CONMED Corporation

Thank you for standing by and welcome to ConMib's Q3 fiscal year 2023 earnings call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. To remove yourself from the queue, press star 1 1 again. You will be limited to one question and one follow-up, then return to the queue. 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 represents 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 in certainties that may cause actual results to differ materially. The company disclaims any obligation to update any forward-looking statements that may be disclosed 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 substitute for GAAP measurements, Management uses these figures to aid in monitoring the company's ongoing financial performance from quarter to quarter and in 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 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 Kurt Hartman, ConMed's Chair of the Board, President and Chief Executive Officer, for opening remarks. Mr. Hartman.

Thank you, Lateef. Good afternoon and thank you for joining us for ConMed's third 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 third quarter results and updated guidance and then open the call to your questions. I will start by saying we're very pleased with our team's performance in the third quarter and as important year to date. Total sales for the quarter were $304.6 million, representing a year-over-year increase of 10.7% as reported and an increase of 11.9% in constant currency. On an organic constant currency basis, sales growth finished at 11.5%. I would remind everyone that in early August, the BioRez acquisition reached its one-year anniversary. We remain very encouraged after one year with the BioBrace product offering and the cadence of market acceptance that we have seen. Our priorities remain the introduction of a delivery system for MIS rotator cuff repair, international regulatory and channel expansion, medical education, and clinical studies. We're making solid progress in all of these areas. Overall, our performance this quarter highlights the benefits of our diversified portfolio from products to geographies. Every business and every geography are not always linearly predictable quarter after quarter. The benefit of diversification is that one adds another flows. And we saw that dynamic deliver a very healthy Q3 2023 with double digit organic growth. From an earnings perspective during the third quarter, our gap net income totaled $15.8 million. This compares to $46.2 million in the third quarter of 2022 and represents a decline of 65.7%. Excluding special items that affected comparability, Our adjusted net income of $28.4 million increased 19.5% year-over-year, and our adjusted diluted net earnings per share of $0.90 increased 16.9% year-over-year. At a macro level, the news cycle has been challenging and global events unsettling, in addition to there being a lot of noise in the medtech markets. Our results today are indicative of our ongoing focus on providing innovative solutions to our customers around the world so they can treat their patients. The underlying surgical specialties and markets that we serve are healthy and healthcare staffing levels continue to improve. In summary, I'm very pleased with the focus and the results delivered in the quarter and year to date and confident that we will finish 2023 in great shape and with positive momentum to start the new year. Before turning the call over to Todd, I'd like to take a quick moment to express our condolences Upon hearing of the tragic and way too early passing of Matt Michon, we want to express our sincere condolences to the Michon family and the KeyBank family. I'll now turn the call over to Todd.

Thank you, Kurt. Knowing Matt and his dogged curiosity, it made me smile to think that maybe he got access to MedTech results before the rest of you. 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 third quarter of 2023, our total sales increased 11.9%. On an organic basis, revenue grew 11.5%. As a reminder, we anniversary the BioRez acquisition on August 9th. The way our calendar fell, Q3 had two fewer selling days compared to the prior year quarter. For Q3, our sales in the U.S. increased 9.5% versus the prior year quarter, and our international sales grew 15.1%. Worldwide orthopedics revenue grew 6.4% in the third quarter. In the U.S., orthopedic sales grew 1.3%, and internationally, orthopedic sales increased 9.7%. Intubones and Biorez both performed well during the quarter. However, we continue to experience supply constraints on our legacy orthopedic business. In addition to those issues, during Q3, our allograft tissue partner, MTF, informed us of an industry-wide reagent supply disruption that will linger into Q4. Those combined constraints will have an impact on revenue and gross margins in Q4 2023, but we expect supply to continue to improve and be back to normal by the first quarter of 2024. Total worldwide general surgery revenue increased 16.0% in the quarter. U.S. general surgery revenue grew 12.9%, while internationally general surgery revenue increased 23.8%. As Kurt said, the benefit of our diversified portfolio was on full display this quarter, delivering healthy double-digit organic growth for ConMed. Now let's move to the expense side of the income statement. We will discuss expenses and profitability in the third quarter, excluding special items which include charges for acquisitions and contingent consideration, amortization of intangible assets, and amortization of deferred financing fees net of tax. Adjusted gross margin for the third quarter was 55.9%, flat compared to a year ago and 150 basis points better sequentially, consistent with our prior guidance. When we guided Q3, I also projected that Q4 margins should improve again sequentially at least 100 basis points. We still expect sequential improvement in Q4 gross margins, but due to the supply disruptions I just talked about, we now expect that improvement to be less than 100 basis points sequentially, but well above gross margins from Q4 a year ago. We remain committed to having gross margins around 60 percent by the end of 2025. Research and development expense for the third quarter was 4.1% of sales, 50 basis points lower than the prior year quarter. Third quarter adjusted SG&A expenses were 37.7% of sales, consistent with the year ago. On an adjusted basis, interest expense was $8.5 million in the third quarter. The adjusted effective tax rate in Q3 was 20.8%. Taxes came in lower than expected, principally due to finalizing our federal tax returns. We still expect the tax rate to be around 25% going forward. Third quarter GAAP net income was $15.8 million. This compares to GAAP net income of $46.2 million in Q3 of 2022. GAAP earnings per diluted share were 50 cents this quarter compared to $1.48 a year ago. Excluding the impact of special items discussed earlier, in the third quarter, we reported adjusted net income of $28.4 million an increase of 19.5% compared to the third quarter of 2022. Our Q3 adjusted diluted net earnings per share were 90 cents, an increase of 16.9% compared to the prior year quarter. Turning to the balance sheet, our cash balance at the end of the quarter was $30.5 million compared to $27.8 million as of June 30th. Accounts receivable days as of September 30th were 68 days compared to 65 at the end of Q2. Inventory days at quarter end were 215 compared to 200 at June 30th. Long-term debt at the end of the quarter was $942.2 million versus $971.5 million as of June 30th. Our leverage ratio on September 30th was 4.8 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 $46.1 million compared to cash flow from operations of $25.9 million in the third quarter of 2022. Capital expenditures in the third quarter were $5.4 million compared to $6.7 million a year ago. Now let's turn to financial guidance. For the full year, we now expect reported revenue to be between $1.240 billion and $1.260 billion compared to our previous guidance range of $1.230 billion to $1.260 billion, with no material change to the expected currency impact on the year. We expect full-year adjusted EPS in 2023 to be between $3.45 and $3.55 compared to our previous range of $3.40 and $3.55. As Kurt said, we are pleased with the performance through the first nine months and are focused on executing a strong finish to the year. We remain confident in our ability to deliver innovation to our customers while driving above market growth and profitability over the long term. And with that, we'd like to open the call to your questions, and I'll hand it back to Lateef.