CONMED's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.24.14 | About: CONMED Corporation (CNMD)

CONMED Corporation (NASDAQ:CNMD)

Q1 2014 Earnings Conference Call

April 24, 2014 10:00 AM ET

Executives

Robert Yedid – Investor Relations-ICR, LLC

Joseph J. Corasanti – President and Chief Executive Officer

Robert D. Shallish Jr. – Chief Financial Officer, Executive Vice President-Finance, Assistant Secretary

Analysts

Mike S. Matson – Needham & Co. LLC

Jeffrey S. Cohen – Ladenburg Thalmann & Co., Inc.

Mark Landy – Summer Street Research Partners

Matt S. Miksic – Piper Jaffray & Co.

James Sidoti – Sidoti & Company LLC

Operator

Good day, ladies and gentlemen. And welcome to the Q1, 2014 CONMED Earnings Conference Call. My name is Jasmine and I will 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 would now like to turn the conference over to your host for today Mr. Bob Yedid of ICR. Please proceed.

Robert Yedid

Hi good morning everyone. This is Bob Yedid with ICR, Investor Relations. 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 represents forward-looking statements that involve risks and uncertainties as those terms are defined under Federal Securities Law.

The Company’s actual results may differ materially from our current expectations. Please refer to 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 medtech 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?

Joseph J. Corasanti

Good morning. Thank you very much Bob. During the first quarter, CONMED’s strong operating performance allowed us to grow our adjusted earnings per share to $0.49, up approximately 9% over the prior year. And at the top-end of the guidance, we provided to investors in February, despite a lower capital spending environment. Sales for the first quarter of 2014 were $181.9 million, a 2% decrease on a constant currency basis versus the first quarter of 2013. Sales in our single-use products, the best indicator of medical procedures were consistent with the prior year period in constant currency despite the impact of severe winter weather in several regions of the U.S. and continued softness in U.S. healthcare utilization. As a reminder, CONMED sales are split almost evenly between the international and U.S. markets.

CONMED benefited from its position as a global company as our international business units generated solid growth single-use product sales offset by lower sales in the U. S. due to weather and utilization trends. Capital products which account for approximately 20% of our sales were lower as we continue to experience a choppy capital spending environment globally.

Specifically, we experienced lower sales of capital product, capital equipment in our visualization and general surgery lines. We expect that the new products that we are introducing in 2014 will help to improve the sales trend in this area through the balance of the year. Indeed, we believe much of the decline in our visualization business is due to forestalled orders as customers wait for the release of our next-generation platform.

I had mentioned the growth in the adjusted earnings per share explained in part by achieving an adjusted EBITDA margin of 18.3% in the first quarter, up over 120 basis points versus the prior year period. We also generated strong cash flow from operations and returning cash directly to shareholders is an important component of our capital allocation strategy.

As our shareholders are aware with the dividend paid in January this year, we’ve boosted the company's dividend rate by 33% to $0.80 per share on an annualized basis or an approximately 2% yield based on the average stock price for the quarter. In the first quarter alone we returned $22.4 million to shareholders through stock repurchases and dividends. CONMED has a consistent track record of generating strong cash flows from operations. And we will continue to focus on returning value to our shareholders through dividends and share repurchases.

Now, I’d like to go into more detail on three key themes for CONMED. First, new products; second our outstanding track record of growing margins and EPS over the last three years; and third, CONMED’s strong and consistent cash flow generation.

As we have discussed, 2014 will be a great year for CONMED with eight new product introductions which has doubled the pace of 2013. Several of these new products were highlighted at the American Academy of Orthopaedic Surgeons in New Orleans last March and were well received.

One of the important new products is the IM8000, our new 2D surgical visualization system. The IM8000 is an extremely advanced system 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 higher 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 leap forward and will be a premier solution for all surgical specialties, including minimally invasive general surgery and arthroscopy.

We expect this new 2D system will re-establish a growth pattern in our visualization product line. In orthopedics, five additional new products for 2014 will bolster our broad portfolio of sports medicine devices. CONMED unveiled its new bipolar radio frequency arthroscopic energy system, which we have now branded the edge ablation system. It offers a versatile, intuitive design and user interface for arthroscopic ablation coagulation and dissection.

The single-use bipolar probes are engineered for knee, shoulder, hip and Extremity arthroscopy procedures. CONMED has been a leader in open and Laparoscopic ultra surgery for decades. With the edge system, 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.

In the arthroscopic resection area our now D4000 arthroscopic Shaver Blade control unit features a touch screen display with a customizable preference profile enabling storage and availability of surgeon preferred settings with plug and play operation and integration with CONMED's fluid pumps it provides for a seamless clinical experience.

With regard to suture anchors CONMED built on a strong competitive position by introducing highly innovative new products for shoulder arthroscopy. We recently introduced the Y-Knot flex system for instability repairs. This is an all suture anchor featuring the smallest double loaded anchor currently available with curved, flexible instrumentation to help surgeons achieve ideal anchor replacement.

