Curt R. Hartman - President, Chief Executive Officer & Director Luke A. Pomilio - Chief Financial Officer & Executive VP-Finance.

Kristen M. Stewart - Deutsche Bank Securities, Inc. Rich S. Newitter - Leerink Partners LLC J. P. McKim - Piper Jaffray & Co (Broker) Michael S. Matson - Needham & Co. LLC Matt Mishan - KeyBanc Capital Markets, Inc. Jeffrey S. Cohen - Ladenburg Thalmann & Co., Inc. (Broker) Mark Landy - Northland Capital Markets James P. Sidoti - Sidoti & Co. LLC.

Good afternoon, everyone and welcome to the CONMED Corporation's Second Quarter 2015 Earnings Call. My name is Irene and I will be your operator today. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. As a reminder, this call is being recorded for replay purposes.

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

The company's actual results may differ materially from its current expectations. Please refer to the risk factors and other cautionary factors in today's press release as well as the company's 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 measures during this discussion.

While these figures are not substitute for GAAP measurements, management will use the figures to aid in monitoring the company's ongoing financial performance from quarter-to-quarter and year-to-year on 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 company to be special or outside of its normal ongoing operations. These adjusted items are specified in the reconciliation in the press release issued this afternoon.

With this required announcement completed, I will turn the call over to Curt Hartman, CONMED President and Chief Executive Officer for opening remarks. Mr.

Hartman?.

Thank you, Irene. Good afternoon, everyone and thank you for joining us for CONMED's second quarter 2015 earnings call. With me on today's call is Luke Pomilio, CONMED's Executive Vice President and Chief Financial Officer. On today's call, I'll provide a brief overview of the financial and operating highlights for the second quarter.

Then Luke will provide a more detailed analysis of our financial performance and commentary on our 2015 outlook. We'll then open the call to your questions. Our second quarter sales of $181 million represented a decrease of 3.8% as reported, and a decrease of 40 basis points on a constant currency basis.

GAAP diluted earnings per share decreased 27% to $0.27 compared to $0.37 in the second quarter of 2014. Adjusted diluted earnings per share decreased 23% year-over-year to $0.36 compared to $0.47 in the second quarter of 2014.

Anticipating that you may have questions on the adjusted earnings, I would note that in the quarter we drove harder on our R&D initiatives, incurred additional marketing expenses including the biannual ISAKOS meeting and recorded the full impact from our modified equity compensation plans.

These initiatives equated to impacts of $0.02, $0.03 and $0.01 respectively on our adjusted earnings per share versus the first quarter of 2015. As I have discussed in the past, our focus has been on revitalizing our marketing, innovation and selling efforts.

While this will remain our constant focus to ensure that we have the best team and product offerings for the markets we serve, I'm very pleased to say that the majority of the heavy lifting in the U.S. markets is now complete. This includes the changes to our U.S.

Orthopedics sales and marketing teams which sell our orthopedic and visualization products and the merging of our former endomechanical and advanced energy teams into a combined advanced surgical commercial unit. Looking more closely at these areas, the U.S. Orthopedic business reported its best performance in the past year.

In addition, the business improved significantly on a sequential basis led by stronger capital sales. We see a robust pipeline that we expect will drive higher growth in the second half of 2015.

Additionally, despite the significant amount of transitional activities occurring in the combined advanced surgical business, its sales force achieved another quarter of positive growth. Again, we see a stronger second half, as this business settles into its normal operating routine.

On the same theme in our international business, Pat Beyer, our President of International has fully assessed our opportunities and has made great progress in adding talent to his leadership team.

This includes a new leader of HR, a general manger for our North and South American market, a country manager for Germany, a general manager for Eastern Europe, Middle East and Africa, and a general surgery distribution business in France, Benelux, and Spain.

Overall, our second quarter financial results were in line with the pattern and progression that we have discussed and we're pleased with the positive momentum across our business. At the macro level, we continue to invest in our product portfolio, largely completed our U.S.

business transformations, and have positioned the company for a strong second half of 2015. Before I turn the call to Luke for more details on our financial performance, let me review a few non-financial highlights from the quarter. During the quarter, we appointed Peter Shagory as Executive Vice President, Strategy and Corporate Development.

