Q1 2020 Earnings Call
Good afternoon, everyone.
For the conference call begins let me remind you that during this call management will be making comments and statements regarding its financial outlook image plans and objectives, which represent forward looking statements that involve risks and uncertainties that those terms are defined under the federal Securities law.
Pressures are cautioned that.
Such forward looking statements are not guarantees of future events performance or results. The companys actual results may differ materially from its current expectations.
Please refer to the risk and other uncertainties disclose under forward looking information in today's press release as well as the Companys FCC filings for more details on the risks and uncertainties that may cause actual results. So do the through mature.
The company disclaims any obligation to update any forward looking statement there maybe discuss during this call except as may be required by applicable law.
You also your management refer to certain non-GAAP adjusted measurements during this discussion.
Well. This figure is while these figures are not a substitute for GAAP measurements management uses these filings to aid in monitoring the companys ongoing financial performance from quarter to quarter and year to year on a regular basis ever benchmarking against other medical technology company.
Adjusted net income and adjusted earnings per share measure the income of the company's excluding credential 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 is important the companys earnings release.
Posted.
So the company's website with diesel required announcements completed I will now turn the call over to Curt Hartman, Conmeds, President and Chief Executive Officer for opening remarks Mr. Herb.
Thank you Chris Good afternoon. Thank you for joining us for Conmeds first quarter 2020 earnings call.
With me on the call as Todd Garner Executive Vice President and Chief Financial Officer.
As you May expect our call today will be different versus the typical quarterly update.
I'll walk you through our first quarter results give you an overview of the company's pandemic response and share with you. Some early data on our April results, Todd and I will split this work appropriately with the goal that you will come away better informed about our business well still recognizing the high level of uncertainty that exists across the global markets.
Well then open the call to your questions.
Turning to our results total sales for the first quarter were $214 million, representing a year over year decrease of 2% as reported and a decrease of 70 basis points in constant currency.
Organic sales in the quarter, which exclude the impact of Buffalo filter declined 3.6% in constant currency.
Our sales were clearly impacted by the Cobot 19 pandemic first sitting in our China business in January then spreading to our Asian markets in March we began to see impacts in Italy, followed by the rest of the Europe and the Americas as the quarters concluded.
Well the quarter was clearly challenged by the pandemic driven procedure deferrals. We are pleased to note. The two of our key growth platform technologies, Airseal and Buffalo filter benefited from increased awareness as filtration and smoke capture technologies during this period.
The financial benefits of these clinical advantages were minimal during the quarter, but we expect a growing awareness and adoption to drive more meaningful benefit in future periods.
Well, we do not expect this increased demand to make up for the total coal would related pressure across the other parts of the business.
We feel the clinical community awareness is increasing which we see as a longer term sustainable outcome.
Finally, I'm pleased to report that we completed our previously discussed salesforce transition efforts within orthopedics as of the quarter end all salesforce transitions have been completed across the company.
From an earnings perspective during the first quarter. Our GAAP net income totaled 5.9 million. This compares to net income of $1 million in the first quarter of 2019, excluding special items that affect comparability. Our adjusted net income of 15.1 15.1 million decreased 8.6% year over year.
And our adjusted diluted net earnings per share of 51 cents decreased tenant a half percent year over year.
I'd now like to discuss the approach we have taken as a company to help mitigate the impacts of the cold that 19 pandemic overall I'm very proud of our teams rapid crisis management response and are continuing efforts during a period of great uncertainty. Our teams responded exceptionally well first regionally and then globally.
And on that point, our response has been guided by three priorities. They are first the safety and well being of our workforce their families and our customers second the financial security the company and finally preparing the company for the future.
As it relates the safety and well being our efforts have been comprehensive and based on information from the centers for disease control in the World Health organization as well as local regional recommendations. We have also consulted with global infection prevention specialist and external consultants to ensure we are taking appropriate precautions to ensure employees.
Safety, while also reducing both exposure to and spread of this virus. Since early March My direct reports have met daily the opening section of our meeting is focused on monitoring the status of every single employee in our organization. We're extremely mindful of the health and safety of each individual and their families as of Monday April 20.
Seven.
CONMED has recorded confirmed cobot cases across our workforce of eight four of those have cleared and for remain important team.
