Good afternoon, everybody. Last session of the day, gold star to all of you for being here. Thank you for joining us and really happy to have the team from Teleflex with us. I'm Isaac Rowe from the Goldman Sachs MedTech team and really appreciate you guys making the trip cross country with us this year.
And to start, I thought maybe what we do is level set with a brief reminder with the midway point in the calendar year. Maybe you can give us an update on sort of your view for the full year, both in terms of key strategic goals but also key financial goals for shareholders, think that would be helpful level set.
Absolutely. Well, first of all, thanks for having us. We certainly enjoyed the day. It's been a busy day and look forward to the opportunity to come back in the future. But in terms of our goals for the year, there's really three strategic goals that we've been focused on.
As you can imagine, VAPSCO solutions, the acquisition that we just completed, is certainly one of the top priorities. We're also focused on accelerating our top line revenue growth through a focus on new product introductions. And then also, we have footprint consolidation initiatives currently underway, and we're using that as a means to drive our gross and operating margins. And so that would be a third focus area. So if I start with Vascular Solutions first, we completed the acquisition in February, and the acquisition integration is underway.
We moved quickly to integrate the sales forces together. We put their sales force together with our interventional sales force. And even during that transition time frame, we're able to achieve 13% growth in the first quarter, which was slightly ahead of our internal expectations and perhaps a good indication as to what we think we can realize in future years as well. The specific goals for that acquisition were to add about 8.5% to 9% growth for the year. We expect it to be incremental to our gross margin by 30 to 50 basis points, incremental to our operating margin by 40 to 50 basis points and then add $0.20 to $0.25 of earnings to the bottom line.
And so pretty good year one accretion and certainly a bit more to come as it becomes more fully integrated. And the way we're looking at the revenue growth, I mentioned that we achieved 13% in the first quarter. We're counting all of that revenue this year as M and A. But as that rolls out into our core business next year as we anniversary the acquisition date, we see that as a means to accelerate our top line growth by about a full point. So a nice driver there as well.
As we looked at the acquisition, there were a couple of things that really interested us. First of all was their twelve year history of driving revenue growth in excess of 10% each year. So double digit revenue growth each year. Their margins gross margins, I should say, were above 60%. And their new product pipeline is pretty encouraging with products such as the Trackliner, which is an extension of their flagship guide liner and then RePlas, which is a product they're partnering with the Army to develop freeze dried plasma, which has got interesting commercial as well as military applications.
And that's a product that is currently in clinical trials, the early stages of that, and that was an expectation that it might be in market by 2020 and perhaps have a size of $100,000,000 or more. So interesting acquisition and we're certainly in the midst of focusing on that. I would say that the next thing that we are focused on is, again, accelerating top line growth, largely through new product introductions. For the year, we guided revenue growth of 4% to 5% on a constant currency basis, which is exclusive of the acquisition of Vascular Solutions. Over the longer term, we think we can get that growth up above 4% to 5%, above the 56% range.
One way to certainly do it is through an acquisition such as Vascular Solutions, which carries a little bit faster growth rate. The other is through new product introductions. And so if you go back in time, Teleflex was generating about 100 to 130 basis points per year of growth out of new products. And we were satisfied with that. So we spent a bit of time looking at our own internal development efforts and refocused those efforts on fewer bigger initiatives.
And in addition, we began to supplement our internal development efforts by going outside and buying what we classify as late stage technology acquisitions, which essentially are companies that are pre revenue towards the end of their development cycle, but not right there at the commercialization stage. Between the combination of those two, we found a way to accelerate our growth. And we're really starting to see that in the marketplace right now. In the second half of twenty sixteen, we accelerated from what had been the 100 to 130 basis points of growth up to 140, and then we got to 180 basis points in the first quarter of this year. So we're starting to see the benefits of those investments in new products.
And the final point that I wanted to just highlight is our focus on footprint consolidation as a means to drive operational efficiency and financial leverage. So we have announced two major footprint restructuring programs in the past three years, which is essentially a move of our manufacturing from a high labor cost location to a lower labor cost location. And in addition to that, we've also announced three restructuring programs aimed at improving the efficiency of our commercial organizations and our back office staff. And the connect or the collective savings coming out of these initiatives is estimated to be in the 60,000,000 to $70,000,000 range once fully implemented. If you look at where we are in terms of realizing those savings, so we ended 2016, we'd realized about $30,000,000 So a little bit less than half.
