Q1 2021 Conmed Corp Earnings Call
[music].
Yeah.
Good afternoon, everyone before the conference call begins let.
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 and the company's actual results may differ materially from its current expectations. Please refer to the risks and other uncertainties disclosed under forward looking information in today's press release.
As well as the company's S E 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'll also hear management refer to these.
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 a bench.
Marking against other medical will take them.
Technology companies.
Adjusted net income and adjusted earnings per share measure the income multi company excluding credits.
Our charges for art considered by the company to be special or outside of its normal ongoing operations. These adjusting items are specified in the constellations supporting the company's earnings release is.
Posted to the company's web site with the required and asked me completed I will turn the call over to Curt Hartman Con Meds chair of the board President and Chief Executive Officer for opening remarks, Mr. Hartman.
Thank you Paul Good afternoon, and thank you for joining us for <unk> first quarter 2021 earnings call with me on the call is Todd Garner Executive Vice President and Chief Financial Officer.
Day, we will walk you through our first quarter results and share our thoughts on the outlook for our business in the current operating environment, recognizing the uncertainty that still exists across our global markets. We will then open the call to your questions.
Turning to our results total sales for the first quarter were $232 $7 million.
Representing a year over year increase of eight 7% as reported and an increase of seven 2% in constant currency.
From an earnings perspective during the first quarter, our GAAP net income totaled $9 9 million. This compares to net net income of $5 9 million in the first quarter of 2020.
Excluding special items that affected comparability, our adjusted net income of $19 1 million increased 26, 8% year over year and our adjusted diluted net earnings per share of <unk> 63.
Increased 23, 5% year over year.
Broadly speaking, we saw consistent year over year performance throughout the quarter with the latter half of the quarter demonstrating better performance. The U S market in particular showed improvement later in the quarter following weather related procedure delays across the southwest.
Consistent with what we communicated in January Latin America remains challenged more so than expected while other international markets saw steady performance throughout the quarter aside from some procedure stoppage in areas of Canada, France and Asia later in the quarter.
Overall, it's great to see both global Orthopedics and global General surgery achieved year over year growth in the quarter as well as positive growth in both the United States and international markets.
We continued to deliver solid growth in both the <unk> and Buffalo filter and were happy to see the state of Kentucky approved smoke evacuation legislation during the quarter that will result in operating rooms across the state going smoke free starting January one 2022.
In closing I remain very proud of the current mid team and the progress we've demonstrated in the quarter. We think these results validated many of the steps we took starting in early 2020 in response to the growing incidence of COVID-19.
As a result of our first quarter performance you will see that we have increased our guidance on both the top and the bottom line I'll now turn the call over to Todd who will provide a more detailed analysis of our financial performance and take you through our guidance adjustments Todd.
Thank you Curt.
All sales growth numbers I reference today will be given compared to the prior year in constant current.
The reconciliation to GAAP numbers is included in our press release as usual we've included an investor deck on our website that summarizes the results of the quarter. Our updated guidance and also provide sales results compared to 2019 for those of you interested in that view.
We did have one less selling day in Q1 2021 compared to Q1 2020.
Normally we would estimate that impact to be between 100, and 150 basis points on the quarter, but given the abnormal external environment in both years, we would not attempt to quantify the impact on the quarter.
For the first quarter of 2021, our total sales increased seven 2% COVID-19 had a meaningful impact on the full quarter.
In January and February each month grew slightly on a global basis compared to the prior year and March grew significantly over March 2020.
In Q1, we grew domestically and internationally in both single use and capital products.
Capital was strong compared to Q1 2020, but was still below our Q1 2019 levels.
For the first quarter, our total U S sales increased four 3% versus the prior year quarter or.
Our international sales increased 10, 8% for the quarter compared to the prior year cash.
Canada, and Australia saw good growth in the quarter Europe was a mixed bag with some countries growing in some declining.
As a whole Europe grew slightly for us in Q1.
