Q4 2022 Conmed Corp Earnings Call
The conference will begin shortly.
Raising the lower Johan during Q&A, you can dial star one one.
[music].
Okay.
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 its plans and objectives.
Statements represent the forward looking statements that involve risks and uncertainties.
Terms are defined under the federal Securities laws.
Dusters are cautioned that any such forward looking statements are not guarantees of 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 S. E. SEC filings for more details on the risks and uncertainties that may cause actual results to differ materially.
The company disclaims any obligation to update any forward looking statements that may be discussed during this call except as may be required by applicable law.
You will also hear Massimo refer to non-GAAP or 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 from benchmarking against other medical technology companies.
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 Companys earnings releases posted to the company's website.
With these required announcements completed I will turn the call over to Curt Hartman <unk> chair of the board President and Chief Executive Officer for opening remarks, Mr. Hartman.
Thank you Justin good afternoon, and thank you for joining us for <unk> fourth quarter and full year 2022 earnings call.
With me on the call is Todd Garner Executive Vice President and Chief Financial Officer.
Today I'll provide a brief overview of the financial and operating performance for the fourth quarter and full year. Todd will then provide a more detailed analysis of our financial performance and discuss our 2023 financial guidance.
After that we'll open the call to your questions.
Our Q4 results were materially impacted by our warehouse management software implementation in October as indicated by our November 14th suspension of guidance.
Total sales for the fourth quarter were 259 million, representing a year over year decrease of eight 4% as reported and a decrease of 7% in constant currency.
Clearly the lack of ability to ship customer orders in a timely fashion resulted in both delayed revenue and lost sales opportunity as customers supported surgeries with competitive products.
Disruption also took our sales teams out of their normal business routines that cost us new opportunities typically associated with the fourth quarter.
We know our customers perform surgery daily with minimal inventory on hand, independent a reliable stream of products to support their needs. In this regard we came up short in Q4 and in many cases customers found alternative solutions, however, customers choose convert products over competing products for a reason and we're working hard to regain their trust.
And have them return to the Con med brand following the system implementation issues.
The revenue shortfall in the quarter fourth quarter earnings also suffered with GAAP net income of $26 6 million.
This compares to net income of $24 4 million in the fourth quarter of 2021.
Excluding special items that affected comparability, our adjusted net income of $12 9 million decreased 61, 3% year over year and our adjusted diluted net earnings per share of <unk> 42 cents decreased 67% year over year.
For the full year sales reached 1.045 billion, representing a year over increase of three 4% as reported and up four 6% increase in constant currency.
The 2022, GAAP net loss totaled $80 6 million compared to net income of $62 5 million in 2021.
Excluding special items that affected comparability, our adjusted net income up $85 million decreased 14, 5% year over year and our adjusted diluted net earnings per share of $2.65 decreased 17, 4% year over year.
Looking back at 2022, which strengthened the broader business to include two fantastic acquisitions, which are both off to a great start quantitatively and qualitatively. We also locked in the majority of our debt at 2.25% interest rate for five years with the new convertible notes, we can continue the development and strengthening our new product.
Introduction process in this difficult experience in Q4 will make us even better at delivering to our customers.
From a market perspective, we believe the surgical environment trended more favorable favorably in the fourth quarter, which stability in procedures and subtle increases in staffing levels across the health care system, all of which are encouraging signs moving forward.
The overall environment has more stability than at this point a year ago, while noting there are still areas of uncertainty around recessionary pressures.
We step into 2000 2023, we're laser focused on basic execution to deliver topline growth and leveraged earnings growth. Further we believe we have assembled a high growth portfolio through a disciplined combination of organic and inorganic development across both general surgery and orthopedic categories and as you will hear from Todd we have more clarity.
Our gross margin outlook in the years ahead as well.
While 2022 did not end as we had planned a strategic outlet for convert remains strong in both the top and the bottom line and this will benefit patients customers employees and shareholders in the quarters and years ahead.
Overall I remain honored to work with this executive team and beyond impressed by their commitment and persistence and pursuing what is in the best interest of conduit.
They and all of our global employees are related partners remain committed to our growth strategies.
'twenty three we will define success by staying focused on our people and ensuring the financial growth and health of the company, while remaining committed to our strategy to drive above market growth in both revenue and earnings with that I'll turn the call over to Todd who will provide a more detailed analysis of our financial performance and discuss our financial guidance Todd.
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 of the quarter and our updated guidance.
For the fourth quarter of 2022, our total sales decreased 7.0%.
Our best estimate of the revenue impact from our warehouse software implementation is in the neighborhood of $65 million.
Our end customer backlog at year end due to this disruption was approximately $30 million.
