泰利福醫療 (TFX) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Teleflex Incorporated Q1 2016 earnings conference call.

(Operator Instructions)

As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Mr. Jake Elguicze, Treasurer and Vice President of Investor Relations. Sir, you may begin.

Thank you, and good morning, everyone. Welcome to the Teleflex Incorporated first-quarter 2016 earnings call. The press release and slides to accompany this call are available on our website, at www.teleflex.com.

And as a reminder, this call will be available on our website, and a replay will be available by dialing 855-859-2056, or for international calls, 404-537-3406, pass code 90662973.

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'd like to remind you some of the matters discuss in the conference call will contain forward-looking statements regarding future events as outline in the 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, I would like to now turn the call over to Benson.

Thanks, Jake. Good morning, everyone.

I am pleased to report a very solid first quarter that exceeded our internal expectations in nearly area, which allows us to raise our full-year 2016 adjusted earnings per share guidance, even at it this early point in the year. While Liam and Tom will go through the numbers in more detail, I would like to highlight some of our key performance metrics.

Overall, I'm delighted with the Company's Q1 results, but I am glad to have the first quarter of the year behind us. As I am sure as you remember from our last earnings call, for a variety of reasons, we believed the first quarter of 2016 was going to be our most challenging quarter of the year. This principally had to do with a difficult comparison as a result of a very strong quarter in 2015, two less shipping days in Q1 of this year, a significant foreign currency headwind, and some other one-off events we expected in Q1.

Beginning with revenue on an as-reported basis, revenue slightly exceeded our initial estimates and was helped by a modestly more favorable foreign currency environment versus our guidance assumption. From a constant currency perspective, our growth rate of 1.1% was slightly under our expectations, but just under it. That being the case, we saw nothing in the quarter that leads us to change our expectations for the year, as we are reaffirming our full-year constant currency revenue growth range of between 5% and 6%.

And a few more details on Q1 revenue. It's always difficult for us to predict with pinpoint accuracy how the loss of two shipping days will precisely affect revenue for a given quarter, and now, retrospectively, I believe we had modestly underestimated the two-day impact when the quarter ended on a holiday weekend.

In addition, we had a few unexpected events. For example, we had an OEM customer push out a fairly large order from the end of Q1 to the beginning of Q2. As a result, we do not expect any of these events will have any impact on our ability to achieve our full-year constant currency revenue growth numbers, and continue to foresee a considerable uptick in growth rates beginning in the second quarter and continuing for the remainder of the year.

Moving to adjusted gross margin, our results were slightly better than our initial expectations, and the over performance in this area came primarily from improved mix. And turning to adjusted operating margin, progress here during the quarter was excellent and exceeded our internal expectations to an even greater extend than adjusted gross margin. And while our adjusted EPS for the quarter was aided by favorability in FX as compared to our original guidance assumptions, the overwhelming majority of our earnings upside were the results of very good operational performance and continued P&L leverage.

Turning to our overall view of the macroeconomic conditions, they remain largely unchanged from our last earnings conference call. We continue to expect good growth out of North America and Asia, moderate growth out of Europe, and some challenges with respect to oil-producing countries as well as with Latin America. All of this is built into our guidance.

Finally, we continue to make good progress on key initiatives, including our footprint consolidation efforts, material substitution programs and higher-margin new product launches. All of these items remain on track and should allow us to deliver both short- and longer-term margin targets that we have laid out previously.

Now, before turning the program over to Liam, I want to congratulate him on his promotion to President and Chief Operating Officer. In this new capacity, Liam's role will be expanded to include oversight of our global manufacturing operations, while he continues to have responsibility for our global commercial functions. Liam has been a reliable performer even before my arrival at Teleflex in 2011, and he continues to be deserving of new and increased responsibilities. He is an example of our increased management bench strength and our commitment to develop future Teleflex leaders from within. Liam, congratulations.

Thank you, Benson, and good morning, everyone.

For the consolidated Company, first-quarter 2016 constant currency revenue grew 1.1%. If you were to normalize our first-quarter results for the two fewer shipping days, our constant currency revenue growth would have been approximately 3.3%.

As mentioned earlier, we face a tough comparable in Q1 2015 where, if you recall, we grew by 5.2% with one less shipping day. This comparable eases in quarter two and three. In addition, we will have one additional shipping day in quarter two and another in quarter four. As such, we expect to see a strengthening in sales growth beginning in quarter two. Although this phasing may be lumpy, this is consistent with our internal expectations on revenue for the quarter and year.

