CONMED Corp Q4 FY2022 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, its plans and objectives. These statements represent forward-looking statements that involve risks and uncertainties as those terms are defined under federal securities laws. Investors are cautioned that any such forward-looking statements are not guarantees of future events, performance, or results. The company's actual results may differ materially from its current expectations. Please refer to the risk and other uncertainties disclosed under the 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 non-GAAP or adjusted measurements during this discussion. While these figures are not a substitute for GAAP measurements, management uses these figures to aid in monitoring the company's ongoing financial performance from quarter-to-quarter and year-to-year on a regular basis and from benchmarking against other medical technology companies. Adjusted net income and adjusted earnings per share measure the income of the company, excluding credit or charges that are considered by the company to be special or outside of its normal ongoing operations. These adjusting items are specified in the reconciliation supporting the company's earnings releases posted to the company's website. With these required announcements completed, I will turn the call over to Curt Hartman, CONMED's Chair of the Board, President and Chief Executive Officer for opening remarks, Mr. Hartman.

Thank you, Justin. Good afternoon and thank you for joining us for CONMED's fourth quarter and full-year 2022 earnings call. With me on the call is Todd Garner, Executive Vice President and Chief Financial Officer. Today, I'll provide a brief overview of the financial and operating performance for the fourth quarter and full-year. Todd will then provide a more detailed analysis of our financial performance and discuss our 2023 financial guidance. After that, we'll open the call to your questions. Our Q4 results were materially impacted by our warehouse management software implementation in October as indicated by our November 14 suspension of guidance. Total sales for the fourth quarter were $250.9 million, representing a year-over-year decrease of 8.4% as reported and a decrease of 7% in constant currency. Clearly, the lack of ability to ship customer orders in a timely fashion resulted in both delayed revenue and lost sales opportunities as customers supported surgeries with competitive products. This disruption also took our sales teams out of their normal business routines and cost us new opportunities typically associated with the fourth quarter. We know our customers perform surgery daily with minimal inventory on hand independent of reliable streams of products to support their needs. In this regard, we came up short in Q4 and, in many cases, customers found alternative solutions. However, customers choose CONMED products over competing products for a reason and we're working hard to regain their trust and have them return to the CONMED brand following the system implementation issues. Given the revenue shortfall in the quarter, fourth quarter earnings also suffered with GAAP net income of $26.6 million. This compares to net income of $24.4 million in the fourth quarter of 2021. Excluding special items that affected comparability, our adjusted net income of $12.9 million decreased 61.3% year-over-year and our adjusted diluted net earnings per share of $0.42, decreased 60.7% year-over-year. For the full year, sales reached $1.045 billion, representing a year-over-year increase of 3.4% as reported and a 4.6% increase in constant currency. The 2022 GAAP net loss totaled $80.6 million compared to net income of $62.5 million in 2021. Excluding special items that affected comparability, our adjusted net income of $85 million decreased 14.5% year-over-year and our adjusted diluted net earnings per share of $2.65 decreased 17.4% year-over-year. Looking back at 2022, we strengthened the broader business to include two fantastic acquisitions which are both off to a great start quantitatively and qualitatively. We also locked in the majority of our debt at a 2.25% interest rate for five years with the new convertible notes. We continue the development and strengthening of our new product introduction process and this difficult experience in Q4 will make us even better at delivering to our customers. From a market perspective, we believe the surgical environment trended more favorably in the fourth quarter with stability in procedures and subtle increases in staffing levels across the healthcare system, all of which are encouraging signs moving forward. The overall environment has more stability than at this point a year ago, while noting there are still areas of uncertainty around recessionary pressures. As we step into 2023, we're laser-focused on basic execution to deliver top-line growth and leverage earnings growth. Further, we believe we've assembled a high-growth portfolio through a disciplined combination of organic and inorganic development across both general surgery and orthopedic categories. And, as you will hear from Todd, we have more clarity on our gross margin outlook in the years ahead. While 2022 did not end as we had planned, the strategic outlook for CONMED remains strong on both the top and the bottom line, and this will benefit patients, customers, employees, and shareholders in the quarters and years ahead. Overall, I remain honored to work with this executive team and am beyond impressed by their commitment and persistence in pursuing what is in the best interest of CONMED. They and all of our global employees and related partners remain committed to our growth strategies. In 2023, we will define success by staying focused on our people and ensuring the financial growth and health of the company, while remaining committed to our strategy to drive above-market growth in both revenue and earnings. With that, I'll turn the call over to Todd, who will provide a more detailed analysis of our financial performance and discuss our financial guidance.

