CONMED Corporation (CNMD) Earnings Call Transcript & Summary

Okay. Good morning, everybody. This is Bob Hopkins on from Bank of America, along with my partner, Travis Steed. We're kicking off the virtual Las Vegas conference. I appreciate everybody's willingness to join this kind of a format. I realize it's obviously not the same as a live presentation and a live meeting, but that's the world we live in today. So thank you for joining under these unusual circumstances. We're kicking off our first fireside chat with CONMED. I think everyone knows Curt Hartman, the company's President and CEO. I believe we may also have on the line Todd Garner, who I think most everybody also knows, who's the Chief Financial Officer of the company. Basically, the entire format here is going to be fireside chat, so Curt and Todd, if you're on, thanks very much for joining us this morning.

Thank you, Bob. Thank you, Travis. And Todd will be joining us. We're texting right now. He's having a little dial-in connectivity problems, but he assures me he's working on it. So we appreciate the opportunity, and we'll -- we're happy to be engaged here.

Yes. Great. Thank you. And it's -- I'm sure that won't be the last technical challenge we'll experience over the course of the next couple of days. But Curt, again, thank you very much for joining us.

I'll start a little bit with a longer-term macro-oriented question to start. And we're going to try to ask all the CEOs participating in this conference to opine on this very important long-term question because obviously, the focus for most people in the short-term has very appropriately been how are the companies dealing with COVID-19. What does it mean to the business near term? What does it mean to the business over the next couple of quarters? Those are all critically-important questions and how everybody is handling this unique situation. But I'd like to start out taking a little bit of a step back and thinking a little bit longer-term into maybe 2021 and beyond and just get everyone's opinion, including yours, Curt, on how do you think this experience and what's going on with COVID, how might that change sort of the medical device ecosystem a little bit longer term? Could it affect the way you guys access hospitals? Could it affect your strategy? Could it affect different decisions you're making about your sales organization? Just maybe as a place to start, again, thinking of it longer term, are there 1 or 2 ways you think the medical device landscape will change on the other side of COVID as a result of everything we're going through? And again, thanks for being here.

It's our pleasure. And it's a great starting point, Bob. And I would tell you, I'll probably start a little bit before the final question you answered there. But as this came upon the marketplace, our priorities as a company, we narrowed it down greatly. Three priorities. It was our people, our safety and well-being of our employees, their families and as well, the customers. Financial security of the company was on that list. And then the third item was how does this look in the future, which is really where your question points to. What is the future for medtech companies? What's the future for the industry? And I would tell you it's still very hazy. It's tough to say what the ultimate future is going to look like, though I think we're starting to see early signs of what the future may be. And I hear people talking about returning to work. And in some regards, that's a -- perhaps the biggest misstatement out there. There is no returning to work. People have continued to work. We've just worked a lot different. And the future of work is somewhat what I'm referring to it as -- the future of work, I believe, is going to be very different. I think as it relates to our customers, they have learned that connectivity through electronic means, whether that's telehealth with their own patients or digital strategies with companies like ours, are very much a productive and efficient use of time. And as a company, we've used this time to really ramp up our digital strategy, digital efforts and connectivity in global webinars. It's really been interesting to have these global webinars with candidly, customers from all over the world participating along with our sales force. And in some ways, that's created a level of intimacy that we hadn't been able to previously arrive at because you just didn't have that same connectivity and that same dialogue data exchange. So I view that as a positive. I certainly think, as I look at our customers, and you're hearing about this already, the surgery center environment, it's much more easily controlled. And I think there's going to be more and more surgeries moving to that environment. There already was a swing of procedure volumes to the surgery center. I think this event is going to accelerate that. As far as the sales force goes, I've read a lot about this. I've talked to our selling organizations. I think for the procedures that we serve, the surgical environment that CONMED serves, our sales force is still very much an integral part of our future. And I run the gamut here. The business of Sports Medicine, the business that our Advanced Surgical team calls on, that's very much operating room-based. Our GI business is a little bit more on the outpatient side, the surgery center environment. And then our Patient Care, the ECG electrode business, which is where the company got its founding, that's more of an administrative materials management, less of a direct customer contact. But each of those unique customers, materials management, they're still asking for our engagement. They're communicating with us early in preparation in some geographies where they haven't really returned to work. We need to be prepared. We need to have the equipment on hand. We need to have the supplies available. So for CONMED, I think our sales force engagement strategy remains pretty much unchanged. I don't want to say it's 100% unchanged because I do think there'll be nuances here. The frequency of direct engagement may decrease and the electronic engagement may increase. But I think specifically to Advanced Surgical and Sports Medicine, where the clinician is expecting the rep in the room to be part of helping them navigate the vast variety of items that can be used, I don't see a big change in that at this point. I think as a company, one of the things that is going to change is this future work statement that I made. We've learned to work remotely as an organization. We've learned to do that with our R&D teams, which pre this year, nobody would have said R&D teams can work remotely. We've learned to do that with our marketing structure. We've learned to do that with our sales operations planning structure. We've learned to do that with our buyers and planners supporting manufacturing. And we were fortunate we had the network infrastructure and backbone in place to make a very quick transition to remote workforce, and we did that literally in 48 hours. And the surveys and feedback we're doing with our employee base is, you know what, this has been pretty productive. We're able to use technologies to do the video conferencing that everybody on this call is aware of. And we're able to use that technology to the benefit of advancing our projects, advancing our work. So I would not want to be a commercial real estate holder in this environment because I think the office environment is going to change very much in the future, unless somebody comes up with a vaccine or something to prevent this disease. But I think the future of work is going to look different than what it did pre-COVID-19. But I think some of those other things, procedures are still going to happen. Reps are still going to be engaged, and innovation is still going to matter in the marketplace.

