Good day, ladies and gentlemen, and welcome to the Quarter Two 2015 Teleflex Incorporated Earnings Conference Call. My name is Emma, and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference. [Operator Instructions]. As a reminder, this call is being recorded for replay purposes. Now, I'd like to turn the call over to Mr. Jake Elguicze, Treasurer and Vice President of Investor Relations. Please proceed.

Thank you, operator, and good morning, everyone, and welcome to the Teleflex Incorporated second quarter 2015 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 (888) 286-8010, or for international calls, (617) 801-6888, passcode 52181612. Participating on today's call are Benson Smith, Chairman, President and Chief Executive Officer; Liam Kelly, Executive Vice President and Chief Operating Officer; and Thomas Powell, Executive Vice President and Chief Financial Officer. Benson, Liam, and Tom will make some brief prepared remarks and then we'll open up the call to Q&A. Before we begin, I'd like to remind you that some of the matters discussed in the conference call will contain forward-looking statements regarding future events as outlined in our slides. We wish to caution you that such statements are, in fact, forward-looking in nature and are subject to risks and uncertainties, 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 made in our press release today, as well as our filing with the SEC including our Form 10-K, which can be accessed on our website. The format for this morning's call will be as follows. Benson will begin with a high-level overview of our quarterly results and provide an update on some key strategic initiatives, including our manufacturing footprint consolidation program. We'll then turn the call over to Liam, who will review our product line and geographic revenue results, provide updates with regards to recent GPO and IDN developments, new product introductions and regulatory approvals and highlight two small acquisitions that we completed. Following Liam, will be…

Thanks, Jake, and good morning, everyone. During the second quarter, Teleflex continued its very solid operating performance building upon the results realized over earlier in the year. Once again, the company generated mid-single-digit constant currency revenue growth and achieved adjusted earnings per share that was slightly higher than our most recent internal projections. This was no small achievement as foreign exchange was a significant year-over-year headwind. As we entered the year, we forecasted that all the second and the third quarters would have extremely unfavorable comparisons to the prior year regarding FX. Therefore, Tom, will spend a little more time than usual walking you through how FX affects our P&L, and more importantly, why we expect substantial improvements in the as-reported numbers in the fourth quarter. By way of example, absent currency, our second quarter 2015 adjusted earnings per share would have shown a 14% increase over the prior year period. This is an indication to the underlying base business leverage that we are achieving. And while Liam and Tom will go into more detail during their prepared remarks, let me provide you with a brief overview of our quarterly results. I also want to bring to your attention one other circumstance that had an impact on our numbers this quarter. At the very end of the quarter we had two recalls. Now, normally we would not call out a recall as an offsetting event, as part of the medical device history and when you have one you take the hit. The only thing that makes these unusual is timing. Normally, when you have a recall, you issue a credit to your customers and then ship in replacement product when it becomes available. But because of the timing of these two recalls, we were unable to ship out replacement product…

Thank you, Benson, and good morning everyone. For the consolidated company, second quarter 2015 constant currency revenues grew 4.7% and similar to the first quarter the revenue growth was broad-based both in terms of product lines and geographic regions. The major drivers of revenue growth this quarter came from improved sales volumes of approximately 262 basis points of revenue growth. This growth was driven by core product growth of 215 basis points, and Vidacare growth of 47 basis points. Vidacare product sales grew approximately 11% on a constant currency basis as compared with the prior year period. While this was good, it was lower than the growth we generated in the first quarter of 2015. The revenue growth rate of Vidacare product sales in the second quarter was down sequentially due to seasonality of military sales, and the timing of some crash car sales that occurred in the first quarter of this year. We continued to achieve approximately 30% revenue growth in the interventional products globally and nearly 20% growth in the EZ-IO products in Europe. During the quarter we also had our first Italian ambulance conversion. We continue to invest aggressively behind Vidacare and we remain extremely bullish on the product's potential. In fact, we expect Vidacare revenues to grow approximately 20% on a constant currency basis for the remainder of 2015. Turning to core product volumes, the increase this quarter was led by improved Vascular, OEM, and Respiratory sales for a domestic perspective. Our CVC business grew approximately 10% globally in the quarter driven by market share gains and product upgrades in the U.S., Europe, and Latin America, and volume gains in Asia-Pacific. While from an international standpoint, core product volume growth was great in Asia, thanks to additional orders coming from China, as well as increased sales…

