Teleflex Incorporated (TFX) Q1 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2020 Teleflex Inc. Earnings Conference Call. At this time all participants are in a listen only mode. After the speakers presentation there will be a question-and-answer session. [Operator instructions] Please be advised that today’s conference is being recorded. [Operator instructions] I would now like to hand the conference to your speaker today, Jacob Elguicze, Treasurer and Vice President of Investor Relations. Please go ahead, sir.

Good morning, everyone, and welcome to the Teleflex Inc. First Quarter 2020 Earnings Conference Call. The press release and slides to accompany this call are available on our website at www.teleflex.com. And as a reminder, this call will be available on our website, and a replay will be available by dialing 8-558-592-056 or for international calls, 404-537-3406, pass code 7545905. Participating on today’s call are Liam Kelly, President and Chief Executive Officer; and Thomas Powell, Executive Vice President and Chief Financial Officer. Liam and Tom will provide prepared remarks, and then we’ll open up the call to Q&A. Before we begin, I’d like to remind you that some of the matters discussed in the conference call will contain forward-looking statements regarding future events as outlined in our slides. We wish to caution you that such statements are, in fact, forward-looking in nature and are subject to risks and uncertainties, and actual events or results may differ materially. The factors that could cause actual results or events to differ materially include but are not limited to, factors referenced in our press release today as well as our filings with the SEC, including our Form 10-K, which can be accessed on our website. With that, I’d like to now turn the call over to Liam.

