Thank you. Welcome, everybody. Obviously, I'm Patrick. I run the U.S. MedTech team here at Morgan Stanley. And delighted to have Liam and Larry here as CEO and Head of IR & Strategy to chat about all things Teleflex. Before we get started, I have some fun disclosures, morganstanley.com/researchdisclosures, or chat to your sales rep. I've managed to get that bit down pretty fast now, so that's pretty good. Thank you so much for agreeing to do this and coming along. And no, it's been great. Maybe the best way to do it would just be some kind of, you know, you guys have quite a broad view of the healthcare system overall. And, you know, so far, first half of this year has been, you know, a lot of procedure volumes.
It's been, volume has been generally pretty strong. How are you thinking about, you know, the next six, 12, 18 months, you know, in terms of volumes?
So I think that, as we look at the environment that we're in right now, I agree with you. Procedure volumes have been robust in the first half of the year. If you take a step back and think of what our goals were at the beginning of the year as a company, what we wanted to do was set out our full year with the potential every quarter to at least achieve our revenue and earnings goals as we went through the year. You go into quarter one, we had a really good start to the year. Net of days, we grew just over 7%. We were happy with that, and we took up the low end of our guidance at the end of that quarter.
We beat earnings, but it was the first quarter, so we held firm on our earnings in the first quarter. As we went along into quarter two, again, we were able to beat our revenue, and again, we were able to take up the low end of our revenue guidance. And while we didn't effectively take up our earnings per share, we had announced an acquisition of a company called Palette Life Sciences, and as part of that acquisition, we covered the $0.15 of dilution, which would have been, in any other words, a call up on earnings.
As we look into the future for the next six months and into the next year, and as we sit here, you know, we've got our guidance laid out there, 5.5%-6.25%. So we feel comfortable in that guidance range. The businesses that have performed well for the first half of the year and have driven a lot of the upside for us have been our interventional access business, our OEM business, and geographically, our Asia Pacific business has done pretty well. As I sit here today, you know, two months into the third quarter, the environment for those businesses continues to be robust. We do see an environment where procedures are continuing to build that momentum into the third quarter.
So we see the back half of the year as being positive, continue to be positive for Teleflex. We continue to expect those businesses to outperform as we go through the remainder of the year. And as we go into next year, then we envision integrating Palette Life Sciences and, and continuing that trajectory and continue to achieve the goals of Teleflex as we move forward. If we look at geographically, I know there's been a lot of talk about China. We see our China business as incredibly solid. It's 4% of our overall business. We see that there have been some... in the news about clampdowns and all of that. My observation, and I've spoken to our team out there, is it's very focused on large capital purchases, rather than the type of business that we're engaged in.
So we don't envision in that having an impact, and we expect China to perform well. And in the pricing environment, we continue to see a positive pricing environment for Teleflex. So all in all, I feel really positive about the year, and the remainder of the year. And I also feel really positive about as our trajectory, as we go into 2024, bringing in Palette Life Sciences into the business and continuing forward on that trajectory.
Yeah, the China observation, that is very consistent with what we're hearing from the others as well.
Good.
It's basically just the capital equipment players. I mean, good segue, I guess, into Palette. For those who maybe if you could paint the, the business for those who might not know a lot about either radiation oncology or how this product fits within that treatment paradigm, and what was it about Palette that, you found interesting as a, as a asset for you and-
Yeah, so we have a criteria when we're looking at assets, and I think if I frame it around that criteria, does it fit within a Teleflex business unit? And absolutely, it does. You know, we have 120-140 sales reps every day in that urology call point, and it's predominantly a urology call point. It's the urologist that in most places, in cases, would place this device. What the device is, when a man is going through radiation therapy for prostate cancer, the hyperfractionation is smaller dose, higher doses of radiation therapy over a shorter period of time, which is great because it is much more effective in the treatment of prostate cancer. The bad news is because you're using higher doses, there is the potential to impact ancillary organs.
