Curt Hartman – President and Chief Executive Officer Luke Pomilio – Executive Vice President-Finance and Chief Financial Officer.

Kristen Stewart - Deutsche Bank Matthew O’Brien - Piper Jaffray Mike Matson - Needham & Company Matthew Mishan - KeyBanc Jeffrey Cohen - Ladenburg Thalmann.

Good afternoon, everyone. Welcome to CONMED Corporation Fourth Quarter and Fiscal Year 2016 Earnings Call.

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 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 adjusted measurements 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, Carmen. And good afternoon everyone, and thank you for joining us for CONMED’s fourth quarter and fiscal year 2016 earnings call. With me on the call is Luke Pomilio, CONMED’s Executive Vice President and Chief Financial Officer. Today, I will provide a brief overview of the financial and operating highlights for the quarter and full year.

Luke will then provide a more detailed analysis of our financial performance, an overview of our fiscal 2017 financial guidance. After that, we’ll open the call to your questions. In the fourth quarter, sales totaled $204.1 million, an increase of 6.8% as reported, an increase of 9.1% in constant currency over the prior year period.

Excluding the AirSeal acquisition, organic sales decreased 3.6% as reported and 1.5% on a constant currency basis compared to the fourth quarter a year ago. From an earnings perspective, our reported GAAP net earnings totaled $6.7 million or $0.24 per diluted share, compared $7.9 million, or $0.28 per diluted share a year ago.

Adjusted net earnings of $15.1 million decreased 8.8% year-over-year and adjusted diluted net earnings per share of $0.54 decreased 10% year-over-year.

The full year 2016 sales were $763.5 million, representing increase of 6.2% as reported, or 8.6% in constant currency, excluding AirSeal, organic sales declined 3.3% as reported and 1.1% on a constant currency basis compared to year ago.

Reported GAAP net earnings for the full year of 2016 were $14.7 million or $0.52 per diluted share, compared $30.5 million $1.09 per diluted share for the full year 2015. Adjusted net earnings of $51.4 million decreased 6.4% year-over-year and adjusted diluted net earnings per share of $1.84 decreased 7.1% versus the full year of 2015.

2016 was about building on and continuing the many initiatives that we have undertaken with respect to people and products to reposition our business for future growth. While acknowledging that we have more work to do, I'm pleased with the progress that we have made on many fronts.

Important milestones at the top of this list include the successful integration of the SurgiQuest acquisition, a truly transformative acquisition for CONMED and one that exceeded all of our expectations.

Importantly, we also recorded solid gains and improving performance in the fourth quarter and throughout the full-year across 78% of our total revenue base.

Overall key highlights and tends included, our international markets at 48.5% of total company sales continue to trend of accelerating constant currency growth, both organically and including AirSeal and delivered a third consecutive quarter with all three reporting segments posting organic constant currency growth.

International sales increased 4.8% year-over-year on an organic constant currency basis. Including the AirSeal platform, international sales improved 10.7% on a constant currency basis. Within international, the export markets delivered a second consecutive quarter of organic constant currency growth after two years of lagging performance.

The direct markets remained in good shape and again delivered solid growth on an organic constant currency basis. Overall, our international business delivered consistent and improving results throughout the year and exited 2016 at a growth rate near the top of the markets that we serve.

This statement is further supported by the fact that our fourth quarter international market organic growth was our best performance in over three years and represented the third consecutive quarter of organic growth, even though the comparable quarter a year ago was our strongest quarter of 2015.

Overall, the international business both direct and export enters the New Year with solid momentum. Finally, I'd remind everyone that the second quarter of 2016 – I am sorry of 2017 will mark just the second anniversary of the launch of AirSeal in the international markets, during which time the distribution channel has undergone a lot of transition.

Moving next to General Surgery, which again delivered a solid quarter in both the domestic and international markets. Globally General Surgery organic sales increased 2.5% as reported and 3.7% in constant currency. AirSeal remained very strong, achieving $19.9 million in global sales in the fourth quarter.

For 2016 AirSeal recorded $68.4 million in sales, exceeding the top end of our forecasted range. As noted earlier, this is been a very positive acquisition for CONMED and our customers, and we remain excited about our future prospects.

Domestic General Surgery at 30% of total company revenue improved 33.4% as reported and 1.5% organically, delivering organic growth for the second consecutive quarter. Overall, our General Surgery business both globally and domestically enters 2017 in good shape with a lot of momentum for the New Year.

Also during the quarter, we continued to advance our global release of the Edge Bipolar Arthroscopic System. Key markets still pending regulatory clearance for launch in 2017 include Korea, which receives the first quarter event in Taiwan, which we expect in the fourth quarter.

While still early in our launch, we are pleased with the initial response and how the product is resonating with customers. Overall, we exited 2016 with solid uptake and are excited about our future prospects for this important offering.

