Q3 2022 Conmed Corp Earnings Call

October 26, 2022

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

[music].

Good afternoon, everyone.

Before the conference call I'll begin.

Let me remind you that during this call management will be making comments and statements regarding its financial outlook. Its plans and objectives. These statements represent the forward looking statements that involve risks and uncertainties as those terms.

<unk> are defined under the federal security laws.

Investors are cautioned that any such forward looking statements are not guarantees for future events performance or results.

The company's actual results may differ materially from its current expectations.

Please refer to the risks and other uncertainties disclosed under the forward looking information in today's press release as well as the company's SEC filings for more detail on the risks and uncertainties that may cause actual results to differ materially the company disclaims any obligation to update them.

He further looking excuse me 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 non-GAAP or adjusted measurement.

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 the benchmarking against other medical technology company.

Adjusted net income and adjusted earnings from 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 earnings releases posted on the company's website.

With these required announcements repeat it I will turn the call over to Curt Hartman.

<unk>.

Sure of the Board President and Chief Executive Officer for opening remarks, Mr. Hartman. Please go ahead.

Thank you Lisa good afternoon, and thank you for joining us for <unk> third quarter 2022 earnings call.

I'm joined by Todd Garner Executive Vice President and Chief Financial Officer Today, We will walk you through our third quarter results and our full year outlook. We will then open the call to your questions.

Turning to our results total sales for the third quarter were $275 1 million, representing a year over year increase of 10, 6% as reported and an increase of 12, 1% in constant currency versus the same quarter in 2021.

From an earnings perspective during the third quarter, our GAAP net income totaled $46 1 million. This compares to net income of $14 9 million in the third quarter of 2021, excluding special items that affected comparability. Our adjusted net income was $23 8 million a decline of three 7%.

Versus the prior year's third quarter and our adjusted diluted net earnings per share came in at 77.

Klein of three 8% versus the prior year's third quarter.

Looking at the quarter in more detail the international markets delivered solid results with nine 6% constant currency growth, while the domestic business grew 14, 2% reported.

With that said the industry continues to face headwinds from my perspective, the two largest issues remain less than ideal health care staffing levels and ongoing global supply chain and consistency.

These issues did not worsen in the third quarter, but we saw only marginal improvement compared to the second quarter from.

From a sales run rate perspective, the quarter started slowly and while the September run rate improve that recovery was not strong enough to achieve our double digit growth outlook on the top line.

Regarding the acquisitions, our first full quarter within the bones was very positive and we remain excited about this business. Additionally, we were incredibly pleased to announce and close on the <unk> acquisition in August we quickly embraced this business that are laser focused on progressing clinical study work training the sales force in educating our customers on the product.

On this last point I personally attended a large customer event. During September . If this meeting was an early indication of customers' enthusiasm for the concept of healing that our instincts are that <unk> technology grew well justified in the years ahead.

I'll wrap up my comments with a mention of a non financial goal I'm proud to announce that <unk> recently published its first ESG sustainability report, which can be found on our website. This report is the work product of a global cross functional team within <unk> supported by an external third party expert and importantly, all of the information in our.

<unk> has been validated by our audit group. This report will serve as our baseline as we response, we pursue enhancements to our ESG initiatives across continents I want to thank the <unk> team responsible for this effort.

In closing I'm proud of the Con mid team and the progress we've made both through the short term and long term outlook of the company with three quarters of 2022 behind US we have delivered strong constant currency organic growth and have closed on two high growth high margin acquisitions that have further strengthened our outlook for the future while continuing to NAV.

A challenging global market economy Global leadership team and our organization around the world continue to perform exceptionally well in an unpredictable environment.

I will turn the call over to Todd who will provide a more detailed analysis of our financial performance and walk you through our outlook Todd.

Thank you Kurt.

Our 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 for the quarter and our updated guidance.

For the third quarter of 2022, our total sales increased 12, 1% revenue from the recent acquisitions was $10 $3 million in the quarter, putting our global organic growth for Q3 of seven 9%.

For Q3, our sales in the U S increased 14, 2% versus the prior year quarter. Our international sales grew nine 6% for the quarter compared to Q3 2021.

Worldwide Orthopedics revenue grew 14.0% in the third quarter in the U S. Orthopedic sales grew 24% and internationally orthopedics sales increased 10, 4%.

Total worldwide General surgery revenue increased 10, 7% in the quarter U S. General surgery revenue grew 11, 8% internationally general surgery revenue increased eight 5%.

Now, let's move to the expense side of the income statement.

We will discuss expenses and profitability in the third quarter, excluding special items, which include charges for acquisitions debt refinancing costs amortization of intangible assets and amortization of deferred financing fees and debt discount net of tax.

Adjusted gross margin for the third quarter was 55, 9% a decrease of 130 basis points from the prior year quarter.

Last quarter, I said to expect gross margins around 55% for the back half of 2000 22022.

In Q3, some mix issues, including lower capital sales caused a stronger than expected gross margin.

Some of that mix may swing back the other way in Q4, and the increased currency headwind will impact Q4 margins with these dynamics Q4 gross margins could end up below 55%.

Research and development expense for the third quarter was four 6% of sales 20 basis points higher than the prior year quarter.

Third quarter adjusted SG&A expenses were 37, 7% of sales a decrease of 170 basis points from Q3 2021.

We are getting the returns on our sales force expansion from last summer and expect those returns to increase over the coming quarters.

Specifically in Q4, we would expect adjusted SG&A expense to be between 35, 5% and 36.0% of sales.

On an adjusted basis interest expense was $7.0 million in the third quarter, we expect interest expense in the coming quarters to be $7 5 million or more depending on future Federal reserve decisions.

The adjusted effective tax rate was 24, 9% in Q3, and we think 25% is the right expectation going forward.

Third quarter GAAP net income was $46 $2 million. This.

This compares to GAAP net income of $14 $9 million in Q3 of 2021.

GAAP earnings per diluted share.

We're a $1 48, this quarter compared to 47 a year ago.

Excluding the impact of special items discussed earlier, we reported adjusted net income of $23 8 million a decrease of three 7% compared to the third quarter of 2021.

Our Q3 adjusted diluted net earnings per share was <unk> 77.

A decrease of three 8% compared to the prior year quarter.

Turning to the balance sheet, our cash balance at the end of the quarter was $33 4 million compared.

Compared to $53 2 million as of June 30.

Accounts receivable days as of September 30th were 65 days compared to 64 at the end of Q2.

Inventory days at quarter end were 222 compared to 192 at June 30th.

Nine days of the increase is related to the inventory from the recent acquisitions. The remaining increase was due to building inventory to mitigate supply chain challenges.

Long term debt at the end of the quarter was 1.036 billion versus $982 million as of June 30.

The changes due to the acquisition of <unk> during the quarter our.

Our leverage ratio on September 32022 was 5.0 times compared to four seven times at June 30.

Cash flow provided from operations for the quarter was $25 $9 million compared to $21 $4 million in the third quarter of 2021.

Capital expenditures in the third quarter were $6 $7 million compared to $5 $6 million a year ago.

Now, let's turn to financial guidance.

We expect reported revenue in Q4 to be between $305 million and $320 million.

