CONMED Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 26, 2023

There are 11 speakers on the call.

Operator

These statements represent the forward looking statements that involve risks and uncertainties as those terms are defined under the federal securities laws. Investors are cautioned that any such forward looking statements are not guarantees of future events, performance or results. The company's actual results may differ materially from its current expectations. Please refer to the risks and other uncertainties disclosed under the forward Information in today's press release as well as the company's SEC filings for more detail on the risks and uncertainties that may cause actual results to differ materially. The company disclaims any obligation to update any forward looking statements that may be discussed during this call, except as may be required by applicable law.

Operator

You will also hear management refer to non GAAP or adjusted measurements during this discussion. While these figures are not suitable substitute for GAAP measurements, Management uses these figures to aid in monitoring the company's ongoing financial performance from quarter to quarter 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 credit or charges that are considered by the company to be special or outside of its normal ongoing operations. These adjusting items are specified in the reconciliation supporting the company's earnings releases posted to the company's website. With these required announcements completed, I will now turn the call over to Kurt Hoeppmann, Conmed's Chair of the Board President and Chief Executive Officer for opening remarks.

Operator

Mr. Hartman?

Speaker 1

Thank you, Jonathan. Good afternoon and thank you for joining us for ConMed's Q2 2023 earnings call. With me on the call is Todd Garner, Executive Vice President and Chief Financial Officer. Our plan is to share with you our Q2 results and then open the call to your questions. I will start by saying we are incredibly pleased with our team's performance in the Q2.

Speaker 1

After setting a new quarterly sales record in Q1, We handily beat that with our Q2 performance. Total sales for the quarter were $317,700,000 representing a year over year increase of 16.6% as reported and an increase of 16.6% in constant currency. On an organic Constant currency basis, sales growth finished at 12.6%. Our commercial teams were outstanding in the first half and the results in Orthopedics And General Surgery indicate we delivered balanced growth across our product offering on a global basis. I'd remind everyone that in mid June the indeboans Business reached its 1 year anniversary.

Speaker 1

We remain pleased with this business and look forward to continued growth in this exciting market as part of our organic base. Additionally, the Bio Brace offering continues to build momentum through growing market acceptance, which is being driven by positive clinical experiences. From an earnings perspective during the Q2, our GAAP net income totaled $13,700,000 This compares to a net loss of 168 $300,000 in the Q2 of 2022 due primarily to the extinguishment of most of the 2024 convertible notes. Excluding special items that affected comparability, our adjusted net income of $26,100,000 increased 5.3 percent year over year and our adjusted diluted net earnings per share of $0.83 increased 9.2% year over year. At a macro level and consistent with my Q1 comments, the underlying surgical markets that we serve are healthy and healthcare staffing levels continue to improve.

Speaker 1

Conversely, inflationary pressure on the material side has been slower to dissipate and supply chains are not yet fully recovered. Overall, we see all these dynamics as stable to improving in the second half of twenty twenty three. In summary, I'm very pleased with the focus and results delivered in the quarter and I'm confident we will build on our success in the second half. Before I turn the call over to Todd, I'd like to provide important context about the standard insufflation market and our competitive position with AirSeal. Let me start by saying that AirSeal is an only in class technology.

Speaker 1

From day 1, it has been replacing Standard insufflation from all marketplace competitors in both robotic and laparoscopic procedures given its unmatched Clinical benefit delivered through low pressure. The introduction of another standard insufflation device into the market will not change our clinical or sales Whether is it a standalone device or attached to a robot. The only parties that will feel the pressure from the introduction of another standard insulation device are the existing standard insufflation companies that we have been replacing for the past 7 years. I will again remind you that none of these companies can deliver Consistent numo at low pressure nor the related clinical benefits, which are significant and are included in the investor that we posted this afternoon. Our position has always been that AirSeal delivers better patient outcomes and competitive devices driven principally through lower pressure.

Speaker 1

To support that position, we have 33 peer reviewed studies with over 6,000 enrolled patients across 5 surgical specialties that demonstrate reduced post operative pain, reduced length of stay, Reduced 30 day visits, reduced ER visits and improved ventilation metrics. Standard Insufflation has 0 clinical studies that demonstrate Any of these important clinical benefits. In fact, I think I can make a compelling argument that we are, through our clinical capabilities, growing the number of available surgeries that can be done laparoscopically in certain patient populations to include elevated risk and high body mass index patients. Competitively, since 2018, 6 new insufflation devices have been introduced to the market and AirSeal continues to win surgeons globally. While the concept of integration of advice with a robot may enhance ease of use, it will do nothing to change the clinical paradigm On which we have been taking market share and will continue to take market share.