Thanks, Liam, and good morning everyone. Given Liam's discussion of the company's revenue growth drivers, I will begin my prepared remarks at the gross profit line. But before I do, I would like to reinforce a point made earlier by Benson, which is that underlying operating performance is solid. So far this year we have made progress against our gross margin efficiency initiatives, including footprint consolidation, host of new manufacturing cost reduction initiatives, and a continued conversion of select distributors to a direct sales model. We have reorganized several business units in order to drive SG&A efficiency and we have reduced the average borrowing cost through the redemption of higher cost notes. However, for the time being our operational progress is being matched somewhat by the impact of currency. For the second quarter, we estimate that the impact of foreign currency which reduced adjusted earnings per share by approximately $0.30. If we were to exclude the currency impact, earnings per share growth would have been approximately 14%. As I go through the quarterly results, I will highlight the currency impact so you can get a better understanding of the underlying operational performance. Turning now to results. For the second quarter, adjusted gross profit was $236.3 million versus $245 million in the prior year quarter. Adjusted gross margin was 52.3% which was flat when compared to the prior year period. During the second quarter we realized improved operational efficiencies from both manufacturing and logistics cost improvement programs, and the beginning stages of manufacturing consolidation. Recent distribution conversions in Japan, Korea, and now Australia, plus the acquisitions of Truphatek and Mini-Lap further boosted gross margin. Additionally, we realized favorable product mix, including strong results in the vascular North America segment. However, the underlying operational improvement in adjusted gross margin was offset was…

Thank you. [Operator Instructions]. Our first question comes from the line of Larry Keusch of Raymond James. Please proceed.

I'm wondering, Benson, if we could start with the chest drainage product and the comments that you made. I understand that these are obviously incremental revenues, albeit at a lower margin. But could you help us understand how you're thinking about perhaps the size of the market or the opportunity? And how should we be thinking about as that being incremental to the 2015 outlook?

So just by way of background as I mentioned in my prepared remarks, there is a consent decree -- excuse me that is affecting the largest competitor out there. When the impact of that started to became apparent we began a series of negotiations with GPOs and IBNs and essentially came to some agreements with those customers for essentially a three-year agreement. So we expect to ramp up to our full production capability and are in the process of doing that and expect the whole -- the majority of that business over a three-year period. We are not, however, making additional investments to expand our production beyond that point. We're really driven by this -- by patients and customer concern more so than an economic opportunity. So while we expect all lines of the business for three-year period it still falls into that category of low gross margin products that longer range we don't think our strategic best area of investment.

Okay, that's helpful. And then I guess the second question is just on M&A. And I guess the question is how are you viewing the opportunities out there? It seems to me, given the strength of the business that you probably don't have a major sense of urgency to get a deal done. But just want to take your temperature on what the environment feels like, what do valuations feel like, and is this still a priority for you guys?

So the short answer to your questions is yes. We -- I would just tell you we've never been busier. We are working on a number of smaller deals two of which -- of the kinds that Liam announced and those are typically deals we have much higher degree of certainty and being able to move across the finish line. But there is a lot of activity in that range where we're looking at for acquisitions right now. But timing is always hard to predict, but it remains the high priority for us.

Okay. And just lastly on that, just in terms of size of deals, just how should we -- I understand the smaller ones, but assuming something a bit larger, should we be thinking more like Vidacare, LMA sizes, that $200 million?

So when possible I would say that's the size we prefer. I think all along we've said we were going to go up to something in the range of a purchase price of, let's say, $500 million plus for the right opportunity. So I think the answer to your question is we still prefer those $100 million revenue size acquisition, they are a little bit easier to integrate. But it's a very opportunistic situation and sometimes things become available that are still attractive and fall a little bit on the larger side of that.

