Enovis Corporation (ENOV) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining us. My name is Kyle Rose. I am one of the medical technology analysts here at Canaccord Genuity. I appreciate you all joining us at our Annual Global Growth Conference. It's a pleasure to see everyone again in person. Very excited to be joined this morning by Enovis. They're a differentiated medical device company focused on products that really span the entire continuum of the orthopedic and musculoskeletal practice, all the way from injury prevention through to repair and recovery, so definitely a differentiated asset to be paying attention to. With me today, we've got, from Enovis, we have Ben Berry, he's the CFO; as well as the VP of IR, Derek Leckow. Thank you both for joining me. We're going to jump into a bit of a presentation and then a fireside chat at the second half year. But before I begin and before I hand it over, I need to make sure any disclosures, if and where applicable, you can find them on our firm website, conference website. And then we'll go in there. So without any further ado, Ben, it would be great to get an overview for the company.

All right. Thanks, Kyle. I see I have the enviable lunch spot, so I'll try to make this entertaining for everybody. I'm going to tell us a little bit about who Enovis is and take you through a little bit about what we're trying to do as an organization, so you can get to understand that. And then obviously, Kyle and I will have a Q&A after that. So if you think about who is Enovis, we are an innovation and growth-driven med tech company. We span the continuum of orthopedics, as Kyle said. We're about $1.7 billion in revenues today. We have two really strong business segments: one is a fast-growing, above-market growth company in the Reconstructive side of the business, which has been growing double digits for over a decade; and then a market-leading position in the Prevention & Recovery business, which is really around our global bracing technologies and our recovery sciences platforms as well. We operate in a very big and growing market. If you think about just our position, we're a relatively small player in the overall implant side of the market but growing fast and taking market share. And then on the P&R side of the business, we're the market leader across most of the categories in which we play. The market is underpinned by some favorable growth dynamics and growth trends. So if you think about the market in which we participate, our weighted average market growth based on the mix of our business grows a little bit faster than the normal market. And then we also have favorable trends that will continue to grow this market from now and well into the future. So if I highlight a little bit about what the two business segments provide, the Prevention & Recovery business right now is about 2/3 of the business. We are the market leader globally both in the bracing technology business, which comes with more foundational brands like DonJoy, Aircast, which if you've seen anyone walking around with a walking boot, you've probably seen them in an Aircast product over your time period. A strong brand recognition in terms of our rehab side as well in terms of Chattanooga. And then we entered a couple of years ago into some of the high-powered laser therapies with regards to an acquisition that we did that brought us the LiteCure lasers, which is growing fast and comes with high margins on the P&R side of the business. If you think about our Reconstructive side of the business, this is really our growth engine for the company. We have been growing double digits here. We're about 50% extremities, so shoulder and foot and ankle, and about 50% hip and knee. We have some really foundational technologies and innovation in this space really led by us pioneering the reverse shoulder in the AltiVate platform several years ago. We are the market leader in reverse shoulder, the #3 player overall in the U.S. market and continuing to grow that business very well. We have a dual pivot knee called EMPOWR, really unique, differentiated need that's solving the patient satisfaction gap for total knee replacement, really growing well for us, outpacing the market and still relatively new implant that has a lot of runway, not only in the U.S. market but outside the U.S. as well. And then we've recently done several acquisitions to build a foot and ankle business. Again, it's a more fragmented market, growing more like high single digits. And we have some foundational technologies that we have as we've acquired those businesses, especially the DynaNail platform, which is a shaped metal technology that really drives fusion in terms of the overall procedure. So really excited about our portfolio and the growth potential that we have and the strong brand recognition that we've established as an organization. One thing that's unique about us that's different than a lot of the orthopedic players in the space is that we cover the whole patient journey. So if you think about preoperative care at a postoperative rehab as well as the intraoperative procedure, we have products that surround the entire journey. So as we think about developing workflows and providing solutions to both clinics and hospitals, we have an advantage of looking at the whole patient journey and developing products around that continuum. And that differentiates us in the space. We're on a growth path. We're about 15% EBITDA margins in 2022. We have a clear plan and path in front of us with regards to driving margin expansion as we continue to shape the business to a continuous and sustainable high single-digit growth profile. And really, the three building blocks of that margin expansion come from the mix of the business to Recon, as I mentioned, Recon is growing double-digit. That will continue. And that will continue to drive overarching mix improvements to the business. We've done a lot of acquisitions over the last several years. And we continue to drive those up the scale curve, which will provide continued margin expansion from now and into the future, and then operating leverage with the growth and productivity from the business system that we implement on a day-to-day basis, which is really focused on driving continuous improvement in everything that we do. As I mentioned, we've been highly acquisitive. One of the things that we think about in terms of our position in the industry is because we cover the full continuum of orthopedics, we have an opportunity to continue to think about how do we build and grow the organization through acquisitions. So there's lots of opportunities for us as we think about expanding into verticals of the market that might be growing faster or adding technologies that are attractive that can leverage some of our core relationships or capabilities, like we've done with the foot and ankle business. And really, the lens that we put on acquisitions is how does it help us achieve our strategic goals as an organization? And those strategic goals are driving a sustainable high single-digit top line, creating a mix advantage for ourselves with higher gross margins that can drive scale and profitable growth into the future. So as we think about building the company through both organic and inorganic means, we think about it in terms of that lens. Just some examples of some of the recent acquisitions that we've done and some of the success that we've had in integrating them. We acquired a business called Mathys, which is based in Switzerland. It really established our foundation for our Recon business outside of the U.S. Before we did this acquisition, about 95% of our revenues were in the U.S. on the Recon side. So this really gives us the capability now, which is almost 1/3 of the business outside of the U.S., to really drive some of our core innovations and product lines outside of the U.S., be it the AltiVate shoulder or the EMPOWR 3D knee. In a very short period of time, we've taken this business and taken it from a mid-single-digit grower to a double-digit grower. We've expanded the gross margins 5 points and really expanded the profit margins of the business as well. And then also on the foot and ankle side, we've acquired now five companies to build, I'd say, a more comprehensive foot and ankle portfolio, all the way from total ankle replacement to midfoot, forefoot offerings as well, so really excited about the portfolio that we've established in foot and ankle. And in a very short period of time, we've built that and are seeing accelerated growth that's ahead of our overall Recon growth and seeing scale in that business as well with the expansion in our EBITDA margins. We are a relatively low-leveraged company. We're about 1.5x leveraged today. So we have a lot of, I'd say, capability and dry powder to continue to do acquisitions, about $1 billion in capacity if we leverage up to go out and do some things inorganically. In terms of where are we in '23, through the first half of the year, really strong performance, 9% underlying core growth through the first half. We beat and raised our guidance through both the first and the second quarter, really tracking towards achieving a strong year in 2023 and taking another step towards our strategic goals. We do have some good underlying momentum with profit margins expanding about 110 basis points through the first half. So really good momentum in the business and really setting ourselves up, like I said, to continue to make progress against our strategic goals. That's a little bit about who we are as Enovis. And now I'll take questions from Kyle.

