Q3 2019 Earnings Call
Presentation, there will be a question answer session asking question during the session you'll need to press star one on your telephone. Please be advised that today's conference is being recorded if you acquire any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today, Jake Elguicze, <unk> Treasurer, and Vice President Investor Relations. Please go ahead Sir.
Thank you and good morning, everyone and welcome to the top what's incorporated third quarter 2019 earnings Conference call.
The press release and slides to accompany this call are available on our website www dot teleflex dot com.
As a reminder, this call will be available on our website a replay will be available by dialing eight fivefive.
Fivenine to 056.
International calls for 04537 340, Sir.
118 by 4.17.
Participating on today's call or Liam Kelly, President and Chief Executive Officer, and Tom How executive Vice President and Chief Financial Officer.
Lehman Tom will provide prepared remarks, and then we'll open up the calls acuity.
Before we begin I'd like to remind that some of the matters discussed in the conference call will contain forward looking.
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, an actual events or results may differ materially the factors that could cause actual results were events to differ materially include but are not limited to doctors reference in our press release.
Today, as well as our filings with the FCC, including our Form 10-K , which can be accessed on our website.
That I'd like to now I'll turn the call earlier.
Thank you Jay.
And good morning, everyone, it's a real pleasure to speak with you again.
I'm very pleased with Teleflex performance during the third quarter as we continue to positive momentum in our business delivering 6.3% revenue growth on an as reported basis, an 8% growth on a constant currency basis.
Like the first half of the year during Q3 the strength in our topline performance was once again broad based driven by improvements across nearly every global product category.
This included 50.4% growth in interventional urology, 8.2% growth in interventional axis, 6.1% growth in vascular access and 5% growth in surgical.
From a geographic perspective, we achieved particularly strong growth within the Americas or constant currency revenue growth was 10.7%.
We saw rebounds, any M&A or constant currency growth improved 5.1% and we drove continued steady performance within Asia or currency neutral revenues grew 5%.
Turning to some other key metrics.
In addition to delivering robust constant currency revenue growth, which we were able to achieve even when facing.
Even when faced with a difficult prior year compatible. It was I was also pleased to see the year over year and sequential expansion in both our adjusted gross and operating margin.
Yes.
During the quarter, our adjusted gross margin reached 58.6%, which was an increase of 160 basis point as compared to the prior year and 90 basis points sequentially, while our adjusted operating margin totaled 27%, which was an increase of 100 basis points.
As compared to the prior year and 180 basis points sequentially.
Turning to the bottom line.
Hi, this is stronger than expected revenue and margin performance.
Coupled with additional benefits from a further reduced tax rate our adjusted earnings per share during Q3.
$2, a 97 cents, which represents an increase up 17.9% over the third quarter of 2018, when normalizing for the impact of FX Q3, adjusted earnings per share grew approximately 19%.
In summary, we are very happy with our better than expected revenue performance as during the third quarter, our global basket or access interventional access and interventional urology businesses outperformed as compared to our prior expectations.
The strong year to date results.
Coupled with our outlook for the fourth quarter has led us to once again increased our full year 2019 guidance for constant currency revenue growth from a range of between seven and a half an 8% to a new range of between 8% an 8.25%.
This updated guidance takes into consideration the better than expected performance from our vascular and interventional access product line. However, this was largely offset by an issue that recently erdos relating to the suspension of operations out of third party sterilization partner site in Georgia.
This Starlight nation issue is causing a disruption of selected teleflex products, mostly within our surgical an OEM businesses.
We are working diligently to resolve this issue to ensure patients and their healthcare providers have access to effective products importantly, the ehrlich product is not one of the teleflex product that has impacted by the third ligation disruption issue.
Additionally.
Our increased constant currency revenue growth guidance range also assume an improvement in full year. Your lift revenue growth as we now expect unit revenue to increase 40% as compared to our prior expectation, which calls for full year revenue growth of approximately 35%.
Today.
We are also reaffirming our full year 2019, adjusted gross and operating margin guidance ranges as well as narrowing our adjusted earnings per share guidance.
I'm a range of between $10, a 90 cents and $11.10 to a new range of between $11.05 and $11 than 10 cents.
Our updated revenue and adjusted earnings per share guidance takes into consideration consideration. The sterilization issue I just mentioned as well as worsening FX environment since we last reported earnings.
Indeed, if we reported our full year adjusted EPS on a currency neutral basis, our year over year EPS growth, assuming the midpoint of our updated range would equate to a growth of approximately 16%.
With that as an overview, let's now review Q3 revenue in more detail.
I will begin with a review of our reportable segment revenue and unless otherwise noted the growth rate I would refer to our on a constant currency basis.
The American delivered revenues of $374.5 million, which is an increase of 10.7%.
This was driven by our interventional urology interventional access and vascular access product category.
Moving to EMEA, Inc.
It reported revenues of $140.5 million, which represents an increase of 5.1%.
On our last earnings call. We stated that we expected to see an improvement in the performance of our EMEA business and that is one of card as during the quarter. The growth in this part of the World was led by our interventional access vascular access and urology products.
Turning to Asia.
Revenues totaled $77.9 million, which is an increase of 5% compared compared to the prior year period.
From a product standpoint growth was strong this within our surgical and vascular access categories, while from a geographic perspective, our business in China grew 11.5%.
This was somewhat offset by weakness in Australia, New Zealand.
And lastly, our OEM business reported revenue of $55.4 million.
Which represents an increase of 1.9%.
You may recall on our last earnings call. We said that we expected our OEM business to show flattish growth within the quarter due to a difficult comparable as well as timing of certain orders.
And that is one of card.
In fact during the third quarter this business did a little bit better than we previously expected.
Now, let me move to a discussion on our revenue by global product category.
Like my comments regarding our reportable segments my comments regarding our global product category growth will also be on a constant currency basis, unless otherwise noted.
Starting with basket or access.
Third quarter revenues increased 6.1% to $148.7 million.
This was driven by strong growth in pigs, and visual navigation products as well as growth in sales of Cdcs.
