CNMD

CONMED Corporation (CNMD)

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Exchange: NASDAQ
Industry: Health Care
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Conmed Corporation (CNMD)

Q2 2010 Earnings Call

July 29, 2010 10:00 am ET

Executives

Joe Corasanti - President and CEO

Rob Shallish - CFO

Analysts

Matt Miksic - Piper Jaffray

Dalton Chandler - Needham & Company

James Sidoti - Sidoti & Company

Robert Goldman - CL King

Valerie Brown - Alliance Bernstein

Presentation

Operator

Good day ladies and gentlemen and welcome to the second quarter 2010 Conmed earnings conference call. My name is Louisa and I will be your operator for today. (Operator Instructions) As a reminder this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Joe Corasanti, President and CEO of Conmed. Please proceed, sir.

Joe Corasanti

Thank you very much. Good morning everyone. Welcome to Conmed Corporation's second 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 continues to be a strong year for us. Our second quarter performance was highlighted by a multitude of successes. Specifically, GAAP diluted earnings per share were five times greater in the second quarter than in the second quarter of 2009 on a sales increase of 10%. Adjusting for unusual items in both quarters, non-GAAP diluted EPS increased to 88% to $0.32 per share. Additionally, year-over-year the GAAP gross margin improved to 51.7% compared to 47% and the non-GAAP gross margin improved to 52.3%, compared to 49.2%. Also we experienced solid growth in our single use product lines of 7% and exceptional growth in our capital product lines of 21.2%. Overall, sales grew 10% on a reported basis and 8.1% in constant currency.

Based on this quarter's performance, which builds on the fine results of the first quarter of this year, we believe that our business is stabilizing and returning to a state of steady consisting growth which is in stark contrast to what occurred in late 2008 and throughout 2009 due to the unprecedented economic conditions over that time. Although there maybe some continued variability within the individual product lines of our business, overall the single-use devices we provide to the healthcare industry continued to meet our sales expectations.

As for the smaller percentage of our business that falls under the capital expenditure budgets of hospitals, we experienced a significant increase in sales during the second quarter. This confirms our previously communicated belief that hospitals can only delay the purchasing, the kinds of capital products we sell, for a limited period of time. These products must be replaced in due course so that surgeries can continue without disruption.

With that overview, let's take a closer look at the second quarter's results. As you know, single-use medical devices primarily used in surgery are the main stay of our business accounting for approximately 75% of Conmed's revenues. These products are used everyday in medical centers around the world. In the recently completed second quarter, our single-use products grew 5.1% in constant currency compared to the second quarter of last year.

Our sports medicine arthroscopy business delivered an extraordinary quarter with single-use sales growth of 15.4% in constant currency. As a reminder, these are devices and instruments that repair torn and damaged soft tissue in joints, generally caused by sports activity. ACL repair in the knee and rotator cuff repair in the shoulder are common procedures. While these minimally invasive arthroscopy procedures are orthopedic by their nature, they should not be confused with total reconstruction of a hip or a knee joint involving large and expensive implants.

Patient population for arthroscopy is much different than the patient population for joint reconstruction. An injury requiring arthroscopy can occur in any age group and most patients will elect to have the surgical repair performed as quickly as possible. On the other hand, joint reconstruction is generally limited to a much older population that has had chronic arthritis condition for sometime. This population of patients generally elects to have the total joint replacement procedure performed when pain becomes unbearable. This tipping point is obviously subjective from person-to-person and much more susceptible to deferment as compared to a sports injury requiring more immediate attention.

Our reason for going through all of this is to point out that our arthroscopy business has had very strong growth so far this year as a result of new product introductions and procedure volume increases. This is in the face of some concern for investors about the overall orthopedic market growth. Fortunately for us, our segment of the industry dealing with sports injuries has done well.

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