Teleflex Inc

NYSE:TFX

Earnings Call Transcript 2018-Q4

[Operator]

Good day, ladies and gentlemen and welcome to the Teleflex Incorporated Fourth Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mr. Jake Elguicze, Treasurer and Vice President of Investor Relations. Sir, you may begin.

[Jake Elguicze, Treasurer and Vice President, Investor Relations]

Good morning, everyone and welcome to the Teleflex Incorporated fourth quarter 2018 earnings conference call. The press release and slides to accompany this call are available on our website at www.teleflex.com. And 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 3059948. 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 will 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 would like to turn the call over to Liam.

[Liam Kelly, President and Chief Executive Officer]

Thank you, Jake and good morning everyone. It’s a pleasure to speak with you again. Let me start by saying how pleased we are with our fourth quarter results and the strong finish we saw to the year. We executed well across many of our business units, particularly in the second half of 2018. This was led by performance within our Interventional Urology North America, Interventional Access North America, Asia and OEM businesses. As expected, we gained momentum as we moved throughout the year delivering accelerated organic revenue growth in the second half of the year as compared to the first half, resulting in full year organic constant currency revenue growth of 5.1%. This top line achievement, coupled with continued execution on various restructuring initiatives drove approximately 18% adjusted earnings per share growth during 2018.

We also achieved several important clinical and regulatory milestones that should position us well for the next several years. Some of those milestones include: publishing new clinical and real world data on UroLift; receiving UroLift Shonin approval in Japan; obtaining the 510(k) for Percuvance, and on February 1 receiving the PMA for MANTA, our recently acquired large-bore vascular closure product.

With that as a summary, let me provide you with an overview of our fourth quarter results. During quarter four, revenue grew 7.8% on a reported basis and 9.4% on a constant currency basis, with only a small contribution from M&A, fourth quarter organic constant currency revenue growth was 9.1% driven by NeoTract becoming organic in quarter four combined with strong growth from legacy product families.

Turning to NeoTract, or as we call it, Interventional Urology, the business had an outstanding fourth quarter and full year. Fourth quarter revenues were $57.8 million, up nearly 48% compared to the prior year period. And full year revenues were $196.7 million, up nearly 57% year-over-year as physicians continued to rapidly adopt UroLift into their practices. The team of relevant clinical data publications continued in quarter four with the published 12-month data from the use of UroLift in men with an obstructive median lobe showing outcomes consistent with our 5-year LIFT study while we also conducted a separate survey, which demonstrated a very low level of awareness among men of minimally invasive treatment option for benign prostate hyperplasia.

Turning to Vascular Solutions, global fourth quarter revenues reached $56.4 million, which represented growth of over 27% compared to the prior year period. Vascular Solutions worldwide revenue growth was once again robust in both North America and EMEA, which continues to benefit from the distributor conversions we initiated in the second half of 2017. For the full year, VSI revenues globally were $209.9 million, up about 18% year-over-year.

Turning to some other key metrics, during the quarter, our adjusted gross and operating margins reached 57.6% and 26.5% respectively both expanding 110 basis points over the prior year period. This translated into adjusted earnings per share of $2.77 for the quarter, which is an increase of 13.5% over fourth quarter 2017. But from a full year perspective, our adjusted earnings per share was $9.90 up approximately 18% from 2017 and near the top end of our previously increased guidance range.

With that as an overview, let’s now look at quarter four revenue in more detail. Fourth quarter 2018 revenue totaled $641.6 million, which is an increase of 9.4% on a constant currency basis. Beginning with the components of organic revenue growth, during quarter four, we saw organic constant currency revenue growth of 9.1%. Our 9.1% organic growth consisted of 5.4% from product volumes, excluding the impact of the surgical product line exit and the shipping day impact and 1.7% from new product introductions. We had 1 additional shipping day in the fourth quarter, which added 1.4%, and positive pricing, which added about 80 basis points. These constant contributors were partially offset by the surgical product line exit, which negatively impacted quarter four growth by about 20 basis points. This should be the last period in which we have any meaningful impact from the surgical product line divestiture. In addition to growing our revenues organically 9.1%, we also had contribution from M&A of about 30 basis points, thereby making our total constant currency revenue growth in quarter four ‘18, 9.4%.

Turning next to our revenue performance by segment, Vascular North America fourth quarter revenue increased 6.3% on a constant currency basis to $85.7 million driven by strong growth in PICC, visual navigation products and EZ-IO. Moving to Interventional North America, fourth quarter revenue was $69.7 million, which is an increase of approximately 13.3% on a constant currency basis. The increase here is primarily the result of higher sales of Vascular Solutions products as well as growth in OnControl.

Turning to Anesthesia North America, fourth quarter revenue was $50.8 million, which is an increase of 2.1% on a constant currency basis. Growth in this segment was driven by our airway and EZ-IO products. Shifting to our Surgical North America business, revenue decreased 3% on a constant currency basis to $42.4 million. Surgical revenues were impacted by our decision to exit a low-margin surgical product in 2017, which caused a headwind of about $1 million in quarter four.

Moving to our overseas operations, fourth quarter EMEA revenues were up 8.2% on a constant currency basis to $150.9 million. Growth in EMEA was largely driven by distributor convergence as well as increased sales of vascular access products. Now to Asia, fourth quarter revenue increased 5.5% on a constant currency basis to $79.8 million. From a product standpoint, growth in this region was driven by interventional access and surgical products. But from a country perspective, revenue growth was strong within Southeast Asia, Japan and China whose revenues expanded approximately 5.2% despite the most difficult comparison of the year.

Next, I would like to brief you on our OEM segment. During the fourth quarter, revenue was up approximately 15.4% on a constant currency basis and reached $52.7 million. The increase in OEM revenues was due to continued strong sales volumes of catheter and performance fiber products. And lastly, fourth quarter revenue for the businesses within our All Other category was up 21.4% on a constant currency basis, totaling $109.6 million. Growth here is primarily attributable to UroLift. That completes my comments on quarter four revenue performance.

Turning to a brief update on UroLift, the fourth quarter closed out a spectacular year for UroLift, not only did revenue grow by nearly 57%, but the interventional urology business unit achieved important milestones in the clinical, reimbursement and regulatory categories. Let me highlight a few of the more recent milestone achievements. In November, we were very pleased to announce UroLift received Shonin approval in Japan. Given that this approval came a bit earlier than expected, we have decided to accelerate some pre-commercial investments to work with key opinion leading urologists ahead of obtaining reimbursement and our expected limited launch in mid-2020.

As a reminder, our plan to build a market for UroLift in Japan will follow a methodical process like how we are building the U.S. market. We continue to believe that obtaining reimbursement will be at 12 to 18-month process. Once reimbursement is established, we will begin commercialization with academic centers to build strong initial clinical experience, followed by a full commercial launch. In parallel with commercialization, we will begin enrolling a PMDA-mandated postmarket clinical study using many of our initial implanting physicians.

