Morning, everyone, welcome to the Teleflex Incorporated third quarter 2019 earnings conference call. The press release and slides to accompany this call are available on our website at www.teleflex.com. As a reminder, this call will be available on our website and a replay will be available by dialing 855-859-2056, or for international calls, 404-537-3406, passcode 1185417. Participating on today's call are Liam Kelly, President and Chief Executive Officer, and Thomas Powell, Executive Vice President and Chief Financial Officer. Liam and Tom will provide prepared remarks, then we'll open up the call to Q&A. Before we begin, I'd like to remind you that some of the matters discussed in the conference call will contain forward-looking statements regarding future events as outlined in our slides.
We wish to caution you that such statements are in fact forward-looking in nature and are subject to risks and uncertainties, and actual events or results may differ materially. The factors that could cause actual results or events to differ materially include, but are not limited to, factors referenced in our press release today, as well as our filings with the SEC, including our Form 10-K, which can be accessed on our website. With that said, I'd like to now turn the call over to Liam.
Thank you, Jake. Good morning, everyone. It's a real pleasure to speak with you again. I am very pleased with Teleflex's performance during the third quarter as we continue the positive momentum in our business, delivering 6.3% revenue growth on an as-reported basis and 8% growth on a constant currency basis. Like the first half of the year, during Q3, the strength in our top-line performance was once again broad-based, driven by improvements across nearly every global product category. This included 50.4% growth in interventional urology, 8.2% growth in interventional access, 6.1% growth in vascular access, and 5% growth in surgical. From a geographic perspective, we achieved particularly strong growth within the Americas, where constant currency revenue growth was 10.7%. We saw a rebound in EMEA, where constant currency growth improved to 5.1%, and we drove continued steady performance within Asia, where currency-neutral revenues grew 5%.
Turning to some other key metrics. In addition to delivering robust constant currency revenue growth, which we were able to achieve even when faced with a difficult prior-year comparable, I was also pleased to see the year-over-year and sequential expansion in both our adjusted growth and operating margins. During the quarter, our adjusted growth margin reached 58.6%, which was an increase of 160 basis points as compared to the prior year and 90 basis points sequentially. Our adjusted operating margin totaled 27%, which was an increase of 100 basis points as compared to the prior year and 180 basis points sequentially. Turning to the bottom line. Thanks to stronger-than-expected revenue and margin performance, coupled with additional benefits from a further reduced tax rate, our adjusted earnings per share during Q3 was $2.97, which represents an increase of 17.9% over the third quarter of 2018.
When normalizing for the impact of FX, Q3 adjusted earnings per share grew approximately 19%. In summary, we are very happy with our better-than-expected revenue performance, as during the third quarter, our global vascular access, interventional access, and interventional urology businesses outperformed as compared to our prior expectations. The strong year-to-date results, coupled with our outlook for the fourth quarter, has led us to once again increase our full-year 2019 guidance for constant currency revenue growth from a range of between 7.5% and 8% to a new range of between 8% and 8.25%. This updated guidance takes into consideration the better-than-expected performance from our vascular and interventional access product lines. This is largely offset by an issue that recently arose relating to the suspension of operations at a third-party sterilization partner site in Georgia.
This sterilization issue is causing a disruption of selected Teleflex products, mostly within our surgical and OEM businesses. We are working diligently to resolve this issue to ensure patients and their healthcare providers have access to effective products. Importantly, the UroLift product is not one of the Teleflex products that is impacted by the sterilization disruption issue. Additionally, our increased constant currency revenue growth guidance range also assumes an improvement in full-year UroLift revenue growth, as we now expect UroLift revenue to increase 40% as compared to our prior expectation, which called for full-year revenue growth of approximately 35%.
Today, we are also reaffirming our full-year 2019 adjusted growth and operating margin guidance ranges, as well as narrowing our adjusted earnings per share guidance from a range of between $10.90 and $11.10 to a new range of between $11.05 and $11.10. Our updated revenue and adjusted earnings per share guidance take into consideration the sterilization issue I just mentioned, as well as worsening FX environment since we last reported earnings. Indeed, if we reported our full-year adjusted EPS on a currency-neutral basis, our year-over-year EPS growth, assuming the midpoint of our updated range, would equate to a growth of approximately 16%. With that as an overview, let's now review Q3 revenue in more detail. I will begin with a review of our reportable segment revenues, and unless otherwise noted, the growth rates I will refer to are on a constant currency basis.
The Americas delivered revenues of $374.5 million, which is an increase of 10.7%. This was driven by our interventional urology, interventional access, and vascular access product categories. Moving to EMEA. It reported revenues of $140.5 million, which represents an increase of 5.1%. On our last earnings call, we stated that we expected to see an improvement in the performance of our EMEA business, and that is what occurred, as during the quarter, the growth in this part of the world was led by our interventional access, vascular access, and urology products. Turning to Asia. Revenues totaled $77.9 million, which is an increase of 5% as compared to the prior year period. From a product standpoint, growth was strongest within our surgical and vascular access categories, while from a geographic perspective, our business in China grew 11.5%. This was somewhat offset by weakness in Australia and New Zealand.
Lastly, our OEM business reported revenues of $55.4 million, which represents an increase of 1.9%. You may recall on our last earnings call, we said that we expected our OEM business to show a flattish growth within the quarter due to a difficult comparable as well as timing of certain orders, and that is what occurred. In fact, during the third quarter, this business did a little bit better than we previously expected. Let me move to a discussion on our revenue by global product category. Like my comments regarding our reportable segments, my comments regarding our global product category growth will also be on a constant currency basis unless otherwise noted. Starting with vascular access. Third-quarter revenues increased 6.1% to $148.7 million. This was driven by strong growth in PICC and visual navigation products, as well as growth in sales of CVCs. Moving to interventional access.
Third-quarter revenue was $106.9 million, which is an increase of approximately 8.2%. Like the results we delivered in the first half of the year, the strength in this business during Q3 was broad-based, with growth in complex catheters, biologics, conventional intra-aortic balloons, and closure products. To anesthesia. Quarter three revenue was $87.1 million, which is an increase of 1.5%. The increase here is primarily driven by sales in endotracheal tubes, atomization, and laryngoscope products. Shifting to our surgical business. Revenue increased 5% to $92.6 million, driven by sales of ligation clips and surgical instruments. Moving to interventional urology. Revenue increased a robust 50.4% to $73.6 million.
