Teleflex Incorporated

Good morning, ladies and gentlemen, and welcome to the Teleflex Third Quarter 2024 earnings conference call. At this time, all participants have been placed in a listen-only mode. At the end of the company's remarks, we will contact a question and answer session. Please note that this 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. Lauren Kirsch, Vice President of Investor Relations and Strategy Development.

Laurence? Good morning, everyone, and welcome to the Teleflex, Incorporated Third Quarter 2024 earnings conference call. The press release and slides to accompany this call are available on our website at teleflex.com. 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 would 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 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 will turn the call over to Liam for his remarks.

Thank you, Larry, and good morning, everyone. On this morning's call, we will discuss the third quarter results, review some commercial highlights, and provide an update on our financial guidance for 2024. For the third quarter, Teleflex revenues were $764.4 million, up .4% year over year on a GAAP basis, and an increase of .2% on adjusted constant currency basis. Third quarter revenues were slightly below our -$770 million guidance, which reflects unanticipated softness in our OEM business. Third quarter adjusted earnings per share was $3.49, a .1% decrease year over year, but notably higher than expectations, driven by strong margin performance, which Tom will discuss later on the call. Now, let's turn to a deeper dive into our third quarter revenue results. I will begin with a review of our geographic segment revenues for the third quarter. All growth rates that I refer to are on an adjusted constant currency basis, unless otherwise noticed. America's revenues were $433.3 million, a .5% increase year over year. Investors familiar with Teleflex will be aware that prior year MSA revenues were booked in the Americas, which impacted growth by approximately 510 basis points in the third quarter. EMEA revenues of $150.2 million increased .9% year over year. The growth continues to be driven by our targeted strategy to increase the geographic availability of Teleflex products and improving utilization in Europe. Now turning to Asia. Revenues were $98.3 million, a 5% increase year over year. The quarter was primarily impacted by the continued soft performance in South Korea due to the ongoing impact of the doctor's strike. We estimate that the doctor's strike impacted our APAC growth by approximately 2%. Looking forward, the doctor's strike remains ongoing, implying headwinds are likely to linger through the remainder of 2024. Now, let's move to a discussion of our third quarter revenues by global product category. Commentary on global product category growth for the third quarter will be on a year over year adjusted constant currency basis, starting with vascular access. Revenue increased .3% year over year to $180.9 million. In the quarter, our broad vascular access portfolio drove growth, including our peripheral and central access products. Of note and as anticipated, global PIC revenue increased strong double digits as we continue to execute our strategy to expand usage of Teleflex products. Moving to interventional. Revenue was $149.9 million, an increase of .4% year over year. In the quarter, the broad portfolio performed well. We still expect an increase in contribution from intro-artic balloon pump revenues in the fourth quarter. Turning to anesthesia. Revenue increased .4% year over year to $101.1 million. Growth was led by intraosseous products, hemostatic products, and single-use laryngeal masks. In our surgical business, revenue was $111.7 million, a decrease of 1% year over year. Our underlying trends in our core surgical franchise continued to be solid with growth of our largest franchises led by instrumentation and chest drainage, but offset by a tough year over year comparison in our ligation portfolio. In the quarter, we were encouraged by tightened stapler growth trends, which improved on a -over-quarter basis and strong double-digit growth year over year as expected. Consistent with our strategy, we continue to practice surgeons and roll out our buttress kit following the launch earlier in 2024. We are encouraged by the sequential growth and continue to see the product as a growth driver over the coming years. For interventional urology, revenue was $83.4 million, representing an increase of .3% year over year. As expected, growth was driven by barigel revenue following the October 2023 acquisition of Palette Life Sciences. And as anticipated, urethral growth was impacted by continued challenges in the office size of service. OEM revenue increased .1% year over year to $82.6 million, and much softer than expected. We were recently notified by a large customer that they have decided to vertically integrate a component that we have been supplying, which has resulted in a loss of this revenue stream. In addition, we have now started to see some customers delay orders as they increasingly focus on managing infantry. Looking forward, we are not aware of any market share loss and have purposefully added manufacturing capacity for our thin-walled micro catheters, one of the fastest growing segments for OEM. Given the continued growth of the markets that we serve, we would anticipate that the softness seen in OEM revenue growth should be transitory, but unlikely to be resolved in 2024. Third quarter other revenue declined .3% year over year to $54.8 million. The decline in revenue on a year over year basis is primarily due to the planned December 2023 exit of the MSA by Medline. That completes my comments on the third quarter revenue performance. Turning to some commercial and clinical updates, starting with an update on Palette, our most recent acquisition. We have now owned Palette Life Sciences for about one year, and I am pleased to report that the acquisition continues to track ahead of expectations. Baragel continues to gain traction in the US with strong sequential revenue momentum. We are seeing success in our marketing strategy and continue to convert urologists and radiation oncologists to the use of rectal spacing due to the compelling clinical data and Baragel's ease of use. Longer term, we see a number of potential opportunities to expand the indications for our NASA product platform. For example, the first patient was recently enrolled in a study for Baragel in men with cancer following the surgical removal of the prostate. The trial will study rectal spacing with Baragel in patients undergoing hyperfractionated post-prostectomy radiation therapy across the United States and one size in Australia. The study endpoints are to demonstrate Baragel rectal spacer as a safe and effective option that reduces prostate radiation side effects for this patient population. Based on the segmentation of risk groups between low, medium, and high prostate cancer recurrence after radical prostatectomy ranges from 16 to 46%. Due to the strong performance in the third quarter, we are increasing our 2024 revenue guidance for Palette to $73 to $75 million from $70 million to $72 million previously. The increasing guidance reflects the performance in the third quarter and updated assumptions for the fourth quarter. Although Palette continues to exceed our expectations, Urolift has not yet stabilized in the United States. Given the continued pressure on Urolift, our four quarter assumptions reflects the third quarter performance, typical year-end seasonality, and the impact from the recent hurricanes and saline shortages experienced in early Q4. In turn, our full year 2024 interventional urology total revenue guidance now assumes approximately 5% growth versus .5% growth previously. Now moving to comments on the intra-aortic balloon pump market. In the United States, we continue to experience cold activity above our historic levels, following a May 8 letter from the FDA to healthcare providers regarding pump safety and quality in relation to our primary competitor in the intra-aortic balloon pump market. There is no change to our view that the biggest incremental opportunity for Teleflex will be in the United States market following the agency's recommendation that healthcare facilities transition away from the use of competitive devices and seek alternatives if possible. We also expect continued share gains in Asia based on solid execution from the team over the past couple of years. Regarding the European Union, the notified body for our primary competitor recently announced that the temporary suspension of the CE mark for its intra-aortic balloon pumps will remain in place until July 1, 2025. We continue to assume that there will not be any meaningful share shift in Europe. We will monitor the market closely and be in a position to respond to customer needs should they arise. On note, we have successfully ramped our manufacturing capacity for pumps and catheters to help customers that are seeking an alternative vendor. We will continue to expand our manufacturing capacity through 2024 and will carefully modulate our capacity in accordance with demand signals. Taking the various global balloon pump market dynamics into account, there is no change to our outlook for the fourth quarter of 2024 as compared to the prior guidance. Finally, I will provide a clinical update. In our surgical business, we continue to expand our foundation of clinical data that supports the use of the Titan SGS stapler as safe and effective for patients undergoing laparoscopic sleeve gastroerectomy. In August, we announced the publication of a propensity matching review of retrospective data. This single center study found that the Titan SGS stapler enables consistent gastric pouch formation with fewer variations, providing potential enhanced clinical outcomes and significant procedural efficiency compared with traditional surgical staplers. The study showed that the use of the Titan SGS stapler's simplified and efficient stapling process was associated with fewer 30-day readmissions, especially those related to nausea and vomiting, which was statistically significant. The median operative time for the Titan SGS stapler was eight minutes less than multi-fire staplers, which was also statistically significant. This is an important efficiency data point as hospitals seek to optimize OR time. In addition, patients were more likely to be discharged within 24 hours after surgery in the Titan SGS stapler cohort as compared to multi-fire staplers. The Titan SGS stapler continues to be the first and only single-fire surgical stapler designed and indicated for sleeve gastroectomy pouch creation and the only surgical stapler cleared by the FDA for this specific indication. We will continue to focus on supporting the Titan SGS stapler with expanded clinical data. That completes my preferred remarks. Now I would like to turn the call over to Tom for a more detailed review of our third quarter financial results. Tom?

