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CONMED Corporation (NASDAQ:CNMD)

Q4 2012 Earnings Conference Call

February 14, 2013 10:00 a.m.ET

Executives

Bob Yedid – ICR

Joe Corasanti – President & CEO

Rob Shallish – CFO

Analysts

Matt Miksic – Piper Jaffray

Jeff Cohen – Ladenburg Thalmann

Mark Landy – Summer Street Research

Bob Goldman – C.L. King

Jim Sidoti – Sidoti & Company

Dale Dutile – The Boston Company

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2012 CONMED Earnings Conference Call. My name is Lisa and I’ll be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I’d now like to turn the conference over to your host for today Mr. Bob Yedid of ICR. Please proceed, sir.

Bob Yedid

Thank you, Lisa. Good morning. This is Bob Yedid from ICR.

Before we begin, let me remind you that during this call CONMED’s management will be making comments and statements regarding their financial outlook, which represent forward-looking statements that involve risks and uncertainties as those terms are defined under the federal securities laws.

The company’s 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 management refer to certain non-GAAP adjusted measurements during this discussion. While these figures are not a substitute for GAAP measurements, the company’s 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 for benchmarking against other medical technology companies.

Adjusted net income and adjusted 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.

Please note that, I want to clarify a minor item in today’s press release, on page four of the release, for the 12 months ended December 31, 2012, the correct number of weighted average shares on a fully diluted basis is $28,653,000. There was no change in the fully diluted EPS for 2012. Again, the corrected number is $28,653,000. The company sent the press release with the correct numbers to Newswire service last evening, and then the Newswire service inadvertently repeated the same number for both basic and fully diluted shares. The Newswire service will be posting a corrected press release shortly.

With these required announcements completed, I’ll turn the call over to Joe Corasanti, CONMED’s Chief Executive Officer and President for his remarks. Joe?

Joe Corasanti

Good morning, everyone. Thanks very much, Bob. I am pleased to report that we completed the fourth quarter 2012 with solid operating results. Sales for the fourth quarter were $201.2 million, the first time in the history of CONMED that we’ve achieved sales in excess of $200 million in a single quarter.

Moreover, we had adjusted earnings per share of $0.52. This solid execution in 2012 resulted in record sales and record earnings per share for the company on a calendar year basis. The fourth quarter’s highlights included, sales increased 8.4% to $201.2 million over sales in the fourth quarter of 2011 and came in within our guidance for the quarter.

On an organic basis, excluding revenue from our MTF partnership and the Viking acquisition, sales were up 3.3%. Adjusted earnings for the quarter were $0.52 per share and were up 13% over the prior year period.

Please note that we were able to resolve an outstanding tax matter relating to our manufacturing facility in Finland in a favorable way for the company. The income tax benefit helped CONMED’s bottom line by about $0.04 per share. Even removing this benefit, we’re able to deliver EPS of $0.48 consistent with our previous guidance for the quarter.

On a GAAP basis, diluted EPS was $0.38 per share. Adjusted operating margin expanded to 11.5% of sales, an increase of 80 basis points over the fourth quarter of 2011, as we continue to execute on our program of plant consolidation and cost reduction across our business units together with the benefit from MTF.

Adjusted EBITDA margin expanded to 18.1%, an increase of 110 basis points over the prior year’s fourth quarter. Cash flow from operations was also strong in the quarter as we anticipated amounting to $33.9 million, with free cash flow of $28.4 million, which amounts to a $1 per share of free cash flow in this one quarter. Our Board of Directors declared a quarterly cash dividend of $0.15 per share, continuing the dividend put in place by the Board of Directors earlier in the year.

Operationally, our team achieved steady execution across our businesses, which resulted in sales, which were within our previously guided range. Gross and EBITDA margins expanded nicely and we delivered EPS that was in-line with our guidance. While we continue to see pressure on healthcare utilization based on our discussions with customers, we are pleased that our capital equipment sales in Q4 were about even year-over-year on a constant currency basis. The second half of 2012 showed a stable market for capital equipment sales year-over-year as compared to a decline in the first half of 2012. Before we get into our product line performance, I would like to update investors on a few initiatives.

First, the Viking medical business is operating right in line with our expectations. The addition of Viking’s line of 3D high definition surgical video products is a highly strategic addition to our general surgical imaging franchise. In order to leverage this product line, we are training our Endosurgery and components of our arthroscopy sales forces to sell the new 3D systems.

Our arthroscopy sales force has been selling CONMED 2D systems for many years and so they are very well trained in making capital equipment sales. The 3D system allows them to provide a broader product line to general surgeons. The Endosurgery sales force is being trained to sell the Viking’s 3D system to two primary specialties, general surgeons and gynecological surgeons. By definition, this training effort will be expensive since the Endosurgery sales force has traditionally sold only single used products.

Today, the Viking Systems is used by surgeons doing complex minimally invasive laparoscopic surgery with applications in urologic, gynecologic, bariatric and general surgery. We believe that the Viking Systems is the only standalone 3D laparoscopic vision system available today that is both FDA cleared and CE marked, which allows CONMED to take advantage of our global sales footprint.

Viking’s 3D HD system is uniquely positioned to fill the gap between conventional 2D HD systems and expensive 3D-HD visualization systems that are available only as part of a highly priced robotic system. Second, one of the key elements of CONMED’s corporate strategy is to expand our margins by selectively reducing costs.

