Q2 2023 CONMED Corporation Earnings Call
Okay.
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. These statements represent the forward looking statements that involve risks and uncertainties as those terms are defined under the federal.
Securities laws investors are cautioned that any such forward looking statements are not guarantees of future events performance or results. 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.
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 any forward looking statements that may be discussed during this call except as may be required by applicable.
The law you will also mention that refer to non-GAAP or adjusted measurements. During this discussion. While these figures are not suitable 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.
A regular basis and for 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 company's earnings releases.
Just to the company's website with these required announcements completed I will now turn the call over to Curt Hartman.
Cotton Con Meds chair of the board, President and Chief Executive Officer for opening remarks, Mr. Hartman.
Thank you Jonathan good afternoon, and thank you for joining us for <unk> second quarter 2023 earnings call.
With me on the call is Todd Garner Executive Vice President and Chief Financial Officer. Our plan is to share with you our second quarter results and then open the call to your questions.
I will start by saying we are incredibly pleased with our team's performance in the second quarter after setting a new quarterly sales record in Q1, we handily beat that with our Q2 performance total sales for the quarter were $317 7 million, representing a year over year increase of 14, 6% as reported and in <unk>.
Increase of 16, 6% in constant currency.
On an organic constant currency basis sales growth finished at 12, 6%.
Our commercial teams were outstanding in the first half and the results in orthopedics and general surgery indicate we delivered balanced growth across our product offering on a global basis I'd remind everyone that in mid June the into bones business reached its one year anniversary. We remain pleased with this business and look forward to continued growth in this exciting.
Market as part of our organic base. Additionally, the bio brace offering continues to build momentum through growing market acceptance, which is being driven by positive clinical experiences.
From an earnings perspective during the second quarter, our GAAP net income totaled $13 7 million. This compares to a net loss of $168 3 million in the second quarter of 2022, due primarily to the extinguishment of most of the 2024 convertible notes, excluding special items that affected compare.
Our ability our adjusted net income of $26 1 million increased five 3% year over year and our adjusted diluted net earnings per share of <unk> 83 increased nine 2% year over year.
At a macro level and consistent with my first quarter comments, the underlying surgical markets that we serve are healthy and health care staffing levels continue to improve.
Conversely, inflationary pressure on the material side has been slower to dissipate and supply chains are not yet fully recovered overall, we see all these dynamics are stable to improving in the second half of 2023 in summary, I'm very pleased with the focus and results delivered in the quarter and I'm confident we will build on our success in the <unk>.
Second half.
Before I turn the call over to Todd I would like to provide important context about the standard installation market and our competitive position with air Shield.
So let me start by saying that <unk> is an only in class technology from day, one it has been replacing standard insulation from all marketplace competitors in both robotic and laparoscopic procedures, given its unmatched clinical benefit delivered through low pressure.
The introduction of another standard installation device into the market will not change our clinical our sales algorithm whether is it a standalone device or attached to a robot.
The only parties that will feel the pressure from the introduction of another standard inflation device or the existing standard installation companies that we have been replacing for the past seven years I will again remind you that none of these companies can deliver consistent pneumo at low pressure, nor the related clinical benefits which are.
And are included in the Investor presentation that we posted this afternoon.
Our position has always been that air shield delivers better patient outcomes and competitive devices, driven principally through lower pressure to support that position. We had 33 peer reviewed studies with over 6000 enrolled patients across five surgical specialties that demonstrate reduced post operative pain reduced.
<unk> stay reduced 30 day visits reduced ER visits and improved ventilation metrics standard insulation has zero clinical studies that demonstrate any of these important clinical benefits.
In fact, I think I can make a compelling argument that we are through our clinical capabilities growing the number of available surgeries that can be done laparoscopically in certain patient populations to include elevated risk and high body mass index patients.
Competitively since 2018, six new insulation devices have been introduced to the market and <unk> continues to win surgeons globally.
While the concept of integration of advice with a robot may enhance ease of use it will do nothing to change that clinical paradigm in which we have been taking market share and we'll continue to take market share I will also remind you that in 2018, two strong competitors introduce their air seal equivalents and I think our results which suggest.
We navigated that period just fine.
From a technology and sustainability standpoint, we own a 187 issued patents and have another 124 pending they extend our patent position through the end of the 20 <unk> and we continue to add to this position.
There are air seal IP crosses the system and is integrated in such a way that it is not one seminal patents that protects us, but rather the integration of the patents across all aspects of the system to include the Iff's box tube set and access ports. This is what makes <unk> function in a manner that delivers clinical benefit.
