Teleflex (TFX) Q3 2017 Results - Earnings Call Transcript

Teleflex, Inc. (NYSE:TFX) Q3 2017 Earnings Call November 2, 2017 8:00 AM ET

Executives

Jake Elguicze - Teleflex, Inc.

Benson F. Smith - Teleflex, Inc.

Liam J. Kelly - Teleflex, Inc.

Thomas E. Powell - Teleflex, Inc.

Analysts

Lawrence Keusch - Raymond James & Associates, Inc.

David Ryan Lewis - Morgan Stanley & Co. LLC

Richard Newitter - Leerink Partners LLC

Anthony Petrone - Jefferies LLC

Mike Matson - Needham & Co. LLC

Matthew Mishan - KeyBanc Capital Markets, Inc.

Andrew Brackmann - William Blair & Co. LLC

Matthew Taylor - Barclays Capital, Inc.

David L. Turkaly - JMP Securities LLC

Operator

Good day, ladies and gentlemen, and welcome to the Teleflex Incorporated Third Quarter 017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this call is being recorded.

I would now like to turn the conference over to Jake Elguicze, Treasurer and Vice President of Investor Relations. You may begin.

Jake Elguicze - Teleflex, Inc.

Good morning, everyone, and welcome to the Teleflex Incorporated third quarter 2017 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, passcode 3479079.

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 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 Benson.

Benson F. Smith - Teleflex, Inc.

Thank you, Jake, and good morning, everyone. I'm very pleased to say that Teleflex had an excellent third quarter as we grew revenue 17.4% on an as reported basis and 15.4% on a constant currency basis. I'm also happy to report that organically we grew our constant currency revenue of 5%. This was a significant acceleration from levels we achieved for the first six months of the year, thanks in part to progress made in our distributor to direct conversion in China.

In addition to strong broad based revenue growth during Q3, we also delivered significant margin expansion, reaching an adjusted operating margin of 26.3%, which is the highest level ever attained since becoming a pure-play medical device company. Mind you, this was a tremendous result, as it is assigned that our organic margin improvement initiatives, integration of various acquisitions and our previously announced restructuring programs remain on track. In fact, as you'll hear from Liam momentarily, we're increasing the savings estimate associated with our various restructuring plans.

The margin performance in the quarter flowed through to the bottom line and translated into GAAP earnings per share of $1.70, which was up 21.4% versus the prior year period and adjusted earnings per share of $2.12, which was an increase of 17.8%. Finally, on the first day of the fourth quarter, we completed the acquisition of NeoTract, which will help the revenue growth and earnings profile of Teleflex for many years to come. The addition of NeoTract as well as the performance of our base business allows us to once again increase many of our full-year 2017 financial guidance metrics, including our constant currency revenue growth expectations, which we were raising from a range of between 12.5% and 14% to a new range of between 14.25% and 14.75%. Our adjusted earnings per share expectations, which are increasing from a range of between $8.20 and $8.35 to a new rage of between $8.30 and $8.40. This marks the third time this year we have been able to increase our adjusted earnings per share expectations.

In closing, we're up to a good start in 2017, and we are positioned well for success in 2018. We continue to see stability within our end markets, good global utilization of many of our products, and positive momentum in revenue generated from the newly introduced products to the market. We've also made significant progress in our distributor conversion efforts, the integration of Vascular Solutions, and have driven substantial margin expansion and shareholder value.

As my time as CEO of Teleflex nears a close, I am more confident than ever in Teleflex's ability to succeed in the healthcare marketplace in the future. I completed my prepared remarks. Now, I'd like to turn the call over to Liam.

Liam J. Kelly - Teleflex, Inc.

Thank you, Benson. And good morning, everyone. For the consolidated company, third quarter 2017 constant currency revenue grew 15.4%. This consisted of Vascular Solutions, which contributed 9.5%; other M&A, which contributed 0.9%, and organic revenue growth of 5%.

Beginning with the components of organic revenue growth, during quarter three, we saw volumes expand year-over-year by approximately 2.4%. These volume gains were predominately due to improvements within our Asia segment, as we continue to take steps forward to our China go-direct.

In addition to volume improvements in Asia, we also saw a nice uptick in core product volumes within our vascular North American business, our OEM business and from EMEA. These volume improvements were somewhat offset by a decline in surgical volumes, resulting from a decision to exit certain lower margin product lines. While this decision results in a small negative near-term revenue impact, we felt that it was the appropriate thing to do to improve the longer-term margin profile of the surgical segment.

As a management team, we will continue to review our portfolio to identify future opportunities to rationalize lower growth margin dilutive segments of our business and we will keep the investment community updated on potential future product line exits. I'm also pleased to report that no Teleflex employee was injured during the recent hurricanes in quarter three. The revenue line for Teleflex was minimal in the quarter, and while we do not have factories or distribution centers in the affected areas, we are currently assessing the impact that the hurricanes may have had on vendors whose materials we use. Our thoughts continue to be with the people still being impacted by the aftermath of the hurricane.

Moving to new products. The positive revenue contribution trend we have seen for the past several quarters once again continued, this time contributing approximately 2.1% of constant currency growth. We are pleased with these results as this marks the first time in the company that we have achieved 2% or more in terms of revenue growth, coming from new product introductions, and it is a testament to our internal private development efforts. Unlike previous quarters, new product revenue growth was once again led by our OEM cardiac and vascular products, as well as the regions of EMEA and Asia. OEM new product revenue was primarily attributed to new future products, by cardiac and vascular new product revenue growth, stems from our recently introduced AC3 Intra-Aortic Balloon Pump and our preloaded antimicrobial and anti-thrombogenic VPS PICCs, respectively.

Turning to pricing. During quarter three, we saw continued improvement in the average selling prices of our products, which drove revenue higher by another 50 basis points. This is consistent with the levels that we achieved during the first-half of the year, and it was predominantly due to our continued ability to take price on a variety of products within the North American market.

