Just talk about the newly created strategic role for Chief Operating Officer. We have Pat here today for the first time, just promoted recently. Just trying to think about, you know, why, why now? You know, what's the role gonna kinda do at this point?
Sure. Great, great question, and, a great way to start. In 2015, the first time I spoke on behalf of the company, I said the transition or turnaround was gonna be led first by people and then by products. And I didn't talk about profitability because that was pretty distant at that moment in time. And Pat is just a reflection of the continuation of our people strategy. And whether it's at this level or deeper into the company, we have a very comprehensive people strategy around people development and succession planning, giving people, new opportunities. And Pat was the first executive to join the team back in December 2014. He started out running international business. Pat lives outside of, London and has for a long time. In 2020, he took over our U.S. orthopedics business.
He led the acquisitions of both In2Bones and the Biorez, and this is just the next natural progression. Let him take on the general surgery portion of the portfolio, in addition to manufacturing, RAQA, and global distribution. And we have this going on all over the company. This just happens to be a very visible role, and I think Pat will dive into that. Those leaders will get a new management experience, and it allows me an opportunity to turn my focus to some more long-term continuation of strategy, the portfolio growth, and the company growth.
You have anything?
No, I guess I would say, first of all, it'd be remiss for me not to say, I celebrate my 10 years at CONMED in December of this year, coming up, and I'm super excited to take on this new role. And in my 30+ years of med tech experience, I've had a number of situations where I've taken on new challenges and new opportunities, and at CONMED, it's about continuing the legacy we're trying to build. It's not hitting great results one year, but continue to do them over time, and I'm excited to take this new opportunity.
Great. Welcome. Glad you made it to Vegas. Q1 just reported a couple of weeks ago. It was 5.9% revenue growth, 7.1x the selling days. You talked about surgical volumes, kinda steady, capital environment, good. It was a tough comp, but just kinda curious, how you thought Q1 kinda played out, kinda versus expectations.
Todd, do you wanna?
Yeah, it was a little better than we thought. You're right. It was a really tough comp. I think we were 19% organic in the year before, as we caught up from our warehouse issue in Q4 of 2022. So to grow on top of that, despite one less selling day, I think we were pretty happy with the start of the year. Didn't change how we saw the rest of the year, but we were very pleased with Q1.
Just some questions, kinda post the call, why you kinda didn't raise the revenue guidance despite the beat and the FX got worse. You still beat by $10 million and kinda saw the first half staying the same. Just curious, like, why, why not kinda raise the guidance at this point in the year?
Yeah, we beat by $5 million in Q1. Yeah, there was a lot of excitement about how we handled the guide. We are early in the reporting cycle, you know? We were one of the first companies to report. In the few weeks that have happened since then, you've seen a lot of companies take that same approach. And, look, it was a positive start to the year, without question. It wasn't big enough to change how we saw the year playing out, either, you know, first half, second half or the full year. So we just kept the constant currency growth the same. FX did get worse for everybody in the last 90 days, and so we explained that to the street and left our guidance the same for the year, and we feel good about that.
Do you think companies are taking that approach, just something they're seeing in kinda March, April timeframe, or is it just kinda being more conservative?
I mean, I can't speak for any other companies but us. I think, you know, it used to be that Q1, you'd be pretty reticent to change your guidance after Q1, unless there was something really meaningfully different. And I think in our case, we don't think, we don't see anything meaningfully different than we did 90 days ago, and so we've left the year the same.
Very fair. The guidance still is implying a decent step up in growth in the back half of the year. So let's kind of break that out a little bit more and kinda the confidence in seeing that acceleration and growth into the back half.
For sure. Yeah, last year, 2023 was a really good year for us and for med tech in general, I think. Very healthy market. We had some easy comps because of our warehouse issues in 2022, but if you look at the Q2 and Q3 of 2023, you know, we grew low double digits in those quarters without any abnormal comps. So I think really that's what the portfolio kinda does when everything's working right now. That's what it does. We started on the Q3 call of 2023. We telegraphed or projected some increasing headwinds in supply, specifically on the ortho side of our business.
