Enovis Corporation (ENOV) Earnings Call Transcript & Summary

Thank you for joining us at this year's Canaccord Genuity Musculoskeletal Conference. My name is Caitlin Cronin. I'm one of the medical device analysts here at Canaccord Genuity. I'm pleased to be joined this morning by Enovis, a medical device company focused on products spanning the orthopedic care continuum. We'll begin with a fireside chat with the Enovis team, and I'll try to leave a couple of minutes at the end for any questions. With me today is Ben Berry, CFO; and Louie Vogt, Group President of Recon. And 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, we'll begin. So I think it would be great if we could just start out with a brief intro from both you and to Enovis and what really makes the company differentiated in the ortho space.

Yes. Thanks for having me and Louie here, Caitlin. Nice to see everybody here in the room. We -- at Enovis, our strategic focus is to really aggressively grow our Reconstructive business, which we've done over the last several years, going from about a $300 million business to $1 billion business last year through aggressive moves from both organic innovation and through acquisitions. So we've been working really hard to continue to build that business into a sustained above-market grower. And at the same time, we've been really working to shape and improve our market-leading Prevention & Recovery business. We're about a $1 billion player in a $4 billion to $5 billion market. So we do this through our EGX business system, which is really focused on embedding strong process around commercial execution, innovation, acquisitions and talent. And all of this with the goal of creating an above-market grower on the top line, continuous margin expansion and continued growth through acquisitions, so we can become a compounder in terms of value creation for our shareholders and potential investors. So overall, we've done a lot of work in the last several years to go from about a $1.2 billion company to now over a $2 billion company, continuing to grow and shape our margins up, and we continue to build the company and shape it through both organic and inorganic means.

And then that's great. And you released earnings recently. What do you want investors to understand coming out of the Q4 results?

Yes. I mean, 2024 was a year for us of transformation. I mean we acquired Lima at the beginning of the year, and we spent the first 6 months really integrating the commercial channels, which -- as we did that, we had some disruption as we were putting things together. But as you saw our progress over the course of 2024, we really accelerated throughout the course of the year, both on the top line and from a margin perspective to where as we exited the year, we had nice good momentum, we were back to double-digit growth in our Recon business in Q4. Our Prevention & Recovery business was continuing to grow in that 3% range, and then we improved our profit margins by 210 basis points at the same time. So we created a lot of good exit momentum from 2024, and that's really continued as we've stepped here into 2025.

And on that point, can you just briefly talk about your 2025 guidance and just the assumptions built into that and if there's room for upside?

Yes. We tried to set a margin or our guidance for 2025 with the thought of, "Okay, where are we coming from? And what is the exit momentum look like based on what we did in 2024?" So because we won't have a lot of the disruption in front of us here as we step into 2025, you'll see our growth accelerate at the corporate level. So we've improved our growth outlook versus what we finished in 2024. We've also shown that we've continued to improve our margins, both from a mix standpoint and getting after another year of synergies from the deal that we did with Lima. So we've guided that as well in terms of accelerated growth, margin improvement this year. And what we've also talked about is we've continued to get up the curve on free cash flow generation, which will take a positive step in that direction here in 2025 as well. We've tried to set the guidance with a view of conservatism as well, just trying to make sure that we're thoughtful about the end market environments. But overall, we're excited about the trajectory we're on and what we're seeing so far in 2025.

And Matt Trerotola, CEO announced his retirement also on the call. I mean, just any more color on his plans for when he will transition and your progress on the search for a new CEO?

