Q4 2019 Earnings Call

January 29, 2020

Operator 2: Good afternoon, everyone. Before the conference call begins, let me remind you that during this call, management will be making comments and statements regarding its financial outlook and its plans and objectives, which represent forward-looking statements that involve risks and uncertainties as those terms are defined under the federal securities laws. Investors are cautioned that any such forward-looking statements are not guarantees of future events, performance or results. The company's actual results may differ materially from its current expectations.

Operator: Good afternoon, everyone. Before the conference call begins, let me remind you that during this call, management will be making comments and statements regarding its financial outlook and its plans and objectives, which represent forward-looking statements that involve risks and uncertainties as those terms are defined under the federal securities laws. Investors are cautioned that any such forward-looking statements are not guarantees of future events, performance or results. The company's actual results may differ materially from its current expectations.

Good afternoon, everyone before the conference call begins let me remind you that during this call management will be making comments the statements regarding its financial outlook and its plans and objectives, which represent forward looking statements that involve risks and uncertainties as those terms are defined under the federal securities laws.

Investors are cautioned that any such forward looking statements are not guarantees of future events performance or results and the company's actual results may differ materially from its current expectations.

Todd Garner: Please refer to the risks and other uncertainties disclosed under forward-looking information in today's press release, as well as the company's SEC filings for more details on the risks and uncertainties that may cause actual results to differ materially. The company disclaims any obligation to update any forward-looking statements that may be discussed during this call, except as may be required by applicable law. You will also hear management refer to certain non-GAAP adjusted measurements during this discussion. While these figures are not a substitute for GAAP measurements, management uses these figures to aid in monitoring the company's ongoing financial performance from quarter to quarter and year to year on a regular basis, and for benchmarking against other medical technology companies.

Operator: Please refer to the risks and other uncertainties disclosed under forward-looking information in today's press release, as well as the company's SEC filings for more details on the risks and uncertainties that may cause actual results to differ materially. The company disclaims any obligation to update any forward-looking statements that may be discussed during this call, except as may be required by applicable law. You will also hear management refer to certain non-GAAP adjusted measurements during this discussion. While these figures are not a substitute for GAAP measurements, management uses these figures to aid in monitoring the company's ongoing financial performance from quarter to quarter and year to year on a regular basis, and for benchmarking against other medical technology companies.

Please refer to the risks and under our other uncertainties disclosed under forward looking information in today's press release as well as the company's FCC filings for more details on the risks and uncertainties that may cause actual results to differ materially.

The company disclaims any obligation to update any forward looking statements that may be discussed during this call, except as maybe required by applicable law.

You will also hear management refer to certain non-GAAP adjusted measurements starting this discussion.

While these figures are not substitute forgot measurements management uses these figures to eat in monitoring the company's ongoing financial performance from quarter to quarter and year to year on a regular basis and for benchmarking against other medical technology companies.

Todd Garner: 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 reconciliation supporting the company's earnings releases posted to the company's website. With these required announcements completed, I will turn the call over to Curt Hartman, CONMED's President and Chief Executive Officer, for opening remarks. Mr. Hartman?

Operator: 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 reconciliation supporting the company's earnings releases posted to the company's website. With these required announcements completed, I will turn the call over to Curt Hartman, CONMED's President and Chief Executive Officer, for opening remarks. Mr. Hartman?

Adjusted net income and adjusted earnings per share Metro the income at the company.

Adding credits or charges that are considered by the company to be special or outside of its normal ongoing operations.

He is adjusting items for specified in the reconciliation supporting the company's earnings releases supposed to visit the company's website.

But these required announcements completed I will turn the call over to Curt Hartman comments, President and Chief Executive Officer for opening remarks Mr. Hartman.

Thank you Jamie good afternoon. Thank you for joining us for Conmeds fourth quarter and full year 2019 earnings call.

Curt Hartman: Thank you, Jimmy. Good afternoon, and thank you for joining us for CONMED's Q4 and full year 2019 earnings call. With me on the call is Todd Garner, Executive Vice President and Chief Financial Officer. Today, I will provide a brief overview of the financial and operating highlights for the Q4 and the full year. Todd will then provide a more detailed analysis of our financial performance and discuss our 2020 financial guidance. After that, we will open the call to your questions. Turning to our results, total sales for the Q4 were $264.9 million, representing a year-over-year increase of 9.2% as reported, and an increase of 9.3% in constant currency.

With me on the call as Todd Garner Executive Vice President and Chief Financial Officer Today, I will provide a brief overview of the financial and operating highlights for the fourth quarter and the full year.

Todd will then provide a more detailed analysis of our financial performance and discuss our 2020 financial guidance. After that we will open the call to your questions.

Turning to our results total sales for the fourth quarter were 264.9 million, representing a year over year increase of 9.2% as reported and an increase of 9.3% in constant currency organic sales growth in the quarter, which excludes the impact of Buffalo filter was 2.6% in constant currency.

Curt Hartman: Organic sales growth in the quarter, which excludes the impact of Buffalo Filter, was 2.6% in constant currency basis. On a pro forma basis, if we had owned Buffalo Filter in 2018, our growth for Q4 2019 would have been 4.6%. While the absolute revenue number in the quarter was in line, given the disruption we projected, Buffalo Filter was especially strong, and Global Orthopedics was below expectations. For the full year, sales reached $955.1 million, representing a year-over-year increase of 11.1% as reported, and 11.7% in constant currency, with organic sales growth of 5.9%.

Basis on a pro forma basis, if we had owned Buffalo filter in 2018, our growth for the fourth quarter of 2019 would have been 4.6% well the absolute revenue number in the quarter was in line given the disruption we projected Buffalo filter was especially strong in global orthopedics was below expectations.

Yes.

For the full year sales reached 955.1 million, representing a year over year increase of 11.1% as reported and 11.7% in constant currency <unk>.

Organic sales growth of 5.9% on a pro forma basis, if we had own Buffalo filter in 2018, our topline growth for 2019 would've been 7.3%.

Curt Hartman: On a pro forma basis, if we had owned Buffalo Filter in 2018, our top line growth for 2019 would have been 7.3%. From an earnings perspective during Q4, our GAAP net income totaled $14.9 million. This compares to net income of $15.7 million in Q4 of 2018. Excluding special items that affected comparability, our adjusted net income of $26.8 million increased 26.5% year-over-year, and our adjusted diluted net earnings per share of $0.90 increased 23.3% year-over-year. For the full year, our GAAP net income totaled $28.6 million compared to net income of $40.9 million in 2018.

From an earnings perspective during the fourth quarter. Our GAAP net income totaled 14.9 million. This compares to net income of 15.7 million in the fourth quarter of 2018.

Excluding special items that affected compared ability our adjusted net income of 26.8 million increased 26.5% year over year and our adjusted diluted net earnings per share of 90 cents increased 23.3% year over year.

For the full year, our GAAP net income totaled 28.6 million compared to net income of 40.9 million in 2018.

Curt Hartman: Excluding special items that affected comparability, our adjusted net income of $77.9 million increased 24% year-over-year, and our adjusted diluted net earnings per share of $2.64 increased 21.1% year-over-year. We are very pleased with the 2019 performance, which we believe positions us for success in 2020 and over the long term. In 2019, we are proud of our efforts around the continued introduction of innovative products across many of our businesses, the successful acquisition and performance of the Buffalo Filter assets, the addition of 2 new directors, the acceleration of the sales force expansion, international channel evolution, and finally, strong full-year revenue and adjusted earnings growth. Overall, we made the right strategic investments to build a foundation for sustainable long-term growth.

Excluding special items that affected compared ability our adjusted net income of 77.9 million increased 24% year over year and our adjusted diluted net earnings per share of $2.64 increased 21.1% year over year.

We're very pleased with the 2019 performance, which we believe positions us for success in 2020 and over the long term in 2019, we're proud of our efforts around the continued introduction of innovative projects across many of our businesses. The successful acquisition of performance with the Buffalo filter assets. The addition of two new directors.

The acceleration of the Salesforce expansion International channel evolution, and finally strong full year revenue and adjusted earnings growth.

Overall, we made the right strategic investments to build the foundation for sustainable long term growth.

Curt Hartman: I'm pleased with where we stand today with good momentum on the top and the bottom lines, as evidenced by our adjusted EBITDA margin reaching 20% for the first time in Q4 of 2019. As we move to 2020, we are focused on building off this momentum and delivering above-market revenue and earnings growth as evidenced by our outlook. Finally, it's worth noting that in February, CONMED will celebrate the 50th year since the company's founding by Eugene Corasanti. We think Gene would be proud of his company today, and based on our guidance, this should also be the year that we exceed $1 billion in revenue, a fitting accomplishment to highlight the 50-year anniversary. With that, I'll turn the call over to Todd, who will provide a more detailed analysis of our performance and discuss our financial guidance. Todd?

I'm pleased with where we stand today with good momentum on the top and bottom lines as evidenced by our adjusted EBITDA margin, reaching 20% for the first time in Q4 of 2019.

As we moved to 2020, we are focused on building off this momentum and delivered above market revenue and earnings growth as evidenced by our outlook.