Sales of new products introduced to the market contributed to 1.1% and were the main driver of revenue growth in the quarter. New product sales were particularly strong within our Surgical and OEM businesses, as well as within our EMEA segment. And while not yet a key contributor in terms of revenue dollars, we continue to make progress in two key strategic initiatives, the launch of Percuvance within our Surgical business and the LMA Protector within our Anesthesia business.

First to Percuvance. The recent [stages] meeting in Boston was an important event signaling our upcoming full-market release. Clinician feedback continues to reinforce what we learned in our limited-market release, which that Percuvance is equal to standard five-millimeter laparascopic instruments in terms of rigidity, so causing less trauma to the patient with virtually scarless incisions. The strength and functionality of the five-millimeter end effector is a exceeding our initial expectations, even during complex cases with challenging patient anatomy.

We've recently completed the first cases with our second-generation Percuvance device in Europe, where we are currently in full-market, release having received a CE mark in quarter one. While within the US, we are currently selling our first-generation Percuvance device and are working with the FDA to get our second-generation device 510(k) approved.

The FDA recently informed us that we will need to do a sterilization study and update the introductions for use prior to commercialization of the second-generation product within the US. And as such, it is our belief that we will be in a position to do a full-market release of our second-generation Percuvance products offering in early Q3. We do not expect this to have a negative impact on 2016 revenues, as we will continue to demonstrate and sell the first-generation product.

Next, to the LMA Protector. We have registrations in places from most major markets and continue with our controlled market rollout with an anticipated full-market release in 2017. The protector is currently being evaluated in 40 hospitals around the world as part of this rollout. This compares to only 11 hospitals when I last spoke to you on our February conference call.

Clinical feedback has been very positive, as the design is getting high marks for its seal pressure, which is critical component to protecting the airway and facilitating ventilation. I am pleased at the status of both of these product launches, and I continue to believe that both are large, multi-year opportunities for Teleflex.

Turning to other components of revenue growth. Previously-completed acquisitions and distributer conversions continue to pay a benefit, and during the quarter added approximately 70 basis points of growth, which was primarily due to the acquisitions of Stenning, Human Medics, and [Thintrup].

Moving to core product pricing. During quarter one, we saw the average selling price of our products expand approximately 20 basis points. This was primarily due to advances in Surgical and Vascular access, somewhat offset by a decline in European product pricing.

Finally, during the quarter, sales volume of existing products declined by approximately 90 basis points. This was primarily the result of two fewer shipping days in the quarter as well as the impact of destocking by our large US distributors. The sales tracing from these distributors show positive sales volume at a hospital level.

In addition, as Benson said a few moments ago, we also had some OEM customers push out orders to the second quarter. And in North America we saw an anemic flu season, which principally affected some of our respiratory therapy and CVC products.

Next, I would like to provide some additional color surrounding our segment and product-related constant currency revenue growth drivers. Vascular North America first-quarter revenue increased 1.5%, to $81.5 million. The increase in Vascular revenue was largely due to the sales of Vidacare EZ-IO and OnControl devices.

Now to Anesthesia North America. First-quarter revenue was $46 million, up 1.6% versus the prior-year period. Growth in this segment was driven by increased sales of Vidacare EZ-IO and airway management devices, somewhat offset by lower sales of regional anesthesia product offerings.

Turning to our Surgical North America business, its revenue increased 3.1%, to $38.9 million. The increase within Surgical is attributable to higher sales of chest drainage and MiniLap products.

Shifting to our overseas businesses, EMEA revenues declined on a constant currency revenue basis by 1.9% and totaled $122.1 million. The decline in European revenue was the result of the shipping day impact and a reduction in some products' pricing.

Moving to Asia, our first-quarter revenue increased 6.4% to $49.2 million. The quarterly increase in Asia revenue was primarily due to higher surgical ligation and central venous catheter sales and the positive impact from the acquisitions of Stenning and Human Medics.

Now to OEM. Revenue in the first quarter decreased 1.6% to $34 million, almost primarily due to lower sales of catheter and extrusion products, as well as the previously mentioned order movement from quarter one to quarter two. This was somewhat offset by an increase in performance fiber sales. Given the underlying business trend, it's our current expectation that OEM sales will rebound nicely during quarter two.