For all of 2012, our adjusted EBITDA margin improved by 140 basis points to 17.4%. We’re pleased to report that we have completed the closure of our Santa Barbara facility, manufacturing has been moved to our existing plants in Mexico and Florida, while R&D, sales and marketing functions have been consolidated at Viking’s headquarters in Massachusetts. In addition, we continue to make progress with the consolidation of our Tampere, Finland, manufacturing plant into our United States locations. Management will continue to seek opportunities to reduce costs in our manufacturing and SG&A functions on an ongoing basis. This effort complements our efforts to grow the top-line and improve our gross margins through the introduction of new products.

Third, we’d like to update each of you regarding our association with MTF for the distribution of sports medicine allograft tissue. MTF, a non-profit organization, is the largest tissue bank in the country, and CONMED became the exclusive worldwide marketing representative for MTF sports medicine tissue at the beginning of 2012. For the fourth quarter of 2012 and the full year, revenues associated with this partnership were $7 million and $28 million respectively. We’re excited about the ability to offer MTF’s allograft sports medicine tissue since it provides us with a complementary product offering in sports medicine and enhances our relationships with our physician customers.

We are pleased with the operating results for full-year 2012 that reflect execution by the CONMED team. Major accomplishments include the following; sales of $767.1 million grew 5.8% year-over-year on a reported basis, equal to 5.7% on a constant currency basis, driven by new revenues from the MTF partnership and Viking revenues principally in Q4 along with organic growth.

Adjusted EBITDA margins expanded 140 basis points to 17.4%. Adjusted EPS is up 20% to $1.80 and free cash flow totaled $73.7 million. In light of CONMED’s record sales and earnings and long-term track record, I thought it would be useful to put in perspective the key attributes that made CONMED an attractive and well-positioned company in the markets we serve.

First, we are a technology-based surgical device company, serving surgeons and healthcare facilities around the world with sales exceeding $0.75 billion. We hold number two or number three market share positions in our key products line. Second, CONMED has consciously shifted its mix to single use products that provide an ongoing stream of sales every day. These comprise about 80% of our sales, the remaining 20% is capital equipment sales that drive the use of our single use products in a razor-razorblade model.

Third, over 60% of our sales come from the orthopedic specialties of sports medicine and powered surgical instruments whose markets enjoy relatively attractive growth rates. Our fastest growing product line is sports medicine joint repair that has grown at a compounded rate of 10.8% in the last three years, including MTF and new products such as our successful shoulder restoration system. Excluding MTF, the organic compounded rate of growth is 6.8%.

Fourth, CONMED is truly a global company with a 50-50 split of sales between U.S. and international market. We sell direct in 16 countries including China, complemented by distributor relationships that allow us to sell in over 100 countries. We are focused on growing sales in emerging markets in Asia and the Americas with 16% growth in the fourth quarter and 8% for the full year in these geographies.

Finally, we have delivered over 15% growth in adjusted earnings per share in each of the last three years. This solid earnings performance and the company’s strong cash flow allow us to reinvest internally, seek new technology and tuck-in acquisitions and allows us to return cash to shareholders through dividends and selective share repurchases.

On this last point, in addition, to our regular dividend of $0.60 per share on an annualized basis, the company has and will continue to buy CONMED’s stock in the open market. Subject to market conditions and provisions of our credit agreement is part of the approximately $50 million of stock repurchase program announced on our previous conference call.

Rob will give you more details on our progress, on these repurchase program shortly. Overall, from an operational and financial basis, we remain extremely positive about the direction of CONMED.

I will now turn the call over to Rob Shallish for a further review of the financials. Rob?

Rob Shallish

Good morning and thanks very much Joe. As Joe mentioned, the fourth quarter continued the strong earnings and cash flow trends seen in the first three quarters of the year. Also as a reminder, the fourth quarter is typically the strongest quarter of the year for CONMED.

In the December 2012 quarter, sales grew 8.4%, or 7.8% on a constant currency basis, while adjusted earnings per share increased 13%. For the full year of 2012, sales grew to a record $767.1 million, an increase of 5.8% at about the same rate on a constant currency basis and as Joe mentioned earnings per share on an adjusted basis were up 20%.

The fourth quarter sales totaled a record $201.2 million compared to sales of $185.6 million in the fourth quarter of the prior year. Excluding the $9.5 million of revenues from MTF and Viking, organic sales increased by 3.3% due to continued solid increases in single use products along with a modest decline in organic capital equipment sales.

We are encouraged by the relative stability of capital equipment sales in the second half of 2012 compared to the prior year period to declines that we experienced in the first half of 2012. By geography, fourth quarter sales in the United States grew 6.4% on a reported basis, but excluding MTF and Viking, organic U.S. sales declined 1.1% primarily due to lower capital equipment sales.

CONMED’s international sales grew 10.6% on a reported basis and 8.5% organically. While sales growth in Europe was generally flat compared to the fourth quarter last year, we experienced robust growth of over 16% in both the Americas and in Asia. International sales continued to make up about one-half of our business.

