Teleflex Incorporated

Thank you for standing by and welcome to the third quarter 2020 Teleflex Incorporated earnings conference call. At this time, all participants are in a 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 one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would like to hand the conference over to your speaker today, J. Cole-Deweese. Treasurer and VP of Investor Relations. Thank you. Please go ahead, sir.

Good morning, everyone, and welcome to the Teleflex Incorporated Third Quarter Earnings Conference Call. The press release and slides to accompany this call are available on our website at www.teleflex.com. As a reminder, this call will be available on our website, and a replay will be available by dialing 855-859-2056. or for international calls, 404-537-3406, passcode 498-7865. Participating on today's call are Liam Kelly, Chairman, 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. Additionally, during this conference call, you will hear management make references to the estimated positive or negative impacts as a result of COVID-19 during the third quarter of 2020. You'll also hear management make statements regarding intra-quarter business performance during the month of October. Management is providing this commentary to provide the investment community with additional insights concerning trends, and these disclosures may not occur in subsequent quarters. 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, and I hope you're all keeping safe and well. Overall, considering the environment we are operating in, we are pleased with our third quarter performance as it reflected the expected improvement in trends across many of our global product categories, led by a faster than expected recovery within our interventional urology business and continued strength within our vascular access product sales. While from a regional perspective, we saw particular strength within the Americas, as the pace of recovery in the United States during the third quarter was encouraging. Quarter three revenues was $628.3 million, which was down 4.1% as compared to the prior year period on a constant currency basis. but far better than the 12% decline we experienced during the second quarter of the year. The decline in year-over-year revenue is due to the impact of COVID-19, which we estimate caused a net negative impact of approximately $78 million, or approximately 12%. If we were to normalize for the negative COVID impact, we estimate that our underlying business grew by approximately 8% on a constant currency basis, consistent with our quarter two revenue performance. We also saw a significant sequential improvement within our adjusted growth and operating margins from the levels achieved during the second quarter, with our adjusted earnings per share of $2.77 in the quarter meaningfully exceeded our internal expectations. This reflects the continued recovery we saw as we moved through the quarter, coupled with prudent operating expense management. Before I go into more detail on our quarterly financial performance, I am happy to announce that during the month of October, we signed a definitive agreement to acquire ZMedica, a market leader in hemostatic products. We are pleased to be able to deploy capital for a differentiated product portfolio that leverages existing Teleflex call points and is immediately accretive to our revenue growth rate adjusted gross and operating margin profile, and to our adjusted earnings per share. Turning to a more detailed review of our third quarter results. As I just mentioned, quarter three revenue declined 4.1% on a constant currency basis and 3.1% on an as reported basis. The decline in revenue was due to COVID-19, which we estimate had a negative impact of approximately $81 million across several global product categories. This was somewhat offset by approximately $3 million of additional revenue within our vascular access and other product categories, which experienced modestly higher than expected demand as a result of COVID-19. From a margin perspective, we generated adjusted growth in operating margins of 57.2% and 25.1% respectively. This translated into a year-over-year decline of 140 basis points at the gross margin line and 190 basis points at the operating margin line. That said, we saw a sequential improvement of 330 basis points on both the adjusted gross and operating margin lines as compared to the levels we achieved in the second quarter. On a year-over-year basis, reduced sales volumes due to COVID was a headwind. However, it was partially offset by our cost containment efforts as we continue to tighten our belts where we deem appropriate in the current environment, balanced against continued investment to sustain our long-term growth aspirations. Adjusted earnings per share was $2.77, down 6.7% year-over-year, but ahead of our internal expectations as the business continued to recover during the quarter. When excluding the negative impact of COVID-19 had on our third quarter results, we estimate that our adjusted earnings per share would have grown approximately 13% as compared to the prior year period. Overall, I am very pleased with our financial performance as it demonstrates the resiliency of our diversified global product portfolio. Let's turn to a discussion on our quarterly revenue trends, which will be