Hi, all. My name is Caroline Borowski, and I'm a member here at the JP Morgan Healthcare Investment Banking Group. It is my pleasure to introduce Liam Kelly, Chairman, President, and CEO of Teleflex. And joining him today is Tom Powell, Executive VP and Chief Financial Officer, as well as Lawrence Keusch, VP of Investor Relations and Strategy Development. Welcome.
Thank you very much, and good afternoon, everyone, and thank you very much for joining me today. We are pleased to be attending the JP Morgan Healthcare Conference, and we appreciate your interest in Teleflex. Before I begin the presentation, I'd like to remind you that some of the matters discussed today will contain forward-looking statements regarding future events. I wish to caution you that such statements are, in fact, forward-looking in nature and are subject to risks and uncertainties, and that actual events or results may differ materially. Okay, so today, Teleflex is a company with global scale that is built on innovation and brand power. We have over 23,000 products across seven clinical areas, providing scale and depth, and we employ more than 15,000 employees in over 30 countries.
In 2022, revenue was $2.8 billion, and we serve more than 80,000 customers worldwide. We also have industry-leading brands that are highly recognizable by healthcare providers around the globe, including Arrow, LMA, Weck, QuikClot, and UroLift. Our portfolio adds value to highly relevant clinical areas. We have products with category leadership in seven key clinical verticals, including vascular access, interventional cardiology and radiology, minimally invasive surgery, interventional urology, emergency medicine, and anesthesia. Our portfolio is diverse, and its construction has been purposeful. Teleflex is more than just a supplier of quality products. We are a partner to the healthcare community and can help clinicians treat their patients across key therapeutic areas and specialties.
When we look, holistically at the healthcare industry, from doctors' offices to the emergency room, to the operating room, to the intensive care unit, we deliver products, services, and education that allow clinicians to deliver quality care and improve patient outcomes. To provide a sense of our financial progress over time, we have been able to consistently generate healthy constant currency growth through our diversified product portfolio. Even though growth slowed temporarily during the pandemic, we continued to build on our durable growth objectives. We achieved a 6.4% revenue CAGR over the past 11 years and believe that we are well positioned to execute moving forward. Regarding profitability, we have driven significant improvements, with adjusted gross margins increasing by almost 1,200 basis points and adjusted operating margin expanding 800 basis points for the year ending 2022 as compared to 2011.
Product mix shift, restructuring benefits, operating efficiencies, and price have all been drivers of the gross margin expansion over the last 10 years. We have also realized strong operating expense leverage as we streamlined our management and reorganized our salesforce structures and leveraged shared service organizations. Turning now to capital allocation. M&A has been a key priority for Teleflex. Over time, we have demonstrated that our disciplined approach to M&A can drive consistent improvements in our financial metrics. In fact, our adjusted return on invested capital has been over 10% in 2021 and 2022. Indeed, over time, we have built a stronger Teleflex and have executed against our strategic initiatives. As I reflect on our past successes, I believe that we remain well positioned into the future.
Our corporate objectives remain focused on driving sustainable constant currency revenue growth, achieving adjusted margin and earnings expansion, optimizing our product portfolio, and advancing a corporate social responsibility and an inclusive culture. Let me expand on the strategic priorities that will enable us to deliver on our long-term objectives as a company. The first strategic priority is to drive sustainable constant currency revenue growth. As we look into the future, we are excited about the opportunities in front of us. Our combination of growth drivers and diversified portfolio will help to provide consistency in growth, while our continued focus on margin expansion and our revenue base will drive attractive free cash flow generation. This will be prioritized for internal growth drivers and inorganic opportunities. Our high-growth portfolio is expected to be a key contributor to our revenue growth algorithm and continued product diversification.
