Enovis Corporation (ENOV) Earnings Call Transcript & Summary

Yes, sure. So one of the things that I'm most excited about is we can take the best of the portfolios across Enovis, Lima and Mathys and really think about how do we innovate for the future. But in the near term, there are things that we can take advantage of. And if I think about Lima, let's just start with the U.S. business. They have a 3D printing capability that's really interesting, but also produces good products and augments that we're able to leverage right away. So very quickly, we were able to get FDA approval to use their products with our Revision Knee, our EMPOWR 3D Knee, their cones, and we're able to capitalize on that, which was a gap that we had in our Revision system Also, they have a pro made product line, which is a 3D printed custom product line that's used for very complex cases. We're able to leverage that with some of our surgeons on the Enovis side. And then also they have a shoulder portfolio called the SMR system, which is a more modular based system, which you can do both anatomic procedures, reverse procedures, revision procedures. And it's a complement to what we offer with the AltiVate. So it feels like it opens up access for us in terms of surgeons that we can target for conversion and market share in the U.S. Those would be the 3 I would highlight in the near term in terms of what we're focused on. Outside the U.S., it's really around how do we leverage the channel to maximize the portfolio that we have. So I think AltiVate can play into certain markets in which Lima was strong, same with the EMPOWR 3D Knee, which we had started to do in the Mathys channels. But now it just gives us more access to more geographies to where we can drive those product lines into those markets. And then vice versa, within Lima, leverage some of the Mathys hip products and then in the Mathys portfolio leverage some of the Lima shoulder products as well. So there's a lot of opportunity for us to really think about how do we maximize the portfolio here. that's a lot of the work that we're doing on top of aligning the channel to make sure that we get it right.

Got it. And maybe the last one on Lima. I think you've said that you expected more than $40 million in cost synergies. I believe you're on track for that. So I guess, again, your confidence level in getting that. How is that progressing? And maybe where are some of those cost synergies coming from?

Yes. I'm very bullish on it. I think we've gotten off to a really good start. Like I said, we were able to announce the leadership structure going into the year. So really get after some of the choices of where there was management layer overlap and get after some of that synergy where Mathys and Lima and Enovis were all going to various trade shows and not needing to use multiple duded, and things like that are things that we're able to leverage, insurance to where they're under now the Enovis umbrella for insurance. So there are some near-term overlap duplication things that we could get after right away, which we've done and feel like we've gotten off to a really good start there. I think what I had said previously was about $10 million to $15 million in Year 1 that would ramp up to $40 million plus over time. I feel very bullish about our pathway there and feel very confident that we'll be able to deliver that.

Great. Now let's kind of move into some of the businesses. So P&R, obviously, well-known brand. It's kind of been a steady mid-single-digit growth business. And maybe just talk about some of the growth opportunities within that business. Is it always kind of going to be in that mid-single digit? Or is there an opportunity to accelerate that even a couple of points, which would make a big difference?

We're definitely working on it. One of the things what happened when Colfax acquired DJO is recognizing that the innovation pipeline and cadence of new product launches had been underinvested in. So one of the things that we've been doing over the last few years is to really refill the pipeline within P&R, some of that through acquisitions. So we acquired a small laser business on the rehab side. That's really doing well for us. It's been growing double digits for the last several years. It comes with higher gross margins. So it really mixes the business in a more meaningful way. and then really trying to get the product vitality up the curve in terms of new products that are coming out more consistently because being the market leader, it's on us to really innovate and make sure that the market is growing based on that innovation. So we're starting to see a more, I'd say, rapid case of innovation within our P&R business to where new products are flowing more consistently now. One of the most recent ones we launched, which was a ROAM OA brace, where we've been the market leader in a lot of the categories in bracing in which we compete. But this OA bracing category is one where we didn't have the same share position where we had in most of our other categories because we didn't have a product to really offer there. So this product launching there, about a $50 million category, gives us ability to really kind of take market share and get our entitlement there. So I think our view is that we've continued to improve the cadence of innovation on P&R. We've done some small shaping moves that will help it. And then there's some opportunities for us to prune some of the portfolio as well and think about other options there to make sure it's a very focused portfolio. So our view is to continue to shape it towards a more mid-single-digit growth business. But one of the things that we really like about P&R is it's a low capital intense business. So one of the things that it does for us is it creates a lot of cash flow to help us fund a lot of the growth in the Recon businesses that's required. So we've been leveraging it for that as well.

