Good day ladies and gentlemen and welcome to the Q1 2012 CONMED earnings conference call. My name is Christie and I’ll be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the conference over to Joseph Corasanti, President and CEO of CONMED. Please proceed sir.

Thank you very much, Christie. Good morning everyone. Welcome to CONMED Corporation’s first quarter 2012 earnings conference call. With me today is Rob Shallish, our Chief Financial Officer. After formal remarks, the call will be open 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 represent 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 adjusted 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. Adjusted net income and adjusted 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. I am pleased to report that we completed the first quarter of 2012 with solid operational results. We are off to a very good start to the new year due in part to our association with the Musculoskeletal Transplant Foundation. I’ll talk about some of the early benefits of that relationship in a moment, but here are first quarter…

Thanks very much, Joe. Good morning everyone. As Joe mentioned, we are off to a very good start in 2012. The first quarter sales totaled $194.3 million at the higher end of the range we previously forecasted. This was an increase of 5.9% compared to sales of $183.5 million in the first quarter last year. Excluding the $7.5 million of revenues from MTF, the organic sales increase was 1.8% similar to the growth rate generated for the full-year 2011. We are especially pleased with the performance of our sports medicine arthroscopy line, including the new MTF partnership where we believe we are meaningfully growing our market share with the new products we have recently launched. By geographies, sales outside of the United States grew more rapidly than U.S. sales. This is consistent with our experience over the last several quarters. International sales now make up slightly more than 50% of our business. Of particular note is the 9% growth in the quarter in the Americas. Europe grew in total 5% although some countries had slight declines. In the United States, including the MTF, sales grew 5%. Excluding MTF, U.S. sales declined to 3% due to the sluggish capital equipment sales. The gross margin percentage, excluding ongoing restructuring costs was 52.7% of sales for the first quarter of 2012. This is a 50 basis point improvement over the adjusted gross margin for the full year of 2011 and slightly higher than the 52.6% adjusted gross margin percentage for the first quarter of 2011. Over the past several quarters, our operations team has been dedicated to improving inventory turns and reducing our investment in inventory. Compared to the March 2011 balance, inventory has declined 5% and the days investment in the inventory has declined. In periods of declining inventory due to reduced…

[Operator Instructions] Your first question comes from Matt Miksic from Piper Jaffray.

I wanted to just follow-up if I could first on margins and the cost of goods line. Can you provide any color, some additional color maybe on what some of the gives and takes there were. If you can quantify any of the impacts that you saw in the first quarter just a little bit of touch heavier than we are looking for?

Well, on the positive side, the MTF transaction is a positive addition to margin. As you know Matt, the sales increase of 7.5% has very little cost of sales associated with it. There is some, but not a lot; offsetting that benefit this quarter were unfavorable manufacturing variances associated with the reduction in inventory that occurred in the second half of last year. Further there were some purchase price variances associated with purchasing product that occurred toward the end of last year. So those 2 items tended to offset each other resulting in a gross margin percentage which approximates what we saw in the first quarter of last year, although it is higher than the overall gross margin that we achieved in 2011. So as we look out to the rest of the year, we have seen these production variances moderating and therefore we believe that the gross margin for the remainder of the year should improve over the current level.

Clearly a nice step up from the MTF agreement. Can you put some, maybe some, can you quantify the variances that you mentioned?

Matt, I think that in terms of absolute numbers it's probably not that beneficial to quantify those exactly because there's differentiation between purchase price variances as well as overhead manufacturing variances. So I guess I should leave it at the variances have moderated and that we do expect an increase in the gross margin as we go through the remainder of the year.

I guess I am trying to figure out if the magnitude of the benefit of MTF, I guess the magnitude of the benefit of MTF has to be around the same size as these variances.

I think that's a good assumption.

And then just in terms of growth trends and I apologize for asking some things you covered but we are hopping around I think as everybody is amongst several call this morning. The market trends that maybe, the way you thinking about you know what you saw in your end markets in the quarter relative to your performance and how that’s factoring into your full-year guidance going forward, you know change maybe from where you began at the beginning of the year positive or negative?