Yes. Matt has been the CEO for over 10 years. He led Colfax through a major transformation from a diversified industrial company to then a 2/3 FabTech, 1/3 MedTech company back in 2020 -- 2019 and then has led the spinout of ESAB and then the creation of Enovis and through the acquisitions that I described, with the most recent one being Lima and really put us on a good trajectory as an organization. So he's at a time in his life where he's been the CEO for over 10 years and done a lot of good things. His youngest daughter just went to college, so he's an empty nester at the same time. And he's going to be close to 60 by the time that he finally retires. So he's in a position of life where he wants to pull back a little bit and spend a little bit more time doing personal goals and some more Board work versus being full-time road warrior. But overall, I think he feels like the company is in a really good position to continue on the legacy that he's built. In terms of the search, it's going well. I mean, we're trying to move at pace. Obviously, I can't comment on timing or anything like that. But I think our view is that we've got a lot of interest and that we'll be able to get a nice, strong dynamic leader to come in and take the reins and really lead us into the next phase of the journey.

And you also touched on the potential impact from Mexican tariffs on your earnings call. I mean, just remind everyone in the room kind of what you said on the earnings call and how quickly you could maybe divert manufacturing to avoid cost in the future, et cetera.

Yes. I mean I think one of the things that still a bit of a fluid situation right now with tariffs, I think if you look at our business, we're half and half, P&R and Recon. Our Recon business is really not exposed right now with the current tariff environment. And really where we have some exposures on the P&R side of the business, where we have a factory in Tijuana, Mexico. So what I said on the earnings call was our exposure with regards to the goods flow from -- between U.S. and Mexico is about $3 million to $4 million a month before we mitigate any of the potential impact. Now we've had 2 months of exemptions so far. So the first month was just an exemption, while they continued to negotiate between the U.S., Mexico and Canada. And then there's a most recent exception that's been put in place with regards to a trade agreement, the USMCA, and a lot of our products qualify for that USMCA. So we're in the process of hoping that, that framework provides an ongoing delay or extension or exemption with regards to these tariffs, but we're fully prepared to continue to mitigate any of the potential impacts that come in. What you saw from us through that post-COVID inflationary period was we were very aggressive in being sourcing and driving productivity in our supply chain and then using price in our P&R business to offset and mitigate some of the impacts, and we're able to do that over the course of a couple of year period to fight all of that inflation back. We would expect the same thing to happen here if these tariffs go into place and they stay there into perpetuity. But hopefully, like I said, this USMCA or some of the negotiations that are happening will provide some framework for this continued exemption. Our view is right now that the -- based on where they are and based on kind of the threat of these tariffs that the first quarter is likely unimpacted, depending on what happens here, we would still expect the second quarter to have very marginal or minimal impacts as well. And then it'd really be about a second half of the year thing that we'd be fighting this back from a mitigation standpoint if the exemptions don't' hold.

Let maybe let's turn to Lima. You have spent a good amount of time last year integrating Lima into your commercial channel. Can you remind everyone just the rationale for purchasing Lima and then where you stand today from an integration perspective?

We looked at Lima before we acquired a company called Mathys back in 2022. And our view was we really liked what Lima was doing, but our entry at that point in time into the European markets, we felt, would be better with Mathys -- is a little bit smaller scale and gave us the opportunity to really lean in with our business system to drive improvements because they were a little bit lower on the margin perspective. And they also were a little less kind of from an entry point, from a price acquiring standpoint. So we acquired Mathys and then did some really good things with regards to driving good top line momentum, getting after a strong gross margin improvement over the course of a couple of years. And then as we looked at the business and we saw that Lima was going to be available, we saw that it would be a very natural fit. As we did our diligence, we saw one, we really liked that about 40% of their business was in extremities or shoulder. We really liked the end markets where they were strong, Mathys wasn't as strong. So it was highly complementary in nature. And then as we got to know them more through the process, we really found a set of dynamic leaders within that business that we were able to think about coming into our organization and playing a bigger role as well. So it was a very exciting time for us to see how that was able to come together and do it in a way where we maintained good growth momentum last year outside the U.S. as we grew double digit. While we were integrating the businesses, we were able to announce what the combined leadership team looked like, right, even before we closed the deal at the beginning of the year. And then we were able to get after cost synergies right away, where there were duplicate costs in terms of management or things where we spent money that were duplicate that we're able to take out of the system right away. So getting after our synergies in year 1, where we've talked about finishing on the top end of the guidance that we gave of the $10 million to $15 million there, and then seeing nice runway for both, I'd say, cross-selling momentum and continued synergy opportunity. We're really excited about the value creation and the transformation that Lima has been able to bring to our company. Now we're 50-50 mix between Recon and P&R., we're 50-50 extremities versus large joints, and we're 50-50 U.S., OUS on the Recon business. So very much more diversified in terms of our growth opportunities as well.