Each of these components was manufactured separately any unique facility with the critical parts being in sourced here at convent.
Were not currently aware of any patent work that will allow another device to function at a low pressure mode.
Finally based on the June 2023, best hospitals in the U S teaching hospital category.
<unk> is present in 92% of the top 25 teaching institutions with mis procedural utilization rates ranging from just getting started to over 75%.
This is a statistically significant effect given that physicians utilize what they're trained on when they depart to surgical practice.
We will never be dismissive of competitive entrants, but I think it's misinformed to assume that the same old technology created by the same partner to the rest of the installation market will somehow materially impact our results never mind that the market knows minimal details about this device from my chair if it's not obvious that it can provide consistent <unk>.
<unk> at low pressure is proven through clinical studies like air Shiel has shown it as just another standard and <unk> device.
The only in class Air Shield technology supported by extensive clinical benefits derived through low pressure has clearly been moving the market to embrace our solution. We do not see anything in a standard installation offering that would slow that progression and we remain extremely optimistic about our future with air shale.
More importantly, and if you're really digest the quarter, we just delivered the overall prospects for <unk>, given the surgical diversity of and balanced growth. Our portfolio is demonstrating look the best they have ever looked in my tenure.
I'll now turn the call over to Todd who will provide further details on our financial performance and discuss our updated 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 investor deck on our website that summarizes the results of the quarter and our updated guidance.
And this time it includes some supplemental information on the moat around our <unk> product line consistent with Curt's comments.
For the second quarter of 2023, our total sales increased 16, 6% on an organic basis revenue grew 12, 6% we anniversary the <unk> acquisition on June 13th and bio Rads will turn organic on August 9th.
For Q2, our sales in the U S increased 17, 1% versus the prior year quarter and our international sales grew 16.0%.
Worldwide Orthopedics revenue grew 19, 8% in the second quarter in the U S. Orthopedic sales grew 29, 4% and internationally orthopedic sales increased 14, 8%.
Total worldwide General surgery revenue increased 14, 1% in the quarter U S. General surgery revenue grew 12, 5% while internationally general surgery revenue increased 17, 9%.
Now, let's move to the expense side of the income statement.
We will discuss expenses and profitability in the second quarter, excluding special items, which include charges for acquisition and contingent consideration termination of a distributor agreements legal matters debt refinancing costs restructuring of software implementation costs amortization of intangible assets and amortization of deferred financing fees net of tax.
Adjusted gross margin for the second quarter was 54, 4% a decrease of 50 basis points from the prior year quarter.
This was consistent with our guidance of mid 54 is for Q2.
Similar to Q1, we saw exceptionally strong growth in some of our lower margin geographies.
Which is skewed the margin to the lower end of our guidance so far.
We remain excited about the improving margins ahead for Q3, we expect gross margins to improve sequentially over Q2 by approximately 150 basis points and then again sequential improvement from Q3 to Q4 between 101 hundred 50 basis points.
Research and development expense for the second quarter was four 3% of sales 20 basis points higher than the prior year quarter.
Second quarter adjusted SG&A expenses were 37, 4% of sales.
Leverage gained on the higher sales drove the 70 basis points improvement over the prior year quarter.
On an adjusted basis interest expense was $8 $5 million in the second quarter, we expect a similar level of interest expense in Q3 and that does incorporate that rise from today.
The adjusted effective tax rate in Q2 was 21, 9% taxes came in lower than expected principally due to the excess tax benefit from stock plans.
This is difficult to predict but we don't expect the same benefit in future quarters, we still expect the tax rate to be around 25% going forward.
Second quarter GAAP net income was $13 7 million. This compares to GAAP net loss of $168 $3 million in Q2 of 2022.
GAAP earnings per diluted share were <unk> 43, this quarter compared to a loss of $5 65 per share a year ago.
Excluding the impact of special items discussed earlier in the second quarter. We reported adjusted net income of $26 1 million, an increase of five 3% compared to the second quarter of 2022 or.
Our Q2 adjusted diluted net earnings per share were <unk> 83.
An increase of nine 2% compared to the prior year quarter.
Turning to the balance sheet, our cash balance at the end of the quarter was $27 8 million compared to $26 5 million as of March 31.
Accounts receivable days as of June 30th were 65 days flat compared to the end of Q1.
Inventory days at quarter end were 200 compared to 215 at March 31.
Long term debt at the end of the quarter was 971 $5 million versus $995 $3 million as of March 31, our leverage ratio on June 32023 was five one times, we continue to expect our leverage ratio to be below four five times by the end of the year.
