Good day ladies and gentlemen and welcome to the second quarter 2010 Conmed earnings conference call. My name is Louisa and I will be your operator for today. (Operator Instructions) As a reminder this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Joe Corasanti, President and CEO of Conmed. Please proceed, sir.

Thank you very much. Good morning everyone. Welcome to Conmed Corporation's second quarter 2010 earnings conference call. With me today is Rob Shallish, our Chief Financial Officer. After formal remarks the call will be opened for questions. Before we begin, let me remind you that during this call we will be making comments and statements regarding our financial outlook, which represents forward-looking statements that involve risks and uncertainties as those terms are defined under the Federal Securities laws. Our actual results may differ materially from our current expectations. Please refer to the risk factors and other cautionary factors in today's press release, as well as our SEC filings for more details on factors that may cause actual results to differ materially. You will also hear Rob and me refer to certain non-GAAP measurements during this discussion. While these figures are not a substitute for GAAP measurements, company management uses them to aid us 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. Non-GAAP net income and non-GAAP earnings per share measure the income of the company, excluding credits or charges that are considered by management to be unusual or outside of the normal ongoing operations of the company. These unusual items are specified in the reconciliation in the press release issued this morning. With these required announcements completed, I can now turn to my comments. 2010 continues to be a strong year for us. Our second quarter performance was highlighted by a multitude of successes. Specifically, GAAP diluted earnings per share were five times greater in the second quarter than in the second quarter of 2009 on a sales increase of 10%. Adjusting for unusual items in both quarters, non-GAAP diluted EPS increased to 88% to…

Thanks very much Joe and good morning everyone. As Joe mentioned, we are very pleased with Conmed's performance in the second quarter of 2010, and for that matter the entire first half of the year. Second quarter sales grew 10% year-over-year to $181.1 million, while earnings per share grew five times on a GAAP basis and 88% on a non-GAAP basis. For the six months, sales were up 8.1%, GAAP EPS was higher by two and one half times and non-GAAP EPS grew 67%. Overall, foreign currency exchange rates were favorable in the second quarter compared to the same quarter a year-ago. Using the exchange rates and effect a year ago, sales would have been $3.2 million less. For the 6 months sales increased $11.1 million due to favorable FX rates, compared to the first six months of 2009 rates. Thus year-over-year constant currency sales growth was 8.1% for the second quarter and 5.4% for the first half of 2010. As a result of the manufacturing cost efficiency measures we put in place last year, as well as the effects of positive FX during the second quarter. The company's gross margin has improved from a year-ago. Specifically, the second quarter non-GAAP gross margin percentage excluding restructuring matters was 52.3%, compared to 49.2% in the June 2009 quarter. This was an increase of 310 basis points. 90 basis points of this increase is due to currency, and the remaining 220 basis points is generally due to improvements we have made in our cost base. Our Mexican manufacturing plant is fully operational, and as we have discussed in the past, beyond the product lines we have already transferred to that site. We will be moving additional lines there over the next few months. Selling, general and administration expense for the second quarter…

(Operator Instructions) And your first question comes from the line of Matt Miksic with Piper Jaffray. Please proceed.

I wanted to ask one question about just what was pretty significant improvement in margins. You talked about FX having a minor impact and operational being sort of the bulk of the improvement. I guess what I'm trying to reconcile is you saw an up-tick and it sounds like in capital sales, and I think of those things as maybe being lesser margin kind of products compared to some of your consumables. Is it just that the absorption is so much better? Or if you could maybe talk about what kind of mix impact you might have seen versus what kind of a cost reduction, as you described, a reduction of your base costs that might have had an impact.

I think most of the improvement in the margin was due to the cost actions that we have taken over the last several months. Absorption helps a little bit, but comparing the sales numbers say in the second quarter to the first quarter, we had a $5 million or $6 million increase in sales which really doesn't have too much of an impact on absorption, With regard to the margins on capital products, the video systems within arthroscopy tend to have a slightly lower gross margin than our overall corporate average. So, to the extent we are selling more video systems that would have a negative impact on our margins. But the cardios and handpieces and the electrosurgical generators generally are in line with our overall company gross margin. So, I guess the reason for going through all this is to say that the improvement is really from the cost actions and not necessarily any significance from product mix.

And I guess if I'm hearing that correctly, the conclusion I would draw is that your margins could have been actually a bit better but for a return to a more sort of traditional mix or maybe slightly stronger in video that offset some of your cost improvements.

Yes, it's difficult to quantify that, but in concept I would agree with that, to the extent we are selling more video systems that would have somewhat of a negative impact on the overall gross margin.

How would you characterize the back half? Are we getting into sort of a normalized mix of your business given the comps and growth in capital?