Okay. Thank you. Your next question comes from the line of David Lewis from Morgan Stanley. Please go ahead.

Hello. This is actually Jon Demchick in for David.

Hey, Jon.

Good morning, Jon.

Hi, Jon.

Good morning. Wanted to follow up on Larry's question on the chest drainage opportunity. And I think you mentioned that you expect to hold onto that business for the three-year timeframe, which I guess coincidentally, follows quite nicely to the long-term plan that you guys mentioned at the Analyst Day. And then, it sounds like the chest drainage opportunity has the potential to impact gross margins by about 100 basis points into the fourth quarter. So obviously, there's some sort of an offset onto the operating line with less selling costs, but should we expect this to impact the gross margin expectations over the next few years?

So just to be clear, the 100 basis points declined from 55% to 52% -- to the 100 basis point you're referring to really included some of the impact from the delay of the transfer of kits and also some impact from our greater than expected respiratory therapy volumes and OEM business. So not all of that decline is due to the chest drainage business.

And Jon, I'll just give you a bit of color on the chest drainage. It -- the largest GPO win that we executed on implementation just began during the month of July.

Okay. Understood. Is there a way to quantify maybe like the impact that the chest drainage business should have on your gross margins overall?

I would say that's getting too finite given all the things to go into the bucket that end up in our gross margins column. But I would say that whatever it turns out to be the impact that it ends up having on our operating margins is negligible.

Okay. That's very understood. One of the big surprises, at least for us, from the Analyst Day was the confidence towards organic growth acceleration in the out years. And I think a big part of that is the pipeline. As Liam mentioned on the call, both Percuvance and the LMA Protector are going to be big contributors to that. With those products launching at the beginning of the years, I was wondering if you could maybe help us think about the growth contribution you're expecting from these products into driving acceleration into 2016.

So we will launch them, we'll come up the limited market release in quarter 2016 for both products. As we said in the Analyst Day, the size of the market for, in particular, the Percuvance is in the region of $300 million to $400 million. The adoption rate we expect to add that it will accelerate during the quarter one through. So we expect an impact in 2016, but we're expecting more significant impacts on revenue growth for that particular product in '17 and '18 as it starts to get some traction. We will have it in 17 hospitals, as I said, at the end of the year. And for the Protector, we are expecting a similar ramp up, slower ramp up in '16 and then accelerating into '17 and '18. Again, I won't get too granular on the details in this particular product line at this time.

Jon, I would tell you that one of the reasons we have this almost like a test-market release going on is so that we can have a better perspective as we plan for 2016 and what the likely volumes are going to be and spend accordingly to be able to make that happen. I would say our accelerating product line though, particularly in the shorter term 2016 has as much to do with what we see as volume growth in the U.S. market and share gains. We're seeing that essentially across most of our business units and particularly areas in the vascular arena where we're seeing a good growth. In fact, we saw some of the strongest underlying constant currency growth in those segments already through the first two quarters.

Your next question comes from the line of Matt Mishan from KeyBanc. Please proceed.

I think you're halfway through the year at this point, but you still maintain the guidance and it's still a pretty wide range. I'm just curious why you weren't able to narrow that a little bit.

Matt, are you referring to -

EPS, that’s right.

The revenue range or the earnings range?

EPS, yes.

Matt, why don't I take that one. So as we thought about it a year, we've got a fairly significant acceleration of revenue, margin expansion and savings and synergies coming to fourth quarter. So we wanted to make sure, we've got no better visibility on that, better understanding what's happening with currencies. But certainly we'll look to narrow that range as we get in the third quarter.

I would just add from my perspective currency continues to be our biggest unknown factor. It bounces around $0.03 or $0.04 within a week. So there is a lot of volatility there. I think if we just look at a constant currency revenue projection, I would say, I'm pretty comfortable that we're going to certainly be in the upper half of our guidance range as in the lower half. We really just need to kind of see what happens with the FX in the fourth quarter to be able to understand how much of that’s going to translate into EPS.

And on the R&D level, for the second quarter in a row that looks like it's about 3% of sales. Are you just seeing less -- why such a low level? Are you seeing less projects to invest in or is it -- I'm just curious?