Cash flow provided from operations in the quarter was $26 7 million compared to cash flow from operations of $18 7 million in the second quarter of 2022.
Capital expenditures in the second quarter were $4 5 million compared to $5 7 million a year ago.
Now, let's turn to financial guidance.
We now expect reported revenue for the full year to be between one 230 billion and $1 260 billion compared to our previous guidance range of between $1 205 billion and $1 250 billion.
With no material change to the expected currency impact on the year.
We now expect full year adjusted EPS in 2023 to be between $3 40, and $3 55 <unk>.
Compared to our previous range of $3 30, and $3 50.
As discussed previously the full year 2023 will have one less selling day compared to 2022.
Our calendar falls Q1 had one extra day in Q3, we will have two fewer sales days.
As we look at the third quarter, we expect reported revenue between 295 and $305 million that includes approximately 100 basis points of FX headwind.
We expect adjusted EPS in Q3 to be between 80 and 85.
As Kurt said, we are pleased with the Q2 performance and our focus on executing and continuing to build on our strong first half as we move through the rest of 2023.
We remain confident in our ability to deliver innovation to our customers, while driving above market growth and profitability over the long term.
That we'd like to open your call open the call up to your questions and I'll turn it back to Jonathan.
Certainly ladies and gentlemen, if you have a question at this time. Please press star one one on your telephone.
If your question has been answered and you'd like to remove yourself from the queue simply press star. One again, we ask that you. Please limit yourselves to one question and one follow up our first question comes from the line.
Marcus from Jpmorgan Your question please.
Yeah, Hi, Thanks for taking the question and congrats on a good quarter.
I'm Robbie.
Two questions, maybe first I could start out with underlying trends it looks like you're participating in a lot of the <unk>.
Strong ortho and surgery trends, we're hearing from other peers.
I would love to get a sense I know you touched on I had been in the script, but would love to get a sense.
Specifically.
U S and how the revamped sales force is doing it in ortho and.
How surgery ex air filtration and smoke evacuation did in the quarter.
I would just say overall, we're very excited about the performance broadly speaking.
Our U S orthopedics business has been undergoing a bit of a rent.
The renovation.
Pat buyer that was tucked in under him in October 2020, He's brought in a new leadership team, we're really starting to see the fruits of that labor.
Second quarter was our best U S. Orthopedics organic performance that we've had in a number of quarters and I think that bodes well for the second half that is that is supported by better sales better marketing better overall support but also the underlying markets to the point of the question.
<unk>.
Seeing higher procedure levels, but you put all that together and it helps.
For delivering good results on the general surgery side, absent <unk> and Buffalo filter.
We delivered growth I mean.
People on this call probably don't understand the amount of business that we have in our advanced endoscopic technology category and that was just shy of a double digit grower in the quarter. We don't usually talk about that but it was a great performance by that business on a global basis.
And then if I take a different angle on it and look globally, we had really strong global performance.
Market, except one.
That had some unique challenges in that market with our portfolio, but really strong performance across the core of the company and in each of our business categories.
Great and I know you talked a lot about it and the scrap so.
Not to pound on it too much but.
There's a lot of Newtown worry in the market that.
<unk> is a great product and delivers a lot of incremental growth for you that.
In a lot of the placements in use or in conjunction with intuitive surgical robotic procedures.
Reports that a third party OEM.
It might be making in insufflator to integrate with it.
Again, I know you talked in the script, but I think it'd be helpful. Maybe just to review what percentage of.
Sure.
Our sale is from robotic procedures, what's currently in the market today beyond <unk> and maybe some of the reasons.
That even if the.
The robotics.
Platform comes with an Insufflator that Ursula will still be used and still be Houston.
A good amount of procedures and footwear growth. Thanks, a lot.
Thanks, Ravi, Yes, I mean look the power of <unk> is in the clinical differentiation that it brings and we.
Sure some of those studies and data that Curt shared verbally that's in the.
The decades in the back of the deck that we provided today you can see.
This is proven over millions of patients and over many years.
As Curt said.
Many times in the last several years our competition has said okay. We finally found the answer to are so this is going to youre going to like this just as much as you like <unk>.
And everything has been found wanting so far because.
It does not.
Do all three things at once right.
And to put gas into the abdomen removes smoke and measure.
<unk> because of our key feature with no valves and because everything is done simultaneously it doesn't turn on and off.
Everything is simultaneous.
That we are allowed to operate at much lower pressures consistently.
Over a myriad of procedures and lots and lots of patients.
Doing that in practice is.
Very difficult and in our opinion nothing that comes with valves.
