Enovis Corporation (ENOV) Earnings Call Transcript & Summary

Thank you. My name is [ Caroline Borowski, ] and I'm a member here at the JPMorgan Healthcare Investment Banking Group. It is my pleasure to introduce Matthew Trerotola, Chairman and CEO of Enovis, and Ben Berry, CFO of Enovis.

Thank you, Caroline. It's great to be here. Good morning, everybody. Good afternoon for those of you joining from the East Coast. We're glad to have an opportunity to present our company. You can read through the forward-looking statements comments at the beginning of the presentation. And then I just want to jump in on Slide #3. This is a page just as a quick introduction to our company. We're in Enovis, an innovation-driven growth company in the med tech space, focused primarily in orthopedics today. As you can see, we're approaching $2 billion in revenue. Our guidance for the year is in the 7.5% organic growth range. We've got healthy profitability with a good opportunity to continue to expand our profitability over time as we scale and improve the business. You can see the split of the business at the bottom. We're global and becoming more global, and we've got 2 major segments. And our Recon segment is a double-digit organic grower that we've been growing aggressively over time. It was less than 20% of our med tech business back in 2019. And as you'll see in a few slides, it's going to be almost 50% on a pro forma basis as we step into 2024. And then P&R is our prevention and recovery segment is really leadership positions and bracing and rehab and products that have some nice complementarity to what we do in our Recon business as well. The next page really focuses on our strategy and goals. And on the right, you can see our strategic objectives that we've been driving, really aggressive expansion at Recon. I talked about how aggressively we've been expanding that. Shaping and improving our P&R business is really reestablishing strong leadership positions in our bracing and rehab businesses and driving nice improvements in those businesses and really start to scale our company and get some of the margin benefits that come with that scaling. And really, the strategic drivers of how we've been doing that are things that go back into our history, as I'll talk about in the next page. We, for many years, as a company, have had a relentless focus on talent, really trying to attract the best team, engage the best team and make that a key part of our strategic advantage as a company. On the lower left, you can see EGX, that's Enovis' growth excellence. And that's our business system, which is a continuous improvement business system, which was really designed after the Danaher business system based on our heritage and innovation. We're very focused on innovation and driving growth through innovation, and we use our EGX tools to have great innovation processes, but then we also focus on driving differentiation and innovation, not just in the products but also a lot of focus on digital and driving innovation in workflows through digital technologies and really driving strategies to get at the data and all the opportunities that will come with AI and things for what can be done with that data over time. And then finally, acquisitions have been a key part of how we've grown and improved our company over time. We've got a very strong capability in this area to do great acquisitions and integrate them well and get great returns for our shareholders, but also drive our strategies forward and strengthen our portfolio. And on the bottom, you can see our strategic goals have been to drive to $2 billion in revenue by 2024. And really in '23 on -- as we exit '23 on a pro forma basis, that's about where we are. High single-digit organic growth, which you can see we're driving this year as well. And at least 50 basis points per year of margin improvement, which we've been successfully driving with an opportunity, we're just moving to the high teens here in margins now, have the opportunity we're comfortable to drive to above 20% margins and beyond over time based on the opportunities that we have in our businesses. This page talks a little bit about where we've been and where we're going. Really, in terms of our history, we were founded as Colfax back in 1995 by Mitch and Steve Rales, who founded the enormously successful Danaher Corporation. I spent a number of years in my career at Danaher as did some of our other key leaders. And our business was founded as an industrial company, really taking a similar approach in terms of having a strong business system based on Lean and continuous improvement and driving both innovation and acquisitions, as I talked about on the previous page as a way to compound value over time for shareholders. We -- over the past number of years, have focused the company in med tech with the final step of that being the spinout of our ESAB business as a public company in early in 2022 and the renaming of our company as Enovis, a focused med tech innovator. ESAB has been very successful as a public company. And as you can see in the middle, we're off to a great start as Enovis as well, growing actually before currency, comfortably into the double digits as a company, 9% CAGR when you factor in some of the currency headwinds through this -- through this period have increased our margins. This is a period where in the ortho space, there hasn't been a lot of margin improvement. There have been some tough headwinds. We've had good healthy margin improvement and have done about 20 acquisitions since 2019 in these businesses, and I'll talk about some of them as I go through the presentation. We step into '24 with a lot of momentum, a lot of opportunity. We just closed last week, the acquisition of Lima, which we had announced right at the end of Q3. So closed, right on track at kind of the early end of when we were focused on closing that deal on January 3. We've had a lot of opportunity to put together aggressive and thoughtful integration plan, partnering with