CONMED Corp Q1 FY2020 Earnings Call

Good afternoon, everyone. Before the conference call begins, let me remind you that during this call, management will be making comments and statements regarding its financial outlook and its plans and objectives, which represent forward-looking statements that involve risks and uncertainties as those terms are defined under the federal securities laws. Investors are cautioned that any such forward-looking statements are not guarantees of future events, performance, or results, and the company's actual results may differ materially from its current expectations. Please refer to the risks and other uncertainties disclosed under forward-looking information in today's press release, as well as the company's SEC filings for more details on the risks and uncertainties that may cause actual results to differ materially. The company disclaims any obligation to update any forward-looking statements that may be discussed during this call, except as may be required by applicable law. You will also hear management refer to certain non-GAAP adjusted measurements during this discussion. While these figures are not a substitute for GAAP measurements, management uses these filings to aid in monitoring the company's ongoing financial performance from quarter to quarter and year to year on a regular basis and for benchmarking against other medical technology companies. Adjusted net income and adjusted earnings per share measure the income of the company, excluding credits or charges that are considered by the company to be special or outside of its normal ongoing operations. These adjusting items are specified in the reconciliations supporting the company's earnings releases posted to the company's website. With these required announcements completed, I will turn the call over to Curt Hartman, CONMED's President and Chief Executive Officer for opening remarks. Mr. Hartman?

