泰利福醫療 (TFX) 2016 Q3 法說會逐字稿

(Operator Instructions)

Good day, ladies and gentlemen, and welcome to the third quarter Teleflex Incorporated earnings conference call. (Operator Instructions) As a reminder, the conference 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.

Thanks, operator, and good morning everyone; and welcome to the Teleflex Incorporated third quarter 2016 earnings conference call. The press release and slides to accompany this call are available on our website at www.Teleflex.com. As a reminder, this call will be available on our website, and a replay will be available by dialing 855-859-2056 or for international calls 404-537-3406, pass code 97714633.

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 can 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 10-K which can be accessed on our website.

With that, I would like to now turn the call over to Benson.

Thank you, Jake. Good morning everyone and thanks for joining us this morning.

To begin with we are very pleased with our overall financial results for the quarter. On an as-reported on revenue growth number of 2.7%, we increased our adjusted gross margin by 6.6%, adjusted operating margin by 14.7%, adjusted EPS by 12.5%, and had excellent cash accumulation.

The forward year-to-date picture looks even better by any measure that demonstrates excellent financial leverage throughout our P&L. Longer-range, based on our results this quarter we feel very good regarding our cumulative 2016, 2017, and 2018 expectations. This quarter is, without question, one of those occasions where we have demonstrated that we have several different levers to continue to drive shareholder value.

We did expect to see an uptick in constant currency revenue between second and third quarter which did not materialize. So we have reduced our full-year revenue guidance, and we are pretty sure that many of your questions will be around revenue. Tom, Liam, and myself will of course cover other areas where we want to provide as much clarity as we can around our revenue numbers.

We had three primary causes responsible for our revenue shortfall. And while they are affecting our 2016 guidance, none of them give us particular alarm relative to our longer-term outlook. Why do I say that? Because underneath the surface are some very encouraging signs in products and markets that are particularly important to us from a sustainable growth perspective. We will elaborate on those points during the course of our discussion today.

I would like to begin by just briefly reminding you of Teleflex's overarching strategy. We believe that the number one growth market in terms of its size and impact on Teleflex over the next 10 years is the United States. The US has more than just an aging population; most countries have that. We believe the US is best equipped in terms of resources to take care of that population, and least likely to engage in rationing or arbitrary cutbacks in healthcare spending as a result of a sluggish GDP.

For us, the United States is in the bull's-eye of where we want to grow. With the right portfolio enhancements we believe it is possible that our US med device business can grow significantly over the next 5 to 10 years.

The only other markets with large populations that we see capable of growing at or above high-single-digit rates are China and India. But even in those markets we're more selective. We want to grow in product areas that are least likely to be replaced by local manufacturing and worth the investment in clinician training.

The other two markets of significant size are EMEA and Japan. We do not see these markets growing as fast, and have pegged them to low-single-digit growth. In these markets we need to pay attention to products that are associated with above average procedural growth rates.

There are some risks though. In the currency forecast we see several years of potential weakness compared to the dollar. Constant currency growth revenue is an interesting metric, but if as-reported revenue is continually eaten away by falling currencies, it is not growth that helps your P&L or generates cash.

When we look at the rest of the world we see an increasing risk from either economic or political uncertainty, and likely higher volatility with their currencies. Looking back to 2011, one of my early observations was we were overexposed in EMEA, at least compared to other US based medical device companies.

The consequences of this became very apparent to us as we approached 2015 and were staring at a $0.87 currency headwind. We intentionally want to reduce this exposure by growing faster in the US and in other markets such as EMEA and Japan.

Another key part of our strategy is that we have a unique opportunity to continue to improve our gross margins, not just through 2018 but for several years after that. These opportunities are not revenue dependent, and will allow us to get the maximum earnings leverage from our revenue growth.

It is our deliberate intention to use this opportunity to enrich our portfolio, and have a greater portion of our revenue in markets and products where growth is both sustainable and defendable. When we review our revenue growth this quarter against this backdrop, for the third quarter, we're not ecstatic. But we're not worried either. We are growing where we want to grow and in the products we want to grow in. Furthermore, all of our leading indicators are very positive.

Now let me get back to the three factors around our third quarter revenue. First, our sales into our US distributors continues to lag behind their sales into hospitals. We received tracing data from our distributors. So we know what end user hospitals are purchasing. When we combine our direct sales into hospitals, plus our distributors' sales into hospitals, we see a very healthy trend for both improved volumes and from newly won accounts. We're gaining accounts and we're growing share at a good pace.

What causes this lag? It is primarily flu related. How do we know that? Because we only see these discrepancies in products that are influenced by the flu. We don't see it at all in any of our surgical products, for example, but we see a much more profound impact in vascular access and certain anesthesia products.

At some recent investor conferences I made a comment about lack of visibility. What I was referring to specifically was this dealer ordering pattern around the flu season. Sometimes it starts to occur as early as September. This year we did not see that uptick. Sometimes it occurs in the very last few weeks of December, and it is one of the reasons we typically have a strong end to our fiscal year.

We also cannot predict the severity of the flu season. In the 2015-2016 season it turned out to be almost nonexistent, while the year before was pretty severe; the two years prior to that, pretty normalized.

It is one of those variables that make pinpoint forecasting for us around the third and fourth quarter a little problematic. That ambiguity is principally what is driving our current revenue guidance range. We see a normal year-end purchasing pattern from distributors. We should be at the high end of our revenue range. If, for some inexplicable reason, distributors do not restock, we could be at the lower end of our revenue range.

The second issue for us in the quarter relates to revenue from new products. Coming into the year, one of our biggest single areas of expected revenue growth for 2016 came from the thought that there would be a significant jump in the contribution from new products.

It is taking us longer than we anticipated to get these products through the value analysis committees which have been installed at almost every major hospital. By mid-August it became readily apparent that summer vacations weren't going to help either.

The net effect is that products we expected to get through these committees by the end first quarter are for the most part just now gaining committee approvals. The math here is pretty simple. Instead of nine months of revenue for new product in 2016, we will get three months of revenue. While this is frustrating, it is not at all discouraging and we're not discouraged.

