Enovis Corporation (ENOV) Earnings Call Transcript & Summary

Good afternoon, everyone. Thank you for joining us at this year's Canaccord Genuity Growth Conference. My name is Caitlin Cronin. I'm one of the medical device analysts here at Canaccord Genuity. And I'm pleased to be joined this afternoon by Enovis, medical advice company focused on product spanning the orthopedic care continuum, including injury prevention, repair and recovery with the goal of improving patient outcomes and transforming procedural and clinical workflows. So we're going to begin with the fireside chat, but I'll try to leave a couple of minutes at the end for any questions from the audience. And with me today is Ben Berry, CFO. Before we begin, I want to remind everyone of any relevant disclosures, which can be found on our conference and/or firm website.

So just beginning with the Q2, you released results last week and would just love to start off with what you want to highlight from the Q2 call.

Yes. Thanks, Caitlin. Thanks for having us here for the conference. No, we had a good solid start to the first half of the year. Our expectations of what we set out in terms of guidance at the beginning of the year, we were able to raise in the first half and continue that on as we think about the projections for the second half of the year. The first 6 months have really been focused for us in terms of integrating Lima, which we announced last year, but we closed at the beginning of this year. So we've been very focused on making sure that we're getting that business integrated and making sure that the channels are aligned, which we've done here in the first half, particularly in the U.S. market, which has been one of the critical focuses of consolidation and overlap. So we feel like it's a good solid start to the year for us. We expect acceleration in the back half of the year and feel like the portfolio is set up for good sustainable success, not only through the balance of this year but into the years beyond.

That's great. And then you also provided some additional historical disclosures for legacy Enovis and also Lima, why do feel the need to provide these disclosures to investors now?

Yes. I think it was something that, as we were explaining what was going on with regards to the integration, it was very clear that we needed to provide some more information given the complexity and some of the overlaps that were coming into play. So we just felt that it'd be better to be transparent with regards to what's going on. So we provided some supplemental information to really lay out what's been happening with regards to the integration of the business, some of the core related impacts and some of the things that we've seen in terms of things that we've discontinued and things like that. So overall, we provided an additional layer of disclosure. And then on top of that, given that Lima comes in and brings in more international business for us, it brings in a different seasonal mix, which we had to make sure that we got out there in terms of saying what some of the seasonal impacts from a quarterly phasing would look like as well. So just taking the feedback based on what we heard and being able to describe what's been going on, these additional information has helped us with regards to that.

And then just on that front, you touched on the quarterly cadence into the back half of the year and how that's really changing with Lima and you provided some good guidance on that. Maybe just provide a little more color on the cadence for the back half of the year.

Yes. I mean you see a slowdown due to summer vacations in European businesses and what we've seen with Lima coming in. So our sequential pattern is a little bit different from what we've traditionally done as legacy Enovis. So what we've outlined is nice acceleration of growth in the back half of the year. But that -- the way that, that is composed is a little bit impacted by some of the summer pressure on the Lima side. But no change to our overall guidance, just a little bit different sequential pathway through the course of the year.

Got it, that makes sense. And then maybe let's just continue on with the Lima integration and the progress there. So you've called out $20 million to $30 million as the expected acquisition impact or about 2% to 3% of your Recon business this year. Where do you stand from a progress standpoint on that estimate?

Yes. I mean it's going a little bit better than our initial plans. I mean what we outlined, as you mentioned, is $20 million to $30 million. What we said is that would start off as we integrate and consolidate the channel, particularly where there was overlaps like in the U.S. market. So we saw that start to impact a couple of percent in the first quarter. And what we also outlined after our first quarter calls, we expected those dissynergies to peak into the second quarter, which they did. So about a 4% to 5% growth headwind in the U.S. market, about 3% overall to the company. We expect that to moderate in the back half of the year as we've gotten a lot of the contracting and the alignment of the territories completed, particularly in the U.S. We're about 70% complete outside the U.S. And what I would say is that we expect the moderation to happen because you start to see an impact from cross-selling opportunities that come and start to ramp up, particularly in Q4. So still about 1 point to 1.5 points headwind in the back half of the year, but the bulk of the dyssynergy happening through the first half.