Excluding restructuring costs, gross margins of 45.6% in the fourth quarter were higher by 210 basis points versus the fourth quarter of 2011. We are pleased with the gross margins in both the third and fourth quarters of this year, as they represent a solid increase over the first half of 2012 and the prior year. The addition of the sports medicine allograft tissue as part of our MTF partnership and continued improvement in our manufacturing efficiency are the primary drivers of this margin improvement.

Selling, general and administrative expense as a percentage of sales was 39.7% in the fourth quarter compared to 37.9% in the same quarter last year. The increase was primarily due to selling expenses for the MTF allograft tissue product line. We estimate these additional expenses at approximately $4 million in the quarter. Research and development spending of $6.9 million for the fourth quarter was down modestly versus the $7.2 million in the fourth quarter of 2011. We only seek to fund specific research projects that meet our internal criteria.

Due to strong sales growth in the fourth quarter, this modestly lower spending translated into R&D as a percentage of sales of 3.4% compared to 3.9% in the fourth quarter of 2011. We think it is more relevant to look at R&D spending on a full-year basis. For 2012, R&D spending of $28.2 million was just slightly down compared to the prior year.

Overall, the adjusted operating margin in the fourth quarter of 2012 grew approximately 80 basis points to 11.5%. For the full year, adjusted operating margin also increased by 60 basis points to 10.7%. We continued to generate solid improvement in the adjusted EBITDA margin. In the fourth, quarter adjusted EBITDA margin increased 110 basis points to 18.1% of sales. GAAP EBITDA margin was 14.3% of sales. The reported income tax rate in the fourth quarter was 30.2% reflecting the favorable resolution of European tax matter and the rate was 31.9% for the full year of 2012.

We have discussed in the past, the company’s favorable cash tax rate. 2012 was no exception with a cash tax rate of approximately 18%. As we look to 2013, we estimate a book tax rate of approximately 35% and a cash tax rate of approximately 20% of pre-tax income.

Turning now to efficiency matters, as Joe mentioned previously, we have completed the closure of our Santa Barbara facility with the consolidation of R&D sales and marketing functions at Vikings headquarters in Westborough, Massachusetts. We’re also consolidating the manufacturing operations from our Tampere, Finland location into our United States locations. The restructuring activities for the Tampere plant are ongoing and will be substantially completed by the end of 2013 as we make an orderly transition. We anticipate that the Tampere consolidation will result in annual savings of approximately $4 million once completed and we are already receiving some of these financial benefits now.

For the fourth quarter of 2012, adjusted earnings per share were $0.52 per share compared to $0.46 per share in the fourth quarter of 2011, representing a year-over-year increase of over 13%. The adjustments for unusual items of $6 million in this fourth quarter are reconciled in the press release issued this morning and include costs associated with the ongoing manufacturing and administrative consolidation programs as well as acquisition costs related to Viking. For the full year, the company incurred unusual items of $17 million in these same areas. As we continue our efficiency programs into 2013, we anticipate incurring pre-tax restructuring costs of between $8 million to $10 million on the consolidation of the Tampere facility and other projects.

Turning now to cash flow, cash provided by operations was very strong at $33.9 million in the fourth quarter as we anticipated and was the best quarter of 2012. For the full year, CONMED generated cash from operations of $95.2 million and free cash flow of $73.7 million. At $2.57 per share of free cash flow, this is 82% higher than the reported earnings per share. As of December 31, 2012, our cash balance stands at $23.7 million. We continued to make improvements to working capital in this fourth quarter. Days in receivables declined to 63 days at December 2012 from the 66 days at December 2011.

Inventory decreased by $12.2 million compared to December 31, 2011, even in light of the higher sales levels. Further, the day’s investment in inventory decreased to 156 days at December 2012 compared to 173 days at December 2011. With regards to our share repurchase program, the company bought shares in the open market in quarter four and under a 10b5 program in January and February of this year. Since October 25, 2012, we’ve repurchased 556,000 shares of stock for $15.9 million at an average price per share of $28.60.

It is management’s intention subject to market conditions and provisions of our credit agreement to repurchase approximately $35 million of our stock over the next 3 months to 6 months. Please note that on January 17, 2013, CONMED expanded its senior credit facility from $250 million to $350 million in part to fund the stock repurchase program, while retaining our financial flexibility to seek prudent and tuck-in acquisitions.

Finally, as of December 31, 2012, the debt-to-book capitalization calculation was 21.1%, marginally higher from the 20% at December 31, 2011, as a result of the borrowing associated with the MTF transaction in January 2012 and the Viking medical acquisition that closed in late third quarter.

Now let’s turn to guidance for the full year and first quarter of 2013. We are reiterating the sales and earnings guidance for 2013 that we provided on our third quarter call. Adjusted earnings per share for 2013 is expected to approximate $1.80 to $1.90, while 2013 sales is expected to be in the range of $785 million to $795 million. The sales increase is approximately 3% on a reported basis and 4% in constant currency.

As we look forward to 2013, while we remain encouraged by our businesses, we are cognizant of a number of external headwinds for CONMED. First, we continue to see softness in the world economy and flat to only modest increases in healthcare utilization. It is important to remember that CONMED generates almost 50% of its sales from international markets, so we are affected by global trends. Second, the imposition of the 2.3% excise tax on medical devices sold in the United States will cost the company approximately $7 million pre-tax or about $0.17 per share for 2013.