Thank you, Chris. Good afternoon, and thank you for joining us for CONMED's first quarter 2020 earnings call. With me on the call is Todd Garner, Executive Vice President and Chief Financial Officer. As you may expect, our call today will be different compared to a typical quarterly update. We will walk you through our first results, give you an overview of the company's pandemic response, and share with you some early data on our April results. Todd and I will split this work appropriately with the goal that you will come away better informed about our business, while still recognizing the high level of uncertainty that exists across the global markets. We will then open the call to your questions. Turning to our results, total sales for the first quarter were $214 million, representing a year-over-year decrease of 2% as reported, and a decrease of 70 basis points in constant currency. Organic sales in the quarter, which exclude the impact of Buffalo Filter, declined 3.6% in constant currency. Our sales were clearly impacted by the COVID-19 pandemic forfeiting our China business in January, then spreading to our Asian markets. In March, we began to see impacts in Italy, followed by the rest of Europe and the Americas as the quarter concluded. While the quarter was clearly challenged by the pandemic-driven procedure deferrals, we are pleased to note that two of our key growth platform technologies, AirSeal and Buffalo Filter, benefited from increased awareness as filtration and smoke capture technologies during this period. The financial benefits of these clinical advantages were minimal during the quarter, but we expect the growing awareness in adoption to drive more meaningful benefits in future periods. While we do not expect this increased demand to make up for the total COVID-related pressure across the other parts of the business, we feel the clinical community's awareness is increasing, which we see as a longer-term sustainable outcome. Finally, I'm pleased to report that we completed our previously discussed sales force transition efforts within orthopedics. As of the quarter-end, all sales force transitions have been completed across the company. From an earnings perspective during the first quarter, our GAAP net income totaled $5.9 million. This compared to a net income of $1 million in the first quarter of 2019. Excluding special items that affected comparability, our adjusted net income of $15.1 million decreased to 8.6% year-over-year, and our adjusted diluted net earnings per share, of $0.51, decreased 10.5% year-over-year. I'd now like to discuss the approach we have taken as a company to help mitigate the impacts of the COVID-19 pandemic. Overall, I'm very proud of our team's rapid crisis management response and our continuing efforts during a period of great uncertainty. Our teams responded exceptionally well, first regionally and then globally, and on that point our response has been guided by three priorities. They are first, the safety and well-being of our workforce, their families, and our customers. Second, the financial security of the company, and finally, preparing the company for the future. Our efforts to ensure the safety and well-being of our employees have been comprehensive and based on information from the Centers for Disease Control and the World Health Organization, as well as local regional recommendations. We have also consulted with global infection prevention specialists and external consultants to ensure we are taking appropriate precautions to ensure employee safety while also reducing both exposure to and spread of this virus. Since early March, my direct reports have met daily. The opening section of our meeting is focused on monitoring the status of every single employee in our organization. We're extremely mindful of the health and safety of each individual and their families. As of Monday, April 27, CONMED has recorded confirmed COVID cases across our workforce of eight. Four of those have cleared, and four remain in quarantine. Further, 120 employees have isolated per guidelines, of which 86 have cleared quarantine and 34 remain in quarantine. We have 92 employees on paid leave as they are in defined high-risk categories, and we have 30 employees on requested unpaid leave to deal with other family situations. Overall, our total company absenteeism has been running at 1% or lower. In summary, CONMED remains very much at work and is using our time wisely to prepare for the future. Our production and distribution employees continue to voluntarily report to work in high numbers, and we have taken many precautionary measures to ensure the safety of these employees. All reporting employees pass through temperature check stations before entering their facilities. Additionally, we have separated the work areas within our factories to avoid any possibility of cross-contamination, enhanced our cleaning protocols, and provided face masks and face shields to employees. For employees working in our plants and distribution centers, we have provided supplemental compensation to recognize these efforts in a trying time. For our office-based employees, we successfully moved to a fully remote workforce. We had previously implemented global technology to make this possible, and our teams completed this transition within a 48-hour period early in the month of March. With respect to our sales teams, we have used the time to greatly increase our training opportunities while continuing to support our customers. We've provided a financial backstop to our fully commissioned sales force, ensuring that they are able to focus on customer support and training and education in preparation for the eventual reopening of markets. As it relates to the financial security of the company, you all know we've completed an amendment to our debt covenants, as previously announced. I want to thank our banking partners for their support and for the efficient process in completing that amendment. We have eliminated our temporary workforce, which made up approximately 5% of our employee base, and we've eliminated all overtime. We've dramatically reduced all discretionary spending and focused our resources on the truly essential priorities. We've focused our production resources on building our top priority sales items while ensuring we have the appropriate safety stocks across our portfolio, and we are also working with our suppliers on a global basis to ensure that we have adequate capacity in our supply chain. We have created a global logistics management team to ensure the uninterrupted supply of our product to customers, as well as our receipt of critical items from our suppliers. As everyone can appreciate, global logistics have been constrained, and staying ahead of this is a full-time job. Our team has done exceptionally well in that regard. Additionally, we've continued to advance our top priority innovation projects. Innovation still matters greatly in our markets. We've provided our sales teams and customers with intense online training content. We've ensured our supply chains are working to handle the expected demand for our top products once surgical procedures return. Importantly, as previously noted, we secured the amendment to our credit facility. Overall, we feel our efforts have positioned us well to navigate through the second quarter, which we believe will be the market low point. We do anticipate some return to elective procedures in May while expecting any surgical restart to be localized and regional, driven by many factors, including COVID caseloads, surgical staffing levels, PPE supply, unemployment rates, local regulations, and patient acceptance of the site of care. While the quarter was not the operating environment that any of us anticipated as we exited 2019, we are still celebrating CONMED's 50th anniversary and our move to the NYSE, which occurred simultaneously, on February 10th. Further, our focus on people, products, and profitability remains while recognizing that we are making the appropriate adjustments given the current climate. I'll now turn the call over to Todd, who will provide a more detailed analysis of our financial performance and discuss the credit facility amendment, and offer an early look at our April results.