Speaker 1

I will also remind you that in 2018, 2 strong competitors Introduce their AirSeal equivalents and I think our results would suggest we navigated that period just fine. From a technology and sustainability standpoint, we own 187 issued patents and have another 124 pending. They extend our patent position through the end of the 2030s and we continue to add to this position. Further, our AirSeal IP crosses And is integrated in such a way that it is not one seminal patent that protects us, but rather the integration of the patents across all aspects of the system to include the IFS box, tube set and access ports. This is what makes AirSeal function in a manner that delivers Clinical benefit.

Speaker 1

Each of these components is manufactured separately in a unique facility with the critical parts being in sourced here at ConMed. We're not currently aware of any patent work that will allow another device to function in a low pressure mode. Finally, based on the June 2020 3 best hospitals in the U. S. Teaching hospital category.

Speaker 1

AirSeal is present in 92% of the top 25 teaching institutions With MIS procedural utilization rates ranging from just getting started to over 75%. This is a statistically significant fact given that physicians utilize what they are trained on when they depart to surgical practice. We will never be dismissive of competitive entrant, But I think it's misinformed to assume that same old technology created by the same partner to the rest of the inflation market will somehow materially impact our results. Never mind that the market knows minimal details about this device. From my chair, if it's not obvious that it can provide consistent pneumoperitoneum Low pressure has proven through clinical studies like AirSeal has shown it is just another standard insufflation device.

Speaker 1

The only in class Airshield technology supported by extensive clinical benefits derived through low pressure has clearly been moving the market to embrace our solution. We do not see anything in a standard insulation offering that would slow that progression and we remain extremely optimistic about our future with Air Shield. More importantly, and if you really digest the quarter we just delivered, the overall prospects for CONMED, given the surgical diversity of and balanced growth Our portfolios demonstrating look the best they have ever looked in my tenure. I'll now turn the call over to Todd, who will provide further details on our financial And discuss our updated outlook. Todd?

Speaker 1

Thank you, Kurt.

Speaker 2

All sales growth numbers I referenced today will be given in constant currency. The reconciliation to GAAP numbers is included in our press release. As usual, we've included investor deck on our website that summarizes the results of the quarter and our updated guidance. And this time, it includes some supplemental information on the moat around our AirSeal product line consistent with Curt's comments. For the Q2 of 2023, our total sales increased 16.6%.

Speaker 2

On an organic basis, revenue grew 12.6%. We anniversaried the Intibones acquisition on June 13 and BioRez will turn organic on August 9. For Q2, our sales in the U. S. Increased 17.1% versus the prior year quarter and our international sales grew 16.0%.

Speaker 2

Worldwide Orthopedics revenue grew 19.8% in the 2nd quarter. In the U. S, orthopedics sales grew 29.4% And internationally orthopedic sales increased 14.8%. Total worldwide general surgery revenue increased 14.1% in the quarter. U.

Speaker 2

S. General surgery revenue grew 12.5%, while international general surgery revenue increased 17.9%. Now let's move to the expense side of the income statement. We will discuss expenses and profitability in the second quarter Excluding special items, which include charges for acquisitions and contingent consideration, termination of distributor agreements, legal matters, debt refinancing costs, restructuring and software implementation costs, amortization of intangible assets and amortization of deferred financing fees net of tax. Adjusted gross margin for the Q2 was 54.4%, a decrease of 50 basis points from the prior year quarter.

Speaker 2

This was consistent with our guidance of mid-54s for Q2. Similar to Q1, we saw exceptionally strong growth in some of our lower margin geographies, which has skewed the margin to the lower end of our guidance so far. We remain excited about the improving margins ahead. For Q3, we expect gross margins to improve sequentially over Q2 by approximately 150 basis points And then again sequential improvement from Q3 to Q4 between 100 and 150 basis points. Research and development expense for the Q2 was 4.3 percent of sales, 20 basis points higher than the prior year quarter.

Speaker 2

2nd quarter adjusted SG and A expenses were 37.4 percent of sales. Leverage gained on the higher sales drove the 70 basis improvement over the prior year quarter. On an adjusted basis, interest expense was $8,500,000 in the 2nd quarter. We expect a similar level of interest expense in Q3 and that does incorporate the rise from today. The adjusted effective tax rate in Q2 was 21.9%.

Speaker 2

Taxes came in lower than expected principally due to the excess tax benefit from stock plans. This is difficult to predict, but we don't expect the same benefit in future quarters. We still expect the tax rate to be around 25% going forward. 2nd quarter GAAP net income was $13,700,000 This compares to GAAP net loss of $168,300,000 in Q2 of 2022. GAAP earnings per diluted share were $0.43 this quarter compared to a loss of $5.65 per share a year ago.