Thank you, Jake, and good morning, everyone. It’s a pleasure to speak with you today. Before I get into the details of our quarterly performance, I’d like to offer my condolences to anyone who has been impacted by the coronavirus. As well as my sincere thanks to all the health care workers, including Teleflex workers who have returned to clinical practice, who put themselves at risks to battle COVID-19 every day. I’d also like to take a moment to recognize the Teleflex employees around the world. These last few months have been far from normal, and our employees continue to inspire me as they have stepped up in extraordinary ways to ensure that we are able to provide our products to the hospitals, clinicians and patients who need them most. So a big thank you to all Teleflex employees. Now on to our quarter one results. So, the first quarter of 2020 was a solid start to the year for Teleflex. Particularly when you take into consideration the global escalation of the COVID-19 pandemic. During quarter one, we generated constant currency revenue growth of 4%. While on a selling day neutral basis, our constant currency revenue growth was approximately 5.5%. Quarter 1 revenue growth was driven by the performance of our Americas, EMEA and OEM segments. But our Asia segment experienced a decline due to COVID-19. From a margin perspective, we generated adjusted gross and operating margins of 57.3% and 25.6%, respectively. This translated into year-over-year growth of 60 basis points at the gross margin line and 190 basis points at the operating margin line. While from an adjusted earnings per share standpoint, we achieved a robust year-over-year increase of 21.4% as earnings per share totaled $2.72 during the quarter. I’m extremely pleased in our ability to drive significant leverage throughout the income statement while navigating through a very difficult operating environment. It is a testament to the strength of the diversified global portfolio we have built over the past few years. Next, I thought it would be helpful to provide some context regarding how we saw COVID-19 impact our first quarter results. As a reminder, our previously provided full year 2020 financial guidance assumed that we would be negatively impacted from COVID-19 by between $5 million and $10 million in the revenue and between $0.05 and $0.10 of adjusted earnings per share. This was assumed to all be related to our business within China. And it was expected to only be a quarter 1 event. It is important to keep in mind that when we provided our guidance on February 20, COVID-19 was largely only impacting China. As we progress through the first quarter, the months of January and February as well as the first 2 weeks of March, were largely in line with our initial expectations, and we did not see much of a negative impact outside of China. However, as the virus began to spread further globally, coupled with the announcement from the American College of Surgeons and the surgeon general, requiring hospitals to postpone and any procedures that are considered to be nonemergent or elective in nature, we began to see more of a pronounced negative impact during the last few weeks of the quarter. And while we estimate that only 1/3 of our product portfolio is correlated to nonemergent or elective procedures, we still felt an impact to our business. During the last few weeks of March, this additional headwind largely occurred within the Americas. [Indiscernible] And primarily within our Interventional Urology, Interventional Access and Surgical product lines. We did see some offset within the Americas from increased sales of certain respiratory products. However, that was not enough to offset the lost revenue and margins from the canceled procedures. Turning to EMEA. We saw a significant increased demand for certain Vascular Access, respiratory and Anesthesia products, and we estimate that our results within this part of the world benefited due to increased demand for our products used in the treatment of patients with COVID-19. While within Asia, the impact from COVID-19 was in line with our previous assumptions. In total, during the quarter, we experienced a revenue headwind that was slightly worse than our initial guidance contemplated while at the adjusted earnings line, the headwind was in line with the high end of our original estimates. This is despite our guidance anticipating an impact in China only, as the virus has expanded beyond China to the rest of the world. Next, I’d like to provide you with our thoughts as we look forward to the remainder of the year. First and foremost, I want to share with you the guiding principles we established as a framework for decision-making through the crisis: employee and customer safety first, communicate with transparency, and manage the business to accelerate through the recovery. On safety first, let me just say that the health and safety of our workers is paramount. As such, we have implemented best practices for health and safety guidelines in accordance with the World Health organization, the CDC and local health authorities. For communicating with transparency, we have formed a global crisis management team to coordinate our actions and engage our employees with regular updates. And on managing the business to accelerate through the recovery, we remain committed to investing the resources necessary to support increased demand due to COVID-19 for certain product lines while maintaining adequate inventory to benefit from a phased recovery. Second. To date, we have had minimal disruptions within our global supply chain. However, this is a very fluid situation and things can change quickly. As an example, because of certain restrictions placed by the governments of both India and Malaysia, we are not currently operating at 100% capacity at certain facilities within those countries. But this restriction has not impacted and in critical respiratory, airway, our vascular products required in the fight of COVID-19. Indeed, for critical respiratory product families, we have been able to achieve significant increases in production over the past four to six weeks. In fact, only a few days in advance of this earnings call, we learned that the Malaysian government was removing certain restrictions they had placed previously, which we expect will enable us to be in a position to increase our production capacity back up to 100% within our Malaysian facility over the next week. And while we can continue to do our best to meet customer demand for most of our products, we are having to place certain respiratory, Vascular and Anesthesia products on allocation due to elevated order rates and increased delivery times associated with those products. Third, based on trends that began in the latter half of March, we expect that the deferral of certain nonemergent and elective procedures will continue to negatively impact our Interventional Urology business and certain portions of our Surgical and Interventional Access product lines. As I mentioned earlier, we estimate that only about 1/3 of our product portfolio is used within procedures that are capable of being deferred. That is not to say that all of these procedures are being deferred due to the criticality of some patients. We also believe deferment cannot occur indefinitely as the patient’s underlying condition are not improving simply because they wait to get a procedure performed. Conversely, once the United States begins to reopen, we believe that elements of our portfolio could benefit from a recovery in outpatient and day case elective procedures as states reach the White House Phase I status. But the remainder of our portfolio impacted by COVID would recover in Phase II. Further, I’d like to advise the investment community that our portfolio has very limited capital equipment exposure. It is our belief that UroLift procedures would be the first to come back in Phase I. Approximately 60% of those procedures are performed in an office or ASC setting. Based on discussions that we have had with several high-volume users of UroLift, their belief is that they should have the capacity to perform a significant amount of the procedures they previously had to postpone. The remaining 40% that are performed in the hospital do not require an overnight stay and are also designated as Phase I. It is our belief that once consumer confidence is re-established, we will begin to see a recovery here also. Following the return of UroLift procedures being performed, we would envision that our Interventional Access and Surgical business would rebound next. As a result, we have positioned our business to be able to take advantage of that increased demand when it occurs. This includes building certain safety stock and making sure that we have the appropriate amount of inventory on hand. Additionally, we have not furloughed our laid-off employees. Rather, we wanted to make sure that we retain our key sales and clinical personnel and keep them motivated in anticipation of procedures returning. However, to somewhat mitigate the negative financial impact stemming from the reduction of certain procedures, we have taken steps to curtail operating expenses. This includes the adjustment of certain executive and management compensation as well as the elimination of any discretionary spending that was not critical to the organization. We’ve also made the decision to delay our national direct-to-consumer UroLift campaign. With that said, given that we cannot accurately predict the scope and timing of the recovery, we are withdrawing our previously provided 2020 financial guidance. Despite needing to remove our 2020 guidance, I remain confident that our long-term global opportunity remains significant, and our business is well positioned to weather the COVID storm and accelerate in the future. With that said, let’s turn our attention to first quarter financial results. I will begin with a review of our reportable segment revenues. And unless otherwise noted, the growth rates I will refer to are on a constant currency basis. The Americas delivered revenues of $358 million in the first quarter, which represents an increase of 4.3%. While on a selling day neutral basis, the Americas grew approximately 6%. Growth within this region was driven by our Interventional Urology, Vascular Access and respiratory product categories and would have been significantly higher, had it not been for the negative impact of COVID-19. EMEA reported revenues of $156.1 million in the first quarter, representing 3.8% growth. While on a selling day neutral basis, EMEA also grew approximately 6%. Growth within this region was driven largely by broad strength across our Vascular Access and respiratory portfolios. And as I stated earlier, we estimate that EMEA benefited from elevated ordering related to COVID-19. Turning to Asia. Revenues totaled $53.1 million in the first quarter, which represents a decline of 9.2%. There was no impact to this region’s growth rate from selling day differences, however, we estimate that we would have had positive constant currency revenue growth, had it not been for the impact of COVID-19. And lastly, our OEM business reported revenues of $63.4 million in the first quarter, which represents an increase of 17.5%. Like Asia, selling day differences had little impact on our OEM business. Growth was driven by a mixture of additional revenue coming from the acquisition of HPC, coupled with an increase of sales volumes of existing products. We do not believe that COVID-19 had a material impact on our OEM business during the first quarter. However, that may change as we move through throughout the year. As it relates to the acquisition of HPC, the integration efforts are well underway, and I’m very pleased with how the business is performing under our leadership. Let’s now move to a discussion of our revenues by global product category. Consistent with my prior comments regarding our reportable segments, commentary on global product category growth will also be on a constant currency basis. Starting with Vascular Access. Due to growth within both our PICC and EZ-IO products, quarter 1 revenues increased 5.6% to $150.3 million. We estimate that COVID-19 positively impacted the growth rates of our vascular products during the first quarter, while one less selling day negatively impacted growth. Moving to Interventional Access. First quarter revenue was $99.9 million, which represents a decline of 2.3%. During the quarter, growth in MANTA, OnControl and intra-aortic balloons was more than offset by declines in complex and drainage catheters as well as one less selling day. Our Interventional business also faced a difficult comparison in Q1 as revenue associated with our divested catheter reprocessing products still occurred during quarter 1, ‘19. Additionally, we estimate that COVID-19 negatively impacted the growth rates of our Interventional Access products during the first quarter as certain nonemergent procedures were canceled. Now to Anesthesia. Quarter 1 revenue was $75.7 million, which represents a decline of 3.9%. The decline in revenue was due to lower sales of laryngeal masks and certain regional Anesthesia products, as well as the impact of one less selling day. As it relates to COVID-19, we estimate that it had a negligible impact during the first quarter. Shifting to our Surgical business. Revenue declined by 11.5% to $75.4 million, driven largely by the impact of COVID-19 and Sterigenics Atlanta plant shutdown and a one less selling day. Moving to Interventional Urology. Quarter 1 revenue increased 24.3% to $74.2 million. Revenue growth rates during the months of January and February, as well as the first couple of weeks of March, were significantly higher than the quarterly growth rate we achieved as UroLift was off to a fantastic start to the year. Unfortunately, the cancellation of elective procedures because of COVID-19 impacted this product line more than any other within our portfolio. As I stated earlier, because the UroLift procedure is performed in an outpatient lower-acuity setting we would envision UroLift to be one of the first types of procedures that will be performed once the United States reopens. And finally, our other category, which consists of our respiratory and urology care products, grew 9.2% and totaling $91.7 million. In large part, we estimate that growth during the quarter was due to increased demand for respiratory products such as filters and humidification, resulting from COVID-19. That completes my comments on quarter 1 revenue performance. I would now like to turn the call over to Tom for a more detailed review of our first quarter financial results. Tom?

