Teleflex - Earnings Call - Q2 2017
August 3, 2017
Transcript
Speaker 0
Good day, ladies and gentlemen, and welcome to the Second Quarter twenty seventeen Teleflex Incorporated Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Treasurer and Vice President of Investor Relations, Jake Elguise.
You may begin.
Speaker 1
Good morning, everyone, and welcome to the Teleflex Incorporated second quarter twenty seventeen 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 five million six seventeen thousand three hundred and eighty nine. Participating on today's call are Benson Smith, Chairman and Chief Executive Officer Liam Kelly, President and Chief Operating Officer and Thomas Powell, Executive Vice President and Chief Financial Officer. Benson, Liam and Tom will provide prepared remarks and then we'll open up the call to Q and 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 and actual events or results may differ materially. The factors that could cause actual results or events to differ materially include, but are not limited to, factors referenced in our press release today as well as our filings with the SEC, including our Form 10 ks, which can be accessed on our website. With that, I'd like to turn the call over to Benson.
Speaker 2
Thank you, Jake, good morning, everyone. First of all, we are pleased with our second quarter and year to date 2017 results and our continued progress on many of our long range initiatives. After six months, we're spot on our constant currency revenue expectations. On top of that, we are benefiting from a more favorable currency environment that has a positive impact on our as reported revenue and our adjusted EPS. Here's some details.
From a year to date standpoint, our constant currency revenue growth, including Vascular Solutions, was 14.4% as compared to our full year guidance range of 12.5% to 14%. If you were to exclude Vascular Solutions and normalize for the impact of shipping days, our constant currency revenue growth for the first six months of the year totaled 4.6% as compared to our full year guidance range of 4% to 5%. That puts us right on track towards the achievement of our previously provided full year constant currency revenue growth guidance range. We've continued to achieve solid results across many of our strategic business units and geographies and this performance coupled with our expectations for the remainder of the year has allowed us to increase our full year as reported revenue growth and adjusted earnings per share guidance ranges. Turning to our quarterly results and beginning with revenue.
Despite having one fewer shipping day in Q2 as compared to the prior year period, revenues grew 11.6% on an as reported basis and 12.9% on a constant currency basis. This includes the contribution from Vascular Solutions product lines, which accounted for approximately 9.6% of our constant currency revenue growth. I'm happy to report that year to date Vascular Solutions performance has been in line with our initial expectations and that we have an opportunity to accelerate some distributor conversions efforts into the latter part of 2017 that were originally planned for 2018. As such, we'll be making some additional investments in the 2017 to accomplish this. During Tom's prepared remarks, he will go through this in a bit more detail.
Setting aside the impact of Vascular Solutions and one fewer shipping day that impacted our results in the quarter, Teleflex posted good growth on a constant currency basis driven by performances of Rite of Care, which grew approximately 17% as well as our OEM, Vascular North America, Surgical North America and EMEA segments. We continue to see stability within our end markets, good global utilization of many of our products and positive momentum in revenue generated from newly introduced products to the market. We also made significant progress on our distributor conversion in China. And as such, we anticipate an acceleration in constant currency revenue growth in the second half of the year as compared to the headwind of revenue of approximately 60 basis points that we experienced during the first half of twenty seventeen. Turning to profitability.
During the second quarter, we generated adjusted gross and operating margins of 55.9925.1% respectively. The operating leverage generated in Q2 translated into adjusted earnings per share of $2.04 which is an increase of 7.9% versus the second quarter of twenty sixteen. It is also better than our prior expectations for Q2, which called for adjusted earnings per share to be relatively flat to the year ago period. Finally, during the first June of twenty seventeen, the company continued to generate strong free cash flow and and this enabled us to repay borrowings that were equivalent to approximately 10% of the Vascular Solutions purchase price within only a few months after closing the transaction. In summary, we're off to a good start in 2017 and are on track to meet or exceed the original 2017 financial targets that we provided the investment community in February.
Additionally, I believe we made good strides in many key areas that will position us well for 2018. That completes my prepared remarks. And I would now like to turn the call over
Speaker 3
to Liam. Thank you, Benson, and good morning, everyone. For the consolidated company, second quarter twenty seventeen constant currency revenue grew 12.9%. During quarter two, we had one less shipping day as compared to the 2016 and this negatively impacted our results by approximately 1.2%. When normalizing for the shipping day impact, sales volumes of existing products grew 1.4%.
