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 laws. Investors are cautioned that any 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 uncertainty disclosure 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 statements 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 measures during this discussion. While these figures are not a substitute for GAAP measures, management uses these figures 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 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 release posted to the company's website. With these required announcements completed, I will now turn the call over to Kurt Hartman, ConMed's President, Chief Executive Officer, and Chairman of the Board for opening remarks. Mr. Hartman?

Thank you, Michelle. Good afternoon and thank you for joining us for ConMed's second quarter 2020 earnings call. With me on the call is Todd Garner, Executive Vice President and Chief Financial Officer. Today we will walk you through our second quarter results and share with you our thoughts on the current operating environment. Our goal is to be as transparent as possible while still recognizing the uncertainty that exists across the global markets. We will then open the call to your questions. Turning to our results, total sales for the second quarter were $157.8 million, representing a year-over-year decrease of 33.8% as reported and a decrease of 32.6% in constant currency. Our global orthopedics business represented 38.3% of sales in the quarter and saw the declines that began in March continuing into April, but the business exited May and June with improving sequential trends. Global general surgery demonstrated more resilience in orthopedics while also experiencing the same overall trend of sequential improvement throughout the quarter. The enthusiasm I noted for the AirSeal and Buffalo Filter products during our first quarter call continued to accelerate throughout the second quarter, driven by enhanced clinical education, upgraded surgical safety protocols, and increasing access to medical facilities that gave our sales force the opportunity to demonstrate the technology. As we have discussed in the past, we believe that awareness of these products in the clinical community continues to increase. We expect this improved awareness to ultimately drive longer-term, sustainable business outcomes and believe that our second quarter results reflect the early benefit of this trend. I'd now like to update you on the continuing actions we are taking as a company as we continue to address and operate in the COVID-19 environment. Consistent with our comments on the Q1 call, our focus has remained on three priorities. They are the safety and well-being of our workforce and their families, the financial security of the company, and finally, operating and executing in the new environment. I want to take a moment to address the health and safety of our employees. As of July 1st, ConMed had recorded 24 confirmed COVID-19 cases across our global workforce. The majority of these cases have cleared with a small number remaining in quarantine and recovery. We've had 78 employees elect voluntary separation from the company given high-risk considerations, and we have 82 currently on paid leave as they fall into defined high-risk categories per the local geographic guidance. As I noted at the end of the first quarter call, ConMed remains very much at work, and employee safety and well-being remain our top priority. As it relates to the financial security of the company, The Bank Debt Covenant Amendment, strong financial discipline, and improving outcomes throughout the second quarter have us positioned well as we enter the second half of the year. We are mindful of market uncertainty and the possibility of further slowdowns, but our business has demonstrated resilience and remains in a position to serve our customers. While we feel our efforts have us well positioned for the second half of the year and beyond, we understand that the nature of this virus will cast uncertainty across the markets on a regional basis, as governments and health care providers adjust to the changing COVID-19 caseloads. Surgical procedure volumes in our specialties did improve over the quarter. Based on our visibility into Q3, we're optimistic this trend will continue, but we remain cautious given the regional impact of COVID caseloads on surgical volumes. Further out, we believe higher unemployment rates may also impact surgical volumes, similar to what we saw in the 2009 through 2011 period. In closing, I'm proud of the ConMed team and the progress we made during the quarter. We leveraged our time for training and education, made certain our sales teams were available when customers requested them, and advanced our innovation efforts with the renewed focus. I'll now turn the call over to Todd, who will provide a more detailed analysis of our financial performance. Todd? Thank you, Kurt.