Thanks Liam and good morning. Given the previous discussion of the company's revenue performance, I'll begin with margins. For the quarter, adjusted gross margin was 60.8%, a 140 basis point increase versus the prior year period. The -over-year increase was primarily due to the favorable impact of gross margin from the termination of the MSA and the acquisition of Pellette and favorable price. Partially offset by manufacturing inefficiencies and continued cost inflation, including labor and raw materials. Adjusted operating margin was .3% in the third quarter. The 10 basis point -over-year increase was primarily driven by the flow through of the -over-year increase in gross margin, partially offset by the inclusion of Pellette Life Science operating expenses and investments to grow the business. Net interest expense totaled 18.8 million in the third quarter, an increase from 15.7 million in the prior year period. The -over-year increase in net interest expense reflects the impact of the funding for Pellette acquisition and share repurchases in the third quarter. Our adjusted tax rate for the third quarter of 2024 was 13.6%, compared to 8% in the prior year period. The -over-year increase in our adjusted tax rate is primarily due to additional costs arising from the enactment of European pillar two tax reform, non-recurring prior year discrete benefits not repeating this period and non-recurring discrete detriments that occurred in the third quarter. At the bottom line, third quarter adjusted earnings per share was $3.49, a decrease of .1% versus prior year. The -over-year decrease in earnings per share includes dilution from the incremental borrowings, the termination of the MSA, and a higher tax rate. Turning now to select balance sheet and cash flow highlights. Cash flow in the year to date continued to be solid. Cash flow from operations for the nine months was 435.6 million compared to 372.4 million in the prior year period. The $63.2 million increase was primarily attributable to favorable operating results, a decrease in cash outflows from inventories as we continue to moderate our inventory levels, and proceeds from the termination of a pension plan. The increase in net cash provided by operating activities was partially offset by higher tax payments. Moving to the balance sheet, at the end of the third quarter, our cash equivalence and restricted cash equivalence balance was $277.8 million, which includes restricted cash equivalence of $34 million associated with the 2024 pension termination as compared to $222.8 million as of year-end 2023. Net leverage at quarter end was approximately 1.7 times. I will now provide an update on our $500 million share repurchase authorization, which includes a $200 million accelerated share repurchase program. Under the terms of the ASR, which began on August 2nd, 678,000 shares were repurchased during the third quarter and represent 80% of the $200 million aggregate under the program. We anticipate completing the ASR in the near term. In addition, we currently have $300 million left on our share repurchase authorization and will continue to be opportunistic with future purchases. Anchored by our strong cash generation, return of capital to shareholders remains an important element of our disciplined capital allocation strategy. Turning to our updated financial guidance for 2024. Our updated 2024 guidance assumes adjusted constant currency revenue growth of .5% to 4% compared to .25% to .25% previously. Note this range excludes the $13.8 million negative impact of the Italian measure discussed on our second quarter earnings and a $4 million headwind from changes in foreign exchange. Our guidance now reflects the -to-date performance and fourth quarter dynamics, including lower than anticipated revenue in both our OEM and our interventional neurology businesses. As Liam mentioned previously, we have not yet seen a stabilization in EuroLeft. In addition, we have also encountered procedure cancellations early in the fourth quarter due to disruption from recent hurricanes in the southern portion of the United States and the impact of failing shortages on electric procedures. On a gap basis, we expect reported revenue growth of .9% to .4% in 2024, implying a dollar range of $3.061 billion to $3.076 billion. Excluding the impact of the Italian measure, we expect reported revenue growth of .4% to .9% in 2024 for a dollar range of $3.075 billion to $3.090 billion. This revenue range, specifically gap revenue excluding the $13.8 million impact from the true up of the Italian measure, anchors our 2024 guidance. For your modeling purposes, the 2024 outlook includes an assumption of $809 to $824 million in revenues for the fourth quarter, representing growth in the range of .6% to .5% year over year on an adjusted constant currency basis, excluding an expected FX headwind of approximately $1 million. We are raising the low end of our 2024 gross margin guidance by 25 basis points to a range of .5% to 61%. Our gross margin guidance reflects the operating performance of the first nine months of 2024 and our expectation of an increased headwind from foreign exchange in the fourth quarter and accelerated capital equipment sales in the fourth quarter from intra-aortic balloon pumps. The capital component of pumps is slightly dilutive to our corporate gross margin. However, we expect the margin profile to improve in the future with the sale of disposables or catheters that carry a more favorable margin profile. We are also raising the low end of our operating margin guidance by 25 basis points to a range of .75% to .0% for 2024. Our guidance reflects the flow through of gross margin and the positive impact of restructuring offset by the inclusion of operating expenses for Polite Life Sciences and investments to grow the business. Moving to items below the line, we now expect net interest expense to approximately $78 million for 2024 versus $81 million previously. The reduction in our net interest outlook primarily reflects debt pay down as well as lower interest rate expectations. Our tax rate for 2024 is now expected to be in the range of 12 to .5% versus the prior guidance of approximately 12%. The tax rate for 2024 reflects -to-date actual results and our expectations for the fourth quarter. Turning to earnings, we are raising the low end of guidance by 10 cents, which captures the performance in the third quarter. In turn, we now expect 2024 adjusted earnings per share to be in a range of $13.90 to $14.20. Finally, we are assuming 47.1 million average weighted shares for 2024, which reflects the 200 million ASR commence during the third quarter. That concludes my prepared remarks. I would now like to turn it back to Liam for closing commentary. Thanks, Tom.