Further a 120 employees of isolated per guidelines of which 86 have cleared quarantine and 34 remain in quarantine.
We had 92 employees unpaid leave as they fall in defined high risk categories, and we have 30 employees unrequested unpaid leave to deal with other family situations.
Overall, our total company absenteeism has been running at 1% or lower in summary, Conmeds remains very much at work and it's using our time wisely to prepare for the future.
Our production distribution employees continue to voluntarily report to work in high numbers and we have taken many precautionary measures to ensure the safety of these employees are reporting employees passthrough temperature check stations before entering the facilities. Additionally, we've separated the work areas within our factories to avoid any possibility of cross contamination.
Enhanced our cleaning protocols and provided face masks and face shield to employees.
For employees working in our plants and distribution centers, we have pulled by provided supplemental compensation to recognize these efforts and the trying time.
For our office based employees, we successfully moved to a fully remote workforce. We had previous previously implemented global technology to make this possible and our teams completed this transition within a 48 hour period early in the month of March.
With respect to our sales teams we've used the time to greatly increase our training opera opportunities will continue to support our customers. We've provided a financial backstop to our fully commissioned salesforce, ensuring that they are able to focus on customer support and training and education in preparation for the eventual open end markets.
As it relates to the financial security. The company you all know we've completed an amendment to our debt covenants as previously announced and I want to thank our banking partners for their support and for the efficient process in completing that amendment.
We've eliminated our temporary workforce, which made up approximately 5% of our employee base and we've eliminated all overtime.
We've dramatically reduced all discretionary spend and focus our resources on the truly a central priorities.
We focused our production resources on building our top priority sales items, while ensuring we have the appropriate safety stocks across our portfolio and we're also working with our suppliers on a global basis to ensure that we have adequate capacity in our supply chain.
And finally, we've created global logistics management team to ensure the under uninterrupted supply of our product to customers as well as our receipt of critical items from our suppliers.
As everyone can appreciate global logistics have been constrained and staying ahead of this is a full time job our team has done exceptionally well in that regard.
And finally in order to prepare for the future. We've continued to advance our top priority innovation projects innovation still matters greatly in our markets. We've provided our sales teams and customers with intense online training content.
We have ensured our supply chains are working to handle the expected demand for our top products when surgical procedures return.
And importantly, as previously noted we secured the amendment to our credit facility.
Overall, we feel our efforts of position us well the cross through the second quarter, which we believe will be led market low point, we do anticipate some return to elective procedures in may well expecting any surgical restart to be more localized and regional and driven by many factors include including cobot case loads surgical staff.
In levels pp supply unemployment late rates local regulations and patient acceptance of the site of care.
Well the quarter was not the operating environment that any of US anticipated as we exited 2019, we're still celebrating conmeds fiftyth anniversary and our moved the NYSE, which occurred simultaneously on February 10.
Further our focus on people products and profitability remains well recognizing that we're making the appropriate adjustments given the current climate.
I'll now turn the call over to Todd will provide a more detailed analysis of our financial performance and discuss the credit facility Amendment and offer an early look at our April results Todd.
Thank you Kurt.
As we go through our results. Please note that I will not be making an attempt to quantify the impact of cobot 19 on our Q1 financials because it it would simply be impossible to do so accurately.
I'm going to walk you through the results as objective facts without trying to adjust for the impact of covert 19.
Later on the call I'll be providing some insight into our revenue for the month of April as we believe this is the most relevant information we can provide to quantify the impact of the deferral of surgical procedures on our global business.
By the way, we did have one extra selling days in Q1 compared to the prior year quarter, the impact of which is immaterial given the broader dynamics of this unprecedented situation.
As Curt said first quarter sales decreased 2.0% on a reported basis and decreased 0.7% in constant currency.
We passed the anniversary of the Buffalo filter acquisition on February 11.
We generated approximately $6.2 million a buffalo filter sales between January 1st 2020, and February 11 2020.
Excluding this contribution our sales declined 3.6% on an organic basis in Q1.
On a pro forma basis, if we had owned Buffalo filtering the full prior year quarter. Our total Q1 2020 revenue would have declined by 3.0%.
