泰利福醫療 (TFX) 2016 Q2 法說會逐字稿

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

(Operator Instructions)

As a reminder this conference is being recorded. I would now like to call over to Jake Elguicze, Treasurer and Vice President of Investor Relations. Sir, you may begin.

Thanks, operator, and good morning everyone and welcome to the Teleflex Incorporated second-quarter 2016 earnings conference call. The press release and slides to accompany this call are available on our website www.Teleflex.com. As a reminder this call will be available on our website and a replay will be available by 855-859-2056 or for international calls 404-537-3406, pass code 47983139.

Participating on today's call are Benson Smith, Chairman and Chief Executive Officer; Liam Kelly, President and Chief Operating Officer; and Thomas Powell, Executive Vice President and Chief Financial Officer. Benson, Liam and Tom will make some brief prepared remarks, and then we will 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 made in our press release today as well as our filings with the SEC including our form 10K which can be accessed on our website. With that said I would now like to turn the call over to Benson.

Thanks, Jake, and good morning, everyone. It's a pleasure to be here once again to discuss Teleflex's performance, and, as an overview, I must say we are very pleased with our results because they leave us well positioned to achieve our 2016 goals but perhaps more importantly put us ahead of schedule in terms of meeting the longer-term goals outlined at our last analyst meeting.

Our strategy in focusing on higher-margin differentiated products in geographies we think will benefit most from demographic trend is already showing dividends. I'm sure you recall that when we initially provided our 2016 financial guidance, we told you that we expected a sequential improvement in constant currency revenue growth rates, adjusted gross and operating margins and adjusted earnings per share as we move throughout the year. And I'm pleased to report that is exactly what happened from Q1 to Q2.

In fact, the operating performance of the Company in the second-quarter continued to exceed our internal expectations in nearly every area allowing us to raise our full-year 2016 adjusted earnings per share guidance for the second straight quarter. Constant currency revenue growth reached 5%, and we believe this positions the Company to achieve our previously provided full-year guidance range.

During the quarter we generated constant currency revenue growth within each of our reportable segments led by our higher-margin vascular, anesthesia and surgical North American franchises. And as we move through the remainder of the year, we fully expect constant currency revenue growth rates to continue to sequentially accelerate in Q3 and Q4 being led primarily by continued strength US market.

Because of our margin goals, strategically for Teleflex it is really important that we put the right products in the right geographies. What and where we grow is just as important to us as how fast we grow. Not all revenue for us is equal. For example, we have to have approximately $3 million of revenue growth in low end respiratory products to generate similar levels of gross profit equal to $1 million worth of Vidacare product growth.

Our vascular access catheters are another example. These products will be primary beneficiary of our first phase footprint consolidation effort. However to be conservative we calculated the savings at static volumes and when we provided our longer-term targets.

So growth in these product categories means we will realize even greater savings down the line and result in a better mix. Speaking about margins, we reached adjusted gross margins and operating margins of 55% and 25.2% respectively both of which represent all-time margin highs for Teleflex as a pure play medical device company.

And despite being the summer months I've already said that we're not going to pull up the lawn chairs once we attain these levels of margins, and that still holds true as we see an opportunity for continued significant margin expansion front of us. Overall, I'm delighted with the Company's results during the first 6 months of 2016, and I expect even stronger showing in the second year half.

That completes my prepared remarks. I would like now to turn the call over to Liam. Liam will go into more detail around second quarter revenue and discuss the drivers we expect to accelerate revenue growth in Q3 and Q4. Liam?

Thank you, Benson, and good morning, everyone. For the consolidated Company, second-quarter 2016 constant currency revenues grew 5%. The primary driver of revenue growth this quarter came from increased sales volumes of core products which contributed approximately 3.5%. This was aided by the fact that we had one additional shipping day in the quarter.

This quarter is a bit unique given that our financial quarter ended four billing days before the calendar end of the quarter. As such, it is difficult to quantify the exact impact of the extra shipping day, but we estimate that it contributed approximately 1% of revenue growth. North America had a strong quarter with constant currency revenue growth of 8%. Of this, core product volume growth improved by approximately 5.5% as compared to the year ago period.

On the last call, I mentioned that sales in to our distributors in the United States were less than the sales [trasings] out. This situation improved slightly in quarter 2 with the remaining deficit expected to equalize during the remainder of the year. We also saw good volume growth out of our OEM business.

And while still delivering positive core volume growth during the quarter, our Asia business experienced lower growth than we initially anticipated as that business is working through a backorder situation associated with our cardiac intra-aortic catheter business as well as some weakness in Southeast Asia. We expect to be past this backorder situation by the end of the third quarter.

Another driver of revenue growth in the quarter is the result of an increase in our sales volume of new products which contributed approximately 1.3% of constant currency revenue growth. New product sales were particularly strong within our surgical, OEM and anesthesia businesses.

Surgical new product sales were driven by increased utilization of products used in robotic procedures, further penetration of our EFX offering as well as an increase in the amount of MiniLap products sold. OEM and new product sales are attributed to increased Force Fiber and coated catheter sales while in anesthesia the growth is primarily due to increased sales of our Rusch disposable LED laryngoscopes. And while not yet a key contributor in revenue dollars I would like to provide you with an update on the Percuvance product launch.