Finally, moving to revenue growth, coming from M&A. During the quarter, M&A, other than Vascular Solutions, contributed approximately 90 basis points of constant-currency revenue growth. The contributors here were Cartika and Pyng, with a larger portion coming from Pyng, as Cartika has now moved into organic growth as of September this year.

Finally, Vascular Solutions contributed 9.5% towards Teleflex's third quarter constant currency revenue growth. And when compared to the third quarter of 2016, Vascular Solutions revenue increased approximately 5.3%. At first glance, this growth rate may seem lower than expected as Vascular Solutions had consistently been growing revenue in the double-digit range. We, however, are not concerned as the lower than normal revenue growth is primarily due to our decision to accelerate some distributor conversions from 2018, into 2017.

As we saw in China with the Teleflex base business, when distributor conversions occur, there may be periods of time that revenue growth slows and that is what happened this quarter with Vascular Solutions as the European distributors' destock. We expect this to also be the case during the fourth quarter of 2017. And as such we, now expect Vascular Solutions to add about 8.5% towards Teleflex's full year revenue growth, which is at the low end of our initially provided range. We fully expect this to be short-lived issue and we continue to anticipate the Vascular Solutions will add close to a point of organic growth in 2018.

Next, I would like to provide some additional color surrounding our segment and product-related constant currency revenue growth drivers. Vascular North America third quarter revenue increased 6.7% to $91 million, and was largely due to higher sales of PICCs and Vidacare EZ-IO and OnControl devices. As I have done in the past, I would like to point out that our PICC sales growth year-to-date is over 23% and our Vidacare year-to-date growth rate is over 19%.

Moving to Anesthesia North America, third quarter revenue was $50.8 million, which was an increase of 4.3% (sic) [4.4%] (11:06) versus the prior year period. If you recall, Anesthesia revenue growth was relatively flat during quarter two, and the increase in quarter three is due to improvement in new product volumes led by our LMA Unique with silicone and LMA Gastro product lines as well as the Pyng acquisition.

Turning to our Surgical North America business, its revenue decreased 2.7% to $40.8 million. As I referenced earlier, the decrease within surgical is primarily attributable to a decision to exit some lower margin product.

Shifting to our overseas operations, EMEA revenues continued their positive trajectory, growing 3.3% on a constant currency basis to $131.5 million. The improvement in European revenue was largely the result of increased sales of vascular, surgical and cardiac products.

Moving to Asia. Our third quarter revenue increased to 11.7% to $72.4 million. This marks the highest level of constant currency revenue growth achieved within Asia since the fourth quarter of 2015. The improvement in Asian revenue was largely the result of increased sales of cardiac, surgical and vascular products. As I communicated on our last earnings call, we expected China to contribute positively in quarter three, and it did, generating revenue growth of over 8.5% in the quarter.

Turning to OEM. During the third quarter, revenues increased 16.1% to $48.6 million, and was primarily due to higher sales of catheter extrusions and performance fiber products. And lastly, third quarter revenue for the businesses within our All Other category was up 86.5%, totaling $99.6 million. Growth here is primarily attributable to the acquisition of Vascular Solutions.

In summary, growth during the third quarter was balanced across our product lines and regions. And as we exit the year, it is our belief that we are well positioned for strong growth to continue into 2018. And speaking of strong growth, I would like to briefly speak to you about some recently completed M&A, including the closing of the NeoTract acquisition. We completed the acquisition of NeoTract on the first day of the fourth quarter; and as such, we will receive an entire quarters' worth of NeoTract results in 2017.

For those of you who may not be aware, NeoTract was a privately held company, based in California, that has developed and commercialized the UroLift System, which is a novel, minimally invasive technology for treating lower urinary tract systems due to benign prostatic hyperplasia or BPH. With a revenue growth profile that exceeds that of Vidacare. This acquisition accelerates Teleflex's near-term sales growth trajectory and provides us with the significant sales channel opportunity. Most importantly, this acquisition enhances Teleflex's long-term organic growth profile and solidifies our ability to sustainably generate strong organic constant currency revenue growth in the future. NeoTract has experienced robust clinical adoption and significant revenue growth since initiating product commercialization in 2014, and this acquisition positions Teleflex to expand our current presence within the urological call point.

Additionally, we expect this acquisition to enable us to improve our margin profile due to NeoTract's gross margin, which exceeds 70% today as well as allow us to capitalize on our significant international infrastructure to drive further penetration of NeoTract UroLift System outside of the United States.

As background. During 2015 NeoTract generated revenue of approximately $18 million. This quickly accelerated to approximately $51 million during 2016. While during 2017, we continue to estimate that revenue will be between $115 million and $120 million and that it will grow at least 40% in 2018. We also continue to believe that NeoTract will be slightly delusive to adjusted earnings per share in 2017, that it will become breakeven in 2018. While in 2019, we expect that it will contribute between $0.35 and $0.40 of adjusted earnings per share and that it will be increasingly accretive, thereafter.

I'm happy to report that the initial few weeks of integration have gone well, and we are very enthusiastic to have the NeoTract team, now part of the Teleflex family. However, NeoTract wasn't the only acquisition that Teleflex recently completed. On a much smaller scale, in September, we acquired certain assets from Tianjin Medical Company, Limited. This acquisition of a contract manufacturer based in Tianjin, China consists of substantially all of the assets used by Tianjin to manufacture a line of Teleflex laryngeal masks. This acquisition should assist our anesthesia business in being even more cost competitive, and it also provides Teleflex with a manufacturing presence within China, which should help as we attempt to get additional products through the Chinese version of the FDA.