So we've got another half yet to go in terms of those savings opportunities. So a good opportunity there. In addition, we've got the integration savings from Vascular Solutions, which we estimate to be in the 20,000,000 to $25,000,000 range by next year and then further $20,000,000 opportunity out a little bit further. So those are some of the key strategic highlights that we're focused on this year. In terms of our specific financial objectives, we have guided revenue growth for the year of 12.5% to 14% with 8.5% to 9% coming from Vascular Solutions.
Gross margin expansion of 130 to 190 basis points EPS, we recently took the opportunity to raise our guidance after the first quarter earnings call to $8.5 to $8.23 which is 10% to 12% growth. And then leverage, we added about a turn of leverage to finance the acquisition of Vascular Solutions. We are now a little bit above 3.5x and we'll work to reduce that leverage level down closer to three by year end. So those are some of the financial targets we're chasing after. So a lot going on, a lot of exciting activity at Teleflex this year.
Got it. A lot of detail in there. We'll try to get to all those items. But maybe to start, since you have an even broader footprint now across the healthcare system than you did prior to Vascular, I'm interested in what you're seeing in overall volume trend. And the reason I ask is we're obviously in an environment where employment in The U.
S. Is pretty good, but the future of ACA is a little hard to predict. So I think everyone is trying to figure out what's the volume trend in Healthcare look like? I thought
you guys had a unique perspective to comment there. Well, in terms of and you're referencing The U. S? Yes. Okay.
In terms of U. S. Volume trends, we have seen strong economic and favorable economic environment in The U. S. Coupled with favorable demographic trends translate into, I think, a pretty healthy medtech environment.
And so we have seen The U. S. Business performing quite well. And our expectation is that it will continue to perform quite well. And as a result, we're investing and focusing on that business quite a bit.
We've put more emphasis on our clinical sales effort to drive further penetration of products such as VitaCare. We're investing behind our new product introductions to make sure that they are achieving the maximum sales potential that we can. And we've been successful in expanding our GPO and IDN arrangements. And so as an outcome of that focus, we've seen good growth. In 2016, our constant currency revenue growth was up 5.5%.
And for this year, we expect to be in the mid single to upper mid single digits in The U. S. So it's a region that's important for us. It's almost half of our total revenue, but one that we think is poised for good growth in the future.
You gave a lot of detail on your plans for top line growth and margins. I'm interested in the role that price plays in your strategy for growth. It seems to me that you guys have done a better job than the overall industry peer group for medtech in terms of achieving pricing. I'm And interested in just how you guys philosophize and operate on the price side?
Okay. Well, we have had success in pricing. If you look at what we've been able to accomplish, dating back to 2011, we had been achieving about 100 or a little more than 100 basis points of pricing, 2011, 'twelve and 'thirteen. And then we've been in the range of 50 to 70 basis points of pricing thereafter. And that's probably a good indication of what we expect going forward is 50 to 70 basis points.
And there's really three areas or three means that we drove the pricing. First, if you go back to 2011 coinciding with the putting in a new management team, we really took a very hard look at our pricing practices and how our products were priced in the marketplace relative to competitive offerings. And what we found is that oftentimes, our products were priced at a discount. And so over the next couple of years, we gradually moved our products back to parity with the competitive products, and that led to some nice pricing opportunities for us and frankly wasn't seen as overly aggressive by the customer base. The next area that we've achieved pricing is through distributor to direct conversions.
So we have a number of markets that were serviced by distributors. At a point in time, we reach a level of scale where it makes economic sense to bring those distributors back in house because we can build the infrastructure and recapture the margin that otherwise would have gone through the distributor channel. And we've been successful in Australia, New Zealand, South Korea, Japan and now we're focused on China in terms of taking a distribution model, correct. Now we scope the total opportunity still remaining to be somewhere 8% to 9% of our total worldwide revenue still goes through distribution and perhaps onethree of that is a good candidate for converting to a direct model and recapturing that pricing. And then the third area is in product pricing.
