CONMED Corporation

Good afternoon, everyone. Before the conference call begins, let me remind you that during this call, management will be making comments and statements regarding its financial outlook and its plans and objectives, which represent forward-looking statements that involve risks and uncertainties, as those terms are defined under the federal securities law. Investors are cautioned that, as such, forward-looking statements are not guarantees of future events, performance, or results, and the company's actual results may differ materially from its current expectations. Please refer to the risk and other uncertainties disclosed under forward-looking information in today's press release, as well as the company's SEC filings for more details on the risk and uncertainties that may cause actual results to differ materially. The company disclaims any obligation to update any forward-looking statement that may be discussed during this call except as may be required by applicable law. You will also hear management refer to certain non-GAAP adjusted measurements during this discussion. While these figures are not a substitute for GAAP measurements, management uses these filings to aid in monitoring the company's ongoing financial performance from quarter to quarter and year to year on a regular basis and for benchmarking against other medical technology companies. Adjusted net income and adjusted earnings per share measure the income of the company's excluding credits or charges that are considered by the company to be special or outside of its normal ongoing operations. These adjusting items are specified in the reconciliation supporting the company's earnings released posted to the company's website. With these required announcements completed, I will now turn the call over to Kurt Hartman, ConMed's President and Chief Executive Officer, for opening remarks. Mr. Hartman.

Thank you, Chris. Good afternoon, and thank you for joining us for ConMed's first quarter 2020 earnings call. With me on the call is Todd Garner, Executive Vice President and Chief Financial Officer. As you may expect, our call today will be different versus a typical quarterly update. We will walk you through our first quarter results, give you an overview of the company's pandemic response, and share with you some early data on our April results. Todd and I will split this work appropriately with the goal that you will come away better informed about our business while still recognizing the high level of uncertainty that exists across the global markets. We'll then open the call to your questions. Turning to our results, total sales for the first quarter were $214 million, representing a year-over-year decrease of 2%, as reported, and a decrease of 70 basis points in constant currency. Organic sales in the quarter, which exclude the impact of Buffalo Filter, declined 3.6% in constant currency. Our sales were clearly impacted by the COVID-19 pandemic, first hitting our China business in January, then spreading to our Asian markets. In March, we began to see impacts in Italy, fought by the rest of Europe, and the Americas as the quarters concluded. While the quarter was clearly challenged by the pandemic-driven procedure deferrals, we are pleased to note that two of our key growth platform technologies, AirSeal and Buffalo Filter, benefited from increased awareness as filtration and smoke capture technologies during this period. The financial benefits of these clinical advantages were minimal during the quarter, but we expect a growing awareness and adoption to drive more meaningful benefit in future periods. While we do not expect this increased demand to make up for the total COVID-related pressure across the other parts of the business, we feel the clinical community awareness is increasing, which we see as a longer-term, sustainable outcome. Finally, I'm pleased to report that we completed our previously discussed Salesforce transition efforts within orthopedics. As of the quarter end, all Salesforce transitions have been completed across the company. From an earnings perspective during the first quarter, our GAAP net income totaled $5.9 million. This compares to net income of $1 million in the first quarter of 2019. Excluding special items that affected comparability, our adjusted net income of $15.1 15.1 million decreased 8.6% year-over-year, and our adjusted diluted net earnings per share of 51 cents decreased 10.5% year-over-year. I'd now like to discuss the approach we have taken as a company to help mitigate the impacts of the COVID-19 pandemic. Overall, I'm very proud of our team's rapid crisis management response and our continuing efforts during a period of great uncertainty. Our teams responded exceptionally well, first regionally and then globally, And on that point, our response has been guided by three priorities. They are, first, the safety and well-being of our workforce, their families, and our customers. Second, the financial security of the company. And finally, preparing the company for the future. As it relates to the safety and well-being, our efforts have been comprehensive and based on information from the Centers for Disease Control and the World Health Organization, as well as local regional recommendations. We have also consulted with global infection prevention specialists and external consultants to ensure we are taking appropriate precautions to ensure employee safety while also reducing both exposure to and spread of this virus. Since early March, my direct reports have met daily. The opening section of our meeting is focused on monitoring the status of every single employee in our organization. We're extremely mindful of the health and safety of each individual and their families. As of Monday, April 27th, ConMed has recorded confirmed COVID cases across our workforce of eight. Four of those have cleared and four remain in quarantine. Further, 