Q2 2022 Conmed Corp Earnings Call
Okay.
Good day, and thank you for standing by walking through the second quarter fiscal year 2022, Conman earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
I ask a question during the session you will need to press star one one on your telephone.
I would now like to hand, the conference over to Cod med for a brief announcement.
Go ahead.
Good afternoon, everyone before the conference call begins let me remind you that during this call management will be making comments and statements regarding its financial outlook and its plans and objectives, which represent forward looking statements that involve risks and.
Certainties 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 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 company.
Yes.
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.
Due 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 Executive Officer for opening remarks, Mr. Hartman.
Thank you Howard and Julie Good afternoon, and thank you for joining us for <unk> second quarter 2022 earnings call.
With me on the call is Todd Garner Executive Vice President and Chief Financial Officer. Additionally, today I've asked Pat Beyer, President of <unk> International and global Orthopedics to join US given the closing of into bonds and our progress with the integration I felt his participation today would be beneficial our plan is to share with you our second quarter.
<unk> provide a quick overview of our first couple of weeks of ownership of into bonds and provide an update on the overall outlook for our business. We'll then open the call to your questions.
I will start by reviewing our second quarter results total sales for the quarter were $277 2 million, representing a year over year increase of eight 6% as reported and an increase of nine 8% in constant currency on an organic basis sales finished at $275 1 million <unk>.
Presenting 9% constant currency growth, we built momentum throughout the quarter and it's worth noting these results came against our best quarter of 2021.
From an earnings perspective during the second quarter, our GAAP net loss totaled $168 3 million due primarily to the extinguishment of most of the 2024 convertible notes.
This compares to net income of $13 3 million in the second quarter of 2021.
Excluding special items that affected comparability, our adjusted net income of $24 8 million increased 11, 8% year over year and our adjusted diluted net earnings per share of <unk> 76 increased 7% year over year.
In the United States market, our perspective is it surgical staffing levels continue to impact surgical volumes during the second quarter outside the United States. We recorded strong performances in several markets to include Europe , Canada, and Latin America. Finally, I was very pleased with the mid June close at the end of bones transaction I want to compliment the entire.
Deal and integration team along with the former <unk> employees on a well developed and executed integration plan, which is off to a strong start obviously more work continues on this but the early days have been very encouraging and the noncommercial side. We also executed a new debt instrument, which Todd will discuss in more detail.
Overall, we delivered a very solid quarter as we continue to navigate the impact of surgical staff labor shortages and their influence on surgery as well as material shortages and continued inflationary pressures in summary, I'm very pleased with the focus and the results delivered in the quarter and look forward to building on our success in the second half I will now turn.
The call over to Pat who will give us an overview of the <unk> integration and business Pat.
Thank you Kurt I'm pleased to join the call today and excited to share our progress with you on our recent acquisition of <unk>, which as a reminder, we closed on June 13th of this year, what attracted us to <unk> was the opportunity to acquire a company in the foot and ankle market that had a strong portfolio of.
Our strong sales team and a strong leadership team since closing we feel even more confident that all three of these are true and that we've acquired a terrific platform.
One of the first things that attracted us to the end of bonds was the quality of its R&D organization.
We were impressed with both the breadth of the portfolio and the innovation that was woven throughout and we continue to be impressed with the existing offering and the new products in the pipeline.
Before we owned into bonds, they were winning in the marketplace and growing healthy double digits that momentum continued through the acquisition and ongoing integration. We are very happy with the progress so far as the end of bones team is now able to leverage our structure.
Rail and additional products, we see growing opportunities for cross selling over the longer term as well as expanded reach through the build out of the sales channels and.
Additional international registrations.
Turning to leadership, we started our integration of the <unk> acquisition immediately post closing with kickoff meetings, both in our USA orthopedic business location of Largo, Florida, and the into bones International HQ relocation of Leon France, both Kickoffs went extremely well and I'd like to congrats.
Relate the teams on their high level of engagement and how well planned. The integration is as we have already made meaningful progress on a number of key integration milestones.
Our kickoff meetings were attended by several of our key sales leaders and distributors and the feedback we received from them has been fantastic. Additionally.
Additionally, Ellen Taylor <unk> CEO has started with con med running our USA foot and ankle business with the energy and positivity that we would expect.
As we move into the third quarter, we remain as excited and positive about the <unk> acquisition as we were when we did our initial diligence.