This portfolio has many of our most exciting products, and we believe there is a long runway for market penetration. Our durable core is expected to show steady growth due to share gains, underlying market expansion, and our category leadership. Of note, our durable core includes franchises with healthy growth, including interventional, vascular, surgical, and OEM, as well as Asia from a geographic perspective. We intend to grow the percentage mix of our high-growth portfolio over time through multiple organic drivers, including new product introductions and market expansion.... Importantly, we will continue to preferentially direct investment to our high-growth portfolio. To sustain our momentum, a key building block of Teleflex's long-term growth investment strategy will be to transform our internal development capabilities, resulting in an improved new product launch cadence and associated increase in our new product revenue.
We are building on our new product development pipeline with a focus on a disciplined approach to advancing our projects. We are also actively engaged in strategies to accelerate time to revenue of our new product development, and we are confident that we can drive increasing momentum in our new product cadence over the coming years. We are off to a really good start and have a number of new products launched in 2023, including a new navigation and PICC stylet in our Vascular business, and the Wattson dual guide wire and pacing wire in our Interventional business. We also received an important expanded cardiac indication for QuikClot in our Anesthesia business unit. Looking outside of the United States, our international sales account for over 30% of consolidated revenues, and we see an opportunity to enhance our geographic reach.
In particular, we have meaningful potential in our Asia-Pacific business with new product launches, expansion in our sales team, and a strengthening of our leadership. Many of the launches are for products already used in the United States, such as PICC, EZ-IO, UroLift, and a variety from the interventional access portfolio, which reduces the risk profile as we go to market. As we focus on our high-growth portfolio, we are confident in the discrete drivers for organic constant currency growth. Of note, we believe that we are still early in our penetration of sizable market opportunities for our exciting portfolio of products. With our preferential investment into our growth drivers, we see opportunities to expand our global sales base over the coming years. In addition, we expect to increase the number of products in our high-growth portfolio through disciplined M&A and internal development.
For example, we have added the Palette Life Sciences product portfolio and the Titan stapler into our high-growth portfolio, which further bolsters our base of growth drivers. Turning now to our second strategic priority. We will continue to achieve adjusted margin and earnings expansion. We are confident that there are several levers to pull that will enhance our margins over time. Importantly, we have a slate of margin expansion drivers that are already in place and complement our methodical approach to consistent productivity initiatives. Mix shift towards our portfolio of high-growth drivers will be the primary driver of adjusted gross margin expansion over the coming years as the percentage of total sales increases. The Palette acquisition added yet another high-growth driver to our portfolio, which is accretive to our gross margin growth.
In addition, our existing restructuring initiatives will be another incremental driver of margin expansion, as well as other operating efficiencies, including distributor-to-direct sales conversions. Purposeful and disciplined incremental investment to maintain our current momentum will be offsetting a portion of our margin expansion. We will allocate investments to drive global product launches, expand our geographic footprint, and develop new products. Although these directed investments will increase operating expense as a percentage of sales over time, we will be targeted in our spend. We are confident that our strategy is prudent and will continue to position Teleflex for durable growth. Our third strategic priority is to optimize our product portfolio through new product introductions, continued M&A, and thoughtful divestitures of non-core assets. We have a history of successful acquisitions across our business units.
From 2011 to 2023, we completed over 80 M&A transactions while deploying $5.4 billion in capital. Of note, as our business development competencies have strengthened, over 80% of the capital we deployed for M&A since 2011 has occurred over the past seven years. In this time frame, we have executed on multiple scale and tuck-in transactions, including the acquisitions of NeoTract and Vascular Solutions in 2017, HPC and Z-Medica in 2020, and Palette Life Sciences in 2023. As we look into the future, we will continue to pursue a steady cadence of acquisitions to help augment our high-growth portfolio and create shareholder value.
We will continue to optimize our portfolio through a disciplined review process focused on M&A as well as divestiture opportunities, and we will endeavor to learn from our portfolio moves and be relentless in our focus on continuous process improvement. Teleflex has been a thoughtful acquirer over the past decade, and this will not change. We take a very disciplined approach to identifying and deciding which opportunities fit our key criteria. We are looking for assets with category leadership, obvious clinical benefits, the ability to lower the overall cost of care, and strong intellectual property protection. We also pay close attention to opportunities that allow us to leverage our infrastructure and expand our geographic footprint. From a financial perspective, we look for assets that are accretive to growth and margins, with a focus on exceeding our weighted average cost of capital in a reasonable period of time.