And lastly, first-quarter revenues for the businesses within our All Other category was up 2.6%, totalling $53.2 million. Growth here is primarily attributable to sales of the additional cardiac intra-aortic balloon products. This was somewhat offset by lower sales within Latin American markets due to the macroeconomic issues facing those countries.

Finally, before I turn the call over to Tom, I would like to update you on additional group purchasing organization and IDN agreements that we received during the quarter. Building on our success in 2015, during the first quarter, we won 12 new agreements and extended another 20. This quarterly total surpasses what we achieved in the fourth quarter of 2015 and now represents the largest number of agreements awarded in any single quarter since we became a pure-play medical device company.

As you will continue to hear me say, these relationships are extremely important to us, as they bolster our ability to continue to drive volume growth across our product portfolio. Of the agreements won in quarter one, several were sole source of [work].

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 first quarter and our 2016 guidance. Tom?

Thanks, Liam. Good morning, everyone.

Given the previous discussion of the Company's revenue growth drivers, I will begin my prepared remarks on the gross profit line. But before I do, I'd like to reinforce the Company is off to a solid start in the first quarter of 2016. During the quarter, we realized expansion of both the gross and operating margins versus prior-year levels. Financial leverage was good, with 19.6% adjusted net income growth being generated from flattish revenue gains.

Cash flow generation was also strong. Additionally, currency head winds moderated during the quarter versus what we'd experienced throughout 2015. Given the strength of the first-quarter results and our outlook for the remainder of the year, we are raising adjusted earnings per share guidance by $0.10 on both the top and bottom end our adjusted EPS range.

Turning now to first-quarter results. For the quarter, adjusted gross profit was $227.8 million, versus $224.8 million in the prior-year quarter. Adjusted gross margin was 53.6%, representing a 130-basis point increase when compared to the prior-year period, and positioning us well for the achievement of our full-year gross margin targets.

During the first quarter, adjusted gross margin benefited from increased sales of higher margin products, primarily in the Asia, Anesthesia, and the All Other segments, the impact of 2015 acquisitions and distributer conversions, and net favorable pricing.

Also in the first quarter, adjusted operating margin improved by 190 basis points. The increase was largely the outcome of the gross margin gain, control over discretionary overhead spending, and the impact of the suspension of the medical device excise tax. For the quarter, adjusted operating profit and margin were $95.1 million and 22.4%, respectively, versus $87.8 million and 20.5%, respectively, in the prior-year quarter.

Continuing down the income statement. For the quarter, adjusted net interest expense decreased to approximately $10.2 million, versus approximately $13.8 million in the prior year first quarter. The decrease in interest expense reflects the refinancing of the 6 7/8% senior subordinated notes in the second quarter of 2015 and the repayment of approximately $50 million of revolver borrowings in the third quarter of 2015.

In the first quarter, the GAAP tax rate came in at 4.9% due to a tax benefit arising from the settlement of an international tax audit. That benefit was added back for purposes of calculating the adjusted the tax rate. Our adjusted tax rate was 19%, which is at the mid point of our 2016 tax rate guidance range of 18.5% to 19.5%. On the bottom line, first-quarter adjusted earnings per share was $1.52, or an increase of approximately 17%.

Turning now to select balance sheet and cash flow highlights. For the quarter, cash flow from operations was approximately $67 million, or an increase of approximately 58% over the prior year. The increase was primarily the outcome of improved operating results and the favorable impact from changes in working capital items, partially offset by an increase in tax payments.

From a balance sheet standpoint, at the end of Q1, cash on hand totaled approximately $393 million, of which, approximately $26 million was located in the United States. Leverage as per our credit facility definition stood at approximately 2.36 times.

That completes my comments on Q1 results. Next, I would like to update you on a change made to our capital structure subsequent to quarter end.

On April 4, pursuit to separate privately negotiated agreements between the Company and certain holders of the convertible notes, the Company paid cash and issued common stock to note holders in exchange for $219.2 million of aggregate principal amount of the convertible notes. We funded the cash portion of the consideration through borrowings under our revolving credit facility.

In addition, we have also received, but not yet settled, conversion notices totally $44.3 million in aggregate principal amount of the convertible notes. The $44 million of unsettled conversion obligations will be settled in June, and we expect to fund the cash portion as able cash or borrowings under the resolving credit facility.

