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Edited Transcript of TFX earnings conference call or presentation 2-May-19 12:00pm GMT

Q1 2019 Teleflex Inc Earnings Call

LIMERICK TOWNSHIP May 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Teleflex Inc earnings conference call or presentation Thursday, May 2, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jacob P. Elguicze

Teleflex Incorporated - VP of IR & Treasurer

* Liam J. Kelly

Teleflex Incorporated - President, CEO & Director

* Thomas E. Powell

Teleflex Incorporated - Executive VP & CFO

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Conference Call Participants

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* Anthony Charles Petrone

Jefferies LLC, Research Division - Equity Analyst

* Brian David Weinstein

William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst

* David Ryan Lewis

Morgan Stanley, Research Division - MD

* Jaime Lynn Morgan

SVB Leerink LLC, Research Division - Associate

* John Hsu

Raymond James & Associates, Inc., Research Division - Research Analyst

* Kevin Michael Farshchi

Piper Jaffray Companies, Research Division - Research Analyst

* Kristen Marie Stewart

Barclays Bank PLC, Research Division - Research Analyst

* Mason Edward Oliva Austen

Morgan Stanley, Research Division - Research Associate

* Matthew Charles Taylor

UBS Investment Bank, Research Division - Equity Research Analyst of Medical Supplies & Devices

* Matthew Ian Mishan

KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst

* Michael Stephen Matson

Needham & Company, LLC, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Teleflex Incorporated First Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Jake Elguicze, Treasurer and Vice President of Investor Relations. Sir, you may begin.

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Jacob P. Elguicze, Teleflex Incorporated - VP of IR & Treasurer [2]

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Thank you, and good morning, everyone. And welcome to the Teleflex Incorporated First Quarter 2019 Earnings Conference Call. The press release and slides who 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 6798477.

Participating on today's call are Liam Kelly, President and Chief Executive Officer; and Thomas Powell, Executive Vice President and Chief Financial Officer. Liam and Tom will provide 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 referenced in our press release today as well as our filings with the SEC, including our Form 10-K, which can be accessed on our website.

With that said, I'd like to now turn the call over to Liam.

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Liam J. Kelly, Teleflex Incorporated - President, CEO & Director [3]

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Thank you, Jake, and good morning, everyone. It's a pleasure to speak with you again.

The first quarter of 2019 was an outstanding start to the year for Teleflex. First quarter revenues grew 4.5% on an as reported basis and 7.6% on a constant currency basis. This is was above our initial expectation for quarter 1 revenue growth. We are particularly pleased with how broad-based the growth was during quarter 1, both from a product and geographic perspective. Our strong top line performance was led by 41.5% growth in Interventional Urology, 17.1% growth in Interventional Access and 20.1% growth in OEM.

Geographically, we achieved particularly strong growth within Asia and the Americas, where constant currency revenue growth was 11% and 6.7%, respectively. We believe our Q1 performance is an excellent example of the type of diverse, accelerated revenue growth that Teleflex can deliver.

Turning to some other key metrics. We reported adjusted gross margins of 56.7%, adjusted operating margin of 23.7% and adjusted earnings per share of $2.24, which represents an increase of 4.2% over the first quarter of 2018. Our adjusted earnings per share performance in Q1 was slightly better than our initial expectations, despite a greater-than-expected headwind from FX as well as year-over-year increases in tariffs.

In summary, our quarter 1 results give us increased confidence in our ability to achieve our previously provided full year 2019 financial guidance and in doing so, deliver on our commitments to shareholders, patients, customers and our 14,000 employees. This morning, we are reaffirming our annual guidance ranges for as reported and constant currency revenue growth, adjusted growth and operating margin and adjusted earnings per share.

With that as an overview, let's now look at quarter 1 revenue in more detail. I will begin by reviewing our revenues by reportable segment, as disclosed in our SEC filings. As a reminder, quarter 1 is the first quarter we are reporting our segments as you see here. But we are also providing a breakdown of revenues on a global product category basis, which I will discuss momentarily.

The Americas delivered revenues of $344 million, which is an increase of 6.7% on a constant currency basis. This is driven by our Interventional Urology and Interventional Access product family. EMEA reported revenues of $154.6 million, an increase of 4.5% on a constant currency basis, led by our Interventional Access and Vascular products.

Asia reported revenues of $60.8 million, an increase of 11% on a constant currency basis, driven by our Vascular, Interventional Access and Surgical products. From a geographical perspective, our business in China grew 11% in the first quarter, and we also saw strength in Korea and Southeast Asia. And lastly, our OEM business reported revenues of $54.2 million, an increase of 20.1% on a constant currency basis, led by strength in catheters and performance fibers. While we are pleased with the quarter 1 growth rate in our OEM business, we continue to expect this business to grow in the upper single digits for the full year.

Now let me move to a discussion on our revenues by global product categories. Starting with Vascular Access. First quarter revenue increased 2.5% on a constant currency basis to a $143.9 million, driven by strong growth in PICCs and CVCs, partially offset by the timing of certain North American-based distributor orders.

