Good day, and thank you for standing by. Welcome to the Second Quarter Fiscal Year 2022 CONMED Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session.

[Operator Instructions] I would now like to hand the conference over to CONMED for a brief announcement. Please go ahead..

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 reconciliations 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 Chair of the Board, President and Chief Executive Officer, for opening remarks. Mr.

Hartman?.

Thank you, Howard and Julie. Good afternoon and thank you for joining us for CONMED's second quarter 2022 earnings call. With me on the call is Todd Garner, Executive Vice President and Chief Financial Officer. Additionally, today I have asked Pat Beyer, President of CONMED International and Global Orthopaedics to join us.

Given the closing of In2Bones and our progress with the integration I felt his participation today would be beneficial. Our plan is to share with you our second quarter results, provide a quick overview of our first couple of weeks of ownership of In2Bones and provide an update on the overall outlook for our business.

We'll then open the call to your questions. I will start by reviewing our second quarter results. Total sales for the quarter were $277.2 million, representing a year-over-year increase of 8.6% as reported, an increase of 9.8% in constant currency. On an organic basis, sales finished at $275.1 million, representing 9% constant currency growth.

We built momentum throughout the quarter and it's worth noting these results came against our best quarter of 2021. From an earnings perspective during the second quarter, our GAAP net loss totaled $168.3 million due primarily to the extinguishment of most of the 2024 convertible notes.

This compares to net income of $13.3 million in the second quarter of 2021. Excluding special items that affected comparability, our adjusted net income of $24.8 million increased 11.8% year-over-year and our adjusted diluted net earnings per share of $0.76 increased 7% year-over-year.

In the United States market, our perspective is that surgical staffing levels continue to impact surgical volumes during the second quarter. Outside the United States, we recorded strong performances in several markets to include Europe, Canada and Latin America. Finally, I was very pleased with the mid-June close of the In2Bones transaction.

I want to compliment the entire deal and integration team along with the former In2Bones employees on a well-developed and executed integration plan, which is off to a strong start. Obviously more work continues on this but the early days have been very encouraging.

On the noncommercial side, we also executed on new debt instrument, which Todd will discuss in more detail. Overall, we delivered a very solid quarter as we continue to navigate the impact of surgical staff, labor shortages and their influence on surgery, as well as material shortages and continued inflationary pressures.

In summary, I'm very pleased with the focus and the results delivered in the quarter and look forward to building on our success in the second half. I'll now turn the call over to Pat who will give us an overview of the In2Bones' integration and business.

Pat?.

Thank you, Curt. I'm pleased to join the call today and excited to share our progress with you on our recent acquisition of In2Bones, which as a reminder we closed on June 13th of this year.

What attracted us to In2Bones was the opportunity to acquire a company in the foot and ankle market that had a strong portfolio, a strong sales team and a strong leadership team. Since closing, we feel even more confident that all three of these are true and that we've acquired a terrific platform.

One of the first things that attracted us to the In2Bones was the quality of its R&D organization. We were impressed with both the breadth of the portfolio and the innovation that was woven throughout and we continue to be impressed with the existing offering and the new products in the pipeline.

Before we owned In2Bones they were winning in the marketplace and growing healthy double digits. That momentum continued through the acquisition and ongoing integration. We are very happy with the progress so far, as the In2Bones team is now able to leverage our structure, scale and additional products.

We see growing opportunities for cross-selling over the longer term, as well as expanded reach due to build-out of the sales channels and the additional international registrations. Turning to leadership.

We started our integration of the In2Bones acquisition immediately post closing, with kickoff meetings both in our USA Orthopedic business location, of Largo Florida; and the In2Bones International HQ location, of Lyon France.

Both kickoffs went extremely well and I'd like to congratulate the teams on their high level of engagement, and how well planned the integration is as we have already made meaningful progress on a number of key integration milestones.

Our kickoff meetings were attended by several of our key sales leaders, and distributors and the feedback we received from them has been fantastic. Additionally, Alan Taylor the In2Bones CEO and has started with CONMED running our USA foot and ankle business, with the energy and positivity that we would expect.

