Curt Hartman - Interim Chief Executive Officer Rob Shallish - Executive Vice President & Chief Financial Officer Bob Yedid - ICR.

Jeffrey Cohen - Ladenburg Thalmann Brad Mas - Needham & Co. Matt Miksic - Piper Jaffray Mark Landy - Summer Street.

Good day ladies and gentlemen, and welcome to the third quarter 2014 CONMED earnings conference call. My name is Tony 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). I would now like to turn the conference over to Mr. Bob Yedid.

Please proceed..

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

The company’s actual results may differ materially from our current expectations. Please refer to the risk factors and other cautionary factors in today’s press release, as well as our SEC filings for more details on factors that may cause actual results to differ materially.

You will also hear management refer to certain non-GAAP adjusted measurements during this discussion.

While these figures are not a substitute for GAAP measurements, the company’s management uses these figures to aid in monitoring the company’s ongoing financial performance from quarter-to-quarter and year-to-year on a regular basis, 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 afternoon.

With these required announcements completed, I will turn the call over to Curt Hartman, CONMED’s Interim Chief Executive Officer for opening remarks. Curt. .

Thank you, Bob. Good afternoon everyone and thank you for joining us for CONMED’s third quarter earnings call. I’m joined today by Rob Shallish, our Executive Vice President and CFO. On today’s call I will provide opening remarks and Rob will provide a more detailed review of our quarterly financial results. We’ll then open the call to your questions.

Let me begin today by first pointing everyone to the press release we issued earlier, which provides a detail summary of our quarterly and year-to-date financial performance. Looking at our third quarter we deliver results that keep us on track to meet our previously revised guidance for 2014.

Total company sales for the third quarter were $175 million, a decrease of 2.4% as reported and 2.6% in constant currency versus the prior year period. GAAP diluted earnings per share were $0.07, a decrease compared to the third quarter of 2013 and included significant costs associated with management restructuring and shareholder activism.

Adjusted diluted earnings per share for the third quarter of 2014 were $0.44, an increase of 10% over the prior year quarter. You can find a detailed list of the adjusting items in our press release.

As a result of this performance we are maintaining our revenue and earning forecast which calls for full year 2014 revenue of $735 million to $745 million, representing a 2.3% to 3.6% decline over 2013. Further, we also affirm our adjusted earnings per share range for 2014 of $1.85 to $1.95, representing an increase of 2.2% to 7.7% over 2013.

I’d now like to take a few minutes to review additional important items from the quarter. These include, first we received the 510(k) clearance from the FDA for the Edge Ablation system and expect to be in a position for a full launch in early 2015. Second, the IM-8000 Camera System was moved into full commercial launch late in the third quarter.

While we expect some contribution from the full release in the fourth quarter, we clearly see 2015 as benefiting the most from this introduction, given the timing associated with evaluations and capital equipment budgets.

Third, in August our Board of Directors declared a quarterly cash divided of $0.20 per share, which was paid on October 6 to shareholders of record on September 15. Fourth, as noted in the press release, the CEO search committee is working with an outside search firm.

It is conducting interviews and has a process advancing quickly to identify a permanent CEO. As the process is ongoing, we will not be entertaining any questions on the search during this call. .

Before I turn the call over to Rob, I would like to provide you with a brief update of what I have been focused on over the past three months. I’ve been engaged in a comprehensive review of the CONMED organization, business alignment, market segments, leadership talent and overall operating rhythm of the company.

I have spoken directly with many of the company’s employees to better understand the current strengths and opportunities within the organization and to put those in the context of the markets we serve. My inquires have been met with a high level of engagement and a sincere desire for improved business outcomes.

Importantly these discussions and reviews have further strengthened my belief that CONMED is on solid footing with respect to its manufacturing, quality and regulatory functions.

Additionally, while admitting I have more to investigate, I see the R&D organization trending more favorably based on some organizational structure changes made approximately 18 months ago. The proof of course will be in our further innovation cadence and ultimately the customer acceptance of our new offerings.