Curt? All sales growth numbers I referenced today will be given in constant currency. The reconciliation to GAAP numbers is included in our press release. As usual, we have included an investor deck on our website that summarizes the results of the quarter and our updated guidance. For the fourth quarter of 2022, our total sales decreased 7.0%. Our best estimate of the revenue impact from our warehouse software implementation is in the neighborhood of $65 million. Our end customer backlog at year-end, due to this disruption, was approximately $30 million, which included the impact of shutting down the warehouse for the last three days of the year to perform a complete physical inventory. History has shown that when supply disruptions in our industry are resolved, the original supplier wins back the vast majority of business lost during the temporary disruption. We know that our customers were well aware of the substitute products prior to our delivery problems, and they choose CONMED to use for a specific reason. Those reasons still exist today and we are even more energized to be excellent partners to our customers. Revenue from the recent acquisitions was $12.5 million in the quarter. As Curt said, both In2Bones and Biorez are off to strong starts and exceeded our expectations in 2022. These products were unaffected by the warehouse disruption, as they are not shipped from that location. For Q4, our sales in the U.S. decreased 3.9% versus the prior year quarter, and our international sales decreased 10.6%. The U.S. is where the majority of In2Bones and Biorez are sold. We estimate that the impact from the warehouse disruption was similar in percentage in the U.S. and OUS. The U.S. was impacted immediately while our international geographies initially benefited from inventory held in our regional distribution centers. Because of that, the remediation efforts first focused intensely on U.S. customers. As the duration of the issue extended, the international channel was depleted and the end customer there was impacted later in the quarter. We've made good improvements in shipping globally and we are shipping at or above normal daily volumes. As of this week, our end customer backlog from the affected warehouse is approximately $10 million. So we're making progress, but we're not where we want to be yet and we still have work to do to replenish our distribution channels and increase our shipping capacity for future expected growth. We will continue to focus and improve until we have turned this weakness into a strength. Worldwide Orthopedics revenue decreased 0.3% in the fourth quarter. In the U.S., Orthopedic sales grew 15% and internationally orthopedic sales decreased 9%. Obviously, the U.S. is seeing most of the benefit from the acquisitions. Total worldwide general surgery revenue decreased 12.0% in the quarter. U.S. general surgery revenue declined 11.5%, while internationally general surgery revenue decreased 13.1%. We estimate that the sales impact from the warehouse disruption was fairly balanced across the portfolio, with a little more impact felt on the general surgery side. For the full-year of 2022, our total sales increased 4.6%. Revenue from the recent acquisitions was $24.8 million in 2022. For the full-year, our sales in the U.S. increased 4.8% versus the prior year and our international sales increased 4.3%. Worldwide Orthopedics revenue increased 6.5% for the full-year of 2022. In the U.S., Orthopedic sales grew 9.2% and internationally Orthopedics sales increased 5.0%. Total worldwide general surgery revenue increased 3.1% for the full-year 2022. U.S. general surgery revenue grew 3.0%, while internationally general surgery revenue increased 3.2%. Now let's move to the expense side of the income statement. We will discuss expenses and profitability in the fourth quarter and the year excluding special items, which include charges for acquisitions and contingent consideration, legal matters, restructuring and software implementation costs, debt refinancing and extinguishment costs, amortization of intangible assets, and amortization of deferred financing fees and debt discount net of tax. Adjusted gross margin for the fourth quarter was 54.2%, a decrease of 270 basis points from the prior year quarter. The majority of the decline is due to the cost deflation we are all dealing with in 2022. The gross margin was lower than we expected due to the significant revenue miss and certain period expenses recognized in Q4. For the full-year, adjusted gross margin was 55.3%, a decrease of 90 basis points from 2021. We told you back in the spring that freight and material cost increases had cost us approximately 300 basis points in gross margin since the 2019 baseline. As we updated that analysis for the end of ‘22, it shows inflationary costs of 330 basis points in total. There has been some relief on the freight side, but the full impact of material cost inflation was higher for the full-year 2022 than what we had seen back in the spring. When we add in the labor component to that metric, we estimate the total inflationary costs have decreased our gross margin by approximately 400 basis points in the last three years. Adjusted gross margin in 2019 was 55.4%. So that means that our improving mix and cost savings over the past three years have essentially offset the impact of inflation over that time period. Research and development expense for the fourth quarter was 4.9% of sales, 80 basis points higher than the prior year quarter. For the full-year 2022, R&D expense was 4.5% of sales, 20 basis points higher than 2021. Fourth quarter adjusted SG&A expenses were 39.7% of sales, an increase of 300 basis points over the prior year quarter because of the miss sales in Q4 2022. For the full-year, adjusted SG&A expenses were 38.8%, so 50 basis points higher than 2021. On an adjusted basis, interest