them. And so we're really hitting the ground running. And the metrics that we shared when we announced the deal are still fully intact. And as I shared on the page here, we expect to have those come on top of our core guidance for this year. So great opportunity with Lima. I'll talk more about that. We've built the foot and ankle business over the past number of years. It's building great momentum as well as a strong grower and an exciting market. And we've really got some great NPI momentum. We had some great products from last year that are going to be ramping this year. We've got some great products we're launching this year. So really excited about the momentum we have as we enter this year. I talked about the Lima acquisition. This is really a big deal for our company, pretty transformative, especially for our Recon segment of our company. And obviously, we've been focused on aggressively growing that Recon segment. This shows you the impact that this has on a pro forma basis. We have about $300 million coming in, and it's all Recon. And so now we're at almost 50% Recon, which is the faster growing and higher gross margin, significantly higher gross margin part of our company. So that's very positive. We've become more global, but in a very attractive way in terms of which countries and what positions and a step change to our margins just on a pro forma basis and then a lot of synergy to get after that can create additional margin opportunity as well. So with this acquisition, we've got about $1 billion Recon segment that has very attractive mix, great opportunities for growth and profit improvement over time. This page talks a little bit about where we compete. We compete in the $50 billion-plus very attractive orthopedic market segment. Great long-term growth drivers on the right that are consistent long-term growth drivers for these orthopedic markets. And our recon business, the $1 billion recon business, competes in about $20 billion of this market. And what's very important is you can see that while extremities is a smaller part of the Recon -- of the surgical market here, it's the fastest-growing part on the page, and our Recon business is about 50% extremities. So we've got a very attractive mix in our Recon business. And we grow very fast in hip and knee as well. Our P&R business is in that $5 billion slice that cuts across the whole market. We've got about $1 billion or so position in that, so more leadership positions here. And what's great about these businesses is that they're adjacent to all these surgical markets. And so the surgical markets we're in, we've got synergy opportunities. The ones we're not in, we know quite well from our participation in P&R and we can make very thoughtful decisions about which of those we do or don't choose to participate in over time to keep our company very strong and differentiated. This is a different view of where our company fits into the orthopedic space. We think this is a very attractive position, this middle tier, where we are a scaled player that has good solid margins, opportunity to keep scaling an opportunity to generate strong cash flow over time to fuel our growth. But at the same time, we've got room to choose where else we participate in orthopedics, plenty of room to grow without having to slow down our growth rate. We can pick and choose how we grow our company, where we grow our company in orthopedics and when we might choose to go into attractive adjacencies to orthopedics that have strong growth and margin fundamentals as well. Also terrific that Orthopedics has a nice fragmented base that you can see from the page before. We've already taken advantage of in terms of driving strategic acquisitions that accelerate our strategies, shape our businesses in an attractive way and have great returns for shareholders. And there's plenty more of that opportunity in the base of this pyramid. We also have a unique position in orthopedics in terms of where we fit into the care continuum in the industry. And we think this is becoming more and more important over time based on some of the trends in the industry. We are the only player in orthopedics that participates significantly before, during and after the surgical procedure or the injury. And that has given us opportunity in terms of brand leverage, in terms of awareness with clinicians being able to leverage surgeons to help us with surgical designs but also help us with bracing designs, for example, but more and more, it's creating a new and even more powerful strategic advantages. We've driven digital workflow advantages in clinics that give us an advantage in the industry. We have connected medicine products, both connected braces and also more app-based connected recovery products that create synergy across this continuum of care. And as the ASC becomes a bigger and bigger part of this industry, as a place to do the surgery, many ASCs participate in multiple parts of this continuum of care. And so the fact that we are known there, that we have access there that we have opportunity to bring solutions that can cut across that is something that gives us a benefit today in terms of our success and ASCs and some that we envision additional opportunities over time. Talking a little bit about our Recon segment. This is a pro forma view where we've kind of included in the Lima business, so you get a feel for as we've closed the business last week, what our Recon segment looks like. It's about a $1 billion segment, about 50% extremities, which if you remember, is the fastest-growing part. It's also a higher gross margin part of the industry as well, which is terrific, it's an advantage for us. We also are about 50-50 inside the U.S. and outside the U.S. and our participation outside the U.S. is in -- mostly in the most attractive markets outside the U.S. And so I think we have the opportunity to keep building a balanced global business and participate in the best segments, in the best markets disproportionately over time. Great technologies across