Teleflex Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 23, 2023

There are 14 speakers on the call.

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 will turn the call over to Mr.

Operator

Lawrence Kirsch, Vice President of Investor Relations and Strategy Development.

Speaker 1

Good morning, everyone, and welcome to the Teleflex Incorporated 4th quarter 2022 earnings conference call. The press release and slides to accompany this call are available on our website atteleflex.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.

Speaker 1

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 and A. Before we begin, I'd like to remind you that some of the matters discussed 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.

Speaker 1

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 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.

Speaker 2

Thank you, Larry, and good morning, everyone. 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 4th quarter constant currency revenue growth Remains durable despite an unexpected subcomponent supply chain issue in our surgical business That resulted in an approximately $3,500,000 headwinds during the quarter. The solid performance in the quarter to target the care of critically ill patients.

Speaker 2

Of note, our interventional, surgical and OEM product categories Generated double digit constant currency year over year revenue growth during the Q4. Encouragingly, We witnessed improving monthly growth on a sequential basis with December representing the strongest month of the quarter As healthcare 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 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% Our high growth revenue portfolio maintained momentum across the majority of growth drivers.

Speaker 2

Although, euroless 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 Medline 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 4th quarter revenue results.

Speaker 2

I will begin with a review of our geographic segment revenues for the 4th quarter. All growth rates that I referred to are on constant currency basis unless otherwise noted. Americas revenues were $458,000,000 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.

Speaker 2

EMEA revenues of $147,800,000 Increased 1.4% year over year. We continue to see procedure volumes improve year over year. Now turning to Asia. Revenues were $78,500,000 increasing 13.3% year over year. We saw strength across the region with all geographies posting solid growth during the Q4.

Speaker 2

China growth approached 7% despite COVID associated disruptions towards the end of the quarter. Let's now move to a discussion of our 4th quarter revenues by global product category. Commentary on global product category growth for the 4th quarter will also be on a constant currency basis. Starting with vascular access. Revenue increased 0.5 percent to $186,400,000 As we anticipated, the performance in the quarter demonstrated a return to growth for vascular access despite A tough comp for central venous catheters due to the year over year reductions in COVID patients in intensive care units in the United States.

Speaker 2

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 twenty twenty three 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 PIC portfolio continue to position us for dependable growth. Moving to Interventional Access.

Speaker 2

Revenue was $125,100,000 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, Uncontrolled and MANTA all contributing to growth. Turning to anesthesia. Revenue was $99,600,000 up 2% year over year.

Speaker 2

Of our larger franchises, hemostatic products, LMA single use masks and endotracheal tubes all had strong performances in the 4th quarter, partially offset by regional anesthesia. In our Surgical business, revenue was $110,400,000 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 Q4 and tightened stateler revenue Revenue was $89,200,000 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.

Speaker 2

Although the overall environment Relative BPH procedures has not yet returned to normal. There were signs of improvement during the Q4. 3rd party data indicates that overall patient visits to urologists were down in the 3% to 4% range Year over year in the 4th quarter, which marks a sequential improvement from the high single digit year over year decline witnessed in the Q3 of 2022. OEM revenues increased 12% year over year to $73,700,000 despite a very difficult comparison to last year. Our order book remains well positioned as customers recognize our broad competencies with competitive capabilities, including 4th quarter other revenue declined 7.1% To $73,600,000 year over year, we continue to expect all MSA revenues to cease at the end of 2023.

Speaker 2

That completes my comments on the 4th quarter revenue performance. Turning to some commercial and clinical updates. As mentioned earlier, we completed the acquisition of Standard Bariatrics early in the Q4 of 2022. Standard Bariatrics commercialize 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 Of note, we have completed the training of the Teleflex sales force on the Titan Stapler, enabling us to double the size organization as compared to standard bariatrics on a standalone basis.

Speaker 2

We also recently announced The Teleflex was rewarded 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 produced in gastric sleeve surgeries. Turning to UroLift. We reached our objective to convert the vast majority of users to UroLift 2 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 Q4 and we reached our target for the year.

Speaker 2

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 U. S, 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 refresh television and digital campaign that launched in February of 2023.