expense was $7.9 million in the fourth quarter and $24.0 million for the full-year. The adjusted effective tax rate was 26.5% in Q4. This was higher than anticipated as the lower income reduced the credits we were able to take against the income. For the full-year, our adjusted effective tax rate was 23.5%. Fourth quarter GAAP net income was $26.6 million, this compares to GAAP net income of $24.4 million in Q4 2021. GAAP earnings per diluted share were $0.86 this quarter, compared to $0.75 a year ago. For the full-year, GAAP net loss was $80.6 million, compared to GAAP net income of $62.5 million in 2021. GAAP net loss per diluted share was $2.68 in 2022, compared to GAAP net income of $1.94 in 2021. Excluding the impact of special items discussed earlier in the fourth quarter, we reported adjusted net income of $12.9 million, a decrease of 61.3% compared to the fourth quarter of 2021. Our Q4 adjusted diluted net earnings per share were $0.42, a decrease of 60.7% compared to the prior year quarter. Excluding the impact of special items discussed earlier for the full-year 2022, we reported adjusted net income of $85.0 million, a decrease of 14.5% compared to 2021. Our full-year adjusted diluted net earnings per share were $2.65, a decrease of 17.4% compared to the prior year. Turning to the balance sheet. Our cash balance at the end of the year was $28.9 million, compared to $33.4 million as of September 30. Accounts receivable days as of December 31 were 69 days, compared to 65 at the end of Q3. Inventory days at year-end were 251 compared to 222 at September 30. Obviously, this was meaningfully impacted by the sales shortfall in the quarter. We expect this metric to reduce significantly as we progress through 2023. Long-term debt at the end of the year was $985.1 million versus $1.36 billion as of September 30. We reclassified the remaining $69.6 million of the 2019 convertible notes to short-term liabilities. Our leverage ratio on December 31, 2022, was 5.6 times, compared to 5.0 times on September 30. The increase is due to the dip in EBITDA in Q4 of 2022. This metric is debt divided by the last 12 months of EBITDA. So this lower Q4 will be in the calculation until Q4 of 2023. We expect adjusted EBITDA for the full-year 2023 in the neighborhood of $240 million. We expect our leverage to drop below 5 times in Q3 of this year and be below 4.25 times by the end of 2023, and in the low-3s by the end of 2024. Cash used for operations in the quarter was $11.6 million, compared to cash flow from operations of $33.8 million in the fourth quarter of 2021. Cash flow provided from operations for the full-year 2022 was $33.4 million, compared to $111.8 million in 2021. The biggest driver of this difference was the significant levels of inventory built in 2022. We expect operating cash flow around $130 million in 2023. Capital expenditures in the fourth quarter were $5.7 million, compared to $3.2 million a year ago. For the full-year, capital expenditures were $21.8 million, compared to $14.9 million in 2021. Now let's turn to financial guidance. We expect reported revenue for the full-year to be between $1.170 billion and $1.220 billion. This includes currency headwinds of 150 to 200 basis points. We've included the detail of the different components of our financial guidance in the investor deck associated with this call, which can be found on our website. As a reminder, we closed on In2Bones in June of 2022 and we closed on Biorez in August. So essentially, both become organic in the second half of the year. So what you see in the reconciliation is basically the revenue from the acquisitions in the first half of the year. For adjusted gross margins, the improving mix of the portfolio is strong and will continue to drive meaningful benefits in the future. For 2023, we think mix, including the acquisitions, should drive between 110 and 140 basis points of benefit. However, 2023 has some specific challenges on the margin side. FX is a meaningful headwind of between 40 and 60 basis points and we continue to digest the inflationary costs discussed earlier and we will be temporarily slowing production in our slower-moving product lines to bring our inventory balance down. This all results in total gross margin improvement of 20 to 50 basis points in 2023. As we look beyond 2023, we expect at least 150 basis point improvement in 2024 and around 250 basis points in 2025. We believe we're on a path to have around 60% adjusted gross margins at the end of 2025. As a percentage of sales, we expect adjusted SG&A to be between 37.0% and 37.4% in 2023 and R&D expense to be in the mid-4s as a percentage of sales. We expect adjusted interest expense to be between $32.3 million and $32.8 million in 2023. We expect the adjusted effective tax rate to be around 25% in 2023. We expect adjusted EPS in 2023 to be between $3.20 and $3.45. That includes an FX headwind of between $0.20 and $0.25. As we look at the first quarter, we expect reported revenue between $262 million and $272 million. That includes about 300 basis points of FX headwind based on the December 31 rates. We see this headwind decreasing each quarter throughout the year. We expect adjusted EPS in Q1 to be between $0.58 and $0.63 inclusive of FX headwind. The full-year FX headwind on the bottom is almost all in the first half of the year split fairly evenly between Q1 and Q2. 2023 will have one less selling day overall than 2022. The way our calendar falls, Q1 will have one extra day and Q3 will have two fewer days. We feel very good about the exciting revenue growth and profitability potential from the portfolio we have built, including our recent acquisitions. We have a self-inflicted wound we need to recover from quickly, we're focused on that. We're moving back on offense and we will be a better and stronger company because of these experiences and focus.