Now do we have anniversary the acquisition going forward for competitive purposes, we will not be discussing specific growth rates and specific product product lines as is our standing policy.
All remaining sales growth numbers I referenced today will be given in constant currency. The reconciliation to GAAP numbers is included in our press release.
For the first quarter of 2020, our domestic sales increased 1.6% versus the prior year quarter, while international sales decreased 3.4%.
Worldwide Orthopedics revenue declined 10.7% in the first quarter domestically orthopedics decreased 18.2% and internationally orthopedic sales decreased 5.6%.
Total worldwide General surgery revenue increased 10.0% in the first quarter with total domestic general surgery revenue growing 14% and internationally general surgery grew 1.3%.
Now, let's move to expense side of the income statement.
For comparative purposes, I will discuss the pn outperformance, excluding special items, which include charges related to acquisitions and integrations manufacturing consolidations debt refinancing costs amortization of intangible assets and amortization of deferred financing fees and debt discount net of tax.
A reconciliation to GAAP numbers is included in our press release.
As you can appreciate our expense metrics as a percentage of sales were impacted unfavorably by the sudden decrease in sales we saw during the month of March.
Adjusted gross margin for the first quarter was 56.9% an increase of 100 basis points from the prior year quarter. This was better than we expected and was trending above expectations all quarter fall.
Research and development expense for the first quarter was 4.7% of total sales a 10 basis point reduction from the prior year quarter.
First quarter SGN expenses on an adjusted basis were 41.2% of total sales that as a 170 basis points higher than the prior year quarter.
Interest expense in Q1, 2020 was $6.5 million.
The adjusted effective tax rate in the first quarter was 18.2% compared to 15.0% in the prior year period.
The low rate was due to the resolution of an outstanding audit as well as the excess tax benefit from equity plans.
First quarter GAAP net income totaled $5.9 million or 20 cents per diluted share compared to a reported net income of $1.0 million or four cents per diluted share a year ago.
Including the impact of special items discussed earlier, our first quarter adjusted diluted net earnings per share were 51 cents versus 57 cents in the prior year period.
Turning to the balance sheet, our cash balance at the end of the quarter was $24.3 million compared to $25.9 million as of December 31, 2019.
Accounts receivable days as of March 31 were 70 days compared to 69 days a year ago.
Inventory days at quarter end were 166 compared to 155 days a year ago. The increase is due to the sudden sales slowdown late in the quarter.
Long term debt at the end of the quarter was $773 million versus 755 million at year end.
Our leverage ratio at March 31, 2020 was 4.5.
Cash flow provided by operations for the quarter was $3.7 million compared to cash flow used in operations of $3.9 million into first quarter of 2019.
Capital expenditures in the first quarter were $2.8 million compared to $4.0 million in the prior year quarter.
As you can see we were operating well within our debt covenants at the end of the first quarter. However, since surgical procedures have been deferred and a majority of our geographies. We expect a significant decrease to EBITDA beginning in Q2 2020.
As you probably saw last week, we have already reached an agreement with our bank group that provides a temporary suspension of our debt leverage covenants until June of 2021.
In exchange for revised liquidity commitments and higher interest rates.
We believe this amendment provides us the flexibility to strategically navigate this unprecedented situation and return to a position of relative strength in the markets. We serve once this pandemic is over.
As Curt mentioned earlier on the expense side, we have dramatically reduced all discretionary spending we have suspended or cut nearly all external spending in order to maintain our full time employee base and continued progress of critical R&D projects.
Our focus is to maintain the improved infrastructure. We have built so that we can continue to stay close to our customers and be ready to provide them with innovative solutions. When they are ready to return to treating patients.
Turning to guidance as you know we withdrew our guidance back in March due to the lack of visibility related to the pandemic.
As we don't think it's possible to accurately assess the impact on our business over the next several quarters, we will not be providing forward guidance at this time.
In lieu of guidance in order to help you understand the impact of a pandemic on our business I will instead walk you through how our business has trended to this point in the month of April.
We expect worldwide revenue to be down between 50% and 55% in the month of April which includes orthopedics down, 65% and general surgery down 40%.
We expect to use to be down, 60% and the rest of the Americas to be down about 70%.
In Europe Middle East in Africa, we expect the total business to be down approximately 45%.
