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Teleflex Inc. (NYSE: TFX)
Q2 2019 Earnings Call
Aug 1, 2019, 8:00 a.m. ET
Questions and Answers
Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Teleflex Incorporated Second Quarter 2019 Earnings Conference Call. [Operator Instructions].
Now it's my pleasure to turn the call to Jake Elguicze, Treasurer and Vice President of Investor Relations.
Jacob P. Elguicze -- VP of IR & Treasurer
Good morning everyone and welcome to the Teleflex Incorporated Second Quarter 2019 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 8346258. 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.
Liam J. Kelly -- President, CEO & Director
Thank you. Jake and good morning everyone. It's a pleasure to speak with you again. The second quarter of 2019 was very positive for Teleflex as we accelerated the momentum in our global business, delivering 7% revenue growth on an as reported basis and 9.6% on a constant currency basis. When normalizing for the impact of one less shipping day, second quarter constant currency revenue growth was 10.8%. Like the first quarter of the year, during quarter two, the strength in our topline line performance was once again broad-based driven by improvements across nearly every global product category. This included 42.7% growth in Interventional Urology, 12% percent growth in Vascular Access, 9% growth in Surgical, and 8.8% growth in Interventional Access. But from a geographic perspective, we achieved particularly strong growth within the Americas and Asia where constant currency revenue growth was 13.1% and 10% respectively.
Turning to some other key metrics; we reported adjusted gross margin of 57.7%, adjusted operating margin of 25.2%, and adjusted earnings per share of $2.66, which represents an increase of 7.7% over the second quarter of 2018. Our adjusted earnings per share performance in quarter two was slightly better than we expected in our last earnings call despite a greater than expected headwind from FX. If we were to normalize for the year-over-year currency headwind, our adjusted earnings per share would have grown 13.8% during quarter two. In summary, we are incredibly pleased with our better than expected revenue performance in the second quarter and first half of the year. This has been added to increase our full year 2019 guidance for constant currency revenue growth from a range of between 6% and 7% to a range of between 7.5% and 8%.
Additionally, based on strong UroLift performance during the first half of the year, we are increasing our full year UroLift revenue growth guidance from a growth rate of approximately 30% to a growth rate of approximately 35%. We are pleased that our increased 2019 revenue growth expectations are being driven by a combination of both, UroLift and non-UroLift product; and if you were to break down the components of our full year constant currency revenue guidance raise on a dollar basis, approximately one-third of the raise is driven by UroLift while approximately two-thirds is driven by the remainder of our products.
Moving away from revenue; today we are also reaffirming our full year 2019 adjusted gross margin guidance, but we are slightly lowering our full year adjusted operating margin guidance largely due to increased headwinds from FX and decisions we made to make certain growth and infrastructure investment. Yet, due to a combination of strong revenue performance coupled with reduced expectations for interest expense, we can offset significantly worse impact from FX and we are reaffirming our adjusted earnings per share guidance range of $10.90 to $11.10. We are pleased with our expectation to grow full year 2019 adjusted earnings by 10% to 12% while funding investment behind key revenue growth opportunities and offsetting headwinds from foreign exchange and tariffs.
With that as an overview, let's now at quarter two revenue in more detail. I will begin with a review of our reportable segment revenue and unless otherwise noted, the growth rates I would refer to are on a constant currency basis. The Americas delivered revenues of $373.8 million, which is an increase of 13.1%. This was driven by our Interventional Urology and Vascular Access product category. Moving to EMEA; in reported revenues of $147.1 million, which represents an increase of 1.9%, during the quarter the growth was led by our Interventional Access and Vascular Access products. However, the performance of this region was slightly lower than what we anticipated a few months ago due to the timing of certain orders. As we look forward, we expect EMEA performance to improve in the second half of the year as compared to the performance during the second quarter.