Yes, Matt. I mean I think our end markets are pretty much where we had anticipated they would be with perhaps just the exception is with I guess demand for capital which was down 4.5%. Single use products, especially in arthroscopy performed well and we saw about market growth rate certainly for our organic sales in sport medicine. But capital was a bit of surprise for us especially with Electrosurgery declining 14.5%. If you recall Electrosurgery had 3 outstanding quarters last year growing just double-digit growth on electrosurgical generators, the capital portion of Electrosurgery and that's reversed itself certainly in this first quarter with a 14% decline. So it's hard to conclude any type of trend I think from one quarter here with Electrosurgery, but the only thing we do know for a fact is that the first quarter last year, generator sales was very, very strong. So I am sure that play a little bit of a role here.

One and on that point on Electrosurgery and maybe the tissues healing product, and again I apologize if you gave a number, but have you given some sense of how that’s progressing so far this year and is that related anyway do you think at what’s happening in Electrosurgery in other words, I am not recalling whether they are the division that's selling it. But if they are, is there some, is there a training or a detailing the so called overhead because these are important but some resource allocation to training and detailing, that could be possibly be impacting some of the other lines, any thoughts on that would be appreciated?

Sure, yes Matt. That’s a good question. And we didn’t address Altrus in our prepared remarks knowing that we would receive a question about Altrus. So here it goes. The Altrus line for vessel sealing is sold by the Electrosurgery division and that is their focused item. It was last year and continues to be this year and the business for Altrus continues to ramp up. We have many converted accounts and our definition of a converted account is an account where a surgeon is using an energy source, an Altrus generator essentially which, by the way we place with users and so, converted account is where the surgeon changes his [indiscernible] card, his or her preference card for vessel sealing and changes it over to the exclusive use of the Altrus device. So we have about 30 accounts where that's happening, right now. And so I look at that and I say, well that's pretty much our base business at this moment in time. We have close to 80 energy sources in the field right now where it would be a combination of converted accounts and as well as evaluation accounts. Where we have evaluation accounts, we are generating revenue because even in evaluations our customers evaluating the product are paying for the single use device which I guess I will refresh everyone's memory. We are charging about $750 per device for Altrus. So the long and short of it is that the product launch is progressing well as we've talked on probably the last two calls, conference calls it's not moving as fast as we thought it would move as, I say a year ago, when we launched the product. We have experienced in last year, and even in Q1 of this year, some limited product supply which slows down evaluations and the cause of that has been continuing manufacturing difficulties that we are experiencing as a result of it being a complicated product to produce and it being still a new product for us and new technology for the world. So all-in-all, we think the product launch is going very well. We forecasted in our last conference call that we would have $5 million to $10 million in sales for Altrus for 2012 and we reiterate that guidance for the product and I think we are on track for that.

You do have another question queuing from Dalton Chandler from Needham & Company.

Just wanted to ask a little bit more about the capital equipment and it's been for several quarters sort of range bound right around this $40 million level and not necessarily this quarter, but just looking back over time, it looks like primarily it's been weakness in the arthroscopy capital equipment. Could you just comment on what you are seeing there and what you think might turn that around?

Well, at arthroscopy capital which is the video systems, we had a really horrible weakness. Last year, we had declines in the 20% range in Q, I think it was Q1 and Q2 maybe even moderated slightly in Q3 and then Q4. So Q1 it’s down 1.7% so we do have certainly is an improvement over the last year. And last year was an interesting year for capital. We had gains and a growth in powered surgical instrument capital and Electrosurgery capital with significant declines in video. And it looks like things are reversing this year, at least in Q1 with sports medicine really being flat I think for capital with Electrosurgery declining 14.5%. So I have to admit to you that we are probably scratching our heads a little bit on and why it’s so choppy and why we’re not getting a definite trend or consistency with our capital sales at this point.

You did say that you expect the trend to reverse next year and to go back to growth. Are you expecting sort of the normalized low-to-mid single digit growth or do you think there may be some pent-up demand out there that could drive that higher for some period of time?

