All right. I think we're about ready to get started with our next session, and we're really pleased to be joined by Teleflex, including Benson Smith, who's the Chairman and CEO. Just announced that he's soon to be just Chairman in about a year from now, but has been CEO for about six and a half years. Jake Elguicze, who's also the Treasurer and the Head of the IR function at Teleflex. I guess just to kick things off, Benson, do you want to reflect a little bit on this six-and-a-half-year run? Teleflex has gone through a big transformation over that time period from a spinoff that wasn't being invested in very heavily under Tyco to now a much larger medical device pure play company that's really driving bigger growth. Can we talk about that just to start with?
There's a lot of areas that I want to go into, but start there.
I'd just say in general, I think the next five years are going to be better than the last six and a half. I think the company's in a considerably different position. We've got a great management team, I think, in place. Liam has been through really all the stages you'd want a new CEO to go through before getting into that role. I look back at where we were in 2011, there were a lot of staff changes that needed to be done, restructuring, rethinking about our product portfolio. A lot of it was similar to the issues and challenges I'd experienced at C.R. Bard, so I think that was helpful. I was on Teleflex's board for five years before this happened, so I had some good familiarity with the business. I think now we're in a very different place.
We've got a much better product portfolio, I think as we move forward that can turn into a growth story for us. I think we have several years of margin expansion ahead of us that are non-revenue dependent. We're starting to see our new products kick in in a more meaningful way. We're optimistic about the growth, particularly in the United States. We've seen now eight quarters of sequential growth and improvement coming out of the U.S. That's an important effort for us. With Vascular Solutions just recently acquired, we've got a lot of good synergies that are going to spill out over the next couple of years from that acquisition. I think it's maybe the best time we could have a leadership transition. 2017 is shaping up nicely and nice to go out on a good year, I think if that's possible.
I think even more importantly, 2018 is shaping up. I think it's good for your successor to step into something that has a lot of potential to do well right off the bat.
Maybe it's important for people to just understand, you've really been planning for this transition for a little while.
Since kindergarten.
In terms of a successor, it's been a very thoughtful process in terms of bringing him over, getting him used to the U.S. market, and really having a well-rounded experience at Teleflex. Can you talk about some of those capabilities that he brings to the table, and how you're going to be able to execute that transition?
Just philosophically, I think it's important in many cases that the succeeding CEO not be the mirror image of the past CEO, that in some regards, I've taken what I can do for Teleflex, I'm not going to say to the limit, but pretty far. I think the next leadership has some different issues to wrestle with. Liam, by way of example, is in many ways a better executor of a plan than I am. I get really interested in what is the strategy, kind of idea creation, what if scenarios. Liam is, I'm not going to say the opposite. He's good at that also, but he's very good at executing plans, and that's the role he's been in really since I've been here. First it was EMEA, then our whole international group, then we brought him over to get really familiar with the U.S.
market, he's quite good at developing the annual operating plans, working with the divisions, making sure that the strategy perspectives are really enforced, whether it's capital allocation, whether it's our financial strategy or our product strategy. I mean enforced in a good way, in a consistent way. I think he's precisely the right person, and he knows the business really well, and he knows the people really well, and that's very helpful to step into the role and have a lot of support from your employees. Also the board has been very much involved in evaluating his progress over the years, and they're wholeheartedly enthusiastic about him stepping into the role.
Great. You mentioned Vascular Solutions. That just closed, and that's a larger deal for Teleflex, and it really brings a lot of growth assets to the company. Can you talk about what you're expecting from Vascular in general, and anything that you see, I guess, in the portfolio differently than what the prior management team saw or that you've seen under the first kind of 30 days of ownership?
Just starting off at a high level, we had some franchises we were quite enthusiastic about, vascular access, surgery, anesthesia. We had some other businesses that were, I'm not going to describe any exactly as orphans, but they weren't large enough to focus a lot of resources on, and one of them was our intra-aortic balloon business, which obviously sold that product into the cardiac cath lab. We had an interventional business, which was enhanced a lot by the Vidacare acquisition and the OnControl product in particular. A relatively small sales force, about a 30-person sales force. Vascular Solutions really now allows us to merge those three businesses into one business.