Thank you, Curt. As we go through our results please note that I will not be making an attempt to quantify the impact of COVID-19 on our Q1 financials because it would simply be impossible to do so accurately. I'm going to walk you through the results as objective facts without trying to adjust for the impact of COVID-19. Later on the call, I will be providing some insight into our revenue for the month of April as we believe this is the most relevant information we can provide to quantify the impact of the deferral of surgical procedures on our global business. By the way, we did have one extra selling day in Q1 compared to the prior year quarter, the impact of which is immaterial given the broader dynamics of this unprecedented situation. As Curt said, first quarter sales decreased 2.0% on a reported basis and decreased 0.7% in constant currency. We passed the anniversary of the Buffalo Filter acquisition on February 11. We generated approximately $6.2 million of Buffalo Filter sales between January 1, 2020, and February 11, 2020. Excluding this contribution, our sales declined 3.6% on an organic basis in Q1. On a pro forma basis, if we had owned Buffalo Filter in the full prior year quarter, our total Q1 2020 revenue would have declined by 3.0%. Now that we have anniversaried the acquisition going forward, for competitive purposes, we will not be discussing specific growth rates in specific product lines as is our standing policy. All remaining sales growth numbers I reference today will be given in constant currency. The reconciliation to GAAP numbers is included in our press release. For the first quarter of 2020, our domestic sales increased 1.6% versus the prior year quarter, while international sales decreased 3.4%. Worldwide orthopedics revenue declined 10.7% in the first quarter. Domestically, orthopedics decreased 18.2%, and internationally orthopedic sales decreased 5.6%. Total worldwide general surgery revenue increased 10.0% in the first quarter, with total domestic general surgery revenue growing 14%, and internationally general surgery grew 1.3%. Now let's move to the expense side of the income statement. For comparative purposes, I will discuss the P&L performance excluding special items, which include charges related to acquisitions and integrations, manufacturing consolidations, debt refinancing costs, amortization of intangible assets, and amortization of deferred financing fees and debt discount net of tax. A reconciliation to GAAP numbers is included in our press release. As you can appreciate, our expense metrics as a percentage of sales were impacted unfavorably by the sudden decrease in sales we saw during the month of March. Adjusted gross margin for the first quarter was 56.9%, an increase of 100 basis points from the prior year quarter. This was better than we expected and was trending above expectations all quarter long. Research and development expense for the first quarter was 4.7% of total sales, a 10 basis point reduction from the prior year quarter. First Quarter SG&A expenses on an adjusted basis were 41.2% of total sales, which is 170 basis points higher than the prior year quarter. Interest expense in Q1 2020 was $6.5 million. The adjusted effective tax rate in the first quarter was 18.2% compared to 15.0% in the prior year period. The low rate was due to the resolution of an outstanding audit, as well as the excess tax benefit from equity plans. First-quarter GAAP net income totaled $5.9 million or $0.20 per diluted share, compared to a reported net income of $1.0 million or $0.04 per diluted share a year ago. Excluding the impact of special items discussed earlier, our first quarter adjusted diluted net earnings per share were $0.51 versus $0.57 in the prior year period. Turning to the balance sheet, our cash balance at the end of the quarter was $24.3 million, compared to $25.9 million as of December 31, 2019. Accounts receivable days as of March 31 were 70 days, compared to 69 days a year ago. Inventory days at quarter-end were 166, compared to 155 days a year ago. The increase is due to the sudden sales slowdown late in the quarter. Long-term debt at the end of the quarter was $773 million versus $755 million at year-end. Our leverage ratio at March 31, 2020 was 4.5 times. Cash flow provided by operations for the quarter was $3.7 million compared to cash flow used in operations of $3.9 million in the first quarter of 2019. Capital expenditures in the first quarter were $2.8 million, compared to $4.0 million in the prior year quarter. As you can see, we were operating well within our debt covenants at the end of the first quarter. However, since surgical procedures have been deferred in a majority of our geographies, we expect a significant decrease to EBITDA, beginning in Q2 2020. As you probably saw last week, we have already reached an agreement with our bank group that provides a temporary suspension of our debt leverage covenants until June of 2021, in exchange for revised liquidity commitments and higher interest rates. We believe this amendment provides us the flexibility to strategically navigate this unprecedented situation and return to a position of relative strength in the markets we serve once this pandemic is over. As Curt mentioned earlier, on the expense side, we have dramatically reduced all discretionary spending. We have suspended or cut nearly all external spending in order to maintain our full-time employee base and continued progress of critical R&D projects. Our focus is to maintain the improved infrastructure we have built, so that we can continue to stay close to our customers and be ready to provide them with innovative solutions when they are ready to return to treating patients. Turning to guidance, as you know, we withdrew our guidance back in March due to the lack of visibility related to the pandemic. As we don't think it's possible to accurately assess the impact on our business over the next several quarters, we will not be providing forward guidance at this time. In lieu of guidance, to help you understand the impact of the pandemic on our business, I will instead walk you through how our business has trended to this point in the month of April. We expect worldwide revenue to be down between 50% and 55% in the month of April, which includes orthopedics down 65%, and general surgery down 40%. We expect the U.S. to be down 60%, and the rest of the Americas to be down about 70%. In Europe, Middle East, and Africa, we expect the total business to be down approximately 45%. Within that broad geography, there are significant differences by country. For example, in Spain, Italy, and France, we are seeing reductions between 50% and 65%. However, Germany is only down about 10%, and the U.K. and the Nordics are down around 30%. Again, these are only April sales. Our Asia and Pacific category includes Australia which is down around 30%. Our other Asian countries are returning to growth in April after declining in the first quarter. We are filtering these orders for true customer demand, trying to prevent stockpiling or building distributor inventory. Because it isn't clear yet whether the Asian sales growth in April reflects true end customer demand, and in order to not unintentionally mislead you, we will not be providing those specific April growth rates today. We hope that this helps you better understand what is going on around the world in the markets we serve. And with that, we'd like to open the call to your questions, and I'll hand it back to Chris.

