CONMED Corporation (CNMD) Earnings Call Transcript & Summary

[Audio Gap] medical device analyst for Bank of America. And next up, we have CONMED Corporation. Curt Hartman, Chair of the Board and President and CEO; Todd Gardner, Executive Vice President and CFO; and newly appointed Chief Operating Officer, Pat Beyer, is joining us as well. Thanks for joining us.

Thanks for having us, of course.

So we maybe just talk about the newly created strategic role for our Chief Operating Officer. We have Pat here today for the first time, just promoted recently. Just trying to think about why now, what's the role going to kind of do at this point.

Sure. Great question and a great way to start. In 2015, the first time I spoke on behalf of the company, I said the transition or turnaround was going to be led first by people and then by products. And I didn't talk about profitability because that was pretty distant at that moment in time. And Pat is just a reflection of the continuation of our people strategy. And whether it's at this level or deeper into the company, we have a very comprehensive people strategy around people development, succession planning, giving people new opportunities. And Pat was the first executive to join the team back in December in 2014. He started out running international business. Pat lives outside of London and has for a long time. In 2020, he took over our U.S. Orthopedics business. He led the acquisitions of both In2Bones and the Biorez. And this is just the next natural progression, let him take on the general surgery portion of the portfolio, in addition to manufacturing RA/QA and global distribution. And we have this going on all over the company. This just happens to be a very visible role, and I think Pat will dive into that. Those leaders will get a new management experience, and it allows me an opportunity to turn my focus to some more long-term continuation of the strategy, the portfolio growth and the company growth.

You want to add anything?

No. I guess I would say, first of all, it'd be remiss for me not to say I celebrate my 10 years at CONMED in December of this year coming up, and I'm super excited to take on this new role. And in my 30-plus years of med tech experience, I've had a number of situations where I've taken on new challenges and new opportunities. And at CONMED, it's about continuing the legacy we're trying to build. It's not hitting great results one year but continue to do them over time, and I'm excited to take this new opportunity.

Great. Welcome. Glad you made it to Vegas. Q1, just reported a couple of weeks ago, it was 5.9% revenue growth, 7.1x the selling days. You talked about surgical volumes kind of steady; capital environment, good. It was a tough comp, but just kind of curious how you thought Q1 kind of played out kind of versus expectations?

Todd, do you want to?

Yes, it was a little better than we thought. You're right. It was a really tough comp. I think we were 19% organic in the year before as we caught up from our warehouse issue in Q4 of '22. So to grow on top of that despite one less selling day, I think we were pretty happy with the start of the year. Didn't change how we saw the rest of the year, but we're very pleased with Q1.

Just some questions kind of post the call. Why you kind of didn't raise the revenue guidance? Despite the FX gotten worse, you still beat by $10 million, and you kind of saw the first half staying the same. Just curious like why not kind of raise the guidance at this point in the year.

Yes. We beat by $5 million in Q1. Yes, there was a lot of excitement about how we handled the guide. We are early in the reporting cycle. We were one of the first companies to report. In the few weeks that have happened since then, you've seen a lot of companies take that same approach. And look, it was a positive start to the year without question. It wasn't big enough to change how we saw the year playing out, either first half, second half or the full year. So we just kept the constant currency growth the same. FX did get worse for everybody in the last 90 days, and so we explained that to the street and left our guidance the same for the year. And we feel good about that.

Do you think companies are taking that approach, just something they're seeing in kind of March-April timeframe? Or is this just kind of being more conservative?

I mean I can't speak for any other companies but us. I think it used to be that you're pretty reticent to change your guidance after Q1 unless there was something really meaningfully different. And I think in our case, we don't think -- we don't see anything meaningfully different than we did 90 days ago, and so we've left the year the same.

Very fair. When -- the guidance still is implying a decent step-up in growth in the back half of the year. So let's kind of break that out a little bit more and kind of the confidence in seeing that acceleration and growth into the back half.

