CONMED Corporation

Thank you for standing by, and welcome to ConMed's fourth 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 the 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 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 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 Pat Beyer, President and Chief Executive Officer, for opening remarks. Mr. Beyer?

Thank you, Lateef. Good afternoon and thank you for joining us for ConMed's fourth quarter 2024 earnings call. With me on the call is Todd Gardner, Executive Vice President and Chief Financial Officer. I'll provide a brief overview of the financial and operating performance for the fourth quarter and the full year. Todd will then provide a more detailed analysis of our financial performance and discuss our 2025 guidance, as well as how we're thinking about the impacts of potential tariffs. We will then open the call to your questions. I'll start by quickly reviewing our fourth quarter results. Total sales for the quarter were $345 million $900,000, representing a year-over-year increase of 5.8% as reported and 6% in constant currency. This performance was generally in line with our expectations and financial guidance. From an earnings perspective, we delivered GAAP net income of $33.8 million in the fourth quarter. This compares to net income of $33.1 million in the prior year period. excluding special items that affected comparability, our adjusted net income of $41.8 million increased 26.2% year-over-year, and our adjusted diluted net earnings per share of $1.34 increased 26.4% year-over-year. For the full year, sales were $1.307 billion, representing year-over-year growth of 5%, as reported, and 5.3% in constant currency. Sales for our orthopedics business increased 2.4% in the fourth quarter and 2.5% for the full year on constant currency basis. Our general surgery business performed well with constant currency growth of 8.7% in the fourth quarter and 7.5% for the full year. AirSeal had another year of strong double-digit growth with record capital and disposable sales despite the change in market dynamics. While our overall sales growth in 2024 was below our potential of our portfolio, we were able to offset some of the top-line headwind with improving profitability driven by product mix and operating leverage, which Todd will discuss in more detail. Our 2024 GAAP net income totaled $130.4 million compared to $64.5 million in 2023. Excluding special items that affected comparability, our adjusted net income of $129.9 million increased 20% year over year, and our adjusted diluted net earnings per share of $4.17 increased 21% year over year. Turning to 2025, we are laser focused on resolving the remaining supply challenges for our orthopedics business and strengthening our operations, while maximizing the potential of our key growth drivers, including AirSeal, Buffalo Filter, BioBrace, and our Foot & Ankle portfolio. We made progress on our supply challenges throughout 2024, but not as quickly as we had planned. Our sales force is now back on offense in Foot & Ankle, while there is still work ongoing in other areas of orthopedics. To that end, we recently engaged a top-tier consulting firm that is helping us drive change more rapidly and turn our operations from an area of weakness into an area of strength. I noted that AeroSeal delivered good growth in 2024 despite the evolving competitive environment for much of the year. We believe the continued strong demand reflects the importance of the clinical insufflation provided by AirSeal in robotic surgery and laparoscopy, which is particularly important for longer and more complex procedures. We are confident that AirSeal will remain a double-digit grower for a long time, supported by physician demand for better patient outcomes, including less pain and quicker recovery times, which mean fewer hospital days enabling the hospitals to treat more patients. We're going to continue to expand the impact of Buffalo Filter, which plays a key role in protecting caregivers from toxic smoke in the operating room. We are the leader in the smoke evacuation market, which is still in the early stages of growth, and we are excited about the outlook for BioBrace, our highly differentiated product for soft tissue repair and sports medicine. Over the last decade, led by Curt Hartman, we turned ConMed into a growth company, and I'm fortunate to take the helm at this point. The ConMed portfolio has been developed over a 55-year period, and we will be performing a deep dive into our portfolio and markets with the objective of sharpening our focus to improve the durability, growth, and profitability of our portfolio into the next decade. I'm excited about our long-term future, and I'm excited about the improvements we are going to make in the coming months. The foundation is strong, and I'm thrilled to be leading ConMed on the next chapter of its growth story. With that, I'll turn the call over to Todd, who will provide a more detailed analysis of our financial performance and discuss our 2025 financial guidance. Todd? Thank you, Pat.