I will now turn the call over to Todd.
Thank you Pat.
All sales growth numbers I reference today will be given in constant currency a 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 and our updated guidance.
For the second quarter of 2022, our total sales increased nine 8% we closed on the antibody <unk> acquisition on June 13th and recognized $2 1 million in sales in the second quarter.
Global organic growth for Q2 was 9.0% compared to the second quarter of last year, which as Curt said was our strongest quarter of 2021.
For Q2, our sales in the U S increased three 9% versus the prior year quarter.
Our international sales grew 17, 2% for the quarter compared to Q2 of 2021.
Europe , Canada, and Latin America were the strongest growers, China decline this quarter in Japan, and Australia grew modestly.
The disparity in growth between the U S and international markets is exacerbated by our prior year comps.
As a reminder, when we talk about our 2021 growth rates, we are comparing to the 2019 baseline since 2020 was impacted by the Covid shutdowns around the world.
With that in mind U S. Q2, 2021 growth was 11, 4% versus 2019, which is well above trend.
Q2, 2021 O U S had its lowest growth of the year compared to 2019 growing only one 2%.
So it's not surprising that Q2 2022 shows the reverse with a lighter than normal growth rate in the U S and a strong growth rate or U S.
Worldwide Orthopedics revenue grew 12, 7% in the second quarter.
In the U S orthopedic sales declined <unk>, 8% and internationally orthopedic sales increased 27%.
Total worldwide General surgery revenue increased seven 7% in the quarter.
U S General surgery revenue grew five 7% internationally general surgery revenue increased 12.0%.
As many of you are aware the OEM side of our Buffalo filter business has been lumpy and its orders and has been a drag on an otherwise strong performance on the on the direct side.
The Buffalo filter direct business combined with <unk> continues to grow around 20% thankfully the Buffalo filter OEM business now represents less than 10% of the combined <unk> and direct Buffalo filter business.
Now, let's move to the expense side of the income statement.
We will discuss expenses and profitability in the second quarter, excluding special items, which include charges for acquisitions legal matters that changes amortization of intangible assets and amortization of deferred financing fees and debt discount net of tax.
Adjusted gross margin for the second quarter was 54, 9% a decrease of 50 basis points from the prior year quarter.
This was better than we anticipated for the second quarter, but we have seen no improvement in the inflationary or supply chain challenges, we discussed last quarter there.
Therefore, we estimate that our gross margin will stay around 55% in Q3 and Q4.
I'll remind you that we estimate that if freight and materials remained at the 2019 prices our gross margin would be about 300 basis points better.
Research and development expense for the second quarter was four 1% of sales 30 basis points lower than the prior year quarter, our R&D investment grew over the prior year, but not as much as sales did we.
We continue to expect R&D to be between four and 5% of sales going forward.
Second quarter SG&A expense on an adjusted basis was 38, 1% of sales a decrease of 20 basis points from Q2 2021, we are getting the returns on our sales force expansion from last summer and expect those returns to increase over the coming quarters.
On an adjusted basis interest expense was $4 9 million in the second quarter.
As Curt mentioned, we refinanced a portion of our outstanding debt during the quarter, we issued new convertible notes using the proceeds to pay off a majority of the existing 2024 convertible notes and locking in an interest rate of 2.25% through may of 2027.
The combination of new convertible notes with the associated hedges and fees and the recent acquisition, we will have a meaningful impact on interest expense and share count going forward.
We expect our interest expense to be about $6 $5 million in Q3 and Q4.
These new notes allow us to record fewer shares in the diluted outstanding share count.
Because the calculation changed mid quarter with the new notes.
The adjusted diluted share count only came down about 1 million shares from Q1 to averaged $32 7 million shares in Q2.
Should plan on Q3 being at least 1 million shares less than the Q2 number.
The adjusted effective tax rate was 25, 5% in Q2, a little higher than our communicated 24% to 25% range.
<unk> been telling you quarter after quarter to expect the tax rate to be higher in the future and unfortunately I have finally been proven right.
We expect the tax rate to be close to 25% for the remainder of the year.
Second quarter GAAP net loss was $168 $3 million due mainly to the charges associated with the extinguishment of the old convertible notes. This.
This compares to GAAP net income of $13 3 million in Q2 2021.