Great. So thank you very much. So look, I've got a list of questions here, if anybody wants to jump in, please feel free. I kind of want to start a little bit on the Q2 recap. You obviously had a strong first half. The Q2 was really strong when I think about U.S. Recon, over 20% in hips and knees, mid-teens for the shoulder business and the extremities business. But then what really stood out was Mathys. Maybe just help us understand, I guess, what's driving -- any drivers to that in the U.S. business we need to talk about? And then internationally on Mathys, is it just a time thing, where you had to get your pieces in place, but the acceleration, I guess, has taken or has happened faster than we expected, so...

Yes, sure. So I'll start with the U.S. Again, it's really continued execution against our playbook of really focusing on driving good outcomes in our product lines and with our patients and convincing surgeons about trying our products and leveraging those technologies. And really, we continue to see strong momentum there in terms of gaining surgeon preference and continuing to grow the portfolio, along with some product launches that we've done to continue to fill out our bag and give us even more strength in the U.S. market. The other thing that we saw in the U.S. is an acceleration in foot and ankle. So that business is really starting to gain some momentum as well, really on the tail of some product launches that we did near the end of last year and into the beginning of this year. So those are some of the key contributors to growth in the U.S. Outside the U.S., it's been, I'd say, a combination of investments that we've made to increase the size of our sales force in certain geographies. And then also, we're getting, I'd say, some momentum around the underlying market conditions. In certain markets outside the U.S., we're seeing some strong momentum with regards to some of the backlog clear, which continues to happen through the end of last year into the beginning of this year. And we think that will continue over the next couple of years as the backlog was built up during the period of COVID. And then also, we're starting -- it's still early days, but we're starting to see some of the synergy capability between the two platforms and bringing those R&D portfolios together to get some momentum of both the AltiVate and EMPOWR into that market as well.