the bottom here in terms of our key implant technology we've had in Enovis, but then others that have come through the acquisitions and a great opportunity to keep growing double digits in this Recon business, get after the growth -- the synergies that are coming from the acquisitions as well and really leverage a number of great technologies that we have both in terms of kind of traditional technologies for designing implants, but also enabling tech, ARVIS, I'll talk about in a minute, our augmented reality solution and other enabling tech that we can bring over time. So just terrific opportunities to keep growing double digits in this very strong Recon portfolio and the acquisition we closed last week just strengthens that even more. Our double-digit growth in Recon is driven by innovation. That's the primary driver of our double-digit growth. We have a reverse shoulder and a knee product that are just better products. The reverse shoulder has been the preferred way. It's been kind of accepted now as the best way to do a shoulder and the lateralized and inferiorized in the U.S. has really become the accepted way to do a reverse. And so we've got the product that's been around the longest has the most data and really the best reverse shoulder. We've also got a knee product that is just kinematically better knee, a dual pivot knee that acts more like your natural knee and it really tapped into an unmet need for higher satisfaction, having a patient feel more like their knee was their normal knee. And we've driven a ton of share with these 2 flagship products in the U.S. and now have all kinds of landscape outside the U.S. in terms of cross-selling opportunity. But then we've been innovating on top of these, of course, a continual pace of innovation. A big one in knee is our revision that we brought out last year that access is another almost 20% of the knee market for us. In shoulder, we've got augmented glenoid coming through the pipeline that are important innovation there. And beyond the implants, our ARVIS enabling tech is just broadly launched second half of last year is really kind of the next wave in enabling tech, particularly fit for the ASC environment. I'll talk a little bit more about that. We've built a great foot and ankle business, and a number of great technologies that are differentiated, better outcomes, better surgical procedures, and we've got this great opportunity to expand our business globally and drive a lot of cross-selling opportunity. So we've been driving double-digit growth through innovation, and we're going to keep driving. Now I get asked a lot how the heck do you grow double digits in Recon consistently? And how much longer can you do this for as you become a larger player? Now we're about a 5-tier player globally in Recon. So we're big enough to be a top-tier player in the industry, but we're far from running out of running room. Little bit of detail here just because that question comes up so much. This is a page without Lima, which shows the split of our Recon business, the growth rates, you can see that our weighted average market growth rate is above the market because of that great mix I talked about. So we're already starting at about 5% to 6% weighted average market growth rate. And then we consistently have grown above market. I'll show you a decade of history on this, but we've consistently grown above market in each of the anatomies and we're expecting to be able to do that over time, plenty of running room the way we see it. And you can see 9 months of '23. '23 was a year where there was some tailwind on Recon markets, right? I think if you look around the industry, you'd probably say there was at least a point or two of growth tailwind in '23. And so that 15% 9 months, okay, maybe that's more like 13 or 14 in a normal market environment, but still very much within that 10% to 15% that is our focus for growth for these markets. Now Lima comes in with a better mix in the international Recon business that we had. So it shapes up the WAMGR of that piece by a little bit. And for the last couple of years, they've been growing well into the double digits, well above market. And so if anything, that enhances our ability to drive this kind of growth in our Recon business. Now this is not a flash in the pan. This is just the U.S. part of it that we've had the longest 10 years of double-digit growth on the shoulder side on the hip and knee side. And we get a lot of questions about whether -- without a big robot in knee, can we keep growing. We're 21% year-to-date last year through the end of the third quarter in hip and knee and the knee growth is higher than the hip growth. So even in an environment where there is enabling tech and robotics and things, we've continued to drive tremendous growth in our knee business, and we see plenty of opportunity, especially as we bring ARVIS into the market late last year as well. Enabling Tech is a really important part of how you succeed in the Recon business today and into the future. Our strategy is really what's on the page. We've been focused on this strategy and been driving this strategy. We're really focused on the right enabling tech for each anatomy. We see this -- this is about workflow. This is about a surgeon's workflow and how you come alongside of that use technology to make it better. And so in shoulder, we've had industry-leading preoperative planning and patient-specific instrumentation. In ankle, we launched last year, industry-leading planning and instrumentation as well. And in knee and hip, we launched ARVIS, which is a really -- the next wave in technology for guidance to enable the surgeon, to plan their surgery, feed it into the surgical procedure and then be able to make their own judgments in the procedure, but be able to see the plan overlaid right on to the patient. And we're finding a lot of surgeons find that very attractive and even more attractive maybe than having a robot do it for them. And it's also just a tremendous fit for the ASC environment as