Speaker 2

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.

Speaker 2

We initiated UroLift cases in the Q4 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 Now for an update on 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 0 catheter related complications.

Speaker 2

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 ErgoPac 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 To help alleviate risk associated with line misidentification, without quick and easy identification between midlines And PIKS, 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 in fixed placement and positioning devices can be expected in 2023 as we continue to drive toward growth and share gain in this segment.

Speaker 2

Turning to the Interventional Access business. I am pleased that the relaunch of the Langston catheter has progressed through the Q4 with product availability in the U. S, Canada, Australia and New Zealand. The Langston catheter is a unique diagnostic tool that helps 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 PCT and a webinar held in December, the Langsam catheter continues to build value for our customers, Enhance our engagement with clinicians in Tamer and demonstrates our relevance in the structural heart space.

Speaker 2

We expect further product launches in our interventional business over the coming years, including complex catheters in the structural part 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.

Speaker 2

We anticipate that as COVID has become increasingly endemic As 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 would 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.

Speaker 2

That completes my prepared remarks. Now I would like to turn the call over to Tom for a more detailed review of our Q4 financial results. Tom?

Speaker 1

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 Q4, enabling us to drive more than 50 basis points of year over year price improvement for 2022.

Speaker 1

During the quarter, we continued to see an improvement in sea freight costs In line with our expectations. Conversely, raw material and supply chain disruption remained elevated and have yet to normalize. Adjusted operating margin was 27.9 percent in the 4th 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 $18,700,000 in the 4th quarter, an increase from $11,800,000 in the prior year period.

Speaker 1

The year over year increase in net interest expense reflects higher interest rates versus the prior year and increased borrowings on a revolver to fund the purchase of standard bariatrics, partially offset by a reduction in average debt outstanding. Our adjusted tax rate for the Q4 of 2022 Was 13.6% compared to 13.8% in the prior year period. The year over year decrease in our adjusted tax rate It's primarily due to further enhancements in tax efficiencies of our global structure, partly offset by tax arising from the new provision of the U. S. Tax law requiring the capitalization of certain R and D expenses.

Speaker 1

At the bottom line, 4th 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 $342,800,000 compared to $652,100,000 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 4th quarter, our cash balance was $292,000,000 as compared to $445,100,000 As of year end 2021, reduction in cash on hand is due to $240,000,000 of payments on our senior credit facility And $73,000,000 were the acquisition of Standard Bariatrics.

Speaker 1

Additionally, we borrowed $100,000,000 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.

Speaker 1

In 2023. Considering the foreign exchange headwind, we expect reported revenue growth Of 4.25 percent to 5.75 percent for 2023, implying a dollar range of $2,910,000,000 to $2,952,000,000 We continue to expect revenue from standard bariatrics to be within a range of $30,000,000 to $35,000,000 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 twenty twenty two in line with our forecast, Raw material inflation was greater than expected at the time of our May 2022 Analyst Meeting.

Speaker 1

And for 2023, we have assumed that macro volatility will And continued inflation in raw materials, labor and utilities to 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 and 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.

Speaker 1

We expect an adjusted tax rate in the 10.25% to 10.75% range for 2023. Net interest expense is expected to approximate $67,000,000 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 20.23 is $13 to 13.60 which represents a 1.5. Year over year decrease at the low end and a 4.1% increase at the high end.

Speaker 1

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 3rd quarter And then it would become neutral in the Q4. 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 5 extra shipping days in the Q1 and 5 less shipping days in the Q4 of this year. Historically, the benefit or headwind to our year over year GAAP revenue growth from a shipping day change It's 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 Q1 of approximately 5.5% to 6.5% When excluding the benefit from 5 extra shipping days of approximately 5%.

Speaker 1

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.

Speaker 1

First, in the second half of twenty twenty two, inflation has been persistent and in 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 margin. 2nd, although we anticipated a sequential improvement in the environment for UroLift throughout 2022. Headwinds persisted through the year. In particular, patient visits to urologists were down year over year 2022 and staffing shortages remained a bottleneck for procedures, especially in the office setting.