Which included the impact of shutting down the warehouse for the last three days of the year to perform a complete physical inventory.
History has shown that when supply disruptions in our industry are resolved the original supplier wins back the vast majority of business lost during the temporary disruption.
We know that our customers were well aware of the substitute products prior to our delivery problems and they choose <unk> to us.
For a specific reason.
So those regions still exists today, and we are even more energized to be excellent partners to our customers.
Revenue from the recent acquisitions was $12 $5 million in the quarter as Kurt said, both <unk> and <unk> are off to strong starts and exceeded our expectations in 2022.
These products were unaffected by the warehouse disruption as they are not shipped from that location.
For Q4, our sales in the U S decreased three 9% versus the prior year quarter.
Those are our U S sales decreased three 9% and our international sales decreased 10, 6%.
The U S is where the majority of into bonds and <unk> are sold we estimate that the impact from the warehouse disruption was similar in percentage in the U S and O U S.
The U S was impacted immediately while our international geographies initially benefited from inventory held in our regional distribution centers.
Because of that the remediation efforts first focused intensely our U S customers.
As the duration of the issue extended the international channel was depleted and the end customer there was impacted later in the quarter.
We've made good improvement in shipping globally, and we are shipping at or above normal daily volumes.
As of this week, our end customer backlog from the affected warehouse is approximately $10 million.
So, we're making progress, but we're not where we want to be yet and we still have work to do to replenish our distribution channels and increase our shipping capacity for future expected growth.
We will continue to focus and improve until we have turned this weakness into a strength.
Worldwide Orthopedics revenue decreased <unk>, 3% in the fourth quarter.
In the U S orthopedic sales grew 15% and internationally orthopedic sales decreased 9%.
Obviously, the U S is seeing most of the benefit from the acquisitions.
Total worldwide General surgery revenue decreased 12.0% in the quarter U S. General surgery revenue declined 11, 5%, while internationally general surgery revenue decreased to 13, 1%.
We estimate that the sales impact from the warehouse disruption was fairly balanced across the portfolio with a little more impact felt on the general surgery side.
For the full year of 2022, our total sales increased four 6% revenue from the recent acquisitions was $24 $8 million in 2022.
For the full year, our sales in the U S increased four 8% versus the prior year and our international sales increased four 3%.
Worldwide Orthopedics revenue increased six 5% for the full year of 2022 and.
In the U S. Orthopedic sales grew nine 2% and internationally orthopedic sales increased 5.0%.
Total worldwide General surgery revenue increased three 1% for the full year 2022.
U S General surgery revenue grew 3.0% while internationally general surgery revenue increased three 2%.
Now, let's move to the expense side of the income statement.
We will discuss expenses and profitability in the fourth quarter and the year, excluding special items, which include charges for acquisitions and contingent consideration legal matters restructuring and software implementation costs debt refinancing and extinguishment costs.
Amortization of intangible assets and amortization of deferred financing fees and debt discount net of tax.
Adjusted gross margin for the fourth quarter was 54, 2% a decrease of 270 basis points from the prior year quarter the.
The majority of the decline is due to the cost inflation, we're all dealing with in 2022.
Gross margin was lower than we expected due to the significant revenue mess and certain period expenses recognized in Q4.
For the full year adjusted gross margin was 55, 3% a decrease of 90 basis points from 2021.
We told you back in the spring that freight and material cost increases had cost us approximately 300 basis points in gross margin since the 2019 baseline.
As we updated that analysis for the end of 'twenty two it shows inflationary costs of 330 basis points in total.
There has been some relief on the freight side, but the full impact of material cost inflation was higher for the full year 2022 than what we had seen back in the spring.
When we add in the labor component to that metric we estimate the total inflationary costs have decreased our gross margin by approximately 400 basis points in the last three years.
Adjusted gross margin in 2019.
At 55, 4%.
So that means that our improving mix and cost savings over the past three years have essentially offset the impact of inflation over that time period.
Research and development expense for the fourth quarter was four 9% of sales 80 basis points higher than the prior year quarter.
For the full year 2022, R&D expense was four 5% of sales 20 basis points higher than 2021.
Fourth quarter adjusted SG&A expenses were 39, 7% of sales an increase of 300 basis points over the prior year quarter because of the missed sales in Q4 2022.
For the full year adjusted SG&A expenses were 38, 8%.
So 50 basis points higher than 2021.
On an adjusted basis interest expense was $7 $9 million in the fourth quarter and $24.0 million for the full year.
The adjusted effective tax rate was 26, 5% in Q4.
This was higher than anticipated as the lower income reduces the credits we are able to take against the income.