Finally, as I mentioned at an investor conference earlier this year, our renewed commitment to new product innovation is starting to bear fruit. In 2016, the number of products introductions increased to 15 from 5 in the previous year. And we anticipate that number to be even higher in 2017 at roughly 20.

While pleased with the increased consistency in our international business and the domestic general surgery business, we did have another tough quarter against difficult prior-year comparable in our domestic Orthopedic business, inclusive of our] video offering, which represents 22% of company sales.

Clearly, we are disappointed with the performance, while acknowledging this business is further behind where we wanted to be given the critical need for new products beyond the Edge platform.

As we indicated in our third quarter call, we have healthy new product pipeline and have accelerated our investment in critical areas to pursue these opportunities. Additionally, we remain focused on the MTF and Sports Medicine areas, as well as the continued development of our capital pipelines the lack of which again hurt us in the quarter.

Finally, we did make some sales leadership structure changes as we entered 2017, which we believe will sharpen our focus. Overall, through a combination of anticipated new product introductions, as well as expected improvements and execution, we built a pathway for domestic orthopedics to trend more favorably in the second half of 2017.

In conclusion, exiting 2016, I like the momentum and trends in 78% of our business, while acknowledging we have more work ahead in domestic orthopedics. Overall, we're gaining traction and continue to have several strategic initiatives involving products and markets that give us optimism as we look at 2017. I'll now turn the call over to Luke..

Thank you, Curt. As mentioned, our total sales for the fourth quarter of 2016 were $204.1 million, an increase of 6.8% on a reported basis and an increase of 9.1% on a constant currency basis versus the fourth quarter of 2015.

For fiscal year 2016, our total sales were $763.5, an increase of 6.2% on a reported basis and an increase of 8.6% on a constant currency basis, compared to the prior-year period.

Our top line performance during the quarter and fiscal year was driven by solid growth within general surgery, particularly the continued strength exhibited by AirSeal, as well as broad improvement in our international markets. This growth was partially offset by challenges within domestic orthopedics and domestic visualization.

For the fourth quarter of 2016, our domestic sales, which represented 51.5% of our total revenue increased 7.6% year-over-year. International sales, which represented 48.5% of total revenue, increased 6% compared to the fourth quarter of 2015 on a reported basis.

Foreign currency exchange rates, including the effects of the FX hedging program, had a negative impact of $4.4 million on fourth quarter sales. In constant currency, international sales increased 10.7% versus the prior-year period.

For fiscal year 2016, our domestic sales, which represented 52.3% of our total revenue, increased 10.4% as positive results in general surgery, driven by AirSeal sales growth, partially offset by weaker than expected sales in orthopedics and to a lesser extent visualization.

International sales, which represented 47.7% of our total revenue, increased 1.9% compared to fiscal year 2015 on reported basis. Foreign currency exchange rates, including the effects of the FX hedging program, had a negative impact of $17.3 million on fiscal year 2016 sales.

In constant currency, international sales increased 6.7% versus the prior-year period. I will now review our three reporting categories, with all growth rate stated in constant currency.

Worldwide orthopedic revenue decreased 3.2% in the fourth quarter, driven by weak capital sales, which faced a tough comparable versus the strong capital sales growth in the fourth quarter a year ago. For fiscal year 2016, worldwide orthopedics revenue declined 1.7%, due to challenges experienced in our domestic markets.

Fourth quarter domestic orthopedics revenue decreased 12.6% versus the prior-year period. The decrease was due to a double-digit decline in capital sales, following positive growth in the third quarter, as well as continued challenges in single-use arthroscopy disposables. For fiscal year 2016, domestic orthopedics revenue decreased 5.4%.

Internationally, orthopedics revenue increased 3.7% year-over-year, as continued improvement in the sale of single-use products offset declines in capital sales within our direct and export markets. For fiscal year 2016, international orthopedics revenue increased 0.7%.

Worldwide general surgery revenue grew 32% in the fourth quarter, driven by a $19.9 million contribution from the AirSeal system. Excluding AirSeal, worldwide general surgery revenue increased 3.7% in the fourth quarter. For fiscal year 2016, worldwide general surgery revenue increased 26% compared to the prior-year period.

Benefiting from an improving trend in organic sales, as well as a strong contribution from AirSeal of $68.4 million for the year. Domestic fourth quarter general surgery sales increased 33.4% and were driven by AirSeal. Excluding AirSeal, domestic general surgery revenue increased 1.5% year-over-year, marking a second quarter of organic growth.

For fiscal year 2016, domestic general surgery sales increased 27.9% and declined 0.7% organically, despite an improved trend in the second half of the year. Internationally, general surgery sales increased 29.5% and benefited from another strong contribution from AirSeal.

Excluding AirSeal, general surgery sales increased 7.8%, consistent with the previous quarter, and driven by a strong rebound in capital sales. For fiscal year 2016, international general surgery sales increased 22.5% and were up 3.9% organically, with our overall performance in this business improving throughout the year.

