CONMED's CEO Discusses Q1 2013 Results - Earnings Call Transcript

| About: CONMED Corporation (CNMD)

CONMED Corporation (NASDAQ:CNMD)

Q1 2013 Earnings Conference Call

April 25, 2013 10:00 AM ET

Executives

Joe Corasanti – President & CEO

Rob Shallish – CFO

Courtney Dugan – ICR

Analysts

Matt Miksic – Piper Jaffray

Jeffrey Cohen – Ladenburg

Mark Landy – Summer Street

Jim Sidoti – Sidoti & Company

Operator

Good day, ladies and gentlemen, and welcome to the Q1 2013 CONMED Earnings Conference Call. My name is Alex and I will be your operator for today. 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) As a reminder, this call is being recorded for replay purposes.

And now I’d like to hand the call over to Courtney Dugan of ICR.

Courtney Dugan

Good morning. 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.

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

Thanks very much Courtney. Good morning, everyone. Sales for the first quarter were $187 million, a decrease of 3.8% versus the prior year period. Adjusted earnings per share for this first quarter were within our guidance range that we provided to investors on our last call coming in at $0.45, compared to $0.43 per share in the same quarter a year ago. Our total sales for the quarter did not meet our expectations we’re able to meet our EPS target through continued improvement in our gross margin and lower effective income tax rate.

On a GAAP basis, diluted EPS was $0.37 per share, an increase of 5.7% from the prior year period. Adjusted operating margin expanded 70 basis points to 11.2% compared to the first quarter of 2012 due to higher gross margins as a result of our continued focus on our operational efficiencies across our production facilities and lower R&D expenses offset by higher SG&A.

Adjusted EBITDA margin of 17.1% was consistent to the prior year’s first quarter. Cash flow from operations was relatively consistent at the first quarter of last year. Our Board of Directors declared a quarterly cash dividend of $0.15 per share, continuing the dividend initiated by the Board of Directors in early 2012.

As mentioned above, sales in Q1 2013 totaled $187 million, a decrease of 3.8% from the prior year quarter and below our guidance range for the quarter. Two fewer selling days in the quarter and the impact of foreign exchange rates of $700,000 explains the year-over-year decline. However, we did see – we did not see the growth we expected in our product sales due to a reduction in healthcare spending in international markets.

Specifically, sales in major European countries have been affected by governmental spending controls and healthcare and lower than anticipated procedure growth. We also saw weaker capital equipment sales in other countries including Australia, Canada and Latin America due to difficult comparisons to the first quarter last year when we had larger capital transactions. Further, the surgical video visualization product line consisting primarily of capital equipment has been affected by hospital budgetary constraints in Europe and elsewhere.

As we follow first quarter healthcare utilization trends, we are seeing major hospital companies report flat adjusted admissions and a decline in commercial admissions. In addition, some large healthcare payers are also reporting flat healthcare utilization, some of which maybe due to consumers responding to higher deductible and co-pay obligations, especially early in the calendar year a deductible of reset and as more and more employees are being shifted to higher deductible plan.

As you can see in the press release, both single use product and capital equipment sales were lower by 3.4% on a constant currency basis in the first quarter as compared to the prior year period. We believe these result support our view that fewer selling days and lower healthcare utilization were the primary drivers of the quarterly sales level given that two fewer days equates to over 3% of total selling period on an organic basis excluding revenue on the Viking acquisition in October 2012, sales were down 4.7% in the first quarter 2013, although the Viking sales offset the 2012 sales of products we discontinued in the Surgical Visualization product group.

Now I would like to update you on a few operational initiatives. First, we were pleased to highlight new products and educational offerings at the Annual American Academy of Orthopaedic Surgeons meeting last month in Chicago.

We exhibited several new products including the recently launched Y-Knot all suture anchor and the lithium battery system for Hall battery operated power instruments among others. Second, this first quarter was the highest sales to date of our tissue sealing device called Altrus achieving sales of $800,000 in the quarter, a nice step up from the Q4 sales level of $600,000.

We are pleased with continued execution in that business and adoption by our surgeon customers based on a more systematic review of the opportunity for the Altrus product line. For the year ahead we expect Altrus sales of approximately $4 to $5 million in 2013.