For the full year, our adjusted effective tax rate was 23, 5%.
Fourth quarter GAAP net income was $26 6 million. This compares to GAAP net income of $24 4 million in Q4 2021.
GAAP earnings per diluted share were 86, this quarter compared to <unk> 75, a year ago for.
For the full year GAAP net loss was $80 6 million compared to GAAP net income of $62 $5 million in 2021.
GAAP net loss per diluted share was $2 68 in 2022 compared to GAAP net income of $1 94 and 2021.
Excluding the impact of special items discussed earlier in the fourth quarter. We reported adjusted net income of $12 9 million a decrease of 61, 3% compared to the fourth quarter of 2021.
Our Q4 adjusted diluted net earnings per share were <unk> 42.
Decrease of 67% compared to the prior year quarter.
Excluding the impact of special items discussed earlier for the full year 2022, we reported adjusted net income of $85.0 million a.
A decrease of 14, 5% compared to 2021.
Full year adjusted diluted net earnings per share were $2 65.
A decrease of 17, 4% compared to the prior year.
Turning to the balance sheet, our cash balance at the end of the year was $28 9 million compared to $33 4 million as of September 30.
Accounts receivable days as of December 31 was 69 days compared to 65 at the end of Q3.
Inventory days at year end were 251 compared to 222 at September 30, obviously this was meaningfully impacted by the sales shortfall in the quarter. We expect this metric to reduce significantly as we progress through 2023.
Long term debt at the end of the year was 90, $985 $1 million versus a $1 billion and $36 million as of September 30th.
We reclassified the remaining $69 $6 million over the 2019 convertible notes to short term liabilities.
Our leverage ratio on December 31, 2022 was five six times compared to 5.0 times on September 30.
The increase is due to the dip in EBITDA in Q4 of 2022.
This metric is that divided by the last 12 months of EBITDA.
So this lower Q4 will be in the calculation until Q4 of 2023.
We expect adjusted EBITDA for the full year 2023 in the neighborhood of $240 million.
We expect our leverage to drop below five times in Q3 of this year and be below four to five times by the end of 2023 and.
And in the low threes by the end of 2024.
Cash used for operations in the quarter was $11 6 million compared to cash flow from operations of $33 $8 million in the fourth quarter of 2021.
Cash flow provided from operations for the full year 2022 was $33 4 million compared to $111 $8 million in 2021.
The biggest driver of this difference was the significant levels of inventory built in 2022.
We expect operating cash flow around $130 million in 2023.
Capital expenditures in the fourth quarter were $5 $7 million compared to $3 $2 million a year ago.
For the full year capital expenditures were $21 8 million compared to $14 9 million in 2021.
Now, let's turn to financial guidance.
We expect reported revenue for the full year to be between one 170 billion and $1 220 billion.
This includes currency headwinds of 150 to 200 basis points we've.
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.
As a reminder, we closed on into bonds in June of 2022, and we closed on <unk> in August so essentially both become organic in the second half of the year. So what you see in the reconciliation is basically the revenue from the acquisitions in the first half of the year.
For adjusted gross margins the improving mix of the portfolio is strong and will continue to drive meaningful benefits in the future.
For 2023, we think mix, including the acquisitions should drive between 110, and 140 basis points of benefit.
However, 2023 has some specific challenges on the margin side.
FX is a meaningful headwind of between 40 and 60 basis points.
And we continue to digest, the inflationary costs discussed earlier, and we will be temporarily slowing production or slower moving product lines to bring our inventory balances down.
This all results in total gross margin improvement of 20 to 50 basis points in 2023.
As we look beyond 2023, we expect at least 150 basis point improvement in 2024 and around 250 basis points in 2025.
We believe we're on a path to have around 60% adjusted gross margins at the end of 2025.
As a percentage of sales, we expect adjusted SG&A to be between 37.0% and 37, 4% in 2023 and R&D expense to be in the mid fours as a percentage of sales.
We expect adjusted interest expense to be between $32 $3 million and $32 $8 million in 2023.
We expect the adjusted effective tax rate to be around 25% in 2023.
We expect adjusted EPS in 2023 to be between $3 20, and $3 45.
That includes an FX headwind between 2020 five.
As we look at the first quarter, we expect our reported revenue between 262 and $272 million.
That includes about 300 basis points of FX headwind based on the December 31 rates.
We see this headwind decreasing each quarter throughout the year.
We expect adjusted EPS in Q1 to be between 58, and 63 inclusive of FX headwind.
The full year FX headwind on the bottom is almost all in the first half of the year split fairly evenly between Q1 and Q2.
