CONMED Corporation
Q1 2009 Earnings Call Transcript

Published: 23 Apr 2009

[Operator:]

Good day ladies and gentlemen, and welcome to the First Quarter 2009 CONMED Earnings Conference Call. My name is Shantley (ph) and I will be your facilitator for today's call. At this time, all lines are muted. We will have a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Joseph Corasanti, President and CEO of CONMED. Please proceed, sir.

[Joseph J. Corasanti:]

Thank you, Shantley (ph). Good morning everyone. Welcome to CONMED Corporation's first quarter 2009 earnings conference call. With me today is Rob Shallish, our Chief Financial Officer. After formal remarks, the call will be open for questions. Before we begin, let me remind you that during this call we will be making comments and statements regarding our financial outlook which represent forward-looking statements that involve risks and uncertainties as those terms are defined under Federal Securities Laws. Our actual results may differ materially from our current expectations. Please refer to the risk factors and other cautionary factors in today's press release as well as our SEC filings for more details on factors that may cause actual results to differ materially. As you will also hear Rob and me refer to certain non-GAAP measurements during this discussion. While these figures are not a substitute for GAAP measurements, company management uses them to aid us 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. Non-GAAP net income and non-GAAP earnings per share measure the income of the company excluding credits or charges that are considered by management to be unusual or outside the normal ongoing operations of the company. These unusual items are specified in the reconciliation in the press release issued this morning. With these required announcements completed, I can now turn to my comments. As you all know, the last six months has been an extraordinary and difficult period in the world's economy. As it relates to healthcare, we have seen that hospital managers in many cases have taken actions to preserve their cash resources by delaying the regular replacement of medical equipment. Also in the last three months, while the company's single-use product sales were relatively stable in constant currency compared to the first quarter of 2008, we recognize that we did not experienced the 8.4% constant currency growth that we've reported in the fourth quarter of 2008. This leads us to believe that there has been a slight effect on the growth rate from delay of the surgical procedures. These delays in procedure volume and capital equipment purchases were more pronounced than we had anticipated when we last spoke to you over two months ago. Consequently, CONMED's first quarter 2009 sales and earnings came in below our expectations. Although the overall economic instability has presented our business with short-term challenges, we have steadfast in our belief that the company is well positioned for future enhanced growth. The economic slowdown will reverse in due course. The positive demographics for healthcare have not changed and in time, the pent-up need for capital equipment replacement and for surgeries will once again trade enhanced demand for the medical devices of our company as well as for other medical technology providers. Specific to COMNED, our confidence is rooted in the fact that the capital equipment we sell is used daily in surgical suites around the world in very common surgical procedures. For example, our surgical video systems are the capital equipment portion of our Endoscopic line. They are used routinely in both arthroscopic and general surgery and have been the standard of care for over 15 years. Mainly in base of surgery in the abdominal area as well as the joints is enabled by surgical video systems like ours. They provide the surgeon with the visual images necessary to perform the minimal access surgery. Without these video systems, surgery would be performed the old fashion way with large incisions that lead to lengthier patient recovery times. Surgical video systems are found in most every hospital operating room because minimal access surgery is pervasive these days. These systems are computer controlled and require routine maintenance. Just like the laptops and computers we use... we all use today these systems need to be replaced on relatively regular basis. The same is true for the powered surgical instrument hand pieces, the capital component of the powered surgical instrument line as well as the Electrosurgical generators, the capital component of the Electrosurgery line. Powered instrument hand pieces have many moving parts and are sterilized after each surgery in auto claves having high temperatures and humidity. We recommend routine maintenance and many customers due take advantage of our service. Even so after a few years of use the hand pieces need to be replaced. Electrosurgical generators have found in every operating room in the world and are used in 90% of all surgical procedures. As with the video systems, these units also must be replaced after a few years of use. In the first quarter of this year, it was evident that hospital administrators continued with the cash conservation measures that we saw in the fourth quarter of 2008, causing routine capital equipment purchases to be deferred. However, these deferrals can only last a short period of time before the regular surgical schedules of hospitals may be disrupted. The same logic can also be implied at the deferral of surgical procedures, injuries and diseases requiring surgical repair not affected by the economy. Therefore, the need for surgical repairs remains high due to the demographics of aging population, greater amounts of sports activity and the growth of in-population in general. Last year, CONMED's single-use products grew at a constant currency rate of 7.7%. In the first quarter of this year, single-use sales in constant currency declined 1.6%. We believe that some of