泰利福醫療 (TFX) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter-two 2015 Teleflex Incorporated earnings conference call. My name is Emma and I'll be your operator for today.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes. I'd now like to turn the call over to Mr. Jake Elguicze, Treasurer and Vice President of Investor Relations. Please proceed.

Thank you, operator, and good morning everyone. Welcome to the Teleflex Incorporated second-quarter 2015 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 888-286-8010, or for international calls, 617-801-6888, passcode 52181612.

Participating on today's call are Benson Smith, Chairman, President, and Chief Executive Officer; Liam Kelly, Executive Vice President and Chief Operating Officer; and Thomas Powell, Executive Vice President and Chief Financial Officer. Benson, Liam, and Tom will make some brief prepared remarks, and then we'll open up the call to Q&A.

Before we begin, I would like to remind you that some of the matters discussed in the conference call will contain forward-looking statements regarding future events, as outlined in our slides. We wish to caution you that such statements are, in fact, forward-looking in nature and are subject to risks and uncertainties, and actual events or results may differ materially. The factors that 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 filing with the SEC, including our Form 10-K which can be accessed on our website.

The format for this morning's call will be as follows. Benson will begin with a high level overview of our quarterly results and provide an update on some key strategic initiatives, including our manufacturing footprint consolidation program. We'll then turn the call over to Liam who will review our product line and geographic revenue results, provide updates with regards to recent GPO and IDN developments, new product introduction, and regulatory approvals, and highlight two small acquisitions that we completed.

Following Liam will be Tom Powell. Tom will review our second-quarter financial results and provide an update regarding our financial guidance for 2015.

Before we begin, I'd like to point out that effective April 1, 2015, the Company reorganized certain of its businesses to better leverage the Company's resources. As a result, the Company realigned its operating segments. Specifically, the Company's anesthesia/respiratory North America operating segment was divided into two operating segments: anesthesia North America and respiratory North America.

Additionally, the businesses comprising the Company's former specialty operating segment, which was included in the all other category, were transferred to the anesthesia North America, vascular North America, and respiratory North America operating segments. As a result of the operating segment changes, the Company now has the following six reportable operating segments: vascular North America, anesthesia North America, surgical North America, EMEA, Asia, and OEM.

In connection with this presentation of segment information, the Company will continue to report certain operating segments, including, among others, the respiratory North America operating segment in the all other category. To facilitate comparability of current to prior-period revenues, we have made available on our website a supplemental schedule which provides historical, quarterly, and annual segment net revenues that have been recast to reflect our current reporting segments.

With that said, I'd like to now turn the call over to Benson.

Thank you, Jake, and good morning, everyone. During the second quarter, Teleflex continued its very solid operating performance, building upon the results realized over earlier in the year.

Once again, the Company generated mid single-digit constant currency revenue growth and achieved adjusted earnings per share that were slightly higher than our most recent internal projections. This was no small achievement, as foreign exchange was a significant year-over-year headwind.

As we entered the year, we forecasted that both the second and the third quarters would have extremely unfavorable comparisons to the prior year regarding FX. Therefore, Tom will spend a little more time than usual walking you through how FX affects our P&L, and more importantly, why we expect substantial improvements in the as-reported numbers in the fourth quarter.

By way of example, absent currency, our second-quarter 2015 adjusted earnings per share would have shown a 14% increase over the prior-year period. This is an indication to the underlying base business leverage that we are achieving. And while Liam and Tom will go into more detail during their prepared remarks, let me provide you with a brief overview of our quarterly results.

I also want to bring to your attention one other circumstance that had an impact on our numbers this quarter. At the very end of the quarter, we had two recalls. Now normally, we would not call out a recall as an offsetting event. They're part of the medical device history, and when you have one, you take the hit.

The only thing that makes these unusual is timing. Normally, when you have a recall, you issue a credit to your customers and then ship in replacement product when it becomes available. But because of the timing of these two recalls, we were unable to ship out replacement product and unable to fulfill other orders in hand for the product.

Second-quarter 2015 revenue totaled $452.1 million, which represents an increase of 4.7% on a constant currency basis. Had we been able to ship replacement product during this quarter, our constant currency revenue growth would have been approximately 5%, and that number done not include the benefit of shipping additional products, if the products were not on product hold. I draw attention to this because our revenue trajectory is an important element in our fourth quarter, and that trajectory is better than what the 4.7% would lead you to.

In the quarter, we saw improved results stemming from Asia, we saw sequential rebound in sales generated out of China, continued benefits from the recent acquisition of Human Medics, and improved results from our business in Japan. Other bright spots this quarter included our vascular business, which grew almost 6%; our OEM business, which grew 7.5%; and our surgical business, which generated almost 8% constant currency revenue growth.

Our surgical business is starting to see increasing sales in our chest drainage product line. As a reminder, chest drainage product sales had been an area that Teleflex had been de-emphasizing over the past several years, due to the fact that these products had low gross margins. But our main competitor is currently operating under a consent decree, and in order to meet the patient and provider need, Teleflex is making every one of these we can.

As we move through the remainder of 2015, we continue to expect to generate additional revenues of chest drainage products. While this is good from a revenue-growth and earnings-per-share perspective, this will pressure our gross margin line, particularly in the fourth quarter.

Turning to adjusted earnings per share, second-quarter 2015 adjusted EPS was $1.42. That compares to second-quarter adjusted EPS of $1.51. But as I stated a few minutes ago, second-quarter adjusted earnings per shares was negatively impacted by foreign exchange by approximately 20%. And if not for FX-adjusted earnings per share, would have increased approximately 14% over the prior-year period.

