CONMED (CNMD) Q4 2019 Earnings Call Transcript

CONMED (CNMD 1.72%)
Q4 2019 Earnings Call
Jan 29, 2020, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, everyone. Before the conference call begins, let me remind you that during this call, management will be making comments and statements regarding its financial outlook and its plans and objectives, which represent forward-looking statements that involve risks and uncertainties as those terms are defined under the federal securities laws. Investors are cautioned that any such forward-looking statements are not guarantees of future events, performance or results, and the company's actual results may differ materially from its current expectations. Please refer to the risks and under -- other uncertainties disclosed under forward-looking information in today's press release as well as the company's SEC filings for more details on the risks and uncertainties that may cause actual results to differ materially.

The company disclaims any obligation to update any forward-looking statements that may be discussed during this call, except as may be required by applicable law. You will also hear management refer to certain non-GAAP adjusted measurements during this discussion. While these figures are not a substitute for GAAP measurements, management use 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 credits or charges that are considered by the company to be special or outside of its normal ongoing operations.

These adjusting items are specified in the reconciliations supporting the company's earnings releases posted to the company's website. With these required announcements completed, I will turn the call over to Curt Hartman, CONMED's president and chief executive officer, for opening remarks. Mr. Hartman?

Curt Hartman -- President and Chief Executive Officer

Thank you, Jimmy. Good afternoon, and thank you for joining us for CONMED's fourth-quarter and full-year 2019 earnings call. With me on the call is Todd Garner, executive vice president and chief financial officer. Today, I will provide a brief overview of the financial and operating highlights for the fourth quarter and the full year.

Todd will then provide a more detailed analysis of our financial performance and discuss our 2020 financial guidance. After that, we will open the call to your questions. Turning to our results. Total sales for the fourth quarter were $264.9 million, representing a year-over-year increase of 9.2% as reported and an increase of 9.3% in constant currency.

Organic sales growth in the quarter, which excludes the impact of Buffalo Filter, was 2.6% in constant currency basis. On a pro forma basis, if we had owned Buffalo Filter in 2018, our growth for the fourth quarter of 2019 would have been 4.6%. While the absolute revenue number in the quarter was in line given the disruption we projected, Buffalo Filter was especially strong, and global Orthopedics was below expectations. For the full year, sales reached $955.1 million, representing a year-over-year increase of 11.1% as reported and 11.7% in constant currency, still an organic sales growth of 5.9%.

On a pro forma basis, if we had owned Buffalo Filter in 2018, our top line growth for 2019 would have been 7.3%. From an earnings perspective, during the fourth quarter, our GAAP net income totaled $14.9 million. This compares to net income of $15.7 million in the fourth quarter of 2018. Excluding special items that affected comparability, our adjusted net income of $26.8 million increased 26.5% year over year, and our adjusted diluted net earnings per share of $0.90 increased 23.3% year over year.

For the full year, our GAAP net income totaled $28.6 million compared to net income of $40.9 million in 2018. Excluding special items that affected comparability, our adjusted net income of $77.9 million increased 24% year over year, and our adjusted diluted net earnings per share of $2.64 increased 21.1% year over year. We are very pleased with the 2019 performance, which we believe positions us for success in 2020 and over the long term. In 2019, we are proud of our efforts around the continued introduction of innovative products across many of our businesses: the successful acquisition and performance of the Buffalo Filter assets, the addition of two new directors, the acceleration of the sales force expansion and International channel evolution, and finally, strong full-year revenue and adjusted earnings growth.

Overall, we made the right strategic investments to build the foundation for sustainable long-term growth. I'm pleased with where we stand today with good momentum on the top and the bottom lines, as evidenced by our adjusted EBITDA margin reaching 20% for the first time in Q4 of 2019. As we move to 2020, we are focused on building off this momentum and delivering above-market revenue and earnings growth as evidenced by our outlook. Finally, it's worth noting that in February, CONMED will celebrate the 50th year since the company's founding by Eugene Corasanti.

We think Gene would be proud of this company today, and based on our guidance, this should also be the year that we exceed $1 billion in revenue, a finished -- a fitting accomplishment to highlight the 50-year anniversary. With that, I'll turn the call over to Todd, who will provide a more detailed analysis of our performance and discuss our financial guidance. Todd?

Todd Garner -- Executive Vice President and Chief Financial Officer

Thank you, Curt. As Curt mentioned, our fourth-quarter sales totaled $264.9 million, which represents an increase of 9.2% on a reported basis and 9.3% in constant currency. The demand for Buffalo Filter products continues to be very strong, and we sold $16.2 million of this exciting product line in Q4. As we previewed on our Q3 call, our Q4 organic sales results were below trend, due in part to channel changes and sales force expansions that we brought forward into 2019.