Thanks, Liam, and good morning, everyone. Given the previous discussion of the company’s revenue performance, I’ll begin at the gross profit line. For the quarter, adjusted gross profit was $361.1 million versus $347.8 million in the prior year quarter or an increase of approximately 4%. Adjusted gross margin totaled 57.3% during the quarter, which is an increase of 60 basis points versus the prior year period. The improvement in gross margin was largely due to favorable product mix, benefits from cost improvement initiatives and the impact of favorable fluctuations in foreign currency exchange rates. The mix benefit realized during the quarter was lessened by the impact of COVID-19 as the adverse revenue impact tended to skew toward higher gross margin products, including UroLift, Surgical and Interventional Access. In light of the reduced revenue outlook resulting from COVID-19, we have proactively looked at expenses in order to identify prudent opportunities to offset the COVID-19 related earnings impact while at the same time, preserving Teleflex’s ability to rapidly rebound once elective procedures recover. The combination of gross margin expansion and OpEx expense measures combined for a 190 basis point increase to adjusted operating margin, which came in at 25.6% for the first quarter. Included in the first quarter operating margin results was a foreign exchange headwind of approximately 50 basis points. Adjusted operating profit was $161.6 million as compared to $145.6 million in the prior year or an increase of approximately 11%. Continuing down the income statement. Net interest expense for the quarter totaled $14.9 million, which is a decrease of approximately 34% versus the prior year quarter. The decrease in interest expense primarily reflects reduced interest rates associated with our variable interest rate debt instruments as well as a cross-currency swap agreement that we executed in the first quarter of 2019. Moving to taxes. For the first quarter of 2020, our adjusted tax rate was 12.5% as compared to 14.8% in the prior year period. The year-over-year decline in our adjusted tax rate is primarily due to a more favorable mix of taxable income in the first quarter of 2020 versus the prior year period, offset in part by a lesser benefit from stock-based compensation. On the bottom line, first quarter adjusted earnings per share increased 21.4% to $2.72. Included in this result is an adverse foreign exchange impact of $0.10. Overall, we are very pleased with the strong bottom line growth despite the headwinds from COVID and FX. Turning now to select balance sheet and cash flow highlights. For the first quarter of 2020, cash used from operations totaled $11.5 million as compared to an inflow of $60.2 million in the prior year period. The decrease is explained by a $53.9 million increase in contingent consideration payments, largely related to milestone payments stemming from the acquisition of NeoTract. Additionally, a $10 million pension contribution was made in the first quarter of 2020. Overall, the balance sheet remains in good shape. At the end of the first quarter, our cash balance was $406 million and our U.S. cash balance was $182 million. Net leverage at quarter end was approximately 2.6x, providing comfortable headroom when compared to our covenant, which requires that we stay below 4.5x. Lastly, we have no near-term debt maturities of a material size. Then to pressure test our liquidity outlook in light of COVID-19, we prepared several recovery scenarios with varying recovery time lines. Under each scenario, Teleflex maintains sufficient liquidity to execute our plans and maintain comfortable covenant headroom with additional borrowing capacity remaining in place and available from our already existing credit facility. And that concludes my prepared remarks. I’d like to now turn the call back to Liam for closing commentary. Liam?

Thank you, Tom. In closing, we delivered solid first quarter results, bearing witness to the benefit of our global diversified portfolio. And while it is difficult to predict whether the path to recovery will be V-shaped, U-shaped or even W-shaped. We, as an organization, will continue to monitor closely the reopening plan state-by-state and country-by-country to ensure we take full advantage as states and countries reopen. We have introduced digital tools to our business units, where we believe it can be an effective in training clinicians on the safe and efficacious use of our products. We will manage the business prudently while staying focused on capitalizing on the long-term potential of our global product portfolio. I would like to finish by again thanking all of our employees who continue to manufacture, distribute and support products that are acquired in the fight of COVID-19. And I’ve been humbled by the response of Teleflex employees as we continue to deliver on our commitments to our customers, their patients and our investors. That concludes my prepared remarks. Now I’d like to turn the call back to the operator for Q&A.

[Operator instructions] And our first question will come from the line of David Lewis from Morgan Stanley.

Just 2 questions for me. I’m going to start with UroLift and then move on to one other segment. So, Liam, you discussed UroLift multiple times and your confidence sort of to the recovery. I just wonder if you could talk about the business trends here. How much was the business down at trough? And have you seen a bounce off April lows? And you talked a lot about ASC access as an advantage but how are you feeling about the 70-year old average patient age and how the referral trend or the patient will react? And then I had a quick follow-up on respiratory.

