CNMD

CONMED Corporation (CNMD)

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CONMED Corp. (CNMD)

F3Q08 Earnings Call

October 23, 2008 10:00 am ET

Executives

Joseph J. Corasanti - Chief Executive Officer and President

Rob Shallish - Chief Financial Officer

Analysts

Raj Denhoy - Thomas Weisel Partners

Dalton Chandler - Needham & Company

James Sidoti - Sidoti & Company

Matt Miksic - Piper Jaffray

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2008 CONMED Earnings Conference Call. My name is Sean Fillet and I will be your facilitator for today’s call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions).

I would now like to turn the call over to your host for today, Mr. Joseph Corasanti, President and CEO. Please proceed, sir.

Joseph J. Corasanti - Chief Executive Officer and President

Thank you, Sean Fillet. Good morning. Welcome to CONMED Corporation’s third quarter 2008 earnings conference call. With me today is Rob Shallish, our Chief Financial Officer. After formal remarks, the call will be open for questions.

Before we begin, let me remind you that during this call we will be making comments and statements regarding our financial outlook which represent forward-looking statements that involve risks and uncertainties as those terms are defined under Federal Securities Laws. Our actual results may differ materially from our current expectations. Please refer to the risk factors and other cautionary factors in today’s press release, as well as our SEC filings for more details on factors that may cause actual results to differ materially.

You will also hear Rob and me refer to certain non-GAAP measurements during this discussion. While these figures are not a substitute for GAAP measurements, company management uses them to aid us 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.

Non-GAAP net income and non-GAAP earnings per share measure the income of the company excluding credits or charges that are considered by management to be unusual or outside of the normal ongoing operations of the company. These unusual items are specified in the reconciliation stated in the press release issued this morning.

With these required announcements completed, I can now turn to our results.

CONMED once again had excellent quarterly financial results. Here are the highlights for the third quarter of 2008: Sales increased 9.1% over the third quarter of ’07. GAAP diluted earnings per share grew to $0.36 per share, a 24% increase compared to EPS of $0.29 in the third quarter of ’07. After eliminating plant restructuring costs, non-GAAP EPS was $0.37 per share, an increase of 28% compared to the GAAP EPS $0.29 in last year’s third quarter.

Cash from operations continued to be strong. For the first nine months of the year, cash from operating activities was $55.8 million, a 57% increase compared to the first nine months of 2007.

Strong quarterly performance was driven by positive sales growth across all of our product lines. As we often mention 75% of our product portfolio is comprised of single-use medical devices while the remaining 25% consists of capital equipment such as our video assistance. While this ratio will vary slightly quarter-to-quarter, it is a good rule of thumb. In this just completed quarter, we had a good mix of single-use versus capital growth with our single-use devices growing 9.4% and our capital products growing 8.3%. This indicates to us that both surgical procedure rates and the demand for the types of capital products we provide were strong in the September quarter this year.

Now I will review each of the product lines in more detail. CONMED’s Arthroscopy product line consists of minimally invasive medical devices designed to repair soft tissue injuries in the joints, such as ACL repair in the knee and rotator cuff repair in the shoulder. This business is also referred to as sports medicine because many of the injuries giving rise to the surgical repair are caused by sports-related activities. In the third quarter of 2008, this product line grew 18% overall and 17% in constant currency compared to the same period last year.

This was clearly another very strong quarter for Arthroscopy products and was driven by 18.2% growth in our core Arthroscopy products and 17.5% growth in the imaging portion of the line.

Now let me move to the Powered Surgical Instruments line, which consists of electric, battery and pneumatic-powered surgical instruments used to perform orthopedic and other surgical procedures. Here we experienced revenue growth of 6.9% in the third quarter within this business especially strong were our large-bone Powered Surgical systems and disposables.

The Electrosurgery line had growth of 2.6%. This compares to double-digit growth in the first half of the year. The decreased growth was due to reduced generator equipment sales after experiencing 31% growth for these devices in the first six months of the year. On a positive note, Electrosurgical’s single-use product sales growth remained consistent with the first part of 2008 growing 8% compared to the third quarter of 2007. As a reminder, Electrosurgery is used in 80 to 90% of surgical procedures and we hold the number two market share position in this market. To reiterate, the 8% growth in single-use products indicates to us that surgical procedures continued in the third quarter at a cost and growth rate.

Switching to our Endosurgery line, which consists of a broad range of products enabling minimally invasive surgery of the abdominal region without making a major incision, third quarter saw a pullback from the double-digit growth of first half of 2008. Although the sales increase for the line was only 2.6% in the third quarter, we believe this lower growth is only a one-quarter phenomenon as the division is anticipating return to double-digit sales growth sales increases in the fourth quarter of this year.

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