All sales growth numbers I referenced today will be given in constant currency. The reconciliation to GAAP numbers is included in our press releases. We did have one less selling day in Q2 compared to the prior year quarter, the impact of which is immaterial given the broader dynamics of this unprecedented situation. For the second quarter of 2020, our total sales decreased 32.6 percent. Revenue steadily improved from the lows of April through each of the three months in the quarter, and that trend of improvement has continued into July. Our Q2 domestic sales decreased 32.2% versus the prior year quarter. Our international sales decreased 33.0% for the full quarter compared to the prior year. Geographies around the globe are performing at varying levels as the virus impact and resulting government responses are not uniform. As expected, our Asia region saw the smallest declines during the quarter. The US and Europe are rebounding following the low point in April, and Latin America did not see much of a rebound at all in Q2. Worldwide orthopedics revenue declined 46.2% in the second quarter. In the U.S., orthopedic sales decreased 50.6%, and internationally, orthopedics decreased 43.5%. Again, the trend of improvement has been on a good slope, especially on the single-use side. However, we expect continued pressure on capital sales for the remainder of the year. Total worldwide general surgery revenue decreased 19.8% in the second quarter. U.S. general surgery revenue decreased 22.9%. Internationally, general surgery revenue decreased 12.5%, with our European region actually posting growth in the second quarter in general surgery. AirSeal and Buffalo Filter are seeing incremental demand as hospitals are increasingly looking for solutions to improve operating room safety. Both of these product lines grew on a year-over-year basis globally, both in the second quarter and year-to-date, and have seen sales continue to grow at a rate that is well ahead of the growth of the underlying procedures they support. Now let's move to the expense side of the income statement. To start, I want to note that we have made the decision not to exclude COVID-related expenses from our operating results in general, as it would be impossible to present an adjusted P&L that accounted for the specific impact of COVID. These COVID-related expenses include additional manufacturing costs, including enhanced hygiene and social distancing efforts within our facilities, increased systems costs to support remote work, and commission support for our sales teams. We have kept to our normal process and principles for excluding special items, which include product rationalization costs, charges related to acquisitions and integrations, restructurings and manufacturing consolidations, debt refinancing costs, amortization of intangible assets, and amortization of deferred financing fees and debt discount net of tax. We were also faced with the decision to make this quarter on the treatment of accounting rule ASC 330-10-30, which deals with the underutilization of fixed plant overhead costs when a sudden drop in production has occurred. This rule requires a significant and abnormal drop in production to be expensed in the current period rather than being recognized when the inventory is sold. Because this rule required abnormal treatment, We expense this charge in Q2 rather than recognizing these costs in Q3 as we normally would. Accordingly, we have decided to exclude that charge from our adjusted Q2 results. This charge relates only to the portion of fixed overhead costs not absorbed as a result of lower production and does not include any incremental costs related to COVID-19. A reconciliation to GAAP numbers is included in our press release. Adjusted gross margin for the second quarter was 53.3%, a decrease of 200 basis points from the prior year quarter due to increased costs from COVID-19. We remain pleased with the underlying margin performance and believe we can return to our improving margin trend when volumes approach prior year levels. Research and development expense for the second quarter was 5.5% of total sales, a 50 basis point increase from the prior year quarter on lower sales. Second quarter SG&A expenses on an adjusted basis were $72.9 million. That represents a decrease of 20.4% from Q2 of 2019, even after the increases to the sales force that we made in Q4 2019 and Q1 of this year. This demonstrates the significant cost reductions we implemented due to the pandemic. Due to these strong expense controls, we did produce positive operating income in Q2 despite the severe impact from the pandemic. Interest expense in Q2 2020 was $8.0 million on an adjusted basis. Because net income was a small negative number for the quarter, the adjusted effective tax rate for the quarter is not comparable to prior periods. Second quarter gap net loss totaled $27.4 million or 96 cents per diluted share compared to a reported net income of $5.7 million or 19 cents per diluted share a year ago. Excluding the impact of special items discussed earlier, we reported an adjusted net loss of $1.9 million compared to adjusted net income of $16.4 million in the second quarter of 2019. Our second quarter adjusted diluted net earnings per share was a loss of 7 cents this quarter versus earnings of 56 cents in the prior year period. Turning to the balance sheet, our cash balance at the end of the quarter was $35.0 million compared to $24.3 million as of March 31st, 2020. Accounts receivable days as of June 30th were 82 days compared to 68 days a year ago, which was better than we thought it might be three months ago. Inventory days at quarter end were 184 compared to 145 days a year ago, The increase in days is fully due to the drop in sales volume. We've done a good job controlling inventory levels during this unprecedented situation as our dollar balance is only $2.9 million higher than last June and only $1.2 million higher than March of this year. Long-term debt at the end of the quarter was $790 million versus $773 million as of March 31st this year. Our leverage ratio at June 30th, 2020 was 5.4 times, still lower than our original covenant. We are performing very favorably to our amended agreement with the banks. Our fixed charge coverage is 3.2 versus our agreement of 2.0, and our liquidity is $359 million at June 30th compared to our minimum agreement of $135 million. Cash flow provided from operations for the quarter was $5.5 million compared to $21.6 million in the second quarter of 2019. Capital expenditures in the second quarter were $3.8 million compared to $5.0 million in the prior year quarter. So, we are pleased that cash flow and profitability are trending well from our lows in April. We are continuing to be prudent with our spending while prioritizing health and safety and serving our customers in this unprecedented environment while still continuing to invest in the development of new products. We believe we are poised to continue to grow faster than our markets as procedures return to normal levels. Lastly, given the resurgence of the COVID-19 virus in recent weeks, we do not see enough macro stability to provide you with financial guidance at this time. However, as I mentioned earlier in my remarks, I can tell you that we are pleased with the improving monthly trends we have seen since the lows we experienced in April. Additionally, we are encouraged that July sales have continued that month-over-month positive trajectory. With that, we'd like to open the call to your questions, and I'll hand it back to Michelle.