GAAP earnings per diluted share was a loss of $5 65 per share this quarter compared to earnings per share of <unk> 41, a year ago.
Excluding the impact of special items discussed earlier, we reported adjusted net income of $24 8 million, an increase of 11, 8% compared to the second quarter of 2021.
Our Q2 adjusted diluted net earnings per share was <unk> 76, and.
An increase of 7% compared to the prior year quarter.
Turning to the balance sheet, our cash balance at the end of the quarter was $53 2 million compared to $24 9 million as of March 31.
Accounts receivable days as of June 30 were 64 days compared to 68 days at the end of Q1.
Inventory days at quarter end were 192 compared to 215 at March 31, we continue to build inventory to mitigate supply chain challenges.
Long term debt at the end of the quarter was $982 million versus $704 million as of March 31 the.
The change is due to the acquisition of into bonds and the fees and charges associated with the new convertible notes.
Our leverage ratio on June 32022 was four seven times compared to three five times on March 31.
Cash flow provided from operations for the quarter was $18 7 million compared to $34 3 million in the second quarter of 2021. The difference is due to the increased working capital in 2022.
Capital expenditures in the second quarter were $5 7 million compared to $3.0 million a year ago.
Now, let's turn to financial guidance.
First let's talk about currency.
Our hedges had done their job of keeping currency to an immaterial impact through the first part of the year, but with the recent strengthening of the dollar we now see between 150 and 200 basis points of currency headwind to revenue in the back half of 2022.
For the full year 2022, we estimate the currency headwind to revenue to be between 100 and 150 basis points.
From an adjusted EPS perspective currency is driving approximately <unk> 10 of incremental headwind compared to a quarter ago.
So we are lowering our revenue guidance range for the year by $10 million due to currency from the old range of 110 5 billion to one 150 billion.
The new range of 1.0 95 billion to one 140 billion.
This represents organic constant currency growth between 8% and 12% we.
We provided a detail of the pieces of our revenue guidance in the investor deck associated with this call.
We're also lowering our adjusted EPS guidance range for the year from the prior range of $3 50 to $3 65.
To a new range of $3 40.
To $3 55.
This updated range includes the turn from negative currency impact.
This represents operational growth between 12% and 15% inclusive of and despite the cost challenges of 2022.
We've also provided a detail of the pieces of our adjusted EPS guidance in the investor deck associated with this call.
Because of all the moving pieces, we thought it would be helpful to give clear top and bottom line guidance ranges for Q3.
We expect reported revenue in Q3 to be between $275 million and $290 million.
And we expect adjusted cash EPS in Q3 to be between 78 and <unk> 84.
The current macro and macro environment poses unique challenges that are impacting the entire healthcare industry, including us.
None of us like lowering numbers. However, the cost challenges we are all dealing with are unprecedented and essentially remove our ability to soften this latest currency move we.
We are focused on strengthening the long term health of the business and the <unk> acquisition is our most recent example of that.
And in the short term our business momentum remains strong in Q2, we grew organic revenue by 9.0% against our strongest quarter of 2021.
And we expect Q3 and Q4 to grow double digits.
When the cost challenges subside and they will at some point we are excited about the profitability of this improved growth and margin engine can provide.
And with that we'd like to open the call to your questions and I'll hand, it back to Howard.
Thank you ladies and gentlemen, if you have a question or comment at this time. Please press star one one on your telephone keypad.
Again, if you have a question at this time, please press star one one on your telephone keypad.
In order to facilitate as many questions as possible. We ask that you. Please limit yourself to one question and one follow up.
Again Nick.
At Star one one please standby, while we compile the Q&A roster.
Our first question or comment comes from the line of Rick Wise from Stifel.
Your line is open.
Alright to you both.
Maybe I'll start.
Just maybe you could expand on.
Your comments both of you said.
Emphasize the strong bid.
This momentum and Todd your comments about <unk>.
Third and fourth quarters.
Going.
Double digits.
Emphasizes that.
But maybe.
Maybe you could.
Give us a little more color on the drivers of that momentum.
I assume it starts with the expanded sales force you alluded to that.
It particular products or geographies that you're particularly thinking about.
As we talk about is it broad based is it narrow just help us better understand.
What you were.
Trying to trying to tell us.
Yes, I think it's a.
A combination of things Rick I think we feel good about the sales force expansions, where they are how they are getting traction.