For sure. Yes, last year -- '23 was a really good year for us and for med tech in general, I think, very healthy market. We had some easy comps because of our warehouse issues in 2022. But if you even look -- if you look at the Q2 and Q3 of '23, we grew low double digits in those quarters without any abnormal comps. So I think really that's what the portfolio kind of does. When everything's working right now, that's what it does. We have -- we've started in -- on the Q3 call of '23, we telegraphed or projected some increasing headwinds in supply, specifically on the ortho side of our business. And so very consistent with what we said in Q3 last year, we've been working through those supply issues on the timing that we said back then, that, that would resolve near the end of Q1. And then Q2, we would kind of get back to speed and get back to normal. So it is true, Travis, you're right, that our second half of this year looks way better than the first half. First half is mid- to high single-digit growth. Second half is better than that. That's really about kind of the step back we've taken on the ortho side because of supply challenges that we've worked through. And that has progressed as we thought, and I -- and we feel good about our guidance for the year.

We also have an extra day, both in the third quarter and the fourth quarter. So just to do it apples-to-apples.

And we'll get into this a little bit more later, the bake-in a little bit of an AirSeal headwind into the full year guidance. So is the way to think about it, if it doesn't kind of play out, there's potentially a little bit of upside to the guidance from that?

Yes. Look, I mean that's a very modest number for 2024, right? I mean, that competitive threat is brand new. I don't -- even in the worst-case scenario, it probably couldn't impact us very much in '24. But you're right, we did allow for some disruption there. But I wouldn't get overly excited. That's a very small total number for 2024.

Okay. No, that's helpful. I won't get expectations set up for that. So when you think about kind of longer term, you talked about kind of top line sustaining kind of double digits. Not hit it every quarter, but there's a pathway for CONMED to kind of generate this kind of double-digit revenue growth. So just thinking about the confidence and that still and some of the drivers behind that?

I think I'd probably start out with our goal is to grow faster than the markets we serve. And you look at the different specialty sports medicine, foot and ankle, general surgery, there's a range of growth rates there. Foot and ankle and sports medicine probably on the higher end of those ranges. And so if I aggregate that and say the markets we serve are growing, I'm just going to call it 5 to 7 because there's no exact data. If we grow faster than that, then we feel like we're winning. We're taking market share. Our goal also is to build a portfolio that allows us to stay on offense. And occasionally, that portfolio is going to take us into double digits, which we did a couple of times last year. So number one, I got to grow faster than the markets we serve. Number two, if the portfolio allows our teams to be fully on offense and life is good across the rest of the business, we should be able to get to the higher ends of that range and perhaps into double digits. So that is a consistent message that we talk about inside of our company and have talked to investors about as well.

I wanted to kind of touch on margins a little bit kind of post Q2 as well. So I think your Q2 gross margins, you're guiding kind of 60 to 80 basis points of expansion year-over-year, which is a little bit of a step-down versus Q1, about a 50 basis point step-down versus last quarter. So is that just [ something ] you're building in there? Is it something getting worse than the Q2 gross margin?

Yes. First of all, I'm happy that 60 to 80 basis points of improvement is a little bit of a step-down. Yes, Q1 went really well. Q1, we thought should be about 100 bps better, and we came in at 160 basis points better. So -- and as I look at the details of that, it's kind of just across-the-board, like everything went well. And normally, life doesn't happen like that. Normally, not everything goes to the positive. So as I said, our Q1 results don't change how we see the year. And so we've kind of allowed for some of -- not everything to go exactly perfectly in Q2 and be in the same place that we thought we'd be for the first half, which is kind of our -- the philosophy was let's keep the first half the same, second half the same. Whatever we beat in Q1, let's just kind of allow for that in Q2. And so that's kind of the approach. Nothing -- I can't find anything that says, oh, margins are going to be much better or worse. The only thing that's notable is FX. And FX did get worse, right? And so part of that takedown in Q2 margins is FX. But other than that, I'd say it's just kind of no change to how we see the overall business. And you can get a little overexcited about a period here and there. We're trying to take a longer view.

And on the longer view, this year, you're 100, 150 basis points of gross margin expansion. Is that the longer-term view that we should think about per year?

