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CONMED (CNMD) Q2 2019 Earnings Call Transcript

By Motley Fool Transcribing – Aug 1, 2019 at 1:24AM

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CNMD earnings call for the period ending June 30, 2019.

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Q2 2019 Earnings Call
Jul 31, 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 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 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 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 in 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 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, Skylar. Good afternoon, and thank you for joining us for CONMED's second-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 the financial and operating highlights for the second quarter.

Todd will then provide a more detailed analysis of our financial performance and discuss our updated 2019 financial guidance. After that, we'll open the call to your questions. Turning to our results, our total sales for the second quarter were $238.3 million, representing a year-over-year increase of 12% as reported and an increase of 12.8% in constant currency. Organic sales growth in the quarter, which excludes the impact of Buffalo Filter, was 6.5%.

On a pro forma basis, if we had owned Buffalo Filter in 2018, our growth for the second quarter of 2019 would have been 8.1%. This was a very solid quarter. Further, I'm very pleased with our performance through the first half of the year as we have continued to improve our top line and margin performance while integrating Buffalo Filter and introducing an impressive cadence of new products into the market. From an earnings perspective, during the second quarter, our GAAP net income totaled $5.7 million.

This compares to net income of $8.7 million in the second quarter of 2018. Excluding special items that affected comparability, our adjusted net income of $16.4 million increased 23.5% year over year, and our adjusted diluted net earnings per share of $0.56 increased 21.7% year over year. Our solid start to 2019 is a direct result of the strong foundation built by our team over the course of the past several years. These results are possible through a relentless focus on releasing a steady cadence of innovative new products while building an evolving income statement and margin and profitability profile.

Finally, as I previously noted, we continue to make great progress on the integration of our Buffalo Filter acquisition. We remain very optimistic about the near and long-term opportunities in the smoke evacuation and filtration market for CONMED and have seen better-than-anticipated performance from this business since we took ownership of it. Overall, our financial results for the quarter has us on solid footing for the remainder of the year and have allowed us to improve our full-year outlook for revenue, gross margin, SG&A leverage, and cash EPS. Before I hand the call over to Todd, I want to thank Dirk Kuyper for his service to CONMED as a member of our board of directors since 2013.

Dirk's contribution as a director during that time were invaluable, particularly during our activist period. Throughout his years of service with CONMED, he provided commercial insight and was integral in the development of our compensation philosophies. Dirk's retirement from the board to pursue his own growing business interests provides us with the ability to pursue a director who brings new perspective and enhances our diversity. With that, I'll 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 Garner -- Executive Vice President and Chief Financial Officer

Thank you, Curt. Before I get 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 second-quarter sales totaled $238.3 million, which represents an increase of 12% on a reported basis and 12.8% in constant currency. Excluding the $13.5 million of Buffalo Filter sales in the quarter, our organic growth rate was 6.5%.

And as Curt said, on a pro forma basis, if we had owned Buffalo Filter in the prior-year period, our constant currency second-quarter revenue growth would have been 8.1%. All remaining sales growth numbers that I reference today will be given in constant currency. The reconciliation to GAAP number is included in our press release. For the second quarter of 2019, our domestic sales increased 17.6% versus the prior-year period.

While international sales increased 7.8%, worldwide orthopedics revenue grew 6.3% in the second quarter. Domestically, second quarter orthopedic sales increased 5.5%, and international increased 6.8%. Total worldwide general surgery revenue increased 19.8% in the second quarter with domestic general surgery revenue growing 24.8% and international increased 9.8%. We are pleased with our performance in the first half of 2019 and are increasing our organic sales growth guidance to between 6% and 6.5% for the full year.