This underlying operational improvement in year-over-year adjusted earnings resulted from higher volumes, favorable product mix coming from areas like Vidacare and Hem-o-lock, and the impact of recently completed acquisitions and distributor conversions. However, during the second quarter, adjusted earnings per shares was somewhat offset by additional manufacturing costs incurred due to the product recalls I just mentioned. These recalls impacted our gross and operating profits by approximately $3.6 million, and gross and operating margins by approximately 70 and 80 basis points respectively. We do not expect these recalls to have an impact during the remainder of the year.

Moving on, I would like to next provide you with an update on the status of our manufacturing footprint consolidation plan. We continue to believe that this program will be substantially completed by the end of 2017 and expect to generate annual savings of between $28 million and $35 million once the plan is fully implemented. These expected synergies are consistent with our initial expectations, which were laid out in 2014.

On our last earnings call, we discussed the impact of foreign exchange, as it was having on our year-end gross margin targets. Specifically, we said that when we entered the year, we had a reasonable cushion in meeting our end year 55% target. However, given the more aggressive decline in the euro during the first quarter, essentially that cushion disappeared.

As we sit here now, two principal factors are causing us to revise our expectations regarding year-end gross margins. The first has to do with certain components relating to kits being transferred to Mexico. Earlier in the year, we had identified substitutions for components that had been available in the United States but were not available in Mexico.

More recently, we have discovered some components that are much superior, and after significant market testing, we believe that the best alternative is to switch to those superior components. This will require some adjustments to the internal tray, which houses those components and will push out the time frame to having them available into next year. We looked very closely at doing this in a two-stage process, but given the relatively short time frame involved, came to the conclusion that it was not cost effective and would introduce an added layer of confusion to the customer.

The second issue impacting our expectations for fourth-quarter gross margin is mix. When we project out our revenue growth for the balance of the year, we are seeing strong growth in our OEM segment in our respiratory therapy business and in our chest drainage business. This is good news, but all three of these product categories carry lower gross margins than our other product lines.

As a result of the decision to delay some of the kit repackaging, along with the additional gross margin pressure from FX and our expected mix of additional OEM respiratory therapy and chest drainage product sales, we now project that we will achieve adjusted gross margin of approximately 54% for the fourth quarter of 2015 versus our original expectation of 55%.

I know that many of you have consistently observed that this Management team takes hitting our goals very seriously. So it pains me to advise you of this. And the year is not over yet, so we will do everything reasonable to mitigate these circumstances and close that gross margin gap.

I say reasonable, because this will only temporarily delay our ability to attain the 55% gross margin level. We remain committed to the achievement of the longer-term targets that we recently shared at our Analyst Day, and do not see any change in our ability to reach those longer-term objectives. In fact, we have growing confidence around some of the margin improvement opportunities that we did not include in our long-range plans.

I also say reasonable because the miss in adjusted margin does not translate into a miss in our adjusted operating margin line for 2015. The reason is that these low gross margin products that are affecting our mix also have very low operating expenses associated with them.

In fact, despite this slight delay, we continue to expect that 2015 will be a strong year for Teleflex. And we are, once again, reaffirming our 2015 financial targets, which include generating constant currency revenue growth between 4% and 6%, adjusted gross margin of between 53% and 54%, adjusted operating margin of between 22% and 22.5%, and adjusted earnings per share between $6.10 and $6.35 per share in 2015.

In summary, we feel very good about where we are in the year. And now Liam will provide you with an update on our strategic business unit results.

Thank you, Benson, and good morning, everyone. For the consolidated Company, second-quarter 2015 constant currency revenues grew 4.7%, and similar to the first quarter, the revenue growth was broad-based both in terms of product lines and geographic regions.

The major drivers of revenue growth this quarter came from improved sales volumes of approximately 262 basis points of revenue growth. This growth was driven by core product growth of 215 basis points and Vidacare growth of 47 basis points. Vidacare product sales grew approximately 11% on a constant currency basis as compared to the prior-year period. While this was good, it was lower than the growth we generated in the first quarter of 2015.

The revenue growth rate of Vidacare product sales in the second quarter was down sequentially due to the seasonality of military sales and the timing of some crash cart sales that occurred in the first quarter of this year. We continued to achieve approximately 30% revenue growth in the interventional products globally and nearly 20% growth in EZ-IO products in Europe.

During the quarter, we also had our first Italian ambulance conversion. We continue to invest aggressively behind Vidacare, and we remain extremely bullish on the product's potential. In fact, we expect Vidacare revenues to grow approximately 20% on a constant currency basis for the remainder of 2015.

Turning to core product volumes, the increase this quarter was led by improved vascular, OEM, and respiratory sales for a domestic perspective. Our CVC business grew approximately 10% globally in the quarter, driven by market-share gains and product upgrades in the US, Europe, and Latin America, and volume gains in Asia-Pacific. While from an international standpoint, core product volume growth was greatest in Asia, thanks to additional orders coming from China, as well as increased sales in Japan. During the quarter, we also experienced strong core product volume increases throughout Europe, as well as in Latin American markets.

Another contributor to our revenue growth this quarter was the continued penetration of new products in the marketplace. During the second quarter, new product introductions contributed approximately 89 basis points of revenue growth. This was led by sales of our European ASK CDC kits, surgical product introductions stemming from our partnership with a robotics provider, sales of our AutoFuser disposable pain pumps, and sales of our Rusch disposable LED laryngoscopes.

Additional sales coming from new product introductions in the quarter were somewhat offset by a decline in new product sales within our vascular business. This was due to the product recall issue which Benson mentioned earlier, as it impacted sales of our ArrowADVANTAGE5 preloaded PICC. We expect new product sales within our vascular segment to rebound during the remainder of the year. Excluding this recall, constant currency revenue growth for the Company coming from new product sales would have exceeded 100 basis points.

Turning to pricing. During the second quarter, the average selling price of our core products were flat, as compared to the prior-year periods. Similar to recent quarters, we were able to achieve price increases within our North American surgical business; however, this was offset by price pressures primarily coming from European markets.