In December, 12-month results from a study of UroLift for BPH in men with an obstructive median lobe were published in prostate cancer and prostatic disease, showing significant improvements in BPH symptoms and quality of life consistent with the 5-year LIFT study. This provides an additional tool for the commercial team as they complete their physician training on the median lobe technique. Seeing clinical outcomes improve as the product moves from the clinical to the real world is a rare achievement in medical devices and we are thrilled to have accomplished this with UroLift over the past few years. We also recently commissioned a survey to better understand patient awareness of BPH and its available treatment options. The survey demonstrated that only 6% of patients surveyed in the U.S. were aware that minimally invasive treatments for BPH were available. Additionally, over 90% said that they were either very likely or somewhat likely to seek minimally invasive procedures if they carry less risk of impotence or incontinence. Clearly, we have only scratched the surface of penetrating this very large market. And as the only BPH therapy that has shown 0 incident of new-onset sexual dysfunction, UroLift is clearly positioned for continued leadership in the minimally invasive treatment of BPH.

More recently, we announced our reimbursement milestone of receiving a positive coverage decision from Humana, adding approximately 9 million covered lives, bringing UroLift total covered lives to over 270 million in the United States. And lastly, we are thrilled to announce that, to date, UroLift has helped over 100,000 men treat their large prostate with a highly efficacious solution that has completely revolutionized the patient experience in treating the symptoms of BPH. We think its obvious UroLift is an exceptionally strong position and expect full year 2019 Interventional Urology revenues to grow by approximately 30% year-over-year as more physicians adopt UroLift deeper into their practice. Longer term, we continue to have high confidence in our multi-year financial objective for the business and believe that UroLift will become the standard of care for the treatment of BPH.

Turning to MANTA, we were pleased to announce on February 1, 2019, that MANTA received pre-market approval from the FDA. This was ahead of our anticipated second quarter 2019 approval assuming no FDA panel review. With this approval, MANTA is now the first commercially available biomechanical vascular closure device designed specifically for large-bore femoral arterial access site closure. We continue to believe the global market for MANTA to be approximately $200 million to $300 million. And our U.S. commercial effort in 2019 will include a limited market release in the second quarter to ensure strong initial outcomes with key thought-leading physicians that we invest in further building the commercial infrastructure to support the long-term growth of this product. As such, we do not expect a significant amount of MANTA revenues in the U.S. in the 2019 time frame.

Let me now take a moment to articulate our primary strategic initiatives for 2019. At the top of the list is driving the continued penetration of UroLift. The Interventional Urology business unit is starting 2019 with strong momentum and several tailwinds that we think will result in another year of significant revenue growth. The sales organization is motivated, more physicians are adopting UroLift deep into their practice, the body of strong clinical evidence continues to grow and reimbursement is well established. We don’t plan to change the playbook significantly in 2019. We simply plan to continue executing our proven go-deep commercial strategy as we methodically expand the commercial organization and leverage UroLift’s broad coverage in the United States. The next initiative is to invest in our growth businesses.

We have proactively decided to either accelerate or expand key investments in 2019 that we believe will support accelerated organic constant currency revenue growth that is sustainable over a multi-year period. While this will create some headwinds to operating margin expansion in the near term, we think it is the right long-term strategic decision for our company. As such, given the earlier than expected approval for UroLift in Japan, we are accelerating pre-commercial investments in that country. These investments will be focused on key opinion leading urologists to address what we believe is a $2 billion market. We are also expanding our direct-to-consumer and digital marketing initiatives in 2019 following a positive pilot in 2018.

Following the acquisition of Essential Medical, we are further building the commercial infrastructure to support MANTA with a focus on accelerating its revenue growth in 2020 and 2021. Next, EZ-IO continues to be a growth driver and we are putting additional resources behind that product. And lastly, we expect our Asia business to continue to drive meaningful growth through 2021, and we plan to support that region with additional sales and clinical resources.

Moving to the advancement of some key pipeline products, we continue to be focused on completing the BLA submission for RePlas, which we anticipate occurring in the third quarter of 2019. Following the submission, our focus will shift to TACs that we will need to complete following RePlas approval. First, we need to begin enrollment in the confirmatory post-approval efficacy study that is mandated by the FDA. Second, we will be focused on building capacity for RePlas to support this efficacy study and some initial commercial scale. We remain very enthusiastic about this product and its longer-term outlook.

Turning to UroLift 2, once the sales force has trained our physician base on the medium lobe technique, we will begin the rollout of UroLift 2, which we continue to expect in the latter half of 2019 with a full conversion of the U.S. physician base from UL 1 to UL 2 in 2021. Our focus for Percuvance in 2019 is to methodically reintroduce the product to key thought-leading physicians in the U.S. and affects initial market demand. Like RePlas, we are assuming an immaterial amount of Percuvance revenue in our 2019 guidance with no change to our longer term revenue assumptions for this product line.

And lastly, non-revenue-dependent margin expansion continues to be a key strategic priority for Teleflex. Our focus in 2019 will be to deliver top savings of previously announced programs while initiating work on our new 2019 restructuring program announced in conjunction with today’s earnings press release. This program involves the relocation of certain manufacturing operations from higher cost locations to existing Teleflex facilities in lower cost geographies and related workforce reductions. In total, we expect to achieve annual pre-tax savings of between $12 million and $14 million once fully completed and we should begin to realize some initial savings beginning in 2021.

Overall, our restructuring initiatives remain on track, further supporting our confidence in our ability to achieve our previously provided long-term adjusted growth and operating margin target. When you take a step back and look at 2019 in the context of these strategic initiatives, we believe we can deliver between 6% and 7% constant currency revenue growth and deliver double-digit earnings growth, all while overcoming foreign exchange, tariffs and tax headwinds and make significant investments to position our business for sustainable long-term growth. One last headwind we are overcoming in 2019 is our first quarter divestiture of our vein reprocessing business, which came to us through the acquisition of VSI. Vein reprocessing was a non-strategic business for Teleflex and was not a fit with our long-term vision. While non-strategic, this business contributed $0.06 to our adjusted earnings in 2018.

Finally, before turning the call over to Tom, I would like to draw your attention to what we believe is an improvement to our segment reporting structure, which we have implemented in the first quarter of 2019. On this slide, you see our segments as they are reported in today’s earnings release on the left. While on the right is our new segment reporting structure the Americas, EMEA, Asia, OEM and other. In addition to these segment changes, beginning with the first quarter of 2019, as part of our quarterly earnings conference call and messaging, we will provide information concerning our global product family revenue, including global vascular access, interventional access, anesthesia, surgical, interventional urology, OEM and other with the other category capturing our respiratory and urology pipeline. We believe this reporting structure is an improvement and will provide investors with greater visibility into the global performance of our product family. In conjunction with the filing of our 10-K, we will also be posting new supplemental financial information on the Investors section of our website, which provides a quarterly historical breakdown of our newly defined segment and global product family revenues.

That completes my prepared remarks. At this time, I would like to thank Teleflex employees and investors for the tremendous amount of support you have provided during my first year as CEO. Now I will turn the call over to Tom for a detailed review of our fourth quarter and full year 2018 financials and to provide our 2019 guidance. Tom?

[Thomas Powell]

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 $369.3 million versus $336.3 million in the prior year quarter or an increase of approximately 10%. Adjusted gross margin increased 110 basis points versus the prior year period to 57.6%. The expansion in adjusted gross margin primarily reflects efficiencies related to higher UroLift and Interventional Access sales volumes, favorable pricing and a positive impact from foreign exchange.