Pete brings to CONMED more than 20 years of experience in healthcare venture investing and M&A through his previous venture capital, investment banking, and corporate roles.

We believe his deep understanding of business development strategies and his investment expertise will be invaluable as we continue to build on our position in the markets we serve. Finally, on July 1, we further strengthened our board of directors with the addition of two healthcare veterans, David Bronson and John Workman.

They bring proven executive leadership and financial expertise and we are confident they will provide valuable counsel as we continue to enhance our growth opportunities. In conclusion, we made great progress in the quarter and remained on track with our turnaround plans.

We are well positioned to build on our year-to-date achievements and deliver accelerating growth in the second half of 2015. And now I'll turn the call over to Luke..

the euro, the British pound, Canadian dollar and Australian dollar. We have a hedging program in place in which we are able to hedge the cash flows from our foreign operations. Under hedge accounting rules, we approximate cash flows as our local sales plus local expenses.

For 2015, we have hedged approximately 35% of our sales exposure and 75% of our earnings exposure to our four primary currencies. Our ability to hedge beyond these levels is limited under hedge accounting rules. As a result of our hedging activities we realized a revenue gain of approximately $2.4 million during the second quarter.

If exchange rates remain at present levels we would expect to generate similar quarterly gains for the remainder of 2015. To be clear, our guidance for revenue and earnings per share already contemplates hedging gains and of course constant currency revenue guidance is always excluded the impact of any hedging activities.

As of today, we have hedged a portion of our first and second quarter 2016 exposure. We plan to hedge our remaining 2016 exposure prior to the end of the year. With that, I would like to open the call to your questions.

Irene could you please begin the question-and-answer session?.

Sure. Your first question comes from the line of Kristen Stewart with Deutsche Bank..

Hey, everybody.

How are you doing?.

Kristen, are you there?.

Yeah.

Can you hear me okay?.

A little bit remote, but go ahead..

Okay. Sorry, I'll talk up.

I was just wondering if you could just maybe give us a couple of words on what gives you confidence just on the second half ramp and confidence in achieving the forecast that you've outlined today, just given where you finished from a growth rate perspective for the first half?.

Great question, and not unexpected. And I think if you look first and foremost at the 1% to 3% constant currency growth and where we are through the first half of the year, to get to that range, it implies that we'll grow somewhere between 2% and 6% if you just do real simple math.

When you look at the activities that we've undertaken in the first half, a very heavy focus on the U.S. effort, that work I believe is behind us and we exited the second quarter with a lot of momentum, really across the board. We don't publicly report exactly the way our business operates for orthopedics, but they had a great quarter.

The advanced surgical business really went through the depth of its transitions in the second quarter. We had new sales hire training, we had product training, so all those activities are behind us. Again, they exited with a lot of momentum and we feel good that those two business' lion's share of our U.S.

revenue are on track with the plans that we had laid out at the beginning of the year. Jump to the other side, go to the international business, Pat has been doing a global tour. Pat, in the second quarter, has made a lot of leadership additions to his team.

We have a new manager over our Latin American and Canadian business with a lot of emphasis on Latin America. We have a new leader for our Eastern Europe, Middle East, Africa as well as our general surgery business in France, Benelux, and Spain.

And the list kind of goes on there in terms of the transitions Pat's trying to make to affect better penetration in the markets that we serve. And so I look at the combination of those things. I look at some of the prevailing underlying trends at some of our key product lines. I look at those things.

I look at the markets and take great confidence that we'll get to the outlook that we've provided.

Still there?.

Your next question comes from the line of Richard Newitter with Leerink Partners..

Hi. Thanks for taking the questions.

Can you hear me okay?.

We can, Rich. Thank you..

Okay. Great. Curt, I have a couple. Maybe we can just start.

So obviously a back-half acceleration on top both for the top-line and the EPS line, which is consistent with what you've been saying, but now that we're halfway through the year, can you maybe help tease out – the actual way we should be modeling 3Q versus 4Q, you know, how back half loaded is this? Should it be a very, very steep modeling kind of into the fourth quarter, or is it more evenly split? Can you help us think through the constant currency growth, the gross margin factors and then also EPS with respect to those items?.