Speaker 1

3rd, Foreign exchange was a larger headwind than was expected as the dollar strengthened against a broad basket of currencies in the second half of twenty twenty two. Interest rates also increased dramatically in the second half of twenty twenty two 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 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 Q4 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.

Speaker 1

With 2022 as the base year and incorporating the updates, we now believe that we will deliver at the low end of the ranges for 2023 The 2025 total revenue CAGR and margin expansion. For the high growth portfolio, which represented a little more than 25 Revenues in 2022, we expect approximately a 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 The 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.

Speaker 2

Thank you, Tom. In closing, I will highlight our 3 key takeaways from the Q4 of 2022 and our 2023 outlook. First, our 4th quarter results were solid and driven by an improving end market for the majority of our businesses. 2nd, 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.

Speaker 2

Importantly, we will continue to focus on investment in our future growth drivers to enhance long term value creation. 3rd, 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 and A strategy.

Speaker 2

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 Furlong with Morgan Stanley. Please go ahead, Cecilia.

Speaker 3

Great. Good morning and thank you for taking the questions. Liam, I wanted to start with 'twenty three 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 3 years.

Speaker 2

Yes. Cecilia, thank you for the question and good morning. So I'll start with our overarching guidance for 2023 on revenue, which is 4.75 percent, 6.25 percent with a midpoint at 5.5%. This represents an improvement over 20 22, 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 1 will be 5.5% to 6.5% with a midpoint of 6%.

Speaker 2

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, as 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 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 €30,000,000 to €35,000,000 this is consistent with our past Guidance principles of giving guidance to an acquisition within the 1st year.

Speaker 2

Obviously, for UroLift, we would expect an improving environment in 2023 and that would Carry on into 2024 and 2025, Cecilia.

Speaker 3

Great. Thank you, Liam. And if I could follow-up on gross Just the outlook that you put out for 2023, 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 that's having on gross margin alongside Synner Bariatrics.

Speaker 2

Okay. I'll just cover the conversion of UroLift 2 and Tom will cover the rest of the topics on margins to see who we are. At UroLift 2, we have The U. S. Market pretty converted at this stage to the UroLift 2.

Speaker 2

And Tom will go through your other questions on the gross margin line.

Speaker 1

Okay. So for 2023, our guidance is 59% to 59.5% or about 5 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. And additionally, we're expecting a modest gross margin headwind from foreign exchange.

Speaker 1

If we were to look at what are the drivers of the accretion, the largest being 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.

Speaker 1

However, inflation is having an impact and it's largely offsetting Those nice gains in the underlying business.

Operator

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

Speaker 4

Hey, thank you. This is Mike Sarcana for Matt today. Good morning, everyone. So just 2 follow ups on Cecilia's questions. Just first on the UroLift Growth CAGR of 8% to 9% over the next 3 years.

Speaker 4

By any chance, could you parse out how you're thinking about U. S. Growth versus OUS growth?

Speaker 2

Yes. 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 EuroLift will grow 12% to 13%. So two comments on that. We The high growth will grow 12% to 13% and within that UroLift will grow 8% to 9%. So a couple of comments on that.

Speaker 2

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 I would also say that 2022 played out a little bit differently than we In the U. S.

Speaker 2

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 a third of our company Still growing at that 12% to 13%. And I think this along with our growth within UroLift would position Teleflex As for attractive long term durable growth as a company.

Speaker 4

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?

Speaker 1

Yes. 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 1st three quarters And then expect to see some margin expansion or further expansion in the 4th quarter as a result of a higher volume, more attractive mix expectation.

Operator

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

Speaker 5

Thank you so much for taking the question. So just on UroLift, the LRP guidance is about 8% to 9%. Is mid single digit And I just want 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.

Speaker 5

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? Thank you for taking the questions.

Speaker 2

Okay, Sjogren, thank you for the questions. I'll let Tom answer the EPS range in a moment. But let me begin with UroLift. So obviously, we feel confident on the 8% to 9% for UroLift Within our LRP, we do believe it will be improving As we go through the LRP and as I said earlier, nothing has changed in our assumptions for the international markets and we continue to anticipate that the international markets will do well. And we do feel good about the global growth for the UroLift Franchise based on all of that and based on the improving environment that we anticipate, as we said in our prepared remarks, and this Gives us the confidence in the LRP growth of 8% to 9% CAGR between now 2025.