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, the year, and our financial guidance. As a reminder, Q4 2024 had one more day than Q4 2023. For the fourth quarter of 2024, our total sales increased 6.0%. For Q4, our sales in the U.S. increased 6.8% versus the prior year quarter, and our international sales grew 5.0%. Total worldwide orthopedic sales grew 2.4% in the fourth quarter. In the U.S., orthopedic sales grew 5.2%, and internationally, orthopedic sales increased 0.6%. Total worldwide general surgery sales increased 8.7% in the quarter. U.S. general surgery sales grew 7.4%, while internationally general surgery sales increased 12.0%. For the full year of 2024, our total sales increased 5.3%. For the full year, our U.S. sales grew 6.9%, and international sales grew 3.4% versus the prior year. Total worldwide orthopedic sales increased 2.5% for the full year 2024. This below-market performance is related to the supply challenges we have disclosed all year long. As Pat said, we have engaged a top-tier consulting firm to help us turn this weakness into a strength in 2025. In the U.S., orthopedic sales grew 5.6%, and internationally, orthopedic sales increased 0.7%. Total worldwide general surgery sales increased 7.5% for the full year 2024. U.S. general surgery sales grew 7.4% in 2024, while internationally general surgery sales increased 7.6%. Now let's move to the expense side of the income statement. We will discuss expenses and profitability in the fourth quarter and the full year, excluding special items which are detailed in our press release. Adjusted gross margin for the fourth quarter was 57.6 percent, which is a 120 basis point improvement over the prior year quarter. For the full year, adjusted gross margin was 56.3 percent, an increase of 110 basis points from 2023. Considering the challenges we had in operations in 2024, we are pleased with this gross margin improvement and believe it reflects the long-term mixed tailwind we have in our portfolio. Research and development expense for the fourth quarter was 3.8 percent of sales, 50 basis points lower than the prior year quarter. This reduction was simply due to the timing of projects and Q4 being the highest sales quarter of the year. For the full year 2024, R&D expense was 4.2 percent of sales, no change from 2023. Fourth quarter, adjusted SG&A expenses were 35.6% of sales. Leverage gained on the higher sales drove the 110 basis point improvement over the prior year quarter. For the full year, adjusted SG&A expenses were 37.1% of sales, 30 basis points lower than 2023. Q4, we delivered an adjusted operating margin of 18.6%. an increase of 280 basis points over the prior year quarter. Adjusted operating margin for the full year 2024 was 15.5 percent, an improvement of 150 basis points over 2023. We are intensely focused on turning our 2024 challenges into strength in 2025. Despite those challenges, the strong improvement we delivered in operating margin demonstrates the long-term opportunity for this portfolio to grow faster than our peers in revenue and profitability. On an adjusted basis, interest expense was $7.4 million in the fourth quarter and $31.6 million for the full year. The adjusted effective tax rate in Q4 was 26.7 percent due to year-end calculations of tax items. For the full year, our adjusted effective tax rate was 24.1 percent in line with expectations. Fourth quarter GAAP net income was $33.8 million, a 2.1% increase over Q4 2023. GAAP earnings per diluted share were $1.08 this quarter compared to $1.05 a year ago. For the full year, GAAP net income was 134, I'm sorry, $132.4 million compared to GAAP net income of $64.5 million in 2023. Gap earnings per diluted share were $4.25 in 2024 compared to gap earnings per diluted share of $2.04 in 2023. Excluding the impact of special items discussed earlier, in the fourth quarter, we reported adjusted net income of $41.8 million, an increase of 26.2% compared to the fourth quarter of 2023. Our Q4 adjusted diluted net earnings per share were $1.34 an increase of 26.4% compared to the prior year quarter. For the full year of 2024, we reported adjusted net income of $129.9 million, an increase of 20.0% compared to 2023. Our full year adjusted diluted net earnings per share were $4.17, an increase of 20.9% compared to the prior year. Turning to the balance sheet, our cash balance at the end of the year was $24.5 million compared to $38.5 million as of September 30th. Accounts receivable days as of December 31st were 62 days compared to 66 at the end of Q3. Inventory days at year end were 211 compared to 224 at September 30th. Long-term debt at the end of the year was $905.1 million versus $940.1 million as of September 30th. Our leverage ratio on December 