Moving to Interventional Access. First quarter revenue was $103.2 million, which is an increase of approximately 17.1% on a constant currency basis. The strength in this business during quarter 1 was broad-based, with growth in legacy Teleflex product lines, like intra-aortic balloon pumps and consumables as well as our OnControl bone marrow product. Growth in these areas was coupled with sales increases and extension of microcatheters as well as biologic products that were part of the legacy Vascular Solutions product portfolio.

Our MANTA large bore closure product, which is reported through the Interventional Access product category entered its limited market release in the U.S. during the second quarter. Our strategy for the limited market release continues to be a methodical rollout to ensure strong initial outcomes with key thought-leading physicians as we invest in further building the commercial infrastructure to support MANTA's long-term growth. As such, we continue to expect the revenue contribution from the early commercialization of MANTA in the U.S. to be immaterial to our 2019 results.

Now turning to Anesthesia. First quarter revenue was $80.3 million, which is a decrease of 1.5% on a constant currency basis. The decrease here is primarily driven by the timing of North American-based distributor orders, which impacted sales of our laryngeal mask products. For a brief update on RePlas, we continue to be focused on completing the BLA submission in the third quarter of 2019.

Now shifting to Surgical. Revenue increased 5% on a constant currency basis to $86.7 million, driven by sales of ligation clips and surgical instruments. We are pleased to see a rebound in the global constant currency revenue growth rate of our surgical product lines, as, during 2019, we are no longer facing the trocar product line exit headwind we experienced during 2018.

Moving to Interventional Urology. Revenues increased 41.5% on a constant currency basis to $59.7 million. Our sales force continues to make good progress in driving physician adoption of the UroLift system. As of the end of the first quarter, our field sales force stood at just over 100, approximately 80% of which were sales reps and 20% were sales associates. We will continue to methodically build this commercial team as we move through 2019. From a market penetration perspective, the commercial team has trained just over 2,000 urologists, out of a total of 12,000 urologists in the United States. We have clearly just scratched the surface of penetrating this large market opportunity.

Every year, our commercial organization becomes more proficient at changing the way physicians and patients think about treating BPH, offering a truly minimally invasive solution that provides rapid, durable relief with no new onset of sustained sexual dysfunction. We also continue to make progress training the U.S. physician base on using UroLift to treat an obstructive median lobe following the removal of this contraindication from the UroLift label. While the prevalence in the U.S. of obstructive median lobe is low, physicians can now use UroLift to deliver good outcomes to men this the challenging anatomy.

Once we finish the median lobe training in the latter half of 2019, we will begin the rollout of the UroLift 2, with a full conversion of the U.S. physician base from UL 1 to UL 2 expected in 2021. And lastly, we continue to actively see the market for the launch of the UroLift in Japan, working with key opinion leaders on preparing for the PMDA mandated post-market clinical trials. As we move through the reimbursement process, we anticipate launching UroLift in Japan, with a limited market release in mid- to late 2020, with revenues ramping more meaningfully in 2021.

With over 110,000 patients treated in the United States alone, 272 million covered lives, a sales force of over 100 in the U.S. and the largest highest quality body of clinical evidence in the category, we believe UroLift has established a commanding market leadership position. We are focused on further strengthening that leadership positioning to ensure sustainable high growth of our Interventional Urology business over a multiyear period. The performance of UroLift in the first quarter gives us increased confidence in our full-year guidance, and we are reaffirming our expectations of annual 2019 Interventional Urology growth of approximately 30%.

And lastly, since OEM was covered in our segment review, let me summarize first quarter revenue for the businesses within our other category, which consists of our respiratory and urology care products. Revenues were down 5.1% on a constant currency basis, totaling $85.6 million. This was attributable to declines in sales of our respiratory and bladder management products, in fact, due to the same North American-based distributor purchasing dynamics that impacted our Vascular and Anesthesia product lines. That completes my comments on quarter 1 revenue performance.

Next, I would like to briefly discuss some things we planned to highlight at the upcoming American Urological Association, or AUA, meeting. A significant part of strengthening UroLift leadership position over the long term is our commitment to invest in high-quality clinical data. Given that tomorrow is the first day of the AUA 2019 Annual Meeting, I would like to provide some of the key takeaways of the important clinical data presentations that will showcase UroLift. First, is a presentation on the real-world results of 1,413 patients who received UroLift across 14 sites in North America and Australia. Results were consistent with those seen in previous clinical studies of the UroLift System, even with a more diverse patient population.

Next, is a study that looks at symptoms and sexual function outcomes in all types of prostates, including those with obstructive median lobes. Findings from of the study suggest that patients with all type of prostate enlargements experienced symptom improvement and preservation of sexual function. The third study examined the use of UroLift in 52 patients, with acute urinary retention, a condition often found in late-stage BPH patients with poor bladder health. The results demonstrated that 79% of patients were catheter free within 3 months, and 96% reported being much or very much better at 6 months.

And lastly, there will be a study that examines the impact, if any, the UroLift implants have on the MRI readings of patients with significant cancer. Results from the study show the UroLift System is unlikely to obscure prostate cancer readings for patients receiving MRI screening.