While the growth rate this quarter is somewhat inflated due to the easier comparables because of the voluntary product withdrawals we had last year, our sales force continues to make excellent progress driving physician adoption of the UroLift System, and we remain on track to train a total of over 450 new urologists during 2019. Transitioning to UroLift 2. We continue to expect to begin the rollout of the UL2 during the fourth quarter, with a full conversion of the U.S. physician base from UL1 to UL2 expected in 2021. Finally, since OEM was covered in our segment review, let me summarize third-quarter revenue for the businesses within our other category, which consists of our respiratory and urology care products. Revenues here were down 0.4% on a constant currency basis, totaling $83.9 million.
This was driven by declines in sales of our respiratory products, somewhat offset by an increase in sales of our bladder management products. That completes my comments on quarter three revenue performance. Next, I would like to briefly discuss some important clinical publications and awards concerning UroLift. First, during the month of August, the UroLift System won the 2019 James & Wells Medical Technology Association of New Zealand award. This award recognizes products that significantly contribute to improving patient outcomes by enhancing their quality of life, as well as exhibiting technical excellence and innovation across the medical device sector. This achievement is yet another example of the UroLift System superiority as compared to alternative methods to treat BPH. It should help us as we continue to try to expand the adoption of the UroLift product within the New Zealand market.
Lastly, during September, the Urology Times showcased the effectiveness and benefits of the UroLift System, noting that due to shortcomings in TURP and medications, the advancement of the minimally invasive surgical technologies category remains imperative for men seeking an effective treatment option for BPH. In the article, UroLift scores favorably, with patients reporting rapid recovery and symptom relief, preserved sexual function, low catheterization rates, and low complications. That completes my comments on UroLift. Let me now provide a brief update on another product we are enthusiastic about, MANTA. For those who may not be aware, MANTA is the first commercially available biomechanical vascular closure device designed specifically for large bore femoral arterial access site closure. It helps reduce time to hemostasis without pre-closure, delivering reproducible results that help clinicians achieve successful closure. During TCT, there were several presentations regarding MANTA, as enthusiasm continues to grow for this device.
Our initial limited market release and price discovery activities remain very much on track. While account penetration, reorder rates, and initial adoption in the U.S. have been strong, full market release for this product in the U.S. will occur in January of the new year, and we fully expect MANTA to be a nice contributor to our revenue growth rate in 2020 and beyond. In closing, I would like to reiterate how pleased we are with our performance during both the third quarter and the first nine months of the year. Revenue growth continues to exceed our expectations, driven by a broad spectrum of products and geographies, which led us to increase our full-year revenue guidance for the second consecutive quarter.
In addition to continued top-line strength, during the quarter, we achieved significant year-over-year and sequential growth and operating margin improvements. We expect that to continue during the fourth quarter. As such, we are narrowing our full-year adjusted earnings per share guidance to a range of between $11.05 and $11.10. Before I turn the call over to Tom, I'd like to take a moment to reflect on our long-range plan. We are currently nine months into a three-year journey. Our revenue growth has exceeded our initial expectations. Our margin targets remain very much on track. We feel more confident than ever in our abilities to achieve the goals laid out in May of 2018. I would like to thank our employees and management teams for their excellent execution in the first nine months of our LRP. For their continued focus on reaching our goals.
That completes my prepared remarks. I would now like to turn the call over to Tom for a more detailed review of our third quarter financial results and full year 2019 financial guidance. Tom?
Thanks, Liam. Good morning, everyone. Given the previous discussion of the company's revenue performance, I'll begin at the gross profit line. For the quarter, adjusted gross profit was $380 million, versus $347.3 million in the prior year quarter, or an increase of approximately 9.4%. Adjusted gross margin increased 160 basis points versus the prior year period, reaching an all-time high of 58.6%. The expansion in adjusted gross margin primarily reflects increased sales volumes, a favorable sales mix of higher-margin products, and benefits from cost improvement programs. Partially offsetting these gains were negative impacts from incremental tariffs. Adjusted operating profit was $175.3 million, as compared to $158.7 million in the prior year, or an increase of approximately 10.5%. Adjusted operating margin increased 100 basis points versus the prior year period, reaching 27%, also an all-time high. As the year has progressed, we've realized robust sequential expansion of adjusted operating margin.
The first quarter adjusted operating margin was 23.7%, followed by 25.2% in the second quarter, and now 27% in the third quarter. We expect further sequential expansion in the upcoming fourth quarter. The trend of strengthening operating margin is largely the result of expansion in the gross margin, timing of investment spending, and volume leverage. Continuing down the income statement, net interest expense decreased to $19.1 million, and this compares to $26.9 million in the prior year quarter. The decrease in interest expense primarily reflects the impact of our cross-currency swap agreements. Moving to taxes. For the third quarter, our GAAP effective tax rate was -132.3% and reflects a discrete tax benefit of $129 million, resulting from a non-U.S. legal entity restructuring that eliminated the requirement to provide for foreign withholding taxes on the future repatriation of certain non-permanently reinvested earnings.
On an adjusted basis, our third quarter tax rate was 10.3% as compared to 10.7% in the prior year period. That takes me to our third quarter 2019 adjusted earnings per share, which was $2.97, or an increase of 17.9% as compared to prior year. We are encouraged by the strong earnings generation stemming from upper single-digit constant currency revenue growth combined with margin expansion. Turning now to select balance sheet and cash flow highlights. During the first nine months of 2019, cash flow from operations totaled $289.2 million, compared to $302.9 million in the comparable prior year period. The decrease in cash flow from operations is primarily attributable to contingent consideration payments of $26.1 million and the net unfavorable impact from changes in working capital, driven primarily by increases in inventory.