On our last earnings call I told you that we recently completed the first cases with our second-generation device in Europe where we are currently in full market release having received a CE Mark in quarter 1. The adoption of this second-generation technology continues to progress nicely overseas, and we expect a slight uptick in OUS revenue contribution in the back half of 2016.

While within the United States, I explained on our last call that we received 510K approval on our second-generation device from the FDA, but that there were some conditions associated with the approval. The 510K conditions require a new sterilization study for reprocessing the reusable Percuvance handle according to the latest FDA guidance.

Execution of the protocol is currently underway, and consistent with what I said in our previous earnings call, we continue to expect to have this completed in August of this year. This continues to position us for a full market launch of the second-generation device in the United States during the third quarter.

We continue to promote demonstrate the first-generation device in hospital in the US, and the customer response continues to be overwhelmingly positive. We have completed 39 evaluations of the product, and 32 are progressing through the value analysis committees.

Turning to other components of revenue growth. During quarter 2, we saw the average selling prices of our products expand approximately 20 basis points. This was primarily due to increases in vascular access and surgical products as well as increases due to distributor conversions. This was somewhat offset by a decline in European product pricing.

Finally, during the second quarter, previously completed acquisitions added approximately 10 basis points of growth. This was primarily due to the acquisition of Stenning.

Next, I would like provide some additional color surrounding our segment and product related constant cursing revenue growth drivers. Vascular North American second-quarter revenues increased 8.8% to $88.2 million. The increase in vascular revenues was largely due to sales of Vidacare EZ-IO and OnControl devices as well as increased intravenous catheter and PICC sales.

Moving to anesthesia North America second quarter revenue was $49.2 million up 8.2% versus the prior-year period. Growth in this segment was driven by increased sales of Vidacare EZ-IO, airway management devices, epidural kits and atomization product offerings. As an aside, the Vidacare product lines continues to perform well growing approximately 30% globally on a constant currency basis this quarter.

Turning to our surgical North America business. It's revenue increased 6.8% to $43.1 million. The increase within surgical is primarily attributable to higher sales of ligation products, surgical instruments and access ports. Chest drainage products, while not strategically important also grew due to competitor issues.

Shifting to our overseas businesses, EMEA revenues rebound in the second quarter and expanded 1.3% on a constant currency basis totaling $131.7 million. The improvement in European revenue was largely the result of increased vascular access and neurology product sales. This was somewhat offset by lower sales of cardiac products as our European business is also working through the same backorder.

Moving to Asia. Our second quarter revenue increased 3.6% to $63.2 million. The quarterly increase in Asia revenue was primarily due to higher surgical ligation and respiratory sales. In addition, we continue to see good growth out of China which during the quarter grew approximately 8% on a constant currency basis.

Turning to OEM. You may recall from our quarter 1 earnings call that this business had some orders pushed from quarter 1 and as a result, we expected to see an improvement in quarter 2. That is what happened as during the second quarter constant currency revenue increased 5.9% to $40.3 million and was primarily due to higher sales of performance fiber products. And lastly, second-quarter revenue for our businesses within our all other category was up 5.4% totaling $57.9 million.

Growth here is primarily attributable to sales of additional respiratory therapy and cardiac intra-aortic balloon products. While our Latin American business made recovery generating modest constant currency revenue growth in the quarter, we do continue to experience difficult trading conditions in Brazil.

Finally, before I turn the call over to Tom, I would like to briefly update you on additional GPO and IDN agreements that we received during the quarter as well as the status of several restructuring plans that are underway. During the second quarter, we continued our track record of success with GPOs and IDNs this time winning 19 new agreements and extending another 9.

Of the agreements won and extended in quarter 2, 16 were sole-source in nature. In a few cases, the sole-source awards protect our existing business, however, the majority of the sole-source awards received in the quarter position the Company to expand our sales across a variety of product lines including laryngoscopes, pain pumps, closure devices, arterial catheters, vascular positioning confirmation systems, PICCs and Vidacare OnControl. This continued success with groups is another reason why we feel confident in our ability to achieve our full-year constant currency revenue growth guidance range.

Lastly, let me update you on our most recently announced series of restructuring programs. I am pleased to report that our 2014, 2015 and 2016 programs remain on track both from a timing perspective and from an expected synergy generation standpoint. These programs are focused on improving both gross profit and reducing operating expenses, and they are expected to be substantially complete between 2017 and 2018.

In total, these three programs are expected to drive between $55 million and $69 million of annualized pretax savings once fully implemented. We have started to see the early benefits from some of these initiatives, and we anticipate seeing significantly more over the next couple of years.

That takes me to the end of my prepared remarks. At this time I would like to turn the call over to Tom for him to review our financial results for the second quarter and to provide our increased full-year 2016 guidance. Tom?

Thanks, Liam, and good morning, everyone. Given the previous discussion of the Company's revenue growth drivers, I'll begin my prepared remarks at the gross profit line.

For the quarter adjusted gross profit was $260.4 million versus $236.3 million in the prior quarter and adjusted gross margin increased 270 basis points to 55%. The attainment of a 55% gross margin exceeded our internal expectations and positions us well for the achievement of both our 2016 and multi-year gross margin targets.