Turning to operating profit, for the quarter, adjusted operating profit was $169.9 million versus $151.2 million in the prior year quarter or an increase of approximately 12%. Adjusted operating margin in the fourth quarter of 2018 was 26.5%, which is an increase of 110 basis points over the prior year period. Adjusted net interest expense decreased to $23.1 million from $23.5 million in the prior year quarter. The decrease reflects the impact of our recently completed cross-currency swap transaction, which provided an interest benefit of approximately $3.3 million in the fourth quarter of 2018 and this was offset by higher interest rates on our floating rate debt. For the quarter, our adjusted tax rate was 11.7% versus 10.9% in the prior year period. On the bottom line, adjusted earnings per share increased 13.5% to $2.77.

Turning now to balance sheet and cash flow highlights, for the full year 2018, cash flow from operations totaled $435 million, up approximately 2% over the prior year. The increase is attributable to favorable operating results partially offset by higher income tax payments in 2018 as compared to 2017 and a net unfavorable impact from changes in working capital. Finally, our debt outstanding at year end was largely unchanged from that of the third quarter. Our leverage level as defined under our credit facility stood at approximately 3.2x.

Overall, 2018 was a solid year for Teleflex. On a full year basis, organic revenue grew by 5.1% and constant currency grew by 12.7%, gross margin and operating margin each expanded by 110 basis points and adjusted EPS increased by 17.9%. And this completes my comments on 2018.

Now, I will move to 2019 guidance. In 2019, we project constant currency revenue growth of between 6% and 7% with Interventional Urology, Interventional Access and Asia being key contributors to growth. Our expectation is that the revenue decrease caused by the recently completed divestiture of the vein reprocessing product line will be offset by recent acquisitions, including MANTA. During 2019, we expect a 1% headwind from foreign exchange with the greatest impact being the first and second quarters. As a result, we expect our as-reported revenue to increase between 5% and 6% during 2019. This would equate to a dollar range of between $2.571 billion and $2.595 billion.

Turning next to gross margin, during 2019, we anticipate that adjusted gross margin will increase between 90 and 140 basis points to a range of 58% to 58.5%. We expect gross margin expansion to be driven by Interventional Urology, Interventional Access and other favorable product mix. Additionally, we expect continued benefits from manufacturing productivity improvement programs and from previously announced footprint restructuring programs. Somewhat offsetting the gross margin expansion, are anticipated headwinds from incremental tariffs, inflation and foreign exchange.

Moving to adjusted operating margin, during 2019, we anticipate that adjusted operating margin will increase between 80 and 130 basis points to a range of 26.5% to 27%. This range includes proactive investments in support of the U.S. launch of MANTA, pre-commercial UroLift market development in Japan and expansion of UroLift direct-to-consumer campaigns in the U.S. That takes me to our adjusted earnings per share outlook for 2019 and this slide serves as a bridge from our full year 2018 adjusted EPS result to our full year 2019 adjusted EPS outlook beginning with 2018 adjusted earnings per share of $9.90.

From an operating standpoint, in 2019, we project our core operations to add approximately $1.66 to $1.71 per share or an increase of approximately 17%. We expect to generate a significant level of operating leverage through accelerated revenue growth, favorable mix and manufacturing and cost reduction initiatives. In 2019, we expect interest expense to range between $87 million and $90 million. The year-over-year reduction of $12 million to $15 million will contribute to an estimated $0.25 to $0.30 of earnings accretion. The year-over-year reduction in interest expense is largely the result of the cross-currency swap completed in October 2018 and our planning assumption that free cash flow will be used to further reduce debt outstanding. The projection also assumes two U.S. interest rate hikes during 2019. Lastly, should capital markets remain receptive we will look for opportunities to further optimize the capital structure.

Moving to taxes, during 2019, we project that our adjusted tax rate will be in a range of 14% to 14.8% and will result in adjusted earnings per share headwind of approximately $0.30 to $0.40. The expected year-over-year increase in adjusted tax rate is a result of a higher mix of U.S. taxable income in the 2019 operating plan. Additionally, our assumption is that the 2019 windfall benefit from stock-based compensation is at a normalized level versus the atypically high level we realized in 2018. Foreign exchange is expected to be a headwind of approximately $0.20 while increased tariffs are expected to be a headwind of approximately $0.15. We estimate that weighted average shares will increase to 47.2 million for full year 2019, which is dilutive by approximately $0.10 per share. And finally, the divestiture of the vein reprocessing business will remove approximately $0.06 of our adjusted EPS base.

So despite a number of headwinds, our outlook for 2019 adjusted earnings per share remains robust at $10.90 to $11.10 and represents growth of between 10.1% and 12.1% versus 2018 or growth rate double that of our expected as-reported revenue growth. While it’s not our practice to provide specific quarterly financial guidance, it has been our practice at the outset of each year to highlight some considerations regarding variability between our quarterly expectations. As for the number of shipping days, 2019 has the same number of total days as to 2018. There’s one less day in the second quarter and one more day in the fourth quarter.

For the first quarter of 2019, we expect to realize approximately 23.5% of full year as-reported revenue. We further expect to realize approximately 19.5% of our full year adjusted earnings per share. These estimates reflect our expectation that the adverse impact from foreign currency will be the greatest during the first quarter. And that concludes my prepared remarks.

I would now like to return the call back to Liam for closing commentary.

[Liam Kelly, President and Chief Executive Officer]

Thank you, Tom. In closing, we are excited for what 2019 holds for Teleflex. We expect as-reported revenue growth of between 5% and 6% and constant currency revenue growth of between 6% and 7%. And despite foreign exchange, tariff and tax headwinds as well as the decision to accelerate certain investments to support sustained organic revenue growth over the long term, we expect another year of strong adjusted earnings growth that is double the rate of our forecasted as-reported revenue growth. Looking over the 2019 to 2021 timeframe, our previously provided financial projections of average organic constant currency revenue growth of between 6% and 7%, adjusted gross margin of between 60% and 61% and adjusted operating margin of between 30% and 31% remain very much on track.

That concludes my prepared remarks. Now I would like to turn the call back to the operator for some Q&A.

[Operator]

Thank you. [Operator Instructions] Our first question comes from David Lewis with Morgan Stanley. Your line is open.

[David Lewis, Morgan Stanley]

Good morning. Liam, I wanted to start with guidance and then maybe a follow-up on NeoTract. So yes, I am sort of thinking about the 6% to 7% constant currency for 2019 and what I consider the impact of NeoTract, Vidacare and VSI and your commentary around limited expectations for MANTA, Percuvance, RePlas, I guess the question I want to ask you is if we think about the 6% to 7%, is the 6% or low end of that guidance range realistic, what gets you to that low end of the range given sort of your commentary this morning? And I have a quick follow-up.