And finally, before I turn the call over to Tom, I would like to provide you with an update on our various restructuring programs. The non-revenue dependent margin expansion opportunity continues to be a differentiator for Teleflex as compared to many of our peers. And we continue to receive feedback from the investment community that they would like periodic updates and for us to summarize all the various restructuring programs in one place. That is what we are doing – we are once again attempting to do here. It is very important to understand that this chart simply represents the restructuring initiatives that have been approved and that are currently underway at the company and their respective costs and synergies. This does not include additional savings that we anticipate generating that come in the form of annual cost improvement programs, material substitution initiatives, improved pricing or potential future restructuring programs. These expected savings would be incremental to the amount shown here, and it is our intention at our Analyst Day next year to provide a comprehensive summary of all our expected savings over a forward-looking multi-year period.

Our announced restructuring programs indicate that we expect to incur between $105 million and $125 million of total charges by the time these programs are complete; and that as of December 31, 2016, we incurred approximately $63 million of those costs. Turning to anticipated savings, we now expect that we will generate between $88 million and $102 million of annualized pre-tax savings and synergies by the time these programs are complete; and that through December 31, 2016, we achieved $31 million. This leaves us with between $57 million and $71 million of additional annual pre-tax savings and synergies yet to be realized, and it is our belief that we will realize substantially all of these estimated annual pre-tax savings and synergies by December 31, 2019. These savings and synergy figures represent an increase of between $4 million and $7 million as compared to our prior estimates.

That takes me to the end of my prepared remarks. Now, I would like to turn the call over to Tom, for him to review our financial results for the third quarter and to provide our updated guidance for 2017. Tom?

Thomas E. Powell - Teleflex, Inc.

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 $298 million versus $245.8 million in the prior year quarter. Adjusted gross margin was 55.7%, a 170-basis point increase when compared to the prior-year period. The expansion in adjusted gross margin was largely due to an increase in the sales of higher margin products, manufacturing cost reductions resulting from footprint realignment programs, and gross margin generated by the acquisition of Vascular Solutions.

Operating margin improved 260 basis points to an all-time high of 26.3%. The improvement was related to gross margin flow through in tight control over discretionary SG&A spending. Adjusted net interest expense increased to $20.9 million from $11.7 million in the prior-year quarter. The increase will flexed the impact of the additional borrowings under our credit facility to finance the acquisitions of Vascular Solutions and NeoTract.

For the quarter, the adjusted tax rate was 18.1%. This quarter's rate is somewhat elevated due to tax cost associated with the integration of Vascular Solutions and less favorable mix. The 390-basis point increase from the prior-year tax rate was also impacted by the prior-year comparable, which was a typically low. For the third quarter it was only a minimal benefit from the new accounting treatment or excess tax benefits. On the bottom line, third quarter adjusted earnings per share increased 17.8% to $2.12.

Turning now to select balance sheet and cash flow highlights. During the first nine months of 2017, cash flow from operations was $320 million or an increase of 6% over the prior year. The increase was primarily the outcome of improved operating results, partially offset by an increase in net working capital. Also, during the quarter debt increased by $250 million as a result of $725 million draw on the revolver in connection with the acquisition of NeoTract, partially offset by the repayment of approximately $475 million of borrowings on the credit facility, and the retirement of the remaining $44 million of outstanding convertible notes. At quarter end, leverage as per our credit facility definition stood at 3.61 times.

And that completes my comments in the third quarter. Now, I'll move to 2017 guidance updates. Beginning with revenue, as we look at the fourth quarter, we see two positive catalysts that allow us to raise both as reported and constant currency revenue growth ranges.

First, our currency outlook has improved from when we last provided an update in August. Assuming currency rates remain at today's levels, foreign exchange would generate an approximate 75 basis point tailwind versus our previous expectation of a 100-basis point headwind. Second is the addition of NeoTract, which was not previously included in guidance. Consistent with our expectation when we announced the acquisition in September, we continue to project that NeoTract will generate full-year revenue of between $115 million and $120 million in 2017.

We expect that the consolidation of the NeoTract results into our fourth quarter will add approximately 150 basis points, 170 basis points to our full-year revenue growth rate. As such, we are raising our as reported revenue growth in the previous range of 11.5% to 13% to new range of 15% to 15.5%.

This revision to as reported growth represents an increase of 3% at the midpoint and reflects both the addition of NeoTract and our improved currency outlook.

Based on the updated assumptions, our as-reported revenue is now expected to be between $2.148 billion and $2.158 billion. In addition, we are raising our constant currency revenue growth expectations from the previous range of 12.5% to 14% to a new range of 14.25% to 14.75%. Revision to our constant currency growth expectation represents an increase of 125 basis points at the midpoint and reflect both the addition of NeoTract and the adjustment of Vascular Solutions growth of 8.5% from our previous range of 8.5% to 9%. As discussed by Liam earlier in the call, the revisions of Vascular Solutions growth rate reflects the revenue impact of our decision to accelerate distributor to direct conversions into the fourth quarter.

Moving to gross margin, we are raising our full year expectation for adjusted gross margin to a range of between 55.7% and 56%. The increase in our expectation is predominantly due to NeoTract. Turning to adjusted operating margin, here we are reducing our full year adjusted operating margin expectation to a range of between 25.3% and 25.5%. The change in adjusted operating margin reflects the inclusion of NeoTract in year-to-date performance.

Shifting to interest expense, given the additional financing associated with NeoTract, we expect an increase in interest expense in the fourth quarter. As we have previously indicated, we may look to term out a portion of the revolving credit facility borrowings through a note offering. As such, we now project our full year 2017 adjusted interest expense to be between $80 million and $81 million.

On taxes, we anticipate that our full year adjusted tax rate will be approximately 17%. And for modeling purposes, it is our expectation that foreign currency exchange rates in the fourth quarter will closely approximate recent spot rates. Our adjusted weighted average share count for the full year 2017 will be approximately 46.4 million shares.