Okay. Thanks, David. So, I’ll talk about the trends that we saw as we went through January and February in regards to the UroLift and then what we saw in March. And I think that will give a good indication to the investment community as to what occurred cures procedures were canceled. So, if we look at January and February, we were actually growing the UroLift business at just over 38%. And in March, the business declined by 3.3%. In the last 2 weeks of March, if you compare that to the first 11 weeks, we actually saw a 64-ish percent decline in the business in those last 2 weeks as procedures got canceled. Now if I look at the other part of your question regarding why we think it’s going to recover and access and the age of the patient. First of all, the average age of a UroLift patient is not 70. The average age of a UroLift patient is just over 60. So, we don’t have, for sure, men in that 70-plus or in a higher risk category. And I think it’s all about customer confidence, consumer confidence as they go back into these centers. But the reason that I’m confident that UroLift is going to recover quickly is on a number of points. First, when I’m speaking to urologists, we know that there is capacity and a desire to do UroLift procedures. We’ve actually conducted a survey with over 170 urologists, and 60% of the urologists were contemplating, scheduling adjustments post-COVID. And investors that are familiar with the UroLift will be aware that, that 60% of UroLift procedures are performed outside of the hospital, and we believe consumer confidence will return first in the ASC and the office environment. And UroLift will obviously benefit from the states that move to Phase I on with CMS and the American College of Surgeons and other leading groups in agreements that outpatient procedures will recover first. So that also leads to our confidence. And the procedure can be performed within 1 hour in a doc’s office or in an ASC or even in a hospital and is the only procedure that will allow to prevent sexual dysfunction. And thirdly, there’s a strong financial incent for urologists and our sales force to ramp back up as quickly as possible. And if you look at the cadence of states, we spent some time looking at that. The 18 states and territories that are about to open or will open in the near future, account for about 32%. There are 4 other states coming quickly behind those, and they account for another 27%. So roughly 60% of the states, that where our business is done are going to open up in the near future. And last thing I’ll say is in that survey that we did, David, it highlighted that BPH is in the top 4 disease states that are being prioritized by urologists as they get back to work behind things like prostate cancer and kidney stones, which are obviously emergent and need a boost are emergent and will develop pain for the patient. And I think lastly, the last comment I’ll make, David, is our DTC campaign, when we bring that online could be a catalyst also to encourage men to go to these practices. Sorry for the long answer, but I think there’s a lot in that question.

I just -- story on the detail, Liam, exactly what I think investors were looking for. And just I’ll do a quick one here to wrap up. 2 businesses that were more durable here in the first quarter were respiratory and OEM. I’m just kind of curious how you see those businesses tracking here on a go-forward basis.

So you’re correct on our respiratory business. And again, I’ll give you the similar commentary on respiratory that I gave you on Interventional Urology. Respiratory in January and February had a small decline, about 2.2%. And you’d expect that, distributors tend to destock in the first couple of months of the year. In March, our respiratory business grew by 44%, culminating in over a 13% growth in the quarter, and that’s clearly because as COVID-19 had an impact, we saw first in EMEA increased orders for respiratory products, followed quickly by our American business. And then in relation to our OEM business, again, it’s a great business. It grew by 17.5%. No real day adjustment here, about half of the growth came from the acquisition and the other half approximately came from the core business. So OEM business has continued to perform excellently as it has done over the past number of years. As we move forward, we’ll keep a close eye on the COVID impact on the OEM. As I said in my prepared remarks, it’s difficult to ascertain that as we move forward because we make products for other companies, and we don’t know yet what the impact is to those companies. So thanks for the questions, David.

And our next question comes from the line of Larry Keusch from Raymond James.

I’m glad to hear everyone is safe. Just wanted to, Liam, maybe start with, as you think about the month of April, you provided some color on some of the parts of the business. But what can you tell us about how April is tracking? And specifically, how are we thinking about the various regions, Americas, EMEA and then Asia Pacific?

Well, Larry, I’m going to try and stay away from discussing intra-quarter results given that we have withdrawn our guidance. I’ll tell you what I, what happened as we entered into the COVID-19 crisis. And I’ll tell you what happened in EMEA and then what happened in March in the Americas. So, it’s -- the COVID pandemic spread from Asia to EMEA first. As hospitals realize, a lot more patients were turning up with respiratory conditions, they, we got an overwhelming number of orders for our respiratory products. And following on from that as patients then migrated through the hospital into the intensive care unit, we got increased orders in our Anesthesia portfolio for airway management products, circuits, ET tubes, those types of the products. And then about a week or 10 days later, as these patients needed vascular access, we saw a ramp-up in our Vascular portfolio within EMEA. The Americas tracked shortly after that. And we saw the almost exact same trend where you saw an increase in respiratory products, an increase in airway management products, and I would expect it to be followed by an increase in vascular products based on the same trend that we saw within in EMEA.

Okay. And then maybe just to finish that thought off, sort of where do you think China is now in terms of, are you seeing recovery there? And then the other question is, I know that you referenced 60% of UroLift procedures being done outside of the acute care setting, do you think there are ways that you can help move some of that outside of the hospital at this point so that perhaps some of that actually can come back faster if you can get it moved into doctor’s office or ambulatory surgical setting?

Yes. I’ll deal with the last part first. I mean, the one thing that I’m encouraged by is that we know that there is capacity in the ASC and in particular, within the office setting. We know also that it is a very effective procedure with great outcomes, and we know that it’s a profitable procedure in both of those settings. And given all of that, fact-based, it is very dependent thereafter on practice by practice. If a urologist has an office setting and does some work in a hospital, then, of course, they have that flexibility to move it to an ASC or an office environment. And if they don’t then they have, then it’s less likely to move. But there is capacity, Larry, and any time there’s capacity, our expectation is that there is flexibility to move from the hospital to the ASC or the office. Regarding the first part of your question on what we saw in China. So what we saw in February and March, was procedures beginning to come back, in particular, in March as they ramped up and it’s very dependent, I guess, city by city. In April, they actually allowed the residents of Hubei to move really throughout the country. As they stopped the lockdown in that part of the world. But what we see in Shanghai, in particular, is as we got towards the end of March, we started to see procedures getting to some sense of normalcy towards the end of March, and we expect Beijing to follow suit very, very quickly. And a lot of our business is done down in the Eastern Seaboard, Larry, so we expect to get back to some level of normalcy as we go through this quarter or quarter 2.

