Thanks, everybody. Up next is Teleflex. We are really happy to have them here today. Liam Kelly, the company's President and COO, is here presenting on behalf of the company, and I think everybody in the audience knows Jake, who does a great job on the investor relations side. Thank you guys very much for being here. Liam will offer some intro comments, then we will do some Q&A. Again, thank you very much for being here.
Thank you very much. Just as a way of opening comments, just to introduce you to Teleflex. For the last 12 months, we generated $1.93 billion in revenue. We are a pure-play medical device company and have been since about the 2011 timeframe. In North America, we are structured by business units, we have a vascular business unit, an anesthesia surgical, we also have a respiratory care business, a cardiac business. Overseas, we are structured by geography. Our revenues in Europe are approximately 27% of our overall revenue, our revenues in Asia are approximately 13%. We see ourselves in the predominantly non-postponable procedures, we have developed a portfolio with strong IP protection. We just recently announced our Q1 earnings call, where we posted a growth of 16%. Much of it was coming from an acquisition that we recently did, Vascular Solutions. That contributed 5.1%.
Billing days, 6%. Our core growth was 4.2%, our growth from previously completed acquisitions was 0.7 of a percent. We have market-leading positions in central venous catheters, Hem-o-lok products, and in LMA products. The Vascular Solutions acquisition also puts us into a very strong call point within the interventional call points. That is a brief introduction to the company.
Great. Well, thank you. One of the things we are trying to do in some of these sessions is really, frankly, in all of them, is to get the views of a company like yours on the broader landscape, then we will obviously boil down and get some Teleflex-specific questions in there. Given your kind of unique position in the marketplace, I would love to get your views on just kind of the outlook for broadly speaking surgical procedure volumes, because they have been fairly robust from a med tech perspective when you look at just the reported growth rates of all the different medical technology companies. Then you look at the growth rate of hospital volumes overall, they are fairly soft. What are you seeing in terms of procedure volumes, just broadly hospital procedure volumes now versus, say, six months ago, and what is your outlook going forward?
What we see today is procedure volumes and core volumes in the market of about call it 1%. That is modestly up on what we would have seen about six months ago, where we would have seen approximately 0.8% or thereabouts. I think that one of the things that people underestimate is what's going to happen to procedure volumes in the future. I think that's because of the demographics, in particular in the key North American market. You have 10,000 Americans every day passing over that 65 age mark. You and I will spend approximately $360,000 in our lifetime on healthcare, but it's not linear. Between the age of 50 and 65, we'll spend about 10% of that expenditure. Between 65 and 85, we will spend 60%.
By the time we get to 2020, and we're here in 2017, there's going to be 10 million more Americans in that bracket. 10 years after that, there's going to be 20 million. That is from a demand perspective, it's going to drive demand. The other dynamic you have is in places like India and China, middle class is growing aggressively. That will also drive demand. The one thing that nobody has figured out is how are we going to pay for this? Because clearly demand is going to come through. It'll bring more pressures on pricing. What we try to do in Teleflex is we try to position ourselves in these emergent non-postponable procedures so that the option of delivering care to the patient is non-optional.
Therefore, we believe we're well positioned to take advantage of that procedural growth that I see is almost inevitable over the next 20 years.
You see that 1% going higher, in other words?
I do, I think we've seen the beginning of the impact of the baby boomers in it already. Because if we go back to, let's say, 18 months ago, that procedural growth rate would have been 0.6%.
Okay. Just strategically for Teleflex, there's been a lot of consolidation that's gone on in the industry. Frankly, over the last two years, more consolidation than I've seen in a 20-year career. Why do you think those transactions are happening? What's your outlook for consolidation in the space broadly as we go forward?
