CONMED Corporation

Good day and thank you for standing by. Welcome to ConMed's first quarter fiscal 2025 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 1-1 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 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 law. 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 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 of its normal ongoing operation. 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. And those attending, I want to thank you for the staying on. We had a little technical issue and we had to log off and come back on. I want to thank you for joining us, good afternoon, and thank you for joining us for ConMed's first quarter 2025 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 first quarter. Todd will then provide a more detailed analysis of our financial performance and guidance, as well as our updated view on the impact of tariffs. We will then open the call to your questions. I'll start by quickly reviewing our first quarter results. Total sales for the quarter were $321.3 million, representing a year-over-year increase of 2.9% as reported and 3.8% in constant currency, a little better than our guidance. While we have more work left to do with our supply chain initiatives, we are pleased that we are starting the year consistent with our full year growth expectations. From an earnings perspective, excluding special items that affected comparability, our adjusted net income of 29.6 million increased 19.6% year-over-year, and our adjusted diluted net earnings per share of 95 cents increased 20.1% year-over-year. First quarter sales growth was balanced across our segments with constant currency sales growth of 3.9% in orthopedics and 3.8% in general surgery. Performance in orthopedics was led by double-digit sales growth in our foot and ankle products, as well as strong demand for BioBrace. We're excited about the outlook for BioBrace, our highly differentiated product for soft tissue repair and sports medicine. BioBrace is being used clinically in over 50 procedures from the rotator cuff to the ACL and into the Achilles. We have 14 peer-reviewed publications already in print and we have nine clinical studies underway. We have a large randomized prospective clinical study with 268 patients and we look to have this study enrollment completed in 2026 with publication in 2027. Also on the good news front, in early April, we received FDA clearance for our new delivery device for a biobrace and rotator cuff repair. We believe this will make the procedure easier and faster for surgeons. General surgery continues to be led by air seal and smoke evacuation, both seeing double-digit demand in quarter one. We continue to believe in the importance of clinical insufflation provided by air seal and robotic surgery and laparoscopy which is particularly important for longer and more complex procedures. Physicians are continuing to choose AirSeal to prioritize patient care as AirSeal has been clinically proven to reduce both length of stay and post-operative pain for patients. We are working on a way to help investors understand the AirSeal attachment rate to DV5 compared to XI and compared to non-robotic procedures. There are multiple uses within the hospital, and there is no practical method to determine where a product is used after the sale. The hospital could be using the capital or the disposables in all three modalities, which ties to the broad clinical benefit in both laparoscopy and robotic surgery. We do, though, sell one SKU that is only used in conjunction with robotic procedures, and that SKU grew in the healthy double digits in quarter one. Turning to our supply chain initiatives, we have made progress here. A number of SKUs on backorder are declining. We're seeing early progress, but we are not where we need to be yet. We continue to believe we should be in a better position by the end of the year. I'm excited about our long-term future. We have a significant tailwind from Mix at our back with strong growth drivers and the opportunity to turn our supply chain operations into an area of strength for the company is well within our control. Of course, we would acknowledge that the near-term macroeconomic and policy backdrop creates some uncertainty for our customers. However, demand for our products remains strong. We think this is a function of the healthy end markets in which we operate and our clinically differentiated products. We are closely tracking the spending pattern of our customers, but have not seen any material changes to date as hospitals systems appear to be prioritizing areas that are key to our business, including our high growth focus areas of minimally invasive surgery and the areas of laparoscopy and arthroscopy, which tend to not be as reliant on large capital purchases. Within these two categories, we have four very unique platforms that are still in the early stages of their growth trajectories. These four platforms are surrounded by a portfolio of products that have been developed hand-in-hand with physicians over time with the goal of supporting ease of use and improved patient outcomes. I'm excited about the opportunities that lie ahead for this portfolio, particularly AirSeal, Buffalo Filter, BioBrace, and Convent Foot & Ankle, especially as we begin to see the effects of the improvements to our supply chain operations over the coming quarters. 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, as well as quantifying our latest thinking on tariffs. 