We are encouraged by our progress with Altrus and we’ll update investors periodically. Third, the newly acquired Viking line of 3D and 2D high definition surgical visualization equipment contributed approximately $2 million in sales in the first quarter.

Our sales forces have been trained on this exciting technology and we have optimistic expectations that customers will embrace the advantages of our 3D systems. As with any capital products the sales cycle is usually longer then with single used products. We will keep you advised on our progress.

Fourth and important component of our business strategy continues to be expanding our margins by selectively reducing cost. We continue to make progress with the consolidation of our Tampere, Finland manufacturing plant into our U.S. locations. We are seeking opportunities to reduce cost in our manufacturing and SG&A functions on an ongoing basis.

This focus on cost and expense levels compliments our efforts to grow revenue and improve our gross margins through the introduction of new products. While the earnings guidance for 2013 remains the same at a $1.80 to $1.90 per share due to continued improved gross margins we recognize the sales in major European countries have been affected by governmental spending controls and lower than anticipated procedure growth.

Further the surgical video visualization product line consisting primarily of capital equipment has been affected by hospitals budgetary constrains in Europe and else where. Healthcare utilization in the U.S. also remains flat with 2012 to date. While we believe the overall economic environment may improve towards the latter half 2013 and increase for general level of healthcare use we consider prudent to reduce the estimated full year sales forecast by $15 million to $770 to $780 million.

For the second quarter of 2013 we anticipate sales will approximate $191 to $196 million and adjusted earnings per share are forecasted to be $0.41 to $0.46. Although sales for the quarter were lower than anticipated we continue to believe that CONMED is an attractive and well positioned company in the markets we serve. We continue to hold the number two and number three market positions in our key product lines.

Single used products comprise approximately 80% of total sales while the remaining 20% is capital equipment sales that drive our razor-razorblade business model.

Overall from an operational and financial basis, we remain 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

Well thanks much Joe and good morning everyone. As Joe mentioned, in the March quarter 2013, sales totaled 187 million, a decrease of 3.8 % from 194 million in the first quarter of 2012, primarily due to two fewer selling days. With the leap year in 2012 and the timing of religious holidays which fell in March this year, compared to April last year, this cost us about 3%.

We have 62 selling days in the first quarter 2013, compared to 64 in the first quarter 2012. In addition, the FX impact of $700,000 was a headwind. While the Viking video sales of $2 million in the quarter are new, they offset the discontinued integrated system sales from the first quarter last year.

You may have noticed that we have simplified the product line sales disclosures in the press release this morning with our disclosures of sales in three categories, orthopedic surgery, general surgery and surgical visualization. On our website in the financial report section, we have posted a schedule on historical information in this format.

The orthopedic line consists of the sports medicine group, plus power surgical instruments. The surgical visualization products that were previously included in the arthroscopy data have been broken out separately because our video systems can be used both in general surgery and for orthopedics. This change became increasingly necessary as a result of the Viking acquisition whose 3D systems are primarily used in general surgery.

Lastly, we have combined our electrosurgery, endosurgery, endoscopic technologies and patient care into the general surgery categorization.

Our orthopedic surgery product line experienced a sales decline of 1.7%, consisting of the sports medicine products with a decline of 3.3%, offset by a 1.1% growth in powered surgical instruments. The decline in sports medicine was principally because of fewer selling days in the quarter and weaker European sales.

Our newer shoulder repair products continue to perform well. Powered instrument growth was driven by the capital products, powered surgical instrument hand pieces with a single use products declining because of the number of days and European issues.

The general surgery product group had a decline of 3.9% with the advance surgical energy line previously referred to as electrosurgery, and the gastroenterology lines generally flat with declines of approximately 7% in each of the endomechanical and patient monitoring lines.

The surgical visualization line with all of our 3D and 2D imaging products experienced the decline of 15.6% due to a difficult comparison of the first quarter last year when we had a number of large one-time sales.

You will note that all of the single use device products declined 3.8%, similar to the percentage decline in selling days. The capital expenditure products declined 3.7%. Although, we had mid-single-digit positive growth percentages in powered surgical instrument hand pieces and electrosurgery generators, while the surgical visualization camera systems declined the 15.6%.