Finally, it's worth noting that in February Conmeds will celebrate the fiftyth year since the company's founding by Eugene Khorasani, We think gene would be proud of this company today and based on our guidance. The should also be the year that we exceed 1 billion in revenue. The finished fitting accomplishment to highlight the 50 year anniversary with that I'll turn the call were to Todd who will.

Provide a more detailed analysis of our performance and discuss our financial guidance Todd. Thank you Kurt.

Todd Garner: Thank you, Curt. As Curt mentioned, our Q4 sales totaled $264.9 million, which represents an increase of 9.2% on a reported basis and 9.3% in constant currency. The demand for Buffalo Filter products continues to be very strong, and we sold $16.2 million of this exciting product line in Q4. As we previewed on our Q3 call, our Q4 organic sales results were below trend due in part to channel changes and sales force expansions that we brought forward into 2019. Part of this increased investment in the sales force is in response to the significant attention that Buffalo Filter has required from our existing sales reps.

As Curt mentioned, our fourth quarter sales totaled $264.9 million, which represents an increase of 9.2% on a reported basis and 9.3% in constant currency.

The demand for Buffalo filter products continues to be very strong and we sold $16.2 million of this exciting product line in Q4.

As we previewed on our Q3 call. Our Q4 organic sales results were below trend due impart to channel changes and Salesforce expansions that we brought forward into 2019.

Part of this increased investment in the Salesforce is in response to the significant attention the Buffalo filter has required from our existing sales reps.

Todd Garner: This is obviously a high-quality problem, but the strength in Buffalo Filter demand this year has actually lowered our organic growth metric from what it would have otherwise been. In Q4, as Curt said, our organic growth was 2.6%, and if we had owned Buffalo Filter in the prior year, it would have been 4.6%.

This is obviously a high quality problem, but the strength in Buffalo filter demand. This year has actually lowered our organic growth metric from what it would have otherwise been.

In Q4, as Curt said organic growth was 2.6% and if we don't Buffalo filter in the prior year it would've been 4.6%.

For the full year sales totaled $955.1 million, which represents an increase of 11.1% as reported an 11.7% on a constant currency basis.

Todd Garner: For the full year, sales totaled $955.1 million, which represents an increase of 11.1% as reported, and 11.7% on a constant currency basis. Our organic growth was 5.9% for the year, but if we had owned Buffalo Filter in the prior year, our organic growth rate in 2019 would have been 7.3%. All remaining sales growth numbers I reference today will be given in constant currency. The reconciliation to GAAP numbers is included in our press release. For Q4 of 2019, our domestic sales increased 13.8% versus the prior year period, while international sales increased 4.5%. Worldwide orthopedics revenue decreased 0.6% in Q4.

Our organic growth was 5.9% for the year, but if we don't Buffalo filter in the prior year, our organic growth rate in 2019 would have been 7.3%.

All remaining sales growth numbers I referenced today will be a given in constant currency. The reconciliation to GAAP numbers is included in our press release.

The fourth quarter of 2019, our domestic sales increased 13.8% versus the prior year period, while international sales increased 4.5%.

Worldwide Orthopedics revenue decreased 0.6% in the fourth quarter.

Approximately 30% of our orthopedic revenue is capital sales and as you know capital can be lumpy from quarter to quarter.

Todd Garner: Approximately 30% of our Orthopedic revenue is capital sales, and as you know, capital can be lumpy from quarter to quarter. Q4 2019 was weaker than we expected on the capital side and faced a comparable quarter in the prior year that was the strongest capital quarter in memory. Our disposable and procedural products continue to grow nicely, and we are confident our new product pipeline will allow our Orthopedic business to grow faster than the market over the long term. Worldwide General Surgery revenue grew 19.8% in Q4, driven by strong performances across the product portfolio. Turning now to full year results. Our domestic sales increased 15.2% versus 2018, while international sales increased 7.9%. Worldwide Orthopedics revenue increased 4.5% year over year, and Worldwide General Surgery revenue grew 19.4%.

Q4, 2019 was weaker than we expected on the capital side and faced a comparable quarter in the prior year that was the strongest capital quarter in memory.

Disposable and procedural products continue to grow nicely and we're confident our new product pipeline will allow our orthopedic business to grow faster than the market over the long term.

Worldwide General surgery revenue grew 19.8% in the fourth quarter, driven by strong performances across the product portfolio.

Turning now to full year results, our domestic sales increased 15.2% versus 2018, while international sales increased 7.9%.

Worldwide Orthopedics revenue increased 4.5% year over year and worldwide General surgery revenue grew 19.4%.

As we look to 2020, we expect total company worldwide organic constant currency revenue growth to be between 7.0 and 7.5%.

Todd Garner: As we look to 2020, we expect total company worldwide organic constant currency revenue growth to be between 7.0% and 7.5%, with currency being a headwind of approximately 120 to 150 basis points based on current exchange rates. We estimate about $5 million of inorganic sales from Buffalo Filter in 2020, which should result in a range of reported revenue between $1.013 billion and $1.020 billion. As Curt said, despite the currency headwind, we expect to cross the billion-dollar revenue mark in the year of our fiftieth anniversary, and we expect the second billion will come much more quickly than the first. Now let's move to the expense side of the income statement.

With currency being a headwind of approximately 120 to 150 basis points based on current exchange rates.

We estimate about $5 million of inorganic sales from Buffalo filter in 2020.

Which should result in a range of reported revenue between a billion 13 and a billion 20.

So as Curt said, despite the currency headwind, we expect across a billion dollar revenue mark in the year of our Fiftyth anniversary and we expect a second billion will come much more quickly than the first.

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 impairments charges related to acquisitions restructurings legal matters and amortization of intangible assets net of tax.

Todd Garner: For comparative purposes, I will discuss the P&L performance excluding special items, which include impairments, charges related to acquisitions, restructuring, legal matters, and amortization of intangible assets net of tax. A reconciliation to GAAP numbers is included in our press release. Adjusted gross margin for Q4 was 54.1%, which was lower than we expected. As we've talked about before, the timing of manufacturing variances can occasionally create lumpiness in gross margins in a given period, and that was the case this quarter. As an example, if we isolate just the timing of how manufacturing variances hit the P&L, it benefited gross margins in Q4 2018 by 30 basis points, but was unfavorable to gross margins by 80 basis points in Q4 2019. The good news on gross margins is that they increased 80 basis points on a full year basis over 2018.

A reconciliation to GAAP numbers is included in our press release.

Adjusted gross margin for the fourth quarter was 54.1%, which was lower than we expected.

As we've talked about before the timing of manufacturing variances can occasionally create lumpiness in gross margins in a given period and that was the case this quarter.

As an example, if we isolate just the timing of how manufacturing variances hit the piano. It benefited gross margins in Q4, 2018 by 30 basis points, but was unfavorable to gross margins by 80 basis points in Q4 2019.

The good news on gross margins is that they increased 80 basis points on a full year basis over 2018.

Todd Garner: As we look forward, we expect gross margins to continue this trajectory of improvement, delivering between 80 and 100 basis points of improvement for the full year 2020, despite approximately 30 to 40 basis points of expected headwind from FX. The way you should think about this throughout the year due to accounting rules is that Q1 will show year-over-year improvement, but it will be well below the anticipated full year range, and as the year progresses, our gross margin improvement will strengthen and deliver between 80 and 100 basis points for the full year. Research and development expenses for the Q4 were 4.6% of total sales and grew approximately 17% over the prior year quarter on a dollar basis.

As we look forward, we expect gross margins to continue this trajectory of improvement delivering between 80 and 100 basis points of improvement for the full year 2020, Despite approximately 30 to 40 basis points of expected headwind from FX.

The way you should think about this throughout the year due to accounting rules is the Q1 will show year over year improvement, but it will be well below the anticipated full year range and as the year progress is our gross margin improvement will strengthen and deliver between 80 and 100 basis points for the full year.

Research and development expenses for the fourth quarter were 4.6% of total sales and grew approximately 17% over the prior year quarter on a dollar basis.

Todd Garner: For the full year 2019, we increased our adjusted R&D expense by approximately 20% and came in at 4.8% of sales for the full year. Looking forward, we will continue to expect R&D to be between 4.5% and 5.0% of sales in 2020. Q4 SG&A expenses on an adjusted basis were 35.3% of total sales, reflecting an improvement of 210 basis points compared to Q4 2018. Full year 2019 adjusted SG&A was 37.8% of sales, an improvement of 130 basis points over the full year 2018, which was significantly better than we guided to at the beginning of the year. As we grow and our product offering expands, it is important to consistently match our resources to our opportunities.

For the full year 2019, we increased our adjusted R&D expense by approximately 20% and came in at 4.8% of sales for the full year.

Looking forward, we will we will continue to expect R&D to between to be between 4.5% and 5.0% of sales in 2020.

Fourth quarter SGN expenses on an adjusted basis were 35.3% of total sales, reflecting an improvement of 210 basis points compared to Q4 2018.

Full year 2019, adjusted EPS Gionee was 37.8% of sales and improvement of 130 basis points over the full year 2018, which was significantly better than we guided to at the beginning of the year.

As we grow and our product offering expands it is important to consistently match our resources to our opportunities.