For rotator cuff repairs, the Y-Knot RC anchors are currently the world’s only self-punching all-suture anchors. Surgeons find these anchors help to simplify techniques while their small size is designed to improve placement options.

As one of the leaders in powered surgical instruments we continue to expand our product lines building upon 50 years of powered instrument engineering expertise with the new Hall 50 Powered Instrument System. These instruments are lighter and more comfortable with ergonomically designed hand pieces.

Together with the recently released Hall autoclavable lithium ion batteries, the Hall 50 instruments deliver dependable long lasting power. In addition, CONMED looks for innovative products outside of our company that can help serve our surgeon customers and are additive to our product lines.

Through the company’s partnerships with MTF, we are introducing the new enhanced Bone Void Filler. This new tissue form offers properties comparable to that of synthetic bone void fillers while adding to osteoinductive and osteogenic opportunities with 100% demineralized cortical bone. We are excited about these new product launches. We will continue to make R&D an important priority at CONMED and R&D investments are up over 20% this quarter versus the prior year period.

With regard to acquisitions, we plan to continue actively evaluate acquisitions both large and small that are complementary to our core product lines. Our focus is on pursing opportunities that will add to our product lines and leverage our sales in manufacturing capabilities.

Our second theme is CONMED’s outstanding track record of growing margins and EPS over the last three years, CONMED has improved this margin through new products and improved mix of single-use products and a consistent program of lean manufacturing and cost reduction initiatives focused on reducing SG&A and cost of goods sold.

In the three years ended December 31, 2013, CONMED grew adjusted EBITDA margins by 320 basis points to 18 % excluding medical device tax. That trend continues in the first quarter 2014, when adjusted margins improved again by over 100 basis points versus the prior year period including the medical device tax in both periods. Throughout 2014, we believe we are well positioned to continue steadily expanding adjusted EBITDA and operating margins in comparison to last year by further improving our product mix and reducing cost. CONMED’s consistent emphasis on lowering our cost base, introducing new products, making selective acquisitions, and repurchasing shares has translated into very solid growth in earnings per share for the benefit of our investors.

From 2010 to 2013, CONMED grew adjusted EPS at a compound annual rate of 16%. And I want to emphasize that CONMED’s four year trend of 16% EPS growth was substantially above several mid-cap med-tech peers that grew EPS at a mean and median level of 9.3% and 5.5% respectively. Finally, CONMED has consistently generated strong levels of cash from operations and free cash flow. In the first quarter, we generated $17 million of cash flow from operations.

In 2011 through 2013, CONMED generated free cash flow of over $220 million which translates into free cash flow yield of approximately 10%. This is an enviable mark for any med-tech company. Rob Shallish will provide more details on our outlook for cash generation and uses of cash in his remarks.

To recap, we were able to deliver the top end of our adjusted EPS guidance at $0.49, despite continued uneven capital product spending and a difficult winter across most of the United States. We anticipate a stronger economic growth globally in 2014, along with our expected new product introductions will allow us to achieve our original sales and EPS targets for 2014.

Looking forward, we plan to leverage the company’s strong market positions and global presence to continue creating value for shareholders. I am optimistic about CONMED’s future. Our employees’ hard work has positioned the company for future success. We look forward to updating you on our continued progress at upcoming Investor Conferences and our second quarter 2014 call.

Now, I’d like to turn the call over to Rob Shallish for a further review of our financials. Rob?

Robert D. Shallish Jr.

Good morning and thanks Joe. Hello to everyone. As Joe mentioned, adjusted diluted earnings per share grew 8.9% to $0.49 in the first quarter, the top of our forecasted range compared to $0.45 in the first quarter of 2013. Diluted earnings per share on a GAAP basis came in at $0.31 for the first quarter and were affected by several special items, including a non-cash item related to a recent change in New York State tax regulations, which as a single item impacted our GAAP earnings by $0.08 per share.

Total sales for the first quarter came in at $181.9 million, a year-over-year decrease of 2.7%, primarily due to lower capital product sales and at worse FX rates in this first quarter of the year. On a constant currency basis, this was comprised of an 8.9% decline in capital products and a 0.1% decrease, almost flat in single-use devices compared to the first quarter of last year. The decrease in capital products was largely due to lower sales of our surgical visualization systems and within our general surgery product lines, lower sales of electric surgery generators.

Now, I will turn to a review of our three categories of product line sales disclosures; orthopedic surgery, general surgery and surgical visualization. We drove an overall improvement in orthopedics this quarter and on a constant currency basis sales were up 1.9%.

As a remainder the orthopedic surgery product group consists of two broad medical device offerings including the sports medicine line and the powered instrument line. Within the sports medicine line we offer single-use procedure specific devices used to repair soft tissue defects in joints. Secondly, arthroscopic enabling devices such as resection tissue removal devices and thirdly, revenues from educating and promoting allograft tissue forms. These three sub categories are referred to as our sports medicine offering.