And thank you. Our first question comes from Travis Steed from Bank of America Securities. Your line is now open.

Hi, good afternoon, everybody. Thanks for taking the question. I guess, I wanted to understand any impact from the Q4 issues going over into Q1? How to think about the Q1 impact? And what's assumed in the guide per share recapture? It sounds like you're assuming all this comes back pretty immediately. Are you seeing signs of that now? I'm just trying to think if there were some at a risk because there's been some examples in the last year where the share didn't come back quite as fast as the company's thoughts? So just want to make sure we understand what’s being assumed in the guidance?

Yes. We concluded the year with a backorder of $30 million, which is now about $10 million, so we experienced a strong January and made significant progress. We still have more work to do, and our focus is on addressing that. My perspective is that the sales impact will be most significant in the first quarter because we are closer to the issue, and as time passes, the impact should lessen. We anticipate that most of those customers will return along with their volume. While we may not regain all of it, we expect to recover the majority, which is reflected in our guidance. It's worth noting that the backlog provides advantages at the beginning of the year. This is when we have the largest gap to fill, and also where we benefit most from catching up on the backlog. Therefore, we are confident in our guidance and are committed to executing our strategy to regain those customers.

Okay. Did you provide a dollar amount for the expected changes in Q1? Additionally, I wanted to clarify the impact in the U.S. and outside the U.S. It seems like conditions may have deteriorated, but towards the end of the quarter, the primary issue appeared to be in the U.S. Now it seems to be affecting both areas, and if so, has the situation outside the U.S. worsened further into 2023?

Yes, that's correct. So no, we can't estimate the exact impact of the catch-up we have to do in Q1. We think it'll be the biggest negative impact, which is offset by the biggest positive impact, right? And then so it would be impossible to really quantify that quarter-to-quarter. Our focus is to earn that business back as quick as possible obviously. And you are correct, when we first talked about this and we expected to resolve quicker than it was, it was U.S. focused, we felt like that the buffer of inventory in our OUS distribution centers would protect us. It did protect us for a time, but because the issue took longer to resolve than we all wanted it to. Those international geographies were impacted later in the quarter. And so as we roll into 2023, the U.S. has recovered better and faster because the remediation efforts were first on that side of the business and we're making good strides on international, but international is probably more impacted at the start of the year here than the U.S.

Okay. I'll leave it there, let others jump in. Thank you.

And thank you. And one moment for our next question. Our next question comes from Robbie Marcus from JPMorgan. Your line is now open.

