CONMED's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.13.14 | About: CONMED Corporation (CNMD)

CONMED Corporation (NASDAQ:CNMD)

Q4 2013 Results Earnings Conference Call

February 13, 2014 10:00 AM ET

Executives

Bob Yedid - ICR, IR

Joe Corasanti - President and CEO

Rob Shallish - Chief Financial Officer

Analysts

Mike Matson - Needham & Company

Jeff Cohen - Ladenburg Thalmann

Young Li - Piper Jaffray

Mark Landy - Summer Street

Jim Sidoti - Sidoti & Company

Operator

Good day, ladies and gentlemen. And welcome to the Q4 2013 CONMED Earnings Conference Call hosted by Bob Yedid from ICR. My name is Sunny, and I will be your event manager this morning. Throughout the conference you'll remain on listen-only. (Operator Instructions)

I'd like to advise all parties that this conference is being recorded for replay purposes. And now, I'd like to hand over to Mr. Bob Yedid. Please go ahead.

Bob Yedid

Good morning. 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 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 and 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 special or outside of the normal ongoing operations of the company. These adjusting items are specified in the reconciliation in the press release issued this morning.

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

Joe Corasanti

Hey. Good morning. Thanks very much Bob. We exited 2013 having generated fourth quarter sales and adjusted EPS results above our guidance. CONMED sales for the fourth quarter 2013 were $203.4 million or 2.1% increase on a constant currency basis versus the fourth quarter of 2012.

We encouraged by the growth we have achieved in both our single use and capital equipment products, which were up over 2% on a constant currency basis for the quarter. Adjusted diluted earnings per share for the fourth quarter were $0.53, excluding the impact of the medical device excise tax adjusted diluted EPS was $0.57 up 10% compared to Q4 2012.

Other Q4 highlights include adjusted EBITDA margin of 18.1%, consistent with the prior year period, excluding the medical device excise tax in 2013 adjusted EBITDA margin for the fourth quarter of 2013 would have 18.9%, an increase of 80 basis points from the prior year period on an apples to apples basis. We also return more capital to shareholders by increasing our quarterly cash dividend by 33% to $0.20 per share

Now I would like to go into a bit more detail on our sales for the quarter. During the fourth quarter our sales of single-use products were up 2% on a constant currency basis. This continues the trend we saw last quarter and overall the second half of 2013 was stronger than the first half of the year.

Capital products were up 2.4% in constant currency, which represents a good rebound versus the third quarter. This capital product sale increases were largely driven by strong sales of our surgical visualization imaging devices in the international markets.

For the full year 2013, the operating results reflected the various headwinds that we have previously outlined related to the medical device tax and currency headwinds. For all of 2013 healthcare utilization was weaker than expected and capital spending by hospitals was choppy. That said, we achieved key accomplishments this year that reflect our employees hard work and position the company for future success.

We are delivering on the strategy that we have outlined to grow our margins and earnings per share faster than sales to continue to deliver on this goal, we are taking important steps to introduce new products, improve our product mix and steadily reduce our operating costs over the next few years.

Now I would like to update you on a few key operational initiatives. Over the last year, we have focused on R&D innovation and we expect 2014 to benefit from more new product introductions then in 2013.

In fact, we are planning to introduce eight products this year, which is doubled the pace of 2013. These eight introductions will include both new products and upgrades to existing products.

One of the important new products is the IM 8000, our new 2D surgical visualization system. We are excited about the IM 8000 for a number of reasons. First, it is extremely advanced with best-in-class three chip CMOS technology that expedites the processing of light to create a pure image with exceptional resolution.

The CMOS sensors in the new camera head provide high-resolution due to increased pixels on each of the three sensors as compared to our former three-chip CCD chip technology.

Together with our new LF 8000 LED light source, we believe our newest surgical video offering is a lead forward and will be a premier solution for all surgical specialties, including minimally invasive general surgery and arthroscopy.

Our new system will be on display at the Academy of Orthopaedic Surgeons Annual Conference next month in New Orleans and we expect to sell our first unit in the second quarter of 2014.

One of our other new products for 2014 falls into our broad portfolio of sports medicine devices. For several years we have been offering an arthroscopic RF energy probe based on monopolar technology for ablation of tissue during sports medicine procedures.