The 270 basis point gain in gross margin reflects the impact from reductions in manufacturing costs resulting from cost improvement initiatives including the 2014 manufacturing footprint realignment plan as well as the resolution of certain product quality issues that impacted the prior-year period. Additionally, gross margin benefited from favorable mix, volume leverage and favorable year-over-year foreign-exchange movements.

Also during the second quarter adjusted operating margin increased 480 basis points to 25.2% which is the highest operating margin achieved by Teleflex since becoming a pure play medical device company. The increase was largely outcome of the gross margin gain, control over discretionary overhead spending, favorable foreign-exchange movements and the impact of the suspension of the medical device excise tax. The gains were somewhat offset increase in R&D spending during the quarter.

Continuing down the income statement. For the quarter adjusted net interest expense decreased to approximately $10.3 million versus approximately $12.8 million in the prior-year quarter. The decrease in interest expense is largely attributable to the June 2015 refinancing of $250 million in principal amount of our 6 7/8% senior subordinated notes. To accomplish the refinancing we've borrowed under our variable rate revolving credit facility which bears an interest rate at a lower level than did our senior subordinated notes.

Moving to taxes. In the second quarter, the adjusted tax rate was 20.6% up 110 basis points versus the prior-year period. Despite being elevated within the quarter, we continue to anticipate that our full-year adjusted tax rate will be between 18.5% and 19.5%.

On the bottom line, second-quarter adjusted earnings per share increased by 33.1% to a $1.89. For the quarter Telefax achieved strong financial leverage throughout the income statement. From reported topline growth of 4.8%, we generated a 10.2% in increased -- increase in adjusted gross profit, a 29.1% increase in adjusted operating profit and a 33.1% increase in adjusted earnings per share. The quarterly performance was benefited by a breadth of non-revenue dependant productivity initiatives intended to deliver stable earnings and cash flow generation regardless of the revenue environment.

Turning now to select cash flow and balance sheet highlights. On a year-to-date basis, cash flow from operations was approximately $181 million or an increase of 66% or $72 million over the prior-year period. The increase was primarily the outcome of improved operating results, a net favorable impact from changes in working capital items and reduction in income tax payments.

From a balance sheet standpoint at the end of the second quarter, cash on hand totaled approximately $476 million. Leverage as per our credit facility definition stood at approximately 2.2 times. That completes my comments on the second quarter results.

Next I would like to walk you through an update of recent capital structure activity. As discussed in our first-quarter earnings conference call, pursuant to separate privately negotiated agreements between the Company and certain holders of the convertible notes, in early April the Company paid cash and issued common stock to note holders in exchange for $219.2 million of aggregate principal amount of convertible notes. We initially funded the cash portion of these exchanges through borrowings under our revolving credit facility.

In May we completed the issuance of $400 million of 10 year senior unsecured notes which bear interest at the rate of 4 7/8%. Proceeds were used to reduce the balance outstanding on the revolving credit facility.

In addition, we also received conversion notices totally $44.3 million in aggregate principal amount of the convertible notes, and these conversions were completed in early June. We funded the cash portion of these conversions through borrowings under the revolving credit facility.

Finally, subsequent to quarter end we repaid $50 million of revolver borrowings with available cash from the balance sheet. We are pleased with both the interest rate and the terms of the high yield offering and with the progress made to address a portion of the outstanding convertible notes in advance of their August 2017 maturity.

Next I'll turn to an update the full-year 2016 financial guidance. Starting with revenue, for 2016 we are reaffirming our full-year constant currency as reported revenue growth guidance ranges of 5% to 6% and 3% to 4% respectively. We anticipate that our constant currency revenue growth rates will continue to accelerate as we continue through the year finishing with a particularly strong fourth quarter. As a reminder, we have one additional shipping day in the fourth quarter 2016 as compared to the prior-year period.

From a segment standpoint we expect the strength we've seen in the first half of the year in our North American segments to continue to the second half. For our international and OEM businesses we expect an acceleration of growth in the back half of the year. We are also reaffirming our previously provided adjusted gross margin guidance range of 54% to 55%. However, we are raising our expectations regarding adjusted operating margin which we now expect to be between 24% and 24.5% versus 23.5% and 24% previously.

Based on the euro's recent trading range and expectations for the balance of the year, we now assume that the euro to dollar exchange rate averages approximately $1.09 for the balance of the year versus our previous assumption of approximately $1.06. And on the bottom-line we are increasing our full-year adjusted earnings per share guidance range and now expect adjusted EPS to be between $7.20 to $7.32 which represents growth of 13.7% to 15.6% versus 2015. The increase in our EPS guidance range is due to a solid second quarter result, the expectation for continued strong operating performance during the second half, a modest improvement in our currency assumptions and also includes plans to increase investment in support of the launch of new products. As a reference point, the increase in our EPS guidance range is in line with the over performance achieved in the second quarter as compared to our internal projections.