Thank you. Our first question comes from Robbie Marcus with JPMorgan. Your line is now open.

Thanks for taking the question. I appreciate that's a lot of color on April and how to think about it. What are you preparing for internally for May and June, and the rest of the year here? How are you going about your planning? Obviously, I don't think anyone knows the answer, but what are you preparing for internally, both from the sales perspective and how to manage those costs down the P&L?

Yes, Robbie, I'll address the first part of your question and then let Todd cover the cost aspect. Our main focus has been on the three priorities I mentioned earlier, with the last one being to prepare for the future. During this period, we've utilized the time to engage our sales force and marketing teams in additional training on surgical procedure products, while continuing to support customers globally. Although many markets have experienced significant slowdowns, there are ongoing cases where urgent surgeries are being performed, including those that use CONMED products. Our representatives are actively supporting customers when needed. We anticipate that the second quarter will be the low point, and we expect some of the postponed surgical procedures to start coming back. We have already observed a slight uptick in some cases this week. In international markets such as China, Japan, and Korea, there have been positive developments, as Todd mentioned. Our aim during this period has been to ensure our sales and marketing teams are ready for when the markets recover. Regarding the second quarter, we believe April may be the toughest month, with May expected to improve slightly, and we hope June will continue that positive trend. However, I won't speculate on whether we'll return to normal by the fourth quarter, as it's too early for such predictions. The recovery is influenced by many factors that could vary regionally or depend on patient acceptance at care facilities, as well as potential resurgences of COVID cases. Our current priority is navigating Q2 and observing what the second half of the year may bring. I indicated that we've implemented significant cost reductions, and now I’ll turn it over to Todd to provide further details on that.

Yes, thanks, Robbie. Obviously, we've got to be very judicious and responsible in our spending, and we're doing that. As we talked about in the prepared remarks, we've taken dramatic cuts to all external spending and discretionary spending. However, we are keeping the employee base and the infrastructure we have built healthy, because the focus here, as you know, the key to success for CONMED is to take market share in these large attractive markets where we play. So when the customers are ready to get back to work, we want to make sure that we're there with no pause or delay. So, we've got to manage both of those things. We have to be judicious and also be ready to be on the offense as soon as the surgeries return. That's how we're handling that.

Maybe…

Robbie, you cut out. Chris, we might need to move on. Robbie can get back in line. Robbie, we're not hearing you.