There's a number of factors at play here in my view. The cost of funds is relatively inexpensive in the current environment. The environment for healthcare is pretty positive because of what I said just on demographic trends, the consolidation is done on the basis that a larger scale company can have a bigger impact on GPO and IDN purchasing groups. Now, in Teleflex, we don't fully buy into this consolidation. We're the consolidator at a different level. You see consolidation with the Medtronics and the Covidiens, you're talking about the BDs and the Bard. Teleflex, in its own right, has been consolidating in that, call it $50 million-$180 million in revenue.
Our view is that those size companies have great difficulty in getting access to GPO and IDN agreements in the U.S., have great difficulty in accessing public tenders and national tenders in the European market getting to bids in Asia. Therefore, in 2012, we bought LMA, which was approximately $120 million business. We bought Vidacare, which was a $60 million-$70 million business, and Vascular Solutions was $164 million business. Those are the businesses that are being impacted by the scale argument, in our view. Teleflex is of a scale that we are well-positioned to be able to have conversations with any GPO and IDN and to be taken seriously. We have been very successful in carving out niches within those segments with very strong IP, so that we're always a relevant conversation piece for any big GPO and IDN.
I think the dynamic. I've never had a customer ask me and put forward the hypothesis that they need more consolidation, that they need fewer vendors. Their view would be that when this has happened in the past, it hasn't been good for the consumer. The prices have gone up.
You don't think your scale is too small to compete over the next, I'm not talking the next six months, but the next five years?
No. Our scale will increase over the next five years as we continue to do consolidation at that lower level.
To do acquisitions. No, I don't think our scale is going to be an issue. Here's a little example. We're the market leader in CVCs. Bard are the market leader in PICCs. They don't get bid together on a GPO contract. There's two separate bids for them. Where does consolidation bring an advantage in that aspect?
Yeah. Well, that's today, though, right? I mean-
Yeah, absolutely.
Yeah.
That can change over time. I've been in healthcare for 25 years. Change happens slowly.
Yeah.
So.
Do you know what percentage of your revenues come from markets where you have, say, 1% or 2% market share? How well positioned are you in terms of product category leadership?
As I said earlier, we like to play in these niches where we have a dominant market position. In our CVC catheters in the United States, we have a nearly 50% market share. In clip ligation, we have a significant market share where we're the number one player. In laryngeal masks, we are the number one player. In intraosseous, we are the number one player. We have a lot of segments where we're number one player, and with Vascular Solutions now in tortuous coronary access, we are the number one player. There are very few areas where we would have a low market share. We like to play in markets and niches where we are either the number one or a very strong number two. The one area where we're perhaps a distant number two is in the PICC market I spoke about earlier.
Even in that market, in the last quarter, we grew that business by 25%. Given if you have a unique proposition, there is the potential to grow even in that segment.
Our unique proposition there is a coating technology that helps prevent thrombus and is also antimicrobial. The cost to the hospital of an infection that they now have to document on PICCs that they didn't have to do two years ago is $42,000 per incident of an infection. They are really interested in talking to us about a product that helps prevent that infection.
You think it's over half the company, though, where your revenues are either, you're either in a number one or two position?
It would be greater than half the company.
Okay. One of the other things I wanted to just get a better sense for was just talk about organic revenue growth opportunities for the company as we move forward. Maybe just talk about what your conviction level in a level of growth and what are the, maybe you could kind of talk about the top two or three product categories that you think will drive growth as you go forward.
Yeah. We have long-term goals out there to get our growth rate to the 5%-6% organic growth rate. This year, we've guidance out there of 4%-5%. If I was to look at the areas where I think there is the potential for growth acceleration, I think for us, new products, we've shown marked improvement in our new product acceleration. If you go back to 2015, our new product revenue is 1.1%. You roll on to 2016, it was 1.3%, and in the latest quarter, it was 1.8%. Clearly, the investments we're making in new products is starting to get some traction and to grow that portfolio.
Sorry, how do you define that?
It's products launched and generating revenue in the last three years.
Okay.