2023 will have one less selling day overall in 2022 the way our calendar falls Q1 will have one extra day in Q3, we'll have two fewer days.
We feel very good about the exciting revenue growth and profitability potential for the portfolio, we have built including our recent acquisitions.
We have a self inflicted wound we need to recover from quickly we're focused on that.
We're moving back on offense, and we will be a better and stronger company because of these experiences and focus.
And with that we'd like to turn the call over back to Justin for your questions.
And thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again and.
And we do ask that you limit yourself to one question and one follow up again, we ask that you limit yourself to one question and one follow up and one moment Bob first question.
And our first question comes from Travis Steed from Bank of America Securities. Your line is now open.
Hi, good afternoon, everybody. Thanks for taking the question.
I wanted to understand any impact from the <unk> issued spilling over into Q1, how do you think about the Q1 impact.
Turning to the guide for share recapture it sounds like Youre, assuming all those come back pretty immediately are you seeing signs of that now and just trying to think through some of the rest of that there has been some examples in the last year, where the Sharon didn't come back quite as fast as any thoughts just want to make sure we understanding what's being assumed in the guidance.
Yes. So we ended the year, a backorder was $30 million and we just said that it's about 10 right now so we've had a good good January made some good improvements we've got some more to go we're focused on that.
The way I think about it Travis is.
The impact to sales should be the biggest in Q1 right because we're closer to the issue and as we get further from the issue of this should be.
Decreasing impact right and we do expect that we will get the vast majority of those customers and that volume back we may not get it all but.
But we do expect we'll get the vast majority of that and that's what's assumed in the guidance and so and I would just point out that obviously.
The backlog benefits the start of the year, So where you have the biggest hole to fill in to make up for.
You also have the biggest that's where you have the big benefit of catching up on the backlog. So we feel good about the.
About our guidance today and are focused on executing and winning the trust of those customer classes.
Okay and I don't know if did you did you give a dollar amount of how to think about the impact in Q1 and then the other question I just want to understand the U S O U S impact and it sounds like things maybe got worse.
<unk> ended the quarter I think we're talking to them.
More of it.
Sure at that point, but now it's impacting kind of both <unk> and <unk>.
Lots of linger, even further in 2023.
Yes, that's correct. So we can't estimate.
Estimate the exact impact of.
The catch up we have to do in Q1, we think it'll be the.
The biggest.
The biggest negative impact, which is offset by the biggest positive impact right and then so it would be impossible to really quantify that quarter to quarter. Our focus is to earn that business back as quick as possible, obviously and you are correct.
When we first talked about this and we expect it is resolved quicker than it was it was a U S focus we felt like that the.
<unk> of inventory in our O U S distribution centers would protect us it did protect us for a time, but because of the issue.
Took longer to resolve than we all wanted it to.
Those international geographies were impacted later in the quarter.
And so as we roll into 2023.
The U S has and has recovered better and faster because the remediation efforts were first on that side of the business and we're making good strides on international but international is probably more impacted at the start of the year here than U S is.
Okay I'll leave it there thank you.
And thank you.
And one moment our next question.
And our next question comes from Robbie Marcus from Jpmorgan. Your line is now open.
Oh, great. Thanks for taking the questions.
Maybe we could just go back to how this.
The warehouse management disruption began why it happened.
And these things are implemented all the time, what was different in <unk> and <unk>.
What are the processes you put in place to prevent it from happening again.
But I would start by saying, we all agree the remediation has taken longer than we expected and.
I think you have to look at convent is one main warehouse, we have international distribution centers. The main warehouses. The warehouse that we put the system in place and as we work through the issues we.
We took a very deliberate approach to identification of prioritization of those issues. While at the same time working daily to ship customer orders and ultimately we identified a lot more areas of remediation that were needed than we anticipated in the early stages.
I think the way I think about it is.
The solutions when operating in a state of the art software package required both technical and operational remediation and the technical remediation require comprehensive user and system validation.
And we're also dealing with a substantial amount of what I would refer to as pure change management and I say that because the warehouse that we upgraded.
Was very manual operation very much.
A paper individual people driven operation versus a system that I referred to it as going from a warehouse kind of vintage 1980 to vintage 2020, that's a quantum step.
And while we thought our work pre install had positioned us to do that we obviously did not do a comprehensive enough set of.
Validation is user verifications that captured all the base user cases.
It is important to notice Todd said, we've got the overall backlog down to $10 million and we're making great progress.
The learnings will pull out of this will obviously come from a comprehensive after action review and any further.
Software platform work that we do which there is not in the foreseeable future at this point in time would obviously benefit from these lessons. So again better today than we were took longer than we wanted.
But long term this was the right solution to allow con med to scale from an operational standpoint.