well. And we're really focused on making sure that these offerings really take into account how much of the market is moving to the ASC. And so we keep the capital cost manageable, make them time and space efficient and make the footprint small because that's what people need in these offerings in the ASC. And we're finding that, that's being very well received by the market as well. We also have the opportunity, certainly over time to take ARVIS into other anatomies. It is primarily software-based, and that means that the path to develop it into other anatomies is one that does not take too much time or cost. And so right now, really ramping in hip and knee and particularly knee, but certainly an opportunity to take it into other anatomies and an opportunity there. M&A has been a key part of how we grow. This page highlights the M&A that we have done in Recon, 2 big globalizations through Mathys bank in '21 and then Lima closed last week. The Mathys deal has been very successful. We've exceeded our revenue, cost, margin returns on that deal. So very successful deals showing that we can do this, we can do it successfully. And now Lima comes. It's a tremendous business to add in its own right, but then it's got great synergy with Mathys and with our U.S.-based business. We did a handful of acquisitions that built a great foot and ankle business that is kind of rounding the corner on $100 million of revenue globally as we move into this year, double-digit grower, great technologies in the space. And then we've done some great investments and acquisitions and the enabling tech space as well. The ARVIS was something we made an investment in Insight, came alongside of them and developed together and then wound up buying out the company at the appropriate time and bringing it in and now using it to develop other things. I want to switch gears and just talk for a minute about P&R. Our P&R segment is about a $1 billion segment in a $5 billion market. So about 20% or so shares. So we have leadership positions in bracing and rehabilitation technologies. And we really -- have been really turning this business back into a very strong leader by getting the innovation content up by driving a lot of improvement in the supply chain and service in this business. And by driving differentiation in the workflow in clinics and orthopedics with our MotionMD solution. This page gives you a little bit more flavor for this P&R segment. It is a strong, low to mid-single-digit grower that has good margins that we keep improving and good strong cash flow. And it's a great complement to our Recon business because it gives us the cash to drive the strong growth in that Recon business. The biggest parts are bracing and RS. Those have been growing in that low to mid-single digits range. So plenty of opportunity to continue to grow this portfolio consistently in low to mid-single digits. Profitability has been improving and at 14%, still has got room to go from there. And while we had to sink some cash into this business, during the pandemic, as everybody did with having to kind of put extra inventory in the system, et cetera. Now as we've come through the backside to a more normal environment and having our EGX driving improvement through this business, we're getting 100% plus cash conversion with that opportunity over time as well. Innovation was close to nothing in this business back in '19 when we acquired these businesses. Now is double digits vitality on the way to high double-digit vitality and that's part of how we're driving consistent share gain in our P&R businesses. And then finally, in P&R, in bracing MotionMD has been a significant advantage for our business. So we have brought to the market a software-based workflow solution that is integrated into the ERPs of the orthopedic clinics. We are integrated into over 40% of the orthopedic clinics in the U.S. And when we get that position, we get more share of wallet, higher gross margins and more stickiness because of the value that we are bringing to those clinics and so that's something that is helping us to grow above market in bracing and will continue to help us on a go-forward basis to grow above market in bracing. And it creates some interesting opportunities as now like some of those clinics are actually part of ASCs. And so all of a sudden, we're now -- we're there and we're running the orthopedic clinic in an [ ANC ] environment, we're very relevant there to my comments earlier about the strategic advantages that are created along the continuum of care. So I'll wrap up with this page really just talking about the strong progress we've made on our key goals and the great momentum that we have as we step into 2024. We've been focused on building a high single-digit grower as Enovis that is double-digit Recon and consistent low to mid-single-digit P&R. And that's exactly what we did last year with 8% year-to-date, 9 months. We've also been focused on driving expansion in our margins at least 50 basis points a year and have continued to do that for the last couple of years as well. And what's great about that is it is GM led. So we've been expanding our gross margin significantly, especially because the highest gross margin parts of our portfolio grow the fastest. And that's enabled us to invest in things like enabling tech and key technologies that are going to fuel growth in the future. And then we still have plenty of room to keep scaling our OpEx base over time. So stepping into 2024, great opportunity, expecting the market to probably have a little tailwind on it again in 2024 as there's still a backlog out there in terms of elective procedures, great innovation momentum for us. We've been working hard to make sure that we're driving pricing and fighting inflation and making sure that we're ready for whatever environment continues to unfold there and scale in and getting after the synergies in our acquisitions. So great momentum as we step into 2024. Excited to talk about it as we work through the year. Thank you.