This includes increased currency headwinds of 300 to 350 basis points for Q4 alone.

For the full year 2022, we now estimate the currency headwind to revenue to be between $150 million 180 basis points in our reported revenue to be between $1 1 billion and $1 115 billion.

This updated revenue guidance translates to organic growth between 11% and 16% in Q4 and between eight and 9% for the full year.

We've included the detail of the different components of our financial guidance in the investor deck associated with this call, which can be found on our website.

We expect adjusted EPS in Q4 between 98 and $1 five.

That makes our full year 2022, adjusted EPS guidance range between $3 21, and $3 28.

The reduction to the full year range from last quarter is due to the decrease in the potential upside in revenue. We anticipated 90 days ago. We now expect the procedure growth to be more moderate than we did a quarter ago and hospital staffing remains a challenge.

Inflation and currency are hindering our ability to offset the reductions to revenue.

We will talk about our 2023 guidance in January but we can already see that the recent significant strengthening of the U S. Dollar will create a meaningful currency headwind for 2023.

Given the multiple moving factors involved in the calculation it is difficult to accurately project, but our current estimates are that the impact could now be around 30.

Obviously as we put the 2023 plan together, we will be looking for ways to mitigate this headwind as much as possible.

We feel very good about the exciting revenue growth potential from our portfolio, we have built including our recent acquisitions. We are keeping the engine strong while being responsive to the dynamics in the marketplace when.

When the cost challenges subside and they will at some point we are excited about the profitability of this improved growth and margin margin engine can provide.

And with that we'd like to open it up to your questions and I'll hand, it back to Lisa.

Thank you.

As a reminder, if you'd like to ask a question. Please press star one on your telephone. We also ask that you limit yourself to one question and one follow up one moment, while we compile the Q&A roster.

Thank you at this time, we are bringing.

To the to the platform.

And Matthew from.

Please go ahead your line is open.

Yeah. Thanks, Thanks for taking my questions.

I guess I'll just start with the currency.

The 30.

The headwind it seems like it's quite a bit bigger, but the tide. It said that it would be kind of like 10 back in mid September .

I know that the dollars continue to strengthen quite a bit but.

Just curious about kind of the difference there.

Sorry for 2023 of that is just to be clear.

Sure Mike, Yes, so through the summer we had run that analysis and you are right in early September which was actually based on.

Rates in the summer.

We had estimated about <unk>, obviously, the currency has moved quite a bit since then.

And that's what's driven the change.

Okay.

And just.

In terms of the revenue shortfall that youre talking about.

How confident argue that it's really driven by kind of.

Just overall procedure growth market growth as opposed to.

Yes.

Market share competitive dynamics or something like that.

Yes, I think.

Look at the detail in our press release and our consumable volume.

<unk>.

Was very strong in the quarter relative to prior year. So we feel like we're getting our share of the procedures. Obviously, we did not have a good capital quarter. We did we've not had a great capital year. Some of that has been supply chain constraints. Some of that has been the age of our capital.

Some of that has just been ongoing enhancements to the capital we have in the market. So I really think that there's good volume in the marketplace again, better staffing would help that and I recently read an article that that even staffing levels at.

The small town hospitals are slowing things down.

Never mind, the big centers, but fighting through that is I think what facilities are doing and companies are trying to do their best to help them. So I feel good about our overall business I feel good about the composition of our product mix, we've got new products hitting the market as well.

So I.

Don't see any indications that we're losing share at this point in time and I guess, if I did I would point to capital right. Now is the one spot where we may be a little suspect given.

Given the age of the portfolio.

Okay got it thank you.

Thank you.

Our next question will be coming from young Li of Jefferies. One moment. Please.

Your line is open.

Hey, guys can you hear me all right.

Yes, Ken.

Alright, great.

Thanks, so much for the questions.

I guess are.

Was wondering.

It seems like <unk> and Buffalo filter.

Continuing to grow 20%.

So that's pretty encouraging.

Can you maybe talk a little bit more about.

The business performance in the quarter and if you can comment on the OEM part that'd be helpful as well.

Sure.

We had a very good quarter.

<unk> was absolutely phenomenal it was very interesting we had strong growth internationally as well as in the domestic market.

I think everybody probably saw intuitive surgical's results and that has always been a wind at our back in the <unk> market, but I would I would tell everybody on the call that we outpaced that growth in air seal on Buffalo filter I think last quarter. We said we were going to avoid the conversation on OEM and this was more about that.

The bigger share of the business as the branded portion.

And we see that business continuing to be a strong franchise for con med and having good results consumables have picked up as a procedure volume has picked up obviously broadly speaking in the markets, whether it's in the U S and the international markets, where they have smoke legislation.

On that today, there are nine states that have legislation five of those states are live.

Four of them have future dates that are effective they represent about 17, 5% of the population 19% of the hospitals. There is an additional three states that could fall into the legislative band still in 2022, New Jersey, New York, and Texas, and Interestingly that would represent 18% of the.

Population about 15% of the hospital so with three additional states, we could see the number the percentage of the population percentage of hospitals effectively double and then there's approximately seven that are on deck for 2024. So there is good momentum in the legislative side Theres good momentum as procedures have recovered.

And those things all.

To help serve and grow the smoke business.

Okay, Great really appreciate the color.

And just for my follow up.

Just kind of want to level set.

Consensus expectations for next year.

I think into bone.

Around $43 million.

Before for <unk> as you mentioned mid single digit.

2023.

It sounds like the initial.

Interest is pretty high.

So if you can maybe.

Comment about.

Those type of.

Consensus expectations.

Okay.

In the right place.

Yes.

Yes, I'm not going to talk about consensus yet, but I will talk about what we've said right. We have said is that with into bones. We said that that market was growing at a high single digits and that business was growing at least twice that and it has certainly done that since we've owned it so it's off to a very good start.

And doing very well and then on your right on bio Rad is we said that 2023 should be single digit millions in revenue and then in 2024, we would get to double digit millions in revenue so.

That's what we've said and I'm not going to I'm not going to grade.

Consensus here with you today.

Okay fair enough. Thanks, so much.

Okay.

Thank you.

One moment for the next question.

The next question, we have is coming from Robby market.

J P. Morgan. Please go ahead.

Yes, hi, thanks for taking the questions.

Maybe first.

It does look like capital ways the.

The bad Guy here, that's the one that missed.

<unk>.

Pretty significantly versus consensus.

<unk>.

Capital is not not the best environment, but we are seeing different trends from companies out there you talk about some of this as backlogs maybe you could just kind of put some of the pieces together is how much is the weak capital environment, how much is not having enough supply due to backlog and how much is that backlog in.

Do you expect it to pick up anytime soon.

Yes, I think anything thats related to electronic circuit boards.

Youre going to see delays and we have an energy platform is sold on the general surgery side that is.

Not immune to those challenges and that that is not a new problem.

But getting those supplies through the chain into production has been more delayed than we might have originally assumed we've made some progress on some of the products, but we have others that we're still working our way through those electronics and supply chain issues.

As I mentioned earlier and one of the other sections. Some of our capital is a little bit dated and we need to refresh that and get that into the marketplace that always plays.