And so what we tend to do is avoid the commoditized price and rather focus on products that offer clear clinical advantages, offer an opportunity to reduce the cost of a procedure, improve the safety for the provider or patients. And we use those as a means to protect our pricing and perhaps advance our pricing. So we try to stay away from those very competitive pricing landscapes and instead tend to focus on niche markets where we can better provide a compelling reason to buy our product and we found that we've been able to price in those areas as well. I want to
come back to the value comment kind of that you made at the end there. But before doing that, talk a little bit about the sales model that you mentioned a little bit where you're talking about the combination of direct and distribution models and the merits of both. How do you put together your customer reach between direct and distribution globally? And where do you
think it's going to go over time? Well, we, as a company, prefer a direct model because of the control. We've chosen to use distributors in certain instances because, as mentioned, perhaps we don't have the scale of revenue location to support putting in the infrastructure and the cost of doing so. But as those regions tend to grow, we look to bring those in house. Another reason why we may choose to use a distributor model is we'll look at the political or the economic volatility of a specific country or region.
We may choose to stay with a distributor to protect ourselves from a financial standpoint or at least insulate ourselves from the risks of a volatile economy or political environment. And then we also end up with distributors through acquisitions. As we acquire companies, oftentimes, they have a distribution model and that becomes part of Teleflex and then a further opportunity to bring that in house at some point in the future. So I would say that as we look towards the future, I mentioned that about 8% to 9% of our revenue still is going through distributors. We currently expect that about onethree of that is eligible to take direct.
Got it. That's helpful.
It's an interesting dovetail to the question of scale actually. When think about the distribution piece and then also innovation. You guys have an interesting amount of scale to work with and I'm interested in how you try to leverage that between both distribution and R and D. And when would you like to have more scale since you don't have it today?
In terms of scale, I would say that we, as a company, feel pretty good about the size that we are. There's been a lot of discussion in the industry about scale is creating an advantage, a competitive I'm advantage in the not sure that we subscribe to the notion that excessive scale creates any greater advantage. At some point, a company reaches a size where they have access to the GPOs, access to the IDNs, access to the customers, have a global distribution network, we're at that point. So we have the ability to reach the customers that we want to. I think perhaps at a certain level and below, there is a scale argument.
And I wouldn't say that that's in our size, but perhaps at the $200,000,000 in revenue or below, some of those companies may not have the access to the GPOs and they may not have the access to a worldwide distribution network. And in that instance, it could make some sense to consolidate. And that's a role we've been playing, where we've actually been looking at some of these companies and we bring them in house to Teleflex as a means to further our own product portfolio and to strengthen that portfolio. So we don't necessarily see scale as a requirement for us to continue to be successful in the marketplace. Instead, we tend to focus our efforts more in product niches where we can really control that niche and create a product portfolio of some completeness that provides the customer with, again, products that serve a clear clinical need.
They reduce the total procedure cost. They reduce the risks for providers and otherwise. And so we tend to focus more so in those areas, in those specific niches versus going head to head with some larger competitors. That's how we think about scale. So when we think about scale, we aren't looking to expand a number of verticals, but rather to continue to build out those niches.
So for instance, if you look at our vascular product line, we had CVCs, we had PICCs, we didn't have an intraosseous offering. And so we purchased VitaCare. So we filled out that piece of the equation. As far as targeting systems, we had a premium priced very, very comprehensive targeting system with Vasanova. But we didn't have one that competed on a lower price end, and so we recently purchased one.
That provides us with a good, better, best offering in targeting. And so as we think about scale, we're more focused on filling out the niches versus creating more and more verticals.
Got it, great. That's a bunch of questions. Let me pause for a minute, see if there's any in the audience. If you have one, please raise your hand and I'll attempt to see you through the spotlight here. If not, I have plenty more.
Okay.
So one product question I wanted to cover before going over to maybe financials and guidance. It had to do with any microbial treatments in the vascular business where it seems like a logical thing to add value there for customers. So I'm interested in how important you think that will be for your customers and maybe the reception there that you expect? And maybe as part of that, the selling process, how will that differ from traditional vascular access?
Well, we see that as a pretty distinct selling point for our product offering. So we, as a company, are the only company that can offer PICCs and CVCs that have both antimicrobial and antithrombogenic coatings. And it becomes difficult to get those claims from the FDA, where you have to demonstrate a four log reduction in order to get that claim. And so what it gives all the ability to do is to go into hospital and say that these products are clinically proven to reduce infection. Now why is that important to the hospital?
