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Sunday, January 01, 2006



Fair Disclosure Wire



10-25-2005



OPERATOR: Good day, ladies and gentlemen, and welcome to the Q3 2005 CONMED earnings conference call. My name is Maria and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session toward the end of this conference. If at any time during the call you require assistance, please press star follow by zero and a coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would like now to turn the presentation over to Mr. Joseph Corasanti, President and Chief Operating Officer. Please proceed, sir.



JOSEPH CORASANTI, PRESIDENT & COO, CONMED CORP: Thank you, Maria. And good morning, everyone. Thank you for joining us to discuss CONMED's results for the third quarter of 2005. Before we begin, I would like to remind you that to the extent our comments or statements this morning represent forward-looking statements as defined under federal securities laws, I refer you to the risk factors and other cautionary factors in today's press release, as well as our SEC filings. On the call today we have Eugene Corasanti, our CEO, and Rob Shallish, our Chief Financial Officer. After formal remarks, the call will be opened up for questions. Overall, our top-line grew 13.4% in the third quarter of '05 compared to the third quarter of '04. Most of this increase came from the addition of the endoscopic technologies product line we acquired on September 30, 2004.



Excluding the effects of the acquisition, our sales grew 1.9% for the quarter on a continued strong international sales growth rate of 11% and a negative 2.7% growth rate for our domestic business. From an earnings per share perspective, our non-GAAP earnings per share were equivalent to $0.32 compared to $0.38 in the third quarter of '04. I refer you to this morning's press release for the GAAP numbers, as well as a reconciliation between GAAP and non-GAAP financial measures. As discussed in our earnings press release this morning, the third quarter's results did not meet our original expectations.



We are obviously disappointed that we were not able to reach the goals we had set for ourselves in this most recent quarter. And I will spend a few moments discussing what happened. The challenges in the quarter can best be summarized into three issues.



First, we experienced a softness in our domestic sales attainment across most of our product lines. Second, we incurred higher costs in manufacturing and distribution as a result of higher petroleum prices. Third, the legal and related costs of our antitrust litigation were higher in the quarter than we had anticipated. So let me address each of these matters. With regard to our sales, I will go through each of our major product lines in more detail. But from a top level perspective, we generally saw domestic sales being much weaker in the quarter than we had forecasted. Sales outside the United States were on target with a growth rate of 11% over last year's third quarter. We do not believe that the domestic sales softness is related to our own internal performance and have discounted this as a possible reason. Instead we believe that factors external to CONMED are responsible for the flat sales domestically.



As a frame of reference, for the 12 months ended June 2005, our United States sales increased organically, not including acquisitions, by approximately 4.5%. In the third quarter 2005, our domestic sales decreased 2.7% organically. This is quite a dramatic swing in one quarter and represents approximately $6 million in revenue. One of the external factors effecting domestic sales relates to elective surgeries. On a national basis, we have received anecdotal information from our sales force that elective surgeries have been less in the recent summer months than normal.



Traditionally, elective surgeries are less in the summer than other times of the year because patients prefer to schedule procedures at times other than traditional vacation months. Further, physicians often schedule vacation time in the summer as well. As a result of fewer surgeries, there's less of a demand for the kinds of surgical products that companies like ourselves offer to the medical community. This year, the elective surgeries in some regions of the country seem to be lower than usual, creating a negative impact on our product sales.



A small part of the reduced demand comes from the effects of the hurricanes along the gulf coast. The larger reason, we think, is the reduced consumer confidence the country has experienced in the last three months as widely reported by the financial media. As a result, we think a certain small percentage of elective surgical procedures are postponed, either for economic or emotional reasons. These postponements are enough to cause a temporary shift in the growth trends of our surgical products. Further, besides effecting single-use surgical products, because surgeries are down, we think it also has effected the timing of the closing process on larger capital equipment transactions. Capital equipment evaluations have been extended and orders have been delayed. The good news is that has been our experience that slowdowns like this do not last forever.



