Q1 2022 Conmed Corp Earnings Call
Good day, and thank you for standing by.
Welcome to the first quarter fiscal year 'twenty, two con men earnings conference call.
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With us today are Curt Hartman, President and CEO , and Todd Garner Executive Vice President and Chief Financial Officer.
I would like to now turn the conference over decline match.
Please note this.
The conference is being recorded.
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 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.
Investors are cautioned that any such forward looking statements are not guarantees of future events performance or results and the companys 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 may be required by applicable law.
You will also hear management refer to certain non-GAAP adjusted measurements. During this discussion while these figures are not a substitute for GAAP measurements management uses these figures to aid in monitoring the company's ongoing financial performance from quarter to quarter and year to year on a regular basis and for benchmarking against other medical technology.
Adjusted net income and adjusted earnings per share measure the income of the company excluding credits or charges that are considered by the company to be special or outside of its normal ongoing operations.
These adjusting items are specified in the reconciliation supporting the company's earning releases posted to the company's website.
With these required announcements completed I will turn the call over to Curt Hartman.
As chair of the Board, President and Chief Executive Officer for opening remarks, Mr. Hartman.
Thank you Debbie and Julie good afternoon, and thank you for joining us for <unk> first quarter 2022 earnings call.
With me on the call is Todd Garner Executive Vice President and Chief Financial Officer Today, We will share with you our first quarter results a more detailed review of the into bones acquisition and the overall outlook for our business well then open the call to your questions.
Start by reviewing our first quarter results total sales for the quarter were $242 3 million, representing a year over year increase of four 1% as reported and an increase of four 3% in constant currency.
From an earnings perspective during the first quarter, our GAAP net income totaled $15 million. This compares to net income of $9 9 million in the first quarter of 2021 excluding.
Special items that affected comparability, our adjusted net income of $23 5 million increased 22, 9% year over year and our adjusted diluted net earnings per share of 70 cents increased 11, 1% year over year.
March was our best month of the quarter as the impact of Omicron was strongest in January and dissipated throughout the quarter in our international markets I would note that Asia, Japan, and Canada, All started slow while Europe and Latin America delivered very solid performances. The U S market showed improvement late in the quarter.
Overall, I'm pleased with the quarter and the commercial performance as we continue to navigate the impact of Covid, we introduced new products across the business and delivered solid results from both the top and Bottomline.
During the quarter, we saw additional smoke legislation passed in Arizona, Georgia, and Washington, which now places about 18% of the U S Hospital network under some form of legislation. While this was favorable it clearly indicates more room ahead on this important topic.
Yeah.
We are encouraged by our revenue outlook after one quarter, both with and without the acquisition given the inflationary pressures and the impact expected from the acquisition I'm comfortable that we have landed on a responsible earnings outlook, which Todd will cover in more detail.
I'll now switched my comments to the acquisition of privately held into bonds today, we announced that we signed a definitive agreement to acquire Memphis, Tennessee based into bonds for $145 million upfront payment with the potential for an additional $110 million of revenue growth.
Based earn outs over a four year period.
We think into bonds is an excellent platform for <unk>. The company brings to convert a very experienced leadership team and innovative and comprehensive foot and ankle portfolio.
Well established and growing sales channel in existing international presence and an exciting platform for future innovation, we're excited to enter the lower extremities foot and ankle market, which has an estimated $4 $5 billion market growing in the high single digit range.
We expect the transaction, which is subject to Hart, Scott Rodino clearance and approval to close late in the second quarter or early in Q3, we expect the transaction to be accretive to our topline and gross margin will be marginally dilutive to earnings in 2022, and 2023 from an organizational standpoint, the business will run.
As a full platform stand alone in the U S market and we will retain the current organizational structure, including the existing sales channel.
Inside of the U S. The products will be picked up commercially by our international team in areas, where there is no existing coverage or where the existing coverage is not as comprehensive as we believe is needed.
As with our current global Orthopedics effort. This business will report directly to pet buyer, our president of international and global Orthopedics.
We believe the <unk> platform will allow us to expand areas, such as medical education, and engineering human resources and accounting services as well as the previously mentioned international market expansion to name a few.
Overall economy has been evaluating strategic options in this space for the last several years and we think our patience and diligence has allowed us to find a great platform addition, led by a talented management team.
We look forward to welcoming Alan Taylor and the into bones employees and sales agents and assure you that we're committed to continued growth in this business.