And you entered the year with about $322 million of contribution from Lima, which was ahead of your expectations. And I think you noted on the call that mostly occurred OUS. So what really drove the OUS outperformance? And then just in the U.S., I know that, that business, you've noted has been challenged in the past. I mean, how are you able to perform with Lima in the U.S. as well?

Yes. I think it really built upon the good momentum that both Lima had independently and that we had on the Mathys side with the things that we were doing in several markets. So I think from our perspective, one, doing a lot of acquisitions, we knew that we had to get the leadership team in place early. And by doing that, we could really hit the ground running in terms of making sure that we were focused on what the channel is going to do, both outside and the U.S., frankly. But outside the U.S., it was less disruptive because like I said, it was more complementary of putting those together, where Lima was stronger in some markets in shoulder, and we're able to leverage that sales force to continue just doing what they were doing. In certain cases, combining territories or expanding our footprint in the scale just gave us more momentum and excitement in the outside-the-U.S. markets. In the inside-the-U.S. market, it was more challenging because we had to integrate. And essentially, the sales force was overlapping, and we had to consolidate that quickly because we've done lots of acquisitions that says that channel can be choppy unless you move fast. And we had to move fast, and we did that within the first 6 months of last year. But again, the momentum that we accelerated through the course of the year, the excitement that we have, not only just from the feet on the street, but just going and seeing the teams excited about what we can do from an innovation and portfolio standpoint; has been really positive in terms of the contribution that Lima has brought on our company. And I'm sure Louie will talk more when you get into specific products.

Great. And then what's left from a cost synergy perspective? And how do you expect these to really hit in years 2 and 3 of the merger?

Yes. So the things that we're doing now are very much more project-based execution from an integration standpoint. Like I said, the unknown was making sure that the channel got solidified there quickly. Now it's about executing against the things that we've identified, both where there are entities that are going to be rationalized or systems that are going to be consolidated or manufacturing that's going to be leveraged, there are opportunities for us to continue to move down that path of accelerating our synergies. I'd say that the biggest tranche of remaining synergy is on the operational standpoint, where Lima was manufacturing product in northeastern Italy, and we're moving production from Switzerland to Italy to take advantage of the cost advantages there. So that's going to be the next step in terms of stepping up in the synergies, and that's going to come in that 2026 time period.

Okay. Maybe let's turn to Recon and get Louie some airtime and start with shoulder. Can you give the audience just a background of the more muted shoulder growth in 2024 and what you guys have done from a launch perspective to really mitigate that in '25?