31st was 3.35 times. Cash flow provided from operations in the quarter was $43.3 million compared to $56.4 million in the fourth quarter of 2023. Cash flow provided from operations for the full year, 2024, was $167.0 million compared to $125.3 million in 2023. That means we turned 5.3% sales growth for the year into 20.9% growth in adjusted EPS and 33.2% growth in operating cash flow. This was accomplished in a year where we built considerable inventory to mitigate our supply issues. Our cash engine is strong, and we have long-term tailwinds to our working capital. Capital expenditures in the fourth quarter were $4.0 million compared to $4.9 million a year ago. For the full year, capital expenditures were $13.1 million compared to $19.0 million in 2023. Now let's turn to financial guidance. Given the uncertainty around President Trump's tariff negotiations, the guidance we are providing today excludes any potential impact. At the end of this discussion, I will provide what the math looks like for us on an annual basis if the negotiations fail and the headline tariff numbers that Trump threatened actually take effect. So excluding that for now, let's start with revenue. While we saw some encouraging signs in Q4, we're not going to get ahead of ourselves with guidance today. In our investor deck, we provided a slide for the purpose of aligning investors' models with where the portfolio is today, including current gross margins and expected mid-term revenue growth ranges. To be clear, we are not changing the level of detail in our ongoing financial disclosures. Rather, we are offering this more detailed product-level view into revenue and margin expectations for the purpose of resetting expectations. Going forward, we will continue to disclose total company results along with the sales breakout between orthopedics and general surgery. Of course, as we always have, we will provide color commentary on certain products as they are relevant and material. That slide I referenced shows the 4% to 9% revenue growth potential of our portfolio over the midterm. We're going to start at the low end of that range for 2025. and expect to earn the credibility to move higher within that range as we deliver in future years. For the full year 2025, we expect constant currency revenue growth between 4 and 6%, with currency headwind between approximately 100 and 120 basis points. Together, that places our reported revenue guidance range between $1.344 billion and $1.372 billion. Of note, Q1 2025 has one less selling day than 2024, and Q3 has one more. Currency is also a little stronger headwind in Q1 than it is for the full year, so we expect reported sales in Q1 to be between $310 million and $316 million. That same slide that I referenced also calculates our gross margin mixed tailwind based on those revenue growth rates to be between 50 and 80 basis points for 2025. We remain bullish on our long-term mixed tailwind as the product families that are growing the fastest also have the higher gross margins. And we're confident this work we're doing on our supply chain and manufacturing will be accretive to gross margins in future years as we increase supply predictability and establish a culture of continuous improvement and cost savings. We're aware that our larger competitors have more sophistication in their processes and that we are too dependent on single source supply. Closing those gaps may require additional investment before we can realize the savings. Therefore, in 2025, it is possible that this effort is a drag on margins before the savings are realized. We're in the early stages of the process and it's too early to quantify the timing and magnitude of the savings we expect. With that context and the fact that currency is a headwind of about 50 basis points for the coming year in gross margins, we would not be surprised if gross margins as a percentage of sales in 2025 were at a similar level to 2024. Before I leave gross margins, I'd like to note that in our standard costing system, For the first time in our history, for a calendar year, in 2024, our standard gross margin started with a 6, at 60.1%. Mix should continue to drive that number up. Our task is to reduce our manufacturing variances and other cost of sales, and we're focused on turning those functions from a weakness to a strength. We continue to expect SG&A as a percentage of sales to decrease over the long term. We expect to continue to invest and grow our resources to improve and solidify the top-line growth. We believe this can be accomplished by growing sales expenses slower than revenue. However, currency is also working against us on this line in 2025, so we expect our 2025 SG&A as a percentage of sales to be similar to 2024. We