CONMED Corporation (CNMD) Earnings Call Transcript & Summary

Good afternoon, everyone. I'm Robbie Marcus, the med tech analyst at JPMorgan. Very happy to introduce a first-time CEO presenter to the JPMorgan conference, Pat Beyer, CEO of CONMED. Pat?

Thanks, Robbie. Good afternoon, everybody. Thank you for the opportunity, and thank you for coming in here to the CONMED presentation. I do want to recognize we have our Executive Vice President and Chief Financial Officer, up here with me, Todd Garner. It's a pleasure to give you the CONMED story here in January of 2025. And clearly, we have our forward-looking information. You're all familiar with that. This is our CONMED vision statement. I'd like to start out a presentation with this. These are words that the CONMED team passionately embraces, executes on and aligns around, and it's something we think about every day about empowering health care providers worldwide to deliver exceptional outcomes to patients. You shouldn't be surprised I'm a new executive at CONMED, and I wanted to share the team that works with me, and I'm proud to represent. There are some new faces and new names on there. We have a new General Counsel, Hollie Foust; and John Farrell is our new Executive Vice President. These are individuals, as you see on this table that some are new to the organization, but what's not new is their commitment to excellence in representing our shareholders. You also have a blend of industry experience and a blend of functional experience. This slide, I'm going to pause on. These 4 items represent our true north when they come together when we think about our shareholders. And the first item is around aggregating growth. As a leadership team and as an organization, we execute and operate for the long-term aggregate growth of our shareholders, both as in the sales and the profitability side. We make decisions for the long term. The second item really talks about our focus to be in the right markets from a size and a growth profile. We choose where we operate, and we happen to work in a number of large markets that we've chosen to be in, be that the general surgery space or the orthopedic space in the areas that we compete in. We're clearly focused on increasing our market share. And we believe when we're in large, fast-growing spaces, we become experts in those spaces. And when we become experts in those spaces, we become more clinically relevant to customers, and it gives us the best chance to take market share and grow faster than the market. And when we do that, we deliver above-market share growth and not just on the revenue side but on the profitability side. This is an important slide for us that we think about as a leadership team and we execute towards. Now I talked about the markets that we compete in, and we share that we're in 2 markets, the orthopedic market and the general surgery market. I'm going to dig deeper into the orthopedic market here. There's 3 large categories that CONMED competes in. Number one, the sports medicine and biologics; number two, the capital equipment space; and the foot and ankle space. These when combined in aggregate, and I'm rounding here, are around a $13 billion market opportunity for us. When we think -- when you think sports medicine and biologics, think repair of soft tissue and healing of soft tissue. When you think capital equipment for CONMED, it's bone saw cutting accessories around cutting bone, visualization systems. And the foot and ankle space is a business that we bought in 2022 with the acquisition of the In2Bones Corporation. And this is the products around the repair of elective foot and ankle procedures, be that plates in the screws or the total ankle system. Our growth drivers in the orthopedic space are really centered around 2 key areas. Number one is the sports medicine and the biologics area, and that's the area where in 2022, we bought the BioBrace franchise. That is a portfolio focused on healing soft tissue. It's a business and a segment. We believe sports medicine is growing between 5% and 7%, and it's an incredibly attractive space to be in. The other area is the foot and ankle space. Foot and Ankle is a segment that we believe is growing 7% plus. We believe this is an area where CONMED should be growing double digits. Another important point about this slide is if you look at the far right-hand column, big market growing fast. If CONMED can take one market share in this space, will increase CONMED sales by over $130 million and bring 11% growth to the company. Big, fast-growing market attractive for us to be in. Again, we're not talking about 2024 as total sales yet. On the left-hand side, you see the pie chart here, which frames CONMED's sales internationally in the United States. You'll see that we're indexed differently than a lot of orthopedic companies, significant, in fact. The majority of our sales come from the international space, 61%. 