Title

Presentation

Teleflex Incorporated beats earnings expectations. Reported EPS is $3.41, expectations were $3.21.

Operator: Good morning, ladies and gentlemen, and welcome to the Teleflex’s Second Quarter 2023 Earnings Conference Call. [Operator Instructions]. And now I will turn the call over to Mr. Lawrence Keusch, Vice President of Investor Relations and Strategy Development.

Lawrence Keusch: 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 we 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 will turn the call over to Liam for his remarks.

Liam Kelly: 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 stabilizations with respect to material inflation, and we’ll continue to monitor trends during the second half of 2023. Our supply chain remained 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 noted. Americas 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 perspectives, we saw a 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 PICC pre-loaded with the NaviCurve 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 coated PICC portfolio and new product introductions. Moving to Interventional Access. Revenue was $124.8 million, up 9.6% year-over-year. Procedure volumes remained 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 gastrorectomy procedures is accelerating. For Interventional Urology, revenue was $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 side of service remains challenging.

The overseas launch activities continue to progress in line with expectations with Japan UroLift 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 the double-digit growth in all of our product categories, including micro catheters. We continue to have good visibility into the business and see solid demand dynamics throughout 2023. Second quarter other revenue increased 4.8% and 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 stand-alone 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 Barrigel rectal spacer is the flagship product for Palette and generates the majority of the company’s revenue.

Barrigel 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 Deflux and Solesta, which are NASHA-based tissue bulking agents designed to treat pediatric vesicoureteral 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 points. 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 3 primary reasons. First, Barrigel 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 hypofractionated 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. Barrigel has grown by expanding market adoption, since its launch due to its unique product features. Unlike other technologies, Barrigel is easily sculpted when placed between the prostates and rectum, providing comprehensive protection from radiation therapy.

The culpability allows the physician to achieve predictable protection of healthy rectal tissue prior to radiation therapy. Barrigel is also highly visible on transrectal ultrasound, which aids accurate placement is biodegradable and offers an 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 incidents growing 3% a year. In addition, the increasing use of hypofractionated radiation therapy is driving demand for rectal spacers to protect healthy tissue. Barrigel 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 that Palette’s NASHA portfolio complements our strong presence in the treatment of benign prostate enlargement. Of note, urologists performed 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 deferrable. 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 receipts 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 power stapling device for use in sleeve gastrorectomy 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 continues 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 revenues 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 VAC approval. Our efforts are taking hold with more than 2x 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 gasterectomy 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?

Thomas Powell: 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 59%, a 60 basis point decrease versus the prior year period. The year-over-year decrease was primarily due to continued cost inflation, product recalls and unfavorable impact on productivity due to raw material supply, partially offset by favorable price, lower logistics and distribution-related costs and benefits from cost improvement initiatives. Turning to price. There is no change to our expectation for at least 50 basis points of positive price year-over-year in 2023. Adjusted operating margin was 26.6% in the second quarter. The 90 basis point year-over-year decrease was the result of flow-through of gross margin, increased headcount and employee-related expenses, investments to grow the business and the inclusion of Standard Bariatrics.

Net interest expense totaled $16.6 million in the second quarter an increase from $11.2 million in the prior year period. The year-over-year increase in net interest expense reflects higher interest rates versus the prior year, partially offset by a reduction in average debt outstanding. Our adjusted tax rate for the second quarter of 2023 was 10.8% compared to 12% in the prior year period. The year-over-year decrease in our adjusted tax rate is primarily due to a reduction in tax costs resulting from U.S. tax law requiring capitalization of R&D effect. At the bottom line, the second quarter adjusted earnings per share was $3.41 and an increase of 0.6% versus prior year. Turning now to select balance sheet and cash flow highlights. Cash flow from operations for the 6 months was $170.6 million compared to $101.9 million in the prior year period.