And so, very consistent with what we said in Q3 last year, we've been working through those supply issues on the timing that we said back then, that would resolve, near the end of Q1, and then Q2, we would kinda get back to speed and get back to normal. So it is true, Travis, you're right, that our second half of this year looks way better than the first half. First half is, you know, mid to high single-digit growth. Second half is better than that.... That's really about kind of the step back we've taken on the ortho side because of supply challenges that we've worked through, and that has progressed as we thought, and we feel good about our guidance for the year.
We also have an extra day, both in the third quarter and the fourth quarter, so just to do an apples to apples.
We'll get into this a little bit more later. So you did bake in a little bit of an AirSeal headwind into the full year guide. Is the way to think about it, if it doesn't kind of play out, there's potentially a little bit of upside to the guidance from that?
Yeah, look, I mean, that's a very modest number for 2024, right? I mean, that competitive threat is brand new. Even in, even in the worst-case scenario, it probably couldn't impact us very much in 2024. But you're right, we did allow for some disruption there, but I wouldn't get overly excited. That, that's a very small total number for 2024.
Okay. No, that's helpful. We won't get expectations set up for that. So, when you think about kind of longer term, you, you talked about kind of top line sustaining, kind of double digits, not hit it every quarter, but there's a pathway for CONMED to kind of generate this kind of double-digit revenue growth. So just thinking about the confidence in, in, in that still and some of the drivers behind that.
I think I'd probably start out with, our goal is to grow faster than the markets we serve. And you look at the different specialties, sports medicine, foot and ankle, general surgery, there's a range of growth rates there. Foot and ankle and sports medicine, probably on the higher end of those ranges. And so if I aggregate that and say the markets we serve are growing, I'm just going to call it five to seven, because there's no exact data. If we grow faster than that, then we feel like we're winning. We're taking market share. Our goal also is to build a portfolio that allows us to stay on offense, and occasionally, that portfolio is going to take us into double digits, which we did a couple of times last year.
So number one, I got to grow faster than the markets we serve. Number two, if the portfolio allows our teams to be fully on offense and life is good across the rest of the business, we should be able to get to the higher ends of that range and perhaps into double digits. So that is a consistent message that we talk about inside of our company and have talked to investors about as well.
I wanted to kind of touch on margins a little bit, kind of post Q2 as well. So I think your Q2 gross margins are getting kind of 60-80 basis points of expansion year-over-year, which is a little bit of a step down versus Q1, about a 50 basis point step down versus last quarter. So what is that just in services you're building in there, or is there something getting worse in the Q2 gross margin?
Yeah, first of all, I'm happy that 60-80 basis points of improvement is a little bit of a step down. Yeah, Q1 went really well. Q1, we thought, should be about 100 basis points better, and we came in at 160 basis points better. So, as I look at the details of that, it's kind of just across the board, like everything went well. And normally, life doesn't happen like that. You know, normally, not everything goes to the positive. So, as I said, our Q1 results don't change how we see the year, and so we've kind of allowed for some of the... You know, not everything to go exactly perfectly in Q2 and be in the same place that we thought we'd be for the first half.
Which is kind of our—the philosophy was, let's keep the first half the same, second half the same. Whatever we beat in Q1, let's just kind of allow for that in Q2. And so that's kind of the approach. Nothing—I can't find anything that says, "Oh, margins are going to be much better or worse." The only thing that's notable is FX, and FX did get worse, right? And so part of that takedown in Q2 margins is FX. But other than that, I'd say it's just kind of no change to how we see the overall business, and you can get a little overexcited about a period here and there. We're trying to take a longer view.
On the longer view, this year, you're at 100, 150 basis points of gross margin expansion. Is that the longer-term view that we should think about per year?
No, no, we said that for 2024. I think there's a... You know, as we laid out kind of a, a three-year look last year, we actually thought 2025 had the opportunity to be better than that, but we'll get to 2025 later. So I think that, our mix tailwind is giving us about 100 basis points in that neighborhood. And so, you know, I, I think 100-150 is probably... You know, I, I'd like to do better than that, but I, I think that's, probably on the low end of what we could do. Especially when we talked about 2025 being better, part of that calculus was we digested 400 basis points of inflation between 2019 and 2022, and that's why we were talking about where gross margins would go over a multi-year period.