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 and our financial guidance. As a reminder, we had one less sales day in Q1 compared to the prior year, which we estimate to be worth between 100 and 150 basis points of growth. For the first quarter of 2025, our total sales increased 3.8% year over year. For Q1, our sales in the U.S. increased 4.2% versus the prior year quarter, and our international sales grew 3.4%. Total worldwide orthopedic sales grew 3.9% in the first quarter. In the U.S., orthopedic sales decreased 2.1%, and internationally, orthopedic sales increased 7.9%. While supply challenges in parts of our orthopedics business drove the underperformance in the U.S., we were pleased to see another quarter of double-digit growth in foot and ankle. Total worldwide general surgery sales increased 3.8% in the quarter. U.S. general surgery sales grew 6.9%, while internationally, general surgery sales decreased 3.3%. The decline internationally was due to our energy and critical care product lines. 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 which are detailed in our press release. Adjusted gross margin for the first quarter was 56.4%, which is 80 basis points higher than the prior year quarter. This was a little stronger than we expected given the mix of the sales in Q1. We're encouraged by the opportunities to improve the supply chain operations that are being identified in conjunction with our external consultants, and we expect at least $20 million of annual savings to come out of this effort. However, those benefits won't really materialize until calendar 2026, as our manufacturing variances are deferred into inventory and get recognized as that inventory is sold. We now have increased visibility into how margins could play out for the rest of the year. We expect margins in Q2 to be in the mid 56% range, Q3 in the mid 55s, and Q4 approaching 57%. That all adds up to margins being relatively flat versus 2024 for the full year, consistent with what we estimated at the beginning of the year. The currency impact has improved by about 20 basis points in the last three months, but the timing of the savings from the operational improvements are a little slower to materialize than anticipated. Research and development expense for the first quarter was 4.0% of sales, 40 basis points lower than the prior year quarter. First quarter adjusted SG&A expenses were 38.7% of sales consistent with the prior year as expected. On an adjusted basis, interest expense was $6.8 million in the first quarter. The adjusted effective tax rate in Q1 was 23.1%. First quarter GAAP net income was $6.0 million compared to $19.7 million in 2024. GAAP earnings per diluted share were 19 cents this quarter compared to 63 cents a year ago. Excluding the impact of special items discussed earlier, in the first quarter we reported adjusted net income of $29.6 million. an increase of 19.6% compared to the first quarter of 2024. Our Q1 adjusted diluted net earnings per share were 95 cents, an increase of 20.1% compared to the prior year quarter. Turning to the balance sheet, our cash balance at March 31st was $35.5 million compared to $24.5 million at December 31. Accounts receivable days as of March 31st were 62 days, no change from the end of 2024. Inventory days at March 31 were 222 compared to 211 at December 31st as we go through the process of improving the supply chain. Long-term debt at the end of the quarter was $891.4 million versus $905.1 million as of December 31st. Our leverage ratio on March 31st was 3.2 times, which was a little better than expected. Cash flow provided from operations in the quarter was $41.5 million compared to $29.1 million in the first quarter of 2024. Our cash flow remains very strong. Capital expenditures in the first quarter were $3.8 million compared to $2.0 million a year ago. Now let's turn to financial guidance. I'm going to talk about guidance without tariffs first and then detail how we're estimating the tariff impact. So you can have both pieces as we expect the environment may continue to be dynamic. So excluding tariffs for now, let's start with revenue. While Q1 came in a little better than we expected, it does not change our view of the constant currency growth for the year. So we continue to expect the year to be between 4% and 6% constant currency growth. Our projected FX impact did ease by about 50 basis points for the year. going from what had been a headwind of 100 to 120 basis points to a headwind of 50 to 70 basis points. That takes our full year guidance up from a range of 1.344 billion to 1.372 billion to a slightly higher range of 1.35 billion to 1.378 billion. We expect reported revenue in Q2 to be between 335 million and $340 million. Our adjusted EPS guidance excluding tariffs for the full year is increasing from a prior range of 425 to 440 to a new higher range of 445 to 460. That reflects the beat in Q1 as well as an improvement in FX of about 5 cents on the year. We started the year with an estimate of currency headwind of approximately 15 to 20 cents We now expect that headwind to be between 10 and 15 cents. We expect Q2 adjusted EPS to be between $1.10 and $1.15. Now let's talk about tariffs. The good news since our last call is that it has become clear that product coming from our plant in Mexico will be exempt from tariffs as we are USMCA compliant. Our disclosure today is based on a 145% tariff on products coming from China, 25% from Canada, and 10% on products from Europe and the rest of the world. Using those percentages, we estimate approximately $5.5 million of supply chain exposure in 2025. 85% of that is from China, 12% is from Europe. This computes to approximately 14 cents of EPS with 2 cents hitting Q3 and 12 cents hitting Q4. We have added a slide in our investor deck that shows our adjusted EPS guidance without tariffs and then with this estimate of tariff exposure. So in a very dynamic environment, we started the year consistent with our revenue guidance and delivering better on the bottom line. We remain focused on the operational improvements we need to move fully on offense in all parts of our business. With that, we'd like to open the call to your questions, and I'll hand it back to Lateef.