Good day, ladies and gentlemen, and welcome to the third quarter Teleflex Incorporated earnings conference call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question and answer session, and instructions will be given at that time. If anyone should require any operator assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Jake Elguicze, Treasurer and Vice President of Investor Relations. Sir, you may begin.
Thank you, operator. Good morning, everyone, and welcome to the Teleflex Incorporated third quarter 2016 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 97714633. 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 make some brief prepared remarks. Then we'll open up the call to Q&A. Before we begin, I'd like to remind you that some of the matters discussed in the conference call will contain forward-looking statements regarding future events as outlined in our slides.
We wish to caution you that such statements are in fact forward-looking in nature and are subject to risks and uncertainties. Actual events or results may differ materially. The factors that could cause actual results or events to differ materially include, but are not limited to, factors made in our press release today, as well as our filing with the SEC, including our Form 10-K, which can be accessed on our website. With that, I'd like to now turn the call over to Benson.
Thank you, Jake. Good morning, everyone. Thanks for joining us this morning. To begin with, we are very pleased with our overall financial results for the quarter. On an as-reported revenue growth number of 2.7%, we increased our adjusted gross margin by 6.6%, adjusted operating margin by 14.7%, adjusted EPS by 12.5%, and had excellent cash accumulation. The full year-to-date picture looks even better. By any measure, that demonstrates excellent financial leverage throughout our P&L. Longer range, based on our results this quarter, we feel very good regarding our cumulative 2016, 2017, and 2018 expectations. This quarter is without question one of those occasions where we've demonstrated that we have several different levers to continue to drive shareholder value. We did expect to see an uptick in constant currency revenue between second and third quarter, which did not materialize.
We have reduced our full-year revenue guidance, and we are pretty sure that many of your questions will be around revenue. Thomas, Liam, and myself will of course cover other areas, but we want to provide as much clarity as we can around our revenue numbers. We had three primary causes responsible for our revenue shortfall, and while we are affecting our 2016 guidance, none of them give us particular alarm relative to our longer-term outlook. Why do I say that? Underneath the surface are some very encouraging signs in products and markets that are particularly important to us from a sustainable growth perspective. We will elaborate on those points during the course of our discussion today. I'd like to begin by just briefly reminding you of Teleflex's overarching strategy.
We believe that the number 1 growth market in terms of its size and impact on Teleflex over the next 10 years is the U.S. The U.S. has more than just an aging population. Most countries have that. We believe the U.S. is best equipped in terms of resources to take care of that population and least likely to engage in rationing or arbitrary cutbacks in healthcare spending as a result of a sluggish GDP. For us, the U.S. is in the bullseye where we want to grow. With the right portfolio enhancements, we believe it is possible that our U.S. med device business can grow significantly over the next five to 10 years. The only other markets with large populations that we see capable of growing at or above high single-digit rates are China and India. Even in those markets, we are more selective.
We want to grow in product areas that are least likely to be replaced by local manufacturing and worth the investment in clinician training. The other two markets of significant size are EMEA and Japan. We do not see these markets growing as fast and have pegged them to low single-digit growth. In these markets, we need to pay attention to products that are associated with above-average procedural growth rates. There are some risks, though. Many currency forecasts see several years of potential weakness compared to the U.S. dollar. Constant currency growth revenue is an interesting metric, if as-reported revenue is continually eaten away by falling currencies, it is not growth that helps your P&L or generates cash. When we look at the rest of the world, we see an increasing risk from either economic or political uncertainty and likely higher volatility with their currencies.
Looking back to 2011, one of my early observations was we were overexposed in EMEA, at least compared to other U.S.-based medical device companies. The consequence of this became very apparent to us as we approached 2015 and were staring at an $0.87 currency headwind. We intentionally want to reduce this exposure by growing faster in the U.S. than in other markets such as EMEA and Japan. Another key part of our strategy is that we have a unique opportunity to continue to improve our gross margins, not just through 2018, but for several years after that. These opportunities are not revenue-dependent and will allow us to get the maximum earnings leverage from our revenue growth. It is our deliberate intention to use this opportunity to enrich our portfolio and have a greater portion of our revenue in markets and products where growth is both sustainable and defendable.
When we review our revenue growth this quarter against this backdrop for the third quarter, we're not ecstatic, but we're not worried either. We are growing where we want to grow and in the products we want to grow in. Furthermore, all of our leading indicators are very positive. Now let me get back to the three factors around our third quarter revenue. First, our sales into our U.S. distributors continues to lag behind their sales into hospitals. We receive tracings data from our distributors, so we know what end-user hospitals are purchasing. When we combine our direct sales into hospitals plus our distributor sales into hospitals, we see a very healthy trend from both improved volumes and from newly won accounts. We are gaining accounts and we are growing share at a good pace. What causes this lag is primarily flu related. How do we know that?
We only see these discrepancies in products that are influenced by the flu. We don't see it at all in any of our surgical products, for example, but we see a much more profound impact in vascular access and certain anesthesia products. At some recent investor conferences, I made a comment about lack of visibility. What I was referring to specifically was this dealer ordering pattern around the flu season. Sometimes it starts to occur as early as September. This year, we didn't see that uptick. Sometimes it occurs in the very last few weeks of December, and it's one of the reasons we typically have a strong end to our fiscal year. We also can't predict the severity of the flu season. In the 2015-2016 season, it turned out to be almost nonexistent, while the year before was pretty severe. The two years prior to that, pretty normalized.
It's one of those variables that make pinpoint forecasting for us around the third and fourth quarter a little problematic. That ambiguity is principally what's driving our current revenue guidance range. If we see a normal year-end purchasing pattern from distributors, we should be at the high end of our revenue range. If for some inexplicable reason distributors do not restock, we could be at the lower end of our revenue range. The second issue for us in the quarter relates to revenue from new products. Coming into the year, one of our biggest single areas of expected revenue growth for 2016 came from the thought that there would be a significant jump in the contribution from new products. It is taking us longer than we anticipated to get these products through the value analysis committees, which have been installed at almost every major hospital.