As we move into the third quarter, we remain as excited and positive about the In2Bones acquisition, as we were when we did our initial diligence. I will now turn the call over to Todd. .

Thank you, Pat. All sales growth numbers I reference today, will be given in constant currency. The reconciliation to GAAP numbers is included in our press release. As usual, we have included an investor deck on our website that summarizes the results of the quarter and our updated guidance.

For the second quarter of 2022, our total sales increased 9.8%. We closed on the In2Bones acquisition on June 13 and recognized $2.1 million in sales in the second quarter. Global organic growth for Q2 was 9.0% compared to the second quarter of last year, which as Curt said was our strongest quarter of 2021.

For Q2 our sales in the US increased 3.9% versus the prior year quarter. Our international sales grew 17.2%, for the quarter compared to Q2 of 2021. Europe, Canada and Latin America were the strongest growers. China declined this quarter, and Japan and Australia grew modestly.

The disparity in growth between the US and international markets is exacerbated by our prior year comps. As a reminder, when we talk about our 2021 growth rates, we are comparing to the 2019 baseline since 2020 was impacted by the COVID shutdowns around the world. With that in mind, US Q2 2021, growth was 11.4% versus 2019 which is well above trend.

Q2 2021 OUS had its lowest growth of the year compared to 2019, growing only 1.2%. So it's not surprising that Q2 2022 shows the reverse, with a lighter-than-normal growth rate in the US and a strong growth rate OUS. Worldwide orthopedics revenue grew 12.7% in the second quarter.

In the US, Orthopedic sales declined 0.8% and internationally Orthopedic sales increased 20.7%. Total worldwide general surgery revenue increased 7.7% in the quarter. US General Surgery revenue grew 5.7%. Internationally general surgery revenue increased 12.0%.

As many of you are aware, the OEM side of our Buffalo Filter business has been lumpy in its order,s and has been a drag on an otherwise strong performance on the direct side. The Buffalo Filter direct business, combined with AirSeal continues to grow around 20%.

Thankfully, the Buffalo Filter OEM business now represents less than 10% of the combined AirSeal and direct Buffalo Filter business. Now, let's move to the expense side of the income statement.

We will discuss expenses and profitability in the second quarter, excluding special items which include charges for acquisitions, legal matters, debt changes, amortization of intangible assets and amortization of deferred financing fees and debt discount net of tax.

Adjusted gross margin for the second quarter was 54.9%, a decrease of 50 basis points from the prior year quarter. This was better than we anticipated for the second quarter, but we have seen no improvement in the inflationary or supply chain challenges, we discussed last quarter.

Therefore, we estimate that our gross margin will stay around 55% in Q3 and Q4. I'll remind you, that we estimate that if freight and materials remained at the 2019 prices, our gross margin would be about 300 basis points better.

Research and development expense for the second quarter was 4.1% of sales, 30 basis points lower than the prior year quarter. Our R&D investment grew over the prior year, but not as much as sales did. We continue to expect R&D to be between 4% and 5% of sales going forward.

Second quarter SG&A expense, on an adjusted basis was 38.1% of sales, a decrease of 20 basis points from Q2 2021. We are getting the returns on our sales force expansion from last summer and expect those returns to increase over the coming quarters. On an adjusted basis, interest expense was $4.9 million in the second quarter.

As Curt mentioned, we refinanced a portion of our outstanding debt during the quarter. We issued new convertible notes using the proceeds to pay off a majority of the existing 2024 convertible notes and locking in an interest rate of 2.25% through May of 2027.

The combination of new convertible notes with the associated hedges and fees and the recent acquisition will have a meaningful impact on interest expense and share count going forward. We expect our interest expense to be about $6.5 million in Q3 and Q4. These new notes allow us to record fewer shares in the diluted outstanding share count.

Because the calculation changed mid-quarter with the new notes, the adjusted diluted share count only came down about 1 million shares from Q1 to average 32.7 million shares in Q2. You should plan on Q3 being at least 1 million shares less than the Q2 number.

The adjusted effective tax rate was 25.5% in Q2, a little higher than our communicated 24% to 25% range. I've been telling you quarter after quarter to expect the tax rate to be higher in the future. And unfortunately I have finally been proven right. We expect the tax rate to be close to 25% for the remainder of the year.

