Okay, good morning, everyone. My name is Vik Chopra. I work on the Wells Fargo medtech team here. I'm pleased to announce management from CONMED for this session. Joining us from the company are Curt Hartman, Chairman of the Board, President, and CEO, and Todd Garner, EVP and CFO. Thank you both for being here.
Thanks, Vik.
So, you know, let's start with a few big picture questions. There's been some recent concern around macro weakness and potential recession. Have you seen any impact to your end market demand thus far?
You know, our most recent quarter, I don't think we saw anything that would indicate slowdowns in surgical procedure volumes in both general surgery and orthopedics, which are the two categories we participate in, in orthopedics, specifically foot and ankle and sports medicine. Obviously, in our quarter, we had some softness in our orthopedic side of our business, but that was more internally driven by our supply chain constraints. But generally speaking, I think we see things pretty much standard as they were in Q1 or as they were in 2023.
Got it. So, you know, let's, let's dive into those supply issues. Like you said, you talked about availability issues on the material side and supply chains in orthopedics, and, you know, I guess as of Q2, they were not yet back to normal. Are there any developments you can talk about since the Q2 call, and are things playing out as expected?
I don't think we're going to give any intra-quarter updates, Vik. What I would do is just kind of walk through a little bit of the history. In Q3 of last year, we noted supply chain challenges impacting our orthopedics business, both sports medicine and our foot and ankle business. We had laid out an expectation that we would clear those as we got into 2024, and we did on the foot and ankle side. We feel pretty good about where things stand relative to foot and ankle. The legacy sports medicine business has had some challenges that have drawn out a little bit longer than we had hoped.
So as we came out of Q2, we thought it was wise to kind of step back, readjust our expectations, and in our guidance, we have put in a level of confidence that we feel is realistic for where things were at the end of the half. We are making progress. We're very focused on executing. We've got a great leader and a great leadership team over our global manufacturing, and that's the focus, execution on that plan. Todd, I don't know if you'd add any other comments there.
Yeah, I think that's right.
What's your expectation for when these supply constraints get cleared?
I guess-
We built into our guidance that we should get through those by the end of this year. As we move into 2025, it should be behind us.
You're pretty confident in achieving that end-of-year target?
Yeah, that's the... We're focused on making that happen.
Do you think you'll lose any share this year or next year following the supply constraints?
You know, it's a great question, and it's one we look at a customer-level detail of what's going on with our customers, and we know that, especially in orthopedics, they don't reschedule procedures. These are implantable devices, and if the surgery is scheduled and you don't have the implantable, they're using somebody else. You just have to remember that typically they came to you for a reason. There was something in your product that they liked. There was something about your feature set that they liked, and it's not like they didn't know about the competitors in sports medicine prior to this issue. So typically, they switch, they make some commitments to the company they switch to, and when you get back in a full supply situation, they find their way back. Some people do it really quick, others take a little bit of time.
They hold you in the penalty box. Long term, if we do lose market share, it would be on, in my view, it would be on the fringes. It wouldn't be material to the overall long-term outlook of the company.
So would there be any changes to the commercial plans for these products as a result of the supply constraints, like, for example, discounting?
No. The pricing in the marketplace, I think people have to understand, in the U.S. market, it's typically under GPO or IDN contracts, and international markets are under tenders. Those contracts typically have a three-year lifespan with kind of renewal periods, so pricing is pretty well established, whatever the product is, and commercially, we're very focused on executing, and if we can find the customer an alternative, which sometimes you can in the implantable world, we will do that, and we feel very good about that, so I don't think backorder as a challenge materially changes our commercial strategy. We're very focused on executing, taking care of customers, getting product out the door.
Got it. Is there any risk of these supply chain issues spilling over into general surgery?
No, and I, I think we feel very good about the general surgery side of the business, and I, I think really, Vik, that question is... That's kind of a cover for the real question, which is: Is this gonna impact AirSeal or Buffalo Filter? And the answer is no. Both of those acquisitions, when we did those acquisitions, we were able to sort through that and redo those supply lines and put them in-house under our control, and we feel very good about our inventory levels and our product availability, both, both at the finished good as well as at the component level that goes into building those products, so I feel very good about general surgery business.
