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

Richard S. Newitter - Leerink Partners LLC Kristen M. Stewart - Deutsche Bank Securities, Inc. Mike S. Matson - Needham & Co. LLC Matt O'Brien - Piper Jaffray & Co (Broker) Jeffrey S. Cohen - Ladenburg Thalmann & Co., Inc. (Broker) Matt Mishan - KeyBanc Capital Markets, Inc. Mark Landy - Northland Securities, Inc..

Good afternoon, everyone. Before we begin, let me remind you that during this call, management will be making some comments and statements regarding its financial outlook which represents 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 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 adjustment measures during this discussion.

While these figures are not a substitute for GAAP measurements, management will use 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 the Company to be special or outside of its normal ongoing operations. 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 President and Chief Executive Officer, for opening remarks. Mr.

Hartman?.

Thank you, Lauren. Good afternoon, everyone, and thank you for joining us for CONMED's third 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 third quarter then Luke will provide a more detailed analysis of our financial performance and an update on our 2015 financial guidance. We will then open the call to your questions.

Looking at the quarter, our results finished short of our expectations and, from my chair, were a disappointment as viewed against the progress we are making across the Company. Third quarter sales of $169.2 million represented a decrease of 3.3% as reported and an increase of 0.5% on a constant currency basis.

GAAP diluted earnings per share totaled $0.32 compared to $0.07 in the third quarter of 2014. Adjusted diluted earnings per share were $0.38 compared to $0.44 in the third quarter of last year.

As we discussed in our conference call at the end of the second quarter, we were confident in hitting our financial targets for the fiscal year based on the progress we had made in the first half of 2015. However, during the third quarter, we faced several challenges that caused our results to be weaker than expected.

First, weakness in export sales negatively impacted our international operations. As we have said previously, one-third of our international revenue comes from the dollar-denominated export business. And during the third quarter, we witnessed incremental deceleration in some of our key export markets.

As an example, Latin America and more specifically, Brazil, was very soft, declining almost $1 million versus the prior year. I would note that our export sales in Latin America, excluding Brazil, were up 2.5% while inclusive of Brazil, our export sales in Latin America were down 8.5%.

The issue here is not pricing as we have not made significant concessions. Rather, this is a demand issue, and it remains difficult to predict the timing of when we will see this stabilize. The Middle East-Africa region was also particularly challenging, declining over $1 million from prior-year levels.

Export has been challenging for the past five quarters, and we're committed to turning this around. To that end, in the first half of this year, we hired new leaders for both our Latin America and MEA export businesses to focus on our distribution strategy in these markets.

Overall, we expect continued export headwinds as we finish out the year, but we are expecting a sequential improvement in Q4 versus Q3. Second, we experienced a slowdown in sales within our General Surgery businesses, with the third quarter declining 3.2% on a constant currency basis after two consecutive quarters of positive growth.

This decline was due to slower capital sales in both our Endoscopic Technologies and Advanced Surgical businesses, distributor reductions in inventory across the domestic General Surgery business and the export market slowdown I previously noted. Also, the slowdown in General Surgery was partially attributable to the delay of new product launches.

Related to my last comment, we are delayed in launching some key products in our Advanced Surgical business.

We reinvigorated our internal marketing and R&D efforts over the past year, but a by-product of this work as the extension of development timelines for some select products in our revamped efforts to confirm our introductions are on the mark from an innovation, quality and customer satisfaction perspective.

Our revamped marketing teams have been instrumental in repositioning our approach to R&D to ensure that voice of customers are critical component of the process.

I would also like to comment on a few bright spots in our business in the quarter that are indicative of the kind of momentum shift that we are focused on delivering across the entirety of our business.

Despite the headwinds in our international export business, our direct international business grew 5% in the quarter with international Orthopedics up 6% and Visualization up 9% in our direct markets. These are nice accelerations from what we saw in the first half of the year.

Also during the third quarter, our domestic Orthopedic business returned to positive growth, marking its first year-over-year improvement following six quarters of declines. While there remains considerably more room for improvement in Orthopedics, we believe these results are a testament to the fact that our hard work is starting to pay off.

