CONMED Corp Q2 FY2023 Earnings Call

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 the 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. The company's actual results may differ materially from its current expectations. Please refer to the risks and other uncertainties disclosed under the forward-looking information in today's press release as well as the company's SEC filings for more detail 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 suitable substitute for GAAP measurements, management uses these figures to aid in monitoring the company's ongoing financial performance from quarter to quarter and year to year on a regular basis and for benchmarking against other medical technology companies. Adjusted net income and adjusted earnings per share measure the income of the company, excluding credit or charges that are considered by the company to be special or outside of its normal ongoing operation. 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 now 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, Jonathan. Good afternoon and thank you for joining us for CONMED's Second Quarter 2023 Earnings Call. With me on the call is Todd Garner, Executive Vice President and Chief Financial Officer. Our plan is to share with you our second quarter results and then open the call to your questions. I will start by saying we are incredibly pleased with our team's performance in the second quarter. After setting a new quarterly sales record in Q1, we handily beat that with our Q2 performance. Total sales for the quarter were $317.7 million, representing a year-over-year increase of 14.6% as reported and an increase of 16.6% in constant currency. On an organic constant currency basis, sales growth finished at 12.6%. Our commercial teams were outstanding in the first half and the results in orthopedics and general surgery indicate we delivered balanced growth across our product offering on a global basis. I'd remind everyone that in mid-June, the In2Bones business reached its one-year anniversary. We remain pleased with this business and look forward to continued growth in this exciting market as part of our organic base. Additionally, the BioBrace offering continues to build momentum through growing market acceptance, which is being driven by positive clinical experiences. From an earnings perspective, during the second quarter, our GAAP net income totaled $13.7 million. This compares to a net loss of $168.3 million in the second quarter of 2022 due primarily to the extinguishment of most of the 2024 convertible notes. Excluding special items that affected comparability, our adjusted net income of $26.1 million increased 5.3% year-over-year and our adjusted diluted net earnings per share of $0.83 increased 9.2% year-over-year. At a macro level and consistent with my first quarter comments, the underlying surgical markets that we serve are healthy and health care staffing levels continue to improve. Conversely, inflationary pressure on the material side has been slower to dissipate and supply chains are not yet fully recovered. Overall, we see all these dynamics as stable to improving in the second half of 2023. In summary, I'm very pleased with the focus and results delivered in the quarter, and I'm confident we will build on our success in the second half. Before I turn the call over to Todd, I'd like to provide important context about the standard insufflation market and our competitive position with AirSeal. Let me start by saying that AirSeal is an only-in-class technology. From day one, it has been replacing standard insufflation from all marketplace competitors in both robotic and laparoscopic procedures given its unmatched clinical benefit delivered through low pressure. The introduction of another standard insufflation device into the market will not change our clinical or sales algorithm, whether it is a stand-alone device or attached to a robot. The only parties that will feel the pressure from the introduction of another