The assumptions were that by 2025, we should get some of that inflation recovery. We haven't really seen much of that yet, so I still think that's theoretically possible, that if we can get some reversal of those of the material costs specifically, that we can maybe even do better than that going forward.
So the $150 this year is, like, assuming no, no help from the inflation recovery?
Yeah, we didn't assume inflation recovery in that.
Mostly just the mix coming through in the higher margin businesses.
Yep.
25, you can kind of get the double whammy of both.
Hopefully.
Yeah.
I mean, you know, when I said that at the beginning of 2023, I thought that was pretty conservative to wait until 2025 for that. Now, we're approaching midway through 2024, still haven't really seen any meaningful-
Right
... inflation recovery, so maybe it's not as conservative as I thought 18 months ago. But, yeah, we'll see. I still think we can do better on material costs going forward.
Okay. So you think, you think there's still opportunity there? It's not like, oh, this inflation's kinda embedded forever.
Theoretically, as channels open up, as our supply chain improves as it is, you know, we should be able to be in a better position from a price standpoint with our vendors. And volume is always good for price, and if the macro remains stable, you know, it's logical that we ought to be able to get some of that inflation that we all dealt with, especially in the kinda 2022 timeframes, you know, some of that ought to come back on materials.
Nice. The margin goals you kinda gave long term were kinda on the gross margin line, and that should flow through to the operating margin line, too?
Yeah, we've said operating should be a little better than that, 'cause we should get leverage in SG&A as we grow, we think.
Great. Then switching to the other topic, with AirSeal and the da Vinci 5 launch. Curious, kinda any initial feedback that you've heard from the field from customers or anything that you think you've kinda learned since seeing the product, you know, on the market at this point?
Yeah, it's obviously early on that side of the equation, and probably not my place to comment on how their, their launch is going. I think what we know is it's what we said back in the second quarter. From our view, it's a next generation insufflator. We have not seen anything that has it replicate what you can do with AirSeal. And, the one thing we do know is AirSeal does work with DV5. That we have 100% confirmed. Pat spends more time with Salesforce, so... And he's head responsible for, for international, when we acquired AirSeal back in 2016. So Pat, any other comments you'd want to add on that?
No, Curt, I think you framed it well. Again, we—it's early days. We're getting feedback, and we're monitoring it closely. We continue to have a really good relationship with Intuitive. We continue to partnership, partner with them, and we're watching it closely.
When you say it does work with da Vinci 5, can you elaborate on that? Just like how it does?
So in the Xi robot, there's a device called ARS, which allows their port to turn into an AirSeal robotic solution access port. That same thing works on the DV5 port.
Okay, so the same port. Do you need the-- There was a connector piece, I think, you launched last year.
Yeah, a couple years ago.
A couple years ago. Do you need a new one of those, or does the old connection-
No.
-work?
Works.
Okay, great. And then, I guess, high level, you're trying to think through... You've got better feature sets. You're competing against workflow, really, and integration. Like, how are you thinking about that competitive landscape? You know, feature sets versus kind of the workflow that they have with integration.
Well, I'm certain there's somebody, some cohort of people who think that ease of workflow is the most important thing, but you have to recognize the medical community values clinically proven items, reduction in length of surgery, reduction in length of stay, reduction in post-operative pain scores. In fact, I think McKinsey just did a study that said the number one health system priority is reduction in length of stay. That is clinically demonstrated. All three of those are clinically demonstrated with AirSeal over millions of patient lives. There's no one else who has that. So if those things matter, we think we're still the winner in this marketplace against all insufflation devices that don't have that clinical outcome. So, how do you put that up against ease of use? I don't know.
I don't, I think one is an apple and one's an orange. They, they don't compare, so...
Going kinda deeper into laparoscopic surgery, like, you probably have experience in Europe there. I don't know how translatable that is in the US. Would love to hear that, but also, Curt, you know, trying to think about kinda repositioning kind of the iFS into the, the laparoscopic side of the, the business even, even more at this point.
