Curt Hartman - President and Chief Executive Officer Todd Garner - Executive Vice President and Chief Financial Officer.

Mike Matson - Needham & Company, LLC Kristen Stewart - Barclays William Inglis - Piper Jaffray Richard Newitter - Leerink Partners LLC Matthew Mishan - KeyBanc Capital Markets Inc..

Good afternoon, everyone. 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 the monitoring of 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, Candice. Good afternoon, and thank you for joining us for CONMED’s Third Quarter 2018 Earnings Call. With me on the call is Todd Garner, Executive Vice President and Chief Financial Officer. Today, I’ll provide a brief overview of the financial and operating highlights for the quarter.

Todd will then provide a more detailed analysis of our financial performance and discuss our 2018 financial guidance. After that, we will open the call to your questions.

As we outlined in our press release, our results reflect continued execution against our strategic plan, allowing us to deliver a fourth consecutive quarter of solid top line growth at or above market growth rates.

Additionally, we saw continued margin expansion and improved profitability in the quarter, even while continuing to make prudent investments in the future growth of the business.

Our total sales for the third quarter were $202.3 million, representing a year-over-year increase of 6.4% as reported and an increase of 8.1% in constant currency and as adjusted for the new revenue accounting standard. From an earnings perspective during the third quarter, our net income of $5.8 million decreased 19% from the third quarter of 2017.

Excluding special items that affected comparability, which Todd will discuss later, our adjusted net income of $13.3 million increased 13% year-over-year, and our adjusted diluted net earnings per share of $0.46 increased 9.5% year-over-year.

Given our solid performance during third quarter and year-to-date, we are increasing the low-end of our full-year 2018 revenue guidance and we remain on track to deliver double-digit earnings growth, while continuing to reinvest back into the company.

In summary, we are very pleased with our performance and we remain focused on our investments and innovation, while continuing to make progress on enhancing our profitability.

Overall, it’s a great time to be part of CONMED for employees, customers and investors, and we believe that our focus will allow us to drive top and bottom line growth through the end of the year and to carry momentum into 2019.

I’ll now turn the call over to Todd, who will provide a more detailed analysis of our financial performance and discuss our 2018 financial guidance.

Todd?.

Thank you, Curt. As Curt mentioned, we reported another strong quarter with total sales of $202.3 million, which represents an increase of 6.4% on a reported basis over the third quarter a year ago. In constant currency and as adjusted for the new accounting standard, ASC 606, total sales grew 8.1% year-over-year.

All remaining sales growth numbers I reference today will be given in constant currency and as adjusted for ASC 606. The reconciliation to GAAP numbers is included in our press release. Our domestic sales increased 11.7% versus the prior year period, while international sales increased 4.5%.

Worldwide Orthopedics revenue increased 5.8% in the third quarter. During the quarter, Domestic Orthopedics revenue grew 5.7% versus the prior year period, posting a fourth consecutive quarter of growth. Internationally, Orthopedics revenue increased 5.8% year-over-year.

Worldwide General Surgery revenue grew 10.7% in the third quarter, driven by strong performance across the product portfolio. Domestically, third quarter General Surgery sales increased 15.5%, and internationally, General Surgery sales increased 1.8%. Now let’s move to the income statement.

For comparative purposes, I will discuss the P&L performance, excluding special items, which include impairments, charges related to acquisitions, restructurings, legal matters, gains on sale of assets, debt refinancing, the impact of tax reform on 2017 deferred tax balances and amortization of intangible assets net of tax.

A reconciliation to GAAP numbers is included in our press release. Adjusted gross margin for the third quarter was 54.7%, up 60 basis points compared to adjusted gross margin a year ago. We continue to expect our full-year 2018 adjusted gross margin to be between 54.5% and 55%, which is an improvement of 50 to 100 basis points over 2017.

On an adjusted basis, which excludes the net write-off of an IP R&D asset, research and development expenses for the third quarter were $9.9 million, or 4.9% of total sales. This compares to $8.3 million, or 4.4% of total sales in the prior year period. This 19.8% growth demonstrates our increased focus on internal R&D.

On an adjusted basis, which excludes the impact of amortization and the charge this quarter for the remaining lease on a vacated building, selling and administrative expenses for the third quarter were $79.5 million, or 39.3% of total sales, compared to $74.6 million, or 39.6% of total sales in the third quarter of 2017.

We were pleased to see leverage in this metric in the third quarter despite our increased investments, which are focused on getting closer to our customers and improving infrastructure to drive future top line growth. Adjusted EBITDA margin in the third quarter of 2018 was 17.2% compared to 17.0% a year ago.

