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.

Ladies and gentlemen, to ask a question, you need to press star then 1 on your telephone. To withdraw your question, press the pound key. We ask that you limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster. Our first question comes from Kristen Stewart of Barclays. Your line is open.

Hey, guys. Thanks for taking my question. a good quarter, putting that into context, obviously, with COVID and the environment. I was wondering if you could just provide us with a little bit more color maybe on the monthly sequential trends to the extent you're willing to do so, and then maybe just some color on July, if you're willing to just give us a little context on what the exit rate might be in July, whether or not sales were or down or up on a year-over-year basis in July, I think that would be helpful. And then I have a follow-up.

Sure, Kristen. Yeah, so back in April, when we were at the height of kind of uncertainty with this new virus, we were one of the early ones to report. And so we felt it would be helpful to the entire space to provide April estimates with only a couple of days left in the month, right? So we did that. on our last call. Obviously, that's not our normal practice to talk about monthly sales or the month into the quarter, right? So a quarter later, as I'm sure you've seen, you've been part of, there's been a plethora of surveys and reports, and we actually almost all get weekly updates on what surgical procedures are doing, And so now we just don't see the need to vary from the normal practice of providing quarterly results. We did, we've provided on the call today color on the months, which I think is helpful and instructive, but we're not going to be disclosing the sales by month other than to tell you that we've been on a good trajectory and July has continued that trajectory. And, you know, because we did give the April numbers you know, with the quarter results, you can kind of see what the May and June were very good.

Okay. Would you be willing to just kind of, I guess, give a little bit more color then on just the commentary around AirSeal and Buffalo Filter? Just maybe talk through what you're seeing there in terms of the level of demand. Is it – I know you said it was accelerating, but any sort of – commentary there just relative to the run rate kind of coming in pre-COVID, how that's tracking as you're kind of looking at trends now?

Sure. You know, those were two of our fastest growing product lines pre-COVID. And frankly, you know, with the dramatic drop in procedures, I didn't expect those to grow in Q2, but they both did. They both put up positive global growth in Q2, which I think is really telling for the strong demand for those two growth drivers of ours. Kurt, I don't know if you wanted to mention anything.

I would just kind of restate the global awareness of the products, the utilization of the products in those in those cases where there is concern for surgical safety and exposure to staff. As that message has gone out and people have been further educated on the technology, as I mentioned, sales reps getting back in in front of customers with the technology, demonstrating the technology, that cadence from start to finish has accelerated, and it's not isolated to one geographic region. I think Todd noted in his script that Europe actually grew in general surgery in the quarter. So that's a pretty strong read-through to the strength of Buffalo Filter and AirSeal in the quarter in Europe. And we had good acceptance, good traction in the U.S. market and other markets, candidly. So we're excited by what both of those platforms were doing before COVID. We remain encouraged. And as I said on the first quarter call, we think it's actually pulling the market share gain forward a little bit because the awareness is just much more heightened because of the disease state COVID-19.

Thanks very much.

Thanks, Kristen.

Our next question comes from Robbie Marcus of J.P. Morgan. Your line is open.

Great. Thanks for taking the question. I was hoping you could spend a minute on your comments around capital equipment. You know, I was actually surprised that it did all things considered better than I thought it would in the quarter by a pretty good deal. I know a lot of your products are not high ASP capital products, so I was hoping you could just give us a little more flavor for what you're seeing in in the C-suites and the willingness to spend capital on capital products here, especially those with maybe lower price tags and, and, you know, some, some are revenue generating for you and others are non-revenue generating for you. If there's any distinction at the hospital level. Thanks.

Sure. So, yeah, Robbie, I'll, I'll give it a try. I, I agree with you. I think it wasn't as bad as, as I feared it might be. Having said that, I think it was down 37% or between 37% and 38%. So it's still a pretty good decrease. And I think that our commentary would be that while we are still seeing customers buy new capital, and you made a great point on the fact that ours is on the lower end of the dollar amount, right? That is, as we see the single use and the disposable revenue stream on a pretty steep rebound, we remain cautious on the capital side. So even though it did better than I think a lot of us thought it might do in Q2, I would still stay cautious through the rest of this year and really until the hospitals have some stability and predictability on their future economic state, right? So... So we remain cautious for capital going forward.