39% of it comes in the U.S., and it's an attractive space for us also in that 77% of this business is recurring. Now on to the general surgery space. This is an $11 billion market that we compete in. And again, I'm rounding here. And there are 5 categories there: access, energy, instruments, endoscopic technology and critical care. I want you to think about 3 key spaces in here. Number one, minimally invasive surgery. And when we think minimally invasive surgery, we think robotics, we think laparoscopy or we think therapeutic GI. The other key area that we compete in strongly is the area of energy and smoke evacuation. And in this world of energy and smoke evacuation, in 2019, CONMED purchased the Buffalo Filter Corporation. So we know smoke evacuation to protect caregivers around the world is a fast-growing market that's in its early years. We expect this market to continue to grow attractively for the foreseeable future. One of our key focus drivers in our General Surgery business, and it's in the area of access, and that's our AirSeal platform. AirSeal is a clinical insufflation platform that's used in the area of robotic laparoscopy -- robotic surgery or laparoscopy. And this is a system that allows clinicians to operate at low pressure in a laparoscopic or a robotic procedure and the benefit for the hospital system is reduced length of stay. And for the patient, a better experience in the hospital. They're leaving the hospital faster and they're having less pain. We draw your attention to the left-hand side, different than the Orthopedic business. 70% of this portfolio, we sold in the United States and 30% internationally, and 91% of it is recurring revenue. Same comment I made about the Orthopedic business. CONMED takes one market share in the spaces of general surgery that it competes with. It adds over $100 million of sales and brings 8% growth to the total company. Now this is a new slide here. Again, I'm in a new chair, new CEO. We want to level set the CONMED position today with respect to mix and margins and where we're going over the midterm. I would draw your attention to the right-hand side of this chart. We lay out the categories that CONMED competes in. We then lay out the mid-term expected revenue growth and the expected estimated 2024 gross margin in these categories. And there's math that's playing a role in calculating the gross margin based on the mix and the growth trajectory. We then lay out the orthopedic, which is what we publicly report, and we lay out the general surgery as well as total CONMED. I want to pause here for a second and make it clear, we are not changing our approach to public disclosure going forward. We will still only report orthopedics, general surgery and total CONMED. But with me being in a new chair and us looking at the business today, we wanted to share for our investors a chance for you to level set your models and get to the point where we're at today with respect to expected growth rates per category and the margin profile of the business going forward. So I'm going to share some numbers. We expect the Orthopedic business to grow between 4% and 8% over the midterm. And the math would say, in 2024, the estimated gross margin will be 57.5%. Our General Surgery business will grow between 5% and 11%; gross margin, 55.2%; and total CONMED between 4% and 9%, and the estimated gross margin 55.6%. With the mix of the sales growth and the margin mix, the mix math would tell us and would suggest that going forward in the midterm, you should see margin mix improvement from CONMED between 50 and 80 basis points coming purely from mix and products here. I draw your attention to the left-hand side. You see the pie chart there that shows our individual categories that we compete in. And it also shows you the mid-term expected revenue growth from our categories as well as the margin. Takeaway from you would be are double-digit growing is 1/3 of our portfolio, and it's also our highest margin portfolio mix of 71%, 71.2%. These are two bar charts here that show, which really plays to the point of aggregating growth on the sales and on the profit side. 10 years ago, CONMED was a little over $700 million, and our guidance this year is between $1.3 million and $1.305 million, and our adjusted EPS has doubled from $1.98 to guidance between $4 and $4.05. Our goal for our shareholders is aggregating growth over the long term. So I was announced as the new CEO January 1, but it was announced at the end of quarter 3's earnings call. And a lot of people ask me, what are you going to do differ Pat? What are you going to change? What's new about CONMED? And I try to be both practical and thoughtful about it. And I think it would be irresponsible for me to say after 10 years with the company, I now am going to change anything because that's not what I believe. I'm going to spend the next 100 days talking to shareholders, talking to customers, talking to the CONMED team, spending time with the Board looking at what's the best CONMED for the long term going forward. At the same time, between October and today, I've spent a lot of times at meetings like this, and I've been hearing a number of questions and thoughts about CONMED. And so these are the 6 focused areas that I will be leading through CONMED. And I've heard a number of things on these first three on the left-hand side. Our investors and shareholders have said to me, "Pat, we want you to focus on these three things, and we want to understand them more." Number one, DV5 is a new entry into the clinical robotic space. And what does that mean to AirSeal? There's questions about the AirSeal