The increase in inventory was in part a tactical move designed to enhance customer service by increasing safety stock levels on select products. Turning now to debt and leverage. During the third quarter, we reduced debt outstanding by approximately $132 million, resulting in quarter-ending net leverage of approximately 2.45 times. Today the company issued a notice of redemption to holders of outstanding $250 million 5.25% senior notes due in 2024. Pursuant to the notice of redemption, the 2024 notes will be redeemed on November 15th at a redemption price equal to 102.625% of the principal amount outstanding, plus accrued and unpaid interest. This completes my comments on the third quarter results. Now I'll move to 2019 guidance updates.
Given our performance for the first nine months of the year and our expectation for the fourth quarter, we are increasing our full-year constant currency revenue growth guidance from a range of between 7.5% and 8% to a revised range of between 8% and 8.25%. As a result of prevailing foreign exchange conditions, we now expect that foreign exchange will result in a 225 basis point headwind to full-year revenue as compared to our previous expectation of 150 basis point headwind. As such, we are lowering our as-reported revenue growth guidance from a range of between 6% and 6.5% to a revised range of between 5.75% and 6%. We are reaffirming our previously provided adjusted gross and operating margin guidance ranges.
Given the favorable trend in LIBOR rates versus expectations and a modest fourth quarter benefit from the redemption of our 2024 notes, we are reducing our estimate for full-year net interest expense to approximately $80 million. Turning to taxes, we now anticipate that our full-year adjusted tax rate will fall within a range of 12.25%-12.5%. This is down from our prior expectation of being on the lower end of the 14%-14.8% previously provided guidance range. From a share count perspective, we continue to expect full-year weighted average shares to be approximately 47.1 million. That takes me to our GAAP and adjusted earnings per share ranges. On a GAAP basis, given the third quarter discrete tax benefit and strong financial results, we are increasing our full-year guidance from a range between $6.82 and $6.94 to a new range of between $9.85 and $9.90.
On an adjusted earnings per share basis, we are raising and narrowing our guidance from a previous range of between $10.90 and $11.10 to a revised range of between $11.05 and $11.10. Included in the updated adjusted earnings per share guidance range is a $0.07 estimated earnings impact stemming from the closure of a third-party sterilization facility. Also included in the adjusted EPS guidance range is our current foreign exchange assumption of a $0.41 full-year headwind versus our previous expectation of a $0.35 foreign exchange headwind. If we reported our full-year adjusted earnings per share on a currency-neutral basis, our year-over-year EPS growth, assuming the midpoint of our updated guidance range, would equate to approximately 16% growth, which serves to reinforce the strength of our 2019 financial leverage. In closing, we are very pleased with the financial performance achieved in the first nine months of 2019.
The acceleration in revenue growth is broad-based, both from a geographic and a product standpoint. Despite a less favorable currency environment, we have increased our earnings estimate while also funding incremental investment. That concludes my prepared remarks. At this time, I'd like to turn the call back over to the operator for questions and answers.
Thank you. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Our first question comes from David Lewis with Morgan Stanley. You may proceed with your question.
Good morning. Thanks for taking the questions. Maybe just two for me here. First, Liam, just kind of a broad commentary on the LRP and then maybe Tom, a couple questions for you on the fourth quarter. Liam, look, 6%-7% with the LRP guidance perspective you offered, you're delivering kind of one point above the high end of the range here, closer to 8%. I think about next year, you've got MANTA, you've got some RePneu as well. As I think about next year, is the right way to think about 2020, you're going to deliver the LRP around 6%-7%? Given those product launches, you can do a little better? I had a couple follows for Liam. I'm sorry, for Tom.
Yeah, sure, David. Based on the LRP, obviously we get the 2020 guidance when we report our Q4 earnings in February. I will comment, as I said in my prepared remarks on the LRP, we couldn't be happier with the progress we're making. We're only nine months in, but within the first nine months of the year, our revenue growth has been incredibly solid.
Year to date through the nine months, we've grown at 8.4%. We've been able to take up our revenue guidance twice within the year. We feel really confident. Obviously, MANTA will come into play in 2020. We also, in 2021, will have the UroLift in Japan that wasn't in our previous guidance. Regarding the revenue line for our LRP, we feel extremely confident in the goals that we set out in May of 2018. It's not just on the revenue line. As we've gone through the year, we've been able to demonstrate to the external community that our margin expansion to the point where, in this quarter, we've hit an all-time gross margin high for the company and an all-time op margin high for the company, showing significant leverage in the income statement.
While at the same time, being able to invest in some of our businesses, in particular the UroLift product, as we continue to invest behind the sales force there, and we'll continue to do that also in Q4.
Okay. Very helpful, Liam. Tom, just two for you. Just first on growth into the fourth quarter. Guidance implies about a point or two of momentum acceleration. What drives the confidence to finish the year that strong? On earnings, I just wonder if you could help us with the reconciliation. It looks like a conservative earnings number implied in the guide for the fourth quarter, and there's a lot of moving pieces between tax, interest, sterilization, and margin improvement. Could you just bridge us a little bit on sort of the components that drive positive and negative tailwinds into the fourth quarter? Because, as I said, it looks a little conservative. Thanks so much.
David, we'll get Tom to cover the EPS, and I'll cover the revenue.
Okay.
On the revenue side, first of all, you have the impact of the sterilization issue. First of all, let me just start by saying that with the sterilization capacity issue, it is contemplated in our updated guidance and contemplated in our raise in our revenue. We do think it's going to have an impact in the fourth quarter of about $8.7 million. Tom will cover the EPS impact, but as he said in his prepared remarks, it's about $0.07. That's about 40 basis points full-year headwinds based on that sterilization issue. Regarding your question, David, on headwinds and tailwinds, obviously we have an extra billing day in the fourth quarter. The way I think you should look at it is the impact from the sterilization issue is pretty much washed with the billing day in the fourth quarter.
If you take the midpoint of our guidance range in the fourth quarter, it would imply that we're planning to grow in the mid-7s in Q4 in order to get to the midpoint of our updated guidance, and we feel really confident on that. That's again against a tough comp. What I really like about the setup for Teleflex is that we're able to put forward a growth rate in the mid-7s up against a tough comp of 7.7% in the prior year. Also in this quarter, if we do a pro forma on the prior year, the growth was 8.2%, and we were able to grow 8% on that. Those are really the headwinds and tailwinds. FX can go either way. I'll let Tom now address the EPS question.
