with prolonged length of pay. In addition, we received Health Canada approval for MANTA in May, which will help us continue to build momentum for our large boreknotor device globally. That completes my prepared remarks.

Speaker 2

Now I would like to turn the call over to Tom

Speaker 1

Given the previous discussion of the company's revenue performance, I'll begin with margin. For the quarter, adjusted gross margin totaled 59.6%, a 30 basis point decrease versus the prior year period. The year over year decrease was the result of volume and mix, Incremental inflation in freight, raw materials and labor, partly offset by favorable prices. Of note, Our price strategy continues to maintain its traction in the 2nd quarter. Adjusted operating margin was 27.5% in the 2nd quarter.

Speaker 1

The 70 basis point year over year decline was the result of the lower gross margin, lower leverage across our expense base and planned investment The business were our growth driver. Net interest expense totaled $11,200,000 in the 2nd quarter, a decrease from $15,900,000 in the prior year period. The year over year decrease in net expense But savings from the early redemption of the 2026 senior notes and the impact of reductions in outstanding debt Using proceeds of the respiratory divestiture and operating cash flows. Our adjusted tax rate for the Q2 of 2022 was 12% compared to 14.4% in the prior year period. The year over year decrease in adjusted tax rate is primarily due to further enhancements in Tax efficiencies of our global structure, currently offset by tax expense arising from the new provision of the U.

Speaker 1

S. Tax law Reporting the capitalization of certain R and D expenses. At the bottom line, 2nd quarter adjusted earnings per share was 3.39 For an increase of 1.2% versus prior year, normalizing for foreign exchange, incremental inflation The respiratory divestiture implies underlying adjusted EPS growth in the low double digit range year over year. Turning to flat balance sheet and cash flow highland. Cash flow from operations in the first half was $101,900,000 compared to $265,100,000 in the prior year period.

Speaker 1

The decrease was primarily attributable to higher tax payments And unfavorable changes in working capital, driven by higher cable and benefit related payment. Also impacting cash flow was an increase in our inventory level to provide support for future growth and to minimize the potential impact from the I can't talk to you. Moving to the balance sheet. Our financial position remains healthy. At the end of the Q2, our cash balance was $308,100,000 as compared to $445,100,000 at the end of 2021.

Speaker 1

Reduction in cash on hand is due to $135,500,000 payment in the 2nd quarter to reduce our revolver borrowing. Subsequent to the debt payment, our floating rate debt now accounts for 42% of the total debt outstanding. Net leverage at quarter end was approximately 1.8 times, which remains well below our 4.5 times covenant. Now moving on to our 2022 guidance. We are reducing our 2022 constant currency revenue growth guidance to 3.25% to 4.25% versus 4% to 5.5% previously.

Speaker 1

Revised constant currency revenue range represents a $21,000,000 to $35,000,000 reduction versus our prior range or $28,000,000 at the midpoint. This contemplates a reduction in our outlook for year end of revenue, partially offset by strength in the remaining businesses. When excluding the impact of the respiratory divestiture and normalizing for 1 less shipping day, the underlying growth projection of the business Remains over 5% year over year when considering the midpoint of our 2022 constant currency revenue growth guidance. On foreign exchange, the dollar has seen meaningful strengthening through the Q2, including the euro exchange rate where we are most exposed. Our initial guidance for 2022 assumed a dollar to a euro change rate of 1.12 for the year.

Speaker 1

Our guidance now assumes an average euro exchange rate of 1.05 for the full year 2022 with parity for the second half. Our guidance now also assumes that other exchange rates have been adjusted to reflect the current rate environment. Revised foreign exchange assumption represents an additional $55,000,000 headwind to reported revenue. For the year, The effective impact of foreign exchange is now a revenue headwind of approximately 3.7 percent or $100,000,000 versus 1.7% and $45,000,000 previously. We now expect reported revenue growth of negative 0.45 percent to positive 0.55 percent in 2022, implying a dollar range of $2,797,000,000 to 2,825,000,000 I will now turn to our outlook for Yearlyst.