Speaker 2

Excluding the impact of special items discussed earlier, in the Q2, we reported adjusted net income of $26,100,000 an increase of 5.3% compared to the Q2 of 2022. Our Q2 adjusted diluted net earnings per share were $0.83 an increase of 9.2% compared to the prior year quarter. Turning to the balance sheet. Our cash balance at the end of the quarter was $27,800,000 compared to $26,500,000 as of March 31. Accounts receivable days as of June 30 were 65 days Flat compared to the end of Q1.

Speaker 2

Inventory days at quarter end were 200 compared to 215 at March 31. Long term debt at the end of the quarter was $971,500,000 versus $995,300,000 as of March 31. Our leverage ratio on June 30, 2023 was 5.1 times. We continue to expect our leverage ratio to be below 4 25 times by the end of the year. Cash flow provided from operations in the quarter was $26,700,000 compared to cash flow from operations of $18,700,000 in the Q2 of 2022.

Speaker 2

Capital expenditures in the Q2 were $4,500,000 compared to $5,700,000 a year ago. Now let's turn to financial guidance. We now Expect reported revenue for the full year to be between $1,230,000,000 $1,260,000,000 compared to our previous guidance range of between $1,205,000,000 $1,250,000,000 with no material change to the expected currency impact on the year. We now expect full year adjusted EPS in 2023 to be between $3.40 $3.55 compared to our previous range of $3.30 $3.50 As discussed previously, the full year 2023 will have one less selling day compared to 2022. The way our calendar falls, Q1 had one extra day and Q3 will have 2 fewer sales days.

Speaker 2

As we look at the Q3, we expect reported revenue between $295,000,000 $305,000,000 That includes approximately 100 basis Points of FX headwind. We expect adjusted EPS in Q3 to be between $0.80 $0.85 As Curt said, we are pleased with the Q2 performance and are focused on executing and continuing to build on our strong first half as we move through the rest of 2023. We remain confident in our ability to deliver innovation to our customers while driving above market growth and profitability over the long term. With that, we'd like to open the call up to your questions and I'll turn it back to Jonathan.

Operator

We ask that you please limit yourself to one question and one follow-up. Our first question comes from the line of Robert Marcus from JPMorgan. Your question please.

Speaker 3

Yes. Hi. Thanks for taking the question and congrats on a good quarter. Thanks, Robbie. Two questions.

Speaker 3

Maybe, first, I could start out with underlying trends. It looks like you're participating in a lot of the Strong ortho and surgery trends, we're hearing from other peers, but would love to get a sense I know you touched on it in Great. But would love to get a sense of specifically U. S. And how the Revamp sales force is doing in ortho and how surgery ex air filtration and smoke evacuation did in the quarter?

Speaker 1

I would just say overall, we're very excited about performance broadly speaking. Our Pedic's business has been undergoing a bit of a renovation. Pat Beyer that was tucked in under him in October of 2020. He's Brought in a new leadership team. We're really starting to see the fruits of that labor.

Speaker 1

The second quarter was our best Pedic's organic performance that we've had in a number of quarters, and I think that bodes well for the second half. That is supported by better sales, better marketing, Better overall support, but also the underlying markets to the point of the question are seeing higher procedure levels. But you put all that together and it helps For delivering good results. On the general surgery side, absent AirSeal and Buffalo Filter, we delivered growth. I mean, People on this call probably don't understand the amount of business that we have in our advanced endoscopic technology category and that was Just shy of a double digit grower in the quarter.

Speaker 1

We don't usually talk about that, but it was a great performance by that business on a global basis. And then if I Take a different angle on it and look globally, we had really strong global performance in the market except one That had some unique challenges in that market with our portfolio, but really a strong performance across the core of the company and in each of our business categories.

Speaker 3

Great. And I know you talked a lot about it in the script, so not to pound on it too much. But there's a lot of newfound worry in the market that AirSeal It is a great product and delivers a lot of incremental growth for you that a lot of the placements and use are in conjunction with Tuitive surgical robotic procedures and reports that a third party OEM Might be making an insufflator to integrate with it. And again, I know you talked in the script, but I think it'd be helpful maybe just to review What percentage of Today beyond the Aeroseal and maybe some of the reasons that even if The robotic platform comes with an insufflator that AirSil will still be used and still be used in a good amount of procedures and forward growth. Thanks a lot.

Speaker 2

Thanks, Robbie. Yes, I mean, look, the power of AirSeal is in the clinical differentiation That it brings and we shared some of those studies and data that Kurt shared verbally that's in The deck, it's in the back of the deck that we provided today. You can see, this is proven over millions of patients and over many years. As Curt said, many times in the last several years, our competition has said, Okay, we finally found the answer to AirSeal. This is going to you're going to like this just as much as you like AirSeal.

