CONMED Corporation (CNMD) Q1 2016 Earnings Report, Transcript and Summary

Good afternoon, everyone. Before we begin, let me remind you that during this call, management will be making comments and statements regarding its financial outlook, which represents forward-looking statements that involve risks and uncertainties as those terms are defined under the federal securities laws. The company's actual results may differ materially from its current expectations. Please refer to the risk factors and other cautionary factors in today's press release as well as the company's SEC filings for more details on factors that may cause actual results to differ materially. You will also hear management refer to certain non-GAAP adjusted measurements during this discussion. While these figures are not a substitute for GAAP measurements, management will use 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 in the press release issued this afternoon. With these required announcements completed, I will turn the call over to Curt Hartman, CONMED's President and Chief Executive Officer, for opening remarks. Mr. Hartman? Curt R. Hartman - President, Chief Executive Officer & Director: Thank you, Karen. Good afternoon, and thank you for joining us for CONMED's first quarter 2016 earnings call. With me on the call is Luke Pomilio, CONMED's Executive Vice President and Chief Financial Officer. Today, I'll provide a brief overview of the financial and operating highlights for the quarter. Luke will then provide a more detailed analysis of our financial performance and an overview of our fiscal 2016 financial guidance. After that, we'll open the call to your questions. Overall, I'm pleased with our progress in the quarter and believe our results represent a solid foundation to our 2016 objectives. Sales of $181.2 million represent an increase 1.8% compared to the first quarter of 2015. On a constant currency basis, sales increased to 5%. Excluding the SurgiQuest acquisition, sales decreased 5.3% as reported and 2.2% on a constant currency basis compared to the first quarter a year ago. As you all are aware, we closed the acquisition of SurgiQuest AirSeal System on January 4, 2016. As a result of solid planning and execution, I'm pleased to report that AirSeal contributed $12.7 million to our top line during the first quarter. We continue to believe this is a transformative technology platform and the customer engagement, both in the market and at industry trade shows, has been encouraging. On a GAAP basis, our reported net loss totaled $2.3 million or $0.08 per diluted share driven by acquisition-related charges. This compares to reported net earnings of $6.3 million or $0.23 per diluted share a year ago. Our adjusted net earnings of $11.6 million decreased 15.3% year-over-year and adjusted diluted net earnings per share of $0.42 decreased 14.3% year-over-year. Looking at positives in the quarter, a solid start from our global Advanced Surgical offering, which benefited from AirSeal, drove strong General Surgery growth of 14.9% as reported and 16.7% on a constant currency basis. Excluding AirSeal, overall General Surgery growth was soft as a result of slow capital sales, declining 4.3% as reported and 2.7% on a constant currency basis. While acknowledging we have more work here, we are pleased to see the improvement versus the trends seen in the second half of 2015. Domestically, we saw a growth in all three of our reporting business segments driven by capital sales. Our U.S. Orthopedics business posted its third consecutive quarter of positive growth and domestic Visualization sales increased 4% year-over-year. Within General Surgery, we had solid performance from our Endoscopic Technologies business in which we introduced the first new product in almost a decade during the quarter. On the international side, total sales declined 30 basis points on a constant currency basis and 3.2% on an organic constant currency basis. In sharp contrast to strong capital sales growth in the U.S., international capital sales declined 19.4% as reported and 15.1% on a constant currency basis in the quarter. As you know, we posted strong constant currency capital sales growth in our international markets in the first quarter a year ago, so we would reiterate that this comparison in an organic basis was already factored in to our constant currency growth expectations for 2016. Importantly, single-use items increased by 5%, 2% without AirSeal on a constant currency basis. Within the international business, the direct market showed another quarter of positive growth, both organically and including AirSeal on a constant currency basis, continuing the trend we saw throughout 2015. This was driven by strengthen in Europe and solid performance across the General Surgery category on an organic basis. On the export side, the headwinds that we experienced in 2015 remained in the first quarter of 2016, with export sales declining 2.1% as reported and 10.2% on an organic basis year-over-year. China and Eastern Europe remained soft in the quarter, as expected, while Brazil was stable. Further export results were also slowed in the quarter as we worked on contract renewal negotiation with our key distribution partners in our Japanese market. The new agreements are signed and we forecast improving trends for Japan in the quarters ahead. Overall, we see our partners in the export markets moving towards stability and believe this is supported by our organizational efforts initiated in the second half of 2015. Now, let me update you on our progress with the integration of SurgiQuest since closing the transaction in early January. Overall, our integration efforts have been successful to date and we remain on track. These efforts include substantial sales force training, aligning logistics and customer service functions, and ensuring inventory systems are in placed to fully support our commercial plans. In the international markets, efforts have included working with the existing distribution partners and in two markets establishing direct presence. Overall, I'm pleased with our integration efforts and the contributions from AirSeal in the first quarter. We remain confident in our previously stated projections for AirSeal for the year and in our ability to leverage our sales force to capitalize on the large opportunity in both traditional laparoscopic and robotic surgeries. Bringing innovative products to market remains a key focus for our commercial teams. During March, we participated in both the AAOS and SAGES annual meetings, where we had a chance to meet with many of our current and potential customers. At AAOS, we showcased a number of our products including TenoLok, ARC, AssistArm, and Edge. And at SAGES, we highlighted