We think we have a pretty good product portfolio.
That wasn't built overnight that's been building over the years.
On the orthopedic side of the business. We started the year at Academy with a big product launch demonstration of new products that we're going to be coming to the market on the general surgery side, we have a pretty robust portfolio really paced by <unk> and the Buffalo filter offering and these are all global offerings.
And as we tried to highlight.
The strength is really pretty broad based across the company right now so I wouldn't point to one specific thing I think it's a combination of all those and then.
To be fair and equitable here, the third and fourth quarter last year were COVID-19 challenged so the double digit growth is coming against the soft comparable but.
Underlying all of that is a nice momentum as this business is built in.
We're hopeful that the surgical staff shortages that are.
I think delaying the ability for surgeries to be completed.
We'll slowly start to subside.
But that remains to be seen so we're not banking on that were kind of thinking things will be status quo.
Hoping that our teams continue to do their best in the marketplace.
<unk> gets a little healthier in terms of surgical staff.
If I could follow up on the <unk> and into bone comments.
It sounds like the integration is going extremely well.
We did.
Late June .
Spoke to.
A number of ortho surgeons and Patakis tech to better understand what.
Based on <unk>.
<unk>.
The outlook and prospects for into bonds and got great feedback.
Hi.
People love the portfolio.
The breadth of the product line there.
Our reps.
There are many things that.
We run about.
But it was clear to me coming out of those discussions that.
You also have a big opportunity.
The importance of sales for us a big opportunity too.
Take the current business and expand it but thats going to be sales force driven can you talk about your updated thoughts on how youre going to grow it.
How are you going to stage this.
Sure.
Just the outlook now a couple of months and from that perspective.
Yes.
We're 45 days and as Pat alluded to everything is Directionally moving the way, we would hope and in the direction, we would hope and it gives us a lot of optimism about the long term outlook of the building and I think just fundamentally it will run at the way we've run the other businesses within unmet and that is a focus and.
Innovation and expanding the sales force for for deeper and broader coverage as appropriate.
Outside the U S. It's about product registrations and product approvals getting those those items into the market and building.
More directed.
Or as appropriate distributor sales force.
And I think Pat is sitting here and he has got all those things on his agenda with Allen and with Stefan who runs international.
So.
I think it's.
More of our basic cooking, if you will how we're going to run the business Pat would you add anything else to that now.
Now I'll correct again, I think we have a.
An offense that we have been running on our other sides of the business, which is invest in the sales force responsibly.
And innovate.
With passion and we're going to follow that offense with a business that has experience doing that and under our platform and our scale and our structure. We think we can accelerate the business for them.
Thank you.
Thanks, Rick.
Thank you.
Our next question or comment comes from the line.
Yes.
Right right.
Mark.
Mr. <unk> your line is open.
Great. Thanks for taking the question.
Todd I was hoping you could walk us through some of the quarterly dynamics. It was really helpful to get third quarter guidance.
But with gross margins in that 55% range for third and fourth quarter. It looks like youre, probably going to need a big step down in SG&A.
To get to the EPS guidance. So maybe just walk us through one is that the right way to think about into how do you get there.
Yes, there's a few moving pieces then from what you probably have in your models Ravi gross margin is one and we think that 55 range is probably where we're going to live for the next six months.
Okay.
Interest expense is going to go up.
If you didn't properly model from the acquisition and the changes in that.
So $6 5 million per quarter and interest expense is about where you should be.
And then where you'll pick up we are going to continue to be judicious of course, and like I said, we expect to get good returns from our SG&A investments, but I think while you are probably get some helping your model is the share count and that's really complicated and probably not.
You didn't already adjust those numbers, but like I said, the Q3 share count should be at least 1 million less than the 32 7 million shares that we averaged in Q2.
Because of the new convertible notes, so hopefully those major pieces and.
The rest of your models hopefully will work.
Yes, I'll have to.
Can't be that fast I'll plug at all and then hopefully it all makes sense.
Yes.
It's a little premature here.
To start asking about guidance for 2023, but I thought maybe if we could just.
I'll spend a minute on some of these headwinds some of them are incremental some of them look like they're going to probably be structural and stay here for a while.
How are you thinking about the potential.
Some of these headwinds to abate or stay in to 2023 and do you think we might get back closer to a normal operating margin expansion. Your next year or do you think.
It will likely be below trend given some of these headwinds that are better here.