While, arthroscopic surgeons have found monopolar probes to be useful, the market generally preferred bipolar RF probes offered by competitors. Now after an expensive R&D process, I can now announce that we will show at AOS next month, our proprietary own arthroscopic energy system based on bipolar RF technology.

The new arthroscopic energy system or AES is designed for arthroscopic soft tissue ablation, resection and coagulation. The AES consists of the radio frequency generator, bipolar probes and optional wired or wireless foot controls. The single-use bipolar probes are engineered for shoulder, knee, hip and Extremity arthroscopy procedures.

CONMED has been a leader in open and Laparoscopic ultra surgery for decades. With AES, we are now entering the growing $0.5 billion bipolar arthroscopic ablation market. We plan on limited launch of these products internationally early in the second quarter with the U.S. launch in the third quarter of 2014.

Throughout 2014, we believe we are well positioned to continue to steadily expand adjusted EBITDA and operating margins by further improving our product mix and reducing costs. We've expanded our adjusted EBITDA margins from a recession low of 13.4% in 2009 to 18.9% in 2013. When excluding the medical device excise tax, this is an annual increase of over 100 basis points each year during the four-year period.

In order to drive down costs further, we are executing on a number of lean manufacturing and cost reduction initiatives focused on reducing G&A and cost of goods sold. In fact this week, we announced that we will be restructuring the manufacturing operation in our Denver, Colorado facility. Over the next 24 months, we will transition the current manufacturing and that plant to other locations.

Our Denver facility will continue to operate as a center of excellence for our sales marketing and R&D groups who manage CONMED’s advanced energy products. We look forward to communicating on our success and future initiatives throughout the year. In 2013, CONMED’s cash generation was solid with cash flow from operations of $81 million and free cash flow of $62.5 million.

Based on the company consistent cash flow generation, the Board is returning cash to shareholders in the form of dividends, which was increased by 33% recently and meaningful share of buybacks. Rob Shallish will provide more details on these proactive efforts in his remarks.

With regard to acquisitions, we continued to actively evaluate acquisitions that are complimentary to our core product lines. Acquisitions are an important part of CONMED’s strategy and have contributed significantly to the company's growth over the past 20 years. Our focus is on pursuing opportunities that will add to our product lines and leverage our sales and manufacturing capabilities.

Lastly, I would like to provide an update on Altrus. For the fourth quarter, Altrus sales were $1.2 million and for the full year Altrus sale totaled $4 million. We are pleased with the continued surge in adoption and usage of Altrus, and now that the product has been under market for sometime, our expectations for continued growth of this product line will be included in our guidance for total company sales.

On the regulatory front, Altrus is sold under 510(k) clearance that was received in 2010. As we have mentioned in prior calls, we have made modifications to the Altrus system over time. After an FDA inspection in the fall of 2013 of our Denver facility where Altrus is manufactured, we received an FDA Form 483 with observations of covering some of the modifications we made to Altrus as well as aspects of our quality system.

We responded to the FDA's 483 observations in October 2013. More recently, the FDA issued warning letter that takes the physician that two changes to the Altrus system were significant enough to require a new 510(k) filing and raises concerns with our quality system, adverse event and corrections and removals reporting.

In response, the company will be filing another 510(k) for Altrus in the next few days to clear any questions about the device and we are in dialogue with the FDA about our actions to satisfy their concerns. We take the warning letter very seriously and are in the process of evaluating improvements to our regulatory processes and to address any question the FDA may have. We will update you with future developments as appropriate.

Before I turn the call over to Rob, I would like to briefly recap our view on the market position and why we are confident that we are executing the right strategy to create value for our shareholders. First, we have proprietary market-leading technology based on surgical devices that create better outcomes for surgeons and their patients. This market leadership has allowed us to win the number two, or number three market position in our key product lines.

Second, CONMED is successfully shifting its mix to single-use products that create a recurring revenue stream with predictable growth and healthy margins. These products comprise 80% of our sales. Third, about 55% of sales -- of our sales come from sports medicine and powered surgical orthopedic instruments, markets that enjoy relatively attractive growth rates.

Fourth, CONMED has a global presence and is well positioned to expand sales in several high growth emerging markets in Asia and the Americas. We achieved 15% growth in these geographies during the fourth quarter and 8% for the full year.