the change in growth rate was due to the inventory management of distributors keeping their inventory replenishments to minimal amounts. The remaining cause for the growth rate decline we believe was due to deferred surgical procedures. We know (ph) these conditions are sustainable over the long-term and we believe that constant currency growth and the company's single-use device sale should return to the expected normal rates of growth of 6 to 8%. When precisely that will occur is difficult foresee, but we are confident in our belief that our distributors will need to restock and that any of the surgeries that were deferred will need to be conducted at some point in the future. Also fueling on our significant long-term expectations is the prospect of new products, including the ECOM monitoring system for Cardiac Output and the soon to be released tissue sealing product. We are also in the final stages of development of an addition to our sports, medicine Arthroscopy product group which should add to the growth from the outline (ph). With respect to ECOM, we have now installed 98 monitors in over 40 institutions in the United States. Usage of the related disposable Endotracheal Tubes is increasing and while revenue is not yet significant, we have every reason to believe that the system will continue to gain traction because the desired monitor, cardiac output on a minimum and basic manner during surgery is the unmet need of anesthesiosis. Tissue sealing is still on target for our third quarter release. As we have discussed in the past, this product will compete for our position in current market estimated to be approximately $1 billion. We believe that features and benefits of our device will enable us to compete favorably against present market participants. So, to summarize a discussion on revenue prospects. We anticipate that the company should return to normal rates of growth as the economy begins to stabilize. Much like water backing up behind the new constructed dam. The built up need for our capital equipment and single-use devices related to surgical procedures will eventually release and return to a normal flow of revenue. Further, the sales growth should be aided by the effect of the new products coming on line. Now turning to the company's cost structure, we've recognized that the current economic environment requires management to be even more prudent with the company's expenditures. Last summer, even before the economy was significantly affected by the recession, we announced an 18-month manufacturing restructuring plan that included the combining of manufacturing facilitates and the establishment of the new manufacturing facility in Mexico. Although we have incurred additional cost during the current implementation phase, we have continued with the project knowing that the long-term benefit of our manufacturing cost structure will far outlay the start-up costs. We have now implemented much of this restructuring plan and we are manufacturing various product lines in our factory in Mexico. While we still have a good deal of work due before the plan is completed, we are on schedule and anticipate that the expected cost savings will be realized fully in 2010. In addition to our ongoing efforts to improve the manufacturing cost structure, we have delayed the hiring for certain open positions, reduced production where there are sufficient finished goods on hand and frozen the company's defined benefit pension plan for the United States employees. All these actions have been taken knowing that we must keep the cost structure in line with the current business realties. However, we have not reduced our previously established sales, marketing and R&D activities which we believe are critical for the future prospects of CONMED. As we look to the remainder of this year, based on our discussions with customers and our own sales professionals, we believe that hospital spending for our capital products should start increasing from present levels in the second half of 2009. The demand is present; it's just a matter of implementation timing from many hospitals. With that said, for the current second quarter of '09, we are forecasting financial results which are similar to those reported in the first quarter. Mainly, we expect that revenues will approximate $162 million to $167 million and that diluted non-GAAP earnings per share should approximate $0.14 to $0.19 per share. For the full year of 2009, based on the first quarter's financial results and our outlook for the remainder of the year, we're revising our previous full year guidance. We now expect total year 2009 revenues to approximate $680 million to $690 million assuming currency rates remain consistent with those of the first quarter of '09. We expect that for the full year, the related diluted earnings per share on a non-GAAP basis will be $0.92 to $1.02. These non-GAAP estimates exclude the additional non-cash interest expense required by FSP APB 14, the net pension curtailment gain from the first quarter and all the manufacturing and restructuring costs expected to be incurred in '09 that are presently not determinable. A final word on our guidance, before I turn the call over to Rob. As you are well aware, these are extraordinary volatile times. I want to reassure you though, that we are doing everything possible to monitor closely the movements of the medical device marketplace and provide you with fortified estimates. As I said a short while ago, we are forecasting a second half rebound, that is based on what we are seeing and hearing from the marketplace today. Any shift in that, beneficial or otherwise, would of course impact our guidance. In conclusion, while CONMED has seen the adverse impact of the current economic volatility, let me reiterate that our products offering is sound, pent-up demand is present and we will return to increase profitability as the economy improves. Now I'd like to turn the call over to Rob Shallish for a further review of our financials. Rob?