By geography, sales in the United States for the first quarter declined $3.5 million or 3.6%. International sales declined 3.9% on a reported basis and 3.2% in constant currency. International sales in the first quarter were $94.4 million representing 50.5% of our total sales.

Sales in European countries were affected by foreign currency exchange, governmental controls affecting procedures and capital expenditures, as well as the fewer number of selling days in the quarter, such that we experienced the sales decline of 7% compared to first quarter last year.

Canada and the Americas experienced a sales decline of 3% due to lower video capital product sales compared to a relatively strong video sales quarter last year. Our Asian business increased 2%. Overall, pricing has remained stable.

Turning now to the other components of the income statement, adjusted gross margins excluding restructuring costs were very strong, coming in at 55.8% compared to 52.7% in the first quarter of 2012. This 310 basis point bump in gross margin was also a sequential improvement from the fourth quarter last year.

The GAAP gross margin also improved to 54.9% compared to 51.9% last year. We continue to see progress in gross margins due to our product mix and efforts to control operating costs. As we look out to the second and third quarters of this year, we believe that gross margins will be some what less than that of this first quarter, due to the anticipated increase in video sales which have margins lower than the overall company average and due to the normal seasonality of the third quarter.

Selling general and administrative expenses for the first quarter 2013 were $77.7 million or $41.6 of total sales compared to $74.8 million or 38.5% of total sales in a same quarter last year. Actual SG&A spending for the first quarter was somewhat less than we had internally budgeted but as a percentage of sales increased compared to last year’s first quarter due to FX and the several headwinds effecting sales we have mentioned.

We also had increases in selling cost due to the addition of a few additional sales people in selected U.S. and international markets and increases in French benefit costs. The medical device excise tax amounted to $1.6 billion this first quarter and as listed as a separate item in our statement of income.

Research and development spending was $5.7 million for the first quarter a decrease versus the $7.1 million in the first quarter of 2012 as we complete certain R&D projects. R&D spending as a percentage of sales was 3% compared to 3.7% in the first quarter of 2012.

As we have mentioned in the past we invest in research and development activities based on our analysis of the merits of individual projects. Therefore there will always be some volatility in R&D as a percentage of sales as individual projects commence or are completed. This quarter R&D expense was lower due to the consolidation of the Santa Barbara and finish R&D groups into our greater corporate organization. We anticipate that R&D cost will increase in subsequent quarters as we fill open positions.

Overall the adjusted operating margin for the first quarter of 2013 grew approximately 70 basis points to 11.2%. For this year, we will include a medical device tax as one of the adjusted items to enable comparison to the prior year announced.

The GAAP operating margin was 8.5% in the first quarter compared to 8.8% in last years first quarter with a decline associated with 80 basis points from the inclusion of the medical device excise tax. The adjusted EBITDA margin was consistent at 17.1% of sales. The GAAP EBITDA margin was 14.7% of sales.

For the first quarter of 2013, adjusted earnings per share were $0.45 per share compared to $0.43 per share in the first quarter of 2012, representing a year-over-year increase of 4.7. The adjustments for unusual items of $3.7 million in this first quarter are reconciled in the press release issued this morning and include costs associated with the ongoing manufacturing and administrative consolidation programs.

As we continue our current efficiency programs into 2013, we anticipate incurring additional pre-tax restructuring costs of $9 million to $10 million on the consolidation of the Tampere facility and other projects.

Please note that the medical device excise tax is included as a reduction in the adjusted earnings per share as well as GAAP. This tax caused both metrics to be lower by $0.04 per share than otherwise would have been the case.

Turning now to cash flow. Cash provided by operations came in at $5.5 million in this first quarter as we anticipated and was generally flat compared to the first quarter of 2012. This includes a contribution of 7.5 million to the company’s frozen pension plan and payment of incentive compensation.

Similar to the quarterly cash flow of 2012 we expect 2013 cash flow from operations to improve in the remaining quarters of 2013 since the pension and incentive compensation payments only affect the first quarter of this year.

During this first quarter, the company repurchased 848,000 shares of its common stock, amounting to $25.7 million. As we stated in late October 2012, our goal was to repurchase approximately $50 million of our stock over six to nine months. Since the announcement of our plan we have repurchased about $30 million of stock. We expect to repurchase an additional $25 million over the next several months.

