Good day, ladies and gentlemen, and welcome to the second quarter 2017 Teleflex Incorporated Earnings Conference Call. At this time, all participants are in listen only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. By our operator assistance, please press star then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Treasurer and Vice President of Investor Relations, Jake Elguicze. You may begin.
Good morning, everyone, and welcome to the Teleflex Incorporated Second Quarter 2017 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 56173289. Participating on today's call are Benson Smith, Chairman and Chief Executive Officer, Liam Kelly, President and Chief Operating Officer, and Thomas Powell, Executive Vice President and Chief Financial Officer. Benson, Liam, and Tom will provide prepared remarks, and 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. 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, I'd like to turn the call over to Benson.
Thank you, Jake. Good morning, everyone. First of all, we are pleased with our second quarter and year-to-date 2017 results and our continued progress on many of our long-range initiatives. After six months, we're spot on our constant currency revenue expectations. On top of that, we are benefiting from a more favorable currency environment that has a positive impact on our as-reported revenue and our adjusted EPS. Here's some details. From a year-to-date standpoint, our constant currency revenue growth, including Vascular Solutions, was 14.4%, as compared to our full-year guidance range of 12.5%-14%. If you were to exclude Vascular Solutions and normalize for the impact of shipping days, our constant currency revenue growth for the first six months of the year totaled 4.6%, as compared to our full-year guidance range of 4%-5%.
That puts us right on track towards the achievement of our previously provided full-year constant currency revenue growth guidance range. We've continued to achieve solid results across many of our strategic business units and geographies, and this performance, coupled with our expectations for the remainder of the year, has allowed us to increase our full-year as reported revenue growth and adjusted earnings per share guidance ranges. Turning to our quarterly results and beginning with revenue. Despite having one fewer shipping day in Q2 as compared to the prior year period, revenues grew 11.6% on an as-reported basis and 12.9% on a constant currency basis. This includes the contribution from Vascular Solutions product lines, which accounted for approximately 9.6% of our constant currency revenue growth.
I'm happy to report that year-to-date Vascular Solutions performance has been in line with our initial expectations and that we have an opportunity to accelerate some distributor conversions efforts into the latter part of 2017 that were originally planned for 2018. We'll be making some additional investments in the second half of 2017 to accomplish this. During Tom's prepared remarks, he will go through this in a bit more detail. Setting aside the impact of Vascular Solutions and one fewer shipping day that impacted our results in the quarter, Teleflex posted good growth on a constant currency basis driven by the performances of Vidacare, which grew approximately 17%, as well as our OEM, Vascular North America, Surgical North America, and AMIA segments.
We continue to see stability within our end markets, good global utilization of many of our products, and positive momentum in revenue generated from newly introduced products to the market. We also made significant progress on our distributor conversion in China, we anticipate an acceleration in constant currency revenue growth in the second half of the year as compared to the headwind of revenue of approximately 60 basis points that we experienced during the first half of 2017. Turning to profitability, during the second quarter, we generated adjusted gross and operating margins of 55.9% and 25.1% respectively. The operating leverage generated in Q2 translated into adjusted earnings per share of $2.04, which is an increase of 7.9% versus the second quarter of 2016.
It is also better than our prior expectations for Q2, which called for adjusted earnings per share to be relatively flat to the year-ago period. During the first six months of 2017, the company continued to generate strong free cash flow, and this enabled us to repay borrowings that were equivalent to approximately 10% of the Vascular Solutions purchase price within only a few months after closing the transaction. We're off to a good start in 2017 and are on track to meet or exceed the original 2017 financial targets that we provided the investment community in February. I believe we've made good strides in many key areas that will position us well for 2018. That completes my prepared remarks, and I would now like to turn the call over to Liam.
Thank you, Benson. Good morning, everyone.
For the consolidated company, second quarter 2017 constant currency revenue grew 12.9%. During Q2, we had one less shipping day as compared to the second quarter of 2016. This negatively impacted our results by approximately 1.2%. When normalizing for the shipping day impact, sales volumes of existing products grew 1.4%. Also impacting volumes in the quarter was our decision to go direct within China, which resulted in our former master distributor of vascular and cardiac goods to no longer purchase product from us. This caused the volume growth shown here to be adversely impacted by approximately 60 basis points. As Benson just mentioned, we made good strides in our efforts to build out our direct sales capabilities in China during Q2. We anticipate that China will no longer be a headwind in Q3 and then become a revenue tailwind during Q4. Moving to new products.