Speaker 2

With regard to your question regarding patient returns, There's 2 elements I think, Sjogon, that needs to be taken into account is patient returns and staffing shortages. And we have seen In the Q4, we saw 13% sequential improvement from Q3 to Q4. We did see across all of our businesses an improvement as you went Through the Q4, as we said in our prepared remarks, that was also true of UroLift as you went through that Q4, you saw improvements As you went through the 3 months of the Q4, I was actually and ultimately, we beat the UroLift, Our expectations for Eurylicht by in excess of €3,000,000 in the 4th quarter, which is the first time we've done that in a couple of quarters now, which gives us I was out on the road last week, spent a few days with our urology sales With UroLift and meeting with customers. And while we're seeing some improvement in staffing levels in hospitals, We're still not seeing it in the ASC and in the office environment. I do anticipate that that will improve as we go through This year, 2023, I also believe that patient flow will begin to return to the office.

Speaker 2

We're going to help that By continuing to train urologists, and we trained close to around 400 urologists last year. Everything is within our control. We're managing, I think, really, really well. We're going to continue with our DTC campaign, And we have a new ad that we just launched. And let's not forget, BPH isn't going away.

Speaker 2

12,000,000 men with BPH are still there. It's deferrable, but it's not gone. And we remain the premier Product for the treatment of BPH and we are in effect the market leader in the treatment of BPH, which gives us confidence for that CAGR for UroLift over the NRP.

Speaker 1

And then with regard to EPS, the $0.60 range, which is a little bit less than 5%, top versus bottom. So the drivers that could push us to the top end of the range would be favorable mix In our sales for the year as well as inflation staying at a certain level. So If I were to characterize what would be the swing factor in there, probably the largest swing factor is going to be foreign exchange rates, which have been Proven to be pretty volatile over the past year, as well as just where does inflation go. So that's Those are probably the 2 biggest swing factors in the guide.

Operator

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

Speaker 6

Good morning. Thank you for taking the questions. I have 2 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 a 6%.

Speaker 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 and A contribution.

Speaker 2

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

Speaker 6

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 22. So So 22% 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 percent plus 200 bps and 29% in 2025.

Speaker 6

Have I done The math is correct.

Speaker 1

You have.

Speaker 7

Okay. Thank you.

Speaker 2

Thanks, Mike.

Operator

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

Speaker 8

Good morning. So I wanted to ask about operating margin. The 4th quarter was strong, But the 2023 up 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?

Speaker 1

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 In foreign exchange, we're getting a lesser gross margin benefit than we would typically get. So we're starting off with less benefit The gross margin, but then as you look at the OpEx, there's a couple of things that are, I guess, I would characterize them as structural in that There are headcount related expenses that we're adding back 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 Part of that's in gross margin, part of it's In OpEx, and some is in 2023 and the balance in 2024 and about 2 thirds of that Restructuring will benefit 2023. So I would say, overall, The biggest impact is just that structural putting the cost back into the OpEx that were not there in 2022.

Speaker 1

And that's part of the reason why we benefited in 2022 with a higher margin as these costs were not in the All structure.

Speaker 8

What's the expected dilutive impact from standard bariatrics in 2023?

Speaker 2

So that's as we stated before, Jason, it's 0 point 10 dollars So it was It was $0.10 to $0.15 for this year and it was $0.10 in the 4th in last year.

Operator

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

Speaker 7

Good morning. Thanks for taking the question. 1 on 23, 1 on the LRP. Just on 2023, Tom, maybe help me with the math here. The midpoint of that Q1 guidance, they adjusted 6%, I think, constant currency.

Speaker 7

It's slightly below the rest of the year. Just Why would the growth for Q2 through Q4 be lower than Q1, if I'm doing the math correctly?

Speaker 2

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 we're 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 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 plan than a back end loaded revenue plan in my experience at least.