durability and sustaining double-digit growth. Well, I want to tell you, in 2024, AirSeal had a record year. It had record sales in disposables and it had record sale in capital sales. We sold a lot more AirSeal by a large amount in 2024, but that doesn't mean we're not reflective about how do we continue to maintain that double-digit growth. And there's 3 areas that we're focused on. Number one, DV5s are in the market today, and we know that clinicians are enjoying the clinical benefits of AirSeal with DV5. But we think it'd be wrong to assume the attachment rate is going to be the same. We know that as we learn more, we'll be able to better understand that attachment rate. Todd Garner shared a year ago that our previous attachment rate was around 33% of all intuitive robot procedures were with AirSeal. We're going to model and expect it to be about half, so about 17.5%, 17%. We see no reason to change that. And so the AirSeal growth story has that as one leg. The second leg of the AirSeal growth story is Xis. We know that Intuitive will continue to manufacture the Xi robot, and those Xis are being shipped globally. CONMED will continue to have a strong attachment to that. The third leg to that stool is laparoscopy. We are seeing clinical insufflation play a bigger and more substantial role in laparoscopy around the world, and we'll continue to drive that. So our eyes are firmly focused on ensuring that our clinical insufflation platform of AirSeal continues to be a growth driver and a double-digit growth driver for the foreseeable future. We also know that we've -- in 2024, we've been public and honest about the hiccups and the stumbles we've had in our operations group with respect to orthopedics. We've talked about our orthopedic portfolio, not achieving its full opportunity because our sales force couldn't get on offense. We have to address that. We've made progress in 2024 but not fast enough. And this slide shares with you, we have engaged a top-tier consulting firm to come in with us. They're coming in with us, and they're going to help us not just get our orthopedic -- sales force on offense, but help us turn our operations from an area of opportunity into a strength. We know in 2022, when we had our distribution challenges, and we had a -- we stubbed our toe as we took a distribution operation, knew we had to scale it, integrated new software there and stumble. We rallied around that. And today, our distribution operations around the world is one of our strongest functions. It told us something. It told us take this opportunity you have right now in operations and turn it into an area of weakness, and we're focused on turning it into an area of strength. The third area, when we talk to customers -- not customers, investors and shareholders is they want to hear about our leverage story. Todd would have shared at 2024 that our expectation is to be below 3.5 turns at the end of 2024. With our strong cash flow and our current trajectory, we expect to be at 3 or below 3 coming out of 2025. So our intention is to focus on these 3 and have them be dissipated in the near term. While we're doing that, we also have 3 amazing opportunities. We're going to continue to expand the impact of Buffalo Filters safety protection for caregivers around the world. We're going to continue to focus on expanding the impact of BioBrace on strength in healing and sports medicine, and foot and ankle will be a double-digit grower for CONMED. Environmental, social governance. I want to share with you CONMED is pragmatic here. We're going to continue to be responsible here. We want to be good citizens, and we are good citizens, and we spend the right amount of time here. We also have strong governance with our Board. So closing thoughts. 2024 was a challenging year, and we're not going to sugarcoat it. We did not achieve the results we expected to achieve or should achieve. We know what we have to do, and we're laser-focused on improving the areas that we need to improve on. We have an intense focus on innovation. We have an intense focus on improving patient outcomes with our caregivers, and we're laser-focused on that. We also are -- compete in large markets. I talked about smoke evacuation, strength in healing and sports medicine, clinical insufflation and foot and ankle, all large attractive markets that we compete in and are positioned with innovation to take market share. We will continue to operate an offense that innovates but innovates towards higher-margin portfolio products. We believe innovation, improving patient care can command higher prices because it delivers better care, both economically for the health care institution and for the patient. And last but not least, I want to leave you with. I'm incredibly excited and proud to be CONMED's new CEO. We are -- I joined CONMED 10 years ago to be part of a growth company, and I'm excited to lead CONMED on the next chapter of the growth story that we're on. We, me and our leadership team will be incredibly focused on our customers, on our shareholders, and we will be laser-focused about operating like that and doing things the right way. So with that said, thank you very much. I appreciate the opportunity to share with you. I usually get applause or something, but it's my first one.