Importantly in the quarter, we recently welcomed Nate Folkert as Vice President and General Manager of our U.S. Orthopedic business. Nate brings 15 years of diverse medical device experience to CONMED.

We believe that his leadership abilities, coupled with a track record of delivering exceptional results across many assignments covering both procedure-specific products and capital equipment, will further accelerate our efforts to enhance innovation and profitably expand our market share in our Orthopedic business.

In summary, the third quarter presented us with a few new issues to address. And we also recognize that we could have done a better job in identifying specific areas of our business where effecting change would likely take longer, particularly in some of our international markets. During the turnaround, the progression is never linear.

And as we continue to dig deeper into each business, we have uncovered additional areas on which to focus our efforts. We've captured a lot of the low-hanging fruit. And while there is much work to be done, our approach to-date has bolstered our confidence level in the long term.

Our conviction of this assessment is based on the fact that as we discovered new challenges as we got deeper inside the Company, we did not let that alter our method of executing the turnaround in the right way. We remain steadfast in our commitment to focus on the long term, even if it comes at the expense of short-term results.

As I mentioned in our last quarterly call, the majority of the heavy lifting in the U.S. markets is mostly behind us, and our focus here remains on execution to continue to drive the progress in the U.S.

On the international side, while we have made great strides, we recognize that implementing the necessary changes to turn around the Company's performance across diverse markets comes with its own challenges, but we have and continue to place emphasis on personnel and critical roles to succeed in doing so.

In conclusion, we remain unwavering in our confidence in the longer-term outlook for CONMED. We continue to make the necessary changes to revitalize our business in both the U.S. and internationally.

While we recognize that some of the transformative changes we are implementing throughout the organization are taking longer than we originally anticipated, we're hiring the right team of leaders and developing an improving product portfolio which should position CONMED well for further improvements of our business as we exit the year.

And now, I'll turn the call over to Luke..

the euro, the British pound, the Canadian dollar, and the 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 local sales less local expense.

In general, we can hedge 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 $2.8 million during the third quarter.

If exchange rates remain at present levels, we would expect to generate a similar gain in the fourth quarter. To be clear, our guidance for revenues and earnings per share on a reported basis already contemplates hedging gains, and of course, constant currency revenue guidance has always excluded the impact of any hedging activities.

As of today, we have hedged our 2016 exposure. These contracts were entered into during the second and third quarters of this year. With that, I would like to open the call to your questions.

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

Our first question comes from the line of Richard Newitter from Leerink Partners..

Hi. Thanks for taking the questions. Curt, maybe I could just start off with the guidance reduction and where you were kind of sitting when you last reported results. You sounded pretty confident in the third quarter and the trends that you were seeing, and you felt comfortable reiterating your full year.

And I understand some of the factors that you went through on the call just now in your prepared remarks, but maybe just help us understand what really kind of changed the most relative to your thinking then to kind of lead to stepping aside from the full-year growth rate?.

Rich, I think the biggest single change has been the export market deterioration which was pretty substantial. The export market is served by distributors. They tend to order in large quantities, and it's not a super predictable pattern. It tends to ebb and flow a little bit.

We're served by a lot of distributors, and that was a reference to my comment about hiring people in some of these markets to get a better view on those distributors.

So we had a big impact from our export market distributors, specifically Brazil, Middle East-Africa and then some other outliers that really slowed down as we got further into the third quarter. The capital equipment across the General Surgery businesses was really soft in the third quarter. Candidly, some of that is competitive response.

We've gone into the market. We're showing up more than we historically have, and I did not ever expect our competitors just let us walk in. And they've started to do what big competitors do which is compete for the business aggressively. So we're going to have to learn how to operate in that environment a little better, a little sharper.

And I think it's a combination of export and the General Surgery slowdown across the U.S. market that were the two biggest factors that gave me pause. Candidly, the last part is about one of my stated goals here which is to have CONMED be trusted by a couple different constituents. One of it is our employees.

