CONMED Corporation (CNMD) Q1 2012 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Q1 2012 CONMED earnings conference call. My name is Christie and I’ll be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the conference over to Joseph Corasanti, President and CEO of CONMED. Please proceed sir.

Thank you very much, Christie. Good morning everyone. Welcome to CONMED Corporation’s first quarter 2012 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 the 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. You will also hear Rob and me refer to certain non-GAAP adjusted 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. Adjusted net income and adjusted earnings per share measure the income of the company excluding credits or charges that are considered by management to be unusual or outside of 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. I am pleased to report that we completed the first quarter of 2012 with solid operational results. We are off to a very good start to the new year due in part to our association with the Musculoskeletal Transplant Foundation. I’ll talk about some of the early benefits of that relationship in a moment, but here are first quarter highlights. Sales of $194.3 million were at the high end of the forecasted range with an increase of 5.9% over sales in the first quarter of 2011. Adjusted earnings for the quarter were $0.43, in line with our expectations and growing 16.2% over Q1 of 2011. On a GAAP basis, diluted EPS was $0.35, an increase of 12.9%. Adjusted operating margin expanded to 10.5% of sales, an increase of 30 basis points over that of the first quarter of 2011. Adjusted EBITDA margin expanded to 16.6% of sales, an increase of 80 basis points. Our Board of Directors recently adopted a cash dividend policy and declared an initial quarterly cash dividend of $0.15 per share. CONMED recently launched multiple new products in our Sports Medicine and Powered Instrument lines at the American Academy of Orthopaedic Surgeons Conference earlier this year. As you can see this was a very busy quarter for CONMED that produced strong results overall. Turning back to the MTF agreement for a moment. As we discussed on our last earnings conference call, we are excited about our new relationship with MTF for sports medicine application. MTF, a non-profit organization, is the largest tissue bank in the country. With our recent agreement we are now the exclusive worldwide marketing representative for MTF Sports Medicine Allograft Tissue. Let me briefly review some of the agreement's key details one more time. CONMED Linvatec's team of surgical sales representatives served as the educational resource to surgeons and facilities concerning the suitability of MTF allografts for ligament reconstruction, cartilage repair and meniscal transplantation as well as for biologic solutions including scaffold and fixation devices. On closing the agreement on January 3rd this year. The 35 employees of the MTF Sports Medicine Marketing and Surgical Consultant Group became employees of CONMED Linvatec. MTF will maintain full responsibility for all activities related to donor suitability, quality acceptance, processing, storage and distribution of the tissue as well as reimbursement of service fees related to the sports medicine allograft. In the first quarter of 2012, gross revenues from the MTF association amounted to $9 million. An accounting pronouncement requires offsetting these revenues of the $1.5 million of amortization for a net effect on reported revenue of $7.5 million. For the full year, we continue to expect gross revenue for the new MTF partnership to be $35 million with additional EBITDA of approximately $15 million to $18 million. We are excited about this relationship with MTF and the promise it has shown thus far. Beyond the financial impact it will have, our association with the industry leader for allograft sports medicine tissue will enhance our product offering in sports medicine and augment our leadership position in the industry. In fact the number of sales representatives have already reported receiving positive feedback from surgeons regarding this partnership and its impact on CONMED’s already strong reputation in the market place. With that I will take a closer look at the quarter's financial results. CONMED's total sales for the first quarter grew 5.9% over the first quarter of 2011. Excluding the $7.5 million related to the MTF agreement, the organic sales increase was 1.8% similar to the overall growth rate for full year 2011. Similarly used products continued to outperform capital products. As with the case last year, our sports medicine, our arthroscopy single use products continued to perform well with reported growth of 19.1%. The organic sales increase was 6.2% excluding the MTF revenues. Other categories of single use products also grew with powered instrument burs and blades advancing 5.4% and general surgery products growing 2.4%. Single use surgical devices are the core of CONMED’S product offerings. Accordingly they now comprise close to 80% of the company's sales with margins on