It is taking longer, but our success rate in getting these products through these committees is high. And we are seeing continued improvement in our contributions for new products particularly in the US where we tend to launch them first. Liam will go over the numbers with you. It is a very good trend.

Finally we're seeing greater than expected weakness in certain geographic markets where local economic conditions continue to be distressed. We thought we were conservative in our expectations, but retrospectively we could have been even more conservative.

Oil producing countries are still in a difficult position, and some Asian basin countries are experiencing greater than expected slowdown in their healthcare spending. Some of these locations may continue to be a drag on constant currency growth. But we do not consider this to be high-quality growth, and we do not plan to chase this growth in the future. On that point, we continue to be focused on this notion of high-quality revenue growth as being as important, if not more important, than just the overall number.

We have a lot of discipline about the products we select to put in significant sales and market resources behind. I personally believe this strategy makes us much less vulnerable to the pricing pressure we're likely to see as healthcare expenses escalate in almost every country, and should make us less vulnerable to currency volatility.

In spite of some softness in our revenue numbers we show great strength throughout the rest of our P&L. We see several years of continued gross and operating margin expansion ahead of us. We are confident in our ability to achieve our previously provided longer-term goals, and see lots of encouraging trends.

Still, any sustained progress in a complex environment always involves overcoming challenges. And, you cannot always anticipate what those challenges will be. That is where and why good management teams make a difference. Track records count. Personally, I have tremendous confidence in our team and in their track record, and in our ongoing commitment to our investors.

With that, let me turn this over to Liam.

Thank you, Benson, and good morning everyone.

For the consolidated company, third quarter 2016 constant currency revenues grew 3.1%. The primary driver of revenue growth this quarter came from increased sales volume of new products which contributed approximately 1.3%. New product sales were particularly strong within our surgical, vascular, and anesthesia product line.

Surgical new product sales were driven by increased utilization of products used in robotic procedures; further penetration of our EFx offering; as well as increases in the amount of percutaneous laparoscopic products sold such as MiniLap.

Vascular new product revenue increases are attributed to sales of our preloaded antimicrobial and antithrombogenic VPS PICCs. While in anesthesia the growth is primarily due to increased sales of our Rusch Disposable LED Laryngoscope and LMA unique products with silicone.

The next largest driver of revenue growth in the quarter was sales of core products which increased 0.9% versus the prior year. Growth here was driven primarily by two areas, OEM and EMEA. Despite the third quarter improvement as compared to the prior-year third quarter, it is our belief that core product volumes were lower this quarter as compared to quarter two due to the distributor destocking issue Benson referred to earlier.

Turning to other components of revenue growth. During quarter three, we saw a nice uptick in the average selling price of our products, which drove revenue higher by approximately 0.7%. This was primarily due to increases in Asia as well as increases within our surgical and vascular product lines.

Finally, during the third quarter, acquisitions added approximately 0.2% of growth. This was primarily due to a small acquisition that occurred within our OEM business.

North American growth for quarter three was approximately 3.6% with approximately 2.2% of that growth coming from new products. As Benson mentioned earlier, the new product revenue growth within North America in quarter three of 2.2%, was an acceleration from the 1.2% growth rate in quarter one, and the 1.6% growth rate in quarter two.

This supports our hypothesis that while value analysis committees have slowed the adoption of new products, we're still seeing an incremental improvement in new products in the North American market.

Staying with North America, and as Benson mentioned earlier, our direct sales combined with distributor tracing show a more robust picture of end hospital sales demand than our reported sales. Again this makes us feel confident in our ability to achieve our revised full-year revenue guidance range.

Next I would like to provide some additional color surrounding our segments and product-related constant currency revenue growth drivers.

Vascular North America, third quarter revenue increased 3% to $85.1 million. The increase in vascular revenue was largely due to sales of Vidacare EZ-IO and OnControl devices, as well as increased PICC sales which incidentally grew by double digits.

Moving to anesthesia North America, third-quarter revenue was $48.7 million, up 2.2% versus the prior-year period. Growth in this segment was driven by increased sales of Vidacare EZ-IO, area management devices, epidural kits, and atomization products. This was somewhat offset by year-over-year declines in regional anesthesia and laryngeal product offerings.

As an aside, the Vidacare product lines continued to perform well, growing approximately 20% globally on a constant currency basis this quarter. The performance in quarter three was within our expectations, and we continue to expect global Vidacare product lines to deliver approximately 20% growth for the full year.

Turning to our surgical North America business. Its revenue increased 5.7% to $41.9 million. The increase within surgical is primarily attributable to higher sales of access ports and surgical instruments. Chest drainage products also grew due to continued competitor issues.

Shifting to our overseas businesses, EMEA revenues continued to rebound in the third quarter, and expanded 2.2% on a constant currency basis totaling $121.4 million. The improvement in European revenue was largely the result of increased urology and surgical product sales. This was somewhat offset by lower sales of cardiac product as our European business continues to work through a backorder in this product category. We have now seen sequential improvement in Europe from negative 1.9% in quarter one, to positive 1.3% in quarter two, and now positive 2.2% in quarter three.

Moving to Asia, our third-quarter revenue increased 2.1% to $64 million. The quarterly increase in Asia revenue is primarily due to higher surgical ligation and anesthesia sales. The Asia result was below expectation, and was driven primarily by weakness in Southeast Asia and Australia. We expect Southeast Asia to recover in quarter four, and have good line of sight of distributor orders driving this recovery.

On a positive note, China growth exceeded 8% in the quarter. We expect a recovery in Asia growth in quarter four as we anniversary some one-time events in the region. This is despite a tough comparable in China in quarter four.

Turning to OEM, during the third quarter revenues increased 6.3% to $41.4 million, and was primarily due to higher sales of performance fiber products. Lastly, third-quarter revenue for the businesses within our all other category was up 2.8% totaling $53.1 million.

