CONMED Corporation

Afternoon, everyone. Before the conference 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 risk and uncertainties as these terms are defined under the federal security 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 other uncertainties disclosed under the forward-looking information in today's press release, as well as the company's SEC filings for more details on the risks 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 the call, except as many 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 substitutes for the GAAP measurements, 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 the benchmarking against other medical technology companies. Adjusted net income and adjusted earnings per share measure the income of the company, excluding credits and 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 Chair of the Board, President and Chief Executive Officer, for opening remarks. Mr. Hartman.

Thank you, Angela. Good afternoon and thank you for joining us for ConMed's fourth quarter and full year 2020 earnings call. With me on the call is Todd Garner, Executive Vice President and Chief Financial Officer. Today I will provide a brief overview of the financial and operating highlights for the fourth quarter and full year, Todd will then provide a more detailed analysis of our financial performance and discuss our initial 2021 financial guidance. After that, we'll open the call to your questions. Turning to our results, total sales for the fourth quarter were $252.8 million, representing a year-over-year decrease of 4.5% as reported and a decrease of 5.2% in constant currency. For the full year, sales reached $862.5 million, representing a year-over-year decrease of 9.7% as reported and 9.3% in constant currency. From an earnings perspective, during the fourth quarter, our gap net income totaled $24.1 million. This compares to net income of $14.9 million in the fourth quarter of 2019. Excluding special items that affected comparability, our adjusted net income of $25 million decreased 6.6% year-over-year, and our adjusted diluted net earnings per share of $0.84 decreased 6.7% year over year. For the full year, our GAAP net income totaled $9.5 million, compared to net income of $28.6 million in 2019. Excluding special items that affected comparability, our adjusted net income of $64.2 million decreased 17.6% year over year, And our adjusted diluted net earnings per share of $2.18 decreased 17.4% year over year. We entered 2020 with a great deal of enthusiasm given our expanding market opportunities and product portfolio. As you all know, the COVID-19 pandemic presented unique operating challenges for every company. Many markets around the world have operated intermittently or shut down for varying periods of time. This dynamic continued in the fourth quarter. Throughout the year, including the fourth quarter, we have been acutely aware of the difficulties that many of our customers have faced, both financially and operationally, and have strived to be good partners to them, taking a lighter touch, particularly as it relates to capital sales. We're taking a longer-term view of these relationships and believe our customers will do the same. We are confident that we are taking the right steps to put the company in the best possible position over the long term. Overall, I'm proud of our team's efforts as we demonstrated agility and resilience in the face of the pandemic, supported our customers through the continued introduction of innovative products across many of our businesses, and delivered a successful full-year performance with our Buffalo filter offering. Overall, I'm very pleased with our team's responsiveness and flexibility. and firmly believe that in spite of the pandemic, we remain well-positioned to achieve long-term, profitable, above-market growth. In 2020, we define success by staying focused on our people, ensuring the financial health of the company, while remaining committed to our long-term strategies that we believe will drive above-market growth in both revenue and earnings. With that, I'll turn the call over to Todd. Todd?