One of it is our customers, and the other part is the market. And clearly, the results we put up in the third quarter did nothing to endear trust with the markets, and we've got to set a new level of expectation that people can say I don't necessarily like it, but I think it's achievable.

And hopefully, that's what our guidance accomplishes here today..

Okay.

And then maybe just on that, where you stand today, the level of visibility you have and into some of those factors that you just mentioned that are a bit more challenging and you appreciated (22:48), maybe can you give us any sense as to rough timelines as to when the export part of the business can return? It sounds like visibility is a bit murky on that.

And then the second part of my question is just on the new product cadence. You said there were some delays. I was curious if you could mention some areas around what those new product areas were and how long do you think it'll take to get those products to market. Thanks..

Sure. So I think I mentioned this in one of our previous calls. The Company really came into the year with a brand new forecasting process, one that is fundamentally driven by the commercial side of the organization versus anything out of the corporate office.

And we rolled that process out and we've also put a lot of new leaders in place, so we have a lot of development and evolution of the process, and that evolution continues. It's a company that serves global markets.

We've got to find the right data, the right inputs to ensure the vitality of the process, and we continue to refine that each and every day, each and every month, each and every quarter.

Our forecasting process today is much better than it was at the beginning of the year, much better than it was a year ago, candidly, so my confidence level in our forecast grows each and every day. As it relates to what we have for our outlook right now, candidly, it's a pretty short window we're forecasting between now and the end of the year.

That's number one. Number two, as we dive into each of these markets that caused us problems, for example, the Latin American market, we see stability in that market third quarter going into fourth quarter. We don't see further degradation in Brazil based on where our sales levels are.

In the Middle East and Africa, we feel like we've got a better understanding after some changes in approach there. So a lot of this revolves around people getting closer to the business, getting closer to what's going on in the markets. It fundamentally means getting our arms around a very broad distributor base, and that's probably my last comment.

On export, we had a historical approach that didn't have a lot of large distributors controlling the market. We had a lot of small distributors, and we're evolving to refresh that process and say let's get some large credible distributors who have more partnership and more oversight and ownership of the markets and a more dedicated focus to CONMED.

On the product side of the question, my comments were around specifically the Advanced Surgical business. As everybody knows, we combined two entities at the beginning of the year, really effective April 1, with our Endomechanical sales force and our Advanced Energy sales force coming together. And that integration has gone exceptionally well.

The people leading that, whether it's Bill Peters or his head of sales, head of marketing, have really affected a solid integration. What has changed in that plan is we have some products in the pipeline that we thought we could drop on top of them. And I don't want to mislead anybody.

These aren't going to, in any one of them specifically, materially move the company, but it's always nice to have new products to drop into the sales force, especially after you combine entities. And we had two groups coming together to sell a broader bag, and we thought we'd be able to drop some new products on top of them.

You'll also recall that one of the big changes we've made, and I've talked about this, was across the board in marketing.

So as we've revamped our marketing efforts, the marketing teams have dove into those products, really pushing voice of customer, really looking at the innovative aspects versus what's in the market, and we've had to make some real-time adjustments to what we thought at one time was good enough.

We've made some tough decisions to say not good enough, and that's going to slow things down. And instead of those products coming into the fold here in the third quarter, fourth quarter, they're more likely first half of next year products which is fine.

We understand that and we'll deal with that and renew our focus on the existing portfolio and other things that have the opportunity to support those businesses..

Our next question comes from the line of Kristen Stewart from Deutsche Bank..

Hi. Thanks for taking the question.

I was wondering if you could just talk mainly about just kind of thoughts around M&A and maybe some product tuck-ins, given the, I guess, softness that you're seeing within the business and I guess just maybe things not – turnaround maybe not coming, I guess, as you may have hoped, just how that changes, if at all, anything from an M&A perspective whether or not you may put some things on hold until the business is kind of starting to turn as you would have liked to have seen..

Great question, Kristen. We have a very active M&A pipeline. And if you look at our balance sheet, you'll see some dollars were allocated to that category. They were small single product tuck-ins and in this case, both of them hit our Orthopedic business. One of them is a patient positioning platform and another one is a special shoulder cannula.

