CONMED Corporation

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 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 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 second 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 second quarter, as well as an update on our priorities and our growth drivers. 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 second quarter results. Total sales for the quarter were $342 million, 300,000. which came in slightly above the high end of our guidance range on year over year growth of 3.1% as reported and 2.9% in constant currency. Sales growth was driven by worldwide general surgery sales of 4.4%. Worldwide orthopedic sales grew 0.8% year over year. We are confident our supply chain initiatives can accelerate growth in orthopedics as well as move into 2026. We will discuss these initiatives in more detail later on in my prepared remarks. From an earnings perspective, excluding special items that affected comparability, our adjusted net income of $35.6 million increased 16.4% year over year, and our adjusted diluted net earnings per share of $1.15 increased 17.3% year over year. Importantly, we believe the work we are doing with our supply chain, the ongoing review of our portfolio, and the investments we're making behind our four key growth drivers support a mid single digit to high single digit revenue growth profile for the business over the longer term. I will now discuss each of these topics starting with our four key growth drivers, AirSeal, Buffalo Filter, BioBrace, and Foot & Angle. I'll begin with AirSeal. This platform remains the largest single contributor to our general surgery growth and is the primary driver of its 92% recurring revenue profile. We want to provide a more granular look at the potential of the platform here. With a little over a year now of experience with DV5 in the marketplace, we are seeing AirSeal being used in 10 to 20% of DV5 procedures. The procedures on XI continue to grow at a healthy level, and AirSeal is used in 35 to 40% of those procedures. For the purposes of this update, we are projecting that the AirSeal use in nonrobotic procedures can grow between 10% to 15% annually over the next five years. If we apply those rates to the cell site consensus of what the mix between DV5 and XI will be over the next five years, we project air seal procedures will grow in the high single digits to the low double digits over that period. We believe that the clinical benefits of air seal in complex procedures continued XI placements, and growing adoption in laparoscopy will provide durable, healthy growth in this differentiated product line. Turning to Buffalo Filter, quarter two direct sales reflect another quarter of double digit growth. Growth in Buffalo Filter is supported by legislative adoption, new product introductions, and deeper hospital protocols that protect caregivers from the harmful byproducts of surgical smoke. Nineteen US states have enacted smoke-free operating room laws, with West Virginia, Virginia, and Minnesota taking effect in 2025. On July 1, North Carolina became the 19th state to enact such laws, with implementation required by January 1, 2026. Globally, we continue to see geographies around the world also enact legislation. We estimate the global smoke evacuation market is approximately $300 million today with line of sight to $2 billion over the next several years. We also continue to drive innovation in this market. In the first half of 2025, we have launched PlumeSafe PX5, a smaller and quieter next generation evacuator designed for ambulatory and outpatient settings. Moving on, sales for our orthopedic products grew in quarter two despite ongoing supply chain recovery work, which I will touch on shortly. Growth in the quarter was led by double digit demand for BioBrace, our highly differentiated biologic implant designed for soft tissue repair and augmentation. BioBrace is now in clinical use across 52 distinct procedures, from rotator cuff and ACL repairs to Achilles and gluteus medius reconstructions, underscoring its versatility across sports medicine anatomies. In April, the FDA cleared a dedicated BioBrace surgery device for rotator cuff repair, BioBrace RC. And early surgeon feedback indicates the instrument streamlines workflow, and improves reproducibility. But based on the strong feedback we received in the second quarter, we are moving into full market release in the United States. Importantly, hospital systems continue to prioritize minimally invasive surgery spend and BioBrace aligns squarely with that trend. Our foot and ankle products delivered double digit growth for the third consecutive quarter, reflecting the successful resolution of prior supply chain challenges. This sustained momentum is a direct result of the foundational work we completed last year to stabilize our operations and improve product availability. At ConMed, we're focused on building a stronger, more resilient operational foundation to support long-term growth and deliver exceptional value to our customers and stakeholders. A key priority is resolving our remaining supply chain challenges, particularly within sports medicine and transforming this area into a competitive advantage. Looking ahead, our strategy here centers on three core objectives. First, stabilizing and scaling operations. We are implementing targeted improvements in procurement, planning, and production to enhance reliability and scalability. These efforts will allow us to better meet customer demand and support future growth. Two, driving efficiencies. We've engaged a top-tier consulting firm to help optimize our operations. This collaboration is expected to generate at least $20 million in annual savings while also accelerating our ability to execute with precision, and agility. Three, building a high performance supply chain. Our goal is to evolve our supply chain into a strategic asset, one that is agile, cost effective, and capable of supporting innovation. We are focused on strengthening supplier