Earnings Call: Q2 2021

Jul 28, 2021

Good day and thank you for standing by. Welcome to the Second Quarter Fiscal Year 2021 ConMed Earnings Conference Call. At this time, all participants are in listen only mode. After the speakers' presentation, there will be a question and answer I would now like to hand the conference over to ConMed Good afternoon, everyone. Before the conference call begins, let me remind you that during this call, management will be making comments and statements regarding its financial outlook and its plans and objectives, which represent 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 and the company's actual results may differ materially from its current expectations. Please refer to the risks and other uncertainties disclosed under forward looking information and today's press release as well as the company's SEC filings for more details on the risks and uncertainties that may cause actual results to differ materially. The company disclaims any obligation to update any forward looking statements that may be discussed during this call, except as may be required by applicable law. You will also hear management refer to certain non GAAP adjusted measurements during this discussion. While these figures are not a substitute for GAAP measurements, Management uses these figures to aid in monitoring the company's ongoing financial performance from quarter to quarter year to year on a regular basis and for benchmarking against other medical technology companies. Adjusted net income and adjusted earnings per share measures 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 posted to the company's website. With these required announcements completed, I will turn the call over to Curt Hartman, ConMed's Chair of the Board, President and Chief Executive Officer for opening remarks. Mr. Hartman? Thank you, Jonathan and Julie. Good afternoon and thank you for joining us for ConMed's Q2 2021 earnings call. With me on the call is Todd Garner, Executive Vice President and Chief Financial Officer. Today, we will walk you through our 2nd quarter results And provide an update to our full year outlook. We'll then open the call to your questions. Turning to our results. Total sales for quarter were $255,200,000 representing a year over year increase of 61.7% as reported And an increase of 58.2 percent in constant currency versus the same quarter in 2020. Given the COVID impact on the markets in Q2 of 2020, I wanted to also note that relative to the Q2 of 2019, Sales increased 7.1% as reported and 6.7% in constant currency. In that view, we feel this was a solid quarter Considering that various factors like vaccination rates and sporadic COVID shutdowns and disruptions impacted the Q2 of 2021 From an earnings perspective during the Q2, our GAAP net income totaled 13,300,000 This compares to a net loss of $27,400,000 in the Q2 of 2020. Excluding special items that affected comparability, Our adjusted net income was $22,200,000 during the quarter and our adjusted diluted net earnings per share were $0.71 each of which increased meaningfully versus our COVID impacted results in the prior year. Our global orthopedics business is improving as we projected. As expected, sports related procedures overall still remain below the pre COVID levels. The international export markets remain the most challenged relative to 2019, while international direct markets and the domestic business showed continued improvement in procedure specific results. As we said in our January outlook, we think our sports medicine business will take longer to return to historical procedure levels than the rest of our business. Global General Surgery again demonstrated strong results, growing when compared to both 2020 as expected, but also against 2019. We remain very happy with our global results of both AirSeal and Buffalo Filter and we anticipate continued strong performance from each of these products. General surgery performance remains in line with our January comments that indicated general surgery would recover faster than sports medicine. Overall, we delivered a very good quarter that aligned with our original guidance considerations, which included: number 1, Q1 seeing the biggest adverse impact from COVID disruption with that impact lingering into Q2, and we believe that was accurate. Further, while we are dealing with the impact of the Delta variant to include select market slowdowns, we believe governments and healthcare systems recognize that a measured slowdown There's a far better approach than implementing broad procedure cancellations when dealing with the spread of the virus. We also stated that global vaccine disbursement would take months. We believe good progress has been made, but there has been market variability in terms of both availability and acceptance of vaccines. And finally, we felt 2021 would be a transition year. We believe this remains true as markets navigate the impact of the Delta variant and perhaps potential future strains. In closing, I'm proud of the ConMed team and the progress we made during the quarter. More directly, my global leadership team has performed exceptionally well and while you always have areas of opportunity, The executive alignment has never been stronger at ConMed. Given the near and longer term opportunities and the strength