Following the exchange transaction, and after giving effect to the conversion notices the Company has received but not yet settled, $136.2 million of aggregate principal amount of convertible notes will remain outstanding.

Finally, I will provide you with an update on our full-year 2016 financial guidance. Beginning with revenue, for 2016, we are reaffirming our full-year constant currency revenue growth guidance range of between 5% and 6%. And we continue to expect as-reported revenue to increase by 3% to 4%. Inherent in the as-reported growth is the assumption that the euro-to-dollar exchange rate average is approximately $1.06 for the balance of the year. Based on the current rates, this may prove to be a conservative assumption.

We are also reaffirming both our previously provided adjusted gross margin guidance range of 54% to 55% and adjusted operating margin range between 23.5% and 24%. Based on current projections, we expect that the operating margin will come in toward the upper end of that range.

On the interest line, we have financed the redemption a portion of the convertible notes through a draw on the revolver. However, we are evaluating more permanent financing alternatives and you should not assume that interest expense will provide a source of additional earnings leverage for 2016.

Our full-year 2016 adjusted tax rate guidance remains 18.5% to 19.5%. Given the continued appreciation in our stock price, we now project a slight increase in our adjusted weighted average share count to 45.6 million shares for full-year 2016. Note that the redemption of the convertible notes itself did not have a material impact to the adjusted share count, as a dilution from a potential conversion had already been included in the calculation.

On the bottom line, we are increasing our full-year adjusted earnings per share guidance range from the previous range of $7 to $7.15 to a revised range of $7.10 to $7.25, which represents growth of 12.2% to 14.5%. The increase reflects both a strong Q1 result and confidence in our outlook for the balance of the year.

That concludes my prepared remarks. At this time, I would like to turn the call back over to the operator for questions.

(Operator Instructions)

Larry Keusch from Raymond James.

Two questions. First, Liam, congratulations on the promotion. And Benson, just wanted to pick your brain and see if had any thoughts on how we should be thinking about succession planning and timing.

So I will repeat my previous comments, that I think that our expectation is that we will have an internal candidate to be able to replace me. I think we'll be in a position to talk about more on timing later in the year, but I am personally very comfortable that -- and as is our Board -- that we've got a good succession spot and intend to share that more publicly as we get closer to the time.

Okay, perfect. Thank you for that. And then perhaps for Benson or Tom or Liam, remind us again how you take the constant currency growth from the 1 percentage range in the first quarter to 5% to 6% for the year. Obviously, implies a significant acceleration. I recognize there's some extra data in to 2Q and 4Q, but again, just walk us through how that math works.

Larry, I'll take that, and thank you for your congrats. If you take it and you take the constant currency growth of 1.1%, then you're [nearing] the billing date, then you're at 3.3%, as we outlined on our Q4 results. So if we take that as our jump-off point, and you look at what happened with the OEM business moving out and some of the destocking that we felt within our distributors, that's about another 1.1%.

And then look at the tough comparables last year, 5.2% with one less billing day, which would be [6.3%], so that should get you about another percent. That's how we bridge it to a 5% to 6% growth rate.

And we're pretty confident, Larry, that we'll see a nice rebound in quarter two and continue on from there. It's not a question of waiting for a Q4 to get there this year. We are pretty confident we will see a nice rebound in Q2.

Okay, terrific. Thanks, guys.

Dave Turkaly from JMP Securities.

I know we had spoken earlier, looking at your segments, about Vascular potentially leading the way this year. I know Vidacare did like 20% last year. I'm curious if you still feel like that could be the strongest segment, and I was wondering if you could maybe help us with what we should expect from Vidacare this year.

Liam here, Dave. Thanks for that. I will deal with Vidacare first.

The Vidacare, we do anticipate a very solid performance again this year from Vidacare. We expect to see Vidacare growing at the 20% range on a full-year basis, and we see it being a contributor to our growth overall.

Vascular continues to perform very strongly, as it did last year. And you are correct, we continue to see Vascular as a segment that will lead the way in our growth in the Americas and globally.

Thanks. And then just one quick followup, maybe for Benson because he historically has had good thoughts on what's happening in the broader marcromarket.

I heard the prepared remarks, but given what we've seen from you guys and peers, the year is off to a good start. A lot of [beat and raises], even though it is early.

