Q2 2021 Conmed Corp Earnings Call
Good day and.
And thank you for standing by and welcome to the second quarter of fiscal year 2021 Con net earnings conference call. At this time all participants are in listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question during the session you'll need the press star 1 on your telephone if you require any further.
The assistance. Please press Star then zero.
I would now like to hand, the conference over to <unk> for a brief announcement.
Good afternoon, everyone before and 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 and so the terms are defined under the federal securities laws and.
Investors are cautioned that any such forward looking statements are not guarantees of future events performance.
The 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 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 maybe 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 and 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.
Adjusted net income and adjusted earnings per share measure of the income of the company excluding credits or charges that are considered.
Company to be special or outside of its normal ongoing operations.
These adjusting items are specified in the reconciliation supporting the company's earning releases posted to the company's website.
With these required announcements completed I will turn the call over to Curt Hartman <unk> chair of the board President and Chief Exec.
And of officer for opening remarks, Mr. Hartman.
Thank you Jonathan and Julie Good afternoon, and thank you for joining us for kind of mid second quarter 2021 earnings call with me on the call is Todd Garner Executive Vice President and Chief Financial Officer Today, We will walk you through our second quarter results.
<unk> and provide an update to our full year outlook. We will then open the call to your questions.
Turning to our results total sales for the second quarter were $255.2 million.
Representing a year over year increase of 61, 7% as reported and an increase of 58, 2% income.
Currency versus the same quarter in 2020, given the COVID-19 impact on the markets and Q2 of 2020 I wanted to also note that relative to the second quarter of 2019 sales increased 7.1% as reported and 6.7% in constant currency.
Currency and that view, we feel this was a solid quarter considering that various factors like vaccination rates and sporadic COVID-19 shutdowns and disruptions impacted the Q2 of 2021 surgical schedules.
From an earnings perspective during the second quarter, our GAAP net income totaled $13.3 million. This compares.
Constant could net loss of 27.4 million and the second quarter of 2020.
Excluding special items that affected comparability, our adjusted net income was $22.2 million during the quarter and our adjusted diluted net earnings per share were <unk> 71.
Each of which increased meaningfully versus our COVID-19.
Pairs to actual results and the prior year.
Our global Orthopedics business is improving as we projected as expected sports related procedures overall still remain below the pre COVID-19 levels. The international export markets remain the most challenged relative to 2019, while international.
Covid and markets and the domestic business showed continued improvement and procedure specific results as we said and our January outlook, We think our sports medicine business will take longer to return to historical procedure levels than the rest of our business.
Global General surgery, again demonstrated strong results growing when compared to both 2020 as expected.
Direct but also against 2019, we remain very happy with our global results of both the <unk> and Buffalo filter and we anticipate continued strong performance from each of these products General surgery performance remains in line with our January comments had indicated general surgery would recover faster than sports medicine.
Overall.
We had a very good quarter that aligned with our original guidance considerations, which included number 1 Q1 has seen the biggest adverse impact from COVID-19 disruption with that impact the lingering into Q2, and we believe that was accurate further while we are dealing with the impact of the Delta variant to include select market slowdowns.
We delivered we believe governments and health care systems recognize that a measured the slowdown is a far better approach and implementing broad procedure cancellations when dealing with the spread of the virus. We also stated that global vaccine disbursement would take months. We believe good progress has been made but there has been market variability in terms of both availability and.
Except ince of vaccines.
And finally, we felt 2021 would be a transition year. We believe this remains true as markets navigate the impact of the delta variant and perhaps potential future strains.
In closing I am proud of the <unk> team and the progress we made during the quarter.
More directly.
Global leadership team has performed exceptionally well and we always have areas of opportunity. The executive alignment has never been stronger at <unk>, given the near and longer term opportunities and the strength of the business. We made a decision during the second quarter to accelerate sales force expansion across our.
Our business and select international markets and both the domestic general surgery and orthopedic markets. This work began in the second quarter and will be essentially completed in Q3. We've also increased our outlook to reflect the strength, we see and our business Todd will provide more of during his review of our outlook the.
The significance.
Of that news should serve to underscore our confidence and our future and my confidence and this leadership team and.
Now I'll turn the call over to Todd who will provide a more detailed analysis of our financial performance and walk you through the increase to our outlook Todd. Thank.
Thank you Curt.
All sales growth numbers I reference today will be given and constant.