Net leverage is approximately 2.1x . Combined with our outlook for strong free cash flow generation, we remain well-positioned to have ample flexibility to execute on our strategy. Most recently, we acquired privately held Palette Life Sciences for an upfront payment of $600 million and contingent consideration of up to $50 million. The Palette acquisition includes Barrigel, a biodegradable, sculptable rectal spacer designed to reduce radiation delivered to the rectum during prostate cancer radiation therapy. Barrigel will complement the UroLift system, covering the top two diseases within urology care, BPH and prostate cancer. Barrigel has grown rapidly since its FDA clearance in May of 2022, due to its unique product features. The product is easily sculpted when placed between the prostate and the rectum, and allows the physician to achieve predictable protection of healthy rectal tissue prior to radiation therapy.
There is a large and growing global market for rectal spacers. The American Cancer Society estimates that there will be 288,000 new cases of prostate cancer in the United States, with the incidence growing 3% per year. In addition, the increasing use of hypofractionated radiation therapy is driving demand for rectal spacers to protect healthy tissue. From a strategic perspective, the addition of Palette portfolio complements our strong presence in the treatment of benign prostate enlargement and helps to expand the clinical landscape of our interventional urology business. Of note, urologists perform the majority of rectal spacers placements, which will leverage our existing call point. We also expect interest in rectal spacing to provide opportunities to cross-sell UroLift, although any synergies are not contemplated in our deal model. Excuse me.
From a financial perspective, we expect the acquisition to be immediately accretive to revenue growth and adjusted gross margin and enhance our adjusted operating margin in the near term. As previously communicated, we expect Palette to generate approximately $56 million in revenue in 2023 on a pro forma basis, and we remain confident in the outlook for the year. Now, I will turn to a brief review of product developments. Starting with Vascular Access. Initial launch activities for the next generation Arrow VPS Rhythm DLX navigation device and the new Arrow PICC, preloaded with NaviCurve stylet, continue to generate a positive customer response and new account agreements. The NaviCurve unique anatomical curve is designed to allow the catheter to align with the curvature of the vasculature. When using our DLX navigation system, the two devices allow for consistent and effective PICC placement without the need for confirmatory X-ray.
Moving to our surgical business. We are on track with the launch plans for the W.L. Gore and Associates Gore SeamGuard bioabsorbable staple line reinforcement material to be used with the Titan stapler. Buttress material is commonly used by surgeons to reduce leaks and bleeding, and strengthen the staple line by redistributing the pressure exerted by an individual staple on a wider area, as well as providing reinforcement for friable tissue. The ability to offer synthetic buttressing material alongside the unique features of the Titan stapler should enable Teleflex to further address surgeon clinical needs and preference in the sleeve gastrectomy market. Turning now to Interventional Access. We launched the Watson and GuideLiner Coast. GuideLiner Coast is a hydrophilic version of the highly successful GuideLiner and has garnered a strong reception in the market.
Wattson is a unique dual delivery guide wire and pacing wire for use in TAVR procedures. Watson will complement our expanding structural heart portfolio, which already includes the MANTA large bore closure device and the Langston dual lumen for contrast delivery and pressure management. In our anesthesia business, we launched the Insighters video laryngoscope and received FDA clearance for QuikClot in the temporary control of mild to moderate bleeding in cardiac surgical procedures, and to control bone surface bleeding following a sternotomy. This clearance enables device utilization across a wider patient population and breadth of surgical procedures. Our fourth strategic priority is to systematically advance corporate social responsibility and an inclusive culture while remaining true to our core values.... These values define our company, shape our corporate culture, guide our business practices, and direct the way we interact with our stakeholders.
