All right, so Teleflex requested some smooth jazz to start the session. But just wanted to introduce the management team here. We have Liam Kelly, the CEO of Teleflex, and Larry Keusch, who runs the IR function and business development for the group. And Liam, maybe you can just give an overview. I know in these sessions we have a mixture of people who are really in the weeds on the stories, but also some new folks. So talk a little bit about Teleflex's journey and evolution from spin to now, and how you've created a lot of value over time through M&A and some of your other strategies. And then maybe we can get more into the details after that.
Yeah, for sure. So, Teleflex is an over 75-year-old company. But we began in a very different place than we are today as a pure-play medical device company. We were an industrial conglomerate. So there was Teleflex Marine, Teleflex Aerospace, and then Teleflex Medical. We became a pure-play medical device company in 2011, and in 2011, our growth rate was anything from -1% to +1%. Our gross margins were around 47%, our operating margins were around 17% or 18%, and our free cash flow was less than $100 million. So we began this journey as a pure-play medical device company, sold all the non-medical assets, and I said in 2011, we became a pure-play medical device company.
So really, we're only 12 years a pure-play medical device company. And over that time, we've, we've used our balance sheet in a number of ways. We've used it to invest behind restructuring programs, we've used it to invest behind R&D, we've used it for M&A. We have done over 80 transactions since that time frame, from go-directs to tuck-ins, to late-stage technologies, to scale transactions over that period of time. And if you roll forward to where we are today, our, our growth rate today is in the... If you take our most latest guidance and take the midpoint, we're growing 6.5% this year. We've laid out a 3-year plan where we can grow 6%.
Our gross margins are in the high 50s% from 47%, from the beginning point a number of years ago, and our operating margins are around 26%-27%, as a company. And our free cash flow is, you know, on average, averaging around $550 million a year. So that's been the transformation story of Teleflex over the past 12 years, and we have a long-range plan in front of us today that is that we will grow at 6% on the top line. We'll expand our gross margins by 250 basis points. We'll expand our operating margins at 200 basis points, and we'll generate strong earnings per share growth.
As I said, we're one year into the plan, and this is the first year, but then from a revenue growth perspective, we feel we're in a good place. Like I said, the midpoint of our guide is 6.5% in the first year of the three-year plan. We have some gross margin expansion. Operating margins are under a little bit of pressure in the first year because of inflation, but notwithstanding that, we still feel confident in the long-range plan, and we continue to execute against that strategy in the twelfth year of it. So...
Great. You know, maybe talk about the composition of businesses that you have. What are some of the themes that string them together, and help us understand how you're positioned in each of the core markets?
Yeah. So we are really if you wanna think about Teleflex, for the most part, we're a critical care company. And we have built this company around that critical care aspect. We would see ourselves, our main call point is within the hospital. And my own view is that while there will be fewer hospital beds in the future as procedures get moved out to lower cost site of service, the acuity of the patient that's in the hospital is getting more and more so intensive. Hospitals in the future are going to be like really large intensive care units with high dependency units in all of the other areas. And that's a really, really good place for Teleflex. So we have a vascular access business, which is the main call point within the intensive care unit.
We have an interventional unit that's focused on the cath lab. We have a surgical business that is focused on the surgical portfolio. We have an OEM business that actually provides products to other equipment providers. And we also have an anesthesia business, which is really focused predominantly within emergency medicine and anesthesia. So if you string all those together, they're really focused on the acute care hospital. The one area where we would have a more of deferrability would be in our interventional urology business. That's approximately 10% of our revenues through the first three quarters of this year. And we've just added another asset to Teleflex within that interventional urology space, an asset called Palette Life Sciences, which is there to treat prostate cancer.
Again, prostate cancer, it's a slow-growing cancer, but it is non-deferrable. So if you look at the themes around Teleflex, it's really around acute care, non-deferrability, and emergent care. So the option not to use our products is pretty limited, because if you don't use our products to treat that patient, the patient's gonna have a very bad outcome. And we really like that space, and that's where we continue to put our focus.
And obviously, you're seeing good growth this year throughout the portfolio. Maybe just address, you know, concerns that folks might have about growing through next year. There's a recession, but you're, you know, very defensible in those kind of situations. Can you talk about anything you're thinking about in terms of underlying demand, staffing, some of the bigger macro issues that will impact the future years?