Speaker 1

Given the first half results And our expectation for sequential revenue increases in the second half of the year, we are now assuming that 2022 UroLift revenue will be down slightly year over year or approximately $335,000,000 versus the prior guidance for 15% growth. This revised assumption reflects a $58,000,000 reduction in year over year revenue compared to what our prior guidance range had assumed. As we look into the second half of twenty twenty two, we expect an improving environment for UroLift as the macro environment is free, utilization picks up and new pain surgeons ramp up. Of note, our current year over year revenue outlook for 2022 Growth in second half with sequential revenue increase in the 3rd quarter and a further sequential increase in the 4th quarter. We have not made any changes in assumptions for the Internet on UroLift outlook as we remain on track with our rollout in Japan And amidst the launch of China and a reimbursement update in frame.

Speaker 2

Turning to the middle of

Speaker 1

the income statement. We expect gross margin of 59% to 59.5% for 2022. Although freight and labor inflation remain largely in line with our expectations, raw material costs are turning out to be higher than previously projected. Accordingly, we are now projecting an inflight headwind in 2022 of 100 basis points versus 70 basis points previously. Recall, this is over and above what we typically see for inflation in any given year.

Speaker 1

Our latest outlook captures our view for the remainder of the year and does not assume any significant improvement in overall material inflation. Importantly, price per day is an inflation offset and we are confident in our ability to exceed at least 50 basis points in price for the year. As a matter of course, we will continue to affect our global pricing and make adjustments as opportunities arise. Relative to operating margin, we now expect operating margin to fall within a range of 20 3 quarters percent, 27.25%. Our guidance reflects the anticipated gross margin And lower leverage across our operating expense fee.

Speaker 1

Moving to earnings, we are reducing our adjusted earnings per share guidance for 20.22 to $13 to $13.40 from a previous range of $13.70

Speaker 3

to 14.30

Speaker 1

Which amounts to a 2.5% decline at the low end and a half a point increase year over year at the high end. Enbridging from our previous adjusted EPS guidance, we noted $0.60 reduction associated with our revised outlook for UroLift. Foreign exchange is now a headwind of $0.46 versus the prior assumptions of $0.20 and incremental inflation is now a headwind of $0.47 Versus $0.33 previously due to the increased raw material costs. The additional headwinds are partially offset by improved operational outlook for other areas of

Speaker 2

our business.

Speaker 1

At this point, our guidance includes a headwind from the respiratory divestiture of $0.15 Normalizing for incremental inflating, foreign exchange and the regulatory divestiture implies underlying adjusted EPS grade At the midpoint of guidance in the high single digit range year over year for 2022 and reflects the benefits of our diverse growth drivers and ability to grow earnings in the period of significant macro challenge. That concludes my prepared remarks. I'd now like to turn it back to Liam for closing comments.

Speaker 2

Thank you, Tom. In closing, I will highlight our 3 key takeaways for the Q2 and our 2022 outlook. First, our diversified product portfolio enabled Teleflex to deliver constant currency growth of 2.3% in the 2nd quarter Despite meaningful macroeconomic headwinds, moreover, when adjusting for the headwind from the respiratory The underlying business growth was 3.5%. 2nd, we will continue to effectively manage the business and look for ways to minimize incremental headwinds from inflation and supply chain challenges. While the near term UroLift revenue results are Our guidance implies an improving growth trajectory in the second half of the year.

Speaker 2

Moreover, We are well positioned when the macro headwinds for the urology market abate. 3rd, we continue to execute against our long term growth strategy. We will continue to incrementally invest in our high growth portfolio and drive dependable expansion in our durable core portfolio. We have levers in place

Speaker 4

to drive further expansion in

Speaker 2

our margins, and our balance sheet is in a solid position with leverage That concludes my prepared remarks. Now I would like to turn the call back to the operator for Q and A.