Now for our more granular look at CONMED's orthopedic sales, we continue to drive very strong performance in our procedure specific single-use devices within sports medicine.

And on a constant currency basis, we achieve growth of 7%. This growth was led by our suite of shoulder repair products. The arthroscopic enabling devices within sports medicine such as single-use resection blades and fluid management tubing sets have traditionally had lower growth rates compared to procedure specific products. This first quarter is no exception with a constant currency growth rate of 1.6%, which we believe is similar to the overall market rate of growth for this category. These devices are susceptible to pricing pressure, reuse and reprocessing, which is not the case with procedure specific devices.

The last component of sports medicine is the revenue we receive from MTF for promoting their sports tissue and biologic products. Sales in this category declined $1.3 million or 18%, primarily due to a contract supplier's inability to supply platelet rich plasma or PRP devices for resale. We had anticipated this decline and have been exploring our alternative options for supply in PRP to our customers. But we may conclude that we will be unable to provide this product in the future. Coming up, these three single-use categories of sports medicine achieved overall growth of 1% or 1.08% on a constant currency basis.

Powered instrument line is a little more straight forward. We offer a full suite of devices for large and small bone orthopedic surgery as well as powered instruments for certain surgical specialties. Powered instruments performed well this quarter and achieved growth of 2.8% year-over-year or 3.7% on a constant currency basis. As a reminder, about one half of sales in this category are single-use drill bits and saw blades with a remainder being instrument hand pieces which are capital equipment items.

While the overall trend for capital equipment sales was negative this quarter, we drove a 4.5% in instrument hand pieces partly due to the new lithium batteries we introduced last year. So on an overall basis, our orthopedic products grew 0.9% on a reported basis and 1.9% on a constant currency basis. This is reported in our press release this morning.

Moving to the general surgery product group, sales declined 4.9% on a reported basis and 4.6% in constant currency, driven by a constant currency decline of 2.7% in single-use products and a constant currency decline of 21% in capital sales.

We have observed modest 2% to 3% declines in the sales of single-use products in all of our general surgery product lines, which we believe are related to severe weather patterns in many regions of the U.S. and lower health care utilization levels in the first quarter as compared to the fourth quarter of 2013.

Also, CONMED as well as many other medical technology firms had strong fourth quarter 2013 sales, perhaps due in part to what some have called a pull forward where patients desire to use expiring health plans prior to the start of a new plan year. This would have the effect of reducing utilization in the first quarter of the year.

In surgical visualization products, sales were down approximately $2.6 million this quarter due to continued variability in capital product sales as well as the anticipated launch of our newest visualization system, which held back sales of our current version, as Joe mentioned.

By geography, sales in the United States for the first quarter of 2014 came in at $87.3 million with international sales equal to $94.6 million. In both the U.S. and international markets capital sales were down approximately 9% in constant currency. Single-use products declined 5% domestically, but grew 5% internationally in constant currency. The U.S. suffered from the lack of procedure growth while we saw a return to growth in Europe and continued strong growth in emerging markets.

Turning now to a discussion of margins. Adjusted gross margins excluding restructuring costs for the first quarter of 2014 were 56.9% of sales, an increase of 110 basis points both year-over-year and on a sequential basis. CONMED is strongly focused on increasing gross margins through our lean manufacturing programs, strategic sourcing initiatives and moving production to lower cost facilities when appropriate.

Selling, general and administrative expenses for the first quarter of 2014 were $73.8 million or 40.6% of total sales compared to $77.7 million or 41.6% of total sales in the same quarter last year. Research and development spending was $6.9 million for the first quarter, up over 21% from the first quarter of 2013. R&D spending as a percentage of sales was 3.8% as compared to 3% in the prior year period and in line with our target of approximately 3.5% of sales. At this spending level we believe we will be able to continue to develop new products as well as upgrades that will improve competitiveness of our offerings in the market.

Overall, the adjusted operating margin in the first quarter of 2014 increased to 11.8%, which is 150 basis points higher than the prior year period. On a GAAP basis, operating margin was 9.5% in the first quarter compared to 8.5% in the same period last year. The adjusted EBITDA margin in the quarter was 18.3% of sales, also a strong increase of 120 basis points versus the prior year period EBITDA margin using GAAP amounts for the first quarter was 50.4% of sales, an increase of 70 basis points.

With regards to special charges, we continued on going consolidation of certain administrative functions and manufacturing activities during the first quarter of 2014. We also incurred litigation costs and a one-time settlement related to a patent dispute. We believe this was a favorable outcome, which will allow CONMED to avoid on going legal costs on a quarterly basis that were typically about the settlement amount and the potentially high cost of going to trial. Other unusual items include the write-off of New York state tax credits eliminated due to a legislative change.