Yeah. I think, if you're in the hospital right now, it's a great place to be. We're back to pre-pandemic levels from procedural standpoint, and I think that is imminently sustainable. For all the generalists that are in the room, you know, no industry is immune to a recession, no industry. But people get sick in good times and in bad, and people go to hospital in good times and in bad. And if you look at our portfolio of products, most of them are covered by a general DRG, and the one that isn't would be the interventional urology business unit, and about 70% of those patients are in Medicare. So again, we would not see our business being that negatively impacted from that perspective. Other macro topics, I guess inflation.
Inflation has been very real for the last couple of years. We are seeing an improving environment right now. You've seen freight inflation come right back. That's back to where it was pre-pandemic levels. Material and labor inflation are improving as we've gone right through the year, and we're watching that really, really closely, 'cause that jump off into next year is gonna be really important for every company within the space, not alone, not alone, Teleflex. Staffing levels in acute hospitals is pretty much back to where it was. Still a little bit of pressure on the office site of service from a staffing point of view, having more difficulty getting people to return to that. And that's just economics, you know?
And when people talk about staffing, they're always looking at nurses and all, but it's the ancillary staff, you know? It's the person that does the reimbursement. It's the person that brings the patient into the treatment room, preps them, gets them ready, does some of the preliminary testing and all of that. You know, that person in America, they can either work in an office environment or they can go and work in Target or Walmart. You're gonna get $25-$26 an hour working in Target and Walmart, and you're not dealing with the public as much as you are in an office, and sometimes an upset public 'cause they're not well, and they're in for treatment. But I think all in all, I think the macro is in a pretty good state.
I think from a recession standpoint, you know, I think there are parts of Europe that are already in recession, candidly. Probably UK would be one of them, Germany, a little bit. I actually not sure it's gonna be a global recession, and I think the US, if it does go in, I think it'll dip in and out. But if you travel through Asia and you talk to the people in Asia about inflation, they look at you as if you come from another country, which you have. But they look at you as if, "What are you talking about?" They're not seeing the same inflation broadly in most parts of Asia that we have seen in the United States and that you've seen in Europe. And so I think that the...
This isn't gonna be a global inflationary environment or a global recessionary environment like we've seen in the past. And my own sense right now with the—I know the U.S. consumer pulled back a little bit in the last quarter, but the U.S. consumer is still very, very strong. And I think, for healthcare in particular, I think the environment is pretty solid right now.
Great. Great. We touched on inflation and mentioned labor. Maybe you could just remind us how much inflation pain you've taken over the last couple of years, what the big buckets are, and from here, kind of what could get better or worse?
Yeah. Our biggest impact on inflation has been material inflation. Earlier on, it was freight inflation, but that's not the case right now. Our normalized inflation in any given year, pre-pandemic, was around $20 million. You know, that's normally what we'd run through our income statement. And we would have offset that with restructuring programs, we would offset that with continuous improvement programs, and we'd have offset that with pricing. In the last couple of years, we've seen that triple and really driven by material inflation. A little bit in labor, but the majority have been coming from material inflation. We've offset as much as we can in pricing. Our pricing has gone from 20 basis points of positive pricing pre-pandemic, we're north of 50 basis points for the last two years.
Normally, tenders are in a three-year cycle with GPOs or in Europe through tenders. So one would anticipate you'll get another year of maybe around 50 basis points to help offset that. But the increased inflation and we've worked to offset it with CIPs and restructuring, but it's just not possible with the levels that we've seen. Now, we have seen, as I said, a stabilizing environment regarding material inflation. We're not anticipating over the next couple of years deflation, but we would anticipate disinflation. And I think that, as I said, we'll watch quarter four really closely to watch what the run rate is like as we head into next year.
I think that if you couple that with our ability to push through some pricing, I think next year from a margin perspective, could be a little bit better.
You talked about this pricing dynamic with the tenders and achieving more than 50 basis points next year. How do we view the pricing going forward from that? Is this better pricing that you've been able to achieve durable for the next five or 10 years, or is this unique to this period?