Fifth, we expect to continue to build upon our track record for adjusted EBITDA margin growth. We expect modest single-digit growth in the years ahead -- sales growth in the years ahead and when coupled with margin expansion, this will translate into double-digit adjusted EPS growth. We believe our past performance is a good indication of our future performance for EPS growth. From 2009 through 2012, CONMED increased earnings per share at a rate of 15% or more each year. Accordingly, we are confident that we have the potential to achieve similar growth going forward.

And finally, with solid earnings performance and strong cash flow, we expect to continue to reinvest internally, seek products and tuck-in acquisitions and to return cash to shareholders through dividends and share repurchases.

I am optimistic about the company's future. I will now turn the call over to Rob Shallish for further review of our financials. Rob?

Rob Shallish

Thanks, Joe, and good morning, everyone. As Joe mentioned, we had a much better quarter to finish out 2013 than we had originally anticipated. Europe performed well and our capital products, particularly our surgical visualization product line, had much better growth than we had forecasted. As a result of the increased sales and with continued improvement in gross margin, adjusted earnings per share exceeded the earnings guidance we provided on our third quarter conference call in October.

In the December 2013 quarter, total sales grew 1.1% or 2.1% on a constant currency basis to $203.4 million, while adjusted earnings per share increased 2% to $0.53. For full year 2013, sales grew to $762.7 million, up 0.2% on a constant currency basis.

By geography, fourth quarter sales in the United States grew 0.4% year-over-year on a reported basis. CONMED’s international sales grew 1.7% on a reported basis and 3.8% on a constant currency basis. This quarterly growth trends are stronger than the growth rates for the entire year, and are as a result we believe of strengthening economies and increases in procedure rates. This bodes well for 2014.

I will now review the performance of our major product lines for the fourth quarter and full year and will discuss sales on a constant currency basis. We achieved sales increases in the fourth quarter across all of our major product lines. In orthopedic surgery, the sports medicine devices and tissue revenues grew 3.4%, while powered instruments were relatively flat. In total, the orthopedic line sales increased 2.2% on a constant currency basis.

Surgical visualization had a very strong quarter, up 5.6% on a reported and constant currency basis from the fourth quarter of 2012 as we increased our sales in export markets. We're forecasting relatively flat growth in capital products for the full year 2014 but believe that the upcoming launch of our new IM 8000 2D platform will help boost sales.

General surgery was up 1.2% on a constant currency basis in the quarter and within that broader product line, our GI and pulmonary products continue to do very well.

For the full year 2013, our orthopedic surgery sales were consistent with 2012. Revenues from our sports biologics product line were up 5.4%, reflecting good progress with the MTF distribution arrangement. General surgery sales were up 0.5% in 2013, with growth in both single-use and capital products on a constant currency basis. The GI and pulmonary and endomechanical product lines were both up over 2% year-over-year.

Advanced energy sales were comparable to 2012, while patient monitoring was down 2% as we continue to operate in a highly competitive environment for that line. Visualization was down 0.9% for the year, mainly due to a weak capital environment and a delayed product launch due to the integration of Santa Barbara and Westborough, Massachusetts locations following our acquisition of Viking in September of 2012 and the movement of product manufacturing to our other facilities.

Turning to margins, gross margin of 54.8% in the fourth quarter were up 150 basis points versus the fourth quarter of 2012. When adjusting for the restructuring costs included in cost of sales, the fourth quarter adjusted gross margin was 55.8% compared to 54.6% in the same period of 2012. Consistent improvements in gross margin throughout 2013 reflect our cost efficiency programs and lean manufacturing focus at outlook. We're encouraged -- are encouraged by the improvement we are seeing and hope to expand further in 2014.

Selling, general and administrative expense as a percentage of sales was 40.5% in the fourth quarter, a slight increase compared to the 39.7% in the same quarter last year. Research and development spending of $6.4 million for the fourth quarter was down slightly versus the $6.9 million in the fourth quarter of 2012 as we continue to focus only on those research projects that will complement our existing product portfolio.

R&D as a percentage of sales was 3.2% in the fourth quarter of 2013 compared to 3.4% in the fourth quarter of 2012 due in part to the solid sales growth in the quarter. We believe it is more relevant to consider R&D spending ratio of full-year basis which was $25.8 million or 3.4% of sales.

