Teleflex Inc. (NYSE:TFX) Q2 2016 Earnings Conference Call July 28, 2016 8:00 AM ET
Jake Elguicze - Treasurer and Vice President of Investor Relations
Benson Smith - Chairman and Chief Executive Officer
Liam Kelly - President and Chief Operating Officer
Thomas Powell - Executive Vice President and Chief Financial Officer
Larry Keusch - Raymond James
Kristen Stewart - Deutsche Bank
Dave Turkaly - JMP Securities
Scott Wang - Morgan Stanley
Anthony Petrone - Jefferies
Ravi Misra - Leerink Partners
Matt Mishan - KeyBanc
Good day, ladies and gentlemen, and welcome to the Teleflex Incorporated Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer and instructions will follow at that time [Operator Instructions] As a reminder, this conference is being recorded.
I would like to turn the call over to Jake Elguicze, Treasurer and Vice President of Investor Relations. Sir, you may begin.
Thanks operator and good morning, everyone and welcome to the Teleflex Incorporated second quarter 2016 earnings conference call. The press release and slides to accompany this call are available on our website at www.teleflex.com. As a reminder, this call will be available on our website and a replay will be available by dialing 855-859-2056, or for international calls, 404-537-3406 pass code 47983139.
Participating on today’s call are Benson Smith, Chairman and Chief Executive Officer; Liam Kelly, President and Chief Operating Officer and Thomas Powell, Executive Vice President and Chief Financial Officer. Benson, Liam, and Tom will make some brief prepared remarks, and then we’ll open up the call to Q&A.
Before we begin, I would like to remind you that some of the matters discussed in the conference call will contain forward-looking statements regarding future events as outlined in 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 cause actual results or events to differ materially include, but are not limited to, factors made in our press release today, as well as our filing with the SEC, including our Form 10-K, which can be accessed on our website.
With that said, I would like to now turn the call over to Benson.
Thanks, Jake and good morning, everyone. It's a pleasure to be here once again to discuss Teleflex's performance and as an overview I must say we are very pleased with our results because they leave us well positioned to achieve our 2016 goals, but perhaps more importantly put us ahead of schedule in terms of meeting the longer-term goals outlined at our analyst meeting.
Our strategy of focusing on higher margin, differentiated products in geographies we think will benefit most from demographic trends is already showing dividends. I'm sure you recall, that when we initially provided our 2016 financial guidance, we told you that we expected a sequential improvement in constant currency revenue growth rates, adjusted gross and operating margins and adjusted earnings per share as we move throughout the year.
And I’m pleased to report that is exactly what happened from Q1 to Q2. In fact, the operating performance of the company in the second quarter continue to exceed our internal expectations in nearly every area allowing us to raise our full-year 2016 adjusted earnings per share guidance for the second straight quarter. Constant currency revenue growth reached 5% and we believe this position the company to achieve our previously provided full-year guidance range.
During the quarter we generated constant currency revenue within each of our order book segments led by our higher margin vascular anesthesia and surgical North American franchises. And as we move through the remainder of the year, we fully expect constant revenue growth rates to continue to sequentially accelerate in Q3 and Q4 being led primarily by continued strength in the U.S. market.
Because of our margin goal, strategically for Teleflex it is really important that we put all the right products in the right geographies. What and where we grow, but this is important to us as how fast we grow. Not all revenue for us is equal. For example, we have to have approximately $3 million of revenue growth in low-end respiratory therapy products to generate similar levels of gross profit equal to $1 million worth of Vidacare product growth.
Our vascular access catheters were another example. These products will be the primary beneficiary of our first phase footprint consolidation effort. However, being conservative we calculated the savings at static volumes and when we provided our longer-term targets. So growth in these product categories means we will realize even greater savings down the line and result in a better mix.
Speaking about margins, we reached adjusted gross margins and operating margins of 55% and 25.2% respectively. Both of which represent all time margin highs for Teleflex as a pure play medical device company. And despite of being the summer months, I have always said that we are not going to pull up the lawn chairs once we attain these levels of margins and that still holds true as we see an opportunity for continued significant margin expansion in front of us.
Overall, I’m delighted with the company's results during the first six months of 2016 and I expect even stronger showing in the second year half. That completes my prepared remarks. I would like now to turn the call over to Liam. Liam will go into more detail around second quarter revenue and discuss the drivers we expect to accelerate revenue growth in Q3 and Q4. Liam?
Thank you, Benson and good morning, everyone. For the consolidated company, second quarter 2016 constant revenues grew 5%. The primary driver of revenue growth this quarter came from increased sales volumes of core products, which contributed approximately 3.5%. This was aided by the fact that we have one additional shipping day in the quarter. This quarter is a bit unique, given that our financial quarter ended four billing days before the calendar end of the quarter. As such, it is difficult to quantify the exact impact of the extra day, but we estimate that it contributed approximately 1% of revenue growth.
North America had a strong quarter with constant currency revenue growth of 8% of this core product volume growth improved by approximately 5.5% as compared to the year ago period. On the last call, I mentioned that sales into our distributors in the United States were less than the sales trading out. This situation improved slightly in quarter two with the remaining debt expected to equalize during the remainder of the year.