Speaker 2

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 be seen as a positive for the investment community.

Speaker 7

Okay. Yes. No, I agree with that on the front end loaded comment, Liam. Thanks. And then on the LRP, I guess maybe 2 part.

Speaker 7

1, if I'm just thinking about the math rate, the 5%, I think the midpoint for revenue, it's about 5% organic This year in 2023, if I'm thinking about that right, but 6% now for the LRP. So it implies an acceleration in 20 4.25, if I'm thinking about that right. And on the margins, to follow-up on the earlier question, People are going to now look at this operating margin, for example, at 26.3% at the midpoint for 2023% and approximately 29% goal in 2025. That's a pretty big step up of about 300 basis points. So basically, what gives you the confidence in both of those, if I'm Thinking about the revenue acceleration in 2024 and 525 correctly here, and then on the margins, basically 150 basis points a year In 2024 and 2025, what gives you that confidence?

Speaker 7

Thanks for taking the questions.

Speaker 2

Okay. So I'll cover the LRP and Tom will cover the margin question. But I know what Tom's answer is, it's going to be really focused on inflation, Larry, which should be no surprise to anybody given the environment that we're in. But let me cover the revenue. It's all constant currency.

Speaker 2

So what I'm going to talk about is constant currency. So the 1st year of the LRP will be 5.5%. We're at the we're guiding to the low end of our LRP, which is 6%. So you are correct, there is a modest uptick in revenue as you go from This year, 2023 into 2024 2025 and why is that? One of the main reasons for that is the improving macro environment that we expect to see Beginning as we go through 2023 and continuing into 2024 2025, the second factor that will help that It's the international expansion of some of our high growth portfolio, not just UroLift, but also the international expansion of It's the international expansion of the intraosseous portfolio, the international expansion of the hemostatic products That will bring accelerated growth in the latter half of the LRP and we feel pretty confident in that.

Speaker 2

It's not a managed Step up, we're going from 5.5 percent to a 6% CAGR over the horizon of the LRP. And I think the other comment that I will make That nobody has picked up on so far and their questioning is durable core was 4% to 5%. While we've been Micro focused on one element of Teleflex, the durable core has been improving all this time and now the durable core For the LRP, it's now 5% at the upper end of the original guide of 4% to 5% through excellent execution by the businesses Globally and the margins on a high portion of that durable core are fairly substantive and helpful to Teleflex. And It's a $14,000,000,000 global TAM for the high growth and we're only 5% penetrated. So the opportunities for us But I'll let Tom address the margin question that you had, Larry, and thanks for the questions.

Speaker 2

Sure, Larry. So the driver of the op margin expansion is really going

Speaker 1

to come from largely from the gross margin. And as you break that down, we're expecting Continued margin accretion due to mix and price. Additionally, we have the MSA with Medline, which And then the third area is that typically we have enough productivity in our operations to more than offset inflation. That wasn't the case in 2022. That's not the case in 2023.

Speaker 1

We do expect to see that some improvement as we go into 'twenty four and 'twenty five on inflation. And as a result, operations productivity once again becomes accretive to gross margin versus dilutive in 20222023. So those are kind of the key drivers of the gross margin. We also expect to see some leverage in the operating margin as a result of Increasing revenues allowing us to leverage that cost structure. So if I think about the key components, that would be the 4 points I would reference.

Operator

The next question comes from Mike Matson with Needham and Company. Mike, please go ahead.

Speaker 9

Yes, thanks. So I want

Speaker 7

to ask one on pricing. I think you said you had over 50 basis points, and I think that was for the full year of 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?

Speaker 2

So we began the year in 2022 expecting 50 basis points of positive pricing, and we exceeded That goal is 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.

Speaker 7

Okay, got it. Thanks. And then I think Tom did call out some restructuring in his comments on the margin. So is that Existing programs or are you planning anything new there?

Speaker 1

That is existing programs, we have a number of footprint Programs that are still finalizing will be largely done by 2025. And then we introduced a new program in the Q4 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

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

Speaker 10

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 $90,000,000 to $100,000,000 of incremental revenue through that timeframe By 25. 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 $90,000,000 to $100,000,000 maybe a little bit more than that. So it would imply some fairly modest Improvement here domestically.