Todd Garner: After Q3, we talked about some changes we are making as a result of that assessment. These changes were primarily in US general surgery and certain international markets across all product lines. Today, we are announcing the next phase of changes we are making to improve the future growth of the company, which is focused on our US orthopedic sales team. As you know, we have put significant investment over the past few years into an innovative product pipeline in orthopedics. As those products become available as 2020 unfolds, we have taken a fresh look at our sales resources to make sure we are best equipped to deliver these innovative solutions to the marketplace. As a result, we are both adding sales territories and changing sales resources in select markets. These moves will increase SG&A in advance of the productivity of those additional resources, especially in Q1.

After Q3, we talked about some changes, we're making as a result of that assessment.

These changes were primarily in us general surgery, and certain international markets across all product lines.

Today, we are announcing the next phase of changes, we're making to improve the future growth of the company, which is focused on our U.S. orthopedic sales team.

As you know we have put significant investment over the past few years into an innovative product pipeline in orthopedics.

As those products become available as 2020 unfolds, we have taken a fresh look at our sales resources to make sure. We're best equipped to deliver these innovative solutions to the marketplace.

As a result, we are both adding sales territories and changing sales resources in select markets.

These moves will increase SGN a in advance of the productivity of those additional resources, especially in Q1.

Todd Garner: We believe these changes will strengthen our ability to grow above the market in the future. Despite these additional investments, we still expect SG&A as a percentage of sales to improve by approximately 10 to 40 basis points for the full year 2020, with increasing leverage as we move throughout the year. Interest expense for the full year 2019 was $30.9 million. As we look to 2020, we expect interest expense to be between $27 and 28 million. Our adjusted effective tax rate in Q4 was 15.9% compared to 23.3% in the prior year period. This was lower than we had forecasted, principally due to the excess tax benefit from stock options, which is difficult to predict.

We believe these changes will strengthen our ability to grow above the market in the future.

Despite these additional investments we still expect SGN, a as a percentage of sales to improved by approximately 10 to 40 basis points for the full year end 2020, with increasing leverage as we move throughout the year.

Interest expense for the full year 2019 was $30.9 million as we look to 2020, we expect interest expense to be between 27 and $28 million.

Our adjusted effective tax rate in the fourth quarter was 15.9% compared to 23.3% in the prior year period.

This was lower than we had forecasted principally due to excess tax benefit from stock options, which is difficult to predict.

Todd Garner: In Q4, that included the vesting of 5-year performance stock units that were granted as Curt undertook the rebuilding of CONMED 5 years ago. For the full year, the adjusted effective tax rate was 19.0% compared to 21.9% in 2018. As we talked about on the Q3 call, as we look to 2020, we can't count on that same level of benefits on the tax line that we received in 2019. Our normal statutory effective tax rate, given our mix of business, should be in the 24% to 25% range, so we will start 2020 with that guidance. Q4 GAAP net income totaled $15.0 million or $0.49 per diluted share compared to reported net income of $15.7 million or $0.54 per diluted share a year ago.

In Q4 that included divesting a five year performance stock units that were granted as Curt undertook the rebuilding of Conmeds five years ago.

For the full year, the adjusted effective tax rate was 19.0% compared to 21.9% in 2018.

As we talked about on the third quarter call as we look to 2020, we can't count on that same level of benefits on the tax line that we received in 2019.

Our normal statutory effective tax rate given our mix of business should be in the 24% to 25% range. So we will start 2020 with that guidance.

Fourth quarter GAAP net income told a $15.0 million or 49 cents per diluted share compared to reported net income of $15.7 million or 54 cents per diluted share a year ago.

Todd Garner: Excluding the impact of special items discussed earlier, our Q4 adjusted diluted net earnings per share were $0.90 versus $0.73 in the prior year period, representing growth of 23% for the quarter. That brings the full year adjusted cash EPS to $2.64, representing growth of 21% over the prior year, which was well above our original guidance for the year of 11% to 13%. We forecast full year 2020 adjusted diluted cash earnings per share in the range of $3.08 to $3.13, representing growth of approximately 17% to 19%. That's inclusive of $0.15 to $0.20 of FX headwind impacting EPS in 2020.

Excluding the impact of special items discussed earlier, our fourth quarter adjusted diluted net earnings per share were 90 cents versus 73 cents in the prior year period, representing growth of 23% for the quarter.

That brings the full year adjusted cash EPS to $2.64 representing growth of 21% over the prior year, which was well above our original guidance for the year of 11% to 13%.

We forecast full year 2020, adjusted diluted cash earnings per share in the range of $3, an eight cents to $3.13 representing growth of approximately 17% to 19%.

Thats inclusive of 15 to 20 cents of FX headwind impacting ETF impacting EPS in 2020.

As we look at the phasing of our financial performance throughout the year I would expect Q1 to be the toughest quarter from a revenue and profitability growth standpoint.

Todd Garner: As we look at the phasing of our financial performance throughout the year, I would expect Q1 to be the toughest quarter from a revenue and profitability growth standpoint. The investments we began making in Q4, and which continue today, will be mostly in the expense lines, but the sales productivity associated with these investments will come later. We are also watching the health situation in China closely. We will always prioritize the safety of our employees and customers over financial results. We have suspended travel in China, and our offices are currently closed. We hope the epidemic resolves quickly, but at this time we are erring on the side of caution. I'll remind you that China represents between 2% and 3% of our global sales.

The investments we began making in Q4 in which continued today will be mostly in the expense lines, but the sales productivity associated with these investments will come later.

We're also watching the health situation in China closely we will all his priorities, we will always prioritize the safety of our employees and customers over financial results, we have suspended travel in China and our offices are currently closed.

We hope the epidemic resolves quickly but at this time, we are erring on the side of caution.

Ill remind you that China represents between two and 3% of our global sales.

Todd Garner: For Q1, we expect 5% to 6% organic constant currency growth despite the extra day we get from Leap Day. As I mentioned a few minutes ago, we expect around $5 million of inorganic contribution from Buffalo Filter prior to its anniversary date. Our FX headwinds on the revenue line are more pronounced in the beginning of the year and get a little better each quarter as the year unfolds. For Q1, we project an FX headwind on the revenue line of 170 to 200 basis points. For adjusted cash EPS in Q1, our projection would be for it to grow high single digits or low double digits and then improve as the year progresses.

So for Q1, we expect 5% to 6% organic constant currency growth. Despite the extra day, we get from Leap day.

As I mentioned, a few minutes ago, we expect around $5 million of inorganic contribution from Buffalo filter prior to its anniversary date.

Our FX headwinds on the revenue line are more pronounced in the beginning of the year and get a little better each quarter as the year unfolds for Q1, we projected FX headwind on the revenue line.

170 to 200 basis points.

For adjusted cash EPS in Q1, our projection would be for it to grow high single digits or low double digits, and then improve as the year progresses.

As we look at the phasing for the rest of the year, the only meaningful adjustment to call out at this point is that Q2 has one less day than the prior year. So we would expect constant currency revenue growth to be between 100 150 basis points lower than our full year guidance range in Q2.

Todd Garner: As we look at the phasing for the rest of the year, the only meaningful adjustment to call out at this point is that Q2 has 1 less day than the prior year, so we would expect constant currency revenue growth to be between 100 and 150 basis points lower than our full year guidance range in Q2. Looking at the balance sheet, our cash balance at the end of the year was $25.9 million, compared to $30.1 million as of 30 September. Accounts receivable days as of 31 December were 64 days compared to 67 days a year ago. Inventory days at year-end were 121 compared to 127 a year ago.

Looking at the balance sheet, our cash balance at the end of the year was $25.9 million compared to $30.1 million as of September thirtyth.

Accounts receivable days as of December 31 were 64 days compared to 67 days a year ago inventory days at year end were 121 compared to 127 a year ago.

Long term debt at the end of the year was $753.6 million versus 780.7 million at September 30.

Todd Garner: Long-term debt at the end of the year was $753.6 million versus $780.7 million at 30 September. Our leverage ratio at 31 December was 4.4x. Cash flow from operations for the year was $95.1 million compared to $74.7 million in 2018. Capital expenditures were $20.1 million compared to $16.5 million in the prior year. In 2020, we expect operating cash flow to be between $110 and $120 million, with capital expenditures around $20 million. With that, we'd like to open the call to your questions, and I'll hand it back to Jimmy.

Our leverage ratio at December 31 was 4.4 times.

Cash flow from operations for the year was $95.1 million compared to $74.7 million in 2018.

And capital expenditures were $20.1 million compared to 16.5 million in the prior year.

In 2020, we expect operating cash flow to be between 110 and $120 million with capital expenditures around $20 million.

With that we'd like to open the call to your questions and I'll hand, it back to Jimmy.

Operator 2: Thank you. As a reminder, to ask a question, you will need to press star then one on your touch tone telephone. To withdraw your question, press the pound key. We ask that, in the interest of time, you please keep to one question and one follow-up question before rejoining the queue. Again, to ask a question, please press star then one on your touch tone telephone. We'll take a moment to see if any questions appear in the queue. Our first question comes from Robbie Marcus with JPMorgan. Your line is now open.