Growth here is primarily attributable to sales of additional respiratory therapy, and North American based cardiac intra-aortic balloon products. This was somewhat offset by year-over-year revenue decline in our Latin America business.

Next, I would like to briefly update you on additional GPO and IDN agreements that we received during the quarter as well as some recently received regulatory approvals. During the third quarter we won 15 new agreements and extended another 10. Of the agreements won and extended in quarter three, 16 were sole source in nature. Approximately half of the sole source awards protect our existing business. While the other half position the company to expand our sales across a variety of clinical areas, including our percutaneous product line, laryngeal masks, pain pumps, dialysis catheters, closure devices, PICCs, vascular positioning confirmation systems, and Vidacare OnControl.

Moving next to regulatory approvals. I am pleased to report that in August we launched a new second-generation Percuvance System in the United States. We had already launched the second-generation device in the second quarter outside of the United States.

This second-generation device is more versatile than its predecessor and features additional interchangeable 5 millimeter tool tips. As well as a new quick connect system to facilitate fast and secure tool tip changes outside of the body.

This product has the performance and versatility for use in common and advanced general laparoscopic procedures including laparoscopic cholecystectomy, upper gastrointestinal, gastric, bariatric, colorectal, and hernia procedures. We remain very enthusiastic about this product opportunity as we see an increased adoption of the product -- as the product gets more approvals from VAC committees in the United States.

In the addition to Percuvance we also received 510(k) clearance from the FDA to market our ARROW JACC with Chlorag+ard Technology and TightTrack tunneler. This device is a long-term, tunneled small french size antithrombogenic and antimicrobial central venous catheter designed for use with high-pressure injections. By providing an antithrombogenic and antimicrobial catheter that protects against catheter occlusion, we are offering a technology that no one else can.

This is important in patients with end-stage renal disease where vessel health and preservation is essential to provide future dialysis vascular access.

Another 510(k) approval that was received from the FDA during quarter three was the ARROW midline product with Chlorag+ard Technology. This is an antithrombogenic and antimicrobial PICC designed to minimize common midline catheter complications such as catheter intraluminal occlusion, thrombus accumulation, and microbial colonization on the catheter surface for a minimum of 30 days.

Development of new technology to ensure the patient receives the safest, most effective IV therapy possible should drive all medical device manufacturers. And it is our belief that this product helps to do so.

The last new product that I would like to draw your attention to is the ARROW VPS Rhythm System. During the third quarter, we received CE certification to commercialize this device in the European Union. The ARROW VPS Rhythm System is a simple and flexible solution that helps the clinician to place the catheter by providing ECG-based tip confirmation in a highly portable, lightweight and versatile design.

It assists in the placement and confirmation of the catheter tip, and may be used for a broad range of catheter types. And it is our belief that this clearance puts us in a position to establish reliable, cost effective standard of care in catheter navigation and placement in Europe.

Lastly I would like to update you on the status of our 2014 manufacturing footprint realignment plan. On our last earnings conference call, I updated the investment community on a variety of our restructuring plans. That included our 2014, 2015, and 2016 restructuring initiatives.

Today, I would like to provide you with a further update specifically regarding the 2014 plan. As a reminder, the 2014 plan was announced in April of 2014. And it involves the consolidation of operations, and related reduction in workforce at certain facilities, and the relocation of manufacturing operations from certain higher-cost locations to existing lower-cost locations.

These actions commenced in the second quarter 2014, and were originally expected to be substantially complete by the end of 2017. Today we have completed the consolidation and relocation of a significant portion of the operation. I would estimate that we will achieve annualized savings of approximately $17 million by the end of 2016 directly related to these actions.

With respect to the remaining actions to be taken under the plan, we revised our savings, expense, and timing estimates during the third quarter to reflect the impact of changes we have implemented with respect to medication delivery devices including certain of the kits sold by our vascular and anesthesia businesses.

As a result of these changes, we have reduced our estimate with respect to the overall annualized savings we expect to realize under the plan, from our prior estimate of $28 million to $35 million to a range of $23 million to $27 million. We anticipate that the changes we have made to our vascular kits will enable us to realize improved pricing on those kits, which in turn we expect will result in increased annual revenues that should offset a significant portion of the decrease in projected plan savings.

As a result, we anticipate that this projected increase in annual revenue, taken together with the projected annualized savings we expect to realize under the plan, should enable us to improve our pretax income on an annualized basis by approximately $28 million to $33 million once the plan has been completed, or substantially similar to our original estimate. However, as a result of the changes, the 2014 manufacturing footprint realignment plan will not be substantially complete until the first half of 2020.

As we have previously stated, these are complex projects, and the potential risk to these restructuring programs has been the timing of the execution. We continue to evaluate alternative measures to mitigate the reduction in savings and accelerate the timetable for completion.

We will update you as this information becomes available. Despite this change, I would like to emphasize that Teleflex remains on track to achieve the 350 to 400 basis points of both adjusted gross and operating margin expansion by 2018 that we have previously discussed with the investment community.

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 third quarter and to provide our updated full-year 2016 guidance. Tom.

Thanks, Liam, and good morning everyone. Given the previous discussion of the Company's revenue growth drivers, I will cover results below the revenue line where we have a very compelling financial story for both the third-quarter and year-to-date results.

For the quarter, adjusted gross profit was $245.8 million versus $230.5 million in the prior-year quarter. And adjusted gross margin increased 200 basis points to 54%. The increase in gross margin reflects the impact of lower manufacturing costs; the impact of favorable fluctuation to the foreign currency exchange rates; and the impact of price increases primarily in the Asia, vascular North America, and surgical North America segments.

Also during the third quarter adjusted operating margin increased 250 basis points to 23.7%. 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. Improvements were somewhat offset by increase in R&D Investment.