Got it. So just turning to your guidance for this year, you lowered the top-line guidance by about $30 million at the midpoint. Was the guidance cut all due to the supply chain issues within orthopedic surgery?
Yes. Yeah, that's essentially the only thing that was different from our expectations on how the year would play out, first half to second half. Essentially the change.
Okay. You know, I think you also said on your Q2 call that you expect similar growth in the back half of the year versus the first half of the year. Just help us think about how we should think about growth within the two segments in the back half of 2024.
Yeah, I think similar to Q1 or to the first half, so the relationship you saw, how general surgery was growing, how orthopedics was growing in the first half. That's essentially, you know, look, life happens, and it won't be exactly like that, of course, but from a material standpoint, we expect the second half to look generally like the first half in those two businesses.
So similar dynamic within the segments as well?
Similar dynamic.
Okay. And then just thinking about, you know, potential upside or downside to your guidance for this year. Just help us sort of frame out the upside case and the downside case as the way you see it?
Sure. You know, like always, it's gonna come down to what the markets do and what we do, or what the execution, right? So, if there are growth drivers that we've talked a lot about, the new acquisitions in orthopedics, the older acquisitions in general surgery, they have the ability to outperform, for sure. They also, you know, of course, things can go the other way. If the market does soften, things can go the other way. So we're focused on what we can control. We think we have a very healthy portfolio in what appears to us to be a healthy market. So, we're working towards those objectives.
Got it. So let's switch topics to AirSeal. On your second quarter call, you said that the percentage of surgeons that have returned to AirSeal after the initial committed number of procedures on da Vinci 5 is consistent with the percent of surgeons that chose AirSeal in the previous robot. Can you just elaborate on this, and was this in line with your expectations?
Yeah, it's exactly what we said, and I think it's exactly in line with our expectation. Listen, the best analogy or analysis I can offer you on AirSeal is what we said on the second quarter call last year. All the features and benefits that clinical insufflation, which is what AirSeal provides, clinical insufflation, reduction in length of surgery, reduction in pain, reduction in post-op recovery, all of those benefits, that is why customers choose AirSeal. That is why surgeons choose AirSeal, and it's clinically validated through numerous studies over thousands of patients and millions of use cases in the marketplace, since we acquired the product in 2016. None of that has changed. There is a new insufflator in the market. Standard insufflation has been around since the 1960s. It's very...
The process today is identical to what the first insufflators came to market offered, so that the differences between the product are very obvious from our chair. So there's a new product in the market. We're seeing it play out in the market. What we offered on the Q2 call was exactly what we thought would happen in the marketplace. Arguably, it's early. They are still very early in their launch. We continue to watch it. We are in all of those hospitals because of AirSeal. We're there. We observe the cases, we see the cases, we see the outcomes, and we feel very good about where our product stands today. Todd, I don't know if you'd offer anything in addition to that.
I think that's right. In our January call this year, while we were still in this theoretical phase, and there was a lot of concern in the market about this, we did put in an allowance for it to be worse than we thought it would be, and then than the early data shows that it is, so it's better than those expectations, but to Curt's point, from the start, you know, we've been confident in the differentiation of AirSeal, and now that this new insufflator's in the market, that differentiation seems to be holding up and making a difference in people's choices, and to Curt's point, it's early. We'll continue to watch it, but everything we've said about why, you know, why customers use AirSeal in the first place is the same reason why they're using AirSeal after they've had a chance to look at this new, this new entrant.
Are you putting numbers around the percentage of surgeons that are returning to you to ask for AirSeal?
Yeah, so, you know, if we're talking about robotic cases, prior to the launch of the new product, we had about 1/3 of robotic cases that used AirSeal as an insufflator. What we said on the call was we're seeing that those doctors who had chosen AirSeal before, they've, when they get the new robot, they make a commitment to use it exclusively with the full feature set for a number of procedures. And what we're seeing that is when they've met their commitment, and sometimes even before they've met their commitment, they're choosing to return to AirSeal. So we're seeing the similar rates of usage after the trial period that we were seeing before. So about 1/3 -
Okay.
is what the early data says.