Is there anything that you are seeing -- and I know in the past you've experienced -- you've been able to grow even when the market wasn't, but on a utilization point or a procedure volume, anything you would point to, because it seems like just across the sector, there's been a lot of strength so far this year.

Yes, so I would concur that that's our perspective as well. Liam mentioned the fact that sales out from distributors to hospitals was actually stronger than our sales into distributors, so we are quite comfortable that we are seeing continued robustness in the US market. The one footnote I would say is, there was a relatively strong flu season last year, which didn't replicate itself this season, but in spite of that, I think we're going to see quite good growth out North America.

The other growth area for us, and I think for other manufacturers as well, is going to be in China. Europe will be positive, but to a lesser extent. And the situation with the oil-producing countries has essentially remained unchanged, which is not in good shape, as I said earlier.

All of that is built into our guidance, and this is consistent from what we are seeing from other manufacturers as well.

Matt Mishan from KeyBanc.

Good morning, thank you for taking my questions.

Good morning.

Just a couple of clarifying ones for me. Did you quantify the impact of the selling days in the quarter on sales?

Yes, we did. We qualified it as 2.2% with the 2 less billing days.

And then what was the -- I didn't catch it. What was your new euro assumption?

Our euro assumption remains for the balance of the year at [1.06], and I think that's one of the areas for upside during the course of the year. What we saw last year, though, was quite a bit of volatility, and so we -- I think in the spirit of some conservatism, want to make sure we don't underestimate what could happen in the third and fourth quarters.

I think that's fair. And then just in terms of potentially terming out the savings versus the converts on the debt side, how are you modeling your free cash flow coming in for the year? I feels like you guys have $300 million of free cash flow expect is coming that should be able to cover that pretty easily.

That's in line with our internal expectations, is about the $300 million of free cash.

But how are you modeling the impact of that free cash? Are you modeling it going straight to cash and equivalents?

Are you modeling it to taking it down debt? Are you modeling it towards instead of terming out [the converts] that actually -- taking that down?

In terms of modeling, we have not assumed a reduction of debt to our capital structure for the balance of the year. Right now, as we took down or redeemed a portion of convertible notes, we put those redemptions that we paid in cash on revolver.

And so I think the way to think about it is that what we did in the first and early part of the second quarter is not what you should assume is the full-year impact of what happens with the converts and/or what's on the revolver. But I wouldn't assume that interest expense is a source of additional earnings or leverage for 2016. So if that helps you to better understand it, but we are not assuming that, that free cash flow is going to reduce our (multiple speakers) --

I think coming at this is another way, we continue to want to preserve sufficient liquidity as we see ourselves as a serial acquirer, and we'll continue down the path of making appropriate acquisitions for the targets we are keenly interested in.

All right. Thank you, guys.

(Operator Instructions)

Jason Wittes from Brean Capital.

Thank for taking the questions. I wanted to ask about second-generation Percuvance.

Can you give us a quick sketch of how it's improved? And also wanted to know if any docs in the US have gotten their hands on it yet.

Okay, so how it has improved. When we did our limited-market release, if you've seen the Percuvance, you change the heads in order to extracorporeally, which means outside the body, to actually continue the procedure. The advantage is we don't make any change to how the surgeon does the procedure.

One improvement that we made was the exchange was a screw-on head in the first round, and in the second iteration of the product, it's actually clip-on. We just did that to speed up the exchange time, and it makes the procedure time shorter for the doctor.

Yes, it is in the hands -- the generation one is in the hands of doctors in the US, and actually, we have completed 250 procedures globally with the majority of them being the US. There was 10 sites of the initial launch. Nine out of the 10 sites have committed to using the product moving forward, and four of them have already gone through their back committee and added it to their formulary, and they are waiting for the second-gen products to be launched.

Now, overseas, in Europe, we received a CE mark in quarter one, so doctors in Europe, we now have sites in Italy, Germany, UK, France, Belgium, the Netherlands, Greece, and actually trialing the product as we speak today, and we are in active full launch in Europe.

What has been the feedback? Is it -- on your description, this doesn't sound like a major overhaul. It just seems like some tweaks. But I'm curious to know if you've got [initial feedback] -- (technical difficulty).