Finally, foreign currency exchange rates are less favorable today than the FX rates at which we hedged our sales in 2012. The hedges that we have in place for calendar year 2013 are at approximately $1.30 to the euro as compared to hedges at $1.41 to the euro that were in effect for 2012. Note that approximately 12% of our sales are based in euros. Doing the math, this FX change results in approximately US$7 million fewer because of the FX change, translating into an approximate $0.08 per share reduction in earnings per share. So the combination of the medical device tax and the FX rates have a $0.25 negative effect on the projected 2013 earnings per share. Without these two items, adjusted earnings per share would have been expected to grow between 14% and 19% over 2012.

While we believe we will be able to partially offset these external headwinds through growth of our core businesses including the introduction of new products, the continuation of our cost reduction programs, and through share buybacks, the anticipated earnings per share growth in 2013 is expected to be somewhat less than what we would normally expect without these factors. Effectively, these headwinds especially those driven principally by the medical device tax are causing us to reset the base from which management will seek to grow earnings per share by approximately 15% annually in line with our long-term strategic plan.

From the perspective of margins, the long-term goal of the company is to increase operating margins by approximately 100 basis points per year. However, given that we anticipate a lower rate of growth and healthcare utilization in 2013 due to the weak global economy. This translates into modest top-line growth for CONMED and makes it difficult for us to achieve this long-term objective.

For 2013, we continue to anticipate that operating margins will expand by approximately 50 basis points, excluding the effects of the medical device tax. Beyond next year, we are maintaining our long-term goal of expanding operating margins by approximately 100 basis points per year and will do that via our core strategies – introducing new products, making improvements in existing products, aggressively managing our cost base, and taking advantage of what we hope will be a resumption of better economic growth in 2014.

Within the context of our annual guidance, for the first quarter of 2013, we expect sales will approximate $192 million to $198 million and an adjusted diluted earnings per share will be in the range of $0.42 to $0.47. Please note that there is one less sales day in 2013 first quarter compared to the first quarter of 2012.

Overall for all of 2012, we are pleased with CONMED strong 20% growth in adjusted earnings year-over-year and $95 million in cash flow from operations. Going forward, we are highly focused on operations and executing our strategy in order to drive shareholder value.

With that, I will now turn the call back over to Joe Corasanti for final remarks before we open the lines for questions. Joe?

Joe Corasanti

Thanks Rob. Let me make a final comment on our long-term goal and our track record of growing earnings at CONMED Corporation. I’d like to remind everyone that CONMED was able to deliver EPS growth of 15% or greater in each of the last three years on a low single-digit growth. The impact of the medical device tax and changes in foreign exchange rates are headwinds in 2013.

However, looking forward to 2014, we believe that with modest organic sales growth and neutral FX, we expect to get back to our long-term goal of growing EPS approximately 15% annually. So thank you very much for participating in the call today.

At this point, I’d like to turn to open the call up for any questions that you may have. Operator?

Question-and-Answer Session

Operator

Your first question comes from the line of Matt Miksic with Piper Jaffray. Please proceed.

Matt Miksic – Piper Jaffray

Hey, good morning. Thanks for taking our questions.

Joe Corasanti

Good morning, Matt.

Matt Miksic – Piper Jaffray

Joe, a couple just on the end markets, you had given some color in terms of sports medicine and capital kind of speaking generally. Could you expand and a little bit on looking forward where you think the sports medicine business kind of settled out here, is this just a three or four – 2% or 3% grower and you will do at or better than that or does it continue to – does it improve at all from here? You gave some color given the historical growth of that business line and then maybe Rob, if you could give your latest, things are not as bad as we thought as they were in the back half in capital, but some color maybe as to how that’s changing, why it’s changing if you’re expecting to kind of continue to improve here, and then I have just a couple of quick follow-ups?

Joe Corasanti

Sure. Matt, well, sports medicine capital that’s our video equipment. So we saw improvement and that it was flat for the year. It’s kind of interesting, we’re seeing Europe has definitely flattened out. However, we’re getting signs that in Spain for example, they plan on spending on capital, which is a surprise, Japan as well. So it’s a little bit mixed out there, but I think for this year, we’re forecasting flatness in sports medicine capital, which is the video. We think that the Viking acquisition could give us a leg-up on selling our 2D capital as we mix it and bundle it perhaps with the 3D offering. But I think in terms of capital, we’re cautious – we’re continuing to be cautious this year.

For the rest of sports medicine which is the majority of the business, the single use products, we’re seeing good growth. We announced that in the prepared remarks and we think the market grows around 5% for sports medicine and we’ve been managing market growth or even a little bit better as a result of new product introductions like SRS and Sequent and Y-Knot product, and we think that will continue.

Matt Miksic – Piper Jaffray

Great. And then the follow-up, you mentioned Viking and I wanted to try to get a sense of couple of things, maybe where – you talked a little bit about how this fits between traditional 2D endoscopy and visualization and then robotic. Can you give a sense of sort of the target hospital or the clinician or is this a number of beds, size of center, volume of center, is it something that maybe gets more uptake in sort of specialty surgery centers, maybe just a little more color as to where you see the optimal target of this fitting in and where the run rate is. I’m curious because there was some data on the revenue run rate when you acquired the asset, I’m wondering how the revenues are kind of matching up against that so far?