As previously discussed, we discontinued the sale of our Altrus tissue sealing device effective July 1st, which caused a $480,000 headwind in the fourth quarter and an $880,000 headwind overall for 2016. This will remain a $260,000 headwind in the first quarter and $100,000 headwind in the second quarter of 2017.

Worldwide visualization sales decreased 13.9% during the fourth quarter. For the fiscal year, worldwide visualization sales were down 5.9%. Domestically, fourth quarter visualization sales decreased 27.7%, as a result of continued deterioration in capital sales. For the fiscal year 2016, domestic visualization sales decreased 13%.

International visualization sales were up 3.3%, driven by growth in our export markets. For fiscal year 2016, international visualization sales were up 2.2% and strengthened our export markets.

Before discussing the remainder of the income statement, I would like to note that beginning with our first quarter of fiscal year 2017 results, we plan a transition to just two reporting categories, orthopedics and general surgery, as such visualization will be reclassified into orthopedics to more appropriately match how we operate and manage our business.

For historic modeling purposes, we have prepared a supplemental financial schedule for the prior two years to reflect this change in our reporting structure, which is available on the home page of the investors financial report section of our website.

To be clear, this schedule reflects contribution from SurgiQuest, as of the close of the transaction on January 4th, 2016. In addition, the change reporting structure has no impact on the operating results of the company and as such our financial statements are unchanged historically. Now turning to other components of the income statement.

Adjusted gross margin for the fourth quarter, excluding restructuring costs declined by 170 basis points year-over-year to 53.4% compared to 55.1% in the fourth quarter of 2015.

Adjusted gross margin was negatively impacted by foreign exchange of approximately a 100 basis points, while unfavorable production variances had a negative impact of approximately 70 basis points. This headwind from production variances was slightly worse in the 50 basis points that I called out during the third quarter call.

For fiscal year 2016, adjusted gross margin expanded 30 basis points year-over-year to 54.5%, ass the negative FX impact of 110 basis points was more than offset by manufacturing cost savings initiatives.

We expect that our fiscal year 2017 adjusted gross margin, excluding restructuring costs in the range of 54.5% to 55.5%, which assumes a currency headwind of approximately 30 basis points versus 2016.

As we have discussed recently, we have begun implementing the next leg of our targeted manufacturing cost improvement programs focused on strategic sourcing, vendor consolidation and SKU reduction initiatives. While these programs will require some upfront investment, they should be breakeven in 2017 and result in a net benefit to 2018 and beyond.

For modeling purposes, we anticipate that first and second quarter of 2017 gross margin will be below our full-year of 2017 gross margin target, and that gross margin will improve in the second half of 2017, with third and fourth quarter gross margin anticipated to be above our full-year 2017 gross margin target.

As we have noted in our quarterly calls throughout the year, effective January 1st, 2016, we began to include certain regulatory costs, such as foreign market product registrations as other product development costs within research and development. Historically we have reflected such costs in SG&A.

For the fourth quarter, these costs amounted to 780,000 and totaled $3 million for the full year of 2016. From a historical perspective, these costs totaled 625,000 for the fourth quarter of 2015 and $2.5 million for the full year 2015.

On adjusted basis, which excludes the impact of amortization, but includes the accounting reclassifications for both periods, selling and administrative expenses for the fourth quarter were $77.2 million or 37.8% of total sales, compared to $74.1 million or 38.8% of total sales in the fourth quarter of 2016.

For the full fiscal year, our selling and administrative expenses were $298.8 million or 39.1% of total sales, compared to $277.9 million or 38.6% of total sales in 2015. We expect our full-year of 2017 SG&A as a percent of sales to be in the range of 38.5% to 39.5%.

Given the seasonal nature of business, we anticipate SG&A will vary from quarter-to-quarter in the range of 37% to 41% of sales. Including the accounting reclassification, research and development expenses for the fourth quarter was $7.6 million or 3.7% of total sales, compared to $7.3 million or 3.8% of total sales a year ago.

For the full year, our research, development expenses were $32.3 million or 4.2% of total sales, compared to $29.9 million or 4.2% of total sales a year ago. Although our ramp-up in R&D spend in the second half of the year was lower then we anticipated, as our new head of R&D assessment [ph] product prioritized our extending projects.

We continue to expect R&D spending to increase in 2017, as we focused on reinvigorating or grant [ph] growth from our pipeline. With this in mind, we expect full-year of 2017 R&D expense in the range of $33 million to $35 million. Adjusted EBTIDA margin in the fourth quarter of 2016 was 17.8% compared to 18.5% a year ago.

Adjusted EBITDA margin for the full-year was 17.4% unchanged compared to the prior year period. The unfavorable impact of foreign exchange reduced the fourth quarter 2016 EBITDA margin by 110 basis point - in 2016 EBITDA margin by 120 basis points. Turning now to a discussion of our income tax rate.