Overall the adjusted operating margin in the fourth quarter of 2013 increased approximately 70 basis points to 12.2% excluding the medical device tax for comparability. For the full year, adjusted operating margin was 11.1%, a 40-basis point increase compared to the full year of 2012.

The adjusted EBITDA margins for the fourth quarter and year were comparable to the similar periods in 2012 at 18.1% of sales for the quarter and 17.2% of sales for the year. We do not adjust these percentages for the medical device tax because of the cash nature of the tax. But I will point out that the tax caused the adjusted EBITDA margins to be lower by 80 basis points in 2013. GAAP EBITDA margin was 13.6% of sales for the year, a year-over-year decline of 90 basis points, again caused by the restructuring costs and device tax.

The reported income tax rate in the fourth quarter on an adjusted basis was 31.4%, while the rate was 30.4% for the full year of 2013. As we look through 2014, we estimate a book tax rate of approximately 33% and a cash tax rate of approximately 20%.

For the fourth quarter of 2013, adjusted diluted earnings per share were $0.53 compared to $0.52 in the fourth quarter of 2012. Excluding the medical device tax, adjusted earnings per share were $0.57 per share and represented a year-over-year increase of 9.6%.

The adjustments for unusual items of $4.7 million net of tax 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. For the full year, the company incurred unusual items of $14.8 million, net of tax in the same areas.

As we continue our efficiency programs in 2014, we anticipate incurring pretax restructuring costs of $4 million to $5 million for projects currently in progress. As Joe mentioned we announced restructuring activities relative to manufacturing in our Denver facility. We will provide an estimate of these anticipated restructuring costs as they become available.

Turning now to cash flow, cash provided by operations was very strong at $27.3 million in the fourth quarter. For the full year, CONMED’s cash generation was solid with cash flow from operations of $81 million and free cash flow of $62.5 million.

Looking forward, we expect that our cash flow in 2014 will be aided by the fact that we will not need to make a pension plan contribution. We may plan contributions of $7 million in each of 2012 and 2013 and those contributions plus asset appreciation in the last two years. We had a positive impact for the foreseeable future.

CONMED has and will continue to return cash to shareholders. In late October, based upon our confidence in the company's outlook, the board increased quarterly dividend by 33% from $0.15 to $0.20 per share. With an annual dividend of $0.80 per share, our dividend yield is now approximately 2% based upon yesterday’s share price.

This increase just 18 months after our initial dividend payment reflects our confidence in the company's operating strategy and market position. Based upon our new quarterly dividend level, CONMED’s returned approximately $22.5 million to shareholders annually through cash dividends.

We believe that our healthy dividend coupled with our share repurchases, which totaled nearly 1.6 million shares of common stock in 2013, demonstrated our complete commitment to returning value directly to our shareholders. We have repurchased those shares at an average price of $32.04 per share, a level less that has been beneficial to our shareholders.

In addition, CONMED instituted a 10b-5 plan in December 2013 to repurchase additional shares under the existing board repurchase authorization. Since the beginning of 2014, we have repurchased an additional 400,000 shares at a price of $16.8 million. As of today, the Board’s remaining share repurchase authorization stands at $37 million and we expect the Board to revisit this amount in the first half of 2014.

As of December 31, 2013, our cash balance stands at $54.4 million compared to $23.7 million as of December 31, 2012. We continue to make improvements to working capital during the year. Inventory decreased by $13 million compared to December 2012 even in light of the higher sales levels.

Turning to guidance for the full year of the first quarter 2014, we believe that the continued modest improvement in the global economy will result in annual sales growth for our products. For the full year 2014, our guidance for sale is between $770 million and $780 million and is based on continued single use products sales growth and the expectation that capital products sales will improve as we enter more normal capital equipment replacement cycle.

With these expected sales levels, we reiterate the full year of 2014 adjusted EPS guidance, up between $1.90 and $2 per share. We also see a parallel improvement in adjusted operating and EBITDA margins of approximately 50 basis points.

We forecast first quarter 2014 sales to be in the range of $191 million to $196 million and adjusted earnings per share to be in the range of $0.45 to $0.49. We are encouraged by our sales and earnings growth in the fourth quarter and believe that we have strengthened our foundation for growth.

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

Joe Corasanti

Thanks very much Rob. I would like to make closing remark regarding our long-term goals. In 2013, we faced headwinds from both the medical device tax and adverse foreign exchange rates that cost us about $0.18 per share.