[Liam Kelly, President and Chief Executive Officer]

Yes. So David, obviously, we are very happy with the progress that we made in 2019. And we are a little bit like the Patriots. We had a much stronger second half than first half in our Teleflex year and in our Super Bowl if I can put it that way. So we have a lot of momentum as we get into just kind of 2019. And in 2019, we estimate that our organic constant currency revenue growth will accelerate in the 5.1% in ‘18 to the 6% to 7% in 2019. And I will point to a few of the growth drivers that we see that will get that acceleration. NeoTract will add approximately 30%, Interventional Access will deliver high single digits, APAC delivering mid- to upper single-digit growth. Those are the three main drivers to that. We also as well as that we expect continued growth in Vidacare. We expect our PICCs to continue to grow, OEM to continue and obviously a rebound in our surgical business and also in Latin America. So, we feel very comfortable with our range of the 6% to 7% and bridging from 5.1% to the 6%, we also feel pretty confident in that lower end, David.

[David Lewis, Morgan Stanley]

Okay. Just sort of to say, Liam that the contribution of incremental products, MANTA, Percuvance, RePlas, it can push you to the upper end of that range. And then my last follow-up I will just ask as well as you think about NeoTract, I wonder if Tom can give us a sense of where NeoTract gross margins sit prior to Neo 2 and then your 30% growth outlook for 2019, what assumptions were made there to reflect emerging competition? Thanks so much. I will jump back in queue.

[Liam Kelly, President and Chief Executive Officer]

Okay. So obviously, it’s a competitive world across many of our businesses, David and the main competition for the UroLift product is the Rezum product. I will say that we are very much down the track of making Rezum or making UroLift the standard of care for the treatment of BPH. We believe that the clinical evidence that we had and the continued clinical evidence that continues to support the product makes it a very easy choice for the urologists to pick our product, the UroLift everyday. We continue to invest behind the sales organization, so for an example, just in sales investment, excluding all the other aspects that we spoke about, we’re actually investing about $10 million in additional sales resources behind the UroLift product. Our original plan for sales heads at this point in our original model was to be at about 85 sales heads. We’re crossing over the 100 mark as we continue to invest heavily behind it, and that’s why we remain confident even in the competitive world. And there is, also the rising boat lifts all tide the rising tide lifts all boats, when we have another company talking about BPH, we actually see that as being a potential good thing as more urologists become aware. And as you heard in my prepared remarks, a lot of men are not aware that there is a minimally invasive treatment out there that has minimal sexual dysfunction or zero sexual dysfunction. So therefore, by educating urologists, by having another company talking and educating urologists that will ultimately end up in men being educated and we still only scratch the surface of penetration with the UroLift product. Tom, do you want to cover the margin question that David asked?

[Thomas Powell]

Yes, certainly. So, David, as we’ve seen volumes grow with NeoTract, we’ve also seen the ability to expand the gross margin even before we go UL2. So, in 2018, we finished the year, I would say, in the mid-70% gross margins. For 2019 we, expect to tick up a little bit further towards the upper mid, if you will, kind of the upper mid range of the 70s.

[Operator]

Thank you. Our next question comes from Rich Newitter with SVB Leerink. Your line is open.

[Rich Newitter, SVB Leerink]

Hi thanks for taking the questions. Just wanted to start off with the guidance, the 6% to 7%, I appreciate a lot of your growth drivers are now organic, but just tracking that underlying base business, I think, is important because that’s where we saw most of the fluctuations last year. Is it right to think kind of the ex NeoTract and VSI business as still a 4% growth business as you contemplate that 6% to 7% growth outlook?

[Liam Kelly, President and Chief Executive Officer]

Yes, thanks, Rich. So, as we look at it, I mean, it’s all organic for Teleflex as we move into 2019. The way we look at it, we’re moving from a 5.1% growth to a 6% to 7% growth. It gets more and more difficult to break out VSI as it becomes embedded within Teleflex. VSI had an excellent year. And we will point even to look at the Interventional Access business unit that we will now be breaking out globally and we would expect that business unit to be in the high single digit for the year 2019. And as I said earlier, the other drivers of our growth that we expect is obviously NeoTract that we’ve spoken about, but also APAC, which we would expect to be in the mid- to upper single-digit growth. And as I said already, there are some other key product and regions such as Vidacare, PICCs, OEM, Surgical, and Latin America that we will expect to see improvements from. So, all in all, we feel very comfortable in our 6% to 7% organic constant currency revenue growth. And I think if we just take a step back, as a company, we couldn’t be happier to think that on as or even at a lower range, on an as-reported revenue growth of 5%, we’re getting double that in EPS, giving you 10% EPS growth, which is a pretty unique med tech asset in our mind.

[Rich Newitter, SVB Leerink]

Okay, fair enough. And then, Liam, in the past, you’ve talked directionally to kind of what the tracing indicator kind of had been for the current and future quarter from your distributors. I guess, one, what percentage of your business is exposed even to maybe some of the factors that created lumpiness from the erratic distributor ordering patterns last year that has been a lesson this year to potentially limit the lumpiness? And then, two, what can you tell us if it’s still relevant about that tracing data in the current period? Thanks.

[Liam Kelly, President and Chief Executive Officer]

Yes. So, starting with how much of our business is exposed, Rich, in the past, about half of our North American business went to the distributors, the Cardinals, the Owens & Minors, the Medlines, those distributors. Moving forward, now that NeoTract and VSI become organic and don’t normally go through that channel, about 1/3 of our business should go through those distributors. Regarding the tracings, our tracings were very consistent with the improved tracings that we saw in Q2 and Q3 of 2018. So, we continue to see good strong end customer demand for our products, which also makes us feel very confident about our 6% to 7% for 2019.

[Rich Newitter, SVB Leerink]

Okay, thank you.

[Operator]

Thank you. Our next question comes from Larry Keusch with Raymond James. Your line is open.

[Larry Keusch, Raymond James]

Good morning everyone. Liam, I want to start with just one bigger-picture question, which is around the strength of your balance sheet as Tom indicated, 3.2x levered. Certainly, gives you, on our math, at least $1 billion of firepower for M&A. So, the question is, I think, most recently, you’ve been sort of talking about, again, a focus on de-leveraging but also potentially able to do some tuck-in M&A. I thought like the door was always opened a little bit more to a larger deal, and so I just wanted to take your temperature on how you’re thinking about M&A activity and potential size?

[Liam Kelly, President and Chief Executive Officer]

Yes. So, you’re absolutely correct, Larry. We’re down to below 3 at the end of the year. Assuming we don’t do an M&A, we will continue to improve our leverage during 2019. The way I look at it, Larry, is that in 2019, we have the capacity to do a scaled transaction if we can find it. The next follow-up of the question normally, Larry, is what’s the environment like. So, the environment is pretty rich at the moment. We had a full M&A team at a big med tech conference recently that was held in San Francisco. We met with well over 60 companies at that. But we do realize, Larry, that we only get credit for the good transactions. So, having the capacity does not mean we’re actually going to do a transaction in ‘19, but we continue to be very active in the M&A world and we continue to look at assets on an ongoing basis. Even in 2018, we didn’t do any scaled transaction, but we still put nearly $100 million of capital to work between MANTA, go-direct and other smaller tuck-in transactions. But to answer your question directly, Larry, yes, we have the capacity to do a scaled transaction if we can find it in 2019.