And our next question will come from the line of Jamie Morgan from SVB Leerink.

This is Rich Newitter from SVB Leerink. I wanted to just ask, first, Liam, on the long-range plan targets, particularly the margin trajectory, I appreciate you withdrew 2020 guidance but much of your spend is under your control. And maybe if you were to just take your base case, you said you were planning on multiple cases in the wake of COVID but if you took your base case, are the long-range margin targets still achievable, maybe not 2021, but say, within the 2-year timeframe, can you give any color there?

Yes. Rich, thanks for the question. So, let me begin by saying, Rich, that we continue to believe that our product portfolio is capable of reaching the 67%, 60%, 61% and 30% plus levels that we put out there a few years ago. That’s it, given the fact that we just withdrew our full year 2020 guidance because of this uncertainty surrounding COVID, it will be very difficult for me to sit here right now and tell you that we can still reach those goals by 2021. And we need to see countries reopen. We definitely need to see the U.S. reopen and procedures return. And once we see that occur, we will have a better idea as to the timeframe where we can achieve those goals. But as I sit here now, I’m still very confident in achieving those longer-term goals. The only uncertainty that’s in my mind is the timing. And I’ll want to see the recovery before I give more detail on that.

And maybe just one more. M&A, obviously, has been central to the strategy at Teleflex for a number of years now. I’m just curious, you went through your liquidity position, but how was that all BD activity changing in the wake of COVID?

Yes. Well, obviously, I still think that our preferred use of cash remains to conduct M&A although having said that, given the high level of uncertainty regarding how long the COVID-19 situation might last, we think it’s reasonable to assume that M&A will slow down in this environment. I think you hit a very important point there, Rich, that our leverage ratio is about 2.6x right now. So we’re in a pretty healthy spot. So, I think in the shorter term, we’ll be relatively cautious and prudent. But I think over the medium term, M&A will for sure continue to play an important role in our transformation from a medium growth company with margin expansion to a high-growth company with margin expansion. And the new reality will be that sellers will now be looking at the valuations that were much higher a couple of months ago. And this might actually present an opportunity for a company like Teleflex with our current liquidity situation. We are in a little bit of uncharted water here with COVID-19. And as a result, I would like the investment community to rest easy, we will continue to be as disciplined as we have ever been as we identify the appropriate targets and I don’t think that now would be the right time to do a billion-dollar transaction in the current environment. So, we will continue to be prudent and we’ll prioritize the strength of our balance sheet amid this evolving situation.

And our next question will come from the line of Shagun Singh from Wells Fargo.

Liam, I was just curious if you think we could see a period of above-average age growth in Q3 as physicians begin working through the backlog and as patients schedule procedures, ahead of the fall, which would be prior to the start of the flu season or for fear of a second wave in the fall? And then I have a follow-up.

So I think, Shagun that as I look at it right now, as I said earlier, we see states begin to reopen. I think we’re going to learn a lot in the next month, and it is very dependent on whether we see a spike in COVID-19 or if we see those curves continue to flatten. In my mind, it’s all about consumer confidence. What I’m actually looking for is when people start to go back to their dentist, and I know we’re not in the dentist business but if people start and if I see my friends going to the dentist, that will mean that we’re very close to people going back to an office and an ASC to have a UroLift procedure done. And if that happens in the second quarter, and it looks like it’s going to begin in the second quarter, I’ll go back to what I said earlier. There’s capacity to do the UroLift procedures, which is the one that was mostly impacted by the postponement of some of these procedures. So therefore, I would anticipate that in Q3 and in Q4, that those procedures, a lot of them would come back. I did speak to a urologist recently, and that individual reiterated what I expected that he would that he has not canceled any UroLift procedures. He has simply postponed them to a later date. So those patients are still currently scheduled in his practice to have that procedure done.

That’s really helpful. And just a question on MANTA. You initiated a full launch on January 1. Can you give us any color on the kind of adoption you saw through mid-March? Any color you can give in terms of procedures? And then what were sales in Q1?

Yes, absolutely. So as those of you that are familiar with our story will know that we had converted 4% of the market last year. And our goal this year was to convert 8% of the global market. I can tell you that MANTA was performing really, really well prior to the impact of COVID. As we went through January and February, we saw significant growth. And if I just took January and February, and if I took 2 months of the global market, we actually had approximately 6% of the global market converted on a pro forma basis, just under revenue we generated in January and in February. Once we got into the last 2 weeks of March, and I’ll give you the same data that I gave for UroLift, we saw a 35% decline in the last 2 weeks of March compared to the first 11 weeks. Just as procedures got pushed out, but the adoption has gone really well. The price point is right in line with what we expected. And again, as these procedures come back, we would believe that this product will come back. And this is one of the products that we are using in some of our digital tools, Telehealth tools that I mentioned in my prepared remarks, to train physicians, even if our salespeople cannot go into the office. And lastly, we have in place the 20-plus associate sales reps that we have planned to have to support this product, and they are active and will be ready once procedures start to come back into the hospitals.

And our next question comes from the line of Raj Denhoy from Jefferies.

It’s Anthony for Raj here. I’m glad to hear everyone’s healthy and good luck to you all through this, the current cycle we’re in. A couple on UroLift. Just as it relates to the current margin profile of that franchise, just considering that you have UL2 and UL out there. So I’m just wondering, what is the status of the margin profile of UroLift at the moment? And then maybe an update on the OUS expansion plans. I think Japan was expected at least a soft rollout first half. And just wondering what COVID does to the OUS expansion plans for UroLift? And then I’ll have one follow-up.

