Good afternoon, everyone.

Before the conference call begins, let me remind you that during this call, management will be making comments and statements regarding its financial outlook and its plans and objectives, which represent forward-looking statements that involve risks and uncertainties as those terms are defined under the Federal Securities Laws.

Investors are cautioned that any such forward-looking statements are not guarantees of future events, performance, or results, and the company’s actual results may differ materially from its current expectations.

Please refer to the risks and other uncertainties disclosed under forward-looking information in today’s press release as well as the company’s SEC filings for more details on the risks and uncertainties that may cause actual results to differ materially.

The company disclaims any obligation to update any forward-looking statements that may be discussed during this call except as may be required by applicable law. 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 uses these figures to aid in monitoring the company’s ongoing financial performance from quarter to quarter and year to year on a regular basis and for benchmarking against other medical technology companies.

Adjusted net income and adjusted earnings per share measure, the income of the company excluding credits or charges that are considered by the company to be special or outside of its normal ongoing operations. These adjusting items are specified in the reconciliation supporting the company’s earnings releases posted to the company’s website.

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, Shannon. Good afternoon and thank you for joining us for CONMED’s Third Quarter 2019 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 third quarter, Todd will then provide a more detailed analysis of our financial performance and discuss our updated 2019 financial guidance. After that, we will open the call to your questions.

Turning to our results, our total sales for the third quarter were $233.6 million, representing a year-over-year increase of 15.5% as reported and an increase of 15.6% in constant currency. Organic sales growth in the quarter, which excludes the impact of Buffalo Filter, was 8.8% in constant currency.

On a pro forma basis, if we had owned Buffalo Filter in 2018, our growth for the third quarter of 2019 would have been 10.3%. This was another solid quarter. And I’m very pleased with the balanced revenue growth across our U.S. and international businesses, as well as across both our General Surgery and Orthopedics portfolios.

Buffalo Filter is also generating solid growth as we see increasing adoption awareness among the medical community of the need for surgical smoke evacuation and filtration. From an earnings perspective during the third quarter, our GAAP net income totaled $7 million. This compares to net income of $5.8 million in the third quarter of 2018.

Excluding special items that affected comparability, our adjusted net income of $18.2 million increased 37.6% year-over-year. And our adjusted diluted net earnings per share of $0.62 increased 34.8% year-over-year.

Overall, we are delivering profitability above the levels we committed to and at the same time, we continue to invest in the business to strengthen our future revenue and profitability growth.

Our solid third quarter performance was a continuation of our results in the first half of the year, as we build on the strong foundation established by our team. Our new product pipeline remains a key growth driver as we further differentiate our product portfolio. We are making great progress on the integration of Buffalo Filter.

And I’m very proud of the team as it continues to drive impressive growth and strong performance. Overall, our financial results for the quarter have us on firm footing for a solid finish to the year and position us well for 2020 and beyond.

Before I hand the call over to Todd, last month we announced two new additions to the CONMED Board of Directors. I’m very pleased to welcome LaVerne Council and Barbara Schwarzentraub to our Board. LaVerne and Barbara are both highly accomplished and are valuable additions to the Board.

We look forward to their contributions as we continue to advance our long-term strategy to deliver above-market performance. With that, I’ll turn the call over to Todd, who will provide a more detailed analysis of our financial performance and discuss the positive update to our 2019 financial guidance.

Todd?.

Thank you, Curt. Before I get started, I want to let you know that we have posted an updated investor slide deck on our website in conjunction with this call. As Curt mentioned, our third quarter sales totaled $233.6 million, which represents an increase of 15.5% on a reported basis and 15.6% in constant currency.

Excluding the $13.9 million of Buffalo Filter sales in the quarter, our organic constant currency growth rate was 8.8%. On a pro forma basis, if we had owned Buffalo Filter in the prior year period, our constant currency third quarter revenue growth would have been 10.3%.

As we mentioned on our second quarter call, our Q3 results benefitted from one extra selling day compared to the prior year quarter, which we estimate to be worth between 100, 150 basis points of growth on the consolidated number. All remaining sales growth number that I referenced today will be given in constant currency.

The reconciliation to GAAP numbers is included in our press release. For the third quarter of 2019, our domestic sales increased 19.2% versus the prior year period, while international sales increased 11.6%. Worldwide Orthopedics revenue grew 7.6% in the third quarter, driven by strong performance across the product portfolio.

Domestically, third quarter Orthopedics sales increased 7.5% and internationally Orthopedics sales increased 7.6%. Total worldwide General Surgery revenue increased 24.0% in the third quarter. Total domestic General Surgery revenue grew 26.0% and internationally General Surgery revenue increased 19.7%.