[Larry Keusch, Raymond James]

Okay, perfect. And then just two quick ones, looks like, at least, relative to my notes, that the timing of RePlas in terms of the BLA submission may have slipped a bit. It looks like now it’s 3Q, I had been under the impression it was more like end of 1Q, early 2Q, so any thoughts around that? And then secondly, maybe for Tom as, again, we think about the 1Q, just trying to think through sort of the comp issues associated with the flu and any thoughts you can provide us there?

[Liam Kelly, President and Chief Executive Officer]

So, yes, I will begin with the RePlas question and you are correct, Larry. In our remarks, we said that the submission would be now in Q3 and you are also correct that we did expect it originally in Q2. And the delays is largely due to the government shutdown. Initially, we didn’t believe that the shutdown would have an impact as we’d already paid the fee. But ironically, given the fact that we’re on up fast-track process, the longer the shutdown went down, the less engagement we were able to get with the agency and that’s the primary reason for the delay. The fact that this was a new process for the FDA and for Teleflex required a lot more over-and-back communication with the agency and that simply didn’t happen as the shutdown went on a little bit longer than we anticipated and that’s what driven the delay, Larry. And Tom, the other part of the question?

[Thomas Powell]

So, you’re asking about the comparability of this year versus last year on the flu, is that the question?

[Larry Keusch, Raymond James]

Correct.

[Thomas Powell]

Yes, we got off to a little bit slower start last year on the flu season or at the end of 2018, I should stay, but it now has moved into full swing flu season and we see a fairly comparable year-over-year comparison.

[Larry Keusch, Raymond James]

Okay terrific. Thank you.

[Operator]

Thank you. Our next question comes from Matthew Mishan with KeyBanc. Your line is open.

[Matthew Mishan, KeyBanc]

Hi good morning and thank you for taking the questions. Hi, Liam or Tom, you had mentioned headwinds from incremental tariffs. What is that assuming? Does it assume that tariffs go 25% on March 1?

[Liam Kelly, President and Chief Executive Officer]

So, Tom, if you don’t mind?

[Thomas Powell]

So, we actually assume that tariffs, yes, do increase, and in fact, increased in 2018 and this is a continuation of those tariffs through 2019. So essentially, we had previously spoken about the level of tariffs as we sat down and reassessed at year-end, we updated the expectation to a greater impact for 2019.

[Matthew Mishan, KeyBanc]

And the investment spending that you’re doing in growth areas, how long do you expect it to be elevated? And how should we think about the phasing of it over 2019?

[Liam Kelly, President and Chief Executive Officer]

Yes. So, some of the investments we’re actually moving forward. So, we had in our LRP anticipated doing some investments within the Japanese market. It’s a good problem to have, quite frankly. We got the Shonin approval much earlier than we anticipated, so we’re actually moving that investment forward for NeoTract. The other investment behind NeoTract is really on the area of the direct-to-consumer campaigns that have been very, very successful in 2018. So, we want to continue those because they are an accelerator for top line growth. The cadence of the investment, they will begin from Q1 in 2019 and remain throughout the year.

[Matthew Mishan, KeyBanc]

Thank you.

[Operator]

Thank you. Our next question comes from Matt Taylor with UBS. Your line is open.

[Matt Taylor, UBS]

Hi good morning thanks for taking the question. So, I wanted to ask about MANTA, two things. First, with the early approval, I guess I was a little surprised that you’re not projecting any material revenue in 2019. Can you talk about why that is? And for the commercial infrastructure build, do you actually need to build a separate team or this going to leverage some of the cardio teams that you already have in place? And just why so long to actually see some uptake given the uptake you’ve had in Europe?

[Liam Kelly, President and Chief Executive Officer]

Yes, thanks, Matt. So, first of all, I want to say we’re very pleased to receive the PMA approval in Q1. A panel review was not required. And as I mentioned, in my prepared remarks, we’ll now commence the limited market release in 2019. I think we’re taking a reasonably cautious approach to the launch. We need to recruit some additional clinical sales heads, but it will be sold through our Interventional sales force. And we are rolling out what has been incredibly successful for us in both our Vascular business unit in our Interventional Urology business unit with the UroLift and now this business unit, which is hunter/farmer model where we will utilize our experienced sales force to begin to convert the account and then we will roll out a clinical and a support function to continue the utilization of the product. We will begin in the 20 sites in the U.S. that were a part of the SAFE MANTA IDE clinical study, and that’s going to be our goal for Q2 and Q3. And maybe we’re just being a little bit conservative, Matt, in our expectations of the revenue, but we think at this stage, it’s better off to be conservative than aggressive until we see the traction of the product in the marketplace. We continue to be very excited about the product, and clinical data for the product is compelling with an over 70% reduction in major vascular complications. And this is significant but according to a JMAT 2017 study, these patients who require 5 additional days in a hospital are twice as likely to die. And the cost of the hospitals, on average, $18,000 as a result. And MANTA continues to have a 96% success rate in hemostasis and a median time to hemostasis reduced to 23 seconds from anything from 6 to 10 minutes. So, the clinical data is compelling. We’re very enthusiastic about the product. Don’t take our comments that we don’t have a lot of revenue baked in to think that we’re not very enthusiastic. I think this in time could be proven to be one of our nicer tuck-in acquisitions in a long time.

[Matt Taylor, UBS]

Thank you. And then just one follow-up on UroLift, I was hoping you might be able to expound on what you mean by making it the standard of care over time. What do you need to do to get from where you are today to a standard of care? And what exactly do you mean by that? I think most people think of that as meaning first-line therapy. You’ve already had 5-year follow-up with a really robust PMA. So, do you need more evidence? Do you need more time? And how will it expand the opportunity when you get to that point?

[Liam Kelly, President and Chief Executive Officer]

Yes, so I think that to make it a standard of care, we need to get an improvement on where we are today. So, let’s take a step back and look at your standard urologist. Your standard urologist will see 75 unique BPH patients every month. On average, the urologists we’ve trained are treating 4 of those patients every month. I think the headway for growth is still a long way and we’re very early in the penetration at this moment in time. So over time, we see getting deeper to that penetration and getting a larger portion of those 75 patients. And once we have a more significant portion, then it would become a front-line therapy and will become the standard of care. Again, Matt, we’re so early on the penetration. We’ve only just trained just over 1,900 urologists of the 12,000 urologists within the United States, so we see significant headroom for future growth. And when we have, let’s call it, 6,000 urologists trained, which are the ones that treat over 80% of the BPH patients, we will be further along the way of making it a standard of care. And once we get more of those 75 patients, it would also see us becoming the standard of care.

[Matt Taylor, UBS]

Great. Thanks a lot.

[Liam Kelly, President and Chief Executive Officer]

Sure. Thanks Matt.

[Operator]

Thank you. Our next question comes from Brian Weinstein with William Blair. Your line is open.

[Brian Weinstein, William Blair]

Hi guys. Thanks for taking the question. Going back to question that was asked a little bit earlier, can you just I know you said this a bunch of different times, but can you just be a little bit more specific and quantify the impact from all the additional spending that you’re pulling forward here, I mean, there’s no I recognize that this was thought about in the long-range plan, but we’re seeing no leverage again from gross margin to operating margin similar to Q4. So, I just kind of want to understand ex some of these investments, kind of what’s the leverage from gross to operating margin might have been in 2019.