As of the end of

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UroLift has 29 publications on its safety and efficacy. As you can see, we continue to invest in building this industry-leading body of clinical evidence and deepening physician understanding of its capabilities and outcomes in real-world settings. Ultimately, we believe this evidence will drive continued adoption of the UroLift System by more physicians and contributes to making UroLift the standard of care for the treatment of BPH.

In closing, I would like to reiterate how pleased we are with our first quarter results. Revenue growth was broad-based. We continue to proactively invest in our higher-margin product opportunities, and we achieved an adjusted earnings per share results that slightly exceeded our initial expectations, all of which positions us well for the remainder of 2019 and beyond.

That completes my prepared remarks. I would now like to turn the call over to Tom for a more detailed review of our first quarter financial results and full year 2019 guidance. Tom?

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Thomas E. Powell, Teleflex Incorporated - Executive VP & CFO [4]

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Thanks, Liam, 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 $347.8 million versus $332.6 million in the prior year quarter or an increase of approximately 4.6%.

Adjusted gross margin increased 10 basis points versus the prior year period to 56.7%. The expansion in adjusted gross margin primarily reflects increased UroLift sales volumes as well as cost benefits from both of our restructuring programs and manufacturing continuous improvement programs. Offsetting these gains were negative impacts from foreign exchange, incremental tariffs and inflation.

Adjusted operating profit was $145.6 million as compared to $141 million in the prior year. Adjusted operating margin in the first quarter was 23.7% or a decrease of 30 basis points over the prior year period. The negative impact from foreign exchange, incremental tariffs and inflation that adversely impacted gross margin also flowed through to impact operating margin. Additionally, as was planned, we increased commercial investment in UroLift and MANTA during the quarter. On a currency neutral basis, adjusted operating margin would have been approximately 24.6%.

Continuing down the income statement. Adjusted net interest expense decreased to $22.4 million from $25.7 million in the prior year quarter. The decrease primarily reflects the impact of the cross-currency swap that was completed in the fourth quarter of 2018.

For the first quarter, our adjusted tax rate was 14.8% versus 12.8% in the prior year period. The increase in our adjusted tax rate is primarily due to the mix of earnings in higher tax jurisdictions during the first quarter of 2019 as compared to the first quarter of 2018 as well as a reduced amount of windfall benefit from stock-based compensation.

Adjusted earnings per share came in at $2.24 or an increase of 4.2% as compared to the first quarter of 2018. This result includes a foreign currency headwind of $0.17 per share, the incremental year-over-year tariffs of $0.05 per share and a headwind from the divestiture of our catheter reprocessing business, which contributed $0.01 per share to the prior year quarter.

Turning now to select balance sheet and cash flow highlights. For the first quarter of 2019, cash flow from operations totaled $60.2 million compared to $86.8 million in the prior year period. The decrease is primarily attributable to increased consideration payments during the quarter.

Finally, debt outstanding at the end of the first quarter was largely unchanged from the fourth quarter of 2018. Of note, during the first week of the second quarter, we entered into an amended and restated credit agreement, which provides for a $1 billion revolving credit facility and a $700 million term loan. The new credit facility contains a leverage covenant, which requires the company to maintain net leverage below 4.5x and this compares to our previous credit agreement, which requires the company to maintain gross leverage below 4.5x. Our net leverage level as defined under the new credit facility stood at approximately 2.7x at the end of the first quarter.

And this completes my comments on the first quarter results. Now, I'll move to 2019 guidance update. We are reaffirming our previously provided full year constant currency revenue growth guidance range of 6% to 7% as well as our reported revenue growth guidance range of 5% to 6%. We're also reaffirming our previously provided GAAP and adjusted gross margin guidance ranges and our adjusted operating margin guidance range. However, we have reduced our full year GAAP operating margin guidance from a range of 17.4% to 18.1% to a revised range of 17.2% to 17.9%. The reduction is a result of additional contingent consideration expense as well as an impairment of certain intangibles that we deem to have no longer value.

Moving to interest expense. We continue to expect full year interest expense to be between $87 million and $90 million. However, we expect to be closer to the low end of that range. We reduced projection as a result of our current expectation for the Fed to maintain rates at current levels versus a previous expectation of rate increases in late Q1 and again in Q4 of 2019. Of note, the projections include the interest benefit from the $250 million interest rate swap completed in March.

Turning to taxes. We continue to expect that our full year 2019 adjusted tax rate will range between 14% and 14.8%. That takes me to our GAAP EPS and adjusted EPS ranges. We reaffirm our previously provided adjusted EPS range of $10.90 to $11.10. However, for the reasons previously outlined in connection with our GAAP operating margin, we are reducing our full year GAAP EPS range from $6.90 to $7.05 to a revised range of $6.72 to $6.84.

As a reminder, our adjusted EPS guidance range includes foreign exchange, tariff and inflation headwinds and the divestiture of our catheter reprocessing business. The range also contemplates an increased level of investment into certain of our higher-growth and higher-margin product categories.