Got it. And maybe just following up on that. I mean, how do you think about that cash flow piece versus investing in some new products? It's certainly a balance. The markets are probably more mid-single digit growth. So it's not the fastest growing markets. But how do you balance how much do you actually invest in the P&R business?

Yes, it's a good question. I mean our focus is prioritized investments. So what we're trying to do is free up investment from other areas to rebalance where we're putting that investment so it can go into places like R&D. So one of the things that you've seen from us is you've seen scaling of the business and improvement of margins. Last year, we improved margins and P&R gross margins by a decent amount. And that allows us to think about how do you rebalance some of the investment. But we see a runway there in terms of continuing to scale up our gross margins, leveraging our business system to really drive good productivity. If you recall, that business has been under a lot of inflationary pressure over the last couple of years. So one of the things that we've done is really focus on how do we get on the right side of that price/cost equation on the P&R side of the business, and we've been more aggressive there. But over time, I think you'll see us continue to expand gross margins to try to both expand the cash flows of P&R, but then also free up some of the rebalancing of investment as well.

Got it. Helpful. All right. Switching over to Recon. And it's interesting you guys, obviously, a lot of large players in the space. You guys have competed very effectively in shoulder hips and knees for a number of years, outgrowing the market in general. So maybe what are some of the things -- I mean how are you doing that? What does Enovis do that helps them compete against the bigger guys?

Yes. I mean it's a playbook for sure but one of the things that it's based on is really making sure that we have good products that are delivering good outcomes. And if you think about the success that we've been able to use to leverage the growth that we've had in Recon, over the last many years where we've been outpacing the market is it starts with innovation and new product cadence of building out our bag and our product offering with meaningful innovation. Started with the reverse shoulder that we launched, AltiVate, back several years ago to where that's really taken the market and shifted the U.S. shoulder market towards more revision -- or not revision but reverse shoulders. And that really helped catapult us as a pretty well no-name player in Recon, like we were known for P&R, but allowed us to gain a foothold to where we became the #3 share player in shoulder. We did something similar with regards to innovation on the knee. We had a design around the knee that needed to be modernized a little bit. But it's a design that's really focused around the natural kinematic motion of how a knee moves and it's the only product like it on the market. So it's a need that it's in 2 ways, depending on if you're walking or squatting, and it mimics the natural motion of how the knee moves. And what we're seeing there is based on now several years of data that we're solving a bit of a patient satisfaction gap with that product line. So it's getting about 93% of patients coming back and saying, hey, it feels like my normal knee, really good satisfaction, good outcome, whereas the market itself is probably about 80% satisfied. So we feel like differentiated technologies that are focused on strong patient outcomes is one critical factor, but then also making sure we're supporting it through KOL advisory teams, making sure that we're finding surgeons that really care about innovation to really help present and publish research around the product performance to be on the podium talking about the benefits of our products, and then diversifying our product lines with some of the acquisitions that we've done. And when we do acquisitions, trying to make sure that it's focused on some of those core principles around innovation. So the foot and ankle businesses that we've acquired, we made sure that there were some clear product lines that were differentiated that we could leverage and then make sure that we create a sales channel aligned and motivated to be a growth business. And that's the other thing that we've made sure that we've done. And then building out our presence with acquisition is kind of the third component.

Got it. I want to talk about you're fighting the fight against robots now, right, in hips and knees and all the big guys have them. You guys do not. So how does that impact your strategy towards -- to compete?

Yes. Robots have been on the market for a while, and we've still been able to outpace the market in hip and knee growth in the face of it. We definitely see it as a threat because you can't deny what some of the larger competitors in the space are doing to promote it in the marketplace. So I think our view is that don't be blind to the threat but think about what we're trying to accomplish with robotics or enabling tech in general. So what we're trying to do is create products that are really helping to enable the implant, the optimal implant performance. So our first step into that has been through augmented reality and navigation through our Arvis device. So we're focused on taking a strong preoperative plan, putting that intraoperatively into a navigation device, let the surgeons still be at the center of the surgery and have the flexibility to have their eyes on the surgical field at all times but then also to have the flexibility to navigate as they're intraoperatively in the procedure. We think there's opportunity for mechanical intervention that can help offload some of the pressure on the surgeon over time from a precision, repeatability standpoint and just taking some of the wear and tear off of the procedure. But our first step has been through navigation, but we're continuing to innovate across what we'd say that continuum of computer-assisted surgery.