Hey, Rich it's Luke. Let me take that one. So I think, historically, our fourth quarter has always been our strongest quarter.

And that being said, our fourth quarter will be strong in 2015, but I think as far as sales growth goes, I suspect that we're entering or leaving the second quarter fairly strong and we expect to see growth starting in the third quarter.

From a profitability standpoint, certainly, currency has been an issue but the other item holding us back from a gross margin standpoint is the hangover of 2014 production variances. We're going to – those are behind us now, starting in the third quarter, we'll get back to a more normalized level of gross profit.

So when I think of gross profit for the third and fourth quarter, I think overall we're going to be looking at the kind of levels that we saw on the second half of last year.

From an EPS standpoint, overall the fourth quarter will be stronger, so I suspect that we'll finish stronger in the fourth quarter than in the third, but we expect a strong performance, overall sales margin as well as EPS in the third quarter..

Okay. That's helpful, Luke. And then just on the – I think you called out $0.05 of items that seemed pretty one time-ish in nature around marketing and R&D.

Should we kind of think of the EPS number normalized for those items as roughly $0.05 higher, and that obviously those won't repeat or there won't be items like that to repeat in the back half?.

Yeah. Let me just go back in the commentary. There were three items. One was a little heavier push on R&D, and we had talked or have talked publicly that the R&D as a percentage of sales needs to probably move up into the 4%. We got there a little quicker, as evidenced by this quarter. I think it was 4.1%.

And I think that's a reflection of the new business leaders, the ownership of the product pipelines, the renewed emphasis on marketing. That was $0.02 above what we saw in the first quarter. And well, I don't think it'll continue necessarily at that trend.

It's going to continue to edge upward, probably a little bit ahead of what we had assumed, but I'm comfortable with that, given everything else that's going on. The second item was marketing spend was $0.03 above where we were in the first quarter as we incurred some – I will call those more one-time items.

ISAKOS is a very large international orthopedic show, because of our presence, high percentage of our international business being orthopedic, we made a larger investment in that show this year than we actually did in the academy and that occurred in the second quarter. So we won't see that one again for two more years.

And then the last one was $0.01 attributable to the revamped equity program that we'd talked about, that we started a year across the company with a revamped focus on equity as a component of people's earnings potential. And that settled in at $0.01 and that will repeat every quarter, but again we think that's very manageable within the P&L.

So I think of the three, the R&D one is the one that probably creeps a little bit higher over time. We got to it a little sooner than I was expecting, but we're pushing on the right things here. We're pushing on getting products out the door, the right products. So, comfortable with that coming on board a little quicker..

Yeah. And Curt, if I can just get one on the M&A side, you made the comment several times that a lot of the U.S. investment restructuring heavy lifting is now behind you. You've made some moves, some hires with Peter, that would seem to suggest that you're gearing up for some M&A going forward.

Can we possibly expect that as soon as the second half? What kind of opportunities should we be looking for?.

It's a great question and we've said, I think, almost now a year to the day, that M&A would be part of our strategy. And with Pete coming on board, it has really accelerated our efforts. Luke and I were kind of holding down that role while we were doing other things here. So we were the bottlenecks in the company. Pete is full time on this.

He's connected to all of our business leaders and we have a very active list at this point in time. He has hit the ground running doing exactly what we hoped he would do.

You know as well as I do you can't time M&A and you know you're going to look at a lot of items before you find one that fits what you're looking for, but I would tell you we have a very active roster of M&A targets.

In addition, you're going to see in the financial statements, we did a few small acquisitions in the second quarter that are somewhat immaterial in terms of the amount of spend, but they are nice tuck-in product lines that we believe will add to our offering. Both of these fit within our orthopedics business. They're both very small.

They have to be put through our distribution channel, validated through our R&D categories, but they're nice product line additions to the portfolio. So we've already got a few small ones under our belt.

Not material at this point in time but things that we think will help on the portfolio, both pull-through and in terms of our reps getting something new to talk about with our customers..

Thank you..