And finally, this takes me to the last component of quarterly revenue growth, or the contribution we received from M&A and distributor-to-direct conversions. Revenue growth from these totaled approximately 114 basis points and was primarily due to the impact of distributor conversions. The performance in this area was consistent with that achieved in the first quarter of the year. It is important to understand that as we progress through the remainder of the year, we continue to expect the contribution to revenue growth from M&A and distributor conversions to accelerate.

Next, I would like to provide some additional color surrounding our segment and product related to constant currency revenue growth drivers. Vascular North America's second-quarter revenue increased 5.6% to $81.2 million. The increase in vascular revenue was largely due to greater sales of central venous catheters, Vidacare EZ-IO products, and catheter navigation products.

Moving to anesthesia North America, second-quarter revenue was $45.6 million, or flat versus the prior-year period. Growth in this segment during the quarter was achieved in our LMA MAD Nasal Atomization product offering. However, this was offset by the discontinuation of some third-party distribution agreements, which was approximately 1%. Lower sales in some of our regional anesthesia products and lower domestic sales of laryngeal masks.

And speaking of MAD Nasal, we recently received regulatory approval to expand our indication for use from a CE Mark perspective to include emergent, urgent, and medically necessary situations, and when intravenous or intramuscular access may be difficult or impossible.

Turning to our surgical North American business, its revenue increased 7.8% to $40.5 million. The increase in surgical revenue was due to higher sales of chest drainage, ligation clips, access ports, and mini lab products. This was somewhat offset by lower sales of general surgical instruments and suture products.

EMEA revenues totaled $129.1 million in the quarter and generated consistent currency revenue growth of 1.7%. This was consistent with the performance this segment realized in the first quarter. And we continued to see the European markets as being stable, with the increase in revenue this quarter primarily due to higher sales of vascular products, including Vidacare and PICCs; higher sales of laryngeal masks; and increased dialysis access product sales.

Moving to Asia, our second-quarter revenue increased 9.4% to $62.1 million. The quarterly increase in Asia revenue was primarily due to stronger sales in China, go-direct efforts in Japan and additional revenues in Korea due to the acquisition of Human Medics.

Now to OEM. Revenues in the second quarter increased 7.5% to $37.9 million. The increase in OEM revenue was primarily due to higher sales of catheter products.

Lastly, our all other segment revenue for the quarter was up 6%, totaling $55.7 million. The increase in other revenue was largely due to higher sales within Latin American countries and intra-aortic balloon pumps and catheters.

Next, I would like to update you on additional group purchasing and IDN agreements that we received in the quarter. In a similar fashion to the first quarter of the year, during quarter two, we once again won a total of 10 agreements. Of these agreements, four were brand new, while six were renewals of existing awards.

One of the new GPO wins was for our Pleur-evac chest drainage products that Benson referred to earlier. The rest spanned across our product offerings that including items such as CVC and arterial access devices, intra-aortic balloon products, dialysis access, and vascular positioning systems, and a brand-new award for an AutoFuser disposable pain pumps. We continue to be quite pleased with the progress we are making in these areas.

Next, I would like to update you on some recent product regulatory approvals that we received, as well as the findings from some independent studies that were performed in which our products were used. During the second quarter, we received 510(K) market clearance from the FDA for our Arrow Endurance extended dwell peripheral catheter system. Endurance was one of the products that we highlighted at our recent Investor Day event.

This device is a single-use peripheral catheter system intended for short-term dwell use to permit delivery of infusion therapies, pressure monitoring, high pressure injection, and the withdrawal of blood. The insertion device consists of an economically designed handle with an integral echogenic needle. The needle has a passably active protection mechanism, guide wire, release tab, and single-lumen catheter. The insertion device is designed as a closed system intended to contain blood throughout the catheter-insertion process.

The concept behind the Arrow Endurance system is that it will be used when a PICC may be too much for a patient, but yet a peripheral IV device is not enough to solve their needs. It is our belief that through the innovative insertion design of this product that we can target a portion of the peripheral IV market and turn that usage over to Endurance. We are quite excited about this product's opportunity and intend to launch it in the United States later this year.

Another area of focus at the recent Investor Day surrounded our leadership position within the area of anti-microbial and anti-thrombogenic coating and helping hospitals minimize the costs associated with hospital-acquired infections. Recently, our Arrow central venous catheters with ARROWguard Blue technology were included in a peer review retrospective study. The study further documented the ability of our central venous catheter with ARROWguard Blue technology to prevent catheter-related bloodstream infections; therefore, reducing their occurrence and reducing direct costs associated with treating those infections.

The antimicrobial catheter outperformed an unprotected CVC in both infection prevention and total cost per patient. Within the study, the ARROWguard Blue catheter achieved a zero infection rate per 1,000 catheter days. In contrast, the unprotected device was associated with a higher catheter-related bloodstream infection rate.

In addition to superior clinical performance, the ARROWguard Blue CVC had sharply lower CVC-related costs than those associated with an unprotected catheter. This study is further evidence that using an unprotected catheter may put both the patient and a hospital's bottom line at unnecessary risk.

And before I review two recently completed acquisitions, I would like to provide an update on the status of the LMA Protector and Percuvance product launches. The LMA Protector is a device that we've been working on, which we expect will bridge the remaining gap with ET tubes and open up a large number of additional procedures, both in the pre-hospital and hospital settings to LMA use.

This is important to Teleflex, as the margin-mix benefit we would get from the migration from ET tubes to LMA use is significant. The Protector has a flexible but fixed-curve tube that allows ease of insertion and anatomical conformity. Its patented dual gastric drainage channel and chamber is designed to improve the laryngeal seal during high-volume regurgitation. It also has an integrated suction port that can be used to rapidly remove any gastric content in the patient or to regurgitate during a procedure.