Yeah, listen, when we bought SurgiQuest in 2016, they had 0% of their revenue outside of robotic surgery. Our last disclosure on that is about 40% of our revenue is outside of robotic surgery. And when we bought SurgiQuest, there was de minimis revenue in international. Today, international has a far smaller footprint of robots than in the U.S. market. We've been as successful with AirSeal outside of the U.S. as we have been in the U.S. We have victories in laparoscopic surgery in the outside of the U.S. markets. We have victories in the U.S. market. You have to remember, at the front of this is a sales representative who's chasing a customer, and sales representatives, like most people, are path of least resistance. They're gonna go where they can secure the sale the quickest.
If, for some reason, the robotic surgery approach slows down, they will pivot. As we continue to expand our sales forces and geographic sales territories shrink, they have to go deeper in their existing customers. Instead of walking in the front door and going to the robotic suite, they'll walk in and take a right and go to the laparoscopic suite. That is- that's just how this industry works, and that doesn't mean we're not helping educate people. And I- I'll hand it over to Pat and let him talk about some of those things we are doing, with our sales force and his experience internationally.
Yeah, again, Travis, clinical insufflation resonates in robotic surgery and laparoscopy. On the international side, absent the robotic installations happening, our sales forces have focused on clinical insufflation and laparoscopy… internationally, we've been doing as well in AirSeal as we've been doing in the United States from a growth standpoint. In the United States, we know clinical insufflation resonates in laparoscopy, and we have sales reps in the U.S. who have been winning on that. What we're doing now is educating the marketplace, having symposiums and medical education on clinical laparoscopy and the value it brings, and we're continuing to see the benefit of that happen.
Yeah, and people need to remember, we've been selling this for 8+ years. We've got a big depth of knowledge and experience internationally and in the U.S. We have a great sales team in the U.S. We have great sales teams outside the U.S. In fact, SurgiQuest acquisition is what allowed us to build the international general surgery channel that we were able to dump things like Buffalo Filter and other general surgery products into. So it, it's got a lot of institutional knowledge around this product and how to approach the market. So I think people have in their mind there's got to be some hard shift. That's not really what has to happen.
No, agree.
It... Yeah.
How's the kind of revenue per procedure for AirSeal? Has that been trending up or flat or just in the confidence that that revenue procedure that you book on AirSeal cases, kind of the consumable recurring revenue, is gonna kinda stay the same?
Yeah, I think it's, it's about $175 per case on a procedure basis, and that's similar OUS and in the US.
Yes. Yeah.
Great. And, when you think about, like, let's say a hospital does buy a DV5 in that OR room, they decide not to use AirSeal anymore. Like, are you helping them kind of redeploy that asset to another room in the hospital, so you can kind of keep that recurring revenue going?
Oh, oh, sure. That would be, like I said, the path of least resistance for the sales rep would say: "How do I redeploy this asset? Do I bring it over to Dr. So-and-so, who's been interested in it, but doesn't have the political clout to get one through the value analysis committee or through the acquisition process?" So yeah, we do that as a matter of routine on any equipment that it's kind of original purpose may have changed. So absolutely.
And then I know you kind of innovated... Think about innovation for AirSeal. You did innovate on the, the port with the robot, launched that a couple of years ago. Is there kind of a pipeline here for, for AirSeal and things you can improve upon over time?
There is, and that's just part of the CONMED offense, is continuing to innovate on the product portfolio, especially the mainstays of the product portfolio. We don't talk about what's in our pipeline. We prefer to have that show up at a trade show, show up at an industry event, show up at our sales meeting before it shows up in the market, so we can fully educate our teams. But people should trust, based on what we've done with the rest of the portfolio, internal innovation is a super important part of the company. You know, back in 2016, we had AirSeal. You know, fast-forward to 2024, we have AirSeal, Buffalo Filter, BioBrace, and In2Bones. So all four big acquisitions. What you don't hear as much about is the internal innovation.
If you were at Academy, you would have seen a new MIS bunion product. You would have seen a new sports medicine platform for the knee and the shoulder. That's all internal innovation around which we continue to grow our presence in the marketplace.
One of your competitors, Stryker, just on the earnings call last week, said smoke evacuation grew at kind of 50% for them. I don't know if their portfolio is really, it's not really a direct overlap or not, but just kind of thinking about, you know, what, how you interpreted that, that number, 50% growth in their quarter.