Part of this increased investment in the sales force is in response to the significant attention that Buffalo Filter has required from our existing sales reps. This is obviously a high-quality problem. But the strength in Buffalo Filter demand this year has actually lowered our organic growth metric from what it would have otherwise been. In Q4, as Curt said, our organic growth was 2.6%, and if we had owned Buffalo Filter in the prior year, it would have been 4.6%.

For the full year, our sales totaled $955.1 million, which represents an increase of 11.1% as reported and 11.7% on a constant currency basis. Our organic growth was 5.9% for the year. But if we had owned Buffalo Filter in the prior year, our organic growth rate in 2019 would have been 7.3%. All remaining sales growth numbers I referenced today will be given in constant currency.

The reconciliation to GAAP numbers is included in our press release. For the fourth quarter of 2019, our domestic sales increased 13.8% versus the prior-year period, while International sales increased 4.5%. Worldwide Orthopedics revenue decreased 0.6% in the fourth quarter. Approximately 30% of our Orthopedic revenue is capital sales.

And as you know, capital can be lumpy from quarter to quarter. Q4 2019 was weaker than we expected on the capital side and faced a comparable quarter in the prior year that was the strongest capital quarter in memory. Our disposable and procedural products continue to grow nicely, and we're confident our new product pipeline will allow our Orthopedic business to grow faster than the market over the long term. Worldwide General Surgery revenue grew 19.8% in the fourth quarter, driven by strong performances across the product portfolio.

Turning now to full-year results. Our domestic sales increased 15.2% versus 2018, while International sales increased 7.9%. Worldwide Orthopedics revenue increased 4.5% year over year, and worldwide General Surgery revenue grew 19.4%. As we look to 2020, we expect total company worldwide organic constant currency revenue growth to be between 7% and 7.5%, with currency being a headwind of approximately 120 to 150 basis points based on current exchange rates.

We estimate about $5 million of inorganic sales from Buffalo Filter in 2020, which should result in a range of reported revenue between $1.13 billion and $1.20 billion. So as Curt said, despite the currency headwind, we expect to cross the $1 billion revenue mark in the year of our 50th anniversary, and we expect the second billion will come much more quickly than the first. Now let's move to the expense side of the income statement. For comparative purposes, I will discuss the P&L performance, excluding special items, which include impairments, charges related to acquisitions, restructurings, legal matters, and amortization of intangible assets net of tax.

A reconciliation to GAAP numbers is included in our press release. Adjusted gross margin for the fourth quarter was 54.1%, which was lower than we expected. As we've talked about before, the timing of manufacturing variances can occasionally create lumpiness in gross margins in a given period, and that was the case this quarter. As an example, if we isolate just the timing of how manufacturing variances hit the P&L, it benefited gross margins in Q4 2018 by 30 basis points but was unfavorable to gross margins by 80 basis points in Q4 2019.

The good news on gross margins is that they increased 80 basis points on a full-year basis over 2018. As we look forward, we expect gross margins to continue this trajectory of improvement, delivering between 80 and 100 basis points of improvement for the full-year 2020, despite approximately 30 to 40 basis points of expected headwind from FX. The way you should think about this throughout the year due to accounting rules is that Q1 will show year-over-year improvement, but it will be well below the anticipated full-year range. And as the year progresses, our gross margin improvement will strengthen and deliver between 80 and 100 basis points for the full year.

Research and development expenses for the fourth quarter were 4.6% of total sales and grew approximately 17% over the prior-year quarter on a dollar basis. For the full-year 2019, we increased our adjusted R&D expense by approximately 20% and came in at 4.8% of sales for the full year. Looking forward, we will continue to expect R&D to be between 4.5% and 5% of sales in 2020. Fourth-quarter SG&A expenses on an adjusted basis were 35.3% of total sales, reflecting an improvement of 210 basis points compared to Q4 2018.

Full-year 2019 adjusted SG&A was 37.8% of sales, an improvement of 130 basis points over the full-year 2018, which was significantly better than we guided to at the beginning of the year. As we grow and our product offering expands, it is important to consistently match our resources to our opportunities. After Q3, we talked about some changes we are making as a result of that assessment. These changes were primarily in U.S.

General Surgery and certain international markets across all product lines. Today, we are announcing the next phase of changes we are making to improve the future growth of the company, which is focused on our U.S. Orthopedic sales team. As you know, we have put significant investment over the past few years into an innovative product pipeline in Orthopedics.

As those products become available as 2020 unfolds, we have taken a fresh look at our sales resources to make sure we are best-equipped to deliver these innovative solutions to the marketplace. As a result, we are both adding sales territories and changing sales resources in select markets. These moves will increase SG&A in advance of the productivity of those additional resources, especially in Q1. We believe these changes will strengthen our ability to grow above the market in the future.