Moving to interventional access.
Third quarter revenue was $106.9 billion, which is an increase of approximately 8.2%.
Like the results we delivered in the first half of the year the strength in this business. During Q3 was broad based with growth in complex catheters, biologics uncontrolled intra aortic balloon and closure products.
Now to anesthesia.
Quarter, three revenue was $87.1 million, which is an increase of 1.5%.
The increase here is primarily driven by sales and ended track you choose.
My vision and during the scope products.
Shifting to our surgical business revenue increased 5% to $92.6 million driven by sales of ligation clips and surgical instruments.
Moving to interventional urology revenue increased a robust 50.4% to $73.6 million.
While the growth rate this quarter is someone in places due to the easier comparable because of the bottom three product withdrawal. We had last year. Our salesforce continues to make excellent progress driving physician adoption of the Uranus system.
We remain on track to train a total of over 450, new urologist during 2019.
Transitioning to your live to we continue to expect to begin the rollout of the UL to during the fourth quarter with a full conversion of the U.S. physician base from UL. One do you have to expected in 2021.
And finally since OEM was covered in our segment review, let me summarize third quarter revenue for the businesses within our other category, which consists of our respiratory and urology care products.
Revenues here were down 0.4% on a constant currency basis.
Totaling $83.9 billion.
This was driven by declines in sales of our respiratory products somewhat offset by an increase in sales of our bladder management product.
That completes my comments on 403 revenue performance.
Next I would like to briefly discuss some important clinical publications on award concerning your that.
Fourth during the month of August the year on this system won the 2019 James in Wells Medical Technology Association of New Zealand Award.
This award recognizes products, that's significantly contribution to improving patient outcomes by enhancing their quality of life.
As well on exhibiting technical excellence and innovation across the medical device sector.
This achievement is yet another example of the euro lift system superiority.
Compared to alternative methods to treat BPH.
And it should help us as we continue to try to expand the adoption of do you on that product within the New Zealand market.
Lastly, during September urology times showcased the effectiveness and benefits of the Euronav system, noting that due to shortcomings in TARP and medications the advancement of the minimally invasive surgical technologies category remains imperative for men seeking an effective.
Treatment option for BBH.
In the article yearning to scores favorably with patients reporting rapid recovery and symptom relief preserve sexual function low categorization rate and low complications.
That completes my comments on your lift let me now provide a brief update on another product we are enthusiastic about manta.
For those who may not be aware mantra is the first commercially available biomechanical vascular closure device designed specifically for large bore femoral arterial access site closure.
It helps reduce time to hemostasis without pre closure delivering reproducible results that help clinicians achieved successful closure.
During TCT there were several presentations regarding manta as enthusiastic continues to grow for the device.
Our initial limited market release on price discovery activities remain very much on track.
Penetration reorder rates and initial adoption in the us have been strong.
Full market release for this product in the U.S. will occur in January of the new year.
And we fully expect mindset to be a nice contributor to our revenue growth rate in 2020 and beyond.
In closing I would like to reiterate how pleased we are with our performance during both the third quarter and the first nine months of the year.
Revenue growth continues to exceed our expectations driven by a bulk broad spectrum of products and geographies, which led us to increase our full year revenue guidance for the second consecutive quarter.
In addition to continued topline strength during the quarter, we achieved significant year over year and sequential growth and operating margin improvements and we expect back to continue during the fourth quarter and as such we are narrowing our full year adjusted earnings per share guidance to a range of between $11.
Five cents and $11.10.
Before I turn the call over to Tom I'd like to take a moment to reflect on our long range plan.
We are currently nine months into a three year journey.
Our revenue growth has exceeded our initial expectations and our margin targets remain very much on track, we feel more confident than ever in our abilities to achieve the goal is laid out in may of 2018.
I would like to thank our employees and management teams for their excellent execution in the first nine months of our at our Pete on for their continued focus on reaching our goals.
That completes my prepared remarks, I would now I'd like to turn the call over to Tom for a more detailed review of our third quarter financial results and full year 2019 financial guidance Tom.
Thanks, Lam and good morning, everyone.
Given the previous discussion of the company's revenue performance I'll begin at the gross profit line.
For the quarter adjusted gross profit was 380 million versus 347.3 million in the prior year quarter or an increase of approximately 9.4%.
Adjusted gross margin increased 160 basis points versus the prior year period, reaching an all time high 58.6%.
The expansion in adjusted gross margin primarily reflects increased sales volumes.
Capable sales mix up higher margin products and benefits from cost improvement programs.
Partially offsetting these gains were negative impacts from incremental tariffs.
Adjusted operating profit was up 175.3 million as compared to 158.7 million in the prior year or an increase of approximately 10.5%.
Adjusted operating margin increased 100 basis points versus the prior period, reaching 27% also an all time high.
As the years progress we've realized robust sequential expansion of adjusted operating margin.
The first quarter adjusted operating margin was 23.7% followed by 25.2% in the second quarter and now 27% in the third quarter.
And we expect further sequential expansion in the upcoming fourth quarter.
The trend of strengthening operating margin is largely the result of expansion in the gross margin timing of investment spending in volume leverage.
Continuing down the income statement net interest expense decreased to one excuse me to 19.1 million and this compares to 26.9 million in the prior year quarter.
The decrease in interest expense, primarily reflects the impact of our cross currency swap agreements.
Moving to taxes.
For the third quarter, our GAAP effective tax rate was negative 132.3% and reflects a discrete tax benefit of 129 million, resulting from a non us legal entity restructuring that eliminated the requirement to provide for foreign withholding taxes on the future repatriation of certain non permanently reinvested.
Earnings.
On an adjusted basis, our third quarter tax rate was 10.3% as compared to 10.7% in the prior year period.
That takes me to our third quarter 2019 adjusted earnings per share.
Which was $2, a 97 cents or an increase of 17.9% as compared to prior year.
We are encouraged by the strong earnings generation stemming from upper single digit constant currency revenue growth combined with margin expansion.