Thank you for the questions. Could you elaborate on how the warehouse management disruption started and the reasons behind it? I would assume such implementations occur regularly. What were the unique factors at CONMED, and what measures have you put in place to prevent a recurrence?

Well, I would start by saying we all agree the remediation has taken longer than we expected. And I think you have to look at CONMED as having one main warehouse. We have international distribution centers. The main warehouse is the one where we put the system in place. And as we work through the issues, we took a very deliberate approach to identify and prioritize those issues, while at the same time working daily to ship customer orders. Ultimately, we identified a lot more areas of remediation that were needed than we anticipated in the early stages. The way I think about it is the solutions when operating in a state-of-the-art software package require both technical and operational remediation, and the technical remediation requires comprehensive user and system validation, and we're also dealing with a substantial amount of what I would refer to as pure change management. I say that because the warehouse that we upgraded was a very manual operation, very much a paper-driven operation versus a system. I refer to it as going from a warehouse, kind of, vintage 1980 to vintage 2020; that’s a quantum step. While we thought our work pre-install had positioned us to do that, we obviously did not do a comprehensive enough set of validation and user verifications that captured all the base user cases. It's important to note as Todd said, we've got the overall backlog down to $10 million, and we're making great progress. The learnings we pull out of this will obviously come from a comprehensive after-action review, and any further software platform work that we do, which there's none in the foreseeable future at this point in time, would obviously benefit from these lessons. So again, we're better today than we were, but it took longer than we wanted, but long-term this is the right solution that will allow CONMED to scale from an operational standpoint.

Great. And maybe just a follow-up question, I appreciate all the color on guidance and some of the long-term outlook commentary. But if I just focus on ‘23 guidance, looks like sales and EPS range came down just a bit at the upper end. I imagine some of that is due to how long this has lasted versus your original expectations when you provided guidance. But maybe just help us understand what's assumed in your market and recovery and customer capture assumptions at the low-end and the high-end. I think would be really helpful. Thanks.

Sure. Yes, you're right, Robbie. When we gave that initial guidance with the disclosure of the warehouse issue, we provided it wider than normal range because it was two months prior to and we normally do it on this call. The difference today versus then is essentially we've taken a little bit off the top of both of those ranges. But we're back to what the range that we would normally give on this call for the year. So that's $50 million on the top and $0.25 range on the bottom. This is very typical where we would start the year. You're right that the adjustment reflects that we're still very bullish on the business. The sales force is very bullish. We know we can win; the fact is that our sales force was put on defense in the fourth quarter, and it's lasted longer than it was supposed to. Our focus is to get them on the offense as quickly as possible, and we're laser-focused on that, so we're moving back to offense and that's what's assumed in the guidance.

And does that include sort of normal market volumes, procedure volumes and I imagine at the high-end of the range full recapture of share?

Yes, I believe our perspective aligns with what others have mentioned regarding the environment showing modest improvement and stabilization. Our guidance reflects a status quo regarding macroeconomic factors.

Great. Thanks a lot.

And thank you. And one moment for our next question. Our next question comes from Rick Wise from Stifel. Your line is now open.

Good afternoon to you both. Maybe just taking the software implementation issue in the opposite direction. Help us understand, I mean, I think we all understand generally that having a software system or going to a modern system as opposed to a hand-managed system, Curt, is impactful. But how do we think about the benefits? When do we start to see those benefits? What kind of assumptions you're making about them in terms of sales, implementation, cash on the financial side, cash working capital efficiency, et cetera. So what do you expect? When do we start to see the positive, not just the recovery?

That's a great question. And it goes back to the reason you do these things. One is efficiency in the location, efficiency in movement of product into the location, through the location, and out of the location, whether that be to the end customer or international distribution centers. That is a very tangible benefit. As we sit here today, we're already seeing some of that efficiency; our incoming receiving operations are materially more efficient than they were pre-implementation of the software. It's one of the areas that we did get right on the implementation. We see those things more broadly across the entirety of the warehouse, which warehouse operations are about receiving, replenishing, and then picking, packing, and shipping. When we get all of these areas lined up the way they should be with all the requisite operational efficiencies and warehouse alignment, we believe we'll see that. Hopefully, as we go day-by-day, week-by-week, we see these efficiency gains more subtly. A year from now, we hope to be proud of the system we have and the output that we have, which means moving inventory faster, allowing our manufacturing and sales ops planning team to do a better job with inventory management, because we've got better controls, better oversight, and better visibility on the global inventory network. These are all the things we would target when putting such a system in place. It's hard to say exactly when right now because we're still working our way through some inherent issues that we ran into. But again, as Todd said in his comments, we've got the backlog down to $10 million, we've made very good progress. The changes required take comprehensive verification and validation, and we're trying to be very thoughtful to not make things worse as we're trying to move forward. I would say we've been successful in that, albeit a little bit slower than we had hoped.