We also saw good volume growth out of our OEM business. And while still delivering positive core volume growth during the quarter, our Asia business experienced lower growth than we initially anticipated as that business is working through a back order situation associated with our cardiac intra-aortic catheter business as well as some weakness in Southeast Asia. We expect to be reconstitute back order situation by the end of the third quarter.
Another driver of revenue growth in the quarter is the result of an increase in our sales volume of new products which contributed approximately 1.3% of constant currency revenue growth. New product sales were particularly strong within our surgical, OEM and anesthesia businesses. Surgical and new product sales were driven by increased utilization of products used in robotic procedures.
Further penetration of our EFX offering as well as an increase in the amount of Mini-Lap product sales. OEM new product sales are attributed to increase Force Fiber and coated catheter sales while in anesthesia the growth is primarily due to increase sales of our Rusch disposable LED laryngoscopes. And while not yet a key contributor in terms of revenue dollars, I would like to provide to with an update on the Percuvance product launch.
On our last earnings call, I told you that we recently completed the first cases with our second generation device in Europe, where we are currently in full market release. Having received a CE mark in quarter one, the adoption of this second generation technology continues to progress nicely over fleet and we expect a slight uptick in OUS revenue contribution in the back half of 2016.
While within the United States I explained on our last call that we received 510(k) approval on our second generation device from the FDA, but that there were some conditions associated with that approval. The 510(k) conditions require new sterilization study for reprocessing the reuse both Percuvance handle or into the latest FDA guidance.
Execution as the protocol is currently underway and consistent with what I said in our previous earnings call, we continue to expect to have this completed in August of this year. This continued to position us for a full market launch of the second generation device in the United States during the third quarter. We continue to promote and demonstrate the first generation device in hospitals in the U.S. and the customer response continues to be overwhelmingly positive. We have completed 39 evaluations of the products and 32 are progressing through the value analysis committees.
Turning to other components of revenue growth; during quarter two we saw the average selling price of our products expand approximately 20 basis points. This was primarily due to increase in vascular access and surgical products, as well as increases due to distributor conversions. This was somewhat offset by decline in European product pricing. Finally, during the second quarter previously completed acquisitions added approximately 10 basis points of growth. This was primarily due to the acquisition outstanding.
Next, I would like to provide some additional color surrounding our segment and product related constant currency revenue growth drivers. Vascular North American second quarter revenues increased 8.8% to $88.2 million. The increase in vascular revenue was largely due to the sales of Vidacare, EZ-IO and OnControl devices. As well as increase intravenous catheter and PICC sales.
Moving to Anesthesia North America; second quarter revenue was $49.2 million, up 8.2% versus the prior year period. Growth in this segment was driven by increased sales of Vidacare, EZ-IO, airway management devices, epidural kits and atomization product offerings. As an aside, the Vidacare product lines continue to perform well, growing approximately 30% globally on a constant currency basis this quarter.
Turning to our Surgical North American business, its revenue increased 6.8% to $43.1 million. The increase within surgical is primarily attributable to higher sales like engagement products, surgical instruments and access boards. Chest drainage products are not strategically important also grew due to competitor issues.
Shifting to our overseas businesses, EMEA revenues rebound in the second quarter and expanded 1.3% on a constant currency basis totaling $131.7 million. The improvement in European revenue was largely the result of increased vascular access and neurology product sales. This was somewhat offset by lower sales of cardiac product, as our European business has also been working through the same back order.
Moving to Asia, our second quarter revenue increased 3.6% to $63.2 million. The quarterly increase in Asia revenue was primarily due to higher surgical litigation and respiratory sales. In addition, we continue to see good growth out of China, which during the quarter grew approximately 8% on a constant currency basis.
Turning to OEM, you may recall from our quarter one earnings call that this business has some order purchase from quarter one, and as a result we expected to see an improvement in quarter two. Well, that is what happened during the second quarter constant currency revenue increased 5.9% to $40.3 million and was primarily due to higher sales and performance of fiber products.
And lastly, second quarter revenue for our business is within our all other category was up 5.4% totaling $57.9 million. Growth here is primarily attributable to sales of additional respiratory therapy and cardiac intra-aortic balloon products. While our Latin America business made a recovery, generating modest constant currency revenue growth in the quarter.
We do continue to experience difficult trading conditions in Brazil. Finally, before I turn the call over to Tom, I would like to briefly update you on additional GPO and IDN agreements that we received during the quarter, as well as the state of the several restructuring plans that are underway.
During the second quarter, we have continued our track record of success with GPOs and IDNs, this time winning 19 year agreements and extending another nine. Of the agreements won and extended in quarter two, 16 were sole sourced in nature. In a few cases, the sole source awards protect our existing business. However, the majority of the sole and sourced awards received in the quarter positioned the Company to expand our sales across a variety of product lines including laryngoscopes, pain pumps, closure devices, arterial catheters, vascular positioning conformation systems, PICCs and Vidacare OnControl. This continued success of groups is another reason why we feel confident in our ability to achieve our full-year constant currency revenue growth guidance range.
Lastly, let me update you on our most recently announced series of restructuring programs. I am pleased to report that our 2014, 2015 and 2016 programs remain on-track, both from a timing perspective and from an expected synergy generation standpoint. These programs are focused on improving both gross profits and reducing operating expenses.
