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, its plans and objectives. These statements represent the forward-looking statements that involve risk 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. 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 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 that may be required by applicable law. You will also hear management refer to non-GAAP or adjusted measurements during this discussion. While these figures are not a substitute for 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 from benchmarking against other medical technology companies. Adjusted net income and adjusted earnings per share measures the income of the company, excluding credit 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, ConMed's Chair of the Board, President and Chief Executive Officer, for opening remarks. Mr. Hartman.

Thank you, Justin. Good afternoon and thank you for joining us for ConMed's fourth quarter and full year 2022 earnings call. With me on the call is Todd Garner, Executive Vice President and Chief Financial Officer. Today I'll provide a brief overview of the financial and operating performance for the fourth quarter and full year. Todd will then provide a more detailed analysis of our financial performance and discuss our 2023 financial guidance. After that, we'll open the call to your questions. Our Q4 results were materially impacted by our warehouse management software implementation in October, as indicated by our November 14th suspension of guidance. Total sales for the fourth quarter were $250.9 million, representing a year-over-year decrease of 8.4% as reported, and a decrease of 7% in constant currency. Clearly, the lack of ability to ship customer orders in a timely fashion resulted in both delayed revenue and lost sales opportunity as customers supported surgeries with competitive products. This disruption also took our sales teams out of their normal business routines and cost us new opportunities typically associated with the fourth quarter. We know our customers perform surgery daily with minimal inventory on hand and depend on a reliable stream of products to support their needs. In this regard, we came up short in Q4, and in many cases, customers found alternative solutions. However, customers choose ConMed products over competing products for a reason, and we're working hard to regain their trust and have them return to the ConMed brand following the system implementation issues. Given the revenue shortfall in the quarter, fourth quarter earnings also suffered, with gap net income of $26.6 million. This compares to net income of $24.4 million in the fourth quarter of 2021. Excluding special items that affected comparability, our adjusted net income of $12.9 million decreased 61.3% year-over-year, and our adjusted diluted net earnings per share of $0.42 decreased 60.7% year-over-year. For the full year, sales reached $1.045 billion, representing a year-over increase of 3.4% as reported and a 4.6% increase in constant currency. The 2022 gap net loss told $80.6 million compared to net income of $62.5 million in 2021. Excluding special items that affected comparability, our adjusted net income of $85 million decreased 14.5% year-over-year, and our adjusted diluted net earnings per share of $2.65 decreased 17.4% year over year. Looking back at 2022, we strengthened the broader business to include two fantastic acquisitions, which are both off to a great start quantitatively and qualitatively. We also locked in the majority of our debt at 2.25% interest rate for five years with the new convertible notes. We can continue the development and strengthening our new product introduction process and this difficult experience in Q4 will make us even better at delivering to our customers. From a market perspective, we believe the surgical environment trended more favorably in the fourth quarter, with stability in procedures and subtle increases in staffing levels across the healthcare system, all of which are encouraging signs moving forward. The overall environment has more stability than at this point a year ago, while noting there are still areas of uncertainty around recessionary pressures. As we step into 2020-23, we're laser-focused on basic execution to deliver top-line growth and leveraged earnings growth. Further, we believe we've assembled a high-growth portfolio through a disciplined combination of organic and inorganic development across both general surgery and orthopedic categories. And as you will hear from Todd, we have more clarity on our gross margin outlook in the years ahead. While 2022 did not end as we had planned, the strategic outlook for ConMed remains strong on both the top and the bottom line, and this will benefit patients, customers, employees, and shareholders in the quarters and years ahead. Overall, I remain honored to work with this executive team and beyond impressed by their commitment and persistence in pursuing what is in the best interest of ConMed. They and all of our global employees and related partners remain committed to our growth strategies. In 2023, we will define success by staying focused on our people and ensuring the financial growth and health of the company, while remaining committed to our strategy to drive above-market growth in both revenue and earnings. With that, I'll turn the call over to Todd, who will provide a more detailed analysis of our financial performance and discuss our financial guidance. Todd? Thank you, 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. As usual, we have included an investor deck on our website that summarizes the results of the quarter and our updated guidance. For the fourth quarter of 2022, our total sales decreased 7.0%. Our best estimate