Great.
Maybe just a follow up question I appreciate all the color on guidance and some of the long term outlook commentary, but if I just focus on 'twenty three guidance.
It looks like sales and EPS range came down just a bit at the upper end.
I imagine some of that is due to how long this has lasted.
Versus your original expectations. When you provided guidance, but maybe just help us understand what's assumed in your your market and recovery and customer capture assumptions at the low end and the high end I think would be really helpful. Thanks.
Sure.
Yes, you're right Ravi when we gave that initial guide with the with the disclosure of the warehouse issue, we gave a wider than normal range because it was two months prior to when we normally do it on this call.
And the difference for today, and then as essentially we've taken a little bit off the top of both of those ranges, but we're back to what the range that we would normally give on this call for the year, So that's $50 million.
The top 25.
Range on the bottom and so this is our very typical where we would how we would start the year.
And Youre right I think the adjustment, we're still very bullish on the business.
The sales force is very bullish we know we can win the fact is that our sales force was put on defense.
In the fourth quarter and it has lasted longer than it was supposed to and so our focus is to get them on offense as quickly as possible.
And <unk>.
And we're laser focused on that so we're moving back to offense.
And.
And that's what's assumed in the guide.
And does that include sort of normal.
Market volumes procedure volumes and I imagine at the high end of the range full recapture of share.
Yes, I think that our view is similar to what you've heard from others that the environment is.
Is modestly improving rate has stabilized.
Yes.
Inherent in this guide is that is kind of status quo.
Sorry, it's status quo.
There are macro factors.
Great. Thanks, a lot.
And thank you.
And one moment our next question.
And our next question comes from Rick Wise from Stifel. Your line is now open.
Good afternoon to you both.
Maybe just.
Taking the software.
M mutation issue in the opposite direction.
Help us understand I mean, I think we can all understand generally that.
Having a software system or going to a modern system as opposed to <unk>.
And managed system.
Kurt <unk>.
Impactful, but.
How do we think about the benefits when you start to see those benefits.
What kind of assumptions, you're making about them in terms of sales.
Sales implementation cash on the financial side.
<unk>.
Cash working capital efficiency et cetera.
What do you expect.
When do we start to see the positive it's not just the recovery.
That's a great great question and it goes back to the reason you do these things one is efficiency.
In the location efficiency and movement of product into the location through the location and out of the location whether that be to the end customer or international distribution centers.
And that is a very tangible benefit and as we sit here today, we're already seeing some of that efficiency, our incoming receiving operations are materially more efficient than they were pre implementation of the software. It's one of the areas that we did get right on the implementation.
And so we see those things more broadly across the entirety of the warehouse, which warehouse operations are about receiving replenishing and then picking packing and shipping.
And when we when we get all of these areas lined up the way they should be with all of the.
The requisite operational efficiencies and warehouse alignment, we believe we will see that and hopefully as we.
Good day by day week by week, we see.
The sufficiency gains more subtly.
<unk>.
We are on this call a year from now and we're proud of the system, we have and we're proud of the output that we have and it means moving inventory faster which allows our.
Manufacturing and sales ops planning team do a better job with inventory management.
Because we've got better controls better oversight better visibility on the global inventory network. So those are all kind of the things. We would go after when you put a system like this in place.
Hard sitting here today for me to say exactly when because we're still we're still working our way through some of these inherent issues that we ran into.
But again as Todd said in his comments, we've got the backlog down to $10 million. We've made very good progress it's as I said.
The changes that have been required take comprehensive verification and validation and we're trying to be very thoughtful to not make.
Things worse as we're trying to move forward and I'd say, we've been successful on that albeit a little bit slower than we had hoped.
Okay.
Maybe you could talk a little more detail about general surgery, obviously.
In terms of.
They are performing.
<unk>.
U S O U S.
Both.
Were pressured.
A little more than the ortho side.
Maybe help us understand some of the moving pieces there and just again, how do you break it out between the warehouse issues something environmental or capital.
And maybe I am thinking about it wrong, but if I say to myself, if the smoke business.
Which is such a significant chunk now is growing at 20% plus.
Thank you for sharing that again.
You must be feeling some real pressure elsewhere.
So where is that what we're kind of.
Covered or improvement have you assumed in giving us the two.
2023 guidance. Thank you.
Well when you look at <unk> in total about 55% of our revenue.
It comes out of general surgery. So the.
Every product we sell outside of the two acquisitions goes through that warehouse so the impact of the warehouse slowdown.
As proportionately going to be larger on revenue for general surgery.
General surgery also has a mix of products that go through the large pack house, especially in our.