So what this technology is, it's a spacing technology, and it actually creates a space between the prostate and the other organs and thereby protects them. So that's what the technology does. So it fits within a Teleflex portfolio. There are high barriers to entry because of the makeup of the technology and the IP associated with it. It has tremendous value to the urologist insofar as it's much easier to use than any competing technology out there. It's sculptable, and it has a really strong healthcare economics argument because it prevents the patient having to come back for ancillary procedures such as incontinence down the road. And this is a product that is rapidly growing within the urology community and has huge potential to grow.
Our focus is not to take share from the main competitor. We might take a little bit, but that's an ancillary point. Our focus here is on growing it. Every day, we are talking to almost 4,000 urologists. Only 20% of those use the Barrigel technology, which is the mainstay of the technology. So we have 80% white space to grow into with this technology and take it to these customers. We expect that the asset will do about $56 million this year, and then we expect that it will grow in the high teens-low twenties over the next number of years.
And I think that, one aspect of this and that I think is important for investors to understand about Teleflex as our entirety, is that people would say, "Ah, but Liam, this isn't organic growth. You know, you're gonna have, $67 million or so of revenue that isn't organic." I would just like to remind investors, the MSA agreement with the sale of the respiratory assets to Medline goes away next year, so there's $70 million of inorganic growth coming out. So whatever growth we put up for next year, when we give guidance in February, you should look at it as truly organic growth for Teleflex.
You know, for that 80% white space, what, why do you think those urologists... Is it just like lack of education, that they're not using it, they're just unaware? Like, what's the barrier then?
So the number one reason that a man will go in to see a urologist is for BPH. The number two reason is prostate cancer. 97% of urologists who treat BPH also treat prostate cancer. So it is a lack of education and awareness, and it is an opportunity for us to educate those urologists to make them aware of the technology. So many of them wouldn't be aware of this technology being aware, being there. And obviously, we have a select number of clinical educators built into our model to also address the RadOnc call point, which is the other smaller call point, but we're not ignoring them by any means. So I think we have many education programs laid out. The technology, as I said, works, works significantly better.
There is an opportunity to sculpt and to mold this product, and to make sure you have appropriate coverage. Obviously, we have a number of clinical investments within our model to continue to bring clinical data to prove the effectiveness of the technology, in particular, around the ability to mold.
For those who might be less aware, from the economics, from the urologist standpoint, reimbursement, that side of things, if you could give some details there, if you have.
Yes, the product is very well reimbursed in all sites of service. So, it is a profitable procedure for the urologist and the RadOnc. It is, as I said, in all sites of service. And just recently, with the changes of reimbursement, the ASC got a significant uplift in its reimbursement, so which makes it even more attractive in the ASC for the LUGPA. And LUGPA, for those who don't know, is a large urology group practices. I just realized I'm talking to Patrick, we use acronyms a lot, so I'll try to be more descriptive.
I'm all about acronyms. You know, maybe outside of that, could you touch maybe on the rest of the sort of high-growth portfolio overall, ex that, ex UroLift? Because, you know, assets like MANTA sometimes sort of fly a little bit under the radar, some details on how things are going there.
So I think what's important about the high growth portfolio, ex interventional urology, for me, is the end markets that they're growing into. So, within our high growth portfolio, you have our PICC portfolio that's growing into a $400 million-$500 million end market. You have our Hemostat portfolio, which is growing into a $600 million end market. You have our intraosseous portfolio, which is also growing into a $600 million-$700 million end market. You have the MANTA, which is growing into a $200 million-$300 million end market. And obviously, you have the Titan stapler, which is also growing into a $300 million end market. So there's lots of room for growth within the end markets.
What every one of those products have in common is their margin profile. The margin profile, everybody assumes that the UroLift product within that portfolio is the highest margin product within the high growth. It's not. In actual fact, Palette is accretive to the growth margin of UroLift. So Palette, in the interventional urology business unit, will now help move interventional urology up into the upper margin portfolio of that. So every dollar we grow in the high-growth bucket gives us leverage within our income statement and obviously helps us to expand our margins over the long term. Our investment is focused behind the high growth portfolio to ensure that we continue to expand and grow those products in excess of the average of the rest of the portfolio.
It is around 25% of our overall business. If you look through our LRP, by the time you get to the end of 2025, the high-growth bucket should be about $1 billion. You've got $1 billion of revenue growing well above the average for Teleflex, with greater margins leveraging the income statement in the longer term.