of the revenue impact from our warehouse software implementation is in the neighborhood of $65 million. Our end customer backlog at year end due to this disruption was approximately $30 million. which included the impact of shutting down the warehouse for the last three days of the year to perform a complete physical inventory. History has shown that when supply disruptions in our industry are resolved, the original supplier wins back the vast majority of business loss during the temporary disruption. We know that our customers were well aware of the substitute products prior to our delivery problems, and they choose ConMed to use for a specific reason. Those reasons still exist today and we are even more energized to be excellent partners to our customers. Revenue from the recent acquisitions was $12.5 million in the quarter. As Kurt said, both Interbones and Biores are off to strong starts and exceeded our expectations in 2022. These products were unaffected by the warehouse disruption as they are not shipped from that location. For Q4, our sales in the U.S. decreased 3.9% versus the prior year quarter those were our U.S. sales, decreased 3.9%, and our international sales decreased 10.6%. The U.S. is where the majority of Intabones and Biores are sold. We estimate that the impact from the warehouse disruption was similar in percentage in the U.S. and OUS. The U.S. was impacted immediately, while our international geographies initially benefited from inventory held in our regional distribution centers. Because of that, the remediation efforts first focused intensely on U.S. customers. As the duration of the issue extended, the international channel was depleted, and the end customer there was impacted later in the quarter. We've made good improvement in shipping globally, and we are shipping at or above normal daily volumes. As of this week, our end customer backlog from the affected warehouse is approximately $10 million. So we're making progress, but we're not where we want to be yet, and we still have work to do to replenish our distribution channels and increase our shipping capacity for future expected growth. We will continue to focus and improve until we have turned this weakness into a strength. Worldwide orthopedics revenue decreased 0.3% in the fourth quarter. In the U.S., orthopedic sales grew 15%, and internationally orthopedic sales decreased 9%. Obviously, the U.S. is seeing most of the benefit from the acquisitions. Total worldwide general surgery revenue decreased 12.0% in the quarter. U.S. general surgery revenue declined 11.5%, while internationally general surgery revenue decreased 13.1%. We estimate that the sales impact from the warehouse disruption was fairly balanced across the portfolio, with a little more impact felt on the general surgery side. For the full year of 2022, our total sales increased 4.6%. Revenue from the recent acquisitions was $24.8 million in 2022. For the full year, our sales in the US increased 4.8% versus the prior year, and our international sales increased 4.3%. Worldwide orthopedics revenue increased 6.5% for the full year of 2022. In the U.S., orthopedic sales grew 9.2%, and internationally, orthopedic sales increased 5.0%. Total worldwide general surgery revenue increased 3.1% for the full year 2022. U.S. general surgery revenue grew 3.0%, while internationally, general surgery revenue increased 3.2%. Now let's move to the expense side of the income statement. We will discuss expenses and profitability in the fourth quarter and the year, excluding special items, which include charges for acquisitions and contingent consideration, legal matters, restructuring and software implementation costs, debt refinancing and extinguishment costs, amortization of intangible assets, and amortization of deferred financing fees and debt discount net of tax. Adjusted gross margin for the fourth quarter was 54.2%, a decrease of 270 basis points from the prior year quarter. The majority of the decline is due to the cost inflation we're all dealing with in 2022. The gross margin was lower than we expected due to the significant revenue miss and certain period expenses recognized in Q4. For the full year, adjusted gross margin was 55.3%, a decrease of 90 basis points from 2021. We told you back in the spring that freight and material cost increases had cost us approximately 300 basis points in gross margin since the 2019 baseline. As we updated that analysis for the end of 22, it shows inflationary costs of 330 basis points in total. There has been some relief on the freight side, but the full impact of material cost inflation was higher for the full year 2022 than what we had seen back in the spring. When we add in the labor component to that metric, we estimate that total inflationary costs have decreased our gross margin by approximately 400 basis points in the last three years. Adjusted gross margin in 2019 were 55.4 percent. So that means that our improving mix and cost savings over the past three years have essentially offset the impact of inflation over that time period. Research and development expense for the fourth quarter was 4.9 percent of sales, 80 basis points higher than the prior year quarter. For the full year 2022, R&D expense was 4.5% of sales, 20 basis points higher than 2021. Fourth quarter adjusted SG&A expenses were 39.7% of sales, an increase of 300 basis points over the prior year quarter because of the missed sales in Q4 2022. For the full year, adjusted SG&A expenses were 38.8%, so 50 basis points higher than 2021. On an adjusted basis, interest expense was $7.9 million in the fourth quarter and $24.0 million for the full year. The adjusted effective tax rate was 26.5% in Q4. This was higher than anticipated as the lower income reduces the