As of March 2013 our cash balance stands at $32.4 million. We continue to make improvements in working capital in this first quarter. Days and receivables declined to 66 days at March 2013 from 67 days in March 2012.

Inventories were basically flat sequentially from December 2012 despite the revenue headwinds. As of March 2013 the debt to book capitalization calculation was 27.4%, marginally higher from 24.8% in March last year. As a result of borrowing associated with common stock repurchases, the installment payment of $34 million to MTF. And the Viking medical acquisition that closed late in the third quarter of 2012.

Our effective tax rate for this first quarter was 26.3% on a GAAP basis and 28.3% on an adjusted earnings basis compared to 36% in the first quarter last year. The reduced rate is generally due to the research and development tax credit from 2012 that must be recorded in this first quarter. For the remaining three quarters of this year we anticipate a tax rate of approximately 34% per quarter. As we have discussed in the past that cash tax rate is less than the book tax rate. This year we anticipate a 20% cash tax rate.

Now I’d like to briefly discuss our Q2 and full year 2013 guidance. We reiterate our 2013 annual earnings per share guidance at this time. The adjusted earnings per share is forecasted to be in the range of $1.80 to $1.90 per share for the full year 2013 which contemplates the effects of the medical device tax and less favorable FX exchange rates.

We are reducing estimated full year sales forecast by $15 million to the range of $770 million to $780 million. The sales reduction is mitigated by higher gross margin than originally forecast as well as a somewhat lower affective income tax rate.

For the second quarter 2013, we expect sales to approximate between $190 million and $196 million and adjusted earnings per share is forecasted to be $0.41 to $0.46 per share.

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

Joe Corasanti

Thank you very much Rob. So before we take any questions, I would like to make a closing remark regarding our long-term goals and out track record for growing earnings at CONMED. While our earnings in the first quarter came in as expected our first quarter sales numbers did not meet our expectations. We believe we have now set achievable and more realistic revenue guidance for the full year 2013 while continuing to maintain the same forecasted earnings guidance.

I would like to remind everyone that CONMED was able to deliver EPS growth of 15% or greater from 2010 to 2012 on a low single digit sales growth. The impact of the medical device tax and changes and foreign exchange rates were headwinds in 2012 we expected.

Healthcare utilization has been modest in 2013 to date as well. 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. We look forward to updating you on our business initiatives during the second quarter 2013 conference call and our coming Investor appearances.

All of the 3600 employee of CONMED are working hard to show our investors that we can do whatever in the balance of 2013. And so with that I’d like to open the call for questions. Alex?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Matt Miksic from Piper Jaffray.

Matt Miksic – Piper Jaffray

Hi, good morning. Thanks for taking the questions.

Joe Corasanti

Good morning.

Matt Miksic – Piper Jaffray

So it seems like lot of the other companies in the space is selling day impact, selling days had an impact in your businesses you’ve talked about, can you – does that translate over into the capital side of the business as much or were there other sort of variables in the quarter around capital that you can comment on? And then I have a couple of follow-ups.

Joe Corasanti

Yeah, with capital, I think as we mentioned we’re seeing some difficult – and extended purchasing decisions being made mostly in Europe. U.K. was actually the worst performing territory for us declining significantly. We are however hopeful that the government may in fact release some dollars into the system to make some capital purchases and we’ve been hearing that that might be happening later in the year. But for now it is a very difficult environment in Europe as a result of austerity measures. The only bright spot for Europe was France. We can’t tell you why, but there (inaudible) in that country.

Matt Miksic – Piper Jaffray

And in the U.S., how would you characterize the trends I guess or demand trends or contracting trends or cycle or lack thereof?

Joe Corasanti

I think we are seeing –actually consistent trends now over the last couple of years. I mean we’re seeing procedure growth is fairly consistent, maybe a little bit weaker, but and capital of course budgets are still tight. They are not the kinds of capital budgets that we’re seeing in 2008, so still difficult environment for capital.

Rob Shallish

Yeah. To further add to that, Matt, we had some – we have a mixed performance in capital as we talked about. Electrosurgery generators and powered surgical instrument hand pieces were actually up this particular quarter. Video was the one that brought the total capital spending, total performance down a little bit. So it seems to be more on the video side of things at the moment.