So, I think it's gonna be slightly elevated for this period. You know, when companies were giving up, you know, 100 basis points, Teleflex was able to carve out 20 basis points in positive pricing when it wasn't a positive pricing market. I think we're also very cognizant of the relationship between pricing and volume. You never wanna cross that line where your customer is waiting for you to actually, at the next round, when they're issuing that tender to exclude you, because you've gone over that line. I do think that we will hold the 50 basis points for next year, and then after that, you'll get some carryover, so it might drop down from 50+ to 30+ thereafter.
I still think there's going to be an environment over the next five years where we will be able to get some positive pricing, probably not at the levels that, that we've seen for the last two years and for next year, but we'll still be in a positive environment, I believe.
Gotcha. Other bigger, big picture items, and then I want to talk about some of the products, but maybe we could just address GLP-1s. You went into some detail on your last call about-
Yeah.
Having a small exposure there. What have you been seeing in terms of the impact of GLP-1s on your business, and maybe frame the value at risk for people?
Yeah. So I think it, you know, we know that it's important to investors. That's why we spent a fair chunk of time on our last earnings call discussing it. And from what we see here right now, we've done a deep dive into our portfolio, and we think the risk in our portfolio is 1%-2% of our total revenue. That's if it all goes away. I mean, it's not all going to go away. You know, GLP-1s are not the panacea to everything that's wrong with society. And, you know, we're talking about GLP-1s as a percent of a percent, which is incredibly dangerous in my mind. So let's look at the facts. The reduction in MACE events goes from 8% to 6.4%.
As a percent of 8.4%, that's a 20% reduction. But in absolute terms, it's 1.6% over a 5-year period. That's 30 basis points per year over a 5-year period if everybody on the planet was taking GLP-1s. The American population, as a percentage that is impacted by obesity, is 40%. The dropout rate in the study was 16% in a controlled environment. The true dropout rate is more than triple that in real life, for when people after a year taking GLP-1s. So I think the impact has been completely exaggerated for all med tech right now, and I think the reality is that the impact is going to be much lower. This almost reminds me of when Amazon were coming into med tech. You remember that?
Yeah.
Med tech got hammered because Amazon were coming into med tech. So how many of our customers buy products from Amazon today?
Two.
It must be you and someone else. Yeah. So this has been, I, I believe, quite exaggerated in its impact on, on, on med tech. Now, it has. It's, and it's impacted broadly across that. And I, I do think the GLP-1s have a place. There's absolutely no doubt about it. I, I think that they're. They, they do have an impact. I think if you look at the, the, the study that came out on Saturday, stroke and cardiovascular events are in the lower spectrum of, of MACE events that, that are, that are impacted. And the reality is that patients will live longer if they're on these GLP-1s, which is actually good for med tech in the long run.
So I think people are looking at GLP-1s as a negative for med tech, when in actual fact, in the longer term, they could be a positive for med tech, in the fullness of time. So, but our biggest exposure, to come back to Teleflex, is our bariatric business. We bought a company called Standard Bariatrics. But again, it's 1% of our revenues. There is some impact on a little piece of our surgical business, potentially, and this is assuming it all goes away, which we all know ain't gonna happen. And on our interventional business, we see very, very little impact. So if GLP-1s was the panacea, if everybody on the planet took them, it would have a 1%-2% total impact on Teleflex revenues. And we'll continue to monitor it.
We're keeping a very close eye on it. And of course, the cost of GLP-1s is also has to be a consideration, because it is costing around, in the region of about $14,000 per year, for this product. Which if you look at the cost of a gastric sleeve, gastric sleeve costs about $20,000, and it's one and done. It doesn't have to be repeat, repeat, repeat. And if most bariatric surgeons do believe that gastric sleeves, once you go through this air pocket, will return. And if the market's a bit smaller, the market's a bit smaller, and Standard Bariatrics is a share take. So I think Standard Bariatrics will be fine in the fullness of time.
Gotcha. That covers the planet. What if they're given an outer space? So let's switch topics and talk about China a little bit.
Mm.
So that's been a hot topic, given Becton gave guidance, and they talked about a little bit more of a slowdown than what they went on to a few months ago. So we'd just love an update on what you're seeing in China in terms of any impact from... You know, you don't have much capital exposure there, but any impact on procedures from the anti-corruption crackdown?
So we really haven't seen that. And if you are going to see it, you will have seen it by now. The crackdown has been going on since the early summer, and it has been, to your point, pretty focused on capital equipment, and also, focused on devices that require a lot of clinical education, a lot of training, because the access to the hospital and doctors, candidly, are afraid to actually go to some events right now just because they don't want to be impacted by that. So we have seen minimal impact from that crackdown. In actual fact, in the last quarter, China, for us, grew in excess of 20%.