Despite these additional investments, we still expect SG&A as a percentage of sales to improve by approximately 10 to 40 basis points for the full year in 2020, with increasing leverage as we move throughout the year. Interest expense for the full-year 2019 was $30.9 million. As we look to 2020, we expect interest expense to be between $27 million and $28 million. Our adjusted effective tax rate in the fourth quarter was 15.9% compared to 23.3% in the prior-year period.

This was lower than we had forecasted, principally due to the excess tax benefit from stock options which is difficult to predict. In Q4, that included the vesting of 5-year performance stock units that were granted as Curt undertook the rebuilding of CONMED five years ago. For the full year, the adjusted effective tax rate was 19% compared to 21.9% in 2018. As we talked about on the third-quarter call, as we look to 2020, we can't count on that same level of benefits on the tax line that we received in 2019.

Our normal statutory effective tax rate, given our mix of business, should be in the 24% to 25% range, so we will start 2020 with that guidance. Fourth-quarter GAAP net income totaled $15.0 million or $0.49 per diluted share compared to reported net income of $15.7 million or $0.54 per diluted share a year ago. Excluding the impact of special items discussed earlier, our fourth-quarter adjusted diluted net earnings per share were $0.90 versus $0.73 in the prior-year period, representing growth of 23% for the quarter. That brings the full-year adjusted cash EPS to $2.64, representing growth of 21% over the prior year, which was well above our original guidance for the year of 11% to 13%.

We forecast full-year 2020 adjusted diluted cash earnings per share in the range of $3.08 to $3.13, representing growth of approximately 17% to 19%, and that's inclusive of $0.15 to $0.20 of FX headwind impacting EPS in 2020. As we look at the phasing of our financial performance throughout the year, I would expect Q1 to be the toughest quarter from a revenue and profitability growth standpoint. The investments we began making in Q4, and which continue today, will be mostly in the expense lines, but the sales productivity associated with these investments will come later. We are also watching the health situation in China closely.

We will always prioritize the safety of our employees and customers over financial results. We have suspended travel in China, and our offices are currently closed. We hope the epidemic resolves quickly, but at this time, we are erring on the side of caution. I'll remind you that China represents between 2% and 3% of our global sales.

So for Q1, we expect 5% to 6% organic constant currency growth despite the extra day we get from leap day. As I mentioned a few minutes ago, we expect around $5 million of inorganic contribution from Buffalo Filter prior to its anniversary date. Our FX headwinds on the revenue line are more pronounced in the beginning of the year and get a little better each quarter as the year unfolds. For Q1, we project an FX headwind on the revenue line of 170 to 200 basis points.

For adjusted cash EPS in Q1, our projection would be for it to grow high single digits or low double digits and then improve as the year progresses. As we look at the phasing for the rest of the year, the only meaningful adjustment to call out at this point is that Q2 has one less day than the prior year, so we would expect constant currency revenue growth to be between 100 and 150 basis points lower than our full-year guidance range in Q2. Looking at the balance sheet. Our cash balance at the end of the year was $25.9 million compared to $30.1 million as of September 30.

Accounts receivable days as of December 31 were 64 days compared to 67 days a year ago. Inventory days at year end were 121 compared to 127 a year ago. Long-term debt at the end of the year was $753.6 million versus $780.7 million at September 30. Our leverage ratio at December 31 was 4.4x.

Cash flow from operations for the year was $95.1 million compared to $74.7 million in 2018. And capital expenditures were $20.1 million compared to $16.5 million in the prior year. In 2020, we expect operating cash flow to be between $110 million and $120 million with capital expenditures around $20 million. With that, we'd like to open the call to your questions.

And I'll hand it back to Jimmy.

Questions & Answers:

Operator

[Operator Instructions] And our first question comes from Robbie Marcus with JP Morgan. Your line is now open.

Robbie Marcus -- J.P. Morgan -- Analyst

Thanks for taking the question. Maybe one on 4Q and one on 2020. If we start with fourth quarter, you did a good job highlighting that there'd be sales force disruption in the quarter. I was wondering if you could get into a little more detail of exactly where you undertook the sales force restructuring in Surgery, the impact it had, and why you think there was the underperformance you talked about within the Orthopedics business.

Curt Hartman -- President and Chief Executive Officer

Sure, Robbie. Let me start with where we undertook the sales force restructuring. On the third quarter call, we said we're going to pull forward some sales force restructure. And we did that because we were in a position to do that.

