Q3 2019 Earnings Call
Management will be making comments the statements regarding its financial outlook and its plans and objectives, which represent forward looking statements that involve risk 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 and the company's actual results may differ materially from its current expectations.
Please refer to the risks and other risks uncertainties disclosed under forward looking information in today's press release as well as the company SEC filings for more details on the risks and uncertainties that may cause actual results may differ materially.
The company disclaims any obligation to update any forward looking statements that may be discussed during this call except this may be required by applicable.
You also here of management refer to certain non-GAAP adjusted measurements starting this discussion while these figures are not a substitute for GAAP measurement management uses these figures to aid in monitoring to companies ongoing financial performance from quarter to quarter and year to year on a regular basis and for benchmarking against other medical technology.
Companies.
Adjusted net income and adjusted earnings per share measure the income of the company excluding credits or charges that are considered by the company to be special or outside of its normal ongoing operations.
These adjusting items are specified in the reconciliations supporting the company's earnings releases posted on the company's website.
With these required enough that's completed I will turn the call over to Curt Hartman, Conmeds, President and Chief Executive Officer for opening remarks Mr. Hartman.
Thank you Shannon good afternoon, and thank you for joining us for condiments third quarter 2019 earnings call.
With me on the call as Todd Gardner Executive Vice President and Chief Financial Officer Today, I'll provide a brief overview of the financial and operating highlights for the third quarter. Tom will then provide a more detailed analysis of our financial performance and discuss our updated 2019 financial guidance. After that we'll open the call to your questions.
Turning to our results for our total sales for the third quarter were 233.6 million, representing a year over year increase of 15.5% as reported and an increase of 15.6% in constant currency.
Organic sales growth in the quarter, which excludes the impact of Buffalo filter was 8.8% in constant currency.
On a pro forma basis, if we had own Buffalo filter in 2018, our growth for the third quarter of 2019 would've been 10.3%.
This was another solid quarter and I'm very pleased with a balanced revenue growth across our U.S. international businesses as well as across both our general surgery in orthopedics portfolios Buffalo filters also generating solid growth as we see increasing adoption awareness among the medical community of the need for surgical smoke evacuation.
Infiltration.
From an earnings perspective during the third quarter, our GAAP net income totaled $7 million. This compares to net income of 5.8 million in the third quarter of 2018.
Excluding special items that affected comparability, our adjusted net income of 18.2 million increased 37.6% year over year and our adjusted diluted net earnings per share of 62 cents increased 34.8% year over year.
Overall, we are delivering profitability above the levels, we committed to and at the same time, we continue to invest in the business to strengthen our future revenue and profitability growth.
Our solid third quarter performance was a continuation of our results from the first half of the here as we build on strong foundation established by our team our new product pipeline remains a key growth driver as we further differentiate our product portfolio.
We are made making great progress on the integration of Buffalo filter I'm very proud of the team as it continues to drive impressive growth and strong performance overall, our financial results for the quarter habits on for putting for solid finish to the year and position us well for 2020 and beyond.
Before I hand, the call over to Todd last month, we announced two new additions to the Conmeds Board of directors I'm very pleased to welcome Luverne Council and Barber shorts and tried to our board burden Barbara are both highly accomplished and our valuable additions to the board. We look forward to their contributions as we continue to advance our long term strategy.
To deliver above market performance with that I'll turn the call over to Todd will provide a more detailed analysis over financial performance and discuss the positive update to our 2019 financial guidance Todd.
Thank you Kurt.
Before I get started I want to let you know that we have posted an updated investor slide deck on our website in conjunction with this call.
As Curt mentioned, our third quarter sales totaled $233.6 million, which represents an increase of 15.5% on a reported basis and 15.6% in constant currency.
Excluding the $13.9 million, a buffalo filter sales in the quarter, our organic constant currency growth rate was 8.8%.
On a pro forma basis, if we had all the Buffalo filter in the prior year period, our constant currency third quarter revenue growth would have been 10.3%.
As we mentioned on our second quarter call. Our Q3 results benefited from one extra selling days compared to the prior year quarter, which we estimate to be worth between 101 hundred 50 basis points of growth on a consolidated number.
All remaining sales growth numbers that I referenced today will be given in constant currency.
The reconciliation to GAAP numbers is included in our press release.
For the third quarter of 2019, our domestic sales increased to 19.2% versus the prior year period, while international sales increased 11.6%.
Worldwide Orthopedics revenue grew 7.6% in the third quarter, driven by strong performance across the product portfolio.