average higher than those of capital products. As we have said previously, we are attempting to reduce our near-term reliance on capital equipment sales which have long sales cycles and are greatly impacted by global economic conditions. As a result, much of our recent R&D activities have been focused on the single use categories. To this end, as I briefly noted earlier, we introduced several new devices at AAOS two months ago. Of note is the Y-Knot shoulder Anchor made entirely of suture material, our expanding product offering for hip arthroscopy and the M-Class cutting blades for powered instruments. The remaining 20% of our product offerings consist of equipment which generally falls under the capital equipment budgets of our hospital customers. Sales of these capital products declined 4.5% compared with first quarter of 2011, reflecting continued softness in the markets for these types of products. Based on what we continue to see in the marketplace, we do not believe we are losing market share. In fact, based on the anecdotal feedback we have been receiving recently from hospital purchase managers, it appears that the capital equipment market is beginning to stabilize somewhat. As a reminder, CONMED has three categories of capital equipment products. They consist of surgical video systems as part of the arthroscopy offering, orthopedic drills and saws as part of our powered instrument line and electrosurgical generators within our electrosurgery line. Each of these systems is necessary for surgical procedures in hospitals and surgery centers but replacement decision can be delayed based on the financial offer -- imperatives of customers. This year we forecast that the capital equipment lines will generally show little growth from 2011 due to the economy and the near-term need for hospitals to invest in other technology such as healthcare IT. However, as we roll out new products in each of our three areas of capital equipment over the next 6 to 9 months, we forecast a return to positive growth in 2013 for the capital equipment portion of our business. With one quarter of the year under our belt, we remain optimistic about CONMED’s ability to deliver continued improving on earnings with margin expansion and greater cash flow. As evidence of this, as I noted earlier, the Board of Directors recently declared the first cash dividend of the company in the company's history. This first quarterly dividend was equal to $0.15 per share with the expectation that similar quarterly dividends would be paid for the remainder of the year making the annualized dividend equal to $0.60 per share for a yield on the current stock price of approximately 2%. The first quarterly dividend was paid earlier this month. The board concluded that this dividend policy was justified based on the company’s cash flow and that payment of the dividend was appropriate in order to ensure that shareholders are benefiting appropriately from CONMED’s operational strength. As a reminder, the company is coming off a record year for cash flow with 2011 free cash flow of $85.4 million. As we look forward to the remainder of 2012, we are adjusting slightly this year’s sales forecast and tightening the earnings forecast. Specifically, we now expect sales will approximate $775 million to $785 million compared to our previously issued guidance of $780 million to $790 million. This small adjustment is due to the first quarter’s softness in capital equipment sale. As for earnings, we are altering the top end of the adjusted diluted earnings guidance to tighten the range of expectations. We now anticipate adjusted EPS to range between $1.75 to $1.85 per share. The top end of the guidance had been $1.88 per share. For the second quarter of 2012, we forecast sales of $1.90 to $1.95, sales of a $190 million to $195 million in adjusted earnings per share of $0.42 to $0.47. CONMED is also looking forward to hosting an Investor Day later in the second quarter. The event is scheduled to take place on Friday, June 8 at CONMED’s Linvatec campus in Largo, Florida right outside of Tampa. You should have already received our save-the-date notice and can expect to receive a formal invitation in early May which will be accompanied by a link to a registration page with all the logistical details. The investor day will provided an opportunity to gain valuable insights into our business through presentations and sports medicine, powered instruments, our agreement with MTF and the related allograft sports tissue market, our new Altrus product, Surgical Video and a review of our global sales organization. In addition, there will be tour of our new state-of-the-art surgeon training facility as well as surgical demonstrations. As I have mentioned before, we remain extremely positive about the direction of the company and look forward to making continued progress in 2012. We will continue to focus on devices that improve patient outcomes and on controlling costs to improve profitability and create long-term shareholder value. I will now turn the call over to Rob Shallish for further review of the financials. Rob?