And our Asia business grew in the very high teens, driven by some really outstanding performance in China, but also in other parts of Southeast Asia, Korea, India, and Japan. So, Japan predominantly from Europe, to be honest, but the rest of it is our core business performing exceptionally well. So we see Asia as a really nice opportunity, including China, moving forward. And it's really the opportunity to sell old as new. You know, products that we launched in the United States and in Europe many years ago, companies we bought over the last number of years, registering those products in Asia Pacific and bringing them to the market is a significant opportunity for us.
... And you touched on UroLift, so now I wanted to ask a couple questions about that and core growth and some of the new growth that you could get from acquisition. So I guess the way I'll frame the question is: UroLift used to be a really strong growth driver for the company.
Yeah.
It slowed down the last couple of years-
Yeah.
with some of the issues around deferrability and reimbursement and the office pressures that you talked about.
Yeah.
So it hasn't been growing this year, but the core has been growing really nicely, as is your high-growth portfolio.
Yeah.
Maybe first remind us, in your long-range plan, the sources of growth in terms of how you define them from a core perspective and a high-growth perspective.
Yeah.
You can start there.
Over our long-range plan, as I said, we plan to grow 6%. In the first year, the midpoint of our guidance, we're growing at 6.5%. The components of that growth were that we expected the high growth to grow 12%-13%. And within the high growth, you had interventional urology, which UroLift sits in. You had Standard Bariatrics, you had the PICC portfolio, our hemostatic portfolio, the MANTA, and obviously the intraosseous portfolio. So that was what was in the high growth. Then in the durable core, we actually updated our guidance on durable core over the LRP. As we were leading into the LRP, the first year of it, durable core was doing better, so we upgraded from 4%-5% to actually 5%.
And in the first year of the LRP, the high growth ex UroLift has done exceptionally well, to your point, Matt, and so has the durable core. The durable core has actually done better than we expected in the first nine months of the LRP. And I think, you know, it's, that's why, you know, our investors own Teleflex, because of the portfolio, not because of one element of it or the other element of it. It's because of the portfolio that we've built of products, and with UroLift being a drag, and you're right, it was a growth driver, but with UroLift being a drag, midpoint of our guidance is still 6.5%. That kind of durable growth is really what we're trying to achieve.
Now, specifically to UroLift, I'll get into that in a little bit more details because I know it's a curiosity and an interest to investors. What's happening with UroLift, international is doing fine. Our growth overseas is extremely solid, double-digit growth, really solid double-digit growth. The office site of service through three quarters, or pardon me, the hospital site of service through three quarters, which has always been the biggest side of service, is also growing through three quarters. The issue is in the office. The change in reimbursement, the staffing issues, the patient flow issues in the office site of service has made it a real drag on the growth of the company, of UroLift. At some stage, that has to bottom out.
You're just at the point where it's getting to the level where it almost has to bottom out in the office. And once that does occur, then we can see UroLift return to growth. Now, in our LRP, as you know, we assumed UroLift would be flat. So we will get to 6% on a flat UroLift number. If UroLift grows, that's just a cherry on top, and I think there is a potential for it to grow through the LRP.
Gotcha. And, you know, so maybe UroLift growth does improve going forward a bit here. What do you think about the durability of growth in the durable core and the high-growth portfolio? Do you think the outperformance that you're seeing this year could continue? Are there puts and takes that we should think about, just at a high level, over the next couple of years?
Yeah. So our goal is always to grow at 6% in any given year. Just because we grow at 6.5% the first year doesn't mean that our—then we're gonna average that out, even though it was a CAGR. Our goal is to continue to deliver. I think there's elements of the high growth that are imminently sustainable through the life of the LRP. I mean, MANTA is gonna continue to penetrate that market. The intraosseous portfolio will benefit, will continue to drive growth. And I think bringing in Palette and Z-Medica as well, in the high growth, have been performing well, and then bringing in Palette into that mix.