Domestically third quarter orthopedic sales increased 7.5% and internationally orthopedic sales increased 7.6%.
Total worldwide General surgery revenue increased 24.0% in the third quarter total domestic general surgery revenue grew 26.0% an internationally general surgery revenue increased 19.7%.
We're very pleased with the sales performance so far this year.
The organic growth has been strong at our expected revenue contribution from Buffalo filter continues to increase we now expect between 47 and $48 million from these surgical smoke evacuation products in 2019, which is up from our previous guidance and is an increase of $6 million to $7 million from our original.
That ends at the time of the acquisition.
I'll remind you that last quarter, we forecasted that our Q3 revenue growth would be above our full year guidance and our Q4 revenue growth would be below that range. There are two principal reasons for this.
First our prior year Q4 organic growth of 10.8% was well above our historic trends and we are going to get ahead of ourselves counting on a similar finished to this year.
The second reason is that we are strengthening our sales resources in several geographies to position us for future growth.
It includes adding sales reps and making additional channel changes, where we have determined it would be beneficial.
So our guidance allows for that disruption in Q4, but we believe puts us in a better position for 2020.
Therefore, we are maintaining our full year organic constant currency revenue growth guidance at 6% to 6.5%.
Currency has become more of a headwind since we last provided guidance and we now expect to currency headwind of approximately 80 basis points for the full year 2019 compared to our previous estimate of 50 basis points.
Therefore, despite worsening currency we are projecting total 2019 reported revenue that is essentially the same as our projection three months ago between $951 million and $957 million representing growth of 10.7% to 11.3%.
Now, let's move to the expense side of the income statement for comparative purposes, I will discuss the Pinedale performance, excluding special items, which include charges related to acquisitions manufacturing costs comps consolidation costs debt refinancing costs and amortization of intangible assets amortization of deferred financing fees and.
Debt discount net of tax.
A reconciliation to GAAP numbers is included in our press release.
Adjusted gross margin for the third quarter was 56.4% an increase of 170 basis points over the prior year quarter. We're pleased with the improvement we're seeing a gross margins and they are currently trending above where we expected them to be at this point of the year.
Our production has been active and increasingly efficient this year as we have focused on manufacturing our new products in house and insourcing other key products.
As we've talked about before the ebbs and flows of inventory and manufacturing variances can make gross margin appear lumpy from quarter to quarter.
We continue to expect the full year adjusted gross margins to improve by approximately 100 basis points over the prior year, which means that the Q4 gross margin is expected to be below trend at around 55% as we expect to sell more than we produce in the quarter.
We remain confident in our improving margin profile going forward.
Research and development expenses for the third quarter were $11.0 million or 4.7% of total sales, which is a 10.9% increase over the prior year period as we continue to actively invest in new products and platforms.
Looking forward, we continue to expect investments in R&D to be between 4.5% at a 5% of sales in 2019.
Third quarter SGN, a expenses on an adjusted basis were 38.5% of total sales, an 80 basis point improvement over the prior year quarter.
Based on the better than expected Buffalo filter integration and the piano leverage in the broader business, we expect improving piano leverage in Q4.
As I discussed earlier in Q4, we plan to initiate Salesforce expansions and channel changes that we believe will deliver additional strength in 2020.
Despite those additional investments we are guiding to increased SGN a leverage for the full year 2019 compared to what we expected three months ago.
We now expect yesterday as a percentage of sales to improve between 120 and 130 basis points for the full year.
Our improving margin profile drove 260 basis points of increased adjusted operating margin in Q3 compared to the prior year quarter year to date adjusted operating margin has increased a 190 basis points.
Interest expense was $8.0 million in Q3 with slightly lower interest rates, we now expect interest expense to be around $32 million for 2019.
The adjusted effective tax rate in the third quarter was 24.2% compared to 24.5% in the prior year period.
This was lower than we expected in Q3 due to recent guidance from the IRS on various pieces of us tax reform and also due to excess tax benefit from a higher stock price.
Year to date for the first nine months of 2019, our adjusted effective tax rate is 20.6% and we now expect a full year to be around 21%.
Third quarter GAAP net income totaled $7.0 million or 23 cents per diluted share compared to a reported net income of $5.8 million or 20 cents per diluted share a year ago.
Excluding the impact of special items discussed earlier, our third quarter adjusted diluted net earnings per share were 62 cents versus 46 cents in the prior year period, representing growth of 34.8%.
We are raising our full year adjusted cash EPS guidance, and now expect EPS between $2.62 and $2.65 representing year over year growth of approximately 20% to 22%.