... You know, even today, Teleflex has a pretty attractive margin structure. And so I guess there's also an interplay for you between reinvesting and, you know, to keep driving the growth and then allowing some of the margin to drop down. How do you guys think about that in terms of, like, the relative puts and takes between those two?
Yeah, and we have given a lot of thought to that, and as was demonstrated within our long-range plan, and, you know, we're the first six months into our long-range plan right now. And if you look at the long-range plan, we had communicated that we'd grow the top line by 6%, and the high-growth bucket, you know, would grow in excess of 12%. So that helps with your margin profile. But we also communicated was our gross margins over that period of time would expand by 250 basis points, but the op margin would expand by 200 basis points, thereby allowing us to reinvest.
Exactly to your point, Patrick, allowing us to reinvest so that we could all continue to augment the growth of the high-growth portfolio, but also invest in R&D for future growth, and to invest behind some new technologies that we want to bring to the market.
And then the inevitable question, just because it's a hot button topic, GLP-1. Bariatrics, I think, is a comparatively small part of the business overall, but just any thoughts you have about that asset class, you know, long term and what it means for the business.
So there's no doubt that GLP-1s will have some impact on bariatric surgeries. My own view is that it's and I've spoken to many bariatric surgeons around this, and if you talk to them, it's going to be somewhat of an air pocket in the shorter term, where individuals will be taking the GLP-1. But do bear in mind that we are talking, when we're talking about gastric sleeves, we're talking about the morbidly obese patient, and for those to have an impact, they need a significant weight loss. So a gastric sleeve normally gets about a 30% weight loss. The weight loss in GLP-1 is much smaller than that. So a lot of times these people need a more drastic intervention in order to have an impact on them.
I think the other impact is that the payers insure these products for a period of time, and then it stops. The data will tell you, once you stop taking them, the weight loss that you've benefited from comes back and potentially more. That's why a lot of bariatric surgeons are saying this is an air pocket, because not all of their patients are going to be able to afford to spend, whatever it is, $14,000-$20,000 a year for these pharmaceuticals. So I think and also in the healthcare economics environment, you have $14,000-$20,000 a year forever to gain a 20% loss, or a surgery that's probably going to cost $15,000 to the system for a 30% loss that should be maintainable over the long term.
At some stage, there has to be a balancing here of is a surgical intervention what's better for the patient, but also better for the ecosystem and the healthcare environment? So there is a lot of enthusiasm for GLP-1. But if you speak to the surgeons themselves who are dealing with these patients, they all seem to think that it is somewhat of an air pocket right now in relation to bariatric surgery. But your point is absolutely correct, Patrick. I mean, bariatrics is a very, very small part of our overall portfolio.
We spoke to one bariatric surgeon who got a panicked call from his administrator because they were spending, just in his hospital, $1.4 million a quarter on GLP-1s just for their own employees, and they're trying to work out how to spend not that much as well.
Well, I think, you know, that speaks to the point that some of this is being taken as a lifestyle drug. I'm sure that... Well, I'm not sure, but I would make an assumption that 1.4 million, they didn't have that many morbidly obese patients in their hospital, I'm assuming. But, so that's part of what needs to be addressed as well.
We, we've come out of and gone through a very aggressive cost inflation environment, which has been, you know, a little tricky for, I think, everybody. I guess two questions. One, very recently, how have you seen that sort of trend for your business? And in connection with that, you've perhaps been somewhat less aggressive than a couple of your peers in terms of taking price. How do you think about the interplay between volume share and price and... Yeah.
So I'll start with the price, and then I'll turn to the inflation part of the question. I think in relation to price, price is a tricky one. You know, in I've been in medical devices for almost 30 years, and I've never had a customer call me up and say, "Hey, Liam, where's my price increase?" And in an environment there was no pricing, I can tell you there's an incredible price discipline within Teleflex. When no company was taking pricing, we were eking out 20 basis points a year, year after year after year on our most differentiated portfolio. We're taking a very measured approach to pricing in this environment because we want to ensure that it doesn't impact volume.
