CNMD
#Sure.
Great question, Kristin.
We closed the SurgiQuest transaction on January 4.
And there's really two priorities when you close a transaction: it's number one, people; and number two, product supply.
And on the day of close, we communicated to every individual within SurgiQuest their status within CONMED.
We also brought both selling organizations together, including management of sales ---+ all sales reps and all marketing individuals from both organizations, and conducted extensive product training across the entirety of the new offering inclusive of the SurgiQuest bag, inclusive of the CONMED bag.
When sales reps went home, they went home into a new defined territory.
And I would say over the last couple weeks, the effort has been focused on learning the new geography.
For the reps that were picking up new customers, it's a lot of meeting and greeting and seamless handoff from the CONMED rep or the SurgiQuest rep who may have covered them.
So I feel like we got out of the gates on the right foot; great communication.
Really letting every employee ---+ CONMED and SurgiQuest ---+ know where they stood.
And I think overall, we would say our customer reception has been favorable, and it's really about picking up both sides of the offering and making sure we're doing our best to advance it.
The guidance we've put out there ---+ $55 million to $60 million ---+ we think is a responsible number.
You look at some of the supplemental information; we show a pretty detailed schedule of what SurgiQuest did last year.
We call out that there was some one-time items in their second quarter related to the revenue for international.
We also know that they had a really strong fourth quarter, some of that clearly motivated by the announcement of the acquisition.
And so we've tried to handicap all of that and give ourself a solid chance to get to the revenue that we've put for guidance.
So out of the gate early; feel very good about where things stand and the leadership that Bill Peters and the sales and marketing team are bringing to that business.
It would be very hard for me to quantify it, but we are not a large organization.
So all the people that are driving business are the same people that were working on acquisition integration plans.
And I think it's reasonable to assume there was some impact on the focus on the underlying advanced surgical business during the run-up to the close of that.
We got pretty quick ---+ Hart-Scott-Rodino closed.
There were other contractual items that we had detailed that had to be closed.
And when we got the quick news on Hart-Scott-Rodino, it just made sense to go really fast to try to close it as quickly as possible.
Though as <UNK> called out, I think I mentioned in the quarter the CET business and the cardiology critical care business were both pretty soft, and I think that had more to do with the fourth quarter than any big distraction in advanced surgical, though there certainly was some.
The advanced surgical business in 2015 for the year delivered 3.2% growth.
And as you recall at the beginning of the year, we made an announcement that we were taking two smaller businesses, endomechanical and advanced energy, and going to combine those to create smaller geographies and sales professionals who had a bigger offering.
And that would allow them to be more efficient with their accounts and their coverage.
And we think that played out very well.
Obviously during that time, we were cross-training people on the half of the bag that they were picking up.
We think that the SurgiQuest acquisition is a natural drop-in center of the fairway ---+ whatever you want to call it ---+ product for that portfolio.
And as an only-in-class technology, highly innovative offering, we think it will shine even a brighter light on the broad CONMED advanced surgical bag.
So I call those kind of all of the positive things that we saw in 2015.
Obviously, things that potentially were adverse to the effort this year ---+ as I mentioned in the previous question, it's still a pretty small management team and at the same time, they are trying to run the business.
They were working diligently around the clock on the SurgiQuest transaction, on the SurgiQuest integration planning, and really trying to put their arms around that organization and the people within CONMED that were impacted by that change.
So there's only so much bandwidth, but I feel like we really ended the year in good shape.
And I'm optimistic about how our chances look for advanced surgical as we enter 2016.
When you look at our 2016 guidance specifically as it relates to export, we did not factor in any material upswing in those markets, specifically in Brazil or in China.
Now, I would say that as we look at the trend from a dollar standpoint, from a performance year over year over a number of year period, we would like to believe that we've kind of hit the bottom of the trough.
When I look at our fourth quarter versus our third quarter versus second and first quarter, we don't see anything right now that indicates a worsening.
Certainly I think China got a little bit worse for everybody in the fourth quarter.
I think I mentioned at the conference earlier this month that China was a pretty small percentage of our overall revenue: under 2.5%.
And we're export in portions of China; we're direct in other portions.
Our direct business seems to be doing okay, hanging in there.
Our export business a little bit more up and down.
So no material change in guidance, and part of this is just macroeconomic.
And I'm not smart enough to call a change on that.
Sure can.
So the way I look at it is as follows.
So we are ending 2015 at $1.60 on an adjusted basis.
And we really have two things going on that is going to reset the bar for 2015.
So the first is moving the cash EPS and the impact of that on the legacy CONMED business is $0.30.
The other item that we have to factor in to reset the bar is FX, and that number is $0.41 to $0.43.
But if we assume $0.43, the net of those two brings us from $1.68 to sort of a new baseline of $1.55.