Also impacting volumes in the quarter was our decision to go direct within China, which resulted in our former master distributor of vascular and cardiac goods to no longer purchase product from us. This caused the volume growth shown here to be adversely impacted by approximately 60 basis points. However, as Benson just mentioned, we made good strides in our efforts to build out our direct sales capabilities in China during quarter two and we anticipate that China will no longer be a headwind in quarter three and then become a revenue tailwind during quarter four. Moving to new products. The positive revenue contribution trend we have seen for the past several quarters once again continued, this time contributing approximately 1.5% of constant currency growth, squarely in line with our full year guidance expectations.
New product revenue growth was once again led by our Vascular, Surgical and Anesthesia product lines. Vascular new product revenues increases are attributed to further penetration of our preloaded antimicrobial and antithrombogenic BPS TICs, while in Surgical new product growth was primarily due to sales of our EFX and AEO5 products. Finally, Anesthesia new product revenue growth is primarily due to increased sales of our LMA unique product with silicon. Turning to pricing. During quarter two, we saw continued improvements in the average selling price of our products, which drove revenue higher by another 60 basis points.
This is consistent with the levels that we achieved during quarter one and the ability to continue to drive positive pricing continues to be a differentiator for Teleflex. Finally, moving to revenue growth coming from M and A. During the quarter, M and A other than Vascular Solutions contributed approximately one percent towards our constant currency revenue growth. The contributors here were Cartica and Ping with a larger portion coming from Cartica. I would like to point out that both Kartika and Ping are growing their revenues organically at high rates and will help Teleflex accelerate its organic constant currency revenue growth rate moving forward.
Finally, Vascular Solutions contributed 9.6% towards Teleflex's second quarter constant currency revenue growth. And when compared to the second quarter of twenty sixteen, Vascular Solutions continued its track record of double digit growth, increasing approximately 10%. I'd like to point out that Vascular Solutions also had one fewer shipping day in quarter two, so its normalized revenue growth would have been about 11.5%. Growth in Vascular Solutions was primarily due to increased sales of Turnpike, GuideLiner and Micro Introducer kit products. And before I talk about the constant currency revenue growth rates of our segments, I would like to briefly share with you how the same metrics I just reviewed with you look like on a year to date basis.
Many of these numbers are similar in nature to the figures I just shared with you for quarter two. And the reason why I want to highlight these year to date figures are twofold. First, they show that we are on track towards the achievement of our full year constant currency revenue guidance range of 12.5% to 14%. And second, I would like to share with you what you should expect to see in terms of second half of the year performance as compared to these figures. For the first six months of twenty seventeen, core product volumes normalized for the extra shipping days grew 1.4%.
This 1.4% includes the negative headwind of 60 basis points because of China, as I just mentioned a few moments ago. As we move forward in the second half of twenty seventeen, we expect China to be a tailwind to revenue growth and as such, we would expect core product volumes excluding the impact of shipping days to accelerate in the 2017 as compared to the 1.4% during the first half. Moving to new products. Growth generated by new products added 1.7% for the first six months of twenty seventeen. As we move towards the back half of the year, we would expect a modest uptick as we get the benefit from products launched in late quarter two such as AT3 and VPS Rhythm.
Turning to price. It contributed about 70 basis points year to date. And during the second half of twenty seventeen, we expect this to be a tad lower, but not in a large respect. Moving to contributions from M and A other than Vascular Solutions. During the first six months of the year, this has added 0.8%.
Looking forward, we expect this to be a bit lower as the Kartika acquisition anniversaries itself. However, beginning in September Kartika revenue growth will be included as core product volume growth. And given Kartika's organic growth rate, this is yet another reason why we expect our core product volume growth to improve moving forward. And before I move to Vascular Solutions, I would like to reaffirm a point made by Benson earlier, which is that at the half year mark, our constant currency revenue growth excluding Vascular Solutions and adjusted for shipping days is 4.6% compared to a guidance range of 4% to 5%. We feel very comfortable with our revenue guidance including and excluding Vascular Solutions.
Now on to Vascular Solutions itself. During the first six months of the year, it added 7.5% towards our overall constant currency revenue growth. In the last six months of the year, we would expect Vascular Solutions to contribute growth rates closer to the level it contributed in the second quarter. And finally, I wish to outline what to expect in terms of the shipping day impact. If you recall, we had a five day benefit in quarter one and one fewer day in quarter two.