<unk> business, the Gi business and so as you slow down those large orders moving through the pack houses, it's going to have a more material impact.
On general surgery and.
Thanks.
I would assign a warehouse slowdown then takes your sales force out of its offensive mode and Theyre, playing defense trying to move product around across our territory with the available product to ensure customers have what they need when they need it and when youre doing that youre, certainly not an offense youre not in a position.
<unk> to look for new business, you are not in a position to try to grow your existing customer base and I think that's that's all a ramification of the warehouse issues.
I personally feel like the fourth quarter was a good surgical procedure quarter I feel like there was a subtle gains and staffing that are starting to show in the.
Environment, that's not to say there are pockets, where there are still issues with surgical procedure volumes and staffing levels, but are generally those two things are both improving.
Certainly what we saw in the fourth quarter.
I feel very good about our general surgery in our orthopedic business today.
It's unfortunate that this was clouding the outcomes of those businesses.
Because I think we have very good portfolios and very good commercial teams that are very focused on their customers.
Rick.
Wanted to make sure I just wanted to make a clarifying comment just so nobody is confused.
You referred to the 20% plus growth that is of course, our expectation on an annual basis for the combined Buffalo filter and <unk> product line.
And that is in our deck Youre correct. We continue to expect that that's a key part of our growth drivers, but it's on the growth drivers deck. It's forward looking.
I want to be clear those product lines combined did not grow 20% in Q4 because of the warehouse issue. So I want to make sure nobody's confused by that but we but we continue to expect.
Moving forward that they will be above that 20% growth mark.
I'm glad you clarified it thank you.
And thank you.
And one moment our next question.
And our next question comes from Matt O'brien from Piper Sandler Your line is now open.
Thanks for taking my questions can you hear me okay.
We can.
Excellent so.
I don't want to.
Sure.
Focus on this too much but.
Our cabinet.
Topline number did come down $10 million from what you guys talked about a couple of months ago and I know you've got better information now is that specific to something in general surgery something in orthopedics.
That you're that you are a little less bullish about now and then can you just talk about the share recapture specific way $65 million in one quarter is a ton of revenue. Obviously, what are you seeing as far as as getting that revenue back and your confidence in the visibility of getting that kind of share back going forward an idea.
One follow up thanks.
Sure. Thanks, Matt.
And good question, let's let's make sure we're clear so $65 million was the Miss in Q4 to our estimate.
$30 million is the backlog at the end of the quarter right. So we had $30 million in orders that if we could have got it out the door, we would've sold $30 million more right.
Inclusive.
That was we shut the warehouse down for the last three days of the year to do a physical inventory to make sure that our book books and records were clean and this thing didn't cause any issues on that side of the fence. So so.
So yes, 65 was the mess that $30 million was the backwards so about $30 million basically moves into 2023 right. So it helps 2023, but of course, you've got to go get that business back now some of that business. We got back before the quarter ended some of those customers. We were able to start serving again and we got them back in Q4.
Some of them, we've already gotten back in January and we're going to continue to focus on taking care of.
Our prior and existing customers and then of course as you know there is a ton of room to go get new customers and so the biggest issue. So the 10 million. We gave you of $60 million range back in November you are correct that we took $10 million off the top end of that range, but we didn't take the entire range down $10 million we took.
We went from a $60 million range wishes wider than we would normally give for the coming year back to a $50 million range and we did take that $10 million off of the top end of the range simply because.
As Kurt explained.
The salesforce being on defense longer than we anticipated when we when we talked in November .
You've got that's going to that's going to bleed a little more into 'twenty three than we anticipated now the backlog is also bigger so you get some benefit that carries into the year as well but.
So we feel good about the revenue projections, we've put forward.
Let's see did I Miss any part of your question.
Yes.
The $10 million.
Was there any area, where there are a little more defensive I don't know if its general surgery our ortho.
It was about it was it like we said it was it was the impact from the 65 was slightly more on the general surgery side, but.
But it affected.
The whole portfolio.
Except for it did not in fact, it did not affect the new acquisitions got it.
Got it appreciate that and then the follow up is on gross margins Todd I mean.
We thought wed get a lot better going forward I mean getting to 60% I'm, assuming you mean like at some point in 2025 versus the full year number again.
60%.
Correct me, if I'm wrong, but where does that level of improvement come from what the theme as far as inflationary benefit over the next several years or or.
Some of the mixed benefits as well because that's quite a bit better than we expected.
Again, knowing that you have been doing better you've been offsetting some of these pressures over the last several years on the inflationary side.
Well, that's what's interesting right I mean, if you really think about 400 basis points of inflation digested over the last three years and our margins have stayed flat right. So that means if inflation just stayed flat and didn't even get better.