the newly acquired AirSeal System and the recently introduced Healix energy platform. We were excited by the interest level in these offerings and we look forward to maintaining that momentum as we continue to focus on reinvigorating our product pipeline. Finally, during the quarter, we appointed Martha Goldberg Aronson, an experienced healthcare executive to our board of directors. We believe that Martha's proven track record of executive and operational leadership in the healthcare industry will make her a meaningful contributor in supporting CONMED's growth strategy and helping us drive increased shareholder value. I'd like to use this to opportunity to again welcome Martha to our board and to express my attitude for her dedication to CONMED's success. In conclusion, we remain confident in our financial outlook for the year as investments in our strategic initiatives and in product development translate into further operating improvements. The initial robust contribution from the AirSeal System validates our acquisition strategy and we look forward to realizing continued benefits from this transaction. I'll now turn the call over to Luke. Luke A. Pomilio - Executive Vice President-Finance & Chief Financial Officer: Thank you, Curt. As Curt mentioned, our total sales for the first quarter of 2016 were $181.2 million, an increase of 1.8% on a reported basis and an increase of 5% on a constant currency basis versus first quarter of 2015. Our top line growth during the quarter was driven by a solid initial contribution from SurgiQuest AirSeal System. All three of our domestic reporting categories also yielded positive results in the quarter while the international capital environment was more challenging, particularly in our export markets. Domestic sales, which represented 53% of our total revenue, increased 10.4% as a result of capital sales across all three of our reporting businesses, predominantly driven by General Surgery due to AirSeal, as well as by the Orthopedic business. International sales, which represented 47% of our total revenue, declined 6.4% compared to the first quarter of 2015 on reported basis. Foreign currency exchange rates, including the effects of our FX hedging program, had a negative impact of $5.7 million on first quarter sales. In constant currency, international sales decreased 0.3% versus the prior period with all three segments declining on a constant currency basis. I will now review our three reporting categories with all growth rate stated in constant currency. Worldwide Orthopedic revenue decreased 1.2% in the first quarter following two consecutive quarters of growth. Domestically, first quarter Orthopedics revenue increased 0.9% year-over-year due to the continued positive trend in capital sales. This marks the third consecutive quarter of year-over-year growth for the domestic Orthopedics following a prolonged period of negative growth. Internationally, first quarter Orthopedic revenue declined 2.5% year-over-year as growth in single-use products was offset by a double-digit decline in capital sales, both in our direct and export markets. Worldwide General Surgery revenue grew 16.7% year-over-year. The acquisition of SurgiQuest AirSeal System contributed $12.7 million to General Surgery's first quarter sales. Excluding AirSeal, Worldwide General Surgery revenue decreased 2.7% compared to the prior year period. Domestically, first quarter General Surgery sales increased 19.4% and were driven by AirSeal. Excluding AirSeal, domestic General Surgery revenue decreased 3.8% year-over-year due to weaker capital sales compared to a particularly strong first quarter a year ago. Internationally General Surgery sales were up 11.2% and benefited from a contribution from AirSeal. Excluding AirSeal, General Surgery sales decreased 0.6% due to continued weakness in export market capital sales. Worldwide Visualization sales were down 7.7% during the first quarter. Domestically, first quarter Visualization sales increased 4.4% year-over-year, marking a return to growth after decline in the prior quarter. International Visualization sales were down 17.5%, primarily due to continued challenges in the export markets. Now turning to other components of the income statement. Adjusted gross margin for the first quarter, excluding restructuring costs, expanded 120 basis points year-over-year to 54.4% compared to 53.2% in the first quarter of 2015. Adjusted gross margin benefited from production variances of approximately 300 basis points, which was partially offset by negative impact from foreign exchange of 140 basis points. Mix of pricing had an overall 40 basis point unfavorable impact. We continue to expect full year 2016 adjusted gross margin, excluding restructuring costs to be in the range of 54.5% to 55.5% with a number of puts and takes underlying that expectation as previously noted. Before moving to other operating expense lines, it's important to note that in the quarter, we reclassified $670,000 of expenses from SG&A to R&D. Regulatory cost, including foreign market (12:30) registrations had become an increasingly significant cost for the company due to enhanced country fee structures and our desire to expand registrations in target markets. Historically, CONMED has included these costs in SG&A. An alternative treatment for these costs is to include them with other product development costs within research and development. We made this change effective January 1, 2016. For the full year 2016, we anticipate this reclassification will be approximately $3.3 million. From a historical perspective, these costs amounted to $625,000 for the first quarter of 2015 and $2.5 million for the full year of 2015. On an adjusted basis, which excludes the impact of amortization, but includes the aforementioned accounting reclassification for both periods, selling and administrative expenses for the first quarter increased to $70.7 million or 39% of total sales, compared to $66.5 million or 37.4% of total sales in the first quarter of 2015. First quarter 2015 SG&A ran lower than the remainder of 2015 due to the timing of commercial investments that were made in 2015. For the full year 2015, adjusted SG&A was 38.7% of sales based on the accounting reclassification I just discussed. As we progress through 2016, we are forecasting quarterly adjusted SG&A in the range of 38% to 40.5% of sales with our full-year estimate in the range of 38.5% to 39.5% of sales. Research and development expenses for the first quarter totaled $8.3 million or 4.6% of sales, compared to $6.5 million or 3.7% of total sales a year ago. The increase over the prior year period include the accounting reclassification of $670,000 and approximately $1.1 million of incremental project