credits we were able to take against the income. For the full year, our adjusted effective tax rate was 23.5%. Fourth quarter gap net income was $26.6 million. This compares to gap net income of $24.4 million in Q4 of 2021. Gap earnings per diluted share were 86 cents this quarter compared to 75 cents a year ago. For the full year, gap net loss was $80.6 million compared to gap net income of $62.5 million in 2021. Gap net loss per diluted share was $2.68 in 2022, compared to gap net income of $1.94 in 2021. Excluding the impact of special items discussed earlier, in the fourth quarter, we reported adjusted net income of $12.9 million, a decrease of 61.3% compared to the fourth quarter of 2021. Our Q4 adjusted diluted net earnings per share were 42 cents, a decrease of 60.7% compared to the prior year quarter. Excluding the impact of special items discussed earlier, for the full year 2022, we reported adjusted net income of $85.0 million, a decrease of 14.5% compared to 2021. Our full year adjusted diluted net earnings per share were $2.65, a decrease of 17.4% compared to the prior year. Turning to the balance sheet. Our cash balance at the end of the year was $28.9 million compared to $33.4 million as of September 30th. Accounts receivable days as of December 31 were 69 days compared to 65 at the end of Q3. Inventory days at year end were 251 compared to 222 as September 30. Obviously, this was meaningfully impacted by the sales shortfall in the quarter. We expect this metric to reduce significantly as we progress through 2023. Long-term debt at the end of the year was $985.1 million versus $1.36 billion as of September 30th. We reclassified the remaining $69.6 million of the 2019 convertible notes to short-term liabilities. Our leverage ratio on December 31st, 2022, was 5.6 times compared to 5.0 times on September 30th. The increase is due to the dip in EBITDA in Q4 of 2022. This metric is debt divided by the last 12 months of EBITDA. So this lower Q4 will be in the calculation until Q4 of 2023. We expect adjusted EBITDA for the full year 2023 in the neighborhood of $240 million. We expect our leverage to drop below five times in Q3 of this year, and be below 4.25 times by the end of 2023 and in the low threes by the end of 2024. Cash used for operations in the quarter was $11.6 million compared to cash flow from operations of $33.8 million in the fourth quarter of 2021. Cash flow provided from operations for the full year 2022 was $33.4 million compared to $111.8 million in 2021. The biggest driver of this difference was the significant levels of inventory built in 2022. We expect operating cash flow around $130 million in 2023. Capital expenditures in the fourth quarter were $5.7 million compared to $3.2 million a year ago. For the full year, capital expenditures were $21.8 million compared to $14.9 million in 2021. Now let's turn to financial guidance. We expect reported revenue for the full year to be between $1.170 billion and $1.220 billion. This includes currency headwinds of 150 to 200 basis points. We've included the detail of the different components of our financial guidance in the investor deck associated with this call, which can be found on our website. As a reminder, we closed on Intabones in June of 2022, and we closed on Biores in August. So essentially, both become organic in the second half of the year. So what you see in the reconciliation is basically the revenue from the acquisitions in the first half of the year. For adjusted gross margins, the improving mix of the portfolio is strong and will continue to drive meaningful benefits in the future. For 2023, we think mix, including the acquisitions, should drive between 110 and 140 basis points of benefit. However, 2023 has some specific challenges on the margin side. FX is a meaningful headwind of between 40 and 60 basis points. And we continue to digest the inflationary costs discussed earlier, and we'll be temporarily slowing production in our slower-moving product lines to bring our inventory balance down. This all results in total gross margin improvement of 20 to 50 basis points in 2023. As we look beyond 2023, we expect at least 150 basis point improvement in 2024 and around 250 basis points in 2025. We believe we're on a path to have around 60% adjusted gross margins at the end of 2025. As a percentage of sales, we expect adjusted SG&A to be between 37.0% and 37.4% in 2023, and R&D expense to be in the mid-fours as a percentage of sales. We expect adjusted interest expense to be between $32.3 million and $32.8 million in 2023. We expect the adjusted effective tax rate to be around 25% in 2023. We expect adjusted EPS in 2023 to be between $3.20 and $3.45. That includes an FX headwind between 20 and 25 cents. As we look at the first quarter, we expect reported revenue between 262 and $272 million. That includes about 300 basis points of FX headwind based on the December 31st rates. We see this headwind decreasing each quarter throughout the year. We expect adjusted EPS in Q1 to be between 58 cents and 63 cents inclusive of FX headwind. The full year FX headwind on the bottom is almost all in the first half of the year split fairly evenly between Q1 and Q2. 2023 will have one less selling day overall than 2022. The way our calendar falls, Q1 will have one extra day, and Q3 will have two fewer days. We feel very good about the exciting revenue growth and profitability potential from the portfolio we have built, including our recent acquisitions. We have a self-inflicted wound we need to recover from quickly. We're focused on that. We're moving back on offense, and we will be a better and stronger company because of these experiences and focus. And with that, we'd like to turn the call over back to Justin for your questions.

And thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. And we do ask that you limit yourself to one question and one follow-up. Again, we ask that you limit yourself to one question and one follow-up and one moment for our first question.

And our first question comes from Travis Steed from Bank of America Securities.

Your line is now open.

Hey, good afternoon, everybody. Thanks for taking the question. I guess I wanted to understand any impact from the Q4 issues going over into Q1, how to think about the Q1 impact, and what's assumed in the guide for share recapture. It sounds like you're assuming all this comes back pretty immediately. Are you seeing signs of that now? I'm just trying to think if we've come at a risk. There's been some examples in that text. last year where the share didn't come back quite as fast as companies thought. So we'll make sure we understand what's being assumed in the guidance.

Yeah, so we ended the year, our back order was $30 million, and we just said that it's about $10 right now. So we've had a good January, made some good improvements. We've got some more to go. We're focused on that. The way I think about it, Travis, is the impact to sales should be the biggest in Q1, right, because we're closer to the issue. And as we get further from the issue, there should be a decreasing impact, right? And we do expect that we'll get the vast majority of those customers and that volume back. We may not get it all, but we do expect we'll get the vast majority of that. And that's what's assumed in the guidance. And I would just point out that, obviously, the backlog benefits the start of the year. So where you have the biggest hole to fill and to make up for, that's where you have the big benefit of catching up on the backlog. So we feel good about our guidance today and are focused on executing and winning the trust of those customers with that.

Okay. And I don't know if you do, did you give a dollar amount of how to think about the impact in Q1? And then the other question was just wanting to understand the US and OUS impact. And it sounds like things maybe got worse with the issue at the end of the quarter. I think we talked in November, it was more of an issue, a US issue at that point, but now it's impacting kind of both US and OUS and didn't know if the OUS would linger even further into 2023.

Yeah, that's correct. We can't estimate the exact impact of the catch-up we have to do in Q1. We think it'll be the biggest negative impact, which is offset by the biggest positive impact. It would be impossible to really quantify that quarter to quarter. Our focus is to earn that business back as quick as possible, obviously. And you are correct. You know, when we first talked about this and we expected it to be resolved quicker than it was, it was a U.S. focus. We felt like that the buffer of inventory in our OUS distribution centers would protect us. It did protect us for a time, but because the issue took longer to resolve than we all wanted it to, those international geographies were impacted later in the quarter. And so as we roll into 2023, The U.S. has recovered better and faster because the remediation efforts were first on that side of the business, and we're making up good strides on international, but international is probably more impacted at the start of the year here than U.S. is.

Okay. I'll leave it there. Thank you.

And thank you. And one moment for our next question. And our next question comes from Robbie Marcus from JP Morgan. Your line is now open.

Oh, great. Thanks for taking the questions. Maybe we could just go back to how this, the warehouse management disruption began, why it happened. You know, I imagine these things are implemented all the time. What was different at ConMed and, you know, what are the processes you put in place to prevent it from happening again?

Well, I would start by saying we all agree the remediation has taken longer than we expected. And I think you have to look at ConMed has one main warehouse. We have international distribution centers. The main warehouse is the warehouse that we put the system in place. And as we work through the issues, we took a very deliberate approach to identification and prioritization of those issues. while at the same time working daily to ship customer orders. And ultimately, we identified a lot more areas of remediation that were needed than we anticipated in the early stages. I think the way I think about it is the solutions when operating in a state-of-the-art software package require both technical and operational remediation. And the technical remediations require comprehensive user and system validation And we're also dealing with a substantial amount of what I would refer to as pure change management. And I say that because the warehouse that we upgraded was very manual operation, very much a paper, individual people-driven operation versus a system. And I refer to it as going from a warehouse kind of vintage 1980 to vintage 2020. That's a quantum step. And while we thought our work pre-install had positioned us to do that. We obviously did not do a comprehensive enough set of validations, user verifications that captured all the base user cases. You know, it's important to note, as Todd said, we've got the overall backlog down to 10 million, and we're making great progress. And the learnings we'll pull out of this will obviously come from a comprehensive after-action review, and any further software platform work that we do, which there's none in the foreseeable future at this point in time, would obviously benefit from these lessons. So again, better today than we were, took longer than we wanted, but long term this is the right solution to allow ConMed to scale from an operational standpoint.