Matt Miksic – Piper Jaffray

Yeah. You don’t seem to be alone in that regard. And, by the way, I guess I should say on the P&L it’s – the hedges, the cost controls I’m sure are much appreciated, sort of holding the line on the bottom line despite the top line. The one other follow-up that I had was – is I guess it’s a capital related item and it’s a new product for you is the sort of 3D visualization technology that you have.

I noticed you are at stages and in that sort of general surgical environment it strikes me that you’ve inserted yourself into a lively debate between robotics and sort of traditional laparoscopy. Can you give us any color as to what sort of response you’re getting, how you’re positioning yourself in that market?

Joe Corasanti

Yeah. Well, with a 3D video it’s been very well received with – if you’re interested in purchasing a 3D visualization until the launch of our system and you could only obtain that type of performance from a robotic system. Recently we saw the launch of another 3D system from one of our competitors. I think that validates of course for us it validates the technology and what we think is going to be the demand for that technology.

So as I said on our earlier conference calls the Viking 3D technology allows us to have greater access to general surgery with a door opener if you will with interesting technology, and it allows us to pull through mechanical products for example and others. So we are very excited of that. We think we’ll do well with it.

Matt Miksic – Piper Jaffray

Anything on trocar or sort of access side of the business that you think that you should have or should need to be more competitive there or do you feel like you have everything you need?

Joe Corasanti

Well we currently have everything that we need and we are referring to the access side – the access would be of the endo-mechanical lines for us, trocars and clip appliers, etcetera. I think we need to refresh some of those lines. We are working on a new trocar system to launch probably in 2014 or at the end of this year and some updates to some of the other products in that endo-mechanical line. But we do have and off – we have everything that a surgeon requires to do a lap coli procedure and we have exceptional products and it’s really unique products for Total Laparoscopic Hysterectomy and we really we think we are market leader in that procedure segment.

Matt Miksic – Piper Jaffray

Great. Thank you.

Operator

Our next question comes from the line of Jeffrey Cohen from Ladenburg.

Jeffrey Cohen – Ladenburg

Thanks for taking my questions. Just to recap Rob, you had spoken about the effective tax rate that you anticipate for the balance of 2013. So 34% is probably a good number to use for modeling?

Bob Shallish

I think that’s a good number to use, yes, Jeff.

Jeffrey Cohen – Ladenburg

Okay. The specific product that you are referring to as far as discontinuation surgical utilization area was which product was that?

Rob Shallish

Well we call that the integrated systems a line of products basically they were the booms that hold lights in the operating room plus the computers that control the lights and other equipment within the hospital. So we deemphasized that particular product line little over a year ago. There were some residual sales of about $2.5 million in the first quarter last year and occasionally we’ll get some residual sales in that particular line but we are not emphasizing it at all at this point.

Jeffrey Cohen – Ladenburg

Got it. Okay. Any pricing increases to mention on any of the products out there that are worth noting and can you talk about specifically for Altrus was there pricing increasing or decreasing going on during the past quarter?

Joe Corasanti

For Altrus now we - our pricing is at the higher end of the range in terms of I guess competitive ASPs and we believe that’s appropriate considering the advanced technology and advanced performance of the Altrus line. If anything we think going forward there will be some pricing pressure on Altrus and that’s something we will be just dealing with going forward.

So with Altrus no price increasing and there might be some slight price increasing being taken by the company in certain product lines but nothing significant.

Jeffrey Cohen – Ladenburg

Okay. As far as this quarter, as far as level detailed information that you are providing in your product launch, should we expect to see this from now on going forward that we’ll only see revenue and growth in composition by the three areas, orthopedic surgery, general surgery, visualization and then you’ll break it down by single capital, single use of capital?

Rob Shallish

That’s our plan. We can give a little bit more color in our commentary on conference calls on individual product groups within these categories, but I think this simplifies the disclosures that we make – and makes it a little bit easier to understand for investors to know about our company.

Jeffrey Cohen – Ladenburg

Okay. Great. Got it. Can you provide any more clarity on $9 million to $10 million that you anticipate for restructuring as far as where that will be coming from?