From healthcare professionals and their patients, to our employees and shareholders, to our suppliers and distributors, and to the countless individuals who make up the communities in which we live and work around the world. We believe that fortifying our culture, creating a welcoming work environment, and looking out for the safety of our employees is foundational for Teleflex. These elements are fostered by our Teleflex core values. Moving to our capital allocation priorities. We are focused on four key priorities for our cash generation. First, we will continue to invest in the business, with the potential for capital investment to execute on footprint consolidation and other productivity initiatives. Second, portfolio optimization remains a priority with a focus on M&A. Third, we will pay down debt when appropriate. And fourth, we will maintain our dividend.
We will continue to prioritize our capital allocation to enhance our returns while retaining flexibility, should business conditions change. Thank you very much for your time today, and we'll have a Q&A session now. Thank you.
Thank you. Starting with M&A, how would you characterize the environment for M&A, and what areas is Teleflex focused on?
So, I think that the environment for M&A is encouraging. As always, we're a serial acquirer, and we are looking for assets, and we're active out there in the marketplace. As I said in my prepared remarks, our net leverage is 2.1x , so we have the most important thing you need for M&A. We have firepower. Palette was an excellent acquisition that we executed on. We'd been working on that asset since 2020. We closed it in 2023, and we believe that it is the perfect type of asset for a company like Teleflex. It's accretive to our top-line growth, it's immediately accretive to our gross margin, and it will become accretive to our earnings and operating margin in 2025. So, we're active in the marketplace.
We have a team here at JP Morgan, meeting with a number of companies just down the road. And we'll continue to execute on the right type of asset for Teleflex. And I think the environment has improved as we've gone through 2023. And I think my belief is that the IPO market will still be challenging for companies, for the most part of 2024, at least.
With the increase in interest rates, do you still see opportunities to execute on M&A? And how do you think about EPS dilution from an M&A perspective?
Well, again, using Palette as an example, I think that was in a higher interest rate environment. And with Palette and with all of our acquisitions, we're very focused on getting to our internal cost of capital by year five. Our internal cost of capital is approximately 10%. And with Palette, we will achieve that even in a higher interest rate environment. I think it's important when you're looking at, at M&A in this current environment, that you're very thoughtful about the assets that you chase, 'cause it's only the best quality assets that are ultimately gonna give a return. And we've always said that we will accept some short-term dilution from our acquisitions, for the longer-term benefit of the company. And again, Palette is a wonderful example of that.
It's going to be $0.35 dilutive in this year, 2024, but then it'll become accretive in 2025, just by leveraging the top-line growth. We expect the asset to grow high teens-low twenties% from a top-line growth, and therefore, that leverage, in the future years is, gives significant returns and allows us to get to that, that return hurdle by, year five.
Now as we think about 2024, how is Teleflex thinking about the macro environment, including staffing shortages, inflation, and supply chains?
So I think that, if you're in the acute hospital, it's really a great place to be right now. Procedural volumes are back to where they were on a pre-pandemic level, and also staffing levels have improved significantly, as we've gone through 2023. And actually, you very seldom hear a hospital talking about staffing levels right now. There are still some challenges in the office side of the service from a staffing level perspective, but that is also improving. Supply chain, I would, I would characterize it right now as stable and very stable. And from an inflationary standpoint, I think we've seen improvements, in the inflationary environment as we've gone through 2023. Now, I'm not, I'm not anticipating deflation in 2024, but I would anticipate disinflation in 2024.
I think that we've already seen that, in particular, as it applies to freight. We've seen improvements in material inflation also as we've gone through the year. So I think the overall macro environment is improving and did improve as we went through 2023, and I expect it to continue to improve as we go through 2024 and beyond.
How should investors be thinking about the exposure of Teleflex to GLP-1 drugs?
So we, we put a lot of thought into this. We know it's important for the investment community, and during our Quarter Three call, we went into a certain level of detail on GLP-1s and the impact that they could have potentially on Teleflex. So, as we broke down our portfolio, obviously we have a bariatric product, the Titan stapler, you know, which is in the teens from a revenue perspective. We looked at our dialysis catheters and we made an assessment on that. We looked at our entire portfolio.
