CONMED Corporation (CNMD) Q1 2021 Earnings Call Transcript

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CONMED Corporation (NYSE: CNMD)
Q1 2021 Earnings Call
Apr 28, 2021, 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 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 these -- 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 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 Chair of the Board, President and Chief Executive Officer, for opening remarks. Mr. Hartman.

Curt R. Hartman -- Chair of the Board, President, and Chief Executive Officer

Thank you, Paul. Good afternoon and thank you for joining us for CONMED's first quarter 2021 earnings call. With me on the call is Todd Garner, Executive Vice President and Chief Financial Officer.

Today, we will walk you through our first quarter results and share our thoughts on the outlook for our business in the current operating environment, recognizing the uncertainty that still exists across our global markets. We'll then open the call to your questions.

Turning to our results. Total sales for the first quarter were $232.7 million, representing a year-over-year increase of 8.7% as reported and an increase of 7.2% in constant currency. From an earnings perspective, during the first quarter, our GAAP net income totaled $9.9 million. This compares to net income of $5.9 million in the first quarter of 2020. Excluding special items that affected comparability, our adjusted net income of $19.1 million increased 26.8% year-over-year and our adjusted diluted net earnings per share of $0.63, increased 23.5% year-over-year.

Broadly speaking, we saw consistent year-over-year performance throughout the quarter with the latter half of the quarter demonstrating better performance. The U.S. market in particular showed improvement later in the quarter following weather-related procedure delays across the Southwest. Consistent with what we communicated in January, Latin America remains challenged more so than expected, while other international markets saw steady performance throughout the quarter, aside from some procedure stoppage in areas of Canada, France and Asia later in the quarter. Overall, it was great to see both Global Orthopedics and Global General Surgery achieve year-over-year growth in the quarter, as well as positive growth in both the United States and international markets.

We continued to deliver solid growth in both AirSeal and Buffalo Filter and we're happy to see the State of Kentucky approve smoke evacuation legislation during the quarter that will result in operating rooms across the state going smoke free, starting January 1, 2022.

In closing, I remain very proud of the CONMED team and the progress we demonstrated in the quarter. We think these results validate many of the steps we took starting in early 2020 in response to the growing incidence of COVID. As a result of our first quarter performance, you will see that we have increased our guidance on both the top and the bottom line.

I'll now turn the call over to Todd, who will provide a more detailed analysis of our financial performance and take you through our guidance adjustments. Todd?

Todd W. Garner -- Executive Vice President and Chief Financial Officer

Thank you, Curt. All sales growth numbers I reference today will be given compared to the prior year in constant currency. The reconciliation to GAAP numbers is included in our press release. As usual, we have included an investor deck on our website that summarizes the results of the quarter, our updated guidance and also provides sales results compared to 2019 for those of you interested in that view.

We did have one less selling day in Q1 2021 compared to Q1 2020. Normally we would estimate that impact to be between 100 basis points and 150 basis points on the quarter, but given the abnormal external environment in both years, we would not attempt to quantify the impact on the quarter.

For the first quarter of 2021, our total sales increased 7.2%. COVID had a meaningful impact on the full quarter. In January and February, each month grew slightly on a global basis compared to the prior year, and March grew significantly over March 2020. In Q1 we grew domestically and internationally in both single-use and capital products. Capital was strong compared to Q1 2020, but was still below our Q1 2019 levels.

For the first quarter, our total U.S. sales increased 4.3% versus the prior-year quarter. Our international sales increased 10.8% for the quarter compared to the prior-year. Canada and Australia saw good growth in the quarter. Europe was a mixed bag, with some countries growing and some declining. As a whole, Europe grew slightly for us in Q1. Asia was the most impacted by the virus in Q1 of 2020, and therefore grew nicely against the easiest geographic comparable for us. As Curt said, Latin America was our most challenged geography in Q1, and our near-term expectations for that region have decreased as progress against the virus is lagging.

Worldwide orthopedics revenue grew 5.9% in the first quarter. In the U.S., orthopedic sales increased 0.2% and internationally orthopedic sales increased 9.4%.

Total worldwide general surgery revenue grew 8.2% in the quarter. U.S. general surgery revenue grew 6.1%. Internationally, general surgery grew 13.4%. AirSeal and Buffalo Filter continue to show strong growth across the globe.