Yes. So you touched on my next question, which was just where are we in the launch of AltiVate and EMPOWR into the European markets? And I guess, where are we as far as bringing some of the ceramics prowess that Mathys has into the U.S. markets?

Yes. We're very much excited about the potential of the two companies together and then the portfolios together. We've been growing really fast in the U.S. So a lot of our investments in instrumentation to support that growth has been more prioritized to support the U.S. growth through the beginning of this year. I'd say we're in the position to where we're going to start to accelerate in the second half with regards to having the inventory in a position where we can be more on offense to drive some of the synergy of AltiVate and EMPOWR outside of the U.S. So I think you'll start to see some momentum for that starting here in the back half of the year. And then in terms of the overarching portfolio, very excited about having a captive ability to make ceramics and what the potential to our overall portfolio could look like over time and advancing some of those projects into the portfolio.

And then on the P&R side, you stabilized the business and reoriented it for mid-single-digit growth through the first half of this year. That comes off of kind of what was a rocky Q4 close to last year. Maybe just anything specific to call out in that business as we think about kind of maintaining this stable growth moving forward?

Yes, I think we've very much kind of been in the work to really stabilize the P&R business over the last couple of years. So if you think about making investments to improve the portfolio and then also taking advantage of trying to shape the overall segment to where we're pruning off certain areas and growing others, that's been part of the focal point. And over the last 8 quarters or so, I'd say if you look at our growth, we've been averaging around 3.5%, 3% to 4% growth in P&R. So we do feel like we've stabilized P&R to be in more of a 3% to 4% growth range right now. We're starting to get some momentum of the investments that we've made in R&D with product launches that are going to start here in the back half of this year. And then we continue to focus, like I said, in terms of some of the laser-based therapies and energy-based technologies that we have that can continue to get us up the curve on growth from a P&R side. So overall, any given quarter, there can be some ups and downs with that because it's more diverse in terms of the product line and the customers in which it supports. But overall, I think we've stabilized it in that kind of 3% and 4% growth range.

Okay. And then on the U.S. Recon side, you talked about prioritizing some investments through the first half of the year. And one of the biggest things that we get questions on and that we believe is unlocking growth is the launch of the Revision, EMPOWR Revision. I believe that's still in a controlled launch, correct me if I'm wrong. And then just kind of level set where we're at from a rollout perspective. Is it still going only to friends and family? Are you able to go out for competitive accounts now? Where -- and then I guess, the second question on that is, is that pulling through primary sales, too?

Yes, I mean, I think it's still a little bit early days with regards to the rollout of it. We're very excited with the preliminary feedback that we've gotten on the product. It does come with a price premium as well. So I think there's some upside in terms of the momentum that it will create as we continue to expand the launch. We'll be able to be more on full offense with that product line here in the back half of the year, inventory positions getting healthier in terms of being able to roll that out fully. And we'll be able to do that here as we think about kind of going through the end of Q3 and into the beginning of Q4 with regards to having full availability for that product line. In terms of who we're targeting, it's a mixed bag. I'd say, obviously, we want to be able to offer it to surgeons that are using our primary as -- and having about 20% of the market being Revision and us not having a product there. So that's a natural place for us to go. But some of the big competitive conversions, it's another weapon for us to use to try to gain that business.

Great. And then on the foot and ankle side, you highlighted the five acquisitions. I mean, two of them came more recently. Aspiration is to go from $60 million to $100 million. Obviously, you've got two acquisitions now. That probably gets you there faster. Just how would you manage the integration process there? Because candidly, it's gone better than we expected. We've seen less dis-synergies at least near term than we expected. And just where do you think you're seeing the most success?