Patients will eventually have their surgeries and hospital administrators will eventually purchase the capital equipment that their facilities require. Consequently, as communicated in today's press release, we continue to be comfortable that CONMED's organic sales growth rate will return to a more normal 6% in 2006. The second matter effecting the company in a negative manner this past quarter was the rise in the price of petroleum, which has a direct effect on the cost of plastic raw material, as well as transportation costs to our factories and also to our customers. Plastic polymers are used in many of our products, particularly our Patient Care products such as surgical suction tubing and EKG monitoring electrodes. It also forms the housing for many of our single-use surgical instruments. Our raw material suppliers have passed on these increased costs in the form of a fuel surcharge, which in some cases approach an increase of 30%.



Additionally, trucking companies are also passing on their increased fuel costs in the form of a fuel surcharge. We estimate that these increased costs approximate $1 million in the quarter. Because of the pricing contracts we have with many of our hospital customers, we have been unable to pass on this cost increase at this time. However, as contracts renew and as we explore the "force de jur" provisions of these contracts, we do believe that we can be successful in passing on a portion of the increased manufacturing costs to our customers. The third and last matter of note in the third quarter are the costs associated with our litigation against a competitor. These costs were somewhat higher in this year's third quarter than in the same period in '04. As we have discussed in the past, we have initiated this litigation believing that the competitor is in violation of various state and federal antitrust laws. This litigation specifically addresses the marketing practices for EndoSurgery products, similar to our EndoSurgery offerings, which prohibit us from a freely competitive marketplace.



Over the last three months, we have been concluding expert discovery and otherwise preparing our case for the summary judgment motion that J&J filed last week. Such preparation involves work by our own lawyers, as well as various other consultants and experts who speak to various economic principles important to our case. These costs were higher in the third quarter of '05 than in '04 and we expect them to be even higher in the fourth quarter of '05. Because we are in the middle of the litigation process, we believe it would be inappropriate for us to disclose the actual costs of the litigation.



We expect to submit our response to the summary judgment motion on November 23rd and the motion is currently scheduled to be heard in December. Now I will turn to a discussion of each of our major product lines. Arthroscopy had an overall sales decline to 50.2 million compared to 50.8 million in the third quarter a year ago.



This results from a combination of domestic sales percentage decline of 8% and an international sales increase of 13%. Of particular interest are the sales of our video imaging products and most notably, the enhanced definition camera that we have been selling for approximately 18 months. In the third quarter of '05, we had sales of video products equalling $10.7 million compared to 12.4 million in the third quarter of 2004. This is a particularly difficult comparison because the sales of video products in the third quarter last year were very strong. Power surgical instruments grew slightly to $30.5 million compared to 30.2 million the third quarter of 2004.



Domestic sales account for the slight increase, while international sales were flat compared to the third quarter last year.



Of note is our new two-trigger small bone handpiece which caused the small bone segment of the line to grow 16% over the third quarter of '04. This two-trigger handpiece was introduced earlier this year and is causing a resurgence of growth in the small bone category.



Electrosurgery grew 5.7% in the third quarter. All of the increase came from the international portion of our business, which saw an increase of 25%. Our domestic business was flat. Of particular note are the increases we have had this year in our Electrosurgery sales in the UK, Canada and Australia. Over the last two years we have marketed our Electrosurgery products through our own direct sales forces in these countries and have begun to see a great deal of success. Patient Care products experienced flat sales growth in the U.S. as well as internationally. Looking forward, we have now released our Pro 2 pulse oximetry monitoring system, consisting of a monitoring unit, a reusable sensor and a single-use sensor holder.



As we have discussed in the past, Pro 2 can obtain a pulse oximetry reading by placing the sensor on the patient's forehead or back.



Traditional measurements are taken by sensors clipped onto the patient's fingers or toes. The advantage of our system is not only accuracy, but it can obtain blood oxygenation readings for patients who have poor blood flow in the extremities. A limited market release involved over 30 institutions in the United States and Europe who found the system very useful in many clinical situations. Our sales force is now actively selling the system and we will report on our progress in the next conference call. EndoSurgery sales grew 13.2% overall on flat domestic sales, but a very robust international sales growth of 36%. Lastly, our newest product line, endoscopic technologies, met our expectations with sales of $15.2 million, consistent with the last three quarters of our ownership of the business.



