Enovis Corporation (ENOV) Earnings Call Transcript & Summary

Hello everyone. Thanks for joining us right after lunch. My name is Brandon Vazquez. For those of you I haven't met, I'm the covering Analyst at William Blair on Enovis. I'm required to tell you for compliance, please go check the williamblair.com website for a full list of disclosures and conflicts of interest. We're happy to have with us Enovis today and the CEO, Matthew Trerotola, who's going to go through a bit of an overview of the company with us. Maybe we'll throw in one or two questions at the end here on the webcast. But then if not, we'll go over to a breakout and do some more detailed Q&A. So over to you.

Thanks Brandon. Hey, everybody. Thanks for coming. I'm glad to have a chance to share our company with you. You can read the forward-looking statement warning. I'm going to start out just with an introduction. We're at Enovis, an innovation-driven growth company, in the MedTech space, really focused in orthopedics today. As you can see from the page, we're about a $2 billion revenue company, healthy profitability, but certainly with still room to keep expanding the profitability. And we've been growing in the high single digits range organically, just about 8% last year. Our guide for this year is 5% to 6% pro forma growth which is -- we're -- as I'll discuss, we've got a significant acquisition that we are integrating that has some dissynergies related to it. So there was sort of a 7% organic growth guide that we had independent from that pro forma growth guide. So still very much executing within our strategic goal of high single-digit organic growth. You can see from the bottom that our company split pretty evenly between Recon and prevention and rehab and is pretty balanced between U.S. and outside the U.S. Nice to have that strong U.S. presence, which is a very attractive markets for us, but also a number of attractive positions outside the U.S. as well. Our Recon segment is our growth engine. It's been a double-digit organic growth engine for many years, and it's been mostly U.S. based. We did a couple of acquisitions that have globalized that business and expanded it significantly. And we also did a handful of acquisitions that moved us into the foot and ankle part of Recon, which is a very attractive part that we were not in. Our P&R segment is our cash engine. It's more of a low to mid-single-digit growth business, nice diversified and uses within the orthopedic space. We're the global leader in sports medicine bracing, global leader in key areas of rehabilitation, including a really nice, fast-growing laser technology business in rehab. And we've been driving not just traditional innovation here, but also software-based innovation, particularly in the U.S. in the orthopedic clinics where we've got a solution that has been reshaping how those clinics do their business. I'll talk about that a little bit more later. This page focuses on our strategy and how we execute. We've been focused on aggressively expanding the Recon part of our company. It's high growth. It's high gross margin, a lot of attractive runway there. We've also been shaping and improving the P&R part of our company. I'll talk about that a little bit and scaling our company, driving up the margin curve and getting ready to drive up the cash conversion curve in the coming years. Strategically, we're focused on talent, first of all, really making sure we work very hard to have great talent, develop that talent and have that talent be highly engaged and empowered to execute our strategies. Second, a lot of focus on innovation, both traditional innovation and increasingly on digital innovation and using that to really drive improvements in our workflows and the data capture within our businesses. We have a business system called EGX Enovis Growth Excellence, which is a lean continuous improvement based business that we use to drive improvements in all parts of our business. It's a set of tools and also a culture with a focus on that continuous improvement. And then finally acquisitions. We've got a very well-honed capability to do great acquisitions and do them well and get the strategic benefits and the returns on the back side. From a goal standpoint, we have been focused on driving high single-digit organic growth and then supplementing that with bolt-on acquisitions beyond that and at least 50 basis points a year of margin expansion with opportunity for more at times, but sort of a year in, year out, 50 basis point improvement. We've got a rich history. We've got a lot of momentum building and really great opportunities ahead. We were founded as Colfax back in 1995, by Mitch and Steve Rales, the founders of the extremely successful Danaher Corporation. I spent a good chunk of my career at Danaher leading businesses and groups of businesses there. And as a company, Colfax had a strong and proven history of kind of creating and driving a business system that was modeled after the Danaher Business System, driving a culture around that business system, innovation focus and successful acquisition engine. We went through a reshaping of our company from a diversified industrial to now a focused MedTech player that included acquisitions into the businesses that we're in today. But then also divestiture of some of our industrial businesses that we had improved over time. And then about 2 years ago, we spun off our ESAB business as a freestanding public company, that's a leader in the welding and fab tech space, and we renamed the company Enovis really -- to really signify our focus on innovation and vision of the future as a MedTech Player. And we're a couple of years into our life as Enovis. You can see we've been growing the company well over the past few years. The organic growth rates are kind of in the high single-digit range. This