In summary, we are pleased with the progress made to date. For the quarter we exceeded our internal expectations for margin expansion, earnings growth and cash flow generation. Our footprint consolidation initiatives are progressing largely on schedule, and we are excited by the prospects of our new product lineup. Additionally, we took steps to address a portion of the convertible notes that were -- and were able to put in place attractively priced long-term financing. As an outcome, we believe we are well-positioned to achieve our longer-term financial and strategic objectives.

And that concludes my prepared remarks. At this time I would like to turn the call back over to the operator for questions. Operator?

(Operator Instructions)

Larry Keusch, Raymond James.

Hi, good morning, everyone.

Good morning, Larry.

I think probably the biggest question mark, post the Q2 results is, again, how you accelerate top line to hit that 5% to 6% constant currency. And I know you've mentioned some areas that you believe will help you get there, the (technical difficulty) quarter, obviously the international OEM. You mentioned that accelerates, as well as in the second half. But I'm just wondering if you can dissect that a little bit more, and help us understand how you really get there?

Okay, Larry. So first I just want to remind everyone what we said that we expect sequential incremental improvement in constant-currency growth rates throughout the year, and obviously that's what we saw in this quarter, and this quarter's broadly in line with our expectations. North America performed very well in this quarter, with constant-currency growth of 8%, which was up from 2.4% in the quarter, and OEM, as you said, was also a strong driver.

EMEA was at 1.3%, which was slightly below our expectation, which was due to the cardiac sales. But we did see an acceleration, Larry, at the back end of the quarter, which makes us feel that should continue throughout the remainder of the year, and we're expecting recovery there. APAC was at 3.6%, slightly below expectations, Larry, but again, driven by lower cardiac scales and some weakness in Southeast Asia.

If we look at the full year, we're confident in our guidance range of 5% to 6% constant-currency revenue growth on a continued growth in the second half, in particular in North America, similar to what we saw in quarter two. We expect EMEA to recover to the low single-digit growth in the second half, and as I said, we witnessed the beginning of that as we exited Q2.

And OEM accelerating growth in the second half of the year, and, Larry, this is a business that we have good visibility on. Our backlog here is normally a quarter ahead, so we're reasonably confident on the OEM accelerated performance in the latter half.

In APAC, we expect to see a cardiac and Southeast Asia recovery in the second half, and continued growth in China and Japan. If I look at it from a product side, we believe that Vidacare will continue to be a contributor to growth in the second half. Our PICC products with our new pre-loaded PICC with Chlorag+ard technology will be a contributor.

And while not expecting a big contribution from Percuvance, we do expect accelerated growth from the other new products from our surgical suite, including MiniLap, EFx, [ISI port]. And finally from a product perspective, we expect laryngoscope blades to continue their very strong growth trajectory.

And not forgetting, Larry, in the final quarter we have one extra billing day, which will also accelerate that growth for us. And quarter four, Larry, traditionally has been our strongest quarter, so a good place to have an extra billing day.

Okay. That's extremely helpful.

Two other quick questions -- so if I just do the math, the second half would have to do 7% to 9% constant-currency growth to hit your 5% to 6% guidance for the year. I'm just trying to see if you can help us calibrate a little bit how you think about the third quarter versus the fourth quarter? I know, again, you mentioned the fourth quarter will be significant in growth, but just help us think about how we jump from the 2Q to the 3Q.

And then the other quick question is if you could just quickly discuss the backorder situation in the balloon pumps?

Okay, so, the backorder situation -- we had, on the pumps, I'll deal with that first, and then I'll come back, Larry, to the quarter growth.

So the backorder situation on the pumps, we had an issue with production of our balloon catheters. We were able to get all our shipments out to the US. Obviously getting them overseas at the end of the quarter proved a little bit difficult for us, so, therefore, we had a backorder situation at the end of the quarter. That will flush through, Larry, in quarter three.

And again, just coming back to the other part of your question, within the next two quarters, again, we expect to see sequential incremental improvement across all of our businesses in Q2 and Q3 -- or sorry, Q3 and Q4. Q3 is a reasonably good comparable for us in the prior year, so we're pretty confident on accelerating that growth, and then continue that into Q4. So that's our expectation is continued acceleration of growth through Q3, and then another step up into Q4, Larry.

Okay, terrific, thanks.

Larry, this is Benson. Just to elaborate on that a little bit, while not the only driver, improvement in EMEA is certainly one of the biggest levers we have. And it's not unusual to see in tight economic times some of those European countries slow down on their letting loose of purse strings for healthcare. That usually has about a 3- to 6-month duration, and then there's enough political pressure that they start to spend again.

We started to see that spend occur towards the end of second quarter. And as we sit here today, we are relatively confident that is going to continue.

There is an acceleration in third quarter, but then an even bigger acceleration of that in fourth quarter. So that, coupled with the OEM numbers, we think gives us pretty good visibility and confidence in hitting those numbers.

Okay. Terrific, thank you for all the color.

Brooks West, Piper Jaffray.

Hi, good morning, guys. This is Tom on for Brooks. Thanks for taking my questions, and congrats on a great quarter.

Thanks, Tom.

I appreciate all the commentary in the prepared remarks on Percuvance. I was just hoping you could remind us on that total opportunity for that product?