As we look to the future, we have every reason to believe that our international sales will continue to grow at rates similar to the growth rates we've experienced in the recent past. Specifically, we estimate an international growth rate of 10 to 11% or so, excluding any foreign currency translation effects. This growth rate is predicated on the continued market leadership role our sales forces assumed in several countries around the world, including the UK, Canada and Australia. Domestically, we foresee continued softness in the United States market for at least the next quarter as we work through the issues of consumer confidence and hurricane stress on the economy. However, we expect these issues to resolve themselves relatively soon in 2006. And that as a result, we would return to more normal rates of growth in the neighborhood of 6% or so. The fourth quarter of each year is typically our strongest. Accordingly, we expect sales to approximate $163 to $166 million. This is a sequential improvement from the third quarter of '05, but has estimated percentage growth similar to that of the third quarter.



With estimated sales at this level, our non-GAAP earnings per share would approximate $0.36 to $0.40 per share and GAAP earnings per share of $0.30 to $0.34. The difference being the transition charges for moving manufacturing from Bard facilities to our facilities for the endoscopic technology's products, as well as the switch-out of surgical lights we have discussed in the past. As for 2006, we will defer making an earnings projection for now, wanting to have more complete forecast information from our various operating units, as well as a better understanding as to the direction of the United States economy. Our present plan is to give our 2006 guidance when we release the fourth quarter 2005 results in early February. However, one word of caution, as analysts work on their models, we currently estimate that our earnings per share will be annually effected by a non-cash charge of approximately $0.16 for 2006 as a result of the requirement for stock option expensing.



While the third quarter's market conditions have resulted in a temporary slowing of our overall growth rate, we remain convinced of the progress we can make in the future. We have an experienced well-trained sales force to represent our products to the medical community. Our new product pipeline is strong with Pro 2 just released. And products such as our new high-definition video camera, additional powered instrument handpieces, and a new electrosurgical generator expected to be offered to the market in the next few months. Lastly, our balance sheet is well positioned to enable us to take advantage of opportunities. We look forward to the future with optimism and confidence that we can achieve our corporate goals. I will now turn the call over to Rob Shallish, to provide more details about our financial results.



ROBERT SHALLISH, CFO, CONMED CORP: Good morning, everyone. As Joe mentioned, the company sales for the quarter ended September, 2005 were $150 million, an increase of 13.4% over the $132.3 million in the third quarter of 2004. Of this total increase, $15.2 million is a result of the endoscopic technologies acquisition we completed a little over a year ago on September 30, 2004. As of the end of the third quarter 2005, we now have a full year of this acquisition's results included with the entire company. For the nine months, sales increased to $464.1 million, an increase of 16.8% compared to September, 2004 nine month sales of $397.2 million. Endoscopic technologies contributed $44.4 million on a nine month basis to these 2005 amounts. We also benefited from favorable foreign currency changes. In the third quarter of 2005 the FX benefit to sales was $900,000 and for the nine months the benefit amounted to $4.6 million. Sales outside the United States continued to increase at a faster pace than United States sales.



In our third quarter, international sales have expanded to 35.4% of our total revenue, while for the nine months international was 36.9% of sales. It has been our experience that the third quarter's foreign sales are slightly lower percentage than the yearly total because the summer months for international sales are effected to a great extent by summer vacation schedules of distributors, hospitals and physicians. In the 2004 year, the foreign sales percentage of the total was 33.9% for the third quarter and 35.1% for the nine months.



Before turning to a further review of our third quarter P&L, I would like to point out that for the purpose of aiding comparisons of period results, Joe and I have made references in this conference call to historic and future expected financial results and components of our income statement determined by excluding certain costs and unusual items. These same matters were also referred to in this morning's press release.