Well, as you're probably aware, hospitals have got an intense focus on reducing infections. They find that on average, it costs more than $40,000 to treat a hospital acquired infection and it's not reimbursable. So there's a real financial incentive to reduce infections. And within the last eighteen months to two years, the CDC has required that hospitals track and report infections. And so what we're starting to see is more and more of a focus and an interest in our products because they're proven to reduce infection.
So we see this as a very differentiated selling point. And as we approach hospitals in the selling process, we essentially work with them to establish a baseline infection rate and then work with them to do a trial with our products to see how that baseline infection rate may change and reduce. And oftentimes, you see a pretty quick prove out of that thesis. In addition, we'll oftentimes enter into a risk sharing agreement as a means to initially get ourselves into the hospital, whereby we'll agree to sell the coated PICC at the same price as an uncoated PICC with the expectation that if we demonstrate a reduction in infections that we will recoup that difference and then price at the higher price point in the future.
Got it. How should we think about the size of opportunity for this product? Is it a family of products that together will have you take a certain amount of share? Is there a margin benefit? Just trying to put into numbers the benefit of this technology.
Well, it's kind of
hard to precisely calculate what exactly it could do for us. I think that as we look at our portfolio, I'd say CVCs, we're currently the market leader with over 70% market share. And largely, we've been able to establish that because of these coatings. I think a real opportunity exists for us in the PICC market. And I say that because with the emphasis on infections and wanting to reduce those infections and needing to report those infections, we've seen a lot of focus on our pick products and those anti infection coatings.
So I think it's hard to exactly spec out how big it could be, but there is a nice opportunity for us, and we've seen good growth out of our portfolio. In fact, our pick products were up by 25% in The U. S. In the first quarter. Now what also is going to help us is that historically, we hadn't had a full suite of of PICC products.
We've recently added multi lumen PICC so that we now have a full offering that we can go to the hospital and sell. And in addition, we're working on gaining registration in China, which has been a fast growing market for others and so another means for us to grow that business. So we see a good opportunity in our pick business with our coatings.
You mentioned China, so let's pause for a moment and talk about that. I think on the
first quarter call, you talked a
little bit about the shift there from direct to consumer. Can you talk about what's going on in China in that sense? And then maybe what's baked
into your expectations for back half? Okay, sure. Well, essentially, as mentioned, we have a number of distributor direct conversions going on. China is currently underway. We initiated that transition in the first quarter.
And what's going to happen is, as a result of our program, we will allow the incumbent distributor to sell through their stock, which will mean they're going clear the channel in the coming months. And they generally hold about six months of stock. So we expect by the end of the second quarter that process will have largely happened. At the same time, we're building our own internal sales capabilities and putting the cost in a little bit of the sales curve. So we're going to see a little bit of an impact to margin, and I'll get to that later.
But the reason why we saw it as important to do now is, one, was the financial benefit of the distributor direct conversion. But then secondly is the control aspect. When we were looking at the execution we were getting, we weren't thinking we were getting the level that we looked for out of this distributor and thought we could improve that through our own efforts. And then we also have opportunities distinct to China with the recent approval of our VitaCare EZIO for sale in China as well as the pending registration of our pick. So having control of the sales channels, these two products entering that market, we saw was important.
In terms of the financial impact, in the first quarter, we estimated the negative impact to revenue was about a 60 basis point headwind. We expect it to be similar in the second quarter, abate somewhat in the third quarter and then move into positive territory in the fourth quarter. We don't expect the gross margin impact to be that significant, maybe 10 or 20 basis point impact from just having lesser sales to the channel. The operating margin impact, however, will be fairly significant in the second quarter, largely because we're putting in the infrastructure and spending the cost ahead of ramping up the sales. But then again, we'll work through that and we'll get back to more normal levels in the third and fourth quarter.
Overall, I think it's a $0.12 to $0.15 EPS impact this year. And again, it's being done because the longer term financial impact is positive as well as the control aspect.
Maybe a couple of operational questions as it relates to margins over time. You've talked about consolidating the company's footprint in your beginning comments as well as in the past and I think also delayering the distribution channel. Where are you in that process? And then what are some of the key milestones that we should watch for on the outside over the next couple of years?