No. No, we said that for '24. I think there's a -- as we laid out kind of a 3-year look last year, we actually thought '25 had the opportunity to be better than that. But we'll get to '25 later. So I think that our mix tailwind is giving us about 100 basis points, in that neighborhood. And so I think 100 to 150 is -- I'd like to do better than that, but I think that's probably on the low end of what we could do. Especially when we talked about '25 being better, part of that calculus was we digested 400 basis points of inflation between 2019 and 2022. And that's why we were talking about where gross margins would go over multiyear period. And the assumptions were that by 2025, we should get some of that inflation recovery. We haven't really seen much of that yet. So I still think that's theoretically possible, that if we can get some reversal of those -- of the material cost, specifically, that we can maybe even do better than that going forward.

So the 100, 150 this year is like assuming no help from the inflation...

Yes, we didn't assume inflation recovery in that.

So mostly just the mix coming through in the higher-margin businesses. And so '25, you can kind of get the double whammy of both.

Hopefully. I mean, I -- when I said that at the beginning of '23, I thought that was pretty conservative to wait until '25 for that. Now we're approaching midway through '24, still haven't really seen any meaningful inflation recovery. So maybe it's not as conservative as I thought 18 months ago. But yes, we'll see. I still think we can do better on material cost going forward.

So you think there's still opportunity there. It's not like the inflation is kind of embedded forever.

Theoretically, as channels open up, as our supply chain improves as it is, we should be able to be in a better position from a price standpoint with our vendors. And volume is always good for price. And if the macro remain stable, it's logical that we ought to be able to get some of that inflation that we all dealt with, especially in the kind of '22 timeframes. Some of that ought to come back on materials.

Nice. The margin goals you kind of gave long term were -- and on the gross margin line, and that should flow through to the operating margin line, too.

Yes. We've said operating should be a little better than that because we should get leverage in SG&A as we grow, we think.

Great. And then switching to the other topic with AirSeal and the da Vinci 5 launch. Curious kind of any initial feedback that you've heard in the field from customers or anything that you think you've kind of learned since seeing the product on the market at this point.

It's obviously early on that side of the equation and probably not my place to comment on how their launch is going. I think what we know is it's what we said back in the second quarter. From our view, it's a next-generation insufflator. We have not seen anything that has it replicate what you can do with AirSeal. And the one thing we do know is AirSeal does work with DV5. We have 100% confirmed. Pat spends more time with sales force. So -- and he's had responsible for international when we acquired AirSeal back in 2016. So Pat, any other comments you'd want to add on that?

No. Curt, I think you framed it well. Again, we -- it's early days. We're getting feedback, and we're monitoring it closely. We continue to have a really good relationship with Intuitive. We continue to partner with them, and we're watching it closely.

When you say it does work with da Vinci 5, can you elaborate on that? Just like how -- just...

So in the Xi robot, there's a device called ARS, which allows their port to turn into an AirSeal Robotic Solution access port. That same thing works on the DV5 port.

Okay. So the same port. And do you need the -- there was a connecting piece, I think, you launched last year.

Yes, a couple of years ago.

A couple of years ago. Do you need a new one of those? Or does the old connection works?

Works.

All right. Great. And then I guess, high level, you're trying to think through -- you've got better feature sets. You're competing against workflow, really, and integration. Like how are you thinking about that competitive landscape feature sets versus kind of the workflow that they have with integration?

Well, I'm certain there's somebody -- some cohort of people who think that ease of workflow is the most important thing. But you have to recognize, the medical community values clinically proven items, reduction in length of surgery, reduction in length of stay, reduction in postoperative pain scores. In fact, I think McKinsey just did a study that said the #1 health system priority is reduction in length of stay. That is clinically demonstrated. All 3 of those are clinically demonstrated with AirSeal over millions of patient lives. There's no one else who has that. So if those things matter, we think we're still the winner in this marketplace against all insufflation devices that don't have that clinical outcome. So how do you put that up against ease of use? I don't know. I don't -- I think one is an apple, one is an orange. They don't compare.

And going kind of deeper into laparoscopic surgery, like you probably have experienced in Europe there. I don't know how translatable that is in the U.S., would love to hear that. But also, Curt, trying to think about kind of repositioning kind of the offense into the laparoscopic side of the business even more at this point.