Yes. So we are continuing to make investments in late-stage technology opportunities that is supplementing that a good bit. So I think our overall investment for the year when you're taking both things into consideration is more than adequate to be able to propel what kind of revenue growth we're projecting.

Okay, and lastly on Percuvance, I think you mentioned that you thought it would be applicable in a broader range of procedures and more complicated procedures. Could you just elaborate on that a little bit? And I know you mentioned the LMA is a full market release in 1Q '16. Are you still comfortable that you'll do a full 1Q '16 launch of Percuvance as well?

Okay. I'll take that. Yes. To your last question, yes. We're very comfortable we're going to get product out there in Q1. Everything is tracking to plan, our internal plan. When we started, we thought we would with doing a lot of procedures in live coli, but in actual fact, we have done as many bariatric and gynecological procedures as we've done live colis during the e-test. And the surgeons are more aggressive in the procedures they would use it in, which is for us quite exciting. Because if it's in a more complex procedure, it's what we would refer to as stick your product in the longer term.

Your next question comes from the line of David Turkaly from JMP Securities. Please go ahead.

I guess just given your performance in the quarter on that pricing side, any update there in terms of your expectations moving forward? Do you still think you can get price as a contributor?

So I think we have indicated over the past couple of quarters that the majority of our pricing is going to come from fewer direct conversions. For example, chest drainage, we might have had an opportunity to raise our prices given the emergency, but we thought that was sending the wrong message to our important GPO customers. The circumstance in Europe just with the addition of what's happening in Greece, what's happening in Russia, et cetera is eliminating some of the other parts of price moves that we're making? So we would continue to suggest that we're in that 100 basis product range over the next couple years, but the majority of it's going to be coming from dealer-direct conversions.

Great. And then on the Arrow Endurance, I guess, do your competitors have a product that's similar to that, or is that a new category that you're creating there?

There are other products within that category that we compete with. But we believe that our insertion process is quite unique and differentiated and will move some of the IB market into that space.

And last one from me, just any details that you'd be willing to share on the Australia distributor, either headcount or revenues, anything like that that you could help us out with would be great? Thanks.

On the Australian dealer to direct, so what we need to do is bleed through their inventory during this quarter and you should see about in the region of 50 basis points to top-line growth in the fourth quarter.

And your next question comes from the line of Matt Taylor from Barclays.

This is actually Ian Mahmud in for Matt. Can you hear me okay?

Yes.

Yes. Good morning.

Good morning.

Okay, great. Good morning. So our question is actually following up on Dave's question about the purchase of the Australia distributor. And we were just wondering if at this point you can maybe size the opportunity for Teleflex in terms of the purchase of more distributors and what your thoughts are on that at this point?

What we've continued to say, for a while, I'll just repeat it, is their cadence of distributor-to-direct conversions [indiscernible] couple of years is what we've forecast over the next couple of years. There continues to be opportunities that are more than enough to be able to support that level. It's really more problematic for us to get down to the individual details about any single one of these. But in terms as an overall annual impact, what we've been delivering over the past couple of years is what we expect to deliver over the '16 through '18 timeframe that we outlined at the Analyst Day.

And just as a follow-up, one of the products that we like from a margin perspective is MAD Nasal. Do you have any update on that or anything that you can share from your current thoughts?

So, as I said during my prepared remarks we just got extended indications in Europe so for emergent use of the product. We continue to invest heavily behind this product. We are very pleased with the growth rate within the product that we're experiencing at the moment and we see the growth within the quarter in the high double-digits globally. So, it's one of the products that's within our area of focus and we continue to look to get more indications for use for the product.

Okay, thank you. And our next question comes from the line of Anthony Petrone from Jeffries. Please proceed.

Well thanks, gentlemen. Couple P&L questions, and then a few product questions. Maybe just a reminder, Benson or Tom, on the $28 million to $35 million in cost savings, how that we should expect that to roll through the P&L over time and sort of where the majority of the savings will be realized? I would assume COGS, but is there some that's allocated to the operating lines? And then one just for this year, on the pain pump distribution agreement that you mentioned in the prepared remarks, Benson, that's immediately accretive. Just wondering what should we expect this year in terms of accretion from those deals? And then, I've a couple of follow-ups.