The strong start in Buffalo Filter revenue also leads us to increase our expected revenue contribution from this product line to be in the range of $44 million to $47 million for 2019, which is well above the range of $40 million to $42 million that we had forecast three months ago. Currency has also improved since we last provided guidance, and we now expect currency headwinds of approximately 50 basis points for the full-year 2019 compared to our previous estimate of 75 basis points. Therefore, we are projecting a total 2019 reported revenue range between $951 million and $958 million, representing growth of 10.6% to 11.4%. 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 amortization of intangible assets, amortization of deferred financing fees and debt discount net of tax. A reconciliation of the GAAP numbers is included in our press release. Adjusted gross margin for the second quarter was 55.3%, an increase of 70 basis points over the prior-year quarter. That brings our gross margin improvement for the first half of 2019 to 120 basis points compared to the first half of 2018.

While this metric can be a little lumpy from quarter to quarter, we now expect gross margins to improve by roughly 100 basis points for the full year, which was the top end of our range at the beginning of the year. R&D expenses for the second quarter were $11.8 million or 5% of total sales, which is an 18.2% increase over the prior-year period, as we continue to actively invest in new products and platforms. Looking forward, we continue to expect investments in R&D to be between 4.5% and 5% of sales in 2019. Second-quarter SG&A expenses on adjusted basis were 38.4% of total sales.

That's a 170-basis-point improvement over the prior-year quarter. Based on the better-than-expected Buffalo Filter integration and the P&L leverage in the broader business, we now expect SG&A as a percentage of sales to improve between 100 and 130 basis points for the full year. Interest expense was $8.7 million in Q2, and we continue to expect interest expense to be between $32.5 million and $33.5 million for 2019. The adjusted effective tax rate in the second quarter was 21.5%, compared to 23.1% in the prior-year period.

Due to the resolution of several tax items in the first half of this year that were to our benefit, the tax rate has been lower in the first half of 2019 than we expect it to be in the back half. In Q3 and Q4, we expect the adjusted effective tax rate to be in the mid- to high 20s but expect the full-year rate to be between 24% and 24.5%. Second-quarter GAAP net income totaled $5.7 million or $0.19 per diluted share, compared to a reported net income of $8.7 million or $0.30 per diluted share a year ago. Excluding the impact of special items discussed earlier, our second-quarter adjusted diluted net earnings per share were $0.56 versus $0.46 in the prior-year period, representing growth of 21.7%.

Taking into account our results through the first half the year, we are raising our full-year adjusted cash EPS guidance by $0.05 in total to now be between $2.52 and $2.57, representing year-over-year growth of approximately 16% to 18%. The adjusted diluted cash earnings per share estimates for 2019 exclude amortization of intangible assets, amortization of deferred financing fees and debt discount, which are estimated in the range of $33 million to $35 million, net of tax, and the cost of special items, including charges related to acquisitions and restructuring costs estimated in the range of $16 million to $18 million net of tax. The way our growth guidance on an adjusted basis plays out between Q3 and Q4, Q3 has one day more than the prior year, and Q4 has the toughest comp of the year. So we expect our Q3 growth rates on the top and bottom lines to be higher than our full-year outlook, and we expect our Q4 growth rates of the top and bottom lines to be lower than our full-year outlook.

Turning to the balance sheet. Our cash balance at the end of the quarter was $22.5 million, compared to $23.4 million as of March 31, 2019. Accounts receivable days as of June 30 were 68 days, consistent with a year ago. Inventory at quarter end was 145 days, which is down 10 days from three months ago but up 11 days compared to a year ago.

The increase from the prior year is driven by new products and in-sourcing projects, as we discussed last quarter. Long-term debt at the end of the quarter was $796 million versus $803 million on March 31, 2019. Our leverage ratio at June 30, 2019 was 5.0 times. Cash flow from operations for the quarter was $22 million, compared to $21 million in the second quarter of 2018.

And capital expenditures in the second quarter were $5 million, compared to $4 million in the prior-year quarter. And with that, we'd like to open the call to your questions, and I'll hand it back to Skylar.

Questions & Answers:


Thank you. [Operator instructions] Our first question comes from Matthew Mishan with KeyBanc.