Our adjusted effective quarterly tax rate decreased to 28.8%, compared to 29.9% in the fourth quarter of 2015.

The higher rate in the fourth quarter of 2015, reflects an increase in tax expense, as a result of the repatriation of foreign earnings to the United States, which was partially offset by benefits recorded for the full year 2015 R&D credit that was extended in the fourth quarter of 2015.

For the full year, our adjusted effective tax rate decreased to 30.4% compared to 32.7% in 2015, due again to the 2015 repatriation. For full year 2017, we estimate a non-GAAP tax rate of approximately 31% to 32%.

Our diluted net earnings per share on a GAAP basis were $0.24 compared to diluted net earnings per share of $0.28 in the fourth quarter of 2015. For the full-year, our diluted net earnings per share on a GAAP basis were $0.52, compared to diluted net earnings per share of a $1.09 a year ago.

As we previously discussed and outlined in today's press release, we exclude the cost of special items, including acquisition costs, restructuring costs, the gain on sale of an asset and debt refinancing net of tax, as well as amortization of intangibles net of tax from our calculation of adjusted diluted net earnings per share.

Excluding the impact of these items, our fourth quarter adjusted diluted net earnings per share were $0.54 versus $0.60 in the prior year period. For fiscal year '16, our adjusted diluted net earnings per share were $1.84 versus $1.98 in the prior year period.

Looking at the balance sheet, our cash balance as of the end of the fourth quarter was $27.4 million, compared to $26.9 million at September 2016 and $72.5 million as of December 2015. Accounts receivable days were at 66 days as of December 2016, compared to 65 a year ago.

The inventory balance was $180.7 million, compared to $188.5 million at September 2016 and $166.0 million as of December 2015. Inventory days at quarter end were 190.

Consistent with my comments from the third quarter, we experienced a typical trend of inventory decreases from September to December as fourth quarter is typically our strongest sales quarter.

I would note that these current and historical inventory levels contemplate an accounting adjustment, which reclassified the field inventory component of our inventories balance in other assets. This change in accounting treatment is reflected in today's balance sheet figures and will be reflected going forward.

The amount reclassified from inventories to other assets was $44.8 million at December 2016 and $33.5 million at December of 2015. Long-term debt at the end of the quarter was $488.3 million versus $490.2 million at the end of September 2016.

Excluding any potential impact from repatriation, we expect senior debt repayments in 2017 in the $22 million to $27 million range, with a year end 2017 leverage ratio of 3.3 times. Now turning to cash flow, cash generated by operating activities totaled $13.6 million for the fourth quarter of 2016, compared to $9.3 million a year ago.

For the full-year, cash generated by operating activities totaled $38.2 million, compared to $48.1 million a year ago. Finally, to summarize our fiscal 2017 financial outlook. We expect our 2017 constant currency sales growth in the range of 1% to 3%.

Based on exchange rates, as of January 27th, 2017, the negative impact to 2017 sales from foreign exchange is anticipated to be approximately 50 basis points.

In addition, we forecast our adjusted diluted net earnings per share in the range of a $1.85 to $1.95, which includes an estimated negative impact from foreign exchange rate based on rates as of January 27th, 2017.

The adjusted diluted net earnings per share estimates for 2017 exclude the cost of special items, including acquisition costs and restructuring costs, which are estimated in the range of $8 million to $10 million net of tax and translates into approximately $0.28 to $0.35 per adjusted diluted share.

Additionally, these estimates exclude amortization of intangible assets, which are estimated in the range of $12 million to $40 million net of tax or approximately $0.42 to $0.50 per adjusted diluted share.

From a sales cadence standpoint, in 2017 we anticipated slightly heavier weighting for the second half of the year relative to what we experienced in 2016, primarily due to a lighter weighting in the first quarter revenue and a heavier weighting of the fourth quarter revenue.

Additionally and consistent with my earlier comments, since the timing of our manufacturing cost improvement efforts we anticipate that this cadence will be even more pronounced for reading – for earnings. And now, I'd like to turn the call back over to Carmen for Q&A..

Thank you. [Operator Instructions] Our first question first question is from the line of Kristen Stewart with Deutsche Bank. Please go ahead..

Hi. Thanks for taking the call.

I was wondering, if - I guess, just for housekeeping, I know there [indiscernible] reporting, is there any way for you guys to breakout since you're crossing [ph] into two divisions, just to give us the actual dollar value for domestic and international, since you're giving us all the different growth measures, maybe just make it easier for us modeling it and to track – better track the performance more explicitly of domestic and international orthopedics going forward and how view that [indiscernible]? And then my real question here is, Curt, you said earlier with respect to the US orthopedics franchise where that's been challenging over the last several quarters, that you did make some changes to improve the business and hopefully that just start to feel some performance in the back half of the year.