Further, as with other medical technology companies, we suffered from lackluster surgical procedure growth while we have reason to believe that the recovering world economy will result in improved numbers of procedures and greater hospital capital spending. For 2014, we are being conservative with our forecasting. Consequently, we are guiding to modest organic sales growth for 2014 that will generate high single digit EPS growth at the midpoint of our $1.90 to $2 per share range.

We look forward to updating you on our continued progress during our first quarter 2014 conference call and upcoming investor event appearances. In addition, please look for our press release on CONMED’s new and upgraded products that will be released prior to the start of the AAOS on March ‘11.

Thank you for participating in the call today. At this point, I would like operator to open the call up for questions. Thank you.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We have a question. And the first question comes from Mike Matson from Needham & Company. Please go ahead.

Mike Matson - Needham & Company

Hi. Glad to hear about your new AES product but I was just wondering -- I know there has been a lot of litigation in that area and I was wondering what your comfort level is with your IP position there running that product?

Joe Corasanti

Yes Mat, good question. We’re very comfortable with it. We have done extensive research in that area and quite frankly some of the patents that would have prevented our entering the bipolar market in the past has now expired. So I think we are in a good shape there.

Mike Matson - Needham & Company

Okay. And then I guess just with regard to Altrus, I mean obviously you’ve seen some pretty good growth on a year-over-year basis but considering the size of that market, it seems like there's potential for it to be a lot bigger. So it seems like it's a good product. I'm just wondering what you think that sort of limiting factor is there for preventing the sales from growing even more quickly?

Joe Corasanti

Yes. We agreed it’s a great product. It has superior performance. We think it feels better than other products on the market. The biggest features that I have talked about in the past is nonstick performance that it offers. Surgeons recognize that they like this and see the value in the product but limiting factors right now and having rapid sequential quarterly growth is simply, where the fourth company get into the market.

So we’re really coming from a position where the new players and its going to just take time I think to build up a reputation and to get in front of surgeon who are willing to trial the product and sometimes it’s a challenge even after the surgeon trials the product and says that they like it and want to switch.

It’s still a challenge. It’s not an automatic conversion for us. There are still several administrative hurdles to overcome in order to get the business into a particular hospital. So I think the short answer is we are seeing sequential growth, slow sequential growth but nevertheless it is growing and it’s just going to take more time.

Mike Matson - Needham & Company

Okay. And then just a final question on the new IM 8000 camera. So is this the first camera to reach the market with the three chip CMOS technology? And are there any advantages from a cost standpoint to CMOS versus CCD?

Joe Corasanti

This is not the first CMOS. We are -- we're very happy with our trial so far with this video system We have gotten just great reviews from surgeons that have seen the picture, the image quality, et cetera. It really provides a lot of good color and definition. So the next question was about the cost, I guess I don’t think there is any significant cost differential between this technology and our previous technology.

Mike Matson - Needham & Company

Correct. That’s what I asked. Thanks a lot.

Joe Corasanti

Thank you.

Operator

Thank you for your question. Next question comes from Jeff Cohen from Ladenburg Thalmann. Please go ahead.

Jeff Cohen - Ladenburg Thalmann

Hi. Thank you for taking the call. Joe, I wondered if you could extrapolate a little bit more on the visualization instrumentation and talk about both Viking and it’s uptick and talk a bit about international markets in 2D versus 3D there?

Joe Corasanti

Absolutely. Viking, great technology, we acquired it year and half ago or so and it has been slow going in the United States but we have had better results outside the U.S. that seems to be more than appetite for 3D technology outside the U.S. where we believe customers would like to have 3D picture quality but are unwilling to spend the millions of dollars required to get that when you purchase a complete robotic system.

So this is a much lesser expensive way to get 3D. Our system is to remind everyone to sell for about $145,000 for one of our 3D systems. So -- and as far as sales generally for video, there have been a little more robust outside the U.S. for 2D and 3D. We would expect that to continue.

However, with the new IM 8000 we are very bullish on this product because of the quality, the image quality that we talked -- that I talked about just a moments ago and I think its going to make us -- it will make us a lot more competitive in these very competitive situations involving hospital conversions for general surgery video systems as well as arthroscopic video systems. And of course having a competitive video system, its very important for pull through of some of the other products that we are selling namely the Shaver Blade products, pumps and pump tubing products that are used in arthroscopic procedures.