Turning now to select balance sheet and cash flow highlights.
During the first nine months of 2019 cash flow from operations totaled 292 point.
289.2 million compared to 302.9 million in the comparable prior year period.
The decrease in cash flow from operations is primarily attributable to contingent consideration payments of 26.1 million and the net unfavorable impact from changes in working capital driven primarily by increases in inventory.
The increase in inventory was in part a tactical move designed to enhance customer service by increasing safety stock levels on select products.
Turning now to debt and leverage.
During the third quarter, we reduced debt outstanding by approximately $132 million, resulting in quarter ending net leverage of approximately 2.45 times.
Finally today the company issued a notice of redemption to holders of outstanding 250 million Fibernet quarter senior notes due in 2024.
Pursuant to the noticed a redemption. The 2024 notes will be redeemed on November 15th redemption price equal to 102.6% to 5% of the principal amount outstanding plus accrued and unpaid interest.
And this completes my comments in the third quarter results now moved to 2019 guidance updates.
Given our performance for the first nine months of the year and our expectation for the fourth quarter, we're increasing our full year constant currency revenue growth guidance from a range of between seven and a half an 8% to revised range of between eight and eight in the quarter percent.
As a result of prevailing foreign exchange conditions, we now expect that foreign exchange will result in a 225 basis point headwind to full year revenue as compared to our previous expectation of 150 basis point headwind.
As such we're lowering our as reported revenue growth guidance from a range of between six and 6.5% to revive range between five and three quarters and 6%.
We are reaffirming our previously provided adjusted gross and operating margin guidance ranges.
And given the favorable trend in LIBOR rates versus exit expectations at a modest fourth quarter benefited from the redemption of our 2024 notes, we're reducing our estimate for full year net interest expense to approximately $80 million.
Turning to taxes, we now anticipate that our full year adjusted tax rate will fall within a range of 12.25% and 12.5%.
This is down from our prior expectation of being on the lower end of the 14% to 14.8% previously provided guidance range.
From a share count perspective, we continue to expect full year weighted average shares to be approximately 47.1 million.
And that takes me to our GAAP and adjusted earnings per share ranges.
On a GAAP basis, given the third quarter discrete tax benefit and strong financial results, we're increasing our full year guidance from a range between $6 at 82 cents and $6, a 94 cents to a new range of between $9.95 and $9.90.
On an adjusted earnings per share basis, we are raising and narrowing our guidance from a previous range between $10, a 90 cents and $11 in 10 cents.
Two revised range between $11.05 in $11.10.
Included in the updated adjusted earnings per share guidance range is a seven cents estimate earnings impact stemming from the closure of a third party sterilization facility.
Also included in the adjusted EPS guidance range is our current foreign exchange assumption of a 41 cents full year headwind versus our previous expectation about 35 cents foreign exchange headwind.
If we reported our full year adjusted earnings per share on a constant or on a currency neutral basis, our year over year EPS growth, assuming the midpoint of our updated guidance range would equate to approximately 16% growth.
Which serves to reinforce the strength of our 2019 financial leverage.
In closing, we're very pleased with the financial performance achieved in the first nine months of 2019.
Acceleration in revenue growth is broad based both from a geographic and product standpoint.
And despite less favorable currency environment, we have increased our earnings estimate while also funding incremental investment.
And that concludes my prepared remarks at this time I'd like to turn the call back over the operator for questions and answers.
Thank you as a reminder to ask a question you'll need to press star one on your telephone to withdraw your question press the pound keep our first question comes from David Lewis with Morgan Stanley . You May proceed with your question.
Good morning, Thanks for taking the questions just.
Maybe just to for me here first.
Liam just kind of broad commentary on the ERP and then.
Maybe Tom a couple questions for you on the fourth quarter.
We'll be in look your 6% to 7% year CRP guidance perspective, you offered you are delivering kind of a point above the high in a range you're closer to 8% and I think about next year, you've got mom. So you've got some replas as well so as I think about next year is the right way to think about 2020, you're going to deliver the LLP around six to seven or given those product lines.
As you can do a little better and I had a couple of calls for them Im sorry for Tom.
Yes sure David.
So based on the on the NRP, obviously, we get to 2020 not guidance. When we report our Q4 earnings in February , but I will comment as I said in my prepared remarks on the NRP, we couldn't be happier with the progress we're making we're only nine months in but within the first nine months of the year. Our revenue growth is incredibly saw.
Yes, so year to date through the nine months, we've grown at 8.4% and.
And we've been able to take up our revenue guidance twice within the year. So we feel really confident we've got to obviously mindset will.
Come into play in 2020, and we also in 2021, we'll have the euro to lift in Japan that wasnt in our previous guidance. So regarding the revenue line for our NRP, we feel extremely confident in the goals that we set out in may it up 2018, and it's not just on the revenue line as we've gone through the year, we've been able to.
To demonstrate the external community that our margin expansion to the point where in this quarter. We've hit an all time gross margin high for the company on an all time op margin high for the company joined significant leverage in the income statement why did the same time being able to invest in some of our businesses in particular, the you're live fraud.
As as we continue to invest behind the Salesforce. There will continue to do that also in Q4.
Okay very helpful. Liam and Tom just two for you just first on on growth into the fourth quarter guidance implies about a point or two mentioned accelerations or what drives the confidence and finished the year that strong and then on earnings just wonder if you could tell us the reconciliation it looks like a conservative earnings number implied in the guide for the fourth quarter and there's a lot of moving pieces between tab.
Interest sterilization in margin improvement can you just were just a little bit on sort of the components that drive positive negative tailwinds into the fourth quarter, because as I said it looks a little conservative. Thanks. So much. So did we get Tom to cover the EPS and I'll cover the revenue.
So on the revenue side. So first of all you have the impact of the sterilization issues. The first of all let me just start by saying that with the sterilization capacity issue. It is contemplated in our updated guidance.