Operator: Thank you. As a reminder, to ask a question, you will need to press star then one on your touch tone telephone. To withdraw your question, press the pound key. We ask that, in the interest of time, you please keep to one question and one follow-up question before rejoining the queue. Again, to ask a question, please press star then one on your touch tone telephone. We'll take a moment to see if any questions appear in the queue. Our first question comes from Robbie Marcus with JPMorgan. Your line is now open.

Thank you as a reminder to ask a question you will need to press Star then one on your touched on telephone to withdraw your question press the pound key we ask that the in the interest a time. Please keep to one question and one follow up question before rejoining the queue.

Again to ask a question. Please press Star then one on your Touchtone telephone.

Well take a moment to see if any questions appearing to Q.

And our first question comes from Robbie Marcus with Jpmorgan. Your line is now open.

Thanks for taking the question.

Robbie Marcus: Thanks for taking the question. Maybe one on Q4 and one on 2020. If we start with Q4, you did a good job highlighting that there'd be sales force disruption in the quarter. I was wondering if you could get into a little more detail of exactly, you know, where you undertook the sales force restructuring in surgery, the impact it had, and why you think there was the underperformance you talked about within the orthopedics business.

Maybe one on for Q1, one on 2020, if we start with fourth quarter you did a good job highlighting that there'd be salesforce disruption in the quarter. I was wondering if you could get into a little more detail as to exactly.

Were you you undertook the salesforce.

Restructuring in surgery the impact it had.

And why you think there was the underperformance you talked about.

Within the orthopedics business.

Sure Rob Let me, let me start with where we undertook the salesforce restructuring on the third quarter call. We said, we're going to pull forward. Some salesforce restructure and we did that because we were in a position to do that we had been watching these parts of the business specifically the general surgery side of the business.

Curt Hartman: Sure, Robbie. Let me start with where we undertook the sales force restructuring. On the Q3 call, we said we were gonna pull forward some sales force restructure, and we did that because we were in a position to do that. We had been watching these parts of the business, specifically the general surgery side of the business and some international markets focused on all products, whether they were selling orthopedics or general surgery. As we moved into the Q4, we had notified people in those markets that this was going to happen, and we started cascading that through. Part of that involved hiring new people, a lot of which we accomplished in the Q4, not 100%, but a lot of it was accomplished in the Q4.

And some international markets focused on all products, whether they were selling orthopedics or general surgery, and so as we moved into the fourth quarter. We had notified people in those markets. At this was going to happen and we started cascading that through part of that involved hiring new people a lot of which we.

Competition in the fourth quarter, not 100%, but a lot of it was accomplished in the fourth quarter outside the U.S. It was around channels, where we looked in set are we going direct our we change into distributor or are we doing a mix as may be the case in some markets and it could have been on the orthopedic side or it could have been on the general surgery side.

Curt Hartman: Outside the US, it was around channels where we looked and said, "Are we going direct? Are we changing a distributor or are we doing a mix," as may be the case in some markets. It could have been on the orthopedic side or it could have been on the general surgery side. As you look at that body of activity, it's inherent that it's gonna cause some disruption for existing sales reps who, number one, have a fear of losing geography that they may have been working in for an extended period of time, and they're trying to understand what they're gonna have left as they go into the new year.

As you look at that.

Body of activity its inherent that it's going to cause some disruption for existing sales reps, who number one have a fear of losing geography that they may have been working in for an extended period of time and they're trying to understand what they're going to have left as they go under the new year. It also.

Curt Hartman: It also has the opposite effect, and I think we saw some of that as an example in Buffalo Filter, where sales force knew that was a very appealing product in the market, and they had a lot of activity going on, and they wanted to capitalize on it while they could in the Q4 before they lost that geography and that sales opportunity. That's a little bit of the sales force expansion. On Orthopedics, I think I'd take you back to what Todd said. About 30% of that business is capital. We have, if you look back over our results over the last 2 years, really, we've had very good capital performance every quarter for effectively 2 years.

Has the opposite effect and I think we saw some of that as an example in Buffalo filter. We're salesforce knew that was a very appealing product in the market and they had a lot of activity going on and they wanted to capitalize on it while they could in the fourth quarter before they lost that geography and that sales opportunity.

So that's a little bit of the Salesforce expansion on orthopedics I think I'd take you back to what Todd said about 30% of that business is capital. We have if you look back over our results over the last two years really we've had very good capital performance every quarter for effectively two years.

Curt Hartman: The Q4 of last year was a really strong capital quarter, and we just didn't get the capital orders in to get us over the hill on that business. A little bit disappointed there. Don't think it has anything to do with the macro perspective. Think the capital markets are still strong. We just didn't get the performance done, the work done that we needed to get where we wanted to get.

And the fourth quarter of last year was a really strong capital quartered. We we just didn't get the capital orders into get us over the hill on that and that business. So little bit disappointed there I don't think isn't as anything you do have the macro perspective, I think the capital markets are still strong we just didn't get the performance done the work done that we needed to get.

We wanted to get.

Great color and maybe just on 2020.

Robbie Marcus: Great color. Maybe just on 2020, the sales guidance of 7 to 7.5 came in a lot better than, you know, I had been expecting, I think most people had been expecting. Maybe just walk us through the confidence or what gives you the confidence to start at such an elevated level here? Is it Buffalo Filter driving the majority of the upside or just, you know, walk us through what gives you that level of confidence. Thanks, guys.

The sales guidance of 77, and a half came in a lot better than.

I had been expecting I think most people have been expecting.

Let me just walk us through the confidence or what gives you the confidence to start at such an elevated level here is it buffalo filter driving the majority of the upside or just walk us through what gives you that that level of confidence thanks guys.

Todd Garner: Sure, Robbie. Thanks for the question. You know, it's actually not elevated from where we've been. Like I tried to explain in my script that organic growth throughout the year has been a little bit misleading, because Buffalo has been so strong and taken so much attention that really the more relevant number to focus on for our performance in 2019 is that pro forma growth. You know, what it would have been had we owned Buffalo in the prior year, and that was 7.3% for the full year. So that's really what the engine did in 2019. We expect continued momentum on all parts of the business.

Sure Robbie Thanks for the question.

Actually not elevated from where we've been like I tried to explain and in my script that organic growth.

Throughout the area has been a little bit misleading because buffalo has been so strong and taken so much attention that really the more relevant number to focus on out for our performance in 2019 is that pro forma growth. What it would have been ahead, we owned Buffalo in the prior year and that was 7.3 per se.

For the full year. So that's really what the engine did in 19, and so to guide seven to seven and a half that's kind of what we've been doing and we expect continued momentum.

On all parts of the business.

Todd Garner: We feel pretty good that that's a good place to start for the year. We think that's what the engine's doing.

And so we feel pretty good that that is that's a good place to start for the year, we think thats what the engines doing.

Todd Garner: We feel pretty good that that's a good place to start for the year. We think that's what the engine's doing.

Curt Hartman: Robbie, I would just add a lot of our confidence comes in the pipeline. Last year, I said this in my opening comments, we introduced a lot of innovation across all of our businesses. You don't fully realize the benefit of that innovation the year that you release. Candidly, some of those introductions which occurred at trade shows didn't really get into the market fully as a system until H2. As we go into 2020, we've got that time under our belt. Those platforms are now out. We had our biggest year ever in medical education and training last year with customers. We think all those various strategic investments that occurred in 2019 just help us build as we get into 2020.

Robbie I would I'd just add a lot of our confidence comes in the pipeline and last year and I said. This in my opening comments, we introduced a lot of innovation across all of our businesses you don't fully realize the benefit of that innovation. The year that you release in candidly some of those introductions, which occurred at trade shows didnt really get into that.

Market.

Fully as a system until the second half of the year. So as we go into 2020, we've got that time under our belt. Those platforms are now out we had a with our biggest year ever and medical education and training last year with customers. So we think all those various strategic investments that occurred in 19, just help us build as we.

Get into 2020.

Todd Garner: I would actually just clarify a little bit of what Curt just said. We announced a bunch of products. Some of those, even sitting here today, still actually aren't cleared yet. They're still going through the regulatory process. Some of them aren't even out in the market yet, right? They're coming still. The pipeline, you know, as we look forward, we expect more from that pipeline in the future than what we've had in the past.

It actually just clarify a little bit of what purchase said.

We announced a bunch of products some of those even sitting here today still actually aren't clear yet they're still going through the regulatory process. So some of them are uneven out in the market yet right so they're coming still.

So the pipeline.

As we look forward, we expect more from that pipeline in the future than what we've had in the past.

Great appreciate the color. Thank you.

Robbie Marcus: Appreciate the color. Thank you.

Thank you. Our next question comes from Matthew Mission with Keybanc. Your line is now open.

Operator 2: Thank you. Our next question comes from Matthew Mishan with KeyBanc Capital Markets. Your line is now open.

Operator: Thank you. Our next question comes from Matthew Mishan with KeyBanc Capital Markets. Your line is now open.

Matthew Mishan: Great, thank you for taking the questions. I wanted to start with the gross margin guidance. You guys have, like, previously communicated that you expected, and I don't wanna put words in your mouth, but 50 to 100 basis points of gross margin expansion per year. I think inherent in the guidance is some acceleration there, especially given the FX headwind. I'm just curious as to what some of the incremental drivers of that inherent acceleration are for 2020.

Great and thank you for taking the question.