Obviously, you're monitoring this closely, and, you know, you'll provide an update on the Q3 call. Just help us understand how easy or how hard is it to incorporate AirSeal with DV5?
You know, Vik, that's a great question, interesting question, and might be one to ask the robotics company. But, from our chair and from what we have read, end user manuals and IFUs, that capability is very easy.
Okay, got it.
It's essentially, as we understand it, it's what the surgeon is used to, right? If they were using the robot before with AirSeal, the connection still works. It's very similar to what they did with Xi. It's how they use AirSeal with the DV5.
Got it. You know, so I mean, I think, Curt, I think you said, you know, it's early days. It's just been a few months of the DV5 launch that are underway. But just what trends are you seeing with respect to AirSeal growth, which we just talked about now, and what are your expectations going forward?
Yeah, I think we tried to hit that on the Q2 call. Our trends are very consistent with pre-launch trends. I think we called out in the Q2 call capital sales in Q2 of AirSeal, which it all starts with selling the IFS box, were very consistent and, in fact, higher than what we had seen in the past, and you have to dissect this market. There's the U.S. market, which has a heavy concentration of robots. There's the international market, where robotic surgery is still very nascent, and we've been selling AirSeal internationally since two thousand and sixteen, so we've been selling that absent the robot, so we know how to sell both to robotic procedures and non-robotic laparoscopic procedures. Xi has been a big user of AirSeal, a big partner of AirSeal.
As Xi moves into international markets, as they continue to sell Xi, that partnership remains. So our trends are very consistent, and we don't see anything that's gonna change that.
Yeah, Vik, I just clarify for folks, because, post our Q2 call, when we did talk a lot about AirSeal capital. I've had a lot of investor questions about, "You talked about capital on the call, but you didn't talk about disposables. How are disposables?" So I want to be clear for everybody. There's been no change. We've seen no pause in any of the AirSeal business, right? It's been consistent with trends, as Curt said. The reason we called out capital on the Q2 call was not to just highlight the positive. It was because, you know, what you typically would see... and we've seen this before.
In 2018, there was a couple of competitors who were trying to respond to AirSeal, and they announced that they- so it was two different competitors at the same time, in the same month, I think it was May of 2018-
Yep.
said, "Here's our new insufflator. This is AirSeal equivalent." So they were trying to respond to the differentiation of AirSeal. And we did see in that month, or maybe a month or two, we saw the market kind of pause on capital purchases of AirSeal. Let's check out the new product. And after they checked out the new product, they came right back to AirSeal. So that's what you'd watch, right? When there's a new capital entrant, the first thing you would see from disruption would be a pause in capital purchases of AirSeal. It and you would that would make sense. And so the reason we called out, this is their first full quarter of being in the market, and we have not seen any pause in the capital purchase of AirSeal. We also haven't seen a pause in the disposables. So just to be clear-
Right.
We weren't trying to be cute with that disclosure. We were trying to be helpful in that that would be the canary in the coal mine, where, you know, if there was gonna be a disruption, that would be the first place you'd see it, and we haven't seen it yet.
I think building on that, in 2018, CONMED and AirSeal did not have the volume of clinical studies published that we have six years later. AirSeal, the technology of clinical insufflation, the clinical benefits to patient, surgeon, and staff, and payers, is very well demonstrated in the marketplace today. There's not a trade show you go to where people don't know about AirSeal. There's not a robotics event that you go to where people don't know about AirSeal. It's just a much more established technology in the marketplace.
And the surgeons that, you know, that are coming back, or maybe even surgeons that are using the built-in insufflator on DV5, like, what, what are you hearing from them? I mean, obviously, the surgeons are coming back. They like the product, but what, what can you share about that?
I can't talk about what their surgeons, their robotics users are doing. What I can tell you is AirSeal is not used in every case. We've said that from day one. AirSeal is used in deep gut, long procedures to maintain stable pneumoperitoneum so that the surgeon can consistently operate in a clear volume, three-dimensional volume, with clear visualization. That's what AirSeal brings, and it does it at lower pressure. And lower pressure, if you just think about the anatomy, less pressure on the venous structure, less pressure on the organs. That's all good clinically. Like, that's what AirSeal brings, and the longer the case, the more of that you want, i.e., low pressure. And so that, that's what brings surgeons to AirSeal. That is fundamentally, in a nutshell, what brings surgeons.
