Teleflex Incorporated

Please stand by. Good morning, ladies and gentlemen, and welcome to the Teleflex second quarter 2023 earnings conference call. At this time, all participants have been placed on listen-only mode. At the end of the company's prepared remarks, we will conduct a question and answer session. Please note that the conference call is being recorded and will be available on the company's website for replay shortly. And now, I will turn the call over to Mr. Lawrence Kirsch, Vice President of Investor Relations and Strategy Development.

Good morning everyone and welcome to the Teleflex Incorporated second quarter 2023 earnings conference call. The press release and slides to accompany this call are available on our website at teleflex.com. Please note that webcast viewers will have the ability to advance the presentation slides on their own. Simply follow along with the presentation as you proceed through the call. As a reminder, a replay will be available on our website Those wishing to access the replay can refer to our press release from this morning for details. 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 will open the call to Q&A. Before we begin, I'd like to remind you that some of the matters discussed in this conference call will contain forward-looking statements regarding future events as outlined in the slides posted to the investor relations section of the Teleflex website. 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. Now, I'll turn the call over to Liam for his remarks.

Thank you, Larry, and good morning, everyone. It is a pleasure to speak with you today. On this morning's call, we will discuss the second quarter 2023 results, our pending acquisition of Palette Life Sciences, and our financial guidance for 2023. Turning to the second quarter, Teleflex revenues were $743.3 million, a year-over-year increase of 5.5% on a reported basis and an increase of 5.9% on a constant currency basis. Second quarter adjusted earnings per share was $3.41, a 0.6% increase year-over-year. We saw stable utilization in the acute care setting in our global markets. The balanced performance in the quarter continues to demonstrate the benefits of Teleflex's diversified product portfolio and broad geographic footprint. From a macro perspective, we continue to see sequential stabilization with respect to material inflation and will continue to monitor trends during the second half of 2023. Our supply chain remains stable in the second quarter, although we are still not yet at normal levels as expected we witnessed a continued stabilization in hospital staffing this was evident in our second quarter revenue growth as most teleflex products are exposed to the hospital setting conversely we are still experiencing geographic pockets that are encountering more persistent staffing disruption in the asc and office side of service but note that bottlenecks are seeing some easing. Now, let's turn to a deeper dive into our second quarter revenue results. I will begin with a review of our geographic segment revenues for the second quarter. All growth rates that are referred to are on a constant currency basis unless otherwise noticed. America's revenues were $424.7 million. which represents 3% growth year over year. In particular, we saw strong performances in our vascular interventional and surgical businesses. EMEA revenues of $147.8 million increased 0.7% year over year. During the quarter, we saw strength in our vascular and urology drainage businesses. Turning to Asia, revenues were $86.7 million. increasing 19.1% year-over-year. During the second quarter, we saw stable demand across the region, including growth in excess of 20% in China. From a product perspective, we saw strong double-digit growth in interventional access and interventional urology in the region. Let's now move to a discussion on our second quarter revenues by global product categories. Commentary on global product category growth for the second quarter will also be on a constant currency basis, starting with vascular access. Revenue increased 6.6% to $173.8 million. We executed well during the second quarter. Initial launch activities for our next generation Arrow VPS Rhythm DLX navigation device and the new Arrow PIC preloaded with the NABI curve stylet have generated a positive customer response. Over the long term, we remain positioned for dependable growth with category leadership in central venous catheters and midlines, anticipated share gains with our novel CODA PIC portfolio, and new product introductions. Moving to interventional access. Revenue was $124.8 million. up 9.6% year-over-year. Procedure volumes remain stable in the quarter, and we continue to benefit from our diversified portfolio. Balloon pumps, right heart catheters, and access and closure all grew at double-digit rates. Manta continues on a trajectory for strong double-digit growth in 2023. Turning to anesthesia. revenue was $100.8 million, down 3.6% year over year. A tough year over year comp due to timing of military orders in the prior year period impacted results. In our surgical business, revenue was $106 million, up 7.7% year over year. In the quarter, we advanced our integration of standard bariatrics and training of new surgeons on the use of the Titan SGS stapler in sleeve gastrectomy procedures is accelerating. For interventional urology, revenue is $77.8 million, representing a decrease of 2.3% year-over-year. Once again, we witnessed year-over-year growth for Urolift in the hospital setting, but the office site of service remains challenging. The overseas launch activities continue to progress in line with expectations, with Japan Eurolift usage growing in line with our expectations. OEM revenues increased 19.8% year-over-year to $84.1 million. The strength in the quarter was broad-based across our portfolio, with double-digit growth in all of our product categories, including microcatheters. We continue to have good visibility into the business and see solid demand dynamics throughout 2023. Second quarter other revenue increased 4.8% to $76 million year over year. We continue to expect all MSA revenues to cease at the end of 2023. That completes my comments on the second quarter revenue performance. Turning to some commercial updates. On July 26, we announced a definitive agreement to acquire privately held Palette Life Sciences for an upfront cash payment of $600 million at closing and up to an additional $50 million on the achievement of certain commercial milestones. The acquisition will expand Teleflex interventional urology to include a portfolio of