In closing, I will highlight our three key takeaways from the third quarter of 2024. First, although we encountered some revenue headwinds in the third quarter, our diversified portfolio and global footprint proved beneficial. In the quarter, we drove year over year gross margin expansion and increased our operating income. We continued to focus on execution, our margins remain healthy, and we raised the low end of our adjusted 2024 EPS guidance range. Of note, our 2024 adjusted earnings per share outlook reflects approximately 85 cents in year over year headwinds, including dilution from the termination of the MSA and the acquisition of Polette Life Sciences, increased taxes primarily due to the Pillar 2 minimum tax and foreign exchange. After adjusting for these headwinds, year over year underlying adjusted constant currency earnings per share growth is approximately 9% at the low end of guidance and 11% on the high end of guidance. Second, cash flow performance remained strong in 2024, with cash flow from operations of $436 million at the nine months and up $63 million over the prior year period. We remain on track to drive over $500 million in cash flow from operations for full year 2024. And net of capital expenditures to invest in growth, it leaves approximately $400 million in free cash flow. The healthy cash flow generation provides a strong foundation for executing on our disciplined capital allocation strategy, including investment back into the business, inorganic growth opportunities, return of capital to shareholders and debt repayments. Third, we will continue to focus on our strategy to drive durable growth. Polette is performing above our expectations. We are executing on the intra-aerobic balloon pump and catheter opportunity and Titan is generating solid growth. We are continuing on our journey to transform our portfolio to drive growth and will execute on expanding our internal innovation engine and pursuing inorganic opportunities, including M&A. That concludes my prepared remarks. Now I would like to turn the call back to the operator for questions and answers.