Your next question comes from the line of Matt O'Brien with Piper Jaffray..

Hey. Good afternoon, everyone. This is actually J. P. McKim in for Matt. I just had a couple questions. I think this was your first quarter with the combined energy and Endo sales force.

So I'm just trying to get an update there on maybe any positive highlights from, kind of, they're selling from a larger bag of tools to sell from, and see how that's going so far?.

Yeah. We're very excited with that transition. We announced plans in early 2015. We lined everything up to go into the new structure, or kind of dissolve everything and go to the new structure starting April 1st. In addition with that, we had some pretty substantial recruiting to do to fill some open territories.

And all that work is behind us and we still came out of the quarter with pretty positive growth. So I put that broadly in the category of a large win for advanced surgical and the leadership team there. Bill Peters came into the company assuming that responsibility and role. He's done a great job driving it.

We've got a new head of marketing there, Maria Rivlin, who's got great clinical experience. She's been with CONMED for, I believe, three years, and stepped up into this leadership role and is really connecting with key opinion leaders. And we've got a great team of sales managers that, you know, several of them are new to the organization.

Some of them have been with the organization and it's a nice blend, and they're really getting out and getting after it. And when you look at two quarters in a row of that business specifically, posting growth, I think it predicts well for the second half in the future of that business.

Now, obviously, you put more emphasis on a business, you're going to discover some bumps in the road and hiccups. And to be real transparent, we've had that. We've had to make those discoveries and adjust. But I like our chances here. I'm excited by the business, excited by what the team's doing, and really like our chances for ongoing success..

Great. Thank you. And then, one more just on kind of the different business segments. For the second half of the year, I think you mentioned good momentum within the orthopedics, in terms of sequential uptick, and then the pipeline seems strong.

Should you be thinking most of the growth is going to be coming from there, or I mean, is surgical visualization going to be another headwind? Or how should we think about those two?.

It's a great question. A large percentage of the company's total revenue is orthopedics. So the answer to your question is growth has to come from orthopedics. If it doesn't, the company is not going to grow.

In the U.S., we have done a lot of heavy lifting in the first six months, feel very good about the team we have, feel very good about what they're doing and how that unfolds in the second half. Outside the U.S., we've got some real shining star markets. We do wonderfully in Spain.

We have other markets that, Canada, Australia, where we have a great orthopedics presence and we continue positive momentum there. And Pat's work has really been to dive into the other market opportunities and start getting them positioned in the right direction.

And I think we'll see that come on track here in the second half, which is really why I referenced some of those new leaders. You mentioned visualization. I look at the second quarter and visualization as a touch of an anomaly. We had good growth in visualization in the U.S. market in the second quarter. That product is handled in the U.S.

by our orthopedic selling force and outside the U.S. we canceled the OEM distribution agreement that was a headwind. And then candidly, as Luke noted in his comments, we've got to do a better job there. It's really predicated on the IM8000. It's a great new product. We have to get out and get after it and that's the message, and I think we will.

So I look at all three of our segments and the momentum that we've had the first half in the general surgery business, I believe, will continue and I think it's positive momentum in orthopedics and I'm expecting visualization to get back on the growth trajectory..

Okay. And just one more if I could. And I think R&D was higher this quarter and you guys foreshadowed that pretty well.

I'm just trying to look at, is there any particular area where you're going to be focusing that spend, or anything in the pipeline or development you're very excited about and want to call out here?.

I don't talk about the pipeline. That's just a Curt Hartman rule. If it doesn't serve anybody well, including our selling organization. I think the thing to know about R&D is it starts with your marketing teams being engaged with customers and really defining that product roadmap strategy. And that has been a big transition for us. We were lacking there.

And we now have some really savvy marketing leaders, just formalized the leader of our orthopedics business, in the second quarter formalized the leader of our advanced surgical marketing, really excited by both of them. The leader of our marketing team for our CET business and visualization the existing person.

So we've got strong marketing leaders who've really been emphasis placed on product roadmap strategy. Now that that's in the hands of R&D, it's their job to start executing. And this was called out six, eight months ago but R&D reports to Pat Beyer.