As we move forward, we will not have any shipping day impact in quarter three, while we will have five fewer days in quarter four. As such, we expect the lack of shipping days to negatively impact us in quarter four. To date, we've estimated that each shipping day has impacted our business by approximately 1.2%. In summary, we feel that we have good visibility into our revenue growth trajectory in the back half twenty seventeen. Next, I would like to turn back to the quarter and provide some additional color surrounding our segment and product related constant currency revenue growth drivers.
Vascular North America second quarter revenue increased 6.3% to $93,500,000 The increase in vascular revenue was largely due to higher sales of PICCs and VitaCare EDIO and OnControl devices. The underlying growth in this segment was somewhat muted by the impact of one fewer shipping day within the quarter. Moving to Anesthesia in North America. Second quarter revenue was $49,100,000 or essentially flat versus the prior year period, as increases in revenue from new product sales and the impact of an acquisition was offset by a decrease in sales volume of existing products part because of one less shipping day. Turning to our Surgical North America business.
Its revenue increased 4% to $44,700,000 The increase within Surgical is primarily attributable to higher sales of access ports, surgical instruments and percutaneous products. Unlike our Vascular and Anesthesia businesses, growth within Surgical was also negatively impacted by one fewer shipping day. Shifting to our overseas operations. EMEA revenues continued their positive trajectory, growing 3.2% on a constant currency basis to $132,000,000 The improvement in European revenues was largely the result of increased sales of vascular, interventional, surgical and cardiac products. Like our North American franchises, growth in this region was also negatively affected by one less shipping day.
Moving to Asia. Our second quarter revenue increased 3.1 to $64,000,000 This region was not impacted by shipping days. However, the China go direct limited revenue growth in the quarter. Without that, this region would have grown approximately 7.5%. Turning to OEM.
During the second quarter, revenue increased 12.5 to $45,100,000 most primarily due to higher sales of catheters and Performance Fiber products as well as the Kartika acquisition. And lastly, second quarter revenues for the businesses within our All Other category was up 73.1%, totaling 100,200,000 Growth here is primarily attributable to the acquisition of Vascular Solutions. In summary, growth during the second quarter was balanced across our product lines and regions. And had it not been for the shipping day, growth in our North American and EMEA product lines would have been about 1.6% higher respectively. And as has been our customary practice, I would like to next briefly update you on the status of GPO and IDN awards as well as some recently received regulatory approvals and product launches.
Adding to the success we realized in the first quarter, during quarter two, we won an additional six new GPO and IDN agreements and extended 16 others. Of the agreements won and extended in quarter two, fourteen were sole sourced in nature and covered a wide variety of clinical areas, including our CVC catheters, laryngeal masks, ligation clips and our percutaneous product offerings. Moving next to some recent product introductions and regulatory approvals, which we've received. Starting with our most recent arterial catheter. We recently received five ten clearance for the ARO Settlinger arterial catheterization device.
This device is indicated for short term use and is designed to improve patient safety by eliminating confusion of catheter identification, while also reducing the risk of complications associated with insertion. It also provides optimal diagnostics leading to effective treatment for patients and we expect to launch this product in The United States later this year. Turning next to RePlas. We are quite enthusiastic about this product. And for those of you who are not familiar with it, Replast is freeze dried plasma.
This product came to Teleflex via the Vascular Solutions acquisition and it is a product that has been developed in cooperation with the U. S. Army. The U. S.
Army is sponsoring the clinical trials of the freeze dried plasma for the treatment of battlefield trauma and other emergency applications. However, Teleflex retains all rights to commercialize Replast. On May 15, Teleflex announced the commencement of a Phase I clinical study whereby Replast was administered to the first patient as part of a 24 patient study being conducted at Hogsworth Blood Center at the University of Cincinnati. In this first stage of the clinical development program, healthy volunteers receive increased dose of their own blood plasma that has been processed using our proprietary freeze drying and packaging techniques to assess safety and tolerability. We continue to expect that we will commercially launch ReClask during 2020 and that it could be a $100,000,000 product opportunity over time for Teleflex.
That takes me to the end of my prepared remarks. At this time, I would like to turn the call over to Tom for him to review our financial results for the second quarter and to provide an updated guidance for 2017. Tom?
Speaker 4
Thanks, Liam, and good morning, everyone. Given the previous discussion of the company's revenue performance, I'll begin my prepared remarks at the gross profit line. For the quarter, adjusted gross profit was $295,300,000 versus $260,400,000 in the prior year quarter. Adjusted gross margin was 55.9%, a 90 basis point increase when compared to the prior year period and representing the highest adjusted gross margin level achieved by Teleflex since becoming a pure play medical device company. As covered on our last earnings conference call, given the tough gross margin comparable in the second quarter of twenty sixteen, we're expecting only modest gross margin expansion for the second quarter of twenty seventeen.