Thank you. If you'd like to ask a question, please press star one on your keypad. If you're using a speaker phone, make sure the mute function is turned off to allow your signal to reach our equipment. We ask that you limit yourself to one question and one follow up. If you would like to ask additional questions, we invite you to add yourself to the queue again by pressing star one. And our first question comes from the line of Patrick Wood with Morgan Stanley. Patrick, your line is now open.

Beautiful. Thank you so much for taking the questions, guys. So I've got one and then one follow up. The first one of the sales cut on the top line, and congrats on doing so well on the gross margin side of things, but on the top line, that sales cut, OEM, I mean, at least by my math, looks to be kind of roughly half of it. I think you guys mentioned the prepared remarks. Am I right in assuming the other residual half is predominantly the effect of the weather and the IV solutions side? Is that fair or is there something else going on?

No, you've got the two buckets. You've just misallocated them, Patrick. So if we look back on the quarter, I would say that we're disappointed with the performance of OEM. But with the exception of OEM in the quarter, the rest of the business performed very well. We were even with the impact of OEM, we were modestly below our guidance range that we provided of 765 to 770. And we're particularly happy, as you pointed out, with the margin expansion, the earnings per share performance, and obviously the strong free cash flow, which will put us in a good place to execute in our capital allocation strategy. Now, specifically to your question with regarding to the buckets in the full year, there's two buckets, as you pointed out, an interventional urology. The total change at the low end of the guidance, Patrick, is approximately $22 million. The larger impact is OEM, and it's driven by two factors. One is the vertical integration of customer order and the order push out due to inventory management. The total impact of that is approximately $14 million in the full year, with the majority of being as a result of a surprise vertical integration that we were not expecting. The other component of it is down to interventional urology. While Pellette continues to perform very well, and we're really happy with the performance of it, our previous guidance had assumed better urolet trends in the fourth quarter. And we have not seen that. Our updated guidance assumes normal seasonality, but does not assume better trends, and also takes into account the Q4 impact of the hurricanes and the IV saline shortage impacting procedures. The total impact of that bucket, Patrick, is approximately $8 million in the full year, reflecting the improved performance from Pellette and urolet being impacted by approximately $11 million. So those are the buckets for the full year. And in the quarter, the impact of OEM was approximately $7 million, and excluding OEM, we would have been handsomely within the ranges that we had provided.

Wow, that's a lot of detail. Thank you. The follow on. On the balance sheet side of things, you'd obviously chatted at our conference and a few other times about the potential potentially a little bit of a bolt on M&A. How are you thinking about the interplay between doing residual $300 million buyback and then bolt on M&A? How do you think about the two opportunities there?

The good thing is that our balance sheet is in excellent shape, Patrick. Our net leverage right now is 1.7 times. And as you saw, as we went through our prepared remarks, our free cash flow operations is 435 million, up 63 million, an outstanding performance on free cash flow, which gives us a lot of confidence that we can do both. We have still $300 million left in our share repurchase plan, and we intend to use that opportunistically. The M&A environment is pretty ripe right now, and we are chasing a number of private assets out there in the market. We are looking at assets that are within the cath lab. We are very focused on that call point. Intensive care call point, emergency medicine, and tuck ins in other parts of the We will remain disciplined, and our focus remains on non-earnings per share dilutive assets that we want to bring into the Teleflex family. So active in that area, and also would intend to continue with our capital allocation on the share repurchase part of the returning capital to shareholders.

Our next question comes from the line of Matthew O'Brien with Piper Sandler. Matthew, your line is now open.

Morning. Thanks for taking the questions. Maybe just a little bit more clarification from the last question, but just, Liam, the OEM pressure, are you going to still feel that same 14 million-ish in the first half of next year? And then for Eurolift, is it really still contained to just the physician's office, or are you starting to see it spread into other areas of weakness, either hospital or ASC? Because I thought the physician's office business is pretty small at this point, and then I do have a follow-up. Thanks.

