Q2 2024 Earnings Summary
- Strong EPS Growth Expected in the Second Half of 2024: The company projects adjusted EPS growth of 9% to 11% in Q3 and 13% to 18% in Q4, leading to full-year adjusted EPS growth between 14.5% and 16.5%, which is "still much better than the vast majority of med tech".
- Robust Performance in General Surgery Business: The general surgery side of the business continues to perform well, with healthy growth expected to continue. Key products like AirSeal are seeing strong demand, and the company does not anticipate supply chain issues impacting this segment.
- Resolution of Supply Chain Challenges and New Product Launches in Orthopedics: The company is addressing supply chain issues in the Orthopedic segment, particularly in Foot and Ankle, where they believe they are now "back on offense". The launch of BioBrace adds to their portfolio, positioning them for future growth as they aim to be "back to full offense by the start of 2025".
- Significant ongoing supply chain issues, particularly in key implantables in Orthopedics, including knee and shoulder implant categories, are impeding the company's growth. The company is struggling to catch up due to unexpected supplier closures—seven suppliers unexpectedly closed doors this year—machine downtimes, and material availability issues. These challenges have resulted in lost sales opportunities and frustration among customers and investors.
- Reduction in growth expectations from previously anticipated double-digit growth to 5%–6% for 2024, which is acknowledged as disappointing by the company. This lower growth rate suggests that the company's growth prospects are weaker than expected, potentially impacting investor confidence.
- Delays in achieving margin expansion targets due to operational challenges, with the company likely to fall short of its previously stated goals for 2025. The CFO admitted that achieving the target gross margin of around 60% by the end of 2025 is now unlikely, as they expect to be around 57% at the end of 2024, and improving 300 basis points in 12 months is not likely. This delay could impact profitability and the company's valuation.
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Margin Expansion Targets
Q: Are previous margin targets still feasible after supply issues?
A: Todd Garner explained that while they are on the same track for improvements, supply issues have caused delays. Previously, they aimed for around 60% margins by the end of 2025, but now expect to be around 57% at the end of 2024. Achieving 60% would require a 300 basis point improvement in 12 months, which is unlikely. However, they still see about 100 basis points of tailwind from mix and continue to view their margin improvement story positively. -
Long-term Revenue Growth Guidance
Q: Is the 5%-6% growth rate the new normal long-term?
A: Todd Garner stated they are capable of much better growth than 5%-6%. He mentioned that 30% of their portfolio should deliver double-digit growth under normal circumstances. They do not consider the current growth rate normal and expect to be a faster grower in the future. -
Supply Chain Challenges and Recovery Timeline
Q: What's causing supply chain issues, and when will it resolve?
A: Curt Hartman detailed that they are facing challenges with key implantables in Orthopedics, including Knee and Shoulder implants. They had 7 suppliers unexpectedly close, causing supply constraints. While the Foot and Ankle business has improved, they are still struggling with Knee and Shoulder implants. They expect to work through these issues in Q3 and be in better shape by Q4, but are cautious given recent surprises. -
Systemic Quality Control Issues
Q: Are there systemic issues causing recurring disruptions?
A: Curt Hartman acknowledged frustrations with past disruptions like the warehouse issue in Q4 2022 and supply chain challenges. He stated that as companies scale, more systems and controls are put in place, and they are diligent in investing appropriately. They continuously challenge themselves to improve and believe they are doing the right things. -
Second Half Guidance
Q: Can you clarify revenue and EPS guidance for Q3?
A: Todd Garner guided to low 5% growth in constant currency for Q3, with a 50 basis point FX headwind. They expect 9%-11% growth in EPS. -
General Surgery Business Performance
Q: Is anything affecting the general surgery growth rate?
A: Todd Garner noted that the general surgery business is close to historical rates. While AirSeal performed well, the smoke product was soft due to a transitory quality issue that has been remediated. They expect the softness to be temporary. -
Supply Issues Impacting General Surgery
Q: Will supply constraints affect general surgery?
A: Curt Hartman expressed confidence in the general surgery business, stating they feel very good about product availability and manufacturing controls. They have complete manufacturing control and redundancy for key products like AirSeal and smoke. They are not anticipating supply issues in general surgery. -
Foot and Ankle Market Trends
Q: How is the lower extremities market performing?
A: Curt Hartman believes the Foot and Ankle market is a growth market and that they have a strong position to participate. Supply chain challenges affected them, but with issues now mostly behind, they are getting back on offense. They've moved some Sports Medicine Foot and Ankle products into the business and launched BioBrace, enhancing their portfolio. -
Market Conditions in Ortho Markets
Q: Are there changes in the orthopedic market conditions?
A: Curt Hartman stated they see healthy underlying markets in major regions like the U.S., Canada, Western Europe, and Japan. While strikes in Korea and events in China have slowed those markets, they are smaller for CONMED. -
Second Half Growth Expectations
Q: Should we expect similar growth in the second half?
A: Todd Garner indicated that their guidance assumes Orthopedics remains challenged longer than originally thought. General surgery is expected to continue performing as it has been.