We were on it we were on a pretty good mix tailwind to grow at that rate and by the way.
Two and a half of those three years did not have the benefit of the new acquisitions, which both came in at 80% gross margins.
And of course, those are going to grow in size and contribution of mix right and so our mixed story is powerful.
<unk>.
I'll tell you that.
I feel good about the 60% because I havent assumed that we get that 400 basis points of inflation back I think in reality, there will be there should be some recovery, but im assuming the labor stays where it is I'm assuming.
That a lot of the material costs.
Some of those spot buys and things where you've paid exorbitant prices. During this period those will come down but we're not.
I don't think the the.
The index cost of 2019 on the materials side as ever coming back right youre not ever getting back to those same levels and so I'm not banking on a lot of improvement or reversal from inflation to get to those numbers the mix part of our business by growing <unk> Buffalo like we've talked about these new acquisitions.
Better operationally, which we're focused on.
We've we've got the ability to get there and I think we've demonstrated oddly enough.
And these three years I think I think we've demonstrated that to be able to offset the crazy.
Inflation like we have.
I would just add to <unk> comment he talked about offsetting cost.
We have the most comprehensive.
Cost reduction program.
Today than we've ever had in my tenure at <unk>.
<unk>.
Would you put that with the right mix of products good things happen. So.
You guys know as well Todd wouldn't put those numbers out here, if we didn't have confidence.
Got it okay. Thanks, so much.
Thank you.
And one moment our next question.
And our next question comes from young Li from Jefferies. Your line is now open.
Alright, great. Thanks for taking our question.
So I heard the comments on Entresto in Buffalo growing less than 20% in Q4 because of the disruption.
I was wondering if you can provide a little bit more color on the growth in Q4.
I assume maybe some of those orders were higher prioritized as possible.
Is it fair to assume that without the disruptions.
Business would have grown 20% in Q4.
Yes, we certainly would assume that we were set up to have a really good quarter. There. So I think without the disruption it would have been there, but we're not going to give the specific.
Growth rates, they're young but we.
We continue to believe that.
That's going to be a big growth driver for us.
<unk> do you think about it we are now seven years post acquisition and that thing is growing as good as it ever has I mean, it's there is no slowing down and then of course Buffalo's a lot younger than his tenure and a lot a lot more penetration ahead of it so.
Yes, we feel very good about that being a big contributor to growth.
For the coming years.
And just on the Buffalo filter aspect there is legislation in some very large geographies coming into play in 2023.
We know now from history that that legislation after its in play at some period of time does help those.
Those growth rates, they're big markets. So I think it doubles the amount of the population in the U S. It's covered so that's another benefit to that market.
I appreciate the additional color.
Yes, one more.
Maybe your thoughts around <unk>.
As far as hiring or 'twenty three.
How much of that was maybe a little bit impacted or delayed.
Yes.
<unk> focus on the warehouses.
Information.
I think you typically would have hired and trained them or for 2023 by now.
Yes.
I'm going to I'm going to separate the topic from the warehouse. We we do typically do sales force expansions in the first part of the new year.
I'm going to go back to June July as a leadership team we took a very.
Hard look at our overall head count and looked at the recessionary.
Elements in the global marketplace and said is now the time that we want to be expanding or do we want to perhaps move a little bit sideways and we made a decision.
Then to prioritize our hiring.
To be more backfill driven versus expansion driven.
We want to we want to understand more where the market may be going if there is recessionary headwinds in 2023.
And so as it relates to the sales force we have done some expansion, but I would put it more on the.
The minimal side relative to prior years.
So salesforce expansion happen, but probably on the lower end of our typical range of expansion.
Okay understood. Thank you so much.
And thank you and one moment our next question.
And our next question comes from Mike Matson from Needham. Your line is now open.
Yes. Thanks, just following up on the questions on the sales force.
I understand the decision brown.
We're expanding it but.
Curious if you did anything to try to.
Retain the perhaps after kind of a difficult fourth quarter and I would imagine a lot of them probably didn't end up hitting their quotas.
So.
Was there some kind of retention comp or something like that given that it wasn't really something within their sort of control and is there any risk of sort of turnover happening there.
Great question Mike.
In the U S and outside the U S.
We do have a pursuit of quota mentality.
We have the ability to track that with.
With great regularity and great frequency and.
Prior to the installation of the warehouse system.
We knew where every individual rep stood and after the implementation and at the end of the year, we knew where rep stood in.
We had a couple of different set of metrics that we were tracking relative to that.
In spite of some of our our issues, we had plenty of reps that made the original quarter and we had plenty of reps that were at third quarter before the installation. So we think we came up with a fair approach.