Joe Corasanti

Well we are in the process of binging that production here to the United States, so that’s a very good substantial piece of that effort that includes severance cost and what not. The Santa Barbara consolidation is pretty much completed. There maybe some residual cost there that we’ll have. We have talked in the past at least in disclosures in our SEC filings about patent suits that we’re involved in and there is a piece of that number that includes the estimates for the legal cost associated with that litigation.

Jeffrey Cohen – Ladenburg

Got it. Okay. So 9 to 10 for the balance of the year?

Joe Corasanti

Yes.

Jeffrey Cohen – Ladenburg

Okay. On the share repurchase, you’d said that you had just paid additional 25 million over the next several months to be used up. I’m assuming that you are including April.

Joe Corasanti

Yes. We’re including April.

Jeffrey Cohen – Ladenburg

Okay. And can you talk about anything just generally speaking as far as a macro view, your space as far as some of the growth trajectories with your business as well as what else you’re seeing out there. And also, could you comment more specifically as far as any specific markets, areas in which you’re gaining market share in areas which you feel that you maybe loosing market share?

Joe Corasanti

Well, in my opinion I think we continue to gain market share in our shoulder business, the anchors used for rotator calf and shoulder instability repair. Even though, total sport medicine was off 73% and some percent this particular quarter, our shoulder products grew 10%. So where we saw the decline was in other areas of our arthroscopy business, some of the more commodity kinds of products which correlate I think with the number of sales days that we had. So shoulder products continue to do well.

In powered instruments we’re getting a very good reaction on the lithium battery product. And that’s one of the reasons that in the capital piece of our powered instruments we saw growth in that particular component of our business. So, in those two areas I think we’re seeing the greatest growth potential for gaining market share. I think where we might be on the loosing end of market share is in some of our EKG electrode business where we’re seeing increased competition from other players. But, of course, the margins on those products are much lower. So, even though sales might be down, it might not affect the profitability all that much. So I think those are the areas. Everything else I would say on a market share basis is pretty stable.

Jeffrey Cohen – Ladenburg

Okay. Wonderful. I appreciate the additional information. Thanks a lot.

Operator

Our next question comes from the line of Mark Landy from Summer Street.

Mark Landy – Summer Street

Good morning, fellows. Thanks for taking my question. Rob, probably a question for you. If I’m not mistaking, I think you guys reported fourth quarter results on February 14, probably halfway through the quarter, did you see weakness kind of towards the back end of the quarter or was there weakness at the front end of the other quarter that you hoped that there will be a pickup in the second part of the first quarter that you kind of gave the guidance that you gave.

Joe Corasanti

I think that not the way I want to get into monthly results, but March was weaker than what we had anticipated. So through January things were pretty much as we had anticipated. March ended up being less favorable.

Mark Landy – Summer Street

And again, sorry to try getting some detail. Was that more on the disposables or more on the capital equipment side?

Joe Corasanti

I would say both.

Mark Landy – Summer Street

Okay. So, just March was just not good all around.

Joe Corasanti

Right, correct. And we typically see the third month of a quarter being better than the other two months. That was also the case this quarter but we just didn’t see the pick up that we would typically like to see.

Mark Landy – Summer Street

I suppose maybe drilling just a little deeper down, were there any orders that you had expected that perhaps maybe hit April first versus March, the end of March or is that just too much granularity?

Rob Shallish

Yeah. I think that’s too much granularity. I would hope that in the second quarter we would see the benefit of one more selling day then in absolute terms then the first quarter. And the effect of Easter and pass over been in the first quarter rather hen the second.

Mark Landy – Summer Street

And then a little bit to Europe you had mentioned that the UK was particularly weak, how much of the downturn is attributed to the UK if you kind of make the UK out what did the rest of Europe look like?

Rob Shallish

Well total Europe our total international business was off little over $3 million. The UK was off $1.5 million. So about half perhaps a little bit less than half of our international miss or I guess comparison to last year was a result of UK softness.

Mark Landy – Summer Street

Some of your competitors have seen, some talk about some parts of Europe there had been reports that I think austerity is being eased somewhat because they are concerned with growth, is that something that you think it perhaps maybe lagging a little bit, have you seen those effects or do you think that maybe some of your competitors had one time blips in Europe and there things are not as – relative is not a good word, but things are not as optimistic as some results as detailed?