of the business, We made a decision during the Q2 to accelerate sales force expansion across our business in select international markets And both the domestic general surgery and orthopedic markets. This work began in the Q2 and will be essentially completed in Q3. We've also increased our outlook to reflect the strengths we see in our business. Todd will provide more during his review of our outlook. The significance of that news should serve to underscore our confidence in our future and my confidence in this leadership team. I'll now turn the call over to Todd, who will provide a more detailed analysis of our financial performance and walk you through the increase to our outlook. Todd? Thank you, Curt. All sales growth numbers I referenced today will be given in constant currency. The reconciliation to GAAP numbers is included in our press release. As usual, we have included an investor deck on our website that summarizes the results of the quarter, our updated guidance and also provides sales results Compared to 2019 for those of you interested in that view. For comparison purposes, Q2 2021 had the Same sales days as 2020, but one less sales day than Q2 2019. We said in January that we expected 2021 to be a transition year and that it would likely take the full year for the sector to be in a post pandemic environment. Halfway through the year, we continue to believe that. For the Q2 of 2021, our total sales increased 58.2% compared to trough quarter of the pandemic a year ago. Our Q2 U. S. Sales increased 64.2% versus the prior year quarter. Our international sales increased 50.7% for the quarter compared to the prior year. Consistent with our expectations, The U. S. Is recovering faster than outside the U. S. State and federal governments in the U. S. Are allowing hospitals to manage their own capacity issues, whereas international governments still locked down selective regions based on spikes in case counts. We expect this dynamic to continue until vaccination rates improve. Worldwide Orthopedics revenue grew 72.9% in the 2nd quarter. In the U. S, orthopedics sales increased 90.7% And internationally orthopedics increased 63.1%. Total worldwide general surgery revenue grew 49.1% in the 2nd quarter. U. S. General surgery revenue increased 55.7 percent, internationally general surgery revenue increased 35.2%. Now let's move to the expense side of the income statement. We will discuss expenses and profitability excluding special items, which Include plant utilization costs, product rationalization costs, charges related to acquisitions and integrations, restructurings, manufacturing consolidations, amortization of intangible assets and amortization of deferred financing fees and debt discount net of tax. A reconciliation to GAAP numbers is included in our press release. Adjusted gross margin for the 2nd quarter was 55.4%, an increase of 210 basis points from the prior year quarter. We believe that the majority of the impact of the pandemic on our gross margins is behind us now as we move to the back half of twenty twenty one. However, freight costs are still elevated. We are working hard to mitigate price increases from our suppliers and we're watching the impact of inflation closely. Thankfully, the underlying improvements to margins are helping to mitigate these issues. As we look at the back half of twenty twenty one, We expect gross margins to be around 57%. Research and development expense for the Q2 was 4.4% of total sales. That's 110 basis point decrease from the prior year quarter, but on much higher sales. The dollar spent in R and D versus Q2 2020 were up 30.1%. 2nd quarter SG and A expense on an adjusted basis were 38.3% of sales compared to 46 2% in Q2 2020. We are now back at similar SG and A rates to revenue as we were in 2019. We are spending less on travel and meetings than we were in 2019, but we have many more customer facing employees than we did then. As Kurt said, based on the significant revenue opportunities ahead of us, we've decided to add sales resources to both general surgery and orthopedics between now and the end of A mid year sales force expansion is not typical for us, but we believe it is warranted based on the near and long term opportunity we have in front of us. And we believe we can make those investments and still deliver on our profitability commitments to shareholders in 2021, while increasing our growth profile in future years. Interest expense in Q2 was $5,800,000 on an adjusted basis. The adjusted effective tax rate was 21.0 percent in Q2. This was lower than we 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 expect our adjusted effective tax rate to be around 25% in the remaining quarters 2021. 