And Pat has run global R&D organizations in the evolution of our R&D team, and the seven months that it's reported into Pat has been tremendous. I've sat in in a lot of those meetings. I'm very encouraged by the work they're doing. And there's a healthy amount of tension there in terms of what we can do, how fast we can do it, but it's the right focus.

So I feel good about the spend. And as I've said this that that spend probably needs to go up in the mid-4% over time. We got there a little bit quicker this quarter than what I was assuming, but I'm okay with that because of where it's focused right now..

Great. Thank you very much..

You bet..

Your next question comes from the line of Mike Matson with Needham & Company..

Hi. Thanks for taking my question.

Curt, I guess I just want to start out by asking you how the second quarter results turned out relative to what you were expecting at the time you reported the first quarter results?.

Mike, it's a great question and there's a lot of IR training that says don't talk about your results relative to your internal plan, but I will tell you. Through the first six months, the company is exactly where we thought it would be when we laid out 2015 and because of that I'm very encouraged about our second half..

Okay. Thanks. And then just you did have an $0.08 shortfall at least relative to consensus this quarter. I understand you don't give quarterly guidance, but you maintained your EPS guidance. So should we be looking toward the lower end of the guidance range now, I mean it's a $0.10 range, so....

Boy, we maintained our guidance because we have confidence that we can deliver within our guidance. And I guess the only example I can point you to is the revision we made to guidance last year. We delivered to the higher end of the midpoint of that. I don't want to point anybody to either end of the guidance. It's our current range.

I suspect at the end of the third quarter we'll tighten the range knowing that we have three quarters of the year under our belt. You know, a question came up earlier about how to model our quarters and we're not going to get into that, but I think a couple things I would point to, to help in modeling. In the U.S.

we made a dramatic change in the way we compensate our sales reps. It's very commission-driven. If you don't sell, then you're not getting paid. Inherently, if you've been around these selling organizations, that means we are going to sell more capital.

And capital is a much longer sales cycle and more of that happens in the back half of the year than the first half of the year. More of that happens in the fourth quarter than the third quarter. With that said, and at 100% commission selling organization, if you don't focus on your disposable business, it's a real short ride.

And our leaders are preaching that story and really pointing our sales reps into the single-use items, and understanding that to build a steady repeatable business you've got to do both. And so the offense is twofold right now and it is shifting the business to be a little bit more back half and I grew up in that environment.

I'm pretty comfortable with it, and a lot of my leaders grew up in a similar vein and understand that offense. So yeah, it's a little more back half loaded than what you may have seen out of CONMED is previous years, but at this point in the year, I feel good about our second half chances..

Okay. And then, I didn't hear any commentary on the EDGE product. Just wondering about the timing on the launch of that. I know you said you don't like to comment on the pipeline, but this is something that you've discussed in the past. So hoping I'll make an exception for this..

Yeah. Fair question, Mike. The EDGE platform, I'm going to put it in the Legacy category. It had been discussed before I got here. So I think we have an obligation to continue to discuss it. Two comments on that; no change. We said it would be second half. It will be second half. My only comment on it would be we are doing extensive in-market work.

We know the predicate that we have to get to or get above to get customer acceptance. And all of our effort is focused on that.

And it will be second half and probably later in the second half, but I feel good about where we're at right now and what the R&D teams and the marketing teams are doing to validate the concept and what we want to deliver to the market, but still second half this year..

All right. Thanks a lot. That's all I have..

Your next question comes from the line of Matthew Mishan with KeyBanc..

Hi, Matt..

Great. Thanks, Curt. Thanks, Luke. Thanks for taking the questions. I think I've heard that you had a lot of people asking about the R&D bump, but it looks like SG&A also bumped quarter-over-quarter.

Is this a good level to be modeling going forward? Have you hit the point where your organization as far as your sales heads and the alignment are where you want them to be, and we can look at this level going forward as being a good level?.

Yeah. Matt, as we talked about last quarter, I mentioned I though first quarter would be low, second quarter would probably be a little higher as we put in some of the structure, putting in place.

I think where we are now is a pretty good level, and the only caveat I'll give is, as we see the top-line grow, the expectation is especially in a big quarter is that we should get some leverage, but I think where we are now is a good place to model..