So the result is modestly favorable to our previous expectation. Versus prior year, adjusted OpEx spending grew by approximately 15%, reflecting the inclusion of Vascular Solutions and expenses associated with the China distributor conversion. Adjusted operating margin was in line with prior year at 25.1%. Adjusted net interest expense increased to $19,400,000 from $10,300,000 in the prior year quarter. The increase is the result of the additional borrowings used to finance the acquisition of Vascular Solutions.
For the quarter, the adjusted tax rate of 16.6% marks a 400 basis point reduction from the prior year rate. More than anything else, the year over year reduction is the result of an easy comparable from the prior year. For the second quarter, the tax benefit of the new accounting treatment for excess tax benefits from stock plans was minimal. On the bottom line, adjusted earnings per share increased 7.9% from $1.89 in the 2016 to $2.04 in the second quarter of twenty seventeen. Turning now to select balance sheet and cash flow highlights.
During the first June, cash flow from operations was $198,000,000 or an increase of 9% over the prior year. The increase was primarily the outcome of improved operating results and working capital management. Also during the quarter, we repaid approximately $90,000,000 of bank debt, which resulted in a reduction of gross leverage to approximately 3.3 times at the end of the second quarter. Finally, post quarter end, we retired the remaining $44,000,000 of outstanding convertible notes. Cash requirements for the retirement were funded through revolver borrowings.
That completes my comments on the second quarter. Now I'll move to 2017 guidance updates. Through the first six months, our operating performance is tracking in line with expectations and the Vascular Solutions integration is proceeding as planned. We do, however, see two positive changes that allow us to raise our as reported revenue guidance and our adjusted EPS guidance. The first positive change is from currency.
Currency rates have improved from when we set our original guidance expectations, which has resulted in less of a headwind to both our as reported revenue growth and adjusted EPS for fiscal year twenty seventeen. Our original 2017 guidance assumed a $0.30 headwind to adjusted EPS. We now expect the headwind to be $0.13 or a $0.17 improvement. The second positive change is an interest expense. Our original guidance had assumed that in order to more permanently finance the Vascular Solutions acquisition, we would term out approximately $500,000,000 of revolver borrowings with a high yield note offering.
This financing was expected to be completed midway through 2017. After reassessing our projected sources and uses of cash, we no longer anticipate the need to term out the revolver borrowings related to the Vastor Solutions acquisition. The favorable interest expense impact of the revised capital structure plan will now be reflected in our updated 2017 adjusted earnings per share guidance. We also believe that we are now in a position to potentially accelerate investment in Vascular Solutions distributor direct conversions into the second half of twenty seventeen, which will help us get a jump on 2018. As such, as we finalize our planning in this area, we will hold a portion of the interest expense savings as a reserve to fund this potential investment.
Let me now walk you through how these changes impact guidance, beginning with revenue. For 2017, we are reaffirming our full year constant currency revenue growth guidance range of 12.5% to 14%. We continue to assume that our base business will grow 4% to 5% and that Vaster Solutions will add 8.5% to 9% to total growth. However, we are raising our as reported revenue growth guidance from the previous range of 10% to 11.5% to a new range of 11.5% to 13%. The 150 basis point increase in as reported revenue growth is the outcome of our improved expectations for 2017 currency environment.
Based on our updated currency assumptions, we now expect as reported revenue to range between $2,083,000,000 and $2,111,000,000 or an increase of approximately $28,000,000 from our previous as reported revenue guidance. Moving to interest expense. As mentioned, our original guidance assumed a mid year high yield financing to term out the Vassar Solutions acquisition. The deferral of this financing will reduce interest expense in the 2017 by approximately $6,000,000 as compared to our initial expectations. Turning now to EPS.
Given the favorable developments, we have increased the bottom end of our adjusted EPS guidance range by $0.15 and the top end of the range by $0.12 Our current outlook for fiscal year twenty seventeen adjusted earnings per share is now a range of $8.2 to $8.35 up from our previous outlook of $8.5 to $8.23 Our assumptions on constant currency revenue growth, adjusted gross margin, adjusted operating margin and adjusted tax rate remain unchanged from the last quarter. So in summary, through six months of 2017, Teleflex is off to a good start. Constant currency revenue growth, gross margin and operating margin are spot on where we'd expected them to be. The integration of Vascular Solutions is also progressing as planned. During the second quarter, we repaid $90,000,000 of bank debt and reduced our gross leverage to approximately 3.3 times.