expect full year R&D expense in 2025 to be between 4.0 and 4.5% of sales. We expect Q1 to land at the high end of that range to make up for some of the timing we saw in Q4 of 2024. Based on current forecast of interest rates from our banking partners, we expect an adjusted interest expense to be between $27.5 million and $28 million in 2025. We expect the adjusted effective tax rate to be in the mid 24% range in 2025. As I mentioned before, we've delivered adjusted EPS growth recently much higher than revenue growth by multiples even. That's because of our margin tailwind and responsible management of expenses. As we focus on moving more on offense going forward, we believe an attractive and responsible model is to grow adjusted EPS at approximately twice the rate of sales growth on a constant currency basis. So longer term, that's what we would expect. As we look specifically at 2025, the currency headwind on adjusted EPS is estimated to be between 15 and 20 cents. And given the potential temporary pause in gross margins I discussed earlier, we project reported adjusted EPS guidance for 2025 between $4.25 and $4.40. The currency impact on EPS appears to be relatively consistent by quarter throughout the year. With the initiatives we have underway, we expect full-year operating cash flow in 2025 to be between $130 million and $140 million, with capital expenditures in the $20 million to $30 million range, putting free cash flow around $110 million for the year. We project adjusted EBITDA between $270 million and $280 million for 2025. Similar to last year, there are heavier cash requirements in the beginning of the year, so we expect our leverage ratio to stay relatively flat for the next six months and then drop below three by the end of 2025. So that concludes our 2025 financial guidance, which as a reminder, excludes any impact from increased tariffs from the new Trump administration. We don't want to be in the business of predicting outcomes of international trade negotiations at this early date, so we're simply going to provide the numeric answer for Trump's initial declaration with no exclusions on an annual basis. For Mexico and Canada, an additional 25% tariff on the total product value crossing the border into the United States using our current accounting and process would be a tariff increase of approximately $45 million in total. The Canadian piece of this is very small. To demonstrate the uncertainty here, even if the 25% tariff ultimately was put in place, but only assigned to the value added in Mexico, the liability would decrease from $45 million to approximately $7.5 million. Today, everything produced in Mexico comes into the United States to be sterilized and shipped around the globe from our distribution center in Georgia. Because of our global revenue mix, theoretically, we could reduce that liability by approximately half by only bringing products into the U.S. that are for U.S. customers. But, of course, that would take time to implement. We also have manufacturing capacity in the U.S. and have experience moving product lines between plants. But of course, that also takes time. For China, Trump has announced an additional 10% to the existing tariffs with no exemptions. The existing tariffs that Trump implemented in his first term are at 25%. However, Section 301 of the Trade Act exempts certain medical devices, which includes our products from China. So we are currently paying very minimal tariffs on product from China. That exemption expires at the end of May 2025, and our partners in the process believe the way the current order is worded, the exemption will continue until expiration. So the worst case scenario appears to be that a 10% tariff would be assessed on product from China beginning this month, which would equate to about $250,000 per month. If nothing changes, beginning in June, the tariff rate would become 35%, which would be approximately $875,000 per month for us, or roughly $10.5 million on an annual basis starting in June. Mitigation efforts here would require finding substitute vendors, which could take significant time in a regulated environment and also potentially add costs. That's the maximum potential impact as we understand it today. Given the number and frequency of changes in policy lately, we will not provide updates with every twist and turn in D.C., but we will provide updates as appropriate on our quarterly calls or in other public formats as we gain further visibility and certainty. As Pat said, we are laser focused on turning our weaknesses into strengths in 2025 by improving our processes and rebuilding our credibility. 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 to your questions, and I'll turn it back to Lateef.