is an all up growth rate. that's got a little acquisition tailwind and a little bit of currency headwind. We've been continuously expanding our margins in a period where a lot of orthopedics players struggle to expand margins from some of the inflation and things that came through the system, in this period. As we look to 2024, early this year, we closed an acquisition of a company called Lima, which I'll talk about a little more, very important acquisition for our company. We have -- the fourth quarter of last year, did a lot of great acquisition planning after the announcement, hit the ground running, closing the deal at the beginning of the year and have a great start on that acquisition. All the financial metrics that we announced, at the time that we announced the deal, were then put into our guidance for this year, and we're tracking a little bit ahead of those after a quarter of the year here. In addition to the Lima acquisition and how it affects us here in '24 and beyond, we've built a great Foot and Ankle business that is really ramping and hitting its stride here in '24 and going to be a great growth contributor over time. And we've got organically a really robust pipeline, some great NPI that came through late last year and some great NPI coming through this year across the businesses, that is really going to help to accelerate us as we go through this year. We address a very attractive $50 billion-plus orthopedic market within the $500 billion MedTech space. The growth drivers on the right, you'd be familiar with orthopedic growth drivers of aging population, active population transition to outpatient care in the ASC environment. You can see on the left, most of the orthopedic market is surgical, and we play in about half of that hip, knee and extremities, shoulder, foot and ankle. And what's important there is that you can see that from a market standpoint, the extremities grow a lot faster than hip and knee, but it is a smaller part of the market. For our business, about half of our business is extremities. And so we've got a mix that is attractive, gives us a weighted average market growth rate that is elevated by a point or 2 over -- versus a broad Recon player. And then finally, our P&R segment, that $5 billion segment that we have $1 billion position in, is what's really great about this is that this segment serves the full range of surgical and sports medicine end uses that are shown in that larger bar. And so nice diversified set of demand drivers for the P&R businesses that create some resilience in terms of how the business grows. And we can see into and understand all the parts of surgical that we're not in and make really thoughtful choices about where we do and don't go over time, either organically and -- or through acquisitions in. And Foot and Ankle is a great example, we could really see and understand the Foot and Ankle space very well from our positions in P&R. We also knew from our Surgical business that we knew how to succeed in a business like that. And so there was a natural path to acquire in and be successful and some synergy out of the gate with some of our stuff on the P&R side. This is a different way to frame up our position in the orthopedics industry. In this $50 billion industry, there are a handful of players that are large and scaled players in this industry. And those players, the ones that are more focused in the industry that tends to become a bit of a growth limiter at some point in time. What's great about our position is this middle tier where we are is what I'd call scaled and agile. We're scaled enough to have healthy margins and to be able to drive to strong cash flow, but we still got plenty of room to scale the business and expand our margins and enhance our cash flow. But we're also agile. We can decide where we do and don't go, within this large orthopedic space so that we can sustain the high growth rates as we build and grow our company. And we can also decide when we might move to adjacent markets outside of the orthopedic space, but logical places for us that open up high-growth running room for our company and allow us to sustain a high single-digit organic growth rate as we grow from $2 billion today to $3 billion and beyond in the years to come. Finally, this market has got a great base of the market where there's constant innovation and more focused companies building and growing. And as I showed on the previous page, we've done 20 acquisitions over the last 4 years, of companies that were in the base of the market, and that's helped to fuel and accelerate our strategies. And as we move into the future, there's plenty more opportunities to acquire in that base of the market. We've got a unique position in that we play along the full orthopedic continuum of care. We're the only player with significant positions along the full orthopedic continuum of care, before, during and after a surgery or an injury. And this is -- this has provided benefits over time in terms of brand awareness and presence, ability to get on contracts, ability to succeed, say, in the ASC environment where businesses are both orthopedic clinics but also starting to grow in and open up as surgery centers. So this has been a source of benefit and strength strategically for us, the position that we play along this continuum. And going forward, we see even more opportunities as there are more and more opportunities for digital solutions and workflow solutions, there's opportunities to bring solutions before, during and after the surgery that bring better outcomes, better efficiency, opportunity to capture data and use that to then strengthen our innovation and our business. As I said, the Lima acquisition that we completed early this year is a big deal. It takes our Recon business to become a $1 billion business. We added about $300 million of