Could you provide more details about the performance in general surgery? Both the U.S. and international markets seem to be under more strain compared to orthopedics. Can you help clarify the various factors involved? Also, how do you distinguish between issues related to the warehouse, environmental factors, or capital? If I'm understanding this correctly, the smoke business, which is significant and growing at over 20%, suggests there might be challenges elsewhere. What kind of recovery or improvement are you factoring into your 2023 guidance? Thank you.

When you look at CONMED in total, about 55% of our revenue comes out of General Surgery. So every product we sell outside of the two acquisitions goes through that warehouse. So the impact of the warehouse slowdown is proportionately going to be larger on revenue for General Surgery. General Surgery also has a mix of products that go through the large packhouse, especially in our AET business, the GI business. As you slow down those large orders moving through the pack houses, it's going to have a more material impact on general surgery. I would assign a warehouse slowdown then takes your sales force out of its offensive mode. They’re playing defense trying to move product around across their territory with the available product to ensure customers have what they need, when they need it. When you're doing that, you're certainly not in offense; you're not in a position to look for new business, and you're not in a position to try to grow your existing customer base. Those are all ramifications of the warehouse issues. I personally feel like the fourth quarter was a good surgical procedure quarter. There were subtle gains in staffing that are starting to show in the environment. Not to say there aren't pockets with issues surrounding surgical procedure volumes and staffing levels. Generally, those two elements are both improving or certainly what we saw in the fourth quarter. I feel very good about our General Surgery and our Orthopedic business today. It's unfortunate that this is clouding the outcomes of those businesses. We have very good portfolios and very good commercial teams that are very focused on their customers.

Rick, I want to make a clarifying comment just so nobody's confused. When you refer to the 20% plus growth, that is of course our expectation on an annual basis for the combined Buffalo Filter and Airseal product line. And that is in our deck; you're correct, we continue to expect that. That's a key part of our growth drivers. But it's on the growth drivers deck. It's forward-looking. I want to be clear, those product lines combined did not grow 20% in Q4 due to the warehouse issue. I want to make sure nobody's confused by that. But we continue to expect moving forward that they will be above that 20% growth mark.

I'm glad you clarified it. Thank you.

And thank you. And one moment for our next question. Our next question comes from Matt O'Brien from Piper Sandler. Your line is now open.

Thanks for taking my questions. Could you hear me, okay?

We can.

Excellent. So I don't want to focus on this too much, but Curt or Todd, the top line number did come down $10 million from what you guys talked about a couple of months ago and I know you got better information now. Is that specific to something in General Surgery, something in Orthopedics? That you're a little less bullish about now? And then can you just talk about the share recapture specifically? I mean, $65 million in one quarter is a ton of revenue obviously, what are you seeing as far as getting that revenue back and your confidence in the visibility of getting that kind of share back going forward? And then I do have one follow-up. Thanks.

Sure, thanks for the question. To clarify, we missed our estimate by $65 million in Q4. At the end of the quarter, there was a backlog of $30 million in orders that we could have fulfilled if we hadn't had to shut down our warehouse for three days for a physical inventory check. So while we missed by $65 million, $30 million of that was due to back orders that will carry into 2023, which could help our business this year, though we need to regain that business. We were able to start servicing some of those customers again before the quarter ended and have already regained others in January. We remain focused on our current and past customers while also seeking new ones. Regarding the revenue range, we did reduce the top end from $60 million to $50 million, not the entire range, because our sales force has been on defense longer than expected, which will have a longer impact into 2023. The backlog is larger now, providing some advantages moving forward. Overall, we feel confident about our revenue projections. Did I address all parts of your question?

No, that’s it. The $10 million, I mean, was there any area where they're a little more defensive? I don't know if it's general surgery or ortho?