2nd quarter GAAP net income totaled $13,300,000 or $0.41 per diluted share compared to a reported net loss of $27,400,000 or $0.96 loss per diluted share a year ago. Excluding the impact of special items discussed earlier, we reported an adjusted net income of $22,200,000 this quarter compared to an adjusted net loss of $1,900,000 in the Q2 of 2020. Our 2nd quarter adjusted diluted net earnings per share Accounts receivable days as of June 30 were 60 days compared to 82 days a year ago and 63 days 3 months ago. Inventory days at quarter end were 167 compared to 184 days a year ago and 178 days 3 months ago. Long term debt at the end of the quarter was $708,000,000 versus $725,000,000 as of March 31. Our leverage ratio at June 30, 2021 was 3.9 times and we are ahead of our schedule on our target for the year. Cash flow provided from operations for the 2nd quarter was $34,300,000 compared to $5,500,000 in 20.20 and $21,600,000 in 20.19. Capital expenditures in the 2nd quarter were 3 $8,000,000 in prior year quarter. We are very pleased with our cash flow and profitability trends. We have managed cash extremely well throughout the pandemic and we expect to continue to do so. We are carrying more inventory than we did pre pandemic, but believe that is wise given the expected rise in volumes and our focus on serving our customers. Finally, let's move to financial guidance. Today, we are increasing our full year revenue guidance to a range of $1,015,000,000 to $1,035,000,000 This compares to last quarter's guidance range of $1,000,000,000 to $1,030,000,000 and our original guidance for the year of $975,000,000 to $1,020,000,000 Specific to Q3, with the recent surge From the delta variant around the globe, we expect Q3 revenues to be similar to Q2. We are also raising our full year adjusted cash EPS guidance to a range of $3.15 to $3.25 This compares to the range of $3.05 to 3 20 that we provided on our Q1 earnings call and our original guidance for the year of $2.85 to $3.05 This new guidance incorporates our additional investment in sales force expansions. With that, we'd like to open the call to your questions and I'll hand it back to Jonathan. We'd like to ask that you please limit yourself to one question and one follow-up. You may get back in the queue as time allows. Our first question comes from the line of Rick Wise from Stifel. Your question please. Good afternoon everybody. It's nice to see such a solid second quarter. Maybe I'll start off with just the general trends. Obviously, As you said, Kurt, seeing a solid general surgery rebound, maybe just give us some color on, To use your line, Rich, how is how has customer engagement changed? How is it changing? What's different now and how do you see that trending as the rest of the year unfolds? Good to talk to you Rick. I think as we look globally, I'm going to try to answer this question on a global perspective. Some of the Latin American markets still remain pretty dynamic in terms of Surgery is being down and access still being very restricted. And then as you think through the quarter, there were various geographic Lockdowns, if you will, the areas around Toronto and parts of the UK at various times, etcetera. So those areas that variability is just every company is dealing with that and we're dealing with that as well. But in areas where COVID cases have been muted or vaccination rates have been higher. Accessibility has been very good for our sales teams And customer engagement as they're looking at their increasing procedure volumes has grown dramatically for our sales teams. And the enthusiasm to be doing the job that they were trained to do is certainly at the forefront. So accessibility, I would say has increased as the year has unfolded. Customer engagement has increased. There are still some areas where they're very tight and how they're running their organizations and We deal with that and we understand that. It's similar to how we run our organization in terms of accessibility to our facility. So we understand those restrictions in today's environment. But overall, I think we feel the trend broadly speaking is in the right direction. And the sales investment, Kurt, obviously, it is unusual for you to do it mid year. Can you give us any Color or flavor about in rough numbers the number of people or teams you're adding or any perspective and Sort of how you expect to deploy them? And I assume the impact is going to on the sales line would be felt more next year, Am I set up for next year more than this, I assume? I think that's a fair statement, Rick. Anytime you do sales force Expansion, whether it's direct reps or associate level reps supporting existing reps, those impacts tend to be a little further out in the future. With that said, I think everybody on the call understands that within the world of smoke evacuation, there is a lot of demand and Conmed is in of the market leading portfolio on a global basis. And we frankly need more feet on the street to support that. And On a positive note, I'm thrilled to say and we said it in the scripted comments, we're also expanding our domestic orthopedics business really largely based on what we're seeing in the marketplace In concert with the product portfolio that we've been working on and are introducing. And then outside the U. S, they're a little bit smaller in terms of the scale of the But there's 5 or 6 country markets where we're either taking the general surgery business direct or expanding our orthopedics presence. And I'm not going to give you exact numbers for competitive reasons, but they're double digit increases in all the businesses And on an absolute number and we're excited to be doing that right now and the sales organizations Recognize the support they're getting when we do this through new products. And I think it's been well received by the company. And just a quick follow-up for Todd. Just related to this question of sales expansion, SG and A as