I think really, Matt, just kind of talking about it at a people level. The sales and marketing structures have transitioned and, yeah there's a few openings here and there but nothing that's going to be model changing in my view. The biggest leadership opening right now is the leader of our U.S. Orthopedics business.

But again, you factor all that in, I think the levels that Luke has talked about going back to the first quarter were probably close to where we need to be. Again though, I'm still pretty focused on some of the individual line items spending and then we're asking our businesses to do the same thing. So we're going to hold people accountable..

Okay. And then versus my model on – surgical visualization was the biggest delta. And I think you mentioned that your sales force is ready to get out and get after it, but I think pervious commentary was that you were being very careful and cautious with the launch.

Are you ready to go out and go full bore with the new visualization product now?.

Yeah. And that really happened in the first quarter. In the second quarter, to me, the anomaly here is as we hit the OEM deal, canceled which had an adverse impact, and then outside the U.S. we did not have favorable performance in our visualization line. We had a double-digit growth quarter in the U.S. in visualization.

So I feel good about what's going on in the U.S. market. I feel good about the IM8000 as a product. And we had two factors; one, execution on our end and one, a strategic decision to end an OEM relationship that impacted the visualization number..

Were there any changes to the sales force in visualization or has that been pretty much left untouched?.

No. The U.S. Orthopedics business sells visualization into Arthroscopy in the U.S. market. That has always been the case and that continues today..

Okay. Thank you very much for the questions..

Thanks, Matt..

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

Hi, Curt, Luke. Thanks for taking the questions.

So I hate to keep beating on the visualization, but Luke, if you can review your previous commentary about second half and perhaps also, Curt, if you can talk about 2D versus 3D for the year and how that looks?.

Hey, Jeff. As far as second half, I think the only second half comments I made relative to visualization was the amount of the OEM which we're going to have as initial headwind. I did talk about the growth that we had both domestically and internationally for visualization over the last couple quarters.

Which areas do you want me to focus on?.

You're speaking about $1.3 million for the first half and $1.8 million for the second half?.

Yeah. So in the current quarter that's the discontinuation of the OEM business, that was $1.3 million in the current quarter. In the second half of 2014, we sold a total of $1.8 million of that OEM product, which will have to have an additional headwind..

Got it. Okay.

And I know Curt doesn't want to comment on any pipeline, but if you could kind of give us a macro-look, Curt, as far as how some of the new products that we saw at the Academy maybe doing in the marketplace? If you could kind of give us a little bit of color as far as the reception from accounts, you know, size of accounts, number of accounts, number of leads, number of orders, etc.? Any color would be super helpful.

Thanks..

Sure. You know, if I take it by business at this point in time, I'll start with visualization. The number – the product is better than the numbers this quarter. The IM8000 in the US has had a favorable reception and you know, a lot of education going on with our selling teams to make sure we're positioning the product right.

It had been obviously, as everybody on the call understands, a long time since we had introduced a new product. So getting people comfortable with that technology solution takes a little bit of time. But overall the market reception has been favorable in the US.

Outside the US, I think we're just a little further behind in addition to the headwind of that OEM cancelization. So we've got more work to do there, better execution on training and focus on the product. But overall I think the market reception for the product has been favorable.

If I kind of stick in the Orthopedic category here for a moment, you know, the Dual Purpose Shaver Blades we've had a very favorable reaction. The Y-Knot extensions into hip and rotator cuff, we've had very favorable reactions.

Obviously these are all items that take trials and time and you know anytime you open up trial competitors are in there as well, so it's not an overnight win. But feedback so far has been favorable on the Power Tool side, both large and small bones, some new products that we showed at Academy.

Importantly the selling organization and the customers are giving us an audience and we're excited by that, and we've got a long way to go to be a Power Tool company, but we're excited by the platform we have to offer in the US, and outside the US, the news is similar.

If you jump into General Surgery, really the focus this year has been about putting the bag together and selling more of what we have. And then on top of that we're going to drop in some small additions.