[Robert D. Shallish:]

Thanks very much, Joe. Good morning everyone. Before jumping into the numbers, I thought it would be useful to spend a few moments on how the overall global economy continue to affect the company in our first quarter. While Joe has already discussed our performance relative to capital equipments spending by hospitals and procedure volumes, I would like to focus on three matters that impacted or will impact our business both positively and adversely. These items as in the fourth quarter are the market tally of the company's convertible bonds, interest rates and foreign currency translation rates. First, with respect to our convertible bonds, as many of you know the market for such bonds has seen significant change in the last few months. In the summer of 2008, our bonds were trading fairly closely to their par value. In October their market value declined by 20% and the company took advantage of this decline in the market value repurchasing $25 million of face value of the bonds and a discount last November. Additionally, in the first quarter of this year CONMED repurchased $9.9 million in face value of the bonds at a discount of approximately 21%, which resulted in CONMED recognizing an overall accounting gain of $1.1 million. Second, we have a seen a dramatic decline in interest rates in the last six months. The company's floating rate financings consist of three components. The first is a term loan of approximately $58 million. Second is revolving credit facility. And third is the off balance sheet securitization program with a discount on the sale of receivables tied to a floating interest rate with approximately $40 million outstanding. Thus, CONMED has approximately $98 million tied to floating interest rates. Interest on these facilities averages to LIBOR plus 125 basis points. With LIBOR at an all time low, we anticipate lower interest expense in 2009 as compared to 2008 as a result of the continued economic volatility. These two matters resulting from overall economic conditions had or will have a beneficial impact on the company. However, these benefits are more than negated by the change in foreign currency exchange rates compared to those of the first quarter last year. Over the last several years, the company has developed a well balanced geography based source of revenue, such that approximately 55% of sales are derived from customers in United States and 45% from outside the United States. Similar to maintaining a vast product portfolio which ensures that we are not overly dependent on any one specific product. Operating as an international organization ensures that we are not overly dependent on any one specific geography. Our international sales come from our direct sales operation in 12 countries and through independent distributor organizations in many of the other countries of the world. Approximately two-thirds of the international sales or 30% of our total sales come from our direct sales groups in the 12 countries where we sell on local currency of the country. We are well represented in the Euro zone with 40% of our direct international sales denominated in that currency; 25% from Canada; 15% from the U.K.; 15% from Australia and the remaining 5% denominated as South Korean won. In the past six months, the foreign currencies in which we sell our medical devices fell 15% to 20% in relationship to the U.S. dollar. While there is always some fluctuation in currency rates, such a dramatic and rapid change in these currencies has not occurred in recent history. This change resulted and reduced first quarter 2009 revenues of $13 million U.S. dollar that would have been achieved with the exchange rates from the first quarter of 2008. Because the company's manufacturing facilities are primarily based in the United States, the cost of our sales in U.S. dollars has been relatively unaffected by foreign currency translation swings. That means that the $13 million revenue reduction as a result of the foreign currency change has a direct impact on the gross margin. Now, we did see some modestly offsetting effects from the direct selling cost internationally from salaries, commissions, rents and other such local currency denominated expenses in our 12 international selling locations. As a net result though, the company's pretax income in the first quarter was adversely impacted by approximately $8.5 million. Now, I would like turn to the specific results for the quarter. In doing so, I would like to discuss comparisons to GAAP and non-GAAP financial amounts. It has been our practice to call out adjustments to the GAAP numbers, which we and management consider critical when analyzing our ongoing business operations and believe that investors may also find this information useful in evaluating our performance. In the first quarter of 2009, such adjustments increased GAAP pre-tax income by approximately $1.6 million. As I mentioned, the company recorded a GAAP gain of $1.1 million on repurchase of the convertible bonds that we have removed from the non-GAAP amounts. The company also recorded a net gain for GAAP purposes of $1.9 million related to the freezing of the company's defined benefit pension plan. This gain results from an adjustment of actuarial computations associated with the freezing of the pension plan as more fully described in this morning's press release. We have also removed this net gain from the non-GAAP EPS computations. Conversely, there are clauses included in the GAAP amounts that we add back to arrive at non-GAAP EPS. Similar to the fourth quarter of 2008, the company incurred first quarter 2009 costs totaling $3.5 million related to the implementation of the previously discussed manufacturing restructuring plan. Also, as we have previously stated, we're required by the FASP to record additional non-cash interest expense on the company's convertible bonds starting in this first quarter of 2009. This charge amounted to approximately $1 million on a pre-tax basis, and we have adjusted for this item in a non-GAAP calculation or compared the purposes the new pronouncement also requires retroactive application. So, we have also adjusted for this item in the first quarter 2008 non-GAAP calculation. In the first quarter of 2008, there was also a $1 million non-GAAP adjustment related to the purchase of our distributor in Italy. So on a GAAP basis, the company's diluted earnings per share for the first quarter of 2009 were $0.15 per share, while the non-GAAP EPS for the first quarter of 2009 was $0.19 per share. Now I'd like to turn to a discussion of our margins. But to compare properly with the first quarter of 2008, I need to describe two adjustments. Our gross margin percent of sales on a GAAP reported basis was 46.5% in the first quarter of 2009. Adding back the 2.9 million in manufacturing restructuring costs included in cost of sales. The pro forma gross margin percentage was 48.3%. Lastly, adding back the $13 million of constant currency effect to both the sales and gross profit, the resulting gross margin percentage is 52.1% in the first quarter of 2009 compared to 51.7% in the first quarter of 2008 which also includes 2008 pro forma adjustment for purchase accounting. So from an operational standpoint, after adjusting for the restructuring and currency, the gross margin percent this first quarter is slightly better than that of the first quarter of 2008. SG&A expense, while lower in absolute dollars by $6.8 million, increased as a percentage of sales to 37.7% in the first quarter compared to 36% in the first quarter of 2008. The increase in the percentage is primarily a function of reduced sales as only one-third of our SG&A costs are variable in nature such as freight costs and commissions. Research expenditures were 5.2% of sales in the first quarter of 2009 compared to the 4.2% of sales in the first quarter of 2008, with the increase in percentage a result of the lower sales denominator. The net of these changes results on a GAAP operating margin for the 2009 first quarter are 4.5% compared to the GAAP operating margin of 11% in the 2008 first quarter. However, on an operating basis backing up the unusual items from both years and adding back the pre-tax effect of first quarter foreign currency, the adjusted operating margin for the first quarter is equivalent to 9.8% compared to the 2008 first quarter adjusted operating margin of 11.6%; the decrease in the pro forma operating margin percentage as a result of the lower sales denominator. Interest expense excluding a non-cash interest expense of the convertible bonds was $1.4 million compared to interest expense of $3.2 million in the first quarter of 2008. The reduced interest cost resulted from lower debt levels, as well as a decrease in rates compared to a year ago. The company's income tax rate in the first quarter of 2009 was 23.9% compared to 38.5% in the first quarter of 2008. The reduced effective income tax rate is a result of the completion of the 2007 IRS audit of the company and a reversal of approximately $800,000 in amounts the company had previously reserved for potential adjustment. As mentioned in past conference calls, payment of nearly all of this tax provision is deferred to future periods because of differences in reporting expense for financial accounting, compared to tax accounting thus increasing the company's current cash flow. Now turning to balance sheet, that company's cash balances are approximately the same as December 2008. The company's balance sheet debt increased to approximately $4 million since December 2008. Although our usage on the receivable securitization facility declined $2 million, which results in a net $2 million increase in financing since the end of last year. As a result of the company's earnings, debt-to-total book capitalization declined slightly to 25.5% at March 31, 2009 compared to 25.6% at the end of December 2008. Because of the required retroactive restatement for FSP APB 14 affecting our convertible bonds, these debt-to-total book capitalization amounts are slightly less than what we have previously reported due to characterizing a portion of the convertible bond as equity rather than debt as required by the new pronouncement. Our days investment in inventory at March 2009 was equal to 166 days, above where we have been running in the last several quarters. In absolute dollar terms, the company's inventory balance stay consistent with that of December 2008. Accounts receivable days in March 2009, adding back the effect of the $40 million utilization of the securitization facility or 72 days in line with our historical average. In absolute dollar terms, receivables have decreased since December 2008. Now, with that, Shantiley (ph), we would like to open up the lines for questions.