If GLP-1s got rid of all of those procedures that were impacted within Teleflex, it would impact just in excess of 1% of the totality of Teleflex revenue, and that's assuming that every American who was categorized obese was on GLP-1s. We all know that's not gonna happen, but if that did happen, the total impact for Teleflex would be 1% of our revenue.
Very helpful. How does Barrigel fit into the Teleflex Interventional Urology franchise? You talked a little bit about it, and getting maybe a little bit more into the detail of how the sales force is going to be organized in order to not disrupt the focus on getting UroLift back to growth.
Yeah, this is what I love about Palette, is that it fits like a glove into the Teleflex portfolio. The number one reason that a man will go and see a urologist is for BPH. The number two reason that a man will go to a urologist is because of prostate cancer. Over 95% of urologists who treat BPH also treat prostate cancer. Of our 3,700 urologists that use our UroLift product today, about 20% of them use the Barrigel product today. 20% of them use another technology, and 60% of them are yet to be educated on the need for spacing. The reason that I you need spacing, as I outlined in my prepared remarks, is because as you're going through radiation therapy on the prostate, the radiation can have a negative impact on the rectum.
So what you're trying to do is create space between the prostate and the rectum to protect it, so that you don't end up with incontinence and other, and other conditions. So it fits seamlessly into the Teleflex portfolio from that, from that perspective. I think that, with regard to the sales force, we've already largely done the integration in the first quarter of the acquisition. We've done the training of all of the salespeople that will be dual bagged as we go through 2024. We did the training in December of 2023.
And we also believe that there is a potential for a halo effect on UroLift from being able to introduce another technology to the urologist, and we haven't put that into our deal model, but we think that's a distinct possibility. We're not ignoring the radiation oncologist. At the same time, we have trained 20 clinical trainers in order to address that call point. And I think that our thoughtful integration of this asset, early signs are pretty good, and as I said in my prepared remarks, we feel really confident on the pro forma $56 million for Palette Life Sciences in fiscal year 2023.
Now thinking about, from the geographic perspective, where do you see the biggest opportunities for growth, and what investments are you making?
So we continue to invest overseas, as we expand certain parts of our portfolio overseas, in particular in Asia. Most investors familiar with Teleflex will know that we've been launching UroLift in Japan very successfully for the last couple of years. That's gone incredibly well. We're also expanding UroLift into China, and that'll begin to ramp in this year, 2024, and then continue to accelerate in 2025. But also, there's big parts of our interventional portfolio that we are taking to the market in Asia. And again, investors familiar with Teleflex will have seen our interventional business growing double-digit through the first three quarters of the year, and a part of that is the growth that we're experiencing selling old as new into parts of Asia.
With that, there is investment within sales organization, within the geographies, and there is an increased clinical data that we're supporting that product launch, and obviously regulatory approvals to go with that. We're also doing similar expansion for products that we have acquired over the last number of years, getting a CE Mark and ramping up within Europe.
How should investors be kind of thinking about the exposure that Teleflex has to a recession, both in the U.S. and kind of touching upon that international component?
Yes, I think that. My thinking right now is that within the United States, with all the data that I'm seeing, is that if we're going to go into a recession, it's going to be a very mild recession. I think there are parts of Europe that are already into a mild recession. My home country, Ireland, is one of them. It's had two quarters of negative growth from what I'm reading, U.K. and Germany, but again, I think it's going to be mild. I don't believe that you're going to see an impact like that in Asia. You talk about inflation when you're talking to your colleagues in Asia Pacific, and they don't know what you're talking about.
They haven't seen the same levels of inflation that we've seen here in the United States over the last while. Investors should always remember that people get sick and need to go to hospital in good times and in bad. It's one of the industries. Nothing is immune to a recession, but the healthcare industry is one that is as protected as any. And I think as you've gone through the variety of different recessions, you've seen that. And also, a large part of our portfolio is purposefully built towards the elderly demographics, which don't tend to suffer as much from loss of employment during a recessionary cycle.
...touching upon this a little bit, what is your exposure to volume-based procurement in China?