spending. Of the $1.1 million of incremental project spending during the quarter, $640,000 represents increased Advanced Surgical spending due to the AirSeal acquisition and the remainder represents project-related spending that we have accelerated due to the suspension of the medical device excise tax. We now expect R&D for 2016 in the range of $36 million to $38 million or 4.6% to 4.9% of sales. This represents an increase of $9 million to $11 million from 2015 reported R&D expense of $27 million. $3.3 million of this increase is related to the accounting change discussed earlier, approximately $3 million is AirSeal-related, and the remainder is project-related growth being fueled by accelerated funding. Adjusted EBITDA margin in the first quarter of 2016 was 17.1% compared to 17.3% a year ago. The unfavorable impact of foreign exchange reduced first quarter 2016 EBITDA margin by 120 basis points. Please see the schedule on today's press release for details on the margin calculations. Turning now to a discussion of our income tax rate. Our adjusted effective quarterly tax rate decreased to 32.2% compared to 34.7% in the first quarter 2015. This quarter reflects the R&D credit, which was not yet extended in the first quarter of 2015. For the full year, we are estimating a non-GAAP tax rate of approximately 32%. Our diluted net loss per share on a GAAP basis was $0.08 compared to diluted net earnings per share of $0.23 in the first quarter of 2015. As we announced on our fourth quarter call and is noted in today's press release, beginning in 2016, we now exclude the cost of special items including acquisition costs, restructuring costs and debt refinancing costs net of tax, as well as amortization of intangible assets net of tax in our calculation of adjusted diluted net earnings per share. Excluding the impact of these items, our first quarter adjusted diluted net earnings per share were $0.42 versus $0.49 in the prior year period. Looking at the balance sheet, our cash balance as of the end of the first quarter of 2016 was $19.9 million compared to $72.5 million as of December 31, 2015. A portion of the SurgiQuest purchase price was funded by available cash on hand. Additionally, during the quarter, we made final a $17 million payment due under the MTF distribution agreement. Accounts receivable days were at 66 days as of March 31, 2016 compared to 65 days a year ago. The inventory balance was $185.1 million compared to $166.9 million as of December 31, 2015. Inventory days at quarter-end were 182 versus 170 year ago. And of the $18 million increase during the quarter, half relates to SurgiQuest production and field inventories, the remainder relates to increased inventories for products being launched in 2016. Turning to cash flow, cash used by operating activities totaled $17.3 million for the first quarter of 2016 compared to $14.8 million of cash generated from operating activities a year ago. The reduction in operating cash flow was due to the GAAP net loss during the quarter, as well as the inventory build. I would like to provide a bit more color on foreign exchange. Similar to many of our peers, we have a hedging program in place – although we have a hedging program in place, we're not able to hedge all of the impact of our foreign exchange fluctuations. Approximately 30% of worldwide sales are subject to foreign currency exposure, which are the direct sales portions of our international sales. For the direct markets, the majority of our foreign currency exposure is represented by four primary currencies. The euro represents approximately 34% of the exposure. The Canadian dollar, approximately 25%. The Australian dollar, approximately 13%. And the British pound, approximately 11%. To be clear, our guidance for revenue and earnings per share on a reported basis already contemplates the impact of foreign exchange, including the gains and losses associated with our hedging program. Constant currency revenue guidance, as always, excludes the impact of any hedging activities. Finally, we are revising our 2016 guidance for reported sales and adjusted diluted net earnings per share due to the updated foreign exchange impact anticipated for the year. We now forecast reported 2016 sales in the range of $768 million to $778 million, which represents growth of 7% to 8% over reported 2015 revenue of $719 million, compared to the previous range of $760 million to $770 million. This revenue forecast includes constant currency organic sales growth of 1% to 3%. Sales related to the SurgiQuest acquisition of $55 million to $60 million and an updated negative impact of foreign exchange of $15 million – of $13 million to $15 million, based on foreign currency exchange rate as of April 22, 2016. You can see the reconciliation of our 2016 sales forecast in the supplemental financial disclosures presentation we posted on the financial reports page of our IR website. Based on our revised 2016 reported sales estimate of $768 million to $778 million, we now forecast 2016 adjusted diluted net earnings per share in the range of $1.95 to $2.05 compared to the previous range of a $1.85 to a $1.95, which reflect the favorable movement in foreign exchange rates. The adjusted diluted net earnings per share estimates for 2016 exclude the cost of special items including acquisition cost, restructuring cost, debt refinancing, which are estimated in the range of $18 million to $20 million net of tax and translates into approximately $0.64 to $0.71 per share – per diluted share. Additionally, these estimates exclude amortization of intangible assets, which are now estimated in the range of $12 million to $14 million net of tax compared to the previous range of $14 million to $16 million net of tax based on the close of the SurgiQuest transaction. This new range translates into roughly $0.43 to $0.50 per adjusted diluted share. From a sales cadence standpoint, we are expecting approximately 48% of this year's sales in the first half of the year and the remainder in the back half. While 2015 was almost evenly split between the first half and second half, the AirSeal acceleration coupled with new product introductions will result in a heavier weighting to the second half of 2016. Additionally for internal modeling purposes, we see the majority of the FX guidance increase in the second half of the year. The earnings cadence will be even more pronounced with an anticipated EPS weighting of 45% in the first half of the year and 55% in the back half of the year, due to the earnings leverage and higher sales quarters. And now, I'd like to turn the call back over to Curt. Curt R. Hartman - President, Chief Executive Officer & Director: Thanks Luke. Karen, I think we're ready to open the line for questions.