That said, we still have more work ahead to improve and strengthen our connections with the markets we serve and to further prioritize our innovation investments. Finally, we are evaluating our global commercial structures with a goal to ensure we have an organization alignment that makes it easy for our customers to do business with CONMED.

Clearly in this case returning to top line growth in the objective. Through all of this I’ve been working collectively and individually with the executive team to implement a more metric driven business environment that includes routine executive management meetings to align, track and drive our business performance across the markets we serve.

We remain extremely focused on actions to address the company’s top line challenge. In summary, the good news us we have many strong (Audio Gap) and we have the products, the brands and market positions to compete more effectively in our growing markets.

On the other hand, we haven’t executed to our potential in some time and we haven’t held the organization accountable for its execution.

While larger strategic decision-making must wait for the appointment of a permanent CEO, we will not wait to make the tactical changes for which any future leader would thank us and that our shareholders would expect of us.

While some challenges clearly exist, we are optimistic that we can create a performance-based environment focused on growing revenue and expanding margins, ultimately increasing shareholder value. I’ll now turn the call over to Rob Shallish for a review of the financials. Rob. .

Thanks Curt and good afternoon everyone. As Curt mentioned, total sales for the September quarter came in at $175 million, a decrease of 2.4% from the third quarter of 2013 on a reported basis, and a similar 2.6% decrease on a constant currency basis.

These percentage changes in the total third quarter sales are consistent with the total sales declines of the first six months of the year. Obviously, we are not satisfied with the sales performance. Let me now get into some more specific details on sales.

Since reported and constant currency changes are so similar this quarter, I’ll limit my comments to variations and the reported numbers. In this third quarter 81% of the sales were single-use products, with the remaining 19% coming from our capital products. Both of these categories had declines of 2.4%.

In total, orthopedic revenue declined 2.9%, general surgery products declined 0.3% and visualization declined 9.4%. Slightly under 50% of the quarter sales came from the United States, which experienced the sales decline of 2.4%.

Within the domestic orthopedic category sports medicine revenue declined 8.7% due to reduced procedure specific and resection sales, combined with a previously discussed discontinuation of PRP products. Powered instruments in the U.S. grew 1%, consisting of a 5.9% increase in capital handpieces, but a 2.9% decline in single-use burs and blades.

Now moving to general surgery, sales increased 0.8% in the U.S. with strong growth in the GI category and positive growth in our patient monitoring devices. Lastly, domestic visualization sales declined 4.8%. As Curt mentioned, the IM-8000 is now in full launch with little benefit of this new system in the third quarter.

As for our international business, which was slightly great than 50% of the total, the reported sales decline for the third quarter was 2.4%, consisting of a 1% decline in orthopedics, a 2% decline in general surgery and a 13.1% decline in visualization.

The primary cause of the weakness in the international side of our business was due to reduced sales in our export markets, particularly in Latin America where we had a number of large orders a year ago, making for a difficult comparison this year.

In the countries where we have subsidiaries and sell through or own sales organization the business was slightly positive. In Europe for example, our total business increased 4.9% where we sell direct in 13 countries. Turning now to the other components of the income statement.

Adjusted gross margins, excluding facility consolidation costs came in at 55.9% compared to 55.1% in the third quarter of 2013, an increase of 80 basis points due to our ongoing manufacturing restructuring and efficiency efforts. The GAAP gross margin increased 190 basis points to 55.1% compared to 53.2% last year.

The increase in the GAAP gross margin was due to benefits derived from past restructuring and lower cost of manufacturing, restructuring activities this quarter compared to a year ago.

Selling, general and administrative expenses for the third quarter 2014 were $71.2 million or 40.7% of total sales compared to $73.5 million or 41% of total sales in the same quarter last year. The medical device excise tax amounted to $1.3 million this third quarter and is listed as a separate item in our income statement.

Research and development spending was $6.9 million for the third quarter, similar to the $7.1 million incurred in the third quarter last year. R&D spending as a percentage of sales was 3.9%, relatively flat compared to the prior year period.

