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.

Thank you, sir. As a reminder, to ask a question, you will need to press star 1 on your telephone. Please limit yourself to a question and a follow-up. If you have more than questions, please press star one again to be back in the queue. Our first question is from the line of Rick Weiss with CFO. Your line is open. Good to ask you both.

Maybe one question on the current environment and I'll start with something else. Kurt and Todd, both of you are emphasizing that the slowness or the weakness in January and February and the significant improvement in March. We've heard from most of the other companies giving us a similar scenario and sort of suggesting that that momentum continued into April. The cautionary comments on Latin America, et cetera, is that what you're seeing? And, you know, maybe just a little more color as part of that on the where you're seeing that strength, any particular procedure area or product areas. Just, you know, help us think through that, if you would.

I think we'll probably double-team this one a bit, Rick. But I think the January-February commentary was really just a continuation of what people saw in the fourth quarter. The fourth quarter was a little tougher from a COVID case impact on procedures. That did continue. And then as we got into the month of March, things opened up a little bit. And in addition, the comparables obviously were most suppressed given the rapid slowdown in the second half of March of 2020. I also don't want to skip past the weather event that happened in February. That had a pretty profound impact across the southwest area of the country. A lot of things were shut down for months. You know, a good portion of a week, that impacts a lot of surgical procedures. And then, you know, on top of that, in COVID case volumes, the southwest California markets were pretty slow at the beginning of the part of the year just because of the restrictions that were in place. As we came through March, things have gotten better as vaccines have rolled out. You know, so I don't think any headlines have changed as we've started the second quarter relative to that. Other than, obviously, I think everybody's aware India is in a very tough spot, and to our commentary, Latin America remains challenged. We said that at the beginning of the year, and it might be a little more challenged even at this point. There's just a little bit of a lack of disbursement of vaccines and availability, et cetera, in the Latin American markets based on what we're seeing as an organization. So that's how I'd frame it. I don't know if Todd has any other comments relative to that.

No, I mean, I agree. Obviously, on a relative basis, things are progressing as you hear everywhere else, Rick. I would just remind everybody that I know we're in this quest for normalcy, right? And everybody's anxious to when are we back to normal? And we're certainly not there. So yeah, March, certainly better than January and February. Again, we're not talking about Q2 on this call, but April, you know, just consistent with what everybody else is saying, April looks a whole lot more like March than it does January and February. But, you know, we're a long way from normal, I would still say, as a market, you know. So that's my perspective. Yeah, thank you.

And just for my second question, we recently did a bunch of due diligence on your smoke business. And what we heard from your customers or potential adopters was, was that COVID has accelerated smoke adoption, more hospitals are interested, more are trialing, expecting faster decision-making, faster movement on legislation. Maybe, you know, what do you expect when you get an approval like this Kentucky legislation? How do we think about the impact on 22 and beyond? And in general, what we hear, is that the reason Did we get the right feedback? Are we hearing the right thing on that decision-making acceleration kind of mindset? Thank you.

Yeah, I think what you've just stated there, Rick, is consistent with, you know, go back to this call a year ago, and if you reread that transcript, we commented for the first time that we think in this environment, as challenging as it is, there is more attention to the smoke evacuation and the air seal product because of the society publications on the benefits of those devices in surgery. And then at the end of the second quarter, we said starting to show up in the financials, and the third quarter definitely showed up in the financials. And that has not changed. And I think that was reflected in the survey work that you did, that there's just a lot more awareness. And it's not necessarily awareness by the surgical staff. It's probably more awareness by the hospital administration and the surgeons who now have a growing appreciation for the impact of surgical smoke on the health of the staff and the overall well-being and welfare of the employees in that facility. We've also said that legislation was not pulling this market. It was more wind at the back of the market. And that's because of all the great work that has happened by the societies, you know, going back a decade plus, whether it's AORN or other societies around the world who've really been advocating for smoke-free environments. So when something like Kentucky comes along and they legislate a mandate, it's obviously positive because, you know, it helps move 100 percent of the market in this direction, and it sets kind of a timeline. If you look, though, we've had other legislation that doesn't have as much teeth. This one appears to have a little more bite to it, so more positive. But I would also say we're not starting from zero. There were already accounts in the state of Kentucky using smoke evacuation and filtration. So it's just helping motivate the other ones that haven't quite moved as quick. I think it's the way I'd frame it.

Thanks, and nice to see the progress on the core. Thank you.

Thanks, Rick.