And subsequent to quarter end, we retired the remainder of all convertible notes outstanding. We have had two positive changes in the form of an improved currency environment and a deferral of a planned high yield notes offering, which provide us the flexibility to make investments to accelerate the Vascular Solutions integration timeline and to once again raise EPS guidance. That concludes my prepared remarks. At this time, I'd like to turn the call back over to the operator for questions. Operator?
Speaker 0
Your first question is from Larry Kuch with Raymond James. Your line is open.
Speaker 5
Thanks everyone. Good morning. So just a couple of quick things here. Could you maybe talk a little bit about China? And obviously I understand the impact is tracking to your expectations.
But could you expand a little bit more on sort of the infrastructure build that you had to do? And I guess your visibility on how much of the distributors product is still out in the channel as you think about the second half? And then I have one other question.
Speaker 3
Okay. Hey, Larry. It's Liam here. I'll take this. So regarding the build out of our infrastructure, we have appointed regional distributors.
So we actually have all of the regions covered and we've also appointed close on 93 sub distributors that will obviously get product to the market. We had a review recently and our sales out, which is the benchmark you want to have in China, sales to the end customer, we're progressing modestly ahead of our expectations in that regard. So that's quite encouraging for us. We have our infrastructure from a talent acquisition point of view almost completely in place. We only have four positions that we haven't made an offer on or have the person on board.
So we're really comfortable with where we're at. We're currently going through a remediation process with the distributor, and they filed some documents outlining their inventory levels. We are currently reviewing that. It's difficult for us to tell exactly how much is left within their portfolio. But given the fact that they have continued to sell for this period of time, we would expect that to be pretty modest at this stage, what's left with the distributor, Larry.
Speaker 4
Okay.
Speaker 5
Terrific. And then just one other quick question. I couldn't help but notice the strength in the EMEA region and I think we saw that beginning in the first quarter as well. So maybe again, if you could expand a little bit on what you think is going on there and how sustainable could that improved growth be? Because I think you were sort of flattish in the past there.
So this marks definitely a nice step up.
Speaker 3
So last year, we grew in EMEA, Larry, by
Speaker 4
about 1.1%.
Speaker 3
And this definitely showed the step up. And the step up is pretty broad based in the geographies within EMEA. Adjusted for billing days, we're at 4.8% within this quarter. And as I said, it's broad based. So we've seen nice recovery.
Germany was always pretty strong, but we've started to see nice recovery in France. We've seen nice recovery in The U. K, Italy and Iberia. And also in the indirect markets in Saudi Arabia, we have seen they seem to have overcome some of the oil crisis there, and that has helped us as well, Larry. So the encouraging thing is that it's broad based and the economies are doing better there as we all know.
So yes, we're really encouraged by what's happening within EMEA. And also some of our new products we're getting out there into the market are driving increased demand we're getting better utilization.
Speaker 2
I think there's also some pent up demand from the fact that they had cut back on expenditures for several years. And you can only do that for so long and really the population almost demands that there's increased spending against healthcare. So I think we're starting to see the benefit of that as well.
Speaker 4
Okay, terrific. Thanks guys.
Speaker 0
Your next question is from David Lewis with Morgan Stanley. Your line is open.
Speaker 6
Hi, guys. This is actually Scott in for David. Just two quick questions for me. I guess first for Liam or Tom, looking at the organic growth guidance for the rest of the year, it seems like did basically a little bit above 4% in the first quarter. You did a 3.5% this quarter.
To get to kind of the midpoint of your guidance, I have to I kind of see the back half delivering organic growth something closer to 5%. And I was wondering if you can talk us through what gives you kind of the confidence that, that will happen in the back half versus the front half. What are some of the key drivers of that acceleration?
Speaker 3
All right, Scott. I'll start. And if Tom wants to add to it, by all means. So first of all, thanks for the question. I would like to point out that our constant currency revenue growth in the first half of the year was 14.4%, first of all.
Adjusted for BSI and billing days, our growth is actually 4.6%, which is an apples to apples comparison to our constant currency full year revenue guidance of 4% to 5%. For the first six months of the year, we are right on plan and slightly above the midpoint of our constant currency revenue guidance at the half year stage. We feel good about the remainder of the year as China headwind becomes a tailwind and we feel even better about next year as VSI rolls off our base growth and this would add approximately 1% to our organic growth moving forward. So Scott, we feel in a really good place regarding our guidance.