Sure. Thanks, Caitlin. So when we say muted, I mean, a lot of that is connected to what Ben was just talking about with the big Lima integration. So naturally, in the U.S., our sales force being an independent channel, there's dis-synergies that come with that. There's a lot of territory duplication and you have to make tough calls about who do you want to lead where and what dirt are you going to assign to which player. In the course of that, there's disruption, there's relationship disruption, account disruption, et cetera. So we made the strategic decision with Lima in the U.S. market and really globally, but in the U.S. market where it's very difficult with those indirect players, that we're going to rip the Band-Aid off in the beginning, we're going to make the right calls about people and talent, we were going to integrate them well and get them up to speed quickly. And we did all of that, and we set ourselves up for a big year too. So I think 2024, in the U.S. shoulder or otherwise, was really sort of a year of getting the back ends to work, getting our systems to talk to one another, getting trained up on product, getting the channel footprint in place the right way. And 2025 is really a year of going out and executing on the cross-selling capabilities and opportunities there. In terms of -- Caitlin, in terms of what's got it all fired up again, we've always had a very differentiated shoulder solution. I got to sit through Rob Ball, I don't know if Rob is in the room, but I got to sit through Rob Ball's talk on Shoulder Innovations, and he talked about the inlay reverse total shoulder and how it's dramatically changed shoulder arthroplasty. And you could see the mix trend that went -- that's going away from anatomic towards reverse. So what made Enovis famous or at the time, DJO was, we were in the original inlay shoulder arthroplasty. And we still have a pretty unique identity in terms of how we do it in our mechanics. We think it's very advantageous for the patient and provides more range of motion with scapular impingement-free range of motion. And we've seen a lot of our competitors sort of go in that direction more recently. Now, we still have a very differentiated position, it's not quite what our portfolio has. But building upon that was one of the things that we wanted to do. So we've launched some new solutions in the glenoid for bone loss, which is really important that, that market is really growing fast, and we're the beneficiaries of getting that out the door kind of in Q4. And a lot of surgeons that had to use different solutions for these anatomies and these pathologies have come back. And of course, new surgeons interested in is -- just like Rob was talking about, interested in the inlay philosophy and how can they optimize their implant design have also come to the table. So I think it's a combination of a little bit of a disruption last year, but good disruption. We're stronger because of it and now some new products that are throwing fire on what is a solidified channel.

Great. Let's move to just total joints. You've also seen a little bit more muted hip growth recently, but have been working to fill the portfolio gaps and return the segment to more robust growth. I mean maybe just talk a little bit about where you had holes, what you're planning on launching and just the expectations of the cadence of that growth kind of returning in that segment.

Sure. Sure. So one of the beauties of our business is that what we've been able to create with so little, frankly. So hips, like some other parts of our business, have a lot of room for portfolio expansion and depth. About 80% of our hips sales are done with 2 stems. And I know there's a lot of my colleagues and peers in here that are in the industry that are jealous of that. So I'll let you know that it only took us 2 stems. But the downside -- and by the way, that gives us a lot of runway for future growth and innovation and expansion, which we need to do. And frankly, with Mathys and Lima, we've done, we just don't have the ability to sell them in the U.S. yet. But in that vein, a big trend in the U.S. market had been towards direct anterior procedures and collared hip stems. And it's something that we simply didn't have. We have a short-, medium- and long-term outlook on how we want to address that segment, that very rapidly growing segment of direct anterior hips. And we have the first solution coming out in the back half of this year. So we're excited about that. And then the medium term is getting some of the products that we sell very successfully outside the United States, into the United States, which we have a very differentiated position. In fact, in the hip stem we acquired from Mathys, the optimys stem, has the lowest risk of revision after 10 years of any hip stem. And that includes the collared stem. So we're excited about bringing that over into the United States, and that's a very unique and durable differentiated product. And then in the long term, we have some goals there as well that I got to be careful about what I'm sharing. But I think the -- one of the things about a big trend like that when you're -- when we have such a relatively small portfolio, is you're vulnerable, right? And so we felt that last year. I think help is on the way there. We're already seeing our hip business really take off. It really wasn't an acetabular problem, it's just more of a portfolio breadth problem, and that should be shored up here pretty quick.

And then just to turn briefly to foot and ankle, you guys have really grown this business, about $100 million-plus run rate by acquiring a number of companies over the last few years. I mean talk about the outlook for you guys in that segment, I mean, particularly with the Zimmer for post-transaction for Paragon in the space, I mean, how do you feel like you're place to continue to do well?