Well, great. I thought that was a really interesting slide you showed and realized it's more of a onetime look into the business under the hood, both on segmenting how the different lines of the business are growing and the different margins. But maybe I could just try and frame for investors the intent with 50 to 80 basis points of gross margin expansion, felt like that wasn't just a onetime number, but somewhere you feel good over the next few years, you could see the next couple of years progress. I look at Street consensus is around 57.4 for next year, which if I do the math off the numbers you had at 50 to 80 basis points, it's probably too high. So is that the intent of the slide to not only just give us a look but also maybe move Street numbers down for '25 a bit?

Yes. Not specifically just to deal with '25 numbers, Robbie, but there's -- we've said a lot of things in the last 4 or 5 years. They've all been true at the time. We wanted to reset. With the new CEO coming in, it's a great opportunity to just share this is the mix of the business right now. Each piece of that grows like this. Each piece of that contributes margins at these levels. So what that math says is based on that mix and those growth rates, that's what that calculation would equal for the next year. Now that's mix only, and this is not '25 guidance actually, right? We'll talk about '25 specifics in a few weeks when we do our Q4 earnings call. But we wanted to kind of ground everybody on what is the current mix of the portfolio what are those different pieces grow, what are their margins so that people could align their models to where CONMED is today and not extrapolating CONMED comment sometimes from years ago.

Got it. So to be clear, you don't want us to put 50 to 80 basis points...

That is not the -- we have not provided 2025 guidance. We'll talk about that in a few weeks. This was an -- your conference provided an opportunity to get everybody aligned on where CONMED is today, what the mix looks like, what the growth looks like in all those different pieces. And then we'll talk about the details of '25 and how we see 2025 specifically in a few weeks.

Great. Okay. I just wanted to start off with that. Pat, you laid out sort of what your 100-day plan was up on the slides and how you're engaging. If I had to look at CONMED, I would say some of the standouts had been on supply chain and execution on that front, whether it's shipping or supply, and you've engaged help there. I'd say on the other side has been a whole slate of new product launches that you have, both in the past and yet to come. So when you're looking, how are you balancing where you're spending your time? Is it more out in trying to learn in the field? Or is it more at home to make sure that the organization is in the right spot for these new product launches?

That's a great question. It is. I have to do both. I think the day I forget the customer and what's happening in the field, I think we stop going in the right direction as an organization. But I think the demands of our internal organization catching up with the outside forces me to be inside to represent our customers. So I will be spending a fair amount of time with our operations but not at the sacrifice of our customers or our sales force, but because it's a clear and present opportunity for us today. For us to treat more patients effectively, we've got to get our operations sorted.

And what's the current status of supply, particularly in the ortho business? How did you end the year with supply?

We made progress not fast enough. Hence, us going to an outside consultant to come in and help us be a lot better.

You talked about AirSeal had its best year ever, yet going forward, maybe a little slower growth -- or I guess you didn't say -- you said a lower attach rate than you'd seen in the past, which I would imagine translates into potentially a slower growth rate moving forward. Just to help level set, what percent of the business, I guess, you used to frame it as AirSeal and Buffalo Filter, where does that sit today? I think it's been a while since we've gotten the last update on that. And taking the attach rate down, how do we think about sort of the growth of that versus the historical growth?

Yes. So that that's actually in that pie chart, right? So you can bring the protractor out and you can figure out their percentage.

We will.