And they're able to also operate on larger body mass patients in a minimally invasive fashion because of AirSeal. They can't do that with standard insufflation. Standard insufflation cannot keep the cavity open like AirSeal with the constant pneumo coming in. So there, there's many, many differentiation points about AirSeal relative to standard insufflation.
Got it. Just one follow-up. I think you had said about 1/3 of AirSeal is used in robotic procedures. Is that the same internationally?
So let's make sure we get that ratio right. This is 1/3 of robotic procedures use AirSeal, so it's not the-
Got it.
It's not how you just stated it. Internationally, as Curt said, there's way less footprint of robots, right? But yeah, I think to Curt's point, and we highlighted this really as clearly as we could on the Q2 call, those deeper, longer procedures like hysterectomies, prostatectomies, nephrectomies, that's where the differentiation of AirSeal really shines through. So you might talk to a doctor who's doing a lot of hernia or, you know, simpler, closer to the surface procedures. They can be satisfied with standard insufflation, but those deeper, longer procedures really benefit from the differentiation of AirSeal, and yes, we see that both internationally and in the U.S. It's really about their procedure base, and it's... You know, docs, none of us know what we don't know, right?
A doctor who has used standard insufflation for their entire career, they may be happy with standard insufflation, and they may be very happy with the standard insufflation on the new robot because it's all they know, and it probably is comparable or maybe even a little better than what they're used to. But if they've been used to AirSeal and the benefits that it brings, they will notice that it's different. We believe, and what we're seeing early, is that they're choosing to have those clinical benefits that Curt described rather than go with standard insufflation.
Got it.
Just one clarification. I also think people have in their mind that it's AirSeal or this insufflator. Oftentimes, there's AirSeal and another company's insufflator in the robotic room. It's not one or the other. So it's very possible that the new robot with the integrated insufflator will be in the room with an AirSeal right next to it, and the surgeon preference, the case type, dictates which one they use.
Got it.
So, I think people have a-
Yeah.
If it's this, it's not that. That, that's not the clinical application.
Right. Yeah, I think that's, that's a helpful point to clarify. Maybe just switching to the P&L. Todd, I think you said you now expect 100 basis points of gross margin expansion this year. What would drive upside to that number?
Yeah, so we have a terrific mixed tailwind that's really. It's not a promise for the future. We've been doing it. You know, everybody was impacted by inflation through the pandemic. Our math is that the inflation impact to us between 2019 and 2022 was 400 basis points. If you look at our gross margins from 2019 to 2022 , they're flat. So our mixed tailwind covered 400 basis points of headwind during that time. As the inflation impact neutralizes, we're now seeing that tailwind show up in margins, and so it is less than we thought it would be.
Because of our supply chain issues that we've talked about, we are a little behind where we thought we would be, but we are growing around 100 basis points in gross profit in 2024 , and that mixed tailwind is not waning here. And so we expect good margins going forward, good improvement in margins going forward. Although, granted, we had said in the fall of 202 that we expect gross margins to be around 60% by the end of 2025 .
Now, as we have, you know, as we come up to, you know, we're 18 months or so from that time period, you know, it looks like we probably won't get quite to 60% in that time period, but it is still a mix, a significant mixed tailwind that's propelling our margins forward, so your question, in 2024, how can that be better? It all comes down to what I said before. If those growth drivers overperform, all of our growth drivers are accretive to margins, so the better they do, the better our margins will do. Volume always helps, of course, and so if the markets are strong and healthy, you know, that'll help, but it's, you know, our execution and what grows at what rates.
So I think you answered my follow-up question, was a 2025 target of 60%.
Mm-hmm.
So it looks like... I know you're not giving formal guidance, but that may not be on the table for next year.