And I'll move on to the Q&A portion. So you talked a little bit about 2023. Can you provide any update specifically on it?

Well, as you see in the presentation, we shared what we had given as the guidance at the end of the third quarter. We also shared the kind of Lima numbers that we announced at the end of the third quarter. And so we're comfortable there was good strong finish to the year, excited about the momentum coming into 2024, but we're not giving any official update on 2023 beyond what's in the presentation.

And in terms of 2024, how are you thinking about the year from an operating environment? What are you assuming about markets, elective trends, recessionary pressures and all of that?

Yes, sure. From a market environment, certainly, we're watching carefully how things go as we start out the year. But we feel like elective surgery had a good, healthy finish to the year. And so there's every reason to believe that there'll be a good start to 2024. As we've talked about and others have talked about, there's -- there's certainly good logic that would suggest that there could be another year of tailwind on the elective surgery markets because there certainly is sort of a backlog of unserved patients that still need to come through the pipeline, but we'll be watching carefully how that plays out. Especially in the first part of the year where things were pretty hot earlier in the year, last year. And so we certainly expect a good healthy start to the year. Whether there'll be any extra tailwind early in the year or not, we're kind of waiting to see how that plays out. Inflation is more stabilized, but hasn't gone away altogether. And so we're certainly pleased that it is a much better inflation environment than it was a couple of years back, but we're still working hard to make sure that we're getting price wherever we can or minimizing price erosion where we can so that we can kind of deal with some of the things like labor inflation and things that continue to come through. But we feel very comfortable with our ability to continue to hit the kind of margin goals that we've talked about of at least 50 basis points a year.

Awesome. And in terms of M&A, the Lima acquisition of data that you provided, you closed that recently. Do you mind kind of providing any updates on integration plans and key milestones for 2024 on that?

Yes, for sure. I mean this has really gone very well. We got -- we announced it there at the end of September. And had a great opportunity from -- for 3 months to work on integration planning, together. And we've got -- as we've shared publicly, we got Brady Shirley, taking the leadership of that and really focusing a large portion of his time on making sure that, that deal is a great success. We've got strong experienced integration leader, a great team on both sides. And so we have done really terrific integration planning through the last couple of months of last year. And so I feel like we're hitting the ground in a terrific place in terms of good alignment on priorities and an ability to not miss a beat in terms of some of the core things going on in the business and start getting after the synergy opportunities very quickly.

And can you maybe walk through the specific guidance you would have given for year one? And any plans for dis-synergies from the integration process for Lima?

Yes. We've contemplated that in the numbers that we've given in terms of what we expect 2024 revenue and EBITDA to be. So if you look at -- you have some public information out there on Lima because they had debt, they were publicly talking about. So overall, we would say you can kind of do the math based on what they had kind of done and where they are kind of projected to land for this year and kind of look at what we've guided and you can kind of do the math to understand what the dis-synergy that we've planned and incorporated into our guidance. We know that there will be some based on all the acquisitions that we've done and the history that we have of integrating the channel. We know there'll be some disruption, so we've been a bit conservative on our approach there, and we're doing the hard work of the integration to make sure that we hit the ground running as we've started the year here with them as part of our company.

Great. And in terms of your leverage, where does that stand post-Lima?

So it'll be about 3x leveraged in 2024 with Lima, so pretty comfortable position. The capacity to do some small bolt-ons, but we're going to be very much focused in 2024 on integrating Lima and doing it well. And I would say our kind of acquisition appetite is much smaller as we do the work to make sure that the integration goes successfully.

Awesome. And maybe in terms of M&A on a more broader scale, will we see more technology and tuck-in acquisitions, where are you focused? What are potentially some bigger opportunities or valuations changing? Can you just kind of describe your acquisition pipeline?