Second quarter GAAP net loss was $168.3 million, due mainly to the charges associated with the extinguishment of the old convertible notes. This compares to GAAP net income of $13.3 million in Q2, 2021. GAAP earnings per diluted share was a loss of $5.65 per share this quarter compared to earnings per share of $0.41 a year ago.

Excluding the impact of special items discussed earlier, we reported adjusted net income of $24.8 million, an increase of 11.8% compared to the second quarter of 2021. Our Q2 adjusted diluted net earnings per share was $0.76, an increase of 7% compared to the prior year quarter. Turning to the balance sheet.

Our cash balance at the end of the quarter was $53.2 million compared to $24.9 million as of March 31. Accounts receivable days as of June 30 were 64 days compared to 68 days at the end of Q1. Inventory days at quarter end were 192 compared to 215 at March 31. We continue to build inventory to mitigate supply chain challenges.

Long-term debt at the end of the quarter was $982 million versus $704 million as of March 31. The change is due to the acquisition of In2Bones and the fees and charges associated with the new convertible notes. Our leverage ratio on June 30, 2022, was 4.7 times compared to 3.5 times on March 31.

Cash flow provided from operations for the quarter was $18.7 million compared to $34.3 million in the second quarter of 2021. The difference is due to the increased working capital in 2022. Capital expenditures in the second quarter were $5.7 million compared to $3.0 million a year ago. Now let's turn to financial guidance.

First let's talk about currency. Our hedges had done their job of keeping currency to an immaterial impact through the first part of the year. But with the recent strengthening of the dollar, we now see between 150 and 200 basis points of currency headwind to revenue in the back half of 2022.

For the full year 2022, we estimate the currency headwind to revenue to be between 100 and 150 basis points. From an adjusted EPS perspective, currency is driving approximately $0.10 of incremental headwind compared to a quarter ago.

So we are lowering our revenue guidance range for the year by $10 million due to currency, from the old range of $1.105 billion to $1.150 billion to the new range of $1.095 billion to $1.140 billion. This represents organic constant currency growth between 8% and 12%.

We provided a detail of the pieces of our revenue guidance in the investor deck associated with this call. We are also lowering our adjusted EPS guidance range for the year from the prior range of $3.50 to $3.65 to a new range of $3.40 to $3.55. This updated range includes the $0.10 from negative currency impact.

This represents operational growth between 12% and 15% inclusive of and despite the cost challenges of 2022. We've also provided a detail of the pieces of our adjusted EPS guidance in the investor deck associated with this call. Because of all the moving pieces, we thought it would be helpful to give clear top and bottom line guidance ranges for Q3.

We expect reported revenue in Q3 to be between $275 million and $290 million. And we expect adjusted cash EPS in Q3 to be between $0.78 and $0.84. The current macro environment poses unique challenges that are impacting the entire health care industry including us. None of us like lowering numbers.

However, the cost challenges we are all dealing with are unprecedented and essentially remove our ability to soften its latest currency move. We are focused on strengthening the long-term health of the business and the In2Bones acquisition is our most recent example of that. And in the short-term, our business momentum remains strong.

In Q2, we grew organic revenue by 9.0% against our strongest quarter of 2021 and we expect Q3 and Q4 to grow double-digits. When the cost challenges subside and they will at some point, we are excited about the profitability of this improved growth and margin engine can provide.

And with that, we'd like to open the call to your questions and I'll hand it back to Howard..

Thank you. [Operator Instructions] Our first question or comment comes from the line of Rick Wise from Stifel. Your line is open. .

All right to you both. Maybe I'll start -- just maybe you could expand on your comments both of you said emphasized the strong business momentum. And Todd your comments about third and fourth quarters growing double-digits, sort of, emphasizes that.

But maybe Curt you could give us a little more color on the drivers of that momentum I assume it starts with the expanded sales force. You alluded to that.

But is it particular products or geographies that you're particularly thinking about as we talk about is it broad-based? Is it narrow? Just help us better understand what you were trying to tell us?.

Yes. I think it's a combination of things Rick. I think we feel good about the sales force expansions where they are how they're getting traction. We think we have a pretty good product portfolio. That wasn't built overnight. That's been building over the years.