standard inflation device are the existing standard insufflation companies that we have been replacing for the past seven years. I will again remind you that none of these companies can deliver consistent pneumo at low pressure nor the related clinical benefits which are significant and are included in the investor presentation that we posted this afternoon. Our position has always been that AirSeal delivers better patient outcomes than competitive devices, driven principally through lower pressure. To support that position, we have 33 peer-reviewed studies with over 6,000 enrolled patients across five surgical specialties that demonstrate reduced postoperative pain, reduced length of stay, reduced 30-day visits, reduced ER visits, and improved ventilation metrics. Standard insufflation has zero clinical studies that demonstrate any of these important clinical benefits. In fact, I think I can make a compelling argument that we are, through our clinical capabilities, growing the number of available surgeries that can be done laparoscopically in certain patient populations to include elevated risk and high body mass index patients. Competitively, since 2018, six new insufflation devices have been introduced to the market and AirSeal continues to win surgeons globally. While the concept of integration of advice with a robot may enhance ease of use, it will do nothing to change the clinical paradigm on which we have been taking market share, and we'll continue to take market share. I will also remind you that in 2018, two strong competitors introduced their AirSeal equivalents, and I think our results would suggest we navigated that period just fine. From a technology and sustainability standpoint, we own 187 issued patents and have another 124 pending. They extend our patent position through the end of the 2030s and we continue to add to this position. Further, our AirSeal IP crosses the system and is integrated in such a way that is not one seminal patent that protects us, but rather the integration of the patents across all aspects of the system to include the IFS box, tube set and access ports. This is what makes AirSeal function in a manner that delivers clinical benefit. Each of these components is manufactured separately in a unique facility with the critical parts being insourced here at CONMED. We're not currently aware of any patent work that will allow another device to function in a low-pressure mode. Finally, based on the June 2023 best hospitals in the US teaching hospital category, AirSeal is present in 92% of the top 25 teaching institutions with MIS procedural utilization rates ranging from just getting started to over 75%. This is a statistically significant fact given that physicians utilize what they are trained on when they depart to surgical practice. We will never be dismissive of competitive entrants, but I think it's misinformed to assume that same old technology created by the same partner to the rest of the insufflation market will somehow materially impact our results. Never mind that the market knows minimal details about this device. From my chair, if it's not obvious that it can provide consistent pneumoperitoneum at low pressure as proven through clinical studies like AirSeal has shown, it is just another standard insufflation device. The only in-class AirSeal technology supported by extensive clinical benefits derived through low pressure has clearly been moving the market to embrace our solution. We do not see anything in a standard insufflation offering that would slow that progression, and we remain extremely optimistic about our future with AirSeal. More importantly, and if you really digest the quarter we just delivered, the overall prospects for CONMED, given the surgical diversity of and balanced growth our portfolio is demonstrating look the best they have ever looked in my tenure. I'll now turn the call over to Todd, who will provide further details on our financial performance and discuss our updated outlook.