Speaker 2

And everything has been found wanting so far because, It does not do all three things at once, right? And to put gas into the abdomen, remove smoke and measure. And AirSeal Because of our key feature with no valves and because everything is done simultaneously, it doesn't turn on and off. Everything is simultaneous that we're allowed to operate at much lower pressures consistently over a myriad of procedures and lots and lots of patients. Doing that in practice It is very difficult.

Speaker 2

And in our opinion, nothing that comes with valves or turns on and off. If I'm now I'm removing smoke, now I'm not. Now I'm inserting gas, now I'm not. Now I'm measuring, now I'm not. Anything that starts and stops with those functions and has valves that is constantly trying to fight The escape of gas is not going to be capable of operating anywhere close to the clinical outcomes that you And that is why everything that has entered the market so far even with all the promotions about saying they figured out How to match AirSeal, nothing has come close.

Speaker 2

And as you can we're coming up on 8 years we're 7.5 years post acquisition. This product line is growing north of 20% every quarter because of how differentiated it is in the space. People doctors are not going to go backwards In clinical outcomes because another company sells it that they like they really like something else that company sells. That's just not how our space works. To specifically answer your question about the attachment to the robotic procedures, It is high in the U.

Speaker 2

S. Because that business was built in the wake of robotic procedures and it sells very nicely and it's And all of the features of the product are relevant to all MIS procedures, but Especially robotic procedures where there's the added risk of the working space collapsing on the arms, There's that added risk and then the added time of having to reset if that were to happen. So there is a high attachment in the U. S. There is a low attachment to robotic procedures outside the U.

Speaker 2

S. Because frankly there weren't as many robotic procedures outside the U. S. Years ago. And so that our sales force outside the U.

Speaker 2

S. Sells it very effectively into non robotic MIS procedures. Our U. S. Sales force has not been forced to develop those muscles, And so they've lived a very good life in the wake of robotic procedures, but there's still enormous if for any reason That opportunity behind robotic procedures were to someday slow, the AirSeal can still grow just as fast as we have been by shifting focus into the non robotic.

Speaker 2

So, we feel very strong about our competitive position, About the differentiation, we see nothing in the market, nothing in any filings, nothing in any discussions that would challenge that. And it's been a terrific product now almost 8 years post acquisition And we expect we don't see anything slowing it down.

Speaker 1

And Ravi from a competitive standpoint, any company in the marketplace who provides a video platform for MIS surgery It's going to have an insufflation device and the insufflation category has traditionally been provided by an OEM, Suspect it's the same OEM that's providing this device and that is considered standard insufflation technology. When you look at attachment to a robot, it's like a video stack. You're putting the platform on there. There may be some integrated ease of use features. But again, consistent pressure, stable pneumoperitoneum at low pressure that can handle The removal of smoke without movement in the working space that can handle Doing that at low pressure, that's the clinical benefit and differentiation that the technology and the intellectual property across the three elements provide.

Speaker 1

So hopefully that helps people understand a little bit different the clinical aspects and value that AirSeal brings to the marketplace, the clinical marketplace.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Rick Wise from Stifel, your question please.

Speaker 4

Good afternoon, Kurt. Hi, Todd. Kurt, the warehouse related issues and customer recapture. Maybe you can help us understand or get a little more color on where things stand. Obviously, the software implementation was done and completed and you were last quarter back up and running.

Speaker 4

I think if I'm remembering correctly, you said that greater than 50% of customers who have been disrupted or In some way you had returned. Where are you now? How much benefit did we see in the quarter? And When do we get back to where you were or where you would aspire to be?

Speaker 1

I think we're on the path that we've Talked about really probably going back to Q4. We had good return in the Q1, supported by An uptick in overall procedure volumes, generally speaking. And, feel like we've we're pretty far back to Recovery on the majority of our customers. There will always be some stragglers, may have signed up with a competitive entrant and had to make some commitments. But I think the best way I can frame it, Rick, we're not walking around worried about how soon are these people going to come back.

Speaker 1

We feel like we've done a good job recapturing any customers that may have departed us for some period of time. And I think the underlying strength in the markets and our overall innovation and portfolio and sales teams have done a really nice job Reassuring those customers that we're back and we're in front of it again. And we said on the last call, we're still working on all The opportunity that the warehouse implementation software brings us and we'll continue to work on that. Anytime you have state of the art software platform, you're You can try to optimize it day in, day out, month in, month out and that journey will continue.

Speaker 4

Okay. And I know how important innovation is in your mind and to the ComEd strategy. Can you give us any color

Speaker 2

About

Speaker 4

what we might see or any way to characterize the Kind of impact that new product launches are having or about to have in a broader portfolio sense and maybe Roll into that, just a little more detailed update on Intibones and Biros. It seems like they're doing well. Maybe just help us understand where they are in terms of Growth and acceptance and how we think about the contribution, just those 2 alone Might make to 2 or 4 second half top line growth. Thanks so much.

Speaker 1

Yes. So we're encouraged by the contribution from new product introductions. And I would probably say leading that right now across the company is Our Orthopedics business, if you were at Academy, you saw a lot of products at Orthopedics, not just BioRes, that was a focus obviously, but We had a lot of new products. And when I look at our new product revenue in the quarter, based on the way we measure it, globally, our Orthopedics business new product contribution has been very helpful. And again, that's credit to The revamp, the new team leadership and how they're approaching innovation with the commercial team and integrating that with our manufacturing group.

Speaker 1

And I think I mentioned on the last call in our interventional endoscopy business, we introduced a product called AVEO, which we think is an only in class product and Market reception on that has been very favorable. Obviously, it's capital components, so it's going through a little longer purchasing cycles. But Well, the marketplace feedback has been really strong. So we continue to push on new product innovation. It's part of what we brought to the It will always be part of our fabric and our teams are doing a really nice job of it right now.

Speaker 1

Bio resin into bones, as I commented, we feel very good about both of those. Into bones, comprehensive business, comprehensive portfolio, rolling out PCR plating, kind of a next iteration on the ankle, doing really good work. And We sunsetted the 1 year mark. It's part of the organic business now, and we'll look forward to that contribution in the second half and going forward. And BioRes becomes organic August, but boy, we're super excited by the market reaction.

Speaker 1

It's good clinical outcomes drive this And good surgeon experiences drive this and we're seeing that and it's about educating surgeons so they understand the technology and how we approach it, How they approach it, but the market enthusiasm is very strong. And again, we feel very good about that acquisition. I don't think we've commented about specific contribution in the second half. So I'm probably not going to break that out here.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Matthew O'Brien from Piper Sandler, your question please.

Speaker 5

Good afternoon. Thanks for taking my questions. Todd, can you just flush out a little bit more on the smoke side? I think you said air steel Has been growing 20%. I want to make sure, has it been did it grow 20% this quarter?

Speaker 5

Is Buffalo growing 20% as well? And what I'm getting at is if those two Still grew about 20%. It looks like the rest of the general surgery business was a little bit lighter than maybe I would have expected, Especially with the comp being a little bit easier here in Q2 versus Q1. I mean, you're just not getting all that halo effect yet from those 2 differentiated products or is there something else going on there? Thanks.

Speaker 2

Yes. So they definitely did grow north of 20% In the Q2 and I don't know that I'd grant your easy comp comment on Q2, but look, we're pleased with how the business is going. We grew 12.6 percent organic across the company. We've got these new acquisitions, which are just Turning they're just anniversarying, they're obviously growing nicely strong. So we feel very good about the Organic growth profile of the company, that's incorporated in the guidance we just gave.

Speaker 2

I will remind you that Q3, Our range does include the double digit organic growth despite having 2 fewer sales days, Right. So remember that as you judge the Q3 number, but look the business is going well. Obviously, there's some legacy products that grow slower. We all know that. But we have many parts of the business growing really well right now.

Speaker 5

Okay. Appreciate that. And then I don't want specifics on Bio Brace or Intibones, but are those 2 still largely on deal plan as far as what you're expecting are ahead of expectations and then this volume growth that we're seeing, everybody's seeing and I am in no way, Todd, ask You bought 24 numbers, but do you think this is something on the volume side that can continue through not only the back half of this year, which it sounds like it already is, but Even into next year as well just the strength in volumes because everybody in the space is going to have a tough comp next year as a result of the strength this year. Thanks.

Speaker 6

Yes. Thanks, Matt. Yes, on

Speaker 2

the deals, yes, they're both performing at least to plan. We talked about on the Q1 call that BioRes, We kind of raised the expectations from mid single digit millions to high single digit millions for 2023. So That obviously was out of the gates a little better than we thought. And yes, look, I think halfway through 2023, I don't think we would be alone in saying the environment feels good. It feels Like pre pandemic, where medtech is back and procedures are back and the growth rates in our spaces are getting back to where they used to be.

Speaker 2

You're right. It's too early to talk about 2024, but it does barring I'm knocking on wood here, but it does feel like maybe we've finally gotten through all the pandemic disruptions And that we probably do have some tailwind from people that didn't get care when they should have and there's some pent up demand maybe. I think it's really tough to quantify, but I think that probably is a tailwind out there for all of us. And Yes, I think we're feeling good about the future as we sit here today.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Vik Chopra from Wells Fargo. Your question please.

Speaker 5

Hey, good afternoon. Thanks for taking the

Speaker 7

question and congrats on a great quarter. Two questions for me. So maybe the first one is on your international business. You put up pretty strong numbers on tough year over year I'm just wondering what trends you're seeing in your various geographies. And then on my follow-up question, your guidance, you sort of raised The top line, Bambi, about $100,000,000,000 at the midpoint.

Speaker 7

And maybe just talk about what gets you towards the low end versus the high end of your guidance? Thank you.

Speaker 1

So let me I'll take the easy one, Vik, and I'll leave Todd the second one. Our international business has been a very steady performer and this year is no exception. They're doing really a nice job Across both Orthopedics and General Surgery. And I think Todd commented some of our export markets Have had really strong performance with the Asian markets, Japan, China, Asia broadly speaking, really Probably growing a little faster than we had even assumed. But Europe is doing a nice job.

Speaker 1

Latin American market is doing a very nice job. So it's been a very balanced international performance across both general surgery and orthopedics. And that's a testament to The infrastructure, the stability of the leadership team and the evolution of the channel and the country market Focus that they've put in place over a number of years. So hopefully that answers your question on international and I'll let Todd take the guidance question.

Speaker 2

Yes. Just to make sure we're all level set. Our current revenue guidance is $1,230,000,000 to 1.2 $6,000,000,000 When we started the year, we guided $1,170,000,000 to $1,220,000,000 So It's been a $60,000,000,000 increase $60,000,000 Sorry, dollars 1,000,000 I'm doing the same thing. A $60,000,000 Increase on the low end from the start of the year and a $40,000,000 increase on the high end from the start of the year. And really that's just reflected in our performance, right?

Speaker 2

Things have gone better than we said. And we always had high expectations for the back half of this year. We continue to have high expectations for the back half of this year and we're executing and we're going to continue to focus on executing.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Matthew Mishan from KeyBanc. Your question please.

Speaker 6

Hi, good afternoon. Thanks for taking the questions. Last three quarters, you guys have been around the low 54s from a gross margin perspective. It seems like this is the beginning of the ramp you've been Expecting over the next like 2 years towards closer towards about 60. Just thinking what's clicking as you get into the second half that's enabling this change?

Speaker 2

Yes. Thank you, Matt. And you're right. This has we have been waiting to get through the first half of twenty twenty three. Things do get better from here.

Speaker 2

What's really clicking has been clicking is the mix of the business, right? These high growth, Highly differentiated product lines that continue to do well all also come with elevated gross margins. And so that mix Tailwind is actually picking up speed. It's not waning. It's picking up speed as those things grow faster than the rest of the portfolio.

Speaker 2

And so that is finally being allowed to show through because we've had some stability on the cost side, right? And cost We still think there's a lot of improvements that we can do on the cost side, but digesting The increased prices from 2022, which as you know, takes a lot of flow through our inventory and therefore our financials, We knew that that would be a weight on the first half of twenty twenty three. And as we get as we've seen stabilization In the cost side, now that mix tailwind is starting to show through. And so We are excited to now start ramping gross margins as you've pointed out and we feel very good and confident About the disclosure we made about 6 months ago when we said we expect gross margins to be to 60% by the end of 2025 and we feel very confident that we can get there. So Thanks for noticing and I hope I answered your question.

Speaker 6

Yes, you did. Thank you. And then I just wanted to switch over to Non robotic U. S. Laparoscopic procedures in the U.

Speaker 6

S, it just seems like such a big opportunity over the long term that your sales force hasn't really hit on as aggressively, I think as or built the muscles to hit on as aggressively as probably you would like. When were you planning to kind of and as you kind of think long term, when were you kind of planning to kind of make that shift or incentivize that shift in the sales force? And does it require some like an R and D update or a modestly different solution in the U. S?

Speaker 1

Matt, it's a good question. And I'm sure right now our commercial leadership team for that business is squirming in their seat. But I think Todd and I are probably being a little harsh. We have several examples of very nice wins on the general laparoscopic side that the team has delivered. 1 earlier this year, which was a total system wide swap out.

Speaker 1

The single biggest point of resistance is you're asking That extensive surgical volume, which is like a 10:one ratio relative to robotics To move to a much more expensive procedure. So in a period the last couple of years where volumes have been up and down and pricing pressure and Inflationary pressures convincing health systems to change and incur additional cost even though they recognize the clinical benefits Has been more of an uphill climb. We hope that as the markets are stabilizing, as procedure volumes are coming back broadly speaking And pricing and everything is normalized and material costs, etcetera, that customers are more willing to step into that realm. And again, it takes a few big ones to tip over and we've done that early this year and late last year. We had a couple of really nice wins And that's contagious for sales force when they see things like that.

Speaker 1

Todd and I talk to our businesses frequently and They know the story and the journey and the path that they're going on. And part of it is continuing to expand sales forces annually. Part of it is Making sure we've got the right product cost structure for those customers, but we will get there. We're not going to change incentive plans to force people there that Been in this industry 30 years, it just doesn't work. It doesn't work the way it's designed.

Speaker 1

Just keep it simple and let people go sell to the customers that are ready to be buyers And show them all the clinical value that we have, especially with a product like AirSeal.

Speaker 2

Yes. I think that's an important part that I would just add, Matt. And I think that's kind of wisdom and focus that Kurt brings here. He's it's funny Here's talking about the commercial team squirming. Whenever you talk about, well, let's drive Station plan to make them sell this much of this and this much of that and this much of the third thing.

Speaker 2

And Kurt's always like, look, Let's make it really clear how they make money and let's let them go make money and make sure they know they work for the customer. Yes, the check is signed by ConMed, but they work for the customer And give the customer what they want. And so I think it is important as you asked that question, which is a good question, Where some places do try and push behavior that way, here we say, Go make your number however you want to make it, right? It serves the customer. Well, if you think about if you're one of those sales Reps in that space, you can walk in behind a $2,000,000 robot and say, hey, why don't you By this $30,000 box that makes every procedure safer, faster, better And that's just an easier starting jumping off point, than walking into a place without that $2,000,000 block Creating the whole for you there, right?

Speaker 2

So you're walking in saying, hey, you should double the expense to get these benefits. It works. Doing it in the laparoscopic non robotic space works. Our like Kurt said, our U. S.

Speaker 2

Team has proven that it works. Our OUS team, We grow just as fast in AirSeal outside the United States as we do inside the United States. And they don't have the wake of the robot. So They have we already have we know that we can successfully go into non robotic procedures and convert those accounts, But we have not micromanaged the sales force to make them go there. They will go there When they need to go there, they will go there and that opportunity is still there.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Young Lee from Jefferies. Your question please.

Speaker 8

All right, great. Thanks for taking our questions. Maybe one more on Airsteal. Just to follow-up on your earlier comments on the top 25 hospitals that uses it. I think it's 92%, some as high as 75% penetrated.

Speaker 8

I guess I'm wondering, what's the average penetration rate in that cohort if you have it? Why or How did the top hospital get to 75%? Is it due to their procedure mix or more surgeon champions or More the longer length of time that Erzurum have been in their hospital?

Speaker 1

There's a lot to unpack there. Teaching hospitals are notoriously hard to crack into. The surgeon champions are thought leaders. They are Very clinically astute. They are absolutely in the prove it to me category.

Speaker 1

So where we have the higher utilization rates, we probably found a surgeon champion sooner and they were able to help proliferate the technology across All the users in that account, where we have lower utilization rates, it may have been harder to crack into that hospital. They may have had an allegiance to other technology. And they were waiting to see more clinical outcomes, but that's why you keep chipping away and to be in 92% of them It's really good after 7 years. And because we're in them, we keep showing up, we keep Demonstrating the value and we'll get more of those key opinion leaders on board across those facilities and the penetration rate will go up. Off the top of my head, I don't have the exact mean, median average, But it ranges from just starting to north of 75% and probably everything in between.

Speaker 1

So It is a journey when you're talking about teaching institutions. They don't just turn overnight. It takes time and our sales teams and our marketing teams spend an awful lot of time To get them on board and we're proud of that work. And when people leave the teaching institutions, what they were trained on and who they trained Buy is very important to how they set up practice and that's why it's such an important statistic for us.

Speaker 8

All right, great. That's very helpful color. I guess, follow-up question. I was wondering, Within your general surgery business, can you maybe comment on some of the key categories or indication that's Driving growth, we're hearing things like bariatric surgery slowing down. It's a small part of your business.

Speaker 8

But are you seeing that as well? Maybe you can highlight some of the categories that's performing a little bit better and some that's a A little bit slower.

Speaker 1

Yes. I don't think we would say we've seen any slowdown in bariatric surgery at this point in time. Again, it's a small Part of our pie that we participate in. And I also think that, That patient cohort probably has a broader mortality index that has to be dealt with. And so when they get to the surgical side of things, sure there's gastric bypass that is more of a weight reduction that Could be impacted by a pharmaceutical solution, but there's just a lot of other bariatric surgery types and indications That are still going to be maintained out there because of the co morbidity of that patient cohort.

Speaker 1

Generally speaking, Across our general surgery businesses, we're seeing good procedure volume, independent of specialty. I mean, It's urological. It's general surgery straight up procedures. It's GYN procedures, there's strength across the board. I don't think I would call out any that are driving the ship, so to speak.

Speaker 1

And I think that As important on the interventional endoscopy side, really good volumes in that market space right now. And our teams are super excited. And they've got a very, very exciting new product there. So we feel good generally about that entire category of our business right now.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Kristen Stewart from CL King. Your question please.

