CONMED Corporation

Thank you for standing by and welcome to ConMed's first quarter fiscal year 2024 earnings conference 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, you may press star 1 1 again. 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 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 a substitute for GAAP measures, 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 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 first quarter 2024 earnings call. With me on the call is Todd Garner, Executive Vice President and Chief Financial Officer. We're also joined today by our new Chief Operating Officer, Pat Byer, Today we will share with you our first quarter results and the overall outlook for our business. We will then open the call to your questions. I'll start by reviewing our first quarter results. Total sales for the quarter were $312.3 million, representing a year-over-year increase of 5.7% as reported and 5.9% in constant currency. I'm proud of these results on top of last year's inflated growth, which was driven by a tailwind from the final sales catch-up from the fourth quarter of 2022 to warehouse issue. Our global logistics team has never operated in as coordinated and efficient a fashion as they are today, and I'm very proud of this team. From an earnings perspective, during the first quarter, our GAAP net income totaled $19.7 million. This compares to net income of $1.8 million in the first quarter of 2023. Excluding special items that affected comparability, our adjusted net income of $24.8 million increased 20.3% year-over-year and our adjusted diluted net earnings per share of 79 cents increased 19.7% year-over-year. Overall, I'm very encouraged by our start to the new year as we saw strength across the domestic business and finished as expected outside the U.S. given the year-over-year comparable sales. First quarter surgical volumes were steady, and capital spend in our categories remains consistent. Our new product launches, including the introduction of BioBrace into the foot and ankle space while early, have us encouraged. We've made good progress in the supply chain challenges we were dealing with last year, and our back order is now back to pre-pandemic levels relative to sales. Most importantly, we delivered solid results on both the top and the bottom line and are set up for continued strong 2024 performance. Before closing, I want to congratulate and welcome Pat Beyer as he has been promoted to the newly created role of Chief Operating Officer. I see this as a natural evolution for ConMed and our leadership team. Pat has great commercial and operational instincts and builds tremendous teams that deliver results. He was the first member of the current team that joined ConMed back in December of 2024. He's well known across the company and with over 30 years in the industry, is well known across our markets, both domestically and internationally. Finally, he has participated in various investor events during his time at ConMed, so he has exposure to this area of the business and many of you listening as well. Overall, I'm pleased with our start to the year, excited by the broad underlying strength of our diverse portfolio, and very encouraged by the positive engagement we are seeing across our business offering in all areas of the company. I'll now turn the call over to Todd, who will provide a more detailed analysis of our Q1 financial performance and take you through our full year guidance. Todd?

Thank you, Kurt. All sales growth numbers I referenced today will be given in constant currency. The reconciliation to GAAP 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 first quarter of 2024, our total sales increased 5.9%. As a reminder, a year ago, we grew 19.4% organically in Q1 of 2023. as we had a tailwind from reducing the warehouse-related backlog. When we look at the first quarter over a two-year stacked growth rate, the average growth rate for the company is in the low double digits. Q1 of 2024 has also had one less selling day compared to the prior year quarter, which we estimate to have impacted consolidated growth between 100 and 150 basis points. For Q1, our sales in the US increased 7.2% versus the prior year quarter, and our international sales grew 4.2%. Worldwide orthopedics revenue grew 3.0% in the first quarter. In the US, orthopedic sales grew 10.6%, and internationally, orthopedic sales declined 1.6%. Total worldwide general surgery revenue increased 8.2% in the quarter. U.S. general surgery revenue grew 5.7%, while internationally general surgery revenue increased 14.1%. Now let's move to the expense side of the income statement. We will discuss expenses and profitability in the first quarter, excluding special items, as noted in our press release. Adjusted gross margin for the first quarter was 55.6 percent, an increase of 160 basis points compared to the prior year quarter. This was meaningfully better than expected due to product mix and specific geographies. Research and development expense for the first quarter was 4.4 percent of sales, 20 basis points higher than the prior year quarter. First quarter adjusted SG&A expenses were 38.7 percent of sales, 80 basis points higher than the prior year quarter. On an adjusted basis, interest expense was $8.2 million in the first quarter. The adjusted effective tax rate in Q1 was 23.8%. First quarter GAAP net income was $19.7 million. This compares to GAAP net income of $1.8 million in Q1 of 2023. Gap earnings per diluted share were 63 cents this quarter compared to 6 cents a year ago. Excluding the impact of special items, in the first quarter we reported adjusted net income of $24.8 million, an increase of 20.3 percent compared to the first quarter of 2023. Our Q1 adjusted diluted net earnings per share were 79 cents, an increase of 19.7 percent compared to the prior year quarter. Turning to the balance sheet, our cash balance at the end of the quarter was $33.9 million compared to $24.3 million as of December 31st. Accounts receivable days as of March 31st were 70 days compared to 67 at the end of 2023 and 65 days a year ago. Inventory days at quarter end were 207 compared to 198 at December 31st and 215 a year ago. Long-term debt at the end of the quarter was $990.1 million versus $973.1 million as of December 31st. Our leverage ratio on March 31st was 4.0 times. As discussed on our last call, given the heavier cash requirements in the beginning of the year, we expect our leverage ratio to stay around four times in the first half of 2024 and then drop into the low threes by the end of 2024. Cash flow provided from operations in the quarter was $29.1 million compared to cash flow used for operations of $3.8 million in the first quarter of 2023. Capital expenditures in the first quarter were $2.0 million compared to $4.3 million a year ago. Now let's turn to financial guidance. The first quarter came in a little better than we expected, and we feel good about the expectations we set in January for the first half and full year. Currency did get worse by about $10 million on the top line for the year. So our reported range for revenue drops by that $10 million and is now 1.33 billion to 1.355 billion. We expect the currency headwind in Q2 alone to be approximately 50 basis points. So we're now guiding to reported growth between 4% and 6% in Q2. The currency impact is affecting gross margin as well, and we expect a portion of the mixed favorability we experienced in Q1 to potentially swing the other way in Q2, resulting in gross margin improvement between 60 and 80 basis points over Q2 of 2023. This would put the first half 2024 gross margins in the range of what we expected back in January. Given the currency impact and expected higher interest rates for the year compared to three months ago, we are lowering our adjusted EPS range for the year by 5 cents to be between $4.25 and $4.35 which still represents growth between 23% and 26% over 2023. Overall, we are pleased with the Q1 performance, and excluding FX, we see the year unfolding the same way we did in January. And with that, we'd like to open the call to your questions, and I'll hand it back to Lateef.