Yeah, you know, these supply chain issues have slowed 2024 to obviously worse than we thought it would be. You know, still growing 5%-6% on the top, you know, mid-teens and EPS on the bottom. So still, by most metrics or standards, still a decent year-
Yeah
... but not the year that we anticipated having at the beginning of the year, and so that slowed us down. The other part of it was, you know, in the fall of 2022 , you know, I talked about that 400 basis points of headwind that we digested. I really thought that by from 2023 to 2025 , in that three-year span, I thought it was conservative at the time to think that we could get 100 basis points of that inflation back, that there'd be inflation recovery of a quarter of what we lost, right? And I thought that was very, very conservative, and when I put that kind of three-year target together, I thought I was being conservative in saying, "Let's assume the 100 basis points of inflation recovery doesn't come until 2025 ." So we did, in that assumption, was a pretty strong 2025 , with both continued mixed tailwind plus some inflation recovery, which at the time, I thought was very conservative.
Fast forward, we're coming into 2025 in the next six months or so. It looks less conservative. You know, we, we haven't seen a lot of inflation recovery. We've seen inflation stabilization, thankfully, but we really haven't seen it go the other way in getting any of that back. So now, as you look at 2025 and the assumptions we had in how strong the improvement in margins for that year, you know, I think we need to be a little more conservative than that model. So again, still a nice mixed tailwind, still margins improving. We're ahead of our pre-pandemic margins today. Most of our bigger competitors are promising that they'll be back to pre-pandemic margins sometime in the future.
Yes.
We're already ahead of pre-pandemic margins and going north. So we have a great margin story, but it is a little slower than we said in the fall of 2022.
Okay, so 60%, maybe not in 2025, but is that still a viable target for you?
For sure.
Beyond 2025?
That's the trend line we're on. We haven't put a new date on that. We'll give guidance for 2025 in January, but that is definitely the trend we're on. We're trending towards that.
Okay, got it. You know, let's talk about In2Bones. Just talk about what you saw, what trends you saw within the lower extremities market, during Q2. One of the larger competitors called it a softer foot and ankle market. Have you seen any softness in the market at all?
You know, we're familiar with that call-out. I don't think at the size of our business, we're quite feeling the ups and downs that the larger competitors may be feeling. Obviously, we had come into this year kind of getting to the tail end of some of our supply chain challenges in foot and ankle. We think we're through the majority of those. We're still working on global registrations outside the U.S. That was part of the integration plan. Those just take time, especially when you look at some of the markets we're trying to get into.
But we feel good fundamentally about our foot and ankle business, the comprehensive nature of the portfolio, the new products we've offered, and then the addition to that business of the BioBrace platform in recent quarters has been a great positive and will help further pull through what I would call the core foot and ankle products. Obviously, it's not a straight-line performance. There's the disruption that we had to deal with on the supply chain challenges, but directionally, we like where we're going. Directionally, we like the markets. This is a fast-growing market, high single-digit market, and has global appeal. So I think we feel very positive about our foot and ankle business. We need to see that show up here as we get into the second half and launch.
You know, to Todd's point, launching the margin profile benefit that that product brings is very important to get more scale there. So, those are the fundamentals of that business. So the same fundamentals that we had when we announced it in 2022 .
Okay.
Todd, anything else there?
And then just with respect to BioBrace, can you just talk about how the launch and uptake is trending in foot and ankle?
Yeah.
I know it's still early, but-
It's early. There's enthusiasm by the sales team. There's a lot of training on the product, right? It is a biologic. Its application is a standard procedure type, so the procedure type, the nuances to the procedure type are pretty straightforward, but understanding the biologic, understanding the construct, understanding the procedure, and doing the training is important, and so we're being very methodical in that, just like we did in sports medicine, very methodical. Want to ensure our sales teams, our marketing teams are fully up to speed. The good news is, because of what we went through in orthopedics, we know how to do that, and then you're going out, and you're getting customers, and again, very similar to the sports medicine market, you convince a surgeon to try it.
They don't, they don't just open it up to every procedure. They'll do a small cohort. They'll do one, two, three cases, and they'll follow the patient. They'll, they'll do a four-week, six-week, eight-week checkup, and they'll say, "Okay, I'm seeing what I thought I would see. Let's schedule some more cases." So early days, don't wanna get ahead of ourself here, but the enthusiasm of the sales team and the customers we've worked with so far is very high. So good, good news so far.