The initial feedback is incredibly positive. It's -- the incision is almost scarless. The feedback from the patient, one patient actually said to a doctor -- accused a doctor of not doing the procedure because the scar was that invisible, at which he was quite amused by.

And the feedback from the doctors, there's no change. The surgeons see no change in their procedure.

The exchange goes well. They are able to use it for more complex cases than we initially thought, so all this all, the feedback from the limited-market release and now the full-market release in Europe is resoundingly positive.

I was simply just -- the second -- from first generation versus second generation is actually what I was asking.

So that's really just the change in the way the end effector is attached. The [first] generation, as Liam said, has to be screwed on. It's a relatively fine thread, particularly in terms of training the technician on how to make those changes.

One of the things that came up during our release was that they wish they had a slightly easier way to do this. This, in fact, is a lot easier way to do it, and there's not a danger that they've only partially screwed the head on and allowing it to come loose. Although, that's just a theoretical observation since it's never happened, but there seems to be a greater comfort level with this attachment method.

And we're very encouraged that we only had to make that small change from limited-market release to full-market release, gen one to gen two.

Okay. And should we assume a more significant impact in 2017? Let me rephrase that.

Can you give us a sense of what we should expect from this in 2016 and then versus that versus 2017?

The impact in 2016 is minimal. We are just beginning to build up our base of customers, and you should begin to see the impact ramp up as we go into 2017, for the Percuvance and Protector.

Okay, but we should assume that 2017 will be a more significant year?

That is correct.

And then one last question for Vascular. You mentioned Vidacare, which continues to do very well. Curious about the other business lines, CVCs and PICC, how they're doing and what the outlook is for the year.

The outlook for the year on both CVCs and PICCs is resoundingly positive. Within the quarter, because of the poor flu season, both CVCs and PICCs were impacted by that. But we don't have any concerns for the full year on our Vascular business, and we are -- continue to be very bullish about our ability to continue to support the CVC franchise and take share with our PICC franchise.

Do you have growth rates for the quarter for those two business lines?

Yes, I do. So our CVC showed a modest decline of about 2%, and our PICC business, again, a modest decline of about $1 million, mostly driven by the flu season.

That's [for the] sales to distributors, not necessarily sales to hospitals.

Correct.

Got it. Thank you very much.

Brian Weinstein from William Blair.

Good morning. Thanks for taking the questions.

Good morning, Brian.

Congratulations on the promotion, Liam.

Thank you very much.

Sure. You mentioned a couple times US distributor destocking. I'm hoping that you can educate us a little bit as to what's going on there, what's driving this, and when do you think that, that bottoms out?

Brian, this happens occasionally. So about 50% of our business goes through these large distributors, the [cardiac care] and the Minors, so those people you should be familiar with. And occasionally we see that they will -- we get trade from some of the shows, the in-hospital sales, and occasionally, we will see a trend where they destock their own inventory levels.

It normally normalized within a quarter, and if it just normalizes in a quarter, then it comes back during the year. It's not going to have any impact in the year. We just happened to see it in this current quarter that we're in.

Okay, I appreciate that. On the restructuring and the facility footprint consolidation, any update there as to how that's progressing and the impact that, that could have in terms of margin contribution this year? Any potential upside that you guys are willing to talk about at this point?

I think it's too early in the year for us to talk about an upside at this point in time. I would say everything is on track as we initially planned for 2016. We expect to see some benefit from this towards the end of the year and more benefit as we move into 2017, but both of phase one into phase two, essentially are tracking to plan.

Next question for me is on gross margin. Last quarter you talked about operational efficiency driving about 60% of the gain and volume and mix driving about 40% of the anticipated gain in 2016. Is that still the way that we should be thinking about it, or are they tracking somewhat differently?

That's still a consistent thought in terms of how we are going to get there in the full year. I'd say that in the first quarter, we had a little stronger benefit coming out of mix, but we continue to expect the operational efficiency gains to build as the year processes. So still thinking along those same lines for the full year.

Great. Thank you for taking the questions.

(Operator Instructions)

Follow-up question from Larry Keusch from Raymond James.

Thank you for taking the question. Benson, just since we haven't really touched on it, just circle back and M&A. It feels like -- well, you guys continue to be extremely disciplined.

Just wanted to get some thoughts on how you're taking valuations. And it doesn't feel like there's a major sense of urgency given the way the business is performing, and again, just wanted to see how you're thinking about M&A broadly.