Finally, moving to EPS, given the year-to-date results and fourth quarter expectations, we are increasing 2017 adjusted earnings per share to a range of $8.30 to $8.40, or year-over-year increase of between 13.1% and 14.4%. The increase of $0.075 at the midpoint reflects a more favorable currency environment as compared to when we last provided guidance, somewhat offset by the addition of NeoTract, which is expected to be slightly diluted.

In closing, I'm pleased with our year-to-date performance. Our growth year-to-date has been broad based and we are seeing improvement in several key metrics such as new product revenue. Our non-revenue dependent margin expansion is very much on track and we've been able to increase our earnings guidance for the third time this year. Additionally, the acquisitions of Vascular Solutions, the NeoTract will serve to further accelerate top line in earnings momentum. We look forward to a strong finish in 2017 and feel the company is well positioned for a successful 2018.

That concludes my prepared remarks. Now, I'd like to turn the call back over to the operator for questions. Operator?

Question-and-Answer Session

Operator

Our first question comes from Larry Keusch of Raymond James. Your line is open.

Lawrence Keusch - Raymond James & Associates, Inc.

Yeah. Hi, good morning, everyone.

Benson F. Smith - Teleflex, Inc.

Good morning, Larry

Liam J. Kelly - Teleflex, Inc.

Good morning, Larry.

Thomas E. Powell - Teleflex, Inc.

Good morning, Larry.

Lawrence Keusch - Raymond James & Associates, Inc.

So, I guess, Liam, maybe – I just want to start with the decision to accelerate these distributor conversions in the Vascular Solutions business. Could you really walk us through why you chose to do that differently than you had anticipated? Particularly, just given that you just close that deal earlier this year. So, I'm just curious why now?

Liam J. Kelly - Teleflex, Inc.

So, Larry, good question. The reason that we would decide to do that now is because it's in our interest for the longer-term growth of the company. We, originally, anticipated that it would take longer to engage with the distributors in conversations about the go-direct. It normally, in our experience, takes a bit longer. But I guess given our history with LMA, Vidacare, the distributors were anticipating this and we got a bit of a lucky break as well, Larry, in all transparency in France, where one of the distributors was sold, which allowed us to begin the process. So, once we have begun that process, it opens up the door for us to have earlier conversations with the other distributors and what it means is we will have that direct channel within our control earlier in 2018, than we had originally anticipated, which bodes well for driving longer term growth for VSI in our own hands. So, that was the basis of the decision, Larry.

Lawrence Keusch - Raymond James & Associates, Inc.

Okay, perfect. And then, just as a follow-up, I guess two thoughts here. First, given the acceleration in the organic constant currency growth versus the first half of the year. Can you give us some sort of preliminary thoughts on how you're thinking about that growth really for the core business? Not so much for NeoTract and Vascular. But as you look into 2018, and then, the only other thing is on the new products, which as you indicated were 2.1% growth. You didn't mention Percuvance in there. So, again, I just wanted to get a sense of, are you still sort of thinking that? You know, that's kind of $18-ish-million in 2018, and then, another 100 basis points of growth in 2019?

Liam J. Kelly - Teleflex, Inc.

Okay, Larry, so I'll begin with the organic, and then, I'll turn to Percuvance, if that's okay? So, I think we're well poised for a very successful 2018. I think during the quarter two earnings call, I told the investment community to expect a slight uptick in our organic revenue growth in the second half of the year versus the first half. I think I also advised that China would become a tailwind in the second half contributing to that growth.

It is still our expectation in quarter three, is very much in line with this. Our half year growth just for billing days and excluding scale acquisitions of 4.6% with organic at 3.8%, and if you look at the midpoint of our full year guidance that would have our full year growth excluding scale acquisitions of 4.4%; and organic at that 3.9%, up from 3.8%.

So, Larry, to answer your question, we are expecting the uptake. I – again reiterated that our 4% to 5% full year revenue guidance included previously closed M&A. And also, looking into 2018, clearly, the headwind from the China go-direct will continue to be a tailwind. And we also think that the – we're very pleased with the new product acceleration and new product organic growth reaching 2.1% in the quarter, which as I said, was an all-time high for Teleflex.

Percuvance didn't have any contributions into that new product revenue growth. And also in our quarter two earnings call, Larry, I mentioned that following the Percuvance recall, we expected to be back into the market during quarter three. As we dug into this with our third-party manufacturer, we identified additional issues. And as a result, we now anticipate being back in the market in early 2018. We are, of course, disappointed in this development especially since the customer demand and positivity towards the percutaneous product offering remains very high. But we're glad we caught it at this early stage.

We will reengage with those customer trials and clinical evaluations once we are back in the market, and we will provide additional information of Percuvance expectations on our quarter four earnings call once we have more clarity. And again, we'll do the same in the spring at our Analyst Meeting. I would reiterate, Larry, we remain really enthusiastic for the longer-term prospect of this product. And again, as I said, we had an all time new product number of 2.1% revenue growth even without the contribution of Percuvance. So, I think it all bodes well for our longer-term outlook.

Lawrence Keusch - Raymond James & Associates, Inc.

Okay. Terrific. Thanks very much, Liam.

Operator

Our next question comes from David Lewis of Morgan Stanley. Your line is open.

David Ryan Lewis - Morgan Stanley & Co. LLC

Good morning. Just a few quick questions from me. The first is, Tom, just to follow up on VSI distributor conversion. So, with that acceleration in those distributor conversions, how are you thinking now about the VSI accretion for next year relative to the prior $0.50 guidance?

Thomas E. Powell - Teleflex, Inc.

Well, we're obviously, to Liam's point, seeing this as a way to accelerate our efforts across Europe. I would say that we're not in a position to provide guidance yet for 2018, but you would expect it to be a positive versus a negative movement, obviously. Just a little premature for us to provide that guidance.