Current currency. The reconciliation of GAAP numbers is included in our press release as usual, we have included and 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 and that view.
For comparison purposes Q2.2000.
21 had the same sales days as 2020, but 1 less sales day than Q2.2019.
We said in January that we expected 2021 to be a transition year and that it would likely take the full year for the sector to be on a post pandemic environment halfway through the year, we continue to believe that.
For the second quarter of 2021, our total sales increased 58, 2% compared to the trough quarter of the pandemic a year ago.
Our Q2 U S sales increased 64, 2% versus the prior year quarter, our international sales increased 57% for the quarter compared to the prior year.
Consistent with our expectations. The U S is recovering faster than outside the U S.
State and federal governments, and the U S are allowing hospitals to manage their own capacity issues, whereas international governments still locked down and selective regions based on spikes and case counts.
We expect this dynamic to continue until vaccination.
Rates improve.
Worldwide Orthopedics revenue grew 72, 9% and the second quarter and the U S. Orthopedic sales increased 97% and internationally orthopedics increased 63, 1%.
Total worldwide General surgery revenue grew 49, 1% and the second quarter.
Cash general surgery revenue increased 55, 7% internationally general surgery revenue increased 35, 2%.
Now, let's move to the expense side of the income statement.
We will discuss expenses and profitability, excluding special items, which include plant utilization cost product range.
Utilization costs charges related to acquisitions, and integrations restructurings manufacturing consolidations amortization of intangible assets and amortization of deferred financing fees and debt discount net of tax.
Adjusted gross margin for the second quarter.
And there was 55, 4% and increase of 210 basis points from the prior year quarter.
We believe that the majority of the impact of the pandemic on our gross margins is behind US now as we move to the back half of 2021. However, freight costs are still elevated we are working hard to mitigate price increases from our suppliers.
And we're watching the impact of inflation of inflation closely thankfully.
And thankfully the underlying improvements to margins are helping to mitigate these issues.
As we look at the back half of 2021, we expect gross margins to be around 57%.
Research and development expense for the second quarter was 4.4% of.
And sales.
110 basis point decrease from the prior year quarter, but on much higher sales the dollar spend and R&D versus Q2.2020, we're up 31%.
Second quarter SG&A expense on an adjusted basis were 38, 3% of sales compared to 40.
A total of 4.2% and Q2.2020.
We are now back at similar SG&A rates to revenue as we were in 2019.
We are spending less on travel and meetings and we were in 2019, but we have many more customer facing employees than we did then.
As Curt said based on the significant revenue opportunities ahead of us we.
6 bid to add sales resources to both general surgery and orthopedics between now and the end of 2021.
And mid year sales force expansion is not typical for us, but we believe it is warranted based on the near and long term opportunity. We have in front of us and we believe we can make those investments and still deliver on our profitability commitments to shareholders in.
Decide when the 1 while increasing our growth profile in future years.
Interest expense in Q2 was $5.8 million on an adjusted basis.
The adjusted effective tax rate was 21.0% and Q2 this was lower than we expected principally due to the excess tax benefit from stock plans.
Plans, but this is difficult to predict but we don't expect the same benefit in future quarters, we expect our adjusted effective tax rate to be around 25% and the remaining quarters of 2021.
Second quarter GAAP net income totaled $13.3 million of 41 per diluted share compared to a reported net loss.
And $2007.4 million or <unk> 96 cents loss per diluted share a year ago.
Excluding the impact of special items discussed earlier, we reported and adjusted net income of $22.2 million this quarter compared to an adjusted net loss of $1.9 million and the second quarter of 2020.
Our second quarter adjusted diluted net earnings per share were <unk> 71, this year versus a loss of 7 and the prior year period.
Turning to the balance sheet, our cash balance at the end of the quarter was $46.4 million compared to $36.8 million as of March 31.2021.
Accounts receivable days as of June 30 were 60 days compared to 82 days, a year ago, and 63 days 3 months ago.
Inventory days at quarter and were 167 compared to 184 days a year ago and of 178 days 3 months ago.
Long term.
Debt at the end of the quarter was $708 million versus $725 million as of March 31.
Our leverage ratio at June 32021 was 3.9 times and we are ahead of our schedule on our target for the year.
Yeah.
Cash flow provided from operations for the second quarter.
$34.3 million compared to $5.5 million in 'twenty, and $2020.1.6 million in 2019.