In closing I'm pleased with our start to the year excited with the addition of the into bones business, which gives us a solid entry into the high growth lower extremity market and I'm looking forward to the continued efforts to grow and expand our business in all the markets we serve.
And now I'll turn the call over to Todd who will provide a more detailed analysis of our Q1 financial performance discuss the impact of the <unk> deal and take you through our full year guidance Todd.
Thank you Kurt.
All sales growth numbers I reference today will be given in constant currency. The reconciliation to GAAP numbers is included in our press release as usual we have included an investor deck on our website that summarizes the results of the quarter and our updated guidance, including a few slides on the acquisition announced today.
For the first quarter of 2022, our total sales increased four 3%. The month of January was below the prior year January due to the impact of Omicron on hospital procedures and staffing in each month of the quarter saw improving hospital volumes for.
For Q1, our sales in the U S increased five 9% versus the prior year quarter.
Our international sales grew two 6% for the quarter compared to the prior year.
Worldwide Orthopedics revenue grew 0.4% in the first quarter in the U S. Orthopedic sales grew two 2% and internationally orthopedic sales decreased 0.5%.
Total worldwide General surgery revenue increased seven 7% in the quarter.
U S General surgery revenue grew seven 5% internationally general surgery revenue increased eight 2%.
Air Seal and our direct Buffalo filter product lines had a very strong quarter. Despite the slow start the OEM side of the Buffalo filter products continues to lag our direct products.
Now, let's move to your expense side of the income statement.
We will discuss expenses and profitability in the first quarter, excluding special items, which include charges for 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 56, 1% an increase of 90 basis points over the prior year quarter or.
Our improving mix continues to drive margins up.
We are seeing increased costs that will affect future quarters, and we will talk about that more when we discuss guidance.
Research and development expense for the first quarter was four 4% of sales 10 basis points higher than the prior year quarter.
First quarter SG&A expenses on an adjusted basis were 39, 7% of sales an increase of 60 basis points from Q1 2021 due to the expansion of the sales force last summer.
On an adjusted basis interest expense was $4 $1 million in the first quarter.
The adjusted effective tax rate was 17, 5% in Q1.
Once again, we benefited from the excess tax benefit from stock we.
We do not expect that same level of benefit going forward.
First quarter GAAP net income totaled <unk> $15.09 million, an increase of 51, 9% over Q1 of 2021.
The 47 of earnings per diluted share this quarter was up 51, 6% over the prior year quarter.
Excluding the impact of special items discussed earlier, we reported adjusted net income of $23 $5 million, an increase of 22, 9% compared to the first quarter of 2021 are.
Our Q1 adjusted diluted net earnings per share was <unk> 70 cents, an increase of 11, 1% compared to the prior year quarter.
Turning to the balance sheet, our cash balance at the end of the quarter was $24 9 million compared to $28 million as of December 31.
Accounts receivable days as of March 31 were 68 days compared to 60 days at the end of 2021. This is a function of the timing of revenue in the quarter with March being much stronger than January a higher mix of receivables came in the last month of the quarter than our normal cadence.
Inventory days at quarter end were 215 in our effort to serve our customers. We continue to build inventory to mitigate supply challenges about half of the increase since December has been in raw materials and web.
Long term debt at the end of the quarter was $704 million versus $672 million as of December 31 about $23 million of the increase is due to the new accounting standard for our convertible notes.
The other side of the re classes essentially a debit to equity.
Our leverage ratio on March 31, 2022 was three five times, which is consistent with December 31.
Cash flow provided from operations for the quarter was zero point $3 million compared to $22 $3 million in the first quarter of 2021 the.
The difference is due to the increase in accounts receivable and inventory discussed earlier.
Capital expenditures in the first quarter were $3 7 million compared to $3 $1 million a year ago.
Now, let's turn to financial guidance.
We are very pleased with what we're seeing on the revenue momentum.
While the effects of Covid still linger, we are seeing good volumes in most of our geographies.
Our confidence in our revenue projection has strengthened since January therefore on an organic basis, we are raising our revenue guidance today to the range of 1.085 billion to $1 130 billion that.
That represents organic growth between 7% and 12% over 2021.
Compared to our previous guidance, the new range is $10 million higher on the bottom and $5 million higher on the top.
There is still a lot of year left but we're seeing very good momentum on the commercial side of the business.
As it relates to currency foreign exchange has gotten worse since January but our hedges are doing what they are intended to do so far.
At the end of the first quarter, we continue to expect immaterial impact to 2022 financial guidance from currency.
On the cost side, we are definitely seeing elevated inflation compared to what we were seeing three months ago.