Both of those are now in the fold, and we're actively marketing those products. And they're small in terms of revenue contribution, but the enthusiasm they build in our sales force and with our customers is very important as we effect the transition. So, I'm actively pushing M&A.

Each of my business leaders and their marketeers are out working the market, looking for new products to tuck in. As you all know, we hired a new head of M&A back in May. He has hit the ground running. He's very active. We're sourcing a lot of deals, and we're encouraging exactly that because we do believe our sales teams are revamped in the U.S.

and ready to do more if we can get them more products..

That interchange, it sounds like to your M&A, is still pushing ahead and....

Yeah, we're still pushing M&A. I don't think anything in the third quarter would have us slow that down. Our challenges in the third quarter are not about the sales force right now in terms of caliber. It's about executing in some tough markets like export.

In General Surgery, we had some capital equipment sales that in some cases, pushed; in some cases, we lost. So we've got to sharpen our focus there and get a little bit better on following through and finding a way to compete in some big opportunities..

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

Hi. Thanks for taking my questions. I guess I just wanted to start with the domestic direct sales team. So I know there were a number of changes made there. It sounds like your growth was better in Orthopedics and maybe a little worse in General Surgery.

But I was just wondering if you could provide an update on how the integration effort has gone on the General Surgery side.

And then just the compensation changes and so forth, has that resulted in any turnover or disruption among the sales teams?.

Sure. Great question, Mike. And just specifically, as I go through each of our businesses, in the U.S., our U.S. Orthopedic selling team recorded its first positive growth quarter in – first on our last seven (30:51), I think.

So, very positive trends there in terms of what we're seeing with the revamped management and direct feet on the street, whether it's through distributor or direct reps. And the compensation changes there were really about simplification, giving them clear understanding of compensation versus what they sell.

So I think the plan is working the way we had hoped. And I think the added attention through a better management structure, most recently with the addition of Nate to run that business, is really starting to move things forward.

Clearly, we have more work to do but excited by the trajectory as we look at our first quarter results, second quarter results and where we finished in the third quarter. In the General Surgery category, we have three businesses in the U.S. We have Advanced Surgical, which is the integration of Advanced Energy and Endomechanical.

And they went through a pretty aggressive compensation change. We think that compensation program is very attractive. We have seen the benefit of that through some of our recruiting efforts. And really, they had a great first quarter and second quarter, and we hit a bump in the road here in the third quarter.

With that said, they were fundamentally just below breakeven in the quarter. Part of that was a de-emphasis on the Altrus product line. Prior to this year, that product line had special compensation tied to it, and we went to a straight compensation program that said no matter what you sell, you're going to get paid the same commission rate.

And the sales force has gravitated to selling what customers want, not what we want them to sell. And that's fine. That's the way the market should work for the long haul.

So part of the headwind in the Advanced Surgical business was a shift off of Altrus into some other products as we work those through the pipeline and then a little bit of capital slowdown, keeping in mind that a certain percentage of that sales force, those coming from Endomechanical, had never sold capital.

So, they're learning how to build the capital pipeline. Now, the other two businesses there, Critical Care, the legacy business, really a large percentage of that goes through the distributors. And we saw a slowdown in distributor ordering activity, though the sales trace, which is the placement of product, that activity still looks good.

So we think perhaps distributors were working their inventory levels down. And then finally, the Endoscopic Technologies had been running really hot with capital equipment the first two quarters. That really slowed down in the third quarter.

And then, again, I go back to this competitive reference; we have a nice biliary stent that had a new entrant to the market to compete against us, and that slowed down some of our progress there. I view that more as a bit of the new entrant coming in and ruffling the market and putting some of our gains on hold.

So hopefully, that covered your question..

Yeah. That was a lot of detail. Thank you. And then just on the gross margins, so if I heard you correctly, it sounds like there was 140 basis point benefit from the production variances this quarter. Mix was positive by 40 basis points, and then you had 160 basis points negative from FX.