Thanks very much, Joe. Good morning everyone. As Joe mentioned, we are off to a very good start in 2012. The first quarter sales totaled $194.3 million at the higher end of the range we previously forecasted. This was an increase of 5.9% compared to sales of $183.5 million in the first quarter last year. Excluding the $7.5 million of revenues from MTF, the organic sales increase was 1.8% similar to the growth rate generated for the full-year 2011. We are especially pleased with the performance of our sports medicine arthroscopy line, including the new MTF partnership where we believe we are meaningfully growing our market share with the new products we have recently launched. By geographies, sales outside of the United States grew more rapidly than U.S. sales. This is consistent with our experience over the last several quarters. International sales now make up slightly more than 50% of our business. Of particular note is the 9% growth in the quarter in the Americas. Europe grew in total 5% although some countries had slight declines. In the United States, including the MTF, sales grew 5%. Excluding MTF, U.S. sales declined to 3% due to the sluggish capital equipment sales. The gross margin percentage, excluding ongoing restructuring costs was 52.7% of sales for the first quarter of 2012. This is a 50 basis point improvement over the adjusted gross margin for the full year of 2011 and slightly higher than the 52.6% adjusted gross margin percentage for the first quarter of 2011. Over the past several quarters, our operations team has been dedicated to improving inventory turns and reducing our investment in inventory. Compared to the March 2011 balance, inventory has declined 5% and the days investment in the inventory has declined. In periods of declining inventory due to reduced productions, we experienced unfavorable manufacturing variances by not fully absorbing fixed overhead costs. Although the first quarter’s gross margin percentage experienced improvement over that of the full-year of 2011, as well as the first quarter of last year, the margin was adversely impacted by unfavorable production variances that occurred in the second half of 2011. These variances have now moderated and we expect the gross margin percentage to improve as we advance through the remainder of 2012. Selling, general and administrative expense increased $4.7 million to $74.8 million compared to $70.1 million in the first quarter last year. The vast majority of this increase, over 80%, was due to the additional sales and marketing personnel and activities associated with the MTF related distribution activities. Excluding these costs SG&A increased only 1.3% over the 2011 first quarter. As a percentage of sales, SG&A was 38.5% of sales in this quarter compared to 38.2% last year. Research and development declined approximately $600,000 due to reduced spending on the ECOM project compared to the activities in the first quarter last year. As you may recall, a year ago we reduced spending on this particular development activity although work is still now ongoing. Total R&D spending this first quarter is consistent with what the company incurred in the last three quarters of 2011. So beyond the ECOM project, we have maintained our level of investment related to future product development activities. Overall as a result of minor changes in gross margin, SG&A and R&D as a percentage of sales, the adjusted operating margin in the first quarter of 2012 grew 30 basis points to 10.5% compared to 10.2% in last year’s first quarter. We continue to forecast a 100 basis point improvement in operating margin for the full year of 2012. By comparison, the adjusted operating margin in 2011 was 10.1%, so the first quarter’s growth demonstrates continued progress on that front. We anticipate achieving these higher operating margins by continuing to leverage our infrastructure. Also, sales are expected to advance at a greater rate than cost increases due to the benefit of new products that should generally have gross margins greater than the company’s current average as well as overall market growth from our current products. Further, we continue to review our cost base to ensure the business is operating in the most efficient manner possible with regard to both the cost of manufacturing products and the SG&A line. At the bottom-line, adjusted earnings per share were $0.43 in the first quarter compared to $0.37 per share year-over-year or an increase of 16.2%. EPS on a GAAP basis was $0.35 compared to $0.31. The adjustments for unusual items in this first quarter are reconciled in the press announcement issued this morning and include costs associated with the ongoing manufacturing and administrative restructuring program, integration of the Nordic distributor acquired at the end of 2011 and legal costs for an arbitration matter related to a contractual dispute with a former distributor. For the remainder of 2012, we expect to incur additional pre-tax manufacturing restructuring costs of $2.5 million to $3.5 million as we complete the manufacturing transition from the Santa Barbara location. Turning now to cash flow, cash provided by operations was $7.6 million compared to $20.7 million in the first quarter last year. The reduced amount is related to 3 items. First, receivables have increased due to the greater amount of sales in the first quarter. Obviously, the benefit of a higher amount of sales outweighs the creation of a greater working capital investment. Second, the cash outflow due to incentive compensation payments was greater in the quarter than last year, due to the higher corporate earnings in 2011 compared to the payments made last year resulting from 2010 income. Finally, we made a voluntary payment of $6.5 million to the pension plan to increase its funding. Without these 3 items, the operating cash flow for the first quarter would have exceeded that of last year. As we go through the rest of 2012, we expect that operating cash flow will be more normalized and that increased income will offset the increase in working capital. Therefore, cash flow from operations should approximate last year’s record total. Let me add 1 additional word about the pension plan. As you may recall, we froze the plan several years ago, so no new benefits have accrued recently. At the end of last year, the assets of the plan were less than a year before due to general market conditions while the calculated liabilities increased due to a lower interest rate assumption caused again by market conditions. This increased funding gap, similar to what many companies have experienced, caused us to make a voluntary $6.5 million in payment into the plan to ease the funding deficit. Since making the contribution, equity markets have improved and the funding deficit has further narrowed. We do not intend to make any further voluntary payments into the plan for the remainder of the year, although we expect to make the actuarially required payment of $2.7 million over the next 12 months. On the balance sheet at March 2012, the cash balance stands at $19.5 million and days and receivables are equal to 67 days, the same as in December 2011 and much improved from the 73 days at March 2011. Inventory declined $5 million compared to December 2011 and $7.8 million compared to March 2011. Further, the days investment and inventory decline to 161 days compared to 173 days in December 2011, and 179 days in March 2011. Finally, as of March 2012, the debt-to-book capitalization calculation was 24.8% compared to 20% at December 2011, as a result of the borrowing associated with the MTF transaction. At March 2011, the comparable rate show [ph] was 23.4%. With that now Christie, we would like to open the line for questions.