We had been watching these parts of the business, specifically the General Surgery side of the business and some International markets focused on all products, whether they were selling Orthopedics or General Surgery. And so as we moved into the fourth quarter, we had notified people in those markets that this was going to happen. And we started cascading that through a part of that involved hiring new people, a lot of which we accomplished in the fourth quarter, not 100%, but a lot of it was accomplished in the fourth quarter. Outside the U.S., it was around channels where we looked and said, are we going direct? Are we changing distributor? Or are we doing a mix, as may be the case in some markets? And it could have been on the Orthopedic side, or it could have been on the General Surgery side.

As you look at that body of activity, it's inherent that it's going to cause some disruption for existing sales reps who, number one, have a fear of losing geography that they may have been working in for an extended period of time and they're trying to understand what they're going to have left as they go into the new year. It also has the opposite effect, and I think we saw some of that as an example in Buffalo Filter, where sales force knew that was a very appealing product in the market, and they had a lot of activity going on and they wanted to capitalize it -- on it while they could in the fourth quarter before they lost that geography and that sales opportunity. So that's a little bit of the sales force expansion. On Orthopedics, I think -- I'd take you back to what Todd said.

About 30% of that business is capital. We have -- if you look back over our results over the last two years, really, we've had very good capital performance every quarter for effectively two years. And the fourth quarter of last year was a really strong capital quarter. We just didn't get the capital orders in to get us over the hill on that business.

So a little bit disappointed there. Don't think it has anything to do with the macro perspective. I think the capital markets are still strong. We just didn't get the performance done, the work done that we needed to get where we wanted to get.

Robbie Marcus -- J.P. Morgan -- Analyst

Great color. And maybe just on 2020, the sales guidance of 7% to 7.5% came in a lot better than I had been expecting, I think most people have been expecting. Maybe just walk us through the confidence -- or what gives you the confidence to start at such an elevated level here? Is it Buffalo Filter driving the majority of the upside? Or just walk us through what gives you that level of confidence. Thanks, guys.

Todd Garner -- Executive Vice President and Chief Financial Officer

Sure, Robbie. Thanks for the question. You know what, it's actually not elevated from where we've been. Like I tried to explain in my script, that organic growth throughout the year has been a little bit misleading because Buffalo has been so strong and taken so much attention that, really, the more relevant number to focus on for our performance in 2019 is that pro forma growth, you know.

What it would have been had we owned Buffalo in the prior year, and that was 7.3% for the full year. So that's really what the engine did in '19. And so to guide 7% to 7.5%, that's kind of what we've been doing. And we expect continued momentum on all parts of the business.

And so we feel pretty good that that is -- that's a good place to start for the year. We think that's what the engine's doing.

Curt Hartman -- President and Chief Executive Officer

And Robbie, I would just add. A lot of our confidence comes in the pipeline. And last year, and I said this in my opening comments, we introduced a lot of innovation across all of our businesses. You don't fully realize the benefit of that innovation the year that you release.

And candidly, some of those introductions which occurred at trade shows didn't really get into the market fully as a system until the second half of the year. So as we go into 2020, we've got that time under our belt. Those platforms are now out. We had a-we had our biggest year ever in medical education and training last year with customers so we think all those various strategic investments that occurred in '19 just help us build as we get into 2020.

Todd Garner -- Executive Vice President and Chief Financial Officer

And I would actually just clarify a little bit of what Curt just said. We announced a bunch of products. Some of those, even sitting here today, still actually aren't clear yet. They're still going through the regulatory process.

So some of them aren't even out in the market yet, right? So they're coming still. So the pipeline -- as we look forward, we expect more from that pipeline in the future than what we've had in the past.

Robbie Marcus -- J.P. Morgan -- Analyst

Great. I appreciate the color. Thank you.

Operator

Thank you. Our next question comes from Matthew Mishan with KeyBanc. Your line is now open.

Matthew Mishan -- KeyBanc Capital Markets -- Analyst

Great, and thank you for taking the questions. I wanted to start with the gross margin guidance. You guys have like previously communicated that you expected 50 -- I don't want to put words in your mouth, but 50 to 100 basis points of gross margin expansion per year. And I think inherent in the guidance is some acceleration there, especially given the FX headwind.

So I guess, just curious as to what some of the incremental drivers of that inherent acceleration are for 2020?

Todd Garner -- Executive Vice President and Chief Financial Officer

Sure, Matt. Good question. And you didn't put the words in our mouth, We put those words in our mouth. You're right.

We -- that's what we said on kind of a long-term repeatable basis. We've said that we would expect 50 to 100 basis points of improvement in gross margin every year. You know, 2020 looks like a better year based on what the team was able to accomplish in 2019. And as we've updated our cost at the end of the year, you know, we do a cost roll on December 31 and roll it into our standard margins.

And it was a strong year. So we're out of the gates, I think, a little better than we are normally. And we feel good about the volumes. We feel good about the mix of new products.