Okay. So the main margin profile of UroLift wouldn’t have changed, Anthony. It’s still in the mid-70s. Our goal is still to roll out the UL2 to get that into the high 70s. And just given COVID-19 and the fact that the FDA have been focused on addressing COVID-19, that will have a slight delay to our 510(k) submission so that will probably be in the June, July timeframe, and then we’ll have a 60-day, 90-day review before we get the product to market. I tell you that because that will have an impact on the Japan rollout. We expect it to be generating revenue in Japan early in 2021. We will probably now be generating revenue in Q1 or, or pardon me from Q1 to Q2, unlikely to go to Q3, but it could go to Q3. It really does depend on the reviewed time. But we will still be generating revenue in 2021. And I would just like to remind everybody that in our LRP, there was no revenue for Japan contemplated in our LRP. So we still envision that we will be generating, most likely in the Q2-ish timeframe revenue in Japan following the reimbursement approval.

And then the follow-up would be, outside of coronavirus, as you do your internal modeling, just any thoughts on the economy? You mentioned that 25% are elective procedures, so it seems that the Teleflex portfolio for a recession is relatively durable. But any views just on economy, unemployment rates, how that plays in? And how you guys are thinking about that internally?

Yes. So no industry is immune to the impact of a recession. But I’m sure as all, every analyst is aware, the industry that is probably more sheltered is medical devices. People, whether you’re in a growing economy or a lagging economy or a recession economy, people still get it, and there is a requirement for our products. Part of our thinking behind the building of our portfolio and really focusing 2/3 of it on nonemergent critical procedures is exactly that to ensure the procedures could not get postponed, it’s standing as in good stead in the COVID-19 crisis that we’re seeing right now because such a small part of our overall portfolio is impacted by postponement of procedures. That same fact pattern would stand to Teleflex also in a recession, where procedures that would not be in a position to get postponed. And even then our procedure that is probably the most selective to UroLift, the health care economics on that are so strong that it is actually even in a recession, it is saving the health systems money as more patients opt for a UroLift procedure.

And our next question will come from the line of Matt Taylor from UBS.

The first one was, I appreciate that cadence that you talked about with the ordering patterns around respiratory, airway management and vascular access. I guess I was wondering if you knew from the trends, you mentioned 44% growth, I think, in March. From what you’ve seen since then, do you think there was a lot of stocking there or do you think that is being actually used because of large number of COVID patients in those centers?

That’s an excellent question, Matt. What we saw at the end of the quarter, we -- and as I said in my prepared remarks, we carried a significant backlog into the quarter. So our normal backlog of orders would, in these product categories, and for our overall business would be about 1-day sales. As we went into April, that was more than -- that was almost triple our normal backlog that we would tend to carry. We are -- we ramped up manufacturing of these respiratory products, some of them by 200% in order to try and address the pandemic. The products will be getting used by the hospitals that are treating COVID patients. Every patient that goes on a ventilator will require a filter -- a bacterial filter. It protects the patients and the people around them, but it also protects the ventilator so you don’t get cross infections. Every patient also will have a HEPA filter, it’s a heat moisture exchange filter, in order to do the work of the nose. We believe that these products are being consumed. No doubt, I think post the pandemic, I think that hospitals and distributors will actually hold more inventory of these products. I think people, as I said also in my prepared remarks, is it a V-recovery? Is it U-recovery? Or is it a [indiscernible] so you go down to larger stockpiles, and we are engaging with government agencies right now because we are prepared to stay building these products, but we want to understand what government agencies want to do with regard to their stockpile actions for key respiratory, Anesthesia and Vascular products.

And then you provided a lot of nice totals around UroLift. I had one more follow-up on that, actually. So, you mentioned talking to some customers who hadn’t canceled cases. I was wondering if you knew, just typically, if you could characterize for us about how far out those cases are typically booked. And then to get patients back in the funnel, is there a lot of testing or evaluation that has to be done? Or is it pretty quick and easy?

So, I’ll deal with the last part of it first. So, if you’re suffering with BPH, your BPH condition is not one that’s going to get better, Matt. So, the urologist would normally use IPSS scores, and it’s a very simple methodology to get a patient’s IPSS scores and it takes about 5 minutes. And the patient, in many instances, can do it online for the urologist. So, there’s no major testing or anything that has to be done in order to reposition the patient. We know that from our digital media and regional DTC campaigns that a patient needs to be scheduled within 4 weeks or so in order for a high acceptance rate of doing the procedure. So that’s what we know from the DTC. And I think it’s around that 4-ish weeks, Matt. And as I said, there is capacity, in particular, within the office and the ASC to schedule these patients to bring in newer patients. Obviously, the offices will have to implement some procedures around social distancing, around face masks as they see appropriate. In order to get it up and running. But I think it should be, at least my perspective is that now that urology practices know which states are opening. We’re actually, again, using some of our digital tools to train urologists to revisit some of the training to make sure that they are ready and prepared to re-engage with their patients. And obviously, as I said in my prepared remarks, we have our DTC campaigns also ready to reengage with those men in order to heighten their awareness of BPH.

And our next question will come from the line of Matt O’brien from Piper Sandler.

This is Drew on for Matt. I wanted to follow-up a little bit on MANTA here. I guess as things begin to loosen up a little bit in the next couple of months from a hospital perspective, just wondering if you’ve kind of gotten a sense on how they will prioritize some things over others? And I guess, specifically, I’m trying to get at beyond what you’ve already said, is there any risk that training on new products such as MANTA could be put off for the time being as hospitals work through backlogs and prioritize whole time?