Asia was the most impacted by the virus in Q1 of 2020, and therefore grew nicely against the easiest geographic comparable for us.
As Curt said Latin America was our most challenged geography in Q1, and our near term expectations for that region have decreased as progress against the virus.
Lagging.
Worldwide Orthopedics revenue grew five 9% in the first quarter.
In the U S orthopedic sales increased <unk>, 2% and internationally orthopedic sales increased nine 4%.
Total worldwide General surgery revenue grew eight 2% in the quarter.
U S General surgery revenue grew six 1%.
Internationally General surgery grew 13, 4%.
<unk> and Buffalo filter continue to show strong growth across the globe.
Now, let's move to the expense side of the income statement.
We will discuss expenses and profitability, excluding special items, which include charges related to acquisitions and integrations restructurings amortization of intangible assets and amortization of deferred financing fees and debt discount net of tax.
Adjusted gross margin for the first quarter was 55, 2% a decrease of 170 basis points from the prior year quarter. This was a little better than we expected as we had forecasted the negative impact from lower production levels from recent periods.
We told you in January that after Q1, we expected adjusted gross margin to be positive compared to the prior year quarters as we move through the year and we continue to expect that.
Research and development expense for the first quarter was four 3% of total sales 40 basis points lower than Q1 2020.
First quarter SG&A expenses on an adjusted basis were 39, one percentage of sales 210 basis points lower than the prior year quarter.
Interest expense in Q1 was $6 $8 million on an adjusted basis.
The adjusted effective tax rate was 13, 4% in Q1. This was lower than we expected principally due to the excess tax benefit from stock plans. This is difficult to predict but we don't expect nearly the same benefit in future quarters. We continue to model, our adjusted effective tax rate to be between 24% in <unk>.
25% in the remaining quarters of 2021.
First quarter GAAP net income totaled $9 9 million or 31 per diluted share, which was an increase of 55% over the prior year quarter.
Excluding the impact of special items discussed earlier, we reported adjusted net income of $19 $1 million and adjusted diluted net earnings per share of <unk> 63.
An increase of 23, 5% compared to the prior year period.
This is the first quarter, where the average stock price has been above our hedged conversion value of $114 92 for the convertible notes.
The impact in Q1 was the addition of approximately 170000 shares to the diluted share count as adjusted.
As you can calculate this had an immaterial impact on adjusted EPS in Q1.
And of course, we cannot predict the future stock price, but if it stayed at current levels. We estimate this will decrease our full year adjusted EPS by approximately <unk> seven.
Turning to the balance sheet, our cash balance at the end of the quarter was $36 8 million.
Compared to $27 $4 million as of December 31, 2020.
Accounts receivable days as of March 31 was 63 days consistent with year end 2020 and down from 70 days at March 31 2020.
Inventory days at quarter end were 178 as we build for anticipated increased volumes. This compares to a 150 days at year end 2020, and 166 days at March 31, a year ago.
With long term debt at the end of the quarter was $725 million versus $735 million at December 31.
Our leverage ratio on March 31, 2021 was four seven times.
As you probably saw this month, we exited the suspension agreement we entered into with our banks a year ago. It turns out we never exceeded our original debt covenants, even during the worst parts of the pandemic and therefore in hindsight did not need the flexibility provided and the suspension agreement.
We appreciate the support of our banking partners through very uncertain times a year ago.
Cash flow provided from operations for the quarter was $22 3 million compared to $3 7 million in Q1 of 2020.
Capital expenditures in the first quarter were $3 1 million compared to $2 $8 million a year ago.
Now, let's turn to our updated view of our 2021 financial guidance.
Three months ago, we opted to provide full year guidance based on a framework of assumptions on how the virus would impact the year.
As a reminder, those assumptions were that Q1 would be significantly impacted by the virus and that impact with linger into Q2, and then ameliorate from there.
Our assumption was that the global disbursement of vaccines would take months, but be effective at reducing the burden on health care from the known variance of the virus.