[Operator:]

(Operator Instructions). And your first question comes from the line of Dalton Chandler of Needham & Company. Please proceed.

[Dalton Chandler:]

Hi, good morning. Let me just start with your new guidance. You had included some specific FX assumptions in your previous guidance. Can you talk us through what the current assumptions are and if its changed from the previous assumptions?

[Joseph Corasanti:]

Yes, Dalton. The assumptions that we were using previously, tied revenues and expenses to currency rates on average of the fourth quarter of 2008. Now, in the first quarter of 2009, it really wasn't too much of a change from those assumptions with perhaps the exception of the British pound which became weaker than expected compared to the U.S. dollar. So, the assumptions going forward are basically the same that we've used in the past, that there would be... exchange rates would be similar to what occurred in the fourth quarter of 2008.

[Dalton Chandler:]

Okay. And then, Joe you've mentioned that you were anticipating an improvement in the hospital market in the second half. Some of your competitors have said similar things; other haven't. Could you just talk about what you have seen or what you are seeing in the market place today that leads you that conclusion?

[Joseph Corasanti:]

Yes. What we saw certainly in Q4 and then in Q1 is a significant slowdown in capital. We did not anticipate a slowdown in disposable sales in Q1, although we did some of that. So, we're forecasting some of that going forward into Q2. So as for the second half of the year, the point of your question, we do see that we're expecting pent-up demand just as result of surgeries needing to be performed and the replacement cycle of capital certainly needing to be performed as well. We just don't see our customers being able to differ much longer than Q3 and Q4.

