CONMED Corporation

Please stand by. Hello and welcome to ConMed's third quarter of 2026 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. 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 forward-looking statements that involve risk and uncertainties, as those terms are defined under 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 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. Reconciliation of those non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAPs are available in the earnings press release on the investor relations portion of our website. I would now like to turn the call over to Mr. Pat Beyer, ConMeds President and Chief Executive Officer. Please go ahead, sir.

Thank you, Operator, and welcome everyone to our third quarter of 2026 earnings call. I'm joined on the line by John Gallagher, our Chief Financial Officer. Let me provide you with a quick agenda for today's call. I'll start with a brief overview of our quarterly financial results. Then I'll discuss the sales performance in our general and orthopedic surgery product lines, the key product growth drivers within each and related operational highlights. John will review our financial results in detail along with our guidance for 2026 which we updated in today's press release. I'll then share a few closing remarks before we open the call for questions. With that, let's get started with a review of our financial performance in the third quarter. Unless noted otherwise, all sales growth figures discussed are provided on a year-over-year and constant currency basis. We reported net revenue of $335.6 million in the third quarter. Our net sales decreased 70 basis points on an as reported basis and 80 basis points on a constant currency basis. On an organic constant currency basis, our net revenue increased 6.7% year over year. As we've discussed previously, our organic growth excludes the sales of gastroenterology products in our general surgery product line. due to our strategic access of these products as part of our portfolio optimization strategy. Our organic constant currency sales performance was consistent with our expectations for the quarter, which we shared in our last earnings call. In terms of profitability, we generated adjusted diluted earnings per share of $1.04 for the third quarter, which exceeded the high end of our expectations In short, we were pleased to deliver strong performance in the third quarter on both the top and bottom line. I'll now discuss the third quarter sales performance in our general surgery and orthopedic surgery product lines, along with updates on the key product growth drivers in each. Excluding the impact of our strategic GI exits, our sales growth was broad-based across both of our product lines, reflecting strong contributions from our key growth platforms. Sales of our general surgery products increased 6.4% on an organic constant currency basis. By geography, our general surgery growth was driven by 15.5% organic constant currency growth internationally, where we saw impressive performance in both EMEA and APAC regions, coupled with 1.9% growth domestically. By product, AirSeal was the largest driver of our total general surgery sales growth. We also saw notable contributions from direct sales of Buffalo Filter, our surgical smoke evacuation platform. I'll now provide an update on these two key growth products, starting with AirSeal, our advanced insufflation platform. We were pleased with our AirSeal sales performance and the improvement in growth trends we experienced in the third quarter as expected. Our Aeroseal's growth was driven primarily by stable growth in sales of disposables and strong growth in capital equipment, particularly outside the U.S. From an operational standpoint, our domestic and international teams remain focused on facilitating the adoption and utilization of Aeroseal in both robotic and laparoscopic surgery. In robotic surgery, AirSeal's clinical differentiation in complex, high acuity procedures remains central to our commercial efforts. Surgeons performing these cases consistently highlight AirSeal's ability to maintain stable, low pressure insufflation as a meaningful advantage over conventional insufflation systems. In practice, this translates into real benefits that have been demonstrated in clinical studies. Shorter procedure times, clear visualizations, and meaningful reductions in both post-operative pain and length of stay. This combination of clinical performance and economic value is what keeps robotic surgeons choosing AirSeal. With this in mind, our team is focused on leveraging these advantages to establish AirSeal as the preferred encephalation solution for complex robotic procedures regardless of the site of care and underlying robotic platform. We continue to see success on this front, which gives us confidence in its growth trajectory as a robotic surgery adoption continues to expand. With respect to specific operational highlights during the quarter, in late July, we announced a new expanded U.S. clinical indication for our AirSeal robotic solution. which is now indicated for use with Intuitive's 8mm hex cannulas. This expanded indication enables our sales professionals to market AirSeal directly to the growing base of hospitals and surgeons adopting Intuitive's DaVinci 5 robotic surgical platform. It also provides prospective customers with the compatibility data they need as they evaluate AirSeal alongside this robotic surgical platform. This data was generated through joint testing conducted between the teams at ConMed and Intuitive, and I'm pleased with the continued collaboration between our organizations. Our team has been focused on educating current and prospective customers on this development in recent months. While it is early, we believe this expanded indication will provide our customers clarity and confidence on the joint use of these products and procedures. We also continue to leverage and expand our portfolio of clinical and economic evidence. Specifically, our team is raising awareness globally of AirSeal's competitive advantages by leveraging the results of a recently published study by Professor Nikhil Vasdev. As a reminder, this study detailed a randomized controlled trial comparing AirSeal to a widely used competing insufflator. It found that patients treated with AirSeal experienced more favorable outcomes in interoperative pain, blood loss, and procedure time. Professor Vazdev has presented his experience and findings of more favorable outcomes at multiple robotic surgery conferences around the world, including the Society of Robotic Surgery Conferences in both the United States and