We will continue to fund meaningful research and development activities basing these on our analysis of the merits of individual projects. There will always be some variations in R&D as a percentage of sales, as individual projects commence or are completed. .

GAAP operating income fell to $2.4 million due to the special items that I will discuss in a moment. Consequently the operating margin using GAAP amounts was 1.4% in the third quarter, compared to 4.9% in last years third quarter.

The adjusted EBITDA margin in the quarter was 18.1%, an increase of 140 basis points compared to the same measure last year of 16.7%. I refer you to the schedule in today’s press announcement for the details of margin calculations. Turning now to a discussion of our income tax rate.

For several years we have participated with the IRS in their cap program, whereby they perform audits during the course of the year, such that matters of any dispute are resolved prior the filing of the company’s tax return in September each year. Consequently, in the third quarter each year we can adjust estimated expense to the actually.

As a result of this process, the effective tax rate on adjusted income for the third quarter of 2014 was equal to 27.7%, very similar to the 2013 third quarters rate of 27.4%.

On a GAAP basis because of the very low pre tax income due to the special items, the adjustments to estimated tax expense caused the quarter’s GAAP tax provision to be a credit of $1.1 million. As we look to the fourth quarter, we anticipate that the tax rate in that quarter will approximate 30% to 31% on adjusted per tax income.

This is similar to the adjusted tax rate for the first nine months of the year.

The adjustments for special items of $15.9 million per tax in this third quarter are reconciled in a press please issued this afternoon and include costs associated with senior management changes, shareholder activism and the ongoing consolidation of certain manufacturing activities and administrative functions.

Approximately $3.5 million of these costs are non-cash acceleration of equity awards.

For the fourth quarter 2014, we expect to encore additional pre tax special costs of between $4 million to $5 million on currently in process projects, principally in manufacturing and other administrative consolidations, as well as the CEO search and other restructuring activities.

Adding all this up, for the third quarter of 2014 diluted earning per share on a GAAP basis were $0.07 per share compared to $0.20 in the third quarter of 2013. Adjusted earnings per share were $0.44 per share, an increase of 10% compared to the $0.40 in the third quarter of 2013.

On the balance sheet, the cash balance has increased to $64.6 million from the $54.4 million at the end of last year. Accounts receivable days are equivalent at 64 days, approximately the same as at December 31 last year. Inventory has grown to $162.1 million compared to $143.2 million at last year-end.

The increase is due to preparation for new product launches, as well as experiencing sales less than anticipated. As a result we have slightly adjusted production schedules to bring inventory to a more normal level. However, I should point out that historically the fourth quarter in generally the highest sales quarter of the year.

So September inventory is usually on the high side in preparation for the forecast of the fourth quarter activity. Turning now to cash flow, cash provided by operations came in at $14.6 million in this third quarter, approximately one half of the similar amount last year.

This decline was caused by the higher special items, as well as the growth in inventory. Even with the cash outflows for special items and inventory however, free cash flow for the nine months of 2014 equals $27.3 million, 31% more than the net income for the period.

Finally as Curt mentioned, we are reaffirming the financial guidance for the 2014 full year that we provided in our July earnings release and conference call. Namely, we forecast total year 2014 sales to be in a range of $735 million to $745 million, and adjusted earnings per share to $1.85 to $1.95.

With that Tony, that completes our prepared remarks. I would like to open the line for questions. .

(Operator Instructions) Your first question comes from the line of Mr. Jeffrey Cohen of Ladenburg Thalmann. Please proceed. .

Hi Rob, Curt and Bob.

How are you?.

Good Jeff. Hi Jeff. .

Jeffrey Cohen - Ladenburg Thalmann:.

:.

That’s for Q4, correct..

Okay, that’s in totality between management restructuring and shareholder activism?.

Yes, correct..

Okay.

And could you talk a little bit about the $11 million for the restructuring of management?.