Contemplated in our raising our revenue we do think it's going to have an impact in the core fourth quarter of about $8.7 million and Tom will cover the EPS impact, but as you said in his prepared remarks is about seven cents, that's about 40 basis points full year headwinds it based on that sterilization issue.
Regarding your question, David on headwinds and Tailwinds, obviously, we have an extra billing day in the fourth quarter. So the way I think you should look at it is the impact from the sterilization issue is pretty much wash with the billing day in the fourth quarter now if you take the midpoint of our guidance range in the fourth quarter.
It would imply that we're planning to grow in the mid Sevens in Q4 in order to get the midpoint of our updated guidance.
At the midpoint of our guidance and we feel really confident done that and that's again against a tough comp what I really like about to set up for teleflex is that we're able to put forward a growth rate in the mid sevens up against the top a tough comp of 7.7% in the prior year and also in this quarter if we.
We do a pro forma in the prior year the growth was 8.2% than we were able to grow 8% on that so those are really the headwinds and tailwinds FX can go either way.
And I'll, let Tom note address EPS question.
Sure. So if we look at our fourth quarter EPS I'd say that given the midpoint of our guidance, we're looking at 15%, 15% to 16% EPS growth. So we looked at what up another very solid quarter now in terms of just a third quarter performance. We we came in a favorable versus our internal expectations favor.
It will versus consensus by 22 cents.
And as an outcome, we raised our guidance at the midpoint by 7.5 cents. Now in addition to that 7.5 cent guidance range. We've also included in our guidance six cents associated with it.
A stronger headwind from foreign exchange and a seven cents adverse impact from the closure of sterilization facility. So as we look at the fourth quarter. We've got a couple of items that are impacting this negatively but overall, we're pretty excited about the strength of the performance as we finish out the year has as much.
Mentioned, we're expecting earnings growth kind of in the 15% to 16% range and David I just want to add one comment on that from what Tom said, we are also investing behind euro lived in the fourth quarter, a little bit heavier than we'd anticipated we had anticipated some new sales hires that would come in in Q1, we're actually go.
Going to bring in those additional headcount in Q4, so that we hit the ground running in Q1 of next year and we're also anticipating doing additional DTC in Q4 so.
I again, what I really liked by the setup is ready to do call up our earnings guidance invest behind the growth drivers in the business and offset some bad guys, which the sterilization is so I think all in all we couldn't be happier with the performance of the business.
For the first nine months and our guidance would reflect that.
All right. Thanks, So it's hard to guys great quarter. Thanks, Thanks, David.
Thank you. Our next question comes from Larry curious with Raymond James You May proceed with your question.
Perfect. Good morning, everyone, one for Liam and then one for Tom.
May be on your lift obviously the product continues to be strong and.
Is outpacing the expectations that you have sat through the year.
Perhaps you could talk a little bit elsewhere again moving into this phase into the.
Fast followers, how you are kind of thinking about.
Average procedures per physician and how that's trending and sort of where the salesforce is really really focused on making sure. This.
Continues to gain traction.
Thanks, Larry and we had a resounding keyboard for your lift it grew at 50.4% through the first nine months of the year, it's growing at around 45%. So that you're right. The product is exceeding all of our our internal expectations.
Third quarter had a slightly easier comps because we had the voluntary withdrawal of the product in Q3 last year. So that is definitely helped this quarter, but notwithstanding that were incredibly focused on making this product to standard of care regarding the physicians.
The the business is incredibly stable. The average position continues to do about four procedures. A month, we continued to develop champions and we continue to make this product to standard of care I think the number of publications, obviously will help the DTC hubs and I think having a sales force Larry that.
Wakes up everyday and only thinks about one product is an obvious advantage as we continue to drive accelerated performance.
So as I said in my prepared remarks, I think we will definitely achieved achieve it not modestly exceed the 450 conditions, we had targeted to train this year and as we move from the early adopter to the fast follower, but it's been very encouraging for me in particular is that the growth has not slowed as we move to that said.
Second phase of clinician and right now we are moving into the fast follower. Our goal has always been that it will take a little bit longer to bring that condition on board that clinician really requires.
There appears to be using the product they require very strong technical data they require real world data that is very aligned the clinical data and they they need broad coverage to ensure they are going get paid for the procedure and I think as we sit here right now moving to the fast follower all four of those boxes or take for teleflex vary.
Okay perfect that once that was helpful. Liam and then.
I guess.
The question here is just want to take your temperature on your confidence in the margin expansion actually through the L.R. paid not for that for 2019, so kind of what gets you there and how do we think about the gating.
And in 20 and 21 for that operating margin expansion just want to think about how recalibrating for that our fee and I guess lastly, just on that.
Given that the sterilization as big of a headwind what sort of feedback you're getting.
From.
And that your sterilization provider as to kind of when they think they might be able to resolve.
Some of these issues.
Okay. So let me take it in chunks Larry.
Let me start with the cadence of margin.
In our at RP.
And let me begin by saying and as I've said in our prepared remarks, I'm more confident than ever in our margin expansion within our ERP as I said, we paid an all time high on both gross and operating margin and where does the margin going to come from what about 60% of it is going to come from mix our philosophy intelliflex.
That not all growth is equal and we're growing our businesses in interventional urology interventional access.
Asia and within our our vascular business in particular picks and Vidacare all of those are accretive to our margins and if you look at where investment goal as Larry equal was behind those businesses and you can see for the first nine month of the at RP. Those are the businesses that are performing exceptionally well.
And then add in OEM, which has has had a great performance.
With regard to the cadence so thats answers. Your question our confidence is already with regard to the cadence what I would expect I don't want to get into 2020 guidance. As you can appreciate but what I would expect Larry is that we would see more margin expansion in 2020 than we've seen in 29, Dean. So you would expect to see further margin expansion to try to trend.
And then another uptake in 2021, but rest assured there will be an uptick in both years in our margin expansion in 2020, and 2021 that would be our expectation.
And then onto your question undisturbed realization.
We began a number of weeks ago, when this issue or rolled in the Atlanta area, Larry to begin to Requalified.
Other.