So we did provide that mix, and it has grown since we showed it last because it has continued to be a really strong grower for us. And yes, Robbie, I would grant that we expect continued growth with Xi, we expect an attachment rate with DV5 that will -- we think it's still safe. It's still early to get that calculation. But a year ago, I threw out kind of theoretically maybe it's half. We still think that's probably a safe assumption, but we'll dial that in as we get more experience. And then the big question is, can we increase the growth in the non-robotic to make up for whatever we might lose in the -- with the DV5? But it's too early to be confident of that. So I do think it's the right thing to kind of come off of that 20% that everybody has had in their mind. The law of big numbers take you off that anyway. But we think AirSeal is a solid double-digit grower for a long time, and we feel very good about it. We feel very good about smoke. And -- but hopefully, we can provide -- I'm really -- frankly, I'm waiting for the sell side, if you can spur your colleagues. We'd love to have a consensus model on what does the market -- what does The Street think DV5 does and Xi does, and then we could apply credible, reasonable attachment rates, and we could provide a little more help for people to feel good about the durability of the double-digit growth of AirSeal. But we've seen a really strong 2024, and we expect that to continue to be good.

We'll sync up after. We have consensus numbers for that.

Anxious to get those.

What about Buffalo Filter? Because this is also a good business. It had a bit of some difficult quarters throughout '24, but it's still a huge growing market. Legislation continues to move through state by state, and it's -- that's a multiyear process. Once it starts, you know the revenues are coming probably within at least 3 years before they have to register to sign up to get on board with the regulation. So how is that market? And how do you feel about Buffalo Filter going into '25?

We like the market. Again, we believe the markets in its early years. We believe the market of protecting caregivers in the operating room from the dangers of smoke and the micro material in that smoke is important. We believe Buffalo Filter and its ability to filter dangerous chemicals is compelling, and we're committed to the business growing, and we think it's a double-digit grower. And we also -- our thoughts are, the numbers we've seen is the current market size for smoke evacuation is about $300 million. We believe the market will be in coming years is up to $2 billion, and so we think it's a super attractive market.

Two of the highest gross margin segments you had on the chart, I definitely saw extremities, I believe Sports Med was one of the other particularly, if I look at In2Bones, the Extremity's acquisition, you did 2, 3 years ago and Biorez, which should be launched -- ramping up in revenues over the coming years here. So maybe you could speak to those 2 products. In2Bones had some supply issues throughout 2024. It sounds like it's getting better, but maybe not quite where you would hope it would be. But maybe just speak to those 2 businesses as the margins are fantastic and the better growth, more contribution it can add over time helps everything.

So Foot and Ankle, In2Bones. So -- and we call it CONMED Foot and Ankle. It's a business we bought in June of 2022. It's a business that we treated it as a stand-alone business. Stayed out of its way in 2022 and 2023 and began to integrate it into the business and connected system to our systems for scalability. As we did that, some of the systems got clogged up, and it compromised our ability for our sales force to go out and take new customers. And so in 2024, in the early quarters, we saw challenges there. We had commented previously that we believed we would exit 2024 on offense on the foot and ankle side. We have strong innovation on the foot and ankle side, and we believe it should be and will be a double-digit grower for us. On the BioBrace side, we bought the Biorez company in August of 2022. That is a strength in healing technology platform that is FDA-approved or anywhere tissue weakness exists. It's currently being sold in clinical use in 48-plus procedures. We have it being sold in the United States with our foot and ankle sales force and orthopedic sales force, and it's being sold and marketed in a number of spaces internationally. BioBrace is a really strong clinical platform that combines the healing biologics of collagen with the strength of PLA from time 0. We're getting great clinical results and feel really good about that portfolio.

How do we think about -- if I look back, especially on Biorez, it was once you get the published clinical data, that can really be when you start to market it to doctors and start to see it take off. Where do we stand with the publications?

Two things. Our initial thoughts, we didn't know what we didn't know. And so -- and we talked publicly about our prospective randomized clinical study, which is being done with centers in Canada and the United States, 268 patients, we expect to finish enrollment in 2025. We expect to get data at the end of 2026. What we didn't know was the surgical communities acceptance with biologics and healing properties and collagen in soft tissue. And the demand for surgeons for prospective clinical studies is not what it needed to be 3 years ago. And so we're keeping that study going. We think it's going to be incredibly important. But today, we have a number of surgeon-led studies on BioBrace. Less than 3 months ago, in orthopedic surgery, we had a surgeon out of the Rothman Institute published on 49 patients with massive rotator cuff tears. Massive rotator cuff tears do not heal well. In fact, published literature would say they fail up to 94% of the time. Our published peer-reviewed study had survival rates of 94%. And so while we're waiting for the prospective study, there's a lot of data being presented and published today.