Could you maybe further explain what some of those changes are and just how confident those changes will actually help to improve it and to what level of improvement we should be expecting? Thanks..

Sure, and Kristen to your first question about the historical reporting, we did put some supplemental schedules up on the website, so take a look at that and then if there's additional color you'd like we'll consider that and discuss that. But, as it relates to US orthopedics, I am going to stick with my historical view here.

It's about having the right people in the right role, and that individual running that business came in at the end of September of 2015. He is been chipping away at it for about five quarters now.

He has done a fantastic job of revamping our marketing approach and engaging global opinion leaders, and I truly mean global, because of the global nature of the portfolio and building a great product pipeline and its really about executing through the R&D quality regulatory and manufacturing team to get the product pipeline out into the field.

And you know, I put a ton of emphasis on getting Edge out and that really delayed anything else that we were going to initiate and we're happy to get Edge out, we think its going to be an important part of our future based on the past four months uptake.

But the rest of the portfolio, significant gap fillers, next generation item where we're very far behind, I think the number one challenge for our orthopedics business is portfolio and the team running that portfolio now is doing a great job and its just a matter of getting in through the process and into the field.

And I say that because I showed earlier this year the cadence of new product introductions and it's greatly stepping up from 5 to 15 to 20 anticipated this year. And you should assume that a big portion of that is in the orthopedics business.

And we have plans this year to get new products into the hands of that sales force and it's all about execution. So it’s really the number one challenge for that business right now, is getting them the right products in a very competitive market..

Okay.

And then I guess, into the other parts of the business that are going really well, how much are you starting to see on just AirSeal beginning to report - the portfolio through on the general surgery side and is there a way to now moving into the New Year, probably on the execution side, just restructure some of the compensation of those sales force to not only compensate them for selling AirSeal, but also change your compensation to sell the whole portfolio at this point?.

Yes, so I think, going all the way back to beginning on AirSeal and the acquisition, we said that the synergy sales would be more of a 2017 thing, I would say that in the fourth quarter we started to see some of the benefit of AirSeal and the pull-through of the other products.

I really go back to specifically in the US market, everything that sales organization had gone through, in 2015 it was about put two businesses together in 2016. It was integrating SurgiQuest into that Advanced Surgical business, and in that environment people are going to sell what they can and AirSeal was the hot platform. We've got more stability.

We've got a very seasoned leadership team now. We've got stability across the leadership ranks. There is really no challenge in front of Advanced Surgical to make sure other than taking of customers and advancing the portfolio. So I think the opportunity for the AirSeal platform to pull products through continues to exist.

We said it would be at 2017 item and I am confident that that’s going to happen. Every business has a philosophy and compensation. We put our compensation philosophy in place, and we leave those decisions pretty locally and to the extent that the local teams are making adjustments, we'll let them run with their adjustments..

Okay, great. I'll hop back in the queue..

Thank you..

And our next question comes from the line of Matthew O’Brien with Piper Jaffray. Please go ahead, Matthew..

Thanks for taking the questions.

Hoping to start with SurgiQuest and the performance in the quarter was quite good and well above over a modeling, just would love to get your thoughts on a growth profile for that business, you know, as we get it here to 2017, can that still be high teens, even 20% growth type product for you?.

Matt, it was a great year for us with the AirSeal platform and the things that I would point to that give us continued confidence in the outlook are few real fundamental things.

I said in my opening comments that in international, just as a reminder, the second quarter this year will only be the second year that AirSeal has been present internationally.

And if you think about the chronology there, SurgiQuest signed up distributors in the second quarter and then right in the middle of the fourth quarter, so four months later the acquisition was announced and then when CONMED closed on the deal January 4th, we had to go through and work with their distributors and make some tough choices about whether to take it direct or keep with their distributors or bring it into our distributors.

And so international has been through a lot, but its still very early days there and when we look at the back half of the year for international with AirSeal, we really started to see the growth accelerating.

So I think early days in international is a great growth driver and the way that our international leadership team as embraced the general surgery opportunity is another advantage. Domestically, it's what I said to Kristen's call, the Advanced Surgical business which carries the AirSeal platform.

There's nothing disrupting them this year and they have an opportunity to continue to connect with customers.

But importantly, when you look at - what we view as the market opportunity, you could say first it’s around robotics and domestically we're probably only at about 30% of the robotics procedures and outside the US its very small robotics, its more general laparoscopic procedures. But Holy Grail is to be in that broad laparoscopic market.

And so we're in a very small percentage of that. So we see great market opportunity in the foreseeable future. So the growth rates there - we very much view at as a growth platform and think the growth rates there should be sustainable..

I guess, just to kind of finish that follow up, and then I do have a follow up question. Just based on the outlook for SurgiQuest alone, would kind of seems to make me think that the ability to hit your guidance, here in the midpoint of your guidance, right on the top line, just from SurgiQuest it happened.