If we look at our fourth quarter EPS, I'd say that given the midpoint of our guidance, we're looking at 15%-16% EPS growth. We look to put up another very solid quarter. In terms of just the third quarter performance, we came in favorable versus our internal expectations, favorable versus consensus by $0.22. As an outcome, we raised our guidance at the midpoint by $0.075. In addition to that $0.075 guidance range, we have also included in our guidance $0.06 associated with a stronger headwind from foreign exchange and a $0.07 adverse impact from the closure of the sterilization facility. As we look at the fourth quarter, we have a couple of items that are impacting us negatively.
Overall, we're pretty excited about the strength of the performance as we finish out the year. As mentioned, we're expecting earnings growth kind of in the 15%-16% range.
David, I just want to add one comment on to that from what Tom said. We are also investing behind UroLift in the fourth quarter a little bit heavier than we'd anticipated. We had anticipated some new sales hires that would come in in Q1. We're actually going to bring in those additional headcounts in Q4 so that we hit the ground running in Q1 of next year. We're also anticipating doing additional DTC in Q4. Again, what I really like about the setup is we're able to call up our earnings guidance, invest behind the growth drivers in the business, and offset some bad guys, which the sterilization is. All in all, we couldn't be happier with the performance of the business for the first nine months, and our guidance would reflect that.
All right. Thanks for the clarity, guys. Great quarter.
Thanks, David.
Thanks, David.
Thank you. Our next question comes from Larry Keusch with Raymond James. You may proceed with your question.
Perfect. Good morning, everyone. One for Liam and then one for Tom. Liam, maybe on UroLift, obviously the product continues to be strong and is outpacing the expectations that you have set through the year. Perhaps you could talk a little bit as we're, again, moving into this phase into the fast followers, how you're kind of thinking about average procedures per physician and how that's trending, and sort of where the sales force is really focused on making sure this continues to gain traction.
Thanks, Larry. We had a resounding quarter for UroLift. It grew at 50.4%. Through the first nine months of the year, it's growing at around 45%. You're right, the product is exceeding all our internal expectations. The third quarter had a slightly easier comp because we had the voluntary withdrawal of the product in Q3 last year. That has definitely helped this quarter. Notwithstanding that, we're incredibly focused on making this product the standard of care. Regarding the physicians, the business is incredibly stable. The average physician continues to do about four procedures a month. We continue to develop champions, and we continue to make this product the standard of care. I think the number of publications obviously will help. The DTC helps.
I think having a sales force, Larry, that wakes up every day and only thinks about one product is an obvious advantage as we continue to drive accelerated performance. As I said in my prepared remarks, I think we will definitely achieve, if not modestly exceed, the 450 clinicians we had targeted to train this year. As we move from the early adopter to the fast follower, what has been very encouraging for me, in particular, is that the growth has not slowed as we move to that second phase of clinician. Right now, we are moving into the fast follower. Our thought has always been that it will take a little bit longer to bring that clinician on board. That clinician really requires their peers to be using the product. They require very strong clinical data.
They require real-world data that is very aligned to the clinical data, and they need broad coverage to ensure that they're going to get paid for the procedure. I think as we sit here right now, moving to the fast follower, all four of those boxes are ticked for Teleflex, Larry.
Okay. Yeah. Perfect. That was helpful, Liam. I guess the question here is just want to take your temperature on your confidence in the margin expansion actually through the LRP, not for 2019. What gets you there, and how do we think about the gating in 20 and 21 for that operating margin expansion? Just want to think about how we're calibrating for that LRP. Lastly, just on that, given that the sterilization is a bit of a headwind, what sort of feedback are you getting from your sterilization provider as to when they think they might be able to resolve some of these issues?
Okay. Let me take it in chunks, Larry. Let me start with the cadence of margin in our LRP. Let me begin by saying, as I said in our prepared remarks, I'm more confident than ever in our margin expansion within our LRP. As I said, we've hit an all-time high on both growth and operating margin. Where is the margin going to come from? Well, about 60% of it is going to come from mix. Our philosophy in Teleflex is that not all growth is equal, and where we're growing our businesses is in interventional urology, interventional access, Asia, and within our vascular business, in particular, PICC and Vidacare. All of those are accretive to our margins. If you look at where our investment goes, Larry, it goes behind those businesses.
You can see for the first nine months of the LRP, those are the businesses that are performing exceptionally well. Then add in OEM, which has had a great performance. With regard to the cadence, so that answers your question on our confidence, Larry. With regard to the cadence, what I would expect, and I don't want to get into 2020 guidance, as you can appreciate, but what I would expect, Larry, is that we would see more margin expansion in 2020 than we've seen in 2019. You would expect to see further margin expansion into 2020 and then another uptick in 2021. Rest assured, there will be an uptick in both years in our margin expansion in 2020 and 2021. That would be our expectation. Then onto your question on the sterilization.
We began a number of weeks ago when this issue arose in the Atlanta area, Larry, to begin to requalify other sterilization cycles in other areas, and our partner has been working very much with us to help us to do that. They don't have clear line of sight as to when that facility may be reactivated. I think that they are working with the Cobb County officials. I think that they are working with the EPA. Right now, we don't have line of sight. Our expectation is that we will have other cycles revalidated by quarter one, and we would envisage that that will allow us to continue to supply product into the marketplace at that time.
I think what has been helpful is some of the FDA statements that have come out. The FDA put out a note last week stating that more than 20 billion devices sold in the U.S., so that's billion, Larry, are sterilized with ethylene oxide, accounting for almost half of all medical devices. I think they also said that it's important to note that there is no readily available process or facilities that can serve as a viable alternative, especially when you're dealing with plastics products. I think that was also incredibly helpful.
Our associations, in particular, AdvaMed and MDMA, continue to work with these local government authorities to educate them on the importance of having sterilized products in the marketplace because it could have a much bigger patient risk than the ETO environmental issue, which from what I can see are very compliant to the Clean Air Act.