Is that correct? And then I guess I'm just trying to get to, if you back out all these moving parts, what's sort of the normalized underlying gross margin. I guess by my math, it seems like it would be around the 56% level.

But is that a fair assessment?.

Yeah. Yeah, Mike. It's Luke. So your numbers were correct. So, we had some favorable mix and we actually had favorable manufacturing variances and other costs of goods sold this quarter. So when I look at the run rate, if we go back to the first half of the year, we reported about 53% and we had $5 million of unfavorable variances.

So when you normalize that, you're at 54.5%. This quarter, we're at 56.1%. I think the normalized level is somewhere between those two numbers. The one consistent theme across the year is the FX impact which is that 160 basis points..

Our next question comes from the line of Matthew O'Brien from Piper Jaffray..

Good afternoon. Thanks for taking the questions. Just, Curt, if we could start with on the General Surgery side, your commentary that you made about some competitive responses that you're seeing within that market. I'm just curious how you're going to compete going forward with these companies, given some of the product delays that you have.

Should we think about this as being a headwind probably until the back half of next year?.

Hard for me, Matt, to put an exact timeline on it because it's not across the board. It's some markets, and part of this is training of our sales team which now have a bigger bag in the Advanced Surgical portfolio to sell.

And we've got to learn how to leverage the capital and disposables and secondarily, we need to learn how to leverage the entire portfolio across CONMED. And to that extent, we just hired another person to come in and help develop our program offerings and manage those across our selling entities in conjunction with our business general managers.

So some of this is putting the right people in place to do these programs, create them, manage them, train our reps on them. Some of it is in key markets we're contractually locked out. So we've got to do a better job on the IDN and GPO front and get in the door.

And some of it is new products where we can broaden the portfolio in innovative ways that perhaps our competitors cannot do right now. I think if you go back in history, that was the attempt with Altrus, was to get into the cut and seal market. And that has not unfolded the way the Company intended it to.

And candidly, it's not a super-competitive product when you look at the two large competitors out there. So we've got to come up with a redo on that play, and that will help us. That one, obviously, is a little longer out when you think about product development, but that work is underway. So there's a lot of different answers to your question.

So I hesitate to say, yeah, it's definitely back half of next year because we have some markets right now where we're competing very effectively; we have other markets where we're a little behind..

Okay. So then as you sit there today, being in the seat about a year, just over – as you look throughout the organization, you've had some things that have popped up that have kind of surprised you.

Do you get the sense that majority of those issues are largely known to you at this point? Or there are some things where you're still a little uncertain as to whether or not those could be problematic going forward? And then just to be a little bit more specific, you're guiding to about 1.5% constant currency growth in Q4.

You got pretty easy comparisons here for 2015.

Is that the type of growth rate or something a little north of that we should expect as we start thinking about 2016 numbers?.

To the first part of the question, Matt, surprises are largely a by-product of not having the right leaders in place, and I think we've done a lot of heavy lifting in putting the right leaders in place. If you look at my leadership team, all the roles are filled now with the final addition here of Nate.

Pat Beyer has been in his role – he'll be coming up on a year in December, and Pat's got the biggest geography and the biggest complexity. He's also my most senior manager. And Pat has done a lot of hiring to provide more focus in the international markets.

It's just fundamentally a challenge of geography and market diversity that has our international transition a little behind the U.S. business. In the U.S., I'm really pleased with our Advanced Surgical efforts. That integration went about as well as we could have hoped, and they had a blip this quarter.

I'm not going to get disappointed by that because I think we're doing the right things there, and I think positive days are ahead. The CET business is smaller business for us and really a business that had suffered from no innovation for a number of years, and we're working hard on that pipeline to speed that up. The U.S.

Orthopedics business, we did a lot of heavy lifting on the commercial end, sales and marketing. Nate has come in, picked that up, continuing to push hard and pushing hard through the innovation side. So I look at the question around surprises and would like to tell everybody we've got most of the big ones behind us.

That said, I've been around long enough to know there's always a new surprise, and it's how we respond to them that matters most. On 2016, we're not yet in a position to give guidance.