Got it. And as you said, OUS, 70% integrated at this point from a channel perspective, but very strong growth in Q2. How do you expect that to trend in the second half?

Yes. I think we've seen that market continue to be pretty healthy. And one of the benefits of this acquisition that's really played out for us is the combined strength between Lima and the Mathys business that we acquired in 2021. So we're seeing a lot of good strength in the core underlying performance of each of those businesses off of even a strong comp that we saw last year. So we would expect maybe a little bit of moderation with regards to some of the dyssynergy impacts ramping a little bit more in the international markets, not a lot. But again, we would still expect good to post good growth in the face of that even on the international markets.

And you talked to cross-selling really expected to start ramping in the second half. What areas of the portfolio do you really think will be most material from a cross-selling standpoint?

Yes. In the U.S. market, we're excited about the products that we're able to get with Cones to partner with our legacy EMPOWR 3D revision system. So that's something that we've been building inventory around in the first half of the year, and we're able to really open up the aperture here as we go into the second half of the year. There's also a custom 3D-printed implant business. It's for super complex cases called ProMade, which we're excited to have in our bag and opportunities that we can think about unlocking, competitive conversions or new business opportunities with having just a broader portfolio to cover all kinds of complicated cases. So that would be for the U.S. market. And outside the U.S., I'd say we're right now working to build a portfolio by market based on what we think is going to provide the most strength, leveraging the best of Mathys, the best of Lima and some of the legacy U.S. products that we're scaling up. So that one is a little bit more complicated because you're building inventory and making sure everything gets in the proper places. But overall, we're making good progress there, and we'll start to see some of that ramp in the back half of the year.

And then once dyssynergies are worked through and the cross-selling really start to take hold, maybe just remind people of how much of a boost to overall growth you think Lima will provide going forward?

Yes. I mean I think the way that we've outlined it is the -- our Recon businesses have continued to grow multiple of markets. We grew 7% in the first half of the year, and that's with the 2% to 3% headwind through the dyssynergies. We've learned our lesson in the past with regards to making sure that channel integration of these types of deals, especially where there's overlap and consolidation that, that happens. The quicker that happens, the more you get the disruption behind you and you're able to get back to more normalized patterns going forward. So that's what we've really been focused on speed of getting that channel solidified so we can get back to normal growth offense here in the back half of the year and into next year. So if you look at the legacy business of Lima, before COVID, they were growing high single digits. Since COVID, they've been growing low double digit. I think our view with the synergies leveraging the capabilities of legacy Enovis and Mathys, the cross-sell across the board, will help us to continue that above-market growth in that same range that we've been experiencing over the last several years.

That makes sense. And you're also already seeing a margin benefit from adding Lima as well. Why is Lima accretive to your overall margin? And how can the margin benefit in the longer term from adding Lima?

Yes. I think it's -- one of the things that was really attractive to this deal is it comes in accretive from the start. I'd say from a shaping of the business, Lima was very deliberate in terms of the composition and what they focused on. So if you think about their business being about 40% extremities, extremities coming with higher gross margin and then selecting certain markets in which how to mix their portfolio. They were really smart in how they did that to create in a pocket of, I'd say, mixed business that comes with pretty strong healthy margins. And we bring that in and then we're able to take that in. And then also on top of that, there's overlap in some of the back office and areas that we're able to get from a synergy perspective. And then down the road, we'll be able to get some operational synergies as well. So it comes in without getting any synergies as accretive by over 100 basis points and then a clear plan that we've outlined to get additional $40 million of benefit of synergies over time, which will add another kicker. So all of that to say, we've been very deliberate ourselves in terms of mixing the business towards higher profitable growth areas, and this just is a natural fit of that, and it lifts the whole company, as you saw through the first half, almost 200 basis points of margin lift.

That's great. Maybe just turning to your shoulder portfolio. So Lima has strengthened your already sizable position in shoulder. Where do you think the acquisition really brings you from a market share perspective within the shoulder market?

Yes. I think our perspective on global markets, there's not a one source of truth with regards to that. But based on the triangulation that we've done in terms of our market position, we'd say that our market share is in the mid-teens in global shoulder, so the #3 player overall.

