CONMED Corporation

Good day, and thank you for standing by. Welcome to ConMed's second quarter fiscal 2024 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. Before the conference call begins, let me remind you that during the 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 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 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 also hear management refer to non-GAAP or adjusted measurements during this discussion. While these figures are not the 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 measures the income of a company, excluding credits or charges that are considered by the company to be special or outside of its normal ongoing operations. These adjusted items are specified in a reconciliation supporting the company's earnings releases posted in 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, Amy. Good afternoon, and thank you for joining us for ConMed's second quarter 2024 earnings call. With me on the call is Todd Garner, Executive Vice President and Chief Financial Officer, and Pat Beyer, our Chief Operating Officer. Today, we will share with you our second quarter results and the overall outlook for our business. We will then open the call to your questions. I'll start by reviewing our second quarter results. Total sales for the quarter were $332 million, representing a year-over-year increase of 4.5% as reported and 5.2% in constant currency. This performance delivered a record high quarterly sales result and was within our range of expectations. From an earnings perspective during the second quarter, our GAAP net income totaled $30 million. This compares to net income of $13.7 million in the second quarter of 2023. Excluding special items that affected comparability, our adjusted net income of $30.6 million increased 17.2% year over year, and our adjusted diluted net earnings per share of 98 cents increased 18.1% year over year. Overall, we had several areas of strong financial performance in the quarter to include gross margin, adjusted EPS, and our leverage ratio, which Todd will cover. Jumping into the key product categories, on the orthopedic side of the business, we did not clear the supply constraints to the level we had expected. While the absolute dollar level of back order is back to normal, The current mix is far more weighted to our core single-use disposables and implant categories, and this by nature creates inefficiencies for our sales teams. Those missed opportunities result in lost sales as customers have alternatives in many of these categories. Further, this slows our team's ability to be fully on offense going after new customers. This leaves us behind our initial plan entering Q3 and requires us to lower guidance for the remainder of the year. We understand this performance is frustrating for both our customers and our investors. On the general surgery side of the business, demand remained healthy across the portfolio. Regarding AirSeal, while it is still very early in the rollout of the new surgical robot, I wanted to provide you with some insight into what we are seeing after its first full quarter in the market. First, in the quarter, our U.S. AirSeal Capital Unit sales grew faster than they did in the prior year quarter. we are seeing no sales slowdown on AirSeal Capital. Second, we understand that the first locations to receive the new robot were likely a targeted list of key customers. We also understand these locations are expected to commit to a certain number of procedures using the full feature set of the robot before they make any adjustments based on their preference. Against that backdrop, in this very early window, our initial surveillance shows that the percentage of surgeons that returned to AirSeal after their initial committed number of procedures on the new robot appears to be consistent with the percentage of surgeons that chose AirSeal on the previous generation. This shows that clinical precision in sufflation at low pressure remains a user preference. Third, AirSeal is used in roughly a third of robotic surgical procedures today, and those surgeries are concentrated in the longer, more complex procedures such as prostatectomy, nephrectomy, hysterectomy, and bariatric surgery. These procedures typically stress standard insufflation due to leaks, smoke evacuation, suction requirements, and large cavity volume demand. We believe, and our early surveillance confirms, that based on patient outcomes and numerous published clinical studies, that the procedures are most likely to use AirSeal today will be the same procedures that use AirSeal with the new robot. I will now turn the call over to Todd, who will provide a more detailed analysis of our Q2 financial performance and take you through our updated full-year 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 second quarter of 2024, our total sales increased 5.2%. For Q2, our sales in the U.S. increased 6.1% versus the prior year quarter, and our international sales grew 4.0%. Worldwide orthopedics declined 0.1% in the second quarter. In the U.S., orthopedic sales declined 0.4%, and internationally, orthopedic sales grew 0.1%. We've talked about our supply chain issues in our sports medicine and foot and ankle businesses, and we expected Q2 to be a transition back to offense. As Kurt said, that transition is taking longer than we expected. Total worldwide general surgery revenue increased 9.4% in the quarter. U.S. general surgery revenue grew 8.9%, while internationally general surgery revenue increased 10.5%. So the general surgery side of the business continues to be healthy and perform in line with historical trends. Consistent with the data that Kurt provided on AirSeal, we continue to see very good global growth in that product line. 