With capital results, New capital sells better it's got that.

Features better better benefits and so we're working on those next generation platforms.

So it's a combination of both I think I'd be honest with you I don't think we have.

Have seen any drop in appetite for capital from our customers as procedure volumes have increased relative to what they might have been in the past 12 previous 12 months.

People are buying the capital that they need to do the procedures. In every every capital item, we sell that has to be in the room to do the procedure. So I don't think we've yet felt the slowdown by our customer base on capital acquisition interest.

Okay.

Great maybe.

Todd as we think about that 30 cents for next year on EPS. I believe you also have some floating rate debt as well so far.

First on the FX component.

It's a bigger drop through 10% or so.

And then we would normally see from Con Ed maybe you could walk us through is that a function of the hedges or what exactly is going on there.

Current interest rates and assuming I believe we're at 50 bps heading into the year and maybe 25 bps in the beginning of next year, how should we be thinking about the interest expense for 2020.

Sure.

Yes, so the hedges basically defer.

The cost right there.

Their job is to protect the near term and take volatility out of the near term, but at some point those bills come due and so I think because almost half of our business is outside of the United States and because we do hedge essentially.

Everywhere that we do business I think we do have a little more exposure on a relative basis to that than others and so as the as the currency has moved here in the last few months and then especially very recently.

That is.

That increases the mass of what.

Bill said it is going to be coming due right now obviously the answer will be different than that because rates will move mix will move it's very dependent on.

What we sell and what we spend and what geography, and then of course, what rates do and so it's very difficult to project with precision.

But I did want to kind of get everybody in the ballpark of where the math says we are today, because because we do have a I think a more comprehensive hedging program that a lot of the names.

That you spend time on and so there is a little we've been more protected in 2022 than others and that.

And that pain has been deferred a little bit to 2023, which is the.

The job of the hedges, it's what they do.

Let me pause there Ravi.

On that before I go to interest expense.

And just confirming you run it through sales right. So that's where we will see the impact as it falls through the P&L, yes.

We have both revenue and cost hedges, so it kind of shows up throughout the P&L.

On interest expense.

I said for Q4, the seven 5 million Thats based on current rates. So that's a quarterly number.

We expect the debt to come down right as we as we pay down debt, but I can't tell you what interest rates are going to do I think obviously the consensus is that they are probably going to go up and so what.

What I've told you is that Q4 should be.

At least $75 million, we'll have to see what the fed does at the next meeting and that will affect the coming quarters.

Okay.

And if I could sneak one last one in.

I think people are just.

A little concerned.

The organic sales Miss versus expectations are you sure that it's more.

A market issue.

Rather than a share ratio or anything else, we should be thinking about there in third quarter and going forward. Thanks a lot.

Yes.

Obviously, we we pay pretty close attention to our business and where the opportunities are and where we perhaps have lost opportunities or picked up opportunities and as I said. The July August performance was was slow it just was slow for our mix of businesses.

Things improved dramatically in the month of September , but not enough to close the gap and then obviously, we didn't close the capital that we needed to close to secure the quarter. So I don't I don't feel like that in a 90 day window, we suddenly started losing market share.

<unk>.

So I feel pretty good about where we're at.

Great. Thanks, a lot.

Thank you one moment for our next question.

And our next question is coming from.

Matthew.

<unk> of Keybanc. Please go ahead.

Hey, good afternoon, and thank you for taking the questions I just wanted to follow up on the age of the capital Alright.

Alright, and just which capital or are you kind of referring to if you because if you're referring to potential refresh of like <unk> and Buffalo filter I think thats all I got.

So very very exciting potentially into next year that you are after or are we talking about like the powered instruments and surgical visualization stuff, that's a little bit more like legacy comment.

But I think certainly the legacy content items that you discussed the power tools. If you look at the entrance to the market on those.

They are probably coming up in that window, we're a refresher additions expansions would be.

<unk>.

In our in our not too distant future.

As far as Air Shield goes there she'll platform the <unk> box.

<unk> is obviously, a very important component of our overall growth story and I think everybody should assume that whether it's consumables or the capital.

Those remain under development.

New items, new features coming all the time again I think everybody on the call knows we don't talk about timing on <unk>.

New products to market, we prefer to get them in the market before we talk about them and we're going to stay true to that approach.

Okay.

Bio Rad is only just a follow up to the previous one where you guys don't really talk about like new product development and how that how are you going to talk about like bio Rad is moving moving forward as like Youre developing like that that platform are you going to specifically call out numbers once you get past.

M&A phase of it and it becomes organic just I'm just curious how youre thinking about communicating that platform moving forward.

I think we will do what we've always done once it becomes organic it will fit into the orthopedics category I am sure we will make no.

Non financial commentary relative to it will be clear.

Clearly talking about studies as they come to fruition and clothes and further impact the results, but we're not going to we're not going to breakout <unk> or into bones as individual line items in every call.

And if I could squeeze just one more one more and I think obviously with the leverage free cash flow is going to become.

Pretty important going into next year, just as you think about the assumptions of free cash flow for this year, how should we be thinking about it and then just I guess any major moving pieces youre thinking around free cash flow without having to give guidance for next year.

Sure Matt.

I think 2022.

Has been tough because of the inventory right.

Trying to stock up.

To mitigate the supply chain issues has put a dent in our free cash flow because of the working capital increases I would expect that as we go into 2023.

That is more neutralized and so you should get we should get back to free cash flow of traveling closer to net income as we've traditionally been. So this is 2022 has been the one off year, where we've invested a lot in working capital I think.

Intelligently and strategically to try and make sure we could service our customers in a very difficult supply chain environment, but but the hope is that we've got.

Got those inventory levels at a place where they can be relatively stable.

And that free cash flow should tie closer to net income as we move forward.

Thanks Scott.

Thank you.

And for our next question one moment please.

Our next question will be coming from Matt O'brien of Piper Sandler. Please go ahead.

Thanks for taking my question.

As I look at the what you said as far as growth in <unk> and <unk> are accurate.

Contribution from the acquisitions I think you said 420 basis points.

About $10 $5 million I'm, assuming a majority of that is.

In development at this point I don't think were expecting much out of bio Rad. So is that math about right. It seems like <unk> is running a little bit ahead of what you guys are kind of contemplating.

When you did that deal and just love to hear what exactly you're seeing there from a momentum perspective in that category.

Yes, so on the on the pure math Youre right.

The lion's share of that is into bonds by a raise is just getting started so very pleased with both of them, but <unk> is by far the Rev.

Revenue contributor at this point.

And I think.

Matt in terms of the marketplace reaction with into bonds.

I think when we originally did the deal we guided to $20 million in this in the back half, obviously, it's going to be more than that because we close before the end of the second quarter, but I think we've also.

Increased our expectations here for the for the remainder of the year based on what has happened in.

Based on how that business trends are there is a strong fourth quarter push in foot and ankle and we've also been.

Candidly some of the things we saw in diligence were even better than we thought were very excited by the work that they're doing with their quantum ankle we're very excited by.

Launch of AR.

New product.

Just hitting the market some carbon plate and that's got some unique features and benefits.