Expenses associated with these activities amounted to $4.9 million net of tax in this quarter. These charges are included in the GAAP earnings per share that I discussed earlier and are excluded from the adjusted results. For the remainder of 2014, we expect to incur additional pre-tax restructuring cost of between $7.5 million and $8.5 million on projects currently in process.

Turning now to cash flow, cash provided by operating activities in the first quarter of 2014 came in at $17 million, which was greater than the first quarter of last year due to positive working capital items. This year we do not have to make any special funding to the frozen pension plan which did occur in the first quarter of 2013 when we contributed $7 million.

Similar to our quarterly cash flow pattern during 2013, we expect 2014 cash flow from operations to continue to improve in the remaining quarters of the year due to the incentive compensation payments only affecting the first quarter of this year.

During the first quarter of 2014, we repurchased 402,000 shares of CONMED common stock for a total of $16.9 million at an average price of approximately $42 per share. As of March 31, 2014, our cash and cash equivalents were $56.3 million. Days and accounts receivable were 65 days and inventory days were 176. Both of these metrics are within historical ranges.

As of March 2014, the net debt to book capitalization calculation was about 22%, this modest level of leverage will allow CONMED to continue to return cash to shareholders in the form of both share repurchases and dividends as well as to seek selective acquisitions consistent with our historical approach.

Our effective tax rate for this first quarter was 45.6% on a GAAP basis and 32.3% on an adjusted basis, compared to 28.3% in the first quarter of last year on an adjusted basis. As you may recall in last year’s first quarter all companies were able to record the full-year of 2012 benefit of federal legislation. That reinstated the research and development tax credit which was substantially lower the effective tax rate in Q1 of 2013. The GAAP tax rate in this Q1 2014 was adversely affected by the passage of most recent New York state budget, that unexpectedly change the tax credit of the state. And eliminated our ability to use accumulated tax credits related to the investments we have made in planned and equipment. CONMED had $2.3 million of New York tax credits that were written off in this quarter. However, in contrast, the good news for CONMED going forward is that New York State is eliminating any state taxes on profits earned on manufacturing in the state. Since CONMED has a major manufacturing presence in Utica, this (indiscernible) tax legislation achieved the same result that would have been delivered using the accumulated tax credits to offset taxes otherwise payable. For the remaining quarters of this year, we anticipate our book tax rate of approximately 32% to 33%. As we have discussed in the past, the cash tax rate is less than the book tax rate. This year we anticipate a 15% to 20% cash tax rate.

Finally in terms of our full year 2014 outlook, we reiterate our total sales guidance of between $770 million and $780 million and our full year adjusted diluted earnings per share guidance of between $1.90 and $2.00. As Joe previously mentioned, we expect that favorable economic conditions coupled with new product introductions will have a positive impact on total sales for this full year. For the second quarter of 2014, we are forecasting sales of approximately $190 million to $195 million and adjusted earnings per share to be in the range of $0.44 to $0.48 per share.

With that, Jasmine, we’ve concluded our prepared remarks and would like to open up the lines for questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) And your first question comes from line of Mike Matson with Needham & Company. Please proceed.

Mike S. Matson – Needham & Co. LLC

Thanks I guess, I just wanted to get a little more clarity into the new product launch timing. So I guess just starting with the camera, the IM8000 and then the LED light source, those were not out in the first quarter, correct. And then those are going to come out in the second quarter and that will be fully available early on in the quarter or late in quarter?

Joseph J. Corasanti

Well, Mike, good morning first of all. The camera is a Q3 launch at this time. So it’s slightly delayed. We did show at the academy as we said in our prepared remarks and it was very well received. We think we’ll do very well with it. Right now Q3 is the launch for the IM8000. The new ablation system, that we’re calling the edge. We expect that European launch in May and a U.S. launch in probably July, so Q3 for that. The Y-Knot is out and doing very well. In fact, it is exceeding our forecast at this point. So the Y-Knot RC for rotator cuff, we are very pleased with that. The Shaver console, that’s launched. It’s doing well. And that’s important because that helps to drive our Shaver Blade business. That’s a key core product line in arthroscopy for us. I think for those who remember some of our earlier conference calls, we may have mentioned in the past that that was a difficult line for us in 2013.

So we are expecting improvement in the Shaver Blade line as a result of the couple of things, and one of the primary thing is this new console which is, user friendly so that has is better electronic and digital display better, so we can do well with that. The Hall 50 has launched, so that’s the lithium-ion batteries and Hall 50 powered instrument for large bone handpieces.

And we’ve mentioned in the past our new trocar line that will be sold by the end of surgery sales force and that one looks like it will be a Q3 launch for us. And that should help us significantly in the U.S and outside the United States, probably more so outside the United States.

Mike S. Matson – Needham & Co. LLC

All right. That’s really helpful. And then the Hall 50 was that out for the bulk of the first quarter or did it come out late in the quarter?

Robert D. Shallish Jr.