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

Hey, guys, thanks for taking my question. I have two questions. I guess that the first just being thanks for the just color and revenue breakdown for April. I was wondering if you could just give us a little bit of perspective on how maybe some of the products may break out just from a setting perspective in terms of what your products are from an inpatient and outpatient basis. So it does seem like more of your products may be skewed more for the outpatient. And then I have a follow-up on Buffalo Filter and AirSeal.

Sure. So I think the way to think about our business on the orthopedic side involves a bit of geographical division. In the U.S. market, sports medicine procedures where we're serving the customer, I'd say north of 70% of that is happening in the ambulatory surgery center. There are still some sports medicine procedures, more challenging procedures, if you will, that could be happening in the hospital environment. But probably at least 70% of that revenue is happening in the surgery center. It's not the same dynamic outside the U.S. There's not nearly the surgery center environment outside the U.S. that you have in the U.S. So orthopedics outside the U.S. could be more hospital-based. On the general surgery side, we have three businesses. Advanced Surgical is the biggest one. They would be principally hospital-based. The patient care category, which is the ECG electrodes, again more hospital-based. Our endoscopic technologies business is probably 50/50, half hospital-based and half surgery center-based. And again, those are generally speaking for Advanced Surgical and Patient Care. And CET, that's a U.S. comment, outside the U.S., most of that is going to happen in a hospital-based environment, with some exceptions, but just generally speaking here.

Perfect. And then on just AirSeal and Buffalo Filter, I was really struck by some of the recommendations coming out of SAGES, and the guidelines just recommending the use of smoke evacuation in these times with COVID, and just filtering out viruses in general. I was just wondering if you could comment on what you're seeing in the marketplace as it relates to the awareness of those recommendations and just early comments that you might have had or just conversations with any health system on more smoke evacuation now with COVID, especially around restarting some procedures with potentially COVID positive patients? Thanks so much.

No, it's a great question. We certainly have tried to stay in tune and in touch with all of those recommendations. We view our role first and foremost as educating on the benefits that our products provide in concert with the recommendations. So as those recommendations came out, we looked at our product portfolio, be it AirSeal or Buffalo Filter, and asked how our technology plays against those recommendations. We worked with the clinical community to set up a host of global webinars and other online training to highlight our product against those recommendations, so really trying to be an educational resource. This is not a time to be selling; it's a time to be educating. That has been truly our global approach. The response in the marketplace to those recommendations has certainly elevated awareness. When awareness is elevated, people look for solutions, and we're getting a lot of attention as they're searching for those solutions. And that comment is truly a global comment. Our inbound interest in products like AirSeal and Buffalo Filter is very strong before this pandemic and even stronger now. We are mobilizing to meet that demand no matter what geography or what market it comes from. It revolves around the ability to capture smoke and filter. Everyone on the call knows that Buffalo Filter in the open environment is the market's leading technology for smoke capture and filtration, and when you look at what the AirSeal platform does in the closed environment, with the smoke evacuation mode and filtration, we truly have the most comprehensive open and closed portfolio in the marketplace with just this truly phenomenal technology. The market is excited about it, and that's why I included it in my scripted comments that this benefit uptick, once you have that awareness, is not going to go away after COVID; the benefit of the technology will remain in the marketplace. So, we're very excited about that and are trying our best to work with customers in every way possible.

Thank you. And our next question comes from the line of Matt O'Brien with Piper Sandler. Your line is now open.

Good afternoon, guys. This is Patrick on for Matt. I just wanted to start with talking about capital requirements. You've done a lot of important work, kind of amending your credit agreements and just making sure you're being super judicious on the P&L. But kind of longer-term or in the medium timeframe, what are your current thoughts on your capital position? Do you feel you need to do something within this year? And if so, do you have a preference, whether it's debt or equity, given how cheap that is right now in this market? Just any color there would be really helpful? Thank you.

Sure, Patrick. We feel really good about the amendment we got done with the banks, and we think this gives us the flexibility to navigate intelligently and strategically through this pandemic. At this time, we don't have any other moves in mind or plans to do anything else.