We are very pleased with the sales performance so far this year. The organic growth has been strong and our expected revenue contribution from Buffalo Filter continues to increase.

We now expect between $47 million and $48 million from the surgical smoke evacuation products in 2019, which is up from our previous guidance, and it’s an increase of $6 million to $7 million from our original guidance at the time of the acquisition.

I’ll remind you that last quarter, we forecasted that our Q3 revenue growth would be above our full year guidance and our Q4 revenue growth would be below that range. There are 2 principal reasons for this.

First, our prior year Q4 organic growth of 10.8% was well above our historic trends and we aren’t going to get ahead of ourselves counting on a similar finish to this year. The second reason is that we are strengthening our sales resources in several geographies to position us for future growth.

This includes adding sales reps and making additional channel changes, where we have determined it would be beneficial, so our guidance allow for that disruption in Q4, but we believe puts us in a better position for 2020. Therefore, we are maintaining our full year organic constant currency revenue growth guidance at 6% to 6.5%.

Currency has become more of a headwind since we last provided guidance. And we now expect to currency headwind of approximately 80 basis points for the full year 2019 compared to our previous estimate of 50 basis points.

Therefore, despite worsening currency, we are projecting total 2019 reported revenue that as essentially the same as our projection 3 months ago between $951 million and $957 million, representing growth of 10.7% to 11.3%. Now let’s move to the expense side of the income statement.

For comparative purposes, I will discuss the P&L performance excluding special items, which include charges-related to acquisitions, manufacturing consolidation costs, debt refinancing costs and amortization of intangible assets, amortization of deferred financing fees and debt discount net of tax.

A reconciliation to GAAP numbers is included in our press release. Adjusted gross margin for the third quarter was 56.4%, an increase of 170 basis points over the prior year quarter. We are pleased with the improvement we are seeing in gross margins. And they are currently trending above where we expected them to be at this point of the year.

Our production has been active and increasingly efficient this year, as we have focused on manufacturing our new products in-house and in-sourcing other key products. As we’ve talked about before, the ebbs and flows of inventory and manufacturing variances can make gross margin appear lumpy from quarter-to-quarter.

We continue to expect the full year adjusted gross margins to improve by approximately 100 basis points over the prior year, which means that the Q4 gross margin is expected to be below trend at around 55%, as we expect to sell more than we produce in the quarter. We remain confident in our improving margin profile going forward.

Research and development expenses for the third quarter were $11.0 million or 4.7% of total sales, which is a 10.9% increase over the prior year period, as we continue to actively invest in new products and platforms. Looking forward, we continue to expect investments in R&D to be between 4.5% and 5% of sales in 2019.

Third quarter SG&A expenses on an adjusted basis were 38.5% of total sales and 80 basis point improvement over the prior year quarter. Based on the better-than-expected Buffalo Filter integration and the P&L leverage in the broader business, we expect improving P&L leverage in Q4.

As I discussed earlier, in Q4, we plan to initiate sales force expansions and channel changes that we believe will deliver additional strength in 2020. Despite those additional investments we are guiding to increased SG&A leverage for the full year 2019 compared to what we expected 3 months ago.

We now expect SG&A as a percentage of sales to improve between 120 and 130 basis points for the full year. Our improving margin profile drove 260 basis points of increased adjusted operating margin in Q3 compared to the prior year quarter. Year-to-date, adjusted operating margin has increased 190 basis points.

Interest expense was $8.0 million in Q3 with slightly lower interest rates. We now expect interest expense to be around $32 million for 2019. The adjusted effective tax rate in the third quarter was 24.2% compared to 24.5% in the prior year period. This was lower than we expected in Q3 due to recent guidance from the IRS on various pieces of U.S.

tax reform and also due to excess tax benefit from the higher stock price. Year-to-date for the first 9 months of 2019, our adjusted effective tax rate is 20.6% and we now expect the full year to be around 21%.

Third quarter GAAP net income totaled $7.0 million or $0.23 per diluted share compared to a reported net income of $5.8 million or $0.20 per diluted share a year ago.

Excluding the impact of special items discussed earlier, our third quarter adjusted diluted net earnings per share were $0.62 versus $0.46 in the prior year period, representing growth of 34.8%.

We are raising our full year adjusted cash EPS guidance and now expect EPS between $2.62 and $2.65, representing year-over-year growth of approximately 20% to 22%.