Okay, perfect. Thanks for the very detailed answers there, Liam. Appreciate it.
Just to add onto that, Larry, as we look at 2019 margin expansion, we believe that the business is performing incredibly well. Is the business creating financial leverage? Absolutely. However, there are three factors that limit the printed result on margin expansion, and those are FX, that's been about a 40 basis point headwind in the year. Tariffs is another 30. Then we've made a number of investments for the future, which we believe will benefit us in the longer term. But this year, we've got expense with no real benefit, and those include the market development in Japan for UroLift, the pre-launch U.S. investment for MANTA. We've got an acceleration of the UroLift sales hires into fourth quarter now, so that's another 65 basis points.
If you think about it, we've got about 140 basis points of factors that are impacting this year that we believe will provide benefit for the future or perhaps go away in the future. The underlying operating performance of the business is very solid this year, being masked somewhat by FX tariffs and some of the investments we've chosen to make.
Great. Thanks for that color.
Yep.
Thank you. Our next question comes from Richard Newitter with SVB Leerink. You may proceed with your question.
Hi, thanks. I have two. Congrats on the quarter. The first on sterilization. I just want to ask, can you quantify or give us a sense as to what your expectation is for expenses or impact to carry over into 2020? Should we be dialing in, as a placeholder, an impact in the first half of next year? $0.07 it's a pretty big impact. I know these things take some time. Thanks for the color earlier, that's my first question. How do we think about this impacting 2020?
Richard, I wouldn't expect a material expense in 2020 in relation to this. What we are doing is working with our partner to validate another sterilization cycle, either in another geography or in another site. I wouldn't anticipate a significant uptick. The $0.07, quite frankly, Richard, is a little bit less than I would normally expect. If you get $8.7 million, I'd expect $0.08-$0.09 of an impact normally. Because of the margin profile, in particular of the products in the other category, that helps us minimize the EPS impact. That's what gets it down to that $0.07. Obviously, we have been working to substitute products as well in order to minimize the impact. As I said in my earlier comment, we anticipate having cycles being validated early in 2020. We're working towards that.
Okay, thanks. Liam, I appreciate the cadence of achieving the margin expansion over the long range plan. It's more margin expansion in 2020 versus what we saw in 2019, and then more in 2021 versus what you'll see in 2020. If I could maybe just throw out what the consensus range for 2020 is. It's between 100 to 200 basis points of margin expansion anticipated for next year, and then something north of 200 implicitly baked in to get to your long range plan. I guess, could you just give directional color? Is that an okay place to be for The Street? Do you feel comfortable generally, as a framework for thinking about the cadence, with where the street is? Thanks.
Thanks, Rich. As you can probably appreciate, I can't comment on 2020 guidance at this stage. I think that as we look at it, I reiterate what I said. There will be a pickup in margin expansion in 2020, and there will be a further pickup in op margin. I would expect, let me try and help you here. I expect more op margin than gross margin expansion in 2020. Maybe that would help you frame it in line with what you said. It's hard for me to comment on 2020 and 2021 until I get to our Q4 and 2020 guidance, Richard, I'm sure you can appreciate. We're very confident in getting to 60%-61% by 2021, and we're very confident on getting to 30%-31% by 2021. I hope that will give you some flavor.
Just to throw in a couple factors that we've got out there happening in 2021 and why that year steps up so much more than 2020. First is the conversion of the UroLift 2 we expect to complete by 2021, and that's going to drive actually a pretty significant amount of margin expansion. Also just on the cadence of our footprint projects, we will have meaningfully more savings in 2021 than we will in 2020. Those are two factors that serve to really drive that 2021 margin expansion up more than the other years.
Okay. Thanks a lot.
Obviously, the reduction in some of the investments that we put in this year helps 2020.
Yeah. Thanks, Rich.
Thank you. Our next question comes from Shagun Singh with Wells Fargo. You may proceed with your question.
Hey, guys. Thank you so much for taking the questions, and congratulations on a great quarter.
Thank you.
Liam, The Street appears to be modeling about 50-150 basis points contribution from MANTA, which is on top of the LRP. Is that reasonable? Are you expecting pent-up demand? If you can give us your take on 2020. Also year to date core is tracking to about 5.4%, and core ex UroLift is tracking to 5.4%, and then UroLift is tracking to about 3.5%. How should we think about these two buckets in 2020? I have a follow-up.
Yes. Let me deal with the latter half of your question first. If you take the midpoint of our updated guidance, it's about 8.125%. Our expectation is that UroLift will add around 3% and the rest of the business will add around 5%. That's what gets us to that 8.125% at the midpoint of our range. To address your question with regards to MANTA, as I said in my prepared remarks, we continue to make excellent progress with the U.S. LMR in the quarter. We're getting very positive feedback, and we've got a very high reorder rate from the testing sites. That to me is a real positive.
We will continue with the LMR in Q3. As I sit here today, I can tell you we are pretty much finalized on our pricing strategy, and we will go to full market release on January 1st of 2020. With regards to its impact on the revenue in 2020, obviously, I expect it to be positive. Again, like my comments to many of your colleagues, unfortunately, I can't start to give guidance for 2020. I will do that when we announce our quarter four results and our guidance for the year. I can tell you, Shagun, that it's gone better than expectations. Again, it all comes back to patient outcomes and clinical data. This product has robust clinical data showing 70% reduction in major vascular complications, and mean time to hemostasis going from 6-10 minutes down to 23 seconds.
The assurance of closure is what we're discovering is really important to the sites, that they know that they'll close it first time every time. It's very positive. It's going well, and it'll be a driver in 2020.
Thank you so much for that color. Just as a follow-up, I wanted to focus on UroLift in Japan, where you're waiting for reimbursement. How are you preparing for the launch in 2020, and how quickly are you able to commercialize once reimbursement becomes effective, which is likely on April 1st? Thank you so much.
We expect to get reimbursement in the latter half of 2020, and we expect to be generating revenue in 2021. You're absolutely correct there. What we are doing in preparation of that, and this was part of the investments that we pulled forward into 2019, we have got market development specialists on the ground working with the key opinion leaders and urologists in order to ensure that they are aware of the product, that they are assisting in communicating with the authorities that the need for this product is in the marketplace. That is an ongoing process and will continue during 2020 until we get the reimbursement in the latter half of 2020 and generate revenue in 2021.