Capital expenditures and the second quarter were $3.0 million compared to $3.8 million in the prior year quarter.
We are very pleased with our cash flow and profit.
The ability trends, we've managed cash extremely well throughout the pandemic and we expect to continue to do so.
We are carrying more inventory than we did pre pandemic, but believe that is wise given the expected rise and volumes and our focus on serving our customers.
Finally, let's move to financial guidance today.
Today, we are increasing our full year.
<unk> guidance to a range of 1.0 of 1.5 billion to 1.035 billion.
This compares to last quarter's guidance range of 1.0 billion to 1.0 of $3 billion.
And our original guidance for the year of $975 million to 1.0 to.
$2 billion.
Specific to Q3 with the recent surge from the Delta variant and around the Globe. We expect Q3 revenues to be similar to Q2.
We're also raising our full year adjusted cash EPS guidance to a range of $3.15 to $3.25.
This.
Compares to the range of $3.5 to 320 that we provided on our first quarter earnings call and our original guidance for the year of $2.85 to $3.5.
And this new guidance incorporates our additional investment and sales force expansions.
With that wed like to open the call to your questions.
<unk> and I'll hand, it back to Jonathan.
Certainly ladies and gentlemen.
Question at this time. Please press Star then 1 on your Touchtone telephone. If your question has been answered and you'd like to remove yourself from the queue. Please press the pound key we'd like to ask that you. Please limit yourself to 1 question and 1 follow up you may get back in the queue. As time allows our first question comes from the.
Rick Wise from Stifel. Your question. Please.
Hi, good afternoon, everybody and.
Nice to see such a solid second quarter.
Maybe I'll start off with.
And just the the the general trends, obviously as you said Curt.
Curt the.
It seemed like a solid general surgery.
Rebound, maybe just give us some color on do you use your language.
You know how is how is how has customer and engagement changed how is it changing what's different now and and how.
How do you see that true.
Trending as the rest of the year on unfolds.
Good to talk to you Rick I think you know as we look globally and I'm going to try to answer this question on a global perspective.
Some of the Latin American markets still remain pretty dynamic in terms of.
Surgeries.
Being down and access there'll be and very restricted and then as you think through the quarter there were various geographic.
Lockdowns, if you will the areas around Toronto and parts of the U K at various times et cetera. So the those areas that variability is just every.
<unk>, but he is dealing with that and we're dealing with that as well, but in areas where and <unk>.
Covid cases have been muted or vaccination rates have been higher accessibility has been very good for our sales teams and customer engagement as theyre looking at their increasing procedure volume.
Every company has has grown dramatically for our sales teams and the the enthusiasm to be doing the job that they were trained to do is certainly at the forefront.
So accessibility of I would say has increased as the year has unfolded customer engagement has increased there.
There is still.
Some areas, where they they're very tight and how they're running their organizations and.
And we deal with that and we understand that it's similar to how we run our organization in terms of accessibility to our facilities. So so we understand those restrictions in today's environment, but overall I think we feel the trend broadly speaking is and the right direction.
Action and.
The sale of investment.
Curt obviously is on.
Unusual for you to do at mid year.
Matt can you give us any color or flavor about.
And rough numbers.
The number of people or teams youre, adding or any perspective and.
Kind of how.
Do you expect the deployed them and.
I assume the the <unk>.
Impacted on the.
Sales of on would be felt more next year.
The set up for next year more than this I assume.
Okay.
I think Thats, a fair statement, Rick and anytime you do sales force expansion, whether it's direct reps.
Associate level of Rep supporting the existing reps.
And those impacts tend to be a little further out and the future with that said I think everybody on the call understands it within the world of smoke evacuation. There is a lot of demand and <unk> is in possession of the market leading portfolio on a global basis.
And.
And we frankly need more feet on the street to support that and.
And on a positive note I'm thrilled to say and we said it and the scripted comments. We're also expanding our domestic orthopedics business really largely based on what we're seeing and the marketplace in concert with the product portfolio that we've been working on and are introducing and then outside the U.
The us there are a little bit smaller in terms of the scale of the expansion, but there's 5 or 6 country markets, where we're either taking the general surgery business direct or expanding our orthopedics presence and <unk>.
And I'm not going to give you exact numbers for competitive reasons, but the double digit increases in all of the businesses.