Thank you. Our first question comes from the line of Kristen Stewart from Deutsche Bank.

Hi. Thanks for taking the question. I just wanted to go over SurgiQuest again, with the $12.7 million in sales this quarter and just kind of discuss, I believe what you're saying in terms of the weightings for SurgiQuest and kind of the dynamics in the quarter because that's – was definitely more than what I was modeling, expecting, given the close and given the fact that they had a larger fourth quarter than expected and just kind of talk through that. Because It's definitely was a pretty good number, and I'm just surprised you kept guidance of 55% to 60%. Curt R. Hartman - President, Chief Executive Officer & Director: Sure, and thanks for joining the call, Kristen. Great place to start. We're excited by the SurgiQuest transaction and the outcomes in the first quarter. As we built our models obviously, we were estimating on close date, and in this scenario, we were able to close early in January – January 4, in fact. And they did have a big December, and that really was reflected in the early start in the quarter with a slow January, which was also hampered by what I would just call the typical integration effort, sales force training – extensive sales force training, and bringing the organization underneath the CONMED umbrella, but once we got the organization out into the street and into the defined territories and recall now that that sailing (23:55) organization in the U.S. is north of 100 people. The market acceptance of this technology was really building under SurgiQuest and we were able to keep that momentum going and they didn't close everything at the end of last year. So, there were some deals out there that we were still able to close and then some other activity we were able to pick up. And outside of the U.S., it was a little bit slower. We really couldn't touch the international markets until the date of the transaction closing because they were going through distributors, but momentum built there very quickly as we got into the late February-March timeframe. So, we wind up with a good quarter, about $12.7 million as we noted and we're excited by that start. That said, I still think it's a little bit early to talk about raising the estimates and the reason I say that is there's still integration work going on that always raises potential hiccups and candidly, there's still a lot of work outside the U.S. as Pat and his team moved the business through the distributors, get tighter relationships with these existing distributors and as I noted in two markets, work on that direct presence. So, I think, we're comfortable with the start. We're excited about the technology and the platform and what it can do for us. But probably a little bit early for us to be taking the numbers up.

Yeah. It's a really great start. I was wondering if you could just maybe talk through the underlying organic number for the company, I guess, it was down 2.2% if I take out SurgiQuest and maybe just walk through that, because that was a little bit weaker. Is that or I guess, was that in line with your view and I guess, if not, what were some of the major contributing factors for that... Curt R. Hartman - President, Chief Executive Officer & Director: Yeah, Kristen...

...was it just simply integration of SurgiQuest, maybe a little bit of a distraction there? Curt R. Hartman - President, Chief Executive Officer & Director: Yeah. Great question, and I think as you think about our underlying organic growth, there were two areas that really hindered us, within General Surgery, the Advanced Surgical businesses where the SurgiQuest platform went and that business' underlying organic growth was very weak in the first quarter, and it was somewhat in line with what we had anticipated. Number one, because we had the sales force out of the field for a greater than expected amount of time given all the training that we wanted to accomplish. And number two, we knew that the sales reps would inherently gravitate to the new object which is a very innovative, exciting platform. So, the underlying organic growth in Advanced Surgical was hindered by that, we also candidly had some back order issues that we're remediating and then hope to ship out of us as we get into the second quarter. And finally, we had some quality issues that cost us to stub our toe a little bit, all occurring within that Advanced Surgical business both in the U.S., but those last couple impacting international as well. On the international side, it was just kind of a soft quarter across the board for capital as we called out in scripted comments. And then, I think one thing that we thought maybe we could close a little bit earlier and see better results was the distribution agreement in Japan that I mentioned in my script and we've got great distributors in Japan. But as – as rightfully they should be, those negotiations were tough. Our team did a great job. There – the distributors did a great job and we struck a very amicable relationship. But it took essentially the entire quarter to get that done and when you're in the middle of the those negotiations, orders are not going to be placed. So, that hampered us, and that might have taken us a little bit lower on the organic side than we would have liked. So, those are probably the two main things I'd point to.

Okay. Perfect. Thanks very much. Curt R. Hartman - President, Chief Executive Officer & Director: Thank you.