[Liam Kelly, President and Chief Executive Officer]

So, I’ll start with the investments and I’ll let Tom then chime in with the leverage. So, in addition to investments just in UroLift and in MANTA, there is about $15 million of additional investments we’re making just in those 2 big buckets in all the areas we spoke about, Brian. On top of that, there’s a $10 million that we had originally contemplated in addition of sales heads that we’re putting in behind UroLift as we continue to drive the top line growth for that product. I’ve always said, not all growth ain’t free, so we’ve got to invest and continue to invest in clinical papers and so on and so forth in order to get there. I’ll let Tom answer the leverage question or the drop-through question if that investment wasn’t there.

[Thomas Powell]

Sure, sure. So, as you know, our operating margin is currently expected to expand by 80 to 130 basis points. The investments that Liam just outlined being $15 million largely relates to the investment for UroLift in Japan as well as the development of the U.S. market for MANTA. If you were to back that out, that operating margin would go from 80 to 130 basis points to 135 to 185 basis points and that doesn’t factor in the point that Liam just made relative to the increase in the sales force for NeoTract. So, it would show a nice margin expansion. I think as Liam mentioned, we are pulling some of those investments forward. And as the businesses begin to grow, obviously we’ll offset that investment and continue to drive revenue and margin expansion.

[Brian Weinstein, William Blair]

Perfect. And then as a follow-up, you do have a couple of businesses that continue to be a little bit weaker than obviously corporate average, but Anesthesia, Surgical, in particular. Can you just talk about opportunities to start to potentially improve growth rates in those businesses they haven’t been covered as much on the call? Thanks.

[Liam Kelly, President and Chief Executive Officer]

Absolutely, Brian. And I will start by saying that in Q4 actually, Surgical, even though it was negative, it was less negative than we had originally anticipated. If you recall on the Q3 earnings call, I mentioned that we expected to grow 8.6% in Q4 and we actually grew 9.1% in Q4. And one of the improvements within there was the Surgical business combined with Vascular OEM and Interventional Urology. But to answer your question regarding those 2 businesses, I think as we go into 2019, Surgical will no longer have that headwind of this business that we made the decision to exit. That could be more profound in the first half of the year versus the second half of the year. Our Anesthesia business grew by 2.1% in this quarter just gone and I think that our Anesthesia business has shown an improvement in 2018 over 2017. So, we continue to be we continue to believe that, that business shows improvement on a year-over-year basis, and actually on a full year basis, it grew by 3.6%, which is about right for a business in the space that it’s in. And don’t forget, Anesthesia is the business unit as we go into 2020 and 2021 where RePlas revenue will be recognized. So, well, that would be a driver for growth within the future. We continue to see growth in that business in our laryngoscope blades. We continue to work with our laryngeal mask portfolio and others. So, I think at 3.6% growth on an annual basis is about right for that business, Brian.

[Brian Weinstein, William Blair]

Okay thank you.

[Operator]

Thank you. Our next question comes from Anthony Petrone with Jefferies. Your line is open.

[Anthony Petrone, Jefferies]

Thanks. Good morning. I have a couple on UroLift and then one on restructuring. Just on UroLift, maybe Liam, the Japan opportunity, can you give a sense of how many urologists is sort of you’re targeting in that market and how pricing settled out there? And then a follow-up on UroLift would be when you look at Japan and UroLift 2 sort of in relation to the $325 million milestone in 2021, it seems like these 2 drivers will make that more achievable. Maybe just some thoughts around that, and then I have a follow-up for Tom? Thanks.

[Liam Kelly, President and Chief Executive Officer]

Okay. So, we estimate that the total Japanese market is probably $2 billion. Initially, we will be targeting what the investment that we’re putting in is to target some of the key opinion leaders, podium-speaking opinion leaders that we will require in order to get the reimbursement. So, we will begin to get urologists to use the product in selected cases now that we have the approval so that they can then write to the authorities identifying this as a priority product and can take it as a priority product for them. Regarding the pricing, the pricing would be determined by the reimbursement. There are approximately 1,900 urologists in the United States trained urologists within the United States. So, the urologists within Japan, we will get that data as we start penetrating within the marketplace. I think that the pricing, as I said, will be determined by the reimbursement. We expect to get the reimbursement in 12 to 18 months after the Shonin. We think that the reimbursement would be quite similar to what we get within the United States, but that will be determined, Anthony, in the time we get that reimbursement. The work that we’re doing now in Japan is to ensure that the authorities realize what an important technology this is. There is a significant connection between the Japanese urology society and the U.S. urology society, which should have.

[Anthony Petrone, Jefferies]

Helpful. And then just a follow-up there, Japan and UroLift 2 in relation to the $325 million milestone in 2021, it seems like this certainly makes that more probable a more probable target, maybe just some thoughts there?

[Liam Kelly, President and Chief Executive Officer]

So, I would say, Anthony, even before this, I thought that was a very probable target. We always and I said it many times that we anticipate and expect a payout of that full milestone. Nothing has changed in my thinking. The revenues that will be generated in Japan will begin in the latter half of 2020 there. And so obviously, that will be ahead of our original call-out, and you are correct, that should help that milestone.

[Anthony Petrone, Jefferies]

Thanks again. And then just restructuring for Tom, new one announced today with the release and maybe just to recap on this seems to be new and not related to the existing programs, but sort of when you wrap all of the programs up, where do you expect the total annualized cost savings to be once all of these are completed and sort of when do you expect that to happen? Thanks.

[Thomas Powell]

Sure. Well, of the programs that are currently outstanding and operational and some of that that we have kicked off frankly have ran their course. But of those two outstanding, we expect total savings ranging from $122 million to $136 million once fully implemented. I would say that in terms of savings that are still remaining to be realized, that’s more in the range of $60 million to $70 million. The program that we launched this morning or initiated recently and announced this morning really is a program that won’t start to realize any savings until 2021 and 2022.

[Liam Kelly, President and Chief Executive Officer]

And Anthony, I apologize, I didn’t answer your question directly. There are approximately 8,000 urologists in Japan.

[Anthony Petrone, Jefferies]

Thank you. Thanks again.

[Operator]

Thank you. Our next question comes from Isaac Ro with Goldman Sachs. Your line is open.

[Isaac Ro, Goldman Sachs]

Hi good morning guys thank you. Another question on UroLift. Specifically, if you could maybe give us a sense of the contribution that you expect from UroLift 2 in revenue this year given your comments around the timing and sales force ramp and I’m curious, on that comment, it seems like you said that the key swing factor, the pace of reps is going to be training for your sales force. Can you just talk a little bit about the key hurdles there? I would think that’s a pretty straightforward thing, that you have good line of sight on, but kind of curious as to whether there’s a reasonable range to think about of how quickly that could play out?