Couple of things, I think we are expecting I think with many other people that the economy will improve. We also see -- what we know internally is that we've got new products coming out. So in video systems, we've got new devices, probably for the emerging markets primarily, in terms of single chip camera systems and other camera systems for single port laparoscopic surgery. On the powered instruments side, our lithium ion battery system we think will drive sales once that is launched. That launch is not expected until Q3 of this year; it’s been slightly delayed. We did show it at the academy, but when that is launched we think that’s going to drive sales for our drills and saws and powered instruments. So those are the two main drivers I think that will help us out in 2013.

Your next question comes from Robert Goldman of CL King.

A couple of updates as well on some metrics that I pay attention to. You know first on the move of production to Mexico, could you just give us an update as to currently what percent of sales results from the Mexico production?

Yes, Bob, it’s in the low-to-mid 20s as a percentage of our total production. Most of the patient care products are produced, a good deal of patient care products are produced there, a good deal of the Electrosurgery products, single use products are manufactured there. As we’ve talked the video products from Santa Barbara, they are nearing the completion of the movement there to Mexico and there are some electronics that are manufactured in Mexico as well.

And by the end of the year, Rob, 2012, where would that percentage do you think?

Yes, in rough terms, Bob, I think it’s going to be in the 25% of our production would be manufactured in Mexico.

And then two other products, if you can give us an update of what’s the annualized run rate looks like now. One is the SRS and the other is the Meniscal Repair Device.

SRS is running and of course that’s a combination of products and we keep adding new products into it, into that category so to speak. But we are running in the neighborhood of $25 million to 30 million annually at present. The Sequent device is running at a rate of approximately $5 million to $6 million annually currently.

With the SRS, that would seem to be a bit of an uptick from what you talked about in the last quarter, is that correct?

Well, I may have mentioned $20 million, $22 million something like that last time around. We certainly are seeing increases in that particular shoulder system.

On the other hand the Sequent seems to be a bit of a down tick, is that correct?

Well, I think what’s happened with the Sequent device is that some surgeons, while they certainly like the performance of the Sequent device, they look at our price point and view it as being more expensive than the competition. Now let me explain that, because our particular Sequent device offers the ability to place 7 stitches in the meniscus. Sometimes there is only a need for 2 or 3 stitches and surgeons may feel that the price is excessive when the competitive models only permit 2 or 3 stitches per device. So they feel that even if they have to open 2 or 3 of the competitive devices, once they get into the surgery that, that may be more cost effective. We are in the process of coming out with the newer model of the Sequent device which we would price at a lower price point that would only have 3 stitches in it. And therefore that should put us in a much better competitive situation with regard to price.

We’ll still be offering both versions; we will have the original and what we are only calling I think the Sequent Dual which is a lower price point product.

Your next question comes from Jim Sidoti from Sidoti.

I have a couple of questions; one, on the expenses in the quarter, were there any expenses related to the MTF integration that you would consider one-time?

No, all of the MTF associated costs are ongoing costs, so there is really no cost associated with MTF that we would break out separately as being unusual.

Any comment on the situation in the Southern Europe. Some of the reports regarding that region have been pretty ominous. Do you have a lot of exposure there and what are you seeing there?

Well, I’ll be honest; as I mentioned in the prepared remarks, Europe overall was higher in sales in the first quarter. If we look at just Spain and Italy together, together they were flat in their sales and in total, we had -- looks as though we had about $11 million of sales from Spain and Italy in the first quarter.

Okay, has there been any increases in DSOs in those areas or any problems with receivables?

Not that I am aware of, Italy has always had some slowness in collections and that may have expanded a little bit but nothing that is of a concern to us.

And then last question on the MTF sales, can you give us some sense on how much of that was the tissue product and how much was the PRP product?

Of the $7.5 million net sales, approximately $1.5 million was the PRP product.

And is that a product where you place the equipment and you sell disposable similar to some of your other products?

There are cases where we will place the centrifuge that does the spinning of the blood. Other times we will sell it, so it’s a combination.

Your next question comes from Mark Landy from Summer Street Research.