And on an absolute number and we're excited to be doing that right now and the the.
The sales organizations recognize.
The support they're getting when we do this through new products and I think it's been well received by the company.
And just a quick follow on for Todd.
Related to the crushed and.
<unk> is the expansion.
SG&A as a percentage of channel.
And the first quarter of 38 this quarter.
I had assumed that might fall of the percentage of sales, but does the expansion even with improving.
Sales levels and the second half day stay more at the 38% of sales level.
Great.
Come down and the percentage of sales. Thanks, so much.
Sure Rick.
So we didn't guide this year to specific targets on SG&A as a percentage of revenue.
This will be supported by revenue very quickly and we feel good about the leverage of our operating expenses as we move to the end of this year and.
The next year.
Thank you.
Thank you. Our next question comes from the line of Robbie Marcus from Jpmorgan. Your question. Please.
Great.
And congrats on a good quarter.
On.
If we could start on the guidance here I just wanted to make sure I understand.
The.
You guys are always and especially through Covid have been.
I'd say more on the conservative side and some of your peers.
So third quarter flattish with second quarter.
And.
The guidance raise at the midpoint, just a little below the beat of second.
<unk> quarter, maybe walk us through your thinking there how much is conservatism how much is what youre seeing and the market through July so far and if you could quantify the impact of the sales expansion on the EPS that would be helpful. Also.
Sure.
Alright, Thanks, Robert Good question.
6 months ago, we talked.
About 2021, right and felt comfortable giving guidance there was a lot of uncertainties at the time, but felt like we had a good enough handle on what was going on out there to give you guys a financial guidance.
6 months later.
We still see the year the same way we the hit back in January with just a few adjustments I would.
I would say.
6 months ago, we didn't expect the Delta variant right. So so cases are a little higher sitting here at the end of July than we would've contemplated.
Back in January but the good news is the business has been fairly resilient through these periods of surges right and so.
It doesn't really change how we see the back half, although we remain cautious about.
And this goes and nobody really knows where it goes but we're but we're still holding the back half with the same.
Vision that we had for the back half and <unk>.
Back in January.
On the other thing that.
<unk> might be a little different I think back in January there was a prevailing thought out there and the market there.
Net.
The Q3 vacations that we cease typically seasonally and this and this space.
It would be reduced as physician.
I would say and we're anxious to make up for lost procedures from last year.
I think that feeling has muted a little bit and the marketplace from what we're hearing.
And everybody sees it and their own circle of friends and family everybody's very anxious to take vacations.
<unk> back together with family and and so we do think there'll be a little more of.
Of that typical seasonality of that shows up.
Than we thought back in January now the procedure should also be getting better right. So that's why you end up we currently that's why we currently think Q2 to Q3 is.
Probably a sideways move on revenue we're back in January we thought it would be a step up from Q2 to Q3.
And then.
And then on the good news of course versus what we thought in January as we've over performed on the top and bottom and the first 2 quarters.
And so what we've done and both of those quarters is take the over and over performance to the guidance. So we passed that through with the 1 exception this time being.
The sales force expansion, we think of it which we think is absolutely the right thing to do for the business and for shareholders and so while.
Cost us a few cents, which is the the difference between the beat and the raise.
We think it sets us up better for next year, and we're still well ahead of our commitments for 2021. So that's how we thought about the guidance and hopefully that helps.
It does yes, that's great and I appreciate that.
And I just want to make sure it's not like you are seeing.
A serious impact from Delta out there today, but youre just remaining.
Cautious considering it as the pandemic because we've heard from several of your competitors that they're not seeing and theyre not expecting.
Packed but remaining vigilant I just want to make sure that that's the thought process, yes, well again it did it hasnt changed our view of the back half.
Of this year that we had back in January so we remain bullish on the improvement and step up that we'll see and the back half I think to say that the delta variant.
<unk> is and affecting anything.
Can't be true right. What you are seeing hospital increases and and areas around the world related to the the Delta variant and as hospitals fill up it makes them make capacity and priority decisions and so of course it has an impact of the question is.
And it is it is it enough to offset the nice trend and procedure growth, we still think we're going to get that.
<unk> trend and procedure improvement despite.
On the Delta of variant and being.
But having a bigger impact than we thought.
The case counts would be.
The 6 months ago.
Great and if I could slip 1 more and you mentioned and you already back to the percentage of.