Fertilization cycles in other areas and our partner has been working very much with as to help us to do that they don't have clear line of sight as to when that facility, maybe reactivated I think that they are working with the Cobb County officials I think that they are working with the EPA.
And but right now we don't have line of sight. Our expectation is that we will have other cycles revalidate those am by quarter, one and we envisage that that will allow us to continue to supply product into the marketplace at that time and I think what has been helpful. In some of the.
The statements that have come out at the FDA put out a note last week.
Saving that more than 20 billion devices sold in the us some that billion, Larry our sterilized with ethylene oxide.
The accounting for almost half of all medical devices.
And I think they also said it's important to note that there is no readily available process our facilities. The can serve as a viable alternative, especially when you're dealing with plastics products. So I think that was also incredibly helpful and our associations in particular admin and MDM may continue to work with the local.
Government authorities to educate them on the importance of having started product in the marketplace because it could have a much bigger and patient.
Risk than the MTO environmental issue, which from what I can see our are very complain to the clean Air Act.
Okay perfect. Thanks for the very detailed answer there Liam appreciate it.
Just to just add on to that Larry you know if we look at 2019 margin expansion that we believed that the business is performing incredibly well. So is the book business, creating financial level leverage absolutely. However, there is kind of three factors that limit kind of the printed result on margin expansion and those are FX.
Thats been about a 40 basis point headwind in the year tariff is another 30, and then we've made a number of investments for the future, which we believe will benefit us in the longer term, but this year, we've got expense with no real benefit and those include the market development in Japan for Euro lift the pre launch us investment for Manta.
We've got an acceleration of the role of sales hires and the fourth quarter now and so that's another 65 basis points. So if you think about it within about a 140 basis points.
Factors that are kind of impacting this year that we believe will provide benefit for the future perhaps go away in the future. So the underlying operating performance of the business is very solid this year being masked somewhat by FX tariffs in some of the investments we've chosen to bank.
Great Thanks to that color.
Thank you. Our next question comes from Richard Newitter SVB Leerink you May proceed with your question.
Hi, Thanks, I have two and congrats on the quarter.
First.
On sterilization I just want to ask.
Could you quantify or give us a sense as to what your expectation is for expenses or impacts a carryover into 2020 should we be dialing in.
As a place holder an impact in the first half.
Up next year.
Seven cents is it's a pretty big impact I know these things take some time. Thanks for the color earlier, but that's my first question how do we think about this impacting 2020.
So rich I wouldn't expect a C and material expense in 2020 relation to this.
What we are doing is working with our partner to validate a another sterilization cycle.
Either in another geography, or another site, so I wouldn't anticipate a significant uptake.
Seven cents quite frankly reaches a little bit less than I would normally expect if you get 8.7 million I'd expect eight to nine cents of an impact normally.
Because of the margin profile in particular up the products in the other category that helps minimize the EPS impact so thats all get down to that seven cents and obviously, we have been working to substitute products as well in order to minimize the impact.
And as I said in my earlier comment, we anticipate having cycles being validated as a.
Early in 2020, so and we're working towards that.
Okay, Thanks and.
Liam I appreciate that.
Cadences, achieving the margin expansion over the long range plan it.
More margin expansion in 2021st what we saw in 2019, and then more than 21 versus what you will see in 20, but just if I could maybe just kinda throw out what the consensus is range for 2020 is it's between 100 to 200 basis points.
Margin expansion anticipated for next year, and then something north of 200 implicitly.
Again to get to your long range plan.
I guess could you just give directional color is that a.
Is that okay place to be.
For the Street do you feel comfortable generally.
As a framework for thinking about the cadence.
With where the construe this thanks.
Thanks, Rich as you can property freeze yet I can comment on 2020 guidance at this stage. So I think that as we look at is I'd reiterate what I said, there will be a pickup in margin expansion in 2020, and there would be a further pick up an op margin I would expect and let me try.
And help you hear I expect more op margins and gross margin expansion in 2020, maybe that would help you frame as and inline with what you said, but it's hard for me to comment on 2020 2021 on till I get to our Q4 and 2020 guidance range as I'm sure you can appreciate but we're very confident in.
Getting to 60, 61% by 2021, and we're very confident on getting to 30, 31% by 2021.
I hope that can give you some some some flavor and just just to throw in a couple of factors that we've got out there happening in 2021, and why they step up or why they hear steps up so much more than 2021st is the conversion of the euro of two we expect to complete by 2021, and that's that's going to drive actually a pre.
The significant amount of margin expansion that also just on the cadence of our footprint projects. We will have meaningfully more savings in 2021 than we will in 2020. So those are two factors that served to really drive that 2021 margin expansion up more than the other years.
Okay. Thanks, a lot.
Obviously the reduction in some of the investments that we put in this year helps 2020, thanks rich.
Thank you. Our next question comes from Shagun Singh with Wells Fargo. You May proceed with your question.
Hey, guys. Thank you so much for taking the questions and congratulations on a great quarter.
Liam Liam.
The street appears to be modeling about 50, 250, Bips contribution from Manto, which is on top of the lobby.
Is that reasonable are you expecting pent up demand.
Give us.
You have taken 2020 and then.
Year to date Glorious tracking to about 5.4% and Euro left for zero left this backing to 5.4, and then you analysts distracting to about 3.5%.
How should we think about.
These two buckets in 2020, and then I have a follow up.
Yes, So let me deal with the latter half of your point your question for US. So if you take the midpoint of our updated guidance is about 8.1% to 5%.
Our expectation is that eggs that during that will add around 3% and the rest of the business without around our pardon who was at around 5%.
Forget as to that that.
8.1% to 5% at the midpoint of our range.
To address your question with regard to man to.
As I said in my prepared remarks, we continued to make excellent progress with the us anymore.
In the quarter, we're getting very positive feedback and we've got a very high reorder rate from the testing sites that to me is the real positive.
We will continue with the other more in Q3 and as I sit here today I can tell you we are pretty much finalized on our pricing strategy and we will go to full market release on January 1st of 2020 with regards to its impact on the revenue in 2020, obviously expected to be positive, but again like my comments too.