Speaker 6
That's really helpful. And one the only other question I had was from our analysis, it seems like vascular in North America did particularly well this quarter. And I was just wondering if you saw any benefits from disruption at one of your competitors, namely Bard. Did you see any kind of benefit in taking market share? Or was it more just execution?
Thank you.
Speaker 3
All right. Thank you very much. Yes, Vascular performed well, growing at 6.3%. And then when I adjust for billing days, you add about another 1.6% to that. So we're really encouraged.
We continue to see strength in our PICC portfolio, Scott. Our PICC portfolio within North America was up over almost 30%. And we continue to put a focus on our antimicrobial and antithrombogenic pick because hospitals are very focused on thrombus and infections, and we are the only company that has a solution to the infection. So we feel very confident on that growth trajectory continuing for our Vascular business. And also, EZIO, the VitaCare portfolio, continues to grow.
At the half year, it's still growing at 20%, and we see that very sustainable for the remainder of the year.
Speaker 6
That's great. Thank you very much.
Speaker 0
Your next question comes from Matt Mishan with KeyBanc Capital. Your line is open.
Speaker 7
Hey, good morning and thanks for taking the questions. Hey, Tom, on vascular solutions, your ability to put off the high yield financing, is that something you've permanently put off or something which is you're just still evaluating your different options?
Speaker 4
Well, mentioned, we've taken a look at our sources and uses of cash. They've come in a little bit stronger on the cash flow than our initial expectations. We've been able to pay down our bank debt by $90,000,000 and we freed up additional capacity on the revolver. And so as we look out for the rest of 2017, the high yield is off the table relative to Vaster Solutions and we expect not to be or not to need to put that high yield financing in years following either. So we believe that we are able to meet our own needs for cash through internally generated sources at this point in time.
So it's probably off Yes.
Speaker 7
And then just following up on that, I think you said that Vascular Solutions would be accretive by about $0.50 by 2018. Do you have what do you think it would be accretive by 2018 without the high yield financing?
Speaker 4
Well, as we think about the impact for the second half of the year, I said it's about a $6,000,000 benefit there. So you would roughly double that benefit for a full year basis and that would put you in the kind of the $0.16 to $0.18 additional accretion.
Speaker 7
Okay, great. And then on RePlus, is there an opportunity for early sales of that once you've begun the clinical trials? Is that something which you could potentially get sales for before it's over? Is there an opportunity for that?
Speaker 3
Matt, it's Liam here. The clinical trials are in order to get FDA approval. So we can't sell prior to FDA approval. So this clinical trial and they have advised we need to do this one and one more. So we expect to commercialize in around the midpoint of 2020 at this stage.
That's our expectation, Matt.
Speaker 7
All right. Thank you.
Speaker 0
Your next question is from Mike Matson with Needham and Company. Your line is open.
Speaker 3
Hello?
Speaker 8
Okay. Can you guys hear me?
Speaker 3
Yes. There we go.
Speaker 8
Sorry, I had it on mute. So just with regard to the EPS guidance increase, it looks like you're increasing it by about the added benefit you're now expecting from the smaller currency headwind yet you beat by about $0.14 this quarter as well. So now some of that may have been from currency, but why not take the guidance up more just given the degree of the beat? Was The Street just sort of modeling things wrong in terms of the quarterly sequencing of the EPS numbers?
Speaker 4
Well, think that's a key point. As we look at our year, we're managing to our internal projections. And so we're never exactly aligned with how The Street is looking at things. And as we look at ourselves through the first six months of the year, what we're seeing is constant currency revenue is right on expectations. Gross margin and operating margin are right on expectations.
And the Vascular Solutions integration is proceeding as planned. And where we're seeing some upside is the interest expense. As I mentioned, that's about $6,000,000 in the back half of the year. We're seeing some benefit from FX as a result of more favorable rates. And in the first quarter, we got a tax windfall.
So as we think about it, those are the areas of upside that we're seeing right now. And as discussed in our prepared remarks, we now believe that we can accelerate some investment for the Vaster Solutions integration. So as we look at those three areas of upside as well as the investment, we believe we're in a position to flow through $0.20 increase in guidance between the first and second quarter raises. Now certainly, if foreign exchange stays at the level we've seen in recent weeks, we could have additional benefit in the future. But right now, we feel as if we are tracking favorably on a couple of non operating issues and right on where we expect it to be from an operating standpoint for the first six months.