Great. And maybe just a follow-up question. I appreciate all the color on guidance and some of the long-term outlook commentary. But if I just focus on 23 guidance, it looks like sales and EPS range came down just a bit at the upper end. I imagine some of that is due to how long this has lasted versus your original expectations when you provided guidance. Maybe just help us understand what's assumed in your market and recovery and customer capture assumptions at the low end and the high end, I think would be really helpful. Thanks.

Sure. Yeah, you're right, Robbie. We gave that initial guide with the disclosure of the warehouse issue. We gave it wider than normal range because it was two months prior to when we normally do it on this call. And the difference today and then is essentially we've taken a little bit off the top of both of those ranges, but we're back to the range that we would normally give on this call for the year. So that's $50 million on the top and $0.25 range on the bottom. And so this is our very typical how we would start the year. And you're right, I think the adjustment we're still very bullish on the business. Um, the Salesforce is very bullish. We know we can win the, the fact is that our Salesforce was put on defense, um, in the fourth quarter and it's lasted longer than it was supposed to. And so our focus is to get them on offense as quickly as possible. And, um, and we're laser focused on that. So we're moving back to offense and, um, And that's what's assumed in the guide.

And does that include sort of normal market volumes, procedure volumes, and I imagine at the high end of the range, full recapture of share?

Yeah, I think that our view is similar to what you've heard from others, that the environment is modestly improving, right? It's stabilized. So, yeah, inherent in this guide is that it's kind of status quo for macro factors. Great.

Thanks a lot. And thank you. And one moment for our next question. And our next question comes from Rick Wise from Stiefel. Your line is now open.

Good afternoon to you both. Maybe just taking the software implementation issue in the opposite direction, help us understand. I mean, I think we can all understand generally that having a software system or going to a modern system as opposed to a hand-managed system, Kurt, is impactful. How do we think about the benefits when you start to see those benefits? What kind of assumptions you're making about them in terms of sales, implementation, cash on the financial side, cash, working capital, efficiency, et cetera? So what do you expect? When do we start to see the positives, not just the recovery?

That's a great question, and it goes back to the reason you do these things. One is efficiency in the location, efficiency in movement of product into the location, through the location, and out of the location, whether that be to the end customer or international distribution centers. And that is a very tangible benefit, and as we sit here today, we're already seeing some of that efficiency our incoming receiving operations are materially more efficient than they were pre-implementation of the software. It's one of the areas that we did get right on the implementation. And so we see those things more broadly across the entirety of the warehouse, which warehouse operations are about receiving, replenishing, and then picking, packing, and shipping. And when we get all of these areas lined up the way they should be with all of the the requisite operational efficiencies and warehouse alignment, we believe we'll see that. And hopefully as we go day by day, week by week, we see this efficiency gains more subtly. And, you know, we're on this call a year from now, and we're proud of the system we have, and we're proud of the output that we have. And it means moving inventory faster, which allows our manufacturing and sales ops planning team do a better job with inventory management because we've got better controls, better oversight, better visibility on the global inventory network. So those are all kind of the things we would go after when you put a system like this in place. Hard sitting here today for me to say exactly when because we're still working our way through some of these inherent issues that we ran into. But again, as Todd said in his comments, we've got the backlog down to 10 million. We've made very good progress. As I said, the changes that have been required take comprehensive verification and validation, and we're trying to be very thoughtful to not make things worse as we're trying to move forward. And I'd say we've been successful on that, albeit a little bit slower than we had hoped.

Okay. Maybe, Kurt, you could talk in a little more detail about general surgery. Obviously, in terms of the performance, I mean, US, OUS, both were pressured a little more than the ortho side. Maybe help us understand some of the moving pieces there and just, again, how do you break it out between the warehouse issues something environmental or capital. And maybe I'm thinking about it wrong, but if I say to myself, if the smoke business, which is such a significant chunk now, is growing at 20% plus, which thank you for sharing that again, gosh, you must be feeling some real pressure elsewhere. And so where is that? What kind of recovery or improvement have you assumed in giving us the 2023 guidance? Thank you.

Well, when you look at ConMed in total, about 55% of our revenue comes out of general surgery. So every product we sell outside of the two acquisitions goes through that warehouse. So the impact of the warehouse slowdown is proportionally going to be larger on revenue for general surgery. General surgery also has a mix of products that go through the large packhouse, especially in our AET business, the GI business. And so as you slow down those large orders moving through the packhouses, it's going to have a more material impact on general surgery. I would assign a warehouse slowdown then takes your sales force out of its offensive mode, and they're playing defense, trying to move product around across their territory with the available product to ensure customers have what they need when they need it. And when you're doing that, you're certainly not an offense. You're not in a position to look for new business. You're not in a position to try to grow your existing customer base. And I think that's all a ramification of the warehouse issues. I personally feel like the fourth quarter was a good surgical procedure quarter. I feel like there were subtle gains in staffing that are starting to show in the environment. That's not to say there aren't pockets where there's still issues with surgical procedure volumes and staffing levels, but generally those two things are both improving or certainly what we saw in the fourth quarter. feel very good about our general surgery and our orthopedic business today. And it's unfortunate that this is clouding the outcomes of those businesses because I think we have very good portfolios and very good commercial teams that are very focused on their customers.

Rick, I just want to make a clarifying comment just so nobody's confused. When you refer to the 20% plus growth, that is, of course, our expectation on an annual basis is for the combined Buffalo filter and air seal product line. And that is in our deck. You're correct. We continue to expect that. That's a key part of our growth drivers. But it's on the growth drivers deck. It's forward looking. I want to be clear. Those product lines combined did not grow 20% in Q4 because of the warehouse issue. So I want to make sure nobody's confused by that. But we continue to expect you know, moving forward that they will be above that 20% growth mark. I'm glad you clarified it. Thank you.

And thank you. And one moment for our next question. And our next question comes from Matt O'Brien from Piper Sandler. Your line is now open.

Thanks for taking that question. Can you hear me okay? We can. Excellent. So I don't want to, you know, focus on this too much. But, you know, Kurt or Todd, the top line number did come down $10 million from what you guys talked about a couple of months ago. And I know you've got better information now. Is that specific to something in general surgery, something in orthopedic? that you're a little less bullish about now? And then can you just talk about the share recapture specifically? I mean, $65 million and one quarter is a ton of revenue, obviously. What are you seeing as far as getting that revenue back and your confidence and the visibility of getting that kind of share back going forward? And then I do have one follow-up. Thanks.

Sure. Thanks, Matt. And good question. Let's make sure we're clear. So 65 million was the miss in Q4 to our estimate. 30 million is the backlog at the end of the quarter, right? So we had 30 million in orders that if we could have got it out the door, we would have sold 30 million more, right? Inclusive, you know, part of that was we shut the warehouse down for the last three days of the year to do a physical inventory. to make sure that our books and records were clean and this thing didn't cause any issues on that side of the fence. So yeah, 65 was the miss, but 30 million was the back order. So that 30 million basically moves into 2023, right? So it helps 2023, but of course you've got to go get that business back. Now, some of that business, we got back before the quarter ended. Some of those customers, we were able to start serving again and we got them back in Q4. Some of them we've already gotten back in January. And we're going to continue to focus on taking care of our prior and existing customers. And then, of course, as you know, there's a ton of room to go get new customers. And so the biggest issue, so the $10 million, we gave you a $60 million range back in November. You are correct that we took $10 million off the top end of that range, but we didn't take the entire range down $10 million. We went from a $60 million range, which is wider than we would normally give for the coming year, back to a $50 million range. And we did take that $10 million off of the top end of the range simply because, as Kurt explained, by the Salesforce being on defense longer than we anticipated when we talked in November, that's going to bleed a little more into 23 than we anticipated. Now, the backlog is also bigger, so you get some benefit that carries into the year as well. But, you know, so we feel good about the revenue projections we've put forward. And let's see, did I miss any part of your question?

No, that's it. The 10 million, I mean, was there any area where they're a little more defensive? I don't know if it's general surgery or ortho.

It was about, it was, like we said, it was the impact from the 65 was slightly more on the general surgery side, but it affected

know the whole portfolio except for it did not in fact it did not affect the new acquisitions got it got it appreciate that and then the follow-up is on gross margins todd i mean it's something that we thought would get a lot better going forward i i mean getting to 60 i'm assuming you mean like at some point in in 20 um 25 versus the full year number being 60 percent um Correct me if I'm wrong, but where does that level of improvement come from? What's assumed as far as inflationary benefits over the next several years or some of the mixed benefits as well? Because that's quite a bit better than we expected. Again, knowing that you've been doing better, you've been offsetting some of these pressures over the last several years on the inflationary side.