David Ryan Lewis - Morgan Stanley & Co. LLC

Okay. And then, Liam, just two for you. The first is, one if you just comment in the U.S. environment we've seen kind of U.S. implanter utilization growth in the third quarter be particularly weak, obviously your organic numbers are better than ours. But kind of comment on the U.S. environment, your thoughts into the fourth quarter, number one. And number two, on NeoTract, just given that 40% growth number for next year, if you can give us a sense of what you're assuming for the underlying investment in that business relative to specific rep hires, things of that nature would be very helpful. Thank you so much.

Liam J. Kelly - Teleflex, Inc.

Yeah. Sure. So, David, I served in the U.S. Environment, and we have read the reports as well of utilization softness. Now, in all transparency, Dave, we are probably not the best company to be a benchmark on utilization. Most of our products are used in emergent procedures where the delivery of care is not optional. So, as the procedure volume goes down, we probably are the least impacted company in that regard because of our portfolio, and because of where we positioned our portfolio and the delivery of that emergent care as I said.

Having said that, I mean, what we see especially through the third quarter is we see in the North American markets, utilization rates of our products continuing to grow modestly, and we don't see any pullback in utilization rates in the United States. So, that's our view of the market. Obviously, we're monitoring it pretty closely, and we don't anticipate seeing that into quarter four and to 2018. But as I said, Dave, we're probably not the best company to be a benchmark for that, we don't really track procedure volumes within hospitals.

On NeoTract, clearly we're investing within this product category. Our investment thesis is that we will add a number of reps in the region of 8 reps to 10 reps again next year. As territories hit a tipping point, we will split the territories – we will either split the territories or add a consultant rep to assist the urology consultant within that territory to continue to accelerate the growth. And we – you're absolutely correct, we do anticipate generating 40% growth year-over-year, and we look at this very favorably.

David Ryan Lewis - Morgan Stanley & Co. LLC

Thank you very much.

Operator

Our next question comes from Rich Newitter of Leerink Partners. Your line is open.

Richard Newitter - Leerink Partners LLC

Hi, thanks for taking the questions. A couple of quick ones. Just maybe a follow-up on NeoTract, I think – thanks for the color there on 8 to 10 new rep hires. I was just wondering how the communication has been, kind of with the sales force and the existing employees of the organization since the deal announcement, just given this was a hypergrowth asset, and anytime, you have a standalone company like that get absorbed, is it going smoothly? Have you still retained the entire organization as is, and was there any distraction of any sort? I'm just curious.

Liam J. Kelly - Teleflex, Inc.

Rich, thanks for the question. It's Liam. I'll take that. So, the initial integration has gone exceptionally well. I personally have been down there twice for signing and close. The people within NeoTract, I think see this very positively. We have had, I think one regrettable sales loss since close, but in all transparency that was a person that wanted to relocate. I think that would have happened whether it was part of Teleflex or not.

The momentum within the company is still very solid. The sales team are very engaged. We are all committed to making the UroLift the standard of care for BPH, and the fact, I think that we have established it as its own business unit within Teleflex, obviously helps that, Rich, and it helps that team keep their own identity while being part of a bigger organization that obviously gives opportunities for future career growth within a larger company rather than a smaller. The management team is intact, Rich, and we don't envision significant changes in that regard either.

Richard Newitter - Leerink Partners LLC

Okay. That's helpful. Just on Vascular Solutions, with respect to the pull forward distributor conversions, I appreciate that this actually is going to be a positive, likely benefit to your accretion assumptions in the year ahead, it is right to think that you're still thinking about – about 100 basis points of incremental growth on top of organic rate, and – or should that also kind of be thought of as an increasing pay-off as we move into 2018 as well?

Liam J. Kelly - Teleflex, Inc.

So, again, we haven't given guidance for 2018, but as I said Rich, in my prepared remarks, we still believe that VSI can add a point to our top-line growth as a company. And as we do our Q4 earnings call and guidance, obviously, we'll give more color on what VSI will add to Teleflex.

Richard Newitter - Leerink Partners LLC

Okay. But it's pretty clear that the VSI contribution in terms of what it can do for you in 2018, bottom-line and top-line, nothing has changed there?

Liam J. Kelly - Teleflex, Inc.

That's a good assumption, Rich.

Richard Newitter - Leerink Partners LLC

Okay, very helpful. One last one. On the China tailwinds that kind of picked up in the back half of 2017, can you quantify kind of those tailwinds just a little bit more, and then, also can you give us any quantification of whether that's kind of a run rate to think about as we move into the first half of 2018?

Liam J. Kelly - Teleflex, Inc.

Well, if you look at the first half of 2018, I'll go back to what I said on the first of 2017, where China was a headwind of about 20 basis points, so obviously, we would see that going away, and we would see it becoming a – turning from a headwind to a tailwind in 2018.

China had been a drag on our growth through the first three quarters, and in actual fact was – was negative in that timeframe, and it turned positive, China, so the tune of about 8.6% in quarter three. And we would see that continuing and accelerating slightly into quarter four in China.

Richard Newitter - Leerink Partners LLC

Okay. Thank you.

Operator

Our next question comes from Anthony Petrone of Jefferies. Your line is open.

Anthony Petrone - Jefferies LLC

Thanks. And Benson congratulations, I don't know if you'll be with us on the fourth quarter call, but it's been a great ride and congratulations.

Unknown Speaker

(39:55), he is going to be the CEO then. So, your perception that I won't be here is correct.

Unknown Speaker

Right? Fantastic.