revenue and now have a $1 billion Recon business. You can see also from the bar, pie that we retain that very attractive mix of having about 50% extremities. So we've gotten larger in Recon, while preserving the high growth and attractive mix of 50% extremities. We're also now pretty balanced between the U.S. and international. The U.S. is the best market, biggest and the best market. So it's great to have a big position there. And in the international space, we've got attractive positions in key markets around the world that are attractive Recon markets as well. We've got a great opportunity to build on the double-digit growth we've had in our U.S. business and now drive double-digit growth across our whole Recon segment. Part of how we'll do that is through cross-selling opportunities that are pretty significant. We've also got a lot of cost opportunity to take out with this combination that we've got a fast start on. We also break some great technologies. We're the only player in Recon that has our own ceramics capabilities. That's going to be a cost advantage over time but also an innovation opportunity. The Lima business also brought in a leading position in Trabecular Titanium, which is 3D printed implants for better designs, more efficient manufacturing and an ability to customize to varying [indiscernible] up to and including full custom implants. And so several very important core technologies that we've got now that are going to help to strengthen and enhance our growth over time in addition to all the great things that we've always had. We get asked a lot about how do you grow your Recon segment so fast and how are you going to continue to do that. And this page really talks about what we've been doing and we're going to be able to keep doing and do even better now that we've got the broader business that we've got and the broader set of technologies. First, our growth is built on some really fantastic core products that have great demonstrated outcomes. Our AltiVate reverse shoulder, pioneered the reverse shoulder, pioneered the best design of reverse shoulder, lateralized and inferiorized, which gives you a better range of motion. And we have had very strong growth and share gain on the back of this product for many years, and we've got plenty of opportunity. And essentially, all of our success to date in AltiVate has been inside the U.S. And so now we've got a wide open field outside the U.S. to take the AltiVate 2. The EMPOWR 3D knee is a knee that tapped into -- it's a kinematically better knee that basically, it pivots when you squat and it pivots when you walk in, that's the way the normal need works. And there was -- in the knee market, going back a number of years, there was plenty of good outcomes in terms of revision rates. But the satisfaction was not great. It was kind of in the 80s in terms of how many people really felt good about the knee that they got. We tapped into that. Our EMPOWR Knee is a knee that now there's been papers published that talk about well into the 90s satisfaction rates, patients having it feel more like their own knee. And we've been able to have very fast growth from a low share position by bringing this great knee, getting surgeons to try it. And then we've innovated around that, the second column here. In all anatomies, we've continuously innovated and -- and so yes, we had a great revision knee, but now we've got great primary knee now. We've got great revision. Yes, we had a great reverse shoulder, but now we've also got a great anatomic. And so bringing these other procedures through has been an important way of how we've grown as well, always focusing on making sure our innovations bring something new and different that the surgeons appreciate in terms of the outcomes or the procedural effectiveness with which they do things. We've also brought some great enabling tech into the market as well. I'll talk about that in a few pages. We've also succeeded very well in the ASC, which is the fastest-growing care setting in the U.S., particularly in knee, there's been a lot of growth in the ASC. Our product set up very well for the active patients that are being selected into the ASC. We've simplified our instrument sets. We've brought enabling technology that's a great fit for the ASC. And our P&R products are often there and present in the ortho clinics that are adjacent to the ASC. So there's a number of parts of our offense that have helped us to succeed in that high-growth ASC setting. We've built a fast-growing foot and ankle business that we're going to continue to grow in scale and we've expanded geographically, opening up space. This shows our U.S. based recon business. We've grown 10 years double digits organically in each of the anatomies in this business through the things that I talked about on the previous page. You can see on the shoulder front, we've got a 14% CAGR across this period that includes COVID year and grew about 10% in 2023. That growth rate in 2023 is a little bit lower as we're between innovation cycles. We've got something called augmented glenoid that we just had approved last week, ARG augmented glenoid for reverse shoulder, just got approved last week, and we'll be kind of rolling that into the market here in Q3 and beyond. And so our Shoulder revenue will kind of tilt back up to more normal growth as well. Hip and Knee, you can see we've grown 70% CAGR for 10 years, 18% growth last year. So great products that have enabled us to grow faster in the market and a great tailwind from that care setting where we succeed so well. Enabling Tech has become an important dimension of competition in our markets as well. This page really talks about our strategic focus. We've been focusing on having the right enabling tech for each anatomy. The surgeries are different. The surgeons have different preferences. In