Yes, Drew, thanks for the question. Let me give you a little bit of added color on what we saw in the key North American market from a revenue perspective in the first 2 months of our full launch. So we had done a limited launch. And as customers are ramping into Q1, 80% of our revenue came from existing customers. So it’s all about driving utilization. Now those customers have already been trained, those customers are already up and running. A large majority in the high 80s of our revenue came from TAVR procedures. So we believe that TAVR procedures should come back relatively early on in the cycle, which should help us. And as I also said in my prepared remarks, Drew, we are using digital tools in the Interventional Access business unit to train our customers on MANTA, and we also have uploaded some training videos to make that available to them. And as hospitals allow salespeople back in, they are allowing them in for critical new product trading procedures. And we, as an organization, have organized protective clothing materials for our sales organization to allow them to re-enter the hospital system.

Okay. That’s good to hear. And then I guess my quick follow-up here, we’ve been hearing about a lot of clinical trial delays across Medtech over the last couple of weeks. Obviously, a chunk of your growth has been driven by new products. It sounds like you’re going to continue all your R&D efforts to all this. But anything meaningful from a clinical trial perspective that may be put on hold temporarily?

Yes. Thank you. We had one MANTA trial that we were in sponsoring that, it was very near the end of its completion. So I don’t think that’s going to have a big impact. We will assess new products as we come out the other side of COVID. I think, Drew, it’s a little bit too early to give any indication as to where we’re at with new products. But we didn’t have, we had some clinical trials going on in the Interventional Urology business unit, within MANTA, within the Interventional Access business unit. And obviously, we always have new products in the works and the mix. Ironically, one product that got a benefit from the COVID-19 was our ISO-Gard Mask, which is a product that we had actually developed to stop clinicians re-breathing gases from a patient. And we that product is now, we’re getting ready to submit it for an emergency authorization to combat COVID. The only other product I could think of that could be impacted would be EZPlas, where we did submit the data to the FDA, and we were expecting to meet with the FDA in, we’re supposed to submit in March and meet them in April. We actually submitted our data at the back end of February. But the meeting with them has been pushed back. So we’re now trying to reschedule that for either May or June.

Our next question comes from the line of Brian Weinstein from William Blair.

You’ve talked a lot about the elective procedure side, but we’ve obviously been hearing a lot on nondeferrable procedures, things like even appendicitis cases, MI patients are down, cancer diagnostics are, companies are telling us that new patients are obviously being impacted there as well, fewer cancer diagnosis. So trauma may be done with fewer people out and about. I appreciate you don’t want to talk too much about April here, but are you seeing an impact on the other 2/3 of the business right now that would kind of jive with what we’re hearing in general about these nondeferrable type cases?

So what we’re seeing from our perspective is the COVID impact other than that, we have not seen any impact from what you’re describing. And right now, given the situation is pretty fluid, Brian, it would be difficult to parse out what’s this impact, what’s that impact. But from what we’re hearing from our frontline people who are engaging with the customers, it’s either COVID or non-COVID, any procedures that are being postponed are more than being offset in that scenario. Any procedures that are being postponed are being more than offset by patients that are coming in because of the impact of COVID. And the parts of our business that are impacted, obviously, by procedures is so small. But people will still get a heart attack. You’ll still need the EZ-IO. If you’re being brought into, following that heart attack, into the emergency room, you’re still going to need a laryngeal mask. You’re still going to end up in the intensive care unit. You’re still going to have a PICC or a CVC placed and you’re still going to have to be put onto a ventilator, and you’re still going to have to use one of our ventilation circuits and our humidification system. So that’s our typical flow of a patient. So if an individual has a heart attack, I think it’s still highly unlikely that they’re going -- they’re not going to go to the hospital or call the ambulance even in this environment.

Okay. And then just to follow-up on an earlier question regarding kind of inventory levels and whatnot. I’m curious, specifically, if you’ve seen ordering patterns from distributors, change all that much at this point outside of COVID-19 products. Are they working down inventory stocking up Are we going to be on the call the next quarter or the quarter after that and hear about changes that were going on with the way that your distribution partners are managing your products?

Yes, thanks. So, what we saw in January and February, was we saw destocking by the distributors, Owens & Minor, Cardinal, those types of distributors. And on a full quarter basis, there was a destocking. Distributors did not react to the COVID crisis as nimbly as one might have anticipated. So we did see cumulative destocking for our businesses within the quarter. The business that was impacted the most was our Vascular business and our Anesthesia business.

Our next question will come from the line of Dave Turkaly from JMP Securities.

Liam, obviously, you sit in a seat where you have a lot of conversations that are -- could be beneficial to a lot of us if we could sort of have some of the similar discussions. You gave us a lot of color. So, thanks, for that, the back half of March. I’m going to assume that April was similar. And again, it’s nice to know that you’re more on the critical care, non-elective side. But not guidance, just opinion. I’d just like to ask you, as you sit in that seat today, looking forward, do you think we’ve seen the worst on the elective procedure front or do you think we’re still not out of the woods and this is going to continue?

So, I think that as I look at the data for the occurrence of COVID-19, globally, we’ve -- and I’m encouraged by the flattening of the curves. And that data, obviously, we can all see. For me, it’s all about consumer confidence. It is all about consumer confidence. When will people feel confident to go back to an ASC, to go back to an office and go back to a hospital. And as I sit in my chair, and thank you for all the nice words about me. But I don’t have a crystal ball unlike anybody else. And I think it’s all about consumer confidence. Now I know that people are and I know clinicians are eager to get back to work because they think that there’s a lot of damage being caused to people who are having mild strokes are not going to the emergency room, and I’m encouraged by the fact that states are reopening. As I said, when I was talking about UroLift, in the coming weeks, states that represent 60% of our UroLift revenue will be reopening. Now the next part of that is consumer confidence. And that, to me, is critical, is the consumer being confident enough to come back in and have procedures done.