We're working awfully hard on our plans for 2016 right now and that work will continue, and we'll review those with our board and our internal leaders to make sure we've dialed in the right assessments.

And again, if I go back to my January comments, it was to exit this year on a trajectory towards market level growth rates and then ultimately decide where we're going peg our growth rates, given the different markets that we serve..

Our next question comes from the line of Jeffery Cohen from Ladenburg Thalmann..

Oh, hi, guys.

Curt, can you talk a little more about the Advanced Surgical business and the new products that'll be introduced in the first half of 2016? And will they be introduced domestically as well as in all of the markets you serve?.

Jeff, we have a couple new products that we were working on that we thought we're going to be able to drop into some – two of those were – or excuse me, one of those was really a continuation of an existing platform. The other two were relatively new as it relates to the Advanced Surgical offering on the Endomechanical side.

We haven't really called those out in specific terms, but they fit the core of the market, if you will, for where the Advanced Surgical group fits.

And right now, as we've gone through and redone the voice of customer work and defined what we believe the market is looking for, it has pushed our timeline on those to be more first half of 2016 than second half of 2015. So that's probably where I'll leave that comment..

Got it. Could you talk about the domestic growth for the Orthopedic business for the quarter? It looked like a bright spot.

Can you talk more specifically about products or segments which sit out?.

Sure. We had a couple areas that we liked what we saw in terms of improvement. Within sports medicine, the anchor line, the sports tissue line, we're starting to see some momentum return to that business. Clearly, we're a smaller player in that market, so the growth should come the law of small numbers, but it had been negative for a while.

So we're starting to see a little bit more attention in that category and a little bit better results. We're competitive across the power tool segment, and I think we're getting our folks in front of the right audiences at this point in time.

Again, we're small in that market, so I'm not going to get too excited about growth rates here yet because the dollars are still small. But we're seeing better outcomes there. That said, we still have work to do in the sports tissue/biologic, the MTF line.

It's, candidly, been a bit of a sore spot for us the last couple of years, and we're revamping our training and education there. I think everybody knows, back in June, we integrated the sports tissue/biologics 24 dedicated reps into the entirety of the U.S. Orthopedic reps. So, there's a bit of growing pain going on there.

But we're working hand-in-hand with MTF to get more field-based training, to get our sales teams up to speed and get in front of more customers. So overall, if you look at Orthopedics, I'd like to believe that the first quarter in the U.S.

was our low spot that you saw improvement in the second quarter and that we finally broke into the positive category in the third quarter in the U.S., and that trend is pointing the right direction and will continue..

Our next question comes from the line of Matthew Mishan from KeyBanc..

Great. Thanks, Curt, Luke, for taking my questions..

You bet..

So if I look at the guidance, it looks like it's coming down more at least for – and I know you don't give quarterly guidance, but it's coming down versus my model more for the fourth quarter than it necessarily is for the third quarter.

And I guess my question is, what gets worse as far as the drivers of the guide down (44:56)? What's worse in the fourth quarter than in the third quarter?.

Matt, it's a good question and I go back to a statement I made earlier. Part of what I set out to do here was to build trust, and we wanted to put guidance out that people could be looking at and say fundamentally we believe this is very safe guidance.

And so we've tried to factor in a range of possibilities into our models and factor in some of the surprises that we saw in the third quarter and say, okay, we think we know where they're going, but let's assume they don't correct or get to the levels that we believe they're going to in the fourth quarter; what would that look like? So we've tried to capture those considerations in our fourth quarter estimates which obviously flow into the full year..

And, Luke, on the gross margins, it looks like they were very good in the quarter. But what I've – following you guys now for a little bit, it seems as if when you do have these unexpected declines in sales, the gross margin doesn't – it doesn't impact you in the current quarter but necessarily in the quarters afterwards.

Is there going to be a hangover on the gross margins from this decline or this guide down (46:32) over the next couple quarters?.