Speaker 10

First of all, am I right about that? And then secondly, how conservative is that? Does it make sense to be doing these DTC Making the CTC spend if you don't think the domestic business can really accelerate over the next several years.

Speaker 2

So Matt, your overall math is fairly good with regard to the growth in UroLift over the 3 year horizon. I think that we still are reliant on the U. S. To drive the bulk of the growth, just because the overseas markets aren't big enough, clearly overseas and international, we're encouraged by what we're doing. And by the time we get to the end of 2025, it will be a bigger portion of the revenue.

Speaker 2

And of course, on a smaller base, the percentage growth is going to be much better. We've done a really good job in Japan. We're going to do a really good job in China, Taiwan, India, France, Spain, Italy, Germany, Brazil and so on and so forth, but they're just not big enough to carry the growth to get us to that The CAGR of 8% to 11%. I think that the DTC does make sense to answer the other part of your question. If you go back to 2022 Based on our expectations, the number of impressions were up by 27%.

Speaker 2

The number of responses were up double very strong double digits. So we feel that that is an encouraging factor. And every time I talk to a urologist and the same was true last week when I was out on the road, Patients are coming into them asking them for euros based on the ad campaigns that they see. So I think we will continue with the DTC campaign And we believe that 8% to 11% is very achievable for us as a company.

Speaker 10

Okay. Appreciate that, Liam. And then as far as the high growth portfolio goes as well, coming down a little bit from, I think, 14 to 15 before it and now 12 to 13 still implies the rest of the portfolio outside of UL is strong. Can you talk about Some of those components, what you're seeing from Manta, Easy. Io, PIX, etcetera, that are giving you the confidence to reiterate the strength in that segment of the business over the next several Thanks.

Speaker 2

Yes. So the high growth is doing really well. In the Q4, it grew approximately 14%. The full year, it grew approximately 14% ex Contributions of UroLift. So, obviously, there are elements within the high growth that are above the average that we And there are elements of the high growth that will be slightly below.

Speaker 2

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 Deliver 8% to 11% from the high growth in 2023. And the performance All other aspects of the high growth except for 1 have been right in line if not ahead of our expectations for the entirety of 2022.

Speaker 2

And there's nothing better than momentum as you know, Matt, as you head into 'twenty three, 'twenty four and 'twenty five 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

Speaker 1

sales growth as we tap

Speaker 2

into that market. And the 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, We're very under penetrated with significant opportunities for growth.

Operator

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

Speaker 11

I 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

Speaker 12

have a couple of follow ups.

Speaker 2

Yes. And we're all well, 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.

Speaker 2

We expect it to become margin accretive as we exit 2024. What you should expect from Sandler Bariatrics is that it will deliver £30,000,000 $35,000,000 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 $60,000,000 by the end of 2025.

Speaker 11

And then quick follow-up, 2 I'll throw in there and I'll get back in queue. 1, 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, talking about U. S.

Speaker 11

Patient behavior? And then maybe just your updated views on the M and A landscape, sort of what level of discussions Teleflex having and just maybe your high level views on M and A? Thanks.

Speaker 2

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 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.

Speaker 2

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 12,000,000 men suffering from BPH. If you walk into At urologist's office and there's 100 men in the urology waiting room. Partly of them are there because they got BPH roughly.

Speaker 2

So it's still the number one reason why Amangos is 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 and A, Clearly, we have the most important thing that you need. We have a very strong balance sheet. For M and A, we're about 1.75 Time's levered at the end of the Q4.

Speaker 2

We are active out there looking at opportunities. We have a lot of lines in the water. We're fishing hard, Anthony. It's very It's 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.

Speaker 2

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

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

Speaker 13

Good morning, guys. Thanks for taking the questions. 1, Let me just start with UroLift. And I did want to ask, I know Japan was better than expected. I mean, was Japan in the quarter, was the 89 versus the 86 that was implied by your guidance?

Speaker 13

Was that Japan? Or I guess, If you could just kind of comment on what drove the few million beat, was that U. S. Or on the international side?