on a constant currency basis. The Americas delivered revenues of $375 million in the third quarter, which represents an increase of 0.4%. Growth within the Americas was driven by vascular access and respiratory products, which both saw elevated demand driven by COVID. In addition, interventional urology was a strong contributor as Urolift continues to be one of the fastest recovering procedures. However, there were offsets With declines in other product categories, we estimate that the Americas would have grown approximately 9%, excluding the impact that COVID-19 had on the region. EMEA reported revenues of $135.7 million in the third quarter, representing a decline of 7%. During the quarter, declines occurred across most product categories, as increasing COVID infection rates negatively impacted procedures and results. Adjusting for COVID, we estimate an approximately 3% underlying decline for the region. Turning to Asia, revenues totaled $68.2 million in the third quarter, which represents a decline of 14.2%. However, we estimate that we would have had positive constant currency revenue growth in the high single digits, if not for the impact of COVID-19. Additionally, during the third quarter, we began transitioning a distributor in Japan. When normalizing for both COVID and the distributor change, growth in the region would have been closer to the low double-digit range, consistent with our longer-term outlook. And lastly, our OEM business reported revenues of $49.4 million in the third quarter, which was down 11.8% on a constant currency basis. As we anticipated, during the third quarter, our OEM business saw a lagged impact related to COVID, relative to our other businesses. Investors familiar with Teleflex will be aware that our OEM business supplies medical companies with complex catheters and surgical sutures, and the quarter three impact reflects reduced orders from these customers, whose business is tied to non-emergent procedures. Excluding the estimated COVID-19 impact, the business grew roughly 28%, which includes a benefit of approximately 11% from the acquisition of HPC. As it relates to HPC, I am pleased to report that we remain on track with our integration efforts. Let's now move to a discussion of our revenue by global product category. Starting with vascular access. Due to growth within both our PIC and EGIO products, Third quarter revenue increased 6.8% to $160 million. We estimate that COVID-19 positively impacted the growth rates of our vascular products during the third quarter by approximately 1%. Moving to interventional access. Third quarter revenue was $93.2 million, or down 13.5% as compared to the prior year period. The decrease was largely due to the delay in the recovery of certain non-emergent procedures because of COVID-19, along with the negative impact stemming from a catheter recall that occurred during the quarter. We estimate that the recall impacted our business negatively by approximately $4 million. The impact on the recall will continue to linger for the next several quarters, as we do not expect to be back on the market with this product until September of 2021. When normalizing for the impact that COVID had on these product lines, we estimate that underlying growth was in the low single digits. Turning to anesthesia, revenue was $75.7 million, which is lower than the prior year by 14.4%. The revenue decline was the result of lower sales of laryngeal masks, regional anesthesia, and area management products. We estimate that COVID had an approximately 10% negative impact in the quarter, implying mid-single-digit declines for the business on an underlying basis. Shifting to surgical. Revenue declined by 12.3% to $82.2 million, driven by lower sales of our ligation and instrument product lines. We estimate a 13% headwind from COVID during quarter three, indicating recovery, as compared to the estimated 30% COVID headwind in quarter two. Moving to interventional urology. Quarter three revenue increased by 11%, to $81.8 million. We estimate an approximate 29% COVID-19-related headwind during quarter three. Notwithstanding the significant headwind on our growth in quarter three, we are pleased with the path of recovery for this business unit and are also happy with the early impact of our national DTC campaign, which is exceeding our expectations. Additionally, we are encouraged that we trained 120 new urologists in quarter three moving to a cadence that is consistent with our expectations prior to COVID. And finally, our other category, which consists of our respiratory and urology care products grew 0.5%, totaling $86 million. In large part, we estimate that growth during the quarter was due to increased demand for certain humidification and breathing products resulting from COVID-19. From a monthly perspective, we note that September outperformed July and August when normalizing for the distributor termination and the product recall within our interventional business. Furthermore, as we have progressed through the first few weeks of October, we continue to see additional modest improvements as compared to last October. That said, due to the significant resurgence of COVID cases globally and when normalizing for selling days, we expect to see a modest improvement in the constant currency revenue performance during quarter four as compared to