Earnings Labs

CONMED Corporation (CNMD)

Q2 2018 Earnings Call· Wed, Aug 1, 2018

$36.69

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Transcript

Operator

Operator

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 represent 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 could 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 of its normal ongoing operations. These adjusted 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 - CONMED Corp.

Management

Thank you, Chelsea. Good afternoon, and thank you for joining us for CONMED's Second Quarter 2018 Earnings Call. With me on the call is Todd Garner, Executive Vice President and Chief Financial Officer. Today, I'll provide a brief overview of the financial and operating highlights for the quarter. Todd will then provide a more detailed analysis of our financial performance, and discuss our 2018 financial guidance. After that, we will open the call to your questions. As we outlined in our press release, we are very pleased to report another solid quarter, and to have a good first half in the books. Our total sales for the second quarter were $212.8 million representing a year-over-year increase of 7.9% as reported, and 7.4% in constant currency and as adjusted for the new revenue accounting standard. Selling days were equal to the prior year. The growth was driven by gains across both of our categories on a worldwide basis. From an earnings perspective during the second quarter, our adjusted net earnings of $13.3 million increased 16.2% year-over-year, and our adjusted diluted net earnings per share of $0.46 increased 12.2% year-over-year. Given these results and the recent top line performance trend, we are increasing our fiscal 2018 top-line guidance once again, and we remain on track to deliver double-digit earnings growth, while simultaneously taking the opportunity to reinvest in the future growth of the company. From an operating perspective, our new product delivery schedule for the year remains on track, and I'm excited to see our R&D investment increasing as the cadence of new product introductions accelerates. Our teams are truly starting to hit on all cylinders with respect to bringing new products that deliver meaningful innovation to the market. In conclusion, we're pleased with the second quarter and first half results. Looking forward, we are confident in our ability to build on this momentum. We remain focused on investing in our people, expanding our product portfolio, and continuing to position CONMED for long-term profitable growth. I'll now turn the call over to Todd who will provide a more detailed analysis of our financial performance and discuss our 2018 financial guidance. Todd?

Todd W. Garner - CONMED Corp.

Management

Thank you. As Curt said, we reported a strong second quarter with total sales of $212.8 million, which represents an increase of 7.9% on a GAAP reported basis over the second quarter a year ago. In constant currency and as adjusted for the new accounting standard ASC 606, total sales grew 7.4%. All remaining sales growth numbers I reference today will be given in constant currency and as adjusted for ASC 606. Our domestic sales increased 12.0% versus the prior year period, while international sales increased 2.9%. Worldwide Orthopedics revenue increased 2.8% in the second quarter and was driven by growth in both capital and single-use sales. Domestically, second quarter Orthopedics revenue continued to see positive growth for the third consecutive quarter with revenues up 2.1% versus the prior year period. Internationally, Orthopedics revenue increased 3.2% year-over-year. Worldwide General Surgery revenue grew 12.9% in the second quarter driven by strong performances across the product portfolio. Domestically, second quarter General Surgery sales increased 18.9%, and internationally General Surgery sales increased 2.3%. Now, turning to other components of the income statement. Adjusted gross margin for the second quarter was 54.6%, up 190 basis points compared to a year ago. We continue to expect our full year 2018 adjusted gross margin to be between 54.5% and 55.0%, which is an improvement of 50 basis points to 100 basis points over 2017. Research and development expenses for the second quarter were $10.0 million or 4.7% of total sales. This compares to $8.0 million or 4.1% of total sales in the prior year period. In line with our comments earlier in the year, we have been increasing our investment in R&D and continue to expect full year 2018 R&D expense in the range of 4.5% to 5.0% as a percentage of total sales. On an…

Operator

Operator

Thank you. Thank you. Our first question will come from the line of Matthew Mishan with KeyBanc. Your line is open.

Matthew Mishan - KeyBanc Capital Markets, Inc.

Analyst

Good afternoon, and thank you for taking the questions.

Curt R. Hartman - CONMED Corp.

Management

Hi, Matt.

Matthew Mishan - KeyBanc Capital Markets, Inc.

Analyst

Hey, Curt, Todd. First, could you go a little deeper into some of the investments that you are making in kind of SG&A and R&D? And then the follow-up question I'll just ask that in advance is, are those investments impacting gross margin at all or just SG&A and R&D?

Todd W. Garner - CONMED Corp.

Management

So yeah, Matt, I'll reiterate the same when we said last quarter, the focus is getting closer to the customer, more direct, which is mostly SG&A, and part of that also is increasing our C-suite sales capabilities and major IDNs and contracting and that's also in SG&A. And then the other thing is building infrastructure. We see opportunities in both on the HR side and on the IT side, a global company in growth mode like we're becoming, we feel like we need to make some improvements in that infrastructure. Those both fall mostly in G&A. So most of the increased investment you'll see in 2018 is going to be on the SG&A line, which is what you're seeing.

Matthew Mishan - KeyBanc Capital Markets, Inc.

Analyst

All right. Thank you.

Todd W. Garner - CONMED Corp.

Management

Thanks, Matt.