Thank you, Curt. All sales growth numbers I reference today will be given in constant currency. The reconciliation to GAAP numbers is included in our press release. As usual, we've included an investor deck on our website that summarizes the results of the quarter and our updated guidance and this time, it includes some supplemental information on the moat around our AirSeal product line, consistent with Curt's comments. For the second quarter of 2023, our total sales increased 16.6%. On an organic basis, revenue grew 12.6%. We anniversary the In2Bones acquisition on June 13th, and Biorez will turn organic on August 9th. For Q2, our sales in the US increased 17.1% versus the prior year quarter, and our international sales grew 16.0%. Worldwide Orthopedics revenue grew 19.8% in the second quarter. In the US, Orthopedic sales grew 29.4% and internationally, Orthopedic sales increased 14.8%. The Total worldwide General Surgery revenue increased 14.1% in the quarter. US General Surgery revenue grew 12.5%, while internationally General Surgery revenue increased 17.9%. Now, let's move to the expense side of the income statement. We will discuss expenses and profitability in the second quarter, excluding special items, which include charges for acquisitions and contingent consideration, termination of distributor agreements, legal matters, debt refinancing costs, restructuring and software implementation costs, amortization of intangible assets, and amortization of deferred financing fees net of tax. Adjusted gross margin for the second quarter was 54.4%, a decrease of 50 basis points from the prior year quarter. This was consistent with our guidance of mid-54 for Q2. Similar to Q1, we saw exceptionally strong growth in some of our lower-margin geographies, which has skewed the margin to the lower end of our guidance so far. We remain excited about the improving margins ahead. For Q3, we expect gross margins to improve sequentially over Q2 by approximately 150 basis points. And then again, sequential improvement from Q3 to Q4 between 100 and 150 basis points. Research and development expense for the second quarter was 4.3% of sales, 20 basis points higher than the prior year quarter. Second quarter adjusted SG&A expenses were 37.4% of sales. Leverage gained on the higher sales drove the 70 basis points improvement over the prior year quarter. On an adjusted basis, interest expense was $8.5 million in the second quarter. We expect a similar level of interest expense in Q3, and that does incorporate the rise from today. The adjusted effective tax rate in Q2 was 21.9%. Taxes came in lower than expected, principally due to the excess tax benefit from stock plans. This is difficult to predict, but we don't expect the same benefit in future quarters. We still expect the tax rate to be around 25% going forward. Second quarter GAAP net income was $13.7 million. This compares to GAAP net loss of $168.3 million in Q2 of 2022. GAAP earnings per diluted share were $0.43 this quarter compared to a loss of $5.65 per share a year ago. Excluding the impact of special items discussed earlier, in the second quarter, we reported adjusted net income of $26.1 million, an increase of 5.3% compared to the second quarter of 2022. Our Q2 adjusted diluted net earnings per share were $0.83, an increase of 9.2% compared to the prior year quarter. Turning to the balance sheet. Our cash balance at the end of the quarter was $27.8 million compared to $26.5 million as of March 31st. Accounts receivable days as of June 30 were 65 days, flat compared to the end of Q1. Inventory days at quarter end were 200 compared to 215 at March 31. Long-term debt at the end of the quarter was $971.5 million versus $995.3 million as of March 31. Our leverage ratio on June 30, 2023, was 5.1 times. We continue to expect our leverage ratio to be below 4.25 times by the end of the year. Cash flow provided from operations in the quarter was $26.7 million compared to cash flow from operations of $18.7 million in the second quarter of 2022. Capital expenditures in the second quarter were $4.5 million compared to $5.7 million a year ago. Now, let's turn to financial guidance. We now expect reported revenue for the full year to be between $1.230 billion and $1.260 billion compared to our previous guidance range of between $1.205 billion and $1.250 billion with no material change to the expected currency impact on the year. We now expect full year adjusted EPS in 2023 to be between $3.40 and $3.55 compared to our previous range of $3.30 and $3.50. As discussed previously, the full year 2023 will have one less selling day compared to 2022. The way our calendar falls, Q1 had one extra day and Q3 will have two fewer sales days. As we look at the third quarter, we expect reported revenue between $295 million and $305 million. That includes approximately 100 basis points of FX headwind. We expect adjusted EPS in Q3 to be between $0.80 and $0.85. As Curt said, we are pleased with the Q2 performance and our focus on executing and continuing to build on our strong first half as we move through the rest of 2023. We remain confident in our ability to deliver innovation to our customers while driving above-market growth and profitability over the long term. With that, we'd like to open the call up to your questions, and I'll turn it back to Jonathan.

