CONMED Corporation

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 risks 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 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 this call, except as may be required by applicable law. You will also hear management refer to certain non-gap-adjusted measurements during this discussion. While these figures are not a substitute for gap 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 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 releases posted to the company's website. With these required announcements completed, I will turn the call over to Curt Hartman, ConMeds Chair of the Board, President, and Chief Executive Officer for opening remarks. Mr. Hartman.

Thank you, Paul. Good afternoon, and thank you for joining us for ConMed's first quarter 2021 earnings call. With me on the call is Todd Garner, Executive Vice President and Chief Financial Officer. Today, we will walk you through our first quarter results and share our thoughts on the outlook for our business in the current operating environment, recognizing the uncertainty that still exists across our global markets. We'll then open the call to your questions. Turning to our results, total sales for the first quarter were $232.7 million, representing a year-over-year increase of 8.7 percent as reported and an increase of 7.2 percent in constant currency. From an earnings perspective during the first quarter, our GAAP net income totaled $9.9 million. This compares to net income of $5.9 million in the first quarter of 2020. Excluding special items that affected comparability, our adjusted net income of $19.1 million increased 26.8 percent year-over-year, and our adjusted diluted net earnings per share of 63 cents increased 23.5 percent year-over-year. Broadly speaking, we saw consistent year-over-year performance throughout the quarter, with the latter half of the quarter demonstrating better performance. The U.S. market in particular showed improvement later in the quarter following weather-related procedure delays across the Southwest. Consistent with what we communicated in January, Latin America remains challenged, more so than expected, while other international markets saw steady performance throughout the quarter, aside from some procedure stoppage in areas of Canada, France, and Asia later in the quarter. Overall, it was great to see both global orthopedics and global general surgery achieve year-over-year growth in the quarter, as well as positive growth in both the United States and international markets. We continue to deliver solid growth in both air seal and Buffalo filter, and we're happy to see the state of Kentucky approve smoke evacuation legislation during the quarter that will result in operating rooms across the state going smoke-free starting January 1, 2022. In closing, I remain very proud of the ConMed team and the progress we demonstrated in the quarter. We think these results validate many of the steps we took starting in early 2020 in response to the growing incidence of COVID. As a result of our first quarter performance, you will see that we have increased our guidance on both the top and the bottom line. I'll now turn the call over to Todd, who will provide a more detailed analysis of our financial performance and take you through our guidance adjustments. Todd?