Well, the bulk of that Jeff is with regard to severance and severance payments to our former CEO and so that’s about 90% of that total..

Okay, got it. So just a couple more if I may.

Could you talk a little bit about the launches of the IM-8000 and Edge and how that may look into Q4 as you’ve just recently launched it? And perhaps could you talk about the ramifications or the anticipation of revenue composition during the fourth quarter, typically between visualization, general surgery and orthopedic surgery please..

Sure Jeff, this is Curt. The IM-8000 was put into full launch at the very end of the third quarter. The selling organization has been trained on the product.

That happened, call it two-thirds of the way through the third quarter and as I said in my prepared comments, while we anticipate some capital through the visualization business to hit in the fourth quarter, we really think given how capital works and pipelines build and budgeting processes, take the majority of that upside, it will start to materialize in 2015.

On the Edge system the prepared comment was that we received the 510(k) from the FDA during the third quarter, but we will not launch that until 2015 early in the year and I think you should expect as we did with the IMA, that until we’re 100% confident that we have the product right and all the various working end items that go with that, the different Edge Ablation tips and we’re required to address all the procedure specific issues, we’re going to be very cautious in launching that.

We’ve clearly made some mistakes in the past and we are going to be mindful to not repeat those with new product introductions. As it relates to breakdown on revenue, probably not going to get into a lot of specifics. Clearly we are looking forward to the IM-8000 success in the field.

We had a big fourth quarter last year in video, so the comparables are a little tougher than our run rate this year and as I said, the Edge System will not impact the fourth quarter whatsoever..

Okay, and any commentary at all about the Viking 3D System and how that’s done?.

I think probably nothing new or exciting additional in the quarter really. I believe we’ve got an opportunity there with that platform. We need to do a better job with our efforts on the commercial side and that will go hand in hand with the IM-8000 launch in trying to re-engage the general surgeons, specifically on the 3D platform..

Okay. And one more if I may.

Could you talk about facility consolidation into 2015 and what might be expected and how that might affect numbers?.

Well, the major effort right now Jeff is on the Centennial, the Denver facility and so that will continue through probably the first three quarters of the year next year before we finalize that and so my guess is we’ll be running at a run rate of $2 million or so a quarter on that process, which includes the process of relocating, as well as severance for the people there.

We’ve not announced any other consolidations. Although certainly on an ongoing basis we’re always looking to be efficient in our individual product lines..

Okay, thanks guys. I appreciate it..

Thank you..

Your next question comes from the line of Mr. Brad Mas of Needham and Company. Please proceed..

Hey, this is Brad in for Mike Matson. Just with all the – I mean obviously the goal here is coming back to revenue growth hopefully in 2015. Just wondering if you could talk about some of the puts and takes there? Is it the camera, is it the Edge System, does M&A have a role, if you could just discuss that, that would be great..

Sure. I think clearly getting the top line moving again is a high priority if not the highest priority for the company. Historically the organizations done a great job on its manufacturing consolidation, but we all know you can only cut your way to success for so long; you’ve got to start growing the top line.

So the focus is really looking at the commercial organization.

Do we have the right alignments, do we have scale, are we sub scale, are there better alignments, all kind of what I put in the tactical category, along with evaluating our sales performance for the existing organizations and saying, are we getting the job done and again, I point to another tactical item.

Everybody on the call is aware there’s been several consolidations, which means at the sales level there’s talent available and in the third quarter the company was able to take advantage of that and pick up some very talented people that we believe will help us immensely in the sports medicine side.

Obviously that doesn’t start on day one, but we moved quickly when we saw those folks available and we are (Audio Gap) skills and talent’s up to par here and bringing what they already know to the market for CONMED. As we look to the future, the orthopedics business and general surgery business are great businesses.

They are growth businesses and CONMEDs just got to go out and get its rightful share through both the sales talent, the sales organization, as well as the right new products and that’s the focus right now; really digging in and understanding what we have or what we don’t have and putting the right parts together to get the top line moving..