the decline of 4% we achieved in quarter three. Tom will provide more details later. That completes my comments on quarter three revenue performance. Turning to some recent clinical and commercial updates. Starting with Eurolift. The response to our national DTC campaign is exceeding our expectations. The strategic role of DTC is important, as about half of the 12 million men being treated for BPH believe prescription medications are their only solution. Thus far, we are tracking well against the target to generate 6x the number of impressions from the regional campaigns in the year-ago period. Web traffic has increased over 150% since the launch, and another encouraging metric is that multiple urologists are now motivated to get trained on UroLift as a result of patient requests due to the campaign. In addition, while there was likely a nominal impact on quarter three results, we expect the momentum for the campaign to continue building into quarter four and early next year as we turn down the advertising full strength starting in early September. Turning to EuroLift 2. Since the FDA clearance on July 31st, we have begun a market acceptance test and received positive preliminary feedback, including the streamlining of the delivery device triggering mechanism and the reduction of waste. We are also increasing manufacturing levels for the product ahead of the full commercial launch slated for early in 2021. Lastly, regarding the Urolift ATC, we note that the market acceptance test is well underway and we have received very positive feedback, which indicates that the device is delivering on the intended benefit of enhanced tissue control when treating challenging anatomies such as obstructive median lobe. Taken together, we see these efforts as helping to build momentum as we seek to further expand our leadership position in BPH. Turning to the next slide on key commercial updates. We recently received an expanded indication for eZIO as the device can now be used for up to 48 hours when alternate intravenous access is not available in both adults and pediatric patients 12 years and older. While we do not expect a material sales uplift from this label expansion, we are always looking to improve our portfolio based on clinician feedback, and this is a prime example of those efforts. Lastly, I'd like to provide the investment community with a few more details of the ZMedica acquisition we announced last night. In mid-October, we entered into a definitive agreement to acquire ZMedica, an industry-leading manufacturer of hemostatic products. Under the terms of the agreement, Teleflex will acquire ZMedica for an upfront payment totaling $500 million and up to an additional $25 million upon the achievement of certain commercial milestones. As part of the transaction, Teleflex will also be acquiring certain tax attributes that are expected to result in future tax benefits. We value these tax attributes at approximately $40 million, which we considered when arriving at our purchase price. Z-Medicus hemostatic technologies are helping reinvent hemorrhagic control, with cost-effective, efficient bleeding control solutions being adopted by markets worldwide. The company offers three main brands, Quick Clash, Combat Gauze, and Quick Clash Control Plus, which utilize a proprietary technology consisting of gauze impregnated with kaolin. The technology activates and accelerates the body's natural clotting ability. ZMedica's products currently focus on the trauma surgery, EMS, military, emergency departments, and interventional segments, with opportunities to expand into additional indications over time. Teleflex's strategy is to invest in innovative products and technologies that can meaningfully enhance clinical efficacy, patient safety, and comfort, reduce complications, and lower the overall cost of care. The acquisition of ZMedica enables Teleflex to leverage strength in the hospital, EMS, and military call points with the differentiated products that complement our EZIO and EZPLAS product portfolio. We are excited to announce this acquisition given its above-company average revenue growth capabilities as well as its above-company average gross and operating margin profile. Pending the receipt of certain regulatory approvals, the transaction is expected to be completed during the fourth quarter of this year. As we look forward, the transaction is expected to contribute between $60 million and $70 million of revenue and between $0.07 and $0.15 of adjusted earnings per share in fiscal year 2021. Beyond 2021, we expect the acquisition to deliver a high single-digit revenue growth profile and further accretion to adjusted earnings per share. On EasyPlaz, After our recent meetings with the FDA, we determined to proceed with the BLA submission rather than an EUA. We continue to work closely with the agency in determining the timing of that submission. Overall, we continue to invest organically in clinical and commercial catalysts that will help to sustain our revenue growth aspirations in a normalized environment. We will also look to augment those internal efforts through the deployment of capital for inorganic growth opportunities, such as ZMedica. That completes my prepared remarks. Now I would like to turn the call over to Tom for a more detailed review of our third quarter financial results. Tom?