By mid-August, it became readily apparent that summer vacations weren't going to help either. The net effect is that products we expected to get through these committees by the end of the first quarter are, for the most part, just now gaining committee approvals. The math here is pretty simple. Instead of nine months of revenue for a new product in 2016, we'll get three months of revenue. While this is frustrating, it's not at all discouraging, and we are not discouraged. It is taking longer, but our success rate in getting these products through these committees is high, and we're seeing continued improvement in our contributions from new products, particularly in the U.S., where we tend to launch them first. Liam will go over the numbers with you. It's a very good trend.
We are seeing greater than expected weakness in certain geographic markets where local economic conditions continue to be distressed. We thought we were conservative in our expectations, but retrospectively could have been even more conservative. Oil-producing countries are still in a difficult position, and some Asian basin countries are experiencing greater than expected slowdown in their healthcare spending. Some of these locations may continue to be a drag on constant currency growth, but we don't consider this to be high-quality growth, and we don't plan to chase this growth in the future. On that point, we continue to be focused on this notion of high-quality revenue growth as being as important, if not more important, than just the overall number. We have a lot of discipline about the products we select to put in significant sales and market resources behind.
I personally believe this strategy makes us much less vulnerable to the pricing pressure we are likely to see as healthcare expenses escalate in almost every country and should make us less vulnerable to currency volatility. In spite of some softness in our revenue numbers, we saw great strength throughout the rest of our P&L, and we see several years of continued gross and operating margin expansion ahead of us. We are confident in our ability to achieve our previously provided longer-term goals and see lots of encouraging trends. Still, any sustained progress in a complex environment always involves overcoming challenges, and you cannot always anticipate what those challenges will be. That's where and why good management teams make a difference. Track records count. Personally, I have tremendous confidence in our team and in our track record and in our ongoing commitment to our investors.
With that, let me turn it over to Liam.
Thank you, Benson, and good morning, everyone. For the consolidated company, third quarter 2016 constant currency revenues grew 3.1%. The primary driver of revenue growth this quarter came from increased sales volume of new products which contributed approximately 1.3%. New product sales were particularly strong within our surgical, vascular, and anesthesia product lines. Surgical new product sales were driven by increased utilization of products used in robotic procedures, further penetration of our EFx offering, as well as increase in the amount of percutaneous laparoscopic products sold, such as MiniLap. Vascular new product revenue increases are attributed to sales of our preloaded antimicrobial and antithrombogenic BPS PICCs. While in anesthesia, the growth is primarily due to increased sales of our Rüsch disposable LED laryngoscope and LMA Unique product with silicone.
The next largest driver of revenue growth in the quarter was sales of core products, which increased 0.9% versus the prior year. Growth here was driven primarily by two areas: OEM and EMEA. Despite the third quarter improvement as compared to the prior year third quarter, it is our belief that core product volumes were lower this quarter as compared to quarter two due to the distributor destocking issue Benson referred to earlier. Turning to other components of revenue growth. During quarter three, we saw a nice uptick in the average selling price of our products, which grew revenue higher by approximately 0.7%. This was primarily due to increases in Asia as well as increases within our surgical and vascular product lines. Finally, during the third quarter, acquisitions added approximately 0.2% of growth. This was primarily due to a small acquisition that occurred within our OEM business.
North America growth for quarter three was approximately 3.6%, with approximately 2.2% of that growth coming from new products. As Benson mentioned earlier, the new product revenue growth within North America in quarter three of 2.2% was an acceleration from the 1.2% growth rate in quarter one and the 1.6% growth rate in quarter two. This supports our hypothesis that while value analysis committees have slowed the adoption of new products, we are still seeing an incremental improvement in new products in the North American market. Staying with North America, as Benson mentioned earlier, our direct sales combined with distributor tracings show a more robust picture of end hospital sales demand than our reported sales. This makes us feel confident in our ability to achieve our revised full-year revenue guidance range.
I would like to provide some additional color surrounding our segment and product-related constant currency revenue growth drivers. Vascular North America third quarter revenue increased 3% to $85.1 million. The increase in vascular revenue was largely due to sales of Vidacare EZ-IO and OnControl devices, as well as increased PICC sales, which incidentally grew by double digits. Moving to anesthesia North America, third quarter revenue was $48.7 million, up 2.2% versus the prior year period. Growth in this segment was driven by increased sales of Vidacare EZ-IO, airway management devices, epidural kits, and atomization products. This was somewhat offset by year-over-year declines in regional anesthesia and laryngeal product offerings. The Vidacare product lines continue to perform well, growing approximately 20% globally on a constant currency basis this quarter.
The performance in quarter three was within our expectations, we continue to expect global Vidacare product lines to deliver approximately 20% growth for the full year. Our surgical North America business, its revenue increased 5.7% to $41.9 million. The increase within surgical is primarily attributable to higher sales of access ports and surgical instruments. Chest drainage products also grew due to continued competitor issues. Our overseas businesses, EMEA revenues continued to rebound in the third quarter and expanded 2.2% on a constant currency basis totaling $121.4 million. The improvement in European revenue was largely the result of increased urology and surgical product sales. This was somewhat offset by lower sales of cardiac products, as our European business continues to work through a backorder in this product category.
We have now seen sequential improvement in Europe from -1.9% in quarter one to positive 1.3% in quarter two, and now positive 2.2% in quarter three. Moving to Asia, our third quarter revenue increased 2.1% to $64 million. The quarterly increase in Asia revenue was primarily due to higher surgical ligation and anesthesia sales. The Asia result was below expectations and was driven primarily by weakness in Southeast Asia and Australia. We expect Southeast Asia to recover in quarter four and have good line of sight of distributor orders driving this recovery. On a positive note, China growth exceeded 8% in the quarter. We expect a recovery in Asia growth in quarter four as we anniversary some one-time events in the region. This is despite a tough comparable in China in quarter four.
Turning to OEM, during the third quarter, revenues increased 6.3% to $41.4 million and was primarily due to higher sales of performance fiber products. Lastly, third quarter revenue for the businesses within our all other category was up 2.8%, totaling $53.1 million. Growth here is primarily attributable to sales of additional respiratory therapy and North American-based cardiac intra-aortic balloon products. This was somewhat offset by year-over-year revenue decline in our Latin America business. Next, I would like to briefly update you on additional GPO and IDN agreements that we received during the quarter, as well as some recently received regulatory approvals. During the third quarter, we won 15 new agreements and extended another 10. Of the agreements won and extended in quarter three, 16 were sole source in nature.