Now, let's move to the expense side of the income statement. We will discuss expenses and profitability, excluding special items, which include charges related to acquisitions and integrations, restructurings, amortization of intangible assets and amortization of deferred financing fees and debt discount, net of tax.

Adjusted gross margin for the first quarter was 55.2%, a decrease of 170 basis points from the prior-year quarter. This was a little better than we expected, as we had forecasted the negative impact from lower production levels from recent periods. We told you in January that after Q1, we expected adjusted gross margin to be positive compared to the prior-year quarters as we move through the year, and we continue to expect that.

Research and development expense for the first quarter was 4.3% of total sales, 40 basis points lower than Q1 2020. First quarter SG&A expenses on an adjusted basis were 39.1% of sales, 210 basis points lower than the prior-year quarter. Interest expense in Q1 was $6.8 million on an adjusted basis.

The adjusted effective tax rate was 13.4% in Q1. This was lower than we expected, principally due to the excess tax benefit from stock plans. This is difficult to predict, but we don't expect nearly the same benefit in future quarters. We continue to model our adjusted effective tax rate to be between 24% and 25% in the remaining quarters of 2021.

First quarter GAAP net income totaled $9.9 million or $0.31 per diluted share, which was an increase of 55% over the prior-year quarter. Excluding the impact of special items discussed earlier, we reported adjusted net income of $19.1 million and adjusted diluted net earnings per share of $0.63, an increase of 23.5% compared to the prior-year period.

This is the first quarter where the average stock price has been above our hedged conversion value of $114.92 for the convertible notes. The impact in Q1 was the addition of approximately 170,000 shares to the diluted share count as adjusted. As you can calculate, this had an immaterial impact on adjusted EPS in Q1. And of course we cannot predict the future stock price, but if it stayed at current levels, we estimate this would decrease our full-year adjusted EPS by approximately $0.07.

Turning to the balance sheet. Our cash balance at the end of the quarter was $36.8 million compared to $27.4 million as of December 31, 2020. Accounts receivable days as of March 31, were 63 days, consistent with year-end 2020 and down from 70 days at March 31, 2020. Inventory days at quarter-end were 178, as we build for anticipated increased volumes. This compares to 150 days at year-end 2020 and 166 days at March 31, a year ago.

Long-term debt at the end of the quarter was $725 million versus $735 million at December 31. Our leverage ratio on March 31, 2021 was 4.7 times. As you probably saw, this month we exited the Suspension Agreement we entered into with our banks a year ago. It turns out we never exceeded our original debt covenants even during the worst parts of the pandemic, and therefore in hindsight, did not need the flexibility provided in the Suspension Agreement. We appreciate the support of our banking partners through very uncertain times a year ago.

Cash flow provided from operations for the quarter was $22.3 million compared to $3.7 million in Q1 of 2020. Capital expenditures in the first quarter were $3.1 million compared to $2.8 million a year ago.

Now, let's turn to our updated view of our 2021 financial guidance. Three months ago, we opted to provide full-year guidance based on a framework of assumptions on how the virus would impact the year. As a reminder, those assumptions were that Q1 would be significantly impacted by the virus and that impact would linger into Q2 and then ameliorate from there. Our assumption was that the global disbursement of vaccines would take months, but be effective at reducing the burden on healthcare from the known variance of the virus. We continue to see 2021 as a transition year with those same assumptions.

Global COVID case counts remain at elevated levels, but our business has also proven to be relatively resilient. As I mentioned earlier, we now have additional concerns in Latin America and also expect a higher diluted share count related to the convertible notes to be a headwind to full-year adjusted EPS.

Our approach to modeling the remainder of the year is to recognize the overperformance in Q1 on the top and bottom line and maintain our expectations for Q2 through Q4 as we had them three months ago, while absorbing the new headwinds I just discussed. That results in revenue guidance for the full-year between $1.0 billion and $1.03 billion. We now expect currency to be favorable to revenue between 50 basis points and 100 basis points for the full-year, but just slightly favorable to adjusted earnings. For adjusted EPS, we now expect the full-year 2021 to be between $3.05 and $3.20.

And with that, we'd like to open the call to your questions, and I'll hand it back to Paul.