Although these financial statement items and results are not in conformance with the United States Generally Accepted Accounting Principals and are considered to be non-GAAP financial measures, we believe that such measures are useful aids to an understanding of the financial performance of CONMED. These non-GAAP financial measures are not intended to be a substitute for the related GAAP financial measures. Now I would like to turn to a discussion of our margins in the third quarter of 2005. Our third quarter gross margin, excluding transition related items, was 51.9%, an improvement from the 51% gross margin in the third quarter of 2004. The higher margin is a result of benefit from the endoscopic technologies business, which has higher gross margins on its products than our corporate average.



Similarly, the nine month gross margin for September, 2005 improved to 52.7% compared to 52% for the nine months of September, 2004, again, due to the effects of the endoscopic technologies products.



Selling, general and administrative expense as a percentage of sales was 35.1% in the third quarter, sequentially higher than the 33.8% in the second quarter of 2005, and up from the 32.3% of sales in the third quarter of 2004. As we advised you in our last several conference calls, we continue to see somewhat higher administrative costs as a result of legal costs associated with the antitrust lawsuit against Johnson & Johnson. Additionally, the endoscopic technologies business had somewhat higher selling and administrative costs as a percentage of sales, offsetting, to some extent, the higher gross margins of that business. Lastly, in the third quarter of 2005, we saw slightly higher employee benefit costs associated with employee insurance, as well as necessary revisions to pension plan actuarial assumptions. Research expenditures were 4.3% of sales for the quarter, higher than the 3.6% of sales in the third quarter of 2004.



As mentioned in previous conference calls, we anticipate that our R&D expenditures as a percentage of sales will approximate 4% to 4 1/2% of sales as we work on various product opportunities that we believe will enhance our future growth. Interest expense was slightly higher in the third quarter of 2005 compared to the third quarter of '04, due to slightly higher average outstanding debt due to the acquisition of endoscopic technologies. Although our floating rate debt has experienced interest rate increases in the last year, due to the Federal Reserve's increasing short-term interest rates, the convertible bonds we issued in November last year ,carrying a fixed interest rate of 2.5%, have mitigated the effect of rate increases.



Now, approximately 50% of our debt and receivable financings are floating with LIBOR, while 50% is fixed at a very attractive rate.



Our effective income tax rate in the third quarter of 2005 is 34.5% consistent with the first half of the year.



Now turning to the balance sheet, cash flow continues to be positive for the company. In our third quarter we generated 9 million in cash from operating activities. During the quarter, we reduced our balance sheet debt by $2.5 million and reduced the receivable financing program by $3 million for a net reduction in financings of $5.5 million. For the nine months we have reduced our balance sheet debt a total of $24 million and have reduced the receivable financing program $6 million. This results in a total reduction in financings of $30 million for the nine month period. Based on the trends of the third quarter and our expectations for the fourth quarter, we now estimate that our free cash flow for the year will approximate $65 million. This is somewhat lower than originally anticipated and is caused by the third quarter's results and our outlook for the fourth quarter. Also, we have seen greater growth in working capital than planned, primarily inventory, since sales have been less than anticipated. We expect this trend in inventory to reverse in the fourth quarter, due to the higher sequential sales activity we anticipate achieving in the fourth quarter.



As we have discussed, one other component of the inventory growth concerns building inventory to facilitate the transition from the borrowed manufacturing plants to our facilities. I might add that the transition is proceeding as we had planned. Our amortization expense for the third quarter was $4.5 million and depreciation was $3.2 million. Our capital expenditures in the quarter were equivalent to $4.1 million. Debt to total book capitalization declined to 35.9%, down from the 39.7% in the fourth quarter of 2004, as a result of debt repayments as well as increases in retained earnings. We are well within the 35% to 45% goal that we set for ourselves some time ago. Now turning to specific balance sheet accounts, with regard to inventory, our days investment at September 30, 2005 was equal to 192 days, up slightly from the 184 days in the third quarter of 2004.