Well, that's what we believe that we are getting to a more historical type of trend in our business, both from a standpoint of seasonality for all of our products and with regard to the mix.

And then just had one follow-up on FX, and I apologize if we're going back over something. It's just that I want to make sure we understand how the impacts of pluses or minuses are happening, kind of your revenues and gross margins and so on. But where do we read the gross profit and/or revenue and/or operating line adds and takes from the FX and from your hedges?

Well, the way we have accounted for the hedges is to include the net benefit of the hedge in sale, since that's where most of the deleterious effect of FX occurs. So, in this particular quarter we had a positive impact from FX in sales of about $1.4 million. In SG&A there would be an increase in costs as a result of our currency rate changes. So there is an impact there too but effect of the hedges is the $1.4 million included in sales.

And then the net benefit to the bottom line is something or is it the operating line I guess. Is that neutral or was that a positive?

Well, I think the disclosure that we made is that the entire FX effect on sales was a $3.2 million. That includes that $1.4 million of the hedges. So, as we have discussed in the past, when the top-line is impacted by a dollar of FX change, 60% of that falls through to the bottom-line.

So that's still the case on the positive side, as well. Alright. Well, that's it. I'll hop out and bank in queue if we have any follow-ups, but thanks so much for taking our questions.

Your next question comes from the line of Dalton Chandler with Needham. Please proceed. Dalton Chandler - Needham & Company: Just a quick question on the guidance. For the quarter you exceeded the high-end of your guidance range by a little bit, but you are reiterating the full year guidance. Is that just a little bit of caution on your part?

Well, yes Dalton. That's the answer. We've had this guidance of $1.20 to $1.30 for the entire year of 2010 since October of last year, and we've analyzed that each quarter as we come out with new information and at this point I think from the standpoint of being cautious and not trying to get ahead of ourselves we have decided to keep the guidance for the full year, the same as we've had it in the past. Dalton Chandler - Needham & Company: And there was such a big surge in the capital sales in the quarter. Is there a feeling that maybe there was a bit of a one-time nature to some of that as facilities tried to get caught up from previously delayed orders?

Well, there may be some of that. Certainly, the comparison to last year is favorable because last year was so weak in the second quarter, but I think as Joe mentioned we are getting back to a more normal cycle with the purchases of capital equipment. Dalton Chandler - Needham & Company: So you think the levels of ordering that you saw in this quarter are sustainable going forward?

Well, as we look out to the entire year, I think the answer is yes. I think that we do forecast more traditional capital business as a percentage of sales.

Your next question comes from the line of James Sidoti with Sidoti & Company James Sidoti - Sidoti & Company: Historically capital sales have signaled better disposable use going forward. How long do you think it'll take before we see it at this cycle?

Video as you know doesn't have any disposables directly related to it except that certainly we are not, our sales people are demonstrating video coming in to make sure people are happy with the video systems that they purchased. It gives them an opportunity to talk about the full range of our products, particularly the single-use products. With the powered instruments, there is more of a direct correlation there between handpieces and the single-use drill bits and saw blades that are used on each procedure. But in terms of whether there is going to be an up-tick because of very good capital sales this quarter. It's very hard for me to quantify that. James Sidoti - Sidoti & Company: With regards to FX, I think this is the first year you've put those hedges in place. Is this a program you're going to continue going forward, or will you hedge 2011?

We'll certainly give that consideration. We have extended the hedges into the first and second quarters of 2011 at this point. The nice thing about having the hedges in place is that it allows us to forecast with a greater confidence knowing that allowance swings in currency won't affect that guidance. James Sidoti - Sidoti & Company: So basically, it allows you to put out a guidance at the beginning of the year and feel comfortable that you're not going to get burnt by a change in the euro.

In general, the answer is yes. It certainly produces the volatility. James Sidoti - Sidoti & Company: And then, are there any other options in terms of refinancing? I know you said you paid down some of the convertible debt, but is there any opportunity to pay down some of the other debt on the balance sheet or refinance some of the other debt on the balance sheet at a more favorable rate?

Well, we are beginning to have discussions with regard to how we refinance the receivable facility which currently has a due date of October 31st this year. In the absence of anything else happening, we can always role that into the revolving facility. And we are also thinking about we refinance the senior credit facility. I don't know if we would be able to achieve rates which are less than what we currently have, but I don't think they are going to be substantially more either.

Your next question comes from the line of Robert Goldman from CL King. Please proceed.

A couple of questions on R&D, first as it impacts the tax rate. Rob, you mentioned that your forecasts do not include an extension of the R&D tax credit, but were that to happen and were that to be retroactive to January 1, how would that in and of itself impact your tax rate?