Questions and Answers:

Operator

Thank you, sir. [Operator Instructions] Our first question is from the line of Rick Wise with Stifel. Your line is open.

Rick Wise -- Stifel -- Analyst

Good afternoon. Maybe one question on the current environment and [Indecipherable] something else. Curt and Todd, both of you were emphasizing that the slowness or the weakness in January and February and the significant improvement in March, we've heard from most of the other companies giving us a similar scenario and sort of suggesting that, that momentum continued into April, ex the cautionary comments on Latin America. Is that what you're seeing? And maybe just a little more color as part of that on where you're seeing that strength, any particular procedure or any product areas? Just help us think through that if you would.

Curt R. Hartman -- Chair of the Board, President, and Chief Executive Officer

I think we'll probably a double team this one a bit, Rick. But I think that January, February commentary is really just a continuation of what people saw in the fourth quarter. The fourth quarter was a little tougher from a COVID case impact on procedures that did continue, and then as we got into the month of March, things opened up a little bit. And in addition, the comparables, obviously were most suppressed given the rapid slowdown in the second half of March of 2020. I also don't want to skip past the weather event that happened in February that had a pretty profound impact across the Southwest area of the country, a lot of things were shut down for a good portion of a week that impacts a lot of surgical procedures. And then on top of that, in COVID case volumes, the Southwest California markets were pretty slow at the beginning, the part of the year just because of the restrictions that were in place. As we came through March, things have gotten better as vaccines have rolled out. So I don't think any headlines have changed as we've started the second quarter relative to that, other than, obviously, I think everybody's aware, India is in a very tough spot, and to our commentary, Latin America remains challenged. We said that at the beginning of the year, and it might be a little more challenged even at this point, there's just a little bit, a lack of disbursement of vaccines and availability etc. in the Latin American markets, based on what we're seeing as an organization. So that's how I'd frame it. I don't know if Todd has any other comments relative to that.

Todd W. Garner -- Executive Vice President and Chief Financial Officer

No, I mean, I agree, obviously from, on a relative basis, things are progressing as you hear everywhere else, Rick. I would just remind everybody that, I know we're in this quest for normalcy, right, and everybody is anxious to when are we back to normal, and we're certainly not there. So yes, March, certainly better than January and February. Again, we're not talking about Q2 on this call, but April just consistent with what everybody else is saying, April looks a whole lot more like March than it does January and February. But we're a long way from normal, I would still say as a market. So that's my perspective.

Rick Wise -- Stifel -- Analyst

Yeah. Thank you. And just for my second question. We recently did a bunch of due diligence on your smoke business, and what we heard from your customers or potential adopters was that COVID has accelerated smoke adoption, more hospitals are interested, more are trialing, expecting faster decision making, fast to move around legislation. Maybe what do you expect when you get an approval like this Kentucky legislation? How do we think about the impact on 2022 and beyond? And in general, did -- what we hear is that the -- did we get the right feedback? Are we hearing the right thing on that decision making acceleration kind of mindset? Thank you.

Curt R. Hartman -- Chair of the Board, President, and Chief Executive Officer

Yeah, I think what you've just stated there, Rick, is consistent with go back to this call a year ago, and if you reread that transcript, we commented for the first time that we think in this environment, it's challenging as it is, there is more attention to this, the smoke evacuation and the AirSeal product, because of the society publications on the benefits of those devices in surgery. And then at the end of the second quarter, we said it's starting to show up in the financials, in the third quarter it definitely showed up in the financials, and that has not changed. And I think that was reflected in the survey work that you did that there's just a lot more awareness and it's not necessarily awareness by the surgical staff, it's probably more awareness by the hospital administration and the surgeons, who now have a growing appreciation for the impact of smoke -- surgical smoke on the health of the staff and the overall well-being and welfare of the employees in that facility. We've also said that legislation was not pulling this market, it was more wind at the back of the market and that's because of all the great work that has happened by the societies going back a decade plus, whether it's AORN or other societies around the world, who've really been advocating for smoke free environment. So when something like Kentucky comes along and they legislate or mandate, it's obviously positive, because it helps move a 100% of the market in this direction and it sets kind of a timeline. So if you look, though we've had other legislation that doesn't have as much teeth, this one appears to have a little more bite to it [Phonetic], so more positive. But I would also say, we're not starting from zero, there were already accounts in the State of Kentucky using smoke evacuation and filtration. So it's just helping motivate the other ones that haven't quite moved as quick. I think it's the way I'd frame it.