Or turns on and off if I'm now I'm, removing smoke now and not now I'm inserting gas now I'm not now I'm measuring now I'm not anything that starts and stops with those functions and has valve that is constantly trying to fight the escape of gas is not going to be.
<unk> of operating anywhere close to the clinical outcomes that you see <unk> and that is why everything that has entered the market. So far even with all the promotions about saying they figured out how to match <unk> nothing has come close and as you can we're coming up on.
Eight year were seven five years post acquisition. This product line is growing north of 20% every quarter.
<unk>.
Because of how differentiated it is in this space.
Doctors are not going to go backwards.
In clinical outcomes because.
Another company sells it that they like they really like something else that company sells that's just not how our space works.
To specifically answer your question about the attachment to the robotic procedures.
It is high in the U S.
Because that business was built in the wake of robotic procedures and it sells very nicely and it's and all of the features of the product are.
Relevant to all mis procedures, but especially robotic procedures, where there is the added risk of the.
Working space collapsing on the arms that added risk and then the added time of having too.
Reset if that were to happen.
So there is a high attachment in the U S.
There is a low attachment to robotic procedures outside of the U S. Because frankly, there werent as many robotic procedures outside the U S years ago.
And so that our sales force outside the U S sells it very effectively into non robotic mis procedures.
Our U S sales force has not been forced to develop those muscles and so they've lived a very good life in the wake of robotic procedures, but there's still enormous if for any reason that opportunity behind robotic procedures were to someday slow.
The aerosol can still grow just as fast as we have been by shifting focus into the non robotic so.
We feel very strong about our competitive position.
The differentiation, we see nothing in the market and nothing in any filings nothing in any discussions that would challenge that.
And it's.
It's been a terrific product now almost eight years post acquisition and we expect we don't see anything slowing it down.
<unk> from a competitive standpoint any company in the marketplace, who provides a video platform for MIF surgery is going to have in Insufflator <unk> device and the installation category has traditionally been provided by an OEM.
Suspect it's the same OEM, that's providing this device.
And that is considered standard insulation technology. When you look at attachment to a robot hit its like a video stack youre, putting the platform on there there may be some integrated ease of use features.
But again consistent pressure stable pneumo peritoneum at low pressure.
That can handle the removal of smoke without.
The movement in the working space that can handle doing that at low pressure, that's the clinical benefit and differentiation that the technology and the intellectual property across the three elements provide so hopefully that helps people understand a little bit different.
On the clinical aspects and value that <unk> brings to the marketplace the clinical marketplace.
Thank you one moment for our next question.
And our next question comes from the line of Rick Wise from Stifel. Your question. Please.
Good afternoon Kurt.
Hi, Todd.
Kurt.
The warehouse related.
Issues and customer recapture maybe you can help us understand.
Get a little more color on where things stand obviously.
Software implementation was done completed.
Last quarter back up and running.
If I'm remembering correctly, you said that greater than 50% of <unk>.
<unk>, who had been disrupted.
Or in some way had return where are you now.
How much benefit did we see in the quarter.
When do we get back.
Where you were where you would aspire to be.
I think we're on the path that we've talked about really probably going back to fourth quarter. We had good return in the first quarter.
Supported by an uptick in overall procedure volumes generally speaking.
Feel like we are.
We're pretty far back to recovery on the majority of our customers are there will always be some stragglers may have signed up with a competitive entrant and had to make some commitments but.
Yes.
I think the best way I can frame it Rick.
We're not walking around worried about.
How soon are these people going to come back we feel like we've done a good job recapturing.
Any customers that may have departed us for some period of time.
Sure.
I think the underlying strength in the markets and our overall innovation and portfolio and sales teams have done a really nice job.
Reassuring those customers that we're back and we're in front of it again.
We said on the last call we're still working on all the the opportunity that the warehouse implementation software brings us and will continue to work on that anytime you have state of the art software platform year, Youre going to try to optimize it day in day out month in month out in that journey will continue.
Okay.
I know how important innovation is in your mind and to the comment strategy can you give us any color.
About.
What we might see or any.
Any way to characterize that.
Kind of impact that new product launches are having are about to have.
Broader portfolio and maybe roll into that.
A more detailed update on into bonds and borrowed it seems like they're doing well.
Maybe just help us understand.
Where they are in terms of.
Growth in.
Acceptance in how we think about the contribution just those two alone might make.
Two are for second half top line growth. Thanks, so much.
Yes. So so we're we're encouraged by the contribution from new product introductions that I would I would probably say leading that right now across the company as our orthopedics business. If you were at Academy you saw a lot of products that orthopedics not just <unk> that was a focus obviously, but we had a lot of new products and when I look at our.