Approximately half of the sole source awards protect our existing business, while the other half position the company to expand our sales across a variety of clinical areas, including our percutaneous product line, laryngeal mask Pain pumps, dialysis catheters, closure devices, PICCs, vascular positioning confirmation systems, and Vidacare OnControl. Moving next to regulatory approvals. I am pleased to report that in August, we launched the new second-generation Percuvance system in the United States. We had already launched the second-generation device in the second quarter outside of the United States. This second-generation device is more versatile than its predecessor and features additional interchangeable five-millimeter tool tips, as well as a new quick-connect system to facilitate fast and secure tool tip changes outside of the body. This product has the performance and versatility for use in common and advanced general laparoscopic procedures, including laparoscopic colectomy, upper gastrointestinal, gastric, bariatric, colorectal, and hernia procedures.
We remain very enthusiastic about this product opportunity as we see an increased adoption of the product as the product gets more approvals from value analysis committees in the United States. In addition to Percuvance, we also received 510(k) clearance from the FDA to market our Arrow JACC with Chlorag+ard technology and TightTrack tunneler. This device is a long-term tunnel, small French size, antithrombogenic and antimicrobial central venous catheter designed for use with high-pressure injections. By providing an antithrombogenic and antimicrobial catheter that protects against catheter occlusion, we are offering a technology that no one else can. This is important in patients with end-stage renal disease, where vessel health and preservation is essential to provide future dialysis vascular access. Another 510(k) approval that was received from the FDA during quarter three was the Arrow Midline product with Chlorag+ard technology.
This is an antithrombogenic and antimicrobial PICC designed to minimize common midline catheter complications, such as catheter intraluminal occlusion, thrombus accumulation, and microbial colonization on the catheter surface for a minimum of 30 days. Development of new technology to ensure the patient receives the safest, most effective IV therapy possible should drive all medical device manufacturers, and it is our belief that this product helps to do so. The last new product which I would like to draw your attention to is the Arrow VPS Rhythm system. During the third quarter, we received CE certification to commercialize this device in the European Union. The Arrow VPS Rhythm system is a simple and flexible solution that helps the clinician to place the catheter by providing ECG-based tip confirmation in a highly portable, lightweight, and versatile design.
It assists in the placement and confirmation of the catheter tip and may be used for a broad range of catheter types. It is our belief that this clearance puts us in a position to establish a reliable, cost-effective standard of care in catheter navigation and placement in Europe. Lastly, I would like to update you on the status of our 2014 manufacturing footprint realignment plans. On our last earnings conference call, I updated the investment community on a variety of our restructuring plans. That included our 2014, 2015, and 2016 restructuring initiatives. Today, I would like to provide you with a further update, specifically regarding the 2014 plan.
As a reminder, the 2014 plan was announced in April of 2014, and it involves the consolidation of operations and a related reduction in workforce at certain facilities and the relocation of manufacturing operations from certain higher-cost locations to existing lower-cost locations. These actions commenced in the second quarter of 2014 and were originally expected to be substantially complete by the end of 2017. To date, we've completed the consolidations and relocation of a significant portion of the operations and estimate that we will achieve annualized savings of approximately $17 million by the end of 2016, directly related to these actions.
With respect to the remaining actions to be taken under the plan, we revised our savings, expense, and timing estimates during the third quarter to reflect the impact of changes we have implemented with respect to medication delivery devices, including certain of the kits sold by our vascular and anesthesia businesses. As a result of these changes, we have reduced our estimates with respect to the overall annualized savings we expect to realize under the plan from our prior estimate of $28 million-$35 million to a range of $23 million-$27 million. We anticipate that the changes we have made to our vascular kits will enable us to realize improved pricing on those kits, which in turn we expect will result in increased annual revenues that should offset a significant portion of the decrease in projected plan savings.
As a result, we anticipate that this projected increase in annual revenues, taken together with the projected annualized savings we expect to realize under the plan, should enable us to improve our pre-tax income on an annualized basis by approximately $28 million-$33 million once the plan has been completed, or substantially similar to our original estimate. However, as a result of the changes, the 2014 manufacturing footprint realignment plan will not be substantially complete until the first half of 2020. As we have previously stated, these are complex projects, and the potential risk to these restructuring programs has been the timing of the execution. We continue to evaluate alternative measures to mitigate the reduction in savings and accelerate the timetable for completion. We will update you as this information becomes available.
Despite this change, I would like to emphasize that Teleflex remains on track to achieve the 350-400 basis points of both adjusted growth and operating margin expansion by 2018 that we previously discussed with the investment community. 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 third quarter and to provide our updated full-year 2016 guidance. Tom?
Thanks, Liam. Good morning, everyone. Given the previous discussion of the company's revenue growth drivers, I'll cover results below the revenue line where we have a very compelling financial story for both the third quarter and year-to-date results. For the quarter, adjusted gross profit was $245.8 million, versus $230.5 million in the prior year's quarter, and adjusted gross margin increased 200 basis points to 54%. The increase in gross margin reflects the impact of lower manufacturing costs, the impact of favorable fluctuations in foreign currency exchange rates, and the impact of price increases, primarily in the Asia, Vascular North America, and Surgical North America segments. Also during the third quarter, adjusted operating margin increased 250 basis points to 23.7%. The increase was largely the outcome of the gross margin gain, control over discretionary overhead spending, and the impact of the suspension of the medical device excise tax.
The improvements were somewhat offset by an increase in R&D investments. Adjusted net interest expense increased to approximately $11.7 million, versus approximately $10.8 million in the prior year quarter. The increase in adjusted interest expense is an outcome of the May 2016 issuance of 10-year four and seven-eighths senior unsecured notes, with the proceeds of the issuance being used to redeem a portion of the three and seven-eighths convertible senior subordinated notes and reduce borrowings under the revolving credit facility. The net result being a modest increase to the average interest rate on outstanding borrowings. The interest rate was partially offset by the third quarter repayment of $50 million of revolver borrowings with cash available on the balance sheet.