120 employees have isolated per guidelines of which 86 have cleared quarantine and 34 remain in quarantine. We have 92 employees on paid leave as they fall in defined high risk categories. And we have 30 employees on requested unpaid leave to deal with other family situations. Overall, our total company absenteeism has been running at 1% or lower. In summary, ConMed remains very much at work and is using our time wisely to prepare for the future. Our production and distribution employees continue to voluntarily report to work in high numbers, and we have taken many precautionary measures to ensure the safety of these employees. All reporting employees pass through temperature check stations before entering the facilities. Additionally, we have separated the work areas within our factories to avoid any possibility of cross-contamination, enhanced our cleaning protocols, and provided face masks and face shields to employees. For employees working in our plants and distribution centers, we have provided supplemental compensation to recognize these efforts in a trying time. For our office-based employees, we successfully moved to a fully remote workforce. We had previously implemented global technology to make this possible, and our teams completed this transition within a 48-hour period early in the month of March. With respect to our sales teams, we have used the time to greatly increase our training opportunities while continuing to support our customers. We've provided a financial backstop to our fully commissioned sales force, ensuring that they are able to focus on customer support and training and education in preparation for the eventual opening of markets. As it relates to the financial security of the company, you all know we've completed an amendment to our debt covenants as previously announced. And I want to thank our banking partners for their support and for the efficient process in completing that amendment. We've eliminated our temporary workforce, which made up approximately 5 percent of our employee base, and we've eliminated all overtime. We've dramatically reduced all discretionary spend and focused our resources on the truly essential priorities. We've focused our production resources on building our top priority sales items while ensuring we have the appropriate safety stocks across our portfolio. And we are also working with our suppliers on a global basis to ensure that we have adequate capacity in our supply chain. And finally, we've created a global logistics management team to ensure the uninterrupted supply of our product to customers as well as our receipt of critical items from our suppliers. As everyone can appreciate, global logistics have been constrained, and staying ahead of this is a full-time job. Our team has done exceptionally well in that regard. And finally, in order to prepare for the future, we've continued to advance our top priority innovation projects. Innovation still matters greatly in our markets. We've provided our sales teams and customers with intense online training content, We've ensured our supply chains are working to handle the expected demand for our top products when surgical procedures return. And importantly, as previously noted, we secured the amendment to our credit facility. Overall, we feel our efforts have positioned us well to cross through the second quarter, which we believe will be the market low point. We do anticipate some return to elective procedures in May, while expecting any surgical restart to be more localized and regional, and driven by many factors, including COVID caseloads, surgical staffing levels, PPE supply, unemployment rates, local regulations, and patient acceptance of the site of care. While the quarter was not the operating environment that any of us anticipated as we exited 2019, we are still celebrating ConMed's 50th anniversary and our move to the NYSE, which occurred simultaneously on February 10th. Further, our focus on people, products, and profitability remains while recognizing that we are making the appropriate adjustments given the current climate. I'll now turn the call over to Todd, who will provide a more detailed analysis of our financial performance and discuss the credit facility amendment and offer an early look at our April results. Todd? Thank you, Kurt.

As we go through our results, please note that I will not be making an attempt to quantify the impact of COVID-19 on our Q1 financials. because it would simply be impossible to do so accurately. I'm going to walk you through the results as objective facts without trying to adjust for the impact of COVID-19. Later on the call, I will be providing some insight into our revenue for the month of April, as we believe this is the most relevant information we can provide to quantify the impact of the deferral of surgical procedures on our global business. By the way, we did have one extra selling day in Q1 compared to the prior year quarter, the impact of which is immaterial given the broader dynamics of this unprecedented situation. As Kurt said, first quarter sales decreased 2.0% on a reported basis and decreased 0.7% in constant currency. We passed the anniversary of the Buffalo filter acquisition on February 11th. We generated approximately $6.2 million in of Buffalo Filter sales between January 1, 2020, and February 11, 2020. Excluding this contribution, our sales declined 3.6 percent on an organic basis in Q1. On a pro forma basis, if we had owned Buffalo Filter in the full prior year quarter, our total Q1 2020 revenue would have declined by 3.0 percent. Now that we have anniversary of the acquisition, going forward, competitive purposes, we will not be discussing specific growth rates in specific product lines, as is our standing policy. All remaining sales growth numbers I referenced today will be given in constant currency. The reconciliation to gap numbers is included in our press release. For