This stronger than expected performance compared to our guidance 3 months ago is a combination of operational overachievement, lower interest expense and lower taxes, which are offsetting worsening currency and the increased investments in sales resources that I mentioned earlier.

The adjusted diluted cash earnings per share estimates for 2019, exclude amortization of intangible assets, amortization of deferred financing fees and debt discount, which are estimated in the range of $32 million to $34 million net of tax and the cost of special items including charges related to acquisitions and manufacturing consolidation costs estimated in the range of $15 million to $17 million net of tax.

Turning to the balance sheet, our cash balance at the end of the quarter was $30.1 million compared to $22.5 million as of June 30, 2019. Accounts receivable days as of September 30, were 67 days compared to 72 days a year ago. Inventory at quarter end was 151 days, which is the same as it was in Q3 a year ago.

Long-term debt at the end of the quarter was $781 million versus $796 million on June 30, 2019, and which makes our leverage ratio at September 30, 2019 was 4.7 times. Cash flow from operations for the 9 months was $54.3 million compared to $50.0 million in the prior year.

Capital expenditures for the 9 months were $13.9 million compared to $11.8 million in the prior year period. And with that, we’d like to open the call to your questions, and I’ll hand it back to Shannon..

[Operator Instructions] Our first question comes from Kristen Stewart with Barclays. Your line is open..

Hey, good afternoon. Congratulations on a good result.

I just wanted to dive a little deeper into the sales force commentary on what you’re doing there, and if you could just give us a little bit more detail into what specific areas you’re going to be making these changes, if it’s something that we should expect to see any sort of disruption from a top-line perspective, if it’s more in the Orthopedics channels, if it’s more in the General Surgery channels, so just any additional color there would be very helpful.

Thank you..

Sure, Kristen. Thanks for the question. I think what we’re trying to signal here is we’ve had a pretty strong year. Typically, organizations will do this at the beginning of the year. We’re in a position to start it a little bit earlier. So that’s part one.

Part two is when you look at the portfolio, when where we’ve added some really exciting items like AirSeal and Buffalo Filter, you should expect that we’re enhancing our sales infrastructure across the organization that sells those products both domestically and internationally. And Todd referenced also channel changes.

We continue to have a roster of channel changes that would be ideal to pursue, assuming product and financial performance allow us to do that. And given where we are year to date, we think it’s prudent to start those.

Could there be some disruption? I think everybody is probably been around long enough to know that anytime you do commercial changes like this or you’re always susceptible to some disruption.

I’d like to believe that our teams have been pretty wired into this and that the execution that has got us here to where we are today is the same execution that will carry us through this type of transition.

But I think also in Todd’s scripted comments he talked about all the various moving parts in the fourth quarter, little more currency, a little bit of channel disruption perhaps, things that we’re trying to factor in, never mind the big prior year comparable. So hopefully that’s enough color on that question.

I don’t want to go too far for competitive reasons. But obviously, we’ve got some areas with a lot of technology that we think sales force expansion is warranted..

Okay, perfect.

And so, I guess, if I’m hearing you correctly, it sounds like you’re – if things are going well and you’re just taking the opportunity to do it now, to kind of set yourself up for 2020, and in the press release you also I think commented that you continue to reaffirm this growth profile that at least mid-single-digits top-line and double-digit EPS.

So it just sounds like things are going well. Clearly, the sales expansion kind of supports that idea, and so this is just simply tough comp, taking the opportunity now to make these changes to keep the momentum going, so clearly, not a sign of anything going wrong. In fact, everything is going right.

And so, it seems like your line of sight looking at 2020 looks pretty good. So anything else we should think about [as we can get] [ph] puts and takes for 2020. It seems like this is kind of the last big tough comps that you guys kind of have set there..

I don’t think I could have answered that question any better than what you just stated it..

All right..

We’ve had – it’s been a good year as we said in the opening comments and in the press release. We’re committed to the top and bottom line performance that we laid out now two years ago, as we head into 2020. And we’re not in a position to give 2020 guidance, but we set the minimum – the stake in the ground remains the same at a minimum.

And because of where we’re at, we’re able to do these things right now as – on a go-forward basis..

Yeah. And, Kristen, I would just add one thing. You did ask about other headwinds like Curt said. It’s not time to talk about the details of 2020 yet. There are two things that we can see right now, two headwinds. If rates stay where they are, currency will be more of a headwind in 2020 than it was in 2019.

And given, several discrete tax items that lowered our effective tax rate in 2019, we would expect the tax rate in 2020 to be higher than it has been in 2019. But despite those two headwinds, we believe the business momentum is strong enough to overcome those factors and deliver on the double-digit earnings we committed to on a sustainable basis..