And maybe ask specifically on shoulder. And there's a lot of enabling tech. I believe you have enabling tech for shoulder. Robots are here coming for shoulder specifically. So the dynamic within shoulder, it's probably -- it's still -- it's much earlier than it is in hips and knees. So how do you see the enabling tech robotic evolution within shoulder given that it's very, very early?

Yes. I think that's one of the things where we launched Arvis with the intent that it could cross both the hip and knee and on the shoulder side. And we thought that on the shoulder in particular, navigation would be really important because it can be a little bit more of a creative and complex procedure. So having a device that's really taking a really strong preoperative plan tech that we have with our Match Point solution and taking that and bringing it into a device that's a headset that's mobile. And one of the things that you realize within shoulder surgeons is the volumes are a lot smaller. A lot of shoulder surgeons out there do less than 20, 30 cases a year. So think about the economics of trying to afford a really expensive robot system. We think that a device like Arvis really could play well there in terms of shoulder enabling tech. And then also, as you think about shift to ASCs at the same time, one of the things that we're trying to make sure that we do with enabling tech is make it accessible across various types of points of care like ASC setting. So one of the things that we're doing is making sure that we can provide things that will help not add time and extra cost to the procedure. So when you're in pressured situations like an ANC environment, was focused on volume and efficiency, that we have products that can support that shift as the market moves more towards those settings.

Got it. Maybe shifting to foot and ankle to a much smaller piece of your business. You mentioned Mathys, there's been a couple of other foot and ankle acquisitions over the last couple of years. So just talk about the strategy there, how do you allocate resources to some of the innovation that you're looking for on the shoulder and hip and knee side versus foot and ankle?

Yes. One of the things that we do and one of the things that we think is really important in terms of our strategy to win in the marketplace, is we run more of a business unit structure within our company. So we have a dedicated team that's focused on foot and ankle, and that's all they're focused on, is driving foot and ankle. The sales channel is foot and ankle specialists. The R&D and the general management and all of the support is really isolated to focus on how do we continue to drive growth in that business. And what we've seen as we've acquired 5 companies and put that together to make sure that we have a really nice broad portfolio offering it's anchored around a few different pieces of innovation. One being the MedShape acquisition that we did, which gave us a DynaNail product, which is a fusion technology that really drives better outcomes in terms of things that were used to be done with plates and screws. And then we acquired Enovis Stet business, which brought us minimally invasive bunions. So we've got products that span the forefoot, the midfoot, the hindfoot and the total ankle. And what we feel like is putting those 5 businesses together -- I mean, I talked a little bit earlier on about some of the channel dynamics of putting Lima into Enovis, we have that fivefold with putting 5 sales forces together with the foot and ankle businesses that we've acquired. So we've gotten behind that now to where we're more on offense. And what we're seeing is really good momentum in the foot and ankle business growing double digits, and we see a lot of good opportunity for growth there.

Got it. About 1.5 minutes left. Maybe just to end on M&A. As you've talked about, you've been a very acquisitive company over the last several years. Lima is, I think, one of the bigger acquisitions that you've done, if not the biggest, then -- just how do you think about M&A now? And do you have to get Lima integration behind you before you do any more?

Yes. So M&A is really a core part of our business system. So we're always thinking about how do we use M&A connected to our strategy to make our business stronger. But in order to do that, it has to be successful M&A. So we have to make sure that we're integrating and executing well. So what we've been very focused on in 2024 is we've got to get the Lima integration on the right pace and on the right track. So it's going to take a lot of organizational focus and effort to do that, to where if we did a lot more M&A in 2024, it would be too distracting and I think it would put the execution of the Lima integration at risk. So our focus right now in 2024 would be some small bolt-on type things, maybe on the P&R side, maybe some portfolio shaping that we could do there. But if anything, it's going to be small and minor while we make sure we're focused on Lima execution in 2024. I think the aperture opens up a little bit more in 2025 but It has to be aligned with our strategic intent to continue to grow high single digit, expand margins and create some of that compounding value.

Great. With that, I think we're out of time. All right. So thanks, Ben.

Appreciate it.