So, everybody gets impacted at some stage by Volume-Based Procurement, but we have been fairly strategic in the products that we launch and sell in China over the past number of years, and we only sell our most differentiated part of our portfolio. So we feel that our strategies in dealing with Volume-Based Procurement have served us well, and we'll continue to execute on those. And I think that no one escapes from it completely, but I think we've done a really good job of managing that. And indeed, in just Q3, our last reportable quarter, our Chinese business grew approximately 20%.
What is your exposure to the Pillar 2 global minimum tax rate?
Well, this is where I'll ask my colleague, Tom, to give us-
Sure. Certainly. Well, obviously, we've been watching it very closely in terms of developments around the world and what regulations are coming out. And as a result, we are able to proactively make some changes in our structure to position us as well as possible for the upcoming change. While we'll give specific guidance on the impact of the tax rate in 2024 at our upcoming earnings call, what I will say is that in our Analyst Day back in 2002, we had guided to a long-term tax rate of 12%. And I'd say that's probably a pretty good approximation of where we think we will settle out, as a result of Pillar 2. So some exposure, but not, not tremendous.
Awesome. Good to hear. And with the majority of your business in the acute care setting, what trends are you seeing here?
So like I said, in the macro view, in with regard to staffing for procedural volumes, if you're in the acute care hospital, it's a great place to be. And we've built our portfolio focused on the acute care hospital in the large part. So I think that procedures in the hospital are back to pre-pandemic levels. I believe that we saw in 2023 the benefit of that, and we saw it within Teleflex. You know, we started the beginning of 2023 with a low end of our guidance of 4.75%, and we updated that as we went through the year. And in Q3, the low end of our guidance was 6.4%. Good execution as we went through the year.
We had three very successful quarters, and we're planning on having a good solid execution in the fourth quarter as well. So within the acute hospital and with the portfolio of products that Teleflex have, we've seen really solid execution, and we believe that's going to continue over the next number of years. So we feel really confident in our portfolio for the future.
Awesome. How do you think about the transition of healthcare in general to the ASC site of service?
Well, that's two wheels on the same car, in effect, because the increased utilization is being facilitated by hospitals actually acquiring ASCs and controlling the flow of the patients. The most successful hospitals today are the integrated ones that have both the acute hospital, the ASC, and then are an insurance carrier as well. They are probably the most successful systems that are in existence within the United States today. And we believe that will continue for us as an organization. So, we believe that utilization will continue. We believe that this environment is going to continue.
And as the hospitals move some procedures to the ASC, in particular orthopedic procedures, it's freeing up capacity in the bricks and mortar of the acute hospital to allow them to do additional procedures and fill the intensive care units, where we get a lot of utilization of our products. So, I think that growth within the ASC and the move to the ASC benefits Teleflex in two ways: We get the volume within the ASC, but we also get the increased volume that allows the hospital to put through, and especially in these vertically integrated systems.
Great. And before we wrap up, is there any kind of closing remarks or anything you would like to kind of leave everyone with, you know, heading into 2024 now?
So we're only a few days into 2024, and we haven't actually finalized our 2023. Our earnings call will be in, in February. But I'm really proud of how we executed for the first three quarters of 2023 as a company. As I said, the low end of our guidance range was 4.75% at the beginning of the year, and at 6.4%-6.5% was our final guidance. As a company, our long-term goal is to grow our top line by 6%. Our long-term goal is to expand our gross margins by 250 basis points by the end of 2025, our op margins by 200 basis points.
And I think, one year in, I've quoted my mother a few times on earnings call, but she used to say, "A good start is half the battle." And we've had a really good start with really good execution for the first three quarters of the year. We're—we won't be satisfied until we make it four out of four and then eight out of eight, as we continue to execute as a company and to deliver value to our shareholders. We feel that the first year of our LRP is on good track, 6.5% at the midpoint of our growth, in the first year, with 6% CAGR as the target.
As a management team, Tom and myself and the rest, and Larry and the rest of the team are committed to continue that execution in 2024, 2025, and 2026.
Awesome. Well, that wraps up our presentation today. Thank you so much.