Speaker 8
All right, thanks. And then can you just remind us with regard to the medical device tax, what you did with the savings there and how big of an impact you'd expect if it were to be resumed in 2018?
Speaker 2
It was approximately $0.12 I think or $12,000,000 excuse And the majority of that went into additional R and D spending.
Speaker 8
And would you be able to pull that back out of R and D to offset the return if it does come back?
Speaker 2
I think at this point, it's a little too soon for us to make a prediction about how we might react to that. Certainly, some of these R and D programs are in the middle of their project life and not a good time necessarily arbitrarily cancel them. So I think we'll just have to look at how we might adjust for that in 2018 against a broader array of things that are going on
Speaker 5
in our P and L.
Speaker 8
Okay, thanks. And just finally on replas, I mean, there any chance we'll see any sort of interim data from the trials? Or is it just going to be we have to wait until everything's done before you give us any sort of updates there?
Speaker 3
No. There's two trials. So the first trial will finish is expected to finish in the summer of twenty eighteen, and we should have those results. And once we have those results, we will be sharing them with the investment community.
Speaker 8
All right. Thanks a lot.
Speaker 0
Your next question is from Chris Cooley with Stephens. Your line is open.
Speaker 9
Good morning. I appreciate you taking the questions. Maybe just one quick one for me, for Tom. When you look at the stronger cash flow through the first half of the year and the reduction that you've seen so far in gross leverage, just kind of curious what you're thinking about or how you're prioritizing uses of cash going forward.
Do we see a greater focus on kind of the instant gratification of distributor to direct conversions or tuck in M and A once you get down to kind of sub three times gross leverage come back into the equation? Just help us frame that up. Thanks so much.
Speaker 4
Sure. Well, as we looked at our cash flow projections, following the Vascular Solutions acquisition, we always left ample room to continue our distributor direct conversion strategy. And candidly, to continue to fund business development efforts, whether they are late stage technology or some smaller tuck ins. Now, we are a company who looks at companies opportunistically. So if something were to come along that were of keen interest, we would certainly take a look at that.
So from our perspective, we saw a very quick delevering given both earnings growth and cash flow generation following Vascular Solutions. And we don't expect that to hold us back from pursuing opportunities that appear attractive.
Speaker 8
Thank you.
Speaker 0
Your next question is from Dave Turkaly with JMP Securities. Your line is open.
Speaker 10
Thanks. Just one clarification from Liam. The 4.6 organic growth that you talked about earlier on a question, that the quarter or is that a year to date number?
Speaker 3
That was for the half year.
Speaker 1
And then Okay. Dave, that's a constant currency number ex Vascular Solutions. And adjusted for days. Great.
Speaker 10
And we've spoken to some surgeons of late on some of your newer products, specifically Percavance and MiniLab. And I'd just love to get your thoughts on where those products stand today. And it seems like there's a bunch of different surgeon groups, subspecialties that would benefit from them. But any color on where the sales base is now and where you think it's going maybe over the next twelve months or so?
Speaker 3
Yes. Dave, overall, I think we're very happy with the continued enthusiasm we see for our percutaneous product offering from surgeons. We've had a number of analysts that have spoken to surgeons directly and published. We had a minor setback in quarter two when we initiated a voluntary recall on the Perkyavance due to the product falling outside our tight tolerance specification. We identified the issue quickly during quarter two, and we're now back in the market with replacement product.
During quarter two, we presented to 14 back committees and received 12 approvals. Our sales force is back out there trialing the product with great enthusiasm. And this was the recall will not materially impact our performance in 2017 as it was mitigated incredibly quickly by our quality teams. So again, very positive. The VAC hit rate continues in that 80% range.
I think that's 86%, twelve out of fourteen. So again, quite enthusiastic for the product continues to get traction. Procedures that we're seeing it being used on increasingly are bariatric and gynecological procedures.
Speaker 4
Thanks a lot.
Speaker 0
Your next question is from Matt Taylor with Barclays. Your line is open.
Speaker 11
Hi, good morning. Thanks for taking the question. You mentioned China a couple of times. I was just hoping you could give us an update on how that transition will look in the second half of the year with regards to growth and maybe just give us some operational thoughts now that you're kind of going direct there. What could that mean for your growth and profitability in China going forward?