Adjusted net interest expense increased to approximately $11.7 million versus approximately $10.8 million in the prior-year quarter. The increase in adjusted interest expense is an outcome of the May 2016 issuance of 10-year, 4 7/8 senior unsecured notes, with the proceeds of the issuance being used to redeem a portion of the 3 7/8 convertible senior subordinated notes, and reduced borrowings under the revolving credit facility;

the net results being a modest increase in the average interest rate on outstanding borrowings. The interest rate was partially offset by the third-quarter repayment of $50 million of revolver borrowings of cash available on the balance sheet.

In the third quarter the adjusted tax rate was 14.2%, which was up 90 basis points versus the prior-year period but was favorable to internal expectations, largely the result of a shift in income to more favorable tax jurisdictions.

On the bottom line, third-quarter adjusted earnings per share increased 12.5% to $1.80. We are pleased with both progress we have made to expand our growth and operating margins and to drive meaningful gains in earnings. Q3 adds another quarter to our year-to-date track record of generating substantial financial leverage from revenue growth in the lower mid-single digits.

This progress is perhaps best evidenced by a quick review of year-to-date performance. For the nine months ended, our reported revenue increased by 2.2%. Our adjusted gross profit increased by 6.1%. Our adjusted operating profit increased by 17.5%, and our adjusted EPS increased by 20.6%.

In addition, for the first nine months our adjusted gross margin increased by 200 basis points, and our adjusted operating margin increased by 310 basis points versus the prior year. So, despite softer than planned revenue growth, we have been able to drive very positive financial results, and the margin expansion and earnings growth story remains very much intact.

Robust earnings growth has also translated into meaningful cash flow generation. For the third quarter, cash flow from operations increased 79% to $120 million. On a year-to-date basis cash flow from operations increased 71% to $302 million. The year-to-date increase was primarily the outcome of improved operating results, a net favorable impact from changes in the working capital items, and a reduction in income tax payments.

From a balance sheet standpoint, at the end of the third quarter, cash on hand totaled approximately $500 million. Leverage, as per our credit facility definition, put it at approximately 2 times. Combining our strong cash flow generation with balance sheet capacity, we're well-positioned to capitalize on strategic opportunities.

Finally during the third quarter we announced an additional restructuring program designed to further improve operating efficiencies and to reduce cost. These actions include the consolidation of select administrative functions and manufacturing operations. Through this program we expect to achieve annualized pretax savings of between $4.5 million and $5.5 million once the program is fully implemented in early 2018.

That completes my comments on the third-quarter results. Next I will provide an update to full-year 2016 financial guidance.

Starting with revenue, as covered earlier for 2016 we are lowering our full-year, as-reported, in constant currency revenue growth guidance to reflect our current expectations. We now project full year as-reported revenue growth to be between 2.4% and 2.8%, and we project constant currency growth to be between 3.4% and 3.8% versus 2015 levels.

Turning to margins, we are reaffirming our previously provided adjusted gross and operating margin guidance ranges of 54% to 55% and 24% to 24.5%, respectively. Based on our year-to-date adjusted tax rate of 18% and projections for the fourth quarter, we now expect full-year adjusted tax rate to be between 17 3/4% and 18 1/4%. This compares to our prior range that called for an adjusted tax rate of between 18.5% and 19.5%.

On the bottom line we are increasing our full-year adjusted earnings-per-share guidance range and now expect adjusted EPS to be between $7.25 and $7.34, which represents growth of 14.5% to 16% versus 2015.

Additionally, we now expect cash flow from operations to be in the range of $400 million versus our original expectation of $330 million. This raise to EPS marks the third consecutive raise this year and signifies our commitment to deliver meaningful earnings accretion regardless of the revenue environment. It is a clear affirmation to Teleflex's capability to generate non-revenue-dependent earnings growth and cash flow generation.

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)

Our first question comes from the line of Larry Keusch with Raymond James.

Thank you. Good morning, everyone.

Good morning, Larry.

I just wanted to -- I know you have touched on some of these aspects here, but with your constant currency guidance for the year, I guess at the midpoint around 3.6%, how do you think about the 5 to 6 that was outlined in the long-range plan? And if you still believe that you are in that range, what sort of accelerates you from where we are today, because obviously you have been struggling a little bit with the top line?

I will let Liam answer that and then I will give you my own color, Larry.

Hey Larry, It's Liam here. We still feel pretty confident in the longer term of 5% to 6%, and what that is based on predominantly is in our outlook for in particular the North American market. What I would like to point out is that we while our North American business units reported saves of 3.6% in quarter three, we have really good visibility on tracing and our direct customer sales.

That would indicate that our actual sell through to hospitals, which for us is the more critical point is the usage of our product in hospitals, in North America during the third quarter was in the high 5%s from a percentage. So we do not think that the third quarter truly reflects what our business is capable of doing. And we see this as a good indicator of actual demand for Teleflex products.

We have also seen a nice recovery in EMEA to achieve over 2% growth in the quarter, so we have seen acceleration there. We also see Asia starting to recover in next year, to start to -- bridges, too, that 5% to 6% in the longer term. So broadly speaking, North America would drive increased revenue growth, a modest recovery in EMEA for those singles, and getting Asia in particular up into the high single-digit category should get us there, Larry.

So I think, Larry, we started to get a lot more comfortable when we started to peel a couple layers of the onion away, and get through what was going on at the distributor level, and look at what was going on at the hospital level. By way of comparison, getting back to the flu, there was essentially no flu in terms of the first quarter this year, in terms of seriously ill patients being in the hospital, which was the case in the prior year, and in fact for the prior four years.

In spite of that, our sales through -- not just for the quarter, but our sales through the hospitals -- is showing really good growth. So, that is a little bit of a masquerading event that is occurring there. And once we get through that and also see the trend in new products, we are a lot more comfortable after we understood that than before we started to do the analysis.

Okay. That is helpful. So, two other quick ones for you, first again just coming back to the 3.6% midpoint in the range, constant currency, that you are now looking for in 2016; and listening to Liam's comments that certainly believe that 5% to 6% is doable, it sounds like perhaps in the latter portion of the LRP. Are you prepared or can you say today whether you think that 2017 sales can accelerate from that 3.6 at the midpoint of the range?