[Operator Instructions] Your first question comes from Matt Miksic from Piper Jaffray.

I wanted to just follow-up if I could first on margins and the cost of goods line. Can you provide any color, some additional color maybe on what some of the gives and takes there were. If you can quantify any of the impacts that you saw in the first quarter just a little bit of touch heavier than we are looking for?

Well, on the positive side, the MTF transaction is a positive addition to margin. As you know Matt, the sales increase of 7.5% has very little cost of sales associated with it. There is some, but not a lot; offsetting that benefit this quarter were unfavorable manufacturing variances associated with the reduction in inventory that occurred in the second half of last year. Further there were some purchase price variances associated with purchasing product that occurred toward the end of last year. So those 2 items tended to offset each other resulting in a gross margin percentage which approximates what we saw in the first quarter of last year, although it is higher than the overall gross margin that we achieved in 2011. So as we look out to the rest of the year, we have seen these production variances moderating and therefore we believe that the gross margin for the remainder of the year should improve over the current level.

Clearly a nice step up from the MTF agreement. Can you put some, maybe some, can you quantify the variances that you mentioned?

Matt, I think that in terms of absolute numbers it's probably not that beneficial to quantify those exactly because there's differentiation between purchase price variances as well as overhead manufacturing variances. So I guess I should leave it at the variances have moderated and that we do expect an increase in the gross margin as we go through the remainder of the year.

I guess I am trying to figure out if the magnitude of the benefit of MTF, I guess the magnitude of the benefit of MTF has to be around the same size as these variances.

I think that's a good assumption.

And then just in terms of growth trends and I apologize for asking some things you covered but we are hopping around I think as everybody is amongst several call this morning. The market trends that maybe, the way you thinking about you know what you saw in your end markets in the quarter relative to your performance and how that’s factoring into your full-year guidance going forward, you know change maybe from where you began at the beginning of the year positive or negative?