The Protector is currently being evaluated in 22 hospitals around the world as part of a small, controlled, limited-market release. Feedback from these controlled releases has been overwhelmingly positive. The Protector design is getting high marks for its seal pressure, which is a critical component of protecting the airway and facilitating ventilation. In addition, the Protector's silicone design and flexible curves have been well received in terms of ease of insertion.

Users have also reported high praise for the advanced gastric access feature. We are quite enthusiastic about this product, and it is our belief that the Protector can move Teleflex forward exponentially in our quest to provide physicians with technology that reduces the risk of area-related complications. We expect a full market release in the first quarter of 2016.

Now to Percuvance. As a reminder, it our belief that Percuvance has the potential to eliminate scarring and pain, and improve a patient's recovery when compared to a traditional multi-port laparoscopic surgery. This device eliminates the need for multiple trocars and allows the surgeon to potentially access the surgical site with better angle. The unique feature of Percuvance allows the surgeon to use similar size operating tips; the same size they have been accustomed to using with traditional 5-millimeter to 10-millimeter straight-stick laparoscopic devices, without the need for a trocar.

The Percuvance surgical system was first used at the Cleveland Clinic in March of this year. I am pleased to tell you that since the initial launch in March, we are currently testing the product in nine hospitals worldwide today and anticipate that we will have the device in 17 hospitals by the end of the year. Similar to the LMA Protector, I am happy to report that initial feedback on Percuvance has also been extremely positive.

Our key findings from the limited market release are three fold. First, it has the applicability in a broader range of procedures. Second, it has applicability in more complex procedures than first envisioned. And third, the Percuvance system has a fast adoption rate, as it does not require a change in surgical practice.

Next, I would like to briefly discuss two small acquisition that were recently completed. The first was the acquisition of N Stenning & Company. Stenning has been a distributor of Teleflex surgical products in Australia under the Pilling and Weck brand for nearly 35 years. Included in this transaction are the Stenning surgical customer relationships throughout Australia, and a team of surgical sales representatives who are now employees of Teleflex.

This acquisition is yet another example of Teleflex executing upon its strategy of converting select distributors to a direct sales model, enabling the Company to leverage our sales performance to support growth and capture additional margin. This all-cash acquisition was completed in June and it is expected to be modestly accretive in 2015.

And lastly, I would like to touch on another acquisition that will benefit our anesthesia segment. Completed on the first day of the third quarter was the acquisition of exclusive North American distribution rights to the AutoFuser and the AutoFuser with auto-select range of disposable pain control pumps from ACE Medical US.

In connection with this transaction, Teleflex entered into a 10-year exclusive distribution agreement with the manufacturer of these products, ACE Medical Corporation. This transaction solidifies Teleflex's position as a leading source of high quality regional anesthesia products, including catheters and pain pump systems, and provides the immediate benefit of a strengthening our anesthesia business in the United States and supports our margin expansion initiatives. This too was an all-cash transaction, and it is also expected to be modestly accretive to revenues and earnings in 2015.

That completes my prepared remarks. With that, I would like to turn the call over to Tom. Tom?

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

But before I do, I'd like to reinforce a point made earlier by Benson, which is that underlying operating performance is solid. So far this year, we have made progress against our gross margin efficiency initiatives, including footprint consolidation, a host of new manufacturing cost reduction initiatives, and a continued conversion of select distributors to a direct sales model.

We have reorganized several business units in order to drive SG&A efficiency, and we have reduced the average borrowing cost through the redemption of higher cost notes. However, for the time being, our operational progress is being masked somewhat by the impact of currency.

For the second quarter, we estimate that the impact of foreign currency was to reduce adjusted earnings per share by approximately $0.30. If we were to exclude the currency impact, earnings-per-share growth would have been approximately 14%. As I go through the quarterly results, I'll highlight the currency impact so that you can get a better understanding of the underlying operational performance.

Turning now to results. For the second quarter, adjusted gross profit was $236.3 million versus $245 million in the prior-year quarter. Adjusted gross margin was 52.3%, which was flat when compared to the prior-year period. During the second quarter, we realized improved operational efficiencies from both manufacturing and logistics cost-improvement programs, and the beginning stages of manufacturing consolidations.

Recent distributor conversions in Japan, Korea and now Australia, plus the acquisitions of Truphatek and Minilab further boosted gross margin. Additionally, we realized favorable product mix, including strong results in the vascular North America segment.

However, the underlying operational improvement in adjusted gross margin was offset by unfavorable impact of product recall-related expenses that reduced gross margin by approximately 70 basis points and foreign exchange rates that reduced gross margin by approximately 50 basis points. While we have not removed these items when calculating our adjusted gross margin, if you were to normalize our results for these impacts, adjusted gross margin would have been approximately 53.5% in the quarter.

Second-quarter adjusted operating profit and margin were $92.3 million and 20.4% respectively, versus $98.3 million and 21% respectively in the prior-year quarter. The decline in adjusted operating margin was primarily due to the unfavorable impact of foreign-exchange rates and recall expenses. These impacts more than offset efficiency gains from the recent reorganization of our North American specialty, anesthesia, and respiratory segments, as well as continued benefits from the 2014 restructuring of our European country organizations. Similar to gross margin, if you were to normalize our results to exclude the impact of currency and the product recall costs, adjusted operating margin in the quarter would have been approximately 23%.

During the second quarter, we also took steps to further optimize the Company's capital structure, the redemption of our 6.875% senior subordinated notes due in 2019. The redemption of these notes occurred on June 1 and was funded through borrowing under our revolving credit facility. As a result of the transaction, we anticipate that adjusted net interest expense will decline from the current levels to approximately $11 million per quarter in the second half of 2015. The objective of this transaction was to lower our average borrowing cost, while maintaining a balance of fixed versus floating rate debt.