The impact from the $65 million was slightly more on the general surgery side, but it affected the whole portfolio. However, it did not impact the new acquisitions.

Got it. Got it. Appreciate that. And then the follow-up is on gross margins. Todd, I mean, it's something that we thought would get a lot better going forward. I mean, getting to 60%, I'm assuming you mean like at some point in 2025 versus the full-year number being 60%, correct me if I'm wrong, but where does that level of improvement come from? What's assumed as far as inflationary benefits over the next several years or some of the mix benefits as well, because that's quite a bit better than we expected. Again, knowing that you have been doing better, even offsetting some of these pressures over the last several years on the inflationary side?

It's interesting to consider that despite 400 basis points of inflation over the last three years, our margins have remained flat. This suggests that if inflation were to level off even without improving, we would still have a favorable mix to support growth at that rate. Additionally, during two and a half of those three years, we did not see the benefits from our new acquisitions, which both have 80% gross margins and are expected to contribute more significantly over time. Our mix story is strong. I feel confident about reaching a 60% margin, although I have not factored in a return of the 400 basis points of inflation. Realistically, some recovery is likely, but I expect labor costs to remain consistent and anticipate that many of the elevated material costs will decrease. However, I don't believe we will return to the material cost index levels seen in 2019. I'm not relying on significant improvement from inflation to reach those figures. By growing Airseal and Buffalo, as we've discussed, and enhancing the operations of these new acquisitions, we have the capacity to achieve our goals. Interestingly, we've shown over these three years that we can counteract the effects of the extreme inflation we've experienced.

And I would just add to Todd's comment. He talked about offsetting costs; we have the most comprehensive cost reduction program today than we've ever had in my tenure at CONMED. You put that with the right mix of products, good things happen. You guys know us well; Todd wouldn't put those numbers out here if we didn't have confidence.

Got it. Okay, thanks so much.

And thank you. And one moment for our next question. Our next question comes from Young Li from Jefferies. Your line is now open.

Great. Thanks for taking our questions. So I heard the comments on AirSeal and Buffalo growing less than 20% in Q4, because of the disruption. I was wondering if you can provide a little bit more color on the growth in Q4? I assume maybe some of those orders were higher prioritized if possible. Is it fair to assume that without the disruptions that business would have grown 20%-plus in Q4?

Yes, we certainly would assume that. We were set up to have a really good quarter there. So I think without the disruption, it would have been there, but we're not going to give specific growth rates there, Young, but we continue to believe that that’s going to be a big growth driver for us. Especially, AirSeal; if you think about it, we are now seven years post-acquisition and that thing is growing as good as it ever has. There's no slowing down. And then of course, Buffalo is a lot younger in its tenure and has a lot more penetration ahead of it. So we feel very good about that being a big contributor to growth for the coming years.

And just on the Buffalo filter aspect, there's legislation in some very large geographies coming into play in 2023. We know from history that legislation after it's in play at some period of time does help those growth rates. They're big markets. I think it doubles the amount of the population in the U.S. that’s covered. So that's another benefit to that market.

I appreciate the additional color. I guess one more just maybe your thoughts around salesforce hiring for ’23. How much of that was maybe a little bit impacted or delayed since you had to pivot and focus on the warehouse situation? I think you typically would have hired and trained them for 2023 by now?

Yes, I'm going to separate the topic from the warehouse. We typically do salesforce expansions in the first part of the new year. But I'm going to go back to June, July; as a leadership team, we took a very hard look at our overall headcount and considered the recessionary elements in the global marketplace and asked ourselves if now was the time that we wanted to be expanding, or do we want to perhaps move a little bit sideways? We made a decision then to prioritize our hiring to be more backfill-driven versus expansion-driven. We want to understand more where the market may be going if there are recessionary headwinds in 2023. As that relates to the salesforce, we have done some expansion, but probably on the minimal side relative to prior years. So salesforce expansion happened, but probably on the lower end of our typical range of expansion.

Okay, understood. Thank you so much.

And thank you. And one moment for our next question. Our next question comes from Mike Matson from Needham. Your line is now open.

Yes, thank you. I’m following up on the questions about the salesforce. I understand why there wasn't an expansion, but I’m curious if any measures were taken to retain the representatives after a challenging fourth quarter. I assume many of them likely didn't meet their quotas. Was there any kind of retention compensation offered since this was out of their control, and is there a risk of turnover in that area?