In the third quarter, the adjusted tax rate was 14.2%, which was up 90 basis points versus the prior year period, was favorable to internal expectations, largely the result of a shift in income to more favorable tax jurisdictions. On the bottom line, third quarter adjusted earnings per share increased 12.5% to $1.80. We are pleased with both progress we have made to expand our gross and operating margins and to drive meaningful gains in earnings. Q3 adds another quarter to our year-to-date track record of generating substantial financial leverage from revenue growth in the lower mid-single digits. This progress is perhaps best evidenced by a quick review of year-to-date performance. For the nine months ended, our reported revenue increased by 2.2%. Our adjusted gross profit increased by 6.1%. Our adjusted operating profit increased by 17.5%. Our adjusted EPS increased by 20.6%.
In addition, for the first nine months, our adjusted gross margin increased by 200 basis points. Our adjusted operating margin increased by 310 basis points versus the prior year. Despite softer than planned revenue growth, we have been able to drive very positive financial results. The margin expansion and earnings growth story remains very much intact. The robust earnings growth has also translated into meaningful cash flow generation. For the third quarter, cash flow from operations increased 79% to $120 million. On a year-to-date basis, cash flow from operations increased 71% to $302 million. The year-to-date increase was primarily the outcome of improved operating results, a net favorable impact from changes in working capital items, and a reduction in income tax payments. From a balance sheet standpoint, at the end of the third quarter, cash on hand totaled approximately $500 million.
Leverage, as per our credit facility definition, stood at approximately 2 times. Combining our strong cash flow generation with balance sheet capacity, we are well positioned to capitalize on strategic opportunities. Finally, during the third quarter, we announced an additional restructuring program designed to further improve operating efficiencies and to reduce costs. These actions include the consolidation of select administrative functions and manufacturing operations. Through this program, we expect to achieve annualized pre-tax savings of between four and a half and five and a half million dollars once the program is fully implemented in early 2018. That completes my comments on the third quarter results. Next, I'll provide an update to full-year 2016 financial guidance. Starting with revenue. As covered earlier, for 2016, we are lowering our full-year as reported and constant currency revenue growth guidance to reflect our current expectations.
We now project full-year as reported revenue growth to be between 2.4% and 2.8%. We project constant currency growth to be between 3.4% and 3.8% versus 2015 levels. Turning to margins. We are reaffirming our previously provided adjusted gross and operating margin guidance ranges of 54%-55% and 24%-24.5% respectively. Based on our year-to-date adjusted tax rate of 18% and projections for the fourth quarter, we now expect full-year adjusted tax rate to be between 17.75%-18.25%. This compares to our prior range that called for an adjusted tax rate of between 18.5%-19.5%.
On the bottom line, we are increasing our full-year adjusted earnings per share guidance range and now expect adjusted EPS to be between $7.25 and $7.34, which represents growth of 14.5%-16% versus 2015. Additionally, we now expect cash flow from operations to be in the range of $400 million versus our original expectation of $330 million. This raise to EPS marks the third consecutive raise this year and signifies our commitment to deliver meaningful earnings accretion regardless of the revenue environment. It's a clear affirmation to Teleflex's capability to generate non-revenue dependent earnings growth and cash flow generation. 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 would like to ask a question at this time, please press the star and then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from the line of Lawrence Keusch with Raymond James. Your line is now open.
Okay. Thank you. Good morning, everyone.
Good morning, Larry.
I know you've touched on some of these aspects here, look, with your constant currency guidance for the year, I guess at the midpoint, around 3.6%, how do you think about the 5% to 6% that was outlined in the long-range plan? If you still believe that you're in that range, what sort of accelerates you from where we are today? Obviously, you've been struggling a little bit with the top line.
I'll let Liam answer that, then I'll give you my own color, Larry.
Hey, Larry. Yes, Liam here. We still feel pretty confident in the longer-term 5% to 6%, what that's based on predominantly is in our outlook for, in particular, the North American market. What I'd like to point out is that while our North American business units reported sales of 3.6% in quarter three, we have really good visibility on tracings and our direct customer sales. That data would indicate that our actual sell-through to hospitals, which for us is the more critical point is the usage of our products in hospitals in North America in the third quarter was in the high fives from a percentage. We don't think the third quarter truly reflects what our business is capable of doing, and we see this as a good indicator of actual demand for Teleflex products.
We've also seen a nice recovery in EMEA to achieve over 2% growth in the quarter, we've seen acceleration there. We also see Asia starting to recover in next year to start to bridge us to that 5% to 6% in the longer term. Broadly speaking, North America will drive increased revenue growth, a modest recovery in EMEA to low single, and getting Asia in particular up into that high single digit category should get us there, Larry.
I think, Larry, we started to get a lot more comfortable with it when we started to peel a couple of layers of the onion away and get through what was going on at the distributor level and look at what was going on in the hospital level. By way of comparison, getting back to the flu, there was essentially no flu in terms of the first quarter of this year in terms of seriously ill patients being in the hospital, which was the case in the prior year and in fact, for the prior 4 years. In spite of that, our sales through, not just for the quarter, but our sales through the hospitals is showing really good growth. That's a little bit of a masquerading event that's occurring there.
Once we get through that and also see the trend in new products, we're a lot more comfortable after we understood that than before we started to do the analysis.
Okay. That's helpful. Two other quick ones for you. First, again, just coming back to the 3.6% midpoint of the range, constant currency that you're now looking for in 2016, and listening to Liam's comments that certainly you believe that 5%-6% is doable. It sounds like perhaps in the latter portion of the LRP. Are you prepared, or can you say today whether you think that 2017 sales can accelerate from that 3.6% at the midpoint of the range? Then the second question is just any thoughts that either Liam or Benson or Tom may have as it relates to M&A and the outlook there.