That's really helpful. Thank you. And I just had a follow-up on AirSeal. My question for you is, I know you've done a really nice job with tying AirSeal with robotic procedures, and there's a natural kind of marriage of both of those two products. But as hospitals push back on capital equipment and are pressured due to COVID-19, can you give us any updated thoughts on if there's any impact that would have on AirSeal or any adoption moving forward? Thank you.

I think as surgical procedures have slowed, that impacts everything. If AirSeal is being used in a robotic procedure and robotic procedures are slowing, that means less consumables that go with the AirSeal capital would be used. As those procedures return, the consumables return. Looking forward, again, I just remind you that we're still very low in our overall penetration of the technology of AirSeal on a global basis. AirSeal was built by attaching to robotic procedures. We've done a very nice job there and continue to build on that, and are excited to continue to work in that marketplace. The broader laparoscopic market remains the big open place, and I think that market is not going to disappear; it's going to come back. So, I still think while you may have an intermittent bump here and blip in the overall outlook, I think there's still a long-term trajectory that we can go on, and certainly some of the recommendations that have come out recently have helped support our belief in the technology, both AirSeal and Buffalo Filter, and the long-term growth prospects for both of those.

Thank you. And our next question comes from the line of Mike Matson with Needham & Company. Your line is now open.

I was curious about your views on the balance between capital equipment and procedural-oriented products. It seems that hospitals are under significant financial strain, and some public hospitals have mentioned plans to cut capital expenditures through the end of the year. I would assume that not-for-profit hospitals are doing the same. Looking towards the latter part of this year and into 2021, do you believe that procedures will recover more quickly than the capital aspect of your business?

Mike, I absolutely think that's going to happen. I think the first thing that the health community wants to do is resume surgical procedures. They are financially more likely than not to be cash flow constrained because surgical procedures are a money-maker. They have not been doing them, and I think that CapEx is going to be put on the sidelines for a period of time. I can't predict how long that will be. I have been through a few of these ups and downs cycles with capital. I think there's always some capital that gets through. It's really driven by need and the replacement cycle and the capital they may currently have. I do think as you look again at our couple of our capital items, whether it be the AirSeal or Buffalo Filter platforms, I think they've shown a little bit of resilience here even in this environment, because people understand the benefits of that technology and are willing to make those investments. Other parts of capital are certainly going to be longer to come back to the market. Again, the first thing is to get procedures going. Capital will be deferred for a period of time. I can't say how long that will be at this point in time.

What I would add is to remind you that particularly regarding AirSeal and Buffalo, those require relatively low capital investment, especially with Buffalo, where you're looking at $2,000 to $4,000 for the box. My first point is that our capital needs are comparatively lower than what is usually discussed in the market. Additionally, we offer multiple programs for our customers, including leasing options, to accommodate those with limited capital who still need to acquire this equipment to serve their patients. We have the creativity and flexibility in our programs to assist them as needed.

Okay, understand. And then just given the pandemic and the lack of access to health care facilities and practitioners, and then with meetings like AOS canceled, how does this impact your new product launches? I'd assume you had some things that were planned for this year; would those then get pushed into next year, and what does that mean for them for next year's product launches? Would you try to do them all at once? Is there some kind of bandwidth issue there?

Well, listen, part of our financial discipline here is we look at everything, and we firmly believe as I said earlier that innovation still matters, but we have prioritized our innovation. That's number one. We will be introducing new products this year in spite of what's going on in terms of access. What we've learned in the last, call it, two months is the ability to use digital technology and digital solutions has taken kind of a meaningful uptick in this environment, and customers have shown a greater willingness to engage in that. Will that stick as they get busy with the surgical procedures? Again, I don't know, but we've gotten certainly better at doing that, and our customers have shown a reception and willingness to that type of approach. Yes, we always prefer in this industry the in-person, it's a relationship business; we prefer the ability to be there highlighting products with a customer face-to-face in the operating room. But we'll find ways to work around that, and I think that is on us, and it's something we've taken a hard look at and are working through as we speak. It doesn't mean that we'll have more products available for next year's launch. We'll talk about that as we get to next year, but we still have some high-priority platforms that we intend to get into the market this year, and we'll just have to be creative in how we introduce those.