So it's implied some pretty stale performance out of the rest of the – I guess, the legacy business, is that the right way to look at it, and just again, given all the momentum we are seeing with SurgiQuest, all the new product and ortho.

Why wouldn’t we kind of skew things towards a higher end of that range that you provided?.

Well, I think here couple of things. Number one would be 2015 and number two would be 2016. I have missed our guidance range two years in a row and for those who know me, it drives me crazy and I'm not going to do it again.

So I have set up what I believe is the guidance range that is appropriate for our historical performance, its appropriate for the execution that remains in front of us with respect to new product introductions that are so critical to the orthopedics franchise. So that’s how I looked at guidance..

Okay. Fair enough. And then question for Luke, just on the gross margin. I know there is a bunch of moving parts here, so maybe understand a few of these, its just when you talk about the guidance for gross margin this year, I know there is a little bit of currency impact that you're thinking about. But was SurgiQuest doing well.

I'm just curious you know, and maybe share a little bit on the upfront cost side, as far as what – what's that’s going to present as far as the headwind.

And then maybe just the underlying business, you know, why wouldn't gross margins on the underlying business pick higher with SurgiQuest doing well, is there some sort of pricing dynamic that you need to cover?.

Sure. So you know, we finish3ed the year at 54.5%, as we head into '17, we're going to have a 30 basis point impact on currency, so a headwind there. And actually I guided for next year, 54.5 to 50.5. So actually I think there's some - anyway you look at there is room for margin expansion there and part of it is SurgiQuest.

But remember, right now SurgiQuest is still less than 10% of the company. So it’s had a little bit of impact. As far as the way the years going to rollout, I am looking at the first and second quarter to be lower than the average for the year, something like 100 basis points.

I see the third quarter picking up a little, perhaps 50 basis points over the average and then I see the fourth quarter being at a 150 basis points over the average. We have a lot of – as I said a lot of good initiatives going on, but its taking us some time to get those implemented..

Thank you..

Welcome..

And our next question comes from the line of Mike Matson with Needham & Company. Please go ahead..

Hi. Thanks for taking my questions. I guess, I have a little bit of a different view of the guidance. Luke, I hear – Curt, I hear you on the - your frustration. But I mean, I guess looking at this year, you ended the year down about 1% organic, you just finished the fourth quarter down about 1.5% organic.

I understand SurgiQuest is going to give you kind of a base of maybe 2% next year, but this year - sorry in '17 you know, but putting that on top, I get to the low end of the guidance, you're talking about a year that's another back half loaded year, just like the last two years where you missed numbers.

So I guess you know, what's different about this year than the last two years. I mean, seems a little bit like guacamole [ph] here where you know, there's one thing that pops up every quarter that you know, one area does well, it does better and than another area you know, disappoint.

So I guess what's different about 2017 versus the last two year's?.

I think the - the part I was trying to point out in the opening was that as we exited the year, we had more consistent performance over multiple quarters with 78% of the revenue. That being the entirety of international across all three categories and 30% the domestic general surgery.

So it wasn't a good quarter, followed by a bad quarter, it was for international three increasing quarters of performance on an organic basis, exiting the year at 4.8% organic growth against a very strong prior-year quarter.

And for general surgery, it - honestly it played out the way we said it would play out at the beginning of the year with that business - that category strengthening in the second half of the year and general surgery put up organic growth in both the third and the fourth quarter and we see that continuing ebbs [ph] independent of AirSeal.

We see the general surgery category continuing to get stronger and some of that's new products, some of that’s its just better sales execution and performance.

And then the - the downside that probably fell a little bit harder than we thought was domestic orthopedics at 22% of revenue when you factor in video and they carry both – or they carry video as part of the orthopedics offering. So we had a little further fall in domestic orthopedics. We had a tough fourth quarter.

I would point out you know, there's no quick turn there. The first quarter this year is the largest first quarter in orthopedics, we had was a year ago. So they are going against another tough comparable, two tough orders up comparables. So it will be a rocky road to recovery for domestic orthopedics.

But again, it's about new products, and getting those out in the offering. And so I look at that 78% of the revenue that had a couple quarters, three quarters as you look at international, two quarters if you look at general surgery and put the AirSeal platform on top of that, and feel like we chance..

Okay. All right.

And then, just with regard to the strong international growth was there anything in the fourth quarter that is, was there anything sort of one-time in nature in their stocking orders, the distributors or anything like that? I mean, I guess, you have stocking orders every quarter, but what I getting as – those are anything larger than normal that was all time in nature?.

No, the international team has been - the entire leadership structure was revamped. We've got great leaders below the president of international.

As I've said on many calls, really reestablish support in the export markets, to be closer to the distributors, be closer to their customers and we're just running a fundamentally much better business there today and it's been improving over time and its great execution, coupled with great leadership team there..