Many of your colleagues. Unfortunately, I can't start to give guidance for 2020, I will do that's when we announced our quarter for David.
Our corridor for results on our guidance for the year, but I can tell you should gun that it's gone.
Better than expectations and again it all comes back to patient outcomes and clinical data this product Hasbro both clinical data showing 70% reduction in major Vassar complications and meantime to Haynes dates is going from 23 from six to 10 minutes down to 23 seconds and the Assurity of closure is what were discovered.
I think is really important to the sites that they know the co. The first time every time, so it's very positive, it's going well and it it would be a driver in 2020.
Thank you so much for that color and then just as a follow up I wanted to focus on your list in Japan radio.
Thanks for reimbursement.
How are you preparing for the launch in 2020, and how quickly are you able to commercialize once reimbursement becomes effective which is likely on April . Thank you. So much.
So yes, so we expect to get dream reimbursement and the latter half of 2020, and we expect to be generating revenue in 2021, So you're absolutely correct. There what we're doing in preparation of that and this was part of the investments that we pulled forward into 2019, we have got market developments specialists on the ground.
Working with the key opinion leaders and urologists in order to ensure that they are aware of the product and that they are assisting in communicating with the authorities that the need for this product within the marketplace and that is an ongoing process and will continue.
During 2020 until we get the reimbursement in the latter half of 2020 and generate revenue in 21, I would reiterate again showing that the revenue per euro that was not initially in our at RFP, because we didnt anticipate having.
Approval in Japan in 2021, which now we expect so we do expect revenue in 2021, which weapon in our original plan.
Thank you.
Thank you very much.
Thank you. Our next question comes from Matt Taylor with US you May proceed with your question.
Hi, Thanks for taking the question.
I was hoping you might give some color on the year lifts patients. If you have any view on whether the Tam is changing here are you still see mostly.
Drug dropout patients be treated or is that actually expanding into other patients and can you comment on the competitive environment are you seeing other minus treatments also pickup and what's happening with surgery.
Maybe just comment on the on all of those dynamics.
Yes so.
The time, we don't believe has changed and we still believe that the US market is a 6 billion dollar market. If you take the drug dropout category.
The ssds that we have was during the list study, which showed that almost 70% of our patients came from the drove our drove dropout category.
Anecdotally, we don't think that has changed at all Thats, where the majority of our patients come from.
With regard to do we see a drop off in surgical procedures, no and I wouldn't expect to match because as we promote the euro live product and as doctors move more and more patients into treatment for BB HAGE with your that product. They will also address.
All from patients that would have traditionally have had a terrific or how to surgery.
But also we're adding to that pool of patients because as the examined the patient. They may find that patients has got a and ongoing disease of the bladder or they may have a prostate and 5% of cases that the profit is too large for euro that and those patients will be added to the surgical pool. So as we draw from.
The surgical tools were also adding to the surgical tools. So therefore, we've never expected that Trps would go down for example, as you are this goes up at the third part of your question, Matt I think was on the competitive landscape, we haven't seen any new technologies come to the marketplace.
The technologies that we see out there the traditional ones.
So TARP more or less is done with steam.
Rather than with just a different form of ablation.
And we are continued to focus on the patient outcomes, because we believe that.
Patient will opt for a procedure that they can go win on a Friday have the procedure done one where to catheter no sexual dysfunction immediate relief and you could be back sitting at your desk on Monday morning, rather than an invasive surgical procedure that gives you a risk of sexual dysfunction, almost guarantees you wearing a catheter and in some instances.
Capital replacement is for a period of time and I still believe that the real world data on Euro lift is so compelling compared the real world data on any other technology out there because our rewards days is showing better results than the clinical data, whereas with other technologies, we've seen worse results from the real world as compare.
Year to the clinical data.
Thanks, Weve Thats good color I just had one follow up which is you are looking probably a couple of years out at China. What do you think the reimbursement and the addressable market could look like there.
So as the Chinese market is a significant market from the population standpoint.
We are currently working on sizing that and we'd be able to give some more details as we enter that market space.
I do think that we have an advantage in China in so far as that we have a very robust call point in China into the urologist.
The reimbursement for than China Chinese market matches. The paper play so it's an out of pocket and always has been not just for this procedure for every procedure is an out of pocket experience for the for the person that has a procedure.
We will.
Our building our dossier for the submission of registration of the product to the Chinese authorities and we would anticipate at this stage.
Sometime late in 2020 ones, we would see that position to get reimbursement if they don't require to clinical study if they do that we've pushed out into 2022 mess.
Okay, great. Thank you.
Thank you. Our next question comes from Raj then only with Jefferies. You May proceed with your question.
Hey, this is.
Anthony Ferrari.
Solutions on the quarter I actually have.
A couple of amount and then one just on the balance sheet and M&A.
Monto can you maybe just recap how you're looking at the market there's.
Trending now obviously the.
TAVR market is proving to be more expansive with the low risk indication I think.
This year, we're looking at 90000 procedures.
The technologies also use and evolve cars and so in a limited market release.
How are you seeing montier being used in those two end markets.
Hello, how are you seeing pricing.
Shake out versus a competitor and then ultimately what do you think your penetration can be in these two end markets and then I'll have a follow up thanks.
So what we're seeing and the limited so personal let me say the market we faced the market a 200 $300 million that is before the expansion into lower TAVR procedures that could probably add another 20 or $30 million to our to our Tam.
Potentially.
What we're seeing in the limited market release is the majority of the of the procedures that are being used in his entire.
A we have focused on the type of our centers because it has.
They are larger there faster growing and but obviously that interventions that does it kind of our does the buyers as well. So obviously, we're picking up by our procedures and even it's also being used with the impella in a number of cases.
From a pricing perspective, we have now got a much better understanding of the relationship between price and volume for the bigger centers versus the smaller centers, we have our pricing strategy pretty much complete in preparation for a January 1st full launch of the product and we feel confident that we have pricing nailed down.