Early days on that but enthusiasm early enthusiasm and then just the caliber of the sales force I mean, we bought a complete standalone business and we've been very pleased with the sales force and their commitment.

Their commitment under <unk> ownership.

That's always a risk when you have a transaction sales forces are.

Very suspect of transactions in this sales force is settled right in and really done a nice job for us.

And we're very pleased overall with the team and we're ramping up in the international market is a very small contribution at this point in time and international part of what <unk> brings to that story is the international approval pathway.

Our <unk> work that needs to be done to get those approvals. We're suited for that work we have the staff the resources to do that work so.

Everything that we had we had seen in diligence has come to fruition.

Sure.

Haven't really run into any negative surprises and really pleased with the depth of experience at the leadership team brings to <unk> across the foot and ankle space.

Okay. That's great to hear and then the follow up question is just you've got this extra currency headwind you've got more interest expense youre going to be facing for 'twenty three how do you balance investing for growth and smoke.

These acquisition versus versus profitability, and I guess to ask directly and Im not sure Tom can answer this.

But can you grow earnings next year, given all of these headwinds.

Well look we're going to talk about 2023 and.

In January but we've got a very strong revenue growth line right and so we'll be focused on.

Fueling that and making sure that that stays strong.

Cost environment, the macro environment.

As challenging and has been challenging for longer than any of us are happy about.

We believe strongly the way out of this is growth right and so we have made the conscious decision.

To maintain the engine not cut resources more deeply than we already have and be able to service our customers.

And do the best we can on the revenue line.

And then.

That will provide the the room in the P&L too.

To drive profitability through the bottom and as <unk> said interest expense, we've talked about the acquisitions. There is still dilutive into 2023 before they get accretive in 2024, and so we've got to finish digesting those.

And right now currency is a stiffer headwind than we thought a few months ago that can change the other way right and so we'll have to see how all of that shakes out as we put the final plan together and we talked to you about 2023.

In January .

Got it thank you.

Thank you one moment, while we prepare for the next question.

Okay.

The next question is coming from Rick Wise of Stifel. Please go ahead. Your line is open.

Alright.

Good afternoon to you both.

Todd.

I was struck by I think you said it.

Maybe Chris.

Talking about the sales force talking about SG&A.

You said, we're starting to get returns or better return on your sales investment.

Knowing how.

Significantly you expanded the sales force.

I think maybe twice over the last couple of years.

I was hoping you could.

And on those comments.

When you use the word returns are.

Are we seeing are you seeing more.

Opening going deeper in existing accounts, what part of the business is benefiting.

And again.

Request for guidance it more.

That sets you up for the potential of the possibility of.

Maybe more meaningful or significant operating sales our operating leverage.

As we look ahead to 'twenty three.

Yes, Youre right Rick It was me and it is a returns it was a returns comment which is basically.

We made we made significant sales force expansions last summer, believing that volumes were about to come back in a strong way.

Obviously, we all know that cause delta and omicron. The volumes were have been delayed and we're not like we all thought they would be at the time.

And so it took longer than it normally does for those new sales reps to get the customer facing time and experience to be productive and to start paying back and so but we are now a year later.

So it has taken longer than it normally would but just based on the leverage right SG&A as a percentage of sales.

Which has been which was higher.

As we digested those those investments you now see that we are lower than the prior year and so that we are getting the returns basically.

On those additional resources and so.

I think in hindsight did we do it a couple of quarters early yes, probably because none of us knew what was going to happen at the end of last year, but we're very happy with the decisions, we made and the investments we made and those teams are often running and being productive now.

And we expect that they will only get more productive.

In the coming quarters.

Got you.

Okay.

Yes.

Next thing I would say at a high level.

Great.

As you think about <unk>.

'twenty three 'twenty four I'm, just wondering how in your own mind.

If you.

If you had to say now how do you think the recovery based on what you know for your business. How is it going to unfold I did 150 Dock survey recently and.

The majority of the docs are saying.

Hi.

Staffing is going to be.

Headwind.

<unk>.

Through March of 'twenty, three it's going to get better they think in the second half but.

Sort of summary.

Summarizing there.

Basically we had 24 is going to be the first.

Time, where they feel like they are going to have worked through a lot of the staffing issues is that the way you are seeing is that the way Youre planning and is set up for next year is sort of a softer first half again aside from currency softer first half an acceleration through the second half into 'twenty four is that the way youre thinking about it.

I don't think I would believe that.

Surgical staff levels, even broadly speaking healthcare staffing levels.

Going to improve overnight I think this is something that's going to be measured in quarters, if not to your comment into 2024. There is a lot that has to happen.

To get back to those.

Yes.

Those fully staffed to levels in there there are some very well known.

Institutions doing some very dramatic things to try to navigate the current staff challenges.

And.

I think there are other factors at play as well, we're coming into seasonal flu and who knows what will happen with COVID-19 in childhood respiratory disease, and how that puts burdens on health system. So there's so many other factors that go into that question, Rick It's a little hard to predict but.

The one thing I am confident of it will not be solved overnight, it's going to take some time with that said when I look at our portfolio, whether its the recent acquisitions of into bones or bio Rad as both we believe we will be.

Hi high growth assets with great gross margins or I look at existing portfolio of products that <unk> has whether it's <unk> Buffalo filter.

Our recently released in 2022 Argo anchor the click lock.

Portfolio those items are all high gross margin items.

They.

Our consumable volume was very strong really throughout the first three quarters of this year and we can just continue to build on that with organic innovation as well, we will do everything possible that we control and let the market sort out those those other macro factors.

When we get to January we will give more outlook views on 2023.

But.

But what we're responsible for we will we will be accountable with it.

To deliver a top line that I think.

We will get us, where we need to get gotcha.

Gotcha. Thank you so much.

Thank you.

While we prepare for our last question.

And our last question.

We will be coming from Travis steed.

Travis Steed of Bank of America Securities. Your line is now open.

Hey, Thanks for taking the question.

Going back to the procedure side.

I guess it kind of stands out because other companies are saying things are a little bit better, but it sounds like you expect the actual procedure growth to moderate a little bit what do you think it is about the mix of your business.

Thats different and I guess also are you assuming a second wave I think that was the youre, assuming a COVID-19 wave again in the guidance and making sure that was still the case.

I didn't specifically call out of Covid wave, but I think anybody who's reading materials around healthcare.

Understands that in the current environment Theres already a respiratory disease.

It's impacting health systems, there could be typical.

Covid wave that we have now become accustomed to after a couple of years here in the fall and the.

The seasonal flu, which certainly is.

On everybody's mind, when you think somebody actually came up with the term for the trifecta viruses. This year as we go into the end of the year, so that could certainly slow down.

I refer to as elective procedures and by and large the majority of what we do are elective procedures. Certainly there is there are some general surgery cases that are not elective, but they can even be delayed. So I. Just think we have a mix of businesses that is a little bit more elective in nature not not to say you can put them off because I think in wave one.

Covid demonstrated that there were co morbidities associated with delay in surgery broadly speaking and I think systems have learned thats not a wise move.

Either for the patient or candidly for their own.

For their own workload life balance.

So it's just.

Our mix of business, a little bit different than others.

Our third quarter started slow.