Thank you, Kurt. All sales growth numbers I referenced today will be given compared to the prior year in constant currency. The reconciliation to gap numbers is included in our press release. As usual, we have included an investor deck on our website that summarizes the results of the quarter, our updated guidance, and also provides sales results compared to 2019 for those of you interested in that view. We did have one less selling day in Q1 2021 compared to Q1 2020. Normally, we would estimate that impact to be between 100 and 150 basis points on the quarter, but given the abnormal external environment in both years, we would not attempt to quantify the impact on the quarter. For the first quarter of 2021, our total sales increased 7.2%. COVID had a meaningful impact on the full quarter. In January and February, each month grew slightly on a global basis compared to the prior year, and March grew significantly over March 2020. In Q1, we grew domestically and internationally in both single-use and capital products. Capital was strong compared to Q1 2020, but was still below our Q1 2019 levels. For the first quarter, our total U.S. sales increased 4.3% versus the prior year quarter. Our international sales increased 10.8% for the quarter compared to the prior year. Canada and Australia saw good growth in the quarter. Europe was a mixed bag with some countries growing and some declining. As a whole, Europe grew slightly for us in Q1. Asia was the most impacted by the virus in Q1 of 2020 and therefore grew nicely against the easiest geographic comparable for us. As Kurt said, Latin America was our most challenged geography in Q1, and our near-term expectations for that region have decreased as progress against the virus is lagging. Worldwide orthopedics revenue grew 5.9% in the first quarter. In the U.S., orthopedic sales increased 0.2%, and internationally orthopedic sales increased 9.4%. Total worldwide general surgery revenue grew 8.2% in the quarter. U.S. general surgery revenue grew 6.1%. Internationally general surgery grew 13.4%. Air seal and Buffalo filter continue to show strong growth across the globe. 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, amortization of intangible assets, and amortization of deferred financing fees and debt discount net of tax. Adjusted gross margin for the first quarter was 55.2 percent, a decrease of 170 basis points from the prior year quarter. This was a little better than we expected, as we had forecasted the negative impact from lower production levels from recent periods. We told you in January that after Q1, we expected adjusted gross margin to be positive compared to the prior year quarters as we move through the year, and we continue to expect that. Research and development expense for the first quarter was 4.3 percent of total sales, 40 basis points lower than Q1 2020. First quarter SG&A expenses on an adjusted basis were 39.1 percent of sales, 210 basis points lower than the prior year quarter. Interest expense in Q1 was $6.8 million on an adjusted basis. The adjusted effective tax rate was 13.4 percent in Q1. This was lower than we expected principally due to the excess tax benefit from stock plans. This is difficult to predict, but we don't expect nearly the same benefit in future quarters. we continue to model our adjusted effective tax rate to be between 24 percent and 25 percent in the remaining quarters of 2021. First quarter GAAP net income totaled $9.9 million, or 31 cents per diluted share, which was an increase of 55 percent over the prior year quarter. Excluding the impact of special items discussed earlier, we reported adjusted net income of $19.1 million, an adjusted diluted net earnings per share of 63 cents, an increase of 23.5 percent compared to the prior year period. This is the first quarter where the average stock price has been above our hedged conversion value of $114.92 for the convertible notes. The impact in Q1 was the addition of approximately 170,000 shares to the diluted share count as adjusted. As you can calculate, this had an immaterial impact on adjusted EPS in Q1. And, of course, we cannot predict the future stock price, but if it stayed at current levels, we estimate this would decrease our full-year adjusted EPS by approximately 7 cents. Turning to the balance sheet, our cash balance at the end of the quarter was $36.8 million, compared to $27.4 million as of December 31, 2020. Accounts receivable days as of March 31 were 63 days, consistent with year-end 2020, and down from 70 days at March 31, 2020. Inventory days at quarter-end were 178 as we billed for anticipated increased volumes. This compares to 150 days at year-end 2020 and 166 days at March 31 a year ago. Long-term debt at the end of the quarter was $725 million versus $735 million at December 31st. Our leverage ratio on March 31, 2021 was 4.7 times. As you probably saw, this month we exited the suspension agreement we entered into with our banks a year ago. It turns out we never exceeded our original debt covenants, even during the worst parts of the pandemic. and therefore, in hindsight, did not need the flexibility provided in the suspension agreement. We appreciate the support of our banking partners through very uncertain times a year ago. Cash flow provided from operations for the quarter was $22.3 million compared to $3.7 million in Q1 of 2020. Capital expenditures in the first quarter were $3.1 million compared to $2.8 million a year ago. Now let's turn to our updated view of our 2021 financial guidance. Three months ago, we opted to provide full-year guidance based on a framework of assumptions on how the virus would impact the year. As a reminder, those assumptions were that Q1 would be significantly impacted by the virus, and that impact would linger into Q2 and then ameliorate from there. Our assumption was that the global disbursement of vaccines would take months, but be effective at reducing the burden on healthcare from the known variants of the virus. We continue to see 2021 as a transition year with those same assumptions. Global COVID case counts remain at elevated levels, but our business has also proven to be relatively resilient. As I mentioned earlier, we now have additional concerns in Latin America and also expect the higher diluted share count related to the convertible notes to be a headwind to full-year adjusted EPS. Our approach to modeling the remainder of the year is to recognize the overperformance in Q1 on the top and bottom line and maintain our expectations for Q2 through Q4 as we had them three months ago while absorbing the new headwinds I just discussed. That results in revenue guidance for the full year between $1.0 billion and $1.03 billion. We now expect currency to be favorable to revenue between 50 and 100 basis points for the full year but just slightly favorable to adjusted earnings. For adjusted EPS, we now expect the full year 2021 to be between $3.05 and $3.20. And with that, we'd like to open the call to your questions, and I'll hand it back to Paul.