Our adjusted EBITDA grew 8.8% over the prior year period, as we continue to balance improving profitability with reinvestment into the business. Excluding the impact of Tax Reform on the 2017 deferred tax balances and adjusted expenses, our non-GAAP effective quarterly tax rate decreased to 24.5% from 25.2% in the prior year period.

We continue to expect our adjusted effective tax rate to be between 25% and 27% going forward, but for the full-year 2018, it will be lower due to the sizable benefit of Belgian tax reform that we recognized in the first quarter.

Third quarter GAAP net income totaled $5.8 million, or $0.20 per diluted share, compared to a reported net income of $7.2 million, or $0.26 per diluted share a year ago.

Excluding the impact of special items discussed earlier, our third quarter adjusted diluted net earnings per share were $0.46 versus $0.42 in the prior year period, representing growth of 9.5%. Looking at the balance sheet. Our cash balance as of the end of the third quarter of 2018 was $29.7 million, compared to $23.4 million as of June 30.

Accounts receivable days as of September 30, 2018 were 72 days, compared to 70 days in the same quarter a year ago. Inventory days at quarter-end were 151, compared to 154 in the same quarter a year ago. Long-term debt at the end of the quarter was $442.9 million versus $471.7 million at the end of 2017.

Our leverage ratio at September 30, 2018, was 3.16 times. Cash flow from operations was $50.0 million for the first nine months of 2018, compared to $44.8 million in the prior year period, and free cash flow was $38.2 million, compared to $35.5 million in the prior year period. Now moving to our financial guidance.

Based on current business trends, we are raising our previously issued sales guidance. We now expect full-year 2018 constant currency sales growth in the range of 6.5% to 7%, an increase of 50 basis points on the low-end from our prior guidance, driven by the better than expected third quarter results.

We continue to project currency as a headwind of 50 to 100 basis points in the fourth quarter, but the effect on the full-year is still expected to be a tailwind of 0 to 50 basis points. This is consistent with our currency guidance last quarter.

We continue to forecast full-year 2018 adjusted diluted net earnings per share in the range of $2.15 to $2.20, representing growth of approximately 14% to 16%.

We believe this as a healthy return for 2018, and our intention continues to be to invest any potential overachievement back into the business to strengthen revenue growth and profitability in future years.

The adjusted diluted net earnings per share estimates for 2018 exclude the cost of special items, including impairments, charges related to acquisitions and restructuring costs and adjustments to the 2017 tax balances and provisional income tax effects of the 2017 Tax Cuts and Jobs Act, which are estimated in the range of $4 million to $5 million net of tax and amortization of intangible assets, which is estimated in the range of $16 million to $18 million net of tax.

And with that, we’d like to open the call to your questions. And I’ll turn it back to Candice..

Thank you. [Operator Instructions] And our first question comes from Mike Matson of Needham & Company. Your line is now open..

Hi, thanks for taking my questions. It’s good to see the improved Orthopedics growth, particularly after four quarters in a row. Just curious if you can maybe talk a little bit more about what’s going on right there, and if there’s any kind of key products that have been contributing to that business? Thanks..

Thanks for the question, Mike. I think the Domestic Orthopedics improvement is just the continued progress that’s being made by the leadership team and the maturity of the businesses. The new product cadence has picked up as new products have gotten into the hands of our sales force, allowing them to get on offense.

And it’s just the combination of the work that’s been occurring over the last several years to get us in a position to be on offense and start winning again with customers and showing the customers that we’re investing.

From a specific product standpoint, obviously, we started the year at Academy with a pretty good show, launch of some new products, both on the capital and the consumable side. And I’d say, we’ve had a pretty balanced offense year-to-date as those things have each picked up and made progress with our customers.

So I wouldn’t call out one specific item, rather the totality of everything we’ve tried to do with new products, not only this year, but in the previous years everything together. Getting our teams on offense is really what the results are about..

Okay, thanks. And then, I know you’re not giving 2019 guidance at this point. But just looking out, I see a few sort of headwinds on the horizon, one from potentially from currency and one from interest rates going up some. I think, you have some variable rate debt. So just curious if you can give us any kind of guidance around those issues.

Are those going to be significant headwinds to earnings growth next year, or is it going to be enough to keep you from getting to kind of that mid-teens range that you’re now targeting? Thanks..

Thanks, Mike. Just for clarity, we’re guiding mid-teens range in EPS growth for 2018. The – what Curt and I said back in January was the organic sustainable engine of this business, we felt like could deliver mid single digits or better on the top and double digits on the bottom.