I would tell you right now those small additions have had minimal impact as we're sorting through some of those, what I would call typical new product category launches, be it didn't quite get it right, little quality hiccups. So again, I see those things as perhaps being a little further out.

In General Surgery and Advanced Surgical is more about selling the broader bag to an existing base of customers than extending our customer reach. So overall, it's moving in the right direction. It's kind of the macro statement I would say there, Jeff..

Okay. And one more.

Any color from the second quarter as far as tissue forms at all?.

You know, a big part of the second quarter in US Orthopedics was taking a very small MTF selling organization that we acquired in 2012 effectively disbanding that selling organization, integrating it into our US Orthopedics and ramping up the entire US Orthopedics effort, be it the distributor or direct rep and selling tissue as part of their broad portfolio.

That integration is done, it's completed. We absorbed some of the MTF reps, others we didn't have a place for or they elected to not want to sell broader product offering.

There was a lot of training that went on with our US Orthopedics effort to get everybody comfortable to represent the product and the takeaway is we have a much broader representation on MTF as come out of the second quarter.

And it's probably too early to point to anything concrete on that, but it's definitely the right move and the people who never had MTF are very excited by the portfolio and I've talked to managers and reps and there's a lot of excitement about having that as part of a broader offering..

That's great. Okay. Thanks, guys, for the commentary. I appreciate it..

Thanks, Jeff..

Thanks, Jeff..

Your next question comes from the line of Mark Landy with Northland Capital Markets..

Hi, Mark..

Afternoon, guys. Thanks for taking my questions.

Luke, I guess just first for you, if we're looking at R&D in terms of absolute dollars, should we think of the spend being roughly to $7 million to $7.5 million in third quarter versus the prior $6.5 million, is that a fair way of looking at it?.

Yeah. You know, I think $6.5 million is low. $7.5 million is plausible, but it's high. But I think that range of $7 million to $7.5 million is probably a good way to look at it. And candidly the way I'd look at it is from a dollar perspective going forward..

Yeah.

That's what I'm trying to get to because you can only turn on and turn off so much R&D during a quarter, right?.

Correct..

So I'd say $7.5 million also high, so kind of between $7 million and $7.2 million is about fair?.

Yes. It's $7 million to $7.5 million, but probably at the lower end of that range..

So I guess just to get a little bit deeper into the weeds with where Mike was going, with respect to the guidance on EPS, I think – if we look at the midpoints of the revenue range or thereabouts, where do you think you need to be on an operating margin side to get to – to the EPS range that you're putting out there? Kind of closer to about 12.5% to 13%? Is that fair?.

Well, you know, I don't think we're going to go through the sort of the exercise. We've laid out our revenue range and the EPS range and people can look at their models and decide all that have lined up.

I think from my perspective, we've talked a lot about the sales numbers, and I think we have some wind at our back at the moment, really some good trends that we're looking at, which for a guy who's been around for a long time. It's really encouraging to see.

I think from a profitability standpoint, gross profit drives a lot of bottom line, and I think we've talked a lot about the impact of variances and how in the second half of the year, we're not going to have that headwind.

So I guess from my perspective, when you look at the sales anticipated for the second half of the year and look at the absence of margins, we're going to have a strong second half any way you look at it..

Yes, the delta....

Mark, I would -.

Sorry..

I would just point to – in the two quarters, we've tried to call out what those unfavorable manufacturing variances are, and that those are going to go away, and that in effect provides a nice bit of wind at our back as we enter the second half. So you have to factor that in.

And I understand the math and you look at the delta, and it's probably different than the way EPS has fallen out quarter-over-quarter at this company on a historical basis.

But I'm trying to encourage people to not use the historical to model the new because it is a different company on a lot of different levels, and therefore, you're probably going to see us evolve to a little more back half loaded, and it's going to start this year..

Right.

But I just want to go back to, I mean, Luke, you had mentioned that there was 150 basis points of gross profit headwind, right? So I mean, even if you look at something being optimistic with the pickup in revenue and the benefit you get to manufacturing from that and other things that run through cost of goods, let's assume you can pick up maybe 200 basis points of margin.

You get to – and the math is just as we discussed, you went through the SG&A with other folks, you just spoke about the R&D, tax.