Thank you for taking my question, and congratulations on a successful quarter. I have two questions. First, I'd like to discuss the underlying trends. It seems you are involved in several strong orthopedic and surgical trends that we've been hearing about from other companies. I know you mentioned this briefly in your script, but I would appreciate more detail regarding the US market and the performance of the revamped sales force in orthopedics, as well as how surgery performed excluding air filtration and smoke evacuation during the quarter.

Overall, we're very excited about our performance. Our US Orthopedics business has been going through some changes since Pat Beyer joined in October 2020 and introduced a new leadership team. We're beginning to see the positive results of that effort. The second quarter marked our best organic performance in US Orthopedics in several quarters, which looks promising for the second half, supported by improved sales, marketing, and overall support, as well as an increase in procedure levels in the underlying markets. When combined, these factors contribute to strong results. In General Surgery, excluding AirSeal and Buffalo Filter, we achieved growth. Many may not realize the extent of our business in the advanced endoscopic technology category, which nearly achieved double-digit growth this quarter. We typically don't highlight that, but it represented excellent global performance. Looking at our global results overall, we had strong performance across most of our core markets, despite facing unique challenges in one market with our portfolio.

Great. And I know you talked a lot about it in the script. So, not to pound on it too much, but there's a lot of newfound worry in the market that AirSeal is a great product and delivers a lot of incremental growth for you, that a lot of the placements and use are in conjunction with intuitive surgical robotic procedures and reports that a third-party OEM might be making an insufflator to integrate with it. And again, I know you talked in the script, but I think it'd be helpful maybe just to review what percentage of AirSeal is from robotic procedures. What's currently in the market today beyond AirSeal and maybe some of the reasons that even if the robotic platform comes with an insufflator that AirSeal will still be used and still be used in a good amount of procedures and forward growth? Thanks a lot.

Thank you, Rob. The strength of AirSeal lies in its unique clinical advantages. We've shared studies and data, and these have been validated over millions of patients over the years. As Curt mentioned, competitors often claim to have found alternatives to AirSeal, suggesting that their solutions will be just as effective. However, none have managed to meet all three essential functions simultaneously: introducing gas into the abdomen, removing smoke, and measuring pressure. AirSeal stands out because it operates without valves, facilitating all these processes at the same time without interruptions. This capability allows us to maintain consistently lower pressures across a wide range of procedures and patients, which is challenging to achieve in practice. In our view, any solution that includes valves or requires starting and stopping functions—like gas introduction or smoke removal—cannot achieve the same clinical outcomes that AirSeal provides. This is why no competitor has successfully matched the performance of AirSeal despite claims to the contrary. As we approach eight years post-acquisition, our product line continues to grow over 20% each quarter, reflecting its distinctiveness in the market. Doctors won’t compromise on clinical results for products from competitors they prefer. Regarding the link between AirSeal and robotic procedures, the attachment rate is high in the US due to the business being established around robotic surgeries, which are particularly relevant given the additional risks associated with them. Outside the US, the attachment is lower because there have historically been fewer robotic surgeries. Our sales teams abroad effectively promote AirSeal within non-robotic minimally invasive procedures. Meanwhile, the US sales team has not had to focus on developing expertise in non-robotic areas. Should the demand for robotic procedures slow down, AirSeal can still grow rapidly by pivoting our efforts toward non-robotic applications. We are very confident in our competitive position and see no market challenges to our differentiation. AirSeal has been an outstanding product nearly eight years post-acquisition, and we anticipate continued success moving forward.

And Robbie, from a competitive standpoint, any company in the marketplace who provides a video platform for MIS surgery is going to have an insufflation device. And the insufflation category has traditionally been provided by an OEM. Suspect it's the same OEM that's providing this device. And that is considered standard insufflation technology. When you look at attachment to a robot, it's like a video stack. You're putting the platform on there. There may be some integrated ease-of-use features. But again, consistent pressure, stable pneumoperitoneum at low pressure that can handle the removal of smoke without movement in the working space that can handle doing that at low pressure. That's the clinical benefit and differentiation of the technology and the intellectual property across the three elements provided. So, hopefully, that helps people understand a little bit different the clinical aspects and value that AirSeal brings to the marketplace, the clinical marketplace.

Good afternoon Curt. Hi Todd. Curt, can you provide us with more details on the warehouse issues and customer recapture? The software implementation was completed last quarter, and I believe you mentioned that over 50% of customers who experienced disruptions have returned. Can you update us on the current situation, the benefits observed this quarter, and when we might expect to return to your previous performance levels or your ideal targets?

I believe we are following the path we discussed since the fourth quarter. We saw a solid return in the first quarter, driven by an increase in overall procedure volumes, and I feel we have made significant progress in recovering with the majority of our customers. While there will always be a few stragglers who may have chosen a competitor and made commitments, I can confidently say that we are not overly concerned about when these customers will return. We have effectively recaptured many customers who may have left us for a time. The underlying strength in the markets, our innovation, and the hard work of our sales teams have successfully reassured these customers that we are back on track. As mentioned in the last call, we are still focused on maximizing the opportunities presented by our warehouse implementation software, and we will continue to do so. With any advanced software platform, the goal is to optimize it continuously, and that journey will carry on.