Picked up as we got into September at a great rate and that was nice to see and we hope that continues into the fourth quarter and gets us to a better spot.

Okay fair enough.

On the 300 basis points of inflation, Todd just curious how that's been trending at this point in the second half gross margin that we should still think about the jumping off point for next year.

Okay.

Yes, I think generally obviously.

Obviously currency you got a little worse, that's affecting us in Q4 more than we expected.

Three months ago, but.

But I still think that 55 range is probably the right current baseline and then.

The question is how quickly does inflation.

<unk>.

That said.

I'm not sure it hasnt really gotten worse, but it hasnt really gotten a lot better.

And so far in the back half of this year. So we're probably going to have to be a little patient there.

So yes.

I think that that mid fifties as probably the current baseline obviously, the acquisitions helped that and as they grow.

Thats accretive because they're both over 80% and then <unk> is in the low seventies Buffalo filter is in the low to mid sixties. So all of our growth drivers are accretive to margins and so as with a little time.

That will we've got a good engine that.

Is driving improving margins its just been masked by the macro challenges that we're facing out there between supply chain and currency. So.

At some point like I said at some point that cloud will move on and then I think people will feel really good about our margin profile in our growth profile.

But we're kind of we're kind of in the clouds right now.

Alright.

Thanks for taking the questions I will follow up offline. Thank you.

Thanks Travis.

Thank you that concludes the Q&A session for today and now I would like to turn the call back over to Mr. Hartman.

Thank you Lisa and I want to thank everybody.

Thank you Lisa I want to thank everybody for your time today, and we look forward to speaking with all of you on our next earnings call. Thank you and good day.

Today's conference call you will be all disconnect. Thank you. This concludes today's conference call you will be all disconnect you all have a great evening.

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Good afternoon, everyone.

Before the conference call I'll begin.

We remind you that during this call management will be making comments and statements regarding its financial outlook and the plans.

Plans and objectives. These statements represent the forward looking statements that involve risks and uncertainties as those terms are defined under the federal security laws.

Investors are cautioned that any such forward looking statements are not guarantees for future events.

<unk> are resolved.

Company's actual results may differ materially from its current expectations.

Please refer to the risks and other uncertainties disclosed under the forward looking information in today's press release.

As well as the company's SEC filings for more detail on the risks and uncertainties that may cause actual results to differ materially.

<unk> disclaims any obligation to update any further looking Susan 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 non-GAAP or adjusted measurement.

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 the benchmarking against other medical technology company.

These adjusting items are specified in the reconciliation supporting the company's earnings release is posted on the company's website.

With these required now I will turn the call over to Curt Hartman.

Okay.

Sure of the Board President and Chief Executive Officer for opening remarks, Mr. Hartman. Please go ahead.

Thank you Lisa good afternoon, and thank you for joining us for <unk> third quarter 2022 earnings call.

Im joined by Todd Garner Executive Vice President and Chief Financial Officer Today, We will walk you through our third quarter results and our full year outlook. We will then open the call to your questions.

Versus the prior year's third quarter and our adjusted diluted net earnings per share came in at 77 <unk>.

A decline of three 8% versus the prior year's third quarter.

Looking at the quarter in more detail the international markets delivered solid results with nine 6% constant currency growth, while the domestic business grew 14, 2% reported.

With that said the industry continues to face headwinds from my perspective, the two largest issues remain less than ideal health care staffing levels and ongoing global supply chain and consistency.

These issues did not worsen in the third quarter, but we saw only marginal improvement compared to the second quarter from a sales run rate perspective, the quarter started slowly and while the September run rate improve that recovery was not strong enough to achieve our double digit growth outlook on the top line.

Regarding the acquisitions, our first full quarter within the bones was very positive and we remain excited about this business. Additionally, we were incredibly pleased to announce and close on the <unk> acquisition. In August we have quickly embraced this business that are laser focused on progressing clinical study work training the sales force in educating our customers on the product.

On this last point I personally attended a large customer event. During September . If this meeting was an early indication of customers' enthusiasm for the concept of healing that our instincts on the <unk> technology grew well justified in the years ahead.

I'll wrap up my comments with a mention of a non financial goal I'm proud to announce that <unk> recently published its first ESG sustainability report, which can be found on our website. This report is the work product of a global cross functional team within con supported by an external third party expert importantly, all of the information in our report has.

Been validated by our audit group. This report will serve as our baseline as we responsibly pursue enhancements to our ESG initiatives across continents I want to thank the <unk> team responsible for this effort.

We have again, a challenging global market.

<unk> Global leadership team and our organization around the world continue to perform exceptionally well in an unpredictable environment.

I'll now turn the call over to Todd who will provide a more detailed analysis of our financial performance and walk you through our outlook 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've included an investor deck on our website that summarizes the results for the quarter and our updated guidance.

For the third quarter of 2022, our total sales increased 12, 1%.

Revenue from the recent acquisitions was $10 3 million in the quarter, putting our global organic growth for Q3 of seven 9%.

For Q3, our sales in the U S increased 14, 2% versus the prior year quarter. Our international sales grew nine 6% for the quarter compared to Q3 2021.

Worldwide Orthopedics revenue grew 14.0% in the third quarter in the U S. Orthopedic sales grew 24% and internationally orthopedics sales increased 10, 4%.

Total worldwide General surgery revenue increased 10, 7% in the quarter U S. General surgery revenue grew 11, 8% internationally general surgery revenue increased eight 5%.

Now, let's move to the expense side of the income statement.

Adjusted gross margin for the third quarter was 55, 9% a decrease of 130 basis points from the prior year quarter.

Last quarter, I said to expect gross margins around 55% for the back half of 2000 to 2022.

In Q3, some mix issues, including lower capital sales caused our stronger than expected gross margin.

I think some of that mix may swing back the other way in Q4, and the increased currency headwind will impact Q4 margins with these dynamics Q4 gross margins could end up below 55%.

Research and development expense for the third quarter was four 6% of sales 20 basis points higher than the prior year quarter.

Third quarter adjusted SG&A expenses were 37, 7% of sales a decrease of 170 basis points from Q3 2021.

We are getting the returns on our sales force expansion from last summer and expect those returns to increase over the coming quarters.

Specifically in Q4, we would expect adjusted SG&A expense to be between 35, 5% and $36 zero percent of sales.

The adjusted effective tax rate was 24, 9% in Q3, and we think 25% is the right expectation going forward.

Third quarter GAAP net income was $46 2 million this.

This compares to GAAP net income of $14 $9 million in Q3 of 2021.

GAAP earnings per diluted share.

We're a $1 48, this quarter compared to 47 a year ago.

Excluding the impact of special items discussed earlier, we reported adjusted net income of $23 8 million a decrease of three 7% compared to the third quarter of 2021.

Q3, adjusted diluted net earnings per share was <unk> 77, a.

A decrease of three 8% compared to the prior year quarter.

Turning to the balance sheet, our cash balance at the end of the quarter was $33 $4 million.

Compared to $53 2 million as of June 30.

Accounts receivable days as of September 30th were 65 days compared to 64 at the end of Q2.

Inventory days at quarter end were 222 compared to 192 at June 30th.