I would reiterate again, Shagun, that the revenue for UroLift was not initially in our LRP because we didn't anticipate having approval in Japan in 2021, which now we expect. We do expect revenue in 2021, which wasn't in our original plan.
Thank you.
Thank you very much.
Thank you. Our next question comes from Matt Taylor with UBS. You may proceed with your question.
Thanks for taking the question. I was hoping you might give some color on the UroLift patients, if you have any view on whether the TAM is changing here. Are you still seeing mostly drug dropout patients be treated, or is that actually expanding into other patients? Can you comment on the competitive environment? Are you seeing other MIS treatments also pick up, and what's happening with surgery? Maybe just comment on all of those dynamics.
Yes. The TAM, we don't believe has changed. We still believe that the U.S. market is a $6 billion market if you take the drug dropout category. The best data we have was during the LIFT study, which showed that almost 70% of our patients came from the drug or drug dropout category. Anecdotally, we don't think that has changed at all. That's where the majority of our patients come from. With regards to do we see a drop-off in surgical procedures? No, I wouldn't expect to, Matt, because as we promote the UroLift product and as doctors move more and more patients into treatment for BPH with the UroLift product, they will also draw from patients that would traditionally have had a TURP or had a surgery.
Also we're adding to that pool of patients because as they examine the patient, they may find that patient has got an ongoing disease of the bladder, or they may have a prostate. In 5% of cases, the prostate is too large for a UroLift, and those patients will be added to the surgical pool. As we draw from the surgical pool, we're also adding to the surgical pool. Therefore, we've never expected that TURPs would go down, for example, as UroLift goes up. The third part of your question, Matt, I think was on the competitive landscape. We haven't seen any new technologies come to the marketplace. The technologies that we see out there are the traditional ones. A TURP more or less is done with steam rather than with just a different form of ablation.
We continue to focus on the patient outcomes because we believe that a patient will opt for a procedure that they can go in on a Friday, have the procedure done, won't wear a catheter, no sexual dysfunction, immediate relief, and you could be back sitting at your desk on Monday morning rather than an invasive surgical procedure that gives you a risk of sexual dysfunction, almost guarantees you wearing a catheter, and in some instances, that catheter placement is for a period of time. I still believe that the real-world data on UroLift is so compelling compared to the real-world data on any other technology out there because our real-world data is showing better results than the clinical data, whereas with other technologies, we've seen worse results from the real world as compared to the clinical data.
Thanks, Liam. That's good color. I just had one follow-up, which is, you're looking probably a couple of years out at China. What do you think the reimbursement and the addressable market could look like there?
The Chinese market is a significant market from the population standpoint. We are currently working on sizing that, and we'll be able to give some more details as we enter that market space. I do think that we have an advantage in China insofar as that we have a very robust call point in China into the urologist. The reimbursement world in China, the Chinese market, Matt, is a pay-for-play. It's an out-of-pocket and always has been, not just for this procedure, but for every procedure. It is an out-of-pocket experience for the person that has the procedure. We are building our dossier for the submission of registration of the product to the Chinese authorities, and we would anticipate at this stage, sometime late in 2021, that we would be in a position to get reimbursement if they don't require a clinical study.
If they do, that will push that into 2022, Matt.
Okay, great. Thank you.
Thank you. Our next question comes from Raj Denhoy with Jefferies. You may proceed with your question.
Hey, this is Anthony for Raj. Congratulations on the quarter. I actually have a couple on MANTA and then one just on the balance sheet and M&A. MANTA, can you maybe just recap how you're looking at the market? There's trending now, obviously, the TAVR market is proving to be more expansive with the low-risk indication. I think this year we're looking at 90,000 procedures. The technology is also used in EVARs. In the limited market release, how are you seeing MANTA being used in those two end markets? How are you seeing pricing shake out versus the competitor? Ultimately, what do you think your penetration can be in these two end markets? I'll have a follow-up. Thanks.
First of all, let me size the market. We sized the market at $200 million-$300 million. That is before the expansion into lower TAVR procedures. That could probably add another $20 million or $30 million to our TAM, potentially. What we're seeing in the limited market release is the majority of the procedures that it's being used in is in TAVR. We have focused on the TAVR centers because they're larger, they're faster-growing, but obviously that interventionist that does the TAVR does the EVARs as well. Obviously we're picking up EVAR procedures. Even, it's also being used with the Impella in a number of cases. From a pricing perspective, we have now got a much better understanding of the relationship between price and volume for the bigger centers versus the smaller centers.
We have our pricing strategy pretty much complete in preparation for a January 1st full launch of the product. We feel confident that we have pricing nailed down in order to ensure that pricing won't be a barrier to adoption based on volume. You'll have to excuse me, Anthony, if I don't go into details on the pricing. I'm sure our competitors listen to the calls the same as anyone else. I don't want to share that for competitive reasons. I can tell you, Anthony, that we feel incredibly confident in our pricing strategy, and we believe that it will not be a barrier to adoption.
Even at the lower end of the pricing strategy that we have for significant volume, it is still accretive to Teleflex, and this product will be an accretive product to Teleflex gross margin and a driver for growth over the long term.
Fair enough. Actually, the follow-up will be instead of M&A, actually intra-aortic balloon pumps. Your competitor had a recall last quarter. It looks like the business over at Teleflex benefited from that. It seems that that was the case this quarter. Just an update on intra-aortic balloon pumps and how that dynamic is playing out. Thanks again and congratulations.
Yeah, thank you very much. The intra-aortic balloon pump recall by the competitor, we won't see a benefit to that, Anthony, in all fairness. What customers will tend to do, because it's capital equipment, they'll postpone the purchase for a period of time. Our growth is purely down to taking share from that same competitor. The longer the recall goes on, you would expect that in Q4, if it still hangs out there a Q1, we will get a benefit then. Our growth has been driven by us taking share from that competitor. Our balloon pump business is growing in the very high teens in that area. We're very confident in our business. I will tell you that we are taking share. We have a new pump on the market. It's doing exceptionally well. We're very happy with that business.