Matthew Mishan -- KeyBanc Capital Markets -- Analyst

Thank you for taking the questions. It's Matt. Curt, I guess let's first start with Buffalo Filter. You're increasing your guidance there.

What's the main driver for that?

Curt Hartman -- President and Chief Executive Officer

I think, Matt, it goes back to what we initially talked about. Number one, it's a market-leading product and technology. It's just a great platform. We then took a great platform and put it in the hands of a much bigger distribution arm, meaning our U.S.

and international sales forces. And the third component is the market. And while there hasn't been a tremendous amount of legislative movement, the in-market passion around this topic has really grown. And I comment, I think, on the previous call about going to AORN and seeing the level of enthusiasm for this technology.

Because it is a workplace safety and a healthcare worker safety item, it's really got a lot of traction with that audience. So we continue to partner with AORN and the various national and local societies and chapters. So it's just a really fast-growing awareness in the marketplace about the importance of this topic. So it's not one thing.

It's a combination of all of the above, and we're just really thrilled that we have that technology in our hands and are able to address the growing and obvious need.

Matthew Mishan -- KeyBanc Capital Markets -- Analyst

Excellent. And I realize general surgery grows on a pro forma basis would be a lot stronger when you put Buffalo Filter in. But this is the second quarter in a row that, on an organic basis, it was a little bit lower than where you were coming in last year. Is it just tougher comparisons here? Or are there some headwinds that you didn't have previously?

Curt Hartman -- President and Chief Executive Officer

I think, candidly, Buffalo Filter has done really, really well, and there's only so much time in a day for our sales force. And they've got a very attractive product right now, and they're spending a lot of time on it. And I think the other nuance to know about the smoke evacuation filtration market and the way we are approaching it, we're interested in helping customers not in one or two boxes. We're interested in helping customers move to a smoke-free environment.

Those projects tend to be more time-consuming. They tend to take more of the sales force marketing team organization's time. And until we get a little more comfortable in our approach and how that process unfolds, we're probably a little bit inefficient in our sales force, but we still remain pretty encouraged about the rest of the portfolio. And just recall, we started the year by saying our general surgery businesses across the board would have more new products hitting them in the second half of the year.

So there's probably been some wait for the new products in general surgery. And now, we've got this hot product in Buffalo Filter that's really helped ramp up. So I think it's a combination of a couple factors, Matt.

Matthew Mishan -- KeyBanc Capital Markets -- Analyst

Thank you very much, Curt.


Our next question comes from Matt O'Brien with Piper Jaffray.

Kevin Farshchi -- Piper Jaffray -- Analyst

This is actually Kevin Farshchi on for Matt today. Thanks so much for taking the questions, and congrats on another solid quarter of results. I'm looking at the chart in the slides, the new product revenue. It's really continuing to increase now north of 30%, and the increase sequentially was very pronounced.

I'm guessing -- I don't know if the chart has Buffalo in it. But can you talk generally broad strokes about some of the contributions of new products in Q2? There were so many that came out in the second half of last year and many we saw a few months ago in ortho. Can you just update us on the progress of those launches and then which new products will be the bigger contributors for the rest of '19? And then I have one follow-up.

Curt Hartman -- President and Chief Executive Officer

Great question. And just to be very clear, it does include the addition of Buffalo Filter. So that is the reason why the graph moved quite a bit one quarter over the next. And to the point of new products and contribution, we've been pleased with the introductions that we had at Academy on the orthopedic side.

And just recall that was around the extremity space, the shoulder space, and the hip space. I would say of the three, the hip space is more behind, if you will. And I say that simply because the big hip meeting is the ISHA meeting, International Society of Hip Arthroscopy. That's not until October.

So that will be where we get tremendous marketplace awareness and introduction to that product. But on the shoulder and the extremities, we're seeing good traction. Now, keep in mind, when you're going into a new space and have new products, there's a lot of training and medical education that goes on. So we really think about things that we introduce this year as having a bigger impact next year.