Product revenue in the quarter.
So the way we measure it globally, our orthopedics business new product contribution has been very helpful and again credit to the re the revamped the new team leadership and how they are approaching innovation with the commercial team and integrating that with our manufacturing group and.
I think I mentioned on the last call in our interventional endoscopy business, we introduced a product called <unk>, which we think is an only in class product and market reception on that has been very favorable August capital components, what's going through a little longer purchasing cycles, but boy the marketplace feedback has been really really strong so.
We continue to push on new product innovation, it's part of what we brought to the company and it will always be part of our fabric and our teams are doing a really nice job of it right now.
Bio resin into bones as I commented, we feel very good about both of those.
Into bones comprehensive business comprehensive portfolio rolling out.
PCR plating.
Kind of a next generation on the ankle.
Doing really good work and.
We sunset at the one year market as part of the organic business now and we.
We'll look forward to that contribution in the second half and going forward in <unk> becomes organic in August .
But.
We're super excited by the market reaction, it's good clinical outcomes drive this.
Good good surgeon experiences drive this and we're seeing that and it's about educating surgeons. So they understand the technology and how we approach it how they approach it but the market enthusiasm is very strong and.
Again, we feel very good about that acquisition I don't I don't think we've commented about specific contribution in the second half.
<unk>.
So I'm, probably not going to break that out here.
Thank you one moment for our next question.
And our next question comes from the line of Matthew O'brien from Piper Sandler Your question. Please.
Good afternoon, Thanks for taking my question.
Can you just flesh out a little bit more on the smoke side. I think you said Erik deal has been growing Tony I want to make sure Hasnt been did grow 20% this quarter Buffalo growing 20, as well and what I'm getting at is it still grew about 20% it looks like there.
Rest of the general surgery business was a little bit lighter than maybe I would have expected.
Back to you with a copy and a little bit easier here in Q2 versus Q1.
Not getting all that halo effect yet from.
From those two differentiated products or is there something else going on there. Thanks.
Yes, so they definitely did grow north of 20% in the second quarter and.
I don't know that I would grant your easy comp comment on Q2, but.
Look we're pleased with how the business is going.
Grew 12, 6% organic across the company.
These new acquisitions, which are just turning there just anniversarying, they're obviously growing nicely.
So we feel very good about the ganic growth profile of the company.
That's incorporated in the guidance, we just gave I will remind you that Q3.
Our range does include the double digit organic growth.
Despite having two fewer sales days right. So remember that as you judge that Q3 number but look the business is going well.
Obviously, there is some legacy products that grow slower we all know that but we have many parts of the business growing growing really well right now.
Okay I appreciate that and then.
I don't want specifics on <unk> or <unk>.
But are those two still largely on deal plan as far as what you were expecting or ahead of expectations and then.
Volume growth that we're seeing everybody thing and I am in no way Todd asking you about 24 numbers, but do you think this is something on the volume side that can.
Can't continue through not only the back half of this year, which it sounds like it already is but even into next year as well just the strength in volumes because everybody in the space is going to have a tough comp next year as a result of the strike this year. Thanks.
Yeah. Thanks, Matt Yeah on the deal yes. They are both performing at least to plan, we talked about on the Q1 call that buyer as we were kind of raise the expectations from mid single digit millions to high single digit millions for 2023, so that that obviously was out of the gates, a little a little better than <unk>.
We thought.
And yes look I think halfway through 'twenty three.
I don't think we would be alone in saying.
The environment feels good it feels like pre pandemic, where med tech is back and procedures are back in the growth rates in our spaces are getting back to where they used to be.
<unk>.
You're right, it's too early to talk about 'twenty four but it does barring.
I'm knocking on wood here, but it does it does feel like maybe we finally gotten through all of the pandemic disruptions.
And that we probably do have some tailwind from <unk>.
People that didn't get care when they should have and there is some pent up demand maybe.
I think that's really tough to quantify but I think that probably is a tailwind out there for all of us and yes.
We're feeling good about the future as we sit here today.
Thank you one moment for our next question.
And our next question comes from the line of Vik Chopra from Wells Fargo. Your question. Please.
Hey, good afternoon, Thanks for taking the question and congrats on a great quarter.
Two questions for me so maybe the first one is on your international business.
Put up pretty strong numbers on top year over year comps I'm, just wondering what trends youre seeing.
<unk> geography.
And then on my follow up question on your guidance you sort of raised.
The top line by about $100 billion.
At the mid point and maybe just talk about what gets you towards the low end versus the high end of your guidance. Thank you.
