Teleflex Incorporated

Ladies and gentlemen, thank you for standing by, and welcome to the first quarter 2020 Teleflex, Inc. earnings conference call. At this time, all participant lines are in listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference to your speaker today. Jake El-Louis, Treasurer and Vice President of Investor Relations. Please go ahead, sir.

Good morning, everyone, and welcome to the Teleflex Incorporated First Quarter 2020 Earnings Conference Call. The press release and slides to accompany this call are available on our website at www.teleflex.com. And as a reminder, this call will be available on our website, and a replay will be available by dialing 855-3255. 859-2056 or for international calls 404-537-3406, passcode 754-5905. Participating on today's call are Liam Kelly, President and Chief Executive Officer, and Thomas Powell, Executive Vice President and Chief Financial Officer. Liam and Tom will provide prepared remarks and then we'll open up the call to Q&A. Before we begin, I'd like to remind you that some of the matters discussed in the conference call will contain forward-looking statements regarding future events as outlined in our slides. We wish to caution you that such statements are in fact forward-looking in nature and are subject to risks and uncertainties, and actual events or results may differ materially. The factors that could cause actual results or events to differ materially include, but are not limited to, factors referenced in our press release today, as well as our filings with the SEC, including our Form 10-K, which can be accessed on our website. With that, I'd like to now turn the call over to Liam.

Thank you, Jake, and good morning, everyone. It's a pleasure to speak with you today. Before I get into the details of our quarterly performance, I'd like to offer my condolences to anyone who has been impacted by the coronavirus, as well as my sincere thanks to all the healthcare workers including Teleflex workers who have returned to clinical practice, who put themselves at risk to battle COVID-19 every day. I'd also like to take a moment to recognize the Teleflex employees around the world. These past few months have been far from normal, and our employees continue to inspire me as they have stepped up in extraordinary ways to ensure that we are able to provide our products to the hospitals, clinicians, and patients who need them most. So a big thank you to all Teleflex employees. Now on to our quarter one results. The first quarter of 2020 was a solid start to the year for Teleflex, particularly when you take into consideration the global escalation of the COVID-19 pandemic. During quarter one, we generated constant currency revenue growth of 4%, while on a selling day neutral basis, our constant currency revenue growth was approximately 5.5%. Quarter one revenue growth was driven by the performance of our Americas, EMEA and OEM segments, while our Asia segment experienced a decline due to COVID-19. From a margin perspective, we generated adjusted gross and operating margins of 57.3% and 25.6% respectively. This translates into year-over-year growth of 60 basis points at the gross margin line and 190 basis points at the operating margin line. while from an adjusted earnings per share standpoint, we achieved a robust year-over-year increase of 21.4%, as earnings per share totaled $2.72 during the quarter. I'm extremely pleased in our ability to drive significant leverage throughout the income statement while navigating through a very difficult operating environment. It is a testament to the strength of the diversified global portfolio we have built over the past few years. Next, I thought it would be helpful to provide some context regarding how we saw COVID-19 impact our first quarter results. As a reminder, our previously provided full year 2020 financial guidance assumed that we would be negatively impacted from COVID-19 by between $5 million and $10 million in the revenue and between five and 10 cents of adjusted earnings per share. This was assumed to all be related to our business within China, and it was expected to only be a quarter one event. It is important to keep in mind that when we provided our guidance on February 20th, COVID-19 was largely only impacting China. As we progressed through the first quarter, the months of January and February, as well as the first two weeks of March, were largely in line with our initial expectations. and we did not see much of a negative impact outside of China. However, as the virus began to spread further globally, coupled with the announcement from the American College of Surgeons and the Surgeon General requiring hospitals to postpone any procedures that are considered to be non-emergent or elective in nature, we began to see more of a pronounced negative impact during the last few weeks of the quarter. And while we estimate that only one-third of our product portfolio is correlated to non-emergent or elective procedures, we still felt an impact to our business. During the last few weeks of March, this additional headwind largely occurred within the Americas, and primarily within our interventional urology, interventional access, and surgical product lines. We did see some offset within the Americas from increased sales of certain respiratory products. However, that was not enough to offset the lost revenue and margins from the cancelled procedures. Turning to EMEA, we saw