So some of the contributors this year, to your final question about new products, we continue to be excited about what's going on in the power tool franchise with MicroFree, and that had another good quarter on top of a fine year last year. So things that we introduced last year are playing a little bigger role this year on driving the new product graph. Things that we introduced this year were getting good acceptance, good medical education and awareness, and those will continue to build.

Kevin Farshchi -- Piper Jaffray -- Analyst

OK. Excellent. That's super helpful, guys. And I wanted to put a finer point on the Buffalo Filter performance.

It's obviously doing a lot better than you anticipated. But trying to parse out the outlook and the sustainability of some of those trends, and it's up $4.5 million. And unless we're totally off on the cadence for this quarter, this is beyond reflecting the outperformance in Q2. So could you describe kind of what the sales trends were and what gives you the confidence in that type of acceleration to get to those stronger results in the second half of the year?

Todd Garner -- Executive Vice President and Chief Financial Officer

Really, it was Q2 was exceptionally strong. I would tell you that Q2 is exceptionally strong. I would tell you the first six weeks, which were the last half of February and March, were also better than we expected. So it's out of the gates better than we thought.

It's been a seamless integration from a commercial side. And so we don't want to get ahead of ourselves, but it's kind of hard to project worse than what we've done here, just based on the strong start and, as Curt talked about, the momentum in the marketplace and the demand. And so we feel good about what that can do this year.

Curt Hartman -- President and Chief Executive Officer

I would just point out, remember, prior to the acquisition, we were already in the smoke evacuation filtration market. So the customer discussion, the awareness, the need, we're not just learning that for the first time. We just happen to now have the best product in the market to address that with, and our sales team globally have done a fantastic job embracing this opportunity and really working with their customers to pronounce the benefits and work with them to help them get where they want to be in their workplace.

Kevin Farshchi -- Piper Jaffray -- Analyst

Perfect. Thanks, guys. Congrats again.


Our next question comes from Rick Wise with Stifel. Your line is open.

Rick Wise -- Stifel Financial Corp. -- Analyst

Good morning. Good afternoon, rather. Let me start with just at a high level, if I could. I mean, obviously, the growth driven by innovation and ever better execution has been steadily ratcheting higher, and Buffalo is helping.

If we think about pro forma rather than organic growth, are we thinking CONMED now as more firmly and sustainably an upper single-digit grower, sort of that 7% to 8% range, particularly as we contemplate the next two years? I know it's way too early to talk about the next few years, and I know both of you are sort of the guys that don't want to get ahead of yourselves, but it's starting to feel that way. Is that too optimistic of you at this point?

Todd Garner -- Executive Vice President and Chief Financial Officer

Well, Rick, you know us well, and you kind of answered your question in your question. We're not going to get ahead of ourselves. And what we've said is we're highly confident that the days of low single-digit growth are behind CONMED that we should be at least mid-single-digit growth or better, right? And we certainly have been demonstrating the better part of it. We have the guidance we have.

And when we're ready to change that, we will let you know.

Rick Wise -- Stifel Financial Corp. -- Analyst

And back to Buffalo again. Two-part question. How is the SurgiQuest-Buffalo combo working in the market? I assume Buffalo is helping SurgiQuest as well and vice versa. Maybe just talk about the combination and how you're approaching customers with this unique portfolio.

I'm curious, Curt, if you did -- when you think about Buffalo and it's performing better, is it performing better because you're having fewer dis-synergies? Or it's that, plus the fact that you're executing better, and there's more demand? How do I think about that outperformance?

Curt Hartman -- President and Chief Executive Officer

So I think the SurgiQuest-Buffalo Filter total story is still unfolding. I think the outcomes here with Buffalo Filter and the success here in the quarter and really since close has to do principally with we acquired a market-leading technology. We have a very large sales force that was hungry for this technology and knows how to sell this technology. And then the third factor is what's going on in the marketplace with smoke reduction and safety in the operating room.

