Enovis Corporation (ENOV) Earnings Call Transcript & Summary

Good afternoon, everyone, and thank you for joining us at this year's Canaccord Genuity Musculoskeletal Conference. My name is Caitlin Cronin, and I'm one of the medical device analysts here at Canaccord Genuity. I'm pleased to be joined this afternoon by Enovis, a medical device company focused on products spanning the orthopedic care continuum, including injury prevention, repair and recovery, with the goal of improving patient outcomes and transforming procedural and clinical workflows. With me today is Ben Berry, CFO; Brady Shirley, COO; and Louie Vogt, Recon Group President. Before we begin, I want to remind everyone of any relevant disclosures which can be found on our conference and our firm website. And with that, I'll turn it over to management for a brief presentation.

Thanks, Caitlin. Good afternoon, everyone. I'm Ben Berry, the CFO of Enovis. I'm going to take you through a really brief overview of our company and then we'll spend most of our time just having a fireside chat here today. So Enovis, we're about a $1.7 billion company. We really focus in 2 primary segments. We're the market leader in our Prevention & Recovery segment, about $1 billion in a $4 billion to $5 billion market. Leading brands that you've heard of, DonJoy and Aircast, which really kind of drive our position within the market in terms of getting our name out there to drive growth in our fast-growing Recon platform. We've been growing double-digits in our Recon platform for over a decade. We've got some core innovation technologies that have been driving that growth, both in the reverse shoulder and the knee. We've been continuing to build this segment within our portfolio through acquisition. We've done over 20 acquisitions over the last several years, really building out our capabilities and our strength within the market, both within categories in which we play. So we established our foot and ankle business over the last couple of years through 5 acquisitions. And then we also expanded our global footprint with the acquisitions of Mathys and Lima, which just closed in January of this year. As I said, our growth formula is really driven by driving growth in our Recon platform. We are a small market share player in a very large market. Like I said, we've been growing double-digit for many years there. On the P&R side, we've been shaping that business platform to be a solid grower. Right now, we've been growing 3% to 4% over the last several quarters and continue to shape that portfolio for consistent growth. Through 9 months of last year, we were growing 8%, so the formula of driving that growth is working for us. And we continue to also drive margin expansion through 3 real clear categories. One is the mix of our business, driving more Recon growth, which comes with higher margins; getting leverage off of the acquisitions that we had in scale; and then operating leverage from the growth as well. The Lima business that we acquired in January of 2024 is going to add $290 million to $300 million of revenue, so take us over $2 billion of revenue in 2024, will increase our gross margins to over 60% and it will add $70 million to $75 million of EBITDA to the company. So really driving strong momentum, good growth capabilities and the opportunity to continue to drive leverage and scale over time. We're excited for another year at the Academy. We've got a lot of great technologies that we're going to be highlighting here across all of the various categories in which we play. We're really excited about some of the categories that have recently launched in our knee system, our revision system within EMPOWR. We just got FDA approval of the Lima TT Cones that can supplement that revision, so excited about the capabilities there to already drive some cross-selling synergies early in the marriage here with Lima. Some strong technologies on the P&R segment, both with the ROAM OA brace in a category in which we hadn't had very large market share but good product to allow us to get our entitlement there. And then the Intelect 2, which will help us drive some continued growth in the rehab segment. Excited about our enabling technology in Arvis and the minimally invasive products that we acquired through Novastep last year and then our Evolve34 device that's going to help us drive continued bunion performance in 2024. Overall, a good cadence and acceleration of innovation in our company. It's a very big focus point for us, something that we really are really looking towards driving good patient outcomes with all the products that we launch and accelerating the innovation momentum across our portfolio. With that, we'll move into the fireside chat.

Awesome. And maybe we can just start with the leadership transition that was announced back in December, Brady, you're retiring in 2025 and Louie, you're stepping up as the new group head of Recon. Brady, tell us a little bit more about this transition. Why is now really the right time? And what will you be focused on from now until your retirement next year?