Sales and SG&A, where you were in 2019, but with a lot more feet on the street.
How do we think about your ability to keep.
Keep that SG&A as a percent just of sales down and moving down with more people, but as maybe some of them.
Activities return conferences, and so on as we're thinking about the back half of this year and and the exit rate into next year.
Sure Yeah, you know look that's a.
Part of how we manage the business right. We've got to grow expenses slower than we grow revenue we understand that we've been doing that we're committed to do that so.
We will.
The idea of of adding these heads is to grow revenue faster than expenses.
And obviously, there is a quarter or 2.
Are those resources arent.
Totally productive yet, but we think that's a pretty short time period and as we move into 2022.
And we should be getting good leverage off of those resources.
Great. Thanks, a lot.
Yes.
Keep queue. Our next question comes from the line of Travis Steed from Barclays. Your question, Please alright, and good afternoon everybody.
You said and you've heard of 6.7% and in Q2 versus 2019, and the math and I was doing as the full year guidance assumes about 9% and the back half so.
Thank you want and put that in context for kind of way right now kind of June July and Thats about where you're at now and Youre, assuming kind of more stable growth versus 2019, as you move and the back half just kind of curious if you'd put any color on on the back half versus the.
And of the end of the quarter.
Share trial, we might even need to revisit those numbers I think.
And just if you take the midpoint of the revenue guidance and adjust for currency.
I think you get growth and between 7 and 7 and a half for the full year versus 19 and.
And so it's not.
The big step up from where we've been in the first half, but it is a step up.
And we definitely think the virus.
We will have less of an impact on procedures and the back half of 2021 than it has on the first half of 2021.
So there is a step up and revenue growth versus 19.
The second half versus first half, but I don't think it is.
And as dramatic.
As you suggest okay. No that's helpful I'll check my math on that and.
And then on the 57% gross margins and it's already a 100 basis points and that's kind of where you were pre COVID-19 and any color on how much of that is coming from kind of of more of a mix shift from Buffalo filter and Ursula versus some of the underlying.
Buying things that Youre doing on the gross margin front and kind of any flavor of how to think about that kind of the opportunities that you have on the gross margin on.
Yeah, I mean, I think mixes at the top of the list of the driver. We've also we've talked over the last year, we've talked about how COVID-19 is kind of forced us to get more efficient and get smarter.
And operations at the same time.
This elevated freight costs and pricing issues that we've talked about and that everybody is dealing with and the world. So.
And thankfully we've made the improvements that we have up until now.
And thankfully the mix is going the right direction for us.
Volume improves.
And hopefully as the logistics channels open up around the globe.
Frei will come down, but what we based on what.
And we based the guidance on for the last 6 months of the year is what we can see now and will continue to manage it closely and try.
As of the gate.
Mitigate those increases as best we can.
Okay and last question on the sales force expansion and strategically is there something youre seeing with the competitive landscape coming out of Covid, where you think there is a bit more opportunity to take share from some of the larger players or just trying to think of the strategic vision there to do it now.
Try and many of our our decision around sales force really comes from the I would say the the bottom up meeting those closest to the action of the business leaders there.
And at the marketplace opportunity with the portfolio of products that they have both the acquired products like Buffalo filter, but also the organically developed products and and there is just.
Well enthusiasm for the product portfolio, which then leads into the decision around.
Feet on the street and customer coverage and we've always been undersized relative to the.
Peer group that we compete within the marketplace of some really big names and more feet on the street as a long term part of this.
This company's offense and we're just in a good spot to do that right now given our profitability given the product mix and given the the organizational leadership at all of the businesses have.
Right now so it's a good time for us to make this choice alright. Thanks Todd.
And Todd Greg Great quarter.
Thanks, Josh drops.
Just generally you. Our next question comes from the line of young Lee from UBS. Your question. Please.
Alright, great. Thanks for taking our questions.
I guess.
First 1.
Good to see that the the U S worth of business improved in Q2 sequentially and.
And then on the interim.
International and direct side.
You mentioned, the export and international markets remain challenged.
Maybe talk a little bit more about that dynamic and the <unk>.
So as Youre seeing and those international markets and.
And also of the visibility on when those excellent market.
On Saint and turned to growth.
Yes, I think speaking to con meds historical approach, we have direct sales channels and we have export sales channels and the export sales channels tend to be and markets that maybe don't have quite as developed of the health care system is what you might find say on western Europe.