That's how we define it. We have a few unique growth opportunities that are pretty unique to us. Vascular Solutions, the reason we liked that acquisition was because of their top-line growth. It's double-digit growth and has been for the last 10 years. That will add a % of growth to Teleflex. The Vidacare has been a great acquisition and continues to drive a % of growth every year. We have many new product opportunities in the out years. Percutaneous Solutions, we've said that by the time we get to 2018, it can be 1% of our overall revenue, and by the time we get to 2019, it can be 1% of our growth. You get procedural volumes that we spoke about earlier that are improving. You get the rest of the R&D portfolio coming through.
We believe that we have a portfolio that's well capable of that 5%-6% organic growth rate.
You said a little bit ago that you maybe have a different thought at Teleflex on consolidation and breadth. What exactly were you referring to?
What I meant by that is consolidation, our scale or size being a limiter to us in Teleflex, having access to the market. At our scale, it's not a limiter. It can be a limiter, as I explained, to those companies that are, let's call it sub-$200 million. Normally, as they grow, a percent of that is overseas, and it's difficult for them to have a meaningful conversation with any big GPO when their total revenue in the U.S. is like $150 million.
Right.
I don't see, and we don't see the scale argument having borne fruit yet.
I see.
Some of those acquisitions have happened a number of years ago, and we haven't seen in the marketplace consolidation of contracts. We haven't seen different categories being bid separately.
That hasn't happened. The beginning of that consolidation happened three years ago. As I said, the medical device market moves slowly, but we've had 3-4 years now for these changes to occur, and they haven't.
Yep. What's your view just of the Becton Dickinson merger? Why do you think it happened? What do you think it does to the marketplace?
I think, again, it's in that consolidation argument if people buy into it. I think that the consolidation of those two companies, there's very little crossover between the two portfolios. I think in the IV side, with PICCs now going together with the BD, I can see the logic and the rationale behind that. In the rest of the portfolio, so in urology, BD doesn't seem to have any urology business, doesn't seem to have a surgical business. I think it's, again, consolidation. Do I see that having an impact to Teleflex? In the shorter term, for me, it creates a big opportunity for us.
Yeah.
There's one less competitor for assets out there in the marketplace that I spoke about earlier. I think in Teleflex, we have been very focused on the infection prevention, and we present to the clinician a coated product that in a kit. They insert it, and it's one and done. Our product takes care of the infection rate, whereas if you're BD, have traditionally been in care and maintenance using flushes, it still takes the compliance from the clinician to do a second step, get the ChloraPrep, get the flush out the line. Whereas with Teleflex products, that isn't a requirement. We still think we have an advantage in the space that we play in today.
Just like you said, the companies that you're consolidating, the smaller $50 million-$200 million could benefit from scale. I would think they would certainly agree. We've talked about this, but could Teleflex benefit from greater scale if from somebody bigger coming to look at you guys? I mean, how much would that help?
If our portfolio was different, perhaps. Because we are in niches and in dominating those niches, we don't have that competitive pressure in the bids. We have had a real focus on pricing. We've been able to gain positive pricing of 20-30 basis points as we reenter into GPO and IDN agreements, and that is simply because an infection will cost the hospital $43,000. Now they have to report infections on PICCs as well as CVCs. Really, they're acutely aware of the healthcare economics argument as much as the cost of the pump of the actual device.
Okay. It doesn't seem like that would. You don't think you'd benefit? How about geographically? Could that help?
Again, geographically, we have enough scale to enter into a French tender, a German tender, an Italian tender, a tender within the U.K. We have sales forces throughout all of those geographies. We're direct in every market of substance overseas, and we're direct in most of the key markets within Asia-Pacific as well. Again, at a $2 billion revenue approximately, we have sufficient scale to address every market in the world with a direct presence.
What % of sales is emerging markets right now, and what's the growth?