Great question, Mike. We have the pursuit of quota mentality in the U.S. and outside the U.S., and we have the ability to track that with great regularity and frequency, and prior to the installation of the warehouse system, we knew where every individual rep stood. After the implementation and at the end of the year, we knew where the reps stood, and we had a couple of different sets of metrics that we were tracking relative to that. In spite of some of our issues, we had plenty of reps that made their original quota, and we had plenty that were at their quota before the installation. So we think we came up with a fair approach for our salesforce in recognition of their accomplishments. We've already had our sales meeting, and I would say coming out of our sales meeting, I was very bullish. We were completely transparent with our salesforce to understand that we couldn't give them everything because we had not yet had this call. But we felt very transparent. They felt engaged across the portfolio of products. This included the acquisition; it's the first time we've had the In2Bones organization at a sales meeting, and I had the opportunity to interact with our salesforce. Every one of our orthopedic reps is now trained and certified on Biorez, so we feel good about how they left our sales meeting and how they're feeling about this year. Can I guarantee you that we will not lose people? I can't, but I feel we've done everything possible to retain our salesforce, our best and brightest.

And thank you. And one moment for our next question. Our next question comes from Matthew Mishan from KeyBanc. Your line is now open.

Hey, guys. Thank you for taking the questions. Most of mine have been asked and answered probably several times at this point. So I'll just go with this one: I think you guys said the overall environment has more stability. I think that's the first time I've heard you guys like say something like that probably in several years. Could you just expand on kind of what you're seeing in the overall environment that you're seeing and that's given you the opportunity to feel better about the overall macro?

I believe there are several factors that contribute to that observation. First, on the commercial side, our sales teams are reporting their perceptions of market procedure volumes. We are closely monitoring data on procedure trends, as well as staffing levels in surgical and hospital settings, and all indications suggest that these elements are seeing increases. Additionally, our executive team has been engaging with health system administration at various levels in the healthcare delivery network, and discussions indicate that the fourth quarter showed improvement. As we move into the new year, these factors appear to be stable or trending positively. On the manufacturing side, while conditions are not completely back to normal, there has been some improvement in the manufacturing environment and supply chain, despite ongoing challenges in China. Overall supply is gradually returning to normal, although certain electronic components are still facing limitations due to a shift towards newer technology. It seems that there is a greater sense of normalcy in this area as well. Overall, we perceive that things are stable to improving within both sides of the business, despite a few exceptions. While the situation is not perfect, it is not deteriorating and shows indications of progressing in a positive direction.

Okay. Excellent. Please continue, Todd.

You'll appreciate this, Matt. I was going to say it's the first time we've said it in three years because it's the first time it's been true in three years.

I think that's pretty fair too. And just last one for me, just I know a lot of you're going at the AOS in March. You got two new acquisitions on the ortho side. Like anything you want to kind of preview or kind of highlight that you'll be showing or showcasing with those acquisitions?

That's a great question. This year, we will have one physical booth that will include the In2Bones organization as well as Biorez as part of CONMED's orthopedic business and the bio-braced technology. We'll conduct our usual surgeon presentations at the booth, and although we haven't published that schedule yet, you can expect sessions focused on foot and ankle and bio-brace from leading surgeons. We're very excited about the agenda and having both of these as part of our offerings. You can anticipate that the core of CONMED’s orthopedics business will showcase newer products from our portfolio, which we think is more effective than discussing them over a phone call. We're looking forward to the academy, and we have a lot planned for this year, including some major trade shows. The [Indiscernible] will be in the States this year; it typically occurs every other year. There's a significant show in September that we attend, and those are excellent trade shows for CONMED's orthopedic business. On the general surgery side, there are fewer major shows, but AORN is a very important one, and we have a strong portfolio there. I left the sales meeting feeling very positive, and our sales team is also feeling encouraged. We're excited about our organic portfolio just as much as our inorganic portfolio, and we need to engage with our customers.

Thanks, Todd.

And thank you. And I'm showing no further questions. I would now like to turn the call back over to Curt Hartman for closing remarks.

All right. Thank you, Justin, and thank you everybody for being with us today. We look forward to speaking with you during our next earnings call and wish you all a good evening. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.