And, Robbie, I would just add one item to that, and I think you hit the nail on the head. The band with which we sell capital is not the super big-ticket items. I don't think we've heard a statement from customers that capital is shut off. I think what we are hearing from customers is now is not the time for us to be evaluating capital technology and and we've got a lot of other priorities right now, and we need to get back into surgery. We need to get revenue-generating procedures back into the facilities. Let's worry about that right now. So we are not pushing hard on capital. It's just not what customers want to hear from us right now.

Great. And if I could... think two in my follow-up here. One, are you seeing any impact, you know, a rate of change to pricing around the world? And then also, Todd, on your OPEX, it's actually a pretty impressive cut, you know, not huge dollar numbers, but still better than what we've seen from some of the larger cap peers. How much of that is now in the baseline of lower spending, and how much is deferred until later this year? Thanks.

Sure. On the pricing side, no real change, Robbie. We still live kind of in between that 1% and 1.5% headwind world, and we haven't really seen that move in the throes of COVID. And, yeah, I mean, on the OPEX, you know, we've tried to be very strategic. We've prioritized being there ready to serve our customers and And so everything customer-facing and customer servicing, we've tried to maintain and make sure that we're nimble and responsive. And anything else, you know, we've taken a hard look at. And so, you know, when you talk about baseline, I know you guys, it's part of your job to model. It's part of my job to model. The hard part is as the volume comes back and as we return closer to normal, obviously those expenses will go that direction as well. And so I would tell you that if revenue stayed at the Q2 level, then expenses are probably going to be at that similar level. But we don't expect revenue to stay at the Q2 level. We expect revenue to be meaningfully better than that. And so, therefore, expenses will come back with revenue.

Thanks a lot.

Our next question comes from Rick Wise of Stifel. Your line is open.

Good afternoon to you both. Maybe I'll focus on Salesforce and Salesforce execution during this period. Kurt, you've made the point, I believe you. This is, at this point, largely thinking about it in a long-term sense, comments and execution story. and you all emphasize in your slides that you shared with us today, the impact of, you know, small amounts of share, the revenue opportunity that offers. So as I reflect back to the Salesforce additions that you made in the fourth quarter of 19 and the first quarter of 20, how are you focusing the sales team now to, are you trying to open up new accounts? Are you, trying to expand in the hospital. How are you driving revenue? How are you rethinking sales execution in this period, given the expanded innovation portfolio, et cetera, despite all the challenges?

Yeah, great question, Rick. The environment in April was obviously very different, and pretty much sales forces were – frozen and that they couldn't get into hospitals. There were no procedures anyway to go visit or work with customers anyway. So we use that time to greatly enhance our Salesforce training. And candidly, our Salesforce is probably the best trained it's ever been, even with the expansion. And I give all credit to our global marketing teams and our digital teams that came together to really create enhanced training. And in fact, push some of that into customer training through webinars that had some of the best attendance of any events we've ever done, inclusive of in-person trade shows. So we've done a lot and learned a lot, and I think some of that will be leveraged as we go forward. As we got into May and June and procedure volumes were picking up, I think the natural instinct of a sales rep is to go where they're comfortable, to go where the customer demand is, And we're not going to steer people off of that, but I think depending on which sales force you're speaking to, if you're the sales force covering Buffalo Filter and AirSeal, there's a lot of new customer interest in that technology. If you're in the orthopedic sales force and it's just about getting those procedures started back up, your first stop is going to be your existing customers. Now, all sales forces do have new technology, so we're we're able to be going after new customers. But I think as procedures come on back line, there's a lower interest in new technology unless it's something like Buffalo Filter and AirSeal that have a clearly defined clinical advantage in this environment. So I think all sales forces come out of the door saying we're going to support existing customers, and then as the technology and the new customer pulls them, that we're on offense and ready to go. And I go back to my first point. We're better trained on our new technology than we've ever been. So I think our efficiency is going to actually be better as those new customers come online.