On the Orthopedic side of the business, we started the year at Academy with a big product launch demonstration of new products that were going to be coming to the market. On the general surgery side, we have a pretty robust portfolio really paced by AirSeal and the Buffalo Filter offering. And these are all global offerings.

And then as we tried to highlight -- strength is really pretty broad-based across the company right now. So I wouldn't point to one specific thing. I think its a combination of all those. And then to be fair and equitable here the third and fourth quarter last year were COVID challenged. So the double-digit growth is coming against a soft comparable.

But underlying all of that is a nice momentum as a business has built. And we're hopeful that the surgical staff shortages that are I think delaying the ability for surgeries to be completed will slowly start to subside but that remains to be seen. So we're not banking on that.

We're kind of thinking things will be status quo and hoping that our teams continue to do their best and that the marketplace gets a little healthier in terms of surgical staff. .

I'd like to follow up on the In2Bones comments. It all sounds like the integration is going extremely well. Curt, we did, sort of, late June spoke to a number of ortho surgeons and pediatrics to better understand what basal is the outlook and prospects for In2Bones. And got great feedback.

People loved the breadth of the product line the reps just -- there are many things that they cited and we wrote about. But it was clear to me coming out of those discussions that you also have a big opportunity.

They emphasize the importance of sales force a big opportunity to take the current business and expand it, but that's going to be sales force driven.

Can you talk about your updated thoughts on how you're going to grow it? How you're going to stage this and just the outlook now a couple of months in from that perspective?.

Yes, we're 45 days in. And as Pat alluded to everything is directionally moving the way we would hope and in the direction we would hope. And it gives us a lot of optimism about the long-term outlook of the building.

And I think just fundamentally we'll run it the way we've run the other businesses within CONMED and that is a focus and continued innovation and expanding the sales force for deeper and broader coverage as appropriate.

Outside the US it's about product registrations and product approvals getting those items into the market and building a more direct or as appropriate distributor sales force. And I think Pat is sitting here and he's got all those things on his agenda with Alan and with Stephane who runs international.

So I think it's just more of our basic cooking if you will how we're going to run the business.

Pat would you add anything else to that?.

No, Curt. Again I think we have an offense that we've been running on our other sides of the business, which is invest in the sales force responsibly and innovate with passion and we're going to follow that offense with a business that has experience doing that.

And under our platform and our scale and our structure, we think we can accelerate the business with them..

Thank you..

Thanks, Rick..

Thank you. Our next question comment comes from the line from of Robbie Marcus from JPMorgan. Mr. Marcus, your line is open..

Great. Thanks for taking my question. Todd, I was hoping you could walk us through some of the quarterly dynamics. It was really helpful to get third quarter guidance. But with gross margins in that 55% range for third and fourth quarter. It looks like you're probably going to need a big step down in SG&A to get to the EPS guidance.

So maybe just walk us through one, is that the right way to think about? And two how do you get there?.

Yes. There's a few moving pieces from what you probably have in your models Robbie. Gross margin is one and we think that 55% range is probably where we're going to live for the next six months.

Interest expense is going to go up, if you didn't properly model from the acquisition and the changes in debt, so $6.5 million per quarter in interest expense is about where you should be. And then where you'll pick up – we are going to continue to be judicious of course. And like I said we expect to get good returns from our SG&A investments.

But I think while you'll probably get some help in your model is the share count and that's really complicated and probably not – probably didn't already adjust those numbers. But – like I said, the Q3 share count should be at least $1 million less than the 32.7 million shares that we averaged in Q2 because of the new convertible notes.

So hopefully, those major pieces and the rest of your models hopefully will work..

Yes. I'll have to – I can't be that fast. I'll plug it all in and hopefully, it all makes sense. It's a little premature here to start asking about guidance for 2023 but I thought maybe if we could just spend a minute on some of these headwinds. Some of them are incremental.

Some of them look like they're going to probably be structural and stay here for a while. How are you thinking about the potential some of these headwinds to abate or stay into 2023.

And do you think we might get back closer to a normal operating margin expansion year next year, or do you think it will likely be below trend given some of these headwinds that are here?.