Larry, I think our long-term view remains similar, that the general marketplace is less favorable to smaller companies than it is to the larger companies through a certain scale extent. Those companies that are $50 million to $100 million in revenue have a tough time with IDNs and GPOs. They have a tough time globalizing.

That's becoming a much more important part of a growth strategy. So we think there's availability of product lines that we are interested in. We have said no to a couple of things that we liked over the past several months because we thought the valuations were out of line, so I would echo the point that we continue to be quite disciplined.

But also, as last year, we continue to be very, very active in many, many more smaller acquisitions that I think are more than gap fillers but good strategic additions for the product line. I think you can expect that to continue with or without a larger acquisition.

Okay, that's great. Thanks for the clarity.

Anthony Petrone from Jefferies.

Thanks, and good morning, guys. Maybe just going back a little bit to Percuvance just get a little bit of an update there on when do you think you'll move beyond the initial procedures that you were targeting with that device? I know it's still early.

I think the initial target market in some of the general surgery applications that you called out is around $300 million to $400 million, but there's clearly a broader market opportunity our there for Percuvance, potentially multiples of that. And so I'm just wondering, you've made some tweaks to the device. Is that now set for a broader surgical application, or is it still you're going after this smaller market within general surgery first, and then that product will expand perhaps in the next two or three years.

Well, the $300 million, $400 million was a subsegment of the overall laparoscopic market. It wasn't defined on a procedural basis. When we launched the product first, we thought we would be doing a considerable number of Lap/Choles.

We are doing some of those, but we've found a broader application for the product in more complex procedures -- complex, tiny procedures. But the position of the patient limits the ability of the surgeon to place trocars where they would once placing trocars, and obviously, with our device, they don't need to place trocars. Some bariatric procedures that the surgeons are doing and have used the product for in the limited-market release.

So the market size is not limited by the procedures per se, but it's the [step] taking a proportion of the laparoscopic overall market.

And than maybe a followup also on M&A. Clearly, a big transaction announced this morning. And if you listen to that call, there's this bigger-is-better mantra is resonated out of that call as well. Medtronic has commented on that as much, certainly with Covidien.

So maybe an update, Benson, on your view, and Liam, on your view on how the hospital market is evolving. Is a bigger bag necessarily better, or do you think being more dominant in a smaller product set is still the way to go? Any thoughts on that would be helpful.

Well, for us, it has to be the way to go for the most part since we're -- our size is what it is. But I would point to the continued success we have with both IDNs and GPOs in this country in terms of winning awards, and for new products as well. So that notion that GPOs or hospitals want to deal with a limited number of suppliers has some partial truth to it, but there's still a robust place for product differentiation and for better clinical outcomes.

I do think, and I've said this many times, I think we are big enough to get in front of GPOs and in front of IDNs. We're big enough be able to sell our products globally.

So I don't see a disadvantage in our size. I see more of an advantage in our nimbleness.

That's helpful. And then one last quick for me is just on the cap structure and the converts. So clearly, a portion that was retired. I don't know if there's an update on the remaining converts in the cap structure, if there's any plans for that? Thanks again.

Sure, well, just a little bit of background on the transaction would perhaps give you some insight. As a reminder, the notes come due on August, 2017. We wanted to take steps to redeem some of those notes in advance of maturity.

Given where the notes currently trading in the marketplace, we saw the opportunity now to take those notes out at a pretty attractive price for us. We determined that the best approach was a privately negotiated transaction versus going out with a full tender offer, just given the difference in the premium that would be required between the two. And because we approached this in that manner, there's a limitation of the amount of notes that could be redeemed at this time.

Now, we're always evaluating the highest and best use of the capital, and so we'll continue to monitor the terms, the maturities, and the rates, and as I mentioned earlier, you shouldn't assume that we are finished with what's been done in the first and early part of the second quarter. We are continuing to look to see if it makes sense when we can go back in the marketplace to look at the remaining notes.

Thank you.

I am showing no further questions. I would now like to turn the call back over to Jake Elguicze for any further remarks.

Thanks, operator, and thanks to everyone that joined us on the call today. This concludes the Teleflex Incorporated first-quarter 2016 earnings conference call.

Ladies and gentlemen, thank you for participating in today's conference. You may all disconnect. Everyone have a great day.