Okay. Perfect, yeah. I was going to ask on the tax rate side.

Is there any way to quantify that?.

Yeah, it’s too soon to quantify it. It just wouldn’t surprise me. I don’t know that it will be up, but I suspect that it could be up. But it’s too soon to quantify that..

Okay, perfect. Thanks. I’ll get back in queue..

Thank you. Our next question comes from Matt O’Brien with Piper Jaffray. Your line is open..

Hi, guys. This is Drew on for Matt. And thank you for taking the questions and congrats on a very nice quarter here. When you originally did the Buffalo Filter deal a couple of quarters ago, I believe you noticed gross margin or you noted gross margins in line with the corporate average and then increasing synergies after year one.

Obviously, now we’re sitting here a couple of quarters later after having write the top line guidance for that a couple of times and sounds like the integration is going very well.

I guess, maybe could you speak to a little bit about the efforts have improved those margins and kind of where you see smoke evacuation checking out from the long-term margin perspective?.

Yeah. Thanks. Your memory is correct. On the date of acquisition, the Buffalo Filter portfolio came in right in the mid-50s, kind of, right out the corporate average. And the expectation was that after we integrated those would claim into the 60s relatively quickly after the first year.

That integration has started, so as we move, as we get later into 2020, we’ll start to see those be accretive at that level..

Okay. Very helpful. And then, I guess, checking on Buffalo Filter there – here, you’ve obviously had a couple of legislative wins over the few quarters. As far as encouraging requiring the use of smoke evacuation in OR.

My question, I guess, is kind of how long it has taken to translate some of those legislative wins into performance for your business, and how dependent is that product in more states adopting similar policies? Thank you..

So I think there is 2 ways to think about smoke evacuation filtration, one is the overall workplace environment. And I would say that is far away the most meaningful thing that is happening across the industry.

The reality of the smoke-free workplace in the operating room is really gaining traction through the various associations that are driving this from the healthcare worker side. We’re almost set a plan where the legislative wins that are back, is secondary to that first one.

We did see Colorado go into effect earlier in the year, and well, that was helpful. It didn’t – Colorado didn’t go from a standing start, waiting for that legislation things were already happening in operating rooms across the State of Colorado.

So we said at the close of the acquisition back in February that our model stood on its own, that legislation was additional wind in our back.

And I think we still firmly believe that, maybe believe that more so, because there is so much marketplace momentum behind the smoke-free work environment in the operating room across the country and candidly in a lot of international markets. That’s really what’s driving the overall results and the improvement of performance.

And yes, there are more players in the industry talking about this. So it’s a combination of marketplace awareness driven by industry, but also driven primarily by that worker, who stands in the operating room, all day, every day and has to deal with the carcinogenic effects, et cetera. And there is just a lot of momentum behind the space, right now..

Well, thank you..

Thank you. Our next question comes from Richard Newitter with SVB Leerink. Your line is open..

Hi, thanks for taking the questions. Congrats on the quarter..

Thanks, Rich..

I have a couple here, I’ve been jumping between the call so I apologize if you addressed this, R&D, obviously, as a percentage of sales came in a little bit lighter than we were looking for. Just would like to hear kind of if there any spending projects that were delayed, I know, R&D is something that, Curt, you’ve been focused on.

So I’m just curious to hear about the cadence of spend there? And then maybe just I’ll ask my second – my other two now.

With the product launches, how are those trending relative to your expectations? And do you feel like that even beginning to show up in results or is most of the benefits still out in front, and because, we did see a pickup there? So I’m just getting curious to hear about what order of magnitude we should be expecting going forward? And then maybe I’ll have a follow-up after that.

Thanks..

Yeah, Rich. On the rate – year-to-date is 4.8% of sales and in Q3 was 4.7%. There is nothing – there is no news there. We remain committed to our new product pipeline, it’s being effective.

And as we talked about before, it does take a while for these new products to get through the process of – getting through the hospital, through the surgeons, through the value analysis committees. And so we expect those 2 would be more impactful to next year than this year.

And the ones, we’ve launched last year or more impactful this year than last year, and that will build on itself, as we continue to develop that pipeline and launch things coming out of there..

Great. And on the [U.S.] [ph] launches, just – and so I get that – that kind of answers the [ortho] [ph] question. Actually, you expect more of an impact from the launches this year or next year.

And we’re basically to seeing the benefits of last year’s launch to this year? Is that correct?.

Right. Yeah. We are benefitting this year already and we expect to benefit next year more than this year..