Terrific question. I know that's what's on everybody's mind. Unfortunately, you are about six months early, Robbie. We're going to talk about 2023 in January. But look, I'll try and be as helpful as I can. I'm not sure I'm going to tell you anything you don't already know. There's no telling where currency goes.

If currency stayed where it is right now, all the way through 2023, then I think you're right I think currency is a headwind going into 2023 again, I'm not prepared to quantify that for you. But I would say the current rates make a headwind for next year.

I think pricing probably maybe for the first time in Medtech's history or at least in our lifetimes, pricing probably turns positive. So that will be a help to gross profit. Our mix continues to be a tailwind, right? Everything that's growing really nicely also comes at a much higher gross margin. In2Bones is the latest example of that.

So that's – that provides some tailwind. And then you get into this inflationary environment. And how long does this last? And when do freight rates start to normalize. And when does the supply chain ease up.

We continue – I told you a quarter ago that we were at two days of sales in back order, which I think is the lowest I've heard from many of our peers. We're now a quarter later, we're at four days in back order four days of sales.

What's interesting in that change is that about a day of that or 25% of our current back order is actually due to competitive back order. So our orders have dramatically increased on some product lines where the competition can't provide and that's actually driving now our back order up.

So we'd be at three days of sales without that but we currently sit at four days of sales and back order. So – and I can't tell you when that's going to change and that will have a big impact, right? When that starts to alleviate, you pick up those extra days of sales.

And so, I would expect the tax rate to remain in that 24% to 25% range, probably as we go into next year. And then -- so the biggest factor of course is gross margin. And that's where those inflation costs are and it's just really hard to predict the duration of what we're seeing today. So I don't know how much more to help you with 2023..

No, that’s all helpful. I appreciate it. Thanks for taking the questions..

You bet..

Thank you. Our next question or comment comes from the line of Travis Steed from Bank of America. Mr. Steed, your line is open..

Good evening, and great quarter guys. Thanks for taking the question. I guess just -- first of all, just to be clear, the only change in the guidance was FX. It looks like you basically took all the margin medicine last quarter for the year. So I just want to make sure that's right, given all these other companies are making an extra margin pressure.

And then on that 300 basis points of headwind and just talk through exactly what some of those pressures are and how long it takes to roll off the balance sheet or is it three months, six months, just trying to think through like what's already kind of embedded in the P&L?.

Yeah. So yes, you're exactly right. The change to guidance today was currency only. So we did take our medicine last quarter, I think for a lot of the inflationary pressures which remain. I would say they've gotten probably incrementally a little bit worse since we talked but the only change to guidance is currency today.

The 300 basis points that we talked about Travis was last quarter we talked about we went and looked at simply a freight and material costs were still at the 2019 levels, right? So if those were still indexed to 2019 costs, our gross margin would be 300 basis points better today.

So when does that roll off and when does it get better? I mean, your guess is as good as mine. So when freight returns to 2019 levels and when material availability and cost return to rational market-driven forces.

Then it will -- it does take 5-ish months, five to six months for that to work its way through the inventory and then into the external P&L and that's how -- that's the flow you should expect..

Okay. No, that's helpful.

When you think about -- obviously there are a lot of unknowns for 2023, but maybe you could just talk about some of the underlying gross margin expansion that natural 50 to 100 basis points a year that you've been getting, your ability to still achieve that and then we can kind of bake in their own assumptions on the headwinds? And then I don't know if Curt has any comments on the hospital capital spending environment that would be helpful too? Thanks for taking the questions..

Sure. So again, mix is our biggest tailwind on gross margin. And we've talked about before that now greater than 25% of the business is AirSeal and Buffalo and those are both margin accretive and growing very nicely in the 20% range or better. And the -- and then we've added In2Bones which is at 80% margin.

So a smaller dollar amount from a sales contribution, but a significant contribution to margins. And so those growth drivers provide the tailwind to mix which are helping us despite the inflationary challenges.

Curt, you want the capital you want to talk about the capital?.

I'm sorry. Yeah, Travis, on the capital environment, I'd just remind everybody our capital is on the smaller end in terms of the absolute purchase dollars required and it's also items that are needed to perform surgery. You don't do surgery, if you don't have our capital items.