We're obviously in the midst of doing our 2017 plan at this point. I think, again, some encouraging signs for us is largely around the fact that there wasn't a flu season this year, that comparable in the U.S. is going to be helpful. The trend of growth in the U.S. is about a full percentage point higher on a hospital basis for the year to date so far compared to last year. That trend is continuing. We expect to see that to continue. I think with additional stabilization in Europe, that's going to be helpful. Most of these shortcomings in the oil countries and Pan-Asian markets will be completely out of our history and comparables. I would certainly expect to see an improvement from 3.6%
Larry, just to reinforce that we have seen a pickup in new products, in particular in our key North American market from 1.2% in Q1 to 2.2% in Q3. We anticipate having a more robust new product as it gets through the VAC committees. What we found, Larry, is it's taking six to nine months to get through these VAC committees. Therefore, it causes a little bit of a lag between launching these products and getting the revenue recognition for them, which we hadn't fully anticipated.
You had a second half to your question, Larry. If you would repeat that.
It was just, again, just your thoughts around the M&A outlook.
We continue to evaluate a lot of opportunities. Our M&A group continues to be quite busy. We remain disciplined about what we're interested in looking at. It basically has to meet that criteria of enriching our portfolio in terms of the essential necessity of the product, limited competition, and good growth opportunities in markets which we think are defendable and sustainable. We're not concerned about our longer range opportunity for M&A to contribute to our growth.
Okay, terrific. Thank you guys.
Our next question comes from the line of Brooks West with Piper Jaffray. Your line is now open.
Hi, can you hear me?
Yeah. Good morning.
Good morning, Brooks.
Good morning. Liam, I missed your comments on the new product contribution. I was wondering if you could just kind of run through highlights again there. I'm curious as you do that, if you could call out any surprises, positive or negative, as you start to get these new products into hospitals.
Our overall new product revenue for quarter three was at 1.3%. The comment I was making about North American new product adoption was that we saw an uptick in new product adoption in our key North American market, going from 1.2% in Q1 to 1.6% in Q2 to 2.2% in Q3. Brooks, my comment was that even though we have this product have now gotten through this value analysis committee, the signs are positive that in our key North American market, we are beginning to see traction. What the value analysis committees have caused is a delay in the products getting through to the hospital. I'll just give you another little anecdote of a positive outcome.
Even though Percuvance itself is not going to drive significant revenue in 2016 and will start to climb through 2017, we see that we have approximately a 70% hit rate in Percuvance going through value analysis committees and getting approval. That's a positive sign for us on Percuvance and in value analysis committees in general. It does cause a lag of that 6-9 months, Brooks.
Okay, perfect. As we look at 2017, just to follow up on the previous questions, could you weight for us the factors that might push you higher or lower? I mean, is it new product performance? Is it geographic performance? Can you just give us some framework for how to think about what weight to attach to the various contributors? Thanks.
Absolutely. We're quite bullish on our North American market, which is a key market. I think as Benson said a number of times, not all growth is equal. Growing in North America is key part of our strategy. We see that in our tracings and our direct to customer that our North American market is actually growing faster than our reported numbers would indicate. For us, Brooks, clearly, demand at the hospital level is consumption of our product, and that's absolutely key to us. On a geographic standpoint, we do require an uptick in our Asian market, and in particular Asian markets. The uptick in Asian markets, in particular in China, in particular in India, and again, more modestly within our Korean markets.
Even within the quarter, we saw that China grew by 8% and India grew by 9% in this current quarter on constant currency. We're not expecting much acceleration in the EMEA, but a modest acceleration in order to get to an accelerated growth in 2017.
Okay. That's helpful. Thank you, guys.
Our next question comes from the line of Kristen Stewart with Deutsche Bank. Your line is now open.
Hey, good morning, everybody.
Good morning.
Good morning.
I was just wondering if you could kind of walk through, I guess, the reduced revenue expectations, but the maintaining of operating margins. Is it just you're being more selective on products that you're selling and looking to focus more on the mix at this stage? Secondarily, I guess, as we look out over the next couple of years, with the push out of some of the savings from the 2014 plan, are there any opportunities for you to perhaps pull in savings from other plans or initiate other restructuring activities? Thanks.
I'm going to have Tom start with the latter half of your question, then I'll jump in for the first half.
Okay. I think the first question was related to maintaining operating margins. Just let me touch on that. As we think about the year-end guidance we've provided, certainly we've got a call-down to revenue. What we're seeing is
A little bit more favorable FX than what we had previously expected. Our reported revenue reduction isn't as significant as a constant currency. It is a reduction, and that's impacted our gross margin modestly. Now, what we've been able to do to hold operating margin is that we had some discretionary spending that we scaled back, and we've also really tightened down on all costs in the SG&A line. We've been able to offset that modest reduction in gross margin as we get to the operating margin. Effectively what we're able to do is hold that margin at the same level despite the reduction in revenue.
From an operating profit standpoint, we are down a little bit due to the revenue call down. We're able to offset that through a little bit favorable tax rate and some favorability in our expectations for interest rates.
Looking at our mix has a lot to do with it, Kristen. If you look at our 2.7% as reported growth number, almost a little over a third of that comes all from Vidacare, where it's growing at 20%. In and of itself, it contributes 100 basis points of growth. At 85% margins, that's really, really helpful in terms of being able to mitigate the loss of revenue in Latin America, for example, which is a much, much lower gross margin product. It gets back to really, I think, reinforcing the quality of the revenue growth story.
I-
Okay.
Go ahead.
Sorry, you asked about Benjamin as well, or about our 2014 restructuring, Kristen, I just want to touch on that. As we detailed, the restructuring plan has been recast, as you saw, from $28 million-$35 million to a new range of $23 million-$27 million. We do have an offset because the decision was to move to a vial rather than an ampoule. In doing that, it does address some healthcare provider safety. This added safety will allow us to take a modest price increase, which will get the combined saving range to $28 million-$33 million. We're pretty close to the original range. I think that we will continue to work and continue to update the investment community on mitigations, and we continue to look to improve that timeline.
The information we have in front of us at the moment is as accurate as we can provide to you today. Notwithstanding that, we are in discussions with our operations people, we are in discussions with outside vendors to assist us to improve that timeline, and we'll update you as that becomes available.
Yeah.
Go ahead.