Jeff Cohen - Ladenburg Thalmann

Okay. Thanks. That’s helpful. As far as 510(k), that’s going back in for Altrus, are there any other modifications that are worth noting, or do you expect the other modifications over the next 12 months?

Joe Corasanti

And I assume you are referring to modifications for the device. They are not, this product performs extremely well and so you should not expect to see modifications to the device over the next 12 months. However, we do have a products underway to come out with what we will be calling the second generation ultras device.

But I would say the primary purpose for this product -- project is to significantly reduce the cost of Altrus. We really don’t think there is need for improvement to the device other than the placement of one of the buttons on the device for just better ergonomics. But in terms of cutting and sealing and the nonstick performance, we feel there is no reason to make improvements there. It’s already performing the best of any device in the market.

Jeff Cohen - Ladenburg Thalmann

Okay and the second generation will also be rigid, correct?

Joe Corasanti

Yes.

Jeff Cohen - Ladenburg Thalmann

Okay. And just one more, if I May, may be for Rob, could you just go over the current facility footprint as you see it over the next 12 months including the transition of Denver?

Rob Shallish

Sure Jeff. The Denver transition may take up to 24 months. So that is not going to happen. So we want to be very, very specific about how we move our manufacturing and make sure we are validating all the processes and so forth. So we've been very good about doing this and other situations and we know that these transitions take some time to do it right.

But after that’s done, our manufacturing will be in three locations. Here in upstate New York, the facility in Largo, Florida, just outside of Tampa and the Chihuahua, Mexican manufacturing site. We will have R&D and marketing locations for couple of our lines in other locations. Denver will remain the same for those types of activities for the energy products and we’ve got the Westborough location for the visualization devices.

Jeff Cohen - Ladenburg Thalmann

Okay. So, Santa Barbara and Tempere finished?

Joe Corasanti

Santa Barbara is closed. Tempere, if not absolutely closed, it’s going to be closed very soon. And of course, we have the sales offices all around the world, so we've got 16 locations with sales offices in areas outside the United States.

Jeff Cohen - Ladenburg Thalmann

Perfect. Thanks very much.

Operator

Thank you. Next question comes from Matt Miksic from Piper Jaffray. Please go ahead.

Young Li - Piper Jaffray

Hi, Joe, Rob. This is Young Li for Matt. Thanks for taking our questions. The first question is on hospital capital. Just the trend in hospital capital spending and that seem to be sluggish or maybe little bit delayed in Q4 across some other players have reported. I’m wondering, would you anticipate any sort of either catch-up or uptick in Q1?

Joe Corasanti

Predicting capital has been a challenge for every company. It’s been choppy as we said in our prepared remarks. We did see a pickup in Q4 as we reported. Our thinking on this all along has been, it’s a replacement market at this point. There's been very little technology upgrading. So at some point, the theory has been that our customers just simply can't hold on to the little systems very much longer and they're going to have to replace. So we’re slightly optimistic about an uptake, but it’s been very difficult to predict.

Young Li - Piper Jaffray

Okay. Sure. Yeah, that’s very fair. I guess another question on joints or (inaudible). So when we -- actually look at total joint recount trends, there is a deferral period and as a result sort of a backlog of patients who are now just coming in to get treatment. Do you thing your sports medicine has that type of backlog in patients as well? And do you expect that to help improving growth at any point?

Joe Corasanti

Yeah. Young, when we look at the numbers outside the U.S, especially in Europe, I think there is the potential that there could be some backlog there. We did see our procedures were slow, primarily in our European markets. In some cases that was mandated by the government and some countries in Europe to slowdown those procedures. So, yes, I think there's a potential for that to come back as a backlog built.

Young Li - Piper Jaffray

All right. Great. Thank you. That’s all the questions for us.

Joe Corasanti

Sure.

Operator

Thank you. Next question comes from Mark Landy from Summer Street. Please go ahead.

Mark Landy - Summer Street

Good morning, folks. Good morning. Can you hear me, okay?

Joe Corasanti

Yeah, you are fine.

Mark Landy - Summer Street

Good. Just looking a little bit into Altrus, I think in the past you kind of guided us to $5 million to $10 million, you kind of hit the road into $5 million for 2013. Just looking at 2014, should we think of kind of the $5 million to $10 million range to keep getting to the upper end or toward the lower end again?