The increase was primarily attributable to lower tax payments and favorable changes in working capital. Moving to the balance sheet. Our financial position continues to provide its flexibility to operate the business and execute it on our disciplined capital allocation strategy. At the end of the second quarter, our cash balance was $250.8 million as compared to $292 million as of year-end 2022. The reduction in cash on hand is primarily due to $154.5 million of payments on our senior credit facility, partially offset by $131.2 million of free cash flow generated during the first 6 months of 2023. Net leverage at quarter end was approximately 1.6x, which remains well below our 4.5x covenant. Turning to financial guidance. Starting with the acquisition of Palette Life Sciences.

As mentioned previously, Palette Life Sciences is expected to generate net sales of approximately $56 million in 2023. Assuming a December 1, 2023 close date, the acquisition is not expected to significantly impact Teleflex’s 2023 revenue. In 2024, we expect the business will achieve year-over-year revenue growth in the high-teens, below 20% range. Assuming December 1, 2023 close, the transaction is expected to be approximately $0.15 and $0.35 diluted the company’s adjusted earnings per share in 2023 and in 2024, respectively. Beginning in fiscal year 2025 and thereafter, the company expects the acquisition to be increasingly accretive to adjusted earnings per share. Teleflex plans to finance the acquisition in borrowings under it’s revolving credit facilities and cash on hand.

At signing of the transaction, we remain in a solid financial position with pro forma net leverage of approximately 2.5x. Accordingly there is no change to our stated long-term capital deployment strategy. Moving to our outlook for 2023. Given our operational performance in the second quarter and our second half outlook, we are revising our 2023 financial guidance. Specifically, we are increasing the bottom end of our 2023 constant currency revenue guidance by 50 basis points to 5.5% to 6.25%. Turning to foreign exchange. We now assume a positive impact from foreign exchange translation of approximately $8 million or 30 basis points to GAAP growth in 2023. This compares to our prior guidance, which assume that $10 million or a 35 basis point headwind for 2023.

Note, our second quarter revenue results reflect a foreign exchange result that was approximately $6 million favorable to what was previously expected. The balance of the updated full year 2023 impact of changes in foreign exchange rates is expected over the second half of 2023. Our revised foreign exchange guidance for 2023 captures the actual rates in the second quarter and now assumes current foreign exchange rates, including a euro to dollar exchange rate of $1.10 in the second half of the year. Considering the revised foreign exchange headwinds, we expect reported revenue growth of 5.8% to 6.55% in 2023, implying a dollar range of $2.953 billion, $2.974 billion and implying an increase to the low end of the dollar range of $32 million and the high end of $80 million.

There are no changes to our outlook for gross and operating margin in 2023. Below the line, we now expect net interest expense to approximate $77 million in 2023, which reflects net incremental borrowings under our revolver for the acquisition of Palette. We are maintaining our 2023 guidance for adjusted earnings per share of $13 to $13.60. Our adjusted EPS outlook has been updated to include $0.15 of dilution from the acquisition of Palette; $0.15 dilution associated with the recall of ET Tubes and the Endurance catheter during the second quarter offset by $0.15 of foreign exchange benefit and the balance from favorable operating performance, including better-than-expected results in the second quarter and higher growth expected in the second half of the year.

That concludes my prepared remarks. I would now like to turn it back to Liam for closing commentary.

Liam Kelly: Thanks, Tom. In closing, I will highlight our 3 key takeaways from the second quarter of 2023. First, our diversified portfolio and global footprint drove durable growth in the second quarter. Our execution remains strong. We are launching new products and our margins remain healthy. Second, the solid second quarter performance keeps us well positioned to deliver on our financial guidance for 2023. As we look into the second half of 2023, we anticipate stable to improving macro conditions. Third, we will continue to focus on our strategy to drive durable growth. We will invest in organic growth opportunities and drive innovation, expand our margins and execute on our disciplined capital allocation strategy to enhance long-term value creation.