And they are expected to be substantially complete between 2017 and 2018. In total, these three programs are expected to drive between $55 million and $69 million of annualized pretax savings once fully implemented. We have started to see the early benefits from some of these initiatives, and we anticipate being significantly more over the next couple of years.
That takes me to the end of my prepared remarks. At this time, I would like to turn the call over to Tom for him to review our financial results for the second quarter and provide our increased full-year 2016 guidance. Tom.
Thanks, Liam, and good morning everyone. Given the previous discussion of Company’s revenue growth drivers, I’ll begin my prepared remarks for the gross profit lines. For the quarter, adjusted gross profit was $260.4 million versus $236.3 million the prior year quarter. The adjusted gross margin increased 270 basis points to 55%.
The attainment of 55% gross margin exceeded our internal expectations and positions us well for the achievement of both our 2016 and multiyear gross margin targets. The 270 basis point gain in gross margin reflects the impact of reductions in manufacturing costs resulting from cost improvement initiatives including the 2014 manufacturing footprint realignment as well as the resolution of certain product quality issues that impacted the prior year period.
Additionally, gross margin benefit from favorable mix, volume leverage and favorable year-over-year foreign exchange movements. Also during the second quarter, adjusted operating margin increased 480 basis points to 25.2% which is the highest operating achieved by Teleflex since becoming a pure play medical device company.
The increase was largely the outcome of the gross margin gain, control over discretionary overhead spending, favorable foreign exchange movements and the impact of the suspension of medical device excise tax. The gains were somewhat offset by increase in R&D spending during the quarter.
Continuing down the income statement. For the quarter, adjusted net interest expense decreased to approximately 10.3 million versus approximately 12.8 million in the prior year quarter. The decrease in interest expense is largely attributable to the June 2015 of refinancing of $250 million in principal amount of our six and 7/8 senior subordinated notes. To accomplish the refinancing we borrowed under our variable rate revolving credit facility, which bares an interest rate at a lower level than did our senior subordinated notes.
Moving to taxes. In the second quarter, the adjusted tax rate was 20.6% up 110 basis points versus the prior year period. Despite being elevated within the quarter, we continue to anticipate that our full-year adjusted tax rate will be between 18.5% and 19.5%. On the bottom line, second quarter adjusted earnings per share increased by 33.1% to a $1.89.
For the quarter Teleflex achieved strong financial leverage throughout the income statement. From reported top-line growth of 4.8% we generated a 10.2% in increased in adjusted gross profit of 29.1% increase in adjusted operating profit and 33.1% increase in adjusted earnings per share. The quarterly performance was dented by a breadth of non-revenue dependent productivity initiatives intended to deliver stable earnings and cash flow generation regardless of the revenue environment.
Turning now to select cash flow and balance sheet highlights. On a year-to-date basis, cash flow from operations was approximately $181 million or increase of 66% or $72 million over the prior year period. The increase was primarily the outcome of improved operating results and net favorable impact from changes in working capital items and reduction in income tax payments. From a balance sheet standpoint, at the end of second quarter, cash on hand totaled approximately $476 million. Leverage as per our credit facility definition stood at approximately 2.2 times.
That completes my comments on our second quarter results. Next, I would like to walk you through an update of recent capital structure activity. As discussed in our first quarter earnings conference call, pursuant to separate privately negotiated agreements between the company and certain holders of the convertible notes, in early April the company paid cash and issued common stock to note holders in exchange for $219.2 million of aggregate principal amount of convertible notes. We initially funded the cash portion of these exchanges through borrowings under our revolving credit facility.
In May we completed the issuance of $400 million of 10 year senior unsecured notes which carry interest at a rate of 4 and 7/8. Proceeds were used to reduce the balance outstanding on the revolving credit facility. In addition, we also received conversion notices totaling $44.3 million in aggregate principal amount of the convertible notes and these conversions were completed in early June. We funded the cash portion of these conversions through borrowings under the revolving credit facility.
Finally, subsequent to quarter end we repaid 50 million of revolver borrowings with available cash for the balance sheet. We are pleased with both the interest rates and the terms of the yield offerings and with the progress made to address the portion of the outstanding convertible notes in advance of the August 2017 absurdity.
Next, I will turn to an update of full-year 2016 financial guidance. Starting with revenue; for 2016 we are reaffirming our full-year constant currency as reported revenue growth guidance ranges of 5% to 6%, and 3% to 4% respectively. We anticipate that our constant currency revenue growth rates will continue to accelerate as we continue through the year finishing with the particularly strong fourth quarter.
As a reminder, we have one additional shipping day in the fourth quarter of 2016 as compared to prior year period. For the segment standpoint, we expect the strength we have seen in our first half of the year in our North American segments to continue through the second half, for our international and OEM businesses we are expecting acceleration of growth in the back half of the year.
We are also reaffirming our previously provided adjusted gross margin guidance range of 54% to 55%, however we are raising our expectations regarding adjusted operating margin, which we now expect to be between 24% and 24.5% versus 23.5% and 24% previously. Based on Euros recent trading range and expectations for the balance of the year we now assume that the Euro to dollar exchange rate averages approximately $9 for the balance of the year, which is our previous assumption of approximately $6.
On the bottom line, we are increasing our full-year adjusted earnings per share guidance range and now expect adjusted EPS to be between $7.20 to $7.32, which represents growth of 13.7% to 15.6% versus 2015. The increase in our EPS guidance range is due to a solid second quarter result, the expectation for continued strong operating performance in the second half, a modest improvement and our currency assumptions and also includes financial increase investment and support of the launch of new products. As a reference point the increase in our EPS guidance range is in-line with the over performance of sheets in the second quarter, as compared to our internal projection.
In summary, we are pleased with the progress made today for the quarter we exceeded our internal expectations from margin expansion, earnings growth and cash flow generation. Our footprint consolidation initiatives are progressing largely on schedule, and we are excited for the prospectus of our new product line. Additionally, we took steps to address a portion of the convertible notes that were and were able to put it in place attractively price long-term financing. As an outcome we believe we are well positioned to achieve our longer-term financial and strategic objectives.
And that concludes my prepared remarks. At this time, I'd like to turn the call back over to the operator for questions. Operator?
Thank you. [Operator Instructions] And our first question will come from Larry Keusch of Raymond James. Your line is now open.
Hi, good morning, everyone. I think probably the biggest question mark, post the Q2 results is, again, how you accelerate top-line to hit that 5% to 6% constant currency. And I know you have mentioned some areas that you believe will help you get there, the [one] (Ph) quarter, obviously the international OEM, you mentioned that accelerates, as well as in the second half. But I'm just wondering if you can dissect that a little bit more, and help us understand how you really get there?
So, first, I just want to remind everyone what we said that we expect sequential incremental improvement in constant currency growth rates throughout the year. And obviously that’s what we saw in this quarter. And this quarter is broadly in-line with our expectations. North America respond very well into the quarter with constant currency growth of 8%, which was up from 2.4% in the quarter. And OEM as you said, was also a strong driver.
EMEA was 1.3, was slightly below our expectation, which was due to the cardiac sales. But we did see an acceleration at the backend of the quarter, which makes us feel that that’s actually continued throughout the remainder of the year and we are expecting recovery there. APAC was 3.6%, slightly below expectations Larry, but again driven by lower cardiac sales and some weakness in South Asia.
If we look at the full-year we are confident in our guidance range of 5% to 6% constant currency revenue growth on a continued growth in the second half, in particular, in North America similar to what we saw in quarter two. We expect EMEA to recover to the low single-digit growth in the second half. And as I said, we witnessed the beginning of that as we exited Q2, and OEM accelerating growth in the second half and the year.
And Larry this is the business that we have good visibility on. Our backlog here is normally a quarter ahead, so we are reasonable confident on the OEM accelerated performance in the later half. In APAC, we expect to see a cardiac and Southeast Asia recovery in the second half and continued growth in China and Japan. If I look at it from a product side, we believe that Vidacare will continue to be a contributor to growth in the second half.
Our PICC products with our new preloaded PICC with Chlorag+ard technology will be a contributor. And while not expecting a big contribution from FERC events, we do expect the accelerated growth from the other new products from our surgical suite including MiniLap, EFx, ISI ports.
And finally, from a product perspective, we expect laryngoscope blades continue their very strong growth trajectory. I am not forgetting Larry in the final quarter, we have one extra billing day, which will also accelerate that growth for us. And quarter four Larry physician has been our strongest quarter. So, a good place to have an extra billing day.
Okay, that’s extremely helpful. Two other quick questions, so if I just do the math, the second half would have to do 7% to 9% constant-currency growth to hit your 5% to 6% guidance for the year. I'm just trying to see if you can help us calibrate a little bit how you think about the third quarter versus the fourth quarter? I know, again, you mentioned the fourth quarter will be significant in growth, but just help us think about how we jump from the 2Q to the 3Q. And then the other quick question is if you could just quickly discuss the backorder situation in the balloon pumps?
So the backorder situation, we had on the contrast deal with that personally, and then I’ll come back Larry to the quarter growth. So the backorder situation on the pumps, we had an issue with production of our balloon catheters. We are able to get all our shipments out to the U.S. Obviously, getting them overseas at the end of the quarter proves a little bit difficult for us. So therefore, we had a backorder situation at the end of the quarter.
That was flush through Larry in quarter three. And again just coming back to the other part of your question, within the next two quarters, again we expect to see sequential incremental improvement across all of our businesses in Q3 and Q4. Q3 is reasonably good comparable for us in the prior year so we are pretty confident on accelerating that growth and then continue that into Q4. So that's our expectation is continued acceleration of growth through Q3 and then I know that will step up into Q4 Larry.
Okay. Terrific. Thank you.
Larry, this is Benson. Just to elaborate on that a little bit the we are not the only driver improving in EMEA it's certainly one of the biggest levers we have. And it's not unusual to see and pay economic times some of those European countries slow down on their letting loose of purse strings for healthcare. That usually have about a three to six month duration and there is political pressure that they start to spend again.
We start to see that spend occur towards the end of second quarter and as we sit here today we are relatively confident that that's going to continue, there is an acceleration in third quarter but than an even bigger acceleration of that in the fourth quarter. So, that coupled with the OEM numbers, we think gives us pretty good visibility and confidence in hitting those numbers.
Okay. Terrific. Thank you for all the color.