Rick Wise -- Stifel -- Analyst

Got you. Thanks. And nice to see the progress in the quarter. Thank you.

Curt R. Hartman -- Chair of the Board, President, and Chief Executive Officer

Thanks, Rick.

Operator

Our next question is from the line of Robbie Marcus with J.P. Morgan. Your line is open.

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

Great. Thanks for taking my question. Congrats on a really nice quarter.

Curt R. Hartman -- Chair of the Board, President, and Chief Executive Officer

Thanks, Robbie.

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

Two questions from me. Maybe to start with the first one, appreciate, you're historically a very conservative management team, and I like that, but just turning to the guidance and, I want to just try and tease out the answer, you mentioned, you raised guidance for the first quarter, be it, but less second, third, fourth quarter assumptions known from what you had coming into first quarter, and I just want to make sure is that more along the lines of, the environment is still uncertain here and you don't want to get ahead of yourself or is it something you're seeing exiting first quarter that, that would not prompt you to take the good trends that you mentioned and bring them forward at all? Just want to try and tease out the answer there.

Todd W. Garner -- Executive Vice President and Chief Financial Officer

Yeah, it really just, it's going to be a year where we got to stay flexible, right Robbie, and we've got to kind of manage the fuel and the brake at the same time, and make sure the fuel is ahead of where the opportunity is and make sure we don't release the brake, where the opportunity is still lagging, right. And so we've got to just stay flexible as we navigate through the year. We were very pleased with Q1. The business did better than we expected, but as we had laid out the year, three months ago, we already had assumed improvement, right. We were counting on Q2 being measurably better than Q1 and it was actually a decent step up from Q1 to Q2. So as we leave Q2, where we had it, it's a smaller step-up than it was, but it's still improvement over Q1 and there is enough uncertainty out there around the globe. And as a -- for everybody -- I think everybody knows, we're essentially 50-50 U.S. and international. There is enough uncertainty, there is just no reason to get ahead of yourself here. So we will play it quarter-by-quarter. We'll count Q1 as a win versus expectations and we'll continue to focus on executing and managing the business appropriately as we have through the pandemic and we'll take it from there and we'll talk about it three months from now.

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

Great, great, appreciate that. Maybe just a follow-up here. At the J.P. Morgan Conference, you were so nice to tell us that AirSeal and Buffalo Filter were 25% of sales now growing at least 20%. I want to see if you could comment on how that part of the business did in first quarter? Thanks.

Todd W. Garner -- Executive Vice President and Chief Financial Officer

Those, I think we said at least 25% of the business, growing at least 20% and that remains true. It beat both of those numbers in Q1.

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

Any color on how much they'd beat by? We can dream pretty big.

Todd W. Garner -- Executive Vice President and Chief Financial Officer

We're not going to get into product line specifics there, but we're pleased with how that's going and the thesis remains intact.

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

All right. I tried. Thanks a lot.

Operator

Our next question is from the line of Matthew O'Brien with Piper Sandler. Your line is open.

Matthew O'Brien -- Piper Sandler -- Analyst

Great, thanks for taking my questions. So Todd, now to keep going on the path here on guidance, but you just beat by -- beat Q1 by $20 million, currency is now going to be more or like a $10 million tailwind versus what you were expecting before. So it's about $30 million, and you know you're only raising the midpoint by $15 million, it seems like things are loosening up here in the U.S., seems like you're going to get some of those cases back down in the Southwest down here in Q2 and for the rest of the year. Is Latin America and some of the pressures you're seeing in EMEA or India really that big of a headwind to think that there is a $15 million delta between the, what we just saw here in Q1 in currency versus the increase in the midpoint of the range?