Overall, we are pleased with our expectations to grow full year 2019 earnings by 10% to 12% while also funding investment behind key revenue growth opportunities, and while also offsetting headwinds from foreign exchange and tariffs.

In closing, I'd like to reiterate our perspective that the first quarter was an excellent beginning to 2019 for Teleflex. We are pleased with our above expectation constant currency revenue and earnings per share results of 7.6% and $2.24, respectively. We believe the strong Q1 sets us up nicely to achieve our previously provided full year 2019 financial guidance.

And that concludes my prepared remarks. Now I'd like to turn the call back over to the operator for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from David Lewis with Morgan Stanley.

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Mason Edward Oliva Austen, Morgan Stanley, Research Division - Research Associate [2]

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This is Mason on for David. I just wanted to start out with Interventional, a pretty strong quarter out of this segment. I was wondering if you could just parse out the drivers here and how sustainable do you see this growth in 2019? And then I just had one quick follow-up.

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Liam J. Kelly, Teleflex Incorporated - President, CEO & Director [3]

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Yes, it's Liam here. So we -- our Interventional business performed very well in the quarter. We're very happy. What we're increasingly positive on is how broad-based the growth was. As I said in my prepared remarks, our legacy Interventional business performed well, in particular, our intra-aortic balloon pumps and catheters had a stellar quarter as did the microcatheters, the GuideLiners, the TrapLiners and the biologics from the old -- or the VSI business that we acquired.

We still expect that on a full year basis, that the Interventional business will grow in the high singles, maybe even sneaking into the double digits with some better execution into the latter half of the year. So I think we're quite bullish on our Interventional Access. Again, what I'm particularly pleased about is it is one of the areas that we highlighted that would be a growth driver in the year and it has started off incredibly strong.

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David Ryan Lewis, Morgan Stanley, Research Division - MD [4]

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Great. Liam, it's David Lewis. Sorry about that. I just want to kind of jump in here with the second question. So Liam, when I think about the back half of the year, comps get a little harder, but the pipeline improves. You have some selling day dynamics. How should we think about first half versus second half growth at this point? And then related to that, just thinking about NeoTract. You talked about 30% outlook for that business this year. That business well above trend here in the first quarter. How are you thinking about NeoTract into the back half of the year as we think about back-half growth?

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Liam J. Kelly, Teleflex Incorporated - President, CEO & Director [5]

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Yes. So for our overall business, I think, David, we're very happy with the start. I'm not too sure that we should focus too much on the comps because if you look back to last year, our toughest comp was Q3 last year, and we had a very solid Q3 in that year. So I -- addressing your NeoTract and what I expect, I guess, your question is really around headwinds and tailwinds for a large extent. So from a headwind perspective, we got the catheter reprocessing business that we exited during the year.

OEM is not going to grow at 20%. We don't expect OEM to grow at 20% in the year. So it should set us down to higher single digits on a full year basis. And then from a tailwind perspective of where we continue to see growth, we had some destockings of distributors in Vascular, Anesthesia and the Other category. As I said, Interventional Access will do the high singles, maybe sneak into doubles. APAC to the high singles and Surgical, I'm really happy to see Surgical recover and it should be in that mid-single-digit range on a full-year basis.

Regarding NeoTract, it obviously started really, really strong and posted 41.5% growth. Now the 30% is a full year number, David, and we're very encouraged by the start. Obviously, as we get into later in the year, we will look at sharpening our pencils on some of our guidance ranges, but I got to tell you I couldn't be happier with the start. And I think we've got a great setup for the full year. First half will -- we don't have the tougher comps in the second half, but it's a great start and it's a great setup from where I look at it, David.

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Operator [6]

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And our next question comes from Lawrence Keusch with Raymond James.

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John Hsu, Raymond James & Associates, Inc., Research Division - Research Analyst [7]

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This is John Hsu on for Larry. If we could start just on the incremental $15 million spend that you had talked about UroLift and MANTA, how much was realized in the 1Q? And just how do we think about gating for the remainder of the year?

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Thomas E. Powell, Teleflex Incorporated - Executive VP & CFO [8]

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So as we think about that $15 million spend, we certainly continue to expect to spend the full amount for the year. I'd say that in the first quarter, we didn't spend 1/4 of that total amount, it's a little more than $1 million overall in the quarter. As we think about how that plays out in the year, you should expect to see the majority of that really going forward in Q2 and Q3.

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John Hsu, Raymond James & Associates, Inc., Research Division - Research Analyst [9]

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Okay. Great. And then I guess a specific on UroLift. Do you see a scenario where there is -- where there -- you could get reimbursement process in Japan a little bit faster than I think your mid-2020 expectation? And then just the second one on UroLift. With UroLift 2, it sounds like it's still tracking for a launch later this year. So how long do you think it will take to realize the higher 70% plus or that -- the high-70s GM for the second UroLift product?