As discussed, the higher inventory levels are due to transition activities for the endoscopic technology products and softer sales in the third quarter than anticipated. Accounts receivable days at the end of September 2005, adding back the effect of the $43 million utilization of the securitization facility, were 76 days. This is slightly higher than our typical ratio of, in a range of 70 to 75 days. We have reviewed our receivable portfolio and do not believe that we have any unusual exposures. Rather, the increase in the days outstanding at the end of the third quarter is, we believe, a symptom of general economic lethargy in the third quarter. Traditionally, the fourth quarter has been a good cash flow period for the company and we expect that this will be the case again this coming fourth quarter. With that, Maria, I would now like to open up the line for any questions.



OPERATOR: Ladies and gentlemen, at this time, if you you wish to ask a question, please press star followed by one on your touch-tone telephone. If your question has been answered or if you wish to withdraw your question, press star followed by two. Press star, one to begin. Your first question comes from the line of Raj Denhoy with Piper Jaffray. Please proceed.



RAJ DENHOY, ANALYST, PIPER JAFFRAY: Great, sure. Thank you. I was curious if I could ask you about the softness in elective procedures you guys mentioned in the third quarter. You mentioned you're thinking around that was driven by anecdotal data you got from your sales force. I guess I'm curious whether you've been able to verify that any other way, in a sense, were you actually able to look at data from hospitals or is there anything else you can point to other than the sales force saying that maybe they saw some fewer procedures?



ROBERT SHALLISH: Well, Raj, there's certainly that information from the sales force and some of that, frankly, comes from medical professionals. There have been reports of physicians saying that their procedures were down in this particular quarter. There were reports of medical personnel and some surgery centers and hospitals worried about layoffs because surgeries were less in this particular quarter. Then we've also seen similar comments by other companies, very frankly. Stryker in their conference call mentioned reduced amount of elective surgeries. They really didn't have a good explanation for that. Earlier, Smith & Nephew had reduced their guidance in terms of their fourth quarter top-line. Yesterday, the Triad Hospital chain disclosed reduced volumes in their business. So I know there are some companies that have reported good results, but I think there are a like number of companies that have reported problems in this particular area.



RAJ DENHOY: It's interesting because you mentioned Stryker. Their medical/surgical division, which doesn't overlap with you completely, put up greater than 20% results in the quarter. I'm curious, is there any possibility there might be something competitive going on here around the edges, whether maybe your product set isn't matching up?



Are there any possible other explanations? Because if it truly is a slowdown, like you mentioned, we might see an acceleration here first part of '06, but hopefully it's not something more dire.



ROBERT SHALLISH: We thought a lot about that, very frankly, Raj, whether it's something that's particular to our company or not. And I guess to have us change from domestic growth rate of over 4% over the last 12 months ended June to a decline of approximately 2% in one particular quarter, you know, hospital customers just don't change their buying patterns that quickly. So we tend to think that it's something else other than us. Also, all the information that we have from our marketing and sales folks does not point to any loss of large customers or even small customers. We think that we've retained our customer base and it's just that the customers are using the products less than they had in the past.



RAJ DENHOY: Okay. Then just one last one. Along with the slowness in the top-line, obviously your operating margins came in a bit lower, obviously there wasn't as much absorption of the expenses. But as you move into the fourth quarter and into next year, if the top-line does stay a little bit soft, how flexible are you guys in being able to drive that number back up to sort of the 15% range? Is that something you can do just with expense control?



ROBERT SHALLISH: Yes, I think it's something that we would certainly work on. You're right in your observation that it's difficult to change a lot of our fixed costs right away, particularly when we had all the expectation in the world that the third quarter was going to be a reasonably good quarter for us. So to change all of our cost structure immediately is pretty difficult, but with notice and advanced thinking, yes, we can adjust to changed circumstances, if in fact that is what we ultimately believe to be the case.



RAJ DENHOY: Okay. Then just one last one on the Endoscopic technologies, you mentioned it was relatively in line with what you've done for the first three quarters you've owned the company.



I'm curious, do you have a number for what it did in the third quarter of last year? Are you seeing growth in that business yet?



ROBERT SHALLISH: I don't have the specific number, but each of the quarters in 2004 was approximately $15 million, plus or minus a few 100,000. So it's roughly the same level that the business had under Bard. That's kind of normal, frankly, for acquisitions. We tend to be quite pleased with an acquisition if we're maintaining the business for the first year and then the expectation is that it would grow beyond that.