Todd W. Garner -- Executive Vice President and Chief Financial Officer

Well, first of all, I like your optimism, Matt, and I like that you're an optimistic guy. I also -- you've done some rounding out a little bit, I think if you do the math on a prior-year of $862 million, I think 50 basis points to 100 basis points works out to between $4 million and $8 million, and so you've rounded that up to $10 million. So I'd caution you there on your rounding. But yeah, look, we had a wider range, right, all we did for our guidance was take the actual for Q1 and left what we had for the last nine months of the year alone. And so we had a $15 million range on our Q1 revenue, we've now delivered a specific number, so our revenue range has shrunk by that $15 million, right. So we're not more bearish on the year at all. We're very pleased with Q1. We just don't see the need to, and there's enough moving pieces out there that there is no need to get that granular or get that specific. So good start to the year. Lots of work left to do, lots of dynamic external levers to deal with and manage and we're going to keep doing it as we have been doing it.

Matthew O'Brien -- Piper Sandler -- Analyst

Got it, OK. And I'm sure everybody in the investment community knows me as uber optimistic, so appreciate you pointing that out. Also was curious on the capital side, I know you have an easy comp. We're seeing across med tech here in Q1 real strength in capital purchases, which you guys clearly saw. How much of it that is obviously pent up COVID demand, how durable is that, I guess for the remainder of the year? I mean are there -- is there a $100 million worth of capital that was deferred or some number that was deferred, that we should expect for the rest of the year? And then what does that say about volumes as we go into Q2 and Q3 as these hospitals are purchasing capital in front of that?

Todd W. Garner -- Executive Vice President and Chief Financial Officer

I think, Matt, the way I would comment on capital is, we saw more of that in the latter half of the quarter, obviously, based on procedures picking up and our capital is a smaller dollar capital and it's essential to procedures being done. So if there is a need, they're going to make the purchase, because otherwise they are potentially deferring a procedure, because of the lack of capital. And then the other thing I would just add on top of that is, we did comment, we had new capital come into the market. We had a new video platform and we had a new large bone power tool platform. So, anytime you have new products like that, put your sales force back on offense, gets them enthusiastic to revisit customers, new customers. So we had a couple of things going in our favor right now relative to our our two bigger capital items, if you will. And then we also have in general surgery, some capital items Helix generators, AirSeal box, the IFS box, and then to a lesser extent the Buffalo Filter capital, small dollar item, but all that adds up to, we have a good opportunity here as markets open up and more procedures are getting scheduled, that puts more wear and tear on existing capital and that opens up capital, and I think we've said, we never saw the slowdown in capital as being related to a lack of financial capability, it was about where were they going to put those capital dollars and there were other more critical needs during the height of the COVID pandemic, then there -- a lot of that's been addressed, so now, they can move on to that more call it routine capital, if you will. How much capital backlog is out there, it's really hard to quantify, really hard to quantify. So I don't think I would take a guess at that one.

Matthew O'Brien -- Piper Sandler -- Analyst

Totally fair. Thank you.

Operator

Our next question is from the line of Richard Newitter with SVB Leerink. Your line is open.

Aaron -- SVB Leerink -- Analyst

Hi, this is Aaron on for Rich. Thanks for taking our questions. Just a couple of quick ones from me. Could you guys maybe talk about what you're seeing throughout the quarter in the sports medicine segment? Have those volumes been starting to pick up with organized sports starting, just wanted to see what you guys have noticed in that area?

Curt R. Hartman -- Chair of the Board, President, and Chief Executive Officer

I think they strengthened as the quarter progressed. You know, we report orthopedics, we have a lot of different products within orthopedics, including video, including power, if you look at our procedure-specific category, which is the anchors that are used in soft tissue repair, we generated growth in that category, both in the U.S. and international market. And then the other item that directly reads on sports medicine procedures would be the MTF tissue biologics portfolio and we generated growth in that, both in the U.S. and the international markets in the quarter. So there was there was a growing set of procedures occurring relative to soft tissue repair, be that the knee, the shoulder, the hip. And just as a reminder, CONMED's biggest presence is in the shoulder, obviously we're doing a lot of innovation to continue to expand within the knee and the hip. And obviously extremities as well as that clinician group gets more focus on soft tissue repair, wrist, foot and ankle, elbow etc. So I think the procedures were starting to pick up as we got further into the quarter, and that's what we're prepared for.

Aaron -- SVB Leerink -- Analyst

Okay, great. Thanks. And then just another quick one on Buffalo Filter. Congrats on, I mean, I guess the Kentucky legislation, it's great. Have you heard of any other states that have a similar type of legislation coming down the pipe?