Came out in the March timeframe, so it didn’t have too much of an impact and a good performance that we had with powered instruments. As a whole target very well I think this past quarter lithium batteries helped a lot I think and then we just have some success with a number of hospital transaction in that line.

Mike S. Matson – Needham & Co. LLC

And then with camera now coming out in the third quarter, are we going to see a similar type of double-digit decline in that business the visualization business in the second quarter and is that factored in your updated guidance.

Robert D. Shallish Jr.

So, I would have to say that so the facts really are unchanged with regard to video for us right we have customers knowing that a new platform is coming out, and for the second quarter they will be waiting. So I would expect continued difficulty with the capital video sales.

Mike S. Matson – Needham & Co. LLC

Okay. And then regard, just with regard to the edge system, I just wondering what the ramp of the sales there would look like because, I guess the ultra has been pretty slow but it seems like with edge given that you’re a fairly large player in the sport medicine area that, I would hope it would see a faster ramp and what we’re seeing with ultra is but I mean do you think that’s a fair – a fair assessment?

Joseph J. Corasanti

You’re right on point with that I think exactly with ultra, just to remind everyone that’s our vessel sealing device that was launched by the Electrosurgery sales force, that sales force is smaller, 55 sales reps and we’re going up against this to extremely large entrenched players who really created that market.

Now with ablation that’s much of a completely different product that serves a completely different market, and we have extremely large U.S. and O-U.S. direct sales force that will be selling the edge product and so they will be leveraging their surgeon relationships and our surgeon education programs, and we’ve had early report already that, in Europe for example, there is we think there is very high demand for an alternative product to service this particular market.

Mike S. Matson – Needham & Co. LLC

And then just one more question on that product coming in sort of a little later than some of the other companies, I mean the product does look pretty good, but what’s your pricing strategy and then just the margins on that product are they higher or lower than you’re other products in the arthroscopy area.

Joseph J. Corasanti

Well, with pricing we’re taking a different approach or strategy than we had with ultras, as we recall ultras we have premium price that right out of the gate. And theory there was we wanted the price to reflect that the products had extremely, had superior performance in every way and that the performance would be well recognized by users and we want to press price through like that.

Now with the ablation product, this is a superior performing product, as well. And we’ve talked about this and showed it at the academy and described how it ablates faster than competitive product. And we have a lot of safety features on the device and we think it’s very, very user friendly in terms of the console as well as the ablation ones that will be coming out. And our strategy, however, will be to competitively price this. And I’m not saying we’ll be discounting it, but it will be competitively priced immediately. And we think that we’ll have a faster uptick as a consequence, of really those two items.

Mike S. Matson – Needham & Co. LLC

All right that’s all I have for now. Thank you.

Joseph J. Corasanti

Sure.

Operator

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

Jeffrey S. Cohen – Ladenburg Thalmann & Co., Inc.

Good morning. Thanks for taking my questions and thank you for the commentary.

Joseph J. Corasanti

Good morning, Jeff.

Jeffrey S. Cohen – Ladenburg Thalmann & Co., Inc.

Could you talk a little bit about the status of the MTF arrangement with PRP? Did you say that there were no PRP device for sale and why? And who you are losing that share to?

Joseph J. Corasanti

Well, Jeff the issue is with a contract supplier for MTF. So we purchased the kits from MTF. MTF had a contract manufacturer, putting the kits together. That contract manufacturer has had difficulties from a production standpoint and also so happens to the contract supplier is a very large company. And this particular business is rather small frankly to them, so it’s not a high priority. And so we’ve been without product for while since about December. We knew we are going to be without product in the first quarter. And had factored all of that into our forecasts, including the entire year’s forecast under the assumption that we would not have inventory to provide to our customers.

So we have notified our customers that we are currently not able to provide the kits. We have looked in alternative sources, none of which look too appealing. The contract manufacturer may be able to supply kits, but we are of the opinion that at least the present that may not be in our best interest to continue to sell this product, just because so much time has passed supplying the kits that our customers most probably have turned over to other competitive devices.

There are a number of competitors that offer a PRP devices, many as a matter of fact, over 10. So I don’t know where all the business would have gone, but it’s not with us anyway. And at present as I said, we’re considering what our options are for this particular line. Last year we had sales of approximately $3.5 million of this product and right now our assumption is that all of that is will not continue into 2014.

Jeffrey S. Cohen – Ladenburg Thalmann & Co., Inc.

Okay. And what percent of the MTF arrangement was that, approximately 10%?

Joseph J. Corasanti

Approximately 10%, yes.

Jeffrey S. Cohen – Ladenburg Thalmann & Co., Inc.

With regard to some of the commentary you had before in single-use for the quarter, you guys being been down 5%, Europe being up 5%. So, you generally attributed that to two factors, one would be severe weather and the other would be low utilization levels perhaps a pull forward from Q4. Is there anything else there?