Rob Shallish

I think Europe is obviously is going through some change. Each country seems to have some level of peculiarity. So for example on the U.K. as you know there are – their fiscal year, the governments fiscal year ends on March 31, and there are significant changes going into place on April 1 or there were in the national health system.

And it’s our opinion that spending in the first quarter, our first quarter and there last quarter was diminished because of unclear funding that might be coming, starting in April associated with these changes taking place with the National Health Service.

So frankly our country managers have some optimism that things might pickup in the U.K. as the structure becomes more solidified. But we’ll have to see if that occurs. In Italy where we – our sales shoulder decline from the prior first quarter, where there was a lack of direction from the government. There was no government really in the first quarter of this year, and I think hospitals were very cautious about spending and knowing exactly what the reimbursements might be.

So each country has a little big different story, but I think it’s all – as it all comes a bit down to a certain amount of uncertainty at the local level, understanding what their funding is going to be for this year and therefore they were just very cautious and spending in the first quarter.

Mark Landy – Summer Street

And then lastly, well, congratulations on the uptick in ultra. I think that’s a step in a good direction. Was that more utilization at existing sites or was that more function of adding new users, new boxes.

Joe Corasanti

Yeah. I think it’s bodes really. We are increasing utilization at some of the existing sites in terms of adding a few additional surging zones at existing hospital customer accounts, but we had certainly that in more hospitals and more surgeons into the sales cycle for us.

Mark Landy – Summer Street

So is it fair to say it was an equal mix of both or can you maybe just point us in one direction or the other?

Joe Corasanti

I’m not sure. I hope Rob, you have anything on that?

Rob Shallish

I think it was I think it was an equal mixture of both. Even in institutions where we’re pretty well established there’s always new surgeons adopting ultras. So the – we tend to look at that surgeon-by-surgeon basis rather than an institution, and we’re always adding new surgeons to the portfolio, if you will.

Mark Landy – Summer Street

Thanks guys. Rob, just the clarification, the S1 index is definitely pointing up this quarter.

Rob Shallish

Okay. Good. Thanks.

Mark Landy – Summer Street

Okay. Thanks.

Operator

(Operator Instructions) Our next question comes from the line of Jim Sidoti from Sidoti & Company.

Jim Sidoti – Sidoti & Company

Good morning. Can you hear me?

Joe Corasanti

Good morning.

Jim Sidoti – Sidoti & Company

Hey, sorry if you guys addressed this already, I’ve been bouncing between a couple of calls this morning. But what was behind the gross margin improvement in the quarter?

Joe Corasanti

Well Jim, it’s just the continued balance that we’ve been working down for the last couple of years on our efficiencies. So, its production efficiencies, it’s our supply chain making sure we are purchasing things at the right price. It’s all of those things. Now I did mention in my prepared remarks that we don’t expect the second quarter to be a strong and our gross margin – this is the first quarter.

We’re looking at our variances and at the variances from production roll-in to the P&L gives us some foresight into what the margin might be in the succeeding periods. And because we have less production going down in the November and December time period because of the holidays, we tend to run more variances in that period which are close to the P&L generally in the second quarter.

So we tend to think that the margin in the second quarter will be little bit less. But on an overall basis we continue to make progress and efficiencies using our factories around the world where we have centers of excellence and moving production to those centers where the production should be.

So, Finland is an example of moving production from that facility to here in Utica as well as to our Largo facility in Florida.

Jim Sidoti – Sidoti & Company

Okay. And then my final question is related to the patent that you mentioned. Is that something where you the defendant or did you bring out – is there a trail day or any timing that you can?

Joe Corasanti

Was it a kind of – there is no timing on the trial.

Jim Sidoti – Sidoti & Company

Okay. All right. Thank you.

Operator

We have no further questions in the queue at this time. At this moment I would like to hand the call back to Joe Corasanti for closing remarks.

Joe Corasanti

Thank you Alex. I would like thank everyone for participating in today’s first quarter conference call for CONMED Corporation and we look forward to talking to you again on our second quarter conference call. Thank you very much.

Operator

Thank you for joining today’s conference. This concludes your presentation. You may now disconnect, good day.

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