a percent of sales, 39% in the 1st quarter, 38% this quarter. I had assumed that might fall as a percentage of sales, but does the expansion even with improving sales levels in the second half, Do you stay more at this 38% of sales level or no, it could come down as a percentage of sales? Thanks so much. Sure, Rick. So we didn't guide this year to specific targets on SG and A as a percentage of revenue. This will be supported by revenue very quickly and we feel good about the leverage of our operating expenses As we move to the end of this year and into next year. Thank you. Thank you. Our next question comes from the line of Robbie Marcus from JPMorgan, your question please. Great and congrats on a good quarter. If we could start on the guidance here. I just want to make sure I understand it. You guys are always and Especially through COVID have been, I'd say more on the conservative side than some of your peers. So 3rd quarter Flattish with 2nd quarter and the guidance raised at the midpoint just a little below the beat of 2nd quarter. Maybe walk us through your thinking there. How much is conservatism? How much is what you're seeing in the market through July so far? And if you could quantify the impact of the sales expansion on EPS that would be helpful also. Sure. All right. Thanks, Robbie. Good question. 6 months ago, we talked about 2021, right, and felt comfortable giving guidance. There was a lot of uncertainties at the time, but felt like we had a good enough handle on what was going on out there to give you guys financial guidance. 6 months later, we still see the year the same way we did back in January with just a few adjustments. I would say, 6 months ago, we didn't expect the delta variant, right? So cases are a little higher sitting here at the end of July than we would have contemplated back in January. But the good news is the business has been fairly resilient through these periods of surges, Right. And so it doesn't really change how we see the back half, although we remain cautious about Where this goes and nobody really knows where it goes, but we're still holding the back half with the same vision that we had for the back half back in January. The other thing that I would say might be a little different, I think back in January, there was a prevailing thought out there in the market that the Q3 vacations that we see Typically, seasonally in this space would be reduced as Physicians were anxious to make up for lost procedures from last year. I think that Feeling has muted a little bit in the marketplace from what we're hearing and everybody sees it in their own Circle of friends and family, everybody is very anxious to take vacations and get back together with family. And so we do think there'll be a little more Of that typical seasonality that shows up than we thought back in January. Now The procedure should also be getting better, right? So that's why you end up we currently that's why we currently think Q2 to Q3 is probably A sideways move on revenue, where back in January, we thought it would be a step up from Q2 to Q3. And then the good news, of course, versus what we thought in January is we've over performed on the top and bottom in the first two quarters. And so what we've done in both of those quarters is take the over performance To the guidance, so we've passed that through with the one exception this time being, the sales force expansion, we think it Which we think is absolutely the right thing to do for the business and for shareholders. And so while it does cost us a few cents, which is the difference between the beat And the raise, we think it sets us up better for next year and we're still well ahead of our commitments for 2021. So that's how we thought about the guidance and hopefully that helps. Yes, that's great. I appreciate that. So I just want to make sure it's not like you're seeing a serious impact from Delta out there Today, but you're just remaining cautious considering it as a pandemic because we've heard from several of your competitors that they're not Seeing and they're not expecting an impact, but remaining vigilant. I just want to make sure that's the thought process. Yes. Well, again, it hasn't changed our view of the back half of this year that we had back in January. So we remain bullish on the improvement And step up that we'll see in the back half. I think to say that the Delta variant isn't affecting anything It can't be true, right? You're seeing hospital increases in areas around the world Related to the Delta variant. And as hospitals fill up, it makes them make capacity and priority decisions. And so of course it has an impact. The question is, is it enough to offset the NICE trend in procedure growth? We still think we're going to get that continued trend in procedure improvement despite The Delta variant being having a bigger impact than we thought the case counts would be Yes, 6 months ago. Great. And if I could slip one more in. You mentioned you're already back to percentage of Sales in SG and A where you were in 2019, but with a lot more feet on the street. How do we think about Your ability to keep that SG and A as a percentage of sales down and moving down with more people, But as maybe some activities return conferences and so on as we're thinking about the back half of this year and the