[Dalton Chandler:]

Okay. Well, at this point are you seeing for example any increase in request for demos?

[Joseph Corasanti:]

Its interesting. What we're seeing is a couple of high profile accounts where, for example 60 generators were evaluated in Q1 and in fact the evaluation, I believe began in Q4 and flowed over into Q1 and we expected that a few except to the evaluation has completed that the sale process would be completed and it was interesting for us to see that that was taken off from the table because of the cash conservation measures being exercised by the hospital. What we know is that this hospital needs these generators and they all attempt to delay the purchase for a few months but we just don't think it's going to go on much longer than that. So its just one example we're using to see to point out the pent up demand is building and we think it will be released.

[Dalton Chandler:]

Okay. And can you just remind us and I guess a normal market, from the time, a prospect or request and evaluation and until they place an order. How long is that usually?

[Joseph Corasanti:]

It really varies from order-to-order and customer-to-customer and with capital equipment evaluations can last one to two months with then purchase orders coming fairly shortly thereafter.

[Dalton Chandler:]

Okay. And with regard to the delay in procedures that you have seen, are there specific procedures you're seeing or is that an across the board issue?

[Joseph Corasanti:]

No, I think it's a little bit on the sports medicine side. In our prepared comments we talked about some of the surgical disposables being delayed. Its interesting, we can't really get arms around whether the surgical rates for general surgery procedures been delayed or it's just types of products that served those procedures, for example the -- lot of patient care products, the electrodes, but those go through distribution a larger box moving type distributor like (inaudible) etcetera. And we don't know, maybe they are just... that's been subject to inventory management at the large box mover type distributors.

[Dalton Chandler:]

Okay. All right. Thanks a lot guys.

[Operator:]

Your next question comes from the line Raj Denhoy of Thomas Weisel Partners. Please proceed.

[Raj Denhoy:]

Hi, good morning.

[Joseph Corasanti:]

Hi, Raj.

[Raj Denhoy:]

I wonder if I could ask just a little bit on the capital spending side, again on the part of hospitals, it sounds like you're fairly confident that we'll see resumption of spending on those items towards end of the year. But, when you sense -- if you look at some of the data its out their on over half of the hospitals operating or operating a loss right now, there is some sporadic talk of hospital bankruptcies. What gives you the confidence that these items, if its powered instruments generators that these can't be delayed indefinitely. In a sense hospitals have this equipment already, can they just continue to wait?

[Joseph Corasanti:]

Yeah, our experience is that, you cannot do surgery without the video powered instruments and electrosurgical generators. So, if these items can no longer be repaired, they have to be replaced or the operating room will be shutdown. So, that's our base line. I mean, we fully recognize that as long as the economy remains in recession and hospitals continue to have financials troubles and struggle that there will no longer by technology upgrades. We fully understand that, and we've taken our numbers down to accommodate that assumption. And so with that really specifically addresses is our high definition video sales, those sales were always a combination of technology upgrade and replacement. While the technology upgrade part of a sale is gone and our assumptions going forward are only on replacement. And those products are routinely broken, the sculpture dropped and sometimes they can be repaired, sometimes they can't. They need to be replaced. And the same is true for the console; the video consoles. They just wear out over time. So they will have to be replaced.

[Raj Denhoy:]

Okay. So that does make sense. But there again, I mean, are you seeing more hospitals in a sense trying to repair rather than replace at this point. I mean, I'm clear that's in your numbers but is the pace of that picking up here?

[Joseph Corasanti:]

Our service revenue... we have a substantial amount of service revenue, but $20 million, $25 million, $30 million of service revenue every year arrives, generally associated with powered surgical instruments but to some extent the video equipment too. And we've not seen any significant change in that revenue. So, that revenue was is consistent I guess. What we would expect it to be. So we're not seeing any great change in revenue associated with our service activities. So, I guess that leads me to believe that hospitals are least servicing equipment as they have been, not necessarily deciding to increase the service to extend the life of any particular pieces of equipment.

[Raj Denhoy:]

Okay. And maybe just little bit on the margin structure, the cost structure. I guess several months since now the manufacturing improvement, it sounds like from your comments, you're seeing a little bit on the gross margin line. Now, is that increase attributable this point to the manufacturing in Mexico?

[Joseph Corasanti:]

Well, I think it's a combination of that to some extent, but also the lean manufacturing that we've put in place over a year ago here in upstate New York, I think that's helping as well.

[Raj Denhoy:]

So, when do you think we'll really start to see that because in our senses when we look at our model if we this rough metric of about 60% of your foreign currency impact falling through to your operating lines, you haven't shown much leverage and in fact obviously now your showing its kind of negative leverage given what's going on the top line, but there hasn't been really much movements in your operating margin line for several quarters, this positive movement. At what point do we start to see the spending notwithstanding what's going on the top-line, but when can we actually start to see some improvement in your cost structure because at all these initiatives that you're spending on right now.