Operator

Thank Our first question will come from Cecilia Forlone from Morgan Stanley. Please go ahead.

Speaker 5

Good morning and thank you for taking the questions. Liam, I did want to start with UroLift and really looking to just get More color in terms of how you're thinking about the back half, the revised guidance, but either contributions from backlog coming back in, either ramping volumes under your prior high volume utilizers, DTC, just kind of a balance of how you're thinking about the environment. And then Really also just your longer term view on that 15% growth to the overall business, how you're thinking about potential backlog to recapture in 2020 beyond?

Speaker 4

Okay, Cecilia. So let's start with the full year outlook for UroLift. Our prior guidance assumed 15% growth, which would have revenue of $393,000,000 And due to current market environment that I went through in my prepared remarks, we are now expecting 335,000,000 representing a reduction of 50 €8,000,000 or approximately 2% for Teleflex in our entirety. I would like to point out before I get into the pieces of EuroLift That our constant currency call down at the midpoint is 1%, which is an indication that the rest of the portfolio Is outperforming by approximately $30,000,000 And I would also point out that a good portion of this Performance is coming from the high growth, high margin portfolios such as hemostats, intraosseous and ticks and the like. The UroLift updated guidance, to answer your question, is not assuming any significant improvement in the operating environment.

Speaker 4

Essentially, we are taking our quarter 2 revenue run rate and assuming sequential improvement into Q3 and further sequential improvement into Q4. This would obviously imply positive growth in the back half of twenty twenty two. Now I would like to point out as well that the updated guidance for UroLift It is based on slower urology procedural recovery trends in the U. S. Our assumptions for OUS have not Changed in that regard.

Speaker 4

Regarding the backlog, we are not assuming that there is a backlog that will come back in the latter half of the year. I think our observation is that the UroLift procedure is still is a very postponedable procedure and there's a reluctance of patients still to come back to the urologists. And there's also a staffing shortage, as I went through in my prepared remarks. So that's our assumptions in the back half, Cecilia, for UroLift and an update on the call down for the full year.

Speaker 6

Great. Thank you.

Operator

Our next question comes from Jason Bedford from Raymond James. Please go ahead, Jason.

Speaker 3

Good morning. Can you hear me okay?

Speaker 4

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

Speaker 3

Maybe just a follow-up question on UroLift. I think you mentioned in the script that you're seeing better utilization In those accounts who are using UL2. And I'm just there's a lot of reasons for that. But I'm wondering what initiatives have you put in place to maybe Accelerate conversion to UL2?

Speaker 4

So Jason, we're very pleased with the rate of conversion that we're seeing right now. We are Actually, slightly ahead of our plan, our internal plan that we laid out at the beginning of the year. What we're seeing is that when surgeons Move over to the UL2, it's also an opportunity for us to reintroduce or to introduce the advanced tissue control. And the combination of those two new products is actually driving greater throughput in those practices. It's a combination of the sales Of course, reengaging with the surgeon and it's also a combination of expanding the size and complexity of Prostate, the surgeon is willing to treat because the outcomes on the UL2 Are actually better than the UL1.

Speaker 4

And obviously, they feel much more comfortable doing median lobes with the advanced tissue control. So we're ahead of our plan, and we do envision having the bulk of the North American, the U. S. Market converted by the end of this year. And that will also result obviously in that 400 basis points in margin expansion for the UroLift product.

Speaker 3

And just broadly, Liam, Has the year on that strategy changed at all over the last 6 months, meaning you came out with a newer strategy at the beginning of the year, obviously it's been a bit slower. Has the Strategy has been tweaked and all.

Speaker 4

So the strategy is as it was because it is working insofar as We did see sequential improvement from Q1 to Q2. UroLift actually grew 7% quarter over quarter. We have to bear in mind they had a really tough comp in the prior year. It grew 120% over 120% in the prior year, was below our expectations. But what we're seeing with physicians is that they are actually the new docs that are trained, We're actually seeing an improvement in the cases per physician from the new docs trained.