exit rate into next year? Thanks. Sure. Yes. Look, that's a key part of how we manage the business, right? We've got to grow expenses Slower than we grow revenue. We understand that. We've been doing that. We're committed to do that. So we will The idea of adding these heads is to grow revenue faster than expenses. And obviously, there's a quarter or 2 where those resources aren't totally productive yet, but we think that's a pretty short time period. And as we move into 2022, We should be getting good leverage off of those resources. Great. Thanks a lot. Thank you. Our next question comes from the line of Travis Steed from Barclays. Your question please. Hi. Good afternoon everybody. So You said you were 6.7% in Q2 versus 2019. And the math that I was doing is the full year guidance It seems about 9% in the back half. So just want to put that in context for kind of where you're at now kind of June, July, If that's about where you're at now and you're assuming kind of more stable growth versus 2019 as you move in the back half, just kind of curious if you'd put any color On the back half versus the kind of the end of the quarter? Sure, Troy. We might need to revisit those numbers. I think If you take the midpoint of the revenue guidance and adjust for currency, I think you get growth in between 7% and 7.5% for the full year versus 2019. And so it's not a big step up From where we've been in the first half, but it is a step up. We definitely think the virus will have less of an impact on procedures In the back half of twenty twenty one than it has on the first half of twenty twenty one. So there is a step up in revenue growth versus 2019, second half versus first half, but I don't think it's as dramatic as you suggest. Okay. No, that's helpful. I'll check my math on that. And then on the 57% gross margins, it's already 100 basis points of kind of where you were pre COVID. Any color on how much of that's coming from kind of a more of a mix shift from Buffalo Filter and AirSilversus some of the underlying things that you're doing On the gross margin front and kind of any flavor of how to think about that kind of the opportunities that you have on the gross margin line? Yes. I mean, I think mix is at the top of the list of the driver. We've also we've talked over the last year, we've talked about how COVID has kind of forced us to get more efficient and get smarter in operations. At the same time, we've got this elevated freight costs And pricing issues that we've talked about and that everybody is dealing with in the world. So thankfully, we've made the improvements that we have up till now. And thankfully the mix is going in the right direction for us. As volume improves and hopefully as the logistics Channels open up around the globe, freight will come down, but what we based the guidance on for the last 6 months The year is what we can see now and we'll continue to manage it closely and try and Mitigate those increases as best we can. Okay. Last question is on the sales force expansion, strategically, is there something you're Seeing with the competitive landscape coming out of COVID where you think there's a bit more opportunity to take share from some of the larger players or just trying to think of the strategic decision there to do it now? No. Our decision around sales force really comes from the I would say the bottom up meaning those closest to the action the business leaders They're looking at the marketplace opportunity with the portfolio of products that they have both the acquired products like Buffalo Filter, but also the Organically developed products and there's just general enthusiasm for the product portfolio, which then leads into decision around Feet on the street and customer coverage and we've always been undersized relative to the Peer group that we compete within the marketplace are some really big names and More Feet on the Street is a long term part of this company's offense And we're just in a good spot to do that right now given our profitability, given the product mix and given the organizational leadership that all the businesses have Right now, so it's a good time for us to make this choice. All right. Thanks, Fred and Todd. Great quarter. Thanks Travis. Thanks Travis. Thank you. Our next question comes from the line of Young Lee from UBS. Your question please. All right, great. Thanks for taking our questions. I guess, first one, it's good to see that the U. S. Ortho business improved in Q2 sequentially, and same thing on the international direct side. But you mentioned the export international markets remain challenged. Can you maybe talk a little bit more about that dynamic and the differences you're seeing in those international markets and also the visibility on when those excellent markets can return to growth? Yes. I think speaking to ConMed's historical approach, we have direct Sales channels and we have export sales channels and the export sales channels tend to be in markets that maybe don't have Quite as developed of a healthcare system is what you might find say in Western Europe, or they historically tended to be on the general surgery ConMed always had a very strong orthopedic presence in the international markets where the healthcare systems were developed. So Our channel expansions in export have been really on both