Within that broad geography, there are significant differences by country for example, in Spain, Italy, and France, we are seeing reduction between 50 and 65%.
However, Germany is only down about 10% and the UK and the Nordics are down around 30%.
Again these are only April sales.
Our Asian Pacific category includes Australia, which is down around 30%.
Our other Asian countries are returning to growth in April after declining in the first quarter.
We are filtering these orders for true customer demand trying to prevent stockpiling or building distributor inventory.
Because it isn't clear yet whether the Asian sales growth in April reflects true end customer demand.
And in order to not unintentionally mislead you, we will not be providing those specific april growth rates today.
We hope that this helps you better understand what is going on around the world in the markets, we serve and with that we'd like to open the call to your questions and I'll hand, it back to Chris.
Thank you.
And as a reminder to ask a question will need to press star one of your Touchtone telephone to withdraw your question. Please press the pound key.
Please standby only composite kuni roster.
And our first question comes from the line of Robbie Marcus with JP Morgan. Your line is now open.
Thanks for.
Taking a.
And I appreciate that.
A lot of color on April and and how to think about it.
What are you preparing for that time for May and June in rest of the year here. How are you going about Europe planning, obviously I don't think anyone knows the answer but what are you preparing for internally at both from a sales perspective, and how to manage those costs down the piano.
Yes, Rob.
Let me, let me take the first half of that ill ill defer the cost income statement cost portion over to Todd but.
Our goal coming into this where those three priorities I highlighted in my scripted comments and in the last one of those was being prepared for the future. So on the Salesforce. The marketing side. We've continued to use this time.
To engage them in additional surgical procedure product training and as appropriate around the globe continuing to support customers and while the markets.
Slowed dramatically in many cases, there were still instances where people were performing emergent surgery, some of which involve CONMED products to our reps continued to support customers as appropriate.
We believe the second quarter is going to be the low point and we think that.
Some of those deferred surgical procedure start to return, we've actually seen a little bit of that this week in some limited cases and clearly in markets outside the U.S. places like China, Japan Korea, we have seen good things as Todd commented in his scripted comments.
So our goal through this whole thing with the Salesforce the marketing teams what's to to stay in a position of preparedness for when the markets to return and as we look at the second quarter.
We think april's the worst we think mays, a little bit better and hopefully June continues that trend.
I am I'm not going to look forward and say, we're going to be back to normal by the fourth quarter I think it's way too early to make those comments.
I think the recovery has so many factors that go into it.
That could be regional that could be driven by patient acceptance for the site of care that could be driven by reemergence of co. Good cases in a given geography.
So we're very focused on just navigating Q2 and seeing what the second half brings.
I mentioned that we've we've taken a hard cut on our costs. It out I'll hand, the second half of this over to Todd to talk a little more about that.
Yes, Thanks Ravi.
Obviously.
We've got to be very judicious and responsible.
On our spending and we're doing that as we talked about in the prepared remarks, we've we've taken dramatic cuts to all external spending and discretionary spending having said that.
We are keeping the employee base and the infrastructure we have built.
Healthy because the focus here as you know.
The key to success for Conmeds.
Is to take market share in these large attractive markets, where we play.
So when the customers are ready to get back to work, we want to make sure that were there with no pause or delay and so we've got to manage both of those things we've got a bit judicious and also be ready to be on offense as soon as as soon as the.
The surgeries return so thats how were handling that.
Maybe.
Rather you cut out.
Chris we might need to move on we can give that Rob we can get back in line, rather when I hear you.
And our next question comes from the line of Kristen Stewart with Barclays. Your line is now open.
Hey, guys. Thanks for taking my question.
I've two questions I guess I'll ask first just being thanks for the.
Just color and revenue breakdown for April.
If you could just give us a little bit a perspective on how maybe some of the products may break out just from a setting perspective.
Terms of what your products are from like an inpatient outpatient basis.
So it does seem like more of your products, maybe skewed mark for the outpatient and then I have a follow up on Buffalo filter and Eric Yes.
Sure. So I think the way to think about our business on the orthopedic side and I've got to.
Got to divide this little bit geographically in the us market sports medicine procedures, where where we're serving the customer.