Cameron.
Or are they historically tended to be on the general surgery side <unk> always had a very strong orthopedic presence in the international markets, where the health care systems were developed so our channel expansion and export have been really on both fronts and then what we're seeing.
Scene and the export markets on orthopedics as the Covid case counts just remain very high and hospital capacity is being consumed by those so procedures like soft tissue repair are just very low on the priority list and those environments. So we're we're patiently waiting our export partners of patiently.
<unk> weighting, we don't want to saddle them with inventory I think we've mentioned on previous call about waiving some of their requirements because we understand the pressures are and in their markets and we were.
Want to be good partners to them as they are good partners to their local hospitals. So it's it's really the variability around Covid Covid case loads.
What's the outlook there.
That's a really tough question to answer.
It's improves.
Steadily if not a little bit slow, but it is improving and we will patiently wait for that improvement and I am not sure I could give you any more color than that young at this point and time.
Okay.
Great.
The color.
And I guess, maybe from the second 1 day.
On smoke evacuation and are you.
You mentioned the <unk>.
Kentucky win last quarter.
No legislative actions.
The major driver for the business, but I'm just kind of wondering.
And the.
Subsequent quarter are you seeing any impacts of that legislation is it easier to get into accounts or other changes and the tone of the conversation and any updates on some of the other dozen or so states that might have legislative updates and the second half of the year.
The topic of surgical smoke too.
To the credit of.
The societies, and the marketplace, AOR and and others. They have done a fantastic job, creating awareness on the health risks associated with surgical smoke and as we've said many times.
Inflation is kind of wind at the back of an already strong wind and.
And places where legislation has passed or been put into place and in some cases, where theres teeth and the legislation it may get somebody to move a little quicker but.
But there's already a lot of movement and I think.
Everybody.
And on this call is probably aware of the dynamics and the marketplace. It's the 2.
The strong growth market and we're in possession of the incredible portfolio and.
And I think.
I think it just bodes well for everybody.
And the marketplace.
Legislation helps but.
It's not of central to the success.
And.
There is a lot of activity around other geographies and legislation, whether its legislatively or through Osha.
But again.
It's kind of in process and we just patiently wait for that to get approved Todd.
Don't know if you've had any other comments.
No I mean, and it's tough to predict who's the next across the line I think theres a dozen states that are and the Red zone.
There's a couple of it seem to be on the 5 year on line, but you know, we'll just wait to see who comes and the accident and yeah. I mean, we already had a DC, we like we said from.
On the.
The.
The market demand is leading the legislation it's not the other way around and so <unk>.
Kentucky was already moving towards smoke evacuation and the general market legislation helps and <unk>.
Hopefully, there's teeth and that and they enforce it and that would be great.
But.
We're.
We're responding to customer demand and and.
And welcome any legislation that comes.
Alright, Thank you very much.
Thank you. Our next question comes from the line of Matt O'brien from Piper Sandler Your question. Please.
Hi, guys. This is actually drew on for Matt. Thank you for taking the questions.
I just wanted to start off on the capital side of things.
It looks like things have remained steady, but the growth rate did soften a little bit sequentially versus 2019 here.
And I know that Theres always some noise, but obviously the concern could be.
Some of the initial demand was pulled forward during the uncertainty of.
And then that can is now kind of working its way and so.
And so.
Maybe you could just speak a little bit what youre seeing on the capital front and kind of how youre thinking about capital internally from a modeling perspective.
But I think capital is driven by.
A couple of different factors availability of funds. We've said consistently we don't think that there's a shortage of funding available.
The prioritization of those funds, we think and 2020 and early part of this year of prioritization of funds were all around supporting of investments that would help with COVID-19.
And then the third item is kind of what I refer to as the basic wear and tear on existing equipment. So as procedure volumes pick back up.
And Tara and existing equip equipment increases as procedure volumes expand beyond the baseline that of facility might have as they try to work into the backlog of procedure.
So there is a demand for more equipment, I think where we're moving into those categories. Those last 2 categories I do think procedure volumes of kicked.
Picked up I think thats evident and everybody in the marketplaces of results and number 2.
People are trying to work off some backlog here and thats going to increase wear and tear so those 2 things to me.
<unk> pain of good picture for what should happen with capital.
