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CONMED Corporation (CNMD) Q4 2023 Earnings Call Transcript

CONMED Corporation (CNMD)

Q4 2023 Earnings Conference Call

Company Participants

Curt Hartman - Chair, President and Chief Executive Officer

Todd Garner - Executive Vice President and Chief Financial Officer

Conference Call Participants

Rick Wise - Stifel

Robbie Marcus - JPM

Matthew O'Brien - Piper Sandler

Kristen Stewart - CL King

Vik Chopra - Wells Fargo

Mike Matson - Needham & Company

Young Li - Jefferies

Travis Steed - Bank of America

Presentation

Operator

Thank you for standing-by. Before the conference call begins, let me remind you that during this call, management will be making comments and statements regarding its financial outlook, its plans and objectives. These statements represent the forward-looking statements that involve risks and uncertainties as those terms are defined under the Federal Securities laws. Investors are cautioned that any such forward-looking statements are not guarantees of future events, performance or results.

The company's actual results may differ materially from its current expectations. Please refer to the risks and other uncertainties disclosed under the forward-looking information in today's press 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 non-GAAP or 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 and 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 adjustment items are specified in the reconciliation supporting the company's earnings releases posted on the company's website.

With these required announcements completed, I will now turn the call over to Curt Hartman, CONMED's Chair of the Board, President and Chief Executive Officer for opening remarks. Mr. Hartman?

Curt Hartman

Thank you, Jonathan. Good afternoon, and thank you for joining us for CONMED's Fourth Quarter and Full Year 2023 Earnings Call.

With me on the call is Todd Garner, Executive Vice President and Chief Financial Officer.

Today, I'll provide a brief overview of the financial and operating performance for the fourth quarter and the full year. Todd will then provide a more detailed analysis of our financial performance and discuss our 2024 financial guidance. After that, we'll open the call to your questions.

Overall, I'm pleased with our fourth quarter results, which delivered record revenue for CONMED. Total sales for the fourth quarter were $327 million, representing a year-over-year increase of 30% as reported, and an increase of 32% in constant currency. These growth rates are obviously aided by the fourth quarter 2022 warehouse disruption, which impacted each part of our business differently in the fourth quarter of 2022.

Fourth quarter earnings delivered GAAP net income of $33.1 million, an increase of 24% over net income of $26.6 million in the fourth quarter of 2022. Excluding special items that affected comparability, our adjusted net income was $33.2 million and our adjusted diluted net earnings per share was $1.06.

For the full year, sales reached a new record of $1.245 billion, representing a year-over-year increase of 19% as reported and 21% in constant currency. 2023 was a year of balanced growth when you look at the full year growth rates across Domestic and International, General Surgery and Orthopedics, and Single-Use and Capital. My perspective is that this speaks to the underlying strength of the entire product portfolio that has been built strategically over time.

2023 GAAP net income totaled $64.5 million compared to a net loss of $80.6 million in 2022. Excluding special items that affected comparability, our adjusted net income of $108.3 million increased 27% year-over-year and our adjusted diluted net earnings per share of $3.45 increased 30% year-over-year.

Looking back at 2023, I'm very proud of both the top- and bottom-line performance, which exceeded and finished at the top end of the original respective 2023 guidance. Early in the year, we quickly remediated the warehouse issues from late 2022, and I can confidently say our global distribution strategy has never been clear.

Our 2022 acquisitions performed well with In2Bones, now CONMED Foot and Ankle, delivering double-digit growth for the full year while absorbing the growing pains of supplier integration and leadership transition so common in private acquisitions. BioBrace platform is a game-changer and exceeded our expectations and as important has a great trajectory as we expand the market reach through sales channel expansion and geographic registrations.

Overall, the entire portfolio was strong, and in 2024, we expect the introduction of several new products across each of our businesses. And while I usually reserve the financial detail analysis for Todd, I'm proud of the team for driving our leverage ratio down to 4.1 times as our increased focus on working capital and overall asset management continues to improve.