Thanks, Kurt. All sales growth numbers I referenced today will be given in constant currency. The reconciliation to gap numbers is included in our press release. Normally on this call, we would discuss the numbers for both Q4 and the full year. Today we will discuss Q4 only and refer you to the press release for the full year comparables. We don't believe spending time on that view is terribly relevant or helpful at this specific time. For the fourth quarter of 2020, our total sales declined 5.2%. While COVID had a meaningful impact on the full quarter, the first two months of the quarter were very close to the prior year revenue performance, but December revenue was well short of the prior year. For the fourth quarter, our sales in the U.S. decreased 0.7 percent versus the prior year quarter. Our single-use products grew 4.0 percent in the U.S., but capital sales were down double digits. Our international sales decreased 10.5 percent for the quarter compared to the prior year. The most impacted geographies during the quarter were Japan and Latin America. The sharp reduction in Japan was largely due to distributors decreasing their inventories. We believe this is good news for future sales due to less inventory in the distribution channel. The rest of Asia and Europe declined in the single digits in the quarter, while Canada and Australia both grew. Worldwide orthopedics revenue declined 9.6 percent in the fourth quarter. In the U.S., orthopedic sales decreased 12.3 percent, and internationally, orthopedic sales decreased 7.9 percent. Capital sales were down double digits globally in orthopedics in the fourth quarter. As Kurt said, we've taken a light touch with our customers when it comes to the timing of capital purchases in 2020, and believe this will strengthen our customer relationships over the long term. Total worldwide general surgery revenue decreased 1.3% in the quarter. U.S. general surgery revenue grew 5.3%. Internationally, general surgery revenue decreased 14.7%. Despite the capital and procedural softness in Q4, AirSeal and Buffalo Filter combined to grow about 20%. We believe these two product lines will continue to benefit from the increased focus on improving operating room safety. Now let's move to the expense side of the income statement. We will discuss expenses and profitability excluding special items, which include charges related to acquisitions and integrations, restructurings, and amortization of intangible assets, and amortization of deferred financing fees and debt discount net of tax. Adjusted gross margin for the fourth quarter was 53.8%, a decrease of 30 basis points from the prior year quarter. As we expected, our product and channel mix continues to drive improvement in our gross margin. However, as we mentioned on our last earnings call, the recognition of unfavorable manufacturing variances is masking that improvement in Q4. Research and development expense for the fourth quarter was 4.6 percent of total sales, the same ratio from the prior year quarter. Fourth quarter SG&A expenses on an adjusted basis were 35.8 percent of sales, an increase of 50 basis points from Q4 2019 due to lower revenue. Interest expense in Q4 2020 was $7.6 million on an adjusted basis. The adjusted effective tax rate was only 9.7% in Q4, as we benefited from the excess tax benefit from stock plans and the resolution of audits. Fourth quarter gap net income totaled $24.1 million, or 81 cents per diluted share, which was an increase of 65% over the prior year quarter. Excluding the impact of special items discussed earlier, We reported adjusted net income of $25.0 million compared to $26.8 million in the fourth quarter of 2019. Our fourth quarter adjusted diluted net earnings per share was 84 cents compared to 90 cents in the prior year period. Turning to the balance sheet, our cash balance at the end of the quarter was $27.4 million compared to $35.6 million as of September 30th, 2020. Accounts receivable days as of December 31st were 63 days compared to 64 days at the end of 2019. Inventory days at quarter end were 150, which was eight days better than they were at the end of Q3. However, we did not see the typical December drop this year due to softer sales as a result of the pandemic. Long-term debt at the end of the quarter was $735 million versus $760 million in as of September 30th. Our leverage ratio on December 31, 2020, was 4.9 times. We are performing very favorably to our agreement with the banks. Our fixed charge coverage is 3.26 versus our agreement of 1.75, and our liquidity was $403 million on December 31st compared to our minimum agreement of $135 million. Cash flow provided from operations for the quarter was $20.1 million, and capital expenditures in the fourth quarter were $3.1 million. Adjusted EBITDA was $47.9 million in Q4 2020, compared to $53.1 million in Q4 2019. We are very pleased with the way our teams have navigated this challenging year. As we look to the future, we are encouraged by the strength of our business and our positioning with our customers. While we're anxious to put the pandemic of 2020 behind us, the pandemic is still with us here as we enter 2021. There's still a great deal of uncertainty about when volumes return to a pre-pandemic trajectory, as well as the timing of when our customers will be free to return to pre-pandemic levels of operation. However, we have now lived with the virus for over 10 months, and we have a better understanding than we did at the beginning of the impact on our business. The key questions we can't answer right now are related to how the new, more contagious variant will affect healthcare globally and how quickly the available vaccines can lower the burden on hospitals. Despite these lingering questions, we have decided to provide financial guidance for 2021 within a framework of our current assumptions. We view 2021 as a transition year where we transition from the impacts of the pandemic in the first part of the year toward a post-pandemic environment by the end of the year. We anticipate that Q1 will continue to be significantly impacted by the virus, and we believe this impact will linger into Q2. Our assumption is that the global disbursement of vaccines will take months, but be effective at reducing the burden on healthcare from the known variants of the virus. We expect procedural growth in the United States to improve before international markets do. As the year progresses, we anticipate that volumes will improve sequentially, and we expect general surgery to see improved volumes before sports medicine does. Given that many sport activities are still suspended and that it typically takes months for an athlete to go from injury all the way to surgery, we do not anticipate sports medicine procedural growth to return to pre-pandemic levels until a couple of quarters after team sports resume globally. Those assumptions lead us to revenue guidance for the full year 2021 of between $975 million and $1.02 billion. We expect currency to be immaterial to 2021. We expect Q1 revenue between $210 million and $225 million. As far as phasing between first half and second half, we expect 46 to 48 percent of our full year revenue to be recognized in the first half of the year and 52% to 54% of revenue to be recognized in the second half of the year. For adjusted EPS, we expect the full year 2021 to be between $2.85 and $3.05. We expect Q1 adjusted EPS to be between 42 cents and 45 cents. We expect the phasing of adjusted EPS to be about 35 percent of the total year in the first half and about 65 percent in the second half of the year. This is a lighter mix in the first half than we're used to, as the lower production levels and higher freight costs that we experienced in the second half of 2020 are likely to continue through at least Q1 2021. And as we've addressed before, These unfavorable manufacturing variances are recognized in the external P&L a full four months after they are incurred. Accordingly, Q1 gross margins will be significantly impacted by the Q4 performance, and Q2 will likely be impacted by the continued lower volumes in Q1. I can tell you that because of this, we expect gross margins in Q1 2021 to to be about 250 basis points lower than the Q1 2020 gross margins. After that, in the second quarter and the second half of the year, we expect margins to show improvement over 2020 levels. It is also clear that the tax rate will be a headwind in 2021. Our adjusted effective tax rate for the full year of 2020 was 12.9 percent for a myriad of reasons that we do not expect to recur in 2021. We are assuming that our tax rate in 2021 will be between 24 percent and 25 percent, assuming no change in the U.S. tax code or any other major geography for that matter. Normally, we give you detail on each line of the income statement for the full year. Because of the level of uncertainty in the current environment, we are not going to do that today. The moving pieces may be different than we currently expect. and we need to remain agile and responsive in delivering the best results for our shareholders over the long term. The good news is that our strategy to shift the mix of the portfolio to higher growth and higher margins is working. We are increasingly competitive in the marketplace, and our customer engagement continues to improve. Our innovation is delivering more profitable products that are more clinically effective. AirSeal and Buffalo Filter are leading the way and are the most obviously impactful right now. However, we believe other product lines will contribute in a significant way in the future as well. And it remains true that our infrastructure can support much higher revenue in our large and attractive markets. As we transition out of the pandemic, we believe customers will continue to reward both our innovation and our actions as valued partners with increased trust and market share. And as volumes return, we believe the work we've been doing on the margin profile will become clearer and more obvious. With that, I'd like to turn you over to Angela for questions.