Terrific question I know, that's what's on everybody's mind. Unfortunately, you are about six months early Ravi we're going to talk about 2023 in January but look I'll try and be as helpful. As I can I'm not sure I'm going to tell you anything you don't already know.
There is no telling where currency goes.
Currencies stayed where it is right now all the way through 2023, then I think you are right I think currency is a headwind going into 2023 again.
Not prepared to quantify that for you, but I would I would say the current rates make make a headwind for next year I think pricing probably maybe for the first time in med Tech's history or at least in our lifetimes.
Pricing probably turns positive so that'll be a help to gross profit.
Our mix continues to be a tailwind right everything thats growing really nicely.
Also comes at a much higher gross margin.
And <unk> is the latest example of that so that's that provides some tailwind.
And then you get into this inflationary environment and how long does this last and when do freight rates.
Start to normalize and when does the supply chain ease up we continue.
I told you a quarter ago.
That we were at two days of sales in back order, which I think is the lowest I have heard from many of our peers.
We're now a quarter later, we're a four days.
In back order four days of sales.
What's interesting and that change is that about a day of that or 25% of our current back order is actually due to competitive back order.
Our orders have dramatically increased on some product lines, where the competition can.
Provide and Thats actually driving now our back order up so we'd be at three days of sales.
Without that but we currently sit at.
At four days of sales in back order so.
And I can't tell you when thats going to change and that will have a big impact right. When that starts to alleviate you pick up those extra days of sales and so.
I would expect the tax rate to remain in that 24% to 25 range probably as we go into next year and then.
So the biggest factor of course is gross margin.
And that's where all those inflation costs are and it's just really hard to predict the duration of what we're seeing today. So I don't know I don't know how much more to help you with 2023.
No. That's all helpful. I appreciate it thanks for taking the questions.
You bet.
Thank you our next question or comment comes from the line of <unk>.
Travis Steed from Bank of America.
Mr. <unk> your line is open.
Hey, great quarter guys.
Thanks for taking the question I guess, just first of all just to declare the only change to the guidance with FX. It looks like you basically took all the margin medicine last quarter for the year. So just want to make sure that that's right. Given all these other companies are are baking in extra margin pressure and then on that 300 basis points of headwind I'm just talk through exactly what some of those pressures are and how long.
It takes the roll off the balance sheet like three months six months, just trying to think through like whats already kind of embedded in the P&L.
Yeah, So, yes, youre exactly right the change to guidance today was currency only so we did.
We did take our medicine last quarter I think for a lot of the inflationary.
Pressures, which remain I would say they've gotten probably incrementally a little bit worse since we talked but.
But the only change to guidance is currency today.
The 300 basis points that we talk about Travis was last quarter, we talked about we went and looked at simply a freight.
And material costs were still at the 2019 levels right. So if if those were still indexed to 2019 costs.
Our gross margin would be 300 basis points better today.
So when does that roll off and when does it get better I mean.
Your guess is as good as mine so when when freight returns.
<unk>.
2019 levels and when material availability and costs return to rational.
Market driven forces.
Then it will it does take.
Sure.
Five ish months five months to six months for that to work its way through the inventory and then into the external P&L and that's how.
That's the flow you should expect.
Okay. That's helpful. When you think about obviously, there's a lot of unknowns for 2023, but maybe you could just talk about some of the underlying gross margin expansion, but that natural 5200 basis points a year that you've been getting your ability to still achieve that and then we can kind of bake in their own assumptions on the headwinds and then I don't know Kurt had any comments on the hospital capital spending environment.
That'd be helpful too. Thank you for taking my questions.
Sure. So again mix is our biggest tailwind on gross margin and we've talked about before that now gray.
Greater than 25% of the business is <unk> in Buffalo and those are both margin accretive and growing.
Very nicely in the 20% range or better.
And the and then we've added into bonds, which is at 80% margin. So a smaller.
Dollar amount from a sales contribution.
But as significant contribution to margins so those.
Those growth drivers.
Provided the tailwind to mix, which are helping us.
<unk>.
Despite the.
Inflationary challenges.
The capital that you wanted to talk about the <unk> I am sorry, yes, Travis on the on the capital environment.
Just to remind everybody our capital is on the on the smaller end in terms of the absolute purchase dollars required and it's also items that are needed to perform surgery. There you don't do surgery. If you don't have our capital items.