Speaker 4

And we've also brought on A larger number of high volume docs within quarter 2. So therefore, that's what gives us the encouragement for the improvement, the sequential improvement in Q3 and the further sequential improvement in Q4,

Operator

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

Speaker 1

Good morning. Thanks for taking my questions. Just to continue along the UroLift questioning, I'll ask those questions upfront. Liam, going down $60,000,000 for the year roughly for UroLift, how much of that is just The volume impact that you're seeing on the folks going into urologists versus Maybe losing

Speaker 2

a few people because of

Speaker 1

the recall or competitive launches versus reimbursement headwinds? And then Just to be the second question, just to put a final point on it, can you still grow euro lift 15% in 'twenty three, 'twenty four and 'twenty five like you mentioned Yes, at the Analyst Day. Thanks.

Speaker 4

Okay. So the lot on that question, so we don't believe the reimbursement is having an impact. We know that it's not competitive pressures that's having an impact. The impact of the recall was pretty minimal, Matt. There was some sales force disruption.

Speaker 4

We did have to swap out some product from the customer and get new product in there And get the comps. So there was that disruption. I will tell you, when I look at the performance of the EuroLift in the year, I will tell you that what we are seeing is a drop off in patient throughput An in person visit to urologists in Q2 versus Q2 last year, and that's compounding the drop that we saw in 2021 versus 2019. We're also experiencing staffing shortages. We did an internal We have over 100 urologists and over 50% of them cited staffing shortages within their practices.

Speaker 4

So that is a compounding issue. We firmly believe that the end market conditions is what's driving the volatility out there. And as I said to Cecilia, Our observation is this is a very postponable procedure. You're not going to die because you didn't have your BPH Regarding the longer term and your question regarding the LRP, just to level set everybody, the LRP assumed a CAGR of 6% to 7% for Teleflex and a 15% CAGR for UroLift. Using 2022 as a jump off, and I think that's an important point to reflect on.

Speaker 4

And I remain confident in the plans we outlined during our Investor Day. Ex UroLift and the Respiratory divestiture, our durable Core grew 4% in Q2. And also, if you look at Q2, ex UroLift, actual growth accelerated. And again, if you exclude the respiratory divestiture, we went from 4.5% in Q1 So 5.2% in Q2. So the rest of the 90% of the business is performing very well.

Speaker 4

Now while UroLift did decline in Q2, I think Teleflex, we are very well positioned when the BPH market recovers. Our sales force is fully staffed and prepared for the market recovery. The market is still massive. There's the U. S.

Speaker 4

Market is $6,000,000,000 and another $6,000,000,000 overseas. And we have the market leading minimally invasive technology, immediate improvement, no sexual dysfunction, no need to wear a catheter. And as I said in my prepared remarks, we expect sequential improvement in Q3, further sequential in Q4. And this will obviously help our run rate into 2023. And we are even though we didn't change our guidance in the year for the international markets, we are Continuing with our international expansion, Japan is going very well.

Speaker 4

China and France should kick in, in Q4. We should get reimbursement in France Q4, Italy and Spain, we continue to seed the markets region by region. And in 'twenty three, 'twenty four, you'll see Germany, Taiwan, India, and we should get Brazil reimbursement at the back end of 'twenty four. So That's why I feel confident in the overall LRP laid out and obviously the CAGR for UroLift in that LRP.

Operator

Our next question comes from Shaqun Sion from RBC Capital Markets. Please go ahead.

Speaker 6

Thank you so much for taking the questions. Liam, Tom, I know it's early, but could you provide some color beyond 2022? EuroLift has been a major growth driver for you guys. It's part of the thesis that gets you to your target of 6% to 7%. How concerned are you of an economic slowdown and the impact on that business?