We have a 6% CAGR over the LRP that we are going to hit, and we're going to hit that, and that needs volume in order to hit it. We are confident we are able to deliver in excess of 50 basis points this year, as we did in excess of 50 basis points last year. I think you'll see around 50 again next year, and then it'll taper back a little bit, back down to that 20 or 30 in the years after. But we'll be able to maintain pricing, I believe, over a multi-year period. And we're thoughtful insofar as that we want to make sure that it doesn't ultimately impact our volumes in the longer term. So we're acutely focused on that.
With regard to inflation, we have seen improvements as we've gone through the year, in particular in freight inflation. Freight inflation is back to where it was. Wage inflation was never that big of an impact for us. Candidly, as we went through the cycle, it was really material inflation. Material inflation really peaked around quarter four. It stabilized for the last two quarters. We are watching it very closely between now and the end of the year to see, do we get some disinflation, not deflation, but disinflation, in the remainder of the year, which is a potential, I believe, because resin prices have started to come back down on the indices. And I think the environment for suppliers to push on excess pricing, the labor market has expanded a little bit.
So I feel that we'll be monitoring that closely, but it is very stable right now and an improving trend that we're seeing as we sit here two months through quarter three.
That makes sense. And then you, you obviously, for both of you, you know, there's a lot of projects internally. Bit of a mean question, but if you couldn't pick Palette, and you had to pick one other project each that you sort of you've seen internally, it doesn't even have to be the material, but like you find interesting or excites you, and I'm not asking you to pick your favorite child, but like, what, what project? Like, is there something that kind of gets you going internally?
So I think as we looked at Palette, and I think, we were not just looking at one asset when we looked at Palette. We were probably, at the time, looking at in excess of eight assets at that time, and they ranged in valuation from anything from $300 million to over $1 billion. Now we were really lucky to get Palette, very happy to have that in the family. But we're still talking to some of those other assets. I can't tell you what they are, obviously, but we are still in conversations because we've still have lots of firepower. Our leverage right now, pro forma, is about 2.5 x. By the end of the year, we'll be at about 2 x.
So we still have lots of firepower, and I think the environment is still very positive for private companies in particular, is where we're focused, and our ability to execute against that. Internally, I think increasing some spend on R&D is important, and I think there are some very exciting opportunities in front of Teleflex. We just launched the new PICC positioning system, the Ritz, which will help augment the PICC portfolio. We have a number of new projects that we're working on in relation to our EZ-IO portfolio, the intraosseous portfolio that I'm quite excited about, that we're investing behind. And also we've continued to invest behind EasyPlast. That still is a product that we're investing behind to bring into the future.
There's never a shortage of opportunities to invest in, Patrick, within Teleflex. And I think some of the areas where we're putting our capital to work will definitely give longer-term returns to the shareholders and be quite exciting for our investors.
Are any internal ones?
Yeah, just the one thing I would add is, within the interventional access business, that's an area that we continue to see as ripe for opportunity. We've got a lot of projects. You're kind of seeing the tip of the iceberg right now, but that's another area that, we're certainly investing in because we think there's real opportunity around both, you know, where we sit today in complex PCI interventions as well as in structural heart.
Then, you obviously talked about capital deployment and extra firepower. What kind of rough areas are you very generally thinking about? I guess that's, that's from a business perspective, but then also, you know, how do you ensure like, the culture fit is good? Because I've seen stuff go badly wrong on culture, which everyone always rolls their eyes when you mention it because it's kind of intangible, but how do you make that work?
I, I think the cultural aspect is more pronounced when you're doing transformational deals. And when you have seen it hit a rock, it's normally these bigger, bigger deals. I, I think that the most important thing when you're bringing an asset in is to be respectful. I mean, you take a step back and you're buying this asset. Why the heck are you buying this asset? Because they have done an extraordinary job, and you're interested in it because of the extraordinary job they've done with that asset. It's the same with Palette. And I think one of the things I'm probably proudest about within Teleflex is our own culture. You know, our core values resonate throughout the organization.