Great. And then could you – I mean, do you guys, can you give an overview of your plans for M&A. Is that something on the horizon or what types or sizes of deals you would consider. I mean, you spoke about the consolidation, so if you could just provide any color. Thanks..

Well, I think the industry has been built over time by a lot of M&A and when I say M&A there’s big M&A and there’s small M&A, and I would just clearly state that CONMEDs not in a position to do large transformational M&A, that is not in the playbook in the near term.

On the other side, there are a lot of innovative, small, tuck-in acquisitions in the marketplace that we continue to look at, be interested in and if the right one comes along at the right financial terms, I’m sure the company and the board would like to pursue those.

Don’t read into that, but the deal is going to be announced tomorrow, don’t read into that, that that’s the only part of the offense. It’s a part of the offense and as a company that generates cash, we have the flexibility to do that, but it will have to fit in and it will have to fit into the core of the business.

We are not going to go off and do something wild and open up a new market here; that’s not where we are as a company. Fundamentally we’ve got to have the right commercial alignment and the right sales talent before any of those things make sense. So we’ve got priorities and we’re working our way through those..

Great, thanks very much..

Thank you..

Your next question comes from the line of Mr. Matt Miksic of Piper Jaffray. Please proceed..

Hey, good evening guys. Thanks for taking our questions. .

Hi Matt..

So I wanted to ask you Curt, you mentioned support of the shareholders and feedback from the shareholders coming out of the meeting and I’m sure the time you spent speaking to folks.

Can you maybe summarize for us some of the things that have come out of that and how you are thinking about sort of fitting them into – accommodating them in your strategic view of the company as it stands right now..

Well, I think a couple of things Matt. Obviously some of those conversations revolved around governance questions and I think as we went into the annual meeting we thought we had done a pretty aggressive and respectable job addressing the governance concerns. 60% of the board is brand new, all new chairs of each committee, a new Chairman.

The Founder had stepped away from the company, as well as the previous CEO who had a family association. So we thought we had done a nice job addressing governance related concerns.

Obviously on the other side its more about running the business and delivering the results that are expected of companies of our size in the healthcare space and I try to cover that in my scripted comments around getting top line revenue moving. The company has done a nice job and its manufacturing consolidations.

Its quality systems are very robust in terms of the depth and talent level of the people here and if we can get the commercial side of the organization moving, I think we are set up to deliver on some of those shareholder expectations, but it doesn’t happen overnight and we are evaluating the commercial alignments, the products we carry, the opportunity for being at more scale in certain markets, whether that’s through tuck-in acquisition or whether that’s through realigning some of the products we already have, and just getting the top line moving I would say would be top priority.

If we do that, a lot of other positive things will happen for the company and shareholders..

And the follow-up if I could.

On the idea of getting the top line moving, when we think about ’15 and we listen to you describing the kind of range of initiatives that your considering, is one of the possible scenarios here that we are going to wind up getting the top line moving on a handful – perhaps a subset or a slight subset of the businesses that your in right now.

In other words, I think that’s pretty clear.

Is that sort of something we leave on the table?.

Well, I’m clearly not going to lay out anything strategic at this point. That would be inappropriate given where we are in the CEO search and what I will say is every one of the markets this company serves, orthopedics and the subsets thereof, of sports medicine, power tools, the video that’s used in our arthroscopy, those are growth markets.

The general surgery segments that we compete in, growth markets. Believe it or not, the GI, Pulmonary and ECG business, patient care business are still growth markets. They may not necessarily be attractive to all investors, but they are still growth markets.

So I’m not one who is used to being a market share donor and I’d like us to find a way to grow (Audio Gap) between the board and management we are setting our priorities and we’ll tackle those priorities as determined best interest of the company and shareholders.

So it’s an attempt to answer your question Matt without being too specific, because it would be inappropriate at this point for me to do that..

Sounds perfectly fair. Thanks for taking the questions..

Thanks Matt..

(Operator Instructions) Your next question comes from the line of Mr. Mark Landy of Summer Street. Please proceed..