Okay. And how many implantations are you up to now with BioBrace?
We don't break it out on implantation level. What I would share with you about the product is there's over 40 different clinical applications. By that, I mean procedure type. We talk about it in rotator cuff and ACL augmentation because those are the large volume procedures, but you get into UCL and procedures, foot and ankle, and you start adding all these different glute medius repair, start adding all these different procedure types. We have 40+ different applications that surgeons have found for BioBrace, number one. Number two, and from our chair, it's ahead of the acquisition model that we built when we closed on this in August of 2022 . So two years in, we're ahead of the model and excited by that.
Two other things that are very important is the launch of instrumentation set for the shoulder. That is in process, working. We don't talk about products until they're in the market, so the only thing I'll share with that is it's in process and working. Then the other part is the clinical studies. Clinical studies are a little bit delayed from what we originally said. That's okay. We'd rather have the right clinical study than rush to get the wrong clinical study out. So our teams have kind of revamped that with marketplace, working collaboratively with surgeon community, both in the U.S. and outside the U.S., to come up with a book of clinical studies that will really be powerful as we go to global registration with the product.
So we've got a few international markets up and running, which is exciting, but there's still a lot more in front of us. So still very early days, but really, really pleased with the acquisition.
Got it. And on the instrumentation, that's specifically for shoulder applications?
Specifically for shoulder. That's where you really get in. If you look at arthroscopy, a rotator cuff repair, arthroscopy, under visualization, fluid management, it's about suture management. There is a ton of sutures going into that shoulder as you're doing the anchors and putting the BioBrace, call it the patch, if you will, in place. Suture management is critical. It's essential, and it can be very complicated when you look at it through a visualization system. So if we can create a device that helps the customer, the surgeon, with suture management and makes them efficient, doesn't slow them down, actually makes them more consistent, predictable, repeatable in the approach, we think that's a game changer for us, and that's what we're working on with customers. We want them to tell us that it's right.
Okay.
And that, that's what we're working on.
Any expectations on launch timing or approval?
We'll let you know when it's in the market.
Got it. Maybe just talking about leverage, you know, it was at the end of Q2 3.8x , just in line with our expectations. Are you still targeting low threes leverage by the end of the year?
Yeah. So I'm glad it was in line with your expectations. It was better than, you know-
Yeah.
We said it would be around 4x, so we were happy with 3.8x . We're ahead of schedule on the year. At the beginning of the year, we did say in the low 3s. With our guidance reset that we talked about earlier, that does impact that a little bit, but because we're ahead of schedule halfway through the year, I think we'll be below three and a half as we get to the end of the year. You know, I don't know if to call that low 3x. It's a little higher than we thought at the beginning of the year, now targeted for the end of the year, but still below three and a half and trending down.
Okay. And then just, you know, as you sort of work that leverage down, how are you thinking about financial flexibility at this point in your ability to do deals? You know, both In2Bones and BioRez are now organic, so just talk about your... You know, comment on your thoughts on M&A in terms of deal size and financial criteria, areas of interest.
Let me start, and Todd can handle the financial aspects of that. But we have a very active M&A team, corporate strategy, corporate development team, and each of our marketing teams is living in the marketplace as our sales reps. We are constantly looking for technologies that have an appropriate fit for our portfolio. And when I look at things like BioBrace, when I look at the foot and ankle business, AirSeal, Buffalo Filter, we're super excited, and we would do those over again in a heartbeat. That's the type of technology play we're looking at. I'm not worried about our leverage ratio nearly as much, because of the mix of our business. We're a high-mix consumable, so the cash generation is very consistent.
We understand as interest rates have gone up, that creates more concern in the investor base, and we wanna be mindful of that. Todd, I didn't leave you much time, but sorry.
Yeah. Yeah, I would just say, you know, we don't need to do an acquisition to keep our growth. You know, if we execute on the portfolio we have, we're gonna have a very strong growth profile, and that's the focus. And, and, you know, I think we're anxious to get our leverage down in the absence of an incredibly compelling. It would have to be really a compelling acquisition, I think, to get us to have leverage go back up.
Got it. I think we're at time, so thank you very much.
Thanks, Vic. Thank you, everybody.