New products are all accretive to our margin profile. And so as we specifically look at 2020, it looks like a strong year for gross margins. And as you said, that's despite absorbing, you know, a meaningful headwind from FX. So we're pretty pleased with the 2020 guide on margins.

Matthew Mishan -- KeyBanc Capital Markets -- Analyst

OK, excellent. And then how should we think about the balance of growth for next year between Orthopedics and General Surgery?

Todd Garner -- Executive Vice President and Chief Financial Officer

Yeah, it's a great question. We expect both to grow above markets. I think Orthopedics, because of the changes we're making just now, will probably be muted a little bit as the year starts and should get better as the year goes on. The investments that we talked about after the Q3 call on the General Surgery side, that also had the same kind of disruption, but we started that earlier.

So hopefully, those benefits, we'll see those earlier in 2020. But in general, I would say, we expect all sides of the business to grow faster than their markets. And we feel like we did that in 2019. And we expect to do that again in 2020.

Matthew Mishan -- KeyBanc Capital Markets -- Analyst

OK. Thanks, Todd. Thanks, Curt.

Operator

Thank you. Our next question comes from Kristen Stewart with Barclays.

Kristen Stewart -- Barclays -- Analyst

I just wanted to circle back on the General -- or the Orthopedic Surgery business and just kind of get a little bit more detail on this capital. That kind of sounds like it was a little bit of a tough quarter and whatnot. We have seen some other companies with some contracts that have been pushed out and some other softer quarters. So I understand your comments that it doesn't seem like it's more of a macro issue at this point, but it does seem like there are some other companies that are also saying it's not a macro issue, but some other quarters that have been coming in a little lighter as well.

Was this a contract that has been pushed or business that was just lost that will come back in the first quarter? It sounds to me like 1Q should be also a little bit softer because of some of the sales disruptions. Any additional color that you could just add on what type of product this is? I know you have some of the visualization products that are in there that has generally been the lumpier side of Orthopedic Surgery. Just any additional color there, and then I'll probably have a follow-u, too.

Curt Hartman -- President and Chief Executive Officer

Yeah, I think specifically, as it relates to Orthopedics, if you think about the capital that is in that business, it is video. It is the power tool platforms. We've had good success in the last couple of years. We had the MicroFree platform, still a very relevant platform, still doing very well.

But the other parts of the capital within Ortho are a little bit aged, and we need to be a little more competitive there. And I really don't believe it is a macro perspective, Kristen. I think it's really our performance. We had some operational issues that slowed us down a little bit.

We are working hard to get in front of that. And it's just a kind of combination of a bunch of small things that added up to it and not a very good quarter in capital for us. I think as Todd alluded to, we stepped into the first quarter. We expect some disruption in Ortho because of the sales changes.

So we're not guiding in the first quarter for big overperformance in Ortho by any stretch. But we do think as the year goes on, our Ortho business will get better. And I think Todd commented in his script as well that on the procedural side, where a lot of the innovation has occurred, things are continuing to move at a very nice pace there with new product acceptance and uptick.

Kristen Stewart -- Barclays -- Analyst

And then just, I guess, big picture, you guys have always kind of said that you're feeling like the model has been kind of this at least mid-single-digit growth, double-digit bottomline. And now you're kind of guiding to 7% to 7.5%, I guess, on the top line, which, I guess, is technically at least mid-single digits. But do you think now we're kind of setting the new kind of bar, I guess, with now thinking about Buffalo Filter being in the base and you've got AirSeal? Those two parts of the businesses are now collectively a nice chunk and growing solidly, strong double digits, that this is kind of setting kind of a new kind of baseline for what we should think about CONMED growing at in the future, just overall from a top line perspective.

Todd Garner -- Executive Vice President and Chief Financial Officer

Thank you, Kristen. Great question. You know, look, our -- the measure of success here is to grow faster than the markets, right? And to do it sustainably, repeatedly, and that's we're focused on. You are correct that our guide of 7% to 7.5% is now technically above the mid-single-digit range that we've talked about.

You know, I think that kind of 6% to 8%, if you think about -- if we can define something between mids and highs and call it 6% to 8%, I think that's actually where CONMED has been performing for the last couple of years, really, right? We've had a quarter or two either above or below that range, but I think 6% to 8% is kind of where the engine has been, and I think we are comfortable in that range right now. And we certainly would not expect the business to slow down. But yes, I think -- so maybe we can define a CONMED -- current CONMED range and call it 6% to 8%.

Kristen Stewart -- Barclays -- Analyst

OK. That seems fair. Thanks very much. I'll jump back in the queue.

Todd Garner -- Executive Vice President and Chief Financial Officer

Thanks, Kristen.

Operator

Thank you. Our next question comes from Rick Wise with Stifel.