Speaker 2

So that 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 $3,300,000 Gray, Without the U. S. 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.

Speaker 2

We did our first 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 roll out.

Speaker 13

Got it. Thanks, Liam. And then on your comments on the durable core and appreciate that how that's kind of moved up In terms of the LRP growth, maybe I mean, what are some of the products, the categories that Are really driving that and that you see driving that LRP growth for the next Several years.

Speaker 2

Yes. I think as I look at where we see an improvement and improving environment, first of all, what you I understand is in 2022, we had a lot of supply chain issues. We had charges of tiebacks, charges of subcomponents and so on and so forth. So that's going to drive some of the early improvements that you're going to see. So you should see an improvement in our vascular business As you go through 2023 and beyond, vascular grew in the entire year about 1% constant currency.

Speaker 2

The normal growth for that business is in the mid single digits. I also believe that Interventional Access, we've got a lovely We have new products coming through in Interventional Access and that's the lifeblood of that business. And Interventional Access, we would anticipate will continue To accelerate, one of our I guess, no more than the durable core, one of our underappreciated assets is our OEM business. We bought this company called HPC a couple of years ago. It does thin walled catheters.

Speaker 2

That on top of the rest of the OEM business has Continued to grow in the high single, low double digits from a business that historically used to grow around 3% or 4%. So I anticipate that OEM will continue to flourish, will continue to That OEM will continue to flourish, will continue to accelerate its growth over the LRP and be a real contributor. And never forget, It's accretive to our operating margin and will drive that. And obviously, APAC is a key growth franchise for us. We have a lot of products that we are launching into the APAC region that we believe will be very successful there.

Speaker 2

So those are some of Key areas that I believe will continue to grow. And as I said earlier, as we go through the LRP, we would anticipate That interventional urology would also improve as we go through the LRP.

Operator

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

Speaker 12

Hey, thanks for squeezing me in here at And 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.

Speaker 2

So George, as you know, it takes 2 to get married. So we're a willing groom or bride, whichever way you want to put us. And it's a question of finding the other party. I will tell you the valuations from the heady days of 2021 Have moderated somewhat and high quality assets are still not Inexpensive, but that's why they're high quality assets and those are the assets that we're going after. But you can we will remain disciplined, George, and Investors can expect us to remain disciplined.

Speaker 2

We will look for assets that are accretive to our top line growth. We'll look for accretive to our gross margins. We'll look for assets that will become accretive to our op margins and earnings pretty quickly after we acquire them. We will we're very disciplined on our return on capital and getting above our internal cost of capital By at least year 5, we've always been able to do that in year 4. But the hurdles will remain the same for Teleflex In finding good assets, bringing them into the family and integrating them into Teleflex and obviously, assets That are unique in the marketplace and segments that are growing faster than the core segments within Teleflex.

Operator

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

Speaker 9

Great. Thank you for taking the questions. Just a quick clarification for me and then I 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?

Speaker 2

Yes. As we said in our prepared remarks and as I said a couple of times already, the changes that we make 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. Yes, that's correct.

Speaker 9

Okay. And then just for Tom on the tax rate, Yes. 10 in the quarter to 10.75 percent 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?

Speaker 1

Well, I would say that as you look at 2023, there's 2 drivers of the tax rate. One is the change in the tax law related to the capitalization of R and 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 IP consolidation projects or consolidation projects that we've undertaken We'll begin to show a higher benefit in 2023, and those benefits will continue throughout the LRP timeframe. 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

Speaker 2

And Matt, I just wanted

Speaker 1

and I should say that's contemplated for 2024, no 2023 impact.

Speaker 2

Sorry, Tom. Yes. And Matt, I just want to circle back on the standard bariatrics question. The difference between pro form a 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.

Speaker 2

So it isn't that significant the difference one way or the other, Matt, is what I would tell you.

Operator

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

Speaker 1

Thank you, Emily, and thank you to everyone that joined us on the call today. This concludes the Teleflex Incorporated 4th quarter 2022 earnings conference call.

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.

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Earnings Conference Call
Teleflex Q4 2022
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