Joseph J. Corasanti

That, well Cascade would be on there too, but besides Cascade it would be the weather and utilization patterns, yes.

Jeffrey S. Cohen – Ladenburg Thalmann & Co., Inc.

Okay. That’s very helpful. And I guess, an overall comment unless if you want to address this, but do you have any commentary on the April 15th press release from Reuters discussing that you have hired a financial advisor to look at potential sales of components of the company or the company.

Joseph J. Corasanti

Well, Jeff as any company would respond, we have no comment on that.

Jeffrey S. Cohen – Ladenburg Thalmann & Co., Inc.

Okay. Thank you.

Operator

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

Mark Landy – Summer Street Research Partners

Good morning, guys. Can you hear me, okay.

Joseph J. Corasanti

Yes, fine, Mark. I think you are little low.

Mark Landy – Summer Street Research Partners

Okay. I’ll speak up. So before getting to some of the general question, in terms of selling days was an extra day in the quarter or day less in the quarter.

Joseph J. Corasanti

Well. I know some companies – boy, I’m getting some feedback, I know some companies (indiscernible) up there. I think that it was the difference maybe in Europe there, Good Friday, last year and it did not occur in March this year. So, we maybe short a little bit with respect to Europe, but in general I think the days are about the same.

Mark Landy – Summer Street Research Partners

Is there was any extra days or less days kind of highlight the weather issues. So it seems like the selling day is pretty much the same there.

Joseph J. Corasanti

Pretty much the same. We may have had a little advantage because Good Friday wasn’t in the first quarter of this year.

Mark Landy – Summer Street Research Partners

I’m just trying to get to kind of the guided $770 million to $780 million, I mean taking obviously the second quarter guidance into account and then commentary on new products. It looks like third quarter and specifically the fourth quarter has to be at growth rates that are significantly you got or put up organically, if you obviously 2012, we had the benefit of NTS. But, how do you get to the or maybe 3% plus to that you need to get to in that fourth quarter and maybe a little bit, will you allow that in the second quarter to get to that $770 million to $780 million.

Robert D. Shallish Jr.

We’ve looked at this and certainly, we need improvement. I don’t think it’s that much of a stress and so for example, so for the second quarter, I think it was about a 1.2% or 3% growth. And then, if you look at the third quarter, we probably would need 3% in that quarter, which seems to be you might be able to comment, if that’s on the high side however the third quarter in 2013 was very, very weak.

So, we would think that’s an easy comp. The other thing that we would give us comfort that we could hit that 3% growth in Q3, but that, that the new products are really coming in Q3 So I think we’ll get a good benefit from the edge and the video and the trocars et cetera. Some of these new products should help us to get there in Q3. And it really it was a very, very weak comp.

And then for Q4, as I look at it, I see that really Q2 and Q3 come out the way I’ve just described. Well, for Q4, I think a 2% growth quarter there, I guess is there, and 2% is what we did last year. So it’s a repeat, if you can look at it that way. And admittedly that would be the low end of the range, but we’d be in the range. So that’s the way we’re looking at it. And we will admit to everyone on this call that we’re banking quite a bit on the new products, but our feedback so far from customers that have seen these new products is that they are going to do very well. They are very strong new products.

Mark Landy – Summer Street Research Partners

Okay. I guess the other question, just relating to this pricing, a piece of that, I know it’s kind of international and Europe strengthening the U.S. They’ve been declining; maybe hurt more by the capital equipment than other geographies. How should one factor in the geographic movements along with pricing to get to those growth rates relative to procedure volumes?

Joseph J. Corasanti

Well, let’s talk about what occurred in the first quarter here. So a single-use sales outside the United States grew 5%, which is very strong actually, led by critically the procedure-specific products, shoulder products overall grew 10%. So, outside the United States, very good growth in the first quarter.

The U.S. had a decline of 5% in single-use sales. So as I said, we think that’s attributable to the weather and utilization, which should catch up as we go through the rest of the year. So as we look at single-use products, good growth outside the United States. The U.S. should pick up its growth rates as we go through the rest of the year to provide a favorable trend on single-use products.

And then with the capital products, we should be getting into a point where we have easier accounts, as Joe mentioned. So even though some of the – like the visualization systems won’t be out until the third quarter, I think that that visualization product line should show some benefit to us as we go through the rest of the year. And I’ll also point out that capital products are still only 20% of our business, so that we can really make some progress, I think, with our single-use devices.

Mark Landy – Summer Street Research Partners

So now, I think, just asking a question maybe in another way. You’ve really got to seek growth in the U.S., stocks pick-up and close that differential between the growth O-U.S. versus the growth in U.S. to try and close that pricing differential should help, right?

Joseph J. Corasanti

We certainly believe that the U.S. will improve the performance over the course of the year.

Mark Landy – Summer Street Research Partners

Okay. Any commentary on discussions with the FDA and Altrus? And I don’t know if you’ve provided any color since the last call?