Speaker 6

How are you thinking about M and A to further boost or even maintain this growth Trajectory longer term. And then if I could just ask a question on the macro items, FX and inflation. What have you assumed? What impact does it have on EPS In 2022 and how much of it flows through into 'twenty three? Thank you for taking the questions.

Speaker 4

Okay. I'll ask Tom to I'll answer the FX and inflation. I'll take the couple of macro questions. So in relation to if we enter into a I think that Teleflex is well positioned. Normally, medical devices, no industry is immune to On the impact, but I think medical devices in general have been cautioned from the impact of a recession.

Speaker 4

I think Teleflex in particular We'll be even more cautious than other types of medical device company. And the reason I say that is that Teleflex, Our whole portfolio is skewed towards the elderly population. And normally, when you go into it, if you look at the last recession and if you look unemployment rates and the reason I'm citing unemployment rates is because it impacts insurance for those individuals. So if you look at the last recession, unemployment went up To about 11%. But if you look at the demographics, if those over the age of 55, unemployment was about 7% and it was double that for those under the age 55.

Speaker 4

And because our portfolio is skewed towards that population, I think we would be somewhat Not completely insulated, but somewhat protected from a recession. Regarding that question specific to UroLift, With 12,000,000 men in the United States suffering from BPH and 100,000,000 globally, there is enough of a patient population there to continue to grow euro even in that type of an environment. Regarding your question on M and A in the current environment, obviously, interest rates have gone up. So the After funding, it has increased. I do think though that the environment is more receptive To more appropriate valuations right now than it has been at any time in the past.

Speaker 4

As I said in my prepared remarks, we are active out there right now. We feel good about the environment. Our leverage is 1.8 times, so we have firepower. We are chasing assets at the moment. We are looking at scale transactions, tuck in transactions.

Speaker 4

And as you heard in my prepared remarks, we announced a late stage technology and a dealer to direct, not that material for Teleflex, but nonetheless an indication that we're If you don't mind, Tom.

Speaker 1

Absolutely. So on the FX front first. So the impact for the year right now is to Reduce our revenue by approximately $100,000,000 We had previously expected to be a $45,000,000 impact. So you've got an incremental $55,000,000 as we think about rates where they currently are as of this week. On the earnings impact from From FX, that's up to $0.46 for the full year.

Speaker 1

It was $0.20 previously. As we think about next You're obviously not able to estimate what currencies will be at come early next year. But assuming they're at the same Level as they are today, what we'd see is a little bit of an incremental impact because the Q1 was stronger and the Q2 Stronger than where they are today. Again, we'll have to wait and see what currencies do next year to answer that question. On the incremental inflation, we're now expecting inflationary impact of $0.47 to earnings versus 0.3 $0.03 previously.

Speaker 1

And that's largely due to raw material inflation continuing to increase. We're actually seeing some stabilization some of the logistics and sea freight, so encouraging sign there.

Operator

Our next question comes from Matthew Mishan from KeyBanc. Please go ahead.

Speaker 3

Excellent. And thank you for taking the questions. I got 2 just to shake it up a little bit off of the euro lift. First, just what steps back in Interventional for the second half to get you to double digit high single digit double digit growth for the year.

Speaker 4

Okay. So on intervention, you are correct. It's an accelerating back half of the year. Obviously, one of the contributors to that is MANTA. As we said, we expect MANTA to grow in around that 50% mark And we'll drive a significant proportion of the growth.

Speaker 4

We also have some supply chain disruption For some of our products in the second quarter that will push out in the back half of the year. And the Langston product is returning to the Also in the back half of the year, which drives that acceleration. And there's a little bit of comp year over year that helps as well, Matt, but we're confident Interventional Access will get to high single digits, low double digits in the back half of the year From a revenue perspective.