You have to excuse me Anthony if I don't go into details on the pricing I'm sure. Our competitors this into the call. The same as anyone else side I don't I don't want to share that from competitive reasons, but I can tell you Anthony that we feel incredibly confident in our pricing strategy and we believe that it will not be a barrier to adoption and even at the lower end the pricing strategy that we.
We have for significant volume it is still accretive to teleflex and this product will be an accretive product teleflex gross margin and a driver for growth over the long term.
Fair enough and actually the follow up will be instead of M&A actually.
Entry or coolant pumps so your.
Competitor had a recall last quarter it looks like the.
The business over Teleflex benefited from that it seems that that was the case this quarter. So.
Just an update on entry or balloon pumps, and how that dynamic is playing out thanks again and congratulations.
Thank you very much so.
The intra aortic balloon pump recall by the competitor, we won't see a benefit to that end in fairness and what customers will tend to do because its capital equipment they'll postpone the purchase for period of time, our growth is purely down to taking share from that same competitor now.
I'm going to recall goes on you would expect that in Q4, but still hangs out there in Q1, we will get a benefit than what our growth has been driven bios taking share from that competitor and our balloon pump business is growing in the in the.
I will tell you that we are taking share we knew pump on the market, it's doing exceptionally well and we're very happy with that business. We will see start to see the benefit I believe of the recall the longer goes on and in particular as we get into this quarter, we're in now and into the coming quarters.
Thanks again.
Thanks Anthony.
Thank you. Our next question comes from Brian Weinstein with William Blair. You May proceed with your question.
Thanks for taking my questions.
You asked number or the Americas numbers was obviously very good.
We have seen though in the past sometimes.
Question is are you seeing anything that suggested maybe any over stocking somewhere where we may need to think about that going forward and in particular, we're hearing about will related products that distribution seeing a bigger bumps unusual heading into the season. So can you talk about any impact based on any of that thanks.
Absolutely, Brian I think that way I look at it is first of all we saw a modest destocking by distributors within the third quarters, So and that's in line, but our expectation you normally expect to see that what's more encouraging for me in the key North American market is the revenue I recognize the red.
Revenue I sell into the distributor, but if I look at my Tracings and if I look at the end customer demand my end customer demand is actually greater than what I'm selling in and recognizing through the distributors. So that gives me a certain level of confidence that there is not an issue with regard to the stock.
It's I don't have the best visibility into it but I think the portfolio. We've built Brian is one that has protected as against days in the past half of our business would have gone through these fees Fox moving distributors, whereas now only a third of our business and they are happy as moment for.
I've got to tell you was when we had some de stocking in Q1 and restocking in Q2, and the investment community hardly even notice to and that type of portfolio. We're trying to build intelliflex and that the level of execution that we're trying to deliver intelliflex and I got to say the other.
Could it happen. This that I feel is that this is the fifth quarter back to back that we have been absolutely consistent in our delivery on almost every line on our income statement revenue margins and earnings so the level of performance by our arch our teams out there is at a very high level.
Thank you. Our next question comes from Matthew O'brien with Piper Jaffray. You May proceed with your question.
Hi, it's Adam on for Matt Congrats on the quarter and thanks for taking the questions. Thank you I wanted to ask about capital allocation over the next 12 months for the company or so just including the potential for M&A.
Are you seeing attractive assets or are multiples still too steep at this point and I had a follow up.
Okay. Adam So first of all let me start with our leverage our leverage is about 2.45 times at the end of this quarter. So we definitely have capacity.
Multiples have have not being the issue for us in the assets. We look at the assets that we have traditionally focused on we're always high quality assets.
The multiple expansion.
At least what I'm seeing out there has come in lower quality assets, which were never the assets. The teleflex have been interested in our preferred use of capital. It's to continue to do M&A and we're very active in the marketplace looking at assets.
We continued to see attractive assets in the space that we look and I think what gives US an advantage in this area is that we're looking pretty broadly. So we're looking in men's have we're looking in vascular area. We're looking in the surgical area. We're looking in the OEM area. We're looking the season emergency medicine area.
How that's very clear thanks, and then if I can squeeze one more and on the surgical side.
Can you update us on the rollout of Perky dance I know that's been in a limited launch days can you just talked about the clinical feedback.
From clinicians and when we should expect Thats progress to a more full launch thanks for taking the questions. Yes. Thanks. So we're continuing with it with a limited market launch as I've said, a couple of times Perky advance is really a show me product.
We want to finish the limited launch we have some clinical work that we want to finish as well before we want we get too excited about the product.
But rest assured once we get to trade 20 guidance, we give a further update.
Thank you. Our next question comes from Dave Turkaly with JMP Securities. You May proceed with your question.
Hey, great. Thanks, you May have mentioned this I apologize if you did but the.
That sterilization plant when exactly did that occurred in what was the cause of it going offline or closing.
Yes, so Dave this is being pretty move well documented within the media.
Emissions in the Atlanta area.
The environmental group the last I saw had put out a notice that the company with compliance to all the rather substandard and they're working now with Cobb County trying to reopen the facility as I said earlier, they don't have any line of sight as to when they will be able to reopen the facility, but we have transitioned products to other.
They were qualified sterilization cycles.
Got it thanks, and then last one just quickly.
The 130 million tax benefits, you said something about it for us I think restructuring, but is that and I'm sure. It's a one time, but are there other opportunities for things like that is that just sort of.
So that we shouldn't expect to see again.
I wouldn't count on that in the future. There there may be some other restructurings out there that could bring on a similar benefit however, I wouldn't count on that there is no one at side right now currently doing anything else along those lines.
Thank you. Our next question comes from Mike Mattson with Needham and company. You May proceed with your question.
Yes. Thanks, So just back to the sterilization issue I understand you're trying to address the problems with the current products that are exposed, but just from a risk mitigation perspective. There is there anything you could do with other products at other facility is to try to prevent.
This type of impact in the future or is that just not possible.
Good question, Mike who have one thing that we have done is we have looked a comparable psychos validated additional cycles.