I think there's also a question about just are we able to pull in other plans to help offset. As we outlined the original guidance for gross margin expansion through 2018, part of it being this footprint consolidation project that we're speaking about. We also mentioned that there were a number of initiatives that weren't included in that margin expansion. Namely, we didn't include benefits from M&A, we didn't include any margin benefit from distributor conversions or subsequent footprint programs. As you're aware, since announcing that gross margin target, we came out with a second initiative on footprint consolidation, so that can be used as a potential way to offset. In addition, today, we're talking about another restructuring program that's got a benefit both in the SG&A line and in cost of goods.
To answer your question is, yeah, we continually look for new ways to drive costs out of the system, and we feel very confident in our ability to get to that gross margin and operating margin target by 2018 as a result of all the activities we've got going on.
I would add to that when we initially introduced it, we said there was a good degree of conservatism in those numbers, and I think that we still would describe that goal as conservative today.
Okay. Then just to follow up too, just for the earnings, what was currency as of last quarter, and what is currency now assumed in the 2016 guidance?
In terms of a revenue impact? Are you looking for total or-
I think the euro-
Currency impact
the euro at 109 for the fourth quarter.
The Euro we've got at 109 in the fourth quarter. As we think about the currency impact on revenue, we're now assuming it's a 1% impact on revenue, and it's about neutral on the bottom line.
Currency was no change on the EPS line quarter-to-quarter guidance?
Well, for the year, it's about neutral. It's a little bit more favorable than what we had expected previously, honestly.
Okay. Thank you.
You're welcome.
Our next question comes from the line of David Lewis with Morgan Stanley. Your line is now open.
Good morning.
Morning, David.
Morning.
Morning, David.
How are you? I want to focus on two issues here this morning. One is cost and one is more strategy. The first is, guys, can we just talk more in detail on the nature of the pushout? It's about three years. Is it quality driven? I'm trying to understand exactly what would have driven the change, and then your confidence that you can get this back through pricing, which is largely why you think the difference is going to be relatively small. Tom, I'm just trying to quantify this for shareholders. To me, it looks like that shift of sort of three years is around $17 million-$30 million of potential impact over that time period, which is about 100 to 200 basis points of margin.
Just, sorry, I know it's three specific questions, and I had a quick follow-up, but I wanted to kind of dig deep on those three issues.
David, let me talk about the cost first. It is a timing issue driven predominantly by a requirement. To provide a vial versus an ampoule, which had a few knock-on effects. One impact was a tray reconfiguration, transportation. As you can imagine, this is a complex project. This added an incremental time lag in order to get this executed and delivered. With regards to what's driving the price increase, moving from an ampoule to a vial does address some significant clinician safety concerns. When you break an ampoule, you sometimes get some healthcare accidents that occur with that. We believe that the change is a marked improvement and allows us to put in a modest price increase into our anesthesia and vascular kits. That is a component of the offset against the timing.
We have had conversations with key customers. It's simply a matter of when their existing contracts expire and are renewed in terms of when we can put that into effect, and it has zero to do with quality.
Okay, Tom, just in terms of quantifying this for shareholders, if this pushes out 3 years, just taking the numbers in the press release, like I said, we're getting $17 million-$30 million of potential shift just over that time frame, obviously not in the absolute number. That's about 100-200 basis points of margin over some 2 to 3-year period of time.
Well, let me just clarify that point. As you look at it previously, we'd expect to be substantially complete with the program by 2018. As you know, our expected savings were between $28 million-$35 million. Now by 2018, we expect to be about two-thirds of the way complete. As we get to 2018, the way you should be thinking about it is it's about a 50 basis point reduction in our 2018 margin, not 120 basis point. Effectively, we're at $16 million by the end of this year. We'll deliver more savings by the time we get to 2018, and the way you should think about it is about a 50 basis point reduction as a result of this push out.
I would say, David, also, we have a constant stream of opportunities we're evaluating that have a positive impact on our margins. I'm not sure the right approach would be to simply do the arithmetic and say, therefore, their overall margin attainment goals are going to be reduced for the time being.
That's very helpful. Thanks for the clarification. I guess the second thing, Benson, was you spent a lot of time in your prepared remarks talking about the strategy for Teleflex, and I wanted to review things. What I took away from your commentary was you're not comfortable with your reliance on ex-U.S. products. It sounded like to me you'd like a business that is more U.S.-centric, and you may have to reinvest at a higher rate to drive some of that acceleration. Am I hearing you right in that preamble? I wonder as it relates to some of the M&A discussions, if you wanted to shift your business more U.S.-focused in light of the current organic growth rate and some of the margin things that are talked about on this call, is this actually the right time to pursue more significant M&A?
Some commentary on some of the strategic questions, just so investors are clear on what you were trying to impart. Thank you.
I do think that the location of acquired revenue is more important to us, and having good growth potential in the U.S. rather than having exhausted their growth in the U.S. and having to depend on foreign growth as a way to sustain their growth rate is figuring more into our calculation about what makes a good investment for us. You are correct that over time, we want to become more centered around the U.S. for the reasons that we described in our strategy. Again, going back to 2015, looking at an $0.87 headwind as a result of currency fluctuations just in Europe was a point that we realized we don't want to be in that or have that same degree of vulnerability as we look down the road.
It is part of our strategy to try and be more U.S.-centric, and that's going to make us look a lot more like other U.S. medical device companies as well.
Okay. Thank you very much.
Our next question comes from the line of Richard Newitter with Leerink. Your line is now open.
Hi, this is Ravi in for Rich. Can you hear me okay?
Yes. We got you, Ravi.
All right. Thank you for taking the questions. Just maybe a follow-up on that, U.S. strategy. Given the distributor commentary that you made where your sell-through is relatively higher than the sell-in and the focus on the U.S. business, does that suggest that there's an opportunity in M&A for more distributor acquisitions in this area? Should we think about as your M&A strategy progresses, this will be a focus? I had a couple of follow-ups. Thank you. Ravi, when we talk about distributor delayering, we're really talking about a different kind of distributor. We're talking about distributors overseas that distribute our products. They buy products from Teleflex. They have a sales organization. They sell that through to the end market. The distributors in North America are distribution hubs, for want of a better way of putting it. They're the Owens & Minor, the Cardinal of this world.