Okay, great. And maybe, Todd, back to gross margin, your explanation was very clear. And, you know, obviously cost reduction is and ongoing cost reduction efficiencies and the leverage from a recovery are going to be big factors there. I've had the impression, and maybe incorrect, that you have not aggressively focused on cost reduction as a separate initiative, preferring instead in recent years to focus on, again, availability of product or innovation. Is there an opportunity now beyond maybe what I can imagine for you to focus on just pure cost reduction as you prepare, get ready for the inevitable slow or fast recovery ahead? Thanks so much.

Yeah, that's a great question, Rick. And I'll just add a little more context for those who may not be as familiar with the story. What Rick's referring to is that You know, our focus on the manufacturing side has been the new products and delivering those new products on time. And so we haven't had kind of on the front burner to go make drastic cost reductions in our manufacturing sites. You know, COVID kind of accelerated some of those things. So things that weren't kind of on our things to do in 2020, that list changed in March. And so, I think we did get to things quicker, and we have had, you know, Kurt talks about learnings and getting more efficient, and that has been more of a priority in the last, you know, three or four months than it frankly was before. So, I think that as volumes return, we'll actually see a better margin profile because of those things. So, you know, When the water lowers, you see the rocks, and you have to deal with the rocks. And so we've been doing that, and we're pleased with how the team has done that. So I think it sets us up well for the future once we get back to normalized volumes.

That's great to hear. Thanks so much.

Our next question comes from Matthew Michon of KeyBank. Your line is open.

Great, and thank you for taking the questions. Hey, Kurt, Todd, we keep hearing more about higher acuity patients entering the hospital. I mean, it's probably fairly difficult because you have such a broad portfolio to say where CONVA as a whole fits. Maybe can you think about your general surgery versus orthopedics and where by segment they would fit in the continuum of acuity?

Matt, I think the only thing I'm going to be able to offer on that is more anecdotal than statistical. And because patients had surgeries deferred, we have heard some instances where the patient is now presenting with more complications, surgery's taking a little bit longer. What percentage that is, I can't give you a good reliable number on that. And I think as you look at our business model, specific in the categories we're in. You know, the sports medicine procedure, about 70% of that in our universe is done in the surgery center in the U.S. market. It's a little bit different blend outside the U.S. And so those patients are still coming in and rotating out pretty quickly. I think on the general surgery side, advanced surgical is principally in the hospital. If those patients are presenting with more comorbidities, higher acuity issues, they're likely to stay and compete with that bed space for COVID patients if they're in that area. But anything I would offer would be anecdotal versus scientific, I think.

Okay. That's still helpful. And I just wanted to follow up on the commentary on global growth on AirSeal and Buffalo Filter in 2Q. I guess was it from – did you see a lot of new placements – you know, of the capital for those devices in the second quarter? Or was it really from increased utilization of the existing equipment where the hospital said, if we're going to do this procedure, we're going to do it using AirSeal and Buffalo Filter?

Our data would say it's both. Our data would say that we certainly considered secured new customers on both Buffalo Filter and AirSeal technology, and our data would say that customers who had the technology were increasing the procedural utilization.

Thank you.

Our next question comes from Richard Kneewitter of SBB Lyric. Your line is open.

Hi, this is Erin on for Rich. Thanks for taking the questions. I was just hoping that you guys could provide us some color, maybe on some trends that you've seen in sports medicine. I know that you just, you know, I know that they're about 70% of those procedures are done in an ASC, but I was wondering, have you noticed a trend that more procedures are moving to the ASC? And then are you, how do you plan to capitalize on a trend that, you know, maybe more procedures could shift towards the ASC?