The positive revenue contribution trend we have seen for the past several quarters once again continued, this time contributing approximately 1.5% of constant currency growth, squarely in line with our full year guidance expectations. New product revenue growth was once again led by our vascular, surgical, and anesthesia product lines. Vascular new product revenues increases are attributed to further penetration of our preloaded antimicrobial and antithrombogenic BPS PICCs. While in surgical, new product growth was primarily due to sales of our EFX and AE05 products. Anesthesia new product revenue growth is primarily due to increased sales of our LMA unique product with Silicone. Turning to pricing. During Q2, we saw continued improvements in the average selling price of our products, which drove revenue higher by another 60 basis points.
This is consistent with the levels that we achieved during Q1. The ability to continue to drive positive pricing continues to be a differentiator for Teleflex. Moving to revenue growth coming from M&A. During the quarter, M&A, other than Vascular Solutions, contributed approximately 1% towards our constant currency revenue growth. The contributors here were Cartica and Pyng, with a larger portion coming from Cartica. I would like to point out that both Cartica and Ping are growing their revenues organically at high rates and will help Teleflex accelerate its organic constant currency revenue growth rate moving forward. Vascular Solutions contributed 9.6% towards Teleflex's second quarter constant currency revenue growth. When compared to the second quarter of 2016, Vascular Solutions continued its track record of double-digit growth, increasing approximately 10%.
I'd like to point out that Vascular Solutions also had one fewer shipping day in Q2, so its normalized revenue growth would have been about 11.5%. Growth in Vascular Solutions was primarily due to increased sales of Turnpike, GuideLiner, and Micro-Introducer kit products. Before I talk about the constant currency revenue growth rates of our segments, I would like to briefly share with you how the same metrics I just reviewed with you look like on a year-to-date basis. Many of these numbers are similar in nature to the figures I just shared with you for Q2. The reason why I want to highlight these year-to-date figures are twofold. First, they show that we are on track towards the achievement of our full-year constant currency revenue guidance range of 12.5%-14%.
Second, I would like to share with you what you should expect to see in terms of second half of the year performance as compared to these figures. For the first six months of 2017, core product volumes normalized for the extra shipping days grew 1.4%. This 1.4% includes the negative headwind of 60 basis points because of China. As I just mentioned a few moments ago, as we move forward in the second half of 2017, we expect China to be a tailwind to revenue growth, as such, we would expect core product volumes, excluding the impact of shipping days, to accelerate in the second half of 2017 as compared to the 1.4% during the first half. Moving to new products. Growth generated by new products added 1.7% for the first six months of 2017.
As we move towards the back half of the year, we would expect a modest uptick as we get the benefit from products launched in late Q2, such as AC3 and BPS Rhythm. Turning to price. It contributed about 70 basis points year to date, during the second half of 2017, we expect this to be a tad lower, but not in a large respect. Moving to contributions from M&A other than Vascular Solutions. During the first six months of the year, this has added 0.8%. Looking forward, we expect this to be a bit lower as the Cartica acquisition anniversaries itself. However, beginning in September, Cartica revenue growth will be included as core product volume growth. Given Cartica's organic growth rate, this is yet another reason why we expect our core product volume growth to improve moving forward.
Before I move to Vascular Solutions, I would like to reaffirm a point made by Benson earlier, which is that at the half-year mark, our constant currency revenue growth, excluding Vascular Solutions and adjusted for shipping days, is 4.6% compared to a guidance range of 4%-5%. We feel very comfortable with our revenue guidance, including and excluding Vascular Solutions. Now, on to Vascular Solutions itself. During the first six months of the year, it added 7.5% towards our overall constant currency revenue growth. In the last six months of the year, we would expect Vascular Solutions to contribute growth rates closer to the level it contributed in the second quarter. Finally, I wish to outline what to expect in terms of the shipping day impact. If you recall, we had a five-day benefit in Q1 and one fewer day in Q2.