We are excited about the acquisition of Palette Life Sciences. We believe that the acquisition will be a meaningful contributor to our growth in the coming years, be immediately accretive to gross margins and will enhance our adjusted operating margins in the near term. In turn, we have further confidence in our ability to deliver on our 2023 to 2025 LRP revenue objectives. That concludes my prepared remarks. Now I would like to turn the call back to the operator for Q&A.

Operator: [Operator Instructions]. And our first question comes from Shagun Singh of RBC.

Shagun Chadha: So by our math, the acquisition would add about 50 basis points to overall Teleflex growth and 400 basis points to Interventional Urology segment. Just is that in the ballpark? And does this help offset some of the weakness in UroLift? Or is your 8% to 9% LRP still intact?

Liam Kelly: Thank you very much for the question, Shagun. I’ll start with your question as it relates to the LRP. As it relates to the LRP, the acquisition of Pallet emboldens our confidence in at least achieving the 6% growth as laid out in our LRP. And here are the building blocks. Durable core will grow at 5%. I think given the performance so far this year and what we expect for the remainder of the year, we feel super confident in that 5%. The high-growth portfolio will be growing at least 12%. And within that, the Interventional Urology business unit, which will include Palette, will be growing at least 8%. So this addition of Palette ensures our ability, we believe, to achieve our 6% LRP growth that we laid out in our Capital Markets Day.

With regards to the addition, what addition that it will make into the future growth of Teleflex, I mean, your math is pretty spot on. It’s delivering $56 million this year. It’s going to grow in the high-teens, to the low-20s in 2024. And I do believe that, that kind of a number should be sustainable into 2025 as well. So obviously, your math is pretty right on the money. And I think it’s an important point to note, as I outlined in my prepared remarks, the gross margins from Palette is a really important factor. And so far as it’s not alone accretive to Teleflex. It’s accretive to the Interventional Urology business unit today and is accretive to the high-growth portfolio. Thanks for the question, Shagun.

Shagun Chadha: And just as a follow-up on UroLift, can you just elaborate on trends you’re seeing? I know that the patient volume comps were a little easier this quarter. But just on a comp-adjusted basis, can you elaborate on trends you are seeing?

Liam Kelly: Yes. We’re still seen through the first half of the year a reduction in patient flow to the urologists. I think from — within the quarter, there were some green shoots, I guess, when you see that the hospital rate of growth continued. We still see pressure in the office side of service, and that still remains somewhat of a challenge to us. We continue to train a robust amount of surgeons. And actually, we saw a tick up in the amount of surgeons that we trained in Q2, but the office still remains a troublesome side of service for this product in the quarter, Shagun.

Operator: Our next question comes from Jayson Bedford of Raymond James.

Jayson Bedford: I wanted to follow-up on the comments on the Titan Stapler. It seemed like the revision in the guide there, you seem depended on longer VAC committee approvals. And I’m just wondering, kind of what’s the source of the pushback there? Do you need more clinical data? Is it a price issue? Just love to dig in on that a little bit more.

Liam Kelly: Yes, Jayson. I mean, obviously, our initial expectation at the low end was $30 million. It’s now in the high-teens. We still expect Titan to be a significant contributor to the LRP. The pushback as we go through the VAC committees and the VAC committees have the knock-on effect of having an impact on the proctoring. Now as I also said in my prepared remarks, we doubled the number of surgeons we proctored from Q1 to Q2, so that’s encouraging. It’s just time, Jayson, is the biggest issue. We would have thought that this product because it’s functioning exceptionally well. That’s what’s very encouraging. The product is doing exactly what it’s supposed to do. I think what’s also important is that it’s a very, very big end market, $300 million.

So once we get through the value analysis committees, the product gets adopted and it’s going pretty well. It’s just taking us longer than we thought. It’s early in the ramp. It’s a big market. We have a path forward. We know what we need to do. It’s just taking us longer to get there as we go through that adoption curve. And I think that it’s also a — having the buttress material for the entire year 2024 will be an important factor for us. Technically, our product doesn’t need buttress because it’s a complete line of staples. But 60% of Bariatric surgeons use buttress when they do a gastric sleeve and it is the standard of care. And a surgeon will tell you, I use buttress because I want to sleep at night. And it’s just a standard of care.