Moving next to our adjusted tax rate. For the second quarter of 2015, the adjusted tax rate was 19.5%, a reduction of 280 basis points as compared to the prior-year period. The year-over-year reduction is primarily due to a favorable shift of taxable income to jurisdictions, with lower statutory tax rates.

On the bottom line, second-quarter adjusted earnings per share was $1.42, or a decrease of 6%. As mentioned, if we were to exclude the currency impact, earnings per share growth would have been approximately 14%.

Turning now to select balance sheet and cash flow highlights. During the quarter, cash provided by operations was approximately $67 million, which is running a little bit behind year-ago levels, largely the result of increased inventories and receivables in Japan, as we transition the business to a direct sales model. We expect an improvement in this area as the year progresses.

On a full-year basis, we project cash flow from operations to both remain on target to exceed $300 million and to achieve growth at a level consistent with adjusted earnings growth. During the quarter, cash on hand increased by approximately $16 million to a quarter-end balance of $325 million, and our US cash balance was $27 million.

Turning next to an update of our full-year 2015 financial guidance. We continue to expect 2015 constant currency revenue growth of between 4% and 6%, and as-reported revenue growth of flat to down 2%, as compared to 2014. As we look to second-half revenues, we expect a currency headwind in the third quarter similar to what we experienced in the second quarter, but then a lessening impact in the fourth quarter given an improvement in the prior-year comparables.

Also during the second half of the year, we expect an acceleration of our constant currency revenue growth rates due to the continued positive impact from recently completed distributor conversions and M&A, gains from new product introductions, increased Vidacare penetration, and higher revenue growth coming from China, stemming from an easier fourth-quarter comparable. Also during the fourth quarter, we have one additional shipping day.

We expect fourth-quarter constant currency revenue growth to be particularly strong, given the building momentum, the easier comparable, and the additional shipping day, which alone is expected to contribute more than 100 basis points to fourth-quarter revenue growth. On a reported basis, assuming currencies remain in their current range, we project our as-reported revenue growth to turn positive in the fourth quarter.

Continuing down the income statement, we had previously guided 2015 adjusted gross margin to be in a range of between 53% and 54% for the year. We now project 2015 adjusted gross margin to be at the low end of the range, or approximately 53%. Revision is attributable to costs related to the second-quarter recalls and the recent decision to delay the transfer of some of the material packaging and kit configurations from the fourth quarter of this year to the first quarter of 2016, plus higher than budgeted sales of OEM and chest drainage products, and ongoing currency headwinds.

The current projection represents and approximate 150-basis-point improvement in the adjusted gross margin versus 2014 and includes an unfavorable currency impact that we estimate will reduce full-year gross margin by approximately 70 basis points. We expect third-quarter adjusted gross margin to improve sequentially from the second quarter, with further improvement projected in the fourth quarter to approximately 54%.

Moving on to adjusted operating margin and earnings per share. For full-year 2015, we continue to expect adjusted operating margin to increase by approximately 200 basis points to 250 basis points to a range of 22% to 22.5%. Based on recently implemented SG&A expense reduction actions, including the reorganization of our North American specialty, anesthesia, and respiratory commercial operations, plus the restructuring of our European finance and marketing organizations, we expect SG&A expense as a percentage of revenue to decline in the second half of 2015, as compared to the first half of the year.

As a result, we expect improved SG&A expense leverage that will offset the gross margin move, and thereby, allow us to maintain our previously provided range for adjusted operating margin. Similar to gross margin, the gains we expect to generate at the operating margin line will be negatively impacted by foreign exchange. And we estimate that the full-year 2015 operating margin would have been approximately 100 basis points higher if were not for foreign exchange headwinds.

Moving on to taxes. We continue to expect our full-year adjusted tax rate to fall within the range of 20% to 21%. On the bottom line, we continue to expect adjusted earnings per share to be within the range of $6.10 to $6.35 per share. That fourth quarter will be considerably stronger than the third quarter.

In closing, we continue to be encouraged by the progress made towards our operational goals and objectives. Our revenue growth is tracking to expectations, and our volume trends continue to improve. While factors have caused us to moderate somewhat on our gross margin expectations, we now expect to over achieve in other areas, and thereby remain on track to reach both our 2015 operating margin and earnings-per-share targets.

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

Thank you.

(Operator Instructions)

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

Hi. Good morning. I'm wondering, Benson, if we could start with the chest drainage product and the comments that you made. I understand that these are obviously incremental revenues, albeit at a lower margin. But could you help us understand how you're thinking about perhaps the size of the market or the opportunity? And how should we be thinking about as that being incremental to the 2015 outlook?

So just by way of background, as I mentioned in my prepared remarks, there's a consent decree that is affecting the largest competitor out there. When the impact of that started to become apparent, we began a series of negotiations with GPOs and IDNs, and essentially, came to some agreements with those customers for essentially a three-year agreement. So we expect to ramp up to our full production capability, are in the process of doing that, and expect to hold the majority of that business over a three-year period. We are not, however, making additional investments to expand our production beyond that point. We're really driven by this, by a patient and customer concern, more so than an economic opportunity. So while we expect to hold onto the business for a three-year period, it still falls into that category of low gross margin products that longer range we don't think are strategic best area of investment.

Okay, that's helpful. And then the second question is just on M&A. And the question is how are you viewing the opportunities out there? It seems to me, given the strength of the business, that you're probably don't have a major sense of urgency to get a deal done. But just want to take your temperature on what the environment feels like, what do valuations feel like, and is this still a priority for you guys?

The short answer to your question is yes. I would just tell you we've never been busier. We are working on a number of smaller deals, two of which of the kind that Liam announced, and those are typically deals we have a much higher degree of certainty in being able to move across the finish line. But there's a lot of activity in that range where we're looking at for acquisitions right now. But timing is always hard to predict, but it remains a high priority for us.