Okay. Thank you..

And our next question is from the line of Matthew Mishan with KeyBanc. Please go ahead, Matthew..

Hey, good afternoon, Curt, Luke. Thanks for taking the questions..

Yes..

Could you give us a sense of the underlying constant currency growth expectations by segment and also what the underlying assumption for AirSeal growth is next year?.

Probably not going to do that Matt. That’s a level of detail that I really don't want to go into, because there are so many moving parts when you look at all the products that make up segments. And I think in my commentary around AirSeal would imply we remain pretty bullish on the growth prospects there.

And if you do the – and its not a fair comparable, I understand, but if you do the pro forma, our $68 million on SurgiQuest, $50 million you know, we grew 35ish plus percent in a year of integration. So we had a good year and international strengthened in the back half of the year. So we feel very good about that platform.

Obviously it’s going against a bigger number, but we feel good about that and kind of look at the rest of the guidance..

Okay. And I was struck by the decline in R&D in the quarter, I mean, obviously you hadn’t – it could be volatile quarter-by-quarter.

But given all the focus on the new products and it was surprise to see that decline and also for your guidance to come in you know, on R&D, kind of well below what you guys were thinking as you were entering the year? Can you kind of explain a little bit about why the R&D ramp was a little bit slower then you thought?.

Yes, I think I would tie it back, certainly we have projects and priorities and the timing of the spend is not truly one year.

It tends to bounce up and down as the projects unfold and as they hit certain stage gates and then I think everybody on the calls aware, we were fortunate to get Kurt Azarbarzin to step into the role running our global R&D and as he's gone around each of the local R&D teams and worked with the marketing teams on project prioritization.

There were some shift in our focus and that probably slowed some of the spending down. But at the end of the day what I am looking at are really two things.

Number one, do we have solid product pipeline and I've said this couple times now, I think more than ever before we have very solid product pipelines in the cadence of new product introductions from 5 to 15 to 20 this coming years is indicative of that.

Number two, do we have the organizational alignment to get them out of the door and I think when you look from R&D to manufacturing RA [ph] getting the that group seamlessly aligned is very important. I think we have that.

So I think at the end of the day to take away from people on the call is better pipelines and we've got the money lined up and we are spending more on R&D than we did last year and we spent more last year than we did the year before. So there is focus on innovation here..

All right. I think that’s fair. And my last question, I think then kind of all the numbers in the release, the one that struck me is the most was the $3.2 million in business acquisition costs, I just – kind of seem like a big number.

Can you give us a sense of what you were looking at or what you are thinking as far as does consulting cost go?.

I am looking through the press release transact, put my head around the $3.2 million….

It was in the reconciliation?.

So that’s in the adjusted call that – that’s part of the fees associated with SurgiQuest deal that they closed at the beginning of the year..

I think that was part – it was in the quarter, if I am not mistaken. But we can go with that offline. We can go look at that – we can talk about that offline then..

And our next question is from the line of Jeffrey Cohen with Ladenburg Thalmann. Please go ahead, Jeffrey..

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

Yes..

So, two if I may.

Can you give us a little further color on the Edge system, you talked about Korea and Taiwan headwind was that the first and the second quarter? Could you talk about some other key markets which you expect to come online and other key markets which are driving some of the international growth?.

Yes. So Korea, we expect to get approval in the first quarter, Taiwan, will not be until the fourth quarter. But fundamentally the product is registered, approved and in evaluation in all the other key markets around the globe. We started that in July, August of last year.

We had a very successful global rollout, I just call out those two because we're still pending approval on those two markets. Right now the product has had very good uptake, very good acceptance and it’s obviously a business model where you are placing the council and your are selling the probe.

So the revenue ramps over time and we're ere excited by the response.

And I think people probably noticed a week or so ago we announced a distribution agreement with OB [ph] and what that does it bring their probes into the mix here which really helps address a broader range of customers, especially important where some of - some of the performance, features benefits that you get in the Edge probe are not needed by all customers, they are looking for different solution that’s very relevant in the emerging markets.

And we're excited to have that as part of the portfolio offering for the Edge ablation system. And again, those probes will plug into any generators. They are very unique in that regard and it’s a bipolar offering. So I think we've got the right offense now on RF ablation and the teams are out running with it.

We had good uptake, a little bit of slowdown in the fourth quarter because pushing disposables in the fourth quarter when you're trying to get to a number is not what people usually do. But the feedback so far has been good. So we remain excited about it..

Okay. Got it.

And can you give us a little further [indiscernible] as far as new introduction is expected for '17, more specifically what segments we should expect to see them in and perhaps a little bit of color on the cadence throughout '17 that you expected to be at your best?.

Yes. The target I laid out was we had – we had anticipation of 20 new products this year, and obviously the needs right now are heavily focused in orthopedics.

So a percentage of those, not all the, but a big percentage are weighted towards orthopedics and to the extent that we can get most of those out the door in the first half of this year that's where most of those line up.

Obviously the other businesses have projects in there that we anticipate getting out, but the target is 20 and a good percentage of those is lined up for orthopedics, which obviously on a global basis, our biggest business..

Are any of those projected to be for AirSeal more specifically?.

There are some things around the AirSeal platform as well, yes..

Okay. Perfect. Those are from me. Thanks for taking the questions..

Thanks, Jeff..

[Operator Instructions] And we have a follow up question from the line of Kristen Stewart with Deutsche Bank. Please go ahead, Kristen..

Hi. Thanks for taking the follow up. Just wanted to better understand, you know, you talked about gross margin in the range and everything else.

But just from an EPS cadence standpoint, just wanted to make sure I understood what you were seeing there? And when you are speaking to the gross margins, when you say under the range, you are talking about specific range that you gave of 54.5 to 55.1. So 1Q and 2Q is going to be below the 54.5 kind of ….

Yes. So….

Not the average being like 55 or something like below that, obviously or just lower end?.

Well, wherever you – your target, your gross margin for the year. So let say, you're at the midpoint of 55, I am saying that Q1 and Q2 would be a 100 basis points below that, Q3 would be 50 basis points higher and Q4 would be 150 basis points higher..

Okay. So it’s not as if 1Q can be below the low end of the range….

1Q could be below the low end of the range. So the guidance I gave 54.5 to 55.5 was our annual target..

Okay. Okay, so you are talking about like wherever we fall within that range and then it’s below our targeted range from there, okay.

And then in terms of just kind of looking, thinking about the EPS range, so that there is no kind of confusion on how EPS falls, I know you said obviously given where the gross margins are, I am not quite sure, how the SG&A falls particularly through the year and obviously the seasonality’s at 37% to 41%.

How should we just think about EPS cadence, I know you don’t want give guidance, but obviously it’s going to be a little more backend loaded….

Yes….

Certainly create a kind of even broad strokes just so that you know, coming out of the gates, or is there some big confusion and….

Sure….

Usually then sets up for some sort of lower guide, how should we just think about….

Sure. So I'll run through the….

Et cetera….

Yes. I'll run through the income statement quickly and I'll run through every line and based on those comments you should be able to build the model.

So I talked about sales and I talked about the sales percentages being relatively consistent with what we experienced in '16, other than we're going to be a little more back half weighted and that would come from - going from first quarter to the fourth quarter..

Okay..

And from a gross margin perspective, I guess I've given color on that. From an SG&A perspective, I think the percentages will be consistent with what we saw on '16. So you know, for example in the third quarter, typically our highest percentage of SG&A, given the relatively low sales at quarter, first quarter is the lowest..

Yes..

And in R&D I think R&D, I would say that - I would be straight-line there across the year. I'd like to think that we'll be at a level spending the first quarter will sustain the remainder of the year..

Okay.

And cash sustained throughout the course of the year as well??.

That’s correct..

Okay. And did you guys adopt from the change and stock compensation assuming that….

Yes, we did….

And was there any significant benefit?.

There is no significant benefit, yes..

Okay, great. All right. And then just more big picture perspective. Curt, any thoughts on portfolio management this year. I know, obviously SurgiQuest has been a great deal for you guys.

How are you just thinking about deals or even portfolio management moves from divestures perspective as obviously there are some solo [ph] businesses that are driving down the growth? Any kind of high level strategic thoughts, I guess now that SurgiQuest isn’t doing well and maybe turning your sight towards some other moves?.

So the priority for cash is two folds, its debt pay down and it's M&A and we remain very active on M&A. We're looking for both tuck-in acquisitions and things that are more transformative, link SurgiQuest. Obviously they do something like that, it has to be a great fit.

So we're very active and continue to look to - at the portfolio and think that's the right thing to do at the stage in CONMED's evolution.

Other divestiture standpoint, right now the businesses that’s dragging us down is orthopedics and I am not going to divest that, that’s nowhere on the radar screen and right now all our focus is on getting orthopedics restored and repositioned for the growth that we know that it can do, and deliver and its about product portfolio.

And that's where our effort is and it’s been successful approach in the general surgery business. It's been successful outside the US by enhancing registrations of existing products in other markets and realigning how we deal with customers and we're just – we're executing the playbook in orthopedics, right now..

And ladies and gentlemen, this concludes our Q&A session for today. I will love to turn he call back to Curt Hartman for final remarks. Curt Hartman.

Thank you, Carmen, and thank you for everybody for joining us today on the call. And we look forward to speaking with you on our next earnings call, which will be held on April 26, 2017. Thank you. And have a good night..

Ladies and gentlemen, thank you for taking in today's conference. This concludes the program and you may all disconnect. Have a wonderful day..