Thank you. And our next question comes from the line of Matt O'Brien from Piper Jaffray. J. P. McKim - Piper Jaffray & Co. (Broker): Hi. Good afternoon. This is actually J.P. in for Matt. Thanks for taking the question. Curt R. Hartman - President, Chief Executive Officer & Director: Thanks for being on. J. P. McKim - Piper Jaffray & Co. (Broker): Yeah. The first one, I guess, I'll dig into the international market, specifically on the capital sales side of it. Do you think it was more of just a macro environment going on over there, or do you think you still have some kind of work to do on the distributor side, or maybe need to go direct in more countries? Just some color there would be helpful. Curt R. Hartman - President, Chief Executive Officer & Director: It's a great question, and it's a little bit of both, to be honest with you. Two of our great international markets are Canada and Australia, and in the first quarter 2015, they both had really big quarters, sold a lot of capital, that performance did not repeat in the first quarter this year, so part of it was an internal issue. Beyond that, obviously, the capital in international that goes through export was limited, because we still have some challenges in the export markets, Middle East, as I mentioned in my scripted comments along with the China. A year ago we sold video in China, this year there were zero dollars in the first quarter for us, video in China. And that's really driven by the crackdown on healthcare as they tighten up the reform policies there. So, it's a little bit macro, it's a little bit internal. But looking at our forecast, we think we see a road to recovery there. So, a slow start on the capital side, in international, but I think we'll get back to where we needed to be. J. P. McKim - Piper Jaffray & Co. (Broker): Got it. And then I'd like to just touch on some of the newer products that we've seen from the recent industry conferences. I think one that we looked at were the TenoLok and AssistArm. Could you kind of (29:37) talk about how those contributed to growth or maybe physician feedback thus far? And then, just could you give a quick update on the ablation system, do you still expect that kind of midyear this year? Curt R. Hartman - President, Chief Executive Officer & Director: Sure. Sure. Well, obviously, we were encouraged both at Academy and SAGES with new products in both the orthopedics and general surgery space and on the orthopedic side, the TenoLok devices has been warmly received. There's a lot training and education that goes with getting customers fully on board with that and we're also trying to facilitate a global launch. So, it's a very well managed launch and the customer acceptance has been very exciting and we definitely recorded revenue in the first quarter and we see that building as the next couple of quarters unfold, so very excited by that. AssistArm, a little bit slower start, but we finished the quarter strong and I think we're going to find a good audience for that one as well. And then finally, the ARC shoulder cannula. We're still working a little bit with customers on the procedure specific to that device and so that one's a little bit slower in the uptake, but we still have confidence that there's a home for that and think that we'll do well once we get some of the final wrinkles out. Over on Advanced Surgical, obviously, I've already talked about AirSeal, great reception there. The other device we showed at SAGES was the helix energy platform, we're very early in rolling that out. Been warmly received by customers who are excited to see an upgrade of that technology in the market, but it'll be a slower launch, because of the size of the platform and the capital intensity that comes with that type of purchase. And then finally on the last part about Edge, as you mentioned, we did show that at Academy, and as I said early in the year at a investor conference, Edge was our number one priority. Management team evaluates our status on that weekly and Nate Folkert, who runs our Orthopedics business, intimately involved with it along with our entire R&D and marketing team and we made a decision based on where everything stood that we were going to show that at Academy and we said at that point in time, it would be late in the second quarter that we'd start slowly getting this out to the market and as of today, those plans remain intact. It's going to be a very measured approach, because it's a new technology. We know what the market wants and we don't want to stub our toe, it's vitally important to the Orthopedic future of CONMED in the domestic and international markets and its an important statement for us with our selling organization. So, I feel like we're on track, but it'll still be a measured approach. J. P. McKim - Piper Jaffray & Co. (Broker): Sounds good. Thank you. Curt R. Hartman - President, Chief Executive Officer & Director: Thank you.