Nine days of the increase is it related to the inventory from the recent acquisitions. The remaining increase is due to building inventory to mitigate supply chain challenges.

Long term debt at the end of the quarter was 1.036 billion versus $982 million as of June 30 the.

The change is due to the acquisition of <unk> during the quarter or.

Our leverage ratio on September 32022 was 5.0 times compared to four seven times at June 30.

Cash flow provided from operations for the quarter was $25 9 million compared to $21 4 million in the third quarter of 2021.

Capital expenditures in the third quarter were $6 7 million compared to $5 $6 million a year ago.

Now, let's turn to financial guidance.

We expect reported revenue in Q4 to be between $305 million and $320 million.

This includes increased currency headwinds of 300 to 350 basis points for Q4 alone.

For the full year 2022, we now estimate the currency headwind to revenue to be between $150 million 180 basis points in our reported revenue to be between $1 1 billion and $1 115 billion.

This updated revenue guidance translates to organic growth between 11% and 16% in Q4 and between eight and 9% for the full year.

We've included the detail of the different components of our financial guidance in the investor deck associated with this call, which can be found on our website.

We expect adjusted EPS in Q4 between 98 and $1 five.

That makes our full year 2022, adjusted EPS guidance range between $3 21, and $3 28.

The reduction to the full year range from last quarter is due to the decrease in the potential upside in revenue, we anticipated 90 days ago we.

We now expect the procedure growth to be more moderate than we did a quarter ago and hospital staffing remains a challenge.

Relation and currency are hindering our ability to offset the reductions to revenue.

We will talk about our 2023 guidance in January but we can already see that the recent significant strengthening of the U S. Dollar will create a meaningful currency headwind for 2023.

Given the multiple moving factors involved in the calculation it is difficult to accurately project, but our current estimates are that the impact could now be around 30.

Obviously as we put the 2023 plan together, we will be looking for ways to mitigate this headwind as much as possible.

We feel very good about the exciting revenue growth potential from our portfolio, we have built including our recent acquisitions.

We are keeping the engine strong while being responsive to the dynamics in the marketplace.

When the cost challenges subside and they will at some point we are excited about the profitability of this improved growth and margin margin engine can provide.

And with that we'd like to open it up to your questions and I'll hand, it back to Lisa.

Thank you.

As a reminder, if you'd like to ask a question. Please press star one on your telephone. We also ask that you limit yourself to one question one follow up one moment, while we compile the Q&A roster.

Thank you at this time, we are bringing.

To the to the platform.

And Madison from.

Please go ahead your line is open.

Yeah. Thanks, Thanks for taking my questions.

I guess I'll just start with the currency.

The 30, the headwind it seems like it's quite a bit bigger I thought the tide. It said that it would be kind of like 10 back in mid September .

I know that the dollar continued to strengthen quite a bit but.

Just curious about kind of the difference there.

Sorry for 2023 that is just to be clear.

Yeah sure Mike Yeah, so through the summer we had run that analysis and you are right in early September which was actually based on.

Your rates in the summer.

We had estimated about <unk>, obviously, the currency has moved quite a bit since then and.

And that's what's driven the change.

Okay.

<unk>.

And.

In terms of the revenue kind of shortfall that youre talking about.

How confident argue that it's really driven by coverage.

Overall procedure growth market growth as opposed to.

Yes.

Market share competitive dynamics or something like that.

Yes, I think.

Look at the detail in our press release and our consumable volume.

<unk>.

<unk> was very strong in the quarter relative to prior year. So we feel like we're getting our share of the procedures. Obviously, we did not have a good capital quarter. We did we've not had a great capital year. Some of that has been supply chain constraints. Some of that has been the age of our capital.

Some of that has just been ongoing enhancements to the capital we have in the market.

I really think that there's good volume in the marketplace again, better staffing would help that and I recently read an article that that even staffing levels at.

The small town hospitals are slowing things down.

So I.

I don't see any indications that we're losing share at this point in time and I guess, if I did I would point to capital right. Now is the one spot where we may be a little suspect.

Given the age of the portfolio.

Okay got it thank you.

Thank you.

Our next question will be coming from young Li of Jefferies. One moment. Please.

Your line is open.

Hey, guys can you hear me all right.

Yes, Ken.

Alright, great.

Thanks, so much for the questions.

I guess are.

Was wondering.

<unk> and Buffalo filter.

Continuing to grow 20%.

So that's pretty encouraging.

Can you maybe talk a little bit more about the business performance during the quarter.

If you can comment on the OEM or that'd be helpful as well.

Sure Yes.

We had a very good quarter.

<unk> was absolutely phenomenal it was very interesting we had strong growth internationally as well as in the domestic market.

I think everybody probably saw intuitive surgical's results and that has always been a wind at our back in the <unk> market, but I would I would tell everybody on the call that we outpaced that growth in <unk> and Buffalo filter I think last quarter. We said, we're going to avoid the conversation on OEM and this was more about that.

The bigger share of the business as the branded portion and we see that business continuing to be a strong franchise for con med and having good results consumables have picked up as a procedure volume has picked up obviously broadly speaking in the markets, whether it's in the U S and the international markets, where they have smoke legislation.

On that today, there are nine states that have legislation five of those states are live.

Four of them have future dates that are effective they represent about 17, 5% of the population 19% of the hospitals. There is an additional three states that could fall into the legislative band.

Still in 2022, New Jersey, New York, and Texas, and Interestingly that would represent 18% of the population about 15% of the hospital. So with three additional states we could see the number the percentage of the population percentage of hospitals effectively double and then there's approximately seven that are on deck for 2024.

There is good momentum in the legislative side Theres, good momentum as procedures have recovered and those things all.

To help serve and grow the smoke business.

Okay, Great really appreciate the color.

I guess for my follow up.

Just kind of want to level set.

Some consensus expectations for next year.

I think into bone.

Around $43 million.

Before.

Before for <unk>, you mentioned mid single digit.

2023.

It sounds like the initial.

Interest is pretty high.

So if you can maybe.

Comment about those type of.

Expectations.

They are in.

In the right place.

Yes, im not going to talk about consensus yet, but I will talk about what we've said we have said is that with into bones. We said that that market was growing at a high single digits.

That business was growing at least twice that and it has certainly done that since we've owned it so it's off to a very good start.

Im doing very well and then on your right on bio Rad is we said that 2023 should be single digit millions in revenue and then in 2024, we would get to double digit millions in revenue so.

That's what we've said and I'm not going to I'm not going to grade consensus here with you today.

Okay fair enough. Thanks, so much.

Okay.

Thank you.

One moment for the next question.

The next question, we have is coming from Robby.

<unk>.

J P. Morgan. Please go ahead.

Yes, hi, thanks for taking the questions.

Maybe first.

It does look like capital ways.

The bad Guy here, that's the one that missed.

Pretty significantly versus consensus.

Now.

Do you expect it to pick up anytime soon.

Yes, I think anything that's related to electronic circuit boards.

Youre going to see delays and we have an energy platform.

Hold on the general surgery side that is.

Not immune to those challenges and that that is not a new problem.

As I mentioned earlier and one of the other sections. Some of our capital is a little bit dated and we need to refresh that and get that into the marketplace that always place with.