Okay, thanks a lot.

Thank you. And we have a follow-up question from the line of Matthew Mishan with Keybanc. Your line is now open.

Hi, great, and thanks for taking the questions. Hi, Curt and Todd, last quarter, we were talking about disruption from sales force reorganization. Were you able to complete those activities before this crisis, and how comfortable are you with the change that you made in the context of all of this that we're dealing with today?

Matt, I did say in my scripted comments that we've completed all of our sales force activities in the first quarter. Remember, in the January call, we noted that we were working in the U.S. orthopedics business, and we completed all of that, and all of our sales force work on a global standpoint is complete and in place. I'm pleased with it. I'm happy we did it. In spite of this hiccup, I don't regret those decisions and think they were the right things to do for the respective parts of the business and geographies where we did those, and we look forward to all of those folks being active in the marketplace when access and surgical procedures return.

Okay, excellent. And then, one of the things that always confused me most about CONMED is the manufacturing variances over multiple quarters. How should we think about your pace of manufacturing through late 1Q into 2Q, and the phasing of potential variances through the rest of 2020?

Yes, that's a really good question, Matt. First quarter was good; gross margin was good overall; manufacturing productivity was really good, but the world changed pretty drastically in March. It would be impossible for me right now to project out any further, but obviously with volumes at the levels we're talking about that will have a negative impact on manufacturing variances. When we have a better ability to talk about those in detail and project them, we will but we're just not in a position to do that today.

And if I could just squeeze one more in, kind of why would you think that the growth you're seeing in Asia is more from distributors stocking than a true recovery?

The growth numbers are pretty large, and we're just trying to figure that out right now, and rather than give those specific numbers, we decided to let you know that they are back to growing after a rough Q1, but we're not able to put a true representative gross number that would help you understand what recovery looks like.

Thank you. And our next question comes from the line of Rick Wise with Stifel. Your line is now open.

Hi, Curt. Hi, Todd. I wanted to go back to gross margin. I think it's at 56.9; I think I'm right in saying it's a record level, but you said it was trending above expectations. I appreciate you're not anxious to forecast going forward, but maybe just help us understand some of the drivers there. Was it the mix of new products? Was it just purely volume? Was it something about some cost reduction initiative that maybe we need to appreciate better? Because it just seems to me that as you come out of this, as you recover, those factors should be in play and whatever the exact numbers are, they should be a real positive as we go back the other way, as volumes recover whenever that is?

Yes, I think that's logical, and it is a bummer, Rick, because I think we were set up to really have a good gross margin story this year. As a reminder, we guided 80 to 100 basis points of improvement at the beginning of the year. We thought Q1 was going to be the tough quarter, right? We thought we would be well below that in Q1, but we'd catch up later in the year. So for Q1 to come in as good as it did, I think was really encouraging to us, and I think the biggest driver was the cost reductions, which is combined with the volume from the prior year. I think we're doing a good job leveraging the infrastructure with a higher revenue base. We've been talking about that a lot, and I think that's playing out. The other couple of things that happened in Q1: I think mix was positive, specifically capital being low, that actually helps margins, and then also FX was a little better than we thought it would be. So that was why it beat our expectations, but there is good underlying activity and progress on the gross margin side of the business.

Yes, and just thank you for that. And just a follow-up on that thought process; Curt, my impression is that the last few years, obviously focused on a lot of factors in CONMED, people, pipeline, sales force expansion, etc., but my impression, and please correct me if I'm wrong, is that you focused less aggressively on pure cost reduction prioritizing instead making sure that the sales force had the products they needed. So, the long winded lined up here, but where I'm going with this is that during a period like this, given your experience, long experience, operating and financial, is there an opportunity to actually accelerate your cost reduction, cost improvement programs that you might not want to tackle otherwise, again, setting you up for actually a leveraged recovery in terms of operating margins, again whenever that happens?