Yes. It's been hard work. It's bringing three companies together. But I would say that we feel like we've done a really good job of stabilizing the best of what we've seen from all three companies and really establishing a business that operates as one cohesive team. And then one of the things that's really exciting about foot and ankle is you've got these various technologies that you've brought together. And now you've got a lot of momentum that's been created and established that can allow us to go do things like the two acquisitions that we've done and now bring them into a business that's already been established and then has capabilities that we can leverage from a synergy standpoint. So in the near term, when we acquired those three businesses, it took us a little bit of time to try to get them up the scale curve because we didn't want to rush to taking cost out while we were building capabilities and evaluating the new talent that we're bringing into the organization. But since we've done that over the last couple of years, and I showed you on the chart that we've gone from a business that was essentially 0 profit to now double-digit profit, we have a lot of momentum to continue to get up the scale curve and then to bring technologies like Novastep and external fixation into the business.

And yes, so let's continue on the M&A theme. I mean, look, this is a company and management team and a Board that has deep roots in roll-ups, look, going all the way back to Danaher, obviously, Colfax and now as a stand-alone med tech company. How should we think about the appetite for continued M&A? Obviously, you've got a lot of tuck-ins. But when we think about taking the bigger bites, I know Mathys was a larger acquisition. But just in this environment, the kind of the valuations you're seeing in the market, where do you see the appetite for M&A moving forward?

Yes, I mean, as you've seen, we have a pretty large appetite for M&A and have done a lot of deals over the last several years to continue to build and shape the organization. So our appetite remains big. As I mentioned, our balance sheet position gives us the capability to go do bolt-ons or take a larger opportunity as well as you think about something that might have more revenue, like we did with a Mathys, for example. So from our perspective, the market is still a little bit touch and go with regards to -- I think the IPO markets dried up a little bit. You're not seeing as much there, so valuations have come down over time. Interest rates are still kind of causing a little bit of problems for various companies, depending on their leverage ratios and things like that. But overall, we see it as a good opportunity for a company like us that has a solid balance sheet to continue to go and look for areas to continue to strengthen the organization against our strategic goals that I laid out and example of the bolt-ons that we did here earlier in the year with regards to continuing to build out our foot and ankle platform. So it's part of our strategy. It's part of our business system in terms of how do we do M&A, how do we integrate it well, how do we think about areas in which we want to continue to strengthen the organization or enter new adjacencies while we think about divesting other parts of the business. So it's all part of what we do on a daily basis as a management team of evaluating how do we want to go forward. And I'd say our track record has proven to say that we're very thoughtful about how we do M&A and how we bring it into the organization.

And then obviously, you're the CFO, so I've got you here. How do we think about the M&A on one side relative to the commitments you made from an LRP perspective? And you talked about 50 bps of annual operating leverage as kind of a floor and long-term targets of getting north of 60% on gross margin. I mean, is there a commitment to those on an annual basis? Or is it, "Hey, we've got a unique opportunity, let's invest and we can -- we'll push a little bit of that down the road"? How do you weigh the pros and cons of those types of decisions?

Yes. It's a good question, Kyle. I think from our perspective, we are very focused on, and I use this word a lot, shaping the business in the right way. And I think it's around trying to give us the right level of momentum to where we can continue the blueprint of making progress and still being able to add bolt-ons or other acquisitions without impeding that process. So if you think about what we've tried to do, we've tried to put some high-level strategic goals out there around high single-digit growth, north of $2 billion, north of 60% gross margins, runway to get above 20% EBITDA margins. And we're very much committed to get up that curve as fast as possible. But we're going to do it in a way that's thoughtful if there are good opportunities for us to bolster the company through acquisitions. So as we talk about 50 basis points or more of growth -- or EBITDA margin expansion every year, we're trying to take into consideration some dilution potentially that could come into the system from bolt-on acquisitions or things that we've seen like we've done in the past. But now that we've created, I'd say, kind of a portfolio that's more comprehensive in terms of where we participate in the orthopedic space, I'd say it's a lot more opportunities for us to bring technologies in and get them up the scale curve quickly than building out new platforms like we've had to do over the past couple of years. So I think there's more opportunity there for us. And then obviously, if there are adjacencies that we look at that we might want to go in that's kind of straddle areas that we already compete in, that could add some different nuances as we think about the integration as well.

Great. Well, thank you very much for joining us. We're just coming up on the end of time. I want to thank everybody for being here today, and thanks for the participation.

All right. Thank you.