So let me I'll take the easy one Vic and I'll leave Todd the second one.
Our international business has been a very steady performer in this year is no exception theyre doing really a nice job.
Across both orthopedics and general surgery.
And I think Todd commented.
Some of our.
Export markets have had really strong performance with the.
The Asian markets.
Japan, China Asia broadly speaking really probably growing a little faster than we had even assumed.
<unk>.
But Europe is doing a nice job Latin American market is doing a very nice job. So it's been a very balanced international performance across both general surgery, and orthopedics and that's a testament to the the infrastructure the stability of the leadership team.
And the evolution of the channel in the country market focus that they've put in place over a number of years. So hopefully that answers your question on international and I'll, Let Todd take the guidance question, Yes, just to just to make sure. We're all level set.
Our current revenue guidance is 123 billion to $1 two 6 billion.
Originally when we started the year, we guided $1, one 7 billion to $1 2 billion. So it's been a $60 billion increased $2 million I'm sorry.
I'm doing the same thing as $60 million increase on the low end from the start of the year and a $40 million increase on the high end from the start of the year and really not just reflected in our performance right things have gone better than we said.
We always had high expectations for the back half of this year.
We continue to have high expectations for the back half of this year.
<unk>.
We're executing and we're going to continue to focus on executing.
Yeah.
Thank you one moment for our next question.
And our next question comes from the line of Matthew <unk> from Keybanc. Your question. Please.
Hey, good afternoon, thanks for taking the questions.
Last three quarters, you guys have been around the low 50 fours from a gross margin perspective.
It seems like this is the beginning of the ramp you had been expecting.
Over the next two years.
Towards closer towards about 60.
Just kind of what's clicking as you get into the second half that's enabling this change.
Yeah. Thank you, Matt and you're right. This has we have been waiting to get through the first half of 'twenty three.
If things do get better from here.
What's really clicking has been clicking as the mix of the business right.
These high growth.
Highly differentiated product lines.
<unk> do well also come with elevated gross margins and so that mix tailwind.
Is actually picking up speed there is not waning its picking up speed as those things grow faster than the rest of the portfolio.
So that is finally being allowed to show through because we've had some stability on the cost side right and costs. We still think there's a lot of improvements that we can do on the cost side.
But.
Digesting the increase the increased prices from 'twenty, two which as you know it takes a while to flow through our inventory and therefore our financials.
We knew that that would be a.
Wait on a first half of 'twenty, three and as we get as we have seen stabilization.
On the cost side now that mix tailwind is starting to show through and so.
We are excited to now start ramping gross margins as you've pointed out and we feel very good and confident about the disclosure we made.
About six months ago. When we said, we expect gross margins to be to 60% by the end of 2025, and we feel very confident.
We can get there so.
Thanks for noticing and I hope I answered your question.
Yes, you guys. Thank you and then I just wanted to switch over to non U non robotic use laparoscopic procedures.
In the U S. It just seems like such a big opportunity over.
Over the long term debt.
Here sales force hasn't really hit on.
As aggressively or built the muscles to hit on as aggressively as probably you would like when were you planning to kind of and then.
As you kind of think long term when we're kind of planning to kind of make that shaft or incentivize that shift in the sales force and does it require some like an R&D update or modestly different solution in the U S.
Matt It's a good question and I am sure right now our commercial leadership team for that businesses squirming in their seat but.
I think Todd and I are probably being a little harsh.
Several examples of very nice wins on the general laparoscopic side that the team has delivered one earlier this year, which was a total system wide swap out the single biggest point of resistance is you're asking.
That extensive surgical volume which is like.
A 10 to one ratio.
Relative to robotics to move to a much more expensive procedures. So in a period. The last couple of years, where volumes have been up and down and pricing pressure and inflationary pressures convincing health systems to change and incur additional cost even though they recognize the clinical benefits has been.
More of an uphill climb.
We hope that as the markets are stabilizing as procedure volumes are coming back broadly speaking.
And pricing and everything is normalized and material cost et cetera that customers are more willing to step into that realm.
And again it takes a few big ones to tip over and we've done that early this year and late last year, we had a couple of really nice wins.
Thats contagious for our sales force when they see things like that.
Todd and I talk to our businesses frequently and.
They know the story in the journey and the path that theyre going on and part of it is continuing to expand sales forces annually part of it is.
The making sure we've got the right product cost structure for those customers, but we will get there we're not going to change incentive plans to force people there that.
But in this industry 30 years, just doesn't work it doesn't work the way. It's designed just keep it simple and let people go sell to the customers that are ready to be buyers.
