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Q1 2019 Earnings Call
April 24, 2019 4:30 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


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 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 expectation. Please refer to the risks and 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 maybe 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 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 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 reconciliation supporting the company's earnings release posted to the company's website. With these required announcements completed, I will turn to 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, Jonathan. Good afternoon, and thank you for joining us for CONMED's first-quarter 2019 earnings call. With me on the call is Todd Garner, executive vice president and chief financial officer. Today, I'll provide a brief overview of financial and operating highlights for the first quarter.

Todd will then provide a more detailed analysis of our financial performance and discuss our 2019 financial guidance. After that, we will open the call to your questions. Turning to our results. Our total sales for the first quarter were $218.4 million, representing a year-over-year increase of 8.1% as reported and an increase of 9.3% in constant currency.

Organic sales growth in the quarter, which excludes the impact of Buffalo Filter acquisition, was 6.3% in constant currency. These results exceeded the high end of our guidance and came against one less selling day in the quarter. I'm pleased with this performance, especially against the double-digit fourth quarter and strong 2018 revenue performance. From an earnings perspective during the first quarter, our GAAP net income totaled $1 million.

This compares to net income of $10.7 million in the first quarter of 2018, which was positively impacted by Belgium tax reform. Excluding special items that affected comparability, our adjusted net income of $16.5 million increased 9% year-over-year, and our adjusted diluted net earnings per share of $0.57 increased 7.5% year-over-year. Overall, we choose solid results driven by growth in both our orthopedics and general surgery businesses during the quarter. We believe our customer-facing investments from 2018 are starting to materialize in our end markets.

Additionally, as we had previously discussed, Q1 was an important quarter for CONMED in terms of launching new innovative products. For those who attended AAOS, SAGES, and more recently, AORN, you saw firsthand the outcome of our customer-focused innovation as we displayed an unprecedented number of new products that benefit the surgeon, the staff, the patient and the payer. As part of these launches, we have ramped up our medical education efforts across the company and believe this will further accelerate adoption. While early, the customer response to our new product offering has been encouraging.

During the quarter, we also closed the acquisition of Buffalo Filter and, to date, have made great progress on the integration with an early focus on the commercial integration of sales, marketing and R&D. We're excited to have the Buffalo Filter team on board and remain optimistic about both the near and the long-term opportunities in the smoke evacuation and filtration market for CONMED. Overall, our results provided a very nice start to 2019 and our global teams remain focused on building both our brand and market awareness of the innovative solutions we are delivering. Our financial results for the quarter put us in solid footing, and our team remains focused on continuing to bring new products to market to drive durable, top-line growth and increasing profitability.

I'll now turn the call over to Todd, who will provide a more detailed analysis of our financial performance and discuss the positive update to our 2019 financial guidance. Todd?

Todd Garner -- Executive Vice President and Chief Financial Officer

Thank you, Curt. Before I get that started, I wanted to let you know that we have posted an updated investor slide deck on our website in conjunction with this call. As Curt mentioned, our first-quarter sales totaled $218.4 million, which represents an increase of 8.1% on a reported basis and 9.3% in constant currency. Excluding the $6.1 million of Buffalo Filter's sales in the quarter, our organic growth was 6.3%.

On a pro forma basis, if we had owned Buffalo Filter in the prior-year period, our first-quarter growth would have been 6.8%, demonstrating the 50-basis-point contribution we talked about when we announced the acquisition back in December. We did have one less shipping day in the first quarter of 2019, so 63 days, compared to 64 in the prior-year quarter. All remaining sales growth numbers I reference today will be given in constant currency. The reconciliation to GAAP numbers is included in our press release.

For the first quarter of 2019, our domestic sales increased 10.1% versus the prior-year period, while international sales increased 8.3%. Worldwide orthopedics revenue grew 5.7% in the first quarter, driven by strong performances across the product portfolio. Domestically, first-quarter orthopedics sales increased 4.9%, and internationally, orthopedics sales increased 6.2%. Total worldwide general surgery revenue increased 13.4% in the first quarter, with domestic general surgery revenue growing 13.7% and internationally general surgery revenue increased 12.8%.