significant increased demand for certain vascular access, respiratory, and anesthesia products, and we estimate that our results within this part of the world benefited due to increased demand for our products used in the treatment of patients with COVID-19. While within Asia, the impact on COVID-19 was in line with our previous assumptions. In total, during the quarter, we experienced a revenue headwind that was slightly worse than our initial guidance contemplated, while at the adjusted earnings line, the headwind was in line with the high end of our original estimates. This is despite our guidance anticipating an impact in China only, as the virus has expanded beyond China to the rest of the world. Next, I'd like to provide you with our thoughts as we look forward to the remainder of the year. First and foremost, I want to share with you the guiding principles we established as a framework for decision-making through the crisis. Employee and customer safety first, communicate with transparency, and manage the business to accelerate through the recovery. On safety first, Let me just say that the health and safety of our workers is paramount. As such, we have implemented best practices for health and safety guidelines in accordance with the World Health Organization, the CDC, and local health authorities. For communicating with transparency, we have formed a global crisis management team to coordinate our actions and engage our employees with regular updates. And, on managing the business to accelerate through the recovery, we remain committed to investing the resources necessary to support increased demand due to COVID-19 for certain product lines while maintaining adequate inventory to benefit from a phased recovery. Second, to date, we have had minimal disruptions within our global supply chain. However, this is a very fluid situation and things can change quickly. As an example, because of certain restrictions placed by the governments of both India and Malaysia, we are not currently operating at 100% capacity at certain facilities within those countries. But this restriction has not impacted any critical respiratory, airway, or vascular products required in the fight of COVID-19. Indeed, for critical respiratory product families, we have been able to achieve significant increases in production over the past four to six weeks. In fact, Only a few days in advance of this earnings call, we learned that the Malaysian government was removing certain restrictions they had placed previously, which we expect will enable us to be in a position to increase our production capacity back up to 100% within our Malaysian facility over the next week. And while we continue to do our best to meet customer demand for most of our products, we are having to place certain respiratory, vascular, and anesthesia products on allocation due to elevated order rates and increased delivery times associated with those products. Third, based on trends that began in the latter half of March, we expect that the deferral of certain non-emergent and elective procedures will continue to negatively impact our interventional urology business and certain portions of our surgical and interventional access product lines. As I mentioned earlier, we estimate that only about one-third of our product portfolio is used within procedures that are capable of being deferred. That is not to say that all of these procedures are being deferred due to the criticality of some patients. We also believe deferment cannot occur indefinitely, as the patient's underlying conditions are not improving simply because they wait to get a procedure performed. Conversely, Once the United States begins to reopen, we believe that elements of our portfolio could benefit from recovering outpatient and day case elective procedures as states reach the White House Phase 1 status, while the remainder of our portfolio impacted by COVID would recover in Phase 2. Further, I'd like to advise the investment community that our portfolio has very limited capital equipment exposure. It is our belief that Urolift procedures would be the first to come back in phase one. Approximately 60% of those procedures are performed in an office or ASC setting. Based on discussions that we have had with several high-volume users of Urolift, their belief is that they should have the capacity to perform a significant amount of the procedures they previously had to postpone. The remaining 40% that are performed in the hospital do not require an overnight stay and are also designated as Phase 1. It is our belief that once consumer confidence is re-established, we will begin to see a recovery here also. Following the return of EURLA procedures being performed, we would envision that our interventional access and surgical business would rebound next. As a result, we have positioned our business to be able to take advantage of that increased demand when it occurs. This includes building certain safety stock and making sure that we have the appropriate amount of inventory on hand. Additionally, we have not furloughed or laid off employees. Rather, we want to make sure that we retain our key sales and clinical personnel and keep them motivated in anticipation of procedures returning. However, to somewhat mitigate the negative financial impact stemming from the reduction of certain procedures, we have taken steps to curtail operating expenses. This includes the adjustment of certain executive