Okay. That's a very helpful answer. I'm just -- a couple of other things on that same topic. Do you think that given the challenges that governments around the world are facing, the budget pressures for the hospitals in this environment, do you think that what was already a price pressure environment for medtech may be different next year, maybe a little bit more global pricing pressure than we're seeing today?

We've operated the last -- well, certainly, my time at CONMED and prior, that this was a -- price was a headwind in our environment, in all medical device environments. And we've learned to operate in that environment. And the way we've been able to offset that is as we aggregate more volume, it helps on the overall margin structure and then with product innovation. And I don't mean incremental innovation. I mean, true product innovation that really is distinguished as assessed by value analysis committees. I think we'll continue on that offense. Does price pressure from a customer perspective change dramatically versus what we've experienced? I think it might be a little too early to say, Bob. And I say that because the reimbursement levels for the majority of patients that we serve remain fairly robust. If there's a trend in reimbursement levels moving downward dramatically, that would certainly be a new headwind that we'd have to learn how to operate in. But those things don't typically come out of right field. Those things are pretty well telegraphed. And so I think if that were to be the new environment, we would, number one, see it coming; number two, I think we'd be able to navigate it, given some of the other things we're learning about cost structure management over the last couple of years as we face this ongoing environment of price pressure. Todd -- I think Todd has joined the call. I don't know, Todd, if you have any other nuances on the price strategy or price pressure headwinds?

Yes. Thanks, Curt. I'm sorry for the technical difficulties getting in. The only thing I would add, Bob, is just to remind everybody that the medtech piece of the healthcare dollar is a very small percentage, right? So it's -- there may be more price pressure than there has been. We'll see. But that's not where this financial hole that our customers find themselves in is going to get solved, right? If they want to make a dent in that, they've got to attack other things long before they get to the medtech dollar to solve their problem.

That's a good point. I appreciate that. Last kind of follow-up on this. Given what you're seeing in the marketplace today and what you anticipate being a very uncertain time for at least, call it, the next 6 months, what's your kind of high-level view on hospitals' ability to buy capital? It's a tough question because we're entering kind of a very unknown period here. But what's your high-level view on hospital willingness to purchase capital in this environment?

