CONMED Corporation Q1 2010 Earnings Call Transcript

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CONMED Corporation (CNMD)

Q1 2010 Earnings Call

April 29, 2010 10:00 a.m. ET

Executives

Joseph Corasanti - CEO and President

Robert Shallish, Jr - CFO

Analyst

Dalton Chandler - Needham & Company

James Sidoti - Sidoti & Company

Matt Miksic - PJC

Robert Goldman - CL King

Presentation

Operator

Good day ladies and gentlemen. Welcome to the First Quarter Earnings Conference Call. My name is Lumeda and I will be your operator for today. (Operator Instructions).

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

Joseph Corasanti

Thank you very much. Good morning, everyone, welcome to CONMED Corporation’s First Quarter 2010 Earnings Conference Call. With me today is Rob Shallish, our Chief Financial Officer. After formal remarks the call will be opened 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 represents forward-looking statements that involve risks and uncertainties as those terms are defined under the 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 in the press release issued this morning.

With these required announcements completed, I can now turn to my comments.

2010 has started off well for CONMED both operationally and financially. Specifically CONMED net income rose 63% over the first quarter of 2009 on a sales increase of 7.5%, adjusting for unusual items in both quarters, non-GAAP net income increased 53%, additionally year-over-year the GAAP gross margin improved to 52% compared to 46.5% and the non-GAAP gross margin improved to 52.4% compared to 48.3%.

Also we experienced double digit sales growth in the majority of our single-use product lines and although capital equipment sales were essentially flat compared to a year ago given the three or five year replacement cycle have been historically same. We believe that the performance of this area of our business should improve as the year progresses.

Importantly this is the third quarter in a row that we have achieved a year-over-year gains in financials performance, reaffirming our belief that the worst of the global economic crisis is behind us. With that said let’s take closer look at the first quarter results as you know single-use medical devices primarily used in surgery are the mainstay of our business accounting for approximately 75% of CONMED’s revenues.

These products are used everyday in medical centers around the world. Let me quickly review what occurred last year, in the first six months of 2009 our sales of this single-use devices declined 2.2% in constant currency. This reflected as we believe economic concerns on the part of patients who may have delayed surgery and on the part of certain distributors of our products who may have reduced inventory levels.

In the second half of 2009, the negative trend was reversed with positive constant currency growth of 2.1% resulting in flat single-use sales to the full year taking the affects of currency into consideration. Now here in the first quarter of 2010, the constant currency growth of our entire line of single-use products improved 4% over that of the first quarter of 2009.

Two of our product lines are Arthroscopy and EndoSurgery, accounted for over 1.5 of our single-use product sales for the quarter and had double digit revenue growth in constant currency for their disposable surgical products. Within Arthroscopy, the sales improvement was due to new product introductions such as the Shoulder restoration System which we have previously discussed.

In our EndoSurgery division the increase was due to continued market penetration. While our relatively weak 2009 first quarter in this segment did create a favorable comparison, we are quite pleased with our results in this segment. The weakest single-use sales performance came from the Patient Care line of products. The 8.1% constant currency decline is primarily results of our decision to eliminate certain unprofitable products from the portfolio.

Although this has an affect on the top line in the long-term the profitability of this division will be improved by eliminating lower margin products. Turning now to the 25% portion of our business that falls into capital budget cycles of our hospital customers, sales were slightly lower in constant currency than the sales in the first quarter a year ago.

Surgical video within the Arthroscopy group was down 2.9% constant currency, powered surgical instruments and Handpieces were down 4.1% while electrosurgical generators offset the decline by growing 7.4%. Purchases of these capital products are susceptible to variability due to the nature of the longer sales cycles compared to single use products which are generally dependent on the demand created by surgical procedures.

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