Turning to Asia; revenues totaled $75.2 million, which is an increase of 10% as compared to the prior year period. From a product standpoint, growth was strongest within our surgical and Vascular Access categories, while from a geographic perspective, our business in China grew 15% and we also saw strength in Korea and Southeast Asia. And lastly, our OEM business reported revenues of $56.4 million which represents an increase of 8.5%. Growth here was led by strength in our suture and catheter product offering. On a full year basis, we continue to expect this business to grow in the upper single-digit range. However, due to a difficult comparable, as well as the timing of certain orders we expect growth within this segment to be relatively flat as compared to the prior year period during the third quarter.
Now let me move to a discussion of our revenues by global product category. Like my comments regarding our reportable segments, my comments regarding our global product category growth will also be on a constant currency basis unless otherwise noted. Starting with Vascular Access; second quarter revenues increased 12% to $153.6 million. This was driven by strong growth and CVCs, PICCs and EZ-IO. Additionally, we saw an increase in distributor orders during quarter two that positively impacted results. This was essentially the reverse of the distributor destocking that negatively impacted our quarter one Vascular results.
Moving to Interventional Access; second quarter revenue was $104.8 million, which is an increase of approximately 8.8%. The strength of this business during quarter two was broad-based with growth in complex catheters, biologics on-control [Phonetic] and intra-aortic balloon products. And while not a meaningful driver of Q2 growth, let me provide you with a brief update on MANTA, our large bore closure products.
The first three months of MANTA's limited market release have gone very well as the product has received strong positive feedback from key both leading positions as we continue to conduct price discovery in the market. We have made good progress on our strategy to generate positive clinical outcomes at key institutions, and we remain on-track with our strategy of generating additional positive physician and patient experiences as we move through the remainder of 2019. We continue to believe that MANTA will contribute to our top line in a more meaningful way in 2020.
Turning to Anesthesia; second quarter revenue was $85.7 million, which is a decrease of 0.9%. The decrease here is primarily driven by softness in airway and pain management products.
Turning to a brief update on RePlas which going forward will be referred to by it's new commercial name EasyPlas [Phonetic]. As a reminder, we are on a fast-track approval process with the FDA and our most recent public comments regarding this product indicated that we expected to complete our BLA submission by the third quarter of 2019. In the course of our frequent communications with the FDA, which have been highly collaborative, we recently received additional questions from the FDA. Although we previously anticipated many of these, there were others that will require additional analysis and testing, which would take more time to complete; therefore we no longer expect to complete the BLA submission by the third quarter of this year.
While this is unfortunate, we view this as a temporary setback. The fact that the BLA submission will take additional time to complete is in part due to the unique nature of the product as a biologic product like this has never been approved by the FDA before. It is important to understand there was no revenue assumed in our 2019 financial guidance related to this product, and less than $10 million in revenue by 2021 in the long-range plan estimate we shared at our Investor Day last year. As we move forward to continue to work with the FDA, we will continue to provide updates as part of our quarterly earnings call as and when we receive further information on the BLA submission and he associated regulatory timing of EasyPlas.
Shifting to our Surgical business; revenue increased 9% to $95.6 million driven by sales of ligation clips and surgical instruments. While this business fundamentally performed very well in quarter two, many of you will recall that it was also against an easy year-over-year comparison. Moving to Interventional Urology, revenue increased 42.7% to $67.9 million, our sales force continues to make excellent progress driving physician adoption of the UroLift system, and we expect to train a total of 450 new urologists during 2019.
From a patient demand perspective, our direct-to-consumer program is performing well, and it is driving new patients toward talking to their urologists about whether they are a good candidate for UroLift as a solution to their BPH. Transitioning to UL2; we continue to expect to begin the rollout of UL2 in the latter half of this year with a full conversion of the UL's physician base from UL1 to UL2 expected in 2021. We are also continuing to actively see the market for the launch of UroLift in Japan, and we remain on-track for a limited market release in mid-to-late 2020 with revenues ramping more meaningfully in Japan during 2021. Given the outperformance of UroLift in the first half of the year, we are raising our annual 2019 Interventional Urology revenue growth from approximately 30% to approximately 35%. And finally, since OEM was covered in our segment review, let me summarize second quarter revenue for the businesses within our other category which consists of our respiratory and urology care products.