Oil costs are significantly up which affect freight and resins. We are currently projecting freight to be 14% higher for the full year 2022 than we were projecting in January .
Material costs have also increased so far we estimate the materials in aggregate will cost us 5% more in 2022 than we thought three months ago.
Because of how we recognize cost with inventory those recent increases did not really impact our P&L in Q1, but they will begin to weigh on the margins. We report going forward of course, we don't know how long we will live in this inflationary environment and where it goes from here.
We are actively working to mitigate these pressures on the P&L, we have already implemented some price increases where it makes sense and are analyzing the opportunity to take price in other areas.
We are also being extremely judicious with any new commercial spending however, I do want to emphasize that we do not think it would be wise to make wholesale cuts to our commercial infrastructure in an effort to offset these macro and hopefully temporary inflationary pressures our business our business momentum is strong.
And we expect double digit revenue growth in the back half of this year, we think it would be very unwise to jeopardize our revenue growth to solve what is hopefully a short term macro issue.
Due to those increased costs without the acquisition that we will talk about in a few minutes, we would have been to direct investors to the low end of our prior full year adjusted EPS guidance.
Specific to gross margins three months ago, I told you I expected gross margins in 2022 to grow over each prior year quarter.
Q1 was a good example of that forecast as it grew 90 basis points above the prior year.
However, given the accelerated inflation I know project each remaining quarter this year to be below the prior year gross margin for the comparable quarter.
Because we recognize manufacturing variances with inventory, we have a better forecast for Q2 than we do for their subsequent quarters.
I can tell you that Q2 looks to be about 100 basis points lower in gross margin than Q2 of 2021.
We will keep you updated as we move through the year.
We also did an analysis of what our gross margins would be today, if freight and material costs were simply static with pre pandemic levels.
Our estimate is that these two items alone have cost us approximately 300 basis points in gross margins since 2019.
Our commercial engine is strong our prior investments are paying off we are also navigating an unprecedented macro storm along with everyone else. We will continue to stay focused on the customer and serving them with an engaged workforce and innovative products, which has resulted in increased profits for our shareholders.
It continues to be our approach as we transition out of the pandemic. We believe customers will continue to reward our actions as valued partners with increased trust and market share.
Now, let's talk about the financial impacts of the acquisition, we announced today.
Enter bones had revenue of $36 $8 million in 2021 at approximately 80% gross margin.
We expect a late Q2 or early Q3, close and we always want to be cautious in the first months of an acquisition due to potential disruption in channel issues. So we're estimating $20 million of revenue contribution in the back half of 2022 from the acquisition.
As you see in the materials included in our deck, we expect the extremities market to grow in the high single digits and into bonds has been growing at least twice as fast as the market.
We expect that similar growth rate to continue as we joined together to address this important customer base.
From an adjusted EBITDA perspective, we expect the acquisition to be slightly positive in 2022.
Contribute single digit millions of EBITDA in 2023 and double digit millions after that.
From an adjusted EPS perspective, we expect the acquisition to be between five and 10 cents dilutive to both the remainder of 'twenty, two and the full year of <unk> 23 and to be accretive thereafter.
That would make our full year 2022 revenue guidance, including the acquisition to be between 110 5 billion and $1 150 billion.
Our full year 2022, adjusted cash EPS guidance range, including the dilution from the acquisition is $3 50 to $3 65.
And with that I'll turn you back to Debbie for the Q&A portion of the call.
I will begin the question answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question comes from Robbie Marcus with JP Morgan. Please go ahead.
Hi, This is lilly on for Robbie Thanks for taking the question.
Maybe just to start with one on near term trends are what are you seeing in terms of the recovery into two Q.
Has that momentum you called out continued into April and are there any geographies or parts of the business that are still lagging.
And I don't want to get too far into Q2 Lilly.
But I think what we saw in the month of March we feel good about that as an exit point and how that's continued.
As we started the second quarter to the point of where there may still be challenges.
I was reading some data relative to the China market and I think everybody knows China, it's not a massive market for con meds.
But there was a reference that some 340 million people are under some form of lockdown. So obviously, China is still a little bit slow relative to other places around the globe other than that I think things are are moving forward.
Around the globe on a positive fashion.
Okay. That's helpful.
And maybe just one on Buffalo filter and Eric Jill how should we be thinking about how those two products did in the quarter and is.
It's 25% of the business growing faster than 'twenty.
20% still the right way to think about those two products.
Yes, yes, Thanks Ali Yes, that's definitely still how we see it.