Today, we'll be updating our 2019 guidance to include Buffalo Filter based on the closing date of February 11. All of that is laid out in the slides on our website to make it easy to follow. First, we need to reset the baseline for 2018 Buffalo Filter sales. We told you back in December that we expected the 2018 external revenue to be approximately $41 million.

We have now completed the audit and conform to the reporting with our accounting policies, including adjustments for ASC 606 and the treatment of contracted R&D. The result is a straightforward shift between revenue and expenses. Our estimated cash EBITDA of approximately $10 million that we talked about in December was confirmed through the audit. The new 2018 revenue baseline on an apples-to-apples basis is approximately $39 million.

Applying the same expected growth range of high teens to low 20s on that baseline gives us expected 2019 Buffalo Filter revenue in the 10 and a half months under our ownership of between $40 million and $42 million in 2019. On the organic business, based on our better-than-expected start to the year, we are increasing our constant-currency sales growth guidance by a quarter of a percentage point. We're now guiding to revenue growth between 5.25% and 6.25% for the full year on an organic basis. We also have an update to our currency assumptions.

We now expect the currency headwind of about 75 basis points for the full-year 2019, compared to our original estimate of 100 basis points. For clarity, that math all adds up to projected 2019 reported revenue between $938 million and $949 million, representing growth of approximately 9% to 10%. 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 charges related to acquisitions, debt refinancing costs and the impact of tax reform on 2017 deferred tax balances and amortization of intangible assets, amortization of deferred financing fees and debt discounts net of tax.

A reconciliation to GAAP numbers is included in our press release. Adjusted gross margin for the first quarter was 55.9%, an increase of 170 basis points from the prior-year quarter. The same ebbs and flows from manufacturing variances that made for a tough comparison in the fourth quarter as we discussed have led to an easier comparison in the first quarter. So while we're pleased with the results this quarter, we don't expect this level of improvement all year long.

Having said that, we are increasing the low end of our full-year forecast range for gross-margin improvement. We now expect between 70 and 100 basis points of improvement for the full year. Research and development expenses for the first quarter were $10.6 million or 4.8% of total sales, which is a 37% increase over the $7.7 million in the prior-year period as we continue to actively invest in our new product pipeline. Looking forward, we continue to expect investments in R&D to be between 4.5% and 5% of sales in 2019.

First-quarter SG&A expenses on an adjusted basis were 39.5% of total sales, a 40-basis-point improvement over the prior-year quarter. As Curt mentioned, the integration of Buffalo Filter is off to a great start, and we project improving leverage on SG&A as we move through the year. We now anticipate approximately 100 basis points of improvement in 2019, compared to our prior expectation of 50 basis points that we provided in January. We now expect interest expense to be between $32.5 million and $33.5 million in 2019.

The adjusted effective tax rate in the first quarter was 15%, compared to 15.9% in the prior-year period. We told you last quarter that the Q1 tax rate would be lower than normal, but it came in a little better than we expected. The lower-than-expected rate was due to benefits from tax group restructuring that drove a catch-up adjustment recorded in the first quarter as well as the excess tax benefits from equity plans and the strong performance of our stock. We continue to expect a go-forward adjusted effective tax rate to be between 24% and 26%, but we now expect to be at the low end of that range for the full year given the discrete items in the first quarter.

First-quarter GAAP net income totaled $1 million or $0.04 per diluted share, compared to a reported net income of $10.7 million or $0.37 per diluted share a year ago. Excluding the impact of special items discussed earlier, our first-quarter adjusted diluted net earnings per share were $0.57, compared to $0.53 in the prior-year period, representing growth of 7.5%. In December, we told you that we expected Buffalo Filter to be neutral to adjusted cash EPS in its first full year with CONMED. We now expect the acquisition to be slightly accretive to 2019 on the bottom line with the benefit materializing closer to the end of this year.