And I think having that in 2024 will also help get us through. But it’s simply time, Jayson. There’s no major pushback. It’s not a pricing issue. It’s not a product performance issue. We’ve got the clinical data that we need. So we have everything that we need to get through, but it’s just taking longer for these VAC committees to come together and allow us through the system.

Jayson Bedford: Okay. Liam, that’s very helpful. And just quickly as a follow-up. OEM continues to be strong there. Can we assume there’s nothing kind of onetime or stocking in that number and you’re still confident in which should be a strong double-digit growth outlook for OEM?

Liam Kelly: Yes. I think OEM has performed exceptionally well, not just this year, but over the last 2 years as well, coming in just shy of 20% stellar performance. This is a business that we have really good visibility into. There are no one-time stocking major items to answer your question directly. This is pure performance. It’s taking share from other competitors in the market. It is also that acquisition that we did a number of years ago, really helping us go along, but it’s really good performance by Greg and the entire team in the OEM division. And I do believe that OEM will have good solid double-digit growth this year, and I do believe that the future is good for that over the foreseeable future with the visibility we have.

Operator: Our next question comes from Anthony Petrone of Mizuho Americas.

Anthony Petrone: Maybe, Liam, just to pivot to Standard Bariatrics. Just an update on traction in the quarter, expectations through the end of the year for Standard. We’ve been hearing obviously some noise on the GLP-1s impacting Bariatric from Intuitive. So just an update on bariatric and then I’ll have a follow-up on earnings.

Liam Kelly: Yes, absolutely, Anthony. And as we said during our prepared remarks, we’re now expecting the high-teens for our Standard Bariatrics. I think that there’s some impact from GLP-1s. But the main issue is getting through these VAC committees. And therefore, you have to get through the VAC committee before you proctor. And as I answered to Jayson’s question, we doubled the number of surgeons that we proctored from Q2 to Q1. Product is performing very, very well. The introduction of buttress will help us. I do believe that GLP-1s have some impact, but it’s not the big impact. I mean we’re just stacking to ramp within this curve. And I do think that there’s mixed views on GLP-1s, they get the reimbursements, it is for a shorter period of time.

And therefore, if you talk to most Bariatric Surgeons, they think it’s having a shorter-term impact. But in the longer term, they don’t see it having a long-term impact on gastric sleeve surgeries. Just the weight loss from gastric sleeve is so more significant than it is from the GLP-1s. But we’re watching it very, very closely, Anthony, and thanks for the question.

Anthony Petrone: And then maybe for Tom, just on margins and the progression here, revised 26% to 26.75%. And maybe just a recap on looking out through the LRP as we look forward to ’24, ’25, just how we should be layering margin expansion in according to or based on what’s still out there for the LRP and how we can translate that into earnings power? Now it’s a little bit confounded down to the earnings line with the Palette acquisition and some of the below-the-line sort of moving parts. So how do we layer in? How do we think about margin expansion from here based on the current guidance out through the LRP? And how does that play in the earnings power now that we have an additional drivers in the nonoperating lines?

Thomas Powell: Okay. Well, as we spoke earlier in the year, we reaffirmed the LRP guidance at that point in time. The way I would think about the addition of Palette is that it is a product that we expect to do about $56 million in revenue this year on a full year basis. Obviously, we wouldn’t have it for the entire year. But then to grow in the high-teens to low-20s over the next couple of years. And as we had mentioned, we expect it to be margin accretive to the IUBU business units to all of Teleflex in the high-growth portfolio. So we see this as slotting in very nicely and providing some additional comfort as we look out into the future years in our margin progression.

Operator: Our next question will come from Larry Biegelsen of W. F.