We continue to see 2021 as a transition year with those same assumptions.
Global COVID-19 case counts remain at elevated levels, but our business has also proven to be relatively resilient.
As I mentioned earlier, we now have additional concerns in Latin America, and also expect a higher diluted share count related to the convertible notes to be a headwind to full year adjusted EPS.
Our approach to modeling the remainder of the year is to recognize the over performance in Q1 on the top and bottom line and maintain our expectations for Q2 through Q4, as we had them three months ago, while absorbing the new headwinds I just discussed.
That that results in revenue guidance for the full year between 1.0 billion and 1.0 of $3 billion.
We now expect currency to be favorable to revenue between 50, and 100 basis points for the full year, but just slightly favorable to adjusted earnings.
For adjusted EPS, We now expect our full year 2021 to be between $3 <unk> and.
And $3 20.
And with that we'd like to open the call to your questions and I'll hand, it back to Paul.
Thank you Sir.
As a reminder to ask a question you will need to press star one on your telephone please limit yourself to a question and a follow up if he has more than question. Please press star one again to be back into queue.
Our first question from.
The line of Rick Wise with Stifel. Your line is open.
Great.
Yes.
Maybe one question on the current environment.
Frankly something else.
Curt and Todd both viewer.
And presenting that.
Slowness.
In January and February and the significant improvement in March.
We've heard from.
Most of the other companies.
Giving us a similar scenario.
Suggesting that that momentum continues.
Into April.
The cautionary comments on Latin America.
Is that what youre seeing and.
Maybe just a little more color as part of that on.
Where youre seeing that strength any particular procedure product areas.
Help us think through that if you would.
I think we'll probably a double team this one a bit Rick but I think the January February commentary was really just.
Just a continuation of what people saw in the fourth quarter.
Fourth quarter was a little tougher from a COVID-19 case impact on procedures that did continue.
And then as we got into the month of March things opened up a little bit and in addition, the comparable is obviously, where most suppressed given the rapid slowdown in the second half of March of 2020.
I also don't want to skip past the weather event that happened in February that had a pretty.
Profound impact across the.
Southwest area of the country a lot of things were shut down.
Good good portion of a week that impacts a lot of surgical procedures.
Then on top of that and COVID-19 case volumes, the southwest, California markets were pretty slow at the beginning of the part of the year just because of the restrictions that were in place.
As we came through March things have gotten better as vaccines have rolled out.
So I don't think any headlines have changed as we've started the second quarter relative to that other than obviously I think everybody is aware India is in a very tough spot in our commentary Latin America remains challenged.
We said that at the beginning of the year and it might be a little more challenged even at this point there is just a little bit.
Lack of disbursement of vaccines and availability et cetera in the Latin American markets based on what we're seeing as an organization.
So that's how I'd frame it I don't know if Todd has any other comments relative to that.
No I mean I agree obviously from on a relative basis things are progressing as you hear everywhere else Rick I would just remind everybody that I know we are in this quest for normalcy right and everybody is anxious to when are we back to normal and we're certainly not there so.
Yes.
March certainly better than January and February.
Again, we're not talking about Q2 on this call but.
April just consistent with what everybody else is saying April looks a whole lot more like March than it does January and February.
But we're a long way from normal I would still say as a market.
So that's my perspective.
Yes. Thank you.
Just from my second question.
We recently.
Thank you good diligence on your business.
Well, we heard from your customers or potential adopters.
COVID-19 has accelerated smoker adoption more hospitals are interested more trialing.
<unk> faster decision, making faster move around legislation maybe.
What do you expect when you get an approval like Kentucky legislation, how do we think about the impact on 'twenty, two and beyond and in general.
What we hear is that the.
Could we get the right feedback are we hearing the right thing.
That decision, making acceleration kind of mindset.
Thank you.
Yes, I think what what you've just stated there Rick is consistent with.
Go back to this call a year ago, and if you read that transcript.