I'd say north of 70% of that is happening in the ambulatory surgery Center. There are still some sports medicine procedures more of the.
The challenging procedures, if you will that could be happy in the hospital environment, but probably at least 70% of that revenues happening in the surgery Center, it's not the same dynamic outside the us.
[music].
Is still not nearly the surgical.
Surgery center environment outside the us that you have in the U.S. So.
Orthopedics outside the us could be more hospital based.
On the general surgery side, we have three businesses advanced surgical is the biggest one they would be principally hospital based the patient care category, which is the the CG electrodes again more hospital based and then our endoscopic technologies business is probably 50 50 half half hospital based in half.
Jeff.
Surgery Center based.
And again those those are.
Generally speaking on advanced surgical and patient care and C.T., that's a us comment outside the US most of that is going to happen in a hospital based environment. Some exceptions, but just generally speaking here.
And then on just air seal in Buffalo filter I was really struck by some of the recommendations coming out.
Stages in the guidelines just recommending the use of smoke evacuation.
In.
Steve Times with total bid and just filtering out of fibrosis in General I was just wondering if you could comment on what you're seeing in the marketplace as it relates to the awareness of those recommendations and just early com comments that you might have had or or just on conversations with them.
Health systems.
And more smoke evacuation now with coal bed, especially around we starting some other procedures now with potentially on surgeries with covance positive patients. Thanks, so much.
No. It's a great question and we certainly have tried to stay in tune in touch with all of those recommendations and we view our role first and foremost as educating.
On the benefits that are products provide in concert with the recommendation. So as those recommendations came out we took a look at our product portfolio be at air she'll be a buffalo filter and set how does our technology play against those recommendations and we worked with clinical community to set up a host of global Webinars in.
And other online training to highlight our product against those.
Those recommendations so really trying to be an educational resource. This is this is not a time to be selling its a time to be educating and that has been truly our global approach.
The response in the marketplace to those recommendation. It is certainly elevated awareness and win awareness is elevated people look for solutions and we're getting a lot of attention as they're searching for those solutions and that comment is truly a global comment.
Our inbound interest in products like Airseal in Buffalo filter is very strong before this pandemic. It it's even stronger now and we are we're mobilizing to meet that demand no matter, where what geography or what market. It comes from and it really does revolve around the ability to capture smoke and fee.
Filter and I think everybody on the call knows at Buffalo filter in the open environment is the market's leading technology for smoke capture and filtration and then when you look at what the or she'll platform does in the closed environment with the smoke evacuation mode and filtration, we truly have the most comprehensive.
Open and close portfolio in the marketplace with just does truly phenomenal technology and in the market is excited about it and Thats why I put it in my scripted comments that.
This benefit this uptick once you have that awareness, it's not going to go away after co bid.
Goes away, which we all hope happens, but the benefit of the technology is going to remain in the marketplace. So we're very excited about that and trying our best work with customers.
In every way possible.
Thank you and our next question comes from the line of Matt O'brien with Piper Sandler Your line is now open.
Good afternoon, guys. This is Patrick on for Matt.
I just wanted to start with talking about capital requirements.
You've done a bunch of important work kind of amending your credit agreements and just making sure you being super judicious on the TNL, but.
Longer term or in the median on kind of timeframe. What are your current thoughts on your capital position right now.
You feel you need to do something.
Within this year and if so do you have a preference on whether its debt or equity.
Given how cheap debt is right now in this market just any color there would be really helpful. Thank you.
Sure Patrick we feel really good about the amendment, we got done with the banks and we think this gives us the flexibility to navigate intelligently and strategically through this pandemic. So.
At this time, we don't have any other moves in mind or plans to do anything else.
The that's really helpful. Thank you.
And I just had a follow up.
On air Steel.
And so my question for you as I know Youve done a really nice job with tying airscale with robotic procedures and there's natural kind of marriage and most of us two products, but as hospitals pushback on capital equipment in our pressured due to cold that 19 can you give us any updated thoughts you have as to if theres.
Any impacts that would have to air steel or any adoption moving forward. Thank you.
But I think you know as procedures, a surgical procedures have slowed that impacts everything and so if air sales being used in a robotic procedure in robotic procedures of Sloane that means less consumables that go with the air seal capital would be used.
As those procedures return the consumables return.