RAJ DENHOY: Okay. Fair enough. Thank you.



OPERATOR: Your next question comes from the line of Dalton Chandler with Needham & Company. Please proceed.



DALTON CHANDLER, ANALYST, NEEDHAM & CO: Good morning. I was just curious, you'd said you do expect a return to historical growth rates next year, if there's anything specific you're seeing that would lead you to that conclusion or you just think that the market can't continue at a lower level.



JOSEPH CORASANTI: I think that we-- Rob and I both agree the market really can't continue at this level and that's the nature of this business. Procedures do need to occur, even elective surgeries do need to happen at some point, and so we think it will return as well.



And for '06, we also think the new product offerings that will be launched at the beginning of the year will certainly help drive the top-line for us as well.



DALTON CHANDLER: Okay. Can you talk about in the 6% growth you expect, how that breaks out between units and pricing?



ROBERT SHALLISH: Well, there may be some small component of pricing because, as you might expect, because of these cost increases that we've had relative to petroleum-based issues, we are examining all the possibilities of raising prices on those products which would have a portion of their costs associated with petroleum. So that is something that we're currently reviewing and putting in place. So there may be some small component of price, but by and large, we tend to estimate that it would be primarily volume.



DALTON CHANDLER: Okay, and can you just remind us when you expect the excess charges related to the Bard transition to end?



ROBERT SHALLISH: Yes, at present our plan calls for Bard to stop manufacturing these products during the first quarter of 2006. But, we still would have inventory on hand of the products that Bard had manufactured and it may take, frankly, another six months to work through that inventory on a FIFO basis until we are selling from an accounting perspective the inventory that we have manufactured ourselves so that these kinds of transition costs associated with the difference in inventory costs, we think, may extend out through the third quarter.



DALTON CHANDLER: Okay. And on the topic of these reduced levels of elective surgeries, do you think that impacted all of your product lines, or was it really isolated in the arthroscopic or orthopedic, I should say, related products?



ROBERT SHALLISH: We think it effected all of the, almost all the product lines. The arthroscopy single-use products or class -- the reason we have such a big decline of 8% or so domestically in the arthroscopy products is primarily because of the video situation, where we had $12 million plus of sales in the third quarter last year and this year it was around 10 million. So that $2 million definitely has an effect on the arthroscopy percentages. Single-use products were more or less flat for arthroscopy. They were more or less flat for powered instruments, more or less flat for Electrosurgery.



Patient Care was flat. Domestic EndoSurgery was flat. So it really was across all of our products that we saw this domestic flatness in single-use devices.



DALTON CHANDLER: Okay. All right. Thanks a lot.



OPERATOR: Your next question comes from the line of William Plovanic with First Albany Capital. Please proceed.



WILLIAM PLOVANIC, ANALYST, FIRST ALBANY CAPITAL: Great, thank you.



Good morning.



JOSEPH CORASANTI: Good morning.



WILLIAM PLOVANIC: Rob, on the Bard charges, roughly give us an idea quarterly impact going forward. Is that going to stay at the 1.8 million or should we see that kind of tail off through '06 and if so, what's the full year number you would expect?



ROBERT SHALLISH: Yes, I think it will stay about that level, very frankly, as we go through the first and second quarter next year. As we work through in the inventory, I think we probably see some decline by the time we get to the third quarter. But we have built up a good deal of inventory, frankly, to make sure that we don't have out of stock situations. The last thing we want to have with any of our products, and particularly on acquisition derived product, is any kind of a back order situation which would cause a customer to have to look somewhere else for a particular product. And so we're definitely providing enough inventory so we minimize that chance.



WILLIAM PLOVANIC: And everything is in place for this transition to take place at the first quarter '06? You're all up and running on the manufacturing side in-house?



ROBERT SHALLISH: Well, it's being done line by line, so a number of the lines have already been transferred to our manufacturing facilities and there's still some to go. And that should be complete by the time we get through the first quarter.



WILLIAM PLOVANIC: Okay. And then can you remind me, what were the US sales and OUS sales for the quarter?



