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 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. the company's actual results may differ materially from its current expectations. Please refer to the risks and other uncertainties disclosed under the forward-looking information in today's press release, as well as the company's SEC filings for more detail 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 non-GAAP or adjusted measurements during this discussion. While these figures are not suitable 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 for benchmarking against other medical technology companies. Adjusted net income and adjusted earnings per share measure the income of the company, excluding credit or charges that are considered by the company to be special or outside of its normal ongoing operation. These adjusting items are specified in the reconciliation supporting the company's earnings releases post to the company's website. With these required announcements completed, I will now turn the call over to Kurt Hartman, Con Med's Chair of the Board, President and Chief Executive Officer for opening remarks. Mr. Hartman?

Thank you, Jonathan. Good afternoon and thank you for joining us for Con Med's second quarter 2023 earnings call. With me on the call is Todd Garner, Executive Vice President and Chief Financial Officer. Our plan is to share with you our second quarter results and then open the call to your questions. I will start by saying we are incredibly pleased with our team's performance in the second quarter. After setting a new quarterly sales record in Q1, we handily beat that with our Q2 performance. Total sales for the quarter were $317.7 million, representing a year-over-year increase of 14.6% as reported and an increase of 16.6% in constant currency. On an organic, constant currency basis, sales growth finished at 12.6%. Our commercial teams were outstanding in the first half, and the results in orthopedics and general surgery indicate we delivered balanced growth across our product offering on a global basis. I'd remind everyone that in mid-June, the Into Bones business reached its one-year anniversary. We remain pleased with this business and look forward to continued growth in this exciting market as part of our organic base. Additionally, the BioBrace offering continues to build momentum through growing market acceptance which is being driven by positive clinical experiences. From an earnings perspective during the second quarter, our GAAP net income totaled $13.7 million. This compares to a net loss of $168.3 million in the second quarter of 2022 due primarily to the extinguishment of most of the 2024 convertible notes, excluding special items that affected comparability Our adjusted net income of $26.1 million increased 5.3% year-over-year, and our adjusted diluted net earnings per share of 83 cents increased 9.2% year-over-year. At a macro level, and consistent with my first quarter comments, the underlying surgical markets that we serve are healthy, and healthcare staffing levels continue to improve. Conversely, inflationary pressure on the material side has been slower to dissipate, and supply chains are not yet fully recovered. Overall, we see all these dynamics as stable to improving in the second half of 2023. In summary, I'm very pleased with the focus and results delivered in the quarter, and I'm confident we will build on our success in the second half. Before I turn the call over to Todd, I'd like to provide important context about the standard insufflation market and our competitive position with AirSeal. Let me start by saying that AirSeal is an only-in-class technology. From day one, it has been replacing standard insufflation from all marketplace competitors in both robotic and laparoscopic procedures, given its unmatched clinical benefit delivered through low pressure. The introduction of another standard insufflation device into the market will not change our clinical or sales algorithm, whether it is a standalone device or attached to a robot. The only parties that will feel the pressure from the introduction of another standard insufflation device are the existing standard insufflation companies that we have been replacing for the past seven years. I will again remind you that none of these companies can deliver consistent pneumo at low pressure, nor the related clinical benefits, which are significant and are included in the investor presentation that we posted this afternoon. Our position has always been that AirSeal delivers better patient outcomes and competitive devices driven principally through lower pressure. To support that position, we have 33 peer-reviewed studies with over 6,000 enrolled patients across five surgical specialties that demonstrate reduced post-operative pain, reduced length of stay, reduced 30-day visits, reduced ER visits, and improved ventilation metrics. Standard insufflation has zero clinical studies that demonstrate any of these important clinical benefits. In fact, I think I can make a compelling argument that we are, through our clinical capabilities, growing the number of available surgeries that can be done laparoscopically in certain patient populations to include elevated risk and high body mass index patients. Competitively, since 2018, six new insufflation devices have been introduced to the market, and AirSeal continues to win surgeons globally. While the concept of integration of advice with a robot may enhance ease of use, it will do nothing to change the clinical paradigm on which we have been taking market share and will continue to take market share. I will also remind you that in 2018, two strong competitors introduced their AirSeal equivalents, and I think our results would suggest we navigated that period just fine. From a technology and sustainability standpoint, we own 187 issued patents and have another 124 pending. They extend our patent position through the end of the 2030s, and we continue to add to this position. Further, our Air Seal IP crosses the system and is integrated in such a way that it is not one seminal patent that protects us, but rather the integration of the patents across all aspects of the system to include the IFS box, tube set, and access ports. This is what makes AirSeal function in a manner that delivers clinical benefit. Each of these components is manufactured separately in a unique facility with the critical parts being insourced here at ConMed. We're not currently aware of any patent work that will allow another device to function in a low-pressure mode. Finally, based on the June 2023 Best Hospitals in the U.S. Teaching Hospital category, AirSeal is present