We will retain a small capital equipment sales force because that's kind of a specialty sale, but it really turns this business now into a $320 million global business force. We'll retain their 83 sales territories as part of the process. It will allow us to have much greater access to sell our own product line into those customers. There's some immediate synergies, obviously, this year. Next year, we'll be able to move into taking some of their dealer businesses, which are the entire OUS business segment for them, on a direct basis. There's kind of an ongoing stream of improvement. We like the space they're in. From a product strategy standpoint, they actually mirror Teleflex quite a bit. They tend to go after niche businesses within the cath lab that much larger suppliers aren't going to bother with. They focus a lot on those hard-to-treat patients.
There's going to continue to be an effort, I think, to try and find solutions for those patients. They've got a lot of well-protected product lines. That's probably where some of the areas of difference are in terms of our view. We're actually excited about the singles and double kind of product launches that they're engaging in, that are going to continue down that path. There's certainly been some external investor enthusiasm about a product called RePlas, which is freeze-dried blood, and there's been some conversation about their large bore closure devices. We're certainly going to continue to invest in RePlas. We think that's a very intriguing opportunity, but it is kind of a binary product. It's either going to work or it's not going to work.
It's going to take a while to get to an understanding of whether that's going to happen or not. Now, that being said, we're pretty optimistic about the product line, but I think we're a bit more cautious in trying to get certainly the investment community out way over ahead on its skis in terms of what this is going to like. When we were modeling the acquisition, we were quite conservative in terms of the numbers we put for that. We think we can reach all our internal goals with or without that product. Large bore is a little different. I think the device they have, the design they have is going to work. The issue is it going to work better than four other people that are working on a very similar device? Is there enough protectability there?
We're not particularly fond of horse races against other much larger companies who have more resources to be able to plow into that. I would say it's early. We certainly want to find out more about that particular project. Again, with or without it, we think there's lots of substance in their R&D portfolio without that.
You touched on some of this. What are some of the singles and doubles that you're excited about in the vascular portfolio, and then maybe how meaningful could the OUS expansion be for them?
TrapLiner is an example of a product that was released not too long ago. The original thought was that would cannibalize some of their GuideLiner product. These are products that are used in difficult-to-treat patients, where they need to go and grab something. As it looks now, the first released early users are using both products as opposed to replacing one with the other. That's kind of an encouraging development that would look like a good product even without that, but it looks like it's going to exceed our expectations. They've introduced kind of a novel in their first entry into the guidewire business with an announcement today. They've got a product coming down the line that's a really novel perfusion device that will get blood flow into an area so that they can do a procedure without putting the patient at further risk.
Again, these are the kinds of really novel products that they, working in close conjunction with leading interventionalists, have come up with and put some resources behind. There's a list to go on. We could talk about it for the next five minutes, but there's a good list of products we're excited about.
Okay. I want to kind of reel it back in and talk from a bigger picture again about growth. Let's ask the audience a question about organic growth. This is just simply, what is your expectation for Teleflex's top line organic growth CAGR over the next three years? Let's ask them that. The key in their answer, we'll take a look at the response and then.
Okay
Talk about how you think about that.
We've got some people in the four, five, some in the three, some in the seven range. Maybe we can talk a little bit about your organic growth expectations for this year first. How that could evolve with things like vascular, Percuvance, and other contributors.
This year we put our guidance at 4% to 5%, and there is a tiny bit of acquired growth from an OEM acquisition that we did late last year, but not very significant. Historically, we had said that we were aiming towards an organic growth rate of somewhere between 5% and 6%. We were certainly a little bit more conservative as we went into this year to that number. I still think that there's a fair argument to be made that that's closer to what our potential is going to be, but we were a little bit more conservative. We're seeing some of the things that occurred in particularly the third quarter of 2016 come out as really transitionary kinds of things or transitory kinds of things, I should say. They're not repeating themselves certainly in the fourth quarter.
I think there's two views you could have. If you think we're a 4% to 5% grower and then you add on the eventual organic growth rate contribution from Vascular Solutions, we're in that 5% to 6% range again. I think we're probably going to see something a little bit north of that over the next couple of years as some of our own products start to kick in and we start to see them come through the Value Analysis Committees a little better with a little quicker rate.
Vidacare's been a real home run for the company.