Thank you. And our next question comes from the line of Mike Matson from Needham & Company. Mike S. Matson - Needham & Co. LLC: Hi. Thanks for taking my questions. So I guess, the guidance obviously implies a pretty big ramp or a pretty heavy weighting to the second half of the year. It reminds me a little bit of last year and that didn't turn out so well. So, I guess, what – can you just walk me through the various things that give you confidence that you can actually see this acceleration in your revenue growth in the second half of the year. What are the various kind of factors, new products, et cetera, that you expect to really drive that? Curt R. Hartman - President, Chief Executive Officer & Director: Sure, Mike. I think it's a couple of things. Number one, it starts with people and the leader is not only my team, but the leaders at the business level, the sales, the marketing leaders, the sales management, the entirety of the amount of change there and the now time enrolled (33:32) that those people have, their clarity on what needs to be changed, that work is well underway, if not already done and we've just got a stable base of new leaders, who are pushing each and every day that a year ago, we didn't have quite the same level of visibility and visibility grows every day as you get people in the chair a little bit longer. Number two, we have a much broader offering of products, that we're bringing to market, most of which that I spoke about in the previous question, we've already introduced. Yet as we look further into the second through fourth quarters, there are other products still in development that we'll be introducing. And the other thing that we've done this year that we did not do last year was sales force expansions. As you look at our businesses in the U.S., the Endoscopic Technologies business expanded their sales force and they did that because they had new product to launch, the first one in ten years and they have more new products that they should be getting later this year. Our Advanced Surgical, obviously, benefited from the acquisition of AirSeal, and we've got a much larger sales force this year, than we had last year and candidly, last year that sales force was hampered, because once we started the acquisition review, we held off on filling sales territories, because we knew SurgiQuest had a lot of great people. And then outside the U.S., Pat has really done a fantastic job evaluating his leadership structure, putting leaders in place, sales, management, and marketing professionals in place and really focusing in – you pickup on this from the re-class into R&D (35:07) on international registrations. We're just getting more products into market and that's not new products, that's taking existing products, getting the registration done so our teams who are very good in international, can sell those products. So, all those things are lining up in front of us and that's what gives us confidence looking at the year and as we said in the early comments it's 48% in the first half, 52% in the second half. Mike S. Matson - Needham & Co. LLC: Okay. And I guess just on the distributor market issues, the timing of those – when those started, when you start to lap it, I guess it would be more in the third quarter, I guess. And then is that – how do we think about the impact of that in your growth, is that something where it was kind of ramping down over several quarters, or was it more of a step down, and then kind of a flat impact, in other words... Curt R. Hartman - President, Chief Executive Officer & Director: Just to be clear, you're talking about in Japan? Mike S. Matson - Needham & Co. LLC: No. The distributor markets is internationally in general. Curt R. Hartman - President, Chief Executive Officer & Director: Broadly speaking. Mike S. Matson - Needham & Co. LLC: Yeah. Curt R. Hartman - President, Chief Executive Officer & Director: I think, broadly speaking, when you look at our – the distributed business, the export business, that's what confused me, the export business. The softness there had started, really under the magnifying lens in the third quarter of last year. So, as we hit the third quarter, we'll go up against pretty beat up comparables, that's not to say it all magically appeared in the third quarter, it was starting to build up to that. So, as we get to the third quarter, the comparables will be pretty well beat up, but also importantly and late in the second quarters, when we made adjustments in our organizational structure to support our distributors, and spend more time with them and help them grow their businesses through medical education, marketing collateral and other in-market support programs that previously had not existed. So, I think a combination of lapping the prior year comparables, in addition to the org redesign that we've done to support them. I had a distributor who came up to me at Academy, he's been a distributor with us for a number of years, actually decade – decade plus and he said, I've spent more time with CONMED in the last year than I had in the previous decade plus. So, we're really investing in the distributor export network to support them in their markets, and really start driving change, and I think we're going to start to see that play out.

Thank you. And our next question comes from the line of Richard Newitter from Leerink Partners.

Hi. Thank you for taking the question. It's Ravi in for Rich. Can you hear me, okay? Curt R. Hartman - President, Chief Executive Officer & Director: We can Ravi.

Hi. Thanks for taking the question. So, I wanted to follow up a little bit on some of the questions that already been asked. Regarding the new product launches at SAGES and AAOS, you put forth a number of new products coming out. I was hoping you could he me understand in terms of you have a bunch coming in Orthopedics and then – that were announced at AAOS and a bunch at SAGES. How do we think of sort of the impact from a segment level? You've guided more towards a second half-weighted year, would you see more of an impact, do you think, in Orthopedic surgery with sort the General Surgery pushed out a little bit further towards the back half of the year until 2017 or is the cadence on that something else? Curt R. Hartman - President, Chief Executive Officer & Director: Yeah. It's a great question and I think the cadence will be the Orthopedics organization both U.S. and internationally will continue to improve starting in the second quarter. Academy was earlier this year, it takes time to ramp up, get sales samples out, get in front our physicians (39:05) for trials, but in Orthopedics, that work has been ongoing now. Whereas in the Advanced Surgical side, which is one business of General Surgery, AirSeal obviously consumed a lot of the first quarter, even though we introduced Healix late. Healix was a big capital item and that takes longer to get in to market, to training, evaluations, customer experience and win capital orders. So I see the Advanced Surgical portion of General Surgery, the biggest portion, having a little bit longer uptake on the new product side. And importantly and I mentioned it in my opening, in the Endoscopic Technologies business, we introduced the new products in Q1, first new product they've had. We've got more coming. And that sales force in the U.S. has really picked that up and ran with it as you would expect when you give a team something new that hasn't had one in a while and they're able to make a pretty quick impact. And so we're excited about that coupled with items like Healix helping to grow the General Surgery category, but again a little bit longer to get the capital out, which is much bigger dollar item than some of the things we've introduced in Endoscopic Technologies. So kind of second quarter onward for Orthopedics and more third quarter in General Surgery, could be sooner but that's just kind of how I see it right now.