Yeah, so thanks, Matt. So with regard to the OEM, as I said, of the 14 million, the majority of it is from vertical integration. That candidly was a surprise. We've been making this particular business for a number of years, and we were not expecting it to be brought in house by this customer, who is a large customer of ours. That will continue through Q3 of next year, so that unfortunately will continue. The de-stocking, we'll monitor that closely with the inventory management of our customers, and we'll make a determination on that as we go through the year. With regards to your question, it's still the office side of service, Matt. The office side of service is incredibly challenged. Obviously, we're going into the final year of reimbursement in this year, and we'll be happy to see the end of those reimbursement changes. That will have another approximately 6% impact on the reimbursement rate for EuroLift in 2025, and that will be the end of the downward trends in reimbursement in the office side of service. So hopefully, at the end of that, it will begin to show some signs of stabilization.

Got it. And then I don't want 25 guidance here. I just was hoping for some air bars around how to think about next year, just because you've got this, it sounds like a $10 million OEM headwind, but then Barragel is doing better, and PICS are doing great, and other things are doing well. I'm just curious if we can think about how all of those factors, plus the MSAs going away, might influence what to think about for the underlying business next year, with the top-line growth going to be in single digits, and can you get operating margins back to where you saw those in 2021?

Thanks. So, Matt, obviously, this is the third quarter call, so we'll address the 2025 guidance when we get to our Q4 call, which is our next earnings call, obviously. So if you don't mind, I'll address that when we get to that earnings call.

Our next question comes from line of Jason Ford with Raymond James. Jason, your line is now open.

Good morning. Thanks for taking the questions. Maybe just a couple here. There's been a few numbers thrown around on the OEM dynamic. I guess, what's the annual revenue level of the lost OEM customer? And I apologize if it's been mentioned.

No, that's okay, Jason. So it's basically $14 million of an impact on our year guidance, with the majority of it coming from the vertical integration. So that's the specific number. We had $7 million of it that we saw in Q3, with another $7 million to come in Q4, so a total of $14 million on the full year from OEM.

Okay. Thanks. And just on the balloon pump did you see any contribution in 3Q and have your underlying assumptions that you kind of laid out on the second quarter call changed at all?

So our underlying assumptions have not changed. We, as investors will be aware, we have a competitor who has got a notice from the FDA advising customers to move away from their pump and seek an alternative. Our quote volume continues to be strong in the U.S. and it is focused on the U.S. The only change since then has been that the CE mark suspension for the competitor has been extended to July of 2025. We do not anticipate a significant change in EMEA. We still believe that the majority of the upside will come in the Americas. So you should see an uptick in the interventional access growth rates in Q4 specifically associated with the volume of pumps that we anticipate in Q4 and nothing has changed to our expectations. We did not see an impact in Q3 also in line with our previous expectations on the balloon pumps. It is anticipated that it will hit in Q4.

Our next question comes from the line of Shagun Singh with RBC. Shagun, your line is now open.

Thank you for taking the question. I guess a couple follow-ups on IABP. Can you provide your updated thoughts on that opportunity in Q4 and then also maybe any puts and takes for 2025 and why you don't think Europe will provide any upside to that outlook even into next year?

So nothing has changed in our outlook from the Q2 call into Q4, Shagun. We anticipated on the Q2 call we called up our revenue by approximately $15 million and we said that large proportion of that was down to the introverted balloon pumps, so call it in excess of $10 million that will hit in the fourth quarter. As we go into 2025, we anticipate that the opportunity will continue to be with us through the first half of 2025 and nothing has changed in our assumption in that regard either. Obviously, as I said to Matt earlier, we will get to guidance when we get to our Q4 earnings call and we will outline what we anticipate the impact of the balloon pumps will be. We don't expect much of an impact, as I said already, within Europe and we continue to take share in Asia Pacific.

Our next question comes from the line of Matt Taylor with Jefferies. Matt, your line is now open.

Hey guys, thanks for taking the question. I just want to follow up the balloon pump forecast and just try to understand how you're thinking about different guideposts in terms of the order flow that you've seen already and just predicting how much upside you could get if things get extended and your competitor may continue to see challenges. We just want more color on the orders that you've seen come through to date and how you're thinking about predicting the upside next year depending on what happens there.

So, as I said earlier, the orders that we see in the fourth quarter are in excess of $10 million and also, as I said a little earlier, we still anticipate that the competitor will be out of the market through the first half of next year. Now, the variable, Matt, is if they stay out of the market longer than that because that would represent a longer term opportunity. So, that's really the yardstick and we'll assess that as we go through. So, we anticipate that they will be out of the market until at least the first half of 2025 and we'll be executing against the opportunity. The order rates have continued, pardon me, the quotation rates have continued strong right through Q3. Obviously, they peaked at the back end of Q2, but they have continued strong through Q3 and into Q4. So, we would anticipate that at least through the first half of next year that this would be an opportunity for Teleflex.