It has. It has added 1% to organic growth. It's one of our highest gross margin products, so it helps us in mix, and it does not show any signs of slowing down. A lot of this is because of changing it from one insertion site, which was in the knee, into the shoulder, and in the shoulder, you get a much higher flow rate than you did in the knee. This is really a good alternative for that crash cart patient, for that heart attack patient, that patient who needs a high fluid volume line in right away and doesn't have blood pressure to be able to support an insertion. That's continuing to drive that share, and as you know, well beyond what our initial expectations were for the product.
Can you talk about Percuvance first maybe? Because you've described that in the past as one of the biggest, if not the biggest, in terms of product potentials for the company. How can we see that ramp over the next couple of years, and can you compare that growth to the growth that Vidacare is driving?
We have just now launched Percuvance through their entire surgical sales force. I think our expectation was is that over the past six months or so, while it was in a more limited release, we'd kind of get a better flavor for what the right surgeon or procedural audience was to go after. What we've learned, let's say one of the benefits to that product is there's obviously no scarring. Who's interested in cosmesis as a benefit? Well, right off the bat, patients that are going in for bariatric surgery are going in because they want to look better, feel better. Those surgeons seem to have an interest. Gynecological surgeons also have expressed more interest than more routine surgeons, particularly with their younger patients. I would say that there's more benefits than just the appearance of it, but that's one of the driving factors.
I think that's where we'll begin to spend more and more time in terms of getting the surgeon community interested in using this and trying this. There's anecdotal evidence that patients who go through this procedure, because they don't have those 3-5 trocars and trocar stab wounds which come from that, require less opiates in the recovery process, and that's becoming a bigger issue just in terms of patient care. Then there's a percentage of patients who have those sewn-up trocar wounds herniate, and so that seems to eliminate that complication as well. What we're trying to do is document not just the occurrence of that, but what that means in terms of what's called soft costs associated with the procedure that Percuvance really helps. We're kind of collecting data as we continue to roll this out.
This is not one of those products where you get the whole institution to convert at once. It's surgeon by surgeon by surgeon. It's a slower ramp-up than some of our other products. We're not especially concerned about that because this is really a well-protected product. There's not a competitive product that's really on our heels to be able to do this. This will take a little longer. We think certainly in a couple of years, it will be at the point where it's adding the same kind of contribution that we expect from Vascular Solutions and Vidacare, which would be another 400 basis points of organic growth coming from that. Even at that rate, it's well under what we think the ultimate potential for the marketplace is, which is much larger than that.
I think that's kind of our minimal expectation for the product line over the next couple of years.
Okay. Great. Let me ask the audience another question. This one's just about guidance, and then maybe we can talk about some of the factors impacting 2017. This asks, "Do you view the midpoint of Teleflex's 2017 earnings guidance as conservative, middle of the road, or aggressive?" We have modestly conservative and middle of the road making up most of the answers here. I guess maybe we could talk a little bit about how you approach developing the guidance range. What are some of the biggest factors that could drive you towards the low or the high end of the range, and what are some of the ones that are more and less predictable?
Our general approach is to first start off with those things we have a high degree of confidence around and are fairly certain or likely to happen, certainly within a range. We look at kind of a list of unsure, could happen, might not happen. Things in that list might be retroactive changes to the tax code if they come about, the ability to repatriate money if that comes about, and kind of make a list and try to come up with some judgment in terms of where we think we've balanced those unknowns into at least some comfort zone. It's rare that all the bad things happen and none of the good things happen, so we try and come up with that. I would say we tend to fall into, particularly when it comes to EPS guidance on that, mostly conservative.
I forget exactly what your numbers were.
In that range. Even in 2016, where we had some other tough things to have to deal with, we were able to raise our EPS guidance three times during the course of the year. Some of that, the last time, was based a lot on tax, but that's one of those things that was in that bucket as well. I think it's fair to say from an EPS standpoint of view, we generally fall on that moderately conservative perspective.
Maybe it's worth commenting on tax as one area where there's some political uncertainty. Can you talk about how tax reform from repatriation, lower corporate tax rate, and border tax could impact the company with the blueprint that we have today?