[Joseph Corasanti:]

Right. No, I think we should start seeing improvement as we go through the second half. As Joe mentioned, we are expecting that the second quarter would be about the same in terms of financial results as the first quarter. So that means the margins are about the same. But in order for us to achieve the numbers that we've talked about for the full year that would mean we would have to see some operating margin expansion as we progress. So, some of it is just because of increased sales and we're leveraging the structure, which we've talked about a lot. Some of the other activities are the benefit from manufacturing changes. Now the full impact of the manufacturing change we don't think would be realized until 2010 however; just because we're still in the process of completing the manufacturing, restructuring and then if get into FIFO accounting where the benefit first goes to inventory and then rolls out into the P&L as we go through inventory turns.

[Raj Denhoy:]

Okay. So that's probably even later in 2010 when to start to see some of that improvement. Then just sort of lastly, the other place obviously, you can drive margins as few more to crooning kind of expense cuts. Things continue to deteriorate over the back half of the year. I know you've laid out some things you're looking at doing as far as not hiring and those sorts of initiatives. But do you start to take more drastic steps as you move into the back half of the year if you haven't seen the top-line improve at all in order to sort of drive towards your earnings targets.

[Joseph Corasanti:]

Well, everything is on the table, Raj, if things don't turn as we expect them to. So, we have thoughts, we have plans, we would prefer that the top-line increases as we expect it to and that we continue to grow our business. But certainly we'll be looking at everything if the economy does not improve.

[Raj Denhoy:]

So in a sense can we look at your new guidance then as maybe a little bit more concrete than previously. In a sense these are numbers that you'll manage the business towards rather than allowing it to fall if the top-line continues to deteriorate.

[Joseph Corasanti:]

Well in the short term, it's difficult to adjust the structure to any great extent. So I would say that much depends on the economy in terms of the meeting these bottom-line numbers rather than any adjustments we could make, any significant adjustment we could make to our cost structure.

[Raj Denhoy:]

Okay. Thank you. Operator

[Brad Even:]

I just want to follow-up on that last question I guess in terms of why base your cost actions on hope of a second half recovery versus being proactive in terms of taking cost out of the business?

[Robert Shallish:]

While it's a good question. We've taken cost out of the business. Joe talked about the freeze and open positions, certain open positions that we've done. We've frozen the pension plan which obviously has an effect on the employee group. We've done all the things that just probably better not to comment on.

[Brad Even:]

Your business is down double-digit from the first half of this year is there something institutional within the company that prevents you from taking some hard action in terms of rightsizing your cost structure so you can keep margins at in acceptable level, so you maintain adequate levels of profitability.

[Joseph Corasanti:]

I guess the answer is that in the short-term it's difficult to immediately impact significantly a change. And I'm talking one quarter and maybe even two quarters because of if there were change in employment of staffing, we're talking severance cost that we're going to incur. And so that doesn't necessarily create a short-term benefit. By short-term I mean three months, four months, five months.

[Brad Even:]

Why assume the best, I guess, I'm just curious why you wouldn't plan for the worst and hope for the best and get the cost. I mean you are somewhat you need here in an economic environment as quite opaque and you are not really taking other than things that are very logical, you're not addressing your fixed cost structure and I'm just a little bit concerned about that in terms of -- and I think its part of why the stock is as weak as it is, is that you seem to be hesitant to address the cost structure meaningfully.

[Joseph Corasanti:]

Well, Brad, we've talked about a number of the initiatives we have here and that we think are going to improve the business over the relatively short-term, the manufacturing, restructuring we're incurring cost there that are our current cost, but we think are going to benefit the organization in a relatively short period of time. We've already laid off here upstate New York, approximately 120, 130 people on our manufacturing operation. From the standpoint of new products, we're extremely excited about some of these new products, the tissue sealing item that comes on line, we think in the third quarter. The ECOM product which is currently on the market today, but we're expanding the usage of that through sales force that has been expanded frankly. There re other new products in the works that we've been working on particularly in the sports medicine line where we're trying to upgrade our single use sports medicine arthroscopy products for procedure specific items. And all of that takes certain amount of effort in work and cost. And we can see the finish line in place for some of these things and don't want to disrupt the meaning of those goals.

[Brad Even:]

Do you think that the relatively limited direct ownership of stock by numbers of the Board caused them to maybe react a little more slowly to the signals the market is sending to you vis-à-vis piece the stock price to perhaps become more aggressive in terms of addressing your cost structure.