So the sports medicine business, again, a high percentage of those procedures are done in the ASC. And I don't know if there's a lot more that would move into that environment. I guess I'll never say never, but we're already north of probably 70%. I think on the general surgery side, I think as multi-specialty ambulatory surgery centers come onto play, you could see more general surgery cases moving to the surgery center. But I think that will play out a little bit slower. I think what is moving right now is more total knees, total hips, and we do obviously sell power tools, which would be used in those cases, and a few other related items. So that could benefit ConMed if that trend were to accelerate. It was already moving that direction. Perhaps COVID has – accelerated that as hospitals look at their space versus the ASC. But I don't think we saw anything dramatic unfolding in sports medicine in the second quarter. More of just getting the procedures through the system was probably the priority versus shifting as it relates to sports medicine specifically.

Okay, great. Thanks. And then just a quick follow-up. I was wondering if you knew, you know, just in terms of your procedures about, like, how many or a percentage were kind of like new patients or maybe versus patients that were, you know, in the backlog and it was potentially just bolus and rescheduling.

I don't have an exact number, Erin. I would tell you the feedback that we're hearing from customers was priority one was the backlog. And again, all anecdotal, we've had some customers say we are comfortable with our status and In the second quarter, we are through the backlog. We've had other customers, and it all gets into how fast they ramp up and how many procedures they feel comfortable with. We've had other customers say we're still working on our backlog. But I think the priority is the backlog. Second is new customers. And I think we're still feeling a little bit of that as we come through the end of the second quarter.

Okay, thank you. Our next question comes from Mike Madsen of Needham and Company. Your line is open.

Hi, thanks for taking my questions. I guess I just wanted to start with what you're seeing in some of these areas of the country, like California, Florida, and Texas, where you're seeing kind of a resurgence in COVID. I mean, I know you're saying that you're seeing July up overall, but are you actually seeing impact in your business in any of those areas or regions?

Yeah, it's a great question, Mike. I had the same question for my team. And it's interesting, the answers that come back from the businesses are not all uniform. So I do think it's fair to say that in those places that, you know, where you see hospitals approaching ICU capacity and You know, there is a pause. There is somewhat of a pause on accelerating. You know, they were on an upward accelerating trend of procedures, and that's how I would frame it, is I think we're seeing a pause. We're not seeing anything close to the April experience, right? But, you know, so in a lot of those parts of the country, You know, they're still on a favorable trajectory, but I think it's safe to say that the trajectory would have been even better had we not been dealing with this resurge of the virus. So it is really interesting. A little too soon probably to make any definitive declaration on it, but, you know, our customers are trying to figure out how to serve the whole public and deal with all the diseases that are out there. and also be very respectful of the danger of COVID-19. And so it's kind of hospital by hospital, region by region. And it was interesting as our businesses answered that question, it wasn't necessarily uniform across the board, but that's the best I think I can do at giving you the latest and greatest on those hotspots.

No, that's fine. That was helpful. And then I know there's not a lot of talk about new products right now, just given everything that's happened from a macro perspective. But just can you maybe comment on the impact of the pandemic on new product launches? Have you been able to execute on recent launches? And have you chosen to delay any other new products you may have been launching at this point until we get past this headwind from the pandemic? procedural delays?

So our approach on new products, Mike, back really March, April, was to re-look at our list and focus our priority on things that were going to impact the business, just roughly call it the next 12 months. And we've kept 100% focus on those. So if we had something that was in the pipeline scheduled to be launched in the second quarter, the third quarter of 2020, it's still in the pipeline on track for those launches. As we deal, though, with a lot of remote work and the inherent R&D challenges that come with that when you're trying to do cadaveric workshops and things of that nature. But We're navigating that, and we've kept that 12-month look, if you will. And it's not exactly 12. There's some that are a little further out. But we've kept the pipeline kind of intact, and all of our R&D resources have gone into that. And I'm proud to say on this call that we had some things that we were targeting to get out the door in the second quarter and early in the third quarter, and we've done that. And we've got some other stuff that's supposed to come out here at the end of the third quarter. And as I sit here today, it's on track. And we've got things in the fourth quarter, and those are on track. Now, the projects that were a little further out, we did pause them. That was part of our R&D spend slowdown in absolute dollars. As the environment is improving for us, we'll be appropriately turning those on at the right time by business. So that's been our approach to R&D. All right, that was helpful. Thank you.