Joe Corasanti

Right, in terms of the run rate, it was about $11 million or $12 million business. Most of it is OEM equipment. The 3D technology was really just taking off. The 3D offering is primarily a specialty instrumentation is going to be used in complex laparoscopic surgeries, urology and gynecology. And it provides the surgeons that are doing these special procedures enhanced visualization that they want and currently and up until now, I would say, they would have to use very expensive robotic system in order to obtain that type of enhanced visualizations, the 3D visualization.

So when we say that the Viking system fills the gap between 2D and this very, very expensive robotic system, that’s exactly what we mean, I mean we’re pricing it at a premium to 2D visualization equipment, but it’s far less than a robotic system. So, we don’t expect hospital-wide conversions of the 3D systems. So the example will be a 15 operating room hospital. We’re not going to put 3D in all 15 rooms. This is going to be sold into two or three operating rooms that are going to be dedicated for some of these complex surgeries.

Matt Miksic – Piper Jaffray

Okay, all right. That’s great. Thank you very much. I’ll get back in queue.

Operator

Your next question comes from the line of Jeffrey Cohen with Ladenburg Thalmann. Please proceed.

Jeff Cohen – Ladenburg Thalmann

Hi, can you hear me okay?

Joe Corasanti

Yes.

Rob Shallish

Hello, Jeff.

Jeff Cohen – Ladenburg Thalmann

Good morning, thanks for taking my questions. Just a couple and I apologize if I had missed your previous discussion or portions of it. So could you kind of discuss from a 30,000 foot view your outlook now on capital equipment? Does it appear as if it’s put in a bottom already or so cautiously optimistic from these levels?

Rob Shallish

Jeff, I personally believe that we’ve bottomed out, so to speak, that we’ve reached a level from which we can now grow. The visualization systems within arthroscopy, our 2D and 3D systems, that was pretty much flat in the fourth quarter. The powered surgical instruments were actually up a little bit. Electrosurgical generators, the smallest component of our capital group, were down about $500,000. But on an overall basis, we were very consistent in the fourth quarter compared to last year on the capital products.

So I tend to think that as we talked before that, all of our capital products are susceptible to use and abuse, and they need to be repaired and replaced over time. Some of that can be delayed, but there is a certain amount that just cannot be delayed. And I think we’ve reached a point where we’ve reached the base level in our capital sales. So I think it’s – our guidance is a flat growth for next year in capital, but there could be upside too, as some of these needed replacements occur.

Joe Corasanti

Yeah. Let me add to that too. I think that we are expecting flatness in 2013. But I think going out a little bit farther, we with some new product launches and what we would expect is an improved marketplace, result of a lot of the replacement purchasing being delayed and will be delayed so far. But fairly as a result of new product launches, electrosurgical (inaudible) coming out. We will be coming out with a new visualization system for sport med and general surgery, and of course our lithium-ion batteries are starting to gain some traction in the market and we think that we actually have an advantage with the system that we offer in terms of lithium-ion batteries for powered instruments. So I think we’ll see some improvement maybe at the end of the year and going into 2014.

Jeff Cohen – Ladenburg Thalmann

That’s very helpful. Could you talk a little about Altrus, you’re not going to specifically break out guidance for this year?

Joe Corasanti

Well, with Altrus, we didn’t talk about that in our prepared remarks, but I am willing to tell you that it’s doing very well. We actually have doubled the number of weekly procedures that Altrus is being used in. So we feel that we’re starting to get some traction and we did anticipate this. We believe that if we would finally once in for all fix the supply issues that had troubled us in the late spring early summer and we’ve had many months now – over six months of very, very good performance without incidents, et cetera. We knew that we would start gaining some traction and that’s exactly what’s happening with Altrus. So we’re very pleased with the performance.

Jeff Cohen – Ladenburg Thalmann

Okay. But we shouldn’t necessarily expect to hear any specific numbers or guidance as far as revenue in the short-term?

Joe Corasanti

With revenue, my recollection is I think we might have put out a number of – probably repeated the number from last year. I think it’s around $5 million to $10 million as I think we could expect this year from Altrus.

Jeff Cohen – Ladenburg Thalmann

Okay. $5 million to $10 million for 2013?

Joe Corasanti

Yes.

Jeff Cohen – Ladenburg Thalmann

Okay, got it. Just a couple more, on the gross profits, on the margin line should we expect 2013 to look more like Q4 or full year being in the high 52% rate or the low 53% rate?

Rob Shallish

Jeff, I would take as your guide the work that or the margins that we have for the last six months of 2012. So on an adjusted basis, there were 54% or thereabouts. MTF has been very positive for us obviously that we’ve seen that all year. But also, the operations group has been doing a great job of being as efficient as possible and we’ve seen improvement in our efficiencies. So, the last six months at 54% or thereabouts I think is probably a good goal.

Jeff Cohen – Ladenburg Thalmann

Got it. Okay. And lastly, could you tell me where head count ended up for the company across the board for the end of 2012?

Rob Shallish

Yeah, it’s 3,600 and so that’s worldwide.

Jeff Cohen – Ladenburg Thalmann

Okay. Perfect. Thanks very much for taking my questions.

Joe Corasanti

Okay.

Operator

Your next question comes from the line of Mark Landy with Summer Street Research. Please proceed.