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Liam J. Kelly, Teleflex Incorporated - President, CEO & Director [10]

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Yes, so I will deal with the conversion of UroLift 2. As I said in my prepared remarks, we will have the conversion completed by 2021 and at that stage, you will see the full benefit of the gross margin pickup. Obviously, as we ramp up in later 2019 and in particular, in 2020, you'll see the pickup of that gross margin benefiting in 2020. But it will be fully realized when we have the total U.S market converted by 2021. From the Japan perspective, as I said in my prepared remarks, we expect to get reimbursement in mid- to late 2020. And then we'll start to roll out -- we're already ceding the markets right here today, and we're aiming for that midyear approval. But as we said, we expect that in mid- to late 2020. Now in our LRP, I got to tell you that we had very little revenue in -- for Japan in 2021, practically none. So if anything, this is a positive for us.

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John Hsu, Raymond James & Associates, Inc., Research Division - Research Analyst [11]

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Okay. Great. And if I could sneak in one more? Can you just remind us about the items that are masking the free cash flow generation this year? And then how you see those progressing through the remainder of the LRP?

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Thomas E. Powell, Teleflex Incorporated - Executive VP & CFO [12]

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Well, really, when you look at the first quarter results, the impact of cash flow from ops is coming from increased contingents consideration. So as a result of change in estimates in the quarter, that's actually reduced our cash flow from ops by about $30 million. And so as we look at the full year, we still expect to be on our full year plan. But again, compared versus a year ago, it's a contingent consideration change.

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Operator [13]

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And our next question comes from Richard Newitter from SVB Leerink.

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Jaime Lynn Morgan, SVB Leerink LLC, Research Division - Associate [14]

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This is Jaime on for Rich. I guess the first question I have, you guys had mentioned that you guys have experienced some decreases due to distributor order timings. So I was wondering if you can just give us a little bit of a greater sense of kind of what happened with that in the quarter? And then is that something that you expect to make up throughout the remainder of the year?

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Liam J. Kelly, Teleflex Incorporated - President, CEO & Director [15]

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Well, I think, that's -- what we've been saying about Teleflex is as we roll all of the businesses into organic, what you'd expect to see is let the cord with the distributors. So in the past, about half of our business went through these distributors and moving forward now in this quarter, about 1/3. And I think a great thing from a Teleflex perspective is that we're able to cushion ourselves against these distributor movements.

So what we saw in the quarter was definitely some destocking even more than we had anticipated. We would expect that to come back during the year in 2019, but we were able to offset that with excellent performance within the remainder of our businesses that are not exposed to distributors, and thereby overcoming that and to post a -- the number that we did from a growth perspective, I think we're very encouraged by.

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Jaime Lynn Morgan, SVB Leerink LLC, Research Division - Associate [16]

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Okay. Great. And then just a housekeeping thing. I'm sorry if I missed it, but did you give what the actual dollar amount was for UroLift in the quarter?

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Liam J. Kelly, Teleflex Incorporated - President, CEO & Director [17]

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Yes, we did. We said that...

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Thomas E. Powell, Teleflex Incorporated - Executive VP & CFO [18]

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$59.7 million.

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Liam J. Kelly, Teleflex Incorporated - President, CEO & Director [19]

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We said that the Interventional Urology business posted $59.7 million in the quarter.

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Operator [20]

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And our next question comes from Matthew Mishan with KeyBanc.

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Matthew Ian Mishan, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [21]

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Liam, just a follow-up to that previous question. Kind of why are you seeing distributors destocking? Is this -- has it been persistent where they're taking their inventory levels even lower than you would think?

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Liam J. Kelly, Teleflex Incorporated - President, CEO & Director [22]

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So I don't think it's a question of them taking their inventory levels much lower. You see a different dynamic with some distributors. Some hold more stock than others. Some hold 30 days, but some have confidence with their customers whether they will hold 45 or 60 days depending on the contract with their customers. They can't go below that stocking level. What you see -- and it's not as organized, Matt, as you and I might think, as some of these distributors will have 40 centers throughout America. And they will place their orders on a Tuesday night and it all rolls up and comes to us by -- overnight on Tuesday night. It just ebbs and flows.

On a full year basis, Matt, it always balances out. And with less of our business exposed to it, I'm not as concerned about that in 2019. It's not going to be as big an impact to Teleflex quarter-over-quarter in '19 as it may have been in 2018 than previous years.

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Matthew Ian Mishan, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [23]

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Okay. And then how sustainable is the growth, the double-digit growth you're seeing in Asia moving forward? Is that something you can count on given some of the investments you've made? And then obviously with UroLift coming on stronger in Japan by 2020?

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Liam J. Kelly, Teleflex Incorporated - President, CEO & Director [24]

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Yes. With our NRP for Asia, that is growing in the high single, maybe sneaking into the double digits. And that's still our expectation. Obviously, we would have some of those levers that would accelerate it in the outer years. So this year, our expectation is high singles. Asia-Pacific is off to a great start. Again, Matt, we're very encouraged. And again, it was pretty broad-based coming from the Vascular Access products, Surgical products and Interventional products. So again, like all of our business and that's what most encouraging is that we've been ramping, Matt, since the second half. And we've been building momentum since the second half of 2018. And now we see a 7.6% posted in Q1 as broad-based geographically and from a product perspective.