So we've not seen any tremendous softening in the demand for capital at this point in time. I think it remains to be seen, if it's going to continue based on the external market. But as of this point in time, I'm not hearing anything different from customers regarding their capital appetite.

And we had a very good capital quarter outside the US markets in Q2 which was great to see as well..

Thanks for that..

Thank you. [Operator Instructions] Our next question or comment comes from the line of Mr. Mike Matson from Needham & Company. Mr. Matson, your line is open..

Yeah. Thanks for taking my questions. I had one about the Orthopedics and General Surgery business. This is the first time I remember in a while that Orthopedics grew faster than general surgery.

Maybe it was a comp issue similar to what you said about the US versus OUS growth rates, but I just wanted to see if you had any comments there on the difference between them?.

We had -- we have 65% of our Orthopedics business is outside the US.

You see that in our investor deck and we had a really strong Orthopedics performance and it's combination of all those things we've typically done which is sales force expansion, new product cadence, getting new products into the international markets sometimes a little bit longer registration. So it takes a little while longer to get them there.

But underneath our Orthopedics business and the pure sports medicine category, the pure anchor soft tissue repair we had a very good quarter, which we think is a good underlying sign for the momentum and direction of the overall business. Obviously, still more work to do in the US market.

Pat has had that responsibility since October of 2020 and he's brought in a new team and that new team is largely responsible for driving the day-to-day activity and new product cadence and really doing nice work. And I'm very confident our US business is going to start moving forward here in the quarters ahead. .

Okay. Thanks. And then just on the Buffalo Filter OEM business. It sounds like that was a little bit of a drag on the Buffalo Filter overall. What's the outlook or expectation for the growth of that portion of the business going forward? I know it's only 10% of the combined of Buffalo Filter and AirSeal but--.

Yes. And as we've talked about this before Matt, Q2 actually was kind of the last strong order book from them. And so the comps get quite a bit easier as we now move past Q2. So -- but we're going to continue to judge the business on what the direct business does. The OEM business will be what it is, but our focus is on the direct business. .

Okay, got it. Thank you..

Thank you. Our next question or comment comes from the line of Matt O'Brien from Piper Sandler. Mr. O'Brien, your line is open..

Can you guys hear me okay?.

We can..

Okay. All right. Sorry something's going on with this new system. So, apologies for that. So, Todd I just want to maybe put a finer point on the expense structure of the business right now.

Are you saying that we're starting to kind of see the top here in Q2 as far as the inflationary pressures and maybe we should start to see some of the pressures abate starting in Q1 or Q2 of next year, or is it going to linger just because you've got a lot of inventory and if it all to turn that because -- the Street is just modeling pretty meaningful increases in operating margins next year and I just don't think that's going to happen.

So, it'd just be helpful if you can kind of give us some sense for how to think about how things flow through from the balance sheet to the income statement over what time period?.

Yes. So, because we have five to six months of inventory on hand now at this point, we are fairly locked in for the rest of 2022. So, I have a pretty good view of where those margins should be.

And so beyond that though Matt it depends on what happens in the real world starting today, right? So, if inflation starts to go down and that gets changed in freight rates and material costs.

Then whenever that -- whenever -- I'm not the one projecting when things crest right? But when they start to go down that will be recognized in our external P&L five to six months after that. So, if -- now -- so what we've -- we think that those inflationary pressures are pretty similar to where they were three months ago.

Freight as -- well, oil is a little better we haven't really seen the requisite decline in freight rates yet. But I do assume that freight following the price of oil should start to moderate a little bit and probably just a little bit. And -- but we haven't seen any real changes in the material cost.

I think those have gotten incrementally worse from three months ago. And so where that goes from here is above my control. But -- so, yes, we're not saying that this is the worst and gross margins shortly get better.

But hopefully things have stabilized and if they can get better, which seems like they could, then our margins will get better, but there will be a delay by a couple of quarters before that shows up in the external P&L..

Okay. It seems to me like Street probably a little too high for next year then. Okay, we'll take care of that. And then I don't want to make a mountain out of a molehill here, but Curt I think you said smoke and our Buffalo and AirSeal grew around 20%. I know it's getting to be a much bigger part of the business now.