the first quarter of 2020, our domestic sales increased 1.6% versus the prior year quarter, while international sales decreased 3.4%. Worldwide orthopedics revenue declined 10.7% in the first quarter. Domestically, orthopedics decreased 18.2%, and internationally, orthopedic sales decreased 5.6%. Total worldwide general surgery revenue increased 10.0% in the first quarter, with total domestic general surgery revenue growing 14%, and internationally, general surgery grew 1.3%. Now let's move to the expense side of the income statement. For comparative purposes, I will discuss the P&L performance excluding special items, which include charges related to acquisitions and integrations, manufacturing consolidations, debt refinancing costs, amortization of intangible assets, and amortization of deferred financing fees and debt discount net of tax. A reconciliation to GAAP numbers is included in our press release. As you can appreciate, Our expense metrics as a percentage of sales were impacted unfavorably by the sudden decrease in sales we saw during the month of March. Adjusted gross margin for the first quarter was 56.9 percent, an increase of 100 basis points from the prior year quarter. This was better than we expected and was trending above expectations all quarter long. Research and development expense for the first quarter was 4.7 percent of total sales, a 10 basis point reduction from the prior year quarter. First quarter SG&A expenses on an adjusted basis were 41.2% of total sales. That is 170 basis points higher than the prior year quarter. Interest expense in Q1 2020 was $6.5 million. The adjusted effective tax rate in the first quarter was 18.2% compared to 15.0% in the prior year period. The low rate was due to the resolution of an outstanding audit as well as the excess tax benefit from equity plans. First quarter gap net income totaled $5.9 million or 20 cents per diluted share compared to a reported net income of $1.0 million or 4 cents per diluted share a year ago. Including the impact of special items discussed earlier, our first quarter adjusted diluted net earnings per share were 51 cents versus 57 cents in the prior year period. Turning to the balance sheet, our cash balance at the end of the quarter was $24.3 million, compared to $25.9 million as of December 31, 2019. Accounts receivable days as of March 31 were 70 days, compared to 69 days a year ago. Inventory days at quarter end were 166, compared to 155 days a year ago. The increase is due to the sudden sales slowdown late in the quarter. Long-term debt at the end of the quarter was $773 million versus $755 million at year end. Our leverage ratio at March 31, 2020 was 4.5%. Cash flow provided by operations for the quarter was $3.7 million compared to cash flow used in operations of $3.9 million in the first quarter of 2019. Capital expenditures in the first quarter were $2.8 million compared to $4.0 million in the prior year quarter. As you can see, we were operating well within our debt covenants at the end of the first quarter. However, since surgical procedures have been deferred in a majority of our geographies, we expect a significant decrease to EBITDA beginning in Q2 2020. As you probably saw last week, we have already reached an agreement with our bank group that provides a temporary suspension of our debt leverage covenants until June of 2021, in exchange for revised liquidity commitments and higher interest rates. We believe this amendment provides us the flexibility to strategically navigate this unprecedented situation and return to a position of relative strength in the markets we serve once this pandemic is over. As Kurt mentioned earlier, on the expense side, we have dramatically reduced all discretionary spending. We have suspended or cut nearly all external spending in order to maintain our full-time employee base and continued progress of critical R&D projects. Our focus is to maintain the improved infrastructure we have built so that we can continue to stay close to our customers and be ready to provide them with innovative solutions when they are ready to return to treating patients. Turning to guidance. As you know, we withdrew our guidance back in March due to the lack of visibility related to the pandemic. As we don't think it's possible to accurately assess the impact on our business over the next several quarters, we will not be providing forward guidance at this time. In lieu of guidance, in order to help you understand the impact of the pandemic on our business, I will instead walk you through how our business has trended to this point in the month of April. We expect worldwide revenue to be down between 50% and 55% in the month of April, which includes orthopedics down 65% and general surgery down 40%. We expect the U.S. to be down 60% and the rest of the Americas to be down about 70%. In Europe, Middle East, and Africa, we expect the total business to be down approximately 45%. Within that broad geography, there are significant differences by country. For example, in Spain, Italy, and France, we are seeing reductions between 50 and 65%. However, Germany is only down about 10%, and the U.K. and the Nordics are down around 30%. Again, these are only April sales. Our Asian Pacific category includes Australia, which is down around 30%. Our other Asian countries are returning to growth in April after declining in the first quarter. We are filtering these orders for true customer demand, trying to prevent stockpiling or building distributor inventory. Because it isn't clear yet whether the Asian sales growth in April reflects true and customer demand, and in order to not unintentionally mislead you, we will not be providing those specific April growth rates today. We hope that this helps you better understand what is going on around the world in the markets we serve. And with that, we'd like to open the call to your questions, and I'll hand it back to Chris.