Looking forward again, I'd, just remind you that.
We're still very low and our overall penetration of the technology of Airseal on a global basis. So that again air she'll was built by attaching to our robotic procedures. We've done a very nice job. There continue to build on that and are excited to continue to work in that marketplace, but the broader laparoscopic.
Market remains the big open place and I think.
That market is not going to disappear, it's going to come back and so I still think while you may have an intermittent bump here and intermit blip in the overall.
Outlook, I think theres still a long term trajectory that we can go on and certainly some of the the recommendations that have come out in recent period have certainly helps support our belief in the technology be at Airseal will be at Buffalo filter and the long term growth prospects for both of those.
Thank you.
Our next question comes from the line of might match with Needham and company. Your line is now.
Yes. Thanks.
So I was just curious about your views on kind of the.
Mix between or I guess the outlook for.
Capital equipment versus the more procedural oriented products.
It sounds like the hospitals are pretty strain financially I know some of the public hospitals have talked about cutting capex through than the year pretty significantly.
In the the not for profit hospitals are doing the same thing.
So.
Looking out kind of latter part of this year and into 21.
Do you think we can do you think the procedures that are going to bounce back more quickly than the kind of the capital part of your business.
Mike I, absolutely think thats going to happen I think the first thing that the health community wants to do his resume surgical procedures.
They are financially more likely than not to be cash flow constrained because surgical procedures are moneymaker.
They have not been doing them and I think that.
Capex is going to be put on.
But on the sidelined for a period of time I can't predict how long that will be.
I do have been through a few these ups and down cycles with capital I think theres always some capital that gets through it's really driven by.
Need it's really driven by the replacement cycle on the capital. They may currently have and I do think as you look again at our couple of our capital items to be in the air seal of Buffalo filter platforms I think they've shown.
A little bit of a resilience here even in this environment that people understand the benefits that technology and are willing to make those investments I do think other parts of capital are certainly going to be longer to come back to the market.
Again first thing is to get procedures going.
Capital will be deferred for a period of time I can't say for how long that we'll be at this point in time.
And what I would add there Mike is just to remind you that.
Especially when you're talking about air CLM Buffalo.
Those are relatively low capital dollars, especially with Buffalo right, you're talking about 2000 to $4000.
For the box and so relative first so the first point is I think our capital is relatively lower than when people talk about capital generally in the market and the other thing is we have multiple programs for our customers including leases.
We have every flavor out there for a customer that is capital constrained, but really needs to get.
This equipment in to serve their patients we have some creativity and flexibility around programs to help them do that so will will serve our customers as they need it.
Okay I understand and then just with you given the pandemic and.
Lack of access to healthcare facilities and practitioners and then with meetings like west cancel how does this impact your new product launches and.
I assume you had some things that we're kind of planned for this year.
With those then get kind of pushed into next year.
And what does that mean for than for next year's product launches you kind of try to do them. All at one instance, or some kind of bandwidth issue there.
Well listen part of our our financial discipline here is we look at everything and we firmly believe as I said earlier that innovation still matters, but we have prioritized our innovation.
That's number one so we will be introducing new products. This year in spite of what's going on in terms of access what we have learned in the last call. It two months is.
The ability to use digital technology digital solutions has has taken kind of a meaningful uptick in this environment and customers have shown a greater willingness to engage in that now will that will that stick as they get busy with the surgical procedures again I don't know.
But we've gotten certainly better at doing that and our customers have shown a reception and willingness to that type of approach, yes, we always prefer in this industry the in person.
The relationship business, we we prefer the ability to be there highlighting products with the customer face to face in the operating room.
But we will find ways to work around that and I think that that is on us and it's it's something we've taken a hard look at in our working through as we speak.
Does it mean that there will have more products available for next year's launch will talk about that as we get to next year.
But we still have some high priority platforms that we intend to get into the market. This year and we'll just have to be creative and how we introduce those.
Okay. Thanks, a lot.
Thank you and our next question comes from blend of Matthew We shot with Keybanc. Your line is now open.
Great and thanks for taking the questions.
Kurt Todd last quarter, we were talking about disruption from.
Salesforce reorganization.
We will be what were you able to complete those activities before this crisis and how comfortable are you.