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Operator [25]

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And our next question comes from Matt Taylor with UBS.

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Matthew Charles Taylor, UBS Investment Bank, Research Division - Equity Research Analyst of Medical Supplies & Devices [26]

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So the first question I wanted to ask was just about the guidance. I mean given your really strong start here, I totally get that you have more confidence in the year. Can you just talk about, philosophically, would you ever raise guidance in Q1 or you're just being a little bit conservative on the overall picture and on UroLift because to start out here, you're well ahead of the annual forecast?

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Liam J. Kelly, Teleflex Incorporated - President, CEO & Director [27]

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Thanks, Matt. Yes. So look, we feel really great about the business. As you see from the performance in Q1, again, as I said, it's broad-based. We think that this continues the remainder of the year. As we think about our 2019 guidance, I think we've put ourselves in a very strong position to meet or exceed our revenue projection. And we intend to work on delivering on our commitments to our shareholders. As we go through the year, Matt, we'll take an opportunity to have another look and sharpen our pencils, but we won't water down an excellent quarter. We're very bullish as we have been all year for our revenue growth.

Regarding UroLift, I think that looking at UroLift, it's a great start, again, great first quarter tucked under the belt. The 30% approximately growth is a full year number. It's a great -- it's a good start. We have a weaker comp actually in UroLift in Q3, which encourages us also because of the voluntary recall we did in Q3. And if you recall last year, we actually addressed the UroLift revenue growth as we went through the year. And hopefully, we'll be in a position to do that again this year. It's a very promising start, Matt.

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Matthew Charles Taylor, UBS Investment Bank, Research Division - Equity Research Analyst of Medical Supplies & Devices [28]

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And I was hoping maybe you could just unpack the Interventional Access growth? Can you talk about the growth of some of those different pieces that you highlighted that are doing well?

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Liam J. Kelly, Teleflex Incorporated - President, CEO & Director [29]

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So as I said, the Interventional business was, again, broad-based. I think we saw some -- I'll cover a couple of them. I don't want to get into the too many of the weeds here, Matt. But if you look at the OnControl, that grew nearly 20%. If you look at the catheter extensions, it grew around 15%. If you look at microcatheters, that was up above 30% and biologics too was well up in those numbers. If you look at our intra-aortic business, that had a very solid start, well up in the double digits, over -- up around 30%. So broad-based, Matt.

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Operator [30]

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And our next question comes from Matt O'Brien with Piper Jaffray.

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Kevin Michael Farshchi, Piper Jaffray Companies, Research Division - Research Analyst [31]

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This is Kevin Farshchi on for Matt today. Congrats on the nice quarter. I wanted to start, going back to NeoTract growth, again, exceptional off of those tough comps. I just wanted to put a finer point on that outperformance. Was there something different this quarter than previous ones from a trend perspective, specifically as you're looking at utilization in existing accounts? And second, if you could talk a little bit about the additional resources you're putting behind the program from the DTC perspective, and how do you think about that expanding for the rest of the year? Any kind of metrics you can provide on those 2 fronts that contributed to the momentum. And I have one follow-up.

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Liam J. Kelly, Teleflex Incorporated - President, CEO & Director [32]

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Yes. So I think the most important metric that we look at is the number of urologists that we've trained. So we've trained just over 2,000 urologists within the United States. There are 12,000 urologists within the United States. We've generated almost $60 million in revenue with only 1/6 of urologists trained in United States. Regarding your question on where the revenue is coming from, from an account perspective, we continue to see 60% of the revenue coming outside of the hospital environment either the ASC or in the office.

So we continue to see momentum building in that area. So no change in the size of service. No change in where we see the revenue coming from, and we continue to be very positive on the metric of the training of urologists getting over 2,000 out of 12,000. I think the same-store sales, we continue to see an increase in same-store sales quarter-over-quarter. And that's what we've seen for the last 3 years within this product category.

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Kevin Michael Farshchi, Piper Jaffray Companies, Research Division - Research Analyst [33]

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That's super helpful. I just had a follow-up on that business as well. You mentioned on the call that you're increasing that 100 group of RePlas associates to kind of meet the demand. Could you remind us a little bit on the rep productivity numbers as they stand today? How are they trending versus last year? And then if you could provide any color on the expectations for that to increase with UroLift 2 in the product bag and those additional reps?

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Liam J. Kelly, Teleflex Incorporated - President, CEO & Director [34]

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So I'll answer the last part of it first. You wouldn't expect any rep productivity just by launching UroLift 2. The UroLift 2 will reduce clinical waste for the urologists, which is a positive. It will reduce their costs of disposing of that waste than it will improve our margins. But there isn't a pricing play to go there. The productivity per rep annualizes in or around $3 million per rep, which is at the higher end one would expect from a sales representative, but obviously, this is a very fast-growing product. The continued investment that you asked about obviously we're doing DTC or doubling the number of DTCs that we did during the year. And we will continue to add reps during the year.