In a risk mitigation stands.
And also we have on our major codes.
As Tom mentioned in his discussion around our increase in inventory prior to the tactical increase in inventory is around to risk mitigation against any other at sterilization issues.
And it is a requirement because other types of sterilization processes do not work on products would be premises products made of certain materials. So I think we've got to have a balanced approach here. Obviously, we all want to protect the environment, we all want to have a safe and.
Firemen Sullivan, but if you were living in their Les you have as much exposure because the pollution than you would in in.
In any other areas. So I think I think common sense is starting to to prevail is my observation I was particularly encouraged by the FDA statement that they made last week.
Okay. Thanks, and then just one follow up just wanted manta.
Is there any economic data as part of the season at the trial or any other trials or or is there anything efforts underway to collect any economic data that would help drive adoption and maybe get this going through fat committees. Thanks.
Yes, there is a gym at study.
From 7.5% to 2%. So if you combine that with the Jim has 30, Mike that that would be a compelling argument for any Vac Committee.
Thank you. Our next question comes from Matthew Me, Sean with Keybanc. Sir you May proceed with your question.
Great and thank you for squeezing me in I'm I, just I just have one.
Can you guys update your free cash flow expectations for the year.
And I am sure Theres, some annual increases through throughout the L. RP, but I think free cash flow was supposed to be somewhere between 500 550 million per year through through that LP and there seems to be a delta between where you are today and those expectations can you kind of bridge. This.
Sure.
So to your point when we put together the L. RP and guided at Analyst Day, We had said that free cash flow would average between 500 550 million over the period, 29% 2021 in inherent in that guidance was the assumption that free cash flow would in fact built to your point. So in 2019, we thought to be less than that that three year.
Bridge 2020 kind of in line in 2021, well in excess.
Now since putting the L. R. P. Together, we've experienced improving results from the knee attract business and we've made other businesses seasons aimed at improving our operations and some of these decisions will have an impact on the near term free cash flow.
So for 2019, I now expect cash flow from operations around 435 million and Capex of approximately 100 million now let me give you some kind of the key deltas from when we put the L. R. P out there you know why we're not seeing free cash flow at the same level that we initially expected.
The first is that any attract is performing better on as a result, so we are paying a higher level of contingent consideration than what was originally contemplated in purchase and counting and those additional payments in excess of what was initially booked actually go through cash flow from operations. Then in addition, we put in addition.
I'll restructuring program in 2019.
And that program doesn't generate savings until 2021 in there is also cash outflows.
We have to invest in the project in 2019, and there's also capex associated with it.
And then in a in another.
Action that we've taken in an effort to really enhanced customer service, we reevaluated our safety stock levels and as a result, we've increased our strategic inventory balances. This year now we believe that this is part of the reason why we're seeing improved customer service results, including improved on time delivery, where they will ultimately Bennett.
For the company over the longer term, but each of these have served to reduce the free cash flow from from our previous expectations, but again, we're pretty happy that any attracted over performing we think the increased inventory will actually help the business as well for restructuring programs will help is no longer term.
Just a follow up to that is the contingent consider in the changes in contingent consideration is that a one is that a one is that a onetime payment that's impacting 2019 or is that something that also would potentially impact 22000 2021 as well.
It could potentially impact 2021.
2020, 2020, so the bulk of the contingent consideration.
Runs through to the end of 2020 and paid in 2021 for new trend.
Thank you guys.
Thank you.
Thank you. Our next question comes from Kristen Stewart with Barclays. You May proceed with your question.
Hey, guys, congrats on a great quarter and happy Halloween.
Thanks.
Just a couple of follow ups for me just wanted to circle back on I guess David's first question.
Miss something on that is there an update on that product because my understanding was that that was still something that youre trying to figure out the filing timeline on that could you provide an update on that and then I have they asked how long does not.
Yesterday, I think David asked about mounted but happy to discuss the plans as we said on our last call.
Would give an update once we had a clear line of sight to be late submission, but I can tell you that our collaboration with the FDA continues to be very.
Obviously, the FDA teleflex than the military we're all excited about the product as we know can have a positive impact on humanity.
As we continue this journey, we have done a a significant amount of testing and we submitted that to the FDA. We have ongoing testing that we are doing that move.
We will continue for the next few months.
Again, working with the FDA, we have agreed add the pediatric study plan, which was a big step forward.
And I think that that for US is a is a positive development. So.
Covered that that obviously go.
And of course.
We are sailing unchartered waters with the FDA, but we are working hand in glove with them, making progress on as soon as we have a clear line of sight to testing being done submitted the FDA and the clear timeline for the B of a we will update the investment community I would just remind you that we had about.
$7 million for this product in our at RP by 2021, and we believe that is the 100 million dollar market opportunity at 25 in the military and 75 of the civilian market. So continue to work on it on making progress.
Perfect and then the other question I have is just on your elected manufacturing and let you guys produced that in Pleasanton is that at all impacted by some of that rolling kind of blackouts with what's going on with suppliers and.
Alternative manufacturing in Mexico, or anything just anything to think about their im sure you guys have safety stock and everything else probably generators tail, but just wondering how you guys are thinking about that as a risk, but we havent Hampshire on the wheels, Chris in general.
That's good to hear [laughter].
We are currently.
We're in good shape there when we bought the near Frac Company. We identified this is the risk and in the first 12 months, we opened up an alternative manufacturing site.
So we can manufacture this product in June sites, and we haven't had any impact of the power of that I'm aware of so no impact to the power rose and Julie manufacturing already established as a company.
Perfect. This does hamsters are doing well, then flattening or they're going around in circles.
Mike I feel like that to south.
Alright, thanks, very much guys congrats again on the quarter.
Thank you.
Thank you I'm not showing any further questions at this time I would now like to turn the call back over to Jake Doug leaves for any further remarks.
Thanks, operator, and thanks, everyone for joining us on the call. Today. This concludes the Teleflex incorporated third quarter 2019 earnings Conference call.