With with the change that you made in the in the context of all of this.
That we're dealing with today.
We met I did say in my scripted comments that we've completed all of our Salesforce activities in the first quarter and remember in the January call. We noted that we were working in the US orthopedics business and we completed all of that and all of our Salesforce work on a global standpoint is complete and in place.
I'm pleased with it I am happy we did it in spite of this this pickup I don't I don't I don't regret those decisions and think they were the right things to do for the respective parts of the business in geographies, where we did those and we look forward to all of those folks being active in the marketplace when access in surgical procedures return.
Okay excellent and then what are the things that I was confused in the most about about about Conmeds are committed the manufacturing variances over multiple quarters.
How should we think about your pace of manufacturing.
Through late one Q into two Q.
And the phasing of potential variances.
Through the rest of 2020.
Yes, it's a really good question Matt.
First quarter was good gross margin was good overall manufacturing.
Productivity was really good but the world changed pretty drastically in March and so.
Be impossible for me right now to project.
Out any any further.
But obviously as with volumes at the levels, we're talking about that we'll have a negative impact on manufacturing variances.
And when we have a better ability to talk about those in detail and project them, we will but we're just not had a position to be able to do that today.
And if I could squeeze one more in kind of why would you think that that the growth you're seeing in Asia with more distributor stocking in than it's been a true recovery.
The growth numbers are pretty large and and so it's.
We're just trying to figure that out right and so rather than give them give those specific numbers.
We just decided to don't let you know the they are back to growing after a pretty rough Q1.
But but we're not able right now to to put a true representative growth number that would help you kind of understand what recovery looks like.
Okay. That's fair thank you very much.
Thank you.
And as a reminder, ladies and gentlemen to ask a question do we need to press star one when you touched on telephone to withdraw your question. Please press the pound key.
Our next question comes from the line the Rick Weiss with Stifel. Your line is now open.
Hey, Greg Hi, Todd.
I wanted to go back to gross margin if I could just the second yes.
56.9, I think I'm right thing, it's a record level.
You said.
Was trending above expectation.
And I. Appreciate you are not anxious to forecast going forward, but maybe just help us understand some of the drivers there.
What that.
Was that the mix of new products was it just purely volume was that.
Something about some cost reduction.
And it should that maybe we need to appreciate better just.
Because it just seems to me that as you come out of this as you recover.
Those factors should be in play and.
Whatever the exact numbers are they should be.
How can I say.
They should be in.
Go positive as we go back the other way as volumes recover whenever that is.
Yes, I think that's logical in it and that it is a bummer rig because I think we were set up to really have a good gross margin story this year.
As a reminder, we guided 80 to 100 basis points of improvement at the beginning of the year and we actually thought Q1 was going to be the tough quarter right. We thought when we talked about it we said we'd be well below that in Q1, but we we catch up later in the year and so for Q1 to come in as good as it did.
I think was really encouraging to us and I think the biggest driver was the cost reductions and which which is combined with volume.
From the prior year and sites I think we're doing a good job.
As volume improves kind of leveraging the infrastructure.
With a higher revenue base right, we've been talking about that a lot and I think thats playing out the other couple of things that happened in Q1.
I think mix was positive specifically capital being load that actually helps margins and.
And then also FX was a little better than we thought it would be so that that was why it beat our expectations, but but it is a there's good underlying activity and progress on the gross margin side of the business.
Yes, and just thank you for that.
Just a follow up.
On that thought process.
Kurt My impression is that the last few years, obviously focused on lot of factors.
Thanks, Tom Matt.
People pipeline.
Salesforce.
Salesforce expansion et cetera, but.
My impression and please correct me if I'm wrong is that Youve focus less aggressively on pure cost reduction.
Prioritizing that making sure that helps us had the products they need several long winded wind up here, but what I'm going with it is that during a period like this given your experience long experience operating and financial is there an opportunity to actually accelerate.
Cost reduction cost improvement programs, it's you might not want to tackle otherwise again setting you up for actually a leveraged.
Recovery in terms of.
Operating margin.
Again whenever that happens.
Rick them number one I'll confirm what you stated our our priority last couple of years for our global manufacturing team has been the successful high quality launch of new products that has been priority one.
Every single day.