They're not stuck up in my office on the wall, but if you go to any factory in Teleflex, or you go to any of our offices around the world, and you ask an associate, "What are the core values of Teleflex?" They will tell you that it's entrepreneurial spirit, make it fun, building trust with people at the center of everything we do. And I think as you're bringing companies in, that cultural aspect, you want people to align to that. Now, who doesn't want to be aligned to having an entrepreneurial spirit, making it fun, building trust, and focusing on people and the patients? So I think the cultural aspect, we're able to manage very, very well. And by gosh, we're good at finding assets, and we're good at integrating them into Teleflex.
With regard to your question on areas that we'd like to focus on. For me, it's a lot of a call point. Where have you got an existing relationship with that you can leverage it? Unashamedly, I like the cath lab. Anything that within the cath lab, to me, is an attractive opportunity. Larry mentioned interventional access. It's an area of growth for us this year, for sure, and continues to grow and will grow over a multi-year period. I really like the intensive care unit as a call point. Our vascular team are there every single day. Emergency medicine, Z-Medica, has been a tremendous asset for us, as an organization, and I think we'll integrate Palette, and then we'll look for something else in the men's health arena thereafter. I do a token in OEM in the morning.
I do a token in surgical, once we've got a Standard Bariatrics fully integrated. But our integration of assets, I think, has been stellar. I think we've done a really... The team has done an exceptional job in integrating the assets. I mean, Z-Medica continues to perform exceptionally well. We've integrated our ERP system, and nobody even noticed, and that's what you want. You want to implement an ERP system without hitting a bump on the road, and we've also integrated the sales forces together and continued the growth.
And, Patrick, sorry, I would just add one other item there, which is we're really not looking to add another leg to the stool. We're really happy with the businesses that we participate in, the call points that we have, and we feel that there's enough white space in there to bring things in that leverage the relationships and call points that we have.
Got it. It's a consistent strategic direction.
Exactly.
Yeah.
Have you seen private asset valuations become a little more realistic? Because it always takes time for that lag effect. How are those discussions?
I hate to answer it this way, but it depends on the asset.
Sure.
Look, Palette wasn't inexpensive as an asset, but it's a great asset. What makes it a great asset is the growth profile, the channel that we have into it, and the margin profile. If you think about it, having a margin profile in excess of UroLift margins is pretty compelling. If you look at other assets out there that might not have that compelling, yes, the valuations have come back on those, and some of them actually have failed to trade. There have been a number of assets that have come to the market that have not actually executed on their exit strategy because of the valuation dynamic out there. The IPO market, I believe, remains closed. You'd know better than me, but I think it does still remain firmly closed.
And look, at the first IPO that comes out there is gonna have to be a pink unicorn, and it's gonna have to get discounted to get attention. That's just the reality of it. So who wants to be the pink unicorn that's going in there first? With a discounted value, you're much better coming to Teleflex and making a definitive exit. So I think the market remains robust. As I said, we were looking at a number of assets at the time we executed on Palette, and we're still looking at them. And those are all attractive to us. Now, like everything in life, there's a few up at the top end that I like better, you know, back to your favorite children comment.
I have a few favorites within there, and the team does, and we're working to execute against that.
I guess finally, you know, outside of the fact that the market's been too obsessed over your UroLift, outside of that, you know, what aspects of, like, Teleflex and the story and the thing do you feel is potentially underappreciated in the market?
So I think that, you know, 90% of Teleflex has performed exceptionally well over the last two years. I think that the organic growth that we mentioned, that, you know, whatever growth that we target for next year will be organic, and therefore, by definition, the 6% within the LRP is organic. And I think that the parts of our portfolio that continue to perform exceptionally well, the bulk of our portfolio is operating well, but in particular, our interventional access, as I mentioned, our OEM business and also our Asia-Pacific, from a regional perspective, businesses have been performing very well. Obviously, our vascular business and anesthesia is also doing well. But I think what's misunderstood is that the... We are gonna grow 6%. We will expand our margins. We will drive earnings growth.
If that comes from this bucket or that bucket, as long as we get to those overall goals, I think that's what should be important, rather than the fact that 10% of our business is not doing as we would have thought two years ago. I think that's probably the most misunderstood. I think the top-line growth that we're gonna drive is organic, and we will drive a 6% CAGR over the period, and we will begin to demonstrate that in year one of the three-year plan.
Amazing. Perfect timing as well. Liam, Larry, thank you so much.
Excellent.
Patrick.