You've spoken about operating income obviously before tax, but it's – to get to the range, you're shooting for somewhere between a 12.5% to 13% operating income margin, and I'm just asking if that's feasible and real?.

I think that....

That's the math on the number that you've thrown out with a 33% tax rate..

Yeah. I think that – I think the numbers you're talking about are in the ballpark. I think they're realistic and I guess – one thing I'll say is we – from a tax perspective we are looking at 33% overall, however we typically benefit from the R&D tax credit in the fourth quarter, so I said it's an additional benefit..

But that's not going to alter – so you are saying that there is a potential for a lower tax rate given the R&D credit if it gets written in, because it obviously not yet approved, correct?..

Correct....

So you included that in your guidance or not?.

That's included. In the first quarter our effective rate was 34.7%. We're down to 33%, and if – right now, we're forecasting a renewal to the R&D tax credit and that would bring us in overall at 33% for the year..

Okay, guys. Thanks for the questions..

Your next question comes from the line of Jim Sidoti with Sidoti & Company..

Good afternoon.

Can you hear me?.

We can, yeah, Jim..

Great. Just wanted to – just one more follow-up on the Visualization business. It sounded like it was pretty strong in the U.S., not as strong overseas.

Do you think that's related to the product or to the way that you're selling it?.

I would tell you it's more related to the way we're selling it. We do a good job with video in select markets, and if you dive into those markets, out then and I'm talking about outside the US, it's really a byproduct of how they're organized and the emphasis that they've put on visualization.

And in those markets we're doing a good job with the product and we will continue to do a good job with the product there because of the teams and the historical approach, and what we're trying to do is effect that change a little bit more. They can't carry international visualization in a few markets. We've got to have broader coverage.

And that's the change that we're working through and pushing hard on. Again, I think the IM8000 is a very good product and will serve us well at this stage in our visualization journey.

Now, the flip side of this is the visualization market demands, ongoing innovation and we have to be right after it back in the R&D shop putting more into this market if we really want to regain our former luster. The Linvatec brand and visualization has been around for a long time and historically, we've not paid enough attention here.

So we're renewing that emphasis..

Okay. So just to be clear, I mean IMF8000 (sic) [IM8000] is available overseas as well.

It's not just a US launch?.

No. It's available and obviously there are some markets that have longer registrations. But there's processes and protocols in place to get registrations in place and it's broadly available in some of the key markets where we want it and it's more about execution sales focus, training, education..

Okay. And then just another follow up on the relationship with MTF.

It sounds like you have quite a few, you have a larger group of people selling that product now? Do they have the capacity to supply you if demand increases?.

It varies depending on what they're selling. There are certain categories that, the donor category is always going to be under constraint. There are other categories where we have tremendous access and we have not leveraged that. So it really varies by the category..

Okay. And obviously you'll focus on the areas where there is more capacity available? I'm just....

Yeah. It does not good to sell something that can't be delivered and....

Right, right. Okay..

We try to ramp up our relationship with MTF and really understand the cascade of products that would work well in the marketplace and part of this is educating customers to the broader portfolio of products..

Okay.

So, and now is it fair to say that the restructuring, at this point, is 100% compete?.

Orthopedics, General Surgery and the various businesses within General Surgery. He then started in the second quarter really driving the accountability, starting to make leadership changes. And I mentioned some of those changes that he made in the second quarter.

So his evolution of the business is a little bit further behind just by the nature of the size and geography coverage on that he had to work through, but good things are going to happen there..

All right. Thank you..

There are no further questions in queue and now I would like to turn the call over to Mr. Hartman for any closing remarks..

Okay, Irene. Thank you. In conclusion I'm pleased with the quarter, the hard work and commitment demonstrated by our employees and the substantial progress we have made across CONMED during the first half of 2015 to transform our business.

We're excited about CONMED's future and believe that we have the right team and strategy in place to drive profitable growth. And I thank everybody for their time today and being on the call with us. And we look forward to speaking with you on our next earnings call, which will be held on October 21, 2015. Thanks, everybody..

Ladies and gentlemen, this concludes today's presentation and you may now disconnect. Have a great day..