Joseph J. Corasanti

There really is no update there. It just stays quo. We continue to sell Altrus and we have responded to the warning letter and we have no other – there’s been no other communications of significance with the FDA and this issue. I can’t remember if I’ve mentioned this method, but I think I did. In the last conference call, we filed a new 510(k) for Altrus. Yes we did, we mentioned that on our last conference call. So that’s a 90 day process. So we’re probably halfway through that waiting period I guess on the new 510(k) for Altrus. So there is really nothing more to report on that.

Operator

And your next question comes from the line of Matt Miksic with Piper Jaffary. Please proceed.

Matt S. Miksic – Piper Jaffray & Co.

Hey Joe, hey Rob. Thanks for taking my questions. Just I guess having covered the quarter of your – in the dynamics of the results. I wanted to ask if you could – without commenting on the press comment speculation about strategic actions or anything like that. I love to get your sense as to how you have looked at the business over the years. And maybe what about the businesses do you think benefit as the combined business in terms of leverage or absorption or manufacturing synergies, distribution synergies to the extent of R&D. And so to the extent you’ve looked at either investing further and some of these areas are pruning the portfolio. What that analysis has led you to? And then have a couple of just quick follow-ups?

Joseph J. Corasanti

Sure, Matt. We regularly look at the portfolio and analyze if there any pruning would be beneficial to shareholders and to, I guess our metrics in general. The obvious one that comes up from time-to-time and we’ve talked about this for many years, you know that patient care business it’s been declining. And so, it’s certainly excess of that Board incurred on our top line growth profile. As we’ve got our numbers internally and we look at that business unfortunately, we think that if we divested that business it would be fairly, highly dilutive to earnings. And so we’ve concluded that might not be in the best interest of all of our shareholders to do that. And probably would not have a favorable impact I think on the stock price of the company because of the dilution that would result from our divestiture transaction.

So yes, we do look at that and we’ve looked at some of the other businesses as well. On the flipside of the coin, we are interested in acquisitions and so we would like to invest in some of these businesses by holding in acquired product lines and businesses and gain market share that way. And so we’re actively out looking for acquisitions.

Matt S. Miksic – Piper Jaffray & Co.

Okay. And so few comments on patient care would indicate that to us is from a kind of distance looking at this business that I would suggest maybe it’s a high margin business it’s gone all that big even though it’s kind of diluted the growth, if you will. Is that the right way to look at it?

Robert D. Shallish Jr.

No, it’s actually not a high margin business in terms of the gross profit margins is the lowest gross profit margin business that we operate. But there are very few below the line costs that are associated with that business. And so it is profitable for us at the operating margin level.

Matt S. Miksic – Piper Jaffray & Co.

Okay, so maybe about – is it above the average operating margins, I’m just trying to get a sense of how just not to zeroing in on that as the solution, but as an example.

Robert D. Shallish

Matt, it is probably not useful to get into that levels, of…

Matt S. Miksic – Piper Jaffray & Co.

All right, okay let me back off that then. It is helpful to sort of understand how the pieces come together.

Robert D. Shallish Jr.

Well, Matt, I just want to make a comment on that. We’ve done an awful lot of integrating over the last five or six years here. And so we are running the company as one unit, one company. We manufacture multiple kinds of product lines in each of our three major factories. We’ve got one R&D group. We have one quality group. We have one HR group.

Even though we talk about these distinct product lines, because I think it’s helpful to investors to know how individual products are doing from a sales perspective. From an operating perspective, we look at the company as one big unit, and it’s often times difficult to get into details on profitability and individual product groups.

Matt S. Miksic – Piper Jaffray & Co.

Sure, and I can understand that generally, it’s not something a lot of teams there, management teams are going to do is get down to that level, but that is helpful to understand. The other I guess looking at divisions in the business lines, a lot of good things happening in sports medicine and encouraging to see the sort of sequential improvements there.

Looking at things like, endoscopic surgery or some of the general surgery markets that you are in, I guess I would ask if you are, if investment is the way, which you’re thinking about those if that impact one of the areas you are looking to invest. What is it, take to get to? Is it scale that you like to achieve the areas? Is it more differentiated products? What would be the strategy for kicking those businesses to another place?

Robert D. Shallish Jr.

Yes, the strategy for that for the general surgery business, is actually pretty interesting because it’s variable with electrosurgery for example, our investment has been made in Altrus and we are waiting to get a return on investment. We’re painfully even describing the process there and unfortunately hasn’t ramped up as fast as we would have like. There are other investments being made in Advanced Energy formally called Electrosurgery and that’s on the Argon Beam product area, the smoke evacuation area and so a combination of internal investments, R&D and new products as well as acquisitions would help us in that area.