And nine months later, three quarters later after executing and demonstrating the ability to do that, we remain confident in that marker that we put on the ground. Specifically to your questions about currency and interest rates, it’s too early to give specific guidance for 2019.

But given where rates are today and our hedging programs, in general, it looks to us today like it shouldn’t be a major issue. It looks like our hedging programs are doing what they are designed to do, which is to mitigate the short-term effect. And so we don’t see any major issue with that at this point.

And it is true that our debt is kind of variable rate, which has saved us a bunch of money over the last few years. But obviously, as interest rates rise, that’s part of our job to manage the business and as things change, then we may have to relook at how we finance that part of the balance sheet.

But so far, neither of those look to us like they should impede our ability to deliver double-digit earnings growth, which was the marker we put on the ground at the beginning of this year..

Thank you. And our next question comes from Kristen Stewart of Barclays. Your line is now open..

Hey, guys, thanks for the question an congrats on a good top line quarter. Just to follow-up on the last question there.

What – how should we just think about tax – the tax rate? Could that inhibit your ability, I guess, to deliver on the double-digit side? Because you did have the benefit from Belgian tax reform, although your tax rate is still relatively one of the higher rates that are out there.

So I would imagine longer-term, there’s an opportunity to probably see that rate be reduced.

But how should we just think about it kind of from a year-to-year comparability perspective?.

It’s a great question, Kristen, and it’s nice to have you back on the call..

Thank you..

Yes, you are correct. Our tax rate will likely be higher in 2019 than it was in 2018 because of some of the credits we were able to benefit from this year. But again, that’s part of the – what Curt and I are paid to manage and we don’t see that again, impeding our ability to deliver double-digit earnings on the bottom as we’ve committed..

Okay, great. And then just a question on kind of dynamics in the business. Capital was up 17% in the quarter. So that’s a pretty strong number. I was just wondering if you could speak to how we should think about the sustainability of that and just kind of the end markets from a CapEx perspective..

Sure. I think, if you look year-to-date, we’ve had pretty respectable capital growth every quarter. And I think, you can keep that going, all things being equal in the market. I think, you can keep that going if you keep the cadence of new product innovation moving.

And we’ve been very focused on innovation, as you know, and that is on both the consumable and the capital side. So earlier this year, we introduced MicroFree. We have some new generators that came out on the General Surgery side, those are all capital items. So we have a broader offense in capital, new innovation. Same thing on the consumable side.

So it’s really about keeping the cadence of innovation, be it capital, be it consumables going. Right now, the markets appear unchanged largely on the capital side. We don’t see anything that appears to be slowing them down and we feel like we have a portfolio that now allows us to be more competitive.

So it seems like our capital trends are pretty stable. And yes, the third quarter was a bit of a pickup. Capital sometimes is difficult to determine when it’s going to close, and we closed a little bit more in the quarter, which was a good thing. But overall, I like the offense here.

So I think, the new product innovation, sales force on offense, those things go together and should keep us moving..

Thank you. And our next question comes from Matt O’Brien of Piper Jaffray. Your line is now open..

Hey, Todd. Hey, Curt, this is Will on for Matt. Thanks for taking the questions. I guess, the first question I have is, would you be able to pull apart for us a little bit what’s going on at General Surgery, particularly with the consumable volumes for AirSeal? Robotic procedural growth is still a healthy 20% growth in the third quarter.

So just wondering kind of what you’re seeing there?.

Yes. Will, we’re not going to get more granular on a product line basis. AirSeal continues to do very well, both on the capital and disposable side. So we’re very pleased with it, but we’re not going to get into product lines here..

And interesting, overall on general surgery. I’ve mentioned this in the last couple of calls. We have three distinct categories of products there, three distinct offerings, customer segments, if you will. And all three of those businesses have been doing very well, thanks to the offense we’ve put in place.

New leadership teams, new marketing teams, new energized R&D teams, and all three of those businesses are growing at or above the market. And yes, AirSeal is a very important portfolio item for us. But I just want to continue to convey that our General Surgery results are not just dependent on AirSeal.

We’ve had very good growth across all those categories, inclusive of the legacy portfolio that the company was founded on, the ECG electrodes in cardiology critical care business. So it’s really been a robust offense there and the leaders and sales and marketing teams are – on General Surgery side are doing a great job..

Great. Thanks for that. And then a quick follow-up, I guess, still with General Surgery. International 1.8%, can you talk a little bit about that? And then any initiatives you have on maybe jumpstarting growth there? Thanks..