Let me start. I think there's certainly a greatly-elevated awareness that capital and capital purchases are not the priority as we reignite the engine of surgical procedures. I think it is about getting the patient in, getting the surgical procedure done and getting the patient on so that they can work on reducing the backlog of surgical patients that clearly are sitting there and ready to have that pain or that issue, whatever it may have been that brought them to the doctor, addressed. And I think that's the first priority for the health care system at this moment in time. As I think about that question specific to CONMED, I would just remind everybody our capital items tend to be on the lower end of the price point. We sell power tools. If you don't have power tools, you're not doing the surgery. Yes, you can repair your power tools and defer the purchase of new ones. Yes, you can repair your video platform and defer the purchase of new ones. On the other side of that equation, we have some only-in-class technology that, so far, we've not felt that deferral of capital, and that's in things like the AirSeal iFs box and the Buffalo Filter smoke evacuation, now. Granted, those items are much lower on the purchase price. A Buffalo Filter smoke evacuation [ council ] somewhere between $2,500 and $4,000. So that's a little different than when you talk about deferral of capital acquisition but integral to the overall smoke evacuation and an iFs is about a $30,000 capital item. So if they see that clinical benefits of that technology, and it's the only way that you can advance the innovation and the clinical benefit is to acquire that technology, it doesn't seem to be slowing them down. Now clearly in the environment where there's just a lot less procedures, they're not buying capital anyway, but as procedures come back, if they are aligned in their thinking and reading the clinical studies, we think that, that capital purchase on iFs and Buffalo Filters are a little bit immune. So that's how I kind of think about it. I certainly think the bigger-ticket capital items are going to be slowed in this environment. But I think some of those must have to do the procedure capital items. You'll still see some level of purchase. I don't think it will go to zero. I don't think it will be what it was before we got into this environment.

Okay. You mentioned something important there which is that the, kind of, hospital world is now very focused on trying to get procedures going again and obviously doctors, hospitals all kind of as soon as things open up all want to do as many electric procedures as they can because that's what generates a lot of the profits for these hospitals, but I'm curious, Curt, if -- I know it's probably fairly early, but if you've got any anecdotes from the field on the patient side of things because I think the supply side, hospitals and doctors will be ready to go. A little more uncertain as to the state of the patient. But one potential thing that I've been hearing from the field, and again it's pretty anecdotal, but is the potential for patients to be a little bit worried about a second wave and therefore maybe pushing in the short term to get procedures done before a second wave, so that maybe we could see a pretty -- as soon as things open, a pretty sharp snapback in electric procedures as patients move to get things done in front of the potential for a second wave this winter or fall? And again, I know it's early, but what do you think of that notion and that potential and the willingness of the patient to come back?

It's a great question and it's one that we've been talking about for a while now and just as a point of reference, about 46% of our revenue comes from outside the U.S. and because of that, we've been watching COVID-19 for a long time it feels like, going all the way back to our January fourth quarter earnings call when we talked about our guidance and actually said we thought it was going to be impacted by COVID-19. And we were able to do that because of that international presence and proximity to customers in places like China and then watching it roll into parts of Europe, be it Italy, France, Spain et cetera. So as those markets have gotten further away from that first round of cases and tried to get back to normal, we've been watching how does the patient respond? Yes, the surgeon wants to do the surgery, the health system wants to do the surgery, but how does the patient respond? Because there is no surgery without the patient, obviously. And so we've not seen a big, what I would call, pushback from patients saying, "I know you want me to come in but I'm not going to." And while it's very early in the U.S. market, again, we haven't seen a big pushback from patients saying, "I don't want to come in. Don't want to have my procedure." Now I think that's a little bit geographically driven. I suspect there may be more hesitancy in places like New York City than there may be in some of the other more remote parts of the U.S. marketplace. And then do I think that there could be a wave of people who want to get their surgery done before a second round? It's very possible, Bob. I think it's too early for us to say that's what's driving anything right now. Todd, I don't know if you have other thoughts you'd want to offer on that.

I agree. I mean, Bob, I've read things along those lines as well. I think at this point everybody is speculating. I think there's some logic to that scenario, but I don't think anybody knows what recovery's going to look like or how the trends go.

Yes, I mean, it's early. But do you guys have a sense for CONMED, specifically, the procedures that have been delayed because of COVID? And there's probably better data in the U.S., but of the procedures say in the U.S. that have been delayed, do you have any sense as to the -- rough sense as to what percentage of those might have already been rescheduled or any kind of data points like that?