Okay. And just lastly on that, just in terms of size of deals, just how should we -- I understand the smaller ones, but assuming something a bit larger, should we be thinking more like Vidacare, LMA sizes, that couple of million dollars?

So when possible, I would say that's the size we'd prefer. I think all along we've said we were willing to go up to something in the range of a purchase price of, let's say, $500 million plus for the right opportunity. So I think the answer to your question is we still prefer those $100-million revenue size acquisitions. They're a little bit easier to integrate. But it's a very opportunistic situation, and sometimes things become available that are still attractive and fall on the little bit larger side of that.

Thank you. Your next question comes from the line of David Lewis from Morgan Stanley. Please go ahead.

Hello. This is actually Jon Demchick in for David.

Hey, Jon.

Good morning, Jon.

Good morning. Wanted to follow up on Larry's question on the chest drainage opportunity. I think you mentioned that you expect to hold onto that business for the three-year time frame, which coincidentally follows quite nicely to the long-term plan that you guys mentioned at the Analyst Day. It sounds like the chest drainage opportunity has the potential to impact gross margins by about 100 basis points into the fourth quarter. So obviously there's some sort of an offset onto the operating line with less selling costs, but should we expect this to impact the gross margin expectations over the next few years?

Just to be clear, the 100 basis points decline from 55% to the 100 basis points you're referring to really included some impact from the delay of the transfer of kits, and also some impact from our greater-than-expected respiratory therapy volumes and OEM business. So not all of that decline is due to the chest drainage business.

Jon, I'll just give you a bit of color on the chest drainage. It's the largest GPO win that we executed on. Implementation just began during the month of July.

Understood. Is there a way to quantify maybe the impact that the chest drainage business should have on your gross margins overall?

I would say that's getting too finite, given all the things that go into the bucket that end up in our gross margin column. But I would say that whatever it turns out to be, the impact that it ends up having on our operating margins is negligible.

Okay, very understood. One of the big surprises, at least for us, from the Analyst Day was the confidence toward organic growth acceleration in the out years. And I think a big part of that is the pipeline. As Liam mentioned on the call, both Percuvance and the LMA Protector are going to be big contributors to that. With both products launching at the beginning of the year, I was wondering if you could maybe help us think about the growth contribution you're expecting from these products into driving acceleration into 2016.

So we will launch them, we'll come off the limited market release in Q1 2016 for both products. As we said at the Analyst Day, the size of the market for, in particular, the Percuvance is in the region of $300 million to $400 million. The adoption rate we expect to add, that it will accelerate during the quarter one, we expect an impact in 2016, but we expect a more significant impact on revenue growth for that particular product in 2017 and 2018, as it starts to get some traction. We will have it in 17 hospitals, as I said, at the end of the year. For the protector, we are expecting a similar ramp-up, slower ramp-up in 2016, and then accelerating into 2017 and 2018. Again, don't want to get too granular on the details on a particular product line at this time.

I would say too, that one of the reasons we have this almost like a test-market release going on is so that we can have a better perspective as we plan for 2016 and what the likely volumes are going to be, and spend accordingly to be able to make that happen. I would say our accelerating product line, though, particularly in the shorter term 2016, has as much to do with what we see as volume growth in the US market and share gains. We're seeing that essentially across most of our business units, and particularly areas in the vascular arena where we're seeing good growth. In fact, we saw some of the strongest underlying constant currency growth in those segments already through the first two quarters.

Thank you very much.

Thank you. Your next question comes from the line of Matt Mishan from KeyBanc. Please proceed.

Great. Thank you for taking my questions.

Good morning, Matt.

Good morning, Matt.

Good morning. Hey, I think you're halfway through the year at this point, but you still maintain the guidance, at least -- and it's still a pretty wide range. I'm just curious why you weren't able to narrow that a little bit.

Matt, are you referring to --

The EPS guidance range.

The revenue range or the earnings range?

EPS, yes.

Matt, why don't I take that one. So as we thought about the year, we've got a fairly significant acceleration of revenue, margin expansion, and some savings in synergies coming in the fourth quarter. So we wanted to make sure we've got better visibility on that, better understand what's happening with currencies. But certainly we'll look to narrow that range a bit as we get into the third quarter.

Is that --

I would just add from my perspective, currency continues to be our biggest unknown factor. It bounces around $0.03 or $0.04 within a week, so there's a lot of volatility there. I think from if we just look at a constant currency revenue projection, I would say I'm pretty comfortable that we're going to certainly be in the upper half of our guidance range rather than the lower half. We really just need to see what happens with FX in the fourth quarter to be able to understand how much of that's going to translate into EPS.

Okay. And on the R&D level, for the second quarter in a row, that looks like it's about 3% of sales. Are you just seeing less -- why such a low level? Are you seeing less projects to invest in or is it -- I'm just curious?

Yes, so we are continuing to make investments in late-stage technology opportunities that is supplementing that a good bit. So I think our overall investment for the year, when you take both things into consideration, is more than adequate to be able to propel the revenue growth we're projecting.

Okay, and lastly on Percuvance, I think you mentioned that you thought it would be applicable in a broader range of procedures and more complicated procedures. Could you just elaborate on that a little bit? And I know you mentioned the LMA is a full market release in 1Q 2016. Are you still comfortable that you'll do a full 1Q 2016 commercial launch of Percuvance as well?

Okay, I'll take that. To your last question, yes, we're very confident we're going to get the product out there in Q1; everything is tracking to plan, our internal plans. When we started, we thought we would with doing a lot of procedures in lab [coley]. In actual fact, we have done as many bariatric and gynecological procedures as we've done lab colies during the test. The surgeons are more aggressive in the procedures they would use it in, which is for us, quite exciting. Because if it's in a more complex procedure, it's what we would refer to as a stickier product in the longer term.