Very good. First of all, I would just like to make sure everyone in the crowd knows so no one else asks me during this meeting that I'm actually retiring. So I really am retiring. It will be -- I'm not looking for something else. It will be April 1, 2025. So why is it the right timing? Honestly, about 7 years ago, we really defined the strategy that we've carried forth with so far and -- meaning that we're not finished. But the 2 bigger pieces of the strategy were to reshape our portfolio, and you've seen us do that, certainly imperfectly but with some great progress. And that was first and foremost. Second was we felt for us to have sustainable growth over time and performance, particularly as a publicly traded company, that we really had to grow our own talent. And we had to establish where we were going to be at that time, start to build talent and move to a place where we could really set the company up properly. It does not mean you can't bring fantastic talent from the outside. It doesn't mean we're still not trying to do that some. But we wanted to grow our leadership from within. So why does this timing work? Well, the timing works because 4 months after April 1 of next year, I'll be 60 years old, so that's part of it. But the bigger part is, those 2 pieces of our strategy, which was reshape the portfolio and have the right talent in place where we could really set the business up for the right next 10-year run, I feel like that those 2 people were in place. One of them is not here, his name is Terry Ross. And the other is Louie Vogt, that's here, and we separated the business into 2 segments, put the right talent and leadership there that we think will really drive the next decade of reshaping our business. So it's been a good run so far. It's going to be even better the next 10, and I'll be on the Board and I'll be all of these guys' bosses and all that.

And Louie, congrats on the opportunity. Can you give us a little more insight into your background and how your role is really changing at Enovis?

Sure, sure. So like Brady, I spent my -- most of -- in fact, all of my career, and you spent most of my career in orthopedics. I started out in 2001 at Zimmer, so this is my 23rd year. And I had -- I stayed there until 2017 so I joined shortly after they spun off from Bristol Myers Squibb and stayed on 3 years after the Biomet deal. I was fortunate enough to serve in many different commercial and product development innovation roles across the company in various different businesses, in ortho recon, total joint arthroplasty, extremities, trauma, foot and ankle, and then I finished at orthobiologics and sports medicine. So I got a good run up the ladder in a lot of the spaces that we compete in now and spaces of future interest. So yes, I joined Enovis in 2017 and took over sales and marketing and progressed my way up, and it's been an absolute treat and a fun ride. The company is quite a bit different now than it was in 2017, and we're heading in a much different direction at a different pace, which is really exciting. And I think the sky is the limit with what we have going on with Lima right now.

Great. And moving on off of that point, given Lima closed last month, what strengths really does Lima bring to your portfolio? And what synergies do you think you can drive as you integrate the business?

We may bounce that one around a little bit. I'll start this way and to say, one, we're always strategic buyers. We're not opportunistic. Our view with Lima was it really brought some of the financial components that we wanted in the reshaping of our business, both on the top side and the bottom. Two, because of that reshape towards Recon and wanting the right global presence, we viewed it as a player that -- before 2021, we were 95% U.S. with our Recon business, then we acquired Mathys and then with this acquisition of Lima, that puts us at about 50-50, which is quite balanced and really positioned well. The geographic presence was not really overlapping. Most of the countries were -- the historical Mathys was strong, Lima was not, and vice versa. So really made a nice layout when you looked at the fit as well as the products. I would also tell you that we care tremendously about really competing long term and constantly having the right balance of extremities in our portfolio. We're always staring at that 50% because we like how the shape is of the extremities market as the previous team before us was up here. And so Lima fit that really well as well. Lastly, I would say there were some fantastic technologies, both in the business as products as well as manufacturing technologies that we thought would be advantageous to our portfolio, the combined portfolio as we went forward. So it was a really well-rounded look, certainly a lot of integration to do, and it's where I'll spend most of my next year really focused there on that. So I don't know if I missed anything, guys?

No, I would just add to that, that I think one of the things that makes Brady the best leader in orthopedics is his love for people and his passion for culture. And having done a lot of these deals, one of the things that's unique about Lima is that we really share a lot of the same blood. We believe in the same things. We have a lot of the same values, behaviors. Our appetite for innovation and strategy and how we win is very, very similar. And I think it gives us a big advantage in getting this thing going and hitting the road hard right from the beginning.

And really tying that into your longer-term goals, you've discussed aiming for high single-digit growth in the business overall as well as about 50 basis points at least a year in margin improvement. How are you really viewing this longer-term guidance in light of the Lima acquisition?

Yes. I mean, it really just reconfirms the guidance that we've put out there. I mean, we've been deliberately trying to shape the business towards more of a Recon mix. And as Brady mentioned and now will be 50-50 as a company within Recon and then 50-50 within Recon outside the U.S. and still about 50% extremities. So if you think about our weighted average market growth rate, we're mixing to a higher weighted average market growth. And that's going to allow us to continue to drive opportunity not only to ride the wave of the market but then continue to take share as a small share player in that big segment. So we feel like the building blocks are in place to reconfirm the strategies that we've put out there with regards to our growth profile, and it further is accelerated by the Lima acquisition. I think Lima has been growing high single digits. Historically, over the last few years, they've been growing double digits. With our opportunity to really drive cross-selling opportunities and leverage some of their capabilities to drive innovation going forward, we feel like that double-digit momentum of Recon will continue, and that will continue to lift our growth.