Yes. The International General Surgery side, remember, the International business, about 70% of that is direct, 30% is export. Export patterns can be a little up and down. And then overlaid on top of that, we’ve talked about these investments back into the business to realign some of our channels.

Those things can be a little bit disruptive and I think we’re just working our way through that in combination with some of the export up and downs. But overall, International has delivered growth in both Orthopedics and General Surgery now, I think, for 10 consecutive quarters, and I feel good about the offense that, that the team is running..

Thank you. And our next question comes from Richard Newitter of Leerink Partners. Your line is now open..

Hi, thanks for taking the questions, guys. So I have two.

The first one, just on the capital business and specifically, I know you had the new product launch on a new camera earlier in the year, and one of your competitors is about to enter upgrade or kind of a new product cycle in the endoscopy division with a new HD camera iteration in the fourth quarter and into 2019.

I’m just curious, to what extent have you benefited potentially just as you guys kind of each are in different kind of product cycle iterations? And can you remind us just how in the past, when Stryker has launched cameras like this, how it’s impacted your business, if at all?.

Well, there’s a lot to unpack in that question, Rich. The – clearly, the Strykers and the KARL STORZs of the world are the large players in video. The Linvatec video platform has kind of long history in the marketplace. It had suffered for a number of years, because we had not been innovating at nearly the cadence that the market demanded.

And we’ve clearly, from day one that I’ve gotten here, been in catch-up mode. We had the first camera came out in 2015. It had been seven years between camera launches, which for the other companies in the space, that probably gave them an opportunity to launch three different camera generations. So we were clearly in catch-up mode.

We continue to try to iterate and you’ve seen some of those products launched at Academy the last couple of years. So we’re not number one, number two in the pack there. We’re playing catch-up. But like the rest of the portfolio, we’re committed to the business. We’re committed to innovating for our customers, these things take time.

And certainly, any competitor comes into the marketplace with a new technology, it’s going to slowdown the market, as customers do what they should do, which is look at all the opportunities. And I can’t comment on what any competitor is doing. I’m not close to their technology.

I just – I look at what we’re doing and I think we’re going down the right path for the future. I guess, that’s where I’ll leave my comments..

Okay, that’s helpful perspective, Curt. Thanks. And Curt, you guys have been a very savvy acquirer of assets. We haven’t really seen any major deals since the SurgiQuest.

One, can you just remind us of maybe some of the smaller tuck-in deals that maybe you’ve done recently, is that sometimes we learn about that are kind of more technology kind of tuck-ons? And then, I’m curious if your kind of view of the landscape has changed at all if maybe valuations having pulled back a touch here.

And you said your – I think, your leverage ratio, Todd, was 3 times. What would you be willing to lever up to for the right asset? Thanks..

Yes. I’ll take the first part of that, Rich, here. We’ve done seven deals, SurgiQuest being the biggest, most transformative and then we’ve done six product line tuck-ins. And those have been somewhat equally spread across both the General Surgery side of the business, as well as the Orthopedic side.

If I go back in time, the TenoLok device, Biceps Tenodesis, has been a great acquisition for us. Really thrilled with the cadence that, that product has had for us on a global basis. We’ve done the AssistArm portfolio on Orthopedics.

On the General Surgery side, last year, we did the Anchor specimen retrieval bag, which has been a nice acquisition for our General Surgery business on a global basis, really had to build that up from the ground and the team has done a great job there.

So things like that are important, because we’ve got good distribution on a global basis, and we can put those when they’re right in the cadence of what – where we sell and get good traction on them quickly. I’ll defer the second-half of that question to Todd relative to evaluations and levering up, if you will..

Yes, Rich, we remain very active and focused on how to become more relevant and more meaningful to our customers, and so we’re active out there in the marketplace. And as far as how far we would gear right, our current leverage is just above 3 times, that’s 3.16 times. Look, for the right deal, we would do a tuck to get it.

The SurgiQuest acquisition has been a homerun. And if there was something else that had the same characteristics of an acquisition like that, we would do it..

Thank you. And our next question comes from Matthew Mishan of KeyBanc. Your line is now open..

Good afternoon, and thank you taking the questions. You guys have had really four exceptional quarters in a row here. But you’re now entering a period of tougher comps. Your implied fourth quarter revenue growth shows some deceleration from where you’re at today.

How should we be thinking about growth like moving forward in the context of kind of where you were coming from compared to where you’re at today?.

Yes. I think, we’re very pleased with the stability and the momentum in the business, Matt. It’s been actually very consistent. The teams have done what they’ve said. It is true that Q4 is a little bit of a tougher comp. You’ll remember that last year, Q3 was a little bit of an easy comp because of the hurricanes and then that made Q4 a tougher comp.