Thank you. And our next question come from Brooks West of Piper Jaffray. Your line is now open.
Hey, good morning, guys. This is [Tom] (Ph) on for Brooks. Thanks for taking my questions and congrats on a great quarter.
I appreciate all the commentary in the prepared remarks on Percuvance. I was just hoping you could remind us on that total opportunity for that product? And then maybe just help us frame the launch cadence, in terms of revenue growth contribution and if there is anything you'd call out on mix impact to the margins from Percuvance that would be helpful.
On the margins, first of all, it's accretive to our overall margins Tom, so that's why we are excited about this particular product. From a launch perspective we have now got the generation two, as I said in my prepared remarks launch within EMEA. We are currently showing the first generation in the United States. We expect to have the launch of the second generation in the United States in this quarter, quarter three.
We don’t have a significant amount of revenue in 2016 but then we see some acceleration in 2017 and a further acceleration 2017 but we really expect to see the impact of it. Regarding the total market size opportunity for this, we see this as being an opportunity between $300 million and $400 million based on taking a 30% of the laparoscopic procedures in the marketplace today.
Okay. Great, thank you. And then I know we talk about this every quarter, but I just want to get your updated thoughts on M&A and more specifically if you could just comment on what the gating factors are to getting deals done? Is it valuation or scarcity of assets? Just any commentary you have would be very helpful. Thank you.
So this is Benson. We have a lot of specific requirements in acquiring a company and I would say that it's true that valuations have crept up somewhat. However, the things we have said no to have to more view with issues that came up during due diligence that we felt would affect our ability to get those synergies we would have expected out of the deal. In terms of low rates things to look at we have actually been as busy as we have ever been in terms of investigating
investigating potential acquisition charges. I will just review my comments, so we think that patients as a virtue when it comes to acquiring our companies and so far there hasn’t been something that's been sold at least why we have bought that.
Thank you, and our next question will come from Kristen Stewart from Deutsche Bank. Your line is now open.
Hi, thanks for taking the question this morning. Wondering if Tom, you can just kind of walk through the increase in EPS guidance? I know last quarter there was a bigger beat than the raise, and it seems like this quarter it's much of the same. So, I'm just wondering if there is some moving parts there? I know that you talked about expectation for a strong second half and some investment spending. Maybe just walk through the outperformance this quarter relative to the amount that you are expecting to see for the balance of the year?
Okay, this is Tom. I'll fill that. So, a little background and give you an overview of how we are thinking about the higher results, the moving pieces as you mentioned and how that plays into guidance. So for the second quarter the increase in EPS guidance of $0.09 at the midpoint is closely aligned with our second quarter compared versus our internal projections.
And our internal projections for the second quarter moved ahead of free consensus. So for the year, we have raised guidance $0.19 as the midpoint which considered the number of factors including favorable FX, strong operating performance and the decision to increase investment behind selective product introductions.
We currently expected FX will be approximately neutral to EPS for the year versus our original assumption of the $0.11 headwind, and the upside of the $0.11 reflects full for VOIs year-to-date favorability of currency as well as some improved expectations for the second half of the year.
Now at the same time we continue to receive positive feedback regarding both Percuvance and protector in the product introductions and are therefore allocating additional resource in support of those product introductions and then future revenue growth.
And finally our year-to-date operating performance has been strong. We have done a good job of leveraging the P&L to drive earnings growth ahead of expectations that has now come we are possible to increase investments and let additional earnings drop through the bottom line.
So our current projections include adjusted EPS growth in the range of 15% which is obviously after when we started the year. Our bottom line is ever achieving, what we have said have to achieve and have been able to provide additional investments funding as a result of some of the upsides in both our operating performance and FX.
I would add some color to that. Liam and I just recently both attended a cadaver lab for Vidacare. And those about a until we got those about 170 people who signed up there, the interesting thing for us was that most of those people were existing the Vidacare users but they typically have been inserting the Vidacare into the leg versus the shoulder.
A shoulder placement has much higher flow rates, it has much better absorption, and really opens up the market for us in a substantial way but what we learnt was people won't automatically shift from the leg insertion to the shoulder insertion and typically actually a candidate attend the cadaver lab and go through that process. So we want to continue to make particularly investments in clinical training for those acute product areas that high margins and what we think our high growth opportunities for us they are going into 2017.
That makes sense. And then I guess just looking at all the restructurings, you had mentioned that everything remains on-track, so or are we seeing some of the savings potentially coming through perhaps a little early than expected maybe looking out into 2017?
So for the restructuring programs, we are largely on-track with expectations. We had discussed previously little bit of delay in wet kits. We are working to resolve that, but that’s not a significant impact. What we are seeing, this quarter we are starting to see some good benefits coming through as a result of the 2014 footprint realigning program.
And those benefits are coming through the balance of some the offsetting costs that frankly that gave it any benefits for last year. What we aren’t yet seeing are the benefits from the second phase of the footprint’s structuring program. We do expect to start seeing those benefits really for next year and primarily the year following.
So a number of initiatives on the footprint that are delivering results. In addition, we have a number of cost improvement programs, aside from footprint that are delivering meaningful results quarter-in and quarter-out, so there is really the productivity gains going on in there in our operations group right now. We also had a pretty clean quarter relative to some one-off expenses that impacted this last year.