That would not be part of our strategy to go into the distribution end of the business in North America. Okay, maybe I guess put another way, are there elements in your control in that area where you can maximize the sell-in to better match the sell-through?
Probably not. I would say that now that we sort of understand this phenomenon, and are quite comfortable that it's not driven by losing share or losing accounts at the hospital level, I think we'll do a better job of understanding the impact a little earlier. Bear in mind that essentially the flu season, except for this year, has been relatively normalized going back the last three years before. This is the first year it's really had much of an impact from the fact that the flu didn't show up. Dealers went into the year with inventory and certain items prepared for the flu season, and then that inventory had to be bled out. Now that we sort of understand and have a full appreciation of it, we're feeling a lot more comfortable about it.
It doesn't affect every product, it doesn't affect every company the same way. We only have a few products that are really affected. It happens to be some anesthesia products and vascular access products. Now that we understand it, we're less alarmed. Eventually, dealer inventories catch up with hospital demand. We don't see this as a long-term strategic issue.
Got it. Maybe just one more follow-up, just on the new products and Vidacare. Number one, can you just give us an update on how that shoulder access project is progressing and sort of what your expectations still are for Vidacare revenues for the year? Secondly, the value analysis committee commentary that you put out there. You expect a little bit more impact, I guess, later, you've noted, around Percuvance in 2017, even more in 2018. Do these sort of longer discussions with value analysis committees affect the timing of any of that revenue, or that's kind of baked into your assumptions still?
I'll deal with the Vidacare product first. As we said in our prepared remarks, Vidacare in the quarter grew by 20%, in line with our expectations. We see our full year growth to be in that 20% range. As you know, this is a very high margin product and one that drives a lot of value in our mix for Teleflex and is part of the reason that even with a softer sales line, that we don't have the operating income impact one would expect from that. Dealing with the new products and the value analysis committees, yes, it has reformed our thinking as to the timing of new products once we launch them and they enter into our sales force. We now see a lag, as I said in my prepared remarks, of about 6 to 9 months before the product comes through.
I do want to quantify that, though, with our hit rate. I use the example of Percuvance as a product that we're working through value analysis committees at the moment, that our hit rate on Percuvance is in the 80% of value analysis committees that we present to, that we get approval. It's a 70% approval rating through value analysis committee. We're quite confident that once we get to the value analysis committee, we'll get through, but it does take a 6 to 9 months for that to happen. We've revised our thinking on our new product revenue to stage it a little bit, the acceleration of growth in new products to stage it a little bit later with that 6 to 9-month window.
Over time, we just have more data to present to them. Right now, we have no real actual hospital experience to show them how these cost improvements work. As we collect more and more of that information, the package we're able to present to these value analysis committees increases, and there are other hospitals we can point them to that have actual experience with it.
Great. Thank you for the question.
Our next question comes from the line of Anthony Petrone with Jefferies. Your line is now open.
Good morning. Thanks, gentlemen. I'm going to have a couple questions on just general procedure volumes, then I'll follow up with one specifically on PICC. Maybe Liam or Benson, can you comment just high level what you guys are seeing in procedure volumes and really it gets to sort of the mixed reads that we're getting from hospitals in the 2Q, 3Q timeframe. I mean, even last night, Community Health reported, HCA is out there today. It looks like HCA is a little bit better, but Community Health is worse. What are you seeing there in procedure volumes? A follow-up to that would be just as you look forward to healthcare exchange enrollment, if that does shift, if premiums go up, deductibles go higher, how do you think that impacts volumes in 2017?
Our best take on this right now is that there is a continued increase in the acuity level of patients at the hospital. We are not seeing a slowdown in U.S. hospitals relative to our product portfolio. In terms of the impact of the Affordable Care Act, our take on this is that the population that is in the Affordable Care Act already were saddled in many cases with high deductibles that were preventing them or delaying them from going to see a doctor, et cetera. We're kind of to that point where really sick patients have to go anyway. We think it's going to have a potential impact on providers potentially. We don't see an impact on our own product line.
Again, we're seeing good growth across our product lines in terms of U.S. hospital utilizations through the year, and it's been increasing every quarter.
That's helpful. Maybe just to shift to PICC. Your competitor reported a couple of days ago, they spoke of gains in the category there through some new products and acquisitions, and I'm just wondering if you're seeing any impact in your business, specifically within PICC.
Your competitor also speaks about an OUS opportunity in PICC, specifically in emerging markets. Is there sort of a push from Teleflex to also move PICCs into emerging markets? Thanks. Okay. I'll take that one. Our PICC growth, as I said in my prepared remarks, in North America was double digits, so over 10% growth in the North American market, which is the largest PICC market in the world. We are in the process of registering our PICC products globally. We do not have a pressure injectable PICC with coating technology registered in the Chinese market. Our competitor may be growing overseas, but for sure, our share gains in North America demonstrate to us that double-digit growth in our PICC markets. That is the largest PICC market, so we're very comfortable with the growth and the share gain we're taking in the key North American market.
That's helpful. Then just timing on, I guess, entering China with your PICCs. Thank you. We have a filing submitted. Okay, thanks.
Our next question comes from the line of Matt Mishan with KeyBanc. Your line is now open.
Hey, good morning, thank you for taking my questions.
Good morning. Morning, Matt.
Hey. When I heard your comments about focusing on the U.S. and growing there, and maybe reducing your exposure to emerging markets and to Europe, the first thing that struck my mind was that, are divestitures back on the table? In particular, I think the cardiac business you've called out before as being potentially non-core. Could you size that business for us right now? What % of that is OUS and Europe versus U.S., and where are the margins in that business versus company average?
The margins are about at our current target levels. The business is around $80 million as a global business. It's growing at a rate that we're quite satisfied with, and there's only one other competitor in that market space. It's been on a healthy trend for the last year, and that has increased our interest in not just maintaining the business but in growing the business, and we're seeing good growth out of it.