ROBERT SHALLISH: US sales for the quarter in total were 96.8 million and OUS sales were 53.2 million.



WILLIAM PLOVANIC: Okay. And then to go back to one-time charges, replacing the lights, how many more of those do you need to do? How much is left?



ROBERT SHALLISH: I may not have the exact number, but my recollection is we have about 30 operating rooms left to go.



WILLIAM PLOVANIC: And what's that [equivolate] to dollar-wise?



ROBERT SHALLISH: Well, I think at the end of the second quarter we had estimated we had about $1 million to go. We only effectively did a few operating rooms in the third quarter and the charge is 120,000 in the third quarter. So in rough terms, we probably have about another 800,000 to go.



WILLIAM PLOVANIC: Okay. And then can you give us an idea just for pricing and unit increases in the quarter. Was pricing up or down year-over-year domestically? And if it was up, give us roughly how much.



ROBERT SHALLISH: Well, overall, it was pretty flat. In some of our product areas we have been able to obtain slight price increases, namely Electrosurgery. I think in Patient Care we may have a small percentage change, a small percentage increase, actually, because there was a contract we do not have any longer for EKG electrodes that had very low pricing. So we did actually increase the price, but the portfolio price is probably higher on average. But except for those two situation, I think that it's pretty flat.



WILLIAM PLOVANIC: Okay, and then for the orthopedic sales force, can you give us a feel for the number of agents, reps at the end of the third quarter and what your expectations are for '06?



JOSEPH CORASANTI: Sure, Bill. I think we're still targeting somewhere between 230 and maybe 240 through 2006, and selectively, we may be upgrading some of these territories. We started that process in the southern California area. So it's still a very strong sales force for us and we'll continue to upgrade as we need to.



WILLIAM PLOVANIC: And where are you at right now?



JOSEPH CORASANTI: I think we're at 230 right now.



WILLIAM PLOVANIC: Okay. And last question, can you give us a sneak peek at what the new products are in '06 that you're excited about and believe will drive growth?



JOSEPH CORASANTI: Sure. We've talked about the high-definition camera system. We will launch that at the Academy. That certainly is going to drive the video portion of our arthroscopy business. And Electrosurgery is coming out with a new generator that actually will be out very soon, before year-end. And then for the Patient Care division, really the two most important products that are exciting products for us, the Pro 2 that we talked about. That's our pulse oximetry line. And later in the year the Econ product for cardiac output monitoring.



WILLIAM PLOVANIC: And then on the Pro 2, I believe earlier Rob had mentioned that that was in test launch, only a certain number of hospitals. Is that full launch nationwide now? Or just give us a feel for the rollout of that.



JOSEPH CORASANTI: Sure. We've already had the valuation process, it's really complete. It happened in the U.S. and in Europe and it is now starting its full launch process. In fact our sales reps are being trained on it right now.



WILLIAM PLOVANIC: And what type of contribution did that product give in the quarter?



JOSEPH CORASANTI: Nothing. We-- it was simply going through the evaluation process.



WILLIAM PLOVANIC: Okay, great. Thanks a lot.



JOSEPH CORASANTI: Sure.



OPERATOR: Your next question comes from the line of Mark pageant with KeyBanc Capital Markets. Please proceed.



MARK PAGET (ph), ANALYST, KEYBANC CAPITAL MARKETS: Good morning. Of the 1.8 million in acquisition transition charges, could you tell us how much is assumed savings relative to the manufacturing transition at CONMED from the Bard facilities?



ROBERT SHALLISH: Well, the entire $1.8 million is that difference.



It's the difference between what we're being charged by Bard currently and what our current expectations of our manufacturing cost is.



MARK PAGET (ph): Thanks.



OPERATOR: Your next question comes from the line of Pat Pace with UBS. Please proceed.



PAT PACE, ANALYST, UBS: Thanks. Good morning. Just on elective surgeries rise, just looking at it from a macro perspective, did you get any sense in your anecdotal evidence that there was -- any of this is being driven by the HMO's? You mentioned consumer confidence, but did anybody mention specifically higher co-pays, stuff like that, for people not electing to have surgery?