Yes. Listen, when we bought SurgiQuest in 2016, they had 0% of their revenue outside of robotic surgery. Our last disclosure on that is about 40% of our revenue is outside of robotic surgery. And when we bought SurgiQuest, there was de minimis revenue in international. Today, international has a far smaller footprint of robots than in the U.S. market. We've been as successful with AirSeal outside of the U.S. as we have been in the U.S. We have victories in laparoscopic surgery in the -- outside of the U.S. markets. We have victories in the U.S. market. You have to remember at the front of this is a sales representative who's chasing a customer. And sales representatives, like most people, are path of least resistance. They're going to go where they can secure the sale the quickest. If for some reason, the robotic surgery approach slows down, they will pivot. As we continue to expand our sales forces and geographic sales territory shrink, they have to go deeper in their existing customers. Instead of walking in the front door and going to the robotic suite, they'll walk in and take a right and go to the laparoscopic suite. That is -- that's just how this industry works, and that doesn't mean we're not helping educate people. And I'll hand it over to Pat and let him talk about some of those things we are doing with our sales force and his experience internationally.

Yes. And again, Travis, clinical insufflation resonates in robotic surgery and laparoscopy. On the international side, absent the robotic installations happening, our sales forces have focused on clinical insufflation and laparoscopy. Internationally, we've been doing as well in AirSeal as we've been doing in the United States from a growth standpoint. In the United States, we know clinical insufflation resonates and laparoscopy. And we have sales reps in the U.S. who have been winning on that. What we're doing now is educating the marketplace, having symposiums and medical education on clinical laparoscopy and the value it brings, and we're continuing to see the benefit of that happen.

Yes. And people need to remember, we've been selling this for 8-plus years. We've got a big depth of knowledge and experience internationally and in the U.S. We have a great sales team in the U.S. We have great sales teams outside the U.S. And in fact, SurgiQuest acquisition is what allowed us to build the international general surgery channel, that we were able to dump things like Buffalo Filter and other general surgery products into. So it -- it's got a lot of institutional knowledge around this product and how to approach the market. So I think people have in their mind, there's got to be some hard shift. That's not really what has to happen.

How is the kind of the revenue per procedure for AirSeal? Has that been trending up or flat? Or just in the confidence that, that revenue procedure that you book on AirSeal cases, kind of the consumable recurring revenue is kind of stay the same.

Yes, I think it's about $175 per case on a procedure basis, and that's similar OUS and in the U.S.

And when you think about like -- let's say, a hospital does buy a DV5 in that OR room, they decided not to use AirSeal anymore, like. Are you helping them kind of redeploy that asset to another room in the hospital so you can kind of keep that recurring revenue going?

Sure. That would be, like I said, the path of least resistance for the sales rep who'd say, how do I redeploy this asset? Do I bring it over to doctor so and so, who's been interested in it but doesn't have the political clout to get one through the value analysis committee or through the acquisition process. So yes, we do that as a matter of routine on any equipment that it's kind of original purpose may have changed, so absolutely.

And I know you kind of innovated -- think about innovation for AirSeal. You did innovated on the port robot launch a couple of years ago. Is there kind of a pipeline here for AirSeal and things you can improve upon over time?

There is. And that's just part of the CONMED offense, is continuing to innovate on the product portfolio, especially the main stage of the product portfolio. We don't talk about what's in our pipeline. We prefer to have that show up at a trade show, show up at an industry event. Show up at our sales meeting before it shows up in the market so we can fully educate our teams. But people should trust based on what we've done with the rest of the portfolio. Internal innovation is a super important part of the company. Back in 2016, we had AirSeal. Fast forward to 2024, we have AirSeal, Buffalo Filter, BioBrace and In2Bones, so all 4 big acquisitions. What you don't hear as much about is the internal innovation. If you were at Academy, you would have seen a new MIS bunion product, you would have seen a new platform for the knee and the shoulder. That's all internal innovation around which we continue to grow our presence in the marketplace.

And one of your competitors, Stryker, on their earnings call last week said smoke evacuation grew kind of 50% for them. I don't know if their portfolio is really -- it's not really a drag, overlap or not, but just kind of thinking about what -- how you interpreted that number, 50% growth in their quarter.