Okay. Can I just ask on the impact from weather and the IV solutions, can you talk about how much you've seen so far and do you still feel over from IV solutions beyond Q4 or do you think that's just a short temporary impact?

So, from what we're reading, we believe it's going to be a short term temporary impact. Obviously, the hurricane has passed through and people are rebuilding down in Florida. So, that was the impact in the southeast. From the saline, we've seen an impact in particular in the central and west regions. We do believe that it's going to normalize because we know that the supplier of saline is moving product in from Europe and from some of their plants in Asia Pacific. So, the intel that we have is that we're beginning to see it get incrementally better already and that it should be much better as we go through the fourth quarter. Obviously, for urology procedures and particular urolyte procedures, you do use a lot of saline because you've got to fill the bladder and that's a significant use of saline when that procedure is getting done. Obviously, you flush it through in order to make sure that the procedure goes well. So, that is our one procedure that is a heavy user of saline in the marketplace.

Our next question comes from the line of

good morning. Thanks for taking the question. Tom, one financial question for you. How much do we, how should we think about debt pay down and how much you could reduce interest expense next year? Seems like a good opportunity, you know, relative to the 78 million dollars you're guiding to this year and I had one follow-up.

Well, the way we're going to think about our free cash flow is to balance kind of investments in organic, inorganic, along with potential use of the remaining share repurchase authorization with debt payment. To the extent we've got surplus cash beyond, you know, opportunities to grow the business or potentially retire shares, we would then consider that as a use of cash to pay down our prepayable debt. So, we're looking to really balance those three equations next year.

You got it. And then, Liam, you know, I know the intra-optic product for you guys has been a pretty strong growth driver for you. A competitor announced approval of a new device yesterday. I know it's early, but I'm just curious to hear how you're thinking about the competitive dynamics in that space, given that it's a big and important product for you guys. Thank you.

Yeah, thanks, Larry. Obviously, we're aware of the competitor dynamics within the marketplace. This competitor was in the market previously over a year and a half ago and we were able to combat their efforts to move customers. The product has incredible loyalty in the marketplace. It is the first intra-optic device in the marketplace and has continued to perform very well for us. We haven't been idle knowing that the competitor is coming to the market and we continue to innovate on our product. And just recently, we launched a disposable intra-optic product in a tray format for ease of use in order to continue to convert the hospital market in the United States. And that launch has gone very, very well. So we still think that we have significant differentiation out there and we're monitoring the situation very closely.

Our next question comes from Anthony Petroni with NISERO. Anthony, your line is now open.

Thanks for getting us in here. A couple on Urology and then one on Asia Pacific. Maybe just an update on Palette and Eurolift. I know those sales teams are now integrated. I think it actually, the full integration goes through the end of 2024 and it feels like they're in a position now to be selling bags. So maybe an update on the integration of Barragel with Eurolift and are you seeing synergies on either one or both sides of that portfolio? And the announcement today on post-radical prostatectomy and maybe as we look ahead what that opportunity means for Barragel and one on Asia Pacific.

Thanks. Yes, thank you Anthony for the question. So the integration of Palette is pretty much done. We've owned it now for almost a year and we couldn't be happier with the performance of the product. As we announced today, we were in a position once again to call up our guidance for Palette. If you recall, we began the year expecting 66 to 68 million and now we're at a guidance range of 73 to 75 million for Palette Life Sciences. And as investors know, the gross margins on Palette are actually better than the gross margins on Eurolift. So the integration is pretty much done. We had a little bit of cross-training to finish out in the fourth quarter but we anticipate getting that done. We didn't build in a halo effect for Eurolift into our model actually when we acquired Palette Life Sciences. And the halo that we've seen has actually been to the Barragel product on the Palette side because we now have more sales reps out there selling the product. So that has driven increased performance on the Palette side. And as I said earlier when I was answering Matt's question, obviously Eurolift continues to be challenged in the office side of service. So post-radical prostatectomy, which was the other part of your question, Anthony. So this is a significant opportunity for Teleflex and for the Palette portfolio. Anything from 10% to 50% of men that go through a radical prostatectomy, the cancer returns. So if you take the midpoint, around 30% of an additional market or about $100 million of a market opportunity. What is very intriguing to us about this opportunity is that Barragel will be only spacing a technology that will be applicable in this area because of the compound of NASA and how it works. Other spacing technologies will not work in this particular application. So we feel that that's encouraging. We've enrolled the first patient. It will take us about a year and a half between enrolling all of the patients to writing up the study, to submitting it to the FDA, to get expanded indication. And we're really looking forward to getting that indication and addressing that $100 million spacing market that patients today don't have access to spacing if you're going through radiation therapy post-radical prostatectomy.

Our next question comes from the line of Richard Newwitter with Tourist Securities. Richard, your line is now open.