Todd W. Garner -- Executive Vice President and Chief Financial Officer

Yeah, Aaron, there's about a dozen states that we think are close and actually we were in the process before the pandemic started. So we would expect as the legislators across the country get back to work, this will be one of the first things they deal with. I'll just remind you, as Curt said, the legislation is really following the demand and not necessarily leading it, but, so we're happy to see it, we welcome it. We think eventually all states will have some rules around keeping workers safe that seems logical, but it's not something that we're holding our breath for or are counting on here at CONMED. We know that the market's going to grow, and this is going to become the standard of care and we're just trying to make sure we can service to customers and get as much of that market share as we can.

Aaron -- SVB Leerink -- Analyst

Okay, great. Thanks so much.

Operator

Our next question is from the line of Mike Matson with Needham. Your lines is open.

David Saxon -- Needham -- Analyst

Hi, Curt and Todd. This is David Saxon on for Mike. Thanks for taking the questions. The first one is just on AirSeal. I was wondering if you could just give an update on the attachment with -- attachment rate with intuitive robots, I guess what can drive that higher over time? And then in March and April, can you talk about how the utilization trended and how that compares to kind of pre-pandemic levels?

Todd W. Garner -- Executive Vice President and Chief Financial Officer

And on your March, April, I mean question David, are you talking about AirSeal utilization specifically or something broader?

David Saxon -- Needham -- Analyst

Yes, AirSeal.

Todd W. Garner -- Executive Vice President and Chief Financial Officer

Okay. Okay so far attachment, I think the way we framed that before is footprint, right, so we framed before that, where you walk into an OR and you see a da Vinci robot, about half the time you'll see an AirSeal box also in the room, right. And that has been climbing over the past several years and that continues to climb. So it's probably approaching more like 60% now, it's probably a safe number to say. So that footprint continues to grow. The procedure capture also continues to grow. That's below the footprint percentage, so we are now north of 35% of the procedures that are done on the da Vinci, where you will be using the AirSeal. And that's just because it's doctor-by-doctor, right. Just because the machine is in the room, you've got a -- you've got to get doc-by-doc, surgeon-by-surgeon to try it and adopt AirSeal. But that continues to go well, those -- both those numbers continue to go up, and we expect they will continue to go up from here. Specific utilization, first of all, we're not going to talk about April here, this is a Q1 call, so we're not going to talk about that, but definitely this is tied to procedures, right. So as as procedures are depressed, like they were in January and February, you have fewer procedures as those open up, then we get more usage, right. So certainly a decent increase between February to March. And as Curt said, February was also impacted by some weather issues in the United States, and so nice pick-up between February and March. We still think we're a long way from normal. We're still again across the globe, procedures are still impacted by the virus. Hospitals are still having to prioritize and manage and adjust, and then patients, of course, are also have their own reasons to maybe delay or defer or be hesitant. So, still not back to normal, but trending in the right direction.

David Saxon -- Needham -- Analyst

Okay, that's helpful. And then maybe another for you, Todd. Just on gross margin, I think you said, second quarter should show some year-on-year improvement, but just given second quarter last year was the trough, should we kind of be thinking in line with what we saw in the first quarter? Any color there would be helpful. Thanks so much for taking my questions.

Todd W. Garner -- Executive Vice President and Chief Financial Officer

Yeah, great question, David. And yeah, I'd say in that range, yeah. So probably around the same area as Q1 and decent growth over Q2, and then Q3 and Q4 should be growth over the prior year quarters.

David Saxon -- Needham -- Analyst

Great, thank you.

Operator

And our last question is from the line of Matt Mishan with KeyBanc. Your line is open.

Matt Mishan -- KeyBanc -- Analyst

Great, and thank you for taking the questions. Hey, I really like how you guys laid out Slide 5 with versus 2020 and versus 2019, and one of the things that like is fascinating about this is that, that orthopedic surgery was like plus 3% versus versus 2019 and down a bunch in the United -- internationally, and down a bunch in the U.S. Could you talk a little bit about the difference there? And whether that you think that on the international orthopedic side, do you think you can maintain a positive growth versus versus 2019, [Indecipherable] with the year?