Then, the second question is just any thoughts that either Liam, Benson, or Tom might have as it relates to M&A and the outlook there?

So, we are obviously in the midst of doing our 2017 plan at this point. I think again some encouraging signs for us is largely on the fact that there was not a flu season this year, so that comparable in the US is going to be helpful. The trend of growth in the US is about 1 full percentage point higher on a hospital basis for the year to date so far compared to last year, so that trend is continuing and we expect to see that continue.

I think with additional stabilization in Europe, that's going to be helpful. And most of these shortcomings in the oil countries and Pan-Asian markets will be completely out of our history and comparables. I would certainly expect to see an improvement from 3.6%. Yes.

And, Larry, just to reinforce that, we have seen a pickup in new products particularly in our key North American market from 1.2% in Q1 to 2.2% in Q3. So we anticipate having a more robust new product as it gets through the VAC committees.

What we found, Larry, that it is taking six to nine months to get through these VAC committees. So therefore it causes a little bit of a lag between launching these products and getting the revenue recognition for them, which we had not fully anticipated.

You had a second half to your question, Larry, and if you could repeat that.

Again, just your thoughts around the M&A outlook.

We continued to evaluate a lot of opportunities. Our M&A group continues to be quite busy. We remain disciplined about what we are interested in looking at. And it basically has to meet that criteria in reaching our portfolio in terms of the essential necessity of the product, limited competition, and good growth opportunities in markets which we think are defendable and sustainable.

We are not concerned about our longer-range opportunity for M&A to contribute to our growth.

Terrific. Thank you, guys.

Our next question comes from Brooks West with Piper Jaffray.

Hi, can you hear me?

Yes. Good morning, Brooks.

Liam, I missed your comments on the new product contribution, and I was wondering if you could just run through highlights again there? I am curious, as you do that, if you could call out any surprises, positive or negative, as you start to get these new products into hospitals.

Our overall new product revenue for quarter three was 1.3%. The comment I was making about North American new product adoption was that we saw an uptick in new product adoption in our key North American market going from 1.2% in Q1, to 1.6% in Q2, to 2.2% in Q3.

So, Brooks, my comment was that even though products have now got through the value analysis committee, the signs are positive that in our key North American markets we're beginning to see traction. And what the value analysis committees have called is a delay in the products getting through to the hospitals.

And I will just give you another little anecdote of a positive outcome. Even though Percuvance itself is not going to drive significant revenue in 2016, and will start to climb through 2017, we see that we have approximately a 70% hit rate in Percuvance going through value analysis committees and getting approval. That is a positive sign for us on Percuvance and on value analysis committees in general. But it does cause a lag of that 6 to 9 months, Brooke.

And then as we look at 2017, just to follow-up on the previous questions, could you weight for us the factors that might push you higher or lower? Is it new product performance? Is it geographic performance? Can you give us some framework for how to think about what weight to attach to the various contributors?

Absolutely. We are quite bullish on our North American market, which is a key market. I think as Benson said a number of times, not all growth is equal. So growing in North America is a key part of our strategy.

We see that in our tracings and our direct to customers that our North American market is actually growing faster than our reported numbers would indicate. And for us, Brooks, clearly demand at the hospital level is consumption of our product, and that is absolutely key to us.

On a geographic standpoint we do require an uptick in our Asian market, and in particular Asian markets. So the uptick in Asian markets in particular, in China in particular, in India, and again more modestly within our Korean markets. And even within the quarter we saw that China grew by 8%, and India grew 9% in this current quarter on constant currency.

We're not expecting much acceleration in EMEA, but a modest acceleration in order to get to an accelerated growth in 2017.

Okay. That is helpful. Thank you, guys.

Our next question comes from the line of Kristen Stewart with Deutsche Bank.

Good morning everybody.

Good morning.

I was just wondering if you could walk through I guess the reduced revenue expectations, but the maintaining of operating margins. Is it just you are being more selective on products that you are selling, and looking to focus more on the mix at this stage?

And then secondarily, as we look out over the next couple of years, with the push out of some of the savings from the 2014 plan, are there any opportunities for you to perhaps pull in savings from other plans or initiate other restructuring activities? Thanks.

I am going to have Tom start with the latter half of your question, and I will jump in for the first half.

Okay, so the first question was related to maintaining operating margins. Let me touch on that. As we think about the year-end guidance that we have provided, certainly we have got to call down to revenue. What we are seeing is a little more favorable FX than what we previously expected. So our reported revenue reduction is not as significant as the constant currency. But it is a reduction and that has impacted our gross margin modestly.

What we have been able to do to hold operating margin is that we had some discretionary spending that we scaled back, and we have also really tightened down on all costs in the SG&A line. So we have been able to offset that modest reduction in gross margin as we get the operating margin. So, effectively what we are able to do is hold that margin at the same level despite the reduction in revenue.

Now from an operating profit standpoint we are down a little bit due to the revenue call down, and we were able to offset that through a little bit favorable tax rate, and some favorability in our expectations for interest rates.

Just looking at -- mix had a lot to do with it, Kristen. If you look at our 2.7% as-reported growth number, almost, a little over a third of that comes all from Vidacare where it's growing at 20%. In and of itself, it contributes 100 basis points of growth. At 85% margins that is really, really helpful in terms of being able to mitigate the loss of revenue in Latin America, for example, which is a much, much slower gross margin product. It gets back to really, I think, reinforcing the quality of the revenue growth story.

You asked about our 2014 restructuring and I just want to touch on that. As we detailed, the restructuring plan has been recast, as you saw, from $28 million to $35 million to a new range of $23 million to $27 million. Now we do have an offset because the decision was to move to a vial rather than an ampoule. In doing that, it does address some healthcare provider safety.

This added safety will allow us to take a modest price increase which will get the combined savings range to $28 million to $33 million. We are pretty close to the original range. I think that we will continue to work and continue to update the investment community on mitigations, and we continue to look to improve that timeline.