Matt, the good news is even though the growth for the quarter wasn't where we hoped it would be, we did have growth for the quarter, and we're anticipating growth going forward. So the variance issue that we ran into, sort of the hangover from 2014 into 2015, isn't something I anticipate going into 2016 with it.

Actually, the production variances currently are neutral to favorable..

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

Good evening, guys. Thanks for taking my question. I guess just trying to reconcile the direct international business, the growth you've seen there with the kind of decline in the distributor business. And we've heard that in some geographies, the currency downturn has been pretty violent.

And there's a lot of questioning on stocking going on, whether or not the local distributors actually have the cash or want to put cash into inventory.

Is that something that impacted you guys in the distributor part of the business, or am I kind of reaching too far to try and reconcile the two?.

I think as the question relates why is direct better, the first part of the answer, Mark, is direct is better because we've made a lot of people changes, and I'll give you a real life example. We have a new country manager in Germany. Luke's been with the Company for a long time and can't remember the last time Germany grew.

We have a new country manager. Six months into his tenure, he's got the ship righted and we're putting up double-digit growth in Germany. We're very excited by that, and that's just a direct market example where the right leader or the right people can make change happen pretty quickly.

If you go to the export market, the historical approach in our export markets has been somewhat of a come one, come all, if you can distribute the product and you're interested, we're going to sign you up as a distributor. I am not a believer in that model. If everybody owns it, nobody owns it.

So we've hired a few people to provide a little better oversight and more direct interaction in some of our key export markets. We've asked them to dive in to the distributor base, narrow the focus on our distributors. So that's the longer-term play. The shorter-term play really goes back to what I referenced in my script about places like Brazil.

Brazil, the overall macroeconomic picture is just terrible. It's not a matter of declining sales because we're dropping our price to the distributor. It's a matter of the distributor simply not buying because there is no demand.

And that trend was there in the first quarter and second quarter, but it took a substantial turn for the worse in the third quarter that caught us a little bit flat-footed. So that, to me, is the biggest issue in the difference between export and direct..

You called out Brazil, Curt (49:58).

Are there any countries that you can kind of put into the same bucket just so that we can have some idea of know what to watch with respect to the local economy?.

Yeah, I specifically called out Brazil because it's an important market – one of our larger markets. I also mentioned the Middle East and Africa area. Those would be the two principal ones that impacted our third quarter. There were other ones, but I would – in totality, they hurt.

But individually, I think they were all within the manageable definition, Mark..

Our next question comes from the line of Kristen Stewart from Deutsche Bank..

Hi. Thanks for taking the follow-up. Luke, I just wanted to go back just to the currency impact and just kind of thinking ahead to 2016 and the past. I know you've always talked about the currency gains that you've had in 2015 as representing potential headwinds as we look forward to 2016.

I think the amount that you've quantified is $10 million in aggregate. What's the total amount in 2015 we should think about? I know you talked about $2.8 million in 3Q and a similar amount in 4Q.

But what's the total amount that we're looking at in 2015?.

Hey, you're 100% right, Kristen. So as of today, we've locked in all of 2016. Unfortunately, as you know, with hedging, you end up at the same place just on a delayed basis. So, we've locked in 2016 rates that weren't as favorable as the rates that we had locked in for 2015.

So the number we're talking about is between $10 million and $11 million of hedge gains that we've realized in 2015 which will be a headwind for us in 2016..

Okay.

So that's the way to think of that, I guess, in terms of the kind of step-down into 2016 just in terms of modeling and thinking ahead?.

That's correct..

Okay, perfect. Thank you for the clarification..

I would now like to turn the call back over to Curt Hartman for closing remarks..

Thank you, Lauren. In conclusion, I'd like to say that we're very encouraged by the positive impact of our revitalization efforts in the U.S. as evidenced by the third quarter performance of our Orthopedics and Visualization businesses.

That said, we remain focused on the turnaround efforts across our footprint and believe that the changes we have instituted throughout the organization will enable us to drive profitable growth over the longer term. Thank you for your time today. We look forward to speaking with you on our next earning call which will be held on January 27, 2016.

Thank you..