India. Our team also made significant progress towards building out our data set in the ambulatory surgery center setting. We aim to utilize this data to further strengthen our value proposition and support our future growth in ambulatory surgery centers. Turning to laparoscopic surgery. As we have discussed in the past, we remain significantly under-penetrated in the US market. with AirSeal estimated to be used in only six to seven percent of the more than three million laparoscopic procedures performed annually. With this in mind, our team is focused on prioritizing specific laparoscopic procedure categories where AirSeal is likely to have a maximal clinical and economic impact, giving us the right to win. Our execution here is becoming more targeted as we implement procedure-specific training for our commercial teams, strengthen our relationship with key clinicians, and generate related clinical and economic evidence. Stepping back, given our performance and progress in the third quarter, we remain confident in AirSeal's long-term growth trajectory. Our conviction is further supported by multiple factors, including RCO's differentiated clinical and economic value proposition, the substantial untapped opportunity that remains ahead of us across the global robotic and laparoscopic surgery markets, and the focused execution of our global team. Moving to an update on Buffalo Filter, our smoke evacuation platform. As I mentioned earlier, we saw strong contributions in the third quarter from sales of our direct smoke evacuation portfolio. With year over year growth within the high single digit to low double digit range, we expect annually over the long term. This performance was moderated by a decrease in sales to our OEM smoke evacuation customers. As we've discussed previously, our strategic focus remains on our direct smoke evacuation portfolio, given its stronger margin profile, and closer proximity to the end user. As a reminder, we estimate the global smoke evacuation market represents a $1 billion opportunity and the unmet clinical need remains clear. An estimated 90% of surgical procedures generate smoke, creating a potentially hazardous environment for both clinicians and patients. Against this backdrop, we continue to see meaningful activity from both legislators and medical societies working to address this issue, which remains an important long-term tailwind for Buffalo Filter. To that end, during the third quarter, Michigan enacted a law requiring facilities that perform surgical procedures with equipment likely to generate smoke to implement a smoke evacuation policy by July 2027. and just this past week, Pennsylvania enacted a law requiring hospitals and ambulatory surgery centers to use smoke evacuation devices during all procedures that generate hazardous smoke. This legislation will require facilities to implement the related programs and policies before the end of January, 2027. With these developments, there are now a total of 23 states with smoke-free operating room laws covering approximately 60% of the United States population. Buffalo filter remains well positioned in this evolving market with clinical studies demonstrating its ability to filter out virtually all toxic surgical smoke. Our team is preparing to leverage these and other recent legislative tailwinds by engaging and educating affected facilities in each state. And we continue to see activity building. with more than 10 additional states currently considering similar legislation. Given this recent traction and significant runway, we expect our direct smoke evacuation portfolio to deliver strong durable growth both in 2026 and longer term. Shifting now to our orthopedic surgery product line. Our orthopedic surgery organic constant currency sales increased 7.2% in the third quarter. By geography, this performance was driven by 12.7% constant currency growth internationally, reflecting broad-based growth across all of our major international regions. Our international growth more than offset a 1.7% decrease in domestic orthopedic sales. Our U.S. performance continued to reflect the impact of actions taken earlier this year to strengthen our commercial organization which we discussed on our second quarter call. As a result of these actions, we continue to believe we are better positioned to drive stable long-term growth in our orthopedic surgery product line. Importantly, our year-over-year growth trends in U.S. orthopedic sales improved on both a two and three year basis in the third quarter. By product, our reinforced bioinductive implant, BioBrace, was a key driver in our orthopedic surgery sales growth in the quarter, particularly the impressive performance delivered by our international team. I'll now provide a brief update on BioBrace. We continue to see the traction globally as our team works to raise awareness of the product and its clinical benefits. Most notably, its ability to provide both mechanical strength to protect repairs and reduce stress on healing tissue and bio-inductive properties to promote tissue growth, supporting the body's natural healing process. The powerful combination of these two attributes allow our sales representatives to confidently recommend BioBrace for prospective customers, toughest cases. Most notably, rotator cuff repairs, where roughly a third to half of procedures are estimated to result in re-tear. As a reminder, BioBrace has clinically demonstrated a 94% healing rate when used to augment rotator cuff repair in high risk patients. The American Academy of Orthopedic Surgeons Clinical Practice Guidelines also now strongly recommend the use of bio-inductive implants to augment these procedures. Support that provides an important tailwind for adoption given the estimated 1 million rotator cuff repair procedures performed annually in the United States alone. We continue to see that clinicians who trial BioBrace for such challenging cases and experience the strong outcomes they are able to achieve, tend to adopt and utilize the product over the long term. Beyond our existing markets, we continue to expand access to BioBrace globally. Most notably, during the third quarter, our international team secured regulatory clearance for BioBrace in Brazil, an important step in extending the reach of this platform. Taken together, we remain confident that BioBrace's differentiated clinical profile and expanding global footprint position it to remain a durable, long-term growth driver for our orthopedic surgery product line. With that, I'll turn the call over to John, who will walk you through our third quarter financial results in greater detail and review our updated guidance.