That's great. And you saw clearance of your AltiVate-augmented glenoid in June and noted an expected Q3 launch of the product on the earnings call. So why is this launch really an important one for your shoulder portfolio?

It's a gap that we've had in our portfolio for some time now. I'd say that it's one of the biggest launches that we've had in our shoulder portfolio in the last several years. So we're really excited about the benefit that will come not only with being able to launch it within our current customers and get a benefit within our same-store sales, but also the opportunity to now have a more robust portfolio to go and get competitive conversions. So we're excited about this product. You get a higher price per procedure for these more complex cases. And right now, we're in the initial phases of scaling that launch up. So you'll see a little bit of benefit here in the third quarter, but you really start to see it start to ramp in the fourth quarter.

And then given, I think, the highest overlap with Lima was in the shoulder portfolio, maybe just talk to the separate strengths that legacy Enovis and legacy Lima have in the portfolios and how they can work together going forward?

Yes. My view is that this has strengthened our overall portfolio breadth in terms of thinking about we have a portfolio solution for all kinds of styles. We still -- from a pioneering of the AltiVate system, which has done really well for us in the U.S. market, we still see a lot of opportunities for that product line to continue to grow in the U.S., but then also unlock some opportunities for ourselves outside the U.S. Lima's portfolio is different and complementary to AltiVate. What I would say is it's got solutions for those that want to do anatomic. It's got a modular portfolio that gives some flexibility in terms of thinking about how do you manage different cases. We're launching a product within Lima called the Prima system, which is similar to a reverse shoulder that's also competitive into the marketplace. So just from a robustness of portfolio standpoint, our shoulder is now stronger with Lima and particularly gives us a lot of growth opportunities outside the U.S. as that market will continue to penetrate into more reverse -- more reverse styles like the AltiVate and now the Prima that's being launched.

That's great. And then maybe continuing on to Arvis, which is your augmented reality solution, and you announced 510(k) for shoulder procedures on the Q1 call. And you also noted on the Q2 call that you expect sort of a soft launch for the technology in shoulder for the remainder of the year. Maybe just remind us what are some key features of the system for the shoulder specifically and any early feedback that you've gotten so far?

Yes. We're really excited about the potential application for Arvis within the shoulder. And for those of you that don't know, Arvis is a headset that's essentially augmented reality, which is a headset on the surgeon with a small battery pack. The benefit of it is you can take your preoperative plan, which we have one of the best-in-class preoperative planning software and the match point system that we offer. You can take that and have that overlaid in terms of your augmented reality to where you can still have full control of the visual field when you're within the surgery, but then have your digital markers with regards to your positioning in terms of finding the glenoid vault or making sure that you're making your incisions in the right places. So we think a combination of good planning with navigation in the shoulder is really important, and that's our first step with regards to Arvis, still early days. The feedback is positive. It's going to be in a limited launch in the back half of the year. But we think it's the step in the right direction to enable our surgeons to still have full control of the surgery, which can be a little bit more complex on the shoulder, but then also have a tool to help them make sure that they're executing their plan like they want to.

And then just turning to your other total joint products. I think you've noted that you've had some weakness within hips over the past few quarters. And it's due to market factors and also your portfolio offerings as well, and you're looking to refresh those into the back half of the year. Can you really remind us and talk to what those new product refreshers are and how you can regain share?

Yes. Yes. I think we've been pretty vocal that within hip and knee, our knee system, our EMPOWR 3D Knee system has been highly differentiated and giving us a lot of momentum within that hip and knee space. And as we have continued to build out that portfolio and think about also trying to get not only knee business, but hip business as we convert customers, we've noticed that there are some gaps within the portfolio in terms of some recent trends over the last several quarters with regards to areas where we might not have as competitive of products. And that would be in just certain kinds of stems and then an impactor device to help perform the procedure. So we've got both of those coming in the back half of the year and early next year to where we're going to build out our portfolio to be much more competitive to where then we can go back to a lot of the knee customers that we've converted and go after that hip business. So overall, we'd expect the hip to be a little bit softer over the next couple of quarters as we continue to get those products in and ramped up. But overall, we still feel good about our opportunities within the knee side to keep generating growth within hip and knee.