Contemplating this accretion and our solid Q1 results, we are raising our full-year adjusted cash EPS guidance by $0.05 in total to now be between $2.47 and $2.52, representing year-over-year growth of approximately 13% to 16%. The adjusted diluted cash earnings per share estimates for 2019 exclude amortization of intangible assets, amortization of deferred financing fees and debt discounts, which are estimated in the range of $34 million to $36 million net of tax and the cost of special items, including charges related to acquisitions and restructuring costs and debt refinancing costs estimated in the range of $16 million to $18 million net of tax. As we look specifically to the second quarter, we think the top- and bottom-line growth rates should be consistent with our full-year guidance with the exception of currency impact. While we anticipate FX headwinds to ease in the back half of the year, we still expect about 100 basis points of FX headwind on the revenue line in the second quarter.

Therefore, we anticipate our reported second-quarter revenue growth rate to be lower than our expected full-year growth rate. Now turning to the balance sheet. Our cash balance at the end of the quarter was $23.4 million, compared to $17.5 million as of December 31, 2018. Accounts receivable days as of March 31, 2019 were 69 days, compared to 70 days a year ago.

Inventory days at quarter end were 155 days, compared to 142 days a year ago. The increase is driven by new products as we build inventory in front of anticipated sales as well as in-sourcing projects that required duplication of inventory during the transition. Long-term debt at the end of the quarter was $803 million versus $439 million at year end. Our leverage ratio at March 31, 2019 was 5.2 times.

Cash flow used in operations for the quarter was $3.9 million, compared to $25 million in cash flow from operations in the first quarter of 2018. The nonrecurring expenses related to the acquisition impacted this number as well as the inventory builds I mentioned a minute ago. Capital expenditures in the first quarter were $4.0 million, compared to $3.8 million in the prior-year quarter. For the full-year 2019, we continue to expect operating cash flow to be between $85 million and $95 million, excluding approximately $20 million in one-time expenses related to the acquisition.

With that, we'd like to open the call to your questions, and I'll turn it over to Jonathan. 

Questions and Answers:


[Operator instructions] Our first question comes from the line of Kristen Stewart from Barclays. Your question, please.

Kristen Stewart -- Barclays -- Analyst

Hey, good afternoon, guys. Congratulations on a good quarter. Just wanted to talk a little bit about Buffalo Filter. I realize that it's probably still early days, but could you give us just overall sense of how well the acquisition and accretion is going? And maybe just talk through the impact of the acquisition and changes relative to any expectations you had previously in terms of the guidance.

Thanks so much.

Curt Hartman -- President and Chief Executive Officer

Thanks, Kristen. We're very pleased at this point. As Todd mentioned, we closed on February 11. I think in my opening comments, I noted that we felt the integration on sales, marketing.

R&D was effectively complete. There's not a lot left to do there. We basically integrated it into our sales channels at this point in time both domestically and outside the U.S. The marketing team is fully in control of the product and the direction of the future pipeline, and the R&D team that Buffalo Filter had is working closely with our R&D team, and we're getting up to speed on the projects they had, and they're getting up to speed on the projects that we had in process.

So I think things are going very well there. The manufacturing operation side is always a longer tail, and we have that work under way as we sort out what we want to do with the manufacturing that they currently have in Buffalo, New York and as well as the manufacturing that they have with their partners outside. So I think overall, the integration we feel very good about. Surprise-wise, I think the only thing I would point to is we were just recently at AORN earlier this month, a very -- the largest nurses show and the customer reception, the work -- Buffalo Filter, the brand recognition of CONMED, all being together in the same booth as demonstrated by attendance at some education programs we had was just fantastic sight.

It just further confirm for me that it was the right asset for us to buy, and I'm happy we own it at this point in time. Todd, I don't know if there's anything from your chair on that.

Todd Garner -- Executive Vice President and Chief Financial Officer

Yes, I would just say, Kristen, in relation to guidance, we have completed the audit at this point. Buffalo Filter have been audited before, so we've now been through that. And the great news is that it confirmed the profitability of the company. The EBITDA is right where we thought it would be as far as from the baseline perspective.