So we've not seen any tremendous softening in the demand for capital at this point in time.
<unk>.
I think it remains to be seen if it's going to continue.
Based on the external market, but as of this point in time I'm not hearing anything different from customers regarding their capital appetite.
We had a very good capital.
Quarter outside the U S markets in Q2, which was great to see as well.
No thanks for that.
Thank you again, ladies and gentlemen, if you have a question or comment at this time. Please press star one one on your telephone keypad. Our next question or comment comes from the line of Mr. Matt Mike Matson from Needham <unk> Company. Mr. Mattson Your line is open.
Hey, Thanks for taking my questions.
I had one about the orthopedics and general surgery businesses. That's the first time I remember in a while that orthopedics grew faster than general surgery.
Maybe it was a comp issue similar to what you said about the U S versus O U S growth rates, but I just wanted to see if you have any comments there on the difference between them.
We had.
We have.
65% of our orthopedics business is outside the U S. You see that in our investor deck, and we had a really strong orthopedics performance and.
Combination of all those things, we've typically done which is sales force expansion and new product cadence getting new products into the international markets, sometimes a little bit longer registration. So it takes a little while longer to get them there but.
Underneath our orthopedics business in the pure sports Medicine category.
The pure anchor soft tissue repair, we had a very good quarter, which we think is a good underlying signed for the momentum and direction of the overall business, obviously still more work to do in the U S market.
Pat.
That responsibility since October .
2020, and has brought in a new team in that new team is largely responsible for driving the day to day activity and new product cadence and really really do a nice work in.
I am very confident in our U S business is going to start moving forward here.
In the quarters ahead.
Okay. Thanks, and then just on the.
The Buffalo filter OEM business sounds like that was a little bit of a drag on Buffalo filter overall whats the outlook or expectation for the growth of that portion of the business going forward.
I know, it's only 10% of combined.
Buffalo filter ourselves, but.
Yes, and as we've talked about this before Matt Q2, actually was kind of the last strong order book from them and so the comps get quite a bit easier as we as we now move past Q2.
But we're going to continue to judge the business on what the direct business does.
AUM business will.
B, what it is but.
But our focus is on the direct business.
Okay got it thank you.
Thank you. Our next question or comment comes from the line of Matt O'brien from Piper Sandler.
Okay.
And Bob you guys hear me I'm sorry, Brian Your line is open.
Yes can you guys hear me Okay, Matt.
Okay, Alright, alright, if someone's going out with this new system.
So apologies for that.
So Todd I, just wanted to maybe put a finer point on the expense structure of the business right. Now are you, saying that we are starting to kind of see the top here in Q2 as far as the inflationary pressures that maybe we should start to see some of the pressures.
Starting in Q1 or Q2 of next year or is it going to linger just because you've got a lot of inventory and it takes a while to turn that.
Our streets, just modeling pretty meaningful increases in operating margin next year and I, just don't think thats going to happen. So it'd just be helpful. If you can kind of give us some sense for how to how to think about how things flow through the balance sheet to the income statement over what time periods.
Yeah, so because because we have five years to six months of inventory on hand now at this point, we are fairly locked in for the rest of 2022, So I have a pretty good view of where those margins should be.
And so.
Beyond that though Matt it depends on what happens in the real world starting today right. So.
If inflation starts to go down and that.
Change in freight rates and material costs.
Then whenever that whenever I am not the one projecting when things crashed straight, but when they start to go down that will be recognized in our external P&L five to six months after that so.
Now so what we've.
We think that those inflationary pressures are pretty similar to where they were three months ago freight is.
While oil is a little better we haven't really seen a requisite decline in freight rates, yet, but I do assume that freight following the price of oil should start to moderate a little bit.
And probably just a little bit.
But we haven't seen any real changes in the material cost I think those have gotten incrementally worse from three months ago.
And so where that goes from here is.
<unk>.
Above my.
Control, but.
So, yes, we're not saying that.
This is the worst in gross margins should only get better but.
Hopefully things have stabilized and if they can get better which it seems like they could.
Then our margins will get better, but there will be a delay by a couple of quarters.
Before that shows up in the external P&L.
Okay. It seems to me like Street, probably a little too high for next year, then, okay, well take care of that.
And then I don't want to make a mountain out of a molecule here, but but.