fronts. And then what we're seeing in the export markets on orthopedics is The COVID case counts just remain very high and hospital capacity is being consumed by those. So Procedures like soft tissue repair are just very low on the priority list in those environments. So we're patiently waiting. Our export partners are We don't want to settle them with inventory. I think we mentioned in our previous call about waiving some of their requirements Because we understand the pressures that are in their markets, we want to be good partners to them as they're good partners to their local hospitals. So It's really the variability around COVID, COVID caseloads. What's the outlook? That's a really tough question to answer. It's improved steadily, if not a little bit slow, but it's improving and we'll patiently wait For that improvement, I'm not sure I can give you any more color than that, Young, at this point in time. Okay, great. Really appreciate the color. And I guess maybe for the second one, just on smoke evacuation. You mentioned the Kentucky went last quarter. I know legislative actions isn't a major driver for the business. But I'm just kind of wondering, In the subsequent quarter, are you seeing any impacts of that legislation? Is it easier to get into accounts or Are there changes in the tone of the conversation? And any updates on some of the other dozen or so states that might have legislative updates in the second half of the year? The topic of surgical smoke To the credit of the societies in the marketplace, AORN and others, they have done a Fantastic job creating awareness on the health risk associated with surgical smoke. And as we've said Many times, the legislation is kind of wind at the back of an already strong wind. And In places where legislation has passed or been put into place, in some cases where there's teeth in the legislation, it may get somebody to move a little quicker. But there's already a lot of movement. I think everybody on this call is probably aware of the dynamics in the marketplace. It's a strong growth market and we're in possession of an incredible portfolio. And I think it just bodes well for everybody in the marketplace that legislation helps, but it's not essential To the success and there is a lot of activity around other geographies and legislation whether it's legislatively or through OSHA. But again, it's kind of in process and we just patiently wait for that to get approved. Todd, I don't know if you had any other comments on that. No, I mean, it's tough to predict who's the next across the line. I think there's a dozen states that are in the red There's a couple that seem to be on the 5 yard line, but we'll just wait to see who comes next. And yes, I mean, we already had a like we've said from the start, The market demand is leading the legislation. It's not the other way around. And so Kentucky was already moving towards Smoke evacuation in the general market legislation helps and hopefully there's teeth in that and they enforce it and that would be great. But we're responding to customer demand and welcome any legislation that comes. All right. Thank you very much. Thank you. Our next question comes from the line of Matt O'Brien from Piper Sandler. Your question please. Hi, guys. This is actually Drew on for Matt. Thank you for taking the questions. I just wanted to start off on the capital side Thanks. It looks like things have remained steady, but the growth rate did soften a little bit sequentially versus 2019 here. I know there's always some noise, but obviously the concern could be that some of the initial demand was pulled forward during the uncertainty of The pandemic is now kind of working its way through the system. So, maybe you could just speak to a little bit what you're seeing on the capital front and kind of how you're thinking about capital Internally from a modeling perspective. I think capital is driven by a couple of different factors. Availability of funds. We've said consistently, we don't think that there's a shortage of funding available. Prioritization of those funds, We think in 2020 early part of this year prioritization of funds were all around supporting of investments that would help with COVID caseloads. And then the 3rd item is kind of what I refer to as the basic wear and tear on existing equipment. So as procedure volumes pick back up, wear and tear on existing equipment increases as procedure volumes expand beyond the Baseline that a facility may have as they try to get work into the backlog of procedures, there's a demand for more equipment. I think We're moving into those categories, those last two categories. I do think procedure volumes have picked up. I think that's evident in everybody in the marketplace's results. And number 2, people are trying to work off some backlog here and that's going to increase wear and tear. So those two things to me Paint a good picture for what should happen with capital. Hard, very difficult to pinpoint exactly when that is. And I think the best thing we can do as a company is Have a portfolio that's ready for that. And we've talked about some new product launches on the capital side and the power tool system and the video side. And we see the market starting to be receptive to looking at those products. So I think we feel optimistic, but until the market