Okay. And I know how important innovation is in your mind and to the CONMED strategy. Can you give us any color about what we might see or any way to characterize the kind of impact that new product launches are having or about to have in a broader portfolio sense? And maybe roll into that, just a little more detailed update on In2Bones and Biorez. It seems like they're doing well. Maybe just help us understand where they are in terms of growth and acceptance and how we think about the contribution. Just those two alone might make two or four second half topline growth? Thanks so much.

Yes. So, we're encouraged by the contribution from new product introductions. And I would probably say leading that right now across the company is our Orthopedics business. If you were at Academy, you saw a lot of products at Orthopedics, not just Biorez, that was a focus, obviously, but we had a lot of new products. And when I look at our new product revenue in the quarter, based on the way we measure it, globally, our Orthopedics business, new product contribution has been very helpful. And again, that's credit to revamp, the new team, leadership and how they're approaching innovation with the commercial team and integrating that with our manufacturing group. And I think I mentioned on the last call, in our interventional endoscopy business, we introduced a product called AVEO, which we think is an only-in-class product and market reception on that has been very favorable. Obviously, it's capital components so it's going through a little longer purchasing cycles. But boy, the marketplace feedback has been really, really strong. So, we continue to push on new product innovation. It's part of what we brought to the company, and it will always be part of our fabric and our teams are doing a really nice job of it right now. Biorez and In2Bones, as I commented, we feel very good about both of those. In2Bones comprehensive business, comprehensive portfolio, rolling out PCR plating kind of the next iteration on the ankle, doing really good work. And we sunsetted the one-year mark. It's part of the organic business now, and we'll look forward to that contribution in the second half and going forward, and Biorez becomes organic in August. But boy, we're super excited by the market reaction. It's good clinical outcomes drive this and good surgeon experiences drive this, and we're seeing that, and it's about educating surgeons so they understand the technology and how we approach it, how they approach it. But the market enthusiasm is very strong. And again, we feel very good about that acquisition. I don't think we've commented about specific contribution in the second half. So, I'm probably not going to break that out here.

Afternoon. Thanks for taking my questions. Todd, can you just flesh out a little bit more on the smoke side? I think you said AirSeal has been growing 20%. I want to make sure, did it grow 20% this quarter? Is Buffalo growing 20% as well? And what I'm getting at is if those two still grow about 20%, it looks like the rest of the General Surgery business was a little bit lighter than maybe I would have expected, especially with the comp being a little bit easier here in Q2 versus Q1. Are you just not getting all that halo effect yet from those two differentiated products? Or is there something else going on there? Thanks.

Yes, they certainly experienced growth of over 20% in the second quarter. I might not agree with your comment about an easy comparison for Q2. However, we are satisfied with the overall performance of the business, achieving 12.6% organic growth company-wide. The new acquisitions are just reaching their anniversary and they're performing very well. We are optimistic about the company's organic growth outlook, which is reflected in the guidance we recently provided. It's important to note that our Q3 projections include double-digit organic growth, even with two fewer sales days. Keep that in mind when evaluating the Q3 results. Overall, the business is thriving. While some legacy products are experiencing slower growth, we have many areas within the business that are performing exceptionally well at the moment.

Okay. Appreciate that. And then I don't want specifics on BioBrace or In2Bones, but are those two still largely on deal plan as far as what you were expecting or ahead of expectations? And then this volume growth that we're seeing, everybody is seeing, and I am in no way, Todd, asking about 2024 numbers, but do you think this is something on the volume side that can continue through not only the back half of this year, which it sounds like it already is, but even into next year as well, just the strength in volumes because everybody in the space is going to have a tough comp next year as a result of the strength this year? Thanks.