In summary, 2023 was a great year for CONMED. Looking forward, I could not be more confident in our prospects to continue delivering top-line growth and leveraged earnings growth, driven by clinically differentiated solutions across our business. This stems from my confidence that we have a talented global team armed with an innovative high-growth portfolio which was built through a disciplined combination of organic and inorganic development across both our General Surgery and Orthopedics categories. The strategic outlook for CONMED remains strong and this will benefit patients, customers, employees and shareholders in the quarters and years ahead.

With that, I'll turn the call over to Todd, who will provide a more detailed analysis of our financial performance and discuss our 2024 financial guidance. Todd?

Todd Garner

Thank you, Curt.

All sales growth numbers I reference today will be given in constant currency. The reconciliation to GAAP numbers is included in our press release. As usual, we've included an investor deck on our website that summarizes the results of the quarter, the year and our updated guidance.

For the fourth quarter of 2023, our total sales increased 31.5%. As a reminder, during the fourth quarter of '22, we were dealing with our warehouse software implementation that affected our ability to ship product. For Q4, our sales in the US increased 33.3% versus the prior-year quarter and our international sales grew 29.0%.

Worldwide Orthopedics revenue grew 19.4% in the fourth quarter. In the US, Orthopedic sales grew 6.0%, and internationally, Orthopedic sales increased 29.8%. As we talked about last quarter, supply constraints in our domestic Orthopedic business, including our MTF allograft tissue, kept us from being on offense as much as we would like. The MTF supply returned to normal during the fourth quarter and we expect to be able to move more fully to offense on the rest of the Orthopedics portfolio by the end of Q1 2024.

BioBrace again delivered strong growth in the fourth quarter and has good momentum going into 2024. What we've previously referred to as In2Bones, we will refer to as Foot and Ankle going forward. As Curt said, we are currently dealing with normal growing pains in this business, which caused Q4 to be below trend, only growing in the mid -- I'm sorry, in the high-single digits. So, still above market, but below what we're used to and what we expect. We continue to expect this business to outgrow the market and be a double-digit grower for us in 2024.

Total worldwide General Surgery revenue increased 41.7% in the quarter. US General Surgery revenue grew 47.6%, while internationally, General Surgery revenue increased 27.8%. Obviously, these elevated growth rates are aided by easy comps from the prior year, but we continue to see the same trend of strong growth from our leading products on this side of the business.

For the full year of 2023, our total sales increased 20.9%, which represents 18.4% growth on an organic basis. For the full year, our US and international sales, both grew 20.9% versus the prior year, which is amazing from a balanced perspective.

Worldwide Orthopedics revenue increased 17.7% for the full year of 2023. In the US, Orthopedic sales grew 15.2%, and internationally, Orthopedic sales increased 19.2%.

Total worldwide General Surgery revenue increased 23.4% for the full year 2023. US General Surgery revenue grew 23.4%, while internationally, General Surgery revenue increased 23.5%.

Now, let's move to the expense side of the income statement. We will discuss expenses and profitability in the fourth quarter and the year excluding special items, which include charges for acquisitions and contingent consideration, termination of distributor agreements, legal matters, debt refinancing costs, restructuring and software implementation costs, amortization of intangible assets and amortization of deferred financing fees net of tax.

Adjusted gross margin for the fourth quarter was 56.4%, which is a 50-basis-point sequential improvement over Q3 and an increase of 220 basis points from the prior-year quarter. So, the product mix tailwind we're counting on is real and working. The challenges we had in Q4 in the US Orthopedic business affected gross margin. We also made some process improvements in one of our plants that drove some period costs that we recognized in the quarter.

For the full year, adjusted gross margin was 55.2%, a decrease of 10 basis points from 2022. While margin improved sequentially throughout the year, inflation experienced throughout 2022 was cycling through the P&L in the first half of 2023, offsetting the underlying favorable mix impact of the product portfolio.

Research and development expense for the fourth quarter was 4.3% of sales, 60 basis points lower than the prior-year quarter. For the full year 2023, R&D expense was 4.2% of sales, 30 basis points lower than 2022....

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