One pile-on with Ben there and I think it's really important. It's important to us, Recon is built off of outcomes and we're an implant company. It's what we are. We're not an enabling technology company. That doesn't mean we might -- it doesn't mean we don't have enabling technologies for our implants but we're an implant company. . And what we saw in Lima was another company that culturally cared about income -- cared about outcomes and deeply cared about the technologies and how they would drive outcomes, and that fit is very unique. And I -- when you talk about growth, you talk about high single digit growth over time, the only way you do that is if you're really competing from an outcomes perspective.

Awesome. And then just turning to foot and ankle. You've worked a lot on shaping this portfolio into a diversified competitive offering. And I just wanted to spend a little bit of time digging into that. Have you surpassed the about $100 million revenue run rate that you predicted for 2023? And really, that's a competitive portfolio size in the space. And how do you view your competition as it relates to the larger strategics and the stand-alone players, given you are more of a formidable player in the space?

Yes. I'll let Brady and Louie talk about kind of the portfolio and the competitive position. But in terms of kind of the financial profile, we've been growing that foot and ankle business double digits. We're on the trajectory to be $100 million run rate at the end of last year, so we'll be into that range in 2024 for sure. So we've made some good progress, both integrating all of the businesses that we've had, maintaining the growth profile and getting them up the scale curve as well and really behind some really strong innovations, which these guys can talk about.

Yes. I guess the comment that I would say is, we very intentionally shaped the business across 5 acquisitions, a focus on outcomes, as you might imagine, and in many ways, kind of the advanced procedure approach. 4 of the 5 acquisitions that we made were extremely specific with what we viewed as breakthrough technologies in their own space that also could play across foot and ankle and even outside of foot and ankle. And that's what we've seen so far, whether it be the MedShape acquisition that we did first, which was fantastic, continues to be a really good growth driver in the business, including the most recent ones that we did last year with Novastep, the leading player in MIS bunion and just fantastic growth last year, the year before and the years to come. It's a neat space that there are some other really good competitors in, that are -- that have their own unique approach to it, and that's kind of the beauty of foot and ankle, is that there are still a lot of great opportunity for a lot of us, us but many others to continue to reshape how the patients do. And so we like where we're positioned. We've been very methodical about how we set it up, both from a product perspective and a channel perspective. And we're excited about the growth platform.

Just a quick follow-up on the channel. What does distribution really look like for you in the space? Is it different from the total joint channel that you offer?

It's almost identical, meaning it's predominantly agents, exclusive agents that's more difficult in foot and ankle and anybody out here that's been a part of foot and ankle would know that. And so it takes a lot of discipline and focus to get to a more dedicated channel. But we do have a hybrid as well with some direct. But at least our approach, and I've been asked this multiple times since we've been in the hip and knee space, are you going to go direct? How far direct are you going to go? Because I was a part of that with some of -- like some of the bigger companies. But for us, what we found is you can be dedicated in an agency model, but you have to be very disciplined and focused and not back away from that or you don't get exactly where you need to be and then that would force you to a direct. But we do have a blend in foot and ankle and it's very similar to what we have elsewhere.

And I just want to touch on your current positioning within the market. Remind us where you are from a market share perspective within hips and knees as well as shoulder.

So in the shoulder, we're largely #3 in most markets. Some markets we're #2 and then in a couple of markets, regionally, we're #1. So that's double-digit market share. We don't -- we haven't provided that, I don't think, publicly, exactly, perfectly. And so -- but we're a double-digit market share in the shoulder, higher in reverse than we are in anatomic and kind of built it out that way over time. And in hip and knee, we're in that 3-ish percent globally when you combine us, when you take historical what was DJO or Enovis legacy plus Mathys plus Lima, but by far the fastest grower as well, by the way.

Yes. On that point, growth has been really strong in knees and hips despite your lack of robotic technology. You spoke that you were...

Do you need a robot to sell hips and knees?

No, but...

I mean, the data I've seen says you don't have less revisions with a robot, but -- I'm having fun with you, Caitlin. I'm sorry, I jumped in on you. We're not the anti-robot company, by the way. I was just having a little fun. So yes, we've grown rapidly without it. And I want to tell you straightforward. I think I was asked a similar question last year, but I'd love to answer this question. Our knee patients post-operatively, 93% are satisfied, where in the marketplace it's 80%. That's how we've grown without a robot. And I think that I have great admiration for the larger companies that we compete against every day. And I think it definitely gives us something to shoot for because I think there's great companies there. And I think the robot has a fantastic place in recon orthopedics. So I like to joke about it, but I really believe that robotics and AI both will make an impact to orthopedics. Today, we haven't seen as much from an outcomes perspective impact, but I think we will over time.