shoulder to date, fantastic planning has been the state of the art, and we've had our Matchpoint solution that has been able to enable the surgeon to plan the procedure and if desired, make custom printed 3D instruments for their procedure, and that's enabled us to have strong leadership in enabling tech in shoulder. And then just recently, we've had our Arvis augmented reality product approved for shoulder. And so over time, we'll be able to bring that great guidance technology to allow the surgeons to serve up their plan intra-operatively. So for shoulder, we've been building as a leader there. In Knee, we have really led with Arvis, and Arvis has been launched now in the knee for almost 2 years as a great new enabling tech that is smaller, more fit for purpose for ASC, but also plenty strong for other care settings as well. It's lower cost, less time included into the operation and still gives the surgeons the great benefit of being able to see their plan, guide the procedures and make the choices they want and record all that data for future use. We've also been really focused on making sure our Enabling Tech is not just a point solution that it spans the entire workflow from the planning through to what's done intra-operatively through to what happens postop in terms of tracking the patient's recovery path. And then finally, trying to make sure that the Enabling Tech that we bring to the market is great for the fastest-growing setting in the market that is the ASC and Arvis. But also, we're finding that -- it's plenty good for hospitals. And outside the U.S., as we've done more and more voice of the customer, we're finding many countries outside the U.S. The hospitals are a lot more cost and space constrained than the hospitals here in the U.S. And they really care a lot about small, not too expensive, time efficient. And so we really believe that our Arvis solution, as we get it approved outside the U.S. is going to be a great benefit in a number of markets as that warms up outside the U.S. As I said, we've done a lot of great acquisitions. This shows some of the key ones we've done in Recon. Two big global expansions, Lima $300 million add. Mathys was about $150 million add when we did it. Mathys was a mid-single-digit strong player, great reputation, some good technologies have been historically a mid-single-digit grower with 10%-ish EBITDA margins. Over the past couple of years, we've grown that business double digits and we've doubled the EBITDA margins, and we still got room to keep moving the margins up. So great success on that acquisition. We've exceeded our plan in terms of both the growth and the margin progress. And now Lima actually combines directly with Mathys outside the U.S. And so there's a whole lot more synergy to go after there. We're off to a great start on the Lima acquisition as well. Handful of foot and ankle acquisitions have built $100 million plus double-digit growth share gainer in that space, great technologies that we've got now for each part of the Foot and Ankle anatomy as well as a strong aligned channel that becomes more and more aligned over time. We've also invested in and then bought out some key technologies like Insight, which is how we got our Arvis technology, thoughtful approach, investing and collaborating with them to launch the product and then having the right to buy out the product at the right point in time to manage the risk there. So that's been an attractive way that we've done acquisitions as well. Moving over to P&R. We've got strong positions. Again, this is a kind of a 3%, 4% growth market. We grow a little bit faster than the market. It's a business that we're focused on growing in low to mid-single digits today and shaping it into a business that can more grow mid-single digits in the future. Very strong leading positions in embracing in the U.S. in key countries around the world. We've been a historical innovator there. And the last handful of years, we've ramped back up the innovation here. Really distinguished ourselves with what we're doing with our workflow solutions and some great strong positions in different technologies within Recovery Sciences. So really have -- over the last 3, 4 years, have built these businesses back into strong leaders, growing 3% to 4% organically, very strong cash generators opportunity to keep nudging up the growth here and have very strong cash conversion and keep increasing the margins of these businesses. It's a great counterpoint to the Recon businesses that grow very fast, but need some fuel to drive that growth. Here has been our strategy for P&R has been about shaping the business. Our Bracing business is growing about low single digits. Within that, our clinic solutions for the orthopedic clinics and where we bring the software, we do the billing. That's been growing high single digits. It's got higher gross margins. Recovery Science has been growing mid-single digits. Within that, we've got a laser business, which is growing double digits, higher gross margins. And so we've been shaping our P&R portfolio, not just overall, but also within each of the businesses really focusing more on products that are higher growth, higher gross margin and less on projects that are lower growth, lower gross margin. Within that Recovery Science business, we've had mid-single-digit growth. And over the last couple of years, we've shed a fair amount of SKUs of businesses that were not that profitable, not that good growers, and we just shed them and offset the growth on other fronts. A lot of good innovation coming through the business here, margins in the mid-teens range now, plenty of opportunity to drive up towards 20% in this business, while our Recon business is already well above 20% with room to move up from there. And a strong cash converter, as well as I talked about. And then