Very difficult to pinpoint exactly when that is and I think the best thing. We can do as a company is have a portfolio that's ready for that and we've talked about some new product launches on the capital side and the <unk>.
Power tool system on the video side and.
And we see.
The market is starting to be receptive to looking at those products. So I.
I think we.
And we feel optimistic but until the market fully opens up it's going to be a little bit slow to develop.
Okay very very helpful.
And then on <unk> just wanted to ask a more longer term question.
And I guess looking back now pre pandemic you did add a couple of new indications and label.
Just as we're thinking about the future <unk> and 'twenty, 2 and beyond anything new and to be expecting from an indication perspective, and any new geographies, where are you still need through all of that product. Thank you.
So right now we have <unk>.
Indications, and obviously and general surgery, and then and thoracic cavity, and then and pediatric applications. The.
There is some interest being expressed about.
Broader pediatric application indications, meaning.
Meaning smaller patients.
Which would involve a tremendous amount of clinical work because of the smaller of the body the <unk>.
More issues, you potentially get into with pressurization, and so that would that would not be of quick turnaround that would be of long term.
Study clinical body of work that would have to happen, but again.
We're seeing great success with <unk> and then geographically.
I think it's more about the channel development and feet on the street. The the partnership and Robotics continues to remain strong and continues to be a mainstay of our U S business and it's growing outside the U S. And then the as we've said from.
The 1 the opportunity to get into the general laparoscopic procedures as really the.
The the very large market and we've said before our international team has demonstrated the ability to do that and part of putting more feet on the street as to shrink territories and get people to focus on all opportunities that <unk> presents and I think we're well on that.
Path.
Thank you.
Thank you. Our next question comes from the line of Richard <unk> from SVP Leerink. Your question. Please.
Hi, Erinn on front right.
Thanks for taking my question I, just have 1 here and I was just hoping that maybe you could.
And talk about the backlog and yes.
And maybe quantify Todd.
Paul.
And how much do you think of sell out there and you know.
And if that and kind of.
Looking ahead and Curt the back half of the year.
Really tough to quantify backlog at this point and time Erin.
Aaron.
I wouldn't even want to hazard a guess I mean, we can.
If you call 2019, and normal market and you look at procedures. If somebody has got a good metric to aggregate the specific type of procedures that we mostly call on and look at where the run rates have been so far and 2021, which I don't think that data.
We reported out that would be the best way to go about calculating and estimation of the backlog.
But.
I, just don't think I would hazard a guess at this point and time are.
I look at <unk> as a.
A smaller company and a big market our job is to be go on.
And after every procedure, whether its backlog or not and we've got a lot of market share to go after so.
We're really focused on that.
Okay.
And from Us.
Thank you. Our next question comes from the line of Mike Matson from Needham and company. Your question. Please.
Yeah sure. Thanks, So I got a few on the orthopedics business. So.
The slide say that you expect the orthopedics to grow at above market rates and the long term.
Putting aside what happened last year of Covid and everything and looking back over the last few years prior to that.
The business never really seem to grow above.
Above market and kind of grew maybe in line with the market at best.
And so.
Just wondering what it's going to take to get it to actually grow above market.
The confidence and the ability to do that and then do you need to do some sort of M&A of some kind of.
Higher growth products similar to what you did on the general.
Surgery side to get there.
Sure.
Before I go and Mike I'd, just remind everybody on this call that our orthopedics business.
As of 2 thirds outside the U S..1 third inside the U S. So if you look at that split and you look historically.
International Orthopedics business that segment grew above the market pretty consistently our domestic segment has been had a lot more variability we've had quarters, where we've gone.
And of the $6, 7.8%, which I would say is above market, but we've also headquarters below and candidly and.
On the negative the U S market has been a tougher market for us to develop consistent performance.
So it remains and Todd and I have said this frequently it remains a work in progress.
There were some changes made last year, we're now running the business as a global orthopedics business looking at it globally.
At the same approach and the U S. As we are using internationally very consistent focus on the product pipeline.
I don't know if we've talked other than 1 other time and the last 5 years about sales force expansion for domestic orthopedics. We just noted that we are expanding our sales force and the U S market for domestic orthopedics.
So we continue to focus on what I would call the basics product innovation sales force expansion.
No 1 should assume that we haven't looked at M&A for.
The <unk> business, we are of Great International channel, we have of large presence we are of good channel and the U S.
Just a lot harder space to find great.
And a that fits with our profile so.