With that said.
I'd have to go back probably 18 months or so where we started talking about some of our manufacturing work now starting to move into focusing on SK, you rationalization routine cost reduction kind of being a little bit more habitual and our approach there and as Todd said earlier in response to one of the questions.
We did have some nice cost reductions.
Carry into 2020 as we rolled standards. So we're we're we're kind of in the early innings of that benefits starting to hit the company.
Can we take advantage of this downturn to accelerate efforts on cost reductions.
I'm not going to bite quite as hard on that part right now and I say that because initiating new products or new projects and cost reduction.
Typically takes a lot of in person presence from the engineering the manufacturing engineering, the quality teams and a lot of that.
Office based employee are working remotely.
And the people that are working in our factories are truly aligned around production support or new product build validation verification activity. So we've really narrowed our focus on the activities at this point in time, but I take more confidence in the successful cost reductions, we built and delivered last year.
Coming into this year as a good.
Predicate of what we can do on a go forward basis.
I appreciate it thanks.
Thank you.
We do have a follow up question from the line of Kristen Stewart with Barclays. Your line is now open.
Thanks for taking the follow up just I guess going on back to gross margin still.
Todd how should we just think about lower on.
Procedure than to the extent you might be slowing down perhaps some of the manufacturing just with respect to the procedure demand being lower we take most of that as a manufacturing variance and and then a current period or should we think about some of those.
Cost of fixed cost just kind of being more capitalized and putting more pressure.
In future periods and and on on cost cuts on such that you might put some of that pressure an inability to see that future gross margin expansion hopefully that question makes sense.
Yes, definitely makes sense, Kristen and I've I've been other companies talking about this that's something we're going to look at right. We've we've started those discussions it will really depend on what the volume looks like right and how Q2 plays out what Q3 is looking like when we get near the end of Q2. So.
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But I'm not going to get ahead on this call of our auditors and our audit Committee. So we'll we'll look at the facts on the ground and decide what makes the most sense and.
And we'll do it that way, but we're certainly aware of those issues.
And we've heard other people talking about that but no answer for you.
Definitively here today.
Okay, and then any I guess color. If you will buy on just kind of order patterns or anything that you're seeing specific to the smoke evacuation.
Just in terms of I know you had said that.
Interest was high going into coal bed is even higher now that are you seeing that translate into actual orders now with.
With co then is it accelerating the actual orders or backlog or anything like that that you could give us any sort of quantitative or even qualitative on backlog and actual orders I know interest is there but is it did actually flowing through and being meaningfully translated into orders at this point.
Yes, it's a great question and I'd, probably give you more qualitative that I woke quantitative at this point that might be something we revisit on the second quarter call, but I I would confirm for you that to.
Our head of our international business and our head of our advanced surgical business have been working.
With their respective marketing teams and.
Updating our global forecasts for both the air seal and the Buffalo filter portfolio.
And and.
On the other side of that continuing to provide educational.
Forums for customers to to dial in and participate be that video forums webinars et cetera.
As that work globally has continued the orders have have also started to come in and I can tell you that that began almost immediately after the early recommendations from the from some of the surgical societies were published and do it was rather supply.
Rising how quick the response was and we've been very encouraged by the.
The receptivity to the education programs that we've provided to try to give customers confidence about what our technology does and how that will work for them. So.
So yes, we have seen the order volume pick up in the backlog pick up and we are we are working to ensure we have product supply to meet any expected future demand.
No there's no major constraints on manufacturing for either of those products at this point.
Now the good the good news is on both of those platforms started with Ifmis.
One of the main activities after acquisition was the vertical integration of that platform technology into.
On the consumable side into our manufacturing network, and we and barked on same process with Buffalo filter.
I can't tell anybody on this call its 100% vertically integrated into our four walls.
But I feel good about our supply chains be the internal manufacturing process or the external supply partners.
We work with on those on those technologies.
Great. Thank you very much.
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Thank you.
This concludes today's question and answer session I would now like to turn the call back to Mr. heartening for any closing remarks Mr. arm.
Thank you Christian Thank you everybody for your time today and we appreciate you listening to the Conmeds story and your questions and we look forward to speaking with you on our next earnings call. Thank you and have a good evening.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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