Operator

Operator

Thank you. Our next question comes from the line of Richard Newitter with Leerink Partners. Your line is open.

Dylan J. Gantley - Leerink Partners LLC

Analyst · Leerink Partners. Your line is open.

Hey, this is Dylan Gantley on for Richard Newitter. How is it going?

Curt R. Hartman - CONMED Corp.

Management

Good, Dylan.

Dylan J. Gantley - Leerink Partners LLC

Analyst · Leerink Partners. Your line is open.

Good. Great. Hey, thanks for taking the questions. I was curious if you could just give a little more color on AirSeal's contribution in the back half of the year here, and maybe how to think about that going forward as well?

Curt R. Hartman - CONMED Corp.

Management

So we've not been in the practice of breaking out AirSeal specifically now for quite a while, but AirSeal continues to be an important part of the overall General Surgery offering. And I think there is a number of different ways that people are looking at it, and we've talked about these in the past, obviously, with the robotics trends that are in the marketplace, AirSeal looks at the procedure growth in robotics, and that's a pretty good proxy for the consumable volumes that are growing. And certainly every day we wake up that's wind at our back. But the other side of this business that we've talked about, the long-term growth trajectory, is a broad laparoscopic market, and we continue to have a pretty strong focus there, and you should think about that also outside the U.S. where there's a smaller presence of robots. That has been our focus from day one is increasing the application, the broad laparoscopic cases. So we've got a pretty broad field to play on with AirSeal. We think we're still very early innings here. And so we see a lot of growth ahead, and supporting that we continue to innovate on the portfolio as part of the future outlook, both directly on AirSeal, but things that would support AirSeal specifically as we noted at one of our previous tradeshows, the whole low impact application there, and the instrumentation sets that go along with that. So we feel good about where we've come with AirSeal, and we feel good about what's it going to contribute in the second half and into 2019 and beyond.

Dylan J. Gantley - Leerink Partners LLC

Analyst · Leerink Partners. Your line is open.

Got it. Thank you very much, Curt.

Curt R. Hartman - CONMED Corp.

Management

Thanks, Dylan.

Operator

Operator

Thank you. Our next question will come from the line of Mike Matson with Needham & Company. Your line is open. Mike Matson - Needham & Co. LLC: Good afternoon. Thanks for taking my questions. I guess, I just wanted to start with the Orthopedics business. It's obviously good to see that growing again now for a few quarters in a row, but the growth is probably somewhat below the market, I think, sports meds is probably more mid single-digit-ish as far as I can tell. But what can you do here to really get that growth to be higher? And then is there a need to do some sort of flagship M&A deal here like what you did with AirSeal in the General Surgery business?

Curt R. Hartman - CONMED Corp.

Management

So a couple things to think about with respect to CONMED specifically in Ortho. I think you're right, the sports medicine category in and of itself is probably higher growth than where we're posting right now. But the totality of our Ortho business is video as well as power in addition to Orthopedics. So we're thrilled with three quarters now domestically of growth where we remain bullish on what's going on outside the U.S. They've had positive growth there for quite some time. And I think more than any of our other businesses, this category for us had the most gaps in the portfolio and a very dated offering. So we've really been increasing the effort here now over time on the new product front. We've had good product introductions 2017, early this year we had a nice introduction at Academy. But we said beginning of the year that this business, this category for us would see a heavier weighting to new products later in the year, and as we enter the second half we're still on track for that. So Mike, it's really about continuing the execution that we've been doing. It's getting the new products out, getting our sales forces globally on offense, and I think we're well underway with that. And in many regards, just a little bit of analogies to the journey we took on General Surgery. The growth rates as I said going back couple of years; number one, get our heads above water; number two, get to market growth rate; number three, really start accelerating. And I think we're somewhere between number two and number three as we look at Orthopedics, and the products that are coming in addition to the products that we have. Mike Matson - Needham & Co. LLC: Okay. Thanks. That was helpful. And then the international business seemed a little slower this quarter. Just wondering if you could comment on that at all. That's all I have. Thank you.

Curt R. Hartman - CONMED Corp.

Management

Yeah. Our international teams both the General Surgery and Orthopedics have been posting pretty good growth rates now, I think it's nine consecutive quarters where both the Ortho and General Surgery internationally have grown. So they've got a little bit tougher comps, they've been going through a lot of those investments that Todd referenced in terms of focusing on channels, those can be disruptive as you maneuver. And finally, they also need that same cadence with new products. But I think, the thing I would point to is through six months international in total is up 3.7% constant currency. So probably right in the range of where the market is growing, and historically speaking, our international teams have had stronger performance in the second half, and we think that's still a favorable view to have right now on international. Mike Matson - Needham & Co. LLC: Great. Thank you.

Operator

Operator

Thank you. I'm showing no further questions at this time. I would now like to turn the call back to Curt Hartman for closing remarks.

Curt R. Hartman - CONMED Corp.

Management

Okay. Thank you, Chelsea and everybody else on the call. Thank you very much for your time today. We look forward to speaking with you on our next earnings call. Thank you.

Operator

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.