I apologize also. Like Matt, I have been on a bunch of calls and I am not sure this was mentioned, but in terms of the MTF products, has that been completely rolled out of the sales force or is there some more to go?

Mark, certainly it's rolled out, I guess not even rolled out is the right term. It just continues with the same people that were -- I hate to use the term selling, educating the physicians about it that came over to our company. That’s about 35 people in sales and marketing. Additionally, there are people at MTF that continue to promote the product for the time being in certain geographies of the country. That will be rolling over to us within the next 12 months and so there is still some work to do there associated with introducing the new sales personnel that will be promoting the product. I don’t believe any of that has occurred as yet. So more of that will occur over the next 12 months.

If I look just a little bit further, is there any opportunity for cross selling and has any of that started with reference to, the feed on the street that you had relative to the feeds on the street that you are bringing in or are now managing?

Mark, I mean, the opportunities certainly exist and some of that have started already. The PRP product is now in the hands of our existing CONMED Linvatec sales force and the tissue has been managed by some of our existing distribution outlets in some of our territories. So actually the transition there was taking place actually before we had the partnership if you will. So and that’s really seamless for our customers. So yes, going forward there is opportunities for cross selling. We think in Canada especially where MTF had not been represented, there is opportunity for tissue as well, PRP first and tissue also.

Okay. And then just in reference to some of the commentary on Altrus manufacturing issues, is this more of a learning curve or training issue at the employee level, is that a logistics issue, a sourcing issue or is it more of a yield issue at this point?

It may be a little bit of everything. The yield is not where we would like it. We're certainly not achieving our yield goals with the product. Remember, this is new technology. We are the only company that’s offering a thermal tissue fusion, vessel sealing product using thermal energy to seal and fuse collagen molecules. And we rapidly heat the ceramic inserts, essentially the heaters inside the jaws of this device and rapidly cool the jaws and that’s what accomplishes the fusion of collagen molecules. So it’s fairly complicated to produce, yield is not where we would like it. We have parts that are sourced, as you would expect. There are many parts that go into this device. So yes, we are getting better with experience and time. And I guess the bottom line is it will take time. You know there is also software involved with this device, both in the energy source, the box, as well as in the hand piece. And our experience in launching products involving software is, from time to time during the first year, two years of a product launch, software changes are required, calibration changes tend to be required. As you get experience in the field doing a variety of different type of surgery and having the product used in different surgeries with different surgeons who may use it differently. That’s the type of experience we are gaining and that type of experience is requiring us to make slight modifications in terms of software and calibration of the device.

Are these just events [ph] and manufacturing changes that you have to make or will some of the entail communication with the regulatory agencies?

This is internal changes. So in another words, a new 5 to 10-K is not required for the types of things that we are doing.

Right, that’s the point. So these are all basically in the some of the manufacturing process and they don’t require a regulatory, okay, fair enough. And then in terms of the ramp up for Altrus, I am assuming still a very much backend loaded or the low end of that range, is it more, kind of more equally loaded to the year. So if I look at the 5 to 10, you kind of do the 5, is it kind of more of a gradual ramp [ph] through the year and if you look at the 10, it is going to be very much backend loaded. How should we think about that?

I think the 5 range, I think, we’ve got pretty close to an installed base now to achieve that, and expanding beyond $5 million in sales depends on the speed in which we can get the evaluations done and surgeons converted. As I discussed earlier, you may not have been on the call at that point, full conversion for us is having the preference card changed by the surgeons so they are using, say, 10 devices per month which is a -- generally speaking, I think what the usage would be for a vessel sealing device by a single surgeon.

And your next question comes from Dale Dutile of the Boston Company.

I just -- for some of the cost-related manufacturing moves and some of the administrative stuff, you have costs going through the P&L for now. Have you quantified what the expected savings from those actions are?

Dale, the savings that we are expecting from what we have currently announced as part of the manufacturing restructuring, namely the Santa Barbara move, approximately $4 million annually would be the savings from changing from Santa Barbara to other locations.

And that's off of what the base pick is, because that's been happening over time, is that right?