Our normal cadence that we've said that we expect is to add around 15 sales heads every year. Now we've gone above that for the last 2 years since we've owned this asset just because we're -- as we said, not all growth is equal in Teleflex, and we're investing behind the areas where our margins are better. And this is definitely one of them, so is Interventional Access, so is Asia. So that -- you can expect that continued investment from Teleflex in areas where our margins are better and therefore getting some leverage in our income statement.

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Operator [35]

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And our next question comes from Brian Weinstein with William Blair.

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Brian David Weinstein, William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst [36]

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Starting with maybe just PICCs and CVCs. Just a little bit more commentary maybe on what's going on there, just in general. Haven't heard a whole lot of update from you guys in the last couple of quarters on those products. So just what do you see in there? And what type of share do you guys think that you guys have now within the PICC category? I know you're continuing to gain it at a pretty healthy clip.

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Liam J. Kelly, Teleflex Incorporated - President, CEO & Director [37]

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Brian, thanks for the question. Yes. Look, I'll start with PICCs. Our PICC growth was almost 13% within the quarter. We continue to take share, in particular, within the key North American markets. We now believe we are #2 behind Bard, and we believe that we're growing and continuing to take share and we'll continue to become a strong #2. Our PICC business or -- pardon me, our CVC business had a nice solid quarter even with the destocking. And we grew around 4.5% in the quarter on our CVC business.

And again, these are all areas that are accretive to our margins and therefore help state the leverage within our income statement that I mentioned earlier. I can't reiterate enough the philosophy within Teleflex is not all growth is equal, and we're trying to drive growth in areas and we are succeeding in driving growth in areas that allow us to, again, expand our margins on top of the restructuring programs that we have in place.

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Brian David Weinstein, William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst [38]

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Great. And then the obligatory M&A question here. You guys clearly have the capacity to be doing something. Can you just give us an update on how you're thinking about M&A, and maybe talk about the funnel and kind of pace of things that you guys are thinking about internally?

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Liam J. Kelly, Teleflex Incorporated - President, CEO & Director [39]

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Thanks, Brian. Yes. I think our leverage ratio is 2.75x net at the end, so we're down below 3x. It obviously gives us the ability and the capacity. We are acutely aware that we want to get credit for the good M&A, and we've got an excellent track record of doing excellent deals, and we would envision that continuing. We are patient. We continue to be active in this space. We continue to look at assets. And obviously we will continue to make progress in that area. The great thing I think from a Teleflex perspective is that we're patient and we also don't see any need to do an acquisition. We feel very comfortable with the performance of our business with or without M&A, but obviously, as an accelerator, we would like to continue -- don't take that comment to mean we're not going to continue to do M&A. We are a serial acquisition company. It's a core competence of ours. And I think there's few better than Teleflex of identifying these assets and bringing them into our organization.

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Operator [40]

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And our next question comes from Anthony Petrone with Jefferies.

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Anthony Charles Petrone, Jefferies LLC, Research Division - Equity Analyst [41]

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Congrats on a good start to the year here. I have one on UroLift and one on MANTA. First one on UroLift. I know there was a reimbursement shift earlier in the year for a competitor. The numbers were ahead of our expectations for UroLift in the first quarter here. Just wondering if the shift in reimbursement is having any impact in the landscape out there? And I'll come back with the follow-up.

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Liam J. Kelly, Teleflex Incorporated - President, CEO & Director [42]

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So I think the reimbursement of the competitor, from our understanding at least, made the procedure for the competitor really an office-based procedure. I actually don't think it has had any material impact on our growth. We're very focused on going deep rather than going wide and building this business in the right way. And as you can see from our growth in the first quarter, the numbers speak for themselves. We don't see that competitor having a significant impact or any impact on our growth. I still believe and I've always believed clinical outcomes will win 7 days a week and twice on Sundays. And our clinical outcomes are just better. It's that simple. And we're fastly becoming the standard of care for the treatment of BPH.

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Anthony Charles Petrone, Jefferies LLC, Research Division - Equity Analyst [43]

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And then just the follow-up on MANTA. Maybe just an update. I know that I think your comments suggest that there is only minimal benefit from that product. This year we're coming off of a pretty heavy data cycle with low-risk data in TAVR showing benefits there. The numbers in TAVR are still very healthy. So I'm just kind of wondering, what kind of contribution this year from MANTA? But as you look outward, as the TAVR market continues to expand, do you have any updated thoughts on what that can contribute?

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Liam J. Kelly, Teleflex Incorporated - President, CEO & Director [44]

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Yes. Thanks, Anthony. Look, we're very excited about MANTA. I think in time this will be seen as one of those another very nice acquisitions that Teleflex did. And as I mentioned in my prepared marks, we're just commencing the U.S. limited market release in Q2. We are testing some pricing, we're making sure that we get our training to the right level so that the product becomes very sticky within the TAVR centers.