As we move forward, we will not have any shipping day impact in Q3, while we will have five fewer days in Q4. As such, we expect the lack of shipping days to negatively impact us in Q4. To date, we've estimated that each shipping day has impacted our business by approximately 1.2%. In summary, we feel that we have good visibility into our revenue growth trajectory in the back half of 2017. Next, I would like to turn back to the quarter and provide some additional color surrounding our segment and product-related constant currency revenue growth drivers. Vascular North America second quarter revenue increased 6.3% to $93.5 million. The increase in vascular revenue was largely due to higher sales of PICC and Vidacare EZ-IO and OnControl devices. The underlying growth in this segment was somewhat muted by the impact of one fewer shipping day within the quarter.
Moving to anesthesia in North America, second quarter revenue was $49.1 million, or essentially flat versus the prior year period, as increases in revenue from new product sales and the impact of an acquisition was offset by a decrease in sales volume of existing products, in part because of one less shipping day. Turning to our surgical North America business, its revenue increased 4% to $44.7 million. The increase within surgical is primarily attributable to higher sales of access ports, surgical instruments, and percutaneous products. Like our vascular and anesthesia businesses, growth within surgical was also negatively impacted by one fewer shipping day. Shifting to our overseas operations, EMEA revenues continued their positive trajectory, growing 3.2% on a constant currency basis to $132 million. The improvement in European revenues was largely the result of increased sales of vascular, interventional, surgical, and cardiac products.
Like our North American franchises, growth in this region was also negatively affected by one less shipping day. Moving to Asia, our second quarter revenue increased 3.1% to $64 million. This region was not impacted by shipping days. However, the China go-direct limited revenue growth in the quarter. Without that, this region would have grown approximately 7.5%. Turning to OEM, during the second quarter, revenue increased 12.5% to $45.1 million, primarily due to higher sales of catheters and performance fiber products, as well as the Cartica acquisition. Lastly, second quarter revenues for the businesses within our all other category was up 73.1%, totaling $100.2 million. Growth here is primarily attributable to the acquisition of Vascular Solutions.
In summary, growth during the second quarter was balanced across our product lines and regions, had it not been for the shipping day, growth in our North American and EMEA product lines would have been about 1.6% higher respectively. As has been our customary practice, I would like to next briefly update you on the status of GPO and IDN awards, as well as some recently received regulatory approvals and product launches. Adding to the success we realized in the first quarter, during Q2 we won an additional six new GPO and IDN agreements and extended 16 others. Of the agreements won and extended in Q2, 14 were sole source in nature and covered a wide variety of clinical areas, including our CVC catheters, laryngeal masks, ligation clips, and our percutaneous product offerings. Moving next to some recent product introductions and regulatory approvals which we've received.
Starting with our most recent arterial catheter. We recently received 510 clearance for the Arrow Seldinger arterial catheterization device. This device is indicated for short-term use and is designed to improve patient safety by eliminating confusion of catheter identification, while also reducing the risk of complications associated with insertion. It also provides optimal diagnostics, leading to effective treatment for patients. We expect to launch this product in the U.S. later this year. Turning next to RePlas. We are quite enthusiastic about this product, and for those of you who are not familiar with it, RePlas is freeze-dried plasma. This product came to Teleflex via the Vascular Solutions acquisition, and it is a product that has been developed in cooperation with the U.S. Army. The U.S. Army is sponsoring the clinical trials of the freeze-dried plasma for the treatment of battlefield trauma and other emergency applications.
Teleflex retains all rights to commercialize RePlas. On May 15th of this year, Teleflex announced the commencement of a phase I clinical study whereby RePlas was administered to the first patient as part of a 24-patient study being conducted at Hoxworth Blood Center at the University of Cincinnati. In this stage 1 of the clinical development program, healthy volunteers received increased dose of their own blood plasma that has been processed using our proprietary freeze-drying and packaging techniques to assess safety and tolerability. We continue to expect that we will commercially launch RePlas during 2020 and that it could be a $100 million product opportunity over time for Teleflex. That takes me to the end of my prepared remarks.
At this time, I would like to turn the call over to Tom for him to review our financial results for the second quarter and provide an updated guidance for 2017. Tom?