Our next question comes from Matthew O'Brien of Piper Sandler. Your line is open.

Actually, thanks for taking that question. So Todd or Kirk, you know, you said on the last call you expect ortho down 65% in April and then general surgery down 40%. Based on where you ended up, For the quarter, you know, it was better on both of those metrics. So obviously the progression through the quarter was good. And I think what we're all trying to figure out is as you exited June, it seems like, you know, the ortho business would probably be down somewhere in the 20%, 25% range and maybe general surgery flat to down, you know, low single digits. Is that a fair approximation of kind of, you know, where you exited the quarter and then that kind of momentum has been carried here into June? end of July. And so when we look at the street numbers for down 22%, something, you know, maybe a little like half of that is more realistic, again, based on the trends you're seeing so far.

Well, I applaud the attempt, Matt. You're not going to get me to bless specific numbers. What I will tell you is that, you know, our experience has been very consistent with, you know, the plethora of things that we've seen, the surveys and the reports. And so, yeah, you know, June was much better than May, which was much better than April, and July continues that trend. So we're not going to get into specific numbers by business, but it's all on a positive trend, and that's as much as we're going to disclose here today.

Okay, that's fair. Just to kind of follow up on that a little bit, too, again, The street's modeling you about flat in Q4 versus this time last year or Q4 last year. You know, it seems reasonable to think that you can be roughly flat, maybe even grow a little bit in Q4. Is that fair, just given how well AirSeal and Buffalo Filters are doing?

Look, I'm very comfortable giving guidance, and I wish we were in a position to give guidance. We're just not today. So we're not going to be doing that, but we are – So far, every month has been better than our internal forecast, and that trend has continued. I hope that does continue. I think we are cautious with what we're seeing out there in the world. I'd tell you this. I'd say a few weeks ago, we might have been talking about giving Q3 guidance. I don't think we would have been talking about giving Q4. I think that was, there's still too many uncertainties around Q4. But, you know, I'd say a month ago I thought, you know, we might actually be able to give some Q3 guidance on the call. And because of the resurgence over the last few weeks, we just don't feel like we can do that. And so I wish we could. I'd be more comfortable in that world. But we just don't think that's wise. And, you know, we don't think it's wise to give the very latest data point and have, you know, you guys model that as the new baseline either because, you know, we're cautious at a macro level. Like I said, the ConMed experience has been very consistent with everything we've heard from our peers. I don't think there's anything, you know, different about our experience. But we are cautious in people getting ahead of themselves on what the back half of this year could look like. So, again, I hope our trend continues and every month is better than our projections. But I don't think we can count on that.

That's all fair. And just as a follow-up... You know, the commentary about all the improvements that you're seeing on the manufacturing side and even on the SG&A side were encouraging as well. You've talked about a 50 to 100 basis point improvement in margins going forward, you know, 70 to I think 170 basis points on the operating margin side in total. You know, as we get back to more normal, are you comfortable with getting closer to the higher end of those ranges, just given all the things that you found here over the last three or four months? Is that the best way to think about things?

Yeah, I think if I can just restate that question, I think I agree with you. You know, I believe because of what we've gone through the last few months, and as Kurt talked about, increased efficiencies, we've had to get smarter, you know, I believe that when volumes return to where they were, we will have a better margin profile than what we did before. Now, the question is, when does that happen? I wish we could put a time on that, but we can't. But I do think we have added some expense because of like we talked about the hygiene and social distancing and those things, which may be with us for a while. But I think we've more than offset that with learnings and focus. And so, yeah, I think that we'll have a favorable margin profile versus prior expectations once this storm is really behind us.