Yes, Matt. I mean I think our end markets are pretty much where we had anticipated they would be with perhaps just the exception is with I guess demand for capital which was down 4.5%. Single use products, especially in arthroscopy performed well and we saw about market growth rate certainly for our organic sales in sport medicine. But capital was a bit of surprise for us especially with Electrosurgery declining 14.5%. If you recall Electrosurgery had 3 outstanding quarters last year growing just double-digit growth on electrosurgical generators, the capital portion of Electrosurgery and that's reversed itself certainly in this first quarter with a 14% decline. So it's hard to conclude any type of trend I think from one quarter here with Electrosurgery, but the only thing we do know for a fact is that the first quarter last year, generator sales was very, very strong. So I am sure that play a little bit of a role here.

One and on that point on Electrosurgery and maybe the tissues healing product, and again I apologize if you gave a number, but have you given some sense of how that’s progressing so far this year and is that related anyway do you think at what’s happening in Electrosurgery in other words, I am not recalling whether they are the division that's selling it. But if they are, is there some, is there a training or a detailing the so called overhead because these are important but some resource allocation to training and detailing, that could be possibly be impacting some of the other lines, any thoughts on that would be appreciated?

Sure, yes Matt. That’s a good question. And we didn’t address Altrus in our prepared remarks knowing that we would receive a question about Altrus. So here it goes. The Altrus line for vessel sealing is sold by the Electrosurgery division and that is their focused item. It was last year and continues to be this year and the business for Altrus continues to ramp up. We have many converted accounts and our definition of a converted account is an account where a surgeon is using an energy source, an Altrus generator essentially which, by the way we place with users and so, converted account is where the surgeon changes his [indiscernible] card, his or her preference card for vessel sealing and changes it over to the exclusive use of the Altrus device. So we have about 30 accounts where that's happening, right now. And so I look at that and I say, well that's pretty much our base business at this moment in time. We have close to 80 energy sources in the field right now where it would be a combination of converted accounts and as well as evaluation accounts. Where we have evaluation accounts, we are generating revenue because even in evaluations our customers evaluating the product are paying for the single use device which I guess I will refresh everyone's memory. We are charging about $750 per device for Altrus. So the long and short of it is that the product launch is progressing well as we've talked on probably the last two calls, conference calls it's not moving as fast as we thought it would move as, I say a year ago, when we launched the product. We have experienced in last year, and even in Q1 of this year, some limited product supply which slows down evaluations and the cause of that has been continuing manufacturing difficulties that we are experiencing as a result of it being a complicated product to produce and it being still a new product for us and new technology for the world. So all-in-all, we think the product launch is going very well. We forecasted in our last conference call that we would have $5 million to $10 million in sales for Altrus for 2012 and we reiterate that guidance for the product and I think we are on track for that.

You do have another question queuing from Dalton Chandler from Needham & Company.

Just wanted to ask a little bit more about the capital equipment and it's been for several quarters sort of range bound right around this $40 million level and not necessarily this quarter, but just looking back over time, it looks like primarily it's been weakness in the arthroscopy capital equipment. Could you just comment on what you are seeing there and what you think might turn that around?

Well, at arthroscopy capital which is the video systems, we had a really horrible weakness. Last year, we had declines in the 20% range in Q, I think it was Q1 and Q2 maybe even moderated slightly in Q3 and then Q4. So Q1 it’s down 1.7% so we do have certainly is an improvement over the last year. And last year was an interesting year for capital. We had gains and a growth in powered surgical instrument capital and Electrosurgery capital with significant declines in video. And it looks like things are reversing this year, at least in Q1 with sports medicine really being flat I think for capital with Electrosurgery declining 14.5%. So I have to admit to you that we are probably scratching our heads a little bit on and why it’s so choppy and why we’re not getting a definite trend or consistency with our capital sales at this point.

You did say that you expect the trend to reverse next year and to go back to growth. Are you expecting sort of the normalized low-to-mid single digit growth or do you think there may be some pent-up demand out there that could drive that higher for some period of time?