It's very, very early. No. I don't think we could give a percentage. Certainly, our customers are engaging with us and trying to align with our reps on the level of their activity and the planning of their activity and so we have -- we're very engaged with the restart, but way too early to try and put a number on it or a magnitude on it.

Okay. And then on the call, you guys gave some helpful detail about April in terms of total company decline in the month, and I'm just curious from what you see today, and what activity you see today, which of the CONMED procedures and technologies are likely to come back earlier on? And which ones do you think will be a little bit more delayed?

Bob, we're a -- we're not a -- we've got a Sports Medicine franchise. We've got an Advanced Surgical franchise. Those are the 2 biggest parts of our business and they're both -- the only difference between the 2 is Advanced Surgical is more hospital based and Sports Medicine is more surgery-center based, and that would be a U.S. comment. Outside the U.S. pretty much majority of cases are done in the hospital environment. So as geographies have opened up, as procedures -- or as health systems have been in a position to do procedures, you've seen each of those categories slowly start to work their way back in. It hasn't been, hey, a lot of these type of procedures being done and not as much of that, it's just the general Sports Medicine, whether they're doing a knee, a hip, a shoulder or an extremity soft tissue case. If they can do one, they can do them all, so to speak. Same thing in the General Surgery side. If they can do a uterine manipulation case, OB/GYN case, they can do a gall bladder removal, they can do a colorectal procedures. The 2 small parts of the business, the GI business and the Patient Care business, which is the ECG electrode business. The Patient Care business is more on the supply side. So as hospitals ramp up, they need those ECG multifunctional electrodes as the endoscopic centers open up. And I'm not talking colonoscopies here, I'm talking the biliary based procedures, the ERCP procedures as those things which are more closer to a surgical procedure in nature as those things start recurring, they ramp up. It's not a procedure type ramps up and everything else is sitting still. So we tend to go up and down as a company versus any one unique business, I think. Todd, is that a fair statement? Did I miss anything in that?

Yes. I think the only thing I would add is our presence in the ASC, which as I listen to some of our peers, it sounds like we might be a little more bigger mix there. But I think to Curt's point earlier on the call, we do expect more to be going toward the ASCs, and I think that our presence there is a good thing.

Okay. So it's more -- it sounds like it's more -- rather than one procedure coming back faster than another, it's more which regions are coming back and which hospitals are opening up. Todd, I'm sure you've disclosed this before, but -- or Curt, percentage of your kind of procedures that are done in the ASC, what is that roughly?

Yes. So we -- in the ortho side of the business, it's 75% or maybe more, something like that. In the General Surgery side of the business, we actually have 3 different businesses there. The Advanced Surgical, where AirSeal and Buffalo Filter are, is mostly hospital-based today. And the GI business that Curt talked about is 50-50-ish.

Okay. So we've talked a little bit about the long term. We've talked a little bit about the kind of immediate term and what's going on. I want to kind of ask, Curt and Todd, you guys, a question on the rest of 2020 and how we exit the year. And the way I would phrase the question is that we've listened to a lot of companies report Q1 numbers and talk about the year. And in large part, due to some optimistic commentary from companies, from medtech management teams about fourth quarter potentially being a quarter that resembles something close to normal, as a result of that, Street estimates for most of medtech companies have revenue growth sort of flat year-over-year in the fourth quarter and a lot have kind of outright growth in the fourth quarter. Now your comments, I felt, were a bit more balanced. But even the consensus numbers for CONMED assume something close to flat growth year-over-year. And I guess, I know you will steer away from a specific comment on guidance but just as a general question, with 20 million, 30 million unemployed with some multiplier of that, that's probably very nervous with some percentage of the population scared about coming into hospitals, it seems to me like the odds of a normal quarter by the fourth quarter seem almost ridiculously low. And so I've been surprised at the commentary from a lot of medtech management teams about the fourth quarter. And so I guess my question, big picture to you is, like why do you think that optimism is out there about the fourth quarter? And what do you think is wrong with my sort of thoughts on the fourth quarter? And why I felt like I think I'm a lot more cautious.