Got it. Very helpful. Thank you so much.

Michelle, do we have any others?

Our next question is a follow-up from Christine Stewart of Barclays. Your line is open. Hi, thanks for taking my follow-up.

I just want to make sure I'm not over-interpreting kind of your comments to Matt in the last comments, I guess, in his attempt to get you to comment on July. Is there anything that you're seeing so far? I appreciate you don't want to give guidance just because there's a lot of parts here. But is there anything that you're seeing in your businesses that would lead you to believe that this sequential monthly improvement would not continue across your businesses? Because it seems like all signs are pointing in the positive direction with air seal and Buffalo filter. but with respect to the other some odd 80% of the business, I'm just curious if there's anything that would lead you to feel less than confident that you wouldn't continue to see some sequential improvement there.

It's a fair question. I think what we're trying to be cautious about is this is a period where a recurrence has started. We've not gone through a recurrence, so we don't know what the market reaction is going to be. So I put that out there. I think the things that are different than in April is in April some of the surgery slowdown was driven by lack of PPE. Some of the surgery slowdown was driven by facility preparation for an onslaught of COVID patients. I think as you fast forward to where we are today, the PPE issue has largely been addressed. The way facilities deal with patients has largely been reduced. created a nice, efficient process, and we know how to treat those patients better. And so I think we just want to understand globally how the market's going to deal with a resurgence before we get too deep into committing to numbers. What we are willing to say is the sequential improvement, May over April, June over May, has continued into July, and that's not a sequential improvement isolated to just Buffalo Filter and AirSeal. It is an overall business sequential improvement. And I just remind everybody we have four unique businesses, and our international team sells all the products across those four categories. So we are seeing sequential improvements in all of our businesses, and that has continued into July. And obviously, as Todd said, we're a couple weeks into this recurrence. We've We've seen hospitals where there's high case concentrations have to slow down. I haven't really seen a slowdown in the surgery center environment because they're dealing with kind of that same-day surgery that get the patient in and out, certain procedure types fit there. So I think we feel good about all the preparation, the work, and where our organization is across all businesses at this point in time.

Okay, great. And then I know that obviously comps are going to be pretty wild as we look ahead to 2021 and all that, but kind of putting comps aside, is there anything that you can see that really changes from a fundamental basis kind of what you're creating here with ComMed in terms of a business profile that should be one that is call it like a mid-to-high single-digit growth story, or should we think about, if anything, COVID maybe underscores the importance of AirSeal and Buffalo Filter, and maybe COVID brings you a little bit more wind to those sails?

Well, I don't think COVID has changed our long-term outlook on what we think the business can be and what we want the business to be, and I say that from the boardroom to the entry-level employee when they sign up here. And the COVID environment has forced us to probably dig even deeper, and not only on what our product focus is going to be, but on the cost structure that Todd spoke to. Global logistics are in play, distribution, channel partners, you name it. Everything has come on the table for review during this environment. And perhaps the environment has allowed us to sharpen focus and accelerate some things. And so maybe in some regards, if we can get back to a normal environment, we'll get where we want to be a little bit faster perhaps. We think Buffalo Filter and AirSeal are great technologies, great growth platforms globally. We thought that when we did the respective acquisitions in 2016 and in 2019, and we believe that as much today, if not more so. That doesn't mean we're going to stop looking for other platform technologies or developing our own platform technologies. We think platform technologies are critical to the long-term success, so we're excited that we have those two and a few more internal ones that we would feel fit in that same category that ConMed already had, and we're just continuing to advance them.

Thanks. That's it for me.

There are no further questions. I'd now like to turn the call back over to Mr. Hartman for any closing remarks. Mr. Hartman?

All right. Thank you, Michelle, and thank you, everybody, for your time today. We look forward to speaking with you on our next earnings call. So thank you. Have a good evening.

Well, ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day. Thank you.