Thank you very much.

Thank you. Your next question comes from the line of Dave Turkaly from JMP Securities. Please go ahead.

Thank you. Just given your performance in the quarter on that pricing side, any update there in terms of your expectations moving forward? Do you still think you can get price as a contributor?

So I think we have indicated over the past couple of quarters that the majority of our pricing is going to come from dealer-direct conversions. For example, chest drainage, we might have had an opportunity to raise our prices given the emergency, but we thought that was sending the wrong message to our important GPO customers. The circumstance in Europe, just with the addition of what's happening in Greece, what's happening in Russia, et cetera, is eliminating some of the other positive price moves that we're making. So we would continue to suggest that we're in that 100-basis product range over the next couple years, but the majority of it's going to be coming from dealer-direct conversions.

Great. On the Arrow Endurance, do your competitors have a product that's similar to that, or is that a new category that you're creating there?

There are other products within that category that we compete with, but we believe that our insertion process is quite unique and differentiated and will move some of the IV market into that space.

And last one from me, just any details that you'd be willing to share on the Australia distributor, either headcount or revenues, anything like that that you could help us out with would be great. Thank you.

On the Australian dealer to direct, what we need to do is bleed through their inventory during this quarter, and you should see about in the region of 50 basis points of top-line growth in the fourth quarter.

Thanks a lot.

Thank you. And your next question comes from the line of Matt Taylor from Barclays.

Hey, this is actually Ian Mahmud in more Matt. Can you hear me okay?

Yes.

Good morning.

Great. Good morning. So our question is actually following up on Dave's question about the purchase of the Australia distributor. And we were just wondering if at this point you can maybe size the opportunity for Teleflex in terms of the purchase of more distributors and what your thoughts are on that at this point?

So what we've continued to say, for a while, I'll just repeat it, is their cadence of distributor-to-direct conversions (technical difficulty) the last couple of years is what we forecast over the next couple years. There continues to be opportunities that are more than enough to be able to support that level. It's really more problematic for us to get down to the individual details about any single one of these. But in terms as an overall annual impact, what we've been delivering over the past couple years is what we expect to deliver over the 2016 through 2018 time frame that we outlined at the Analyst Day.

Okay, that's helpful. And just as a follow-up, one of the products that we like from a margin perspective is MAD Nasal. Do you have any update on that or anything that you can share from your current thoughts?

As I said during my prepared remarks, we just got extended indications in Europe, so for emergent use of the product. We continue to invest heavily behind this product. We are very pleased with the growth rate within the product that we're experiencing at the moment, and we see the growth within the quarter in the high double-digits globally. So it's one of the products that's within our area of focus, and we continue to get -- to look to get more indications for use for the product.

Helpful. Thank you.

Thank you. Our next question comes from the line of Anthony Petrone from Jefferies. Please proceed.

Thank you, gentlemen. Couple P&L questions, and then a few product questions. Maybe just a reminder, Benson or Tom, on the $28 million to $35 million in cost savings, how that we should expect that to roll through the P&L over time and where the majority of the savings will be realized? I would assume COGS, but is there some that's allocated to the operating lines?

And then one just for this year, on the pain pump distribution agreement that you mentioned in the prepared remarks, Benson, that's immediately accretive. Just wondering what should we expect this year in terms of accretion from those deals? And then I have a couple of follow-ups.

In terms of the $28 million to $35 million, it's largely savings that's going to show up in the COGS and gross margin line. There really isn't anything below that associated with that program. In terms of the timing, we spoke about a bit of that starting to happen in 2015, largely in the third and then in the fourth quarter, we've now moved manufacturing for some of our dry kits through VasaNova down to Mexico. So we're going to start to realize those savings in the third and fourth quarter of this year. The majority of the savings, however, will be realized in 2016, and then $200 million more in 2017. So I'd say next year is the lion's share of the gain.

Relative to the pain pump question, it's $0.02 toward the end of the year. We actually have to bleed through our existing inventory. I think the two things that were quite attractive to us about this is this is an extremely attractive product compared to the market leader's product that's out there, and by negotiating this deal for the distribution rights in the United States, it improves our gross margins from one of the lower gross margin products in our bag to one of the higher ones. So $0.02 this year; it will be much more favorable to you us next year.

That's helpful. A couple to round it out on products. On Vidacare, maybe just an update on where the greenfield opportunity there is. Are there still hospitals in the US that you can still penetrate? Or is it more just increasing usage at existing sites? And then maybe just a quick update on Weck disposable trocars with Intuitive Surgical. Intuitive had a pretty good quarter with volumes and placements. I'm just wondering how that plays out over time. Thank you.

Yes, so I'll take the Vidacare question first. It was always the case when we bought Vidacare that we realize that the opportunity to expand was in the ambulance service, in Europe, particularly. We were very pleased to convert our first ambulance service in Italy during the quarter, as I said during my prepared remarks. There is still significant penetration opportunities within the United States, in particular within the hospital segment. And we had a recent publication of a paper that showed that for emergent vascular access, that even compared to a CVC, the EZ-IO was a better opportunity or a better methodology of getting immediate access for the vasculature. We continue to see opportunities within the EMS segment within North America, within the hospital segment within North America, within the European EMS segment, and also within Asia-Pacific. Where it's in its infancy within Asia-Pacific, and in the future, that's a long-term growth prospect for us. So we've continued to be very bullish about potential growth with EZ-IO and the Vidacare products. And if we look at the half year, we are in the region of a 20% growth within the half-year basis. And we anticipate that to continue throughout the remainder of the year, as I said in my prepared remarks.