Yes, we started that back in the June or July period last year. So we are achieving some savings now. I don't know, honestly, how they quantify what those savings are.

That's fair enough, so that $4 million off of something, a run-rate in the middle of last year or so.

That's right.

And then, just I mean you laid out your hedges again, currency hedges and the euro seem to be the one that's gone against you a little bit. I am just wondering as we look into next year, what's the flow through to the EBIT line from changes in currency, assuming no hedges?

Yes, excluding the hedges, if there is a $1 million change to the top line, 50% to 60% of that flows through to pre-tax because we do have offsetting electric currency cost.

Sure, perfect. And then just on the -- have you ever, I mean, because the mix shift between consumables, you know, single use and capital equipment has been pretty dramatic. Have you ever helped people understand what’s the gross margin differentials between those two businesses? I am assuming you’re getting some benefit from that now, and if you are saying that capital equipments start to improve against next year, I would think that it would be somewhat of a headwind?

Yes, capital equipment tends to have, on average, and there are always exceptions, but average capital equipment tends to have a lower gross margin our single use products. I think that if we’re fortunate, and we believe we will be, to have some growth in capital equipment next year, I really don’t think that would have a major impact on from a negative sense on gross margins. We would probably be talking about a few basis points that would be even hard to measure, very frankly. I think the greater trend that we see is improving gross margins as a result of some of the manufacturing things that we were doing to be as efficient as possible, as well as introducing new products, especially the single use products which would have higher margins than the current versions. I guess, offset to some extent by capital products that may come out but I tend to think the single use products would outweigh the negativity with capital.

Is it a point that a differential between capital and single use is not that great or that some of new single use products you are introducing are going to be very comfortable products?

Well, I guess both. I think some of the new single use products can be in a much higher margin position than our current average. Overall, when I look at capital products compared to our overall margin, if we are at 52%, 53% margin today, our capital products are on average probably about 50% as a margin.

Your final question comes from the line of Brad Evans from Heartland.

The first question I have is for Rob in terms of, can you just give us, what is the draw on revolver at the end of the quarter?

At the end of the quarter we have about a $130 million outstanding on the revolver, if I recall correctly.

Okay. And your expectations for debt reduction, where do you think that will end the year based upon what you see today?

Well, I am expecting that we would have the same kind of free cash flow that we had last year, namely about $85 million. We are going to be paying dividends, that should be for this year. We will have three quarters of dividends in. So that will be about $12 million and I'm frankly looking at most of the rest of the cash going toward debt reduction. So it would be in the neighborhood of $50 million or so of debt reduction.

And I am just curious with, just, lot of the discussion [ph] on the capital equipment side and it has introduced some volatility into your operation in the last couple of years and I appreciate the outlook for recovery in 2013. I just wonder whether considering the high multiples that are being paid for medical device healthcare assets in general, are there portions of the capital equipment pieces of your business that would make sense to potentially divest? Is that even possible?

Yes, I don’t think it’s possible Brad, when I look at the each of the three components: in arthroscopy, the capital pieces for surgical video, and while there is no disposables that are directly tied to that, we do feel that offering in surgical video is an opportunity for our sales people to talk about a broad range of products with surgeons, including the single use products. So I don’t think that’s a possibility. Certainly in powered instrument it’s not a possibility, because half of the business there are the hand pieces and half of the business are the single use products. So they really go together; I don’t think there is any opportunity there. And lastly on the electrosurgical generator front, the disposables while, having a universal architecture, so that our disposables fit in competitive products and vice-versa, I really don’t think there is an opportunity to divest the capital piece and just keep the single use. So I guess in brief, I don’t think there is an opportunity to do that.

And then an update on capital spending for the year, where do you think you'll come in for the year?

Well, for us I think it’s going to be in the $20 million range, a little bit higher than last year, because of the remodeling that we've done with the surgeon training center in Florida.

We have no further questions. I would now like to turn the call over to Joseph for closing remarks.

I would like to thank everyone for attending the first quarter earnings conference call for CONMED Corporation. We look forward to talking with you again on our second quarter conference call. Thank you very much.

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