For our sales forces and <unk>.
Our recognition of their accomplishments and we are actually at this point in time already had our sales meeting and I would say coming out of our sales meeting.
I was very bullish.
We were completely transparent with our sales force to understand and we couldnt.
Give them everything because we have not yet had this call, but we felt like we were very transparent.
We felt they left their very engaged across the portfolio of products.
And that's inclusive of the acquisition is the first time, we've had the end of the bones.
Organization at a sales meeting I had the opportunity to interact with their sales force.
We have every one of our orthopedics reps now trained and certified on <unk>. So we feel we feel very good about how they left our sales meeting and how they're feeling about this year can I guarantee you that we will not lose people I can't.
But I feel we've done everything possible to retain our sales force, our best and our brightest.
And thank you all right.
Thanks.
And one moment our next question.
And our next question comes from Matthew <unk> from Keybanc. Your line is now open.
Okay, great. Thank you for taking the question guys.
Most of mine have been.
Asked and answered probably several times at this point.
So I'll just go with this one.
I think you guys said the overall environment has more stability I think thats. The first time I've heard you guys say something like that probably in several years could you just expand on.
Kind of what Youre seeing in the overall environment.
That youre seeing in the books.
Yeah.
The opportunity to get that kind of want to feel better about the overall macro.
I think theres a couple of answers to that question.
Matt.
I start on the commercial side.
It's both factual and anecdotal.
Our selling organization is feeling about the marketplace the procedure volumes, they're seeing they're participating in.
How are the data around procedure trends and surgical staff and hospital staff levels moving.
And all of the data that I've seen on that which show net adds to those elements.
And then there is.
Just call them conversations that.
The entirety of the executive team has with health system administration and.
Folks that operate at a different level within the health delivery network and all of those conversations are lining up to show that the fourth quarter showed improvement and we are coming into the new year with with those things stable to moving in a more positive direction. The other the other side of this is what <unk>.
I was talking about is more on the manufacturing environment.
We are not back to normal I don't want to imply that.
But there is more LLC in the manufacturing environment and supply chain.
Notwithstanding some of the issues that are going on in China.
But.
I think the basics of supply are returning slowly to normal.
I want to be careful here there are certain electronic components that are still under a constrained approach.
If you have older electronics, you're under a more constrained approach because everybody is moving towards new electronics and I think you've heard that from several people, but there is a more sense of normality there as well so on both sides of the business, we feel like things are stable to improving.
Notwithstanding a few outliers.
That's not the world is not perfect, but it's not getting worse and it shows signs and is moving in a more favorable direction.
Okay excellent and then I would.
Alright.
You'll appreciate this Matt I was going to say, it's the first time, we've set it in three years because it's the first time, it's been true in three years.
I think that's pretty fair.
Okay.
And just last one for me.
No allowance.
Yes.
And in March you got two new acquisitions on the ortho side.
Mike anything you want to kind of preview or kind of highlighted that you'll be showing our showcases with those acquisitions.
Yes, it's a great question.
We will have one.
One physical booth presence this year.
That will be inclusive of the into bones organization as well as the.
<unk> was part of <unk> orthopedic business and.
The <unk> technology, and we will do our normal.
Surgeon presentation in the booth and we Havent formally publish that schedule, yet so I don't want to get ahead of the organization.
But suspect we will have sessions that focus on foot and ankle and <unk> from leading surgeons and we're super excited about that agenda, we're super excited about having both of those.
Part of the offering and then you should assume that the core of Con meds orthopedics business will also be highlighting newer products in the portfolio.
We'll allow them to do that versus on a phone call.
But we're excited about academy.
We've got a lot going into this this year and.
There's a couple of other really big trade shows in 2023. This of course is going to be in the states. This year that's typically.
Every other year.
There is a great show in September that we go to <unk> and those are great Tradeshows for Con meds orthopedics business on the general surgery side.
There's lesser big shows I mean, <unk> is a very big show and we've got a wonderful portfolio there and then our <unk> business.
It goes to some smaller localized shows but has a couple of big shows and we have some nice products. There one that I came out of the sales made it really encouraged by in the sales force very encouraged by so we're excited about the organic portfolio as much as we are the inorganic portfolio.
Just got to get it in front of our customers.
Alright, Thanks, Scott Thanks, Scott.
And thank you.
I am showing no further questions I would now like to turn the call back over to Curt Hartman for closing remarks.
Alright, Thank you Justin and thank you everybody for being with US today, and we look forward to speaking with you during our next earnings call and wish you all good evening. Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly to.
Two reasons lower Johan during Q&A, you can dial one one.
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