Fully opens up, it's going to be a little bit slow to develop. Okay. Very, very helpful. And then on Aerosteal, I just want to ask a more longer term question. I guess looking back now Pre pandemic, you did add a couple of new indications to the label. Just as we're thinking about the future of Aeroseal In 2022 and beyond, anything new to be expecting from an indication perspective and any new geographies where you still need to roll out that product? Thank you. So right now we have indications and obviously in general Surgery and then in thoracic cavity and then in pediatric applications. There is some interest being expressed about Broader pediatric application indications, meaning smaller patients, which would involve a tremendous amount Clinical work because the smaller the body, the more issues you potentially get into with pressurization. So That would not be a quick turnaround. That would be a long term study clinical body of work that would have to happen. But again, We're seeing great success with AirSeal. And then geographically, I think it's more about the channel development and feet on the street. The partnership in robotics continues to remain strong and continues to be a mainstay of our U. S. Business and it's growing outside the U. S. And then the as we've said from day 1, the opportunity to get into general laparoscopic procedures is really The very large market and we've said before our international team has demonstrated the ability to do that and part of putting more feet on the street is to shrink territories and get people to focus on all opportunities that AirSeal presents. And I think we're well on that path. Thank you. Thank you. Our next question comes from the line of Richard Newitter from SVB Leerink. Your question please. Hi, this is Erin on for Rich. Thanks for taking your questions. I just have one here. I was just hoping that maybe you could talk about the backlog and maybe quantify, if possible, How much you think is still out there and if that could kind of give you a boost looking ahead into the back half of the year? Really tough to quantify backlog at this point in time, Aaron. I wouldn't even want to hazard a guess. I mean, we can If you call 2019 a normal market and you look at procedures, if somebody has got a good metric to aggregate These specific type of procedures that we mostly call on and look at where the run rates have been so far in 2021, which I don't think that data has been reported out, That would be the best way to go about calculating an estimation of the backlog. But I just don't I think I would hazard a guess at this point in time. I look at Conmed as A smaller company in a big market, our job is to be going after every procedure, whether it's backlog or not. And we've got a lot of market share to go after. So we're really focused on that. Okay, great. Thank you so much. Thank you. Our next question comes from the line of Mike Matson from Needham and Company. Your question please. Yes, sure. Thanks. So I got a few on the orthopedics business. So the slides say that you expect The orthopedics to grow at above market rates for the long term. But putting aside what happened last year with COVID and everything, looking back over the last few years prior to that, The business never really seemed to grow above market. It kind of grew maybe in line with the market at best. And Just wondering what it's going to take to get it to actually grow above market, your confidence and ability to do that? And Do you need to do some sort of M and A of some kind of higher growth products similar to what you did on the general surgery side to get there? Sure. And just before I go in, Mike, I'd just I'd remind everybody on this call that our orthopedics business is about 2 thirds outside the U. S, 1 third inside the U. S. So if you look at that split And you look historically at the international orthopedics business that segment grew above the market pretty consistently. Our domestic segment has been had a lot more variability. We've had quarters where we've gone up into the 6%, 7%, 8%, which I would say is above market, but we've also had quarters below and candidly in the negative. The U. S. Market has been a tougher Market for us to develop consistent performance. So it remains and Todd and I have said this Frequently, it remains a work in progress. There were some changes made last year. We're now running the business as a global orthopedics business. Looking at it globally, same approach in the U. S. As we're using internationally, very consistent focus on the product pipeline. I don't know if we've talked other than one other time in the last 5 years about sales force expansion for Domestic Orthopedics. We just Noted that we are expanding our sales force in the U. S. Market for domestic orthopedics. So we continue to focus on what I would call the basics, Product innovation, sales force expansion. No one should assume that we haven't looked at M and A for our orthopedics business. We have a great international channel. We have a large presence. We have a good channel in the U. S. It's just a lot harder space to Fine, great M and A that fits with our profile. So everything remains on the table to get this business To be more consistent specifically in the U. S. Market, I'm proud of what the team has done internationally