I wanted to start with the gross margin guidance you guys as previously communicated.

You expected 50 and want to put words in your math, but 50 to 100 basis points of gross margin expansion.

Per year, I think inherent in the guidance is some acceleration there, especially given the FX headwind.

So just curious as to as to what some of the incremental drivers of that inherit an acceleration.

For 2020.

Sure Matt Good question and you Didnt put the words in our mouth, we put those words in our mouth, you're right. That's what we've said on kind of a long term repeatable basis. We've said that we would expect 50 to 100 basis points of improvement in gross margin every year.

Todd Garner: Sure, Matt. Good question. You didn't put the words in our mouth, we put those words in our mouth. You're right. We-

Matthew Mishan: Okay.

Todd Garner: That's what we said on a kind of a long-term repeatable basis. We've said that we would expect, you know, 50 to 100 basis points of improvement in gross margin every year. You know, 2020 looks like a better year based on what the team was able to accomplish in 2019. As we've updated our cost at the end of the year, you know, we do a cost roll on December 31 and roll it into our standard margins. It was a strong year. We're out of the gates, I think a little better than we are normally. We feel good about the volumes. We feel good about the mix of new products. The new products are all accretive to our margin profile.

2020, it looks like a better year based on what the team was able to accomplish in 2019 and as Weve updated our cost.

We ended the year ago, we do a cost roll on December 31, and roll it into our standard margins.

And it would it was a strong year so.

We're out of the gates I think a little better than we are normally and we feel good about the volumes we feel good about the mix of new products new products are all accretive to our margin profile.

Todd Garner: As we specifically look at 2020, it looks like a strong year for gross margins. As you said, that's despite absorbing, you know, a meaningful headwind from FX. We're pretty pleased with the 2020 guide on margins.

And so as we specifically look at 2020, it looks like a strong year for gross margins and as you said that's despite absorbing.

A meaningful headwind from FX so.

We're pretty pleased with with the 2020 guide on margins.

Matthew Mishan: Okay, excellent. How should we think about the balance of growth for next year between Orthopaedics and General Surgery?

Okay excellent.

And then how should we think about the balance of growth.

For next year between orthopedics and general surgery.

Yes, that's a great question.

Todd Garner: You know, that's a great question. We expect both to grow above markets. I think orthopedics, because of the changes we're making just now, will probably be muted a little bit as the year starts and should get better as the year goes on. The investments that we talked about after the Q3 call on the general surgery side were, you know, that also has the same kind of disruption, but we started that earlier, so hopefully those benefits, we'll see those earlier in 2020. In general, I would say, you know, we expect all sides of the business to grow faster than their markets. We feel like we did that in 2019, and we expect to do that again in 2020.

We expect both to grow above markets.

I think orthopedics because of the changes, we're making just now we'll probably be muted a little bit as the year starts and should get better as the year goes on.

The investments that we talked about after the Q3 call on the general surgery side.

That also has the same kind of disruption, but we started that earlier so hopefully those benefits, we'll see those earlier in 2020.

But in general I would say we expect.

All sides of the business to grow faster than their markets.

And we feel like we did that in 2019, and we expect to do that again in 2020.

Matthew Mishan: Okay. Thanks, Todd.

Okay. Thanks, Todd Thanks.

Thank you. Our next question comes from Kristen Stewart with Barclays. Your line is now open.

Operator 2: Thank you. Our next question comes from Kristen Stewart with Barclays. Your line is now open.

Operator: Thank you. Our next question comes from Kristen Stewart with Barclays. Your line is now open.

Kristen Stewart: Hey, good afternoon. I just wanted to circle back on the general or the orthopedic surgery business and just kind of get a little bit more detail on this capital that kind of sounds like it was a little bit of a tough quarter and whatnot, because we have seen some other companies with some contracts that have been pushed out and some other softer quarters. I understand your comments that it doesn't seem like it's more of a macro issue at this point, but it does seem like there are some other companies that are also saying it's not a macro issue, but some other quarters that have been coming in a little lighter as well.

Good afternoon.

To circle back on the general or the orthopedic surgery business, and just kind of get a little bit more detail on this capital.

That that kind of sounds like it little bit of a tough quarter or whatnot, we have seen some other.

Companies with some contracts that have been pushed out and some other softer quarter. So I understand your comments that it doesn't seem like it's more about macro issue at this point, but it does seem like there are.

Some other companies that are also saying, it's not a macro issue, but at some other quarters that I think coming in a little lighter as well.

Kristen Stewart: Was this a contract that has been pushed or business that was just lost that will come back in Q1? It sounds to me like Q1 should be also a little bit softer because of some of the sales disruptions. Any additional color that you could just add on what type of products this is? I know you have some of the visualization products that are in there that has generally been the lumpier side of orthopedic surgery. Just any additional color there, and then I'll probably have a follow-up, too.

Just a contract that that has been put last year business that mission loss that that will come back in the first quarter. It sounds to me like one Q should be also a little bit softer because of some of the south disruptions and any additional color that you can just add on what type of products. It says I know you.

I have some of the.

Visualization products that are in there that that has generally been lumpier side of orthopedic surgery, just any additional color there and then I'll probably have follow up too.

I think specifically as it relates to orthopedics. If you think about the capital that that is in that business. It is video that is the power tool platforms.

Curt Hartman: Yeah. I think specifically as it relates to orthopedics, if you think about the capital that is in that business, it is video, it is the power tool platforms. We've had good success the last couple of years. We had the MicroFree platform, still a very relevant platform, still doing very well. The other parts of the capital within ortho are a little bit aged, and we need to be a little more competitive there. I really don't believe it is a macro perspective, Kristen. I think it's really our performance. We had some operational issues that slowed us down a little bit. We are working hard to get in front of that.

We've had good success. The last couple of years, we had the micro free platform still a very relevant platform still doing very well, but the other parts of the capital within north or a little bit aged and.

We need to be a little more competitive there.

And I really don't believe it is a macro perspective, Chris and I think it's really our performance we had some operational issues that slowed us down a little bit.

We are working hard to get in front of that and it's just to kind of combination of a bunch of small things that added up to and not a very good quarter and capital for US I think as Todd alluded to we step in the first quarter, we expect some disruption in ortho because of the sales changes. So we're not we're not guiding in the first quarter for for big over performance in North.

Curt Hartman: It's just a kind of combination of a bunch of small things that added up to not a very good quarter in capital for us. I think as Todd alluded to, we step into Q1, we expect some disruption in ortho because of the sales changes. We're not guiding in Q1 for big overperformance in ortho by any stretch. We do think as the year goes on, our ortho business will get better. I think Todd commented in his script as well, that on the procedural side where a lot of the innovation has occurred, things are continuing to move at a very nice pace there with new product acceptance and uptick.

So by any stretch, but we do think as year goes on our ortho business will get better and I think Todd.

Commented in his script as well that on the procedural side, where a lot of the innovation has occurred things are are continuing to move at a very nice pacer with new product acceptance and uptick.

Okay, and then just I guess Big picture you guys have always kind of said that youre feeling like the model has been kind of death.

Kristen Stewart: I guess big picture, you guys have always kind of said that you're feeling like the model has been kind of this at least mid-single digit growth, double digit bottom line, and now you're kind of guiding to 7 to 7.5, I guess, on the top line, which I guess is technically at least mid-single digits. Do you think now we're kind of setting the new kind of bar, I guess, with now thinking about Buffalo Filter being in the base and you've got AirSeal, those two parts of the businesses are now collectively a nice chunk and growing solidly strong double digits, that this is kind of setting kind of a new kind of baseline for what we should think about CONMED growing at, in the future, just overall from a top-line perspective?

At least mid single digit growth.

Couple digit bottom line and now you're kind of guiding to seven to seven a half I guess on the topline.

Which I guess is technically at least mid single digits, but do you think now we're kind of setting a new kind of bar I guess with now thinking about Buffalo filter being in the basin, you've got Airseal. Those two parts that businesses are now collectively a nice chunk and growing solidly strong double digit.

That this is kind of setting a new kind of baseline for for what we should think about conmeds going.

In the future.

Just overall from a top line perspective thanks.

Kristen Stewart: Thanks.

Thank you, Chris and Great question.

Todd Garner: Thank you, Kristen. Great question. You know, look, our the measure of success here is to grow faster than the markets, right? To do it sustainably, repeatedly. That's what we're focused on. You are correct that our guide, you know, of 7 to 7.5 is now technically above the mid-single digit range that we've talked about. You know, I think that kinda 6 to 8, you know, if you think about if we can define something between mids and highs and call it 6 to 8, I think that's actually where CONMED has been performing, you know, for the last couple of years, really, right? We've had a quarter or two either above or below that range, but I think 6 to 8 is kinda where the engine has been.

What are the measure of success here is to grow faster than the markets right and to do it sustainably repeatedly and.

And that's what we're focused on you are correct that our guide of seven to seven a half is now technically above the mid single digit range that we've talked about.

Yeah, I think that kind of six to eight.

If you think about if we can define something between meds and highs and call. It six to eight I think thats are actually where CONMED has been performing.

For the last couple of years really right. We've had we've had a quarter or to either above or below that range, but.