It depends on how you define emerging markets, but our APAC, which broadly is emerging markets, is approximately 12% or 13% of our business. Traditionally, it has grown in that 5%-6%. We recently went direct with part of our business in China. That was a long-term view. We have just got registration for the Vidacare portfolio. We're expecting our coated PICC to have a registration later in the year. It'll be short-term pain for a couple of quarters for long-term growth in China. The Asia Pac market from a growth perspective in three key markets. We look at China as a definite possibility for growth, and that has traditionally been growing in the 7% or 8%. We see India as a nice possibility for growth. That has been growing at double digits for the last number of years.
We see Korea, where we've taken our business direct, as a very mature market, but one where there is significant opportunity for growth for Teleflex as well.
It's interesting, Bard has been growing in emerging markets 25%-30%. What's the delta?
The main focus of Bard's growth, I believe, and obviously you'll have to ask Tim and John before they exit, but the main focus of their growth has been PICC growth in China.
Yeah.
We don't have a coated PICC product registered in China yet. We hope to address that by quarter three of this year, and we'll be in a position then to compete in that market segment. Our focus on PICCs has been in the North American market that has been growing traditionally at that 3% and 4%, and last quarter we grew at 25%. With the coated catheter, we see ourselves taking share.
As you look at 2018 and beyond, do you think you can get the emerging market business up to the kind of growth rate that Bard had once you have the product mix?
Our long-term aspirations for growth for our businesses are to have North America growing in that high single-digit growth, to have EMEA growing in that low to mid-single digit growth, and to get double-digit growth out of APAC. I define the whole of APAC, which includes Japan and Australia, which traditionally are slower-growing markets. By definition, China, India, and Korea will be growing at a faster pace than that double-digit growth rate.
Okay. Then maybe just also touch on the CEO transition, the impact on the business and how people should be thinking about it.
Clearly, I've been in Teleflex since 2009, so I know the business really well. I've moved over to the United States. This is my fourth year now, since I've been here. The company strategy has been time-tested, has delivered tremendous shareholder value, and has been the product of a management team delivering it. I think you can see very little change to the strategy because of the fact that it has delivered so well. I think we'll continue to be a consolidator. I think we'll continue to look for acquisitions that are in niches. We will continue to focus on R&D. We will continue with our margin expansion, our non-revenue-dependent margin expansion program, and we will continue with all of those to accelerate our growth rate to that 5%-6%. We'll continue to de-layer in our distribution channel.
I can't see a significant change in strategy. Obviously, we want to position the company to have a very strong growth profile, because in the 2025, let's say, timeframe, the non-revenue-dependent margin opportunities will eventually finish unless we do another number of acquisitions.
Given you've been active, what is the capacity from here from a capital allocation perspective for M&A?
At the moment, we're at about 3.5x gross leverage. We have said that we'll delever very quickly from Vascular Solutions. We will be in the low 3s by the end of this year, and we will get below 3x next year. We have a portion of cash, about $520 million, offshore. Whether the Trump administration will help us to repatriate that, I don't think either of us should hold our breath. We're also looking at internal opportunities. We were able to avail of really good tax planning as part of the Vidacare acquisition, and we were able to repatriate some cash on a very attractive basis. We're looking to see if that might be an opportunity for us to repatriate some cash.
We haven't stopped our M&A activity on the basis that this might bear fruit, and that would remove a turn in effect from our gross leverage.
Given the nature of business and the consistency of the earnings and cash flow, how levered are you comfortable taking the company when acquisitions present themselves?
What we've said and what we've done in the past is we've gone up to 3.7x for Vidacare and again for Vascular Solutions. As long as we've clear line of sight to get back down below 3x, we've said that to the ratings agencies as well. We don't really have an ambition at this stage to become investment grade. We see the best use of our capital to continue to do acquisitions because it drives tremendous return for our shareholders.
On something we were talking about a little bit earlier on the disruption side with, or the potential for disruption with Bard and Becton. Is that primarily in PICCs? Hypothetically, where could the opportunities present themselves?