relationships, improving inventory management, and leveraging data to drive smarter decision making. We are confident that by the end of the year, we will be in a significantly improved position. The path forward is clear and the opportunity to turn operations into a true engine of growth and value creation is well within our control. To support these initiatives, ConMed is committed to maintaining a strong balance sheet and reducing debt. We expect our leverage ratio to fall below 3.0 by the end of 2025. providing financial flexibility for future investments. In conclusion, we remain confident in our business fundamentals and long-term strategy. We are actively optimizing our portfolio towards higher margin, high growth opportunities to enhance shareholder returns. Thank you to our employees, partners, and stakeholders for your continued commitment and support. We look forward to updating you on our progress in the quarters ahead. With that, I'll turn the call over to Todd, who will provide a more detailed analysis of our quarter two 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. For the second quarter of 2025, our total sales increased 2.9% year over year. For Q2, our sales in the U.S. increased 2.8% versus the prior year quarter, and our international sales grew 2.9%. Total worldwide orthopedic sales grew 0.8% in the second quarter. In the U.S., orthopedic sales decreased to 0.8%, and internationally, orthopedic sales increased 1.8%. Total worldwide general surgery sales increased 4.4% in the quarter. U.S. general surgery sales grew 4.3%, while internationally, general surgery sales increased 4.7%. 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 are detailed in our press release. Adjusted gross margin for the second quarter was 56.5%, which is 120 basis points higher than the prior year quarter and consistent with our expectations. We continue to make progress on backorder with the numbers headed in the right direction. Research and development expense for the second quarter was 4.1% of sales, 10 basis points lower than the prior year quarter. Second quarter, adjusted SG&A expenses were 37.1% of sales, 20 basis points higher than the prior year. On an adjusted basis, interest expense was $6.4 million in the second quarter. The adjusted effective tax rate in Q2 was 24.8%. Second quarter GAAP net income was $21.4 million compared to $30.0 million in 2024. GAAP earnings per diluted share were 69 cents this quarter compared to 96 cents a year ago. Excluding the impact of special items discussed earlier, in the second quarter, we reported adjusted net income of $35.6 million, an increase of 16.4% compared to the second quarter of 2024. Our Q2 adjusted diluted net earnings per share were $1.15, an increase of 17.3% compared to the prior year quarter. Turning to the balance sheet, our cash balance at June 30th was $33.9 million compared to $35.5 million at March 31. Accounts receivable days as of June 30th were 62 days, no change from the end of Q1. Inventory days at June 30th were 212, which is 10 days lower than at March 31. Long-term debt at the end of the quarter was $881.1 million, compared to $891.4 million at March 31st. Our leverage ratio on June 30th was 3.1 times, which was a little better than expected. Cash flow provided from operations in the quarter was $29.1 million, compared to $43.3 million in the second quarter of 2024. Capital expenditures in the second quarter were $5.7 million compared to $3.6 million a year ago. Now let's turn to financial guidance. Let's start with revenue. We are updating our full-year reported revenue guidance to a range of $1.356 billion to $1.378 billion, which is a narrowing from the prior range of 1.350 billion to 1.378 billion. FX is now projected to be essentially neutral for the full year 2025. We expect Q3 reported revenue to be between $330 million and $337 million, with about 50 basis points of tailwind from FX. Last quarter, we talked about margin and EPS guidance without tariffs, and then gave specific disclosure on the expected tariff impact on 2025 by quarter. With the first six months of the year behind us and our cost of goods sold being deferred with inventory for six months, we now know the tariff impact on 2025, which is two cents in Q3 and seven cents in Q4. That is now incorporated in our guidance. We told you back in January to expect gross margins in 2025 to be similar to 2024. That was without any additional tariffs. We continue to expect 2025 gross margins to be similar to 2024. While digesting the additional tariffs, currency has ameliorated somewhat. The FX impact on gross margins is still a headwind, but better than the original estimate of 50 basis points. We told you a quarter ago to expect margins in Q2 to be in the mid 56% range, Q3 in the mid 55s, and Q4 approaching 57%, which was without tariffs. Including our tariff disclosure from the same call, that translated to Q4 guidance in the mid 55s. We continue to see the year playing out that way. Turning to EPS. We started the year guiding adjusted EPS between $4.25 and $4.40 with currency headwind between 15 and 20 cents. So the organic constant currency guide without additional tariffs was $4.45 to $4.55 at the beginning of the year. That organic constant currency guidance without tariffs is now increased to $4.59 to $4.74. We now expect currency to be a headwind of approximately 10 cents and tariffs to be approximately 9 cents, resulting in reported adjusted EPS between $4.40 and $4.55, which is 9 cents better on both ends than our guidance last quarter, inclusive of tariffs. Our guidance slide in the investor deck shows the apples to apples comparison of our prior guidance and today's guidance. Specific to Q3, we expect adjusted EPS to be between $1.03 and $1.08. In summary, we are overperforming in profitability and our leverage is lower than projected halfway through the year. We remain focused on our growth drivers to improve our execution and get back to above-market revenue growth consistently. With that, we'd like to open the call to your questions.