Our direct business and Buffalo filter is doing much better than the OEM business, which is to be expected.
The OEM business is a little bit of a drag on on that metric, but air seal and our direct side of the Buffalo filter business continue to do very well.
Great. Thank you.
The next question comes from Rick Wise with Stifel.
Please go ahead.
Good afternoon gentlemen.
Maybe.
You could just expand on.
Your thoughts and pursuing into bonds.
Obviously, a big Tam rapid growth better gross margins those are pretty evident, but maybe talk about how you see.
The synergies between.
Into bones, and today's con Ed and you know.
And how it's likely to evolve.
Yeah.
Working together as we look ahead to the next few years.
Great Great question, Rick and the first three you nailed those are all very important parts. When we look in and this is obviously a new adjacency for us it's under the umbrella of orthopedics, but it's not a space that we have a very large presence in at all we do have some products through our sports medicine business that address the footing.
<unk>.
Soft tissue aspects of of the extremities marketplace and so that has allowed us to spend more time in this market get more acquainted with the market and there's a lot to like in this market and specific to into bones. They bring a very experienced and seasoned leadership team they have a very broad.
Leo and they have a very well established sales channel and.
And very important from a con med perspective, they have a very solid international presence with direct sales channel in a couple markets and coverage of 25 countries. So all of those things lined up very well for <unk>. When we looked at the when we looked at this particular asset relative to everything else that may have been in the market.
Place at any given time it as I noted in my comments, we've been looking at this market for some some period now.
We think it's just it's an expansion opportunity, it's a high growth market.
And so for all those reasons and probably more just fit very well with where we want to go or.
Not only today, but well into the future and we.
We already compete with a lot of these competitors that will be lined up against so I think we're comfortable with that and I think we've demonstrated that we can do that and this is just another opportunity for <unk> Corporation.
And just to follow up and you.
At the end or.
Going where I was going to go anyway.
No I'm going to get asked.
How is <unk> going to.
Compete with the larger players and you know I've had this conversation about your existing business multiple times and you've answered it eloquently.
I don't know do you, but there are other aspects do you have a big enough portfolio to compete.
Or are the decision points different will you.
Well you have to invest more aggressively.
To continue the kind of growth you've laid out in Salesforce, just maybe talk in a little more granularity about some of those those points.
Sure.
We believe the existing portfolio that into bones has is a phenomenal starting point for con meds and they've worked very diligently to build that portfolio and obviously they continue on with their R&D efforts and that was certainly one of the things that excited us just we dove in our diligence and looked at their portfolio and where.
They were taking the portfolio.
So innovation is a consistent part of the story and extremities.
Just like it's a consistent part of what we've been trying to do at Cod met over the last several years sales force expansion sales force excellence consistent part of being in the implant market, which extremities.
Certainly isn't the implant market it should surgeon driven preference item, that's very similar to what <unk> already operates with our portfolio.
And so all those things are very similar to what we already do today and as I noted that the competitive base is very similar to the people. We line up against so there those things are all very similar to us.
I'm not going to say there are nuances to this market relative to our other markets every specialty has its own nuances, but I think our our team.
It feels very comfortable about entering that and I say that because of the leadership team that into bone Springs and has from a depth of experience in this marketplace.
We are we are in essence buying a platform, where we're not buying a product line, we're buying a platform and it starts with people and that's something I've said from day, one where we want to find great people and we will do well in the markets. If we have great people and I think we're getting all of that and then some with this acquisition.
It makes sense, thanks for the extra color.
Thanks, Rick.
The next question is from Mike Matson with Needham and company. Please go ahead.
Yeah. Thanks.
The other question on into bonds on the press release mentions upper and lower extremities, but it sounded like the comment on the in the prepared remarks really focus more on the lower extremity portion. So can you just talk about the mix there in there in their portfolio.
Within the foot and ankle area I guess are there any kind of.
He holds where they're lacking products like maybe like total ankle or something like that.
So it's a great question and if you if you go to the end of bones.
Website, youll see that they do mention upper and lower extremities as their company descriptor and it's a fair descriptor and if you look at our in our Investor deck, We've got a slide in there with the.
Our product portfolio that does show some upper extremity items.
You dissect that $38 $6 million of revenue. The majority of that revenue is driven by the lower extremities and that's really what we valued the company on now in saying that we do believe that there is some value in that upper extremities portfolio and we do believe that over time, we can.
Can we can look at that and see if we want to invest more and continue to develop that we certainly have a channel that calls on that space. If you think about the shoulder and what we do in sports medicine in the shoulder.