Got it. And then, Curt, I guess, you are trending on a pro forma basis with the inclusion of Buffalo Filter in both years at a double-digit growth rate. Thanks for the visibility or the early commentary on 2020. But I’m just curious, why is the mid-single-digit growth rate, a level of growth for our company that – it’s trending at double-digits now.

And is that just you’re trying to building some cushion, where it’s at least mid-single-digits, but feels like if it were to drop on – even on harder comps. You are still probably a high-single-digit grower.

I’m just trying to get my arms around why you go from 10% are double-digits to mid-single-digits with all the momentum drivers that you have in front. Thanks..

Well, I think, number 1, we don’t give our detailed guidance until January, so a lot of that question probably is better addressed in January, and what we’re trying to do today is confirm for people that – reconfirm for people that stake we’ve put the ground back in, I guess, it was 2018 that will be not less than mid-single-digits on the top.

And I think, we said even back on that call, there could be years when it’s above that. But it will not be less than that based on everything we’re trying to do here on the product cadence side, the commercial organization side, the customer engagement side.

So our view today, our commentary today is to reinforce remind whatever the right word is folks that we remain committed to that as we head into 2020. Could it be better, will have to wait and see what we come out with for guidance in the January call. We were together next, but we like the direction of the product portfolio.

We like what our teams are doing on global basis, as I mentioned in my comments, it was really balanced, when you look at our numbers, internationally, U.S., it was really balance when you look at general surgery and orthopedics, and the performance level was really solid across the company.

So those give us confidence, sitting here at the end of the third quarter to talk about 2020 at a minimum of where we see ourselves..

Okay, thanks..

Thank you. [Operator Instructions] Our next question comes from Matthew Mishan with KeyBanc. Your line is open..

Hey, good afternoon, Curt, Todd. Thanks for taking the questions and nice quarter..

Thank you..

I’m going to get two in here, one on gross margin and then one on update on free cash flow for the year. Can you talk about the moving pieces of the gross margin improvement year-over-year? And then, you always talked about if you could bring leverage – bring volume through your facilities, you’d be able to drive a lot of leverage.

Potentially, we’re starting to see that right now. Just curious where you are in integrating Buffalo Filter and AirSeal into your two main manufacturing operations. And then just lastly, just could you just give us an update on what your thoughts are around operating cash flow and CapEx for the year..

Sure. Well, I’ll try and hit those. If I miss it, Matt, you’ll have to remind me. First of all, the moving pieces of gross margin. So the way we look at it, we talk about price, FX and then we combine volume and cost improvements together. So for Q3, price – the impact on gross margins, price was a negative 60 basis points.

FX was actually positive 10 basis points this quarter, and the combination of volume and cost improvements was 220 basis points. So that’s where the 170 of benefit comes from. And year to date, it’s a very similar kind of profile and were 140 basis points better year to date. You asked about Buffalo Filter integration.

So that is just beginning on the operation side. So really, we haven’t done anything up until now to integrate that. So that will be happening over the next six months to a year. And AirSeal, we did in-source some of our AirSeal products, not all, but some of our key products.

We did that earlier this year and that’s gone really well, actually a little better than we expected it to. So that’s part of what’s contributing to the positive outcome. On operating cash flow and free cash flow, it is consistent with our expectations at the beginning of the year.

If you’ll remember, we guided to 85 to 95 on operating cash flow and CapEx of 15 to 18. I think we’re very close to those ranges. With the one adjustment for the acquisition and the debt and the fees related to the acquisition, right, so there was about $20 million of one-times that hit operating cash flow from the transaction.

If you exclude that, we’d be right in line with that original expectation for the year on cash flow..

Thank you..

Thank you. Our next question is a follow-up from Kristen Stewart with Barclays. Your line is open..

Hi, thanks for the follow-up. Just a quick one for me, are you guys seeing any changes at all in your customer base just from a hospital capital equipment spending environment at all, either in the U.S. or any geographies outside the United States? Thanks..

I don’t think we’ve seen anything, any real change in the nature of capital spending either in the U.S. or outside the U.S. at this point in time, Kristen. It seems to be business as usual and we had a solid growth quarter on capital as it relates to the CONMED portfolio. So I think we see things pretty steady as we look forward here..

And nothing kind of changing as you look at your order books or anything like that?.

No, no change..

Okay, okay. Thanks very much..

Thank you. I’d now like to turn the call back over to Mr. Hartman for any closing remarks. Mr.

Hartman?.

Thank you, Shannon. I just want to thank everybody for your time today and we look forward to speaking with you on our next earnings call. Thank you, everybody..

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect..