Q2 2019 Earnings Call

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Mccain and Mexico.

Do you feel like make endodontic products and accessories, such as dental files and mirrors.

The shutdowns will result in an estimated annual revenue impact of $10 million.

With minimal impact to adjusted earnings per share since these are low margin products.

For the remainder of the year, we're guiding P.T. and I for low single digit organic growth.

In line with the long term outlook for this business.

[noise] CFS international sales were clear bright spot in the quarter increasing 9%.

Driven by commercial stability in Europe solid execution on day, two countries and strong growth in Canada, China and Japan.

Based on a strong first half performance and second half expectations for each of the CSS franchises.

We're modestly increasing our CSS reported revenue growth guidance for the full year to slightly greater than 2%.

And are also raising our organic growth guidance to slightly more than 4%.

Let me now move to our orthopedics and tissue technologies are Otcs segment on slide six.

Second quarter revenues were $134.4 million.

Representing an increase of 7.2% on an organic basis compared to the prior year.

Well in reconstruction increased mid single digits in the second quarter.

With growth coming from our outpatient wound care portfolio and plastic and reconstructive products.

Both of which grew double digits.

In addition, our inpatient business increased mid single digits in the quarter driven largely by sales of Primatrix.

Revenues in our private label business grew 15% largely due to timing.

As a reminder, the private label business can be lumpy on a quarterly basis.

But over the long term organic revenues are expected to grow in the mid to high single digits.

Organic growth in our orthopedics business was roughly flat for the second quarter.

Our lower fixation portfolio improve sequentially as growth in our new Panda to now.

Help to stabilize this business.

Sales in our ankle portfolio grew in the low single digits as the recent launch of our XT revision ankle is performing well despite keith scheduling delays at several of our high volume accounts.

Our upper extremity product lines increased mid single digits with growth in both our shoulder and rest.

We expect organic growth of our orthopedics business to accelerate into the mid single digits. During the second half of the year based on new product launches and the increasing momentum of our focused sales channel.

International sales within ODP increased double digits, driven by strength in our regenerative portfolio.

In both Europe and Canada.

For the full year 2019, our reported and organic growth guidance for the total OTI tea segment remains unchanged.

Turning to slide seven I'll now review the key components below revenue for the second quarter 2019.

GAAP and adjusted gross margin were essentially unchanged from the prior year.

Our adjusted EBITDA margin was 25.5% in the second quarter.

An increase of 200 basis points compared to the prior year.

And was driven mainly by improved operating leverage.

Based on a strong second quarter performance, we now expect to be at 24.5% for the full year.

Which is at the high end of our previous guidance range.

Our adjusted tax rate was 18.8% in line with our guidance.

At about a full point higher than last year due to a lower deduction from stock based compensation.

GAAP earnings per share were 34 cents in the second quarter compared to 14 cents in the prior year.

Adjusted earnings per share were 73 cents.

Representing growth of nearly 22%.

The improvement was the result of higher revenue improved operating leverage and a lower interest expense.

For the full year 2019, we are reaffirming our total reported revenue guidance range of $1.515 billion.

The $1 billion to $525 million representing growth in the range of 3% to 4%.

And organic revenue growth of approximately 5%.

Moving to earnings per share were reaffirming our GAAP EPS guidance range of $1.46 to $1.53.

However, we are increasing the midpoint of our adjusted earnings per share by five cents.

Two new range of $2.70 to $2.75.

For the third quarter, we expect reported revenues of between $373 million at $378 million.

Which represents organic growth of approximately 4%.

This guidance reflects a sequential decline of $5 million in sales due to timing.

Roughly $3 million was an orders of our new products placed with some of our early adopters and $2 million was in our private label business, both of which were realized in the second quarter.

We expect third quarter adjusted earnings per share to be in the range of 64 to 67 cents, which at the midpoint represents growth of approximately 10% over the prior year.

Turning to slide eight I'll now discuss our cash flow performance.

Our operating cash flow in the second quarter was $48.5 million.

An increase of over $12 million compared to the prior year.

Free cash flow conversion on a trailing 12 month basis as of June Thirtyth was 54%.

On improvement of more than 12 points over the prior year.

As we indicated on our first quarter earnings call. We expect an improvement in cash flows during the second half of the year.

As we move past the spending associated with carbon integration activities.

As of June Thirtyth, our bank leverage ratio was 2.8 times.

We maintain a strong and flexible balance sheet with cash and cash equivalents of $176 million.

And capacity on our revolver of approximately $1 billion to support potential future tuck in acquisitions.

And with that ill turn the call back over to Pete.

Thanks, Glenn if you turn to slide nine I'd like to provide a few summary thoughts on the company relative to the focus areas we communicated in February .

Our strong financial results in both segments through the first half of the year give us confidence that we can achieve our full year 2019 financial targets.

We've launched 10, new products into a larger and more focus global commercial organization on or ahead of schedule. We also achieved the fastest growth from our international business. Since we closed the Cogs in acquisition, which helped drive better than expected performance in the second quarter.

With organic revenue growth of 4.9% through the first half of the year, we've reduced the ramp required to meet our full year guidance of 5%.

During the third quarter. The teams are focused on exiting the TSA with Jay Jay in Japan, and taking control of all substantial day two countries. Thus completing the majority of the commercial integration work associated with the content acquisition.

As these integration activities wind down will make further investments in our product pipeline to drive future growth.

And this is an area I find this plan to spend more time on and is a benefit of our new leadership structure.

With our global scale, and the neurosurgery market and a highly effective commercial channel we're investing in technologies that can drive upsides to our plant.

On the orthopedics and tissue technology side, Dallas, we're investing to meet the increasing demand across our regenerative portfolio, we're increasing manufacturing capacity and resources to support our existing leadership positions and also enter new markets.

Finishing the first half of 2019 and orthopedics with positive growth was an important milestone in turning around this franchise and we look to accelerate growth in the back half.

Finally, with our relevance scale and neurosurgery and regenerative technologies, we continue to work with customers to develop value based healthcare products and services and deliver them through our innovative contracting solutions. In summary, we believe we have the team and plans in place to achieve or beat the goals. We set in 2019 and expect to see organic revenue growth accelerate above 5% in 2020 that concludes our prepared remarks, thanks for listening and operator would you. Please open up our lines for questions.

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We'll go first to Raj Denhoy.

Jefferies.

Good morning, Ron.

Oh, Hi, <unk> Mmm Yep, Yep, I apologize for a missing the the question earlier.

You'll watch been asked but I I really just kind of want to ask a higher level question you know about.

The strategy kind of long term you know so much has been or so much of your your longer term plans seem driven on an acceleration right and you know T.T.

You know last quarter, we saw some good result, this quarter it seemed particularly orthopedics it stepped down a little bit of what you're seeing very good results to a lot of cottman right and I think even raise the guidance, they're a little bit and so the question is really as you think about the complexion of the business over the next you know several quarters and years really.

You know we used the right focus to expect an improvement in you know T.T. or is it really you know should more emphasis put on what what cognition can ultimately do given everything you've described round the scale of that business and and the competitive landscape.

Right. It's actually quite good looks are really really important question and one that you know as we do an investor day at some point here the future. Obviously this will be kind of the the core clearly with cars and we do have this capability and we now have this scale that not only can we add talking acquisitions in the United States that we now have this global scale one of the big priorities that we had when we bought causing it to add things that have impacted markets around the world. So totally agree on the other side of the shop, though I would say first fall on orthopedics is going just pretty mushy comment on we actually are in a really good position here with a a very strong ankle and shoulder portfolio and finally stable very strong dedicated sales force. So I think yes, you should expect to see that accelerate but yeah, you know probably be smaller charging type plays or or specifically organic developed a products.

When you think about the work that we've done with this Ah see a bow relationship and stuff.

Those are the kind of deals that I think wow build that out, but we got all the right pieces in in place there on the T.T. side. You know we are the leader in broader inpatient and outpatient combined wound reconstruction I think we're just starting to get the right traction here on outpatient, but I'm very excited about our future opportunity to nerve.

And where we might be able to go with that our opportunity in plastic and reconstructive, which is breast reconstruction have wall and building that out and so we are actually starting to see some of those benefits. It's early.

But I think you could expect to see us between organic and inorganic investments focus on on those areas.

Well that's helpful.

Maybe I could also just ask about nerve is kind of a second question No you you mentioned.

You know that's something to particular that product line. In particular, you know is there any updated thoughts on new product launches. There I mean, I know it kind of it as a quarter was progressing you made some comments at various.

Forums about that <unk>, what's your current thought around the portfolio nerve and your ability to kind of expand what you have there.

Yeah, I would say that it's an area of interest for US we were one of the earlier pioneers within the area.

I would say that we had lost focus over the last few years, we've regained that bogus. This is really a building year, we out of some new products. We plan to bring out in 2021 that we've talked about specifically is this nerve three d. product, which is a a conduit that actually has a an inner core that we believe will help deliver better reach recovery of the of the nerves and then some other products that will be working on to fill out that pipeline, but at this point in time, it's still a very small component of our business, but we think about the technologies and the channels that we have we clearly believe that we can be one of the leaders in the space as you know it's not.

It's significantly crowded space. So I wouldn't I think there's room for plenty of folks to grow as as dish business content continues to grow but I'd say love to hear more about what we're thinking about nerve in 2020.

<unk>. Thank you.

Thanks Roger.

And that kind of thing, but the question and answer session Anthony's conference.

Thank you.

You may now.

Mm.