[Joseph Corasanti:]

We don't believe... we believe these decisions would be the same whether they owned 20% of the company or the percentage that they own today. They have judiciary duty to make the proper decisions. And their interest are align with those of the shareholders. So, I don't know what else to say about that. I am sure that the Directors would probably buy more stock of that the financial means to do that. I can't speak for them now. I'm only one Director out of on the entire board. So I could tell you...

[Brad Even:]

Have you seen trends in April on the capital equipment side that give you hope that you're forecast for second half recovery is realistic?

[Joseph Corasanti:]

We saw some trends in March. So a lot of our information perhaps is anecdotal but we did see improved numbers in March. So only relative to January and February I think yeah, let me just follow-up on what Rob was talking about we started a lot of cost reduction initiatives 18 months ago. We're fallowing through on those initiatives and they are very substantial. We've consolidated now three factories down into one in the upstate New York area, we've moved from Warrens, Mexico to Tuwal (ph), Mexico, where we're planning on closing the service, the distribution etcetera in Al Paso, Texas. The win manufacturing -- so we've got, it was something started 18 months. So we've gotten now in front of this. We haven't waited until today to start initiatives. We have been well underway with these initiatives and what we want to do is continue the initiatives. We're certainly analyzing whether we need to begin some additional initiatives and quite frankly we just can't talk about some other things here on the table, on a conference call, the impact the lives of many people that potentially are listening to this call right now. So we're doing everything we can do, to cut cost and also to drive the top line.

[Brad Even:]

Can you just speak to, I guess one of things that was so much surprising to me was with a couple of quarters now of double... I guess with this quarter and next quarter your forecast there and looking back to the fourth quarter, I'm surprised that we haven't seen more improvement in terms of working capital and particularly on the inventory side. Do you have any thoughts there?

[Joseph Corasanti:]

The inventory at the end of March is almost the same, exactly the same as at the end of December. We have made adjustments in our purchasing. So that there actually is fewer raw materials in the stream than we've had previously. Finished goods are little bit higher as a result of sales being less than we had expected frankly. So we've made adjustments and those adjustments will continue. So, I guess I'll leave it with that and on receivable basis, receivables are down because sales are down and we've collected cash.

[Brad Even:]

Do you expect working capital would be a reasonably good source of cash as you move through this next couple of quarters?

[Joseph Corasanti:]

I would say that it's either going to be neutral or a source of cash.

[Brad Even:]

Just last line of questioning and I'll see the floor. In terms of free cash flow priorities going forward here it looks like even on your revised guidance, the company should generate it looks like close to $50 million in free cash flow plus or minus. Does that sound about right?

[Unidentified Analyst:]

That does sound about right. I do think that working capital will be plus for the year overall. We have significant amounts of non-cash expense in the P&L, some of which we back out from GAAP basis. Taxes in terms of cash that we pay are extremely low if non-existent. CapEx, little bit higher in first quarter than it was in the first quarter last year but we expect that to moderate. So, free cash flow in that range of $45 million-$50 million probably reasonable.

[Brad Even:]

So we have the 58 million on the senior term debt outstanding. We've got I guess, $115 million on the convert face value outstanding and then the AR securitization. Is that correct?

[Unidentified Analyst:]

That's correct. There maybe a small usage on the revolver of couple of million dollars at the end...

[Brad Even:]

So with the free cash flow, do you think you'll be paying down debt here in the shot term as you, I mean if you are able to hit your forecast?

[Unidentified Analyst:]

That would be our usage a bit, Brad, exactly.

[Brad Even:]

Okay. Thank you.

[Operator:]

Your next question comes from the line of Dane Sedoy of Sedoy & Company (ph). Please proceed.

[Unidentified Analyst:]

Good morning Rob. Good morning Joe.

[Robert Shallish:]

Hi, how are you?

[Unidentified Analyst:]

Good, good. Just following-up on Brad's last question. With the debt pay down, what would be -- where will you go with that, will you pay down the convert first at a discount or will you go for the other debt.

[Robert Shallish:]

It's certainly attractive to think about the convert. We do have some restrictions in our senior credit facility that may prohibit us from doing too much more on convertible bonds at this point, but certainly debt pay down is one of our goals this year.

[Unidentified Analyst:]

And then in the light of the economy what would be your strategy to well out the tissue sealing device. I mean, it doesn't seem like hospitals are going to step up and spend a lot of money on capital equipment anytime soon. So, will you still placing the controls and no charge and sign them up for long-term leases on the overall term projects on the consumables or what would be the strategy there?