Revenues were up 0.3% in the constant currency basis, totaling $88.4 million; this was driven by an increase in sales of our bladder management products, offset by declines in sales of our respiratory products. That completes my comments on quarter two revenue performance. Next, I would like to briefly discuss some important clinical and reimbursement update on UroLift.
First, we are pleased to announce that Anthem, one of the nation's leading health insurance providers has revised their surgical and minimally invasive BPH medical policy to revise coverage for UroLift. With the announcement of Anthem coverage, UroLift has now achieved coverage by all the national and regional commercial plans, and all independent licensees of the Blue Cross Blue Shield Association, as well at 100% Medicare coverage. Given that Anthem with the last large commercial payer to change their coverage policy on UroLift to positive, our reimbursement teams focus is now on supporting this strong coverage with robust clinical and real world data, and that with any new commercial payer coverage decision Anthem will take time to work through the commercial channel. Therefore, we do not expect any material upside to our 2019 UroLift guidance due to this coverage decision.
Let me move briefly to a clinical data update. A meaningful part of our strategy to make UroLift the standard-of-care to treat BPH is to create an industry-leading high-quality set of published clinical evidence. On our last earnings call, we announced our 1,413 patient's real-world study, and that results were consistent with those seen in previous clinical studies of the UroLift system, even with a more diverse patient population. In July, the study was published in the Journal of Endourology, it's publication serves the tool for our sales team to use when calling on both, new and existing physicians.
In closing, I would like to reiterate how pleased we are with our second quarter and first half of the year performance. Revenue growth has been incredibly strong, driven by a broad spectrum of products and geographies which led us to increase our revenue guidance for the full year. We have been working to build a product portfolio capable of accelerating revenue growth and gross margin expansion and feel we are on-track to achieve that goal. When you take a step back and look at the midpoint of our increased full year 2019 constant currency revenue growth guidance range, approximately 2.8% of our expected growth is driven by UroLift and nearly 5% is being driven by the remainder of our products. In fact, the midpoint of our increased constant currency revenue growth guidance range indicates that we expect to grow approximately 7% during the second half of 2019, and this is against more difficult comparison. The ability for us to accomplish this gives us additional confidence in our ability to consistently grow between 6% and 7% over a multi-year period.
In addition to continued revenue growth in the second half of the year, we also expect to generate a material improvement in our adjusted gross and operating margins which will translate into meaningful earnings and free cash flow generation. And as such, we are reaffirming our full year adjusted earnings per share guidance range.
That completes my prepared remarks. I would now like to turn the call over to Tom for a more detailed review on our second quarter financial results and full year 2019 financial guidance. Tom?
Thomas E. Powell -- Executive Vice President & Chief Financial Officer
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 $376.6 million versus $348.3 million in the prior year quarter, or an increase of approximately 8.1%. Adjusted gross margin increased 60 basis points to 57.7%, the expansion in adjusted gross margin primarily reflects increased sales volumes, benefits from cost improvement programs, and a favorable sales mix of higher margin products. Partially offsetting these gains were negative impact from foreign exchange, incremental tariffs, higher logistics and distribution costs and inflation.
Adjusted operating profit was $164.7 million as compared to 158.8 million in the prior year. Adjusted operating margin in the second quarter of 2019 was 25.2% which is a decrease of 80 basis points over the prior year period. As the improvement in gross margin was offset by the negative impact from foreign exchange, additional selling expenses related to the revenue upside and select investments designed to upgrade our quality systems, strength and protection of our IP portfolio enhanced customer experiences while interacting with Teleflex. On a currency neutral basis, adjusted operating margin would have been approximately flat to a year ago period.
Continuing down the income statement; net interest expense decreased to $20.3 million from $26.5 million in the prior year quarter. The decrease primarily reflects the impact of our cross-currency swap agreements. Moving to taxes; for the second quarter our adjusted tax rate was 13.4% versus 12.7% in the prior year period. The increase in our adjusted tax rate is primarily due to the mix of earnings in higher tax jurisdictions, as well as a reduced amount of windfall benefit from stock-based compensation. Adjusted earnings per share was $2.66 or an increase of 7.7% as compared to the prior year. We are encouraged by the strength of our earnings performance as this result includes a foreign currency headwind of $0.15. So on a currency neutral basis, adjusted earnings per share increased by approximately 13.8% in the second quarter.