Great. Thanks. And then maybe a couple of follow-ups on that. Going to your Visualization business, one of your competitors have been talking about their sort of integrated camera and OR suite. Is there something in your -I mean, 4% U.S. sales was I think a little bit worse than we had expected for the first quarter. Is there anything – now that the camera launch anniversaried last year, what do you guys need to do to sort of regain momentum in that segment? Curt R. Hartman - President, Chief Executive Officer & Director: Yeah. So when you talk about Visualization, CONMED has a great brand, the Linvatec camera system is long established in the market. It's a great brand. The brand was damaged and it was damaged because of a lack of new product innovation. And fortunately, at the end of 2014 or early 2015, we got the first new camera the company had put out in seven years. So, we're doing a lot of heavy lifting to reestablish our self as a video entrant in the market. That's the general statement. Outside of the U.S., we have a couple of markets that are pretty good with video. But largely, our international team needs to do a better job understanding and selling video. And then, another general comment on video is it's a multi-specialty device, it's not a pure orthopedic device. And when hospitals make purchases, they want to talk about multi-specialty purpose for video systems and we have not been real good at that as well. So, there's a lot going on within CONMED to address the long-term outlook on video. It's not going to mysteriously get better overnight and it is a lot of hard work at the ground level. And then second, I think the market is saying, great, you came out with a new camera. What are you going to do for me next? And that's on us on the inside on R&D standpoint to continue to show the market we're going to innovate. And those are all the different lines we're running down to reinvigorate our Visualization line and be a better participant in a market that we think is an attractive market and fits in well with the rest of our business, both on the Orthopedic, Sports Medicine side, but also in the General Surgery side. So, we've got a lot of work to do here. It started with the new camera and it starts with getting more emphasis from management added across to our businesses.

Thanks. And then, maybe if I could sneak in a couple more. Just one on SurgiQuest and then one on the P&L. With SurgiQuest, I guess it's roughly $12.7 million sales, does that include sort of any SurgiQuest-specific disruption? In other words, could that have been higher given the timing and the integration that's been going on? And then on the second one, Luke, maybe on the FX and the earnings guidance, you brought down the headwind about $8 million. I'm just wondering if you could confirm or walk me through the math in terms of the impact on the bottom line. I'm getting to about an $0.08 negative impact, is that right? And if so, can you just reconcile that with your guidance and in your earnings – your EPS raise and how much of the component of the EPS raise is associated with foreign exchange? Thanks. Curt R. Hartman - President, Chief Executive Officer & Director: So, on SurgiQuest, was their disruptions are the (44:05) $12.7 million. I mean they – we commented that they had a very strong December, which you would expect, but that was probably partially offset or further impacted by the amount of training we did. That said, it still requires a lot of end market evaluation and we had a much bigger sales force going after the market than what SurgiQuest has. So, you talk about our range of $55 million to $60 million kind of a straight-line staircase 12, 14, 16, 18 gets you to $60 million. I'm not telling anybody on the call that that's exactly how this is going to play out, but that is the way to think about it as it relates. And you've got to think about it in the components of U.S. versus international. Last year in the second quarter, international SurgiQuest built up all their distributors. Their second biggest quarter last year was second quarter. They did $13.5 million in the second quarter last year. So that's a really big prior-year comparable for our international team to go against. And we still got our U.S. selling effort, which has a much broader portfolio besides the SurgiQuest platform that we want them out in the market selling. So, was there an impact from the fourth quarter results? Sure. But there are other things that offset that you run into within integration and run into with a broader selling bag (45:30). I'll let Luke talk about FX. Luke A. Pomilio - Executive Vice President-Finance & Chief Financial Officer: Sure. So, let me – I'll run through the numbers quickly. So, we've raised our guidance by $8 million. That's actually a number that net of a hedge change. So, as rates changed, the hedges change as well. So the gross number was $11 million, the net number is $8 million. The way that runs down to the $0.10 EPS impact is the result. A local hedge based on our selling and administrative costs in country, that's about 35%. So, if you run those numbers and tax effect that you'll come down to about $0.10.

Thank you. And our next question comes from the line of Matt Mishan from KeyBanc.

Great. Thanks for taking my questions. Luke A. Pomilio - Executive Vice President-Finance & Chief Financial Officer: You bet.

I just wanted to start on the gross margin and just want to make sure I'm looking at this right. On that, I think 55.2% ex the amortization and I think last quarter, Luke, you had indicated that you were going to try and get up to 54% for the year. And so, it looks like the gross margins are actually coming in higher than you would have thought. What are some of the moving pieces around that in the quarter and is that – I'm I looking at it right to where the gross margins maybe a little bit stronger this year than you would have thought coming in? Luke A. Pomilio - Executive Vice President-Finance & Chief Financial Officer: Yeah. I think the gross margins are up at the higher end of what we thought. So coming to the year, we knew that we had 140 basis point impact negative from currency in the – and that's what we realized. In the current quarter, we had a 300 basis point favorable impact from production variances and candidly that was a little better than what I had anticipated. Offsetting favorability was also some mix at around 40 basis points, so that's how we ended up at the first quarter number. I think most of those factors should hold true as we look forward, and the change in currencies to our benefit should provide a slight tailwind as well that could be as much as 50 basis points. So, I think as we look out for our target for the year, 54.5% to 55.5% is where I'm hoping to get to.