Thanks, Liam. Good morning, everyone. Given the previous discussion of the company's revenue performance, I'll begin my prepared remarks at the gross profit line. For the quarter, adjusted gross profit was $295.3 million, versus $260.4 million in the prior year quarter. Adjusted gross margin was 55.9%, a 90-basis point increase when compared to the prior year period and representing the highest adjusted gross margin level achieved by Teleflex since becoming a pure-play medical device company. As covered on our last earnings conference call, given the top gross margin comparable in the second quarter of 2016, we were expecting only modest gross margin expansion for the second quarter of 2017. The result is modestly favorable to our previous expectation. Versus prior year, adjusted OpEx spending grew by approximately 15%, reflecting the inclusion of Vascular Solutions and expenses associated with the China distributor conversion.
Adjusted operating margin was in line with prior year at 25.1%. Adjusted net interest expense increased to $19.4 million from $10.3 million in the prior year quarter. The increase is the result of the additional borrowings used to finance the acquisition of Vascular Solutions. For the quarter, the adjusted tax rate of 16.6% marks a 400-basis point reduction from the prior year rate. More than anything else, the year-over-year reduction is the result of an easy comparable from the prior year. For the second quarter, the tax benefit of the new accounting treatment for excess tax benefits from stock plans was minimal. On the bottom line, adjusted earnings per share increased 7.9% from $1.89 in the second quarter of 2016 to $2.04 in the second quarter of 2017. Turning now to select balance sheet and cash flow highlights.
During the first six months of 2017, cash flow from operations was $198 million, or an increase of 9% over the prior year. The increase was primarily the outcome of improved operating results and working capital management. Also during the quarter, we repaid approximately $90 million of bank debt, which resulted in a reduction of gross leverage to approximately 3.3 times at the end of the second quarter. Finally, post quarter end, we retired the remaining $44 million of outstanding convertible notes. Cash requirements for the retirement were funded through revolver borrowings. That completes my comments on the second quarter. Now I'll move to 2017 guidance updates. Through the first six months, our operating performance is tracking in line with expectations, and the Vascular Solutions integration is proceeding as planned.
We do, however, see two positive changes that allow us to raise our as-reported revenue guidance and our adjusted EPS guidance. The first positive change is from currency. Currency rates have improved from when we set our original guidance expectations, which has resulted in less of a headwind to both our as-reported revenue growth and adjusted EPS for fiscal year 2017. Our original 2017 guidance assumed a $0.30 headwind to adjusted EPS. We now expect the headwind to be $0.13 or a $0.17 improvement. The second positive change is in interest expense. Our original guidance had assumed that in order to more permanently finance the Vascular Solutions acquisition, we would term out approximately $500 million of revolver borrowings with a high-yield note offering. This financing was expected to be completed midway through 2017.
After reassessing our projected sources and uses of cash, we no longer anticipate the need to term out the revolver borrowings related to the Vascular Solutions acquisition. The favorable interest expense impact of the revised capital structure plan will now be reflected in our updated 2017 adjusted earnings per share guidance. We also believe that we are now in a position to potentially accelerate investment in Vascular Solutions distributor direct conversions into the second half of 2017, which will help us get a jump on 2018. As such, as we finalize our planning in this area, we will hold a portion of the interest expense savings as a reserve to fund this potential investment. Let me now walk you through how these changes impact guidance. Beginning with revenue. For 2017, we are reaffirming our full-year constant currency revenue growth guidance range of 12.5% to 14%.
We continue to assume that our base business will grow 4% to 5% and that Vascular Solutions will add 8.5% to 9% to total growth. However, we are raising our as-reported revenue growth guidance from the previous range of 10% to 11.5% to a new range of 11.5% to 13%. An 150-basis point increase in as-reported revenue growth is the outcome of our improved expectations for 2017 currency environment. Based on our updated currency assumptions, we now expect as-reported revenue to range between $2.083 billion and $2.111 billion, or an increase of approximately $28 million from our previous as-reported revenue guidance. Moving to interest expense. As mentioned, our original guidance assumed a mid-year high-yield financing to term out the Vascular Solutions acquisition. The deferral of this financing will reduce interest expense in the second half of 2017 by approximately $6 million as compared to our initial expectations.