Joe Corasanti

Yeah.I think, now with the experience we’ve had in terms of how long it takes to get a conversion, meaning from the time it takes to get -- the surgeon is already using a competitive device, to get the surgeon interested in trying something new. Then scheduling the evaluation and then after getting a positive evaluation, the time it takes to get it through hospital administration. So they tend to buy the device for the surgeon who likes it, that experience leads us to believe that we’ll probably be again at the low-end of that range. So around $6 million is I think what’s forecasted for Altrus for 2014.

Mark Landy - Summer Street

And now with respect to the new 510(k), are you able to continue to sell new systems or do you have to stop those activities, or you’re able to supply minimal to guys who are out there and how is the operation on this 483?

Joe Corasanti

Yeah, I mean, today, we’re selling Altrus but I can’t give you definitive answer today about that because we’re still in discussions with the FDA on that very issue. We have a response, written response that is due to the FDA and we’ll be making that response shortly. And after that, there’s probably discussions that take place. So, unfortunately, I can't give you definitive answer on that. But the possibility does exist that we may have to stop selling for the period of time that takes to get the 510(k) cleared.

Mark Landy - Summer Street

And where are you anticipating in terms of an approval time for that 510(k)?

Joe Corasanti

510(ks) generally take 90 days, so I think that’s what we’re expecting.

Mark Landy - Summer Street

I think we had spoke to and I had ask the question specifically, maybe they’ll plan a little bit about whether or not, you talked that you had to go back to the agency with some of the changes. What was position that you’ve taken relative to the agency’s position? That they see that there is a new 510(k) and you perhaps couldn’t?

Joe Corasanti

This happens quite often. We have experience with this with some of our other products and I know other companies do as well. What generally happens when there is new product that’s launched is that, it’s very typical to make a number of changes. And most of those changes relate to manufacturing process changes that will do a number of things, improve the yield, make reduce costs, just make it much more easy to manufacture. Some of the changes involve adding poke-oke systems to the manufacturing process that eliminates operator error, things of that nature and some lean manufacturing changes so.

And the things that I’m describing don't relate to the performance of the device. And so I think many companies, CONMED included think that those types of changes aren’t the types of design changes intended to impact performance for the device that require a submission of a new 510(k).

Mark Landy - Summer Street

I understand what you are saying and that was the reason why I had asked the question during the year. But what’s specifically relating to device performances is the FDA concerned with relative to just improving the product from a manufacturing perspective, yields, et cetera, or there is a lack of documentation to be able to go from the changes to do the divine process and to the final product from a QA perspective and the QC perspective.

Joe Corasanti

Yeah, so the FDA starts with a kind of a high level wins. The FDA in the letter talks about, I guess, three high-level issues, right. They are concerned about the process in Denver for design controls, that’s paperwork issue. Our process for deciding when to file a new 510(k), that’s another process paperwork issue. Our process for reporting adverse events and field actions, that's another good manufacturing process, net practice process issue. So those are the three high level issues contained in the letter.

The specific change that gives concern apparently to the FDA is the change to the method that we use to secure the ceramic inserts, that go inside the jaws of the device and by the way this is an important part of the device. It provides us with the non-stick performance. So, anyway we made a change -- a manufacturing change that made it easier to make this device and improved our yield. If we had a better way to -- by creating a better way to secure the inserts, we've better yield, they plus fall out a bad product. In our view other performance issue and then the other one would be we've changed the number of permitted activations of the handpiece. When we first launched it, we had 200, we moved it up to 450. So those of the two, those are, that's it.

Mark Landy - Summer Street

Thanks, guys. I appreciate the clarity. So we are catching -- they are somewhere between -- somewhere around $2 million to $3 million of risk that just kind of pull part and go through the 510(k) to this year’s guidance?

Joe Corasanti

Yeah, I mean, the way to look at it is, let's take it say worse case scenario we thinks it's -- assume that if you want to take those position or make those assumption say the market will not be sold four, three months. And so you can kind of figure it out that way I guess if you said 2 million to 3 million maybe is a possibility, yeah.

Mark Landy - Summer Street

Okay, fair enough. And turning it over to Europe, in general I think Europe has been showing constraints. Are you seeing it at the grassroots level or is it more towards the specialized hospitals and then the breakup between the improvements versus disposables against capital equipment?