Well, I'll take a first stab, and then Curt can weigh in. I would say, first of all, I wouldn't hand out report cards just yet on those modeling. I don't think we would say that you're wrong at all. Our position is we don't know. That's why we're not giving guidance and we just need to let this play out. To your question about the logic behind some of that, you asked earlier about Q3, and there's logic that says you should get things done before the next winter season, right? If there is a lull in this virus. And then the question is economic security, right? We all learned 10 years ago that health care -- the health care customer, the patient, is much more sensitive to economic security when it -- as it comes to their health care needs. And so we all have to be very mindful of that, and Curt and I both lived that and fully understand that, which is why we're not giving guidance longer out. And so -- but I think the unemployment, obviously, is really high right now. When you ask about some of the logic, I probably should steer away from the economics, the economist scenario planning. But there is some data that suggests a lot of that number is in the furlough category, right? So I guess there is some hope or idea that maybe a lot of those jobs come back quickly. Again, that's not -- certainly not our expectation and we're not planning on that. So we're trying to, as Curt said, first, protect our people, then protect the company, which we've done with our debt agreements and then prepare for the future. And in the protect the company standpoint is also been about reducing our expenses, right? And so that if the fourth quarter is not back to normal on a revenue basis, which we're prepared for, our spending won't be either, right? And so that's how we're approaching it. And we are not pretending to know even what May or June looks like at this point, right? We're going to follow our customers. We're going to stay close to them, give them what they need. And the business will be back to normal when it's back to normal. We're not going to be the ones to predict that.

And then, I mean, one scenario that I've sort of been thinking about is that, that combines everything we've just talked about, is that maybe the move, to put it in CONMED terms, from the down 50% to 55% to say down, I don't know, pick a number, down 15% is the more linear move and then perhaps the more challenging move is the move from down 15% back to normal. I don't know if that resonates with you at all, but that's certainly from putting together all the data points that I have, that's something that makes sense to me.

Bob, I think what Todd and I are both aligned on here is that at this point, if we want to call this the early, early, early inning of some signs of recovery, meaning geographies going back to doing surgical procedure volume, neither one of us feel that it's a worthy endeavor to predict way out into the future. There's just too many other factors, most of which you've hit on in other questions about how do patients react? How does unemployment factor? How does a return, on a broad basis or in a geographic limited basis, return of a COVID hotspot slow things down? And on the other side, there's the other things you mentioned. Is there a big patient push to get this surgery done before there's a reemergence? And where does the broad-based economics play into all of this? I just think there's so many balls in the air right now that bring uncertainty into the question. We're just trying to do exactly what Todd said, which is follow the customer. We're going to be there. We're going to be ready for them. We're going to have product and people available. And they will ultimately dictate the pace of this recovery. And our job is to be there to support them. And it wouldn't serve anybody well for Todd or I to say, "Hey, we think the third quarter looks like this, the fourth quarter looks like that." We just don't think there's been enough stability in the system at this point in time to make those projections. I'd love to tell you we could get to that point at some not-too-distant date in the future, but that remains to be seen. So I think we're just -- we're not willing to go out and say what's it look like.

Yes. No, it makes total sense to me. Last quick question before we close here, and thanks again for joining us today, is a question just for Todd on -- I know you guys talked on the last quarterly call a lot about covenants and the room you've given yourself there. I'm just curious though, from how do you kind of talk about the liquidity profile of the company with the cash balance in the mid-20s, if we have a couple of really tough quarters and you perhaps burn some cash, how do you think about the liquidity profile of the company and the potential needs to shore that up?

Yes. Good question, Bob. Yes. So we personally don't keep a lot of cash on our balance sheet, right, because we do have some debt. And so at the end of every month, every quarter, we pay -- we keep the debt level as low as we can. So we have an enormous revolver in our bank agreement. So at March 31, the availability on our revolver was $340 million, something like that. So we have plenty of liquidity through our credit facility. And so that's why there was no need to go raise new capital. There was no need to even expand the credit facility at all. Our only need was to get a holiday on our leverage, on our total debt-to-EBITDA covenant. So that was the only need we had. We have plenty of liquidity. We're not concerned about that.

Okay. That's super helpful. Well, Curt, Todd, thank you very much for joining us. That concludes our session. Good luck with the rest of your meetings, and thanks, everybody, for listening in. Very much appreciate it guys. Thanks so much.

Thanks, Bob.

Okay. Talk to you soon. Thank you.