Turning now to EPS. Given the favorable developments, we have increased the bottom end of our adjusted EPS guidance range by $0.15 and the top end of the range by $0.12. Our current outlook for fiscal year 2017 adjusted earnings per share is now a range of $8.20
To $8.35, up from our previous outlook of $8.05 to $8.23. Our assumptions on constant currency revenue growth, adjusted gross margin, adjusted operating margin, and adjusted tax rate remain unchanged from the last quarter. In summary, through six months of 2017, Teleflex is off to a good start. Constant currency revenue growth, gross margin, and operating margin are spot on where we expected them to be. The integration of Vascular Solutions is also progressing as planned. During the second quarter, we repaid $90 million of bank debt and reduced our gross leverage to approximately 3.3 times. Subsequent to quarter end, we retired the remainder of all convertible notes outstanding.
We have had two positive changes in the form of an improved currency environment and a deferral of a planned high-yield notes offering, which provide us the flexibility to make investments to accelerate the Vascular Solutions integration timeline and to once again raise EPS guidance. That concludes my prepared remarks. At this time, I'd like to turn the call back over to the operator for questions. Operator?
Thank you. Ladies and gentlemen, if you have a question at this time, please press star then the one key on your touch tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Your first question is from Larry Keusch with Raymond James. Your line is open.
Thanks, everyone. Good morning. Just a couple quick things here. Could you maybe talk a little bit about China? Obviously, I understand the impact is tracking to your expectations, could you expand a little more on sort of the infrastructure build that you had to do and I guess your visibility on how much of the distributor's product is still out in the channel as you think about the second half? Then I have one other question.
Okay. Hey, Larry. It's Liam here. I'll take this. Regarding the build-out of our infrastructure, we have appointed regional distributors. We actually have all of the regions covered, we've also appointed close on 93 sub-distributors that will obviously get the product to the market. We had a review recently, our sales out, which is the benchmark you want to have in China, sales to the end customer. We're progressing modestly ahead of our expectations in that regard. That's quite encouraging for us. We have our infrastructure from a talent acquisition point of view, almost completely in place. We only have four positions that we haven't made an offer on or have the person on board, we're really comfortable with where we're at. We're currently going through a mediation process with the distributor, they filed some documents outlining their inventory levels.
We are currently reviewing that. It's difficult for us to tell exactly how much is left within their portfolio. Given the fact that they have continued to sell for this period of time, we would expect that to be pretty modest at this stage, what's left with the distributor, Larry.
Okay. Terrific. Just one other quick question. I couldn't help but notice the strength in the EMEA region, and I think we saw that beginning in the first quarter as well. Maybe, again, if you could expand a little bit on what you think is going on there and how sustainable could that improved growth be? Because I think you were sort of flattish in the past there, this marks definitely a nice step up.
Last year, we grew in EMEA, Larry, by about 1.1%, and this definitely shows a step up. The step up is pretty broad-based in the geographies within EMEA. Adjusted for billing days, we're at 4.8% within this quarter. As I said, it's broad based. We've seen nice recovery. Germany was always pretty strong, but we've started to see nice recovery in France. We've seen nice recovery in the U.K., Italy, and Iberia. Also, in the indirect markets, in Saudi Arabia, they seem to have overcome some of the oil crisis there, and that has helped us as well, Larry. The encouraging thing is that it's broad based and the economies are doing better there, as we all know. Yeah, we're really encouraged by what's happening within EMEA.
Also some of our new products we're getting out there into the market are driving increased demand, and we're getting better utilization.
Yeah, I think there's also some pent-up demand from the fact that they had cut back on expenditures for several years, and you can only do that for so long. Really the population almost demands that there's increased spending against healthcare. I think we're starting to see the benefit of that as well.
Okay, terrific. Thanks, guys.
Your next question is from David Lewis with Morgan Stanley. Your line is open.
Hi, guys. This is actually Scott in for David. Just two quick questions from me. I guess first for Liam or Tom, looking at the organic growth guidance for the rest of the year, it seems like you did basically a little bit above four in the first quarter. You did a 3.5% this quarter. To get to kind of the midpoint of your guidance, I kind of see the back half delivering organic growth, something closer to 5%. I was wondering if you can talk us through what gives you kind of the confidence that that will happen in the back half versus the front half. What are some of the key drivers of that acceleration?