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

Oh, great. Thanks for taking the question. Congrats on a really nice quarter. Thanks, Robbie. You know, two questions from me. Maybe I'll start with the first one. You know, appreciate you're historically a very conservative management team, and I like that. But just turning to the guidance and... You know, I want to just try and tease out the answer. You mentioned you raised guidance for the first quarter beat, but left second, third, fourth quarter assumptions alone from what you had coming into first quarter. And I just want to make sure, is that more along the lines of, you know, the environment is still uncertain here and you don't want to get ahead of yourself? Or is it something you're seeing exiting first quarter that would – you know, not prompt you to take the good trends that you mentioned and bring them forward at all? Just want to try and tease out the answer there.

Yeah, really just, you know, it's going to be a year where we've got to stay flexible, right, Robbie? And we've got to kind of manage the fuel and the brake at the same time and make sure the fuel is ahead of where the opportunity is, and make sure we don't release the brake where the opportunity is still lagging, right? And so we've got to just stay flexible as we navigate through the year. We were very pleased with Q1. The business did better than we expected. But as we had laid out the year three months ago, we already had assumed improvement, right? We were counting on Q2 being measurably better than Q1, and it was actually a decent step up. from Q1 to Q2. So as we leave Q2 where we had it, it's a smaller step up than it was, but it's still improvement over Q1. And there's enough uncertainty out there around the globe. And I think everybody knows we're essentially 50-50 U.S. and international. You know, there's enough uncertainty. There's just no reason to get ahead of yourself here. So we will play it quarter by quarter. We'll count Q1 as a win versus Expectations. And we'll continue to focus on executing and managing the business appropriately as we have through the pandemic. And we'll take it from there, and we'll talk about it three months from now.

Great. Great. I appreciate that. Maybe just a follow-up here. You know, at the J.P. Morgan Conference, you were so nice to tell us that AirSeal and Buffalo Filter were 25% of sales, now growing at least 20%. I wanted to see if you'd comment on how that part of the business did in first quarter.

Thanks. I think we said at least 25% of the business growing at least 20%, and that remains true. It beat both of those numbers in Q1.

Any color on how much they beat by? Because we can dream pretty big.

We're not going to get into product line specifics there, but we're pleased with how that's going and the thesis remains intact.

All right. I tried. Thanks a lot.

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

Great. Thanks for taking the question. So, Todd, not to keep going on the path here on, on guidance, but you know, you just beat by, you know, Q1 by 20 million currency is now going to be more like a $10 million tailwind versus, you know, what you were expecting before. So it's about 30 and you know, you're only raising the midpoint by 15. It seems like things are loosening up here in the U S seems like, you know, you're going to get some of those cases back down in the Southwest done here in Q2 and for the rest of the year. is Latin America and some of the pressures you're seeing in EMEA or India really that big of a headwind to think that there's a $15 million delta between what we just saw here in Q1 and currency versus the increase in the midpoint of the range?

Well, first of all, I like your optimism, Matt, and I like that you're an optimistic guy. You've done some rounding up a little bit. I think if you do the math on on a prior year of 862, I think 50 to 100 basis points works out to between $4 and $8 million. And so you've rounded that up to 10. So I'd caution you there on your rounding. But yeah, look, we had a wider range, right? All we did for our guidance was take the actual for Q1 and left what we had for the last nine months of the year alone. And so We had a $15 million range on our Q1 revenue. We've now delivered a specific number, so our revenue range has shrunk by that $15 million, right? So we're not more bearish on the year at all. We're very pleased with Q1. We just don't see the need to, and there's enough moving pieces out there that there's no need to get that granular or get that specific. So Good start to the year. Lots of work left to do. Lots of dynamic external levers to deal with and manage. And we're going to keep doing it as we have been doing it. Got it. Okay.

And, you know, I'm sure everybody in the investment community knows me as uber optimistic, so I appreciate you pointing that out. You know, I also was curious on the capital side. I know you had an easy comp. We're seeing across MedTech here in Q1 real strength in capital purchases, which you guys clearly saw. How much of that is obviously pent-up COVID demand? How durable is that, I guess, for the remainder of the year? I mean, is there $100 million worth of capital that was deferred or some number that was deferred? that we should expect for the rest of the year? And then what does that say about volumes as we go into Q2 and Q3 as these hospitals are purchasing capital in front of that?