This stronger than expected performance compared to our guidance three months ago is a combination of operational overachievement lower intrinsic lower interest expense and lower taxes.
Which are offsetting worsening currency and the increased investments in sales resources that I mentioned earlier.
The adjusted diluted cash earnings per share estimates for 2019 exclude amortization of intangible assets amortization of deferred financing fees and debt discount which are estimated in the range of $32 million to $34 million net of tax and the cost of special items, including charges related to acquisitions and manufacturing consolidation costs.
Estimated in the range of $15 million to $17 million net of tax.
Turning to the balance sheet, our cash balance at the end of the quarter was $30.1 million compared to $22.5 million as of June Thirtyth 2019.
Accounts receivable days as of September Thirtyth were 67 days compared to 72 days a year ago.
Inventory at quarter end was 151 days, which has the same as it was a Q3 a year ago.
Long term debt at the end of the quarter was $781 million versus $796 million on June Thirtyth 2019.
Which makes our leverage ratio at September Thirtyth 2019.
Was 4.7 times.
Cash flow from operations for the nine months was $54.3 million compared to $50.0 million in the prior year capital expenditures for the nine months were $13.9 million compared to $11.8 million in the prior year period.
And with that we'd like to open the call to your questions and I'll hand, it back to Shannon.
As a reminder to ask the question you will need to press star one of your telephone to withdraw your question press the pound Keith.
Analysts will be limited to one question and one follow up please standby will the compiled acuity roster.
Our first question comes from Kristen Stewart with Barclays. Your line is open.
Hey, given good afternoon. Congratulations on a good result, I just wanted to dive a little deeper into the sales for commentary on what you're doing there and if you could just give us a little bit more detail into what specific areas here, you're going to be making these changes at this summer.
Thing that we should expect to see any sort of disruption on from a top line perspective, if it's more in the orthopedic channels that it's more in the general surgery channels, just any additional color there would be very helpful. Thank you.
Sure Chris Thanks for the question I think what we're trying to signal here as we've had a pretty strong year typically organizations will do this at the beginning the year. We're in a position to started a little bit earlier. So that's part one part two is when you look at the portfolio and where Weve added.
Some really exciting items like air she'll in Buffalo filter you should expect that we're enhancing our sales infrastructure across the organization that that sells those products, both domestically and internationally and Todd referenced also channel changes. We continue to have a roster of channel changes that would be ideal to pursue.
Assuming product and financial performance allow us to do that and given where we our year to date, we think it's prudent to start those could there be some disruption I think everybody is probably been around long enough to know that anytime you.
Do commercial changes like this or you're always susceptible to some disruption I'd like to believe that our teams have been pretty wired into this and.
But the execution that has got us here to where we are today is the same execution that will carry us through this type of.
Transition, but I think also in Todd scripted comments you talked about.
All the various moving parts in the fourth quarter.
It'll more currency a little bit of channel disruption, perhaps things that we're trying to factor in never mind, the big prior year comparable so hopefully that's a that's enough color on that question I don't want to go too far for competitive reasons, but.
Obviously, we've got some areas with a lot of technology that we think salesforce expansion as warranted.
Okay, perfect and so I guess, if I'm hearing you correctly it sounds like things.
Things are going well, you're just taking the opportunity to do it now kind of set yourself up for 2020, and then b.
Press release, you also I think commented that you continue to reaffirm the growth profile of at least mid single digits.
Topline and double digit EPS. It just sounds like things are going well clearly the sales like stamps and kind of supports that IDN. So this is just simply tough comp taking the opportunity now to to make these changes to keep the momentum going so clearly not a sign of if anything going wrong in fact everything's going.
Right on and so it seems like your line of sight looking at 2020 looks pretty good so anything else. We should think about as we're thinking puts and takes for 2020 seems like that this kind of the last big tough comp stat that you guys kind of have.
Fair.
I don't think I could have answered that question any better than what you just stated that [laughter] sorry.
We've had its been a good year as we said in the opening comments and in the press release.
We're committed to the.
Top and bottom line performance that we laid out now two years ago as we head into 2020, and we're not in a position to give 2020 guidance, but we set the minimum you know the stake in the ground remains the same at a minimum and.
Because of where we're at.
We're able to do these things right now as on a go forward basis.
Yes, Chris and I would just add one thing you did ask about other headwinds like Curt said, it's not time to talk about the details of 2020 yet.
There's two things that we can see right now to two headwinds.