We commented for the first time that we think in this environment is challenging as it is.
There is more attention to the smoke evacuation and the <unk> product because of the society publications on the benefits of those devices in surgery.
And then at the end of the second quarter, we should start to show up in the financials in the third quarter definitely showed up in the financials.
That has not changed and I think that was reflected in the survey work that you did that.
Theres just a lot more awareness.
Not necessarily awareness by the surgical staff.
Probably more awareness by the hospital administration and the surgeons, who are now have a growing appreciation for the impact of smoke.
Surgical smoke on the health of the staff and the overall well being and welfare of the employees in that debt facility.
We've also said that legislation was not pulling this market. It was more wind at the back of the market and that's because of all the great work that has happened by the societies going back a decade, plus whether it's <unk> or other societies around the world, who have really been advocating for smoke free environment, So when something like.
Kentucky comes along in the legislature of mandate.
It's obviously positive because.
It helps move a 100% of the market in this direction.
And it sets kind of a timeline. So if you look though we've had other legislation that doesn't have as much teeth. This one appears to have a little more bite to it so more positive.
But I would also say we're not starting from zero there were already accounts from the state of Kentucky, using smoke evacuation and filtration. So it's just helping motivate the other ones that haven't quite moved as quickly I think is the way I'd frame it.
Gotcha.
Thanks.
Okay.
Yes on the quarter. Thank you.
Thanks, Rick.
Okay.
Our next question is from the line of Robbie Marcus with Jpmorgan. Your line is open.
Oh, great. Thanks for taking the question and congrats on a really nice quarter.
Thanks Robert.
Two questions from me, maybe just start with the first one I appreciate.
Youre, a historically, a very conservative management team and I like that.
But just turning to the guidance and I wanted to just try and tease out. The answer you mentioned you raised guidance for the first quarter beat but less second third fourth quarter assumptions of known from what you had coming into first quarter and I just wanted to make sure is that more along the lines of the environment is still.
Uncertain here and you don't want to get ahead of yourself or is it something youre seeing exiting first quarter that that Wade.
Not.
Not prompt you to take the good trends that you mentioned in and bring them forward at all just wanted to try and tease out the answer there.
Yes, it really just it's going to be.
It's going to be a year, where we got to stay flexible Ravi and we've got to.
Kind of manage the fuel and brake at the same time and make sure. The fuel is ahead of where the opportunity is and make sure. We don't release the break where the opportunity is still lagging right and so we've got to just stay flexible as we navigate through the year. We were very pleased with Q1.
The business did did better than we expected.
But as we had laid out the year three months ago.
We already had assumed improvement we were counting on Q2 being measurably better than Q1, and it was actually a decent step up from Q1 to Q2. So as we leave Q2, where we had it it's a smaller step up than it was but it's still improvement over Q1, and there's enough uncertainty out there.
Around the globe and as for everybody I think everybody knows we're essentially 50 50 U S and international.
There's enough uncertainty there is just no reason to get ahead of yourself here. So we will play it quarter by quarter.
We will count Q1 is a win versus expectations and we will continue to focus on executing and managing the business appropriately as we have through the pandemic and we will take it from there and we'll talk about it three months from now.
Great Great I appreciate that maybe just a follow up here at the Jpmorgan Conference you were so nice to tell us that <unk> and Buffalo filter, we're 25% of sales now growing at least 20% I want to see if you'd comment on how that part.
The business did in first quarter.
Those.
I think we said at least 25% of the business growing at least 20% and that remains true.
It would be it would be both of those numbers.
In Q1.
Any any color on how much they feedback.
We can dream.
Okay.
We're not going to get into product line specifics there, but we're pleased with how that's going in and the thesis remains intact.
Alright, I tried thanks a lot.
Our next question is from the line of Matthew O'brien with Piper Sandler Your line is open.
Great. Thanks for taking the question, so Todd not to keep going down the path here on guidance, but you just feedback.