And then I think of sort of the next category as areas where we need to execute in 2016.
And that's a aggregate of $0.30 to $0.40 and that gets us to the $1.85 to $1.95.
Within $0.30 to $0.40 is our organic business as well as SurgiQuest, and what we attempted to do today is really lay out the components of SurgiQuest in the supplemental financial disclosures that let people build models.
What I will say is that within that $0.30 to $0.40, depending on where you are in the range, SurgiQuest provides a substantial amount of it.
What I would say is it's included in the $0.30 to $0.40.
And the difficulty that I have is is we are expecting something from a major contribution from SurgiQuest.
However, we have taken the SurgiQuest business and we merged it within to our advanced surgical business, so it's really one business now.
So we're actually cutting in some places on our business and reinvesting on the SurgiQuest side.
We're also doing the opposite: getting synergies on SurgiQuest.
So I guess what I would do if you are modeling is use the guidance that we've provided to come up with your estimate on SurgiQuest and then the difference is really the organic growth.
Sure.
Let me start with SG&A.
So we ended up the year below 40%, and that would certainly be the target we'd be looking for under normal circumstances in 2016.
Unfortunately, currency is going to be impacting FX and the FX impact on currency is going to be 80 basis points unfavorable.
Going the other way is that we are going to get leverage from SurgiQuest.
And the leverage we're going to get from SurgiQuest on the SG&A line will push us back below the 40% level.
And last, while it's a reporting change from a reporting standpoint going forward with adjusted cash EPS, we'll get an additional 170 basis point reduction on an adjusted basis.
So that's really the puts and takes on SG&A.
From gross margin, we ended the year on an adjusted basis of 54.2% compared to 2014 adjusted of 55.4%.
While that's a 120 basis point decline, 2015 actually had 140 basis points of currency impact.
It also had 70 basis points of unfavorability due to the beginning-of-year deferred variances.
So excluding those items, our gross profit improvement in 2015 was 90 basis points.
As we look at 2016, we're going to get back the 70 basis points from the deferred variances as we are starting the year much more favorable.
As we have discussed, FX continues to be a problem and the FX impact on 2015 gross profit based on the current FX rates is an additional 140 basis points.
And just to be clear: this is in addition to the impact realized in 2015 of 140 basis points, so we're having an aggregate 280 basis point unfavorable FX impact since the beginning of 2015.
The last factor that's going to impact 2016 gross margin is SurgiQuest, which will have a slight favorable impact on an adjusted basis as the SurgiQuest margins are higher than our corporate averages.
From an R&D perspective, R&D amounted to 27.8% in 2015, as we mentioned, representing 3.8% of sales.
With the SurgiQuest acquisition, we will be adding $2.8 million to $3.2 million of additional spend.
From a percentage standpoint, we should be close to historic levels based on our current R&D budgets.
And as <UNK> mentioned, we are considering various alternatives to redeploy the funds freed up from the medical device excise tax suspension.
And it's likely that additional research and development projects will be one of those alternatives.
So I'm going to pause there and see if you have any additional questions.
Our preliminary number is $8 million, but I want to caution that's a preliminary number and we're still completing the valuation.
Sure.
So as I mentioned ---+ as mentioned, we had $256 million as of the end of the year.
We acquired SurgiQuest for $265 million, and of that purchase price, approximately $42 million was related to cash that we had on our balance sheet.
Sure, Jeff.
I think the filing is reflective of ---+ it's a simple business transaction.
Scopia acquired Coppersmith.
Jerome Lande, the principle at Coppersmith, is now a high level executive within Scopia.
And the shares of Coppersmith were ---+ that Coppersmith owned in CONMED are now owned by Scopia.
And Jerome remains a member of our Board of Directors, and this is the simple regulatory filing to announce that transaction.
I think the way to look at cadence for 2016 ---+ and I think 2015 is a respectable predicate ---+ the second and the fourth quarter are certainly bigger quarters on an absolute dollar basis.
And I think that's a byproduct of the way we've structured the US selling effort, with a commission-driven sales force with targets set up on an annualized basis.
But also people very motivated to show progress at the halfway mark.
International is a little bit harder to predict because of the export versus direct business and they tend to be more stable throughout the course of the quarters.
So I do think you cannot use the fourth quarter as a predicate on the first quarter, and I do think you will see us growing through Q1 into Q2.
You always get a little bit of a third-quarter slowdown and that tends to be a bigger fourth quarter.
And I see no reason to expect different this year.
SurgiQuest, we have tried to build a responsible model.
We know that out of the gate there is a lot of things that happen in a transaction: cross-training, new customers, new reps.
So we think that has a little bit slower start out of the gate and then builds as the year unfolds from more of a straight line build through the year versus following the normal pattern of Q2, Q4 being bigger.