Speaker 3
Thanks, Matt. It's Liam here. I'll take this. So what we see is in quarter three so year to date, China has been a headwind of about 60 basis points. So that headwind will disappear in quarter three and it will become neutral or modestly accretive to our growth.
And then once you get into quarter four, we will see it contribute to our growth and you'll see that come through in core volume. Operationally, we are in a good place. We have recruited all the sales talent. They are out there creating demand within the marketplace. And as I said earlier in a recent review I had with the China team, in our sales out metric, which is the most important metric, we are marginally ahead of our expectations.
So all in all, we feel really comfortable with where we are in the transition from that master distributor in China.
Speaker 11
Thanks. And I was wondering if you could talk a little bit about the different products in the vascular portfolio now that you've owned the company for a period here. Which areas are doing maybe a little bit better than expected? And are there any doing a little bit worse than you initially forecast?
Speaker 3
So the good news is that GuideLiner continues to perform really, really well. At the half year, that's growing about 17%. Turnpike is also doing really well at the half year, it's about 70%. The other microintroducer kits is doing fairly well. That's up in the 18% region.
No surprises, Matt, thankfully, to report. The products are performing in line with expectations. We're getting double digit growth at the in the quarter. It grew by 11.5%, and it's been growing in that range since we acquired it. So double digit growth continues.
And we're really looking forward to when it rolls off our M and A part of our P and L into core organic growth because it will add approximately 1% to our overall growth in Teleflex.
Speaker 11
Great. Thanks a lot for the thoughts.
Speaker 0
Your next question is from Richard Meewitter with Leerink Partners. Your line is open.
Speaker 12
Hi, this is Ravi in for Rich. Thank you for taking the questions. I just had one on the free dried plasma product. Just could you help us understand the competitive dynamic in the space? I don't believe there's anything out there aside from maybe some French suppliers of of of the of the product.
And kind of could you maybe give us some opinion on the you know, any sort of patent protection you'll have there? And, you know, is there anything given the importance of this study and usage by the U. S. Military that could potentially accelerate approval of the product ahead of those 2020 timelines? Thank you.
Speaker 3
Okay, Robbie. So you are absolutely correct. There is one French company and one German company that do provide freeze dried plasma. They both of those went through a local approval process in their countries and neither are available for in The United States, neither have a five ten approval. And our understanding is that there are no clinical trials going on with either of those product categories.
To our own potential of accelerating, it's really, Ravi, dependent on how quickly we can get the clinical trials done and get the results published to move on from Phase I trial to Phase II and accelerate that. Obviously, we're working closely with the FDA because the military want this product as soon as they can possibly get it because it does have a serious impact on the troops in the battlefield. To your IP question, the IP isn't on the freeze drying product itself, but it's more in the delivery mechanism. Most products today are in glass jars, almost like if you remember MASH, those glass jars used to hang up in MASH, that television program. But ours is in a compressible bag, which is ideal for battlefield and also for emergency ambulance delivery of freeze dried plasma to a patient.
So the double valve on our bag is where the IP lies and we have really strong IP around that.
Speaker 12
Great. Thank you very much.
Speaker 0
And you have a follow-up from Larry Keusch with Raymond James. Your line is open.
Speaker 5
Yes. Just a quick housekeeping. What's the assumption now for the remainder of the year for the euro? It had been, I believe, 104,000,000. And could you just maybe talk a little bit about the headwind that may be present from the peso strengthening?
Speaker 4
Sure. So we updated our forecast projections in mid June at the time. The euro was trading around $1.11 to the dollar. We expected Q2 to end up around $1.1 and that's the rate that we put into our projections for the balance of the year. So we've got the balance of the year at 1.1.
As we look the past couple of weeks, we've seen a dramatic weakening of the U. S. Dollar relative to the euro. The euro's now trading at 1.18. So the extent it were to stay at that level, we could expect additional translational benefits.
As far as the strengthening dollar that obviously impacts our ability to purchase excuse me, peso tax our ability to purchase from Mexico. And as we look at all of the impacts, we have seen some benefit from the translational side offset on the transactional side. And in fact, the transactional impact has been a little bit bigger than we typically see largely due to some of the other currency moves around the world including the peso. Okay, terrific. Thanks, Tom.
Speaker 0
And I'm showing no further questions. I would like to turn the call back to Jake Elguise for any further remarks.
Speaker 1
Thanks, operator, and thanks to everyone who joined us on the call today. This concludes the Teleflex Incorporated second quarter twenty seventeen earnings conference call.
Speaker 0
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program and you may all disconnect. Everyone have a great day.