We will start to see the benefit, I believe, of the recall the longer it goes on, and in particular, as we get into this quarter we're in now and into the coming quarters.
Thanks, Liam.
Thanks, Anthony.
Thank you. Our next question comes from Brian Weinstein with William Blair. You may proceed with your question.
Hey, guys. Thanks for taking the questions. The U.S. number, or the Americas numbers, was obviously very good. We have seen, though, in the past, sometimes you get hit by distribution patterns where things get a little bit ramped up and then have to get pulled back in the channel. Question is, are you seeing anything that suggests there may be any overstocking somewhere and we may need to think about that going forward? In particular, we're hearing about flu-related products at distribution seeing a bigger bump than usual heading into the season. Can you talk about any impact that you saw in any of that? Thanks.
Absolutely, Brian. I think the way I look at it is, first of all, we saw a modest de-stocking by distributors within the third quarter. That's in line with our expectation. You normally expect to see that. What's more encouraging for me in the key North American market is the revenue I recognize is the revenue I sell into the distributor. If I look at my [tradings] and if I look at the end customer demand, my end customer demand is actually greater than what I'm selling in and recognizing through the distributors. That gives me a certain level of confidence that there is not an issue with regard to de-stocking that I should be worried about. In particular, since I've seen modest de-stocking in the third quarter.
Having said that, I don't have the best visibility into it, but I think the portfolio we've built, Brian, is one that has protected us against this. In the past, half of our business would have gone through these box moving distributors, whereas now only a third of our business. The happiest moment for me, I got to tell you, was when we had some de-stocking in Q1 and restocking in Q2, and the investment community hardly even noticed it. That's the type of portfolio we're trying to build in Teleflex, and that's the level of execution that we're trying to deliver in Teleflex.
I got to say, the other bit of happiness that I feel is that this is the fifth quarter back to back that we have been absolutely consistent in our delivery on almost every line on our income statement, revenue, margins, and earnings. The level of performance by our teams out there is at a very high level.
Great. Thanks for taking the question, guys.
Sure, Brian.
Thank you. Our next question comes from Matthew O'Brien with Piper Jaffray. You may proceed with your question.
Hi, it's Adam on for Matt. Congrats on the quarter, and thanks for taking the questions.
Thank you.
I wanted to ask about capital allocation over the next 12 months for the company or so, just including the potential for M&A. Are you seeing attractive assets, or are multiples still too steep at this point? I had a follow-up.
Okay, Adam. First of all, let me start with our leverage. Our leverage is about 2.45 times at the end of this quarter. We definitely have capacity. Multiples have not been the issue for us in the assets we look at. The assets that we have traditionally focused on were always high-quality assets. The multiple expansion, at least what I'm seeing out there, has come in lower quality assets, which were never the assets that Teleflex have been interested in. Our preferred use of capital is to continue to do M&A. We are very active in the marketplace looking at assets. I guess the easiest way to tell you that I'm spending more of my time on M&A in the last number of months than I have in any time since I took over as CEO.
We continue to see attractive assets in the space that we look. I think what gives us an advantage in this area is that we're looking pretty broadly. We're looking in men's health, we're looking in vascular area, we're looking in the surgical area, we're looking in the OEM area, we're looking in the anesthesia and emergency medicine area. Of course, we never stop looking in the interventional cardiology radiology area. We're looking at a broad spectrum. The assets that we look at, we think we'd be able to care about value even in the current environment. Rest assured, we are active and busy.
That's very clear. Thanks. If I can squeeze one more in on the surgical side. Can you update us on the rollout of Percuvance? I know that's been in a limited launch phase. Can you just talk about the clinical feedback from clinicians and when we should expect that to progress to a more full launch? Thanks for taking the questions.
Yes, thanks. We're continuing with the limited market launch. As I've said a couple of times, Percuvance is really a show-me product. We want to finish the limited launch. We have some clinical work that we want to finish as well before we get too excited about the product. Rest assured, as we get to 2020 guidance, we'll give a further update.
Appreciate it. Thank you.
Thank you.
Thank you. Our next question comes from David Turkaly with JMP Securities. You may proceed with your question.
Hey, great, thanks. You may have mentioned this, I apologize if you did, but that sterilization plant, when exactly did that occur, and what was the cause of it going offline or closing?
Yes. Dave, this has been pretty well documented within the media. It became, I believe, an issue for the local Cobb County with regard to permits. The company is working with the local Cobb County. The environmental group, the last I saw, had put out a notice that the company was compliant to all the relative standards, and they're working now with Cobb County trying to reopen the facility. As I said earlier, they don't have any line of sight as to when they will be able to reopen the facility, but we have transitioned products to other qualified sterilization cycles, to minimize the impact down to that $8.7 million in revenue and $0.07 in EPS.
Got it. Thanks. Last one, just quickly, the $130 million tax benefit. You said something about OUS, I think, restructuring. I'm sure it's a one-time, are there other opportunities for things like that? Is that just sort of something we shouldn't expect to see again?
That is a one-time benefit that'll occur this quarter and this quarter only. I wouldn't count on that in the future. There may be some other restructurings out there that could bring on a similar benefit. However, I wouldn't count on that. There's no line of sight right now currently to doing anything else along those lines.
Great. Thanks.
Thank you. Our next question comes from Mike Matson with Needham & Company. You may proceed with your question.
Yeah, thanks. Just back to the sterilization issue. I understand you're trying to address the problems with the current products that are exposed. Just from a risk mitigation perspective, is there anything you can do with other products at other facilities to try to prevent this type of impact in the future? Or is it just not possible?
Good question, Mike. Well, one thing that we have done is we have looked at comparable cycles, validated additional cycles in a risk mitigation sense. Also we have on our major codes, as Tom mentioned in his discussion around our increase in inventory, part of the tactical increase in inventory is around a risk mitigation against any other sterilization issues. I think, Mike, it really comes back to the fact that there are 20 billion medical devices that are sterilized in the U.S. using ETO. It is a requirement because other types of sterilization processes do not work on products with deep crevices, products made of certain materials. I think we've got to have a balanced approach here. Obviously, we all want to protect the environment. We all want to have a safe environment to live in.