Well, that's what's interesting, right? I mean, if you really think about 400 basis points of inflation digested over the last three years margins have stayed flat, right? So that means if inflation just stayed flat and didn't even get better, we were on a pretty good mix tailwind to grow at that rate. And by the way, two and a half of those three years did not have the benefit of the new acquisitions, which both come in at 80% gross margins. And of course, those are going to grow in size and contribution of mix, right? And so Our mixed story is powerful. I'll tell you, I feel good about the 60% because I haven't assumed that we get that 400 basis points of inflation back. I mean, I think in reality, there should be some recovery, but I'm assuming the labor stays where it is. I'm assuming that a lot of the material costs, some of those spot buys and things where you've paid exorbitant prices during this period. Those will come down, but we're not, I don't think the, the index cost of 2019 on the material side is ever coming back, right? You're not, you're not ever getting back to those same levels. And so I'm not banking on a lot of improvement or reversal from inflation to get to those numbers. The mixed part of our business by growing air, Salem Buffalo, like we've talked about these new acquisitions, getting better operationally, which we're focused on, you know, we've got the ability to get there. And I think we've demonstrated, oddly enough, in these three years, I think we've demonstrated that to be able to offset the crazy inflation like we have.

And I would just add to Todd's comment, you know, he talked about offsetting costs. We have the most comprehensive... cost reduction program today than we've ever had in my tenure at ConMed. And you put that with the right mix of products, good things happen. So, you know, you guys know us well. Todd wouldn't put those numbers out here if we didn't have confidence. Got it. Okay. Thanks so much.

And thank you. And one moment for our next question. And our next question comes from Young Lee from Jefferies. Your line is now open.

All right, great. Thanks for taking our questions. So, I heard the comments on Airstream and Buffalo growing less than 20% in Q4 because of the disruptions. I was wondering if you can provide a little bit more color on the growth in Q4. You know, I assume maybe some of those orders were higher prioritized, if possible. Is it fair to assume that without the disruptions, that business would have grown 20 plus percent in Q4?

Yeah, we certainly would assume that. We were set up to have a really good quarter there. So I think without the disruption, it would have been there. But we're not going to give the specific growth rates there, Young. But we continue to believe that that's going to be a big growth driver for us. you know, especially AeroSeal, you think about it, we are now seven years post-acquisition, and that thing has grown as good as it ever has. I mean, there's no slowing down. And then, of course, Buffalo is a lot younger in its tenure and a lot more penetration ahead of it. So, you know, we feel very good about that being a big contributor to growth for the coming years.

And just on the Buffalo filter aspect, there's legislation and some very large geographies coming into play in 2023. And we know now from history that that legislation, after it's in play at some period of time, does help those growth rates. They're big markets. I think it doubles the amount of the population in the US that's covered. So that's another benefit to that market.

I appreciate the additional color. I guess one more. Maybe your thoughts around Salesforce hiring for 23, how much of that was maybe a little bit impacted or delayed since you had to pivot and focus on the warehouse situation? I think you typically would have hired and trained them for 2023 by now.

Yeah, I'm gonna separate the topic from the warehouse. We do typically do Salesforce expansions in the first part of the new year. But I'm going to go back to June, July. As a leadership team, we took a very hard look at our overall headcount and looked at the recessionary elements in the global marketplace and said, is now the time that we want to be expanding or do we want to perhaps move a little bit sideways? And we made a decision than to prioritize our hiring to be more backfill driven versus expansion driven. We want to understand more where the market may be going if there is recessionary headwinds in 2023. And so as that relates to the sales force, we have done some expansion, but I would put it more on the minimal side relative to prior years. So Salesforce expansion happened, but probably on the lower end of our typical range of expansion.

Okay, understood. Thank you so much.

And thank you.

And one moment for our next question. And our next question comes from Mike Mattson from Needham.

Your line is not open.

Yeah. Thanks. Um, you know, just following up on the questions on the Salesforce, um, you know, I understand the decision Brown, not expanding it, but, um, you know, just curious if, um, you did anything to try to, you know, retain the reps after kind of a difficult fourth quarter. And I'd imagine a lot of them probably didn't end up hitting their quotas. Um, so they, you know, was there some kind of retention comp or something like that, given it wasn't really something within their sort of control. And is there any risk of sort of turnover happening there?