Q1 by $20 million currency is now going to be more like a $10 million tailwind versus what you were expecting before so that's about 30.
And you're only raising the midpoint by 15 seems like things are loosening up here in the U S seems like youre going to get some of those cases back down in the southwest on here in Q2 in the year.
Latin America, and some of the pressures you're seeing in EMEA, our India really that big of a headwind.
I think that there is a $15 million delta between what we just sat here in Q1 and currency versus the increase in the.
Midpoint of the range.
Well first of all I like your optimism that.
Like if you are an optimistic guy.
I also think you've done some rounding up a little bit I think if you do the math on.
On a prior year of 862, I think 50 to 100 basis points works out to between four and $8 million and so you've rounded that up to 10. So.
I'd caution you there on year rounding.
But yes look we.
We had a <unk>.
Wider range right. All we did for our guidance was take the actual for Q1 and left what we had for the last nine months of the year alone and so we had a $15 million range on our Q1 revenue.
We've now delivered a specific number so our revenue range has shrunk by that $15 million right. So we're not we're not more bearish on the year at all.
We're very pleased with Q1, we just don't see the need to and there is enough. There was enough moving pieces out there that there is no need to get that granular or get that specifics. So good start to the year.
Lots of work left to do lots of diner.
Dynamic external.
Levers to deal with and manage and we're going to we're going to keep doing it as we have been doing it.
Got it okay and I'm sure everybody in the investment community knows.
We're optimistic so I appreciate you pointing that out.
Also curious on the on the capital side.
I know you had an easy comp we're seeing across med tech here in Q1 real strength in capital purchases, which you guys saw how much of it that is obviously pent up COVID-19 demand how durable is that I guess for.
The remainder of the year I mean are there is there.
Hundred million dollars' worth of capital that was deferred or some number that was deferred when we should expect for the rest of the year and then what does that say about volume.
As we go into Q2 and Q3 as these hospitals are purchasing capital in front of that.
But I think Matt the way I would comment on capital as we saw more of that in the latter half of the quarter obviously.
Based on.
Procedures picking up and our our capital is a smaller dollar capital and it is it is essential to procedures being done. So if there is a need.
They're going to make the purchase because otherwise they are they are potentially deferring a procedure because of the lack of capital and then the other thing I would just add on top of that as we we did comment.
New capital come into the market, we had a new video platform and we had a new large bone power tool platform. So anytime you have new products like that puts your sales force back on offense gets them enthusiastic to revisit customers new customers.
So we had a couple of things going in our favor right now relative to our our two bigger capital items, if you will.
And then we also have in general surgeries from capital items helix generators.
<unk> box.
Box and then.
Lesser extent, the Buffalo filter capital small dollar item, but.
All of that adds up to.
We have a good opportunity here as markets open up in more procedures are getting schedule that puts more wear and tear on existing capital and that opens up capital and I think we've said we never saw the slowdown in capital as being related to a lack of financial.
Capability, it was about where where are they going to put those capital dollars and there were other more critical needs during the height of the COVID-19 pandemic than they are.
A lot of that has been addressed so now they can move on to the more.
Call it routine capital if you will.
How much capital backlog is out there, it's really hard to quantify.
Really hard to quantify so I don't think I would take a guess at that one.
Totally fair. Thank you.
Our next question is from the line.
New meter with VB Leerink your line is open.
Hi, This is Aaron on for Ed Thanks for taking our question.
Just a couple quick ones from me.
Can you maybe talk about what Youre seeing.
Throughout the quarter and this points marathon.
<unk>.
Have those volume starting to take off with organized sports starting and just wanted to see what you guys have noticed in that area.
I think they strengthened as the quarter progressed.
We report orthopedics, we have a lot of different products within orthopedics, including video including power.
<unk>.
If you look at our procedure specific category, which is the anchors that are used in soft tissue repair.
We generated growth in that category, both in the U S and international market and then the other item that directly reads on sports medicine procedures would be the MTF tissue biologic <unk> portfolio, and we generated growth in that growth.