Rick Wise -- Stifel Financial Corp. -- Analyst

Good afternoon, Curt. Hi, Todd. Maybe just to start off back on the sales force expansion discussion. You have been very clear that you were accelerating your investment there, your initiatives, your territory splitting.

And I just wanted to -- if I could understand better, when do you think the process is going to be completed, largely completed? Is it largely completed in the first quarter? And is it correct to assume, if it is largely completed then, that as the year unfolds, probably more in the back half that these initiatives support that acceleration as we move toward throughout 2020? Is that the right way to think about it?

Curt Hartman -- President and Chief Executive Officer

So Rick, great question. I would break it down into the two parts. The part that we announced on the third quarter really focused on the U.S. General Surgery and broadly International, agnostic of which product category we're talking about.

That work, because it started as we entered the fourth quarter, is largely in place. As I said earlier, we're still in the hiring mode in some of the geographies where we're doing expansion. But by and large, most of those folks that have been hired have either been to or are in training as we wrap up the month of January and are out working in their new geography, their new territory or in the category of International. We've made the associated go direct or channel change move and have new people up and running.

Now their productivity is a whole different question, and we think that productivity ramps as the year unfolds. And because we started this now a quarter ago, we're going to get to that productivity ramp sooner. The second half, which we just announced this morning, was the U.S. -- or this afternoon was the U.S.

Orthopedics business. And literally, we are just coming out of those communications in the month of January when you have your sales meetings and you talk to your team and you look at the performance and you look at the new product cadence that they've been given and what's coming and you say, what do we need to best match up sales, commercial with product innovation that we've provided or are providing. And so we're now just communicating and rolling those transitions through, in some cases, doing hires. In other cases, looking at the expansion geographies and really cementing that so that, that will take us into the first quarter here.

We would hope to have all of that done in this quarter. And then productivity, again, will follow on the heels of that -- those people and changes being in place.

Rick Wise -- Stifel Financial Corp. -- Analyst

Alright. That makes sense. So 1.5 questions, just to follow-up. The half, I would assume, it showed what you were saying about that 2% to 3% of sales in China.

Do we expect that to drop dramatically, go away temporarily? I just wasn't sure what you wanted us to believe. And maybe last, you could talk a little bit more. I don't expect you to give us specifics for competitive reasons, but you've, you know -- Todd alluded to the new products that have -- that are in the pipeline that have yet to be approved, seemingly like it -- relatively imminent. But maybe just talk broadly about where you're focused.

And should we imagine that the acceleration in innovation and pipeline is ever more visible as we proceed through 2020? Thank you.

Todd Garner -- Executive Vice President and Chief Financial Officer

OK. So first of all, on China, Rick. So it is -- it's the Chinese New Year right now and so this is a week where China has essentially shut down anyway. The government has asked the people that it'd be kind of only really important travel that happens between now and the 10th.

They're trying to get a handle on the spread of the virus. And so they've asked for very limited travel through February 10. And so we are following those guidelines at this point. And you know, that's all we know for now, right? So as we get updates every day, we'll know if people can get back to work after the 10th or if it extends beyond that.

And so it's just something we're watching. It's not a huge impact on us. But in a given quarter, if it extends much longer than the current request, then it could have a negative impact on the guide that we've just given this morning for Q1. And so anyway, we just wanted to call that out as something we're watching closely.

On the new products and how those roll out and when you should expect more contribution, the good news and the bad news about this sector is that our customers don't change quickly or easily. We are very encouraged by the innovation that CONMED has delivered, and we believe and are seeing customers get excited by that innovation. But as we said multiple times, this will be a slow kind of gradual growth, account-by-account, doctor-by-doctor, that will add to itself over time. And so when you launch something, it doesn't have an immediate huge impact on the revenue line.

But over time, several quarters later and then as you move forward on a sequential basis, you gain accounts, and it grows and becomes more impactful. And so that's how we think of it. We think you'll see more in 2020 from a revenue perspective from the 2019 launches than you did in '19, and then the same will be true for every succeeding year.

Rick Wise -- Stifel Financial Corp. -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Mike Matson with Needham & Company. Your line is now open.

Mike Matson -- Needham and Company -- Analyst

Thanks. Thanks for taking my question. I guess just wanted to go back to the kind of gross margin or, I guess, sorry, operating margin, implied guidance and the fact that you've got this pretty significant EPS headwind. It seems like, from my math, about 30 to 40 basis points in there.

If I look at the guidance for gross margin and SG&A that you're looking at underlying margin improvement of 100 to --sorry, 120 to 180 basis points, if my math is right? So I guess that's a pretty significant improvement. So just how confident are you in your ability to deliver that? What's really going to be driving that in 2020?