Hi, good morning. It's Robbie in Forage. So I have two questions, one on IABP, one on M&A. So I guess the first one, with the IABP, you have this 10 million line of sight in four quarter. Could you just help us think about what portion of that is capital versus consumable and of that cohort? What kind of long tail do you see out of that on the consumable screen?

Yeah, Robbie. So I will tell you that the vast majority of that is capital in the United States. The consumable will follow over a period of time. If you look at the overall market, the global market for intra-aortic balloon pumps and catheters, it's approximately half and half. Half of the market is pumps and half of it is catheters. To answer the other part of your question as to what would follow, I think that as we look forward, the advantage of using the manufacturer's catheter with the manufacturer's pump is compelling. Most customers today in the United States, the majority of them will use fiber optic. If you use a TelaFlex catheter with TelaFlex pump, you have that fiber optic capacity available to you. If you use a competing competitor's catheter with our pump, you lose that fiber optic advantage. We think it's compelling that customers will use our catheter with our pump.

Presumably, given the way the FDA is managing this, it seems like the tail on the consumable would be a little bit more pushed out. Secondly, on the M&A, you talked about non-EPS dilutive assets. Does that mean your tolerance for EPS dilution in M&A is a little bit lower now? It sounds like the market might be opening up and valuations might be picking up a little bit. It sounds a little bit different than what you said in the past. Do we look at the repo here as a boost to earning to absorb that kind of dilution or make it from M&A a little bit more neutral?

Robbie, I think the environment, I would push back a little bit with valuations going up. I think that what we're seeing in the marketplace is that valuations are finally modulating and have been doing for the last six plus months. It takes a while for what's happening in the public markets to sink into the private markets. Secondly, I think with that change in valuation, obviously the improvement in interest rates, it's a lot more compelling to bring in an asset that is not EPS dilutive. Obviously, our criteria doesn't change. We're looking for assets that are accretive to our top line growth. Also, we're looking for assets that are at least equal to, if not accretive to our gross margin and will continue to be accretive over time. We'll get to margin accretion in a reasonable amount of time. I think what I'm trying to say is that there are assets out there that meet all those criteria and are also not EPS dilutive.

Our next question comes from the line of Dave Turkely with SeedSendJMB. Dave, your line is now open.

Hey, good morning. I just want to confirm, is the OEM business primarily in the Americas geographically?

Dave, yeah, the vast majority of the revenue is within the Americas. That is correct.

Thank you. I wanted to ask one on

that.

I was wondering if you could give us an update on how that's doing either a growth rate and maybe what you're seeing in the underlying procedures that that's used for.

Yeah, so on the procedures, so first of all, Manta continues to penetrate the market. It's the only large board closure device out there in the marketplace that's a single shot product. The procedures that it's used on is TAVAR and EVAR. Over the past year, as we continue to penetrate TAVAR, we actually have now focused on doing that same penetration within EVAR. What we've noticed is that the EVAR side of the house isn't as price sensitive as the TAVAR side of the equation. Therefore, our pricing in the EVAR market has been a lot more favorable. We continue to penetrate, Dave, and the product is continuing to perform.

Our next question comes from the line of Craig Bijou with BOFA. Craig, your line is now open.

Good morning, guys. Thanks for taking the question. I had one on IAPP and then a follow-up on OEM. Liam, the orders that you're seeing or what you are assuming for Q4, I'm just curious if you have visibility into whether those orders are a normal, for a normal replacement cycle for the pumps. Have they reached their useful life? Or if you're actually seeing hospitals switch away from the competitor pumps?

Well, you have the normal recycle for our own pumps within the number, but we are also seeing the uplift is really being driven. That's our normal run of the business, Craig, the conversion. But we are seeing accounts converting completely away from the competing product. I think that's your question, and we are seeing that.

Yeah, I guess, sorry, I wasn't clear. The question is more on your competitors' replacement cycle. So are you winning, are the orders that are coming in that you, the incremental revenue that you're expecting, is that coming from hospitals moving away from your competitor or just you're picking up a natural replacement cycle?

Yeah, that's fair, Craig. Sorry about that. So what we're seeing is both. We're seeing the replacement as pumps come up to be replaced, we're getting replacements, and then we're also seeing systems completely swap out pumps that in some instances are less than two years old.

Got it. That's helpful. And then just as a follow up on OEM, I mean, if you back out the 7 million that you talked about, I think growth this quarter would have been 9%. So when, you know, how should we think about the growth of that business? Is it high single digits, or is it, you know, slow or to mid single digits? Just any way to think about the normal growth of that underlying OEM business?