Good evening guys.

Can you hear me okay?.

We can Mark..

Oh great. Rob, just a quick one for you. No material foreign exchange impact this quarter. You didn’t mention it in the prepared remarks for Q4.

Is it fair to assume that’s status quo for the fourth quarter 2014?.

Yes, that’s very correct Mark. As you know, we’ve had our hedging program in place for quite some time and so we are hedged at appropriate rates for the fourth quarter, and in fact for 2015. So many of the rate declines that have occurred recently are the strengthening of the dollar that’s occurred recently.

It should not have a major impact for us next year at the bottom line. There maybe some impact on sales, because our total hedging program hedges the net exposure that we have, which includes the benefit of the offsetting amounts in our selling expenses internationally.

So on the bottom line we think that the currency changes of recent weeks should have minimal impact for us for next year..

I guess following on from that Rob, could you quantify the benefit that you saw from that hedging in the third quarter and what it would like in the fourth quarter at the current rates?.

In terms of absolute dollars, I don’t have that in mind to be honest with you Mark, but certainly because of the hedges, we had a positive impact from those hedges that offset the other currency declines in the market..

And then Rob, I guess just looking at the fourth quarter and the guidance range that was set up on the last call, keeping the P&L kind of in a similar fashion that you had in the fourth quarter of last year, little gives and takes relating to what’s happening this year, revenues kind of within the range, I mean is it possible for you guys to at least narrow that range that your giving us via the 185 to 195.

Can you talk a little bit more about the top off that range or should we still think that the bottom off of that range is reasonable. You’ve certainly (ph) averaged. It seems that sales at least for this quarter weighs in the right direction relative to consensus expectations. Just a little bit of insight there would be helpful..

Number one, when we did the call in the second quarter we set out a range and credibility is built on delivering within your range and we think our third quarter results were a step one in that direction. There are some factors in the fourth quarter like the currency changes on the top line that Rob mentioned.

That could have a little bit of impact depending on how our sales mix turns out, U.S. versus international and we’ve tried to be very cautious in terms of tightening the range given those factors, because we think continuing to be credible with our guidance is most important at this point in time. So we’ve left the guidance unchanged.

Understand that probably creates a little bit of frustration, but felt that was better at this point in time to do that, rather than tighten and miss a factor that changes in the fourth quarter and takes us outside of that range on the downside. .

Understood and well appreciated. I got no problem on that. And then I guess my last question is we’ve had some commentary and we’ve seen the capital expense market pick up a little bit. Are you guys hoping to take advantage of some of that pick up in the capital market or are they being structurally at CONMED that still need to be resolved.

That are hindrances to at least benefiting from some of that in the fourth quarter, and that’s all I have..

No, we clearly believe the capital market has improved and certainly some competitors have commented on that and demonstrated results that support that and my expectation is that CONMED will also participate in some of that upside. We have a nice platform in the power tools; we have a nice platform in the camera that was just launched.

I do expect the company to participate in some of that upside.

As I said earlier, the fourth quarter last year was a big video quarter, so we are competing against a tough prior year with a new camera system, which always takes a little bit more time to get through customers and sales force confidence, but we’re working hard on that and if the market goes up, our goal should be to participate in the market increases and certainly would say based on third quarter results from our competitors at the market that capital equipment has improved as compared to the first half and we need to participate in that..

Thanks very much guys..

I would now like to turn the remainder of the conference back over to Mr. Hartman for concluding remarks and thank you..

Well, thank you Tony and thank you everybody for joining us this evening on the call. We hope today’s update was helpful and we understand that investors will be looking for a more strategic overlay in the months ahead. We do remain on track for our revised commitments and we’ll be working hard to ensure we don’t deviate from meeting that plan.

The Board remains highly engaged in both the short term and long term success of CONMED and is committed to moving quickly on the selection of a permanent CEO, while ensuring the best governance practices are achieved. Thank you for you time today and we look forward to speaking with you on our next call..

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