Everything remains on the table to get this business.
To be more consistent specifically and the U S market.
Out of what the team has done and internationally and we just got a little more work to do here and the U S market.
Okay. Thanks, that's helpful and then just as far as the.
The sales force expansion and general surgery and orthopedics.
I know you've provided a lot of commentary already on it but maybe you could talk a little bit about how you are actually deciding where to add the reps, which territories are hospitals et cetera and.
And then how youre sort of managing any risk around.
And Mr option as you layer and these additional reps.
Yes, I think our approach this year is consistent with what we've done in years past.
We look at where the market demand is and we look at our results and whether we're looking at historical procedure volumes, where our products fit in and.
And do our results.
And up and say, we're getting our fair share or do they not.
And.
Typically our sales force expansion targets of those areas, where we're not generating the revenue that we would expect given the procedure base, there where our products have overlap and and oftentimes you'd just have sales reps, who are big geographic territories.
<unk> line, they're making choices about how and where they spend their time and so we try to take a.
A very constructive approach that we're going to give them more time closer to home, we're going to carve off a piece of their territory and maybe a piece of somebody else's territory or another another approach is to take our great sales.
Sales Rep and say, we know you can do more and we're going to give you a little bit of help but down the road.
That may mean carving off piece of your territory is that sales associate takes on a full time.
Roll at some point and the future. So we're doing a little bit of everything there, but again, it's also supported by new product innovation, either what we've released.
And what we see coming that we think can make a difference.
Okay. Thanks, that's really helpful. I appreciate it.
Thank you. Our final question today comes from the line of Matt <unk> from Keybanc. Your question. Please.
Great and thank you for taking the question the guys.
Hey, Curt first.
Please turn it matter to you if of procedures performed and the ASC versus versus hospital outpatient.
And is it a different set of different sales process for you.
It does not matter to me.
And im.
I think I can confidently say it doesn't matter to our sales force.
The other comfortable going into the hospital, they're comfortable going into the ASC is at a different process, yes, I would say there is a different process the.
The.
The ASC, especially where you have surgeon ownership.
There are more ASC groups now.
You tend to see a little bit different financial profile.
And then you might see in the health of the large hospital systems.
And large hospital systems can have more layers to get through both.
Have what I would call the equivalent value analysis committees and decision, making processes and trials and evaluations and and throw in the mix and a lot of health systems now.
<unk>.
And their own freestanding ambulatory surgery centers. So there is some overlap there.
<unk> developed.
Part of our broader health care solutions team has and ASC approach.
And we're working from the top down and the sales reps continue to work at the street level. So it is addressing the customer and the the venue that.
They see fit and offering products.
Excellent and then for Todd.
On the gross margins, especially exiting the year at 57% and the back half of it doesn't sound like there's a whole lot of mitigation of the freight and logistics and Corp.
And that number.
And so potentially and thats.
1 and Thats actually a higher number for you.
Outside of that is that a good starting point for 2022.
Or is there just more typical seasonality and the first half versus the that the second half to consider.
It's a great question I'm not going.
To get into guiding 2022.
But I will say, yes, I mean, I think as we move to the future we should be moving north and general right now.
There's a lot of uncertainties and we need this macro environment to settle down a little of that.
But yes, I think it's a fair.
There is certainly my assumption that the margin will be headed north not south.
Right.
And then lastly, you did 30 million of free cash flow.
And this quarter.
The strong start to the year, despite the inventory builds.
And I guess my question.
Question would be as we get into later this year into early next year is M&A and potential consideration for you guys again.
M&A has been of consideration.
Since the day after we close Buffalo filter on it we didn't turn the we didn't turn of the strategic development team off.
And they would be very disappointed to hear me say anything different and we have a very good thorough process certainly as our leverage has gone down our ability to look bigger has increased.
But M&A has always been on Matt that that's just part of our offense. It has been from day..1 so we continue to look for.
And your technologies I think everybody on the call understands the market's really price of the IPO market has really heated up never mind, all the money going into specs.
So the and being very disciplined as a key part of our offense.
But M&A always is on the table here alright.
Alright.
Appropriate much.
Thank you Matt.
Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Curt Hartman for any further remarks.
Thank you Jonathan and I just want to thank everybody for your time today and we look forward to speaking with you on our next earnings call. Thank you.
Thank you.
Ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
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Joe.
Yes.
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