And show them all of the clinical value that we have especially with a product like <unk>, yes.
Yes, I think thats, an important part that I would just add Matt.
And I think thats kind of wisdom and focus that Kurt brings here he is.
It's funny to hear us talking about the commercial team Squirmy.
When you whenever you talk about well, let's drive the compensation plan to make themselves as much of this in this much of that in this much of a third thing.
And Curt as always like look, let's let's make it really clear how they make money and let's let him go make money and make sure. They know they work for the customer yes.
<unk> is signed by <unk>, but they work for the customer and give the customer what they want and so I think it is important as you asked that question, which is a good question.
Where some places do try and push behavior that way here, we say.
Go make your number however, you want to make it right. It serve the customer well if you think about if you're one of those sales reps in that space.
You can walk in behind the $2 million robot and say Hey, why don't you buy this $30000 box that makes every procedure safer faster better.
And Thats, just the easier starting jumping off point.
Dan walking into a place with without that $2 million block.
Yes.
Creating the hole for you there right, so youre walking in and saying Hey, you should double the expense to get these benefits.
That it works doing it and the laparoscopic non robotic space works are like Kurt said, our U S team has proven that it works our <unk> team, we grow just as fast in <unk> outside the United States as we do inside the United States and they don't have the week of the robot so they have.
We already have we know that we can successfully go into non robotic procedures and convert those accounts, but we have not micromanage the salesforce to make them go there.
They will go there.
When when it when they need to go there.
They will go and that opportunity is.
It's still there.
Thank you one moment for our next question.
And our next question comes from the line of young Li from Jefferies. Your question. Please.
Alright, great. Thanks for taking our question.
One more on him as CEO .
Follow up on your earlier comments on the.
Pop.
25 hospitals that uses it.
I think it's a 92%.
Hi, 75% penetrated.
I guess im wondering.
What's the average penetration rate in that cohort if you have it.
Why or how did the top hospital get to 75%.
Due to their procedure mix or more surgeon champions or more the longer length of time that appears to have been in their hospital.
There is a lot to unpack there.
Teaching hospitals are notoriously hard to crack into.
The.
The surgeon champions are thought leaders they are.
Very clinically astute.
They are absolutely in the prove it to me category.
So where we have the higher utilization rates, we probably found a surgeon champion sooner and they were able to help proliferate the technology across all of the users and that account, where we have lower utilization rates. It may have been harder to crack into that hospital, they may have and Ed and allegiance to other technology.
And they were waiting to see more clinical outcomes, but.
That's why you keep chipping away and to be a 92% of them.
Really good after seven years.
And because we're in them, we keep showing up we keep demonstrating the value and we will we'll get more of those key opinion leaders on board across those facilities and the penetration rate will go up.
<unk>.
On top of my head I don't have the exact.
Mean median average.
But it ranges from just starting.
To north of 75%.
And probably everything in between so it's it is a journey when you are talking about teaching institutions. They don't just turnover overnight. It takes time and our sales teams and our marketing team spent an awful lot of time to get them onboard and we're proud of that work in.
When people leave the teaching institutions, what they were trained on and who they trained by is very important to how they set up practice and that's why it's such a.
That's why it's such an important statistic for us.
Alright, great Thats very helpful color.
I guess follow up question.
I was wondering within your general surgery business.
Can you maybe comment on some.
The key categories or indication.
Having growth.
Hearing things like bariatric surgery slowing down.
It's a small small part of your business.
But are you seeing that as well maybe you can highlight some of the categories.
For me, a little bit better and some that little.
A little bit slower.
Okay.
Yes, I don't think we would say we've seen any slowdown in bariatrics surgery at this point in time again, it's a small part of our pie that we participate in.
And I also think that.
That patient cohort.
<unk> has a broader.
Mortality index it has to be dealt with and so when they get to the surgical side of things.
Sure Theres gastric bypass that it's more of a weight reduction that could be impacted by a pharmaceutical solution.
But theres just a lot of other bariatric surgery types and indications that that are still going to be maintained out there because of the co morbidities that patient cohort.
Generally speaking across our general surgery businesses.
We're seeing good procedure volume independent of specialty I mean, it's it's urological it's.
General surgery straight up procedures.
Sure.
G y and procedures.
The strength across the board I don't think I would call. It any that are driving the ship so to speak and I think that as important on the interventional.
Endoscopy side.
Really good volumes in that market space right now and our teams are super excited.
Got a very very exciting new product there. So we feel good generally.
About that entire category of our business right now.
Thank you one moment for our next question.