Will it be of a magnitude of revenue that it's material and contributing in 2025?

Well, I mean, that's a little bit of a subjective qualification there, Robbie, but yes, it's meaningful to us, right? It's already been meaningful. I think if I go back to our disclosures between August and December of 2022, we sold about $1 million, right? We essentially bought it pre-revenue. We sold about $1 million in those first few months. And then through our disclosures, you can see that we were right around $10 million for 2023. So we added $9 million in 2023. That trend -- that's the kind of slope that we think this business is on. We think it's got a large opportunity. It's incredibly impactful. So yes, we -- hand to your earlier point, at 80-plus percent gross margins, every dollar helps the P&L.

Maybe if we move down the P&L. You talked about 50 to 80 basis points on gross margin. It was a good target, but not necessarily guidance, how should we think about below the line? There's a lot of work being done behind the scenes. Do you still feel like you can get leverage on OpEx above the gross margin expansion moving forward?

We do. I think you should expect R&D to stay in that 4% to 5%. I think that's a really good place for us. I think we can be appropriately innovative with that level of investment on the total company side. Obviously, it's higher in Sports Med than it is in others, right? So that's an average for the company. But we -- I don't think that will change. And then SG&A, we will continue to expand the sales force, shrink territories. We'll continue to try and make sure that, that top line stays strong. But we think with our revenue growth opportunities, we ought to be able to grow SG&A at a lower rate than we do revenue. So that provides leverage to the P&L. And so we do expect that operating margins should grow a little better than gross margins.

Any thoughts as it relates to tax or interest with interest rates where they are?

Yes, we're very conservative on the tax side. It's -- I know others have talked about maybe tax rates going up. I don't think ours are capable of going up. I think we're...

Can they go down?

Well, long term, they can definitely go down. We're very conservative on the tax side. Interest rates definitely coming down and our debt is coming down. So yes, interest expense should be a tailwind as we go forward.

It's been a while since the debt has been in a position that it allows you to go out and do more M&A, yet I would say, getting below 3.5x kind of puts you back in potentially offensive territory. How do you think about capital allocation? How does M&A fit in there? Is M&A on the table for 2025?

It's definitely on the table. And again, it was never off the table. While we recognize that our leverage was high, we were responsible, but we kept looking. And we challenged our business development team and our commercial teams that if there's a great technology that should be in CONMED's portfolio and in the sales force, we'll look at it. Those didn't come up, but it didn't stop us looking, and we'll continue to look.

Are there any -- obviously, you're not going to tell us the targets you're going after, but are there any clear holes in the portfolio or near adjacencies that you think would be potentially interesting to add?

I think there's -- I wouldn't say that we have this huge gap and glaring hole that we're directing our teams, we have to fill that or else we're in trouble. But there's lots of innovative technology in adjacencies or in the sweet spot area of technologies that we would love to bring in.

I know Todd and I have talked about this before. Now that you moved in, I know you talked about the necessity to return to a beat and raise. You're trying to level set the investor expectations here. How well does the CONMED organization realize the necessity to continue to move estimates up and deliver above the promised expectations? Because in the end, share price typically correlates with estimate revisions. And there's been a lot of times where we've seen up and down and up and down at CONMED. All of us wanted to return to up, up, up. So what are you doing as the new CEO to make sure the organization understands the need to consistently outperform?

I'd say two things. Number one, we work for our customers, our patients and our shareholders, and we know that. At the same time, there are -- the leadership team that runs this company are acutely aware. In fact, Todd will spend 30 weeks or 30 minutes this week with our top 120 people talking about what winning looks like at CONMED, and I will spend an hour talking about CONMED and where we're going. And there will be no question the pillar that we make and keep commitments has got to resonate loudly with them. We heard it loud and clear.

I think that's a great place to end. I appreciate the time. Thanks, everybody, for joining. Thanks a lot.

Thank you, Robbie.

Thank you. Thanks, Rob.