And as Curt said, the integration is going well, so the model is intact and looking good. The only tweak, like I explained, is a little -- a shift to just between revenue expenses on how they record some things. And so as we confirm that to our accounting policies, the revenue came down a couple of million dollars, but it doesn't affect the profitability. So you just have to adjust that baseline on the revenue and everything else looks good.

Kristen Stewart -- Barclays -- Analyst

And I guess between the end of the close of the deal and then most recently, there's been some favorable news coming out of Colorado. Can you just maybe comment on to what extent that represents a tailwind? I don't know if you've been able to quantify it or anything, just thoughts on how that might impact the sales outlook for Buffalo Filter going forward.

Curt Hartman -- President and Chief Executive Officer

Yes. I think consistent with what we said, the acquisition model that we had built was really largely based on the enthusiasm in the marketplace for the technology and the concept of smoke evacuation and filtration and that all legislation that would perhaps tip in favor, we view that as wind in our back. So the regulation you're referring to in Colorado recently being signed, we view as positive news. With all things, these regulations take time to be put in place and take time for everyone to understand exactly what the mandates is.

But clearly, we see it as positive news. And you've got Rhode Island. Now you've got Colorado. There's other states that are working on legislations.

So we think the momentum is continuing to move in the right direction and certainly is favorable news relative to our outlook with the acquisition.


Thank you. Our next question comes from the line of Richard Newitter from SVB Leerink. Your question, please.

Unknown speaker

Hey, this is Dylan on for Rich. Thanks for taking the questions. I was hoping to start just with the gross-margin improvement there. I think you've set the bottom end of guidance there by about 20 basis points.

I was curious in relation to what you're seeing with Buffalo Filter and some of the outlook there for the business. I believe before you said most of that was on the opex side or if there was other improvement that you're seeing there in the base business. Thank you.

Todd Garner -- Executive Vice President and Chief Financial Officer

Yes. Thanks, Dylan. No, that improvement is not from Buffalo Filter. Buffalo Filter comes in the door just barely above our gross-margin rate.

It will get better as we integrate like Curt talk about longer term as we get in next year and the year after. That will be more meaningfully accretive to gross margins. But at the start, it's really not. And so the performance really was internal.

Some of it's noise. Talked about the ebbs and flows of manufacturing branches that we've talked a lot about last quarter when it was a kind of negative comparable. We got the other side of that this quarter. So good performance.

We're pleased with the start of the year, and enough to raise the low end of our guidance for the improvement we expect for the full year, but we would not expect 170-basis-point improvement like we saw in Q1 to be -- to hold through the rest of the year.

Unknown speaker

OK. Got it. Thanks. And then maybe just one more on Buffalo Filter here.

As afar as AirSeal goes, I mean that's been fairly tied to robotic general surgery. Is there any business that you'd like in kind of what you saw in Buffalo Filter, too? And maybe help us think about how this thing can grow aside from just 20% here over the long term. Thank you.

Curt Hartman -- President and Chief Executive Officer

I think the way we've described the market, Dylan, anywhere in surgery that an energy platform is used, smoke is created, and I think these are approximate numbers. There's 390 million surgical procedures done around the world across all specialties. 90-plus percent of those use some form of energy, so therefore, the smoke evacuation and filtration opportunity is very substantial. It is created in open procedures like knee and hip procedures.

It's created in open general surgery procedures. It's created in craniotomy. So it's hard to say watch one procedure volume trend and you'll understand the growth rate of smoke because when a hospital or even at a surgeon's -- a doctor's office says they want to be smoke-free, they're talking about every procedure of every specialty that creates smoke. That's what they want to remove smoke from.

So if you were to go into a hospital that said we have a smoke-free operating room environment, that would mean every procedure that uses an energy platform that generates smoke would have to have smoke evacuation and filtration in it, and that's what gives us great excitement. It's a really big addressable market. There's an evolution of understanding at the customer level, how important the topic this is for the healthcare worker, but I think we're starting to see that really pick up. There's been a lot of work to create that awareness over the last eight or 10 years.