Does that help.
Let me take the inventory build.
So biggest piece of it was building up some inventory related to the Denver shutdown.
So as you may recall, that facility made primarily electrosurgical generators for which we have a pretty good business outside the US.
And as a result, in order to give some lead time on registrations, we need to build up some inventory.
And as far as gross margin for next year, given all of the puts and takes, I think we're going to be trying to get back to 54%.
But as I mentioned, there's a lot of moving pieces with that.
It's a great question.
It's an expectation; it's not an expectation that we've built early into the model.
It's something that as we look at the business, we think happens in a longer period of time because the focus out of the gate is each side of the transaction ---+ CONMED learning the SurgiQuest product portfolio, SurgiQuest learning the CONMED portfolio.
There's some time to get everybody comfortable and then moving to that next level, where we get product pull-throughs probably a little bit later in the year.
Though we certainly think that something as innovative as the SurgiQuest AirSeal system, when we bring that in and talk with customers, it shines a brighter light on the rest of our portfolio.
So that's an absolute expectation.
I can't say that I could point to anything at three weeks in to say that we've seen that, but it's certainly an expectation.
Well, I look at a couple things here.
Number one: the biggest percentage of our revenue is orthopedics.
And we've put together what I think is a stronger second half of the year, which bodes well for the future.
And we did that both in the US as well as in our direct international markets, which is two-thirds of international business.
So the biggest piece of our business had a stronger second half than it did a first half.
And those leaders, those managers, those reps in the direct markets get better with each and every day.
I also think the cadence of products is going to help them.
Three of the four acquisitions that we completed in 2015 ---+ three of those were product line drop-ins that benefit the orthopedics business on a global basis.
And then there's internal work that continues ---+ products that were introduced last year that will continue to increase and products that we have in the plans for this year that we think should benefit.
So the biggest business ---+ I think we've got a lot of things lined up correctly to help us move forward there.
The next biggest business is the advanced surgical portfolio.
Again, the team has been in place now for a year.
We just added ---+ and they grew 3.2% in the US market.
We just added a very exciting acquisition to that portfolio.
They had some new products that they were supposed to get in 2015 that are now more geared towards the first half of 2016.
So the combination of the experience leadership team, SurgiQuest, and the addition of some new products.
So our second-biggest business has a lot of momentum.
And that leaves our two smaller businesses, endoscopic technologies and legacy business cardiology critical care.
Both of those businesses have had full-time leaders in place since last January.
Both of those leaders have been looking at strategic alternatives for their businesses in terms of product additions, sales force efforts with customers in different manners, whether it's through structured programs.
And I think we will start to realize some of that benefit as this year unfolds.
So I put all that together.
And on the other side, I think we've spent a lot of time studying the export market and where we think we are with the export market.
Just for reference, a data point: if export would have been flat in 2015, we would have been in our original growth range.
So the volatility in export took us out of the game.
Could it happen again.
Yes, it could happen.
But again, I've got to look at the facts, the data I have in front of me.
And right now, we think export is at least stable, and so we've modeled 1% to 3% based on everything that I've just discussed.
And then other things we are expecting.
The business finished the year ---+ and this is in the supplemental schedule; we break it out by quarter ---+ the business finished at just over $49 million.
And I believe the prior-year number was around mid-$30s million.
I don't have that number right in front of me, so don't hold me to the T, but it was in the mid-$30s million.
So it was pretty sizable growth rate.
But again, we point out that part of that growth rate in 2015 came from some one-time build-up of international distributors that will not repeat.
So we've got to back that out.
And then we also know that in the fourth quarter, they had a pretty substantial run-up, which we think is an inherent byproduct of highly motivated salespeople not having a clear picture on what their future is going to look like until the transaction closes.
So we think there's probably some revenue that may not necessarily repeat.
So we've tried to pull those things out and build a responsible model.
So we've put the $55 million to $60 million guidance out there.
We hope we can have that conversation at some point in the future.
It's a percentage.
Actually, it works both ways ---+ percentage and dollar.
So the business does have both capital and recurring.
And it's a little bit analogous to CONMED in that the majority of the business, north of 70%, is recurring.
I wouldn't say that there is a large capital backlog and I think you can look at the supplemental schedule we put out and look at their fourth quarter to support that statement.
So it is a capital business.
The capital is not placed; it is sold.
And there was an active pipeline that continues to be worked, and we're looking to expand that pipeline.
Does that answer your question.
Okay.
Thank you, Karen, and take you, everyone, for your time today.
We look forward to speaking with you on our next earnings call, which will be held on April 27 of 2016.
And we look forward to getting the year off to a good start.
So thank you, everybody.
Have a good evening.