Okay, great. Thanks so much guys.
Thank you. And our next question comes from Dave Turkaly from JMP Securities. Your line is now open.
Just looking at the margins again here, obviously it's been a big part of your story historically. And I think you guys have said 2016 to 2018 you could get 300 to 400, or 350 to 400, additional basis points on the gross margin side. But given where we are today and how you have gotten there, I would just like to get some thoughts on the growth side.
And then I know you said 1 for 1 to adjusted operating margin throughout that 2016 to 2018 time frame. And clearly this quarter it was much higher on the operating side. I'm curious if you think that should be a trend that may, we may be able to follow and that could continue looking ahead. Thanks.
This is Tom, I’ll see on that. And so it's obviously a distribution to the end, a good chance to have. But just for the background for everyone on the call. So at our Analyst Day event, we outlined a multiyear plan FY2018 we expect increase, both in gross margin and operating margin by 350 to 400 basis points beyond where we ended 2015.
And we further indicated that the operating margin increase was a minimum and that we would work to drive additional financial leverage. I wanted to make sure that we had adequate funds available to the launch of new products and other strategic investments.
So given all of that, the gross margin target, as we factor in where we ended last year, it's 56.2 to 56.7 operating margin 25 to 25.5, and so recognizing that the midpoint of our 2016 operating margin guidance were already two thirds of the way to that 2018 targets. One might think we have got additional room for upside, and we potentially do. But there are a couple of points that I want to outline.
First of all, with the temporary repeal that med device tax, which added about 70 bps to our 2016 operating margin, and this repeal with not contemplated and we provided 2018 guidance and could provide additional upside to that guidance should the repeal be permanently inactive. Second, is that we want to make certain that there are sufficient funds available for support of the launch of new products.
So, while we are making great progress now on margin expansion, we also want to put some of that progress into investment to make sure that the future growth with Vidacare, Percuvance and other products is robust as it can be. And thirdly, while we have been successful supplementing our internal R&D efforts with late stage technology acquisitions.
Over the next couple of years we want to continue to build out a level internal R&D spending again make certain that we have got a pipeline to deliver revenue growth into the future. So the bottom-line is that if you would exclude the benefit of the medical benefit would feel we expect to accomplish approximately 50% of that operating margin target by the end of this year.
And we think that positions us quite well to achieve our 2018 target we feel very good about where we are to accomplish that. You are getting to see some upside from the med device tax, that's currently repealed and as mentioned we gave the guidance. We will continue to drive upsides that one to one relationship of gross to operating margin.
Thank you for that. That is very detailed, and congrats, it's not often that you see companies that can continually expand their margins as you guys have. So there should be some credibility behind that. Maybe just one on the products side, obviously it seems like your vascular results were strong and they led the way as we were hoping they would.
Any color on the PICC market? Competitors seem to be indicating that it is growing healthily, and you mentioned a new product. I guess I would just like to hear your thoughts on your portfolio there and how the overall market is. Thanks.
Okay. So, it's Liam here. So, our big business in North America grew by over 8% in the quarter so that for us was a really nice rebound. Our Chlorag+ard pre-loaded PICC is a new product, it's a two and three lumen product that is accelerating growth. We have the only PICC on the market that is both anti-microbial and anti-thrombogenic and that gives us a strategic competitive advantage against our competitors.
And we see this as an opportunity for a sustainable long-term growth in our PICC segment and we continue to take market share. Globally our PICC business is up 6% and again very encouraging and we expect to see that accelerated as we continue to roll out the pre-loaded PICC. We also have some positioning systems that are unique to Teleflex.
So when you talk about the PICC market you also need to talk about the positioning systems and an acquisition we did late last year out of positioning technology will come to the market late quarter three early quarter four and that again will give us an opportunity to be more competitive in this space. So we are very enthusiastic about our options in the PICC space.
Thank you very much.
Thank you. And our next question will come from David Lewis from Morgan Stanley. Your line is now open.
Hi, guys, good morning. This is actually Scott Wang in for David.
I guess first a question for Liam. Liam, I think I heard you say that Vidacare growth this quarter was 30%. And I was wondering if you can walk us through what drove that acceleration, because I think in the past, I think Vidacare growth has been trending more along the lines of like 20%?
It has been trending on the 20% range you are correct and we still expect it to be north of 20% for the entire year. Within this quarter we had a really tough comparison and it grew and it grew in total in the mid teens. The EZ-IO product in this quarter performed very, very well and the OnControl products performed even better.
So cumulative with 30% growth we see expansion in the hospital segment in particular on the EZ-IO where we see more adoption for the difficult vascular access and we see more hospitals using this product. And as Benson said earlier about our cadaver lab, hospitals will be more inclined doing the deposit and the shoulder.
We are a lot of clinical education to encourage people to place that product if you would imagine in a busy emergency room or in an intensive care area. Having access to the shoulder is a much easier sight than getting to the leg and obviously clinicians are now starting to move to the shoulder and get higher flow rate, to get better infusion of the therapy they are applying.
And therefore that continues the acceleration of the hospital, and even in the EMS space, back in the day when we bought Vidacare, we thought that was starting to saturated. That is definitely not the case. There is more and more adoption of the products in the emergency space, and we continue to accelerate our growth overseas as well.