Speaker 3

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

Speaker 1

Well, for the full year, right now, cash flow from operations is in the 400 The $450,000,000 range with CapEx in the $75,000,000 to $80,000,000 range. Some the things that impacted the Q1 and first half will also play out in the full year as to why it isn't as strong as last year. So an incremental tax payment this year that's actually recouped over the next 2 years is pretty significant. Then also some of the changes in working capital We've taken up inventories to make certain we've got adequate supply to provide a buffer against supply chain disruptions. We also had a really, really strong AR collection last year that's not expected to reoccur this year.

Speaker 1

It was right at the end of last year that We don't expect to reoccur. And then as also mentioned, there's increased compensation related to payroll. Just the payouts in early 1, we're depressed given 2020's performance and we're back to a normalized level of payout for this year. So those are some of the big drivers as to why the Cash flow isn't as strong this year as it had been previously.

Operator

Our next question comes from Mike Pollock from Morpher Research. Please go ahead.

Speaker 1

Hey, good morning. Thank you for taking the questions. Two quick follow ups, EuroLift and then one bigger picture question, if I may. Just the recall, was it fully sorted Exiting June or is there a tail to complete July, August? And then July, any would you hazard a comment on EuroLift volume thus far in July.

Speaker 1

And then the broader question is just You made a comment or 2 about favorable benefit so far from certain pricing actions. Can you just remind us probably across the portfolio what you're doing there, Quarter of magnitude, what kind of benefit are you driving towards? And what's kind of the Over what time horizon might those benefits start to manifest in numbers? Thank you so much for taking the question.

Speaker 4

Okay. So I'll start with pricing. So when we laid out our plan, our pricing was going to be 50 basis points. We will be at least at 50 basis points on the year. We're ahead of that target as I sit here today.

Speaker 4

The areas where we take price, our surgical business is doing well, our vascular business has been performing well And also our anesthesia business has been driving some of that pricing. On the Regarding the recall, yes, the recall is fully behind us in the quarter. We took all of the reserves for the inventory we took back In quarter 2, and it's all reflected in our financial results already. Regarding your question on future UroLift growth In the quarter and what's happening in July, I don't want to get specifically into July, but it is reflected in what I said. We're expecting Sequential improvement in Q3 and then further sequential improvement in Q4.

Speaker 4

So that's We'll give you that's the indication that we have right now.

Operator

Our next question comes from Craig Bijel from Wolfe Securities. Please go ahead.

Speaker 7

Thanks guys for taking the questions. I have one on your list

Speaker 3

and then a follow-up

Speaker 7

on margins. So At the Analyst Day end of May, you guys still seem pretty confident. And I apologize for asking such a granular Question and Liam, I know you provided a little bit of detail on the monthly performance. But I mean, how did June sequentially compare to May? It seems if you guys felt pretty strong at the Analyst Day and then There's a decent sized miss here and I understand you didn't get the expected revenue in June from UroLift.

Speaker 7

But I was hoping just to maybe understand a

Speaker 1

little bit

Speaker 7

about the sequential growth within the quarter, if you would?

Speaker 4

No, absolutely. And just to level set, so we were off The quarter by around $14,000,000 And when we gave our guidance at the beginning of the year, and you're right, We reaffirmed it at the Analyst Day in quarter 2. We did anticipate an improving environment from April to June. So April was slightly below our plan. May did improve despite COVID cancellations within Within the month of May, but we did not see the expected improvement in June.

Speaker 4

June was not a good month for EuroLift, To be fair, in actual fact, June was worse than either of the 2 months and decelerated. We did get a little bit of an impact from the recall, just sales time from the recall. But I think the more significant factors were the ones that I pointed to in person visits to urologists dropping year over year and staffing shortages within urology So they're not able to see the throughput of patients. I mean, urologists in our survey and it was done during the quarter, so it was reflective of that COVID environment, they did all cancellations from patients due to COVID, either The patients had it, they were closed contact as they went through. So it's a fair question.

Speaker 4

And for sure, June was much worse than the other 2 months.