Nathan Treybeck: This is Nathan Treybeck on for Larry. Can you just talk about Palette like the overlap with UroLift position, how penetrated is the U.S. market? And so far, is Barrigel expanding the market or it taking share?

Liam Kelly: Yes, Nathan, thank you very much for the question. So we see this as a market development opportunity. If you look at our existing interventional urology customer base, only 20% of them use the Barrigel spacing technology today and 97% of them actually treat prostate cancer. So this is a market expansion opportunity for us in the domestic market within the United States. The product is approved in EMEA, and it’s also approved in Australia. We will be expanding approvals into other geographies as we take this under our wing. But we definitely see this as a margin expansion opportunity. And we definitely see there’s an opportunity to leverage our existing sales force and leverage that channel. We have a super global channel now into the urologist, and we believe that we can expand the market.

There’s other spacing technologies out there. I think between having another company talking about spacing and other company raising awareness. We believe we have a better product than anything that’s out in the market today. It’s sculptable. It is visible. It is easy to inject. It doesn’t solidify overly quickly. It’s a one-step process. it’s reversible. We’ve had excellent clinical data. There have been zero embolisms that have been 0 device-related adverse events, and we have robust clinical data to support the product. We love the growth profile. We love the margin profile and we love the synergies within our sales force. And we’re not going to build this into our model, but there is the potential that it could have also a halo effect for UroLift in expanding into urologists that previously may not have been open to trying a new technology like UroLift.

Nathan Treybeck: Okay. And if you could just give us your high-level thoughts on 2024 in light of the acquisition, which is expected to be $0.35 dilutive, like what is your ability to absorb this dilution? I mean, the street has you at $14.50 to an EPS next year?

Liam Kelly: Yes. Nathan, we’re not going to get into 2024 on today’s call. We’re halfway through the year. We’ve raised our revenue guidance for the second quarter in a row. We feel really confident about where we’re at as a company. We’ve also — we’ve maintained this year’s earnings per share guidance even with the $0.15 dilution that’s coming from Palette. So we feel really good about where we’re at, and we’ll get into 2024 guidance when we get to February next year. I’ve already had made comments on the LRP about our belief and confidence in being able to achieve all aspects of the revenue profile with Palette within our LRP 6% and all the components within that I just laid out.

Operator: Our next question comes from the line of Matthew O’Brien of Piper Sandler.

Matthew O’Brien: Liam, just in talking about Palette a little bit here that the Barrigel product got approved in May of last year. You’re saying it at least the majority of revenue total per Palette now. So I don’t have the numbers, but I’m assuming it’s $30 million or $40 million of revenue in a year basically that they’ve generated already. And then you’re saying kind of in high-teens to low-20% growth for next year. I would think that just if they’ve been able to grow that quickly that you guys at Teleflex to be able to grow it at a similar rate. So why is high-teens, low-20% is the right number? Why isn’t it 30%, 40%, 50%? I know you have to integrate it, but why wouldn’t it be significantly higher than that, just given how well they did with it on their own?

Liam Kelly: Well, I think, Matt, everything you say, it’s hard for me to push back too hard. We’re definitely going to have more sales reps out there. We’ve got a very strong sales force within the United States and globally for this call point. I mean I think the high-teens low-20s is probably the right number for us right now. If it’s better than that, it’s better than that and everyone’s happy. I think for us, we feel right now that that’s the right number. You’re correct. We’ve got to integrate it. It’s not the toughest integration on the planet in all transparency. It’s 1 call point, 1 big large call point. And then obviously, the [indiscernible], we have a methodology to address that through the addition of clinical trainers.

And this is an investment hypothesis for us with the addition of Palette. We are going to continue to expand this market and grow this market. And if it’s better in the high-teens and low-20s, we’ll let you know, and we’ll grow it from there. But it’s — we feel it’s a great transaction. And if it’s better than we expect, then the multiple is better than we expect and everything within that dynamics of it is better than we expect.