And then maybe just help us frame the launch cadence, in terms of revenue growth contribution, and if there's anything you'd call out on mix impact to the margins from Percuvance, that would be helpful.

On the margins, first of all, it is accretive to our overall margins, Tom, so that's why we're excited about this particular product.

From a launch perspective, we have now got the generation two, as I said in my prepared remarks, launched within EMEA. We are currently showing the first generation in the United States.

We expect to have the launch of the second generation in the United States in this quarter, quarter three. We don't have a significant amount of revenue in 2016, but then we see some acceleration in 2017, and further acceleration in 2017 where we really expect to see the impact of it.

Regarding the total market size opportunity for this, we see this as being an opportunity of between $300 million and $400 million based on taking a certain percentage of the laparascopic procedures in the marketplace today.

Okay. Great, thank you.

I know we talk about this every quarter, but I just want to get your updated thoughts on M&A, and more specifically if you could just comment on what the gating factors are to getting deals done? Is it valuation or scarcity of assets? Just any commentary you have would be very helpful. Thank you.

This is Benson. We have a lot of specific requirements in acquiring a company, and I would say that it is true that valuations have crept up somewhat. However, the things we have said no to have more to do with issues that came up during due diligence that we felt would affect our ability to get the synergies we would've expected out of the deal.

In terms of flow rate, things to look at, we've actually been as busy as we've ever been in terms of investigating potential acquisition targets. I'll just reiterate my comments though. We think that patience is a virtue when it comes to acquiring companies, and so far there hasn't been something that's been sold that we have said, boy, I wish we had bought that.

Kristen Stewart, Deutsche Bank.

Hi, thanks for taking the question this morning. Wondering if, Tom, you can just kind of walk through the increase in EPS guidance? I know last quarter there was a bigger beat than the raise, and it seems like this quarter it's much of the same. So I'm just wondering if there's some moving parts there?

I know that you talked about expectation for a strong second half and some investment spending. Maybe just walk through the outperformance this quarter relative to the amount that you are expecting to see for the balance of the year?

Okay. This is Tom. I will field that.

So just a little background and give you an overview of how we're thinking about our results, the moving pieces as you mentioned, and how that plays into guidance. So for the second quarter, the increase in EPS guidance of $0.09 at the mid-point is closely aligned with how the second quarter compared versus our internal projections. Our internal projections for the second quarter were a little bit ahead of street census.

So for the year, we raised guidance $0.19 at the mid-point, which considers a number of factors including favorable FX, strong operating performance, and the decision to increase investment behind selective product introductions. We currently expect that FX will be approximately neutral to EPS for the year versus our original assumption of an $0.11 headwind.

And the upside of the $0.11 reflects both the realized year-to-date favorability from currency, as well as some improved expectations for the second half of the year. At the same time, we continue to receive positive feedback regarding both Percuvance and Protector new product introductions, and are, therefore, allocating additional resource in support of those product introductions and in future revenue growth.

And finally, our year-to-date operating performance has been strong. We've done a good job leveraging the P&L to drive earnings growth ahead of expectations. And as an outcome, we are both able to increase investment and let additional earnings drop through to the bottom line.

Our current projections include adjusted EPS growth in the range of 15%, which is obviously up from where we started the year. Bottom line is that we are achieving what we set out to achieve, and have been able to provide additional investment funding as a result of some of the upsides in both our operating performance and FX.

Let me add some color to that. Liam and I just recently both attended a cadaver lab for Vidacare, and there was about -- it was in Philadelphia, and there's about 170 people who signed up there. The interesting thing for us was that most of those people were existing Vidacare users, but they typically had been inserting the Vidacare into the leg versus the shoulder.

A shoulder placement has much higher flow rates, it has much better absorption, and really opens up the market for us in a substantial way. But what we learned was, people won't automatically shift from the leg insertion to the shoulder insertion until they actually attend the cadaver lab and go through that process. So we want to continue to make, particularly investments in clinical training for those key product areas that have high margins and what we think are high-growth opportunities for us there going into 2017.

That makes sense. And then I guess just looking at all the restructurings, you had mentioned that everything remains on track, or are we seeing some of the savings potentially coming through perhaps a little early than expected maybe looking out into 2017?

So for the restructuring programs, we are largely on track with expectations. We had discussed previously a little bit of a delay in [wet] kits. We're working to resolve that, but that is not a significant impact.

What we are seeing this quarter is we are starting to see some good benefits coming through as a result of the 2014 footprint realignment program. And those benefits are coming through without some of the offsetting costs that, frankly, negated any benefit for last year.

What we aren't yet seeing are the benefits from the second phase of the footprint restructuring program. We don't expect to start seeing those benefits really until next year, and primarily the year following.

So a number of initiatives on the footprint front are delivering results. In addition, we have a number of cost improvement programs aside from footprint that are delivering meaningful results quarter in, quarter out. So there is really good productivity gains going on in our operations group right now.

Okay.

We also had a pretty clean quarter relative to some one-off expenses that impacted us last year.

Okay. Great, thanks so much, guys.

Dave Turkaly, JMP Securities.

Thanks. Just looking at the margins again here, obviously it's been a big part of your story historically. And I think you guys have said 2016 to 2018 you could get 300 to 400 or 350 to 400 additional basis points on the gross margin side.