Got some products that go into the hand and wrist. So there may be some opportunity there, but that that's that's to be determined Mike. We're more focused on the value that they've created in the lower extremities, and where that's going to take us right out of the gate.
Okay got it yeah, I didn't I didn't look to that slide yes definitely helpful.
And then.
I guess as far as the the supply chain goes.
A lot of commentary about the cost pressures, but I didn't really hear anything about any kind of significant shortages of any sort of components or anything like that so I just wanted to check in and see if you've had any kind of issues, where you've not been able to fulfill orders at any of your products do you have couldn't get components or raw materials or something like that.
Yes, Mike we're dealing with that like everybody else is dealing with that and that's part of the material cost increase too right because.
The suppliers are in a position of scarcity and if you want to get the product.
They've kind of you pay the price to get it and so that is definitely part of what's happening out there I would to give you some historical perspective.
We're now at about.
We're now at about two days worth of sales and back order before the pandemic, we probably lived routinely below a half a day worth of sales and so.
It's not.
You know you think about two days of sales, it's not that much right on a material basis.
But compared to where we used to live.
I'd, rather have two more days of sales in Q1.
I'd always rather add to more details.
Yeah. So it's something we're dealing with I think our team has really.
Done a notable job of mitigating through those pressures, but we are certainly not immune and are feeling the same things that everybody else is feeling around the world.
Okay. Thanks, and then.
Just a follow up on that Todd I think I think I heard you say you expect double digit growth in the second half revenue growth in the second half is that include is that because youre, including the inorganic component from the acquisition or were you speaking on an organic basis or did I just completely hear that wrong.
No you heard it right.
On an organic basis now part of that is the back half of 2021 was a lot worse than it was supposed to be right because of Delta and then omicron. So there are some easy comps in there, but yeah, we do project.
Without the acquisition, we expect double digit revenue growth in the back half of 2022.
Okay got it thank you.
Yeah.
The next question is from Matthew Mission with Keybanc. Please go ahead.
Hey, guys congratulations on the acquisition.
I just wanted to go to.
Dilution in 'twenty, two and 'twenty three from it.
Just how are you thinking about and I'm sorry, if I missed it how are you thinking about like the financing cost of this acquisition.
And does that also include like investments you need to make to support the growth.
Yes, great question Matt.
So yeah. The financing part is basically what it makes it a dilutive right because we told you from an EBITDA perspective, it's actually positive even in the first six months of.
As 2022, and then it gets.
It's single digit millions to EBITDA in 2023, and so what turns positive EBITDA in two dilutive EPS is the financing we can fund the $145 million upfront with milestones over four years, we certainly have that kind of capacity in our current credit.
Facilities, but rates are rising.
Rates are right so.
That's what it is the financing that makes a dilutive and so I would just point out that there is two quarters in 2022, and then four quarters in 2023, which is.
So it is getting more accretive as we move forward, but its a its four quarters worth of interest cost in 2023, So that's why it still stays.
<unk> in 2023, and then we should be accretive once we get through 2023.
Okay that makes total sense given the given the current environment.
And then just you mentioned it was this is this is a platform that's been built.
Just can you go back and give us a little bit of context of how this company has come together was it organic or inorganic.
I'm just trying to understand how it's how it's been built.
Sure.
Do my best here.
From what I know of the history started out as a French based company.
<unk> developed a U S commercial presence at some point there was a merger of the U S commercial presence with the French entity and both entities had some form of R&D established and and that's in part why they.
Uh huh.
Bigger presence internationally than a lot of companies at this scale. So today they retain a presence.
Split about 50 50 in terms of people in the U S and internationally. The U S. Sales channel is a sales channel we're very familiar with it's a distributor base sales channel which is not.
A typical in this particular specialty.
And we obviously have a hybrid sales channel here in our U S. Orthopedics business. So we're familiar with those.
And <unk>.
The majority of their product portfolio to the best of my knowledge has come through organic innovation and development.
So I think it's been built very financially responsible.
And.
As a very good solid and growing presence in the leadership team and the experience and depth of knowledge of the market is very evident when you. When you look at their backgrounds. So a lot to like here and that's what made it very appealing to convert.
Alright, Thank you very much guys.
Thanks, Matt.
This concludes our question and answer session I would like to turn the conference back over to Curt Hartman for any closing remarks.
Thank you Debbie I want to thank everybody on today's call for your time and we look forward to speaking with you again on our next earnings call. Thank you have a good evening.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.