Couple of things, I think we are expecting I think with many other people that the economy will improve. We also see -- what we know internally is that we've got new products coming out. So in video systems, we've got new devices, probably for the emerging markets primarily, in terms of single chip camera systems and other camera systems for single port laparoscopic surgery. On the powered instruments side, our lithium ion battery system we think will drive sales once that is launched. That launch is not expected until Q3 of this year; it’s been slightly delayed. We did show it at the academy, but when that is launched we think that’s going to drive sales for our drills and saws and powered instruments. So those are the two main drivers I think that will help us out in 2013.

Your next question comes from Robert Goldman of CL King.

A couple of updates as well on some metrics that I pay attention to. You know first on the move of production to Mexico, could you just give us an update as to currently what percent of sales results from the Mexico production?

Yes, Bob, it’s in the low-to-mid 20s as a percentage of our total production. Most of the patient care products are produced, a good deal of patient care products are produced there, a good deal of the Electrosurgery products, single use products are manufactured there. As we’ve talked the video products from Santa Barbara, they are nearing the completion of the movement there to Mexico and there are some electronics that are manufactured in Mexico as well.

And by the end of the year, Rob, 2012, where would that percentage do you think?

Yes, in rough terms, Bob, I think it’s going to be in the 25% of our production would be manufactured in Mexico.

And then two other products, if you can give us an update of what’s the annualized run rate looks like now. One is the SRS and the other is the Meniscal Repair Device.

SRS is running and of course that’s a combination of products and we keep adding new products into it, into that category so to speak. But we are running in the neighborhood of $25 million to 30 million annually at present. The Sequent device is running at a rate of approximately $5 million to $6 million annually currently.

With the SRS, that would seem to be a bit of an uptick from what you talked about in the last quarter, is that correct?

Well, I may have mentioned $20 million, $22 million something like that last time around. We certainly are seeing increases in that particular shoulder system.

On the other hand the Sequent seems to be a bit of a down tick, is that correct?

Well, I think what’s happened with the Sequent device is that some surgeons, while they certainly like the performance of the Sequent device, they look at our price point and view it as being more expensive than the competition. Now let me explain that, because our particular Sequent device offers the ability to place 7 stitches in the meniscus. Sometimes there is only a need for 2 or 3 stitches and surgeons may feel that the price is excessive when the competitive models only permit 2 or 3 stitches per device. So they feel that even if they have to open 2 or 3 of the competitive devices, once they get into the surgery that, that may be more cost effective. We are in the process of coming out with the newer model of the Sequent device which we would price at a lower price point that would only have 3 stitches in it. And therefore that should put us in a much better competitive situation with regard to price.

We’ll still be offering both versions; we will have the original and what we are only calling I think the Sequent Dual which is a lower price point product.

Your next question comes from Jim Sidoti from Sidoti.

I have a couple of questions; one, on the expenses in the quarter, were there any expenses related to the MTF integration that you would consider one-time?

No, all of the MTF associated costs are ongoing costs, so there is really no cost associated with MTF that we would break out separately as being unusual.

Any comment on the situation in the Southern Europe. Some of the reports regarding that region have been pretty ominous. Do you have a lot of exposure there and what are you seeing there?

Well, I’ll be honest; as I mentioned in the prepared remarks, Europe overall was higher in sales in the first quarter. If we look at just Spain and Italy together, together they were flat in their sales and in total, we had -- looks as though we had about $11 million of sales from Spain and Italy in the first quarter.

Okay, has there been any increases in DSOs in those areas or any problems with receivables?

Not that I am aware of, Italy has always had some slowness in collections and that may have expanded a little bit but nothing that is of a concern to us.

And then last question on the MTF sales, can you give us some sense on how much of that was the tissue product and how much was the PRP product?

Of the $7.5 million net sales, approximately $1.5 million was the PRP product.

And is that a product where you place the equipment and you sell disposable similar to some of your other products?

There are cases where we will place the centrifuge that does the spinning of the blood. Other times we will sell it, so it’s a combination.

Your next question comes from Mark Landy from Summer Street Research.

I apologize also. Like Matt, I have been on a bunch of calls and I am not sure this was mentioned, but in terms of the MTF products, has that been completely rolled out of the sales force or is there some more to go?