And so, we don’t see any slowdown in the momentum of the business. We’re very pleased with the execution of our teams against their strategic plan. And we feel like we’re in a really good position heading into the end of the year and into next year. As far as the guidance, we just didn’t see a need to get ahead of ourselves from that standpoint.

So it is true – and coming up against the tougher comp, it wouldn’t surprise us if the nominal growth rate dropped a little bit. But if you normalize Q3 and Q4, we think you’ll see pretty good strength as we finish up the year here with good momentum heading into 2019..

Okay. That makes sense. And then moving to gross margin. I’ve been waiting for you guys to pop a good gross margin on – a really good gross margin on the sales beats.

Why are we seeing more upside to the gross margin here? What’s holding it back?.

Well, we started the year guiding improvement of 50 to 100 basis points for the year. And nine months in, on a year-to-date basis, we are at a 100 basis points improvement over prior year. So we’re at the top-end of that range nine months in. And so again, I think, we’re executing as we planned.

We continue to make improvements there and expect to be able to continue to improve gross margins as we move into 2019 and beyond..

Thank you. [Operator Instructions] And our next question comes from Kristen Stewart of Barclays. Your line is now open..

Hi. Just a follow-up, and I’m not sure if you’re willing to provide this level of detail.

But are you able to kind of comment in terms of AirSeal in terms of where mostly usage is in terms of procedures?.

When you say where, Kristen, what are you talking about? Are you talking about geographically? You’re talking about…?.

No, just the type of procedure. So hysterectomies versus colon procedures versus anything like that.

Is there any concentration?.

Off the top of my head, Kristen, I’m afraid I wouldn’t give you a great answer. I can certainly get some data around that and maybe we can share that in the next public venue.

But I think if you kind of look at history, it was built around where the Intuitive Surgical robots are and we don’t participate in every procedure that they’re in, but we participate in a lot of the categories that robots are applicable for. And then, obviously, our push here has been to get into the broad laparoscopic surgery market.

That’s going to be slower to build, but we’ve been making progress there, both in the U.S. and outside the U.S. So off the top of my head, I’m sure my General Manager is screaming at me behind-the-scenes right now, saying Curt, you should do this, but it is not coming to my head right now..

Sorry to put you on the spot and to get you in trouble with your Product Manager..

That’s okay..

Look, I think, it’s safe to say that it’s a broad range of procedures..

Okay. And are you still – sorry, go ahead..

I was just going to say, as I traveled around and visited cases, it’s a wide range of different procedures. So I’m not sure that it’s concentrated or there’s any one that has the lion’s share of it..

Okay.

And are you still feeling like you’re getting a full portfolio pull-through of having AirSeal of the other products? I mean, it seems like the number has been just that, that?.

We do. We think, it’s a platform technology and it gives us a reason to be there each and every day. And inevitably, as we continue to enhance our portfolio, those items become an opportunity in those cases.

And because of our presence with those key opinion leaders and the opportunity to be there every day, we’re able to take advantage when opportunities are presented. So yes, we think there’s definite synergy sales.

Very hard to quantify it, because we don’t ask for people to report on that, but we just see the growth across the portfolio as an indication that, that is happening..

Okay, perfect. Thanks, guys..

Thank you. And our next question comes from Matthew Mishan of KeyBanc. Your line is now open..

Hey, just a quick one.

Can you follow-up on the thoracic de novo approval you got earlier in the year and how that’s gone?.

Yes, we’re pleased. And just as a reminder, that’s the first de novo application and approval for thoracics, and it was really about being able to go into the customer and kind of claim that space. We’re the only company in the market with approval, both for laparoscopic and thoracic indication.

And that should help the customer in terms of simplifying their purchasing decision. We’re the one company that can cover both spaces.

We’ve had some very good, just call them, podium presentation, Webexs, with some leading surgeons in the thoracic space, who are advocate users of the technology and that has brought – their names behind the technology has brought additional focus in the marketplace to the technology.

So I’ll just to remind you though, in the overall grand scheme of things, there’s perhaps 100,000 thoracic procedures done a year. So it’s never going to be the definer of the outcomes. It’s just a nice expansion opportunity and a broad indication opportunity to talk to our customers about. But so far, so good, Matt..

All right. Thank you, Curt..

Thank you. And that concludes our question-and-answer session for today. I’d like to turn the conference back over to Mr. Hartman for closing remarks..

Thank you, Candice, and thank you all for your time today, and we look forward to speaking with you on our next earnings call. Thank you..

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program, and you may all disconnect. Everyone, have a great day..