That's great. And then maybe turning to foot and ankle. You've worked really hard over the last few years to become a formidable player in the foot and gold space over $100 million run rate. Just as the segment is appearing to really heat up competitively. Maybe just talk to us about what are the most competitive aspects of your portfolio and where you stand today from an innovation perspective going forward?

Yes. We've been really deliberate in building that portfolio to have a breadth to it that is highly competitive across the whole foot. So if you think about forefoot, midfoot, hindfoot we've built a portfolio that covers the entire foot all the way up into total ankle replacement. But with some really competitive differentiated products. So we're seeing really nice performance within our fixation devices that we got with the MedShape acquisition that we did. Those products from a fixation fusion standpoint are really performing well and differentiated across the foot. We acquired minimally invasive technology with the Novastep acquisition for bunions. That product line continues to perform very well for us. And then we've been launching new products across those categories with regards to plating and screws that can help just fill out the bag with additional new products that are helping us drive growth as well. So if I look across the portfolio that we've built and one of the lessons that we've learned with regards to putting those businesses together, I mean, remember, we acquired 5 businesses and had to get those channels aligned as well. So it took us a good almost a year to do that. We're starting to see the fruits of that labor with regards to accelerated growth versus the market. And I think some of the competitive commentary that we've seen about increased competitiveness in the space is partly due to some of the acceleration we've seen in our portfolio, frankly, and that business continues to perform well and is growing into the double digits for us.

And then just on that point, I think we -- you noted and other companies noted some market weakness in the segment during the Q2. What do you think drove this market weakness? And obviously, you're growing in spite of that. So what do you expect going forward from a procedural environment?

Our view is that the market is relatively stable in foot and ankle. Now there's some new seasonal norms that we're seeing with regards to summer vacation schedules and things like that, that might have some short-term market impacts. But overall, I would say that what we saw was the competition really highlighting some increased competitiveness, and we feel like we are a direct result of those comments. So I think our view is foot and ankle is performing well, underlying market condition relatively stable, not seeing a big tailwind with regards to procedural flow but not seeing anything that would make us concerned that the market is weak. And then pretty good optimism with all the new products that we've been launching that will continue to drive momentum in that side of the portfolio.

That makes sense. We have a few minutes left. Any questions from the audience. All right. Maybe just to wrap it up, we would love a short description of where Enovis is today and what you're really trying to hope investors get going forward about the company and it's trajectory?

Yes. We separated into a pure-play medtech business in the beginning of 2022. And if you think about the portfolio and what it looked like at that time and where we are today, based on some significant transformational acquisitions, we've taken a business that was in the like a little less than $1.5 billion and 14% margins today, if you looked at our guidance over $2 billion and closer to 18% margin. So in a pretty short amount of time, we've reshaped the company to a portfolio that's now mixed in a way that's 50% Recon, 50% Prevention & Recovery where we're the #1 player, and it's a strong cash flow generator to fund a lot of the growth investments on the Recon side. And now we've also diversified our growth capability within Recon, which we used to be primarily within the U.S. market with 2 key flagship product lines. Now we've diversified our portfolio across foot and ankle, extremities, globalized to where we now have a lot of opportunities to grow even in the face of competitive pressure that's out there. So we've mixed the business in a way that's healthier, strengthened the business in terms of our bottom line margin, continued to get up the scale curve in terms of our cash flow generation. So we can continue to create opportunities for the company to create that compounding growth value equation through additional bolt-on M&A, additional shaping and then just organic mix of the business in general. So it's a really interesting time for the company. We've gotten through a transformational acquisition that's coming in and driving earnings accretion in year 1, but spent a lot of the time in the first half really getting it integrated. And now as we get into the back half of the year, really excited about the acceleration opportunities that we have and the momentum that we're going to create into 2025 and beyond. So it's an exciting time to be at Enovis and a lot of good things happening at the company.

Great. Well, thanks, Ben, for joining us today, and thank you, everyone.

Thank you.