Yes, thanks, Matt. Regarding the deals, they are both performing at least as we anticipated. During the Q1 call, we increased our expectations for Biorez from mid-single-digit millions to high single-digit millions for 2023, indicating a better start than we expected. Midway through 2023, the environment appears to be positive, reminiscent of the pre-pandemic period, with med tech and procedures returning, and growth rates in our sectors are approaching previous levels. While it's premature to discuss 2024, it seems we may have finally moved past the pandemic disruptions, and there may be some tailwind from individuals who delayed care, resulting in pent-up demand. Quantifying that can be challenging, but it likely serves as a benefit for all of us. Overall, we feel optimistic about the future as we look ahead.

Hey good afternoon. Thanks for taking the question and congrats on a great quarter. Two questions to me. So, maybe the first one is on your international business. You put up pretty strong numbers on tough year-over-year comps. I'm just wondering what trends you're seeing in your various geographies? And then on my follow-up question, in your guidance, you've sort of raised the topline by about $100 billion at the midpoint. And maybe just talk about what gets you towards the low end versus the high end of your guidance? Thank you.

Our international business has been very consistent, and this year is no different. They are performing well in both Orthopedics and General Surgery. Some of our export markets, particularly in Asia including Japan and China, are growing even faster than we anticipated. Europe is also performing well, as is the Latin American market. Overall, we have seen a balanced international performance in both General Surgery and Orthopedics, which reflects the strong infrastructure, stable leadership, and focused channel strategies established over the years. I hope that addresses your question about international performance, and I’ll let Todd cover the guidance question.

Yes. Just to make sure we're all level set. Our current revenue guidance is $1.23 billion to $1.26 billion. Originally, when we started the year, we guided $1.17 billion to $1.22 billion. So, it's been a $60 million increase. Sorry, $1 million. I'm doing the same thing. A $60 million increase on the low end from the start of the year and a $40 million increase on the high end from the start of the year. And really that's just reflected in our performance, right? Things have gone better than we said. And we always had high expectations for the back half of this year. We continue to have high expectations for the back half of this year, and we're executing, and we're going to continue to focus on executing.

Hey good afternoon. Thanks for taking the questions. Last three quarters, you guys have been around the low 54s from a gross margin perspective. It seems like this is the beginning of the ramp you've been expecting over the next, like, two years or just closer towards about 60%. What's clicking as you get into the second half that's enabling this change?

Thank you, Matt. You’re correct. We’ve been waiting to get through the first half of 2023, and things will improve from this point onward. What’s really working well is the mix of our business. The high-growth, highly differentiated product lines are performing strongly, and they also come with higher gross margins. This favorable mix is gaining momentum. It’s not slowing down; in fact, it’s accelerating as these products grow faster than the rest of our portfolio. Now that we have some stability on the cost side, we’re able to see this mix effect come through. We believe there are still many improvements to be made on the cost side, but we’ve been absorbing the increased prices from 2022, which take time to impact our inventory and financials. We knew this would weigh on the first half of 2023, but with the stabilization in costs, the positive mix is starting to show. We are excited to begin ramping up gross margins, as you’ve noted. We feel very confident about our earlier disclosure that we expect gross margins to reach 60% by the end of 2025, and we believe we can achieve that goal. Thank you for recognizing this, and I hope I answered your question.

Thank you. I wanted to discuss the potential for non-robotic US laparoscopic procedures. It seems like a significant long-term opportunity that your sales team hasn’t fully capitalized on or developed the necessary skills for. When do you plan to encourage a shift in focus for the sales team? Will this require any updates from R&D or a different approach in the US?