So if there are any dis-synergies that come with an acquisition, which typically there are, it's been about time, the amount of time that our sales force has to deal with everything they have in front of them. I mean, the SurgiQuest platform, AirSeal, is an unbelievable platform. It's still an only in-class technology. It's still a growth platform, and it is still a grower for us and right now just having reps have the ability to get a hold of everything.

I think when we think about new products, one of the new products was a pediatric indication for the AirSeal platform that we just released into the field that started July, and that is now the total solution. We have thoracic indication. We have the broad general surgery application. Now we have pediatric application.

We have a standard of care in technology there that is second to none. So there's growth runway there. There's growth runway with Buffalo Filter, and it's just about building up our abilities to get after everything also simultaneously.


Our next question comes from Kristen Stewart with Barclays. Your line is now open.

Kristen Stewart -- Stifel Financial Corp. -- Analyst

Hi. Thanks for taking the question. Just a follow-up on Rick's commentary. I guess if I look at your growth expectations for this year and pro forma-ed for Buffalo Filter, it does kind of put you within that 7% to 8% range on an organic basis.

And I guess I'm just thinking what would be factors that I guess you might worry about that might bring that south. I mean, is it just simply any particular concerns with respect to the base general surgery business? Or is that certainly something that is possible, just given the overwhelming trends of Buffalo Filter? I know you don't want to commit to it, but I'm just trying to see what could make it not that number.

Todd Garner -- Executive Vice President and Chief Financial Officer

Good question, Kristen. Thanks. We don't see any red flags or alarms ahead. We think there's good momentum across the business, and so we feel good about how everything is going.

The only hesitation I would have on getting too far ahead of ourselves for the rest of the year is that Q4 2018 was just exceptionally strong. And I wouldn't want to take for granted that that same kind of year-end push is necessarily a given. So I don't know why it wouldn't be, right? And we know that in recent years, there has been an increasing trend of procedures moving to that Q4. And so again, nothing specific that I can tell you as a big watch-out, but I think just being cautious and not taking for granted that we can grow on top of last year's Q4 the same way we did last Q4.

So I think we're a little cautious on that comp waiting for us out there. But the underlying operations of the business and the credibility and relevance of our sales force is better today than it was six months ago, and we expect it will continue to get better. So we feel good about where things are headed but still want to -- we'll take this a quarter at a time and go from there.

Kristen Stewart -- Stifel Financial Corp. -- Analyst

I was wondering if you guys have any updates on just the forecast for the smoke evacuation market in light of some of the different legislations that have passed or are sitting on different state legislatures. How are you thinking about that? I know when you acquired Buffalo Filter, you had talked about the smoke evacuation market as growing about 20%. Is that something that you think can maybe high teens or something like that could be sustained going forward, just given all the momentum you're seeing at the AORN conference and otherwise?

Curt Hartman -- President and Chief Executive Officer

I'll start with the market question first. We believe it continues to be a pretty robust growth market, really driven by the growing global awareness around the topic, around the safety issue. And really, there's a lot of people promoting the awareness of this issue, and it starts with the healthcare worker, themselves, promoting it. That's one of the things that was very much jumped out at me when I went to AORN.

I think I've commented before. I first saw this at AORN in the early 2000s in the contrast of what I saw then versus the awareness now. It was dramatically different, and that just tells me there's just this growing enthusiasm for safety in the OR, the technology to prevent the smoke and evacuate it, filter it is in high demand. So the market outlook remains very robust.

I think as it relates to CONMED, we're obviously -- by virtue of the acquisition, we're all in on this space. We put a lot of money out there. We made a lot of investments to get to the point we are, and we continue to see this as a long-term growth runway. Legislatively, we're tracking that.

We have not seen dramatic change in the legislative landscape, specifically as it relates to the U.S. Obviously, Colorado came into play. There's a few other states that are discussing it, but there hasn't been any strong movement. There's some legislation out for comment.