So, in terms of the $28 million to $35 million it's largely savings that's going to show up in the COGS in gross margin line. There really isn't anything below that associated with that program. In terms of the timing, we spoke about a bit of that starting to happen in 2015 largely in the third and then in the fourth quarter. We've now moved manufacturing for some of our dry kits and VasaNova down to Mexico. So we're going to start to realize those savings in the third and fourth quarter of this year. The majority of the savings however will be kind of realized in 2016 and then a couple of million dollars more in 2017. So I think next year is kind of the lion share of the gain.

Relative to the pain pump question, it's a couple of pennies towards the end of the year. We obviously have to believe through our existing inventory. I think the two things that were quite attractive to us about this is, this is a extremely attractive product compared to the market leaders product that's out there, and by negotiating this deal for the distribution rights in the United States it improves our gross margins from one of the lower gross margin products in our bag to one of the higher ones. So few cents this year it will be much more favorable to us next year.

That's helpful. And then just a couple to round it out on products. On Vidacare, maybe just an update on where the Greenfield opportunity there is. Are there still hospitals in the U.S. that you can still penetrate? Or is it more just increasing usage at existing sites? And then maybe just a quick update on Weck disposable trocars with Intuitive Surgical. Intuitive had a pretty good quarter with volumes and placements. I'm just wondering how that plays out over time. Thanks.

Yes, so I'll take the Vidacare question first. So and it was always the case when we bought Vidacare that we realized that the opportunity to expand was in the ambulance service in Europe particularly and we were very pleased to convert our first ambulance service in Italy during the quarter as I said during my prepared remarks. There is still significant penetration opportunities within the United States and particular with the hospital segment. And we had a recent publication of a paper that showed that for emergent vascular access that even compared to CVC, EZ-IO was a better opportunity, a better methodology of getting immediate access for the vasculature. So we continue to see opportunities within the EMS segment, within North America, within the hospital segment, within North America, within the European EMS segment, and also within Asia-Pacific where it's in its infancy within Asia-Pacific and in the future that's a long-term growth prospect for us. So we continue to be very bullish about potential growth with EZ-IO and the Vidacare products and if we look at the half year, we are in the region of 20% growth within the half year base and we anticipate that to continue throughout the remainder of the year as I said in my prepared remarks. Your second question was regarding to the trocars. And this is one of the significant drivers behind our product growth which I said was 84 basis points within my prepared remarks. So this continues to be a focus for us and we're very, very pleased with the partnership that we had with Intuitive. And I think Intuitive likewise are very pleased with the partnership with Teleflex.

Okay, thank you. Your next question comes from the line of Jason Wittes from Brean Capital. Please go ahead.

I wanted to ask first just a more clarification on gross margin. The component kit issue, is that a one-quarter delay type issue, or is that something that's going sort of continue into next year?

So -- our this is a relatively recent decision that we just arrived at a week or so. The current estimate is that is about a quarter delay. So we expect to get into manufacturing that product by the end of first quarter, it obviously won't have much impact on our gross margins in the first quarter that will follow that. But that's about the time it's going to take us to do the reconfiguration of the packaging and get through the validation process.

Okay, and sounds like you're not necessarily able to quantitate what the chest drainage opportunity might be it terms of -- it sounds like it's going to be accretive to overall margins, but for gross margins it will be dilutive. And I guess you're not in a position to necessarily quantitate that at this point. Is that the right way to think about it?

So, yes. I think we'll have a much better perspective on that in terms of the surrounding detail by the end of third quarter. We're in the practice of ramping up manufacturing that has an added cost that aren't going to stick around I think once we get to those levels but we'll have a much clearer picture about that certainly by the end of the year, most likely by the end of the third quarter.

And as I said during my earlier comments we're just in the process of converting the largest GPOs following the win. So we’ll have much more clarity on that as we go through the next quarter.