Curt R. Hartman -- Chair of the Board, President, and Chief Executive Officer

Yeah, I guess the first thing I would point to is that internationally, about 60% of that business, 60%-plus of that business is orthopedics. So the point of that statement is our presence internationally in orthopedics is much bigger, much more pronounced, much better market position and that is a historical event driven when CONMED bought the Linvatec assets from Bristol-Myers Squibb in the late '90s, we we retained a lot of that existing infrastructure and still have that infrastructure in place and the market share that comes with being there in that consistent. The other thing is, the -- we had some market performances that we're really heavily focused on orthopedic procedures returning. In places like China, which experienced COVID first and foremost, they're kind of back to doing procedures, and that's a respectable orthopedics market for us. Places like Australia, New Zealand and Canada, Japan, good markets for CONMED because of our presence in good orthopedic markets for CONMED. So as those markets have gotten a lot healthier in terms of their ability to deal with COVID procedures, and then the softer comparables that they had for the full quarter. So we have a very good orthopedics business outside the U.S. and I think our orthopedics business outside the U.S. will continue to have positive momentum. It's been that way for a number of years. In the U.S., we've said from day one, this has been our biggest challenge market and we continue to evaluate and continue to innovate and good things are happening there. We've got [Indecipherable] over the top of the U.S. now, orthopedics bringing a lot of the same practices that they employed internationally into the U.S. market. And I feel positive about but where we're going and looking forward to the second half of the year for our U.S. orthopedics business, where I think [Indecipherable] are doing, we'll really start having traction.

Matt Mishan -- KeyBanc -- Analyst

Okay. And as a follow-up to the gross margin question, Todd, have you worked through the unfavorable manufacturing variances and the higher freight costs you were experiencing?

Todd W. Garner -- Executive Vice President and Chief Financial Officer

No, they're not all behind us yet, right. It's a four-month deferral, it's how that works from the accounting perspective. So December, so as an example, the unfavorable manufacturing variances we saw in December will hit the external P&L in April, right. And then January hits in May, and so that's how it works. And so obviously December was bad, January and February were bad. So that, as we said before, that will continue to impact -- it will kind of mask margins continuing into Q2 and then hopefully will be less of a clouding factor when we move into the back half of the year.

Matt Mishan -- KeyBanc -- Analyst

Okay. And last question, just a follow-up to the AirSeal question with da Vinci. Just curious, when doctors train on da Vinci from Intuitive or at -- in medical school, are they also trained on AirSeal? And have you -- are you trying to get AirSeal into medical schools, so when the doctors initially learn how to do the procedure, they're learning it on the AirSeal?

Curt R. Hartman -- Chair of the Board, President, and Chief Executive Officer

So two parts to that question, Matt. Obviously, given the long-standing relationship that first SurgiQuest and CONMED has continued with Intuitive, there are a lot of training events that occur with Intuitive Surgical, where AirSeal is present. So if a doctor is coming in to an Intuitive training event, they're likely to see an AirSeal platform there and get that exposure at the same time. As far as the direct medical school resident training programs, obviously, we target all those, I couldn't look anybody in the eye and say we have 100% success, that's just kind of customer dynamics. But part of our growth trajectory is to be in medical school programs with all of our products, obviously. So those are certainly priorities.

Matt Mishan -- KeyBanc -- Analyst

Thank you. Thanks, guys. Congrats.

Curt R. Hartman -- Chair of the Board, President, and Chief Executive Officer

Thank you.

Operator

As there are no further questions, this concludes the Q&A session. I'd now like to turn the call back to Mr. Hartman for any closing remarks. Mr. Hartman?

Curt R. Hartman -- Chair of the Board, President, and Chief Executive Officer

Thank you, Paul. And I just want to thank everybody for your time today and we look forward to speaking with you on our next earnings call. Thanks and have a good evening.

Operator

[Operator Closing Remarks]

Duration: 42 minutes

Call participants:

Curt R. Hartman -- Chair of the Board, President, and Chief Executive Officer

Todd W. Garner -- Executive Vice President and Chief Financial Officer

Rick Wise -- Stifel -- Analyst

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

Matthew O'Brien -- Piper Sandler -- Analyst

Aaron -- SVB Leerink -- Analyst

David Saxon -- Needham -- Analyst

Matt Mishan -- KeyBanc -- Analyst

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