There's some new areas that are starting to talk about it, but nothing dramatic has occurred, really, in the last quarter. Colorado passed legislation, went into effect. But other than that, term insurance has really been just more of the awareness. It really has been the societies driving the topic more than the legislative change.


Our next question comes from Richard Newitter with SVB Leerink.

Richard Newitter -- SVB Leerink -- Analyst

So you raised both -- for the full-year outlook on the top line, you raised both the organic range, and you raised your Buffalo Filter contribution. But the organic raise appears to be all based on what you think is getting better or going to get better in the back half as the organic performance was about in line with what we were looking for. So I guess is that really just tied to new product launches and your optimism about how they're trending in the current quarter and you feel more confident in their ability to kind of drive acceleration in the organic performance into the back half? And is that all going to be showing up in ortho or spread evenly between the two divisions? If you could flesh that out a little bit. Thanks.

Todd Garner -- Executive Vice President and Chief Financial Officer

Sure, Rich. So the -- we've done 6.4% organic growth for the first six months of the year, so kind of in that range where our guidance is. The way we see that playing out is Q3 has that extra day, right? So the Q3 growth rate should be above that range. And then Q4, like I talked to Kristen about, it's just a little -- we're just being cautious.

It's such a strong comp. If you remember, we were over 10% growth in Q4 of 2018, and so we wouldn't be surprised if that were a little below the full-year range that we're giving. We don't know what it will be. Like I said, there's no specific or onetime issues that we're concerned about, but I think we're just being appropriately cautious there.

And as far as where in the business, I'd say it's broad-based. It's our international team, and it's both general surgery and orthopedics. We see both as health, and so nothing specific to call out for you there on one over the other.

Richard Newitter -- SVB Leerink -- Analyst

OK. Thanks.


[Operator instructions] Our next question comes from Mike Matson with Needham. Your line is now open.

David Saxon -- Needham and Company -- Analyst

Good afternoon, and this is David on for Mike. Thanks for taking the questions. One on Buffalo Filter and one on opex. First one.

Can you talk about the mix between branded and OEM sales at Buffalo Filter and maybe comment on the outlook for the OEM category now that you've maybe had more time to talk with some of the partners there?

Curt Hartman -- President and Chief Executive Officer

Yes. I think sales mix is always more heavily weighted toward the branded. That trend would obviously continue. But I would say that we feel pretty good about the OEM partners, and we've been in contact with all of them at a very high level, and we're committed to remaining in that business, supporting that business.

And we're seeing growth on both sides of the portfolio, so I think we feel good overall.

David Saxon -- Needham and Company -- Analyst

OK. Thanks. And then on SG&A, I mean, from a dollar perspective, it was higher than we were modeling but also higher sales. So on a percentage-of-sales basis, it was roughly in line.

So just wondering was there any, I guess -- were you planning on higher spending in that line? Or was there anything that came up in the quarter?

Todd Garner -- Executive Vice President and Chief Financial Officer

No, David. I would say that, actually, we were pleased with where that came in. With the elevated sales, I think our expenses were pretty much in where we thought. And so the 170-basis-point improvement over the prior-year quarter was actually better than we expected, which led us to, you know, we've updated our guidance there that we now expect the full year to be an improvement of 100 to 130 basis points.

And I'll remind you that we started the year, six months ago, projecting 50 basis points of improvement for the year on that line. And now six months later, we're projecting 100 to 130. So it validates what we've been saying is that we feel like we've built an infrastructure that can handle a much higher revenue base, and that's what we saw in Q2. We saw strong revenue and expenses not needing to go up with that revenue growth.

And so I think we're pretty pleased with where we are, which led us to improving the guidance on that line.

David Saxon -- Needham and Company -- Analyst

Great. Thanks, and congrats on the quarter.

Todd Garner -- Executive Vice President and Chief Financial Officer

Thank you. Thank you.