With capital results, New capital sells better it's got better features better better benefits and so we're working on those next generation platforms.

<unk>.

So it's a combination of both I think I'd be honest with you I don't think we have seen any drop in appetite for capital from our customers as procedure volumes have increased relative to what they might have been in the past 12 previous 12 months.

People are buying the capital that they need to do the procedures.

Every every capital item, we sell that has to be in the room to do the procedure. So I don't think we've yet felt the slowdown by our customer base on capital acquisition interest.

Okay.

Great maybe.

Todd as we think about that 30 cents for next year on EPS side. I believe you also have some floating rate debt as well so first on the FX component.

Bigger drop through 10% or so.

Then we would normally see from Con Ed maybe you could walk us through is that a function of the hedges or what exactly is going on there and if current interest rates and assuming I believe we're at 50 bps heading into the year and maybe 25 bps in the beginning of next year, how should we be thinking about the interest expense for 2020.

Sure.

Yes, so the hedges basically defer.

The cost right there.

Their job is to protect the near term and take volatility out of the near term, but at some point those bills come due and so I think because almost half of our business is outside the United States and because we do hedge essentially ever.

That is.

That increases the mass of what.

Bill says is going to be coming due right now obviously the answer will be different than that because rates will move mix will move it's very dependent on.

What we sell and what we spend and what geography, and then of course, what rates do and so it's very difficult to project with precision.

But I did want to kind of get everybody in the ballpark of where the math says we are today, because because we do have a I think a more comprehensive hedging program that a lot of the names.

That you spend time on and so there is a little we've been more protected in 2022 than others and that.

And that pain has been deferred a little bit to 2023, which is the.

The job of the hedges, it's what they do.

Let me pause there Ravi.

On that before I go to interest expense.

And just confirm you run it through sales right. So that's where we will see the impact as it falls through the P&L, Yes, we have both revenue and cost hedges. So it kind of shows up throughout the P&L.

On interest expense, what I said for Q4, the $7 5 million Thats based on current rates. So that's a quarterly number.

We expected that to come down right as we as we pay down debt, but I can't tell you what interest rates are going to do I think obviously the consensus is that they are probably going to go up and so.

What I've told you is that Q4 should be it.

At least $75 million, we'll have to see what the fed does at the next meeting and that will affect the coming quarters.

Yes.

And if I could sneak one last one in.

I think people are just.

A little concerned.

The organic sales Miss versus expectations are you sure that it's more of.

A market issue.

Rather than a share ratio or anything else, we should be thinking about there in third quarter and going forward. Thanks a lot.

Yes.

<unk>.

So I feel pretty good about where we're at.

Great. Thanks, a lot.

Thank you one moment for our next question.

And our next question is coming from.

Matthew.

Michelle.

Please go ahead.

Hey, good afternoon, and thank you for taking the questions I just wanted to follow up on the age of the capital.

And just which capital or are you kind of referring to a few because if you're referring to.

<unk> refresh of like <unk>, and Buffalo filter I think Thats all I got.

Very very exciting potentially into next year that youre after or are we talking about like the powered instruments and like surgical visualization.

The stuff, that's a little bit more like legacy comment.

But I think certainly the legacy <unk> items that you discussed the power tools. If you look at the entrance to the market on those.

They are probably coming up in that window, we're a refresher additions expansions would be.

Yes.

And our not too distant future.

As far as the <unk> platform. The <unk> seal box is obviously on a very important component of our overall growth story and I think everybody should assume that whether it's consumables or the capital.

Those remained under development.

New items, new features coming all the time again I think everybody on the call knows we don't talk about timing on new products to market, we prefer to get them in the market before we talk about them and we're going to stay true to that approach.

Okay.

Bio Rad is only just a follow up to like the previous one where you guys don't really talk about like new product development and how that how are you going to talk about like bio Rad is moving moving forward as like Youre developing like that that platform are you going to specifically call out numbers once you get past the.

Initial.

M&A phase of it and it becomes organic just I'm just curious how youre thinking about communicating that platform moving forward.

I think we will do what we've always done once it becomes organic it will fit into the orthopedics category I am sure we will make.

Non financial commentary relative to it will be.

With the leverage free cash flow is going to become.

Pretty important going into next year just.

As you think about the assumptions of free cash flow for this year, how should we be thinking about it and then just I guess any major moving pieces youre thinking around free cash flow without having to give guidance for next year.

Sure Matt.

I think 2022.

Has been tough because of the inventory right.

Trying to stock up.

To mitigate the supply chain issues has put a dent in our free cash flow because of the working capital increases I would expect that as we go into 2023.

Intelligently and strategically to try and make sure we could service our customers in a very difficult supply chain environment, but but the hope is that we have.

We've got those inventory levels at a place where they can be relatively stable and that free cash flow should tie closer to net income as we move forward.

Thanks Scott.

Thank you.

Our next question one moment please.

Our next question will be coming from Matt O'brien of Piper Sandler. Please go ahead.

Thanks for taking my question.

As I look at the what you said as far as growth in <unk> and <unk> are accurate.

Integration of the acquisitions I think you said 420 basis points.

That's about $10 $5 million I'm, assuming a majority of that is.

In development at this point I don't think were expecting much out of bio Rad. So is that math about right. It seems like it's running a little bit ahead of what you guys are kind of contemplating.

When you did that deal and just love to hear what exactly you're seeing there from a momentum perspective in that category.

Yes, so on the on the pure math Youre right.

The lion's share of that is <unk> is just getting started so very pleased with both of them, but <unk> is by far the <unk>.

Revenue contributor at this point.

And I think.

Matt in terms of the marketplace reaction with into bonds.

Increased our expectations here for the for the remainder of the year based on what has happened in.

Based on how that business trends are there is a strong fourth quarter push in foot and ankle.

We've also been.

Candidly some of the things we saw in diligence were even better than we thought were very excited by the work that they're doing with their quantum ankle. We're very excited by a launch of a new.

New product.

Just hitting the market some carbon plate and Thats got some unique features and benefits.

Very early days on that but enthusiasm early enthusiasm and then just the caliber of the sales force I mean, we bought a complete standalone business and we've been very pleased with the sales force and their commitment.

Their commitment under <unk> ownership, that's always a risk when you have a transaction sales forces are.

Very suspect of transactions in this sales force is settled right in and really done a nice job for us and we're very pleased overall with the team and we're ramping up in the international market is a very small contribution at this point in time and international part of what <unk> brings to that story is the international approval pathway.

<unk> work that needs to be done to get those approvals.

We're suited for that work we have the staff the resources to do that work. So everything that we had we had seen in diligence has come to fruition.

Haven't really run into any negative surprises.

Really pleased with the depth of experience at the leadership team brings to <unk> across the foot and ankle space.

Okay. That's great to hear and then the follow up question is just you've got this extra currency headwind you've got more interest expense youre going to be facing for 'twenty. Three how do you balance investing for growth and smoke plus these acquisition versus versus profitability and I guess to ask directly at him.

Not sure Tom can answer this but.

But can you grow earnings next year, given all of these headwinds.

Well look we're going to talk about 2023 and.