and management compensation, as well as the elimination of any discretionary spending that was not critical to the organization. We've also made the decision to delay our national direct-to-consumer Eurolist campaign. With that said, given that we cannot accurately predict the scope and timing of the recovery, we are withdrawing our previously provided 2020 financial guidance. Despite needing to remove our 2020 guidance, I remain confident that our long-term global opportunity remains significant and our business is well positioned to weather the COVID storm and accelerate in the future. With that said, let's turn our attention to first quarter financial results. I will begin with a review of our reportable segment revenues, and unless otherwise noted, the growth rates I will refer to are on a constant currency basis. The Americas delivered revenues of $358 million in the first quarter, which represents an increase of 4.3%, while on a selling day neutral basis, the Americas grew approximately 6%. Growth within this region was driven by our interventional urology, vascular access, and respiratory product categories, and would have been significantly higher had it not been for the negative impact of COVID-19. EMEA reported revenues. of $156.1 million in the first quarter, representing 3.8% growth, while on a selling day neutral basis, EMEA also grew approximately 6%. Growth within this region was driven largely by broad strength across our vascular access and respiratory portfolios, and as I stated earlier, we estimate that EMEA benefited from elevated ordering related to COVID-19. Turning to Asia. Revenues totaled $53.1 million in the first quarter, which represents a decline of 9.2%. There was no impact to this region's growth rate from selling day differences. However, we estimate that we would have had positive constant currency revenue growth had it not been for the impact of COVID-19. And lastly, our OEM business reported revenues of $63.4 million in the first quarter. which represents an increase of 17.5%. Like India, selling day differences had little impact on our OEM business. Growth was driven by a mixture of additional revenue coming from the acquisition of HPC, coupled with an increase of sales volumes of existing products. We do not believe that COVID-19 had a material impact on our OEM business during the first quarter. However, that may change as we move throughout the year. As it relates to the acquisition of HPC, the integration efforts are well underway and I am very pleased with how the business is performing under our leadership. Let's now move to a discussion of our revenues by global product category. Consistent with my prior comments regarding our reportable segments, commentary on global product category growth will also be on a constant currency basis, starting with basket or access. Due to growth within both our PIC and EZIO products, quarter one revenues increased 5.6% to $150.3 million. We estimate that COVID-19 positively impacted the growth rates of our vascular products during the first quarter, while one less selling day negatively impacted growth. Moving to interventional access. First quarter revenue was $99.9 million, which represents a decline of 2.3%. During the quarter, growth in Manta, On Control, and Interarctic Balloons was more than offset by declines in complex and drainage catheters, as well as one less selling day. Our interventional business also faced a difficult comparison in Q1, as revenue associated with our divested catheter reprocessing products still occurred during Q1-19. Additionally, we estimate that COVID-19 negatively impacted the growth rates of our interventional access products during the first quarter as certain non-emergent procedures were canceled. Now to anesthesia. Quarter one revenue was $75.7 million, which represents a decline of 3.9%. The decline in revenue was due to lower sales of laryngeal masks and certain regional anesthesia products, as well as the impact of one less selling day. As it relates to COVID-19, we estimate that it had a negligible impact during the first quarter. Shifting to our surgical business. Revenue declined by 11.5% to $75.4 million, driven largely by the impact of COVID-19 and Sterigenics Atlanta plant shutdown and one less selling day. Moving to interventional urology. Quarter one revenue increased 24.3% to $74.2 million. Revenue growth rates during the months of January and February, as well as the first couple of weeks of March were significantly higher than the quarterly growth rate we achieved, as Urolift was off to a fantastic start to the year. Unfortunately, the cancellation of elective procedures because of COVID-19 impacted this product line more than any other within our portfolio. As I stated earlier, because the Urolift procedure is performed in an outpatient, lower acuity setting, we would envision Urolift would be one of the first types of procedures that will be performed once the United States reopens. And finally, our other category, which consists of our respiratory and urology care products, grew 9.2%, totaling $91.7 million. In large part, we estimate that growth during the quarter was due to increased demand for respiratory products, such as filters and humidification, resulting from COVID-19. That completes my comments on quarter one revenue performance. I would now like to turn the call over to Tom for a more detailed review of our first quarter financial results. Tom?