I think it's an emerging, growing market, and there's room for a couple of parties at this point in time. we're pretty happy with our smoke portfolio, and it sounds like they're happy with theirs. We're -- I don't know if I'd add anything else to that.

It's a big market, growing fast, and more multiple players can win at the same time.

yes. True.

Yes. Great. On the base business, obviously, another part of the story is like keeping their growth going in the base business. And so kind of the confidence in kind of -- you did talk about some of the new products you're launching, but anything else? I don't know. Some of the larger companies have been taking share over -- holding on to share a little bit harder than they were before or just trying to get confidence that this base business can kind of continue to do the kind of lower to mid-single-digit growth that it's been doing.

No, let me try this one, Pat. I have talked often about every selling organization having a platform product around which everything else you offer looks just a little bit better. It started with AirSeal, and therefore, everything else in our general surgery bag looked a little bit better. And as we incrementally innovated on that, our presence in the marketplace grows. If you go to the orthopedic business, clearly, a new platform in our sports medicine franchise is BioBrace. And if you walked by our booth at Academy a year ago on BioBrace Day and then walk by this year, where some of the same surgeons were up there presenting 2-year data, it's been used in over 40 clinical applications in the body. When we go in now and talk about rotator cuff repair, we lead with a product like BioBrace. But our new anchor system for the shoulder looks that much better. So it is about protecting that core portfolio, but bringing in that platform technology to really differentiate you in the eyes of the clinical community.

Travis, I'd just play on that, again. We believe in the platform technology. We also believe in the trifecta of medical devices: innovate, medical education and continuing to invest in your sales force, and those 3 really work. And it only gets better when you have platform technologies. You can wrap them around.

Absolutely.

That's helpful. And then In2Bones, kind of any update on that? I know there were some supply issues in In2Bones as well as kind of the legacy ortho business. Getting back on offense there, just trying to think about how that's going at this point.

Travis, I think we said at the end of quarter 4 and we said in quarter 1 that we were having supply challenges, and we would expect ourselves to be working through them in quarter 1, continuing to get them behind us in quarter 2 and get back on offense in quarter 3 and in the second half. And we're on track to that. Nothing's changed since that.

Kind of both of those deals, In2Bones and Biorez, kind of tracking to deal models at this point.

Yes. I think we communicated when we did the acquisition of BioBrace, it was -- we do $1 million -- it was $1 million business. We said it would do single million dollars last year, and then we raised it to high single digits. And then in our guidance for this year, it'd be double-digit millions, and we're tracking towards that. On the foot and ankle side, we continue to do well towards our model and feel good about that.

And gentlemen, quick housekeeping question on Korea. You mentioned strikes in Korea. Other companies have mentioned it too. Any update on Korea?

We don't know when the strike's going to finish. We have a really good Korean business, and we're really proud of it. At the same time, we think we can weather any storm that would happen there with respect to that nurses' strike. So it won't impact team CONMED. We've got a good team there, and we continue to do well there.

One question I want to kind of ask all the procedure companies is, the market in total utilization, remember, has been really good. And I don't know if we're trying to kind of find a new normal kind of post-COVID and some of the catch-up. Kind of any views on what's above normal? What's not? Is this normal? Or are we going to be kind of bracing for kind of a moderation in procedure growth kind of moving forward?

Todd and I had a discussion on this, and he brought up, I think, what is a really relevant point. I don't know if we're big enough to have a strong opinion on the overall procedure volume. We think the procedures are steady, stable and consistent. And I think for the first time, I would throw that comment around the globe. We don't have areas where things are really spiking or things are really slow. There's just steady, stable and consistency in the categories that we participate in: sports medicine, foot and ankle, general surgery and the GI category. So in those 4 categories, we see good volumes. Are they 50 basis points higher than normal? I'm not sure I can recall what normal is anymore because that was 2019 and prior. That's forever ago. But it's just steady and stable, I think, is how I would define it.

Great. Anything else that [indiscernible]?

No.

Great. Thanks for joining us. Good conversation. Thanks.

Thanks, Travis.

Thank you.

Thank you, everybody.