In January but we've got a very strong revenue growth line right and so we'll be focused on.

Fueling that and making sure that that stays strong.

Cost environment, the macro environment.

Is challenging and has been challenging for longer than any of us are happy about.

We believe strongly the way out of this is growth right and so we've made the conscious decision.

To maintain the engine not cut resources more deeply than we already have and be able to service our customers.

And do the best we can on our revenue line.

And then.

That will provide the the room in the P&L too.

To drive profitability through the bottom and as <unk> said interest expense, we've talked about the acquisitions. They are still dilutive into 2023 before they get accretive in 2024, and so we've got to finish digesting those.

Right now currency is a stiffer headwind than we thought a few months ago that can change the other way right and so we'll have to see how all of that shakes out as we put the final plan together and we talked to you about 2023.

In January .

Got it thank you.

Thank you one moment, while we prepare for the next question.

Okay.

The next question is coming from Rick Wise of Stifel. Please go ahead. Your line is open.

Alright.

Good afternoon to you both.

Todd.

I was struck by I think you said it.

Maybe Chris.

Talking about the sales force talking about SG&A.

You said, we're starting to get returns or better return on your sales investment.

Knowing how.

Significantly you expanded the sales force.

I think maybe twice over the last couple of years.

I was hoping you could.

And on those comments.

When you use the word returns.

Are we seeing are you seeing more.

<unk> opening going deeper in existing accounts, what part of the business is benefiting.

And again.

Request for guidance it more.

That sets you up for the potential of the possibility of.

Maybe more meaningful or significant operating sales our operating leverage.

As we look ahead to 'twenty three.

Yes, Youre right Rick It was me and it is a returns it was a returns comment which is basically.

We made we made significant sales force expansions last summer, believing that volumes were about to come back in a strong way.

Obviously, we all know that cause delta and omicron. The volumes were have been delayed and we're not like we all thought they would be at the time.

And so it took longer than it normally does for those new sales reps to get the customer facing time and experience to be productive and to start paying back and so but we are now a year later.

So it has taken longer than it normally would but just based on the leverage right SG&A as a percentage of sales.

Which has been which was higher.

As we digested those.

Those investments you now see that we are lower than the prior year and so that we are getting the returns basically.

On those additional resources and so.

And we expect that they will only get more productive in.

In the coming quarters.

Sure.

Okay.

I guess the net.

First thing I would say at a high level.

Right.

Do you think about 'twenty three 'twenty four I'm just wondering how in your own mind.

If you.

If you had to say now how do you think the recovery based on what you know for your business. How is it going to unfold I did a 150 dock survey recently and the majority of the docs are saying.

Hi.

Staffing is going to be.

Headwind.

Through March of 'twenty, three it's going to get better they think in the second half but.

Sort of.

Summarizing your comments a bit.

<unk> had 24 is going to be the first.

Time, where they feel like they are going to have worked through a lot of the staffing issues is that the way you are seeing is that the way Youre planning and is it set up for next year is sort of a softer first half again aside from currently softer first half an acceleration through the second half into 'twenty four is that the way youre thinking about it.

I don't think I would believe that.

Surgical staff levels, even broadly speaking healthcare staffing levels.

Are going to improve overnight I think this is something that's going to be measured in quarters, if not to your comment into 2024. There is a lot that has to happen.

To get back to those.

Yes.

Are those fully staffed to levels in there there are some very well known institutions doing some very dramatic things to try to navigate the current staff challenges.

And.

I think there are other factors at play as well, we're coming into seasonal flu and who knows what will happen with COVID-19.

Childhood respiratory disease, and how that puts burdens on health system. So there's so many other factors that go into that question, Rick It's a little hard to predict.

Hi high growth assets with great gross margins or I look at existing portfolio of products that <unk> has whether it's <unk> Buffalo filter.

Our recently released in 2022 Argo anchor the click luck.

Portfolio those items are all high gross margin items.

They.

When we get to January we will give more outlook views on 2023.

But.

But what we're responsible for we will we will be accountable with it and <unk>.

Deliver a top line that I think.

We will get us, where we need to get gotcha.

Gotcha. Thank you so much.

Thank you.

While we prepare for our last question.

And our last question.

We will be coming from Travis steed.

Travel feed of Bank of America Securities. Your line is open.

Hey, Thanks for taking the question.

Going back to the prestigious side.

I guess it kind of stands out because other companies are saying things are a little bit better but.

I would like you expect the actual procedure growth to moderate a little bit what do you think it is about the mix of your business.

Thats different and I guess also are you assuming that second wave I think that was that you were assuming a COVID-19 wave again in the guidance is making sure that was still the case.

I didn't specifically call out of Covid wave, but I think anybody who's reading materials around health care understands that in the current environment Theres already respiratory disease.

It's impacting health systems, there could be typical.

Covid wave that we have now become accustomed to after a couple of years here in the fall and the.

The seasonal flu, which certainly is.

On everybody's mind, when you think somebody actually came up with the term for the trifecta of viruses. This year as we go into the end of the year, so that could certainly slow down.

I refer to as elective procedures and by and large the majority of what we do are elective procedures. Now certainly there is there is some general surgery cases that are not elective, but they can even be delayed. So I. Just think we have a mix of businesses that is a little bit more elective in nature not not to say you can put them off because I think in wave one.

Covid demonstrated that there were co morbidities associated with delay in surgery broadly speaking and I think systems have learned thats not a wise move.

Either for the patient or candidly for their own.

For their own workload life balance.

So I just.

Our mix of business, a little bit different than others.

Our third quarter started slow.

Picked up as we got into September at a great rate and that was nice to see and we hope that continues into the fourth quarter and gets us to a better spot.

Okay fair enough.

On the 300 basis points of inflation, Todd just curious how that's been trending at this point in the second half gross margin that we should still think about the jumping off point for next year.

Okay.

Yes, I think generally obviously.

Obviously currency you got a little worse, that's affecting us in Q4 more than we expected.

Three months ago, but.

But I still think that 55% range is probably the right current baseline and then.

The question is is how quickly does inflation.

Prove it.

Kurt said.

I'm not sure it hasnt really gotten worse, but it hasnt really gotten a lot better.

And so far in the back half of this year. So we're probably going to have to be a little patient there.

So yes.

I think that that mid <unk> is probably the current baseline obviously, the acquisitions helped that and as they grow.

That will we've got a good engine that.

Is driving improving margins is just being masked by the macro challenges that we're facing out there between supply chain and currency. So.

At some point like I said at some point that cloud will move on and then I think people will feel really good about our margin profile in our growth profile.

But we're kind of we're kind of in the clouds right now.

Alright.

Thanks for taking the question I'll follow up offline. Thank you.

Thanks Travis.

Thank you that concludes the Q&A session for today and now I would like to turn the call back over to Mr. Hartman.

Thank you Lisa and I want to thank everybody.

Thank you Lisa I want to thank everybody for your time today, and we look forward to speaking with all of you on our next earnings call. Thank you and good day.

Today's conference call Youll be all disconnect. Thank you. This concludes today's conference call you will be all disconnect you all have a great evening.

Q3 2022 Conmed Corp Earnings Call

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