Joe Corasanti

In Europe, I think the difficulty was in the public hospital arena less so with private, I think that’s the case in Spain in particular. And capital is off significantly and in Europe, but to our surprise this year now we saw the disposals flatten out really up until Q4. So the good news is, we're hanging on to what we saw in Q4, hoping that we're in a turnaround situation with our international sales for disposables and even to some extent for our capital products. And of course what's also going to be helping us going forward is the launch of new capital. We have the new video system and the new helix are going to be in generator and some new powered instrumentation, the new 18-minute lithium-ion battery which is going to be very signification outside the U.S. and Europe in particular and the new Hall 50 powered instruments for large bone procedures.

Mark Landy - Summer Street

Got it. And then just last question. (Inaudible) airports etcetera kind of a little bit up in arms about some of the changes that we made to pay to kind of last year. Are you kind of structuring for 2014 the similar type of commission structure? Have you made major changes to it and most would be actually from the sales force?

Joe Corasanti

All right. It's funny every year we modify our commission structure slightly to have focused selling on certain products that we think are important, I think this year will be no different. We'll have -- with eight new products, we'll have certain incentives to get a good start on the product launches. And in terms of maybe a longer-term strategy with our sales forces, we're contemplating improvements in the variety of areas in order to generate greater organic sales growth, especially in United States.

Mark Landy - Summer Street

(Inaudible) I am sure you related all that in 2014.

Joe Corasanti

2014, the plans have been rolled out, yes.

Mark Landy - Summer Street

Okay. Thanks guys. I appreciate the time.

Operator

Thank you. We have another question. And this question comes from Jim Sidoti from Sidoti & Co. Please go ahead.

Jim Sidoti - Sidoti & Company

Good morning. Can you hear me?

Joe Corasanti

Yeah, Jim. How are you?

Jim Sidoti - Sidoti & Company

Great. You could start sending us some of your snow, we've got enough.

Joe Corasanti

Well, good luck with it.

Rob Shallish

Enjoy it, right.

Jim Sidoti - Sidoti & Company

Anyway, just one follow-up on the Denver plant and the decision to shut that down, was that at all related to the 483 in the FDA warnings or is that strictly a financial decision?

Joe Corasanti

Like all of our factory consolidations, it's a financial consideration and it really was part of the, I'd say the long-term planning of the company that was I guess contemplated say five years ago and although obviously know decision was made regarding the Denver facility five years ago, there was a long-term plan to look at how we could cut cost out of our structure. And as you saw, it's started with Chelmsford and Finland and then the two facilities in Utica and the opening of the Chihuahua, Mexico factory some five years ago. So I think it's just a good business practice to take cost out of your structure where you can and when you can. And I think that's where we are right now with Denver. We are at the point where we would call this when we can. And so, that's what’s happening.

Jim Sidoti - Sidoti & Company

Okay, all right. And then just switch gears a little with the pending acquisition of ArthroCare do you see any opportunity to add to your sales force for that market?

Joe Corasanti

We've seen this in the past with M&A activity. There is always the opportunity for sales reps to want to make it change. And so, yes, to the extent that exists we will take a look at the opportunities that present themselves for any sales as they want to make a change.

Jim Sidoti - Sidoti & Company

Okay. Can you make some comment on the overall size of those sales force, particularly in the orthopedic market and if just in general if you plan to add sales people, I guess in that market and as well as your other businesses in 2014?

Joe Corasanti

No, we're planning to do a few things with the sales forces, but they're really still on the planning -- in the planning stages. We added sales reps over the last couple of years in several of our sales forces, so I really probably not prepare to comment on sales force say at this time.

Jim Sidoti - Sidoti & Company

Al right, great. That's it for me.

Operator

Thank you. We have no further questions.

Joe Corasanti

Well, I want to thank everyone for participating in today's fourth quarter and year end earnings conference call for CONMED Corporation. We thank you for your attention and we look forward to talking to you on our next earnings conference call. Thank you very much.

Operator

Thank you. Ladies and gentlemen, that concludes our conference today. You may now disconnect.

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CONMED Corporation (CNMD): Q4 EPS of $0.53 beats by $0.05. Revenue of $203.4M (+1.1% Y/Y) beats by $6.16M.