I think, Matt, the way I would comment on capital is we saw more of that in the latter half of the quarter, obviously, based on procedures picking up. And our capital is a smaller dollar capital, and it's essential to procedures being done. So if there's a need – they're going to make the purchase because otherwise they are potentially deferring a procedure because of a lack of capital. And then the other thing I would just add on top of that is we did comment, we had new capital come into the market. We had a new video platform and we had a new large bone power tool platform. So anytime you have new products like that, put your sales force back on offense, gets them enthusiastic to revisit customers, new customers. So we had a couple things going in our favor right now relative to our two bigger capital items, if you will. And then we also have in general surgery some capital items, helix generators, the air seal box, the IFS box, and then to a lesser extent the Buffalo filter capital, small dollar item. But all that adds up to we have a good opportunity here as markets open up and more procedures are getting scheduled. That puts more wear and tear on existing capital, and that opens up capital. And I think we've said we never saw the slowdown in capital as being related to a lack of financial capability. It was about where were they going to put those capital dollars. And there were other more critical needs during the height of the COVID pandemic. A lot of that's been addressed, so now they can move on to that more, call it routine capital, if you will. How much capital backlog is out there? It's really hard to quantify. Really hard to quantify. So I don't think I would take a guess at that one. Totally fair. Thank you.

Our next question is from the line of Richard Neweter with SVD Lyric. Your line is open.

Hi, this is Erin on Rich. Thanks for taking our questions. Just a couple of quick ones from me. Could you guys maybe talk about what you're seeing throughout the quarter in the sports medicine segment? Have those volumes been starting to pick up with organized sports starting? Just wanted to see what you guys have noticed in that area.

I think they strengthened as the quarter progressed. You know, we report orthopedics. We have a lot of different products within orthopedics, including video, including power. If you look at our procedure-specific category, which is the anchors that are used in soft tissue repair, we generated growth in that category both in the U.S. and international market. And then the other item that directly reads on sports medicine procedures is would be the MTF tissue biologics portfolio. And we generated growth in that, both in the US and the international markets in the quarter. So there was a growing set of procedures occurring relative to soft tissue repair, be that the knee, the shoulder, the hip. And just as a reminder, ConMed's biggest presence is in the shoulder. Obviously, we're doing a lot of innovation to continue to expand within the knee and the hip. obviously extremities as well as that clinician group gets more focused on soft tissue repair, wrist, foot and ankle, elbow, et cetera. So I think the procedures were starting to pick up as we got further into the quarter, and that's what we're prepared for.

Okay, great. Thanks. And then just another quick one on Buffalo Filter. Congrats on, I mean, I guess the Kentucky legislation is great. Have you heard of any other states that have a similar type of legislation coming down the pipe?

Yeah, Erin, there's about a dozen states that we think are close. Actually, we're in the process before the pandemic started. So we would expect as the legislators across the country get back to work, this will be one of the first things they deal with. I'll just remind you, As Kurt said, the legislation is really following the demand and not necessarily leading it. So we're happy to see it. We welcome it. We think eventually all states will have some rules around keeping workers safe. That seems logical. But it's not something that we're holding our breath for or counting on here at ConMed. We know that the market's going to grow, and this is going to become a standard of care And we're just trying to make sure we service the customers and get as much of that market share as we can.

Okay, great. Thanks so much.

Our next question is from the line of Mike Mattson with Needham. Your line is open.

Hi, Curt and Todd. This is David Saxon on for Mike. Thanks for taking the questions. First one is just on AirSeal. I was wondering if you could just give an update on the attachment rate with intuitive robots. I guess what can drive that higher over time? And then in March and April, can you talk about how utilization trended and how that compares to kind of pre-pandemic levels?

And on your March-April question, David, are you You're talking about AirSeal utilization specifically or something broader? Yes, AirSeal. Okay. Okay, so far, you know, attachment, I think the way we framed that before is footprint, right? So we've framed before that where you walk into an OR and you see a DaVinci robot about half the time you'll see an air seal box also in the room, right? And that has been climbing over the past several years, and that continues to climb. So it's probably approaching more like 60% now is probably a safe number to say. So that footprint continues to grow. The procedure capture also continues to grow. That's below the footprint percentage. So We are now north of 35% of the procedures that are done on the DaVinci will be using the AirSeal. And that's just because it's doctor by doctor, right? Just because the machine is in the room, you've got to get doc by doc, surgeon by surgeon to try it and adopt AirSeal. But that continues to go well. Both those numbers continue to go up, and we expect they will continue to go up from here You know, specific utilization. First of all, we're not going to talk about April here. This is a Q1 call, so we're not going to talk about that. But definitely, this is tied to procedures, right? So as procedures are depressed, like they were in January and February, you have fewer procedures. As those open up, then we get more usage, right? So certainly a decent increase between February and And as Kurt said, February was also impacted by some weather issues in the United States. And so nice pickup between February and March. We still think we're a long way from normal. We're still, you know, again, across the globe, procedures are still impacted by the virus. Hospitals are still having to prioritize and manage and adjust. And then patients, of course, also have their own reasons to you know, maybe delay or defer or be hesitant. So still not back to normal, but trending in the right direction.