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, software implementation costs, amortization of intangible assets, and amortization of deferred financing fees net of tax. Adjusted gross margin for the second quarter was 55.3%, an increase of 90 basis points compared to the prior year quarter. Research and development expense for the second quarter was 4.2% of sales, 10 basis points lower than the prior year quarter. Second quarter adjusted SG&A expenses were 36.9% of sales, 50 basis points lower than the prior year quarter. On an adjusted basis, interest expense was $8.2 million in the second quarter. The adjusted effective tax rate in Q2 was 24.0%. Second quarter GAAP net income was $30.0 million. This compares to GAAP net income of $13.7 million in Q2 of 2023. GAAP earnings per diluted share were 96 cents this quarter compared to 43 cents a year ago. Excluding the impact of special items discussed earlier in the second quarter, we reported adjusted net income of $30.6 million, an increase of 17.2% compared to the second quarter of 2023. Our Q2 adjusted diluted net earnings per share were 98 cents, an increase of 18.1% compared to the prior year quarter. Turning to the balance sheet, our cash balance at the end of the quarter was $28.9 million compared to $33.9 million as of March 31. Accounts receivable days as of June 30th were 65 compared to 70 at the end of March and 65 a year ago. Inventory days at quarter end were 196 compared to 207 in March and 200 a year ago. Long-term debt at the end of the quarter was $965.2 million versus $990.1 million as of March 31st. Our leverage ratio on June 30th was 3.8 times which was better than we expected. So all balance sheet metrics moved in the right direction in the quarter and were improving in our working capital controls. Cash flow provided from operations in the quarter was $43.3 million compared to $26.7 million in the second quarter of 2023. Capital expenditures in the second quarter were $3.6 million compared to $4.5 million a year ago. Now let's turn to financial guidance. The revenue in the first half of the year is very close to what we expected at the beginning of the year. However, we expected to have better improvement in our global orthopedics business at this point. We knew we had supply challenges to work through early in the year, and we expected our teams to be fully back on offense by July 1st. While we have made significant improvements with the supply chain and our back order is back to pre-pandemic levels, we remain hand-to-mouth on too many items, which is impeding our ability to be fully back on offense. Of course, this is a central focus for us, and we believe that we should be in a much stronger position by the end of the year. In Q1, we grew 5.9%, and in Q2, we grew 5.2%, both against the strong growth rates we saw throughout 2023. So we've grown between 5% and 6% constant currency in the first half of the year. We think it's prudent to expect that same level of growth in the second half of the year, with Q3 on the lower part of that range. We project about 50 basis points of currency headwind in the third quarter and immaterial FX in Q4. That would put our full year reported revenue guidance between $1.305 billion and $1.315 billion. Our focus will be to strengthen our operational foundation over the next six months, increase the confidence of our sales forces, particularly in orthopedics, and be back to full offense by the start of 2025. With orthopedics being slower in the back half of the year than we expected, that has an impact on gross margins. For the first six months of 2024, we improved gross margins by 130 basis points compared to 2023, consistent with our initial guidance for the year of improvement between 100 and 150 basis points. And we continue to project improving margins sequentially. We expect Q3 to be in the mid-56% range and Q4 to be around 57%. That would put us around 100 basis point improvement on the year, with the mixed engine still very positive and driving us northward. Again, our focus over the next six months will be to improve our internal operations, and we believe that will allow us to continue to improve margins at a higher pace than the vast majority of MedTech. We've included in our IR deck how this revised guidance impacts our original 2024 guidance for SG&A, interest expense, and the tax rate. We will continue to invest in the business to improve our revenue growth, but grow expenses slower than revenue. We project EPS growth to be between 9 and 11 percent in Q3, and between 13 percent and 18 percent in Q4. That would put our new full-year guidance for adjusted EPS between $3.95 and $4.02, representing growth between 14.5 percent and 16.5 percent still much better than the vast majority of medtech. While we're disappointed by the need to reset our guidance lower than our initial expectations on the year, we believe these numbers are responsible and demonstrate a healthy growth company on the top and bottom lines with upside in the future. We are focused on executing and winning in the marketplace with our improving engine. And with that, we'd like to open the call to your questions and turn it back to Amy.