All right, Scott. I'll start. If Tom wants to add to it, by all means. First of all, thanks for the question. I would like to point out that our constant currency revenue growth in the first half of the year was 14.4%, first of all. Adjusted for VSI and billing days, our growth is actually 4.6%. Which is an apples-to-apples comparison to our constant currency full-year revenue guidance of 4%-5%. For the first six months of the year, we are right on plan and slightly above the midpoint of our constant currency revenue guidance at the half-year stage. We feel good about the remainder of the year as China headwind becomes a tailwind. We feel even better about next year as VSI rolls off our base growth. This would add approximately 1% to our organic growth moving forward.
Scott, we feel in a really good place regarding our guidance.
That's really helpful. The only other question I had was, from our analysis, it seems like Vascular in North America did particularly well this quarter. I was just wondering if you saw any benefits from disruption at one of your competitors, namely Bard. Did you see any kind of benefit in taking market share, or was it more just execution? Thank you.
All right. Thank you very much. Vascular performed well, growing at 6.3%, then when I adjust for billing days, you add about another 1.6% to that. We're really encouraged. We've continued to see strength in our PICC portfolio, Scott. Our PICC portfolio within North America was up over almost 30%, and we continue to put a focus on our antimicrobial and antithrombogenic PICC because hospitals are very focused on thrombus and infections, and we are the only company that has a solution to the infection. We feel very confident on that growth trajectory continuing for our Vascular business. Also, EZ-IO, the Vidacare portfolio, continues to grow. At the half year, it's still growing at 20%, and we see that very sustainable for the remainder of the year.
That's great. Thank you very much.
Your next question comes from Matt Mishan with KeyBanc Capital. Your line is open.
Hey, good morning, and thanks for taking the questions. Hey, Tom, on Vascular Solutions, your ability to put off the high yield financing, is that something you've permanently put off or something which you're just still evaluating your different options?
Well, as mentioned, we've taken a look at our sources and uses of cash. They've come in a little bit stronger on the cash flow than our initial expectations. We've been able to pay down our bank debt by $90 million. We freed up additional capacity on the revolver. As we look out for the rest of 2017, the high yield is off the table relative to Vascular Solutions, and we expect not to need to put that high yield financing in years following either. We believe that we are able to meet our own needs for cash through internally generated sources at this point in time. It's permanently off the table.
Yeah, just following up on that, I think you said that Vascular Solutions would be accretive by about $0.50 by 2018. What do you think it would be accretive by 2018 without the high yield financing?
Well, as we think about the impact for the second half of the year, I said it's about a $6 million benefit there. You would roughly double that benefit for a full-year basis, and that would put you in the kind of the $0.16-$0.18 additional accretion.
Okay, great. On RePlas, is there an opportunity for early sales of that once you've begun the clinical trials? Is that something which you could potentially get sales for before it's over? Is there an opportunity for that?
Hey, Matt, it's Liam here. The clinical trials are in order to get FDA approval. We can't sell prior to FDA approval. This clinical trial, and they have advised we need to do this one and one more. We expect to commercialize around the midpoint of 2020 at this stage. That's our expectation, Matt.
All right. Thank you.
Your next question is from Mike Matson with Needham & Company. Your line is open.
Hello?
Okay. Can you guys hear me?
Yeah. Everything good.
Sorry, I had it on mute. Just with regard to the EPS guidance increase, it looks like you're increasing it by about the added benefit you're now expecting from the smaller currency headwind, and yet you beat by about $0.14 this quarter as well. Now some of that may have been from currency, but why not take the guidance up more, just given the degree of the beat? Was The Street just sort of modeling things wrong in terms of the quarterly sequencing of the EPS numbers?
Well, I think that's a key point. As we look at our year, we're managing to our internal projections. We're never exactly aligned with how The Street's looking at things. As we look at ourselves through the first six months of the year, what we're seeing is constant currency revenue is right on expectations. Gross margin and operating margin are right on expectations. The Vascular Solutions integration is proceeding as planned. Where we're seeing some upside is the interest expense. As I mentioned, that's about $6 million in the back half of the year. We're seeing some benefit from FX as a result of the more favorable rates. In the first quarter, we got a tax windfall. As we think about it, those are the areas of upside that we're seeing right now.