Number one, I'll confirm what you've stated. Our priority in the last couple of years for our global manufacturing team has been the successful high-quality launch of new products. That has been priority one every single day. With that said, I'd have to go back probably 18 months or so, where we started talking about some of our manufacturing work now starting to move into focusing on SKU rationalization, routine cost reduction, kind of being a little more habitual in our approach there, and as Todd said earlier in response to one of the questions, we did have some nice cost reductions carry into 2020 as we rolled standards. So, we're kind of in the early innings of that benefit starting to hit the company. Can we take advantage of this downturn to accelerate efforts on cost reductions? I'm not going to bite quite as hard on that part right now. Initiating new products or new projects in cost reduction, typically takes a lot of in-person presence from the engineering, the manufacturing engineering, the quality teams, and a lot of that office-based employee are working remotely. The people that are working in our factories are truly aligned around production support or new product build, validation, verification activity. We've really narrowed our focus on the activities at this point in time, but I take more confidence in this successful cost reductions we built and delivered last year coming into this year as a good predicate of what we can do on a go-forward basis.

I appreciate it. Thanks.

Thank you. And we have a follow-up question from the line of Kristen Stewart with Barclays. Your line is now open.

Thanks for taking the follow-up. I guess going on back to gross margins stuff. Todd, how should we just think about the lower procedures? To the extent you might be slowing down perhaps some of the manufacturing, just with respect to the procedure demand being lower, will you take most of that as a manufacturing variance in the current period? Or should we think about some of those fixed costs being more capitalized and putting more pressure in future periods and on cost of goods sold such that you might put some of that pressure and inability to see that future gross margin expansion? Hopefully that question made sense?

Yes, definitely made sense. Kristen, I've seen other companies talking about this; that's something we're going to look at right, and we've started those discussions. It'll really depend on what the volume looks like right and how Q2 plays out and what Q3 is looking like as we get near the end of Q2, but I'm not going to get ahead on this call of our auditors and our audit committee. We'll look at the facts on the ground and decide what makes the most sense, but we're certainly aware of those issues, and we've heard other people talking about that; but no answer for you definitively here today.

Could you provide any insight into the order patterns for smoke evacuation? I understand you mentioned that interest was high before COVID and has increased since then, but are you seeing this interest reflected in actual orders now? Is COVID accelerating orders or impacting backlog in any way? Any quantitative or qualitative information on these aspects would be helpful. I know there is interest, but is it leading to meaningful orders at this time?

No, it's a great question, and I'd probably give you more qualitative than I will quantitative at this point. That might be something we revisit on the second quarter call, but I would confirm for you that our Head of our International Business and our Head of our Advanced Surgical business have been working with their marketing teams and updating our global forecast for both the AirSeal and the Buffalo Filter portfolio. On the other side of that, we're continuing to provide educational forums for customers to dial in and participate, via video forums, webinars, et cetera. As that work globally has continued, the orders have also started to come in, and I can tell you that began almost immediately after the early recommendations from some of the surgical societies were published, and it was rather surprising how quick the response was. We've been very encouraged by the receptivity to the educational programs that we've provided to try to give customers confidence about what our technology does and how that will work for them. So, yes, we have seen the order volume pick up and the backlog pick up, and we're working to ensure we have product supply to meet any expected future demand.

There's no major constraint on manufacturing for either of those products at this point?

The good news is on both of those platforms started with IFS. One of the main activities after acquisition was the vertical integration of that platform technology into our manufacturing network. We embarked on the same process with Buffalo Filter. I can't tell anybody on this call it's 100% vertically integrated into our four walls, but I feel good about our supply chains, whether they are the internal manufacturing process or the external supply partners that we work with on those technologies.

Great, thank you very much. Have a good night.

Thank you. And this concludes today's question-and-answer session. I would now like to turn the call back to Mr. Hartman for any closing remarks. Mr. Hartman?

Thank you, Chris, and thank you everybody for your time today; we appreciate you listening to the CONMED story and your questions. We look forward to speaking with you on our next earnings call. Thank you, and have a good evening.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.