Speaker 9

Hi, good afternoon and congrats on the results. I was wondering if you could just share a little bit more details on Buffalo Filter, Sir, if there's any passage of legislation since we last spoke, and just in general the competitive environment there too?

Speaker 2

There is. Ohio and Missouri got approved most recently. So The cascade continues and we expect that it will continue to build And it continues to go well. There's a lot of runway there. We have the best device in the market, we believe.

Speaker 2

And we expect to pick things out of that business going forward.

Speaker 9

Okay, thanks. And maybe you could expand further just on the general capital Environment, it looks like capital grew nicely this quarter. Just any additional color there you could share?

Speaker 1

Sure. It's interesting. It was consistent it was solid performance both on general surgery and in orthopedics. And it was interesting. We had One of our better performances on power tools, we had really strong performance on video.

Speaker 1

And on the general surgery side, we have an extensive platform of energy platforms, argon and Just basic energy and all of those did very well in the quarter. And I think the teams feel pretty good about both of those categories as we look into the Obviously, AirSeal Capital, Buffalo Filter Capital, the boxes fall into that category as well. So those are helpful items as well on the general surgery side.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Mike Matson from Needham and Company. Your question please.

Speaker 10

Yes. Thanks for taking my questions. I guess, first, just wanted to ask one on BioBrace. Maybe talk about sort of the early Feedback you're hearing there, what type of procedures you're seeing it used in and to what degree do you think it's sort of Taking share for some of the competing products versus just being picked up by surgeons that hadn't been using that type of product before?

Speaker 1

Yes, it's a great question. We're seeing it deployed And a host of other surgical procedures. We obviously have a product that's specific to rotator cuff. We have A product that's specific to ACL augmentation. But the one for rotator cuff is more like a patch construct, so surgeons can are modifying that and using it on other indications, whether it's Achilles tendon repair or glute med repair.

Speaker 1

And I think if I'm trying to remember from the slide at Academy, I think one of the surgeons put up 23 different surgical applications Where Bio Brace had been used and there's a lot of new users new to the collagen A market that we're finding. But there are some competitive users from the 1st generation product in the market who are interested in this product Because candidly, the strength of Time 0 is a massive selling feature. That is a super important point when you talk about retare. So we're seeing some adoption out of that space as well, but it's a growing market. It's new technology for healing and there's a lot of new adoption.

Speaker 1

Again, clinical studies are super important in this space Just like they were in the early days of AerSeal. So we're working on clinical studies. The market has some clinical studies from the 1st generation Technology that's out there, but they want to see clinical studies on our technology. But because there's experience with that first gen product, They probably did some of the market development heavy lifting that is beneficial to us and it's probably why we're a little bit ahead of plan.

Speaker 10

Okay. Thanks. And then just with Intibones now being a year past the actual close, Can you just talk about the degree to which you sort of increase investment there, either sales force or Number of sets, R and D, etcetera.

Speaker 1

Yes. We bought it as a standalone business, Mike, and we run it as a standalone business. Obviously, internationally, we're doing more integration because we have the sales channel there and into bones did not have a sales So investment outside the U. S. Is about getting regulatory approvals.

Speaker 1

It's about building more sales channel, where we Where there was no lower extremity sales channel, but we're able to do that because we have an orthopedics presence Under which we can tuck this. So you're not building the management piece, you're building more the direct sales or the distributor agent sales channel. In the U. S, I think everybody in the lower extremity space would say it's a great market and more feet on the street matter and We're under that same mindset, more feet on the street matter and a great R and D engine, which came with into bones is essential to us moving forward. But as Todd and I have said before, we don't do a top down spend this much in R and D, the local marketing team, the local R and D team, the leadership, The general manager, this reports again into Pat Beyer under Global Orthopaedics.

Speaker 1

They run their business reviews, they take market feedback, they build their R and D portfolio. They know what the sales channel can consume at once or over a period of years and they build a R and D engine to support that. So I think if we're doing anything on the leverage side, because of our infrastructure on medical education Through our straight up sports medicine business, we're able to do more medical education that indeboans probably couldn't do on their own as a standalone, Because we just have scale through our bigger sports medicine business and that occurs both in the U. S. And outside the U.

Speaker 1

S. And then some of the back office scale that we talked about. We can bring a lot of that back office shared services that they just couldn't scale up.

Speaker 10

Okay, great. Thank you.

Operator

Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Kurt Hartman for any further remarks.

Speaker 1

Thank you, Jonathan. I want to thank everybody. Today, we went a little longer than normal, but I appreciate your time. And we look forward to speaking with you on our next earnings call. Thank you and have a good evening.

Operator

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

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Earnings Conference Call
CONMED Q2 2023
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