Mark, certainly it's rolled out, I guess not even rolled out is the right term. It just continues with the same people that were -- I hate to use the term selling, educating the physicians about it that came over to our company. That’s about 35 people in sales and marketing. Additionally, there are people at MTF that continue to promote the product for the time being in certain geographies of the country. That will be rolling over to us within the next 12 months and so there is still some work to do there associated with introducing the new sales personnel that will be promoting the product. I don’t believe any of that has occurred as yet. So more of that will occur over the next 12 months.

If I look just a little bit further, is there any opportunity for cross selling and has any of that started with reference to, the feed on the street that you had relative to the feeds on the street that you are bringing in or are now managing?

Mark, I mean, the opportunities certainly exist and some of that have started already. The PRP product is now in the hands of our existing CONMED Linvatec sales force and the tissue has been managed by some of our existing distribution outlets in some of our territories. So actually the transition there was taking place actually before we had the partnership if you will. So and that’s really seamless for our customers. So yes, going forward there is opportunities for cross selling. We think in Canada especially where MTF had not been represented, there is opportunity for tissue as well, PRP first and tissue also.

Okay. And then just in reference to some of the commentary on Altrus manufacturing issues, is this more of a learning curve or training issue at the employee level, is that a logistics issue, a sourcing issue or is it more of a yield issue at this point?

It may be a little bit of everything. The yield is not where we would like it. We're certainly not achieving our yield goals with the product. Remember, this is new technology. We are the only company that’s offering a thermal tissue fusion, vessel sealing product using thermal energy to seal and fuse collagen molecules. And we rapidly heat the ceramic inserts, essentially the heaters inside the jaws of this device and rapidly cool the jaws and that’s what accomplishes the fusion of collagen molecules. So it’s fairly complicated to produce, yield is not where we would like it. We have parts that are sourced, as you would expect. There are many parts that go into this device. So yes, we are getting better with experience and time. And I guess the bottom line is it will take time. You know there is also software involved with this device, both in the energy source, the box, as well as in the hand piece. And our experience in launching products involving software is, from time to time during the first year, two years of a product launch, software changes are required, calibration changes tend to be required. As you get experience in the field doing a variety of different type of surgery and having the product used in different surgeries with different surgeons who may use it differently. That’s the type of experience we are gaining and that type of experience is requiring us to make slight modifications in terms of software and calibration of the device.

Are these just events [ph] and manufacturing changes that you have to make or will some of the entail communication with the regulatory agencies?

This is internal changes. So in another words, a new 5 to 10-K is not required for the types of things that we are doing.

Right, that’s the point. So these are all basically in the some of the manufacturing process and they don’t require a regulatory, okay, fair enough. And then in terms of the ramp up for Altrus, I am assuming still a very much backend loaded or the low end of that range, is it more, kind of more equally loaded to the year. So if I look at the 5 to 10, you kind of do the 5, is it kind of more of a gradual ramp [ph] through the year and if you look at the 10, it is going to be very much backend loaded. How should we think about that?

I think the 5 range, I think, we’ve got pretty close to an installed base now to achieve that, and expanding beyond $5 million in sales depends on the speed in which we can get the evaluations done and surgeons converted. As I discussed earlier, you may not have been on the call at that point, full conversion for us is having the preference card changed by the surgeons so they are using, say, 10 devices per month which is a -- generally speaking, I think what the usage would be for a vessel sealing device by a single surgeon.

And your next question comes from Dale Dutile of the Boston Company.

I just -- for some of the cost-related manufacturing moves and some of the administrative stuff, you have costs going through the P&L for now. Have you quantified what the expected savings from those actions are?

Dale, the savings that we are expecting from what we have currently announced as part of the manufacturing restructuring, namely the Santa Barbara move, approximately $4 million annually would be the savings from changing from Santa Barbara to other locations.

And that's off of what the base pick is, because that's been happening over time, is that right?

Yes, we started that back in the June or July period last year. So we are achieving some savings now. I don't know, honestly, how they quantify what those savings are.