And I know you mentioned two of the facilities that you have, where there was some -- it sounds like sort of a minor impact. But can you just remind us, I know you got a ton, but I guess, an overview of how many you have, I imagine, and they’re considered essential, but even here in the Americas, are you manufacturing at capacity in most of your other facilities? And has there been any COVID impact at any of the other ones? So our 3 strategic locations that I can put it that by geography are Mexico, the Czech Republic and Malaysia. Malaysia, we just got word a few days ago that we can ramp up to 100% capacity. We were at 50%. We had enough inventory in the channel to allow us to focus the 50% capacity on COVID-related products. Now as we ramp up to 100%, we will be able to replenish the stocks that we drew down on. We obviously manufacture in multiple plants in the United States. The twin cities is an area that we’re focused on in all of those facilities. Every facility we have is in Americas is up and running. The Malaysia was at half capacity and our plant in India was closed, and we anticipate that reopening in the near future. But we have sufficient inventory to carriers for that Indian facility as well, just to be clear.

And our next question will come from the line of Matthew Mishan from KeyBanc.

Liam, I just want to better understand the OEM, and I’m sorry if I missed it, but how much of the increase was from the HPC acquisition? And were customers just stocking inventory out of supply chain caution there?

So as I said, it grew 17.5%. It’s about half and half. Half of it comes from HPC and about half of it coming from our core business. Our OEM business is supplied to other companies. So you don’t normally get the stocking up impact from an OEM business. It was business as usual. Now the one impact that you see there in the growth rate is as a result of the sterilization. If you recall, OEM was impacted because of getting certain products to that Atlanta sterilizer. So we did get some of that product flushing through within this quarter, quarter 1. And that’s the only impact, I think I called out for OEM.

Okay. And then, Tom, on cash flow, I mean, you can see the continued consideration in the pension payments in the quarter, are those the primary one-offs for 2020? And how are you thinking about like the inventory build that you’ve been doing normalizing through the course of the year?

So those are the primary one-offs. And I would say that in terms of inventory, we did build up inventory a little bit in the first quarter, some last time buys and also stocking to be ready for, having sufficient inventory to get to the COVID situation. So as we look towards the rest of the year, we wouldn’t anticipate a broad scale continuation of build with one exception. We will continue to build UroLift. Our days of inventory on hand had been only about 15 days, and we look to increase that so that we’ve got an ample supply of that product available, should there be a pretty significant ramp after we do get past the elimination of elective surgeries, if you will. So I would say with the exception of that, we don’t anticipate continuing to build inventories. Now with that being said, we’ve got to a better, have better visibility towards where demand is and make sure that we’re meeting up with that until we get that precise visibility, we could see some one-offs up or down either way.

Our next question will come from the line of Kristen Stewart from Barclays.

I hope you’re all well and safe wherever you are. I just wanted to go back to UroLift, not to be the dead horse, but I just wanted to get a better understanding of the split. I know you have said the majority are done in an office or ASC setting. Can you maybe just help us understand what the split is in the office? I was under the impression most is done in ASC. And then I know you had commented, I think it was to David, that the average age was kind of around 60. Is that fair then to assume that the majority from a payer perspective is more a managed care payer? And what do you estimate kind of the average co-pay might be? And would there be any concerns there from an economic basis, if we were to have more of a recession kind of factor, this COVID period?

Okay. So roughly, it’s evenly split of the 60%. It’s roughly evenly split between the ASC and the office. So we don’t, it’s not really weighted to one side or the other. And a lot of the ASCs, in all transparency look like an office environment for the most part. With regard to your question on the average age, so the private insurer pay, if I recall correctly, is around 30-ish percent of the total. And identifying the procedure requirements a little bit earlier has been something that we have been investigating with some clinical trials. Regarding if a recession comes into being, is there a co-pay? There is a co-pay, for sure. But as we all know, that is common across all payment methods today. And it’s just, I think, a fact of life that we spend more on health care once we get beyond the age of 55, and that shouldn’t, so from the age of 50 to 65, you’re going to spend about 10% of your total expenditure on health care in your lifetime. From 65 to 85, you’re actually going to spend about 60% of your health care. And that phenomenon has been around through multiple recessions. Without having that significant an impact. And you’ve got to balance the co-pay with the discomfort of the patient is feeling from having BPH. And if they’re in urinary retention, I mean, you’re catheterizing yourself 10 times a day. And then the overall health care economics for the system, by having a BPH procedure, the overall cost of treating that patient goes down by taking them a off farm or not having them to have an acute procedures. So I think the health care economics argument for the UroLift is probably one of the strongest, which is why the product has been so successful.

Okay. And then just to clarify, you said in the last two weeks of March, UroLift sales were tracking down 64%, that’s on a year-over-year basis?

No, no. From -- if you take the first 11 weeks and then you compare the last 2 weeks to the first 11, it’s down 64% in those last 2 weeks compared to the first 11, Kristen.

Okay. So that’s not year-over-year? Got you.

No.

Okay. That’s helpful. Would you be willing to share what it is on a year-over-year basis, I guess? Or just to give perspective on that?

I actually don’t have it -- I don’t know what it was. I thought it a better metric. And the reason I thought a better metric is for the investment community to understand what were we doing before COVID had its impact. So, the business was growing over 38% in that first 2 months of the quarter. And then I thought what the investment community would benefit most from, what happened in the last 2 weeks compared to the first 11. So that’s why I thought it was appropriate to share that metric with the investment community to give them a flavor of what we saw on the ground with the UroLift procedure.

Okay. So relative to that rate, the rate -- the change then from that point, then declined 64%.

Yes. And let me give -- I’ll give you the growth rate by month, Kristen, if this helps you. This is on a year-over-year basis. So, IUB, the UroLift grew over 38%, as I said, in January and February, and then it declined 3.3% in March.

And I’m not showing any further questions at this time. I’d like to turn the call back over to Jake Elguicze for any closing remarks.

Thanks, operator, and thanks to everyone who joined the call today. This concludes the Teleflex Inc. First Quarter 2020 Earnings Conference Call. Have a nice day.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.