Todd Garner -- Executive Vice President and Chief Financial Officer

OK. Good question, Mike. I would -- so the ranges we gave, as I model these out, the ranges on the expense lines and on the revenue growth that I gave would -- if you took the high and low of all of those ranges, you would get an operating margin range improvement of 70 to 170 basis points. So you can pick where you want to be in on that range.

And that includes -- and that's inclusive of 40 to 50 bps of headwind from FX. So as you just did, translating that to what it would have been without FX, you're right. It would have been a higher number without FX. And so I think your math is solid.

You're on the high -- you're on the higher side of the full range of available options. But yeah, I think the key takeaway is the profitability engine is strong, continues from last year, you know, maybe even accelerating. And it gives us the freedom and the ability to make some of these pretty significant changes that we talked about last quarter and that we're talking about this quarter. The strength of the profitability allows us to do those things at a bigger scale than maybe we could have otherwise done and still deliver our commitments on the bottom line.

Mike Matson -- Needham and Company -- Analyst

OK. How much of that margin improvement is coming from mix, from Buffalo Filter and just higher-margin products, I guess?Oh, man, that's hard to break out when you start talking about the whole portfolio. When we bought Buffalo Filter, we talked about it contributing 50 basis points of increased operating margin in 2020. And obviously, it's overperformed.

And so it's at least that on its contribution alone. But at this point, it's kind of melded into the business. It's in a -- it's a little hard to get too precise with the different pieces. I think what we're happy about is the overall engine is working, the profitability is improving and it allows us to fund the business to keep the top line growing above market and still deliver really healthy double-digit growth on the bottom.

OK. That's helpful. And then just more of a housekeeping question. I apologize if you mentioned this in prepared remarks, I might have missed it.

But it does look like the diluted share count was up a little bit sequentially. So could you maybe explain why that happened?

Todd Garner -- Executive Vice President and Chief Financial Officer

Nothing abnormal there. We did have the vesting of the performance stock units that I talked about. So -- but other than that, nothing abnormal.

Mike Matson -- Needham and Company -- Analyst

Alright, great. That's all I have. Thank you.

Todd Garner -- Executive Vice President and Chief Financial Officer

Thank you, Mike.

Operator

Thank you. Our next question comes from Matt O'Brien with Piper Sandler. Your line is now open.

Drew Stafford -- Piper Sandler -- Analyst

Hi, guys. This is Drew, on for Matt. Thank you for taking the question. I guess I was paging through your slide deck a couple of weeks ago while you were presenting, and there's really a couple of slides that stood out to me.One was the chart of new projects -- or new products as a percent of your total revenue.

And then, I guess, the other was the breakout of your products into negative and single and then double-digit growth buckets. And then, I guess, collectively, it's showing a pretty impressive transition in the business over the last five years. I guess a piece of that was, obviously, driven by new product launches, but you also had some SKU reduction in that process. So to focus a little bit on the latter, I guess my question is, how far along are you in that SKU reduction process? I mean is that 10%, 20%, 30%, 50%? And then two, how meaningful could that be from a profitability perspective?

Curt Hartman -- President and Chief Executive Officer

So Drew, our focus on the first part of that question on new products as a percentage of quarterly revenue, we've been providing that chart now a couple of years. And the reason we initiated that chart was because early on, we were putting a lot of money into R&D, and we needed a visual to show folks what they were getting or what we're driving with that investment in R&D. And I think at last look, which we showed at JPMorgan's conference, we showed that number being north of 30% of the quarterly revenue. And we think that's in a healthy range, and we're probably going to discontinue that chart as the company is going to continue to innovate.

We're going to continue to drive. That number is going to bounce around a little bit. On the other side of the question, as we looked at the portfolio, I think Todd and I have said many times, our priority for our operations group is to launch new products. Secondarily, it's what I would call the internal efficiencies and driving internal efficiencies, whether that's through manufacturing enhancements or SKU reduction.

I would say, just overall, without getting into many details that the SKU reduction component of our efficiency drive has not been a major factor. It's been more about M&A and new product innovation driving accretive gross margin products into the portfolio. And it's been about the sales volume. So SKU reduction, if it were to be a large contributor, still remains in front of us, but we haven't quantified that or candidly initiated that as a massive part of the effort at this point in time.

I don't know, Todd, if that's a fair summary from your chair.

Todd Garner -- Executive Vice President and Chief Financial Officer

I think it's a great summary. Yes. I wouldn't overemphasize SKU reduction, although it's part of it, but I'd say, it's a small part of it. The focus has simply been to put our resources into faster-growing markets and to meet unmet needs in those markets.

And so that's what we've been doing. And we've -- and as we've added resources there, they've delivered and that has what -- that's what has shifted the mix of the portfolio to a balance of faster-growing things.