Mark Landy – Summer Street Research

Good morning, folks and congratulations for breaking the $200 million mark.

Joe Corasanti

Thank you.

Mark Landy – Summer Street Research

Joe, I wonder if you can just clarify a little bit of the comment that you made with the kind of education components to the endo guys with respect to Viking as being intensive. Should we think about them – how should we think about the impact of this sales education on sales probably over the next quarter or two?

Joe Corasanti

Over the next quarter or two, that’s a short period of time. I think we’ll start seeing some system sales, but not a lot. The training was completed just a couple of weeks ago with the Endosurgery group. Now that’s a sales force of about 35 individuals that have a long history of selling single use disposable laparoscopic instrumentation and the mechanicals.

So, the learning curve in terms of getting involved in a capital sale evaluation process and even issues that come up in terms of different forms of pricing and financing and things of that nature. So, there will be a learning curve. I think they will do a great job with it. I think the 3D technology that Viking provides is going to open up a lot of doors for the Endosurgery division and I would expect to see an increase in Endosurgery sales, the core product line of endomechanicals as we open some doors and get our disposable products into some new accounts.

Mark Landy – Summer Street Research

Okay. So I think you backhanded answer that question. I was focusing more on the disruption, so the fact that you already completed that sales education, they are back in force and going forward, there shouldn’t be any disruptions from having them removed from the field to get educated?

Joe Corasanti

Right. For the endomechanical business, yeah, I know I only see upside in that.

Mark Landy – Summer Street Research

Okay. And then in terms of Europe, couple companies have reported and they have seen surprise orders out of Spain. I suppose Spain along with Greece, you can call them the fringe with respect to Europe, maybe a little bit of Italy, Portugal kind of led the charge in the deterioration. And how are you guys thinking about that surprise order? Do you think that’s just one-time stocking or do you think it could be a sign that perhaps they’ve also bottomed out and maybe that there is going to be some stable orders coming out of it in the future?

Joe Corasanti

It’s difficult to say. I mean actually if I go back and think about some of the experience over the last three or four years, when austerity was basically taking hold in I guess all the European countries, and even in the UK. I think that austerity measures everywhere except with the medical system and we saw huge orders coming out when the rest of the country was tightening their belt. So I think it’s very difficult to predict what the government is going to do in these countries and sometimes they decide to stimulate their economy by making capital purchases in medical equipment, sometimes they tighten their belts. So, the surprise this year is that there is all kind of indications that Spain is going to be buying.

Mark Landy – Summer Street Research

Okay. So, say if I look at 2013, is it safe to assume that there is potentially some upside out of Europe if we continue to see improvements in the European economy?

Joe Corasanti

Well, it was flat last year, I don’t know how much improvement we’re going to see this year. I mean I just don’t think we’re forecasting that much improvement in Europe. I think when we look at our international sales, we’re really hopeful that we can see a continued strength in South America and Asia.

Mark Landy – Summer Street Research

And just lastly turning to the medtech tax, you’d mentioned that you’re going to try and offset some of the tech with price increases passed to your customers. How successful have you been? Do you think that you are going to be able to continue to try and reduce that $7 million exposure or is that where it’s going to stand?

And then lastly with respect to the fourth quarter, did you see any increased buying ahead of that or are you able to pre-sell some large orders and costs ahead of the tax, which maybe drew from the first quarter?

Joe Corasanti

Yeah, no, we didn’t see anything ahead of being pulled-in in Q4. We’ve talked about our desire to raise pricing where we can. Historically, we have not taken price in the United States from time to time. We get a price increase outside the United States, but in the United States pricing has essentially been stable to maybe with some of the really old legacy products. It’s been declining and those declines are offset by the new product introductions that we make where we maybe can take some price, but generally it’s been stable.

So our feeling is that now is appropriately good time to try to raise price where we can. I have stated in the past that it’s going to be very difficult for us to do that because of pricing contracts. So some $350 million of our sales are in the United States and the majority of it is tied up with pricing contracts. I think we’re only free to raise price on about $75 million to maybe $80 million of our U.S. business currently today. We will attempt to take price on that portion of the business and as the pricing contracts roll off on the remaining part of the business, we’ll see what we can do on price. But I think our customers have been treated very well in terms of price in the past and I certainly hope they’d be understandable today about taking a small price increase.

Mark Landy – Summer Street Research

Thanks guys.

Operator

Your next question comes from the line of Robert Goldman with C.L. King. Please proceed.

Bob Goldman – C.L. King

Good morning. Few questions for you. First, the medical device tax, you mentioned last time you’re going to report that under the operating lines. Is that still the case?

Rob Shallish

Bob, we’re in discussion with our independent accountants about that and it’s still up in the air. We will definitely break it out as a separate item. As we’ve talked, my preference is to include it below the operating line on the income statement. There may be some pushback from the accounting industry that would say we should include that in operating income. So, the jury is still out on that, but we’ll definitely disclose it as an independent line item.

Bob Goldman – C.L. King

When you provide a guidance, Rob, for operating margin growth in 2013. Are you including or excluding the tax?

Rob Shallish

I’m excluding that.

Bob Goldman – C.L. King

Okay. Second on SG&A to sales, if I adjust for MTF which is to say take out the sales and take out what you disclose as the SG&A related to those sales. It looks like your SG&A to sales were 39.1% in the fourth quarter up from 37.9% in the prior year. Now if my math is right, Rob, why the 120 basis point increase?