Well, on an overall basis we would achieve a rate for the entire year if they were to enact that. It would be roughly 36.5%, something like that. We had some adjustments in the first quarter of this year relative to a completion of an IRS exam. So as we look at our full tax rate, we expect it to be 37.5% absent changes as a result of IRS exams. And because we had some of that earlier this year in 2010, we would expect the full year tax rate to be somewhere in the neighborhood of 36.5%.

And the other question on R&D is on the R&D expenses. Many companies in the current environment are choosing to or having to increase R&D because of FDA requirements, et cetera. And Joe, you did mention that you had a winding down of some R&D programs and that's why the R&D dollars went down. But could you give us some guidance on where you see R&D dollars or R&D as a percent of sales going over the next couple of years and sort of perhaps your philosophy on R&D spending?

Our thinking on R&D is that it probably will moderate slightly. It increased substantially between 2001 and probably 2008. The reason for the significant increase in those years was because of two or three very significant projects: the ECOM project for Cardiac Output Monitoring and the Tissue Sealing project. So we did a lot of spending in those areas. And I would also add, we also, probably in 2005 and 2006 added substantially to arthroscopy as well to improve and round out the sports medicine procedure-specific lines. So, those projects are winding down and are focused now is really on sales and marketing to get a return on investment for that extra spending in R&D. You mentioned FDA concerns with other companies. We went through that 4 or 5 years ago when you saw in those years 2006, 2007, increased spending in quality. We had added a corporate vice president for quality to oversee all of the division's quality activities and regulatory activities. So, we think we've already improved our quality systems to meet the new standards set by the FDA with regard to the new GMPs. They came out in '98-'99. So, we think we are in really good shape with the FDA. We are strongly in compliance and all of the, what I would say, historical or legacy product lines that perhaps were lacking in documentation because of their age are now all caught up and up to date. So, what does that mean going forward? I think it means that our level of R&D spending is pretty much going to be where it is today with maybe slight increases for inflation, but I don't see us ramping it up as maybe some other companies are saying that they are doing. Our focus now is getting a return on investment for what we have already spent in R&D.

If I can just follow up and just so I can get it right for modeling purposes, should we assume R&D then, the dollars, though, are basically in line with inflation, as you say? And I guess that means that the R&D to sales ratio will probably trickle down over the next few years.

That's correct. That's what I am expecting to see.

Your next question comes from the line of Valerie Brown with Alliance Bernstein. Please proceed.

I have a question about your operating margins for each of the reported segments. Could you provide us with that information, please?

I don't have all of that in front of me. I guess I'd refer you to the SEC filings that we make on a quarterly basis. We intend to file the 10-Q for this past quarter well in the next few days. So we'll have all that in there. In general, the operating margins for the Linvatec business which is the orthopedic business, so Linvatec, electrosurgery and endosurgery are in rough terms speaking from a memory about 15%. The two product areas that we have, that we are working on in terms of improving those margins are the endoscopic technologies line and the patient care line whose margins are well less than 5% each.

Your next question is a follow-up from the line of James Sidoti with Sidoti & Company. Please proceed. James Sidoti - Sidoti & Company: One last question on margins. If you break out the one-time costs in the quarter you were at 9.2% operating margin. Now, you just said you're going to get a little leverage on the R&D line, and I think earlier you said you should be saving some money on this SG&A line because of some of the cost cuts you did this quarter. So, is it reasonable to think that by 2011 you get somewhere close to 11% on an operating margin basis?

I don't want to give exact guidance now, Jim. We will be able to provide more of that in October, but the trend you are thinking about is absolutely what we think we can do, because as we talked in the past, we were working toward an operating margin in the mid-teens that we believe we can accomplish in the 3 years or so. So, as each year roles by, we should be improving that operating margin to get to that 3 year goal. James Sidoti - Sidoti & Company: How much cost do you think you'll save next quarter because of the reductions you made this quarter? I think Joe threw out a number.

We didn't talk about the quarterly savings, it's just within expected annual savings from the, the costs we made this quarter should be about $5 million. James Sidoti - Sidoti & Company: So $5 million on an annual basis?

Yes. James Sidoti - Sidoti & Company: And that's on the sales and marketing line? Or is that across the income statement?

For the most products on SG&A, a little bit with regard to the movement of product lines to the Mexico which would be in cost to sales.

(Operator Instructions) And at this time we have no further questions in the queue. I would like to turn the call back over to Mr. Joe Corasanti for any closing remarks. Sir?

Well, I want to thank everyone for joining us today for our second quarter earnings conference call and we look forward to speaking to everyone again for the third quarter conference call in October. Thank you very much. Bye.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.