and we just got a little more work to do here in the U. S. Market. Okay, thanks. That's helpful. And then just as far as the sales force expansion, both general surgery and orthopedics, I know you've provided a lot of commentary already on it, but maybe you could talk just a little bit about how you're actually deciding where to add the reps, which territories or hospitals, etcetera. And then how you're Or hospitals, etcetera. And then how you're sort of managing any risk around disruption as you layer in these additional reps? I think our approach this year is consistent with what we've done in years past. We look at where the market demand is and we look at Our results and whether we're looking at historical procedure volumes, where our products fit in and do our results Line up and say we're getting our fair share or do they not. And typically our sales force expansion targets those areas We're not generating the revenue that we would expect given the procedure base there where our products have overlap. And oftentimes you just have sales reps who have big geographic territories and they're making choices about how and where they spend their time. And so we try to take a very constructive approach that we're going to give them more time closer to home. We're going to carve off a piece of their territory, maybe a piece of somebody else's territory or another approach is to take a great sales rep and say, We know you can do more and we're going to give you a little bit of help, but down the road that may mean carving off piece of your territory as that sales associate takes on a full time Roll at some point in the future. So we're doing a little bit of everything there. But again, it's also supported by new product innovation, Either what we've released or what we see coming that we think can make a difference. Okay, thanks. That's real helpful. Appreciate it. Thank you. Our final question today comes from the line of Matt from KeyBanc. Your question please. Great and thank you for taking the question guys. Hey Kurt, first, does it matter to you if a procedure is performed in the ASC versus hospital outpatient. And is it a different sales process for you? It does not matter to me. And I think I can confidently say it doesn't matter to our sales force. They're comfortable going into the hospital. They're comfortable going into the ASC. Is it a different process? Yes, I would say there's a different process. The ASC, especially where you have surgeon ownership, though there are more ASC groups now, You tend to see a little bit different financial profile than you might see in the health, the large hospital systems. Large hospital systems can have more layers to get through both have what I would call the equivalent value analysis committees and decision making This is in trials and evaluations and throw in the mix that a lot of health systems now own their own freestanding ambulatory Surgery center. So there is some overlap there. ConMed developed part of our broader healthcare solutions team has an ASC approach. We're working from the top down and the sales reps continue to work at the street level. So it is addressing the customer and the venue that they see fit And offering products. Excellent. And then for Todd, on the gross margins especially exiting the year at 57% in the back half. It doesn't sound like there's a whole lot of mitigation of freight and logistics incorporated in that number. And so potentially that's actually a higher number for you. Outside of that, is that a good starting point for 2022, or is there just more typical seasonality in the first half versus the second half to consider? It's a great question. I'm not going to get into guiding 2022, but I will say, Yes. I mean, I think as we move to the future, we should be moving north in general, right? Now, there's a lot of Uncertainties and we need this macro environment to settle down a little bit. But yes, I think it's a fair it's certainly my assumption That the margin will be headed north, not south. Okay. And then lastly, you did that $30,000,000 of free cash So this quarter, you've had a very strong start to the year despite the inventory builds. I guess My question would be as we get into later this year into early next year, is M and A a potential consideration for you guys again? M and A has been a consideration since the day after we closed Buffalo Filter. We didn't turn the strategic development team off and they'd be very disappointed to hear me say anything different and we have a very good thorough Certainly as our leverage has gone down, our ability to look bigger has increased, but M and A has always been on that. That's just Part of our offense, it has been from day 1. So we continue to look for appropriate technologies. I think everybody on the call understands The market is really pricey, the IPO market is really heated up, never mind all the money going into specs. So being very disciplined is a key part of our offense, but M and A always is on the table here. All right. Thank you very much. Thank you, Matt. Thank you. This does conclude the question and answer I'd like to hand the program back to Curt Hartman for any further remarks. Thank you, Jonathan. And I just want to thank everybody for your time today and we look Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.