Matt, it's a good question. And I'm sure right now, our commercial leadership team for that business is squirming in their seat. But I think Todd and I are probably being a little harsh. We have several examples of very nice wins on the general laparoscopic side that the team has delivered on earlier this year, which was a total system-wide swap-out. The single biggest point of resistance is you're asking that extensive surgical volume, which is like a 10:1 ratio relative to robotics to move to a much more expensive procedure. So, in a period the last couple of years where volumes have been up and down and pricing pressure and inflationary pressures, convincing health systems to change and incur additional cost, even though they recognize the clinical benefits has been more of an uphill climb. We hope that as the markets are stabilizing as procedure volumes are coming back, broadly speaking, and pricing and everything is normalized and material costs, etc., that customers are more willing to step into that realm. And again, it takes a few big ones to tip over, and we've done that early this year and late last year. We had a couple of really nice wins and that's contagious for a sales force when they see things like that. Todd and I talked to our businesses frequently. And they know the story and the journey and the path that they're going on. And part of it is continuing to expand sales forces annually. Part of it is making sure we've got the right product cost structure for those customers, but we will get there. We're not going to change incentive plans to force people there that have been in this industry 30 years, it just doesn't work. It doesn't work the way it's designed, just keep it simple and let people go sell to the customers that are ready to be buyers and show them all the clinical value that we have, especially with a product like AirSeal.

I think it's important to highlight that Curt emphasizes clarity in how the team can earn money and the importance of serving the customer. Although we might talk about setting sales targets for the team, Curt encourages a straightforward approach: let them understand how they can succeed and focus on customer needs. Even though the company is the one paying them, their ultimate goal should be to satisfy the customer. It's crucial to let the sales team determine their own paths to achieving their targets, as long as it benefits the customer. Consider a sales rep who is trying to sell a $30,000 product that enhances procedures compared to a $2 million robot. It's easier to present that value proposition than to ask for an increase in expense without the supporting technology. Our teams, both in the US and internationally, have shown that our strategies are effective, even in markets where robotic solutions aren't used. We have success in non-robotic procedures without micromanaging our sales force; they will capitalize on those opportunities when they arise.

All right. Great. Thanks for taking our questions. Maybe one more on AirSeal. Just to follow up on your earlier comments on the top 25 hospitals that uses it, I think it's a 92%, some as high as 75% penetrated. I guess I'm wondering what's the average penetration rate in that cohort if you have it, why or how did the top hospital get to 75%? Is it due to their procedure mix or more surgeon champions or more the longer length of time that AirSeal has been in their hospital?

There's a lot to unpack there. Teaching hospitals are notoriously hard to crack into. The surgeon champions are thought leaders. They are very clinically astute. They are absolutely in the prove it to me category. So, where we have the higher utilization rates, we've probably found a surgeon champion sooner, and they were able to help proliferate the technology across all the users in that account, where we have lower utilization rates. It may have been harder to crack into that hospital. They may have an allegiance to other technology, and they were waiting to see more clinical outcomes. But that's why you keep chipping away. And to be in 92% of them is really good after seven years. And because we're in them, we keep showing up, we keep demonstrating the value, and we'll get more of those key opinion leaders on board across those facilities and the penetration rate will go up. Off the top of my head, I don't have the exact mean median average. But it ranges from just starting to north of 75% and probably everything in between. So, it is a journey when you're talking about teaching institutions. They don't just turn over overnight. It takes time, and our sales teams and our marketing teams spend an awful lot of time to get them on board, and we're proud of that work. And when people leave the teaching institutions, what they were trained on and who they trained by is very important to how they set up practice and that's why it's such an important statistic for us.

All right, great. That's very helpful color. I guess, a follow-up question. I was wondering, within your general surgery business, can you maybe comment on some of the key categories or indications that's driving growth, we're hearing things like bariatric surgery slowing down. It's a small part of your business. But are you seeing that as well? Maybe you can highlight some of the categories that's performing a little bit better and some that's a little bit slower.

Yes, I don't think we would say we've seen any slowdown in bariatric surgery at this point in time. Again, it's a small part of our pie that we participate in. And I also think that that patient cohort probably has a broader mortality index that has to be dealt with. And so, when they get to the surgical side of things, I'm sure there's gastric bypass that is more of a weight reduction that could be impacted by a pharmaceutical solution. But there's just a lot of other bariatric surgery types and indications that are still going to be maintained out there because of the comorbidity of that patient cohort. Generally speaking, across our General Surgery businesses we're seeing good procedure volume independent of specialty. I mean it's urological, it's general surgery straight up procedures. It's GYN procedures, there's strength across the board. I don't think I would call out any that are driving the ship, so to speak. And I think that as important on the interventional endoscopy side, really good volumes in that market space right now and our teams are super excited. And they've got a very, very exciting new product there. So, we feel good generally about that entire category of our business right now.