Curt I think you said smoke and.
Alright, Buffalo and <unk> grew around 20% I know, it's getting to be a much bigger part of the business now so I'm, assuming it's not well above 20% is probably a little less than that.
I'd love to hear a little bit more about what's going on in that market. You've got a bunch of states that are mandating. It now much more that are that are about to I think are pending.
Is the market still healthy are you starting to see the impact of competition. There are some bigger players there.
Net.
Our our rattling some cases, a little bit more about their position in those in those categories or one of those categories anyway. So would.
Just love to hear if the market's still help but you are still doing well or if youre starting to see maybe some competition creeping in a little bit.
Matt I would tell you I still feel really good about our Buffalo filter smoke business.
Notwithstanding the challenges of the opens up and down of OEM. The direct offering is doing well, it's doing well outside the U S is doing well in the U S.
And.
If theres been any interruption, it's Ben.
The staff shortage issues at hospitals slowed down full hospital implementation of a smoke elimination program.
The appetite for smoke elimination remains very high.
On the legislative change state by state as beneficial as we've said.
Sure.
That that still has a long way to go candidly.
So.
I'm not I'm, not saying in any way shape or form that con meds backing off of our smoke position, we feel very good about the portfolio.
<unk>.
We still have a market leading position and we're going to we're going to continue to work hard to maintain that market leading position.
Okay, great to hear thanks, so much.
Okay.
Thank you our next question or comment comes from the line of Matt.
Matthew <unk> from Keybanc capital standby.
Thanks for taking the question Sean Your line is open.
Thank you for taking the questions.
Just first one on me. Thank you very much for the color on the composition of OEM.
At this point in Buffalo filter.
Just curious what why that's been a drag if it's just your focus on your primary business and whether any of the previous customers are now in the market with their own solution.
We're not aware of any of the previous customers.
Well, we have contracts with the customers. So we haven't we haven't lost any contracts thats, what they buy under the contract that has been the up and down.
So I wouldn't I wouldn't say I'm aware of anybody who has been more aggressive.
One company did an acquisition of a product line.
They have an existing portfolio.
They were buying from us from Buffalo filter when we acquired it.
But other than that I'm, not aware of anybody else who's brought their own direct product into the market.
Yes, I think it's as simple as inventory levels with the ups and downs of the market. If you remember last summer everybody thought vaccines are out and everything is going to be gangbusters in the back half of 2021.
And I think people ordered up a lot of inventory because this product line is like Kurt said I mean, there is a huge demand for a huge need for it and I think people stocked up their shelves, assuming a really strong.
Back half of 'twenty, one and then of course Delta hit and then omicron hit in.
And so I think <unk> been burning through inventory.
And I think it's probably that simple we know we're growing faster than them on it from a demand from an end demand standpoint.
But I think it's really a function of.
Buying buying a lot last year when everybody expected the back half of 'twenty, one to be different than it ended up being.
Okay.
Thank you for answering that and then.
On.
I know you don't want to talk about 2020 threes, you spoke about that a little bit earlier.
But just if FX remains at current rates into next year, how should we think about.
The headwind from unwinding hedges and kind of where would we see it.
Well you would see it.
We are I'll remind everybody we are pretty well naturally hedged around the world. So where we have significant business. We also have footprint.
So we are naturally hedged pretty well and then we synthetically hedge all of our major currencies that we do business in.
We have revenue hedges, we have cost hedges.
And.
<unk>.
That's why other people have been talking about currency earlier, this year and our hedges were protecting us from the near term volatility.
But those bills eventually come due and with this recent move over the last three months.
It's having the impact that we outlined today or in 2022 the impact on 2023 is actually still not yet determined because not all of those contracts for 2023 have even been purchased yet.
And so it's impossible for me to quantify that for you today, but.
Currency.
Never know, where it's going to go.
But if you assume that.
Everything froze, where it is right now and didn't move for the next 18 months.
It's safe to say that currency would be a headwind for 2023 on both the top and bottom, but I am not prepared to quantify that for you today.
Alright, Thank you very much.
Thank you I'm showing no additional questions in the queue at this time I would like to turn the conference back over to management for any closing remarks.
Thank you Howard and thank you everybody for joining us for the call. This evening and we look forward to speaking with you again in the future. Thank you.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everyone have a wonderful day speakers standby.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Okay.
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Yes.
Okay.
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