I think it's an emerging, growing market, and there's room for a couple parties at this point in time. We're pretty happy with our smoke portfolio, and it sounds like they're happy with theirs. We're. I don't know if I'd add anything else to that.
It's a big market, growing fast, and multiple players can win at the same time.
Yeah.
Great. On the base business, you know, obviously, another part of the story is, like, keeping the growth going and the base business. So kind of the confidence and kind of... You did talk about some of the new products you're launching, but anything else, I don't know if some of the larger companies have been taking share of or holding on to share a little bit harder than they were before, or just trying to get confidence that this base business can kind of continue to do the kind of the lower to mid-single-digit growth that it's been doing?
You know, let me try this one, Pat. I, I have talked often about every selling organization having a platform product around which everything else you offer looks just a little bit better. It started with AirSeal, and therefore, everything else in our general surgery bag looked a little bit better, and as we incrementally innovated on that, our presence in the marketplace grows. If you go to the orthopedic business, clearly a new platform in our sports medicine franchise is BioBrace. And if you walked by our booth at Academy a year ago on BioBrace Day and then walked by this year, where some of the same surgeons were up there presenting two-year data, it's been used in over 40 clinical applications in the body.
When we go in now and talk about rotator cuff repair, we lead with a product like BioBrace, but our new anchor system for the shoulder looks that much better. So it is about protecting that core portfolio, but bringing in that platform technology to really differentiate you in the eyes of the clinical community.
Travis, I'll just play on that again. We believe in the platform technology. We also believe in the trifecta of medical devices: innovate, medical education, and continuing to invest in your sales force.
Yeah.
Those three really work, and it only gets better when you have platform technologies you can wrap them around.
Absolutely.
That's helpful. And then In2Bones, kind of any update on that? I know there were some supply issues in In2Bones as well as kind of the legacy ortho business, like getting back on offense there. Just trying to think about how that's going at this point.
... Travis, I think we said at the end of quarter four, and we said in quarter one, that we were having supply challenges, and we would expect ourselves to be working through them in quarter one, continuing to get them behind us in quarter two, and get back on offense in quarter three and in the second half. We're on track to that. Nothing's changed since that.
Kind of both of those deals, you had In2Bones and Biorez, but kind of tracking the deal models at this point?
Yeah, I think we communicated when we did the acquisition of BioBrace, it was a million-dollar business. We said it would do $1 million last year, and then we raised it to high single digits. And then in our guidance for this year, it'd be double-digit millions, and we're tracking towards that. On the foot and ankle side, we continue to do well towards our model and feel good about that.
Then kind of one quick housekeeping question on Korea. You mentioned strikes in Korea. Other companies have mentioned it, too. I don't know, any update on Korea?
We don't know when the strike's gonna finish. We have a really good Korean business, and we're really proud of it. At the same time, we think we can weather any storm that would happen there with respect to that nurses' strike. So it won't impact Team CONMED. We've got a good team there, and we continue to do well there.
One question I'd wanna kind of ask all the procedure companies is, the market and total utilization of everyone's been really good, and I don't know if we're trying to kind of find a new normal, kind of post-COVID and some of the catch-up. Kind of any views on, you know, what's above normal, what's not? You know, is this normal, or are we gonna be kind of bracing for kind of a moderation in procedure growth, kind of moving forward?
So Todd and I had a discussion on this, and he brought up, I think, what is a really relevant point. I don't know if we're big enough to have a strong opinion on the overall procedure volume. We think the procedures are steady, stable, and consistent, and I think for the first time, I would throw that comment around the globe. We don't have areas where things are really spiking or things are really slow. There's just steady, stable, and consistency in the categories that we participate in: sports medicine, foot and ankle, general surgery, and the GI category. So in those four categories, we see good volumes. Are they 50 basis points higher than normal? I'm not sure I can recall what normal is anymore, 'cause that was 2019 and prior. That's forever ago.
But it's just steady and stable, I think is how I would define it.
Great. Anything else that you feel like I missed?
No.
All right, great. Thanks for joining us. It was a good conversation. Thanks.
Thanks, Travis.
Thank you.
Thank you, everybody.