A lot of that work candidly done by Buffalo Filter as they were building their business. So we're clearly benefiting from that and continue to leverage their key executives to help us get the message out and keep building that message.


Thank you. Our next question comes from the line of Mike Matson from Needham & Company. Your question, please.

Mike Matson -- Needham and Company -- Analyst

Yes. Hi. Thanks for taking my questions. Just another Buffalo Filter question, I guess.

So I seem to remember that there was a portion of their business that was -- where they're generating some sales from selling the products through other device companies. Can you remind us how much that is? And just curious any updates there in terms of what the outlook is for that. Have you heard from any of these companies if they want to continue to purchase some of that CONMED?

Curt Hartman -- President and Chief Executive Officer

Sure, Mike. There were two businesses of Buffalo Filter. One, I'm going to refer to as a branded business. That's the Buffalo Filter product.

The Buffalo Filter was directly selling either through the sales force or their independent distributors, and there was the OEM business that they were selling to other strategics, including CONMED where we could sell that into our market. We talked about that there was product differentiation, that the branded product was always a little bit better. Obviously, it had a few more features, it was always a little more state-of-the-art, if you will. Though the OEM platforms in some cases were uniquely developed for the OEM partner.

We have, in fact, heard from everyone of those OEMs, and we continue to maintain and support those businesses. We think the market is still in such a very early stage that it's important that market awareness is created, and we think that technological advantages that Buffalo Filter brings to the table from an R&D standpoint are very important. And we believe at this point in time, OEMs still recognize that. Now there's no certainty that they will want to continue to buy from us but we've certainly tried to send a message that our intent is to continue to support those parties both from a marketing and R&D standpoint.

We have not broken out the difference in the two levels of sales and probably aren't going to get into that.

Mike Matson -- Needham and Company -- Analyst

OK. Thanks. And then just on the selling day impact, I mean, is it as simple as taking a one out of 64, which sort of imply a 1%, 1.5% kind of in your headwind to your sales growth? And then can you just please tell us the selling days for the remaining three quarters? Are there any differences versus last year?

Todd Garner -- Executive Vice President and Chief Financial Officer

Yes. Thanks, Mike. I always get nervous on putting too fine a point on a sales day in a quarter, but yes, we do. Just like we estimated last quarter when there was one extra day, our estimate is a day is worth somewhere between 1% and 1.5%.

So yes, I'd say that's consistent with our thinking. The Q2, the consistent day, Q3 actually has one more day this year and then Q4 is the same. So 2019 for the full year will be an even number of days. We had one less in Q1, and we have one more in Q3.

So that's how that plays out for the year.


Thank you. Our next question comes from the line of Rick Wise from Stifel. Your question, please.

Rick Wise -- Stifel Financial Corp. -- Analyst

Good afternoon, Curt and Todd. Curt, I thought maybe you could talk about the innovation engine a little bit. First, maybe just help us think about some of the parts you launched in '18: the cordless small bone power system, the Anchor Tissue Retrieval System, the TruShot with Y-Knot. Where are we in the rollout there? And what inning are we in terms of rolling all that out? And maybe as part of that discussion, when we met at AAOS, you launched an impressive array of new products.

You're entering the hip, the sizable hip arthroscopy space. My understanding, if I got it right, for the first time, that's a big market. Maybe talk to us about the takeaways from AAOS and the reaction to these new systems and how we think about all that new area of integration affecting 2019.

Curt Hartman -- President and Chief Executive Officer

Sure, Rick. Great question. Glad to have you on the call. The products you mentioned, MicroFree was introduced Academy 2018.

The Anchor System came on board late in 2017. '18 was really its first full year on the general surgery side. And then TruShot, the first launch of that occurred late in 2018. The first time we showed it was at Academy in 2019.