I would just add on the cardiac business, we have a reasonably robust new product pipeline coming through that we believe is going to accelerate the growth within cardiac. It is accretive to our overall growth on the top line. You are right, Matt. More of the business is overseas than is in North America. Notwithstanding that, it is, as Benson said, a duopoly.
There's one other player in that market space, so it's still quite attractive to us.
Okay. Just a little bit more color on the changes in the impact of the restructuring actions. I think you previously were calculating the $28 million-$35 million conservatively, and when you did it, you did it on static volumes. Am I thinking about that right? Have you updated the numbers based upon the current volumes today or the expected volumes, and maybe the magnitude of the change is a little bit greater?
I would say we have made no change to the way that we calculate the savings on the restructuring. We've been consistent in the way that we calculate that.
We want to present the ranges exactly the same way they were calculated initially. If your point is that have volumes been going up associated with those product lines, the answer is yes. There is some conservatism in that as a result of that.
All right. Got it. Thank you very much.
Our next question comes from the line of Brian Weinstein with William Blair. Your line is now open.
Hey, guys. Just wanted to go back to the flu commentary a little bit. We heard the same thing last night out of Quidel given the surrounding distribution situation there. How do you guys specifically quantify flu? What specific products, you mentioned anesthesia and vascular access, but how do you specifically quantify your impact of flu? What is your general dollar amount that you're exposed to there? Then also, on that topic, if we didn't see seriously ill patients in the hospital in 1Q as a result of the flu season, why was this something that was not kind of already previously contemplated that this might be an area where you guys could potentially see a shortfall? Thanks.
The product categories that are impacted by the flu season are in our vascular portfolio. Our central venous catheters are impacted. Within our anesthesia portfolio, you have laryngeal masks and endotracheal tubes and those. In our respiratory portfolio, the humidification part of that portfolio. Those are the three. For example, Brian, our surgical portfolio, zero impact on a strong or weak flu season, and similar to our cardiac portfolio. How do we measure the impact? We look at trends as to what happened in prior years. Last quarter three, a lot of the distributors bought in quarter three in anticipation of the flu season. That just simply did not happen in this quarter. We saw a pickup last year in North America in quarter four, and it normally comes in late November into December in quarter four.
We anticipate at the top end of our range, as we said, that same phenomenon. We've spoken to our largest distributors. They told us to expect that exact same phenomenon. They purchase on the basis of a normalized flu season. If the flu season is more aggressive and the vaccine doesn't work as well, we see a positive. If, as last year, the flu season was anemic, we see a slight negative.
I think your question is a good one, and part of the answer is that since I've been here, flu seasons have been pretty much similar from year to year. In many cases, I wouldn't have anticipated, for example, personally, I wouldn't have anticipated that CVC catheters were a big product being used during the flu. It only affects a few product lines and only a few of those really severe patients. This experience this year of having basically no flu season took us a while to catch onto it, but now we have, I think, a pretty clear line of sight around it.
Thank you.
As a reminder, ladies and gentlemen, if you would like to ask a question, that's star then one. Our next question comes from the line of Matt Taylor with Barclays. Your line is now open.
Hi, thanks for taking the question. Can you hear me okay?
Yeah, Matt. Good morning.
Yeah, Matt. Good morning.
I wanted to circle back to some of the commentary you made about the revenue progression, just given the softness of the quarter. You spoke about perhaps getting some acceleration in different geographies going forward, but recently you also talked about lack of visibility in some of those areas. I guess, can you just give us some level of confidence on the specific plans that you have internationally, specifically where you've seen weakness to kind of draw out better growth rate and achieve that kind of mid-single-digit rate you've been aspiring to more consistently?
Let me address the visibility question, and I'll turn it over to Liam. My commentary about visibility is the unpredictable nature now of the flu season and not a lot of visibility in terms of exactly what dealers or when dealers are going to stock up for it. It's not simply a matter of asking a distributor what they're going to do. These are decisions that are made at local distribution units, not nationally. Those 40 different Cardinal locations that are going to make the decision what inventory they're going to pull in. Aside from that, we have excellent visibility. Asia, for example, we pretty much have all the orders in-house that we're going to ship out the fourth quarter. Liam can comment a little bit more about the overall trends there.
Yeah. I'll first of all talk about the first quarter, Matt, and then I'll give a little bit of a longer term. First of all, in the fourth quarter, we've one extra billing day, and as Benson was alluding to, a good line of sight in two parts of our business which contribute to that acceleration, APAC and OEM. At this stage, for a distributor model in APAC, we would have all the orders booked, as Benson was saying. We have seen a nice uptick in EMEA through Q1, Q2, Q3. We expect that to continue into Q4. Then longer term, we had a few one-time events in Asia that we have anniversaried some product registration issues, in particular in China, around double lumen tubes and LMA Unique laryngeal masks that were now back in the market. That will help accelerate those markets.
Our growth in China, even in the quarter, was 8%. India is another market for us where we grew at 9% within the quarter. We're quite selective in the markets that we want to grow in Asia, but we see those driving Asia beyond the performance that we've seen year-to-date. We see EMEA in low single digits, Japan and Australia in that same bracket. We also are quite encouraged by the tracings and end customer demand we see in North America, and we see that predominantly driving a lot of our sales growth in the future.
Great. Maybe just one follow-up. You are entering into some new, relatively good product cycles. You've got Vidacare, the Protector, and now Percuvance. Can you just speak in broad strokes about whether you expect new product growth next year in 2018 to be kind of more or less or the same as we saw here in 2016?
We haven't given our 2017 guidance, but given the number of new products that we have coming through our portfolio, and now that we have a better handle on what happens with these value analysis committees, we would expect a pick-up in new product revenues in the years to come for sure, and we'll address that when we're giving our 2017 guidance.
Vidacare, for example, is not a product that would be included in our new product numbers.
Yeah.
Even though it's relatively new to us, that number's outside of our new product estimates.
Okay. Thanks very much, guys.
That is all the time we have for questions. I would now like to turn the call back over to Mr. Jake Elguicze for any closing remarks.
Thanks, operator, and thanks for everyone for joining us today on the call. This concludes the Teleflex Incorporated third quarter 2016 earnings conference call.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.