Okay. Got it. And then, on SurgiQuest, I think most – looking at the first quarter numbers, you're probably feeling fairly confident about the $55 million to $60 million, but I was just curious how confident you remain in the double-digit accretion guidance for SurgiQuest. Luke A. Pomilio - Executive Vice President-Finance & Chief Financial Officer: As Curt said, I think it's early to talk about raising numbers, but we're pleased with where we ended up the first quarter from a sales perspective. From a margin standpoint, we were where we expected to be and our cost structure that is in place already is right where we expected to be. So, I feel really good about finishing the year from a SurgiQuest standpoint exactly where we hope to be.

Thank you. And our next question comes from the line of Jeffrey Cohen from Ladenburg Thalmann. Jeffrey S. Cohen - Ladenburg Thalmann & Co., Inc. (Broker): Oh, hi. Thanks for taking the questions. Curt R. Hartman - President, Chief Executive Officer & Director: Hey, Jeff. Luke A. Pomilio - Executive Vice President-Finance & Chief Financial Officer: Hi, Jeff. Jeffrey S. Cohen - Ladenburg Thalmann & Co., Inc. (Broker): I was hoping you could draw down a little bit firstly into the SG&A line and talk about that, and how's the percentage of revenues versus sales expense and what got tacked on from the SurgiQuest acquisition, and was the fair amount of that one-time in nature or training in the size of the new sales force at least in General Surgery or Advanced Surgery and how that might look going forward. I know that Luke also had some general comments about that. Luke A. Pomilio - Executive Vice President-Finance & Chief Financial Officer: Yeah. So, we had talked about adding for SurgiQuest 22% to 25% of sales for the year, and that's in fact what we did. We're in that range. I think the other things that are impacting the GAAP numbers is clearly the SurgiQuest amortization. Now, as I talked about in my scripted comment, that number came in lower, but it is impacting our GAAP number. From a non-GAAP number, that number's being pulled out. So, I think SurgiQuest is right in line with where we expected to be from an SG&A standpoint. Jeffrey S. Cohen - Ladenburg Thalmann & Co., Inc. (Broker): So on a revenue percentage, you'd expect that SG&A line to be relatively flat to where we are now. Luke A. Pomilio - Executive Vice President-Finance & Chief Financial Officer: Yeah. So for the quarter, on an adjusted basis, excluding amortization, we're at 39% for the year. I'm targeting 38.5% to 39.5%. As we saw in 2015, depending on the sales level, a certain amount of our SG&A is fixed so that number bounces around a little. So, we'll have some quarterly variability. But as far as full year number, I'd be looking at 38.5% to 39.5% as a percentage of sales. Jeffrey S. Cohen - Ladenburg Thalmann & Co., Inc. (Broker): Okay. Got it. And second question, if you could talk about some of the territories outside the U.S. and specifically, if you could talk about will you consider maybe taking some of these territories direct that are currently under distribution agreements. Curt R. Hartman - President, Chief Executive Officer & Director: Is had a question specific a question specific to the AirSeal platform or just in general as we look at CONMED? Jeffrey S. Cohen - Ladenburg Thalmann & Co., Inc. (Broker): I'd say in general as you look at CONMED. Curt R. Hartman - President, Chief Executive Officer & Director: Sure. No, it's a great question. As we look at export, there's a step in between what you're describing and where we are today. Historically, the export businesses and the local country markets have been very independent. And with Pat's view of creating the one CONMED, we've got great country managers and I'll use Canada as a wonderful example. A year ago, we had two separate entities, one running the General Surgery side and one running the Orthopedics side. And the leader up there, along with Pat and others, made a well-informed decision that we should consolidate this business and have one leader and leverage the one CONMED approach and they, in fact, did that work late in the year last year in the second half. And in that example, it made perfect sense. It was all direct and it made perfect sense for us to consolidate that leadership. In some of our international markets, we might have the Orthopedic business direct and the General Surgery run through exporters, but the direct leader in that market has no influence on the export arm, the General Surgery side. So, an intermediary step is to take that export business in a given market and let the local CONMED market leader have more influence on that, work with customers, work with the distributor versus that distributor reporting into somebody who's far removed from that given market. And Pat and his team are evaluating those plans. And we think it's a win-win for the distributor because they get in market local support, they continue to maintain their position with CONMED, and they have local end market speak-the-language resources and in some cases, that's the appropriate approach. In another cases longer term, it may make sense to take something direct where we've been running through distributors, but that's not on the table right now. I think Pat is comfortable with this intermediate step. Jeffrey S. Cohen - Ladenburg Thalmann & Co., Inc. (Broker): Okay. So some of these territories could be going through this intermediate step in 2016. Curt R. Hartman - President, Chief Executive Officer & Director: We would probably start some of them in the second half of 2016. Jeffrey S. Cohen - Ladenburg Thalmann & Co., Inc. (Broker): Okay. Perfect. That does it for me. Thank you. Curt R. Hartman - President, Chief Executive Officer & Director: Thanks, Jeff. Luke A. Pomilio - Executive Vice President-Finance & Chief Financial Officer: Thanks, Jeff.

Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back over to CONMED management for any additional comments. Curt R. Hartman - President, Chief Executive Officer & Director: Thank you, Karen. Thank you everybody for your time today. And appreciate you coming along for the ride on the CONMED story and we look forward to speaking with you on our next earnings call, which will be held on July 27, 2016. Thank you.