And then it is really where the future opportunity for Vidacare is in the ongoing growth of Vidacare is to continue to compare it's ambulance services in Europe, hospitals in Europe, ambulances services in Asia and hospital services within Asia.
Very helpful. Thanks. And I guess a couple questions for Tom on guidance. Tom, on foreign exchange, given that the new euro rate assumption underlying your guidance is at 1.09, up from 1.06, and FX is now neutral to EPS, which is a little over $0.10 improvement by my math, but you guys didn't reduce the top-line hit from FX to sales. Can you walk us through what were some of the offsets to the improvement in your euro rate assumption on growth?
Are you referencing the 3% to 4% reported?
It's largely a range that that we are looking at so if we do see some of improvements in the Euro we see some abbreviation in other areas throughout the world so it's just combination of those different currency modes.
Fair enough. And can you also help me understand your margin guidance a little bit versus your 2Q results? Obviously operating margins were incredibly strong for the second quarter, and it seems like, for the balance of the year, operating margins are going to be a bit lower. My sense is, from your commentary, that part of that is attributable to increased investment to support probably the launch of Percuvance, as well as some of your newer product lines. I was just hoping you can walk us through some of those offsets?
Okay, sure well. First of all I would look at the longer trends on margins specific quarters can have higher or lower levels of spending that belong on tissues, we had a pretty clean quarter both in the growth and operating margin this year as last year there were some comps un-favorability to comps that came in little bit extra bump.
But overall, if we look at where we are on the back half of the year we are expecting overall operating margin to be kind of inline to slightly less than where we are in the second quarter with the fourth quarter being particularly stronger than the third. We are intending to make investments in the third quarter to support these product offerings into and that's going to have a little over margin expectation as result.
But overall, our operating margin, as we look to the back after the year, we will be largely in-line with where we are in the second quarter. I think just slightly under second half versus second quarter. On the gross margin-line, we expect again to be largely in-line with where we are in the second quarter and modestly trending up wards depending on how mix plays out.
That's great, thanks.
Thank you. And our next question comes from Jason Wittes of Brean Capital. Your line is now open. Jason your line is now open.
Operator, I think you can go to the next question please.
Our next question will come from Anthony Petrone from Jefferies. Your line is now open.
Maybe to go back to the price discussion in terms of the portfolio and the performance in the quarter, I guess, specifically price was called out as a contributor in vascular North America and surgical North America. So, maybe you can provide a little bit of an update on the pricing dynamics in these markets? Which products are driving price, and what is the runway that the Company still has as it relates to price gains specifically? And then I will have another one on the OUS PICC market.
Hi its Liam here. So we have said that you can expect a longer-term fee about 20 basis points of price from Teleflex moving forward, and that’s roughly what we saw within this quarter. The pricing in our vascular segment mostly came from our arterial product lines and that was as a result of some contract renegotiations that we completed earlier on in the year, in our surgical business within our instrument and some in our polymer clips.
So our expectation is that we still see opportunities to take price long-term in our more differentiated products where we have market share. We did see slightly price degradation in EMEA which offset the pickup that we made in North America. But on balance it was on 20 basis points.
So as I said, we do expect to see that level of pricing be available to as longer-term. And we will continue also to do our dealer to direct, which also does have a longer-term pricing point as we take those business as direct. So expect the same as what you see from us in our current state is I guess would be our guidance.
That’s helpful and then on the OUS PICC opportunity, one of your competitors is making a push into several emerging markets, in particular, China. And so I'm just wondering your views on the OUS PICC market in emerging markets and whether or not that is in a longer-term growth outlook for the Company?
Okay so if I look at emerging markets in PICC specifically, in China, we have only got our first generate PICC registered in China. Our Chlorag+ard technology PICC, our pre-loaded PICC are not yet registered there. We anticipate having the first of our newer generation PICCs registered in quarter four this year or quarter one of next year and that will give us a springboard to attack that market in China.
In Latin America, our PICC business is up 11% and we expect to see continued growth there. We have run a number of training programs in clinical education in Latin America and we believe that is driving the uptick in our PICC market in that area.
And we also believe that the acquisition of [NewV] (Ph), which is our lower cost conformation technology that we bought last year that would have accelerated our position in these emerging markets where quite frankly they are just not willing to pay for a higher cost positioning system that we offer in the United States.
And just again last for me, back to the U.S. would just be any update you can provide on procedure volumes, a number of your competitors noted that we are seeing a tailwind from procedure volumes, so anything you can add there will be helpful. Thanks again.
So on the data we see externally tells us the procedure volumes are up-ticking moderately so we think we are getting about 1.5% to 1.7% in procedure volumes. All the other volume gains which we gained 5.5% in this quarter we believe is coming from taking share from change in the mix of our products within the marketplace and the trading the customer up which also expands our gross margins.
Thank you. And our next question will come from Richard Millar from Leerink Partners. Your line is now open.
Hi, good morning, it's Ravi in for Rich. Can you hear me all right?
Yeah, Ravi good morning.