Anthony Petrone - Jefferies LLC

Well, good luck. And thanks for everything. Two on NeoTract, and then, one on the restructuring target. So on just trying to walk through the math for the fourth quarter actually on what's actually baked in. So, I think by my math here you're baking in about $10 million, but the run rate on $115 million to $120 million seems to be much higher. So, maybe just to reconcile the fourth quarter contribution for NeoTract. And then, yeah, the update would be I think the shift in Medicare rates came out last night. I'm just wondering how it shook out for the UroLift CPT codes heading into 2018. What actually is the rate in 2017 and what will that rate be in 2018? And then, I'll have a follow-up on margins. Thanks.

Liam J. Kelly - Teleflex, Inc.

Okay. So, with the – with the change, we didn't hear of any change that would happen for the CPT code for the UroLift, and so no adjustments to our reimbursement rate for that product. And our math is at the $1.5 million to $1.7 million would have NeoTract adding $28.5 million to $31.5 million in the fourth quarter.

Anthony Petrone - Jefferies LLC

Got it. Got it. And on the margin front, I know we're – we'll get an update next year – in the spring at the Analyst Day. But I'm just wondering as you – as you look outward now and how this flows into margins, you know anything that that you could share on what the mix of maybe a margin of uplift will look like, you know between restructuring, gains going forward, mix, and perhaps even to the extent that price still plays into margin as a driver. Thanks.

Liam J. Kelly - Teleflex, Inc.

Okay. And you're absolutely correct. We'll give longer-term guidance when we have our Analyst Day in the spring. I will tell you that we're very pleased that we're able to call up our longer-term benefit from restructuring by between $4 million to $7 million on this cause and that's a real positive for us. We do anticipate having modest positive core pricing and I think we're a little bit of a positive anomaly in that respect in Teleflex and we have been able to take a modest positive core pricing as well as pricing from our distributor to direct.

And obviously, we have got continuous improvement programs in place. We have material substitution in place, and now, we have product mix playing in as well with VSI and NeoTract, having higher margins than our core portfolio. And then, making good decisions to exit lower margin portfolio as we did within our surgical business units. So, we will get further guidance on our Analyst Day, and I think the future looks bright for our margin expansion story.

Anthony Petrone - Jefferies LLC

And just one last one...

Liam J. Kelly - Teleflex, Inc.

Tom is just going to provide a little bit more...

Benson F. Smith - Teleflex, Inc.

Just maybe a little more color, just if you think about the guidance we've provided in the last Analyst Day, through 2018 we still feel very confident in our ability to see the gross operating margin guidance even excluding the acquisitions of Vascular Solutions and NeoTract. In fact, we're kind of already at the operating margin target as we speak, including with acquisitions, and as Liam pointed out, as we look at NeoTract, it carries a higher gross margin than Teleflex and is growing very rapidly. We see that kind of in the low-70s gross margin. And as we look at the next-generation products, perhaps even increasing that margin.

And so, we see that as a real margin driver going forward that would be additive to what we've provided previously. Vascular Solutions is also accretive on the gross and operating margin. We had mentioned in 2018, we expected to add 80 basis points to grow to 100 basis points into operating. So, both of those acquisitions will be additive to what we had previously communicated. And then, to Liam's point, we see pricing mix, other initiatives in operation such as our material substitution program continuing to build on that. And so, we see a multi-year margin expansion story still intact for Teleflex. So, we're pretty bullish and we'll provide more details on 2018 in the future at the Analyst Day.

Anthony Petrone - Jefferies LLC

And what if I could sneak in is just back-end (44:25) for BARD, maybe just a comment on the tech market, and if you see any changes with the new ownership of BARD coming down? Thanks.

Liam J. Kelly - Teleflex, Inc.

So, obviously, we're very focused on our own PICC portfolio that as I said is growing rapidly. We do – are very focused on the antimicrobial and anti-thrombogenic nature of our products, which clearly gives us an advantage. And through that, the three quarters, we're growing it over 25%, as I said, in my prepared remarks. Any integration of two companies of that size would cause disruption. We think that it may have a nice opportunity for us with some talent acquisition. And regardless of whether the two companies would unite, I think we're very well positioned to take share of BARD in its own or with BARD under BD. And we have just resubmitted our coded PICC in China, which we would anticipate getting that registration within 12 months. So, we're quite bullish about our opportunities within the PICC space as we compete with Baird and also AngioDynamics. And we also see that we have a positioning system that was formerly positioning system of another company and that gives us a good opportunities for continued growth in that segment.

Anthony Petrone - Jefferies LLC

Thank you again.

Operator

Our next question comes from Mike Matson of Needham and Company. Your line is open.

Mike Matson - Needham & Co. LLC

Good morning. Thanks for taking my questions. I guess, I just wanted to start with the divestitures that you spoke about of some of the lower growth and lower margin businesses. I know you're probably not going to tell us what other areas you're looking out there, but can you just talk about how much opportunity you have to continue to shed some of these types of things?

Liam J. Kelly - Teleflex, Inc.

So, let me just say your assumption about us, of our not telling you what other businesses are on the target list is absolutely correct. I think our broader operating philosophy has been that as we are making acquisitions, like Vascular Solutions and NeoTract, it puts us in a position to be able to take a look at additional things in our business portfolio which may not have the same strategic importance to us – maybe lower growth, lower gross margin products, less lined up in a good competitive network. So, that's kind of the framework at which we're looking at it, the attractiveness of the interest to another buyer is obviously another thing. So, much beyond that, we're really not able to comment, other than don't be surprised if we do so more of this.

Mike Matson - Needham & Co. LLC

Okay, that's helpful. And then, with regard to Vascular Solutions, just wondering if you continue to see double-digit growth in the areas where you weren't going through these distributor transitions, it sounded like that was mostly in Europe. So, I don't know, maybe the question would be, did the U.S. grow double digits or if some of that was going on here than any area where you didn't go through those issues?

Liam J. Kelly - Teleflex, Inc.