Okay, that's helpful. And then maybe another for you, Todd. Just on gross margin, I think you said second quarter should show some year-on-year improvement. But just given, you know, second quarter last year with the trough, should we kind of be thinking – You know, in line with what we saw the first quarter, any color there would be helpful. Thanks so much for taking the question.

Yeah, great question, David. And, yeah, I'd say in that range, yeah. So, you know, probably around the same area as Q1 and, you know, decent growth over Q2. And then Q3 and Q4 should be growth over the prior year quarters. Great. Thank you.

And our last question is from the line of Matt Mission with KeyBank.

Your line is open. Great, and thank you for taking the questions. Hey, I really like how you guys laid out slide five with versus 20 and versus 19. And one of the things that is fascinating about this is that orthopedic surgery was plus 3% versus 2019. and down a bunch internationally, and down a bunch in the U.S. Could you talk a little bit about the difference there and whether you think that on the international orthopedic side, do you think you can maintain a positive growth versus 2019 through the remainder of the year?

Yeah, I guess, Matt, the first thing I would point to is that internationally, about 60% percent of that business, 60-plus percent of that business is orthopedic. So the point of that statement is our presence internationally in orthopedics is much bigger, much more pronounced, much better market position. And that is a historical event driven when ConMed bought the Linvitec assets from Bristol-Myers Squibb in the late 90s. We retained a lot of that existing infrastructure. and still have that infrastructure in place and the market share that comes with being there and that consistent. The other thing is we had some market performances that were really heavily focused on orthopedic procedures returning. You know, in places like China, which experienced COVID first and foremost, you know, they're kind of back doing procedures, and that's a respectable orthopedics market for us. places like Australia, New Zealand, and Canada, Japan, good markets for ConMed because of our presence and good orthopedic markets for ConMed. So as those markets have gotten a lot healthier in terms of their ability to deal with COVID procedures and then the softer comparables that they had for the full quarter. So we have a very good orthopedics business outside the U.S., and I think our orthopedics business outside the U.S. will continue to to have positive momentum. It's been that way for a number of years. In the U.S., we've said from day one, this has been our biggest challenge market, and we continue to evaluate and continue to innovate, and good things are happening there. You know, we've got Pat Beyer over the top of the U.S. now, orthopedics, bringing a lot of the same practices that they employed internationally into the U.S. market, and I feel positive about where we're going and looking forward to the second half of the year for our U.S. orthopedics business, where I think a lot of what we're doing will really start having traction.

As a follow-up to the gross margin question, Todd, have you worked through the unfavorable manufacturing variances and the higher freight costs you were experiencing?

No, they're not all behind us yet, right? It's a four-month Deferral is how that works from the accounting perspective. So December, so as an example, the unfavorable manufacturing variances we saw in December will hit the external P&L in April, right? And then January hits in May. And so that's how it works. And so obviously December was bad. January and February were bad. So that, as we said before, that will continue to impact, it'll kind of mask margins continuing into Q2, and then hopefully, you know, will be less of a clouding factor when we move into the back half of the year.

Okay. And last question, just a follow-up to the aerosol question with DaVinci. I'm just curious, When doctors train on da Vinci from Intuitive or in medical school, are they also trained on AirSeal, and are you trying to get AirSeal into medical school so when the doctors initially learn how to do the procedure, they're learning it on the AirSeal platform?

So there's two parts to that question, Matt. Obviously, given the longstanding relationship, that First Surgiquest and ConMed has continued with Intuitive, there are a lot of training events that occur with Intuitive Surgical where AirSeal is present. So if a doctor is coming in to an Intuitive training event, they're likely to see an AirSeal platform there and get that exposure at the same time. As far as the direct medical school resident training programs, obviously we We target all those. I couldn't look anybody in the eye and say we have 100% success. That's just kind of customer dynamics. But part of our growth trajectory is to be in medical school programs with all of our products, obviously. So those are certainly priorities.

Okay.

Thanks, guys. Congrats. Thank you.

As there are no further questions, this concludes the Q&A session, and I'd like to turn the call back to Mr. Hartman, for any closing remarks. Mr. Hartman?

Thank you, Paul. And I just want to thank everybody for your time today, and we look forward to speaking with you on our next earnings call. Thanks and have a good evening.

This concludes today's conference call. Thank you for joining Humanities Connect. Have a great day and stay safe.