Good morning, thanks. Just wanted to follow up a little bit on the FX commentary that was asked earlier. Trying to understand the cadence, the top-line still has the impact, but you are sort of absorbing it on the bottom line. Is that that you are reinvesting in those areas that would be effective on the top-line that's kind of acting as a natural hedge? And if so, going back to the reinvestments, where are those going? Can you give a little bit more detail on how you are reinvesting some of this upside that you have done in the first half? Thanks.
As we look at the guidance that we have outlined I'd say that there is a couple of things going on. First of all, strong operational performance as mentioned, we also have some FX benefit and we are doing two things with that, one is following some of that through the bottom line to increase guidance and the other is finding investments behind some of the new product introductions.
As we have talked throughout the call you have heard a number of investment, one was behind Vidacare and additional cadaver labs we are seeing great returns on those investments. In addition, we have received very, very favorable feedback from the doctors who have been trialing the Percuvance product.
And we want to make sure we are out there providing the support to help that product get up and to the hospitals value analysis committees. And so there are a number of new products that are in the pipeline that we want to make sure there is adequate funding behind. So that's helpful, Liam do you have any other.
The reason we are putting these additional investments behind Percuvance is because of the very positive feedback. The fact that we are ready with this generation of products, what we have seen is that the more institutions we can get into the funnel, our hit rates getting through the value analysis committees is very high. So, we want to make sure that we are getting more and more doctors introduced to the product, more and more surgeons using the product and more and more surgeons willing to go to value analysis committees and take their case to use these products.
And Ravi this is Jake to address may be your first question on FX. I mean there is really a lot of puts and takes in terms of the different currencies that's long during the course of the year versus our original expectations, many of which from a profitability standpoint, I don't have still that same impact.
So, while the Euro was a little bit favorable compared to probably our initial thoughts, there are other currencies the Pound, the Canadian Dollar and a variety of others that we operate in that kind of went in an opposite direction still keeping that full-year on FX rate headwind assumptions revenue at about approximately 2% type level.
Great, thank you.
Thank you. And our next question comes from Matt Mishan from KeyBanc. Your line is now open.
Hi, thank you. Good morning, and thank you for taking my questions. I think when you originally gave guidance, you teased out some of the various moving pieces like volume, new product growth, pricing and so forth. And in your original assumptions, you had I think new product growth growing 200 basis points to 250 basis points for the full-year.
And you have been coming in that 100 basis points to 150 basis points for the first half, and I'm just curious, what drives that back-half acceleration in new products growth really into that 3% range to kind of hit your guidance? Especially given, I don't think a big piece of that would be Percuvance or LMA.
Hey, Matt. How you are doing? It's Liam here. You are correct not a big piece but it's event LMA trajectories it's somewhat of a contributor in the second half. The main contributors are the ones that I have launched line but our growth for the quarter. Our Chlorag+ard pre-loaded PICC is a big driver in the second half.
Within our surgical group, we have the MiniLap, EFx and ISI ports and our laryngoscope blades in our surgical business units. So again, what we expect to see in Q3 and Q4 is an incremental improvement and a sequential improvements in our new products.
And also Matt what you want to bear in mind is some instances let me take the Chlorag+ard PICC for example. There is some cannibalization within that number so the what we see in the first half of the year as we get it's even if the products is not in the marketplace we are still selling the core PICC and pre-loaded of that customer, so you will see represented in volume rather than in new products.
Okay, got it. That's helpful. And then with Percuvance, I think in your original conversation around what the long-term opportunity was, you had included about 3 to 4 million of applicable procedures, but that was all U.S. based. And now that you have had the products out in Europe for a little over a quarter now with the full commercial launch, what do you think the opportunity is in Europe in particular? Are there any limiting factors that would be different, where your expectation would be much lower in Europe than it would be in the U.S.?
So, normally you would expect to get a - first of all we are not going to change our expectations for Percuvance Matt, we are going to maintain the 300 to 400 million as the market opportunity until we get farther down the road here and get some traction on it. So we will maintain that and it was based in the U.S. number, you are correct, but down the less I think to be conservative, we should maintain that number.
What we are seeing with Europe is similar to what we are seeing in the U.S. and it is very, very strong acceptance for the product. The one thing you want to get from our product math is it needs to be intuitive. So when you put it in the hands of a surgeon they should get it immediately and with this product they do, they get it immediately.
But similar to the U.S. they are not called value analysis committee to oversee, but there is a pricing board similar methodology that you go through to get the products approved and that’s what we are working through at the moment. In Europe alone we have over 70 surgeon trials that we have completed with this product.
And again overwhelming enthusiasm from the surgeons, it's just a questing of working it through the system in the individual countries and it's different country-by-country. So we haven’t pulled back from of our enthusiasm in the product, but same-store and we are not updating that 300 to 400 million market opportunity Matt.
Great, and just one quick clarification. I didn't catch what - did you change the operating margin guidance for the full-year? I didn't hear.
We did. So we have increased by 50 basis points on the lower and upper end to 24% to 24.5%.
Okay. Thank you very much, guys.
Thank you [Operator Instructions] At this time, I’m showing no further questions. I would like to turn the call back over to Jake Elguicze, Treasurer and Vice President of Investor Relations for any closing remarks.
Thanks, operator and thanks to everyone for joining us on the call today. This concludes our second quarter 2016 earnings conference call. Have a good day.
Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may now disconnect. Everyone have a great day.
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