So I'm assuming it's not well above 20% it's probably a little less than that. I would love to hear a little bit more about what's going on in that market. You've got a bunch of states that are mandating it now much more that are about to I think are pending -- is the market still healthy? Are you starting to see the impact of competition.

There's some bigger players there that are rattling some gauges a little bit more about their position in those categories or one of those categories anyway. So -- would just love to hear if the market is still healthy, you're still doing well or if you're starting to see maybe some competition creeping in a little bit..

Matt I would tell you I still feel really good about our Buffalo Filter smoke business. I -- notwithstanding the challenges of the up and down of OEM the direct offering is doing well. It's doing well outside the US. It's doing well in the US.

And if there's been any interruption, it's been the staff shortage issues at hospitals, slow down a full hospital implementation of a Smoke Elimination program. The appetite for smoke elimination remains very high. The legislative change state-by-state is beneficial as we've said. And that still has a long way to go candidly.

So, I'm not saying in any way shape or form that CONMED is backing off of our smoke position. We feel very good about the portfolio. And we still have a market-leading position. We're going to continue to work hard to maintain that market-leading position..

Okay. Great to hear. Thanks so much..

Thank you. Our next question or comment comes from the line of Matthew Mishan from KeyBanc Capital. Standby. Mishan, your line is open..

Thank you for taking the questions. Just, first one on me, thank you very much for the color on the composition of OEM at this point in Buffalo Filter.

Just curious about why that's been a drag, if it's just your focus on your primary business, and whether any of the previous customers are now in the market with their own solution?.

We're not aware of any of the previous customers. Well, we have contracts with the customers. So, we haven't lost any contracts. It's what they buy under the contract that has been the up and down. So, I wouldn't say, I'm aware of anybody who's been more aggressive. One company did an acquisition of a product line. They have an existing portfolio.

They were buying from us from Buffalo Filter when we acquired it. But other than that, I'm not aware of anybody else who's brought their own direct product into the market..

Yes. Matt, I think it's as simple as inventory levels. With the ups and downs of the market, if you remember, last summer, everybody thought vaccines are out and everything is going to be gangbusters in the back half of 2021.

And I think people ordered up a lot of inventory, because this product line is -- like Curt said, I mean there's huge demand for -- a huge need for it.

And I think people stocked up their shelves assuming a really strong back half of 2021 and then, of course, Delta hit and then Omicron hit, and -- and so, I think they've been burning through inventory. And I think it's probably that simple. We know we're growing faster than them from an end demand standpoint.

But I think it's really a function of buying a lot last year when everybody expected the back half of 2021 to be different than it ended up being..

Okay. Thank you for answering that. And then, on just -- I know you don't want to talk about 2023. You spoke about that a little bit earlier.

But just if FX remains at current rates into next year, how should we think about headwind from unwinding hedges and kind of where would we see it?.

Well, you'd see it -- we are -- I'll remind everybody, we are pretty well naturally hedged around the world. So, where we have significant business, we also have a footprint. And so, we are naturally hedged pretty well and then we synthetically hedge all of our major currencies that we do business in. We have revenue hedges. We have cost hedges.

And they -- that's why other people have been talking about currency earlier this year and our hedges were protecting us from the near-term volatility. But those bills eventually come due and with this recent move over the last three months -- it's having the impact that we outlined today on 2022.

The impact on 2023 is actually still not yet determined, because not all of those contracts for 2023 have even been purchased yet. And so, it's impossible for me to quantify that for you today. But, currency, you never know where it's going to go.

But if you assume that everything froze where it is right now and didn't move for the next 18 months, I think it's safe to say that currency would be a headwind for 2023 on both the top and bottom, but I'm not prepared to quantify that for you today..

All right. Thank you very much..

Thank you. I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to management for any closing remarks..

Thank you, Howard, and thank you everybody for joining us for the call this evening, and we look forward to speaking with you again in the future. Thank you..

Ladies and gentlemen, thank you for participating in today's conference. This concludes. You may now disconnect. Everyone have a wonderful day. Speakers standby..