in 92% of the top 25 teaching institutions with MIS procedural utilization rates ranging from just getting started to over 75%. This is a statistically significant fact given that physicians utilize what they are trained on when they depart to surgical practice. We will never be dismissive of competitive entrance, but I think it's misinformed to assume that same old technology created by the same partner to the rest of the insufflation market, will somehow materially impact our results, never mind that the market knows minimal details about this device. From my chair, if it's not obvious that it can provide consistent pneumoperitoneum at low pressure as proven through clinical studies like AirSeal has shown, it is just another standard insufflation device. The only-in-class AirSeal technology, supported by extensive clinical benefits derived through low pressure, has clearly been moving the market to embrace our solution. We do not see anything in a standard insufflation offering that would slow that progression, and we remain extremely optimistic about our future with AirShield. More importantly, and if you really digest the quarter we just delivered, the overall prospects for ConMed, given the surgical diversity of and balanced growth our portfolio is demonstrating, look the best they have ever looked in my tenure. I'll now turn the call over to Todd, who will provide further details on our financial performance and discuss our updated outlook. 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've included Investor Deck on our website that summarizes the results of the quarter and our updated guidance. And this time, it includes some supplemental information on the moat around our air sale product line, consistent with Kurt's comments. For the second quarter of 2023, our total sales increased 16.6%. On an organic basis, revenue grew 12.6%. We anniversary the InterBones acquisition on June 13th, and Biores will turn organic on August 9th. For Q2, our sales in the US increased 17.1% versus the prior year quarter, and our international sales grew 16.0%. Worldwide orthopedics revenue grew 19.8% in the second quarter. In the U.S., orthopedic sales grew 29.4%, and internationally orthopedic sales increased 14.8%. Total worldwide general surgery revenue increased 14.1% in the quarter. U.S. general surgery revenue grew 12.5%, while internationally general surgery revenue increased 17.9%. Now let's move to the expense side of the income statement. We will discuss expenses and profitability in the second quarter, excluding special items, which include charges for acquisitions and contingent consideration, termination of distributor agreements, legal matters, debt refinancing costs or structuring and software implementation costs, amortization of intangible assets, and amortization of deferred financing fees net of tax. Adjusted gross margin for the second quarter was 54.4%, a decrease of 50 basis points from the prior year quarter. This was consistent with our guidance of mid-54s for Q2. Similar to Q1, we saw exceptionally strong growth in some of our lower margin geographies, which has skewed the margin to the lower end of our guidance so far. We remain excited about the improving margins ahead. For Q3, we expect gross margins to improve sequentially over Q2 by approximately 150 basis points. And then again, sequential improvement from Q3 to Q4 between 100 and 150 basis points. Research and development expense for the second quarter was 4.3% of sales, 20 basis points higher than the prior year quarter. Second quarter adjusted SG&A expenses were 37.4% of sales. Leverage gained on the higher sales drove the 70 basis points improvement over the prior year quarter. On an adjusted basis, interest expense was $8.5 million in the second quarter, We expect a similar level of interest expense in Q3, and that does incorporate the rise from today. The adjusted effective tax rate in Q2 was 21.9%. Taxes came in lower than expected principally due to the excess tax benefit from stock plans. This is difficult to predict, but we don't expect the same benefit in future quarters. We still expect the tax rate to be around 25% going forward. Second quarter gap net income was $13.7 million. This compares to gap net loss of $168.3 million in Q2 of 2022. Gap earnings per diluted share were 43 cents this quarter compared to a loss of $5.65 per share a year ago. Excluding the impact of special items discussed earlier, in the second quarter we reported adjusted net income of $26.1 million, an increase of 5.3% compared to the second quarter of 2022. Our Q2 adjusted diluted net earnings per share were 83 cents, an increase of 9.2% compared to the prior year quarter. Turning to the balance sheet, our cash balance at the end of the quarter was $27.8 million compared to 26.5 million as of March 31st. Accounts receivable days as of June 30th were 65 days flat compared to the end of Q1. Inventory days at quarter end were 200 compared to 215 at March 31. Long-term debt at the end of the quarter was $971.5 million versus $995.3 million as of March 31. Our leverage ratio on June 30, 2023 was 5.1 times. We continue to expect our leverage ratio to be below 4.25 times by the end of the year. Cash flow provided from operations in the quarter was $26.7 million compared to cash flow from operations of $18.7 million in the second quarter of 2022. Capital expenditures in the second quarter were $4.5 million compared to $5.7 million a year ago. Now let's turn to financial guidance. We now expect reported revenue for the full year to be between $1.230 billion and $1.260 billion compared to our previous guidance range of between $1.205 billion and $1.250 billion, with no material change to the expected currency impact on the year. We now expect full-year adjusted EPS in 2023 to be between $3.40 and $3.55 compared to our previous range of $3.30 and $3.50. As discussed previously, the full-year 2023 will have one less selling day compared to 2022. The way our calendar falls, Q1 had one extra day, and Q3 will have two fewer sales days. As we look at the third quarter, we expect reported revenue between $295 and $305 million. That includes approximately 100 basis points of FX headwind. We expect adjusted EPS in Q3 to be between 80 cents and 85 cents. As Kurt said, we are pleased with the Q2 performance and our focus on executing and continuing to build on our strong first half as we move through the rest of 2023. We remain confident in our ability to deliver innovation to our customers while driving above market growth and profitability over the long term. With that, we'd like to open the call up to your questions, and I'll turn it back to Jonathan.