And we have a follow-up question from Kristen Stewart with Barclays. Your line is now open.

Kristen Stewart -- Stifel Financial Corp. -- Analyst

Hi. Thanks for taking the follow-up. My question was actually going to be on margins, and I was going to mention that, at least from my model, SG&A was a bit better, which was a good thing, and the operating margins came in a little bit higher than where I was modeling and certainly a nice lift year over year. How should we just think about the longer-term opportunity from a margin-expansion story, just generally speaking? It seems like you've got good momentum from an ability to drive maybe mix and just maybe some take out on costs from a gross profit perspective.

And then as you were just talking about the opportunity to really leverage your existing sales and marketing infrastructure, so any just kind of comments directionally on where you think margins can go over the longer term would be helpful.

Todd Garner -- Executive Vice President and Chief Financial Officer

Sure, Kristen. I think we're just really pleased with how the teams have executed in the front half of this year. We started by saying we thought gross margins should get better by 50 to 100 basis points, and now we're at the top end of that range as our updated guidance. And so that's been better than we thought.

And we just talked about SG&A being significantly better than we thought, which then, of course, means that operating margins are better than we originally thought. So everything is tracking on the good side of the ranges we provided at the beginning of the year. Still, it's too early to talk about 2020 guidance or beyond, but our -- what we've talked about on a longer-range margin profile is kind of that 50 to 100 basis points every year, at least on the gross margin line and then operating expenses growing slower than sales grow, which leads to improving operating margins. And then, as you know, we've added in Buffalo Filter, which adds 200 basis points over three years to that organic margin improvement trend.

And all of those things are, so far in 2019, are trending kind of above those minimums of where we've put out. So we're going through our planning process now for next year. And as we get closer to that, and in January, we'll talk about how that -- what that looks like for 2020. But in the meantime, I think we're pleased with how things are going.

Kristen Stewart -- Stifel Financial Corp. -- Analyst

Just on Buffalo Filter, that is definitely very margin accretive from an operating margin perspective. So I guess to the extent that you continue to over deliver on that business that I guess you're saying that 200 basis points over three years could be conservative, then, I guess.

Todd Garner -- Executive Vice President and Chief Financial Officer

Yes, could be.

Kristen Stewart -- Stifel Financial Corp. -- Analyst

And is it still kind of your general view that some -- the level of upside you may look to reinvest back into the business to just support the longevity of revenue growth and obviously not necessarily let all of that flow through but probably some?

Todd Garner -- Executive Vice President and Chief Financial Officer

Yes. I think that's a fair way to describe it. We definitely will continue to prioritize the sustainability and the health of the revenue growth profile of the company, and there will definitely be future investments beyond where we are today. But we feel like we can do that in a manner that shares that overachievement with our shareholders and so the stronger revenue is you can invest in the business and still share that overachievement with the shareholders.

And that would be our intention.

Kristen Stewart -- Stifel Financial Corp. -- Analyst

All right. Thanks so much again. Great quarter.


At this time, I'd like to turn the call back over to Curt for any closing remarks.

Curt Hartman -- President and Chief Executive Officer

Thank you, Skylar, and I just want to thank everybody for your time today. We look forward to speaking with you on our next earnings call. Thank you.


[Operator signoff]

Duration: 41 minutes

Call participants:

Curt Hartman -- President and Chief Executive Officer

Todd Garner -- Executive Vice President and Chief Financial Officer

Matthew Mishan -- KeyBanc Capital Markets -- Analyst

Kevin Farshchi -- Piper Jaffray -- Analyst

Rick Wise -- Stifel Financial Corp. -- Analyst

Kristen Stewart -- Stifel Financial Corp. -- Analyst

Richard Newitter -- SVB Leerink -- Analyst

David Saxon -- Needham and Company -- Analyst

More CNMD analysis

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CONMED Corporation Stock Quote
CONMED Corporation
$81.71 (1.92%) $1.54

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