Hi, good afternoon and congratulations on the results. Could you provide more details on Buffalo Filter and whether there has been any new legislation since our last conversation? Also, I'd like to hear your thoughts on the current competitive environment in that area.

Ohio and Missouri were recently approved, and we anticipate that this momentum will continue. We believe there is significant potential ahead. We have the leading device in the market and expect substantial growth from this business moving forward.

Okay. Thanks. And maybe you could expand further just on a general capital environment. It looks like capital grew nicely this quarter. Just any additional color there you could share?

Sure. It was solid performance in both General Surgery and Orthopedics. We had one of our better performances with power tools and really strong results in video. On the General Surgery side, our extensive platform of energy platforms, including Argon and basic energy, performed very well this quarter. The teams feel optimistic about both categories as we look into the second half of the year. Additionally, AirSeal Capital and Buffalo Filter Capital also contribute positively to the general surgery segment.

Yes, thanks for taking my questions. I guess, first, just wanted to ask one on BioBrace. Maybe talk about sort of the early feedback you're hearing there, what type of procedures you're seeing it used in? And to what degree do you think it's sort of taking share for some of the competing products versus just being picked up by surgeons that hadn't been using that type of product before?

Yes, that's a great question. We are seeing it used in a variety of other surgical procedures. We have a product specifically for rotator cuff and another for ACL augmentation, with the rotator cuff product resembling more of a patch construct. Surgeons are adapting this for other uses, such as Achilles tendon repair or glute repair. I recall from a slide at the Academy that one surgeon mentioned 23 different surgical applications for BioBrace. There are many new users entering the collagen A market, along with some competitors from the first-generation products who are interested in ours, primarily due to the exceptional strength at time zero, which is crucial when discussing re-tear risks. Adoption is also emerging from that segment. The market represents new technology for healing, and we're seeing a lot of new uptake. Clinical studies are very important in this field, similar to the early days of AirSeal, and we are focusing on those studies. While there are existing clinical studies from the first-generation technology, there's a demand for studies on our technology. However, the experience with the first-generation product has likely helped with market development, which may explain why we are slightly ahead of our plan.

Okay. And then just with In2Bones now being a year path to actual close, can you maybe just talk about the degree to which you sort of increased investment there, either sales force or number of sets, R&D, et cetera?

Yes, we acquired it as an independent business and continue to operate it as such. Internationally, we are integrating more since we have a sales channel that In2Bones lacked. The investment outside the US focuses on obtaining regulatory approvals and developing a sales channel that had previously not existed for lower extremity products. We can achieve this due to our orthopedic presence, which allows us to incorporate In2Bones effectively. We are not expanding the management structure but rather enhancing the direct sales or distributor agent sales channels. In the US, the lower extremity market is robust, and having more representatives in the field is crucial. We share this belief, and the strong R&D capabilities that came with In2Bones are vital for our progress. However, as Todd and I have mentioned previously, we do not approach R&D spending from the top down; rather, the local marketing and R&D teams along with the leadership and general manager report to Pat Beyer under global Orthopedics. They conduct business reviews, gather market feedback, and create their R&D portfolio. They understand the capacity of the sales channel over time and develop an R&D engine to support it. On the leverage side, our existing medical education infrastructure through our sports medicine business enables us to provide more medical education than In2Bones could have managed independently due to our larger scale. This advantage applies both in the US and internationally, as well as in utilizing back-office shared services which they were unable to scale.

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Curt Hartman for any further remarks.

Thank you, Jonathan. I want to thank everybody. Today we went a little longer than normal, but I appreciate your time and we look forward to speaking with you on our next earnings call. Thank you and have a good evening.

Thank you ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.