But, the information that we have in front of us at the moment is as accurate as we can provide to you today. Notwithstanding that, we are in discussions with our operations people, and we are in discussions with outside vendors to assist us to improve that timeline and we will update you as that becomes available.

I think there is also a question about are we are able to pull in other plans to help offset. As we outlined the original guidance for gross margin expansion through 2018, part of it being this footprint consolidation project we are speaking about.

We also mentioned that there were number of initiatives that were not included in that margin expansion. Namely, we didn't include benefits from M&A. We didn't include any margin benefits from distributor conversions, or subsequent footprint programs. As you are aware, since announcing the gross margin target, we came out with a second initiative on footprint consolidation, so that can be used as a potential late offset.

In addition, today we're talking about another restructuring program that's got a benefit both in the SG&A line and in cost of goods. To answer your question is we continually to look for new ways to drive cost out of the system. And we feel very confident in our ability to get to that gross margin and operating margin target by 2018 as a result of all of the activities we've got going on.

I would add to that when we initially introduced it, we said there was a good degree of conservatism in those numbers and I think that we still would will describe that goal as conservative today.

That's helpful. Just to follow up for earnings, what was currency as of last quarter, and what is currency now assumed in the 2016 guidance?

In terms of a revenue impact, are you looking for a total or --? (multiple speakers)_

So I think the euro (multiple speakers) at $1.09 for the fourth quarter.

So the euro we've got at $1.09 in the fourth quarter. As we think about the currency impact on revenue, we are now assuming it is a 1% impact on revenue, and it is about neutral on the bottom line.

So currency made -- was no change on the EPS line? Quarter to quarter guidance (multiple speakers).

The euro is (multiple speakers) control. It's a little bit more favorable than what we had expected previously, honestly.

Thank you.

You're welcome.

Our next question comes from David Lewis with Morgan Stanley.

Good morning.

Good morning David.

How are you? I want to focus on two issues here this morning: one is cost, and one is more strategy.

The first is -- guys, could we just talk in more detail on the nature of the push out? It is about three years. Is it quality driven? I am trying to understand exactly what would have driven the change. And then your confidence that you can get this back through pricing, which is largely why you think the difference is going to be relatively small.

Then, Tom, I am trying to quantify this for shareholders. To me, it looks like that shift of sort of three years is around $17 million to $30 million of potential impact over that time period, which is about 100 to 200 basis points of margin. I'm sorry; I know it is pretty specific questions, and I have a quick follow-up, but I wanted to dig deep on those three issues.

David, let me talk about the cost first. It is a timing issue driven predominantly by a requirement to provide a vial versus an ampoule which had a few knock-on effects. One impact was a tray reconfiguration, transportation; as you can imagine, this is a complex project. This added an incremental time like in order to get this executed and delivered.

With regard to what is driving the price increase, moving from an ampoule to a vial does address some significant clinician safety concerns. When you break an ampoule you sometimes get some healthcare accidents that occur with that. We believe that the change is a marked improvement, and allows us to put in a modest price increase into our anesthesia and vascular kits. That is a component of the offset against the timing.

We have had conversations with key customers. It's simply a matter of when their existing contracts expire or renew in terms of when we can put that into effect, and it has zero to do with quality.

Tom, just in terms of quantifying this for shareholders, so this pushes out three years, just taking the numbers in the press release. Like I said, we are getting $17 million to $30 million of potential shift just over that time frame, obviously not in the absolute number, and that is about 100 to 200 basis points of margin over some 2 to 3 year period of time?

Let me just clarify that point. As you look at it, previously we had expected to be substantially complete with the program by 2018. And so as you know, our expected savings were between $28 million and $35 million.

Now, by 2018 we expect to be about two-thirds of the way complete, so it's more, it gets 2018 the way that we should be thinking about it is a 50 basis point reduction in our 2018 margin, not 120 basis points. Effectively we are at $16 million by the end of this year. We will deliver more savings by the time we get to 2018. And the way that you should think about it is about a 50 basis point reduction as a result of this push out.

I would say, David, also we have a constant stream of opportunities we are evaluating that have a positive impact on our margins. I think that it would be -- I'm not sure the right approach would be to simply do the arithmetic and say, therefore, the overall margin attainment goals are going to be reduced. Or the timing.

That is very helpful. Thanks for the clarification. I guess the second thing, Benson, was you spent a lot of time in your prepared remarks talking about the strategy for Teleflex, and I wanted to review things here. What I took away from your commentary was you are not comfortable with your reliance on ex-US products. It sounded like to me you would like a business that is more US-centric, and you may have to reinvest at a higher rate to sort of drive some of that acceleration.

Am I hearing you right, in sort of that preamble? And I wonder, as it relates to some of the M&A discussions, if you wanted to shift your business more US focus in light of the current organic growth rate and some of the margin things that were talked about in this call -- is this actually the right time to pursue more significant M&A? Some commentary on some of the strategic questions, just so the investors are clear on what you were trying to impart. Thank you.

I do think that the location of acquired revenue is more important to us. And having good growth potential in the US, rather than having exhausted their growth in the US and having to depend on foreign growth as a way to sustain their growth rate, is figuring more into our calculation about what makes a good investment for us.

You are correct that over time we want to become more centered around the US for the reasons that we described in our strategy. And again going back to 2015, looking at a $0.87 headwind, and as a result of currency fluctuations just in Europe, was a point that we realized we do not want to be in that or have that same degree of vulnerability as we look down the road.

So it is part of our strategy to try and to be more US-centric, and that is going to make us look a lot more like other US medical device companies as well.

Okay. Thank you very much.

Our next question comes from Richard Newitter with Leerink.

Hi this is Robby in for Rich. Can you hear me okay?

Yes.

Thank you for taking the questions, this is a follow-up on the US strategy. Given the distributor commentary that you made where your sell through is relatively higher than the sell-in and the focus on the US business, does that suggest that there is an opportunity in M&A for more distributor acquisitions in this area? Should we think about, sort of as your M&A strategy progresses, this will be a focus?

Then I had a couple of follow-ups.