So all three of those, a little bit different in their timing. But if I used MicroFree and Anchor, a little over a year in on each, still a lot of customer enthusiasm, still a lot of customers to go after and still a lot of uptake in terms of the product as measured by revenue. TruShot being newer, we had what I would refer to as more of a limited release late last year. But as we went into Academy, we were in full release and TruShot was part of an extremities platform.

As you noted, we did release a hip platform. A lot of the hip platform products will be coming out in this quarter, the second quarter. They were all fully released at Academy. And then we had the Y-Knot Pro platform in the shoulder and then we have the CrystalView arthroscopy pump, and obviously, we showed the Buffalo Filter product portfolio.

So really all those last four or five are relatively new. I think as measured by the customer enthusiasm at AAOS and at AORN, we're very excited about the potential. We had great customer feedback. We took a substantial number of leads.

Our sales force is very excited to have these products in their hands. As you well know, these things take time. The ability to get a trial is dependent on the surgeon. Their willingness to open up for a trial, you have to go through value analysis committees.

But we think we've done the right thing arming our sales force with a wide array of innovative products. And we think based on those customers at those trade shows, getting our hands on them and hearing our story, there's a lot of enthusiasm. So we're pretty excited about what we've got going on, on the innovation side right now. And I think we've mentioned that there's more coming in the second half of this year.

Those will be more weighted toward the general surgery side of the business, but we've got a very nice portfolio right now.

Rick Wise -- Stifel Financial Corp. -- Analyst

Great. And just as a secondary, Curt, if you could, or Todd, could talk about the investment spending going behind SG&A. You spent more than I expected in SG&A and to quote you, you said you ramped customer education efforts. Maybe talk a little bit about that.

What's that mean? Are you at the right place now? Do you have to spend more? And are we -- I'm sort of hoping a little bit that even though you have all these innovation opportunities that you might be at a little bit of an inflection point in your ability to drive steady, consistent positive leverage. So just again, some perspective on all that. Where are you now? And what are the implications of this higher spending? Thanks.

Todd Garner -- Executive Vice President and Chief Financial Officer

Well, yes, Rick. It's higher spending on higher sales. On a ratio basis, we're better than we guided, and we start out the year saying we were going to have 50 basis points of improvement on that metric for full year 2019. After one quarter, we've updated that to 100 basis points.

And so I think we are getting good leverage. At the same time, we have raised the low end of our gross margin guidance. And just in the Q1, with only half a quarter of Buffalo in its very first six weeks, we've got a 100-basis-point improvement to our operating margin over the prior year. So I think those are all confirmatory signs that the model is working, that the profitability is here.

We're guiding cash EPS to 13% to 16% growth, which again is already higher than we said three months ago. So I think we feel very good about the infrastructure of the business, leveraging that for higher revenue and dropping our results to the bottom line.

Curt Hartman -- President and Chief Executive Officer

And Rick, I should have been clear on my comment. We have ramped up medical education. You've seen our cadaveric workshops and learning lab. And when I first got here, it wasn't getting used a lot because we didn't have any new products to show customers, and we've kind of gone to the other side.

We have a lot of new products, and our clinical teams, marketing, education teams are working over time to get products in front of customers in the cadaveric workshops. And the other part of the marketing spend and sale spend is putting those new product samples in our team's hands. I think we're doing it absolutely the right pace at the right clip, and we're doing it in a way that allows Todd to make the comments he just made that our ratios continue to get better. So I don't want anybody to take my comment as a signal that you should expect our ratios in SG&A to get out of whack.

We have a very firm plan that we're running through this year and we accounted for all those new products. I was simply just making a point that our clinical education teams are working over time. We're very proud of the work we do, that they do and are doing with our customers, and that's a big part of us getting our products, the new products in front of customers.


Thank you. Our next quarter comes from the line of Matthew Mishan from KeyBanc. Your question, please.

Matthew Mishan -- KeyBanc Capital Markets -- Analyst

Great. Thank you for taking the questions. Hey, Todd, I just wanted to move back to the gross margin and, first off, congratulations on the number. That was excellent.