Thank you, Pat. Given Pat's detailed discussion of our sales results in the third quarter, I will begin my remarks at the gross profit line. Unless otherwise noted, my commentary will focus on our non-GAAP results during the third quarter of 2026, with all growth rates on a year-over-year basis. Our earnings press release issued today includes reconciliations to the most comparable figures presented in accordance with GAAP. We also have included a supplemental slide deck reviewing our third quarter results and updated financial guidance on the investor relations section of our website. Third quarter adjusted gross profit was consistent with the prior year period. Adjusted gross margin was 56.4%, an increase of 40 basis points driven primarily by favorable product mix. Adjusted operating expenses were essentially flat with a 20 basis point decrease in adjusted SG&A expense and a 1% decrease in adjusted R&D expense. Our adjusted operating margin was 15.4%, an increase of 20 basis points. Adjusted interest expense was $10.5 million in the third quarter compared to $6.3 million last year. The increase in our adjusted interest expense in the third quarter of 2026 reflects the impact of our recent debt refinancing activities. As a reminder, during the second quarter of 2026, we drew down on our new $450 million term loan and our existing revolving credit facility to repurchase $645.2 million of our $800 million 2.25% convertible notes ahead of their June 2027 maturity. The adjusted affected tax rate in the third quarter was 23.5% compared to 25.5% last year. Adjusted net income was $31.4 million, or $1.04 per diluted share, compared to $33.4 million, or $1.08 per diluted share, in 2025. As Pat mentioned, our third quarter adjusted EPS results exceeded the low and high end expectations we outlined on our second quarter earnings call by six cents and one cent respectively. We generated $46.4 million of free cash flow in the third quarter of 2026, a decrease of 3.6% year over year. Turning to a review of our balance sheet and financial conditions. As of September 30, 2026, Con Med had cash of $48 million, total debt obligations of $815.9 million, and additional available borrowing capacity of $468.5 million. This compares to cash and equivalent of $40.8 million, total debt obligations of $834.9 million, and available borrowing capacity of $648.5 million as of December 31st, 2025. Our leverage ratio on September 30th, 2026 was 2.7 times. Lastly, with respect to share repurchases, during the first nine months of 2026, we repurchased approximately 1.2 million shares of common stock for a total of $49.9 million. We anticipate allocating approximately $62 million to share repurchase in the full year of 2026. Turning to a review of our 2026 financial guidance, which we updated in today's press release. We updated our net sales guidance range today based on updated expectations for revenue contributions from product sales and the MSA agreement related to our strategic exit from our GI product offerings in 2026, and updated assumptions regarding the impact on our revenue results from changes in foreign currency exchange rates. Specifically, our full year 2026 net revenue guidance now assumes GI revenue of approximately $20 million, compared to our prior guidance range of $20 to $22 million. And changes in foreign currency exchange rates are now expected to represent a tailwind to gap results of approximately $9 million compared to our prior expectation of a tailwind from FX of between $7 to $7.5 million. On an organic constant currency basis, We now expect net sales growth of five to five and a half percent compared to our prior expectation of five to six percent. Our updated full year 2026 revenue guidance also reflects both our performance in the third quarter and updated outlook for the balance of the year. Specifically, we reaffirm the low end of our organic constant currency growth range and remain confident in our team's ability to deliver at least 5% organic constant currency growth in 2026. We narrowed the high end of our organic constant currency growth range to reflect a more measured pace of sequential improvement in our growth trends compared to what was assumed in our prior guidance. With respect to profitability guidance for 2026, we now expect non-GAAP adjusted diluted earnings per share in the range of $4.54 to $4.61 compared to our prior guidance range of $4.48 to $4.60. The increase in our non-GAAP EPS guidance range reflects our better than expected EPS results in the third quarter. For modeling purposes, our updated financial guidance for 2026 now assumes adjusted gross margin of approximately 57.5%, Adjusted interest expense of approximately $33.7 million in 2026 compared to our prior expectation of approximately $33 million. Adjusted effective tax rate of approximately 24.5% compared to 25% previously. We expect to generate free cash flow of approximately $115 million. and we expect weighted average shares outstanding of $30.2 million. Lastly, as it relates to the fourth quarter of 2026, our guidance implies the following. Gap net sales of between $364 million and $370 million. This represents organic constant currency growth in the range of 5.1 to 6.8%. excluding expected GI revenue of approximately $3.7 million and an FX tailwind of approximately $650,000. Adjusted EPF in the fourth quarter of between $1.23 and $1.30. I'll now turn the call back to Pat to share a few closing thoughts.