In addition to the FX headwind, second quarter earnings also included incremental year-over-year tariff expense which reduced earnings by approximately $0.03, as well as a headwind from the divestiture of our catheter reprocessing business which contributed $0.01 in the prior year quarter.
Turning now to select balance sheet and cash flow highlights. During the first six months of 2019, cash flow from operations totaled $157.3 million compared to $181.6 million in the prior year period. The decrease in cash flow is primarily attributable to contingent consideration payments. Finally, during the second quarter we further reduced our outstanding debt by approximately $28 million and our net leverage stood at approximately 2.63 times. This completes my comments on our second quarter results. Now I'll move to 2019 guidance updates.
Given our performance for the first six months of the year and our expectation for the remainder of the year, we are increasing our full year constant currency revenue growth guidance from a range of between 6% and 7% to a revised range of between 7.5% and 8%. We are also increasing our as-reported revenue growth guidance from a range of between 5% and 6% to a revised range of between 6% and 6.5%. Our current expectation is that currency is 150 basis point headwind to revenue.
Continuing down the P&L we are reaffirming our previously provided GAAP and adjusted gross margin guidance ranges. However, we are lowering our GAAP and adjusted operating margin guidance ranges. Our updated adjusted operating margin guidance range is reduced by 50 basis points from a range of between 26.5% to 27% to a revised range of between 26% and 26.5%. Similar to the second quarter discussion, reduction in full year adjusted operating margin expectations can be attributed to a couple of items.
First, a less favorable FX environment versus our previous expectation. We project that 2019 operating margin will be adversely impacted by an additional 25 basis points versus our previous expectation. Second, additional selling expense associated with the revenue outperformance in UroLift and other areas of the business. And then third, proactive investments designed to both protect and enhance future growth prospects, investments include upgrades to our quality systems, strength and protection of our IP portfolio, enhanced customer experiences while interacting with Teleflex.
Moving now to interest expense; on our last earnings call we pointed to the investment community to the low end of our $87 million to $90 million range. However, to date LIBOR rates have trended favorable versus expectation and we have now included a 25 basis point reduction for 2019. As a result, we are lowering our full year interest expense guidance to a range of between $82 million and $83 million.
Turning to taxes; we are reaffirming our previously provided range of between 14% and 14.8% although, we now expect that will be at the very low end of that range. Over share count perspective, we now expect full year weighted average shares to be closer to 47.1 million as compared to our prior expectation of 47.2 million. And that takes me to our GAAP and adjusted earnings per share ranges; on a GAAP basis, we are increasing our full year guidance from a range of between $6.72 to $6.84 to a new range of between $6.82 and $6.94.
On an adjusted basis we are reaffirming our previously provided guidance range which calls for earnings of between $10.90 and $11.10. Implicit in this adjusted EPS guidance range is our current FX assumption of a 35% full year headwind versus our previous expectation of $0.20. So given the strength of the revenue outperformance, we were able to maintain earnings guidance despite a $0.15 increase in the headwind from FOREIGN EXCHANGE.
In closing, we are very pleased with the top line growth achieved in the first half, the acceleration growth was broad-based across our portfolio of products, we believe the investments made to-date are paying dividends and those planned for the balance of 2019 will serve to further strengthen our business platform and provides a framework for continued topline acceleration. While foreign exchange has somewhat tempered earnings growth, the underlying constant currency operating performance has been strong. Adjusting for currency; first half adjusted EPS grew by 13% and further adjusting toward the China tariff, first half adjusted EPS grew by 14.7%, so a very solid start to 2019.
And that concludes my prepared remarks, I'd like to now turn the call back to the operator for Q&A.
Questions And Answers
Questions and Answers:
Duration: 62 minutes
Jacob P. Elguicze -- VP of IR & Treasurer
Liam J. Kelly -- President, CEO & Director
Thomas E. Powell -- Executive Vice President & Chief Financial Officer
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