Yeah. We get compared a lot to Bard. I think it's because Benson spent 17 years there, more than the crossover between our two companies, quite frankly.
Also your strategy is very similar.
Yeah. It is, and we've done what Bard did probably 20 years ago.
Yeah.
That's a good point. The crossover between our two companies is a little bit on PICCs, where we have approximately 7% market share, then minutely on dialysis catheters.
Yeah.
There's very little crossover between us, Bard, or now BD Bard.
Yeah
Formation will be.
Yeah. In other words, we shouldn't think of that as a big opportunity for the company.
I don't think it's going to be a big tailwind or headwind. As they start putting the two companies together, perhaps it'll be a talent acquisition opportunity for Teleflex.
Last question I have. Folks, please chime in if you'd like. I just wonder if you could go through some of the recent acquisitions and talk about the potential. I know all your public statements. The potential for revenue synergies from these transactions. Where's the biggest opportunity among the last couple of deals that you've done?
I guess I'll focus on VSI. We didn't build any revenue synergies within our model, and it's our latest acquisition. We've just put the two sales forces together in the last number of weeks, and clearly we had 26 people selling the OnControl device from Vidacare. Now we're going to have 86 people selling the OnControl Vidacare device. Could there potentially be a tailwind with that and get some revenue synergies? For sure. Is there the potential for revenue synergies on the international markets? For sure. We just haven't built that into our model. We think that's more prudent. Obviously, as the opportunities present themselves, we'll take them. With the Vidacare acquisition, clearly the revenue synergies came from the hospital sector.
Vidacare had a channel, a very good channel into the EMS and military, but they didn't have channel into the hospital sector, so with our vascular sales force, there was clearly significant synergies, and that's why, quite frankly, we've been able to continue with that 20% growth trajectory with that Vidacare portfolio three years later.
I guess last question from me is, given the asset mix that you have today, what's the upside case on revenue growth if you really execute? I'm saying, put aside the fact you might do further acquisitions and get yourself into faster-growing businesses, what's the upside case if you really execute on the revenue growth side given this asset mix?
I think, the key North American market has been one that we've focused on for growth. Within that, as I said earlier, percutaneous has the opportunity to deliver a percent by the time we get to 2019. Vidacare will continue, VSI will continue. We continue to invest in R&D. We have a really good portfolio now of tip positioning PICC products that are very competitive within the space that could be an accelerator for growth. Within VSI, there is also the RePlas opportunity, which is freeze-dried plasma. That has been estimated to be a $100 million market opportunity. I do believe we've just announced the first clinical trial. That has to be followed by a second clinical trial. They will both be completed by, let's call it April, May 2020, we will take that product to market in the second, third quarter of 2020.
That has potential for significant upside for our company. Again, it's a $100 million opportunity there. I think the potential for upside will continue to delayer. International markets have an opportunity. Taking our business direct in China should be able to accelerate the growth. We see nice opportunities to accelerate our growth. Of course, the synergies from Vascular Solutions, the potential synergies from Vascular Solutions in 2018 and 2019 from leveraging our channel, especially in Europe where they went through distributors, will also help that.
If you aggregate all that up, if things go well. I'm just trying to get a sense for magnitude. Could this be a 10% growth business if you're really executing, or is it more 7% or 8%? We know what your guidance is, I'm asking little rose-colored glasses for a second.
Our guidance is 5%-6% if we accelerated really well. Our 5%-6% was predicated on our base business without VSI. We still believe our base business over time is capable of that. If you were to add the 1% from Vidacare, I think that's where, if everything went well and you had your rose-tinted glasses on, I think that would be a positive outcome for Teleflex.
Great. Liam, that's all I had. If there's questions, we'll take them. Otherwise, I think that's it. Thanks everybody for being here. Appreciate it.
Thank you. Thank you very much.
Absolutely.