[Unidentified Analyst:]

Yeah. Jim, the strategy is the same that we anticipated. I don't know, three to six months ago which is of course to place the capital and sell the disposables. So again this is a note an expensive disposable item we think we can probably have an ASP of about $450 which is what the market is with the three or four other competitors that have made up this billion dollar market of tissue sealing. And so -- well, let me add a lot of this is not certainly it's not missionary selling and we're not asking hospitals to spend money that they are not already spending now. We are really going to be taking share with this product. So where we switching out competitive product through our part and there will be no additional cost as a result to our hospital customers.

[Unidentified Analyst:]

All right. Thank you.

[Operator:]

The next question comes from line of Matt Miksic of Piper Jaffray. Please proceed.

[Matt Miksic:]

Hi thanks for taking the questions. A couple left, I think one is around the future trends. One of your larger competitors have talked in the quarter about some of the more at least what's perceived is more discretionary sports medicines entire high procedures has starting to stabilize in the first quarter after showing some pressure maybe in the back half of the year. Are you seeing anything like that in your procedure trends, have you seen does that churn line sound the same for you? I know its tough, it seems like everybody's view on sports medicine are on these different kinds of procedures; they're going to use that maybe under their mix and maybe showing a different impact. But what have you seen?

[Robert Shallish:]

Matt, it's somewhat difficult for us to get into conversation of what happens on a month-to-month basis. I guess I'll comment in general that the first part of the first quarter was weaker in terms of our sales of single-use products than the last six or eight weeks or so. So it's possible there could be a reversal of a trend here. But I guess that's why we've left the forecast for the second quarter about the same as what we incurred and achieved in the first quarter. So, we're being cautious about what's going to happen here in the second quarter.

[Matt Miksic:]

Right, in the second quarter. And I guess I am adjoined the long list (ph) to focus pushing you here on why or maybe not being more conservative on the second quarter but looking out past that just seems like trying to predict in this environment two quarters away how hospital behaviors going to change is a tough gain, given what we've seen in the last 12 months. I guess you even ask these questions six different ways. Joe you said something about seeing some trends in the end of March, but I wasn't sure whether you said that you saw trends there that showed the things might be stabilizing or things might be improving or the pipeline might be loading up for people who are coming out of bunker years, spend a little more money on the CapEx side. Could you elaborate on that a little bit?

[Joseph Corasanti:]

Well, in March I mean, we did some deals close. So that was encouraging for us. Deals that maybe had been delayed in Q4 and certainly we're not closing in January and February. And as far as our numbers go for the second half of the year, not only is it I guess our belief that we think capital will loosen up a little bit. But that's when we certainly expect to get beginning more traction on the ECOM product, that was launched on January 5th, the launch of tissue sealing and also a significant launch in our sports medicine line relating to a new shoulder system that's coming out which is the fastest growing part of the sports medicine business or marketplace. So, it's not just waiting to see when hospitals will start buying capital again. It's the plan to launch of new products.

[Matt Miksic:]

Okay. And those are launches that are underway and that you really feel are going to have a revenue impact in Q3. Or they are launches that begin in Q3 and maybe have a revenue impact at the end of the year and at Q1?

[Joseph Corasanti:]

Its ECOM launched on January 5th. So, we should have an impact certainly in Q3, Q4. The tissue sealing is going to be Q3 ramp up Q4 impact and the sports medicine product. Probably Q4...

[Matt Miksic:]

Q4 launch?

[Joseph Corasanti:]

No, no, no.

[Matt Miksic:]

Or impact?

[Joseph Corasanti:]

Impact, yes.

[Matt Miksic:]

Okay. And then I realized that you're not -- you don't want to get into too much details to what other you might be considering but I think maybe what people want to hear on the cost side is that you are at least considering and sort of ready to make further changes not just in terms of manufacturing efficiencies but in terms of things like indirect cost through SG&A lines where in these kind of environments people want to frankly see people tighten their belt a little bit. So it's really -- it be great to hear, if your listings are on the table and you are ready to move on those two things (ph) and stay the same or maybe get worse here as you go through the second quarter.

[Joseph Corasanti:]

Yes. Well, that's exactly I think you vocalized it well. That's exactly what's happening and it's just difficult for us to layout our plans when it effects a lot of people. So they are on the table. They've been on the table. Probably we certainly started thinking about this at the beginning in January. So yes something that we could do.

[Matt Miksic:]

Okay. Fair enough. Well, thank you for taking the questions.

[Joseph Corasanti:]

Sure.

[Operator:]

There are no further questions in the queue at this time.

[Joseph Corasanti:]

All right, if there's no further questions; I'd like thank everyone for joining us today. CONMED continues to work hard improve its operations and we certainly look forward to discussing our progress with you at our next conference call. Well thank you very much. Have a good day.

[Operator:]

Thank you for your participations in today's conference. This concludes the presentation. You may now disconnect. Have a good day.