In the U S and the international markets from the quarter.
So there was.
There was a growing set of procedures occurring relative to source soft tissue repair would be that the knee the shoulder the hip and.
Just as a reminder, con meds biggest presence was in the shoulder. Obviously, we've we're doing a lot of innovation to continue to expand within the knee and the hip.
Obviously extremities as well as.
Debt clinician group gets more focus on soft tissue repair wrist foot and ankle elbow etcetera. So I think I think the procedures, we're starting to pick up as we got further into the quarter.
That's that's what we're prepared for.
Okay great.
And then just another quick one on Buffalo filter Congrats on you guys.
Kentucky legislation is great.
Have you heard of any other states that have a similar type of legislation coming down the pipe.
Yes, Aaron there is theres about a dozen states.
That we think are close.
Sure.
Actually we are in the process before the pandemic started so we would expect as the legislators across the country get back to work.
This will be one of the first things they deal with I'll, just remind you as Curt said the legislation is really following the demand and not necessarily leading it but so we're happy to see it we welcome. It we think eventually all states will have.
Some rules around keeping workers safe that seems logical.
But it's not something that we're holding our breath for or are counting on here at <unk>. We know that the market is going to grow and this is going to become a standard of care and <unk>.
We're just trying to make sure we service the customers and get as much of that market share as we can.
Okay, great. Thanks, so much.
Our next question is from the line of Mike Matson with Needham Your line is open.
Hi, Curt and Todd This is David Saxon on for Mike Thanks for taking the questions.
First one is just on <unk> I was wondering if you could just give an update on the attachment with.
Attachment rate with intuitive robots.
What can drive that higher over time, and then in March and April can you talk about.
How the utilization trended and how that compares to kind of pre pandemic levels.
And on your March April question, David You talked.
Talking about air seal utilization, specifically or or something broader.
Yes, Eric.
Okay.
Okay. So far.
Catchment I think I think the way we framed out before his footprint right. So we've framed before that.
Where you walk into an or and you see a da Vinci robot.
Half of that time, you'll see an <unk> box also in the room right and that has been climbing over the past several years and that continues decline. So it's probably approaching more like 60% now is probably a safe number to say so that that footprint.
<unk> continues to grow the procedure capture also continues to grow.
That's below the footprint percentage. So we're now north of 35% of the procedures that are done on the da Vinci will be using the <unk>.
And that's just because it's doctor by Doctor right just because the machine is in the room you've got to.
<unk> got to get dark by Doc surgeon by surgeon to try it and adopt air steel, but that continues to go well those both those numbers continue to go up and we expect they will continue to go up from here.
Specific utilization first of all we're not going to talk about April here. This is the Q1 call.
So we're not going to talk about that but.
This is tied to procedures right. So as as procedures are depressed like they were in January and February.
Fewer procedures as those open up.
Then we get more usage right. So certainly.
A decent increase.
Between February to March and as Curt said February was also impacted by some weather issues in the United States and so nice pickup between February March we still think we're a long way from <unk>.
Normal.
We're still again across the globe procedures are still.
Impacted by the virus hospitals are still having to prioritize and manage in and adjust and then patients of course are also have their own reasons too.
Maybe delay or defer or be hesitant so.
Still not back to normal but trending in the right direction.
Okay. That's helpful. And then maybe another for you Todd just on gross margin I think you said second quarter should show some year on year improvement, but just given.
Second quarter of last year with the trough should we kind of be thinking.
In line with what we saw the first quarter.
Any any color there would be helpful. Thanks, so much for taking my question.
Yes, great question David.
Yes.
In that range, so probably around the same area as Q1.
And decent growth over Q2, and then Q3 and Q4 should be growth over the prior year quarters.
Great. Thank you.
And then last question is from the line of Matt Mission with Keybanc. Your line is open.
Great and thank you for taking the questions.
Hey, I really like how you guys laid out slide five.