But given where we are today and how you've gotten there, I would just like to get some thoughts on the growth side. And then I know you said 1 for 1 to adjusted operating margin throughout that 2016 to 2018 time frame, and clearly this quarter it was much higher on the operating side. I'm curious if you think that should be a trend that may -- we may be able to follow and that could continue looking ahead. Thanks.

This is Tom. I will field that. It's obviously a good position to be in, a good challenge to have.

But just a little background for everyone on the call, so at our analyst day event we outlined a multi-year plan that by 2018 we expect to increase both the gross margin and operating margin by 350 to 400 basis points beyond where we ended 2015. And we further indicated that the operating margin increase was a minimum, and that we would work to drive additional financial leverage, but wanted to make certain we had adequate funds available for the launch of new products and other strategic investments.

So given all of that, the gross margin target, if you factor in where we ended last year, just kind of 56.2% to 56.7%, operating margin 25% to 25.5%. And so recognizing that the mid-point of our 2016 operating margin guidance, we're already two-thirds of the way to that 2018 target. One might think we have got additional room for upside, and we potentially do. However, there's a couple points that I want to outline.

First of all, with the temporary repeal of the med device tax, which added about 70 bps to our 2016 operating margin, and this repeal was not contemplated when we provided the 2018 guidance, and could provide additional upside to that guidance should the repeal be permanently enacted. Second is that we want to make certain that there are sufficient funds available for support of the launch of new products. So while we're making great progress now on margin expansion, we also want to put some of that progress into investment to make sure that future growth of Vidacare, Percuvance, and other products is as robust as it can be. And thirdly, while we have been successful supplementing our internal R&D efforts with late stage technology acquisitions, over the next couple of years we want to continue to build out the level of internal R&D spending to, again, make certain that we've got a pipeline to deliver revenue growth into the future.

So bottom line is, if you were to exclude the benefit of the medical device repeal, we expect to accomplish approximately 50% of that operating margin target by the end of this year. And we think that positions us quite well to achieve our 2018 target. We feel very good about where we are and our ability to accomplish that.

Again, we could see some upside from the med device tax, that's currently repealed. And as mentioned when we gave the guidance, we will continue to drive upsides to that 1-to-1 relationship for gross operating margin.

Thank you for that. That is very detailed, and congrats, it's not often that you see companies that can continually expand their margins as you guys have. So there should be some credibility behind that.

Maybe just one on the products side -- obviously it seems like your vascular results were strong, and they led the way as we were hoping they would. Any color on the PICC market? Competitors seem to be indicating that it is growing healthily, and you mentioned a new product. I guess I would just like to hear your thoughts on your portfolio there and how the overall market is. Thanks.

It's Liam here. Our PICC business in North America grew by over 8% in the quarter, so that for us was a really nice rebound. Our Chlorag+ard pre-loaded PICC is a new product. It's a 2 and 3 lumen product that is accelerating our growth.

We have the only PICC on the market that is both anti-microbial and anti-thrombogenic, and that gives us a strategic competitive advantage against our competitors. And we see this as an opportunity for sustainable long-term growth in our PICC segment, and we continue to take market share. Globally, our PICC business was up 6%, and again, very encouraging, and we expect to see that accelerate as we continue to roll out the pre-loaded PICC.

We also have some positioning systems that are unique to Teleflex. So when you talk about the PICC market, you also need to talk about the positioning systems. And an acquisition we did late last year of a positioning technology will come to the market late quarter three, early quarter four, and that, again, will give us an opportunity to be more competitive in this space. So we are very enthusiastic about our options in the PICC space.

Thank you very much.

David Lewis, Morgan Stanley.

Hi, guys, good morning. This is actually Scott Wang in for David.

Morning.

I guess first a question for Liam. Liam, I think I heard you say that Vidacare growth this quarter was 30%. And I was wondering if you can walk us through what drove that acceleration, because I think in the past, I think Vidacare growth has been trending more along the lines of like 20%?

It has. It has been trending on the 20% range, you are correct, and we still expect it to be north of 20% for the entire year. Within this quarter, we had a really tough comparable in Q1, and it grew in total in the mid-teens.

The EZ-IO product in this quarter performed very, very well for us. And the OnControl product performed even better. So cumulatively it was 30% growth.

We see expansion in the hospital segment in particular, on the EZ-IO, where we see more adoption for the difficult vascular access, and we see more hospitals using this product. And as Benson said earlier about our cadaver lab, hospitals will be more inclined to insert the product on the shoulder. We are doing a lot of clinical education to encourage people to place that product.

If you imagine in a busy emergency room or an intensive care area, having access to the shoulder is a much easier site than getting to the leg. And obviously clinicians are now starting to move to the shoulder to get higher flow rates, to get better infusion of the therapy they are applying, and therefore, that continues the acceleration in the hospital.

And even in the EMS space, back in the day when we bought Vidacare, we thought that was starting to get saturated. That is definitely not the case. There's more and more adoption of the product in the emergency space.