ROBERT SHALLISH: No. We've not, not heard that, Pat. There was an interesting article in the Wall Street Journal yesterday about self directed plans and so forth. So perhaps there is something like that going on, but we don't have any information ourselves about that.



PAT PACE: Okay, and just to follow-up on the -- your orthopedic sales force. You guys restructured that sales force a couple of years ago and had a pretty good effect up until now. Have you given any thought to going through a similar process with some of your other sales forces in the U.S. and just given what happened this quarter?



JOSEPH CORASANTI: Well, you refer to the other sales forces we have.



We have five total. The orthopedic sales force is set up the way it is with the independent sales agent groups because it's really the norm in orthopedics. With our Electrosurgery, our Patient Care, CET, and EndoSurgery sales forces, those traditionally in the industry have been direct sales forces. And they typically perform quite well.



And if you look back over the last probably three or four years, even with Electrosurgery, that sales force has done exceedingly well, growing high single-digits to double-digit growth in the U.S. So I think we're prepared to stay with what we have and if anything, as the business increases on the top-line, perhaps even add to those direct sales forces.



PAT PACE: Fair enough.



JOSEPH CORASANTI: Sure.



PAT PACE: And just on the Econ, can you be a little bit more specific as far as when you think that might be ready for rollout?



JOSEPH CORASANTI: I'll try. There's quite a bit of software involved in the monitoring box essentially. We're in the validation process, starting the validation process for a lot of that software. Both software and firmware. Our current estimate is that we may be ready at the end of the first quarter to start some clinical valuations of the product. If all goes well, perhaps we could roll it out in second quarter. And that's about as specific as I think I can get with that product line.



PAT PACE: Okay. Great. Thanks a bunch.



JOSEPH CORASANTI: Sure.



OPERATOR: Your next question is a follow-up from William Plovanic with First Albany Capital. Please proceed.



WILLIAM PLOVANIC: Great. Three questions. First of all, the legal spending in '05 and '06, would you expect it, especially in regards to J&J, would you expect that to increase in '06 versus '05, number one? Number two, would you be willing to quantify just kind of annual expenses for that? And then three, just in regards to interest expense going forward, is this kind of the -- what interest expense should we use for the kind of all the debt and, the 4 million was a little higher, I was looking for some others, I don't know, but what do you think it's going be roughly on a quarterly basis? Thanks.



JOSEPH CORASANTI: Sure. Well, Bill, with regard to the J&J antitrust case, we are forecasting higher expenses in '06 as we prepare for trial. Interest was-- ROBERT SHALLISH: Yeah, interest was the second question. I think that in rough terms, we are about $4 million in interest expense this quarter and looking forward, it's hard to know what the fed is going to do with rate increases and what the inflationary situation might be and the economy. But assuming that there is moderation in rate increases from this point on, that the cash flow of the business will enable us to reduce the debt and we would see interest expense at about this level or slightly declining based upon reduced amounts of debt outstanding. If there are -- if it turns out there are very significant rate increases going forward, then that would change that outlook a little bit. But I don't expect that to be the case. We've just gone through an environment in the last year where we've gone from a fed funds rate of 1% to much higher than that now, 3%, 4%.



I've kind of lost track. So it's been a significant change over this last year's period. I don't expect that same kind of change going forward.



JOSEPH CORASANTI: And, Bill, I apologize. I know you asked us another question about annual expenses for the case, the antitrust case, and I think really the best practices litigation strategy, I think it's probably in our best interest not to disclose what those annual expenses are.



WILLIAM PLOVANIC: Okay. Thank you.



JOSEPH CORASANTI: Sure.



OPERATOR: At this time there, are no more questions. I will now turn the call back over to management.



JOSEPH CORASANTI: Well, again, we thank everyone for joining us today for our third quarter conference call. We look forward to the year-end and fourth quarter call. Thank you very much.



OPERATOR: Thank you, ladies and gentlemen, for your participation in today's conference. This concludes today's presentation. You may now all disconnect. Enjoy your day.



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