The great thing also is it's a very focused market. You've got less than 600 TAVR centers within the United States. And the TAVR market, as we know, is growing around 17%. Again, I'll go back to the clinical data, it's very compelling. 70% reduction in major vascular complications, which should save a hospital 5 additional days in the hospital for those major complications and 18,000. And that's why we're testing some pricing scenarios in the limited market release. But we don't expect significant revenue in the U.S. in 2019 as we roll out that limited market release, Anthony. And we'll give more guidance as we get into 2020 as to what we expect from MANTA.

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Operator [45]

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And our next question comes from Kristen Stewart with Barclays.

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Kristen Marie Stewart, Barclays Bank PLC, Research Division - Research Analyst [46]

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I was just wondering, just in terms of -- I had a clarification for Tom. I think he had mentioned that the GAAP EPS number was going lower just because of an intangible impairment. What was impaired, I guess, or will be impaired?

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Thomas E. Powell, Teleflex Incorporated - Executive VP & CFO [47]

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It's a minor impairment, $3 million in size. So in connection with the QT Vascular acquisition, an option for a future product was included in that transaction, and we've decided not to pursue that future product. And as a result, we've written off the option.

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Liam J. Kelly, Teleflex Incorporated - President, CEO & Director [48]

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Yes, Kristen. It was an option and it used paclitaxel coatings, and just with the recent announcement, we don't believe we'll be exercising that into the future. So that -- and a fairly modest impairment.

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Kristen Marie Stewart, Barclays Bank PLC, Research Division - Research Analyst [49]

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Got you. Okay. And then just as you're, I guess, looking out for the balance of the year, I guess, just to point out you do have one less selling day in 2Q, correct? So that will be about 100 basis points to growth. Is that right?

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Liam J. Kelly, Teleflex Incorporated - President, CEO & Director [50]

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Yes. It's about -- it's normally about 100 basis points, and we pick that day back up in Q4, just to be clear. And again if I am ever going to have a billing day and if I'm going to pick a quarter, the quarter I want to be in is Q4.

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Kristen Marie Stewart, Barclays Bank PLC, Research Division - Research Analyst [51]

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Okay. That sounds good. And then last kind of question, just another kind of follow-up from one of the other questions. On UroLift 2, why does it take so long to roll it out in the U.S.? And if you're kind of starting later this year, why would it take a full year to roll out? Is it something that you could possibly do on a more expedited basis that could help drive a little bit more margin expansion?

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Thomas E. Powell, Teleflex Incorporated - Executive VP & CFO [52]

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So we're -- again, we're trying to be thoughtful on this. And the reason that we are being -- taking our time, if I can put it that way, is we want to be methodical. We do not, under any circumstances, want to impact the growth of this product because of training divisions on a new product. So we want to keep the growth accelerating at a level that it can do over the next number of years while converting those physicians. And also as a reminder to what I said previously, we are also going back to some of the urologists who are only doing a smaller number of cases every month to retrain them on the new technology to develop those clinicians as champions. Now that they have seen the rapid adoption of the UroLift product, I think they'll be more encouraged to become champions and not get behind the growing trends to use UroLift for the treatment of BPH as it becomes the standard of care.

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Operator [53]

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(Operator Instructions) Our next question comes from Mike Matson with Needham & Company.

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Michael Stephen Matson, Needham & Company, LLC, Research Division - Senior Analyst [54]

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Just have another one on UroLift. So in Japan, are you selling the product through a direct sales force or a distributor? And do you expect the pricing to be higher or kind of in line with the U.S. or lower?

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Liam J. Kelly, Teleflex Incorporated - President, CEO & Director [55]

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So in answer to your first question, Mike, our intention is to build out a sales force within Japan. In this year, 2019, we will be putting some feet on the street in Japan to do some market development work with key opinion leaders as I said in my prepared remarks.

With regards to reimbursement, we would envision and we don't know what the reimbursement rate is going to be until we get it. We feel that the Japanese authorities, given that there is such a close alignment between the Japanese Urology Association and the American Urology Association, we would envision that it would be reasonably close to that level of reimbursement in Japan that we have in the United States, which is a -- we would be happy with that result, let me put it that way.

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Michael Stephen Matson, Needham & Company, LLC, Research Division - Senior Analyst [56]

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Okay. And then, Tom, just wondering if you could quantify the tariff impact, and if we do have a trade agreement here and the tariffs go away, how much would that add to your margins for the remainder of the year?

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Thomas E. Powell, Teleflex Incorporated - Executive VP & CFO [57]

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Sure. As we look at the tariffs for 2019, we're currently estimating the impact to be about $9 million on a full year basis. So if those tariffs were to go away in future quarters, we'd estimate potentially a $6 million benefit for quarters 2, 3, and 4. And again, that's assuming you'd get all of quarter 2.

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Operator [58]

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I am not showing any further questions at this time. I would now like to turn the call back over to Jake Elguicze for any closing remarks.

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Jacob P. Elguicze, Teleflex Incorporated - VP of IR & Treasurer [59]

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Thank you, operator, and thanks to everyone for joining us on the call today. This concludes the Teleflex Incorporated First Quarter 2019 Earnings Conference Call.

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Operator [60]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.