So, that the U.S. was in line with our expectations, we saw an uptick year-to-date was slightly ahead in APAC. And you're absolutely correct, most of the impact was in Europe. And what happens? Clearly, the distributors we end – we begin the conversations with the distributors on a go-direct. So, they stop ordering, they're not going to order product and have it sitting in their warehouse for us to buy it back and just ties up cash for them. So, the impact was almost exclusively seen within Europe from a degradation standpoint and the U.S. was in line with our general expectation.

Mike Matson - Needham & Co. LLC

Okay. Thanks. Maybe if I could squeeze one more, just on China. It seems like the government there is really pushing to buy from local manufacturers. So, does that concern you at all and did that factor into your decision to buy this company there at all?

Liam J. Kelly - Teleflex, Inc.

So, the decision to buy the company in China has very little to do with that particular phenomenon. As I said in my remarks, it will actually help us get through this – Chinese FDA for some product categories. But the decision to buy that company was really to solidify our supply chain for our fast growing LMA with silicone product, which is one of our new products and it was manufactured by that company Tianjin (48:57). So, it will help with our margin profile, it will help with our ability to continue to grow that product in North America. And I think that you are right that the Chinese government is giving preference to local manufacturers. But that has been happening for the last two years and we've addressed that with very differentiated products within our portfolio that are not easy to substitute in that marketplace.

Mike Matson - Needham & Co. LLC

Thank you.

Liam J. Kelly - Teleflex, Inc.

Thanks, Mike.

Operator

Our next question comes from Matthew Mishan of KeyBanc. Your line is open.

Matthew Mishan - KeyBanc Capital Markets, Inc.

Hey, good morning, and thank you for taking the questions.

Liam J. Kelly - Teleflex, Inc.

Good morning.

Benson F. Smith - Teleflex, Inc.

Good morning.

Thomas E. Powell - Teleflex, Inc.

Good morning.

Matthew Mishan - KeyBanc Capital Markets, Inc.

Just a lot of moving pieces now. And I was just hoping you could just go back to the core organic constant currency growth rate, that 4% to 5% guidance you gave. And talk around what you're seeing around just the core organic growth. Are you coming in near the high end, the low end, or how are you feeling about the core business?

Liam J. Kelly - Teleflex, Inc.

Okay, Matt. So, if we go back to the 4% to 5%. The 4%, 5% did include previously completed M&A in our guidance, which we gave at the beginning of the year. Now, if we go back to where we're performing versus that. And if you take our constant currency guidance of 14.25% to 14.75%. You take out VSI and you take out NeoTract, and you normalize our billing days and do all that. You are at a range of call it 4.25% to 4.55%, with a midpoint of 4.4%. So, that's a comparative to our guidance, and then, our original guidance would insinuate or give you an organic growth of 3.7% to 4.6% at the midpoint of over 4.1%, and our current guidance would give you 3.75% to 4.05% with the midpoint of about 3.9%.

So, all in all, those are the moving pieces, and clearly, we exited some lower margin business, as I – which I said in my prepared remarks as a headwind of about 20 basis points all coming in the second half of the year for the 20s of full year basis. So, we're very comfortable where we are in relation to our guidance and very comfortable where we are in relation to our organic growth. And obviously, a key component to that is new product, which we continue to see acceleration on.

Matthew Mishan - KeyBanc Capital Markets, Inc.

Okay, got it, that's really helpful. And then, I know you're not given guidance for next year, but I think you're going to do, I think you're looking to do a high yield offering. What do you think the full – the right run rate for interest expense going into next year is? I mean, I know the fourth quarter won't be the full run rate, but what do you think the right run rate is going into next year?

Liam J. Kelly - Teleflex, Inc.

So, you're right, given the offering would be midway through, it would be slightly elevated from what we're seeing in the fourth quarter. I don't have the exact number calculated as of yet, but...

Thomas E. Powell - Teleflex, Inc.

Yeah, and, Matt, and it's obviously somewhat dependent on when we do the offering and what rate we end up getting on the offering. So, I'm sure that following the completion of a note offering, we'll certainly be able to communicate more with investors as to what our longer-term run rate would be for interest expense.

Matthew Mishan - KeyBanc Capital Markets, Inc.

Okay, and great. And then, last question, on Vascular Solutions, anyway you can break out the North American growth versus the international to get a sense for what the real impact of the distributor direct issues are, as compared to like your ability to drive growth in North America?

Liam J. Kelly - Teleflex, Inc.

So, Matt, I said earlier that North American growth was in line with our expectations. I mean, the impact, we estimate the impact of the distributor destocking in Europe to be about $2.5 million and further destocking that will happen in the fourth quarter as we have these conversations. The important thing here, Matt, is that destocking takes place accelerates our opportunities in 2018 for the go-direct. So, it's a short-term headwind, but it's a longer-term positive for Teleflex.

Matthew Mishan - KeyBanc Capital Markets, Inc.

Okay, understood. All right. Thank you very much, and congratulations.

Liam J. Kelly - Teleflex, Inc.

Thank you.

Operator

Our next question comes from Brian Weinstein of William Blair. Your line is open.

Andrew Brackmann - William Blair & Co. LLC

Hey, guys, this is actually Andrew Brackmann on for Brian this morning. I want to go back to the distributor conversion and could you maybe talk a little bit more about your pipeline and runway that you have here and when do you think it will be kind of materially done? Thanks.

Liam J. Kelly - Teleflex, Inc.

Okay, Andrew. So, we have said in the past that about 8% to 9% of our business is a potential for a go-direct, and of that, about one-third, it would be attractive to is then would be in geographies that we would consider. Obviously, we've executed in China, at the same time we did the VSI acquisition, which almost refills the bucket with the exact same value. So, the original statement still holds. Obviously, now we will execute in 2018, on a significant portion of the VSI go-direct, which will bring down that overall percentage. But we still are constantly looking at opportunities for our go-direct, and there are still some parts of the world that we think we should execute on in the next coming years.