And our next question comes from the line of Kristen Stewart from C. L. King Your question. Please.
Hi, good afternoon, and congrats on the results I was wondering if you could just share a little bit more details on Buffalo filter if theres any passage of legislation since we last spoke.
Just in general the competitive environment there.
There is Ohio and Missouri.
Got approved most recently so.
The Cascade continues and we expect that it will continue to.
Build.
And it continues to go well.
That's there's a lot of runway there we have the best device in the market, we believe and we expect big things out of that business going forward.
Okay. Thanks, and maybe you could expand further just on a general capital environment. It looks like capital grew nicely. This quarter just any additional color there sure.
Sure.
It's interesting it was consistent it was it was solid performance both on general surgery.
And in orthopedics.
And it was interesting we had.
One of our better performances on power tools, we had really strong performance on video.
And on the general surgery side, we have an extensive platform of energy platforms argon and.
Just basic energy in all of those did very well in the quarter and.
I think the teams feel pretty good about both of those categories. As we look into the second half of the year, obviously <unk> capital Buffalo filter capital the boxes fall into that category as well. So those are helpful.
Items as well on the general surgery side.
Thank you one moment for our next question.
And our next question comes from the line of Mike Matson from Needham and company. Your question. Please.
Yes, thanks for taking my questions I guess first just wanted to ask one on <unk>.
Maybe you can talk about sort of the early feedback you're hearing there what type of procedures, you're seeing use them and to what degree do you think it's sort of taking share from some of the competing products versus just being picked up by a surgeon that hadn't been using that type of product before.
Yes, it's a great question.
We're seeing it deployed.
And Ah.
The other.
Surgical procedures, we obviously have a product that's specific to rotator cuff, we have a product thats specific to ACL augmentation.
But the one for rotator cuff is more like a patch construct so surgeons can are modifying that and using it in other.
Other indications whether it's.
Achilles tendon repair or gluten <unk> repair and I think.
I'm trying to remember from the slide at Academy I think one of the surgeons put up 23 different surgical applications.
<unk> had been used.
And.
There's a lot of new users new to the new to the college in a market that we're finding.
But there are some competitive Youtube users from the first generation product in the market who are interested in this product.
Candidly the strength at time zero is a massive selling feature that is a that is a super important point when you talk about retail.
So we're seeing some adoption out of that space as well, but it's.
It's a growing market.
It's new technology for healing and Theres, a lot of new adoption.
Again clinical studies are super important in this space just like they were in the early days of <unk>. So we're working on clinical studies.
Market has some clinical studies from the first generation technology, that's out there, but they want to see clinical studies on our technology, but because there is experienced with that first gen product.
They probably did some of the market development heavy lifting.
That is beneficial to us and that's probably why we're a little bit ahead of plan.
Okay. Thanks.
Then just put into bonds now being a year.
The actual close.
Can you maybe just talk about the degree to which you've sort of increased investment there either salesforce or number of sets R&D et cetera.
Yes.
We bought it as a standalone business, Mike and we run it as a standalone business obviously internationally.
We're doing more integration because we have the sales channel there and into bones did not have a sales channel.
So investment outside the U S was about getting regulatory approvals, it's about building more sales channel.
Are we where there was no lower extremity sales channel.
But we're able to do that because we have in orthopedics presence.
Under which we can tuck this so youre not building the management piece, you're building more of the direct sales or the.
The distributor agent sales channel.
In the U S.
I think everybody in the lower extremities space would say, it's a great market and more feet on the street matter and we're we're under that same mind mindset more feet on the street matter and a great R&D engine, which came with into bones is essential to us moving forward.
But as Todd and I have said before we don't do a top down spend this much in R&D the local marketing team the local R&D team the leadership the general manager.
The reports again into Pat buyer under global Orthopedics, they run their business reviews, they take market feedback.
They build their R&D portfolio.
They know what the sales channel can consume it once or over a period of years.
They build the R&D engine to support that so.
I think if we're doing anything on the leverage side.
Because of our infrastructure on medical education.
Through our straight up sports Medicine business, we're able to do more medical education that into bones, probably couldnt do on their own as a standalone because.
Because we just have scale.
Through our our bigger sports medicine business and that occurs both in the U S and outside the U S. And then some of the back office scale that we talked about.
Shared services that they just couldnt scale up.
Okay, great. Thank you.
Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Curt Hartman for any further remarks.
Thank you Jonathan I want to thank everybody today, we went a little longer than normal, but I. Appreciate your time and we look forward to speaking with you on our next earnings call. Thank you and have a good evening.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
Okay.
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Okay.
Okay.
Yes.
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