Okay, fair enough. And just did you give an indication of how PICC and CVCs did this quarter?

Yes, I gave an indication of CVC. CVCs grew 10% globally and that was really consistent across all the geographies. PICCs were impacted by the recall, as I mentioned during my prepared remarks, and overall were 8.1% of growth.

Yes, PICCs were -- Jason, PICCs were down about 8% in the quarter and that's really coming from the product recall issue that we referred to earlier. Had it not been for that we would be more in line with where we were in prior quarters.

Okay. And then the last question on ARROW Endurance. How big is the market today for these type of products? Sounds like there's some other products out there and how big do you expect it can grow to?

Well, if you look at the total IV market, and Jason, I'm not suggesting you do this --

Fair enough.

That would be a $300 million $400 million market but the segment of the market that we're targeting is in $40 million to $50 million entire segment that we're posting this product on is it's a in between a peripheral IV and a PICC. And what you see happen is some of the IV segment moved to the Endurance and some of the PICC segments moved to the Endurance.

Okay, thank you. And our next question comes from the line of Richard Newitter from Leerink Partners.

Hi. Good morning, thank you for taking the questions. This is Ravi here --

Richard, we can barely hear you.

Good morning, can you hear me now? This is actually Ravi in for Rich. Is that better?

A little better.

Okay, may be some headset. So I wanted to follow-up on the recall. I was hoping if you could quantify that a little bit, given you said about 30 BPs in the quarter. How do you see that going forward on the top-line and any commentary on when you see that resolving? And then may be one on FX exposure. It sounds like what you're saying is that Europe at least seems to be doing okay. But I was just curious if you could just quantify a little bit about your currency exposure, what are the components of that? Thanks.

So, relative to currency we have made our balance for the year projections assuming a dollar euro at $1.08. One of the impacts of currency in the second quarter had more to do with the euro versus other currencies. And that introduces a layer of complexity that makes projections I would just tougher to do. If we were only concerned about the dollar-to-euro number it would a lot easier to answer your question. But by way of example in the second quarter we had also budged it at about $1.08 and I think the actual average number was a $1.10, but we saw more unfavorability from currency than what we expected because of the euro in relationships to other currencies.

So let me provide a little more details around our exposures and help you better understand. So Benson probably touched on euro which is our biggest exposure. We do about 30% of our business in euros. Our next biggest exposure is really less than 5% of our revenue. So if you look at some of those other areas where we are exposed its Australia dollars, Japanese yen, Chinese yuan, Canadian dollar, British pound. So we don't have any significant exposures outside of the euro and that's why we tend to focus on it quite a bit. Now, for us in terms of exposure, we have the greatest exposure related to translation. We don't see big transactional and other issues impacting us. We've talked about a full year exposure on the range of about $0.85 or so. Now, you may say boy, second quarter you set was around 30 and the reason for that is twofold. First of all we see the greatest currency exposure with the euro in the second quarter, just given how rates moved last year, beginning the fourth quarter we're going to start to get a more favorable comparable. So that will help us on that front. And then I forgot the other point I was going to make related to the currency here. But in any event as we think about those impacts it's really second quarter is going to be our greatest impact as we get into the third quarter, it will abate a little bit, and then the fourth quarter even more so. So full year the impact that would be $0.05, it's largely driven by the euro and again the second quarter we expect to be the greatest impact.

To answer to your question about the recalls, first of all we've obviously booked the extent of receiving the merchandise back in the second quarter; we will re-shift that to customers, and will be in a position to have the product come off product hold in the third quarter. So we'll see a benefit in terms of some revenue coming from that. The cost of rework essentially we've booked in the second quarter and that should not have, it will obviously get calculated into our overall year-end gross margin number but we should not see any residual effect from that in the third quarter or in the fourth quarter.

Okay, thank you. We have no more questions at this time. [Operator Instructions]. As we have no more questions coming through, I would now like to turn the call over to Jake Elguicze for closing remarks.

Thanks, operator, and thanks to everyone that joined us on the call today. This concludes the Teleflex Incorporated second quarter 2015 earnings conference call.