That's fair enough, so that $4 million off of something, a run-rate in the middle of last year or so.

That's right.

And then, just I mean you laid out your hedges again, currency hedges and the euro seem to be the one that's gone against you a little bit. I am just wondering as we look into next year, what's the flow through to the EBIT line from changes in currency, assuming no hedges?

Yes, excluding the hedges, if there is a $1 million change to the top line, 50% to 60% of that flows through to pre-tax because we do have offsetting electric currency cost.

Sure, perfect. And then just on the -- have you ever, I mean, because the mix shift between consumables, you know, single use and capital equipment has been pretty dramatic. Have you ever helped people understand what’s the gross margin differentials between those two businesses? I am assuming you’re getting some benefit from that now, and if you are saying that capital equipments start to improve against next year, I would think that it would be somewhat of a headwind?

Yes, capital equipment tends to have, on average, and there are always exceptions, but average capital equipment tends to have a lower gross margin our single use products. I think that if we’re fortunate, and we believe we will be, to have some growth in capital equipment next year, I really don’t think that would have a major impact on from a negative sense on gross margins. We would probably be talking about a few basis points that would be even hard to measure, very frankly. I think the greater trend that we see is improving gross margins as a result of some of the manufacturing things that we were doing to be as efficient as possible, as well as introducing new products, especially the single use products which would have higher margins than the current versions. I guess, offset to some extent by capital products that may come out but I tend to think the single use products would outweigh the negativity with capital.

Is it a point that a differential between capital and single use is not that great or that some of new single use products you are introducing are going to be very comfortable products?

Well, I guess both. I think some of the new single use products can be in a much higher margin position than our current average. Overall, when I look at capital products compared to our overall margin, if we are at 52%, 53% margin today, our capital products are on average probably about 50% as a margin.

Your final question comes from the line of Brad Evans from Heartland.

The first question I have is for Rob in terms of, can you just give us, what is the draw on revolver at the end of the quarter?

At the end of the quarter we have about a $130 million outstanding on the revolver, if I recall correctly.

Okay. And your expectations for debt reduction, where do you think that will end the year based upon what you see today?

Well, I am expecting that we would have the same kind of free cash flow that we had last year, namely about $85 million. We are going to be paying dividends, that should be for this year. We will have three quarters of dividends in. So that will be about $12 million and I'm frankly looking at most of the rest of the cash going toward debt reduction. So it would be in the neighborhood of $50 million or so of debt reduction.

And I am just curious with, just, lot of the discussion [ph] on the capital equipment side and it has introduced some volatility into your operation in the last couple of years and I appreciate the outlook for recovery in 2013. I just wonder whether considering the high multiples that are being paid for medical device healthcare assets in general, are there portions of the capital equipment pieces of your business that would make sense to potentially divest? Is that even possible?

Yes, I don’t think it’s possible Brad, when I look at the each of the three components: in arthroscopy, the capital pieces for surgical video, and while there is no disposables that are directly tied to that, we do feel that offering in surgical video is an opportunity for our sales people to talk about a broad range of products with surgeons, including the single use products. So I don’t think that’s a possibility. Certainly in powered instrument it’s not a possibility, because half of the business there are the hand pieces and half of the business are the single use products. So they really go together; I don’t think there is any opportunity there. And lastly on the electrosurgical generator front, the disposables while, having a universal architecture, so that our disposables fit in competitive products and vice-versa, I really don’t think there is an opportunity to divest the capital piece and just keep the single use. So I guess in brief, I don’t think there is an opportunity to do that.

And then an update on capital spending for the year, where do you think you'll come in for the year?

Well, for us I think it’s going to be in the $20 million range, a little bit higher than last year, because of the remodeling that we've done with the surgeon training center in Florida.

We have no further questions. I would now like to turn the call over to Joseph for closing remarks.

I would like to thank everyone for attending the first quarter earnings conference call for CONMED Corporation. We look forward to talking with you again on our second quarter conference call. Thank you very much.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.