Andrew Brackmann - William Blair & Co. LLC

Got it. Thanks. And then, one more, last quarter you had made some comments around some competition headwinds in your lower end respiratory products. Are you still seeing that in the third quarter or is that kind of material behind you? Thanks.

Liam J. Kelly - Teleflex, Inc.

Thank you. Actually, the comments that we made, Andrew, were around our anesthesia portfolio, and I'm happy to be able to comment that our anesthesia portfolio had a very solid quarter, three growing at 4.3%, driven predominantly by new product introductions, the LMA with silicone that I spoke about earlier, the LMA with Gastro, and also the Pyng acquisition that we introduced in the intraosseous space in that group. So, we – there's always competition in parts of our business. But I think we're managing some of that competition very well.

Andrew Brackmann - William Blair & Co. LLC

Thanks, guys.

Operator

Our next question comes to Matt Taylor of Barclays. Your line is open.

Matthew Taylor - Barclays Capital, Inc.

Hi, good morning, guys. Thanks for taking the questions.

Liam J. Kelly - Teleflex, Inc.

Good morning.

Matthew Taylor - Barclays Capital, Inc.

Good morning, guys. So, I wanted to ask you about next year. I mean if we look at how things are improving here organically and with these acquisitions and FX is going your way, you have a lot of tailwinds going into 2018. And I guess I'm just curious philosophically how much of that you would drop through versus reinvest when – if we add up kind of that contributions from each of those things, you could easily grow above kind of this low to mid teens rate on earnings that you've been growing. So, how do you balance those things?

Liam J. Kelly - Teleflex, Inc.

So, clearly, Matt, there are some areas of investment that we have identified within Teleflex. NeoTract, as we have always said was an investment thesis for Teleflex, we will continue to invest in particular in the sales channel in NeoTract. The go-directs in Europe will require some investment, and I think we did alert the investment community that we will begin that investment in the latter half of the year in anticipation of the go-direct. But we will have to put sales resources into Europe to support the growth that we anticipate from VSI in Europe.

And obviously, there are parts of our portfolios that are fast growing, like the intraosseous with Vidacare and now with Pyng, that we would put resources. But we're – our philosophy on investment, Matt, is we invest behind our highest margin, fastest growing assets in order to drive ongoing shareholder value. So, that is our philosophy in order to continue to accelerate Teleflex's growth profile.

Matthew Taylor - Barclays Capital, Inc.

Okay. Great. And I just wanted to clarify, you said earlier on the call you're analyzing the potential impact of some suppliers in Puerto Rico. It sounded like that would be pretty small, is there any way that you can give us some brackets around what the quantification of that impact would be?

Liam J. Kelly - Teleflex, Inc.

You're correct, it's pretty small, Matt, but at the same token, we're just keeping a very watchful eye. We have some components that go into our kits that come out of that geography. And also, we are watching very closely what happens to the price of PVC, not because of the hurricane per se on providers down there, but the demand for PVC will go up as the building industry increases its demand for that raw material. So, we're watching that closely to see if that's going to have a cost impact, but that will impact every medical device company that uses PVC, not just Teleflex, so we don't see it is as being significant, and we didn't see the hurricanes as having a significant impact on our revenue growth in Q3.

Matthew Taylor - Barclays Capital, Inc.

Okay. All right. Thank you very much.

Operator

Our next question comes from Dave Turkaly of JMP Securities. Your line is open.

David L. Turkaly - JMP Securities LLC

Hi, thank you. I, too, would like to congratulate you, Benson. It's been a great run.

Benson F. Smith - Teleflex, Inc.

Thanks, Dave.

David L. Turkaly - JMP Securities LLC

Sure. Quickly, the Percuvance thing. Obviously, we've done some diligence on that product, it seems like there is some good pent-up demand, some people that are using it fairly frequently, I'm just curious the issue that arose as a new one that delays you to 2018, like is that a manufacturing problem or what exactly happened or is happening with the product?

Benson F. Smith - Teleflex, Inc.

Yes, it's a manufacturing specification problem with our third-party provider of some of the products. So, we're working with them to get a root cause. We think we're pretty close and we anticipate being back early in 2018. We agree with you, the customer sentiment is very, very strong. There's a lot of pent-up demand for the products. Our sales force are just waiting to get it back, so they can go back to that customer base with the product. So, we're really looking forward to getting it back in the hands of our sales reps and back to the customers who really want to use this products early in 2018.

David L. Turkaly - JMP Securities LLC

Great. And one quick follow-up. I know you mentioned PICC positioning as sort of a driver, maybe even for competitive gains. But are you still selling – I think it was Nostix and VasoNova, but are both of those still being used and/or any color on sort of which is more prominent or which is helping you on the competitive landscape?

Benson F. Smith - Teleflex, Inc.

So, we still sell both. We have a good, better, best philosophy. The VasoNova portfolio gives a nurse who is placing a PICC, a confirmation that the PICC is in the right position. The Nostix gives us guidance and for countries in particular overseas where they just want to use ECG, it allows them to use ECG. I would anticipate that the – and the preloaded Nostix product is now just into the marketplace. But I would anticipate the growth profile, the accelerated growth profile could come more from Nostix than from the VasoNova, but like all products in this category, would you start to take market share? You'll actually get a bounce on both categories and both should see growth. But the Nostix is more comparable to what the physicians are used to using in the marketplace. So, therefore, that's why anticipate that gaining momentum and it has some real competitive advantages over some of the systems out there.

David L. Turkaly - JMP Securities LLC

Thanks a lot.

Operator

There are no further questions. I'd like to turn the call back over to Jake Elguicze for any closing remarks.

Jake Elguicze - Teleflex, Inc.

Thanks, operator, and thanks to everyone that joined us on the call today. This concludes the Teleflex Incorporated third quarter 2017 earnings conference call.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.