I understand the 170-basis-point improvement isn't sustainable as you move through the course of the year. I'm just trying to understand the manufacturing variances. Did they more impact 1Q '18 where that number wasn't normally lower? Did they unusually impact 1Q '19 so that the next several quarters, basically what you're guiding to -- the next several quarters is below where you're at today?

Todd Garner -- Executive Vice President and Chief Financial Officer

Yes. It was the prior-year number that -- as we talked about last quarter, the builds that were happening late into '17 or in the fall of '17 drove favorability in late '17, which was a headwind last quarter, right? And then as we digested those, it was an easy comp in Q1 of '18, so it was really a prior-year story. We've got better control of that now and so it relates to the prior year, Matt.

Matthew Mishan -- KeyBanc Capital Markets -- Analyst

So I guess sequentially, as you look into 2Q, 3Q and 4Q, you have Buffalo Filter coming in. Why would gross margin be lower in 2Q, 3Q and 4Q that would be in the first quarter?

Todd Garner -- Executive Vice President and Chief Financial Officer

Well, so the comps go up a little bit, and we are allowing ourselves to -- we got some inventory burn off that we need to make, and so we're allowing some room for those flows. Obviously, we'll be working to do the best we can, but we're not prepared to raise guidance above what we've done so far today.

Matthew Mishan -- KeyBanc Capital Markets -- Analyst

OK. That's fair. And then can you talk a little bit about how you're positioned now with your energy or like the surgery platform especially in combination with surgical smoke? And how natural the fit is the sales cycle between energy and surgical smoke?

Curt Hartman -- President and Chief Executive Officer

So I'll start with the second question there. The fit is hand in glove. They go absolutely hand in hand. If you have an energy source, that energy source is creating smoke.

We have the full cycle solution to evacuate and filter the smoke that our energy solution created. So they go absolutely hand in hand. It's a very synergistic sales approach. Our reps are in those cases all day.

As far as our energy platform goes, Matt, you've been around the story a little bit. You probably recall a couple of years ago, we updated the Healix energy platform. We did exit what I would call the pure cut and seal energy market. We had a platform that was really not competitive there, and we exited that a number years ago.

So that remains an opportunity for us to have that full solution when it comes to the cut and seal, which is an application that does create smoke. So I think we have a very good platform that is good as we could be.


Thank you. Our next question comes from the line of Matthew O'Brien from Piper Jaffray. Your question, please.

Unknown speaker

Great. Thanks for taking the questions. This is Will on for Matt. Kind of a similar question to the last one, but any sense of how conversations are going with the value analysis committees and de novo accounts for Buffalo Filter? And any thoughts on bundling strategies there? And it's obviously early, but factored into organic guidance, any cross-selling opportunities with AirSeal?

Curt Hartman -- President and Chief Executive Officer

So I think overall, we're building on a market that's already in process of being built. So the conversations with OR staff, the conversations with value analysis committees are not new conversations. They're conversations that we're building on that had been in the works for a time. As we go into that new customer, it really does start in the OR.

It starts with the surgeon willing to have extra equipment in the procedure. We think the Buffalo Filter equipment is uniquely designed to accommodate that surgeon feel with that device in their hand, and it addresses a real issue with the nursing staff that is very central to their livelihood and I think it's something that as people look to create a better environment, a better workplace for their staff. It's just natural that they would want to remove smoke, which clinical studies have shown is very detrimental to their long-term health. So I have not heard any pushback as we've approached value analysis committees.

I've not heard any pushback as we've approached the education that we have to do with those de novo accounts and helping them understand why this is so important. So I think things are good on that side. I'm sorry, Will, the second part of your question was?

Todd Garner -- Executive Vice President and Chief Financial Officer

Cross-selling with AirSeal.

Curt Hartman -- President and Chief Executive Officer

Cross-selling with AirSeal. I think our sales force carries both products. They are the best people equipped in the world to demonstrate the benefits of having the minimally invasive and open-procedure smoke evacuation platforms coming from one vendor. That doesn't mean all customers want that to be the story.