Great stay where they are currency will be more of a headwind in 2020 than it was in 2019.
And given several discrete tax items that lowered our effective tax rate in 2019, we would expect the tax rate in 2020 to be higher than it has been in 2019, but despite those two headwinds we believe the business momentum is strong enough to overcome those factors and deliver on the double digit earnings we've committed to on a sustained.
Sustainable basis.
Okay, perfect that was going to ask on the tax rate side is is there anyway to quantify that.
And it's too soon to quantify it just wouldn't surprise me I don't I don't know that it'll be up but I suspect that it could be up but it's too soon to quantify that.
Okay perfect. Thanks, I'll get back in Q.
Thank you. Our next question comes from Matt O'brien with Piper Jaffray. Your line open.
Hi, guys. This is that drew on for Matt and thank you for taking the questions and congrats on a very nice quarter here.
When you originally did the Buffalo filter deal a couple of quarters I believe you noticed gross margin or you noted gross margins in line with the corporate average and an increasing synergies actor your one.
It's in our sitting here a couple of quarters later after having great. The topline guidance for that a couple of times and sounds like integration is going very well.
I guess, maybe could you speak to a little bit about the effort to improve those margins and kind of where you see smoke evacuation shaking out from a long term margin perspective.
Yes. Thanks.
Our memory is correct.
On the data acquisition, the Buffalo filter portfolio came in right in the mid Fiftys kind of right at the corporate average.
And the expectation was it after we integrated.
Those would climb into the sixties relatively quickly after the first year.
The integration has started so as we move as we get later into 2020.
And we'll start to see those be accretive.
At that level.
Okay very helpful and I guess picking on Buffalo feel to their here Youve, obviously had a couple legislative wins over the last few quarters.
As far as encouraging are requiring the use of smoke evacuation and though our.
My question I guess.
Kind of how long that taken to translate some of those legislative went into performance their business and how dependent is that product and more state that up in similar policies. Thank you.
So I think there's two ways to think about smoke evacuation filtration. One is the overall workplace environment and I would say that is far and away. The most meaningful thing that has happened in across the industry. The reality of smoke free workplace in the operating room is.
Really gaining traction through the various.
So she patients that are driving this from the healthcare workers side.
We're almost at a point where the legislative.
Wind at our back is secondary to that first one.
We did see Colorado go into effect earlier in the year and while that was helpful. It Didnt, Colorado Didnt go from a a standing start waiting for that legislation things were already happening in operating rooms across the state of Colorado. So we said at the close or the end.
And back in February that.
Our model stood on its own that legislation was additional wind at our back in I think we still firmly believe that may be believe that more so because there's so much marketplace momentum behind the smoke free.
Work environment in the operating room across the country and candidly in a lot of international markets.
Thats really whats driving.
The overall results in the improvement in the performance and yes. There are more players in the industry talking about this so it's a it's a combination of marketplace awareness.
Driven by industry, but also driven primarily by that worker who stands in the in the.
Operating room, all day everyday and has to deal with the carcinogenic effects et cetera.
And.
There's just a lot of momentum behind the space right now.
Well thank you.
Thank you. Our next question comes from Richard Newitter with SVB Leerink. Your line is open.
Hi, Thanks for taking the questions congrats on a quarter X Ray.
I have a couple here I I've been jumping between calls so I apologize if you you addressed this R&D.
The percentage of sales came in a little bit lighter than than we were looking for.
Just would like to here kind of there any spending projects that that were delayed I know you know our R&D, it's something that current you've been focused on so I'm just curious to hear about the cadence of spend there and then maybe just a last my second via that you now.
Ortho product launches how are those trending relative to expectations and do you feel like that's even beginning to show up and results or is most of the benefits still out in front.
And because we did see a pickup there. So I'm just getting curious to hear about what order of magnitude, we should be expecting going forward.
And then maybe I'll have a follow up after that thanks.
Yeah rich on the rate year to date, it's 4.8% of sales and in Q3 was 4.7 so.
Theres Theres nothing Theres no news there we remain committed to our new product pipeline, it's it's being effective and.
We've talked about before it does take a while for these new products to get through the process of getting through the hospital through the surgeons through the value analysis committees and so we expect those to be more.
Impactful to next year than this year and the ones, we launched last year or more impactful this year than last year.
That will build on itself as we continue.
To develop that pipeline and launch things.
The income coming out of there.
So I get that kind of answered the or the question actually you expect more of an impact from the launches. This year next year and we're basically just seeing the benefits of last year's launches. This year is that right. Yeah. We're definitely benefiting this year already and we expect to benefit next year more than this year.