Your second question was regard to the trocars, and this is one of the significant drivers behind our product growth, which I said was 84 basis points, within my prepared remarks. So this continues to be a focus for us, and we're very, very pleased with the partnership that we have with Intuitive. And I think Intuitive, likewise, are very pleased with the partnership with Teleflex.

Thank you.

Thank you. Your next question comes from the line of Jason Wittes from Brean Capital. Please go ahead.

Thank you for taking the questions. I wanted to ask first just more clarification on gross margin. The component kit issue, is that a one-quarter delay type issue, or is that something that's going to continue into next year?

So our -- this is a relatively recent decision that we just arrived at in the past week or so. The current estimate is that it's about a quarter delay. So we expect to get into manufacturing that product by the end of first quarter. It obviously won't have much of an impact on our gross margins in the first quarter. That will follow that, but that's about the time it's going to take us to do the reconfiguration of the packaging and get it through the validation process.

Okay, and sounds like you're not necessarily able to quantitate what the chest drainage opportunity might be it terms of -- it sounds like it's going to be accretive to overall margins, but for gross margins it will be dilutive. And I guess you're not in a position to necessarily quantitate that at this point. Is that the right way to think about it?

So yes, I think we'll have a much better perspective on that in terms of the surrounding details by the end of third quarter. We're in the process of ramping up manufacturing. That has an added costs that aren't going to stick around I think once we get to those levels. But we'll have a much clearer picture about that certainly by the end of the year and most likely by the end of the third quarter.

And as I said during my earlier comments, we are just in the process of converting the largest GPO following the win. We'll have much more clarity on that as we go through the next quarter.

Okay. Fair enough. And just did you give an indication of where PICCs and how PICCs and CVCs did this quarter? Yes, I gave an indication of CVCs. CVSs grew 10% globally. That was really consistent across all the geographies. PICCs were impacted by the recall, as I mentioned during my prepared remarks, and overall were 8.1% growth.

PICCs were -- Jason, PICCs were down about 8% in the quarter, and that's really coming from the product recall issue that we referred to earlier. Had it not been for that, we would be more in line where we were in prior quarters.

And then the last question on Arrow Endurance. How big is the market today for these type of products? It sounds like there's some product -- other products out there, and how big do you expect it can grow to?

If you looked at the total IV market, and Jason, I'm not suggesting you do this, but --

Fair enough.

That would be a $300 million, $400 million market. But the segment of the market that we're targeting is in the $40 million to $50 million -- entire segment that we're focusing this product on, its in between a peripheral IV and a PICC. And what you see happen is some of the IV segment moved to the Endurance and some of the PICC segment moved to the Endurance.

Okay. Great. Thank you very much.

Thank you. And our next question comes from the line of Richard Newitter from Leerink Partners. Please go ahead.

Hi. Good morning. Thank you for taking the questions. This is Ravi.

Richard, we can barely hear you.

Hi, good morning. Can you hear me now? This is actually Ravi in for Rich. Is that better?

A little better.

I wanted to follow up on the recall. I was hoping if you could quantify that a little bit, given you said about 30 BPs in the quarter. How do you see that going forward on the top line and any commentary on when you see that resolving? And then maybe one on FX exposure. It sounds like what you're saying is that Europe at least seems to be doing okay. But I was just curious if you could just quantify a little bit about your currency exposure, what are the components of that? Thank you.

So relative to currency, we have made our balance-of-the-year projections assuming a dollar euro at $1.08. One of the impacts of currency in the second quarter had more to do with the euro versus other currencies, and that introduces a layer of complexity that makes projections, I would just say, tougher to do. If we were only concerned about the dollar-to-euro number, it would be a lot easier to answer your question. But by way of example, in the second quarter we had also budgeted it at about $1.08. I think the actual average number was $1.10. But we saw more unfavorability from currency than what we expected because of the euro in relationships to other currencies.

So let me provide just a little more details around our exposures and help you better understand. Benson appropriately touched on the euro, which is our biggest exposure. We do about 30% of our business in euros. Our next biggest exposure is really less than 5% of our revenue. So if you look at some of those other areas where we're exposed, it's the Australian dollar, Japanese yen, Chinese yuan, Canadian dollar, British pound. We don't have any significant exposures outside of the euro, and that's why we tend to focus on it quite a bit.

Now, for us in terms of exposure, we have the greatest exposure related to translation. We don't see big transactional and other issues impacting us. We've talked about a full-year exposure on the range of about $0.85 or so. Now, you may say, boy, the second quarter you said was around $0.30, and the reason for that is two-fold. First of all, we see the greatest currency exposure with the euro in the second quarter, just given how rates moved last year. As we get in the fourth quarter, we're going to start to get a more favorable comparable. So that will help us on that front. And then -- I forgot the other point I was going to make related to the currency here. But in any event, as we think about those impacts, it's really -- the second quarter is going to be our greatest impact. And as we get into the third quarter, it will abate a little bit, and then the fourth quarter even more so. Full year, the impact is about $0.85; it's largely driven by the euro, and again, the second quarter we expect to be the greatest impact.

Relative to your question about the recalls, first of all, we've obviously booked the expense of receiving the merchandise back in the second quarter. We will reship that to customers, and we'll be in a position to have the product come off product hold in the third quarter. So we'll see a benefit in terms of some revenue coming from that. The cost of rework, essentially we have booked in the second quarter and that should not have -- it will obviously get calculated into our overall year-end gross margin number, but we should not see any residual effect from that in the third quarter or in the fourth quarter.

Great. Thank you very much.

Thank you. You have no more questions at this time.

(Operator Instructions)

As we have no more questions coming through, I'd now like to turn the call over to Jake Elguicze for closing remarks.

Thank you, operator, and thank you to everyone that joined us on the call today. This concludes the Teleflex Incorporated second-quarter 2015 earnings conference call.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.