As discussed in our prepared remarks, we now believe that we can accelerate some investment for the Vascular Solutions integration. As we look at those three areas of upside as well as the investment, we believe we're in a position to flow through $0.20
increase in guidance between the first and second quarter raises. Certainly, if foreign exchange stays at the level we've seen in recent weeks, we could have additional benefit in the future. Right now, we feel as if we are tracking favorably on a couple of non-operating issues and right on where we expect it to be from an operating standpoint for the first six months.
All right, thanks. Can you just remind us with regard to the medical device tax, what you did with the savings there and how big of an impact you'd expect if it were to be resumed in 2018?
It was approximately $0.12, I think, or $12 million, excuse me.
Yes.
The majority of that went into additional R&D spending.
Would you be able to pull that back out of R&D to offset the return if it does come back?
I think at this point, it's a little too soon for us to make a prediction about how we might react to that. Certainly, some of these R&D programs are in the middle of their project life and not a good time necessarily to arbitrarily cancel them. I think we'll just have to look at how we might adjust for that in 2018 against a broader array of things that are going on in our P&L.
Okay, thanks. Just finally on RePlas, is there any chance we'll see any sort of interim data from the trials, or is it just going to be we have to wait till everything's done before you give us any sort of updates there?
No, there's two trials. The first trial is expected to finish in the summer of 2018, and we should have those results. Once we have those results, we will be sharing them with the investment community.
All right. Thanks a lot.
Your next question is from Chris Cooley with Stephens. Your line is open.
Thank you. Good morning. I appreciate you taking the questions. Maybe just one quick one for me for Tom. When you look at the stronger cash flow through the first half of the year and the reduction that you've seen so far in gross leverage, just kind of curious what you're thinking about or how you're prioritizing uses of cash going forward. Do we see a greater focus on kind of the instant gratification of distributor-to-direct conversions, or tuck-in M&A once you get down to kind of sub three times gross leverage come back into the equation? Just help us frame that up. Thanks so much.
Sure. Well, as we looked at our cash flow projections, even following the Vascular Solutions acquisition, we always left ample room to continue our distributor-to-direct conversion strategy and, candidly, to continue to fund business development efforts, whether they are late-stage technology or some smaller tuck-ins. We are a company who looks at companies opportunistically. If something were to come along that were of keen interest, we would certainly take a look at that. From our perspective, we saw a very quick de-levering given both earnings growth and cash flow generation following Vascular Solutions, and we don't expect that to hold us back from pursuing opportunities that appear attractive.
Thank you.
Your next question is from David Turkaly with JMP Securities. Your line is open.
Thanks. Just one clarification from Liam. The 4.6% organic growth that you talked about earlier on a question, is that the quarter or is that a year-to-date number?
That was for the half year.
Okay.
Dave, that's a constant currency number ex Vascular Solutions.
Adjusted for days.
Yeah. Okay, we've spoken to some surgeons of late on some of your newer products, specifically Percuvance and MiniLap. I'd just love to get your thoughts on where those products stand today. Any color on where the sales base is now and where you think it's going maybe over the next 12 months or so?
Yeah. Dave, overall, I think we're very happy with the continued enthusiasm we see for our percutaneous product offering from surgeons. We've had a number of analysts that have spoken to surgeons directly and published. We had a minor setback in quarter two when we initiated a voluntary recall on the Percuvance due to the product falling outside our tight tolerance specification. We identified the issue quickly during quarter two. We're now back in the market with replacement product. During quarter two, we presented to 14 VAC committees and received 12 approvals. Our sales force is back out there trialing the product with great enthusiasm. The recall will not materially impact our performance in 2017 as it was mitigated incredibly quickly by our quality teams. Again, very positive. The VAC hit rate continues in that 80% range. I think that's 86%, 12 out of 14.
Again, quite enthusiastic for the product, continues to get traction. Procedures that we're seeing it being used on increasingly are bariatric and gynecological procedures.
Thanks a lot.
Your next question is from Matthew Taylor with Barclays. Your line is open.
Hi, good morning. Thanks for taking the question. You mentioned China a couple times. I was just hoping you could give us an update on how that transition will look in the second half of the year with regards to growth and maybe just give us some operational thoughts now that you're kind of going direct there. What could that mean for your growth and profitability in China going forward?