I think six to eight as kind of where the engine has been and and I think we're comfortable in that range right now and we certainly would not expect the business to slow down.

Todd Garner: I think we're comfortable in that range right now, and we certainly would not expect the business to slow down. We can define a CONMED, a current CONMED range and call it 6 to 8.

But I think so maybe we can we can define a cod conmeds current CONMED range and call it six to eight.

Okay, that's fair.

Kristen Stewart: Okay, that seems fair. Thanks very much. I'll jump back into queue.

Thanks very much.

Todd Garner: Thanks, Kristen Stewart.

Thanks, Greg.

Thank you. Our next question comes from Rick Rick Wise with Stifel. Your line is now open.

Operator 2: Thank you. Our next question comes from Rick Wise with Stifel. Your line is now open.

Operator: Thank you. Our next question comes from Rick Wise with Stifel. Your line is now open.

Okay.

Rick Wise: Good afternoon, Curt. Hi, Todd. Maybe just to start off, back on the sales force expansion discussion. You have been very clear that you were accelerating your investment there, your initiatives, your territory splitting. I just want to, if I could understand better, when do you think the process is gonna be completed, largely completed? Is it largely completed in Q1? Is it correct to assume if it is largely completed then that, as the year unfolds, probably more in the H2, that these initiatives support that acceleration as we move forward throughout 2020? Is that the right way to think about it?

Good afternoon current had Todd.

Maybe just start off.

Back on the Salesforce expansion discussion.

You have been very clear that you were excel rating your investment there your initiatives you're territory splitting and I just want to if I could understand better when do you think that process is going to be completed largely completed.

Largely completed in the first quarter.

And is that correct to assume if it is largely completed than that.

As the year unfolds, probably more in the back half that these initiatives.

Initiatives support that acceleration.

As we move toward.

Throughout 2020, that's the right way to think about it.

So so Rick Great question I'd break it down into the two parts the part that we announced on the third quarter.

Curt Hartman: Rick, great question. I would break it down into the two parts. The part that we announced on the Q3 really focused on the US general surgery and broadly international, agnostic of which product category we're talking about. That work, because it started as we entered the Q4, is largely in place. As I said earlier, we're still in the hiring mode in some of the geographies where we're doing expansion, but by and large, most of those folks have been hired, have either been to or are in training as we wrap up the month of January, and are out working in their new geography, their new territory or in the category of international. We've made the associated go direct or channel change move and have new people up and running.

Really focused on the U.S. general surgery, and broadly international agnostic of which product category talking about.

That work because it started as we entered the fourth quarter.

Is largely.

In place as I said earlier, we're still in the hiring mode and some of the geographies, where we're doing expansion, but by and large most of those folks have been hired.

Either been too or are in training as we wrap up the month of January .

And ER out working in their new geography, there new territory or in the category of International we've made the associated go direct or channel change move and have new people up and running now their productivity as a whole different question and we think that productivity ramps as the year unfolds and and bill.

Curt Hartman: Now, their productivity is a whole different question, and we think that productivity ramps as the year unfolds. Because we started this now a quarter ago, we're gonna get to that productivity ramp sooner. H2, which we just announced this morning or this afternoon, was the US orthopedics business.

Because we started this now a quarter ago, we're going to get to that productivity ramp sooner.

Second half, which we just announced this morning was the us or this afternoon was a usource predicts business.

Curt Hartman: Literally, we are just coming out of those communications in the month of January when you have your sales meetings and you talk to your team and you look at the performance and you look at the new product cadence that they've been given and what's coming, and you say, "What do we need to best match up sales commercial with product innovation that we've provided or are providing?" We're now just communicating and rolling those transitions through, in some cases, doing hires, in other cases, looking at the expansion geographies and really cementing that. That will take us into Q1 here. We would hope to have all of that done in Q1, and then productivity again will follow on the heels of that, those people and changes being in place.

And literally we are just coming out of those communications in the month of January when you're hover sales meetings and you.

Talk to your team and you look at the performance when you look at the new product cadence that they they've been given and whats coming and you say what do we need to best match up sales commercial with.

Product innovation that we've provided or are providing and so we're now just communicated enrolling those transitions through in some cases doing hires in other cases.

Looking at the expansion geographies in really cementing that so that that will take us into the first quarter here, we would hope to have all of that done in this quarter and then productivity again, we'll follow on the heels of that.

Those people in changes being in place.

Rick Wise: That makes sense. 1.5 questions just to follow up. The half, I would just wanna make sure what you were saying about that 2% to 3% of sales is China. Do we expect that to drop dramatically, go away temporarily? I just wasn't sure what you wanted us to believe. Maybe last, you could talk a little bit more, and I don't expect you to give us specifics for competitive reasons, but you know, Todd alluded to the new products that are in the pipeline that have yet to be approved, seeming like relatively imminent.

That makes sense.

One and a half questions just upon the half how would you want make sure. Once you were saying about that 2% to 3% sales since China.

Do we do expect that too.

Dropped dramatically go away temporarily I, just I just wasnt sure what you wanted us to believe and.

And maybe last you could talk a.

A little bit more and I don't expect you to give us specifics for competitive reasons, but.

Yes.

Todd alluded to the new products that have better in the pipeline to have yet to be from thing you Mike.

Relatively eminent but maybe just talk broadly about where you're focused and should be managing that the acceleration in innovation and pipeline is ever more visible as we proceed through 2020. Thank you.

Rick Wise: Maybe just talk broadly about, you know, where you're focused, and should we imagine that the acceleration in innovation and pipeline is ever more visible as we proceed through 2020? Thank you.

Okay.

Todd Garner: Okay. First on China, Rick. It is, it's the Chinese New Year right now, and so this is a week where China's essentially shut down anyway. The government has asked that people, that it be kind of, you know, only really important travel that happens between now and the tenth. They're trying to get a handle on the spread of the virus. We've asked for very limited travel through February 10. We are following those guidelines at this point. You know, that's all we know for now, right? As we get updates every day, we'll know if people can get back to work after the tenth or if it extends beyond that. It's just something we're watching.

So first on China Rick.

So it is it's the Chinese new year right now.

And so this is a week, where China is essentially shut down anyway. The government has asked that people that it'd be kind of.

Okay.

Only really important travel that that happens between now and the 10th they're trying to.

Get a handle on the spread of the virus and so.

Something we're watching it's not a huge impact on us, but in a given quarter you know if it extends much longer than the current request then it could have a negative impact on the guy that we've just given this morning for Q1.

Todd Garner: It's not a huge impact on us, but in a given quarter, you know, if it extends much longer than the current request, then it could have a negative impact on the guide that we've just given this morning for Q1. Anyway, we just wanted to call that out as something we're watching closely. On the new products and how those roll out and when you should expect more contribution, you know, the good news and the bad news about this sector is that our customers don't change quickly or easily. We are very encouraged by the innovation that CONMED has delivered, and we believe and are seeing customers get excited by that innovation. As we said multiple times, this will be a slow kind of gradual growth, account by account, doctor by doctor, that will add to itself over time.

And so anyway, we just wanted to call that if something were watching closely.

The new products and how those roll out and when you should expect more contribution.

The good news and the bad news about their sector is that our customers don't change quickly or easily.

We are very encouraged by the innovation that comment has delivered and we believe and are seen customers get excited by that in innovation, but as we said multiple times. This will be a blow kind of gradual growth account by account Dr by Doctor.

That will add to itself over time, and so you know when you launch something it doesn't have an immediate huge impact on the revenue line, but over time several quarters later and then as as you move forward on a sequential basis.

Todd Garner: You know, when you launch something, it doesn't have an immediate huge impact on the revenue line, but over time, several quarters later, and then as you move forward on a sequential basis, you gain accounts, and it grows and becomes more impactful. That's how we think of it. You know, we think you'll see more in 2020 from a revenue perspective from the 2019 launches than you did in 2019, and then the same will be true for every succeeding year.

Gain accounts in it grows and becomes more impactful and so that's how we think of it.

You know, we think you'll see more than 2020 from a revenue perspective from the 2019 launches than you did in 19 and then the same will be true for every succeeding year.

Thank you.

Mike Matson: Thank you.

Thank you are next question comes from Mike.

Operator 2: Thank you. Our next question comes from Mike Matson with Needham & Company. Your line is now open.

Operator: Thank you. Our next question comes from Mike Matson with Needham & Company. Your line is now open.

Yeah.

Thanks, Thanks to take my question I guess, just wanted to go back to the kind of gross margin or I guess, sorry operating margin Clyde guidance and yeah. The fact that you've got this pretty significant U.P.S. had wind it it seems like on my map about 30 to 40 basis points in there if I look at the guidance.

Mike Matson: Thanks. Thanks for taking my questions. I guess, just wanted to go back to the kind of gross margin or I guess, sorry, operating margin implied guidance and, you know, the fact that you've got this pretty significant EPS headwind. It seems like by my math, about 30 to 40 basis points in there if I look at the guidance for gross margin and, SG&A, that you're looking at underlying margin improvement of 120 to 180 basis points, if my math is right. I guess that's a pretty significant improvement. You know, just how confident are you in your ability to deliver that? What's really gonna be driving that in 2020?