Robbie, when we talk about distributor de-layering, we are really talking about a different kind of distributor. We're talking about distributors overseas that are -- they distribute our products. So they buy products from Teleflex, they have a sales organization, and they sell that through to the end market.

The distributors in North America, our distribution hubs, for want of a better way of putting it, they're the Owens & Minors, the Cardinals of this world. So that would not be part of our strategy to go into the distribution end of the business in North America.

Okay, then maybe put another way, is there other elements in your control in that area where you can sort of maximize the sell-in to sort of better match the sell through?

Probably not. I would say that now that we sort of understand this phenomenon, and are quite comfortable that it is not driven by losing share or losing accounts at the hospital level, I think we will do a better job of understanding the impact a little earlier. Bear in mind that essentially the flu season, except for this year, has been relatively normalized going back the last three years before.

This is the first year it's really had much of an impact in the fact that the flu didn't show up. So dealers went into the year with inventory in certain items prepared for the flu season and then that inventory had to be bled out. Now we have to understand and have a full appreciation of it we are feeling more comfortable about it.

It does not affect every product and it does not affect every company the same way. We only have a few products that are really affected. It happens to be some anesthesia products and vascular access products. But now that we understand it, we are less alarmed. Eventually, dealer inventories catch up with hospital demand. So we do not see this as a long-term strategic issue.

Got it. And maybe one more follow-up, on the new products in Vidacare. Number one, can you give us an update on how that shoulder access project is progressing, and what your expectations still are for Vidacare revenues for the year?

And then secondly the value access committee commentary that you put out there, you expect a little bit more impact, I guess later you have noted around Percuvance into 2H 2017, even more in 2018. Do these longer discussions with value access committees affect the timing of any of that revenue or that is kind of baked into your assumptions still?

I will deal with Vidacare product first. So as we said in our prepared remarks, Vidacare in the quarter grew by 20%, in line with our expectations. We see our full-year growth to be in that 20% range. As you know this is a very high margin project and one that drives a lot of value in our mix for Teleflex. And it is part of the reason that even with a softer sales line that we do not have the operating incoming impact that one would expect from that.

Dealing with new products and the value analysis committee, yes, it has reformed our thinking as to the timing of new products, once we launch them and they enter into our sales force. We now see a lag, as I said in my prepared remarks, of about 6 to 9 months before the product comes through. I do want to quantify that though with our hit rate and I used the example of Percuvance as a product that we're working through value analysis committees at the moment. Our hit rate on Percuvance is in the 80% of value analysis committee that we present to that we get approval. So it is a 70% approval rating through value analysis committees.

So we are quite confident that once we get to the value analysis committee, we get through, but it does take a 6 to 9 months for that to happen. So we have revised our thinking on our new product revenue to stage it a little bit, the acceleration of growth in new products to stage it a little bit later with that 6 to 9 month window.

Over time we just have more data to present to them. Right now we have no real actual hospital experience to show them how these cost improvements work. As we collect more and more of that information, the package we are able to present to these value analysis committees increases, and there are other hospitals we can point them to that have actual experience with it.

Thank you for the questions.

Our next question comes from Anthony Petrone with Jefferies.

Good morning. Thanks, gentlemen. I have a couple of questions on general procedural volumes, and I will follow up with one specifically on PICCs.

Maybe Liam or Benson, can you comment, just high level, what you guys are seeing in procedure volumes? And really it gets to the mixed reads that we're getting from hospitals. In the 2Q 3Q time frame, even last night Community Health reported, and then HCA is out there today. It looks like HCA is a little bit better, but Community Health is worse. What do you see there in procedure volumes?

And then a follow-up to that would be just as you look forward to health care exchange enrollment. If that does shift, if premiums go up, deductibles go higher, how do you think that impact volumes in 2017?

Our best take on this right now is that there is a continued increase in the acuity level of patients at the hospital. So, we're not seeing a slowdown in US hospitals relative to our product portfolio.

In terms of the impact of the Affordable Care Act, our take on this is that the population that is in the Affordable Care Act already were (inaudible) with high deductibles that were preventing them or delaying them form going to see a doctor et cetera. And we are kind of though that point were really sick patients have go any way.

So we think it is going to have an impact, a potential impact on providers potentially, we do not see an impact on our own product line. And, again, we are seeing good growth across our product lines in terms of US vascular utilizations through the year and has been increasing every quarter.

That's helpful. And then maybe to shift to PICCs, your competitor reported a couple days ago they spoke of gains in the category there, through some new products and acquisitions. And I am just wondering if you are seeing any impact in your business specifically within PICCs?

And your competitor also speaks about an OUS opportunity in PICCs specifically in emerging markets. Is there sort of a push from Teleflex to also move PICCs into emerging markets? Thanks.

Our PICC growth, as I said in my prepared remarks in North America was double-digit. So over 10% growth in North American markets. Which is the largest PICC market in the world.

We are in the process of registering our PICC product globally. We do not have a pressure injectable PICC with coding technology registered in the Chinese market.

Our competitor may be growing overseas, but for sure our share gains in North America demonstrates double-digit growth in our PICC market. And that is the largest PICC market. So we are very comfortable with the growth and share gains we are taking in the key North American market.

That is helpful, and then just timing on entering China with your PICCs.

We have a filing submitted.

Okay. Thanks.

Our next question comes from Matt Mishan KeyBanc

Hey good morning and Thank you for taking my questions.

Good morning Matt.

When I heard your comments about focusing on the US and growing there, and maybe reducing your exposure to emerging markets and into Europe, the first thing that struck my mind was that our divestiture back on the table? And in particular I think the cardiac business you have called out before as being potentially non-core, can you size that business for us right now? What percentage of that is OUS and Europe versus US? And where are the margins in that business versus company average?

So the margins are about at current target levels. The business is around $80 million as a global business. It is growing at a rate that we are quite satisfied with, and there is only one other competitor in that market space. So, I think that it has been on a healthy trend for the last year and that has increased our interest in not just maintaining the business but in growing the business and we're seeing good growth out of it.