Jayson Bedford: Got it. That’s understandable. I appreciate that. And then just back to UroLift, I know it’s getting to be a smaller part of the overall business, but there’s other areas of med tech that just have not recovered from the pandemic. I can think of women’s health as one area. Is this a category that especially in the outpatient setting and the physician’s office setting that is just probably structurally different from now on and let most likely will not reaccelerate? Hence, the 8% to 9% that you talked about last quarter, probably is it going to happen in the future?

Liam Kelly: Yes. Now in all transparency, when we began the year, I thought that UroLift was going to recover. I expected it to grow somewhere in the region of around 3%. Now as I look forward to the full year, I would expect Interventional Urology, which would include Palette to have a low single-digit decline, something around 3% right now. I think what’s changed. The market is huge. The condition is progressive. There are loads of men out there that have BPH. I think the pressure in the office, Matt, as I look at it today, is the real issue. If you go back to ’17, ’18, ’19, we were growing the market because we were using the office call point to bring men in from the drug dropout and the drug category, and we were able to convert those men during that period of time.

With the change in reimbursement, with the patient flow, with the lack of staffing, that channel for now is challenged in pulling those men in and expanding the market. So I think that we need to get the office channel addressed. And I just can’t see that getting addressed in the next 2 quarters being totally honest. So I think it’s going to take at some time to recover. Now having said that, this quarter, we trained more docs than we had the quarter before for a number of quarters. So docs are putting their hands up to get trained. The international profile is excellent. I couldn’t be happier with what’s happening overseas. And domestically, I think that for the remainder of the year, I think it’s going to do what I said it’s going to do. There are a couple of green shoots.

It was minus 5%. Last year, it was minus 5% in the first quarter it was minus 2.5% this quarter. So there’s a couple of green shoots here some positivity there. But I think that it’s a challenged call point in that office right now with all of the factors that are playing into it.

Operator: Our next question will come from Craig Bijou of Bank of America Securities.

Craig Bijou: So I wanted to start with some of the components of the LRP. And namely, Liam, I think you said that you now expect Interventional Urology, including Pallet to grow at least 8%, which would mean underlying UroLift, longer-term growth takes a step down. So I just wanted to make sure that, that’s correct. And maybe what’s driving that, is that the — it sounds like it’s the U.S. side, but maybe a little bit more color on what you see over the next several years for UroLift? And then also, Standard Bariatrics. So I know you’re expecting some pretty good growth for the next several years. Just wanted to understand how we should think about that growth level in ’24, ’25 relative to what you had expected before?

Liam Kelly: Yes. I mean I think — I’ll start with the first part of your question. And your assumption and your math is, I can’t fault it, you’re absolutely correct. But that’s why I’m so confident in the 6% LRP. I’m not expecting any here or I’m not expecting anything from UroLift within the LRP right now. The international market is strong. If the domestic market recovers, it’s great for investors. It’s great for Teleflex, and it’s great for our LRP. The margin profile is strong. So in effect, in my mind, this basically takes UroLift off the table in regards to the LRP. With regard to Standard Bariatrics, like I said earlier, it’s a huge market. Once we get through the VAC committees and the proctoring of the surgeons. Our goal here is to continue with the performance of the product to continue to take our appreciated share in the bariatric sleeve market.

Bariatric sleeve market isn’t going away because of GLP-1s, it’s going to be there forever. There is a place for this. If you talk to any surgeons, they will tell you that. So I do believe that it’s going to be a meaningful contributor to the LRP for our ’24 and ’25 as we grow into that huge market.

Craig Bijou: Got it. And just as a follow-up on ’24, I know you guys aren’t going to provide guidance or talk about what the Street has estimated. But would love to hear any of the puts and takes that are going to affect ’24. Obviously, you have the Palette acquisition, you have the MSA rolling off. So I just want to ask you specifically on what we should be thinking about when we’re thinking about ’24 EPS and if maybe the messaging that you guys have given previously is not fully quite reflected in the Street’s estimates?