Yes, thanks to the visibility or or the early commentary on 2020, but I'm just curious why why isn't mid mid single digit growth rate.
On a level of growth for a company that.
So you know some cushion where it's at least mid single digits, but.
Feels like it's different were to drop on even on the harder comps you still probably a high single digit growth I'm just trying to get my arms around why go from 10% or double digit some mid single digits with all the momentum drivers that you Havent front. Thanks.
Well I think number one you know we we don't give our detailed guidance until January so.
A lot of that question, probably is better addressed in January and what we're trying to do today.
Is confirmed for people that.
Reconfirm for people that stake we put in the ground back in.
I guess it was 2018 that will will be not less than mid single digits on the top and.
I think we said even back on that call that there could be years, when it's above that.
But it will not be less than that based on everything we're trying to do here on the product cadence side, the commercial organization side, the customer engagement side. So.
Our our view today, our commentary today is to reinforce.
Remind whatever the right word is folks that were we remained committed to that as we head into 2020.
Could it be better we'll have to wait and see what what we come out with for guidance in the January call. When we're together next but we'd like the direction of the product portfolio, we like.
What our teams are doing a global basis as I've mentioned in my comments it was really balanced.
When you look at our numbers.
Internationally us it was really balanced when you look at general surgery in orthopedics and.
The performance level was really solid across the company. So those those give us confidence sitting here at the end of the third quarter to talk about 2020 at a minimum of where we see ourselves.
Okay. Thanks.
Thank you once again, ladies gentlemen, if you wish staff question at this time. Please press Star then one are you touched on telephone.
Our next question comes from Matthew Mission with Keybanc. Your line is open.
Hi, good afternoon, Curt Todd Thanks for taking the questions and next quarter.
Thank you.
I'm going to get to in here.
In the one on gross margin and then and then wanted an update on the on free cash flow for the year.
You talked about the moving pieces of the gross margin improvement year over year.
And then you always talked about if you could bring leverage volume through your facilities.
To be able to drive a lot of leverage.
Potentially we're starting to see that right now I'm, just curious where you are integrating buffalo filter.
And Airseal into two main manufacturing operations and then just lastly, just could you just give us an update on what your thoughts are around operating cash flow and capex.
For the year.
Sure I'll try and hit those if I, if I Miss it Matt you'll have to remind me.
First of all the moving pieces of gross margin. So the way we look at it we talk about price FX and then we combined volume and cost improvements.
Together, so for Q3 price impact on gross margins price was a negative 60 basis points.
FX was actually positive 10 basis points, this quarter and and the combination of volume and cost improvements was 220 basis points, So thats, where the 170.
Benefit comes from and year to date, it's it's a very similar kind of profile and were 140 basis points better year to date.
You asked about.
Buffalo filter integration. So that is just beginning on the operation side. So really we havent done anything up until now to integrate so that will be happening over the next.
Zero six months to two a year.
And Eric we did in source some of our air steel product not all but some of our key products. We've we did that earlier this year and Thats gone really well actually a little better than we expected it to so that's that's part of what's contributing.
On to the to the positive outcome.
Operating cash flow.
And free cash flow it is consistent with our expectations at the beginning of the year. If you'll remember we guided to 85 to 95 on operating cash flow and Capex of 15 to 18.
I think we're very close to those ranges with the one adjustment for the acquisition and the debt in the fees related to the acquisition right. So there was about $20 million of one times.
That hit operating cash flow from the transaction if you exclude that.
We'd be right in line with that original expectation for the year on cash flow.
Thank you.
Thank you. Our next question is far from Kristen Stewart with Barclays. Your line is open.
Hi, Thanks, a follow up just a quick one for me are you guys seen any changes at all in your customer base just from a hospital capital equipment spending environment at all on either in the us there.
Any geography is outside the United States. Thanks.
I don't think we've seen anything any real change in the the nature capital spending either in the U.S. market or outside the us at this point in time, Chris and it seems to be the business as usual and we've had a solid growth quarter on capital as it relates the CONMED portfolio. So I think we see things pretty stuff.
I'd as weak as we look forward here.
Nothing kind of changing as you look at your order book, there or anything like that.
No.
Okay No no change.
Experiment.
Thank you.
I'd now like to turn the call back over to Mr. Hartman for any closing remarks Mr. Hartman.
Thank you Shannon I just wanted to thank everybody for your time today and we look forward to speaking with you on our next earnings call. Thank you everybody.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.