Okay. Well, in terms of that footprint consolidation, I touched on this a little bit in our in my opening comments about the strategy in that. We've announced two major footprint consolidation initiatives over the past three years. That, along with some other restructuring programs, have got savings potential of 60,000,000 to $70,000,000 Through the end of twenty sixteen, we've realized about half of that. So we've got another half or more to go.
So 150 basis points of margin expansion has already been realized. We still have another 150 basis points to go. Now in addition, there are other manufacturing locations that have not been announced for relocation that have a similar potential. So there is the opportunity to do essentially a third wave, if you will. In addition to that, through the acquisition of Vascular Solutions, we've got two distinct opportunities.
The first was to restructure the sales, marketing, corporate overhead and those types of costs. And we've largely completed that through the second quarter. And then as a second phase, we've got the opportunity to consolidate manufacturing and bring those distributors in house. And that's likely more a 2019 story than a current story. In terms of the distributor to direct, again, sized the opportunity at about 8% to 9% of revenue still going through these distributors.
We think about a third of that is potential for taking direct. So we've got about 3% of total revenue that still is a distribution model that we think we can bring in house.
Got it. If you do all that, how should we think about the incremental margin performance in the business on the other side of those key changes? It seems like it should be reasonably better. Well, I
think reasonably better is a good but unprecise number. And I'm thankful that we don't have to make it more precise. We have an Analyst Day event scheduled for October 6 year. And our intention is to walk through a couple of things. One of them being what does the margin story look like over the next couple of years?
Where do we think it can go, what are the drivers. We'll also talk about what we think the revenue trajectory is. At that point in time, we're going to have Vascular Solutions under our belt for a good six months and we can get greater clarity around that. In addition, we'll spotlight or highlight some of our new products and more important product offerings at that event. So we'll get some more clarity there.
But I think it's fair to say that there's a lot of opportunity left. If you think about margin expansion, I talked about the current footprint programs and what's left there. We've got distributor to direct conversions that add additional opportunity. We've got pricing that we've been realizing year in, year out, and we expect that to continue into the future. By the very nature of some of our higher growth products, we're driving favorable mix.
As a product offering, VitaCare has been growing at 20% a year and carries in excess of 80% margins. So as we look out into the future, we think we've got a good runway ahead of us to continue to drive gross and operating margin expansion.
We're coming up on just under five. I think we're almost four minutes actually to go. Any other questions, raise your hand now and I'll be happy to call on you, but I've got a couple more. Yes, Veronica?
Can you talk about your strategy in urology from here? And how important is that as you think about driving growth? You just Just urology, what's the strategy for growing from here?
Well, our urology business is largely a European business. And as we think about it, we're probably somewhat focused on the Europe business. Another competitor is pretty dominant in The U. S. And one of our approaches is not go to head to head with an entrenched competitor such as that.
So as we think about urology, it's more of an expansion of the potential across the European region.
Other questions? Okay. If I look at sort of the long term corporate history of Teleflex, it's been one of continuous evolution, a lot of change. And I think it's always interesting to ask a question, what comes next? Imagine you're never done pruning the portfolio, looking for new assets.
So how should we think about the next iteration of the company as it relates to where you guys operate?
Well, as we think about it, there was a pretty transformative time for Teleflex. And as we look to the future, we don't see that level of transformation immediately there. In fact, what we see is a lot left to do with what we currently got going on right now, which is getting back to the points I raised at the beginning of the discussion, which is focusing on getting the top line growth going through new product introductions, through continued acquisitions, through distributor to direct conversions, through focusing on margin expansion through the footprint programs, other ways and certainly through acquisitions. Our business throws off a significant amount of free cash flow every year. We'll be able to quickly delever following the acquisition of Vascular Solutions.
And we want to be back out in the marketplace looking for that next deal. As we think about some of the value creation opportunities we've had, it's certainly been margin and it's certainly been some of our acquisitions. I think about the creation of value that we got from VitaCare, LMA and we expect to get from Vascular Solutions, it's a critical piece of what we're going do going into the future. So I wouldn't look for a great transformative event. Rather, I'd look to say that the next couple of years, we're still focused on executing similar opportunities to what we have right now and there's enough to provide a really compelling financial story.
Got it. Well, great having you
guys here for the first time. Really appreciate you making the effort and look forward to having this conversation again next year. Thank you for
your Absolutely. Thanks for having us. Yes. Great. Thank you.