Gross margin and S.G.N.A. that you're looking at underlying margin per minute 100, 100, sorry, 120 to 180 pieces points. If my math is right. So I guess, that's that's pretty significant improvement. So you know just how confident are you in your ability.

Deliver that what's really going to be driving that in 2020.

Okay. Good question like I would so the the Rangers we gave as I model. These out the the Rangers on the expense lines and on the revenue growth that I gave would if you took the high and low of all of those ranges you would get an operating margin range.

Todd Garner: Good question, Mike. The ranges we gave as I model these out, the ranges on the expense lines and on the revenue growth that I gave would, if you took the high and low of all of those ranges, you would get an operating margin range improvement of 70 to 170 basis points. You know, you can pick where you wanna be in on that range. That includes-

<unk> improvement of 72 170 basis points. So you know you can pick where you want to be in on that range.

And that includes and that's inclusive of.

Mike Matson: Okay.

Todd Garner: That's inclusive of 40 to 50 BPS of headwind from FX. As you just did, translating that to what it would have been without FX, you're right. It would have been a higher number without FX. I think your math is solid. You know, you're on the higher side of the,

40 to 50 bibs of headwind.

I'm from effects. So as you <unk> as you just did translating that to what it would've been without effects, you're right. It's it would've been a higher number without effects and so I think your math is solid you're on your on the high rate you know you're on the higher side of the.

Full range of available options, but but yeah I think the key take away is the profit a bit the profitability engine is strong continues from last year, you know, maybe even accelerating and and it gives us the freedom and the ability to make.

Mike Matson: Okay

Todd Garner: Full range of available options. Yeah, I think the key takeaway is the profitability engine is strong, continues from last year, you know, maybe even accelerating, and it gives us the freedom and the ability to make some of these pretty significant changes that we talked about last quarter and that we're talking about this quarter. You know, the strength of the profitability allows us to do those things at a bigger scale than maybe we could have otherwise done and still deliver our commitments on the bottom line.

Some of these pretty significant changes that we talked about last quarter and that we're talking about this quarter you.

The the strength of the profitability allows us to do those things that are bigger scale that maybe we could have otherwise done and still deliver our commitments on the bottom line.

Okay.

Mike Matson: Okay. How much of that margin improvement is coming from mix, from Buffalo Filter, and just higher margin products, I guess?

How much of that margin improvement is coming from from mix from suffer filter and just higher margin products I guess.

Oh, well then that's hard to break out when you start talking about the whole portfolio. When we bought Buffalo filter we talked about.

Todd Garner: Well, man, that's hard to break out when you start talking about the whole portfolio. When we bought Buffalo Filter, we talked about it contributing 50 basis points of increased operating margin in 2020. Obviously, it's overperformed. It's at least that on its contribution alone. At this point, it's kind of melded into the business. It's a little hard to get too precise with the different pieces. You know, I think what we're happy about is the overall engine is working, the profitability is improving, and it allows us to fund the business to keep the top line growing above market and still deliver really healthy double-digit growth on the bottom.

It contributing 50 basis points of in <unk> have increased operating margin in <unk> in 2020.

And obviously, it's over performed and so it's a it's at least that on its contribution alone but at this point, it's kinda melted into the business. It's an <unk>, it's a little hard to to get to precise with the different pieces.

You know I think what we're happy about is the overall engine is working the profitability as improving and it allows us to fund the business to keep the top line growing above market and still deliver really healthy double digit growth on the bottom.

Okay.

Mike Matson: Okay. That's helpful. Then, just more of a housekeeping question. I apologize if you mentioned this in prepared remarks. I might have missed it. It does look like the diluted share count was up a little bit sequentially. Can you maybe explain why that happened?

And then just more of a housekeeping question apologize. If you mentioned this and prepared marks on my mistake, but it does look like that that we did show countless up a little bit sequentially. So maybe explain why that happened.

Nothing abnormal there we did have the vesting of the performance stock in it so they talked about so.

Todd Garner: Nothing abnormal there. We did have the vesting of the performance stock units that I talked about. Other than that, nothing abnormal.

But other than that nothing at all.

Alright, great. Thank you.

Mike Matson: All right, great. That's all I have. Thank you.

Thank you might.

Todd Garner: Thank you, Mike.

Curt Hartman: Thank you, Mike.

Thank you are next question comes from Matt Prime with Piper Sandler airline is how open.

Operator 2: Thank you. Our next question comes from Matt O'Brien with Piper Sandler. Your line is now open.

Operator: Thank you. Our next question comes from Matt O'Brien with Piper Sandler. Your line is now open.

Hi, guys. This is I drew on for Matt. Thank you for taking the question.

Drew Ranieri: Hi, guys. This is Drew for Matt. Thank you for taking the questions. I guess I was paging through your slide deck a couple weeks ago while you're presenting, and there's really a couple of slides that stood out to me. One was the chart of new products as a percent of your total revenue, and then I guess the other was the breakout of your products into negative, single-, and double-digit growth buckets. I guess collectively, you know, it's shown a pretty impressive transition in the business over the last five years. I guess a piece of that was obviously driven by new product launches, but you also had some SKU reduction in that process.

Drew Gulley: Hi, guys. This is Drew for Matt. Thank you for taking the questions. I guess I was paging through your slide deck a couple weeks ago while you're presenting, and there's really a couple of slides that stood out to me. One was the chart of new products as a percent of your total revenue, and then I guess the other was the breakout of your products into negative, single-, and double-digit growth buckets. I guess collectively, you know, it's shown a pretty impressive transition in the business over the last five years. I guess a piece of that was obviously driven by new product launches, but you also had some SKU reduction in that process.

I I guess paging through your slide deck, a couple of weeks ago, while you're presenting in there was really a couple of flight that set out to me one was the cherry of New project, our new product as a percent per cent of your total revenue and then I get the other was break out of your product into a negative and single and double digit growth buckets, and then I guess collectively.

You know it sounded pretty impressive transmission in business over the last five years I.

I guess a piece of that would that be see driven by new product launches, but you also had some you reduction in that process.

Drew Ranieri: To focus a little bit on the latter, I guess my question is, how far along are you in that SKU reduction process? I mean, is it 10%, 20%, 30%, 50%?

So the focus a little bit on the latter I guess my question is how far along are you in that you reduction process and is it 10 2030 50 per cent.

Drew Gulley: To focus a little bit on the latter, I guess my question is, how far along are you in that SKU reduction process? I mean, is it 10%, 20%, 30%, 50%?

Drew Ranieri: Two, how meaningful could that be from, you know, a profitability perspective?

And then to haul meaningful could that be from you know profitability perspective.

Drew Gulley: Two, how meaningful could that be from, you know, a profitability perspective?

So it drew our.

Curt Hartman: Drew, our focus on the first part of that question on new products as a percentage of quarterly revenue, we've been providing that chart now a couple years. The reason we initiated that chart was because early on, we were putting a lot of money into R&D, and we needed a visual to show folks what they were getting or what we were driving with that investment in R&D. I think at last look, which we showed at JPMorgan's conference, we showed that number being north of 30% of the quarterly revenue, and we think that's in a healthy range, and we're probably gonna discontinue that chart. You know, the company's gonna continue to innovate, we're gonna continue to drive, that number's gonna bounce around a little bit.

Our focus on the first part of that question on new products as a percentage of quarterly revenue, we've been providing that chart no. A couple of years and the reason we initiated that chart was because early on we were putting a lot of money into r. and D. and we needed a visual to show folks what they were getting or what we were driving with that investment in r. and d.

I think it at last look, which we showed a J.P. Morgan conference. We showed that number be in north of 30% of the quarterly revenue and we think that's an unhealthy range and and we're probably going to discontinue that chart is you know the company's gonna continue to innovate. We're gonna continue to drive that number is going to bounce around a little bit on the other side of the.

Curt Hartman: On the other side of the question, as we looked at the portfolio, I think Todd and I have said many times our priority for our operations group is to launch new products. Secondarily, it's what I would call the internal efficiencies and driving internal efficiencies, whether that's through manufacturing enhancements or SKU reduction. I would say just overall, without getting into many details, the SKU reduction component of our efficiency drive has not been a major factor. It's been more about M&A and new product innovation driving accretive gross margin products into the portfolio, and it's been about the sales volume.

Question.

As we as we looked at the the portfolio I think Todd and I have said many times our priority for operations group is to launch new products.

Secondarily, it's what I would call the internal efficiencies and driving internal efficiencies, whether that's true manufacturing him enhancements are skew reduction.

I would say just overall <unk> without getting into many details the the skew reduction component over you should see drive has not been a a major factor.

Been more about m. in a a new product innovation driving a creative gross margin products into the portfolio and it's it's been about the sales volume so skew reduction.

Curt Hartman: SKU reduction, if it were to be a large contributor, still remains in front of us, but we haven't quantified that or candidly initiated that as a massive part of the effort at this point in time. I don't know, Todd, if that's a fair summary from your chair.

If it were to be a large contribute are still remains in front of us, but we haven't quantified that are candidly initiated that as a massive part of the effort at this point in time I I don't know Tata that's a fair summary.

From your chair diving, it's a great summary, yeah, I wouldn't I wouldn't over emphasized skew reduction although it you know it's part of it but I'd say, it's a small part of it. The the focus has simply been to put our resources into faster growing markets and to and to meet unmet needs.