And at Palette, we haven't built this into our acquisition model, but it could have a halo effect to UroLift as well, where you're in talking to urologists who traditionally would not have used UroLift, but they, 97% of urologists that do BPH also do prostate cancer. So the synergies here are tremendous. And as you know, we expect Palette, in a full year, this year, to do $56 million, and we expect it to grow high teens, low twenties over a multi-year period. So that is, in effect, completely replacing the $80 million of growth that we had from UroLift over the LRP. And as I said earlier, if UroLift continues, recovers, then that's only great for our investors, and it's great for Teleflex. The durable core, I think there are components of it.
Some pieces of our business will take a modest step back as you go through the LRP, but other parts of our business will take an uptick. I would expect vascular to improve as we go through the LRP. They were impacted by a recall this year. I would say the same for anesthesia. It'll pick up as we go through the LRP. And I think that the interventional business with the new products coming through in that area, I'm really excited for our interventional business. I think that has a really strong potential through the LRP, and geographically, as I said earlier, I'm enthusiastic for Asia through the LRP.
Gotcha. Maybe we could double-click on Palette and talk a little bit about... You just mentioned the growth opportunity, but also talk about the margin profile and the kind of returns that you expect on that acquisition, and I wanted to roll that into maybe a question about how you think about acquisitions in general.
Yeah. So I'll start with the return profile. We'll get above our internal cost of capital by year five on the Palette acquisition. And for those of you who don't know what Palette is, it's a spacing technology when men are getting prostate cancer treatment. The current treatment is to get radiation therapy. When you get radiation therapy, there can be ancillary damage to some of the other organs, and this is a spacing technology that pushes the other organs away to protect them from that impact. The reason that this was incredibly attractive to us is because of the call point.
We have a very strong sales force in that urology call point every day, and the vast majority of spacing is placed by the urologist, and the remainder, about 20%, is done by rad oncs, radiation oncologists. So two really strong call points that we're really focused on. I think that the margin profile also made it incredibly attractive, as well as the market profile. There's about 290,000 new cases every year, so that's the area we're going to grow into. 20% of our current UroLift customers, 20% use Barrigel. So it's—it's—we've got a lot of white space. This is not about taking share from any other product in the marketplace for us. This is about expanding the market. As I said earlier, 97% of customers that treat BPH also do prostate cancer.
The other really attractive thing about this asset is the margin profile. Not only is it gross margin accretive to Teleflex, it's gross margin accretive to the interventional urology business unit, and most investors familiar with Teleflex will know that the interventional urology gross margins are in the high 70s%. So it ticks all of the boxes for us. It's a better technology. You can scope this technology. It actually will stay in the body a little bit longer than the existing technologies that are on the marketplace. It's a simple one-step process instead of 14 steps. So when you're converting a customer in that white space, it's easier for us to convert them than the competing technology. And if you add all that together, the return profile, the gross margin profile, it'll become op margin accretive in 25.
It's a little bit dilutive this year or next year, $0.35, but in reality, the returns on this will be significant thereafter.
Great. Maybe you could just talk about your acquisition strategy and-
Yeah
... capital allocation strategy in general. You've done a lot of acquisitions over time. What do you see in the current environment with the way asset prices have been stressed? And maybe remind us, you know, how much dry powder you have to be able to do deals at this point.
Yeah. So I think that the good quality assets are never inexpensive, you know. On the surface, Palette did not look inexpensive, but once people understand the gross margin profile and the fit, then it looks like a good deal for Teleflex and the growth profile as well. What we're seeing out there right now is there are assets available, many assets available, and we are currently very active. I think we're very cognizant of our leverage. Our leverage right now is 2.1x net. You know, in the past, I would have been talking about it 4x net, and at 4x net, we probably have over $2 billion of dry powder.
The reality is, I think three is the new four right now, so we're acutely aware of our leverage profile as a company. And if you look at our recent acquisition strategy, you know, we did Palette, we did Standard Bariatrics, and we've discussed that that'll be fine in the long run. We did hemostasis, and we did Z-Medica. That's a really nice string of pearls. They're all accretive to our gross margin. They are all accretive to our op margin in a very short period of time. They all have a very nice growth profile. They all have a really nice EBITDA profile. And that little string of pearls with the cash generation that we have is something that we're imminently capable of continuing over a multi-year period.
Great. Well, I think we should probably end there.
Absolutely.
Thanks so much for your time, and thanks for your interest in Teleflex.
Thank you very much, and cheers.