Starting with the lower corporate tax rate, we're pretty tax efficient already, and if that is accompanied by a change in the way they do interest deductions, that's probably a net negative for us. That's obviously something we're paying fairly close attention to. We think it's not going to just be a net negative for us. There's been a lot of people in the era of inexpensive money who've been doing a lot of money, who've been borrowing a lot, whether it's just forward going or past is another issue. I think there's a lot of details to be sorted out. I spent some time in Washington last week, and then two weeks ago as well, and I would say there's a lot of disagreement in terms of many of these policies. You get to border tax adjustments, even more so.
I'm anything from a political expert, but our understanding is that there's a growing constituency in the Senate that really has a dim view of that, and maybe the votes aren't going to be there for border tax adjustment. I think the things out of Washington in general are there's obviously some people in favor of it. The administration is in favor of it one day, and then the next day, not so much. I think that has the potential, depending on what the details are, to be more concerning to us.
For repatriation, you still have a lot of cash offshore, right? How could that impact you as well?
Again, depending on what the details are, but that's an area where we would likely have a benefit from it. I think just in the short term, because there's some expectation that something happens in that area. We're likely to take a differing view to the debt financing we used for Vascular Solutions. We're probably not going to go out to the high yield market while this is still kind of in play, and we will receive a benefit by keeping that on a revolver until that's resolved. I think we'll see some tax benefit this year that would help from that decision alone.
Okay, we just have a couple minutes left. I wanted to ask the audience another question and then maybe talk a little bit about margins. This just asks where Teleflex should focus in terms of improving to drive better stock price performance. The answers here are revenue growth, gross margins, EBIT margins, earnings growth or cash flow growth. Let's take some feedback from the audience and talk a little bit about some of these areas. Organic revenue growth was the number one answer, but we do have some margin, and earnings and cash flow votes here too. We talked about revenue growth, and that begets some of these other things, but one of the things that's interesting about Teleflex is that you have a long margin pathway-
that you've described in part in the three-year LRP that kind of ends next year. Can you talk about what that says and then what's been incremental to that, and kind of lead into where that could go over time?
This is an interesting answer pattern. I would say we see it a little bit differently, and I think because we may ascribe a lot more certainty to the several years we have left of non-revenue dependent margin growth. For us, that's always a bit less risky than having all your eggs simply in a revenue growth story. That being said, we think we're increasingly moving towards a growth story, and I would say a combined story, margin and revenue growth, with some caveats. We're not going to chase revenue that is at really low margins, that is not sustainable. We're not going to go after big business and lower prices just to be able to have an artificially inflated revenue line.
We've had talked about for several years now what we call the quality of your revenue growth, and not all revenue growth is equal to us. For every $1 in revenue growth we get from Vidacare, we would actually get $3 of revenue growth from low-end respiratory therapy products. We are somewhat picky about the revenue growth we're willing to pursue, and making sure that it's in areas where we can keep the business over time, where we're likely to be able to keep our margins up over time. That drives a lot of thinking about whether we'd rather have 6% of revenue growth or 8%, whatever the numbers are, we're going to lean and have a bias towards what we'll call high-quality revenue growth.
Great. We're almost out of time, since you mentioned the non-revenue dependent margin drivers, can you just illustrate what some of those are, the ones that are in the plan, and then any ones that are out there that could provide upside?
Generally, the 350 to 400 basis points that we spoke about as for our goals for that 2016, 2017, and 2018 period were driven around the benefits that came from a variety of footprint consolidation programs. There's also a category which I'll call material substitution, where we're able now, because of the consolidation of some of these products, to get better pricing on either the raw materials or make some changes in those raw materials to have more beneficial gross margins. Then mix is just an inherent part of it. All of our selling resources tend to be concentrated against higher gross margin products. As we see growth in those products growing more and more quickly, we're getting a benefit from mix. What was never included in that, and one of the reasons we thought it was conservative guidance, was acquisitions.
We presented ourselves as a serial acquirer and also these dealer direct acquisitions. By way of example, Vascular Solutions now adds a whole additive gross margin improvement to the picture short-term, not even long-term. I would say the same thing is true with our decision to go direct in China. It adds a margin improvement component to it, as well as a revenue component to it as well.
Great. I think we have to end there, we're going to have a breakout down the hall. Thanks very much for your time.
Thank you.