With the endomechanical line the laparoscopic products and we are really anticipating that the new trocar line is going to return that business to a steady 5% to 6% grow. So if you take a look at our numbers and go back just three to four years, and then say there is a period of six years that we had that type of growth in EndoSurgery. We think we can get back there with this new trocar line, some of the other new products that we are developing. So that for us, is again a combination of investments in R&D. We think we’ll be getting a payback pretty soon as soon as that product line launches, as well as some small targeted technology type acquisitions that will fill gaps in that product line. So stapling is one area, Chinese manufacturing is another area. There are several investments that can be made in Endosurgery.

With the GI line up, purely a scale issue. We have a sales force that desperately needs new products and a larger base of business, I think, would be efficient. So we’re actively looking in that area in the GI space for scale. So, and that leaves us with where we started, I guess, which is Patient Care and that business is generating cash. It’s profitable, but I’m not sure that investment is wanted in that area.

So I think that rounds also with discussion of all of our general surgery businesses and the different pathways we’re looking at to improve that general surgery business.

Matt S. Miksic – Piper Jaffray & Co.

That is helpful. Thank you, Joe. Thank you, Rob.

Operator

And your next question comes from the line of Jim Sidoti with Sidoti & Company. Please proceed.

James Sidoti – Sidoti & Company LLC

Good morning. Can you hear me?

Joseph J. Corasanti

Yes, Jim. How are you?

James Sidoti – Sidoti & Company LLC

Great, great. I understand your reluctance to comment on the – you don’t want to go backin April, but I just wanted to ask, maybe you can make some comments on some of the other transactions in this space. I’m sure you’ve been following a few, acquiring through care and now Zimmer announced this morning they’re well there. Are there any opportunities as a result of this consolidation for you to maybe add to your sales force and capitalize on some of these disruptions in the near-term?

Robert D. Shallish Jr.

We already asked with the Smith & Nephew ArthroCare announcement. Yes, we think there’s opportunities for acquiring some of the top performing sales reps as an example. With any large acquisition, which is what that amounts to, I would suspect that would be some disruption for a period of time. The timing actually bodes very well for us as we’re launching the edge ablation system. So really I think we’re very fortunate that the timing is working out this way.

With the Zimmer, as we say, was just announced, Zimmer and Biomet was just announced today and so I don’t – with the timing of that announcement and the timing of our call I haven’t given it that much thought, but I’m sure there will something that are beneficial. Well, maybe beneficial and maybe negative to come out of that. We’ll also think about it.

James Sidoti – Sidoti & Company LLC

All right. Thank you.

Operator

And your next question comes from the line of Mike Matson as a follow-up with Needham & Company. Please proceed.

Mike S. Matson – Needham & Co. LLC

Thanks. Just a couple more quick questions. Are the margins on the visualization products lower? So in other words, is that part of the reason that your margins were stronger with the big decline there this quarter. And then, I guess conversely assuming that new products do take off in the second half of the year, is that going to then put some pressure on your margins?

Joseph J. Corasanti

Well, the margins on our visualization systems are – gross margins are lower than the overall corporate average. And I guess, there is probably some impact to the overall margin this quarter, but I guess, I’ll remind you that the sales of surgical visualization products in the first quarter were I don’t know about 6%, 7% of our sales, so not a huge number with respect to the total. So I really think that the benefit in the margins has resulted from all of the work we’ve done over the last couple of years with regard to efficiencies and our manufacturing processes.

Mike S. Matson – Needham & Co. LLC

Okay. And then, I guess, I just wanted to push back a little on the R&D target of 3.5%, because I know, I mean it’s kind of at the low end of what I see among orthopedics companies and especially among, even among the larger companies, which have a lot more scales and revenues that they can leverage R&D across. So, just with the smaller companies it seems like the numbers are considerably higher than 3.5%. So, I guess, why do you feel like that is the right number and why shouldn’t at the 5% to 6% even higher than that.

Robert D. Shallish Jr.

Well. We would – I mean, we agree with you on a number of valid points that the entire orthopedics companies that we were a pure play orthopedic company I would expect our R&D spending to be 5% or 6%. Content managers general surgery business which is 40% of our sales. And accordingly, our R&D spending is less, because we are spending less in the general surgery businesses in our, especially if you look at the patient care business is very low R&D you can spend. Mostly, expanding engineering for those legacy type of products.

So, I think that’s really the answer. That’s the reason why a company like CONMED and other companies that manage both playing on orthopedics business and maybe a general surgery business will have different metrics and the R&D metric is one that would be different as well.

Mike S. Matson – Needham & Co. LLC

All right. Thanks a lot, that’s all I have.

Operator

And that concludes today’s question-and-answer session. I would like to hand the call over for any closing remarks.

Joseph J. Corasanti

Well. I thank everyone for attending today’s earnings call. We are very pleased with our operating results, in terms of earnings growth and margin improvement. We look forward to seeing the new products continue to ramp up. And we look forward to our next earnings conference call to update you on our improvements on the top line that we are expecting. Thank you very much for your participation.

Operator

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

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