Rob Shallish

Well, when I took a look at it, I backed out the MTF sales as well. I think we were pretty much in line absent the MTF transaction. The one other piece is the acquisition that we made early in 2012 of our Nordic distributor, so that the expenses – selling expenses of that distribution area are now included in SG&A.

Bob Goldman – C.L. King

And then that would have been what couple of million dollars or...?

Rob Shallish

Well, for the year, it would have been in the neighborhood of $6 million to $7 million.

Bob Goldman – C.L. King

Okay. That was done in the first quarter, you say?

Rob Shallish

Yes.

Bob Goldman – C.L. King

Okay. And just so I make sure I heard the numbers right. MTF’s contribution in the quarter on revenue was $7 million and to SG&A expenses, $4 million?

Rob Shallish

Correct.

Bob Goldman – C.L. King

Okay. Okay. And then, on R&D to sales, for Joe. So it’s I think the lowest that I’ve ever seen at CONMED certainly the last seven years. How do you view that ratio, Joe? And to what extent are you now looking at acquisitions to supplement your R&D?

Joe Corasanti

Yeah, Bob, that is the lowest that I can recall as well 3.6%. We’ve – usually we’ve been around 5% quarterly, annually for many years. And it’s ticked down just a little bit as we had some of these large R&D projects roll off and reduce the spending. I think that what we will be looking when the timing is right for some increased R&D spending and some projects that we believe we can get a very good return on investment for and supplement R&D by making some acquisitions, not the typical types of acquisitions that we have made. Typically, we’ve made rollup, tuck-in type of acquisitions buying sales and products and market share, and I think there are opportunities to buy technology. We did that a couple of time successfully, I’d say, in the last three years and we want to continue to – I think we want to continue to do that.

Bob Goldman – C.L. King

Okay. And then finally on Altrus, you did provide sales projection for the year of $5 million to $10 million. It would be all the more meaningful in context if you would also share what the fourth quarter sales of Altrus were or to give us some sense of the last few months in, if any of those months would have put you at $5 million to $10 million annual pay?

Rob Shallish

Yeah, Bob, we are not at the $5 million to $10 million run rate currently. We would certainly hope to see that as we go through the year. The fourth quarter Altrus sales were approximately $600,000, which was the highest quarter that we have had. So, we’ve seen continual growth in the Altrus business. But we need to see acceleration if we’re going to hit the $5 million or $10 million number, you’re right.

Bob Goldman – C.L. King

Okay. Thank you very much.

Operator

(Operator Instructions) Your next question come from the line of Jim Sidoti with Sidoti & Co. Please proceed.

Jim Sidoti – Sidoti & Company

Good morning, can you hear me?

Joe Corasanti

How’re you, good morning, Jim, yes.

Jim Sidoti – Sidoti & Company

Great. First question, was there any quantifiable impact during the quarter from the hurricane?

Rob Shallish

Jim, there’s nothing that we could put our finger on, no.

Jim Sidoti – Sidoti & Company

Okay. And the Endoscopic Technologies business, you guys have been fighting that one for a few years. What’s like this year’s probably the best growth I’ve seen in the last four or five, I mean you think you’ve really turned the corner there and will that continue to grow at a low single digit rate?

Joe Corasanti

Yeah, Jim. I’m glad you pointed that out. It was a very good year for the CET division, Endoscopic Technologies, as you say, and yeah I think – yeah, we’re feeling good about that business now. I think it’s – the structure is right. It’s streamlined to sales forces. I’d say refocused on the types of products that they can have success with. And we’re just very happy to be where we are today compared to where we were five years ago with that business. That really sums it up.

Jim Sidoti – Sidoti & Company

Okay. And then with the Viking acquisition, I assume sales in the quarter, I think, were around $2 million or $3 million, is that about right?

Rob Shallish

$2.5 million, yes.

Jim Sidoti – Sidoti & Company

Okay. And going forward, you indicated that you think that there’s an opportunity with urologist and OB/GYN. Do you have relationship with those doctors now for your other endoscopic products?

Joe Corasanti

Yeah, it ties in very nicely with Endosurgery. So, Endosurgery sales of course, they are selling to general surgeons doing laparoscopic bariatric surgery and cholecystectomy of course is the largest, most prevalent procedure for general surgeons but in the area of GYN, total laparoscopic hysterectomy is becoming a very, very important procedure for endomechanical products and of course we think also now for the Viking 3D systems.

So we have the relationships with general surgeons and GYN surgeons, some relationships with urologists but not as strong there as with GYN and general.

Jim Sidoti – Sidoti & Company

Okay. And then the last question is the power surgical equipment. In the fourth quarter numbers, some of the large hip and knee distributors seem to tick up a little bit. Are you seeing any evidence of that in your sales?

Rob Shallish

Well, we, I think, had a good fourth quarter in powered instrument sales, Jim. Both capital and single use products grew by 4.1% over the quarter last in 2011. In terms of capital products, that was probably our best quarter of growth. So we’re seeing some acceleration in capital purchases and on single use products, it’s pretty consistent. We had 5% growth in single use products for all of 2012. So all in all, I think it’s a pretty good year for powered instruments and I think these numbers are perhaps consistent to even to add better than what we see out of the hip and knee companies.