Todd Garner: No, I think it's a great summary. Yeah, I wouldn't overemphasize SKU reduction, although, you know, it's part of it, but I'd say it's a small part of it. The focus has simply been to put our resources into faster-growing markets and to meet unmet needs in those markets. That's what we've been doing. As we've added resources there, they've delivered, and that's what has shifted the mix of the portfolio to a balance of faster-growing things.

In those markets and so that's what we've been doing a week and a and as we've added.

Resources there they've delivered in that has what that's what has shifted the mix of their portfolio to a balance a faster growing things.

At at Thank you and then on on Air Seal you've had a couple indication expansions over the last couple of years with you know if they're ethic attic pediatric anything meaningful in the pipeline that we can expect there and 2020.

Drew Ranieri: Got it. Thank you. On AirSeal, you've had a couple indication expansions over the last couple years with, you know, thoracic and I think pediatric. Anything meaningful in the pipeline that we can expect there in 2020? I believe last you said, AirSeal was used in about 30% of robotic cases. Is that number still accurate today? Thank you.

Drew Gulley: Got it. Thank you. On AirSeal, you've had a couple indication expansions over the last couple years with, you know, thoracic and I think pediatric. Anything meaningful in the pipeline that we can expect there in 2020? I believe last you said, AirSeal was used in about 30% of robotic cases. Is that number still accurate today? Thank you.

And then I believe last you said air he'll use in about 30% robotic cases, it is that number still accurate today. Thank you.

So let let me take the first part of that <unk>.

Curt Hartman: Let me take the first part of that. We remain very excited about AirSeal. It had another great year in 2019. Probably the biggest thing we can do for AirSeal was the sales force expansion that we talked about in Q3, putting more feet on the street in that component of our general surgery category because that's the same team that's selling Buffalo Filter. Two very innovative products, two very high in demand products. We think the opportunity remains very large in front of us as it relates to AirSeal, driven, yes, by indication expansions into thoracics and pediatrics. As we've said many times, really driven by the ongoing development of clinical studies really around the globe.

So we're we remain.

Very excited about air she'll it had another great you're in 2019 and probably the biggest thing we can do for air Seal was the sales force expansion that we talked about the third quarter, putting more feet on the street isn't that component of our general surgery category because at the same team that sell in Buffalo filter to very innovative products to very high and demand product. So we think the.

The the opportunity remains very large in front of us as it relates to air she'll driven yes by indication expansions into thrash six in pediatrics, but as we said many times really driven by the ongoing development of clinical studies really around the globe, it's been really great to see global thought leaders.

Curt Hartman: It's been really great to see global thought leaders embrace the technology, start their own body of work, and get up and do podium presentations and publications. That is as important as anything that we're doing inside on the innovative front. I think you know we're probably not gonna talk about future pipeline as it relates to AirSeal. We like to launch things before we talk about them. We understand the importance of that portfolio, and our work on that portfolio continues. I'm gonna let Todd probably update you on the robotics association.

Embraced the technology start their own body of work and get up and do podium presentations and publication. So that is is important as anything that we're doing inside on the innovative front and I. I think you know, we're probably not going to talk about future pipeline as relates to air she'll, we we like to launch things before we talk about but.

We understand the importance of that portfolio in our work on that portfolio continues I'm gonna, let Todd probably update you on the the Robotics Association.

Todd Garner: Yeah. It is our estimate that, we're in about 30% of the robotic cases, today, and that number seems to climb every year. Somewhere in that 30% to 1/3 is probably where we are.

Yeah. It is our estimate that we're in about 30% of the robotic cases today and that number seems to climb every year, so somewhere in that 30% to a third.

Is is probably where we are.

Yeah.

Thank you and.

Operator 2: Thank you. As a reminder, to ask a question, you will need to press star then one on your touch tone telephone. To withdraw your question, press the pound key. Our next question is a follow-up from Kristen Stewart with Barclays. Your line is now open.

Operator: Thank you. As a reminder, to ask a question, you will need to press star then one on your touch tone telephone. To withdraw your question, press the pound key. Our next question is a follow-up from Kristen Stewart with Barclays. Your line is now open.

As a reminder to ask a question you will need to press star than one on your touch tone telephone.

Your question press the pound key.

Next question is a follow up from Kristen Stewart with Barclays airline is helping.

Hi, I'm links are paying the product revenue in Pie chart, the slide deck.

Kristen Stewart: Hi. Thanks for putting the product revenue pie chart in the slide deck. I guess I didn't put my protractor up, but it looks like Buffalo Filter and AirSeal are approaching like $200 million in revenues, which is nice. I guess is it correct to think about those two businesses as growing more, I guess, above that, call it like 15%-ish growth rate going forward? Is there anything that you guys see that would prevent that level of growth? And is there anything we should think about going forward just in terms of legislative milestones or regulatory meetings for Buffalo Filter? I know the AORN meeting's probably coming up. I think that's usually like in the April-ish timeframe, and anything to update there?

I guess I didn't put my protract or up that looks like a tough one filter in air sealer approaching like 200 million M. revenues, which is nice.

I guess if it is it correct to think about those two businesses is crying more I guess, sometimes that call. It like 15 per cent Nash <unk> three going forward and is there anything that you guys see that would prevent that level of career.

And is there anything we should think about going forward just in terms of might just <unk> right regulatory meetings <unk>.

I know that Acorn meetings, Pat like coming up I think that's usually like in April less time frame and anything to update their.

Curt Hartman: Yeah. Start with the last part of that. AORN actually starts the Saturday after AAOS.

Yeah, <unk> start with the last part of that <unk> is actually starts the Saturday after A.O.S.

Kristen Stewart: Okay.

Curt Hartman: AAOS is the last week in March in Orlando, and AORN is in Anaheim, California. That'll be a fun week for those in the industry, on two different parts of the geography. The combination of AirSeal and Buffalo Filter and your question about 15% growth, we don't routinely throw around growth numbers, but we see both of those as double-digit growers for the foreseeable future. On the Buffalo Filter side, we clearly exceeded our expectations in the first 11 months of that product, and there's nothing that we saw in the market globally that says there's a slowdown coming. Legislatively, there was not a lot of change in Q4, and we've said this many times, that it's really the healthcare worker that's driving this. Legislation is more of a lagging indicator at this point in time.

<unk> the last week in March in Orlando in A.R.N. is in Anaheim, California, So that'll that'll be a fun week for those in the industry on two different parts of the geography.

The combination of air Sea on Buffalo filter and your question about 15 per cent growth, we we don't routinely throw around growth numbers, but.

We see both of those double digit growers for the foreseeable future.

On the Buffalo filter side.

We we clearly exceeded our expectations in the the first 11 months of that product and there's nothing that we saw in the market globally that says a slowdown coming.

Legislatively, there was not allowed to change in the fourth quarter and and we said this many times that it's really.

Healthcare worker, that's driving this legislation is more of a lagging indicator at this point in time to healthcare environment is really embraced the need for the smoke free workplace because of all the health hazards associated with surgical smoke and we're doing our best to to support that initiative.

Curt Hartman: The healthcare environment has really embraced the need for the smoke-free workplace because of all the health hazards associated with surgical smoke, and we're doing our best to support that initiative behind the scenes. Legislation has not fundamentally changed in the last quarter. I think I got all your questions there, Kristen, but if I didn't, please ask again.

Behind the scenes and legislation has not fundamentally changed in the last quarter.

So I think I got all your questions or Kristen, but if I didn't please please ask again.

Kristen Stewart: I think we're good. Is there anything to note at AAOS, or will it just be kind of releasing some of the new products and just kinda showcasing them there?

I think we're good and is there anything to know that definitely a lesser will just be kind of.

I'm, a new products and just kind of showcasing them there.

I think it's Academy is a show for us starts a year.

Curt Hartman: I think it's Academy. Academy is a show for us. It starts the year. New product cadence is typically best demonstrated there, though it is early in the year, so oftentimes we have things that come out later in the year. Again, a good show for CONMED and our orthopedics business.

New product cadences typically best demonstrated their though it is early in the year. So oftentimes we have things that come out later in the year, but again, a good show for Conmen orthopedics business. Okay. Thanks very much.

Kristen Stewart: Okay. Thanks very much.

Thank you.

Operator 2: Thank you. Now I'd like to turn the call back over to Mr. Hartman for any closing remarks. Mr. Hartman?

Operator: Thank you. Now I'd like to turn the call back over to Mr. Hartman for any closing remarks. Mr. Hartman?

I'm not like trying to call back over to Mr. Hartman for any closing remarks, Mr. Harmon.

Alright, Thank you Jimmy and I want to think everybody in the call today for your time and we look forward to speaking with you on our next earnings call. After the first quarter. Thank you and have a good evening.

Curt Hartman: All right. Thank you, Jimmy, and I wanna thank everybody on the call today for your time, and we look forward to speaking with you on our next earnings call after Q1. Thank you, and have a good evening.

Ladies and gentlemen, thank you for your participation on today's conference. Just doesn't include your programming you may now disconnect.

Operator 2: Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your program, and you may now disconnect.

Operator: Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your program, and you may now disconnect.

Yeah.

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