Maybe just touch briefly on how Arvis has really evolved and how that is the enabling technology offering that works for your portfolio?

You want to take it?

Sure, sure. Yes. So look, I would say that enabling tech has a future in ortho recon and a big future. How that manifests and which part of the continuum it is, is a little different. And I think we're approaching it in a unique way, which is what's best for us, given our size and how we view the market going forward from a health care economic standpoint. So Arvis is a really innovative AR, mixed reality, augmented reality, is a really innovative way to take navigation and make it wearable and dramatically reduce the cost of use for -- to get orthopedic navigation and guidance. It's early, it's only been around for probably 5 years in orthopedics. So it's definitely one of the newest, if not the newest, category. We think we have the pole position in it in hip and knee and it has a bigger future ahead of it. In terms of how it's evolved, it was rudimentary a few years ago, and I would say that now people can do it faster and with as much accuracy as any technology that they're using right now. So we think it's a good club to play right now and it has a lot more upside with where we can go with it. Having the actual navigation be wearable, be very cost-effective and the camera is located on top of your head gives you an advantage about how you can register the anatomy and how quickly you can go through some of the time-consuming elements of registry and the navigation. So again, we think it has a big upside. It's very new to the world. We like being innovative and on the front end, and it certainly has the cost structure to play in a lot of different realms around the world and, of course, in the ASC market here, which is very important to us. So I think it's -- I guess to summarize, it's blossoming but it's picking up a lot of speed.

Maybe we could turn to new product launches in your pipeline. Just given the recent filling out your foot and ankle portfolio and also the launching of your Revision Knee solution over the past few years, what gaps are really left in your portfolio? And how should we think about which new product launches are coming in 2024 and which will be material growth drivers for you?

Sure. So the -- we talked about it, Arvis. There's other things blooming in that field for us but I've got to be careful with that. I know half of the people in the room are not in investment banking because I know them all. So I got to be careful about what I say here. But I would tell you that a big sort of next frontier for us in the recon -- or in the surgical space is Revision. I don't think that's a surprise to anybody. We've built really a big and very fast-growing business with barely competing in some of the more complicated parts of orthopedic surgery. So as we expand on that, we can cover a lot more of the market than we've ever been able to. And so we're able to -- we're getting to the point we're able to get all of a surgeon's business with our portfolio, whereas before, we could only get a portion of it. So that share of wallet becomes really, really important. It also opens up a lot of doors for targeting for us. So we can go after the market and parts of the market that we've never been able to do so. So in both our hip and knee business and also our shoulder business and even our elbow business, where we think Revision is really kind of the future of what we're doing. It manifests in some of the things you see here, I mean Lima's TT Cones, or their Trabecular Titanium cones are new. We just received 510(k) approval to use them with our EMPOWR Knee system, which is exciting. And then we have some additional cones that will be coming out later this year that we have been working on and then some advancements in our shoulder portfolio as it relates to Revision. So a lot of new stuff coming out this year that's going to open a lot of doors. We're very excited about it. But I guess, generally speaking, I think Revision is a big next horizon for the implant business.

And then just in the final minute we have here, we can touch on OUS. Lima certainly bolsters your OUS business, which you added to a few years ago with a European ortho company, Mathys. How is the European business doing? And how are the cross-selling opportunities going for you at this point?

Yes. I'll jump on that one first. What I would tell you is, they're not going as well as we would have liked them to, and it's not because the technologies have not been accepted. As a matter of fact, they've been widely accepted with great demand, but many of us suffered from some pretty -- some relatively challenging manufacturing partners in the early part of 2023. And so in that type of environment, you feed where you need to feed and we had tremendous growth going in our U.S. surgical business, and so we continue to feed that. We have great demand, whereas, I would say, 2024, we view as a breakout year really for us from a cross-selling perspective with the channel we already had and then add Lima to that and it just even makes it build further. So we think we'll see what we -- this EMPOWR Knee and the AltiVate shoulder really start to run in those markets as we step into 2024.

Yes. What's exciting, Caitlin, is with even some of those limitations, I mean, we still grew double digits outside the U.S. And Lima also finished very strong and has some good momentum as we start the year. So overall, even with some of the constraints, we're still able to grow our international Recon business double digit in 2023.

Great. We're out of time but appreciate you all for joining us today.

Thank you.

Thanks, everybody.

Thank you so much.