And we continue to accelerate our growth overseas as well. And that is really where the future opportunity for Vidacare is and the ongoing growth of Vidacare is to continue to convert ambulance services in Europe, hospitals in Europe, ambulance services in Asia, and hospital services within Asia.

Very helpful. Thanks.

And I guess a couple questions for Tom on guidance. Tom, on foreign exchange, given that the new euro rate assumption underlying your guidance is at $1.09, up from $1.06, and EPS is now -- FX is now neutral to EPS, which is a little over $0.10 improvement by my math, but you guys didn't reduce the top-line hit from FX to sales. Can you walk us through what were some of the offsets to the improvement in your euro rate assumption on growth?

Are you referencing the 3% to 4% reported?

Yes.

It's largely a range that we are looking at. So if we do see some improvement in the euro, we see some degradation in other areas throughout the world -- so it's just a culmination of all those different currency moves.

Fair enough. And can you also help me understand your margin guidance a little bit versus your 2Q results? Obviously operating margins were incredibly strong for the second quarter, and it seems like, for the balance of the year, there's going to be -- operating margins are going to be a bit lower. My sense is, from your commentary, that part of that is attributable to increased investment to support probably the launch of Percuvance, as well as some of your newer product lines. I was just hoping you can walk us through some of those offsets?

Okay. Sure, first of all, I would look at the longer trend on margins. Specific quarters can have higher or lower levels of spending. You can have one-off issues. We had a pretty clean quarter, both in the gross and operating margin this year.

Last year there were some comps -- unfavorability in the comps that gave us a little bit extra bump. But overall, if we look at where we are on the back half of the year, we are expecting overall operating margin to be kind of in line to slightly less than where we are in the second quarter, with the fourth quarter being particularly stronger than the third. We are intending to make some investment in the third quarter to support these product offerings and to -- and that's going to have a little lower margin expectation as a result.

But overall, our operating margin, as we look to the back half of the year, will be largely in line with where we are the second quarter -- I think just slightly under the second half versus second quarter. On the gross margin line, we expect, again, to be largely in line with where we are in the second quarter, and modestly trending upward depending on how mix plays out.

That's great, thanks.

Jason Wittes, Brean Capital.

I think you can go to the next question, please.

Anthony Petrone, Jefferies.

Thanks, and good morning. Maybe to go back to the price discussion in terms of the portfolio and the performance in the quarter, I guess specifically price was called out as a contributor in vascular North America and surgical North America. So maybe you can provide a little bit of an update on the pricing dynamics in these markets? Which products are driving price, and what is the runway that the Company still has as it relates to price gains specifically? And then I will have another one on the OUS PICC market.

Hi, it's Liam here. So we have said that you can expect longer term to see about 20 basis points of price from Teleflex moving forward. And that is roughly what we saw within this quarter.

The pricing in our vascular segment mostly came from our arterial product lines, and that was as a result of some contract renegotiations that we completed earlier on in the year. In our surgical business, it was in our instruments and some in our polymer clips. So our expectation is that we still see opportunity to take price long term in our more differentiated products where we have market share.

We did see slight price degradation in EMEA, which offset the pickup that we made in North America. But on balance it was around 20 basis points. So as I said, we do expect to see that level of pricing be available to us longer term.

And we will continue also to do our dealer to direct, which also does have a longer-term price impact as we take those businesses direct. So, expect the same as what you see in our current status I guess would be our guidance.

That's helpful. And then on the OUS PICC opportunity, one of your competitors is making a push into several emerging markets, in particular, China. And so I'm just wondering your views on the OUS PICC market in emerging markets, and whether or not that is in a longer-term growth outlook for the Company?

Okay. So if I look at emerging markets and PICC specifically, in China, we have only got our first-generation PICC registered within China. Our Chlorag+ard technology PICC, our pre-loaded PICC are not yet registered there. We anticipate having the first of our newer generation PICCs registered in quarter four of this year or quarter one of next year, and that will give us a springboard to attack that market in China.

In Latin America, our PICC business was up 11%, and we expect to see continued growth there. We have run a number of training programs and clinical education in Latin America, and we believe that is driving the uptick in our PICC market in that area.

And we also believe that the acquisition of [newV], which is our lower cost confirmation technology that we bought last year, that will help accelerate our position in these emerging markets where, quite frankly, they are just not willing to pay for a higher cost positioning system that we offer in the United States.

And just again last for me, back to the US would just be any update you can provide on procedure volumes. A number of your competitors noted that we are seeing a tailwind from procedure volumes, so anything you can add there will be helpful. Thanks again.

On the data we see externally tells us the procedure volumes are upticking moderately, so we think we're getting about 1.5% to 1.7% from procedure volumes. All of the other volume gains, which we gained 5.5% in this quarter, we believe is coming from taking share, from changing the mix of our products within the marketplace, and trading the customer up, which also expands our gross margins.

Thank you.

Richard Newitter, Leerink Partners.

Hi, good morning, it's Ravi in for Rich. Can you hear me all right?

Yes, good morning.

Good morning, thanks. Just wanted to follow up a little bit on the FX commentary that was asked earlier. Trying to understand the cadence -- the top line still has the impact, but you are sort of absorbing it on the bottom line.