fast-growing non-animal stabilized hyaluronic acid or NASHA spacer and tissue bulking products that improve patient outcomes in urology, urogynecology disorders, colorectal conditions, and radiation oncology procedures. Palette is estimated to generate net sales of approximately $56 million on a standalone basis in fiscal year 2023. We believe Palette will contribute meaningfully to our growth in the coming years with revenue growth in the high teens to low 20% range year over year in 2024. The strong growth profile for Palette gives us further confidence in our ability to deliver on our 2023 to 2025 LRP growth objectives. The Barragel Rectal Spacer is the flagship product for Palette Life Sciences and generates the majority of the company's revenue. Barragel is a NASHA spacer with a compelling value proposition, driven by a reduction in radiation delivered to the rectum during prostate cancer radiation therapy, while increasing tumor control and patient quality of life. In addition, the Palette Life Sciences portfolio also includes D-Flux and Celesta, which are NASHA-based tissue bulking agents designed to treat pediatric vesico-ureteral reflux and fecal incontinence, respectively. The acquisition of Palette Life Sciences will allow us to incorporate this exciting high-growth and high-margin technology into our interventional urology business units, along with our well-established global call point. We are focused on bringing urologists and other specialists more innovative technologies that can positively impact patient care. The acquisition of Palette is attractive for three primary reasons. First, Baragel is a differentiated rectal spacer with a strong growth profile following FDA clearance in May of 2022. and represents a highly complementary product to our existing interventional urology business. In recent years, the treatment of prostate cancer has increasingly utilized hypopractionated radiation therapy, which uses higher doses of radiation in fewer treatments. In order to reduce radiation-associated complications, usage of temporary rectal spacers has grown as a way to protect healthy rectal tissue from harmful radiation. Barragel has grown by expanding market adoption since its launch due to its unique product features. Unlike other technologies, Barragel is easily sculpted when placed between the prostate and rectum, providing comprehensive protection from radiation therapy. The sculptability allows the physician to achieve predictable protection of healthy rectal tissue prior to radiation therapy. Baragel is also highly visible on transrectal ultrasound, which aids accurate placement, is biodegradable, and offers one-step assembly of the delivery device in all sites of service. Second, 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% a year. In addition, the increasing use of hypofractionated radiation therapy is driving demand for rectal spacers to protect healthy tissue. Baragel was cleared for marketing in the United States and Australia, and is CE-marked. We expect to gain market clearance in additional geographies over the coming years. Third, the acquisition of Palette is reflective of our disciplined capital deployment strategy. From a strategic perspective, the addition of Palette's NASHA portfolio complements our strong presence in the treatment of benign prostate enlargement. Of note, urologists perform the majority of rectal space replacements. which will leverage our broad and established sales organization. Today, 97% of physicians using Urolift also treat prostate cancer. In addition, the treatment of prostate cancer is not deferable. So we are adding another durable growth driver to our portfolio. We also expect interest in rectal spacers to provide opportunities to cross-sell Urolift. From a financial point of view, the transaction is consistent with our strategy to acquire assets that are accretive to Teleflex's growth rate and margins. Palette's adjusted gross margin will be accretive to both the corporate average and the interventional urology business unit. In addition, we expect Palette operating margin to enhance the corporate average in the near term. Finally, post-close, our balance sheet will remain sound. allowing us to continue to execute on our long-term capital deployment strategy. The acquisition is subject to customary closing conditions, including receipt of certain regulatory approvals, and is expected to be completed in the fourth quarter of 2023. We look forward to welcoming the Palette employees to Teleflex. Turning to an update on the Titan SGS Stapler. We continue to execute on our commercial strategy for the Titan SGS powered stapling device for use in sleeve gastrectomy procedures to treat obesity. Feedback for the Titan stapler remains positive and we remain confident in the value proposition for the Titan SGS stapler. The 23 centimeter continuous staple line enables ideal pouch creation and no overlapping staples that are common with traditional powered staplers. we are optimistic that over time we will be able to generate data that shows a reduction in complications and meaningful time savings per procedure. Despite the continued positive feedback from the field, we now expect Titan stapler revenue to be in the high teens for 2023, which is lower than what our original guidance for 2023 had assumed. Value analysis committee clearance has taken longer than we anticipated. which has slowed our ability to train surgeons. We have learned from the early experience and have refined our strategies for gaining back approval. Our efforts are taking hold with more than two times the number of surgeons trained in the second quarter of 2023 versus the first quarter of the year. Moreover, we have a strong pipeline of surgeons in queue to be proctored, so we expect further improvement through the year. We continue to monitor the usage of GLP-1 drugs in treating obesity. Based on our market checks, it is our sense that GLP-1s had some impact on bariatric surgery volumes in the second quarter. It remains too early to assess the long-term impact on the market, given questions on reimbursement and safety profile. In the interim, we remain acutely focused on penetrating a large sleeve gastrectomy market that is in excess of 120,000 procedures in the United States, given the very early stages of the Titan Stapler launch. We remain confident that the Titan Stapler will be a meaningful contributor to our high growth portfolio through the LRP period. That completes my prepared remarks. Now I would like to turn the call over to Tom for a more detailed review of our second quarter financial results. Tom?