Speaker 7

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

Speaker 4

So I might ask Tom to cover that, if

Speaker 1

you don't mind, Tom. Yes. So, sure. So conceptually, as we think about moving forward, there are a couple of things that will drive margin in the future. One is clearly mix.

Speaker 1

And as we've spoken about, our high growth portfolio of products also are higher margin Products. So as those continue to grow, they will provide a nice mix benefit as they represent disproportionate amount of growth in the business. We and obviously, UroLift, we need to get UroLift back and growing to help us achieve everything wanted to achieve at the Analyst Day guidance. I would say that as we look at some of the other drivers, we We've got restructuring programs out there that based on what we currently announced and are active on, we've about $45,000,000 of savings left to be realized there. And then we also have a number of Cost improvement initiatives that go on every year within the plants' distribution centers, etcetera, that drive meaningful amounts of productivity, a lot of Sigma type of work.

Speaker 1

So those are the key drivers for us. As we think about the guidance we have provided at the Analyst We had assumed an inflationary environment continues throughout the LRP timeframe, although not quite to the same level of this year. We had assumed there would be inflationary pressures going forward. And that's still our belief right now based on what we're seeing.

Operator

The next question comes from Richard Newton from

Speaker 1

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

Speaker 4

Yes. So I'll start with the treatment rates. The Kaplan study, which was a 35,000 patient retrospective study, clearly demonstrated that revision rates For UroLift, we're very similar to TARP and we're well below the revision rates For other technologies that are out there in the marketplace. With regard to share shift, no, Rich, is the playing and honest answer. We haven't seen any share shift In the marketplace, we've analyzed our all of the accounts within that do business with UroLift and Teleflex, And we have not seen share shift within our existing accounts.

Speaker 4

We firmly believe that it is end market dynamics That are having the impact on UroLift and the postponable nature of the procedure. So Yes. I think that's That would be the answer. Okay.

Speaker 2

Fair enough. Got it.

Operator

Our next question comes from Mike Matson from Needham. Please go ahead, Mike.

Speaker 8

Yes, thanks. So I have a few questions on SaaS and both. So first on UroLift, I mean the DTC, I mean you about these metrics and running ahead of expectations and so forth. But I mean, I guess I'm just wondering, well, it's a year into this now. I mean, what's happening in these patients?

Speaker 8

Mean, shouldn't the ultimate measure or Vectra care be the procedure growth, I mean, which is negative? So are these patients just not Scheduling with their urologists yet or are the urologists turning them down because they're too busy doing other procedures or something? And then my second question is On your list, just on vascular access, you saw slower growth and you called out some factors there that caused that. Just wondering if that would potentially continue beyond the Q2? Thanks.

Speaker 4

Yes, Mike. Thank you. So with regard to DTC, we're very pleased with the performance of DC, at the half year stage, we're ahead of all of our metrics regarding patients that we're sending on to urologists Through all the different media. We do know from our survey, it is taking urologists much longer to schedule these patients. That timeframe has elongated.

Speaker 4

But we see the role of DTC is to make men aware that UroLift exists and to move those men Onto the care of the urologist so the procedure can get done. You are correct. The ultimate measure should be The patient flow and volume, but unfortunately in the current environment, patient Flow in 2 urologists is down and also the capacity of urologists to do these procedures because of staffing shortages is also impacted. With regard to your question on vascular access, so vascular access grew 1% in In the quarter, what we saw was fewer intensive care patient visits because of COVID. And this is one of the business that is seeing some Light chain disruption.

Speaker 4

So we've got a modestly heightened back order situation with our vascular access portfolio In the Q2, we still expect it to grow mid single digits for the full year, Mike.

Operator

That is all the time that we have for questions this morning. I will hand it back to Laurence will follow any final remarks.

Speaker 1

Thank you, Darius, and thank you to everyone that joined us on the call today. This concludes the Teleflex Incorporated 2nd quarter 2022 earnings conference call.

Operator

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

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