Yes, foot and ankle is a wonderful market. So it's foot and ankle and shoulder are both growing high single-digit. Foot and ankle maybe a little bit even more than that. And we've outpaced the market every year since we've gotten into the space. We did do a string-of-pearls approach to building that business, that's hard to pull off. One of the things that we really pride ourselves on is being an M&A accelerator, right? That's sort of that Colfax DNA. And Matt, our CEO, is as good as anyone in this business or almost any industry at M&A. And -- so we know how to do it. We know what to find, and we know how to do it once we find it. And so I think foot and ankle is a great example of our capability there. That market is growing fast, but we also have so much runway left for that portfolio expansion and build out. And it's really -- it's a fun time for the foot and ankle business. They have market-leading growth quarter after quarter. Our office location in the U.S. for Recon is primarily the Texas Triangle. So it's Dallas, Austin and Houston. And those guys in Houston have a lot of fun as they double or sometimes triple the market. So it's a fun time to be in that space. I think as you think about long-term prospects of that, I mean, we got a lot of work to do on building out our channel to have the footprint across the entire United States and a whole world of expansion internationally that we've barely broached. And I think in terms of Paragon, I think they're a great company. I tip my hat to them. They've had a lot of wonderful innovation. I think what they've been able to pull off is really remarkable. And so I think for Zimmer, that's a fast-growing category to get into, there's a very established way to monetize these businesses. And I'm not going to talk about product comparables, but I think it's a good addition to them. All these acquisitions bring a lot of disruption, foot and ankle -- foot and ankle is the most embryonic of all of them So if you know the space and you know how the channel network is built out there, there's a -- it's a little bit of the Wild West of all the businesses, I will say. And so that disruption is difficult to manage, and we'll be opportunistic where we can. But overall, I think for the foot and ankle market itself, I don't think innovation is going to stop anytime soon. And my guess is Zimmer is going to try to put the pedal to the metal as well. So good space to be in. We're really comfortable with our portfolio and in particular, our innovation engine. And how quickly they're able to pump out new products, and that really changed the game and building on that foundation we have with some really differentiated NiTiNOL-based products or memory metal based products. And we've got a good runway ahead of us.

Maybe in the last minute or so, we can touch on enabling tech with Arvis, and then you also recently launched your 360 NAV system. Maybe just give a little more color on that latter system and then also your expectations for innovation and launches in Arvis this year?

Yes. So we've spent the last few years really building out sort of the foundational elements across the continuum as we call it. So sort of looking at the workflow from preoperative, intraoperative, postoperative and kind of where do we want to be and what do we need to do? And how can we make no regret decisions? Because there's still a lot of change in the air with how these things are going to work, how their economic models are going to be established. Is it going to work primarily in the U.S.? How are we going to do OUS? What are you going to do in the ASC, et cetera? So we made a lot of no-regret decisions, and one of those was Arvis. We think that the augmented reality will play a significant role in the future. With 360 NAS (sic) [ NAV ], it is more of a traditional navigation system, it's an optical tower. It gives us the freedom and flexibility to get into any execution tool that we want. So when we talk about execution tools, we're talking about things that literally facilitate the execution of the surgery, i.e., robotics, things along these lines. So guidance and navigation, we got that covered. And we also have a foundation to go where we want to go with execution support. I think we're -- I don't want to reveal too much about what we want to do beyond that right now. But as Arvis has matured, particularly in the shoulder, our surgeons are getting a lot of value out of it. We've done our best to try to keep it quiet and to keep it in a -- we're very focused on patient care and being patient-centric with what we do with innovation, responsible innovation, really focused on getting the accuracy and the quality of the outcome, right? And then, of course, you move on to usability and things along these lines, industrial design. So we're sort of at that phase right now, where we're trying to work out how to make it smooth, efficient so that we can onboard new customers and with a very small learning curve and they can get better at what they do. That's kind of where we are in the process right now. And I think you're going to see us want to get a little more aggressive with it in the back half of the year. But we definitely have a leadership position there, and it's definitely the most capital-light approach to navigation and guidance in the shoulder. And we think that the clinical outcome improvements are going to be a little more -- are going to be better than what people think. So really excited about what that gives us.

Okay. I think, we'll end it there. Thank you, everyone.