[Liam Kelly, President and Chief Executive Officer]

So, the UroLift 2, we expect to roll that out in the latter half of 2019. There won’t be a revenue pickup from it because the pricing for UroLift 2 is the same as UroLift 1. So, we don’t anticipate to have a big but we wouldn’t get a margin pickup as we begin to roll it out. So, the real play here is to move from the mid-70s to the high 70s in gross margin as we roll out the UroLift 2 and we will begin in the latter half of 2019, this year. Just to answer your question on the training, the training was more one of the reasons that we snowballed the rollout the UroLift 2 was to allow our salespeople to train urologists on the median lobe, which was a new indication we got in 2018. So, we didn’t want to distract our sales force and take away from the growth engine by having them do 2 things at the one time, training on the median lobe and rolling out the UL 2. Now we should have the training on the median lobe completed with most of our urologists by halfway through 2019 and that would free up the resources to roll out the UL 2, as I said, in the latter half of ‘19. I hope that makes it clear.

[Isaac Ro, Goldman Sachs]

Yes, that makes sense. Thank you. And then just a follow-up on the restructuring program, maybe a little bit more of a longer-term question here. I’m wondering if some of the steps that you’re taking here could have benefit to the company for cash performance and maybe to the tax rate? It’d be helpful if you could maybe quantify the extent to which those might play out. Thanks.

[Thomas Powell]

So, the real focus for us is to continue to drive earnings accretion and obviously that’ll play into cash flow as well. With the recent program that we’ve initiated, it’s expecting to deliver savings of $11 million to $14 million on top of the programs that were already outstanding. So, we would see this as a way to kind of solidify, if you will, our free cash flow. It’s not much of a tax play as it is in terms of driving cash flow savings.

[Isaac Ro, Goldman Sachs]

Got it. Thank you guys.

[Operator]

Thank you. Our next question comes from Dave Turkaly with JMP Securities. Your line is open.

[Dave Turkaly, JMP Securities]

Thanks. I just want to make sure I heard that last part, the restructuring, right. So, $60 million to $70 million in pretax savings coming from prior programs, this one, $12 million to $14 million, I just want to confirm that. And then if that’s the case, you’ve talked about your long-term gross margin plan. It would seem that getting north of $60 million would already you could already sort of have identified or put yourself in that range with the program you’ve announced that you technically wouldn’t need any other new ones. But just, I guess, your thoughts on that.

[Thomas Powell]

Well, I think the point you’re making is a valid one. We have good line of sight to our gross margin target of $60 million to $61 million. We’re guiding to within pretty close range of that for this year and that includes the impact of the tariffs. Our hope is that perhaps those tariffs aren’t in place in the future and that can provide another benefit. But yes, we do have very clear line of sight with the activities currently in place to get to that gross margin target.

[Liam Kelly, President and Chief Executive Officer]

I’ll just point out, Dave, that, that is true. Not all the restructuring programs will be completed by 2021.

[Thomas Powell]

That’s a fair point.

[Dave Turkaly, JMP Securities]

Got it. And then manufacturing footprint realignment, over the years, we have seen several of those. I imagine that you may not have as many opportunities to announce more along in that exact bucket or that category. I guess, just any comment on the footprint? And are there still opportunities to consolidate manufacturing facilities?

[Liam Kelly, President and Chief Executive Officer]

So, David, it’s Liam here, we continue to look for always look at our business right across, not only in manufacturing, but in all areas of our business as part of our ongoing process. And the interesting thing about restructuring is and manufacturing alignment is that every time we do a scaled acquisition, there is the potential to identify more opportunities. So it’s a little bit like dealer to direct. We think we are well down the road with our dealer to direct than we do in acquisition like VSI and it identifies other opportunities and we saw that in 2017. So, it’s an ongoing process and it’s something we look at on a fairly regular basis.

[Dave Turkaly, JMP Securities]

Thanks.

[Operator]

Thank you. Our next question comes from Kristen Stewart with Barclays. Your line is open.

[Kristen Stewart, Barclays]

Hey, good morning everybody. Thanks for letting me take a question. If I am doing the math right, if I look at the incremental sales from NeoTract this quarter as well as the incremental sales from VSI this quarter, which were really quite strong, it looks like combined those two products basically contributed a little over 5 percentage points to the top line, which would imply I guess the legacy business was flat? Am I thinking about that correctly in doing the math?

[Liam Kelly, President and Chief Executive Officer]

So our growth within the quarter, our constant currency growth was 9.1%. Our growth in – it was 9.4% into the M&A. When we bridged, we bridged to 3.7% with our run-rate through Q3 and we said UroLift would add 3%, [indiscernible] would add 1.3% and the improvement will be 60 basis points, I think. If you look at what actually happened, UroLift just did modestly better, but the core business actually, the 60 basis points of improvement was better and did better than that 60 basis points improvement. And Kristen, it gets to the point where trying to exact VSI from the core becomes more and more difficult when we go through it. So I don’t want people to think that we’re going to continue to talk about our business in core or non-core, because there is a few moving pieces. You also have the fact that we exited a business in 2018 that had an impact. But our core was very much in line with our expectations within that quarter. And we had a really strong second half of the year with our overall business, and I think we’re in great spot to line up to do our 6% to 7% in 2019.

[Kristen Stewart, Barclays]

Okay. And then just thinking about the pricing dynamics for this year, I think you guys ended up with 70 basis points of favorable price. I believe that includes the benefit of distributor conversion. Should we think about the components of growth next year maybe less relying on that effect of distributor conversion? Do you have still more to go or will the growth kind of still come more from new products?

[Liam Kelly, President and Chief Executive Officer]

Sorry. Go ahead, Kristen. I didn’t mean to talk sorry. So I guess, basically you are correct, most of the – almost all of that pricing came from our go direct. So our pricing in 2018 in core pricing was neutral and you could expect the same in 2019, very neutral pricing overall and we don’t anticipate or we haven’t been seeing any go direct or significant go direct in 2019.

[Kristen Stewart, Barclays]

Thank you very much.

[Liam Kelly, President and Chief Executive Officer]

Yes, I would expect to answer your question on the core business, the core business was approximately 3.7% in the second half of ‘18 just to reinforce my point on the improvement in the core business as we went through the year.

[Kristen Stewart, Barclays]

Okay. I will take that offline.

[Operator]

Thank you. Our next question comes from Mike Matson with Needham. Your line is open.

[Mike Matson, Needham]

Hi, thanks for squeezing me in. I guess just wanted to go back to UroLift in Japan, can you just talk about the market there for treating BPH, is it similar to the U.S., in other words, are there same types of laser products there and etcetera? Thanks.

[Liam Kelly, President and Chief Executive Officer]

Yes, Mike, it’s the second largest medical device market in the world outside the U.S. and they are very, very developed. So they would have all the technologies that we would have in the United States. They use similar therapies. They actually do more surgeries than we traditionally do within the United States and the other anomaly within the Japanese culture, which I think will help us, is that the whole area of sexual dysfunction is probably more highlighted than it would be in a Western culture. So I think that, that will be something that we will be promoting with our urology partners and the urologists in Japan because men can stay sexually active much later in life than they traditionally do in the Western world.

[Mike Matson, Needham]

Okay, thanks. And then just with the RePlas being pushed off by a quarter, you mentioned this post-approval efficacy trial and other things you have to do before you can really get in to kind of a full launch, because that implied that there is really no – you are not expecting any meaningful revenue from that this year. And then once you start selling it particularly to the military is this going to be kind of like a fairly lumpy where they come in and just order a bunch or is it going to be more of a kind of a gradual ramp in the sales? Thanks.