With versus 'twenty and versus <unk> 19 in one of the things that I guess.
Fast anything about <unk> debt orthopedic.
Surgery was partly plus 3%.
Versus versus 2019 and down a bunch in the United internationally and down a bunch in the U S. Could you talk a little bit about about the difference there and whether that you think that on the international orthopedic side do you think you can you can you can maintain.
Positive growth versus versus 2019 for the remainder of the year.
Yes, I guess, the first thing I would point to is it internationally.
About 60% of that business 60, plus percent of that business is orthopedics. So the point of that statement is our presence internationally in orthopedics is much bigger much more pronounced much better market position and that is a historical event driven when con meds.
The Linda Tech assets from Bristol Myers Squibb in the late nineties, we we retained a lot of that existing infrastructure and.
And still have that infrastructure in place in the market share that comes with being there and that consistent.
The other thing is the we had some market performance is that we're really heavily focused on orthopedic procedures returning.
In places like China, which experienced COVID-19 first and foremost.
They're kind of back doing procedures and Thats, a respectable orthopedics market for US places like Australia, and New Zealand and Canada, Japan, good good markets for <unk> because of our presence in good orthopedic markets for Con meds. So as those markets have gotten a lot a lot healthier in terms of their ability to deal with COVID-19.
Procedures, and then the softer <unk>.
Comparable so that they had for the full quarter. So.
We have a very good orthopedics business outside the U S and I think our orthopedics business outside of the U S will continue.
To have positive momentum, it's been that way for a number of years in the U S.
We've said from day one this has been our biggest challenge market.
And we continue to evaluate and continue to innovate and good.
Good things are happening there.
We've got Pat buyer.
The top of the U S. Now orthopedics, bringing a lot of the same practices that they employed internationally into the U S market and I feel positive about where we're going in.
Looking forward to the second half of the year for our U S. Orthopedics business, where I think the lines are doing will really start having traction.
Okay.
And as a follow up to the gross margin question. Todd have you worked through the through the unfavorable manufacturing variances.
And the higher freight costs you were experiencing.
No, they're not all behind us yet.
It's a four months.
<unk> is how that works from an accounting perspective, so December.
So as an example, the the unfavorable manufacturing variances we saw in December will hit the external P&L in April right and then January hits in May and so that's how it works and so obviously <unk>.
December was bad January and February.
We are bad so that as we said before that we will continue to impact Mark it'll kind of mask margins continuing into Q2.
And.
And then hopefully we will be less of a clouding factor.
When we move into the back half of the year.
Okay.
And last question just a follow up to the Aircell question with with da Vinci.
Curious.
When doctors training on da Vinci.
From intuitive or in medical school are they also train on air sale and have you are you trying to.
Are you trying to get air sales into medical school. So when the doctors initially learn how to do the procedure they are learning it.
Intercept platform.
So the two parts of that question, Matt obviously, given the longstanding relationship that first surge request and <unk> has continued with intuitive.
There are a lot of training events that occur with intuitive surgical where she'll his presence. So if the doctor is coming in to an intuitive training event.
They are likely to see an error shield platform, there and get that exposure at the same time as far as the direct.
Medical School resident training programs obviously.
We target all of those I Couldnt look anybody in the eye and say, we have 100% success Thats just kind of customer dynamics.
But part of our growth trajectory is to be in medical school programs with all of our products obviously.
So those are those are certainly priorities.
Hey, Thanks, guys congrats.
Thank you.
Yes.
As there are no further questions. This concludes the Q&A session I would now like to turn the call back to.
Mr Hartman for any closing remarks, Mr Hartman.
Thank you Paul and I just want to thank everybody for your time today and we look forward to speaking with you on our next earnings call. Thanks and have a good evening.
This concludes today's conference call. Thank you for joining you may now disconnect have a great day.
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Yes.
Yes.
Yes.
Yes.
Yes.
Yes.
Okay.
[music].
[music].
[music].