DrewStafford

Got it. Thank you. And then on AirSeal, you've had a couple of indication expansions over the last couple of years with thoracic and, I think, pediatric. Anything meaningful in the pipeline that we can expect there in 2020? And then I believe last you said, AirSeal is using about 30% robotic cases.

Is that number still accurate today? Thank you.

Curt Hartman -- President and Chief Executive Officer

So let me take the first part of that. So we're -- we remain very excited about AirSeal. It had another great year in 2019. And probably the biggest thing we can do for AirSeal was the sales force expansion that we talked about in the third quarter, putting more feet on the street in that component of our General Surgery category because that's the same team that's selling Buffalo Filter, two very innovative products, two very high-in-demand products.

So we think the opportunity remains very large in front of us as it relates to AirSeal, driven, yes, by indication expansions into thoracic and pediatrics. But as we've said many times, really driven by the ongoing development of clinical studies, really, around the globe. It's been really great to see global thought leaders embrace the technology, start their own body of work and get up and do podium presentations and publications. So that is as important as anything that we're doing inside on the innovative front.

And I think you know, we're probably not going to talk about future pipeline as it relates to AirSeal. We like to launch things before we talk about them. But we understand the importance of that portfolio, and our work on that portfolio continues. I'm going to let Todd probably update you on the Robotics Association.

Todd Garner -- Executive Vice President and Chief Financial Officer

Yeah. It is our estimate that growing about 30% of the robotic cases today, and that number seems to climb every year. So somewhere in that 30% to one-third is probably where we are.

Operator

Thank you. [Operator instructions] Our next question is a follow-up from Kristen Stewart with Barclays. Your line is now open.

Kristen Stewart -- Barclays -- Analyst

Hi.Thanks for putting the product revenue pie chart in the slide deck. I guess -- I didn't put my protractor up, but it looks like Buffalo Filter and AirSeal are approaching like $200 million in revenues, which is nice. So I guess if it's -- is it correct to think about those two businesses is growing more, I guess, above that, call it, like 15%-ish growth rate going forward? Is there anything that you guys see that would prevent that level of growth? And is there anything we should think about going forward, just in terms of legislative milestones or regulatory meetings for Buffalo Filter? I know that AORN meeting is probably coming up, I think that's usually like in the April-ish time frame. And anything to update there?

Curt Hartman -- President and Chief Executive Officer

Yeah. I'll start with the last part of that. AORN is -- actually starts this Saturday after AOS. AOS is the last week in March in Orlando, and AORN is in Anaheim, California.

So that will be a fun week for those in the industry on two different parts of the geography. The combination of AirSeal and Buffalo Filter and your question about 15% growth, we don't routinely throw around growth numbers, but we see both of those as double-digit growers for the foreseeable future. On the Buffalo Filter side, we clearly exceeded our expectations in the first 11 months of that product, and there's nothing that we saw in the market globally that says there's a slowdown coming. Legislatively, there was not a lot of change in the fourth quarter, and we've said this many times that it's really the healthcare worker that's driving this legislation.

It's more of a lagging indicator at this point in time. The healthcare environment has really embraced the need for the smoke-free workplace because of all the health hazards associated with surgical smoke, and we're doing our best to support that initiative behind the scenes, and legislation has not fundamentally changed in the last quarter. So I think I got all your questions there, Kristen. But if I didn't, please ask again.

Kristen Stewart -- Barclays -- Analyst

I think we're good. Is there anything to note at AAOS? Or will it just be kind of releasing some of the new products and just kind of showcasing them there?

Curt Hartman -- President and Chief Executive Officer

I think it's -- academy as a show for us starts the year, new product cadence is typically best demonstrated there, though it is early in the year. So oftentimes, we have things that come out later in the year. But again, a good show for CONMED in our Orthopedics business.

Kristen Stewart -- Barclays -- Analyst

OK. Thanks very much.

Operator

Thank you. I'd now like to turn the call back over to Mr. Hartman for any closing remarks. Mr.

Hartman?

Curt Hartman -- President and Chief Executive Officer

Alright. Thank you, Jimmy, and I want to thank everybody on the call today for your time, and we look forward to speaking with you on our next earnings call after the first quarter. Thank you, and have a good evening.

Operator

[Operator signoff]

Duration: 52 minutes

Call participants:

Curt Hartman -- President and Chief Executive Officer

Todd Garner -- Executive Vice President and Chief Financial Officer

Robbie Marcus -- J.P. Morgan -- Analyst

Matthew Mishan -- KeyBanc Capital Markets -- Analyst

Kristen Stewart -- Barclays -- Analyst

Rick Wise -- Stifel Financial Corp. -- Analyst

Mike Matson -- Needham and Company -- Analyst

Drew Stafford -- Piper Sandler -- Analyst

DrewStafford

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