Liam Kelly: So I’ll let Tom comment on the EPS. I mean, I think you’ve hit the 2 main ones that I think the Street needs to think about. Obviously, the MSA, the $70 million of revenue that goes away next year, then you layer in — and that’s at very low margins and has an impact on EPS of about $0.25. But then you layer in the Palette acquisition, and of course, Palette acquisition adds back in $56 million of revenue on the base year and obviously then growing at high-teens to low-20s. So that — those are the puts and takes on the top line. And I don’t — I’m not expecting Tom to get into any real details about 2024 EPS, but I think those are the 2 main ones, Tom, aren’t they?

Thomas Powell: They are. I will say that a couple of things that we’re watching as well. Our foreign exchange rates, which have shown a nice improvement recently, and so that should give us a half year benefit next year. And we’re also starting to see some improvements in the areas of inflation. So we’re seeing our sea freight has already come back and shipping times are improving dramatically, which will allow us to be able to do a couple of things, including bringing down our level of inventories, which will obviously help out to cash flows as we continue to manage those down. But I think, yes, the key things that are changing are the MSA, Palette and then the — we’re watching FX and inflation closely, but those could be some tailwinds for us.

Operator: Our next question comes from Kristen Stewart of CL King.

Kristen Stewart: Tom, I was just wondering on the bottom line, why just reiterate the guidance rather than tightening the range?

Thomas Powell: Well, it’s a fair question. As we think about what’s happened is that we looked at all the puts and takes of the quarter and there are end of the year. And so if you — if you think about what we’ve commented on, the EPS range was really driven by adding in the incremental dilution from Palette of $0.15. And then associated with the recalls in the second quarter, we had another $0.15 of expense. The FX, as I mentioned, has improved. And as a result of both second quarter and full year expected benefit. That actually is an offset of $0.15. And then the balance is a combination of improved operating performance in the second quarter and second half. So essentially, a number of changes since our last guidance, that pretty much net out.

As Liam commented, we are covering the dilution associated with the Palette acquisition and still maintaining guidance. So we’re — we’re effectively raising, if you will, from that standpoint that we’re covering something new. But as we continue to monitor the year, we’ll look at it and reevaluate the range in the third quarter.

Operator: Our next question will come from Richard Newitter of Truist Securities.

Unidentified Analyst: It’s Ling on for Rich. So maybe I’m wondering if you could provide some color on the trends in your high-growth portfolio, like including MANTA thermostatic devices, et cetera.?

Liam Kelly: Yes. As I said in my prepared remarks, MANTA continues to penetrate the market is on track for real solid double-digit growth. If you look at the other areas of the high-growth portfolio, we’ve discussed 2 of them already. And we would expect that UroLift for the high-growth portfolio to be well within those high single-digit growth. I do want to take a moment on the durable core, if you don’t mind. I think that the durable core has been performing really, really solidly. We’ve had excellent performance from OEM that was mentioned earlier, but Interventional Access has had a great performance as has Asia Pacific. And as investors familiar with Teleflex will be aware of both Interventional and APAC have very strong gross margins for the company.

So the whole portfolio of Teleflex, we believe is working really, really well. From the durable core to the high-growth. And we believe that for 2 quarters in a row, we called up our revenue forecast 2 quarters in a row. And we have seen significant improvement from last year. I think back last year, we grew 4.3%. Look at our guidance for this year, the midpoint has at almost 5.9%. So we’ve seen significant improvement. And again, this is the advantage of a diversified global company. Not everything is going to go the way you think. But when you add it all together, it all makes sense. And it’s — I think it’s a solid performance, and the addition of Palette is really going to help us.

Unidentified Analyst: That’s great. So maybe I’ll follow-up on margins. Could you walk us through the cadence of gross margin operating margin throughout the year?