[Liam Kelly, President and Chief Executive Officer]

Yes, Mike, you are correct we don’t have revenue expectation for RePlas in 2019. The post-market study will not prohibit us from selling the products. The FDA just mandated that we do that study post-launch or we will still be in a launch phase. Regarding your question on the military and the lumpiness of it, we do not expect the military to come in and place one blanket order. We expect this to be a gradual adoption of this technology. We believe that they will begin in the Special Forces within [indiscernible] there is always some activity and this product has incredible relevance in the back of the field where soldiers would require plasma and the current plasma offerings are not applicable in that type of an environment, because you either need to follow them ordering last year. So I would believe we would see a modest pickup beginning there and then ramp. Then once it’s established, it can be somewhat lumpy, to your expression, because they will fill out the kit bags. Now we will try to manage the timing of that so they’re not filling out the kickbacks for the Air Force, the Navy, the Marines and the military all in the one time. So that should help smooth it out. So we have a reasonable amount of our EZ-IO Vidacare business that currently goes through the military and we have a good call point into that area of business.

[Mike Matson, Needham]

Okay, great. Thank you.

[Operator]

Thank you. [Operator Instructions] Our next question is a follow-up from Larry Keusch with Raymond James. Your line is open.

[Larry Keusch, Raymond James]

Okay, thanks. Just two quick ones guys. Just on the APAC region, so growth was 5.5% constant currency in the fourth quarter, 6.7% in the third quarter. We have obviously now anniversaried the go direct over there in China. So just wanted to get some sense of what’s sort of the right way to think about the growth and I recognize that UroLift at some point will influence that? But prior to that launch, what’s the right way to think about APAC and where can that go? And then the other quick question was just on the free cash flow, if I remember correctly, Tom, I think you guys are looking for $1.5 billion in free cash flow generation over the course of the LRP and just wanted to see how you are thinking about that as we come out of 2018?

[Liam Kelly, President and Chief Executive Officer]

Okay, Larry, I will take APAC first. So APAC, you are right, grew quarter four, 5.5%. It actually grew by 6.6% on a year basis in 2018. What I expect from APAC in ‘19 and in the longer horizon is that it will grow in the mid to upper single-digits. We continue to have momentum as we have gone through the year. China grew by I think 5.2% in the fourth quarter, but it was up against a really tough comparator. It was almost 10.5%, 11% in the prior Q4. We have anniversaried the go-direct and we continue to build momentum in China. But along with that, we will then register the UroLift in other geographies. We have identified three geographies within APAC that we are working to register the UroLift product and that’s above and beyond the Shonin that we received for Japan. We are also rolling out some initiatives around clinical education in different geographies within Asia-Pac and we believe that will be an accelerator as well. So we feel, I mean, China – our Japan – our Asia-Pac is one of our key drivers with Interventional Access and with Interventional Urology. And again, it goes back to the old Teleflex philosophy, not all growth is equal. Those three areas of growth are all accretive to our longer term gross margin objectives. Then free cash flow?

[Thomas Powell]

Sure. So Larry, just on the free cash flow, to your point, yes, we had guided to approximately $1.5 billion of free cash flow over the timeframe 2019 to 2021 and we are still on track towards that from an operating standpoint. I will say there are two kind of non-operating impacts that have come up since then. One is that the performance from the acquisitions is outperforming the initial accounting estimates if you will and so the extent we pay out more in contingent consideration such as the prior discussion we had on NeoTract that would impact free cash flow as a reduction in cash flow from operations. Additionally, the restructuring program that we just announced was not contemplated in that guidance, but that isn’t all that meaningful from a longer term. But if you were to adjust for the contingent consideration payments, yes, we are still on track for that $1.5 billion free cash flow target.

[Larry Keusch, Raymond James]

Okay, terrific. Thank you.

[Thomas Powell]

Yes.

[Operator]

Thank you. Our next question is a follow-up from Kristen Stewart with Barclays. Your line is open.

[Kristen Stewart, Barclays]

Hey, thanks for taking the follow-up. Just real quickly, I think that you guys – well, I heard you guys reiterate the long range plan. I am just wondering if the restructuring programs that you announced today, which said they start realizing savings in 2021, which I would assume are pretty small how that just kind of plays into your confidence and the operating margin performance maybe getting to the lower end or the higher end just given some of the pacings of the investments as well that you are making in the business? And then also the tax rate, that came in a little bit below where I was anticipating this year how do you still feel about the longer term tax guidance that’s out there?

[Thomas Powell]

Sure. So as we just think about the tax rate, I think we are still of the expectation that the tax rate will continue to move upwards in subsequent years. That’s largely due to a shift in mix where we are expecting more and more income to be generated in the U.S. And that tax rate, although reduced in the recent Tax Cuts and Jobs Act, is still higher than our average. Now the drivers of that increase in the U.S. income is businesses such as the UroLift products as well as catheter solutions that are growing have above average margins and the growth is predominantly in the U.S. So we do still expect the tax rate to move up as time progresses. I will say that our assessment of the Tax Cuts and Jobs Act has been a little bit more favorable than our initial interpretation of the act and so we are seeing a little bit of favorability from that. So I would say the two of them fairly well wash out over the longer term, so I would right now assume the tax rate is still moving in line with the longer term projection. And then the first focus area maybe just help refine the...

[Liam Kelly, President and Chief Executive Officer]

The 2020 restructuring program, so I think the inputs are the – this restructuring program has a modest impact in 2021, Kristen. So that’s going to – it’s going to be beyond that where we will see the benefit of this new restructuring program.

[Kristen Stewart, Barclays]

Okay. So it’s not like there should be any significant level of upside or greater confidence in the higher end of the operating margin LRP just given that it’s going to be more modest?

[Liam Kelly, President and Chief Executive Officer]

I think as Tom said, the upside on the LRP is going to come from improvement in mix more so than coming from this latest restructuring program. I think we continue to be very bullish about things like UroLift, very bullish about VSI, very bullish about MANTA, very bullish about RePlas and very bullish about Asia Pacific and Vidacare. And all of those, if they perform better, will deliver significant mix that could be a potential for upside in our LRP on the gross and operating margin.

[Thomas Powell]

Yes. And just to think about the kind of the cadence of those savings, I had mentioned that of the $122 million to $136 million in total program savings and just to clarify that is inclusive of the program just announced today. So of that savings, about $60 million to $70 million is still outstanding. And through the timeframe 2021, we expect to realize about half of that $60 million to $70 million. So as you can see, we are creating some benefit to extend beyond the LRP timeframe.

[Kristen Stewart, Barclays]

Okay, perfect. Thanks very much guys.

[Thomas Powell]

Thank you.

[Operator]

Thank you. I am showing no further questions at this time. I’d like to turn the call back over to Jake Elguicze for closing remarks.

[Jake Elguicze, Treasurer and Vice President, Investor Relations]

Thanks, operator and thank you everyone for joining us on the call today. This concludes the Teleflex Incorporated fourth quarter 2018 earnings conference call.

[Operator]

Ladies and gentlemen, this concludes today’s conference. Thanks for your participation. Have a wonderful day.