Thanks, Matt. It's Liam here. I'll take this. What we see is that in quarter three, year-to-date, China has been a headwind of about 60 basis points. That headwind will disappear in quarter three, and it'll become neutral or modestly accretive to our growth. Then once you get into quarter four, we will see it contribute to our growth, and you'll see that come through in core volume. Operationally, we are in a good place. We have recruited all the sales talent. They are out there creating demand within the marketplace. As I said earlier in a recent review I had with the China team in our sales out metric, which is the most important metric, we are marginally ahead of our expectations. All in all, we feel really comfortable with where we are in the transition from that master distributor in China.
Thanks. I was wondering if you could talk a little bit about the different products in the vascular portfolio now that you've owned the company for a period here. Which areas are doing maybe a little bit better than expected, and are there any doing a little bit worse than you initially forecast?
The good news is that GuideLiner continues to perform really well. At the half-year, that's growing about 17%. Turnpike is also doing really well at the half-year at about 17%. The other Micro-Introducer kits is doing fairly well. That's up in the 18% region. No surprises, Matt, thankfully to report. The products are performing in line with expectations. We're getting double-digit growth. In the quarter, it grew by 11.5%, and it's been growing in that range since we acquired it. Double-digit growth continues, and we're really looking forward to when it rolls off our M&A part of our P&L into core organic growth because it'll add approximately a percent to our overall growth in Teleflex.
Great. Thanks a lot for the thoughts.
As a reminder, ladies and gentlemen, if you'd like to ask a question, that's star then one on your touch-tone telephone. Your next question is from Richard Newitter with Leerink Partners. Your line is open.
Hi, this is Ravi in for Rich. Thank you for taking the questions. I just had one on the freeze-dried plasma product. Could you help us understand the competitive dynamic in the space? I don't believe there's anything out there aside from maybe some French suppliers of the product. Could you maybe give us some opinion on any sort of patent protection you'll have there? Is there anything, given the importance of this study and usage by the U.S. military, that could potentially accelerate approval of the product ahead of those 2020 timelines? Thank you.
Okay, Ravi. You are absolutely correct. There is one French company and one German company that do provide freeze-dried plasma. Both of those went through a local approval process in their countries, and neither are available in the U.S. Neither have a 510 approval. Our understanding is that there are no clinical trials going on with either of those product categories. To our own potential of accelerating, it is really, Ravi, dependent on how quickly we can get the clinical trials done and get the results published to move on from phase I trials to phase II and accelerate that. Obviously, we are working closely with the FDA because the military wants this product as soon as they can possibly get it because it does have a serious impact on the troops and in the battlefield.
To your IP question, the IP isn't on the freeze-drying of product itself, but it's more in the delivery mechanism. Most products today are in glass jars, almost like if you remember "M*A*S*H," those glass jars used to hang up in "M*A*S*H," that television program. Ours is in a compressible bag, which is ideal for battlefields and also for emergency ambulance delivery of freeze-dried plasma to a patient. The double valve on our bag is where the IP lies, and we have really strong IP around that.
Great. Thank you very much.
You have a follow-up from Larry Keusch with Raymond James. Your line is open.
Oh, yeah, just a quick housekeeping. What's the assumption now for the remainder of the year for the euro? It had been, I believe, 104. Could you just maybe talk a little bit about the headwind that may be present from the peso strengthening?
Sure. We updated our forecast projections in mid-June. At the time, the euro was trading around 111 to the dollar. We expected Q2 to end up around 110, and that's the rate that we put into our projections for the balance of the year. We've got the balance of the year at 110. As we look the past couple of weeks, we've seen a dramatic weakening of the US dollar relative to the euro. The euro's now trading at 118. The extent it were to stay at that level, we could expect additional translational benefits. As far as the strengthening dollar, that obviously impacts our ability to purchase, or excuse me, peso impacts our ability to purchase from Mexico. As we look at all of the impacts, we have seen some benefit from the translational side offset on the transactional side.
In fact, the transactional impact has been a little bit bigger than we typically see, largely due to some of the other currency moves around the world, including the peso.
Okay, terrific. Thanks, Tom.
I'm showing no further questions. I would like to turn the call back to Jake Elguicze for any further remarks.
Thanks, operator, and thanks to everyone who joined us on the call today. This concludes the Teleflex Incorporated second quarter 2017 earnings conference call.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program, and you may all disconnect. Everyone, have a great day.