Liam Kelly: You want the cadence of gross margin and operating margin throughout this year?

Unidentified Analyst: Correct.

Liam Kelly: Okay. I might ask Tom to cover that.

Thomas Powell: Yes, absolutely. Well, I think first of all, one thing that you may want to understand is just that FX has got a pretty meaningful impact on how margins actually play out. We actually saw foreign exchange have a meaningful positive impact in the first quarter. It turned slightly negative in the second quarter as it impacts gross margin. And then the third and fourth quarter, we expect after the FX impact — or I should say we expect the FX impact to be even greater to gross margins. So if you were to strip out the foreign exchange impact, what you’d see is a sequentially improving gross margin throughout the year with a fairly sizable improvement from the first to the second quarter and then again from the third to the fourth quarter.

If you were to maintain the FX in there, what you’re going to see is a gross margin that is about the same each quarter, a little bit softer in the third, a little bit stronger in the fourth as what we experienced here in the second quarter. In the second quarter, we had a couple of puts and takes. Obviously, we had the recall expense. Foreign exchange, as I mentioned, was modestly negative impact, but we also had favorable pricing and some credits from foreign countries that provided some benefit. So overall, I would say that pay attention to how FX may play out. And if you were to strip that out, you’d see sequentially improving gross margin. And it’s very similar on the operating margin. If you strip out the FX impact, you would see sequentially improving op margin throughout the year.

Obviously, we do have to consider FX. And as a result, what you’re going to see is by a little bit softer gross margin in the third quarter and something the same or a little bit stronger in the fourth quarter as what we saw in the second.

Operator: Our next question will come from George Sellers of Stephens.

George Sellers: I guess switching back to Palette quickly. With the 97% of UroLift users, that are also treating prostate cancer. And I believe you said 20% already used Barrigel. Are they also already using a space or product? Or is this more of a white space opportunity?

Liam Kelly: So there would — George, great question. There would be a white space opportunity of about 60%. So an addition — in total, about 40% of them are using a spacing product of some sort, 20% of them using Barrigel. And so therefore, you would be left at around 60% of white space. And again, I will reiterate. For us, this is not about attacking the other 20%. This is about attacking the 60%, educating the physicians on the benefits of using spacing, the benefits of Barrigel as a spacer, the ones I outlined already and to remove that toxicity from other organs around the prostate. So it’s really around white space, George, growing into an existing customer the urology, oncologists, which is an excellent call point for us to get into where some of the product is used by those individuals. So really encouraged by that, and I think it’s a nice opportunity.

George Sellers: Okay. That’s really helpful. Switching to the OEM segment, this continues to really perform exceptionally well. And it sounds like you’ve got visibility to that continuing the remainder of the year. But could you just give some additional detail on the pieces driving that outperformance? And how should we be thinking about that sustainability over the LRP?

Liam Kelly: Yes. I think great question again, George. I think that’s the beauty about the OEM businesses is this right across the Board. We’ve got a really strong double digit in the catheter business. We’ve got a really strong double digit in the suture business. We got really strong double-digit in the completed product business. And obviously, the complex catheters within those catheters are performing exceptionally well. It’s right across the Board. You’re correct. We have great visibility to this business. This is one business where the customers order well ahead in advance to make sure that they have capacity booked. And again, I think we have — we’re really encouraged by what we see. It is dilutive to our gross margins.

But God, is it accretive to our op margins? This is a great business for us and one that’s performing exceptionally well with long visibility. And if I could find another tuck-in to put into OEM, we’ve got the capital available, I do it in the morning because it’s — we’ve got solid growth within there and a really strong customer base.

Operator: That is all the time that we have for questions this morning. I would like to turn the conference back to Lawrence Keusch for closing remarks.

Lawrence Keusch: Thank you, Jayal, and thank you to everyone that joined us on the call today. This concludes the Teleflex Incorporated Second Quarter 2023 Earnings Conference Call.

Operator: You may now disconnect.