finally, in P&R, digital healthcare has been a key part of how we've differentiated ourselves. We've got a solution for orthopedic clinics in the U.S. that they integrate into their systems, and they use it to manage the durable medical equipment, so mostly braces that are running through those clinics. It brings them a bunch of operational efficiency and financial effectiveness. Also lets them focus their time and energy as practitioners on serving their patients. We've got two models here. One is where we sell the software to the clinic. And we get a SaaS fee and we get deeper penetration into the wallet of that clinic. The other model, we actually take over the management of the DMA in that clinic and the building of the DMA in that clinic. And we use the software to do that efficiently. And we get higher gross margins, more share of wallet. And you can see, we have dramatically grown the amount of clinics that are using our workflow over the last 4, 5 years. And this typically contributes about a point or 2 of growth to our U.S. bracing business every year and helps us to outgrow the market between the clinic conversions that ultimately come and some of the penetration that we get with that. And it's very sticky, once we get into these clinics, we're sticky. So helps to grow our business, enhance the gross margins, creates a stickiness that is valuable over time. And then finally, we stepped into the year with a strong outlook in line with our strategic goals of high single-digit organic growth. 50 basis points plus of margin expansion, but then we laid on top of that, the Lima numbers that we had announced when we announced the deal back at the end of the third quarter. So strong guide for the year. It took us up a little in May, based on being the first quarter by a little bit. And so great opportunity to accelerate through the year and deliver a great year. Look forward to telling you more about it as we make our way through the year. Thank you.

Maybe we'll try to sneak in 1 or 2 questions here before we go into the break out just because we have a couple of minutes. Given the importance of Lima today, both to the story into stock, can you just update us a little bit about, I think we're 5-ish, 6 months now in integration? How are things going? What's been surprising you are positive, negative? And how are we on track with the expectations you guys have laid out?

Yes. Sure, Brandon. I mean the headline is things are going very well. We had about 3 months to do the integration planning between sign and close, and we really -- I think we've got a great process around how we how we go from diligence and integration planning and then really hit the ground running at the close. And this one, we certainly put a lot of resourcing against it in terms of integration leadership and teams and support to make sure that we do it with excellence. We hit the ground running in the beginning of January, closed right on time, hit the ground running and have had a great start. We're exceeding our goals in terms of the sort of the core performance of the business and are also in line with or better than our goals for the kind of integration dissynergies that we had anticipated that we would have. We got a fast start on getting the cost out of the business, and that's reading through, and we're focused on getting the next wave at it. really exciting the quality of the talent that's joined us. We've created a kind of very strong outside the U.S. Surgical business that is -- has got a number of key Lima leaders that are leaders within that business. We've also put some of them in global leadership roles. So great talent, great cultural fit really beyond my expectation in terms of talent and cultural fit. And so definitely excited about how we've come out of the gate. We've got some important things to work through this year. They're right in our sights. 5 years in, we feel definitely ahead of the game in terms of how things are going. And as we execute through the balance of the year, I think it will be clear that not only are we going to have a great first year, but we're going to have some great momentum flowing into next year.

And on the last question, and we'll -- but in your experience, you guys have done a lot of acquisitions like this. How long of a process is it that we're going to be talking a little bit of dissynergies and integration efforts. This is a story where in calendar '25, we can talk about like we ever -- by an organization, we're on the [indiscernible] or is it a little longer?

Yes. So we believe that as a best practice, it's the best practice to work through the channel integration quickly but thoughtfully. And so we have planned from the start to really push through the channel integration in the first year and get that behind us and understand that, that creates a little bit of dis-synergy in the first year because you're kind of forcing the issue on some channel choices and things. But we feel like that's much healthier in order to be able to then step into '25 and beyond with the right momentum in terms of kind of reshape the line channel. And so we would expect that some of the dis-synergies from channel integration will sort of peak in Q2 and then be trending down after that. We'll also have positive synergy from the cross-selling that starts to grow in Q3 and Q4 and really kind of accelerate next year. And so we are executing the integration in a way that should have, by the time we get into '25, we're working on specific projects that are executing against cost synergies, supply chain synergies, some of the combined R&D projects. So we'll be in kind of normal project execution mode in '25 versus heavy integration mode in '24.

Great. Well that, we're going to hit the breakout or just follow us [indiscernible].

I have no idea for time because there is no timer...