Is that that you are reinvesting in those areas that would be effective on the top line that's kind of acting as a natural hedge? And if so, going back to the reinvestments, where are those going? Can you give a little bit more detail on how you are reinvesting some of this upside that you've done in the first half? Thanks.

So, as we look at the guidance that we have outlined, I would say there's a couple things going on -- first of all, strong operational performance.

As mentioned, we also have some FX benefit and we're doing two things with that. One is flowing some of that through to the bottom line to increase guidance, and the other is funding investment behind some of the new product introductions.

As we've talked throughout the call, you've heard a number of areas of investment. One was behind Vidacare. Additional cadaver labs are seeing great returns on those investments.

In addition we've received very, very favorable feedback from the doctors who have been trialing the Percuvance product, and we want to make sure we are out there providing the support to help that product get up and through the hospital's value analysis committees. And so there are a number of new products that are in the pipeline that we want to make sure there is adequate funding behind.

So if that's helpful. Liam, do have any other?

No, I think the reason we are putting the additional investment behind Percuvance is because of the very positive feedback. The fact that we are ready with this next generation of product, what we've seen is that the more institutions we can get into the funnel, our hit rate getting through the value analysis committee is very high. So we want to make sure that we are getting more and more doctors introduced to the product, more and more surgeons using the product, and more and more surgeons willing to go to the value analysis committees and take their case to use this product.

And, Ravi, this is Jake. Just to address your first question on FX, there's really a lot of puts and takes in terms of the different currencies that swung during the course of the year versus our original expectations, many of which, from a profitability standpoint, don't have still that same impact.

So while the euro was a little bit favorable compared to probably our initial thoughts, there are other currencies like the pound, the Canadian dollar, and a variety of others that we operate in that kind of went in an opposite direction, still keeping that full-year FX rate headwind assumption to revenue at about that approximately 2% type level.

Great, thank you.

Matt Mishan, KeyBanc.

Hi, thank you. Good morning, and thank you for taking my questions.

Good morning, Matt.

I think when you originally gave guidance, you teased out some of the various moving pieces like volume, new product growth, pricing and so forth. And in your original assumptions, you had I think new product growth growing 200 to 250 basis points for the full year. And you've been coming in that 100 to 150 basis points for the first half, and I'm just curious, what drives that back-half acceleration in new product growth really into that 3% range to hit your guidance? Especially given, I don't think a big piece of that would be Percuvance or LMA.

Liam here. You are correct, not a big piece of it is Percuvance. LMA protector is somewhat of a contributor in the second half.

The main contributors are the ones that I outlined earlier when I was talking about our growth for the quarter. Our Chlorag+ard pre-loaded PICC is a big driver in the second half.

Within our surgical group we have the MiniLap EFx and ISI port, and our laryngoscope blades in our surgical business unit. So again, what we expect to see in Q3 and Q4 is an incremental improvement and a sequential improvement in our new products.

And also, Matt, what you want to bear in mind is, in some instances, let me take the Chlorag+ard PICC, for example, there is some cannibalization within that number. So what we see in the first half of the year is, even if the product is not in the marketplace, we're still selling the core PICC not pre-loaded to that customer, so you'll see it represented in volume rather than in new products.

Okay, got it. That's helpful.

And then with Percuvance, I think in your original conversation around what the long-term opportunity was, you had included about 3 to 4 million of applicable procedures, but that was all US-based. And now that you have had the product out in Europe for a little over a quarter now with the full commercial launch, what do you think the opportunity is in Europe in particular? Are there any limiting factors that would be different, where your expectation would be much lower in Europe than it would be in the US?

So, normally you would expect to get -- first of all, we're not going to change our expectations for Percuvance, Matt. We're going to maintain the $300 million to $400 million as the market opportunity until we get farther down the road here and get some traction on it. So we will maintain that.

And it was based on a US number, you are correct. But nonetheless, to be conservative, we should maintain that number.

What we are seeing within Europe is similar to what we're seeing in the US, and it's very, very strong acceptance of the product. The one thing you want to get from a product, Matt, is it needs to be intuitive. When you put it in the hands of the surgeons, they should get it immediately. And with this product, they do. They get it immediately.

Similar to the US, they're not called value analysis committees overseas, but there is a pricing board, similar methodology that you go through to get the product approved, and that's what we are working through at the moment. In Europe alone, we have over 70 surgeon trials that we've completed with this product. And again, overwhelming enthusiasm from the surgeons. It's just a question of working it through the system in the individual countries, and it's different country by country. So we haven't pulled back from our enthusiasm for the product, but by the same token, we're not updating that $300 million to $400 million market opportunity, Matt.

Great, and just one quick clarification. I didn't catch what -- did you change the operating margin guidance for the full year? I didn't hear.

We did. So we've increased that by 50 basis points on the lower and upper end to 24% to 24.5%.

Okay. Thank you very much, guys.

Thanks.

(Operator Instructions)

At this time, I am showing no further questions. I'd like to turn the call back over to Jake Elguicze, Treasurer and Vice President of Investor Relations, for any closing remarks.

Thanks, operator, and thanks, everyone, for joining us on the call today. This concludes our second-quarter 2016 earnings conference call. Have a good day.

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