I would just add on the cardiac business, we have a reasonably robust new product pipeline coming through that we believe is going to accelerate the growth within cardiac. It is creative to our overall growth on the top line, but you are right, Matt, more of the business overseas than in North America. But notwithstanding that, it is as Benson said a duopoly. There is one other player in that market space. So it is still quiet attractive to us.

Okay and then just a little more color on the changes on the impact of the restructuring actions. I think you previously were calculating the $28 million to $35 million conservatively, and you did it on static volumes. Am I thinking about that right? And have you updated the numbers based upon your current volumes today, or the expected volumes? And maybe the magnitude of the change is a little bit greater?

I would say that we have made no changes to the way that we calculate savings on the restructuring. We have been consistent in the way that we calculate that.

We want to present the ranges exactly the same way they were calculated initially. But if your point is how volumes been going up associated with those product lines the answer is yes. So there is some conservatism in that as a result.

All right. Got it. Thank you very much.

Our next question comes from Brian Weinstein with William Blair

Hey guys, I just wanted to go back to the flu commentary a little bit, we heard the same thing last night out of [Quidel] given the surrounding D distribution situation there. But how do you guys specifically quantify flu, what specific products, you mentioned anesthesia and vascular aspects, have you specifically quantify you impact of flu? What is your general dollar amount that you are exposed to there?

And then also on that topic, if we didn't see seriously ill patients in the hospital in 1Q as a result of the flu season, why was this something that was kind of not already previously contemplated that this might be an area where you could potentially see a shortfall?

The product categories that are impacted by the flu season are in our vascular portfolio. Our central venous catheters are impacted. Within our anesthesia portfolio you have laryngeal mass, and to tracheal tubes and those. And in our respiratory portfolio the humidification part of that portfolio, those are the three.

For example Brian our surgical portfolio has zero impact on a strong or weak flu season, and similar to our cardiac portfolio. How do we measure the impact? We look at trends as to what happens in prior years. So, last quarter three, a lot of the distributors bought in quarter three in anticipation of the flu season. And that simply did not happen in this quarter.

We saw a pickup last year in North America in quarter four, and it normally comes in late November into December in quarter four. We anticipate at the top end of our range that same phenomenon.

We have spoken to our large distributors, they told us to expect the exact same phenomenon. They purchase on the basis of a normalized flu season. If the flu season is more aggressive and the vaccine does not work as well we have seen a positive. As last year's flu season was anemic we see a slight negative.

I think your question is a good one and part of the answer is, since I have been here, flu seasons have been pretty much similar from year-to-year. And in many cases I would have not anticipated, for example, personally I would've not anticipated CDC catheters were a big product use during the flu.

It only affects two product lines and only a few of those really severe patients. So this experience this year having basically no fleas reason, it took us a while to catch on to it. But now I think we have a pretty clear line of sight around it.

Thank you.

(Operator Instructions)

Our next question comes from Matt Taylor with Barclays

High Thank you for taking the questions. Can you hear me okay.

Yes Matt.

I want to circle back to some of the commentary that you made about revenue progression given the softness of the quarter.

You spoke about perhaps getting some acceleration in different geographies going forward. But recently you also talked about lack of visibility in some of those areas. I guess, can you just give us some level of confidence on the specific plans that you have internationally? Specifically where have seen weakness to kind of draw out better growth rate and achieve the mid single-digit growth rate that you have been aspiring to more consistently?

Let me address the visibility question and I will turn it over to Liam. My commentary about visibility is the unpredictable nature now of the flu season, and not a lot of visibility in terms of exactly when viewers are going to put stock up for it.

It's not a matter of asking the distributor what you are going to do these are decisions made at local distribution units not nationally. There are 40 different partner locations that will make decision on what inventory they will pull in.

Aside from that we have excellent visibility. Asia for example, we pretty much have all orders in-house that we are going to ship out the fourth quarter, and Liam can go over a little more about the trends there.

First I will talk about this first quarter Matt and I will give you a bit of the longer term.

First of all in the fourth quarter we went have one extra billing day. And Benson was eluding to a good line of sight in two parts of our business that contributed to that acceleration, AIPAC and OEM.

At this stage for a distributor model in AIPAC we have all of the orders booked, as Benson was saying. We have seen a nice uptick in EMEA through Q1, Q2, and Q3. And we expect that to continue into Q4.

Then, longer-term, we had a few one-time events in Asia, that we have anniversaries, some product registration issues, and in particular in China, around the double (inaudible) tubes and unique laryngeal mask that are now back in the market. So that would help accelerate those markets.

Our growth in China, even in the quarter was 8%. India is another market with personal growth of 9% in the quarter. We are quite selective in the markets that we want to grow in Asia, but we see those driving, Asia, beyond the performance that we have seen the year to date.

We see EMEA and low single digits, Japan and Australia in that same bracket. But, we also are quite encouraged by the tracings and end customer demand that we see in North America. And we see that predominantly driving a lot of our sales growth in the future.

Great and then just one follow-up, you are into some new relatively good product cycles. You've got Vidacare, the protector, and now Percuvance. Can you speak in broad strokes about whether you expected new product growth of next year in 2018 to be more or less for the same that we saw here in 2016?

We have not given our 2017 guidance. But given the number of new products that we have coming through our portfolio, and now that we have a better handle on what happens in the value committee, we would expect a pick up new product revenues in the years to come for sure. And we will address that when we give our 2017 guidance.

But Vidacare is an example, is not a product that would be included in our new product numbers. Even though it is relatively new to us so that number is outside of our new product estimate.

Okay. Thanks very much you guys.

That is all of the time that we have for questions. I would now like to turn the call back over to Mr. Jake Elguicze for closing remarks.

Thanks operator and thanks everyone for joining us today on the call. This concludes the Teleflex Inc. third-quarter 2016 earnings conference call.

Ladies and gentlemen Thank you for participating in today's conference. This does conclude today's program you may now disconnect. Everyone have a great day.