So we approach it as a customer would ask for us to approach it. It's very difficult to measure cross-selling, but I think when you have unique platforms like we have with AirSeal and with Buffalo Filter, inherently, you're going to get some long-term cross-selling benefit from that.

Unknown speaker

Great. Thanks for that. And then in terms of your R&D investments, the investments you've made on the orthopedic side clearly are translating into some pretty meaningful products as we saw at AAOS. Just curious on where you're investing R&D dollars today and any particular segments that you'd like to highlight.


Curt Hartman -- President and Chief Executive Officer

We've been on a couple of year journey here of moving the R&D spend as a percent of sales from the low threes up to the four and a half to five, and we kind of hit right in the middle of that this quarter. And I think everybody knows our R&D spend is built by the unique businesses and what they see in the market that their customers need. We've certainly been focused for the last couple of years on orthopedics, and we remain focused on that. We've said this is going to be a good year for orthopedics.

We had a very good start. There's more coming, and I've already alluded to the fact that general surgery will be back-half-weighted this year, and so there's more coming on the general surgery side. So it's not dollars going to one business. It's dollars going to the most important issues that our teams think we can address, and those happen to be across both general surgery and orthopedics at this point in time.

So no singular focus there. It's each business uniquely running their R&D engines to address what the customers are telling them they need.


Thank you. [Operator instructions] And our final question is a follow-up from the line of Kristen Stewart from Barclays. Your question, please.

Kristen Stewart -- Barclays -- Analyst

Hey, thanks for allowing me to follow up. I just wanted to see, Todd, if you could break out a little bit more specifically the contribution from Buffalo Filter in terms of the change in EPS guidance and then how you're thinking about the 2020 outlook. I think you guys had commented on $0.10 to $0.15 accretion around the time of the announcement. Does that still sound about right? Or would you guys kind of take more of a philosophy of looking to target double-digit bottom line and look to kind of reinvest back into the business? Thanks.

Todd Garner -- Executive Vice President and Chief Financial Officer

Our current expectation is consistent with our original expectation, Kristen. We said we thought it would be neutral in its first full year, and now it looks to be slightly accretive in 10 and a half months. So that's not a big difference. It's a slight positive, right? I'm not going to get more granular than that.

And then as far as 2020, we would stick with our $0.10 to $0.15 range today. That's a decent size range, and we'll update that more when we get to 2020. But so far, we're very pleased with the acquisition obviously. The model is very healthy and intact and confirmed and we're executing.

So we will update you as we have updates to get, but that's the guidance we have for now.

Kristen Stewart -- Barclays -- Analyst

And then just last question. How should we just think about the progression with organic sales? You guys had 7%-plus underlying. If I adjust out for the extra selling day or the one month selling day in the quarter, the guidance for the full year is 5.25% to 6.25%. So is it just a matter of more difficult comps as we move through the course of the year or is there some reason why we should see deceleration in growth trends across the businesses?

Todd Garner -- Executive Vice President and Chief Financial Officer

No, we don't see any barriers, Kristen. We feel good about the momentum of the business. Like you said, Q1 came in well. It is three months.

There's a lot of year left and we don't want to get ahead of ourselves, but we're very pleased with how things are going and we'll update you next quarter if that outlook changes.


Thank you. And 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.

Curt Hartman -- President and Chief Executive Officer

Thank you, Jonathan, and thank you to everybody on the call today for your time, and we look forward to speaking with you on our next earnings call. Thank you.[Operator signoff]

Duration: 46 minutes

Call Participants:

Curt Hartman -- President and Chief Executive Officer

Todd Garner -- Executive Vice President and Chief Financial Officer

Kristen Stewart -- Barclays -- Analyst

Mike Matson -- Needham and Company -- Analyst

Rick Wise -- Stifel Financial Corp. -- Analyst

Matthew Mishan -- KeyBanc Capital Markets -- Analyst

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