If you're living in L.A., you have as much exposure because of pollution than you would in any other area. I think common sense is starting to prevail is my observation, and I was particularly encouraged by the FDA statement that they made last week.
Okay, thanks. Just one follow-up just on MANTA. Is there any economic data as part of the SAFE MANTA trial or any other trials, or is anything efforts underway to collect any economic data that could help drive adoption and maybe get this thing through VAC committees? Thanks.
There is a JMIS study that was published that I believe stated that a major complication would cost a hospital $18,000 to treat. That study was done in 2017, the clinical data for the product is compelling in this area, where it shows over a 70% reduction in those major complications, from 7.5% to 2%. If you combine that with the JMIS study, Mike, that would be a compelling argument for any VAC committee.
Thank you.
Thank you. Our next question comes from Matthew Mishan with KeyBank. You may proceed with your question.
Great, thank you for squeezing me in. I just have one. Can you guys update your free cash flow expectations for the year? I'm sure there's some annual increases throughout the LRP. I think free cash flow was supposed to be somewhere between $500 million and $550 million per year through that LRP, and there seems to be a delta between where you are today and those expectations. Can you kind of bridge those?
Sure. To your point, when we put together the LRP and guided at Analyst Day, we had said that free cash flow would average between $500 million and $550 million over the period 2019-2021. Inherent in that guidance was the assumption that free cash flow would in fact build, to your point. In 2019, we thought it'd be less than that three-year average, 2020 kind of in line, and 2021 well in excess. Since putting the LRP together, we've experienced improving results from the NeoTract business, and we've made other business decisions aimed at improving our operations, and some of these decisions will have an impact on the near-term free cash flow. For 2019, I'd now expect cash flow from operations around $435 million and CapEx of approximately $100 million.
Now let me give you some kind of the key deltas from when we put the LRP out there, why we're not seeing free cash flow at the same level that we initially expected. The first is that NeoTract is performing better. As a result, we are paying a higher level of contingent consideration than what was originally contemplated in purchase accounting. Those additional payments in excess of what was initially.
Booked actually go through, cash flow from operations. In addition, we put in an additional restructuring program in 2019. That program doesn't generate savings until 2021. There's also cash outflows that we have to invest in the project in 2019. There's also CapEx associated with it. In another action that we've taken in an effort to really enhance customer service, we've reevaluated our safety stock levels. As a result, we've increased our strategic inventory balances this year. We believe that this is part of the reason why we're seeing improved customer service results, including improved on-time delivery. We think we'll ultimately benefit the company over the longer term. Each of these have served to reduce the free cash flow from our previous expectations.
Again, we're pretty happy that NeoTract is overperforming. We think the increased inventory will actually help the business, as well as the restructuring programs will help us in the longer term.
Just a follow-up to that, Tom. Is the changes in contingent consideration, is that a one-time payment that's impacting 2019, or is that something that also would potentially impact 2020 and 2021 as well?
It could potentially impact 2021, 2020.
2020. The bulk of the contingent consideration runs through to the end of 2020 and is paid in 2021 for NeoTract.
All right. Thank you, guys.
Thank you.
Thank you. Our next question comes from Kristen Stewart with Barclays. You may proceed with your question.
Hey, guys. Congrats on a great quarter, and Happy Halloween.
Thank you.
Thank you.
Just a couple follow-ups from me. Just wanted to circle back on, I guess, David's first question. He had mentioned RePlas, which I guess now is called EZPLAZ, as being something to expect in 2020. I just wanna make sure I didn't miss something on that. Is there an update on that product? 'Cause my understanding was that that was still something that you were trying to figure out the filing timeline on that. Could you provide an update on that? I have a follow-up as well.
Yes, absolutely. I think David asked about MANTA, happy to discuss EZPLAZ. As we said on our last call, we would give an update once we had a clear line of sight to BLA submission. I can tell you that our collaboration with the FDA continues to be very constructive. Obviously, the FDA, Teleflex, and the military, we're all excited about the product as we know it can have a positive impact on humanity. As we continue this journey, we have done a significant amount of testing, and we've submitted that to the FDA. We have ongoing testing that we are doing that will, we will continue for the next few months.
Again, working with the FDA, we have agreed the pediatric study plan, which was a big step forward, and I think that that is, for us, is a positive development. We've covered that obstacle. Of course, we are sailing uncharted waters with the FDA, but we are working hand in glove with them, making progress, and as soon as we have a clear line of sight to the testing being done, submitted to the FDA and a clear timeline for the BLA, we will update the investment community. I would just remind you that we had about $7 million for this product in our LRP by 2021, we believe that it's a $100 million market opportunity, 25 in the military and 75 in the civilian market.
Continue to work on it and making progress.
Perfect. The other question I have is just on UroLift and manufacturing. I believe you guys produced that in Pleasanton. Is that at all impacted by some of the rolling kind of blackouts with what's going on with the fires in California or any level of risk there? I'm not sure if you guys have any alternative manufacturing in Mexico or anything. Just anything to think about there. I'm sure you guys have safety stock and everything else, probably generators too, but just wondering how you guys are thinking about that as a risk level.
We have a hamster on the wheel, Kristen.
That's good to hear.
No.
Perfect. Thank you.
We're in good shape there. When we bought the NeoTract company, we identified this as a risk, and in the first 12 months, we opened up an alternative manufacturing site in one of our existing facilities. We can manufacture this product in dual sites, and we haven't had any impact of the power outs that I'm aware of. No impact of the power outs and dual manufacturing already established as a company.
Perfect. Those, those hamsters are doing well then. Glad to hear.
They're going around in circles.
All right. Well, I feel like that too. All right. Thanks very much, guys. Congrats again on the quarter.
Thank you.
Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Jake Elguicze for any further remarks.
Thanks, operator. Thanks to everyone for joining us on the call today. This concludes the Teleflex Incorporated third quarter 2019 earnings conference call.
Thank you, ladies and gentlemen. This concludes today's conference call.