Yeah, so obviously the integration is going to have an impact in 2025. The outlook for the OEM business is still very positive once you get beyond the Q3 next year and the vertical integration. The normal underlying growth of that business is in the mid to high single digits. We've seen years where the team have executed well and they've gotten into the double digit growth. In particular, when there was supply chain disruption, we have converted a number of accounts. We're really doing well in the micro catheter space and we have capacity. So the good thing, even with this vertical integration is we have capacity. We've put extensions onto both of two plants. So the team is out there now chasing new orders, executing against those orders, doing R&D projects for some of our key customers in order to build up the order book as we head into 2025. So once you get through 2025, Greg, you'll see a normalized growth for the OEM business in 26 and beyond. And that normalized growth would be to the mid to high single digits and in a good year to sneak into the low doubles.

Our next question comes from the line of Michael Pollark with Wolf Research. Michael, your line is now open.

Hey, thank you. Sorry, I will follow up on OEM. Can I better under, or I'm hoping to better understand this insourcing decision by the customer. Do you work with this customer and other products? How big is this customer after this exit? And then this product that's being insourced, do you make this for other customers? And is there a reason why the customer is now moving to do this themselves? Is that a risk for this product category for other customers who you make this for? Sorry for the complicated question, but I want to understand a little bit better the why and what behind this surprise.

Yeah, it's a fair question, Mike. This is a product. It's a significant component of a product that this customer sells as a branded product. And we've been making this for many, years and it is the decision to insource, and we only make it for this specific customer to answer that part of your question. Second part of your question is why do they move it internally? Our assumption from the team is that they have an absorption issue in one of their plants and they're addressing it by moving this inside and they have the capability within their plant for this particular product. Most of our products that we make are pretty complex micro catheters, pretty complex extrusions. This product was a little bit unique. It's not that complex and therefore the company felt that they could do themselves in-house.

Our next question comes from the line of Mike Madsen with Needham. Mike, your line is now open.

Yeah, thanks. Just one on Titan and bariatric surgery. So, good to hear the product doing better, but what are you seeing with regard to bariatric surgery, procedure volumes, any signs of stabilization there? I know it's been declining for a while, so do you think it's just the procedures generally, sorry. Do you think that as we start to kind of lap those declines maybe the market will start to level off?

So, I think as you look forward, I think that the market will level off. What we see out there in the marketplace today is the rate of decline has slowed mostly, but they're still in decline. But candidly, Mike, it doesn't really matter for us. We're penetrating a $250 million market with a product that the clinical study today that we announced on the call demonstrates that it's better. So, we get people out of the hospital quicker. There's about a 25% delta for our patient group exiting the hospital after a day compared to the other technologies. And also the efficiency, because it's a single line of staplers, it's much faster, so it reduces operating room time, and that's a key driver for hospitals to make decisions which technology to use as you can appreciate. So, I think it will stabilize, but it doesn't really matter to us whether it does or not. Titan grew strong double digits within the quarter, and grew sequentially quarter on quarter. So, that is encouraging, and it will be a growth driver for us through the next number of years.

Okay, got it. Thank you.

Cheers,

Mike. Our next question comes from the line of Kristen Stewart with CLK. Kristen, your line is now open.

Hi, I just wanted to focus in a little bit on the gross margin performance. I think your guidance for the full year implies gross margins up 100 to 150 basis points for the full year. I think the exit of MSAs was about 100 basis points. Just want to check the math on that. And then as we think ahead, are there any kind of puts and takes that we should think about in terms of the gross margin performance for next year?

Well, sure. Well, to your point, we have raised our gross margin guidance to a range of 60.5 to 61%. The MSA going away did have an impact, and that impact will come to a close in the fourth quarter of this year as it will be in our run rate. So as we think about next year, what we're really looking to do is continue to drive margin expansion through a combination of positive price, through cost improvement programs. We still have savings from restructuring initiatives and using all of that to offset inflation. We've been seeing inflation moderate from what it had been. It's still higher than what it was but we're seeing that start to moderate. So we're going to get past some of the headwinds that we saw from this year on gross margin with the loss of Paulette.

Okay. And then just thinking about the opportunity with the introverted balloons.

How should we think about

that?

I'm sorry, just the loss of the MSA. I misspoke.

Sure. And then just thinking about the opportunity with the introverted balloon pumps and what we're likely to see in 2025. How should we think about you guys looking at that as kind of just flowing through the bottom line or will you look to reinvest some of the upside opportunity there back into the business?

So as we look at it, as I said earlier, we're going to have the opportunity is going to be with us through at least the first half of 2025. There is a potential depending on what the outcome is from the FDA that it goes longer than that, but we'll assess that as we go through. With regard, we would like to see a good portion of it flow through to earnings, but we would also like to take some of it and invest it for growth into the future. And I think that's a balanced approach that we would try to take with that opportunity.

That concludes our Q&A session. I will now turn the call back over to Lawrence for closing remarks. Lawrence.

Thank you, Mark. Thank you to everyone that joined us on the call today. This concludes the Teleflex, Inc. Third Quarter 2024 earnings conference call.

That concludes today's call. Thank you all for joining. You may now discuss