Jim Sidoti – Sidoti & Company

And what are you forecasting for that business in 2013, do you think that trend continues to improve a little bit or do you think your fourth quarter was just kind of a one quarter event?

Rob Shallish

We are expecting to be in this mid-to-single digit growth range for 2013.

Jim Sidoti – Sidoti & Company

All right. Thank you.

Operator

Your next question comes from the line of Dale Dutile with the Boston Company. Please proceed.

Dale Dutile – The Boston Company

Hi, good morning. I’m sorry to jump off for a few minutes, so if this was addressed, but just on MTF, I think you said that was $28 million for the year. I believe you thought that that will be a little higher for the year – I mean has that kind of played out as you expected or was it a little weaker for the year from a top line perspective?

Rob Shallish

Well, Dale, there is always some confusion, I think, with the first estimates that we gave for revenue benefit from MTF and what ultimately has occurred because of the accounting that we have to have for the amortization of the distribution agreement. So when we first acquired MTF, we believe that the sales benefit to CONMED would be approximately $35 million.

Dale Dutile – The Boston Company

Right.

Rob Shallish

We then learned that accounting rules require us to record the amortization of the distribution agreement which amounts to about $6 million a year not as an SG&A cost, but as a contra sales, so we have to deduct it from sales. So $35 million was our original estimate or thereabouts, takeaway $6 million, it gets $29 million. We ended up with $28 million from the year or so. It’s...

Dale Dutile – The Boston Company

That’s the kind of where you thought it would be. Okay.

Rob Shallish

Almost exactly what we anticipated.

Dale Dutile – The Boston Company

And then from an operating earnings contribution, I mean there is virtually no cost of goods on that revenue I believe and your SG&A from an incremental perspective is fairly minimal as well? Is that right or how should I think about what that contributed to operating profits for the year?

Rob Shallish

Well, there is a significant component in SG&A. So, the 35 or so people that we brought on board from MTF are all included there, plus we pay commissions to some distribution agents. So, the offsetting expense to the MTF revenue was not in gross margin as you pointed out, it’s in SG&A. But the total EBITDA effect of about $15 million that we anticipated at the beginning of the year is about what we got out of that business this year. So, all in all, it was contributed just as we had expected.

Dale Dutile – The Boston Company

So I mean if I kind of exclude that from the year and look at kind of your operating profit growth, if you hadn’t done the MTF deal, it looks like there’d be no growth, probably decline. Is that am I missing something?

Rob Shallish

I don’t know. When I’ve taken a look at it, I think that perhaps half to two-thirds of the growth is attributable to MTF and the rest would be from our own activities.

Dale Dutile – The Boston Company

Okay. Your EBITDA grew by how much?

Rob Shallish

The EBITDA percentage increased about 110 basis points.

Dale Dutile – The Boston Company

The EBITDA was up $18 million – less than that actually, well about $18 million and you’re saying $15 million of it came from MTF, that’s lot more than half?

Rob Shallish

Well, a good share of it did come from MTF. I would agree with you.

Dale Dutile – The Boston Company

Okay. So underline – you’re saying the underlying business is going to grow earnings in 2013 was 14% to 19% excluding the medical device tax and your currency hedges. How do you go from virtually no growth to 14% to 19% growth in 2013? I’m just kind of looking on an apples-to-apples basis. You don’t have another MTF obviously for this year. How do you accelerate growth to get to the numbers you’re talking about?

Rob Shallish

Well, we’re anticipating a greater sales growth in 2013 and 2012. So, on an organic basis, we grew 1.5% in sales in 2012. We’re expecting a growth of 3% in 2013, 4% on a constant currency basis.

Dale Dutile – The Boston Company

Okay.

Rob Shallish

So that takes out the FX factor. So, our expectation is that sales growth will be greater in 2013 than 2012. And basically it’s leveraged. We’re leveraging the structure that we have and more of that sales dollar increase falls down to the bottom line.

Dale Dutile – The Boston Company

Okay. Does the guidance – your earnings guidance include the share repo, which I mean if it’s done as quickly as you say, that’s going to add several cents to earnings. Is the repo incremental to your earnings guidance or is that in the guidance?

Rob Shallish

It’s in the guidance.

Dale Dutile – The Boston Company

Okay. So that accounts for how much of the guidance?

Rob Shallish

If we’re successful in concluding this $50 million purchase in the next two or three months, that would equate to about $0.08 to $0.09 on an EPS basis.

Dale Dutile – The Boston Company

At the high end of the range, that’s all of the earnings growth?

Rob Shallish

Well, we’re taking a look at offsetting the medical device tax. The EPS range that we have of $1.80 to $1.90 is just marginally up from the $1.80 that we have this year.

Dale Dutile – The Boston Company

Right, right. Okay, now, I hear you. There’s some headwinds. Okay. Thank you.

Rob Shallish

Thanks.

Operator

There are no additional questions at this time. I would now like to turn the presentation back over to management.

Bob Yedid

Thank you very much operator and I want to thank everyone for participating in the call today. We’re very encouraged by the progress that we’re making with CONMED Corporation and a great performance that we had for the fourth quarter and for 2012, and look forward to joining you again on our first quarter 2013 conference call. Thank you very much.

Operator

Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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