Great question, Mike. In the U.S. and outside the U.S., we do have a pursuit of quota mentality. And we have the ability to track that with great regularity and great frequency. And prior to the installation of the warehouse system, we knew where every individual rep stood and after the implementation and at the end of the year, we knew where reps stood. And we had a couple different set of metrics that we were tracking relative to that. And, you know, in spite of some of our issues, we had plenty of reps that made their original quota and we had plenty of reps that were at their quota before the installation. So we think we came up with a fair approach for our sales forces. And recognition of their accomplishments and you know we've actually at this point in time already had our sales meeting and I would say coming out of our sales meeting I was very bullish I was we were completely transparent with our sales force understanding we couldn't give them everything because we had not yet had this call but we we felt like we were very transparent we felt they left they're very engaged across the portfolio of products and and that's inclusive of the acquisition. This is the first time we've had the End of Bones organization at a sales meeting. I had the opportunity to interact with their sales force. We have every one of our orthopedics reps now trained and certified on BioRes, so we feel very good about how they left our sales meeting and how they're feeling about this year. Can I guarantee you that we will not lose people? I can't. But I feel we've done everything possible to retain our sales force our best and our brightest.

And thank you.

Thanks. And one moment for our next question. And our next question comes from Matthew Mishan from KeyBank.

Your line is now open.

Thank you for taking the questions, guys. Most of mine have been asked and answered probably several times at this point. I'll just go with this one. I think you guys said the overall environment has more stability. I think that's the first time I've heard you guys say something like that, probably in several years. Could you just expand on what you're seeing in the overall environment that you're seeing and that's giving you... the opportunity to feel better about the overall macro.

I think there's a couple answers to that question, Matt. I start on the commercial side. It's both factual and anecdotal. How are our selling organizations feeling about the marketplace, the procedure volumes they're seeing, they're participating in? How are the data around procedure trends and surgical staff and hospital staff levels moving. And all the data that I've seen on that would show net ads to those elements. And then there's just column conversations that the entirety of the executive team has with health system administration and folks that operate at a different level within the health delivery network. And all of those conversations are lining up to show that the fourth quarter showed improvement and we're coming into the new year with those things stable to moving in a more positive direction. The other side of this is what Todd was talking about is more in the manufacturing environment. We are not back to normal. I don't want to imply that. But there is more fallacy in the manufacturing environment in the supply chain notwithstanding some of the issues that are going on in China. But I think the basics of supply are returning slowly to normal. I want to be careful here. There are certain electronic components that are still under a constrained approach. And if you have older electronics, you're under a more constrained approach because everybody's moving towards new electronics. And I think you've heard that from several people. But there is a more sense of normalcy there. So on both sides of the business, we feel like things are stable to improving, notwithstanding a few outliers. The world's not perfect, but it's not getting worse, and it shows signs and is moving in a more favorable direction.

Okay, excellent.

You'll appreciate this, Matt. I was going to say it's the first time we've said it in three years because it's the first time it's been true in three years. Okay.

I think that's pretty fair, too. And this last one for me, I know a lot of us are going out to AOS in March. You got two new acquisitions on the Ortho side. Anything you want to kind of preview or kind of highlight that you'll be showing or showcasing there with those acquisitions?

That's a great question. We will have one physical booth presence this year. that will be inclusive of the EndoBones organization, as well as the Biores is part of ConMed's orthopedic business and the BioBrace technology. And we will do our normal surgeon presentation in the booth, and we haven't formally published that schedule yet, so I don't want to get ahead of the organization. But suspect we'll have sessions that focus on foot and ankle and biobrace from leading surgeons. And we're super excited about that agenda. We're super excited about having both of those as part of the offering. And then you should assume that the core of ConMed's orthopedics business will also be highlighting newer products in the portfolio. And we'll allow them to do that versus on a phone call. But we're excited about Academy. We've We've got a lot going into this year, and there's a couple other really big trade shows in 2023. ISACOS is going to be in the States this year. That's typically every other year. There's a great show in September that we go to, OSET, and those are great trade shows for ConMed's orthopedics business. On the general surgery side, there's lesser big shows. I mean, AORN is a very big show, and we've got a wonderful portfolio there. And then our AET business goes to some smaller localized shows but has a couple big shows. And we have some nice products there. One that I came out of the sales meeting really encouraged by and the sales force very encouraged by. So we're excited about the organic portfolio as much as we are the inorganic portfolio. And just got to get it in front of our customers.

All right. Thanks, Todd.

And thank you. And I am showing no further questions. I would now like to turn the call back over to Kurt Hartman for closing remarks.

All right. Thank you, Justin, and thank you, everybody, for being with us today. And we look forward to speaking with you during our next earnings call and wish you all a good evening. Thank you.

This concludes today's conference call. Thank you for participating.

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